Bernanke’s verbal intervention ends the euro rally
Ben Bernanke made it clear that the Fed does not want to see a weaker dollar, which he blames for the rise in inflation (of course, his own monetary policy had nothing to do with that). The FT made the point that it was highly unusual for a Fed chairman to comment on the dollar, and that this comment marks a deliberate attempt to influence foreign exchange markets. He expressed concerned about the recent rise in inflationary expectations, but reiterated that the present policy stance would be sufficient to ensure long-term price stability. Euro/$ fell to below $1.55 following the comments, a change of about 2 cents.
Continued dislocation in money markets
The Wall Street Journal economics blog has an entry about the ECB’s latest dollar auction, with bids of $64.9bn for $25bn of 28-day funds on offer. This is the highest demand since the ECB increased its swap line with the Fed to $50bn in early May. The blog quotes an analysis who points out that this plus continuing demand for funds in the Fed’s TAF auction would point towards “continued dislocation in private term funding markets and a demand for funding through central bank facilities.”
Daniel Cohen on subprime
In a column in Vox, Daniel Cohen offers his analysis on the subprime crisis. Based on research about four decades of sovereign debt crisis, he concludes that the core problem is the financial sectors Panglossian views, after Voltaire’s here who only sees the bright side of things. Cohen predicts that the crisis will take quite some time yet to unfold, that all the bogus gains made during the securitisation years will be reversed, and that this will be followed by a new episode of euphoria.
Surely, something must be done…
It is not that easy to summarise what the Ecofin meeting actually decided on policies to deal with the rising oil and food prices. Frankfurter Allgemeine reports that they did decide against the French proposal to freeze VAT. They also decided that member states should not do anything that could harm competition between them, such as unilateral cuts in petrol taxes. But they also decided that government intervention on the prices themselves is alright, since these prices are distorted by speculation – so they say, without going into too much detail what that means exactly. (We are somewhat sceptical about the speculation story, and prefer to think of the rise in commodity prices as a liquidity and money-driven phenomenon.)
Spanish unemployment rises
El Mundo has the story of an alarming rise in Spanish unemployment, up by almos 400,000 over the last year to a May level of 2.3m. Finance minister Pedro Solbes said the numbers are not good, but refused to speak about a crisis. While the Spanish economy is still growing, the data appear to show a strong sensitivity of the job market to the construction boom, which ended abruptly, as the property market in Spain is now in freefall.
Towards consumption taxation in Finland
The Finish finance minister Jyrki Katainen proposed a complete overhaul of the Finnish tax system writes Newsroom Finland. He said the centre of gravity of taxation must be shifted away from income and into environment-damaging consumption and the asymmetry between the taxation of earned and unearned income needs to be redressed. A high-level working group has been appointed to produce a report by the end of 2010. Earlier this week the OECD suggested in their report on Finland to increase the property tax and decrease income tax, especially on high income earners.
Appeal to Irish trade unions: The Lisbon Treaty is as good as it gets
Ahead of the referendum on the Lisbon Treaty in Ireland Proinsias De Rossa, a senior member of the Labour party, said that it is entirely politically naive to argue that you can reject the Lisbon Treaty and get a better deal for working people out of a completely changed scenario, reports the Irish Independent. Two weeks ago, the Irish Congress of Trade Unions (ICTU) voted in favour of the Lisbon Treaty. But the vote was far from unanimous in reaching its pro-treaty stance, with 14 members voting in favour, five against and eight abstaining. Despite the ICTU position to support a 'Yes' vote, two major unions, TEEU and Unite, will recommend its members to vote 'No'.
Wolfgang Munchau on 10 years of the euro
Writing in FT Deutschland, Wolfgang Munchau says the euro finance ministers should adopt their own two-pillar model. Apart from the focusing on budget consolidation alone, they should add a macroeconomic policy pillar to their deliberations, complete with discussions on economic performance, reforms, taxation, and how to represent the euro area’s interests abroad. Jean-Claude Juncker, has done very little so far to free the eurogroup from its self-imposed limitations of interest.
Euro area Q1 growth revised upward
Frankfurter Allgemeine reports that Q1 economic growth has been revised upwards from 0.7% to 0.8%, after growth of only 0.3% in Q4 2007. The growth was driven mostly by investments, which accounted for 0.4pp of the 0.8% growth rate. The article also talks about estimate that the outlook for the euro area economy is not so good, as inflation is hampering consumer sentiment.
Is the Asian economic boom over?
Frankfurter Allgemeine had an interesting article on the growing economic strains in Asia, where dollar pegs and rising oil and foods are causing severe inflation, as governments and central banks are unwilling to adopt to positive interest rates – thus exacerbating the problem. A country where these problems have already become acut is Vietnam, where inflation has shot up to 25%, and where market analysts are now talking about a currency crisis. The article says that the Philippines, South Korea, and even India suffer similar problems. The upshot is that some countries, notably China, have huge currency reserves, with which they can maintain their present policy for a long time.
Russian economy overheating
Russian economic growth is likely to be again around 8% this year, according to the IMF, and reported by Frankfurter Allgemeine, with inflation now running at a level of 14%. The article says the reason for inflation is the oil and food prices, and the lack of a ruble revaluation, which used to be the most effective weapon against inflation according to the author of this article. The IMF has also criticised the loosening of fiscal policy as a potential driver of Russia’s overheating economy.
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