Posts Tagged ‘ecb’

Those who like to tint their spectacles with roses saw reason to cheer. The Eurozone economy appeared to be on the slow march to recovery. Oh boy it was slow, and the signs of recovery were subtle, but they were there. Then yesterday it began to look as if was all going to blow up.

There is a consensus across much of the euro area that pain just can’t be avoided; that recovery can only occur if first we have pain, then more pain, and then – just to be on the safe side – a bit more pain. But, or so goes the consensus, the people realise this; they are willing to make the sacrifices, and recovery will follow – just be patient and let hard work and fortitude carry the euro through.

Last year Stein Ringen, a sociology professor at Green Templeton College Oxford, penned a piece for the ‘FT’. He said: “Economists are no more likely always to agree than any other experts but there was a remarkable unanimity as the crisis unfolded: Europe was on the edge of the abyss; bold and rapid action was needed from strong governments.” But, in his bullish article, he added: “Against this storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available. She has been proved right.” He then talked about how the solution turned out to be “steady work and steely brinkmanship.”

The article was written on March 27 last year. At that time there was a consensus across the euro area that predictions of doom had been disproved. There was one snag with the optimism of that time: subsequent events showed it to be ill-informed. In fact, the euro area has been in recession/depression ever since.

Then earlier this year, in another one of those ‘told you it would be all right’ type statements, José Manuel Barroso, president of the EU Commission, said: “[The] existential threat against the euro has essentially been overcome.” He concluded: “In 2013 the question won’t be if the euro will or will not implode.” Or take this piece in ‘Bloomberg’, written in January this year, Why Austerity Works and Stimulus Doesn’t http://www.bloomberg.com/news/2013-01-07/why-austerity-works-and-fiscal-stimulus-doesnt.html

The author Anders Aslund said: “After five years of financial crisis, the European record in Northern Europe is sound, thanks to austerity, while Southern Europe is hurting because of half-hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.”

So, was there evidence to back-up these claims? Was austerity working?

Of late there have been signs – small signs, but signs nonetheless – of improvement. Take Markit’s latest Purchasing Managers’ Indices (PMIs) for both manufacturing and services. The word high features prominently. For Ireland the composite PMI for June rose to a five month high; it hit a three month high for Germany; a 24 month high for Spain; a ten month high for France, and a 21 month high for Italy.

So that was encouraging.

Spanish manufacturing now appears to be out of recession, with the latest manufacturing PMI for Spain hitting 50 – a 26 month high – a score which is meant to be consistent with zero growth. Furthermore, recent trade data showed the first trade surplus for Spain in 40 years.

On the debt front, central government debt in Greece is well below target so far this year, and much better than during the corresponding period last year. Ireland appears to be on course to meet its targets for this year.

This is where the good news finishes, however.

Sure, Spain posted its first trade surplus in 40 years, but this was largely down to plummeting imports. In other words, the surplus was a symptom of economic depression. Sure the PMIs are looking better, but they still suggest the euro area is in recession – a very deep recession in some cases, including – by the way – France and Italy.

As for debt, total external debt (that’s public and private owed to creditors abroad) is 168 per cent of GDP in Spain, 200 per cent of GDP in Greece, 227 per cent in Portugal, and 410 per cent in Ireland.

Debt maturing in 2013 or 2014 in Greece equates to 21 per cent of GDP in Greece and Portugal, 23 per cent in Spain, and 32 per cent in Italy.

Unemployment, especially in Greece and Spain, remains at levels that can only really be called horrendous.

How can hard work save these countries when there isn’t the work for people to do?

But we now appear to be entering a new era; one in which monetary policy will slowly tighten. If the Fed raises interest rates in 2015, as it suggests, what will this mean for the euro area?

Bond yields soared in Portugal yesterday on the latest political uncertainty following the resignation of two government ministers. They also rose sharply in Greece, which is also facing a political challenge at the moment, after the Democratic Left pulled out of the Greek coalition following the closure of State TV, in another government attempt to reduce spending. Yields were up in Spain too.

The good news, albeit small comfort for many, is that Angela Merkel seems to have woken up to the plight of the euro area’s unemployed youth. Post German elections – assuming she wins that is – there is even a chance she will rein back on pressure for more austerity.

The truth is that austerity is not working. Sure parts of the economies across much of Europe need a radical overhaul, and indeed could do with some austerity measures. But other parts of the economy need stimulus, and they need big stimulus. Nothing short of a latter day Marshall Plan will do.

But the ECB has been a disaster – fretting over inflation when deflation was a bigger danger.

Maybe, the ECB will mend its ways, but the signs are not good. If the Fed tightens, the euro may come under pressure relative to the dollar, and in such an environment it is hard to imagine the ECB announcing quantitative easing, even if this is what the region needs.

Alas, thanks to policy errors, and an ill-founded sense of confidence – even a head in the sand mentality amongst many decision makers in the euro area – it is no longer the euro that faces a so-called existential threat, it is the EU itself, and that is tragic.

It is not too late to save the project, but only massive investment, perhaps funded by the ECB printing money, will do it.

© Investment & Business News 2013

Last year Mario Draghi, president at the ECB, said the Eurozone central bank was ready to do “Whatever it takes to save the euro.” The markets loved it, and have been loving it ever since, but they forgot about the prefix, because Mr Draghi also said a few things at the beginning of the “whatever it takes statement.” In fact, he said: “Within our mandate.” That was a pretty important proviso. It is like celebrating because someone says you have done something that is good, but ignoring the fact that it was prefixed by not.

That was last summer. Now it seems that at last Super Mario Draghi has done something other than talk with prefixes that get ignored.

Yesterday the ECB voted to cut interest rates to half a per cent. So at last they are at the same level as the UK – not so long ago they were 1 per cent.

Mr Draghi said the “ECB was ready to act,” and those words got the markets all excited again.

But why has it taken so long? Inflation in the Eurozone was just 1.2 per cent in April. Across the region, and for the time being, inflation is as about as threatening as a puppy wearing a muzzle.

Well, there is an answer to the question. One ECB member voted to keep rates on hold. Jörg Asmussen, a German economist, who is normally thought of as a Draghi supporter, voted to keep rates on hold. He felt the rate cut would have little impact. Jens Weidmann, President of the German Bundesbank, held similar doubts but voted with the rest of the pack on this occasion.

So what’s next? Will the ECB really announce quantitative easing (QE)? Just remember last year Mr Weidmann likened QE to a Faustian pact. See: Quantitative Easing 

It hardly seems likely that when the topic of creating money comes up at the ECB Mr Weidmann will vote in the affirmative.

© Investment & Business News 2013

The data was revealed a week or so ago. It is pretty clear cut. According to the ECB, the median wealth of the Spanish is 183,000 euros, 172,000 euros for Italians, 75,000 for the Portuguese, and a stunning 267,000 euros in Cyprus. In contrast, median wealth in Germany is just 51,000 euros.

So that’s it then. The problem is not that the poor old Spanish and Cypriots are being pulverised by the vicious EU, which is being prompted by Germany into punishing them for mythical misdeeds. Instead, the real problem is that poverty stricken German households barely have two cents to rub together.

The solution is simple enough: tax ‘em. Have a wealth tax. And where will it end? Will the meat in your freezer – beef, horse or otherwise – be seen as wealth and subjected to tax?

There is an alternative take. Writing in the ‘FT’, Wolfgang Munchau argued that the ECB survey was in fact being taken out of context. For one thing, he said median wealth is a meaningless guide. He said: “If you want to compare across countries, it is better to take the mean.” Mr Munchau suggested that if we use mean wealth as the guide, then Germany’s does not lag behind troubled Europe as much as the quoted data suggests. It is not clear that Mr Munchau is right here, however. After all, median data is the better measure for telling us the position of most people, and is not distorted by a small number of people with massive wealth.

But Mr Munchau made a more substantive point. Actually the differences in wealth are a symptom of the euro – that is to say, a Cypriot euro has less value than a German euro, hence Cypriot assets appear to be worth more.

Others question the limitation of the ECB data, and say it does not take into account savings in pension schemes.

But there are other more important points. For one thing, the ECB survey relates to asset values from a couple of years ago. Asset prices across much of troubled Europe have crashed since.

Besides we all know that in Germany the housing market is seen as less important. The Germans do not celebrate house prices going up – they mourn.

The data does suggest an interesting idea though. Is the reason the savings ratio in Germany is relatively high, and thus consumption to income relatively low, because Germans have less wealth tied in the home, and after a period of rising house prices, appear to have less wealth?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

The political entanglements in the euro area are escalating. Last week a triumvirate of finance ministers from Germany, Holland and Finland put a rather large spoke in the wheel. You may know that during the summer it was agreed that Spain’s banks could be bailed out directly by the IMF, EU Commission and the ECB via the organisation called the European Stability Mechanism (ESM).  But last week the three finance ministers issued a statement saying: “The ESM can take direct responsibility for problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities.”  So what was that: “legacy issues”? What does that mean? Were they referring to bank bail-outs that occurred some time ago, such as Ireland’s? If this is the case, their statement seems pretty reasonable. Alternatively, were they referring to the bail-out of Spain’s banks? Many interpreted it that way, leading to claims that Spain had been betrayed.

Meanwhile, Helmut Kohl – who as you may recall was German Chancellor during German reunification, and an out and out supporters of the euro – made a speech in which he said of Angela Merkel: “She is destroying my Europe.” He called for giving Greece more time to make its reforms.

Then there was Vaclav Klaus, President of the Czech Republic. When his country joined the EU, its leaders signed a treaty agreeing to also join the euro at some point in the future. But the treaty imposed no time frame. So when did Mr Klaus think this will happen?

“Perhaps in the year 2074 we can join the European Monetary Union,” he said last week.

So that wasn’t very nice about the euro, was it?

In the UK, calls for a referendum on staying in the EU are growing, and the talk is that David Cameron will pledge to hold such a referendum if he wins the next election.

That’s the snag. Either the euro falls apart, which – according to many – will be a disaster for the world economy, or we see closer political union, which will probably leave the UK’s membership of the EU in tatters.

But there is a third way. The euro could survive, without political union.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

It’s been a busy week for QE. Japan hit the virtual printing press again. This time it was QE7. The latest minutes from the Bank of England’s interest setting committee implied more QE is on the cards. And you will no doubt recall that the US Fed released its latest version of QE recently. This time it said it is going to spend  $40 billion a month buying up assets, for… well it has not said for how long, just for as long as necessary.

Finally the ECB has revealed its own version of QE.

Now this may come as something of a shock, but apparently central bankers in Germany are not so keen.

And last week, Jans Weidmann, top man at the Deutsche Bundesbank, was quoting Johann Wolfgang von Goethe. That’s the German author who wrote about Faust, and pacts with devils. In one of the stories from ‘Faust’ the devil disguised himself as a fool, and persuaded the emperor, who was suffering from too much debt, to solve his problem by printing more money. The result, of course, was runaway inflation.

Now the media are paraphrasing Mr Weidmann sayng that he has called QE the work of the devil.

Meanwhile, as if to prove the German central banker right, there is a growing consensus that some extra inflation may be exactly what we need to pay down debts, without creating one mother of a depression.

It is just…

First of all, evidence that QE leads to inflation is pretty feeble. We live in a world of fractional banking, which means banks create money through their lending. For reasons we are all familiar with, banks are not keen on lending at the moment, not at all. This all means that there is a danger of the money supply contracting so fast that deflation will descend on the global economy like a giant hammer, beating down green shoots wherever they appear.

Central banks may wish to create inflation, but whether they can do so is another matter entirely.

For an individual country there is evidence that QE can be mildly inflationary, because it pushes down the value of a currency. But you can’t have all currencies falling at once. When Japan, the UK, the US and the Euro area all unleash QE at the same time, while China keeps to its policy of maintaining a link between the yuan and the dollar, the currency effect of QE pretty much gets cancelled out.

The real problem is not so much that QE leads to inflation; it is that all it really does is try to get things back to what they used to be like.

It does push down on interest rates, driving up the price of government bonds, making all other assets look cheap, forcing them to either rise, or at least not crash. Those encumbered with huge debts (or most of them) find that, thanks to low rates, they can manage to pay their way.

As a result the economy is on a kind of hold. The underlying problems that caused the crisis in 2008 are not being fixed, and so it drags on, and on.

QE’s snag is that it is it not accurate. It is the bluntest of instruments, and right now, any stimulus measure needs to be targeted.

Part of the problem is demographics, and there is no easy fix to that one.

Part of the problem is that for decades, savers have been risk averse. Money has gone into assets that do not create wealth, and not enough money has gone into supporting the ideas of entrepreneurs.

But there is another point, and that really does take us to the crux of the issue. Read on. See: In the 21st Century, taxes may need to be much, much higher.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

This is no wind up. The last week or so has seen hints. The green shoots may not be big, peeking above the surface like scared mice, but they have been there all the same. So is this for real? Has the recovery begun?

Yesterday on the Andrew Marr Show former Prime Minister John Major said: “Recovery begins from the darkest moment. I’m not certain, but I think we have passed the darkest moment.”

So what’s the evidence?

Earlier this month, data from the ONS revealed another rise in employment – this time up 236,000 in the three months to July. Elsewhere, data on July’s industrial production indicated the biggest jump in this sector for 25 years. The OECD took a look at the G7 and the four big emerging economies (BRICs) and saved its most bullish words for the UK and Brazil, which were the only countries that it said were due to see a pick-up next year.

The round of good news was completed by the Centre of Economics and Business Research (CEBR), which has forecast that 2013 will see the first rise in real incomes for UK households since 2009.

Looking beyond the UK’s borders, markets were c*ck-a-whoop. Both the US Fed and the Euro regions’ central bank – the ECB – have announced QE (or in the case of the ECB QE ish), and at last they are saying central bankers are taking decisive action. A report from ‘Financial Times Deutschland’ suggested that unit labour costs have fallen by 15 per cent in Greece since 2010, with significant falls also seen in Spain and Ireland. Greece saw its current account deficit fall by 54 per cent between 2007 and 2011.

Finally maybe policy makers are learning lessons. Vince Cable is agreeing to relax labour laws in the UK. David Cameron wants to cut down on red tape, and make it easier to gain planning permission. He wants to see an end to dithering.

Then there is the funding for lending scheme.  This is an idea that really seems to have struck a chord across the world, so much so that some economists in the US are now urging the Fed to announce a similar idea.

And finally, the World Economic Forum has released its latest league table showing the world’s most competitive countries. And guess which country moved from number ten on the chart to number eight? Yes, that’s right the UK. The usual suspects did better: Switzerland, Singapore, Finland, Sweden and the Netherlands. But of the G7 only Germany in sixth spot and the US in seventh scored higher.

Recessions are bad, of course they are, but they can have a cleansing effect. They can correct bad habits, get rid of bad ideas, and create economies that are more focused on ideas that work. The UK has had a torrid few years, but maybe it is now set to benefit from the correction.

Well is it? Read on…

Whether you believe the UK downturn is slowly ending does to an extent depend on what you believe caused its problems in the first place.

Let’s look at the data, the theories, and the policies and ask: do they stack up?

First there’s data on employment. It has improved and that’s good, of course it is. But the quarter also saw a 24,000 rise in the number of part time workers. There are now 1.42 million people working part-time in the UK, which is the highest number ever recorded – and records go back to 1992. So maybe the improvement in employment is not quite as impressive as it seems.

The jump in industrial production in July, the highest in 25 years, is to be celebrated, but to an extent this occurred as producers made up for lost production in the previous month due to the Jubilee celebrations.

What about forecasts that real wages are set to rise in the UK? Here the news is more encouraging but it hinges on an ‘if’.

The CEBR reckons average real disposable income for households will rise by 0.5 per cent in 2013. If it is right, then it will be the first such rise since 2009. Incidentally, average wages in the year to June increased by 1.5 per cent, according to stats out last week. In the year to June, inflation – as measured by the retail price index – was 3.2 per cent. So during the 12 months to the end of June the average worker became a lot worse off.

The CEBR also forecast that the households who will benefit the most from rises in real disposable income will be those on lower incomes. It reckons households whose disposable income is less than £26,000 will see their income rise by 1.5 per cent next year, after inflation. Middle income earning households will see real disposable income rise by 1 per cent. And those receiving more than £50,000 are expected to see a rise of 0.7 per cent.

So what assumption did the CEBR make to draw these predictions? Firstly, the improvement for lower incomes is down to falls in bonuses. (In the year to June bonus pay fell by 4.7 per cent.) Secondly, the CEBR assumed that inflation is set to fall. It may be right about that, but the question mark here relates to the price of food. Droughts in Russia and the US are hitting crop yields. At the same time, too much arable land is being used to grow bio-fuels, a policy that seems pretty mad. As for the euro area, ECB President Mario Draghi said he will do whatever it takes to save the euro, and now he has delivered – or tried to anyway. The ECB is engaging in its own form of quantitative easing. It is not outright QE, it is not creating new money; rather it is taking deposits from commercial banks to match its bond buying. See: It’s QE Jim, but not as we know it.

But Mario’s scheme is complicated. It is really aimed at Italy and Spain, but for either of these countries to take part, they must first ask the European Stability Mechanism for help. And they must sign a memorandum of understanding, relating to the austerity cuts they must make. In other words, in order to avail themselves of ECB money, Italy and Spain must agree to cuts.

“Don’t do it,” says Nobel Laureate Joseph Stiglitz. In an interview with a Spanish paper he said that for Spain to sign on the dotted line, to ask the ESM for help and agree to Germany’s insistence on austerity, would be tantamount to economic suicide.

As for the US, something pretty interesting is happening across the pond. While some of the Christian fundamentalists that seem to be gaining more sway over the US political scene seem hell bent on enacting policies designed to pretty much terrify the rest of the world, amongst economists the QE debate has reached a new level. Professor Michael Woodford is a big cheese at Columbia University. He also happens to be the most respected academic on monetary economics in the world.

He reckons that when the Fed sets its monetary policy, it should take into account what’s called nominal US GDP – that is to say GDP measured in dollars, not adjusted for inflation. He is also a big fan of the Bank of England’s big idea: funding for lending, in which the central bank lends to banks if they agree to lend this money on to businesses and for mortgages.

But what all this really means is that the thinking at the Fed and among its advisors is slowly coming round to the view that that a little bit of inflation may be a good thing. Let’s face it, when you are in debt and inflation is quite high, and your income is rising with inflation, then the value of your debt relative to income is falling.

So that’s just a hint that the Fed is relaxing its inflation intentions. Bear in mind that the CEBR’s forecast for the UK economy is based on the assumption that inflation will fall, you can see how the whole thing is based on contradictory ideas.

But this still leaves the questions: is the UK on the mend?

Markets have overreacted to the latest news on QE. The UK has plenty of problems and challenges ahead, but yes, the outlook right now is more positive than a week ago.

The real snag is that neither central bankers nor indeed many governments are fixing the underlying problem. And to find out about that, read on.