Today was the day of the monthly ECB speech, concerning the most
important European interest rates: the fixed rate for refinancing operations (refi rate) and the
marginal lending facility. Both rates stayed unaltered, in comparison to the
previous month; respectively 0.75% and 1.5% for the refi rate and the marginal
lending facility. As most analists didn’t expect the rates to change, little was surprising in today’s interest event.
For this reason, the most important part of today was the speech by the
chairman of the ECB, Mario Draghi, which accompanied the news on the interest
rates: this speech could supply useful information on future rate changes.
Here are the pertinent snips of Draghi's
speech combined with my comments:
… we decided to keep
the key ECB interest rates unchanged. HICP inflation [harmonized consumer prices
index- EL] rates have declined further,
as anticipated, and fell below 2% in February. Inflation expectations for the
euro area remain firmly anchored in line with our aim of maintaining inflation
rates below, but close to, 2% over the medium term. Overall, this will allow our monetary policy
stance to remain accommodative.
My comments:
Draghi states here in plain English: we maintain our policy of printing extra money, as long as
the inflation rate allows us to do so.
Available data
continue to signal that economic weakness in the euro area has extended into
the beginning of the year, while broadly confirming signs of stabilisation in a
number of indicators, albeit at low levels. At the same time, necessary balance
sheet adjustments in the public and private sectors will continue to weigh on
economic activity. Later in 2013 economic activity should gradually recover,
supported by a strengthening of global demand and our accommodative monetary
policy stance.
My comments: The distinguished
economic trendwatcher and "Dutch Doctor Doom" Kees de Kort always states concerning
this kind of fact-free predictions: “soon everything will be better (S.E.W.B.B)”.
Where Draghi exactly sees the strengthening global demand is an enigma, but he sees it (presumably). Draghi: “By the way, did I tell you
that we will print extra money”.
In order to support
confidence, it is essential for governments to continue implementing structural
reforms, to build further on the progress made in fiscal consolidation, and to
proceed with financial sector restructuring. We are closely monitoring
conditions in the money market and their potential impact on the stance of
monetary policy and the functioning of the transmission of our monetary policy
to the economy. Our
monetary policy stance will remain accommodative with the full allotment mode
of liquidity provision.
My comments: Draghi: “DID I TELL YOU THAT WE WILL BE PRINTING
EXTRA MONEY?!?!”
Let me now explain our
assessment in greater detail, starting with the economic analysis. The GDP
outcome for the fourth quarter of 2012 was weak, with Eurostat’s second
estimate indicating a contraction of 0.6% quarter on quarter. The decline was
largely due to a fall in domestic demand but also reflected weak exports. As regards 2013,
recent data and indicators suggest that economic activity should start
stabilising in the first part of the year. A gradual recovery should commence
in the second part, with export growth benefiting from a strengthening of
global demand and domestic demand being supported by our accommodative monetary
policy stance.
My comments: Draghi
hopes to spur investments with the extended money supply in Europe and
fantasizes over a strengthening global demand in the second half of 2013. However, when you look really well at the latest, somewhat weakening American and Chinese fundamentals data, this
strengthening global demand is not a dead-cert yet. And further, he states: “DIDN’T YOU PAY ANY ATTENTION, GUYS?!?! OUR
PRINTING PRESS IS GOING BERZERK!!!!. YOU WILL HAVE MUCHO, MUCHO DINERO, IF
YOU NEED IT!!”
The Governing Council
continues to see downside risks surrounding the economic outlook for the euro
area. The risks relate to the possibility of weaker than expected domestic
demand and exports and to slow or insufficient implementation of structural
reforms in the euro area. These factors have the potential to dampen the
improvement in confidence and thereby delay the recovery.
My comments: this
part of the speech sums up nicely the downside risks of this year:
disappointing exports and disappointing domestic demand all over Europe. And last, but not least, a disappointing
improvement of the monetary / economic situation in the Euro-zone, where things seem to be slightly better, but where the smallest shock (Italy) can cause the situation to deteriorate quickly again.
In the Governing
Council‘s assessment, risks to the outlook for price developments continue to
be seen as broadly balanced over the medium term, with upside risks relating to stronger than
expected increases in administered prices and indirect taxes, as
well as higher oil prices, and downside risks stemming from weaker economic
activity.
My comments: Draghi
is right here when he sees increased indirect taxes as an inflationary risk. A
number of countries already increased the VAT-level (i.e. Value Added Tax), as well as the level
of taxes and duties on products, like oil and gas derivatives and alcohol.
While most European
citizens are currently living a life of frugality, the tax-addicted governments
still try to compensate for their decreased direct tax income by increasing
indirect taxes. This indeed spurs inflation.
The annual growth rate
of loans (adjusted for loan sales and securitisation) to non-financial
corporations stood at -1.5% in January, after -1.3% in December 2012. The
annual growth in MFI loans to households moderated slightly to 0.5%, from 0.7%
in December. To a large extent, subdued loan dynamics reflect the current stage
of the business cycle, heightened credit risk and the ongoing adjustment of
financial and non-financial sector balance sheets. At the same time, available
information on the access to financing of non-financial corporates indicates
tight credit conditions for small and medium-sized enterprises.
My comments: While
Draghi and his peers hope for economic stabilization in 2013HY1 and improvement
in 2013HY2, the mentioned data on business and consumer loans seems to point in
the other direction.
The euro area-wide
general government deficit is expected to have declined from 4.2% of GDP in 2011
to 3.5% of GDP in 2012 and is projected to be reduced further to 2.8% of GDP
this year. Governments should build on this progress with a view to further
restoring confidence in the sustainability of public finances. At the same
time, fiscal consolidation must be part of a comprehensive structural reform
agenda to improve the outlook for job creation, economic growth and debt
sustainability. In
the view of the Governing Council, it is of particular importance at this
juncture to address the current high long-term and youth unemployment. To this
end, further product and labour market reforms are needed to create new job
opportunities by supporting a dynamic, flexible and competitive economic
environment.
My comments: It is very good that Draghi makes this point in red and bold: the European governments do their best to reduce the general government deficit, in order to stay in tune with the European Stability and Growth Pact (SGP). These governments seemingly do so
successfully.
However, the governments fail hopelessly at stopping the increasing unemployment and especially the soaring youth unemployment.
In my opinion, this is something to be ashamed about. Unfortunately, I don't see any improvements in this matter in the foreseeable future, as long as skinflints, like Olli Rehn, Angela Merkel and Mark Rutte and their misplaced frugality rule in the European institutions.
Perhaps even more important than what Draghi had to say today,
was what he didn’t state. Today’s so-called elephant in the room was: the
looming currency war. My interest for this ‘missing issue’ was provoked by the
savvy Steve Collins aka @TradeDesk_Steve (on Twitter).
At this moment, there is an
increased risk for a currency war between Japan and the United States/United
Kingdom. Yet, the United States still allow Japan to expand
its monetary supply, although the exchange rate of the Japanese Yen already
declined by 10% since the highest position in 2012. However, soon there might be a moment that the United States
becomes fed up with the consequences of this cheap yen.
The chances for American exports to the Far
East decline when the dollar becomes too expensive, compared to the yen and the
yuan. In this situation, the American government (or in this case: the Fed)
might decide to choose for a ‘more aggressive monetary policy’.
The odds for such a conflictuous situation increased
strongly with the appointment of the new chairman of the Bank of Japan, Haruhiko
Kuroda. He is not only a renowned advocate of an agressive monetary policy, but
also a confident (and straw-man) of the Japanese Prime Minister, Shinzo Abe.
As the distinguished Dutch professor Sylvester Eijffinger already
stated a few weeks ago (see the earlier mentioned link):
It is a mistake to
think that the Bank of Japan is independent, like most of the other Central Banks in the
western world. They receive their orders straight from the Japanese Finance
Ministry. According to employees of the BoJ itself, it is nothing but an agency
that must follow orders, concerning currency market issues.
Point taken…
It has not so many consequences for Europe, when the Japanese yen drops a little more in
value. Trade between Japan and Europe is much less intensive than trade
between Japan and the United States, according to professor Eijffinger. However, when the United States and United
Kingdom also get involved in such a currency war, then the consequences would be much worse
for the European Union.
Again professor Eijffinger:
A currency conflict
isn't a solution at all for Europe. When we look at the eurozone, to start with
Germany: according to an investigation by Deutsche Bank, German exporting companies
are competititve until €1 = $1.80.
French and Italian
firms, however, start already to experience export problems at $1.20. That
explains why François Hollande is banging the drum for monetary intervention.
This explanation describes exactly the split that Mario Draghi is in, currently:
his 'Teutonic' brain tells him that entering a currency war is not in the
interest of the strongest economies in Europe, like Germany, Austria,
Luxemburg, Finland and The Netherlands.
However, his Southern-European heart tells him that the economic situation for the PIIGS-countries AND France could quickly deteriorate, when the
dollar-rate drops in comparison to the Euro.
This split position between the Northern and Southern
European countries forces Mario Draghi to assume the ostrich position, for the
time being.
Mario Draghi: Currency
war?! Between the US and Japan?! Never heard of!!!
I only hope that, when the US Dollar indeed starts to drop, in
comparison to the Euro, Draghi at least HAS a strategy.
Too often in
Europe, it is almost forbidden to think about a certain issue, under pressure
of the Germans. The Germans are still scared sh*tless about hyperinflation, in spite of the fact that this issue is farther away than in many other years.
However, not having a viable strategy in such a situation, is almost
economic suicide…
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