Just a few hours ahead of the long-awaited EU summit, Greece received some unexpected relief. During his appearance at the European Parliament, ECB president Jean-Claude Trichet announced that the ECB will keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010. In parallel, the ECB plans to introduce, as of January 2011, a “graded haircut schedule”. As part of its non-standard measures during the financial crisis, the ECB had lowered the threshold for assets accepted as collaterals to triple-B-minus, from A-minus. While other non-standard measures are now gradually phased out, the crisis measure will stay.
Technical details of the plan will be presented at the press conference after the next ECB meeting on 8 April. At least two main questions will then have to be answered: will the new rules only apply to government bonds or to all other asset classes currently eligible as collateral? Will a threshold (minimum rating) still exist? At present it seems likely that different haircuts will be applied for every rating level going down to BBB-. The question is whether the graded haircut schedule would also apply for ratings below BBB-. Currently, the only haircuts the ECB applies to sovereign debt are tied to the maturity, not the credit rating.
A new “graded haircut schedule” could be seen as the ECB’s contribution to increase fiscal discipline in the future. As a consequence, yield spreads across the Eurozone could be wider than in the past.
Thursday, March 25, 2010
Wednesday, March 24, 2010
German Ifo defies double-dippers
Did anyone say double-dip? The German Ifo index surged to 98.1 in March, from 95.2 in February; its highest level since June 2008. The increase was driven by both the current assessment and the expectation component. The current assessment is clearly leaving its depressed levels, increasing to 94.4, from 89.8 in February. At the same time, the expectations component continued its strong upward trend and is now at its highest level since June 2007. Earlier today, the German PMI manufacturing surged to its highest level ever and the PMI services jumped to 23-months high.
Today’s confidence indicators show that the pause of the German recovery around the turn of the year was nothing more than a temporary break. The underlying trend of the German recovery remains healthy: business confidence is high, order books are filling, recruitment plans are increasing and even investment prospects are improving. The German “export machine” is gathering speed again.
There it is again: the German export machine. Together with the European and Greek fiscal crisis, the German export model has dominated headlines in recent days. However, it seems a bit short-sighted to blame German exports for the problems of other Eurozone countries. Very often, German exporters do not compete with other Eurozone exporters but with Chinese, American or Japanese exporters.
While the timing of the debate on the German export model might not have been productive in finding a Eurozone agreement on how to deal with the Greek fiscal crisis, the need for more German domestic demand is undisputable. The German economy needs more domestic investment and consumption. Not for the sake of other Eurozone countries but for the sake of transforming the current rebounce into a self-sustained boom. With the highest economic stimulus packages of all Eurozone countries and the tax relief agreed under the new government, it is hard to criticise Germany for inactivity. In a way, the current uncompromising German position on Greece could even benefit Eurozone rebalancing. Last week’s u-turn on Greece seems to be – partly – driven by the upcoming crucial regional elections in North Rhine-Westphalia. Losing these state elections would rob the government’s majority in the German upper house, limiting scope for major (tax) reforms.
A scary export machine to some, to others it is an export-driven recovery. In any case, today’s Ifo confirms that the German economy will leave its winter depression soon.
Today’s confidence indicators show that the pause of the German recovery around the turn of the year was nothing more than a temporary break. The underlying trend of the German recovery remains healthy: business confidence is high, order books are filling, recruitment plans are increasing and even investment prospects are improving. The German “export machine” is gathering speed again.
There it is again: the German export machine. Together with the European and Greek fiscal crisis, the German export model has dominated headlines in recent days. However, it seems a bit short-sighted to blame German exports for the problems of other Eurozone countries. Very often, German exporters do not compete with other Eurozone exporters but with Chinese, American or Japanese exporters.
While the timing of the debate on the German export model might not have been productive in finding a Eurozone agreement on how to deal with the Greek fiscal crisis, the need for more German domestic demand is undisputable. The German economy needs more domestic investment and consumption. Not for the sake of other Eurozone countries but for the sake of transforming the current rebounce into a self-sustained boom. With the highest economic stimulus packages of all Eurozone countries and the tax relief agreed under the new government, it is hard to criticise Germany for inactivity. In a way, the current uncompromising German position on Greece could even benefit Eurozone rebalancing. Last week’s u-turn on Greece seems to be – partly – driven by the upcoming crucial regional elections in North Rhine-Westphalia. Losing these state elections would rob the government’s majority in the German upper house, limiting scope for major (tax) reforms.
A scary export machine to some, to others it is an export-driven recovery. In any case, today’s Ifo confirms that the German economy will leave its winter depression soon.
Thursday, March 11, 2010
Geen tijd voor heilige koeien
Elk land heeft zijn heilige economische koeien. Nederland koestert de hypotheekrenteaftrek, België de loonindexering en Frankrijk het eeuwige geloof in de publieke sector. En Europa heeft de regels van het Stabiliteitspact en de inflatiedoelstelling van 2 procent van de Europese Centrale Bank. Vooral die laatste heilige koe aanraken is een doodzonde. Terecht?
Olivier Blanchard, de hoofdeconoom van het IMF, heeft het aangedurfd de heiligste Europese koe aan te raken en de inflatiedoelstelling van 2 procent ter discussie te stellen. Waarom niet 4 procent? Natuurlijk roept zo'n voorstel felle reacties op. Vooral in Duitsland, waar prijsstabiliteit de heilige koe is. Bijna elke Duitser krijgt het anti-inflatiegen met de paplepel binnen. De befaamde Bundesbank is een van de weinige dingen waarop Duitsers trots zijn. Ook al heeft het Stabiliteitspact de Europese buurlanden niet tot verantwoord beleid kunnen verplichten, toch blijft de erfopvolger van de Bundesbank, de ECB, de rots in de branding. Kritiek op de ECB komt dicht in de buurt van blasfemie.
Zelfs Otmar Issing, de purist onder de inflatiestrijders, heeft ooit toegegeven dat de 2 procent van de ECB redelijk arbitrair is. Niemand kan empirisch bewijzen waarom 2 procent beter is dan 1 procent of 3 procent, maar een te starre doelstelling beperkt de flexibiliteit. Even ter herinnering: de goede oude Bundesbank had geen inflatiedoelstelling en was in de praktijk veel flexibeler dan vaak gedacht. In de veertig jaar voor het begin van de monetaire unie lag de maandelijkse inflatie 70 procent van de tijd boven 2 procent, sinds 1999 slechts 20 procent.
De voorbije jaren hebben getoond dat een al te starre inflatiedoelstelling niet altijd het beste is voor een economie. In jaren van negatieve prijseffecten door de mondialisering was 2 procent wellicht te hoog, in jaren van snel stijgende grondstofprijzen waarschijnlijk te laag.
Met de ambitieuze doelstelling van 2 procent brengt de ECB de economie van de eurozone aan de rand van deflatie. In de komende jaren moeten veel Europese landen in concurrentiekracht veel verloren terrein op Duitsland herwinnen. Als in Duitsland de loonstijgingen ook in de komende jaren zeer gematigd blijven, betekent dat voor landen als Ierland, Griekenland en Spanje (en eventueel ook België) dat zij in feite de nominale lonen moeten laten dalen. Dat betekent deflatie aan de Middellandse Zee.
Een hogere inflatiedoelstelling is geen panacee en heeft ook nadelen. Een pragmatischer aanpak met meer aandacht voor de kerninflatie en de inflatiebehoefte van een economie zijn echter het overwegen waard. De belangrijkste les van de crisis is dat trots en dogma's slechte raadgevers zijn. Zelfs economische heilige koeien kunnen vroeg of laat in de gracht belanden.
Deze column verscheen eerder in het Belgische dagblad "De Tijd".
Olivier Blanchard, de hoofdeconoom van het IMF, heeft het aangedurfd de heiligste Europese koe aan te raken en de inflatiedoelstelling van 2 procent ter discussie te stellen. Waarom niet 4 procent? Natuurlijk roept zo'n voorstel felle reacties op. Vooral in Duitsland, waar prijsstabiliteit de heilige koe is. Bijna elke Duitser krijgt het anti-inflatiegen met de paplepel binnen. De befaamde Bundesbank is een van de weinige dingen waarop Duitsers trots zijn. Ook al heeft het Stabiliteitspact de Europese buurlanden niet tot verantwoord beleid kunnen verplichten, toch blijft de erfopvolger van de Bundesbank, de ECB, de rots in de branding. Kritiek op de ECB komt dicht in de buurt van blasfemie.
Zelfs Otmar Issing, de purist onder de inflatiestrijders, heeft ooit toegegeven dat de 2 procent van de ECB redelijk arbitrair is. Niemand kan empirisch bewijzen waarom 2 procent beter is dan 1 procent of 3 procent, maar een te starre doelstelling beperkt de flexibiliteit. Even ter herinnering: de goede oude Bundesbank had geen inflatiedoelstelling en was in de praktijk veel flexibeler dan vaak gedacht. In de veertig jaar voor het begin van de monetaire unie lag de maandelijkse inflatie 70 procent van de tijd boven 2 procent, sinds 1999 slechts 20 procent.
De voorbije jaren hebben getoond dat een al te starre inflatiedoelstelling niet altijd het beste is voor een economie. In jaren van negatieve prijseffecten door de mondialisering was 2 procent wellicht te hoog, in jaren van snel stijgende grondstofprijzen waarschijnlijk te laag.
Met de ambitieuze doelstelling van 2 procent brengt de ECB de economie van de eurozone aan de rand van deflatie. In de komende jaren moeten veel Europese landen in concurrentiekracht veel verloren terrein op Duitsland herwinnen. Als in Duitsland de loonstijgingen ook in de komende jaren zeer gematigd blijven, betekent dat voor landen als Ierland, Griekenland en Spanje (en eventueel ook België) dat zij in feite de nominale lonen moeten laten dalen. Dat betekent deflatie aan de Middellandse Zee.
Een hogere inflatiedoelstelling is geen panacee en heeft ook nadelen. Een pragmatischer aanpak met meer aandacht voor de kerninflatie en de inflatiebehoefte van een economie zijn echter het overwegen waard. De belangrijkste les van de crisis is dat trots en dogma's slechte raadgevers zijn. Zelfs economische heilige koeien kunnen vroeg of laat in de gracht belanden.
Deze column verscheen eerder in het Belgische dagblad "De Tijd".
Thursday, March 4, 2010
ECB press conference - Phasing out hits speed bump
While the one-needled compass would clearly allow the Governing Council to take a longer vacation break, the phasing out of the ECB’s liquidity measures is continuing. Which measures were today unwound? Firstly, the 6-month longer-term refinancing operation (LRO) of 31 March will be the last one of its kind and it will be conducted at a floating rate, like the December 12-month LRO. Secondly, as of the end of April, 3-month refinancing operations will return to their normal structure with a variable rate tender procedure. All other measures remain in place: one-week and one-month refinancing operations will continue to be conducted at fixed rates with full allotment, at least until 12 October 2010. As a consequence, excess liquidity through full allotment will remain in the markets at least until early November, enabling banks to rollover any needs from the expiring first two 12-month LROs.
Of course, besides the ECB’s exit strategy, Greece and the austerity measures presented yesterday were the dominant topics of the press conference. However, Trichet only reiterated the ECB’s official position which welcomed the convincing additional and permanent fiscal consolidation measures. According to Trichet, the measures were “a key signal both for the long-term fiscal sustainability and for substantially enhancing the price and cost competitiveness of the Greek economy”. Despite this moral support, Trichet refrained from further comments.
To sum up, the Greek roadblock on the exit strategy has become a speed bump. The phasing out continues but at a much slower pace. Generous liquidity provisions were effectively extended until November. By returning to variable rate tenders at the 3-month operations and keeping full allotment at the shorter maturity, the ECB is trying to gradually get its grip back on money market rates. If this strategy works, the ECB could theoretically start hiking rates before all liquidity measures end. However, this theory, reality is often different.
Of course, besides the ECB’s exit strategy, Greece and the austerity measures presented yesterday were the dominant topics of the press conference. However, Trichet only reiterated the ECB’s official position which welcomed the convincing additional and permanent fiscal consolidation measures. According to Trichet, the measures were “a key signal both for the long-term fiscal sustainability and for substantially enhancing the price and cost competitiveness of the Greek economy”. Despite this moral support, Trichet refrained from further comments.
To sum up, the Greek roadblock on the exit strategy has become a speed bump. The phasing out continues but at a much slower pace. Generous liquidity provisions were effectively extended until November. By returning to variable rate tenders at the 3-month operations and keeping full allotment at the shorter maturity, the ECB is trying to gradually get its grip back on money market rates. If this strategy works, the ECB could theoretically start hiking rates before all liquidity measures end. However, this theory, reality is often different.
Thursday, February 25, 2010
German labour market defies winter
Snow-resistant? German unemployment increased by a non-seasonally adjusted 25,900 in February. Officially, 3.64 million Germans are currently unemployed. In seasonally-adjusted terms, however, unemployment increased by only 7,000, lifting the seasonally-adjusted unemployment rate to 8.2%, from a revised 8.1% in January. At the same time, the numbers of vacancies dropped for the first time since September, by 4,000.
Today’s labour market report includes good and bad news. Of course, it did not come as a surprise that German unemployment would continue to increase again and it was also not the last time. However, the fact that even with an exceptionally strong winter, seasonally-adjusted unemployment only increased marginally is good news. While the rest of the economy seems to suffer from the harsh winter weather, the labour market remains snow-resistant.
Looking ahead, things will probably get worse before they get better and unemployment is still bound to increase somewhat. However, the worsening should be short-lived. Leading indicators, historical evidence and recent wage settlements with job guarantees all point to a stabilisation of the labour market around the summer. Recent German surveys showed that recruitment plans are improving gradually. Initially, the stabilisation of the labour market should be marked by a pure unwinding of short-work schemes with only limited impact on private consumption. However, given very sluggish consumption in the second half of last year, no boost can be too small.
The labour market should continue to be the bright spot of the German economy and tender positive surprises should not be excluded. The horror scenarios of exploding unemployment remained what they were: scenarios.
Today’s labour market report includes good and bad news. Of course, it did not come as a surprise that German unemployment would continue to increase again and it was also not the last time. However, the fact that even with an exceptionally strong winter, seasonally-adjusted unemployment only increased marginally is good news. While the rest of the economy seems to suffer from the harsh winter weather, the labour market remains snow-resistant.
Looking ahead, things will probably get worse before they get better and unemployment is still bound to increase somewhat. However, the worsening should be short-lived. Leading indicators, historical evidence and recent wage settlements with job guarantees all point to a stabilisation of the labour market around the summer. Recent German surveys showed that recruitment plans are improving gradually. Initially, the stabilisation of the labour market should be marked by a pure unwinding of short-work schemes with only limited impact on private consumption. However, given very sluggish consumption in the second half of last year, no boost can be too small.
The labour market should continue to be the bright spot of the German economy and tender positive surprises should not be excluded. The horror scenarios of exploding unemployment remained what they were: scenarios.
Wednesday, February 24, 2010
German recovery takes a break
Today’s second estimate of the German statistical office confirmed what we already knew: the recovery took a break in the fourth quarter. After two quarters with solid growth, German GDP stagnated in Q4 2009. The YoY decline of 1.7% illustrates that the economy has left the worst behind.
The decomposition of the decline reveals interesting details. Consumption life after the car scrap scheme does not exist. Private consumption dropped by a dramatic 1.0% QoQ, returning private consumption to the level of early 2007. Capital investment and, very surprisingly, government spending also dropped significantly. Only exports continued their strong upward trend, increasing by 3.0% QoQ. Rebalancing the German economy towards more domestic demand looks differently.
At first sight, it looks as if the German economy has fallen into hibernation: stagnating growth in the fourth quarter and yesterday's weakening Ifo index. However, looks can be deceiving. The underlying trend remains healthy. Demand for German products remains strong and German companies are increasingly becoming more positive about the future.
Looking ahead, the harsh winter weather will determine the near term outlook for the German economy as it weighs on production, construction and the implementation of the government's stimulus for infrastructure investment. However, the snow will only delay but not stop the recovery. The hibernation should be short.
The decomposition of the decline reveals interesting details. Consumption life after the car scrap scheme does not exist. Private consumption dropped by a dramatic 1.0% QoQ, returning private consumption to the level of early 2007. Capital investment and, very surprisingly, government spending also dropped significantly. Only exports continued their strong upward trend, increasing by 3.0% QoQ. Rebalancing the German economy towards more domestic demand looks differently.
At first sight, it looks as if the German economy has fallen into hibernation: stagnating growth in the fourth quarter and yesterday's weakening Ifo index. However, looks can be deceiving. The underlying trend remains healthy. Demand for German products remains strong and German companies are increasingly becoming more positive about the future.
Looking ahead, the harsh winter weather will determine the near term outlook for the German economy as it weighs on production, construction and the implementation of the government's stimulus for infrastructure investment. However, the snow will only delay but not stop the recovery. The hibernation should be short.
Monday, February 22, 2010
Zeit fuer Idealisten
In findet man Idealisten aller Farben. Flämische Separatisten, die nichts lieber wollen als die Wallonen los zu werden, Wallonen, die sich am liebsten bei Frankreich anschließen würden und natürlich auch die Europäischen Idealisten. Die träumen nun schon Jahrzehnte den Traum der vollendeten Einheit Europas: die politische Union. Macht die griechische Tragödie diesen Traum endlich wahr?
Die Europäischen Regierungschefs haben letzte Woche zugesagt, Griechenland nicht fallen zu lassen. Mit politischem Gewicht wurde ein Sicherheitsnetz unter Griechenland gespant. Ob das reicht, um die Finanzmärkte zu beruhigen bleibt abzuwarten. Die von der Griechischen Regierung versprochene Haushaltskorrektur von 10% des BIP innerhalb von drei Jahren wäre ein neuer Europäischer Rekord. Politisch korrekt heißt so etwas „ambitioniert“, politisch unkorrekt „fast unmöglich“. Griechenland wird also sehr wahrscheinlich noch mal nachlegen müssen und die Regierungschefs können schon mal ihr Sicherheitsnetz anziehen.
In einer finanziellen Rettungsaktion, wie die auch aussehen mag, wird wohl vor allem Deutschland einen großen Betrag stemmen müssen. Nicht viele Bürger würden verstehen, warum in Deutschland gespart werden muss und die Steuersenkungen auf sich warten lassen, man aber gleichzeitig die Zeche früherer Partys anderer Länder bezahlt.
Genau das ist das Problem der Währungsunion. Es gibt keine deutlichen Sperrstunden und keine Ausnüchterungszelle. Die Währungsunion funktioniert nur, wenn es neben der europäischen Geldpolitik auch eine europäische Haushaltspolitik gibt. Eine Haushaltspolitik, bei der Länder deutlich gezwungen werden können, um in einem frühen Stadium ihre Probleme in den Griff zu bekommen. Und einen Strafmechanismus, bei dem nicht die anderen die Zeche bezahlen müssen.
Es gibt viele Möglichkeiten, ein strengeres Rahmenwerk in Kraft zu setzen. Es muss nicht die Europäische Wirtschaftsregierung sein. Es geht aber nicht ohne Machtverlust. Wenn der letzte Akt der griechischen Tragödie beendet ist, kann Europa jedoch nicht einfach zur Tagesordnung übergehen. Die Europäischen Idealisten in Brüssel wird’s freuen.
Dieses Stueck wurde auch in Euro am Sonntag als "Letter from...Brussels" veroeffentlicht
Die Europäischen Regierungschefs haben letzte Woche zugesagt, Griechenland nicht fallen zu lassen. Mit politischem Gewicht wurde ein Sicherheitsnetz unter Griechenland gespant. Ob das reicht, um die Finanzmärkte zu beruhigen bleibt abzuwarten. Die von der Griechischen Regierung versprochene Haushaltskorrektur von 10% des BIP innerhalb von drei Jahren wäre ein neuer Europäischer Rekord. Politisch korrekt heißt so etwas „ambitioniert“, politisch unkorrekt „fast unmöglich“. Griechenland wird also sehr wahrscheinlich noch mal nachlegen müssen und die Regierungschefs können schon mal ihr Sicherheitsnetz anziehen.
In einer finanziellen Rettungsaktion, wie die auch aussehen mag, wird wohl vor allem Deutschland einen großen Betrag stemmen müssen. Nicht viele Bürger würden verstehen, warum in Deutschland gespart werden muss und die Steuersenkungen auf sich warten lassen, man aber gleichzeitig die Zeche früherer Partys anderer Länder bezahlt.
Genau das ist das Problem der Währungsunion. Es gibt keine deutlichen Sperrstunden und keine Ausnüchterungszelle. Die Währungsunion funktioniert nur, wenn es neben der europäischen Geldpolitik auch eine europäische Haushaltspolitik gibt. Eine Haushaltspolitik, bei der Länder deutlich gezwungen werden können, um in einem frühen Stadium ihre Probleme in den Griff zu bekommen. Und einen Strafmechanismus, bei dem nicht die anderen die Zeche bezahlen müssen.
Es gibt viele Möglichkeiten, ein strengeres Rahmenwerk in Kraft zu setzen. Es muss nicht die Europäische Wirtschaftsregierung sein. Es geht aber nicht ohne Machtverlust. Wenn der letzte Akt der griechischen Tragödie beendet ist, kann Europa jedoch nicht einfach zur Tagesordnung übergehen. Die Europäischen Idealisten in Brüssel wird’s freuen.
Dieses Stueck wurde auch in Euro am Sonntag als "Letter from...Brussels" veroeffentlicht
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