ECB meeting – Draghi’s elegant interpretation of “we-never-pre-commit”

As expected, the ECB kept interest rates on hold. ECB president Draghi elegantly balanced between dovish and hawkish comments, keeping all options open. In our view, rates should remain on hold unless the economic recovery fails to materialise in the coming months. Non-standard measures remain the ECB’s most preferred policy option.


The ECB’s macro-economic assessment remained broadly unchanged compared with the February meeting. The ECB still witnesses a stabilisation of the Eurozone economy at a very low level and expects a gradual recovery in the second half of the year. ECB president Draghi stressed the current dichotomy between stabilising and even improving soft data on the one hand and disappointing hard data on the other hand.

The ECB’s macro-economic assessment was also reflected in the latest ECB’s staff projections. In these projections, GDP growth forecasts for both 2013 and 2014 were slightly revised downwards. The new mid-point projection is now -0.5% for 2013 (from -0.3% in the December projections) and 1% for 2014 (from 1.2%). As regards inflation, the projections for 2013 remained unchanged at 1.6% but were slightly revised downwards to 1.3% for 2014 (from 1.4%). These changes were mainly driven by the negative carry-over effect from weaker-than-expected GDP growth in 4Q12 and lower headline inflation rates at the beginning of the year. Broadly speaking, the underlying pattern of the future path of the Eurozone economy has remained unchanged since the December meeting. It looks as if it would need at least one or two months of disappointing hard data before the ECB would change its view.

With the almost unchanged macro-economic assessment, it did not come as a surprise that the ECB kept its risk analysis unchanged. Risks to the economic outlook are still to the downside, while risks to the inflation outlook remain balanced. Notably, the euro exchange rate has disappeared as a downside risk to inflation. Maybe a nice side-effect of the Italian elections and possibly signalling that the ECB is happy with the euro at 1.30 against the dollar.

Sluggish credit growth and, more particularly, the fragmentation of credit growth and credit access for SMEs seems to have become the biggest concern of the ECB. In fact, the Eurozone remains stuck in a double credit whammy, with both the supply and demand side being significantly suppressed. However, the ECB does not seem to have a plan how to tackle this problem.

Ahead of today’s meeting, there was some excitement in financial markets about the ECB’s possible reaction to the Italian elections and the lagging economic recovery. Draghi’s reaction to the Italian elections could become another magic wording. He called it the “angst of the week”. Fiscal reforms in Italy were on auto-pilot and would continue, according to Draghi. Moreover, he reiterated that the rules of the OMT were clear: first a bailout (light or fully-fledged) and then the ECB could consider starting OMT.

While Draghi stubbornly tried to present his fair weather face regarding the economic outlook and the return of growth in the second half of the year, his between-the-lines comments were rather dovish. The introductory statement had the term “accommodative” five times compared with four times in the February statement, Draghi explicitly mentioned that the Governing Council had discussed a rate cut and also said that the “monetary policy stance will remain accommodative as long as needed”. Obviously, the ECB still does not pre-commit in any way but the last statement comes already very close to the Fed’s “rates will remain very low until late 2014”.

All in all, Mario Draghi today had a bit for everyone. A bit of dovishness to dampen the exchange rate and a bit of hawkishness and positivity to counter economic doom-thinkers. The door to a rate cut was not opened further, neither was it closed. It has become a revolving door. In fact, Draghi gave an elegant “we-never-pre-commit” show, keeping all options open.

Eurozone: Adjourned game – again

At last night’s Eurogroup meeting, Cyprus moved another small step closer to a bailout. The big issue of possible private sector involvement remains unsolved.

The relative calm in financial markets combined with some tender signs of economic stabilisation have taken the sense of urgency and emergency from most Eurogroup meetings. Contrary to many meetings over the last years, meetings of Eurozone finance ministers have been healthier for ministers who often suffer from too little sleep. Meetings lasting until the middle of the night have again become an exception and are no longer the rule. The fate of the Eurozone no longer depends on make-it-or-brake-it summits until sunrise. Still, several important fundamental issues, such as shaping the future of the monetary union, are still unsolved. Besides further steps towards a banking union (eg, the definition of legacy assets for possible direct bank recapitalisation through the ESM or a bank resolution mechanism) and the first test for the new fiscal framework, the pending bailout for Cyprus remains a crucial issue.

At last night’s Eurogroup meeting, Eurozone finance ministers confirmed its principal commitment to offer a bailout for Cyprus. In June last year, Cyprus had officially requested such a bailout. Now, with a new Cypriot government in place, the final agreement seems to be closer. Currently, the Cypriot authorities are still negotiating with the Troika on the details of the so-called Memorandum of Understanding. While initially the Cypriot government had tried to negotiate a Spanish-style bailout, only targeted at bank recapitalisation, the sharp deterioration of public finances seems to argue in favour of a fully-fledged bailout. Details of the negotiations were not revealed last night but the announcement that the new Cypriot government has agreed on an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions shows the willingness to make further concessions. Eurozone finance ministers agreed to “target political endorsement of the programme around the second half of March”.

One of the crucial questions of the probable bailout package is not only its scope (bailout light vs fully-fledged bailout) but also its financing. In several Eurozone countries, concerns have increased that a bailout for Cyprus would see taxpayers’ money bailing out what some have called a money laundry paradise. A bailout without private sector involvement could have problems passing national parliaments, particularly the German Bundestag. For a private sector involvement, several options look possible: privatization of state assets, restructuring of the banking sector, a bail-in of depositors and/or bank bond holders or a sovereign haircut as in Greece. Obviously, any of these forms of private sector involvement (PSI) could have unwanted averse effects either on Cyprus (as a bail-in could lead to a wide-spread withdrawal of funds, eventually undermining the entire business model of the economy) or other Eurozone countries as the uniqueness of PSI in Greece would be more than only second-guessed. As so-often during the euro crisis, the eventual compromise will have to balance both political but also economic calculations.

ECB preview - The return of catenaccio?

The improved but still bleak economic outlook, lower inflationary risks and new euro crisis uncertainty since the Italian elections have given rise to new speculation about a possible ECB rate cut this week. True, a downward revision of the inflation outlook could open the door to a rate cut a bit further. However, new political uncertainty is rather an argument against than for a rate cut. We expect the ECB to keep rates on hold on Thursday. We might even see a tactical shift, with the ECB moving from “attack is the best defence” to good old Italian-style catenaccio, with a well-organised defence forcing the other team to take the initiative.


  Find ING's ECB preview here: http://bit.ly/YOVfae

German labour market remains solid

German labour market remains solid as a rock, defying the winter weather and the euro crisis. German unemployment increased by a non-seasonally adjusted 18,400 in February, bringing the number of unemployed to 3.156 million. Despite the harsh winter weather, the February increase was somewhat smaller than in previous years. In seasonally-adjusted terms, unemployment even dropped, keeping the seasonally-adjusted unemployment rate at last month’s 6.9%.

For the labour market, the tailwind stemming from a favourable business cycle has ebbed away. It seems as if the German labour market has reached its natural rate of unemployment last year. A further additional drop in unemployment would require additional structural reforms, eg a further reduction of the mismatch between vacancies and job-seekers’ qualifications, or substantially higher growth. As none of these two factors are likely to gather pace this year, the German labour market should continue treading water in the period ahead. Nevertheless, at the current juncture and in its current shape, even a stagnating labour market will be growth supportive.

The overall trend of the German labour market still masks interesting diverging trends across the sectors. While unemployment has increased in the export-oriented manufacturing sector, companies operating in domestic sectors, as eg in the construction sector and health services, still have a strong demand for labour. This trend is also reflected in the latest European Commission survey, which showed that recruitment plans remain cautious in the manufacturing sector but very favourable in the service sector. This new divergence could have an impact on the new round of wage negotiations. Several unions already announced their bids for this year’s negotiations and more will follow. Demands range between 3.5% and 6%. Obviously, these demands are unlikely to be fully met but with our expected inflation rate of 2% for this year, real wages look set to increase for the second year in a row.

The German job miracle has become less magic. However, even without magic and enchantment, the labour market should remain growth-supportive.

Watchdog finally unchained?

You have probably heard it often enough: the worst of the crisis is over. Indeed, financial markets have excessively celebrated Mario Draghi’s “whatever it takes”, structural reforms in peripheral countries are starting to bear some fruit and confidence indicators have improved somewhat. However, as with every severe marital quarrel, avoiding a break-up is not an automatic return to normal. It often needs long-term counselling and effective action to avoid repeating the mistakes of the past. Returning to the euro crisis, the counselling has led to another make-over of the fiscal framework, giving the European Commission additional powers and an ever more decisive role. The former paper tiger has become an unchained watchdog. However, we think it will use its new powers carefully, balancing between austerity pragmatism and restoring credibility of the fiscal framework. A shift away from nominal results to structural adjustment could be the new fudge.

Here's a longer note on the Eurozone's fiscal framework and the role of the European Commission.
http://bit.ly/YhFMBh

Ifo signals German economy returns to league of its own

The wow effect. Germany’s most prominent leading indicator, the Ifo index, increased in February for the fourth month in a row and stands now at 107.4; its highest level since April last year. Both, the current assessment and the expectation component improved significantly. The headline index saw its strongest monthly increase since July 2010, the expectation component the strongest monthly increase since July 2009. Nothing seems to be able to stop German business optimism.


Earlier today, the contraction of the German economy in the last quarter of 2012 was confirmed. As expected, exports turned out to be the main drag on the economy. Stable private and public consumption illustrated the sound fundamentals of the economy.

Looking ahead, evidence is increasing that the contraction in the fourth quarter has been a one-off which never felt anything near a recession. With the improved outlook for the US and China, prospects for German exporters are also clearing off. The inventory build-up seems to have come to an end and order books have started to thicken again. In fact, it looks as if the gradual decoupling from the rest of the Eurozone is continuing. While most other Eurozone countries remain stuck in recessionary territory, preoccupied with structural reforms and austerity, German businesses are surfing on the wave of optimism. German optimism could become reality as the main drivers behind the fundamental decoupling, or unique selling points of the economy, remain in place in 2013: export diversification, a balanced budget, labour market strength and favourable financing conditions.

A day like today once again illustrates the divergences across the Eurozone. While most other Eurozone countries are moaning under the burdens of reforms, austerity and recession, the German economy continues playing in a league of its own.

ZEW climbs to highest level since April 2010

Full speed ahead? The German ZEW index increased in February to the highest level since April 2010. The ZEW index which measures investors’ confidence now stands at 48.2, from 31.5 in January; the third consecutive monthly increase. At the same time, however, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to 5.2, from 7.1 in January, its lowest level since June 2010. The positive contagion in financial markets continues to comfort financial analysts.
The ZEW index has not the best track record when it comes to predicting German economic activity. In fact, since 2006, the index had a tendency to “miss” the periods of strong growth. Since mid-2011, however, the components of the ZEW and the Ifo have broadly stayed in tune. With this in mind, we could see another increase of Germany’s leading confidence indicator, the Ifo index, at the end of this week.

Without any single hard data for the year 2013, the prospects for the German economy look promising. Even if the real economy only lives up to half the expectations recently created by soft indicators, any fears of a technical recession should turn out to have been unjustified.