Another tenth and the ECB will hit it’s inflation target for the first time since inception!
That’s why they called this the ‘beneficial recession.’
Just in time for year end performance bonuses…
Highlights
| Europe Inflation Rate Drops Most in Almost Two Decades to 2.1% |
| Trichet Says Stability, Growth Pact Must Be Fully Respected |
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This is not a good sign given their monetary arrangements with no federal fiscal authority to incur the corresponding budget deficits, public and private.
And the unlimited Fed swap lines to the ECB could now be further increasing eurozone foreign currency debt, and funding imports with fresh ‘cheap and easy’ dollar debt.
Euro-zone trade deficit swells in September
Euro-zone trade deficit swells in September (AP) – The euro-zone swung to a trade deficit of 5.6 billion euros ($7.1 billion) in September from a 2.9 billion euro surplus last year. Imports surged 16 %in September from a year ago. Exports grew just 9 percent. The euro-zone trade deficit for the year to date — from January to August — now stands at 29.6 billion euros ($37.52 billion). Euro exports to the United States dropped 5 %from January to August from a year ago, Eurostat said. And exports to the currency area’s biggest customer, Britain, did not grow at all for the first eight months of the year. Imports from Russia climbed by a quarter over the same timeframe. Eurostat revised down its August trade figures, saying total euro-zone exports dropped 3 %during the month from a year ago. It originally reported a first estimate of 2 percent. Imports in August also grew less than expected — at 6 %instead of 7 percent.
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(email exchange)
The dollar is a world reserve currency only because we are the only ones who ‘allow’ a trade deficit.
With a trade deficit, the rest of world is long your currency.
With a trade surplus, like japan, the world is short your currency.
The eurozone wants a trade surplus and to be a reserve currency.
They are either ignorant of how a monetary system works or have the arrogance of demanding the violation of an accounting identity by decree???
>
> On Fri, Nov 14, 2008 at 12:15 AM, Russell wrote:
>
> If True … hyper inflation in the pipe.
>
Sarkozy Pushes for Abandonment of Dollar as World Reserve Currency
French President Nicolas Sarkozy said on Thursday ahead of the G20 meeting of world leaders:
“I am leaving tomorrow for Washington to explain that the dollar cannot claim to be the only currency in the world…, that what was true in 1945 can no longer be true today”.
There have been many previous indications that the dollar would not remain the world’s reserve currency for long. But this is a dramatic statement by a close American ally.
Reading between the lines, I am guessing that Sarkozy is pushing for a shift from the dollar to a basket of currencies as a world reserve standard, instead of a change to a single currency such as the Euro or the Yuan.
But we’ll have to wait and see what Sarkozy is really advocating.
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ECB to Cut Rates as Slump Calls for `Radical Action’
by Christian Vits
Nov. 6 (Bloomberg) — The European Central Bank will cut interest rates for the second time in less than a month today as the region’s economy suffers its worst slump in 15 years, economists said.
“It’s time for radical action,” said Ken Wattret, an economist at BNP Paribas SA in London. “This is a very severe economic downturn, interest rates should come down a long way.”
Obviously they still haven’t figured out lower rates will make matters worse, as lower rates cut government interest payments (it’s a spending cut) which removes income paid to the private sectors.
The only aspect that might help is the hope that the lower rates drive the currency lower. This is one of those ‘be careful what you wish for’ conditions.
First, with falling aggregate demand around the world, export growth will be problematic even with the lower real wages that come from a lower currency.
Second, a falling currency raises import prices and reduces real terms of trade, particularly for a large energy importer like the eurozone.
Third, anything that weakens the economy and lowers standards of living is socially dangerous.
Fourth, the problems of USD debt including USD losses growing as a % of euro based capital and income that have been driving the euro down remain and the risk of an acceleration of this process increases as the eurozone economies weaken.
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As the Belgian bank giant Fortis collapses, citizens of that country appreciate the bonheur of belonging to the eurozone. Had it not been for the euro, Belgium would have devalued and sharply increased interest rates  just as Iceland was forced to do. The banking and financial crisis is quickly changing perceptions. Across Europe, there is a bit of a scramble to join the euro. Politicians from Scandinavia to Eastern Europe, fearful of the abyss, are re-evaluating the wisdom of going it alone (Denmark, Sweden, Norway) or postponing structural reform (Hungary, Poland). Brazil and Mexico have secured a swap line from the Federal Reserve Bank. When it comes to liquidity conditions, size seems to matter after all.
‘Had it not been for the euro, Belgium would have devalued and sharply increased interest rates  just as Iceland was forced to do.’
Yes, but only because they don’t understand what other options are, like sustaining output and growth via fiscal measures, setting interest rates where they want them for further public purpose (including the option of a zero rate policy), and letting private corps with external currency debt problems default on them and convert them to equity in bankruptcy while sustaining the ongoing business as desired for further public purpose (keeping the banks open while they are legally getting reorganized) etc etc.
It’s the blind leading the blind.
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This will keep a lid on euro aggregate demand in the eurozone for a while as budget deficits grow due to falling revenues and increasing transfer payments.
Larger national deficits are needed to sustain output and employment, but also add systemic risk due to their peculiar institutional structure.
Eurozone to honour budget rules as econ faces stall
By Dave Graham and Anna Willard
BRUSSELS, Nov 3 (Reuters) – Euro zone finance ministers pledged on Monday to stick to European Union budget rules even though economic growth is seen halting next year, in a deal the European Commission hailed as needed policy cooperation.
“This is not the time to let the deficits rip,” said Jean-Claude Juncker, chairman of monthly talks among the finance ministers of the 15-country currency area.
“We don’t want to indulge in an orgy of spending and indebtedness — in essence, mortgaging future generations,” he told a news conference after their Monday talks.
The ministers backed European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change.
They also supported the Commission’s estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the widening of the deficit, mainly as a result of a natural fall in revenues and a rise in expenditure, already constituted a significant fiscal stimulus for the euro zone.
>
> On Mon, Nov 3, 2008 at 11:18 PM, James K. wrote:
>
> sad, sad.
>
> ”This is not the time to let the deficits rip,” said Jean-Claude Juncker,
> chairman of monthly talks among the finance ministers of the
> 15-country currency area.
>
Their loss, our gain, if we play our cards right and accommodate their desire for export driven growth- preferably with their exports going to us.
Might happen if we have the right fiscal package and trade policy to support imports.
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He’s not quite there. Yes, they need a ‘fiscal authority’ but he doesn’t see it’s function as providing the deficit spending necessary to sustain output and growth, though his mention of ‘currency printing’ could be stretched to suggest that. Instead, the focus is on collecting taxes to fund itself:
Agree. Eastern Europe is a huge problem and again much depends on what the Fed does because the ECB can only underwrite this stuff to the extent that the Fed will continue to offer the ECB unlimited swap facilities. Sarkozy gets this. He now recognizes the Achilles Heel at the heart of the EMU:
Speaking to the European Parliament on Tuesday, French President Nicolas Sarkozy said that an “economic government” partnering with the European Central Bank (ECB) was necessary for the continuation of the 15-nation eurozone  the collection of nations within the European Union that uses the euro as currency.
The financial and banking imbroglio consuming Europe has emphasized how the EU and specifically the eurozone  although impressive and supranational  are nonetheless unprepared for, and incapable of handling, wide-ranging economic crises. The European Union is not a superstate, despite the accusations of its detractors or the wishful thinking of its supporters. It does not have a unified decision-making authority on most policy issues except for those concerning the functioning of its common market, and those are primarily non-political.
The establishment of the eurozone is an impressive feat in its own right. It binds together 15 economies within the 27-member union with a common currency and a common central bank. However, the ECB and the eurozone in general lack a number of competencies that, if ever implemented, would have impinged on national sovereignty but would have also made monetary and economic sense. These include taxation, currency “printing”, decision-making on where to funnel funds in times of crises and European-wide bank regulation.
In times of plenty  which the eurozone has experienced for the most part since its inception  it may seem sufficient that the authority of the ECB is strictly limited to keeping inflation under 2 percent (a role inherited from its direct ancestor the German Deutsche Bundesbank). However, the current crisis illustrates the deficiency of this system. Without supranational taxation, the eurozone does not have the ability to make liquidity infusions into the system directly  it simply does not have any real cash of its own. In fact, Europeans have had to depend on the U.S. Federal Reserve for capital through unlimited dollar funds made available Oct. 13. A credit-starved Europe had to draw $250 billion  with hundreds of billions more potentially outstanding  on the first day the Fed announced that swaps would be unlimited.
Even with a taxation system that would supply the ECB with its own pool of funds, someone would still have to make a political decision regarding receivership of those funds.
Sarkozy may have tried to allay these fears by using the word “economic”  highlighting that the authority would not extend beyond the policy realm currently being rocked by the financial crisis. This is a valiant marketing effort for sure, but in reality one cannot separate the political and the economic “government”, especially if the eurozone receives authority over taxation or the ECB becomes responsible for deciding which banks get bailed out or which industries receive loans. Were the Europeans willing to go this far in giving up national sovereignty, they would have done it already.
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ECB on inflation- while interest rate cuts are likely (and in my honest opinion, won’t help anything), what they consider low unemployment and wage gains still a factor and making headlines and have been causing some footdragging.
Trichet May Need to Prove ECB’s Inflation Credentials (Update1)
By Ben Sills
“Whether that means inflation is suddenly going to fall enough is highly doubtful,” said Broux. “Unemployment is the lowest in a generation.”
While oil prices have halved in the past three months and inflation slowed to 3.6 percent in September, workers are demanding compensation for higher costs.
Germany’s IG Metall labor union is seeking an 8 percent pay increase, the largest in 16 years, and workers at Ireland’s Electricity Supply Board last month demanded 11.3 percent.
Germany preparing some kind of fiscal package, but still no details. The government and bond issuance is already set to gap up, and this will add to the systemic risk:
Germany is preparing a package of economic measures to support consumption and help selected industries as growth in Europe’s largest economy rapidly loses steam, government officials said on Wednesday.
The fiscal package is considered more than just an economic response to the financial crisis; it is also a political move aimed at making Berlin’s €500bn ($644bn, £395bn) rescue package for its banks more palatable to voters, a year ahead of a general election at risk of becoming overshadowed by the abrupt slowdown.
The government reduced its 2009 gross domestic product growth forecast last week from 1.2 to 0.2 per cent and several economists fear the economy could even shrink next year.
Meaning higher deficits.
Although details of what will be included are yet to be announced, the move confirms that Berlin is no longer aiming to balance the federal budget by 2011, once a central goal of Angela Merkel, the chancellor.
Government officials said on Wednesday Ms Merkel had appointed Jörg Asmussen, deputy finance minister, and Walther Otremba, deputy economics minister, to prepare a list of measures to support consumers and business that could be adopted as early as next week.
The growth-supporting efforts are thought to be tax incentives to encourage consumption of German products, such as new cleaner cars or energy-efficient heating systems for homes.
“We need measures that have leverage,” said Joachim Poss, a Social Democratic MP and public finance expert, adding that these should be limited in the time they were available.
One option would be to increase the budget of a 2006 programme of tax incentives to encourage consumers to insulate their homes.
The economics ministry is also keen for KfW Group, the public sector development bank, to provide 100 per cent loans to small and mid-sized companies, as they struggle to secure credit in the financial turbulence.
More controversial is the issue of tax cuts, largely because of Ms Merkel’s concerns, shared by Peer Steinbrück, the finance minister, that these could fail to increase consumption at a time the downturn is beginning toaffect tax revenues.
However, an economics ministry official said Mr Asmussen and Mr Otremba had not abandoned the notion of income tax cuts.
Alternatively, the government could decide to bring forward by one year a decision to allow taxpayers to deduct the cost of their health insurance from their tax bills, the official said.
The decision, forced upon the government by a court ruling, was due to apply from 2010 and would cost the federal and regional governments €9bn a year in total.
In contrast, China, with its own fiscal authority and non-convertible currency, has no solvency issue and can get the job done if they aren’t shy about it:
China says domestic demand boost can help economy
BEIJING, Oct 23 (Reuters) – China can overcome the tightening in economic conditions by boosting domestic demand, Chinese Premier Wen Jiabao said on Thursday.
“We can overcome the current difficulties through stimulating domestic demand,” said Wen after meeting German Chancellor Angela Merkel.
Merkel added: “We want to use the chances (we have) through an intense cooperation.”
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Europe adds to Bank Plans in Bid to Blunt Likely Recession
By David Gauthier-Villars and Leila Abboud in Paris, Sara Schaefer Munoz in London, and Mike Esterl in Frankfurt
Some European governments are looking at going beyond government aid to banks to help businesses, in an effort to inject money directly into the economy as lending remains stagnant and a continent-wide recession looms.
Italy’s government said Tuesday it was working on a package of economic-stimulus measures that could include guaranteeing corporate debt, a move that could give distressed Italian companies a new advantage over rivals elsewhere — and if enacted could set off a new round of cross-border competition, or complaints, about national aid.
Sounds highly inflationary, if the Italian guarantee is worth anything in the credit markets.
French President Nicolas Sarkozy called for the creation of sovereign-wealth funds to defend big companies from being bought up by non-Europeans at bargain prices, and proposed an “economic government” to coordinate euro-zone economic policy.
Also sounds highly inflationary as well as operationally problematic.
No talk of giving the euro parliament the fiscal authority to (deficit) spend their way out of the mess they have created.
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(email exchange)
And this only makes it worse:
Hungary Raises Benchmark Rate to Defend its Currency (Update2)
By Balazs Penz and Zoltan Simon
Oct. 22- Hungary’s central bank raised its key interest rate in an emergency measure to shore up the country’s currency, after it fell to near a record against the euro.
The Magyar Nemzeti Bank in Budapest raised the two-week deposit rate today to 11.5 percent, the highest since July 2004, from 8.5 percent, it said in an e-mailed statement. The move came two days after the bank left rates unchanged at its regular meeting. The last emergency rate increase was in 2003.
Governments are net payers of interest, so raising rates adds to governments spending on interest and raises costs of doing business and costs of investments- all ‘inflationary biases’ that further weaken the currency.
And a weaker euro (just saw it at about 129) means unrealized dollar losses across the Eurozone grow as a percentage of (eurodenominated) capital, pushing the banking system and the national governments pledged to support it towards insolvency.
>
> On Wed, Oct 22, 2008 at 3:08 AM, wrote:
>
> I wonder whether this will prove a tipping point for the euro:
> The willingness of the ECB to “bail out” a country that is not
> yet member of the Eurozone is quite significant and signals the
> concerns that EMU members now have about the disruptive
> effects of a crisis in Hungary. Of course, they can do it now
> that the have the sub-underwriter of last resort in the Fed.
> Also, the ECB liquidity support, unlike IMF conditionality loans,
> does not come with any attached string. The additional issues
> that the ECB action has caused are however important: if 5
> billion is not enough if the financial pressures intensify would
> the ECB lend more? Will the ECB do similar swaps with other
> Emerging Europe economies that are likely candidates – in the
> next few year – for EMU membership? Also should Hungary now
> use this additional international liquidity to prevent a further
> depreciation of its currency or should it save this additional
> ammunition in case things get worse?
>
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