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Currency Wars: The New World Ordoliberalism

There’s been quite a bit of chatter lately about the threat of “Currency Wars” amongst global policymakers. A situation might be declared a “currency war” when one or more countries engage in policies that end up significantly changing the value of their currencies, shifting the global trade dynamic. But nations might engage in policies that significantly change the value of their currencies for a lot of reasons, so the declaration of a currency war is never taken lightly. It’s also not taken lightly since it can signal a shift in fundamental market forces that can have broad and sustained impacts on the global financial markets and the broader global economy. Presently, the US and Japan have unleashed the financial bazookas: Both the Federal Reserve and the Bank of Japan (BOJ) have near zero interest rates and both are signaling that they will hold those rate at these historically low levels until the global economy appears to be well on the road to recovery. Additionally, the Fed and BOJ are employing additional “market operations” that involve buying and assets from financial institutions (e.g. the Fed’s “Quantitative easing”), typically used to free up credit for the financial system or lower borrowing costs). So it’s pretty clear that historically low interest rate are going to be the norm for the next couple of years or longer and, overall, this likely to be good news for the world given the ongoing economic troubles in these two critical economies.

In Europe, however, the European Central Bank (ECB) has a decidedly different overall path to recovery. The eurozone’s central banking strategy has been to maintain a surprising tight overall credit environment with the ECB holding its overnight rate at 0.75% vs the near 0% rates at the Fed and BOJ. In addition, while, the ECB has also agreed, in principle, to engage in open market bond purchases to ease up the eurozone’s sovereign debt crisis, no bonds have actually been purchased yet by the ECB. To be fair, the ECB has engaged rather extensive emergency lending to eurozone banks in place of outright bond purchases (over 1 trillion euros), but as we’re going to see below, the ECB’s current policies also seem almost designed to ensure the bulk of those emergency loans get paid back early.

In other words, while the ECB appears to agree with the Fed and BOJ that central bank assets purchases can be a legitimate policy under emergency circumstances, the ECB appears to take a much stricter definition of what constitutes “an emergency”. While the Fed and BOJ seem to be treating high unemployment in the face of near zero rates as “an emergency”, the ECB has taken a decidedly different view. From the ECB’s apparent perspective, high unemployment is simply what is to be expected as a consequence of economic downturns and resulting austerity. These are intended to be temporary pains required for future prosperity. Ensuring “price stability” (low inflation) is, instead, the sole mandate of the ECB and that means the only emergencies that warrant significant central bank actions in the eurozone are those emergencies that risk the purchasing power of the euro itself.

The Fed, on the other hand, has a dual mandate of price stability and full employment. Like the ECB, the BOJ has a single mandate of price stability. But unlike the ECB, the BOJ is effectively behaving as if it has the Fed’s dual mandate. This fundamental “mandate divide” may not seem very significant when the global economy is doing well. But when the world is trying to claw its way out of the world global recession since the Great Depression, interest rates are near zero, and two major central announce aggressive new monetary easing, it can become problematic when other major central banks decide that reducing credit and shrinking deficits is a higher priority:

G20 set to dilute big powers’ demands on currencies

By Jan Strupczewski and Tetsushi Kajimoto
MOSCOW | Fri Feb 15, 2013 3:22pm EST

(Reuters) – The Group of 20 nations will not single out Japan over the weak yen and will disregard a call from G7 powers to refrain from using economic policy to target exchange rates, according to a text drafted for finance leaders.

A G20 delegate who has seen the communique – prepared by finance officials for their bosses – also said it would make no direct mention of new debt-cutting targets, something Germany is pressing for but which the United States wanted struck out.

If adopted by G20 finance ministers and central bankers meeting in Moscow on Friday and Saturday, Japan will escape any censure for its expansionary policies which have driven the yen lower and drawn demands for action from some quarters.

“There will not be a heavy clash about currencies in the end, because nobody can risk such a negative signal,” said another G20 delegation source.

The currency market was thrown into turmoil this week after the Group of Seven – the United States, Japan, Germany, Britain, France, Canada and Italy – issued a joint statement stating that domestic economic policy must not be used to target currencies, which must remain determined by the market.

Tokyo said that reflected agreement that its bold monetary and fiscal policies were appropriate but the show of unity was shattered by off-the-record briefings critical of Japan.

A quick review of that recent G7 drama and subsequent whipsawing in the yen:
The currency market kerfuffle was, in part, a consequence of the nuanced/vague nature of the G7’s statement on Japan’s stimulus spending and currency devaluation. The G7 communicated this by basic saying that there would be no attempt to censure Japan over its new aggressive monetary easing. Following this statement, a Japanese official publicly declared it to be a G7 endorsement of Japan’s policies and those policies include talk of intentionally targeting a fall in the yen. So the markets took this as a sign that the yen would be allowed to fall further and the yen did just that: it fell further. Then a G7 official released a comment saying that, no, the Japanese official was incorrect and the G7 was indeed concerned about the rate of the fall in the value of the yen and also concerned over statements by Tokyo over targeting exchange rates. In other words, the G7 said stimulus spending designed to increase internal demand is ok, just don’t intentionally try to devalue a currency in order to make exports more attractive. Or something along those lines. Currency wars tend to involve a lot of rhetorical confusion.


The G20 draft merely sticks to previous language on the need to avoid excessive currency volatility, the delegate said.

The yen has fallen by around 20 percent since November. Having firmed earlier on Friday, it turned tail and dropped about 0.6 percent against the dollar and euro in response to the communique details.


Officials lined up to pour cold water on talk of a currency war where countries indulge in competitive devaluations.

European Central Bank President Mario Draghi said recent sparring over currencies was “inappropriate, fruitless and self-defeating” and U.S. Treasury official Lael Brainard warned against “loose talk”.

France has been a lone voice calling for euro exchange rate targets. Draghi said the currency was trading in line with long-term averages, a point endorsed by International Monetary Fund chief Christine Lagarde.

Also, make a note of France’s lone call for an exchange rate target, as it will be relevant to an important lessons highlighted below regarding a new dynamic in our contemporary currency conundrum: currency exchange rate policies can become exceedingly complicated when currency unions are involved. They tend to lend themselves to win-lose situations. Or win-“win more” or lose-“lose less”. Win-win situations are also possible, but we haven’t seen too many of those emerge out of the eurozone crisis yet. *fingers crossed!*

Skipping Down…


The meeting in Moscow of ministers from the G20 nations, which account for 90 percent of the world’s gross domestic product and two-thirds of its population, also looked set to lay bare differences over the balance between growth and austerity policies.

The draft communique reflected a row brewing between Europe and the United States over extending a promise to reduce budget deficits beyond 2016 A pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a G20 summit of leaders in St Petersburg in September.

The G20 put together a huge financial backstop to halt a market meltdown in 2009 but has failed to reach those heights since. At successive meetings, Germany has pressed the United States and others to do more to tackle their debts. Washington in turn has urged Berlin to do more to increase demand.

“It’s very important to calibrate the pace of fiscal consolidation,” Brainard said. “It’s … important to see demand in the euro area and some of that must take place through internal rebalancing.”

There will be no direct mention of fiscal targets, in response to U.S. pressure, reflecting its focus on running expansive policies until unemployment falls, the G20 delegate said.

Canadian Finance Minister Jim Flaherty, addressing the working dinner, said the growth versus austerity debate represented a “false dichotomy” that should not preclude action to boost jobs and growth now while targeting balanced budgets later.

The G7 and G20 powers are largely unified in their opposition to targeted currency devaluations. The conflict between the US and German over long term “fiscal targets”, however, underscores a more fundamental disagreement between the general role governments should be allowed to play during an economic crisis: should governments and central banks even be allowed to engage in the kinds of aggressive monetary policies we see coming from the Fed and BOJ? Or should the policy response focus almost exclusively on setting “fiscal targets”. The term “fiscal targets” is a fancy phrase for “government spending austerity intended to cut deficits” and its clearly the approach favored by the ECB and its chief member the Bundesbank. Germany’s Bundesbank is chief amongst the subordinated national central banks that operate in the eurozone and what the Bundesbank generally wants, the Bundesbank generally gets. And the Bundesbank really does not like low interest rates and LOVES “fiscal targets”. To a large extent, when we talk of a Fed/ECB divide, it’s really a Fed/Bundesbank divide.

In the above excerpt, there are references to the row over whether or not the “fiscal targets” set by the G20 in Toronto in 2010 – and set to expire this year – should be renewed for 2016. The targets, championed by Germany, involve the major economies of the world cutting their deficits in half by 2016. Germany appears to be interesting in setting up more “concrete” deficit-cutting agreements. At this point it’s unclear what the enforcement mechanism Germany is envisioning to ensure compliance with such targets, but considering that this these call for global “fiscal targets” are coming from Germany in the midst of extreme global economic weakness – especially weaknesses in the eurozone – it’s pretty clear that German policymakers would really like to see austerity go global:

G-20 at Odds Over Fiscal Goals as Fails to Meet 2010 Aim
By Ilya Arkhipov & Rainer Buergin – Feb 15, 2013 6:57 AM CT

Group of 20 governments disagreed over the strength of new fiscal goals as they risk missing the targets set three years ago.

After committing at a Toronto summit in 2010 to halve budget deficits by this year, most advanced nations are now facing failure on that score and on a related pledge to stabilize their debt by 2016.

As G-20 finance chiefs meet in Moscow, the challenge now is to find a replacement for the Toronto goals after weak economic growth hamstrung fiscal consolidation worldwide. While German Finance Minister Wolfgang Schaeuble advocated “concrete” targets, Russian official Ksenia Yudaeva said formal commitments would be “counterproductive.”

“We might want to have long-term principles and particular strategies for countries with high deficit levels,” Yudaeva, Russia’s G-20 sherpa, said in an interview. “But I don’t think we need any precise commitments like during Toronto. It should be much more flexible.”

The G-20 will discuss adopting a new deadline for deficit goals and may set 2016 as the new target date, Russian Finance Minister Anton Siluanov said today. Given the debt burden of industrial nations, “a credible path of debt reduction is really essential and the positive environment should be used by the G-20 countries,” Schaeuble said.

Fiscal Stance

Assessing the appropriate stance of fiscal policy has caused rifts between the major economies since the global financial crisis began in 2007. It’s pitted the U.S., whose officials have preferred to focus on boosting economic growth in the short term, against a European push for immediate austerity measures.

‘Very Restrictive’

The European fiscal stance remains “very restrictive,” leaving room for easing as the region’s debt crisis ebbs, Brazilian Finance Minister Guido Mantega said.

The finance chiefs already watered down their Toronto agreement after November talks in Mexico City, saying they would ensure “the pace of fiscal consolidation is appropriate to support recovery.”

To stimulate or not to stimulate, that is the question (to be asked by a centrally coordinating authority)

The major central banks don’t just have a divide in their overall philosophies regarding the risks and benefits of monetary stimulus. From a power-structure standpoint the ECB is operating in a vastly different environment from its US and Japanese counterparts. For starters, the Federal Reserve and BOJ are both central banks for a single economy whereas the ECB is kind of the chief central bank for a large number of nations that each have their own central banks. As such, the ECB is constantly forced to choose a single set of monetary policies for a wide variety of nations with very different needs. Additionally, because money is likely to flow within the eurozone as a consequence to changing economic realities it’s very possible for policies that damage some eurozone members to end up helping other eurozone members. For instance, one of the more persistent patterns we’ve seen emerging during the course of the eurozone crisis has been rising borrowing costs for the weakest nations coupled with ultra-low (and sometimes negative) borrowing costs for Germany. This type of phenomena is not something the Fed of BOJ have to face.

Another difference in the power structures of the ECB vs the Fed or BOJ is that when eurozone members fall into financial troubles the control of the entire nation is handed over to an ECB-EU-IMF “troika” that gets to manage the country, set policies, and impose austerity should the troika choose do so. And the ECB is always part of the troika. In other words, while central banks are normally politically “independent”, there has always been a risk that the politicians would just replace the central bankers should those bankers unilaterally decide run a “tight money” policy over strong public opposition. That risk of an indirect public revolt is just not a big issue for the ECB. As long as the ECB’s policies please the eurozone’s most powerful members (Germany, in particular), the ECB will be largely free to engage in the kinds of policies that would normally leave a populace livid. This “troika” reality greatly facilitates the ECB’s ability to impose tight-money pro-austerity policies.

These fundamental difference in central bank operational consideration raise an additional question regarding the above article excerpts: When policymakers talk about the need for more “concrete” fiscal targets and new “promises” to cut deficits in half by 2016, how could such “promises” and “goals” carry any sort of weight without something like an international analog to the eurozone that includes a kind of super-central bank or super-troika to mandate potentially unpopular policies? These might seem like silly “out there” questions given the current G20 divide over whether or not to extend the 2010 Toronot “fiscal targets” or censure Japan for it’s aggressive stimulus. But keep in mind that there are policymakers with bigger international plans on their minds. This includes the European Union’s economic and monetary affairs minister Olli Rehn. If you think of Mario Draghi’s ECB as the “austerity-lite” bloc in the eurozone and the Jens Weidmann’s Bundesbank as the “austerity-heavy” crowd, Rehn is sort of in the middle. He’s been calling for greater central bank monetary policy “coordination” for years. It’s not exactly clear what exactly he has in mind, but back in 2010 he said that he saw “a certain need for reinforced international coordination of monetary policy” and then suggested that the IMF could be the “coordinator” in chief:

Global monetary policy coordination needed: EU’s Rehn

By Jan Strupczewsktae

WASHINGTON | Sat Oct 9, 2010 11:35am EDT

(Reuters) – The world needs more coordination of monetary policy to avoid exchange rate volatility and achieve balanced economic growth, the European Union’s economic and monetary affairs commissioner said on Friday.

Such coordination could take place in the framework of the International Monetary Fund or the Group of 20 biggest developing and developed economies, the commissioner, Olli Rehn, said as the IMF and World Bank convened meetings here.

“I can see that there is a certain need for reinforced international coordination of monetary policy,” Rehn told Reuters in an interview. “We are discussing with our partners the possible ways and means to advance such coordination in the G20 and IMF.”

Finance ministers and central bank governors from the Group of Seven richest industrialized countries were to discuss the issue on Friday evening, and the talks are likely to be continued in the wider G20 forum at the end of the month.

“I am looking forward to the G7 and later the G20 discussing the chances of enhancing international coordination of monetary policy, where the G20 and the IMF might play an enhanced role,” Rehn said.

Asked if it should be the IMF that would help coordinate policies globally, Rehn said: “In my view the IMF is a natural choice for facilitating enhanced international coordination of monetary policy.

The need for more coordination is underlined by recent actions by several countries around the world to weaken their currencies in order to help exports and boost economic growth.

“In order to achieve a rebalancing of global growth, which is the main message of the IMF annual meetings, there is a need to address the currency issue as well; exchange rates should reflect economic fundamentals,” he said.

Asked if the euro, trading around $1.40, was too strong, Rehn said:

“Since several other currencies have been put on a path of depreciation recently, the euro has gained in value. It is not good for the European economy, nor for the world economy, for the euro area to carry a disproportionate burden of exchange rate volatility.”

The above article was written in October 2010, when the euro was trading near $1.40 as a consequence of the ECB running a relatively tight monetary policy compared to the other big central banks. The following article is from earlier this month but eerily similar: Mr. Rehn reiterated his calls for more international coordination of monetary policy while fretting over the dangers a ~$1.35 euro could do to the eurozone economies. Interestingly, at this point a number of Europe’s leading exporters don’t appear to mind an increasing euro:

EU’s Rehn wants closer currency coordination – report

VIENNA | Sat Feb 9, 2013 10:45am GMT

(Reuters) – The European Union’s top monetary official wants closer coordination on currencies to avoid potentially damaging disruptions to world trade, he told an Austrian magazine.

The remarks by Economic and Monetary Affairs Commissioner Olli Rehn come amid a standoff between France and Germany over whether a strengthening euro needs an official European response or whether markets should be left to set exchange rates.

Germany said this week the strong euro was not a concern and signalled opposition to a French proposal for a mid-term target rate, exposing policy divisions over mainland Europe’s currency between its top two economies.

The European Central Bank will monitor the economic impact of a strengthening euro, ECB President Mario Draghi said on Thursday, feeding expectations the climbing currency could open the door to an interest rate cut.

“I recognise the risk of competitive devaluation. We have recently warned the government of Japan about corresponding steps towards depreciation of the yen,” Rehn told Profil magazine in an interview published on Saturday.

“We need reforms in the international monetary system so as to avoid negative influences on international trade. The coordination within the G7, G20 or the IMF should therefore be improved,” he added, referring to policy-setting groups of leading nations and the International Monetary Fund.

Rehn said a stronger euro would be very harmful mainly for the southern euro zone countries, while Germany, Austria, the Netherlands and Finland could handle this. “But the southern countries would have problems with their exports to other parts of the world,” he said.

The eurozone’s Currency Civil War. Coordinating is hard
One of the fundamental challenges facing globalization is over the question of whether or not the priorities should be to create a unified set of global rules or a unified set of global goals. Some global goals – say, reducing suffering – might be best approached with a global rule like the universal enforcement of human rights. But other goals, like avoiding a global depression, might not do so well by the imposition of global rules on monetary policies. And as France has been discovering lately, if your nation live’s under a unifies monetary policy regime you probably don’t want the austerity fetishists running that regime:

Analysis: France runs into German wall on EU growth drive

By Mark John

PARIS | Sun Feb 10, 2013 6:57am EST

(Reuters) – French efforts to divert Europe from economic austerity have foundered twice in a week due to German resistance, underlining a growing policy divide that is hobbling the core partnership.

Berlin rejected President Francois Hollande’s call on Tuesday to set a mid-term target for the euro, a move he hoped would bring the single currency down to a level that would make it easier for French industry to sell its goods abroad.

Three days later, German Chancellor Angela Merkel joined forces with Britain’s David Cameron at a Brussels summit to push through the first ever cut in the 27-nation’s budget, taking an axe to spending on infrastructure projects backed by Paris.


Hollande could have expected a hero’s welcome in Brussels for his handling of his first war in the African state of Mali, where French forces have driven al Qaeda-linked rebels out of its main northern towns and into the hills.

Moreover, with Cameron having put Britain’s EU membership on the line by promising a referendum on it if re-elected, last week’s summit could have offered France and Germany the stage to rally together in a demonstration of European solidarity.

But in the budget wrangling that ensued, it was Hollande who looked isolated as his efforts to forge a coalition of southern and eastern European states demanding more generous spending were quashed by Germany, Britain and other northern countries.

EU officials were mystified when Hollande, citing other engagements, chose not to attend a pre-summit huddle with Cameron, Merkel and EU President Herman Van Rompuy on Thursday afternoon where key details of the deal were hammered out.

From then on, what Cameron called the band of “like-minded budget disciplinarians” including Germany, the Netherlands, Sweden and Finland had the upper hand and for France, it was a matter of salvaging what it could from the summit.


Ultimately, cuts to an EU budget which in total represents barely one percent of the region’s economic output are unlikely to influence how quickly it comes out of the current downturn.

However the clash between Paris and Berlin on the level of the euro currency points at deep-rooted differences in the national interests of the two countries that may prove more telling in the long run.

A study by Deutsche Bank last month calculated that France’s exporters start being priced out of world markets when the euro rises above 1.22-1.24 dollars – a level it has already long left behind to trade at $1.33 now.

Germany’s higher value-added export products, however, only start to be disadvantaged when the exchange rate is above $1.54. Until that point, there is little damage to the German economy and indeed some benefit in a strong euro because it keeps the prices of imported goods and hence inflation in check.

“We do not agree on economic policy and a number of other areas,” Jean-Dominique Giuliani, head of the Robert Schuman Foundation, a French think tank on Europe, told Europe 1 radio.

“The gulf between France and Germany is widening somewhat and that worries me.”

The Deutsche Bank study referenced in the above excerpt reveals another important complication facing the eurozone nations when attempting to crafting a one-size-fits-all-policy for the whole currency union: One of the patterns that’s emerged is that whenever bad news hits the markets, we find money flowing out of the weaker eurozone bonds markets and into German bunds. Now, when that bad news is in the form of a rising euro that reduces everyone’s potential exports, the eurozone’s wealthier members could engage in the kind of stimulus or monetary measures (e.g. interest rate cuts) seen elsewhere in the world to jump start everyone’s economies. This kind of stimulus could have the effect of a currency devaluation, so economies could be stimulated across the continent while the euro falls in value, but it would come at the cost of some additional debt – at least in the short run – for the countries financing the stimulus, but given that well placed stimulus that invests in the future that shouldn’t be a problem.

There’s another option that might also bring down the value of the euro too: When economies crash, the values of their currencies often follow suit. But the value of the euro is based on a strange mish mash of increasingly divergent economies that all get factored in together. So by allowing the euro to rise just enough to only trash some of the eurozone economies, the euro could actually end up falling back down to a more competitive level without any stimulus at all. It just takes some time…and the selective collapse of the eurozone economies. Plus, much of the money flowing out the crashing economies are likely to end up flowing back into Germany and the other wealthier members. And the “best” part of this selective collapse strategy is that it doesn’t require any nation’s postponing any of the “structural reforms”. In fact, those “structural reforms” can continue at an even faster pace! It’s win-“win”.

With the euro current sitting at ~$1.30 it wouldn’t take much more than a 15% rise of the euro before we find all of the eurozone economies running into serious trouble. But according to the following article, that same above Deutsche Bank study found that the euro’s “danger zone” range for the German economy was estimated to be 1.54-1.94 dollars/euro compared to the 1.22-1.24 dollars/euro putting France at risk(although, realistically, it’s probably much closet to 1.54 dollars/euro). So if that study’s estimates are reasonable (which is always a big if), the euro – currently ~1.30’s dollars/euro – might be able to rise another 50% (although probably much less than 50%) before it becomes “dangerously high” for Germany’s economy. It’s an example of one of the currency union conundrums we’re learning about: by using a single currency – and Bundesbank-style central banking – to integrate a set of diverse economies into one harmonious economic union, the strong euro policy championed by the Bundesbank is driving the eurozone economies into the categories of “the already screwed” and “not yet screwed” with respect to the rise of the euro. It’s a reminder of why a currency union isn’t necessarily the best union to start off an international integration project. Maybe a union of social contracts towards providing democracy, civil rights, a decent standard of living, high-quality labor laws, universal environmental protection, and an opportunity to pursue a meaningful life would be a better approach

UPDATE 1-France says surging euro “too high”

Wed Jan 30, 2013 11:35am EST

By Jean-Baptiste Vey

Jan 30 (Reuters) – The French government sounded the alarm on Wednesday about the surging value of the euro, vowing to raise the issue with euro zone and G20 partners as concerns about currency wars flare.

The euro has risen to a 14-month high against the dollar and hit its highest level in 33 months against the yen , making euro zone exports dearer on international markets.

Economists say that France suffers more than Germany when the euro rises because its exports are more price-sensitive than German exports, which include more higher value-added products.

A Deutsche Bank study found that the French economy begins to take a knock when the euro’s rise above 1.22-1.24 dollars while for Germany the pain threshold is not reached until the euro gets to an exchange rate in a range of 1.54-1.94 dollars.

In Professor Weidmann’s class don’t expect extra credit no matter how hard you try

It appears that the major powers have decided, for now, against declaring the monetary policies by Japan (and the US to a lesser extent) a form of “Currency Warfare”, but keep in mind that the decisions last week by the G7 and G20 powers against censuring Japan were done over the opposition of a German-led coalition of wealthier European nations. Also keep in kind the Bundesbank chief, Jens Weidmann, is continuing to demand that see the world “tough it out” through austerity in order to avoid try to bring the global economy back on track. Weidmann also argues that a rising euro is not a problem and in fact justified based on the eurozone’s strong economic fundamentals alone. The markets, it would appear, are deeply impressed with the ECB’s ability to impose austerity policies regardless of circumstance:

Weidmann Says ECB Won’t Cut Interest Rates to Weaken Euro
By Jana Randow & Jeff Black – Feb 15, 2013 4:03 AM CT

European Central Bank council member Jens Weidmann said an appreciating euro alone won’t trigger a cut in interest rates and the exchange rate’s gains are justified by the economic outlook.

The strength of the euro “is one factor among many in determining future inflation rates” and “we will certainly not justify any monetary policy decision with one single factor,” Weidmann, who heads Germany’s Bundesbank, said in a Feb. 13 interview. “I believe that the exchange rate of the euro is broadly in line with fundamentals. You cannot really say that the euro is seriously overvalued.”

His comments come as central bankers and finance ministers from the Group of 20 nations meet in Moscow today amid speculation of a currency war. Looser monetary policy in the U.S. and Japan combined with mounting optimism in Europe drove the euro to 14-month and three-year highs against the dollar and the yen earlier this month. The currency has dropped two cents since ECB President Mario Draghi said on Feb. 7 that its appreciation poses a downside risk for inflation, signalling he may consider cutting rates.

While the euro area’s recession deepened in the fourth quarter, there are signs the region is starting to recover. Economic confidence rose for a third month in January and investor sentiment has improved since September.
If the appreciation of the exchange rate reflects a regained confidence in the euro area and an improved growth outlook, then this is fully in line with fundamentals,” said Weidmann, who opposes any further ECB action to fight the debt crisis and was the only council member to vote against the central bank’s bond-purchase program.

ECB Forecasts

Weidmann suggested the ECB won’t significantly revise its economic forecasts next month. In December it predicted a 0.3 percent contraction this year followed by growth of 1.2 percent in 2014. Inflation was projected to average 1.6 percent this year and 1.4 percent next year.

“Our forecast, which I think is still in line with what we’ve seen so far, is one of a gradual recovery in the second half of this year, lagging the upswing of the world economy,” Weidmann said. “I have no reason to doubt this baseline” and confidence indicators serve “as a confirmation of our projections.”

Notice that the head of the Bundesbank is arguing that there is no need to be concerned about the rise in the euro because this rise merely reflects renewed market confidence in the region’s economy even though the eurozone recession deepened in the last quarter. In addition, Weidmann’s own forecasts for the eurozone include a “gradual recovery in the second half of this year, lagging the upswing of the world economy“. The markets apparently like economies that are lagging their peers. Those “structural reforms” will kick in doubleplusgood any day now.

Skipping down…

‘Unanimous Agreement’
All members of the ECB’s Governing Council agree “that central banks cannot solve the euro-area crisis,” Weidmann said. “There is unanimous agreement that only structural reforms and fiscal consolidation” are the answer.
A slower pace of adjustment in euro member countries remains “one of the major risk factors” for the economic outlook, he said.
Weidmann, 44, left his job as German Chancellor Angela Merkel’s advisor to take the helm of the Bundesbank in May 2011. He stuck to his criticism of the ECB’s as-yet-untapped bond- buying plan, which has been tacitly supported by Merkel, saying the calm it has brought to financial markets was to be expected.

When Bundesbank chief Jens Weidmann states that the ECB’s governing council is in “unanimous agreement that only structural reforms and fiscal consolidation” are viable options, he’s basically saying that monetary policy (e.g. the kinds of central banking policies we’re seeing from the Bank of Japan and the Fed) really can’t do anything to impact the overall eurozone situation. Ironically, however, by not engaging in monetary actions (like cutting the ECB’s interest rate), the ECB might be creating a situation that fuels a net monetary contraction (e.g. starving the eurozone banking system of credit) and it’s all related to the ECB’s earlier emergency monetary policy. Back in December 2011 and then again in February 2012, the ECB let Europe’s banks turn in all sorts of distressed securities (especially Spanish and Italian debt) as collateral for a three year loan. It was the kind of thing central banks are supposed to do when large systemic risks loom and no other entity has the clout needed to impose a shift in market sentiment. And the ECB’s maneuver did help quite a bit. At least they helped quite a bit in the financial markets. The austerity policies that were a condition (and Bundesbank demand) of the bond market intervention have wreaked havoc on the employment situation but that can’t really be blamed on the ECB’s emergency loans.

But there’s a provision to the ECB’s new emergency loan program that has just started kicking in that probably won’t help: Last month the banks became allowed to return those three year loans early. And if the healthiest banks do return those loans, that effectively sucks credit out of the eurozone banking system and raises borrowing costs for the weakest nations and generally reduces the credit cushion out there for unexpected crises. So not only is the euro rising in value right now, but as long as the ECB holds its interest rate steady while the rest the US and Japan holds rates at near-zero levels the strongest eurozone banks are going to have an incentive to repay those ECB loans early and shrink the overall eurozone credit supply. On top of all that, ECB loan repayments that suck credit out of the eurozone banking system also have the effect of pushing up the value of the euro. Plus, the healthiest banks will get the first chances to unload the assets that all the banks turned in as collateral when the loans first took place (and that included a lot of crappy assets), leading to further bifurcation of the eurozone banking/finance sector (which is one of dynamics that led to the ECB’s emergency programs in the first place). It’s that self-reinforcing cycle of awfulness that should sound familiar at this point:

Banks’ LTRO Repayments to Underline Two-Tier Europe: Euro Credit
By John Glover – Jan 24, 2013 9:12 AM CT

Lenders repaying cash borrowed from the European Central Bank via its Longer-Term Refinancing Operations are poised to underline the north-south divide that characterizes the euro region.

Banks can start paying back this week more than 1 trillion euros ($1.33 trillion) of three-year money they borrowed in two portions during 2012. Only banks able to raise funds at less than the 75 basis points the ECB charges are likely to repay, and they will probably be from northern Europe, said Richard McGuire, a strategist at Rabobank International in London.

“If it turns out the repayments come from the core banks only, then that’s a negative,” McGuire said. “It shows there’s still a two-tier euro zone. The tension is still there.”

The ECB’s LTRO programs in December 2011 and February 2012 reduced the risk of a systemic crisis blowing the single currency apart. Along with ECB President Mario Draghi’s July pledge to do “whatever it takes” to preserve the euro, the cash infusions helped stem a rout in Spanish and Italian bonds.

Between 200 billion euros and 250 billion euros are likely to be repaid “and we aren’t expecting many peripheral banks to take part,” said Derek Hynes, who helps manage $9.5 billion at ECM Asset Management Ltd. in London. “They have some market access now, but they’ll need three to six months to gain the confidence to hand back the money.”

Rates Rise

The prospect of money flowing back to the ECB has driven up interest rates in the futures market. The rate on three-month euro futures expiring in December 2013 rose as high as 0.54 percent on Jan. 18, the most since July and up from 0.25 percent at the start of the year. The two-year interest-rate swap cost has climbed to 55.2 basis points from 38 at the end of November.

The LTROs swelled the ECB balance sheet to 2.94 trillion euros, up from about 2.5 trillion euros on Dec. 16. While a reversal of that as banks repay is “a major milestone,” it may produce “stealth” interest rate increases, George Saravelos, a strategist at Deutsche Bank AG in London, said in a report.

The yield on two-year German notes increased to as high as 24 basis points on Jan. 17 from minus 1.5 basis points at the beginning of the year. The rate is now 17.4 basis points.

Banks can now repay their borrowings at weekly intervals. The ECB is expected to publish the number of companies repaying and the amount returned tomorrow, with national central bank accounts revealing later which countries reimbursed LTRO cash.
Fading Attraction

Spanish and Italian banks took about 334 billion euros of the 532 billion euros of LTRO borrowing disclosed by the banks and tracked by Bloomberg. Cash was parked in government securities, helping to support bond markets as suggested at the time by France’s then-President Nicolas Sarkozy.

The “Too little, too late is better late than never” school of central banking
ECB head Mario Draghi has often said that the relative value of major currencies should be determined “by the markets”. It’s another way for the ECB to say “we don’t want to do this or that policy at this point” without actually saying that explicitly. And that would seem to be sending a signal to the markets that the euro is poised to rise….unless the economy does so poorly that it ends up falling anyways. So when we factor in a rising euro (with falling exports) coupled to a shrinking eurozone credit market, should we expect a renewal of the kind of full-blown crises that prompted the ECB’s emergency lending in the first place?

Well, probably not. The near-full blown meltdowns of the recent past that prompted measures like the “LTRO” emegency loans in the first place have been put under control to varying degrees so the threat of any sort of immediate debt crisis emerging in the financial markets has subsided for now. It’s the labor market that’s threatening to trigger the round of crises. The austerity policies that have come as as condition for each of the bailouts for the Southern European economies countries – plus Ireland – are making the successful ECB interventions in the eurozone bond market and financial market an irrelevant accomplishment. Rising record unemployment is going to insure the bailed out banks won’t have functioning economies needed work off their remaining mountains of debt (which was quite frequently nationalized private financial sector debts). But, for now, the banks should have sufficient funds to prevent the kind of banking solvency crises we’ve seen in recent years.

Another reason why the early repayment of the emergency loans probably won’t be a big deal is that the markets have been learning many lessons about how the eurozone’s leadership might respond. These have been powerful lessons in the past few years. Being the first major crisis since the creation of the eurozone, this has been a learning experience for everyone. And one of those lessons learned has been that the ECB will eventually step in to fix a dire situation. But only after it becomes dire. That’s just how they roll. Should the rise in short-term borrowing costs rise too much the ECB will intervene.

So we’ll likely see a continuation of the support by the ECB for the eurozone financial markets and more austerity for the public. The markets know there’s a pretty solid ECB guarantee on debt in the crisis-hit eurozone countries for at least in the short/medium-ish term even if the Bundesbank seems to want to unwind all the emergency lending programs. The bifurcation of eurozone sovereign debt markets between the healthy and weak banks can probably continue for a while longer. If the healthiest banks return more loans than expected, things will, ironically, suddenly start getting worse even though larger than expected loan repayments could be seen as sign that things are getter better. And if things start getting worse enought for the weaker economies, the ECB will probably do something to contain the damage. At least that’s what the markets seem to be expecting. And you can’t blame them. It’s the ‘just in time, one hopes’ brand of central banking that the ECB seems to have been striving for the entire time

MONEY MARKETS-Draghi fuels bets for lower money market rates

Tue Feb 19, 2013 8:52am EST

* ECB’s “accommodative” stance creates one-way bet on rates

* LTRO repayments, high or low, seen flattening Eonia curve

* Trade already crowded, leaving slim gains for latecomers

By William James

LONDON, Feb 19 (Reuters) – European Central Bank president Mario Draghi has created a win-win situation for traders in the run-up to Friday’s announcement on early repayments of banking sector loans, with short-term rates expected to go anywhere but up.

Traders are banking on the euro zone money market curve flattening over the coming weeks, unwinding a rise in longer-term borrowing costs that has effectively tightened monetary conditions over the last month.

Larger-than-expected early repayments of emergency banking sector loans in January caused money market rates to rise, pushing up the wholesale cost of money that filters through the financial system and drawing the attention of the ECB.

But, that reaction has since moderated and even a larger-than-expected second repayment would be unlikely to prompt another rise because markets believe this would increase the chances of the ECB cutting interest rates to keep policy loose.

Lower-than-forecast repayments, or any signal from the ECB on cutting rates could even drive rates lower, market participants said.

“You could call it a Draghi ‘put’. He suggested at the last press conference that the ECB may act if it doesn’t like what it sees,” said Elwin de Groot, strategist at Rabobank in Utrecht.

“So, if there’s too strong a reaction from the market(to the repayment) they may take new measures, and the first best option is maybe a cut in the refinancing rate.”

The faster the surplus of liquidity in the banking sector shrinks, the more the money market curve steepens as traders bring forward expectations of when increased competition for scarce cash starts to push rates up.

So is betting that an ECB rate cut will follow a larger than expected loan repayments a sound bet? Well….maybe. But at the same time, over the last few years we’ve consistantly seen Jens Weidmann and the Bundesbank vehemently oppose virtually all of the existing emergency ECB measures. It’s the Bundesbank’s oppisition that seems to be the required ingredient for the “too little, too late” central banking methodology the ECB has been developing. So if banks do end up making surprisingly large emergency loan repayments and the markets are betting that this would likely lead to monetary easing by the ECB, the markets might want to hedge their bets:

Bundesbank looks ahead to ECB “exit” as LTROs repaid

By Eva Kuehnen and Andreas Framke

FRANKFURT | Fri Feb 22, 2013 12:07am GMT

(Reuters) – A bumper return of 3-year loans to the ECB would boost the case for it exiting crisis mode, a top Bundesbank official said ahead of Friday’s news on how much banks will hand back at a repayment window next week.

Joachim Nagel, in charge of market operations at the German central bank, stressed, however, that it was still unclear when the exact time for an exit would be as the European Central Bank’s monetary policy has not yet worked evenly across the 17 euro zone countries.

The ECB lent banks a total of more than 1 trillion euros (864.8 billion pounds) in twin 3-year, ultra-cheap lending operations in December 2011 and February 2012 – a ploy that ECB President Mario Draghi said “avoided a major, major credit crunch”.

The ECB is now giving banks the chance to repay the funds early. Last month, it began allowing them to pay back the first of the twin loans. Friday’s announcement will detail how much of the second they plan to return at the first chance on February 27.

“If the excess liquidity in the banking system abates significantly, then it would be time to consider an exit from the non-standard measures brought on by the crisis,” Nagel told Reuters, without giving a specific level.

“It is not yet completely clear when exactly it will be time for the exit. The markets and the financial system are still far too fragmented for that. I warn against declaring an end to the crisis despite the calmer phase on markets in recent months.”

The market-driven unwinding of the ECB crisis measures stands in contrast to the policies being pursued by central banks in the United States and Japan, which are looser.

This policy contrast has helped drive up the euro, which is also supported by investor confidence that the bloc will hold together after Draghi’s pledged last July that the ECB would do “whatever it takes” to preserve the single currency.

Banks to ECB: maybe we need those loans afterall
So will the markets be facing a situation where the ECB retreats from “crisis mode” as the Bundesbank desires? Or will we see a continuation of the ECB’s emergency measures? Well, that seems to depend on the whether or not the eurozone banks return more ECB emergency loans or less than expected when the repayment of the second round of emergeny loans becomes an option. And Friday (Feb. 22) was the day that the eurozone banks got to declare the amounts they intend to repay to ECB when the window for 2nd round loan repayment opens on Feb. 27. “Fortunately” for eurozone economies in need of a lower euro and continuing financial credit the news was “good”…in the sense that the news wasn’t actually very good so some ECB easing might be on the way:

Euro Touches One-Month Low as ECB Bank Repayments Miss Forecast
By Joseph Ciolli – Feb 22, 2013 2:48 PM CT

The euro touched the lowest level against the dollar in six weeks after the European Central Bank said institutions will repay less of Long-Term Refinancing Operation borrowing next week than economists forecast.

The 17-nation currency trimmed gains versus the yen as the European Commission forecast the region’s economy will shrink for a second year in 2013. The Australian dollar rose the most in seven weeks after central bank Governor Glenn Stevens said the bar for intervention was high. Japan’s currency weakened amid a White House meeting between Prime Minister Shinzo Abe and President Barack Obama, who made no mention of the yen during remarks after the discussion.

“The market is trading on confidence and sentiment, and the LTRO news shows that tail risk has shrunk less than we thought,” Greg Anderson, New York-based head of Group of 10 currency strategy at Citigroup Inc., said in a telephone interview. “What we’ve seen this week is the last of the euro longs getting squeezed out.” A long position is a bet that an asset will rise.

The euro fell was little changed at $1.3186 at 3:45 p.m. in New York after touching $1.3152, the lowest level since Jan. 10. The shared currency is down 1.3 percent this week. It rose 0.3 percent 123.21 yen today after strengthening as much as 0.8 percent. The yen weakened 0.4 percent to 93.43 per dollar.

The euro may depreciate to the 2013 low of $1.2998 it reached on Jan. 4 if it declines past a support level at $1.3151, Cilline Bain, a London-based technical analyst at Credit Suisse, wrote today in a client note. Support is an area on a chart where buy orders may be clustered.

German Confidence

The common currency declined as the ECB said 356 banks will hand back 61.1 billion euros ($80.5 billion) on Feb. 27, the first opportunity for early repayment of the second LTRO. The median forecast in a Bloomberg News survey was for 122.5 billion euros.

The region’s gross domestic product will contract 0.3 percent in 2013, compared with a November prediction of 0.1 percent growth, the Brussels-based commission said.

The euro rose earlier after the Germany’s Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, climbed to 107.4 from 104.3 in January. That’s the fourth straight gain. Economists predicted an increase to 104.9, according to a Bloomberg News survey.

Ordoliberal stagdeflation, possibly coming to a complex social arrangement near you
One of the more fascinating aspects about the eurozone’s structure is that it’s managed via the ECB(officially) and the Bundesbank(unofficially) and this has created a persistent “good cop/bad cop” dynamic although a “reluctant good cop/Calvinist fundamentalist bad cop” analogy might be a little more appropriate. This is going to be an important dynamic for the world to come to terms with an understand, because if folks like Olli Rehn – the EU economic and monetary minister that wishes to see greater international “reinforced coordination” of monetary and fiscal policies – ever see their envisioned system put into place, the “reluctant good cop/Calvinist fundamentalist bad cop” dynamic might be coming to a country near you.

That quirk of the Bundesbank – the quirk that makes it appear to be philosophically unable to advocate anything other than austerity policies– that’s a “quirk” we might expect to find in any sort of future international “eurozone-lite” complex international debt “arrangement”. It’s the Bundesbank’s Ordoliberalism orthodoxy, where the state must create the regulations necessary to create market conditions that will most closely approximate perfectly competitive marketplace. The market outcomes still rule, but they’re outcomes from a market that is being actively designed and managed by the state. And temporary “one time” actions like state stimulus spending are considered serious breaches of Ordoliberal orthodoxy. If economic healing is to take place, it should take place at a systemic level. Budget cuts, deficit reduction, and general austerity are the preferred approaches to fixing economic imbalances. The Ordoliberalism of the Bundesank is certainly a more pragmatic form of economic utopianism when compared to, say, Ayn Rand’s Objectivism that dominates the US’s conservative movement in that Ordoliberalism doesn’t assume markets magically self-correct under any circumstances. It’s more pragmatic, but still crazily unpragmatic in that it still treats the market outcomes of the state-managed marketplaces as somehow sactrosanctr and magically super-efficient. Economic theories tend to fixate on monetary tranasactions alone in their models because that’s what’s measured. But it’s approach that tends to model market outcomes as being too meaningful leads to warped economics.

Ordoliberalism, like laissez-faire theories, takes market outcomes and economic imbalances very very seriously. Part of what makes the current application of Ordoliberal thought to the eurozone crisis so grimly fascinating to watch is that the Ordoliberal paradigm has been virtually untested for something like a currency union of 17 disparate nations. The philosophical disaste for something like trade imbalances and deficit spending can take on entirely new dynamics when translated from an individual nation to an entire collection of nations bound together by and currency union. And even though international Ordoliberalism has been a disaster so far it doesn’t sound like many Germans are interested in changing course:

The New Republic
NOVEMBER 28, 2012
Please, Herr Krugman, May I Have Another?
How America’s favorite liberal stokes German masochism


WHEN GERMANS VOTE in next year’s national election, they will have the choice between two candidates who hold the distinction of having been repeatedly insulted by Paul Krugman. The New York Times columnist has a habit of accusing Angela Merkel of dim-wittedness, questioning her “intellectual flexibility” and accusing the members of her government of “living in Wolkenkuckucksheim—cloud-cuckoo land.” Krugman has treated Peer Steinbrueck, her Social Democratic competitor for the country’s highest office, no better. The austerity policies embraced by Steinbrueck, who was Germany’s finance minister in 2008 and 2009, were pure “bone-headedness”; his speeches criticizing deficit spending were “know-nothing diatribes.” Krugman even went so far as to compare Steinbrueck’s ideology with that of the least popular political group, in contemporary German eyes, after the Nazis—the Tea Party.

The relationship between the popular Times columnist and the dominant European economy has thus settled into a stable, if neurotic, pattern: Krugman attacks Germans for their economic habits and trashes their most beloved public officials; in response, Germans wince, complain, and then ask for more. Irwin Collier, professor of economics at the Free University of Berlin (and a friend of Krugman’s from their graduate-school days at MIT), admitted that it was unlikely that any of those students who line up to hear Krugman speak at universities actually change their minds after engaging with him.

According to David Marsh, chairman of the advisory board of London & Oxford Capital Markets, it’s not a surprise that Germans would volunteer for such punishment. “Krugman is part of the ritual of self-criticism in Germany,” he tells me. “There is a tendency in the culture of self-flagellation.” But that doesn’t explain how a Nobel Prize–winning economist got involved. If Germany has a national penchant for masochism, why did Krugman become one of its primary public enablers?

KRUGMAN IS AWARE that people with his understanding of economics don’t normally receive much attention in Germany. “We have a tradition in the Anglo-Saxon world, you try and have a schematic view of the economy,” he tells me. “German have this whole—well, it’s kind of hard for me to know what they’re saying.”

Krugman is not alone in his confusion. The philosophical touchstone of contemporary German economics isn’t the work of Adam Smith, or Hayek, or Marx, but rather Walter Euken, a man whom few outside of Germany have ever heard of (though he’s so well-regarded in his own country that his face has appeared on a German stamp). In the 1930s, Euken founded a school of economics at the University of Freiburg that came to be known as ordoliberalism. It combined a commitment to free markets with a belief in strong government, but its primary economic concern was stability—understandable in a country scarred by the experience of hyperinflation in the 1920s, the depression of the 1930s, and the subsequent rise of Nazism.

When West Germany needed to create a state in the aftermath of World War II, the ordoliberal theoreticians set up the “social market economy” that became the country’s unquestioned economic framework. They created a robust welfare state, but it was embedded in a legal structure that was engineered to promote economic stability—rules for balanced budgets, rules for labor participation in the workplace—and ideally wouldn’t require continuous intervention by the state.

The flip side of this obsession with rules was a distaste for the sorts of pragmatic responses to crises preferred by American economists. That’s why many Germans still tend to embrace “automatic stabilizers” like unemployment insurance, but shy from discretionary spending, like massive stimulus packages. They would prefer to suffer short-term pain now for the promise of arriving at a more sustainable equilibrium later. And worst of all for Germans is the idea—not at all unusual in Anglo-Saxon economic literature—that inflation can help lift a country out of an incipient depression. Germans hear the word inflation and think only of their worst nightmare: instability.

That explains why “Germany has very few influential Keynesian economists,” as a recent report by the European Council on Foreign Relations put it. Olaf Storbeck, economics correspondent for the German business daily Handelsblatt, is somewhat more blunt: “Keynesianism is a dirty word in Germany,” he says.

Collier is blunter still. When I ask how he would summarize the native German tradition, he shifts from his flat American Midwestern accent to a shrill Colonel Klink–style Teutonic shriek. “If you do not follow the rules, you do not eat in Berlin, you do not eat in Frankfurt, you do not eat in Hamburg, you do not eat in Munich!

Collier also volunteered to recite for me the effusive introductory remarks that he delivered when awarding Paul Krugman an honorary degree at the Free University. But before he could begin, Collier was interrupted by a muffled noise in the background. “That was my wife,” he said. “She wants me to tell you that she doesn’t agree with anything Paul has to say about inflation.”

The creation of a single currency for wide variety of nations was a bold experiment filled with a lot of potential but even more risks. One thing about complex social arrangements: There might be a number of ways to successful implement a complex social arrangement, like a currency union, but there are far more ways to screw them up. That’s entropy for you. This doesn’t mean we shouldn’t try to achieve complex social arrangement (e.g. democracy, or maybe even currency unions), but the inherent difficulties of trying to make complex social systems that make life easier and better for virtually all parties involved cannot be overstated. It’s just hard to do.

Money, itself, is a tricky enough complex social arrangement to implement in a closed single economy. It’s both a social arrangement and a social technology. But it’s tricky technology. Money subjectively represents some sort of “value” that gets traded around within a larger complex social arrangement. Money lets us “monetize” some of our interactions with each other so we can sort of keep accounts for who did what. Sort of. In that sense, money is a means to a desired end: We’d like to be able to live and trade with each other in ways that we can all agree are fair. Using money instead of barter seems to help achieve that end so we all use it in spite of its flaws. And we’ve actually gotten pretty good at it when weird far-right/Ordoliberal doctrines aren’t getting in the way.

Part of what makes money so tricky to implement is that it binds together things as vague as “a fair wage” or “value provided” across all the users of the currency with something as absolute as settling accounts. You have to pay what you owe or bad things happen to you. That’s part of how the system works. The settlement of accounts is part of what’s at the core of why money works as a system in the first place: the expectation of the settling of accounts keeps people participating. It seems fair and predictably. But that same expectation ends up causing many of the social problems we find today because the accounts that need to be settled aren’t actually fair. A major driver of the eurozone crisis has been the settlement of accounts (national debt following a crisis, usually after private debt had been nationalized). They’re only approximations of fairness and especially meaningful approximations. Again, money is a tricky technology.

And in the case of the eurozone, shared money became the foundation for building a new, integrated society. It might have seem like an obvious choice for a collection of nations to use money as that initial social contract lynchpin but it was actually a very risky choice. It was also a choice that inevitably led to a number of future choices as the many new situations that would inevitably arise in a new currency union came to fruition. One of those choices was the choice of how to settle accounts when an entire nation’s financial sector implodes. The fair answer to that question isn’t at all obvious. But the chosen answer by the Bundesbank and the large euorzone/EU/IMF policymaker community appears to be that the full settlment of accounts to foreign investors will be a core principle of the complex social arrangement of a continent of people all living together. Also, currency stability. And there won’t be that many other core priciples. Democracy won’t be one (e.g. troikas). Those sanctrosanct principles of foreign investor account settlement and currency stability appear to be what the eurozone’s designers have in mind to unify the vast complex social arrangement that is the eurozone. Even if it means installing troikas that undemocratically impose massive unemployment and destroyed lives in an effort to somehow “settle accounts” with foreign investors. It’s symptomatic of a common problem facing societies all over the world: when account settlement ends up actually reducing the overall capacity of a society by disrupting people’s lives (via unemployment, a lack of education, degraded health, etc.), money, itself, becomes part of the problem. This is why we have a concept of usury. People have been learning and relearning these lessons about the potential pitfalls of account settlment for a long long time. The primary method the eurozone leaders have chosen to fosters a more harmonious way of living together is to implement national usury. Accounts will be settled even if the methodes for settling those accounts disrupts a nation’s ability to settle accounts.

The grim reality is that the eurozone social contract is now rooted in a fancy form of usury and a race to the bottom. This reality was hightlighted by an column written by EU economics and monetary affairs minister Olli Rehn last December. In the piece(excerpted below), Mr. Rehn argues that not only should the “structural reforms” continue unabated, but that there’s really no point in countries like Germany even trying to stimulate the economies of their eurozone neighbors because even if Germany did engage in stimulus spending, much of that spending would go to the rest of the world because the Southern European economies are too expensive and need more “structural reforms”. So even if it would help virtually the entire eurozone if the wealthier nations intentionally imported more goods from their ailing neighbors in order to settle accounts more quickly, that won’t happen until “structural reforms” make the Southern European economies as “competitive” as the poorest nations of the rest of the world (which ignores the artifical increase in their currencies that the Southern economies incurred to join the euro).

Part of the implicit social contract in what the eurozone’s designers envision for the eurozone is that “market forces” will play a major role in determining what happens in people’s lives. They will be regulated market forces, but the market forces will still reign supreme. In other words, the eurozone policymakers have decided that market equilibriums will determine the quality of life if its citizens. This is a particularly problematic perspective to have as the dominant philosophy guiding an entire continent. Marketplaces may naturally find equilibriums but they also naturally lend themselves to “race to the bottom dynamics”. The market equilibrium that the eurozone leaders are subjecting their citizens to may not be the kind of equilibrium you’d want to live in:

December 10, 2012 7:33 pm
Financial Times
Europe must stay the austerity course

Confidence is returning as structural reforms help rebalance the economy, says Olli Rehn

By Olli Rehn

The eurozone is living through lean times, but there is light at the end of the tunnel. On the one hand the short-term economic outlook remains weak. On the other hand, there are signs that confidence is returning.

The progress made reflects important decisions at both the national and European levels. These decisions have begun to rebuild confidence, calming markets and countering fears of a collapse of the euro. Far-reaching structural reforms are helping to rebalance the eurozone economy. Progress is tangible: current account imbalances among eurozone members have fallen markedly, as competitiveness lost by some members in the decade before the crisis is regained.

It is true that the correction of current account imbalances has so far come predominantly in deficit countries, but this is no surprise given the scale of the challenges they face. As John Maynard Keynes noted before the Bretton Woods talks, such adjustment is “compulsory for the debtor and voluntary for the creditor”.

Note that when Mr. Rehn says, “Far-reaching structural reforms are helping to rebalance the eurozone economy”, what he’s basically saying is that there was a group of nations that weren’t poor enough. Now they’re getting poorer. Things are improving.

Also note that when Mr. Rehn says, “It is true that the correction of current account imbalances has so far come predominantly in deficit countries”, he’s reminding us of the fact that the primary way the eurozone has cured itself from the problem of the Southern European nations importing from their neighbors more than they exported back wasn’t for the Southern nations to cut imports some and export more. They’ve simply been slashing imports as a result of austerity. The exports don’t increase until the Southern wages get cut quite a bit more. That’s the plan.


This does not invalidate the case for a more symmetrical external rebalancing within the eurozone, involving creditor as well as debtor countries. The European Commission has said surplus countries should implement reforms to strengthen domestic demand. Germany could do this by opening up its services market and by encouraging wages to rise in line with productivity, two of the recommendations made to Berlin by the EU Council last July.

But at the same time, we should be aware that the eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world.

This means adjustment channels are influenced significantly by global economic interdependence. A reduction of surpluses in the north will not lead automatically to a corresponding increase of demand for exports by the south.

The principal beneficiaries of greater German demand would be the central European economies closely integrated into Germany’s supply chains. Our analysis suggests that a 1 per cent increase in German domestic demand would improve the trade balance of Spain, Portugal and Greece by less than 0.05 per cent of gross domestic product. This would not get us very far, which is why policies to enhance competitiveness – both structural and cost-related – remain crucial for the adjustment and rebalancing of the eurozone.

The case for a significant fiscal stimulus in Germany, as some call for, is also weak. The country will de facto have a much less restrictive fiscal stance in 2013 than the rest of the eurozone: the structural budget balance is expected to be little changed in Germany but to increase by 1 percentage point of GDP in the eurozone as a whole.

When Mr. Rehn writes “The case for a significant fiscal stimulus in Germany, as some call for, is also weak. The country will de facto have a much less restrictive fiscal stance in 2013 than the rest of the eurozone: the structural budget balance is expected to be little changed in Germany but to increase by 1 percentage point of GDP in the eurozone as a whole”, he’s basically saying that Germany should not be seen as having an overly restrictive fiscal policy, given the austerity measures elsewhere, because Germany itself isn’t engaging in austerity and therefore not “tightening” its spending as much as its neighbors. It’s an interesting argument.

Skipping down…

In order to overcome the crisis and restore confidence, we must continue to remove structural obstacles to sustainable growth and employment; pursue prudent fiscal consolidation; and turn bold thoughts into convincing actions when redesigning and rebuilding our economic and monetary union. In short, we need to stay the course and pursue decisive reforms in our member states and deeper integration in the eurozone.

The writer is vice-president of the European Commission, responsible for economic and monetary affairs and the euro

Staying the course, no matter what: a lynchpin of the social contract
Olli Rehn ended his above column with a phrase often heard from leaders, “we need to stay the course”. It’s a rhetorical course he’s continuing to stay on. In addition to currency stability and usurious foreign investor accounts settlement, “staying the course” appears to be another apparent lynchpin of the new eurozone social contract. It’s a fascinating lynchpin for the eurozone to have since it’s actually “staying the course of continual change of an unknown nature towards a goal of greater integration to be implemented by people like Olli Rehn”.

“Staying the course” is also a fascinating lynchpin because it’s a microcosm of the global macrocosm. “Stay the course” has been the unspoken mantra of globalization for decades. The eurozone is just the most advanced manifestation of that global social contract to integrate our lives economies more and more no matter what. And for good reason. Technology and endless march of history ensured globalization. We really are all living in one giant global society in ways never seen before. It’s a really really complex social arrangement and it’s an arrangement we’re not getting rid of so we sort of have to figure out how to make it work. This is one reason why the eurozone’s trials and tribulations are so much bigger than the eurozone itself: the whole world is going to have to figure out how to all live together in better ways if we’re going to avoid global catastrophe over the next century. The twin threats of ecocollapse and social upheaval are poised to loom large over the next century. It’s a consequence of our built-to-fail global recklessness and mismanagement. We have to stay the “staying the course” course. We just need a better course.

Globalization really will happen because it’s already happened and continuing to happen. Globalization, like money, is both sort of an ends and a means. We want a global “community” with fair rules that make all of our lives better because that’s win-win. Globalization is just not a guaranteed win. We might mess it up immensly (like we’re currently doing). But we’re going to keep globalizing regardless of the risks because the alternative is for everyone to live alone in their own national enclaves. So we need a global social contract. It’s just a matter of what kind of social contract it turns out to be. The eurozone is currenly offering us an Ordoliberal social contract that’s sort of a more extreme version of the social contract that has dominated global trade for decades: an adherence to quasi-regulated neoliberal economics(austerity), foreign investor account settlement(more austerity), strictly enforced currency stability(and more austerity), and “staying the course”(presumably the austerity ends at some point). And, increasingly, a loss of national sovereignty in order to ensure the markets can work their magic:

The New York Times
Official Urges Greater Accountability by Euro Members
Published: January 11, 2013

BRUSSELS — Olli Rehn, the European commissioner in charge of the euro, defended the bloc’s austerity policies on Friday and urged legislators to pass a law that would let him push countries even harder to shore up their finances.

Signaling little letup in the need for wrenching adjustments in Europe, Mr. Rehn also issued warnings to a wide range of countries, including some with the region’s largest economies, to keep to the reform path and contribute to overall growth.

Mr. Rehn acknowledged the value of recent studies by economists at the International Monetary Fund suggesting that the damage created by austerity was up to three times more severe than previously thought. But Mr. Rehn also warned that those studies might not take sufficient account of the need to restore faith in countries blocked from borrowing money on international markets.

“We have not only the quantifiable effect, which is something that the economists like to emphasize, but we also have the confidence effect,” Mr. Rehn said.

Mr. Rehn, in Brussels, also urged members of the European Parliament to speed up an agreement on fiscal legislation.

Those rules would require member states to present their public finance plans to the European Commission in greater detail, and sooner, than is required now. The commission could then demand revisions, as deemed necessary. For member states that are already in financial trouble, those rules would let the commission conduct regularly scheduled reviews and require more information about a country’s financial sector than is currently the case.

The rules would give “stronger possibilities of pre-emptive oversight as to national budgets before they are finally presented to national Parliaments” in order “to ensure that the member states practice what they preach,” Mr. Rehn said.

Failing to pass the law, he said, could invite a rerun of events in the middle of the last decade, when Germany and France essentially ignored their deficit-cap provisions, contributing to the current debt crisis in Europe.

“It’s a very serious issue,” he said.

Unfortunately, it looks increasingly like we’re going to be seeing more and more proposals by the Bundesbank and folks like Olli Rehn for the world to embrace an Ordoliberal model. Fortunately, there’s no shortage of other approaches available. Social contracts are pretty much limited by what we can think of. A diversity of complex social arrangements is sort of humanity’s specialty on this planet. It’s identifying and picking the best options that’s the hard part. That’s why learning from history is so important. Recent history has been repeatedly demonstrating the inadequacy of Ordoliberalism as an international model. It’s similar to the problem with neoliberalism (the GOP’s crony-Ayn Randism): Any system that takes our current economy too seriously – to the point where lives are destroyed because someone doesn’t have enough money – is a society that’s priming itself for failure. Especially right now when we have a planet filled with messed up economies that are all integrating together…ledger balances – from individual to national debts – just aren’t that meaningful and with both neoliberalism and Ordoliberalism life outcomes are determined primarily by market outcomes. And as the financial sector taught us all in the lead up to the financial crisis: markets can be easily rigged. Neoliberalism and Ordoliberalism are just not what we need right now. Climate change, overpopulation, and overpollution are threatening to create mass migrations and the collapse of entire regions of the planet so we need a social contract that’s really good with dealing with lots of poor people that recently experienced mass catastrophes. Nature is going to ensure plenty of mass death and destruction on its own. Societies are going to need to be operating as intelligently and efficiently as possible. Artificially stagnating lives via austerity induced by economic circumstance is just not going to be an option for successful societies. If there were other technologically advanced species living on this planet that developed the ability to overpopulate, overpollute, and generally implode themselves we could learn for their experiences. But there aren’t any around* so we’re going to have to figure out something new to get humanity through the challenges of the next century because they are unprecedented and growing.

Part of what makes neoliberalism, Ordoliberalism, and currency unions in general so tantalizing a model for integrating the lives of large numbers of people in vastly different circumstances is that they all rest on a foundation of uniformity: there is a system, it has rules, and the rules are presumed to lead to better outcomes than if there were no rules. And it’s true that these systems are likely better an improvement over complete anarchy. But the uniformity of these systems that makes them so tempting for binding diverse lives together is also an enormous weakness. Different situations require different economic environments when you’re using something as imperfect as money as the medium for interactions. There’s just no reason to expect the social contracts we’re seeing offerred to the world – Ortholiberalism or the standard neoliberalism – to be successful for the vast majority of of the global population. One of the most prevalent and powerful lessons history teaches us is that markets sort of work but also sort of don’t work. Economic social contracts that allow market outcomes to destroy lives are not going to work, especially during this phase of history when more and more national economies are becoming ever more tightly integrated. Figuring out a fair system with the kind of flexibility that works for everyone is going to require different approaches and probably different ways of viewing money itself. We’re going to have to get creative if we’re going to figure out a how to live together successfully. It’s an ancient problem that requires unprecedented solutions for unprecedented* problems.




*There is one other species available that’s experienced global collapse, but the Wookies ain’t talking. And their situation doesn’t really apply. And in case you’re curious, there was a giant explosion that collapsed the ecosystem when their super duper fail safe DeathStar brand iridium fusion plant exploded. Someone sold them what they thought were magical baby Ewok-Chihuahua hybrids. Nope. It was over fast. The Gremlin-sized vent leading to the reactor chamber didn’t help. It was seriously tragic. So there are some applicable lessons to humanity’s current situation regarding the dangers of power plants but, thankfully, the Wookies’ mogwai infestation doesn’t really apply to our current conundrum. And to keep it that way, Do Not Disturb the space eggs people! Leave those kinds of situations to the professionals.

Update 4-20-2013
And it looks like the G20 is officially backing away from Olli Rehn’s global developed-economies austerity drive, where the largest economies in the world all agree to cap government spending at some arbitrary debt-to-GDP ratio. For now, at least. Proposals for a cap on the unemployment-to-population ratio are similarly ignored, as such proposals would never be made in the first place. Classes at the Global Leadership Clown College are in session:

G20 backs off austerity drive, rejects hard debt cut targets

By Leika Kihara and Paul Eckert

Fri Apr 19, 2013 11:54pm BST

(Reuters) – Finance leaders of the G20 economies on Friday edged away from a long-running drive toward government austerity in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of worries over a sluggish global recovery.

The G20 club of advanced and emerging economies also said it would be watching for negative effects from massive monetary stimulus, such as Japan’s – a nod to concerns of developing nations that those policies risk flooding their economies with hot capital and driving up their currencies.

Russian Finance Minister Anton Siluanov said at a news conference that officials from the Group of 20 nations believed overall debt reduction was more important than specific figures.

“We agreed that these would be soft parameters, these would be some kind of strategic objectives and goals which might be amended or adjusted, depending on the specific situations in the national economies,” he said.

Russia – this year’s G20 chair – had hoped to secure an agreement on setting fixed targets for reducing debt by the time G20 leaders meet in St. Petersburg in September.

But the United States and Japan have firmly opposed the idea of committing to fixed debt-to-GDP targets, with Washington trying to keep the focus of the G20 on growth.

“Quite frankly, the language could have been stronger but it’s sufficient to move this forward,” said Canadian Finance Minister Jim Flaherty.


The drive toward government austerity has been undercut by weakness in economies that took severe measures to cut deficits, including Britain, which is headed into its third recession in the last five years. The U.S. economy also shows some signs of strain that economists pin on belt-tightening in Washington.

Earlier this week, the IMF reduced its forecast for global growth and reiterated its call for some European countries to throttle back their austerity drives.

Fitch cut its credit rating on Britain on Friday to double-A-plus, citing expectations that general government debt will rise to 101 percent of GDP by 2015-2016 due to weak growth.

In an interview with BBC television, IMF chief Christine Lagarde said now might be time for Britain to consider relaxing its focus on austerity given the recent weakness in its economy.

Russia’s Siluanov also said a greater amount of coordination was needed with the IMF on global liquidity, with recommendations expected by next July.

A language/doublespeak-related side-note: The phrase used in the article “The drive toward government austerity” is a phrase worth appreciating as a wonderful example of how ambiguity in language can parallel and even drive ambiguity in thought. One of the fun things about the term “government austerity” is that doubles as a phrase one could use to describle an idealized state of a government with “austere” finances from a debt and deficits perspective. Germany’s state of having low-deficits and a relatile low debt-to-GDP ratio could be considered a form of “government austerity” even though the German public sector is quite large by historical standards.

But the term “government austerity” could also describe that Ayn Randian/Grover Norquist Libertarian government-free paradise we hear so much about. Under this interpretation of the term, “goverment austerity” assumes that it’s a society with very little government. Period.

So the use of the phrase “The drive toward government austerity” is very appropriate in an article disussing this topic because what we’re seeing are seemingly endless attempts by leaders arguing that nations can acheive that Germany-like state of “government austerity” (low government debt/deficits) by simply cutting government spending. The Randian/Norquist ideal of an “austere government” that can’t provide basic services to its populace is being acheived by arguing that the low-deficit/low-debt ideal of “government austerity” can be accomplished if the public immediately cuts its goverment spending and the overall services provided by government to its citizens. But it’s just temporary. Once a transitory period passes and the magic of lower-government debt works throughout the economy, growth will return and society will be able to afford more government services if it so chooses. That’s the publically advanced theory for why Randian/Norquist policies are to be implemented.

That little trick of selling temporarily smaller government in order to afford larger government later is being successfully sold to one nation after another. THAT’s why it seems like nearly the entire G20, except for the US and Japan, wants to see global government spending curbs. The Reagan Revolution really has gone global, except it’s a variant of the Reagan Revolution that’s likelier to have more widespread appeal. Reagan’s phase, “Government isn’t the solution to the problem. Government is the problem” is an idea that’s only going to have limited global appeal. A lot of societies just aren’t crazy enough to embrace that. But the idea that “Government debt is the problem and therefore cutting government temporarily is the only solution,” is the kind idea that could appeal to a much broader audience around the globe. You get the same “Reagan Revolution” policies but without the “Reagan Revolution” idealistic fervor. There’s an idealistic fervor alright, but it’s based on a different kind of idealism…it’s an ideal world where various “crowding out” government debt theories regarding what constitutes “too much” government debt are coupled to a theory that Germany’s Ordoliberal approach of shock-doctrine economics to decrease the government deficits and debt loads really will work well for other nations in vastly different situations. The “crowding out” government debt theories and austerity solutions turn out to be demonstrably wrong, so it’s really more of a faith than an ideal at this point.

So you have to love statements like “The drive toward government austerity has been undercut by weakness in economies that took severe measures to cut deficits”. Yes, contractionary policies are still contractionary. Our leaders appear to still be struggling to figure that one out. When the Reagan Revolution went global so did stupidity.


18 comments for “Currency Wars: The New World Ordoliberalism”

  1. It looks like an unexpectedly weak eurozone economic report, lowered expectations for the rest of the year, and inflation rates below the target of 2% have given the ECB the kind of negative news momentum the inflation-wary central bank needs to justify a further rate cut. So, of course, the ECB decided to do nothing for the eighth straight month:

    Financial Times
    Last updated: March 7, 2013 8:41 pm
    ECB sticks to its monetary guns

    By Michael Steen in Frankfurt

    The European Central Bank declared that it would maintain an easy monetary policy stance “as long as needed” while the eurozone battles record unemployment and shrinking economic activity.

    “Our monetary policy will remain accommodative as long as needed,” Mario Draghi, ECB president, said during his monthly press conference .

    Barclays analysts said in a note: “This commitment to an ‘open-ended’ policy is something new, showing the ECB’s desire to see market rates remain close to zero despite the ongoing improvement in financial markets’ confidence towards the euro area.”

    The US Federal Reserve has said interest rates will remain near zero until unemployment falls to at least 6.5 per cent. While Mr Draghi described high unemployment as a “tragedy”, the ECB has no mandate to target joblessness.

    Although some on the 23-member governing council had sought an immediate cut of the bank’s main refinancing rate from 0.75 per cent, the ECB kept its rates on hold for the eighth consecutive month.

    Mr Draghi has consistently struck a gently upbeat tone on the eurozone’s prospects, despite being careful to say repeatedly that the risks to the outlook “remain on the downside”.

    “The recovery path is by and large unchanged,” he said. “Later in 2013 economic activity should gradually recover, supported by a strengthening of global demand.”

    However, the bank’s own staff projections paint a gloomy picture. The quarterly forecasts for growth were revised down again. They now predict a contraction of 0.5 per cent this year, from a fall of 0.3 per cent previously. More alarmingly for a central bank whose sole policy target is price stability, the ECB is now forecasting inflation to slow to 1.6 per cent this year and 1.3 per cent next year, short of its “close to, but below” 2 per cent medium-term target.

    “The get-out-of-jail card for the ECB with these forecasts has been to suggest that they are merely an input for their discussions, so they can go on to ignore them,” Ken Wattret, economist at BNP Paribas, said. “But it is stretching credibility for a central bank with one mandate to ignore its own current inflation projections.”

    The euro made strong gains against other major currencies as investors expressed relief that the ECB had made no immediate move to ease monetary policy. The single currency rose more than 1 per cent against the dollar to its strongest level in a week and nearly 2 per cent against the Japanese yen.

    “The market went into this expecting Draghi to be [more] dovish,” said Alan Ruskin, currency strategist at Deutsche Bank. “There’s a suggestion here that quite a lot of bad news is priced into the market.”

    Posted by Pterrafractyl | March 7, 2013, 10:42 pm
  2. See 4-20-2013 update at of the original post.

    Posted by Pterrafractyl | April 20, 2013, 7:45 pm
  3. Uh oh, it’s looking like the bifurcation of the eurozone credit markets is still leaving Spanish business in middle of a credit crunch that’s threatening Spain’s ‘recovery‘. That ongoing risk of default is forcing Spanish lenders to further restrict credit, which is further threatening Spain’s business which, in turn, adds to the risks in Spain’s banking system, and that means less lending, which leads to…

    If only there was someone that could do something about this senseless situation. If only.

    Posted by Pterrafractyl | September 9, 2013, 1:40 pm
  4. When bankers say things like, “we would argue that disinflation is positive for the periphery – higher odds of ECB stimulus – but deflation is negative – increasingly onerous debt burdens in real terms”, it should be translated as: the deflation news out of the eurozone is so bad it’s just gotta be good:

    Euro zone bond yields, money market rates plunge on low inflation

    Fri Jan 31, 2014 10:17pm IST

    * Euro zone bond yields plunge as inflation falls to 0.7 pct

    * Emerging market tension may add to deflationary pressure

    * Markets expect the ECB to potentially ease policy further

    * Some banks see an ECB rate cut as soon as next week

    By Emelia Sithole-Matarise and Marius Zaharia

    LONDON, Jan 31 (Reuters) – Euro zone bond yields and money market rates slid on Friday after an unexpected drop in inflation intensified speculation the European Central Bank may ease its policy in coming months.

    Spanish 10-year yields fell close to the eight-year lows hit earlier this month, while equivalent German, Italian, Belgian, Austrian, Finnish, and Dutch yields hit their lowest in six to seven months.

    Inflation in the euro zone fell to 0.7 percent in January from 0.8 percent the previous month and compared with a forecast of 0.9 percent in a Reuters poll. The figure is well below the ECB’s target of nearly 2 percent.

    “This obviously raises the stakes for the ECB,” said Ciaran O’Hagan, rate strategist at Societe Generale in Paris.

    “Last time around (ECB President) Mr Draghi said the low inflation reading was an aberration to be corrected but it’s getting harder and harder to explain.”

    Money market rates suggest investors expect the ECB to hold fire at its meeting next week: forward overnight bank-to-bank euro lending rates dated for the February meeting, at 0.18 percent, are higher than the spot Eonia rate of 0.155 percent.

    The downward trajectory of money market rates maturing beyond February, however, indicates expectations the ECB may ease its policy later this year. The biggest declines – up to 5 bps on the day – were seen in Eonia rates from May to November – all trading at or around their lowest since mid-2013.

    “The market is clearly expecting something from the ECB either a rate cut or something on the liquidity side,” said Jean-Francois Robin, head of rates strategy at Natixis. “That might be the big danger here if the ECB does nothing maybe market reaction might be a bit violent in this regard.


    Some banks – such as RBS and Deutsche Bank – predict prompt action from the central bank. RBS economist Richard Barwell forecast a cut in the main refinancing rate to 0.10 percent from 0.25 percent next Thursday, with the rate the ECB pays banks for holding their cash overnight remaining at zero. Deutsche economists see a 5-10 basis point cut in the three key rates, including the marginal lending rate.

    Benchmark 10-year Bund yields dropped 5 bps to 1.565 percent, a six-month low.

    Of particular worry is that the outlook for inflation may worsen if the sell-off in emerging markets continues.

    There are several channels through which this could happen: tumbling currencies in the developing world could lead to cheaper imports, a slowdown in demand from emerging markets could push some euro zone prices lower, while investment flows into the euro zone could strengthen the single currency.


    This could partly explain why Spanish and Italian bonds have shown resilience this week even during the most intense bouts of selling in emerging markets, having in past years shown vulnerability to shifts in global risk appetite.

    “The EM (emerging market) developments are … good news for the euro zone periphery,” rate strategist Christoph Rieger wrote in a Commerzbank weekly note.

    “Near-term uncertainty could lead to flows out of EM into euro zone countries … Moreover, the likely slowdown of demand from some EM … further weighs on inflation expectations, which should spur speculations about the ECB response.”

    Analysts said the fact that peripheral yields fell after the lower inflation data could be a sign that investors still saw a very reduced risk of deflation in the euro zone.

    Deflation could have a negative impact on peripheral debt markets, as it would increase their debt burden in real terms and would hurt their economic growth prospects.

    “Diminishing price pressures are a double-edged sword for the periphery,” Rabobank senior rate strategist Richard McGuire said. “We would argue that disinflation is positive for the periphery – higher odds of ECB stimulus – but deflation is negative – increasingly onerous debt burdens in real terms.

    Yeah, it’s that pesky emerging market sell-off that’s causing all this trouble. But at least now the markets are expecting the ECB to finally act with some stimulus measures. Good luck with that!

    Posted by Pterrafractyl | January 31, 2014, 2:11 pm
  5. The ECB was slated to announce its plans for any policy changes in the fight against deflation in the eurozone. As we can see from the pre-announcement speculation, if there’s one thing the ECB can’t complain about these days it’s a lack of options:

    ECB options for staving off euro zone deflation threat

    FRANKFURT Wed Feb 5, 2014 9:00am EST

    (Reuters) – A shock slump in euro zone inflation to a level way below the European Central Bank’s target is focusing the minds of its policymakers, who have the chance to respond at Thursday’s monthly meeting.

    While they may choose to wait for updated medium-term economic forecasts in March before deciding whether to act, the drop in inflation to just 0.7 percent last month highlights the immediacy of the deflation risk facing the 18-country bloc.

    After the ECB’s January policy meeting, President Mario Draghi set out two scenarios that could trigger fresh policy action: a deterioration in the medium-term inflation outlook and an “unwarranted” tightening of short-term money markets.

    ECB policymakers have discussed – in theory – a number of policy measures they could deploy to deal with either of these scenarios. Each comes with its own merits and drawbacks.

    Following is a description of some of the main options and their respective pros and cons.


    With the ECB’s main interest rate already at just 0.25 percent, the central bank is running out of room to lower official borrowing costs. Analysts polled by Reuters last month did not expect the ECB to cut rates within a forecast horizon extending to June 2015. [ID:nL5N0L32MW] Should the ECB opt to lower rates, it would probably go with a smaller cut than the 25-basis-point increment it has always used – to 0.1 percent, for example. Such a step would send a signal that the ECB is ready to act to meet its inflation target, but would have only a muted impact on the economy.


    The ECB has discussed the possibility of suspending operations to soak up money it spent buying sovereign bonds during the euro zone’s debt crisis under its now-terminated Securities Markets Programme. [ID:nL5N0L92MG] Ending the so-called “sterilization” operations would inject about 175 billion euros ($236.43 billion) of liquidity into the financial system, which would help ease strains in euro zone money markets.

    One argument against suspending the sterilization operations would be to avoid raising questions about ECB policy ahead of a ruling by the German Constitutional Court on the central bank’s new bond-buying programme.

    The court is considering whether the ECB’s plans to buy “unlimited” amounts of bonds from stricken euro zone states, announced in 2012 at the height of the crisis, is really a vehicle for funding member states through the back door. That could violate German law.

    Purchases made under the yet-to-be-used bond plan are also meant to be sterilized to stop them fuelling inflation.


    The ECB funneled over 1 trillion euros into the financial system in late 2011 and early 2012 with twin three-year long-term refinancing operations (LTROs) at low interest rates. The move provided banks with ample liquidity, giving them more certainty about their funding situation and taking tension out of money markets. But banks have been repaying big chunks of the loans early so there is no guarantee they would jump again at a repeat offer, especially as they are tidying up their books ahead of a health check of the banking sector by the ECB.


    Quantitative easing (QE) – effectively, printing money – would be a way to flood the economy with funds. By buying government bonds on the secondary market, the ECB could bring down market interest rates and ease money market tensions. The increase in the money supply would, in theory, also push up prices and stave off the deflationary threat. Although the ploy has been used by the U.S. Federal Reserve, the Bank of Japan and the Bank of England, many ECB policymakers have deep reservations about making this move, from which they fear it would be difficult to exit. Another concern is that the merits of QE are unclear: in the United States, a quicker clean-up of the banking sector than in Europe may have been the decisive factor in pepping up the economy, not QE.


    The ECB has vowed to keep its key interest rates “at present or lower levels for an extended period of time”. But how long is an ‘extended period’? To help anchor inflation expectations, the ECB could sharpen its language. The Fed did this by tying its guidance to developments in the U.S. labor market, but a problem for the ECB may be that its mandate is to focus on price stability, not the broader economy. The Bank of England’s recent experience may also not inspire the ECB to refine its message. Its forward guidance was rendered virtually obsolete last month when Britain’s jobless rate fell close to the 7.0 percent level the BoE set in August as a threshold for considering higher interest rates, confident it would take years to get there.

    Yes, there are a number of options for the ECB. Unfortunately, whether or not those options are on the table is another question:

    Draghi Said to Seek German Support on Bond Sterilization
    By Jana Randow Feb 3, 2014 6:01 PM CT

    European Central Bank President Mario Draghi would only consider ending the sterilization of crisis-era bond purchases if he’s openly backed by the Bundesbank, according to two euro-area central bank officials familiar with the debate.

    Ending the liquidity drain would add almost 180 billion euros ($243 billion) to the euro-area financial system at a time when officials are trying to curb volatility in money markets and official interest rates are close to zero.

    Draghi said he would contemplate asking ECB policy makers to halt the absorption of liquidity from the now-terminated Securities Markets Program if the Bundesbank helps sell the move to the German public, the people said, asking not to be identified because the deliberations are private. Sterilizing bond purchases typically neutralizes their impact on money supply, curbing inflation risks.

    Enlisting the Bundesbank to convince the German public of a change in the terms of the SMP may be Draghi’s defense strategy against the kind of backlash his predecessor Jean-Claude Trichet experienced when he announced the program in 2010. Then-Bundesbank President Axel Weber criticized the measure on the same day, saying it posed “significant” risks.

    A spokesman for the ECB declined to comment yesterday. The Bundesbank supports ending the liquidity absorption and has deliberated on the measure in the ECB’s monetary-policy and market-operations committees, a central-bank official told Bloomberg on Jan. 31.

    Market Watch

    Ending the liquidity drain, which started with the bond purchases during the financial crisis, would more than double excess liquidity in the system. That could help to curb volatility in market interest rates and reduce banks’ incentive to keep cash at the ECB rather than lend it on. Draghi has said the Frankfurt-based institution is ready to act if money-market rates are unwarranted or the outlook for inflation worsens.

    The central bank has failed for the past two weeks to sterilize SMP purchases in a sign that lenders may be reluctant to park cash at the central bank amid tighter funding conditions. Excess liquidity, money not immediately needed by banks to meet their obligations, fell to 168 billion euros on Jan. 31 from 813 billion euros two years ago.

    The ECB’s Governing Council next meets to set monetary policy on Feb. 6. Policy makers kept the main rate at a record low of 0.25 percent in January after a surprise cut in November.

    Woah! So even the Bundesbank is signaling that it would support an end to bond “sterilization” to help ward off deflation!? That’s a pretty surprising policy stance coming from the Bundesbank all things considered:

    The Wall Street Journal
    Bundesbank Would Favor End of ECB Sterilization
    Move Would Boost Liquidity in Banking System and Smooth Recent Market Volatility

    By Brian Blackstone
    Jan. 31, 2014 9:44 a.m. ET

    FRANKFURT—Germany’s Bundesbank would favor an end to the European Central Bank’s policy of withdrawing significant amounts of money from the banking system to offset its government-bond holdings, a person familiar with the matter said.

    Such a move, which would have the effect of boosting liquidity in the banking system, would be aimed at smoothing out recent volatility in money markets, the person said.

    Analysts said they were surprised by the Bundesbank’s position, given its fierce opposition to the ECB’s willingness to purchase government bonds since the euro debt crisis escalated in 2010. The bond buying raised concerns in Germany about its inflationary consequences and the ECB’s separation from fiscal-policy matters.

    Under an ECB bond-purchase plan known as the Securities Markets Program, the central bank committed to withdrawing funds from the banking system in amounts equal to what it accumulated in government bonds of Greece, Ireland, Portugal, Spain and Italy. By doing so, the central bank would avoid flooding the banking system with what would in effect be freshly minted money via the bond purchases.

    The ECB bought more than €200 billion ($271 billion) in these bonds under the facility from 2010 to 2012, though some of those have since matured. The ECB is no longer buying government bonds, and the SMP was shelved in 2012.

    But each week, the ECB still drains funds by offering financial institutions interest-bearing deposits, a process known as sterilization.

    Other central banks such as the U.S. Federal Reserve, the Bank of England and the Bank of Japan have also purchased their respective governments’ bonds—and in much larger amounts than the ECB. But those central banks have allowed the money to remain in the financial markets, as a source of stimulus for the economy, known as quantitative easing. The ECB has been reluctant to follow suit.

    It is unclear whether there is a consensus at the ECB to end the sterilization policy, the person familiar with the matter said. The ECB meets again on Thursday. In December, ECB President Mario Draghi said the ECB was reflecting on the issue.

    Sterilization helps keep money supply stable, and the policy also shields the ECB from criticism that it has used its balance sheet to monetize government debt. This concern is particularly pronounced in Germany, where purchases of government bonds stir fears of inflation and a loss of central bank independence.

    “If you stop sterilization, just below €180 billion will be added to the liquidity surplus,” said Nick Kounis, economist at ABN AMRO, referring to the amount of government bonds the ECB still has on its books. “That will give you an adequate cushion and push down on” the rate at which banks lend to each other, he said.

    The Bundesbank’s current president, Jens Weidmann, voted against the ECB’s current bond facility, known as the Outright Monetary Transactions, in September 2012. The ECB has also pledged to sterilize any bond purchases under the OMT, though that hasn’t been tested yet as the program hasn’t been used.

    “I’m surprised that the Bundesbank would support” ending the weekly funding drains, said Beat Siegenthaler, currency strategist at UBS in Zurich. Indeed, the Bundesbank, under its previous president Axel Weber, vigorously opposed the creation of the Securities Markets Program in 2010.

    Ending the sterilizations carries risks, analysts said. Germany’s constitutional court is weighing whether the ECB’s OMT bond program complies with German law.

    And if the ECB shows a willingness to change the rules on its first bond program, it may do so again on the OMT, or open the door to quantitative easing. “If you can do unsterilized government bond purchases once, you can do them again,” said Richard Barwell, economist at RBS.

    So what’s it going to be ECB? Another rate cut? LTRO expansion? Some sort of ECB QE? Just a market pep talk? Or maybe, just maybe, the suspension of bond ‘sterilization’ programs that suddenly got the green light?

    Or…how about doing nothing while the ECB brushes off concerns about deflation? Could that be what to expect? Hmmmmm….yeah, doing nothing while the ECB brushes off concerns about deflation is probably what we should have expected:

    ECB’s Draghi says discussed available tools, decided to wait

    FRANKFURT Thu Feb 6, 2014 9:26am EST

    Feb 6 (Reuters) – The governing council of the European Central Bank had a broad policy discussion at its meeting on Thursday but decided to hold off from action pending new economic forecasts next month, President Mario Draghi said.

    “The reason for today’s decision not to act has really to do with the complexity of the situation I just described and the need to acquire more information,” Draghi told a news conference following the ECB’s decision to keep interest rates on hold.

    “First of all, the macroeconomic projections by the staff, which will be coming out in early March… for the first time will contain forecasts for 2016 and that is a very significant change in … the information set that we use for our analysis.”

    Draghi said the governing council had broadly discussed the policy instruments it might use. These included the possibility of suspending operations to soak up money the ECB spent buying sovereign bonds, which had received particular attention in the market ahead of Thursday’s meeting.

    “It’s one of the many instruments that we are looking at, it’s not been discussed… we had a broad discussion about all the instruments,” he said, adding that ECB committees had been studying various measures, “so that by the time and if we are to decide to activate the measures, we are ready to go”.

    “What measures we will decide to activate … will depend on the contingencies that we will have to face,” Draghi said.


    Posted by Pterrafractyl | February 6, 2014, 11:11 am
  6. One of the interesting quirks about how the eurozone crisis has played out is the fact that the pledge by ECB president Mario Draghi back in 2012 to do “whatever it takes” to save the euro has generally been credited with stabilizing eurozone sovereign debt markets and yet that action by Draghi has never accepted as legitimate by Germany’s top bankers. It’s the kind of conflict that isn’t exactly confidence-inducing for the broader markets about the eurozone’s long-term prospects.

    And then stuff like this happens:

    The Wall Street Journal
    8:05 am Feb 7, 2014
    Why Germany Is No Fan of ‘Whatever It Takes’

    By Brian Blackstone

    FRANKFURT–The red-robed German constitutional judges in Karlsruhe have held the ECB’s signature crisis tool—a bond-buying plan called Outright Monetary Transactions—in their hands since June.

    After eight months, they have decided to punt it to Luxembourg and the European Court of Justice.

    This is more than just legal shuffling between jurisdictions. The OMT, created in September 2012, was the policy tool that backed up ECB President Mario Draghi’s July 2012 pledge to do “whatever it takes” to preserve the euro. This assurance that the ECB would use its money-printing powers to keep countries from bankruptcy was enough to bring Spanish and Italian government bond yields down sharply. The OMT hasn’t even been used yet.

    Germany’s Bundesbank vehemently opposed the OMT, arguing that it is the responsibility of governments to deal with fiscal matters, not the ECB. But Bundesbank President Jens Weidmann was overruled by the rest of the ECB’s governing council.

    On Friday, Germany’s constitutional court went even further than the Bundesbank, saying in effect that the OMT is illegal. “There are important reasons to assume that [the OMT] exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget,” it said.

    Strong words. But they deferred to the European Court of Justice because this is a matter of European law. The ECB will likely get a more sympathetic hearing in Luxembourg, as the ECJ has typically given European institutions leeway in how they interpret the rules. In the meantime, the ECB can still deploy the OMT if it wants while the case works its way through courts.

    Still, the ECB isn’t in the clear. Anything that shines a spotlight on the OMT’s fine print is a negative. The perception in markets that OMT is an unlimited tool helped stabilize bond markets. But there are limits. OMT can only be used for bonds up to a three-year maturity. And countries must first sign up for a rescue package with euro zone governments and agree to conditions, a complicated and time-consuming process.

    But Germany may yet be the biggest loser in all this. Its central bank opposed OMT and its top judges now say it is outside the ECB’s mandate. But the Bundesbank and the constitutional court can’t stop it.

    No, the Bundesbank and German constitutional court may not be able to stop the use of bond-buying by the ECB. But they can undercut the program to the point where it doesn’t matter:

    How Germany Just Undercut the Euro
    By Megan Greene Feb 7, 2014 12:23 PM CT

    A German court may have just weakened European Central Bank President Mario Draghi’s most potent weapon in the battle to save the euro.

    Back in July 2012, Draghi calmed panicked markets with a pledge to do “whatever it takes” to defend the euro and with a program, known as outright monetary transactions, to stabilize interest rates throughout the euro area by buying the bonds of financially distressed governments. The move was a game changer, shifting the crisis in Europe from acute to chronic. European markets have been relatively calm ever since.

    There has always, though, been a significant caveat: The German Constitutional Court had to rule on whether the bond-buying program complied with German law, which forbids monetary financing of the budget. Following a closely-watched debate in the court last September, most analysts expected it would offer a “yes, but” ruling that accepted the bond buying was legal, pending a few small revisions to make the Germans feel they had more control.

    Instead, the German court has surprised many analysts by offering a “no, but” ruling: It thinks the bond-buying program violates German law, but recognizes that the European Court of Justice should determine whether the ECB is acting within its mandate. The European court must now investigate whether the program falls within the ECB’s mandate as a form of monetary rather than economic policy. This will take at least 18 months.

    So what happens in the meantime if a country gets in trouble and the ECB wants to buy its bonds? One possibility is that the program will be put on hold until the European court deems it legal — meaning that the central bank’s most powerful policy tool will be completely defunct. This should worry Portugal, which is due to exit its bailout program later this year and is taking some comfort that there is a safety net if things go horribly wrong. Other financially challenged countries in Europe should be concerned as well: Both Greece and Italy have unstable governments that could collapse over the next 18 months, possibly triggering investor panic.

    More likely, the bond-buying program will be considered in force and then ruled on retroactively. Given the German court’s position, the Bundesbank could refuse to participate in any bond purchases until the program is adjudicated. The eurozone doesn’t have a banking union, a fiscal union or a political union, but at the very least it can claim to have a fully functioning monetary union. If the largest national central bank refuses to participate in an ECB program, that claim could be called into question, to the great dismay of investors.

    Furthermore, what happens if a government defaults on the bonds purchased by the ECB? The central bank can in theory make up entries on its balance sheet to carry those losses forward, but realistically it will want to raise more capital from its member countries. If the Bundesbank refuses to pay for any losses resulting from what a German court considers to be an illegal program, the losses will be spread across the other euro-area countries, many of which can ill afford them.

    In referring the case to the European court, the German court highlighted three amendments that would convince it that the bond-buying program is in accordance with the ECB’s mandate and German constitutional law: “this would probably require that the acceptance of a debt cut must be excluded, that government bonds of selected Member States are not purchased up to unlimited amounts, and that interferences with price formation on the market are to be avoided where possible.”

    If the European court agrees, it will take all of the teeth out of the bond-buying program. The promise to buy government bonds was successful because betting against an ECB with unlimited firepower was never going to pay off for investors. Limiting the ECB’s firepower changes the calculus. Speculators could test its resolve, sending borrowing costs for weak euro area countries soaring again. Borrowing costs would also rise if the ECB were made a preferred creditor in an effort to avoid losses. Investors would demand a higher yield on sovereign debt, knowing they would be first in line to suffer losses in the event of a debt restructuring.

    More likely, the European court will rule that the ECB program is legal without the German court’s proposed amendments. In this case, the ECJ’s ruling will be binding, but there will be overt disagreement between Europe’s highest court and its largest member state’s highest court on the most important policy tool in the region. It is hard to believe investors won’t wonder about the program’s effectiveness if and when it is eventually activated.

    Note that even if a new crisis breaks out in the next 18 months and the Bundesbank succeeds in blocking the ECB’s bond-buying, there are some crisis response measures that the Bundesbank would be more than happy to support…

    Posted by Pterrafractyl | February 9, 2014, 7:53 pm
  7. Here’s the latest ECB deflation denialism gem:

    ECB sees no deflation risk for now: Praet

    BRUSSELS Tue Feb 25, 2014 3:15am EST

    (Reuters) – The European Central Bank sees no current risk of deflation nor signs of people delaying purchases, policymaker Peter Praet said in a newspaper interview published on Tuesday.

    Praet, who holds the economics portfolio on the ECB’s Executive Board, told Belgian newspaper De Standaard that persistently low inflation would represent a risk.

    But this was at the moment being mainly driven by subdued food and energy costs. Energy prices are highly volatile.

    “Weak demand and high unemployment could also be playing a role,” he said.

    The ECB’s mandate is to deliver price stability, which it defines as inflation of close to but below 2 percent over the medium term.

    Euro zone inflation is currently running at just 0.8 percent – well below target. “We accept that price developments are weak and that the weakness is continuing in the medium term,” Praet said.

    Ah, the ECB does actually see the risk of deflation due to persistently low-inflation. Subdued food and energy costs are being primarily attributed for the subdued prices, although “weak demand and high unemployment could also be playing a role”. So the ECB’s stance is that the eurozone’s near-deflationary status is due to food and energy costs, but the economic depression experienced across the region (which has probably kept quite a lid on energy demand) might also be playing a role? Wonderful. Now whenever the ECB wants an excuse to do nothing it can point to the eurozone electicity market which has been struggling with an electrical-grid over-supply issue for years. The deflationary winds will continue to blow across the eurozone.

    Posted by Pterrafractyl | February 25, 2014, 1:16 pm
  8. It’s always Groundhog Day at the ECB:

    The Wall Street Journal
    Economy & Business
    Five Takeways from Mario Draghi’s ECB Press Conference

    By Geoffrey T. Smith
    1:11 pm Mar 6, 2014

    European Central Bank President Mario Draghi’s monthly press conference was a low-key affair. A month ago, with inflation grinding lower and politicians complaining about the strength of the euro, there had been hints of action, and the message had been essentially to wait until March, when there’d be more data.

    That led many to believe there was a snippet of a chance of a rate cut or, more likely, non-standard policy measures, such as an end to its policy of draining funds from banks to offset asset purchases.

    Here are the main takeaways:

    1. Scraping by without more easing: Mr. Draghi said last month that the ECB’s new staff forecasts would decide whether or not further easing was necessary. Well the forecasts are in. After a month of “by and large positive” data, they upheld what the ECB has been proclaiming for a couple of months already: a gradual recovery and an even more gradual upturn in prices, reaching (a conspicuously precise) 1.7% by the fourth quarter of 2016. In other words, inflation will just about be high enough to count as “close to, but below, 2%”—the ECB’s definition of price stability. That’s therefore a justification not to do anything, policy-wise.

    2. There will be no ‘sterilization’: There’d been plenty of speculation among analysts and market participants that the ECB would end the week-by-week “sterilization” of its first wave of bond purchases, effectively creating another €175 billion of excess liquidity that would help to keep money-market rates down. Sterilization sounds complicated, but what it really means is that the ECB offsets its asset purchases by offering banks interest-bearing deposits to keep the supply of money stable. Mr. Draghi said the market hasn’t needed that kind of help this month. He added that it probably wouldn’t have any lasting effect anyway.

    3. Don’t underestimate effects of turmoil in Ukraine: Mr. Draghi was invited to speculate on the impact of the Ukraine crisis. He argued that people shouldn’t believe the impact would be limited just because the euro-zone’s trade and financial links with Ukraine are small. The geopolitical risks could quickly become “substantial”. He also argued that the crisis would have a “severe” impact on Russian economic growth. The Russian government is forecasting 1.8% growth this year, meager by emerging market-standards. And the central bank has already spent over $11 billion in foreign reserves defending the ruble’s exchange rate.

    4. Certainty returning? Until the start of last year, the ECB warned repeatedly about the uncertainty over the economic outlook. First Mr. Draghi called it “heightened”, then “high”, then merely “persistent”. But it now seems to be a thing of the past. The slow healing of the euro zone’s financial system has advanced to a point where the ECB feels able to produce, for the first time, forecasts running over two-and-a-half years into the future. Fragmentation of the banking system is increasingly a thing of the past. As he said earlier this week in the EU Parliament, “the glass is more than half full.” Which means, barring disasters, that the easing cycle is over, whether or not the ECB still claims to have an easing bias.

    5. The euro strength’s a mixed blessing: Mr. Draghi’s apparent confidence in the recovery encouraged pushed the euro to its highest level this year against the dollar as traders scaled back their hopes of any further easing of policy. Mr. Draghi said that the euro’s rise in the course of the last year had knocked nearly half a percent off the inflation rate, but given that the inflation rate is only 0.8%, it would still be well below target even without the forex effect. It remains one of the chief potential risks to the euro zone’s recovery in many people’s eyes, although for now, the ECB is just happy to see it strengthening domestic purchasing power.

    It sounds like Draghi has been taking lessons at the Paul Ryan School of Motivational Leadership: If Draghi can convince the markets that the ECB is convinced that the markets are perfectly capable of improving on their own – without any of that crippling government assistance – the markets will finally be forced to capitulate on their hopes of further ECB help and instead just pull themselves up from the bootstraps. The danger-zone is no place for the weak.

    Posted by Pterrafractyl | March 6, 2014, 10:49 am
  9. One of the ever-lingering concerns over the eurozone’s economy centers on the persistently near-zero inflation that threatens to snuff out any sort of recovery and keep the region locked into a deflationary death-spiral. And since central banks can’t really set negative interest rates even when that would be the best mechanistic method for jump starting the economiy the call for “unconventional” central banking methods inevitably grow when nations find their economies in deflationary quicksand. And since this is the eurozone we’re talking about, those calls inevitably fall on the deaf ears of the eurozone’s central bankers. Those blind, deaf, and dumb ears:

    Euro Inflation at Lowest in Over 4 Years Misses Estimates
    By Ian Wishart and Jennifer Ryan March 31, 2014

    Euro-area inflation slowed in March by more than economists forecast to the lowest level in over four years, keeping pressure on the European Central Bank to take action to foster the currency bloc’s recovery.

    Consumer prices grew 0.5 percent in the year, after a 0.7 percent gain in February, the European Union’s statistics office in Luxembourg said today. That missed the 0.6 percent median forecast in a Bloomberg News survey of 41 economists. The inflation rate has been below 1 percent for six months, while the ECB seeks to keep it at just under 2 percent.

    Today’s result is half of the ECB’s forecast for 2014 and well below the central bank’s medium-term objective. Only three of 57 economists in a separate Bloomberg survey expect the ECB to cut its benchmark interest rate when policy makers meet on April 3 in Frankfurt. The rest expects it to remain unchanged.

    “They will be very uncomfortable with a 0.5 percent inflation rate, though they would expect that to bounce back in April,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London. “On balance they would believe that the number itself doesn’t merit further action given that the forecast is for it to trend higher. It’s definitely a presentational challenge, 0.5 percent is not where any central bank in its right mind would want it to be.”

    Record Unemployment

    The core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, advanced 0.8 percent after a 1 percent jump in February.

    Indications that the euro area’s recovery is gaining traction have been mounting, including economic confidence increasing more than forecast in March. Yet the currency bloc remains dogged by near-record unemployment and anemic price growth as it struggles to expand output.

    “For the euro area as a whole we can expect positive growth, while we were negative in 2013,” ECB Governing Council member Ewald Nowotny told Oesterreich newspaper in interview published today. “In this sense, we’ve overcome recession, but this doesn’t mean that all problems have gone away.”

    ECB Governing Council member Jens Weidmann said on March 29 that the recovery will push inflation rates back up.

    “With regard to the currently low level of inflation in the euro area, one should bear in mind that two-thirds of this deceleration of prices can be attributed to energy and unprocessed food prices, which is to say cyclical factors that are likely to be temporary,” Weidmann said.

    Today’s inflation data are estimates. The statistics office will release final figures for March on April 16.

    Well, in Weidmann’s defense, energy prices just might be on the rise for the eurozone and the rest of the EU if Russia cuts the gas off, so that rise in energy inflation he’s predicting just might happen. But that hasn’t really happened and may not happen at all. But even if it does, is that going to be what the eurozone needs to get out of its funk? The ‘Ukraine’ treatment? Either way, here we are. The threat of WWIII might now be the official best hope for the eurozone economy. Or maybe the upcoming stress tests will fix everything:

    Spain, The ECB And The Power Of Talk
    Frances Coppola Contributor

    Investing 3/30/2014 @ 9:46AM

    Spain is in a mess. Over a quarter of its adult workforce is unemployed, and according to CIB Natixis it has lost 25% of its production, even more than Greece. Spain’s inflation rate has been falling steadily and has now turned negative: the most recent retail sales figures show a fall of 0.2%. Various people anticipate ECB easing monetary policy because of the growing threat of deflation in Spain.

    But this is to misunderstand the role of monetary policy in a currency union. The ECB sets monetary policy for the union as a single unit, not for its individual components. Deflation in Spain is a driver of ECB decisions only to the extent that it depresses Euro zone CPI. And I’m sorry if this sounds brutal, but Spanish unemployment is of no consequence, since the ECB does not have a mandate to target unemployment even at the Euro zone level, let alone in an individual country. The ECB can no more set policy to tackle deflation or unemployment in Spain than it can set policy to meet the desire of German savers for better returns. Its mandate is to maintain inflation close to 2% across the Euro zone economy AS A WHOLE.

    Admittedly, Euro zone aggregates don’t look particularly healthy: inflation at 0.8% is far below the 2% target and M3 is stagnating. M3 lending is actually falling, indicating that bank deleveraging continues to place severe restrictions on the availability of finance, especially in periphery countries:

    [see chart]

    Real interest rates in the periphery remain far above the ECB’s policy rate.

    But there is some good news, too. Euro zone stocks have risen substantially in the last week, and yields on periphery bonds are at their lowest for several years. And the Euro has fallen, which benefits exporters. To be sure, the Euro zone already has a trade surplus, largely due to the ever-growing German trade surplus. But exports need to strengthen in periphery countries too, so a falling Euro is perhaps good news for them (although I have argued elsewhere that it is more likely to benefit German exporters).

    These market movements do not seem to be driven by fundamentals. Rather, they appear to be driven by expectations that the ECB will undertake more aggressive monetary easing, perhaps by means of QE or negative interest rates on bank reserves. The ECB has signaled that it is considering both of these.

    But I fear these expectations are wrong. Signals don’t necessarily equate to action, and if markets respond to the signal by pricing in the action, then they may render the action itself unnecessary. If the ECB’s intention was to force a fall in the Euro, then the combination of signalling with the deplorable Spanish retail figures just released has already done the job. In which case there will be no easing.

    My negative view of the likelihood of ECB easing is supported by this chart showing the ECB’s medium-term inflation forecast:

    It seems that the ECB is expecting a sustained rise in inflation to start any time soon, gradually returning inflation to target by 2020. While this seems a long time, it should be remembered that many EU countries are undertaking structural reforms which can be expected to depress growth for quite some time to come. Greece has now been in recession for six years and growth has not yet returned.

    In my view the ECB’s inflation forecast – despite the slow return to target – is over-optimistic. But it is not my view that matters. The question is whether the ECB believes its own forecast. If it does, there will be no easing.

    The ECB’s optimism may be due to the fact that Eurozone banks are currently undergoing the Asset Quality Review, the Eurozone’s equivalent of the Fed’s recent stress tests. The AQR started in November 2013 and is scheduled to take a year to complete. Many European banks have over-risky balance sheets and insufficient capital: the AQR forces them to address this, not least because banks that fail the AQR may be wound up (it’s amazing what effect the threat of dissolution has!). This was the underlying reason for the horrible figures recently released by the Italian bank Unicredit. I have no doubt there will be other banks releasing horrible figures in due course.

    If the principal cause of the fall in M3 lending is accelerated bank deleveraging due to the AQR, then it is reasonable to suppose that once the AQR is completed, those banks that are judged healthy will be in a position to resume lending to households and businesses. If so, then the credit crunch and associated disinflationary trend is a short-term phenomenon which will resolve itself in due course without any need for ECB monetary easing. Hence the ECB forecast.

    Yes, it’s a sad fact that the deflationary pain in Spain simply is not a big issue for the ECB. That’s how the system was set up. Zone-wide inflation or deflation is what matters. Granted, the zone-wide inflation is also dangerously low, but this is the ECB we’re talking about here. Danger is its main export.

    As the article also points out, it’s possible that the real strategy is to force a decline in the euro via internal devaluation of the periphery (e.g. deflation in Spain) combined with central banking jaw-boning about future plans for further ECB action. This would, of course, be an awful policy that fosters eurozone economic growth by encouraging German exports through a lower euro achieved by deflation in the periphery. What came first, the chicken or the egg? How about if the egg is preemptively smashed on the ground…is it still an open question? That seems to be the ECB’s question of the day.

    But also note the argument made above: It’s possible that the real reason Jens Weidmann and the ECB officials are optimistic about the future inflation rate is because the “Asset Quality Review” (AQR) banking stress test is coming up, leading to a hoarding of banking assets. And once those tests are over that hoard will presumably released by the healthy banks. This, in turn, will create the fruitful cycle of more lending, higher inflation, and an overall economic recovery. Could that be the plan? Sure, but this plan also assumes that the ECB isn’t preemptively making it less likely that banks will actually pass those upcoming stress tests by restricting credit through overly tight monetary policies. And it’s also assuming that no help is going to be need between now and when the stress tests end in October. So is “deflationary policies and happy talk followed by more waiting” the unspoken ECB policy for the next six months? How about permanently?

    Posted by Pterrafractyl | March 31, 2014, 10:19 am
  10. The ECB’s Dilemma: Long cons require long-term credibility:

    Draghi’s Attempt to Talk Down Euro Lost on Traders: Currencies
    By Lukanyo Mnyanda and Liz Capo McCormick Apr 2, 2014 11:26 AM CT

    As far as currency traders are concerned, it’s going to take more than words for European Central Bank President Mario Draghi to weaken the euro.

    The 18-nation currency has slipped 0.5 percent against a basket of nine developed-market currencies since Draghi said March 13 that the exchange rate is “increasingly relevant in our assessment of price stability.” That compares with a drop of 1.8 percent for the yen and a 0.3 percent gain for the dollar, Bloomberg Correlation-Weighted Indexes show.

    The ECB, which meets tomorrow, is under pressure to stem a 20-month advance in the euro that has weighed on growth and slowed inflation to barely a quarter of its 2 percent target. Among the actions Draghi may take are cutting the central bank’s record-low interest rates or stop mopping-up the excess liquidity from its asset-purchase program.

    “The time for talk is over and measures must be implemented,” Neil Jones, the London-based head of financial institutional sales at Mizuho Bank Ltd., said in a phone interview yesterday. “Talk is not going to do it. Verbal intervention is insufficient.”

    Exceeding Forecasts

    Euro bears may need to be patient. Policy makers will keep their benchmark rate at a record 0.25 percent, according to all but three of 57 economists in a Bloomberg News survey. One sees a cut tomorrow to 0.1 percent while two call for 0.15 percent.

    The euro strengthened 8.1 percent over the past year, snapping four straight annual declines from 2009 through 2012, according to Bloomberg Correlation-Weighted Indexes.

    Like last year, the euro has performed better than predicted in Bloomberg strategist surveys. The 18-nation currency strengthened 0.2 percent to $1.3769 in the first quarter, compared with a median prediction for a 3.2 percent drop to $1.32. At the end of 2012, strategists were projecting a decline to $1.27 by end-2013, which turned out to be 8.2 percent lower than its $1.3743 Dec. 31 close.

    Jones sees the shared currency climbing to $1.40 this year, from $1.3763 at 12:23 p.m. in New York. The median forecast of contributors in a Bloomberg survey is for the euro to finish this year at $1.30.

    The euro has been supported by signs that the region’s economy is gathering steam, after Draghi pledged to prevent the currency bloc from splintering in July 2012.

    ECB’s Dilemma

    While the euro’s strength is a tribute to Draghi’s success in calming nerves at the height of the sovereign-debt crisis, it risks stymieing a recovery struggling with almost record-high joblessness.

    Purchasing-manager indexes released last week showed factory and services activity in the first quarter was the strongest in almost three years, and confidence in the region was the highest since 2011. In the euro-area, the jobless rate was at 11.9 percent in February, while in Italy it climbed to 13 percent, underscoring the dilemma facing ECB officials.

    “The PMIs show the euro-zone is not contracting — it’s a stagnation, but some are calling it positive growth,” Marc Chandler, the global head of currency strategy in New York at Brown Brothers Harriman & Co., said in a phone interview on March 31. “That all will buy the ECB time because the next step the ECB may have to take is more drastic, such as a deposit-rate cut to negative yields. That’s a nuclear option because the ramifications are hard to know.”

    Deflation Threat

    A report this week showed euro-area consumer prices rose an annual 0.5 percent in March, compared with the ECB’s target of just below 2 percent, raising the specter of a Japan-style era of deflation that discourages investment and spending. Prospects of ECB action faded after Governing Council member Jens Weidmann, who’s also head of Germany’s Bundesbank, said March 29 that officials should only react to “second-round effects” of slowing inflation, which aren’t evident currently.

    “There isn’t enough confidence that the ECB will respond to the disinflation we’ve seen so far,” Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG, said in a phone interview on March 31. Traders “need the ECB to respond to disinflation” before selling the currency and using the proceeds to invest in higher-yielding assets, he said.

    The euro rose 8% in the last year despite all the ECB promises of future actions to avoid a deflationary death spiral? How did that happen?!

    Posted by Pterrafractyl | April 2, 2014, 11:30 am
  11. Help! Help! We’re still drowning!

    Oh thank goodness, the lifeguard is still here and he’s promising to continue monitoring the situation closely:

    ECB says ready to act if ‘lowflation’ lingers too long

    By David Milliken and Eva Taylor

    FRANKFURT Thu Apr 3, 2014 11:19am EDT

    (Reuters) – The European Central Bank is ready to deploy anything in its monetary policy toolbox if inflation stays too low for too long despite keeping interest rates steady on Thursday, its president said.

    The ECB held its main interest rate at a record low of 0.25 percent and the rate for bank deposits at central banks at zero, hoping the euro zone recovery will gain strength unaided.

    ECB chief Mario Draghi told a news conference that he and his colleagues expected a prolonged period of low inflation and that if it dragged on too long, action would be taken.

    That marked a significant shift of tone from last month when he appeared to set quite a high bar to action.

    “We will monitor developments very closely and we will consider all instruments available to us,” Draghi said. “We are resolute in our determination to maintain a high degree of monetary accommodation and act swiftly if required.”

    He emphasized that any policy shift could be over and above interest rate moves, saying: “The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.”

    He added that printing money – quantitative easing – had been discussed at Thursday’s policy meeting.

    Having barely reacted to the earlier policy decision, Draghi’s comments saw the euro drop to a session low against the dollar.

    Euro zone inflation fell to 0.5 percent in March, levels last seen when the economy was deep in recession in 2009, but it was driven by the kind of softer food and energy prices the bank usually judges as temporary.

    Draghi said the risk of deflation remained limited and labeled the latest inflation figures hard to read, partly because Easter holidays fall in April this year after coming in March last year, thereby delaying the impact of rising travel and hotel prices at a time when many people take a holiday.

    “We need more information to assess whether there has been a change in the medium-term (inflation) outlook,” he said.


    Policymakers have been willing in recent weeks to publicly broach cutting deposit rates below zero – effectively charging banks to hold cash with the ECB – or embarking on bond purchases as the United States, Japan and Britain have, if the threat of deflation became more acute.

    Most notably, Bundesbank chief Jens Weidmann – often a hardliner – has said creating money via quantitative easing was not out of the question.

    One reason for that appears to have been the strength of the euro which will bear down on import prices, depressing inflation further.

    Indeed, one aim of flagging possible future action could be to try and talk the currency down.

    Draghi said the exchange rate was not a policy target but was a factor in assessing price stability. “The possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely,” he said.

    Pressure from abroad to act has mounted, most notably from the International Monetary Fund, which has warned of the threat of “lowflation” rather than outright deflation.

    “More monetary easing, including through unconventional measures, is needed in the euro area,” IMF head Christine Lagarde said in a speech on Wednesday, outlining the Fund’s policy recommendations ahead of its spring meetings next week.

    Draghi conceded that low inflation made euro zone debt harder to cut and economic adjustment more difficult.

    Last month, the ECB forecast it would take 2-1/2 years for inflation to rise to 1.7 percent, which even then would barely meet the target for annual price growth below but close to 2 percent.

    Phew! All that calming talk about the possibility of future help and the discussion about how a late Eastern could have contributed to our current crisis really saved the day.

    Although we’re still all drowning. Also, there are sharks. Help! Sharks! There are sharks circling us!

    Oh, those are the lifeguard’s pets. They’re here to help us eventually.

    Posted by Pterrafractyl | April 3, 2014, 9:06 am
  12. Check it out! According to Olli Rehn, the eurozone’s debt crisis is stabilized *gulp* so now the time for “strengthening economic competitiveness” and “securing” the energy sector:

    EU must refocus on energy, industry after debt crisis – Rehn

    April 6, 2014, 4:03 am

    By Jan Strupczewski

    BRUSSELS (Reuters) – After dealing with the sovereign debt crisis, the euro zone must now focus on how to win more business for its manufacturing and services industries and make sure its energy supply is secure, the EU’s top economic official said on Saturday.

    The euro zone economy is set to start growing again this year after four years of crisis which kept policy-makers busy with unprecedented institutional reform of the single currency area.

    Over the last four years, the euro zone has created a bailout fund – the biggest lender of last resort in the world. It has sharpened rules to control budgets, introduced debt breaks into national laws and set up a banking union with one supervisor, one set of rules to shut down a bank and money to pay for it.

    But now that the crisis is over, priorities have to change, EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview.

    “In economic jargon – a move from macro to micro,” said Rehn, who starts a leave of absence from the Commission on Monday to run in the European Parliament elections on May 25.

    “We have done the macro for the moment – we have stabilized the European economy. Now it is time to focus on strengthening economic competitiveness and entrepreneurship for the sake of job creation,” he said.

    Reducing the unemployment rate is generally regarded as a big challenge for the EU, but the rate has at least stopped rising. Unemployment in the euro zone went down to 11.9 percent from 12 percent in October 2013 and has been stable at 11.9 ever since.

    Rehn stressed the need for cutting red tape for businesses, better education and completing work to make all 28 countries of the European Union one big market in which all goods and services can be freely traded and its 500 million people can travel or work.

    “Instead of institutional wrangling, we have to focus on concrete, practical efforts to strengthen the ongoing economic recovery and job creation in Europe,” Rehn said.

    The urgency of this task is underlined by the rise of nationalistic parties across Europe, which gain their support from people tired of the economic crisis, of the record high unemployment and of the need to bail out countries that got cut off from markets because of excessive spending.


    The EU has more ambitious projects up its sleeve like a euro zone finance minister, a euro zone treasury, euro zone budget or even euro zone bonds, but none of them stands a chance of ever being realised without popular support.

    Such projects will be on the agenda of EU institutions after this year, but practical issues immediately helping growth and job creation were more important for now.

    “It will be an important work stream of the next Parliament and next Commission,” Rehn said.

    “But we have to identify what the most important issues are for the moment. It is the economic reforms that matter more than institutional wrangling,” he said, noting that the internal workings of the euro zone could be improved.

    While the EU should stay out of the small issues best solved locally, it could help its companies with big issues, Rehn said.

    “By big things I mean safeguarding peace and security in Europe which is not an outdated mission as we have seen unfortunately in eastern Europe in recent months,” he said.

    “In the medium to long-run, challenges in the case of Europe relate mostly to the economic recovery and energy security which is very topical for many reasons,” he said.

    He noted certain parts of Europe were excessively dependent on Russian gas, which was not only important to heat homes, but was also key for industry that is fighting to be competitive in the global economy.

    It was therefore important for Europe to increase its energy security and build alternative sources of renewable energy.

    “That is this big challenge and that is related to the move from macro to micro,” Rehn said.

    This doesn’t look good. When Olli Rehn says “It is the economic reforms that matter more than institutional wrangling”, he’s saying “more austerity”. At least, that’s what history would suggest.

    And when Rehn noted that certain parts of Europe were excessively dependent on Russian gas, which was not only important to heat homes, but was also key for industry that is fighting to be competitive in the global economy, it sounds like he was saying that people living in countries like Poland need to stop using all that cheap Russian gas to heat their homes. Industry needs it. Alternative must be found. Coal perhaps?

    Polish PM: EU should form energy union to secure supplies

    TYCHY, Poland, March 29 Sat Mar 29, 2014 11:10am GMT

    (Reuters) – Polish Prime Minister Donald Tusk said on Saturday the European Union should form an energy union to bolster its energy security and lessen its dependence on key gas supplier Russia whose annexation of Crimea has caused a tense stand-off with the West.

    Russia, which provides around one third of the EU’s oil and gas, sent shockwaves through the international community with its military intervention and annexation of Ukraine’s Crimea peninsula two weeks ago.

    The action prompted the United States and its European allies to begin imposing sanctions on President Vladimir Putin’s inner circle and to threaten to penalise key sectors of Russia’s economy.

    Some 40 percent of Russia’s gas destined for Europe is shipped through Ukraine.

    “The experience of the last few weeks shows that Europe must strive towards solidarity when it comes to energy,” Tusk said.

    He said Poland’s proposed energy union would be based on six points including the “rehabilitation” of coal as a valid energy source, more shale gas exploration and common purchases to ensure the best price.

    Liquid gas imports from the United States should also play a role in Europe’s energy diversification efforts, he said.

    Since Russia’s annexation of Crimea, European leaders have already agreed to accelerate their quest for more secure energy supplies and reduce dependence on Russian oil and gas.

    The EU has made progress in improving its energy security since gas crises in 2006 and 2009, when rows over unpaid bills between Kiev and Moscow led to the disruption of gas exports to western Europe. However, it has not yet managed to reduce Russia’s share of European energy supplies.

    Oooo…so Poland’s president has coal and shale gas in mind. Nice and diverse:

    Chevron, Polish Firm Jointly Explore for Shale Gas
    WARSAW, Poland March 31, 2014 (AP)

    Poland’s gas giant PGNiG and Chevron on Monday agreed to jointly hunt for shale gas in southwestern Poland in a move to speed up the exploration amid tension with major gas supplier, Russia.

    “The experience of recent weeks shows that Europe must show more solidarity in the energy sector,” Poland’s Prime Minister Donald Tusk said over the weekend.

    Tusk called for greater investment in Europe’s gas network, on joint purchase policies and on a greater role in the energy mix for coal, which is Poland’s top energy source, and shale gas, which is unpopular in Europe.

    On Monday, PGNiG spokeswoman Dorota Gajewska said PGNiG and Chevron will jointly assess gas deposits in their areas of operation and will exchange geological information, which is vital for choosing exploration sites. Such information is scarce in Poland, due to the small number of exploratory wells. There are some 50 now, while hundreds are needed to offer a reliable assessment.

    Chevron said in a statement that successful exploration could result in the “establishment of a joint company in which each holds a 50 percent interest.”

    The companies say cooperation will help cut their costs and risks.

    Chevron is currently assessing results from its four exploratory wells.

    In Europe, only Poland and Britain are actively exploring for shale gas.

    Britain and Poland are the only EU countries in the fracking business? imagine that. You’ll have to imagine it soon since it sounds like the EU’s leadership envisions putting an end to the EU’s overall lack of fracking. Within the next 5 years:

    Russia fallout pushes Europe to develop shale gas
    By Alanna Petroff @AlannaPetroff March 31, 2014: 12:05 AM ET

    LONDON (CNNMoney)
    Europe, seeking to reduce its dependence on Russian natural gas, is encouraging political leaders to step up efforts to tap the region’s shale gas deposits.

    Jose Manuel Barroso, president of the European Commission, the EU’s executive body, said growing tension with Russia over its actions in Ukraine serve as a “very strong wake-up call for Europe” about energy issues.

    “Europe is working very decisively to reduce its energy dependency,” he said last week at an EU-U.S. summit in Brussels.

    Europe can pursue many long-term options such as ramping up renewable energy production and importing liquified natural gas, both expensive propositions. But shale gas continues to be front of mind among energy ministers and policymakers.

    Accessing nearby shale gas resources would be cheaper than other options and could create up to one million jobs in the coming years, according to research commissioned by the International Association of Oil & Gas Producers.

    “The outlook [for shale] is undoubtedly brighter now than it was a year ago,” said energy analysts at Eurasia Group.

    According to figures from the U.S. Energy Information Administration, European countries are sitting on roughly 470 trillion cubic feet of recoverable shale gas resources — a huge amount considering gas demand in Europe is roughly 18 trillion cubic feet per year.

    But it’s not going to be an easy process: Europe’s shale gas production is essentially zero right now, and it will take a coordinated effort to get moving.

    Pavel Molchanov, an energy analyst at Raymond James, says the whole process will take years.

    Over the next five years, [European] countries will have to identify where their resources are and build out the infrastructure for this industry to develop — that can include developing pipelines and training workers,” he said. “This also means getting the required rigs to drill for shale gas, which are in the U.S. and Canada, but don’t really exist in Europe.”

    On top of that, a web of regulations is slowing progress, and environmental concerns about the process of extracting shale gas have led some European countries to ban the practice altogether.

    The controversial extraction process — called hydraulic fracturing, or fracking — involves injecting water, sand and chemicals deep into the ground at high pressure to crack shale rock, allowing oil and gas to flow.

    This practice has spurred America’s energy boom, but opponents argue fracking can contaminate local water, create earth tremors and wreak havoc on the environment.

    Despite the obstacles, the United Kingdom and Poland are making the biggest strides in pursuit of shale gas production.

    “Poland is the furthest along. It’s conceivable that in the next five years we could see meaningful production,” said Will Pearson, director of global energy and natural resources at Eurasia Group.

    Lithuania, Romania and Ukraine are also keen to pursue shale, he said.

    Meanwhile, other countries are less enthusiastic. Germany, Denmark, Ireland and the Netherlands have informal fracking bans, requiring so much onerous documentation and pre-drilling research that energy companies are hesitant. Bulgaria and France have outright fracking bans.

    “It will take awhile before France and Germany change their policies toward shale,” said Pearson, but “hostility toward the sector is going to dissipate” as Europe tries to decrease its dependence on Russian energy.

    Over the medium term, Europe is working on building more interconnected links and storage facilities to give nations more flexibility with their natural gas supplies.

    The process “is not very glamorous,” says Pearson, but it will help Europe reach its goal of greater energy independence.

    Well there we go, we finally found a major sector of the economy that the EU’s leadership is excited about investing in: fracking.

    Posted by Pterrafractyl | April 6, 2014, 11:38 pm
  13. France doubles down on dumbed down economic theories:

    Financial Times

    August 27, 2014 3:31 pm
    Emmanuel Macron symbolises Hollande’s bet on economic reforms

    By Hugh Carnegy in Paris

    Emmanuel Macron, France’s precocious new economy minister, was full of praise for his ousted predecessor when he formally took over from the rebellious Arnaud Montebourg on Wednesday, promising to continue the left-winger’s work to restore France’s industrial prowess.

    But behind the courteous blandishments on both sides – the men appear to have got on well personally – there was no mistaking the change implied by the surprise appointment of the man the French media have dubbed “the anti-Montebourg”.

    By promoting his former chief economic adviser in a government reshuffle that dumped leftwing dissidents from the cabinet, President François Hollande has sent the clearest signal to date that he is doubling down on his belated adoption of a market reform agenda to boost France’s stubbornly stagnant economy.

    “Mon cher Manu” – as Mr Montebourg called the youthful Mr Macron – said his task was no less than to “improve the performance of France, restore the confidence our partners, investors and the world…and also restore the confidence that the French need to have in themselves”.

    The hard left was quick to denounce the appointment of the former Rothschild banker, saying it showed Mr Hollande was in hock to the world of finance that he denounced as his ““true adversary”” in his 2012 election campaign.

    Reaction in the financial markets was, by contrast, very positive. “Excellent news,” declared Bruno Cavalier, chief economist at French broker Oddo Securities and hitherto a trenchant critic of Mr Hollande’s government. “It shows that the economic policy designed to be favourable for business is not negotiable.”

    An unashamed liberal social democrat, Mr Macron is credited with being a prime mover behind Mr Hollande’s so-called ““responsibility pact”” announced in January that marked a swing behind supply-side reform policies, with the promise of €40bn in tax cuts for business over the next three years.

    As deputy secretary-general in the Elysée Palace from 2012 until last month, Mr Macron also had Mr Hollande’s ear when the government previously piled new taxes on business and households, evoking the fury of the corporate world and prompting public protests against the country’s high tax regime.

    But he was known to have opposed Mr Hollande’s emblematic election pledge to impose a 75 per cent marginal income tax rate – “It’s Cuba without the sun,” he is reputed to have complained. He pressed the case for the impending €50bn cuts in France’s huge public spending bill that have so disquieted the left.

    Mr Macron also developed a close relationship with French business leaders over the past two years, seen by them as a rare figure in the Socialist administration who has personal experience of working in the private sector. He has impressed foreign officials, notably winning plaudits in London when he handled the French side of the failed 2012 negotiations to merge Airbus with BAE Systems.

    “I am often introduced abroad as the man who works with Emmanuel Macron,” Mr Hollande sometimes likes to joke.

    In his new role, Mr Macron is well placed to drive a promised break-up of monopolies in areas from the legal profession to pharmacies in a further stage of structural reform. Only 36, the graduate of France’s elite Ecole Nationale d’Administration served on a commission set up by former president Nicolas Sarkozy in 2008 that recommended just such reforms, among many others that did not see the light of day at the time.

    And, of course, since it’s pro-austerity, Angela had to chime in with her approval:

    Bloomberg Businessweek
    Merkel Urges France Reforms Suggesting Lower Deficit Will Follow
    By Arne Delfs August 27, 2014

    Chancellor Angela Merkel urged French President Francois Hollande to press ahead with economic reforms, while hinting he has flexibility in the pace of deficit reduction.

    The German chancellor cited the risk to market confidence when governments “always” run deficits and the need to recognize “that higher spending doesn’t create growth,” her first comments on France since Hollande purged cabinet ministers who opposed spending cuts.

    “We can talk about the question of whether you have a 2 percent deficit or 3 percent, or 1 percent, or a balanced budget like us,” Merkel said during a panel discussion with reporters in Berlin today. “What’s at issue in France is to really do those structural reforms. And the French president has announced them.”

    Notice how the “flexibility” Merkel alludes to in France’s deficits targets are all lower deficits than the current target. France had pledged a 3% target that it couldn’t possibly meet and yet Merkel suggests that France is free to have “a 2 percent deficit or 3 percent, or 1 percent, or a balanced budget like us”. How flexible!

    But more generally, since lower wages, reduced government expenditure, and a general decline in domestic spending is supposed to take place across all of Europe simultaneously while one nation after another is told to either emulate Germany’s high-tech export-oriented economy or go die in a ditch, one of the questions that’s never really asked of folks like Merkel is which non-European countries around the globe should be expected to spend more on imports to make up for Europe’s self-imposed slashes in demand. Someone has to spend more if Merkel’s magic austerity pixie-dust is supposed to work and eventually reduce France’s deficits. Is it only supposed to be the US that engages in deficit spending to stimulate the global economy? Should developing economies be increasing the European imports? Keep in mind that Wolfgang Schauble was calling for global deficit reduction targets at the G20 meeting just last year. That’s the other side of the austerity coin that never really gets asked: since the whole scheme is based around boosting exports, who is supposed to counteract the planned austerity with more imports? And if the answer is “no one is supposed to spend more”, then how exactly is France and the rest of Europe supposed to export their way out of the economic ditch? Oh, that’s right, more austerity should do the trick…

    Posted by Pterrafractyl | August 27, 2014, 2:36 pm
  14. Following up on Merkel’s offers of “flexibility” with France’s budget deficits, here’s a similarly generous offer coming out of Berlin: Germany is totally willing to let France spend additional years under austerity in order to get its deficit under 3%: Man, that’s generous:

    Germany ready to dilute austerity medicine for reform-minded France

    By Michelle Martin

    BERLIN Thu Aug 28, 2014 2:24pm EDT

    (Reuters) – After ramming austerity medicine down the throats of smaller euro zone countries for the past four years, Germany is showing clemency toward its closest ally, France.

    Dubbed ‘KRANKreich’ or ‘ill empire’ – a pun on the German word for France – by mass-selling daily Bild, Germany is worried by its neighbor’s health, not least because the Ukraine crisis to the east is hurting its own economy.

    The last thing Germany needs is deeper trouble to its west.

    The upshot is that Berlin is willing to cut Paris some slack in the form of a quid pro quo: a commitment by French President Francois Hollande to implement reforms is likely to see Germany give him more time to put France’s public finances in order.

    Germany is encouraged by Hollande’s shake-up of his government this week and the commitment to push ahead with reforms and spending cuts.

    The Socialist, the most unpopular French president in over half a century, has ousted maverick Economy Minister Arnaud Montebourg over a tirade against Germany’s “obsession” with austerity, and shown he is finally prepared to tackle skeptics.

    Speaking in Paris on Thursday, German Finance Minister Wolfgang Schaeuble said he agreed with Hollande that public and private investment was needed to boost growth.

    “I think that we are pushing in the same direction,” he said at a news conference with his French counterpart Michel Sapin, who stayed on after the cabinet reshuffle to continue the role in which he has tried to convince EU partners France will fix its public finances.

    Carsten Schneider, a senior member of the Social Democrats who share power with Chancellor Angela Merkel’s Christian Democrats, stressed the importance of France implementing rather than just announcing reforms. But he hinted at some help.

    “We have a vital interest, whether we’re Social or Christian Democrats, in France getting back on its feet,” he said.

    “I can only cross my fingers that (French Prime Minister Manuel) Valls will now get support for his reforms. We need to support France in that so it remains stable,” he added.


    Germany has already shown some signs of softening the tough stance on fiscal discipline it took during the early years of the euro zone crisis.

    Last year, Berlin shifted its focus to “growth-friendly consolidation”, whereby it continues to encourage countries to balance their budgets and cut deficits, but also to take measures to tackle unemployment and boost growth.

    The German government is also tolerating higher wages in Germany, potentially boosting domestic demand and reducing its relative competitiveness, a fillip for other euro zone economies.

    Momentum is also building for greater fiscal leniency after European Central Bank President Mario Draghi, in a landmark speech last Friday, put more emphasis on fiscal stimulus than austerity by calling for governments to boost demand.

    Draghi’s speech picked up on a drive away from austerity that is being led by Italian Prime Minister Matteo Renzi.

    Under pressure from Renzi, European leaders agreed in June to make “best use” of the flexibility built into the euro zone’s fiscal rules – as long as countries carry out reforms.

    Another game-changing factor is the macroeconomic backdrop.

    Until earlier this year, the German economic juggernaut had forged ahead despite problems elsewhere in the euro zone. But a contraction in Germany in the second quarter, slowing inflation, and the dampening effect of the Ukraine crisis on European business has strengthened the case for greater fiscal leniency.

    On Thursday Schaeuble said crises abroad and signs of an economic slowdown meant it was “important to stay the course” on investment, adding that increasing investment and improving the legal framework for it would be one of the main subjects of discussion when European ministers meet in Milan next month.

    Hollande’s stated determination to undertake reforms is likely to give Berlin the reassurance it needs to loosen the fiscal reins slightly. This could come in the form of a new let-off for France.

    France has already been granted a two-year reprieve to get its deficit in line in 2015. It says it will press ahead with a 50-billion euro spending cut for 2015-2017 but go no further.

    Norbert Barthle, budget committee leader for the German Christian Democrats (CDU), told Reuters France was Germany’s “biggest headache” and he hoped the government crisis would put pressure on Hollande to carry out announced reforms.

    But he suggested Germany would agree to give France another reprieve to bring its deficit under the EU’s 3 percent ceiling.

    Barthle said another extension “will only be acceptable if the EU Commission says clearly what is expected of France. We assume that France to stick to the things it has signed, including the fiscal pact.”

    EU rules stipulate that governments must aim for a budget close to balance or in surplus and they also have to reduce public debt. But the rules also say governments can get more time to achieve a balanced budget if they implement reforms that have a demonstrable positive impact on growth.

    Marcel Fratzscher, president of the DIW economic institute, said France was unlikely to be able to bring its deficit below 3 percent of GDP before 2016 so Germany would probably have little choice but to agree to give France more time.

    “The German government knows that, so the issue will be more what the French government commits to in return – if it can really prove it’s making a lot of progress on structural reforms there may be more willingness,” he said.


    Germany may offer France some concessions but it does not want to be taken for a ride.

    To guard against any slippage, Berlin is still keen to maintain pressure on euro zone strugglers to cut their deficits and work towards budget balance to avoid opening the flood gates to more lax fiscal policy.

    “The danger is that France, possibly with Italy, will tear down from behind what we have worked so hard to build,” one senior German official said.

    Martin Koopmann, managing director of the Genshagen Foundation, an institute for German-French cooperation in Europe, said the German government would approach France’s problems with “a significant dose of pragmatism” and probably reluctantly give it another extension.

    Ultimately, Germany has a vested interest in not squeezing too hard on France, which is its biggest export market.

    Well, it sounds like “austerity forever” is here to stay. And that means a lot more EU youths had better start learning German if they want a job. Once they do that at they can at least brain-drain themselves to Germany to look for work, although under a new German law they’ll only have six months to find one. And after six months, it’s back to the lands of endless austerity:

    The Telegraph
    Angela Merkel announces plans to deport EU welfare cheats
    Major new crackdown on “benefits tourism” also to include bans on re-entering Germany for five years and direct funding to impoverished

    Justin Huggler in Berlin

    4:33PM BST 27 Aug 2014

    Germany has announced plans to deport welfare cheats from other European Union countries as part of a major new crackdown on “benefits tourism”.

    Angela Merkel’s government wants to expel immigrants from other EU countries who lie or use fraudulent means to claim benefits in Germany, and block the worst offenders from re-entering the country for up to five years.

    There have already been calls for Britain to follow Germany’s lead, with the former Labour minister Frank Field calling on David Cameron to implement similar measures.

    The proposed new German law, which could come into effect as soon as next year, has been promoted under the slogan “Wer betrügt, der fliegt”: whoever lies, flies.

    “Freedom of movement is a vital part of European integration, to which we are fully committed,” the German Interior Minister, Thomas de Maiziere, told reporters, introducing the proposed new measures. “Nevertheless, we must not close our eyes to the problems associated with it.” The European Commission yesterday welcomed the German proposals, and said it would “carefully assess the draft legal measures announced today to ensure their strict compliance with EU law”.

    British efforts to curb benefits tourism have fallen foul of existing EU laws. But Mrs Merkel’s government is confident its proposals are in line with EU law.

    “In so far as the German Government wants stricter application of the current EU law on free movement, the Commission has always stressed that Member States should make full use of the possibilities that EU law offers to fight abuse and fraud. Abuse weakens free movement,” said a spokesman for the European Commissioner for Employment, Social Affairs and Inclusion.

    There has been growing concern in Germany over the problem of benefits tourism within the EU. Under the new law, those coming to Germany to look for work will have six months to find a job, or at least prove they have a reasonable prospect of securing work, or they must leave the country.

    In order to prevent migrants fraudulently claiming child benefit in two countries, claimants will have to present a tax ID number.

    The new law also includes a clampdown on migrants falsely claiming to be self-employed in order to claim benefits.

    In order to comply with EU law, re-entry bans will only be applicable in the most severe cases of fraud. There are some doubts over how effectively such a ban can be policed in the Schengen area.

    But Brussels sources have welcomed the German proposals.

    “The German proposals are well researched and fact based whereas the British go with Iain Duncan Smith’s gut feelings or Cameron’s fears about out Ukipping Ukip,” said a Brussels source. “Germany has also been clear it will act within the law, the UK doesn’t give a monkeys and runs into trouble.” The new proposals still stop short of demands from Angela Merkel’s CSU Bavarian sister party, which led calls for a crackdown and wanted further limits on child benefits for immigrants.

    In other news, here’s the latest piece by Paul Krugman that refutes the very notion that these “structural reforms” are even called for based on France’s economic fundamentals. It’s a great read but don’t expect it to impact policy or anything even when it comes from an economist that has been correctly predicting the outcomes of this crisis for years. Brain drains come in many forms.

    Posted by Pterrafractyl | August 28, 2014, 2:27 pm
  15. That was odd: Jens Weidmann just welcomed the “ambitious goals” of the G20 delegates to increase economic growth around the world while continuing to assert that austerity is the only solution. Could we be looking at start of a policy pivot or was his praise of the “ambitious goals” just happy talk?

    Bloomberg News
    Weidmann Says Governments Must Take Lead Amid ECB Policy Limits
    By Jana Randow Sep 20, 2014 1:04 AM CT

    European Central Bank Governing Council member Jens Weidmann said monetary policy can only play a limited role in fostering growth, encouraging governments to press ahead with structural reforms.

    European countries with high debt levels should focus on a “credible path toward sustainable public finances” and restructure their economies to increase competitiveness, Weidmann told Bloomberg News in Cairns, Australia, where he is attending a Group of 20 meeting of finance chiefs.

    ‘Fertile Ground’

    “The ultra-loose monetary policy has driven down funding costs to historically low levels and the ECB ensures that credit to the economy is not constrained by a lack of liquidity,” he said. “However, for monetary policy to exert stimulative effects it has to fall on fertile ground.”

    Other than structural reforms, that comprises of a “rigorous” assessment of banks’ health, cleaning up their balance sheets and sufficient capitalization, he said.

    Europe is facing calls from its G-20 peers to prop up an economy that stagnated in the second quarter and risks slipping into deflation. Finance ministers and central bankers from the world’s leading industrialized and emerging economies will share plans this weekend on ways to boost gross domestic product by 2 percent over five years, a goal the group committed to in February at a meeting in Sydney.

    ‘Ambitious Goals’

    “Ambitious goals to increase sustainable growth rates are certainly welcome against the background of sluggish growth and sticky unemployment in some countries,” Weidmann said. “This is why the Australian G-20 initiative deserves support.”

    G-20 policy makers will discuss the merits of using government spending and tax powers to give an immediate boost to a sluggish expansion, amid concern monetary easing may no longer be sufficient to reflate weakening economies in Europe and Asia.

    While policy makers can contribute to efforts to bolster the economy, “they should not give in to the temptation of trying to fine tune economic outcomes on which they do not have direct influence,” he said. Measures they can take include ensuring a growth-friendly tax system, flexible labor and product markets, working toward financial stability and an efficient provision of public services and goods, he said.

    Aha. Ok, Weidmann merely endorsed the idea of setting a goal of higher global growth rates while spouting the same supply-side solutions the EU has already embraced as the means of getting there. So Berlin, as expected, remains opposed to government stimulus. And, as expected, that opposition includes opposition to stimulus anywhere:

    G20 Resolves To Check Profit Shifting For Fair Tax Realisation
    India has been at the forefront in raising the issues concerning tax avoidance

    20 Sep, 2014 19:54 IST

    The Finance Ministers of the G20 nations on Saturday (20 September) resolved to tackle Base Erosion and Profit Shifting (BEPS) to make sure companies pay their fair share of tax.

    G20 Chases Growth Goal, Differ On How To Get There

    Financial leaders of the Group of 20 top economies remain committed to chasing higher global growth, but were divided on how to achieve it as Germany pushed back at calls from the United States and others for more immediate stimulus.

    Opening a meeting of G20 finance ministers and central bankers, Australian Treasurer Joe Hockey outlined on Saturday an ambitious agenda of boosting world growth, fireproofing the global banking system and closing tax loopholes for giant multinationals.

    “We have the opportunity to change the destiny of the global economy,” said Hockey, who back in February launched a campaign to add 2 percentage points to world growth by 2018 as part of Australia’s presidency of the G20.

    That goal has seemed ever more distant as members from China to Japan, Germany and Russia have all stumbled in recent months. Just this week, the Organisation for Economic Cooperation and Development (OECD) slashed its growth forecasts for most major economies.

    U.S. Treasury Secretary Jack Lew called for the euro zone and Japan to do more to boost demand and revive activity, signalling out Germany as having scope to do much more thanks to its burgeoning trade surplus.

    Berlin was none too pleased.

    “We will not agree on short-sighted stimuli,” a German G20 delegate said, arguing that in most countries debt was still too high to allow for increased spending.

    Germany has been under intense pressure to allow the euro zone to ease back on fiscal austerity and to boost its own economy through more government spending or tax cuts.

    More than 900 individual growth proposals had been submitted and analysed by officials, said Canadian Finance Minister Joe Oliver, the co-head of a G20 working group on growth. “We believe that these actions in total – and if implemented, and that is key – would come very close to 2 percent,” he told Reuters.

    Keep in mind that German Finance Minister Wolfgang Schauble was calling for global deficit cutting targets at the G20 last year so this isn’t anything new. Neither is the extreme unhelpfulness of those global austerity recommendations:

    The New York Times
    One Big Unhappy Economy
    Report on G-20 Labor Markets Finds Too Few Jobs Worldwide

    SEPT. 19, 2014

    Unhappy economies, it turns out, are all unhappy in the same way. A recent report on job markets globally showed that too few jobs are being created worldwide, and even fewer good jobs are. Wages are flat or falling in all major economies as corporate profits claim an increasing share of productivity gains.

    The report, prepared by the World Bank, the United Nations’ labor agency and the Organization for Economic Cooperation and Development, notes that poor job creation and stagnant wages, if unchanged, will result in permanently lower living standards for most people amid widening inequality. It also states that the situation will not repair itself — and, actually, is self-reinforcing.

    The report calls for action by the G-20 to break those negative feedback loops, including more government spending to bolster consumption, higher minimum wages to raise pay, and renewed commitment to social safety nets. What the report does not say is that none of that is likely to happen on the needed scale, individually or collectively, unless governments change their priorities.

    When the United States and other advanced economies bailed out global banks, they were betting, wrongly, that a restored financial system would foster broad prosperity. When they turned their policy focus toward austerity measures and deficit reduction, and away from fiscal stimulus, they doubled down on that bad bet. The result has been prosperity for the few, at the expense of the many.

    The report is clear that when consumption and investment wane, government is supposed to make up the shortfall to revitalize the economy. But governments in the grip of poisoned politics and misguided ideology have largely abdicated their role. Even the Federal Reserve, which has as part of its mandate the maintenance of full employment, has come under pressure to raise interest rates in the near term. That would be a mistake, akin to the premature removal of fiscal support.

    The evidence in the report presents a global economy that remains weak and fragile. To be strong and resilient, it needs growth that, in the words of the report, is “job-rich and inclusive.” Theoretically, such growth is possible. Politically, it is still out of reach.

    To put the situation in Picketty-terms, if “r > g” is the problem, “r >> g” is the solution, according to Jens Weidmann.

    Posted by Pterrafractyl | September 20, 2014, 4:15 pm
  16. Oh look, it’s another round of Groundhog Day for the G20:

    Austerity versus growth version 3.0 at G20/IMF
    By Mike Peacock October 5, 2014 6:23 AM

    LONDON (Reuters) – World policymakers gather in Washington later this week to ponder how to sustain economic recovery at a time when the United States is about to turn off its money taps.

    Given the same G20 finance ministers and central bankers met in Australia only two weeks ago it is not hard to guess how the debate will go: most of the western world will urge the euro zone to do more to foster growth and Germany will warn against letting up on austerity.

    That debate has circled within the G20 for three years and is fizzing now in Europe with France, Italy and others pressing for a loosening of fiscal strait-jackets to allow time for economic reforms in defiance of Berlin’s wishes.

    “Existing flexibility within the rules should allow governments to address the budgetary costs of major structural reforms, to support demand and to achieve a more growth-friendly composition of fiscal policies,” European Central Bank President Mario Draghi said on Thursday after a monthly policy meeting.

    The Federal Reserve will end its program of bond-buying with new money later this month, a prospect that has already driven the dollar higher and created jitters about a reversal of money flows out of emerging markets back into the United States.

    The euro zone in the guise of the ECB has been doing its best to come up with new stimulus, though it has shied away from full quantitative easing so far.

    Its most effective card may be euro weakness, the flipside of dollar strength.

    The euro is down almost 10 percent from a peak against the dollar in May. With U.S. money printing about to end and speculation about the timing of a first interest rate rise, there are good reasons to think this trend could continue.

    The strong U.S. jobs report on Friday did little to change the picture.

    “I don’t think it changes the Fed dynamics. I still think the first rate hike is maybe mid-year,” said Kim Rupert, managing director at Action Economics in San Francisco. “We are trying to gauge whether it’s March or June.”

    If the euro keeps falling, it would push the prices of imports up while making it easier for euro zone countries to sell abroad which should have an upward impact on both growth and inflation. The impact won’t be immediate though, as last week’s inflation reading of just 0.3 percent demonstrated.

    As with Japan last year, G20 policymakers gathered in Washington for the annual meeting of the International Monetary Fund and World Bank are in a poor position to complain about competitive devaluation having demanded stronger European growth for so long.

    The IMF will release its latest World Economic Outlook before the meeting starts.

    “The global economy is at an inflection point: it can muddle along with sub-par growth, a ‘new mediocre’; or it can aim for a better path where bold policies would accelerate growth, increase employment, and achieve a ‘new momentum’,” IMF chief Christine Lagarde said as she looked ahead to the annual meet.

    Last month’s G20 meeting again failed to secure agreement on concrete measures, largely due to resistance from Germany, Europe’s largest economy.

    Well, at least the euro is finally being allowed to significantly depreciate. That help Europe’s ailing economies get some much needed inflation and the bizarre dream of a Keynsian-free European recovery is going to require quite a bit of exporting. So “yay” for the falling euro. But keep in mind that, given the extent of the self-inflicted austerity-disaster, a falling euro along with the ECB’s other forms of monetary stimulus are still a pointlessly weak form of stimulus without some form of fiscal stimulus(which Berlin is still ruling out). And that means the euro might need to fall a lot more than many are expecting:

    ECB’s predicament leaves peers mute on currency depreciation

    By Eva Taylor, Leika Kihara and Howard Schneider

    FRANKFURT/TOKYO/WASHINGTON Tue Sep 16, 2014 10:16am BST

    (Reuters) – Attempts by the European Central Bank to weaken the euro have the potential to spark a currency war but policymakers across the world are keeping silent, knowing the ECB has scant alternatives to keep its economy afloat.

    Euro zone central bankers have spelled out the need for a weaker euro to breathe life into the bloc’s economy, which flatlined in the second quarter and is flirting with deflation.

    Such comments are usually a no-go among the big industrialised nations for fear that one country’s bid to become more competitive might trigger a race to devalue currencies and prompt other economies to resort to protectionism.

    But ECB measures that have helped push down the euro to below $1.30 from just shy of $1.40 in May have drawn little objection. These include verbal interventions, cutting interest rates close to zero and a pledge to flood the banking system with money via cheap loans and purchases of private sector debt.

    “People aren’t criticizing the ECB as triggering a currency war, because they are worried the euro zone may slip into deflation,” said a Japanese policymaker with direct knowledge of exchange rate policy. “It’s in the interests of the global economy for Europeans to do what’s needed to avoid deflation.”

    Japan got a similar pass from its G20 peers last year when Prime Minister Shinzo Abe launched an aggressive mix of monetary and fiscal stimulus that pushed the yen sharply lower.

    Having urged Tokyo for years to do something to galvanise its listless economy, other major economic powers could hardly complain about such “Abenomics”.

    The problem for the ECB is that its new funding may not pass through to businesses and households as intended. Many euro zone banks are still laden with bad loans and struggling to meet regulatory demands for more capital buffers, while uncertainty from the conflict in Ukraine and a sanctions war with Russia could spoil companies’ appetite for new loans.

    A weaker euro might be a more effective remedy.

    “With the euro zone doing worse economically than the United States and United Kingdom, a weaker euro against the dollar and pound is just what the doctor ordered,” said Barry Eichengreen, professor of economics at the University of California and one of the world’s foremost experts on currency systems.

    “There would then be an end to the litany of financial shocks originating in Europe that have perturbed U.S. financial markets for the last four years.”

    The United States has criticised currency policies in the past – urging China, for example, to move towards a market-determined exchange rate – but its bigger concern now is possible deflation in Europe.

    “Some recent steps and further discussion in Europe toward a more accommodative pro-growth strategy are encouraging, but boosting domestic demand is key and efforts to do so should be supported by decisive actions across a full range of economic policies – fiscal, structural and monetary,” a U.S. Treasury official said on Friday.


    When ECB policymakers talk about the euro, they emphasise that the exchange rate is not a policy target. But the ECB has an inflation target and the exchange rate influences inflation.

    Draghi said in March, for example, that an effective rise in the euro of about 8 percent since mid-2012 had knocked 40 to 50 basis points off headline inflation, which was then 0.5 percent but slowed to 0.3 percent in August.

    French central bank governor Christian Noyer said last week the euro’s roughly 4 percent fall since meant policymakers’ rhetoric had “succeeded perfectly”, adding: “We needed to bring the euro down and we still need to bring the euro down.”

    “The significant point here was to affect the exchange rate,” his Austrian counterpart Ewald Nowotny said hours after this month’s unexpected interest rate cut.

    The ECB’s latest staff projections see import prices rising, helped by a weaker euro, which should feed inflation, but the bank stresses it could do more if deflation risks persist – including broadening asset purchases to include sovereign bonds.

    The currency may be a trigger for that: “All things being equal, a stronger euro justifies a more accommodating monetary policy,” Executive Board member Benoit Coeure said last week.

    Provided the ECB sticks to domestic assets and does not intervene directly – neither of which are on its agenda at present – its central bank peers are likely to tolerate its actions unless the euro takes a dramatic dive.

    “Continuing to take steps to actively push down the exchange rate after the euro has fallen by, say, 30 percent would be enough to excite foreign critics,” Eichengreen said.

    “But the euro’s fall to date is only 5 percent on a trade-weighted basis. So any red line is far off in the future.”

    Could we be at beginning of a much longer trend of a falling euro for the foreseeable future? It’s looking like a possibility. But it’s important to keep in mind that this is still largely an austerity+exports-only strategy for economic recovery and, right now, the US is the only major economic bright spot in the global economy. So it’s unclear how well Europe’s strategy if exporting its way to recovery to going to work, even with a much cheaper euro, unless the rest of the global economy can start picking up too. If only there was a giant pile of cash tucked away somewhere that could be spent on addressing all the critical global needs to get that global economy going.

    Posted by Pterrafractyl | October 6, 2014, 7:54 pm
  17. That’s a lot of exports:

    The Wall Street Journal
    Germany Replaces China as World’s Trade-Surplus Boogeyman

    By Ian Talley

    Sep 30, 2014, 3:33 pm ET

    China’s devalued exchange rate has made it a pariah of U.S.-based manufacturing and a beloved target of countless U.S. political diatribes and bills seeking to censure Beijing for its currency policy.

    But it is key U.S. ally Germany that’s sapping growth from the global economy, according to the latest tally of trade surpluses by the International Monetary Fund.

    Germany has replaced China as the largest surplus economy in the world.

    Fostering growth where exports far outweigh imports means that expansion comes at the expense of other economies. Instead of encouraging German domestic consumers to boost growth in its weaker eurozone members, for example, Berlin’s economic policies have hindered Europe’s recovery, the IMF and U.S. officials have repeatedly warned.

    Concern over global trade imbalances is why finance leaders from the world’s top economies have vowed not to use their exchange rates to gain a competitive advantage over other countries. (Though without a global currency cop, there’s little to stop tit-for-tat currency depreciations across the world.)

    That’s why the U.S. took Germany to task late last year in its semiannual currency report, and is why Berlin is likely to be targeted in the next review due out in a few weeks.

    Under pressure from the U.S., China has appreciated its currency by around 30% since 2006, not including inflation. Although the IMF says China’s yuan is still between 5%-10% undervalued, it estimates the euro to be up to 15% undervalued for Germany’s economy..

    It’s not just Europe’s problem, however. Worth $18.5 trillion, Europe’s collective economy is the largest in the world. The regional recession and the potential for a triple dip back into economic contraction still on the horizon are putting the brakes on global growth.

    As the IMF plans to revise down its outlook for the global economy next week at a gathering of top finance officials from around the world, Germany is likely to come under pressure to do more to fuel domestic growth, and in turn, help the European and global economies rev up.

    That is indeed a lot of exports for Germany which would be easier to celebrate if the economy generating the top global trade surplus wasn’t tied to an experimental currency union in the midst of a depression. And when you consider that the IMF sees the euro up to 15% undervalued for the German economy while, at the same time, the euro is still far to strong for the eurozone’s austerity-riddled economies if they’re going to have any hope of exporting their way out of a depression, you have to wonder how large that German trade surplus is going to get before this crisis is over. A depressed eurozone economy both suppresses the value of the euro (which helps exports) while the depressed economy and austerity policies simultaneously trash Germany’s exports to its eurozone partners and, eventually, the global trading partners too. It’s a rather unbalanced economic balancing act.

    Of course, given how divergent the Germany economy is from so much of the rest of its eurozone, you also have to wonder if the eurozone crisis is actually going to end with the ending of the eurozone crisis. There are lots other ways to end it:

    The New York Times
    The Conscience of a Liberal
    Europanic 2.0

    Paul Krugman
    October 11, 2014 10:39 am

    Anyone who works in international monetary economics is familiar with Dornbusch’s Law:

    The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.

    And so it is with the latest euro crisis. Not that long ago the austerians who had dictated macro policy in the euro area were strutting around, proclaiming victory on the basis of a modest uptick in growth. Then inflation plunged and the eurozone economy began to sputter — and perhaps more important, everyone looked at the fundamentals again and realized that the situation remains extremely dire.

    In 2012, the problem was very high borrowing costs in the periphery — which we now know were driven more by liquidity issues than solvency concerns. That is, the markets basically feared that Spain or Italy might default in the near term because they would literally run out of money — and market fears threatened to turn into a self-fulfilling prophecy. And all it took to defuse that crisis was three words: “Whatever it takes”. Once the prospect of a cash shortage was taken off the table, the panic quickly subsided, and at this point both Spain and Italy have historically low borrowing costs.

    What’s happening now, however, is very different. It’s a slower-motion crisis, involving the euro area as a whole, which is sliding into a deflationary trap with the ECB already essentially at the zero lower
    . Draghi can try to get traction through quantitative easing, but it’s by no means clear that this could do the trick even under the best of circumstances — and in reality he faces severe political constraints on what he can do.

    What strikes me, also, is the extent of intellectual confusion that remains. Germany still seems determined to regard the whole thing as the wages of fiscal irresponsibility, which not only rules out effective fiscal stimulus but hobbles QE, since it’s anathema for them to consider buying government debt.

    And it’s remarkable, too, how the logic of the liquidity trap remains elusive even after six years — six years! — at the zero lower bound. Not the worst example, but I read Reza Moghadam:

    Wages and other labour costs are simply too high, even by the standards of rich countries, let alone emerging markets competitors.

    Augh! If it’s external competitiveness you’re worried about, depreciating the euro is what you want, not wage cuts. And cutting wages in a liquidity-trap economy almost surely deepens the slump. How can this not be part of what everyone understands by now?

    Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength. But I (and others I talk to) are having an ever harder time seeing how this ends — or rather, how it ends non-catastrophically. You may find a story in which Marine Le Pen takes France out of both the euro and the EU implausible; but what’s your scenario?

    Ok, the “Marine Le Pen” end game scenario was a bit terrifying, but it does raise an increasingly important question: how is this euromess going to end if not in a disaster given the current trajectory? Especially if more austerity is coupled with the promise of more exports that will make everything better (once enough austerity applied) is the only politically allowable answer. And what if the lesson from Germany is that more exports doesn’t actually lead to higher wages and higher standards of living because that would threaten “competitiveness”? Is a happy ending even possible at that point? What solution would work? Oh, that’s right, Ordoarithmetic for everyone! That would be a happy ending for all. Too bad it’s not possible.

    The New York Times
    The Conscience of a Liberal
    German Weakness
    Paul Krugman
    Oct 12 9:26 pm

    Wolfgang Münchau says the right thing: Germany doesn’t actually have a strong domestic economy. It’s more or less at full employment thanks to an immense trade surplus that has yet to diminish significantly:
    [see pic]
    And even so, and despite negative real interest rates, it’s not in a roaring boom. Without that huge surplus — driven, as Münchau says, by investment booms abroad — Germany would be very clearly in the grips of secular stagnation.

    The idea that Germany is a useful role model depends on Ordoarithmetic — the view that what we need is for everyone to run enormous trade surpluses at the same time.

    Well, while the ‘Ordoarithmetic for all!’ may not be possible, perhaps there’s a chance that Germany’s weak domestic economy will eventually prompt Berlin’s policy-makers to change course, especially if Europe’s economic woes manage to drag down the entire global economy (a scenario the IMF is already warning about). Although, if Wolgang Münchau is correct, that ‘Germany gives up austerity once European austerity finally undermines Germany’s economy by undermining off the global recovery that fuels Germany’s exports’-scenario may not be very likely. Quite the opposite:

    Financial Times

    Germany’s weak point is its reliance on exports
    Wherever stimulus comes from, it will not be from Europe’s powerhouse

    By Wolfgang Münchau
    October 12, 2014 5:14 pm
    One of the biggest misconceptions about the eurozone has been a belief in the innate strength of Germany – the idea that competitiveness reforms have transformed a laggard into a leader. This is nonsense. The German model relies on the presence of an unsustainable investment boom in other parts of the world. That boom is now over in China, in most of the emerging markets, in Russia certainly. What we saw last week is what happens once the world returns to economic balance: Germany reverts to lower economic growth.

    I have heard the suggestion that this is actually good news. If Germany is weak, it is more aligned with the other eurozone countries, and hence more likely to accept the need for policy action, such as asset purchases by the European Central Bank or even even a fiscal stimulus.

    Be careful what you wish for. On the evidence so far, the opposite is the case
    The political opposition to the ECB’s asset purchase policies has been hardening. With interest rates at close to zero, conventional monetary policy tools have been exhausted. German commentators have expressed outrage at the proposed fiscal relaxation in France and Italy. Last week’s debate in Germany was not about fiscal stimulus, but about measures to further improve the country’s competitiveness.

    Fiscal consolidation is politically popular. The government’s main policy goal for 2015 is fiscal balance. Even Germany’s hawkish economic institutes derided this as a “prestige project”, and concluded that the government has room to increase spending on early childhood education and the country’s ageing roads and railways. Instead, MPs are discussing further expenditure cuts to ensure that projections of a fiscal balance hold under the assumption of weaker economic growth.

    What would it take to shift their intransigence? Again, you do not wish for that situation to arise. It would take far more than a few quarters of weak economic growth. The main number to watch is the unemployment rate. At 4.9 per cent, Germany has one of the lowest in the EU. Unless that number goes up, Berlin is not going to change its position. When that number goes up, I would expect even less willingness to accept fiscal transfers to the eurozone periphery. So wherever stimulus comes from, it will not be from Germany – and this will make it rather toxic.

    Previously, the main characteristic of the eurozone had been strong growth in the core that partially offset contraction in the periphery. Now both the core and the periphery are weak. And policy is not responding sufficiently. .Add the two together and it is not hard to conclude that secular stagnation is not so much a danger as the most probable scenario.

    So the way Münchau sees it, not only is secular stagnation probable due to the ongoing austerity obsessions. It’s also probable that secular stagnation will lead to further entrenchment of Belin’s pro-austerity forces.

    How is this all supposed to end again? Oh yeah.

    Posted by Pterrafractyl | October 13, 2014, 8:26 pm
  18. Recall how, back in 2010, the G20 jointly embraced global austerity and all pledged to cut their budget deficits in half by 2013. And then in 2013, in the midst of all the austerity-induced damage of the prior three years, the US was pushing for a joint G20 fiscal stimulus in order to increasing lagging demand while Europe, led by Germany, called for a double-down of the austerity policies. Well, here’s the 2016 version of that same G20 meta-debate:

    U.S. to push for greater fiscal spending at G20: Treasury official


    Mon Feb 22, 2016 2:41pm EST

    The United States will call on G20 countries this week to use fiscal policy in order to boost global demand, a senior U.S. Treasury official said on Monday.

    “We will urge greater use of policy space, including fiscal space, to bolster global demand. That would lead to strengthened confidence and I would expect reduce volatility,” the Treasury official said in a preview call with reporters ahead of a G20 meeting later this week in Shanghai, China.

    G20 finance ministers, including U.S. Treasury Secretary Jack Lew, and central bank governors will meet on Feb. 26-27, with sagging global growth, divergent monetary policies and currency devaluations set to dominate the agenda.

    “We will urge greater use of policy space, including fiscal space, to bolster global demand. That would lead to strengthened confidence and I would expect reduce volatility.”
    So the US is pushing for a coordinated G20 fiscal stimulus agenda to bolster global demand. And if you think about the potential “beggar thy neighbor” dynamics that could materialize if some, but not all, of the G20 nations implement fiscal stimulus policies in a globalized economy, having the G20 arrange for things like a coordinated fiscal stimulus by the world’s largest economies is one of the most useful things an international organization like the G20 can do. Of course, now that Berlin effectively runs Europe and a large number of G20 nations are European, it’s pretty clear that the G20 is only going to be used for coordinated austerity policies going forward:

    Deutsche Welle

    Schäuble rejects coordinated stimulus at G20, with China under pressure

    Finance ministers and central bankers from the G20 are at odds over the medicine needed to boost the world’s ailing economies. Germany rejects a stimulus, but others say it should be part of a mix that includes reforms.

    Date 26.02.2016

    Germany’s Finance Minister Wolfgang Schäuble rejects the idea of a coordinated fiscal stimulus package, which is being floated at a gathering of finance ministers from the G20 in Shanghai.

    He urged countries to follow through on promises of pro-growth structural reforms, rather than boosting growth via monetary and fiscal policy.

    “The debt financed growth model has reached its limit,” Schäuble said at an event organized by the Washington-based Institute of International Finance alongside the Shanghai meeting. “We do not agree on a G20 fiscal stimulus package.”

    Rather, he urged countries to deliver on reforms.

    “We are not lacking in policy proposals,” he said. “We are lacking in policy implementation.”

    That sentiment was partially echoed by Mark Carney, head of the Bank of England. Governments need to follow through with promised economic reforms, he said, adding that central banks still have room to cut interest rates.

    “Global growth has disappointed because the innovation and ambition of global monetary policy has not been matched by structural measures,” Carney said. “In most advanced economies, difficult structural reforms have been deferred.”

    The need to go bold

    The IMF managing director, Christine Lagarde, who was also attending the Shanghai meeting, agreed that policymakers need to speed up the pace of reforms, and urged them to do so. But she said it wasn’t an either-or choice: Reforms need not preclude coordinated stimulus spending.

    “We think they should go bold, they should go broad and they should go together,” said Lagarde. Referring to monetary and fiscal policy and structural reforms, she said: “There has to be action on all fronts.”

    The G20 gathering includes finance ministers and central bankers from wealthy economies, including the United States, China, Japan, Germany and England, as well as major emerging economies.

    “Germany’s Finance Minister Wolfgang Schäuble rejects the idea of a coordinated fiscal stimulus package, which is being floated at a gathering of finance ministers from the G20 in Shanghai.”
    Of course he did.

    But notice that it wasn’t just Wolfgang Schaeuble standing in the way of a coordinated fiscal stimulus. Even the IMF, which is one of the main boosters for stimulus at this point, is also a strong advocate of neoliberal “structural reforms”. Similarly, Mark Carney at the Bank of England still sees some limited room for central banks to act, but also embraced Schaeuble’s calls for further austerity:

    That sentiment was partially echoed by Mark Carney, head of the Bank of England. Governments need to follow through with promised economic reforms, he said, adding that central banks still have room to cut interest rates.

    “Global growth has disappointed because the innovation and ambition of global monetary policy has not been matched by structural measures,” Carney said. “In most advanced economies, difficult structural reforms have been deferred.”

    So Carney is clearly in the “coordinated austerity” camp, but unlike Schaeuble he’s also open to further monetary stimulus measures like QE. And that appears to be the middle ground attitude among G20 governments: more austerity, but maybe more monetary stimulus too.

    If that’s not disturbing and ominous enough to raise the hairs on the back of your neck, check out this analysis of Carney’s G20 speech he gave last night :

    Channel 4
    Mark Carney’s last chance saloon warning on the global economy

    Paul Mason
    Friday 26 Feb 2016

    Last night Mark Carney, governor of the Bank of England, issued a stark warning about the future of capitalism. Here is what he said: “The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.”

    I would concur with that except for the word “equilibrium”. If growth collapses; if you can’t earn interest on capital invested; and if inflation cannot be relied on to erode the world’s 270 trillion dollar debts, the last thing you’re going to get is anything like equilibrium.

    In fact you’re going to get a second financial collapse, starting in China and the emerging markets where debt has rocketed, and this time the monetary policy tools central bankers have used to revived the economy after 2008 will be – as Carney admits – of very limited use.

    Sometimes, in journalism, just spelling out more clearly what policymakers – who always have to use opaque and restrained language – mean is a public service in itself.The whole speech and the assorted graphs are here. So here goes.

    The 12 trillion (my figure) dollars worth of money printed by central banks in the form of quantitative easing and soft loans has simply bought time. That time has been used to mend the banking system, defusing the debt timebombs that would have closed all the ATMs in the world, Greek-style, if the bailouts had not happened.

    But constantly printing money, and slashing interest rates close to zero, can’t revive sustained economic growth unless the structure of the global economy, and individual countries, changes.

    But it hasn’t changed enough. Instead money surged into the emerging markets, creating a financial bubble that has burst. If, as many expect, those countries respond by slashing at each other with currency devaluations – aka curency war – Carney fears the global financial architecture will begin to fall apart. The words he uses are “it will be more challenging to build a truly open, global system”.

    So central bankers are facing an existential question: was eight years of QE just a bridge between two manageable crises, or a “pier” leading nowhere? Carney thinks the crisis is manageable: that is, he thinks there are things central bankers can do to buy more time – but they cannot revive growth themselves.

    And the problems are long term. Carney lists them: ageing populations, destruction of capacity by two boom-bust cycles, higher borrowing costs for ordinary people compared to banks, less investment, more inequality, people paying down debt and the austerity measures required by high public debt.

    “With more savings chasing fewer investment opportunities, equilibrium safe returns have fallen sharply towards zero.” Again, in plain English: there’s too much capital for capitalism to function and its depressing the baseline return on money to zero.

    With interest rates slashed close to zero, all central banks can do is continue with unconventional policies: namely printing money to buy the debts of governments and “communicating” – ie promising not to raise interest rates.

    Problem is, some of the effects of QE are only temporary. Boosting asset prices runs out of steam. The impact on growth is temporary. And inflation is falling close to zero. So the central banks have to push real interest rates negative. About a quarter of the world economy now enjoys what you might call Central Bank anti-capitalism: policy set so that one pound automatically becomes 90p over time.

    But something’s blocking the effectiveness of these negative interest rates: because they destroy the traditional business models of banks, banks don’t pass them on. So savers are insulated from them, while businesses are not.

    This, Carney points out, leads to devaluation of the currencies of countries doing the negative interest rates. And that leads to the currency war that’s simmering away, and that everybody wants to avoid, because after currency war comes controls on capital and then – goodbye globalisation.

    The Bank of England’s governor points out that, in this situation, all you can do is for individual countries to try and restart their economies through structural measures, not monetary ones. Since they can’t borrow and spend their way out of the crisis, they have to “reform” their way out of it.

    But how? Carney does not spell out the details but in the G20 parlance, the main tools in the toolkit of “structural reform” are ripping up labour protections, privatising public assets, cutting business taxes, boosting state investment – and direction of investment – into the major industries and projects, and privatising education.

    Naturally, in all countries where this is tried it provokes resistance, and is therefore done gradually. But Carney points out doing things slowly does not work, because austerity, low growth, high debts and falling wages feed off each other.

    The world then needs to “use the time purchased by monetary policy to develop a coherent and urgent approach to supply-side policies”.

    But nobody in the room believes that will happen. G20 countries are already seriously engaged in competitive exit routes from the crisis: Saudi Arabia slashing the oil price to hurt America, Japan and China hurting each other with currency measures, the Eurozone destroying social cohesion among its weaker members through austerity.

    Both Britain and America, which effectively “won” the recovery by taking QE measures early and (in America’s case) avoiding austerity, are currently engaged in luxury political debates. In America the actual macroeconomic policies being debated at the G20 rarely figure in debates between the Republican candidates, and Hillary Clinton’s strongesst card against Sanders is that “there’s more to this than economics”. Here we’re engaged in a “nice-to-have” fistfight over EU membership.

    So Carney’s speech has to be read like a “last chance saloon” warning – decoded it says: we can do more through QE, we can slash interest rates to negative, we might have to reach inside the banking system and force banks to pass negative interest rates on to savers, and we can keep the banking system from exploding again, but only a co-ordinated turn to policies that revive growth by governments will prevent a 1930s style exit into deglobalisation.

    “So central bankers are facing an existential question: was eight years of QE just a bridge between two manageable crises, or a “pier” leading nowhere? Carney thinks the crisis is manageable: that is, he thinks there are things central bankers can do to buy more time – but they cannot revive growth themselves.”
    That’s the first part of Carney’s message: central bank monetary policy, while useful, cannot revive growth alone in this kind of situation. And on that’s a pretty uncontroversial stance that just about everyone can agree with. It’s the non-monetary action that Carney advocates where things get or controversial…in a similar way to how hitting yourself on the head with a hammer so it feels good when you stop is also rather controversial:

    The Bank of England’s governor points out that, in this situation, all you can do is for individual countries to try and restart their economies through structural measures, not monetary ones. Since they can’t borrow and spend their way out of the crisis, they have to “reform” their way out of it.

    But how? Carney does not spell out the details but in the G20 parlance, the main tools in the toolkit of “structural reform” are ripping up labour protections, privatising public assets, cutting business taxes, boosting state investment – and direction of investment – into the major industries and projects, and privatising education.

    Naturally, in all countries where this is tried it provokes resistance, and is therefore done gradually. But Carney points out doing things slowly does not work, because austerity, low growth, high debts and falling wages feed off each other.

    The world then needs to “use the time purchased by monetary policy to develop a coherent and urgent approach to supply-side policies”.

    Yes, according to Carney, austerity isn’t enough. We need rapid austerity “because austerity, low growth, high debts and falling wages feed off each other.” In other words, the failed austerity policies of yesteryear didn’t work because they weren’t implemented fast enough and, therefore, what the world should do now is continue using monetary policies to buy time so the world can develop a rapid, coordinated “supply-side” mega-austerity agenda. And keep in mind, compared to folks like Wolfgang Schaeuble, Carney is relatively moderate. He’s still a neoliberal basket case, but a relatively moderate one compared to some of his peers.

    That’s the state of affairs at the G20: Almost all sides agree that “ripping up labour protections, privatising public assets, cutting business taxes, boosting state investment – and direction of investment – into the major industries and projects, and privatising education” is absolutely vital for the future of the global economy. They merely differ on how rapidly to get there and what types of monetary policies should be employed smooth the path to a global neoliberal wasteland.

    Beyond being ominous, it’s also pretty big missed opportunity. After all, if the world’s leaders were actually serious about creating a viable global economy for the 21st century, groups like the G20 that can coordinate the kinds of policies that need broad international cooperation would be pretty invaluable.

    Posted by Pterrafractyl | February 26, 2016, 4:54 pm

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