MacroScope

Is it time for the ECB to do more?

From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

And the pressure on the ECB to do more has mounted after the preliminary inflation estimate for March was published on Monday. The data showed inflation cooling down further to 0.5 percent, its lowest since November 2009.

The IMF’s top European official expressed worry over low inflation and said there was more room for further ECB easing after the March preliminary inflation data released.

Policymakers don’t seem to be ready yet, despite inflation falling to new lows each month since October and outright declines in prices in a few peripheral economies.

A question of energy

After two days in The Hague, Barack Obama moves on to Brussels for an EU/U.S. summit with Ukraine still casting the longest shadow.

Europe’s energy dependence on Russia is likely to top the agenda with the EU pressing for U.S. help in that regard while the standoff with Russia could give new impetus to talks over the world’s largest free trade deal.

Russia provides around one third of the EU’s oil and gas and 40 percent of the gas is shipped through Ukraine. EU leaders dedicated part of a summit to the issue last week and German Chancellor Angela Merkel supported asking Obama to relax restrictions on exports of U.S. gas.

Sanctions loom for Russia

The European Union, as we exclusively reported yesterday, has agreed on a framework for sanctions against Russia, including travel restrictions and asset freezes, which goes further than many expected. The list of targeted individuals is still being worked on but will be ready for the bloc’s foreign ministers to look at on Monday.

Angela Merkel will speak to the German Bundestag about the standoff with Russia. Merkel has been cautious about imposing anything too tough as she tries to convince Vladimir Putin to agree to a “contact group” that would reopen communications between Moscow and Kiev. But yesterday she said measures would be imposed next week – after a Crimean referendum on joining Russia which the West says is illegal – unless diplomatic progress is made.

There is no sign of Vladimir Putin coming to the negotiating table and no question of western force being deployed. In Washington, Ukrainian Prime Minister Arseny Yatseniuk said his government was ready to negotiate over Moscow’s concerns for the rights of ethnic Russians in Crimea – a possible diplomatic avenue? The U.N. Security Council will discuss the crisis in an open meeting later.

When is a war not a war?

Is it war if no shots have been fired? The Ukrainians say so but Moscow, its grip on Crimea now pretty much complete, says it is merely protecting its people. The rest of the world and its financial markets watch on very uneasily.

There is virtually no chance of any western military response after Vladimir Putin declared he had the right to invade his neighbour – NATO  expressed “grave concern” but did not come up with any significant measures to apply pressure on. But there will be a diplomatic and economic price to pay.

The rouble tumbled by 2.5 percent at Monday’s open and the central bank has already acted to try and underpin it, raising its key lending rate by 1.5 percentage points although the Russian economy is already in poor shape. The main Russian stock index has plunged by about 9 percent with Gazprom doing worse than that and safe haven German Bund futures have jumped.

Japan-style deflation in Europe getting harder to dismiss

To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks – just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

In many ways, policymakers fear deflation more than inflation as it’s a more difficult spiral to exit. After all, interest rates can only go as low as zero and if that doesn’t kickstart spending, they’re in trouble. Again, just ask the Japanese.

ECB deflation risk denial has echoes of 2009

Euro zone policymakers like to talk. They often contradict each other at separate speaking engagements on the same day. But they have struck a chorus in recent weeks, asserting that deflation is not a threat.

Members of the ECB Governing Council have been particularly vocal, insisting they will not have to alter policy to counter falling prices.

Jan 9: Mario Draghi says the euro zone may “experience a prolonged period of low inflation” — steering clear of even mentioning the word deflation.

Will rounding cents bring euro zone down?

The 18-country euro zone has had a rough ride in the past 6 years, and even with the glimmers of good news reaching the darkest corners of the debt crisis, the European Central Bank has been anything but ready to sound a crisis-over siren.

Right after ECB President Mario Draghi warned against undue optimism, the central bank has identified a new threat to the common currency’s integrity – rounding up or down small change.

Belgium plans to allow retailers to round 1 and 2-cent coins to the closest five cents, in a similar fashion as Finland and the Netherlands already do. But the ECB had harsh words against such going-it-alone moves, published in a legal opinion published on its Internet site.

Turkish troubles

Ask investors about their minimum criteria when putting money into a country and rule of law comes pretty high. That’s one of the reasons why Turkey’s corruption scandal, and the reaction of the government in ousting hundreds of police officers, is so serious. The lira touched a record low on Thursday.

Today, parliament’s justice commission will debate a draft law reforming the High Council of Judges and Prosecutors, which makes judicial appointments. Critics of the bill say it will give the justice minister significant influence over appointments, describing it as anti-constitutional and undermining the separation of powers.

Prime Minister Tayyip Erdogan’s ruling party is slipping in the opinion polls although it remains comfortably ahead of its opponents. Erdogan finishes an Asian tour today with a visit to Malaysia.

ECB’s Draghi gives Germans “perverse” lesson

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When Mario Draghi, the president of the European Central Bank, told Der Spiegel magazine at the end of last year that “there was this perverse Angst” in Germany that things were turning bad, he caused an outcry in  German media, already suspicious of his policies. What had perhaps slipped by Draghi is that the English word perverse can also mean kinky in German.

Was his outburst really helpful, a German journalist queried during the monthly press conference on Thursday, and the Italian tried to set the record straight.

Scrambling for the right sheet of paper, he started: “First of all, … if I can find the actual definition of perverse in English I’d be very glad, but as usual … anyway there is a difference between perverse and perverted.” The whole room burst into laughter.

ECB rate cut expectations to be left deflated

Euro zone inflation has dropped to just 0.8 percent and the core measure is lower still – at 0.7 percent it has fallen pretty consistently over the last year.

Nonetheless, the European Central Bank is likely to sit tight at its policy meeting today. The Bank of England’s rate setters are also meeting but facing a very different set of problems.

It’s probably too early for any dramatic moves but the ECB may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests. Today, Mario Draghi is likely to reaffirm its readiness to act.