Mervyn King on Tuesday night signalled he was not convinced of the case for lower interest rates and could see many reasons why the rise in oil prices might increase inflationary pressure. Continue reading →
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.
The euro fell briefly below $1.19 yesterday. There is nothing surprising or exceptional about that, the common currency has been drifting steadily downwards against the dollar for a number of, by-now, pretty well known reasons – better economic performance in the US, a growing interest rate differential between the ECB and the Fed, political issues following the referendum noes, and an incapacity to decide what to do with the SGP. Yesterday however, an apparently new element was introduced: Christian Noyer, and his appearance before the Foreign Affairs Committee of the French National Assembly.
That this should have caused a stir surprises me. Christian Noyer is Governor of the French national bank (and not simply, as much of the press report, an ECB governing council member). It is therefore perfectly logical that when asked whether any country could leave the eurozone, he should reply in the affirmative. EU member states are, as Noyer says, still sovereign nations. He would therefore have been lying to answer ‘no, it is impossible’. Curiously, the other part of M. Noyer’s recorded testimony, that any exit would put in question continued membership of the EU is far more debateable, yet seems to have attracted far less attention.
Membership of a currency union is (or should be) an economic, not a political decision. Decisions on entry or exit should therefore be taken on economic grounds, and discussions of the issues involved should be possible without an atmosphere of emotional hysteria. Of course, if your currency falls simply because someone states the obvious (I mean the information content *is* zero), then this may indicate that there is a rather deeper problem knocking around somewhere or other.
This is a very convenient moment to put up this post. Alan Greenspan has just admitted that he’s human like the rest of us, and that he doesn’t have a very good explanation for why long-term interest rates have been falling at a time when he and his Fed colleagues have been busy raising short-term rates. I think he’s being a bit coy here, since I’m sure he has some idea. Among other things he will be well aware of the contents of a speech made recently by Ben Bernanke, a US economist who is considered high on the list of possible Greenspan successors.
“Iwill argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving–a global saving glut–which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving.” Continue reading →
Note this extract: “As financial markets digested the remarks of Roberto Maroni, Italy’s welfare minister, the interest rate differential between Italian and German bonds rose to 23 basis points, the widest spread since November 2002.”
These are the numbers we will be following at Afoe moving forward. Maroni is a member of a Northern xenophobic party that wants an independent country for the north of Italy. But *note*: he is in the government, and responsible for an important part of the Lisbon agenda, labour reform. So this is not some complete outside crank. Bottom line: Berlusconi’s government is an unstable coalation, and this very instability *is* cause for concern, especially since we have just seen mainstream politicians lose important votes in two of Europe’s more stable democracies.
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 →
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 →
The euro reached its lowest level against the dollar in seven months last week dropping from a valueof $1.311 a month ago to $1.255 on Friday. This was the lowest level since last October. Undoubtedly there are a confluence of factors at work here: yesterday’s French growth numbers, longer term stagnant growth in Germany and Italy, Sunday’s elections in the Federal Republic, the up and coming referendum in France, rumourology about forthcoming ECB rate cuts etc.
This downward pressure will in reality be welcomed in many quarters, since it could give some useful relief to hard pressed exporters, and it may help those (eg Spain) with serious balance of payments problems by offering some kind of corrective impetus.
But all of this only draws attention to one underlying fundamental of the situation: there has never been a ‘strong euro story’, it has always been a ‘weak dollar’ one. And it is here that things get really complicated, since it begs the question of whether the US is able and ready to live once more with a ‘strong dollar’, and if it isn’t then this immediately poses the question as to what exactly the repercussions will be? Continue reading →