And more from the ECB…

November 22, 2013

The bombardment of European Central Bank interventions continues today. ECB chief Mario Draghi addresses the European Banking Congress in Frankfurt and any number of his colleagues break cover elsewhere.

Draghi shepherded a surprise interest rate cut earlier this month and consistently says that other options are on the table though yesterday he said that talk of cutting the deposit rate into negative territory to try and force banks to lend more was people “creating their own dreams”.

Having said that, the prospect of printing money has been raised, at least in principle, and the markets still expect a new round of long-term liquidity pumped into the banking system – a repeat of last year’s LTROs – early next year. Anything more would be hugely difficult for Germany and its fellow travellers to swallow.

German Finance Minister Wolfgang Schaeuble talks at the same conference and staked out his ground yesterday, saying the ECB must not offer “false stimulus” and that monetary policy alone would not solve the euro zone crisis – a fairly clear warning off thoughts of QE.

Bundesbank boss Jens Weidmann was one of around a quarter of the ECB’s policymaking ranks to speak out against the November rate cut and has also constantly stressed the limits of monetary policy.

Aside from Draghi, France’s Christian Noyer, Austria’s Ewald Nowotny and Italy’s Ignazio Visco address a Bank of France conference in Paris as does chief economist Peter Praet. Bank of Slovenia Governor Bostjan Jazbec is at a business conference in Ljubljana.

That represents a reasonable cross-section of ECB opinion though somewhat skewed to the dovish side. Praet proposed this month’s rate cut and has raised the prospect of the ECB starting outright asset purchases (QE by another name) if things got too bad.
Big surprise yesterday when Ukraine abruptly dropped its planned trade deal with the European Union and threw itself back on the mercy of Mother Russia.

Major themes to follow up – what does this say about the EU’s international influence and actually has it dodged a bullet given Ukraine’s spotty record on democracy, human rights and justice? Probably more important is what did Vladimir Putin offer in terms of sticks and carrots – the threat of higher gas prices, or no gas? Will he now bail his neighbour out?

It’s another notable tactical diplomatic victory for Putin, following his success in driving the agenda over Syria. But beyond the pride and standing factors, is it doing Russia much strategic good? Turkish Prime Minister Tayyip Erdogan, another leader with an off-and-on relationship with the EU, is in Moscow today for talks with Putin.

Greece’s troubles look pale in comparison to Ukraine’s and it does not need any more bailout money for a couple of months. That might explain why Athens is not yet meeting the concerns of its EU/IMF/ECB lenders about a 2 billion euros hole in its 2014 budget.

Prime Minister Antonis Samaras, who insists he can inflict no more austerity on his people, meets Angela Merkel in Berlin today.
Aside from Draghi’s pledge to do whatever it takes to save the euro it was Merkel’s decision last year that Greece must stay in the euro zone come what may that changed the tenor of the crisis. So this will almost certainly be sorted eventually — with some form of debt relief  to make the numbers add up – but probably not for some while.

Standout in terms of economic data is Germany’s Ifo sentiment index. It is expected to rise again. November’s PMI survey showed stronger growth yesterday (in stark contrast to France) and Germany’s ZEW sentiment index hit a four-year high earlier this week.

But the survey evidence is increasingly diverging from the hard data, something we should perhaps look at in greater depth. Detailed GDP data just out confirmed Europe’s largest economy grew by a modest 0.3 percent in the third quarter.

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