Club within a club


One official said Eurogroup chair Jeroen Dijsselbloem would make a statement following the meeting of the 19 before a further meeting of the 18 with creditor institutions, including the ECB and IMF.

Greece is excluded from that latter meeting. Greece is a member of the IMF. The IMF’s Articles of Agreement give the first of its purposes as —

To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

Is there a precedent for the IMF sitting in on a meeting of a currency union, minus one of its members, for the purposes of agreeing some kind of currency quarantine of that member?

As Europe’s Banks Falter, Is There A Risk To The Eurozone?

“We do not have a federal budget, so the idea that we could do the same as what is done on the other side of the Atlantic doesn’t fit with the political structure of Europe,”
Jean-Claude Trichet, commenting last week on the Eupean “summit” in Paris last Saturday

“If you concentrate on California or Florida, it is not at all like Massachusetts or Alaska……It is the same in our case and we have to make a judgment what is good for the full body of the 320 million people” in the euro area.”
Jean Claude Trichet in an interview with Ireland’s RTE radio last July, following the controversial decision to raise ECB interest rates to 4.25%

“Europe gives up on a joint rescue plan against the crisis,” since the EU “lacks the necessary institutions to respond as the United States has done”.
Spain’s El Pais yesterday (Sunday 5 October)

For Europe, this is more than just a banking crisis. Unlike in the US, it could develop into a monetary regime crisis. A systemic banking crisis is one of those few conceivable shocks with the potential to destroy Europe’s monetary union. The enthusiasm for creating a single currency was unfortunately never matched by an equal enthusiasm to provide the correspondingly effective institutions to handle financial crises. Most of the time, it does not matter. But it matters now. For that reason alone, the case for a European rescue plan is overwhelming.
Wolfgang Munchau, The Financial Times, Monday 6 October 2008

The euro experienced its biggest one-day drop against the yen in seven years this morning as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of giving any concrete programme of coordinated action. The 15-nation currency declined to a 14-month low against the dollar – hitting $1.3598 at 8:52 a.m. in London – and to its weakest in two years versus the yen after European leaders meeting this weekend avoided announcing any plan that would be equivalent to the U.S.’s $700 billion bailout. And the reason for the euro’s fall is clear, the ability of the eurozone countries to apply a concerted startegy to address the problems in the banking and financial system has been called into question, and nowhere is the huge gap between the currency’s ambition and its political architecture so evident as it is in the above two quotes from Jean Claude Trichet. When push comes to shove, the US Treasury, as we have seen last week, does not concentrate on the needs of Florida or Massachusetts, but on those of the entire United States, and who, may we ask is in a position to concentrate at this point on the financing needs of the whole 15 member eurozone-area, since trying to manage economies which are one organic whole by splitting them analytically into monetary and fiscal entitites simply isn’t going to work, and it never was. Let me expain. Continue reading

Eurozone Watch Blog

Well I have just noticed a new new Eurozone blog: Daniela Schwarzer and Sebastian Dullien who have been blogging at Eurozone Watch Blog for a few months now. Daniela has a post today about Mr Euro, Jean-Claude Juncker. But see this George Parker piece in the FT:

Jean-Claude Trichet, European Central Bank president, on Friday delivered a stiff warning to eurozone finance ministers to back off in an escalating dispute over the bank’s independence.

Mr Trichet pointed out that it was his signature on euro banknotes and that it was unlawful under the EU treaty for finance ministers to give instructions or try to influence the bank.

His comments came at a strained news conference in Helsinki with Jean-Claude Juncker, Luxembourg prime minister, who was on Friday given a second two-year term as political head of the eurozone.

Mr Juncker said he had only agreed to carry on chairing the eurogroup – the political arm of the single currency – after finance ministers supported his plan to have an “intensified dialogue” with the ECB.

As I say in a comment on Daniela’s post. This is about the only topic I am currently in agreement with Trichet on: I simply don’t see what he and Trichet have to talk about.

Meantime over on Afoe Mark Thoma had a very interesting guest post last week on whether the eurozone will be affected by any possible downturn in the US, and this post has been picked up by both New Economist and Claus Vistesen at Alpha Sources.

Will They, Won’t They?

While Latvia is still arguing with the EU Commission over the spelling of eiro (or is it euro), the FT today asks the much more pertinent question: will the other baltic states even be able to join? On the backs of the energy hike Estonia and Lithuania are struggling to comply with the entry conditions, especially those on inflation. Slovenia is, however, expected to join on target on 1 January 2007.

Estonia, Lithuania and Slovenia set themselves the target of being in the first wave of new euro members next January and of complying with most of the rules, including public debt levels, interest rates and budget deficits.

Estonia, however, is struggling to meet the inflation criterion, which is likely to be set at about 3 per cent this year, 1.5 per cent above the average inflation rates of the three countries with the lowest inflation….. Like in other former Soviet-bloc countries, energy has a bigger weighting in Estonia’s consumer price index because the country uses power less efficiently than the EU’s older members.

“We feel that it’s a shame that just when we need to qualify for euro entry, the world oil prices go up,” said Kylike Sillaste, adviser to the prime minister….

Joaquin Almunia, the EU’s monetary affairs commissioner, has said he will apply strictly the entry standards for the candidate countries, although the ultimate decision on enlarging the eurozone lies with member states.

Has He Finally Gone Mad?

Really, when I saw this I had a hard time believing it.

The UK’s case for staying out of Europe’s single currency “is becoming weaker”, European Trade Commissioner Peter Mandelson has argued in a bid to reopen Britain’s euro debate……The British economy has prospered outside of the single currency but with increasing harmonisation in other areas of financial services, the long term case for staying outside is becoming weaker.

Which world is he living in?

The Political Fallout of Italy’s Growth Problem

Yesterday the news from Italy was the sudden drop in industrial output, today it is the fact that this makes Berlusconi’s re-election much more uphill work. In particular his coalition just lost a vote in Messina, Sicily, that they normally should have won.

This trend in indutrial output is important for what it implies about growth in Italy this year and next, and this is important for the knock-on implications for Italy’s deficit. This Italian government has incorporated an economic growth target of 1.5 per cent in its 2006 budget, and this target now seems improbable. This means the budget shortfall will be greater than agreed with Brussels, and that the deficit will rise more than anticipated. More problems.

The IMF is critical of the approach the Italian government is taking and has already expressed its fears that Italy will not meet its goal of reducing its budget deficit to 3.8 per cent of gross domestic product in 2006 from 4.3 per cent this year. The principal culprit for the IMF: Italy’s slow productivity growth.

“The nation’s economic problems are essentially ‘made in Italy’,” an IMF report said last month. “The fundamental factor accounting for weak competitiveness, and for a decade of disappointing economic performance, is slow productivity growth. Over 1996-2004, growth of output per hour worked was the lowest among all industrial countries and a cumulative 5.5 percentage points below the euro area average.”

Don’t Say I Didn’t Tell You!

Inflation in the eurozone is not about to spiral out of control. I have been arguing this for months now. The latest piece of evidence: French consumer prices fell 0.3 percent in November as compared with the previous month:

French consumer prices fell 0.3 percent in November on the previous month, national statistics office INSEE reported on Tuesday. That brought the annual rate of inflation down to 1.8 percent from 2.0 percent in October. The drop in consumer prices was largely driven by a 2.8 percent fall in energy prices, with petrol products down 5.1 percent.

Italian Industrial Output Falls Sharply

Well, this was really what I had been waiting for, not that I welcome the news, obviously, but simply that as far as I am concerned it is far from unexpected. People have been ‘writing off’ Italy’s grave structural problems far too easily IMHO:

Industrial production in Italy declined 0.9 percent month-on-month in October for an annual drop of 2.7 percent, national statistics agency ISTAT reported today.

The fall was driven by a 3.6 percent year-on-year drop in intermediate goods production and a 3.1 percent reduction in consumer goods output.

OTOH, the German Investor Confidence Index published by the ZEW Center for European Economic Research spiked dramtically upwards today showing how strong growth in China and the US and the falling euro is boosting expectations in Germany’s export sector. This is, I think, pretty much what we can expect to see from Germany in the months and years ahead: strong export growth when the global economy is booming, and weak domestic demand keeping overall growth tepid.

Mario Monti Makes A Reasonable Point

Mario Monti – former European commissioner for the EU internal market – is interviewed in the FT today. On the recent ECB decision to raise interest rates he has this to say:

Critics of the ECB say its monetary policy has been too restrictive. Mr Monti disagrees but says “there is an institutional credibility to be gained in the infancy of an institution. For a central bank, that is gained if you err on the restrictive, rather than the permissive side.”

Yesterday’s rate increase “is likely to avoid a weakening of that perception of credibility, and is likely to reduce the need for further increases in the very short term”, he said.

I don’t entirely agree with him, but this is a reasonable explanation. I agree that you couldn’t exactly call recent ECB policy too restrictive. You really can only sustain that position if you think that what Germany really needs is a sustained dose of Japanese-style ZIRP (but to do this you would have to undo monetary union in my opinion, EMU wasn’t constructed with this type of problem in mind). We may get to this situation, but we aren’t their yet. Hence there is a plan b available, which is try to continue offering a bit of something for everyone.

In this context M. Monti is concerned about bank credibility, but he also makes a more subtle point: that a quick rise now buys time, and takes off the pressure for subsequent rises in the short term. As I say, I don’t entirely buy this, but at least it is a coherent argument.