With European Union continuing its slow steady fall into deflation, the question of “what’s to be done?” has becoming a permanent fixture for European policy-makers. But for the eurozone, with it’s shared monetary system, the question is a much more complicated “what should we all be doing together?”. The answer to that latter question, unfortunately, has consistently been “not enough”, despite prior promises.
This is not to say that there have no attempts to stimulate the eurozone economies. On the contrary, for the past three years, the ECB has been offering hundreds billions of euros in low interest loans out to eurozone banks and for the past three years banks have been accepting those loans. Accepting those loans and then paying them back. But not lending those loans. And when you factor in the seemingly permanent austerity regimes imposed across the eurozone, that lack of lending is no surprise.
Still, the ECB hasn’t given up entirely in its attempts to reflate the eurozone. Back in June, the ECB decided to inject another 400 billion euros into the eurozone banking system in a two-phase loan program. And as we’ll see below, in both phases the eurozone banks wanted far less than what was offered while continuing to pay back their previous loans. In other words, while the ECB has been trying the expand the monetary base in the eurozone’s financial markets that monetary base has continued to shrink. As the excerpt below puts it, it’s like ‘Waiting for Godot’. And as we’ll see at the end, it really IS like Waiting for Godot, theatrics and all.
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There was a recent Ernst & Young report on the amount of lending by Spanish banks that painted a glass-is-half-full picture for Spain’s banks: while loans to corporations and businesses by Spanish banks fell 5.7 percent in 2014 (and 1.5 percent across the EU), a recent Ernst and Young report projects a 1.8 percent rebound in Spanish bank lending next year and another 5.4 percent rise in lending in 2016. In other words, Spain’s economic dead cat might start bouncing soon, and after a year or so the cat shall rise again! At least that’s the projection from the Ernst & Young report. And who knows, maybe that’s what will happen.
But keep in mind that it’s still a rather significant and ominous phenomena that EU bank lending has fallen at all in 2014 since the European Central Bank has been driving borrowing costs down significantly and basically giving banks nearly free money to lend via the “Targeted Long-Term Refinancing Operations” (TLTROs) and yet lending has fallen. It’s almost as if waiting for the stimulative effects of the free ‘TLTRO’ cash is like Waiting for Godot.
Except under the ECB’s ‘Godot scenario’, the ECB keeps promising the arrival of Godot while the ECB’s pro-austerity allies leave Godot tied up in an attic somewhere. And the wait continues...:
TLTRO effect is the ECB’s Waiting for Godot
By Ross Finley
September 23, 2014When banks are offered hundreds of billions of euros worth of what is essentially free money and they don’t take everything they can get, something has gone seriously wrong.
The European Central Bank’s latest offer of cheap cash to banks — only this time tied to loans they provide to private sector businesses rather than with no strings attached — has gotten off to a weak start.
That suggests not only that temporary liquidity for lending may be the wrong approach to boost a flat-lining euro zone economy that is barely generating any inflation, but it also underscores the much more serious lack of demand in the economy.
With only 82.6 billion euros taken up in the first of two tranches it is now clear that the ECB will not be able to find enough takers for the 400 billion euros it has put on offer.
The latest Reuters poll of euro zone money market traders predicts that banks will take up 175 billion in the December auction, leaving one-third of the cash untapped.
To put that number in perspective, when the ECB last offered money like this in the depths of the euro zone debt crisis a few years ago banks swallowed up more than one trillion euros. That made for explosive results on asset prices but also did very little to spur lending.
Now ECB President Mario Draghi, who is running an institution that appears programmed to do everything in its power to avoid outright purchases of sovereign bonds as a policy option, is running out of room for manoeuvre.
Part of the problem is he’s spinning a lot of policy plates at the same time.
The latest round of cheap cash — dubbed Targeted Long-Term Refinancing Operations (TLTROs) — comes along with record low interest rates and an even more-negative deposit rate, which in theory should drive banks to take the cash and lend.
The ECB also plans to build up the Asset-Backed Securities (ABS) market in Europe in order for the central bank to swoop in and purchase vast swathes of it.
That will be lucrative for those who want to sell on those securities, and some traders have suggested that waiting for details on ABS purchases has interfered with the TLTRO.
Either way, banks will need to expand credit in order to usher in a climate where securitisation — which involves parceling together new securities backed by loans against assets — takes place. The idea is to connect small and mid-size businesses with the broader capital markets, where large companies tend to go first to borrow.
But that underlying lending does not appear to be happening.
Lena Komileva, chief economist at G+ Economics, wrote:
In market psychology terms, it creates a dangerous market co-ordination loop between ‘buying’ the ECB announcement and ‘selling’ policy action, which threatens to disrupt the core channel of policy transmission into real economies – confidence.
In other words, so long as markets are just trading the effect from policy announcements but not actually responding to the policy, nothing will ever happen to real lending.
The ECB also is close to wrapping up a lengthy assessment of euro zone bank balance sheets and will have to walk a fine line reporting the results in order not to create havoc if they contain any ugly surprises.
So why won’t banks take free money in the meantime?
Komileva explains it this way:
The big difference between bank activities in financial markets and in real economies is the financial incentives and risk aversion. Lenders manage their cost of credit and capital more efficiently by selling securities to other investors and by borrowing from the ECB, whereas when a loan is made in the real economy it stays on the bank’s books until it matures. This is an expensive diet for capital-constrained banks.
Lending to the private sector has been in decline for the better part of two years and shows no signs of abating since the TLTROs were launched in June.
The latest data from the ECB due on Thursday are expected to show a 1.5 percent annual decline in lending, according to the latest Reuters poll, barely changed from the month before.
Economists appear to be paying very little attention to this data series, making no visible attempts to establish the link between whether a revival in private sector lending might generate any significant amount of inflation.
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There’s a lot to absorb there, and the part at the end about the utility of just giving peopbut note this key point made in the article:
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Either way, banks will need to expand credit in order to usher in a climate where securitisation — which involves parceling together new securities backed by loans against assets — takes place. The idea is to connect small and mid-size businesses with the broader capital markets, where large companies tend to go first to borrow.But that underlying lending does not appear to be happening.
Lena Komileva, chief economist at G+ Economics, wrote:
In market psychology terms, it creates a dangerous market co-ordination loop between ‘buying’ the ECB announcement and ‘selling’ policy action, which threatens to disrupt the core channel of policy transmission into real economies – confidence.
In other words, so long as markets are just trading the effect from policy announcements but not actually responding to the policy, nothing will ever happen to real lending.
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As the article points out, while the Draghi-wing of the ECB continues to fight with the Bundesbank and its austerity coalition over how strongly to back the proposed monetary stimulus programs like quantitative easing (QE), it’s all moot if the banks don’t take that central bank cash and loan it out.
That’s part of the reason it’s so ominous that bank lending fell across the EU in 2014: it’s not just a bad sign that economic demand is so tepid that banks lack the customers looking for a loan. The shrinking EU credit market also threatens the entire mechanism by which a QE stimulus plan would even operate in a useful way.
Solely relying on QE and other forms of monetary stimulus might be useful if consumer demand hasn’t already collapsed and interest rates aren’t close to zero. But when that economic collapse has already taken place, interest rates are already near nothing, and consumer demand is far below what it used to be, even handing out free cash to banks isn’t necessarily going to be enough to reverse the condition. Those banks have to have someone to lend to if the stimulus is going to work.
Still Waiting For Godot...
Now, if fiscal stimulus was actually allowed in the EU this could be dealt with. But since fiscal stimulus isn’t allowed, it’s exclusively up to the ECB’s underwhelming monetary measures, like the ‘free money’ TLTROs, to carry the day. It’s one more reminder of why relying exclusively on monetary stimulus and abandoning fiscal stimulus is so insane when you’re facing Depression-like conditions and shrinking crdit: the chicken-and-egg problem can be solved pretty easily as long as fiscal stimulus is allowed. Otherwise, it’s just more ‘waiting for Godot’, with the additional hope that Godot knows how to solve the chicken-and-egg puzzle:
The Wall Street Journal
Money Beat blog
Europe’s Banks Are Reluctant Borrowers
11:36 am ET
Dec 12, 2014
By Alen MattichThe European Central Bank is swimming against a very strong liquidity tide.
Quite how strong is evident in this week’s bank refinancing operations. On Thursday, the ECB reported that the region’s commercial banks are taking up some €130 billion of super cheap central bank funding in the second installment of its Targeted Longer-Term Refinancing Operation (TLTRO). That level of demand verged on disappointing–earlier forecasts had figured on a €170 billion flow to banks.
But even the resulting take-up overstated the situation. On Friday the ECB reported banks are paying back a shade under €40 billion of its previous LTRO funding scheme, leaving the net infusion at a mere €90 billion.
The eurozone’s banks just aren’t that interested in holding onto the ECB’s largesse.
In February 2013, there was nearly €850 billion of LTRO funds outstanding. By this September, in the absence of any further ECB operations and a steady flow of bank repayments, that total had shrunk to under €350 billion.
These bank sector repayments have been a major factor in the shrinkage of the ECB’s balance sheet during the past couple of years. In early 2012 the ECB’s balance sheet was more than €3 trillion. By the end of this summer it was only just above EUR2 trillion.
Banks haven’t wanted cheap ECB funding because they haven’t wanted to lend the money out. Instead, they’ve focused on rebuilding their balance sheets to make up losses incurred during the crisis and to meet more stringent capital requirements. Lending to the private sector has consistently shrunk during the past couple of years.
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So following the tepid 82.6 billion euros in TLTRO borrowing back in September, the eurozone banks took only took 130 billion euros in December, far less free “TLTRO” cash than was offered or even expected. And, of course, it’s even worse because...:
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In February 2013, there was nearly €850 billion of LTRO funds outstanding. By this September, in the absence of any further ECB operations and a steady flow of bank repayments, that total had shrunk to under €350 billion.
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Banks haven’t wanted cheap ECB funding because they haven’t wanted to lend the money out. Instead, they’ve focused on rebuilding their balance sheets to make up losses incurred during the crisis and to meet more stringent capital requirements. Lending to the private sector has consistently shrunk during the past couple of years.
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while the ECB’s pro-austerity allies leave Godot tied up in an attic somewhere
That pretty much encapsulates the situation from a bank balance sheet standpoint. Banks will take some of the free ECB cash because it’s useful even if they aren’t planning on lending it out (like for rebuilding balance sheets), but that lack of lending also means any sort of sustainable banks-borrowing-from-the-ECB-lend-it-out-and-jump-start-the-economy virtuous cycle is simply not going to happen. And as a consequence of all this, eurozone banks’ balance sheets have been shrinking for the past two years as the world watches Europe descend into a deflationary death spiral.
Is Godot’s Absence a Source of Strength?
Bad news abounds! Or does it? After all, the worse the economic news, the stronger the ECB’s pro-stimulus stances become. At least, that’s what one might assume if one also assumes the proponents of austerity actually care about ending Europe’s near depression. Waiting for Godot can lead to a lot wishful thinking:
Forbes
The Weaker The Eurozone, The Stronger The ECB?
12/12/2014 @ 3:18PMJeremy Hill
Yesterday (Thursday), Eurozone banks were offered virtually free money from the European Central Bank through the Targeted Long Term Refinancing Offering (“TLTRO”). Guess what happened? An almost universal “non/nein/no/não/geen/óxi thank you,” Mr. Draghi! OK, if we must, we will take just €130 billion of your free money because honestly…, we have no one to lend it to. In total, 306 Eurozone banks took in the TLTRO funds. That’s a bit less than €2.6 billion per bank on an average basis with about 25% of the total amount going to core Eurozone country banks. Ultimately, the weak showing of this tranche of the TLTRO may make it easier for the ECB to convince the Germans to go along with a US style quantitative easing notwithstanding the Maastricht Treaty’s prohibition on monetizing fiscal deficits (a very big NEIN! According to Angela Merkel and Jens Weidmann).
Banks not wanting free money speaks volumes to the very weak level of European loan demand. Except for refinancing, there is no impetus for Eurozone businesses to request new loans from their banks. The fundamentals of the Eurozone economy do not warrant capital expenditures or risky research & development programs funded by bank loans. At the same time, the very low interest rates and inflation expectations do not create the feeling of urgency for companies to take on additional capital.
For the Eurozone to get fiscally healthy, aggressive monetary policy will need to play a role. However, what ails the Eurozone has never been about monetary policy. Monetary policy is merely a salve and the ECB is a temporary savior. The Eurozone’s problems are structural in nature and include balance of payments, labor costs, regulatory/employment inflexifbility, demographics, fiscal deficits/debt and above all, very low final demand for goods and services. Hence, the current Eurozone economic malaise which includes low-flation, disinflation or deflation and simply stultifying complacency of investment animal spirits. In this context, the job of monetary policy is to provide cover and time for the more difficult political and policy changes that realign economies and trade. We don’t dare to hope that these changes will be anything other than incremental and allow for further muddling through. What the ECB’s liquidity injections have done is prevent the Eurozone from lurching from crisis to crisis. That is a temporary state that cannot be indefinitely maintained, no matter the size of the potential liquidity injections or the verbal skills of Draghi.
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Note that when the article says “For the Eurozone to get fiscally healthy, aggressive monetary policy will need to play a role. However, what ails the Eurozone has never been about monetary policy. Monetary policy is merely a salve and the ECB is a temporary savior. The Eurozone’s problems are structural in nature and include balance of payments, labor costs, regulatory/employment inflexifbility, demographics, fiscal deficits/debt and above all, very low final demand for goods and services,” the kinds of “structural” adjustments to the rules of business and the economy that are generally implied by such statements include things like lowering wages, cutting pensions, gutting the safety net, making it “easier it hire and fire” during a time when mass firings would probably result, and just generally enact exactly the kind of “structural reforms” that will kill demand and remove the need for banks to make new loans, short-circuuiting the stimulative power of monetary measures like QE.
Of course, this doesn’t mean EU members can’s benefit from “structural reform”. Just not those reforms. There could be non-supply-side reforms like strengthening the safety or making government the employer of last resort. Afterall, creative destruction is far less destruction when you aren’t destroying lives in the process. And, of course, the kinds of “stuctural reforms” that protect those lives during the process of ‘creative destruction’ are slated to be destroyed under an austerity agend. So why not develop “structural reforms” that enable “creative destruction” without destroyed lives? It’s an option. But since the idea of New Deal-style “structural reforms” is in the process of being unpersoned, it’s an easy to forget option.
Skipping down...
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With the feeble take up of the latest TLTRO tranche, the ECB might just be forced to actually buy bonds. Not now, but eventually. The other piece of bad news from the Eurozone yesterday was the fact that French inflation went negative for the month of November. That is the first time that French core CPI has been negative since 1990 which is when this economic indicator was first collected by France.
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Did you catch that? France’s inflation rate went negative for the month of November.
Continuing...
It may be that the US has exported to the Eurozone our previous central banking mantra: good news is bad; and, bad news is good. That is, the worse the micro economic data becomes in Europe, the easier it is for the ECB to press their case for further monetary stimulus. The caveat is that the market has already essentially front run further ECB liquidity. That may mean that the ECB has a very short and defined window for attempting QE or some other non-traditional liquidity injecting policy. If they wait any longer, the risk tilts toward changing risk-to-reward dynamics, creating asset bubbles and denigrating financial stability.
The TLTRO may eventually prove more robust in later tranches. That is not likely to happen in the near term however as there is too much uncertainty in Eurozone over the state of politics and the upcoming election cycles in Greece, Spain and France. At some point Draghi will need to succinctly command that the Germans cease and desist in their trepidation to stimuli. Should Eurozone asset price volatility increase, it will be his opening for implementing other monetary policy solutions. The fact that the German Bundesbank downgraded its own forecast for German growth next year to a mere 1% is not immaterial. All of these negatives are adding up, but the ECB is still a ways off from seamlessly pushing another €1 trillion of liquidity into the system.
The last sentence really covers it: “All of these negatives are adding up, but the ECB is still a ways off from seamlessly pushing another €1 trillion of liquidity into the system.” And the negatives sure are piling up:
Germany’s economy is stalling while France is falling into outright deflation. At the same time, EU banks are are turning down free money! Why? Because there’s no one willing to borrow because everyone expects things to stay bad or get worse. And what’s the light at the end of the tunnel?! The fact that things are so bad that investors still willing to scoop up sovereign debt and drive government borrowing costs to record lows in part because investors are assuming that the ECB will be forced to eventually by sovereign bonds in order to prevent the eurozone economy from imploding because everything else it’s doing isn’t working.
That expectation of future action by the ECB has been the underlying driver for a rally in the eurozone’s sovereign bonds that’s over two-years old and that rally is still going strong with no end in sight for either the EU-wide depression or an end to the Bundesbank’s opposition to ECB sovereign bond purchases or anything resembling a fiscal stimulus.
It’s a grimly fascinating dynamic: the primarily element of the market psychology holding the eurozone (and larger EU) together is faith that the ECB will eventually be allowed to do something its most powerful members deeply oppose and find ideologically threatening. And yet it’s a faith that is objectively grounded in the apparent economic hopelessness of the current situation. The markets are playing chicken with the Bundesbank and its austerian allies that the ECB will eventually be allowed to purchase sovereign bonds simply to avoid an eventual financial/socioeconomic meltdown. And as long as the markets are convinced thatrobably continue to find plenty of buyers.
But until that game of chicken is resolved, the other kind of monetary stimulus poliicies being debated, like the QE targeting Asset Backed Securities (ABS) aren’t going to be of any help because the existing austerity policies kill the consumer demand required to avoid a short-circuiting of the ABS QE.
Wait, Is That Godot Coming Towards Us From The End Of The Tunnel? No. It’s That Austerity Train
But wait, could it be that the even Jens Weidmann and the Bundesbank are finally getting behind the ECB’s plans for QE involving both sovereign debt and asset backed securities? Well, there was a recent Reuters article suggesting exactly that, although it was later withdrawn as erroneously based on an ECB report an not a Bundesbank report.
Exclusive: ECB considers making weaker euro zone states bear more quantitative easing risk — sources
By John O’Donnell and Paul Carrel
FRANKFURT Fri Dec 19, 2014 7:08am EST
(Reuters) — European Central Bank officials are considering ways to ensure weak countries that stand to gain most from a fresh round of money printing bear more of the risk and cost.
Officials, who spoke on condition of anonymity, have told Reuters that the ECB could require central banks in countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying, reflecting the riskiness of their bonds.
Such a move could help persuade a reluctant Germany to back plans to buy state bonds.
There is currently a stand off between the ECB and Germany’s Bundesbank over ECB preparations to buy sovereign bonds, so-called quantitative easing (QE), to shore up the flagging euro zone economy.
But while the idea may help overcome opposition in Germany, which is worried that fresh money printing could encourage reckless spending and leave it to pick up the tab, critics will argue that any such conditions curtail its scope and impact.
Although a release of new money to buy state bonds appears all but certain, how it will happen remains fluid. The ECB’s Governing Council holds its next monetary policy meeting on Jan. 22., with market expectations high for fresh stimulus.
Requiring weaker countries to set aside extra provisions would signal that more of the risk of potential losses would rest with national central banks, rather than the ECB in Frankfurt.
“Losses are taken ... by the nation states,” said one official.
The ECB declined to comment.
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CHANGING SHAPE
Lobbying by the small group of countries opposed to fresh money printing is now gradually shifting towards changing the shape of quantitative easing rather than try to block it altogether.
The Bundesbank is demanding that any new round of bond buying be subject to strict limitations.
Its president, Jens Weidmann, this week outlined two such possibilities – restricting ECB buys to bonds of countries with a top-notch credit rating or allowing each central bank to buy their country’s bonds at their own risk.
“Even if you say it’s not too early for QE, there is still something to be said about how you set it up,” said one euro zone central bank official.
“If the central bank would only buy bonds from its own country, then the chances and risks would go to that central bank. What happens if there is a loss? It would be good if the central banks have made adequate provisions.”
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But while setting such a precondition for any resulting losses would help win over Germany, it threatens to further undermine the notion that all 18 countries of the euro bloc are on an equal footing.
As the article points out “Lobbying by the small group of countries opposed to fresh money printing is now gradually shifting towards changing the shape of quantitative easing rather than try to block it altogether.”. In other words, a compromise. And now behold the Bundesbank’s compromises: either forcing the weakest economies to shoulder the greatest risks for any quantitative easing program, and that’s just one compromise put forth by Weidmann. or limiting the QE to only those nations with a ‘top-notch’ credit rating (QE for all the countries except those that need it).
So let’s assume the ECB really does end up accepting Weidmann’s first option of forcing the weakest economies to shoulder the greatest risk of the QE doesn’t end up turning turning the their economies around. Wouldn’t that mean that, if the QE doesn’t work out as hoped, the weakest economies will presumably end up even weaker and require even more austerity to make up for the lost ground?
Which raises an obvious question: wouldn’t the Bundesbank’s compromise mean that Berlin and its austerian allies will have an incentive to derail any QE program in order to ensure a continuation of the austerity? It’s a alarming possibility, and yet, here we are. All austerity, a fizzling TLTRO, and no Godot.
So let the waiting continue. But it’s not just waiting for a mythical person to arrive. Sometimes you’re waiting for them to leave.
Even MORE Fun With Science: Earthquake Weaponry
Here’s Wolfgang Münchau take on Jens Weidmann’s proposed make-the-weakest-states-take-on-the-greatest-risk-and-go-deeper-into-debt-if-it-doesn’t-work QE “compromise”: Weidmann “compromise” plan is so bad and potentially disastrous for the weakest states that it’s probably worse than no QE at all. It’s quite a compromise:
“The banking “union” will be one in which each country is responsible for its own banking system. The most important structural innovations are joint banking supervision and a tiny fund to cover losses when a banker runs away with the till. When I asked for a co-ordinated approach to dealing with failed banks, this is not what I meant.” Yep!
Continuing...
“If the ECB goes down this route, it will be the end of a single monetary policy. Yet the eurozone is supposed to be a monetary union, not a fixed exchange-rate system where everybody happens to use the same notes and coins.” Yikes. It sounds like Weidmann’s plan is not only a disaster in waiting but it could kill the eurozone too, at least in spirit. More so.
It looks like it’s time for another round of public pleading from Mario Draghi for Berlin to let the ECB act like a central bank:
So we have another reminder that the horrible “make the weakest members incur the biggest QE risk while also limiting its scope”-QE plan is still what Berlin is interested in if there’s going to be any QE at all.
There’s also calls that no QE plans be put in place until the January 25 Greek snap elections are resolved. But should Syriza win, that’s probably going to put any sort QE, even a crappy QE, on hold until a Syriza-led government agrees to continue with austerity. And who knows long that will take but it’s clearly Berlin’s demand:
That sure sounds like Berlin telling the ECB it’s going to flip out unless any QE is done after getting strict assurances that the “structural reforms” will continue unabated. Austerity, reduced pensions and safety-nets, firesale privatizations, and the general kind of middle-class defanging that’s taken place in the US for the past generation is a clear goal for Europe’s leaders and continuing with that is going to be an absolute pre-condition for avoiding a German freakout. Or avoiding a ‘Grexit’ from the eurozone altogether:
You hear that Portugal and Ireland? You’re rehabilitated. That must feel good.
Continuing...
According to the report, the German government considers a Greece exit almost unavoidable if the leftwing Syriza opposition party led by Alexis Tsipras wins an election set for Jan. 25. No pressure Greece!
Oh, Ha ha! Berlin was apparently just kidding although not actually:
Well that’s reassuring. German officials are assuring the world that the reports about Berlin’s plans for a ‘Grexit’ are erroneous because it’s just assumed that Greece will stick with the austerity no matter what. Why?:
Yes, you see, there are no ‘Grexit’ plans because Berlin officials just assume the Greeks will stick to the austerity no matter who wins the elections because the EU can’t be blackmailed since a ‘Grexit’ is now considered economically palatable for the eurozone.
Also:
Well, technically it’s not intervening in an election when the message is, “Resistance is futile. Have fun voting!”
The more things change, the more they stay the same. Or get worse. It’s really just better that isn’t allowed.
Hans-Werner Sinn, one of Germany’s top economists and an arch opponent of virtually all ECB policies designed to stimulate the economy, just reiterated his view that outright deflation across the eurozone isn’t really a problem. Sinn is also suggesting that, should the ECB finally engage in QE, Germany might be constitutionally bound to leave the eurozone:
“While Bundesbank head Jens Weidmann, lawmakers in German Chancellor Angela Merkel’s coalition and economists such as Sinn criticize the ECB’s expanding role, Merkel hasn’t opposed Draghi publicly. The chancellor on Jan. 7 backed keeping Greece in the euro area as long as it fulfills its austerity commitments, saying she has “always” sought to keep the euro area from splintering.” LOL, yeah Angela has been really supportive of Draghi’s QE efforts.
So anyways, Sinn just upped the anti-QE ante. There’s no longer just the threat that Greece will get kicked out. Now Germany might be constitutionally forced to leave should QE be enacted, at least according to Sinn.
Also, deflation is totally cool. And maybe even desirable:
“So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses”. Yep. Doing the mathematically impossible: That’s the plan. And one of Germany’s most influential economists is suggesting that Germany blow up the whole eurozone if there’s any deviation from the plan. So the plan also includes hostage taking in addition to doing the impossible, which kind of makes sense since the rest of the plan makes no sense at all.
Nonsense + hostage taking. That’s the plan.
Paul Krugman brings us a fun trip down Euromemory Lane...the memory of watching a family of nations violently push each other down an endless flight of stairs:
In other news, consumer prices in the EU just fell for the first time on record with 16 EU members showing price declines last month. So...just keep pushing...
Yep, Germany’s economy staged something of a turnaround last quarter, growing 0.1 percent following a 0.2 percent fall the previous quarter. And there’s nothing to worry about regarding EU-wide deflation. Ah, the memories. Just keep on keepin’ on. You’ll hit rock bottom eventually and can go from there.
If you know any holders of Eastern European mortgages that ares suddenly freaking out, note that they aren’t alone:
“And for three years it worked. But on Thursday the Swiss suddenly gave up. We don’t know exactly why; nobody I know believes the official explanation, that it’s a response to a weakening euro. But it seems likely that a fresh wave of safe-haven money was making the effort to keep the franc down too expensive.”
A wave of of safe-haven money heading towards Switzerland. Now what might be causing the Swiss National Bank to assume that? One explanation is the growing expectations that some sort of eurozone QE is finally on the way, which will only add to the euro’s plunge and cost the SNB even more.
But also keep in mind that the latest reports on the structure of the eurozone’s QE plan are even more horrible than the pessimists expected:
So with Greece’s snap elections just around the corner, we’re getting word that the new ‘German Friendly’ QE plans are not only going to the crappy “each national bank does its own QE”-plan, but those national banks are also going to have a cap on their expenditures (which completely negates the psychological warfare required for a central banking policy like this to work), but the Greeks aren’t even going to be allowed to participate.
So just how unrealistic is all the talk of a ‘Grexit’ going to be if Greece is shut out of any QE and told to suck it up for the next generation? Especially if the rest of the QE plan is preemptively sabotaged to ensure that the rest of the eurozone continues down the deflationary death spiral. Is a ‘Grexit’ really all that unimaginable given the unimaginably bad policies that almost seemed designed to punish and demoralize the entire nation? And if Greece goes, how long before nations like Spain or Ireland follow suit?
It all raises the question: Is it really just the cost of a QE “safe-haven euro wave” the SNB was fearing? A ‘Grexit’ and possible eurozone unwinding seems like it could be pretty costly too and how unimaginable is such a scenario when policies seem to be designed to enrage the Greeks.
Beware of Greeks bearing optional Grexits. Especially after you’ve repeatedly slapped them and made it clear you have no intention to stop.
Here’s a reminder that the forces continuing to threaten the global economy into with a completely unnecessary deflationary vortex and a socioeconomic race to the bottom include historically inaccurate and delusional macroeconomic memories that exclude the key role deflation played in the rise of the Nazis. That’s not the only force at work keeping the race to the bottom going, but self-censored Nazi-related memories are part of the problem:
That article does a great job of highlighting the fact that the deflationary nature of Germany’s economic nightmare of the early 30’s has been lost to the history books and summarizing the overall situation. But this part really stands out as encapsulating one of the critical dynamics at work in the larger eurozone crisis of confidence:
That’s one of the core issues at play in ways that could impact the entire planet: If the eurozone becomes of economic zone where fiscal burden-sharing becomes a constitutional crime, Europe becomes committed to economic nonsense. Fiscal burden-sharing is one of the most important mechanisms that could actually allow for the eurozone to function as a viable entity in the long-run without systematically screwing over some members while favoring others.
Cobbling together a growing number of highly divergent economies into into monetary union is kind of an exercise in intentional BS. Eurozone economies inevitably get distorted one way or another just be virtue of being a giant synthetic currency. Weaker nations get a stronger currency (hurting exports), in exchange for larger markers, cheaper financing, larger credit lines, and a stabler currency. The larger, export-oriented dominant economies primarily get a cheaper currency, potentially much cheaper than it other would be. And larger markets too.
But the eurozone is an overall fabulous deal for the larger export-oriented nations like Germany that would otherwise have much stronger national currencies and kind of a crappy deal for the smaller, weaker nations, as we’ve now learned. And fiscal transfers are really one of the most effective ways to balance this out. Burden-sharing, and the spirit to back it up, are critical for the European Project to succeed. And yet burden-sharing is precisely what must be avoided at all costs according to the Bundesbank’s ordoliberal order.
The US couldn’t realistically function without routine fiscal transfers that no one gripes about. The Red States would be far too poor, compared to the Blue states, without a long-term commitment to Blue-to-red fiscal transfers for social cohesion not to be severely impacted from an ever growing wealth gap. And yet that very kind of strain is getting built into the the eurozone by ruling out fiscal transfer or mandating austerity as the price for an emergency injection. It’s totally insane.
And the mandating by Berlin that each member’s central bank (possibly minus Greece) handles any QE purchases (with probable caps on purchases) for the QE program basically introduces a formal breakdown of the eurozone’s unitary monetary policy, where there’s one policy for all via the ECB. All this in order to avoid burden-sharing because fiscal transfers cannot be allowed. That opposition to fiscal transfer is a core principle that’s being fought for tooth and nail by the Bundesbank even though it’s bound to undermine the whole monetary union project in the long-run.
And garbage historical analysis is providing critical garbage justifications pushed by shady politicians in order to garner the required public support for the middle-class-busting policies they desire.
Wow that is all awful. GOP-league awful. And that’s why we are all screwed. Like, historically screwed. But at least future generations will learn from our mistakes so it’s not entire pointless.
Oh wait...
The ECB made its big QE announcement today. It’s a little bigger than expected, but just as crappy:
Well, at least it was over a trillion euros and the 500 billion figure many were projecting. It could be worse!
And then, of course, there were comments like this:
Ah yes, the ol’ “We did our austerity (in the midst of a global boom while we were breaking a our budget pledges) so why shouldn’t everyone else have to do it too (during a major global downturn and without the budgetary grace)!”-argument. It’s one of those memes that never gets old. And now that some sort of QE is finally about to get underway, it’s an argument we’re probably going to be hear a lot more. After all, with the ECB pledging to incur up to 20% of any losses, that means there’s still going to be some risk sharing and therefore more whining from Berlin about risk sharing. Hopefully it will only be 20% of the whining we would otherwise hear.
Unfortunately, since the level of risk sharing is so low, we’ll probably also get to eventually worry about things like this:
Yep. Part of the whole point of risk sharing is that it doesn’t end up making a bad situation worse by sending the weakest countries into a complete Greek-style tail-spin if the QE doesn’t work out as planned or some sort of external shock takes place. And yet, by capping the QE at just over a trillion euros over the course of the next year and a half instead of leaving it as an open ended endeavor like a normal major central bank should do, the likelihood of QE actually changing market expectations in a positive way has been dramatically reduced. Already.
So now we have a QE plan that’s somewhat larger than expected, but with a cap that limits its effectiveness and a measly 20% risk sharing clause that makes is all the more likely that the weaker states that need QE the most are either going to be too scared to actually implement the remaining 80% of the QE through their national banks or screwed if they do fully embrace the policy but it isn’t big enough to overwhelm all the other policy disasters of the last 6 years. It’s pretty much what we should have expected. A little bigger than it might have been, but still inadequate and poison-pilled enough to ensure that nothing really changes. As expected.
But at least Greece gets to participate in it. That was a little unexpected. Oh wait, never mind. Greece’s participation is optional, and likely to be ‘limited’:
Aha. So Greece gets to participate, but due to the 33% cap on the amount of member state debt the ECB can own and the fact that the ECB already holds a large amount of Greece’s debt from the previous “bailouts”, it appears that Greece’s participation in the QE ‘might be limited’.
Yep, pretty much as expected.
With Greece headed to the polls and Syriza likely to lead the new government, the EU could be in for another crisis of one form or another. Not that a Greek snap election was necessary for a crisis. The eurozone and its many unresolved issues is all you need for a crisis:
Wow. OK, so the German political and business elites are in official freakout mode over the Bundesbank’s apparent loss of influence over the ECB policies and now warn that an even bigger challenge lies in picking the right point to exit the QE programme. Yeah, that exit from QE is going to be a pretty big challenge, thanks to the changes in the fine print that Berlin demanded to ensure the program would be far more Bundesbank-like than it ever should have been:
Note the key point at the end:
Risk sharing, which translates into fiscal transfers between states when its needed, is something that other monetary unions (like the US being a union of states) just takes for granted. Because it just works better for everyone. But for the eurozone, which was built on a Bundesbank model where fiscal transfers/risk-sharing are viewed as highly problematic, we find that the only was to implement QE policy is form 80% of the new QE debt is to be held be national central banks without risk sharing. Remember the Cyprus meltdown? This is why you can’t forget about:
Yep. And that risk to private bondholders is a direct consequence of 80%-no-risk-sharing demands of the Bundesbank. If some new shock hits and derails the eurozone economies (even more), we might end up seeing, say, Spain, suddenly on the hook for far more than it can afford to pay. And it sure doesn’t look like the rest of the eurozone member states are going to be helping out in that scenario. At least not for more than 20% of the tab. So thanks to the Bundesbank’s meddling, the eurozone has a whole new disaster scenario to start worrying about.
Of course, as we saw above, none of this is preventing folks like Jens Weidmann and German commentators from endless whining about how much influence the Bundesbank has lost. But keep in mind that there might be a lot more than just whining coming from Berlin. Big changes to who runs the eurozone bailouts could be in store too:
Keep in mind that the above article was written before the details of the ECB’s QE program were announced. Still, it’s pretty apparent that a drive to overhaul the troika system is building amongst EU policy-makers although as the article noted:
So now that the QE program has been announce and the pro-austerity Jean-Claude Juncker is leading the European Commission, will Berlin’s fears over the Commission leading future bailout negotiations suddenly evaporate? Maybe not, since Germany’s finance minister announced his belief that the troika was the “right instrument” for any state seeking aid just a few days after the above article:
So we might be in store for a tussel over the troika, with the EU Commission on one side and Berlin on the other. But keep in mind that Merkel’s government and Juncker’s European Commission are basically on the same side, ideologically. So is there really going to be a fight, or is it just going to be theatrics?
keep in mind, as the abve article points out, removing the ECB from future bailout decisions might require reworking another major component of the EU’s crisis-management tool:
That’s right. If the ECB really is removed from the troika, as Juncker and the European Commission are advocating, the 500 billion euro ESM is probably going to be up for renegotiation. Let’s see how that goes.
Still, as the article also points out, the ECB is still going to have a major role in any future bailouts even if its not part of troika. How? By simply threatening to cut off its credit line to crisis-hit countries if they don’t implement the austerity demands:
So if we do happen to see a new round of EU-wide crisis-resolution reforms, we could easily see a reworking (like gutting) of the 500 billion euro bailout fund and maybe even the removal of the ECB from future bailout management roles. But even if the ECB is removed from that role, it will still have the power to threaten financial implosion. Or we might see a continuation of the existing nightmare system.
Damned if you do, damned if you don’t: that the new spirit of the EU. Why on earth that was spirit chosen is unclear. But it is what is it.
One of the most frequently heard criticism of the ECB’s QE plans (which deserves plenty of criticism for being too timid) is that QE isn’t really targeting the real problems plaguing Europe, at which point there’s some vague declaration about how “structural reforms” are needed that inevitable involve some sort of European Reagan Revolution. And it’s certainly the case that QE is a suboptimal tool when the other traditional tools required to fully utilize the ultra-low rates, like fiscal stimulus programs, are ideologically taken off the table, although it’s also probably a lot better than doing nothing and just sticking with Europe’s New Normal.
Still, the overall plan could be a lot better and that includes structural reforms too. But as the article points out, if there’s any sort of “structural reform” that’s required for the eurozone to actually function in an sane manner, it’s the kind of structural reform that gives more power to the economically weaker members so they don’t inevitable end up being owned by their wealthier partners and end up economic colonies. Strangely, that kind of “structural reform” is never on the table:
Yes, as HSBC’s chief economist notes:
That’s one of the great unspeakable ideas in today’s policy discussions: there’s no way Europe can work without balancing the trade imbalances. Otherwise you’ll inevitably end up with the biggest exporters effectively owning the rest. Of course, there are the constant calls for Southern Europe to become more “competitive” by impoverishing the populace, which is of course an absurd proposition since the only possible way for Greece to become as “competitive” as Germany’s exports without dedicating itself to permanent low wages is for Greece to become a high-tech export powerhouse. Every single one of those nations has to become global export powerhouses in high value-added sectors like car exports or cutting edge instrumentation. If Southern Europe can manage to pull that off (which is basically impossible), then a kind of balance of trade could possibly emerge. But otherwise, colonization is pretty much inevitable.
Well, there is the other obvious solution to balancing things out: US-style fiscal transfers from right to poor states without constant whining about it. That would work. But that’s also not an option. Due to all the whining. Whining in the form of threatening to implode Greece’s banking system unless it agrees to adhere to the existing terms of the “bailout”:
Angela Merkel asks at the end, what concept might the Greek government present as an alternative to the existing policy regime? Gee.ow about a eurozone area that actually tries to achieve the ECB’s declared ~2% inflation target (which is much lower than what is realistically needed). Would that work? Maybe actually living up to the agreements that existed before the Greek bailout like actually trying to combat deflation and not constantly making up excuses for why it’s suddenly now ok to jump into a deflationary vortex. Maybe that would help out in this situation. What a radical concept:
While falling energy prices are certainly a much more desirable deflationary source than the other options out there, keep in mind that core inflation (which excludes energy prices) fell to 0.6%. That 2% inflation target keeps getting farther and farther away. At the same time...
Yes, “Europe’s strategy for ending its debt crisis relies on generating enough growth through supply-side economic overhauls, and through a hoped-for but so-far elusive confidence boost from austere fiscal policies”. So while the ECB is declaring its intention to keep the QE going until the 2% target is reached, the fact that Berlin is completely ruling out anything that ends the “supply-side economic overhauls” means we might be in store for some form of QE executed in an economic environment that’s almost designed for it to fail for a long, long time. Party on.
Here’s an article that’s a reminder that Greece’s showdown with the EU is going to have to be convincingly resolved before Greece has a chance of participating in any QE programs. Greece isn’t slated to participate in the QE right away, although Mario Draghi suggested that it could happen as soon as July. But if Greece leaves the eurozone and defaults on its debt in the process, the remaining eurozone members are potentially liable for Greece’s share. And cross-border fiscal transfers are one of the biggest no-no’s in the eurozone...unless it comes in the form of an undeclared foreign bank bailout (see Ireland).
So even if Greece manages to work out a compromise with the EU over its austerity schedule in the near future, there’s a good chance Greece won’t be participating in any QE programs anytime soon unless the situation gets so completely resolved that the door on a future ‘Grexit’ is slammed convincingly shut for good. And since that doesn’t seem very likely at the moment, the likelihood of Greece’s participation in any sort of future QE going forward should probably remain in doubt, which is kind of insane since Greece can use a QE stimulus more than anyone else. But that’s how the eurozone rolls:
That part at the end more or less summarizes the questions the Greek QE dilemma hinges on:
And since the austerity policies imposed on Greece almost seem designed to tempt a default, it’s unclear why we shouldn’t expect at least some sort of default-induced “messiness” in the event of a ‘Grexit’, especially since Greece needs far more than just QE to really get its economy growing again. That’s all part of why it doesn’t seem very likely that Greece will be participating in any sort of QE, even next year, should the current showdown get resolved without a ‘Grexit’.
But also keep in mind that there’s nothing stopping these QE/default-fear dynamics was remaining exclusive to Greece. The QE program is only slated to operate through September 2016 and will have to be renewed after that if the situation calls for it (which it almost certainly will). So if the economic situation stagnates or gets worse, and anti-austerity parties continue their ascent in these member states, the threat of a ‘Spexit’ or ‘Portexit’ and even larger shared liabilities could become part of the 2016 QE renewal debate.
It all highlights another one of the quirks of the eurozone: The greater the crisis, the greater the need for collective monetary and/or fiscal action but also he greater the barriers to engaging in that collective action due to all the rules against doing things that might end up resulting in any sort of fiscal transfer. As a consequence, the EU is so dedicated to maintaining the illusion of members-state economic independence that the union is effectively losing the ability of pulling itself up from the bootstraps. Yes, it turns out building a Galt’s Gulch for nation states, held together by a shared currency and a “United We Stand Separately!” mentality, is a lot easier said than done. Now we know.
Did you hear the great news? The eurozone crisis is over! No really, Mario Draghi said so:
Revel in the corner turning: 1.5 percent EU economic growth in 2015, 1.9 percent in 2016, and 2.1 percent in 2017 (plus near deflation now, but 2 percent inflation by 2017). Three years of anemic growth following a depression and record high unemployment rates in a number of member states, and no real addressal of any of the inherent problems associated with having a shared currency for so many disparate economies and no fiscal transfers, an ongoing EU crisis of democracy(especially in the eurozone)...and voila! Crisis over!
You also have to love Draghi’s assertion about Greece that “the ECB was doing plenty to help the member state most ravaged by the region’s crisis”, although when he “took the rare step of publicly revealing that the governing council had extended the amount of emergency liquidity assistance provided to Greece’s banks by €500m,” it’s true that the 500m euro extension of emergency credit to Greece’s banks is indeed helpful, especially since the ECB is threatening to nuke Greece’s economy even more than normal once Greece runs out of cash this month by demanding that Greece not issue any more short-term debt. No matter what. Unless it gets the approval of the troika. And just as before, the troika is all saying Greece needs to do all the austerity it agreed to. No leniency at all.
So even though there was an agreement on Feb 20 to revisit the Greek austerity negotiations in four months, it looks like the ECB is going to be used as the vehicle to reignite the crisis and force Greece to submit to ALL the austerity and just utterly crush and sense that basic decency, compassion, or even honesty will be adhered to in the affairs of the eurozone. The eurozone crisis is over. And the era of vassal state usury is just getting started...
Wow, they don’t do subtle:
Yep, the EU has apparently decided to speed up the beat down and public flogging schedule for Greece by a couple of months of having the ECB set up this looming short-term funding crisis, clearly in the hopes of either forcing a humiliating capitulation by the Greek government on all fronts with no concessions even before the previously planned negotiations (which would have been at the end of June) or forcing Greece to use up its emergency funding options by the time the negotiations even start.
It’s a fascinating decision by the troika to force this short-term funding crisis because, if anything, this is the kind of move the could pay off nicely for the troika if they get a complete capitulation from the Greeks but it’s also exactly the type of jerk move to inflict on the beleaguered Greek public that makes something like a ‘Grexit’ that much more likely. The bleaker a future in the eurozone seems, the less painful, relatively speaking, a ‘Grexit’ is going to feel in comparison. So the schedule is sped up but also the stakes.
In other news, EU chief Jean-Claude Juncker informed Spain that its economic crisis is far from over and warned against getting any hopes that the austerity policies will be allowed to be eased up.
There’s a particular passage in the following Wall Street Journal article that is so inadvertently revealing that you have to wonder if it was some sort of Freudian typo or really what the author was trying to convey. It’s just a passing sentence in one of the many articles about the eurozone crisis and the ECB’s QE plans so it’s sort of a trivial point, but at the same time the reality that this ‘typo’ suggests is both so fundamental and yet so unspeakable in much of the eurozone-related public discourse that your really have to wonder: Did the author really intend on saying that Berlin opposed QE because it could lead to economic growth that might reduce the pressure for “painful reforms”?
Since it really does seem like Berlin is trying to create economic depressions as a means of forcing targeted populations to just get used to second-tier standards of living (it avoids the need for fiscal transfers from wealthy to poor member states if people just accept that the poorer states will be much poorer than the wealthy states indefinitely), it’s entirely conceivable that part of Berlin’s QE opposition includes concerns over QE actually working. But that’s also something that’s NEVER supposed to be said in public, especially in the Wall Street Journal:
So....was this intentional? Opposition to QE because it might lift growth?
That certainly sounds like the real intent behind Berlin’s reasoning, but it’s not normally stated that plainly.
Whether or not it was intentional, the sentiment is certainly observable in the larger elite zeitgeist. After all, the arguments in favor of ‘expansionary austerity’ have been discredited for years at this point and yet the dedication to the pro-austerity/Ordoliberal arguments have been absolutely unwavering amongst public officials and, generally speaking, business elites too. So it’s pretty clear that Europe’s elites have collectively decided that making large swathes of the continent permanently poorer is just something that needs to happen if they’re going to achieve their new right-wing socioeconomic fantasy future.
It’s also now abundantly clear that Europe’s elites decided to adopt a Bundesbank-style approach to central banking where monetary tools are declared unhelpful and useless and only “structural reforms” (in the form of neoliberal deregulations, pay cuts for the rabble, and the destruction of public services) can solve the underlying problems that led up to a crisis. In that context it’s pretty obvious why there would be genuine fears that QE might actually help the situation.
And while it’s probably the case that there shouldn’t be too much concern over the QE actually jump-starting the economy given the successful opposition to any sort of fiscal stimulus across the EU which is really what it needed, it’s still quite possible that Europe’s elites are fearing QE will act as a catalyst for the inevitable upturns that happen whenever you depress an economy for years. Economic upticks happen, and for Europe these days any uptick is significant.
It’s all part of the twisted dynamic dominating Europe’s decision-making, where teaching the populace all the wrong lessons in how economies function and recover is one of the primary objectives for this entire depression/austerity experience: The longer this whole eurozone crisis situation goes on, the likelier it is that nations will hit at least a medium-term socioeconomic ‘rock bottom’ from which they can experience a bit of growth that everyone can champion as vindication for their policies of choice. If that inevitable bout of growth coincides with a QE program, people can say “see, it was the QE that was needed!”, but if there’s no QE or it’s systemically thwarted QE, leaders can point to the austerity and say “finally, the sacrifice is paying off and now you all see that austerity and neoliberal reforms are the only way! Supply-side economics forever!”
And you had better believe that the pro-austerity establishment across Europe has been waiting for an opportunity to triumphantly shout “Supply-side economics forever!” because that’s the big prize. It would be like if the elites made up a religion that centered around celebrating the the awesomeness of rich people and the awfulness of the poor and somehow everyone joined, convinced that someday they, too, will be allowed to climb the ladder (You can see the appeal).
So we probably shouldn’t be to surprised that ECB chief Mario Draghi recently announced that the eurozone crisis is already over thanks, in part, to the mere announcement of the QE program that has yet to start but more austerity will be required for it to fully work. After all, if the eurozone has a period of relative growth the next few years during this QE program, even the meager growth like what the ECB is projecting (1.5 percent in 2015, 1.9 in 2016 and 2.1 in 2017), there’s a good chance observers might attribute that growth to QE and not ‘expansionary austerity’ or Bundesbank-style Ordoliberalism. But if the ECB declares a eurozone recovery that’s starting right now, before QE really starts, at least the austerians might be able to contain any QE-related damage to their austerity legacy project. And since maintaining the “if you cut wages and benefits, growth will come” Field of Dreams pretense is going to be an obvious top priority for Europe’s elites (that’s the big prize), it’s clear that the promotion of socioeconomic Big Lies is going to be a top priority for Europe’s governments for the foreseeable future.
At the same time, as that interesting article excerpt indicated above, maintaining the austerity policies in some form or another is also probably going to be a top priority for Europe’s elites, even if a recovery slowly takes hold, because transitioning much of Europe towards a ‘no government’/‘you’re on your own, feel free to die’-US-right-wing-style socioeconomic paradigm is quite possibly the only realistic way to make the eurozone work in the long-run without automatic fiscal transfers from ‘rich Europe’ to ‘poor Europe’ if Europe maintains its current neoliberal zeal. Austerity is necessary because the acceptance of widespread poverty, concentrated in some nations but not others, is necessary for a cutthroat supply-side eurozone to work.
So if you thought the eurozone crisis was surreal so far, get ready for the upcoming period of declarations of economic victory coupled with ongoing calls for continuing the austerity because only austerity can bring about the robust recoveries needed to make up for all the lost ground caused by the austerity.
Snatching victory by feeding yourself to the jaws of defeat isn’t something one would normally do, but in the contemporary eurozone nation-state self-cannibalism is the only path forward.
Don’t ask questions. It’ll all make sense after a meal.
It begins:
It never ends:
Yep, the QE has officially begun! And that means its time for Bundesbank chief Jens Weidmann to whine about how deflation isn’t really anything to worry about so why bother with all this unnecessary QE. Why not just let the situation fix itself through endless austerity, right?
So the eurozone is finally embracing QE, Weidmann is till whining, and the euro is plunging accordingly. What this means in the long-run remains to be seen. In the short-run, one thing is very clear: It’s no accident that the onset of QE coincided with a plunging euro. It’s connected:
As the article points out:
But as is also points out:
As we can see, while the value of the euro is plunging, the value of euro-denominated bonds is rallying, leading to what appears to be an element of foreign-investor profit-taking that’s partially reinforcing the plunge in the euro. And while the fall of the euro has been slowing happening for over a year, the start of QE catalyzed a rather fast and furious plunge for the value of the euro. It a plunge that’s to be expected, although it sounds like this was a somewhat bigger impact on the markets than the were expecting (the yields on German 10-year bunds dropped over 25% from 0.31% to 0.23% on the second day of QE!).
But it’s not just foreign investors driving this plunge. Notice the predictions of the Deutsche Bank analysts that the euro could fall to $0.85 by 2017. Their thesis? “The eurozone countries, in total, have a big and persistent excess of savings, and given the low returns on offer at home, they will sell their euros and venture abroad.” Yep, as much as we hear about endless economic weakness in the eurozone, keep in mind that export powerhouses like Germany or the Netherlands are creating a savings glut and the outflow of that savings glut could be a downward force on the euro for years to come.
So, overall, the start of QE is good news for not only Europe but the rest of the world too. It’s just not as good for the rest of the world as it is for Europe because it implies further trade deficits for Europe’s trading partners. But Europe’s depression hasn’t exactly been helpful for the global economy either so if the world has to go through a period of cheaper than normal euros that’s probably not a bad tradeoff in the long-run.
Of course, that assumes that plunging value of the euro relative to the dollar and other major currencies isn’t a permanent phenomena. It also assume that Europe isn’t in for a long-run bout of austerity-onomics and doesn’t find itself still stuck in some sort of euro-malaise situation a decade from now where cheap euros and weak eurozone imports become the new normal in the long-run. Because if that happens, the imbalance between net creditor and debtors states that’s plagued the eurozone thus far might go global:
As Krugman points out, the plunging euro has probably already given the eurozone boost and this is certainly good news for the eurozone. But here’s the crucial caveat:
Yep, if we just look at what “the market” is implying with with the collapsing rates on German bunds it would appear that “the market” is expecting very long term European weakness. And that also implies a weak euro for the foreseeable future along with growing eurozone surpluses (especially for the export powerhouses) and growing trade deficits for the rest of the world.
If this seems alarming, well, it is sort of is alarming since it appears to be describing a scenario where the eurozone crisis is never really resolved. At least if nothing changes regarding Europe’s attitude towards junk economic theories and mercantilism over the next decade.
At the same time, keep in mind that it was just two years ago when the euro was above $1.30 and the Bundesbank was arguing that the euro didn’t really need to fall at all and could maybe even rise. So this threat of an imbalanced world where a savings-heavy eurozone ends up exporting its deflation everywhere is far from ideal, but it’s still an improvement over a eurozone-depression.
It’s all a reminder that for all the focus on intra-eurozone struggle by Europe’s export powerhouses to impose export-maximizing Ordoliberal economic theories across the eurozone (without any consideration of the need for intra-eurozone balances of trade or fiscal transfers), we’re still on track for a potentially larger global conflict in coming decades: What happens to the global economy if Berlin succeeds in turning the rest of Europe “into Germany”? Or, if not “Germany” (i.e. high tech, high value exports), at a permanent net exporter. Why couldn’t Spain or Italy run surpluses every year by just depressing domestic demand and wages so much that average people don’t really have the money for many imports?
That’s the often-stated goal for the austerity policies...turn countries like Spain and Italy into Germany! Well, what if, say a decade from now, Spain and Italy haven’t actually been “turned into Germany” but have still beaten their populations so severely that worker pay is low enough for their economies to successfully competing with the developing world for low-wage manufacturing jobs? And what if virtually all of the eurozone is running a trade surplus decades from now?
So how does the world deal with a eurozone that is dedicated to a policy of mercantilism that can’t help but destabilize the global economy? Since the markets appear to be predicting an indefinite period of cheap euros and a weak Europe, it’s a question the global community is probably going to have to answer sooner or later.
In the mean time, enjoy the plunge!
European policy-makers warned against “excessive optimism” in the market in response to the faster-then-expected plunge in the value of the euro and surging value in government bonds. Then they called for more austerity. So, true to form, Europe’s leaders interpreted a situation that indicates the markets are probably very pessimistic about the long-term prospects of the eurozone as an excuse to declare austerity the only solution to Europe’s woes. Sure, the plunging euro and surging bonds already indicates little faith in the long-term consequences of the austerity policies, but Europe’s leaders just had to make sure:
You have to love it: More calls for getting “inflation close to 2 percent as quickly as possible,” coupled with more calls for austerity right now while Europe can still ‘take advantage of the situation’.
In other news, EU Commission economics minister Pierre Moscovici declared that a ‘Grexit’ would be a complete disaster that risks a domino-effect spreading across the eurozone and everyone needs to show more solidarity. This came amongst reports that his boss, Jean-Claude Juncker, met with Greek prime minister Alexis Tsipras, warning him that Greece had better do everything its creditors asked or else risk getting its emergence ECB financial lifeline getting cut off:
When you read:
keep in mind that Greece’s creditors include Germany and Berlin’s demands are that nothing changes in the austerity demands. Also keep in mind that their “demands for savings” are already being met, with Greece currently running a 1.5% GDP surplus to pay back its “bailout”. It’s the planned tripling of the surplus to 4.5% of Greece’s GDP that Greece is trying to change.
And don’t forget that it’s entirely possible that the plan for both Berlin and the rest of the EU is to just run out the clock, find no solution at all, wait for Greece to run out of money, and hope for new, more compliant government:
Once again:
That sounds like a pretty good summary of the situation, because it’s pretty clear at this point that most of the EU governments have little interest in compromising with Greece at all and prefer a pro-usury vision of the eurozone where hard money far right economic theories become the immutable laws of the land.
So why not just tighten the screws and hope for a new government in a few months after early elections? That’s the logic that appears to be at work in governments across the EU which is terrifying because this means most of Europe charting a path towards some sort of “dominant state/vassal state” model where the dominant godfather state is seriously based on the Godfather template. Who know why that’s a desirable model but as the Greek tragedy plays out it’s becoming increasingly clear that the “solidarity” being developed is the solidarity of a pack of sovereign bond vigilantes.
While none of this bodes well, keep in mind that there is still one major reason for optimism,as highlighted below in an interview of Nouriel Roubini. And it’s based on a very simple observation: despite the confident swaggering of Berlin’s negotiators, a ‘Grexit’ really might be very contagious:
That’s right, when it comes to a ‘Grexit’, Nouriel “Dr. Doom” Roubini is almost sounding optimistic. Why? Because a ‘Grexit’ would be so unthinkably awful for all parties involved, and not just Greece, that it’s not going to be allowed to happen.
Of course, that analysis assume that there’s much concern in Berlin about the bonds of countries like Spain and Italy catching the ‘Grexit’ contagion with rates already at record lows. After all, higher rates on sovereign yields in the periphery as a result of any ‘contagion’ will just be an excuse to call of more austerity, and more austerity is clearly still the meta-agenda for Europe.
So while it’s likely that a ‘Grexit’ would create a new source of financial stress for Europe’s periphery nations, it’s not actually clear that Europe’s leaers wouldn’t welcome seeing a ‘Grexit’ disaster inject some additional chaos into the situation. Just as long as it’s controlled chaos. And that’s the question...can the chaos be controlled:
As the article suggests, if ‘Grexit’ takes place, we’re probably looking at a situation where...
And that’s probably not a bad set of ‘Grexit’ predictions, which raises the question: just how much are Berlin and the rest of the EU ‘creditor nations’ going to care if “the euro would take a hammering as foreign funds sought shelter in U.S. and British assets, euro zone stocks would fall, and borrowing costs in the bloc’s low-rated countries would soar as those obliged to stick with Europe tried to stem losses by buying German government bonds”?
And it seems like the answer is something like “well, as long as the ‘Grexit’ contagion doesn’t get too bad, it will probably be fine”. And who knows, with QE getting underway that might provide enough monetary cushioning to ward off any major ‘Grexit’ fears. At least in terms of controlling runaway interest rates and a run on the bond markets.
But as the article above also pointed out:
and if there’s a ‘Grexit’ in the next few months, it’s kind of hard to see how the political contagion isn’t going to go viral. A no compromise ‘Grexit’ isn’t exactly the kind of scenario that engenders long-term faith in the European project and yet ‘no compromise’ appears to be the credo policy-makers are demanding from Greece, and the rest the periphery to a lesser degree, at nearly every turn.
That’s all part of what’s making the ‘Grexit’ standoff within the context of QE a scarily fascinating dynamic to watch: based on past experience with Europe’s current leadership crew, some financial chaos is welcome, just not too much. And showdowns that lead to an overriding of democratic institutions in favor of supra-national economic regimes are similarly welcome. So a ‘Grexit’ that leaves the Greeks traumatized and scares the hell out the rest of the Europe may not be all that undesirable from the completely uncompromising, far-right standpoint that typically emanates from Berlin and dominates Europe.
But you also can’t ignore the fact that a ‘Grexit’ can have political repercussions that can’t be contain even if the financial turmoil can be kept under control through the ECB and QE or some other monetary tools. In other words, all the talk we year about how a ‘Grexit’ is manageable is only really talking about the economics of managing a ‘Grexit’. And that’s something that you might be able to predict is manageable. But how easy is it going to be to predict the political fallout of a ‘Grexit’? Especially if, as suggested by Yves Smith above, the entire game plan for the EU is to force an early election by being uncompromising and unreasonable and just creating a drawn out awful situation? How do you contain the political fallout for something like that?
It’s not at all clear, at least in the short run. In the long run who knows.
While it may seem somewhat depressing when you see a bucket of crabs that keep pulling the potential escapees back into the bucket, keep in mind that it’s entirely possible that the crabs aren’t simply trapped a in a bucket. They might be trapped in a suicidal cycle of petty revenge and despair too and maybe dragging others back in the bucket with them is the only source of pleasure in their lives. And, if that’s the case, just imagine the psychological change that takes place when everyone is trying to ensure no one else escapes, but then one of the big crabs that helped throw everyone in the bucket in the first place suddenly climbs out:
Yeah, you read that right:
Praying to the double-negative gods. The oxygen levels must be running low in the bucket.
Still, it’s nice to hear things like “The [ministers] found that extending the deadline for correcting the deficit was justified by the fiscal effort made by France since 2013, and by the current weak economic conditions and other factors,” coming from the European Commission. Weak economic conditions as an excuse for increasing public spending? Why that’s almost....Keynesian! *gasp*
Yes, the eurozone’s little second-class crabs just might be starting to recognize that they too can escape the bucket, but only if they work together. Good luck little crabs! And don’t forget: The critters that threw you in the bucket in the first place probably want to keep you there:
Yeah, sorry little crabs. ECB Chief Mario Draghi doesn’t really see a need to let you out of the bucket. As he noted:
Yep, according the ECB, the improving performance of Ireland isn’t really sustainable or due to the successes of all its past “structural reforms”. No, Ireland’s better than expected economic growth this year is merely due to external factors like “low interest rates and oil prices and the depreciation of the euro”.
In other words, all those “structural reforms” and years of austerity were NOT the secret to Ireland’s recent success. The ECB’s monetary tools (which have been opposed by Europe’s austerians for years) and OPEC’s oil glut are what did the trick. And while the ECB is probably making a very valid point about the effectiveness of its monetary policies and external factors vs the effectiveness of the “structural reforms”, that valid point is being used as an excuse for imposing even more “structural reforms” on countries like Ireland.
The ultimate lesson from all this is that if you’re a crab, stay out of buckets! You’ll eventually be allowed to leave the bucket, but it still doesn’t end well.
The Telegraph has an article about the role the ECB has assumed as the troika’s chief “bad news” enforcer in the negotiations with Greece that contains a really notable quote from an analyst at the pro-austerity Peterson Institute:
“The central bank’s strategy is aimed at getting recalcitrant eurozone policymakers to do things they otherwise would not do”:
Once again:
Part of what makes that observation by someone at the Peterson Institute so interesting is that, throughout the eurozone crisis, one of the primary excuses we’ve heard for why the ECB can’t engage in more aggressive monetary policies, like the “Outright Monetary Transactions” (OMTs) where the ECB has the option of purchasing sovereign bonds, is that if the ECB starts buying sovereign bonds, its political independence will be threatened.
For instance, when QE was under proposal, that’s the argument we heard from Bundesbank chief Jens Weidmann last year:
That’s the typical Bundesbank: the ECB can never engage the routine central banking tool of buying sovereign bonds because that makes it a “political prisoner”. It’s also a typically silly Bundesbank stance since, as Ambrose Evan-Pritchard and Mario Draghi both pointed out back in December, whether or not folks want to admit it, the eurozone might technically be a monetary union, but it’s also undeniably a de facto political union because sharing a central bank and currency is an inherently political exercise given the sharing of sovereignty involved.
So opposition to the ECB getting involved in political decisions is somewhat moot given that the eurozone is already a political union or sorts via its shared monetary policy whether folks want to admit it or not:
That was from back in December when the tussle over QE was still getting worked out. And QE was, of course, approved the following month over Berlin’s objections. But it was passed with conditions: The QE program would be limited to 60 billion a month and, instead of pooling the risks of the asset purchases, 80 percent of the purchases would would done by the national banks with no risk sharing. So the “Big Bazooka” of QE was reduced to a medium-sized bazooka, not due to Mario Draghi’s analysis of the needs of the situation, but due to the need for the ECB to balance the dicey politics of the situation:
As we can see, while QE did in fact happen over Berin’s opposition, it only happened after Mario Draghi made concessions that may have undermined the viability of the whole endeaver and he only did this to avoid a full blown revolt in Berlin, where politicians don’t want to see QE because they don’t want eurozone states to have to fiscal space to take the political decision to avoid the austerity-mandated right-wing “reforms” that the Europe’s business elites have been pining for. In other words, a very political compromise was required for the ECB to do its QE:
So that’s a fun review about how the ECB’s QE ended up a ‘medium-sized bazooka’ instead of a ‘big bazooka’ due to arguments from Berlin about the loss of the ECB’s “political independence”. Arguments that were primarily driven by Berlin’s concerns that the ECB’s QE would give other eurozone members (e.g. the eurozone ‘periphery’ and especially Greece) the economic space to avoid political decisions that Berlin desires. (e.g. right-wing austerity policies that Berin wants all members to adopt).
In other words, QE went from a “big bazooka” to a “medium-sized bazooka” via a politically motivated compromise that factored in the reality that Mario Draghi needs the political support of Berlin and this compromise was ostensibly being done in response to fears that the QE would end up politically compromising the ECB and fears that QE would give other eurozone members the fiscal flexibility needed to take a different political decisions other than the austerity mandated by the troika (which is also dominated by Berlin).
We’re through the
looking-glassfunhouse mirror here, people!The Federal Reserve decided to keep rates unchanged today, a move that was widely expected given the shaky foundations of the global economy and lack of inflation.
This decision was a day after the new eurozone inflation figures came in. Surprise! Eurozone inflation fell 0.1% in August...to 0.1%. Yes, the 0.1% drop in eurozone inflation cut the eurozone’s inflation rate in half:
“Low inflation also makes it harder for the indebted eurozone countries to reduce their debt and increase their competitiveness vis-à-vis Germany, the region’s powerhouse, economists said. For these reasons, major central banks consider 2% inflation as optimal to provide a cushion against deflation.”
Yes, it’s not just outright deflation that can ruin your economy. When a major debt-overhang is part of the reason for the low inflation in the first place (because there was a major recession or whatever) and this is happening in the midst of a single-currency experiment with major imbalances between member states, low inflation alone is more than enough to keep your economy stuck in ‘suck’ mode:
“It’s important to realize that it matters not at all whether the overall rate is slightly positive or slightly negative; as the IMF says, “lowflation” creates all the problems we associate with deflation, even if the headline number is greater than zero.”
Yep. And with a headline inflation rate of 0.1% for the eurozone, we’re clearly in the “it’s effectively deflation” zone of destructively low inflation which is why it’s looking like the ECB’s choose-you-own adventures in quantitative easing have much farther to go. Especially since, at this point, the ECB’s too-small-but-better-than-nothing QE program is the only thing resembling a stimulus program for the entire eurozone which, of course, is completely inadequate given these unusual economic circumstances.
So don’t be surprise if we see stories about EU, low inflation, and plenty of euro-fretting over the need to extend or even expand QE for potentially years to come. Then again, this is the eurozone we’re talking about, so we also shouldn’t be surprised to see plenty of stories about how the Bundesbank thinks everything is fine and nothing further needs to be done. It’s more of a poorly-choose-your-own adventure-in-purgatory in QE and those adventures don’t end well:
“The economic situation in the euro area has stabilized, the deflationary worries — which were already exaggerated at the beginning of the year — have faded further, and we have launched an unprecedented purchase program that is in the middle of being implemented”.
And that interview comes out on the same day we learn that a 0.1% drop in the eurozone’s inflation cut the inflation rate in half.
In other news, look who the BIS chose as their new chairman...