ECB Interest Rate Policy

Brad Setser has a post today on Kate Moss, not provoked by her evidently economically intriguing modelling properties, but due to the Kate-Moss-thin credit-spreads which Bloomberg’s William Pesek refers to in this article. What really turns Pesek on it turns out isn’t Kate Moss at all but the possible existence of links between China’s economic boom and the recent surge in popularity for credit derivatives.

And it is in the context of this evolutionary chain that Brad Setser’s work on China and Systematic Risk offers itself as some kind of missing link.
Continue reading

Good Moon On The Rise?

French political life is always full of surprises: while some seem past their best (de Villepin), and others are positively wilting (Chirac), new stars constantly appear in the galaxy. In this case Europe Minister Catherine Colonna. Her agility on the Turkey issue, and her sound sense on the ECB make her stand out against what is admittedly a not especially ‘brilliant’ background. Still, maybe when Sarkozy gets over his marital issues he’ll start to give her a run for her money.

On the ECB

Philippe Douste-Blazy: ?Everyone can see that the euro today remains an unfinished project, for lack of a seriously co-ordinated economic policy between members of the eurozone,? he said. ?Let us not leave economic and budget policy to the European Central Bank, let us not leave it just to the European Commission, to people who are not elected.?

Catherine Colonna: ‘elaborated’ on her senior minister’s remarks, saying the eurozone’s policymakers should focus more on citizens’ main concerns jobs and growth while respecting the ECB’s independence. ?Fiscal harmonisation is another important avenue that must be pursued.?

On Turkey Negotiations

Jacques Chirac: “Turkey needs to recognise Cyprus ….the continuing failure to do so poses political and legal problems and is not in the spirit expected of a candidate to the union?.

Catherine Colonna: ?When it comes to Turkey, its future with the EU accession or another solution can only be written at the end of a long process….?Between now and then, the rules have been set out: if the conditions set are met, the negotiations can begin.?

Something Worries Me About Peter Bofinger

Really I realise I have been remiss in another important sense. I have long assumed that in fact the decision to reduce deficits was taken due to the coming fiscal pressure from ageing. This certainly was the background to the discussion. However now I look at the details of the SPG this area is not mentioned (as far as I can see) and the other – the free rider and associated – is the principal consideration.

So those who criticize the bureaucratic and infexible nature of the ECB are in the right to this extent. Of course the underlying demographics *should* be part of the pact, but that is another story.

I find myself in a tricky situation, since I am deeply sceptical that the euro can work, and now after the French vote even more so, but since it has been set in motion, the best thing is obviously to try and make it work (even while doubting). So I am thinking about all this. Obviously I should try and write a longer post making this clearer.

The SGP was adopted at the Amsterdam Council 1997. A history of the implementation of the pact, and a summary of the debate over the new pact can be found here. The Stability and Growth Pact was designed as a framework to prevent inflationary processes at the national level. For this purpose it obliges national governments to follow the simple rule of a balanced budget or a slight surplus.

Now if we go back to the origins of the pact, to the communication of the European Commission on 3 September 2004, you will find the following:

“As regards the debt criterion, the revised Stability and Growth Pact could clarify the basis for assessing the “satisfactory pace” of debt reduction provided for in Article 104(2)(b) of the Treaty. In defining this “satisfactory pace”, account should be taken of the need to bring debt levels back down to prudent levels before demographic ageing has an impact on economic and social developments in Member States. Member States’ initial debt levels and their potential growth levels should also be considered. Annual assessments could be made relative to this reference pace of reduction, taking into account country-specific growth conditions.”

Now curiously I have found nothing in Bofingers argument which seems even to vaguely recognise this background.

A good starting point for this topic would be the conference “Economic and Budgetary Implications of Global Ageing held by the Commission in March 2003.

The European Council in Stockholm of March 2001
agreed that ?the Council should regularly review the
long-term sustainability of public finances, including the
expected strains caused by the demographic changes
ahead. This should be done both under the guidelines
(BEPGs) and in the context of the stability and
convergence programmes.?

This document on the history of EU thinking on ageing and sustainability is incredible.
Continue reading

The First Chink of Light

There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB – Lucas Papademos – has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.
Continue reading

The Calm Before The Storm

Following the turbulent river of news which has flowed unrelentingly through the principal European media outlets since Sunday night, today we seem to be swimming in a relative ocean of calm. This is very deceptive. Today the Netherlands is voting and tomorrow the ECB will have a closely watched meeting which may potentially have significant consequences for the EU economy.

If at this stage there seems little doubt about the outcome of the Dutch vote (more worthy of interest will be the level of participation and the size of the ‘no’ majority), we are also unlikely to see anything earth shattering happening over at the ECB. It is unlikely that there will be any change in the Central Bank’s two per cent interest rate policy (or twirp, as some wit at Morgan Stanley has christened it, after the rather better known zero rate (or zirp) policy at the Bank of Japan). All the watching eyes inevitably be focussed on the press conference, and on Trichet’s handling of the inevitable questions (worth a look at the 2:30pm webcast).

So if today we are enjoying a ‘day of reflection’, tomorrow we will undoubtedly see battle rejoined. In particular, it will be ‘D’ – or decision – day for Barroso and the EU Commission.
Continue reading

Crisis Looming At The ECB?

A right royal row is brewing at the ECB. Basically the old guard theorists of the ‘one size fits all’ monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray.
Continue reading

French Economic Slowdown Puts More Pressure on May 29

French economic growth slowed more than expected in the first quarter and this is bound to have a negative impact on yesterdays ‘big push’ to win support for the ‘yes’ in the European constitution referendum. Gross domestic product in what is Europe’s third-largest economy grew January -March by only 0.2%. This compares with the October-December period, when it expanded by a revised 0.7%.
Continue reading

ECB: Rate Cut In The Autumn?

Despite a widespread feeling that interest rates in Europe may be about to rise, futures markets seem near to pricing in a rate cut for the second half of the year.

One interesting knock-on consequence of this that no-one seems to be twigging is that any such move might well cramp the style of Alan Greenspan over at the US Federal Reserve. To date everyone is imagining that interest rates in the US will continue to rise at a ‘measured’ or ‘not so measured’ pace. But with the current account deficit to worry about there will be a limit to how far Greenspan can push the difference in rates (or spread) without driving up the dollar, something I’m sure he dearly wants to avoid doing.
Continue reading

ECB: Plus ?a Change?

The ECB met earlier today to conduct the monthly review of interest rate policy. It came as a surprise to noone that the outcome was to leave everything just as it is. Surprisingly though the decision this month is surrounded by a little more controversy than has been the case of late since Italy’s Berlusconi and economic opinion in Germany have been suggesting that some reduction of rates might be no bad thing, whilst Spain’s economy minister (and former EU commisioner) Pedro Solbes is reported to have been pushing for an increase. Why the difference?
Continue reading