Yesterday I was interviewed for TRT World about the Greek economy and possible Grexit. Have a look here.
All posts in category ECB
The economic suffering of the Greek people is horrendous and it has to stop – interview on TRT World
Posted by Lars Christensen on February 21, 2017
Greece is once again back on the agenda in the European financial markets and we are once again talking about Greek default and even about Grexit. There seems to be no end to the suffering of the Greek economy and the Greek population.
I must say that I have a lot of sympathy with the Greeks – they have terrible policy makers and no matter how many austerity measures are implemented there is no signs of any visible improvement either in public finances or in the overall economic performance.
Hence, the Greek economy has essentially been in decline for nearly nine years and there seems to be no signs of it changing.
To me there is no doubt what the main reason it – it is the monetary strangulation of the Greek economy due to the countries membership of the euro area.
I don’t like to see the euro area fall apart and I believe it can be avoided, but on the other hand I have a very hard time seeing Greece getting out of this crisis without either receiving a more or less complete debt write-off or leaving the euro area (or both).
ECB can’t do much more
Since 2008 there has been two dimensions to the monetary strangulation of the Greek economy.
First of all for much of the period since 2008 the ECB has kept overall euro zone monetary conditions far too tight to achieve its own 2% inflation target as illustrated by our – Markets & Money Advisory’s – composite indicator for monetary conditions in the euro zone, which shows that monetary conditions in the euro zone essentially were too tight from 2008 until early 2015 and only has been broadly neutral (indicator close to zero) over the past 20 months or so.
Second, the euro zone is not an optimal currency area and it is very clear that Greece today needs significantly easier monetary conditions than for example Germany, which might need tighter monetary conditions.
Looking at these to factors it is clear that the ECB indeed has moved in the right direction in the last two years and overall we believe that monetary conditions right now are about right for the euro zone as a whole. However, the problem is that monetary conditions still is far too tight for Greece.
As long as overall euro zone monetary conditions were too tight there was a good argument that the ECB should ease monetary policy to ensure that it would hit its 2% inflation target over the medium-term and that would help Greece. However, that is not really the case now. While there is no reason for the ECB to tighten monetary conditions it is today much harder to argue for new measures to ease euro zone monetary conditions.
That makes Greece’s problem even more acute and makes the argument for Greek euro exit even stronger.
The problem of course is that Greece is damned no matter what. If Greece stays in the euro area then the hardship continues for the Greek people and there is no reason to believe that more austerity fundamentally will improve public finances and while there have been some signs of growth beginning to pick over the past year any minor tightening of monetary policy from the ECB will likely send Greece directly back to recession.
On the other hand if Greece where to leave the euro area it is unlikely it would happen in an orderly fashion. Rather it is likely to happen in a chaotic fashion and lot of things could go badly wrongly – also for the rest of the euro zone. Just think about what speculation it would create regarding possible Italian or even French euro exit. And will euro exit also mean EU exit and what will be the geopolitical ramifications of this?
So it is not an easy choice. However, I continue to believe that it would be both in the interest of Greece and of the rest of euro area as a whole that Greece leaves the euro area.
The suffering will have to end. However, Greece should not be kicked out of the euro. Rather Greece should be helped out of the euro. Unfortunately there is little will within the EU or the ECB to make this happen and populists around Europe are eager to use this debacle to further sabotage European reforms.
See also my earlier posts on Greece her:
Posted by Lars Christensen on February 10, 2017
A couple of days ago I read an interview with ECB’s former chief economist Otmar Issing about the euro crisis. I frankly speaking didn’t find the interview particularly interesting and Issing brings little new to the discussion.
Issing rightly repeats the worries about moral hazard problems and he is critical about the ECB’s credit policies even though it is clear that he fails to point to the difference between credit policies (which central bankers should stay far away from) and monetary policy (which central banks have a mandate to conduct).
Even more depressingly Issing completely fails to recognize the monetary nature of the euro crisis.
This is particularly depressing given Otmar Issing certainly knows his monetarist theory and he used to be know as the monetarist at the ECB.
It was Otmar Issing who famously put monetary analysis based on the quantity theory of money at the centre of thinking in the ECB’s early days. Hence, Issing was the main architect behind ECB’s so-called two pillar strategy. The one pillar was that the ECB should look at a broad range of economic indicators when assessing the monetary policy stance. The second pillar was the monetary pillar which emphasized monetary (essentially montarist) analysis.
What happened to the reference value for M3 growth?
At the core of the monetary pillar was what came to be known as the reference value for M3 growth.
This is how the ECB (read Otmar Issing!) used to define the reference value:
This reference value refers to the rate of M3 growth that is deemed to be compatible with price stability over the medium term. The reference value is derived in a manner that is consistent with and serves the achievement of the Governing Council’s definition of price stability on the basis of medium-term assumptions regarding trend real GDP growth and the trend in the velocity of circulation of M3. Substantial or prolonged deviations of M3 growth from the reference value would, under normal circumstances, signal risks to price stability over the medium term.
So what we are talking about here is the growth rate of M3, which over the medium-term will ensure 2% inflation given the trend-development in money demand (trend real GDP growth and trend-velocity growth).
We can operationalize this by looking at the equation of exchange (in growth rates):
(1) m + v = p + y
Where m is M3 growth, v is the growth rate of M3-velocity, p is inflation (in the GDP deflator) and y is real GDP growth.
If we define v* as trend growth in M3-velocity and y* as trend/potential real GDP growth and finally assume inflation should hit the inflation target of 2% then we can re-write (1):
(1)’ m + v* = 2% + y*
Re-arranging further we can get a target for M3 (m-target), which will ensure 2% inflation over the medium-term:
(2) m-target = 2% + y* – v*
The ECB used (2) to calculate the reference value for M3 growth by assuming v* was around -1/2% and y* was 2%, which would give you a reference value of 4.5%.
The ECB kept this target constant over time despite the fact that neither the trend in velocity nor the trend in real GDP growth are constant over time.
If we instead want to take into account changes in v* and y* over time we can try to “estimate” these variables by applying a Hodrick–Prescott filter (HP filter). Somewhat simply said a HP filter is just a sophisticated moving average.
Introducing the policy-consistent M3 growth rate
While Otmar Issing might have given up on monetary analysis I have not. In fact monetary analysis is at the core of the new publication on Global Monetary Conditions, which my advisory – Markets & Monetary Advisory – will start to publish in the coming months.
In this publication we in fact calculate what we term the policy-consistent M3 (or M2) growth rate for the 25-30 countries, which will be covered in the publication (see more here).
The graph below shows actual M3 growth (the blue line) in the euro zone compared with the policy-consistent M3 growth rate (the red line).
The grey bars are the a 3-year weighted moving averages of the difference between actual and policy-consistent M3 growth and as such is a measure of the monetary policy stance. Negative (positive) bars indicates that M3 growth is too slow (too fast) to ensure that the ECB will hit the 2% inflation target over the medium-term. We can here term this as the ‘money gap’.
In our new monthly publication we will focus on four different monetary measures to put together one monetary conditions indicator (M3 growth, nominal GDP growth, interest rates and the exchange rate), but if we only focus on our measure of the policy-consistent M3 growth rate we nonetheless get great insight about monetary conditions in the euro zone.
Looking at the development in the ‘money gap’ we see that monetary conditions were broadly speaking from the euro was established in 1999 and until 2006. However, from 2006 monetary conditions clear became too easy.
That, however, change dramatically as M3 started to slow rather dramatically in early 2008 and already at the time should have been clear that soon the M3 would drop below the ECB’s reference value for M3 (and our policy-consistent M3 growth rate). Despite of this the ECB hiked its key policy rate in July 2008! This is of course was the first major policy major the ECB made in the crisis. More disastrous policy mistakes of course followed in 2011 when the ECB hiked interest rate twice!
Hence, had the ECB only focused on M3 the ECB would certainly have tightened monetary policy more aggressively in 2006 and 2007, but even more importantly it would never have hiked interest rates in 2008 and 2011. Rather judging from M3 growth relative to the ECB’s own (old) reference value or our policy-consistent M3 growth rate the ECB should have slashed interest rates aggressively in the Autumn of 2008 and in 2009 and should have initiated quantitative easing once interest rates hit zero.
Otmar Issing should be angry (but for the right reasons)
Hence, Otmar Issing is indeed right to be angry with the ECB, but he should be angry for the right reasons. Issing might point to problems of moral hazard and I certainly share these concerns, but what Otmar Issing really should be angry about is that the ECB complete have given up on taking Issing-style monetary analysis seriously as a result at least six years after 2008 monetary policy far too tight!
Unfortunately Issing seems to have given up on his own analysis as well. That is deeply regrettable. So we can only hope that Otmar Issing will go back to proper monetary analysis of the typical ‘Calvinist preaching’, which unfortunately is so common among German policy makers – both in Frankfurt and Berlin.
If he did that he would continue to criticize the ECB for trying to distort bond market pricing and encouraging moral hazard, but he would also recognize that ECB chief Mario Draghi has been right pushing for quantitative easing and that it should be continued as long as necessary to keep M3 growth around at least 4.5-5% as this ensures that inflation will be close to ECB’s 2% inflation target.
PS I don’t think re-introducing the reference value for M3 growth would be the best policy framework for the ECB, but it certainly would be better than the present non-policy-framework and very much doubt that we would still would be talking about a euro crisis had the ECB taken the reference value serious.
Posted by Lars Christensen on October 23, 2016
Sunday we got some bad news, which many wrongly will see as good news – this is from Reuters:
China and the United States on Sunday committed anew to refrain from competitive currency devaluations, and China said it would continue an orderly transition to a market-oriented exchange rate for the yuan CNY=CFXS.
…Both countries said they would “refrain from competitive devaluations and not target exchange rates for competitive purposes”, the fact sheet said.
Meanwhile, China would “continue an orderly transition to a market-determined exchange rate, enhancing two-way flexibility. China stresses that there is no basis for a sustained depreciation of the RMB (yuan). Both sides recognize the importance of clear policy communication.”
There is really nothing to celebrate here. The fact is that in a world where the largest and most important central banks in the world – including the Federal Reserve – continue to undershoot their inflation targets and where deflation remains a real threat any attempt – including using the exchange rate channel – to increase inflation expectations should be welcomed.
This of course is particularly important in a world where the ‘natural interest rate’ likely is quite close to zero and where policy rates are stuck very close to the Zero Lower Bound (ZLB). In such a world the exchange rate can be a highly useful instrument to curb deflationary pressures – as forcefully argued by for example Lars E. O. Svensson and Bennett McCallum.
In fact by agreeing not to use the exchange rate as a channel for easing monetary conditions the two most important ‘monetary superpowers’ in the world are sending a signal to the world that they are in fact not fully committed to fight deflationary pressures. That certainly is bad news – particularly because especially the Fed seems bewildered about conducting monetary policy in the present environment.
Furthermore, I am concerned that the Japanese government is in on this deal – at least indirectly – and that is why the Bank of Japan over the last couple of quarters seems to have allowed the yen to get significantly stronger, which effective has undermined BoJ chief Kuroda’s effort to hit BoJ’s 2% inflation target.
A couple of months ago we also got a very strong signal from ECB chief Mario Draghi that “competitive devaluations” should be avoided. Therefore there seems to be a broad consensus among the ‘Global Monetary Superpowers’ that currency fluctuation should be limited and that the exchange rate channel should not be used to fight devaluation pressures.
This in my view is extremely ill-advised and in this regard it should be noted that monetary easing if it leads to a weakening of the currency is not a beggar-thy-neighbour policy as it often wrongly is argued (see my arguments about this here).
Rather it could be a very effective way of increase inflationary expectations and that is exactly what we need now in a situation where central banks are struggling to figure out how to conduct monetary policy when interest rates are close the ZLB.
See some of my earlier posts on ‘currency war’/’competitive devaluations’ here:
Posted by Lars Christensen on September 4, 2016
Exactly one year ago today I was with the family in the Christensen vacation home in Skåne (Southern Sweden) and posted a blog post titled The Euro – A Monetary Strangulation Mechanism. I wrote that post partly out of frustration that the crisis in the euro once again had re-escalated as Greece fell deeply into political crisis.
One year on the euro zone is once again in crisis – this time the focal point it the Italian banking sector.
So it seems like little has changed over the past year. After nearly eight years of crisis the euro zone has still not really recovered.
In my post a year ago I showed a graph with the growth of real GDP from 2007 to 2015 in 31 different European countries – both countries with floating exchange rates and countries within the euro areas and countries pegged to the euro (Bulgaria and Denmark).
I have updated the graph to include 2016 (IMF forecast).
The picture is little changed. In general the floaters (the ‘green’ countries) have done significantly better than the peggers/euro countries (the ‘red’ countries).
That said, I am happy to admit that it looks like we have had some pick-up in growth in the euro zone in the past year – ECB’s quantitative easing has had some positive effect on growth.
However, the ECB is still not doing enough as new headwinds are facing the European economy. Here I particularly want to highlight the fact that the Federal Reserve – wrongly in my view – has moved to tighten monetary conditions over the past year, which in turn is causing a tightening of global monetary conditions.
Second, if we look at the money-multiplier in the euro zone it is clear that it over the past nearly two years have been declining somewhat due in my view to the draconian liquidity (LCR) and capital rules in Basel III, which the EU has pushed to implement fast.
Furthermore, given the increase in banking sector distress in the euro zone recently the euro zone money-multiplier is likely to drop further, which effective will constitute a tightening of monetary conditions. If the ECB does not offset these shocks the euro zone could fall even deeper into a deflationary crisis. If you are interested in what I think should be done about it have a look here and here.
Concluding, the monetary strangulation in the euro zone continues. Luckily, again this year at this time it is vacation time for the Christensen family so I will try to enjoy life after all.
If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: email@example.com
Posted by Lars Christensen on July 14, 2016
A very good friend of mine asked me what the ECB should do in the present situation where inflation and inflation expectations continues to run well-below the ECB’s inflation target.
Here is my answer – it is what we could call a gameplan for the ECB (it could easily be used by other central banks as well):
1) Stop communicating in the terms of interest rates. Announce a PERMANENT growth rate for the money base. Announce that the growth rate will be stepped up every month or quarter until inflation expectations are at 2% at all relevant time horizons – for example 2y2y swap inflation expectations. At every ECB meeting the permanent money base rate is announced.
2) Control the money base by buying a basket of global AAA-rated govies.
3) Announce a NGDP LEVEL target consistent with the 2% inflation target and announce that the ECB will not let bygones be bygones – meaning if you undershoot the target one year then you should overshoot the following year.
4) Internal forecasting should be given up. Instead only surveys of professional forecasters and market forecasts should be used for policy input. In the reasoning for the money base growth target there should be given only a reference to these forecasts and the ECB should commit itself to set money base targets based on these forecasts and nothing else.
And what could the of EU do?
1) Suspend the implementation of Basell III and other banking regulation that depress the money multiplier and increase demand for safe assets until nominal GDP has grown for at least 4% for 8 quarters in a row.
And maybe also…
2) Suspend the growth and stability pact for now.
I think it is very easy to create inflation and nominal demand. It is all about commitment. Unfortunately the ECB does not have such commitment.
Posted by Lars Christensen on July 8, 2016
Greece has made yet another other deal with the EU and IMF on its debt situation. Or rather as one EU official described it to the Financial Times “If it looks like we are kicking the can down the road that is because we are”.
Said in another way, this is not really a deal to solve the fundamental problem, but rather a deal to avoid dealing with the fundamental problem.
So what is the fundamental problem? Well, at the core of this is that the Greek government simply is insolvent and can’t pay its debts, but at the same time the EU is refusing to accept this fact.
The IMF seems to understand this and probably so do the eurocrats, but politically it seems impossible to accept because that would mean the EU would have to accept that the strategy to deal with Greece’s problems has been wrong and it would mean accepting a major debt write-down on Greece sovereign debt something with likely would not be popular with voters in for example Germany or the Netherlands.
Some are arguing that Greece haven’t done enough to solve its own problems and that letting Greece off the hook with a major debt write-down would just encourage even more bad habits and that is probably right, but it does change the fact that it is very hard to see how Greece will be able to pay of the debt.
Furthermore, it is wrong when some are arguing that Greece hasn’t done anything. In fact, Greece has done more fiscal austerity than any other nation in Europe. So if we for example look at the accumulative tightening of fiscal policy in Greece since 2009 then we will see that Greece in this period has tightened by 18-20% of GDP (measured as the accumulative change in IMF’s measure of Greece’s structural budget deficit). By any measure, this a massive fiscal tightening.
However, one thing is the effort another thing is the outcome and here the story is quite different. Hence, since 2009 Greek public debt has grown from 108% of GDP in 2008 to more 180% of GDP this year. Hence, despite of massive fiscal austerity public debt has continued to grow every single year since 2008.
The reason for this depressing development is the fact that Greece has seen a massive collapse in economic activity. Hence, since 2008 nominal GDP in Greece has dropped by nearly 30%. A true economic disaster. No matter how fiscally conservative a country is it is impossible to stabilize the debt ratios with such an economic contraction.
Therefore, to fundamentally solve Greece’s debt problem it is needed to solve Greece’s growth problem and that is not easy. Fiscal stimulus could of course be a solution, but Greece don’t have the money for that and the markets will not be willing to finance a fiscal stimulus package.
Another solution is massive structural reforms and that is somewhat more promising that fiscal stimulus, but given the depth of the crisis even the most comprehensive reform package is not likely to be enough and that leaves on one solution – monetary easing.
But since Greece is not in control of its own monetary policy because the country is a member of the euro zone that is not really possible either. Or rather it is – if Greece decides to leave the euro area. That seems like a very risky strategy, but it is blatantly obvious that this is really the only solution that would work.
Therefore, it is not a question whether we will get a ‘Grexit’, but rather when it will happen. The German taxpayers will not forever be willing to pay the price for kicking the can down the road.
PS Marcus Nunes also comments on Greece.
PPS The IMF has a new paper, which once again shows that Greece is insolvent and urgently needs a debt write-down.
If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: firstname.lastname@example.org
Posted by Lars Christensen on May 28, 2016
Recently both the Italian and the Spanish governments have come out and said that they will have to revise their expectations for their budget deficits in negative direction.
Similarly, there has been renewed budget concerns in Portugal and Greece. Hence, last week IMF chief Christine Lagarde expressed strong reservations about Greece’s ability to achievement its fiscal targets.
So far the markets have reacted fairly calmly to rising concerns about the fiscal situation in particularly Southern Europe, but these concerns nonetheless raises the question whether or not we will see renewed euro zone financial turmoil again soon.
Some are eager to claim that the failure to consolidate public finances in Southern Europe is a lack of effort to do so.
However, the fact is that we have seen significant fiscal tightening in countries like Greece and Spain as illustrated by the graph below (the source is IMF and own calculations for all graphs in this post).
What the graph is showing is the accumulative tightening of fiscal policy measured as the sum of yearly changes in structural budget deficit in the PIGS countries (Portugal, Italy, Greece and Spain) as well as Iceland. We use Iceland as an example of austerity in a non-euro country.
The graph clearly shows that particularly Greece has tightening fiscal policy dramatically since 2009-10 and now has tightened fiscal policy by nearly 20% of GDP. We have also seen a dramatic tightening of fiscal policy ins Portugal and Spain (and Iceland), but less so in Italy.
But how about the outcome? Lets look at the development in public debt.
The outcome surely is depressing. Despite tightening fiscal policy by nearly 20% of GDP since 2009/10 public debt in Greece today is nearly 40%-point higher as share of GDP than at the start of the ‘austerity period’. And it is the same sad story for Portugal, Spain and Italy.
However, if we look at Iceland the story is completely different. Here public debt is nearly 40%-point of GDP lower today than when austerity was initiated in 2010.
So why did Iceland succeed with fiscal austerity while the PIGS have failed? Well, my loyale readers already know the answer – nominal GDP growth. Just take a look at the graph below.
Greece have been a depression style contraction in nominal GDP and NGDP is today nearly 30% lower than at the start of the crisis in 2008 and for the rest of the PIGS-countries we are essentially at the same nominal GDP level as eight years ago!
But then look at Iceland’s nominal GDP. Despite a total collapse of the Icelandic banking sector in 2008 and a sharp contraction in real GDP in 2008-10 nominal GDP grew through the crisis years (2008-10) and has grown robustly since then. Some – including me – would even argue that NGDP growth in Iceland has been growing too strongly.
So why this difference in NGDP growth between the PIGS and Iceland? Well it is simple – it is all about the monetary policy regime. The PIGS countries are of course euro members and have not seen enough monetary easing to get NGDP growth back to decent levels of 4-5%, which would be comparable to ECB’s 2% inflation target. On the other hand Iceland has seen significant monetary stimulus in the form of a sharp depreciation of the Icelandic króna and a drop in interest rates.
As a result monetary policy has more than offset the negative impact on aggregate demand from fiscal policy in Iceland and this is the real reason for the success of fiscal consolidation in Iceland.
This obviously has not been the case in the PIGS countries, where monetary policy has failed to offset the negative impact on demand from the fiscal austerity measures.
Without monetary easing fiscal woes will continue
This also leads me to the clear conclusion that we are very likely to see a continued increase on public debt-to-GDP ratios in the PIGS countries if the ECB fails to fundamentally and permanently lift NGDP growth in the euro zone to at least 4-5%.
Until that happens the PIGS countries have no other option that to continue to the fiscal austerity measures, but it is very unlikely to succeed for long unless we see a pick up in growth.
Therefore, policy makers in the PIGS countries should rather focus on growth enhancing policies such as cuts in corporate taxation and labour market deregulation and maybe also more immigration rather than on focusing on fiscal austerity. But the most important thing will be for the ECB to end the deflationary pressures in the euro zone economy. A 4% NGDP target accompanied by significant open-ended quantitative easing would do the job.
Unfortunately I have little hope for either reforms in the PIGS countries or a fundamental monetary policy regime change so I continue to think that we could very easily see an other of ‘euro turmoil’ in the coming months.
Posted by Lars Christensen on April 19, 2016
I hate to say it, but I fear that we are in for a new round of euro zone troubles.
My key concern is that monetary conditions in the euro zone remains far to tight, which among other things is reflected in the continued very low level of inflation expectations in the euro zone. Hence, it is clear that the markets do not expect the ECB to deliver 2% inflation any time soon. As a consequence, nominal GDP growth also remains very weak across the euro zone.
And with weak nominal GDP growth public finance concerns are again returning to the euro zone. This is from Reuters:
Spain plans to ask the European Commission for an extra year to meet its public deficit targets, El Pais reported on Sunday, after missing the mark with its 2015 deficit and raising the prospect of further spending cuts to narrow the budget gap.
The country last month reported a 2015 deficit of 5 percent of economic output, one of the largest in Europe and above the EU-agreed target of 4.2 percent. To reduce that to the 2016 target of 2.8 percent of gross domestic product (GDP), the Spanish government will need to find about 23 billion euros ($25 billion) through tax increases or spending cuts.
The economy ministry declined to comment on the newspaper report, which cited government sources as saying that acting Economy Minister Luis de Guindos would include revised economic projections in the stability program to be presented to Parliament on April 19.
And Spain is not the only euro zone country with renewed budget concerns. Hence, on Friday Italy’s government cut it growth forecast for 2017 and increased it deficit forecast. Portugal is facing a similar problem – and things surely do not look well in Greece either.
So soon public finances problem with be back on the agenda for the European markets, but it is important to realize that this to a very large extent is a result of overly tighten monetary conditions. As I have said over and over again – Europe’s “debt” crisis is really a nominal GDP crisis. With no nominal GDP growth there is no public revenue growth and public debt ratios will continue to increase.
So why are we not seeing any NGDP growth in the euro zone?
Overall I see four reasons:
- Global monetary conditions are tightening on the back of tightening of monetary conditions from the Fed and the PBoC.
- Regulatory overkill in the European banking sector – particularly the implementation of the Liquidity Coverage Ratio (LCR), which since mid-2014 has caused a sharp drop in the euro zone money multiplier, which effectively is a major tightening of monetary conditions in the euro zone.
- Continued fiscal austerity measures to meet EU demand is also adding to the negative aggregate demand pressure.
- And finally, the three factor above would not be important had the ECB been credibly committed to its 2% inflation target. However, has increasingly become clear that the ECB is very, very reluctant in implemented the needed massive quantitative easing warranted to offset the three negative factors described above (tighter global monetary conditions, regulatory overkill and fiscal austerity). Instead the ECB continues to fool around with odd credit policies and negative interest rates.
Therefore, urgent action seems needed to avoid a new “euro spasm” in the near-future and I would focus on two factors:
- Suspend the implementation across of the new Liquidity Coverage Ratio until we have seen at least 24 months of consecutive 4% nominal GDP growth in the euro zone. Presently the implementation of the LCR is killing the European money market, which eventually will be draining the overall European economy for liquidity.
- The ECB needs a firm commitment to increasing nominal GDP growth and to bring inflation expectations back to at least 2% on all relevant time horizons. Furthermore, the ECB need to strongly signal that the central bank will increase the euro zone money base to fully offset any negative impact on overall broad money growth from the massive tightening of banking regulation in Europe.
So will we get that? Very likely not and the signs that we are moving toward renewed euro troubles are increasing. A good example is the re-escalation of currency inflows in to the Danish krone. Hence, the krone, which is pegged to the euro, has been under increasing appreciation pressures in recent weeks and Danish bond yields have as a consequence come down significantly.
This at least partly is a reflection of “safe haven” flows and fears regarding the future of the euro zone. These concerns are probably further exacerbated by Brexit concerns.
Finally, there has been signs of renewed banking distress in Europe with particularly concerns over Deutsche Bank increasing.
So be careful out there – soon with my might be in for euro troubles again.
Posted by Lars Christensen on April 11, 2016
The French regional elections provided yet another sad testimony to that thesis. Here is the one-graph version of that idea.
The graph shows the support for the extremist/populist anti-immigration party Front National (FN) against the unemployment rate across different regions in France. Each dot represents a region.
The simple regression ‘model’ shows that a 1%-point increase in unemployment increases support for FN by nearly 5%-point.
So it might be that FN is helped by the recent terror attacks in Paris and by the ‘refugee crisis’, but this is mostly about a weak French economy.
So if you want to blame anybody for the electoral success of Front National you should point the fingers at Jean Claude Trichet who as ECB-chief in 2011 hiked interest rates twice and at president Holland who has done everything to worsen the already bad competitive position of the French economy since he became president in 2012.
If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: email@example.com or firstname.lastname@example.org.
Posted by Lars Christensen on December 8, 2015