To QE or not to QE?

April 7, 2014

ECB Vice-President Vitor Constancio testifies to the European Parliament prior to attending the IMF Spring meeting in Washington at the back end of the week along with Mario Draghi and other colleagues. Jens Weidmann, Yves Mersch and Ewald Nowotny also speak today.

There has undoubtedly been a change in tone from the ECB, which is now openly talking about printing money if inflation stays too low for too long (no mention of deflation being the required trigger any more). Even Bundesbank chief Weidmann has done so.

Last week, Draghi made it sound as if really serious thought was being given to how to do it. He raised the prospect of buying private sector assets, rather than government bonds as other central banks have. The question is whether he is trying to talk the euro down or whether the central bank is now more alarmed, and therefore deadly serious.

Over the weekend, Frankfurter Allgemeine Zeitung reported an ECB study which showed one trillion euros of new money would raise inflation by just 0.2 percentage points, while another model came up with 0.8 points. We have established the studies do exist and if they are believed it’s hard not to conclude that the bar for instigating QE remains high, whatever the rhetoric.

At the IMF, the debate about growth over austerity will be reignited after the Fund urged the ECB to do more and a reshuffled French government said new tax cuts might mean it takes longer to meet its EU budget deficit targets.

Germany’s Angela Merkel and Dutch premier Mark Rutte meet today as do new French Finance Minister Michel Sapin and his German counterpart Wolfgang Schaeuble.

The EU’s top jobs are up for grabs later in the year and the race is hotting up. Deposed French finance minister Pierre Moscovici is likely to be put forward by Paris as EU economics chief or Eurogroup head, which would essentially rule other French nationals – Christine Lagarde and Pierre Lamy, for example – out of the running.

Centre-left and centre-right frontrunners for the top jobs – Martin Schulz and Jean-Claude Juncker – could well be vetoed by the British and others so the field is narrowing. Over the weekend, Finnish premier Jyrki Katainen said he would resign this summer after three years in office and was available for EU or international roles. 

Hungary duly re-elected Prime Minister Viktor Orban on Sunday while 21 percent of the vote went to the far-right Jobbik, a harbinger perhaps for EU elections in May after France’s National Front also performed solidly in local elections. Jobbik has pledged to create jobs, be tough on crime, renegotiate state debt and hold a referendum on EU membership. While it denies being racist, it provides a lightning rod for suspicion among some Hungarians towards the Roma and Jews.

Four years of Orban rule have been marked by heavy taxes levied on mainly foreign-owned sectors including banks, and other policy measures which he claims saved the country from a Greece-style crisis and freed it from IMF strictures. Critics say the country’s growth prospects and markets remain fragile and accuse the premier of curbing democratic checks and balances and freedom of the media.

That didn’t cut much ice with the electorate. With 96 percent of the ballots counted, Orban’s Fidesz party was projected to win 133 of the 199 seats in parliament – bang on the two-thirds threshold needed for his party to change the constitution. What he may do with that is unclear.

Ukraine’s uneasy standoff is creaking. On Sunday, pro-Russian protesters seized state buildings in three east Ukrainian cities, leading Kiev to accuse Vladimir Putin of orchestrating “separatist disorder”. In turn, the Ukraine government said it would take Russia to an arbitration court if talks with Moscow failed to roll back hikes in the price of natural gas that Kiev called an act of economic aggression.

The annual Reuters Africa summit gets underway featuring a host of top policymakers.

After almost a year of promising it, Nigeria finally rebased its GDP calculations on Sunday for the first time since 1990, almost doubling its calculation of national output and, statistically at least, leapfrogging South Africa to become Africa’s largest economy. However, the shift will do little to change life for the millions trapped in poverty. The new figure shrank Nigeria’s debt-to-GDP ratio to 11 percent for 2013 from 19 percent in 2012. It will be interesting to see if investors respond.

German industry output has risen 0.4 percent in February, following a jump in industry orders. The economy ministry says that points to higher activity in the first quarter of the year. Spanish industry output data are due shortly and the Bank of France will produce an updated forecast for Q1 GDP.  

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