European Parliament wants ECB to change inflation target

 

This looks like one of the first big power battles by the European Parliament in the area of monetary policy. Two senior members of the EP’s economic and monetary affairs committee, Pervanche Beres, head of the committee, and Werner Langen, have issued a draft recommendation according to which the ECB should adjust its inflation target in the light of globalisation (meaning, to raise it), move from a number to a band, and to publish its own inflation forecasts, FT Deutschland reports. The report says the recommendation is not yet official, and will only be voted in October or November. It has no legal force in the sense that the EP cannot impose a target. But a parliamentary vote would almost certainly put the ECB under political pressure, and be a huge embarrassment for Jean-Claude Trichet, who rejects any change in the ECB’s definition of price stability. The two EP members also want the ECB to conduct a closer dialogue with the Fed.

 

 

Trichet says second round effects have arrived

In an interview with four European Newspapers, Jean Claude Trichet made a couple of points that might be of interest. He said the latest rise in unit labour costs was significant, and would need to taken into account. In other words, the ECB is seeing some second round effects. He also rejects any change in the inflation index to accommodate asset prices, but to evaluate asset prices indirectly, through their wealth effects. While this is interesting, we struggled to find any further news in this very long interview – we were looking in the Frankfurter Allgemeine version.

 

 

Oil Price falls – inflation problem solved?

The oil price has been falling rapidly for a few days, and yesterday it fell to below $130. Are we now going to see massive deflation? The FT reports that traders and analysts are deeply divided over what happened and is going to happen. Some believe this is the downward phase, predicted some time ago, as a result of the US-led global economic slowdown, which will see falling demand for oil, while others are reluctant to call the top of the market yet.

 

 

Thomas Fricke on Angela Merkel

Thomas Fricke, writing in FT Deutschland, has drawn some interesting parallels between Angela Merkel and her two predecessors. Merkel is currently at the top of the opinion polls, but this might change well before the September 2009 federal elections. The same happened to Kohl and Schroder, both of whom had similarly good ratings, but which dropped rapidly as the economy tanked, as they had no strategy to deal with it, like Merkel herself. While the Kohl and Schroder recessions were severe, most economists underestimated the severity of the downturn at the time, just as they underestimate it now.

 

 

Italian housing sales fall

Italy is somewhat more immune to the property crisis than other countries, but the property slowdown is being felt in Italy as well. The research institute Nomisma found that the total number of housing sales in Italy fell from 845000 in 2006 to 806 in 2007, and to an estimated 726000 this year. There is evidence that home buyers are waiting to buy until prices fall further. This year, nominal prices will remain unchanged, meaning a decline in real prices. Last year’s house price inflation was 2.1%, and a little higher for commercial property, Il Sole 24 ore reports.

 

 

Ackermann’s codex

Frankfurter Allgemeine has a cynical comment on the codex prepared by the Institute for International Finance as a lesson from this crisis. It is full of banalities such as: Bank should remain liquid, or banks should make bonus payment in accordance with profits and the interests of the shareholders. Nothing to do disagree with, but so general as to be practically useless.

 

 

A call on Belgium to get its act together

Belgium’s King Albert II yesterday refused to accept Yves Leterme’s resignation, and appointed three Belgian politicians – two Francophone, and one member of the German minority – as mediators in the conflict. See this report in ARD German television (we find the Belgian coverage too detailed to be useful for a non-Belgian audience). The coalition broke up after Leterme failed to reach agreement to transfer responsibility for labour, health, family from the federal to the regional level, as demanded by the Flemish partners in the government coalition, and rejected by the Francophones.

 

 

The FT has an editorial on Belgium, saying that the political crisis is now turning into a situation where it damages the country’s economic performance. If the country were to become subsumed in this dispute, it would risk its stability and prosperity. It is time, therefore, for a swift compromise.

 

 

 

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