Relations between the German Bundesbank and the ECB are turning tense again. What dictates this complex relationship of ups and down is one thing and one thing only—the Bundesbank’s fear of inflation. When deflationary pressures occur (falling prices) the German Bundesbank tends to accord more leeway for the ECB and it mutes its hawkish stance.
But when German inflation is on the rise, then the trauma Germany experienced from the inflationary crisis of the 1930s comes rushing back. Then the Bundesbank’s stance becomes hawkishly vocal and relations become strained. So, what has caused Germany’s Bundesbank to “raise its voice” this time around? This time, it's a bit more complex than just inflation. Continue reading "German Bundesbank Uneasy With ECB"→
The year 2017 is just around the corner and it seems that more troubles are brewing for the Eurozone. The region faces a deadly combination of a premature ECB taper, Fed tightening and more political uncertainty. Together, those factors could disrupt the already fragile Eurozone recovery.
ECB Tapers While Fed Tightens
Mario Draghi, the ECB President, so far has proved (and more than once) his ability to stabilize the Eurozone economy and delicately navigate monetary policy. But, in the latest ECB rate decision, which was also the last for 2016, Mario Draghi may have slipped up and acted a bit too hastily. Draghi declared that the ECB would reduce its monthly bond purchases from the current pace of €80 billion a month to €60 billion, beginning in April 2017. Despite constant denials from the ECB, there is simply no other way to interpret Draghi’s declaration but as a tapering of the ECB’s Quantitative Easing program. And, in the world of monetary policy, especially ultra-loose monetary policy, less stimulus equals tightening.
The ECB is effectively rolling back part of the brakes it has used to curb volatility in the Eurozone debt market. When the Greek crisis loomed, the ECB used QE to curb volatility. Likewise, when the Spanish banking crisis erupted and, as of late, with Brexit and the Italian banking crises, the ECB quickly responded. The ECB’s massive QE program helped restrain the shocks to the system. Continue reading "Eurozone: 2017 Spells More Trouble"→
It’s been barely five months since the Brexit referendum and yet here we are again, another European referendum, another political battle. This time around, it is Italy’s future in the balance and the Euro’s integrity at stake.
This upcoming referendum, due on Sunday, is a vote for constitutional reform that will abolish Italy’s dual parliamentarian system. Currently, Italy’s Parliament has two chambers, the Senate and the Chamber of Deputies. And, peculiar as it may sound, both have the same powers, but rather than balance they simply paralyze one another.
Why It Matters For The Euro
So, that begs the question, why is a referendum in Italy so important for the Euro? In one word: Banks. In the past few months, the Eurozone economy has started to show some signs of life. Among the data releases, Eurozone Manufacturing PMI rose to 53.7, retail sales in Germany has their strongest monthly gain in five years, and the Eurozone trade balance surplus rose by 37.8% over last year. Even in Italy, the Manufacturing PMI is holding above the 50 level, signaling expansion. All of which is "courtesy of a low Euro” that benefits European exporters. And yet, core inflation in the Eurozone is incredibly low at 0.8% and credit activity is weak, with the M3 level turning stagnant. Even the ECB’s €80 billion in monthly liquidity operations have thus far been insufficient to revive credit growth which is essential for the Euro recovery. At the heart of the problem is Europe’s banking system and its need to capitalize. Continue reading "Euro: No Longer a One-Way Bet"→
Peril is on the horizon for the Eurozone and its currency, the Euro. The survival of Deutsche Bank, the largest lender in the Eurozone, is at risk. And even more worryingly, the trouble brewing at the bank is not isolated but is rather part of a wider systemic risk across the Eurozone banking system. As the conundrum unfolds and radiates across the region, the Euro will not be spared.
Eurozone Banks On The Balance
The Deutsche Bank crisis was seemingly ignited in mid-September when the US Department of Justice announced its intention to fine Deutsche Bank $14 billion to settle claims of wrongdoing during the mortgage crisis of 2008. Last week, it was reported that Deutsche Bank was on the verge of reaching a settlement with the Justice Department which would reduce the fine to $5.4 billion. Nevertheless, and regardless of the amount, with Deutsche Bank’s total capitalization at $18 billion, it’s clear the bank does not have sufficient capital to pay such a hefty fine. The fact is that troubles within the Eurozone banks, and specifically in Deutsche Bank, have been brewing for a while. Continue reading "Deutsche Bank Woes To Hit Euro"→
The UK economy is sending mixed signals of resilient performance and negative sentiment. The latest PMI readings, both in services and manufacturing, plunged below 50, signaling a contraction. Consumer confidence took a nosedive to -12 in July from a -1 reading just a month before. And in the real estate sector, the latest survey of the Royal Institution of Chartered Surveyors of estate agents showed that only 23% of the participants expected housing prices to rise in the next twelve months.
The Bank of England, at its August meeting, responded with sweeping measures to ease monetary conditions. The BoE cut the benchmark interest rate by 25 bps to 0.25%, eased capital requirements for UK banks which will free up £150 billion of liquidity, and the “crown jewel” – a new round of £60 billion in Quantitative Easing, bringing the QE total to £435 billion.
Nevertheless, Key data released in the UK this week suggests that the overall economy is rather resilient, with unemployment holding at 4.9% and core inflation falling only moderately, from 1.4% to 1.3% year-on-year.