Euro zone

ECB: Battle over Draghi’s successor fully joined

The eight-year tenure of ECB President Mario Draghi will come to an end in late October, and it remains unclear who will succeed the Italian in the top ECB job. But irrespective of who ultimately takes over the ECB reins in November, we are anticipating a continuation of the current ultra-expansionary monetary policy. Why? Because the direction of monetary policy of the Eurozone’s central bank is not set by the President alone, but by the Governing Council as a whole. In other words, even the staunchest monetary policy hawk would not be able to bring about any immediate change in direction. However, the next few weeks will involve not just a search for a successor to ECB President Draghi, but also a replacement for EU Commission President Jean-Claude Juncker, who is likewise nearing the end of his term. According to an unwritten rule, these two key EU positions should not…

Why such actionist behaviour on the part of the ECB?

ECB President Mario Draghi has put the ECB under enormous pressure to act on Tuesday with an announcement that has come as a complete surprise and is in my opinion economically incomprehensible: he said that the ECB was considering further monetary stimuli if inflation failed to pick up and there were no signs of economic improvement in the coming weeks. In a move most unusual for a central bank, Draghi has explicitly demanded an improvement in the economic situation and higher inflation expectations. This of course means that the current situation has taken the ECB by surprise, or that actions in recent weeks have been too hesitant. A further interest rate cut was explicitly announced and – if this were to prove insufficient – another asset purchasing programme. In purely formal terms, the new monetary orientation might have been prompted by the visible decline in inflation expectations, and, in particular,…

ECB: Ready to act in an emergency

At today’s meeting, the ECB adjusted its forward guidance. Whereas the message in the monetary policy statement to date has been that key Eurozone interest rates would remain at their current levels until at least through the end of 2019, this timeframe has now been pushed back to the middle of next year at the earliest. In other words, the guardians of monetary policy are factoring the current risk factors (trade dispute/ Brexit) into their overall European economic outlook. The circumspect stance of the central bank is also reflected in the revised ECB staff projections. The growth outlook has been revised downwards slightly for both the 2020 and 2021 time horizons. At the same time, Draghi was keen to avoid coming across as overly pessimistic. For example, he also pointed in this context to the positive development of the Eurozone labour market. Inflation projections were adjusted only slightly. One striking…

Visibly slower increase in inflation in the euro zone

Consumer price inflation decelerated noticeably in the euro zone in May. The inflation rate – based on the harmonized consumer price index HICP – fell from 1.7% in April to 1.2% in May according to the Eurostat flash estimate. This is largely attributable to a lower increase in prices for services. During the Easter holidays last month, the price of services climbed more than usual. In May, this price increase was corrected again. As the inflation rate for other goods, food and energy was only moderate, the inflation rate as a whole has declined. At the country level, all economies publishing flash estimates also reported lower consumer price increases. The corrections were particularly substantial in Germany and Spain where the annual rate fell by 0.8 and 0.7 percentage points respectively. In Germany, the inflation rate for May was 1.3% and in Spain it was only 0.9%. How will things develop…

Monetary policy cannot substitute for fiscal policy

The rising risk premiums for Italian government bonds are a thorn in the side of the Lega and its Deputy Head of Government, Salvini. At present, the government in Rome has to pay an upcharge of almost three percentage points compared to German Bunds when borrowing money for ten years in the financial market. Even crisis-riddled Greece currently hardly offers a higher mark-up. In this context, basking in the glory of his party’s victory in the European elections Salvini has demanded that not just Italy, but the ECB should bear the brunt of the additional refinancing costs Italy faces. Salvini has, however, hitherto not provided details on how this proposal should be implemented. Irrespective of how Salvini might intend to implement the idea in reality, there are several reasons why it points in the wrong direction. Firstly, ever since the Eurozone was established the principle has been that government financing…

Surging populism – an insidious poison tainting the EMU

Populist parties in the eurozone have had the wind at their backs for a number of years now. What is more, populist groupings made a better showing than ever before at the recent elections to the European Parliament – the political turbulence in Austria did not, in the end, have a lasting impact on election behaviour across the EU as a whole. Nevertheless, a certain habituation effect can be detected by now on the bond market. Where investors were apprehensive two years ago that Marine Le Pen might win the presidential elections in France, the populists’ latest successes at the ballot box have scarcely sparked any sizeable market movements. The market’s relative nonchalance is probably attributable to the fact that populist factions have learned from Le Pen’s defeat and are now more loathe to advocate extreme positions, e.g. that their country should pull out of the eurozone. However, the relative…

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