ECB and Inflation

[The Minsky Moment]

Great stuff from the leak.
I love the "completely underweighted the possibility they would flail about for three years.". TG is a smart guy but I guess prior to the point his exposure to European institutions was limited.

Americans, used to functioning government bodies like Congress, were amazed at European inaction

Like, dude, there's a reason we gave our central bank real authority and minimal congressional oversight.  Rand be damned.

[Tonitrus]

[Iormlund]

In broken record news, Spain gets its third deflationary month in a row with a -0,2% decrease in prices.

Official inter-annual price index is now on -1.1%. Stagnant prices in most sectors could not compensate for Telco and fuel cost decrease.

[Sheilbh]

Incidentally Greece failed to elect a President so the country's going into an election. Latest polls:

The recent polls have shown that the governing New Democracy have closed the gap somewhat on SYRIZA. An Alco poll for Proto Thema released on Saturday put SYRIZA on 28.3%, New Democracy on 25%, Golden Dawn on 5.2%, PASOK on 4.6%, To Potami on 4.4%, the Greek Communist Party on 4.2%, and the Independent Greeks on 3%. Previous polls had put the gap between the top two parties at almost eight percentage points.

[Zanza]

The German government now apparently thinks that Greece leaving the Eurozone wouldn't be an issue anymore and would become a necessity if Tsirpas wins the election. 

[Sheilbh]

Though every previous opinion from the German government has either been wrong or abandoned at 4am in Brussels

Everyone does seem relatively sanguine about the prospect of Grexit now. I think there may be a little bit too much confidence, though obviously I've no idea. In my view the Greeks (also the Spanish and Italians) need to leave the Euro and if the Greeks do hopefully they'll cause enough turbulence to force the ECB into QE.

[Ed Anger]

I'm now losing value on my Normandy holdings. Plz fix Euro.

[PJL]

What some people seemed to have forgotten that if Greece leaves the Euro, is that it will actually make the Euro stronger relative to other countries. Therefore, the next weakest economy in the Euro will be the most adversely affected, and be the target of speculators, until they too are kicked out of the Euro, making it stronger still, until the next victim is found and kicked out, and so on.

I suspect though if Greece is kicked out, everyone else (including the Germans) will ring-fence everyone else from it. Greece will be made an example, which will scare the others into being more compliant. At the same time there will be some concessions to the countries that have behaved well and adhered to the prescription.

[MadImmortalMan]

I'm betting on Portugal.

[Iormlund]

Everyone does seem relatively sanguine about the prospect of Grexit now. I think there may be a little bit too much confidence, though obviously I've no idea. In my view the Greeks (also the Spanish and Italians) need to leave the Euro and if the Greeks do hopefully they'll cause enough turbulence to force the ECB into QE.

I don't think it makes much sense for us to exit the Euro any more. The main problem a couple years back was convertibility risk scaring investors off. Once Draghi put an end to that, Spain started to stabilize.

That is not to say everything is peachy. There are still millions of unemployed, many of whom won't ever work again. Every year pensioners grow in number. And many youngsters have emigrated.

My own family is a reflection of this situation: my parents are retired, one of my siblings unemployed, the other works in Germany, and I too will sign for a German firm in a couple weeks.

[Sheilbh]

Yeah. I understand de Guindos made a distinction by saying the 'recession' was over, but not mentioning the crisis which I think is accurate. I still can't see how Eurozone policies lead to an end to the crisis. But you're probably right I think Ireland, Spain and Portugal are countries that would probably benefit less than Italy, Greece and possible France and Belgium.

The Euro would probably appreciate if Greece left but the ECB could probably intervene enough to keep the pressure off other crisis countries.

The problem, as ever, is political. I don't think these levels of unemployment and deflation and minimal growth are sustainable indefinitely. What's more is that Germany seems really unaware or just doesn't care about political pressure. I remember sitting a few weeks ago and reading two articles next too each other. One was that the FN had polled their highest ever figure in one of the French papers. Next to it was a story about how Schaeuble wanted Brussels to have a right of veto over French budgets

As you'll know Podemos are polling well. The FN are polling well. In Ireland the largest number of votes will go independents, after them the largest party could be Sinn Fein. All of those elections in the next two years will be difficult and even if the mainstream still wins they may cause significant policy shifts (see Sarko). Germany may feel that letting Greece go if Syriza wins is manageable, what about Spain if Podemos win and start implementing their policies, or France if Sarkozy has been run close by Le Pen?

The other risk is that Greece would be doing what orthodox economists have been arguing for from the start and they'd be doing what the IMF normally proposes. They've got a primary budget surplus. It wouldn't be easy but they'd be doing what a country in a debt crisis should: devaluation and renegotiation of debt. I think the first 12 months would be pretty awful with high inflation and high interest rates but after that you'd start to expect a pretty robust recovery - especially given how far the Greek economy has fallen.

If that happens which is basically what, from my understanding, most economists would expect which is why in a Greek-style crisis most would prescribe (and the IMF does) devaluation and renegotiation then I think the rosiness of staying in the Euro looks a lot less positive for, for example, Italy or France.

Edit: And of course despite most countries piling on the debt European bond yields have fallen to the lowest point 'since the Black Death' according to the Telegraph

[Iormlund]

Podemos winning is a distinct possibility. If that happens all bets are off. Whether their Dear Leader plans to implement their populist agenda or will moderate his stances when he accedes to power is impossible to know.

[celedhring]

Podemos winning is a distinct possibility. If that happens all bets are off. Whether their Dear Leader plans to implement their populist agenda or will moderate his stances when he accedes to power is impossible to know.

We will see a PP-PSOE coalition/kiss of death before a Podemos government, imho.

[Sheilbh]

I've seen talk of a Labour-Tory Grand Coalition here. Trouble with it is I can't see how it wouldn't destroy both parties.

Would it be similar in Spain?

[Iormlund]

Not PP, as there are no alternatives. But it would most likely destroy the Socialists (which I pointed out in the Euro Left thread).