A nightmare team for Brussels

 

At their dinner last week, according to FT Deutschland, Angela Merkel and Nicolas Sarkozy finally co-ordinated – they co-ordinated the jobs they want in the European Commission. Sarkozy wants Michel Barnier to succeed Charly McCreevy as internal market and finance commissioner (note: with exactly the same overloaded profile), while Merkel wants Gunter Oettinger to take up the same job as Gunter Verheugen as industry commissioner, to protect German industry against an onslaught from Brussels. The article also quoted a British diplomat as saying the nightmare scenario would be Milliband as foreign minister, and a French commissioner in charge of finance – where he would naturally counteract the interests of the City of London.

 

Jean Quatremer reports that Sarkozy said France and Germany will support the same candidate for the European Council job. The front runner seems to be Jan Peter Balkenende, but the situation is still fluid. Juncker is no longer seen as a likely winner, but his candidacy mainly fulfilled the role of stopping Blair.

 

In a comment, FT Deutschland said it would be preferable to give responsibility for finance to a commission from a country without a big financial centre, for otherwise the new commissioner would be tempted to defend his own country’s interests.

 

Global economy recovers

There were more signs that the recovery is finally gathering speed, with two big indicators showing significant increases. JP Morgan’s composite PMI, a global purchasing managers index, rose from 53 to 54.4, while in the US the ISM index rose by a surprisingly robust 3 points to 55.7, the FT reports. In particular, the latter suggests that factory payroll employment may have stabilised.

 

EBRD warns CEE countries on foreign currency debt

The FT reports of an EBRD report according to which central and eastern Europe must get rid of its “addiction to foreign currency debt” by improving macroeconomic management, building local currency markets and tightening regulation.  The report says policy makers must counter a bias towards foreign exchange borrowing that “could continue to pose a threat to stability”.

 

 

 

Dutch banks no longer count

NRC Handelsblatt has a wistful article bemoaning the recent developments in Dutch banking, after the split up of ABN Amro and ING. Dutch banks used to be global leaders, but they have now withdrawn from the world stage, back to Europe. The article said that finance gave the Netherlands much international prestige, but nowadays Dutch banks no longer count.

 

Buiter on quasi fiscal actions by the central banks

Willem Buiter picks up on a theme he has been blogging on for some time – why central banks should not act as quasi-fiscal authorities. The interesting bit of his post is not so much the argument – which is that central banks should focus on the macroeconomic stability mandates, not engage in redistribution of income, which is an intensely political task. What is interesting is Buiter’s optimism that exit strategies will reveal the true extent of the fiscal activities of central banks.

 

Roubini on the bubble

Writing in the Financial Times, Nouriel Roubini argues that the massive market rally is caused not only by low interest rates and quantitative easing, but also by the weakness of the dollar, what has led to the mother of all carry trades – where the dollar becomes the funding currency.  Roubini has three scenarios how this bubble could burst. The dollar will eventually stop falling, at which the funding costs cease to be negative; the Fed will not be able to surpress volatility forever as its asset purchase programme eventually expires; and finally, once the recovery gets stronger, the Fred may raise interest rates.

 

Munchau on ZIRP

Wolfgang Munchau argues in his FT column that the time for a monetary policy exit may not be now, but it may be closer than most market participants think. There is a now real danger that low interest rates produce another bubble, which could unwind earlier than previous bubble, and which may prove much more costly than the previous financial crisis. It is for this reason that central banks need to raise interest rates – rather than inflation expectations.

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