Tag Archives: European Central Bank

February 19, 2013 · 17:20

Neutral Stupidity

The EU lawmakers are about to finalize rules for a single supervisory mechanism (SSM) coordinated by the ECB. The European Commission is expected to table legislation for a resolution mechanism to wind up ailing banks within the coming months. European Central Bank (ECB) chief Mario Draghi said on Monday in the European Parliament that a euro zone banking union will need a common resolution fund, and that it has to be “fiscally neutral over the medium term.” How can another European bank bailout fund be fiscally neutral?

 ”The European Resolution Fund should be backed by a public backstop mechanism to ensure that it would be fiscally neutral over the medium term.”

Mario Draghi

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Yup..neutral, but only over the medium term. Sooner or later the taxpayers will have to pay for this bailout, too…

Speaking with MEPs on the monetary affairs committee, Draghi said that the resolution fund should be financed via levies to safeguard against having to “recourse to taxpayer money,” the EUobserver.com reports.

Levies, hu?

ESMHere are some related words:

Also, the European Resolution Fund “should be backed by a public backstop mechanism,”  Mr. Draghi added, to ensure that it would be “fiscally neutral over the medium term.”

I’m sorry, but this sounds like pure nonsense to me.

There’s nothing new here – just another way to ensure that the bailout mechanisms already set up by the EU  leaders – the European Stability Mechanism (ESM) and the European Financial Stabilisation Mechanism (EFSM) – will still be in place when the European banking union becomes a reality.

But the need for a pan-European resolution fund is widely accepted among most EU lawmakers. However, some countries fear it could lead to their taxpayers financing bank rescues in other countries.

Well, I think they’re on to something….

Meanwhile, Draghi continues to kick the can, downplaying the recent diplomatic row over the exchange rate policy of the euro, dismissing it as “excessive” talks of a currency war involving the euro zone, Japan and the US.

He also said that the ECB did not regard the euro zone exchange rate as “a policy target, but it is important for growth and price stability.”

Important, but not a target….

And, according to the bank’s economic forecasts, the euro zone economy will fall by 0.3 percent in 2013, although Draghi indicated that he expected “a gradual recovery later this year.”

Heard that one, too…..quite a few times over the last five years.

bailout_packages

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January 28, 2012 · 16:57

El-Erian On Markets Balance Solvency, Growth and Liquidity

Another week has passed by and more ugly signs of how deep our economic troubles are have emerged. The only thing that keeps our financial house of cards from collapsing is the endless stream of money coming from the central banks – primary the US Federal Reserve and the European Central Bank (ECB). But doubts about the final outcome still persist.

“The health of the global economy, and that of markets, depends on the success of a series of medium-term handoffs between the public and private sectors – in growth, balance sheets and credit flows. This week’s data highlighted their complexity.”

Mohamed El-Erian 

In spite of the massive injection of money into the financial system by the central banks, key economic indicators continue to disappoint.  And by now, the central banks have painted themselves into a corner where there’s little else to do. The global economy is practically in state of stagnation – the next stage is depression…

Mohamad El-Erian at PIMCO is one of the top leaders who have managed to keep his cool and not lose his head throughout this whole mess so far.

He openly admits he does not have all the answers, but as usually he points to some key factors that we all should be aware of.

Here’s his latest commentary, as published by CNBC today:

“The health of the global economy, and that of markets, depends on the success of a series of medium-term handoffs between the public and private sectors – in growth, balance sheets and credit flows. This week’s data highlighted their complexity. Fortunately for investors, the valuation impact is being compensated by central banks‘ wide open liquidity spigots,” El-Erian writes.

And continues:

To counter disorderly private sector de-levering and avoid an economic depression, governments and central banks around the world have aggressively ballooned their balance sheets.

This has helped heal some private balance sheets but job creation has remained very anemic, income inequality has increased, and growth has been too weak to allow for the de-levering of the public sector (including fiscal deficits and central balance sheets which now vary in size from 20% of GDP in the US to 30% in Europe).

In the US, Friday’s disappointing GDP print for the fourth quarter was a reminder of the challenge, especially in view of a less-than-reassuring composition.

Consumer growth was limited to just 2% notwithstanding yet another decline in the savings rate to 3.7%, a level last seen at the end of 2007. Export growth also decelerated. Indeed, were it not for a surge in inventory, the economy would have probably succumbed to the drag from government components.

The extent of the growth challenge in Europe was highlighted by Friday’s higher than expected increase in Spanish unemployment (to an agonizing 22.9%).

Meanwhile several of the region’s governments, ECB, IMF and private creditors continued to squabble about how to allocate the inevitable losses on Greek debt.

In Portugal, another highly vulnerable economy, market measures of default risk reached record highs this week.

The longer such solvency and growth indicators continue to flash red in Europe, the more likely that capital will continue to flee; and the harder it will be to overcome the region’s debt crisis.

Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house.

Read the full post at CNBC.

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January 20, 2012 · 23:58

“Euro Zone Crisis is Germany’s Fault”

Now, this is an interesting point of view: According to Director of the Division on Globalization and Development Strategies at UNCTAD,  Heiner Flassbeck, the European financial crisis are all Germany‘s fault. Here at econoTwist’s, however, we belive that the responsibility should be shared among several others – like the incompetent EU parliament and the ridiculous artificial institution called the EU Council. But Mr. Flassbeck makes some valid arguments, and it’s certainly a theory worth taking into account.

“Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union.”

Heiner Flassbeck

“There is no solution to the current euro zone crisis as long as no one effectively challenges the consistency of Germany’s economic policy strategy with the logic of a monetary union. Captain Merkozy’s boat approaches the rocks at high speed,” Heiner Flassbeck writes.

This commentary is syndicated by www.eurointelligence.com:

A German End to the Euro Vision

Once upon a time European leaders believed in a step-by-step approach of European integration.

Each step would bring Europe closer to the target of closely related but still independent states.

According to this vision states would be willing to relinquish more and more of their independence, in order to gain advantages of peace, global strength through political cooperation and economic strength as a result of a big common market.

“Germany is considered by many as the role model for the rest of the union. That is the biggest mistake and the real reason why Europe is committing economic suicide instead of tackling its problem at the root.”

In this approach, the creation of a monetary union was just one of these consecutive and unavoidable steps on the path to strengthen political cooperation and to completethe common market with its indisputable advantages for all European citizens.

Unfortunately, twelve years after the start of the European Monetary Union (EMU) reality tells a different story.

EMU is in troubled water and captain Merkozy is steering the boat towards some dangerous rocks that could mark the end to a long and peaceful ride of a formerly war torn region.

Much has been said about the folly of pushing countries to cut public expenditure, increase taxes and put pressure on wages in the middle of one of the deepest recessions in modern history.

However, even the outspoken critics of the Merkozy approach rarely discuss Germany’s economic policy approach.

To the contrary, Germany is considered by many as the role model for the rest of the union. That is the biggest mistake and the real reason why Europe is committing economic suicide instead of tackling its problem at the root.

“Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union.”

A monetary union is in essence a union of countries willing to harmonize their rates of inflation and to sacrifice national monetary policies.

A country like Germany, fighting for higher market shares in international markets, tries to achieve the opposite. It has to undercut the cost and price level of its main trading partners by all means.

A monetary union formed by already closely integrated countries becomes a rather closed economy and needs domestic policy instruments like monetary policy to stimulate growth time and again.

German monetarism asks for the opposite, the absence of any discretionary action of central banks and relies solely on flexibility of prices, in particular wages.

Along these lines the story of EMU’s failure is quickly told. From the very beginning of the monetary union, German politicians put enormous pressure on trade unions to help realise an increase of unit labour cost and prices that was less than in other countries.

Since member states no longer could devalue their currencies to maintain competitiveness as they had done hitherto this was a rather easy task. The effects got stronger as small annual effects accumulated over time and, after ten years, created a huge gap in competitiveness in favour of Germany.

“Germany built up huge current account surpluses and Southern Europe and France accumulated the complementary deficits.”

The ECB, in good German monetarist tradition, celebrated the achievement of the two percent inflation target, while ignoring the fact that this was built on two-sided violation of the inflation target.

Without Germany’s undershooting of the target the overshooting in Southern European countries would not have been compatible with two percent overall.

The result is disastrous for the southern European economies as they are losing permanently market shares without being able to successfully retaliate the German attack. They would need a number of years with falling wages to come back into the markets.

However, the time to do that is not available.

Falling wages mean falling domestic demand and recession especially in countries like Italy or Spain with small export shares of some 25% of GDP. The resulting depression would be politically unbearable.

“Even a political tour de force would in vain as long as Germany is blocking the indispensable short and medium term relief measures.”

Until EMU as a whole recovers strongly, deficit countries will remain in current account deficits and will not be able to reduce their budget deficits.

What would be required is direct intervention by the ECB to bring down bond yields as well as Eurobonds to bridge the time until the deficit countries’ competitiveness is restored.

These measures are blocked by the German economic policy doctrine.

There is no solution to the current euro zone crisis as long as no one effectively challenges the consistency of Germany’s economic policy strategy with the logic of a monetary union.

Captain Merkozy’s boat approaches the rocks at high speed.

By Heiner Flassbeck

Director of the Division on Globalization and Development Strategies at UNCTAD.

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