Weidmann back in the spotlight

April 2, 2014

Euro zone finance ministers in Athens are joined by their EU counterparts outside the single currency area with work to be done on signing off on the final details of banking union and preparing a common line for the upcoming G20/IMF meeting in Washington. The elephant in the room will be the threat of deflation.

European Central Bank number two Vitor Constancio said yesterday that low euro zone inflation was a concern but predicted it would rise in April, having dropped to just 0.5 percent in March. There are good reasons to think so but either way it suggests the ECB – which has its monthly policy meeting tomorrow – is in no hurry to act.

As EU economics chief Olli Rehn pointed out, it’s not all bad. Low prices will increase disposable incomes so could help a demand-led recovery. But they won’t help rebalance the currency area’s economy and will certainly make still-high national debts harder to pay off.

The key will be if consumers and businesses start deferring spending decisions in the expectations that things will get cheaper. That is when deflation becomes a profound risk and the ECB insists it sees no sign of that.

One of the highlights today in Athens will be a news conference with ECB Governing Council member and Bundesbank President Jens Weidmann and German finance minister Wolfgang Schaeuble.

Weidmann sprang a surprise last week by declaring that QE money printing was not out of the question if deflation looked like taking hold, though he preferred cutting into negative territory the rate the ECB pays banks to park money with it as a means to counter an overly strong euro, which will drive import prices, and therefore inflation, lower still.

Greece told the euro zone ministers yesterday that it hoped to avoid a third bailout – figures of up to 20 billion euros have been bandied about.
Greece is fully funded for the next 12 months – a key requirement for the IMF to keep lending — and is considering ending its four-year exclusion from bond markets by selling 1.5-2 billion euros of five-year bonds in a test issue in the first half of the year.

Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup, was cautious, saying it was too early to say how things would pan out.
One fly in the ointment is the coalition government’s parliamentary majority has fallen to just two seats while the anti-bailout Syriza party continues to ride high in the polls and is likely to perform strongly at May’s EU elections. Despite flickers of economic revival, unemployment is still running at nearly one-in-four of the workforce and national debt is not far off double the size of the economy.

New French Prime Minister Manuel Valls will likely propose new names for his government today.

Speculation has centred on whether Pierre Moscovici will remain in the powerful finance minister’s job. That could be telling following President Francois Hollande’s announcement of more tax cuts to boost consumer demand in addition to his existing drive to cut labour costs for business, all of which is likely to mean France misses EU budget deficit limits.

Having already been given extra time – until the end of 2015 – to get its deficit down to three percent of GDP, the reaction from some of its peers was unsurprising. Both Rehn and Jeroen Dijsselbloem called on France to meet its debt obligations and not let up on structural reforms. Hollande, in turn, will look to the likes of Italy’s Matteo Renzi to make common cause on the need to galvanise economic growth.

Valls is anything but a firebrand leftwinger but for now will march to Hollande’s tune. Another straw in the wind would be any promotion for Industry Minister Arnaud Montebourg, a critic of austerity policies and a believer in protectionism to secure jobs, who sources say could get an expanded portfolio.

There could also be rehabilitation for some big names from the past, such as Hollande’s ex-partner Segolene Royal.

At an EU/Africa summit in Brussels, a smaller group including Hollande will meet to discuss the security situation in Central African Republic.

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