The second round effects arrived yesterday

 

We have been talking about second round effects for some time, but yesterday they came. Germany's public sector workers agree an 8% pay rise stretched over two years - 5.1% this year, the rest in 2009. The deal ends otherwise certain prospects of a wide-ranging public sector strike from April, and is expected to cost the German public authorities some €10bn. The deal sets the level for other rounds of industrial bargaining, including chemicals, and engineering.

 

The agreement came on the same day when Eurostat announced a rise in euro area inflation to 3.5% in March. It means that real interest rates in the euro area are fast approaching zero. There is now also an overwhelming consensus that euro area interest rates are not going to fall.

 

The FT quotes Erkki Liikanen, Finland’s central bank governor, as saying that slower growth took longer to lower inflationary pressures in the euro area than in the US. This would suggest that the ECB is going to keep rates at 4% for quite some time to come. (We note that the analysts' consensus of a Q2 rate cut now looks distinctly unrealistic). 

 

 

Fillon combines savings with state reform

Francois Fillon announced to his ministers that full employment – and not purchasing power -will be at the heart of the upcoming reform agenda, reports Le Figaro. He further announced that there will be savings measures combined with the state reform but that social reforms shall proceed. Public deficit had to be revised upwards for 2007 as well as the forecast for 2008 and many economists consider even the weakened objective of a balanced budget by 2012 as no longer attainable.

 

FAZ on public finance and the French state

The FAZ in its editorial wonders whether Sarkozy’s government was ever seriously committed to reduce France’s public debt. Sarkozy used his first time in office to introduce tax reductions without an equivalent expenditure cuts. But the main problem is the state sector itself. The devolution of power from the central state towards the regions created new jobs at the regional level without reducing the redundant jobs at the central level. The reform to replace only one out of two retiring civil servants was postponed until the end of the legislative period. Moreover public expenditures are financed by different sources diluting the responsibility for the whole budget. It is no wonder that the fingers are pointed to France if it cannot reduce its deficit even in times of falling unemployment. 

 

Jouyet prepares the French EU presidency

In an interview with Le Monde, the French EU minister Jean-Pierre Jouyet said the EU needed a new generation of leaders for the new jobs created by the Lisbon Treaty. He went out of his way to make the point that France is going to run an inclusive EU presidency, and not playing chevalier seul. He also said that the ECB would go out of the crisis reinforced if Europe is less affected by the financial crisis, successfully contains inflation and prevents the US recession to touch Europe. He said that the ECB has so far managed the crisis well, now it needs to find the right equilibrium between preserving purchasing power and maintaining economic growth. Jouyet did not answer the question whether the French will be capable of maintaining its budget engagements in 2008 but evoked the expenditure freeze and the state reform as a right signal. Asked about his disagreements with Henri Guiano he said that he agrees with his view on financial regulation namely that the capitalism of speculators will sooner or later kill the capitalism of entrepreneurs.  

 

 

UBS - another $18bn in write-offs

Soon we are talking about real money. After writing off $18bn last year, UBS is set for another writedown in this ballpark, the FT reports. Switzerland's largest bank is also likely to raise $13bn in new capital. The article also quotes an analyst who is saying that the market of banks not writing off their exposures at once, saying they would welcome a healthy $21bn writeoff. The Calculated Risk blog says that this was "a reminder that the confessional is still open, and the numbers will be huge."

 

 

 

Denis Snower on the crisis

Denis Snower, writing in FT Deutschland, makes the point that the really surprising aspect of the credit crisis is that people continue to be surprised by bad news. He said it is very clear that this financial crisis - and its interactions with the real economy - still has some time to run. US house price will be falling for some time too. The weakness in the dollar will raise inflation, and US consumer will ultimately reduce their spending. He said while the long-term outlook for the global economy is good, we are facing a big crisis in the short-term.

 

 

 

Waldman and Buiter on regulation

Steve Waldman says the problem with Hank Paulson's regulatory proposals is that we do not have a deficiency of regulation, but a deficiency of the financial system itself. He says "there is not much intellectual alpha left" in the system, and that everything has to come on the table in the debate that lies ahead.

Willem Buiter also has a long entry in his blog on why Paulson's plan to raise the Fed's powers is going to make everything worse.

 

 

 

Menzie Chinn on US house prices

Menzie Chinn, on Econbrowser, had a very interesting, and technical post on US house prices, which essentially says that estimates of a peak-to-trough fall of 50% are actually quite plausible. He starts by looking at forecasts for the Ofheo price index (the US government's nominal index). He is running a series of statistical test on the available forecasts for this index - and then goes to translate those forecasts for the Case-Shiller price index - which is considered to be a much better indicator. The result is really gloomy. (By the way: The Econbrowser blog where Chinn posted, also a very interesting piece on the disintegration of the antarctic ice shelf.)

 

 

FT on the dollar

The FT said in an editorial that the dollar's role of a global reserve currency will be severely tested if the Federal Reserve continues with its current policies. Sovereign wealth funds that have decided to recapitalise the US banking system, and central banks reserve portfolios are being severely eroded by the devaluation of the dollar, and further damage is likely if US inflation were to rise. The FT is dismissive of the idea that the euro could replace the dollar as a global reserve currency because of the euro area's lack of geostrategic power.

 

 

The death of private equity

The FT has an interesting comment by Michael Gordon of Fidelity, who said that the boom in private equity was nothing more than a mirage. Private equity as it developed in recent is nothing else than leverage buy-outs. He defends the principle of well capitalised private equity deals, not the excessively leveraged variety, but he says the private equity boom, driven by cheap interest rates and lax regulation, was all about debt, not about improved management.

 

 

Germany returns to the Dark Ages

It is April 1 today, and some news organisations have maintained the habit to report an April fools story. So you might want to treat the following disturbing piece of news with a grain of salt. (That might also go for the rest of today's news - maybe there was no German wage deal after all!)

 

ARD Tagesschau reports that Germany's constitutional court will this week accept a complaint by Germany's farmers against the 2002 EU summer time directive, which means that the clocks will go back on Wednesday. Furthermore, Germany's trade unions have made it clear that if the clocks go back on Wednesday, they want the hour thus gained to be recorded as paid overtime. 

 

 

 

 
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