By Todd Buell
FRANKFURT (MNI) — Top European Central Bank officials have taken
to the airwaves in recent days to assure investors and citizens that the
bank’s recent extraordinary actions, specifically its decision to
purchase government bonds, neither endangers price stability nor
threatens the ECB’s hallowed independence.
Their comments come as GDP figures from Germany show that Europe’s
largest economy resisted the bad weather in early 1Q surprisingly well,
beating growth expectations with a +0.2% quarterly gain.
Last night ECB President Jean-Claude Trichet assured a major German
evening news show that the ECB will prevent inflationary pressures by
sterilizing the extra liquidity it injects by buying bonds.
“We are responsible for price stability in the Eurozone. Ensuring
price stability is our mandate and it is our firm commitment,” he said.
Trichet’s comments came after the program flashed black-and-white
pictures of the hyperinflation of the 1920s mixed with expert opinion
predicting a return to 1970s-style double-digit inflation.
Ordinary citizens also told the camera that they worry about the
value of their money.
That may help explain why Juergen Stark, a German member of the
ECB’s Executive Board and a superhawk, went on German public radio this
morning offering assurances that although inflation would be “somewhat
higher” this year than last, there will still be price stability.
“I see no inflation danger for the foreseeable future,” Stark
stressed. As long as economic momentum does not accelerate, the danger
of higher inflation that is currently manifesting itself in some
emerging economies will not materialize in the Eurozone, he predicted.
Stark insisted that the ECB’s decision to buy government bonds as
well as private debt securities will not change that. The bond buying
program is not inflationary because “the excess liquidity is being
collected again and there arises no inflation pressure,” he argued.
“We’re not printing money.”
However, the question is how long economic momentum in the Eurozone
will remain moderate. And what will happen to price stability — or more
precisely, the ECB’s monetary policy — if there is a multi-speed
recovery with Germany taking the lead while peripheral countries such as
Portugal, Ireland and Greece lag behind?
Given its historical reliance on exports, Germany is better
positioned than other Eurozone countries to take advantage of robust
global demand. Such a development may already be spurring German
investment and even producing a labor market recovery.
Today’s German GDP data provide additional fodder for Germany
bulls. Surpassing most expectations, GDP grew by 0.2% on the quarter.
Inventories, public consumption and exports contributed to the robust
gain, while weak private consumption only partially offset them.
The lack of consumer demand is helping to keep the recovery subdued
and therefore reducing the chances of demand-led inflation in Germany
and other Eurozone economies.
In France, sluggish private consumption contributed to a
below-expected first quarter GDP figure, which came in at only +0.1%.
French domestic demand is likely to remain weak in coming quarters as
unemployment rises and public spending shrinks.
Yet Germany and France both seem firmly on the path to recovery.
Not so for the peripheral countries, where immense challenges remain.
Greek first quarter GDP figures, released today, showed a contraction of
0.8% on the quarter and -2.3% y/y. A drop in public consumption, due
undoubtedly to the belt tightening efforts underway there, was one of
the main culprits, the statistics agency said. The country is facing the
likelihood of a 4.0% drop in GDP this year.
Spain, another struggling peripheral country, today announced
significant budget-cutting measures. The combination of public-sector
wage austerity and a VAT rise as of July will likely produce a
reduction of economic output in the second half of this year and in
early 2011.
Economic weakness is prompting the ECB to take an increasingly
skeptical view of adding more smaller and weaker countries to the single
currency bloc.
In Estonia, scheduled to enter the Eurozone on January 1, 2011,
maintaining inflation at the low levels required for Eurozone entry will
be “very challenging” over the medium term, even if the country is
currently satisfying that criterion, the ECB warned.
“Once output growth resumes, with a fixed exchange rate regime, the
underlying real adjustment is likely to manifest itself in higher
inflation,” the bank said.
Ultimately it is the European Council that decides on Eurozone
membership, not the ECB, and the recommendation comes in the first
instance from the European Commission. Indeed, the Commission today
lauded Estonia for its efforts at convergence and said it “is ready to
adopt the euro on January 1, 2011.”
In its skepticism, the ECB is eyeing the very real risk that should
there be a two-, or multi-speed, recovery in Europe, it will further
confound monetary policy. Should German and French consumers, for
example, finally become more willing to open their pocketbooks, then
demand-side price pressures might give an upward push to inflation.
This development, if combined with a rise in commodity prices and
an increase in imported inflation because of a weakened euro, might
force the central bank to hike rates or withdraw liquidity faster than
it had intended.
A faster rate hike would in turn jeapordize the efforts of
peripheral EMU states to reignite economic growth. It would, of course,
underpin the bank’s credibility on price stability, but it might require
the ECB once again to trot out its leading officials once again to
defend unpopular moves, this time in the face of jobless queues, closed
businesses, riots or worse.
–Frankfurt bureau; +49-69-720142; tbuell@marketnews.com
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