Euro zone litmus tests

November 27, 2014

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Two vital gauges of euro zone progress, or lack of it, today.

German inflation for November is forecast to slip to 0.6 percent and will cue up the euro zone figure on Friday, which is predicted to come in at just 0.3 percent. Spanish inflation, due earlier, is forecast to come in at -0.3 percent.

There is also euro zone M3 money supply which shows the scale of bank lending to the private sector. Lending has fallen year-on-year every month for as far back as I can remember. The European Central Bank is directing a lot of its fire at pushing cash at banks in the hope they will start lending more forcefully.

The debate about quantitative easing is running white hot after ECB President Mario Draghi declared “excessively low” inflation has to be raised fast and that the ECB will act more forcefully if its existing efforts to pump money into the listing euro zone economy fall short.

The ECB won’t take the final leap into sovereign bond-buying until next year when it has had time to gauge the impact of its programme to buy covered bonds (underway with tepid results so far), asset-backed securities (launching now) and a new round of cheap four-year loans which will be offered to banks next month.

ECB Vice-President Vitor Constancio has put us all on notice for the first quarter next year if the ECB’s balance sheet is not expanding as hoped.

Draghi speaks again today, in Finland. He has consistently said monetary policy will be most effective if it works in tandem with governments’ fiscal policy and structural economic reforms. It looks like he might be left high and dry. New European Commission President Jean-Claude Juncker’s 300 billion euro infrastructure investment plan looks threadbare and Germany is intent on balancing its budget next year and will not shift on that.

Two leading economists present their joint report in Paris on what France and Germany should do in order to strengthen their economies. They were asked by the German and French governments to produce the report in part to take the sting out of a diplomatic row over the balance between fostering growth and keeping a lid on debt.

Will any of their recommendations be adopted? The French and German economy ministers will hold a news conference this afternoon.

The European Commission faces a censure motion in the European Parliament after Eurosceptic lawmakers united to condemn the role Juncker played in Luxembourg tax schemes, stating he was directly responsible for tax policies which are now under investigation by the Commission for unfairly attracting multinational businesses. Juncker denies this and the motion will not get enough support to pass but it’s an inauspicious start for him.

OPEC Gulf oil producers meeting in Vienna today will not propose an output cut, reducing the likelihood of joint action by OPEC to prop up prices that have sunk by a third since June. Oil has this morning dropped to a four-year low around $76. The decision could help push inflation lower still though it will raise, at the margins, the ability of consumers and companies to spend and invest.

After Scots rejected independence two months ago, partly on the back of promises of more devolved powers, the Commission set up to make recommendations is set to say Edinburgh should have nearly full control over income tax and more autonomy over welfare payments. As a result, the debate about more powers for England, and the question of Scottish parliamentarians being able to vote on matters that only affect England, is sure to hot up.

Egypt has a monetary policy meeting and is expected to keep interest rates on hold as inflationary pressure continues to ease and policymakers seek to avoid stifling a nascent economic recovery. To cut its budget deficit, the government slashed fuel subsidies in July which pushed up prices. But the effect appears to have been short-lived, with the pace of economic activity picking up in the three months since and core inflation continuing to ease in October.

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