ECB forces revaluation of Slovakian koruna ahead of accession
The ECB forced Slovakia to appreciate their currency on May 29, half a year before the country is about to join the euro area, reports Der Standard. One euro costs now 30,126 koruna, which is 17.65% less than the day before. According to central bank officials the appreciation happened under the intense pressure of the ECB amid fears of rising inflation in Austria. Last March, the EU approved an 8.5% appreciation of Slovak koruna against the euro. Behind the scenes there were already disputes between the ECB, which considers 2009 as too early for an entry of Slovakia, and the member states as well as the Commission which recommend early entry. In its convergence report, the ECB voiced serious concerns about whether the country could satisfy the convergence criteria on a sustainable basis.
German unemployment – As good as it gets
Pan-German unemployment was 7.8% in May, the lowest rate in 15 years. In the south western state of Baden Wuerttemberg it was 4.1% - a condition that can be described as close to full employment. FAZ writes that this latest fall comes at a time when the improvement in the labour market is slowing down, as companies are getting more cautious in hiring. So while this was a significant economic upswing for the labour market, this is about as good as it gets.
Spanish and Belgian inflation – getting worse again
Spanish inflation almost reached 5% in May – which shows that despite the economic slowdown, Spain continues to lose relative competitiveness in the euro area (which had 3.6% inflation in May). That puts Spain at the top end of the inflation scale. El Mundo reports on the political ramifications, as the opposition is now accusing the government of doing nothing.
In Belgium, the inflation rate has even topped 5%.
Politicians in disarray over how to respond to rising petrol prices
High petrol prices incited protests from fishermen and truckers throughout Europe, but European leaders differ on how to respond to, reports Le Monde. Sarkozy’s proposal to limit the VAT on petrol was rejected by the European Commission and skeptically received by member countries. But the call for fiscal transfers intensifies. The Austrian government just decided to increase the tax credit for households who use their car to go to work. France, supported by Italy suggested earlier to increase the upper limit of state aid that could be transferred to the fishermen (limited to €30,000 per year) without the permission from the Commission. The Nordic countries and the Commission are skeptical and plea instead for a more fundamental restructuring of the fishery sector to reduce the number of fishermen. A common EU policy approach would require unanimity in the council.
Have Fed rate cuts produced global inflation?
John Taylor is proposing a global inflation target, and argues that the Fed’s interest rate cuts may have triggered the global commodities price boom. We found this in the Economists View blog. Effectively Taylor argued that the extreme interest rate cuts in the US have precluded others from raising interest rates, as this would have put excessive pressure on their currencies. The result is that global monetary policy was too lax.
As an aside, Jeffrey Frankel, writing in Vox, has more on his theory that low interest rates are driving the rise in global commodities prices, and finds both theoretical and empirical evidence.
The sustainability of the oil price
There is a lot of research on oil at present. A much quoted paper this morning, one of the most optimistic assessments we have seen in quite some time, is from the Dallas Fed, which concluded that barring serious supply shocks, a $100 oil price (in 2008 dollars) is not sustainable over the next 10 year period.
Are inflation expectations more anchored over here than over there
This is from the excellent Wall Street Journal economics blog, who dug up a working paper by the Fed about inflation expectations in the US. They conclude that long-run inflation expectations are reasonably well-anchored in both economies, though more firmly in the euro area than in the US. In particular, surprises in macroeconomic data releases have a much bigger on the US inflation expectation than on European expectations.
What is the impact of inflation on the credit market
Writing in the FT, Aline van Duyn writes up three arguments why inflation will raise spreads in the credit market. First, higher interest rates and reduced availability of credit from capital-constrained banks, could increase defaults. Second, inflation makes all fixed-rate bonds less attractive. Third, the record issuance in May of investment grade, fixed-rate bonds may be a sign that corporate treasury have some sense of what could be around the corner.
Martin Wolf on why the UK should not join the euro
There is a renewed debate in the UK whether the country should join the euro. The paper’s Lex column had recently argued that the country is now meeting the five tests, and that there were now no economic reasons why the UK should not join. Martin Wolf says in his column Lex is wrong. First, the equilibrium exchange rate varies. Second, interest rates would be too low (to contain the credit boom); third price stability would be worse; and finally being outside the euro area has meant no disadvantages, either in economic performance, or in terms of the City of London. (Wolf is right in our view; the UK is economically now ready for membership; it would require a very serious reforms, for example to the mortgage market, to make this work – highly unlikely.)
Holger Schmieding on Germany
Writing in the FT, Holger Schmieding says the best policy action German could take at the moment is to cut payroll tax, current around 40% of the wage bill. This would increase purchasing power, and since those tax are shared by employers and employees, would also reduce cost pressures in companies, and have a mild disinflationary impact.
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