ECB may be more cautious next week than some believe

 

The FT leads with the story that the ECB has given no signs of a large interest rate cut for next week, meaning that it may either hold interest rates steady, or reduce them only marginally, i.e. by a quarter point. Some market participants had expected a softening in the ECB’s stance, as indicated by the recent sharp fall in the euro’s exchange rate. ECB board members have been saying that the medium term inflation outlook was consistent with the price stability target, and that there are no expectations of a significant undershoot, let alone deflation.

 

 

 

Gas collapse feared

FT Deutschland writes that the EU Commission is internally a lot more alarmed about the gas delivery breakdown than it admits. For once, there is a possibility that the present stop might cause physical damage to the Ukrainian pipeline system, which may not be easily repaired. Secondly, even if Russia restarted deliveries today, it would still take a week until the gas arrives, since the system can only be gradually reactivated. The consequences are particularly severe for eastern Europe, with Poland, Slovakia and other countries having declared a state of emergency.

 

 

Karamanlis fires Alogoskoufis

The fate of the Greek finance minister George Alogoskoufis was sealed yesterday, when Greek PM Costas Karamanlis fired him as part of a wider cabinet reshuffle. Reuters has the story, though it appears to us that it naively accepts the attempt to turn the former finance minister into the sole scapegoat of the country’s deep malaise. Alogoskoufis is now blamed for the rise in the deficit, as well as for taking tough measures to collect taxes, and for failing to help the poor (which does not make sense). (A question a lot more people will be asking now is whether this is the beginning of a process that might lead to outright sovereign default. The euro area biggest political crisis to date may be in the making.)

 

 

Sarkozy against consumption stimulus

Now here is an issue on which Sarkozy and Merkel agree. They are both opposed to any stimulus of consumption. In an address to French MPs, Sarkozy said consumption serves no useful purpose, according to a news report in Les Echos. It has been tried under Mitterrand, and later under Chirac, he said, and it turned to be out to be pouring water in the sand.

 

 

German bond auction flops

The FT has the story that a German bond auction flopped, signaling bad news for governments trying to raise finance for multi-billion heavy stimulus packages. The 10-year €6bn bund auction received bids of only €5.24bn, or 87%, the second worst result ever. The FT reminded readers that last year, seven German auctions failed, and before that, the last time it happened was in July 2000 after the dotcom crash.

 

 

Boeri and Garibaldi on Italy’s fiscal policy

Writing in Lavoce, Tito Boeri and Pietro Garibaldi say while the Prodi administration made the mistake of permanently trying to discover windfall gains, the current administration is making the opposite error, of failing to re-adjust budget projections in the light of the recession. The current strategy lacks transparency, and it appears that the government is somehow torn between the need for fiscal rigour, and for providing an effective stimulus, and in the process not achieving either.

 

 

Johnson on a global stimulus

Simon Johnson, writing in RGE EuroEconomonitor, dismisses the idea of a 2% global stimulus, as this would require a massive stimulus from the euro area, to get to that average. He noted that there is no appetite for a bailout for weak euro area members, such as Greece, and that Germany continues its free-rider strategy – to piggy-back on the stimulus package of others. (not clear to us whether he takes account of the stimulus that is currently in the works, which is about 2% of GDP.)

 

The US output gap

Several US bloggers, including Paul Krugman and Menzie Chinn, posted the Congressional Budget Office’s forecast for the US output gap, which appears as bad as during the early 1980s.

 

 

Chinn says the current recession will be more protracted, lasting a total of seven quarters, the longest since the Great Depression. Krugman says the stimulus will not close the gap by much. It is too little and too wasteful.   

 

FTD Editorial: German government acts too late

In an editorial, FTD writes that the panic the German government displays this week follows weeks of complacency. Now the government is not only hastily negotiating a stimulus package in the order of 2% of GDP, but also a fund to help credit-constrained companies. The editorial says the government has suddenly realized that the jobs market is turning badly, and that the political climate is already changing. The editorial says there is a risk that the action may be coming too late – so save the economy, and to save the incumbent politicians.

 

 

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