BlogSpot - May 19th, 2014
The crisis is NOT over
With close to 0 growth, Eurostat GDP growth data for 2014Q1 disappointed. EuroIntelligence, in rather harsh words, writes that the survey data, especially the purchasing managers’ index, gave a misleading picture of the dynamics by being consistently too optimistic and adding noise rather than information. For EuroIntelligence, the weak growth dynamic is the counter-party of the weak inflation dynamic. Jeremie Cohen-Setton, at Bruegel, has a blogspot on the impact of deflation on the economy.
In a Project Syndicate entry, Barry Eichengreen is critical of EU officials’ claim that the crisis is over, with unresolved unemployment crisis, a banking crisis with a flawed banking union, a still too high public debt, still large competitiveness imbalances (particularly in France and Italy), and too weak demand. De Grauwe and Ji, in a CEPS document, stress that spread normalization is not related to underlying fundamentals, but rather beliefs in monetary expansion.
For Krugman as well as the Economist, growth is in the wrong places because the periphery should have higher growth rates. Italy, Portugal but also the Netherland experienced negative growth while France stagnated (yet supported by higher government spending and inventory adjustment). The dynamic is positive in Germany, Belgium and Spain. Greece experienced its smallest contraction in four years.
Charlemagne offers a review of three books from Jean Pisani-Ferry, Philippe Legrain and Roger Bootle and Nicholas Brealey that hold that the crisis is less about financial markets turmoil that how heterogeneous economies can share a common currency. They are all three critical of the way the crisis was managed, particularly on banking resolution and macroeconomic imbalances but differ on the solutions to implement.
Martin Wolf warns about complacency and overreliance on monetary fixes. We reviewed the debate about monetary policy options for the eurozone in last week’s BlogSpot. Analysts are joining in the call for more unconventional action: Mickey Levy (VoxEU piece) advocates for quantitative easing with the purchase of sovereign debt securities with short maturities; Hatcher and Minford (VoxEU) suggest that price-level targeting would be more effective than inflation-targeting. Brunello Rosa, in Roubini, suggests that the ECB would work through portfolio rebalancing (forcing a shift in allocations from risk-free sovereign bonds toward equities, credit and eventually foreign assets, contributing to currency depreciation); enhanced forward guidance (further flattening the short end of the EUR swap curve, stimulating investment); increased liquidity; and greater confidence in the ECB’s stand against deflation. A banking channel could be activated as cheaper funding costs lead to lower lending rates while QE could also help create a more favorable environment for equity and debt issuance. For Wolf, the ECB needs to show the imagination it demonstrated with OMT in order to secure a healthy recovery. However, according to a Reuters poll, no Fed-style QE is in sight (hat-tip Eurointelligence). In a FT column, Ralph Atkins points to German opposition. However, like Martin Wolf, De Grauwe and Ji argue that a situation where the ECB is the only credible actor is politically unsustainable.
Election Week!
RealTime Brussels has a primer on the upcoming European elections, to be held between Thursday May 22 and Sunday May 25—with results released at 11 p.m. Brussels time on the 25th. What about the timing?
First exit polls come at 9 p.m. Brussels time on Thursday, when polls close in the Netherlands—important will be to watch for gains made by the right-wing Freedom Party, hoping to form an alliance in the new Parliament with other far-right, anti-immigrant parties. Voters in the U.K. also head to the polls on Thursday with eyes on the result for the U.K. Independence Party.
The real action will be on Sunday. Between 6 p.m. and 8 p.m. exit polls from Germany, France and Greece will be released—with attention focused on how euroskeptic perform (AfD in Germany and National Front in France, as reported in Les Echos by Cecile Cornudet). At 9 p.m. the Parliament publishes figures on turnout.
In a Peterson article, Anish Tailor and Nicolas Veron stress that the election will have several unprecedented features: first election under the Lisbon Treaty; first election when the main pan-European parties—including the center-right European Peoples’ Party (EPP) and the center-left Socialists and Democrats (S&D)—are fielding lead candidates for European Commission President. With turnout remaining a key question. Tailor and Veron look at how it relates with the unequal representation of countries in the Parliament. Ashoka Mody and Owen McDougall (Bruegel) write that the lack of trust, especially in the ability of European institutions to provide financial stability and safety nets, will dominate the voting decision, leading to a further fall in turnout to 40 percent or even lower.
Harold James, in Project Syndicate, writes that the political crisis in Europe runs deep with the established families – social democrats, liberals, and the European People’s Party (EPP) bloc –discredited. He hopes for the elections to be the wake-up call that pro-EU parties so desperately need. He advocate for a way to combine the fundamentally French concern about the dangers of inequality with the fundamentally German concern about excessive public debt. That is why property and wealth taxes are likely to become the foundation of a new political alignment in Europe. Ian Buruma also stresses the lack of a common European identity and argues that the only thing left to unify around is a social contract, preferably on John Locke’s notion of enlightened self-interest as opposed to David Hume’s view that tradition and cultural prejudice is what holds societies together.
The Emerging View… A new hope for India?
Narendra Modi (called India’s Shinzo Abe by Brahma Chellaney) and his party has inflicted the worst defeat since independence to the Congress Party on the promise of economic revival (see FT). In a Project Syndicate entry, Gopinath and Dhaliwal set an economic roadmap for India in five points: (i) invest massively in physical capital (ii) develop the industrial sector, (iii) improve the institutional investment, (iv) achieve fiscal discipline and (v) improve quantity and quality of education and healthcare.
By Simon Ganem
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