The Troika’s secret agenda: Not saving Greece, but saving the capital of multinationals

On a daily basis Greece is being accused of a lack of willingness to reform, including tackling tax evasion and avoidance. In March, however, Greece introduced several measures to improve tax collection and to counter tax evasion and avoidance in a structural manner. But the Troika itself has asked the Greek government to repeal these same measures. In doing so it is practicing the opposite of what it is preaching.

In other words, the Troika and several European leaders are guilty of doublespeak. They are criticizing the Greek taxpaying ethic, meanwhile opposing any Greek measure aiming to restrict tax evasion by multinational enterprises and capital flight.

Goldman's "Conspiracy Theory" Stunner: A Greek Default Is Precisely What The ECB Wants

Last week, we showed a curious thesis by Goldman, which asked if there is a new and "ominous" development in European currency swings, namely the emergence of what may be a "under the table" fight between the ECB and the Bundesbank on which bonds to monetize.

This is what Goldman said then:

the average maturity of ECB bond buying is around 8.0 years, in line with what Executive Board member Coeure said in his May 18 speech. However, while Italy and Spain see purchases that have an average maturity above that of the outstanding debt stock, Bundesbank buying has fallen short from the very beginning.... This kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.

The eurozone's 'five presidents' report': An assessment

The long-awaited report rightly aims to complete a financial union in the eurozone, but over-emphasises structural reforms and underplays the need for stronger counter-cyclical policies.

The eurozone in its current institutional setup may not survive the next severe political or economic crisis, and needs reform. The presidents of the European Commission, the European Central Bank (ECB), the European Council, the European Parliament and the Eurogroup have now presented their widely anticipated report – the ‘five presidents’ report’ – on how to complete the monetary union. It contains some important proposals, such as a strong emphasis on completing the banking and capital markets unions. But two key aspects are missing: a more activist ECB in order to prevent future shortfalls in demand, and strongly counter-cyclical fiscal policies at the national level. What is more, the case for a convergence of structural policies in the eurozone is less strong than the report assumes.

Britain wins ECB battle, but has it won the war?

The European Court of Justice (ECJ) granted the UK an important victory against the European Central Bank (ECB) on March 4, with a ruling that prevents the central bank from limiting the clearing of euros outside the Eurozone.

The move would have fragmented the single market and increase the probability of Britain leaving the EU. However, the court document leaves open the possibility of future conflicts with the ECB. Why is this so, and are future conflicts likely?

Quantitative easing alone will not ward off deflation

The ECB will embark on a programme of quantitative easing (QE) tomorrow, as very low inflation poses a mounting threat to the economic stability of the eurozone. The rate of consumer price inflation has dropped below zero, and hence far below the European Central Bank’s (ECB) target of just below 2 per cent. This highlights the degree of weakness in the eurozone economy and further increases doubts over debt sustainability across the currency union: without a healthy dose of inflation, it is much harder for households, firms and governments to reduce their debt burdens.  The problem is that QE alone is unlikely to be effective without a significant change in the ECB’s approach to monetary policy. The ECB needs to manage people’s expectations about the future path of demand, income and inflation more forcefully if it is to generate a proper economic recovery across the eurozone. 



According to one view of monetary policy, central banks set short-term interest rates to keep the economy close to full employment and inflation at the target level. In exceptional cases, this interest rate can fall to zero, but not below. In such circumstances, the central bank has to find other ways to stimulate the economy. One approach is QE: buying long-term assets like government bonds in order to drive up their price and bring down their ‘yield’, or interest rate (the price and yield of a bond are inversely related). The hope is that buying these bonds will drive up the prices of other long-term assets like corporate bonds, equities and even property. QE would thus lower long-term interest rates, increase the value of firms and real estate, and drive up the wealth of households. Ideally, this induces firms and households to invest and consume more, and help the central bank reach its target on inflation.

The ECB is not the German central bank

For many years, the debate about whether the European Central Bank (ECB) was too heavily influenced by Germany was confined to academic papers. As of late, it has become the central policy question of the eurozone. Germany is more influential at the ECB than it should be. In fact, Mario Draghi’s penchant for seeking German approval has been his biggest mistake as head of the ECB. He should end it. If he waits until the German public comes around to looser ECB policy, it might be too late, as the seemingly unstoppable fall in inflation and the eurozone’s weak growth prospects show. The Bundesbank, rather than torpedoing reasonable ECB decisions, should throw its weight behind a more expansionary monetary policy and back the ECB. 



The ECB was modelled on the German Bundesbank. As a result, it is one of the world’s most politically independent central banks; its mandate is focused narrowly on price stability; it does not take broader economic goals like unemployment into account in the way other central banks, such as the Fed, do; and it is de facto more restricted than other central banks, since controversial measures can lead to complex political and legal struggles, involving 18 (soon to be 19) countries. Its setup and philosophy are therefore ‘German‘, that is, conservative and cautious.

Crisis Management: Europe Eyes Anglo-Saxon Model with Envy

By Henrik Müller

REUTERS

 

A graffito showing ECB head Mario Draghi and German Chancellor Angela Merkel outside the construction site of the new bank headquarters in Frankfurt.

Should the European Central Bank follow the Anglo-Saxon model and buy up vast quantities of sovereign bonds in attempt to finally overcome the euro crisis? ECB head Mario Draghi is under pressure to act now. But what are his options?

Does the European Central Bank’s President Have Any Clothes?

By Desmond Lachman

Among the more useful lessons that I learnt about how markets really worked during my stint as an economist on Wall Street came from a seasoned, albeit cynical, emerging market bond-trader at Salomon Brothers. He taught me that when the winds are strong even turkeys fly. By which he meant to say, never mind a country’s poor economic and political fundamentals. When global liquidity conditions are favorable and when everyone is stretching for high yielding assets, even in the worst of circumstances that country’s bond prices will rally.

If ever there was a time that this lesson has relevance for the European economic outlook, it is now that Ben Bernanke has intimated that he might soon be taking his foot off the Fed’s money printing accelerator and put an end to the Fed’s extraordinary monetary policy accommodation by 2014. Considering that it has been the Fed’s actions that has helped keep the European sovereign bond market afloat, Mr. Bernanke’s announcement all too likely presages the renewed intensification of the European sovereign debt crisis.

The European Central Bank Broken transmission mechanisms

NEW figures from Europe reveal that both GDP and inflation in the euro area are falling, while unemployment is steadily rising. The mix of pain calls for monetary easing, and at its last policy meeting the European Central Bank did indeed reduce its main interest rate to 0.75%, a record low for the single-currency area. Yet as a recent Free exchange columnexplained, low ECB rates aren't having the desired effect around the struggling periphery:

In 2008, as the euro zone started to contract, the ECB slashed its main rate from 4.25% to 1%. But because investors were worried about the state of the banks, the returns that banks had to offer on their own bonds rose. This offset the ECB’s easing, so that firms’ borrowing rates fell by less than normal.

‘ECB: what is the reason for the lower rate?’

La Tribune, 2 May 2013

At meeting in Bratislava on May 2, the governing council of the European Central Bank is expected to cut the ECB’s key interest rate, from 0.75 per cent to 0.5 per cent or less.

The decision, which has already been welcomed by the markets, "is more of a political compromise than a life-saving initiative for the European economy," argues La Tribune. "It speaks volumes about the difficult situation of the ECB, which has to contend with the conflicting imperatives of the economic situation and German demands."

ECB says ditching austerity would not help euro zone

BRUSSELS/FRANKFURT (Reuters) - ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much.

Germany's Central Bank and the Eurozone

Christopher Alessi

Introduction

The German Bundesbank was established in 1957 as the world's first fully independent central bank with a simple but all-encompassing mandate: to keep the price of the German deutsche mark stable by limiting inflation. The Bundesbank's anti-inflationary ethos stems from a searing recollection of the hyperinflation Germany endured amid the 1920s economic crisis, which ultimately triggered lasting political and social turmoil. Due to its politicalindependence and unwavering commitment to its mandate, the Bundesbank became the most powerful central bank in Europe in the second half of the twentieth century--and, ultimately, the model upon which the European Central Bank was constructed when the eurozone came into being more than a decade ago. 

Weidmann Says ECB Won’t Cut Interest Rates to Weaken Euro

European Central Bank council member Jens Weidmann said an appreciating euro alone won’t trigger a cut in interest rates and the exchange rate’s gains are justified by the economic outlook.

The strength of the euro “is one factor among many in determining future inflation rates” and “we will certainly not justify any monetary policy decision with one single factor,” Weidmann, who heads Germany’s Bundesbank, said in a Feb. 13 interview. “I believe that the exchange rate of the euro is broadly in line with fundamentals. You cannot really say that the euro is seriously overvalued.”

ECB agrees deal to ease Ireland's debt burden

The European Central Bank has agreed a deal which allows Ireland to liquidate Anglo Irish Bank and repay the debt over a longer period of time to ease the burden on the country's taxpayer.

The arrangement, signed off by ECB chiefs at their meeting in Frankfurt, will cancel a debt repayment instalment of €3.1bn (£2.6bn) due next month and every March for the next 10 years, equivalent to about 2pc of the country's GDP.

Anglo Irish Bank, now known as IBRC, will be liquidated under the plan and its outstanding debt will be converted into a new long-term bond intended to spread the repayment over a longer period of time cutting the cost to the state.

Central bank survey shows continuing weak demand for credit; but bank finances steadier

The European Central Bank says demand from businesses for bank loans remains weak.

The ECB’s lending survey, released Wednesday, showed a “pronounced net decline” in business loan demand in the fourth quarter. The main reason: Companies are not seeing a need to finance new fixed investment such as buildings and machinery, a key component of any recovery.

ECB Warns of Euro-Zone Risk: Draghi Clashes with Berlin Over Aid to Cyprus

The head of the European Central Bank, Mario Draghi, warned German Finance Minister Wolfgang Schäuble last week not to dismiss Cyprus as not being 'systemically relevant' and said a failure to bail out the island nation could threaten the wider euro zone.

European Central Bank President Mario Draghi confronted German Finance Minister Wolfgang Schäuble last week to criticize his stance on Cyprus and said failure to bail out the island nation could threaten the euro zone.

Eurozone: Are the building blocks falling into place?

On the face of it, September was a good month for the euro. For once, market expectations were met. The European Central Bank (ECB) belatedly opened the way for action to address the ruinous polarisation of government borrowing costs in the eurozone. Germany’s Constitutional Court removed the last obstacle to the deployment of the European Stability Mechanism. The Commission put forward proposals for a eurozone banking union. And Dutch voters resisted the clarion call of political populism. Will the market rally that greeted these developments be sustained, or will it prove as transient as previous ones? Cautious optimism is warranted, but more is needed to convince investors of the irreversibility of the euro.

European Central Bank urged to take eurozone action

 

The head of the Organisation for Economic Co-operation and Development has called on the European Central Bank to take action on the eurozone crisis.

"It has to be a credible signal," Angel Gurria said. "If you have the ECB which can work in the markets... then why not?"

The ECB meets this week amid much speculation it will resume buying the debt of countries with high borrowing costs.

Germany and others oppose such a move.
'System at stake'
 
Mr Gurria was asked by news agencies whether the ECB should buy bonds of Italy and Spain, two countries whose interest rates at auction have exceeded 7% in recent months.
"Yes, they should," he replied. "If you ask when, the answer is the sooner the better."
"I think that the ECB is the bazooka, the firepower, the muscle, the one that has the capacity to impress upon the markets," he added.

Eurozone crisis: German central bank boss warns against more ECB loans

Jens Weidmann warns printing billions of euros for indebted countries would deter them from implementing reforms. Photograph Eric Piermont/AFP/Getty Images

 

European Central Bank plans to increase lending to struggling eurozone members risks becoming "addictive like a drug", Germany's central bank chief warned on Sunday.

Jens Weidmann said printing billions of euros and offering them at low interest rates would make life too easy for indebted countries and deter them from making cuts in public expenditure and pushing through economic reforms.

Market Watch: Internal discord leaves ECB’s threats toothless Commentary: Bundesbank’s Weidmann undercuts Dragh

By David Marsh, MarketWatch 

LONDON (MarketWatch) — A central bank’s ability to intimidate the financial markets through active, targeted intervention is directly proportional to its ability to deliver on promised action.

Exactly as in the Cold War.

Imagine if Harry S. Truman, Dwight D. Eisenhower or John F. Kennedy threatened the Soviet Union with nuclear retaliation in the event of intrusion on NATO territory. The next day, the president is called to order by his defense secretary who says deploying nuclear weapons is illegal. The deterrent would lose all credibility. Very likely, West Germany would have been overrun in the 1950s or 1960s by the Red Army. 

We see certain parallels here with the European Central Bank. In the battle over the euro, Europe is far from speaking with one voice. The ECB Governing Council may decide in coming weeks, by majority vote, to purchase large quantities of government bonds issued by troubled euro states. This requires that Spain or Italy request an official European rescue program and agree to additional reforms and savings.