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How Big Mac prices are adjusting to euro crisis (Greeks, Irish get a break)

These are stories Report on Business is following Wednesday, Feb. 6, 2013.

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Big Macs and the euro crisis
A new study illustrates just how prices may be adjusting in the troubled region that is the euro zone.

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The report released today by the Bruegel think tank, based on The Economist's Big Mac index, suggests that the most troubled countries in the 17-member monetary union are getting a break. With the exception of Italy, for some strange reason.

Economist Guntram Wolff used Economist findings from its famous measure to compare price changes across the major euro nations to the average for the region.

The news, he said, is good.

"Austria and Germany grow above average, while, Greece, Ireland, Portugal and Spain are below average," he said.

The latter four have been at the focus of the three-year old debt crisis that has laid the euro zone low.

"Even France is below average," he added. "So adjustment seems to be working not just for unit labour costs but even real prices adjust."

But in Italy, burger prices have climbed at the fastest pace in the region, but for Estonia.

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"A Big Mac costs €3.85 [$5.20 U.S.], while it costs only €3.60 in France and €3.64 in Germany," he found.

"Or to put it in percentages, in July 2011, Italy was overvalued by 2.9 per cent while in January, 2013, it was overvalued by 5.7 per cent relative to Germany."

That's troubling, according to the economist.

"Overall, the Big Mac index shows some adjustment in the euro area in the last 18 months but Italian inflation rates are worrying," he said.

"Labour market reforms that do not translate into lower product market prices are detrimental to consumers and prevent the economy from gaining export strength. Italy needs to apply the right policies to address high inflation."

Report urges action
Canadian consumers feel "ripped off" by higher prices in Canada than in the U.S., says a report by a Senate committee studying price gaps between the two countries, recommending Ottawa review Canadian tariffs and other matters with an eye to reducing the price discrepancies.

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"When the Canadian dollar is at parity with the U.S. dollar, Canadian consumers notice that prices here are typically higher than in the United States," says the report released today.

"When Canadians window-shop, on a visit to the United States or online, they notice price gaps, especially on brand-name goods, from Aspirin to running shoes."

But the report concludes that there is no one solution to the problem of price differences after the committee examined pricing of products ranging from ice skates to jeans, automobiles and books, The Globe and Mail's Marina Strauss and Barrie McKenna report.

It recommends Ottawa continue to integrate safety standards between Canada and the U.S. with the intent of reducing price discrepancies "without compromising the safety needs of the two countries."

Strong day for RIM
The launch of the much hyped BlackBerry Z10 smartphone in Canada on Tuesday was the best debut of any of Research In Motion Ltd.'s previous BlackBerrys, the company said today.

"In Canada, yesterday was the best day ever for the first day of a launch of a new BlackBerry smartphone," chief executive officer Thorsten Heins said in a statement. "In fact, it was more than 50 [per cent] better than any other launch day in our history in Canada."

RIM, which has lost a huge amount of market share mainly to Apple Inc. and Samsung Electronics Co. Ltd., is counting on the new device to win back consumers in a number of developed markets, The Globe and Mail's Iain Marlow writes.

The (ongoing) trouble in banking
Royal Bank of Scotland's chairman repeated a phrase oft heard since the financial crisis as he issued his mega mea culpa today: "We have to fix the culture in the banking industry."

Phillip Hampton was announcing a settlement in the wide-ranging probe over manipulation of key interest rates. He talked, as others have before him, about integrity in an industry that was wounded by the crisis and has lurched since from scandal to scandal, the latest involving the London Interbank Offered Rate, or Libor.

Today's settlement by RBS, once the model for a global bank, involves paying more than $600-million (U.S.) and pleading guilty to wire fraud in Japan, wrapping up a deal with authorities in Britain and the United States related to Libor, Swiss Franc Libor and Yen Libor. The probe, the bank said, found wrongdoing by 21 employees, largely in the latter two rates.

"The RBS board acknowledges that there were serious shortcomings in our systems and controls and also in the integrity of a small group of our employees," Mr. Hampton said.

"This is a sad day for RBS, but also an important one in continuing to put right the mistakes of the past," he added in the statement.

"We have to fix the culture in the banking industry. The most important part of that is focusing our efforts on the needs of our customers and acting with integrity. And it also involves facing up to the bank's past failings, no matter how uncomfortable that is."

Of 21 people involved, according to RBS, six have been fired, including two managers, and six other are being disciplined. Eight left the bank earlier.

"The findings also highlight serious failures in the controls and risk management systems RBS had in place," the bank said.

"However, none of the regulators in question concluded that RBS, as a firm, had engaged in any deliberate misconduct," it added.

"There are no findings that anyone beyond individual traders and, in some instances, their immediate supervisors, was aware of, or instructed, any deliberate manipulation of submissions, nor is there any finding that RBS suppressed Libor submissions at the direction of senior management."

Today's settlement is the latest in a series of black eyes for the banking industry, which emerged from the financial crisis tarred and loathed, and facing new regulations and pressure on bonuses. These have ranged from JPMorgan Chase & Co.'s 'London Whale' to the settlements over foreclosures.

"The integrity of Libor depends on truthful information provided by a select group of some of the world's most important banks," said David Meister, director of enforcement at the U.S. commodity Futures Trading Commission, as he announced the CFTC's part of the settlement.

"The public is deprived of an honest benchmark interest rate when a group of traders sits around a desk for years falsely spinning their bank's Libor submissions, trying to manufacture winning trades. That's what happened at RBS."

Oil sands project troubled
Canada's Suncor Energy Inc. has taken a hit of almost $1.5-billion on its Voyageur project, a massive oil sands plant that is now at serious risk of cancellation, The Globe and Mail's Nathan VanderKlippe reports.

The $11.6-billion Voyageur upgrader is designed to process 200,000 barrels per day of heavy oil sands bitumen into a lighter oil. The project was 15 per cent built, and Suncor had already spent $3.5-billion, when Suncor halted work in 2009.

"Suncor's view is that the economic outlook for the Voyageur upgrader project is challenged," the company said in a statement last night as it posted a quarterly loss of $562-million or 37 cents a share.

"The partners have been considering options for the project, including the implications of cancellation or indefinite deferral," it added.

WestJet hikes dividend
WestJet Airlines Ltd. today posted a stronger fourth-quarter profit, and boosted its quarterly dividend to 10 cents from 8 cents.

The Calgary-based airline earned $60.9-million, or 46 cents a share, compared to $35.6-million or 26 cents a year earlier, The Globe and Mail's Guy Dixon reports. For the year, WestJet earned $242.4-million, or $1.78, also up sharply from 2011.

January kind to real estate
One month does not a trend make, but sales numbers coming in from across Canada show a January housing market with some spunk still.

"The January home sales results are rolling in across Canada's major cities, and year-over-year growth looks much improved from December's 17.9-per-cent year-over-year dive in the major markets," said economist Robert Kavcic of BMO Nesbitt Burns.

National numbers won't be reported by the Canadian Real Estate Association until mid-February, but local boards have started to post their January results.

As The Globe and Mail's Tara Perkins reports, the Toronto Real Estate Board reported yesterday that sales in January slipped by only 1.3 per cent from a year earlier, following December's year-over-year slump of more than 20 per cent.

Sales in Calgary, meanwhile, the one standout city in the country, picked up steam, climbing more than 15 per cent, and Edmonton registered a gain of 3 per cent.

Notable, said Mr. Kavcic, is that sales of homes over $1-million climbed by 3.5 per cent in January, though there aren't a lot of those.

"The surging equity market certainly isn't hurting the high end of the market," he added.

Having said that, Mr. Kavcic also pointed out that last month's numbers are being compared to a "very weak month" a year earlier, while there was also one more business day factored into the latest sales figures.

Still, the latest January sales come after months of a cooling market, driven lower, deliberately, by a fresh round of mortgage restrictions brought in by Finance Minister Jim Flaherty in July. And even as sales slipped and new listings were hit, prices held up.

But … not so fast, Vancouver.

Vancouver is seen as the one market where a "soft landing" wasn't in the cards. But even there, January's sales decline, of more than 14 per cent, was markedly slower than December's 30 per cent.

Prices in Vancouver have lost 6 per cent from their peak last May, though BMO says that January's drop of 11 per cent in new listings could "ultimately temper the price declines."

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