When the facts change...
The ECB cut by 50bp yesterday, and will probably cut again by 50bp in December. The Bank of England cut by 150bp, to 3%, the lowest level since the days of Churchill, and lower than euro area UK interest rates for the first time. UK economic commentators, including Martin Wolf and Samuel Brittan welcome the decision, while Frankfurter Allgemeine believes that complacency has given way to panic at the Bank of England. As for the European rate cut, Aurelio Maccario says it is a missed opportunity, the result of fine balancing act between members who want to cut by as little as 25bp and those who wanted 75bp. There will be another 50bp cut in December.
But while economists place a lot of hope into these base rate cuts, real world interest rates are coming down only at a snail’s pace. The Times reports that British mortgage lenders were refusing to pass on those interest rates, except for Lloyds TSB, which has accepted £5.5bn in government capital. The other banks said their rates were under review. Also, the article says that 24 lenders have withdrawn tracker mortgages from the market - mortgages based on base rate plus some fixed percentage.
Money market rates continued to improve yesterday on both sides of the Atlantic. 1-Month Euribor is now at 4.25%, 3-Month Euribor 4.59%. But the gap to policy rates remains formidable.
The recession is getting a lot worse
The interest rate cuts came amid a background of fast deteriorating economic activity. The IMF yesterday produced another alarming downward revsision of its economic growth forecasts, coming only four weeks after the downward revisions in its World Economic Outlook. Global growth in 2009 will fall to a level of 2.9% - which the IMF says means a global recession – while Germany’s GDP will is forecast to fall by 0.8%, UK by 1.3%, and US GDP by 0.7%. Olivier Blanchard made the point that the interest rate cuts were welcome, but would alone not solve the problem. Fiscal policy is now the answer, and he said there is significant room for manoeuvre in Germany and in China.
FT Deutschland points out that this is the first industrial national recession since 1945.
Stock markets plunged worldwide on recession fears, with the French and German indices down some 6-7% yesterday, and further market slides overnight in Asia.
A further example of the suddenness of the economic decline came from Germany yesterday where the statistics office reported an 8% monthly fall in industrial orders, the biggest drop for 18 years. According to Frankfurter Allgemeine, foreign orders were down 11%. As an export-dependent economy, Germany is now at the beginning of a hard recession.
Writing in Frankfurter Allgemeine, Hans Barbier criticises the German government for its puny stimulus packages. The German should have agreed on a temporary tax cut, which would been a free market solution, and significantly more expansive that the largely politically motivated stimulus measures.
Thomas Fricke, writing in FT Deutschland, makes the point that if one believes that America’s current account is to high, then one logically would have to make the same statement about Germany’s current account surplus. Germany’s beggar-thy-neightbour economic strategy, based entirely on export success combined with high domestic savings rates and low consumption, is completely unsustainable.
France targets 3.1% deficit for 2009
The French government presented yesterday its outlook for 2009 to the senate, according to Les Echos. Growth forecast was revised downwards from 1% to 0.2-0.5% and the public deficit upwards to 3.1%. The government advanced the timing for its revision, initially planned for mid-November, to benefit from Obama’s presence in the media and not to take attention away from the international conference on the reform of the financial system. There is also little sense for the parliament to debate the outdated budget from mid September. Budget minister Eric Woerth said that they do not expect to breach with the stability pact, as the European Commission already indicated that it will take exceptional circumstances into account.
Royal emerges in leading poll position
Segolene Royal emerges as the frontrunner for party leadership from yesterday election, reports Le Monde. With about 29% of the votes she is 4pp ahead of Bertrand Delanoë and Martin Aubry (both about 25%). Benoît Hamon, the left wing candidate, received 19%. Segolene Royal, the former presidential candidate, was considered an outsider just two months ago, before the financial crisis took its full swing. As in her presidential campaign, she is still considered by the party base as the candidate for ‘change’. These results are the nightmare the party leadership had feared, a clear defeat of its crown prince Delanoe and the reemergence from Royal out of nothing. Tough negotiations between the different fractions are assured!
The Franco-German divide
Thomas Ferenzi in Le Monde cites the historian Jacques-Pierre Gougeon who argues that the recent tensions between France and Germany are not a sporadic phenomenon but reflecting a long run tendency of both countries of developing apart, a process that started with the German reunification. Since then the mistrust and lack of understanding between the two people is on the rise. The two current leaders, Nicolas Sarkozy and Angela Merkel, only accentuate the rising divide and led to a level of disagreement rarely seen before.
European summit diplomacy reaches new levels of absurdity
FT Deutschland has small entry on Sarkozy’s summit diplomacy for the G20. Apart from France, Germany, UK and Italy, Jose Luis Zapatero will take part – as Sarko gave him the EU presidency slot – and the Dutch will take part in their role as G10 president. Only Juncker stays at home, the paper noted.
Dlouhy on the Czech EU presidency
Writing in the FT, Vladimir Dlouhy, former Czech economics minister, says proposals to extend the French EU presidency beyond January 1 are absurd because they make a mockery of the European integration process. He also advocated against overemphasising the role of the state in the post-crisis economy, and urged the Czech presidency to present proposals how to get the government out of its bank shareholdings. He said government intervention was the right and pragmatic thing to do in a crisis though.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.