Re: [A-List] US Fed Move Sparks ECB Dilemma + Not Following in the Fed's Footsteps?

["Hugh Whinfrey" <hugh@xxxxxxxxxxxx>]

Fact is though that the ECB appears to be doing a brilliant job
of keeping the Euro under 1.50. There is speculation out there now
that the French rogue trader story was a head fake aimed at
making the Fed overreact. I have no idea myself as to whether that's
true.

Regardless, as I understand, the ECB has various macro targets buried in 
its legal underpinnings that constrain it from playing the game that the 
Fed now awants it to play. So the Fed doesn't have a chance in hell 
of getting its way with this approach - as long as the Euro continues to 
exist.

The point being that Hudson's "monetarist jerks" sit in the law-making
bodies etc. that design the instiutions of Euroland rather than 
(necessarily solely) in the policy-making offices of the bank itself .

Hugh

 

----- Original Message ----- 
From: "Michael Hudson" <michael.hudson@xxxxxxxxxxxxx>
To: "A-List" <a-list@xxxxxxxxxxxxxxxxxxx>
Sent: Saturday, January 26, 2008 10:57 PM
Subject: Re: [A-List] US Fed Move Sparks ECB Dilemma + Not Following in the Fed's Footsteps?


Europe's crazy if it doesn't lower its rates. High rates are keeping the
euro high against the dollar, hurting Airbus sales and other exports. Good
news for Boeing to have such monetarist jerks running things.
    "Keeping rates high" means "keeping wages low." Always remember that
synonym.
    Michael Hudson


On 1/25/08 8:20 PM, "Yoshie Furuhashi" <critical.montages@xxxxxxxxx> wrote:

> What do you think, Michael and Nestor? -- Yoshie
> 
> <http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/25/cnecb125.xm
> l>
> US Fed move sparks ECB dilemma
> 
> By Ambrose Evans-Pritchard in Davos
> Last Updated: 12:56am GMT 25/01/2008
> 
> A serious conflict at the European Central Bank has broken into the
> open after Spain's finance minister revealed that a number of board
> members are pushing for an immediate rate cut in light of the
> emergency action by the US Federal Reserve week.
> 
> Pedro Solbes, the former EU monetary commissioner and now Spain's
> deputy premier, confirmed persistent reports that there had been a
> tug-of-war at the ECB headquarters, belying the faÃade of unity.
> advertisement
> 
> "An important debate is going on within the European Central Bank over
> whether or not to cut interest rates," he told the television station
> Telecinco.
> 
> While he did not elaborate, it appears that a bloc of governors from
> southern Europe and probably Ireland are deeply at odds with the
> hawkish anti-inflation stance of the German Bundesbank.
> 
> Jean-Claude Trichet, the ECB's president, gave no hint of the
> disagreements in a talk at the World Economic Forum in Davos. He stuck
> rigidly to the script that the chief threat to the eurozone is
> inflation, which reached 3.1pc in December - the highest since the
> launch of the euro. "There is one needle in our compass, price
> stability," he said.
> 
> This is "no time for complacency" over inflation, he said, implicitly
> playing down the danger of a credit implosion. The ECB continues to
> hold rates at 4pc. It has made no change since the credit crunch hit
> in August. Axel Weber, the hard-line Bundesbank chief, went further,
> insisting that rates are "still on the accommodative side and in no
> way restrictive."
> 
> This may be true for Germany which is lean after driving down wages,
> but it is another matter for Latin Bloc countries. The Spanish
> property bubble has burst, with prices falling in most of its cities.
> 
> Former US Treasury Secretary Larry Summers said the picture seemed to
> be darkening rapidly. "The outlook for Europe is being revised
> downwards. "
> 
> Julian Callow, Europe economist at Barclays Capital, wants a half
> point cut in eurozone rates by May. He slashed his growth forecast to
> 1.5pc in 2008.
> 
> The Spanish banks have been unable to place mortgage security debt on
> the market for five months, and are reportedly hoarding up to â40bn
> (Â30bn) in unsold issues for use as collateral at the ECB's liquidity
> window - if necessary.
> 
> Italian bonds are under heavy pressure as the Prodi coalition
> disintegrates, increasing the risk of a eurosceptic government. Until
> now the German orthodoxy has largely passed unchallenged but the
> crisis has brought tensions to a head.
> 
> Even the Austrian and Luxembourg governors - often described as the
> "attack dogs" of the Bundesbank bloc - have changed their tune,
> highlighting the growing risks of an economic downturn.
> 
> On the currency markets, the euro has failed to rally since the US
> rate cuts and the markets are betting that the ECB will be forced to
> cut rates soon.
> 
> <http://www.businessweek.com/print/investor/content/jan2008/pi20080125_132962.
> htm>
> Economic Focus -- From Action Economics January 25, 2008, 4:01PM EST
> text size: TT
> Not Following in the Fed's Footsteps?
> ECB officials show no signs of implementing rate cuts at the next
> policy meetingâand insist Europe can weather a financial downturn in
> the U.S.
> 
> by Natascha Gewaltig
> 
> The European Central Bank (ECB) has declined to comment on the Fed
> emergency move on Jan. 22, despite mounting speculation about an ECB
> rate cut at the next meeting. Euro zone officials are clinging to
> their hawkish inflation stance, though the markets have stopped
> listening to the ECB's rhetoric. We do expect a shift to a less
> hawkish stance at the meeting that would introduce the option of rate
> cuts in the future.
> 
> The sell-off in stock markets earlier this week was accompanied by a
> flurry of comments from ECB officials as well as politicians. ECB
> Executive Board member Juergen Stark and Jose Gonzalez-Paramo, as well
> as EU Commissioner Joaquin Almunia, indicated that stock markets may
> be overreacting. Stark said one should not dramatize the market
> correction and that current developments are "a necessary correction
> of excesses of the past". Almunia stressed that one should not
> overreact, and that U.S. imbalances are the "root cause" of the
> turmoil.
> 
> Almunia spoke after a meeting of European Finance Ministers, which
> indicates that he was representing the majority view of European
> governments. He said the EU is "well prepared to weather" the turmoil
> and stressed that EU fundamentals are sound. Meanwhile, Germany's
> Thomas Mirow said market losses are unlikely to affect the economy,
> and that the market turmoil is the U.S.'s responsibility. The EU still
> sees growth close to potential, even though Almunia indicated that
> growth rates are likely to fall short of last year's projections.
> 
> No Need for Change
> 
> Equally, ECB officials continued to stress that the main scenario is
> for growth around potential, and Bundesbank President Axel Weber said
> that he does not see the need for a change in the ECB's stance. Stark
> said that "the situation today is different from that at the start of
> the decade, when we also saw a clear slowing of economic growth" and
> repeated that "in the whole euro area the fundamental economic data
> are good." He pointed to favorable company profitability and stressed
> that households are better off than in other areas, where they are
> heavily indebted.
> 
> With growth still seen around potential, officials continue to stress
> that the ECB's main mandate is to secure price stability. Stark
> repeated that the ECB is closely monitoring developments and would
> react accordingly. Weber said the ECB has zero tolerance with regard
> to second round effects and firming inflation trends. And President
> Jean-Claude Trichet said on Jan. 22 that "particularly in demanding
> times of significant market correction and turbulences, it is the
> responsibility of the central bank to solidly anchor inflation
> expectations to avoid additional volatility." This was in line with
> Vice-President Lukas Papademos, who said that "at this juncture it is
> more important than ever that central banks continue to pursue their
> primary objective of price stability."
> 
> Weber followed this up on Jan. 23 with remarks stressing that ECB
> rates remain accommodative rather than restrictive, that the ECB
> should not "signal any loosening," and that markets may be pricing in
> "certain wishful thinking" regarding rates. However, while all this
> still sounds hawkish, with no sign that the ECB has abandoned its
> tightening bias, it seems almost impossible to believe that the ECB
> would deliver a rate hike in the current situation. True, inflation is
> running above 2%, but even Weber sees it gradually coming down toward
> the end of the year, and the central bank's hawkish rhetoric seems
> mainly designed to prevent high wage demands and second round effects.
> 
> This week's stock market losses, coupled with the public talking about
> a slowdown in growth and the possibility of a recession, may in fact
> make it less likely that unions will be able to secure large wage
> deals, as workers will start to worry more about job losses than wage
> gains. This should help the central bank to stay put even though
> inflation is likely to overshoot the ECB's upper limit of 2% for most
> of this year.
> 
> Decoupling Hope
> 
> So, what about a rate cut at the next meeting? At the last council
> meeting, the ECB did not even discuss the possibility of a cut and
> only considered a hike, which indicates how far the central bank has
> to go before rate cuts appear on the agenda. So far, officials still
> seem hopeful that the euro zone can partially decouple from the U.S.
> and sustain relatively robust growth.
> 
> This hope is not only based on the assumption that emerging markets
> will partly compensate for a possible slowdown in the U.S. but also on
> the hope that European housing markets will not see a crash similar to
> the one in the U.S. The recent episode confirms once again that
> financial market crisis tends to be triggered by house price crashes.
> European banks may have suffered from their involvement in the U.S.
> subprime crisis and will also feel the pressure from stock market
> corrections but have so far escaped a crisis on the domestic property
> markets.
> 
> Irish housing prices may have turned down, but Ireland itself is too
> small to set the trend for the euro zone as a whole. Germany, the
> largest euro zone country, avoided the housing boom in the first
> place. France, the second largest, has experienced a slowdown. But at
> 5.6% annual growth in the third quarter, French house price inflation
> still remains robust, and there is no sign of a crash. So far it looks
> as if the normalization of the French housing market is gradual and
> controlled.
> 
> The country that seemed mostly at risk of a sharp correction was
> Spain, the euro zone's fourth largest economy. Spanish house prices
> have more than tripled in the past 10 years. At the same time, the
> house price to income ratio in Spain has doubled in 10 years. The OECD
> warned previously that house prices are overvalued by as much as 30%.
> So far, however, the correction seems to be gradual and contained.
> House price inflation has come down successively, but at 4.8% annual
> growth in the fourth quarter, also remains relatively robust.
> 
> The Key Is Reform
> 
> Since there is no sign of a serious housing crash, the euro zone
> financial system appears in position to weather the storm. ECB
> officials also stress that reform efforts, and not cheaper credit,
> will be needed to boost European growth. In contrast to the U.S., the
> euro zone economy has been characterized by a marked slowdown in
> productivity growth over the past decade. An article in the ECB's
> latest monthly report points out that euro zone productivity growth
> since mid-1990 has decelerated to an average rate of just 1.3%, which
> is around 1.4 percentage points less than over the 1974-94 period. In
> the U.S., on the other hand, the rate of productivity growth
> accelerated to 1.9% on average, from an average of 1.4% over the past
> 20 years.
> 
> The stronger productivity growth in the U.S. was a driving factor
> behind higher growth compared with the euro zone's. U.S. growth
> accelerated to 3.1% on average between 1995 and 2006, compared with
> just 2.1% in the euro zone. This was only partially due to information
> & communication technologies (ICT), with the largest discrepancy
> between overall labor productivity and growth most apparent in the
> more traditional ICT using sectors. It seems European companies have
> not exploited the benefits of new technologies to the same extent as
> in the U.S.
> 
> Over the 1995-2006 period compared with the previous 15 years, euro
> area labor productivity growth fell in most non-ICT related sectors,
> and especially in market services, including distribution, financial,
> and business services. Yet, at the same time, it accelerated in the
> U.S. This could indicate there is still potential to boost
> productivity growth in the euro zone, provided governments press ahead
> with reforms designed to create an entrepreneurial-friendly
> environment, boost competition, and foster market integration across
> the euro zone.
> 
> Clearly, these are objectives that will not have an immediate impact
> on the economic situation. However, latest confidence data, including
> the manufacturing PMI and Ifo, came in better than expected. And as
> long as growth remains around potential, and interest rates are seen
> around neutral, the hawks at the ECB will argue that lowering rates in
> order to boost growth would only lead to an unsustainable boom-bust
> cycle. They may even point to developments on the U.S. housing market
> to support their arguments.
> 
> Nevertheless, comments indicate that at least national central bank
> heads are getting increasingly nervous about the growth outlook. In
> this environment, threats of a rate hike are looking out of place,
> even though stock markets have recovered, and we would expect a
> softening of the rhetoric at the next meeting. If the ECB effectively
> moves to a neutral stance, this would leave the door open for cuts if
> the euro zone economy turns out to be less immune to the U.S. slowdown
> than expected.
> 
> Gewaltig is director of European economics for Action Economics .