ECB aftermath; how firm is opposition to QE?

June 10, 2014

After the European Central Bank opened its toolbox and deployed pretty much everything it had left, bar printing money, the question is if and when QE becomes a live possibility.

ECB chief Mario Draghi pointedly said at his monthly news conference that all policy options had not been exhausted.
German resistance to such a move will remain, however, and Draghi’s deputy, Vitor Constancio, has already intimated that it will take until late this year to judge whether the latest gambits have made a difference before moving onto the next stage.

Bundesbank chief Jens Weidmann is already out today saying the ECB has ventured onto new ground and that governments need to treat the move as a wake-up call to continue with economic reforms. He added that there was a risk that long-term inflation expectations could be de-anchored – ECB speak for deflation.

ECB policymakers Benoit Coeure and Yves Mersch, who can be reasonably said to represent differing ends of ECB opinion, both speak later today as does Finnish central bank chief Erkki Liikanen.

One to ponder: By no longer offsetting the government bonds the ECB bought back during the debt crisis by taking in an equivalent amount in bank deposits each week –  non-sterilisation in central bank jargon – has Draghi essentially crossed the Rubicon in terms of creating money and does that mean the philosophical objections to full-on QE have been surmounted?

Swedish Prime Minister Fredrik Reinfeldt will host Germany’s Angela Merkel, Britain’s David Cameron and Dutch premier Mark Rutte at his private residence for a second day to discuss reforming the EU and “achieving a more efficient EU that is focused on creating jobs and growth”.

After EU elections delivered strong returns for some far-right and far-left parties, EU leaders say they have recognized the need to refocus on what matters to their people but are arguing over who should take the top jobs in Brussels which set the tone.

Cameron is publicly opposed to Luxembourg’s Jean-Claude Juncker, who he regards as an arch federalist, becoming European Commission President though as the candidate for the centre-right EPP group of  parties which came top in the election he is in pole position. IMF chief Christine Lagarde, who would have been favoured by Britain, has ruled herself out of the running.

Yesterday, Cameron phoned Italian Prime Minister Matteo Renzi, Hungarian Prime Minister Viktor Orban and Reinfeldt. Renzi would be the leader of a powerful EU country who could tip the balance. In Britain, the opposition Labour party has also come out against Juncker.

The IMF will release its latest report on Greece’s bailout programme, a day after the government named economist Gikas Hardouvelis as finance minister in a cabinet reshuffle. A technocrat, he is unlikely to rock the bailout boat but he is likely also to push for growth by cutting taxes.

Eight hours of talks between Russia, Ukraine and the European Commission ended early on Tuesday without a deal on resolving a gas pricing row, raising the risk of supply disruption. Talks will resume shortly.

Ukraine’s Energy Minister Yuri Prodan said the negotiations, brokered by the Commission in Brussels, had stumbled over a Russian price mechanism proposal which would link lower prices to export duty.

The July 20 deadline for an Iran nuclear deal to be struck has looked ambitious for a while. Yesterday, as fresh talks got underway in Geneva, Tehran said a six-month extension might be needed. Western officials say Iran wants to maintain a uranium enrichment capability far beyond what is suitable for civilian nuclear power stations. Iranian President Hassan Rouhani is in Turkey for talks.

First quarter GDP data for the Ukraine and Turkey will make for interesting reading and after a shocking fall in Q1 activity, the Dutch central bank will produce its half-yearly economic forecasts. The British Retail Consortium said overnight that UK sales growth slowed last month after a bonanza in April.

Russia’s economy is firmly in slowdown mode, partly due to western sanctions imposed over Ukraine. Russian economy minister Ulukayev speaks in Zurich.

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