OMOs vs QE

In the panel discussion about monetary and fiscal policy at the Lindau Nobel Meeting in Economic Sciences, Prof. Martin Hellwig remarked that he doesn‘t see such a huge difference between quantitative easing (QE) and the open market operations (OMO) that central banks normally use as a main tool of implementing monetary policy, in the case of the ECB these OMOs are by and large the main refinancing operations (MROs). I thought about Hellwig’s remark and my conclusion is this.

On the surface there seems to be in deed very little difference from both implementation and (supposed) effect on the money supply and term structure. The central bank buys securities from banks and credits their accounts with newly created fiat money.  Still, rather remarkable differences are in the details.

Continue reading OMOs vs QE

Lindau Nobel Blog: On the Future of the Euro Area

I have written a little something on the Euro area, its current weaknesses and challenges and some suggestions of how to overcome them or at least improve on the current situation. Read it at the Blog of the Lindau Nobel Laureate Meeting on Economic Sciences:

Thanks to the LNLM blog for giving me the opportunity to write it there.

Euro Area Inflation still points to excess capacity

Today, Eurostat published the new flash estimate for Euro Area inflation in July. The inflation rate (i.e. HICP inflation compared to July 2016) is at 1.3%, so not much has happened since June, when the figure was 1.4%. The flatness of the inflation rate may partly be explained by the usual seasonal, where in July and August, price increases tend to remain flat.

Euro Area Inflation Rate (July 2017, Flash estimate). Source: Eurostat

But the disaggregated figures provided by Eurostat point to more. Energy prices have increased by 2.2%, while food and services prices increased in line with the overall rate. Falling short, however, are industrial goods prices. This points to two insights. First, energy still seems an important driver of the inflation rate, which makes it difficult for the ECB to use the HICP as a meaningful yardstick for monetary policy, as I have argued before. Second, while services become more expensive and make use of more capacity, i.e create more jobs and/or increase the wages, the industry has still a lot of slack. This wouldn’t be a problem, if services would soak up all the excess labour, but this is unlikely. Further, as prices in the industrial sector increase only sluggishly, firms have little incentive to invest in new machinery, hire new workers and increase wages, all of which would be necessary. Unfortunately, there is only little the ECB could do. Investments should increase along with confidence which tends to come in tandem with political stability, a lesson especially for Italy and Spain.

Update, August 31, 2017:

The new flash estimate by Eurostat for inflation in August ist basically in line with the numbers a month ago, although energy prices stoke inflation by almost 4%, i.e. twice as much as in July. Thus, the main take-away hasn’t changed: Subdued industry inflation and services inflation below target point to excess capacity in the economy. No need for the ECB to tighten.

After the French election

Now that the French have fortunately elected a sane, reasonable centrist as president, let‘s talk a bit about the future of the Euro area, as Mr Macron envisions it. The new president advocates a Euro area budget, common bonds, a Euro area finance minister and an economy minister, further a common unemployment insurance for the whole of the EU. None of these points are actually crazy, but I think Mr Macron does not quite realise what his ideas actually entail and how some compromises may look like, if Germany is to go with it. Continue reading After the French election

One Swallow Doesn’t Make A Summer

Today Eurostat announced that the Euro area’s inflation rate (as measured by the HICP) has reached two per cent in February (see press release here: While seems finally some good news for the crisis-battered Euro area, it actually isn’t. Here’s why. Continue reading One Swallow Doesn’t Make A Summer

On ifo’s accountability bonds

In a recent press statement, ifo’s President Clemens Fuest argues for second-tier “accountability” bonds that would allow debt above the current limits of the Maastricht criteria, but with strings attached. From the statement:

Fuest and Becker propose that states only be allowed to finance 0.5 percent of their annual economic output with normal bonds. Should they run higher deficits, the excess debt should be subordinate i.e. it will only be repaid after other debts, must not be bought by the ECB, and should also only be held by banks with higher equity cover.

He continues to argue that such bonds would have far higher interest rates than regular bonds, thus discouraging states from using them to much. Continue reading On ifo’s accountability bonds

I thought we were past that

In a recent interview with the FT, Peter Navarro, an advisor to Donald Trump claimed the undervalued Euro to be an implicit Deutsche Mark and would benefit only Germany at the expense of our fellow Europeans and, of course, the US.

Hoo boy.

OK, I know that facts are not a particular strength of the new US government, but still, at least the assessment of the situation is correct: The Euro is probably undervalued vis-a-vis the Dollar, if you believe in The Economist’s Big-Mac-Index and thus in purchasing power parity. Given the more robust labour market and the recent monetary tightening of the Fed as compared to the Eurozone’s mess and still ultra-loose monetary policy by the ECB, the claim that the Euro is undervalued isn’t really a stretch.

Also true, undervalued currencies usually, ceteris paribus, benefit exporters of which Germany has a lot. But most of our exports go to Europe, i.e. the claim that Germany would benefit unfairly from the undervalued Euro is not as strong as you may think. In 2015 (oh facts again!), only 9.5% of our exports go to the US ( How exactly our exports to other Eurozone-countries are subject to the (external!) exchange rate is beyond me.

But for the sake of the argument, let’s assume for a second that Germany is benefitting unfairly. The obvious remedy for this would be an appreciation of the Euro vis-a-vis the Dollar, and to do this the ECB should stop its ultra-loose monetary policy and start raising interest rates better sooner than later. Wait, what? Yes, this is basically what Jens Weidmann and Wolfgang Schäuble demand for quite some time now. The allegations that Germany would keep the exchange rate towards the Dollar artificially low is nonsense, at best. And even if, there are some compelling arguments of why the ECB has adopted an ultra-loose monetary policy: weak labour markets in the south, under-capitalised banks, over-indebted governments, etc. Better export opportunities for Germany are merely a side-effect. We can talk about whether the ECB’s policy is adequate or what exactly drives Germany’s exports (non-substitutability perhaps?) or whether purchasing power parity holds, but going back to mercantilist thinking of the past fits the US goverment’s economic thinking: they are not thinking at all.

QE is no debt relief

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

The IMF, Greece and the ECB

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