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The EU mess slogs on. The European Central Bank met today and left interest rates unchanged, as the economic situation in Europe (well, France and Italy) looks to be worsening. ECB president Mario Draghi said during the press conference today, “the recovery remains weak, fragile and uneven.” The big news from the euro zone earlier this week, of course, was that Italy has unexpectedly fallen into a triple-dip recession. Ambrose Evans-Pritchard writes that Germany’s economy is also weakening, and certainly isn’t strong enough to make up for its southern neighbors.
Inflation in Europe is almost non-existent — it was just 0.4 percent in July, far below the central bank’s 2 percent target, though core inflation, less food and energy, is at a somewhat higher 0.8 percent. “Policy makers seems to be in denial that falling prices are a threat,” writes Mark Gilbert. Draghi today blamed low inflation on energy prices, and said he expects it to rise in the next year or two.
Matt O’Brien, however, argues that low inflation could lead to Europe’s own lost decade. He looks at breakeven rates (inflation-protected bonds minus non-inflation-protected ones, which roughly estimates expected inflation) and finds that they indicate there isn’t a lot of confidence in higher inflation coming in Europe. Why? Keeping inflation low is the ECB’s raison d’etre. “For all Draghi’s done getting the ECB to be more aggressive, it’s still a central bank that cares about low inflation über alles,” writes O’Brien.
The good news is that the value of the euro is falling. At the ECB press conference today, Draghi spent a bit of time talking about exchange rates — a somewhat unusual move for a central banker. Since a recent peak around $1.40 in the spring, the euro was down to $1.34 today. The WSJ reports that Draghi “offered a long list of reasons why the euro has cheapened, which in addition to raising inflation should provide a boost to the bloc’s fragile economic recovery via stronger exports.”
What’s wrong in Europe? Well the Russian sanctions aren’t helping, but the euro zone has plenty of other problems, writes Sober Look. The Economist says that the euro zone has “an excess of debt, which in turn is causing banks, companies and households to be cautious about lending, investing and spending.” What Europe needs, both argue, is QE from the ECB. Consensus on the likelihood of that, though, seems to be “don’t hold your breath.” — Shane Ferro
On to today’s links: