Merkel demands greater role for euro area

 

In an interview with the FT, Angela Merkel said the Anglo-Saxon system of financial regulation has failed, and that it is now up to the euro area to provide leadership for setting new rules for the financial system. In particular, she advocates a system in which there is a more transparent relationship between capital and risk. She also advocates the creation of a euro area wide rating agency, to compete with the American market leaders, S&P, Moody’s and Fitch.

(A short comment from us: We are sceptical about where this will lead to, and cannot quite see what difference a European-based rating agency would do, other than being subject to political influence. But her statement is significant in the sense that the euro area is becoming politically more assertive. Expect more of this kind.)

 

FT editorial on Merkel

The FT is full of praise in an editorial on Angela Merkel, who is described as Europe’s strongest political leader. Apart from the obvious points about her leadership in Europe, the editorial makes the additional point that Merkel’s Grand Coalition has performed better than some people have forecast. It points towards the increase in the pension age, and changes in immigration rules.

 

 

France and Germany plan joint response in case of Irish No Vote
The International Herald Tribune reports that Nicholas Sarkozy and Angela Merkel have talked in detail about the consequences of an Irish No Vote, and that Sarkozy has promised a joint Franco-German response in that case – though he did not say what that response would be. Sarkozy was quoted as saying that the prospects of a No Vote would be a big problem for the forthcoming French EU presidency, and for Europe as a whole. The article also quotes Andrew Duff, liberal MEP and constitutional expert, as saying that a No Vote would possibly sink the treaty, as the Ireland, as a euro area member, cannot easily be forced out of the EU. (In other words, an Irish No Vote would be incredibly messy.)

 

 

Spanish inflation up

Spanish inflation has risen to 4.6% headline (up 0.2 points), and 3.3% core (up 0.2 points) in May, according to El Mundo. The interesting thing is the rise in core inflation, which shows it is following – not leading – headline inflation. Add together the rise in inflation, and the fall in Spanish nominal prices, the fall in real house is even larger.

 

 

High profits and wages to blame for Greek inflation

Nicholas Garganas said on his last meeting as a Governor of the Bank of Greece that high profits and wage hikes contribute to upward consumer price pressure in Greece, reports Kathemerini. Based on figures put together by the central bank, wholesalers in 2007 saw their profits rise by an average of 82%, while retailers and other industrial companies recorded a 21.5% and 11% rise in profit respectively for the same period. Wages, on the other hand, are forecast to increase 8.3% this year, while productivity is to rise by 1.6% only.  Companies take advantage of their leading market position to book excessive profits and workers are being given over-the-top wage hikes, said departing Governor. Inflation in Greece reached 4.9% last month – its highest level for a decade.

 

Will the Fed raise interest rates in August?

Could it be that this time the Fed will follow the ECB? The Calculated Risk blog has entry discussing the odds of an August Fed rate increase by 25bp. There are several calculations, one putting the odds at 40%, another at 70%, based on a mixture of market-based indicators. All this talk about inflation, it says, is finally getting some attention.

 

 

 

Boeri and Garibaldi on the reform of Italian labour contracts

Writing in Lavoce, Tito Boeri and Pietro Garibaldi make the case for a reform in Italian labour contracts – a subject some people want to treat as a taboo. The present system dates back to 1993, when the country still operated its own monetary policy and when globalisation pressures were not as intense. The current system is based on a national negotiations, plus some company-specific elements. The basic problem with the system is the lack of a link between wages and productivity.

 

Il sole 24 ore reports that the various Italian social partners have put a deadline for labour reform contract of end-September. Employers and unions are current in talks to reform the system, which is increasingly viewed as inadequate.

 

 

 

Munchau on ECB and money markets

Writing in FT Deutschland, Wolfgang Munchau argues that by raising policy rates in July, the ECB will not produce an increase, but merely prevent a fall in money market interest rates. The money market rates are those that matter for the economy – via the various bank channels. Money market and policy rates are currently decoupled, but this is not going to last forever. If the ECB did nothing, money market rates, such as 3-month Libor would fall from a rate close to 5% (before the announcement) back to 4% eventually. It is with this in mind that the ECB is raising policy rates.

 

 

Inflation expectations: a third pillar? (of course not)

The Wall Street Journal economics blog has a discussion about some analysts now like to call a third pillar in ECB monetary policy: Inflation expectations. Noting that inflation expectations, measured by 5-yr inflation forward swaps, have reached 260bp in the euro area, clearly above the ECB’s target on what is even longer than a medium-term horizon. (We are sceptical about this interpretation for the simple reason that inflation expectations are not independent of the two other pillars. The ECB has always looked at various measures of inflationary expectations, which on their own are not reliable guides to future inflation It is in the combination with other analytic tools that a recorded rise in inflation expectations become important).

 

 

 

Dani Rodrik on globalisation

Dani Rodrik has a very thoughtful entry in his blog about globalisation (hat tip Angry Bear). He says the general fear about the impact of global trade is to with the different institutional setup of domestic and international trade. He says the success of modern capitalism is due more the institutional setup of markets, than to the markets themselves. “Markets need regulation, stabilization, and legitimation because they are not self-regulating, self-stabilizing, or self-legitimizing.” Domestic trade is embedded in this institutional setup. International trade is not.

 

 

 

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