Posts Tagged ‘european central bank’

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Now some surveys are suggesting that parts of the UK economy are enjoying their best growth since 2006. So is that it then? Is the crisis that began in 2008 well and truly over? And here is another question: does it just go to show the government was right all along? Austerity works, QE, or quantitative easing, is best?

There are reasons to think the recovery this time around is for real, unlike in 2009/2010 when the UK saw something of a false dawn. This time real things seem to be happening. UK exporters are enjoying more success selling their wares outside the Eurozone, and the success enjoyed by the car industry is a good example of this. Then there is evidence of reshoring, as companies look at return at least some of their manufacturing to their home markets.

But does this really prove that austerity works? Does this really prove QE was the right thing to do all along?

There is something quite ironic about something George Osborne has said. He has often laughed off ideas that the way to solve a crisis caused by having too much debt was to borrow more. That was how he has defended austerity. And yet, by encouraging a new housing boom, it could be argued that Mr Osborne is trying to solve an economic crisis caused by too much household debt, by getting households to borrow more.

It boils down to whether you think government debt is worse than private debt. Just remember that in many parts of the world, such as Spain for example, household debt became government debt.

Now let’s focus some more on UK household debt. In the year 2000 UK household debt to disposable income, according to the OECD, was 112 per cent. In 2007 it was 174 per cent, and in 2012 it was back down to 146 per cent. The Office of Budget Responsibility recently forecast that UK household debt is set to rise again – albeit not by a great deal. This differs, by the way, from the US which has seen the ratio fall to a much lower level, and which is expected to fall even further.

Household debt keeps getting forgotten. It was household debt across the UK, the US and Europe which explained why QE was never going to lead to hyperinflation. Households had become afraid to spend, to borrow. The money supply, the broad money supply, which economists believe is associated with inflation, is as much determined by debt and borrowing levels as anything.

Despite the Bank of England issuing £375 billion in QE over the last few years, the broad money supply has only seen very slight growth. See it terms of a bath with a big hole in it. You turn the tap on full, to make up for the water leaking out of the bottom, and many, who seem to be oblivious to the hole, fret that the bath will overflow.

QE was never going to lead to hyperinflation and the biggest failing of the European Central Bank was not to realise this.

But just because QE was not going to create hyperinflation that does not mean it is a good idea. If you have a bath with a hole in it, what is the best thing to do? Is it to turn the taps up full, or try to fix the leak? QE amounts to taking the former approach.

The trouble with austerity is that it can work when tried in isolation. But it has not been tried in isolation; rather it has been a Europe wide thing. This has had disastrous consequences for the UK and Eurozone.

The UK had a worse downturn than most of the Europe because the UK was more reliant on its banking sector. The UK is enjoying a faster recovery than the Eurozone partly because it is not in the euro and has a cheaper currency, and partly because of QE.

But while QE has not created hyperinflation, it has led to higher asset prices. To misquote George Osborne: “How can you solve a crisis caused by asset prices being too high, by getting asset prices to rise?”

What the UK, the US and Europe need is for central bank money printing to fund investment to enable the world’s developed economies to start fulfilling the potential of the fantastic innovations we have seen in recent years.

Instead, we have seen the UK return to old habits. Central bank policy via QE and government policy are combining to push up house prices and household debt when what we need is more investment. This is not a good development.

© Investment & Business News 2013

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31 July 2013, and 1 August 2013: mark these dates in your diary. On these days economic news was revealed that meant one of two things; either the economy was well and truly on the mend, or we are seeing one very big blip. If it is the former, celebrate; if it is the latter enjoy it while it lasts.

They hadn’t expected much. Purchasing Managers’ Indices (PMIs) suggested the US economy had a rotten Q2. Sure, said the optimists, Q3 would be better, but the second quarter of this year was one we would rather forget. Then on 31July 2013 the hard data was released and it told a very different tale.

The US economy expanded at an annualised rate of 1.7 per cent in Q2, and by 1.4 per cent year on year. That was much better than expected, much better than the PMIs suggested.

Both business investment and residential investment helped – in the US when house prices go up so does construction, unlike in the UK where the correlation seems only very vague.

So that was the US. The news was good in the Eurozone too. The latest PMI from Markit on manufacturing in the region was out yesterday and it rose, hitting a two year high, with a reading of 50.3. To put that in perspective, any score over 50 is meant to correspond to growth. A reading of 50.3 is nothing special, but by recent standards it is positively wonderful.

Broken down by country things look like this:

Ireland,   51.0,    5-month high
Netherlands   50.8   24-month high
Germany   50.7   18-month high
Italy   50.4   26-month high
Spain   49.8   2-month low
France   49.7   17-month high
Austria   49.1   8-month high
Greece   47.0   43-month high

And finally we turn to the UK. The latest PMI for UK manufacturing rose to 54.6, a 26 month high. And get this. According to Markit which compiles the data along with CIPS: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Apologies for raining on such a pleasant parade, but the story was not good everywhere. In Russia and Turkey the PMIs fell sharply and look worrisome, in China the picture is mixed, with the official PMI pointing to a modest pick-up and the unofficial PMI from HSBC/Markit, which puts more weight on smaller companies, deteriorating.

Still with the PMIs, the news on Poland and the Czech Republic was much better. Watch these two countries closely, especially Poland. If there is truth in all this talk about reshoring, Poland, with its proximity to the developed part of Europe, may be a big beneficiary.

One worry is that other data out yesterday showed that Sweden contracted in Q2. The out and out bears – those who are cynical for a living – question the PMIs. They say they did not predict the slow-down in Sweden; they did not predict the pick-up in the US, and they are giving a misleading picture on Europe. The big fear relates to central bankers tightening policy as a result of this data. The Fed may accelerate its plans to ease back on QE.

As for the European Central Bank, it is cautious and conservative to a T. There is a permanent danger it will lose its nerve, and tighten again, sending the Eurozone back into recession.

© Investment & Business News 2013

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Beware of the TROIKA bearing gifts. The TROIKA is the collection of letters we use to describe the IMF, ECB and EU Commission and the organisations that, have clubbed together to provide money to Greece.

And everyone, with the exception of people living on Mars and members of the TROIKA, knows that the conditions imposed on Greece in return for providing more loans have caused the country to suffer economic depression. The IMF has already broken ranks, and said the TROIKA should have realised that Greek debt was not sustainable much sooner than it did, and should have agreed a haircut, in the process greatly alleviating Greek pain, at around a year earlier than it did.

Now a trio of economists – Dimitri Papadimitriou, Gennaro Zezza, and Michalis Nikiforos – have produced a model based on stock flow analysis, which suggests that Greek unemployment might rise from the horrendous 27.4 per cent level it is currently at, to 34 per cent by the end of 2016.

The lexicon is bare. Words fail. If 27.4 per cent is horrendous what is 34 per cent unemployment?

The three economists say Greece needs a kind of latter day Marshall Plan. They are right. Austerity in some sectors of the Greek economy, in particular the public sector, has to be tempered with equally significant levels of investment.

If Greece was Germany, global leaders would not agree to such austerity because they would fear the political repercussions. But this is little Greece. It may have been a superpower 2,500 year ago, but Alexander is dead, Sparta defeated, and the TROIKA vents its fury like the Titans escaped from Hades. For more see: A New Stock-Flow Model for Greece Shows the Worst is Yet to come 

© Investment & Business News 2013

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

The EU’s financiers responsible for the Greek rescue scheme in 2008 have reacted strongly to accusations from the IMF that serious errors were made in the initial bail-out of Greece. Maybe it is time that these deniers started being a little more honest with themselves and us.

Haircuts can be good things. Sampson may not have agreed with such a sentiment, but, on the other hand, we tend to feel better afterwards. It can be like that with sovereign debt too, but in 2010, the so-called TROIKA – that’s the organisation made up of the IMF, EU commission and ECB – thought the very idea of a haircut of Greek debt was about as sensible as turning the Acropolis into a new apartment block.

Plenty of people warned that it was dangerous, and over and over again we were told that the harsh terms imposed on Greece were not necessary. Now the IMF is saying it was all a terrible mistake.

In a report published yesterday the IMF said: “Not tackling the public debt problem decisively at the outset or early in the programme created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output.”

Of course this is the IMF. It is not going to wear a hair shirt, or be too vocal in slating its partners for that matter.

It said that after the initial bail-out Greek public debt “remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.”

And, it continued: “There are…political economy lessons to be learned. Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program. The obstacles encountered in implementing reforms also illustrate the critical importance of ownership of a program, a lesson that is common to the findings of many previous EPEs. To read the report, go to Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement 

A spokesman for the EU commission said: “We fundamentally disagree… With hindsight we can go back and say in an ideal world what should have been done differently. The circumstances were what they were. I think the commission did its best in an unprecedented situation.”

ECB President Mario Draghi has entered the debate too, saying: “We tend to judge things that happened yesterday with today’s eyes. We tend to forget that when the discussions were taking place the situation was much, much worse.”

Hindsight bias is indeed a real phenomenon, and maybe we are all too keen to claim wisdom after an event. Psychologists can even cite studies to show that we have a distorted view of our own history, claiming, or even believing we predicted certain events when in fact we did no such thing.

But on this occasion citing hindsight bias as an excuse is not good enough.

Plenty of media, including, but not only, this publication warned at the time that the TROIKA was failing to see reality, that it was punishing Greece unnecessarily and that debt has to be cut via write-downs.

The TROIKA ignored what was obvious to outsiders. To now claim it had no way of knowing; that we are applying hindsight bias shows it has not learned anything. It is, frankly, arrogantly ignoring what is happening around it, stuck as it is in an ivory tower, or wherever it is that these financiers live.

There is a lesson today. Still the TROIKA, EU Commission and grandees of the Eurozone claim that the worst is over; that the troubled economies of indebted Europe are on the road to recovery, and by doing so they continue to make fatal mistakes.

What will happen in two years’ time, when the IMF says that too much austerity in 2013 led to unnecessary human hardship? Will the TROIKA accuse the IMF of hindsight bias, and say it had no way of knowing this at the time?

Rather than denying errors, perhaps the TROIKA et al, should tuck into some humble pie, and then, just maybe they will notice they are repeating this mistake.

© 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.

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