FRANKFURT (MNI) – Strong data out of the Eurozone’s biggest
economies reinforce the idea that the recovery from the worst recession
since the Depression is taking hold.
Greece’s decision Friday to activate the E30 billion EMU/IMF aid
plan has not yet tempered the market selloff of Greek sovereign debt.
Indeed, in recent days – despite Greece’s official request for aid,
which many thought would bring relief to markets — spreads on Greek
bonds have hit successive new record highs, making the cost of
government borrowing untenable.
If these events are portents of things to come, then they
exacerbate the existing risk that the Eurozone could be heading toward
an unusually perilous two-speed recovery with “core” Europe taking the
lead and peripheral countries falling behind.
This movement could have disastrous consequences for monetary
policy if the guardian of the currency, the ECB, is forced to hike rates
earlier than anticipated. Such a move might curb inflation, but it would
make the cost of doing business higher everywhere and raise debt
servicing costs for the already heavily-indebted peripheral countries in
Europe.
Despite briefly falling moments after Friday’s decision by Greece
to formally request the aid package, the yield on 10-year Greek
government bonds soared again Monday, hitting 9.00% — the highest level
since the advent of the Eurozone. The spreads between German and Greek
10-year bonds hit 650 basis points at one point Monday, also a record.
Meanwhile, economic data this week, at least in the principal EMU
countries, has been extremely encouraging. Germany’s Ifo index, by far
the most market-sensitive of the data releases, shattered expectations
by hitting 101.6 in April. Ifo said that German companies were
considerably more satisfied with the current business situation.
In view of the outlook for the second half of the year, firms
reported that they were “more optimistic than before,” Ifo said, adding:
“The German economy has shifted into a higher gear.”
French consumer spending on manufactured goods also rebounded more
than expected in March, as outlays grew across the board.
And joining in all the rosiness was the Eurozone flash consumer
confidence index for April, released Thursday afternoon. This showed an
increase of 2.1 points from March.
Thursday’s April flash PMI data for manufacturing and services for
France, Germany and the Eurozone, also surprised on the upside, in some
cases breaking multi-year highs.
Yet even if businesses and consumers in the large Eurozone
countries — and some of the smaller, better developed ones — are
starting to see a clearer recovery, the Greek crisis remains an
omnipresent reminder that things are not yet back to normal.
Despite the announcement Friday that the country would seek aid
from the EU and the IMF, markets have remained volatile. This, and
recent comments from members of the Governing Council, strongly suggest
that the ECB will not depart anytime soon from its current monetary
policy course: a gradual withdrawal of extraordinary measures, and no
rate hike until probably early next year.
Such a strategy is almost certainly good for the aggregate health
of the Eurozone economy, as being forced to raise interest rates too
quickly to stop a few overheating Eurozone economies could undermine
growth everywhere else.
Thus, Council member Ewald Nowotny told Market News International
over the weekend that “it is important for monetary policy that no such
divergence occur” among Eurozone countries.
Council member Guy Quaden also told MNI that even though harmonized
consumer inflation bounced unexpectedly in Europe last month, the
development was “starting from very low inflation levels.”
Prevailing HICP as well as “inflation expectations remain at a
level compatible with our definition of price stability,” Quaden
assured.
As for the ECB’s policy stance, “we will have to discuss and to
assess the situation month after month, but for the time being it seems
to me that our interest rates are still appropriate,” he said.
Although recent utterances from Juergen Stark and Axel Weber
suggest inflationary risks are tilted to the upside, a faster move into
a rate hike or a withdrawal from extraordinary measures seems unlikely.
Hiking rates earlier than markets expect would not only hamstring
the Eurozone’s still inchoate recovery, but risk putting more pressure
on Greek government bond yields.
These arguments make it seem likely that as long as inflation and
inflation expectations remain under control, which nobody contests at
the moment, the ECB will not deviate from its set path.
—
(April 21, 2010)
FRANKFURT (MNI) – The latest Comments from European Central Bank
Governing Council member Axel Weber offer further evidence of an
emerging split at the ECB over how to interpret the most recent
inflation readings.
“While inflation risks are low in the short-term, they are still
pointed upwards,” Weber said Tuesday.
Diverging from the official line of “broadly balanced” inflation
risks, Weber’s comments backed those of fellow arch-hawk Juergen Stark
who had warned Friday that “all in all, risks to the inflation outlook
seem to be tilted to the upside.”
Weber, who heads the Bundesbank, pointed to March’s spike in the
euro area’s harmonized consumer inflation figure to 1.4%, saying it was
“not far away” from the ECB’s price stability definition of close to but
below 2%.
Nout Wellink, on the other hand, assured that the “little bit of a
surprise” in last month’s Eurozone HICP “hasn’t changed and our
appreciation of what’s in front of us hasn’t changed during the last few
months.”
Erkki Liikanen on Tuesday observed that “price developments and the
underlying pace of monetary expansion are expected to remain moderate
over the policy-relevant horizon.”
In its World Economic Outlook, that International Monetary Fund on
Wednesday also observed that Eurozone “recovery prospects are still
sluggish, and so inflation pressures remain subdued.” It advised the ECB
to “keep interest rates exceptionally low.”
Stark and Weber, the two Germans on the Council both confirmed that
interest rates remain appropriate and that an exit from the ECB’s
ultra-loose monetary policy still appears a long way off. Nevertheless,
Weber’s and Stark’s inflation warning show that the hawks are beginning
to poke their heads above the parapet.
Weber argued for rapid action once it is time for the rate cycle to
turn.
“What can be expected from monetary policy is a symmetrical
reaction to financial imbalances meaning that quick rate cuts during a
crisis go hand in hand with quick rate rises after the crisis.”
A perfectly symmetrical approach of the kind described by Weber
would require the ECB to raise interest rates by some 325 bps within
just seven months.
The monetary policy debate in the Eurotower is becoming more lively
again.
–Frankfurt newsroom +49 69 72 01 42; Email: tbuell@marketnews.com
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