International Economics: IB Economics

Hurrah! Europe has exited recession, with the big four economies -  France, Spain, Germany and Italy - helping push Eurozone growth for the first quarter to 0.3%, exceeding expectations. It seems that the prospect of falling inflation and accommodative monetary policy mean that it will slowly recover, although growth will remain moderate.

The Guardian looks at the state of the Eurozone economy and argues that the latest interest rise is not going to be well-received, given the moribund state of many economies, notably Germany. It seems as though Germany and France seem to have accepted the fact that low growth is going to be a feature of the next few months. 

The ECB has announced that it will be look out for instances of price gouging and the possibility of EU firms using the current inflationary environment to increase their profit margins, exploiting consumers. Apparently this stems from some research shown to the ECB council suggesting that profit margins have increased by 25% at a time when ordinarily we'd expect them to be shrinking. 

Were they to do so, it would slow the rate at which inflation falls, although quite what the ECB can do about this is another matter. 

Following this week's unprecedented 0.75% rise in European interest rates, the European Central Bank has signalled that further rate rises are on the way - with monetary policy in both Europe and the UK looking to bring down inflation.  

Larry Elliott sets out the dilemma facing central banks across the developed world - how should they act? Increase rates? Keep rates the same? By how much? For how long? 

In many senses, the headline alone captures the remarkable nature of the recent policy environment. However, with Eurozone inflation estimate reaching 8.1%, the ECB has decided that it can no longer stay its hand. 

The current policy interest rate is -0.50% and the bank is planning to raise rates by 0.25% in July and have rates back at 0% by September. You might reflect upon what the Bank is trying to achieve by raising rates, and whether there will be much in the way of an immediate impact upon economic agents, as well as what such a move is signalling. 

A look around the world's largest economies for insights into how they are dealing with the spectre of inflation - and an interesting chart detailing how shortages are feeding into price rises across the globe. 

It seems that many central banks look like holding off on interest rate increases for fear of jeopardising the recovery from the pandemic. Indeed, many still have to wind down their QE schemes, and will do that before raising rates. 

And then there's the UK where, it seems, a rate rise is more likely.

The Guardian casts its eyes in the direction of Europe, noting that the EU has relaxed some of its fiscal rules, notably the Growth and Stability Pact, and is thinking about what comes next.

The editorial view? Keynesian economics, it seems...

The Eurozone has shrunk by nearly 4% in the first quarter of 2020 as a direct consequence of the coronavirus pandemic. Of course, countries such as France, Italy and Spain have been among the worst affected,  whereas Germany has seen only a slight decrease in economic growth and a commensurately small increase in unemployment.

Stimulus packages from around the globe: the ECB have followed the Fed and the UK government with an unrpecedented stimulus package to buy debt and try to prop up Europe's economies and the Euro more generally. 

As with other such packages, the devil will be in the detail, but the intention is sound. 

It's hard, for Lagarde. The European Central Bank (ECB) has announced plans for a monetary stimulus to help the Eurozone economy through the coronavirus outbreak. 

It is looking to encourage commercial banks to lend and has restarted a programme of quantitative easing. I never thought I'd be using that word again so shortly after the last financial crisis, but that's probably a function of my age. 

The stagnation of the Eurozone continues - not apace, but just continues - and the new head of the ECB, Christine Lagarde, has announced a wide-ranging review of ECB strategy and the restarting of QE in the mean time. 

What are the implications of this for Eurozone growth and inflation. If past evidence is anything to go by, not much.

The Eurozone seems to be in danger of slipping into recession - and so Super Mario, as Monsignor Draghi is known, has moved to cut the deposit facility rate from -0.4% to -0.5% and restart quantitative easing.

Back to the future it seems. However, it seems that the ECB is running out of monetary policy tools, and perhaps government's notably Germany's might have to take up the slack by pursuing a fiscal stimulus package.  

The December inflation data for the Eurozone, seeing an uptick in inflation to 2.9%, has led to speculation about the future direction of interest rates. Might it deter the European Central Bank from cutting interest rates to some degree?

The European Central Bank has nudged interest ratees higher by 0.25% to 3.25% - a record high for the institution - although there are concerns that this might trigger a recession in the Eurozone.

It's part of the trade-off between needing to tackle inflation and the effects on growth, and has been mirrored across the developed world with the Federal Reserve having also raised rates by the same amount.

A lovely article about the nature of monetary policy, which looks at the conduct of global central banks and also highlights the difference between demand-pull and cost-push inflation.

In essence, Philip Inman argues that current rhetoric about tightening monetary policy to tackle inflation has had, and will have, little effect upon it, in large part because inflation is driven by higher energy prices. 

Interest rates are going up sharply in Europe with the European Central bank announcing a 0.75% rise in all of its key rates: the deposit rate goes from 0% to 0.75%, the refinancing rate to 1.25% from 0.5%. Additionally, they've also given notice that they expect rates to rise yet further in the rest of the year. 

As in the UK and the US, these rate rises are seen as a way of tackling Eurozone inflation which is expected to reach 9.1% in August. 

Inflation in the Eurozone has reached record levels - at 8.6% - and the signs are that the ECB are on the point of tightening monetary policy, in line with the rest of the developed world.

Inflation's up in the Eurozone too - reaching 4.9% last month - the highest figure since the creation of the Euro and well above the 2% target. 

Much like the UK, the bulk of this inflationary pressure is cost-push, and some worry that it's already being reflected in higher wage claims which may stoke a wage-price spiral. The flip side of this is that the uncertainty associated with the Omicron variant means that policymakers are wary of acting decisively at this stage. 

Prophet of doom, Mohamed El-Erian wonders whether central banks will be able to stave off yet another economic crisis in the wake of the coronavirus pandemic. He's - typically - not very optimistic

However, the overriding impression is that uncertainty is hampering any attempt at stimulating a recovery.

The ECB has announced another increase in the size of its bond buying programme, trying to buttress the various forms of fiscal stimulus being offered with the appropriate monetary stimulus.

This will take its bond buying to 1.35 trillion euros, and the duration of the programme is being extended by another six months to June 2021. We live in interesting times, indeed.

The Guardian analyses the ECB intervention - and reaches an unsurprising conclusion. Really? Is this the best you can do?

Larry Elliott is less than impressed with Christine Lagarde. In contrast to the reaction of markets to the intervention of her predecessor, Mario Draghi, he wonders whether yesterday's announcement of quantitative easing has make markets more jittery, and reduced fragile confidence rather than bolstered it. 

This excellent Guardian article recapitulates something that I was dimly aware of, but which isn't always self-evident. Unlike the Bank of England, the Federal Reserve or the Bank of Japan, the voting of the ECB's governing council isn't made public.

Barry Eichengreen argues that with the appointment of Christine Lagarde, this is likely to change; he argues that independent monetary policy is only truly tenable when policymakers can be held accountable, and indeed when teaching about UK monetary policy, I make great play of the advantages of transparency and credibility. Perhaps it's time for the ECB to follow suit.  

An interesting first speech from Christine Lagarde, as President of the ECB, in calling for EU governments to look to increase public investment.

It strikes me as a wise approach, given that monetary policy seems to have run out of road, and that Europe's struggling economies require some other form of stimulus. Apparently, even the ECB is Keynesian now; that said, dress it up with modern concerns, notably the digital economy and greening the economy and somehow it doesn't seem so threatening.