Friday, March 28, 2014
Inflationary pressure in Germany remains low. Based on the results of six regional states, German headline inflation dropped to 1.0% YoY in March, from 1.2% in February. On the month, German prices increased by 0.3% MoM. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation decreased to 0.9%, from 1.0% in February. Looking at the available components at the regional levels shows that the drop in headline inflation was mainly driven by lower energy prices, the continued decline in communication costs and last year’s Easter Bunny. In 2013, Eastern was in March which pushed down prices for vacation trips. While there hardly is a 100%-guarantee for anything in economics, it is for sure that the negative effect from Eastern will be reversed next month. Today’s inflation data do by no means signal any deflationary tendencies in the German economy. To the contrary, inflation data should rather be filed under Mario Draghi’s famous label “with low inflation, you can buy more stuff”. Unless energy prices unexpectedly drop further, today’s reading should mark the trough in German headline inflation this year. Due to reversed base effects, headline inflation should increase in the coming months before flattening out over the summer months. For the ECB, however, German inflation data could cause another headache in Frankfurt. Earlier today, Spanish March inflation was reported at -0.2% YoY, from 0.1% in February, increasing the odds that Eurozone headline inflation has slowed down further in March. While latest confidence indicators have confirmed the ECB’s base case scenario for the economic recovery, inflation has and probably also will fall short of expectations. We don’t think that the ECB will react to a single data release but Monday’s inflation data could tip the balance in a Governing Council which does not seem to have made up its mind yet. At the current juncture, we still think that the ECB’s preferred next policy option is to do nothing. First of all, current deflationary tendencies are mainly the result of supply shocks with potentially positive consequences (lower energy and food prices, improvement of competitiveness). Secondly, headline inflation should accelerate in the coming months due to reversed base effect. Finally, the instruments the ECB has available in its toolbox largely look like illusionary giants: giant from a distance but rather unimpressive in terms of effectiveness, practicability and indisputability. All of this means that most likely outcome of next week’s ECB meeting is that the ECB will continue talking the talk in order not to have to walk the walk.
Thursday, March 13, 2014
Mijn favoriete tv-held is terug. Jack Bauer, het hoofdpersonage van de Amerikaanse reeks '24', gaat voor de negende keer het Amerikaanse volk en zijn president redden. Een held die geen compromissen sluit en tegenslagen moet verwerken, maar uiteindelijk toch zegeviert - zij het soms tegen een hoge persoonlijke prijs. Het wordt tijd dat Jack Bauer zich ten dienste stelt van Europa.
De afgelopen jaren heeft het heilige geloof in Hollywoodachtige happy endings postgevat in de eurozone. Als de eurozone maar dicht genoeg bij de afgrond staat, worden op het laatste moment belangrijke beslissingen genomen en knopen doorgehakt.
Ook nu lijken de meeste Europese beleidsmakers weer op zo'n happy end te hopen. Achter de schermen van de financiële markten is er een behoorlijke 'deadlock' ontstaan over de volgende bouwsteen van de bankenunie. Het bankenresolutiemechanisme, dat in december nog met veel bombarie werd gepresenteerd, is namelijk nog lang niet in kannen en kruiken. Het Europees Parlement wijst het voorstel van de regeringsleiders namelijk af. Terecht.
Want in zijn huidige vorm kan het bankenresolutiemechanisme banken niet in een weekend afwikkelen en staat de deur ver open voor politieke koehandel. De meningsverschillen met de regeringsleiders zijn groot en moeilijk te overbruggen. Toch overheerst het gevoel dat het weer goed zal komen. Daarbij zou Europa meer baat hebben bij een bewogen finale dan bij weer een zoet, gladgestreken Hollywood- happy end.
Want als we met een kritische bril terugkijken naar de happy endings van de afgelopen jaren, zien we dat er wel belangrijke stappen zijn genomen, maar dat er steeds weer te veel ruimte werd gelaten voor de vervolgfilm. Of het nu gaat over sixpacks, twopacks of economische onevenwichten, alle nieuwe elementen maken de eurozone sterker. Maar ze geven ook voldoende ruimte voor politieke koehandel of het verzachten van de regels. Recente discussies over hoe de berekeningen van structurele begrotingstekorten kunnen worden aangepast of waarom handelsoverschotten van meer dan 6 procent van het bruto binnenlands product niet moeten worden aangepakt, maakten dat opnieuw pijnlijk duidelijk. Veel nieuwe bouwstenen van de monetaire unie volgen het waarom-makkelijk-als-het-ook- ingewikkeld-kanprincipe.
Het Europees Parlement heeft nu de unieke kans om de volgende bouwsteen van de nieuwe monetaire unie simpel, transparant en helder te maken. Het moet alleen het been stijf houden. In een periode waarin het Duitse Hof het Europees Parlement als minderwaardig beschouwt, krijgt het Europees Parlement de uitgelezen gelegenheid om zijn macht te laten zien. De procedure voor bankenafwikkelingen moet op een bierviltje passen, en niet op een chaotisch stripverhaal van mijn zoon lijken. Zet door.
Helaas is er te veel fantasie vereist om zich Europees Parlementsvoorzitter Martin Schulz als krachtige, compromisloze actieheld voor te stellen. Daarom is er maar één uitweg: Jack Bauer voor Europa.
Deze column verscheen vandaag in het Belgische dagblad "De Tijd"
Tuesday, March 11, 2014
This week will be decisive for the final version of the Eurozone’s bank resolution fund. A compromise is still not in reach. It’s again one of these crucial weeks for the Eurozone, which go almost unnoticed from markets’ radar screens. Back in December, European government leaders celebrated a big breakthrough on the road towards the banking union, agreeing on the so-called Single Resolution Mechanism (SRM). The SRM should be the institutional counterpart for the Single Supervisor, being able to unwind failing banks. Under the SRM, governments will build up national bank-resolution funds by imposing levies on banks. The funds should gradually be merged into one European pot containing around €55bn over 10 years. The inter-governmental agreement in December was not the last word. The European Parliament (EP), which also has to sign off on the deal, opposed the agreement. In fact, the EP recently confirmed its red lines regarding the SRM, repeatedly stressing that no deal was better than a bad deal. The EP’s criticism of the SRM deal principally follows two main lines: the decision-making process and the size of the resolution fund. In the current set-up it will be hard to rescue a bank during one weekend, but rather it is a long-lasting process. In more detail, the EP wants the ECB to be the only authority to decide whether a bank is "failing or likely to fail". The intervention right for governments should be reduced to zero. This means that resolution actions concerning a specific bank should be decided only at the executive board level of the SRM to avoid political power-games and ensure that banks receive equal treatment, irrespective of their country of origin. The EP clearly wants to avoid a role for the Council in decisions on a bank's resolution. Finally, the EP wants an earlier and faster mutualisation of the national compartments in the Resolution Fund. Up to now, Eurozone finance ministers have been rather reluctant to compromise, while the EP is playing hardball. A compromise between the two parties will not be easy to find – particularly on the issue of decision-making. Comments after last night’s Eurogroup meeting confirmed that finance ministers are struggling to agree on a new proposal for the talks with the EP. In our view, the most likely outcome of finance ministers’ talks should eventually be to move on the issue of earlier mutualisation of the national funds. The negotiations between finance ministers, the EP and the current EU presidency, the Greek government, will officially resume tomorrow. The Greek government has set the deadline to find a compromise to the end of this month. This is needed to allow the European Parliament to still vote on the SRM in April at its last plenary session before the elections. Based on the experiences of the last years, there still is the deeply-rooted belief that European governments should once again succeed in thrashing out a last-minute compromise. However, past successes are not always a guarantee for future success. This time might be different. Two factors argue against a last-minute deal: the European Parliament felt side-lined several times during the euro crisis and might want to make the SRM a litmus test of its increased powers. Moreover, with or without SRM, any costs of possible bank rescues this year as the result of the ECB’s stress tests and asset quality review will have to be carried by national players anyway. The only European element in possible bank rescues this year would be financial support to national governments through the ESM. Over the past years, every time the Eurozone seemed to be in a decision deadlock, it has been a good strategy to bank on the Eurozone’s ability to thrash out a last-minute compromise. This time around, however, there is a significant risk that just banking on past successes might be too little.
Thursday, March 6, 2014
It must have been a disappointment for those who had expected an exciting and action-loaded ECB meeting today. In fact, the ECB did not do anything. Interest rates remain on hold and any possible new unconventional measures were left safely stored in the closet. ECB president Mario Draghi himself had stirred the expectations for today’s meeting during the press conference back in February. However, looking at the pure economic facts, the ECB did not see any reason to change its current policy stance today. Looking at the economic indicators released since early February could only lead to ticking all the boxes with the name “no change” on it. Confidence indicators increased despite emerging market concerns, inflation stabilised and is – according to the ECB – artificially kept low by negative energy price effects and the appreciation of the euro, and peripheral countries showed further signs of improvement. At the same time, money markets normalised. Only bank lending stagnated, but at least did not get worse. In sum, all incoming data released since February made it very hard to justify further ECB action. The long-awaited ECB staff projection also made it harder to act. In short, the latest ECB staff projections confirmed the well-known baseline scenario of a continuation of the Eurozone’s gradual recovery in the coming years with expected GDP growth rates of 1.2% (from 1.1%), 1.5% (unchanged) and 1.8% in 2014, 2015 and 2016 respectively. As regards inflation, ECB staff expects a slow increase of headline inflation in the years ahead from 1.0% in 2014, to 1.3% in 2015 and 1.5% in 2016 (with 1.7% expected in 4Q). Risks to the economic outlook are still to the downside and balanced for the inflation outlook. The same old story. During the press conference, Mario Draghi continued with its latest efforts to downplay the deflation threat. Remember that back in November, deflation was still the biggest risk for the Eurozone. The tone has changed. We already learned earlier that deflationary forces were (partly) a result of structural adjustment in the Eurozone periphery and that it was needed to look at the individual components of the HICP basket and not at the headline number when measuring deflation. Today, the backtracking received three new elements: slack (also known as The Zlack) in the economy, energy prices and the exchange rate. Obviously, slack in the Eurozone economy will keep inflationary pressure low for several years. According to Draghi, the negative impact from lower energy prices had shaved off 0.5%-points of headline inflation, while the appreciation of the euro accounted for another 0.4%-points. The fact that Draghi explicitly mentioned the exchange rate impact on inflation is in our view a clear signal that the ECB would not be pleased with a further strengthening of the euro. Judging from Draghi’s statements, the ECB’s inaction is the result of better-than-expected data but also of the fact that all potential next steps are either highly complicated to implement or highly controversial; or even both. Over the last month’s, the ECB had often put many market participants off the scent. With today’s meeting, this confusion should hopefully end. New action is still possible but only if tensions in the money market increase and/or the inflation outlook worsens. Until then, the ECB will lean back and do nothing, enjoying what Draghi called the island of stability.
Zig-zagging towards the industrial recovery? German new orders increased in January, confirming that the economy’s industrial backbone is further strengthening. New orders were up by 1.2% MoM, from an upwardly revised drop of 0.2% in December. On the year, new orders are up by more than 8%. 1.9%. The drop was broadly driven by weaker foreign and domestic demand. Both domestic and foreign orders increased in January. Within foreign orders, however, orders from other Eurozone countries had a relapse, dropping by almost 9% MoM. Despite the January increase in domestic orders, German manufacturing remains highly dependent on foreign orders. Over the entire year 2013, foreign orders were up by almost 4%, while domestic orders only increased by a meagre 0.5%. Earlier today, the German statistical agency released details of Q4 trade data. The details revealed interesting information. Particularly the French stagnation is leaving its marks on German exports. France is still Germany’s most important trading partner, but the gap vis-à-vis other countries is narrowing. In the fourth quarter, 9.1% of all German exports went to France, 8.2% to the US. Between 1999 and 2002, more than 11% of all German exports went to France. As regards the Eurozone rebalancing story, Germany’s trade surplus vis-à-vis the rest of the Eurozone shrank by 13% in 2013,, compared with 2012, and stood at 58.6bn euro (roughly 2.2% of German GDP). Returning to the latest figures, it is noteworthy that three out of the top 5 German export destinations are countries outside the Eurozone (US, UK and China). Looking ahead, the German export engine could stutter somewhat longer than expected. Concerns that spooked financial markets since the beginning of the year might have disappeared from markets’ radar screens but could leave some bruises on the German economy. Taken one-by-one, slowing emerging markets, Russia or the Ukraine are too small to matter for the economy. However, together with China, all these countries together account for around 15% of all German exports. It looks as if the basis for a strong pick-up in German exports is shrinking. All in all, today’s data send two important messages for the German growth outlook. The near term looks very rosy and industrial production should gain further momentum. To maintain this momentum into the longer term, however, the economy needs more domestic demand.