QE: Lost In Contradiction: The IMF And Competitive Wage Dumping In The Euro Area - by Ronald Janssen

A staff discussion note published recently by the IMF addresses the argument that squeezing wages across a large part of the euro area is dangerous and deflationary as it will not improve anyone’s relative competitive position while undercutting domestic demand everywhere.

 Since the IMF has always been a staunch advocate of the ongoing euro area experiment of substituting currency devaluation with wages devaluation, it is worth taking a closer look at its work.

The IMF bases its findings on a simulation whereby nominal wage growth in a set of five countries representing an economic weight of 30% of the euro area (Greece, Italy, Spain, Portugal, Ireland) is reduced by 2 percentage points over the course of two years. Importantly, this simulation is carried out under the assumption that the ECB’s hands as regards cutting its interest rates are tied because these rates are already hitting the zero mark. It is also assumed that lower wages growth is fully passed on into domestic prices, implying that there are no cuts in real wages.

Note EU-Digest: QE - Money printing presses going full speed and major dangers lie ahead for the US, EU and Japanese economies. When they come they will make the 2007/2009 economic crises look like child's play.

Read more: Lost In Contradiction: The IMF And Competitive Wage Dumping In The Euro Area

ECB: Draghi: More risks to growth outlook have emerged - by Jenny Cosgrave

QE ?

Further downside risks to euro area's growth and inflation outlook have emerged as a result of currency headwinds and weakness in commodity prices, President of the European Central Bank Mario Draghi warned.

Draghi said slowing growth in emerging markets, a stronger euro and the fall in oil prices were the main factors hurting the outlook for growth, but that more time was needed to assess if the central bank would release further monetary stimulus as a result.

"As a result, renewed downside risks to the outlook for growth and inflation have emerged. For many of these changes, it is too early to judge with sufficient confidence whether they will cause lasting slippage from the trajectory that we initially expected inflation to follow when we decided to expand our asset purchase programme in January," Draghi said in a speech addressed to the European Parliament's Committee on Economic and Monetary Affairs.

The central bank chief also said that it was too soon to determine how bad the loss of growth in emerging markets was and whether the economic situation seen in the region was temporary or permanent.

"We will therefore monitor closely all relevant incoming information and its impact on the outlook for price stability," he added.

The Frankfurt-based ECB committed to pump some 1.1 trillion euros into the currency bloc earlier in the year in an effort to revive the euro zone's drooping economy and lackluster inflation outlook.

Read more: Draghi: More risks to growth outlook have emerged

QE ECB: Germany wary of ECB quantitative easing, World Bank warns reforms needed as well

European stock markets were boosted by the European Central Bank’s bond-buying scheme with several share indexes hitting seven-year highs on Thursday.

Banks and car makers were among the best-performer companies as they are likely to benefit from cheap lending rates and a weaker euro.

But the head of the World Bank, Jim Yong Kim, told euronews that on top of the bond purchases, eurozone governments also need to do more to reform their economies.

Referring to the bond buying he said: “This is a tool and it should be used, because the potential to have a self-fulfilling and continuous deflationary cycle was very real. The other half of this is that there’s still not enough to really solve the problems. You know, the countries that are in the most trouble, have to move forward with their reform agenda.

What an opportunity! We have historically low oil prices and now we have a quantitative easing. This is now the time to really jump in.”

Germany was the least enthusiastic with economists, politicians and business leaders there warning this is taking the euro system deeper into unchartered territory.

Hans-Werner Sinn, the head of the influential Ifo economic think-tank, called it “illegal, unsolid state financing by printing money”.

Note EU-Digest: Mario Draghi the ECB Chairman who used to be a Goldman Sachs employee is going on a slippery slope with QE financing - Given Draghi's US related banking experience and link with the Goldman Sachs Financial corporatio - whose financial history is not one of sound and honest practices puts up a lot of red flags.

Read more: Germany wary of ECB quantitative easing, World Bank warns reforms needed as well | euronews, economy

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

France, Germany and Italy urged to follow Spain’s lead to revive eurozone

France, Germany and Italy must agree to jolt the eurozone economy back to life or face a long period of low growth, low inflation and an increasing debt burden, according to a stinging report by the Organisation for Economic Cooperation and Development (OECD).

The Paris-based thinktank, which counts the world’s major trading states as members, said Spain and other smaller countries had shown the way by pushing through reforms to reorganise their economies while the core nations were locked in discussions over how to lift growth.

Speaking before a meeting of world leaders at the G20 summit in Brisbane, Australia, this month, the OECD’s chief economist said eurozone governments needed to support efforts by the European central bank to lower borrowing costs in addition to boosting public spending on education and infrastructure investment.

Catherine Mann said: “Fiscal spending in the near term to support innovation, education, and infrastructure will both support near-term growth as well as turn back the legacy of low potential output and complement the engines of trade and investment.”

She praised Spain and other countries hit hard by the 2008 financial crisis for restructuring their banking sectors and driving down labour costs to revitalise the economy. She said the continent’s core countries needed to unlock the potential for growth in their economies with a similar programme of reform.

EU-Digest