Has Fillon only got until the end of the year?
Francois Fillon will remain prime minister at least throughout the EU presidency . The message was send out by Sarkozy to dispel rumours of a possible break up between the two (see ourpress briefing on 22 May). Both started a charm offensive, but Le Monde speculates that it is only a matter of time. Fillon lost his principal role as an arbiter to Sarkozy. He is now the one who reunites half of the cabinet to prepare the next wave of reform and who holds the meetings with the MPs. Though these summits are nothing new, Sarkozy is the one to make those meetings known by the public. Meanwhile, Fillon was reported by Le Monde to have talked openly to supporters about his eventual departure.
The politics of the German presidency
It is now official. The SPD will nominate Gesine Schwan, a political scientist, for the federal presidency, in a direct challenge to Horst Kohler, the inbumbent, who has the support of the CDU and the liberal FDP. Financial Times Deutschland says in an editorial that the SPD’s decision to nominate its own candidate is the de facto end of the Grand Coalition. In itself, this would be good news, since the Grand Coalition is politically finished. Unfortunately, it is over a year until the next elections, and this means no effective government for a prolonged period.
Goerg Paul Hefty, commentator in FAZ, argues that the SPD is pursuing a high-risk strategy by nominating Ms Schwan, who lost to Kohler last time. For her to win she would need the support of the SPD, the Greens and the Post-Communists to unite around the candidate. As the left is now the country’s third largest political force they will undoubted extract a price for their support, which is almost certainly their inclusion in a coalition of the left after the federal elections later that year. This would have profound implications on German politics.
Germany’s lobbyists up in arms over single payments area
The creation of a Single European Payments Area, or SEPA, is meeting fierce opposition in Germany, from newspaper owns, to savings banks associations, who fear that the new direct debt rules would require a huge administrative cost. Frankfurt Allgemeine reports that this criticism is partly based on fears that the new SEPA direct debit, which has to be authorised separately, might persuade people to cancel their existing direct debits, and not renew them. This is particular the case for newspaper, who realise a certain proportion of their sales through the fact that people do not bother to cancel their direct debits. The Bundesbank supports the new scheme, and has warned that the new scheme would, if necessary, be supported by domestic legislation.
Don’t worry – González-Páramo tells FT
Manuel González-Páramo tells the FT in an interview that the liquidity operations will continue into the indefinite future, and that the ECB has incurred no risk in accepting more securities as collateral – as suggested by another ECB board a few weeks ago. He said there is no significant increase in the amount of liquidity relative to bank assets since 2000. He also denied suggestions that banks have become overly reliant on ECB liquidity.
Joseph Stieglitz against Inflation targeting
Joseph Stiglitz in Les Echos argues that inflation targeting is a failure and should be abandoned. If countries now face high inflation it is not because they were not successful at inflation targeting but because international prices for petrol and alimentation increased dramatically. Countries thus suffer under imported inflation. Inflation targeting would not bring down international prices. Worse, inflation targeting would then require that domestic prices would have to fall dramatically to compensate the dramatic imported price increases. The price to pay would be an economic slowdown and further unemployment. It is not the politicians and the central banks to blame for imported inflation, nor are those the ones to solve the problem in times of subdued global growth prospects. The best would be to abandon inflation targeting.
Buiter on how central banks could restrain asset price booms
Willem Buiter makes the point that monetary policy is a bad tool to control asset price bubble, but at the same time central banks must recognise that there is an asymmetry in bubble that has deep affects on them: the bubbles build up slow, and deflate fast, often requiring some form of intervention. He makes three proposals for central banks to use non-monetary policy tools. First, impose a simple measure of leverage, for example gross exposure to book equity, as a metric for insolvency risk, apply that measure to all financial institutions, and adjust it in a counter-cyclical manner. Second, imposing minimum liquidity requirements, and finally, set up a special regulator structure for too-large-to-fail banks, with a specific provision for regulatory insolvency.
Munchau on inflation
Wolfgang Munchau argues in his FT column that not the 1930s, but the 1970s offer a better historical parallel to our situation today. An oil price shock, largely accommodated by central banks, drives up inflation worldwide, while the central bankers stand paralysed by the financial crisis. Munchau says a vast monetary expansion over the last ten years has led to serial assets price bubbles – equities, property, credit, now oil and other commodities – and is now feeding into general consumer prices. He concludes that the financial crisis and the global readjustment have the same cause – excessive liquidity.
Menzies Chinn on transmission channels of monetary policy
In his Econbrowsers blog, Menzie Chinn cites, and comments on, a paper by Nicola Cetorelli and Linda Goldberg, who show that the bank lending channel has been profoundly changed by globalalisation. Monetary policy affects small banks more than large banks. Taking a global perspective, the bank lending channel still works, but this means that a domestic US interest rate cut affects the rest of the world increasingly more than the US itself. Chinn says this result has important implications for the decoupling debate. As shocks propagate abroad, de-coupling is becoming impossible.
FT on EMU
In an editorial on the 10th anniversary of the euro, the FT said that EMU had been a success against all odds. It produced low inflation, low interest rates, economic stability, more trade, more jobs. There are many challenges ahead, among them better international co-ordination, better fiscal policy supervision, and more economic policy co-ordination.
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