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The New World Ordoliberalism Part 5: The TLTRO and Waiting for Godot. And Sanity.

With Euro­pean Union con­tin­u­ing its slow steady fall into defla­tion, the ques­tion of “what’s to be done?” has becom­ing a per­ma­nent fix­ture for Euro­pean pol­i­cy-mak­ers. But for the euro­zone, with it’s shared mon­e­tary sys­tem, the ques­tion is a much more com­pli­cat­ed “what should we all be doing togeth­er?”. The answer to that lat­ter ques­tion, unfor­tu­nate­ly, has con­sis­tent­ly been “not enough”, despite pri­or promis­es.

This is not to say that there have no attempts to stim­u­late the euro­zone economies. On the con­trary, for the past three years, the ECB has been offer­ing hun­dreds bil­lions of euros in low inter­est loans out to euro­zone banks and for the past three years banks have been accept­ing those loans. Accept­ing those loans and then pay­ing them back. But not lend­ing those loans. And when you fac­tor in the seem­ing­ly per­ma­nent aus­ter­i­ty regimes imposed across the euro­zone, that lack of lend­ing is no sur­prise.

Still, the ECB has­n’t giv­en up entire­ly in its attempts to reflate the euro­zone. Back in June, the ECB decid­ed to inject anoth­er 400 bil­lion euros into the euro­zone bank­ing sys­tem in a two-phase loan pro­gram. And as we’ll see below, in both phas­es the euro­zone banks want­ed far less than what was offered while con­tin­u­ing to pay back their pre­vi­ous loans. In oth­er words, while the ECB has been try­ing the expand the mon­e­tary base in the euro­zone’s finan­cial mar­kets that mon­e­tary base has con­tin­ued to shrink. As the excerpt below puts it, it’s like ‘Wait­ing for Godot’. And as we’ll see at the end, it real­ly IS like Wait­ing for Godot, the­atrics and all.

——————————————————

There was a recent Ernst & Young report on the amount of lend­ing by Span­ish banks that paint­ed a glass-is-half-full pic­ture for Spain’s banks: while loans to cor­po­ra­tions and busi­ness­es by Span­ish banks fell 5.7 per­cent in 2014 (and 1.5 per­cent across the EU), a recent Ernst and Young report projects a 1.8 per­cent rebound in Span­ish bank lend­ing next year and anoth­er 5.4 per­cent rise in lend­ing in 2016. In oth­er words, Spain’s eco­nom­ic dead cat might start bounc­ing soon, and after a year or so the cat shall rise again! At least that’s the pro­jec­tion from the Ernst & Young report. And who knows, maybe that’s what will hap­pen.

But keep in mind that it’s still a rather sig­nif­i­cant and omi­nous phe­nom­e­na that EU bank lend­ing has fall­en at all in 2014 since the Euro­pean Cen­tral Bank has been dri­ving bor­row­ing costs down sig­nif­i­cant­ly and basi­cal­ly giv­ing banks near­ly free mon­ey to lend via the “Tar­get­ed Long-Term Refi­nanc­ing Oper­a­tions” (TLTROs) and yet lend­ing has fall­en. It’s almost as if wait­ing for the stim­u­la­tive effects of the free ‘TLTRO’ cash is like Wait­ing for Godot.

Except under the ECB’s ‘Godot sce­nario’, the ECB keeps promis­ing the arrival of Godot while the ECB’s pro-aus­ter­i­ty allies leave Godot tied up in an attic some­where. And the wait con­tin­ues...:

TLTRO effect is the ECB’s Wait­ing for Godot
By Ross Fin­ley
Sep­tem­ber 23, 2014

When banks are offered hun­dreds of bil­lions of euros worth of what is essen­tial­ly free mon­ey and they don’t take every­thing they can get, some­thing has gone seri­ous­ly wrong.

The Euro­pean Cen­tral Bank’s lat­est offer of cheap cash to banks — only this time tied to loans they pro­vide to pri­vate sec­tor busi­ness­es rather than with no strings attached — has got­ten off to a weak start.

That sug­gests not only that tem­po­rary liq­uid­i­ty for lend­ing may be the wrong approach to boost a flat-lin­ing euro zone econ­o­my that is bare­ly gen­er­at­ing any infla­tion, but it also under­scores the much more seri­ous lack of demand in the econ­o­my.

With only 82.6 bil­lion euros tak­en up in the first of two tranch­es it is now clear that the ECB will not be able to find enough tak­ers for the 400 bil­lion euros it has put on offer.

The lat­est Reuters poll of euro zone mon­ey mar­ket traders pre­dicts that banks will take up 175 bil­lion in the Decem­ber auc­tion, leav­ing one-third of the cash untapped.

To put that num­ber in per­spec­tive, when the ECB last offered mon­ey like this in the depths of the euro zone debt cri­sis a few years ago banks swal­lowed up more than one tril­lion euros. That made for explo­sive results on asset prices but also did very lit­tle to spur lend­ing.

Now ECB Pres­i­dent Mario Draghi, who is run­ning an insti­tu­tion that appears pro­grammed to do every­thing in its pow­er to avoid out­right pur­chas­es of sov­er­eign bonds as a pol­i­cy option, is run­ning out of room for manoeu­vre.

Part of the prob­lem is he’s spin­ning a lot of pol­i­cy plates at the same time.

The lat­est round of cheap cash — dubbed Tar­get­ed Long-Term Refi­nanc­ing Oper­a­tions (TLTROs) — comes along with record low inter­est rates and an even more-neg­a­tive deposit rate, which in the­o­ry should dri­ve banks to take the cash and lend.

The ECB also plans to build up the Asset-Backed Secu­ri­ties (ABS) mar­ket in Europe in order for the cen­tral bank to swoop in and pur­chase vast swathes of it.

That will be lucra­tive for those who want to sell on those secu­ri­ties, and some traders have sug­gest­ed that wait­ing for details on ABS pur­chas­es has inter­fered with the TLTRO.

Either way, banks will need to expand cred­it in order to ush­er in a cli­mate where secu­ri­ti­sa­tion — which involves parcel­ing togeth­er new secu­ri­ties backed by loans against assets — takes place. The idea is to con­nect small and mid-size busi­ness­es with the broad­er cap­i­tal mar­kets, where large com­pa­nies tend to go first to bor­row.

But that under­ly­ing lend­ing does not appear to be hap­pen­ing.

Lena Komil­e­va, chief econ­o­mist at G+ Eco­nom­ics, wrote:

In mar­ket psy­chol­o­gy terms, it cre­ates a dan­ger­ous mar­ket co-ordi­na­tion loop between ‘buy­ing’ the ECB announce­ment and ‘sell­ing’ pol­i­cy action, which threat­ens to dis­rupt the core chan­nel of pol­i­cy trans­mis­sion into real economies – con­fi­dence.

In oth­er words, so long as mar­kets are just trad­ing the effect from pol­i­cy announce­ments but not actu­al­ly respond­ing to the pol­i­cy, noth­ing will ever hap­pen to real lend­ing.

The ECB also is close to wrap­ping up a lengthy assess­ment of euro zone bank bal­ance sheets and will have to walk a fine line report­ing the results in order not to cre­ate hav­oc if they con­tain any ugly sur­pris­es.

So why won’t banks take free mon­ey in the mean­time?

Komil­e­va explains it this way:

The big dif­fer­ence between bank activ­i­ties in finan­cial mar­kets and in real economies is the finan­cial incen­tives and risk aver­sion. Lenders man­age their cost of cred­it and cap­i­tal more effi­cient­ly by sell­ing secu­ri­ties to oth­er investors and by bor­row­ing from the ECB, where­as when a loan is made in the real econ­o­my it stays on the bank’s books until it matures. This is an expen­sive diet for cap­i­tal-con­strained banks.

Lend­ing to the pri­vate sec­tor has been in decline for the bet­ter part of two years and shows no signs of abat­ing since the TLTROs were launched in June.

The lat­est data from the ECB due on Thurs­day are expect­ed to show a 1.5 per­cent annu­al decline in lend­ing, accord­ing to the lat­est Reuters poll, bare­ly changed from the month before.

Econ­o­mists appear to be pay­ing very lit­tle atten­tion to this data series, mak­ing no vis­i­ble attempts to estab­lish the link between whether a revival in pri­vate sec­tor lend­ing might gen­er­ate any sig­nif­i­cant amount of infla­tion.

...

There’s a lot to absorb there, and the part at the end about the util­i­ty of just giv­ing peop­but note this key point made in the arti­cle:

...
Either way, banks will need to expand cred­it in order to ush­er in a cli­mate where secu­ri­ti­sa­tion — which involves parcel­ing togeth­er new secu­ri­ties backed by loans against assets — takes place. The idea is to con­nect small and mid-size busi­ness­es with the broad­er cap­i­tal mar­kets, where large com­pa­nies tend to go first to bor­row.

But that under­ly­ing lend­ing does not appear to be hap­pen­ing.

Lena Komil­e­va, chief econ­o­mist at G+ Eco­nom­ics, wrote:

In mar­ket psy­chol­o­gy terms, it cre­ates a dan­ger­ous mar­ket co-ordi­na­tion loop between ‘buy­ing’ the ECB announce­ment and ‘sell­ing’ pol­i­cy action, which threat­ens to dis­rupt the core chan­nel of pol­i­cy trans­mis­sion into real economies – con­fi­dence.

In oth­er words, so long as mar­kets are just trad­ing the effect from pol­i­cy announce­ments but not actu­al­ly respond­ing to the pol­i­cy, noth­ing will ever hap­pen to real lend­ing.

...

As the arti­cle points out, while the Draghi-wing of the ECB con­tin­ues to fight with the Bun­des­bank and its aus­ter­i­ty coali­tion over how strong­ly to back the pro­posed mon­e­tary stim­u­lus pro­grams like quan­ti­ta­tive eas­ing (QE), it’s all moot if the banks don’t take that cen­tral bank cash and loan it out.

That’s part of the rea­son it’s so omi­nous that bank lend­ing fell across the EU in 2014: it’s not just a bad sign that eco­nom­ic demand is so tepid that banks lack the cus­tomers look­ing for a loan. The shrink­ing EU cred­it mar­ket also threat­ens the entire mech­a­nism by which a QE stim­u­lus plan would even oper­ate in a use­ful way.

Sole­ly rely­ing on QE and oth­er forms of mon­e­tary stim­u­lus might be use­ful if con­sumer demand has­n’t already col­lapsed and inter­est rates aren’t close to zero. But when that eco­nom­ic col­lapse has already tak­en place, inter­est rates are already near noth­ing, and con­sumer demand is far below what it used to be, even hand­ing out free cash to banks isn’t nec­es­sar­i­ly going to be enough to reverse the con­di­tion. Those banks have to have some­one to lend to if the stim­u­lus is going to work.

Still Wait­ing For Godot...
Now, if fis­cal stim­u­lus was actu­al­ly allowed in the EU this could be dealt with. But since fis­cal stim­u­lus isn’t allowed, it’s exclu­sive­ly up to the ECB’s under­whelm­ing mon­e­tary mea­sures, like the ‘free mon­ey’ TLTROs, to car­ry the day. It’s one more reminder of why rely­ing exclu­sive­ly on mon­e­tary stim­u­lus and aban­don­ing fis­cal stim­u­lus is so insane when you’re fac­ing Depres­sion-like con­di­tions and shrink­ing crdit: the chick­en-and-egg prob­lem can be solved pret­ty eas­i­ly as long as fis­cal stim­u­lus is allowed. Oth­er­wise, it’s just more ‘wait­ing for Godot’, with the addi­tion­al hope that Godot knows how to solve the chick­en-and-egg puz­zle:

The Wall Street Jour­nal
Mon­ey Beat blog
Europe’s Banks Are Reluc­tant Bor­row­ers
11:36 am ET
Dec 12, 2014
By Alen Mat­tich

The Euro­pean Cen­tral Bank is swim­ming against a very strong liq­uid­i­ty tide.

Quite how strong is evi­dent in this week’s bank refi­nanc­ing oper­a­tions. On Thurs­day, the ECB report­ed that the region’s com­mer­cial banks are tak­ing up some €130 bil­lion of super cheap cen­tral bank fund­ing in the sec­ond install­ment of its Tar­get­ed Longer-Term Refi­nanc­ing Oper­a­tion (TLTRO). That lev­el of demand verged on disappointing–earlier fore­casts had fig­ured on a €170 bil­lion flow to banks.

But even the result­ing take-up over­stat­ed the sit­u­a­tion. On Fri­day the ECB report­ed banks are pay­ing back a shade under €40 bil­lion of its pre­vi­ous LTRO fund­ing scheme, leav­ing the net infu­sion at a mere €90 bil­lion.

The eurozone’s banks just aren’t that inter­est­ed in hold­ing onto the ECB’s largesse.

In Feb­ru­ary 2013, there was near­ly €850 bil­lion of LTRO funds out­stand­ing. By this Sep­tem­ber, in the absence of any fur­ther ECB oper­a­tions and a steady flow of bank repay­ments, that total had shrunk to under €350 bil­lion.

These bank sec­tor repay­ments have been a major fac­tor in the shrink­age of the ECB’s bal­ance sheet dur­ing the past cou­ple of years. In ear­ly 2012 the ECB’s bal­ance sheet was more than €3 tril­lion. By the end of this sum­mer it was only just above EUR2 tril­lion.

Banks haven’t want­ed cheap ECB fund­ing because they haven’t want­ed to lend the mon­ey out. Instead, they’ve focused on rebuild­ing their bal­ance sheets to make up loss­es incurred dur­ing the cri­sis and to meet more strin­gent cap­i­tal require­ments. Lend­ing to the pri­vate sec­tor has con­sis­tent­ly shrunk dur­ing the past cou­ple of years.

...

So fol­low­ing the tepid 82.6 bil­lion euros in TLTRO bor­row­ing back in Sep­tem­ber, the euro­zone banks took only took 130 bil­lion euros in Decem­ber, far less free “TLTRO” cash than was offered or even expect­ed. And, of course, it’s even worse because...:

...

In Feb­ru­ary 2013, there was near­ly €850 bil­lion of LTRO funds out­stand­ing. By this Sep­tem­ber, in the absence of any fur­ther ECB oper­a­tions and a steady flow of bank repay­ments, that total had shrunk to under €350 bil­lion.

...

Banks haven’t want­ed cheap ECB fund­ing because they haven’t want­ed to lend the mon­ey out. Instead, they’ve focused on rebuild­ing their bal­ance sheets to make up loss­es incurred dur­ing the cri­sis and to meet more strin­gent cap­i­tal require­ments. Lend­ing to the pri­vate sec­tor has con­sis­tent­ly shrunk dur­ing the past cou­ple of years.

...
while the ECB’s pro-aus­ter­i­ty allies leave Godot tied up in an attic some­where

That pret­ty much encap­su­lates the sit­u­a­tion from a bank bal­ance sheet stand­point. Banks will take some of the free ECB cash because it’s use­ful even if they aren’t plan­ning on lend­ing it out (like for rebuild­ing bal­ance sheets), but that lack of lend­ing also means any sort of sus­tain­able banks-bor­row­ing-from-the-ECB-lend-it-out-and-jump-start-the-econ­o­my vir­tu­ous cycle is sim­ply not going to hap­pen. And as a con­se­quence of all this, euro­zone banks’ bal­ance sheets have been shrink­ing for the past two years as the world watch­es Europe descend into a defla­tion­ary death spi­ral.

Is Godot’s Absence a Source of Strength?
Bad news abounds! Or does it? After all, the worse the eco­nom­ic news, the stronger the ECB’s pro-stim­u­lus stances become. At least, that’s what one might assume if one also assumes the pro­po­nents of aus­ter­i­ty actu­al­ly care about end­ing Europe’s near depres­sion. Wait­ing for Godot can lead to a lot wish­ful think­ing:

Forbes
The Weak­er The Euro­zone, The Stronger The ECB?
12/12/2014 @ 3:18PM

Jere­my Hill

Yes­ter­day (Thurs­day), Euro­zone banks were offered vir­tu­al­ly free mon­ey from the Euro­pean Cen­tral Bank through the Tar­get­ed Long Term Refi­nanc­ing Offer­ing (“TLTRO”). Guess what hap­pened? An almost uni­ver­sal “non/nein/no/não/geen/óxi thank you,” Mr. Draghi! OK, if we must, we will take just €130 bil­lion of your free mon­ey because hon­est­ly…, we have no one to lend it to. In total, 306 Euro­zone banks took in the TLTRO funds. That’s a bit less than €2.6 bil­lion per bank on an aver­age basis with about 25% of the total amount going to core Euro­zone coun­try banks. Ulti­mate­ly, the weak show­ing of this tranche of the TLTRO may make it eas­i­er for the ECB to con­vince the Ger­mans to go along with a US style quan­ti­ta­tive eas­ing notwith­stand­ing the Maas­tricht Treaty’s pro­hi­bi­tion on mon­e­tiz­ing fis­cal deficits (a very big NEIN! Accord­ing to Angela Merkel and Jens Wei­d­mann).

Banks not want­i­ng free mon­ey speaks vol­umes to the very weak lev­el of Euro­pean loan demand. Except for refi­nanc­ing, there is no impe­tus for Euro­zone busi­ness­es to request new loans from their banks. The fun­da­men­tals of the Euro­zone econ­o­my do not war­rant cap­i­tal expen­di­tures or risky research & devel­op­ment pro­grams fund­ed by bank loans. At the same time, the very low inter­est rates and infla­tion expec­ta­tions do not cre­ate the feel­ing of urgency for com­pa­nies to take on addi­tion­al cap­i­tal.

For the Euro­zone to get fis­cal­ly healthy, aggres­sive mon­e­tary pol­i­cy will need to play a role. How­ev­er, what ails the Euro­zone has nev­er been about mon­e­tary pol­i­cy. Mon­e­tary pol­i­cy is mere­ly a salve and the ECB is a tem­po­rary sav­ior. The Eurozone’s prob­lems are struc­tur­al in nature and include bal­ance of pay­ments, labor costs, regulatory/employment inflex­if­bil­i­ty, demo­graph­ics, fis­cal deficits/debt and above all, very low final demand for goods and ser­vices. Hence, the cur­rent Euro­zone eco­nom­ic malaise which includes low-fla­tion, dis­in­fla­tion or defla­tion and sim­ply stul­ti­fy­ing com­pla­cen­cy of invest­ment ani­mal spir­its. In this con­text, the job of mon­e­tary pol­i­cy is to pro­vide cov­er and time for the more dif­fi­cult polit­i­cal and pol­i­cy changes that realign economies and trade. We don’t dare to hope that these changes will be any­thing oth­er than incre­men­tal and allow for fur­ther mud­dling through. What the ECB’s liq­uid­i­ty injec­tions have done is pre­vent the Euro­zone from lurch­ing from cri­sis to cri­sis. That is a tem­po­rary state that can­not be indef­i­nite­ly main­tained, no mat­ter the size of the poten­tial liq­uid­i­ty injec­tions or the ver­bal skills of Draghi.

...

Note that when the arti­cle says “For the Euro­zone to get fis­cal­ly healthy, aggres­sive mon­e­tary pol­i­cy will need to play a role. How­ev­er, what ails the Euro­zone has nev­er been about mon­e­tary pol­i­cy. Mon­e­tary pol­i­cy is mere­ly a salve and the ECB is a tem­po­rary sav­ior. The Eurozone’s prob­lems are struc­tur­al in nature and include bal­ance of pay­ments, labor costs, regulatory/employment inflex­if­bil­i­ty, demo­graph­ics, fis­cal deficits/debt and above all, very low final demand for goods and ser­vices,” the kinds of “struc­tur­al” adjust­ments to the rules of busi­ness and the econ­o­my that are gen­er­al­ly implied by such state­ments include things like low­er­ing wages, cut­ting pen­sions, gut­ting the safe­ty net, mak­ing it “eas­i­er it hire and fire” dur­ing a time when mass fir­ings would prob­a­bly result, and just gen­er­al­ly enact exact­ly the kind of “struc­tur­al reforms” that will kill demand and remove the need for banks to make new loans, short-cir­cu­uit­ing the stim­u­la­tive pow­er of mon­e­tary mea­sures like QE.

Of course, this does­n’t mean EU mem­bers can’s ben­e­fit from “struc­tur­al reform”. Just not those reforms. There could be non-sup­ply-side reforms like strength­en­ing the safe­ty or mak­ing gov­ern­ment the employ­er of last resort. After­all, cre­ative destruc­tion is far less destruc­tion when you aren’t destroy­ing lives in the process. And, of course, the kinds of “stuc­tur­al reforms” that pro­tect those lives dur­ing the process of ‘cre­ative destruc­tion’ are slat­ed to be destroyed under an aus­ter­i­ty agend. So why not devel­op “struc­tur­al reforms” that enable “cre­ative destruc­tion” with­out destroyed lives? It’s an option. But since the idea of New Deal-style “struc­tur­al reforms” is in the process of being unper­son­ed, it’s an easy to for­get option.

Skip­ping down...

...

With the fee­ble take up of the lat­est TLTRO tranche, the ECB might just be forced to actu­al­ly buy bonds. Not now, but even­tu­al­ly. The oth­er piece of bad news from the Euro­zone yes­ter­day was the fact that French infla­tion went neg­a­tive for the month of Novem­ber. That is the first time that French core CPI has been neg­a­tive since 1990 which is when this eco­nom­ic indi­ca­tor was first col­lect­ed by France.
...

Did you catch that? France’s infla­tion rate went neg­a­tive for the month of Novem­ber.

Con­tin­u­ing...

It may be that the US has export­ed to the Euro­zone our pre­vi­ous cen­tral bank­ing mantra: good news is bad; and, bad news is good. That is, the worse the micro eco­nom­ic data becomes in Europe, the eas­i­er it is for the ECB to press their case for fur­ther mon­e­tary stim­u­lus. The caveat is that the mar­ket has already essen­tial­ly front run fur­ther ECB liq­uid­i­ty. That may mean that the ECB has a very short and defined win­dow for attempt­ing QE or some oth­er non-tra­di­tion­al liq­uid­i­ty inject­ing pol­i­cy. If they wait any longer, the risk tilts toward chang­ing risk-to-reward dynam­ics, cre­at­ing asset bub­bles and den­i­grat­ing finan­cial sta­bil­i­ty.

The TLTRO may even­tu­al­ly prove more robust in lat­er tranch­es. That is not like­ly to hap­pen in the near term how­ev­er as there is too much uncer­tain­ty in Euro­zone over the state of pol­i­tics and the upcom­ing elec­tion cycles in Greece, Spain and France. At some point Draghi will need to suc­cinct­ly com­mand that the Ger­mans cease and desist in their trep­i­da­tion to stim­uli. Should Euro­zone asset price volatil­i­ty increase, it will be his open­ing for imple­ment­ing oth­er mon­e­tary pol­i­cy solu­tions. The fact that the Ger­man Bun­des­bank down­grad­ed its own fore­cast for Ger­man growth next year to a mere 1% is not imma­te­r­i­al. All of these neg­a­tives are adding up, but the ECB is still a ways off from seam­less­ly push­ing anoth­er €1 tril­lion of liq­uid­i­ty into the sys­tem.

The last sen­tence real­ly cov­ers it: “All of these neg­a­tives are adding up, but the ECB is still a ways off from seam­less­ly push­ing anoth­er €1 tril­lion of liq­uid­i­ty into the sys­tem.” And the neg­a­tives sure are pil­ing up:
Ger­many’s econ­o­my is stalling while France is falling into out­right defla­tion. At the same time, EU banks are are turn­ing down free mon­ey! Why? Because there’s no one will­ing to bor­row because every­one expects things to stay bad or get worse. And what’s the light at the end of the tun­nel?! The fact that things are so bad that investors still will­ing to scoop up sov­er­eign debt and dri­ve gov­ern­ment bor­row­ing costs to record lows in part because investors are assum­ing that the ECB will be forced to even­tu­al­ly by sov­er­eign bonds in order to pre­vent the euro­zone econ­o­my from implod­ing because every­thing else it’s doing isn’t work­ing.

That expec­ta­tion of future action by the ECB has been the under­ly­ing dri­ver for a ral­ly in the euro­zone’s sov­er­eign bonds that’s over two-years old and that ral­ly is still going strong with no end in sight for either the EU-wide depres­sion or an end to the Bun­des­bank’s oppo­si­tion to ECB sov­er­eign bond pur­chas­es or any­thing resem­bling a fis­cal stim­u­lus.

It’s a grim­ly fas­ci­nat­ing dynam­ic: the pri­mar­i­ly ele­ment of the mar­ket psy­chol­o­gy hold­ing the euro­zone (and larg­er EU) togeth­er is faith that the ECB will even­tu­al­ly be allowed to do some­thing its most pow­er­ful mem­bers deeply oppose and find ide­o­log­i­cal­ly threat­en­ing. And yet it’s a faith that is objec­tive­ly ground­ed in the appar­ent eco­nom­ic hope­less­ness of the cur­rent sit­u­a­tion. The mar­kets are play­ing chick­en with the Bun­des­bank and its aus­ter­ian allies that the ECB will even­tu­al­ly be allowed to pur­chase sov­er­eign bonds sim­ply to avoid an even­tu­al financial/socioeconomic melt­down. And as long as the mar­kets are con­vinced tha­trob­a­bly con­tin­ue to find plen­ty of buy­ers.

But until that game of chick­en is resolved, the oth­er kind of mon­e­tary stim­u­lus poli­icies being debat­ed, like the QE tar­get­ing Asset Backed Secu­ri­ties (ABS) aren’t going to be of any help because the exist­ing aus­ter­i­ty poli­cies kill the con­sumer demand required to avoid a short-cir­cuit­ing of the ABS QE.

Wait, Is That Godot Com­ing Towards Us From The End Of The Tun­nel? No. It’s That Aus­ter­i­ty Train
But wait, could it be that the even Jens Wei­d­mann and the Bun­des­bank are final­ly get­ting behind the ECB’s plans for QE involv­ing both sov­er­eign debt and asset backed secu­ri­ties? Well, there was a recent Reuters arti­cle sug­gest­ing exact­ly that, although it was lat­er with­drawn as erro­neous­ly based on an ECB report an not a Bun­des­bank report.

Here’s the actu­al update:

Exclu­sive: ECB con­sid­ers mak­ing weak­er euro zone states bear more quan­ti­ta­tive eas­ing risk — sources

By John O’Don­nell and Paul Car­rel

FRANKFURT Fri Dec 19, 2014 7:08am EST

(Reuters) — Euro­pean Cen­tral Bank offi­cials are con­sid­er­ing ways to ensure weak coun­tries that stand to gain most from a fresh round of mon­ey print­ing bear more of the risk and cost.

Offi­cials, who spoke on con­di­tion of anonymi­ty, have told Reuters that the ECB could require cen­tral banks in coun­tries such as Greece or Por­tu­gal to set aside extra mon­ey or pro­vi­sions to cov­er poten­tial loss­es from any bond-buy­ing, reflect­ing the risk­i­ness of their bonds.

Such a move could help per­suade a reluc­tant Ger­many to back plans to buy state bonds.

There is cur­rent­ly a stand off between the ECB and Ger­many’s Bun­des­bank over ECB prepa­ra­tions to buy sov­er­eign bonds, so-called quan­ti­ta­tive eas­ing (QE), to shore up the flag­ging euro zone econ­o­my.

But while the idea may help over­come oppo­si­tion in Ger­many, which is wor­ried that fresh mon­ey print­ing could encour­age reck­less spend­ing and leave it to pick up the tab, crit­ics will argue that any such con­di­tions cur­tail its scope and impact.

Although a release of new mon­ey to buy state bonds appears all but cer­tain, how it will hap­pen remains flu­id. The ECB’s Gov­ern­ing Coun­cil holds its next mon­e­tary pol­i­cy meet­ing on Jan. 22., with mar­ket expec­ta­tions high for fresh stim­u­lus.

Requir­ing weak­er coun­tries to set aside extra pro­vi­sions would sig­nal that more of the risk of poten­tial loss­es would rest with nation­al cen­tral banks, rather than the ECB in Frank­furt.

“Loss­es are tak­en ... by the nation states,” said one offi­cial.

The ECB declined to com­ment.

...

CHANGING SHAPE

Lob­by­ing by the small group of coun­tries opposed to fresh mon­ey print­ing is now grad­u­al­ly shift­ing towards chang­ing the shape of quan­ti­ta­tive eas­ing rather than try to block it alto­geth­er.

The Bun­des­bank is demand­ing that any new round of bond buy­ing be sub­ject to strict lim­i­ta­tions.

Its pres­i­dent, Jens Wei­d­mann, this week out­lined two such pos­si­bil­i­ties – restrict­ing ECB buys to bonds of coun­tries with a top-notch cred­it rat­ing or allow­ing each cen­tral bank to buy their coun­try’s bonds at their own risk.

“Even if you say it’s not too ear­ly for QE, there is still some­thing to be said about how you set it up,” said one euro zone cen­tral bank offi­cial.

“If the cen­tral bank would only buy bonds from its own coun­try, then the chances and risks would go to that cen­tral bank. What hap­pens if there is a loss? It would be good if the cen­tral banks have made ade­quate pro­vi­sions.”

...

But while set­ting such a pre­con­di­tion for any result­ing loss­es would help win over Ger­many, it threat­ens to fur­ther under­mine the notion that all 18 coun­tries of the euro bloc are on an equal foot­ing.

As the arti­cle points out “Lob­by­ing by the small group of coun­tries opposed to fresh mon­ey print­ing is now grad­u­al­ly shift­ing towards chang­ing the shape of quan­ti­ta­tive eas­ing rather than try to block it alto­geth­er.”. In oth­er words, a com­pro­mise. And now behold the Bun­des­bank’s com­pro­mis­es: either forc­ing the weak­est economies to shoul­der the great­est risks for any quan­ti­ta­tive eas­ing pro­gram, and that’s just one com­pro­mise put forth by Wei­d­mann. or lim­it­ing the QE to only those nations with a ‘top-notch’ cred­it rat­ing (QE for all the coun­tries except those that need it).

So let’s assume the ECB real­ly does end up accept­ing Wei­d­man­n’s first option of forc­ing the weak­est economies to shoul­der the great­est risk of the QE does­n’t end up turn­ing turn­ing the their economies around. Would­n’t that mean that, if the QE does­n’t work out as hoped, the weak­est economies will pre­sum­ably end up even weak­er and require even more aus­ter­i­ty to make up for the lost ground?

Which rais­es an obvi­ous ques­tion: would­n’t the Bun­des­bank’s com­pro­mise mean that Berlin and its aus­ter­ian allies will have an incen­tive to derail any QE pro­gram in order to ensure a con­tin­u­a­tion of the aus­ter­i­ty? It’s a alarm­ing pos­si­bil­i­ty, and yet, here we are. All aus­ter­i­ty, a fiz­zling TLTRO, and no Godot.

So let the wait­ing con­tin­ue. But it’s not just wait­ing for a myth­i­cal per­son to arrive. Some­times you’re wait­ing for them to leave.

Discussion

17 comments for “The New World Ordoliberalism Part 5: The TLTRO and Waiting for Godot. And Sanity.”

  1. Here’s Wolf­gang Mün­chau take on Jens Wei­d­man­n’s pro­posed make-the-weak­est-states-take-on-the-great­est-risk-and-go-deep­er-into-debt-if-it-does­n’t-work QE “com­pro­mise”: Wei­d­mann “com­pro­mise” plan is so bad and poten­tial­ly dis­as­trous for the weak­est states that it’s prob­a­bly worse than no QE at all. It’s quite a com­pro­mise:

    Finan­cial Times

    Clever wrap­ping dis­guis­es Europe’s worn-out poli­cies

    A delayed but well-aimed mon­e­tary stim­u­lus blast is bet­ter than a pre­ma­ture sput­ter from can­nons

    Wolf­gang Mün­chau

    Decem­ber 28, 2014 3:49 pm

    Maybe it is the sea­son­al spir­it. I feel like some­one who got almost every­thing I ever wished for. When the euro­zone cri­sis erupt­ed, I asked for an emer­gency back­stop from the Euro­pean Cen­tral Bank. Then I demand­ed a bank­ing union, and then a large invest­ment pro­gramme. Each time, Europe’s pol­i­cy mak­ers said yes. I want­ed quan­ti­ta­tive eas­ing, the pur­chase of sov­er­eign bonds by the ECB, which has not hap­pened yet but prob­a­bly will next month. The eurobond was the only thing I did not get.

    The score is four of five. So why am I still not hap­py? The answer is that I feel robbed. It was only an illu­sion. I did not get a sin­gle thing.

    The bank­ing “union” will be one in which each coun­try is respon­si­ble for its own bank­ing sys­tem. The most impor­tant struc­tur­al inno­va­tions are joint bank­ing super­vi­sion and a tiny fund to cov­er loss­es when a banker runs away with the till. When I asked for a co-ordi­nat­ed approach to deal­ing with failed banks, this is not what I meant.
    ...

    The bank­ing “union” will be one in which each coun­try is respon­si­ble for its own bank­ing sys­tem. The most impor­tant struc­tur­al inno­va­tions are joint bank­ing super­vi­sion and a tiny fund to cov­er loss­es when a banker runs away with the till. When I asked for a co-ordi­nat­ed approach to deal­ing with failed banks, this is not what I meant.Yep!

    Con­tin­u­ing...

    ...
    It looks as though the same is going to hap­pen with QE. I am sure the finan­cial mar­kets will cel­e­brate the deci­sion. The euro will fall — until some­body reads the small print. The com­pro­mise under dis­cus­sion allows cred­i­tor coun­tries to wash their hands of any risk. The idea is that each nation­al cen­tral bank buys the sov­er­eign bonds of its own coun­try — and if this results in loss­es, the nation­al gov­ern­ment in ques­tion makes the cen­tral bank whole. Think about that for a sec­ond. Italy’s gov­ern­ment bor­rows mon­ey, the Bank of Italy buys the debt and the gov­ern­ment promis­es to com­pen­sate the bank if its bonds fall in val­ue (for instance because mar­kets stop believ­ing the government’s promis­es). The cir­cu­lar­i­ty is pre­pos­ter­ous.

    If the ECB goes down this route, it will be the end of a sin­gle mon­e­tary pol­i­cy. Yet the euro­zone is sup­posed to be a mon­e­tary union, not a fixed exchange-rate sys­tem where every­body hap­pens to use the same notes and coins.

    The moot­ed com­pro­mise would also lim­it the size of any QE pro­gramme. There is only so much risk that the cash-strapped gov­ern­ments of the eurozone’s periph­ery can absorb. They are unlike­ly to be able to do enough to anchor infla­tion expec­ta­tions at the ECB’s tar­get of just under 2 per cent.

    I under­stand that this com­pro­mise is still being dis­cussed. No deci­sion has been tak­en, and not every­body agrees. It is not clear to me why cen­tral bankers in favour of QE would accept it.

    They might, I sup­pose, rea­son that an inad­e­quate QE pro­gramme is bet­ter than none at all. If so, they are wrong. The habit of accept­ing half-baked solu­tions is the rea­son why the euro­zone is in its present mess. Gov­ern­ments accept­ed per­ma­nent aus­ter­i­ty in return for emer­gency cash in the cri­sis years, but that pol­i­cy only end­ed up enlarg­ing the bur­den of gov­ern­ment debt. A flawed QE pro­gramme would like­wise be, not a small step towards a solu­tion, but a big step away from one.

    ...

    One can have a long dis­cus­sion about what that means. But a QE pro­gramme would have to be open-end­ed if it were to have any chance of pro­duc­ing this effect. You can either say: “What­ev­er it takes.” Or you can say: “No more than such and such bil­lion euros.” But you can­not say both at the same time, and expect peo­ple to believe you.

    If an inco­her­ent com­pro­mise is the only option avail­able, it should be reject­ed. The euro­zone can­not afford anoth­er botched pol­i­cy mea­sure with dubi­ous ben­e­fits and con­sid­er­able side-effects.

    If they decide to do noth­ing, cen­tral bankers will at least keep this bar­rel of pow­der dry. A delayed but well-aimed blast of mon­e­tary stim­u­lus is far bet­ter than a pre­ma­ture sput­ter from the ECB’s can­nons. I fear, how­ev­er, that accom­mo­dat­ing Ger­many will be the over­rid­ing pri­or­i­ty.

    The result­ing pol­i­cy might be wrapped up in lan­guage that makes it look like what I asked for. But the resem­blance is super­fi­cial. That is the trou­ble with try­ing to please every­one. It forces you to take deci­sions that are prag­mat­ic and real­is­tic — even if they are wrong.

    “If the ECB goes down this route, it will be the end of a sin­gle mon­e­tary pol­i­cy. Yet the euro­zone is sup­posed to be a mon­e­tary union, not a fixed exchange-rate sys­tem where every­body hap­pens to use the same notes and coins.” Yikes. It sounds like Wei­d­man­n’s plan is not only a dis­as­ter in wait­ing but it could kill the euro­zone too, at least in spir­it. More so.

    Posted by Pterrafractyl | December 28, 2014, 9:25 pm
  2. It looks like it’s time for anoth­er round of pub­lic plead­ing from Mario Draghi for Berlin to let the ECB act like a cen­tral bank:

    All eyes on Berlin as ECB read­ies bond-buy­ing scheme

    By Noah Barkin

    BERLIN Sun Jan 4, 2015 4:37am EST

    (Reuters) — In August 2012, dur­ing a vis­it to Cana­da, Ger­man Chan­cel­lor Angela Merkel swept aside doubts about her sup­port for Mario Draghi and his promise, weeks before, to do what­ev­er it takes to pre­serve the euro.

    The pledge by the Ital­ian pres­i­dent of the Euro­pean Cen­tral Bank met a storm of crit­i­cism in Ger­many. Yet Merkel told reporters gath­ered in the Cana­di­an par­lia­ment in Ottawa that Draghi’s remarks were “com­plete­ly in line” with her own approach to the cri­sis.

    Her com­ments helped con­vince mar­kets that Draghi had the polit­i­cal sup­port to back up his bold words with action, calm­ing fears of a cat­a­stroph­ic euro breakup.

    Two and a half years on, the cri­sis in Europe’s sin­gle cur­ren­cy bloc has shift­ed from acute to chron­ic and once again it has fall­en to Draghi to come to the res­cue.

    As Europe stum­bles into 2015, dogged by weak growth and the prospect of defla­tion, Draghi is on the verge of launch­ing mass pur­chas­es of gov­ern­ment bonds with new mon­ey — also known as quan­ti­ta­tive eas­ing (QE) — in the hopes of jolt­ing Europe’s econ­o­my into life.

    But this time, it is unclear whether he can count on the same clear sup­port from Berlin.

    With­out it, the effec­tive­ness of any QE pro­gram could be under­mined. More fun­da­men­tal­ly, a rift between Ger­many and the ECB would her­ald a dan­ger­ous new phase for Europe in which the bloc’s two most impor­tant shapers of pol­i­cy are at odds.

    In a rare four-page inter­view with Ger­man dai­ly Han­dels­blatt on Fri­day, Draghi appeared to go out of his way to reach out and avert such a clash, say­ing the risk of the ECB fail­ing to pre­serve price sta­bil­i­ty had risen and it may need to act to meet its man­date.

    “Ger­many’s posi­tion on the QE pro­gram is arguably the sin­gle most impor­tant issue for the ECB right now,” said Mar­cel Fratzsch­er, head of the DIW eco­nom­ic insti­tute in Berlin and a for­mer offi­cial at the ECB. “Sup­port from both Merkel and (Finance Min­is­ter Wolf­gang) Schaeu­ble will be absolute­ly vital.”

    FIERCE REACTION

    What has changed since 2012?

    For one thing, fears of a euro breakup have sub­sided. That has made it eas­i­er for Ger­man offi­cials to push back against poli­cies they dis­agree with.

    The wor­ry in Berlin is QE will reduce pres­sure on strug­gling south­ern euro coun­tries to reform. Some think pump­ing new mon­ey into the sys­tem would sow the seeds of a future cri­sis.

    “If the ECB isn’t care­ful about how it does QE the reac­tion in Ger­many will be fierce,” said a senior Ger­man offi­cial who request­ed anonymi­ty due to sen­si­tiv­i­ties over ECB inde­pen­dence.

    “If QE does hap­pen, as it cer­tain­ly looks like it will, it should hap­pen in a way that does­n’t see it under­mined by Ger­man politi­cians. Draghi needs to know what the red lines are.”

    Com­pli­cat­ing the debate is the rise of the Alter­na­tive for Ger­many (AfD), a euroscep­tic par­ty that did­n’t exist back in 2012.

    After sweep­ing into three region­al par­lia­ments in east­ern Ger­many last year, the AfD will try to win its first seats in a west­ern assem­bly when Ham­burg votes in mid-Feb­ru­ary.

    A QE pro­gram, which the mar­kets expect to be unveiled as soon as the ECB’s next pol­i­cy meet­ing on Jan. 22, could play into the AfD’s hands.

    Uncer­tain­ty sur­round­ing a Jan. 25 elec­tion in Greece, which could vault the left-wing Syriza par­ty into pow­er, has mud­died the waters fur­ther by rais­ing the risk of a sov­er­eign default and severe loss­es for the ECB on any Greek bonds it holds.

    Should the ECB unveil a QE pro­gram that includes Greece before the polit­i­cal out­come in Athens is clear, it would be impos­si­ble for the Ger­man gov­ern­ment to remain silent, sev­er­al offi­cials said.

    “The Greek sit­u­a­tion makes it much more dif­fi­cult to announce a QE pro­gram where the risks are shared out,” said Chris­t­ian Oden­dahl, chief econ­o­mist at the Cen­tre for Euro­pean Reform in Lon­don.

    COURT CHALLENGE

    The oth­er cloud hang­ing over QE is the risk of a legal chal­lenge in Ger­many’s Con­sti­tu­tion­al Court.

    In Feb­ru­ary last year, the court in Karl­sruhe expressed con­cerns that the OMT bond-buy­ing scheme Draghi unveiled in the months after his 2012 “what­ev­er it takes” speech, which has nev­er been used, vio­lat­ed a ban on fund­ing gov­ern­ments.

    It referred the case to the Euro­pean Court of Jus­tice (ECJ) in Stras­bourg, whose advis­er is due to give a pre­lim­i­nary assess­ment on Jan. 14 and a final rul­ing in mid-2015. That could have big impli­ca­tions for how the ECB approach­es QE.

    “The con­sen­sus view in the mar­ket is that the ECJ won’t find any­thing wrong with the bond-buy­ing scheme, but there is a risk,” said Elga Bartsch, chief Euro­pean econ­o­mist at Mor­gan Stan­ley.

    “Berlin is clear­ly wor­ried about the impli­ca­tions of the ECJ rul­ing for the Ger­man Con­sti­tu­tion­al Court. And the ECB is also tak­ing it very seri­ous­ly, oth­er­wise they could have moved in Decem­ber.”

    The ECB may feel the need to tread care­ful­ly pend­ing a final rul­ing, increas­ing the chances of a QE pro­gram in which the cred­it risks tied to pur­chased bonds remain with nation­al cen­tral banks — an idea float­ed by Bun­des­bank Pres­i­dent Jens Wei­d­mann last month.

    “This is a solu­tion that could work for Ger­many,” said the senior Ger­man offi­cial.

    If the ECB goes down this path, Merkel could feel more com­fort­able endors­ing it but by lim­it­ing the scope of the pro­gram it may under­whelm finan­cial mar­kets and fail to revive the euro econ­o­my.

    “If you lim­it this along nation­al lines, it would clear­ly be a dis­ap­point­ment because it would show quite stark­ly that the ECB is run­ning up against its lim­its,” Oden­dahl said. “Draghi knows that the announce­ment itself will be the most impor­tant thing. I hope he is bold.”

    ...

    So we have anoth­er reminder that the hor­ri­ble “make the weak­est mem­bers incur the biggest QE risk while also lim­it­ing its scope”-QE plan is still what Berlin is inter­est­ed in if there’s going to be any QE at all.

    There’s also calls that no QE plans be put in place until the Jan­u­ary 25 Greek snap elec­tions are resolved. But should Syriza win, that’s prob­a­bly going to put any sort QE, even a crap­py QE, on hold until a Syriza-led gov­ern­ment agrees to con­tin­ue with aus­ter­i­ty. And who knows long that will take but it’s clear­ly Berlin’s demand:

    ...
    “If the ECB isn’t care­ful about how it does QE the reac­tion in Ger­many will be fierce,” said a senior Ger­man offi­cial who request­ed anonymi­ty due to sen­si­tiv­i­ties over ECB inde­pen­dence.

    “If QE does hap­pen, as it cer­tain­ly looks like it will, it should hap­pen in a way that does­n’t see it under­mined by Ger­man politi­cians. Draghi needs to know what the red lines are.”
    ...

    That sure sounds like Berlin telling the ECB it’s going to flip out unless any QE is done after get­ting strict assur­ances that the “struc­tur­al reforms” will con­tin­ue unabat­ed. Aus­ter­i­ty, reduced pen­sions and safe­ty-nets, fire­sale pri­va­ti­za­tions, and the gen­er­al kind of mid­dle-class defang­ing that’s tak­en place in the US for the past gen­er­a­tion is a clear goal for Europe’s lead­ers and con­tin­u­ing with that is going to be an absolute pre-con­di­tion for avoid­ing a Ger­man freak­out. Or avoid­ing a ‘Grex­it’ from the euro­zone alto­geth­er:

    Ger­many believes euro zone could cope with Greece exit — report

    BERLIN Sat Jan 3, 2015 6:43pm GMT

    (Reuters) — The Ger­man gov­ern­ment believes that the euro zone would now be able to cope with a Greece exit if that proved to be nec­es­sary, Der Spiegel news mag­a­zine report­ed on Sat­ur­day, cit­ing unnamed gov­ern­ment sources.

    Both Chan­cel­lor Angela Merkel and Finance Min­is­ter Wolf­gang Schaeu­ble believe the euro zone has imple­ment­ed enough reforms since the height of the region­al cri­sis in 2012 to make a poten­tial Greece exit man­age­able, Der Spiegel report­ed.

    “The dan­ger of con­ta­gion is lim­it­ed because Por­tu­gal and Ire­land are con­sid­ered reha­bil­i­tat­ed,” the week­ly news mag­a­zine quot­ed one gov­ern­ment source say­ing.

    ...

    You hear that Por­tu­gal and Ire­land? You’re reha­bil­i­tat­ed. That must feel good.

    Con­tin­u­ing...

    ...
    In addi­tion, the Euro­pean Sta­bil­i­ty Mech­a­nism (ESM), the euro zone’s bailout fund, is an “effec­tive” res­cue mech­a­nism and was now avail­able, anoth­er source added. Major banks would be pro­tect­ed by the bank­ing union.

    The Ger­man gov­ern­ment in Berlin could not be reached for com­ment.

    It is still unclear how a euro zone mem­ber coun­try could leave the euro and still remain in the Euro­pean Union, but Der Spiegel quot­ed a “high-rank­ing cur­ren­cy expert” as say­ing that “resource­ful lawyers” would be able to clar­i­fy.

    Accord­ing to the report, the Ger­man gov­ern­ment con­sid­ers a Greece exit almost unavoid­able if the left­wing Syriza oppo­si­tion par­ty led by Alex­is Tsipras wins an elec­tion set for Jan. 25.

    ...

    Ger­man Finance Min­is­ter Schaeu­ble has already warned Greece against stray­ing from a path of eco­nom­ic reform, say­ing any new gov­ern­ment would be held to the pledges made by the cur­rent Sama­ras gov­ern­ment.

    Accord­ing to the report, the Ger­man gov­ern­ment con­sid­ers a Greece exit almost unavoid­able if the left­wing Syriza oppo­si­tion par­ty led by Alex­is Tsipras wins an elec­tion set for Jan. 25. No pres­sure Greece!

    Oh, Ha ha! Berlin was appar­ent­ly just kid­ding although not actu­al­ly:

    Finan­cial Times

    Berlin insists it expects Greece to remain in euro­zone

    By Ste­fan Wagstyl in Berlin
    Jan­u­ary 4, 2015 4:11 pm

    Ger­many has insist­ed that it expects Greece to stay in the euro­zone, despite a news report claim­ing Berlin was ready to see Athens quit the com­mon cur­ren­cy if the pop­ulist Syriza par­ty wins this month’s snap elec­tion and reneges on the country’s reform pro­gramme.

    Der Spiegel mag­a­zine report­ed on Sun­day that Chan­cel­lor Angela Merkel was aban­don­ing her pre­vi­ous com­mit­ment to keep­ing Greece in the euro­zone at any price, and prepar­ing instead for a pos­si­ble Greek exit in the event that Syriza — which has called for dras­tic debt cuts and an end to aus­ter­i­ty — con­fronts EU part­ners with unac­cept­able demands.

    ...

    Georg Stre­it­er, the deputy gov­ern­ment spokesman, said: “Greece has ful­filled its oblig­a­tions in the past. The fed­er­al gov­ern­ment is assum­ing that Greece will con­tin­ue to meet its oblig­a­tions.”

    Sig­mar Gabriel, Germany’s econ­o­my min­is­ter and leader of the cen­ter-left Social Democ­rats, also said on Sun­day that the Ger­man gov­ern­ment want­ed Greece to stay in the euro­zone.

    “The goal of the Ger­man gov­ern­ment, the Euro­pean Union and even the gov­ern­ment in Athens itself is to keep Greece in the euro zone,” Mr Gabriel told the Han­nover­sche All­ge­meine Zeitung in an inter­view to be pub­lished on Mon­day.

    “There were no and there are no oth­er plans to the con­trary,” he said, adding that the euro zone had become far more sta­ble in recent years. “That’s why we can’t be black­mailed and why we expect the Greece gov­ern­ment, no mat­ter who leads it, to abide by the agree­ments made with the EU.”

    The finance min­istry ear­li­er said it did not com­ment on “spec­u­la­tive reports”, and referred to a state­ment from Mr Schäu­ble, pub­lished short­ly after the elec­tion was called in Greece, in which he said there was no alter­na­tive to Greek efforts to over­haul the econ­o­my, which were “bear­ing fruit”.

    “If Greece choos­es a dif­fer­ent path, it will become dif­fi­cult,” added Mr Schäu­ble, say­ing elec­tions did not change the fact that Athens had to stand by its agree­ments.

    The for­eign min­istry echoed that line, with Michael Roth, the Europe min­is­ter, tweet­ing: “Greece is a mem­ber of the euro­zone. And it should remain one.”

    But the anti-euro Alter­na­tive for Ger­many (AfD) par­ty was quick to seize on the mag­a­zine arti­cle to poke a fin­ger at Ms Merkel. Bernd Lucke, the par­ty leader, said: “I wel­come this belat­ed insight from Ms Merkel and from Schäu­ble that a Greek exit from the euro would be bear­able.”

    Carsten Nick­el of Teneo Intel­li­gence, a polit­i­cal analy­sis com­pa­ny, said reports that Ger­many was con­sid­er­ing the option of a Greek euro exit were “intend­ed to send a strong sig­nal to Athens ahead of the upcom­ing snap gen­er­al elec­tions”.

    He said that “they should not be mis­read as a defin­i­tive posi­tion­ing in case of Greek non-com­pli­ance” with its debt oblig­a­tions and reform com­mit­ments. “It is far more like­ly that Berlin will devel­op its strat­e­gy of deal­ing with a new Greek gov­ern­ment on the go, and in a more flex­i­ble man­ner.”

    How­ev­er, peo­ple close to the gov­ern­ment argue that it is most unlike­ly that chan­cellery or finance min­istry offi­cials had sought to send Greek vot­ers a sig­nal. In their view, the pos­si­ble advan­tages of such a move are far out­weighed by the poten­tial risks of inflam­ing anti-EU and anti-Ger­man opin­ion in Greece by being seen to be inter­ven­ing in the elec­tion.

    Nev­er­the­less, there is wide­spread agree­ment in gov­ern­ment cir­cles on the point that a poten­tial “Grex­it” is today less of a threat than three years ago. Not only are debt-laden coun­tries, includ­ing Greece, mak­ing progress with reforms but the EU has backed the euro­zone with new insti­tu­tions, while many com­mer­cial banks have raised fresh cap­i­tal.

    Well that’s reas­sur­ing. Ger­man offi­cials are assur­ing the world that the reports about Berlin’s plans for a ‘Grex­it’ are erro­neous because it’s just assumed that Greece will stick with the aus­ter­i­ty no mat­ter what. Why?:

    ...
    “The goal of the Ger­man gov­ern­ment, the Euro­pean Union and even the gov­ern­ment in Athens itself is to keep Greece in the euro zone,” Mr Gabriel told the Han­nover­sche All­ge­meine Zeitung in an inter­view to be pub­lished on Mon­day.

    “There were no and there are no oth­er plans to the con­trary,” he said, adding that the euro zone had become far more sta­ble in recent years. “That’s why we can’t be black­mailed and why we expect the Greece gov­ern­ment, no mat­ter who leads it, to abide by the agree­ments made with the EU.”
    ...

    Yes, you see, there are no ‘Grex­it’ plans because Berlin offi­cials just assume the Greeks will stick to the aus­ter­i­ty no mat­ter who wins the elec­tions because the EU can’t be black­mailed since a ‘Grex­it’ is now con­sid­ered eco­nom­i­cal­ly palat­able for the euro­zone.

    Also:

    ...peo­ple close to the gov­ern­ment argue that it is most unlike­ly that chan­cellery or finance min­istry offi­cials had sought to send Greek vot­ers a sig­nal. In their view, the pos­si­ble advan­tages of such a move are far out­weighed by the poten­tial risks of inflam­ing anti-EU and anti-Ger­man opin­ion in Greece by being seen to be inter­ven­ing in the elec­tion.
    ...

    Well, tech­ni­cal­ly it’s not inter­ven­ing in an elec­tion when the mes­sage is, “Resis­tance is futile. Have fun vot­ing!”

    The more things change, the more they stay the same. Or get worse. It’s real­ly just bet­ter that isn’t allowed.

    Posted by Pterrafractyl | January 4, 2015, 11:10 pm
  3. Hans-Wern­er Sinn, one of Ger­many’s top econ­o­mists and an arch oppo­nent of vir­tu­al­ly all ECB poli­cies designed to stim­u­late the econ­o­my, just reit­er­at­ed his view that out­right defla­tion across the euro­zone isn’t real­ly a prob­lem. Sinn is also sug­gest­ing that, should the ECB final­ly engage in QE, Ger­many might be con­sti­tu­tion­al­ly bound to leave the euro­zone:

    Bloomberg News
    Ifo’s Sinn Says ECB Using Defla­tion Risk as Excuse for QE
    By Bir­git Jen­nen Jan 12, 2015 3:27 AM CT

    Euro­pean Cen­tral Bank pol­i­cy mak­ers are using the specter of defla­tion as an excuse to help the euro area’s weak­er nations, said Hans-Wern­er Sinn, head of Germany’s Ifo eco­nom­ic insti­tute.

    The argu­ment by cen­tral bankers that the ECB needs to act because infla­tion is below its goal of just under 2 per­cent isn’t cov­ered by the treaty gov­ern­ing the cur­ren­cy union, Sinn said in a phone inter­view. Con­sumer prices in the euro area post­ed an annu­al decline in Decem­ber for the first time in more than five years, though core infla­tion rose.

    “The risk of defla­tion is just a pre­text for quan­ti­ta­tive eas­ing, for ham­mer­ing out a bailout pro­gram for south­ern Europe,” Sinn said. The decline in infla­tion is due to low­er crude prices and “there’s no need for ECB action,” he said.

    ...

    Greek Write­down

    Quan­ti­ta­tive eas­ing “would give the ECB the func­tion of lender of last resort toward indi­vid­ual states” in the euro area, said Sinn, who advo­cates an inter­na­tion­al con­fer­ence to write down Greek debt.

    While Bun­des­bank head Jens Wei­d­mann, law­mak­ers in Ger­man Chan­cel­lor Angela Merkel’s coali­tion and econ­o­mists such as Sinn crit­i­cize the ECB’s expand­ing role, Merkel hasn’t opposed Draghi pub­licly. The chan­cel­lor on Jan. 7 backed keep­ing Greece in the euro area as long as it ful­fills its aus­ter­i­ty com­mit­ments, say­ing she has “always” sought to keep the euro area from splin­ter­ing.

    The ECB’s Out­right Mon­e­tary Trans­ac­tions pro­gram, a bond-buy­ing plan announced in 2012 after Draghi pledged to do “what­ev­er it takes” to defend the cur­ren­cy, car­ries fur­ther risks for the euro area’s uni­ty, Sinn said.

    Europe would face “a big con­sti­tu­tion­al prob­lem” if the Euro­pean Union’s top tri­bunal declared the ECB’s plan legal in a non-bind­ing opin­ion to be pub­lished Jan. 14, with a rul­ing four to six months lat­er, he said.

    Germany’s Con­sti­tu­tion­al Court ruled last year that OMT, which has nev­er been used, prob­a­bly over­stepped the ECB’s man­date and asked the Euro­pean Court of Jus­tice to decide on its legal­i­ty.

    Ger­many could end up in a posi­tion where it would be con­sti­tu­tion­al­ly bound to leave the euro area, Sinn said. “Some­body would have to give in and that would be the ECB,” he said. “It would have to give up on OMT vol­un­tar­i­ly.”

    “While Bun­des­bank head Jens Wei­d­mann, law­mak­ers in Ger­man Chan­cel­lor Angela Merkel’s coali­tion and econ­o­mists such as Sinn crit­i­cize the ECB’s expand­ing role, Merkel hasn’t opposed Draghi pub­licly. The chan­cel­lor on Jan. 7 backed keep­ing Greece in the euro area as long as it ful­fills its aus­ter­i­ty com­mit­ments, say­ing she has “always” sought to keep the euro area from splin­ter­ing.” LOL, yeah Angela has been real­ly sup­port­ive of Draghi’s QE efforts.

    So any­ways, Sinn just upped the anti-QE ante. There’s no longer just the threat that Greece will get kicked out. Now Ger­many might be con­sti­tu­tion­al­ly forced to leave should QE be enact­ed, at least accord­ing to Sinn.

    Also, defla­tion is total­ly cool. And maybe even desir­able:

    The New York Times
    The Con­science of a Lib­er­al

    Ordoarith­metic
    Paul Krug­man
    Octo­ber 1, 2014 5:25 pm

    Francesco Sara­ceno is furi­ous and dis­mayed at Hans-Wern­er Sinn, who says among oth­er things that defla­tion in south­ern Europe is nec­es­sary to restore com­pet­i­tive­ness. Why not infla­tion in Ger­many, he asks?

    But Sara­ceno fails to under­stand Ger­man log­ic here. As they see it, their econ­o­my was in the dol­drums at the end of the 1990s; they then cut labor costs, gain­ing a huge com­pet­i­tive advan­tage, and began run­ning gigan­tic trade sur­plus­es. So their recipe for glob­al recov­ery is for every­one to deflate, gain­ing a huge com­pet­i­tive advan­tage, and begin run­ning gigan­tic trade sur­plus­es.

    You may think there’s some kind of arith­metic prob­lem here, but in Ger­many they have their own intel­lec­tu­al tra­di­tion.

    “So their recipe for glob­al recov­ery is for every­one to deflate, gain­ing a huge com­pet­i­tive advan­tage, and begin run­ning gigan­tic trade sur­plus­es”. Yep. Doing the math­e­mat­i­cal­ly impos­si­ble: That’s the plan. And one of Ger­many’s most influ­en­tial econ­o­mists is sug­gest­ing that Ger­many blow up the whole euro­zone if there’s any devi­a­tion from the plan. So the plan also includes hostage tak­ing in addi­tion to doing the impos­si­ble, which kind of makes sense since the rest of the plan makes no sense at all.

    Non­sense + hostage tak­ing. That’s the plan.

    Posted by Pterrafractyl | January 12, 2015, 3:43 pm
  4. Paul Krug­man brings us a fun trip down Euromem­o­ry Lane...the mem­o­ry of watch­ing a fam­i­ly of nations vio­lent­ly push each oth­er down an end­less flight of stairs:

    The New York Times
    The Con­science of a Lib­er­al
    A Trip Down Euromem­o­ry Lane
    Paul Krugu­man
    Jan 13 12:57 pm
    Jean-Claude Trichet, June 2010:

    As regards the econ­o­my, the idea that aus­ter­i­ty mea­sures could trig­ger stag­na­tion is incor­rect … In fact, in these cir­cum­stances, every­thing that helps to increase the con­fi­dence of house­holds, firms and investors in the sus­tain­abil­i­ty of pub­lic finances is good for the con­sol­i­da­tion of growth and job cre­ation. I firm­ly believe that in the cur­rent cir­cum­stances con­fi­dence-inspir­ing poli­cies will fos­ter and not ham­per eco­nom­ic recov­ery, because con­fi­dence is the key fac­tor today.

    Olli Rehn, Decem­ber 2012: “Europe must stay the aus­ter­i­ty course.”

    Europe marched into this dis­as­ter with eyes wide shut.

    In oth­er news, con­sumer prices in the EU just fell for the first time on record with 16 EU mem­bers show­ing price declines last month. So...just keep push­ing...

    CNBC
    No risk of ‘defla­tion spi­ral’ in Europe: Ger­man min­is­ter
    Hol­ly Elly­att | Annette Weis­bach
    1/16/2015

    Despite data show­ing that the euro zone has slid into defla­tion, Ger­many’s deputy finance min­is­ter brushed off con­cerns that the region could enter a down­ward spi­ral of falling prices and lack of demand.

    “This is not what econ­o­mists and text­books describe as a defla­tion spi­ral, this is a mod­est price devel­op­ment,” Stef­fen Kam­peter told CNBC Thurs­day.

    He also said that the Ger­man econ­o­my was grow­ing “beyond expec­ta­tions” and could exceed recent growth fore­casts for this year.

    Data released last week showed that the 19-coun­try sin­gle cur­ren­cy region had entered defla­tion ter­ri­to­ry in Decem­ber. Prices in the euro zone fell 0.2 per­cent year-on-year in Decem­ber, mark­ing the first time since 2009 that prices have dipped into neg­a­tive ter­ri­to­ry.

    ...

    Defla­tion con­cerns ana­lysts because a decline in the price of goods can cause con­sumers to delay pur­chas­es in the hope of fur­ther price falls, putting pres­sure on the broad­er econ­o­my.

    The fig­ures prompt­ed wide­spread mar­ket spec­u­la­tion that the Euro­pean Cen­tral Bank (ECB) could announce a full-scale quan­ti­ta­tive eas­ing pro­gram when it meets on Jan­u­ary 22. The deputy finance min­is­ter would­n’t com­ment on any forth­com­ing ECB action, how­ev­er.

    The Ger­many econ­o­my – which is the largest in the euro zone – has staged some­thing of a turn­around of late, after veer­ing dan­ger­ous­ly close to reces­sion in 2014.

    The econ­o­my con­tract­ed 0.2 per­cent in the sec­ond quar­ter of 2014 but man­aged to avoid reces­sion when it expand­ed 0.1 per­cent in the third quar­ter. Tech­ni­cal­ly, a reces­sion is a con­trac­tion in gross domes­tic prod­uct (GDP) over two con­sec­u­tive quar­ters.

    In Decem­ber, Ger­many’s cen­tral bank, the Bun­des­bank, down­grad­ed its growth pre­dic­tions for Ger­many, fore­cast­ing growth of only 1 per­cent in 2015. But Kam­peter said he believed that could be a con­ser­v­a­tive esti­mate.

    “The good news is Ger­many is still grow­ing and will grow on. We have been grow­ing beyond expec­ta­tions and the main fac­tor is that pri­vate demand is work­ing quite well and I would­n’t be sur­prised if our (growth) pre­dic­tions for 2015 will be enhanced by this devel­op­ment,” he said.

    ...

    Yep, Ger­many’s econ­o­my staged some­thing of a turn­around last quar­ter, grow­ing 0.1 per­cent fol­low­ing a 0.2 per­cent fall the pre­vi­ous quar­ter. And there’s noth­ing to wor­ry about regard­ing EU-wide defla­tion. Ah, the mem­o­ries. Just keep on keepin’ on. You’ll hit rock bot­tom even­tu­al­ly and can go from there.

    Posted by Pterrafractyl | January 16, 2015, 9:55 am
  5. If you know any hold­ers of East­ern Euro­pean mort­gages that ares sud­den­ly freak­ing out, note that they aren’t alone:

    The New York Times
    The Con­science of a Lib­er­al

    Francs, Fear and Fol­ly

    Paul Krug­man
    JAN. 15, 2015

    Ah, Switzer­land, famed for cuck­oo clocks and sound mon­ey. Oth­er nations may exper­i­ment with rad­i­cal eco­nom­ic poli­cies, but with the Swiss you don’t get sur­pris­es.

    Until you do. On Thurs­day the Swiss Nation­al Bank, the equiv­a­lent of the Fed­er­al Reserve, shocked the finan­cial world with a dou­ble wham­my, simul­ta­ne­ous­ly aban­don­ing its pol­i­cy of peg­ging the Swiss franc to the euro and cut­ting the inter­est rate it pays on bank reserves to minus, that’s right, minus 0.75 per­cent. Mar­ket tur­moil ensued.

    And you should feel a shiv­er of fear, even if you don’t have any direct finan­cial stake in the val­ue of the franc. For Switzerland’s mon­e­tary tra­vails illus­trate in minia­ture just how hard it is to fight the defla­tion­ary vor­tex now drag­ging down much of the world econ­o­my.

    What you need to under­stand is that all the usu­al rules of eco­nom­ic pol­i­cy changed when finan­cial cri­sis struck in 2008; we entered a look­ing-glass world, and we still haven’t emerged. In many cas­es, eco­nom­ic virtues became vices: Will­ing­ness to save became a drag on invest­ment, fis­cal pro­bity a route to stag­na­tion. And in the case of the Swiss, hav­ing a rep­u­ta­tion for safe banks and sound mon­ey became a major lia­bil­i­ty.

    Here’s how it worked: When Greece entered its debt cri­sis at the end of 2009, and oth­er Euro­pean nations found them­selves under severe stress, mon­ey seek­ing a safe haven began pour­ing into Switzer­land. This in turn sent the Swiss franc soar­ing, with dev­as­tat­ing effects on the com­pet­i­tive­ness of Swiss man­u­fac­tur­ing, and threat­ened to push Switzer­land — which already had very low infla­tion and very low inter­est rates — into Japan­ese-style defla­tion.

    So Swiss mon­e­tary offi­cials went all out in an effort to weak­en their cur­ren­cy. You might think that mak­ing your cur­ren­cy worth less is easy — can’t you just print more bills? — but in the post-cri­sis world it’s not easy at all. Just print­ing mon­ey and stuff­ing it into the banks does noth­ing; it just sits there. The Swiss tried a more direct approach, sell­ing francs and buy­ing euros on the for­eign exchange mar­ket, in the process acquir­ing a huge hoard of euros. But even that wasn’t doing the trick.

    Then, in 2011, the Swiss Nation­al Bank tried a psy­cho­log­i­cal tac­tic. “The cur­rent mas­sive over­val­u­a­tion of the Swiss franc,” it declared, “pos­es an acute threat to the Swiss econ­o­my and car­ries the risk of a defla­tion­ary devel­op­ment.” And it there­fore announced that it would set a min­i­mum val­ue for the euro — 1.2 Swiss francs — and that to enforce this min­i­mum it was “pre­pared to buy for­eign cur­ren­cy in unlim­it­ed quan­ti­ties.” What the bank clear­ly hoped was that by draw­ing this line in the sand it would lim­it the num­ber of euros it actu­al­ly had to buy.

    And for three years it worked. But on Thurs­day the Swiss sud­den­ly gave up. We don’t know exact­ly why; nobody I know believes the offi­cial expla­na­tion, that it’s a response to a weak­en­ing euro. But it seems like­ly that a fresh wave of safe-haven mon­ey was mak­ing the effort to keep the franc down too expen­sive.

    If you ask me, the Swiss just made a big mis­take. But frankly — fran­cly? — the fate of Switzer­land isn’t the impor­tant issue. What’s impor­tant, instead, is the demon­stra­tion of just how hard it is to fight the defla­tion­ary forces that are now afflict­ing much of the world — not just Europe and Japan, but quite pos­si­bly Chi­na too. And while Amer­i­ca has had a pret­ty good run the past few quar­ters, it would be fool­ish to assume that we’re immune.

    What this says is that you real­ly, real­ly shouldn’t let your­self get too close to defla­tion — you might fall in, and then it’s extreme­ly hard to get out. This is one rea­son that slash­ing gov­ern­ment spend­ing in a depressed econ­o­my is such a bad idea: It’s not just the imme­di­ate cost in lost jobs, but the increased risk of get­ting caught in a defla­tion­ary trap.

    ...

    So let’s learn from the Swiss. They’ve been care­ful; they’ve main­tained sound mon­ey for gen­er­a­tions. And now they’re pay­ing the price.

    “And for three years it worked. But on Thurs­day the Swiss sud­den­ly gave up. We don’t know exact­ly why; nobody I know believes the offi­cial expla­na­tion, that it’s a response to a weak­en­ing euro. But it seems like­ly that a fresh wave of safe-haven mon­ey was mak­ing the effort to keep the franc down too expen­sive.”

    A wave of of safe-haven mon­ey head­ing towards Switzer­land. Now what might be caus­ing the Swiss Nation­al Bank to assume that? One expla­na­tion is the grow­ing expec­ta­tions that some sort of euro­zone QE is final­ly on the way, which will only add to the euro’s plunge and cost the SNB even more.

    But also keep in mind that the lat­est reports on the struc­ture of the euro­zone’s QE plan are even more hor­ri­ble than the pes­simists expect­ed:

    RTE News
    ECB devis­es ‘Ger­man-friend­ly’ bond-buy­ing pro­gramme: report

    Fri­day 16 Jan­u­ary 2015 17.23

    The Euro­pean Cen­tral Bank has devised a bond-buy­ing pro­gramme that will be accept­able to Ger­many, which has voiced reser­va­tions about the mea­sure, mag­a­zine Der Spiegel has report­ed.

    Ger­many has made no secret of its objec­tions to a con­test­ed pro­gramme of so-called quan­ti­ta­tive eas­ing which the ECB is plan­ning to help pre­vent the euro zone from slip­ping into defla­tion.

    Ger­man gov­ern­ment offi­cials, as well as the head of the Bun­des­bank, Jens Wei­d­mann, have repeat­ed­ly voiced con­cern about such a pro­gramme.

    They believe it will take away the pres­sure on gov­ern­ments to push through essen­tial, but painful, eco­nom­ic reforms. And tax­pay­ers, par­tic­u­lar­ly Ger­man ones, could end up foot­ing the bill should anoth­er coun­try be unable to repay its debt, the crit­ics argue.

    Accord­ing to Der Spiegel, ECB chief Mario Draghi pre­sent­ed a scheme aimed at pla­cat­ing such con­cerns to Chan­cel­lor Angela Merkel and Finance Min­is­ter Wolf­gang Schaeu­ble at a meet­ing on Wednes­day.

    Merkel’s office con­firmed a meet­ing took place but refused to reveal what was dis­cussed.

    The week­ly, in a pre-released copy of a sto­ry to appear in Sun­day’s edi­tion, said that under the revised scheme, the nation­al cen­tral banks will only be allowed to buy the sov­er­eign debt of their respec­tive coun­tries.

    That means that each nation­al cen­tral bank alone will car­ry the risk of a pos­si­ble default by their gov­ern­ment. And Ger­many, Europe’s pay­mas­ter, will not have to bail out anoth­er coun­try, the mag­a­zine said.

    In addi­tion, a ceil­ing of 20–25% will be set on how much a cen­tral bank can buy of a gov­ern­men­t’s debt, Der Spiegel said, with­out reveal­ing its sources.

    Fur­ther­more, cri­sis-hit Greece will not par­tic­i­pate in the scheme because its sov­er­eign debt does not ful­fil the nec­es­sary qual­i­ty cri­te­ria, the report said.

    The ECB holds its first pol­i­cy meet­ing of the year on Thurs­day and is wide­ly expect­ed to announce some sort of QE pro­gramme to try to kick-start the euro zone’s slug­gish econ­o­my.

    ...

    Coeure stressed that the aim of such a stim­u­lus oper­a­tion is to “ensure con­fi­dence in the capac­i­ty of the cen­tral bank to sta­bilise infla­tion”.

    The French ECB board mem­ber said that there is an increas­ing risk that “growth and infla­tion remain con­stant­ly weak, that we slump into an ‘econ­o­my of 1% — growth at 1% and infla­tion at 1%”.

    “This prospect is suf­fi­cient­ly dan­ger­ous for us to be wor­ried about,” he said.

    Touch­ing on anoth­er burn­ing ques­tion sur­round­ing the bloc, the ECB board mem­ber said there is “no ques­tion of Greece leav­ing the euro” fol­low­ing Jan­u­ary 25 elec­tions which are feared to bring anti-aus­ter­i­ty par­ty Syriza to pow­er.

    “The stakes of the elec­tion are else­where, it’s the com­po­si­tion of the cock­tail of reforms that will allow this coun­try to defin­i­tive­ly exit the cri­sis and to fur­ther inte­grate with Euro­pean economies,” he said.

    So with Greece’s snap elec­tions just around the cor­ner, we’re get­ting word that the new ‘Ger­man Friend­ly’ QE plans are not only going to the crap­py “each nation­al bank does its own QE”-plan, but those nation­al banks are also going to have a cap on their expen­di­tures (which com­plete­ly negates the psy­cho­log­i­cal war­fare required for a cen­tral bank­ing pol­i­cy like this to work), but the Greeks aren’t even going to be allowed to par­tic­i­pate.

    So just how unre­al­is­tic is all the talk of a ‘Grex­it’ going to be if Greece is shut out of any QE and told to suck it up for the next gen­er­a­tion? Espe­cial­ly if the rest of the QE plan is pre­emp­tive­ly sab­o­taged to ensure that the rest of the euro­zone con­tin­ues down the defla­tion­ary death spi­ral. Is a ‘Grex­it’ real­ly all that unimag­in­able giv­en the unimag­in­ably bad poli­cies that almost seemed designed to pun­ish and demor­al­ize the entire nation? And if Greece goes, how long before nations like Spain or Ire­land fol­low suit?

    It all rais­es the ques­tion: Is it real­ly just the cost of a QE “safe-haven euro wave” the SNB was fear­ing? A ‘Grex­it’ and pos­si­ble euro­zone unwind­ing seems like it could be pret­ty cost­ly too and how unimag­in­able is such a sce­nario when poli­cies seem to be designed to enrage the Greeks.

    Beware of Greeks bear­ing option­al Grex­its. Espe­cial­ly after you’ve repeat­ed­ly slapped them and made it clear you have no inten­tion to stop.

    Posted by Pterrafractyl | January 16, 2015, 7:33 pm
  6. Here’s a reminder that the forces con­tin­u­ing to threat­en the glob­al econ­o­my into with a com­plete­ly unnec­es­sary defla­tion­ary vor­tex and a socioe­co­nom­ic race to the bot­tom include his­tor­i­cal­ly inac­cu­rate and delu­sion­al macro­eco­nom­ic mem­o­ries that exclude the key role defla­tion played in the rise of the Nazis. That’s not the only force at work keep­ing the race to the bot­tom going, but self-cen­sored Nazi-relat­ed mem­o­ries are part of the prob­lem:

    Finan­cial Times
    The euro­zone: A strained bond

    The ECB’s debate with Ger­many threat­ens to lessen the impact of the expect­ed asset-buy­ing plan

    Jan­u­ary 18, 2015 7:04 pm

    Claire Jones and Ste­fan Wagstyl

    In his tumul­tuous time as pres­i­dent of the Euro­pean Cen­tral Bank, Mario Draghi has always been able to rely on the unequiv­o­cal sup­port of Ger­man chan­cel­lor Angela Merkel.. Not any more.

    The mutu­al trust between Europe’s most impor­tant cen­tral banker and its most pow­er­ful polit­i­cal leader will this week be put to the test as the ECB unveils its long-await­ed quan­ti­ta­tive eas­ing pack­age in the face of seri­ous Ger­man reser­va­tions about the cen­tral bank buy­ing gov­ern­ment bonds.

    Berlin will not pub­licly oppose the pack­age that Mr Draghi is expect­ed to unveil in Frank­furt on Thurs­day. But it is press­ing for tough con­di­tions which the ECB fears could lim­it its chances of suc­cess. “We have made it clear that it is ques­tion­able to do QE,” says one per­son with a knowl­edge of gov­ern­ment think­ing. “Draghi talks to peo­ple in Berlin. He knows what is going on in Ger­many.”

    The stand-off comes at a crit­i­cal time for Ger­many, the euro­zone and the EU, with the econ­o­my stag­nant, unem­ploy­ment high and the union’s rep­u­ta­tion as a glob­al eco­nom­ic pow­er­house at stake. The euro last week touched an 11-year low against the dol­lar after the Swiss cen­tral bank’s deci­sion to drop the cap on the franc removed from the mar­ket a big buy­er of euros. Next Sun­day, vot­ers go to the polls in debt-laden Greece, the eurozone’s most vul­ner­a­ble mem­ber, in an elec­tion which could deter­mine its future in the euro­zone.

    With the fall in oil prices push­ing the region back into defla­tion for the first time in five years, Mr Draghi sees QE as a pow­er­ful weapon in his fight against a long-last­ing bout of falling prices that would plunge the region into eco­nom­ic depres­sion.

    It would also boost the col­lec­tive pow­er of the EU’s cen­tral insti­tu­tions, not least the ECB, and help show the world and scep­ti­cal Euro­pean vot­ers that the union remains more than the sum of its parts.

    Yet events in Greece — where the left­ist Syriza par­ty, which is call­ing for a nation­al debt restruc­tur­ing, is expect­ed to win — have under­lined Ger­man con­cerns about QE, above all the fear that Ger­man tax­pay­ers might have to take the hit for spend­thrift mem­ber states. At the same time, Ms Merkel is not as con­vinced as she was at the peak of the euro­zone cri­sis that the eco­nom­ic dan­ger is so acute that she has to back Mr Draghi at any cost. “At this time [Ms Merkel] is more scep­ti­cal. My impres­sion is that she has some doubts about whether QE will work,” says a senior MP from the chancellor’s Chris­t­ian Demo­c­ra­t­ic Union (CDU).

    Room for com­pro­mise

    The ECB pres­i­dent last week met Chan­cel­lor Merkel and Wolf­gang Schäu­ble, her pow­er­ful finance min­is­ter. Mr Draghi will almost cer­tain­ly com­pro­mise on ele­ments of his pack­age of gov­ern­ment bond pur­chas­es to appease the Ger­man pub­lic. But resis­tance is so fierce that this might not be enough. And by bow­ing to Berlin, Mr Draghi risks announc­ing plans that would dis­ap­point mar­kets and destroy the ECB’s biggest chance to spur the region towards a mean­ing­ful recov­ery. “Mar­kets need to view any QE pack­age as a con­tin­u­a­tion of mon­e­tary pol­i­cy and not some­thing which is con­strained by the pecu­liar­i­ties of the euro­zone,” says JPMor­gan strate­gist Stephanie Flan­ders.

    But for most Ger­mans, QE is not the answer to the eco­nom­ic weak­ness of the eurozone’s more vul­ner­a­ble mem­bers, with some believ­ing it is a threat to the com­mon currency’s finan­cial sta­bil­i­ty. With long mem­o­ries of the dan­gers of infla­tion dat­ing back to the 1920s, Ger­mans are scared that unleash­ing more liq­uid­i­ty into the already sat­u­rat­ed euro­zone econ­o­my will even­tu­al­ly trig­ger a hor­ren­dous price surge.

    More­over, many Ger­mans say mon­e­tary eas­ing will post­pone painful spend­ing and bor­row­ing cuts by giv­ing weak states more finan­cial wig­gle room.

    At Thursday’s vote, the ECB pres­i­dent will not be able to count on the sup­port of the two top Ger­mans at the bank — Jens Wei­d­mann, Bun­des­bank pres­i­dent, and Sabine Laut­en­schläger, ECB exec­u­tive board mem­ber. Mr Draghi will almost cer­tain­ly win a major­i­ty on the board. But even if he secures unan­i­mous sup­port for QE from cen­tral bank gov­er­nors in the rest of the 19-mem­ber euro­zone, it will not help him in Berlin — the dis­sent will encour­age oth­er Ger­man crit­ics and exac­er­bate the chal­lenge of win­ning over opin­ion in the cur­ren­cy area’s most pow­er­ful nation. From its Frank­furt head­quar­ters, just miles from the ECB’s new build­ing, the Bun­des­bank has led the charge against QE.

    Mr Wei­d­mann, a for­mer advis­er to Ms Merkel, has said open­ly the pol­i­cy would do lit­tle to lift the region’s econ­o­my and could delay reform. His views are shared by Mr Schäu­ble, who has made clear his irri­ta­tion with mon­e­tary eas­ing, say­ing in a Bild news­pa­per inter­view that “cheap mon­ey” should not sap the will­ing­ness to exe­cute reforms.

    Ger­man oppo­si­tion

    What Mr Wei­d­mann says mat­ters: the Ger­man cen­tral bank holds the sta­tus of nation­al trea­sure for its staunch defence of the Deutschemark in the 1970s, which helped pro­duce decades of low infla­tion and strong growth before the intro­duc­tion of the sin­gle cur­ren­cy. Clemens Fuest, pres­i­dent of the ZEW think-tank, says: “The Bun­des­bank for Ger­mans is a sym­bol of solid­i­ty.”

    ...

    Recent dis­cus­sions have focused on the tim­ing, scale, and nature of the pro­gramme. Berlin would pre­fer pur­chas­es of short-term sov­er­eign bonds, not long-term debt which it views as more like fis­cal sup­port. It also wants the ECB to buy bonds from all coun­tries, and not just weak south­ern states, as this would also smack of bud­getary assis­tance.

    More con­tro­ver­sial­ly Mr Wei­d­mann has sig­nalled that he would be less crit­i­cal of a QE pro­gramme which placed the bur­den of loss­es on nation­al cen­tral banks. Any­thing else would “lead to a redis­tri­b­u­tion of risks between tax­pay­ers in the mem­ber coun­tries”, he said in Decem­ber. Mr Draghi looks set to bow to the Bun­des­bank president’s request, as well as Berlin’s demand that debt pur­chas­es are focused on bonds with short­er matu­ri­ties.

    But shoul­der­ing nation­al cen­tral banks with respon­si­bil­i­ty for any cred­it loss­es from their nation­al bonds would dam­age the appear­ance of cross-EU sol­i­dar­i­ty. Ear­li­er cri­sis-fight­ing schemes have seen a com­mit­ment to share loss­es, and to break with that prin­ci­ple now would sug­gest the ECB is not as com­mit­ted to mon­e­tary union as it once was. How­ev­er, mar­ket econ­o­mists would pre­fer a com­pro­mise on bur­den shar­ing, rather than Mr Draghi being forced to back down on the size of a pack­age.

    Fed­er­al Reserve-style open-end­ed bond pur­chas­es, with a com­mit­ment from the ECB to keep buy­ing until infla­tion is on course to hit the tar­get of 2 per cent, is viewed by many investors as the most cred­i­ble form of QE. But a small pack­age of below €500bn would dis­ap­point mar­kets, even if the risk of any pos­si­ble loss­es were to be shared.

    Der Spiegel, the Ger­man mag­a­zine, report­ed that Greek bonds would be exclud­ed from QE. A like­li­er option is for Greece to be includ­ed, as long as Athens remains in a Euro­pean Com­mis­sion reform pro­gramme.

    ...

    His­to­ry les­son

    Where defla­tion is not part of the nar­ra­tive

    Ger­mans have been treat­ed to an unusu­al charm offen­sive by the Euro­pean Cen­tral Bank in recent weeks, with Mario Draghi grant­i­ng inter­views to the local press. But it is unlike­ly to dent the hos­til­i­ty Ger­mans feel towards the ECB. The coun­try has long used its eco­nom­ic his­to­ry to push the virtues of fru­gal­i­ty. That nar­ra­tive is so strong that the quan­ti­ta­tive eas­ing pro­gramme sought by the ECB chief will remain unpop­u­lar.

    “I hes­i­tate to go back to the 1920s but, after the first and sec­ond world wars, Ger­many found out that when cen­tral banks financed state spend­ing, it destroyed the cur­ren­cy,” says Jörg Krämer, chief econ­o­mist at Com­merzbank. “The expe­ri­ence of hyper­in­fla­tion is some­what in the DNA here, so Ger­mans do not want to see the ECB buy­ing gov­ern­ment bonds.”

    The destruc­tion of the Reichsmark’s val­ue is an impor­tant his­tor­i­cal les­son. But miss­ing from that nar­ra­tive is the painful defla­tion that fol­lowed hyper­in­fla­tion. In 1923, at the height of the hyper­in­fla­tion, 751,000 Ger­mans were with­out work. By 1932, as defla­tion began to bite, unem­ploy­ment hit 5.6m.

    “There is a strand of his­tor­i­cal think­ing that the hyper­in­fla­tion of the 1920s pre­pared the Ger­man peo­ple for the rise of Hitler, when in fact the Weimar Repub­lic sur­vived that but not the defla­tion of the ear­ly 1930s,” says Adam Tooze, an eco­nom­ic his­to­ri­an at Yale Uni­ver­si­ty.

    While Mil­ton Fried­man and Anna Schwartz’s sem­i­nal text, A Mon­e­tary His­to­ry of the Unit­ed States, has helped ensure the US pol­i­cy mis­takes that led to defla­tion are remem­bered, there is no equiv­a­lent in Ger­many.

    Clemens Fuest, pres­i­dent of the ZEW think-tank, says: “The emer­gence from the depres­sion in Ger­many was very dif­fer­ent to that in the US or the UK. We didn’t have a nar­ra­tive of ter­ri­ble defla­tion, which exists else­where.”

    The post­war suc­cess of West Ger­many in the 1950s and 1960s, under the “ordolib­er­al­ist” eco­nom­ic doc­trine, strength­ened the rep­u­ta­tion of the view that politi­cians and cen­tral bankers are there to main­tain order, not boost demand.

    That arti­cle does a great job of high­light­ing the fact that the defla­tion­ary nature of Ger­many’s eco­nom­ic night­mare of the ear­ly 30’s has been lost to the his­to­ry books and sum­ma­riz­ing the over­all sit­u­a­tion. But this part real­ly stands out as encap­su­lat­ing one of the crit­i­cal dynam­ics at work in the larg­er euro­zone cri­sis of con­fi­dence:

    ...
    More con­tro­ver­sial­ly Mr Wei­d­mann has sig­nalled that he would be less crit­i­cal of a QE pro­gramme which placed the bur­den of loss­es on nation­al cen­tral banks. Any­thing else would “lead to a redis­tri­b­u­tion of risks between tax­pay­ers in the mem­ber coun­tries”, he said in Decem­ber. Mr Draghi looks set to bow to the Bun­des­bank president’s request, as well as Berlin’s demand that debt pur­chas­es are focused on bonds with short­er matu­ri­ties.

    But shoul­der­ing nation­al cen­tral banks with respon­si­bil­i­ty for any cred­it loss­es from their nation­al bonds would dam­age the appear­ance of cross-EU sol­i­dar­i­ty. Ear­li­er cri­sis-fight­ing schemes have seen a com­mit­ment to share loss­es, and to break with that prin­ci­ple now would sug­gest the ECB is not as com­mit­ted to mon­e­tary union as it once was. How­ev­er, mar­ket econ­o­mists would pre­fer a com­pro­mise on bur­den shar­ing, rather than Mr Draghi being forced to back down on the size of a pack­age.
    ...

    That’s one of the core issues at play in ways that could impact the entire plan­et: If the euro­zone becomes of eco­nom­ic zone where fis­cal bur­den-shar­ing becomes a con­sti­tu­tion­al crime, Europe becomes com­mit­ted to eco­nom­ic non­sense. Fis­cal bur­den-shar­ing is one of the most impor­tant mech­a­nisms that could actu­al­ly allow for the euro­zone to func­tion as a viable enti­ty in the long-run with­out sys­tem­at­i­cal­ly screw­ing over some mem­bers while favor­ing oth­ers.

    Cob­bling togeth­er a grow­ing num­ber of high­ly diver­gent economies into into mon­e­tary union is kind of an exer­cise in inten­tion­al BS. Euro­zone economies inevitably get dis­tort­ed one way or anoth­er just be virtue of being a giant syn­thet­ic cur­ren­cy. Weak­er nations get a stronger cur­ren­cy (hurt­ing exports), in exchange for larg­er mark­ers, cheap­er financ­ing, larg­er cred­it lines, and a sta­bler cur­ren­cy. The larg­er, export-ori­ent­ed dom­i­nant economies pri­mar­i­ly get a cheap­er cur­ren­cy, poten­tial­ly much cheap­er than it oth­er would be. And larg­er mar­kets too.

    But the euro­zone is an over­all fab­u­lous deal for the larg­er export-ori­ent­ed nations like Ger­many that would oth­er­wise have much stronger nation­al cur­ren­cies and kind of a crap­py deal for the small­er, weak­er nations, as we’ve now learned. And fis­cal trans­fers are real­ly one of the most effec­tive ways to bal­ance this out. Bur­den-shar­ing, and the spir­it to back it up, are crit­i­cal for the Euro­pean Project to suc­ceed. And yet bur­den-shar­ing is pre­cise­ly what must be avoid­ed at all costs accord­ing to the Bun­des­bank’s ordolib­er­al order.

    The US could­n’t real­is­ti­cal­ly func­tion with­out rou­tine fis­cal trans­fers that no one gripes about. The Red States would be far too poor, com­pared to the Blue states, with­out a long-term com­mit­ment to Blue-to-red fis­cal trans­fers for social cohe­sion not to be severe­ly impact­ed from an ever grow­ing wealth gap. And yet that very kind of strain is get­ting built into the the euro­zone by rul­ing out fis­cal trans­fer or man­dat­ing aus­ter­i­ty as the price for an emer­gency injec­tion. It’s total­ly insane.

    And the man­dat­ing by Berlin that each mem­ber’s cen­tral bank (pos­si­bly minus Greece) han­dles any QE pur­chas­es (with prob­a­ble caps on pur­chas­es) for the QE pro­gram basi­cal­ly intro­duces a for­mal break­down of the euro­zone’s uni­tary mon­e­tary pol­i­cy, where there’s one pol­i­cy for all via the ECB. All this in order to avoid bur­den-shar­ing because fis­cal trans­fers can­not be allowed. That oppo­si­tion to fis­cal trans­fer is a core prin­ci­ple that’s being fought for tooth and nail by the Bun­des­bank even though it’s bound to under­mine the whole mon­e­tary union project in the long-run.

    And garbage his­tor­i­cal analy­sis is pro­vid­ing crit­i­cal garbage jus­ti­fi­ca­tions pushed by shady politi­cians in order to gar­ner the required pub­lic sup­port for the mid­dle-class-bust­ing poli­cies they desire.

    Wow that is all awful. GOP-league awful. And that’s why we are all screwed. Like, his­tor­i­cal­ly screwed. But at least future gen­er­a­tions will learn from our mis­takes so it’s not entire point­less.

    Oh wait...

    Posted by Pterrafractyl | January 18, 2015, 11:31 pm
  7. The ECB made its big QE announce­ment today. It’s a lit­tle big­ger than expect­ed, but just as crap­py:

    USA Today
    ECB announces mas­sive stim­u­lus pro­gram
    Paul David­son, Kim Hjelm­gaard and Don­na Lein­wand Leg­er, USA TODAY 11:14 a.m. EST Jan­u­ary 22, 2015

    In its most aggres­sive move yet to rouse the list­less euro­zone econ­o­my, the Euro­pean Cen­tral Bank agreed Thurs­day to buy 60 bil­lion euros a month in bonds to hold down inter­est rates and pump cash into the bank­ing sys­tem.

    The pur­chas­es of gov­ern­ment and addi­tion­al pri­vate-sec­tor bonds will begin in March and con­tin­ue through at least Sep­tem­ber 2016, total­ing about 1.1 tril­lion euros. That’s more than the 500 bil­lion euros ini­tial­ly expect­ed.

    The pro­gram, called, quan­ti­ta­tive eas­ing, or QE, is aimed at hold­ing down already low inter­est rates and fill­ing bank cof­fers to spark more lend­ing, juic­ing the econ­o­my. They’re also intend­ed to fur­ther push down the euro, boost­ing Euro­pean exports, and chan­nel more invest­ments into stocks to dri­ve up mar­kets.

    The ECB final­ly pulled the trig­ger on QE after con­sumer prices in the region fell 0.2% last month. Per­sis­tent defla­tion can prompt con­sumers to put off pur­chas­es, trig­ger­ing fur­ther price declines and reces­sion.

    “Infla­tion dynam­ics have con­tin­ued to be weak­er than expect­ed,” ECB pres­i­dent Mario Draghi said at a news con­fer­ence.

    The euro­zone econ­o­my like­ly grew less than 1% last year, econ­o­mists esti­mate, after emerg­ing from reces­sion in 2013.

    ...

    Eco­nom­i­cal­ly strong nations such as Ger­many have opposed the pro­gram, fear­ing that if strug­gling coun­tries such as Spain and Italy default­ed on their bond pay­ments, Ger­man tax­pay­ers would get stuck with the bill.

    For 20% of the bond pur­chas­es, the ECB agreed to share loss­es among euro­zone nations. That strat­e­gy is backed by econ­o­mists who fear inter­est rates in debt-racked coun­tries will spike if they’re forced to absorb all the loss­es on their bonds.

    But indi­vid­ual nations will have to bear loss­es for the remain­der of the pur­chas­es in an appar­ent con­ces­sion to Ger­many.

    Oth­er recent ECB mea­sures to stim­u­late growth large­ly have been inef­fec­tive. They include offer­ing cheap bank loans and mak­ing banks pay to park their mon­ey at the cen­tral bank to prod them to lend more.

    Ear­li­er Thurs­day ahead of the announce­ment, the ECB decid­ed to leave bench­mark inter­est rates, the cost of bor­row­ing at the cen­tral bank, at 0.05%.

    While the Amer­i­can econ­o­my saw resur­gent expan­sion in the third quar­ter — grow­ing 5% — the major Euro­pean economies of Ger­many, France, Spain, Italy and oth­ers have seen lit­tle growth since the finan­cial cri­sis first began in 2008.

    Ger­many is frus­trat­ed at what it sees as spend­ing profli­ga­cy as well as a lack of struc­tur­al reforms in some south­ern Euro­pean nations, such as Italy, Spain and Greece. It also har­bors entrenched his­tor­i­cal fears of infla­tion and has been reluc­tant to endorse mon­e­tary pol­i­cy that could lead to ris­ing prices.

    Ger­man Chan­cel­lor Angela Merkel, speak­ing min­utes before the ECB announce­ment, said the euro­zone has its sov­er­eign debt cri­sis some­what under con­trol, but more work needs to be done.

    Ger­many has opposed the ECB’s stim­u­lus pack­age, but Merkel said aus­ter­i­ty should not be pit­ted against stim­u­lus. “It’s very rarely a black and white solu­tion,” she said.

    Regard­less of the ECB deci­sion, euro­zone coun­tries should con­tin­ue to main­tain fis­cal poli­cies that encour­age growth beyond pub­lic mon­ey. “We need invest­ment by the state, but we all need pri­vate invest­ment,” Merkel said. “Reforms are well worth your while.”

    The deci­sion is fur­ther com­pli­cat­ed by upcom­ing Greek elec­tions this week­end. A recent report by the Ger­man mag­a­zine Der Spiegel sug­gest­ed that if Greece’s hard-left Syriza par­ty wins that elec­tion — it is cur­rent­ly lead­ing in the polls — and demands major con­ces­sions on its debt pay­ments, then Merkel would pre­fer to let Greece leave the euro­zone in a so-called “Grex­it.”

    A few hours ahead of the announce­ment, Sig­mar Gabriel, Ger­many’s fed­er­al min­is­ter for the econ­o­my, said on stage dur­ing the annu­al meet­ing of the World Eco­nom­ic Forum in Davos, Switzer­land, that Ger­many had already under­tak­en struc­tur­al reforms while France had sim­ply increased its debts.

    “Every nation has to have the courage to (under­take) such reforms and to speak clear­ly about them with­out mak­ing peo­ple afraid, ” he said.

    ...

    Well, at least it was over a tril­lion euros and the 500 bil­lion fig­ure many were pro­ject­ing. It could be worse!

    And then, of course, there were com­ments like this:

    A few hours ahead of the announce­ment, Sig­mar Gabriel, Ger­many’s fed­er­al min­is­ter for the econ­o­my, said on stage dur­ing the annu­al meet­ing of the World Eco­nom­ic Forum in Davos, Switzer­land, that Ger­many had already under­tak­en struc­tur­al reforms while France had sim­ply increased its debts.

    Ah yes, the ol’ “We did our aus­ter­i­ty (in the midst of a glob­al boom while we were break­ing a our bud­get pledges) so why should­n’t every­one else have to do it too (dur­ing a major glob­al down­turn and with­out the bud­getary grace)!”-argu­ment. It’s one of those memes that nev­er gets old. And now that some sort of QE is final­ly about to get under­way, it’s an argu­ment we’re prob­a­bly going to be hear a lot more. After all, with the ECB pledg­ing to incur up to 20% of any loss­es, that means there’s still going to be some risk shar­ing and there­fore more whin­ing from Berlin about risk shar­ing. Hope­ful­ly it will only be 20% of the whin­ing we would oth­er­wise hear.

    Unfor­tu­nate­ly, since the lev­el of risk shar­ing is so low, we’ll prob­a­bly also get to even­tu­al­ly wor­ry about things like this:

    For 20% of the bond pur­chas­es, the ECB agreed to share loss­es among euro­zone nations. That strat­e­gy is backed by econ­o­mists who fear inter­est rates in debt-racked coun­tries will spike if they’re forced to absorb all the loss­es on their bonds.

    Yep. Part of the whole point of risk shar­ing is that it does­n’t end up mak­ing a bad sit­u­a­tion worse by send­ing the weak­est coun­tries into a com­plete Greek-style tail-spin if the QE does­n’t work out as planned or some sort of exter­nal shock takes place. And yet, by cap­ping the QE at just over a tril­lion euros over the course of the next year and a half instead of leav­ing it as an open end­ed endeav­or like a nor­mal major cen­tral bank should do, the like­li­hood of QE actu­al­ly chang­ing mar­ket expec­ta­tions in a pos­i­tive way has been dra­mat­i­cal­ly reduced. Already.

    So now we have a QE plan that’s some­what larg­er than expect­ed, but with a cap that lim­its its effec­tive­ness and a measly 20% risk shar­ing clause that makes is all the more like­ly that the weak­er states that need QE the most are either going to be too scared to actu­al­ly imple­ment the remain­ing 80% of the QE through their nation­al banks or screwed if they do ful­ly embrace the pol­i­cy but it isn’t big enough to over­whelm all the oth­er pol­i­cy dis­as­ters of the last 6 years. It’s pret­ty much what we should have expect­ed. A lit­tle big­ger than it might have been, but still inad­e­quate and poi­son-pilled enough to ensure that noth­ing real­ly changes. As expect­ed.

    But at least Greece gets to par­tic­i­pate in it. That was a lit­tle unex­pect­ed. Oh wait, nev­er mind. Greece’s par­tic­i­pa­tion is option­al, and like­ly to be ‘lim­it­ed’:

    The New York Times
    E.C.B. Stim­u­lus Calls for 60 Bil­lion Euros in Month­ly Bond-Buy­ing

    By DAVID JOLLY and JACK EWINGJAN. 22, 2015

    FRANKFURT — The Euro­pean Cen­tral Bank said on Thurs­day that it would begin buy­ing hun­dreds of bil­lions of euros worth of gov­ern­ment bonds in an aggres­sive — though some say belat­ed — attempt to pre­vent the euro­zone from becom­ing trapped in long-term eco­nom­ic stag­na­tion.

    The bank’s pres­i­dent, Mario Draghi, said the cen­tral bank would begin buy­ing bonds worth 60 bil­lion euros, or about $69.7 bil­lion, a month. That is more spend­ing than the €50 bil­lion a month that many ana­lysts had been expect­ing.

    The long-await­ed pro­gram, known as quan­ti­ta­tive eas­ing, is meant to spur growth in the list­less euro­zone econ­o­my and to raise infla­tion to health­i­er lev­els. In Decem­ber, infla­tion in the 19 coun­tries of the euro­zone fell below zero and raised the specter of defla­tion, a sus­tained decline in prices that can lead to high­er unem­ploy­ment and that is noto­ri­ous­ly dif­fi­cult to reverse.

    As a fur­ther stim­u­lus step, the Euro­pean Cen­tral Bank also said on Thurs­day that it was cut­ting the inter­est rate it charges on loans to com­mer­cial banks, as long as the banks com­mit to lend­ing that mon­ey to com­pa­nies or indi­vid­u­als. The new rate would be 0.05 per­cent, down from 0.15 per­cent.

    ...

    The Euro­pean Cen­tral Bank will coor­di­nate the buy­ing, Mr. Draghi said, but will del­e­gate some of it to the cen­tral banks of the var­i­ous euro zone coun­tries. In a fur­ther com­pro­mise, some of the risk from bond buy­ing will be tak­en by the Euro­pean Cen­tral Bank and some by nation­al cen­tral banks.

    Antic­i­pat­ing crit­ics who might say that the Euro­pean Cen­tral Bank is not in full con­trol of the eurozone’s mon­e­tary pol­i­cy if it shares the risk of its pro­gram, Mr. Draghi said, “The sin­gle­ness of mon­e­tary pol­i­cy remains in place.”

    He said that the cen­tral bank would begin buy­ing gov­ern­ment bonds based on each country’s share of the cen­tral bank’s cap­i­tal, which is com­men­su­rate with their pop­u­la­tion and gross domes­tic prod­ucts.

    He said that the cen­tral bank would not buy more than 33 per­cent of any country’s out­stand­ing bonds, nor more than 25 per­cent of any bond issue. The cen­tral bank will buy the bonds on the open mar­ket, he said, to allow the mar­ket to set the price. Those con­di­tions appear intend­ed to address legal chal­lenges to bond buy­ing by the cen­tral bank.

    Asked about Greece — a spe­cial case because of the polit­i­cal uncer­tain­ties there and because the coun­try con­tin­ues to labor under an inter­na­tion­al bailout pro­gram over­seen in part by the Euro­pean Cen­tral Bank — Mr. Draghi said that the bank could buy Greek bonds. But in prac­tice, he not­ed, such pur­chas­es might be lim­it­ed.

    Greece, he said, would have to con­tin­ue adher­ing to the terms of its bailout pro­gram, which is also being admin­is­tered by the Inter­na­tion­al Mon­e­tary Fund and the Euro­pean Com­mis­sion. That adher­ence is cur­rent­ly uncer­tain, as Greece awaits nation­al elec­tions this week­end that could result in a new government’s seek­ing to revise the terms of the bailout.

    In addi­tion, the Euro­pean Cen­tral Bank already owns a large pro­por­tion of Greek bonds and would not hold more than 33 per­cent of the total. But in July, Mr. Draghi said, redemp­tions of Greek bonds could allow the cen­tral bank to buy more.
    ...

    Aha. So Greece gets to par­tic­i­pate, but due to the 33% cap on the amount of mem­ber state debt the ECB can own and the fact that the ECB already holds a large amount of Greece’s debt from the pre­vi­ous “bailouts”, it appears that Greece’s par­tic­i­pa­tion in the QE ‘might be lim­it­ed’.

    Yep, pret­ty much as expect­ed.

    Posted by Pterrafractyl | January 22, 2015, 1:54 pm
  8. With Greece head­ed to the polls and Syriza like­ly to lead the new gov­ern­ment, the EU could be in for anoth­er cri­sis of one form or anoth­er. Not that a Greek snap elec­tion was nec­es­sary for a cri­sis. The euro­zone and its many unre­solved issues is all you need for a cri­sis:

    Irish Times
    Ger­mans unit­ed in the con­vic­tion ECB has gone rogue
    The ECB’s €1.14 tril­lion move has been a slap in the face for the Ger­man estab­lish­ment

    Derek Scal­ly

    First pub­lished: Sat, Jan 24, 2015, 01:01

    While Sau­di Ara­bia lament­ed the pass­ing of King Abdul­lah yes­ter­day, Ger­many was busy bury­ing its last illu­sions about the Euro­pean Cen­tral Bank.

    After a long and valiant strug­gle, Ger­man hopes were final­ly extin­guished that the ECB would change its mon­e­tary mind and come back to the Bun­des­bank way of think­ing.

    The major­i­ty deci­sion by the ECB gov­ern­ing coun­cil to buy €1.14 tril­lion in sov­er­eign bonds has been a a slap in the face for the Ger­man estab­lish­ment.

    Lead by the Bun­des­bank, Germany’s polit­i­cal, media and busi­ness lead­ers had insist­ed they saw no loom­ing defla­tion­ary threat to jus­ti­fy bond-buy­ing. When the ECB pro­ceed­ed any­way, they dis­missed it as “Draghi dop­ing” of weak euro economies.

    Real­i­sa­tion
    As the quan­ti­ta­tive eas­ing (QE) dust begins to set­tle, anoth­er effect of the ECB’s announce­ment is clear: the real­i­sa­tion that the ECB has final­ly shrugged off the Bun­des­bank as its mon­e­tary pol­i­cy pro­to­type and, in Ger­man eyes, irrev­o­ca­bly and unfor­giv­ably gone rogue.

    ...

    Big­ger chal­lenge
    Behind the scenes at the Bun­des­bank offi­cials say the ECB has, for short-term QE ben­e­fits, effec­tive­ly pawned its polit­i­cal inde­pen­dence and made itself even more behold­en to gov­ern­ments. They are cir­cum­spect about los­ing Thursday’s bat­tle, and warn that an even big­ger chal­lenge lies in pick­ing the right point to exit the QE pro­gramme.

    For Ger­man mon­e­tary hawks the QE pro­gramme is the third and final strike against the ECB, and Ger­man notions of inde­pen­dent cen­tral bank­ing. The first was 2010’s secu­ri­ty mar­kets pro­gramme (SMP), the sec­ond was 2012’s out­right mon­e­tary trans­ac­tions (OMT), still before Ger­man and Euro­pean courts.

    Ger­man oppo­si­tion to these mea­sures was vis­cer­al but the QE announce­ment saw Ger­man attacks on the ECB turn fer­al. The Frank­furter All­ge­meine dai­ly, house jour­nal of Germany’s con­ser­v­a­tive and finance-mar­ket elite, effec­tive­ly ran a front-page obit­u­ary for the euro yes­ter­day, say­ing the ECB’s QE deci­sion had “buried” mon­e­tary union.

    Wow. OK, so the Ger­man polit­i­cal and busi­ness elites are in offi­cial freak­out mode over the Bun­des­bank’s appar­ent loss of influ­ence over the ECB poli­cies and now warn that an even big­ger chal­lenge lies in pick­ing the right point to exit the QE pro­gramme. Yeah, that exit from QE is going to be a pret­ty big chal­lenge, thanks to the changes in the fine print that Berlin demand­ed to ensure the pro­gram would be far more Bun­des­bank-like than it ever should have been:

    The Wall Street Jour­nal
    ECB’s Risk-Shar­ing Rid­dle for Mar­kets
    Much of the Risk Won’t be Shared Across the Euro­zone

    By Richard Bar­ley
    Jan. 23, 2015 9:42 a.m. ET

    Red her­ring or fatal flaw?

    The Euro­pean Cen­tral Bank’s new €1‑tril­lion-plus bond-pur­chase pro­gram comes at a cost. The ques­tion of who may have to foot the bill if things go bad­ly is any­thing but clear-cut: much of the risk won’t be shared across the euro­zone but will remain with nation­al cen­tral banks. Right now, that issue is large­ly irrel­e­vant. One day, it might not be.

    The ECB’s risk-shar­ing com­pro­mise looks like this. Pur­chas­es of bonds issued by Euro­pean insti­tu­tions, to amount to 12% of the new buy­ing announced Thurs­day, will be on a ful­ly risk-shared basis. The ECB will hold anoth­er 8% of total pur­chas­es on a pooled basis, too. But the risk of the remain­ing 80% of the pur­chas­es will remain with the eurozone’s nation­al cen­tral banks.

    The deal appears to have been nec­es­sary to get a pro­gram that is larg­er, more open-end­ed and able to buy debt at longer matu­ri­ties than the mar­ket had expect­ed. For now, that is what mat­ters for investors.

    ECB Pres­i­dent Mario Draghi expressed sur­prise Thurs­day that the risk-shar­ing issue had gar­nered such atten­tion. That under­plays the pol­i­tics of the sit­u­a­tion, but to some extent is true.

    In the near term, the pack­age should have reduced the chances of large loss­es on euro­zone gov­ern­ment bonds due to cred­it risk. Fur­ther mon­e­tary accom­mo­da­tion, accom­pa­nied by a pick­up in the euro­zone econ­o­my that already appears to be begin­ning, should sup­port growth expec­ta­tions. Quan­ti­ta­tive eas­ing is already clear­ly boost­ing risk appetite, with stocks and cred­it mar­kets ral­ly­ing.

    And when nation­al cen­tral banks start buy­ing gov­ern­ment bonds from investors in March, they will be swap­ping instru­ments with a claim on a nation’s tax­pay­ers for euros, which ulti­mate­ly rep­re­sent a claim on the euro­zone. The idea that risk isn’t being shared looks like smoke and mir­rors.

    But longer-term, this fudge could mat­ter. If a nation­al cen­tral bank suf­fered loss­es and need­ed to be recap­i­tal­ized by its gov­ern­ment, and risk isn’t shared across the euro­zone, pri­vate bond­hold­ers could take a big­ger hit to bail the cen­tral bank out, UBS notes. They would implic­it­ly bear the cost of recap­i­tal­iza­tion.

    This was a key prob­lem with the ECB’s pre­vi­ous for­ay into gov­ern­ment bond mar­kets: investors feared they would become sub­or­di­nat­ed cred­i­tors. ECB pur­chas­es caused investors to revise up their assump­tions of loss­es giv­en default, mak­ing them reluc­tant to hold bonds. But since default risk now appears low, this is less of a prob­lem.

    The ques­tion that mat­ters then, is what could cause a new bond-mar­ket cri­sis? The answer is already here from Greece: Pol­i­tics. And the details of the ECB’s QE pol­i­cy are a reminder that the euro is a unique­ly polit­i­cal con­struct, lack­ing the fea­tures that oth­er mon­e­tary unions take for grant­ed, such as fis­cal transfers—or risk-shar­ing by anoth­er name.

    ...

    Note the key point at the end:

    The ques­tion that mat­ters then, is what could cause a new bond-mar­ket cri­sis? The answer is already here from Greece: Pol­i­tics. And the details of the ECB’s QE pol­i­cy are a reminder that the euro is a unique­ly polit­i­cal con­struct, lack­ing the fea­tures that oth­er mon­e­tary unions take for grant­ed, such as fis­cal transfers—or risk-shar­ing by anoth­er name.

    Risk shar­ing, which trans­lates into fis­cal trans­fers between states when its need­ed, is some­thing that oth­er mon­e­tary unions (like the US being a union of states) just takes for grant­ed. Because it just works bet­ter for every­one. But for the euro­zone, which was built on a Bun­des­bank mod­el where fis­cal trans­fer­s/risk-shar­ing are viewed as high­ly prob­lem­at­ic, we find that the only was to imple­ment QE pol­i­cy is form 80% of the new QE debt is to be held be nation­al cen­tral banks with­out risk shar­ing. Remem­ber the Cyprus melt­down? This is why you can’t for­get about:

    But longer-term, this fudge could mat­ter. If a nation­al cen­tral bank suf­fered loss­es and need­ed to be recap­i­tal­ized by its gov­ern­ment, and risk isn’t shared across the euro­zone, pri­vate bond­hold­ers could take a big­ger hit to bail the cen­tral bank out, UBS notes. They would implic­it­ly bear the cost of recap­i­tal­iza­tion.

    Yep. And that risk to pri­vate bond­hold­ers is a direct con­se­quence of 80%-no-risk-sharing demands of the Bun­des­bank. If some new shock hits and derails the euro­zone economies (even more), we might end up see­ing, say, Spain, sud­den­ly on the hook for far more than it can afford to pay. And it sure does­n’t look like the rest of the euro­zone mem­ber states are going to be help­ing out in that sce­nario. At least not for more than 20% of the tab. So thanks to the Bun­des­bank’s med­dling, the euro­zone has a whole new dis­as­ter sce­nario to start wor­ry­ing about.

    Of course, as we saw above, none of this is pre­vent­ing folks like Jens Wei­d­mann and Ger­man com­men­ta­tors from end­less whin­ing about how much influ­ence the Bun­des­bank has lost. But keep in mind that there might be a lot more than just whin­ing com­ing from Berlin. Big changes to who runs the euro­zone bailouts could be in store too:

    Finan­cial Times
    Troi­ka in ques­tion after EU court rul­ing on bond-buy­ing plan

    Peter Spiegel in Brus­sels and Claire Jones in Frank­furt
    Last updat­ed: Jan­u­ary 14, 2015 1:37 pm

    The much-hat­ed “troi­ka” that has over­seen a suc­ces­sion of euro­zone bailouts may be dis­man­tled — not by vot­ers enraged at its demands for aus­ter­i­ty but by a top offi­cial at the Euro­pean Court of Jus­tice.

    In an inter­im rul­ing on the legal­i­ty of the Euro­pean Cen­tral Bank’s 2012 bond-buy­ing plan, the EU’s top court on Wednes­day gave a green light for full-blown gov­ern­ment bond pur­chas­es.

    But in an opin­ion that could have far-reach­ing con­se­quences, Pedro Cruz Vil­lalón, an advo­cate-gen­er­al of the ECJ, said that if the ECB ever acti­vat­ed Out­right Mon­e­tary Trans­ac­tions — a bond-buy­ing scheme cre­at­ed to help euro­zone bailout coun­tries — “it must refrain from any direct involve­ment in the finan­cial assis­tance pro­gramme that applies to the state con­cerned”.

    Olli Rehn, the Finn who ran Euro­pean Com­mis­sion pol­i­cy in the five euro­zone bailouts at the height of the cri­sis, said the opin­ion appeared to sig­nal the end of the troi­ka — the ECB, the com­mis­sion and the Inter­na­tion­al Mon­e­tary Fund — which has man­aged all res­cues since the cri­sis began in 2010.

    The troika’s role in demand­ing eco­nom­ic reform and aus­ter­i­ty in return for loans in Greece, Ire­land, Por­tu­gal and Cyprus has made it a high­ly con­tro­ver­sial part­ner­ship. Its instruc­tions have helped fuel the rise of Greece’s rad­i­cal left Syriza par­ty, which is poised to win snap par­lia­men­tary elec­tions on Jan­u­ary 25.

    “The ECJ advocate-general’s report looks quite cat­e­gor­i­cal and would seem to end the ECB’s par­tic­i­pa­tion in the EU-IMF troi­ka in the case of an OMT acti­va­tion,” Mr Rehn told the Finan­cial Times. “This would prob­a­bly mean the begin­ning of the end of the troi­ka in its cur­rent form, which would in turn push the euro­zone to yet anoth­er impor­tant insti­tu­tion­al reform.”

    The Euro­pean Com­mis­sion would not com­ment on the deci­sion. But offi­cials not­ed that Jean-Claude Junck­er, the new com­mis­sion pres­i­dent, has advo­cat­ed a change in the troi­ka process since the out­set of his tenure.

    “Of course we can­not go with the troi­ka as it is,” Mr Rehn’s suc­ces­sor, EU eco­nom­ics chief Pierre Moscovi­ci, told the FT dur­ing a vis­it to Athens last month.

    Senior euro­zone offi­cials cau­tioned that the com­mis­sion had long sought to take con­trol over euro­zone res­cues from the oth­er mem­bers of the troi­ka but had been thwart­ed by a Ger­man-led group of coun­tries that did not ful­ly trust Brus­sels to dri­ve a hard bar­gain with bailout gov­ern­ments.

    In addi­tion, many of the res­cue struc­tures cre­at­ed dur­ing the cri­sis, includ­ing the eurozone’s €500bn res­cue fund, fore­see a direct ECB role. The court’s rul­ing could force lead­ers to rework them.

    The ECB has long been uncom­fort­able with its role in the troi­ka. Peter Praet, a mem­ber of the ECB’s exec­u­tive board, said in Decem­ber the cen­tral bank had been “led by neces­si­ty” to join the group, and that this had put a lot of pres­sure on the insti­tu­tion.

    ...

    Even out­side the troi­ka, the ECB would still pos­sess­es the ulti­mate weapon to force recal­ci­trant gov­ern­ments to swal­low aus­ter­i­ty and reform: the abil­i­ty to cut off liq­uid­i­ty to a country’s bank­ing sys­tem.

    In 2013, the ECB told the Cypri­ot gov­ern­ment that it would stop “emer­gency liq­uid­i­ty assis­tance”, a move that would trig­ger the col­lapse of the bank­ing sys­tem or even­tu­al euro­zone exit, if it did not accept the terms of a bailout.

    The cen­tral bank is par­tic­u­lar­ly resent­ed in Ire­land after it forced Dublin to hon­our senior debt in its col­lapsed banks in return for its inter­na­tion­al bailout.

    At times dur­ing the euro­zone debt cri­sis, the ECB came close to over­step­ping its tech­no­crat­ic man­date. In 2011, its then pres­i­dent Jean-Claude Trichet sent an uncom­pro­mis­ing let­ter dic­tat­ing a detailed eco­nom­ic pol­i­cy agen­da to Sil­vio Berlus­coni, Italy’s waver­ing prime min­is­ter, and his Span­ish coun­ter­part José Luis Rodríguez Zap­a­tero.

    Mr Trichet’s let­ter implied that the ECB would not come to the res­cue of Spain and Italy by pur­chas­ing their sov­er­eign debt unless they imple­ment­ed his rec­om­mend­ed eco­nom­ic reforms.

    Keep in mind that the above arti­cle was writ­ten before the details of the ECB’s QE pro­gram were announced. Still, it’s pret­ty appar­ent that a dri­ve to over­haul the troi­ka sys­tem is build­ing amongst EU pol­i­cy-mak­ers although as the arti­cle not­ed:

    Senior euro­zone offi­cials cau­tioned that the com­mis­sion had long sought to take con­trol over euro­zone res­cues from the oth­er mem­bers of the troi­ka but had been thwart­ed by a Ger­man-led group of coun­tries that did not ful­ly trust Brus­sels to dri­ve a hard bar­gain with bailout gov­ern­ments.

    So now that the QE pro­gram has been announce and the pro-aus­ter­i­ty Jean-Claude Junck­er is lead­ing the Euro­pean Com­mis­sion, will Berlin’s fears over the Com­mis­sion lead­ing future bailout nego­ti­a­tions sud­den­ly evap­o­rate? Maybe not, since Ger­many’s finance min­is­ter announced his belief that the troi­ka was the “right instru­ment” for any state seek­ing aid just a few days after the above arti­cle:

    Ger­many’s Schaeu­ble sees con­tin­ued role for troi­ka in EU bailouts

    NEW DELHI Tue Jan 20, 2015 5:09am EST

    Jan 20 (Reuters) — Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble sees a con­tin­ued role for “troi­ka” inspec­tors from the Euro­pean Com­mis­sion, ECB and IMF in future euro zone bailouts, say­ing on a vis­it to India on Tues­day it was the “right instru­ment” for any state seek­ing aid.

    Euro­pean Com­mis­sion chief Jean-Claude Junck­er has said this for­mu­la of inspec­tors from the Com­mis­sion, the Euro­pean Cen­tral Bank and the Inter­na­tion­al Mon­e­tary Fund, which has over­seen the bailouts of coun­tries like Greece, may have to change after rec­om­men­da­tions by a top EU court advis­er.

    The advo­cate gen­er­al’s view on ECB plans to buy gov­ern­ment bonds to bol­ster the euro zone econ­o­my, put to the Euro­pean Court of Jus­tice, includ­ed the opin­ion that the ECB should no longer be direct­ly involved in mon­i­tor­ing such assis­tance.

    So we might be in store for a tus­sel over the troi­ka, with the EU Com­mis­sion on one side and Berlin on the oth­er. But keep in mind that Merkel’s gov­ern­ment and Junck­er’s Euro­pean Com­mis­sion are basi­cal­ly on the same side, ide­o­log­i­cal­ly. So is there real­ly going to be a fight, or is it just going to be the­atrics?

    keep in mind, as the abve arti­cle points out, remov­ing the ECB from future bailout deci­sions might require rework­ing anoth­er major com­po­nent of the EU’s cri­sis-man­age­ment tool:

    In addi­tion, many of the res­cue struc­tures cre­at­ed dur­ing the cri­sis, includ­ing the eurozone’s €500bn res­cue fund, fore­see a direct ECB role. The court’s rul­ing could force lead­ers to rework them.

    That’s right. If the ECB real­ly is removed from the troi­ka, as Junck­er and the Euro­pean Com­mis­sion are advo­cat­ing, the 500 bil­lion euro ESM is prob­a­bly going to be up for rene­go­ti­a­tion. Let’s see how that goes.

    Still, as the arti­cle also points out, the ECB is still going to have a major role in any future bailouts even if its not part of troi­ka. How? By sim­ply threat­en­ing to cut off its cred­it line to cri­sis-hit coun­tries if they don’t imple­ment the aus­ter­i­ty demands:

    Even out­side the troi­ka, the ECB would still pos­sess­es the ulti­mate weapon to force recal­ci­trant gov­ern­ments to swal­low aus­ter­i­ty and reform: the abil­i­ty to cut off liq­uid­i­ty to a country’s bank­ing sys­tem.

    In 2013, the ECB told the Cypri­ot gov­ern­ment that it would stop “emer­gency liq­uid­i­ty assis­tance”, a move that would trig­ger the col­lapse of the bank­ing sys­tem or even­tu­al euro­zone exit, if it did not accept the terms of a bailout.

    The cen­tral bank is par­tic­u­lar­ly resent­ed in Ire­land after it forced Dublin to hon­our senior debt in its col­lapsed banks in return for its inter­na­tion­al bailout.

    So if we do hap­pen to see a new round of EU-wide cri­sis-res­o­lu­tion reforms, we could eas­i­ly see a rework­ing (like gut­ting) of the 500 bil­lion euro bailout fund and maybe even the removal of the ECB from future bailout man­age­ment roles. But even if the ECB is removed from that role, it will still have the pow­er to threat­en finan­cial implo­sion. Or we might see a con­tin­u­a­tion of the exist­ing night­mare sys­tem.

    Damned if you do, damned if you don’t: that the new spir­it of the EU. Why on earth that was spir­it cho­sen is unclear. But it is what is it.

    Posted by Pterrafractyl | January 24, 2015, 7:46 pm
  9. One of the most fre­quent­ly heard crit­i­cism of the ECB’s QE plans (which deserves plen­ty of crit­i­cism for being too timid) is that QE isn’t real­ly tar­get­ing the real prob­lems plagu­ing Europe, at which point there’s some vague dec­la­ra­tion about how “struc­tur­al reforms” are need­ed that inevitable involve some sort of Euro­pean Rea­gan Rev­o­lu­tion. And it’s cer­tain­ly the case that QE is a sub­op­ti­mal tool when the oth­er tra­di­tion­al tools required to ful­ly uti­lize the ultra-low rates, like fis­cal stim­u­lus pro­grams, are ide­o­log­i­cal­ly tak­en off the table, although it’s also prob­a­bly a lot bet­ter than doing noth­ing and just stick­ing with Europe’s New Nor­mal.

    Still, the over­all plan could be a lot bet­ter and that includes struc­tur­al reforms too. But as the arti­cle points out, if there’s any sort of “struc­tur­al reform” that’s required for the euro­zone to actu­al­ly func­tion in an sane man­ner, it’s the kind of struc­tur­al reform that gives more pow­er to the eco­nom­i­cal­ly weak­er mem­bers so they don’t inevitable end up being owned by their wealth­i­er part­ners and end up eco­nom­ic colonies. Strange­ly, that kind of “struc­tur­al reform” is nev­er on the table:

    The Guardian
    Euro­zone defla­tion: where does this leave quan­ti­ta­tive eas­ing?
    Despite falling prices across the cur­ren­cy bloc, coun­tries such as Italy, Por­tu­gal and Spain need a change in the bal­ance of pow­er more than they need QE, writes Phillip Inman

    Fri­day 30 Jan­u­ary 2015 08.21 EST

    Prices are falling in the euro­zone – by more than finan­cial ana­lysts expect­ed. The cul­prit is not just oil, where the price has more than halved since last sum­mer, but all the com­modi­ties that tum­ble in price when glob­al growth fal­ters.

    Sur­plus­es of cop­per, zinc and alu­mini­um have also pushed down prices. Decent har­vests and intense com­pe­ti­tion among the big super­mar­kets have kept food prices low.

    Most Ger­man com­men­ta­tors reck­on falling prices are a tem­po­rary phe­nom­e­non and should be ignored. Low oil prices will dri­ve growth and the econ­o­my will recov­er. Why ease cred­it to spur eco­nom­ic activ­i­ty – as Euro­pean Cen­tral Bank (ECB) chief Mario Draghi is about to do – when it will hap­pen soon with­out any help?

    No cuts in inter­est rates or mon­ey cre­ation by quan­ti­ta­tive eas­ing (QE) are need­ed, they argue.

    This think­ing, they say, fits with the pol­i­cy adopt­ed by the Bank of Eng­land back in 2011 when UK infla­tion spiked at 5%. Thread­nee­dle Street refused to react, even when there were econ­o­mists clam­our­ing for it to raise inter­est rates. The sit­u­a­tion sort­ed itself out.

    The ECB has ignored the Ger­man protes­ta­tions and announced €1.1tn of QE over the next year. The ques­tion is, can it make a dif­fer­ence?

    The major­i­ty view inside the ECB’s Frank­furt bunker is that falling prices are an indi­ca­tion of weak demand. If it can use QE to buy gov­ern­ment debt, prefer­ably not from banks but from oth­er lenders that will use the cash to boost con­sumer and busi­ness bor­row­ing, then the euro­zone econ­o­my might just gain some momen­tum.

    Fol­low­ing the same line of argu­ment, prices will reflate, or at least sta­bilise, as con­fi­dence ris­es among con­sumers and busi­ness­es.

    But €1.1tn of QE is not very much in the con­text of a €10tn euro­zone econ­o­my. Spread across the 19 euro mem­bers it amounts to only a frac­tion of the sup­port most econ­o­mists believe is need­ed for a notice­able boost to cred­it.

    And the euro­zone econ­o­my is still dogged by the imbal­ances that brought finan­cial cri­sis in 2010, when Greece ran out of mon­ey and Ger­many ruled out trans­fers with­in the cur­ren­cy loan, instead offer­ing only more loans.

    As HSBC’s chief econ­o­mist Stephen King said this week, it is not defla­tion that is slow­ly stran­gling the euro­zone econ­o­my so much as the con­tin­u­ing dom­i­nance of Ger­many, which likes every­one to buy its goods while it shuns imports. “Ger­mans strug­gle to under­stand that a large BoP [bal­ance of pay­ments] sur­plus means their sav­ings are used to acquire for­eign rather than domes­tic assets. And that those for­eign assets may, at times, offer the wrong mix of risk & reward. Cred­i­tors and debtors two sides of same coin,” he said in a cou­ple of tweets sum­ming up his views.

    He was refer­ring to Greece, but could as eas­i­ly have includ­ed Italy, Por­tu­gal and Spain – even though the lat­ter is grow­ing these days. These coun­tries need a change in the bal­ance of pow­er more than they need QE.

    As Richard Bat­ley, a senior econ­o­mist at Lom­bard Street Research, said on Fri­day: “We need to remem­ber that the real imbal­ances of the euro area can­not be solved by mon­e­tary pol­i­cy alone. ECB pol­i­cy is ulti­mate­ly lit­tle more than a painkiller – but at least ECB QE is now pre­scrip­tion strength.”

    Yes, as HSBC’s chief econ­o­mist notes:

    As HSBC’s chief econ­o­mist Stephen King said this week, it is not defla­tion that is slow­ly stran­gling the euro­zone econ­o­my so much as the con­tin­u­ing dom­i­nance of Ger­many, which likes every­one to buy its goods while it shuns imports. “Ger­mans strug­gle to under­stand that a large BoP [bal­ance of pay­ments] sur­plus means their sav­ings are used to acquire for­eign rather than domes­tic assets. And that those for­eign assets may, at times, offer the wrong mix of risk & reward. Cred­i­tors and debtors two sides of same coin,” he said in a cou­ple of tweets sum­ming up his views.

    He was refer­ring to Greece, but could as eas­i­ly have includ­ed Italy, Por­tu­gal and Spain – even though the lat­ter is grow­ing these days. These coun­tries need a change in the bal­ance of pow­er more than they need QE.

    That’s one of the great unspeak­able ideas in today’s pol­i­cy dis­cus­sions: there’s no way Europe can work with­out bal­anc­ing the trade imbal­ances. Oth­er­wise you’ll inevitably end up with the biggest exporters effec­tive­ly own­ing the rest. Of course, there are the con­stant calls for South­ern Europe to become more “com­pet­i­tive” by impov­er­ish­ing the pop­u­lace, which is of course an absurd propo­si­tion since the only pos­si­ble way for Greece to become as “com­pet­i­tive” as Ger­many’s exports with­out ded­i­cat­ing itself to per­ma­nent low wages is for Greece to become a high-tech export pow­er­house. Every sin­gle one of those nations has to become glob­al export pow­er­hous­es in high val­ue-added sec­tors like car exports or cut­ting edge instru­men­ta­tion. If South­ern Europe can man­age to pull that off (which is basi­cal­ly impos­si­ble), then a kind of bal­ance of trade could pos­si­bly emerge. But oth­er­wise, col­o­niza­tion is pret­ty much inevitable.

    Well, there is the oth­er obvi­ous solu­tion to bal­anc­ing things out: US-style fis­cal trans­fers from right to poor states with­out con­stant whin­ing about it. That would work. But that’s also not an option. Due to all the whin­ing. Whin­ing in the form of threat­en­ing to implode Greece’s bank­ing sys­tem unless it agrees to adhere to the exist­ing terms of the “bailout”:

    Ger­many, ECB play hard ball with Greece

    By Paul Car­rel and Jus­si Rosendahl

    BERLIN/HELSINKI Sat Jan 31, 2015 9:08am EST

    (Reuters) — Ger­man Chan­cel­lor Angela Merkel ruled out a debt write­down for Greece on Sat­ur­day, and a Euro­pean Cen­tral Bank pol­i­cy­mak­er threat­ened to cut off fund­ing to Greek banks if Athens does not agree to renew its bailout pack­age.

    The euro zone’s pay­mas­ter and the ECB are both tak­ing a tough line with Greece’s new left­ist gov­ern­ment, whose leader swept to vic­to­ry last Sun­day promis­ing that five years of aus­ter­i­ty, “humil­i­a­tion and suf­fer­ing” were over.

    Alex­is Tsipras has also promised to rene­go­ti­ate agree­ments with the Euro­pean Com­mis­sion, ECB and Inter­na­tion­al Mon­e­tary Fund “troi­ka” and write off much of Greece’s 320 bil­lion euro ($360 bil­lion) debt, which at more than 175 per­cent of gross domes­tic prod­uct is the world’s sec­ond-high­est after Japan.

    Merkel flat­ly reject­ed such a pos­si­bil­i­ty.

    “There was already a vol­un­tary waiv­er by pri­vate cred­i­tors; Greece has already been exempt from bil­lions by the banks. I don’t see a fur­ther debt hair­cut,” she told Ger­man dai­ly Die Welt in an inter­view pub­lished in its Sat­ur­day edi­tion.

    “Europe will con­tin­ue to show sol­i­dar­i­ty for Greece, as for oth­er coun­tries hit par­tic­u­lar­ly hard by the cri­sis, if these coun­tries under­take their own reforms and sav­ings efforts,” Merkel added in a thin­ly veiled threat to Athens.

    With­out the sup­port of inter­na­tion­al lenders, Greece would soon find itself back in an acute finan­cial cri­sis.

    Unable to tap the mar­kets because of sky-high bor­row­ing costs, Athens has enough cash to meet its fund­ing needs for the next cou­ple of months. But it faces around 10 bil­lion euros of debt repay­ments over the sum­mer.

    “I’M WAITING,” MERKEL TELLS ATHENS

    ...

    Europe’s bailout pro­gram for Greece, part of a 240 bil­lion euro res­cue pack­age also involv­ing the Inter­na­tion­al Mon­e­tary Fund, expires on Feb. 28. A fail­ure to renew it could leave Athens unable to meet its financ­ing needs and cut its banks off from cen­tral bank liq­uid­i­ty sup­port.

    The ECB does not accept Greek sov­er­eign bonds as col­lat­er­al in its refi­nanc­ing oper­a­tions as they are below invest­ment grade. How­ev­er, it allows cen­tral bank financ­ing to Greek banks as the coun­try is in a bailout pro­gram.

    Erk­ki Liika­nen, a mem­ber of the ECB’s pol­i­cy­mak­ing Gov­ern­ing Coun­cil, said that fund­ing, too, could dry up if Greece does not remain in a pro­gram.

    “Greece’s pro­gram exten­sion will expire in the end of Feb­ru­ary so some kind of solu­tion must be found, oth­er­wise we can’t con­tin­ue lend­ing,” Liika­nen, also the gov­er­nor of Fin­land’s cen­tral bank, told pub­lic broad­cast­er YLE.

    Merkel said the ECB’s Jan. 22 deci­sion to pump bil­lions of euros into the euro zone with a bond-buy­ing pro­gram did not mean coun­tries would end efforts to shape up their economies with struc­tur­al reforms.

    She put the onus on the new Greek gov­ern­ment to present a cred­i­ble eco­nom­ic pol­i­cy.

    “The goal of our pol­i­cy was and is that Greece remains a per­ma­nent part of the euro-com­mu­ni­ty,” Merkel said.

    “To that end, Greece and the Euro­pean part­ners make their con­tri­bu­tion. Apart from that, I am now wait­ing to see what con­cepts the Greek gov­ern­ment will present.”

    Angela Merkel asks at the end, what con­cept might the Greek gov­ern­ment present as an alter­na­tive to the exist­ing pol­i­cy regime? Gee.ow about a euro­zone area that actu­al­ly tries to achieve the ECB’s declared ~2% infla­tion tar­get (which is much low­er than what is real­is­ti­cal­ly need­ed). Would that work? Maybe actu­al­ly liv­ing up to the agree­ments that exist­ed before the Greek bailout like actu­al­ly try­ing to com­bat defla­tion and not con­stant­ly mak­ing up excus­es for why it’s sud­den­ly now ok to jump into a defla­tion­ary vor­tex. Maybe that would help out in this sit­u­a­tion. What a rad­i­cal con­cept:

    The Wall Street Jour­nal
    Euro­zone Con­sumer Prices Fell Sharply in Jan­u­ary
    Decline in Infla­tion Puts Pres­sure on ECB

    By Paul Han­non, Mar­cus Walk­er and Bri­an Black­stone
    Jan­u­ary 30, 2015

    Con­sumer prices in the euro­zone fell more sharply and more broad­ly in Jan­u­ary, height­en­ing the risk of a slide toward defla­tion that the Euro­pean Cen­tral Bank hopes to halt and then reverse through its new bond-buy­ing pro­gram.

    The Euro­pean Union’s sta­tis­tics agency said on Fri­day that con­sumer prices were 0.6% low­er than in Jan­u­ary 2014, hav­ing fall­en 0.2% on an annu­al basis in Decem­ber. The decline in prices was the largest since July 2009.

    The plunge in con­sumer prices is unlike­ly to have an imme­di­ate effect on the ECB poli­cies. Last week, the ECB said it would pur­chase €60 bil­lion ($68 bil­lion) in pub­lic and pri­vate debt secu­ri­ties each month, most­ly gov­ern­ment bonds, start­ing in March and last­ing until Sep­tem­ber 2016 in a bid to bring infla­tion clos­er to the bank’s 2% tar­get.

    Still, the longer con­sumer prices per­sist in neg­a­tive ter­ri­to­ry, the more pres­sure the ECB will even­tu­al­ly come under to extend the pur­chase pro­gram. Offi­cials have said it won’t end until they are con­fi­dent that infla­tion is on track to reach their objec­tive.

    The pro­gram “will end only once we get a strong sense that infla­tion is con­verg­ing toward 2%,” ECB exec­u­tive board mem­ber Benoît Coeuré said in an Ital­ian news­pa­per inter­view this week.

    Econ­o­mists now esti­mate prices could con­tin­ue to fall until the third quar­ter, and pos­si­bly for longer.

    “Head­line infla­tion could remain neg­a­tive dur­ing most of this year,” said Son­ali Pun­hani, an econ­o­mist at Cred­it Suisse . “Even though cycli­cal indi­ca­tors are turn­ing in the euro area and the ECB QE pro­gram was more pos­i­tive than expect­ed, the pass through to infla­tion is like­ly to come with a lag.”

    The lat­est drop in infla­tion was dri­ven large­ly by falling ener­gy prices, but also by declin­ing prices for man­u­fac­tured goods as busi­ness­es passed on some of the sav­ings they have made on their ener­gy bills. Food prices also fell, while prices of ser­vices rose more slow­ly than in recent months.

    The core rate of infla­tion excludes items such as food and ener­gy, whose prices are large­ly deter­mined by glob­al demand and sup­ply, and beyond the influ­ence of the ECB. It fell to 0.6% from 0.7% in Decem­ber.

    This trend will wor­ry ECB pol­i­cy mak­ers, who want to pre­vent the fall in oil prices hav­ing “sec­ond-round effects” as oth­er busi­ness­es cut their prices to gain mar­ket share and work­ers set­tle for low­er pay ris­es. The ECB wor­ries that house­holds and busi­ness­es will grow accus­tomed to falling prices, and post­pone some spend­ing deci­sions in antic­i­pa­tion of a bet­ter deal lat­er in the year, in turn lead­ing to falls in out­put and fur­ther drops in prices.

    ...

    Beyond the threat of a defla­tion­ary spi­ral, the decline in prices could, on the oth­er hand, help boost con­sumer spend­ing pow­er in the near term, to the extent that falling prices are dri­ven by low­er ener­gy costs.

    There is mount­ing evi­dence that house­holds are increas­ing their spend­ing on goods and ser­vices oth­er than ener­gy. Fig­ures from France also released Fri­day showed house­hold spend­ing rose by 1.5% in Decem­ber, three times faster than econ­o­mists had expect­ed. While retail sales rose less sharply in Germany—by 0.2% from the pre­vi­ous month—that increase fol­lowed two months of strong ris­es. Com­pared with Decem­ber 2013, sales were up 4.0%.

    A bounce in con­sumer spend­ing aid­ed an accel­er­a­tion in Spain’s econ­o­my dur­ing the fourth quar­ter, sta­tis­tics insti­tute INE said Fri­day. The eurozone’s fourth-largest econ­o­my grew 0.7% in the three months to Decem­ber, com­pared with the pre­vi­ous quar­ter, INE said. That is equiv­a­lent to an annu­al pace of growth of 2%, INE added. In the third quar­ter, it had post­ed 0.5% growth from the ear­li­er peri­od.

    How­ev­er, con­sumer spend­ing con­tin­ues to be restrained by high lev­els of unem­ploy­ment. Euro­stat Fri­day said that the job­less rate fell to 11.4% in Decem­ber from 11.5% in Nov., with 157,000 peo­ple find­ing work dur­ing the month. While that was the low­est rate of unem­ploy­ment since August 2012, it remained near the post­cri­sis peak of 12.0%, and much high­er than in the U.S., Japan or the U.K.

    At the same time, falling prices makes debt bur­dens heav­ier to bear, push­es up infla­tion-adjust­ed bor­row­ing costs, and slows the rebal­anc­ing of the euro­zone econ­o­my, mak­ing the lega­cies of Europe’s long debt cri­sis even hard­er to escape.

    To regain com­pet­i­tive­ness and reduce for­eign debts, coun­tries such as Spain need infla­tion rates below Germany’s. But if Ger­man infla­tion is neg­a­tive, then debtor coun­tries need sharply neg­a­tive infla­tion. That makes their pri­vate and pub­lic debts—whose val­ue in euros stays the same, even if prices and incomes fall—harder to pay down.

    Europe’s strat­e­gy for end­ing its debt cri­sis relies on gen­er­at­ing enough growth through sup­ply-side eco­nom­ic over­hauls, and through a hoped-for but so-far elu­sive con­fi­dence boost from aus­tere fis­cal poli­cies, for debtor nations to pay down high debts to more mod­er­ate lev­els.

    That strat­e­gy has already test­ed by the lack of growth in recent years and grow­ing signs of fray­ing vot­er sup­port for the estab­lished polit­i­cal par­ties that are fol­low­ing the pol­i­cy. Greece’s new gov­ern­ment under left-wing par­ty Syriza is part­ly a result of pub­lic frus­tra­tion at the inabil­i­ty of coun­tries to escape from under crush­ing debts despite mas­sive belt-tight­en­ing.

    If infla­tion falls deep­er into neg­a­tive ter­ri­to­ry and gets stuck there, it would raise even more doubts about whether euro­zone debtor coun­tries can recov­er with­out restruc­tur­ing their debt that would spread more of the cost of clean­ing up Europe’s cri­sis to cred­i­tor nations such as Ger­many.

    The effec­tive­ness of the ECB’s quan­ti­ta­tive-eas­ing pro­gram in lift­ing infla­tion, and with it, the nom­i­nal incomes of house­holds and gov­ern­ments, could thus be deci­sive for Europe’s whole approach to the cri­sis.

    While falling ener­gy prices are cer­tain­ly a much more desir­able defla­tion­ary source than the oth­er options out there, keep in mind that core infla­tion (which excludes ener­gy prices) fell to 0.6%. That 2% infla­tion tar­get keeps get­ting far­ther and far­ther away. At the same time...

    At the same time, falling prices makes debt bur­dens heav­ier to bear, push­es up infla­tion-adjust­ed bor­row­ing costs, and slows the rebal­anc­ing of the euro­zone econ­o­my, mak­ing the lega­cies of Europe’s long debt cri­sis even hard­er to escape.

    To regain com­pet­i­tive­ness and reduce for­eign debts, coun­tries such as Spain need infla­tion rates below Germany’s. But if Ger­man infla­tion is neg­a­tive, then debtor coun­tries need sharply neg­a­tive infla­tion. That makes their pri­vate and pub­lic debts—whose val­ue in euros stays the same, even if prices and incomes fall—harder to pay down.

    Europe’s strat­e­gy for end­ing its debt cri­sis relies on gen­er­at­ing enough growth through sup­ply-side eco­nom­ic over­hauls, and through a hoped-for but so-far elu­sive con­fi­dence boost from aus­tere fis­cal poli­cies, for debtor nations to pay down high debts to more mod­er­ate lev­els.

    Yes, “Europe’s strat­e­gy for end­ing its debt cri­sis relies on gen­er­at­ing enough growth through sup­ply-side eco­nom­ic over­hauls, and through a hoped-for but so-far elu­sive con­fi­dence boost from aus­tere fis­cal poli­cies”. So while the ECB is declar­ing its inten­tion to keep the QE going until the 2% tar­get is reached, the fact that Berlin is com­plete­ly rul­ing out any­thing that ends the “sup­ply-side eco­nom­ic over­hauls” means we might be in store for some form of QE exe­cut­ed in an eco­nom­ic envi­ron­ment that’s almost designed for it to fail for a long, long time. Par­ty on.

    Posted by Pterrafractyl | January 31, 2015, 8:00 pm
  10. Here’s an arti­cle that’s a reminder that Greece’s show­down with the EU is going to have to be con­vinc­ing­ly resolved before Greece has a chance of par­tic­i­pat­ing in any QE pro­grams. Greece isn’t slat­ed to par­tic­i­pate in the QE right away, although Mario Draghi sug­gest­ed that it could hap­pen as soon as July. But if Greece leaves the euro­zone and defaults on its debt in the process, the remain­ing euro­zone mem­bers are poten­tial­ly liable for Greece’s share. And cross-bor­der fis­cal trans­fers are one of the biggest no-no’s in the eurozone...unless it comes in the form of an unde­clared for­eign bank bailout (see Ire­land).

    So even if Greece man­ages to work out a com­pro­mise with the EU over its aus­ter­i­ty sched­ule in the near future, there’s a good chance Greece won’t be par­tic­i­pat­ing in any QE pro­grams any­time soon unless the sit­u­a­tion gets so com­plete­ly resolved that the door on a future ‘Grex­it’ is slammed con­vinc­ing­ly shut for good. And since that does­n’t seem very like­ly at the moment, the like­li­hood of Greece’s par­tic­i­pa­tion in any sort of future QE going for­ward should prob­a­bly remain in doubt, which is kind of insane since Greece can use a QE stim­u­lus more than any­one else. But that’s how the euro­zone rolls:

    Bloomberg News
    Greek Euro Exit Risk Sig­nals ECB’s QE Safe­guards Want­i­ng

    by Jana Randow
    6:01 PM CST
    Feb­ru­ary 15, 2015

    (Bloomberg) — Mario Draghi’s assur­ance that the Euro­pean Cen­tral Bank has ring-fenced the risks of its bond-buy­ing pro­gram has a caveat.

    While the ECB pres­i­dent says the euro area’s 19 nation­al cen­tral banks will buy and hold their own country’s debt, the mon­ey they cre­ate — at least 1.1 tril­lion euros ($1.3 tril­lion) — can flow freely across bor­ders through the region’s Target2 pay­ment sys­tem. Should a nation build up lia­bil­i­ties and then leave the cur­ren­cy union, the remain­ing mem­bers may have to share the bill.

    The risks have been thrown more sharply into focus by the stand­off between Euro­pean gov­ern­ments and a new­ly elect­ed Greek admin­is­tra­tion, which has prompt­ed a deposit flight and put the country’s future in the euro in doubt. As ECB offi­cials join politi­cians gath­er­ing in Brus­sels on Mon­day to seek a solu­tion to the cri­sis, Greece ulti­mate­ly threat­ens to expose the weak­ness of mea­sures to address legal con­straints and pub­lic con­cern over cen­tral-bank stim­u­lus.

    “There’s a polit­i­cal sig­nal that comes out of the sus­pen­sion of risk shar­ing: there’s no will­ing­ness in the ECB to build up fis­cal risks via the back door if politi­cians aren’t,” said Nick Matthews, senior econ­o­mist at Nomu­ra Inter­na­tion­al Plc in Lon­don. “At the same time, asset pur­chas­es will cre­ate reserves that per­me­ate through the Target2 sys­tem. The ques­tion of what hap­pens if a coun­try exits hasn’t been addressed.”

    ..

    Neg­a­tive Bal­ances

    ECB-style QE will be more com­pli­cat­ed than pro­grams by the Fed­er­al Reserve and Bank of Eng­land because it’ll hap­pen in a cur­ren­cy union that isn’t backed by a fis­cal union, with debt mutu­al­iza­tion and cen­tral-bank financ­ing of gov­ern­ments banned. That makes Target2, the Eurosystem’s finan­cial plumb­ing, a poten­tial indi­ca­tor of where risks are build­ing up.

    When a lender in one coun­try set­tles an oblig­a­tion with a coun­ter­par­ty in anoth­er, the assets and lia­bil­i­ties are reg­is­tered on the cen­tral-bank bal­ance sheets. Those bal­ances are aggre­gat­ed each busi­ness day at the ECB, the Eurosystem’s hub, and reflect­ed in Target2.

    All five bailout coun­tries are run­ning neg­a­tive Target2 bal­ances, as are six oth­ers includ­ing Italy and France, accord­ing to data com­piled by Germany’s Osnabrueck Uni­ver­si­ty. Greece had lia­bil­i­ties of 49 bil­lion euros at the end of last year. The biggest cred­i­tor is Ger­many, which saw claims on the ECB jump to 515 bil­lion euros at the end of Jan­u­ary from 461 bil­lion euros the pre­vi­ous month.

    Stealth Bailout

    Hans-Wern­er Sinn, pres­i­dent of Germany’s Ifo research insti­tute, has argued that the bal­ances describe effec­tive loans from core euro coun­tries like Ger­many to south­ern Europe — a form of stealth bailout that was nev­er approved by leg­is­la­tors. Offi­cials at the ECB and Germany’s Bun­des­bank have said Target2 is sim­ply a sys­tem of dou­ble-entry book­keep­ing.

    Even so, Bun­des­bank Pres­i­dent Jens Wei­d­mann wrote a let­ter to Draghi in 2012 warn­ing that mount­ing Target2 claims reflect grow­ing risks in the Eurosys­tem.

    Back then, imbal­ances were dri­ven by the flood of mon­ey pro­vid­ed by cen­tral banks in cri­sis coun­tries to finan­cial insti­tu­tions shut out of the inter­bank mar­ket. Banks in core nations such as Ger­many, lack­ing lend­ing options, found them­selves flush with cash which they deposit­ed with their nation­al cen­tral banks.

    Greek QE

    This time, the cash will come from an attempt by the ECB and nation­al cen­tral banks to stave off defla­tion. They’ll add a total of 60 bil­lion euros a month to their bal­ance sheets from March by pur­chas­ing gov­ern­ment and pri­vate debt. At least some of that mon­ey is like­ly to cross bor­ders as investors chase yields on oth­er assets.

    An ECB spokes­woman declined to com­ment on the impli­ca­tions of QE for Target2.

    While Greece won’t ini­tial­ly take part in QE because of the size of the ECB’s exist­ing hold­ings of the country’s debt from an ear­li­er bond-pur­chase pro­gram, Draghi has said he expects it to do so even­tu­al­ly, pos­si­bly as soon as July.

    Yet with its new gov­ern­ment reject­ing its aid pro­gram and threat­en­ing a debt default, the coun­try is already show­ing how cen­tral-bank mon­ey cre­ation can esca­late in a cri­sis.

    Greek Cri­sis

    After being cut off from a key avenue of ECB fund­ing this month because of the government’s stance, Greek lenders were grant­ed access to 60 bil­lion euros of Emer­gency Liq­uid­i­ty Assis­tance from the Greek cen­tral bank at its own risk. They used it with­in days as they fought to off­set deposit out­flows, prompt­ing the ECB to raise the allowance to 65 bil­lion euros. That allowance will also be reviewed by the Gov­ern­ing Coun­cil on Wednes­day.

    Euro­pean politi­cians are try­ing to craft a deal that allows the Greek gov­ern­ment to keep financ­ing itself while hold­ing to most of the reform require­ments that under­pinned its bailout. Should they fail, Greece may have to drop the euro, leav­ing its lia­bil­i­ties behind.

    “Is it right to say there’s no risk shar­ing when you have Target2?” said Nomura’s Matthews. “It depends on what a default would look like. If it’s a default and a messy exit, you have a prob­lem.”

    That part at the end more or less sum­ma­rizes the ques­tions the Greek QE dilem­ma hinges on:

    “Is it right to say there’s no risk shar­ing when you have Target2? It depends on what a default would look like. If it’s a default and a messy exit, you have a prob­lem.”

    And since the aus­ter­i­ty poli­cies imposed on Greece almost seem designed to tempt a default, it’s unclear why we should­n’t expect at least some sort of default-induced “messi­ness” in the event of a ‘Grex­it’, espe­cial­ly since Greece needs far more than just QE to real­ly get its econ­o­my grow­ing again. That’s all part of why it does­n’t seem very like­ly that Greece will be par­tic­i­pat­ing in any sort of QE, even next year, should the cur­rent show­down get resolved with­out a ‘Grex­it’.

    But also keep in mind that there’s noth­ing stop­ping these QE/de­fault-fear dynam­ics was remain­ing exclu­sive to Greece. The QE pro­gram is only slat­ed to oper­ate through Sep­tem­ber 2016 and will have to be renewed after that if the sit­u­a­tion calls for it (which it almost cer­tain­ly will). So if the eco­nom­ic sit­u­a­tion stag­nates or gets worse, and anti-aus­ter­i­ty par­ties con­tin­ue their ascent in these mem­ber states, the threat of a ‘Spex­it’ or ‘Por­tex­it’ and even larg­er shared lia­bil­i­ties could become part of the 2016 QE renew­al debate.

    It all high­lights anoth­er one of the quirks of the euro­zone: The greater the cri­sis, the greater the need for col­lec­tive mon­e­tary and/or fis­cal action but also he greater the bar­ri­ers to engag­ing in that col­lec­tive action due to all the rules against doing things that might end up result­ing in any sort of fis­cal trans­fer. As a con­se­quence, the EU is so ded­i­cat­ed to main­tain­ing the illu­sion of mem­bers-state eco­nom­ic inde­pen­dence that the union is effec­tive­ly los­ing the abil­i­ty of pulling itself up from the boot­straps. Yes, it turns out build­ing a Galt’s Gulch for nation states, held togeth­er by a shared cur­ren­cy and a “Unit­ed We Stand Sep­a­rate­ly!” men­tal­i­ty, is a lot eas­i­er said than done. Now we know.

    Posted by Pterrafractyl | February 16, 2015, 8:19 am
  11. Did you hear the great news? The euro­zone cri­sis is over! No real­ly, Mario Draghi said so:

    Finan­cial Times

    With per­fect tim­ing, ECB’s Draghi calls end to euro­zone cri­sis

    Claire Jones in Nicosia
    March 5, 2015 6:15 pm

    Mario Draghi’s tim­ing looks impec­ca­ble. Only six weeks after push­ing through quan­ti­ta­tive eas­ing in the face of fierce resis­tance from Ger­many, the Euro­pean Cen­tral Bank pres­i­dent has now called time on the region’s cri­sis.

    Mr Draghi’s mes­sage on Thurs­day was clear: the eurozone’s econ­o­my had, with the help of QE, turned a cor­ner and was on the path to a mean­ing­ful recov­ery.

    Finan­cial and sov­er­eign debt crises have left the bloc’s econ­o­my small­er than it was before the col­lapse of US invest­ment bank Lehman Broth­ers almost sev­en years ago.

    Despite geopo­lit­i­cal risks ema­nat­ing from Greece and the EU’s east­ern bor­ders, the ECB’s econ­o­mists now believe the euro­zone can put the recent years of eco­nom­ic stag­na­tion behind it. The cen­tral bank on Thurs­day signed off on growth pro­jec­tions of 1.5 per cent for this year, 1.9 per cent in 2016 and 2.1 per cent in 2017. That was much bet­ter than it had expect­ed three months ago.

    The ECB will only begin buy­ing gov­ern­ment bonds from the start of next week. But the announce­ment of the pro­gramme had already been enough to trig­ger a sharp improve­ment in the finan­cial cli­mate. “Bor­row­ing con­di­tions for firms and house­holds have improved con­sid­er­ably,” Mr Draghi said at a press con­fer­ence in Nicosia, the Cypri­ot cap­i­tal, where the meet­ing of the gov­ern­ing coun­cil was held.

    “This was Mr Draghi at his chest-thump­ing best,” said Marc Ost­wald, of ADM Investor Ser­vices Inter­na­tion­al. “He boast­ed of the ECB’s suc­cess in bring­ing down long-term inter­est rates and cor­po­rate lend­ing rates even before the actu­al QE pro­gramme has start­ed.”

    Carsten Brzes­ki, econ­o­mist at ING-DiBa, said: “It was the most pos­i­tive and opti­mistic assess­ment in a long while. Words like broad­en­ing and strength­en­ing have not been used in com­bi­na­tion with the euro­zone recov­ery for quite some time.”

    Low oil prices would also help lift con­sump­tion, while QE had stamped out the threat that the fall in crude costs would trig­ger a vicious defla­tion­ary spi­ral of low­er wages and a slump in the avail­abil­i­ty of cred­it.

    While the ECB slashed its infla­tion fore­cast for 2015 to zero, its pro­jec­tions showed infla­tion on course to hit the cen­tral bank’s tar­get of below but close to 2 per cent by 2017. Head­line infla­tion in the euro­zone is now falling for the first time in five years and the core mea­sure of price pres­sures, which strips out the cost of oil and food, is at an all-time low of 0.6 per cent. Mr Draghi said the stronger recov­ery would boost core infla­tion as well.

    Not every­one at the press con­fer­ence agreed with the ECB’s rosy assess­ment of the eco­nom­ic out­look, how­ev­er. Mr Draghi faced sev­er­al angry remarks from Greek jour­nal­ists, who said the ECB was not doing enough to help their coun­try, which despite the bet­ter out­look in the region as a whole is like­ly to have fall­en back into reces­sion in the first quar­ter of 2015.

    Mr Draghi chal­lenged their claims, say­ing the ECB was doing plen­ty to help the mem­ber state most rav­aged by the region’s cri­sis, and took the rare step of pub­licly reveal­ing that the gov­ern­ing coun­cil had extend­ed the amount of emer­gency liq­uid­i­ty assis­tance pro­vid­ed to Greece’s banks by €500m. The details of extend­ed loan agree­ments are shroud­ed in secre­cy, with the cen­tral bank rarely reveal­ing the terms of the emer­gency loans.

    The ECB pres­i­dent also reit­er­at­ed the cen­tral bank’s posi­tion that it would con­sid­er accept­ing Greek gov­ern­ment debt at its reg­u­lar oper­a­tions once it became more like­ly that the Syriza-led gov­ern­ment would suc­cess­ful­ly com­plete its bailout pro­gramme.

    ...

    Rev­el in the cor­ner turn­ing: 1.5 per­cent EU eco­nom­ic growth in 2015, 1.9 per­cent in 2016, and 2.1 per­cent in 2017 (plus near defla­tion now, but 2 per­cent infla­tion by 2017). Three years of ane­mic growth fol­low­ing a depres­sion and record high unem­ploy­ment rates in a num­ber of mem­ber states, and no real addres­sal of any of the inher­ent prob­lems asso­ci­at­ed with hav­ing a shared cur­ren­cy for so many dis­parate economies and no fis­cal trans­fers, an ongo­ing EU cri­sis of democ­ra­cy(espe­cial­ly in the euro­zone)...and voila! Cri­sis over!

    You also have to love Draghi’s asser­tion about Greece that “the ECB was doing plen­ty to help the mem­ber state most rav­aged by the region’s cri­sis”, although when he “took the rare step of pub­licly reveal­ing that the gov­ern­ing coun­cil had extend­ed the amount of emer­gency liq­uid­i­ty assis­tance pro­vid­ed to Greece’s banks by €500m,” it’s true that the 500m euro exten­sion of emer­gency cred­it to Greece’s banks is indeed help­ful, espe­cial­ly since the ECB is threat­en­ing to nuke Greece’s econ­o­my even more than nor­mal once Greece runs out of cash this month by demand­ing that Greece not issue any more short-term debt. No mat­ter what. Unless it gets the approval of the troi­ka. And just as before, the troi­ka is all say­ing Greece needs to do all the aus­ter­i­ty it agreed to. No lenien­cy at all.

    So even though there was an agree­ment on Feb 20 to revis­it the Greek aus­ter­i­ty nego­ti­a­tions in four months, it looks like the ECB is going to be used as the vehi­cle to reignite the cri­sis and force Greece to sub­mit to ALL the aus­ter­i­ty and just utter­ly crush and sense that basic decen­cy, com­pas­sion, or even hon­esty will be adhered to in the affairs of the euro­zone. The euro­zone cri­sis is over. And the era of vas­sal state usury is just get­ting start­ed...

    Greece sends EU reform list, more hur­dles before ear­ly cash

    By Renee Mal­te­zou and Jan Strupczews­ki

    ATHENS/BRUSSELS Sun Mar 8, 2015 2:19am IST

    (Reuters) — Greece sent its euro zone part­ners an aug­ment­ed list of pro­posed reforms on Fri­day but EU offi­cials said sev­er­al more steps were required before any release of aid funds to a coun­try that Prime Min­is­ter Alex­is Tsipras says has a noose around its neck.

    Strug­gling to scrape togeth­er cash and avoid pos­si­ble default, Athens made a 310 mil­lion euro par­tial loan repay­ment to the Inter­na­tion­al Mon­e­tary Fund, while Tsipras plead­ed to be allowed to issue more short-term debt to plug a fund­ing gap.

    Greece is run­ning out of options to fund itself despite strik­ing a deal with the euro zone in Feb­ru­ary to extend its EU/IMF bailout by four months.

    Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi has refused to raise a lim­it on Athens’ issuance of three-month trea­sury bills which Greek banks buy with emer­gency cen­tral bank funds. He said on Thurs­day the EU treaty pro­hib­it­ed indi­rect mon­e­tary financ­ing of gov­ern­ments.

    “The ECB has still got a rope around our neck,” the left­ist Greek pre­mier com­plained in an inter­view with Ger­man mag­a­zine Der Spiegel released on Fri­day. If the ECB con­tin­ued to object, it would be assum­ing a grave respon­si­bil­i­ty, he said.

    “Then it would be back to the thriller we saw before Feb. 20,” Tsipras said, refer­ring to the date when Greece agreed a four-month exten­sion of its bailout with euro zone part­ners after mar­ket jit­ters ignit­ed by polit­i­cal uncer­tain­ty.

    In a let­ter to the 19-nation Eurogroup, Finance Min­is­ter Yanis Varo­ufakis out­lined plans to fight tax eva­sion, acti­vate a “fis­cal coun­cil” to gen­er­ate bud­get sav­ings and update licens­ing of gam­ing and lot­ter­ies to boost state rev­enues, a Greek offi­cial said.

    How­ev­er, the expand­ed list of reforms arrived too late for deputy finance min­is­ters and Euro­pean Com­mis­sion experts who met on Thurs­day to scru­ti­nize it before a reg­u­lar meet­ing of finance min­is­ters of the cur­ren­cy area next Mon­day.

    “What­ev­er pro­pos­als emerge (from Varo­ufakis), they can’t be seen in iso­la­tion,” said a senior EU offi­cial, who declined to be named due to the sen­si­tive nature of the talks. “They have to been seen in the over­all con­text of all pol­i­cy mea­sures ... There is no con­nec­tion with the dis­burse­ments.”

    One key con­di­tion for Greece to receive any more euro zone mon­ey is for Athens to reach an agree­ment with its three inter­na­tion­al cred­i­tors — the euro zone, the ECB and the IMF — on the imple­men­ta­tion of reforms agreed by the pre­vi­ous gov­ern­ment. Such talks have not even begun yet.

    “FEWER WORDS, MORE DEEDS”

    Greece must repay a total of 1.5 bil­lion euros to the IMF over the next two weeks against a back­drop of dwin­dling tax rev­enues, frozen bailout funds and eco­nom­ic stag­na­tion. Three oth­er install­ments are due on March 13, 16 and 20.

    ...

    Greece has month­ly needs of about 4.5 bil­lion euros, includ­ing a wage and pen­sion bill of 1.5 bil­lion euros. It is not due to receive any finan­cial aid until it com­pletes a review by lenders of final reforms required under its bailout.

    Greek cen­tral bank chief Yan­nis Stournaras said after talks with Tsipras on Fri­day that Greek banks were suf­fi­cient­ly cap­i­tal­ized and faced no prob­lem with deposit out­flows.

    “There is full sup­port for Greek banks (from the ECB), there is absolute­ly no dan­ger,” he said after the meet­ing. But he added Mon­day’s euro zone meet­ing had to be “suc­cess­ful”.

    Athens has begun tap­ping cash held by pen­sion funds and oth­er enti­ties to avoid run­ning out of funds as ear­ly as this month. Var­i­ous short-term options it has sug­gest­ed to over­come the cash crunch have been blocked by euro zone lenders to pres­sure the Tsipras gov­ern­ment into enact­ing reforms.

    A Ger­man Finance Min­istry spokesman said on Fri­day that Berlin saw no basis for Greece to get the next 1.5 bil­lion euro tranche of its bailout imme­di­ate­ly, but if Athens imple­ment­ed its reforms soon­er than expect­ed, it could get paid ear­ly.

    “If the Greek pro­gram is in a posi­tion to work out its list of reforms in detail ear­li­er than the end of April and the troi­ka agrees to it and if this pro­gram is, accord­ing­ly, imple­ment­ed ear­li­er, it would of course be pos­si­ble to make a pay­ment ear­li­er,” spokesman Mar­tin Jaeger told reporters.

    Wow, they don’t do sub­tle:

    Var­i­ous short-term options it has sug­gest­ed to over­come the cash crunch have been blocked by euro zone lenders to pres­sure the Tsipras gov­ern­ment into enact­ing reforms.

    Yep, the EU has appar­ent­ly decid­ed to speed up the beat down and pub­lic flog­ging sched­ule for Greece by a cou­ple of months of hav­ing the ECB set up this loom­ing short-term fund­ing cri­sis, clear­ly in the hopes of either forc­ing a humil­i­at­ing capit­u­la­tion by the Greek gov­ern­ment on all fronts with no con­ces­sions even before the pre­vi­ous­ly planned nego­ti­a­tions (which would have been at the end of June) or forc­ing Greece to use up its emer­gency fund­ing options by the time the nego­ti­a­tions even start.

    It’s a fas­ci­nat­ing deci­sion by the troi­ka to force this short-term fund­ing cri­sis because, if any­thing, this is the kind of move the could pay off nice­ly for the troi­ka if they get a com­plete capit­u­la­tion from the Greeks but it’s also exact­ly the type of jerk move to inflict on the belea­guered Greek pub­lic that makes some­thing like a ‘Grex­it’ that much more like­ly. The bleak­er a future in the euro­zone seems, the less painful, rel­a­tive­ly speak­ing, a ‘Grex­it’ is going to feel in com­par­i­son. So the sched­ule is sped up but also the stakes.

    In oth­er news, EU chief Jean-Claude Junck­er informed Spain that its eco­nom­ic cri­sis is far from over and warned against get­ting any hopes that the aus­ter­i­ty poli­cies will be allowed to be eased up.

    Posted by Pterrafractyl | March 8, 2015, 12:58 am
  12. There’s a par­tic­u­lar pas­sage in the fol­low­ing Wall Street Jour­nal arti­cle that is so inad­ver­tent­ly reveal­ing that you have to won­der if it was some sort of Freudi­an typo or real­ly what the author was try­ing to con­vey. It’s just a pass­ing sen­tence in one of the many arti­cles about the euro­zone cri­sis and the ECB’s QE plans so it’s sort of a triv­ial point, but at the same time the real­i­ty that this ‘typo’ sug­gests is both so fun­da­men­tal and yet so unspeak­able in much of the euro­zone-relat­ed pub­lic dis­course that your real­ly have to won­der: Did the author real­ly intend on say­ing that Berlin opposed QE because it could lead to eco­nom­ic growth that might reduce the pres­sure for “painful reforms”?

    Since it real­ly does seem like Berlin is try­ing to cre­ate eco­nom­ic depres­sions as a means of forc­ing tar­get­ed pop­u­la­tions to just get used to sec­ond-tier stan­dards of liv­ing (it avoids the need for fis­cal trans­fers from wealthy to poor mem­ber states if peo­ple just accept that the poor­er states will be much poor­er than the wealthy states indef­i­nite­ly), it’s entire­ly con­ceiv­able that part of Berlin’s QE oppo­si­tion includes con­cerns over QE actu­al­ly work­ing. But that’s also some­thing that’s NEVER sup­posed to be said in pub­lic, espe­cial­ly in the Wall Street Jour­nal:

    The Wall Street Jour­nal
    Aggres­sive ECB Stim­u­lus Ush­ers In New Era for Europe
    Euro­pean Cen­tral Bank to Pur­chase €60 Bil­lion in Assets Each Month Start­ing in March

    By Bri­an Black­stone,
    Paul Han­non and
    Mar­cus Walk­er
    Updat­ed Jan. 22, 2015 10:57 p.m. ET

    FRANKFURT—The Euro­pean Cen­tral Bank ush­ered in a new era by launch­ing an aggres­sive bond-buy­ing pro­gram Thurs­day, shift­ing pres­sure to Europe’s polit­i­cal lead­ers to restore pros­per­i­ty in one of the glob­al economy’s biggest trou­ble spots. (Update: Euro­zone con­sumer prices fall sharply).

    Investors cheered the ECB’s com­mit­ment to flood the euro­zone with more than €1 tril­lion ($1.16 tril­lion) in new­ly cre­at­ed mon­ey, spark­ing a ral­ly in stock and bond mar­kets and send­ing the euro plung­ing.

    But in light of Europe’s under­ly­ing prob­lems of stag­nant growth, high debt and rigid labor mar­kets, ECB Pres­i­dent Mario Draghi sug­gest­ed the cen­tral bank’s largess alone won’t be enough to right its econ­o­my.

    “What mon­e­tary pol­i­cy can do is cre­ate the basis for growth,” he said. “But for growth to pick up, you need invest­ment; for invest­ment, you need con­fi­dence; and for con­fi­dence, you need struc­tur­al reform.

    The reac­tions to the cen­tral bank’s move rip­pled wide­ly through the world’s trad­ing floors, cor­po­rate board­rooms and Euro­pean cap­i­tals. “It’s one piece of get­ting Europe back to growth, and we should see an impact,” Joe Jimenez, chief exec­u­tive of drug giant Novar­tis said in an inter­view in Davos, Switzer­land, where the polit­i­cal and eco­nom­ic elite are gath­ered for meet­ings of the World Eco­nom­ic Forum.

    The effects also rever­ber­at­ed beyond the bor­ders of the 19-mem­ber euro­zone: Den­mark on Thurs­day cut its main inter­est rate for the sec­ond time in a week, seek­ing to damp investor inter­est in its cur­ren­cy as investors sold the euro.

    Mr. Draghi said the ECB will buy a total of €60 bil­lion a month in assets includ­ing gov­ern­ment bonds, debt secu­ri­ties issued by Euro­pean insti­tu­tions and pri­vate-sec­tor bonds. The pur­chas­es of gov­ern­ment bonds and those issued by Euro­pean insti­tu­tions such as the Euro­pean Invest­ment Bank will start in March and are intend­ed to run through to Sep­tem­ber 2016. Mr. Draghi sig­naled the pur­chas­es could extend fur­ther if the ECB isn’t meet­ing its infla­tion tar­get of just below 2%. In Decem­ber, con­sumer prices fell 0.2% in Decem­ber on an annu­al basis in the euro­zone, the first drop in over five years.

    The ECB’s new stim­u­lus “should strength­en demand, increase capac­i­ty uti­liza­tion and sup­port mon­ey and cred­it growth,” Mr. Draghi said.

    ...

    The biggest chal­lenge for QE is whether it can break the eco­nom­ic stag­na­tion that has gripped the euro­zone in recent years, which has led to the crum­bling of pub­lic con­fi­dence in Europe’s insti­tu­tions and its polit­i­cal class.

    An ane­mic eco­nom­ic recov­ery since 2013 has left job­less­ness too high and out­put and infla­tion too low to escape the dam­age of the 2008 glob­al finan­cial cri­sis, which was com­pound­ed by the eurozone’s sub­se­quent sov­er­eign-debt cri­sis. Long after most oth­er major economies have recov­ered from the finan­cial cri­sis era, the euro­zone remains bur­dened by high debts, bad loans, sick­ly banks, stressed house­holds and ane­mic demand.

    Stub­born­ly high unem­ploy­ment rates in most euro­zone coun­tries apart from Ger­many have led to vot­er revolts against estab­lished polit­i­cal par­ties, fuel­ing the rise of extreme or pop­ulist par­ties rang­ing from ant­i­cap­i­tal­ist far-left to xeno­pho­bic far-right. Sur­veys show pub­lic trust in the EU and its bod­ies, includ­ing the ECB, has suf­fered too—although most vot­ers across the euro­zone remain firm­ly opposed to leav­ing the euro.

    Not all mem­bers of the cen­tral bank’s gov­ern­ing coun­cil sup­port­ed the deci­sion to buy gov­ern­ment bonds. Mr. Draghi said there was a large major­i­ty in favor of launch­ing the pro­gram and una­nim­i­ty that, in prin­ci­ple, buy­ing gov­ern­ment bonds is “a true mon­e­tary pol­i­cy tool.” But some coun­cil mem­bers didn’t think it was nec­es­sary to buy bonds now. The ECB didn’t name oppo­nents, but Germany’s two ECB coun­cil mem­bers have recent­ly sig­naled their oppo­si­tion to buy­ing bonds.

    Germany’s gov­ern­ment is wor­ried that the ECB’s move, by lift­ing growth and low­er­ing bor­row­ing costs, will take the pres­sure off euro­zone gov­ern­ments to enact painful reforms. “Now is the time to get our hous­es in order,” Ger­man Chan­cel­lor Angela Merkel said Thurs­day in a speech at Davos.

    Despite those divi­sions, Thursday’s bond deci­sion marks a new era for a cen­tral bank that was mod­eled on Germany’s con­ser­v­a­tive Bun­des­bank in the 1990s—at a time when fight­ing infla­tion was more of a pri­or­i­ty than com­bat­ing stag­na­tion, weak con­sumer prices and recur­ring finan­cial crises.

    With offi­cial inter­est rates near zero and ample loans to banks fail­ing to boost infla­tion so far, the ECB was left with few options apart from buy­ing secu­ri­ties in the pub­lic debt mar­ket, thus rais­ing the mon­ey sup­ply. The ECB will cast a wide net for pub­lic debt, say­ing it would pur­chase secu­ri­ties with matu­ri­ties rang­ing from two to 30 years. The ECB is also will­ing to buy bonds with a neg­a­tive yield, which some short-dat­ed Ger­man gov­ern­ment bonds now have.

    ...

    So....was this inten­tion­al? Oppo­si­tion to QE because it might lift growth?

    ...
    Not all mem­bers of the cen­tral bank’s gov­ern­ing coun­cil sup­port­ed the deci­sion to buy gov­ern­ment bonds. Mr. Draghi said there was a large major­i­ty in favor of launch­ing the pro­gram and una­nim­i­ty that, in prin­ci­ple, buy­ing gov­ern­ment bonds is “a true mon­e­tary pol­i­cy tool.” But some coun­cil mem­bers didn’t think it was nec­es­sary to buy bonds now. The ECB didn’t name oppo­nents, but Germany’s two ECB coun­cil mem­bers have recent­ly sig­naled their oppo­si­tion to buy­ing bonds.

    Germany’s gov­ern­ment is wor­ried that the ECB’s move, by lift­ing growth and low­er­ing bor­row­ing costs, will take the pres­sure off euro­zone gov­ern­ments to enact painful reforms. “Now is the time to get our hous­es in order,” Ger­man Chan­cel­lor Angela Merkel said Thurs­day in a speech at Davos.
    ...

    That cer­tain­ly sounds like the real intent behind Berlin’s rea­son­ing, but it’s not nor­mal­ly stat­ed that plain­ly.

    Whether or not it was inten­tion­al, the sen­ti­ment is cer­tain­ly observ­able in the larg­er elite zeit­geist. After all, the argu­ments in favor of ‘expan­sion­ary aus­ter­i­ty’ have been dis­cred­it­ed for years at this point and yet the ded­i­ca­tion to the pro-aus­ter­i­ty/Or­dolib­er­al argu­ments have been absolute­ly unwa­ver­ing amongst pub­lic offi­cials and, gen­er­al­ly speak­ing, busi­ness elites too. So it’s pret­ty clear that Europe’s elites have col­lec­tive­ly decid­ed that mak­ing large swathes of the con­ti­nent per­ma­nent­ly poor­er is just some­thing that needs to hap­pen if they’re going to achieve their new right-wing socioe­co­nom­ic fan­ta­sy future.

    It’s also now abun­dant­ly clear that Europe’s elites decid­ed to adopt a Bun­des­bank-style approach to cen­tral bank­ing where mon­e­tary tools are declared unhelp­ful and use­less and only “struc­tur­al reforms” (in the form of neolib­er­al dereg­u­la­tions, pay cuts for the rab­ble, and the destruc­tion of pub­lic ser­vices) can solve the under­ly­ing prob­lems that led up to a cri­sis. In that con­text it’s pret­ty obvi­ous why there would be gen­uine fears that QE might actu­al­ly help the sit­u­a­tion.

    And while it’s prob­a­bly the case that there should­n’t be too much con­cern over the QE actu­al­ly jump-start­ing the econ­o­my giv­en the suc­cess­ful oppo­si­tion to any sort of fis­cal stim­u­lus across the EU which is real­ly what it need­ed, it’s still quite pos­si­ble that Europe’s elites are fear­ing QE will act as a cat­a­lyst for the inevitable upturns that hap­pen when­ev­er you depress an econ­o­my for years. Eco­nom­ic upticks hap­pen, and for Europe these days any uptick is sig­nif­i­cant.

    It’s all part of the twist­ed dynam­ic dom­i­nat­ing Europe’s deci­sion-mak­ing, where teach­ing the pop­u­lace all the wrong lessons in how economies func­tion and recov­er is one of the pri­ma­ry objec­tives for this entire depression/austerity expe­ri­ence: The longer this whole euro­zone cri­sis sit­u­a­tion goes on, the like­li­er it is that nations will hit at least a medi­um-term socioe­co­nom­ic ‘rock bot­tom’ from which they can expe­ri­ence a bit of growth that every­one can cham­pi­on as vin­di­ca­tion for their poli­cies of choice. If that inevitable bout of growth coin­cides with a QE pro­gram, peo­ple can say “see, it was the QE that was need­ed!”, but if there’s no QE or it’s sys­tem­i­cal­ly thwart­ed QE, lead­ers can point to the aus­ter­i­ty and say “final­ly, the sac­ri­fice is pay­ing off and now you all see that aus­ter­i­ty and neolib­er­al reforms are the only way! Sup­ply-side eco­nom­ics for­ev­er!”

    And you had bet­ter believe that the pro-aus­ter­i­ty estab­lish­ment across Europe has been wait­ing for an oppor­tu­ni­ty to tri­umphant­ly shout “Sup­ply-side eco­nom­ics for­ev­er!” because that’s the big prize. It would be like if the elites made up a reli­gion that cen­tered around cel­e­brat­ing the the awe­some­ness of rich peo­ple and the awful­ness of the poor and some­how every­one joined, con­vinced that some­day they, too, will be allowed to climb the lad­der (You can see the appeal).

    So we prob­a­bly should­n’t be to sur­prised that ECB chief Mario Draghi recent­ly announced that the euro­zone cri­sis is already over thanks, in part, to the mere announce­ment of the QE pro­gram that has yet to start but more aus­ter­i­ty will be required for it to ful­ly work. After all, if the euro­zone has a peri­od of rel­a­tive growth the next few years dur­ing this QE pro­gram, even the mea­ger growth like what the ECB is pro­ject­ing (1.5 per­cent in 2015, 1.9 in 2016 and 2.1 in 2017), there’s a good chance observers might attribute that growth to QE and not ‘expan­sion­ary aus­ter­i­ty’ or Bun­des­bank-style Ordolib­er­al­ism. But if the ECB declares a euro­zone recov­ery that’s start­ing right now, before QE real­ly starts, at least the aus­te­ri­ans might be able to con­tain any QE-relat­ed dam­age to their aus­ter­i­ty lega­cy project. And since main­tain­ing the “if you cut wages and ben­e­fits, growth will come” Field of Dreams pre­tense is going to be an obvi­ous top pri­or­i­ty for Europe’s elites (that’s the big prize), it’s clear that the pro­mo­tion of socioe­co­nom­ic Big Lies is going to be a top pri­or­i­ty for Europe’s gov­ern­ments for the fore­see­able future.

    At the same time, as that inter­est­ing arti­cle excerpt indi­cat­ed above, main­tain­ing the aus­ter­i­ty poli­cies in some form or anoth­er is also prob­a­bly going to be a top pri­or­i­ty for Europe’s elites, even if a recov­ery slow­ly takes hold, because tran­si­tion­ing much of Europe towards a ‘no government’/‘you’re on your own, feel free to die’-US-right-wing-style socioe­co­nom­ic par­a­digm is quite pos­si­bly the only real­is­tic way to make the euro­zone work in the long-run with­out auto­mat­ic fis­cal trans­fers from ‘rich Europe’ to ‘poor Europe’ if Europe main­tains its cur­rent neolib­er­al zeal. Aus­ter­i­ty is nec­es­sary because the accep­tance of wide­spread pover­ty, con­cen­trat­ed in some nations but not oth­ers, is nec­es­sary for a cut­throat sup­ply-side euro­zone to work.

    So if you thought the euro­zone cri­sis was sur­re­al so far, get ready for the upcom­ing peri­od of dec­la­ra­tions of eco­nom­ic vic­to­ry cou­pled with ongo­ing calls for con­tin­u­ing the aus­ter­i­ty because only aus­ter­i­ty can bring about the robust recov­er­ies need­ed to make up for all the lost ground caused by the aus­ter­i­ty.

    Snatch­ing vic­to­ry by feed­ing your­self to the jaws of defeat isn’t some­thing one would nor­mal­ly do, but in the con­tem­po­rary euro­zone nation-state self-can­ni­bal­ism is the only path for­ward.

    Don’t ask ques­tions. It’ll all make sense after a meal.

    Posted by Pterrafractyl | March 8, 2015, 11:33 pm
  13. It begins:

    ECB’s ‘QE’ on track with day one pur­chas­es at 3.2 bn euros
    Agence France-Presse March 10, 2015 9:45pm

    The Euro­pean Cen­tral Bank’s mas­sive bond pur­chase pro­gramme, known as quan­ti­ta­tive eas­ing, or QE, got off to a good start with pur­chas­es at 3.2 bil­lion euros on the first day, a top ECB offi­cial said Tues­day.

    ECB exec­u­tive board mem­ber Benoit Coeure said that dur­ing Mon­day’s kick-off day for the pro­gramme, the ECB and the cen­tral banks of the 19 euro­zone nations pur­chased a total 3.2 bil­lion euros in bonds.

    That put the QE pro­gramme on track to attain its month­ly goal of 60 bil­lion euros worth of buy­back of pub­lic and pri­vate sec­tor debt, he said at a sem­i­nar in Frank­furt.

    The ECB’s QE scheme has already been used by the US Fed­er­al Reserve and the Bank of Eng­land to stim­u­late their economies.

    ...

    The ECB hopes that by buy­ing bonds off investors they will invest the mon­ey else­where, thus boost­ing growth and pre­vent­ing a dan­ger­ous cycle of falling prices from set­ting in.

    It nev­er ends:

    Wei­d­mann ques­tions ECB bond-buy­ing on pro­gram­me’s first day

    ZURICH Mon Mar 9, 2015 5:43pm GMT

    (Reuters) — Bun­des­bank chief Jens Wei­d­mann took aim at the Euro­pean Cen­tral Bank’s new bond-buy­ing plan on Mon­day, say­ing it blurred the lines between mon­e­tary and fis­cal pol­i­cy and risked delays to bud­get con­sol­i­da­tion efforts.

    The ECB began its pro­gramme of print­ing mon­ey to buy sov­er­eign bonds — so-called quan­ti­ta­tive eas­ing (QE) — on Mon­day with a view to lift­ing euro zone infla­tion from below zero and back towards its tar­get of just under 2 per­cent.

    But Wei­d­mann, who sits on the ECB’s pol­i­cy­mak­ing Gov­ern­ing Coun­cil, ques­tioned whether the weak price pres­sures in the 19-coun­try euro zone jus­ti­fied the cen­tral bank deploy­ing a more expan­sive mon­e­tary pol­i­cy.

    “Is that real­ly a rea­son to become more expan­sive now? I am scep­ti­cal,” he said in the text of a speech for deliv­ery in Zurich.

    “The risk paint­ed by some peo­ple of a self-rein­forc­ing spi­ral of falling wages and prices, or defla­tion, is very low,” he added. “This view is shared by the vast major­i­ty of the ECB Gov­ern­ing Coun­cil.”

    Wei­d­mann not­ed that the ECB’s plan to buy sov­er­eign bonds on the sec­ondary mar­ket was not banned by the cen­tral bank’s rules.

    ...

    Of the bond-buy­ing plan, he added: “That can, of course, lead to bad habits and to coun­tries putting off the nec­es­sary con­sol­i­da­tion of pub­lic bud­gets.”

    Yep, the QE has offi­cial­ly begun! And that means its time for Bun­des­bank chief Jens Wei­d­mann to whine about how defla­tion isn’t real­ly any­thing to wor­ry about so why both­er with all this unnec­es­sary QE. Why not just let the sit­u­a­tion fix itself through end­less aus­ter­i­ty, right?

    So the euro­zone is final­ly embrac­ing QE, Wei­d­mann is till whin­ing, and the euro is plung­ing accord­ing­ly. What this means in the long-run remains to be seen. In the short-run, one thing is very clear: It’s no acci­dent that the onset of QE coin­cid­ed with a plung­ing euro. It’s con­nect­ed:

    The Wall Street Jour­nal
    Cen­tral-Bank Moves Spook Investors
    Euro slides and stocks sell off in the U.S. as glob­al finan­cial sys­tem adjusts to changes

    By Tom­my Stub­bing­ton and Charles Forelle
    Updat­ed March 10, 2015 8:07 p.m. ET

    The euro slid clos­er to par­i­ty with the dol­lar, long-term bond yields in the euro­zone nudged clos­er to zero and U.S. stocks tumbled—a stark demon­stra­tion of the reorder­ing of the world’s finan­cial sys­tem by its cen­tral banks.

    The U.S. Fed­er­al Reserve appears poised to raise inter­est rates, mak­ing the dol­lar more attrac­tive, just as the Euro­pean Cen­tral Bank begins print­ing euros to buy gov­ern­ment bonds.

    That the world’s two biggest eco­nom­ic blocs would even­tu­al­ly head in dif­fer­ent direc­tions has long been appar­ent, but the feroc­i­ty of the mar­ket moves sug­gests investors are quick­ly accept­ing that it is hap­pen­ing now.

    The Dow Jones Indus­tri­al Aver­age post­ed its largest one-day point decline since Octo­ber, reflect­ing wor­ries that a soar­ing dol­lar would crimp U.S. cor­po­rate prof­its as well as the antic­i­pa­tion of high­er domes­tic inter­est rates. The Dow fell 332.78 points, or 1.8%, to 17662.94 and is now neg­a­tive for the year.

    The euro began this year above $1.20 and this month above $1.12. It has crum­bled. Tues­day, it fell anoth­er 1.4% to trade at $1.0700 against the dol­lar, its low­est in near­ly 12 years.

    ECB data show that much more mon­ey is flow­ing out of the euro­zone to buy for­eign stocks and bonds than is flow­ing in. In Decem­ber, the lat­est fig­ures avail­able, the gap was €76 bil­lion (about $82 bil­lion).

    “Last year, the sto­ry was euro weak­ness. Now, on top of that, we have a big dol­lar ral­ly,“ said Paul Lam­bert, head of cur­ren­cy at Insight Invest­ment. “I think we will cer­tain­ly see par­i­ty by the sum­mer.”

    The euro’s weak­ness has many caus­es. One is the ECB’s bond-buy­ing pro­gram, known as quan­ti­ta­tive eas­ing and first announced in Jan­u­ary. It began Mon­day, and the effects were imme­di­ate­ly appar­ent. Euro­pean gov­ern­ment-bond yields, already epochal­ly low, fell fur­ther. Falling yields on bonds mean ris­ing prices. The ECB prints euros to buy bonds.

    The 10-year Ger­man gov­ern­ment bond end­ed Tues­day with a yield of 0.23 per­cent­age point, accord­ing to Tradeweb, down 0.08 per­cent­age point from the day before. Ger­man yields are now neg­a­tive on matu­ri­ties of up to eight years, mean­ing investors effec­tive­ly pay to hold the debt.

    The bond-buy­ing pro­gram is meant, in part, to encour­age investors to buy riski­er things than gov­ern­ment bonds, such as debt and equi­ty of Euro­pean com­pa­nies that would pow­er a recov­ery from stag­nant growth.

    But the low returns on euro­zone gov­ern­ment debt also appear to be push­ing investors out of the cur­ren­cy bloc entire­ly. That weighs on the euro, too.

    Ana­lysts at Deutsche Bank , cit­ing the sharp flows out of the euro­zone, cut their fore­cast Tues­day for the euro and now expect it will reach $1 by the end of this year and $0.85 by 2017.

    Their the­sis: The euro­zone coun­tries, in total, have a big and per­sis­tent excess of sav­ings, and giv­en the low returns on offer at home, they will sell their euros and ven­ture abroad.

    ...

    The tum­bling euro may well be good news for Europe. The euro­zone is mired in excep­tion­al­ly low infla­tion, and mak­ing for­eign goods more expen­sive could give infla­tion a boost. Very low infla­tion, and espe­cial­ly defla­tion, saps eco­nom­ic activ­i­ty.

    Many investors expect the cur­rent trends to con­tin­ue. ECB Pres­i­dent Mario Draghi , at his month­ly news con­fer­ence last week, reit­er­at­ed that he expect­ed the bond-buy­ing pro­gram to con­tin­ue through fall 2016—even if the euro­zone man­ages to crawl its way to growth.

    “QE is like­ly to remain with us for the fore­see­able future and giv­en the eco­nom­ic head­winds fac­ing us, bet­ter data is unlike­ly to change that,” said Salman Ahmed, glob­al fixed-income strate­gist at Lom­bard Odi­er Invest­ment Man­agers.

    And in the U.S., the rise in inter­est rates appears, if any­thing, to be get­ting clos­er. Friday’s report of strong jobs growth in the U.S. poten­tial­ly pulls it forward—and more data could change that assess­ment again.

    Yields on a broad swath of euro­zone gov­ern­ment bonds touched all-time lows Tues­day. In Spain and Italy, 10-year yields hit their low­est on record at 1.17% and 1.22%, respec­tive­ly.

    ...

    As the arti­cle points out:

    ...

    The tum­bling euro may well be good news for Europe. The euro­zone is mired in excep­tion­al­ly low infla­tion, and mak­ing for­eign goods more expen­sive could give infla­tion a boost. Very low infla­tion, and espe­cial­ly defla­tion, saps eco­nom­ic activ­i­ty.

    ...

    But as is also points out:

    ...
    The euro began this year above $1.20 and this month above $1.12. It has crum­bled. Tues­day, it fell anoth­er 1.4% to trade at $1.0700 against the dol­lar, its low­est in near­ly 12 years.

    ECB data show that much more mon­ey is flow­ing out of the euro­zone to buy for­eign stocks and bonds than is flow­ing in. In Decem­ber, the lat­est fig­ures avail­able, the gap was €76 bil­lion (about $82 bil­lion).

    ...

    The 10-year Ger­man gov­ern­ment bond end­ed Tues­day with a yield of 0.23 per­cent­age point, accord­ing to Tradeweb, down 0.08 per­cent­age point from the day before. Ger­man yields are now neg­a­tive on matu­ri­ties of up to eight years, mean­ing investors effec­tive­ly pay to hold the debt.

    ...

    But the low returns on euro­zone gov­ern­ment debt also appear to be push­ing investors out of the cur­ren­cy bloc entire­ly. That weighs on the euro, too.

    Ana­lysts at Deutsche Bank , cit­ing the sharp flows out of the euro­zone, cut their fore­cast Tues­day for the euro and now expect it will reach $1 by the end of this year and $0.85 by 2017.

    Their the­sis: The euro­zone coun­tries, in total, have a big and per­sis­tent excess of sav­ings, and giv­en the low returns on offer at home, they will sell their euros and ven­ture abroad.

    ...

    As we can see, while the val­ue of the euro is plung­ing, the val­ue of euro-denom­i­nat­ed bonds is ral­ly­ing, lead­ing to what appears to be an ele­ment of for­eign-investor prof­it-tak­ing that’s par­tial­ly rein­forc­ing the plunge in the euro. And while the fall of the euro has been slow­ing hap­pen­ing for over a year, the start of QE cat­alyzed a rather fast and furi­ous plunge for the val­ue of the euro. It a plunge that’s to be expect­ed, although it sounds like this was a some­what big­ger impact on the mar­kets than the were expect­ing (the yields on Ger­man 10-year bunds dropped over 25% from 0.31% to 0.23% on the sec­ond day of QE!).

    But it’s not just for­eign investors dri­ving this plunge. Notice the pre­dic­tions of the Deutsche Bank ana­lysts that the euro could fall to $0.85 by 2017. Their the­sis? “The euro­zone coun­tries, in total, have a big and per­sis­tent excess of sav­ings, and giv­en the low returns on offer at home, they will sell their euros and ven­ture abroad.” Yep, as much as we hear about end­less eco­nom­ic weak­ness in the euro­zone, keep in mind that export pow­er­hous­es like Ger­many or the Nether­lands are cre­at­ing a sav­ings glut and the out­flow of that sav­ings glut could be a down­ward force on the euro for years to come.

    So, over­all, the start of QE is good news for not only Europe but the rest of the world too. It’s just not as good for the rest of the world as it is for Europe because it implies fur­ther trade deficits for Europe’s trad­ing part­ners. But Europe’s depres­sion has­n’t exact­ly been help­ful for the glob­al econ­o­my either so if the world has to go through a peri­od of cheap­er than nor­mal euros that’s prob­a­bly not a bad trade­off in the long-run.

    Of course, that assumes that plung­ing val­ue of the euro rel­a­tive to the dol­lar and oth­er major cur­ren­cies isn’t a per­ma­nent phe­nom­e­na. It also assume that Europe isn’t in for a long-run bout of aus­ter­i­ty-onom­ics and does­n’t find itself still stuck in some sort of euro-malaise sit­u­a­tion a decade from now where cheap euros and weak euro­zone imports become the new nor­mal in the long-run. Because if that hap­pens, the imbal­ance between net cred­i­tor and debtors states that’s plagued the euro­zone thus far might go glob­al:

    The New York Times
    The Con­science of a Lib­er­al
    Export­ing Europe’s Stag­na­tion

    Paul Krug­man
    March 11, 2015 8:06 am

    [see pic of plung­ing euro]

    Watch that plung­ing euro! Actu­al­ly, it’s good news for Europe. Euro­pean growth num­bers have been bet­ter late­ly, and the weak euro — which makes EZ man­u­fac­tur­ing and oth­er trad­ables more com­pet­i­tive — is sure­ly a large part of the expla­na­tion. Not so good for Japan or the US. But how should we think about this?

    It’s more or less stan­dard inter­na­tion­al macro that with high cap­i­tal mobil­i­ty and float­ing exchange rates, demand shocks in any one coun­try or region will be “shared” with oth­er coun­tries. If you have excep­tion­al­ly strong demand, your cur­ren­cy will rise, crimp­ing your own growth while boost­ing growth abroad; if you have excep­tion­al­ly weak demand, you will get par­tial com­pen­sa­tion via a weak­er cur­ren­cy that helps net exports. Such effects can be off­set with inter­est rate changes if you’re not at the zero almost low­er bound, but we are.

    But how much of a demand shock is shared? I argued about a month ago that it depends on the extent to which the shock is per­ceived as tem­po­rary ver­sus per­ma­nent. In an ide­al­ized world per­ma­nent shocks should be ful­ly shared — that is, per­ma­nent­ly weak demand in Europe should hurt the Unit­ed States just as much as it does Europe.

    So, can we say any­thing about how the recent move in the euro fits into this sto­ry? One way, I’d sug­gest, is to ask how much of the move can be explained by changes in the real inter­est dif­fer­en­tial with the Unit­ed States. US real 10-year rates are about the same as they were in the spring of 2014; Ger­man real rates at sim­i­lar matu­ri­ties (which I use as the com­pa­ra­ble safe asset) have fall­en from about 0 to minus 0.9. If peo­ple expect­ed the euro/dollar rate to return to long-term nor­mal a decade from now, this would imply a 9 per­cent decline right now.

    What we actu­al­ly see is almost three times that move, sug­gest­ing that the main dri­ver here is the per­cep­tion of per­ma­nent, or at any rate very long term Euro­pean weak­ness. And that’s a sit­u­a­tion in which Europe’s weak­ness will be large­ly shared with the rest of the world — Europe will have its fall cush­ioned by trade sur­plus­es, but the rest of us will be dragged down by the coun­ter­part deficits.

    Now, this ids not how most ana­lysts approach the prob­lem. They make a fore­cast for the exchange rate, then run this through some set of trade elas­tic­i­ties to get the effects on trade and hence on GDP. Such esti­mates cur­rent­ly indi­cate that the dol­lar will be a mod­er­ate-sized drag on US recov­ery, but no more. What the eco­nom­ic log­ic says, how­ev­er, is that if that’s real­ly true, the dol­lar will just keep head­ing high­er until the drag gets less mod­er­ate.

    As Krug­man points out, the plung­ing euro has prob­a­bly already giv­en the euro­zone boost and this is cer­tain­ly good news for the euro­zone. But here’s the cru­cial caveat:

    ...US real 10-year rates are about the same as they were in the spring of 2014; Ger­man real rates at sim­i­lar matu­ri­ties (which I use as the com­pa­ra­ble safe asset) have fall­en from about 0 to minus 0.9. If peo­ple expect­ed the euro/dollar rate to return to long-term nor­mal a decade from now, this would imply a 9 per­cent decline right now.

    What we actu­al­ly see is almost three times that move, sug­gest­ing that the main dri­ver here is the per­cep­tion of per­ma­nent, or at any rate very long term Euro­pean weak­ness. And that’s a sit­u­a­tion in which Europe’s weak­ness will be large­ly shared with the rest of the world — Europe will have its fall cush­ioned by trade sur­plus­es, but the rest of us will be dragged down by the coun­ter­part deficits.
    ...

    Yep, if we just look at what “the mar­ket” is imply­ing with with the col­laps­ing rates on Ger­man bunds it would appear that “the mar­ket” is expect­ing very long term Euro­pean weak­ness. And that also implies a weak euro for the fore­see­able future along with grow­ing euro­zone sur­plus­es (espe­cial­ly for the export pow­er­hous­es) and grow­ing trade deficits for the rest of the world.

    If this seems alarm­ing, well, it is sort of is alarm­ing since it appears to be describ­ing a sce­nario where the euro­zone cri­sis is nev­er real­ly resolved. At least if noth­ing changes regard­ing Europe’s atti­tude towards junk eco­nom­ic the­o­ries and mer­can­til­ism over the next decade.

    At the same time, keep in mind that it was just two years ago when the euro was above $1.30 and the Bun­des­bank was argu­ing that the euro did­n’t real­ly need to fall at all and could maybe even rise. So this threat of an imbal­anced world where a sav­ings-heavy euro­zone ends up export­ing its defla­tion every­where is far from ide­al, but it’s still an improve­ment over a euro­zone-depres­sion.
    It’s all a reminder that for all the focus on intra-euro­zone strug­gle by Europe’s export pow­er­hous­es to impose export-max­i­miz­ing Ordolib­er­al eco­nom­ic the­o­ries across the euro­zone (with­out any con­sid­er­a­tion of the need for intra-euro­zone bal­ances of trade or fis­cal trans­fers), we’re still on track for a poten­tial­ly larg­er glob­al con­flict in com­ing decades: What hap­pens to the glob­al econ­o­my if Berlin suc­ceeds in turn­ing the rest of Europe “into Ger­many”? Or, if not “Ger­many” (i.e. high tech, high val­ue exports), at a per­ma­nent net exporter. Why could­n’t Spain or Italy run sur­plus­es every year by just depress­ing domes­tic demand and wages so much that aver­age peo­ple don’t real­ly have the mon­ey for many imports?

    That’s the often-stat­ed goal for the aus­ter­i­ty policies...turn coun­tries like Spain and Italy into Ger­many! Well, what if, say a decade from now, Spain and Italy haven’t actu­al­ly been “turned into Ger­many” but have still beat­en their pop­u­la­tions so severe­ly that work­er pay is low enough for their economies to suc­cess­ful­ly com­pet­ing with the devel­op­ing world for low-wage man­u­fac­tur­ing jobs? And what if vir­tu­al­ly all of the euro­zone is run­ning a trade sur­plus decades from now?

    So how does the world deal with a euro­zone that is ded­i­cat­ed to a pol­i­cy of mer­can­til­ism that can’t help but desta­bi­lize the glob­al econ­o­my? Since the mar­kets appear to be pre­dict­ing an indef­i­nite peri­od of cheap euros and a weak Europe, it’s a ques­tion the glob­al com­mu­ni­ty is prob­a­bly going to have to answer soon­er or lat­er.

    In the mean time, enjoy the plunge!

    Posted by Pterrafractyl | March 12, 2015, 10:28 pm
  14. Euro­pean pol­i­cy-mak­ers warned against “exces­sive opti­mism” in the mar­ket in response to the faster-then-expect­ed plunge in the val­ue of the euro and surg­ing val­ue in gov­ern­ment bonds. Then they called for more aus­ter­i­ty. So, true to form, Europe’s lead­ers inter­pret­ed a sit­u­a­tion that indi­cates the mar­kets are prob­a­bly very pes­simistic about the long-term prospects of the euro­zone as an excuse to declare aus­ter­i­ty the only solu­tion to Europe’s woes. Sure, the plung­ing euro and surg­ing bonds already indi­cates lit­tle faith in the long-term con­se­quences of the aus­ter­i­ty poli­cies, but Europe’s lead­ers just had to make sure:

    UPDATE 1‑Europe’s pol­i­cy­mak­ers warn against exces­sive opti­mism over ECB’s bond buy­ing

    Sat Mar 14, 2015 11:31am EDT

    * ECB’s Vis­co says QE car­ries risks, ECB must be quick

    * Greece’s Varo­ufakis sees QE fuelling equi­ty bub­ble

    * Italy Econ­Min says com­pa­nies still lack con­fi­dence (Recasts adding com­ments, details)

    By Valenti­na Za and Francesca Lan­di­ni

    CERNOBBIO, Italy — March 14 (Reuters) — Euro­pean pol­i­cy­mak­ers warned on Sat­ur­day against exces­sive opti­mism fol­low­ing the launch of the Euro­pean Cen­tral Bank’s bond buy­ing pro­gramme, with Gov­ern­ing Coun­cil mem­ber Ignazio Vis­co say­ing inter­est rates could not remain near zero for­ev­er.

    The ECB began a pro­gramme of buy­ing sov­er­eign bonds, or quan­ti­ta­tive eas­ing, on Mon­day with a view to sup­port­ing growth and lift­ing euro zone infla­tion towards its tar­get of just under 2 per­cent.

    Vis­co, Italy’s cen­tral banker, said the euro had weak­ened faster than expect­ed since the ECB first hint­ed at the move and there were risks the pro­gramme could over­shoot its goal, as well as fuel an exces­sive rise in the prices of finan­cial and real estate assets.

    “We must try to get infla­tion close to 2 per­cent as quick­ly as pos­si­ble,” Vis­co told a con­fer­ence in Cer­nob­bio, on the shores of Italy’s Lake Como, where pol­i­cy mak­ers and com­pa­ny exec­u­tives gath­ered to dis­cuss the eco­nom­ic and finan­cial out­look for Italy and Europe.

    “We can’t keep inter­est rates at zero for­ev­er or for an ultra-pro­longed peri­od of time,” Vis­co said.

    The ECB cut its main pol­i­cy rate to 0.05 per­cent at the begin­ning of Sep­tem­ber.

    ...

    FRAGILITY

    Vis­co said this week’s poor fig­ures on Ital­ian indus­tri­al out­put showed the eco­nom­ic sit­u­a­tion remained frag­ile despite a “new opti­mism” among investors that was lack­ing only a few weeks ago.

    “It’s a sign that we need to be care­ful about exces­sive opti­mism ... there is still fragili­ty,” he said.

    A warn­ing against exces­sive opti­mism on Sat­ur­day came also from Ital­ian Econ­o­my Min­is­ter Pier Car­lo Padoan, who said domes­tic com­pa­nies still lacked con­fi­dence to make the most of the oppor­tu­ni­ties offered by the ECB’s ultra-loose mon­e­tary pol­i­cy.

    He said the Rome gov­ern­ment would try to take advan­tage of the cur­rent sit­u­a­tion to push through reforms that enhanced growth in the longer-term, so that the ECB’s move did not sim­ply trans­late into a short-term boost.

    “There is a macro­eco­nom­ic win­dow of oppor­tu­ni­ty which is big­ger than we thought a few weeks back ... (but) one should not be exces­sive­ly opti­mistic,” Padoan said at the Lake Como con­fer­ence.

    Vis­co said Bank of Italy pro­jec­tions put the coun­try’s eco­nom­ic growth at between 0.5 and 1.0 per­cent this year and above 1.5 per­cent in 2016.

    The Ital­ian econ­o­my shrank for a third con­sec­u­tive year in 2014.

    You have to love it: More calls for get­ting “infla­tion close to 2 per­cent as quick­ly as pos­si­ble,” cou­pled with more calls for aus­ter­i­ty right now while Europe can still ‘take advan­tage of the sit­u­a­tion’.

    In oth­er news, EU Com­mis­sion eco­nom­ics min­is­ter Pierre Moscovi­ci declared that a ‘Grex­it’ would be a com­plete dis­as­ter that risks a domi­no-effect spread­ing across the euro­zone and every­one needs to show more sol­i­dar­i­ty. This came amongst reports that his boss, Jean-Claude Junck­er, met with Greek prime min­is­ter Alex­is Tsipras, warn­ing him that Greece had bet­ter do every­thing its cred­i­tors asked or else risk get­ting its emer­gence ECB finan­cial life­line get­ting cut off:

    EU exec­u­tive warns of Grex­it ‘cat­a­stro­phe’, urges euro sol­i­dar­i­ty

    By Jan Strupczews­ki and Alas­tair Mac­don­ald

    BRUSSELS Sat Mar 14, 2015 6:04am IST

    (Reuters) — The Euro­pean Com­mis­sion warned of “cat­a­stro­phe” if Greece has to aban­don the euro and its chief exec­u­tive, Jean-Claude Junck­er, urged EU gov­ern­ments to show sol­i­dar­i­ty as Athens strug­gles to secure more cred­it.

    A day after Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said Greece might stum­ble out of the euro zone because new, left-wing lead­ers failed to nego­ti­ate new bor­row­ings, Junck­er’s eco­nom­ics com­mis­sion­er said EU hard­lin­ers under­es­ti­mat­ed the risk that this would start a fatal domi­no col­lapse of the com­mon cur­ren­cy.

    “All of us in Europe prob­a­bly agree that a Grex­it would be a cat­a­stro­phe — for the Greek econ­o­my, but also for the euro zone as a whole,” Pierre Moscovi­ci told Der Spiegel — a view not in fact shared by some con­ser­v­a­tive allies of Chan­cel­lor Angela Merkel who favor ampu­tat­ing the bloc’s trou­bled Greek limb.

    Moscovi­ci, a French Social­ist, coun­tered the argu­ment that pro­tec­tive mech­a­nisms put in place in the three years since the last major debt cri­sis meant Grex­it — or an inad­ver­tent “Grex­i­dent” — could be con­tained, or even strength­en the euro.

    “If one coun­try leaves this union, the mar­kets will imme­di­ate­ly ask which coun­try is next,” Moscovi­ci told the Ger­man mag­a­zine. “And that could be the begin­ning of the end.”

    Moscovi­ci’s com­ments reflect alarm in the new Com­mis­sion formed under Junck­er in Novem­ber that brinkman­ship by lead­ers on both sides of the dis­pute in the euro zone risks get­ting out of hand, and a fear gov­ern­ments under­es­ti­mate the poten­tial dam­age.

    RISK OF FAILURE

    Pledg­ing to help find a com­pro­mise, Junck­er spent some 90 min­utes host­ing Greek Prime Min­is­ter Alex­is Tsipras, rein­forc­ing a rela­tion­ship that has irked some in Berlin who fear the EU exec­u­tive, which is not itself a lender to Greece, may mud­dy the debt nego­ti­a­tions and try to water down the lenders’ terms.

    An EU offi­cial told Reuters that Junck­er urged Tsipras, 20 years his junior, to do much more to show cred­i­tors he was meet­ing their demands for sav­ings and free mar­ket reforms. If he did not, he told Tsipras, there was “a dis­tinct dan­ger” Greece could find itself shut out of the euro mon­e­tary sys­tem.

    In pub­lic, Junck­er sound­ed a note of urgency to oth­er EU gov­ern­ments: “This is not a time for divi­sion,” he said.

    “This is the time for com­ing togeth­er.”

    Tsipras is try­ing to sat­is­fy con­di­tions from lenders who last month extend­ed until June a 240-bil­lion-euro ($250 billion)bailout deal while also retain­ing the sup­port of vot­ers who elect­ed him to end years of aus­ter­i­ty. He said Greece was doing its bit and oth­ers must now help ease its “human­i­tar­i­an cri­sis”.

    Com­mis­sion offi­cials say Junck­er, a long-time pre­mier of Lux­em­bourg and for­mer chair of the Eurogroup of euro zone finance min­is­ters, is alarmed by talk of let­ting Greece go if Athens fails to make sav­ings and free mar­ket reforms demand­ed.

    Schaeu­ble said on Thurs­day there was a risk of that hap­pen­ing if nego­ti­a­tions failed. “As the respon­si­bil­i­ty, the pos­si­bil­i­ty to decide what hap­pens lies only with Greece and because we don’t exact­ly know what those in charge in Greece are doing, we can’t rule it out,” he told an Aus­tri­an broad­cast­er.

    Merkel’s spokesman played down talk of a “pri­vate feud” with Athens, where offi­cials have raised com­plaints about the Nazi occu­pa­tion and World War Two repa­ra­tions.

    The Dutch chair­man of the Euro Group of euro zone finance min­is­ters, Jeroen Dijs­sel­bloem, said the Greeks laid too much blame for their prob­lems on for­eign­ers.

    ...

    TIME FOR “SOLIDARITY”

    Junck­er said: “The Com­mis­sion wants to be help­ful. But the Com­mis­sion is not a major play­er in this because all the deci­sions ... will have to be tak­en by the Eurogroup.”

    Some euro zone offi­cials voiced irri­ta­tion dur­ing last mon­th’s nego­ti­a­tions at Junck­er’s par­al­lel dia­logue with Tsipras and at Moscovi­ci’s efforts to help draft com­pro­mise accords.

    Com­mis­sion offi­cials have said the exec­u­tive’s role has been to offer advice to an inex­pe­ri­enced Greek gov­ern­ment.

    On Feb. 20, Tsipras agreed to extend the bailout pack­age to June but talks start­ed only on Wednes­day in Brus­sels on how Athens will meet con­di­tions to unlock new cash.

    Greek gov­ern­ment spokesman Gabriel Sakel­lar­idis said on Fri­day that Tsipras would call a ref­er­en­dum if cred­i­tors demand­ed extra aus­ter­i­ty mea­sures in exchange for finan­cial aid.

    When you read:

    ...
    An EU offi­cial told Reuters that Junck­er urged Tsipras, 20 years his junior, to do much more to show cred­i­tors he was meet­ing their demands for sav­ings and free mar­ket reforms. If he did not, he told Tsipras, there was “a dis­tinct dan­ger” Greece could find itself shut out of the euro mon­e­tary sys­tem.
    ...

    keep in mind that Greece’s cred­i­tors include Ger­many and Berlin’s demands are that noth­ing changes in the aus­ter­i­ty demands. Also keep in mind that their “demands for sav­ings” are already being met, with Greece cur­rent­ly run­ning a 1.5% GDP sur­plus to pay back its “bailout”. It’s the planned tripling of the sur­plus to 4.5% of Greece’s GDP that Greece is try­ing to change.

    And don’t for­get that it’s entire­ly pos­si­ble that the plan for both Berlin and the rest of the EU is to just run out the clock, find no solu­tion at all, wait for Greece to run out of mon­ey, and hope for new, more com­pli­ant gov­ern­ment:

    Naked Cap­i­tal­ism
    Troi­ka Tight­en­ing the Noose on Greece as Gov­ern­ment Cash Crunch Wors­ens
    Post­ed on March 7, 2015 by Yves Smith

    “I begin to dis­cern the pro­file of my death.” That arrest­ing sen­tence, culled from ear­ly drafts, served as the anchor for one of the finest nov­els ever writ­ten, Mar­garite Yourcenar’s Mem­oirs of Hadri­an.

    The Troi­ka and Eurogroup look to be work­ing towards the Greek gov­ern­ment to start hav­ing sim­i­lar thoughts. How­ev­er, giv­en the high lev­el of pop­u­lar sup­port for Syriza, and press reports that Greek cit­i­zens ful­ly expect that the new gov­ern­ment to at best only be able to deliv­er on a small por­tion of its cam­paign promis­es, the end game for Greece is look­ing more and more like­ly to be a failed state rather than a more neolib­er­al-friend­ly gov­ern­ment.

    We warned almost as soon as the mem­o­ran­dum was agreed among Greece, the Troi­ka, and the Eurogroup, that giv­en that the gov­ern­ment was already out of cash and had IMF pay­ments due in March, the log­i­cal course of action would be to with­hold funds to force Greece to give in on struc­tur­al reforms. Remem­ber that the cur­rent “bailout,” which is being used as a term of art, is seen by the Troi­ka and Eurogroup as a con­tin­u­a­tion of the exist­ing IMF fund­ing pack­age, which includes a set of struc­tur­al reforms. Syriza want­ed to change what it says are 30% of them. The IMF and ECB have made clear that they expect the new gov­ern­ment to stick with the exist­ing pro­gram, and their body lan­guage is that they aren’t open to much in the way of changes, save per­haps human­i­tar­i­an relief (Varo­ufakis has said that he secured agree­ment on that issue; the Troi­ka has been mum).

    Indeed, the cred­i­tors are behav­ing just as expect­ed. From Friday’s ekathimerin:

    Greece sub­mit­ted to Eurogroup chief Jeroen Dijs­sel­bloem Fri­day an out­line of sev­en reform pro­pos­als to form the basis for dis­cus­sion at Monday’s meet­ing of euro­zone finance min­is­ters, but the signs from Brus­sels are that Athens is no clos­er to secur­ing the release of its next tranche of bailout fund­ing.

    The 11-page doc­u­ment sent by Finance Min­is­ter Yanis Varo­ufakis sets out sev­er­al pro­pos­als that have already been made pub­lic as well as some that were only made known Fri­day. The sug­ges­tion that caused the most sur­prise was to fight tax eva­sion by enlist­ing non-pro­fes­sion­al inspec­tors, includ­ing tourists, on a two-month basis dur­ing which they would col­lect audio­vi­su­al data that could be used to tar­get evaders..

    In his let­ter to Dijs­sel­bloem, Varo­ufakis calls for tech­ni­cal dis­cus­sions regard­ing the pro­pos­als to begin as soon as pos­si­ble.

    “We envis­age that… the major­i­ty of the items on our first list can be fur­ther spec­i­fied as soon as pos­si­ble so that the result­ing agree­ment can be rat­i­fied by the Eurogroup, and Greece’s Par­lia­ment, and become the basis for the review,” wrote the Greek finance min­is­ter, who added that the gov­ern­ment pro­pos­es all tech­ni­cal dis­cus­sions and fact-find­ing or fact-exchange ses­sions should take place in Brus­sels.

    A Euro­pean offi­cial speak­ing on con­di­tion of anonymi­ty told jour­nal­ists in the Bel­gian cap­i­tal that since no tech­ni­cal work had been done by Greece’s lenders due to the pro­pos­als only being sub­mit­ted Fri­day, there is no way euro­zone finance min­is­ters will be in a posi­tion to approve the Greek pro­pos­als on Mon­day.

    You can see what is going on here. Notice first that the pro­posed reform list has changed, allow­ing the Troi­ka to act as if this is a new pro­pos­al. Sec­ond, the two sides dis­agree on what con­sti­tutes an ade­quate tech­ni­cal review, and the Troika’s view will gov­ern. Third, which the arti­cle does not acknowl­edge, Varo­ufakis appears to be try­ing to cir­cum­vent the process envis­aged in the mem­o­ran­dum, which was for the Troi­ka to approve the reform pack­age, and then have the Eurogroup approve any release of funds.

    So the lenders’ actions can be dressed up as bureau­crat­ic neces­si­ties, but they amount to delay­ing tac­tics giv­en that time is clear­ly of the essence for Greece.

    The Greek gov­ern­ment is start­ing to sound des­per­ate. Per the Tele­graph:

    Speak­ing in an inter­view with Der Spiegel mag­a­zine, Alex­is Tsipras appealed to the ECB to alle­vi­ate pres­sure on the cash-strapped coun­try.

    The ECB “is still hold­ing the rope which we have around our necks” said Mr Tsipras, refer­ring to the cen­tral bank’s reluc­tance to resume ordi­nary lend­ing to Greek banks at a meet­ing in Cyprus on Thurs­day.

    The cen­tral bank has also rebuffed Greek appeals to raise the lim­it on short-term debt issuance, as it faces €6.5bn in pay­ments over the next three weeks.

    Should the ECB con­tin­ue to resist Greek pleas for assis­tance, “the thriller we saw before Feb­ru­ary 20 will return” warned Mr Tsipras, refer­ring to the mar­ket tur­moil which gripped the coun­try as it car­ried out pro­tract­ed nego­ti­a­tions with its cred­i­tors.

    The wee prob­lem was that the thriller extend­ed only to Greek deposits, Greek bonds, and Euro­pean stocks. Unlike the its US cout­ner­part, the ECB doesn’t care about equi­ty prices. Periph­ery bond yields bare­ly budged, and now with QE about to be launched, they are now trad­ing at insane­ly low lev­els. Mario Draghi almost cer­tain­ly thinks he has the Greek sit­u­a­tion well con­tained.

    And the Feb­ru­ary 20 com­par­i­son does not bode well either. As Nan­ti­na Vgontzas put it in a Real News Net­work inter­view:

    You know, in April the institutions–or the troi­ka, it was for­mal­ly called, you know, the IMF and the ECB, they’re going to review SYRIZA’s bud­get, basi­cal­ly. And at that point the Euro­pean Cen­tral Bank might be play­ing some games again. Already today they said that they’re not going to loan mon­ey to Greece until they see that they’re com­ply­ing with the bailout mea­sures. So as those pres­sures are going to increase again, we’re going to see if the gov­ern­ment is going to blink like they did on Feb­ru­ary 20 or if they’re going to resort to impos­ing cap­i­tal con­trols, nation­al­iz­ing the banks, and then, last­ly, the most radical–not in the ide­al ide­o­log­i­cal sense, but in terms of its eco­nom­ic reper­cus­sions, exit­ing the Euro­zone.

    John Dizard of the Finan­cial Times works through the impli­ca­tions:

    The prob­lem is that the Greek gov­ern­ment will run out of cash to pay its oper­at­ing expens­es in full by the sum­mer, or even soon­er, and nei­ther the Euro­peans nor any­one else will give them enough new mon­ey to pay its bills. That means the Syriza cab­i­net will have to tell pub­lic sec­tor employ­ees and pen­sion­ers that part of their income will be paid in (trans­fer­able) IOUs, which will plunge to a steep dis­count. The lead­ers can blame Ger­mans, oli­garchs, neolib­er­al econ­o­mists or Mar­tians, but a lot of their core sup­port­ers will be unhap­py, and quite open about their feel­ings.

    The eurogroup polit­i­cal lead­er­ship and the euro­c­ra­cy are pre­pared for this. Their recent civ­il exchange of let­ters rep­re­sents a truce, not a peace. The eurogroupies know that there is no mutu­al­ly accept­able deal to be had with the Syriza gov­ern­ment. So their silent inten­tion is to nego­ti­ate with the next gov­ern­ment, who­ev­er that might be, after the Greek gov­ern­ment is forced to call for an ear­ly elec­tion.

    Things have to get pret­ty bad for that to hap­pen; after all, Syriza just won fair and square less than two months ago, and their poli­cies are sup­port­ed by a major­i­ty of the Greek pub­lic.

    The Troi­ka, hav­ing got­ten Greece to blink once, appears to believe it will pre­vail no mat­ter what, either by get­ting Syriza to capit­u­late (unlike­ly but not impos­si­ble) or to make non-com­pli­ance so cost­ly that the gov­ern­ment will be oust­ed. Of course, as we’ve sep­a­rate­ly point­ed out, eco­nom­ic sanc­tions (which is what this amounts to) do not have a great track record of suc­cess. Look how Putin enjoys high poll rat­ings despite the con­cert­ed efforts of the West to dam­age Russia’s econ­o­my as a way to force regime change.

    ...

    Once again:

    ...

    So the lenders’ actions can be dressed up as bureau­crat­ic neces­si­ties, but they amount to delay­ing tac­tics giv­en that time is clear­ly of the essence for Greece.

    ...
    John Dizard of the Finan­cial Times works through the impli­ca­tions:

    The prob­lem is that the Greek gov­ern­ment will run out of cash to pay its oper­at­ing expens­es in full by the sum­mer, or even soon­er, and nei­ther the Euro­peans nor any­one else will give them enough new mon­ey to pay its bills. That means the Syriza cab­i­net will have to tell pub­lic sec­tor employ­ees and pen­sion­ers that part of their income will be paid in (trans­fer­able) IOUs, which will plunge to a steep dis­count. The lead­ers can blame Ger­mans, oli­garchs, neolib­er­al econ­o­mists or Mar­tians, but a lot of their core sup­port­ers will be unhap­py, and quite open about their feel­ings.

    The eurogroup polit­i­cal lead­er­ship and the euro­c­ra­cy are pre­pared for this. Their recent civ­il exchange of let­ters rep­re­sents a truce, not a peace. The eurogroupies know that there is no mutu­al­ly accept­able deal to be had with the Syriza gov­ern­ment. So their silent inten­tion is to nego­ti­ate with the next gov­ern­ment, who­ev­er that might be, after the Greek gov­ern­ment is forced to call for an ear­ly elec­tion.
    ...

    That sounds like a pret­ty good sum­ma­ry of the sit­u­a­tion, because it’s pret­ty clear at this point that most of the EU gov­ern­ments have lit­tle inter­est in com­pro­mis­ing with Greece at all and pre­fer a pro-usury vision of the euro­zone where hard mon­ey far right eco­nom­ic the­o­ries become the immutable laws of the land.

    So why not just tight­en the screws and hope for a new gov­ern­ment in a few months after ear­ly elec­tions? That’s the log­ic that appears to be at work in gov­ern­ments across the EU which is ter­ri­fy­ing because this means most of Europe chart­ing a path towards some sort of “dom­i­nant state/vassal state” mod­el where the dom­i­nant god­fa­ther state is seri­ous­ly based on the God­fa­ther tem­plate. Who know why that’s a desir­able mod­el but as the Greek tragedy plays out it’s becom­ing increas­ing­ly clear that the “sol­i­dar­i­ty” being devel­oped is the sol­i­dar­i­ty of a pack of sov­er­eign bond vig­i­lantes.

    While none of this bodes well, keep in mind that there is still one major rea­son for optimism,as high­light­ed below in an inter­view of Nouriel Roubi­ni. And it’s based on a very sim­ple obser­va­tion: despite the con­fi­dent swag­ger­ing of Berlin’s nego­tia­tors, a ‘Grex­it’ real­ly might be very con­ta­gious:

    Bloomberg News
    Roubi­ni Greek Doom Scenario’s So Bad It May Keep the Euro Intact
    by Lisa Abramow­icz
    11:23 AM CDT
    March 13, 2015

    (Bloomberg) — Nouriel Roubi­ni isn’t called “Dr. Doom” for noth­ing. He tends to be a glass half-emp­ty kind of guy who wor­ries a lot about loom­ing crises.

    But in an inter­est­ing twist, when it comes to Greece, the eco­nom­ic professor’s not that con­cerned. Here’s why: the dooms­day sce­nario he envi­sions if the coun­try exit­ed the euro zone is so bleak for the whole region that pol­i­cy mak­ers both in Athens and across Europe will nev­er let it hap­pen. It’s true oth­er ana­lysts are spec­u­lat­ing that offi­cials in Ger­many and oth­er EU coun­tries are more will­ing now to enter­tain the idea of a Greek exit, but that’s not how Roubi­ni sees it.

    Bor­row­ing costs would soar for nations such as Italy and Spain and Euro­peans would race to with­draw cash from their bank accounts, accord­ing to Roubi­ni, a pro­fes­sor at New York University’s Stern School of Busi­ness. Even Ger­many — Greece’s main neme­sis as it nego­ti­ates a new finan­cial aid pack­age from Euro­pean lead­ers — rec­og­nizes this risk, he said in a Bloomberg Tele­vi­sion inter­view Fri­day.

    “It doesn’t make sense to have a Greek exit,” he said. “There would be mas­sive con­ta­gion.”

    While bond buy­ers are sell­ing Greek bonds, they seem com­pla­cent about the risk to the rest of the euro region and have been pour­ing mon­ey into debt of Italy, Spain and Por­tu­gal, send­ing yields on those nations’ debt to record lows. Span­ish and Ital­ian 10-year bonds are yield­ing just 1.2 per­cent.

    Greek Bonds

    Greek debt, mean­while, has been falling. Yields on Greece’s 10-year bonds rose to 10.7 per­cent Fri­day from 8.6 per­cent on Feb. 24. Rates on its 3‑year notes have climbed to 19 per­cent from 12.4 per­cent.

    So, maybe investors are right to dis­miss con­cerns that a Greek exit would infect all of Europe, even as the nation with one-quar­ter of its work­ing-age pop­u­la­tion unem­ployed faces very real dead­lines for mak­ing debt pay­ments.

    While Greece made a 350 mil­lion euro loan repay­ment to the Inter­na­tion­al Mon­e­tary Fund Fri­day, it faces anoth­er finan­cial hur­dle on March 20, when the gov­ern­ment has to pay the Inter­na­tion­al Mon­e­tary Fund anoth­er 346 mil­lion euros and refi­nance 1.6 bil­lion euros of trea­sury bills.

    ...

    Roubi­ni says that, even though Ger­many has been vocal about its dis­plea­sure with Greece’s antics, every­one under­stands the poten­tial con­se­quences of fail­ing to keep the region intact — which is why it won’t unrav­el.

    Dr. Doom almost sounds a lit­tle opti­mistic.

    That’s right, when it comes to a ‘Grex­it’, Nouriel “Dr. Doom” Roubi­ni is almost sound­ing opti­mistic. Why? Because a ‘Grex­it’ would be so unthink­ably awful for all par­ties involved, and not just Greece, that it’s not going to be allowed to hap­pen.

    Of course, that analy­sis assume that there’s much con­cern in Berlin about the bonds of coun­tries like Spain and Italy catch­ing the ‘Grex­it’ con­ta­gion with rates already at record lows. After all, high­er rates on sov­er­eign yields in the periph­ery as a result of any ‘con­ta­gion’ will just be an excuse to call of more aus­ter­i­ty, and more aus­ter­i­ty is clear­ly still the meta-agen­da for Europe.

    So while it’s like­ly that a ‘Grex­it’ would cre­ate a new source of finan­cial stress for Europe’s periph­ery nations, it’s not actu­al­ly clear that Europe’s leaers would­n’t wel­come see­ing a ‘Grex­it’ dis­as­ter inject some addi­tion­al chaos into the sit­u­a­tion. Just as long as it’s con­trolled chaos. And that’s the ques­tion...can the chaos be con­trolled:

    COR­RECT­ED-Europe’s fire­walls may not be enough to stem Grex­it investor pan­ic

    Thu Feb 19, 2015 10:33am EST

    (Cor­rects 10th para­graph to read “anti-aus­ter­i­ty par­ties”, not gov­ern­ments)

    * Despite fire­walls, Grex­it would hit euro, bonds and stocks

    * Investors to seek safe havens if Greece left euro zone

    * Wari­ness to polit­i­cal con­ta­gion new fac­tor since 2012

    * Some see post-Grex­it falls as poten­tial buy­ing oppor­tu­ni­ty

    By John Ged­die

    LONDON, Feb 19 (Reuters) — For all the fire­walls Europe put in place over the last three years, the actions investors say they would take if Greece left the euro cur­ren­cy bloc sug­gest the ensu­ing pan­ic would rum­ble through finan­cial mar­kets.

    The immi­nent launch of a bond-buy­ing scheme from the Euro­pean Cen­tral Bank has so far quelled the anx­i­ety that in 2012, when Greece last looked set for the exit, prompt­ed a steady stream of mon­ey out of the euro zone.

    But this could quick­ly change if the cur­rent stand-off between the new anti-aus­ter­i­ty gov­ern­ment in Athens and its inter­na­tion­al cred­i­tors shifts the bal­ance of prob­a­bil­i­ty towards Grex­it.

    Investors say the euro would take a ham­mer­ing as for­eign funds sought shel­ter in U.S. and British assets, euro zone stocks would fall, and bor­row­ing costs in the bloc’s low-rat­ed coun­tries would soar as those oblig­ed to stick with Europe tried to stem loss­es by buy­ing Ger­man gov­ern­ment bonds.

    “A lot of inter­na­tion­al investors would use it as an oppor­tu­ni­ty to just sell to the ECB and leave the euro area, sim­i­lar to what we have seen before,” said Patrick O’Don­nell of Aberdeen Asset Man­age­ment, a fund with over 400 bil­lion euros under man­age­ment.

    ...

    But there is lit­tle evi­dence as yet of investors pro­tect­ing them­selves against a Grex­it threat.

    The lat­est Reuters polls show only 25 per­cent of econ­o­mists think Grex­it will hap­pen this year, far less than the 90 per­cent chance Cit­i­group attached to such an out­come at the height of the debt cri­sis in 2012.

    Mar­kets, out­side Greece, have bare­ly stirred even with anti-aus­ter­i­ty par­ties in the likes of Spain and Ire­land also ris­ing to promi­nence.

    Aberdeen’s O’Don­nell remains heav­i­ly invest­ed in the bloc’s low-rat­ed periph­er­al bonds, wait­ing for the ECB to buoy prices fur­ther when it launch­es quan­ti­ta­tive eas­ing in March.

    Gareth Cole­smith, a port­fo­lio man­ag­er at Insight Invest­ment, said that with­out the prospect of the ECB’s scheme, bor­row­ing costs in the bloc’s oth­er weak links — Por­tu­gal, Italy and Spain — would already be a lot high­er.

    This is was what hap­pened in 2012, as investors became con­vinced that Greece leav­ing would cre­ate a domi­no effect even­tu­al­ly result­ing in a break-up of the union and a return to pre-euro cur­ren­cies.

    Since then, the ECB has pledged to do what­ev­er it takes to save the euro, Europe’s finan­cial sys­tem has been through a com­pre­hen­sive health check, and the ECB has unveiled QE, which many see as a road-map towards debt mutu­al­i­sa­tion.

    But, says Insight’s Cole­smith, it may not be enough.

    “If the shift of investor sen­ti­ment is suf­fi­cient­ly large, it will only cush­ion the blow rather than pre­vent it.”

    Inter­na­tion­al funds could pull invest­ments out of the euro area, exac­er­bat­ing a fall in the cur­ren­cy that could see it tum­ble towards par­i­ty with the U.S. dol­lar.

    Hedge funds may then start to prey on coun­tries most like­ly to fol­low Greece out the door. Por­tu­gal, the only oth­er coun­try to have junk-rat­ed debt, is an obvi­ous can­di­date.

    POLITICAL CONTAGION

    Unlike in 2012, poten­tial polit­i­cal con­ta­gion could also become a fac­tor in invest­ment deci­sions.

    Spain too could be tar­get­ed with the Podemos par­ty — a hard-left ally of Greece’s Syriza — lead­ing the polls before elec­tions in Decem­ber.

    “It would be very much a case of pick­ing off the weak­est mem­bers of the herd,” said Ker­ry Craig, glob­al mar­ket strate­gist at JPMor­gan Asset Man­age­ment.

    For some investors, a post-Grex­it sell­off could have a sil­ver lin­ing. Julien-Pierre Nouen, chief econ­o­mist at Lazard Frères Ges­tion in Paris, said that with Euro­pean growth improv­ing, signs of banks lend­ing again and QE in prospect, the firm remains over­weight euro zone equi­ties.

    “We would be buy­ers on any mar­ket weak­ness. If the mar­ket falls by 10 per­cent we would cer­tain­ly be buy­ers,” he said

    Mon­ey man­agers that have to remain invest­ed in the bloc, would ini­tial­ly turn to the safest assets if the bloc frac­tured.

    Many would buy Ger­man gov­ern­ment bonds — an uninvit­ing prospect when easy cen­tral bank pol­i­cy has dri­ven yields on much of this debt below zero, effec­tive­ly mean­ing investors are pay­ing for the priv­i­lege of lend­ing.

    “It is real­ly a ques­tion of fear ver­sus greed a lot of the time in finan­cial mar­kets and, if fear takes over, bonds will be bought even at these lev­els,” said Mark Dowd­ing, a port­fo­lio man­ag­er at Lon­don-based fund Blue­bay.

    As the arti­cle sug­gests, if ‘Grex­it’ takes place, we’re prob­a­bly look­ing at a sit­u­a­tion where...

    ...

    Investors say the euro would take a ham­mer­ing as for­eign funds sought shel­ter in U.S. and British assets, euro zone stocks would fall, and bor­row­ing costs in the bloc’s low-rat­ed coun­tries would soar as those oblig­ed to stick with Europe tried to stem loss­es by buy­ing Ger­man gov­ern­ment bonds.

    ...

    And that’s prob­a­bly not a bad set of ‘Grex­it’ pre­dic­tions, which rais­es the ques­tion: just how much are Berlin and the rest of the EU ‘cred­i­tor nations’ going to care if “the euro would take a ham­mer­ing as for­eign funds sought shel­ter in U.S. and British assets, euro zone stocks would fall, and bor­row­ing costs in the bloc’s low-rat­ed coun­tries would soar as those oblig­ed to stick with Europe tried to stem loss­es by buy­ing Ger­man gov­ern­ment bonds”?

    And it seems like the answer is some­thing like “well, as long as the ‘Grex­it’ con­ta­gion does­n’t get too bad, it will prob­a­bly be fine”. And who knows, with QE get­ting under­way that might pro­vide enough mon­e­tary cush­ion­ing to ward off any major ‘Grex­it’ fears. At least in terms of con­trol­ling run­away inter­est rates and a run on the bond mar­kets.

    But as the arti­cle above also point­ed out:

    ...
    Unlike in 2012, poten­tial polit­i­cal con­ta­gion could also become a fac­tor in invest­ment deci­sions.

    Spain too could be tar­get­ed with the Podemos par­ty — a hard-left ally of Greece’s Syriza — lead­ing the polls before elec­tions in Decem­ber.

    “It would be very much a case of pick­ing off the weak­est mem­bers of the herd,” said Ker­ry Craig, glob­al mar­ket strate­gist at JPMor­gan Asset Man­age­ment.

    ...

    and if there’s a ‘Grex­it’ in the next few months, it’s kind of hard to see how the polit­i­cal con­ta­gion isn’t going to go viral. A no com­pro­mise ‘Grex­it’ isn’t exact­ly the kind of sce­nario that engen­ders long-term faith in the Euro­pean project and yet ‘no com­pro­mise’ appears to be the cre­do pol­i­cy-mak­ers are demand­ing from Greece, and the rest the periph­ery to a less­er degree, at near­ly every turn.

    That’s all part of what’s mak­ing the ‘Grex­it’ stand­off with­in the con­text of QE a scar­i­ly fas­ci­nat­ing dynam­ic to watch: based on past expe­ri­ence with Europe’s cur­rent lead­er­ship crew, some finan­cial chaos is wel­come, just not too much. And show­downs that lead to an over­rid­ing of demo­c­ra­t­ic insti­tu­tions in favor of supra-nation­al eco­nom­ic regimes are sim­i­lar­ly wel­come. So a ‘Grex­it’ that leaves the Greeks trau­ma­tized and scares the hell out the rest of the Europe may not be all that unde­sir­able from the com­plete­ly uncom­pro­mis­ing, far-right stand­point that typ­i­cal­ly emanates from Berlin and dom­i­nates Europe.

    But you also can’t ignore the fact that a ‘Grex­it’ can have polit­i­cal reper­cus­sions that can’t be con­tain even if the finan­cial tur­moil can be kept under con­trol through the ECB and QE or some oth­er mon­e­tary tools. In oth­er words, all the talk we year about how a ‘Grex­it’ is man­age­able is only real­ly talk­ing about the eco­nom­ics of man­ag­ing a ‘Grex­it’. And that’s some­thing that you might be able to pre­dict is man­age­able. But how easy is it going to be to pre­dict the polit­i­cal fall­out of a ‘Grex­it’? Espe­cial­ly if, as sug­gest­ed by Yves Smith above, the entire game plan for the EU is to force an ear­ly elec­tion by being uncom­pro­mis­ing and unrea­son­able and just cre­at­ing a drawn out awful sit­u­a­tion? How do you con­tain the polit­i­cal fall­out for some­thing like that?

    It’s not at all clear, at least in the short run. In the long run who knows.

    Posted by Pterrafractyl | March 15, 2015, 11:54 pm
  15. While it may seem some­what depress­ing when you see a buck­et of crabs that keep pulling the poten­tial escapees back into the buck­et, keep in mind that it’s entire­ly pos­si­ble that the crabs aren’t sim­ply trapped a in a buck­et. They might be trapped in a sui­ci­dal cycle of pet­ty revenge and despair too and maybe drag­ging oth­ers back in the buck­et with them is the only source of plea­sure in their lives. And, if that’s the case, just imag­ine the psy­cho­log­i­cal change that takes place when every­one is try­ing to ensure no one else escapes, but then one of the big crabs that helped throw every­one in the buck­et in the first place sud­den­ly climbs out:

    Finan­cial Times
    France’s wins two-year reprieve from EU bud­get rules

    Peter Spiegel in Brus­sels
    March 10, 2015 3:34 pm

    The French gov­ern­ment won two more years to bring its bud­get deficit under the EU ceil­ing of 3 per cent of eco­nom­ic out­put despite objec­tions from oth­er euro­zone cap­i­tals that big­ger coun­tries were being giv­en eas­i­er treat­ment under new bud­get rules.

    The two-year waiv­er, for­mal­ly adopt­ed by EU finance min­is­ters at a meet­ing on Tues­day in Brus­sels, comes after a sim­i­lar­ly divi­sive debate with­in the Euro­pean Com­mis­sion over the French bud­get last month. Under EU rules, the com­mis­sion rec­om­mends whether a coun­try should be giv­en an exten­sion, which must then be approved by finance min­is­ters.

    Michael Noo­nan, the Irish finance min­is­ter and one of the most vocal crit­ics of the deci­sion dur­ing the closed-door nego­ti­a­tions, said he had raised the issue of equi­table treat­ment dur­ing the two days of delib­er­a­tions.

    “I am say­ing if you’re giv­ing dis­cre­tion to six or sev­en Euro­pean coun­tries includ­ing France, we want dis­cre­tion as well,” Mr Noo­nan said. EU offi­cials said oth­er small­er euro­zone coun­tries, includ­ing Por­tu­gal and Slo­va­kia, raised sim­i­lar con­cerns dur­ing the debate.

    Despite the divi­sions, the min­is­ters issued a state­ment say­ing the exten­sion until 2017 was war­rant­ed because of the unex­pect­ed­ly strong eco­nom­ic head­winds France has faced and the reform efforts under­tak­en by the gov­ern­ment of Pres­i­dent François Hol­lande over the past two years.

    “The [min­is­ters] found that extend­ing the dead­line for cor­rect­ing the deficit was jus­ti­fied by the fis­cal effort made by France since 2013, and by the cur­rent weak eco­nom­ic con­di­tions and oth­er fac­tors,” the state­ment said.

    In Octo­ber, Mr Hollande’s gov­ern­ment uni­lat­er­al­ly announced it would break an agree­ment with Brus­sels to bring its deficit below the 3 per cent ceil­ing this year, a move that led to a series of warn­ings from the com­mis­sion that France risked becom­ing the first euro­zone coun­try to be fined under the EU’s new cri­sis-era fis­cal rules.

    After repeat­ed­ly delay­ing its deci­sion, the com­mis­sion last month grant­ed the two-year waiv­er — the third delay Paris has received since the start of the cri­sis — but vowed it would revis­it the issue again in three months after demand­ing more bud­get cuts and eco­nom­ic reforms.

    “France needs to step up its efforts,” said Vald­is Dom­brovskis, the commission’s vice-pres­i­dent in charge of euro­zone pol­i­cy. “We are putting France under very tight dead­lines, so we will be com­ing back to assess both its fis­cal and macro­eco­nom­ic per­for­mance in the next two, three months.”

    ...

    At the core of the dis­pute over France is whether Paris has done enough to war­rant the waiv­er. Under the EU rules, the com­mis­sion must deter­mine a euro­zone gov­ern­ment has tak­en “effec­tive action” in its effort to cut its deficit even if it miss­es the tar­get.

    Many EU offi­cials believe France has failed to meet that thresh­old, and the legal text pro­posed to min­is­ters includ­ed tor­tured lan­guage, say­ing the com­mis­sion found no evi­dence to con­clude there was “no effec­tive action”. Sev­er­al EU offi­cials believed the dou­ble-neg­a­tive in the find­ing meant the exten­sion was ille­gal, but min­is­ters decid­ed to sup­port it regard­less.

    Yeah, you read that right:

    Many EU offi­cials believe France has failed to meet that thresh­old, and the legal text pro­posed to min­is­ters includ­ed tor­tured lan­guage, say­ing the com­mis­sion found no evi­dence to con­clude there was “no effec­tive action”. Sev­er­al EU offi­cials believed the dou­ble-neg­a­tive in the find­ing meant the exten­sion was ille­gal, but min­is­ters decid­ed to sup­port it regard­less.

    Pray­ing to the dou­ble-neg­a­tive gods. The oxy­gen lev­els must be run­ning low in the buck­et.

    Still, it’s nice to hear things like “The [min­is­ters] found that extend­ing the dead­line for cor­rect­ing the deficit was jus­ti­fied by the fis­cal effort made by France since 2013, and by the cur­rent weak eco­nom­ic con­di­tions and oth­er fac­tors,” com­ing from the Euro­pean Com­mis­sion. Weak eco­nom­ic con­di­tions as an excuse for increas­ing pub­lic spend­ing? Why that’s almost....Keynesian! *gasp*

    Yes, the euro­zone’s lit­tle sec­ond-class crabs just might be start­ing to rec­og­nize that they too can escape the buck­et, but only if they work togeth­er. Good luck lit­tle crabs! And don’t for­get: The crit­ters that threw you in the buck­et in the first place prob­a­bly want to keep you there:

    The Irish Times
    Taoiseach push­es for greater bud­get flex­i­bil­i­ty from Europe
    Enda Ken­ny says fis­cal rules should reflect ‘grow­ing eco­nom­ic strength of the coun­try’

    Suzanne Lynch

    First pub­lished: Fri, Mar 20, 2015, 15:04

    Taoiseach Enda Ken­ny has raised the prospect of fur­ther tax cuts in October’s bud­get as Ire­land con­tin­ues its bid to secure more flex­i­bil­i­ty from the Euro­pean Com­mis­sion on the inter­pre­ta­tion of fis­cal rules.

    Speak­ing at the end of the sec­ond day of an EU sum­mit at which the EU’s eco­nom­ic rules were dis­cussed, Mr Ken­ny said that Irish offi­cials were work­ing with the Euro­pean Com­mis­sion to find ways of inter­pret­ing EU bud­get rules that would reflect the real eco­nom­ic pro­file of the coun­try.

    “You don’t want an inter­pre­ta­tion of the rule that doesn’t reflect the grow­ing eco­nom­ic strength of the coun­try,” he said, adding that he had out­lined Ireland’s strong eco­nom­ic per­for­mance to EU lead­ers dur­ing Fri­day morning’s ses­sion.

    Refer­ring to October’s bud­get, he said: “Hope­ful­ly we can con­tin­ue to reduce the tax­a­tion bur­den that so peo­ple next year will con­tin­ue to see anoth­er mod­est increase in their take-home pay...We accept the rules of the Euro­pean Com­mis­sion, but the fact that we’re in a very dif­fer­ent posi­tion than we were four years ago, how best can we inter­pret the rules with the Com­mis­sion.”

    Min­is­ter for Finance Michael Noo­nan last week pressed for more flex­i­bil­i­ty for coun­tries such as Ire­land in the inter­pre­ta­tion of EU bud­get rules dur­ing a Eurogroup meet­ing in Brus­sels, fol­low­ing the Euro­pean Commission’s deci­sion to grant France two more years to reach its deficit tar­gets.

    In par­tic­u­lar, the Gov­ern­ment is dis­put­ing the eco­nom­ic growth and data pro­jec­tions being used by the Euro­pean Com­mis­sion in cal­cu­lat­ing Ireland’s debt and deficit tar­gets.

    The need for mem­ber states to pro­ceed with struc­tur­al reforms was empha­sised by ECB pres­i­dent Mario Draghi at Friday’s closed-door meet­ing, as the head of the Euro­pean Cen­tral Bank not­ed that Europe’s recent strong per­for­mance main­ly reflect­ed exter­nal fac­tors such as low inter­est rates and oil prices and the depre­ci­at­ing euro.

    With Greece con­tin­u­ing to pre­oc­cu­py minds in Brus­sels, Ireland’s strong eco­nom­ic per­for­mance and expe­ri­ence of sub­sti­tut­ing pro­posed troi­ka mea­sures with its own alter­na­tives dur­ing the Irish bailout was cit­ed a num­ber of times dur­ing the sum­mit, Mr Ken­ny said, with Ger­man chan­cel­lor Angela Merkel among those doing so.

    ...

    Yeah, sor­ry lit­tle crabs. ECB Chief Mario Draghi does­n’t real­ly see a need to let you out of the buck­et. As he not­ed:

    The need for mem­ber states to pro­ceed with struc­tur­al reforms was empha­sised by ECB pres­i­dent Mario Draghi at Friday’s closed-door meet­ing, as the head of the Euro­pean Cen­tral Bank not­ed that Europe’s recent strong per­for­mance main­ly reflect­ed exter­nal fac­tors such as low inter­est rates and oil prices and the depre­ci­at­ing euro.

    Yep, accord­ing the ECB, the improv­ing per­for­mance of Ire­land isn’t real­ly sus­tain­able or due to the suc­cess­es of all its past “struc­tur­al reforms”. No, Ire­land’s bet­ter than expect­ed eco­nom­ic growth this year is mere­ly due to exter­nal fac­tors like “low inter­est rates and oil prices and the depre­ci­a­tion of the euro”.

    In oth­er words, all those “struc­tur­al reforms” and years of aus­ter­i­ty were NOT the secret to Ire­land’s recent suc­cess. The ECB’s mon­e­tary tools (which have been opposed by Europe’s aus­te­ri­ans for years) and OPEC’s oil glut are what did the trick. And while the ECB is prob­a­bly mak­ing a very valid point about the effec­tive­ness of its mon­e­tary poli­cies and exter­nal fac­tors vs the effec­tive­ness of the “struc­tur­al reforms”, that valid point is being used as an excuse for impos­ing even more “struc­tur­al reforms” on coun­tries like Ire­land.

    The ulti­mate les­son from all this is that if you’re a crab, stay out of buck­ets! You’ll even­tu­al­ly be allowed to leave the buck­et, but it still does­n’t end well.

    Posted by Pterrafractyl | March 20, 2015, 5:58 pm
  16. The Tele­graph has an arti­cle about the role the ECB has assumed as the troika’s chief “bad news” enforcer in the nego­ti­a­tions with Greece that con­tains a real­ly notable quote from an ana­lyst at the pro-aus­ter­i­ty Peter­son Insti­tute:
    “The cen­tral bank’s strat­e­gy is aimed at get­ting recal­ci­trant euro­zone pol­i­cy­mak­ers to do things they oth­er­wise would not do”:

    The Tele­graph
    How the Euro­pean Cen­tral Bank became the real vil­lain of Greece’s debt dra­ma
    Dis­cre­tionary pow­er exer­cised by the cen­tral bank has put it at the heart of Greece’s euro tur­moil

    By Mehreen Khan

    5:00PM BST 10 May 2015

    When a rogue pro­test­er scaled the plat­form occu­pied by Euro­pean Cen­tral Bank pres­i­dent Mario Draghi at his month­ly press con­fer­ence in April, the usu­al­ly unruf­fled Ital­ian could be for­giv­en for being paral­ysed by fear.

    Con­front­ed with female activist shout­ing “end the ECB dic­ta­tor­ship”, Mr Draghi was show­ered with pam­phlets bear­ing a list of inchoate threats, accus­ing the cen­tral bank of “auto­crat­ic hege­mo­ny” and Mr Draghi of being an evil “mas­ter of the uni­verse”.

    As she was swift­ly whisked away by ECB hench­man, the Twit­ter­sphere was soon abuzz with rumours of the iden­ti­ty and pos­si­ble moti­va­tion behind Mr Draghi’s “con­fet­ti-bomber.”

    As it turned out, 21-year old Ger­man Josephine Witt, was not a dis­grun­tled Greek cit­i­zen demand­ing answers from the ECB chief.

    But the fem­i­nist agi­ta­tor was a stark reminder that tech­no­crat­ic cen­tral bankers are not immune from pub­lic anger over euro­zone eco­nom­ic pol­i­cy.

    In the last three months, the Frank­furt-based ECB has become the tar­get of vocif­er­ous crit­i­cism for its han­dling of the Greek cri­sis.

    Weeks before the con­fet­ti attack, Mr Draghi was heck­led by a Greek jour­nal­ist at a press con­fer­ence in Nicosia. Before that, he was the sub­ject of a tirade from a Greek MEP dur­ing an address at the Euro­pean Par­lia­ment.

    On both occa­sions, the Ital­ian was shout­ed down as he was forced to defend his institution’s role in Greece’s debt dra­ma.

    ‘Ultra Vires’

    “In their attempt to respect their duties, the ECB’s pol­i­cy­mak­ers have made them­selves polit­i­cal,” Greece’s finance min­is­ter Yanis Varo­ufakis told an audi­ence of aca­d­e­mics and econ­o­mists in Paris last month.

    The refrain strikes at the heart of his government’s com­plaints against the notion­al­ly inde­pen­dent ECB.

    As one of Greece’s three main cred­i­tors — along­side the Inter­na­tion­al Mon­e­tary Fund and the Euro­pean Com­mis­sion — the cen­tral bank is unique in wield­ing the pow­er that can ulti­mate­ly force the coun­try out of the sin­gle cur­ren­cy.

    Despite not offi­cial­ly being par­ty to the polit­i­cal nego­ti­a­tions over extend­ing Greece’s bail-out, the ECB has made a num­ber of dis­cre­tionary moves since the Syriza gov­ern­ment was elect­ed just over 100 days ago. .

    When he first swept into pow­er, Prime Min­is­ter Alex­is Tsipras appealed to Mr Draghi to pro­vide some form of bridg­ing finance to keep the coun­try afloat as he sought to re-write the terms of Greece’s res­cue pro­gramme.

    It soon became clear the Ital­ian would not be play­ing ball.

    Not only has the ECB rebuffed requests for tem­po­rary finan­cial relief, but its dis­ci­pli­nar­i­an stance has led to accu­sa­tions that it is act­ing ‘ultra vires’ — tak­ing polit­i­cal­ly moti­vat­ed action out­side of its legal remit to ensure finan­cial sta­bil­i­ty in the euro­zone.

    The first con­tro­ver­sial move came as Mr Tsipras and Mr Varo­ufakis were hot-foot­ing around Europe, drum­ming up sup­port for their government’s nascent plans to rip up Brus­sels aus­ter­i­ty con­tract.

    On Feb­ru­ary 4, the ECB’s 28-mem­ber Gov­ern­ing Coun­cil took alate-evening deci­sion to remove its ordi­nary fund­ing oper­a­tions for Greek banks.

    The vote was held hours after Mr Varo­ufakis had met with the ECB’s chief in Frank­furt ear­li­er in the day.

    In remov­ing the waiv­er, which allowed Greece’s banks to post gov­ern­ment debt as col­lat­er­al for cheap cash, the Greek finan­cial sys­tem became sole­ly reliant on expen­sive emer­gency funds to stay afloat.

    Frank­furt said its deci­sion was based on an assess­ment that it was “not pos­si­ble to assume a suc­cess­ful con­clu­sion of the pro­gramme review”. This was wide­ly inter­pret­ed as a threat to the fledg­ling Left­ist gov­ern­ment: capit­u­late, or you will be forced to suf­fer the con­se­quences.

    Greek bank stocks fell by as much as 30pc the fol­low­ing day and the begin­nings of a bank run were well in motion.

    The ECB has since been forced to inject ever-increas­ing amounts of emer­gency loans into Greece. Last week, the Gov­ern­ing Coun­cil met to make its 13th week­ly hike of the emer­gency ceil­ing, tak­ing it to €79bn.

    The liq­uid­i­ty squeeze has since inten­si­fied. The cen­tral bank fol­lowed up its action by offi­cial­ly ban­ning Greek banks from increas­ing their hold­ings of short-term gov­ern­ment debt. This has proven to be anoth­er major con­straint on the cash-strapped gov­ern­ment which is strug­gling to pay out pub­lic sec­tor pen­sions and salaries.

    Tight­en­ing the noose

    With trust between Greece and its part­ners fray­ing, Mr Tsipras vent­ed his frus­tra­tions in a let­ter to Angela Merkel and Mr Draghi in March. He chas­tised the ECB for mak­ing it “impos­si­ble” for his gov­ern­ment to meet its basic oblig­a­tions to its cit­i­zens.

    “I am urg­ing you not to allow a small cash flow issue, and a cer­tain ‘insti­tu­tion­al iner­tia’, to turn into a large prob­lem for Greece and for Europe,” wrote Mr Tsipras.

    His pleas have fall­en on deaf ears.

    Unlike his sem­i­nal promise to bring Europe back from the brink in July 2012, Mr Draghi has made no pledge to “do what­ev­er it takes” to save Greece.

    Instead, the ECB is con­sid­er­ing mak­ing it even hard­er for banks to access emer­gency funds by tough­en­ing up its col­lat­er­al rules. A deci­sion could be tak­en as soon as this week.

    Board mem­ber Yves Mer­sch has gone as far as to open­ly sug­gest Greece may have to issue IOU’s in order to avoid default­ing on its own peo­ple this month.

    For his part, Mr Draghi fierce­ly rebuffs accu­sa­tions of “black­mail”. He main­tains the ECB has always been a rules-based insti­tu­tion, and is ready to rein­state its ordi­nary lend­ing to Greece should a “suc­cess­ful com­ple­tion” of the cur­rent bail-out be car­ried out.

    “The ECB has €104bn expo­sure to Greece. That’s 65pc of Greek GDP and the high­est expo­sure in the euro­zone,” respond­ed the for­mer Gold­man Sachs banker, when asked if his insti­tu­tion was “asphyx­i­at­ing” Greece over its reform pro­gramme.

    Bail-outs at the end of a gun

    As the euro­zone has lurched from cri­sis to cri­sis, the ECB has always been at the cen­tre of high­ly-charged are­na of polit­i­cal deci­sion-mak­ing.

    In such moments of cri­sis, “the ECB is a full-blood­ed polit­i­cal actor,” notes Jacob Funk Kierkegaard of the Peter­son Insti­tute in Wash­ing­ton..

    “The cen­tral bank’s strat­e­gy is aimed at get­ting recal­ci­trant euro­zone pol­i­cy­mak­ers to do things they oth­er­wise would not do,” notes Mr Kierkegaard.

    Threats against Greece are no excep­tion.

    Last year, a series of let­ters between then ECB chief Jean-Claude Trichet and Ireland’s min­is­ter of finance revealed the cen­tral bank had threat­ened to cut off emer­gency funds for Ireland’s belea­guered finan­cial sys­tem if the gov­ern­ment did not apply for a bail-out in 2010.

    The cor­re­spon­dence con­firmed that the ECB had held a gun to the head of the gov­ern­ment in return for a res­cue pack­age worth 100pc of Ireland’s GDP. Sim­i­lar threats abound­ed dur­ing Cyprus’s bank res­cue in 2013.

    In a recent­ly pub­lished account of the machi­na­tions that led up to Greece’s orig­i­nal bail-out in 2010, it was revealed that Mr Trichet and the ECB were the main obsta­cles to an IMF plan to restruc­ture a por­tion of Greece’s debt. Mr Trichet feared any move to impose loss­es on pri­vate investors could trig­ger anoth­er “Lehman moment” in the frag­ile world econ­o­my.

    The sub­se­quent move to lend more than €300bn in loans to the bank­rupt coun­try has been called a “fatal error” by for­mer IMF bail-out chief Ashoka Mody.

    The IMF lat­er admit­ted it had sac­ri­ficed Greece at the altar of Europe’s bank­ing sys­tem, with more than 90pc of its res­cue cash being used to prop up banks in France and Ger­many rather than keep Greece afloat.

    Forced to defend his institution’s account­abil­i­ty, Mr Trichet told a par­lia­men­tary inquiry in Dublin last month: “We helped Ire­land more than any oth­er cen­tral bank helped any oth­er coun­try”.

    This famil­iar rhetoric will ring hol­low in Athens.

    ...

    Once again:

    ...
    As the euro­zone has lurched from cri­sis to cri­sis, the ECB has always been at the cen­tre of high­ly-charged are­na of polit­i­cal deci­sion-mak­ing.

    In such moments of cri­sis, “the ECB is a full-blood­ed polit­i­cal actor,” notes Jacob Funk Kierkegaard of the Peter­son Insti­tute in Wash­ing­ton..

    “The cen­tral bank’s strat­e­gy is aimed at get­ting recal­ci­trant euro­zone pol­i­cy­mak­ers to do things they oth­er­wise would not do,” notes Mr Kierkegaard.

    Threats against Greece are no excep­tion.
    ...

    Part of what makes that obser­va­tion by some­one at the Peter­son Insti­tute so inter­est­ing is that, through­out the euro­zone cri­sis, one of the pri­ma­ry excus­es we’ve heard for why the ECB can’t engage in more aggres­sive mon­e­tary poli­cies, like the “Out­right Mon­e­tary Trans­ac­tions” (OMTs) where the ECB has the option of pur­chas­ing sov­er­eign bonds, is that if the ECB starts buy­ing sov­er­eign bonds, its polit­i­cal inde­pen­dence will be threat­ened.

    For instance, when QE was under pro­pos­al, that’s the argu­ment we heard from Bun­des­bank chief Jens Wei­d­mann last year:

    Bond buy­ing threat­ens ECB inde­pen­dence, says Bun­des­bank’s Wei­d­mann
    Share­cast – Wed, Feb 19, 2014 09:13 GMT

    LONDON (Share­Cast) — Ger­man Bun­des­bank Pres­i­dent Jens Wei­d­mann warned that the Euro­pean Cen­tral Bank’s (ECB) out­right mon­e­tary trans­ac­tions (OMT) pro­gramme could threat­en the Euro­zone mon­e­tary author­i­ty’s inde­pen­dence.

    The OMT allows unlim­it­ed pur­chas­es of gov­ern­ment bonds under cer­tain con­di­tions.

    In an inter­view with Frank­furter All­ge­meine Zeitung, Wei­d­mann claimed that a cen­tral bank becomes a “polit­i­cal pris­on­er” when it pur­chas­es gov­ern­ment bonds and that the OMT pro­gramme would make it dif­fi­cult to con­duct mon­e­tary pol­i­cy.

    That’s the typ­i­cal Bun­des­bank: the ECB can nev­er engage the rou­tine cen­tral bank­ing tool of buy­ing sov­er­eign bonds because that makes it a “polit­i­cal pris­on­er”. It’s also a typ­i­cal­ly sil­ly Bun­des­bank stance since, as Ambrose Evan-Pritchard and Mario Draghi both point­ed out back in Decem­ber, whether or not folks want to admit it, the euro­zone might tech­ni­cal­ly be a mon­e­tary union, but it’s also unde­ni­ably a de fac­to polit­i­cal union because shar­ing a cen­tral bank and cur­ren­cy is an inher­ent­ly polit­i­cal exer­cise giv­en the shar­ing of sov­er­eign­ty involved.

    So oppo­si­tion to the ECB get­ting involved in polit­i­cal deci­sions is some­what moot giv­en that the euro­zone is already a polit­i­cal union or sorts via its shared mon­e­tary pol­i­cy whether folks want to admit it or not:

    The Tele­graph
    Draghi’s author­i­ty drains away as half ECB board joins mutiny
    Draghi is right: the euro means a sin­gle gov­ern­ment and a Euro­pean super­state, and to pre­tend oth­er­wise is intel­lec­tu­al­ly infan­tile.

    By Ambrose Evans-Pritchard

    3:10PM GMT 05 Dec 2014

    The Euro­pean Cen­tral Bank is fac­ing a full-blown lead­er­ship cri­sis. Mario Draghi’s author­i­ty is ebbing, with pow­er­ful impli­ca­tions for finan­cial mar­kets and the long-term fate of mon­e­tary union.

    Both Die Zeit and Die Welt report that three mem­bers of the ECB’s six-strong exec­u­tive board refused to sign off on Mr Draghi’s lat­est state­ment, an unprece­dent­ed mutiny in the sanc­tum sanc­to­rum of the ECB’s pol­i­cy mak­ing machin­ery.

    The dis­senters are report­ed­ly Germany’s Sabine Laut­en­schläger, Luxembourg’s Yves Mer­sch, and more sur­pris­ing­ly France’s Benoît Cœuré, an indi­ca­tion that Paris is still hop­ing to avoid a break­down in rela­tions with Berlin over the man­age­ment of EMU.

    The real­i­ty is that a full six months after Mr Draghi first talked loose­ly of a €1 tril­lion blitz to head off defla­tion risks, almost noth­ing has actu­al­ly hap­pened. The ECB bal­ance sheet has shrunk by over €100bn.

    Talk has achieved a weak­er euro but that is not mon­e­tary stim­u­lus. It does not off­set the with­draw­al of $85bn of net bond pur­chas­es by the US Fed­er­al Reserve for the glob­al econ­o­my as a whole. It is a zero-sum devel­op­ment.

    The clash comes at a del­i­cate moment amid Ital­ian press reports that Mr Draghi may soon go home, draft­ed to take over the Ital­ian pres­i­den­cy as the 89-year old Gior­gio Napoli­tano pre­pares to step down. Such an out­come is unlike­ly. Yet there is no doubt that Mr Draghi has press­ing fam­i­ly rea­sons to return to Rome, and he bare­ly dis­guis­es his irri­ta­tion with Frank­furt any longer.

    ...

    Mr Draghi made clear that the ECB can over­ride Ger­many on bond pur­chas­es if need be. “We don’t need to have una­nim­i­ty,” he said, though he could hard­ly have answered oth­er­wise when ques­tioned explic­it­ly on the point. One can imag­ine the scan­dal if he had sug­gest­ed instead that Ger­many has a veto.

    Yet it is hard to see how a deeply-split ECB can pro­ceed – as the Bank of Japan did most recent­ly with a nar­row 5:4 vote in favour of Abe­nomics II – on an issue of such huge polit­i­cal and legal import as full QE. (Pin-prick QE is anoth­er mat­ter, but it would make no dif­fer­ence)

    As I wrote last night, such action would be a recruit­ing trum­pet for Germany’s AFD anti-euro par­ty and would endan­ger Ger­man pop­u­lar and polit­i­cal con­sent for mon­e­tary union. The Ver­fas­sungs­gericht has already declared that the pre­vi­ous back­stop plan for Italy and Spain (OMT) “man­i­fest­ly vio­lates” the Treaties and is prob­a­bly Ultra Vires. This issue is not yet resolved at the Euro­pean Court.

    Germany’s euroscep­tic pro­fes­sors are already prepar­ing a fresh law­suit against QE, argu­ing that it entails very large lia­bil­i­ties for Ger­man tax­pay­ers, is de fac­to fis­cal pol­i­cy, and infringes the bud­getary sov­er­eign­ty of the Bun­destag. Ear­li­er rul­ings by the Ver­fas­sungs­gericht sug­gest that many of the judges might broad­ly agree. Nor is it clear that the Bun­des­bank could take part in QE once such a case had been filed, an issue that receives almost no atten­tion from mar­kets.

    Let me be clear, I have no crit­i­cism of Mr Draghi. He has worked won­ders, giv­en the polit­i­cal con­straints. His man­age­ment of the ECB has been noth­ing less than hero­ic.

    I agree ful­ly with the log­ic – though not the pur­pose – of his cri de coeur in Fin­land a week ago. The ulti­mate suc­cess of EMU, he said, “depends on the acknowl­edg­ment that shar­ing a sin­gle cur­ren­cy is polit­i­cal union, and fol­low­ing through with the con­se­quences”.

    Or put anoth­er way, once you have launched a mon­e­tary union, you have auto­mat­i­cal­ly launched a polit­i­cal union too. That is what EMU means. The euro means a sin­gle gov­ern­ment and a Euro­pean super­state, and implic­it­ly the abo­li­tion of Ger­many as a ful­ly sov­er­eign inde­pen­dent state. To pre­tend oth­er­wise is intel­lec­tu­al­ly infan­tile. To resist this truth — yet to pro­ceed dogged­ly with EMU any­way — mere­ly con­demns Europe to rolling crises and per­ma­nent depres­sion.

    Mr Draghi is absolute­ly right about this, which is why those of us who were euroscep­tics at Maas­tricht – and I wrote the leader for the Dai­ly Tele­graph on the night of that infa­mous treaty exact­ly 23 years ago – always opposed EMU with inflex­i­ble deter­mi­na­tion, and why we have great sym­pa­thy for those in Ger­many who wish to pull out of EMU in order to save their own sov­er­eign state before it is too late.

    Mr Wei­d­mann is equal­ly right in think­ing – as he appears to do – that the head­long charge towards debt pool­ing and de fac­to fis­cal union by mon­e­tary means is a mor­tal threat to Ger­man democ­ra­cy and the rule of law.

    The stakes are very high. A show­down must sure­ly come with­in months, one way or anoth­er.

    That was from back in Decem­ber when the tus­sle over QE was still get­ting worked out. And QE was, of course, approved the fol­low­ing month over Berlin’s objec­tions. But it was passed with con­di­tions: The QE pro­gram would be lim­it­ed to 60 bil­lion a month and, instead of pool­ing the risks of the asset pur­chas­es, 80 per­cent of the pur­chas­es would would done by the nation­al banks with no risk shar­ing. So the “Big Bazooka” of QE was reduced to a medi­um-sized bazooka, not due to Mario Draghi’s analy­sis of the needs of the sit­u­a­tion, but due to the need for the ECB to bal­ance the dicey pol­i­tics of the sit­u­a­tion:

    The Econ­o­mist
    Berlin v Frank­furt
    Ten­sions are ris­ing between Ger­many and the Euro­pean Cen­tral Bank
    Jan 24th 2015 | From the print edi­tion

    TO UNDERSTAND the com­plex rela­tion­ship that Mario Draghi, head of the Euro­pean Cen­tral Bank (ECB), enjoys with Ger­many you could do worse than flick through the archives of Bild, the country’s biggest tabloid. “Mam­ma Mia!” it fret­ted in Feb­ru­ary 2011, when Mr Draghi, then gov­er­nor of Italy’s cen­tral bank, emerged as a can­di­date. “With Ital­ians, infla­tion is a way of life, like toma­to sauce with pas­ta.” Two months lat­er, after a charm offen­sive by Mr Draghi, the paper relent­ed, prais­ing his Ger­man­ic rec­ti­tude and show­ing a pic­ture of him under a Pick­el­haube (a spiked Pruss­ian hel­met). But in August 2012, soon after Mr Draghi said he would do “what­ev­er it takes” to save the euro, Bild said it would demand its hel­met back if Mr Draghi opened the mon­ey spig­ot for lazy Spaniards and Ital­ians. This week, with Mr Draghi prepar­ing to announce plans for quan­ti­ta­tive eas­ing (QE)—creating mon­ey to buy sov­er­eign debt—the tabloid warned of deval­u­a­tion, doom and decline (if not, yet, infla­tion).

    Mr Draghi was nev­er the crazed mon­ey-print­er of Ger­man night­mares. But like oth­er cen­tral bankers, he has con­clud­ed that extra­or­di­nary eco­nom­ic times call for extra­or­di­nary mea­sures. Europe’s econ­o­my is in the dol­drums; it is flirt­ing with defla­tion, with the oil-price col­lapse dri­ving head­line infla­tion in the euro zone down to ‑0.2% last month (the goal is “below, but close to, 2%”). Long-term infla­tion expec­ta­tions are wor­ry­ing­ly low. The ECB has deployed var­i­ous unortho­dox mea­sures, includ­ing cheap financ­ing for Europe’s banks and neg­a­tive inter­est rates. Now Mr Draghi is reach­ing for the last tool in the box (the ECB’s gov­ern­ing coun­cil approved a QE pack­age on Jan­u­ary 22nd, as we went to press).

    QE deeply unnerves many Ger­mans, brought up on mem­o­ries of a hard Deutschmark and fears of infla­tion. Today Wolf­gang Schäu­ble, the finance min­is­ter, down­plays the defla­tion threat. There is an added com­pli­ca­tion: in eas­ing mon­e­tary pol­i­cy, Ger­mans fear, the ECB also eas­es the pres­sure on coun­tries like France and Italy to reform their economies and bring their bud­gets under con­trol. Look at Italy, they say: in 2011 Sil­vio Berlus­coni, then prime min­is­ter, pledged bud­get cuts and struc­tur­al reforms under ECB pres­sure, only to back­track as soon as the bank’s inter­ven­tion had cut inter­est rates. Investors’ antic­i­pa­tion of QE has already helped push many euro-zone bond yields to record lows.

    The ECB’s mon­e­tary activism has riled Ger­many before. In 2011 two of its cen­tral bankers quit their jobs over the ECB’s inter­ven­tion in bond mar­kets. Mr Draghi’s rela­tion­ship with Jens Wei­d­mann, head of the Bun­des­bank, is noto­ri­ous­ly scratchy. Mr Wei­d­mann and his fel­low Ger­man on the gov­ern­ing coun­cil, Sabine Laut­en­schläger, were expect­ed to vote against QE this week.

    What makes the QE row dif­fer­ent, and more dan­ger­ous, are signs that Mr Draghi is los­ing the con­fi­dence of Angela Merkel, Germany’s chan­cel­lor. In the euro’s dark­est hour in 2012, she backed Mr Draghi over the protests of Mr Wei­d­mann, her for­mer advis­er, when the ECB approved a con­di­tion­al bond-buy­ing scheme known as OMT. But this week, in a speech in front of both men, she voiced her fears that ECB action might “result in the impres­sion that what needs to be done in the fis­cal and com­pet­i­tive spheres could be pushed into the back­ground.” She has been irked by Mr Draghi’s stri­dent demands that coun­tries with “fis­cal space” (ie, Ger­many) should use it to boost demand.

    In most Euro­pean insti­tu­tions Ger­man eco­nom­ic clout has trans­lat­ed into out­sized polit­i­cal heft. In the ECB, by con­trast, its for­mal exer­cise of pow­er is lim­it­ed. Ger­mans have just two of the 21 votes that deter­mine the bank’s pol­i­cy (and under a com­plex new set of rules, it will some­times be just one). But Mr Draghi’s con­ces­sions over QE show how far Ger­man angst influ­ences ECB busi­ness. The QE pro­gramme will oblige the euro zone’s nation­al cen­tral banks to take on most of the risk of their respec­tive gov­ern­ments’ debt, rather than pool­ing it among all 19 mem­bers. The over­all size of the pro­gramme will also be lim­it­ed to some €60 bil­lion a month.

    A medi­um-sized bazooka

    Mr Draghi may guard his inde­pen­dence fierce­ly, but his polit­i­cal anten­nae are fine­ly tuned. He knows that with­out Ger­man assent his own efforts will flail. Nor are his con­cerns as mis­aligned with Mrs Merkel’s as some sug­gest: in recent speech­es he has sound­ed pos­i­tive­ly Teu­ton­ic in his insis­tence that gov­ern­ments must com­ple­ment the ECB’s mon­e­tary pol­i­cy with their own struc­tur­al reforms, par­tic­u­lar­ly to labour mar­kets.

    ...

    The dan­ger is clear: that a QE pack­age bur­dened by Ger­man-imposed con­straint proves inef­fec­tu­al and yet man­ages to cor­rode Ger­man sup­port by its mere exis­tence. The polit­i­cal dam­age, in oth­er words, could turn out to out­weigh the eco­nom­ic ben­e­fits. Ger­many will sure­ly grow more hos­tile to future bail-outs, as well as to pro­posed changes to euro-zone gov­er­nance. Mr Draghi may find it hard­er to expand the QE pro­gramme in future, as oth­er cen­tral banks have done, or to relax its con­di­tions. More dif­fi­cult bat­tles for the ECB’s pres­i­dent sure­ly lie ahead. That Pick­el­haube could yet come in use­ful.

    As we can see, while QE did in fact hap­pen over Berin’s oppo­si­tion, it only hap­pened after Mario Draghi made con­ces­sions that may have under­mined the via­bil­i­ty of the whole endeaver and he only did this to avoid a full blown revolt in Berlin, where politi­cians don’t want to see QE because they don’t want euro­zone states to have to fis­cal space to take the polit­i­cal deci­sion to avoid the aus­ter­i­ty-man­dat­ed right-wing “reforms” that the Europe’s busi­ness elites have been pin­ing for. In oth­er words, a very polit­i­cal com­pro­mise was required for the ECB to do its QE:

    ...

    QE deeply unnerves many Ger­mans, brought up on mem­o­ries of a hard Deutschmark and fears of infla­tion. Today Wolf­gang Schäu­ble, the finance min­is­ter, down­plays the defla­tion threat. There is an added com­pli­ca­tion: in eas­ing mon­e­tary pol­i­cy, Ger­mans fear, the ECB also eas­es the pres­sure on coun­tries like France and Italy to reform their economies and bring their bud­gets under con­trol

    ...
    In most Euro­pean insti­tu­tions Ger­man eco­nom­ic clout has trans­lat­ed into out­sized polit­i­cal heft. In the ECB, by con­trast, its for­mal exer­cise of pow­er is lim­it­ed. Ger­mans have just two of the 21 votes that deter­mine the bank’s pol­i­cy (and under a com­plex new set of rules, it will some­times be just one). But Mr Draghi’s con­ces­sions over QE show how far Ger­man angst influ­ences ECB busi­ness. The QE pro­gramme will oblige the euro zone’s nation­al cen­tral banks to take on most of the risk of their respec­tive gov­ern­ments’ debt, rather than pool­ing it among all 19 mem­bers. The over­all size of the pro­gramme will also be lim­it­ed to some €60 bil­lion a month.

    A medi­um-sized bazooka

    Mr Draghi may guard his inde­pen­dence fierce­ly, but his polit­i­cal anten­nae are fine­ly tuned. He knows that with­out Ger­man assent his own efforts will flail. Nor are his con­cerns as mis­aligned with Mrs Merkel’s as some sug­gest: in recent speech­es he has sound­ed pos­i­tive­ly Teu­ton­ic in his insis­tence that gov­ern­ments must com­ple­ment the ECB’s mon­e­tary pol­i­cy with their own struc­tur­al reforms, par­tic­u­lar­ly to labour mar­kets.

    ...

    So that’s a fun review about how the ECB’s QE end­ed up a ‘medi­um-sized bazooka’ instead of a ‘big bazooka’ due to argu­ments from Berlin about the loss of the ECB’s “polit­i­cal inde­pen­dence”. Argu­ments that were pri­mar­i­ly dri­ven by Berlin’s con­cerns that the ECB’s QE would give oth­er euro­zone mem­bers (e.g. the euro­zone ‘periph­ery’ and espe­cial­ly Greece) the eco­nom­ic space to avoid polit­i­cal deci­sions that Berlin desires. (e.g. right-wing aus­ter­i­ty poli­cies that Berin wants all mem­bers to adopt).

    In oth­er words, QE went from a “big bazooka” to a “medi­um-sized bazooka” via a polit­i­cal­ly moti­vat­ed com­pro­mise that fac­tored in the real­i­ty that Mario Draghi needs the polit­i­cal sup­port of Berlin and this com­pro­mise was osten­si­bly being done in response to fears that the QE would end up polit­i­cal­ly com­pro­mis­ing the ECB and fears that QE would give oth­er euro­zone mem­bers the fis­cal flex­i­bil­i­ty need­ed to take a dif­fer­ent polit­i­cal deci­sions oth­er than the aus­ter­i­ty man­dat­ed by the troi­ka (which is also dom­i­nat­ed by Berlin).

    We’re through the look­ing-glass fun­house mir­ror here, peo­ple!

    Posted by Pterrafractyl | May 11, 2015, 1:31 pm
  17. The Fed­er­al Reserve decid­ed to keep rates unchanged today, a move that was wide­ly expect­ed giv­en the shaky foun­da­tions of the glob­al econ­o­my and lack of infla­tion.

    This deci­sion was a day after the new euro­zone infla­tion fig­ures came in. Sur­prise! Euro­zone infla­tion fell 0.1% in August...to 0.1%. Yes, the 0.1% drop in euro­zone infla­tion cut the euro­zone’s infla­tion rate in half:

    The Wall Street Jour­nal
    Euro­zone Infla­tion Slows Unex­pect­ed­ly in August
    Fig­ures raise ana­lysts’ expec­ta­tions that the ECB will expand quan­ti­ta­tive eas­ing pol­i­cy by the year-end

    By Nina Adam
    Updat­ed Sept. 16, 2015 8:56 a.m. ET

    FRANKFURT—Inflation across the euro­zone unex­pect­ed­ly weak­ened in August, rais­ing hopes among econ­o­mists that the Euro­pean Cen­tral Bank will even­tu­al­ly expand its already mas­sive bond-buy­ing pro­gram to com­bat the eco­nom­ic risks asso­ci­at­ed with too-weak prices.

    The annu­al rate of infla­tion declined to 0.1% in August from 0.2% July, the Euro­pean Union’s sta­tis­ti­cal office said Wednes­day. That marks a down­ward revi­sion to Eurostat’s flash esti­mate of 0.2% and push­es annu­al infla­tion fur­ther away from the ECB’s tar­get of just below 2%.

    “We expect the ECB to ease pol­i­cy fur­ther by the end of this year,” said Fabio Fois, an econ­o­mist at Bar­clays in Milan. “It could announce an exten­sion of its cur­rent quan­ti­ta­tive eas­ing pro­gram beyond Sep­tem­ber 2016, raise the amount of its month­ly pur­chas­es or add addi­tion­al assets to its bas­ket,” he said.

    Under the ECB’s bond buy­ing pro­gram, launched in March, the cen­tral bank is buy­ing about €60 bil­lion a month in pub­lic and pri­vate debt secu­ri­ties, most­ly gov­ern­ment bonds, with a tar­get­ed end date of Sep­tem­ber 2016.

    The ECB has already indi­cat­ed that it is pre­pared to expand its bond-buy­ing pro­gram beyond Sep­tem­ber 2016. Such a move could become nec­es­sary if infla­tion does­n’t return to the ECB’s medi­um-term tar­get, as cur­rent­ly envis­aged by the bank.

    Low­er oil prices prompt­ed ECB staff ear­li­er Sep­tem­ber to cut their infla­tion fore­casts. They pre­dict a grad­ual increase in infla­tion to 1.7% in 2017 from 0.1% this year. “Risks to both euro area activ­i­ty and infla­tion are on the down­side, and these risks have inten­si­fied” in the past few weeks, Peter Praet, a mem­ber of the ECB’s Exec­u­tive Board, warned last week.

    ...

    Infla­tion was sub­dued in almost all of the 19 coun­tries using the euro. Prices fell from August last year in Spain, Greece and Cyprus, but rose by 0.4% in Italy and 0.9% in Aus­tria, Euro­stat said. Econ­o­mists at J.P. Mor­gan Chase said infla­tion could fall to zero in the euro­zone this month.

    Ser­vices infla­tion in the euro­zone remained close to all-time lows in August, indi­cat­ing that “a stronger and broad­er recov­ery in employ­ment is need­ed to bol­ster domes­tic demand and dri­ve up wages and prices,” said Mr. Fois.

    Typ­i­cal­ly, low infla­tion is good for house­holds and com­pa­nies by boost­ing dis­pos­able income and pro­vid­ing a sta­ble envi­ron­ment to bor­row, invest and spend. But when con­sumer prices weak­en too much, or fall out­right, con­sumers may delay pur­chas­es and com­pa­nies may be less inclined to invest because of uncer­tain­ty over their future rev­enues.

    Low infla­tion also makes it hard­er for the indebt­ed euro­zone coun­tries to reduce their debt and increase their com­pet­i­tive­ness vis-à-vis Ger­many, the region’s pow­er­house, econ­o­mists said. For these rea­sons, major cen­tral banks con­sid­er 2% infla­tion as opti­mal to pro­vide a cush­ion against defla­tion.

    ECB Gov­ern­ing Coun­cil mem­ber Ewald Nowot­ny said in an Aus­tri­an news­pa­per inter­view Tues­day that very low infla­tion “is a big prob­lem for the ECB.”

    In a sep­a­rate report Wednes­day, Euro­stat said growth in both labor costs and wages slowed in the sec­ond quar­ter. Euro­zone labor costs, for every hour worked, were up 1.6% from the same peri­od last year, com­pared with an annu­al increase of 1.9% in the first quar­ter. Annu­al wage infla­tion slowed to 1.9% from 2.0%.

    Mean­while, the Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment on Wednes­day raised its 2015 eco­nom­ic growth fore­cast for the euro­zone by 0.1 per­cent­age point to 1.6%, but cut its 2016 fore­cast to 1.9% from 2.1% in June.

    “Unem­ploy­ment remains high and under­ly­ing domes­tic price pres­sures are weak,” the OECD said in its Inter­im Eco­nom­ic Out­look.

    “Low infla­tion also makes it hard­er for the indebt­ed euro­zone coun­tries to reduce their debt and increase their com­pet­i­tive­ness vis-à-vis Ger­many, the region’s pow­er­house, econ­o­mists said. For these rea­sons, major cen­tral banks con­sid­er 2% infla­tion as opti­mal to pro­vide a cush­ion against defla­tion.”
    Yes, it’s not just out­right defla­tion that can ruin your econ­o­my. When a major debt-over­hang is part of the rea­son for the low infla­tion in the first place (because there was a major reces­sion or what­ev­er) and this is hap­pen­ing in the midst of a sin­gle-cur­ren­cy exper­i­ment with major imbal­ances between mem­ber states, low infla­tion alone is more than enough to keep your econ­o­my stuck in ‘suck’ mode:

    The New York Times
    The Con­science of a Lib­er­al
    Euro­pean Lowfla­tion

    Paul Krug­man
    Sep 17 10:17 am

    There is good rea­son to believe that the con­ven­tion­al 2 per­cent infla­tion tar­get is too low, even for the Unit­ed States; the risks of hit­ting the zero low­er bound are clear­ly much high­er than peo­ple believed when 2 per­cent became ortho­doxy. But what­ev­er the case for a high­er US tar­get, the case is much, much stronger for Europe, which com­bines Japan-style demog­ra­phy — a shrink­ing work­ing-age pop­u­la­tion, mak­ing sec­u­lar stag­na­tion more like­ly — with adjust­ment prob­lems that get much hard­er when infla­tion is low. It’s impor­tant to real­ize that it mat­ters not at all whether the over­all rate is slight­ly pos­i­tive or slight­ly neg­a­tive; as the IMF says, “lowfla­tion” cre­ates all the prob­lems we asso­ciate with defla­tion, even if the head­line num­ber is greater than zero.

    So how’s it going? Ter­ri­bly. Despite QE, euro area core infla­tion is stuck below 1 per­cent.

    The euro remains a slow-motion dis­as­ter, despite the con­stant claims that a bit of growth here or there some­how vin­di­cates all the suf­fer­ing.

    “It’s impor­tant to real­ize that it mat­ters not at all whether the over­all rate is slight­ly pos­i­tive or slight­ly neg­a­tive; as the IMF says, “lowfla­tion” cre­ates all the prob­lems we asso­ciate with defla­tion, even if the head­line num­ber is greater than zero.”
    Yep. And with a head­line infla­tion rate of 0.1% for the euro­zone, we’re clear­ly in the “it’s effec­tive­ly defla­tion” zone of destruc­tive­ly low infla­tion which is why it’s look­ing like the ECB’s choose-you-own adven­tures in quan­ti­ta­tive eas­ing have much far­ther to go. Espe­cial­ly since, at this point, the ECB’s too-small-but-bet­ter-than-noth­ing QE pro­gram is the only thing resem­bling a stim­u­lus pro­gram for the entire euro­zone which, of course, is com­plete­ly inad­e­quate giv­en these unusu­al eco­nom­ic cir­cum­stances.

    So don’t be sur­prise if we see sto­ries about EU, low infla­tion, and plen­ty of euro-fret­ting over the need to extend or even expand QE for poten­tial­ly years to come. Then again, this is the euro­zone we’re talk­ing about, so we also should­n’t be sur­prised to see plen­ty of sto­ries about how the Bun­des­bank thinks every­thing is fine and noth­ing fur­ther needs to be done. It’s more of a poor­ly-choose-your-own adven­ture-in-pur­ga­to­ry in QE and those adven­tures don’t end well:

    FXStreet
    No rea­son for ECB to expand QE pro­gram fur­ther — ECB’s Wei­d­mann
    Wed, Sep 16 2015, 11:07 GMT

    (Mum­bai) — In an inter­view with Sued­deutsche Zeitung pub­lished on Wednes­day, the Euro­pean Cen­tral Bank’s (ECB) Gov­ern­ing Coun­cil mem­ber Jens Wei­d­mann not­ed, there is no rea­son for the cen­tral bank to expand its cur­rent asset pur­chase pro­gram as the eco­nom­ic assess­ment under­pin­ning the cur­rent strat­e­gy is still intact.

    Key Quotes:

    “The eco­nom­ic sit­u­a­tion in the euro area has sta­bi­lized, the defla­tion­ary wor­ries — which were already exag­ger­at­ed at the begin­ning of the year — have fad­ed fur­ther, and we have launched an unprece­dent­ed pur­chase pro­gram that is in the mid­dle of being imple­ment­ed,”

    “Mon­e­tary pol­i­cy should not let itself be influ­enced by the up and down of indi­vid­ual indi­ca­tors for as long as the mon­e­tary assess­ment is still valid at its core.”

    “The eco­nom­ic sit­u­a­tion in the euro area has sta­bi­lized, the defla­tion­ary wor­ries — which were already exag­ger­at­ed at the begin­ning of the year — have fad­ed fur­ther, and we have launched an unprece­dent­ed pur­chase pro­gram that is in the mid­dle of being imple­ment­ed”.
    And that inter­view comes out on the same day we learn that a 0.1% drop in the euro­zone’s infla­tion cut the infla­tion rate in half.

    In oth­er news, look who the BIS chose as their new chair­man...

    Posted by Pterrafractyl | September 17, 2015, 11:00 am

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