German Grand Coalition in crisis
Half of Germany is celebrating a catholic holiday today – which means no newspapers – while the other northern half is waking up to newspaper headlines that the Grand Coalition has hit its biggest crisis yet. The most important development has been the decision by the SPD to nominate its own candidate for the federal presidency. Horst Kohler, the current president, is in principle prepare to be a candidate for the highest office again, but only if he has the support of the SPD. Without this support, he is not guaranteed a majority in the electoral chamber, and without this guarantee he is unlikely to take the risk of a defeat. The SPD is likely to nominate Gesine Schwan, a university professor from east Germany, for the highest office in the country, which has outraged the Christian Democrats. Another development has been the SPD’s decision not to support a wage increase for members of parliament, despite the fact that the leadership of the two partners in the Grand Coalition had previously agreed this step. (It is clear that with little over a year to go until the federal elections, the election campaign has effectively started). See for example Spiegel for more details.
Ifo index bounces back
The Ifo index bounced back from 102.4 to 103.5 in May, reversing more than half of the losses of the previous month, and driving the euro towards $1.57, as the markets are becoming less certain about the “global recession” story that has spooked investors recently. FT Deutschland quotes analysts as saying that this development is pointing towards a soft landing for the German economy. In particular, the relatively mild developments suggest that the long awaited recovery in consumer sentiment will continue through this year – and provide an important support for the economy as investment is weakening. There are already signs that manufacturing orders are beginning as the euro’s exchange rate against the dollar is slowly having an effect.
Sarkozy wants to control everything
Sarkozy invited his closest political allies to work on how to spin the message of the upcoming reforms, reports Le Monde. His poll rates still at a low point and faced with continuing trade unions’ manifestations and a more independently minded parliamentary majority Sarkozy tries to get hold of the political process again, marginalizing his prime minister Francois Fillon. Sarkozy took the traditional Tuesday meetings with parliamentarians away from Fillon, after his party refused to support the government project on GMOs or institutional reforms. According to a closed ally of Sarkozy this was an inevitable decision since Fillon failed to do his job.
Eric Chaney on French fiscal policy
Eric Chaney, writing in Telos, gives a mixed assessment on the French ‘fiscal package’ also known by the French acronym TEPA. Passed on 21 August 2007 it was sold by the new government as an important tool to bolster confidence and thus make reforms easier. Chaney had previously argued that a strict economic angle, the fiscal package was an unnecessary fiscal stimulus without long-term merits. Real life has confirmed this diagnosis: the ‘fiscal shock’ was based on flawed economics, namely that fiscal stimulus generate high growth returns, and proved counter-productive in the French political debate. Yet, the new government’s fiscal policy is not as negative as some critics are saying, and it is not too late to re-design it so that budget decisions would support structural reforms.
For a European crisis committee
In a comment for Le Monde, a group of former statesmen including Jacques Delors and Helmut Schmidt called for the primacy of politics over the financial crisis. They propose to set up a European crisis committee whose task would be to analyse the impact of the financial crisis , its socio-economic risks throughout Europe and to prepare recommendations to the European council and the international institutions on how to limit the effects of the crisis. Amid a financial volume which is three times higher than the global GDP, rising income inequalities and the challenges posed by the rising economies in Asia a a political response is required. It should include improved regulation of banks and financial instruments, reserve holdings for non-banks, limits to the ratio of indebtedness, and revise the executive bonus payments with respect to their risk incentives. European leaders should act together with a sense of pragmatism and openness to cooperate in the pursuit of a common objective.
The Fed is done with rate cutting
The Fed published its minutes yesterday, from which it became clear that the last rate cut was a close call, and that there will be no more rate cuts even if the contracts were to contract further. This suggests that the hawks are gaining ground – as they already become more vociferous in recent times. This story is covered almost everywhere, including Calculated Risk. The minutes themselves are here.
Another record for oil
The oil price hit another high, at $132.7pb, yesterday as the market is now running scare of actual supply shortages. The futures market suggests further price hikes, with the delivery contract for December 2016 now at close to $140pb. FT Deutschland says another factor that hit market sentiment yesterday was a study by EnergyWatch, according to which oil production has peaked, and likely to fall about half the current level by the year 2030.
Der Spiegel had an interesting story yesterday, pointing out that the price of diesel in Germany is now the same as the price of petrol, despite the fact that the government subsidises diesel through a lower tax rate. In addition, the diesel technology is loosing its technological edge, as a result of which the long-running trend towards diesel engines might be reversed.
ECB agrees user requirements for Target2Securities
The FT Deutschland has all the details about the user requirement for T2S, the euro area wide clearing and settlement system for securities planned by the ECB. The requirements envisage that national Central Securities Depositories (CSDs) should indicate until July 4 whether or not they are ready to participate in T2S. The idea behind T2S is to reduce settlement and clearing costs which range from 45 cents to over 2 Euros, and are significantly higher than in the US. The article mentions three cost scenarios: one scenario where all the euro area CSDs participate, which would cut the price per transaction to 39-57 cents by 2013, a scenario where the CSD of the UK, Denmark and Sweden participate, which would cut the price to 26-44 cents, and a scenario where only half of the euro area CSDs participate, where the price would be 64-84 cents.
US house price to rent ratio
We believe that the house price to rent ratio is one of the better indicators of relative property over- or undervaluation, as rental markets tend to be a lot more stable during bubbles. Here is a chart from the Big Picture blog about the price to rent ratio, which one would expect to be stable over time, and which suggests that US house prices have a lot further to fall. Incidentally, if you did the same for the UK, you find that the bubble indicated by this chart would be even strong, and the downturn much weaker.
A contrarian view on house prices
John Muellbauer and Anthony Murphy write in the Financial Times that their regional house price model for the UK does not suggest the massive overvaluation that many commentators have suggested. They argue that price-to-rent or price-to-income ratios are misleading, but that structural factors such as immigration and changes in the financial sector, and lower interest rates have changed the dynamics. On their present calculation, UK house prices are overvalued by about 10%, but with rising inflation there is a risk of an overshooting.
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