ECB: Ooops, we did not mean it
Like Captain Renault in Casablanca, the ECB appears “shocked, shocked” that the financial markets interpreted last week’s statement by Jean-Claude Trichet that interest rate would have to go up and up. Nothing further from the truth, apparently. They will go up once, but not necessarily twice, according to Jurgen Stark, who said the Juli rate rise should be seen as a warning shot, not the beginning of a sequence, according to il sole 24 ore. It is clear that the ECB wants to put the lid on market expectations of three further rate increases (we at Eurointelligence expect two – not one, not three. So we wonder, if the quarter (only) point increase in June was the end of the sequence, what exact purpose should it serve? Are we going to hit the target of less than 2% inflation then, when we are missing it now? We believe the ECB does not know, or agree, what it will do in the autumn. It will depend very much on the inflation outlook, and the economic outlook. If both inflation and inflation expectation remain well above target, which we expect, then, in the absence of an economic eclipse, a further increase in interest rates is both probable and desirable. The biggest problem with the ECB at the moment is the way it communicates future decisions. Preannouncements have added to the confusion.
Draghi says monetary policy caused crisis
The Wall Street Journal economics blog has an interesting entry about some comments by Mario Draghi, governor of the Bank of Italy, who expressed cautious optimism, but said the crisis is not over by a long shot. What we found most interesting was his statement about monetary policy and financial stability. Here is what he had to say: “an environment of low interest rates had contributed to excess liquidity, mispricing and misallocation of risk. In this new financial landscape monetary policy has a financial stability dimension that central banks simply can no longer ignore.” In other words, low interest rates over long time can provide financial instability. Which means that monetary policy actively contributed to this crisis. This is very much the European View of this crisis.
D-Day in Ireland
This is the big day. The world’s anti-Europeans have descended on Dublin in the hope that the Irish electorate will vote against the Lisbon Treaty, the successor of the failed constitution. It is impossible to forecast the referendum, but the supporters of the Lisbon Treaty are extremely nervous. What makes it all more difficult is the fact that the country is euro area member. If this was Latvia, the country would be told within five minutes, to hold a second referendum, or get out. That may still happen, especially considering that the usual options of renegotiations plus second referendum do not apply. There are no bits, Ireland could opt out of. The Irish Independent and the FT have some further pre-referendum news. The results of the Irish referendum will be out by Friday late afternoon.
Wolfgang Proissl in the FT Deutschland already ponders the consequences of an Irish No. He says the best, though unfair course of action, would be to give the Irish some silly concessions, and then submit the treaty to a new referendum. After that, however, the EU should seriously consider the future constitutional process. The best course of action would be for the euro area and Schengen countries to use ability under the treaty to form separate mini-unions.
FT Deutschland has added an interesting aspect. It looked at previous EU referendums and concluded that the probability of a No Vote rises disproportionately with the economic weakness. Ireland is, of course, on the verge of a steep downturn as the house price bubble has burst. (We are not quite sure whether and to which extent this theory is correct, but we think it might be worth pondering on).
The future of Kurt Beck
There are articles, whose truth content are very difficult to assess. This is one of them. Frankfurter Allgemeine has an insight article on a palace revolt in the SPD against chairman Kurt Beck. It seasoned correspondent, a well-known expert on this party, has talked to all senior party officials, who told that Beck will not be the party’s candidate for chancellor at the 2009 elections, and that he will probably not even survive as party chairman beyond the Bavarian elections in the autumn. The only thing that might keep Beck in a job is the lack of an alternative leader. What made us skeptical about the story is that none of the senior malcontents are happy to come out in the open. (We do not doubt that the author has good sources, but we doubt their motivation). The leadership of the party has not forgiven Beck for his suggestion that at state level, SPD-candidates should be allowed to do their own deals with the Left Party, successors of the former Communists. Opinion polls add to Mr Beck’s discomfort. He is now very unpopular in the popular, and within his party. (Then again, Helmut Kohl has been in a similar situation before he became chancellor. We are not yet ready to believe that the SPD is about to ditch its chairman. But we do believe that the question of how to treat the Left Party will occupy the SPD for some time to come.)
An axis from hell: Italy and France form a protectionist alliance
The FT has the story this morning that the Berlusconi and Sarkozy administration that France and Italy have agreed to push a harder European line against China and India in the WTO, and for Italy to support Sarkozy’s pet project of a Mediterranean Union. “Foreign trade – an Italy-France axis is born,” the FT quotes Adolfo Urso, Italy’s under-secretary for trade, when meeting Anne Marie Idrac, his French counterpart, on Tuesday.
Italian minister promises public sector reforms
Renato Brunetta, the minister put in charge of the public sector in the Berlusconi administration, yesterday vowed to eliminate absenteeism in the Italian public sector, one of the biggest problem at the root of low public sector productivity in the country, according to il sole 24 ore. Brunetta said many soft routes had been taken in the past, without success. He says what is necessary now is wage contract reform, performance related pay, and disciplinary procedure to reduce absenteeism to the level of the private sector.
Klaus on the euro
Vaclav Klaus timed his round-robin condemnation of the euro to appear in this morning’s Financial Times to coincide with the Irish referendum. So if you are Irish, and inclined to vote No, this might stiffen your spine. Klaus offers a long, and not very original anti-European rant, blames the euro for all economic ills, and the wrong response to globalization.
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