EU Economy: Euro-zone political divisions undermine ECB policy plans - by Nicholas Spiro

Ever since the euro-zone crisis escalated dramatically in the autumn of 2011, financial markets have been clamouring for a programme of large-scale government bond purchases by the European Central Bank aimed at restoring confidence in Europe's ailing economy.

After successive disappointments, the issue for investors is not whether the central bank has the gumption to act, but whether the deep disagreements among the 25 members of the ECB's governing council have caused irreparable damage to the bloc and the single currency.

Germany's influence looms large over the management of the euro-zone crisis - and particularly over the conduct of European monetary policy.

While Germany's central bank, the Bundesbank, has long been a staunch opponent of government bond-buying on the grounds that it blurs the lines between fiscal and monetary policy and, if unlimited in size, would be illegal under the European Union's core treaty, its government has been more pragmatic.

It even gave its blessing to the ECB's 2012 bond-buying programme, which was known as outright monetary transactions.

However, Berlin's stance on a large-scale stimulus programme for the euro zone has hardened significantly over the past few months, and can now best be described as "Bundesbank lite".
Angela Merkel, Germany's chancellor, has become more concerned about the unintended consequences of monetary stimulus.

The outright monetary transaction scheme led to a 2½-year-long period of calm in euro-zone financial markets, which relieved pressure on governments (in particular those of Italy and France) to undertake important fiscal and structural reforms.

As far as Germany is concerned - and indeed in the view of many euro-zone watchers - sovereign quantitative easing is not the answer to Europe's underlying problems, which are a dearth of labour and product market reforms to boost competitiveness and increase the bloc's long-term growth rate.

What is even more worrying is that investors themselves have little faith in the effectiveness of quantitative easing.

The results of a survey of economists published earlier this month showed that while the vast majority believed the ECB would undertake sovereign quantitative easing, most were of the view that a large-scale bond-buying scheme would do little to boost growth and inflation.

The disconnect between the certainty that full-blown quantitative easing would be launched and the lack of faith in its efficacy is striking and is the strongest sign yet of the widespread waning confidence in central banks.

Yields on euro-zone government bonds have fallen sharply over the past few months because investors expect deflation - or, at the very least, "lowflation" in the words of the International Monetary Fund - to persist for a considerable period of time.

According to Bank of America Merrill Lynch, the volume of negative-yielding government debt in the euro zone has more than doubled from about €500 billion (HK$4.5 trillion) in October.
Equity markets are more sanguine about the likely effects of quantitative easing.

German stocks have risen 2 per cent over the past three months on hopes that sovereign quantitative easing will weaken the euro further - Europe's single currency has already lost a further 7 per cent against the US dollar over the past month - and provide a fillip to Germany's export-driven economy.

Yet, the sharp decline in the euro is hardly a sign of confidence in the single-currency area.

If the price that the ECB must pay to get sovereign quantitative easing off the ground is that national central banks shoulder the risks of buying their respective governments' bonds, serious questions could be raised about the supposed singleness and integrity of the euro zone.

A bond-buying programme big enough to mask the political and technical weaknesses of the scheme is not going to repair that damage.

Read more: Euro-zone political divisions undermine ECB policy plans | South China Morning Post

EU Economy: Why Would Anybody Adopt the Euro in 2015? - by Adam Chandler

On Thursday,January 1, 2015 Lithuania became the 19th country to join the euro-zone. The move made it the last Baltic nation to adopt the currency, and the timing was inauspicious—the euro looks more and more like an economic death sentence as depressions spread across the continent.

Proving skeptics right, less than 24 hours later, the currency's value dropped to a four-year low after European Central Bank President Mario Draghi seemed to suggest that the bank might start printing money to combat what he called "excessively low" inflation. The Financial Times noted that with the latest dip, the euro's value "has fallen by 12 percent against the dollar in the past six months."

And just as Lithuania has joined the club, Greece appears to be considering getting out as it heads toward elections with the hard-left Syriza party, currently leading in the polls, threatening to leave the euro-zone if it wins.

So what's driving Lithuania to join a flailing, unsteady economic partnership? A political link to the West seems to be one answer, and the threat of Russia would be another. As Matt O'Brien noted at Wonkblog,"it's no coincidence that Lithuania's support for joining the euro has gone from 41 percent in 2013 to 63 percent today in the wake of Russia's incursion into Ukraine."

Driving home the point, at a ceremony on Thursday, Lithuanian Prime Minister Algirdas Butkevicius offered that the euro would “become a guarantor of both economic and political security.”

Read more: Why Would Anybody Adopt the Euro in 2015? - The Atlantic

Euro zone morale reaches two-year high in September but mood in the Netherlands worsened by 0.9 points - by Martin Santa

Optimism in the euro zone's economy brightened for the fifth month running and hit a 2-year high in September, driven by improving confidence across all sectors and confirming that a recovery is underway.

The European Commission said on Friday the 17-nation bloc's morale rose faster than expected to 96.9 from 95.3 in August, the best reading since August 2011.

In the wider European Union, confidence was up by 2.4 points to 100.6 points, taking the indicator above its long-term average for the first time since July 2011.

In the euro zone, the positive trend was particularly strong in three out of the bloc's five largest economies, with Spain and Italy rising by 2.5 points and France up by 1.6 points.

Sentiment in Germany, Europe's biggest economy, was broadly unchanged, while the mood in the Netherlands worsened by 0.9 points in September.

Across the bloc, employment plans were revised upwards in industry, services, retail trade and construction, the European Commission said.

Almere-Digest

Euro to Beat Dollar? On Draghi’s Genius - by Axel Merk

Investors have not woken up to it, but last week may have been a game changer. European Central Bank (ECB) President Draghi took tail risks out of the euro zone, while at the same time forcing closer fiscal integration. He did it all while keeping the ECB out of some political minefields. It's pure genius. The initial market reaction suggested he might have lost a battle, not realizing that he is winning the war.

Dismayed by a dysfunctional process caused by a lack of leadership and the increasing risk of some of the worst case scenarios playing out, we have been staying away from the euro in our hard currency strategy. As of late last week, those dynamics changed: we are giving the euro another chance, not only because of substantial short covering potential, but also because Draghi’s “whatever it takes” approach might bring about seismic changes in how European integration, fiscal and monetary policy move forward.

In essence, Draghi told the world that the ECB will act like a central bank of a United States of Europe if the integration of European fiscal policy accelerates. The “integration” process hasn’t worked particularly well. In the early years of the euro zone, peripheral euro-zone countries used cheap access to financing to live beyond their means. Now, the markets have serious doubts about the sustainability of the finances of weaker Eurozone countries. To regain the markets’ trust, governments have nibbled with austerity measures. While the respective governments will take offense to us using the term “nibble” at their hard fought progress, governments have not been able to reduce their debt loads.

Politicians blame the high cost of borrowing and speculators. Unfortunately, as long as debt is merely shuffled around, no matter how big any aid package may be, it is unlikely to bring long lasting relief. In an effort to regain the trust of the markets, governments must engage in credible structural reform. Ireland has successfully gone down this path, but politicians have so far been unable to do the same in Spain, Italy and Greece. In Spain, Prime Minister Rajoy enjoys an absolute parliamentary majority and has no excuse. Italy is run by a technocrat; as such, the market is rightfully suspicious. Greece, well, is in a category of her own.

To break the debt spiral of these weaker countries, the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) have been put in place. Accessing these facilities comes with a hefty price tag: giving up sovereign control over one’s budget. However, that’s exactly what a United States of Europe needs: tight fiscal integration. While access to the bailout facilities reduces the immediate cost of borrowing, it may also shut the door to selling bonds in the markets at palatable cost.


Read more: Euro to Beat Dollar? On Draghi’s Genius | Resource Investor

S&P, Geithner and Company: Stop mingling in EU Affairs

It all is starting to look like a lot of unwanted heavy handed US pressure on Europe. 

Just days before EU leaders convene for a do-or-die crisis summit in Brussels, US based Standard and Poor's announced it was putting the sovereign debt of almost all eurozone countries, as well as the bloc's 440-billion-euro ($590-billion) bailout fund, on review for a possible downgrade. France, Germany, and leaders of all the 17 euro-zone nations were angered by Standard@ Poor's decision to put almost the entire bloc on credit watch, just as the single currency is desperately fighting for its survival. At the same time U.S. Treasury Secretary Timothy Geithner, on a trip in Europe, put even more negative pressure on Europe by saying that he was worried: "the eyes of the world are very much on Europe."

The German media turned on S@P for timing its announcement to coincide with this week's frantic search for a solution to Europe's debt crisis.The website of the German newspaper Handelsblatt reported resentment and indignation, with political and banking figures highly critical of the agency.

Christian Noyer, the president of Banque de France accused rating agencies of acting as "one of the motors of the crisis in 2008" and said it could be asked whether they were playing the same role now. Mr Noyer said that in the light of Monday's Franco-Germany agreement on far-reaching measures to tackle the crisis, the agency had mistimed its announcement as well as relying on methodology based more on political than economic factors.

Even outside the euro-zone, some eyebrows were raised. Alastair Campbell, who was press secretary to Tony Blair when the latter was British prime minister, said on Twitter it was time for television documentary makers to "shine a light" on ratings companies.

EU politicians have long been waging a war against the huge power of the rating US based ra6ting agencies and some denounced S@P's moves as a bid to deflect attention away from the United States' much bigger — and potentially even more dangerous — debt mountain.

Unfortunately the problem is that the U.S. media landscape is dominated by massive Wall Street traded corporations have , through a history of mergers and acquisitions concentrated their control over what people see, hear and read, not only in the US, but also around the world. In many cases, these giant companies are vertically integrated, controlling everything from initial production to final distribution. Recently they have turned their wrath against Europe, which has been actively trying to get the world to put stricter controls on free-wheeling Wall Street speculators, the banks and the financial community in general.

Said one EU parliamentarian: "We don't need US credit rating agencies here. As to Mr. Geithner,  please pack your bags, go home and deal with your own country's problems.  Don't tell Europe what to do.

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Like it or not, the euro zone will remain intact, hatching a United States of Europe. - by Michael Goldfarb

Euro Crisis? What euro crisis? That's so last week. The American debt ceiling kerfuffle — now that's a crisis.

That's the attitude around Europe at the moment, following yet another deal last week to postpone Greece's inevitable bankruptcy. Not even the declaration by rating agency Moody's that Greece was almost certain to default, nor the continued rise of Spanish and Italian interest rates has shaken the continent's confidence.

Long time observers of the euro zone understand that brinkmanship — and then a last minute agreement forged by France and Germany — is the way things get done in the world's largest trading bloc.

Vince Cable, Britain's business secretary told the BBC last weekend, "The biggest threat to the world financial system comes from a few right-wing nutters in the American Congress rather than the euro-zone."

For more: With the Euro in crisis, is Europe finished?

Europe Default-Insurance Costs Soar - by Mark Brown

The cost of insuring European sovereign and corporate debt against default using credit default swaps jumped higher in early trading Friday, as the intensifying euro-zone debt crisis and fears of a global slowdown hit financial markets around the world.

The SovX Western Europe index, which investors can use to buy or sell default protection on a basket of 15 sovereign borrowers, was 12.5 basis points wider at 305/311 basis points, according to index owner Markit.

CDS function like a default insurance contract for debt. A widening of one basis point in a five-year CDS spread equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years.

For more: Europe Default-Insurance Costs Soar - MarketBeat - WSJ

European Unemployment Fell in February, Led by Germany, Italy - by Simone Meier

European unemployment fell in February as companies from Germany to Italy added workers to meet reviving global demand, offsetting job cuts in debt- burdened Spain.

The 17-nation euro region’s seasonally adjusted jobless rate fell to 9.9 percent from a revised 10 percent in January, the European Union statistics office in Luxembourg said in an e- mailed statement today. At 20.5 percent, Spain had the highest jobless rate and the Netherlands the lowest, with 4.3 percent.

For more: European Unemployment Fell in February, Led by Germany, Italy - Bloomberg