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 â€œthere 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.â€
Yesterdayâ€™s rate increase â€œis likely to avoid a weakening of that perception of credibility, and is likely to reduce the need for further increases in the very short termâ€, 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.
Well, despite the fact that the eurozone finance ministers aren’t on board, and that the OECD doesn’t approve, Trichet and company will undoubtedly go ahead tomorrow with the first refi rate rise in 5 years. (I think important issues are involved here, so I’ll try and write something more substantial for Afoe tomorrow, when the decision is announced.):
Europeâ€™s finance ministers on Tuesday delivered a last-ditch plea to the European Central Bank not to raise interest rates, amid fresh international criticism of the bankâ€™s hawkish stance.
Jean-Claude Juncker, Luxembourgâ€™s prime minister, claimed inflation was under control and warned the bank that a rate rise could hit growth in the 12-country eurozone. Simultaneously, the Organisation for Economic Co-operation and Development said it believed a rate rise was premature.
Incidentally, the IMF, in the person of Rodrigo Rato, is also contrarian, so this is very much ‘go it alone’ stuff from Frankfurt: ‘into the valley of death, rode the 600’.
Well, the Antonio Fazio question seems definitely to have decided that it doesn’t want to go away. The FT today informs us that the European Commission will take legal action before the end of the year against Italy over the allegations that against Fazio ( governor of the Bank of Italy). This threat is, however, not without its own problems since:
the Commission would be suing the Italian government, which has asked Mr Fazio to step down but cannot remove him. Mr Fazio is appointed for an indefinite term and can be removed only by the central bankâ€™s board. Mr Fazio has denied any wrong-doing. On Thursday, he told Bank of Italy employees: â€œTo serve the state independentlyâ€‰.â€‰.â€‰.â€‰is the attitude that has always inspired the actions of the central bank.â€
“To be independent, or not to be independent, that is the central bank question”
The always interesting Paul de Grauwe has a piece in the FT today (subscription only unfortunately, but he does collect all his FT pieces on his website here, so it will doubtless appear eventually). Basically he is arguing a view which I agree with: in its enthusiasm for raising interest rates the ECB is overdoing the inflation problem, and not by a little:
Strange things are happening in Frankfurt these days. Barely two weeks ago the European Central Bank issued its monthly bulletin containing an analysis of the perspectives for inflation in the euro area. In a nutshell the story was the following.
Yes, yearly inflation has increased to 2.5 per cent (October 2005) and this is a source of concern for a central bank that has promised to keep inflation below 2 per cent. But, as we all know, a central bank that targets the rate of inflation should be forward-looking and base its interest rate decisions on the expected future rate of inflation. The remarkable thing about the analysis is that, after voicing its concern about current inflation exceeding 2 per cent, it came to the conclusion that the perspectives for future inflation were favourable.
Paul de Grauwe’s work is generally highly commendable, and this presentation of his on the pluses and minuses of the euro is a really good background primer.
The Portuguese government has announced plans to reduce its fiscal deficit. The aim is to cut the deficit from an expected 6.2 % of GDP this year to below 3% – the theoretical maximum ceiling permitted under the EU’s growth and stability pact – by 2008. Most of the savings will come by addressing the cost of public sector workers – of whom there are some 700,000 in Portugal (total population a little over 10 million). Promotions are to be frozen, salaries pegged to a 2% rise, and retirement ages raised from 60 to 65. All this is provoking a storm of threatened protests, so I guess the proof of the pudding will be in the eating.
I like this title. I have, I unashamedly admit, lifted it straight from NTC research (where it was in any event hardly the most creatively original of headers). I like it since it seems to run counter in spirit to all those admonishing lectures we are currently getting about the dangers of ‘secondary inflation’ and pass-through. The headline refers to the fact that Germany’s EU-harmonised annual inflation rate (HICP) for September was revised down to 2.6 percent from an initial 2.7 percent, the Federal Statistics Office announced on Wednesday. Actually this revision is something of a statistical freak as the reading in question was the harmonised consumer price index for Germany, which is calculated for European purposes. In fact AP runs a different headline: German Inflation Rate Climbs in September, which doesn’t really prove that there are lies, damn lies and statistics, but rather that we have a labyrinth of statistical indices at work – AP quote the straight national CPI, and not the harmonised index. Anyway, if you can battle your way through all this, well good luck to you!
Much more to the point, however, is the detail that , not considering heating oil and motor fuel, the rate of price increase would have been just 1.6%. Inflation scare? Where? Oh yes, I forgot, in Spain and Greece.
As reported by the Federal Statistical Office, the consumer price index for Germany rose by 2.5% in September 2005 on September 2004, and by 0.4% on August 2005. That is the highest year-on-year rate of increase for more than four years (May 2001: +2.7%). In July and August 2005, the year-on-year rates of change were +2.0% and +1.9%, respectively. The estimate for September 2005 based on the results from six Länder was thus confirmed.
The year-on-year rate of price increase was strongly influenced by the sustained price increase for energy in September 2005. In that month, price increases were recorded primarily for mineral oil products again. Not considering heating oil and motor fuel, the rate of price increase would have been just 1.6%. Domestic fuel prices were up 40.0% compared with the same month a year earlier.
Source: German Federal Statistical Office
Hungary converted itself into the latest country to join the line of EU members awaiting chastisment for failing to enforce budgetary discipline after it became clear that its deficit for 2005 could be almost double official forecasts.
Joaquín Almunia, EU monetary affairs commissioner, told European finance ministers Hungary’s deficit this year was projected to be 6.1 per cent although some economists say it could top 7 per cent.
The state of Hungary’s public finances was only revealed after the country’s central bank blew the whistle on the government, which used creative accounting to massage down the deficit. The revelation is embarrassing for the European Commission, which reported in July that Hungary was “within reach” of achieving its targeted deficit for 2005 of 3.6 per cent.
Eurostat reports that 12 EU states exceeded the 3% stability and growth pact limit last year. But let’s start with the good news: 6 states – Denmark, Finland, Estonia, Sweden, Ireland and Belgium – had a budget surplus in 2004. The three countries with the highest deficits were Greece (6.6%), Hungary (5.4%), Malta (5.1%), and Cyprus (4.1%).
All the larger EU states (with the honourable exception of Spain) had excess deficits: Poland (3.9%), Germany (3.7%), France (3.6%), Italy (3.2%) and the UK (3.1%). Eurozone total government deficit rose to 70.8% of the total GDP of the region.
Poland is having elections Next Sunday. They are getting rather less press coverage than the German ones, but one issue does now seem to have hit the news:
Poland could be heading for a referendum on the adoption of the euro in late 2009…. Centre-right group Civic Platform (PO) and the eurosceptic Law and Justice party (PiS) both came out in favour of a referendum on the single currency in the Polish press on Monday (19 September), with Law and Justice proposing a date toward the end of the parliament’s next four year-long session.
The latest opinion polls tip Civic Platform to win the general elections by 32 percent with Law and Justice picking up 27 percent and the pair planning to form a powerful new coalition that will be less friendly toward the euro and the EU Constitution than the present left-wing government (SLD).
The economic news from Italy continues to be grim. This week more negative data on consumer confidence and the trade deficit (the biggest since 1992, and it was of course in 1992 that Italy came flying out of EMU).
The ISAE research institute’s consumer confidence index fell to 100.9 in July from 102.9 in June, touching its lowest level in 13 months and underlying the public’s reluctance to make expensive purchases of property or durable goods.
Earlier this week Italy reported it had run a world trade deficit in the first five months of this year of ?6.28bn (?4.4bn, $7.6bn), the biggest imbalance between national exports and imports since 1992.