Even though the European public is by now used to ludicrously large sums the amount of the ECB’s latest interventions should raise concerns. The QE programme for sovereign bonds saps up bonds worth €80b every month, a quarter of it German. Now the ECB has put their eye on another way to shower the continent with freshly printed money: corporate bonds. As if sovereign debt QE wasn’t problematic (and ineffective for that matter) enough, as the experience of last year showed. Continue reading ECB’s bond purchasing programmes are reckless in several ways
There was a little Twitter exchange on the nature of the ECB’s QE programme between Paul de Grauwe and Marcel Fratzscher. Paul sees QE as a sort of debt relief and asks why the ECB grants such relief to Germany, France and Italy but not to debt-burdened Greece. If you think of QE as a sort of debt relief, Paul’s question is legitimate, after all Greece would benefit most from a debt relief. But that is not what QE is or should be. Continue reading QE is no debt relief
A while ago on a German train station, I saw a conductor telling a group of people that smoking is prohibited in this station. He was laughed at and ignored. Later on a passenger next to me on the train told the conductor, how glad he was that he stood up to the smoking people and reminded them of the rules. The conductor replied that it is sadly not in his power to enforce the smoking ban in German stations – and not his job for that matter. This would be the job of DB Security, a subsidiary of Deutsche Bahn, who (together with the German Federal Police) is responsible for the security of German train stations and have the means to enforce the rules. The passenger complained that all the security personnel making their rounds do rarely remind people of the smoking ban and even more rarely enforce it. An observation I can confirm. The conductor shrugged “A lot is changing” to which the passenger replied “Unfortunately”.
We could now dismiss this little story as an unimportant chat of people unhappy about change, but I think there is more to it. It is not a story about change but about rules and how unenforced rules makes people unhappy.
Currently in Germany’s Top 40 Radio Charts is a song by Max Giesinger called “80 Millionen”, where the singer muses about the incredibly small chance of meeting his lover, a chance of one in eighty million, the rough-and-ready number of the German population. Though 81.8 million would be the more accurate number, for reasons of song-writing eighty million is fine. The singer also admits that he “was never good at probabilities” but he remembered that the chance of meeting her (or him for that matter) approaches zero. Now the probability of meeting, falling in love and actually being together with one particular person is indeed close to zero – in the literal frequentist view it is one over eighty million, which is zero for all practical purposes, even for matters of the heart in which the brain has little say. The thing is, a purely frequentist approach is plain wrong. Luckily for Mr Giesinger, the chances are much better than he thinks. Continue reading One in arguably a few thousand
I am currently working on an estimation of a monetary union model I set up for my PhD thesis. For this, I need quarterly data of the output gap of Germany and France, which is surprisingly hard to come by. So I estimated it myself using real GDP data from Eurostat (unadjusted, chain-linked). For a very first glance, I de-seasonalised the data via moving-averages. After that, I employed the modified Hodrick-Prescott filter (mHP) as suggested by Bruchez (2003). Yes I know, the HP and mHP filters have their drawbacks and weaknesses, but they are nevertheless useful for a first look on the data.
While Europe’s ongoing economic crisis has revealed fundamental construction errors of the economic and monetary union, the migrant crisis reveals similar faults with Europe’s borders-be-gone Schengen scheme. If the Schengen accords are to survive – and by all means they should – we have to come to terms with the consequences of near-abolishing all internal borders, even if they are hard to accept for politicians and voters. Until now, these consequences were either unknown or ignored, a laziness we can no longer afford. Schengen is an integral, visible and practical part of the peaceful European unification and has to be preserved for practical, political and economic reasons. The pursuit of ever-closer union entails costs, some of them political, such are Schengen’s costs. But as the personal and economic benefits of the accords greatly outweigh the costs, European politics and voters must accept a certain sovereignty loss. Although Schengen is over twenty years old, its completion was not pressing until last year’s onset of the migrant crisis – or it was not seen as pressing. However, it is pressing now. Continue reading Schengen has some inconvenient consequences
There have been leaks of alleged minutes of an IMF high rank conference call about Greece. Allegedly, Poul Thomsen, Director of the IMF’s European Department and his colleagues agreed that Greece only decides on the brink of default (p. 6). While Thomsen is right that Greek decisions are taken in the most effective way only close to default, there is little the fund could do about it. Greece is technically insolvent and is only able to keep on going with the extensive support of the ECB (and the ESM), in fact it is only political will that keeps Greece afloat, so the whole arrangement is near-default anyway. So, the only institution able to exert influence on Greece is the ECB. But the fund is not at all in a position to have a sizeable influence on the developments in Greece anyway, neither economically, since the Greek debt is guaranteed by the ECB’s various unconventional monetary policy programmes, nor politically, since they are currently not taking part in the “rescue” programme. The IMF wants a debt cut (which German chancellor Angela Merkel refuses) and will until then stand on the sideline. Continue reading The IMF, Greece and the ECB
So, everybody and their grandmas are discussing something so absurdly wacko, that just a few years earlier, even mentioning it could very well cost you your professional reputation. But in times of QE and negative rates, the perception of “throwing money off a helicopter” is relatively less crazy. In absolute terms of course, it is still nuts. Continue reading Helicopters are for real disasters
New numbers of the consumer price index sparked again a debate about what monetary policy can do to fight off European deflation and thence the economic glum across the continent. In brief, in February the HICP fell by 0.2 percentage points an an annualised basis. Since the average HICP is the ECB’s preferred gauge for “inflation”, this would suggest further loosening of monetary policy – not to mention that monetary
policy is as loose as it never has been, and this for years. So you may have noticed that I have put the term inflation in quotes, since inflation is something else, but not (really) the change of the HICP. Continue reading Inflation is inflation is inflation. Or not?
As was expected, today the ECB cut its penalty interest rates on banks’ deposits further into negative territory to 0.4 from 0.3 per cent. Additionally, the ECB also cut its main refinancing operations rate to zero from 0.05 per cent and increased the volume of its QE purchases to 80 billion Euro per month, from 60 billion. As always, the ECB cited sub-par inflation due to slow credit growth as the reason for this policy move.
To my mind, this policy move is merely cosmetic, to keep up the mirage of the ECB’s prowess, where there is actually nothing Frankfurt’s Ostend can do to end Europe’s slump. For years now, Europe is stuck in a liquidity trap. And as we all know, in a situation where the transmission mechanism is broken, more liquidity will not help, that’s why it is called a trap. It seems worth to repeat, that no central bank, no matter how powerful, can monetise away a liquidity trap. Not even the ECB, not even with the fancy, shiny new policy tools of negative rates or QE. Europe’s problem is not liquidity supply, given QE and ultra-low interest, ultra-long provisions, money is everything but scarce. But two features of Europe’s economies make all this supply virtually void.