Draghi criticises Berlusconi's economic policy
Italian central bank governor Mario Draghi yesterday launched a wide-ranging attack on the new government’s economic policies, according to il sole 24 ore. He noted that the 2008 deficit is deteriorating once again, and said the only way for Italy to get out of its economic mess is for cuts and reforms in public spending, improved public services, and tax cuts. He also criticised the “Robin Hood tax” on windfall profits by energy companies, as well banks and insurance companies. He said bank customers will ultimately pay the prices of this tax.
Spain’s labour market worsens dramatically in June
El Pais has an interesting snippet of information that has the Spanish government extremely worried about the state of the economy. The number of people affiliated to the Social Security agency (people in legal jobs who pay social security), has worsened dramatically in June, a month in which this number usually turns up for season reasons. Much of this decline is due to the malaise in the construction sector. Experts are quoted as saying that this is not an isolated number, but an indicator where the labour market is heading (for some reason unknown to us, it appears to be a better early indicator than unemployment).
Ireland revised growth forecast to 0.5% and announced €500m spending cuts
Ireland needs to cut €500m from their spending plans to pay for increased dole payments, reports the Irish Independent. Finance minister Brian Lenihan hopes the €500m "savings" on government spending will be enough to prevent Ireland breaking the EU rules on borrowing this year. But that depends on the rest of the economy -- outside of building and property -- holding firm. But analysts suggested it may not. Lenihan reckons he will have to borrow almost €8bn this year -- €3bn more than planned. Economic growth, which was widely forecast at around 3% at the time of last year's Budget, has been revised down to just half a per cent.
Are the Belgians mad?
How inflation can create second round effect can be seen easily in Belgium, a country which is current suffering some of the highest inflation rates in the euro area. Le Soir reports that in August, Belgian price indeces will be recalculated, and rents and many other prices will be adjusted according to this index. The amount of the indexation has been calculated as 4.8% (compared to the ECB’s inflation target of 2%). Belgium is too small to have any effect on the euro area, but if this was the rule, any spike in headline inflation would automatically and quickly lead to a rise in the broader price level. In this case, the main effect will be rise in unemployment.
Why we need more ECB rate rises
Ciaran o’Hagan, fixed income strategist at Societe Generale, makes the case for a string of European rate increases, and argues that the ECB’s quarter point rise today is not enough. Writing in the FT, he says inflation is already spilling over into the labour market, as the latest Q1 wage statistics from Eurostat show. Demand is not slowing fast enough to keep the lid on the rise in core inflation. He says the ECB should surprise the markets by raising interest rates by more than the markets currently expect.
Why we do not need more rate rises
Also writing in the FT, George Magnus of UBS makes the very opposite argument – though not in respect of the euro area, more in respect of the UK and the US. He says there is a severe and self-reinforcing deleverage cycle happening – with real housing prices to fall for several years to come, and credit deleverage happening until about 2010. The economic consequence is a broad-based downturn, which is easier measured in terms of its expected length than depth. He says it is bizarre to think how inflation could rise in such an environment, and he predicts inflation to peak in the autumn of this year. Central banks who reinforce the deleveraging cycle through raising interest rates (i.e. the ECB), commit a huge policy error.
The French take on why we might need or not a rate rise
With his against the immanent interest rate rise, Nicolas Sarkozy provoked numerous reactions throughout Europe (see Spiegel online). Also the French press discusses whether or not the ECB is right to raise interest rates now. In an interview with Le Monde Nicolas Veron argues in favour of the rate rise as the danger of inflation is clearly present. Christian de Boissieu argues that there are no signs of second round effects. Important wage increases such as the ones in Germany were recuperations of past wage moderations, thus backward not forward looking. De Boissieu says that in today’s world monetary policy is not the only instrument against inflationist tensions and advocates more deregulation for France.
Kaczynski: I will sign Lisbon only after Ireland does
This is quite clever. Lech Kaczynski clarified yesterday that he does not intend to block the Lisbon Treaty, according to Le Monde. He will sign the documents, which has already been approved by the Polish parliament, after the Irish vote in favour. Otherwise he will not sign. The intention of his manoeuvre is of course to prevent a 26-to-1 situation, which France and Germany had hoped to create to isolate the Irish. (We expect that Vaclav Klaus would do the same if the Czech parliament approved, which is not certain). As a result, Ireland will have at least two further countries behind it. The French and German strategy looks increasingly shaky.
The US car market tanks
This is a US domestic story, but with important implications for the European economy. James Hamilton has collected some US car statistics, which impressively show the decline of high-consumption vehicles, including SUVs and light trucks. In April, both domestic and especially imported light trucks sales fell off the cliff, while imported cars rose. This is obvious bad for the US car industry – compounded yesterday by rumours whether GM is on the verge of bankruptcy. But it is also interesting development for the European car industry, as it is not so good for the German companies (also big producers of light trucks, as well as high-consumption luxury limousine, and better for the French car makers, who make small-to-medium sized cars.
US delusion
We have felt for some time that senior US policy makers have become increasingly delusional about the US economy, advocating some of the solutions that got the US into the current mess. Mark Thoma has taken an in-depth look at the state of this debate in the US, which revolves around the question how can the US avoid adjustment, through fiscal stimulus, monetary policy, or other tools. Interesting also is how some economists now apportion blame, to emerging markets for raising global demand, not to the US of course. (To anyone outside the US, one should realise that the adjustment in global imbalances, which we are expecting to happen, will happen, but it may take significantly longer.)
Another good example of delusion is Fed governor’s Fred Mishkin’s latest speech, extracts of which are reprinted in the Wall Street Journal Economics blog. Apart from self-congratulatory comments about the Fed’s role to prevent a depression, he says the worst of the turmoil is now over, and things are slowly turning back to normal as financial supervisory improve.
Deutsche takes over Fortis stake in ABN Amro
NRC Handelsblatt reports that Deutsche Bank has taken over the stake by the Dutch-Belgian Fortis bank in ABN Amro for about €700bn, as the consolidation in the European banking sector continues. This transaction turns the German bank into one of the largest providers of financial services in the Netherlands.
No money please!
Journalists have known forever that some of the best stories start with denials. So when Deutsche Bank and UBS both claim on the same day that they do not new capital, we now suspect that this is very likely to happen, especially now that the credit crisis is moving into the fourth wave. There has been speculation that both banks are about to report further credit-related losses, the FT reports.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.