With the eurozone facing the threat of a prolonged period of “low-flation”, the European Central Bank has been urged to stretch its monetary policy toolkit further and deploy more unconventional measures. One widely flagged option would be to cut the interest rate that banks receive for parking their money with the central bank to below its current zero level. Frankfurt would then replicate an experiment first tried by Denmark’s central bank, which in 2012 cut its deposit rate to -0.20 per cent.
As of Thursday, however, Denmark is no longer a valid comparison. The Danish National Bank has announced that, with effect from Friday, it will raise its deposit rate by 15 basis points to 0.05 per cent (it had already increased it to -0.10 per cent in January). Meanwhile, the central bankers in Copenhagen left the lending and the discount rate unchanged at 0.2 and 0 per cent respectively.
When confidence is shot, policy must get ahead of the curve if it is to count. Do less than markets expect, and there is a decent chance that measures will have the opposite impact to what policymakers were hoping for.
Which is one of two reasons why the Swiss National Bank’s latest move to counter the franc’s appreciation has backfired. This from the FT’s Peter Garnham:
The Swiss franc rose sharply on Wednesday after the Swiss National Bank’s latest attempts to stem strength in its currency disappointed investors.
The Swiss franc climbed 1.4 per cent to SFr1.1318 against the euro, added 1.5 per cent to SFr0.7848 against the dollar and gained 1.7 per cent to SFr1.2886 against the pound.
Minutes of the Riksbank’s July 4 policy meeting, published today, see deputy governor Lars Nyberg become the latest central banker to lambast the eurozone authorities over their handling of the Greek crisis. From the minutes:
Economically it would have paid off to find a solution to the Greek crisis a long time ago, given the costs in the form of less efficient markets and falling stock markets that the uncertainty has led to. However, Greece is now part of the euro area and this means that the crisis must be resolved politically and at the European level. Mr Nyberg noted that the European mechanisms for resolving crises do not appear to work particularly well.
Financial market investors are wondering, and justifiably so, how a crisis in a larger country could possibly be managed if it is not even possible to reach agreement on how to deal with Greece.
Quite. Because of this, he says, “a relatively minor economic crisis may quickly become a major political crisis”. (Note that this was before events in Italy took a turn for the worse.)
Irish pluck and entrepreneurship remain undiminished by the country’s banking and economic crisis. John Bruton, the former Taoiseach (prime minister), was in Frankfurt today as ambassador for Ireland’s international financial services industry, arguing the case for its future growth.
The idea might send a chill down the spines of some in Frankfurt, including at the European Central Bank. Ireland has been the source of some of the biggest banking disasters to face the eurozone, including at branches of German banks.
The European Central Bank has emerged from the financial crisis as one of the few institutions with its reputation intact – and its powers greatly enhanced – so a job on its governing council is a pretty good gig by any measure.
One is coming up in June, when Austrian economist Gertrude Tumpel-Gugerell is leaving after eight years at the top table. Two candidates have been put forward to replace her: Peter Praet, 61, a well-regarded director of the Belgian central bank for the past decade; and Elena Kohutikova, 57, a former Slovak national bank deputy governor and now an economist at Vseobecna Uverova Banka, a unit of Italy’s Intesa SanPaolo. A decision is expected at the next meeting of Finance ministers on 15th February.
One factor that could prove decisive is that Ms Tumpel-Gugerel is currently the only woman at the top of the ECB. The EU also likes its institutions to be “geographically-balanced”, usually a code that all the top jobs shouldn’t just go to the bloc’s largest and oldest members. The five remaining directors at the ECB hail from France, Germany, Spain, Portugal and Italy – surely another edge for Ms Kohutikova.
The euro surged higher on Thursday, hitting a one-month high against the Swiss franc after Jean-Claude Trichet, chairman of the European Central Bank, warned of inflationary risks in the eurozone.
Mr Trichet struck a hawkish tone after the central bank’s policy meeting – at which it left its main lending at 1 per cent – emphasising that the ECB was prepared to raise interest rates to keep prices stable. “Risks to the medium-term outlook for price developments are still broadly balanced, but could move to the upside,” he said.
What has been the root cause of the eurozone’s difficulties? Athanasios Orphanides, Cyprus’s central bank governor, says European solidarity and the level of trust between the continent’s governments have been called into question. The correct response, he has just argued in a lecture at Frankfurt’s House of Finance, was to design systems of mutual support – or insurance policies – that would allow Europe’s monetary union to weather future economic and financial storms.
To some, especially in Germany, that might sound like offering rewards for poor fiscal behaviour and turning the eurozone into a “transfer” union in which taxpayers’ money flows from fiscally prudent countries to the profligate. But Mr Orphanides took the example of motor insurance. “Would banning all insurance be a sensible way to ensure individual responsibility?” he asked.
Berlin’s approach – and that of the European Central Bank – to handling the eurozone crisis, has come under strong attack from Peter Bofinger, economics professor at Würzburg university and an independent adviser to the German government. Without a profound change of strategy there was a “major risk of an unraveling of the euro area,” he has said.
A “dangerous” adjustment process is being forced on eurozone countries, he told a Financial Times/Credit Suisse conference in Frankfurt. The weakest spot is Greece, which faces rising unemployment and debt levels. As a result, political opposition to euro membership would grow, according to Prof Bofinger. “Sooner or later we will have a discussion in Greece: ‘why not leave the euro?’” A new currency could then be devalued and much of the government’s debt cancelled out. Once Greece had left, others would follow.
In the early days of the telephone, human operators played a crucial role: you called the operator, asked for the Joneses at a certain address, and she called them for you and connected you. Telephones were never forecast to be ubiquitous: their number would be forever constrained by the cost and availability of human operators required to make the system work.
Few people – if any – envisaged automatic connection. When it finally came along, no doubt it was unpopular with telephone operators. But the sacrifice of their jobs – painful as it was – paved the way for the highly efficient system we know today. It is unlikely the telephone operators were consulted on the matter, much less given the deciding vote.
So there is a level on which it seems strange that EU policymakers should get to choose whether or not they remain a part of the fiscal sanctions process. Euro member states might be punished if they are fiscally irresponsible, going forwards, but then again they might not: it will depend upon votes by policymakers. The ECB’s proposal for semi-automatic sanctions has been thwarted: the decision to punish will remain lengthy – and political.
There is a problem with this.
A welcome piece of good news for Jean-Claude Trichet, European Central Bank president: Estonia is about to join the eurozone as its 17th member. The entry of the tiny Baltic state has significance beyond its shores. It shows that despite all the woes of the past year, Europe’s monetary union is still on an expansion course. Mr Trichet has just been speaking in Tallinn, the country’s capital, at an event kicking off the final preparations before January 1, 2011 when the euro becomes legal tender.
His comments covered the usual themes about Europe’s common destiny and the euro’s importance in the continent’s economic integration. But Mr Trichet did not speak as if Greece had never happened. There was a stern warning that future members had to do more that just meet the technical requirements for joining (although with hindsight, it is not even clear that Greece managed that).
Mr Trichet said: