MacroScope

Ukraine fissure

Pro-Moscow rebels declared a resounding victory in Sunday’s referendum on self-rule for eastern Ukraine, with some saying that meant independence and others eventual union with Russia. On the ground, fighting appears to be getting increasingly out of control.

The EU declared the referendum illegal but separatist leaders in eastern Ukraine may use the vote to formalise a split with Kiev. Nearly 90 percent of voters in Donetsk, the larger of two eastern regions where a plebiscite was held, voted for self-rule, the head of the separatist election commission there said.

There are signs of alarm even in Moscow with Vladimir Putin calling last week for the referendum to be suspended, perhaps fearing tougher sanctions from the West. Washington and the EU have set any disruption of Ukraine’s May 25 national election as their red line. Putin has belatedly given rhetorical support to that vote. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

EU foreign ministers meet in Brussels today and are likely to expand their criteria for sanctions should they feel the need to go further. Sources have told us that there is agreement to add about 15 people and five Crimean-based companies to the bloc’s list of targets. The EU has previously imposed asset freezes and visa bans on 48 Russians and Ukrainians over Moscow’s annexation of Crimea.

This would mark the first time the bloc has targeted companies but the measures are still limited and well behind the stance of the United States. Only trade and financial sanctions would really bite and on that, Washington is much keener than Europe which is heavily dependent on Russia for its energy needs.

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.

To QE or not to QE?

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.