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Thursday, April 25, 2013

Conflict of interest (rates): clamour for ECB rate cut grows but Germany remains wary

The last few days have seen a shifting of consensus in the ECB rate cuts debate.

Recent economic data in the eurozone has been particularly bad, with private sector activity slowing more than expected. However, potentially more importantly, this effect has been seen in Germany and some of the stronger northern countries as well.

In response to this data most banks and analysts shifted their expectations and now forecast an ECB rate cut in May or June.

The thinking goes that, a slowing economy in these countries (and therefore lower inflation) will give the ECB more scope to cut rates without fear of it having disproportionate effects on the stronger economies. After all, the ECB is meant to find a balance that suits all countries (although it rarely does, hence the flaw of one-size-fits-all monetary policy).

As always on central banking issues though, Germany remains the key player.

German Chancellor Angela Merkel has now waded in to debate about possible ECB action. Speaking at the conference organised by Sparkassen association this morning, Merkel said:
"The ECB is obviously in a difficult position. For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available and especially for liquidity to reach corporate financing."

"If we want to get back to a bearable interest rate level, then we have to get over this internal division of the euro zone."
In a country where central bank independence is worshiped, politicians usually stay well clear of commentating on monetary policy, so Merkel's comments are quite extraordinary. Perhaps they were prompted by increasing noise coming out of the French government over what it sees as the need for the ECB to take a more activist approach, despite a genetlemen's agreement between the two governments not to discuss ECB policy in public.

German ECB board member Joerg Asmussen also weighed in yesterday saying:
"Monetary policy is not an all-purpose weapon for any kind of economic illness…Due to impaired monetary policy transmission, the pass-through of rate cuts to the periphery would be limited, and this is where they are most needed.
At the same time, rate cuts would further relax already unprecedentedly easy financing conditions in the core. This is not per se a problem – but interest rates that are too low for too long can eventually lead to distortions. In particular:
  • to a misallocation of resources, which ultimately leads to lower potential growth,
  • to excessive capital inflows into a number of emerging economies with exchange rate effects and credit risks,
  • and to reduced incentives for governments, banks, and corporates to adjust."
For numerous reasons, it seems that a rate cut should not be taken for granted after all. Asmussen is  right that given the broken transmission mechanism and market fragmentation, any cut will have limited effect on the economies where it's meant to provide a boost. But more importantly, there is still a view in Germany that lower rates could have a harmful effect particularly by pumping up an asset and property bubble – similar to those seen when newly low ECB rates were introduced in the south during the euro's creation.

That said, the wave of voices calling for some ECB action is growing, particularly given the wider debate on austerity. It will be tricky to balance this with the demands of the northern countries.

Once again the ECB finds itself stuck as the main player in an increasingly political debate.


christina speight said...

Since most of the EU nations' export trade is in effect INTRA-EU trade the northern countries (and Open Europe) should not be surprised that their GDP has suffered as their customers demand dries up. That's a single currency for you.

Britain is busily redirecting its export trade to non-EU countries and to the surprise of some is showing small but steady growth even though construction industry was hit hard by the madly unseasonable weather of the last quarter. Many of Britain's customers in the EU are also not buying so our record is just about acceptable even with that handicap.

It had betrter dawn on the Germans soon that the crisis will not stop until they mutualise the eurozone debt, They can;t do that without a new treaty which they will not succeed in getting permission from the 27 (new treaties are nt just foir the 11).

So the options are EITHER to continue in penury and increasing economic disaster and social upheaval OR scrap the EURO!

Merkel's quote above is OK until it crashes down with the actual heart of the problem - - "we have to get over this internal division of the euro zone."

Cannot she see that you cannot have a single currency with an EU of sovereign states, Debts have to be pooled. The Germans won't accept this so the only alternative is - Scrap the Euro.

Rik said...

Fully agree the EZ has been focussing on how to avoid mas write offs ico euro exits and countries going bust.
But they forget that they are making a worse kind of Japan for 1 decade (at least and likely longer) of Europe.

The latter is at least an equal size problem.
Resources/capital allocation is Europe (not only the EZ) is horrible.
In the government sector it goes to statepensions and welfaretransfers iso R&D and education.
The businesssector for a large part is outsourcing to cheaper production countries (which also have a considerable growth potential as a market).
Money available is moved away from the business sector to buying government debt to plug a deficit hole.
Inefficient governments (basically everything Med.ish) can keep go on with business as usual and keep the inefficiencies largely intact.
Europe's own talent massively is moving abroad while being replaced by semi-educated often difficult to integrate groups from the 3rd world.
Just to name a few.

Rik said...

For debt mutulation the EZ doesnot mainly require a new treaty. The most important thing is they need approval in Germany. The latter meaning that the German Constitution has to be changed. And on points that require a referendum to do so. Impossible to see the German Constitutional Court not ruling on it when Merkel would want another direction and impossible to see them ruling otherwise seen the present jurisprudence.
And a German referendum simply means a no go.
With the UK they could come to a deal and as it would imply refersal of rights in most other countries it likely is acceptable and doesnot need referenda. Cameron would be happy with that as he would get something to show at home. Not easy but it looks do-able.
With the German population such thing (horsetrading) is not possible and can in case of a (very likely negative) outcome also not be papered over. It is really pulling the plug.

In the newspaper articles where OE was quoted of the Buba's remarks re the OMT they make more or less the same mistake. If this is in the original or the article I did not check.
At the end of the day if the GCC rules that OMT is not ok. It would mean the German Constitution has to be changed, not that it is not possible in an absolute sense.
Or give them say a 2 year grace period to correct things (like new ECB legislation that explicetly forbids that (more likely as that donot require referenda))).

It simply looks that the ECB has stepped over its mandate (not only from the treaty art. 123 mainly), but more important from the German Constitution (the pars. dealing with the transfer of powers by the Buba to the ECB). Which is not officially in a mandate but simply limits things and effectively works because of that similar.
The latter is a 100% German issue, nothing to do with EU law.
The problem is it simply looks like the ECB is planning to do that (overstepping its mandate). So there is a considerable problem there.

Next to that the GCC can rule without referring to the ECJ if it deems the EU law fully clear. This on the treaty mandate issue.
Which looks that way and in a for the rescue brigade negative way seen the wording of the provisional ruling earlier.

It is true that the top courts donot like to take political decisions. However it is even more true that they usually stick to earlier jurisprudence. Which is simply pretty negative for the rescue.
Nearly all analyst (most with the legal skills of the average baboon) simply and conveniently forget that. Simply another example like so many in this case of most analysis being done by people who donot have a clue about the subject matter they have to analyse. Economist with no ability to step out of field of their own expertise.

Rollo said...

One size fits no-one. Germany is already sucking Europe dry.

Freedom Lover said...

Frau Merkel: "...For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available..."

"If we want to get back to a bearable interest rate level, then we have to get over this internal division of the euro zone."

Frau Merkel seems to have realized at last that the euro-zone has to break up into at least two zones - one for those whose economies need an interest rate rise, & one for those who need it to be lower. And then what? Will the resulting two quasi euro-zones find the same problem again? Almost certainly!

Best solution: accept that euro was a huge mistake, & allow all those who want/need to leave to do so whenever they wish to - & begin this process as soon as possible.

Andrew Smith said...

Seems the Germans still won't accept the inflationary solution which the UK political class are determined to administer here.