Friday, October 3, 2014

Trouble in Euroland -Deflation Lurking?

This article in the UK-Telegraph suggests there is trouble in Euroland. Ambrose-Evans Pritchard says that the rise of an anti EU political party in Germany may complicate any plans the ECB has to startup a QE type program. Some quotes below and then a comment.

 "Standard & Poor’s has issued an extraordinary credit alert on the eurozone, one that deserves close attention."

"It warns that the rise of Germany's AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form of QE, stimulus that has already been pocketed and spent in advance by the markets."

"S&P also warned that a forthcoming judgment by the European Court on the ECB’s backstop plan for Italy and Spain (OMT) might queer the pitch yet further."

"The German Verfassungsgericht has already ruled that the OMT “manifestly violates” the EU Treaties and is probably “Ultra Vires”, meaning that the Bundesbank may not legally take part. The European Court can hardly ignore this if it values its own survival. (Just to clarify, the German court does not defer to the ECJ as a superior court. It reserves the sovereign right to strike down anything the EU institutions do, pointedly reminding overzealous officials that the member countries are the “Masters of the Treaties”, and not the other way round)."

"David Marsh from the monetary forum OMFIF – and author of books on both the Bundesbank and the euro – says there cannot be any serious QE in these circumstances. “QE is just not on the table. It is a red herring,” he said."

"I agree entirely with S&P’s analysis, and I also note a stark divergence in market perceptions between German experts (or those who read German and follow Germany closely) and the Anglo-Saxon/global fraternity. Americans in particular seem to view the ECB as the counterpart of the Federal Reserve, responding to normal economic signals. It is nothing of the kind. The ECB is a political animal. It cannot stray far from German political consent, or at least it cannot do so safely.
It is already clear that Germany will drag its feet on the ECB’s plans for private bond purchases (ABS, RMBS, covered bonds) for months. Berlin/Frankfurt will seek to ensure that it does not add up to much – at least until Germany itself gets into trouble."

"We are back to the core problem that bedevilled the eurozone through its three near-death experiences – May 2012, November 2011, and July 2012 – which is how far the German body politic is willing to go to shore up monetary union when push comes to shove."

"This issue has never been resolved. At each stage Germany has agreed to do just enough to keep EMU going, always at the twelfth hour, without ever going far enough to put the currency union on a workable footing (Very difficult in my view, though that won’t stop EU leaders persisting until victims take matters into their own hands)."
My added comment: So will we get a QE style asset purchase program out of the ECB or not? This article suggests it won't happen. If it doesn't happen, does the Eurozone free fall into a full scale deflation? This is why all this requires constant monitoring. It is impossible to project whether a major deflation event might be coming or a major inflation event (due to official response trying to stave off the deflation event). What is very clear is that the seeming calm we have now (where the forces of deflation and inflation seem to have offset each other) is not likely to last much longer. We probably get a much clearer picture by early 2015.

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