Monthly Archives: October 2005

More On Exchange Rates and Policy Rate Differentials

Posted on by

Morgan Stanley’s Stephen Len is obviously on the same page as I am about how the rising interest rate differential between Europe and the US is likely to drive short term currency movements:

Policy rate differentials are especially important now for the currency markets, and it pays to focus on central banks these days.

Reason 1. Global monetary paths are diverging, not converging. Among the major economies, only the US has an output gap small enough to support tightening. I doubt either the ECB or BOE will be in a position to tighten rates this year. Many now understand quantitative easing must be terminated by early next year, but no one has proposed actually raising interest rates from zero. Therefore, monetary paths are diverging, with the rest of the world having trouble keeping up with the Fed. This makes the Fed much more important for the USD than in ‘normal’ times.

Reason 2. Global equity portfolios are likely to be out of balance. Since 2003, there have been massive equity flows into Euroland and Japan. Since much of these flows occurred when the USD was still in structural decline, and some of the outflows reflected fears of a USD crash, it makes sense to suspect hedge ratios are quite low on these equity outflows. With the rise in the FFR and resilient dollar, the cost of running these currency exposures is increasingly unjustifiable. The equity market cap-weighted short-term interest rate differential between the US and the major markets is now around 180 bp, and still rising. If the Fed takes the FFR to 5.0% by end-2006, the differential will reach levels last seen in 2000.

Issing Gives Inflation Warning

Posted on by

More evidence today of how the Central Bankers and their economic advisers are doing their best to sound the inflation alarm. This time it is ECB Chief Economist Otmar Issing:

European Central Bank Chief Economist Otmar Issing said a surge in oil prices may lead to higher-than- expected inflation in 2006, as the bank edges closer to raising interest rates for the first time in five years.

“Rising oil prices are not only affecting current inflation rates but they’re also overshadowing next year,” Issing said in an interview on Oct. 14 at a banking event in Frankfurt. “It can’t be ruled out that risks for price developments will deteriorate that much over the medium term that we might have to expect the annual inflation rate to slightly exceed 2 percent.”

The comments were the second in three days suggesting the bank may raise its inflation estimate of 1.9 percent for 2006. The bank projects the level this year at about 2.2 percent. ECB President Jean-Claude Trichet said at a briefing after the annual meeting of the Group of 20 industrial and developing near Beijing yesterday that he can’t exclude inflation being “over and above” the bank’s 2 percent ceiling.

My view: this very much depends on the evolution of oil prices. There is little evidence of any strong impact on ‘core prices’ at this point, there is plenty of evidence of growth weakness. There is thus little justification from a purely eurozone perspective for any short term increase in interest rates, and certainly no justification whatsoever in the case of Germany.

Of Demons and Details.

Posted on by

Tonight, a French friend sent sent me an email expressing his disappointment about the fact that a Eurodistrict comprising the French (Euro-)city Strasbourg and the German regional authority Kehl, which will be officially created by officials from both parties at a signing ceremony tomorrow afternoon, is falling far short of the enthusiasm it was conceived with (some details by Reuters (in French)).

During the heyday of the latest Franco-German governmental rapprochement in early 2003, Chancellor Schröder and President Chirac signed a declaration calling for new forms of European institutional cooperation. But lacking consistent ideational support from the two governments, the regional authorities were unable to overcome different administrative practices, legal concerns, and – problems to fund a bridge. Thus, they will not establish a new form of supranational institution but rather “just another” council for regional cross-border cooperation. And they won’t get a new bridge.
Continue reading →

Almost a Fistful

Posted on by


Vicenta, Edward, Tobias, and David (from left to right)Some light Friday afternoon reading, and some faces you may not have seen yet. A month ago, almost exactly two years after the day that will live in infamy, the first afoe meet-up took place in Stockholm.

Despite the fact that not everyone in the fistful could make it to the Swedish capital, it was a great opportunity to discuss the past, present, and future of Europe, the world, blogs in general and afoe in particular. But above all, it was great to finally meet some of the people with whom so many emails were exchanged – a valuable reminder that the blogosphere can not only lead to a meeting of minds, but, in some cases, also to a meeting of entire people.

Growth and Inflation in the UK

Posted on by

Following-up on my post earlier this week on interest rate policy I see Graham Searjeant has a piece in the Times today arguing that Mervyn King has the balance wrong between fighting inflation and stimulating growth.

In a sense I think that Searjeant is not entirely fair when he says:

Growth has become even more vital to support an ageing population. The Governor may deny responsibility. The rest of us cannot.

Evidently this is the case, but equally I am sure that Mervyn King is well aware of the fact. However since it is long term *sustainable* growth we are talking about here, and since I don’t doubt this is what he (King) is aiming at, even if his efforts, and the reasoning behind them remain obscure (and here I do think we can blame King) I really don’t think Searjeant’s point sticks in the way he wants. The issue is whether short-term growth is being needlessly sacrificed, and if so, to what?

Short-term growth is being sacrificed IMHO to the god of global imbalances, and the campaign to correct them, and it is these, and not inflation, which are King’s real target. (continued).
Continue reading →

The Choke Point

Posted on by

Well following my speculation yesterday that the suggested de-coupling of the UK rebate issue from agricultural reform might be connected to the implications of the Doha round, news is in today that France last night called for an emergency meeting of European Union ministers to discuss “growing concerns in Paris that Europe will concede too much ground in the Doha round of trade talks“. The FT quotes Mandelson as saying:

“We are rapidly approaching the choke point where the different pieces either fall together or fall apart”

Avian Flu

Posted on by

It has been confirmed that the variant of avian flu found in Turkey is the H5N1 high pathogenic virus. Obviously on reading this one is caught between a feeling of panic and a desire to stay calm. Frankly the stay calm bit should win out, in all of us. Panic only makes things worse.

Clearly were some of the worst fears to be realised this would be a grave situation, but hopefully they won’t. One key point which needs to be made is that there still isn’t a H5N1 strain that is readily transmitted among humans, hopefully there won’t be, even if this may be hope against hope.

The WHO have an informative update on the Geographical spread of H5N1 avian influenza in birds. If you look at this report from the WHO on the situation in Indonesia (where three people have died) or in Vietnam (where 21 of the 64 cases proved fatal) you will see that even when the virus does cross species it is containable. So while the possibility of a pandemic exists we are not there yet, and possibly never will be. It’s quantifying the *possibly* part that is difficult. Basically I have put this post up in case any one else wants to voice an opinion. Clearly we at Afoe will try and monitor this situation from now on.

UPDATE (by Doug Merrill): Good sense from a biologist on what is likely to be helpful and what not can be found here.

Go West Young Man

Posted on by

My preocupations about the impact of demographic change on German society are already pretty well known. Well if Germany as a whole has a sizeable problem, the former East German Lande have a huge one. The state-owned KfW development bank project in a report out today (German only unfortunately, an English version of the press release is here) that the while the population of the old West Germany will drop by six percent between 2002 and 2050, that of the six eastern states will decline by a whopping 25%. Not to mention the fact that those who remain are likely to be even older on average than their Western counterparts. As a consequence the available workforce is likely to fall by a staggering 55%.

The issues raised by this research are large and important. Is, for example, East Germany now in irreversible decline? Can this process repeat itself elsewhere (including between rather than within nation states) as younger, more highly skilled and more mobile workers leave ageing and relatively more depressed areas etc?

The issue of migration from East to West Germany been receiving attention for some time now. Frank Heiland in a survey “Trends in East-West German Migration from 1989 to 2002” (follow the link and go to Volume 11 article 7) argues that there have been two waves of East-West migration The first one, 1989-1990, was triggered by the opportunities and uncertainties before the Reunification; the second one, since 1997, coincides with economic stagnation in the East and improving job prospects in the West.
Continue reading →

Turks snubbing arranged marriage with EU?

Posted on by

The excellent Dutch weblog Sargasso has an entry on Turkish cult novelist Burak Turna, whose latest book The Third World War or Üçüncü Dünya Savasi is turning into a regular best-seller in Turkey. One quote from Turna, taken from the International Herald Tribune:

”Turks are waking up to two facts,” Turna said at a café near Istanbul’s bustling Taksim Square, where he was greeted like a rock star by young fans. “One is that everything told to the Turkish people by EU leaders is lies. Two, that a Muslim country will never get into an EU that doesn’t want us”.

Fair enough. However, in his novel The Third World War Turna acts out Turkish feelings of anti-EU resentment in the following way:

The year is 2010 and the European Union has rejected Turkey. Fascist governments have come to power in Germany, Austria and France and are inciting violence against resident Turks and Muslims. A vengeful Turkey joins forces with Russia and declares war against the EU. Turkish commandos besiege Berlin, obliterate Europe and take control of the Continent.

Continue reading →

UK Rebate ‘On The Table’?

Posted on by

EU Politix is reporting UK Deputy Prime Minister John Prescott as telling a plenary session of the EU’s Committee of the Regions that London is “strongly committed” to finding agreement on the EU budget before the end of 2005. He is quoted as saying “We can not change agriculture in the short term.” and “We have put our abatement on the table. It is not the best way to spend European money”. If confirmed at the actual summit this would be news. This is also being linked to the establishment of some kind of fund to offset the industrial impact of globalisation and offshoring.

However I remain sceptical both on whether there is this dis-connect between the budget and agricultural reform in reality (remember opening talks with Croatia was not – *definitely not* – linked with the agreement to start negotiations with Turkey) and about the advisability of the UK taking this approach. Still, maybe this has something to do with it.