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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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