I don’t like saying ‘I told you so’, but if you can spare the time to go through some of my posts, the ‘reading the tealeaves’ rate hasn’t been too bad lately. First there is the question of ECB rates, they need to come down. I started indicating this at the time of the May meeting. Then there is the trouble at mill story about the ECB, and then the negative consequences for the euro of a French ‘no’ (and here), all of which you were able to read on Afoe well before they got to be a commonplace in the mainstream press.
Well today there is more confirmation of my ‘crisis’ ECB hypothesis:
European Central Bank uncertainty about whether interest rates might have to be cut to boost the flagging eurozone economy has spilled into a semi-public debate among members of its rate-setting council.”
Hints by Jean-Claude Trichet, ECB president, and Otmar Issing, the bank’s chief economist, that the possibility had increased of borrowing costs falling have contrasted with comments by several national central bank governors on the committee.
The differences highlight the dilemma faced by the ECB. Economic growth, lacklustre for the past four years, has slowed again, and politicians are increasing the pressure for a further cut in borrowing costs. But excess liquidity and oil price increases are sounding inflationary alarm bells.
Incidentally speculations are already begining about Otmar Issing’s successor. I wish I could say for my part that his presence will be sorely missed. Doubtless he will be looking forward to all the extra time he can spend with his family.
Now, I have two more strong calls out (well three if you count the fact that I dismiss out of hand the inflation round the corner story, and have been doing so for the past three years): the EU commission will have little alternative but to try to strictly enforce the Stability and Growth Pact, and Alan Greenspan won’t be able to get very far with the ‘measured rate increases’. Inflation, collapsing dollar, China bust: I just don’t know how so many bright people can get things *so* wrong.
The obvious question. The comission always tried to enforce the pact. The ministers voted them down. What makes you think that the governments will do otherwise?
“What makes you think that the governments will do otherwise?”
Easy: just contemplating what will happen to the euro if they don’t. Circumstances alter cases and times change. Up to now they have been able – more or less – to laugh off the ‘euro future under threat story’, but even cats only have *so many* lives. They don’t seem to be advancing too rapidly towards serious budget reform, there is no lasting resolution of the ‘constitution crisis’ in sight, if they don’t enforce the SGP then they really are asking for serious trouble.
“they really are asking for serious trouble”
Oh yes, and they probably will get it.
I’m looking at this story:
http://www.bloomberg.com/apps/news?pid=10000100&sid=awiLd5I8d5RY&refer=germany
this one:
http://news.yahoo.com/s/nm/20050615/bs_nm/financial_britain_snow_dc/nc:732;_ylt=Ag15Sk0SZlR_bp35GhvhMxJ0bBAF;_ylu=X3oDMTBiMW04NW9mBHNlYwMlJVRPUCUl
(I’m sorry, I can’t help reaching the conclusion that Snow is basically a fool. What he is doing is talking the dollar up, which is the last thing he should be doing).
and this one:
http://news.yahoo.com/s/nm/20050615/bs_nm/economy_fed_dc;_ylt=AsRcwDC0rcZ_KHVckH4q8OS573QA;_ylu=X3oDMTBiMW04NW9mBHNlYwMlJVRPUCUl
All the conditions seem to be there for a major dollar rally, and a major ‘attack’ on the euro. Don’t forget Italy was ‘forced out’ of EMU in 1992.
Part of any increase in pressure could come as a result of a sudden and dramatic change in consensus: when more traders ‘fold’ and accept that the euro really is on a downward trend. one thing which will make this more like likely is any string of headlines suggesting ‘dithering’ on the pact.
Circumstances alter cases and times change.
Not really in this case. The threat was the same, it just has become apparent.
This may be my cynical streak speaking, but facing a budget crisis and humilation it bears sole responsibility for and a crisis of a currency maybe at some point there’s collective responsibility for predicting a government’s actions is easy.
Asking the punishable whether there shall be punishment is a basic flaw, which can be fixed only by basic remedies.
On strictly enforcing the stability pact.
This is economic sado-masochism, and evidently Germany, France, and Italy are not keen on it. Some, such as the kinky cabaret artists in the European Commission, to judge from their rhetoric, clearly do derive enormous pleasure from this activity. The G&S Pact, like most treaties and directives that are produced within the EU institutions, is easily ignored. What are the guardians of rules and regulations going to do if a member states ignores them – levy fines and worsen the deficit, chuck them out of the ?uro and prompt a crisis for both the single currency as well as the member state concerned, impose sanctions, take the member state to the European Court ….. sovereignity ultimately rests with the individual EU member state, not the Commission, and, certainly not the ECB.
John Kay has an interesting article on how little influence and power organisations like the IMF, G8, etc really have. I would say that this is also true of the EU. Professor Kay points out: that power in a complex and global modern economy is very widely diffused.
he goes on to say that
The defining characteristic of a market economy is that no individual, or corporation, or small group, determines its directions. But since this is hard to grasp, the fallacy that decisions of big import for the world economy are being made in these conference rooms is sustained by both preening politicians inside and protesting demonstrators outside.
See Empty talk of the world’s leading nations
The markets will determine the fate of the ?uro.
It is also worth remembering that the ?uro has, in the past, been worth below 90 cents US; ?uro / US $ollar parity may yet be seen again. I don’t think that is a problem for the eurozone – notions that a strong ?uro is a sign of EU virility are misconceived.
“Not really in this case. The threat was the same, it just has become apparent.”
Yes, and now it is apparent, it is real. Try looking at this face:
http://bonoboathome.blogspot.com/2005/06/blair-and-chirac-may-look-happy.html
Something somewhere is going to give here.
“This is economic sado-masochism, and evidently Germany, France, and Italy are not keen on it”
This is clear. But my feeling is you can’t make a 180 degree turn in the middle of a crisis. The time to have realised this is now probably gone. They have no real alternative to this S-M ritual IMHO. They built the box, and now they’re trapped inside.
Dictionary.com thesaurus reading on ‘immure’
bind, capture, chain, check, circumscribe, coerce, compel, confine, deprive, disenfranchise, disfranchise, dominate, enchain, enclose, enthrall, fetter, hobble, hold, immure, imprison, incarcerate, indenture, jail, oppress, reduce, restrain, restrict, secure, shackle, shut in, subdue, subject, subjugate, suppress, tether, tie, yoke.
They have no real alternative to this S-M ritual IMHO. They built the box, and now they’re trapped inside.
There is always an alternative. In this case it is simply a question of refusing to take part.
When France and Germany effectively made the G&S Pact redundant the ?uro didn’t collapse (in fact it continued to rise), and if Italy takes the same view I don’t think it will impact the value of the ?uro.
“What makes you think that the governments will do otherwise?”
Easy: just contemplating what will happen to the euro if they don’t.
The big continental economies (F, G, I) want a weaker euro, and if the ECB won’t give it to them, they may be willing to spend their way into it. With the S & G Pact now amended to recognize that it is essentially unenforceable, this is the opportunity for those who want a loose monetary policy to get what they want without having to politick for it.
(And in the worst case scenario, it’s a way for those who want out to get out without being blamed for it.)