Category Archives: A Few Euros More

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Issing Gives Inflation Warning

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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.

Growth and Inflation in the UK

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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).
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The Choke Point

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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”

UK Rebate ‘On The Table’?

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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.

EU Common Circus Policy?

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MEPs are soon scheduled to debate a new ‘Common Circus Policy’. This is following the publication of a report: “new challenges for the circus as part of European culture”. Apparently MEPs agree that circuses should be referred to as part of Europe’s cultural heritage, but tend to disagree on whether they should include presentation of animals or not:
At the moment, Austria does not allow circuses to use any wild animals (even in the parliament?), while the Scandinavian countries ban some kinds of animals, such as lions and tigers (hence the more touchy-feely approach to politics there I imagine).

UK Jobless Upward Trend Continues

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U.K. jobless claims rose for an eighth consecutive month in September, extending the longest period of increases in almost 13 years, “as growth in Europe’s second- biggest economy slows”. This adds just a little more evidence to the fact that all is not necessarily currently all for the best in the land of John Stuart Mill. However as NTC research point out, not all is totally bad either:

Meanwhile, annual average earnings growth held steady at 4.2 percent in the three months to August, signalling that higher inflation is still not feeding through to wages.

So earnings continue upwards at a healthy clip, but not above trend. No evidence of ‘secondary effects’ here then. Which makes you wonder why the normally reasonable Mervyn King is currently being so evidently unreasonable. You can find my explanation for this here (and in the comments).

Mervyn King on Tuesday night signalled he was not convinced of the case for lower interest rates and could see many reasons why the rise in oil prices might increase inflationary pressure.
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German Inflation Revised Down

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I like this title. I have, I unashamedly admit, lifted it straight from NTC research (where it was in any event hardly the most creatively original of headers). I like it since it seems to run counter in spirit to all those admonishing lectures we are currently getting about the dangers of ‘secondary inflation’ and pass-through. The headline refers to the fact that Germany’s EU-harmonised annual inflation rate (HICP) for September was revised down to 2.6 percent from an initial 2.7 percent, the Federal Statistics Office announced on Wednesday. Actually this revision is something of a statistical freak as the reading in question was the harmonised consumer price index for Germany, which is calculated for European purposes. In fact AP runs a different headline: German Inflation Rate Climbs in September, which doesn’t really prove that there are lies, damn lies and statistics, but rather that we have a labyrinth of statistical indices at work – AP quote the straight national CPI, and not the harmonised index. Anyway, if you can battle your way through all this, well good luck to you!

Much more to the point, however, is the detail that , not considering heating oil and motor fuel, the rate of price increase would have been just 1.6%. Inflation scare? Where? Oh yes, I forgot, in Spain and Greece.

As reported by the Federal Statistical Office, the consumer price index for Germany rose by 2.5% in September 2005 on September 2004, and by 0.4% on August 2005. That is the highest year-on-year rate of increase for more than four years (May 2001: +2.7%). In July and August 2005, the year-on-year rates of change were +2.0% and +1.9%, respectively. The estimate for September 2005 based on the results from six Länder was thus confirmed.

The year-on-year rate of price increase was strongly influenced by the sustained price increase for energy in September 2005. In that month, price increases were recorded primarily for mineral oil products again. Not considering heating oil and motor fuel, the rate of price increase would have been just 1.6%. Domestic fuel prices were up 40.0% compared with the same month a year earlier.
Source: German Federal Statistical Office

Hungary Gets A Rap On The Knuckles Too

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Hungary converted itself into the latest country to join the line of EU members awaiting chastisment for failing to enforce budgetary discipline after it became clear that its deficit for 2005 could be almost double official forecasts.

Joaquín Almunia, EU monetary affairs commissioner, told European finance ministers Hungary’s deficit this year was projected to be 6.1 per cent although some economists say it could top 7 per cent.

The state of Hungary’s public finances was only revealed after the country’s central bank blew the whistle on the government, which used creative accounting to massage down the deficit. The revelation is embarrassing for the European Commission, which reported in July that Hungary was “within reach” of achieving its targeted deficit for 2005 of 3.6 per cent.

UK and German Retirement Policies Compared

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As we all know raising the participation rates of older workers is both essential and a core component of the Lisbon Agenda, so here’s a timely report from the Anglo-German Foundation for the Study of Industrial Society comparing policies directed towards older workers in the UK and Germany. More salacious material to stimulate all you policy wonkers out there. (Hat Tip to David from North Sea Diaries). Looking at the table on page 3 the UK seems to have been a good deal more successful in acieving these objectives over the last decade. In both coutries male participation rates in the 55-64 age group has actually gone down since 1990, with the increase for the group as a whole being a matter of increasing female participation. On the other hand the UK has managed to reverse the 1990 – 2000 downward male trend and between 2000 and 2004 55-64 male participation went up, something which it noticably didn’t do in Germany.

The report concludes that the primary deficit concerning active labour market policies for older unemployed in Germany is the lack of specific targeting of this group both in active job placement and training. In the UK, the scope of active measures is rather limited both with regard to the kind of measures � New Deal 50 plus/New Deal 25 plus � and the level and duration of funding………In the UK � despite a more socially inclusive stance recently � funding of job creation and a broad application of training measures has not taken place so far, given the low intervention character of labour market policies. In Germany, in the wake of recent labour market reforms, a shift in paradigm towards a more activating approach to job placement has been implemented.

Being Right After The Event

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The FT has a piece on the growing tensions within the Republican tent over Iraq.

If we quit now, said Condoleezza Rice, the secretary of state, in a speech at Princeton University last month, we will embolden every enemy of liberty and democracy across the Middle East. We will destroy any chance that the people of this region have of building a future of hope and opportunity. And we will make America more vulnerable.

She is right. This was always the risk, that the objectives were unrealistic and that the US would come out weakened, but it seems that at the time few were willing to listen.

Kanan Makiya, an outspoken proponent of the war who is documenting the horrors of the Saddam regime in his Iraq Memory Foundation, opened the AEI meeting by admitting to many dashed dreams.

He said he and other opposition figures had seriously underestimated the powers of ethnic and sectarian self-interest, as well as the survivability of the constantly morphing and flexible Ba’ath party. He also blamed the Bush administration for poor planning and committing too few troops.

Well this seems to be another example of what at times rather than shouting it may be better from time to time to listen to what your opponents are actually saying. If you strip out the WMD argument, concern about “ethnic and sectarian self-interest” and the impact of this on any subsequent political process was always the major preoccupation of those who had doubts.