Hi everyone, just wanted some thoughts on the EUR.
Most central banks reacted to the CPI and growing inflation by raising their rates, except the ECB. C. Lagarde is beary saying anything.
Seems to me that they are pretty unefficient (for the people at least).
The EUR since its introducting dropped and dropped.
I find it very odd that these people get paid so much and that when they have to react, there is nothing.
There must be a logical reason…
The ECB always seems to act slowly and weakly. I can’t recall any time when the EUR has been top of my table from bullish to bearish currencies.
Yep seems to be the case. Unbelievable that all the other major banks reacted already and they only start to THINK about measures now.Outrageous
That’s because of the autonomy of each member country that’s unlike anything else other central bank have to deal with. While the EU can provide a framework against which each country has to abide by in general terms it doesn’t have the governing capacity that fits in with the overall direction of each country. Atleast not as easily.
For e.g. Biden & Powell can meet and discuss how best to align federal government policy direction with federal monetary policy. It’s so much harder to imagine coming up with a similar plan of action b/w Lagarde and other heads of state.
Raising interest rates will no doubt benefit the stronger economies like Germany & France. But can the same be said equally for all the countries in the EU? Populations of harder hit countries are already reeling hard from not just inflation but supply/demand shocks from war and perhaps even the pandemic still. Raising interest rates will make it harder to borrow money and will adversely affect small/medium businesses on top of all the other complications. That’s just one possible scenario from raising interest rates prematurely.
Edit: Besides they stopped the PEPP purchases in March and are trying to be as predictable as they can be for each member country.
Edit 2: If you follow ECB announcements closely enough you can tell the difference between the hawks and doves and conclude why they take on those stances. For e.g. Bundesbank presidents Jens Weidemann and his successor, Joachim Nagel have always hawkish. They tend to vote strongly against QE policies, in line a strong German economy. Similarly, the head of the DNB (Netherlands), Klaas Knot, is also very hawkish and has been calling for a 50bp hike the past few months.
On the other hand you have doves like Fabio Panetta (Italy), who was cautioning against stopping asset purchases in March. Reflects the more precarious state of the Italian economy.
This, I believe, is the reason why market analysts are watching the 10Y yield spread between the German & Italian bonds to determine which way the ECB will move.
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If you want to know how hawkish members certain members of the ECB can be, just read the wiki article on Jens Weideman. Just from the remarks he’s made as far back as 2011 you can see the complications the ECB faces.
Except 1:
In September (2011), with the ongoing European sovereign debt crisis, Weidmann was observed by a British commentator, David Marsh, to be taking a “cool” course relative to Chancellor Merkel. Marsh wrote that Weidmann was saying the European Monetary Union (EMU) “has to go in one of two directions. Either it takes the path of a fiscal union in which member countries fuse together their economic and financial systems into a much more robust framework that will protect them from internal dislocation. Weidmann says, coolly, this is somewhat unlikely. Or EMU remains a looser grouping of countries that will face the discipline of the financial markets if they fail to produce economic convergence,” namely exit from the EMU and default, looking particularly at Greece.
Excerpt 2:
In a late November, 2011, speech in Berlin, Weidmann criticized the errors and “many years of wrong developments” of the EMU’s peripheral states, particularly the wasted opportunity represented by their “disproportionate investment in private home-building, high government spending or private consumption”, David Marsh reported.
Excerpt 3:
Weidmann, in late August 2012, was reported to have threatened to resign as Draghi’s July 2012 promise to do “whatever it takes” to save the Euro seemed likely to lead to purchases of Italian and Spanish bonds to keep interest rates in those major member economies capped at manageable levels.
Just goes to show that if all the economies in the EMU were strong like Germany we’d have seen rate hikes far sooner.
Thanks darthdimsky for this nice answer which much inside!
As the US seems to have a Federal working system promptly to react, the EU seems to be a lumbering beast with some bright people arguing with some less bright people to get something done. Maybe the reason the EUR only fell since its introduction…
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Huge coincidence. I was just reading this article about the ECB’s struggles. It points out the problem countries and shows the bond spreads between those countries and the German bonds. Basically if they raise rates they risk a financial collapse of some problem nations in the EMU.
The problem countries listed are Portugal, Italy, Greece & Spain. They’re collectively referred to as PIGS in the article. I think you should read it dude. Pretty insightful.
Mr Weidmann said it best all those years ago that for the EUR to work well all the member countries need to have more aligned financial & economic systems. Because they don’t have any the countries that have the best discipline (like Germany, Netherlands & Austria) are suffering. It’s really sad.
Disclaimer: Am not bashing any of the weaker EU countries listed. My own country (Sri Lanka) has been much worse when it comes to applying any fiscal discipline.
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Thanks for the article. Really seems that the ECB puts up a facade, so that they appear credible on the news and that behind the scenes, nothing really happens and the problems accumulate.
Sad, is the word. You nailed it.
I believe they have no choice but to always be optimistic. It’s a common trait in Central Bank dealings with the media. If they aren’t they will induce panic among the markets. The ECB aren’t the only ones guilty of this. All the central banks are notorious for this. Here’s an example of Governor Kuroda telling folks at Davos there’d be no negative interest rates a week before the BOJ implemented them in 2016. Time stampled.
I don’t think the ECB can help the fact that they cannot enforce monetary/fiscal policies as efficiently as other central banks. Lagarde makes a mention of this in her speech today.
“Second, the euro area has a unique institutional set-up, built around 19 not yet fully integrated national financial markets and 19 national fiscal policies, with limited coordination. This presents the risk of our monetary policy stance being unevenly transmitted across the union.”
If I had the knowledge/qualifications and were paid even 10x as Lagarde was being paid I would take her job. It’s thankless. They are under immense pressure from all sides and are held accountable for the bad decision making in some countries. And they are given the job of maintaining the EUR and seeing that those countries don’t get screwed over. For e.g. if they are too aggressive in their monetary policy they could push the weaker EMU countries to bankruptcies and be responsible for a global contagion. They got a pretty tough job.
On the other note they have said they stopped asset purchases and are raising hikes from JUL onwards. So some good news.