- Regional inflation in Eurozone at five-year lows
- Bündesbank blocking ECB's path to sovereign bond purchases
- Italian unemployment hits highest level since 1977
By Stephen Pope
It certainly is a “Black Friday” inside the Eurozone, but not in the retailing sense of the word. Regional inflation declined back to September's levels this month, hitting its five-year low of 0.3%.
This places more pressure on European Central Bank president Mario Draghi to swiftly enact policy measures that will combat the tortuous tumble toward deflation.
Food, alcohol and tobacco prices increased by 0.5%. Given that 28% of Eurozone imports are accounted for by oil, fuels and lubricants, it is clear that the slowdown can be partially explained by the substantial decline in oil prices.
The Eurostat report showed that energy prices fell 2.5% in November from a year earlier. These data, however, do not reflect the deeper decline in crude oil following Opec’s refusal to reduce oil production.
That implies that next week, (Thursday, December 4), Mario Draghi will be caught between the proverbial rock and a hard place as he will have to confirm another round of pessimistic forecasts, tell press that he wants to raise inflation as fast as possible and emphasise that he will use all available tools at his disposal (even though the governing council is far from united on this issue).
Deadlock at the ECB puts president Mario Draghi in a difficult position
before the press. Photo: Hannelore Foerster \ Getty Images
Of concern here is the inertia that seems to exist at the heart of the Eurozone's seeming inability to recognise the scale of, and react to, the problems it faces. It is undeniable that the ECB spent far too long both sitting on its hands and believing its own medium-term economic forecasts without looking at the actual, street-level situation across much of the continent.
There are increasing signs of deflation throughout the region, just look at consumer prices index data for the top five economies....
... Germany is at 0.6%; France, 0.5%; Italy, 0.2%; Spain, minus 0.5%; and the Netherlands is at 1.1%.
Time gentlemen please
Surely we are now at a point where the Bündesbank (BUBA) cannot keep blocking the path to sovereign bond purchases as the ECB's quantitative easing is stepped up to mimic the actions of the Federal Reserve, the Bank of England and (of course) the Bank of Japan.
A few indecisive policy makers have dropped hints that the ECB governing council meeting next Thursday is not be the appropriate moment to add to the stimulus that is already in place. This week, ECB vice-president Vitor Constancio said that the best moment to "consider new tools" would be in the second quarter of 2015.
This, of course, would be so the effects of low refinancing, negative deposit rates, targeted long-term refinancing operations plus covered bond and asset-backed securities purchases could be evaluated in a broader sense than is currently possible.
On the other hand, one wonders why, having excited the markets with tough talk about QE last week, the bank would seek to snatch away those very same hopes this week?
I sense that, behind the polite niceties and smiles offered for public consumption, there is one almighty squabble going on right now. In fact, it is likely to be a power play between the ECB and the German Bündesbank.
Specifically, I sense that Draghi is being cowed by BUBA and the Dutch central bank, as neither nation is keen on sovereign asset purchases (as they are one step too close to central bank state funding).
Bündesbank president Jens Weidmann is a known opponent
That is why Draghi said yesterday that the bank requires more time for the “positive effects of the current stimulus to be felt’’ before adding that "should it become necessary to further address risks of too prolonged a period of low inflation, the governing council is unanimous in its commitment to using additional unconventional instruments within its mandate…”.
Charting the course of the Titanic
These types of comment are such nonsense. For goodness' sake, there has been far too much dither, delay, denial, and indecision already. How bad does it have to become before action is taken? Presently, Eurozone inflation is sinking faster than the Titanic… we all know what happens to unsinkable ships.
Repeatedly, Draghi has said that the ECB is aware of the risks and is ready to act should they increase. Well, Mr. President... the time to act is now, not next year.
It was actually time to act several months ago, but we cannot turn back the clock. So act now for goodness' sake!
In fact, if one looks back over the past year, one can nearly anticipate what Draghi will say next Thursday. After all, at the policy meeting press conference on February 6, he cited the need for
That could explain why he hadn’t added more stimulus at that point. But then, he repeated on February 23 that officials "ready to take any action…”.
Now or never
Honestly, if the ECB were a private sector organisation, its share price would be at rock bottom and its shareholders would likely turn the management out, as they are lethargic, arrogant and incompetent.
Earlier this year, inflation in six German states slowed. This proved to be good indicator for the path of the German CPI, and way back then I argued that the governing council should pay close attention to the inflationary trend.
They did not, and now look at the mess the region is in...
It does not help that the reform at the national level is not materialising.
Today Italy’s unemployment rate rose above 13% in October, setting another new record as businesses refrain from hiring amidst the country’s longest recession since World War II.
The unemployment rate rose to 13.2% from a revised 12.9% the previous month, the highest rate seen since the quarterly series began in 1977.
A view to the metaphorical horizon. Photo: iStock
My message to President Draghi is this, and it is simple:
Just because your fellow Italians are not offering swift and aggressive action to solve their national problem, there is no excuse for you to be inactive and ignore your regional problem.
Act now, or next year, the Eurozone may decide to quantitatively ease you from your office.
Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or comment below to engage with TradingFloor.com's social trading platform.