MacroScope

When Mario met Jean-Claude

European Central Bank President Draghi and Eurogroup President -Juncker talk during a news conference in Nicosia, Cyprus

A day before the European Central Bank’s monthly policy meeting, ECB President Mario Draghi will travel to Luxembourg for talks with incoming European Commission president Jean-Claude Juncker. Oh to be a fly on the wall.

Some in the ECB are concerned that ultra-low sovereign borrowing costs and Draghi’s “whatever it takes” promise has relieved pressure on euro zone governments to carry on with structural economic reforms.
Juncker has signalled he is comfortable with a Franco-Italian drive to focus on growth and job creation rather than cutting debt.

ECB policymakers would probably be happy with that if it came in tandem with reforms to make euro zone economies more competitive. But it is worried about slippage.

Italian Prime Minister Matteo Renzi said last month the Bundesbank should not comment on Italian government policies, after its chief, Jens Weidmann, said Rome should complete structural reforms before calling for increased budget flexibility.

Italian second quarter GDP data are due and forecast to show paltry growth of 0.2 percent, well below Spain’s 0.6 percent which increasingly looks like it is pulling ahead.

Erdogan on the move

Turkey's PM Erdogan walks to his plane at Esenboga Airport in AnkaraTurkey’s ruling AK party is due to announce its presidential election candidate. Prime Minister Tayyip Erdogan is widely expected to announce his presidential bid, and then emerge victorious in the polls after a 40-day election campaign. Polls give Erdogan around 55 percent of the vote and a 20 point lead.

Under Erdogan, Turkey has made great strides economically and diplomatically but some if not much of that progress has been tarnished by a crackdown over the past year on anti-government protests and a purge of the judiciary and police in response to corruption charges against his acolytes which the premier says represent a plot by shadowy forces to oust him.

If he wins he is expected to exercise far more power than his presidential predecessor. Aides have said he would rule with a “council of wise men” made up partly of close allies and would oversee top government business, effectively sidelining some ministries and ministers.

Talking the talk

European Central Bank President Mario Draghi delivers a speech in Amsterdam which will fixate the markets following his recent statement that a stronger euro would prompt an easing of monetary policy.

Most notably via his Clint Eastwood-style “whatever it takes” declaration the best part of two years ago, Draghi has proved to be peerless in the art of verbal intervention. But even for him there is a law of diminishing returns which may require words to be backed up with action before long. 

In the 12 days since he put the euro firmly on the ECB’s agenda, the currency has actually weakened a little and certainly shied away from the $1.40 mark which many in the market see as a first red line for the euro zone’s central bank. That is probably because investors expect action from the ECB  soon and if so, there are good reasons to think they may be wide of the mark.

Five days on, Ukraine accord at risk of unravelling

An international agreement to avert wider conflict in Ukraine, brokered only five days ago, is teetering with pro-Moscow separatist gunmen showing no sign of surrendering government buildings and Kiev and Moscow trading accusations over who was responsible for killings over the weekend.

Washington, which signed last week’s accord in Geneva along with Moscow, Kiev and the European Union, said it would decide “in days” on additional sanctions if Russia does not take steps to implement the agreement. U.S. Vice President Joe Biden is in Kiev where he is expected to announce a package of technical assistance.

So far, markets’ worst fears have not materialized but with thousand of Russian troops massed on the frontier with Ukraine and deadly clashes between Ukrainian forces and pro-Russian separatists, it would not take much to change that.

Erdogan unfettered

Investors have spent months looking askance at Turkey’s corruption scandal and Prime Minister Tayyip Erdogan’s response to it – purging the police and judiciary of people he believes are acolytes of his enemy, U.S.-based cleric Fethullah Gulen. But it appears to have made little difference to his electorate.

Erdogan declared victory after Sunday’s local elections and told his enemies they would now pay the price. His AK Party was well ahead overall but the opposition Republican People’s Party (CHP) appeared close to seizing the capital Ankara. 

Turkey’s lira has climbed in early trade to its strongest level in two months on the basis that at least there is political continuity. But any rally could prove short-lived with the battle between Erdogan and Gulen likely to deepen and a gaping current account gap already making the economy vulnerable to any financial market turmoil, of which there has been plenty.

Putin welcomes Crimea in

Vladimir Putin has told Russia’s Duma that he has approved a draft treaty to bring Ukraine’s Crimea region into Russia and in doing so continues to turn a deaf ear to the West’s sanctions-backed plea to come to the negotiating table.

Overnight, Japan added its weight to the sanctions drive, suspending talks with Moscow on an investment pact and relaxation of visa requirements. EU and U.S. measures have targeted a relatively small number of Russians and Ukrainians but presumably there is scope to go considerably further, particularly if Putin decided to move into eastern Ukraine too.

EU foreign ministers yesterday began discussing how to reduce energy reliance on Russia. That’s a long-term project but one that could deal a hammer blow to the Russian economy if it succeeds.

Money for Ukraine?

Russia’s next move remains the great unanswered question for Ukraine but there are glimmers that things might be starting to move elsewhere.

IMF chief Christine Lagarde said last night she would send a technical support team to Ukraine soon if Kiev makes a request. It can’t do so until an interim government is formed, probably tomorrow. That would be step one, but only step one, down the road to an international aid package.

The European Union’s foreign policy chief promised Ukraine’s new leaders strong international support but offered up no specifics and there will be no meaningful bailout until after elections slated for late May although EU budget commissioner Janusz Lewandowski said bridging aid of 1 billion euros might be available.

New face at the ECB

The European Central Bank held a steady course at its first policy meeting of the year but flagged up the twin threats of rising short-term money market rates and the possibility of a “worsening” outlook for inflation – i.e. deflation.

The former presumably could warrant a further splurge of cheap liquidity for the bank, the latter a rate cut. But only if deflation really takes hold could QE even be considered.
Sabine Lautenschlaeger, the Bundesbank number two poised to take Joerg Asmussen’s seat on the executive board, breaks cover today, testifying to a European Parliament committee. A regulation specialist, little is known about her monetary policy stance though one presumes she tends to the hawkish.

Iran and the EU announced on Sunday that a deal between Tehran and six major powers intended to pave the way to a solution to a long standoff over its nuclear ambitions will come into force on Jan. 20. Thereafter, negotiations will begin on a final settlement. Brent crude has fallen in response. It’s early days but if oil falls significantly this year, that will factor into fears about deflation taking hold in Europe.

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.

That sinking feeling

Euro zone inflation, or deflation, is the focus of the moment.

Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.

It’s too early for any dramatic moves but the European Central Bank, which has a policy meeting on Thursday, 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.

A shock fall in euro inflation to 0.7 percent prompted an interest rate cut to 0.25 percent in November followed by a chorus of denials that deflation was a threat. ECB chief Mario Draghi adhered to that last week but added that he and his colleagues had to make sure inflation didn’t get stuck in the “danger zone” below one percent.