Europe at a Crossroads for Economic Growth: Gallo

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June 23 (Bloomberg) -- Alberto Gallo of RBS discusses what Europe needs to do to spark economic growth, looks at the election for European Commission president and offers his view of the impact of monetary policy on global markets. He speaks on “The Pulse.”

Weaker.

-- growing but weaker.

There is a european recovery, but the numbers are slightly below consensus.

There is the political and he monetary reaction.

The political reaction is to focus more on growth.

The eu leaders are deciding on a new president with juncker being one of the candidates.

He is a federalist, so there is discussion around this.

The eu needs to decide whether to have more eu or less eu.

I think what we need is more eu with a push towards growth measures and reforms.

And the united states of europe, we are at a bit of a crossroads.

On the mend -- on the monetary side, the ecb can help.

They are preparing more qe, but it is private assets, asset-backed securities, loans.

So the ecb can help, but to a certain extent, at some point, it will become a political decision.

I am still positive on european bonds, the european recovery.

This political action is key going forward.

And the case for juncker?

It is hard to say whether he is the best man, but clearly, you have to reflect the vote.

There is more consensus.

Even merkel is supporting him now.

So they are still is gushing potential goals, but most countries are reaching a consensus, i think.

Let's turn to the rest of the world.

You think that markets in england and the fed could turn more hawkish this year.

You say the markets should be bracing for carnage.

Why is that?

We have got through five years of buying riskier assets.

It is now time for a turn.

I do not think the bond market is prepared for it.

So far, yellen is keeping a green light for risk, as you have seen.

It is true.

The bond market in the u.s. is not pricing in where the fed funds forecast is.

To me, it is like the fed are becoming a bit like traders.

They are worrying about the selloff tomorrow.

They are saying, if i turn hawkish, there will be a reaction like last summer, so i am not turning hawkish and i will delay the time of the recognition.

Bond investors will realize that a treasury is not a great investment if you place it at 2 %. the thing to do would be to show a yellow light and tell investors that lower rates are not here forever, i am going to raise at some point.

The fed is not doing that and that is worrying.

That is the major risk we see for bond markets.

You you think we are headed for another taper tantrum, as we saw last may?

I think the fed will remain dovish in the next few months.

After that, bond investors should open up their eyes.

Why am i buying a two point 5%? there would be some volatility.

What would be the impact?

The most affected areas of the market are u.s. high yield, etf's, emerging markets.

In all of these environments, europe, which is the slow turtle in the growth environment, is a good place to be for bond holders.

The ecb is going to keep dovish while the fed and the bank of england have to change their stance.

Rex headline earlier this month was the spanish yields were trading below u.s. yields.

I am not worried about it.

You think that accurately reflects the price premium?

In europe, fundamentals today are worse but they are getting slowly better.

The ecb is doing more.

In the u.s. and the u.k., you have threats of asset levels which have been created by qe.

The u.s. high yield market.

There is an incredible amount of money flowing into high yields.

The threat of asset bubbles has been highlighted by the imf in their last review from the u.s. economy.

It was about financial stability.

Policy makers are relying on macro regulations to curb this overheating of the markets.

I do not think it will work.

If it does, it only works on housing markets.

Like jeremy stein said before leaving the fed, the only tool which gets in all the cracks of the economy is interest rates.

You have got to give a signal to investors that the punch bowl is not there forever.

Carney said that is the last line of defense.

But he did change forward guidance.

He said they would raise interest rates earlier.

So i think yellen, at some point, needs to do the same.

That will be the moment of recognition for investors.

But it is still a few months off.

It is still a few months off.

But i am more worried about treasuries and guilds then i -- gilts than i am of out -- about

This text has been automatically generated. It may not be 100% accurate.

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