Wednesday, June 25, 2014
They will not bend it like Beckham but when European leaders meet in Brussels this week, they are likely to present varying forms of flexibility. Flexible and rigid. These have probably been the best two key words describing the main issues of this week’s European Summit: flexibility on the Eurozone’s fiscal rules and rigidity in the power game on the nomination of the next president of the European Commission. As regards to the Eurozone’s fiscal rules, the economic stagnation in France and Italy combined with the overall rather anaemic recovery of the Eurozone has revived the debate on growth versus austerity. Irony or not, it is mainly the countries, which up to now have not really been glowing with structural reforms, that are now pushing for more fiscal wiggle room. It is also the same countries which have not built in automatic correction mechanisms in their national debt brakes under the so-called fiscal compact. The basic idea behind a new initiative of mainly social democratic governments is to give countries more time for fiscal consolidation in return for structural reforms. Moreover, it should be possible to exclude certain investments and the costs of economic reforms from nominal fiscal deficits. Many social-democratic leaders suggested that the fiscal framework should be applied in a more flexible way. In our view, these attempts of publicly watering down the Eurozone’s fiscal framework are mainly hot air and much ado about nothing. The discussions on flexible interpretations of the rules are as old as the rules themselves. The calculation of the so-called cyclically-adjusted fiscal balances has already shown how complex and open for interpretations these methodologies can be. Moreover, the Eurozone’s fiscal rules already provide more time to adjust in a period of very low or negative GDP growth. Of course, as long as it is a tit-for-tat, including structural reforms into the fiscal equation can make sense. However, this can be better done by clear-cut and strict commitments and supervision than by new methodological tricks. Moreover, let’s not forget that earlier proposals by Germany to introduce binding reform contracts between countries had been rejected by many. The basic principle for economic rules to work is that they should be easy and simple. Further complexity by adding proxies for structural reforms could make sense economically but would make the fiscal framework even more complicated. Monitoring of fiscal policies would then definitely be an art, not a science. It is obvious that flexibility will be one of the buzz words at this week’s Summit. However, the interpretation of flexibility is likely to differ. While several countries led by France and Italy seem to advocate new rules with new flexibility, Germany will stick to the flexibility under the current rules. As long as there is no agreement on any binding framework for structural reforms, it is very hard to see Germany agreeing to any changes of the fiscal framework. The other big topic that will address at least some government leaders’ flexibility is the first stage of European musical chairs: the nomination of the next president of the European Commission. Remember that government leaders have to propose a candidate who will then have to be nominated by European Parliament. Despite earlier reservations, a consensus amongst government leaders to support Jean-Claude Juncker has emerged. Only British Prime Minister Cameron and his Hungarian colleague Orban are still publicly opposing Juncker. Cameron suggested earlier that failing to get his way may increase the chances of a UK exit from the EU. This threat, however, has turned out to be an own goal. Many other European politicians showed little understanding for what some called tactical exaggeration with Cameron’s aides now seemingly resigned to defeat on Juncker’s appointment. Cameron is in a difficult position having promised a referendum on EU membership should his Conservative Party win the 2015 General Election. He has said that he would campaign in favour of remaining in the EU so long as the UK’s relationship with the EU can be renegotiated with certain EU powers “brought back” under domestic control. With Juncker in charge the perception – rightly or wrongly – is that Cameron will be less likely to win any concessions. With the Labour Party currently leading in the UK polls it is possible that the proposed referendum never takes place. However, the Labour leadership is coming under pressure from its own backbenchers to offer it given that UKIP, the anti-EU party that “won” the recent European parliamentary elections, is starting to eat into its support. However, another interesting aspect of all this is the increased polarisation in the UK population’s thinking on its relationship with the EU. UKIP’s surge in the polls has been attracting headlines, but we also see that a greater proportion (and rising) of the UK's population are in favour of staying in the EU. However, it isn’t a majority being led by positive sentiment to Europe – it is more the fear factor of what might happen should the UK leave with people worried about jobs and growth. If there is a form of negotiation that brings some powers back to the UK then approval to stay in the EU rises to 57% according to a recent YouGov poll. However, if no EU concessions are won by the UK government, which would lead to a widespread press revolt and could quickly lead to a reversal in the polls, there is a high probability that the UK leaves the EU in 2016/17. If this occurs, the assumption is that the UK will quickly be allowed into the European Free Trade Association (with Norway, Switzerland, Iceland and Liechtenstein), which basically would give the UK population what it wants – access to the single market without the political ties. It would also allow Europe to press on with greater integration without having to continually make amendments to appease the British. That said, there may be some concern within Brussels about losing the UK given it is still a large, important (and rapidly growing) economy that positively contributes to the EU’s coffers. Some may also take the view that having the UK within the EU also helps boost the EU’s own global influence – US President Obama has recently explicitly stated he wants to see the UK remain part of the EU. Furthermore, demographics do not look good for the EU and losing the UK (whose demographics are dramatically different) may intensify worries over the outlook for the EU’s population, growth and wealth over coming decades. All in all, this week’s Summit almost looks like sports event with government leaders bending and stretching their flexibility. As in real sports, overstretched flexibility can sometimes lead to unexpected injuries. This piece is a co-production together with my ING colleague and UK expert James Knightley
Tuesday, June 24, 2014
Levelling off. German business confidence dropped in June on the back of weaker expectations, illustrating that the earlier hard-headed optimism is slightly crumbling. Germany’s most prominent leading indicator, the Ifo index, just decreased to 109.7, from 110.4 in May. While the current assessment remained unchanged, the expectations component dropped to 104.8, from 106.2 in May. It is the first time since Spring 2013 that the Ifo has dropped for two months in a row. However, despite today’s drop the absolute level of the Ifo index is still high and there is clearly no reason to panic. The German economy continues to send mixed signals. On the positive side, the strong fundamentals with record high employment, low unemployment rates and extremely favourable financing conditions should ensure continued solid growth in the months ahead. Earlier today, the German statistical office released the latest wage growth data. On the year, real wages were up by 1.3% in Q1, the strongest increase since the first quarter of 2011. Interestingly, wages in the part-time sector increased the strongest (+4.6% QoQ in nominal terms) and at the same time the wage gap between the former West and East German states is narrowing further. Nominal wages in the former East increased by 3.3% QoQ and 2.4% QoQ in the former West. Overall, low inflation, wage increases and the introduction of the minimum wage bode well for private consumption this year. Despite the strong fundamentals, there are currently however also some negative factors weighing on German growth prospects. Two disappointing months in a row for industrial production suggest that the Ukrainian conflict and the Chinese slowdown could still have a stronger impact on the real economy than confidence indicator made us believe and that the Eurozone recovery is not (yet) strong enough to have a positive impact on the German industry. Moreover, France’s economic problems should not leave Germany unharmed, as France is still Germany’s most important trading partner. With the US and the UK going strong, there is no reason to start singing swan songs on German exports. However, the normally very reliable growth engine could sputter longer than expected. With the reversal of favourable one-offs from the first quarter (ie the strong growth contribution of inventories and the mild winter weather), a growth correction the second quarter is almost inevitable. However, today’s Ifo and particularly the unchanged current assessment component suggest that the slowdown will rather be of a technical than of a fundamental nature. Looking beyond short-term fluctuations, the bright prospects for domestic demand should offset any possible headwinds for exports from the far East and the nearby West.
Sunday, June 15, 2014
Eigentlich geht es Mario Draghi so wie Joachim Löw. Beide setzen alles daran, um endlich den großen Sieg zu landen. Der eine will den WM-Titel, der andere den Sieg über Rezession und Deflation. Beide setzen dabei auf die Offensive und auf das Prinzip Hoffnung. Joachim Löw setzt in Brasilien auf einen einzigen Stürmer. Er hofft auf den Torinstinkt anderer Mitspieler. Im Aufgebot von Mario Draghi gegen Rezession und Deflation gibt es nicht mal einen richtigen Stürmer. Alle Maßnahmen, die letzte Woche präsentiert wurden sind nicht die große Trendwende für den Euroraum und werden auch nicht zu einem Durchstarten des Kredit- und Wirtschaftswachstums führen. Die EZB-Entscheidungen erleichtern vor allem für südeuropäische Banken nochmals die Finanzierungskosten. Die Banken können vor allem über die sogenannte TLTRO vier Jahre an extrem billiges Geld kommen. Das sollte sich bei den Konditionen für Kreditkunden schon bemerkbar machen. Es bleibt allerdings dabei, dass das schrumpfende Kreditwachstum im Euroraum nicht nur ein Angebots- sondern auch ein Nachfrageproblem ist. Große Unternehmen sind im Augenblick häufig gut mit Kapital ausgestattet oder haben einen guten Marktzugang, so dass die Kreditnachfrage eher gering ist. Es sind vor allem die südeuropäischen Mittelständler, die schwer an neue Kredit kommen. Aber auch für sie bringen die EZB-Maßnahmen nur beschränkt Besserung. Letztendlich ist bei einer Kreditvergabe nicht so sehr der Preis von EZB-Geld entscheidend, sondern viel mehr das Kreditrisiko und das verändert sich nicht. So überwiegt bei Mario Draghi deutlich das Prinzip Hoffnung. Die Hoffnung, dass die neuesten Maßnahmen vielleicht im Herbst, nach den Ergebnissen des Bankenstresstests und weiteren Strukturreformen der Regierungen, wenigstens eine kleine Anschubhilfe für Kreditwachstum und Konjunktur leisten können. Da geht es Draghi dann doch besser als Joachim Löw. Der hat nicht bis zum Herbst Zeit. Gastbeitrag in der Euro am Sonntag vom 14.6.2014
Thursday, June 5, 2014
The ECB today ignited monetary policy fireworks. With rate cuts, new liquidity measures to enhance the transmission mechanism and some hints at further unconventional measures, the ECB presented a policy package of last hope. This was as far as the ECB could go without getting lost in the unchartered territory of QE. The trigger for today’s action was probably the downward revisions of the ECB’s staff projections and the wider fear that the recovery could falter and deflation could become a threat. As regards growth, the ECB now expects GDP growth to come in at 1.0% in 2014, 1.7% in 2015 and 1.8% in 2016. Risks to this outlook are still to the downside. As regards the inflation outlook, the ECB revised all its forecasts down and now expects inflation to come in at 0.7% in 2014, 1.1% in 2015 and 1.4% in 2016. The earlier pick-up in inflation towards the end of 2016 has also become less likely. In its latest forecasts, ECB staff expects inflation to be at 1.5% in Q4 2016. So what did the ECB actually decide? Rates. The easiest measures were the rate cuts on all major interest rates. The ECB announced a 10bp rate cut for the refi rate (to 0.15%, from 0.25%) and the deposit rate (to -0.1% from 0%). At the same time, the rate on the marginal lending facility was cut by 35bp (to 0.4%, from 0.75%), thereby making the rate corridor symmetric again. Targeted longer-term refinancing operations. This will become the ECB’s version of a funding for lending scheme, or better a reversed funding for lending scheme. According to the ECB, these TLTROs will have a maturity of around 4 years. Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. Lending to the public sector will not be considered in this calculation. The maximum volume of such TLTROs could amount to around 400bn euro. Two TLTROs will be conducted in September and December this year. Then, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark. The interest rate on these TLTROs will be fixed at the current ECB’s refi rate plus a fixed spread of 10 basis points. In our view, these TLTROs look like a reversed funding-for-lending scheme: the more lending commercial banks provide to the private sector, the more cheap funding they can get. Full allotment. The full allotment on all other liquidity operations was extended to December 2016. SMP sterilization. The ECB announced to stop the SMP sterilization. ABS purchases. The door for ABS purchases was kept open as the ECB decided to “intensify preparatory work related to” ABS purchases. According to ECB president Draghi, ABS would have to be based on real loans and not derivatives. Taken everything together, today’s package of policy measures is a strong one, underlining the ECB’s determination and willingness to act. However, as so often during the euro crisis, first-glance-enthusiasm doesn’t always last. Looking somewhat critically at today’s measures, the ECB has no guarantee that the economy and lending to the private sector can really be kick-started. The ECB is still dependent on banks. To some extent, the wish is still father to the thought. Nevertheless, with today’s measures, the ECB has at least sent three clear messages: i) the downward bias for rates is gone and rates have really reached the lower bound; ii) with the extended full allotment and the TLTROs the ECB rates will remain extremely low for at least another two years, if not even longer; and iii) if need be, QE – at least in the form of ABS purchases – could be started. Back in the summer of 2012, Draghi gave a whatever-it-takes moment for the existence of the Eurozone. Today’s measures are not yet a whatever-it-takes moment for the Eurozone economy but they are at least a good package which will give the Eurozone some additional monetary tailwind.
Mit Mann und Maus in den Angriff, um endlich das entscheidende Tor gegen Krise, Rezession und Deflation zu schießen. So kurz vor Beginn der Fußball-Weltmeisterschaft hat EZB-Präsident Mario Draghi sich für Italiener untypisches Offensivspiel entschieden. Eine Art geldpolitischer Voetbal Totaal. Anfang Mai gab Mario Draghi sein geldpolitisches Catenaccio auf. Der Satz, dass die EZB „komfortabel“ war mit neuen Maßnahmen im Juni hat seitdem die Phantasien von Marktteilnehmern beflügelt. Aber was kann die EZB eigentlich liefern? Viel und gleichzeitig wenig. Eigentlich bestehen fast alle theoretischen Instrumente nicht den Praxistest. So riefen die anglo-sächsischen Analysten sofort nach Quantitative Easing. Sie meinen damit das Aufkaufen von Staatsanleihen, Unternehmensanleihen und anderen Wertpapieren. So wie die amerikanische und britische Notenbanken es schon vorgemacht haben. Vergessen wird dabei allerdings, dass die Höhe von Renditen auf Staatsanleihen schon länger kein Problem mehr ist. Und gleichzeitig ist es nur schwer vorstellbar, dass die EZB z.B. ein französisches Abweichen von Sparzielen mit dem Aufkaufen von Staatsanleihen belohnen würde. Ganz zu schweigen von den Schlangen, die sich in Deutschland vor dem Bundesverfassungsgericht bilden würden. Zudem können sich Unternehmen, die selber Anleihen ausgeben, vor Nachfrage gar nicht retten und brauchen wirklich keine zusätzliche Unterstützung der EZB. Bliebe nur ein Programm zum Ankurbeln der Mittelstandskredite. Die EZB überlegt daher, dem brachliegenden Markt für verpackte Mittelstandskredite neues Leben einzuhauchen. Nicht einfach in Zeiten von Bankenstresstests. Ein letztes Instrument, das häufig genannt wird, sind negative Einlagenzinsen. Normalerweise verzinst die EZB Geld, das Geschäftsbanken bei ihr kurzfristig parken mit dem Einlagenzins. Ein negativer Einlagenzins würde Banken beim Geldparken eine Gebühr aufbrummen. Es gibt zwei theoretische Argumentationen hinter so einem Schritt. Einerseits soll so eine Parkgebühr Banken dazu anregen, die Kreditvergabe wieder anzukurbeln. Anderseits könnte eine Parkgebühr auch ausländische Investoren abschrecken und so den Wechselkurs des Euro etwas abschwächen. Wie so häufig überzeugt die Theorie allerdings nicht in der Praxis. Einige kleinere Länder haben in den letzten Jahrzehnten mit einem negative Einlagenzins experimentiert; zuletzt z.B. Dänemark. Während die Kreditvergabe fast gar nicht reagierte, sah man wenigstens einen kleinen Einfluss auf den Wechselkurs. Ob das jedoch auch im Euroraum funktioniert, ist mehr als fraglich. Ausländische Investoren, die in letzter Zeit wieder vermehrt südeuropäische Staatsanleihen gekauft haben, werden durch negative Zinsen überhaupt nicht tangiert. Ganz im Gegenteil. Weiterer EZB-Aktionismus könnte das Vertrauen in den Euroraum weiter stärken und sogar zu einer Aufwertung des Euro führen. Draghi scheint überzeugt vom Angriffsfußball. Daher wird es heute wohl eine altherkömmliche Leitzinssenkung geben, garniert mit Elementen nach dem Motto „nützt es nicht so schadet es auch nicht“ wie dem negativen Einlagenzins und mehr Liquidität. Vielleicht hätte jemand Draghi sagen sollen, dass der niederländische Voetbal Totaal zwar die Herzen der Fans, jedoch nie einen WM-Titel gewonnen hat.