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The New World Ordoliberalism, Part 7: To QE, or Not to QE, That is the Ominous Question

As the Euro­pean Cen­tral Bank (ECB) con­tin­ues to wres­tle with the deci­sion of when and how quick­ly to wind down its quan­ti­ta­tive eas­ing (QE) pro­gram while infla­tion remains stub­born­ly below the 2 per­cent tar­get and like­ly to stay well below 2 per­cent for the fore­see­able future, it’s worth not­ing that there’s a new night­mare to add to the equa­tion: The euro has surged in val­ue this year, a move that not only depress­es exports in recov­ery economies like Spain and Por­tu­gal but also depress­es infla­tion. And one of the things hold­ing down the val­ue of the euro is the ECB’s QE pro­gram. So if the ECB tapers off the QE too ear­ly and quick­ly it’s going to make an over­ly-strong euro even stronger while drag­ging infla­tion even low­er, poten­tial­ly derail­ing frag­ile recov­er­ies in the aus­ter­i­ty-inflict­ed mem­ber states.

Adding to the ECB’s chal­lenges is that the QE pro­gram offi­cial­ly expires at the end of 2017. Unless it’s extend­ed. And as the fol­low­ing arti­cle notes, when you look at the sched­ule for the ECB’s Gov­ern­ing Coun­cil meet­ings where the upcom­ing QE details — with a meet­ing on Octo­ber 26th and anoth­er on Decem­ber 14th — it’s entire­ly pos­si­ble that the ECB won’t final­ize its QE details until that Decem­ber 14th meet­ing. And if that hap­pens, mar­kets are only going have around 10 trad­ing days to adjust to what­ev­er the new QE real­i­ty is going to be going for­ward. And those trad­ing days at the end of year tend to be low vol­ume and there­fore poten­tial­ly much more volatile. So if there’s a big sur­prise, and it’s a neg­a­tive sur­prise from the mar­ket’s per­spec­tive, we could see some wild times for the euro­zone’s finan­cial mar­kets head­ing into the New Year and a wild time for the euro­zone economies next year. Wild unpleas­ant times.

But even if the ECB does man­age to make it very clear what it’s plan­ning for the QE pro­gram well in advance of that Decem­ber 14th meet­ing, if that deci­sion involves a pre­ma­ture cur­tail­ment of the QE pro­gram that could still results in an ongo­ing surge in the val­ue of the euro and fur­ther flir­ta­tions with defla­tion. And more wild unpleas­ant times for the euro­zone as a surg­ing euro starts killing off the frag­ile export-dri­ven recov­er­ies of in places like Spain, Greece, and Por­tu­gal.

And as we saw in Part 6 of this series, there’s also the ongo­ing issue of the QE “cap­i­tal keys” that deter­mine the vol­ume of bonds each euro­zone nation’s cen­tral bank can legal­ly pur­chase with­out break­ing the ECB’s self-imposed QE rules. In the case of Ger­many, which has the largest round month­ly bond pur­chas­es due to the large size of the Ger­man econ­o­my, there is sim­ply a lack of enough avail­able bonds. But for the weak­er nations like Por­tu­gal and Ire­land the “cap­i­tal key” cap on the amount of bonds the ECB can pur­chase in the QE pro­gram pos­es a dif­fer­ent kind of lim­i­ta­tion: the “cap” on the the total size of that nation’s bond mar­ket (33 per­cent of the total nation­al sov­er­eign bond mar­ket) that can be bought up in the QE pro­gram is already being hit in Por­tu­gal and Ire­land and it’s going to be hit in oth­er mem­ber states the longer QE con­tin­ues, poten­tial­ly forc­ing a pre­ma­ture end­ing to QE unless whether that’s pru­dent or not.

Sure, the ECB sim­ply could change the rules that lim­it the avail­able bonds to get around this lim­i­ta­tion, but that prob­a­bly won’t be an option with the Bun­des­bank and its allies com­plete­ly opposed to the idea. And that means that we are look­ing at a sit­u­a­tion where:
1. The ECB clear­ly wants to end QE as soon as the eco­nom­ic sit­u­a­tion allows for it.

2. The ris­ing val­ue of the euro is mak­ing end­ing QE a lot less fea­si­ble at the moment because end­ing QE is inevitably going to make the euro rise even more and that threat­ens the export-led recov­er­ies of the euro­zone mem­ber states that were forced to incurred mas­sive aus­ter­i­ty in order to cut costs and make their economies more export-ori­ent­ed.

3. Even if QE is extend­ed sig­nif­i­cant­ly, unless there’s a rule change to the 33 per­cent cap rule there’s going to be an end to QE any­way, hit­ting one nation at a time as they approach that cap.

And that all means we’re in a sit­u­a­tion where the polit­i­cal dri­ve to end QE shows no signs of abat­ing while the sig­nals from the actu­al econ­o­my (per­sis­tent­ly low infla­tion, frag­ile recov­er­ies, and a surg­ing euro that threat­ens those frag­ile recov­er­ies) are increas­ing­ly warn­ing against a hasty and ill-timed QE taper. And the ECB has to decide what it’s going to do before the end of 2017, but it can’t wait too long to make that deci­sion because mar­kets need time to adapt with­out cre­at­ing tur­moil in the finan­cial mar­kets.

As is the case with so much of the ECB’s deci­sions since the start of the euro­zone finan­cial cri­sis the sus­pense is tin­gling­ly ter­ri­fy­ing:

Bloomberg Mar­kets

ECB May Not Have Final QE Plan Ready Until Decem­ber

* Offi­cials may not final­ize new bond plan until Decem­ber
* Traders would only have about 10 trad­ing days to adapt

By Paul Gor­don and Lucy Meakin
Sep­tem­ber 1, 2017, 7:40 AM CDT Sep­tem­ber 1, 2017, 12:02 PM CDT

The Euro­pean Cen­tral Bank has a tight timetable for decid­ing the future of its bond-buy­ing pro­gram, but investors may face an even tighter one to adjust to the out­come.

The Gov­ern­ing Coun­cil will hold its first for­mal talks next week on the pace of asset pur­chas­es after Decem­ber, when the cur­rent pro­gram is sched­uled to expire. Yet it’s con­ceiv­able that the deci­sion won’t be final­ized until the Dec. 14 meet­ing, accord­ing to euro-area offi­cials famil­iar with the mat­ter. That would leave around 10 trad­ing days, dur­ing a hol­i­day sea­son when vol­umes are typ­i­cal­ly low, for mar­ket par­tic­i­pants to sort out their strat­e­gy for the New Year.

The ECB’s 25 pol­i­cy mak­ers have plen­ty to talk about: some say the euro area’s robust eco­nom­ic recov­ery war­rants the wind­ing down of bond pur­chas­es — cur­rent­ly run­ning at 60 bil­lion euros ($71 bil­lion) a month — while oth­ers point to fee­ble infla­tion as a rea­son to keep stim­u­lus going. Yet leav­ing a deci­sion too late could unnerve investors and push up the euro and bond yields, under­min­ing the efforts so far.

“We’re all aware of the real­i­ty of the clock that they face,” said Charles Diebel, head of rates at Avi­va Investors in Lon­don. “But mar­kets have got very used to being told what’s com­ing a long time in advance, so to chance your arm and decide to wing it at the last minute in itself is like ask­ing for trou­ble.

Pos­si­ble Sig­nals

Offi­cials are aware of the risk of wait­ing too long, with two of the peo­ple say­ing they shouldn’t sur­prise investors by hold­ing back every detail on the future of QE until the final meet­ing of the year. That sug­gests the ECB is still like­ly to deliv­er sig­nals on the plan for asset pur­chas­es after one or both of the next two meet­ings. A spokesman for the cen­tral bank declined to com­ment.

Nei­ther would a taper­ing deci­sion at two weeks notice be unprece­dent­ed. When the U.S. Fed­er­al Reserve decid­ed to cut its own bond pur­chas­es start­ing in Jan­u­ary 2014, it made the announce­ment on Dec. 18, 2013.

The dif­fer­ence is that the Fed start­ed for­mal talks on taper­ing at their June 2013 meet­ing and fre­quent­ly talked in pub­lic about taper­ing in the fol­low­ing months. The New York Fed even includ­ed ques­tions on the top­ic in its sur­vey of pri­ma­ry deal­ers.

The ECB has so far explic­it­ly avoid­ed putting the top­ic of next year’s pur­chas­es on the Gov­ern­ing Council’s agen­da. At July’s ses­sion, it agreed to start dis­cus­sions in “the fall,” but even then opt­ed not to say if that nec­es­sar­i­ly meant the Sept. 7 meet­ing.

The slide in the euro in reac­tion to the news that the full details of the asset-pur­chase plan may wait until until Decem­ber might encour­age those pol­i­cy mak­ers who expressed con­cern at the July meet­ing of a pos­si­ble over­shoot of the sin­gle cur­ren­cy.

The euro’s gain after Pres­i­dent Mario Draghi’s speech in Por­tu­gal in June — when he spoke of “refla­tion­ary forces” — and the currency’s jump again last week when he opt­ed not to try to talk it down in a speech in Jack­son Hole, Wyoming, showed how sen­si­tive mar­kets are. That jus­ti­fies extreme pru­dence, with changes to com­mu­ni­ca­tion and pol­i­cy like­ly to move even slow­er than orig­i­nal­ly expect­ed, two of the peo­ple said.

Eco­nom­ic Upturn

Some pol­i­cy mak­ers are more san­guine. Bun­des­bank Pres­i­dent Jens Wei­d­mann and Eston­ian cen­tral-bank gov­er­nor Ardo Hans­son have both said recent­ly that the euro’s strength reflects the economy’s upturn and is noth­ing to wor­ry about. Aus­tri­an Gov­er­nor Ewald Nowot­ny said on Fri­day that he wouldn’t “dra­ma­tize” the gain.

But Nowot­ny also added that pol­i­cy nor­mal­iza­tion can’t be about “abrupt­ly step­ping on the brake.” It’s “sen­si­ble to see how to get off the accel­er­a­tor and how to care­ful­ly ini­ti­ate” the process, he said. Vice Pres­i­dent Vitor Con­stan­cio said in a sep­a­rate speech that while the euro area’s eco­nom­ic recov­ery is prov­ing to be increas­ing­ly robust, a “strong world­wide refla­tion­ary phase that seemed like­ly at the begin­ning of the year has not mate­ri­al­ized.”

...

But for some com­men­ta­tors, the urgency for action is mount­ing because the ECB looks set to run into its self-imposed lim­its on how much debt it can buy from each nation, issuer and bond issue. The cur­rent sched­ule will take its pur­chas­es to 2.3 tril­lion euros, equiv­a­lent to almost a quar­ter of gross domes­tic prod­uct. The ECB’s bal­ance sheet — fueled by free loans to banks — has soared to 4.3 tril­lion euros.

“Stick­ing your head in the sand until Decem­ber and hop­ing the prob­lem goes away is not a com­mu­ni­ca­tion strat­e­gy,” said Richard Bar­well, an econ­o­mist at BNP Paribas Asset Man­age­ment in Lon­don. “The issue lim­its are going to force them to exit pre­ma­ture­ly. They can­not duck the con­se­quences indef­i­nite­ly.”

———-

“ECB May Not Have Final QE Plan Ready Until Decem­ber” by Paul Gor­don and Lucy Meakin; Bloomberg Mar­kets; 09/01/2017

“The Gov­ern­ing Coun­cil will hold its first for­mal talks next week on the pace of asset pur­chas­es after Decem­ber, when the cur­rent pro­gram is sched­uled to expire. Yet it’s con­ceiv­able that the deci­sion won’t be final­ized until the Dec. 14 meet­ing, accord­ing to euro-area offi­cials famil­iar with the mat­ter. That would leave around 10 trad­ing days, dur­ing a hol­i­day sea­son when vol­umes are typ­i­cal­ly low, for mar­ket par­tic­i­pants to sort out their strat­e­gy for the New Year.”

Yeah, the end of the year at the last minute prob­a­bly isn’t the best time for the ECB to throw a sur­prise QE curve­ball. Unless it’s a very acco­moda­tive curve­ball that leans towards the ‘dovish’ side that’s sort of a reit­er­a­tion of the ECB’s long-held stance to “do what­ev­er it takes” to hold the finan­cial sys­tem togeth­er, the stance ECB Chief Mario Draghi his­tor­i­cal­ly took in 2012 as the euro­zone sov­er­eign bond mar­kets teetered on the edge.

But if it’s a last minute neg­a­tive curve­ball that tight­ens con­di­tions and simul­ta­ne­ous­ly sig­ni­fies a his­toric piv­ot away from ‘do what­ev­er it takes’ and sets mar­ket expec­ta­tions for sig­nif­i­cant fur­ther tight­en­ing over the next year, things could get rather chop­py:

...
“We’re all aware of the real­i­ty of the clock that they face,” said Charles Diebel, head of rates at Avi­va Investors in Lon­don. “But mar­kets have got very used to being told what’s com­ing a long time in advance, so to chance your arm and decide to wing it at the last minute in itself is like ask­ing for trou­ble.
...

Shock­ing the mar­kets out of QE com­pla­ce­ny does seem like ask­ing for trou­ble. But sad­ly, we can’t entire­ly rule ask­ing for trou­ble out. Because while Mario Draghi was reit­er­at­ing his “Do what­ev­er it takes” pledge to the mar­kets over the past five years, we can’t for­get that the Aus­ter­ian wing of the euro­zone https://www.dailykos.com/stories/2012/05/14/1090839/-The-Austerions. For a lot of pow­er­ful peo­ple in the euro­zone’s finan­cial pow­er struc­ture — notably Bun­des­bank chief Jens Wei­d­mann and Ger­man finance min­is­ter Wolf­gang Schaeu­ble — call­ing for trou­ble is their thing. For the aus­te­ri­ans, mas­sive trou­ble for the nation isn’t a prob­lem, it’s a solu­tion.

Real­ly stu­pid eco­nom­ic poli­cies like the aus­ter­i­ty mad­ness was the ‘solu­tion’ inflict­ed on Greece to a rep­re­hen­si­ble degree and to coun­tries like Spain, Ire­land, and Por­tu­gal to a some­what less rep­re­hen­si­ble degree. And the only rea­son that same far-right aus­ter­i­ty agen­da, an agen­da that’s dom­i­nat­ed most of the euro­zone’s eco­nom­ic deci­sion-mak­ing and suc­cess­ful­ly imposed aus­ter­i­ty across Europe, has­n’t pre­vailed at the ECB lev­el. And that’s because it would have implod­ed the entire euro­zone econ­o­my and the zone itself. That’s too much trou­ble. But just about any­thing less than the implo­sion of the euro­zone is appar­ent­ly con­sid­ered accept­able lev­els of trou­ble for Team Aus­ter­i­ty. We’ve seen that over and over and there’s absolute­ly no indi­ca­tion that this has changed. Calls for trou­ble are very pos­si­ble because they are very prece­dent­ed.

Keep­ing the Mar­ket Unin­formed isn’t the Best Pol­i­cy, but Might not be as Bad as Inform­ing the Mar­ket of Bad Pol­i­cy

So hope­ful­ly the unspo­ken rule — the rule that nation­al economies, but not the entire euro­zone econ­o­my, can be allowed to implode — will con­tin­ue rul­ing the day as the ECB approach­es this big QE deci­sion over the next few months. And hope­ful­ly the euro does­n’t keep surg­ing too. But if the ECB real­ly is going to wind down QE over the year or two it’s unclear what’s going to hold the euro down dur­ing the process. Maybe oth­er mea­sures will be used to hold the cur­ren­cy down, but the same forces that oppose QE all along have opposed all the oth­er stim­u­la­tive mea­sures too. Will those forces be held at bay while QE unwinds? As we’re going to see, the answer to that ques­tion is “maybe?!”.

And let’s also not for­get that the ECB’s need to sig­nal to the the mar­kets as ear­ly as pos­si­ble of of its QE plans is poten­tial­ly in con­flict with the need to keep the val­ue of euro down if the details of the ECB’s plans includ­ing end­ing QE soon too. If end­ing QE in 2018 real­ly is the ECB’s plan, the euro prob­a­bly has quite a bit of surg­ing ahead of it unless some­thing else inter­venes. But the ECB can’t hold off on this deci­sion for long. It has to final­ize and release the details of its QE plans between now and its Decem­ber 14th meet­ing at the very lat­est. And if those ECB plans real­ly are plans to end QE, there’s real incen­tive for the ECB hold off on releas­ing those plans now in order to avoid the kind of euro surge that could dis­rupt those plans.

But wait­ing until the Decem­ber 14th meet­ing also increas­es the odds of a bad mar­ket reac­tion. And the more the aus­ter­i­ty fac­tion wins out the worse that mar­ket reac­tion is going to be (worse, as in, a much high­er euro). It’s a real conun­drum. The ECB does­n’t just need to release its QE plan details soon. The ECB needs to release pos­i­tive details that relieve the mar­kets and avoid surg­ing the euro. Soon (unless it’s ok with trou­ble, which is prece­dent­ed):

CNBC

Euro zone coun­tries could be in dan­ger if euro con­tin­ues to rise, econ­o­mist says

The recent rise in the euro could put eco­nom­ic recov­ery in dan­ger
“But if there would be an over­shoot of the exchange rate then of course they’ll have a prob­lem because with their large for­eign debt they don’t have a sec­ond wheel on their machin­ery.”

Sil­via Amaro
Pub­lished 4:45 AM ET Wed, 30 Aug 2017 | Updat­ed 5:56 AM ET Wed, 30 Aug 2017

A euro that con­tin­ues to rise against the U.S. dol­lar is now the main dan­ger being posed to frag­ile euro zone economies that are still recov­er­ing after the sov­er­eign debt cri­sis of 2011, one econ­o­mist has told CNBC.

Ire­land, Por­tu­gal and Spain have become some of the fastest grow­ing economies in Europe after receiv­ing help from cred­i­tors to restore their finances after the crises that begun in 2011. How­ev­er, the recent rise in the euro could put their recov­er­ies in dan­ger, accord­ing to Daniel Gros, direc­tor of the think tank Cen­tre for Euro­pean Pol­i­cy Stud­ies, told CNBC Wednes­day.

“That is of course the main dan­ger point for them,” he said.

“As long as the euro does­n’t go much above 1.20 they should be able to con­tin­ue. But if there would be an over­shoot of the exchange rate then of course they’ll have a prob­lem because with their large for­eign debt they don’t have a sec­ond wheel on their machin­ery,” Gros said.

The euro rose above the 1.20 lev­el against the green­back on Tues­day on grow­ing geopo­lit­i­cal ten­sions between North Korea and the U.S. A stronger euro means that Euro­pean prod­ucts become more expen­sive in inter­na­tion­al mar­kets, which could decrease for­eign appetite for Euro­pean goods and thus hurt EU economies.

Coun­tries like Por­tu­gal and Spain owe much of their recov­ery to exports, exports have been high­er than those of Ger­many, France and Italy (the biggest EU economies) since last year, accord­ing to data col­lect­ed by TS Lom­bard.

John Hardy, head of forex trad­ing at Saxo Bank, told CNBC Wednes­day that “we have seen a near term peak of sorts trig­gered as the EURUSD and dol­lar Index breached key lev­els, but the pull­back sug­gests the USD weak­ness has extend­ed too far.”

The focus has start­ed to shift towards Frank­furt where Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi is due to speak next week, fol­low­ing a mon­e­tary pol­i­cy meet­ing.

Investors had been hop­ing to get some indi­ca­tions about the bank’s pro­gram to exit mon­e­tary stim­u­lus but the recent uptick in the euro rais­es doubts that the ECB will announce such details.

Easy mon­e­tary pol­i­cy sup­press­es the val­ue of a cur­ren­cy and the poten­tial end of this pol­i­cy in the euro zone is seen as one of the key rea­sons why the euro is cur­rent­ly ris­ing. A strong cur­ren­cy also acts as a defla­tion­ary pres­sure at a time when the cen­tral bank wants to bring core infla­tion up in the region.

...

In its lat­est fore­casts, in June, the ECB pro­ject­ed head­line infla­tion at 1.5 per­cent in 2017 and 1.3 per­cent in 2018. The bank’s tar­get is to see infla­tion “close but below 2 per­cent.”

———-

“Euro zone coun­tries could be in dan­ger if euro con­tin­ues to rise, econ­o­mist says” by Sil­via Amaro; CNBC; 08/30/2017

Easy mon­e­tary pol­i­cy sup­press­es the val­ue of a cur­ren­cy and the poten­tial end of this pol­i­cy in the euro zone is seen as one of the key rea­sons why the euro is cur­rent­ly ris­ing. A strong cur­ren­cy also acts as a defla­tion­ary pres­sure at a time when the cen­tral bank wants to bring core infla­tion up in the region.”

The mar­kets are always watch­ing. And they see a poten­tial end to QE but they also see that a a ris­ing euro is a pre­dictable con­se­quence of exact­ly that pol­i­cy and also exact­ly the kind of change in cir­cum­stance that makes end­ing QE a lot hard­er. As a con­se­quence, a week before the ECB’s Sep­tem­ber 7th meet­ing the mar­kets could already see that the ECB’s expect­ed ambi­tions were active­ly get­ting thwart­ed, in part thwart­ed by the ris­ing euro result­ing for those expect­ed ambi­tions:

...
The focus has start­ed to shift towards Frank­furt where Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi is due to speak next week, fol­low­ing a mon­e­tary pol­i­cy meet­ing.

Investors had been hop­ing to get some indi­ca­tions about the bank’s pro­gram to exit mon­e­tary stim­u­lus but the recent uptick in the euro rais­es doubts that the ECB will announce such details.
...

So head­ing into the Sep­tem­ber 7th ECB meet­ing, the mar­ket’s were appar­ent­ly expect­ing that the ECB want­ed to announce an end QE, but the mar­kets also rec­og­nized that attempt­ing to an QE while the euro is surg­ing is a high­g­ly risky maneu­ver and might have to be post­poned giv­en cur­rent con­di­tions. It’s sort of a Catch-22 sit­u­a­tion, but not real­ly. True Catch-22 sit­u­a­tions don’t have an escape. In this case there is an escape — sane, sober pol­i­cy — but sane, sober pol­i­cy often isn’t an option for the ECB. It’s more like a syn­thet­ic Catch-22 sit­u­a­tion cre­at­ed by the active deci­sion to leave no good options.

Mario Draghi’s “No Deci­sion Yet” Sep­tem­ber 7th Sig­nal

What will the ECB ulti­mate­ly do? Well, the ECB just met on Thurs­day, Sep­tem­ber 7th, and Mario Draghi did indeed give a sig­nal. And it was quite a sig­nal in an iron­ic sense: Draghi sig­naled that the volatil­i­ty of the euro left the ECB uncer­tain about what to do with the QE. So he announced that they’re plan­ning on mak­ing their deci­sion in Octo­ber, pre­sum­ably at the ECB meet­ing on Octo­ber 26th. He also sig­naled that infla­tion is expect­ed to even­tu­al­ly reach 2 per­cent (what a bold pre­dic­tion). Oh, and he not­ed that the QE dis­cus­sions were very pre­lim­i­nary. And that they haven’t had any dis­cus­sions at all about the “cap­i­tal keys” caps on coun­tries like Por­tu­gal that are pre­vent­ing them from ful­ly par­tic­i­pat­ing the QE (the coun­tries that need it the most get thwart­ed). He did state that inter­est rates were going to remain ultra-low for an extend­ed peri­od, but also not­ed that it had­n’t been dis­cussed yet whether or not they’ll get raised before the QE pro­gram ends.

So the sig­nal Draghi sent to the mar­kets was that the ECB has no idea what it’s going to do, has­n’t real­ly talked about it, and will decide in a month and a half (hope­ful­ly). And to pla­cate the mar­kets he also announced that inter­est rates will stay low for an extend­ed peri­od, although they haven’t decid­ed yet whether to raise inter­est rates before or after QE is end­ed, which is a rather mixed sig­nal since QE could end next year. But that’s the sig­nal Draghi had to send. In terms of calm­ing the mar­kets and avoid­ing a fur­ther surg­ing of the euro it prob­a­bly was­n’t Draghi’s best sig­nal to the mar­kets:

Bloomberg

Draghi Says Euro a Con­cern as ECB Tar­gets Octo­ber Deci­sion on QE

* ECB cut its infla­tion out­look on surge in sin­gle cur­ren­cy
* Gov­er­nors con­sid­ered sce­nar­ios for recal­i­brat­ing QE in 2018

By Car­olynn Look
Sep­tem­ber 7, 2017, 8:00 AM CDT Sep­tem­ber 7, 2017, 8:35 AM CDT

Mario Draghi said the Euro­pean Cen­tral Bank is watch­ing the euro’s gains as pol­i­cy mak­ers edge toward set­tling the future of their bond-buy­ing pro­gram.

“The recent volatil­i­ty in the exchange rate rep­re­sents a source of uncer­tain­ty which requires mon­i­tor­ing” for its impact on price sta­bil­i­ty, the ECB pres­i­dent told reporters in Frank­furt on Thurs­day. He said the deci­sions on QE are “many, com­plex, and always nat­u­ral­ly one thinks about risks that may mate­ri­al­ize in the com­ing weeks or months, so that is the cau­tion behind not spec­i­fy­ing a date — prob­a­bly the bulk of these deci­sions will be tak­en in Octo­ber.”.=

The sin­gle cur­ren­cy rose as much as 1.2 per­cent as Draghi spoke to break above $1.20. It was up 0.9 per­cent at $1.2025 at 3:23 p.m. Frank­furt time.

The sig­nal that a deci­sion on bond pur­chas­es is like­ly next month “makes it dif­fi­cult for the ECB pres­i­dent to talk down the euro,” said Nick Kou­nis, an econ­o­mist at ABN Amro in Ams­ter­dam. “The cur­ren­cy mar­ket is telling Draghi that talk is cheap and it is putting more weight on the upcom­ing QE actions.”

The euro’s surge — more than 14 per­cent against the dol­lar this year and almost 6 per­cent on a trade-weight­ed basis — was reflect­ed in a down­grade to the ECB’s infla­tion out­look even as Draghi said eco­nom­ic growth remains sol­id. That high­lights the dif­fi­cul­ty pol­i­cy mak­ers face as they debate the future of their QE pro­gram — which has already topped 2 tril­lion euros ($2.4 tril­lion) and is sched­uled to con­tin­ue at a month­ly pace of 60 bil­lion euros until the end of this year.

ECB staff now see infla­tion at 1.2 per­cent in 2018 and 1.5 per­cent in 2019, well below the goal of just below 2 per­cent.

Still, Draghi said that there was “broad sat­is­fac­tion” with­in the Gov­ern­ing Coun­cil that con­sumer prices will even­tu­al­ly con­verge with expec­ta­tions for stronger growth.

...

The ECB chief described the dis­cus­sion on the path of QE as “very, very pre­lim­i­nary” and that the Gov­ern­ing Coun­cil con­sid­ered the “trade-offs” between var­i­ous sce­nar­ios relat­ed to the pace and dura­tion of pur­chas­es. Pol­i­cy mak­ers want to see the work of ECB’s tech­ni­cal com­mit­tees before decid­ing, he said.

He said offi­cials did not dis­cuss the ECB’s self-imposed lim­its on the pro­por­tion of bond issues it can buy, not did they talk much about the risk the cen­tral bank will run out of debt to buy.

“We haven’t dis­cussed real­ly the scarci­ty issue because so far, he said. “We’ve con­sis­tent­ly shown that we’ve been able to cope with this issue quite suc­cess­ful­ly.”

The ECB chief also reit­er­at­ed that inter­est rates will be kept low for an extend­ed peri­od, and said offi­cials did not dis­cuss whether they could be raised before net asset pur­chas­es end.

———-
“Draghi Says Euro a Con­cern as ECB Tar­gets Octo­ber Deci­sion on QE” by Car­olynn Look; Bloomberg; 09/07/2017

““The recent volatil­i­ty in the exchange rate rep­re­sents a source of uncer­tain­ty which requires mon­i­tor­ing” for its impact on price sta­bil­i­ty, the ECB pres­i­dent told reporters in Frank­furt on Thurs­day. He said the deci­sions on QE are “many, com­plex, and always nat­u­ral­ly one thinks about risks that may mate­ri­al­ize in the com­ing weeks or months, so that is the cau­tion behind not spec­i­fy­ing a date — prob­a­bly the bulk of these deci­sions will be tak­en in Octo­ber.”

The ECB punts the QE deci­sion from its Sep­tem­ber 7th meet­ing to the Octo­ber 26th meet­ing. Six weeks. And until then the sig­nal to the mar­kets from the ECB is like­ly going to be that it has­n’t decid­ed yet. And that’s assum­ing the final deci­sion real­ly is made and announced by that Octo­ber 26th meet­ing. And if things get pushed back to the Decem­ber 14th meet­ing that leaves just 10 trad­ing days before the end of the year. It’s going to be an inter­est­ing ride for the euro in the final quar­ter of 2017.

And don’t for­get, the high­er the euro goes, the clos­er infla­tion gets to that defla­tion­ary dan­ger zone. A dan­ger zone the euro­zone is already sched­uled to flirt with over the next cou­ple of years (hence Draghi’s expec­ta­tion that infla­tion will “even­tu­al­ly” con­verge with the 2 per­cent tar­get):

...
ECB staff now see infla­tion at 1.2 per­cent in 2018 and 1.5 per­cent in 2019, well below the goal of just below 2 per­cent.

Still, Draghi said that there was “broad sat­is­fac­tion” with­in the Gov­ern­ing Coun­cil that con­sumer prices will even­tu­al­ly con­verge with expec­ta­tions for stronger growth.
...

But also don’t for­get that there are things Draghi could eas­i­ly say that will bring the euro down. He could tell the mar­kets good news that reas­sures it that the ECB is com­mit­ted to its exist­ing accom­moda­tive poli­cies and a smooth land­ing for the QE and not some arbi­trar­i­ly set dead­line to pla­cate the Ordolib­er­al fac­tion’s ide­o­log­i­cal desire to end stim­u­la­tive mea­sures. Pol­i­cy san­i­ty. That would help bring down the euro. But it’s appar­ent­ly not an option in this sit­u­a­tion which is rather scary. If there’s been a sav­ing grace for the euro­zone over the last five years it’s that the ECB has been the one insti­tu­tion where Team Aus­ter­i­ty did­n’t always win out. If that changes we could look­ing at a very scary next phase of the evo­lu­tion of the euro­zone.

There was, how­ev­er, the one thing Draghi said that should soothe mar­kets and help hold the euro down: that inter­est rates would be kept low for an extend­ed peri­od. Although he also stat­ed that the ECB Gov­ern­ing Coun­cil did­n’t actu­al­ly dis­cuss whether or not rates will be raised before the end of QE. It could have been more sooth­ing, although it could have been worse too:

...
The ECB chief also reit­er­at­ed that inter­est rates will be kept low for an extend­ed peri­od, and said offi­cials did not dis­cuss whether they could be raised before net asset pur­chas­es end.

So maybe QE will be end­ed next year but rates will stay low for much longer. That’s the kind of sig­nal that should at least help keep the eurofrom surg­ing.

But, again, if the QE pro­gram is end­ed soon — say, in 2018 — the ques­tion of whether or not inter­est rates are going to be hiked before, or only after, the QE bond buy­ing pro­gram ends is going to be moot in a year. t’s an exam­ple of eas­i­ly the ECB’s sooth­ing words can be under­mined by the rest of sig­nal­ing — offi­cial and unof­fi­cial sig­nals — which is s an impor­tant point to keep in mind because we’re enter­ing into a poten­tial­ly pre­car­i­ous phase of the euro­zone cri­sis — the unwind­ing stim­u­la­tive mea­sures phase — and if the ECB screws this up we could be look­ing at more crises. One of the eas­i­est way for the ECB to screw this up is for it to inad­ver­tent­ly send sig­nals that indi­cate the crazy Aus­ter­i­ty Team is tak­ing over com­plete­ly and the mar­kets are in for a giant shock and few things are going to shock mar­kets and spike the euro quite like a rapid pull out of the ECB’s ultra-low inter­est rate posi­tion. So if there’s a mis­com­mu­ni­ca­tion on mat­ters relat­ed to the expec­ta­tions for future rate hikes that could have a sig­nif­i­cant impact on the ECB’s abil­i­ty to actu­al­ly unwind the QE pro­gram giv­en how tight­ly inter­twined the QE pro­gram is with inter­est rates and cur­ren­cy val­u­a­tions.

This is seri­ous­ly tricky cen­tral banker stuff going on right now in the euro­zone. If the ECB tries to calm the mar­kets it just might make mat­ters worse. But say­ing noth­ing does­n’t help either. These are very non-ide­al con­di­tions for the end some­thing like QE.

The 2018 Unwind­ing of QE to Be, Accord­ing to Three Anony­mous Insid­ers

So giv­en the sit­u­a­tion the ECB finds itself in — and role pub­lic sig­nal­ing for the ECB, or lack there­of, is play­ing in the devel­op­ment of that sit­u­a­tion — it’s worth not­ing that, accord­ing to the fol­low­ing report based on three anony­mous peo­ple privy to ECB Gov­ern­ing Coun­cil think­ing, the ECB has already made quite a few deci­sions on these mat­ters. Most­ly scary deci­sions. But let’s start with the pleas­ant part: Accord­ing to these insid­ers, the ECB has decid­ed whether or not it’s going to raise inter­est rates before the end of the QE pro­gram: no, it won’t.

And in the­o­ry that would be a relief to mar­kets and per­haps help bring the euro down. But it turns out not be be much reas­sur­ance giv­en the rest of what these insid­ers allege: that the ECB has already decid­ed to unwind the QE pro­gram next year. Specif­i­cal­ly, the insid­ers say the ECB has already plan­ning on sig­nif­i­cant cut to the month QE bond pur­chas­es start­ing in Jan­u­ary, and are only debat­ing whether to get it by 33–66 per­cent. And they’re plan­ning on end­ing the pro­gram entire by the fall of 2018 . So the ques­tion of whether or not those ultra-low rates rise before or after QE ends is moot in a year if what these anony­mous insid­ers say is true. It’s the kind of report that lim­its the abil­i­ty of Draghi to reas­sure mar­kets.

Also, accord­ing to the anony­mous insid­ers, there will be no flex­i­bil­i­ty on the nation­al QE “cap­i­tal keys” caps. They are non-nego­tiable and chang­ing them (like lift­ing the 33 per­cent cap) would cre­ate legal chal­lenges. If that’s tru­ly the dom­i­nant posi­tion inter­nal­ly at the ECB at this point it’s a sign that Team Aus­ter­i­ty — led by Wolf­gang Schaeu­ble and Jens Wei­d­mann — real­ly is plan­ning on ensur­ing QE effec­tive­ly ends soon­er rather than lat­er whether or not there’s an offi­cial­ly declared end to QE. The nation­al caps effec­tive­ly put a time lim­it on the QE pro­gram. A lim­it that nations hit at dif­fer­ent points and the nations that need it most tend to hit the caps first.

So there are now anony­mous reports ema­nat­ing from the ECB hint­ing at exact­ly the kind of poli­cies that would call for a high­er euro. And as we saw, if the ECB does­n’t give the final impor­tant details until its Decem­ber 14th meet­ing that could be ask­ing for trou­ble, leav­ing just 10 tra­di­tion­al­ly low vol­ume mar­ket trad­ing days before the end of the year. As we also heard from Mario Draghi, the offi­cial deci­sion will prob­a­bly come at the next meet­ing on Octo­ber 26th. So it’s worth not­ing the oth­er impor­tant pol­i­cy stance indi­cat­ed in the fol­low­ing arti­cle: the icing on the cake comes from Fin­land’s cen­tral bank gov­er­nor and ECB board mem­ber Erk­ki Liika­nen, who inform reporters that, while the ECB’s deci­sion on QE might be made at the Octo­ber 26th meet­ing, there would be a some “fine-tun­ing” on tech­ni­cal issues that pre­vent the final deci­sion from hap­pen­ing until the Decem­ber 14th meet­ing. And, of course, in a high­ly volatile envi­ron­ment, there could be a lot of tech­ni­cal issues. Espe­cial­ly after the ECB announces the plans these insid­ers are hint­ing at and espe­cial­ly if mar­ket spec­u­la­tion about ECBG Gov­ern­ing Coun­cil spec­u­la­tion of the mar­kets leads the euro high­er.

It’s pos­si­ble this is anony­mous blus­ter, but at a min­i­mum it appears that Team Aus­ter­i­ty inside the ECB, an ene­my of QE all along, wants to make it look like it’s reassert­ing its con­trol at the ECB lev­el. That’s the sig­nal the right-wing pro-aus­ter­i­ty fac­tion is send­ing to the mar­kets via anony­mous reports like the fol­low­ing one. And if it’s an accu­rate sig­nal that means these ECB insid­ers just informed the mar­kets that there’s a poten­tial­ly sig­nif­i­cant shock com­ing up from the ECB and the shock won’t be final­ized until Decem­ber 14th, leav­ing just 10 trad­ing days for the mar­kets to work out at the end of the year. It’s the kind of mes­sage that’s prob­a­bly not going to make Draghi’s job any eas­i­er.

It’s also impor­tant to note that these insid­er reports could be blus­ter from a minor­i­ty fac­tion. And specif­i­cal­ly right now, this could be com­ing from the Berlin fac­tion to pla­cate the Ger­man elec­torate that has an elec­tion going on at the moment. Tough talk on QE is good pol­i­tics in Ger­many’s elec­tion.

Still, the advance of the euro mat­ters for the euro­zone ‘periph­ery’ nation now forced to export their way out of the ‘aus­ter­i­ty zone’. These are nations that have had one eco­nom­ic tragedy after anoth­er inflict­ed upon them in recent years and it would be a mas­sive tragedy if the Team Aus­ter­i­ty man­aged to cre­ate a euro spike that desta­bi­lized those same economies due to stu­pid­ly over­reach­ing dur­ing the QE unwind. And even if the anony­mous report isn’t real, it’s a real sig­nal being sent through anony­mous sources by Team Aus­ter­i­ty to the pub­lic with the pow­er to move mar­kets by chang­ing expec­ta­tions:

Reuters

Exclu­sive: ECB pol­i­cy­mak­ers agree on cut­ting stim­u­lus — sources

Reuters Staff
Sep­tem­ber 8, 2017 / 3:57 AM / Updat­ed

FRANKFURT (Reuters) — Euro­pean Cen­tral Bank pol­i­cy­mak­ers agreed at their meet­ing on Thurs­day that their next step would be to begin reduc­ing their mon­e­tary stim­u­lus, three sources with direct knowl­edge of the dis­cus­sion said.

After 2–1/2 years of mas­sive mon­ey-print­ing, the ECB is tak­ing baby-steps toward wean­ing the euro zone off the easy cash that has helped boost the econ­o­my but is also blamed for cre­at­ing bub­bles in rich­er coun­tries such as Ger­many.

The ECB left its poli­cies unchanged on Thurs­day. But Pres­i­dent Mario Draghi sug­gest­ed Octo­ber would be deci­sion time regard­ing the future of the 2.3 tril­lion euros ($2.8 tril­lion) bond-buy­ing pro­gram. Pol­i­cy­mak­ers debat­ed var­i­ous sce­nar­ios, he said.

The four options being con­sid­ered for reduc­ing its bond buy­ing, accord­ing to sources who asked not to be named, include cut­ting its month­ly buy­ing from the cur­rent 60 bil­lion euros to 20 or 40 bil­lion from the start of 2018, with the scheme run­ning for anoth­er six or nine months.

The deci­sion was like­ly to come at the Oct. 26 meet­ing and should be backed by a broad con­sen­sus, the sources said. One sug­gest­ed a com­pro­mise could be found for set­ting month­ly pur­chas­es some­where between 20 bil­lion and 40 bil­lion euros.

The sources added that much of the focus of the dis­cus­sion was on the over­all amount of the pur­chas­es, includ­ing the rein­vest­ment of pro­ceeds from matur­ing bonds, which will slow­ly rise toward 15 bil­lion euros per month next year, the sources said.

The ECB declined to com­ment on the report, which pushed the euro and gov­ern­ment bond yields in the sin­gle cur­ren­cy bloc high­er.

INFLATION

Despite sol­id eco­nom­ic growth in the euro zone, infla­tion has yet to rise back to the ECB’s tar­get of almost 2 per­cent and has been fur­ther curbed by a recent rise in the euro against major cur­ren­cies, which makes imports cheap­er and exports less attrac­tive.

The ral­ly in the euro was rais­ing the chances that the ECB would opt to phase out quan­ti­ta­tive eas­ing only very slow­ly next year and may look for oth­er ways to sup­port the econ­o­my.

The sources said pol­i­cy­mak­ers also agreed that inter­est rates will not be raised before the asset buys end, indi­cat­ing by default that any exten­sion of the pro­gram would also push out the first rate hike.

...

LIMITS

Any exten­sion to the bond scheme will leave the ECB exposed to the risk of run­ning out of eli­gi­ble bonds to buy under the strict con­di­tions it has set itself to lim­it mar­ket dis­tur­bance and not become a block­ing minor­i­ty in any coun­try.

But the sources said the so-called issuer lim­it, which caps any ECB buy­ing to a third of a country’s out­stand­ing debt, is not up for dis­cus­sion because it would open the pro­gram up to a legal chal­lenge.

Main­tain­ing the cap and the program’s oth­er self-imposed con­straints would cur­tail the pur­chas­es as the ECB is already approach­ing its lim­it in sev­er­al coun­tries — notably Ger­many, the euro zone’s biggest econ­o­my and the ECB’s top crit­ic.

This meant the ECB may have to devi­ate even far­ther from the nation­al quo­tas adopt­ed at the out­set of the pro­gram, which deter­mine how much debt it can buy from each coun­try depend­ing on its share­hold­ing in the cen­tral bank.

Indeed, the ECB has been buy­ing few­er Ger­man and more Ital­ian and French bonds than it is sup­posed to for months, with pur­chas­es of pub­lic-sec­tor paper issued by Ger­many hit­ting an all-time low in August.

Some tech­ni­cal issues may have to wait until the ECB’s last meet­ing of the year in Decem­ber, accord­ing to Finnish gov­er­nor Erk­ki Liika­nen.

“We have a meet­ing in Octo­ber where we will address these issues, and it could be that the fine-tun­ing on these issues will be made after­wards,” Liika­nen told the Finnish par­lia­ment on Fri­day.

———-

“Exclu­sive: ECB pol­i­cy­mak­ers agree on cut­ting stim­u­lus — sources” by Reuters Staff; Reuters; 09/08/2017

“The ECB declined to com­ment on the report, which pushed the euro and gov­ern­ment bond yields in the sin­gle cur­ren­cy bloc high­er.”

No com­ment from the ECB on the “let’s end QE in 6–9 months and slash bond pur­chase 33–66% in Jan­u­ary and give the mar­kets 10 trad­ing days to adjust” rumored plans. *Gulp* Hope­ful­ly it’s just ECB pol­i­cy not to com­ment on anony­mous reports.

Still, that would­n’t change the fact that there’s group of peo­ple in the ECB leak­ing a behind-the-scenes nar­ra­tive to the press that the con­sen­sus deci­sion has already been arrived at by the ECB Gov­ern­ing Coun­cil to cut QE dra­mat­i­cal­ly in Jan­u­ary and end it entire­ly by the fall. And while mar­kets might not have been shocked to hear such a plan back in, say, mid April, when the euro was clos­er to $1.05 and not $1.20 , it’s a lot more sur­pris­ing to hear plans to unwind QE in the first 6–9 months of 2018 now that the euro is $1.20 with plen­ty of momen­tum to head high­er as QE unwinds.

But, let’s not for­get that the oppo­nents of QE — pri­mar­i­ly the Bun­des­bank and its allies- were more than hap­py to call for an expen­sive euro back in 2013 when the euro­zone’s ‘periph­ery’ economies were far clos­er to implod­ing than they are today. So this insid­er report is sur­pris­ing in a gen­er­al sense giv­en the obvi­ous risks of an over­val­ued euro to the euro­zone economies, but it’s not par­tic­u­lar­ly sur­pris­ing giv­en who we’re talk­ing about. Reck­less pol­i­cy s the aus­ter­i­ty fac­tion’s spe­cial­ty.

And note how, even if there is a sur­prise ECB deci­sion about QE and the oth­er stim­u­lus pro­grams and the QE pro­gram is extend­ed with­out big cuts to the month­ly bond buy­ing and no declared plans for shut­ter­ing the QE, the ECB’s “cap­i­tal keys” cap on the QE sov­er­eign bond buy­ing at 33 per­cent of a nation’s out­stand­ing sov­er­eign bonds is still in place and not going any­where accord­ing to these insid­ers. And that QE nation­al cap is already forc­ing Por­tu­gal and Ire­land to con­tin­u­al­ly cut their par­tic­i­pa­tion in the QE pro­gram. So when we hear that the chang­ing the rules to lift those nation­al caps is already ruled out by these insid­ers, we’re hear­ing a sig­nal that QE is going to be allowed to end soon one way or anoth­er: either QE will be wound down inten­tion­al­ly or even­tu­al­ly all the par­tic­i­pat­ing nations will even­tu­al­ly hit their caps and effec­tive­ly end it any­way:

...
Any exten­sion to the bond scheme will leave the ECB exposed to the risk of run­ning out of eli­gi­ble bonds to buy under the strict con­di­tions it has set itself to lim­it mar­ket dis­tur­banc and not become a block­ing minor­i­ty in any coun­try.

But the sources said the so-called issuer lim­it, which caps any ECB buy­ing to a third of a country’s out­stand­ing debt, is not up for dis­cus­sion because it would open the pro­gram up to a legal chal­lenge.

Main­tain­ing the cap and the program’s oth­er self-imposed con­straints would cur­tail the pur­chas­es as the ECB is already approach­ing its lim­it in sev­er­al coun­tries — notably Ger­many, the euro zone’s biggest econ­o­my and the ECB’s top crit­ic.

This meant the ECB may have to devi­ate even far­ther from the nation­al quo­tas adopt­ed at the out­set of the pro­gram, which deter­mine how much debt it can buy from each coun­try depend­ing on its share­hold­ing in the cen­tral bank.
...

“This meant the ECB may have to devi­ate even far­ther from the nation­al quo­tas adopt­ed at the out­set of the pro­gram, which deter­mine how much debt it can buy from each coun­try depend­ing on its share­hold­ing in the cen­tral bank.”

And keep in mind that this report came out on Sep­tem­ber 8th, one day after ECB chief Mario Draghi told the mar­ket that the ECB is going to need the next six weeks to wait and see and observe the sit­u­a­tion with the ris­ing euro to deter­mine its QE deci­sion. It’s a pret­ty strong “trou­ble here we come!” sig­nal for these ECB insid­ers to send to the mar­ket.

The Schaue­ble Con­sen­sus. That’s a Thing. Uh Oh.

Although, again, it’s entire­ly pos­si­ble that the anony­mous insid­er report is just a sto­ry intend­ed to pla­cate the Ger­man elec­torate or dis­in­fo for some oth­er rea­son. It’s an anony­mous insid­er report and peo­ple spread false sto­ries for all sorts of rea­sons.

But unfor­tu­nate­ly, accord­ing to the fol­low­ing report in the Finan­cial Times from Sep­tem­ber 6th, Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble — arguably the most pow­er­ful per­son in Europe and a con­sis­tent advo­cate for absolute­ly mer­ci­less appli­ca­tions of aus­ter­i­ty doc­trines — has views on these mat­ters that are more and more in line with the ECB con­sen­sus. Not entire­ly. Schaeu­ble wants an end to all ECB stim­u­lus poli­cies (QE and low rates and any­thing else) soon­er than peo­ple expect, as he puts it. And while it does­n’t sound like the ECB is on board with a com­plete rapid rever­sal of all stim­u­lus pro­grams, it does sound like Schaeuble’s views on end­ing QE com­plete­ly next year is increas­ing­ly the con­sen­sus on the ECB Gov­ern­ing Coun­cil

The Finan­cial Times

Draghi faces anoth­er test to taper with­out tantrums

by: Claire Jones in Frank­furt
Sep­tem­ber 6, 2017

Mario Draghi has been wrestling with a €2tn issue through­out this year — how to rein in the Euro­pean Cen­tral Bank’s quan­ti­ta­tive eas­ing pro­gramme with­out alarm­ing the mar­kets and slow­ing down the eurozone’s recov­ery.

Now, as the hour of truth looms for the €60bn-a-month asset pur­chase scheme — due to be dis­cussed at Thursday’s ECB meet­ing ahead of a like­ly deci­sion in Octo­ber — atten­tion is shift­ing else­where: notably, to inter­est rates.

“The ECB think­ing into next year could be that what mat­ters more for the euro is not the size [of] QE, but keeping...interest rate expec­ta­tions anchored for as long as pos­si­ble,” said Marchel Alexan­drovich, econ­o­mist at Jef­feries Inter­na­tion­al, an invest­ment bank.

QE remains an intense­ly polem­i­cal top­ic as the ECB pres­i­dent can attest. Ger­many has always been uneasy about the bond-buy­ing pro­gramme, while euro­zone coun­tries with low­er lev­els of growth are much more enthu­si­as­tic about its impact on reduc­ing bor­row­ing costs.

Wolf­gang Schäu­ble, Germany’s finance min­is­ter, called on Wednes­day for the ECB to ditch such extra­or­di­nary cri­sis mea­sures because of the strength of the euro­zone recov­ery. “Unusu­al mon­e­tary pol­i­cy implies it is not usu­al or nor­mal — we should get back to a nor­mal mon­e­tary pol­i­cy,” he said. “We have come back to a nor­mal sit­u­a­tion much quick­er than peo­ple thought.”

But, inso­far as they refer to QE, Mr Schäuble’s remarks are in line with the con­sen­sus, which is increas­ing­ly con­fi­dent of a deci­sion next month to scale back asset pur­chas­es from Jan­u­ary, so that the scheme can wind down next year.

Since the ECB risks run­ning out of eli­gi­ble assets if it con­tin­ues pur­chas­es at their cur­rent pace and Mr Draghi has declared sev­er­al times that his bank has van­quished the threat of defla­tion, much of the ratio­nale for QE has gone.

That is not the case, the ECB argues, for inter­est rates.

At 1.5 per cent com­pared with a tar­get of just below 2 per cent, infla­tion is still weak, part­ly because of the strong euro. Core infla­tion is even more fee­ble, at 1.2 per cent.

There is broad agree­ment with­in the ECB’s gov­ern­ing coun­cil that any deci­sion to increase rates from their cur­rent record lows could risk throt­tling the recov­ery, despite demand for high­er rates from Ger­many and else­where.

At present, the main refi­nanc­ing rate is zero while the deposit rate paid by banks is minus 0.4 per cent.

Despite the healthy euro­zone recov­ery that brought growth to 2.1 per cent for the year to June, expec­ta­tions of a rate rise in the medi­um term have dived in recent months — par­tic­u­lar­ly since a con­fer­ence speech Mr Draghi gave in Sin­tra in June.

The ini­tial after­math of that speech, in which the ECB pres­i­dent said “defla­tion­ary forces have been replaced by refla­tion­ary ones”, was a jump in the euro, as investors judged that there would be less rea­son in the near future to keep inter­est rates low.

But ECB offi­cials has­tened to say that Mr Draghi had been mis­un­der­stood, and his speech also argued that pol­i­cy “needs to be per­sis­tent” because infla­tion­ary pres­sures were “not yet durable and self-sus­tain­ing”.

Since then, mar­kets for futures con­tracts indi­cate that investors have gone from pric­ing in a 90 per cent chance of a rate rise by the end of 2018 to a 40 per cent chance — the low­est prob­a­bil­i­ty on record.

One cen­tral bank offi­cial close to the delib­er­a­tions said the adjust­ment in inter­est rate swaps sug­gest­ed “mar­kets were final­ly tak­ing our for­ward guid­ance seri­ous­ly”. That is a ref­er­ence to Mr Draghi’s near-con­stant refrain that the bank expects rates to “remain at their present lev­els for an extend­ed peri­od of time, and well past” the time when QE is final­ly brought to an end.

...

Bankers — par­tic­u­lar­ly in Ger­many — are not hap­py about con­tin­ued ultra-low inter­est rates. “The real econ­o­my is doing well, the mar­ket is expect­ing I think an increase in inter­est rates or a reduc­tion in the neg­a­tive nature of inter­est rates. Let’s start doing that,” said John Cryan, Deutsche Bank chief exec­u­tive on Wednes­day, refer­ring to an issue that also con­cerns Mr Schäu­ble. “It can’t be for­ev­er that deposit tak­ing is lossmaking?...for banks.

The mar­kets’ strug­gle to inter­pret Mr Draghi’s remarks over the sum­mer has also fuelled sharp ris­es in gov­ern­ment bor­row­ing costs and con­tributed to the euro’s rise.

The currency’s ascen­dan­cy means in turn that a new round of eco­nom­ic fore­casts by ECB staff on Thurs­day will almost cer­tain­ly show infla­tion weak­en­ing in 2018 — com­pli­cat­ing the bank’s task of explain­ing why now is the time to exit, even though next to no one expects infla­tion to hit its tar­get dur­ing the next cou­ple of years.

“If you look back at what he has accom­plished in the past two or three years, Mr Draghi is prob­a­bly the most suc­cess­ful cen­tral banker there is,” said Michael O’Sullivan, chief invest­ment offi­cer in the inter­na­tion­al wealth man­age­ment divi­sion at Cred­it Suisse.

“But on the euro, he hasn’t been that forth­right. There is a dan­ger that if he doesn’t feel the need to say any­thing on Thurs­day, then the cur­ren­cy could draw investors and appre­ci­ate fur­ther.”

Ken Wat­tret, econ­o­mist at TS Lom­bard, a research firm, said: “Infla­tion is still rather low, so the ECB needs to make clear that the hur­dle to embark on inter­est rate ris­es is much high­er than the hur­dle to taper­ing.

“What Mr Draghi should do on Thurs­day is put some dis­tance between adjust­ing QE and rais­ing inter­est rates. He ought to empha­sise that pol­i­cy adjust­ment will be very grad­ual. Oth­er­wise he risks under­min­ing the progress which it has tak­en such a long time to achieve.

———

“Draghi faces anoth­er test to taper with­out tantrums” by Claire Jones; The Finan­cial Times; 09/06/2017

“Wolf­gang Schäu­ble, Germany’s finance min­is­ter, called on Wednes­day for the ECB to ditch such extra­or­di­nary cri­sis mea­sures because of the strength of the euro­zone recov­ery. “Unusu­al mon­e­tary pol­i­cy implies it is not usu­al or nor­mal — we should get back to a nor­mal mon­e­tary pol­i­cy,” he said. “We have come back to a nor­mal sit­u­a­tion much quick­er than peo­ple thought.”

Those were Wolf­gang Schaeuble’s com­ments on Sep­tem­ber 6th, the day before the ECB met and Mario Draghi issued his vague state­ment about how the ECB needs to wait and observe the sit­u­a­tion before mak­ing any deci­sions on how fast to wind down the QE pro­gram. “We have come back to a nor­mal sit­u­a­tion much quick­er than peo­ple thought.” So we have this mes­sage from Schaeu­ble, a supreme­ly pow­er­ful fig­ure, the day before Mario Draghi gives his “we’ll wait and see” speech, and then the fol­low­ing day we get the above report from the anony­mous insid­ers that more or less is in line with Schaeuble’s mes­sage.

It’s rather omi­nous giv­en Schaeuble’s influ­ence because Schaeuble’s way of think­ing is the default mode for how the euro­zone seems to oper­ate on all mat­ters involv­ing finance, except for ECB mat­ters in recent years because that would have implod­ed the entire euro­zone. So if Schaeuble’s way of think­ing is about to replace Draghi’s rel­a­tive­ly ‘dovish’ reign now that the euro­zone is slow­ly recov­er­ing we real­ly can’t rule out the ECB fol­low­ing Schaeuble’s lead and “renor­mal­iz­ing” back to a “a nor­mal sit­u­a­tion much quick­er than peo­ple thought” over the next cou­ple of years. Or at least much soon­er than is eco­nom­i­cal­ly appro­pri­ate (Schaeu­ble is a high­ly ide­o­log­i­cal­ly dri­ven fig­ure so eco­nom­ic appro­pri­ate­ness is nev­er a pri­or­i­ty for him).

But it’s extra omi­nous to hear Schaue­ble’s “renor­mal­ize it all (at any cost)” views in a report that describe’s Schaeuble’s views on QE as tru­ly the behind-the-scenes con­sen­sus:

...
But, inso­far as they refer to QE, Mr Schäuble’s remarks are in line with the con­sen­sus, which is increas­ing­ly con­fi­dent of a deci­sion next month to scale back asset pur­chas­es from Jan­u­ary, so that the scheme can wind down next year.
...

As we’ve seen repeat­ed­ly over the past 5+ years, ever since the euro­zone cri­sis real­ly got into full swing, when Wolf­gang Schaeu­ble calls for a pol­i­cy it’s a call root­ed in puni­tive Ordolib­er­al ide­ol­o­gy, not prac­ti­cal eco­nom­ics. So to hear that Schaeuble’s views are the con­sen­sus view on almost any­thing is a big warn­ing sign that the ide­o­logues are once again tak­ing over at the ECB.

But that’s the sig­nal­ing com­ing out of the ECB and all pow­er­ful Ger­man finance min­is­ter head­ing into this cru­cial peri­od for the euro­zone econ­o­my. End­ing QE was nev­er going to be easy, but if the Ordolib­er­al ide­o­logues are call­ing the shots dur­ing this QE wind down phase it could be a very bumpy ride. Offi­cial­ly, Mario Draghi is telling the mar­kets to vague­ly not wor­ry because he’s promis­ing to keep inter­est rates ultra-low for the fore­see­able future even if QE is unwound next year, and maybe the ECB won’t end QE at all next year if the euro keeps surg­ing. That’s the offi­cial mes­sage.

But unof­fi­cial­ly the mes­sage from anony­mous ECB insid­ers and Wolf­gang Schaeu­ble is that the deci­sion has already been made to kill QE next year, with rate ris­es pre­sum­ably to fol­low. And if the mar­kets decide to lis­ten to that unof­fi­cial mes­sage instead of the offi­cial one the euro is going to just keep going high­er and high­er, poten­tial­ly derail­ing the frag­ile export-based eco­nom­ic recov­er­ies that are being used to jus­ti­fy end­ing QE in the first place.

And as the above arti­cle point­ed, we saw what hap­pens when the mar­kets mis­in­ter­pret the ECB. Back in June, when Draghi sound­ed like he was shift­ing away from guard­ing against defla­tion to guard­ing against infla­tion, the euro did exact­ly what you would expct: it jumped in val­ue, con­tribut­ing to the over­val­ued euro sit­u­a­tion we have today:

...
Despite the healthy euro­zone recov­ery that brought growth to 2.1 per cent for the year to June, expec­ta­tions of a rate rise in the medi­um term have dived in recent months — par­tic­u­lar­ly since a con­fer­ence speech Mr Draghi gave in Sin­tra in June.

The ini­tial after­math of that speech, in which the ECB pres­i­dent said “defla­tion­ary forces have been replaced by refla­tion­ary ones”, was a jump in the euro, as investors judged that there would be less rea­son in the near future to keep inter­est rates low.

But ECB offi­cials has­tened to say that Mr Draghi had been mis­un­der­stood, and his speech also argued that pol­i­cy “needs to be per­sis­tent” because infla­tion­ary pres­sures were “not yet durable and self-sus­tain­ing”.
...

But as the arti­cle also also not­ed, the mar­kets have since tak­en the ECB’s offi­cial­ly mes­sag­ing on inter­est rate guid­ance — don’t expect a rate rise for a while — to heart. So if there’s a deci­sion, or mar­ket expec­ta­tion, to raise inter­est rates soon after end­ing QE that could be a gen­uine sur­prise that would only send the euro high­er:

...
Since then, mar­kets for futures con­tracts indi­cate that investors have gone from pric­ing in a 90 per cent chance of a rate rise by the end of 2018 to a 40 per cent chance — the low­est prob­a­bil­i­ty on record.

One cen­tral bank offi­cial close to the delib­er­a­tions said the adjust­ment in inter­est rate swaps sug­gest­ed “mar­kets were final­ly tak­ing our for­ward guid­ance seri­ous­ly”. That is a ref­er­ence to Mr Draghi’s near-con­stant refrain that the bank expects rates to “remain at their present lev­els for an extend­ed peri­od of time, and well past” the time when QE is final­ly brought to an end.
...

Yep, mar­kets were final­ly tak­ing the for­ward guid­ance on inter­est rates seri­ous­ly. For­ward guid­ance that Draghi reit­er­at­ed dur­ing his Sep­tem­ber 7th “we’ll wait and see” speech. And note that the cur­rent rel­a­tive­ly high val­u­a­tion of the euro has already priced in the assump­tion that rates are going to stay very low for an extend­ed peri­od of time. So, again, if there’s a sur­prise on high­er rates soon­er than expect­ed don’t be sur­prised by a high­er euro.

And, unfor­tu­nate­ly, that for­ward guid­ance on rates from Draghi is the same for­ward guid­ance Wolf­gang Schaeu­ble just com­plete­ly con­tra­dict­ed on his Sep­tem­ber 6th com­ments. And the three anony­mous ECB insid­ers who hint­ed at a rapid wind­ing down of QE next year (end it in the first 6–9 months of 2018) did­n’t help that offi­cial guid­ance either because plans for end QE next year could eas­i­ly be inter­pret­ed as mean­ing the Schaeuble/Bundesbank fac­tion is now com­plete­ly call­ing the shots and that fac­tion wants rates to rise “much quick­er than peo­ple thought”, as Schaeu­ble put it.

So if there’s a surpise announce­ment that a rate rise could hap­pen as soon as, say, next fall (after QE winds down) — or sur­prise unof­fi­cial sig­nalling that the mar­ket takes to heart over the offi­ci­zl sig­nalling — that means the val­ue of the euro is poised for some fur­ther surg­ing. And the high­er the euro goes, the less jus­ti­fied end­ing QE and rais­ing rates becomes because that real­ly can be a seri­ous drag on weak economies just try­ing to export their way back to health after all the aus­ter­i­ty threw them down a depres­sion-lev­el hole. A ris­ing euro is a real prob­lem for those plans to wind down QE next year.

But end­ing QE isn’t just a prob­lem in terms of allow­ing ide­ol­o­gy to take over from sober man­age­ment and poten­tial­ly desta­bi­liz­ing mar­kets in all sorts of ways. The ris­ing euro — which was always going to be a con­se­quence of end­ing QE — also under­mines the basic eco­nom­ic mod­el that all the oth­er EU nations were sup­posed to adopt after all the aus­ter­i­ty they incurred. The Berlin-based Ordolib­er­al ide­ol­o­gy that dom­i­nates the EU’s eco­nom­ic poli­cies coun­tries was the basis of the aus­ter­i­ty demands. Coun­tries like Greece and Spain and Ire­land where sup­posed to take on all sorts of aus­ter­i­ty as part of the ‘med­i­cine’ to trans­form their economies into mean, lean, export machines (with an empha­sis on mean, appar­ent­ly). If nations incur bru­tal aus­ter­i­ty they will come out stronger than before. That was the implied social con­tract.

And that Ordolib­er­al exports-at-all-costs ide­ol­o­gy has gen­er­al­ly viewed the ECB’s extreme stim­u­lus mea­sures as an unnec­es­sary crutch that does­n’t allow the mar­ket dynam­ics (high gov­ern­ment bor­row costs and pos­si­ble nation­al bank­rup­ti­cies) to play their course and force the nec­es­sary pain required to cre­ate economies like Ger­many’s. That’s the insane ide­ol­o­gy backed by Schaeu­ble that typ­i­cal­ly dom­i­nates EU and euro­zone deci­sion-mak­ing on all things finan­cial and the only rea­son it has­n’t dom­i­nat­ed at the ECB lev­el over the past five years too is that it would have implod­ed the whole euro­zone sys­tem. But it’s entire­ly pos­si­ble the Schaeu­ble wing is going to take over for the Draghi wing at the ECB as the QE unwind­ing phase is hap­pen­ing and if that hap­pens we could see the euro rise to lev­els that destroy any hope for coun­tries like Spain and Por­tu­gal to turn them­selves into mean, lean, export machines. The euro will be too strong for their exports. It’ll be the final insult to all the aus­ter­i­ty they incurred: tak­ing away the finan­cial ‘punch bowl’ too quick­ly and killing the export sec­tors the ‘periph­ery’ nations cre­at­ed so far.

How pos­si­ble is such a sce­nario, where the euro con­tin­ues to rise, squash­ing weak recov­ery? Well, don’t for­get that we’ve already seen how lit­tle the Bundesbank/austerity fac­tion cares about an over­val­ued euro crush­ing the periph­ery eco­nom­ices. That was the case in 2013 when the val­ue of the euro down in 2013 when the issue of an over-val­ued euro for the weak­er economies was being debat­ed.

And back in 2013 we did­n’t have a whole array of stim­u­lus mea­sures set to be unwound that will mech­a­nis­ti­cal­ly increase the val­ue of the euro. But we do now and one of the key dan­gers in unwind­ing the ECB’s extreme mea­sures like ultra low rates and QE has always been the dan­ger of unwind­ing too fast. Stu­pid­ly fast. Ide­o­log­i­cal­ly stu­pid­ly fast. And that’s always been a dan­ger Wolf­gang Schaeu­ble and Bun­des­bank chief Jens Wei­d­mann embrace.

Also don’t for­get that the ECB has been careen­ing towards a cur­tail-QE-at-all-cost modal­i­ty all year and if the euro was­n’t surg­ing the above plan would be very plau­si­ble. As we saw above, end­ing QE in 2018 — a move that just might mean 2018 is guar­an­teed to be an expen­sive euro year — is appar­ent­ly the con­sen­sus view at the ECB Gov­ern­ing Coun­cil. It’s not the offi­cial sig­nal, but it is the unof­fi­cial sig­nal.

So while the ECB has offi­cialy sig­naled to the world that it does­n’t know what it’s going to do yet because of the ris­ing euro, unof­fi­cial signs are sug­gest­ing oth­er­wise. And those unof­fi­cials signs point towards ECB plans that it can’t eas­i­ly reveal to the mar­kets because reveal­ing those plans would spike the euro even more. And don’t for­get, the longer the ECB waits to release its plans for next year the greater the odds of the final deci­sion not being announced until the ECB’s Decem­ber 14th meet­ing, leav­ing mar­kets just 10 trad­ing days left in Decem­ber to process those plans. It’s quite a pow­derkeg sit­u­a­tion that we’re see­ing devel­op.

And that’s just the near-term risk we’re look­ing at over the next few months. The far greater long-term risk is the prospect that the aus­ter­i­ty fac­tion real­ly is about to take over ECB pol­i­cy mak­ing dur­ing this crit­i­cal unwind­ing phase for QE and the rest of the ECB’s stim­u­lus mea­sures. That “renor­mal­iza­tion” phase is the kind of phase that should take years to care­ful­ly exe­cute and wait­ing for the right con­di­tions. But as Wolf­gang Schaeu­ble warned us, the aus­ter­i­ty fac­tion wants to see “renor­mal­iza­tion” soon­er than peo­ple expect. And as con­tem­po­rary euro­zone his­to­ry warns us, folks like Wolf­gang Schaeu­ble don’t actu­al­ly care if their ide­o­log­i­cal­ly dri­ven deci­sions end up dam­ag­ing the euro­zone’s weak­er economies because that dam­age sim­ply because an excuse for more aus­ter­i­ty. Aus­ter­i­ty is the ends and means here: cre­at­ing a union of export pow­er­hous­es that derive their export prowess from their poor­ly paid work­ers. If end­ing QE too fast harms all these ‘periph­ery’ economies and forces them to impose even more aus­ter­i­ty to deal with a strong euro that’s not a bug. It’s a fea­ture.

Discussion

7 comments for “The New World Ordoliberalism, Part 7: To QE, or Not to QE, That is the Ominous Question”

  1. Reuters has a new piece on a set of recent polls of econ­o­mist about their expec­ta­tions of the ECB’s plans for its quan­ti­ta­tive eas­ing (QE) pro­gram and oth­er stim­u­lus mea­sure like ultra-low rates. While polls of econ­o­mists aren’t always all that rel­e­vant, in this case these are the kinds of polls worth watch­ing giv­en the impor­tance of mar­ket expec­ta­tions — in par­tic­u­lar expec­ta­tions of a high­er euro that could become a self-ful­fill­ing prophe­cy — will play in the ease of ECB’s like­ly stim­u­lus wind down start­ing in Jan­u­ary.

    What did the polled econ­o­mist expect? Well, they expect pret­ty much what the three anony­mous ECB insid­er leaked to the pub­lic the day after Mario Draghi gave his “let’s wait and see how high the euro goes over the next month and half before mak­ing any deci­sions” speech last week: that the ECB was going to announce a 6 month exten­sion to QE, cut its month­ly QE bond pur­chas­es sig­nif­i­cant­ly in Jan­u­ary, and almost cer­tain­ly wind down QE com­plete­ly by the end of 2018. And the vast major­i­ty also expect­ed the ultra-low inter­est rates would not be touched at all in 2018.

    So if the ECB real­ly has already decid­ed to end QE, but not raise rates at all, it’s at least con­ve­nient if there’s already a gen­er­al expec­ta­tion of such a move. But there was a sec­ond poll also men­tioned in the arti­cle. A poll of for­eign exchange (FX) strate­gists ask­ing them to pre­dict where the val­ue of the euro will go next and what its impact could be on the ECB’s poli­cies. And what they expect­ed was that the euro would keep all of its gains from this year. In oth­er words, the pres­sure from the euro’s mas­sive gains isn’t expect­ed to recede. But even worse, accord­ing to these strate­gists, if the euro ris­es anoth­er 5 per­cent next year the ECB could start get­ting “uncom­fort­able”. And obvi­ous­ly the high­er it gets the more uncom­fort­able the ECB is going to be and the more tempt­ed it’s going to be to either slow down the wind down or reverse course and amp up the stim­u­lus again.

    Keep in mind that the euro has already risen 13 per­cent in 2017. On the one hand, if the euro has already risen that much it means some of the upward pres­sure on the euro expect­ed as QE is phased out has already been released. But at the same time, it’s a sign of how much upward pres­sure there was at the begin­ning of 2017. The aus­ter­i­ty mad­ness of this decade neces­si­tat­ed quite a bit of mon­e­tary stim­u­lus to hold some­thing like the euro­zone togeth­er. And it’s hard to believe that the for­mal phase out of QE, and not just expec­ta­tions of a future phase out, won’t end up putting more upward pres­sure on the cur­ren­cy as the Great Unwind­ing of 2018 tran­spires.

    So when you com­bine the expec­ta­tions described in those polls it sounds like the mar­ket is expect­ing the ECB to end QE next year cou­pled with no rate next year. But the mar­kets are also expect­ing that this pol­i­cy is only going to require a 5 per­cent increase in the val­ue of the euro before things get “uncom­fort­able”. And almost every­thing the mar­ket is expect­ing the ECB to do is the kind of thing that should push up the euro or, at a min­i­mum, not push it down. It’s anoth­er reminder of how tricky the com­ing months are going to be for the ECB. As one of the polled econ­o­mists apt­ly puts it, “they have to present it in a way that it is per­ceived by the mar­kets as dovish instead of hawk­ish”:

    Reuters

    ECB to announce in Octo­ber plans to reduce QE; buy bonds through June 2018: Reuters Poll

    Shru­tee Sarkar, Rahul Karunakar
    Sep­tem­ber 15, 2017 / 7:46 AM / Updat­ed

    BENGALURU (Reuters) — The Euro­pean Cen­tral Bank will announce in Octo­ber a six-month exten­sion to its asset pur­chase pro­gram but will cut how much it buys each month to 40 bil­lion euros from Jan­u­ary, a Reuters poll of econ­o­mists found.

    The euro zone has been per­form­ing stronger recent­ly than at any time since the glob­al finan­cial cri­sis. That has fueled expec­ta­tions that the ECB will begin scal­ing back its quan­ti­ta­tive eas­ing (QE) pro­gram after more than two years of bond buy­ing dur­ing it which snapped up more than 2 tril­lion euros worth of main­ly gov­ern­ment bonds.

    The Reuters poll of ECB watch­ers, tak­en Sept. 11–14, pre­dict­ed that the resur­gence in eco­nom­ic growth will be main­tained over the com­ing year. But infla­tion is not expect­ed to reach the cen­tral bank’s tar­get of close to but just below 2 per­cent until 2019 at least.

    Mount­ing opti­mism about the euro zone econ­o­my has led to a run-up in the euro exchange rate, pos­ing a dilem­ma for the cen­tral bank as it tends to tamp down import­ed infla­tion.

    ECB Pres­i­dent Mario Draghi said at his Sep­tem­ber news con­fer­ence that the cen­tral bank was look­ing at how to wind down its 60 bil­lion euros of month­ly asset pur­chas­es and would be ready with a plan by Octo­ber.

    While a Reuters poll on Sept 1 also flagged Octo­ber as the most like­ly date, econ­o­mists are now near­ly unan­i­mous. Only two of 52 sur­veyed thought the ECB would wait until Decem­ber, when the cur­rent pro­gram is sched­uled to end.

    The ECB is expect­ed to announce a six-month exten­sion to QE, accord­ing to the con­sen­sus of 39 econ­o­mists who answered an addi­tion­al ques­tion, tak­ing the pro­gram through to the end of June. Fore­casts ranged from 3–12 months.

    “The tricky exer­cise for the ECB is to actu­al­ly announce that they will con­tin­ue buy­ing in 2018, but that it will peter out grad­u­al­ly these pur­chas­es,” said Peter Van­den Houte, chief euro zone econ­o­mist at ING Finan­cial Mar­kets. “They have to present it in a way that it is per­ceived by the mar­kets as dovish instead of hawk­ish.”

    But the deci­sion to start scal­ing back bond pur­chas­es soon is also a prac­ti­cal one: It already owns a huge chunk of the euro zone gov­ern­ment bond mar­ket.

    “A con­tin­u­a­tion of QE in unchanged form into 2018, as has been rumored in some quar­ters, does not appear to be an option...as bond sup­ply scarci­ty pos­es a hard tech­ni­cal con­straint on the QE pro­gram,” not­ed Mar­ius Gero Daheim, senior euro­zone strate­gist at SEB.

    Asked what will be the ECB’s month­ly pur­chase amount from Jan­u­ary, the medi­an response from a sim­i­lar num­ber of respon­dents was 40 bil­lion euros, down from the cur­rent 60 bil­lion. The range of views was 30–50 bil­lion.

    Asked when the ECB would close the pro­gram com­plete­ly, 31 of 33 econ­o­mists said by the end of next year, includ­ing six who said it could be wrapped up in the first half of 2018. The remain­ing two said the pur­chas­es would end some­time in 2019.

    Most fore­cast­ers who were asked if the ECB was right to start unwind­ing its ultra-easy pol­i­cy said it should. But the vast major­i­ty also said the ECB would not like­ly do any­thing with its key inter­est rates through to the end of next year.

    FLYING EURO

    The euro’s ral­ly this year — up over 13 per­cent against the dol­lar and hit mul­ti-year highs after the Sept 7 meet­ing — has some ECB pol­i­cy­mak­ers wor­ried, sug­gest­ing the pace of any reduc­tion in QE is like­ly to be slow.

    Draghi men­tioned the currency’s strength as a con­cern sev­er­al times at the Sep­tem­ber press con­fer­ence. But ECB board mem­ber Benoit Coeure said ear­li­er this week that the euro’s strength may have less of an impact than in the past.

    A Reuters poll of for­eign exchange strate­gists pub­lished on Sept. 7 pre­dict­ed the euro EUR will hold on to most of those gains over the com­ing year. But they also said if the euro rose anoth­er 5 per­cent, the ECB would become uncom­fort­able.

    Eco­nom­ic growth in the cur­rent quar­ter was fore­cast in the lat­est Reuters poll at 0.5 per­cent, up from 0.4 per­cent pre­dict­ed last month. Medi­an fore­casts show steady 0.4 per­cent growth through to the end of next year.

    ...

    Infla­tion is fore­cast to remain well below the ECB’s tar­get until at least 2019, aver­ag­ing 1.5 per­cent this year and 1.4 per­cent next. Only one fore­cast­er had infla­tion at 2 per­cent at any point through the end of next year.

    ———-

    “ECB to announce in Octo­ber plans to reduce QE; buy bonds through June 2018: Reuters Poll” by Shru­tee Sarkar, Rahul Karunakar; Reuters; 09/15/2017

    Asked when the ECB would close the pro­gram com­plete­ly, 31 of 33 econ­o­mists said by the end of next year, includ­ing six who said it could be wrapped up in the first half of 2018. The remain­ing two said the pur­chas­es would end some­time in 2019.”

    So long QE! Prob­a­bly! But the ultra-low rates are hear to stay for a while. Hope­ful­ly:

    ...
    Most fore­cast­ers who were asked if the ECB was right to start unwind­ing its ultra-easy pol­i­cy said it should. But the vast major­i­ty also said the ECB would not like­ly do any­thing with its key inter­est rates through to the end of next year.
    ...

    And hope­ful­ly there isn’t more than a 5 per­cent rise (e.g. going from the ~1.20 euro to dol­lar exchange to 1.26):

    ...
    A Reuters poll of for­eign exchange strate­gists pub­lished on Sept. 7 pre­dict­ed the euro EUR will hold on to most of those gains over the com­ing year. But they also said if the euro rose anoth­er 5 per­cent, the ECB would become uncom­fort­able.
    ...

    So that’s both opti­mistic and omi­nous, which is either opti­misti­cal­ly omi­nous or omi­nous­ly opti­mistic. And prob­a­bly rather omi­nous when you con­sid­er the impact on the val­ue of that euro that the pres­ence of the aus­ter­i­ty fac­tion, led like Bun­des­bank chief Jens Wei­d­mann and Ger­man finance min­is­ter Wolf­gang Schaeu­ble, that is going to be send­ing all sorts of sig­nals to the mar­ket that they are inter­est­ed in see­ing all the stim­u­lus end­ed soon­er than peo­ple expect, as Schaeu­ble put it last week.

    For­tu­nate­ly it sounds like the mar­kets are most­ly ok with the wind down, if these polled econ­o­mists are reflec­tive of mar­ket sen­ti­ments. And that makes sense both because QE and oth­er stim­u­lus mea­sures have made some sec­tors of the mar­kets a lot less prof­itable. There are win­ners and losers with QE, that’s unam­bigu­ous. It’s the kind of thing only used with the alter­na­tive is let­ting a finan­cial cri­sis emerge and soci­ety los­es.

    But it also makes sense that the mar­kets would large­ly be ok with the QE wind down next year since it real­ly is a poten­tial­ly good time to do it. If the euro­zone’s gen­er­al eco­nom­ic recov­ery con­tin­ues into 2018 that would be a bet­ter time to unwind the QE than not. Espe­cial­ly if rais­ing the 33 per­cent nation­al caps remain non-nego­tiable. QE has to end soon­er or lat­er if those caps can’t be raised so dur­ing a rel­a­tive­ly ok eco­nom­ic recov­ery is the moment to do it. Now is a ok moment to wind QE down if the nation­al caps won’t be lift­ed. But it’s only an ok moment if the aus­ter­i­ty fac­tion does­n’t screw it up.

    It was a point Jens Wei­d­mann made last week when he argued exact­ly that, that now is the moment to end QE. He was right. The prob­lem is that Wei­d­mann is wrong on most oth­er things due to his fas­cism-friend­ly Ordolib­er­al ortho­doxy. Hyper-rigid­i­ty is just not a good fit for some­thing like the euro­zone. But that’s what the euro­zone is based on (it’s mod­eled on the Bun­des­bank).

    The oth­er prob­lem is that It’s a rather del­i­cate moment for the euro­zone econ­o­my at the moment that requires the kind of poli­cies (and gen­tle touch) that the aus­ter­i­ty fac­tion lead­ers like Wei­d­mann and Schaeu­ble have proven inca­pable of back­ing because that would vio­late the crazy Ordolib­er­al ortho­doxy that jus­ti­fies their far-right eco­nom­ic agen­da that’s going to turn the euro­zone into a trap for the weak­er mem­ber nations. And the expec­ta­tion of the Weidmann/Schaeble wing tak­ing over pol­i­cy when Mario Draghi retires in late 2019 would mean the mar­kets can’s count on the ultra-low rates stay­ing ultra-low for longer than 2019. What’s that going to do the euro if the mar­kets get the impres­sion that Jens Wei­d­mann is going to be ECB chief in late 2019 and ush­er in an era of Ordolib­er­al ortho­doxy, damn the con­se­quences? It’s a ques­tion we have to ask since Berlin has made it clear they want Jens Wei­d­mann to take over as ECB chief:

    Dow Jones Newswires

    ECB Crit­ic Holds His Tongue as Race Nears for Bank’s Top Job

    By Tom Fair­less
    June 07, 2017

    FRANKFURT – Jens Wei­d­mann, the Ger­man cen­tral-bank chief who made his name by loud­ly attack­ing the Euro­pean Cen­tral Bank’s cri­sis-fight­ing efforts, has become a qui­et defend­er of the ECB against its Ger­man crit­ics.

    The shift has been sub­tle. Mr. Wei­d­mann still crit­i­cizes the bank’s rad­i­cal stim­u­lus mea­sures. But his tone has soft­ened as evi­dence accu­mu­lates that the ECB’s poli­cies are work­ing — and as the race to become the insti­tu­tion’s next pres­i­dent approach­es.

    “There is cur­rent­ly no doubt that an expan­sion­ary mon­e­tary pol­i­cy stance is appro­pri­ate,” Mr. Wei­d­mann said in a speech late last month, while sug­gest­ing he might not agree with his col­leagues on the details.

    Only five years ago, he was boast­ing of clash­es with fel­low pol­i­cy mak­ers, and com­par­ing easy-mon­ey poli­cies to drugs and alco­hol.

    As ECB offi­cials gath­er Wednes­day and Thurs­day in Esto­nia, what was once a bit­ter argu­ment over the bank’s far-reach­ing mon­e­tary stim­u­lus is expect­ed instead to be a prag­mat­ic dis­cus­sion about whether to start reduc­ing it.

    Mr. Wei­d­mann declined to be inter­viewed for this arti­cle.

    ECB Pres­i­dent Mario Draghi’s term ends in 2019. The jock­ey­ing to suc­ceed him is like­ly to begin some­time after Ger­many’s nation­al elec­tions in Sep­tem­ber. The pres­i­den­cy is deter­mined by a vote of euro­zone lead­ers.

    Mr. Wei­d­mann has been care­ful­ly non-com­mit­tal. “I make a point of nev­er tak­ing part in spec­u­la­tion on such issues,” he said in an inter­view last month, respond­ing to whether he might be the next ECB chief.

    But Ger­man Chan­cel­lor Angela Merkel and her finance min­is­ter, Wolf­gang Schaeu­ble, are report­ed­ly pre­pared to push for him, on the basis that no Ger­man has led the ECB, which is based in Frank­furt, in its near 20-year his­to­ry.

    Mr. Wei­d­mann has been care­ful not to alien­ate his Ger­man con­stituen­cy. While he has cooled his fiery rhetoric, he con­tin­ues to crit­i­cize poli­cies viewed with deep dis­trust in Ger­many, such as gov­ern­ment-bond pur­chas­es.

    Despite his unpop­u­lar­i­ty in some Euro­pean cap­i­tals, Mr. Wei­d­mann would have a strong claim for the top job. Ger­many is the region’s anchor econ­o­my, and the ECB was mod­eled on the Bun­des­bank. Mr. Wei­d­man­n’s pre­de­ces­sor, Axel Weber, was wide­ly seen as the front run­ner before he pulled out of the race, a deci­sion that infu­ri­at­ed Ms. Merkel. Cru­cial­ly, only a minor­i­ty of Euro­zone gov­ern­ments have required bailouts — or come close. Many oth­ers are sym­pa­thet­ic to at least some Ger­man con­cerns.

    With a rap­proche­ment between the ECB and its most impor­tant share­hold­er, the Bun­des­bank, the bank could stand a bet­ter chance of win­ning accep­tance in Ger­many for some of its poli­cies. And, as the ECB nav­i­gates an exit from its stim­u­lus, it would stand a bet­ter chance of avoid­ing a pub­lic fight that could con­fuse investors and rat­tle finan­cial mar­kets.

    Mr. Wei­d­man­n’s col­leagues on the ECB’s gov­ern­ing coun­cil are relieved about his new approach. Many had grown exas­per­at­ed, com­plain­ing, usu­al­ly in pri­vate, that Mr. Wei­d­mann reject­ed anti-cri­sis mea­sures while propos­ing no alter­na­tives

    Still, the Bun­des­bank chief’s new­found ami­ty with the ECB is rais­ing some con­cerns back home. Ger­mans revere their con­ser­v­a­tive cen­tral bank for cement­ing the nation’s post­war rebound. Much of Ger­many’s polit­i­cal and eco­nom­ic estab­lish­ment thinks the ECB’s ultra-low inter­est rates pun­ish Ger­man savers while tak­ing the pres­sure off slug­gish Euro­pean economies such as France and Italy to reform.

    “I fear that Mr. Wei­d­mann has soft­ened his oppo­si­tion,” said Jörg Krämer, chief econ­o­mist at Com­merzbank in Frank­furt.

    Nor is it clear that a mere shift in tone will be enough to win around Mr. Wei­d­man­n’s crit­ics in south­ern Europe.

    When ECB Pres­i­dent Mario Draghi repeat­ed­ly com­plained in pub­lic about col­leagues say­ing “Nein zu Allem” — Ger­man for “No to every­thing” — it was clear whom he meant. The Ital­ian has­n’t made that jibe recent­ly, though.

    “Many in south­ern Europe cer­tain­ly have strong reser­va­tions against Jens Wei­d­mann, that’s for sure,” says Gun­tram Wolff, head of Brus­sels-based think tank Bruegel. Mr. Wolff cit­ed the Bun­des­bank chief’s oppo­si­tion to bond-buy­ing schemes that propped up strug­gling euro mem­bers dur­ing the region’s debt cri­sis.

    His “peri­od of quiet­ness” prob­a­bly has helped to soft­en objec­tions in south­ern Europe to his poten­tial can­di­da­cy, though it has­n’t elim­i­nat­ed them, Mr. Wolff says.

    Mr. Wei­d­mann is 49 years old and is a for­mer Inter­na­tion­al Mon­e­tary Fund offi­cial, He is from the south­ern Ger­man region of Swabia, known for its thrifty house­wives that are fre­quent­ly invoked by Ms. Merkel, to whom Mr. Wei­d­mann served as chief eco­nom­ic advis­er. He would be the youngest-ever ECB pres­i­dent.

    The last time the ECB pres­i­den­cy was open, Ms. Merkel pushed for Mr. Weber. But Mr. Weber’s rift with oth­er ECB mem­bers over the ques­tion of buy­ing gov­ern­ment bonds led to his res­ig­na­tion, and to Mr. Draghi becom­ing pres­i­dent in 2011.

    With his new­ly restrained tone, Mr. Wei­d­mann appears to have learned from his pre­de­ces­sor’s mis­takes, which dimin­ished Ger­man influ­ence at the ECB.

    Under Mr. Draghi, the ECB has become the euro­zone’s most impor­tant cri­sis-fight­er, in defi­ance of Ger­man ortho­doxy that says cen­tral banks should stick to keep­ing infla­tion down. The insti­tu­tion has lent cheap­ly and freely to euro­zone banks, cut inter­est rates to around zero or in some cas­es below zero, and bought more than EUR1.5 tril­lion in gov­ern­ment bonds under its quan­ti­ta­tive eas­ing pro­gram (known as QE).

    All of those mea­sures pro­voked anger in Ger­many. Many peo­ple feared they would lead to infla­tion and under­mine the sta­bil­i­ty of the euro. Mr. Wei­d­mann led the oppo­si­tion to Mr. Draghi. He warned in 2012 that, for gov­ern­ments, “cen­tral-bank financ­ing can become addic­tive like a drug.”

    “It is like an alco­holic say­ing that I need to get a bot­tle tonight,” Mr. Wei­d­mann said at anoth­er point in the cri­sis as the ECB pon­dered how to help coun­tries threat­ened by finan­cial-mar­ket pan­ic.

    Most econ­o­mists say events have large­ly vin­di­cat­ed Mr. Draghi.

    The steady improve­ment in the euro­zone’s recov­ery can be traced to the cumu­la­tive effect of ECB stim­u­lus mea­sures since 2014, says Greg Fuze­si, econ­o­mist at J.P. Mor­gan in Lon­don. Euro­zone growth out­paced the U.S. in the first quar­ter and infla­tion has jumped in recent months from zero to 1.4%, approach­ing the ECB’s tar­get range.

    ...

    ———-

    “ECB Crit­ic Holds His Tongue as Race Nears for Bank’s Top Job” by Tom Fair­less; Dow Jones Newswires; 06/07/2017

    “Most econ­o­mists say events have large­ly vin­di­cat­ed Mr. Draghi.”

    Yep, don’t for­get, “Most econ­o­mists say events have large­ly vin­di­cat­ed Mr. Draghi,” because events large­ly vin­di­cat­ed Draghi’s poli­cies at the expense of Jens Wei­d­man­n’s fac­tion. That’s why it’s so dis­tress­ing to see a Berlin pow­er play on the ECB right now. It’s Team Always Wrong tak­ing over. It’s almost the worst sig­nal that could be sent dur­ing this crit­i­cal peri­od. Espe­cial­ly when the euro can’t rise too much in com­ing months. Wei­d­mann is the king of mis­guid­ed rea­sons for cut­ting off stim­u­lus mea­sures to an ill-advised degree. A “Wei­d­mann for ECB Chief” push right now, when QE needs to be gen­tly unwound, is like hand­ing kit­tens a croc­o­dile. It’s ill-advised unless you just don’t care about the kit­tens. That’s the real­i­ty despite the recent Wei­d­mann hap­py talk (which is actu­al­ly just under­stat­ed unhap­py talk):

    ...
    The shift has been sub­tle. Mr. Wei­d­mann still crit­i­cizes the bank’s rad­i­cal stim­u­lus mea­sures. But his tone has soft­ened as evi­dence accu­mu­lates that the ECB’s poli­cies are work­ing — and as the race to become the insti­tu­tion’s next pres­i­dent approach­es.

    “There is cur­rent­ly no doubt that an expan­sion­ary mon­e­tary pol­i­cy stance is appro­pri­ate,” Mr. Wei­d­mann said in a speech late last month, while sug­gest­ing he might not agree with his col­leagues on the details.

    Only five years ago, he was boast­ing of clash­es with fel­low pol­i­cy mak­ers, and com­par­ing easy-mon­ey poli­cies to drugs and alco­hol.
    ...

    And note that the above report was from June. Wied­mann play­ing the role of Bizarro Wei­d­mann for months. A role he has to play until the ECB chief suc­ces­sion process plays out, which starts in earnest fol­low­ing teh Ger­man elec­tions this month:

    ...
    ECB Pres­i­dent Mario Draghi’s term ends in 2019. The jock­ey­ing to suc­ceed him is like­ly to begin some­time after Ger­many’s nation­al elec­tions in Sep­tem­ber. The pres­i­den­cy is deter­mined by a vote of euro­zone lead­ers.

    Mr. Wei­d­mann has been care­ful­ly non-com­mit­tal. “I make a point of nev­er tak­ing part in spec­u­la­tion on such issues,” he said in an inter­view last month, respond­ing to whether he might be the next ECB chief.

    But Ger­man Chan­cel­lor Angela Merkel and her finance min­is­ter, Wolf­gang Schaeu­ble, are report­ed­ly pre­pared to push for him, on the basis that no Ger­man has led the ECB, which is based in Frank­furt, in its near 20-year his­to­ry.

    Mr. Wei­d­mann has been care­ful not to alien­ate his Ger­man con­stituen­cy. While he has cooled his fiery rhetoric, he con­tin­ues to crit­i­cize poli­cies viewed with deep dis­trust in Ger­many, such as gov­ern­ment-bond pur­chas­es.

    Despite his unpop­u­lar­i­ty in some Euro­pean cap­i­tals, Mr. Wei­d­mann would have a strong claim for the top job. Ger­many is the region’s anchor econ­o­my, and the ECB was mod­eled on the Bun­des­bank. Mr. Wei­d­man­n’s pre­de­ces­sor, Axel Weber, was wide­ly seen as the front run­ner before he pulled out of the race, a deci­sion that infu­ri­at­ed Ms. Merkel. Cru­cial­ly, only a minor­i­ty of Euro­zone gov­ern­ments have required bailouts — or come close. Many oth­ers are sym­pa­thet­ic to at least some Ger­man con­cerns.
    ...

    “But Ger­man Chan­cel­lor Angela Merkel and her finance min­is­ter, Wolf­gang Schaeu­ble, are report­ed­ly pre­pared to push for him, on the basis that no Ger­man has led the ECB, which is based in Frank­furt, in its near 20-year his­to­ry.”

    Merkel and Schaeu­ble want this to hap­pen. Wei­d­mann is play­ing nice-ish. The ECB is look­ing scary in 2020.

    And it’s not like sud­den­ly mut­ing his non-stop oppo­si­tion to vir­tu­al­ly all of the ECB’s stim­u­lus mea­sures is going to make every­one for­get the agen­da Wei­d­mann rep­re­sents. So a big fight over Wei­d­mann is some­thing that might also play out as QE unwinds.

    But is Wei­d­man­n’s arrival inevitable? Well, as the fol­low­ing arti­cle sug­gests, not quite. But as the fol­low­ing arti­cle also sug­gests, some­one from Ger­many does appear to be the inevitable ECB replace­ment. Just maybe not Jens Wei­d­mann. Maybe. Appar­ent­ly his Mr. Nice Guy act has­n’t worked.

    France and Italy just report­ed­ly sig­naled to Ger­many that they would agree to a Berlin ECB chief after Draghi, but not Wei­d­mann. And Berlin is like, “We have just one qual­i­fied can­di­date on offer, and it is Wei­d­mann”. It’s poten­tial­ly the lat­est psy­chodra­ma of despair for the euro­zone, but the French and Ital­ian gov­ern­ments total­ly deny the sto­ry.

    Is it just blus­ter and dis­in­fo? It’s not an incon­ceiv­able sto­ry. As the above arti­cle not­ed, Axel Weber, Wei­d­man­n’s pede­ces­sor at the Bun­des­bank, was the front-run­ner for the head of the ECB in 2010, but pulled out when it became clear he would have to imple­ment stim­u­lus mea­sures of some sort. Specif­i­cal­ly, Weber quit the race for ECB chief over the prospect that he would have to over­see gov­ern­ment bond buy­ing. That was a time when the ECB was engaged in an ear­ly QE of sorts to sta­bi­lize the mar­kets dur­ing that ini­tial euro­zone cri­sis, which was fun­da­men­tal­ly a cri­sis of faith in the bond mar­kets of numer­ous sov­er­eign bond mar­kets across the euro­zone. It’s a hint at what kind of pol­i­cy intent is behind Jens Wei­d­man­n’s some­what less com­bat­ive rhetoric.

    But if the report is true, it’s a very strong sign that Berlin gets to pick the next ECB chief com­ing in 2019 because France and Italy are going to have a lot of pull on who takes that slot:

    Reuters

    France and Italy open to Ger­man ECB chief, but not Wei­d­mann: Spiegel

    Reuters Staff
    Sep­tem­ber 15, 2017 / 2:42 PM / Updat­ed

    FRANKFURT (Reuters) — France and Italy have sig­nalled to Ger­many that they are open to a Ger­man becom­ing pres­i­dent of the Euro­pean Cen­tral Bank but not if it is Bun­des­bank chief Jens Wei­d­mann, Der Spiegel report­ed on Fri­day.

    The Ger­man mag­a­zine said that rep­re­sen­ta­tives from France and Italy had informed Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble and his offi­cials of their posi­tion.

    Paris and Rome fear Wei­d­mann, a long-time crit­ic of the ECB’s quan­ti­ta­tive eas­ing pro­gramme, would oppose a flex­i­ble and prag­mat­ic mon­e­tary pol­i­cy in times of cri­sis, but Der Spiegel sug­gest­ed Berlin was unlike­ly to agree with that view.

    “We have just one qual­i­fied can­di­date on offer, and it is Wei­d­mann,” it quot­ed an unnamed source close to the Ger­man gov­ern­ment as say­ing.

    ...

    France’s finance min­istry also declined to com­ment when con­tact­ed by Reuters, but a French gov­ern­ment source said there were no such dis­cus­sions at this stage.

    An Ital­ian gov­ern­ment spokesman said the Spiegel report was “com­plete­ly false”.

    The term of the cur­rent ECB pres­i­dent, Italy’s Mario Draghi, expires in late 2019.

    ———-

    “France and Italy open to Ger­man ECB chief, but not Wei­d­mann: Spiegel” by Reuters Staff; Reuters; 09/15/2017

    “Paris and Rome fear Wei­d­mann, a long-time crit­ic of the ECB’s quan­ti­ta­tive eas­ing pro­gramme, would oppose a flex­i­ble and prag­mat­ic mon­e­tary pol­i­cy in times of cri­sis, but Der Spiegel sug­gest­ed Berlin was unlike­ly to agree with that view.”

    Fears that inflex­i­ble, unprag­mat­ic poli­cies and Jens Wei­d­mann are a pack­age deal. Those are the fears France and Italy report­ed­ly expressed to Ger­many and those are indeed rea­son­able fears. The prob­lem is that they’re rea­son­able fears even if it’s a non-Wei­d­man­n’s alter­na­tive instead unless that non-Wei­d­man­n’s alter­na­tive has Bizarro Wei­d­mann poli­cies, some­thing high­ly unlike­ly, trag­i­cal­ly.

    And what was Berlin’s report­ed response? “We have just one qual­i­fied can­di­date on offer, and it is Wei­d­mann”:

    ...
    “We have just one qual­i­fied can­di­date on offer, and it is Wei­d­mann,” it quot­ed an unnamed source close to the Ger­man gov­ern­ment as say­ing.
    ...

    It’s Wei­d­mann or the high­way. Oh dear.

    So that’s the sig­nal that is get­ting sent to the mar­kets right now about who they can expect at the helm of the ECB in just a cou­ple years. Jens ‘always Ordolib­er­al, often wrong’ Wei­d­mann, would take over for Draghi in Decem­ber 2019. it’s a prob­lem. Espe­cial­ly when Berlin report­ed­ly says Wei­d­mann is “the one”.

    And yes, there are also con­trary sig­nals being sent from Draghi and oth­ers that rates are going to stay quite low for an extend­ed peri­od even if QE unwinds entire­ly in 2018. But that extend­ed peri­od could be as short as a cou­ple years if Jens Wei­d­mann takes over the ECB in Decem­ber 2019. And that’s the kind of pos­si­bil­i­ty that prob­a­bly isn’t going to do great things to the euro as it becomes clos­er and clos­er to Wei­d­mann tak­ing over. Don’t for­get Wolf­gang Schaeuble’s Sep­tem­ber 6th warn­ing that things were going to have to nor­mal­ize “soon­er than peo­ple expect” includ­ed a nor­mal­iza­tion of inter­est rates too.

    Also don’t for­get that the race to replace Draghi has­n’t real­ly got­ten under­way yet. So the full impact on mar­ket expec­ta­tions for a much stronger euro dur­ing a loom­ing Wei­d­mann era has­n’t real­ly been felt yet because the suc­ces­sion race isn’t yet under­way. But it’s com­ing soon. Right in the mid­dle of this crit­i­cal QE unwind­ing peri­od when a surg­ing euro is exact­ly what the euro­zone does­n’t need. Oh good­ie.

    Now, it’s impor­tant to point out that a ris­ing euro does­n’t have to be such a prob­lem for the euro­zone and would actu­al­ly help alle­vi­ate Ger­many’s egre­gious export sur­plus. There’s no eco­nom­ic law that says the euro­zone can’t imple­ment oth­er poli­cies to help blunt the impact on the weak­est nations expect­ed to export their way out of the deep depres­sions they were thrown into. That’s always an option. For instance, if the euro­zone was set up like the US as a trans­fer union that allows mon­ey to just flow from the wealthy states to poor­er, in per­pe­tu­ity if need be, and no one makes a big deal out of it that kind of sys­tem could enable a stronger euro with­out the periph­er­al cru­el­ty. It’s very a uniony thing to do. Super help­ful in many sens­es. But that kind of trans­fer union sys­tem sim­ply is not pos­si­ble in the euro­zone giv­en the polit­i­cal oppo­si­tion, pri­mar­i­ly in Ger­many which is the nation that would be pay­ing out the most for such a trans­fer union struc­ture (while accru­ing plen­ty the immense ben­e­fits in return). So the euro­zone, as it’s struc­tured today, is not well pre­pared to deal with the con­se­quences of a strong euro to the periph­ery nations, but it does­n’t have to be that way. It’s a con­se­quence of bad pol­i­tics asso­ci­at­ed with bad eco­nom­ics.
    It’s also impor­tant to note that if the euro­zone was ever turned into the mean, lean, export machine that the aus­ter­i­ty poli­cies were sup­posed to do (as opposed to just cre­at­ing mass unem­ploy­ment, mind­less­ly cut­ting use­ful spend­ing, and destroy­ing fam­i­lies and futures, but with a few new export sec­tors), hav­ing the euro­zone oper­at­ing with mas­sive export sur­plus­es like Ger­many is a glob­al night­mare. It would pre­cip­i­tate one cri­sis after anoth­er. You can’t have the euro­zone, which could grow, oper­at­ing with mas­sive trade sur­plus­es indef­i­nite­ly. So if there was a way for the euro­zone to oper­ate at a high­er euro with­out throw­ing its weak­est economies into a new round of crises that would be great.

    And it’s also impor­tant to note that it’s entire­ly pos­si­ble the euro’s rise won’t be enough to have a sig­nif­i­cant neg­a­tive impact. Maybe the gen­er­al euro­zone recov­ery con­tin­ues and exports to oth­er euro­zone mem­bers (which would­n’t be as sen­si­tive to a ris­ing euro) is the pri­ma­ry dri­ver of the recov­ery and it all works out. But if we do see a sig­nif­i­cant fur­ther rise in the euro with a sig­nif­i­cant neg­a­tive impact to coun­tries par­tic­u­lar­ly sen­si­tive to a ris­ing euro the per­il is that the euro­zone has already demon­strat­ed that it does­n’t have many tools oth­er than ECB mea­sures already employed to coun­ter­act the neg­a­tive effects of a ris­ing euro for the affect­ed nations. The fis­cal sta­bi­liz­ers don’t exist and can’t exist to a mean­ing­ful extent due to ide­ol­o­gy.

    It’s reflec­tion one of the fun­da­men­tal prob­lems with the euro­zone: the cur­ren­cy is shared but not the bur­dens that come with it. Because you would need a trans­fer union and a real union in spir­it (like a real Euro­pean iden­ti­ty that super­sedes exist­ing nation­al­ism) for some­thing like that to work. And right now it does­n’t exist. That’s why stuff like a the poten­tial neg­a­tive impact of the ris­ing euro in the face of the Great QE Unnwind mat­ters so much. The euro­zone is arti­fi­cial­ly frag­ile due to its stu­pid far-right Ordolib­er­al ide­ol­o­gy. Fis­cal stim­u­lus is off the table. Trans­fer union shar­ing is off the table. The ECB is the only tool. And the ascen­dance of Jens Wei­d­mann as the next ECB chief sig­nals a tran­si­tion to a new phased were even the ECB’s tools are tak­en off the table head­ing into 2020. That’s why this is such a bad sig­nal to have Wei­d­mann jock­ey­ing to replace Draghi at this point in time. It both sig­nals a stronger future euro and no mean­ing­ful ECB response if that stronger euro screws things up.

    On the plus side, the fact that a Wei­d­mann era would prob­a­bly be one where the ECB is much less use­ful for con­tain­ing crises than it has been under Draghi means that, while the mar­kets might per­ceive a loom­ing era of Jens Wei­d­mann becom­ing ECB chief as a strong euro sign, it’s also hard to ignore the fact that if there’s one thing that could cause a rever­sal in this stim­u­lus-wind down pol­i­cy it’s a big eco­nom­ic cri­sis cre­at­ed by Wei­d­man­n’s addic­tion to stu­pid poli­cies. A big enough cri­sis could force even a Wei­d­mann-run ECB to imple­ment appro­pri­ate lev­els of stim­u­lus and if there’s one thing that can cre­ate a giant cri­sis it’s Jens Wei­d­mann becom­ing ECB chief. It’s a catch-22 that odd­ly sort of helps the sit­u­a­tion. The upward push that a Wei­d­mann ECB era has on the euro has to be pared by the down­ward push of the per­il a Wei­d­mann ECB places on the real euro­zone econ­o­my. Don’t for­get, Mario Draghi has been proven right with his loose stim­u­lus poli­cies at Jens Wei­d­man­n’s expense. And Wei­d­mann is his like­ly replace­ment. Which might help keep the euro down because expec­ta­tions of a new era of open cri­sis isn’t going to be great for the val­ue of the euro. The bad news is kind of good news in this con­text. So there’s that. Yay.

    Posted by Pterrafractyl | September 17, 2017, 6:32 pm
  2. Remem­ber the reports from last month about how France and Italy told Ger­many that they would be open to hav­ing a Ger­man as the next head of the ECB, just not Bun­des­bank chief Jens Wei­d­mann, who has demon­strat­ed an inca­pac­i­ty to sup­port almost any stim­u­lus poli­cies regard­less of cir­cum­stances? Well here’s Wei­d­man­n’s response to com­ments made by for­mer Ital­ian prime min­is­ter Enri­co Let­ta about how it was be a “dis­as­ter” if Wei­d­mann became the next head of the ECB. Wei­d­man­n’s response is worth not­ing because it gives us a hint about how he’s going to han­dle the inevitable and sig­nif­i­cant oppo­si­tion as the bat­tle over Mario Draghi’s suc­ces­sor gets under­way: Wei­d­mann spun Let­ta’s attack on him as an attempt to veto any Ger­man from tak­ing that job. It’s a like­ly pre­view of what’s to come, which it looks like the upcom­ing bat­tle over the next head of the ECB could devolve into anoth­er exer­cise in euro­zone trib­al­is­tic dys­func­tion:

    Reuters

    ECB’s Wei­d­mann says should be no veto on nation­al­i­ty of Draghi’s suc­ces­sor

    Reuters Staff
    Sep­tem­ber 24, 2017 / 10:12 AM

    MILAN (Reuters) — Bun­des­bank chief Jens Wei­d­mann, tout­ed as a pos­si­ble suc­ces­sor to Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi when his term expires in 2019, said on Sun­day there should be no veto on the ECB’s next boss based on nation­al­i­ty.

    In an inter­view broad­cast by Ital­ian state tele­vi­sion RAI, the Ger­man cen­tral banker was asked about com­ments by for­mer Ital­ian prime min­is­ter Enri­co Let­ta, who recent­ly said it would be a “dis­as­ter” if Wei­d­mann took Draghi’s job.

    “I did not know that. But could you imag­ine what would be Italy’s reac­tion if in Ger­many some­one said ‘absolute­ly no way’ to the appoint­ment of an Ital­ian at the helm of the ECB?” Wei­d­mann said.

    “The same would apply in the case of a Greek or a Bel­gian col­league. If we start exclud­ing cer­tain coun­tries ... well, that is not the idea of Europe that I have in mind and it would cer­tain­ly not strength­en the image of the EU and of the euro.”

    ...

    Der Spiegel report­ed ear­li­er this month that France and Italy had sig­naled they were open to a Ger­man becom­ing head of the ECB, but not Wei­d­mann, who has often crit­i­cized Draghi’s quan­ti­ta­tive-eas­ing pro­gram.

    Paris and Rome fear he would oppose the same kind of ultra-loose mon­e­tary pol­i­cy if he were in charge, accord­ing to Der Siegel.

    ———-

    “ECB’s Wei­d­mann says should be no veto on nation­al­i­ty of Draghi’s suc­ces­sor” Reuters Staff; Reuters; 09/24/2017

    “In an inter­view broad­cast by Ital­ian state tele­vi­sion RAI, the Ger­man cen­tral banker was asked about com­ments by for­mer Ital­ian prime min­is­ter Enri­co Let­ta, who recent­ly said it would be a “dis­as­ter” if Wei­d­mann took Draghi’s job.”

    And what was Wei­d­man­n’s response to Enri­co Let­ta’s “dis­as­ter” com­ment? A response that con­flat­ed oppo­si­tion to Jens Wei­d­mann with oppo­si­tion to Ger­many:

    ...
    “I did not know that. But could you imag­ine what would be Italy’s reac­tion if in Ger­many some­one said ‘absolute­ly no way’ to the appoint­ment of an Ital­ian at the helm of the ECB?” Wei­d­mann said.

    “The same would apply in the case of a Greek or a Bel­gian col­league. If we start exclud­ing cer­tain coun­tries ... well, that is not the idea of Europe that I have in mind and it would cer­tain­ly not strength­en the image of the EU and of the euro.”
    ...

    So that’s prob­a­bly what we can expect from Wei­d­mann. He’s going to por­tray attacks on him as an ‘attack on Ger­many’. And part of what com­pli­cates this is that almost any oth­er Ger­man offi­cial like­ly to be nom­i­nat­ed as ECB chief in place of Wei­d­mann would still almost cer­tain­ly be an Ordolib­er­al nut job with rough­ly the same stances as Wei­d­mann.

    It’s the kind of sit­u­a­tion that just invites anoth­er euro­zone trib­al­is­tic show­down which reflects one of the ongo­ing sys­tem­at­ic chal­lenges the euro­zone faces: eco­nom­ic dis­putes nat­u­ral­ly take on trib­al­is­tic dynam­ics in the euro­zone because Ordolib­er­al­ism is so wide­ly pop­u­lar in Ger­many — it’s effec­tive­ly part of the nation’s iden­ti­ty — and Ger­many is the dom­i­nant eco­nom­ic pow­er with the most say on eco­nom­ic mat­ters. So when Ger­many wants to head the ECB it becomes a mas­sive ques­tion over the risks of hav­ing an Ordolib­er­al ide­o­logue call­ing the shots. This is a dis­pute that’s prob­a­bly going to come up over and over as long as the euro­zone holds togeth­er.

    But as Ger­many con­tin­ues drift­ing right-ward, the econ­o­mists it offers for these kinds of posi­tions are only going to be increas­ing­ly Ordolib­er­al. It’s not a great dynam­ic for the Euro­pean Project.

    And Ordolib­er­al­ism isn’t just not a bad fit for a euro­zone-style sys­tem. It’s bad for the glob­al econ­o­my because it’s based on using aus­ter­i­ty to cre­ate large trade sur­plus­es and the world can’t han­dle an entire euro­zone with mas­sive Ger­many-style exports. In oth­er words, if the Ordolib­er­al trans­for­ma­tion of Europe fails it’s a series of nation­al dis­as­ters. But if it suc­ceeds it’s a glob­al dis­as­ter.

    Intra-euro­zone con­flicts over eco­nom­ic poli­cies are inevitable because Ordolib­er­al­ism is a bad fit for some­thing like the euro­zone but Ordolib­er­al poli­cies are going to be imple­ment­ed any­way because it’s inevitable that Ger­many is going to get to head up the ECB pret­ty reg­u­lar­ly. That’s just a perk of being the biggest econ­o­my. The fight over Wei­d­mann is just a pre­lude to sim­i­lar fights to come, which is why it’s rather dis­tress­ing to see the cur­rent ECB suc­ces­sion fight already devolve into fight over whether or not the pre-emp­tive rejec­tions of Jens Wei­d­mann (because he’s a nut) is an exam­ple of unfair cen­sor­ing of Ger­many.

    It’s a per­fect recipe for trib­al­ist instincts to take over at a time when Ger­many is expe­ri­enc­ing a far-right surge. And don’t for­get, if Wei­d­mann ends up los­ing in his quest and this becomes a big sore point in Ger­many, that resent­ment is going to be nursed by the Ger­man far right for years to come and prob­a­bly dri­ve more Ger­man vot­ers into euroskep­tic far right arms. That’s the kind of nasty pol­i­tics that could eas­i­ly emerge from the upcom­ing bat­tle over who heads the ECB. And a whole bunch of future ones.

    Posted by Pterrafractyl | October 8, 2017, 7:26 pm
  3. The bid day has final­ly arrived. Almost. Not until Thurs­day, Octo­ber 26th, when the ECB meets and pre­sum­ably makes a big announce­ment about what it’s going to do about the quan­ti­ta­tive eas­ing (QE) pro­gram start­ing in Jan­u­ary.

    But before we look at what the ECB is expect­ed to announce, it’s worth tak­ing a quick look at a recent analy­sis from Deutsche Bank that makes a cou­ple impor­tant points about why there is so much pres­sure on the ECB to end QE:

    1. The ECB is cur­rent­ly buy­ing sev­en times as much sov­er­eign debt as is being issued by euro­zone gov­ern­ments, lead­ing to a short­age of avail­able gov­ern­ment bonds to pur­chase to keep QE going.

    2. This is due in part to the strongest economies, in par­tic­u­lar Ger­many, run­ning bud­get sur­plus­es.

    It’s a reminder of one of the pri­ma­ry chal­lenges fac­ing the ECB through­out this peri­od of emer­gency mea­sures to hold the euro­zone mar­kets togeth­er:
    the rest of the euro­zone’s emer­gency mea­sures were most­ly just aus­ter­i­ty-based poli­cies that wast­ed the the oppor­tu­ni­ty QE cre­at­ed to bor­row cheap­ly and stim­u­late the econ­o­my with use­ful pub­lic invest­ments in the future:

    Bloomberg Mar­kets

    Here’s Why the Stakes Are High­er for the ECB’s QE Exit
    Cen­tral bank’s bond buy­ing has far out­stripped new issuance, mak­ing it a big­ger event for the mar­ket, Deutsche Bank says

    By Piotr Skolimows­ki
    Octo­ber 20, 2017, 4:44 AM CDT

    When it comes to quan­ti­ta­tive eas­ing, the Euro­pean Cen­tral Bank may be try­ing to bite off more than it can chew.

    The ECB is now buy­ing sev­en times more bonds than the euro-area gov­ern­ments are adding to the mar­ket, accord­ing to cal­cu­la­tions by Deutsche Bank econ­o­mist Torsten Slok. To put it into per­spec­tive, Bank of Japan’s bond pur­chas­es cur­rent­ly out­strip new issuance by a fac­tor of three. The demand com­ing from the Fed­er­al Reserve hasn’t exceed­ed sup­ply since around mid-2002.

    In gen­er­al, Deutsche Bank esti­mates that because of the cen­tral-bank activism rough­ly $8 tril­lion of glob­al debt is trad­ing at sub-zero rates. That’s rough­ly 17 per­cent of all the world’s out­stand­ing bonds.

    “This reveals how much addi­tion­al ‘fire­pow­er’ each cen­tral bank brought to the mar­ket in an attempt to low­er long rates and nar­row cred­it spreads and boost stock mar­kets,” Slok says in his note. The “dif­fer­ence in QE mag­ni­tude across the G3 is an impor­tant rea­son why the ECB exit is like­ly to be a much big­ger event for mar­kets.”

    In the ECB’s case, the asym­me­try has been exac­er­bat­ed by attempts from some of the euro-area largest economies to reduce their debts. Ger­many, which gets the biggest quo­ta of month­ly QE pur­chas­es among mem­ber states, has been run­ning a bud­get sur­plus since 2014. In Nether­lands, rev­enue also exceed­ed spend­ing last year. Both can now issue debt with neg­a­tive yields. Bor­row­ing costs have also dropped for deficit-coun­tries such as Italy, Por­tu­gal and Spain, allow­ing them to refi­nance debts at low­er rates.

    On Oct. 26, the ECB is going to lay out plans for its bond-buy­ing in 2018. The pro­gram will reach 2.28 tril­lion euros ($2.7 tril­lion) by the end of 2017, and there may only be room for lit­tle more than 200 bil­lion euros of pur­chas­es next year.

    ...

    ———-

    “Here’s Why the Stakes Are High­er for the ECB’s QE Exit” by Piotr Skolimows­ki; Bloomberg Mar­kets; 10/20/2017

    The ECB is now buy­ing sev­en times more bonds than the euro-area gov­ern­ments are adding to the mar­ket, accord­ing to cal­cu­la­tions by Deutsche Bank econ­o­mist Torsten Slok. To put it into per­spec­tive, Bank of Japan’s bond pur­chas­es cur­rent­ly out­strip new issuance by a fac­tor of three. The demand com­ing from the Fed­er­al Reserve hasn’t exceed­ed sup­ply since around mid-2002.”

    The ECB can’t keep buy­ing sev­en times more bonds than the euro-area gov­ern­ments are issu­ing for­ev­er. Those gov­ern­ments can either stim­u­late their economies by issu­ing more bonds or the ECB can wind down QE. And, of course, it’s the lat­ter option. Ger­many, and now the Nether­lands, are run­ning sur­plus­es, and the rest of the euro­zone mem­bers are oper­at­ing under the built in deficit con­straints under the aus­ter­i­ty doc­trine of trans­form­ing the economies into mean, lean export machines by slash­ing labor costs, reg­u­la­tions, and pub­lic spend­ing. So more gov­ern­ment bor­row­ing is appar­ent­ly not an option out of the predica­ment:

    ...
    In the ECB’s case, the asym­me­try has been exac­er­bat­ed by attempts from some of the euro-area largest economies to reduce their debts. Ger­many, which gets the biggest quo­ta of month­ly QE pur­chas­es among mem­ber states, has been run­ning a bud­get sur­plus since 2014. In Nether­lands, rev­enue also exceed­ed spend­ing last year. Both can now issue debt with neg­a­tive yields. Bor­row­ing costs have also dropped for deficit-coun­tries such as Italy, Por­tu­gal and Spain, allow­ing them to refi­nance debts at low­er rates.
    ...

    And now, thanks to the euro­zone’s Ordolib­er­al obses­sion eco­nom­ic growth by reduc­ing debt and cut­ting costs (which is fine for fam­i­lies, but gen­er­al­ly fool­ish at the macro­eco­nom­ic lev­el), room for fur­ther QE is run­ning out fast:

    ...
    On Oct. 26, the ECB is going to lay out plans for its bond-buy­ing in 2018. The pro­gram will reach 2.28 tril­lion euros ($2.7 tril­lion) by the end of 2017, and there may only be room for lit­tle more than 200 bil­lion euros of pur­chas­es next year.
    ...

    Accord­ing to Deutsch Bank, the euro area will have lit­tle more than 200 bil­lion euros of worth of gov­ern­ment bonds avail­able for the ECB next year. That’s how crazy debt averse the euro­zone is thanks to its steady embrace of Ordolib­er­al­ism: so debt averse it will waste one of the most use­ful parts of QE. Cheap bor­row­ing. It’s just how the euro­zone is set up now.

    Giv­en all that, we prob­a­bly should­n’t be too sur­prised if the ECB’s big QE announce­ment dur­ing the Octo­ber 26th meet­ing ends up involv­ing a pret­ty big cut in the QE bond pur­chas­es. Which, as the fol­low­ing arti­cle notes, is pret­ty much what econ­o­mists are expect­ing the ECB to announce, along with an exten­sion of the bond pur­chas­es for about 9 months. The big ques­tion at this point is whether or not the ECB is going to declare a sched­ule for end­ing QE entire­ly or leave that ques­tion unad­dressed. Accord­ing to sources it sounds like the ECB its going to sig­nal keep­ing QE going at a low rate for well past Sep­tem­ber 2018, in a sort of dor­mant hiber­na­tion low lev­el mode that will allow it to be rea­wok­en if need­ed. So don’t expect Mario Draghi to declare the death of QE fol­low­ing the Octo­ber 26th meet­ing. Expect him to announced its planned hiber­na­tion:

    Reuters

    High noon for the ECB, Draghi at the QE Cor­ral

    Bal­azs Koranyi
    Octo­ber 20, 2017 / 4:15 AM / Updat­ed

    FRANKFURT (Reuters) — Not for the first time, Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi is fac­ing a tricky bal­anc­ing act.

    With the euro zone eco­nom­ic recov­ery well into its fifth year, the time has come to cut stim­u­lus. Yet, over­ly ambi­tious tight­en­ing could choke off the very growth Draghi has fos­tered, threat­en­ing to undo years of work.

    Draghi also has to find com­mon ground between pol­i­cy hawks, who argue the ECB has spent its fire­pow­er so any fur­ther stim­u­lus has neg­li­gi­ble effect, and doves, who point to per­sis­tent­ly weak infla­tion as evi­dence the bank has not met its price-sta­bil­i­ty man­date.

    The com­pro­mise is like­ly to be a cut in bond pur­chas­es at Thursday’s pol­i­cy meet­ing, twinned with a lengthy exten­sion of stim­u­lus and a com­mit­ment to keep rates low for many years to come.

    Such a move would ensure that easy pol­i­cy per­sists while also reduc­ing the ECB’s reliance on uncon­ven­tion­al tools and poten­tial­ly paving the way to exit bond pur­chas­es.

    The prob­lem is that while growth is on its best run in a decade, unem­ploy­ment remains high, wage growth is bare­ly vis­i­ble and infla­tion will prob­a­bly not rise back to the ECB’s tar­get before the end of the decade.

    The bond pur­chas­es have depressed bor­row­ing costs but the ECB is slow­ly run­ning out of debt to buy so it either takes a step toward the exit or redraws the rules of the pro­gram, a poten­tial­ly con­tro­ver­sial move that may send the wrong sig­nal.

    A Reuters poll of econ­o­mists con­clud­ed the ECB Cen­tral Bank it will start trim­ming its month­ly asset pur­chas­es to 40 bil­lion euros from 60 bil­lion euros in Jan­u­ary.

    It was most­ly split on whether the pro­gram would last six or nine more months after that.

    Sources close to the ECB’s pre-meet­ing dis­cus­sions say the a nine-month exten­sion seems like­ly with debate over month­ly vol­umes between 25 and 40 bil­lion euros a month.

    But the real issue will be whether to keep the asset buys open end­ed, mak­ing anoth­er exten­sion pos­si­ble, or sig­nal an even­tu­al end of bond pur­chas­es, as demand­ed by hawks, includ­ing pow­er­house Ger­many.

    While this debate is still open, sources speak­ing to Reuters said it is more like­ly the bank would main­tain the flex­i­bil­i­ty and even sig­nal a will­ing­ness to increase asset buys if the out­look sours.

    That, says UBS, is cru­cial: “We view the dura­tion of the exten­sion in net asset pur­chas­es as more impor­tant than the month­ly size in ensur­ing the ECB’s abil­i­ty to man­age the expec­ta­tions around its future pol­i­cy.”
    New bond pur­chas­es will add lit­tle to infla­tion. But they will buy the ECB some time as it waits for growth to final­ly trans­late into infla­tion.

    In a glim­mer of hope for pol­i­cy­mak­ers, Germany’s largest trade union recent­ly asked for a 6 per­cent wage hike for near­ly 4 mil­lion work­ers, an ambi­tious move, which could lift wages across the board as many employ­ee groups look to IG Met­all to set the trend.

    Euro zone infla­tion — cur­rent­ly at 1.5 per­cent — remains well below the ECB’s tar­get of almost 2 per­cent and expec­ta­tions are for it to stay that way at least until 2019.

    ...

    ———-

    “High noon for the ECB, Draghi at the QE Cor­ral” by Bal­azs Koranyi; Reuters; 10/20/2017

    “With the euro zone eco­nom­ic recov­ery well into its fifth year, the time has come to cut stim­u­lus. Yet, over­ly ambi­tious tight­en­ing could choke off the very growth Draghi has fos­tered, threat­en­ing to undo years of work.”

    Now is clear­ly not the time for over­ly ambi­tious tight­en­ing that could choke off the eco­nom­ic recov­ery. A recov­ery that’s tech­ni­cal­ly been going on fir five years but has still left wages stag­nant, infla­tion chron­i­cal­ly too low, and high unem­ploy­ment in the most aus­ter­i­ty-afflict­ed coun­tries:

    ...
    The prob­lem is that while growth is on its best run in a decade, unem­ploy­ment remains high, wage growth is bare­ly vis­i­ble and infla­tion will prob­a­bly not rise back to the ECB’s tar­get before the end of the decade.

    The bond pur­chas­es have depressed bor­row­ing costs but the ECB is slow­ly run­ning out of debt to buy so it either takes a step toward the exit or redraws the rules of the pro­gram, a poten­tial­ly con­tro­ver­sial move that may send the wrong sig­nal.
    ...

    Yep, the euro­zone’s recov­ery is still extreme­ly tepid for the weak­est economies, but QE has to end soon any­way or bond pur­chas­es need to be reduced sig­nif­i­cant­ly because, as we’ve already seen, issu­ing new bonds and end­ing the bond short­age via more gov­ern­ment bor­row­ing in a big stim­u­lus effort isn’t an option in the euro­zone.

    ECB sources are hint­ing that the plan is to cut the 60 bil­lion month­ly pur­chas­es by 25–40 bil­lion and extend the month­ly pur­chas­es through Sep­tem­ber 2018.

    And while it’s unclear if the ECB will announce a plan to final­ly end QE as Ger­many is demand­ing, sources indi­cate that the ECB is going to say it’s cut­ting QE now in order to extend it for the pur­pose of increas­ing it lat­er. It’s a neat lit­tle log­ic loop unwind­ing mech­a­nism: QE needs to be cut because there’s an inad­e­quate sup­ply of bonds, and so there are con­cerns that the mar­kets will be unset­tled by an over­ly aggres­sive QE unwind­ing. But due to this lim­it­ed bond pool, the more the ECB cuts the month­ly bond pur­chas­es, the longer it can extend the pro­gram with the promise of increas­ing QE in the if the need aris­es. It’s a pret­ty clever way to spin the bond pur­chase cuts as a pos­i­tive “we’re try­ing to keep QE alive” sig­nal to the mar­kets (clever if you ignore the mad­ness of aus­ter­i­ty poli­cies that are cre­at­ing this bond short­age and forced QE unwind­ing in the first place):

    ...
    Sources close to the ECB’s pre-meet­ing dis­cus­sions say the a nine-month exten­sion seems like­ly with debate over month­ly vol­umes between 25 and 40 bil­lion euros a month.

    But the real issue will be whether to keep the asset buys open end­ed, mak­ing anoth­er exten­sion pos­si­ble, or sig­nal an even­tu­al end of bond pur­chas­es, as demand­ed by hawks, includ­ing pow­er­house Ger­many.

    While this debate is still open, sources speak­ing to Reuters said it is more like­ly the bank would main­tain the flex­i­bil­i­ty and even sig­nal a will­ing­ness to increase asset buys if the out­look sours.
    ...

    “While this debate is still open, sources speak­ing to Reuters said it is more like­ly the bank would main­tain the flex­i­bil­i­ty and even sig­nal a will­ing­ness to increase asset buys if the out­look sours.”

    Accord­ing to the ECB sources, the offi­cial line from the ECB after the Octo­ber 26th meet­ing is going to be: we’re cut­ting bond pur­chas­es sig­nif­i­cant­ly, but it’s for the pur­pose of keep­ing the ECB’s toe dipped in the QE pool for as long as pos­si­ble, with the promise of div­ing back in if the need aris­es. Less is more. Or rather, less is longer which is maybe more if it’s need­ed.

    And don’t for­get, the fact that QE has to end soon is pri­mar­i­ly due the ECB run­ning out of avail­able bonds. And in some coun­tries, like Por­tu­gal, that’s because they are hit­ting their “cap­i­tal keys” cap on the num­ber of bonds they can have pur­chased (33 per­cent), And in the case of Ger­many there’s clear­ly a need to apply less QE or no QE at all. Each euro­zone mem­ber has its own par­tic­u­lar stim­u­lus needs, and those needs vary dra­mat­i­cal­ly. But only one QE pol­i­cy could be cho­sen, instead of a more flex­i­ble approach that allows indi­vid­u­als nations to have more or less QE depend­ing on their cir­cum­stances. It’s a reminder that even QE seems to suf­fer from the same prob­lem we’ve seen through­out the euro­zone exper­i­ment: the one size fits all approach is not work­ing. It cre­ates win­ners and losers and there’s bare­ly any sys­tems in place to help the losers. The ECB has one set of inter­est rates (too high for some, too low for oth­ers), there’s one shared val­ue of the euro (too strong for some too weak for oth­ers), but not much shar­ing terms of fis­cal trans­fers from rich to poor mem­ber states, so these ten­sions build up don’t get addressed and then get point­ed at by the aus­te­ri­ans as a rea­son to end QE.

    And don’t for­get, if a big fis­cal stim­u­lus pol­i­cy that involved lots of gov­ern­ment bor­row­ing was allowed in the euro­zone that would solve a lo of these QE prob­lems, boost the econ­o­my, and cre­ate the new gov­ern­ment bonds that keeps plen­ty avail­able for the QE pro­gram avoid­ing a forced QE unwind­ing.

    And it’s not like there’s a short­age of things for the euro­zone to make a pub­lic invest­ment in. Per­haps there could be mas­sive invest­ments in pre­vent the col­lapse of the insects. Isn’t that the kidn of thing the euro­zone should be invest­ing in while bor­row­ing costs are extra low? Stop­ping the insect die off? It seems rather impor­tant.

    So also don’t for­get that refus­ing to allow for stim­u­lus gov­ern­ment spend­ing on pub­lic invest­ments towards address­ing prob­lems that only gov­ern­ments are going to real­is­ti­cal­ly be able to address, like the die off of insects, it’s just hav­ing neg­a­tive con­se­quences on the macro­eco­nom­ic envi­ron­ment. It also means all the prob­lems that could and must be fixed if gov­ern­ments could bor­row to fix them aren’t get­ting fixed. Like the insects dying which is going to kill us all. Wast­ed QE can have high oppor­tu­ni­ty costs. Costs like the future.

    Posted by Pterrafractyl | October 22, 2017, 11:44 pm
  4. Could have been worse! That’s the gen­er­al sen­ti­ment fol­low­ing the ECB’s big QE announce­ments fol­low­ing ECB chief Mario Draghi’s announce­ments fol­low­ing the Octo­ber 26th meet­ing on Thurs­day. True to Draghi’s typ­i­cal form, the announced QE cuts — a nine month QE bond buy­ing exten­sion that cuts the month­ly buys by 50 per­cent — were framed in the most dovish man­ner pos­si­ble, with Draghi empha­siz­ing that QE could be extend­ed fur­ther and increased if need be. As he put it, “This is not taper­ing, it’s a down­size.” All that was more or less in line with the mar­ket’s expec­ta­tions, but Draghi also said it was like­ly the QE would be extend­ed again when the new­ly announced exten­sion expires next Sep­tem­ber. And while that’s not exact­ly a shock­ing rev­e­la­tion since it seemed like there would be at least one more wind-down round of taper­ing no mat­ter what, it’s still pret­ty notable for the ECB chief to issue for­ward guid­ance in the con­text the rest of Draghi’s dovish com­ments. So the over­all mes­sag­ing from the ECB was, rel­a­tive to expec­ta­tions, mod­er­ate­ly dovish.

    And that’s part of what makes this a sig­na­ture Draghi move: much of his suc­cess in man­ag­ing the euro­zone cri­sis has been root­ed in his abil­i­ty to sur­prise to the mod­er­ate­ly dovish side at key moments, and doing this with enough fre­quen­cy to car­ry out an over­all dovish mon­e­tary pol­i­cy over fierce and con­stant oppo­si­tion from the aus­ter­i­ty fac­tion led by Bun­des­bank chief Jens Wei­d­mann, Draghi’s like­ly suc­ces­sor in 2019. And as the fol­low­ing arti­cle points out, Wei­d­mann not sur­pris­ing­ly called for Draghi to announce a planned end date of QE, as is con­sis­tent with his stance on pret­ty much all stim­u­lus poli­cies since the start of the cri­sis.

    And that, right there, high­lights the secret to Mario Draghi’s suc­cess as the euro­zone’s cen­tral banker this far: he’s con­sis­tent­ly man­aged to over­come Jens Wei­d­mann and the aus­ter­i­ty fac­tion on mat­ters relat­ed to ECB pol­i­cy at key points. This is one of the only areas of euro­zone pol­i­cy-mak­ing where the aus­ter­i­ty fac­tion has­n’t dom­i­nat­ed, which prob­a­bly has a lot to do with the fact that if the aus­ter­i­ty fac­tion did dom­i­nate on ECB pol­i­cy the finan­cial mar­kets would have implod­ed in one euro­zone mem­ber after anoth­er. And let’s not for­get about all the times the aus­ter­i­ty fac­tion has won in recent years, includ­ing in the design of “cap­i­tal keys” that is lim­it­ing the abil­i­ty of the coun­tries that need the QE the most to par­tic­i­pate. But at least at this key point in the Great QE taper, which tech­ni­cal­ly start­ed in April with the cut from 80 to 60 bil­lion euros a month, the ECB got to once again sur­prise to the dovish side and do so while cut­ting QE sig­nif­i­cant­ly.

    It was one of those ECB moments that empha­size how lucky Europe is that Mario Draghi, and not Jens Wei­d­mann, has been ECB chief dur­ing the past five years because don’t for­get that Wei­d­man’s pre­de­ces­sor at the Bun­des­bank, Axel Weber, was on track to head up the ECB instead of Draghi back in 2011 before Weber pulled out of the race in protest of the ECB’s ini­tial stim­u­lus poli­cies. So if things had gone a bit dif­fer­ent­ly back in 2011 we could have had ECB chief Weber this whole time and things would have pre­sum­ably gone quite a bit dif­fer­ent­ly for the euro­zone. And that’s pre­sum­ably what’s going to be in store for the euro­zone when Jens Wei­d­mann like­ly takes over in 2019, which is part of what should be appre­ci­at­ed about this par­tic­u­lar QE taper deci­sion: It had Draghi’s dovish touch that is in stark con­trast to the kinds of deci­sions the ECB is going to make once Wei­d­mann or some­one like him takes over in 2019.

    So it was a hawk­ish move (cut­ting QE) that was suc­cess­ful­ly pack­aged as dovish (by hint­ing at reflat­ing QE lat­er if need­ed and a like­ly future exten­sion) over the oppo­si­tion of Wei­d­man­n’s demands (hawk­ish cuts and a hawk­ish dec­la­ra­tion of the end of QE at a par­tic­u­lar date) and Draghi man­aged to pull it off while sur­pris­ing mar­kets to the dovish side. Not bad on Draghi’s part and, more impor­tant­ly, a lot bet­ter than the mad­ness that’s like­ly to fol­low when Wei­d­mann or some­one like him takes over:

    The Wall Street Jour­nal

    ECB promis­es gen­tle eas­ing of stim­u­lus

    Tom Fair­less
    12:00AM Octo­ber 28, 2017

    The Euro­pean Cen­tral Bank said on Thurs­day night it would car­ry on buy­ing gov­ern­ment bonds deep into next year but in reduced month­ly amounts, a pol­i­cy shift that sig­nals it will fol­low the US Fed­er­al Reserve on a path toward high­er inter­est rates.

    ...

    Europe’s strength­en­ing recov­ery is reduc­ing the need for such a stim­u­lus in the ECB’s eyes, even though infla­tion remains weak and well below the bank’s tar­get.

    The ECB sig­nalled it is mov­ing away from easy mon­ey, but the mes­sage was laden with caveats, and the bank left open exact­ly when, and how, its stim­u­lus mea­sures would end.

    The deci­sion to reduce QE gen­tly comes amid a rare, syn­chro­nised recov­ery across the world’s economies, a result of extra­or­di­nary efforts by cen­tral banks to sup­port growth and the fad­ing of the finan­cial cri­sis era.

    The ECB’s deci­sion reopened a rift with­in the bank’s gov­ern­ing coun­cil, where Germany’s cen­tral bank, the Bun­des­bank, has led a minor­i­ty fac­tion that want­ed a more deci­sive end to stim­u­lus.

    Under the plan, the ECB will con­tin­ue to buy bonds until the end of next Sep­tem­ber, but cut the pace of its pur­chas­es to €30bn ($45bn) a month from €60bn after Decem­ber this year. The bank also left its key inter­est rates unchanged and said that rate ris­es remain some way off.

    Europe’s exit from QE will thus be far slow­er than that pur­sued four years ago by the Fed, which cut its pur­chas­es by $US10bn a month.

    ECB Pres­i­dent Mario Draghi said the deci­sion didn’t sig­nal the end of QE. Instead, he indi­cat­ed QE would prob­a­bly be extend­ed beyond Sep­tem­ber, an unex­pect­ed sweet­en­er for investors.

    “This is not taper­ing, it’s a down­size,” Mr Draghi said.

    It is the third time that the ECB has extend­ed its cal­en­dar for QE. The lat­est move will push the over­all size of the pro­gram above €2.5 tril­lion, or almost a quar­ter of the region’s eco­nom­ic out­put, and more than dou­ble its orig­i­nal­ly planned size.

    Investors wel­comed Mr Draghi’s bal­anc­ing act, which pushed back mar­ket expec­ta­tions for an inter­est rate increase deep into 2019.

    “This is soft­ly, soft­ly taper­ing,” said Ian Stew­art, chief econ­o­mist at Deloitte. “The ECB cer­tain­ly isn’t tak­ing away the punch bowl.”

    The euro fell 1 per cent against the dol­lar on the day, while shares of com­pa­nies in the eurozone’s most indebt­ed nations jumped on a bet that the ECB’s extra­or­di­nary mon­e­tary stim­u­lus would sup­port the region’s mar­kets for longer than many had antic­i­pat­ed.

    The ECB also promised to rein­vest the pro­ceeds of matur­ing bonds for “an extend­ed peri­od of time”, and to lend freely to banks against col­lat­er­al until at least the end of 2019. Mr Draghi under­lined the impor­tance of the com­mit­ment to rein­vest, and while declin­ing to give an esti­mate of the amounts involved, said they were “going to be mas­sive.”

    Those com­ments helped to avoid a finan­cial mar­ket tur­bu­lence, which investors had feared could fol­low from a strong sig­nal that tighter mon­e­tary pol­i­cy was approach­ing.

    But the deci­sion drew dis­sent on the ECB’s 25-mem­ber rate-set­ting com­mit­tee. Bun­des­bank pres­i­dent Jens Wei­d­mann opposed it, wor­ried that the ECB hadn’t yet drawn the cur­tain on QE despite the eurozone’s robust eco­nom­ic recov­ery.

    Mr Wei­d­mann is a long­time crit­ic of the ECB’s bond pur­chas­es, and has been argu­ing for a quick­er with­draw­al of stim­u­lus.

    He would have been will­ing to sup­port a fresh exten­sion of quan­ti­ta­tive eas­ing if the program’s end had been more clear­ly in sight. Some oth­er mem­bers also had reser­va­tions about keep­ing QE open-end­ed, offi­cials said.

    Mr Draghi spoke glow­ing­ly of the eurozone’s recov­ery, but argued it was heav­i­ly reliant on “ample” sup­port from the cen­tral bank. “We must be patient and per­sis­tent,” he said.

    The com­mit­ment to keep the QE pro­gram open-end­ed gives the ECB flex­i­bil­i­ty to respond to future eco­nom­ic tur­bu­lence. But it leaves lit­tle room for error.

    By Sep­tem­ber, the ECB will have almost exhaust­ed the bonds that it is allowed to pur­chase under the rules of QE, which lim­it the bank to buy­ing only 33 per cent of any indi­vid­ual government’s debt. That rais­es ques­tions about the ECB’s abil­i­ty to respond to any future cri­sis.

    Mr Draghi declined to address con­cerns about pos­si­ble bond short­ages. He said pol­i­cy mak­ers hadn’t dis­cussed any change to rules gov­ern­ing QE, but insist­ed they would be able to find enough bonds if need­ed.

    ———-

    “ECB promis­es gen­tle eas­ing of stim­u­lus” by Tom Fair­less; The Wall Street Jour­nal; 10/28/2017

    “Under the plan, the ECB will con­tin­ue to buy bonds until the end of next Sep­tem­ber, but cut the pace of its pur­chas­es to €30bn ($45bn) a month from €60bn after Decem­ber this year. The bank also left its key inter­est rates unchanged and said that rate ris­es remain some way off.”

    A nine month exten­sion and a 50 per­cent cut in size. On the dovish side of the gen­er­al range pre­dict­ed. But it’s the clar­i­fi­ca­tion that this cut did­n’t sig­nal an end of QE that made the announce­ment sig­nif­i­cant because a state­ment like that real­ly was­n’t expect­ed:

    ...
    ECB Pres­i­dent Mario Draghi said the deci­sion didn’t sig­nal the end of QE. Instead, he indi­cat­ed QE would prob­a­bly be extend­ed beyond Sep­tem­ber, an unex­pect­ed sweet­en­er for investors.

    “This is not taper­ing, it’s a down­size,” Mr Draghi said.
    ...

    It’s also sig­nif­i­cant that Draghi overt­ly stat­ed that this was­n’t the begin­ning of the end of QE because that’s exact­ly whawt Jens Wei­d­mann want­ed him to do and, again, that’s the kind of pol­i­cy that we should expect when Wei­d­mann, or some­one like him, takes over in 2019:

    ...
    Those com­ments helped to avoid a finan­cial mar­ket tur­bu­lence, which investors had feared could fol­low from a strong sig­nal that tighter mon­e­tary pol­i­cy was approach­ing.

    But the deci­sion drew dis­sent on the ECB’s 25-mem­ber rate-set­ting com­mit­tee. Bun­des­bank pres­i­dent Jens Wei­d­mann opposed it, wor­ried that the ECB hadn’t yet drawn the cur­tain on QE despite the eurozone’s robust eco­nom­ic recov­ery.

    Mr Wei­d­mann is a long­time crit­ic of the ECB’s bond pur­chas­es, and has been argu­ing for a quick­er with­draw­al of stim­u­lus.

    He would have been will­ing to sup­port a fresh exten­sion of quan­ti­ta­tive eas­ing if the program’s end had been more clear­ly in sight. Some oth­er mem­bers also had reser­va­tions about keep­ing QE open-end­ed, offi­cials said.
    ...

    “He would have been will­ing to sup­port a fresh exten­sion of quan­ti­ta­tive eas­ing if the program’s end had been more clear­ly in sight.”

    Wei­d­mann would have sup­port­ed an exten­sion to QE if Draghi had declared a QE end date. But that did­n’t hap­pen so Wei­d­mann pre­sum­ably does­n’t sup­port the QE exten­sion. Which, again, is the kind of lead­er­ship the euro­zone is in store for in just a cou­ple of years because all indi­ca­tions are Berlin real­ly wants him in thast post.

    And what rea­son did Wei­d­mann give for his call to declare an end QE now? He lit­er­al­ly cit­ed his past oppo­si­tion to QE as the rea­son. As Wei­d­mann puts it in the arti­cle below, “In my view a clear end of net pur­chas­es would have been war­rant­ed, espe­cial­ly because I, as you prob­a­bly know, have tak­en a par­tic­u­lar­ly crit­i­cal view on gov­ern­ment bond pur­chas­es in the euro zone.” QE should be end­ed now due to all the rea­sons it should have been end­ed pre­vi­ous­ly and nev­er start­ed in the first place. That’s basi­cal­ly what Wei­d­mann just argued, like a true ide­o­logue. That’s the kind of ide­o­log­i­cal lead­er­ship in store for the euro­zone economies in a cou­ple of years which is a key con­text for inter­pret­ing the ECB’s recent deci­sion: it could have been worse because it’s on track to be worse in a cou­ple years when Wei­d­mann takes over:

    Reuters

    ECB should have sig­naled end to asset buys: Wei­d­mann

    Reuters Staff
    Octo­ber 27, 2017 / 6:38 AM

    PARIS (Reuters) — The Euro­pean Cen­tral Bank should have sig­naled a clear intent to end asset-buy­ing, Bun­des­bank Pres­i­dent Jens Wei­d­mann said on Fri­day, a day after the bank extend­ed the pur­chas­es and left the door open to anoth­er exten­sion.

    Growth is improv­ing and much of the stim­u­lus is pro­vid­ed through the ECB’s bloat­ed bal­ance sheet, so the rel­e­vance of ongo­ing asset pur­chas­es is dimin­ish­ing, Wei­d­mann, a long-time crit­ic of the ECB’s quan­ti­ta­tive eas­ing pro­gram said in Paris.

    ...

    “In my view a clear end of net pur­chas­es would have been war­rant­ed, espe­cial­ly because I, as you prob­a­bly know, have tak­en a par­tic­u­lar­ly crit­i­cal view on gov­ern­ment bond pur­chas­es in the euro zone,” he said.

    Wei­d­mann, tout­ed as a poten­tial can­di­date to suc­ceed ECB Pres­i­dent Mario Draghi in two years, argued that easy mon­e­tary pol­i­cy is still need­ed giv­en weak infla­tion, so the debate is about the extent of the stim­u­lus and the instru­ments the ECB should use.

    “The main impact of our pur­chase pro­gram is not so much in the month­ly buys, but in the total vol­ume of bonds already on our books,” Wei­d­mann added.

    Indeed, the ECB has pur­chased over 2 tril­lion euros worth of bonds and Draghi acknowl­edged on Thurs­day that this is an increas­ing­ly vital com­po­nent of pol­i­cy sup­port.

    Wei­d­mann added that an end of asset buys is also war­rant­ed as the gap between the economy’s out­put and poten­tial is rapid­ly clos­ing. “Accord­ing to our fore­casts, the out­put gap will close next year, and in the short term, the econ­o­my could grow even faster than pre­vi­ous­ly expect­ed,” he said.

    ———-

    “ECB should have sig­naled end to asset buys: Wei­d­mann” by Reuters Staff; Reuters; 10/27/2017

    “In my view a clear end of net pur­chas­es would have been war­rant­ed, espe­cial­ly because I, as you prob­a­bly know, have tak­en a par­tic­u­lar­ly crit­i­cal view on gov­ern­ment bond pur­chas­es in the euro zone,” he said.

    Yes, Jens Wei­d­mann has indeed tak­en a “par­tic­u­lar­ly crit­i­cal view on gov­ern­ment bond pur­chas­es in the euro zone.” A par­tic­u­lar­ly crit­i­cal view that’s large­ly been wrong all along. Wei­d­mann and the aus­te­ri­ans were typ­i­cal­ly wor­ry­ing about hyper­in­fla­tion before it became abun­dant­ly clear defla­tion was the real threat. He was oppos­ing the idea of QE up through 2013 and then Wei­d­mann final­ly reached a point where he agreed that QE was nec­es­sary because out­right defla­tion is a seri­ous prob­lem in April of 2014, dur­ing the run up to QE. But by Novem­ber of that year he had come up with all sorts of new rea­sons why QE was a bad idea. He’s just hat­ed QE at almost every turn.

    Of course, giv­en the reports that France and Italy told Ger­many that they’ll accept a Ger­man ECB chief as Draghi’s suc­ces­sor but just not Wei­d­mann, it’s pos­si­ble the next ECB chief won’t be Jens Wei­d­mann, but it’s not like we can expect a bet­ter sub­sti­tute in terms of Ordolib­er­al ortho­doxy. And that’s what makes the rel­a­tive­ly dovish stance by Draghi so omi­nous: the rigid ortho­doxy of Jens Wei­d­mann or some­one like him is just a cou­ple years away, which means Draghi basi­cal­ly has two years to Wei­d­mann-proof the euro­zone econ­o­my. And that’s not easy since the only fea­si­ble way to Wei­d­mann-proof the euro­zone econ­o­my is to help get it run­ning so hot that it’s ready for a bunch of rate hikes and an end to all stim­u­lus by the time Wei­d­mann or some­one like him takes over.

    It points to one of the more inter­est­ing dynam­ics Draghi faces in han­dling the taper/downsizing of QE in the face of his own retire­ment as the bat­tle to replace him gets under­way: the more hawk­ish Draghi’s 2019 replace­ment, the stronger the euro­zone econ­o­my needs to be by 2019 in order to be ready to deal with the self-inflict­ed wounds from all the hawk­ish­ness. The aus­ter­i­ty fac­tion of Europe that Wei­d­mann leads in finan­cial realm is like GOP. You just have to hope they don’t do too much dam­age should they obtain pow­er. But with the ECB we know Berlin wants Wei­d­mann to take over in 2019 so we know the aus­ter­i­ty fac­tion is going to get a lot more pow­er in just a cou­ple of years. ECB pol­i­cy-mak­ers know there’s a high prob­a­bil­i­ty that the ECB is going to basi­cal­ly go insane in a cou­ple years under Wei­d­mann.

    So if a cen­tral banks knows it’s going to go insane in a cou­ple years what should it do? That’s part of what the ECB pol­i­cy-mak­ers have to keep in mind as the QE taper/downsize unfolds. The clock in tick­ing on san­i­ty for the ECB. What is the sane thing to do in that sit­u­a­tion? It’s unclear but that’s part of what pol­i­cy-mak­ers have to fig­ure out. Macro­eco­nom­ics can often have a giant psy­chodra­ma feel to it but in the case of Mario Drah­hi’s dilem­ma over what to do what Wei­d­man­n’s loom­ing insan­i­ty as the Great QE Unwind­ing gets under­way that psy­chodra­ma is get­ting remark­ably per­son­i­fied.

    Posted by Pterrafractyl | October 29, 2017, 10:47 pm
  5. Here’s some good-ish/bad-ish news about the future of lead­er­ship in key Euro­pean insti­tu­tions:
    First, the good-ish news. It sounds like Angela Merkel is no longer keen on cham­pi­oning Bun­des­bank chief Jens Wei­d­mann to be the next head of the ECB after Mario Draghi’s term expires in 2019. This would be fab­u­lous news if it meant that the ECB was­n’t about to be tak­en over by some­one with Wei­d­man­n’s hard right Ordolib­er­al eco­nom­ic phi­los­o­phy. Unfor­tu­nate­ly, it also sounds like Markel’s plan is to just get one of the oth­er cen­tral bankers from North­ern Europe who agree with Wei­d­mann to replace Draghi instead. So the plan is basi­cal­ly Wei­d­man­n’s poli­cies with­out all the polit­i­cal bag­gage Wei­d­mann has cul­ti­vat­ed as a con­se­quence of his seem­ing­ly end­less oppo­si­tion to the ECB poli­cies that have actu­al­ly held the euro­zone togeth­er.

    But that’s not the only good-ish/bad-ish angle to this. Because the rea­son Angela Merkel has decid­ed to for­go the mas­sive prize of get­ting Wei­d­mann at the helm is the ECB is because she has her eyes on an even big­ger prize: The EU Com­mis­sion pres­i­den­cy, which is also going to be vacat­ed by Jean-Claude Junck­er next year. Accord­ing to EU con­ven­tion, you can’t have the Ger­mans hold­ing can’t occu­py two of Europe’s most senior posts at the same time. So Merkel had to choose, and she chose the EU com­mis­sion pres­i­den­cy.

    Specif­i­cal­ly, Merkel appears to be get­ting behind Man­fred Weber, the Bavar­i­an politi­cian who is the cur­rent head of the Euro­pean Peo­ple’s Par­ty (the umbrel­la EU-wide cen­ter-right par­ty in the EU par­lia­ment). Although it sounds like some in Merkel’s par­ty would pre­fer the job go to Peter Alt­maier, Merkel’s trust­ed eco­nom­ic advi­sor and the cur­rent Ger­man Finance Min­is­ter (who was pre­ced­ed by the hor­rif­ic Wolf­gang Schaeu­ble). So there’s still a ques­tion of who Ger­many is going to put for­ward to lead the EU Com­mis­sion, which is arguably the most pow­er­ful post in the EU, although one could make the case that the head of the ECB is actu­al­ly the most pow­er­ful post but lim­it­ed to the euro­zone.

    So as we can see, Merkel’s gov­ern­ment has a tough deci­sion ahead of it, but it’s a pret­ty nice tough deci­sion to make: which pow­er­ful post do you want the most. And for now, it’s the EU Com­mis­sion pres­i­den­cy that Merkel finds the most tempt­ing. And that means Jens Wei­d­mann, the man who would have proud­ly destroyed the euro­zone’s economies in order to pla­cate his Ordolib­er­al ortho­doxy, might not become even more pow­er­ful. Some­one sim­i­lar will instead take that job. It’s extreme­ly good-ish/bad-ish news for Europe:

    Bloomberg

    The Com­plex Cal­cu­la­tions Behind Angela Merkel’s ECB Strat­e­gy

    By Bir­git Jen­nen
    August 24, 2018, 7:14 AM CDT

    * Ger­man leader spurs race for EU posts ahead of 2019 dead­lines
    * Weber, Alt­maier are said to be con­tenders for top EU exec­u­tive

    The biggest bar­ri­er to Jens Weidmann’s can­di­da­cy for the Euro­pean Cen­tral Bank has a name: Man­fred Weber.

    Weber, a Bavar­i­an who leads the largest bloc in the Euro­pean Par­lia­ment, is said to be prepar­ing a bid to replace Jean-Claude Junck­er when he stands down as Euro­pean Com­mis­sion pres­i­dent next fall. The prob­lem for Wei­d­mann, the cur­rent Bun­des­bank chief, is that con­ven­tion dic­tates Ger­mans can’t occu­py two of Europe’s most senior posts at the same time.

    Chan­cel­lor Angela Merkel has come to the view that it’s more use­ful to Ger­many to secure the com­mis­sion post than the top ECB job, accord­ing to peo­ple famil­iar with her think­ing, con­firm­ing a report in Han­dels­blatt on Wednes­day.

    Yet Weber, a mem­ber of Merkel’s Bavar­i­an sis­ter par­ty, isn’t a shoo-in, accord­ing to the peo­ple, who asked not to be iden­ti­fied dis­cussing inter­nal par­ty delib­er­a­tions. Some in her Chris­t­ian Demo­c­ra­t­ic Union would rather see the post go to Peter Alt­maier, a Merkel con­fi­dant who is Germany’s econ­o­my min­is­ter.

    It’s a sign that jock­ey­ing by the Euro­pean Union’s gov­ern­ments, its polit­i­cal fac­tions and Europe’s lead­ers is heat­ing up. Their choic­es will influ­ence the EU’s course for years to come on every­thing from mon­e­tary pol­i­cy to how it deals with pop­ulist chal­lengers.

    In fact, Germany’s shift away from Wei­d­mann was under way six months ago, accord­ing to the peo­ple. It’s come to the fore now because the process of select­ing can­di­dates to head the com­mis­sion opens in ear­ly Sep­tem­ber, one of them said.

    Merkel, asked about the race in Tbil­isi on Thurs­day, framed her reply in the con­text of whom the Euro­pean People’s Par­ty, the umbrel­la body which includes her CDU, will nom­i­nate as its can­di­date for com­mis­sion pres­i­dent. That post and the ECB pres­i­den­cy are up for grabs in the fall of 2019, after elec­tions to the Euro­pean Par­lia­ment in May.

    “The dis­cus­sion about upcom­ing per­son­nel deci­sions in con­nec­tion with the Euro­pean Par­lia­ment elec­tion is slow­ly start­ing now,” Merkel said. “There’s been no deci­sion what­so­ev­er, and the post of Euro­pean Cen­tral Bank pres­i­dent comes up only much lat­er.”

    Merkel has rea­son to hedge her bets: she and her Bavar­i­an allies are fresh from a clash over migra­tion that led to a coali­tion rift in June. While Weber and Alt­maier are both broad­ly pro-Euro­pean, they’ve dif­fered in tone on refugee pol­i­cy and come from oppo­site sides of the recent­ly patched-up divide.

    Merkel’s Choic­es

    Weber, 46, declined to com­ment when asked about his ambi­tions. He sig­naled a pos­si­ble bid last week, telling the Welt am Son­ntag news­pa­per that “I’ll be giv­ing some thought to whether I throw my hat into the ring.” Alt­maier, 60, who once worked at the Euro­pean Com­mis­sion in Brus­sels, hasn’t com­ment­ed pub­licly.

    The Euro­pean People’s Par­ty is like­ly to need the sup­port of lib­er­al par­ties to install the next Euro­pean Com­mis­sion head. If the math doesn’t come togeth­er, Ger­many might shift its sights back to Wei­d­mann and the top ECB post, one of the peo­ple said.

    The com­mis­sion, the EU’s exec­u­tive body, is respon­si­ble for poli­cies from trade and ener­gy to reg­u­la­tion on behalf of the bloc’s 500 mil­lion peo­ple. As pop­ulists includ­ing Steve Ban­non seek to turn the Euro­pean elec­tion into a pop­ulist beach­head, the cal­cu­la­tion in Berlin may be that hav­ing a Ger­man in charge at a time of dis­rup­tion rang­ing from U.S. pro­tec­tion­ism to Russ­ian aggres­sion out­weighs the ECB chief’s pow­ers.

    ECB’s North­ern Tier

    Accord­ing to one of the peo­ple famil­iar with the government’s think­ing, it might be bet­ter for Ger­many if a non-Ger­man takes over at the ECB but pur­sues the same pol­i­cy. That could indi­cate a fel­low north­ern Euro­pean, with names such as Finland’s Erk­ki Liika­nen or Olli Rehn, Estonia’s Ardo Hans­son, and Klaas Knot of the Nether­lands among those men­tioned by econ­o­mists.

    If Merkel holds back, French Pres­i­dent Emmanuel Macron might gain more room to push can­di­dates from his coun­try, such as Bank of France Gov­er­nor Fran­cois Villeroy de Gal­hau or ECB Exec­u­tive Board mem­ber Benoit Coeure.

    Wei­d­mann, who was for­mer­ly Merkel’s chief eco­nom­ic advis­er, “ticks all the box­es” — except that he’s Ger­man and has opposed the ECB’s asset-buy­ing pro­gram to pro­tect the euro, Carsten Brzes­ki, chief econ­o­mist at ING Diba in Frank­furt, told Bloomberg Tele­vi­sion. As a result, his can­di­da­cy would run into “much oppo­si­tion from the south­ern Euro­pean coun­tries.”

    In a coali­tion with the lib­er­al Free Democ­rats, Merkel might have come under more pres­sure to cham­pi­on Wei­d­mann for the ECB. But in her cur­rent tie-up with the Social Democ­rats, the chan­cel­lor “has less inter­est in get­ting this grand prize,” said Brzes­ki.

    ...

    ———-

    “The Com­plex Cal­cu­la­tions Behind Angela Merkel’s ECB Strat­e­gy” by Bir­git Jen­nen; Bloomberg; 08/24/2018

    Weber, a Bavar­i­an who leads the largest bloc in the Euro­pean Par­lia­ment, is said to be prepar­ing a bid to replace Jean-Claude Junck­er when he stands down as Euro­pean Com­mis­sion pres­i­dent next fall. The prob­lem for Wei­d­mann, the cur­rent Bun­des­bank chief, is that con­ven­tion dic­tates Ger­mans can’t occu­py two of Europe’s most senior posts at the same time.

    Which extreme­ly pow­er­ful post do you want to fill: that’s Angela Merkel’s prob­lem. Which has become Jens Wei­d­man­n’s prob­lem because Merkel appears to have deter­mined that hav­ing Man­fred Weber at the head of the EU Com­mis­sion is a bet­ter bet:

    ...
    Chan­cel­lor Angela Merkel has come to the view that it’s more use­ful to Ger­many to secure the com­mis­sion post than the top ECB job, accord­ing to peo­ple famil­iar with her think­ing, con­firm­ing a report in Han­dels­blatt on Wednes­day.
    ...

    But Weber him­self isn’t a sure bet for Merkel. Some in her par­ty would would pre­fer some­one else: Peter Alt­maier, Merkel’s long-time eco­nom­ic advis­er who is now Ger­many’s finance min­is­ter. It’s anoth­er pleas­ant conun­drum for Merkel:

    ...
    Yet Weber, a mem­ber of Merkel’s Bavar­i­an sis­ter par­ty, isn’t a shoo-in, accord­ing to the peo­ple, who asked not to be iden­ti­fied dis­cussing inter­nal par­ty delib­er­a­tions. Some in her Chris­t­ian Demo­c­ra­t­ic Union would rather see the post go to Peter Alt­maier, a Merkel con­fi­dant who is Germany’s econ­o­my min­is­ter.

    It’s a sign that jock­ey­ing by the Euro­pean Union’s gov­ern­ments, its polit­i­cal fac­tions and Europe’s lead­ers is heat­ing up. Their choic­es will influ­ence the EU’s course for years to come on every­thing from mon­e­tary pol­i­cy to how it deals with pop­ulist chal­lengers.
    ...

    And note how the choice to pre­fer Weber or Alt­maier would sug­gest a shift on Merkel’s part to back­ing much stricter refugee poli­cies:

    ...
    Merkel has rea­son to hedge her bets: she and her Bavar­i­an allies are fresh from a clash over migra­tion that led to a coali­tion rift in June. While Weber and Alt­maier are both broad­ly pro-Euro­pean, they’ve dif­fered in tone on refugee pol­i­cy and come from oppo­site sides of the recent­ly patched-up divide.

    Merkel’s Choic­es

    Weber, 46, declined to com­ment when asked about his ambi­tions. He sig­naled a pos­si­ble bid last week, telling the Welt am Son­ntag news­pa­per that “I’ll be giv­ing some thought to whether I throw my hat into the ring.” Alt­maier, 60, who once worked at the Euro­pean Com­mis­sion in Brus­sels, hasn’t com­ment­ed pub­licly.
    ...

    Keep in mind that Weber cre­at­ed a bit scan­dal for him­self back in Jan­u­ary when he called for 2018 to be the year when Europe finds a “final solu­tion” to the refugee cri­sis dur­ing a radio show. So when the arti­cle says Weber and Alt­maier “dif­fer in tone” on the refugee pol­i­cy it’s an under­state­ment. And he’s the cur­rent leader of the EPP, the rul­ing par­ty of the EU par­lia­ment. Although, in fair­ness, as the leader of the EPP, which is large­ly tasked with imple­ment­ing Angela Merkel’s refugee poli­cies, Weber’s rhetoric on the refugee issue is pol­i­cy issue is gen­er­al­ly direct­ed at redi­rect­ing anger away form asy­lum seek­ers and more toward ille­gal immi­gra­tion, which was the argu­ment he was mak­ing that “final solu­tion” argu­ment.

    At the same time, keep in mind that the EPP includes par­ties like in Vik­tor Orban’s Fidez Par­ty. Its sup­port was need­ed to give the EPP a major­i­ty. Also, while Weber him­self is forced to damper his anti-refugee/im­mi­grant cen­ter due to being the floor leader of the cen­ter-right EPP, he’s also report­ed­ly con­sid­er­ing let­ting Poland’s vir­u­lent­ly anti-refugee/xeno­pho­bic PiS par­ty into the EPP, indi­cat­ing an upcom­ing aban­don­ment of Merkel’s refugee pol­i­cy and a right­ward shift for the EPP. In oth­er words, we prob­a­bly should­n’t be sur­prised if Weber, as EU Com­mis­sion Pres­i­dent, expe­ri­ences a sig­nif­i­cant uptick in “final solution”-style gaffes as he attempts to co-opt the surg­ing far right by mov­ing the EPP far right.

    And the refugee cri­sis and the cen­tral role it’s play­ing in Europe’s exis­ten­tial far right cri­sis is just one of many areas where we might expect a shift in both tone and pol­i­cy as the EPP’s strat­e­gy of co-opt­ing the far right plays out.

    Addi­tion­al­ly, there’s one of mas­sive issue where hav­ing Weber at the head of the EU Com­mis­sion could have major ram­i­fi­ca­tions: on the Brex­it nego­ti­a­tions. Back in June of 2017, three months after Britain trig­gered Arti­cle 50 of the Lis­bon Treaty to for­mal­ly leave the EU, Weber called for no exten­sion of the two year Brex­it talks. He also demand­ed that Britain lose its vot­ing EU rights in March of 2019 whether or not an agree­ment has been reached. So if the Brex­it talks are still going on when Junck­er retires (in Novem­ber 2019), and Weber takes over, the EU Com­mis­sion could be get­ting ready get nasty and make an exam­ple out of Britain (like what the Troi­ka did to Greece, but as pun­ish­ment for leav­ing).

    And since the EPP will still need the sup­port of oth­er par­ties to get either Weber or Alt­maier the votes they need, it’s still pos­si­ble Ger­many won’t get the EU Com­mis­sion pres­i­den­cy. In which case Jens Wei­d­mann will pre­sum­ably become the next head of the ECB:

    ...
    The Euro­pean People’s Par­ty is like­ly to need the sup­port of lib­er­al par­ties to install the next Euro­pean Com­mis­sion head. If the math doesn’t come togeth­er, Ger­many might shift its sights back to Wei­d­mann and the top ECB post, one of the peo­ple said.

    The com­mis­sion, the EU’s exec­u­tive body, is respon­si­ble for poli­cies from trade and ener­gy to reg­u­la­tion on behalf of the bloc’s 500 mil­lion peo­ple. As pop­ulists includ­ing Steve Ban­non seek to turn the Euro­pean elec­tion into a pop­ulist beach­head, the cal­cu­la­tion in Berlin may be that hav­ing a Ger­man in charge at a time of dis­rup­tion rang­ing from U.S. pro­tec­tion­ism to Russ­ian aggres­sion out­weighs the ECB chief’s pow­ers.
    ...

    But assum­ing Wei­d­mann does­n’t become ECB chief, that still means some­one of Wei­d­man­n’s tem­per­me­nt. And that’s part of what’s so omi­nous of this news: it’s going to be a hawk at the helm of the ECB no mat­ter what. Don’t for­get that the hawk­ish ECB poli­cies have been a proven fail­ure through­out the euro­zone cri­sis. That’s what’s in store for the euro­zone (and the world) again in 2019. The deci­sion appears to have been made already:

    ...
    ECB’s North­ern Tier

    Accord­ing to one of the peo­ple famil­iar with the government’s think­ing, it might be bet­ter for Ger­many if a non-Ger­man takes over at the ECB but pur­sues the same pol­i­cy. That could indi­cate a fel­low north­ern Euro­pean, with names such as Finland’s Erk­ki Liika­nen or Olli Rehn, Estonia’s Ardo Hans­son, and Klaas Knot of the Nether­lands among those men­tioned by econ­o­mists.

    If Merkel holds back, French Pres­i­dent Emmanuel Macron might gain more room to push can­di­dates from his coun­try, such as Bank of France Gov­er­nor Fran­cois Villeroy de Gal­hau or ECB Exec­u­tive Board mem­ber Benoit Coeure.
    ...

    And you have to love the spin on Wei­d­mann at the end: he ““ticks all the box­es” — except that he’s Ger­man and has opposed the ECB’s asset-buy­ing pro­gram to pro­tect the euro.”. He’s a per­fect can­di­date, except for being unwill­ing to pro­tect the euro. And it’s true, if he was­n’t nuts he’s the per­fect can­di­date on paper:

    ...
    Wei­d­mann, who was for­mer­ly Merkel’s chief eco­nom­ic advis­er, “ticks all the box­es” — except that he’s Ger­man and has opposed the ECB’s asset-buy­ing pro­gram to pro­tect the euro, Carsten Brzes­ki, chief econ­o­mist at ING Diba in Frank­furt, told Bloomberg Tele­vi­sion. As a result, his can­di­da­cy would run into “much oppo­si­tion from the south­ern Euro­pean coun­tries.”
    ...

    And while it’s true that his being Ger­man restricts him from get­ting the job if Weber gets to become EU Com­mis­sion Pres­i­dent because of that con­ven­tion, the fact that he’s been “opposed the ECB’s asset-buy­ing pro­gram to pro­tect the euro” is a pret­ty big rea­son to oppose giv­ing Wei­d­mann even more pow­er. He’s been con­sis­tent­ly wrong through­out the euro­zone cri­sis and would have made it far worse if he got his way. So while Wei­d­mann will prob­a­bly lose out on becom­ing head of hte ECB because of a tech­ni­cal­i­ty about Ger­many hav­ing two senior posts at once, it’s going to be impor­tant to keep in mind that he real­ly should­n’t have be giv­en that posi­tion based on his per­for­mance as an emer­gency cri­sis man­ag­er through­out the euro­zone cri­sis. Ordolib­er­al dog­ma would have prob­a­bly frag­ment­ed the euro­zone by now.

    For­tu­nate­ly, a lot of peo­ple in Europe do keep this in mind about Wei­d­mann, which is why Merkel now favors get­ting some­one from anoth­er coun­try, like Fin­land, who is going to have Wei­d­mann-like poli­cies but not Wei­d­man­n’s track record of call­ing for bru­tal­ly hawk­ish poli­cies for years just on prin­ci­pal. That’s the style of eco­nom­ics Wei­d­mann rep­re­sent. Bru­tal­ly hawk­ish poli­cies. And it’s going to be some­one else of a sim­i­lar per­sua­sion instead.

    So it’s look­ing like 2019 is going to bring us a Wei­d­mann-like hawk­ish ECB banker who will be will­ing to inflict eco­nom­i­cal­ly destruc­tive poli­cies based on ortho­doxy. And Man­fred Weber will prob­a­bly be EU Com­mis­sion pres­i­dent. That’s what’s in store for the EU’s big lead­er­ship rota­tion in 2019. Whoop­ie.

    It’s worth keep­ing in mind that the ECB is bound to take a more hawk­ish stance and more aggres­sive­ly unwind its stim­u­lus soon­er or lat­er. But with a Wed­i­mann-like ECB chief com­ing up in 2019, that del­i­cate unwind­ing process is guar­an­teed to be extra dan­ger­ous and stu­pid. That’s the cost of hav­ing an ECB chief who is will­ing to impose right-wing cen­tral bank poli­cies and an aus­ter­i­ty agen­da. You could do a lot worse than Mario Draghi and the ECB pol­i­cy is sched­uled to get a lot worse next year. And this right­ward And it sounds like Angela Merkel has decid­ed on that which means it’s prob­a­bly going to hap­pen.

    Also keep in mind that if Wei­d­mann does­n’t become ECB chief in 2019, that means Ger­many will have an even stronger claim on the posi­tion the next time, which hap­pens in 2027. And Wei­d­mann is young enough to be in posi­tion to be that 2027 Ger­man can­di­date. But if it’s not him, it’s like­ly to be anoth­er Ger­man Ordolib­er­al. So we real­ly could be look­ing at 16 years of Wei­d­mann-like ECB lead­er­ship com­ing up in 2019.

    So the good-ish news that Wei­d­mann prob­a­bly won’t get the posi­tion in 2019 is actu­al­ly very bad news. And that makes the news of Merkel’s plans for the EU and ECB pret­ty much bad news all around. Enjoy Mario Draghi’s rel­a­tive will­ing­ness to be a respon­si­ble cen­tral banker. His tenure con­sist­ed of large­ly oppos­ing Jens Wei­d­mann and even­tu­al­ly win­ning at the last minute at the height of cri­sis. It could have been worse but it’s about to get worse in a lit­tle over a year. The twi­light months of rel­a­tive ECB san­i­ty are get­ting frit­tered away as 16 years of Wei­d­mann-like insan­i­ty looms ahead. A major glob­al finan­cial insti­tu­tion is about to get stuck on stu­pid for the next 16 years.

    So at least any finan­cial bets that assumed ill-advised hawk­ish poli­cies from the ECB will be eas­i­er bets to make. That will pre­sum­ably cre­ate some nice mar­ket oppor­tu­ni­ties for finan­cial traders. Inter­est­ing new finan­cial arbi­trage oppor­tu­ni­ties. It’s as close as we get to actu­al good-ish news in this sto­ry.

    Posted by Pterrafractyl | August 25, 2018, 1:05 am
  6. It’s that time again. Time to seri­ous­ly fret about the prospect of Bun­des­bank chief Jens Wei­d­mann becom­ing the next head of the Euro­pean Cen­tral Bank (ECB) lat­er this year at the end of Mario Draghi’s term. That’s one of the con­se­quences of what appears to be the dwin­dling prospects for Ger­many’s push to make Man­fred Weber the head of the Euro­pean Com­mis­sion. Recall how the way the EU sys­tem selects peo­ple for top jobs neces­si­tat­ed that Ger­many basi­cal­ly choose between push­ing for hav­ing a Ger­man as the Euro­pean Com­mis­sion Pres­i­dent or have a Ger­man at the helm of the ECB, but not both. And last year it had appeared that Angela Merkel’s gov­ern­ment set­tled on the push for Weber to become the next Euro­pean Com­mis­sion pres­i­dent and leav­ing the ECB posi­tion for a non-Ger­man.

    Well, the EU par­lia­men­tary elec­tions are just days away and it appears that the prospects for Man­fred Weber becom­ing the next EU Com­mis­sion Pres­i­dent are look­ing a lot less cer­tain, an omi­nous sign giv­en that it sig­nals a last minute far right surge and the prospects of Hun­gary’s Vik­tor Orban play­ing a ‘king-mak­er’ role in decid­ing who fills that role. Giv­en those expect­ed dif­fi­cul­ties for Weber, Angela Merkel is report­ed­ly look­ing for a Plan B for per­son­nel deci­sions and Plan B appears to be return­ing to the dri­ve to make Jens Wei­d­mann the head of the ECB. Wei­d­mann is also engaged in a ‘charm offen­sive’ so he’s on board with the ida.

    Although it’s pos­si­ble the dust­ing off of Plan B is actu­al­ly part of Plan A because, as the fol­low­ing arti­cle also notes, Merkel might sim­ply be bring­ing about these renewed plans for Wei­d­mann as a kind of bar­gain­ing chip in the broad­er nego­ti­a­tions over who gets which posi­tions. It’s a plau­si­ble sce­nario giv­en the extreme resis­tance Wei­d­mann could face from the euro­zone mem­bers who were rav­aged by exact­ly the kind of aus­ter­i­ty-focused Ordolib­er­al eco­nom­ic ide­ol­o­gy cham­pi­oned by Wei­d­mann. The idea of Ger­many push­ing for him to now head the ECB when so many euro­zone economies remain excep­tion­al­ly frag­ile real­ly is a potent threat Merkel can use in these nego­ti­a­tions because giv­ing some­one like Wei­d­mann that kind of pow­er is like an eco­nom­ic death sen­tence for a lot of these euro­zone mem­bers.

    So we’ll see if Wei­d­man­n’s ECB ambi­tions end up com­ing to fruition this year or if he’s just being used as threat in the nego­ti­a­tions over Man­fred Weber’s Euro­pean Com­mis­sion bid. The results of the upcom­ing elec­tions will shape which sce­nario plays out. Let’s hope this is just a threat to gain lever­age because a Wei­d­mann-run ECB is more or less ask­ing for eco­nom­ic dis­as­ter if a cri­sis breaks out. But the fact that the mere threat of a Wei­d­mann-era at the ECB is poten­tial­ly a nego­ti­at­ing bar­gain­ing chip for Merkel in the bat­tle over the next Euro­pean Com­mis­sions pres­i­dent under­scores the fact the very idea of Wei­d­mann head­ing the ECB is not a pop­u­lar idea with a lot of Europe. That’s why it’s lever­age:

    The Finan­cial Times

    Ger­man hawks push Jens Wei­d­mann for ECB pres­i­den­cy job
    Fear that Ger­many could miss out on top EU posts fuels pres­sure on Angela Merkel

    Guy Chaz­an in Berlin, Alex Bark­er in Brus­sels and Claire Jones in Frank­furt

    May 21, 2019 10:00 pm

    Ger­man mon­e­tary hawks are mak­ing a con­cert­ed push for Jens Wei­d­mann to suc­ceed Mario Draghi as pres­i­dent of the Euro­pean Cen­tral Bank, amid fears that Ger­many could miss out on all the top EU jobs up for grabs this year.

    Berlin’s pri­or­i­ty is to ensure a Ger­man becomes pres­i­dent of the Euro­pean Com­mis­sion, and Germany’s chan­cel­lor Angela Merkel has thrown her weight behind Man­fred Weber’s bid for the job. But offi­cials in Berlin know that Mr Weber — a Bavar­i­an MEP with no gov­ern­ment expe­ri­ence, who is the lead can­di­date of the Euro­pean People’s par­ty in this weekend’s Euro­pean elec­tions — faces a strug­gle to secure the post.

    “If it is clear there is a block­ade against [Weber] that you can­not over­come, then the ECB can be an alter­na­tive,” said one senior fig­ure in Ms Merkel’s CDU/CSU bloc. “It makes sense.”

    ...

    Mr Wei­d­mann him­self has launched a charm offen­sive, giv­ing inter­views to south­ern Euro­pean news­pa­pers and mak­ing a speech in Ham­burg last week in which he defend­ed the ECB’s expan­sion­ary mon­e­tary pol­i­cy. With­out it, he said, “eco­nom­ic growth would have been weak­er”.

    Even if his bid is unsuc­cess­ful, it may be used by Ger­many as a bar­gain­ing chip in the nego­ti­a­tions for the whole pack­age of EU jobs that must be decid­ed this year.

    Ms Merkel has opened the door to Ger­many putting for­ward can­di­dates for oth­er top jobs. “I am cam­paign­ing for [Weber] as pres­i­dent of the com­mis­sion,” she told the Süd­deutsche Zeitung last week. “But that does not mean that Ger­many does not have oth­er excel­lent per­son­al­i­ties for oth­er jobs.”

    The dan­ger for Ms Merkel is that, hav­ing missed out on the best oppor­tu­ni­ty to secure a top EU job for a Ger­man in close to a gen­er­a­tion, she emerges from the nego­ti­a­tions emp­ty-hand­ed.

    “There’s a big dan­ger that we’ll be left with noth­ing,” said one CDU/CSU advis­er. “If that hap­pens, it is inevitable that Merkel will get the blame.”

    Mr Weber’s claim to the top EU job derives from the “Spitzenkan­di­dat” sys­tem in which the nom­i­nee of the largest EU par­lia­men­tary group becomes com­mis­sion pres­i­dent.

    But Emmanuel Macron, the French pres­i­dent, is strong­ly opposed to the Spitzenkan­di­dat process and could block Mr Weber’s appoint­ment. With the Euro­pean People’s par­ty also expect­ed to lose votes to rightwing pop­ulist par­ties, Mr Weber might strug­gle to win a major­i­ty in the Euro­pean Par­lia­ment.

    How­ev­er, Mr Wei­d­mann is also no shoo-in as head of the ECB. He has been a harsh crit­ic of Mr Draghi’s ultra-low inter­est rates, €2.6tn bond-buy­ing stim­u­lus pro­gramme and his pledge to do “what­ev­er it takes” to save the euro­zone. As a result, he is wide­ly mis­trust­ed in south­ern Europe and his poten­tial can­di­da­cy is also viewed with scep­ti­cism in Paris.

    Mr Weidmann’s oppo­nents also point out that Ger­mans sit at the helm of oth­er EU finan­cial sec­tor bod­ies, includ­ing the Euro­pean Invest­ment Bank, the Euro­pean Sta­bil­i­ty Mech­a­nism — the res­cue fund for euro­zone sov­er­eigns — and the Sin­gle Res­o­lu­tion Board, the agency in charge of shut­ting down the eurozone’s failed banks.

    How­ev­er, Mr Weidmann’s chances of suc­ceed­ing Mr Draghi have been talked up in the Ger­man media. In a pro­file this month, news mag­a­zine Der Spiegel said his ascent to the sum­mit of the ECB would be a “dream come true” for many Ger­man savers

    “It is their hope that a Ger­man head of the ECB would final­ly end the low inter­est rate pol­i­cy of the cur­rent bank chief, the loose mon­e­tary pol­i­cy which has deval­ued Ger­man sav­ings and life insur­ance,” Der Spiegel said. It also quot­ed experts as sug­gest­ing that Mr Wei­d­mann would suc­ceed in “depoliti­cis­ing” the ECB.

    ———-

    “Ger­man hawks push Jens Wei­d­mann for ECB pres­i­den­cy job” by Guy Chaz­an, Alex Barkerand Claire Jones; The Finan­cial Times; 05/21/2019

    “Berlin’s pri­or­i­ty is to ensure a Ger­man becomes pres­i­dent of the Euro­pean Com­mis­sion, and Germany’s chan­cel­lor Angela Merkel has thrown her weight behind Man­fred Weber’s bid for the job. But offi­cials in Berlin know that Mr Weber — a Bavar­i­an MEP with no gov­ern­ment expe­ri­ence, who is the lead can­di­date of the Euro­pean People’s par­ty in this weekend’s Euro­pean elec­tions — faces a strug­gle to secure the post.

    The worse it looks for Man­fred Weber’s EU Com­mis­sion Pres­i­dent prospects the bet­ter it looks for Jens Wei­d­man­n’s ECB chief prospects. And right now it’s look­ing pret­ty good for Wei­d­mann, which is bad news for the euro­zone and rea­son Wei­d­man­n’s bid may be Berlin’s bar­gain­ing chip over Weber’s nom­i­na­tion:

    ...
    “If it is clear there is a block­ade against [Weber] that you can­not over­come, then the ECB can be an alter­na­tive,” said one senior fig­ure in Ms Merkel’s CDU/CSU bloc. “It makes sense.”

    ...

    Mr Wei­d­mann him­self has launched a charm offen­sive, giv­ing inter­views to south­ern Euro­pean news­pa­pers and mak­ing a speech in Ham­burg last week in which he defend­ed the ECB’s expan­sion­ary mon­e­tary pol­i­cy. With­out it, he said, “eco­nom­ic growth would have been weak­er”.

    Even if his bid is unsuc­cess­ful, it may be used by Ger­many as a bar­gain­ing chip in the nego­ti­a­tions for the whole pack­age of EU jobs that must be decid­ed this year.

    Ms Merkel has opened the door to Ger­many putting for­ward can­di­dates for oth­er top jobs. “I am cam­paign­ing for [Weber] as pres­i­dent of the com­mis­sion,” she told the Süd­deutsche Zeitung last week. “But that does not mean that Ger­many does not have oth­er excel­lent per­son­al­i­ties for oth­er jobs.”
    ...

    And note how one of the dynam­ics at work here is the fact that there’s dis­agree­ment in the EU over whether or not it should adhere to the “Spitzenkan­di­dat” sys­tem for select­ing an EU Com­mis­sion pres­i­dent. That’s the sys­tem where each of the par­ties puts for­ward a can­di­date to be EU Com­mis­sion pres­i­dent before the elec­tions and whichev­er par­ty wins the most MPs has their can­di­date become EU Com­mis­sion pres­i­dent. But the “Spitzenkan­di­dat” sys­tem is more of a for­mal agree­ment, not a hard rule, so it can be changed when­ev­er EU gov­ern­ments decide to change it and right now France’s gov­ern­ment is strong­ly push­ing for chang­ing it and switch­ing to a sys­tem where the EU Com­mis­sion pres­i­dent is deter­mined by a major­i­ty vote instead. And thanks to far right par­ties peel­ing off MPs from Weber’s Euro­pean People’s par­ty (EPP) it could end up being dif­fi­cult for Weber to actu­al­ly get a major­i­ty of the votes:

    ...
    Mr Weber’s claim to the top EU job derives from the “Spitzenkan­di­dat” sys­tem in which the nom­i­nee of the largest EU par­lia­men­tary group becomes com­mis­sion pres­i­dent.

    But Emmanuel Macron, the French pres­i­dent, is strong­ly opposed to the Spitzenkan­di­dat process and could block Mr Weber’s appoint­ment. With the Euro­pean People’s par­ty also expect­ed to lose votes to rightwing pop­ulist par­ties, Mr Weber might strug­gle to win a major­i­ty in the Euro­pean Par­lia­ment.
    ...

    And that’s why it’s sus­pect­ed that Wei­d­man­n’s renewed bid for ECB chief could be part of a attempt by Berlin to gain addi­tion­al lever­age in the ensu­ing bat­tle over who becomes EU Com­mis­sion pres­i­dent. The same mem­ber states that oppose Weber also oppose Wei­d­mann, espe­cial­ly France:

    ...
    >How­ev­er, Mr Wei­d­mann is also no shoo-in as head of the ECB. He has been a harsh crit­ic of Mr Draghi’s ultra-low inter­est rates, €2.6tn bond-buy­ing stim­u­lus pro­gramme and his pledge to do “what­ev­er it takes” to save the euro­zone. As a result, he is wide­ly mis­trust­ed in south­ern Europe and his poten­tial can­di­da­cy is also viewed with scep­ti­cism in Paris.

    ...

    How­ev­er, Mr Weidmann’s chances of suc­ceed­ing Mr Draghi have been talked up in the Ger­man media. In a pro­file this month, news mag­a­zine Der Spiegel said his ascent to the sum­mit of the ECB would be a “dream come true” for many Ger­man savers

    “It is their hope that a Ger­man head of the ECB would final­ly end the low inter­est rate pol­i­cy of the cur­rent bank chief, the loose mon­e­tary pol­i­cy which has deval­ued Ger­man sav­ings and life insur­ance,” Der Spiegel said. It also quot­ed experts as sug­gest­ing that Mr Wei­d­mann would suc­ceed in “depoliti­cis­ing” the ECB.
    ...

    “It is their hope that a Ger­man head of the ECB would final­ly end the low inter­est rate pol­i­cy of the cur­rent bank chief, the loose mon­e­tary pol­i­cy which has deval­ued Ger­man sav­ings and life insur­ance,” Der Spiegel said. And their hopes aren’t unfound­ed giv­en Wei­d­man­n’s track record. Which is, again, why even threat­en­ing to push for Wei­d­mann at the ECB is such potent lever­age for Berlin in the upcom­ing post-elec­tion nego­ti­a­tions.

    So while we still have to see how the EU par­lia­men­tary elec­tions turn out it sounds like the poten­tial for a real fight over Weber as EU Com­mis­sion pres­i­dent is almost guar­an­teed unless the EPP some­how man­ages to get a major­i­ty of the seats and that does­n’t look like­ly.

    Plus, as the fol­low­ing arti­cle notes, Weber’s prospects took a new sud­den hit in recent day: it turns out the scan­dal that just col­lapsed the Aus­tri­an gov­ern­ment hit Weber’s EU Com­mis­sion ambi­tions too. This is the scan­dal caused by a 2017 video that was just show­ing the leader of far right Free­dom Par­ty, Heinz-Chris­t­ian Stra­che, propos­ing to offer gov­ern­ment con­tracts to a woman he thought was a Russ­ian oli­garch’s niece as part of a quid pro quo. It turns out this woman was­n’t actu­al­ly a Russ­ian oli­garch’s niece and the entire thing appeared to be some sort of sting arranged by a still unknown par­ty. But the video was enough to trig­ger the res­ig­na­tion of all of the Free­dom Par­ty mem­bers in the Aus­tri­an gov­ern­ment, lead­ing to a col­lapse of the cur­rent gov­ern­ment and new elec­tions.

    So how did this scan­dal impact Weber? Well, since it was already a high­ly con­tro­ver­sial deci­sion for Aus­tri­a’s cen­ter-right par­ty to agree to go into a coali­tion with the far right Free­dom Par­ty in the first place, the fact that this coali­tion has already implod­ed due to the cor­rup­tion of the far right has done seri­ous polit­i­cal dam­age Aus­tri­an Chan­cel­lor Sebas­t­ian Kurz. And as the fol­low­ing arti­cle describes, Kurz was seen as a ris­ing star in the EPP and Weber has­n’t missed a chance to cam­paign along­side him. And that’s just the lat­est fac­tor that has even Weber’s back­ers feel­ing like the tide might be turn­ing against him:

    Politico.eu

    Man­fred Weber’s Wurst night­mare
    Cam­paign finale caps rough week for EU pres­i­den­tial can­di­date.

    By Matthew Kar­nitschnig

    5/24/19, 10:01 PM CET
    Updat­ed 5/25/19, 12:12 AM CET

    MUNICH — The beer flowed, the pret­zels were crisp and there was no short­age of Wurst.

    Only one thing was miss­ing at Man­fred Weber’s grand finale in Munich on Fri­day — what the Bavar­i­ans call Stim­mung, gen­uine excite­ment. It was, like Weber him­self, nice enough.

    The final hours of Weber’s cam­paign as Spitzenkan­di­dat of the Euro­pean Peo­ple’s Par­ty (EPP) were sup­posed to be the moment when he sealed the deal. Instead, the EPP nom­i­nee to be the next pres­i­dent of the Euro­pean Com­mis­sion found him­self fight­ing a rear­guard action.

    It start­ed last week as the video scan­dal in Aus­tria enveloped Weber BFF Sebas­t­ian Kurz’s gov­ern­ment. Things got worse mid-week when Emmanuel Macron hint­ed he might sup­port Michel Barnier to become the Commission’s next pres­i­dent.

    “Barnier is a man who has great qual­i­ties,” the French pres­i­dent told Belgium’s Le Soir. Just for good mea­sure, Macron made clear any seri­ous can­di­date for the top EU job should have “expe­ri­ence at the high­est gov­ern­men­tal lev­el or Euro­pean Com­mis­sion lev­el” — a descrip­tion that would rule out Weber, a vet­er­an mem­ber of the Euro­pean Par­lia­ment.

    That bomb­shell was fol­lowed by new data show­ing Weber’s cen­ter right in Ger­many had slipped to 28 per­cent in a bench­mark pub­lic tele­vi­sion poll — still com­fort­ably in first place but down 2 per­cent­age points in just a week.

    Weber’s week only got worse just hours before his final ral­ly when a YouTube upris­ing against his cam­paign, which began to build ear­li­er in the week, explod­ed. Dozens of pop­u­lar Ger­man-speak­ing per­son­al­i­ties on the plat­form encour­aged their fol­low­ers not to vote for Weber’s Chris­t­ian Demo­c­ra­t­ic alliance (or the Social Democ­rats or the far-right Alter­na­tive for Ger­many).

    So instead of a cel­e­bra­tion, Friday’s ral­ly-to-end-all-Weber-ral­lies land­ed with a thud. While the par­ty faith­ful clapped and cheered on a parade of EPP dig­ni­taries in a vast audi­to­ri­um on Munich’s trade fair­grounds, Weber func­tionar­ies out­side the hall offered a sober real­i­ty check.

    “It’s not look­ing good,” said one junior Weber-helper who was draped in a foot­ball-style scarf embla­zoned with Weber’s vis­age and the slo­gan “to the top of Europe.”

    The col­lapse of Kurz’s gov­ern­ment last week over an incrim­i­nat­ing video that showed the leader of his far-right coali­tion part­ner par­ty schem­ing to trade pub­lic con­tracts for polit­i­cal favors with a woman he believed to be the niece of a Russ­ian oli­garch has rever­ber­at­ed through the entire EPP. Until the scan­dal hit, Kurz was regard­ed as a ris­ing star in the par­ty alliance and Weber didn’t miss an oppor­tu­ni­ty to cam­paign along­side him.

    Though Kurz him­self wasn’t impli­cat­ed in the scan­dal, his deci­sion to risk a coali­tion with the far-right Free­dom Par­ty now looks to many in the EPP like a big mis­take. He was sup­posed to speak in Munich but sent a video instead.

    “As you no doubt have heard, as a result of the rev­e­la­tions of the past week it’s nec­es­sary for me to remain here in Aus­tria,” Kurz told his par­ty allies in the video.

    No one was com­plain­ing.

    Instead of Kurz, the orga­niz­ers arranged for a sur­prise guest — Poland’s for­mer Pres­i­dent Lech Wale­sa, leader of the country’s Sol­i­dar­i­ty move­ment in the 1980s, who warned of the dan­gers posed by Europe’s pop­ulists.

    “We don’t want them to destroy our Euro­pean house,” he told the crowd.

    As was the case through­out the cam­paign, that was the theme of the night. In addi­tion to Wale­sa, Bul­gar­i­an Prime Min­is­ter Boyko Borisov and Croa­t­ian pre­mier Andrej Plenkovic offered endorse­ments for Weber.

    But the high­light came toward the end, with Angela Merkel. It was the chancellor’s only cam­paign appear­ance in Ger­many and the EPP tried to make the most of it. She was intro­duced by troupe of acro­bats who twist­ed them­selves into var­i­ous shapes includ­ing Merkel’s trade­mark rhom­bus hand ges­ture.

    Merkel kept things short and sweet with a 12-minute speech, in which she offered a famil­iar pot­pour­ri of Euro­pean patri­o­tism laced with dire warn­ings over the state of the world.

    “A lot is at stake,” she told the crowd.

    Describ­ing Weber as a “bridge-builder,” Merkel said the strong sup­port he enjoys with­in the EPP shows that he “was the right man for our times.”

    ...

    After the crowd had left, Weber took a seat in the mid­dle of the hall to chat alone with EPP Pres­i­dent Joseph Daul, appear­ing relieved that it was final­ly over.

    ———-

    “Man­fred Weber’s Wurst night­mare” by Matthew Kar­nitschnig; Politico.eu; 5/24/2019

    “The final hours of Weber’s cam­paign as Spitzenkan­di­dat of the Euro­pean Peo­ple’s Par­ty (EPP) were sup­posed to be the moment when he sealed the deal. Instead, the EPP nom­i­nee to be the next pres­i­dent of the Euro­pean Com­mis­sion found him­self fight­ing a rear­guard action.”

    Being on the defen­sive days before an elec­tion is nev­er great sit­u­a­tion for a politi­cian. And in Weber’s case it was defense on mul­ti­ple fronts: Emmanuel Macron is indi­cat­ing that he wants the EU to use a major­i­ty vote to choose the next EU Com­mis­sion pres­i­dent and drop the cur­rent Spitzenkan­di­dat sys­tem that would auto­mat­i­cal­ly give the EPP the EU Com­mis­sion pres­i­den­cy as long as it win a plu­ral­i­ty. Then dozens of Ger­man YouTube stars waged a video cam­paign accus­ing Weber’s CDU (and the SPD and AfD) of ignor­ing cli­mate change and eco­nom­ic inequal­i­ty (so it was effec­tive­ly a pro-Green Par­ty cam­paign). And that’s on top of Aus­tri­a’s Chan­cel­lor and ris­ing star in Weber’s EPP, Sebas­t­ian Kurz, watch­ing his polit­i­cal for­tunes evap­o­rate in the wake of the Free­dom Par­ty’s cor­rup­tion video scan­dal. It was an excep­tion­al­ly bad week for Weber and the fact that this was the last week of the cam­paign only made it worse:

    ...
    It start­ed last week as the video scan­dal in Aus­tria enveloped Weber BFF Sebas­t­ian Kurz’s gov­ern­ment. Things got worse mid-week when Emmanuel Macron hint­ed he might sup­port Michel Barnier to become the Commission’s next pres­i­dent.

    “Barnier is a man who has great qual­i­ties,” the French pres­i­dent told Belgium’s Le Soir. Just for good mea­sure, Macron made clear any seri­ous can­di­date for the top EU job should have “expe­ri­ence at the high­est gov­ern­men­tal lev­el or Euro­pean Com­mis­sion lev­el” — a descrip­tion that would rule out Weber, a vet­er­an mem­ber of the Euro­pean Par­lia­ment.

    ...

    Weber’s week only got worse just hours before his final ral­ly when a YouTube upris­ing against his cam­paign, which began to build ear­li­er in the week, explod­ed. Dozens of pop­u­lar Ger­man-speak­ing per­son­al­i­ties on the plat­form encour­aged their fol­low­ers not to vote for Weber’s Chris­t­ian Demo­c­ra­t­ic alliance (or the Social Democ­rats or the far-right Alter­na­tive for Ger­many).

    ...

    “It’s not look­ing good,” said one junior Weber-helper who was draped in a foot­ball-style scarf embla­zoned with Weber’s vis­age and the slo­gan “to the top of Europe.”

    The col­lapse of Kurz’s gov­ern­ment last week over an incrim­i­nat­ing video that showed the leader of his far-right coali­tion part­ner par­ty schem­ing to trade pub­lic con­tracts for polit­i­cal favors with a woman he believed to be the niece of a Russ­ian oli­garch has rever­ber­at­ed through the entire EPP. Until the scan­dal hit, Kurz was regard­ed as a ris­ing star in the par­ty alliance and Weber didn’t miss an oppor­tu­ni­ty to cam­paign along­side him.
    ...

    ““It’s not look­ing good,” said one junior Weber-helper who was draped in a foot­ball-style scarf embla­zoned with Weber’s vis­age and the slo­gan “to the top of Europe.””

    The pes­simistic junior Weber-helper is right. It is indeed not look­ing good for Weber. Still, it could be worse. He remains the front-run­ner for the posi­tion and Berlin has a track record of win­ning these kinds of fights. And then there’s the ‘Wei­d­mann threat’ back­ing him. That’s part of what’s going to be fas­ci­nat­ing to watch play out in the com­ing days as the results of the EU elec­tions trans­late into polit­i­cal pow­er plays. A lot is at stake which makes this exact­ly the kind of time when we should expect all sorts ques­tion­able nego­ti­at­ing tac­tics. Ques­tion­able tac­tics like threat­en­ing the nom­i­na­tion of Jens Wei­d­mann to head the ECB.

    It all under­scores one of the grim con­se­quences of the dis­as­trous and bru­tal aus­ter­i­ty poli­cies of the last decade suc­cess­ful­ly demand­ed by Berlin: That track record of aus­ter­i­ty pol­i­cy dis­as­ter, which was cheer­lead­ed by Wei­d­mann every step of the way, has con­ferred onto Berlin a potent polit­i­cal pow­er dur­ing these kinds of nego­ti­a­tions in the form of a cred­i­ble threat of lead­ing Europe down that dis­as­trous path again.

    Posted by Pterrafractyl | May 25, 2019, 11:31 pm
  7. It’s quite a part­ing gift: In what appears to be the last major deci­sion of Mar­dio Draghi’s tenure at the ECB, a new round of mon­e­tary stim­u­lus was announced this week by the ECB. It was more than what the mar­kets were expect­ing. Sig­nif­i­cant­ly, the new bond pur­chas­es are open end­ed in terms of dura­tion. So when Chris­tine Lagarde takes over lat­er this year she’s going to be inher­it­ing an exist­ing stim­u­lus pol­i­cy frame­work with­out a set end date. Giv­en the end­less bat­tles with­in the ECB over the last decade over whether or not to engage in mon­e­tary stim­u­lus at all, there has been enor­mous uncer­tain­ty over what to expect from the ECB once Draghi is no longer the ECB’s chief. the fact that Lagarde is going to start off with stim­u­lus mea­sure with­out a set end date is the kind of sce­nario that should sig­nif­i­cant­ly address that uncer­tain­ty.

    Still, as the fol­low­ing arti­cle notes, this new stim­u­lus was­n’t unan­i­mous­ly backed by the euro­zone mem­ber states. Notably, France joined Ger­many and the oth­er anti-stim­u­lus ECB mem­bers in oppos­ing these new mea­sures. It’s a real­ly big deal in terms of the inter­nal pol­i­tics of the ECB board giv­en that France has usu­al­ly been the largest euro­zone econ­o­my that favored the stim­u­lus mea­sures. So while Lagarde is going to be inher­it­ing an unprece­dent­ed open-end­ed stim­u­lus pol­i­cy frame­work, she’s also inher­it­ing excep­tion­al­ly weak insti­tu­tion­al sup­port for those open-end­ed poli­cies. Still, you have to give Draghi cred­it for at least try­ing to end his term on a pos­i­tive note. Inter­est­ing­ly, when Draghi announced these new mea­sures, he not­ed one area where there was area of pol­i­cy where there was una­nim­i­ty with­in the ECB board, but it was unfor­tu­nate­ly pol­i­cy the ECB can only call for and has no con­trol over: the need for fis­cal stim­u­lus from euro­zone gov­ern­ments because mon­e­tary stim­u­lus is not enough on its own:

    Reuters

    Draghi ties Lagarde’s hands with promise of indef­i­nite stim­u­lus

    Bal­azs Koranyi, Francesco Canepa
    Sep­tem­ber 11, 2019 / 5:05 PM

    FRANKFURT (Reuters) — Euro­pean Cen­tral Bank chief Mario Draghi pledged indef­i­nite stim­u­lus on Thurs­day to revive an ail­ing euro zone econ­o­my, tying the hands of his suc­ces­sor for years to come and spark­ing an imme­di­ate con­flict with U.S. Pres­i­dent Don­ald Trump.

    As Draghi’s eight-year man­date nears its close, the ECB cut rates deep­er into neg­a­tive ter­ri­to­ry and promised bond pur­chas­es with no end-date to push bor­row­ing costs even low­er, hop­ing to kick-start activ­i­ty near­ly a decade after the bloc’s debt cri­sis.

    The big­ger-than-expect­ed stim­u­lus will increase pres­sure on the U.S. Fed­er­al Reserve and Bank of Japan to ease pol­i­cy next week to sup­port a world econ­o­my increas­ing­ly char­ac­ter­ized by low growth and pro­tec­tion­ist threats to free trade.

    “You remem­ber me say­ing that all instru­ments were on the table, ready to be used. Well, today we did it,” Draghi told a news con­fer­ence.

    Yet there were doubts, even with­in the ECB itself, as to whether the lat­est mea­sures — most of the few remain­ing tools in its mon­e­tary pol­i­cy arse­nal — would be enough to stoke a euro zone recov­ery in the face of a U.S.-China trade war and pos­si­ble dis­rup­tion from Brex­it.

    Draghi faced faced push­back from the rep­re­sen­ta­tives of Ger­many and France as well as at least one of his own board mem­bers when he pushed for resum­ing the ECB’s bond-buy­ing pro­gram, three sources told Reuters.

    Thursday’s moves also infu­ri­at­ed Trump, who just this week called on the U.S. Fed to adopt a neg­a­tive-rate pol­i­cy.

    ...

    LAGARDE CONSTRAINED

    A 10 basis point cut in the ECB’s deposit rate to ‑0.5% was ful­ly expect­ed but the revived bond pur­chas­es exceed­ed many expec­ta­tions because they are set to run until “short­ly before” the ECB rais­es inter­est rates.

    Giv­en that mar­kets do not expect rates to rise for near­ly a decade, such a for­mu­la­tion sug­gests that pur­chas­es could go on for years, pos­si­bly through most of Chris­tine Lagarde’s term lead­ing the bank.

    “Today’s deci­sions have anchored and enshrined the Draghi lega­cy in future ECB deci­sions,” ING econ­o­mist Carsten Brzes­ki said.

    “What­ev­er it takes has just been extend­ed by as long as it takes,” Brzes­ki said, refer­ring to the 2012 speech in which Draghi promised to do “what­ev­er it takes” to save the euro, a bold move cred­it­ed with hold­ing the cri­sis-hit bloc togeth­er.

    While con­ser­v­a­tive ECB pol­i­cy­mak­ers had spo­ken out against more bond pur­chas­es in recent weeks, the deci­sion sug­gests some of them even­tu­al­ly agreed, giv­ing Draghi a major­i­ty for what is prob­a­bly his last major pol­i­cy move.

    Under­lin­ing the need for action, the ECB cut its growth pro­jec­tions for this year and next, pre­dict­ing growth at just above 1%, below what is con­sid­ered its nat­ur­al poten­tial.

    The ECB’s deci­sion trig­gered a ral­ly in euro zone bonds that will cut the cost of bor­row­ing across the 19 coun­tries that use the euro. The sin­gle cur­ren­cy itself firmed a touch after wild price swings dur­ing Draghi’s news con­fer­ence.

    EFFECTIVE?

    A sim­ple rate cut would have increased the cost to com­mer­cial banks of park­ing their more than 1 tril­lion euros worth of excess reserves safe­ly at the ECB, a dan­ger­ous move since banks trans­mit the bulk of its pol­i­cy to the real econ­o­my.

    To off­set that bur­den, the ECB promised even cheap­er long-term fund­ing and said it would intro­duce a mul­ti-tier deposit rate to shield them from some of the charge. That could leave lenders about 2 bil­lions of euros a year bet­ter off than pre­vi­ous­ly, accord­ing to some esti­mates.

    Yet the size and design of the scheme under­whelmed bankers whose own loans are being offered at rock-bot­tom rates.

    “Even if the tiered inter­est rate intro­duced today pro­vides some relief, Euro­pean banks will con­tin­ue to have to pay bil­lions to the ECB every year as some sort of penal­ty charge tax,” Hans-Wal­ter Peters, pres­i­dent of the Ger­man bank­ing asso­ci­a­tion, said.

    Euro zone stocks were lit­tle changed on Thurs­day, how­ev­er, high­light­ing investors’ doubts about the effec­tive­ness of ECB pol­i­cy, which can only prop up domes­tic con­fi­dence, not deliv­er a U.S.-China trade deal or seal a Brex­it agree­ment.

    Indeed, Draghi stepped up his rhetoric in call­ing for gov­ern­ments to spend their way out of a slow­down, sin­gling out Ger­many, which is obsessed with run­ning a bal­anced bud­get.

    “Now it is high time for the fis­cal pol­i­cy to take charge,” Draghi said. “There was una­nim­i­ty, name­ly that fis­cal pol­i­cy should become the main instru­ment.”

    Draghi has called for years for gov­ern­ments to do more to stim­u­late growth.

    With the ECB’s bal­ance sheet already bloat­ed and rates at record lows, ana­lysts also ques­tioned the effec­tive­ness of more stim­u­lus and sug­gest­ed it could even work against the ECB.

    “The key risk is that rate cuts could even back­fire. Deeply neg­a­tive inter­est rates could push up sav­ing rates — see the surge in Ger­man sav­ings, for instance,” Shwe­ta Singh, a man­ag­ing direc­tor at TS Lom­bard, said.

    “Cru­cial­ly, there may be much less scope this time for the euro to edge low­er and thus boost infla­tion expec­ta­tions.”

    ———-

    “Draghi ties Lagarde’s hands with promise of indef­i­nite stim­u­lus” by Bal­azs Koranyi, Francesco Canepa; Reuters; 09/11/2019

    “Draghi faced faced push­back from the rep­re­sen­ta­tives of Ger­many and France as well as at least one of his own board mem­bers when he pushed for resum­ing the ECB’s bond-buy­ing pro­gram, three sources told Reuters.”

    It was such a his­toric deci­sion that even the back­lash was his­toric. France joined the anti-stim­u­lus crowd. It’s also worth not­ing one of way this could back­fire on the euro­zone econ­o­my if the anti-stim­u­lus crowd wins out in future stim­u­lus deci­sions: while the new bond pur­chas­es don’t have a pre­cise expi­ra­tion date, they are set to expire “short­ly before” the ECB rais­es rates. So the oppo­si­tion to these QE bond pur­chas­es could be chan­neled into dri­ves for rais­ing rates pre­ma­ture­ly:

    ...
    A 10 basis point cut in the ECB’s deposit rate to ‑0.5% was ful­ly expect­ed but the revived bond pur­chas­es exceed­ed many expec­ta­tions because they are set to run until “short­ly before” the ECB rais­es inter­est rates.

    Giv­en that mar­kets do not expect rates to rise for near­ly a decade, such a for­mu­la­tion sug­gests that pur­chas­es could go on for years, pos­si­bly through most of Chris­tine Lagarde’s term lead­ing the bank.

    “Today’s deci­sions have anchored and enshrined the Draghi lega­cy in future ECB deci­sions,” ING econ­o­mist Carsten Brzes­ki said.
    ...

    But at least it sounds like there was una­nim­i­ty at the ECB on one key pol­i­cy area: the need for fis­cal pol­i­cy because mon­e­tary pol­i­cy can’t stim­u­late the euro­zone econ­o­my on its own:

    ...
    Euro zone stocks were lit­tle changed on Thurs­day, how­ev­er, high­light­ing investors’ doubts about the effec­tive­ness of ECB pol­i­cy, which can only prop up domes­tic con­fi­dence, not deliv­er a U.S.-China trade deal or seal a Brex­it agree­ment.

    Indeed, Draghi stepped up his rhetoric in call­ing for gov­ern­ments to spend their way out of a slow­down, sin­gling out Ger­many, which is obsessed with run­ning a bal­anced bud­get.

    “Now it is high time for the fis­cal pol­i­cy to take charge,” Draghi said. “There was una­nim­i­ty, name­ly that fis­cal pol­i­cy should become the main instru­ment.”

    Draghi has called for years for gov­ern­ments to do more to stim­u­late growth.
    ...

    It just hap­pens to unfor­tu­nate­ly be una­nim­i­ty in an area of pol­i­cy they have no con­trol over. Euro­zone mem­ber state gov­ern­ments will be the ones to decide whether or not there’s a fis­cal stim­u­lus. And thanks to the EU bud­get rules, mem­bers states aren’t allowed to run the spend­ing deficits need­ed for a mean­ing­ful fis­cal stim­u­lus unless their debt-to-GDP ratios are below 60% (a total­ly arbi­trary cut­off). So almost no euro­zone mem­ber states are allowed to engage in fis­cal stim­u­lus with Ger­many being the big excep­tion. But the only rea­son Ger­many is in a posi­tion to do so is because it’s been run­ning bud­get sur­plus­es for years, despite the depres­sion-lev­el eco­nom­ic con­di­tions of its euro­zone neigh­bors, and is only now about to get its debt-to-GDP below 60%. It’s been a grim exam­ple of bud­get sur­plus­es can iron­i­cal­ly be gross­ly irre­spon­si­ble bud­get sur­plus under the wrong cir­cum­stances. But Ger­many has run those gross­ly irre­spon­si­ble sur­plus­es nonethe­less and as a result it no longer has the 60% rule as an excuse for not run­ning a fis­cal stim­u­lus. So will Ger­many recon­sid­er that stance now that Draghi announced that the ECB unan­i­mous­ly endors­es more fis­cal stim­u­lus? Well, if Angela Merkel’s com­ments two days ear­li­er are any indi­ca­tion, no Berlin has not changed its mind and con­tin­ues to hold to the posi­tion expressed back in August that it’s ready and will­ing to engage in fis­cal stim­u­lus policies...but only if the econ­o­my gets much worse. In oth­er words, there will be no mean­ing­ful fis­cal stim­u­lus from Ger­many until its already too late to avoid eco­nom­ic dis­as­ter. That’s what Merkel just dou­bled down on:

    Reuters

    Ger­many stick­ing to bal­anced bud­get goal, Merkel says

    Paul Car­rel
    Sep­tem­ber 10, 2019 / 12:57 PM

    BERLIN (Reuters) — Ger­man Chan­cel­lor Angela Merkel said on Tues­day her gov­ern­ment was stick­ing to its bal­anced bud­get pol­i­cy, tem­per­ing expec­ta­tions for fis­cal stim­u­lus in Europe’s largest econ­o­my.

    “As a fed­er­al gov­ern­ment, we take seri­ous­ly the respon­si­bil­i­ty for a sol­id bud­get pol­i­cy,” Merkel told an event orga­nized by the Ger­man tax­pay­ers’ fed­er­a­tion. “And I can assure you that we are stick­ing to the goal of a bal­anced bud­get.”

    Ear­li­er, Finance Min­is­ter Olaf Scholz said Ger­many was ready to pump “many, many bil­lions of euros” into its econ­o­my to counter any sig­nif­i­cant slow­down in growth and the coun­try must take bold mea­sures to fight cli­mate change before it’s too late.

    Germany’s 30-year gov­ern­ment bond yield rose into pos­i­tive ter­ri­to­ry on Tues­day for the first time in over a month, lift­ed by expec­ta­tions for fis­cal stim­u­lus and uncer­tain­ty over whether the ECB will launch asset pur­chas­es this week.

    But Merkel stressed the impor­tance of tak­ing a tight fis­cal approach giv­en Germany’s age­ing pop­u­la­tion.

    “I always say in inter­na­tion­al talks that, giv­en our demo­graph­ic sit­u­a­tion, this (debt) issue is much more vir­u­lent and impor­tant for us than per­haps in oth­er coun­tries with dif­fer­ent demo­graph­ic devel­op­ments,” she said.

    Scholz is a mem­ber of the Social Democ­rats (SPD), junior part­ners in the rul­ing coali­tion led by Merkel, a con­ser­v­a­tive.

    He said Ger­many was in a posi­tion to do more if an eco­nom­ic cri­sis hits thanks to its sol­id bud­get plan­ning and rigid pol­i­cy of not tak­ing on new debt.

    Merkel’s com­ments sug­gest her con­ser­v­a­tives could resist any moves by the SPD-led Finance Min­istry that they believe go too far in loos­en­ing the purse strings to fight any down­ward eco­nom­ic spi­ral.

    The con­ser­v­a­tives regard the government’s so-called “black zero” bal­anced bud­get pol­i­cy as indis­pens­able, the leader of Merkel’s Chris­t­ian Democ­rats (CDU) said late last month.

    Reuters report­ed on Mon­day that Berlin may set up inde­pen­dent pub­lic bod­ies to take on new debt and boost invest­ment in key parts of the econ­o­my, with­out falling foul of strict nation­al spend­ing rules.

    Germany’s econ­o­my con­tract­ed 0.1% in the sec­ond quar­ter and weak data since has fueled con­cerns that Europe’s biggest econ­o­my could shrink again between July and Sep­tem­ber and tip the coun­try into reces­sion for the first time since 2013.

    ...

    ———–

    “Ger­many stick­ing to bal­anced bud­get goal, Merkel says” by Paul Car­rel; Reuters; 09/10/2019

    ““As a fed­er­al gov­ern­ment, we take seri­ous­ly the respon­si­bil­i­ty for a sol­id bud­get pol­i­cy,” Merkel told an event orga­nized by the Ger­man tax­pay­ers’ fed­er­a­tion. “And I can assure you that we are stick­ing to the goal of a bal­anced bud­get.”

    The Ger­man econ­o­my may be dra­mat­i­cal­ly slow­ing with euro­zone con­tin­u­ing to teeter towards reces­sion, but noth­ing has changed regard­ing Berlin’s obses­sion with run­ning sur­plus­es. That was the answer Merkel pre­emp­tive­ly gave two days before the ECB’s calls for fis­cal stim­u­lus. And note how Merkel rou­tine­ly cites Ger­many’s demo­graph­ics and aging pop­u­la­tion as a rea­son for these mas­sive sur­plus­es. It’s the pro­mo­tion of an eco­nom­ic mod­el that’s pred­i­cat­ed on the idea that the only way a coun­try with an aging pop­u­la­tion can pay for itself is through very low nation­al debt lev­els achieved through bud­get sur­plus­es which are only fea­si­ble for a coun­try run­ning con­sis­tent large trade sur­plus­es like Ger­many. It’s an eco­nom­ic mod­el that math­e­mat­i­cal­ly can’t work for most of the world simul­ta­ne­ous­ly. That’s the kind of eco­nom­ic par­a­digm being cham­pi­oned here and all indi­ca­tions are Berlin’s con­ser­v­a­tives are ful­ly com­mit­ted to this for the long-run:

    ...
    Ear­li­er, Finance Min­is­ter Olaf Scholz said Ger­many was ready to pump “many, many bil­lions of euros” into its econ­o­my to counter any sig­nif­i­cant slow­down in growth and the coun­try must take bold mea­sures to fight cli­mate change before it’s too late.

    Germany’s 30-year gov­ern­ment bond yield rose into pos­i­tive ter­ri­to­ry on Tues­day for the first time in over a month, lift­ed by expec­ta­tions for fis­cal stim­u­lus and uncer­tain­ty over whether the ECB will launch asset pur­chas­es this week.

    But Merkel stressed the impor­tance of tak­ing a tight fis­cal approach giv­en Germany’s age­ing pop­u­la­tion.

    “I always say in inter­na­tion­al talks that, giv­en our demo­graph­ic sit­u­a­tion, this (debt) issue is much more vir­u­lent and impor­tant for us than per­haps in oth­er coun­tries with dif­fer­ent demo­graph­ic devel­op­ments,” she said.

    Scholz is a mem­ber of the Social Democ­rats (SPD), junior part­ners in the rul­ing coali­tion led by Merkel, a con­ser­v­a­tive.

    He said Ger­many was in a posi­tion to do more if an eco­nom­ic cri­sis hits thanks to its sol­id bud­get plan­ning and rigid pol­i­cy of not tak­ing on new debt.

    Merkel’s com­ments sug­gest her con­ser­v­a­tives could resist any moves by the SPD-led Finance Min­istry that they believe go too far in loos­en­ing the purse strings to fight any down­ward eco­nom­ic spi­ral.

    The con­ser­v­a­tives regard the government’s so-called “black zero” bal­anced bud­get pol­i­cy as indis­pens­able, the leader of Merkel’s Chris­t­ian Democ­rats (CDU) said late last month.

    ...

    Germany’s econ­o­my con­tract­ed 0.1% in the sec­ond quar­ter and weak data since has fueled con­cerns that Europe’s biggest econ­o­my could shrink again between July and Sep­tem­ber and tip the coun­try into reces­sion for the first time since 2013.
    ...

    It all sounds rather bleak. Or at least almost all of it. There is this one inter­est­ing pro­pos­al being float­ed around in Berlin: cre­at­ing new inde­pen­dent pub­lic agen­cies that, due to their inde­pen­dence, can take on debt in ways that don’t count against the nation­al spend­ing rules that strict­ly lim­it Ger­many’s fis­cal pol­i­cy:

    ...
    Reuters report­ed on Mon­day that Berlin may set up inde­pen­dent pub­lic bod­ies to take on new debt and boost invest­ment in key parts of the econ­o­my, with­out falling foul of strict nation­al spend­ing rules.
    ...

    Could that work? If Berlin was giv­en a path to fis­cal stim­u­lus that allowed it to still tech­ni­cal­ly stick to its bud­get rules would Ger­many’s politi­cians accept that? We’ll see, but it sounds like it’s under seri­ous­ly con­sid­er­a­tion. The idea is to cre­ate a “shad­ow bud­get”, where the debt tak­en on by these new inde­pen­dent agen­cies would­n’t be count­ed as fed­er­al spend­ing under Ger­many’s debt rules. The spend­ing would still be count­ed under the EU’s Sta­bil­i­ty and Growth Pact debt rules, but because those rules are less strict than Ger­many’s own rules that would free up space for more fis­cal stim­u­lus.

    Keep in mind that the EU’s Sta­bil­i­ty and Growth pact is actu­al­ly a hor­ri­bly con­strain­ing rule that has been used to jus­ti­fy the kind of destruc­tive aus­ter­i­ty we’ve seen over the last decade. If a coun­try’s spend­ing deficit exceeds 3% of GDP the coun­try is legal­ly oblig­at­ed to cut spend­ing. It’s one of the many hor­ri­ble bud­get rules that plagues the future of the EU. And yet it’s less strict than Ger­many’s bud­get rules. Under the EU’s fis­cal rules laid out by the EU Sta­bil­i­ty and Growth Pact, mem­ber states can run a deficit of up to 1% of GDP as long as their debt-to-GDP ratio is sig­nif­i­cant­ly below 60%, a thresh­old Ger­many is only now cross­ing after years of irre­spon­si­ble bud­get sur­plus­es. But Ger­many’s con­sti­tu­tion only allows for a fed­er­al bud­get deficit of up to 0.35% of GDP. So by using this “shad­ow bud­get” trick­ery, Ger­many might be able to run a deficit up to 1% instead of 0.35%. That’s the extent of the poten­tial stim­u­lus we appear to be look­ing at. Cur­rent­ly, under the Ger­man con­sti­tu­tion’s 0.35% cap, only about 12 bil­lion euros would be avail­able for stim­u­lus spend­ing but due to slow­ing growth rates and oth­er fac­tors that would be reduced to 5 bil­lion euros. Under the EU Sta­bil­i­ty and Growth Pact 1% cap, it would be about 35 bil­lion. That’s the most that could be spent by these inde­pen­dent agen­cies if this scheme gets under­way.

    We’re also told by Econ­o­my Min­is­ter Peter Alt­maier that the gov­ern­ment is con­sid­er­ing pri­va­tiz­ing the stim­u­lus instead to get around the rules. The gov­ern­ment would cre­ate a non-prof­it and inject it with 5 bil­lion euros for spend­ing on address­ing cli­mate change, with a max­i­mum invest­ment of 50 bil­lion euros. This is how dif­fi­cult it legal­ly is for Ger­many to to run fis­cal stim­u­lus pro­grams thanks to its con­sti­tu­tion­al spend­ing con­straints. Pri­va­ti­za­tion gim­micks are poten­tial required. The biggest econ­o­my in Europe oper­ates under these lunatic rules. It’s actu­al­ly a huge prob­lem.

    That’s how messed up the sit­u­a­tion is: At a time when inter­est rates are neg­a­tive, Ger­many is con­sid­er­ing a bud­get gim­mick that will free it up from its own extra-idi­ot­i­cal­ly strict bud­get rules so it can instead oper­ate by the less-idi­ot­i­cal­ly strict EU Growth and Sta­bil­i­ty Pact bud­get rules and might run a pri­va­tized stim­u­lus scheme to get around those rules instead:

    Reuters

    Exclu­sive: Ger­many con­sid­ers ‘shad­ow bud­get’ to cir­cum­vent nation­al debt rules — sources

    Michael Nien­aber
    Sep­tem­ber 9, 2019 / 7:45 AM

    BERLIN (Reuters) — Ger­many is con­sid­er­ing set­ting up inde­pen­dent pub­lic agen­cies that could take on new debt to invest in the country’s flag­ging econ­o­my, with­out falling foul of strict nation­al spend­ing rules, three peo­ple famil­iar with talks about the plan told Reuters.

    The cre­ation of new invest­ment agen­cies would let Ger­many take advan­tage of his­tor­i­cal­ly low bor­row­ing costs to spend more on infra­struc­ture and cli­mate pro­tec­tion, over and above debt lim­its enshrined in the con­sti­tu­tion, the sources said.

    Germany’s debt brake allows a fed­er­al bud­get deficit of up to 0.35% of gross domes­tic prod­uct (GDP). That’s equiv­a­lent to about 12 bil­lion euros ($13.3 bil­lion) a year but once fac­tors such as growth rates have been tak­en into account, Berlin only has the scope to increase new debt by 5 bil­lion next year.

    Europe’s largest econ­o­my is tee­ter­ing on the brink of reces­sion and pent-up demand for pub­lic invest­ment from towns and cities across the coun­try is esti­mat­ed at 138 bil­lion euros by state-owned devel­op­ment bank KfW.

    Under the “shad­ow bud­get” plan being con­sid­ered by gov­ern­ment offi­cials, new debt tak­en on by the pub­lic invest­ment agen­cies would not be account­ed for under the fed­er­al bud­get, said the sources, who declined to be named.

    Lim­its on how much debt they could take on would instead be gov­erned by the rules of the EU’s Sta­bil­i­ty and Growth Pact, giv­ing Ger­many room to boost spend­ing with­out need­ing a two-thirds major­i­ty in par­lia­ment to change its own debt rules.

    “Nor­way has its oil, Ger­many has its cred­it stand­ing. It’s like a nation­al resource,” one senior offi­cial told Reuters, point­ing to the fact that Ger­man debt is in such demand that yields have turned neg­a­tive, even for long-term bonds.

    “If man­aged wise­ly, an inde­pen­dent pub­lic invest­ment agency could even make mon­ey by tak­ing on new debt,” the offi­cial said.

    Otto Fricke, chief bud­get law­mak­er of the oppo­si­tion busi­ness-friend­ly Free Demo­c­ra­t­ic Par­ty, told reporters on Mon­day it would not back any plans to intro­duce par­al­lel bud­gets through inde­pen­dent pub­lic agen­cies.

    “This is noth­ing but an attempt to led vot­ers up the gar­den path,” Fricke said, adding that he was con­cerned par­lia­men­tary con­trol over bud­get ques­tions would be weak­ened.

    ...

    The Finance Min­istry spokes­woman point­ed to an ear­li­er state­ment by a deputy finance min­is­ter for par­lia­men­tary affairs say­ing Berlin did not think there was a lack of pub­lic funds.

    ‘ACCOUNTING TRICKS’

    Under the Euro­pean Union’s fis­cal rules, coun­tries can run a deficit of up to 1% of eco­nom­ic out­put as long as their debt-to-GDP ratio is sig­nif­i­cant­ly below 60% — some­thing that Germany’s Finance Min­istry expects to hap­pen this year.

    That would mean Ger­many could take on new debt worth up to 35 bil­lion euros a year, rather than the 5 bil­lion allowed under its own con­sti­tu­tion­al­ly enshrined debt brake.

    The move comes at time Ger­man bor­row­ing costs are at a his­toric low, with bond yields in neg­a­tive ter­ri­to­ry. That means investors are will­ing to pay a pre­mi­um to keep their mon­ey with Berlin, rather than get­ting inter­est pay­ments.

    Philipp Stein­berg, head of the eco­nom­ic pol­i­cy depart­ment at the Min­istry for Eco­nom­ic Affairs and Ener­gy, said it could take a while for a coali­tion to emerge in par­lia­ment in favor of chang­ing the nation­al debt rules, so the gov­ern­ment should act.

    “We should explore all pos­si­bil­i­ties to finance nec­es­sary invest­ments under the debt brake, includ­ing set­ting up inde­pen­dent bod­ies not account­ed for under the debt brake,” he said. “We should be able to resist crit­i­cism about using account­ing tricks — the task is worth it.”

    How­ev­er, some cau­tioned that using “account­ing tricks” to cir­cum­vent strict nation­al rules could harm Germany’s eco­nom­ic cred­i­bil­i­ty and that pol­i­cy­mak­ers should bal­ance the long-term risks with the short-term fis­cal gains.

    “Ger­mans like their rules and they like to inter­pret them very nar­row­ly,” said Tom Krebs, pro­fes­sor of macro­eco­nom­ics and eco­nom­ic pol­i­cy at the Uni­ver­si­ty of Mannheim. “I’d rather focus on chang­ing the fis­cal rule in our con­sti­tu­tion.”

    CLIMATE FOUNDATION

    With the cur­rent frag­men­ta­tion of Germany’s polit­i­cal land­scape, it would be very dif­fi­cult to reach the two-third majori­ties need­ed in both cham­bers of par­lia­ment to change the nation­al debt brake, ana­lysts say.

    It would require an unprece­dent­ed “super-grand coali­tion” of Chan­cel­lor Angela Merkel’s con­ser­v­a­tive CDU/CSU bloc and Finance Min­is­ter Olaf Scholz’s cen­ter-left Social Democ­rats with at least two oppo­si­tion par­ties such as the pro-spend­ing Greens and the far-left Die Linke join­ing them.

    Sep­a­rate­ly, Econ­o­my Min­is­ter Peter Alt­maier on Mon­day float­ed the idea of cre­at­ing a non-prof­it cli­mate foun­da­tion into which Berlin could ini­tial­ly inject 5 bil­lion euros.

    The foun­da­tion would issue inter­est-free loans for cli­mate pro­tec­tion projects — up to a max­i­mum of 50 bil­lion euros — with the aim of reduc­ing Ger­man car­bon emis­sions, he told reporters.

    That’s rough­ly the amount need­ed to finance the addi­tion­al cli­mate pro­tec­tion mea­sures the gov­ern­ment is con­sid­er­ing, and which Berlin aims to present on Sept. 20.

    Alt­maier said any gov­ern­ment bor­row­ing or lend­ing through such a non-prof­it foun­da­tion would not vio­late the fed­er­al government’s self-imposed bal­anced bud­get goal — or the more for­mal debt brake — because the foun­da­tion would be pri­vate.

    ———

    “Exclu­sive: Ger­many con­sid­ers ‘shad­ow bud­get’ to cir­cum­vent nation­al debt rules — sources” by Michael Nien­aber; Reuters; 09/09/2019

    “Under the “shad­ow bud­get” plan being con­sid­ered by gov­ern­ment offi­cials, new debt tak­en on by the pub­lic invest­ment agen­cies would not be account­ed for under the fed­er­al bud­get, said the sources, who declined to be named.”

    A “shad­ow bud­get”. Berlin needs to hide its stim­u­lus from itself. Those are the rules enshrined in the con­sti­tu­tion. Using a “shad­ow bud­get” of inde­pen­dent agen­cies, Ger­many can instead oper­ate under the slight­ly less insane EU Sta­bil­i­ty and Growth Pact rules. This is at a time when Berlin is lit­er­al­ly paid to bor­row with neg­a­tive inter­est rates:

    ...
    Germany’s debt brake allows a fed­er­al bud­get deficit of up to 0.35% of gross domes­tic prod­uct (GDP). That’s equiv­a­lent to about 12 bil­lion euros ($13.3 bil­lion) a year but once fac­tors such as growth rates have been tak­en into account, Berlin only has the scope to increase new debt by 5 bil­lion next year.

    Europe’s largest econ­o­my is tee­ter­ing on the brink of reces­sion and pent-up demand for pub­lic invest­ment from towns and cities across the coun­try is esti­mat­ed at 138 bil­lion euros by state-owned devel­op­ment bank KfW.

    ...

    Lim­its on how much debt they could take on would instead be gov­erned by the rules of the EU’s Sta­bil­i­ty and Growth Pact, giv­ing Ger­many room to boost spend­ing with­out need­ing a two-thirds major­i­ty in par­lia­ment to change its own debt rules.

    ...

    ‘ACCOUNTING TRICKS’

    Under the Euro­pean Union’s fis­cal rules, coun­tries can run a deficit of up to 1% of eco­nom­ic out­put as long as their debt-to-GDP ratio is sig­nif­i­cant­ly below 60% — some­thing that Germany’s Finance Min­istry expects to hap­pen this year.

    That would mean Ger­many could take on new debt worth up to 35 bil­lion euros a year, rather than the 5 bil­lion allowed under its own con­sti­tu­tion­al­ly enshrined debt brake.

    The move comes at time Ger­man bor­row­ing costs are at a his­toric low, with bond yields in neg­a­tive ter­ri­to­ry. That means investors are will­ing to pay a pre­mi­um to keep their mon­ey with Berlin, rather than get­ting inter­est pay­ments.
    ...

    And if the inde­pen­dent agency option does­n’t pan out, there’s the pri­va­tized stim­u­lus scheme that the Econ­o­my Min­istry is look­ing into: Cre­ate a pri­vate foun­da­tion that’s focused on a par­tic­u­lar area of inter­est and grant a lim­it­ed amount of mon­ey to it. In this case, it would be 5 bil­lion euros inject­ed into a non-prof­it foun­da­tion work­ing on reduc­ing Ger­man car­bon emmis­sions. Up to 50 bil­lion euros could be spent under the scheme the Econ­o­my Min­istry is con­sid­er­ing. Which, again, is a drop in the buck­et com­pared to what the Berlin should be spend­ing at this point giv­en the fact that the euro­zone growth is stalling and Ger­many has mas­sive fis­cal space to spend:

    ...
    Sep­a­rate­ly, Econ­o­my Min­is­ter Peter Alt­maier on Mon­day float­ed the idea of cre­at­ing a non-prof­it cli­mate foun­da­tion into which Berlin could ini­tial­ly inject 5 bil­lion euros.

    The foun­da­tion would issue inter­est-free loans for cli­mate pro­tec­tion projects — up to a max­i­mum of 50 bil­lion euros — with the aim of reduc­ing Ger­man car­bon emis­sions, he told reporters.

    That’s rough­ly the amount need­ed to finance the addi­tion­al cli­mate pro­tec­tion mea­sures the gov­ern­ment is con­sid­er­ing, and which Berlin aims to present on Sept. 20.

    Alt­maier said any gov­ern­ment bor­row­ing or lend­ing through such a non-prof­it foun­da­tion would not vio­late the fed­er­al government’s self-imposed bal­anced bud­get goal — or the more for­mal debt brake — because the foun­da­tion would be pri­vate.
    ...

    But a 50 bil­lion euro cli­mate change pri­vate invest­ment foun­da­tion is at least bet­ter than noth­ing. And that’s the alter­na­tive. Noth­ing. Or almost noth­ing. And Ger­many is the only large euro­zone econ­o­my with low enough debt to even con­sid­er a stim­u­lus. This is why the euro­zone, and the broad­er EU, remain eco­nom­i­cal­ly in per­il: they are built on fun­da­men­tal­ly idi­ot­ic eco­nom­ic the­o­ries that sound respon­si­ble if you don’t think too much about them. Mas­sive bud­get and trade sur­plus­es can’t pos­si­bly be the pri­ma­ry path to eco­nom­ic secu­ri­ty. That’s a recipe for glob­al finan­cial tur­moil. And yet that’s the mod­el at the heart of the dog­ma that’s behind Ger­many’s con­sti­tu­tion­al spend­ing brakes and the dog­ma that led to things like the Sta­bil­i­ty and Growth Pact being passed in the first place.

    So that’s all part of why Draghi’s part­ing gift to Chris­tine Lagarde was poten­tial­ly so sig­nif­i­cant. The one thing the euro­zone econ­o­my, and larg­er Euro­pean econ­o­my, des­per­ate­ly needs — a big pub­lic fis­cal stim­u­lus that involves spend­ing like invest­ing in clean ener­gy and mit­i­gat­ing cli­mate change — is effec­tive­ly off the table. The aus­ter­i­ty lob­by con­tin­ues to dom­i­nate Europe, leav­ing the ECB’s pol­i­cy the only thing real­is­ti­cal­ly on the table and the same forces that are lim­it­ing fis­cal stim­u­lus want to lim­it mon­e­tary stim­u­lus too. And yet the ECB can’t fix Europe’s eco­nom­ic funk on its own. Espe­cial­ly when rates already in neg­a­tive ter­ri­to­ry. The only thing the ECB can do at this point is not sig­nif­i­cant­ly dis­rupt the euro­zone finan­cial mar­kets and buy time for the gov­ern­ments of the EU, and espe­cial­ly the euro­zone, to get their sh*t togeth­er and actu­al­ly adopt mod­ern eco­nom­ic knowl­edge into the bud­get rules. Mario Draghi bought Chris­tine Lagarde time and made this clear to the mar­kets. That was the great­est of his part­ing gifts to Lagarde. It prob­a­bly won’t be enough time because Europe’s aus­ter­i­ty coali­tion, which is larg­er than just Ger­many, has demon­strat­ed no sign of learn­ing any­thing from the past decade of eco­nom­ic cri­sis and no sign of chang­ing their minds to allow for the real fis­cal stim­u­lus. But the chang­ing of the minds of enough of the aus­ter­i­ty coali­tion to is what needs to hap­pen for Europe to real­ly draw itself out of its eco­nom­ic funk and allow for a nor­mal­iza­tion of mon­e­tary pol­i­cy. That’s what the ECB is buy­ing time for: wait­ing for san­i­ty at the EU gov­ern­ment lev­el on fis­cal spend­ing.

    All Lagarde can do this point is main­tain or expand the extreme mon­e­tary eas­ing and QE poli­cies to hold things togeth­er in the hopes the politi­cians advo­cat­ing aus­ter­i­ty are either swept out of office or change their mind. That’s the only real­is­tic hope for the euro­zone even though it’s hard to imag­ine the aus­ter­i­ty crowd relent­ing and allow­ing for the required changes in fis­cal pol­i­cy that needs to hap­pen. But hold­ing the euro­zone’s finan­cial mar­kets togeth­er while hop­ing for that pol­i­cy change is all all Draghi could do and all Lagarde can real­ly do too. Because the ECB can’t do this alone. Cen­tral banks are sup­posed to work in coor­di­na­tion with gov­ern­ment to help finance fis­cal spend­ing. Buy­ing time and hop­ing that fis­cal spend­ing is allowed to hap­pen is all Lagarde can do. She’s nom­i­nat­ed for an eight year term so that’s how long she’s going to be walk­ing this tightrope act. And it’s entire­ly pos­si­ble the ECB won’t raise rates for anoth­er eight years, espe­cial­ly if we expe­ri­ence a glob­al reces­sion soon and it’s nasty. So Draghi’s new QE bond buy pro­gram, which could be in place until rates are set to rise, could poten­tial­ly be in play for Lagarde’s entire eight year if we’re look­ing at an extend­ed nasty glob­al bust. And with eco­nom­ic storm clouds like Trump’s trade war antics with Chi­na and fall­out from Brex­it con­tin­u­ing to rain down on Europe’s economies, it’s hard to see why we should­n’t expect a reces­sion to erupt in Europe over the next year or so. Europe’s trade sur­plus­es make it extra sen­si­tive to glob­al slow­downs and we seem to be set­tling into a glob­al slow­down. If that does hap­pen, Draghi’s part­ing QE gift is going to remain one of Chris­tine Lagarde’s hand­i­er tools for years to come.

    Con­vinc­ing Euro­pean gov­ern­ments to spend more mon­ey is one of the Euro­pean Cen­tral Bank chief’s top pri­or­i­ties if the ECB’s stim­u­lus poli­cies are going to work in the long-run and con­vinc­ing those gov­ern­ments to spend more is a seem­ing­ly impos­si­ble task. Strange times.

    Posted by Pterrafractyl | September 15, 2019, 10:58 pm

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