Euro zone

Brexit might be the best thing to happen to the EU

Many must feel like they have woken up to a nightmare, but this nightmare is for real – the British have decided to leave the European Union. Yet Brexit might be the best thing to have happened to the EU in recent years. Brexit could provide the impetus for a better, more modern Europe. With 52 percent voting to leave the EU, the result was very narrow – a decision that no one had seriously expected in the run up to the referendum. This was also reflected on financial markets which were caught completely off guard. In the short term, calm will return to stock markets, but further political and economic developments will prove crucial in determining the long-term direction of financial markets. Now it is up to politics and the economy to restore stability, a mammoth task for those responsible. The referendum has left Great Britain a divided country….

BVerfG gives the green light for OMT

The German Federal Constitutional Court (BVerfG) rejected the complaint brought before it against the ECB’s OMT programme, declaring the suit filed to be in part “inadmissible” and in part “unfounded”. Moreover, in the opinion of the court, the “rights and duties of the German Bundestag including its fundamental responsibility for budget policy have not been impaired.” The Karlsruhe court thus followed the European Court of Justice (ECJ), which ordained in its ruling of 15 June 2015 that the ECB’s OMT programme was compatible with European law under the conditions and constraints stated at the time. Although the BVerfG again expressed substantive reservations as regards the OMT, these were not so severe as to require the court to deviate from the principle that European law must take precedence over national law. Today’s judgement by the BVerfG is unlikely to have surprised many market players. Following the ECJ’s judgement last year the…

The bond markets in the Eurozone are grossly overpriced

There are growing signs of a marked increase in inflation in the Eurozone. It will not be long before the consequences of this are felt. Soon afterwards there could be a noticeable rise in yields. Yields on 10-year German Bunds dropped below 0% for the first time ever this week. This time the renewed decline in yields was not sparked off by the European Central Bank (ECB) launching a fresh programme of sovereign bond purchases but by mounting concerns over Brexit. Latest opinion polls reveal a sizeable gain in the number of supporters for Great Britain’s exit from the European Union. They now have a lead and thus Brexit is perceived as a possibility. All investment vehicles responded negatively to this development. But yields on Bunds were already at a very low level of only 0.05 percent even before this. It would be unfair, however, to apportion the blame for…

Unemployment falls, but remains the problem in Euroland

In the European Monetary Union (EMU) unemployment has been falling since Q2 2013. The rate has been gradually reduced from over 12 percent to at present 10.2 percent. A large proportion of the new jobs created can probably be attributed to the moderate economic recovery. However, it has not yet become strong enough to drive the rate down to levels prior to the crisis. For this reason, there has only been a very slow decline in the unemployment rate. The turgid unemployment in many EMU member states is also a reflection of a lack of structural reforms. Some of the Eurozone economies have in the recent past introduced structural reforms to their labour markets. On balance, the indicators on labour market flexibility show that deregulation of termination and recruitment regulations has increased the scope in the labour markets of the individual EMU member states. And in response to the severe…

Negative key interest rates: A monetary game of dice

In the aftermath of the financial crisis, an ever increasing number of experiments were carried out to make monetary policy more expansionary. Negative key interest rates are the latest beacon of hope. More and more central banks are introducing negative interest rates to promote lending and thereby inject life into the economy and nudge up inflation. But now a serious economic debate has flared up between central bank representatives and international economic thinktanks over whether these goals can actually be achieved. Over the long term, negative key interest rates involve many risks of producing the exact opposite of what central bankers hope to achieve. 1.) Private households are hoarding cash Negative interest rates are not being passed on to private households anywhere in the world at present. Yet, the longer the era of negative interest rates persists, the greater the pressure to do precisely this. The danger exists of cash…

Eurozone likely to face problems after end of ECB purchase programme

The interim conclusion on the PSPP around 14 months after the start of the programme is mixed. Contrary to what had been feared, the ECB has so far always managed to meet its purchase target in full. In spite of its technical success, however, the ECB has not yet met all the aims inherent to the programme. Although lending in the eurozone has risen sharply, inflation is still close to or even below 0%. Medium-term inflation expectations, which are mainly influenced by the trend in the crude oil price, are in fact below the level at the beginning of the PSPP. This was one of the main reasons behind the ECB’s decision to increase the programme volume substantially in March of this year. In contrast, the market-related consequences of PSPP are considerable. Both yields and spreads have fallen sharply in the meantime, while the volatility of bonds has increased. Moreover,…

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