EU-DIGEST

Euro-zone fiscal policy sound: "It is easier to reduce interest rates in a timely way than to fiddle with tax schedules"

Data to be released Friday is forecast to show inflation in the 15-member euro zone slipped to below three percent for the first time in more than 12 months in November, paving the way for a possible rate cut next week. Analysts expect the European Union's statistics office to report that annual inflation in the euro zone dropped from 3.2 percent in October to 2.7 percent this month as falling oil prices have undercut inflationary pressures. This leaves euro-zone inflation still above the European Central Bank's (ECB) two-percent target for annual inflation. But leading ECB officials, including bank chief Jean-Claude Trichet, have signaled that the ECB's 21-head rate-setting council was gearing up to ease monetary policy further when it holds one of its regular-out-town meetings in Brussels next Thursday.

Note EU-Digest: The Economist reports that according to the European Commission the euro area’s collective budget deficit was 0.6% of its GDP last year, a picture of health compared with America (approximately 7%) and Britain (4%). Therefore there is some obvious reluctance in Europe to prime the fiscal pump. The orthodoxy for three decades has been that monetary policy is the best tool to manage the economic cycle. It is easier to reduce interest rates in a timely way than to fiddle with tax schedules. Furthermore, there is still room to loosen monetary policy in Europe: even after recent reductions, interest rates are 3.25% in the euro zone and 3% in Britain. Europe also has a more solid fiscal buttress. The public sector accounts for a much bigger slice of GDP so a drop in private spending has proportionately less impact on the economy than in America where it is 70%. State benefits for the unemployed are larger than in America, so public spending rises by more in a downturn. Tax receipts are bigger too and they tend to fall quickly in downturns, providing an automatic fiscal relief for taxpayers. It is therefore not good practice for Europe to copy US fiscal policy.

Labels: ECB, EU, Euro Zone, Fiscal Policy

ECB put up more cash, Euro 12b (US 15.1B) to Denmark

The ECB, the central bank for the 15-nation euro zone -- of which Denmark is not a member -- said the 12 billion euro ($15.1 billion) swap will remain in effect as long as needed. It was done with the goal of increasing the amount of cash in short-term euro money markets. The move will make it easier for Denmark, whose krone currency is pegged to the euro, to get access to euros. The ECB provided similar moves for Hungary and Switzerland earlier this month. The swap will provide euros to the Danish bank in exchange for Danish kronor and should lower the exchange rate for euros in Denmark.

Labels: Denmark, ECB, EU

Europe's Domino Effect

A variety of government interventions have suddenly sprung up across the continent since Sunday: Iceland is drafting a plan to bring its banks back from the brink; Britain's treasury secretary is "looking at some pretty big steps" to do the same; Spain and Portugal are set to guarantee all bank deposits; Sweden's central bank is upping its loans to Nordic banks; and Greece, Denmark, Ireland and Germany have all made moves to guarantee bank deposits.

Some still think Europe is forgetting its key unifying force: the European Central Bank. Cantor Fitzgerald Strategist Stephen Pope thinks the best way to calm markets is for the ECB to step in and act as a kind of clearing bank, or middle man between lenders, in order to help keep the faith that banks' loans will be returned. That could be more effective than even a rate cut, or the central bank's current method of offering overnight loans to individual banks, or injecting liquidity.

Labels: ECB, EU, meltdown, World Economy

ECB liquidity injections not working - by Leigh Phillips

The billions of euros the European Central Bank has been injecting into money markets since the start of the crisis in an attempt to get banks to start loaning money to each other and other businesses is not working.Instead, banks are redepositing some of the monies back with the ECB itself - over €100 billion overnight as of Tuesday (30 September - the latest available figures) - as they are worried that the central bank is the last safe place left to stash their cash.

As of last Tuesday (23 September), banks had "parked" €1.4 billion with the ECB's "deposit facility." By Thursday, the figure had climbed to €4.2 billion and jumping to €28 billion the next day. On Monday, banks were now depositing €44 billion with the ECB and as of yesterday, the latest figures available, the cash placed with the bank for safekeeping had more than doubled to €102.8 billion.

Labels: Banking system, ECB, EU

ECB- One Trichet is enough, Juncker says

Brussels would certainly be a duller place without the sparkling wit of Jean-Claude Juncker. As guest speaker at a think-tank breakfast on Wednesday, the Luxembourg leader was challenged by an over-excited British questioner to admit that the eurozone economy was in a complete mess. Lest matters grew even worse, the questioner asked, shouldn’t Juncker and his colleagues immediately start arranging the “orderly” break-up of the single currency area? “No", replied Juncker …"Something in my heart is telling me that the British will be happy [one day] to join the single currency.” On the substance of the question, however, Juncker made the point that the disruptions to the individual national economies of the eurozone would surely have been far greater over the past 10 years if there had been no euro.

“Do you really think the European economy would be in better shape if we had had national currencies?” he asked. Would national central banks in Europe have been able to produce a better co-ordinated response than the European Central Bank and Jean-Claude Trichet, its president, had done during the market turmoil of recent months? Then came Juncker’s masterstroke. “Would 15 or 16 Trichets be outperforming one Trichet? I don’t think so. Personally, I really think one Trichet is enough.

Note EU-Digest: without the ECB in place, the European financial system would be in total chaos following what now is shaping up to be the collapse of the deregulated US financial system.

Labels: ECB, EU, Trichet

Nowotny says Europe not in recession

Europe may be facing a sharp slowing in economic growth but it is not in recession and still faces a serious inflation threat, European Central Bank Governing Council member Ewald Nowotny said on Friday. His comments, among the first he has made since joining the ECB Governing Council as head of the Austrian central bank last week, came as EU finance ministers and central bankers meeting in Nice, France, addressed the twin threat facing Europe from slowing growth and high inflation.ECB President Jean-Claude Trichet has said repeatedly in recent days that inflation, running at 3.8 percent in the euro zone in August, or twice the ECB's target rate, remains a menace despite recent signs of easing as oil and commodity prices.

Labels: ECB, EU, EU Economy

Economic squeeze in Europe has hit 'rock bottom': ECB's Trichet

The president of the European Central Bank said Saturday that the economic squeeze has "hit rock bottom," telling Italian television that he expects a "gradual revival" over the course of 2009. "Going by our calculations, just published, during the second and third quarters of this year, we hit rock bottom," Jean-Claude Trichet told RAI 1 on the sidelines of an economic forum attended by political leaders at Lake Como, Italy.

Labels: ECB, EU, EU Economy

Eurogroup Chairman Juncker Says Economy is Not on Brink of Recession

Speaking to reporters in a press conference in Luxembourg, EU President Jean-Claude Juncker said the EU's economy is not at the brink of a recession.

Labels: ECB, EU Economy

ECB chief defends response to downturn

EUROPEAN CENTRAL Bank (ECB) president Jean-Claude Trichet has defended the institution's responses to the financial turmoil that has shaken global markets for the past year and warned the turbulence is not over. "We still are in a market correction," Mr Trichet said at the Kansas City Federal Reserve Bank's annual monetary policy conference in Jackson Hole, Wyoming, that draws central bankers, economists and business people from around the world. "What has been done until now has been pretty well done, it seems to me, under those very difficult circumstances," he said, responding from the conference audience to a paper critical of the reactions of the US Federal Reserve, the ECB and the Bank of England to financial turbulence.

Labels: ECB, EU, Jean-Claude Trichet

EU/ECB - Hail the (unelected) president of Europe - by Ralph Atkins

The latest downturn – last week came news that the second quarter saw the first quarterly contraction in the eurozone economy since the launch of the euro – coincides with a period of political drift in the European Union, 15 of whose 27 members use the single currency. The sinking by Irish referendum voters of the Lisbon treaty on institutional reforms dashed hopes of the region becoming more politically effective, not least through the creation of a full-time EU president. But Europe does have one high-profile president with a sense of purpose and international standing. Jean-Claude Trichet, president of the European Central Bank, won the hearts of financial markets last year, and the respect of eurozone politicians, for his swift and bold action to ensure the proper functioning of markets. He has stood firm as oil prices drove global inflation sharply higher, refusing to follow the US Federal Reserve in cutting interest rates and even raising eurozone borrowing costs at the start of last month. Mr Trichet’s reputation is helping Europe’s image. Read US economics blogs and you quickly have the impression that quite a few Americans would like him exported to Washington.

Labels: ECB, EU

The ECB Pulls the Rate-Hike Trigger citing inflation risks

Unlike the Federal Reserve, the European Central Bank has one policy mandate: maintaining price stability. And the ECB put its money where its mouth is on July 3, raising its benchmark interest rate 25 basis points to 4.25%. The Swedish Riksbank also raised its benchmark rate 25 basis points, to 4.5%, earlier in the day. The ECB's move was widely expected by financial markets. Recent hawkish comments and the reaction to rising overall interest rates in the euro zone, along with stronger economic data, at least from Germany, had changed expectations to a rate hike in recent months.

Labels: ECB, EU, Interest rates

Europe Inflation Accelerates More Than Estimated, Reaches 3.7% - by Fergal O'Brien

The inflation rate in the euro area rose to 3.7 percent last month, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said in a statement today. That is higher than the 3.6 percent estimate published on May 30. Soaring commodity prices have pushed up costs for companies and consumers across Europe and at the same time damped spending and threatened economic growth. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, setting aside concerns about the economy's expansion to combat the fastest inflation in 16 years.

Labels: ECB, EU, Inflation

German Chancellor Angela Merkel said the euro currency has significantly helped Europe assert itself despite turbulence in the financial markets worldwide. In her written statement marking the 10th anniversary of the European Central Bank (ECB), Merkel said: 'The euro, which is the second most important currency in the world, has significantly contributed to Europe's ability to successfully assert itself in the global world and despite turbulence in the financial markets.'

Labels: ECB, EU, Germany, Merkel

EU finance ministers say no to safety net in EU for banks paid by tax payers

After a decade of talking about how to react if banks operating in several European countries veer toward collapse, EU finance ministers on Friday agreed on some ground rules that could see governments share the cost of an unlikely rescue. European Central Bank President Jean-Claude Trichet made it very clear that many national central bank governors had emphasized the danger of giving banks any kind of potential safety net paid for by taxpayers. "The idea of sharing the burden at the international level is even considered by some as something which is far away from the present possibilities," he said.

The text of the EU finance ministers agreement says regulators do not aim to prevent bank failures.

The agreement also specified "The objective of crisis management is to protect the stability of the financial system ... and to minimize potential harmful economic impacts." - "The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses," it said. This agreement comes less than a year after Northern Rock bank in Britain stumbled toward insolvency and went to the Bank of England for help. That led to the nation's first bank run in more than a century. European finance ministers said government assistance would always be a last resort and there was no guarantee of help. Private sector solutions will always come first, according to the document, and a government rescue "will only be considered to remedy a serious disturbance in the economy. "European banks are increasingly making cross-border acquisitions, deals that have been strongly encouraged by EU officials who say it will boost competition and reduce costs. Italy's UniCredit leapt into Europe's top 10 lenders by buying Germany's HVB three years ago, while Spanish bank Santander, Franco-Belgian counterpart Fortis and Royal Bank of Scotland recently won a joint bid for the Netherlands' ABN Amro. This wave of consolidation raises the risk of a failure big enough to ripple across two or more European nations, speeding up ten years of regulators' discussions.

"What's ten years in Europe-land?" the EU's top financial services official, Charlie McCreevy, told The Associated Press. "Financial turmoil has sharpened the focus. It's now time to do something".

Labels: Bailout, ECB, EU Economy

EU warns of continued financial turmoil

EU Economic and Monetary Affairs Commissioner Joaquin Almunia told Japanese business leaders Friday in Tokyo that world economic conditions "are particularly challenging this year" adding that financial markets "are set to remain fragile for some time." Almunia's remarks, which were made available by his office, said that problems in credit markets combined with record high commodity prices have intensified concerns that the global economy is in trouble. "Oil and food prices have reached record highs and the U.S. economy is undergoing a pronounced slowdown," Almunia said. "The turmoil in international financial markets is also expected to continue for longer than initially thought."

Almunia said that economic growth in the European Union will be lower than the 2.4 percent and the 2.2 percent for the 15-nation euro-zone forecast made late last year. He said a new indication of the bloc's economic outlook for this year will be released Feb. 21.

Labels: ECB, EU, EU Economy

ECB leaves interest rates unchanged, pressure remains

The ECB decided on Thursday to hold its key interest rates steady at 4 percent, ignoring calls from European economic circles to follow the U.S. Federal Reserve's lead to lower rates to promote economic growth.The main pressure, which builds on the ECB to cut rates, includes the Bush administration's tax-relief plan and the U.S. Fed's monetary policy of lowering interest rates in recent months, as the U.S. central bank has reduced rates five times since September to the current 3 percent in a bid to stimulate the economy.

Note EU-Digest: The ECB is correct in not following the US example of interest rate cuts given that the EU economic picture is totally different from that of the US. Following the US pattern of rate cuts would only increase inflation in Europe which has been on the rise.

Labels: ECB, EU, EU Economy

ECB's Tumpel-Gugerell sees EU economy in good shape

The European economy is in "good condition" but there has been a pickup in prices and inflation must be kept in check, a European Central Bank official was quoted as saying on Friday. ECB Executive Board member Gertrude Tumpel-Gugerell was asked by Austrian newspaper der Standard why the ECB was just "looking on" when stock markets had plunged in recent days and the U.S. Federal Reserve had cut interest rates to ward off a potential recession In response, she said: "What's important is confidence in the economy," according to an interview published on the paper's Web site on Friday. "I see the European economy in good condition." Asked by the paper what she thought of a recent acceleration in inflation, the Austrian said: "There is a cost push; we must ensure that this doesn't roll on further. Our main task is to ensure price stability. All in all, I see a slowdown in growth today, but no dramatic change."

Labels: ECB, EU, EU Economy

Germany's Merkel says strong euro has advantages

German Chancellor Angela Merkel said on Tuesday that the high level of the euro reflected the strength of the European economy and has advantages as well as disadvantages. "The strong euro is a sign of the strength of Europe. It has advantages and disadvantages. The disadvantages are talked about all the time," Merkel told reporters at a news conference. "The question is whether we should try to change the euro rate without regard to price stability. The answer to that is a clear no."

Said Merkel: "The ECB, whose main priority is fighting inflation,is the only major bank in major industrialized countries currently contemplating the possibility of increasing interest rates, even as worries persist about the fallout from the U.S. subprime lending crisis. The ECB's price stability policy is supported by us," Merkel stressed. She pointed to Germany's "firm rule that the European Central Bank's independence should not be called into question by any political pressure."

EU-Digest comment: Mrs. Merkel is right on target. The ECB is doing a great job and the way to fight inflation is not to reduce interest rates. Europe does not need the economic disaster the US is experiencing.

Labels: ECB, euro, Germany, Inflation

European Central Bank, Bank of England hold rates steady

The European Central Bank and Bank of England, despite growing unease about inflation and slowing economic indicators, kept their benchmark interest rates unchanged Thursday. But ECB president Jean-Claude Trichet told a news conference that the European bank is ready to act "pre-emptively" to counter inflation in the 15-country euro zone, which is home to 318 million residents and accounts for more than 15 per cent of the world's gross domestic product. Trichet, speaking to reporters after the bank decided to keep its benchmark refinancing rate unchanged at four per cent, said the ECB "remains prepared to act preemptively so that second-round and upside risks to price stability" do not materialize. That is blunt language warning that should the bank deem it necessary, it is ready to lift its key interest rate.

Labels: ECB, EU

Trichet: 'Major uncertainties' about euro zone outlook in 2008

In an interview with EuroNews that aired Friday, Jean-Claude Trichet said that the bank's governing council, which sets interest rates for the 13-nation euro zone, are worried about the risk of weaker growth. "It is true there are major uncertainties with regard to the economic situation," he said. "The council of governors of the ECB feels that there is a greater risk of weaker growth, with it going below around 2 percent."

Labels: ECB, Economy, EU

Europe's liquidity blitz fails to settle nervous credit markets - by Ambrose Evans-Pritchard

THE Bank of England is once again the frugal sister of the credit markets, vastly outdone by Frankfurt. The €349 billion ($583.5 billion) blitz by the European Central Bank is 25 times the size of Tuesday's auction on Threadneedle Street, where banks took up a modest £10 billion ($23.2 billion) of three-month credit at an average rate of 5.95 per cent. The scale of the ECB injection dwarfs the emergency funding that stunned financial markets at the start of the credit crunch in August. Unlimited sums are being provided for two weeks at 4.21 per cent, 70 basis points below the three-month Euribor rates that set mortgages in Spain, Ireland and elsewhere.

Labels: ECB, EU, World Economy

On the day that U.S. investment banking Morgan Stanley announced a larger-than-expected fourth-quarter loss because of subprime write-downs, European Central Bank chief Jean Cleade Trichet gave investors a stomach-turning reminder that he simply wouldn't be able to fight the squeeze on borrowing costs by cutting interest rates in the eurozone. The problem is rising inflation, something which, if not kept under control, could have an even more damaging effect on the European economy than the subprime mortgage crisis."Looking ahead, the inflation rate is expected to remain significantly above 2% in the near future, and it is likely to moderate only gradually in the course of 2008," said Trichet. That means the European Central Bank won't cut interest rates until well into 2008, unlike the U.S. Federal Reserve, or Bank of England, which have both cut rates recently. Unlike the ECB and the Bank of England, the Federal Reserve does not have an inflation target that it uses to for determining monetary policy, though it is currently debating adopting one.
Things are a little easier for the Bank of England, which also has a 2.0% consumer price inflation target, but is currently dealing with a CPI of 2.1%.

Labels: ECB, EU, Inflation

E.C.B. Pumps in $500 Billion - by Jeffry Cane

The European Central Bank yesterday allocated more than $500 billion in euros to banks at below-market interest rates. Banks with sufficient collateral submitted bids at interest rates as low as 4.2 percent.But the huge additional infusion of cash by the E.C.B. suggests that the coordinated action by itself might be insufficient to stabilize credit markets. "The operation is highly unusual and heterodox; and while getting creative in dealing with liquidity crunches may be appropriate, this action signals some desperation on the part of the E.C.B.," says Nouriel Roubini on his blog. The E.C.B., he notes, is the only Group of Seven central bank other than the Bank of Japan that has not eased on interest rates.

"This is basically Father Christmas to those who have access," Erik Nielsen, an economist at Goldman Sachs, told the Financial Times. "They are bailing out people who have not really adjusted their balance sheets to the new reality." Yves Smith at the Naked Capitalism blog notes: "Markets are right to be concerned about recession risks, but there is an awful lot of whining mixed in here. After all, most traders' year-end bonuses stand to benefit a lot from an even softer Fed policy stance. The markets were not satisfied with one dessert; they wanted two."

Labels: ECB, EU, US Economy

France: spending and unemployment highest in Europe - France urged to cut its spending by ECB

The President of the European Central Bank, Jean-Claude Trichet, has urged France to reduce its public spending. Giving evidence to a commission in Paris set up to boost economic growth, Mr Trichet said France was "not in the right frame in terms of efficiency". He said that in 2007, public spending in France would be the heaviest as proportion of gross domestic product (GDP) within the European Union. Mr Trichet also said France had the highest unemployment level in the eurozone. For older people, he said the jobless rate was "ridiculously low" and he called for greater flexibility in the labour market, along the lines of Denmark and the Irish Republic. Note EU-Digest: Mr. Sarkozy, the French President seems to be on the right track to remedy the present unstable economic situation in France. In general his efforts are also strongly supported by a majority of the French voters.

Labels: ECB, Economy, EU, France, Sarkozy

European Economy: ECB has interest in strong euro

The European Central Bank has an interest in a strong currency, and the euro’s level also reflects broad global interest in the euro, Lorenzo Bini Smaghi of the ECB’s executive council said yesterday. “We have an interest in a strong currency,” Bini Smaghi said, adding that the ECB’s main focus is on assuring price stability in the 13-member currency bloc. The “world is betting on Europe,” he said in this town near Florence at a conference hosted by Italy’s Confindustria business lobby. Bini Smaghi also warned conference attendees against thinking that U.S. authorities are deliberately driving the U.S. dollar down to boost the competitiveness of their exports. “I don’t think so,” he said. “It’s wrong to assume conspiracy.” The ECB’s mandate is to keep medium-term euro-zone inflation rates “close to, but below, 2.0%.” Euro-zone inflation in October rose to a 2.6% annual rate due to a spike in food and oil prices.

“If we keep inflation low, and inflation expectations low, then real interest rates will also be kept low, and that’s what matters to businesses,” Bini Smaghi said.

Labels: ECB, EU, World Economy

Business comment: Sub-prime crisis is the edge of a financial hurricane - Bernard Connolly

It is hard to overstate the seriousness of the global financial crisis. Yet the world's central monetary authorities - the central banks - have been culpably slow to recognize how dangerous things have become.In the US, the Fed is belatedly recognizing that what is now happening is not a "healthy correction" of the previous under-pricing of risk but a virulent infection running rapidly through the financial system, threatening to inflict severe structural damage on the real economy. Its decision announced last Friday to cut the Discount Rate, the rate at which financial institutions can borrow directly from the Federal Reserve Banks, was a step in the right direction. But it will not be anything like enough.

In contrast, the EU quite deliberately created the most dangerous credit bubble of all: EMU. And, whereas the mission of the Fed is to avoid a financial crisis, the mission of the ECB is to provoke one. The purpose of the crisis will be, as Prodi, then Commission president, said in 2002, to allow the EU to take more power for itself.

Note EU-Digest:"The above report by Mr. Connolly must be earmarked as the usual British Conservative rhetoric against the EU. Countries in Europe which have chosen to follow the US economic model - "buy now and pay later" (including Britain), will pay the price for this folly which has become a pure Fata Morgana. Unfortunately many other nations will also be dragged down by the sheer weight of this world-wide economic crises caused by poor judgement and greed."

Labels: ECB, EU, US, World Economy

ECB signals higher rates ahead - by G. Thomas Sims

FRANKFURT: The European Central Bank on Thursday signaled that it would lift borrowing costs as early as June to prevent a robust European economy from stoking inflation, even as a surging euro begins to crimp corporate profits and slow exports.

Jean-Claude Trichet, the bank's president, left interest rates unchanged at 3.75 percent Thursday, but he suggested he would lift rates in June for the eighth time since 2005 as a widespread economic recovery fuels the risks of rising prices. The indication came as the Bank of England lifted its rate to 5.5 percent, a fourth increase since August, in an effort to tame the roaring British economy.

Labels: ECB, EU Economy

GO EU GO !! - Euro rises to new two-year high against US dollar

Euro rises to new two-year high against US dollar

The euro has risen on Tuesday to a record against the Japanese yen and a two-year high against the US dollar as further signals of robust eurozone economic growth reaffirmed expectations of a rise in the key European Central Bank rate to 4% in June, if not earlier. The euro surged as the ECB Governing Council is due to meet this week, on Thursday. The key rate may well be raised from 3.75% this week as futures trading signalled increased expectation of higher rates after economic data published today showed that German exports rose for the first time in four months in February and French industrial production was stronger than expected.

Labels: ECB, Economy, EU, euro