BlogSpot - June 3rd, 2014
An Election Reader
Akin to Krugman, RealTime Brussels provide a summary of the general thinking after the elections: earthquakes and shocks—with Ms. Le Pen’s far-right Front National party winning a quarter of the votes in France, while Mr. Farage’s UKIP got 27% in the UK, marking the first time a party other than the Conservatives or Labour had won a national election since 1910; and other triumphant showings by anti-EU parties in Italy, Denmark, Austria, Hungary and Greece. RealTime Brussels reflects on the new importance of the European Parliament, notably in its role in allocating the top jobs at the European Commission—including the disputed President position. Joschka Fischer, in Project Syndicate, further fuels the idea that votes for nationalist extremes are a reminder of a past of war and destruction.
Sonia Piedrafite and Anne Lauenroth, in a CEPS book/EPIN study, look further into the election and find that public interest in the EU fail to increase with the elections, with low visibility of European top candidates; debates focused on national issues; the dominance of a protest vote against governments and large parties. Daniel Gros and Sonia Piedrafite (CEPS) debunk the idea that the European Parliament is less democratic because of a low participation rate, by looking at numbers in a wider context, comparing with participation rates in mid-term congressional elections in the United States.
For Jacob Funk Kirkegaard, in Peterson Institute, tones down the analysis of Europe’s populist resurgence, with a number of positive results from the election. In particular, in Greece and Italy, where the election may matter most, the results strengthened the position of current governing coalitions. Further, in countries with stronger support for populist parties (Denmark, UK, and France), the 30 percent upper bound for populist representation was not broken, suggesting limits to populism. For the Parliament itself, a grand-coalition will remain in the center (a point previously made by JFK), with some uncertainty as to how divided extremes will stand on specific issues.
Jean Pisany Ferry (Project Syndicate) finds that no single theory accounts for the variety of national results and that the more you look at the numbers, the more puzzling they become. While Harold James argues that the dominant pattern is nationalism in former imperial countries, this does not hold for Denmark.
Pisany Ferry looks at the messages from the elections: on the economic front, the need to boost growth and employment, yet avoiding making impossible promises—and focusing on the single market, carbon pricing, youth unemployment (especially in the South), and regional rebalancing. On the political front, one concern is that government, at whatever level, should deliver. Francesco Daveri, in VoxEU, after finding a correlation between the success of a Euroskeptic party and the widening of bilateral trade deficits with Germany, purports that a gradual rebalancing of Germany's external accounts of Germany would bring with it not only a greater economic stability in the Eurozone but also greater political stability. Javier Solana (Project Syndicate) calls for a program of strategic priorities, with the economy at the top—to stimulate economies and launch active labor-market policies to reduce unemployment, above all for young people. Policies include stimulating R&D spending, and fixing deficiencies in the monetary union’s institutional design. Beyond this, the elections provide an opportunity to reconsider European foreign policy, as illustrated with the current crisis in Ukraine.
Long expected June monetary policy meeting
FreeExchange reports on the clues given by Draghi himself on future monetary policy actions and finds that action is highly likely to comprise of interest-rate cuts, and attempts to boost credit in southern Europe by providing long-term funding to banks provided that they deploy it to expand business credit. Interest-rate cuts are now regarded as a done deal—making the ECB the first big central bank to move into negative territory (Pia Huttl (Bruegel) reviews the Danish experience with negative deposit rates). Beyond this, some easing of liquidity is expected—notably to deal with continuing credit constraints in Southern Europe.
Marc Chandler (EconoMonitor) writes that expectations include various actions, short of actual QE. The tools are: three potential interest rates to cut (lending rate, which would have the greatest impact according to Chandler; EONIA; and refi rate, on which the impact would be limited and with substantial risks associated with negative rates) and two different forms of asset purchases. Measures like extending the full allotment of refinance operations, the suspension of efforts to sterilize the previous bonds purchases under SMP, and even a new LTRO targeted to new lending, are possible—though with unclear impact. QE (asset purchases) could be of two types: buying private sector assets (bank bonds and asset-back-securities) or buying government bonds.
As an aside, the ECB financial stability review (hat-tip EuroIntelligence) warns that the global search for yield poses new financial stability risks, while the previous of risks – weak banks, and lack of sovereign backstops are now receding.
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