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Currency Wars: The New World Ordoliberalism

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

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

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

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

G20 set to dilute big pow­ers’ demands on cur­ren­cies

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

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

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

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

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

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

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

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


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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fis­cal Stance

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


‘Very Restric­tive’

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

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


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

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

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

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

Glob­al mon­e­tary pol­i­cy coor­di­na­tion need­ed: EU’s Rehn

By Jan Strupczewsk­tae

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

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

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

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

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

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

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

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


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


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

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

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

EU’s Rehn wants clos­er cur­ren­cy coor­di­na­tion — report

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

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

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

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

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

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

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

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


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

Analy­sis: France runs into Ger­man wall on EU growth dri­ve

By Mark John

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

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

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

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



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

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

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

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

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



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

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

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

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

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

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

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

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

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

UPDATE 1‑France says surg­ing euro “too high”

Wed Jan 30, 2013 11:35am EST

By Jean-Bap­tiste Vey

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

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


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

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

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

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

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

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

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

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


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

ECB Fore­casts

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

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


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

Skip­ping down...


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


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

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

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

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

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

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

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

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

Rates Rise

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

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

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

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


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


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

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

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

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

MONEY MAR­KETS-Draghi fuels bets for low­er mon­ey mar­ket rates

Tue Feb 19, 2013 8:52am EST

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

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

* Trade already crowd­ed, leav­ing slim gains for late­com­ers

By William James

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

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

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

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

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

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

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

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


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

Bun­des­bank looks ahead to ECB “exit” as LTROs repaid

By Eva Kuehnen and Andreas Framke

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

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

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

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

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

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

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


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

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


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

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

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

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

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

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

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


Ger­man Con­fi­dence

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

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

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


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

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

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

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


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


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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

By Olli Rehn

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


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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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


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

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

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

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

“It’s a very seri­ous issue,” he said.

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

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




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

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

G20 backs off aus­ter­i­ty dri­ve, rejects hard debt cut tar­gets

By Lei­ka Kihara and Paul Eck­ert

Fri Apr 19, 2013 11:54pm BST

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

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

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

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

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

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

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



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

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

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

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

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


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

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

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

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

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


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

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

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

    By Michael Steen in Frank­furt

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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

    Fri Jan 31, 2014 10:17pm IST

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

    * Emerg­ing mar­ket ten­sion may add to defla­tion­ary pres­sure

    * Mar­kets expect the ECB to poten­tial­ly ease pol­i­cy fur­ther

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

    By Emelia Sit­hole-Matarise and Mar­ius Zaharia

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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


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

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

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

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

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

    ECB options for staving off euro zone defla­tion threat

    FRANKFURT Wed Feb 5, 2014 9:00am EST

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

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

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

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

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


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



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

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

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

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


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


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


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

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

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

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

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

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

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

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

    Mar­ket Watch

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

    FRANKFURT Thu Feb 6, 2014 9:26am EST

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

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

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

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

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

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


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

    And then stuff like this hap­pens:

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

    By Bri­an Black­stone

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

    ECB sees no defla­tion risk for now: Praet

    BRUSSELS Tue Feb 25, 2014 3:15am EST

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

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

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

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

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

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


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

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

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

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

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

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

    Here are the main take­aways:

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

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

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

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

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

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

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

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

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

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

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

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


    Record Unem­ploy­ment

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

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

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

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

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

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

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

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

    Invest­ing 3/30/2014 @ 9:46AM

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

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

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

    [see chart]

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

    Exceed­ing Fore­casts

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

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

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

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

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

    ECB’s Dilem­ma

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

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

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


    Defla­tion Threat

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

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

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

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

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

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

    By David Mil­liken and Eva Tay­lor

    FRANKFURT Thu Apr 3, 2014 11:19am EDT

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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

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

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

    April 6, 2014, 4:03 am

    By Jan Strupczews­ki

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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


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

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

    Pol­ish PM: EU should form ener­gy union to secure sup­plies

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

    Chevron is cur­rent­ly assess­ing results from its four explorato­ry wells.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

    Finan­cial Times

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

    By Hugh Carn­e­gy in Paris

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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


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

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

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

    Ger­many ready to dilute aus­ter­i­ty med­i­cine for reform-mind­ed France

    By Michelle Mar­tin

    BERLIN Thu Aug 28, 2014 2:24pm EDT

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

    Anoth­er game-chang­ing fac­tor is the macro­eco­nom­ic back­drop.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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


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

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

    Justin Hug­gler in Berlin

    4:33PM BST 27 Aug 2014

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

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

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

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

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

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

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

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

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

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

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

    But Brus­sels sources have wel­comed the Ger­man pro­pos­als.

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


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

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

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

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

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


    ‘Fer­tile Ground’

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

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

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

    ‘Ambi­tious Goals’

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

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

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


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

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

    20 Sep, 2014 19:54 IST

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


    G20 Chas­es Growth Goal, Dif­fer On How To Get There

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

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

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

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

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

    Berlin was none too pleased.

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

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

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


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

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

    SEPT. 19, 2014

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

    ECB’s predica­ment leaves peers mute on cur­ren­cy depre­ci­a­tion

    By Eva Tay­lor, Lei­ka Kihara and Howard Schnei­der

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

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

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

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

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

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

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

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

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

    A weak­er euro might be a more effec­tive rem­e­dy.

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

    By Ian Tal­ley

    Sep 30, 2014, 3:33 pm ET

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

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

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


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

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

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

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

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

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

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

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

    The New York Times
    The Con­science of a Lib­er­al
    Europan­ic 2.0

    Paul Krug­man
    Octo­ber 11, 2014 10:39 am

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

    Finan­cial Times

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

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

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

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

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

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


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

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

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

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

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


    Mon Feb 22, 2016 2:41pm EST

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

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

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


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

    Deutsche Welle

    Schäu­ble rejects coor­di­nat­ed stim­u­lus at G20, with Chi­na under pres­sure

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

    Date 26.02.2016

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

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

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

    Rather, he urged coun­tries to deliv­er on reforms.

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

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

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

    The need to go bold

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

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

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


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

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

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

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

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

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

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

    Paul Mason
    Fri­day 26 Feb 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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