ECB purchases of govt bonds for last week amounted to EUR 4 billion,
matching previous week and bringing total to EUR 55 billion:
Week Purchases Total
1 16.5 16.5
2 10.0 26.5
3 8.5 35.0
4 5.5 40.5
5 6.5 47.0
6 4.0 51.0
7 4.0 55.0
That’s a lot of greek bonds, presumably the ECB is buying enough to support rates sufficiently so they can refi themselves.
Still looks like the strategy for Europe could be functionally very close to my proposal, and fiscally sustainable if they continue on the current path.
This is just inference on my part- I have no information other than what I’ve read online.
The ‘distributions’ the ECB will make will be via buying enough national govt debt in the secondary markets to keep the national govs solvent and able to fund their deficits, at least in the short term markets.
If they determine any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent.
ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable.
The austerity measures will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed.
With currency strength and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro to 1.60 vs the dollar remain in place, while the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is in place.
While restructuring risk remains, it need not be forced by solvency risk. So restructuring need not happen.
Power has shifted to the ECB, presumably under substantial influence of the national govt finance ministers, as the ECB directly or indirectly moves to fund the entire banking system and national govt. deficits.
This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national govt. deficits they allow.
The conflict will remain the money interests in Europe who put currency strength as a priority, vs the exporters who favor currency weakness.
The consensus will be that unions and wages in general must be controlled.
Again, I do not know for sure that the ECB is actually moving in this direction.
They may not be.
Watch closely to see if the buying of national govt. securities remains sufficient to keep the national govts solvent.
(Feel free to distribute)
HEADLINES:
Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
Merkel faces test in vote for president
Berlin hints at move on pay deal ruling
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
Germany Faces Shortage of Skilled Workers in 2025, Study Says
French Economy Slowed to a Crawl in First Quarter of 2010
French Jobless Claims Increase as Companies Trim Workforces
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
Spanish May Producer Prices Advance Most in 19 Months on Oil
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
Greek optimistic on budget deficit reduction
ARTICLES:
Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
(Bloomberg) The euro-area economic recovery stalled in June for a third month amid financial-market “strains.” The Eurocoin index measuring economic expansion in the 16 nations that share the single currency fell to 0.46 percent from 0.55 percent in May, the Center for Economic Policy Research and the Bank of Italy, which co-produce the index, said in a statement. “Recent strains in the financial markets have affected the performance of the indicator,” according to the statement. The index “has however been supported by the new improvement in foreign trade.” The index, which includes business and consumer confidence readings, industrial production, price figures and stock-market performance, aims to provide a real-time estimate of economic growth, according to the report.
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
June 25 (Bloomberg) — European Commission President Jose Barroso said the region’s leaders are determined to keep the euro a “very strong” currency.
“I have no doubts of the absolute determination of European Union leaders and European Union institutions to keep the euro as a very strong and stable currency,” Barroso said in an interview with Bloomberg Television in Toronto, where he is attending a meeting of leaders from Group of 20 countries.
Against the U.S. dollar, the euro has fallen 19 percent since its Nov. 25 high, trading yesterday at $1.2279 after reaching a four-year low of $1.1877 on June 7.
The 16-nation currency’s “real effective exchange rate has lost close to 10 percent” since its peak in October, the European Commission, the EU executive, said yesterday in its quarterly assessment of the euro-region economy.
The continent’s economic “fundamentals” are good, and Europe’s debt and deficits are smaller than some of its “main partners,” Barroso said, adding investors have been reassured by an almost $1 trillion plan by the euro nations and the International Monetary Fund to backstop the sovereign debt of the region’s weakest members.
It’s “a very important message of confidence that is being conveyed to markets as well,” Barroso said.
Barroso also said that China’s plan to provide more currency flexibility was a “move in the right direction” that increases confidence in the global economy.
Earlier yesterday, Barroso said that exit strategies from fiscal stimulus programs should be gradual, differentiated and “growth-friendly.”
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
June 25 (Bloomberg) — German Finance Minister Wolfgang Schaeuble said he has “no doubt” that European governments will hold to their commitments to cut public deficits, Corriere della Sera reported, citing an interview.
“Too-high deficits have to be responsibly reduced,”
Corriere quoted Schaeuble as saying. “We have a shared agreement, and I have no doubt that all will abide by their commitments.”
Merkel faces test in vote for president
(FT) The presidential election – in a specially constituted federal assembly – represents the biggest challenge for Angela Merkel since she formed a government in October combining her own Christian Democratic Union with the liberal Free Democratic party. The combined popularity of the coalition parties has since dropped from 48.4 per cent to 35 per cent, according to a poll published by Stern magazine and the RTL television network. The proportion of voters saying they would vote again for Ms Merkel as chancellor has also dropped to just 39 per cent, her lowest rating for more than three years, according to a Forsa institute poll. Political scientists believe that if Christian Wulff, Ms Merkel’s candidate for the presidency, were to lose the vote on Wednesday to Joachim Gauck, the non-party candidate supported by the SPD and Greens, it could force the resignation of both the chancellor and her government.
Berlin hints at move on pay deal ruling
(FT) The German government on Thursday signalled it was considering legislation to quell protests from both company chiefs and worker representatives over a court ruling that threatens the way they agree wage deals. Judges in Erfurt, eastern Germany, on Wednesday ended a 50-year-old practice of extending in-house wage deals made between an employer and its biggest union to cover all workers in the company doing similar jobs. The judges agreed with a doctor at a hospital in Mannheim who had demanded he be paid according to the national pay deal of the doctors’ union, not the in-house deal agreed by services union Verdi. They said in their verdict that established wage-bargaining practices contravened the right of citizens freely to form alliances. There was no “basic principle” forcing a company “to adopt a uniform wage deal”, they declared.
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
(Bloomberg) Germany will sell 77 billion euros ($94.5 billion) of bonds and bills in the third quarter, 2 billion euros less than forecast in December. A larger adjustment will come in the fourth quarter, assuming the economy stays steady, a finance ministry official said. Finance Minister Wolfgang Schaeuble has pledged to cut net new borrowing by the end of the year. A federal issuance calendar released in December said gross debt sales this year would be a record 343 billion euros ($421.5 billion). The third-quarter debt issuance includes 44 billion euros of bonds and 33 billion euros of bills. Schauble’s ministry said on June 22 that the so-called structural budget deficit will be 53.2 billion euros this year, 13.4 billion euros less than the 66.6 billion euros originally expected. It also said then that net new borrowing this year will be 15 billion euros below the 80.2 billion euros in the 2010 budget plan.
Germany Faces Shortage of Skilled Workers in 2025, Study Says
June 25 (Bloomberg) — Germany faces a shortage of skilled workers in 2025 as the population is shrinking, the Federal Labor Agency’s research institute said.
Due to demographic reasons the size of the German workforce will constantly decrease until 2025 while the number of employed in the services industry may rise by more than 1.5 million, the institute said in a study published yesterday.
By contrast, the number of employees in the manufacturing industry may fall by almost 1 million over the next 15 years, the study said.
German unemployment fell more than twice as much as economists forecast in May as exports from Europe’s biggest economy surged, bolstering the recovery. The number of people out of work declined a seasonally adjusted 45,000 to 3.25 million, the lowest since December 2008, the Labor Agency said June 1.
French Economy Slowed to a Crawl in First Quarter of 2010
Paris (dpa) — The French economy slowed alarmingly in the first quarter of 2010, with gross domestic product (GDP) expanding by only 0.1 per cent, the government’s statistics office Insee said Friday.
The primary reason for the poor result was a drop of 0.2 per cent in domestic demand, compared to an increase of 0.5 per cent in the last quarter of 2009, when GDP rose by 0.6 per cent.
This was the second bit of bad economic news for the government in less than 24 hours. Late Thursday, the Labour Ministry said that the rolls of unemployed had grown by some 22,600 in May, the largest rise in unemployment since the beginning of the year.
Some 2.7 million people were out of work at the end of May, an unemployment rate of 9.5 per cent.
French Jobless Claims Increase as Companies Trim Workforces
(Bloomberg) The number of jobseekers in France climbed in May as manufacturers trimmed payrolls in the wake of the country’s worst recession in more than half a century. The number of unemployed actively looking for work rose by 22,600 last month, an increase of 0.8 percent, the Labor and Finance Ministries said. The total number of jobseekers was 2.7 million. While claims have risen every month this year except in March, national statistics office Insee predicts the economy is about to begin creating jobs again for the first time in two years. “Total employment fell heavily in 2009, dragged down by the drop in activity,” Insee said late yesterday. “It should progress slightly over 2010 as a whole.”
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
June 25 (Bloomberg) — France’s plan to lift its retirement age is a signal to investors about the seriousness of President Nicolas Sarkozy’s intention to cut the budget deficit, Finance Minister Christine Lagarde said.
“The priority is to protect the retirement system,”
Lagarde said today on France Inter radio. “We are also trying to send a message of security to the markets.”
Sarkozy’s government set out proposals last week to raise the minimum age at which workers can tap the state pension to 62 in 2018 from 60 currently. The age at which full benefits are reaped is to rise to 67 from 65 under the plan, which labor unions protested yesterday.
France is the only country among Europe’s five biggest economies not to have presented a detailed savings plan for next year. Britain set out deficit-cutting measures totaling 113 billion pounds ($167 billion) earlier this week and Germany announced cuts of 81.6 billion euros ($101 billion) on June 7.
Sarkozy has committed to reducing the deficit from 8 percent of gross domestic product this year to 6 percent in 2011 and 3 percent in 2013.
Lagarde said “there’s no reason to think” that France’s AAA credit rating is threatened, though she said the country doesn’t have the luxury of time to debate the pension overhaul.
“We have time pressure, it’s not possible to delay,”
Lagarde said. “The public finance situation doesn’t allow for it. We need to take measures quickly.”
Sarkozy and Lagarde join leaders and finance ministers of the Group of Eight later today in Huntsville, Ontario, before meeting their Group of 20 counterparts tomorrow in Toronto.
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
(Bloomberg) Italian gross domestic product will expand 1.2 percent this year and 1.6 percent in 2010, up from previous forecasts of 1.1 percent and 1.3 percent respectively, Confindustria said. The single currency’s 14 percent slide against the dollar this year will “more than offset” the impact of budget cuts worth 24.9 billion euros, which will shave 0.4 percentage points of GDP in 2011 and 2012, Confindustria said. Prime Minister Silvio Berlusconi’s deficit-curbing measures aim to reduce the budget deficit by an additional 1.6 percent of GDP, bringing the shortfall within the EU limit of 3 percent of GDP in 2012 from 5.3 percent last year.
Spanish May Producer Prices Advance Most in 19 Months on Oil
June 25 (Bloomberg) — Spanish producer-price inflation accelerated to the fastest in 19 months in May as higher oil prices boosted energy costs.
Prices of goods leaving Spain’s factories, mines and refineries rose 3.8 percent from a year earlier after a 3.7 percent increase in April, the National Statistics Institute in Madrid said today. That’s the biggest increase since October 2008. From the previous month, prices gained 0.2 percent.
Crude-oil prices rose 8 percent in the 12 months to the end of May, pushing up manufacturers’ costs. Still, with the economy continuing to shrink and the unemployment rate at 20 percent, consumer-price inflation remains restrained. Spain’s underlying inflation rate, which excludes volatile food and energy prices, turned negative in April for the first time on record.
The government forecasts the economy will contract 0.3 percent this year.
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
June 25 (Bloomberg) — Spain’s Labor Minister Celestino Corbacho may cut a 426 euro-a-month ($525) subsidy paid to the unemployed whose two-year, contributions-based jobless benefit has run out, Cinco Dias reported.
The subsidy, which cost the state 1.2 billion euros since it was introduced last year, will be difficult to maintain after August as Spain tries to cut its deficit, the newspaper reported, citing an interview with Corbacho.
Greek optimistic on budget deficit reduction
(AP) Greece’s finance minister on Thursday voiced confidence that the country will meet or even surpass its ambitious targets to slash spending and boost revenues by the end of the year. “Have we won the bet? No,” George Papaconstantinou said. “But we have well-founded hopes and are optimistic that, for the first time in many years, at the end of the year the state budget will achieve or even exceed the targets we have set.” Papaconstantinou said his optimism was based on figures showing a 40 percent deficit reduction during the first five months of the year, as well an expected revenue boost from increased consumer taxes. On Friday the cabinet is set to approve a key draft law on pension and labor reforms. The government says the current pension system is not viable, and if left unchanged would come to absorb 24 percent of GDP in 2050, from the current 12 percent.
On Thu, Jun 24, 2010 at 7:37 AM, wrote:
you seem to be arguing that the fix is in for the eurozone. is that a correct read?
Yes, looks like it to me.
if so, then your expected rise in the euro could occur sooner rather than later.
Yes.
seems to me that it will be difficult for the euro to rally anytime soon as central banks / portfolio managers trim their euro exposure on any strength.
Right, the portfolio shifting may not have run its course yet. That’s the risk. I’m thinking a sell off in gold, which went up this last bit due to euro fears, will signal the turn in psychology/reduction in euro fear.
With restructuring risk already on the table, seems it has to be mainly discounted in that anyone who can readily shift out of euro already have, and for those still holding euro financial assets they probably have euro liabilities and don’t want to add currency risk by shifting out of euro?
I suppose the real test will be the next mini funding crisis to see how the euro handles that stress.
Makes sense.
i’m getting fixated on the whole monetarists vs keynesian showdown that seems to be unfolding. in my mind the Greenspan era conditioned traders to believe that monetary policy was all powerful and the solution to every bump in the road. with rates near zero almost everywhere that impression will certainly fade.
And rightly so. The reality is sinking in that the Fed has no more meaningful tools, and the ones they thought they had can only help liquidity, and not support aggregate demand beyond keeping it from getting worse due to liquidity issues.
at the same time, the magnitude of the financial crisis and now the Greek crisis has seriously damaged the credibility of deficit spending.
Yes, for the wrong reasons, but I agree that’s the perception that’s driving policy.
so here we are with little faith in either concept and no clear sign anywhere of the handoff from public sector to private sector demand growth.
Right, that hand off traditionally comes from a return of private sector credit expansion, mainly housing and cars, which still hasn’t taken hold in this cycle. With all the demand leakages of unspent income due to pension funds, corp reserves, etc, some entity has to spend more than its income to make up for that.
I see a big test of theory coming in the next few years with little ammunition to proactively fight.
interesting times for sure.
Depressing, too.
I’d like to live during at least one period of true prosperity that’s ours for the taking in this time of abundant resources and geometrically expanding technology.
As previously discussed, it is possible their deficits already got high enough and the euro low enough to support very modest growth when market forces intervened to stop further fiscal expansion.
One problem now is proactive cuts can set them back if a combination of private sector credit and exports doesn’t expand at the same time.
And expanding exports remains problematic as that would tend to strengthen the currency to the point where net exports remain relatively low, and there is nothing they can do to keep the euro down should that happen.
Another problem is the market forces that are working to limit their fiscal expansion will continue to hamper their ability to fund themselves, especially with continuing talk of ‘restructuring’ which, functionally, is a form of default.
I’ve read the ECB is now buying about 10 billion euro/week of national govt bonds in the secondary markets and ‘learning and demonstrating’ that it is not inflationary, doesn’t cause a currency collapse, and poses no operational risk to the ECB as some feared it might. As they all become ‘comfortable’ with this look for market forces to ‘force’ them to expand the buying geometrically as happened with their funding of their banking system, where much of the ‘risk’ is now at the ECB as they accept collateral for funding from their member banks that no one else will.
Operationally the ECB can fund the whole shooting match. And if they can address the moral hazard the usual way via the growth and stability pact, this time with the leverage of being able to threaten to cut off ECB funding to punish non compliance.
This ‘solution’ of the ECB buying national govt debt in the secondary markets is conceptually/functionally nearly identical to my proposal of per capita distributions to the national govts by the ECB. The difference is my proposal would not have ‘rewarded bad behavior’ as theirs does, but that’s a relatively minor consideration for them at the moment, and if they continue doing what they are doing, they have ‘saved the euro,’ even though having the ECB fund all the banks and national govts wasn’t their original idea of how it all would end up.
European Industrial Orders Increase for Third Month
Trichet Says Current Situation Requires ‘Credible Measures’
ECB’s Trichet Says Italian Budget Cuts Go in ‘Right Direction’
German debt agency asked to issue bonds
Schäuble defends German austerity
German Government Won’t Turn to Tax Cuts Amid Deficit Reduction
S&P’s Kraemer Sees No ‘Serious Risk’ of Euro Break Up
Merkel Defends Spending Cuts, Gets Backing From Trichet
Germany Sees Jobless Numbers at Under 3 Million
French Consumer Spending Gains on Signs Job Market Is Improving
French Economy to Expand 1.4% This Year on Exports, Insee Says
Zapatero Says Not Cutting Deficit Would Raise Interest Costs
We still contend that the world’s economic analysts do not understand the problem with the EMU mechanism, namely that there is no central fiscal authority that is allowed to credit accounts in an unlimited fashion. If you have doubts, please read the article below.
I mentioned when Estonia announced entry three weeks ago that if any sovereign really understood that they were giving up true ability to simply supply all the credits necessary in local currency, versus now having to tax or borrow before you spend (like municipalities), Estonia would not enter.
And please read the underlined portion of the article below. They still position the Euro mechanism weakness as “no policy fits all” or “there is no authority to distribute EU wide tax revenues collected”, or “there is no political union”. It all misses the point.
The U.S., Canada, Japan, Australia and UK do not borrow money. They drain excess reserves by issuing government securities so we can earn interest. Remember, when Japan allowed 30trn of excess reserves by not issuing government securities, the bill auctions were 200 times oversubscribed, even though the bills yielded only 2 or 3bps.
The mechanism is not fixed, the governments have limited resources for obligations, unless they allow the ECB or some other fiscal authority to have unlimited ability to credit accounts.
Thanks, Cliff
Agreed.
They also seem to equate a strong euro with economic prosperity.
What Crisis? The Euro Zone Adds Estonia
June 18 (NYT) —Guess what? The funniest thing happened in Europe on Thursday. A new country joined (yes, joined) the euro zone. And the mood here was upbeat.
With a debt crisis that appears to be spreading from Greece to Spain, membership for the country, Estonia, might seem more curse than blessing. There had been speculation that countries might abandon the single currency. And some doubt Estonia is even ready for the move.
“Maintaining low inflation rates in Estonia will be very challenging,” the European Central Bank warned last month.
Still, the euro remains among the strongest currencies in the world, and membership opens the door to a club with global influence. For small and unsure countries on the fringes of the European Union, it doesn’t get much better — no matter the mounting downsides for countries already on the inside.
“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table,” said Simon Tilford, the chief economist for the Center for European Reform, a research organization based in London. “But you also could call it sheer bloody-mindedness of Estonia to join now with the outlook for the currency so uncertain.”
Meeting in Brussels, Europe’s 27 governments hailed the “sound economic and financial policies” that had been achieved by Estonia in recent years. They said Estonia would shift from the kroon to the euro on Jan. 1, 2011.
For the leaders of the bloc, expanding the euro zone to 17 nations is tantamount to a show of confidence at an inauspicious time for the battered euro, which has lost about 13 percent of its value against the dollar since the beginning of the year.
“The door to euro membership is not closed because we are going through a sovereign debt crisis,” said Amadeu Altafaj, a spokesman for Olli Rehn, Europe’s commissioner for economic and monetary affairs. “Estonia’s admission is a sign to other countries that our aim is to continue enlarging economic and monetary union through the euro.”
With economic output of about $17 billion, the Estonian economy is tiny. Yet the country’s central bank governor, Andres Lipstok, will now be able to take a seat on the European Central Bank’s powerful council that sets interest rates.
Membership is also an important signpost that a country is on the way to achieving Western European standards of living, an important goal for a former Soviet republic like Estonia that has long been among the Baltic states eager to develop.
Perhaps most important, membership is recognition of the hard work and sacrifice it took to keep Estonia’s bid on track.
Estonia, along with Sweden, were the two countries with the smallest shortfalls between revenue and spending among all members of the 27-member European Union. Moreover, public debt in Estonia at 7.2 percent of gross domestic product is tiny compared with that of most other countries in the bloc.
“It’s a great day for Estonia,” Andrus Ansip, the Estonian prime minister, told Latvian state radio in an interview here.“We prefer to be inside, to join the club, to be among decision makers.”
Estonia becomes the third ex-Communist state to make the switch to the euro, after Slovenia and Slovakia, but it is the first former Soviet republic to do so, sending a signal to other countries in Central and Eastern Europe that they, too, can aspire to membership.
That said, the euro zone is not expected to expand further for some time to come as other candidates like the Czech Republic, Hungary, Latvia, Lithuania, Bulgaria, Romania and Poland still fall short of the entry criteria partly because of their large budget deficits.
And the accession of Estonia will do little to erase the chief criticism of the euro project: that Europe’s nations are too economically disparate to maintain supranational institutions like a single currency in the long term.
Price stability is one of the main criteria for admission to the euro club. But in the past, political leaders have brushed off concerns from the European Central Bank about candidate nations in their eagerness to expand the euro zone.
Greece won admission even after the central bank reported in 2000 that the country’s debt equaled 104 percent of gross domestic product, far above the limit of 60 percent set out in the Maastricht Treaty. The bank said that Greek inflation met targets only because of declines in oil prices and other exceptional factors.
According to economists, the preparation to join the euro zone created some disadvantages for Estonia compared with neighboring countries, which have enjoyed a relative degree of flexibility by hanging on longer to their legacy currencies for now.
Now that Estonia is joining the euro zone, the most immediate advantages are likely to include greater interest from foreign investors and lower borrowing costs for both the public and private sectors.
But those could be short-term advantages. Estonia and its export-driven economy could be quickly overshadowed by financial difficulties, particularly if the euro zone remains unstable and if neighboring countries like Poland and its Baltic neighbors insist on hanging on to their currencies.
“Investors will only be willing to lend to Estonia on favorable terms if Estonia can continue to compete,” said Mr.Tilford, the London economist. “That is where the biggest risks for Estonia now lie.”
And there is another downside, Mr. Ansip, the Estonian prime minister, said in the radio interview.
“Our banknotes are more beautiful than euro banknotes,” he said.
Thanks,
It was an hour interview and to some degree taken out of context.
I would not buy euro here- chart looks terrible!!!
But I would look to see it show signs of turning with an eye to getting long, probably vs the yen.
The problem with the euro zone has been a tendency for the currency to continually adjust to levels where the trade balance can’t go into surplus in a meaningful way, like China, Japan, and Germany before the euro.
To run a trade surplus generally requires tight fiscal to keep domestic demand down, but then a policy of buying fx (off balance sheet deficit spending) to keep the currency ‘competitive’ to support exporters at the expense of the macro economy.
Euro May Rise to $1.60 Due to Austerity: Economist
By Antonia Oprita
June 4 (CNBC) — Austerity measures imposed by the euro zone will likely push the euro back towards $1.50 or even $1.60 but the European currency is unlikely to achieve the status of reserve currency, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com Friday.
The euro has fallen sharply versus the dollar since the euro zone’s sovereign debt worries began, with many analysts predicting it will slide to parity with the greenback or even below.
But Mosler thinks the recent plunge has been caused by portfolio adjustments – investors shifting assets from euros to gold or dollars – and that this trend is nearly over.
Rising taxes and spending cuts, pledged by governments in the single European currency area to cut debt, are “like a crop failure” because they will decrease the amount of euros available, he said.
“Everything they do in the euro zone is highly deflationary,” Mosler told CNBC.com in a telephone interview.
“I think there’s a very good chance the euro would be stronger because of the austerity measures; this can very easily get it back to $1.50-$1.60,” he added.
To keep the euro down, the ECB would have to buy dollars but “ideologically, that would mean they’re accumulating dollar reserves,” which the European Union does not want, Mosler said.
The euro is unlikely to become a global reserve currency because the EU’s economic policy is geared towards growth based on exports and the euro zone is running a surplus, he explained.
“The only way the rest of the world will hold your currency is if you run a trade deficit,” he said. “Economics is the opposite of religion, it’s better to receive than to give.”
The ECB Could End the Debt Crisis
The European Central Bank could easily appease the fears of default which have plagued markets regarding by creating money and giving it to its members, Mosler said.
The ECB, “if it wants to credit any nation, it can,” he added. “The ECB could make a distribution of, say, 10 percent of GDP to each member. The ECB can just credit the accounts of the member nations based on how many people they have. That would reduce all debt ratios this year by 10 percent.”
The measure would not contradict EU anti-bailout rules, since the money would be distributed equally among members and if the cash is used to cover the deficit would not be inflationary, Mosler added.
“My proposal is to put the ECB in a position where governments become dependent of checks from the ECB,” he said. “Operationally, it’s very simple to do, you just credit their accounts. The Finance Ministers would direct the money.”
The central bank could make this an annual distribution, and attach financial discipline conditions to it, such as respecting the EU’s Stability and Growth Pact.
The country that does not respect the pact does not get the money, making it a more powerful enforcement mechanism and helping fight speculators at the same time, he explained.
Pretty much all bad:
European Unemployment Unexpectedly Increases to 12-Year High
Trichet Says Fiscal Sustainability Fosters Confidence, Growth
By that he means the austerity measures/deficit cutting which only makes things worse.
Trichet Says ECB ‘Fiercely Independent,’ Stable Prices Mandate
Just doing his job.
Trichet sees need for ‘budgetary federation’
He’s sees this as a watchdog to keep deficits down.
Trichet Says ECB Won’t Tolerate Budget Indiscipline Any Longer
He’s concerned about the secondary mkt purchases of greek debt meaning even this very modest support is in question.
ECB’s Noyer Says Rating Firms Aggravating Crisis
Weber Says ECB Bond Purchases Musn’t Exceed ‘Tight Limits’
More talk on limiting ECB purchases.
ECB’s Stark Says Bank May Start Withdrawing Liquidity in July
Doesn’t matter but indicates their attitude.
Nowotny Sees No Risk of Double-Dip Recession due to Austerity
That’s the entire source of the risk of a double dip recession.
Bank of Italy: EU euro defense package can’t last
And calls for a return to the 3% deficit limits.
ECB: Banks Will Suffer Considerable Loan Losses In 2010, 2011
Bank deposits are insured only by the national govts that are already seeing their funding threatened.
ECB warns of ‘hazardous contagion’
True, but they have their channels totally confused.
Trichet Says Second-Quarter Growth May Be Better Than Expected
European Manufacturing Growth Slowed More Than Estimated in May
Germans, ECB Spar Over Bond Plan
After Debt Crisis, New Tension Between ECB, Germany
Survey suggests Germans are unhappy with Merkel
Merkel Says Budget Deficit Looks ‘Moderate’ Versus Spain, U.K.
Still doesn’t get how the UK comp isn’t applicable.
Hypo Real Estate gets more loan guarantees
Spain presses for labor market reform deal
Fitch downgrades Spain’s credit rating
European Loans Post First Annual Increase in Eight Months
German Unemployment Falls Twice as Much as Forecast
German Retail Sales Rose in April on Declining Unemployment
French New Car Sales Fall 12% in May, After 12 Monthly Gains
Italian Unemployment Climbs as Recovery Fails to Create Jobs
This video has the initial segment of my presentation at the April 28th fiscal sustainability conference, followed by an interview that I was told aired in Russia. It includes my euro zone proposals and proposals for the US Economy.
Euro Swings Won’t Stop China Reserves Shift, Yu Says
Right, they want to stay ‘competitive’ in the euro zone
China Property Stocks to Rebound End-Year, Xia Says
China’s Inflation Target of 3% This year ‘Difficult’ to Meet
Even with the yen rising with the dollar.
Not a good sign.
Inflation per se isn’t ‘bad’ for an economy, it’s that people don’t like inflation and fighting inflation can be very bad for an economy.
Just an ‘excuse’ for an oversold market that wanted to go up anyway.
Yes, China doesn’t want a weak euro for trade purposes.
But they don’t want to own the euro bonds either.
The fiscal tightening in the euro zone will do the work for them and strengthen the euro, even as it keeps growth and employment down, at least until the next funding crisis which could be a few weeks down the road or more.
No way to tell. My best guess is upside and downside of 10% or more for equities depending on which way the eurozone tips, with risk from a China slowdown remaining as well, and oil recovering in any case as it’s ultimately under (thinly disguised) Saudi control who do a pretty good job of making it look like market forces always move the price.
China Says Reports on Euro Holdings Review Groundless
May 27 (Bloomberg) — China said that a report that it’s reviewing foreign-exchange holdings of euro assets is “groundless” and the nation’s sovereign wealth fund said it’s maintaining its European investments.
“Europe has been, and will be one of the major markets for investing China’s exchange reserves,” the State Administration of Foreign Exchange said in a statement on its website today. The official Xinhua News Agency reported China Investment Corp. President Gao Xiqing said yesterday Europe’s turmoil “hasn’t had too big of an impact” on CIC’s investment decisions.