Stimulus delayed

 

Today is stimulus day in Germany, where the Grand Coalition is set to decide both on the economic package and a controversial recapitalization fund for industry. The stimulus will be €50bn, according to the FT, at the upper end of the previously mention range, and will include tax cuts for lower wage earners, and lots of infrastructure spending. More controversial is the fund, which effectively extends the bank rescue scheme to the entire economy. At its most extreme, this could entail the nationalization of a large German car maker.

 

There is, apparently, still opposition to this idea from the SPD. (But we think this may be tactical to win some other concessions elsewhere.)

 

FT Deutschland reports that the stimulus may not become effective for another six months. The article offers two explanations. Merkel wants to time this to coincide with the election campaign. The article also quotes other CDU politicians as saying that the idea behind the implementation delay would be to reduce the impact on the 2009 budget deficit. These politicians are concerned that Germany may breach the Maastricht deficit as early as 2009 unless the stimulus is delayed. (This, if true, would be bad news, since the package itself contains little in terms of an immediate economic boost. It would mean that the total stimulus effect on 2009 would be negligible).

 

 

Ms Merkel and the recession

In the form of an open letter to chancellor Merkel in Les Echos, Karl de Meyer says that the financial crisis happened at the worst moment for Merkel, who was never at ease with economics. She has yet to prove that she can lead in the worst recession after 1945. So far, her performance was disappointing. By failing to react decisively, Merkel lost the credit she gained earlier on the international scene and even created doubts among the German public. Ahead of the general elections in September the only advantage of the crisis is that it places constraints on the SPD and its candidate Frank Walter Steinmeier during the election campaign. 

 

ECB interest rate forecast

Almost all German banks expect the ECB to cut rates by a 50 basis points this week, to 2%, according to the FT Deutschland. But most economists also expect the ECB not to follow the Fed all the way to zero. The bottom of the interest rate cycle is put at 1.5% by five economists, at 1% by three, and at 2% by two economists.

 

Irish government under pressure

In Ireland the government has come under increased pressure after another catastrophic week in which unemployment reached a 10-year high. The weakening economy has hit the popularity of the government parties and their leaders in most recent polls, writes the Sunday Independent. Prime minister Cowen and finance minster Lenihan are apparently at odds about speed and the extent of the stimulus. The debate centers on the issue of job losses and wage cuts as an extra €2bn needs to be cut in public spending. The general government deficit is heading for 9.5% if GDP  this year. The Labour party has questioned the government’s ability to lead the country out of the recession and calls for early elections after furious unions warned about fierce resistance if the Government sought unilateral pay cuts.

 

Irish warm up to Lisbon Treaty

The Sunday Independent also reports that “as the Irish economy continues to decline at an alarming rate, the poll has picked up on the public's fear, with a huge swing in support of the Lisbon Treaty: 55% (up 16% since the December 12 poll) now say they will vote Yes, while 37% (down 7%) say they will vote No, while 15% are undecided (24% in December).” Jean Quatremer writes that the economic crisis acts as a reminder that Ireland depends on Europe, and that the EU is better to be re-enforced than weakened.    

 

Tony Blair for president?

So if the Irish vote yes on the Treaty, there is still the question of who becomes the first EU president? Tony Blair is now, once again, in the race for the top job, the FT writes from Brussels. Blair was off the list until recently, but the article says the EU’s multiple crises have had an impact on the way governments are now looking at the job, for which Jean Claude Juncker was previously tipped. The view is now that the job should be held by a heavyweight – as opposed to Mr Juncker. This is the apparent line up of top EU jobs, Irish referendum permitting: Barroso at Commission, de Hoop Scheffer as  EU foreign policy chief, Fogh Rasmussen at Nato, and Schulz and Buzek to chair the European Parliament presidency.

 

Asian exports are collapsing

The latest trade data from Asia are horrifying. There seems to be a collapse in global trade under way. Brad Setser has a good analysis with plenty of charts showing the collapse in trade in Korea and Taiwan, where exports are down 40% year on year.

 

 

The next bubble?

Writing in Frankfurter Allgemeine, Commerzbank chief economist Jorg Kramer warns of another bubble – in sovereign bonds -, as US treasury yields are now down at 2.5%, and bunds at 3%. He says these yields are unsustainable. Once the fears of deflation subside, which is only a matter of time, investors should expect to make heavy losses on those papers.

 

 

Obama’s protectionist team

Jagdish Bhagwati has changed his mind on Obama’s economics team even before the swearing-in-ceremony. Writing in Vox he says that Obama’s appointments and advisers include well-known trade protectionists (he gives a long list of names). The real problem is that Obama has done nothing to nib this in the bud. Worse, he seems to have embraced all the old bad protectionist ideas, such as auto bailouts, which raises parallels with the 1930 Smoot-Hawley tariff.

 

 

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