Weber hints at another rate increase

 

It was only a matter of time until the ECB would challenge the emerging consensus that weaker economic growth would automatically lead to a fall in interest rates. Several senior central bankers, including Axel Weber, Lorenzo Bini Smaghi and Jurgen Stark came out with hawkish messages of varying degrees to dispel any idea that the ECB might be considering a rate cut. Weber went furthest when he said, as reported by Frankfurter Allgemeine, that the next rate move be an increase if the economic stabilises, as he expects. He also said that the weaker economic growth would not have much impact on the inflation rate. He even said that the ECB is very likely to miss its inflation target over the medium term, when he said it is far from assured that inflation will come down to 2% even by 2010. Weber also indicated that the ECB’s next inflation forecast, out next week, will show a modest upward revision. The forex markets reacted immediately to these comments, pushing the euro up some 2 cents to $1.478.

FT Deutschland also carries this story, adding some comments from other central bankers. Bini Smaghi is quoted as saying that stimulating the economy through lower interest rates would lead to even higher inflation. Stark said that the most probable scenario is a gradual pickup in economic growth after the current phase of economic weakness.

 

German IG Metall wants 8% pay rise

It is quite possible that Weber’s hawkish comments are at least to some extent influenced by the latest wage demands from IG Metall, Germany’s most influential trade union. FAZ reports that one of the union’s regional committees is asking for a pay rise of 7-8%, which of course they won’t get, but it is indicative that the IG Metall no longer accepts pay settlements below the rate of inflation.

Back from holidays, the Irish are all over the place over the Lisbon Treaty

The Irish Times has a story this morning that a delegation has been dispatched to Denmark to see how this country secured an opt-out of the Maastricht Treaty, and to learn whether there may be any lessons to be learnt to help solve the Lisbon Treaty’s ratification crisis.  The Irish Times quotes the Danish newspaper Jyllands-Posten as reporting that the Danish model was now being actively considered by the Irish Government. The Irish delegation was composed of officials from the Department of Foreign Affairs and the Attorney General's office. The report says that if Ireland proceeded down that road, by seeking opt-outs from defence or the Charter of Fundamental Rights, the approval of all 26 EU partners would be required.

 

The Fistful of Euros blog commented on this story saying that any notion at this stage of a second referendum is being met with strong hostility in Ireland, as evidenced by the hostile political reaction recently, when an Irish minister floated the idea.

 

What does it take to get rid of the US current account deficit

 

Robert Dekle , Jonathan Eaton and Samuel S. Kortum write in Vox about what it would take to get rid of the US current account deficit, and the implication on the economy of the US and several other countries.  They distinguish between two scenarios, one of maximum flexibility relating to the economy’s adaptability, and maximum inflexibility. The results are best summarised in the table, which we reprint.

 

 

Table 1. Changes in outcomes under different adjustment scenarios

Maximum Flexibility

Minimum Flexibility

	GDP	Mfg. shr	Real GDP	GDP	Mfg.shr.	Real GDP
Canada	-0.9	-0.9	0.3	-5.7	-1.2	0.1
China	1.5	-0.4	0.0	8.2	-0.5	-0.2
Germany	2.5	-1.4	0.2	18.8	-1.8	0.8
Japan	3.3	-1.7	0.2	26.2	-2.1	0.3
Mexico	-2.2	0.3	-0.1	-14.7	0.2	-1.7
US	-4.5	3.0	-0.4	-29.9	3.5	-2.0

 

 

This shows us that to get rid of the US current account deficit, the US manufacturing share has to increase by 3 percentage points, while the German share has to fall by 1.4 percentage points. The authors note that some of the adjustment has already happened.

 

 

 

What France needs to do

Writing in Le Monde, Christian de Boissieu, Jean-Herve Lorenzi and Olivier Pastre say that the financial crisis has still more than halfway to go, and it is necessary to tackle this problem at a global level, preferably through an international conference. They say that France could play a leading a role, calling for such action, but this necessitates a wholly different approach to domestic economic reforms, on enterprise, and on the budget in particular. With this in place, France could use its EU presidency to drive the international agenda forward.

 

 

 

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