Euro zone

ECB accounts: technical framework for TLRO in preparation

From the ECB accounts for the January meeting of the Governing Council, it emerges that the currency guardians discussed the possible risks to the EMU’s economic outlook at some length. The most recent economic data had turned out to be weaker than ECB representatives expected. One of the factors cited as a driver of this development was the introduction of the new emission standard (WLTP) and its negative impact on automotive production. Governing Council members agreed that it was not yet conclusively clear how long the economic dip would persist. Moreover, they expressed uncertainty with regard to how this would impact on the medium-term growth outlook. ECB representatives agreed with the analysis of Chief Economist Praet that the downward risks to the Eurozone’s growth outlook have increased. Where inflationary developments are concerned, the Eurozone’s senior central bankers continue to believe that fundamental price pressure in the Eurozone is on the…

Euroland purchasing manager indices: Industry brakes and surveys point to ongoing muted growth

On balance, the sentiment amongst European purchasing managers has brightened slightly in February. The Composite Index rose from 51.0 to 51.4 points, which in the wake of the latest falls corresponds to the highest level in three months. The improvement can be attributed solely to the service sector, where the sentiment barometer rose. The yardstick for manufacturing lost ground, by contrast, and at 49.2 points it is not only below the growth threshold of 50, but also the lowest figure in five years and eight months. Production decreases, dwindling demand and declining export business are all impairing sector sentiment. Judging by the survey results, the Euroland upturn should continue although the growth rates will presumably remain muted. The preliminary figures released on February sentiment among German purchasing managers painted a mixed picture. The Composite Index for Germany edged up from 52.1 points in January to 52.7 in February. However, this…

Spain facing new elections

In Spain, the lower house of the Spanish parliament rejected Prime Minister Sánchez’s draft budget by a clear majority on Wednesday. The Catalonian separatist parties, on whose support Sánchez’s minority government depends, voted against the budget along with conservatives and liberals. Sánchez had previously rejected the independence parties‘ demands to oppose, among other things, legal proceedings against the separatist leaders over the Catalan independence referendum in October 2017. So, new elections are very likely – again! Sánchez plans to make a related statement after a cabinet meeting today. Possible election dates are 14 or 28 April or 26 May, when Spaniards also vote in European, regional and local elections. Based on current surveys, the Socialists would represent the strongest faction in parliament, although a parliamentary majority would remain a long way off. Even a potential coalition with the left-wing populist Unidos Podemos currently only achieves around 40%. It is to…

“Sovereign-bank nexus” a bone of contention

The problem of the “sovereign-bank nexus” has still not been resolved nine years after the European sovereign financial crisis began. Far from it: the most recent results of the EBA stress tests show exceptionally strong home bias for Europe’s banks – which is even higher in the periphery than it is in core Europe. The preferential regulatory treatment for EU government bonds in bank balance sheets as well as the liquidity ratio requirements are causing increased demand for government paper. While the share of all outstanding government bonds held by domestic banks has fallen in recent years in most countries, with the exception of Italy and Greece, this is a result of high demand from the ESCB due to the PSPP. If the ECB decides to reduce its balance sheet in the medium or longer term, there is a danger of a shortage of demand for government bonds in the…

Spain: Strong growth despite political logjam

Little seems capable of shaking the Spanish economy at the moment. With a quarter-on-quarter growth rate of 0.7% in the fourth quarter of 2018 the Spanish economy even managed to accelerate compared to the summer months (third quarter 2018: plus 0.6%). This is a respectable result bearing in mind the fact that Spain’s major trading partners such as Germany, France and Italy delivered a rather weak performance in the second half of 2018. Conspicuous here is how little the country’s ongoing political weakness has impacted its good economic performance. The incumbent social democratic government under prime minister Pedro Sánchez may be described as anything but effective. With just 84 out of 350 seats it is the smallest minority government in the whole of Europe. This makes it almost impossible for it to carve out its own independent economic and welfare policy profile. The Sánchez government is reliant on the toleration…

Italy: populist alliance on shaky ground

The populist coalition in Italy is faltering increasingly. While M5S (Five Star Movement) and Lega were singing from the same hymn sheet last autumn in the fight against the budgetary requirements laid down by Brussels, the relationship between the coalition parties is now marked mainly by dispute. The conflicts revolve on the one hand around the migrant policy, as the right-wing populist Lega favours a particularly tough stance against immigration. On the other hand, major dissent surrounds both economic and financial policy as well as transport policy. Lega is going along somewhat grudgingly with the government plans on guaranteed basic income, while the left-wing populist M5S is opposed to expensive infrastructure projects such as the rail connection between Turin and Lyon (total cost of EUR 26bn). Although both government partners have so far denied they are eyeing up a coalition, breakup, media reports state that Lega is already sounding out…

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