Europe’s economy is vulnerable to
ripple effects from the crisis in Russia and Ukraine.

As the European Union, the U.S. and Canada look to take
coordinated action to pressure Russia to back off its annexation
of Crimea, economists at Morgan Stanley and Deutsche Bank AG
released reports yesterday analyzing the potential for fallout
on Europe’s economy should the crisis spread.

The impact could be transmitted through finance if Russia
grabs assets or if the creditworthiness of its assets declines,
said Gilles Moec and Marco Stringa, London-based economists at
Deutsche Bank. Among other channels, world trade may be roiled
by a drop in Russian imports or if Russia holds back exports of
its energy.

“On all these counts, the European Union would come firmly
first among those affected,” said Moec and Stringa.

Using data from the Bank for International Settlements,
Deutsche Bank noted French banks are the most exposed, with $51
billion in claims over Russia in the third quarter of last year.
As a share of total bank assets, Austria has the highest ratio
at 1.4 percent, followed by the Netherlands and Italy.

The share of euro-area foreign direct investment assets
held in Russia were 3 percent of the total in 2012, according to
Morgan Stanley economist Olivier Bizimana in London.

If trade took a hit, then euro-area merchandise exports to
Russia might fall from the 2.5 percent of total shipments in
2013, said Bizimana. Germany is the most exposed: about 3.3
percent of its exports head east.

On energy, Germany gets one-fifth of its coal and a quarter
of its oil from Russia, while Finland gets 100 percent of its
natural gas and more than two-thirds of its oil from there, said
Moec and Stringa.

“In order for European growth to be materially impacted,
an extreme scenario would need to unfold with a deep recession
in Russia — similar to what was seen at the time of the Ruble
crisis in 1998 — and large spillover to the eastern part of the
European Union,” said the Deutsche Bank economists. A more
likely risk would arise if uncertainty spread in Europe when
emerging markets are already wobbling, they said.

An economic downturn in Russia would also shave the foreign
affiliate sales of euro-area companies, which on average
generate 1.5 percent of their revenue from the Russian market,
said Bizimana. France’s Danone (BN) and Adidas AG of Germany are
among the most exposed.

Europe also has “little room” in fiscal and monetary
policies to respond if there were a downturn in external demand,
said Bizimana.

* * *

The European Central Bank may have inadvertently provided
insight into how much it can bear a rising euro.

With the currency at about its highest since 2011 against
the dollar and the Chinese yuan, economists at Credit Suisse
Group AG reworked an analysis in the ECB’s latest monthly
bulletin. It measured the effects of a 10 percent appreciation
by the euro on prices of non-energy industrial goods and
services over a four-year period.

Those results suggest to the economists, including London-based Neville Hill, that a 10 percent gain in the trade-weighted
euro would shave 0.5 percentage point from inflation over three
years, by hurting exporters and making imports cheaper.

Using the ECB’s latest forecast, if the euro were to rise
10 percent relative to its level this month, that would
translate into inflation of 1.3 percent in the final quarter of
2016 rather than the 1.7 percent the ECB now projects. A 4
percent gain would be enough to leave inflation at 1.5 percent.

The ECB’s inflation goal is just less than 2 percent. The
study comes as ECB President Mario Draghi warns the euro rising
is “increasingly relevant to our assessment of price
stability.”

A gain in the euro to $1.44 from $1.38 yesterday “may be a
sensible level for markets to expect the ECB to back its strong
words with actions,” the economists said in the March 14
report.

* * *

The stronger the economy of an emerging market, the more
it’s hurt when the Federal Reserve debates withdrawing stimulus.

That “intriguing” finding is in a study released this
week evaluating the effects on developing nations of news about
the Fed’s so-called tapering of quantitative easing.

The paper, published by the National Bureau of Economic
Research, showed statements about tapering from then-Chairman
Ben S. Bernanke were associated with much larger declines in
currencies and stocks of “robust” emerging markets such as
Israel and China. Declines were smaller in more fragile
counterparts like Brazil and Turkey, which have large current
account deficits.

“A possible interpretation is that tapering news had less
effect on countries that received fewer inflows of funds in the
first instance during the quantitative years and had less to
lose in terms of repatriation of capital and reversal of carry-trade activities,” said Joshua Aizenman of the University of
Southern California, Michael M. Hutchinson of the University of
California Santa Cruz and Mahir Binici of Turkey’s central bank.

* * *

The global economy could be poised for one of its longest
postwar expansions, in the eyes of Morgan Stanley. That’s partly
because the recovery from recession is so weak and disjointed.

Global growth is set to extend its five-year run for the
foreseeable future, Morgan Stanley economists Joachim Fels and
Manoj Pradhan wrote in a March 14 report.

Since 1970, they identify expansion periods as 1970-1974,
1976-1979, 1983-1990, 1994-2000, 2002-2008 and since 2010.

The reason the current expansion may last is the world’s
recovery has been anemic, inflation is low in the advanced world
and monetary policy will stay easy, Fels and Pradhan said.
Economies around the world also are out of sync, lowering the
risk of a joint overheating, they said.

* * *

Failure by central banks to coordinate macroprudential
regulation, their new crisis-fighting tool, could trigger a
“capital war” that depresses global interest rates.

That’s the warning of a new study of those policies written
by Olivier Jeanne, a professor at Johns Hopkins University in
Baltimore and published by the NBER. Such regulation assesses
the risks posed to the whole financial system rather than
individual companies.

It’s key to understanding why authorities “failed to
perceive and contain the financial vulnerabilities that were
building up during the boom,” Jeanne said.

In an effort to analyze the risk of spillovers from
differing policies around the world, Jeanne said a restriction
on finance in one country, such as lending curbs, would deflect
capital toward other nations, forcing them to act in response.
The result could be akin to an “inefficient arms race” in
which together, the policies are too intense.

* * *

The euro area, South Korea and U.K. face the highest risk
of deflation while Japan has escaped the threat, according to a
vulnerability index from Societe Generale SA.

Adopting work from the International Monetary Fund, bank
economist Herve Amourda designed the gauge around 14 factors,
including inflation expectations over the next year and
disposable income growth.

The deflation index was at minus 0.36 in the euro zone at
the end of last year and minus 0.29 in the U.K. By contrast,
Japan’s was 0.07, up from minus 0.71 in 2010.

Societe Generale assigns a 15 percent chance of deflation
in the euro region.

* * *

Looks count for entrepreneurs trying to attract investors.

A study published this month in the Proceedings of the
National Academy of Sciences found attractive men have
disproportionate success in obtaining venture capital funding
for startup businesses, compared with women and other men.

In pitches, male entrepreneurs are 60 percent more likely
to succeed than women and gender explains 42 percent of this
variance. Physical attractiveness as rated by the audience
produces a 36 percent increase in success.

The results were generated by a controlled experiment in
which identical business-plan videos were narrated by men and
women. The group of 521 participants picked the pitch narrated
by males 68 percent of the time.

To contact the reporter on this story:
Simon Kennedy in Paris at
skennedy4@bloomberg.net

To contact the editors responsible for this story:
John Fraher at
jfraher@bloomberg.net
Anne Swardson, Paul Badertscher