Category Archives: Economics: Currencies

That Other Issue

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The euro. Hamish McRae talks a lot of sense in the Independent today:

“So was the euro a terrible mistake? Will Germany, Italy and France go back to the mark, the lira and the franc? A string of stories have hit the streets hinting that this may be the outcome following the failure of France and the Netherlands to ratify the European constitution.

It is easy to see why there should be such speculation, but the eurozone is not going to collapse in the near future. I may be wrong, but my instinct is that while it will eventually unravel, such an event is almost certainly at least a decade away. That said, the debate matters because what was once a no-go subject is now being talked about, and this changes things.”

Maroni Update

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Here’s the FT’s reading of the situation.

Note this extract: “As financial markets digested the remarks of Roberto Maroni, Italy’s welfare minister, the interest rate differential between Italian and German bonds rose to 23 basis points, the widest spread since November 2002.”

These are the numbers we will be following at Afoe moving forward. Maroni is a member of a Northern xenophobic party that wants an independent country for the north of Italy. But *note*: he is in the government, and responsible for an important part of the Lisbon agenda, labour reform. So this is not some complete outside crank. Bottom line: Berlusconi’s government is an unstable coalation, and this very instability *is* cause for concern, especially since we have just seen mainstream politicians lose important votes in two of Europe’s more stable democracies.

One more irrelevant detail:
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When No Means Maybe

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Sometimes, just sometimes, being a journalist is hard. War correspondants, political columnists pressured to ‘firm-up’ an elusive source‘, BBC reporters, the list of those who could rightly complain is probably endless. But amongst the most challanging of the many missions which may occasion their way into the in-tray must, undoubtedly, be that of interpreting the intentionally elusive language of the central banker. Yesterday was there was a good case in point. ECB President Trichet actually said:

?I am not telling you anything that could be interpreted as preparing a rate cut,?

Now buried deep within the lexicon of obscurantism which governs central bank policy interpretation must be one which reads: when they say ‘a’ they mean ‘b’, since today we find this: Trichet signals ECB could cut rates

So, just to help you out, I’ll explain how this particular journalist probably reached this particular reading: by a process called backward reading. The FT’s Ralph Atkins must be convinced, just as I am, that the ECB will be forced (by both political pressure and by economic realities) to cut rates later in the year. So reading backwards, Trichet, who must himself be aware that the arguments for a rate cut may become compelling, was, of course, preparing the ground. What he couldn’t do yesterday, not under any circumstances,was give any indication whatsoever that he was ceding to the impact of the recent votes. Strange world, that of the banker, and that of the journalist come to think of it.

ECB Holds Rates at 2%

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The European Central Bank held its main refinancing rate constant at 2% for the 24th consecutive month this afternoon. No real surprise here. Perhaps the most revealing comment has been: “Whether others like it or not, the ECB isn?t an activist central bank,? a view offered to the Financial Times by one Julian Jessop, economist at Capital Economics.

The FT also points out that: “the 5.5 per cent slide in the euro to $1.226 against the dollar since the ECB?s last meeting may have done some of the Bank?s work for it. The weakening of the euro is stimulative to growth in the same way a rate cut would be, and, if it persists, is likely to be an upward drag on eurozone inflation“.

We will see. The euro has had a much calmer day today, clawing back this morning most of the ground lost in hectic trading last night. It is currently going for around $1.2279 in a fairly volatile afternoon.

The – oh they’ve all gone quiet over there – European Commission seems determined to sit things out till the June Summit, while Barroso appeals for calm:.

“?What I am asking for now is that political leaders, in particular government chiefs, not take individual, or unilateral decisions. I ask political leaders to show responsibility, to show caution”

Jean-Claude – into the valley of death rode the 600 – Juncker, Luxembourg’s prime minister and holder of the rotating EU presidency, continued to insist ratification should go forward as planned. Since Luxembourg is to have the next scheduled referendum, it will be interesting to see whether he in fact leads the troops more than the statutory ‘half a league’.

Europolitix has it that behind the scenes (and this is really the problem about how we do politics in Europe) a revolt is brewing amongst those who would be asked to follow Junker’s noble sacrifice: Poland, Denmark, Ireland, the Czech Republic, and, of course, the UK.

He Would Say That Wouldn’t he

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For those who are not old enough to remember, these are the immortal words of Mandy Rice Davies.
Now throwing a link quickly back across the Atlantic, Dave Altig at Macro blog picked up my ECB post and added a response from Hans Eichel.

But, the plot does thicken a bit.
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ECB: Just Look At This!

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I had promised a quiet day. I may have to eat my words. Look at this on the euro, and remember my post yesterday.

The currency also weakened after Germany’s Stern magazine reported German Finance Minister Hans Eichel and Bundesbank President Axel Weber discussed a possible failure of European monetary union. The euro is off to its worst start of a year since 2001, down 9.3 percent compared with the dollar.

“This is extremely bad timing and has undoubtedly compounded euro selling,” said Monica Fan, head of global foreign-exchange research at RBC Capital Markets Ltd. in London.

The euro retreated from as high as $1.2341 after the magazine said Eichel and Weber, who represents Germany on the ECB’s policy committee, discussed the euro’s potential failure with economists. The magazine quoted Joachim Fels, chief fixed- income economist at Morgan Stanley, who took part in the meeting. Fels declined to comment.

“We can neither confirm nor deny” that a meeting took place, said Bundesbank spokesman Wolf-Ruediger Bengs in a telephone interview. “We hope to issue a statement shortly.”

This is incredible stuff, and that it is breaking in the press must also be indicative of something. I go back to my post last week. It seems what I suggested is right: the ECB is deeply divided, and this ‘quietism’ and the policy of twirp is causing alarm in two important economies (Germany and Italy). This is not the end of the euro, but this discussion could mark the begining of the end. It all depends on how rapidly events unfold, and how long ‘ostrichism’ prevails in Frankfurt and Brussels.

Postscript: I am following the evolution of the Euro/USD over at our other page: A Few Euros More.

Czech Republic Having Second Thoughts

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I missed this at the time, but apparently officials responsible for monetary policy in the Czech Republic are begining to have second thoughts about joining the euro.

“Czech central bank policy maker Robert Holman said the government should abandon plans to adopt the euro by 2010 because joining the single currency may stifle growth, the first central banker in the country to call for a delay.

“I would not rush with euro adoption because it represents significant risks for us,” said Holman, 51, who joined the bank’s board on Feb. 13, in a May 18 interview in Prague. “The euro zone economy has been growing very slowly in the past five years, and among other factors, it could have been caused by having the common currency.””
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Crisis Looming At The ECB?

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A right royal row is brewing at the ECB. Basically the old guard theorists of the ‘one size fits all’ monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray.
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That Dreaded D Word

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“Dial D for Deflation” declared the Economist in 2002 in an article which amazingly is still available online. Since Alan Greenspan officially declared the deflation scare over, the word has hardly cropped up in economic debates.

Yet anyone looking at the rapid rise in value of the euro, and the absence of growth in some key economies – Germany, Italy – could have been forgiven for thinking that the ‘all clear’ signal was being given a bit too soon.

Today the latest EU inflation figures are out from Eurostat (PDF file), and Goldman Sachs are warning that: ?without preventive action from the ECB, unit labour costs threaten to pose a future risk of deflation?.
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