Reuters blog archive
from Anatole Kaletsky:
This week’s theatrical resignation threat by Manuel Valls, the French prime minister, combined with deep European anxiety about deflation, suggest that the euro crisis may be coming back. But a crisis is often an opportunity, and this is the hope now beginning to excite markets in the eurozone.
Investors and business leaders are asking themselves three questions: Will European governments and the European Central Bank recognize the unexpected weakness of the eurozone economy as an opportunity to change course? If they do, will they know how to grasp it? And will they be allowed to do what is necessary by the true economic sovereign of Europe, German Chancellor Angela Merkel?
First, the opportunity. Europe still has a chance to save itself from a Japanese-style lost decade of stagnation and deflation. And this may well be a last chance, because a lost decade in Europe could produce some very un-Japanese social rebellions and political upheavals. Europe, after all, lacks Japan’s social consensus, national unity and financial cohesion. It is far from clear that Europe could survive 10 years of recession without up the eurozone breaking up and even perhaps the European Union.
Second, what must Europe do to save itself from stagnation and disintegration? The obvious answer is to follow something similar to the “three arrows” program popularised (though not genuinely implemented) by Japan’s prime minister, Shinzo Abe. Abe’s “three arrows” were: aggressive monetary stimulus; fiscal easing requiring suspension of deficit and debt targets, and structural reforms to correct long-term weaknesses in both supply and demand.
But the relentless downward trajectory of inflation in the euro zone has got plenty of economists sounding unconvinced that the situation will turn around any time soon.
Euro zone inflation is the big figure of the day. The consensus forecast is it for hold at a paltry 0.5 percent. Germany’s rate came in as predicted at 0.8 percent on Wednesday but Spain’s was well short at -0.3 percent. So there is clearly a risk that inflation for the currency bloc as a whole falls even further.
The Bundesbank has taken the unusual step of saying wage deals in Germany are too low and more hefty rises should be forthcoming, a sign of its concern about deflation. But the bar to printing money remains high and the European Central Bank certainly won’t act when it meets next week. It is still waiting to see what impact its June interest rate cuts and offer of more long-term cheap money to banks might have.
The euro zone is not deflating, it's just at risk of a too-prolonged period of low inflation, says European Central Bank President Mario Draghi.
Judging by recent evidence, it might be very prolonged, which is bad news for an economy struggling to shift out of low gear.
Amid all the furore over David Cameron’s failure to block Jean-Claude Juncker for the top EU job at a summit last week, the bloc’s leaders signed a free-trade pact with Ukraine and said they could impose more sanctions on Russia unless rebels de-escalate in the east of the country by Monday.
In turn, Ukraine president Poroshenko extended a ceasefire by government forces until 10 p.m. local time today.
Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.
It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.
Euro zone inflation – due at 0900 GMT - is forecast to hold at a paltry 0.7 percent in May, in what European Central Bank President Mario Draghi has labelled the danger zone below 1.0 percent for the eighth successive month.
After German inflation fell to just 0.6 percent on the EU measure on Monday, well below forecasts, the bloc-wide figure could also undercut. We already know the Spanish and Italian inflation rates were just 0.2 and 0.4 percent respectively last month. If that comes to pass, any doubts about ECB action on Thursday, which are thin on the ground anyway, must surely be banished.
Fresh talks between Russia, Ukraine and the European Commission in Berlin will aim to resolve a gas price dispute that Moscow has warned could make it cut off supplies next week.
Ukraine has said the price for 2014 should be agreed before it starts making any payments. Russia's energy minister has said Moscow and the EU have proposed that Kiev pay Gazprom $2 billion, and another $500 million before June 7, as a precondition for a price discount and further talks.
What is also becoming increasingly evident is that it wouldn't do much good.
Through economic research notes with titles like “ECB likely to do something next month” (JP Morgan), “ECB comfortable about acting next month” (Barclays), “ECB to act!... next month… (very probably)” (Rabobank), you get the depth of just how reluctant this central bank is to do anything, for all the talk of being ready to act.
Financial markets may view the latest sanctions against Russia as feeble, but the reaction from Moscow – Vladimir Putin threatened to reconsider Western participation in energy deals and his foreign minister, Sergei Lavrov, said they were the work of weak politicians – suggests otherwise.
Russia's top oil producer, Rosneft, will release first-quarter financial results after its boss and close Putin ally Igor Sechin was put on the U.S. sanctions list. Yesterday, energy giant Gazprom – whose chief escaped censure – said further Western sanctions over Ukraine could disrupt its gas exports to Europe and hit its business and shares.