Let’s postpone that date a little
Ooops, here were go. Jean Claude Juncker announced that the deadline for a balance budget is postponed from 2010 to 2012 – for two reasons as FT Deutschland reports. The first is that the economic downturn is making this goal less likely to achieve, and the second is that France has already said it could not achieve it, preferring a date of 2012. The paper said Juncker was hard pressed not to give the impression that this amounted to a weakening in the finance ministers’ resolve to achieve budgetary balance. The paper also noted that the German finance minister, Peer Steinbruck, regarded the date as a personal victory for the German EU presidency.
By the way, the finance ministers chose a most interesting venue to announce the new policy of fiscal profligacy – the halls of the European Central Bank, which celebrated its 10th birthday yesterday. Quite a birthday present!
(In our view, yesterday’s postponement clearly shows the idiocy of picking a date. The problem with deficit reduction in the euro area is once again that relatively little was done during the boom years 2006-2008 – while most of the envisaged pain was earmarked for the subsequent period, which happens to be a period of economic downturn.)
Il Sole 24 ore points out that Jean-Claude Juncker, head of the euro group, gave a positive response to Italy’s new finance minister Giulio Tremonti’s plans to cut Italy’s budget deficit by 2011. In another article il sole 24 ore quotes Tremonti as saying that he indends to stick to the Prodi/Padoa-Schioppa budget consolidation plans. As these eurogroup deadlines slips, Italy looks in severe danger of becoming an budget-consolidation overachiever.
Jean-Pisani Ferry on the euro’s next ten years
Writing in FT Deutschland’s blog Wirtschaftswunder Jean Pisani-Ferry makes the point that the euro’s next ten years will be different from the first ten years. He says challenges included divergence, and a change of emphasis away from deficit numbers towards a broader assessment of macroeconomic stability. Other priorities during that period will be the management the enlargement of the euro, to adopt an exchange rate policy, not managed floating, but a new assertive global economic diplomacy.
No milk today…
There are ongoing protests of the dairy industry against falling milk prices throughout Europe (Belgium, Austria, the Netherlands and Germany). At the end of 2007 the milk price rose due to a rise in worldwide demand and decreased supply. In the past months the price has dropped as the US increased its milk production and vegetarian substitutes became available. Protesters complain about retailers, which increasingly play dairy farmers up against each other in order to lower the price. In Austria the parties reached a first agreement, according to Der Standard. In Germany however, the dispute between the dairy farmers and retailers intensifies and already led to first milk shortages, writes the FT Deutschland.
In Greece, apparently, inflation is not a monetary phenomenon but the fault of retailers
Meanwhile protests against high food and petrol prices as well as the search for policy options continue. In Greece, prices of basic household items in Greece, such as bread, rocketed higher by nearly 15%, according to Kathemerini. The Greek government is calling on the food industry to cut prices or be placed on the “blacklist”. The ministry intends to publish the names of businesses that unjustifiably increase prices.
The Czechs have a found a new reason not the join the euro
Sometimes we wonder whether some of the accession states have spent more than five minutes thinking about the political economy of a single currency. Someone who clearly has not is Zdenek Tuma, the governor of the Czech central bank, who made the pronouncement, according to the Financial Times. "As compared to other members of the eurozone, it could easily be a member of the club. On the other hand, looking at the good performance and the high credibility of monetary policy, I could say we could stay outside for some time and it would not hurt the Czech economy." So what he is saying effectively that the only time to join the euro, is when the good economic performance ends. (What he may not have thought about is that this is also the time when the rest of us decide that you may not qualify).
The IMF has made a new, and slightly less studid forecast for the euro area
The IMF’s forecast for the euro area (1.4% for 2008) was so utterly absurd that it was either a mistake, or some cheap political ploy to pressure on the ECB to cut interest rate. After the strong growth during Q1 and most likely Q2, it would have taken the euro area a severe recession to get to that number for 2008. This is not impossible of course, but not forecastable either. Frankfurter Allgemeine reports that the IMF has now recognised the facts – although not much as changed since the spring forecasts - and has revised its spring forecast to 1.75%, still a little on the low side, probably wrong, but no longer quite so absurd. The IMF did not change its forecast for 2009 of 1.25%, which appears more realistic to us (i.e. a growth slowdown, but no recession).
The US housing correction goes on and on and on
A very good and authoritative analysis on the US housing market – one of the drivers of the global economy at the moment – comes from Lawrence Lindsey – formerly of the White House, and the Fed – in the Weekly Standard, hat tip Calculated Risk. Lindsey says there three fundamental problems with the US property markets: “Homebuilders made too many houses, prices rose too high, and credit standards dropped too low. Each is unraveling at its own pace.” His conclusion is very gloomy. This housing crisis will take a long time to unravel. He does not predict an ending for quite some time, though does not give any dates.
And the UK housing correction is starting in earnest
There can be little doubt that the UK housing market is going the same way as the US market. The FT reports that the number of mortgages approved for house purchases fell from 63000 in March to 58000 in April, compared with 130,000 in late 2006 and the lowest since such records began in 1999. The monthly increase in net mortgage lending fell from £6.7bn to £6.4bn. The only good news is that the remortgaging figures hold up, which suggests that existing homeowners have no trouble refinancing. The picture is consistent with further falls in house prices.
Giavazzi on spreads
Writing in Vox, Francesco Giavazzi takes a closer look at explanation of the Libor-OIS spreads, that is spreads on 1 and 3 month money market rates, and swap rates on future central bank policy rates. One would assume that an efficient market would be able to arbitrage them away. He contrasts the two most common explanation, a European view according to which the spread reflects credit risks, and a US view, according to which it reflects a shortage of bank capital. He says both views are flawed. The European view would imply that there would be different spreads for different financial institutions (with different credit risk perceptions), which is not the case. He concludes that the most plausible theory is one that says the cause of the spread is predatory behaviour by banks.
A new system of bank supervision in the euro area
Writing in NRC Handelsbald, Roel Beetsma and Sylvester Eijffinger argue the case for a European Financial Services Authority, as a co-ordinator and delegator of financial supervision, anchored firmly at EU – not euro area - level. The EFSA should impose uniform rule, and be independent of the ECB, though it must supply the ECB with relevant information. Another important – and politically attractive – part of their proposal is that the EFSA has no resources of its own. In particular, it cannot bail out a bank.
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