ECB and Inflation

[Sheilbh]

Also there's a lot of worries about Germany's economy.

Thank God the EU spent the last four crisis years fixing the structural problems in the Eurozone.

[The Minsky Moment]

According to official data, we hit -0,3% inflation this past month. Woot!

Milton Friedman is rolling over in his grave.

[The Minsky Moment]

Poland has also experienced deflation, probably for the first time in recorded history, and we were not doing much austerity. Kinda begin to get scared now.

The thread got sidetracked into an austerity discussion but I do think the problem here is primarily monetary.  The markets believe the ECB will take action to protect the integrity of the currency bloc but the inflation target has lost credibility on the underside.

[Sheilbh]

Yeah. It's not really a Keynesian thing. The most stinging jermiads I've read on Eurozone policy are coming from monetarists and the odd wonderful crackpot like Ambrose Evans-Pritchard.

[Sheilbh]

Euro growth figures out.

Germany and Italy shrinking, France has stalled. Small growth in Spain. Overall the Eurozone economy had no growth and the EU as a whole had 0.2% growth. Inflation in the Eurozone is now 0.4% and across the EU:



The aforementioned AEP:

Germany is itself a victim of EMU's austerity fanatics
By Ambrose Evans-Pritchard Economics Last updated: August 14th, 2014

So now we learn. Germany had a double-dip recession last year without telling us. This could soon turn into triple-dip after contraction of 0.2pc in the second quarter.

German bond yields are pricing in stagnation as far as the eye can see. 10-year Bunds fell below 1pc this morning for the first time in history, and far below levels seen during the deflationary episodes of the Second Reich in the late 19th Century.


The bond markets are flashing deflation warnings, but they are also indicting the European authorities for gross incompetence. Professor Paul De Grauwe from the London School of Economics says policy elites have misdiagnosed the fundamental cause of Europe's chronic slump and its failure to recover. They are treating a demand crisis as if it were a supply crisis, imposing "reforms" – an Orwellian touch – that can only exacerbate EMU-wide distress in the short-run.

"They are doing everything they can to stop recovery taking off, so they should not be surprised if there is in fact no take-off," he said.

"It is balanced-budget fundamentalism, and it has become religious. We know from the 1930s that if everybody is trying to pay off debt and the government then deleverages at the same time, the result is a downward spiral," he said.

"The rigidities in the European economy have been there for ages. They have absolutely nothing to do with the problem we face today."

The claim that Spain's recovery validates the EMU strategy of retrenchment and reform makes you want to weep. To the extent that Spain has reached self-sustaining take-off – questionable given the collapse of investment and the damage from labour hysteresis – it is largely because Spain is pursuing a beggar-thy-neighbour wage squeeze policy, just as Germany did nine years ago with such malign effects for the eurozone as a whole.

This displaces the contractionary pressures into France and Italy. "You can do this in one country but it can't possibly be a model for the whole eurozone. If everybody does this it leads to generalised deflation, and that is what we are seeing," he said.

The outcome of Europe's strategic incoherence is that EMU output is still 2.5pc below its 2008 peak. This six-year slump is worse than Europe's performance the early 1930s by a wide margin. It is the most serious European depression seen in peacetime for 170 years, and I would wager that the 1840s were better.

By contrast, US output is nearly 8pc above its old peak. America has achieved escape velocity. It is growing at a sustained rate that is 2pc to 3pc faster than in the eurozone. The compound effects of this are devastating. Europe is falling off the economic map.


While growth is allowing the US to reduce its aggregate debt ratio, slump is causing Europe's ratios to ratchet higher. There is no reward for hair-shirt policies. Calvinism is best kept in the Presbystery.

Europe's relapse is entirely self-inflicted. It is the result of policy failure by the European Central Bank, by the European Commission, by the Eurogroup (much of it under Jean-Claude Juncker), and above all by the German finance ministry, the body that is ultimately responsible for EMU crisis strategy.

The revised figures this morning from Wiesbaden (Destastis) show that the German economy has been far weaker than originally supposed. GDP contracted by 0.4pc in Q4 2012, and again in Q1 2013. Average growth over the last two years has been little more that 0.6pc.

Germany is the victim of its own policy of pro-cyclical fiscal austerity and its refusal to invest. It is gaining nothing from a current account surplus of 7.5pc of GDP (in breach of EU limits). The secondary effects on other countries are so damaging that they more than negate any gain for Germany itself.

The eurozone as a whole has stalled to zero growth. It has no safety margin as the effect of Russian sanctions start to bite, lopping 0.3pc off Europe's GDP this year (according to a leaked document by the Commission). It has no margin against a potential credit shock from China, nor against knock-on effects from Fed tightening in the US.

The ECB is paralysed by politics. It cannot secure German assent for quantitative easing because Berlin/Buba are using stimulus as an instrument to enforce their reform dictates, and they are not yet satisfied that Italy is complying. Monetary policy has been contaminated.

Those in charge are so stubborn, ideological, and certain of their cause, that they are willing to drive Europe over the edge to force obeisance. They are doing so even though credit is still contracting, the M3 money supply has ground to a halt, a third of the eurozone is in outright deflation, and now Germany itself has buckled. Policy is too tight even for Germany itself. Yet it goes on, because otherwise Latins might get off too lightly.

If you want a good target for "structural reform" – the mantra that grates, the more it is repeated – you might start with institutional governance of the eurozone itself. That certainly cries out for a neutron bomb.

Since we all know that EMU politics are intractably hopeless, we can only conclude that Europe will lurch from debacle to debacle until the Project is shut down for the good of humanity.

Thank you. Now I will take my medicine.

[The Minsky Moment]

They're turning Japanese.  I really think so.

[Sheilbh]

Draghi wants a relaxation on austerity:

E.C.B. Chief Seeks Tax Cuts and State Spending
By BINYAMIN APPELBAUMAUG. 22, 2014

JACKSON HOLE, Wyo. — Mario Draghi, president of the European Central Bank, said Friday that European governments needed to move from a focus on austerity to a "more growth-friendly composition of fiscal policies."

Mr. Draghi's comments were a change in tone for him, reflecting mounting concern that economic growth is sputtering in many European countries and that existing efforts have proved insufficient to spur faster growth.

Speaking before an annual gathering of central bankers and economists at a resort in the Rocky Mountains, Mr. Draghi said that the central bank was moving to increase its own stimulus campaign but that governments in the eurozone also needed to help bolster demand for goods and services.

"Since 2010, the euro area has suffered from fiscal policy being less available and effective," he said. "It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this."

Mr. Draghi's comments underscored a growing divide between the United States, where the economy appears to be gaining strength, and Europe, where an enduring malaise has kept unemployment painfully high while the rate of inflation, generally considered most beneficial when it is running around 2 percent annually, has nearly come to a halt.

The aggregate economy of the 18 euro area countries did not grow in the second quarter, according to an initial estimate published this week. The data provided ammunition for critics who say European countries have undermined growth by curtailing government spending.

The central bank moved in June to expand its own campaign to stimulate the economy, and Mr. Draghi emphasized that the effort would continue.

"Our preparations for outright purchases in ABS markets is fast moving forward," he said, referring to the bank's plans to begin a broad bond-purchase program, emulating the Federal Reserve and the Bank of Japan.

He also noted that the euro's recent decline was likely to continue as the American economy gains strength, a development he characterized as favorable because it would help to increase exports.

Mr. Draghi suggested that European countries should consider public investments and tax cuts to complement the central bank's stimulus campaign. Countries like Germany, which are relatively healthy, have the most room to adopt such policies without breaking the rules of the euro area.

Mr. Draghi appeared to refer to the need for such countries to reconsider their commitment to austerity in calling for the euro area to move to "a more growth-friendly" fiscal stance. Some German officials, however, have already signaled a reluctance to move in this direction. They argue that the onus is on struggling European countries like Spain, Italy and Greece to make painful economic adjustments intended to increase long-term growth, like reducing legal protections for workers, cutting back on social welfare programs and reducing public spending.

Mr. Draghi was careful to say that those countries could not avoid such adjustments. The argument he made on Friday, however, was that such policies are by themselves insufficient.

"Without higher aggregate demand, we risk higher structural unemployment, and governments that introduce structural reforms could end up running just to stand still," he said. "Without determined structural reforms, aggregate demand measures will quickly run out of steam and may ultimately become less effective."

[Martinus]

Funny how despite all this Keynes is generally derided in Europe and even proles worship at the altar of Hayek and von Mises these days.

[The Brain]

BINYAMIN APPELBAUMAUG reporting from JACKSON HOLE? You realize this is fake, right?

[Tamas]

Thing is: we have the US as a counter-example where printing money like there is no tomorrow helped at least pretend there has been a recovery (stock prices recovered, so all is well, yay!).

However: the US being the only superpower left, and the dollar long has been the default currency for the world, they can get away with whatever they do. Could the Eurozone has, though? Behind the Euro there is no massive superpower, but a bickering slow-moving collection of states with vastly different growth potentials and laws and issues. Could they get away with Euro QE? Would it not carry some big risks?

[Sheilbh]

The UK has. The Eurozone, not the US, is the exception.

Also the US recovery looks pretty broad and solid. The UK better fits your description as the government's decided to start re-inflating the housing bubble

[Duque de Bragança]

The UK has. The Eurozone, not the US, is the exception.

Also the US recovery looks pretty broad and solid. The UK better fits your description as the government's decided to start re-inflating the housing bubble

I guess London prices were not high enough. 

[Martinus]

The UK has. The Eurozone, not the US, is the exception.

Also the US recovery looks pretty broad and solid. The UK better fits your description as the government's decided to start re-inflating the housing bubble

I guess London prices were not high enough. 

Not enough Russians.

[The Minsky Moment]

Thing is: we have the US as a counter-example where printing money like there is no tomorrow helped at least pretend there has been a recovery (stock prices recovered, so all is well, yay!).

There is no pretend about it.  Eurozone unemployment rates are a 12% and trending worse.
US unemployment rates have been steadily dropping the past few years and are now down to about 6.2%.  That is - around half.

Could they get away with Euro QE? Would it not carry some big risks?

The real question is can they get away with not doing it.  The problems the Euro economies face are deflation, zero growth, and Euro (currency) strength.  So when I hear the neo-Austrians in Europe drone on about inflation risks and not weakening the Euro it is like Alice in Wonderland.  The Japanese experience shows that deflationary expectations can become so anchored an economy can just stagnate for decades.  Europe could be headed in that direction.

[celedhring]

Spanish year-on-year inflation down to -0,5%, second month in a row of deflation, and the largest price fall since 2009.