Coppola Comment

Eurozone inflation is in the doldrums again. After perking up to 1.7% in April, it slumped back to 1.2% in May. According to Bloomberg , this was "lower than expected". But I wonder who, apart from the ECB, really expected anything else. Core inflation has been well below target for the last five years: (chart from Bloomberg) And although the headine HICP measure increased in 2016-18, this was mostly due to the oil price bouncing back from its 2014-15 slump: (chart from Macrotrends) The wild swings in the energy inflation rate can be clearly seen on this chart from Eurostat: It's perhaps not obvious at this resolution, but the movement in headline HICP is almost entirely due to the energy price. In fact comparing the inflation and oil price charts, it is hard to see much justification for the ECB's claim that it started QE in March 2015 because inflation expectations were becoming "unanchored". Headline HICP briefly dipped below zero...

Over at Bruegel, Zsolt Darvas takes the ECB to task for systematic forecasting errors in the last five years. He shows that the ECB has persistently overestimated inflation and unemployment, and on this basis he questions the ECB's decision to end QE in December 2018. I share his concern that the ECB has tightened too soon, though as the ECB's QE program is seriously flawed and very damaging, I am not sorry to see the back of it. But I think that in focusing on the last five years, he has underestimated the scale of the ECB's failure. Here is his lovely chart showing Eurozone inflation since the creation of the Euro: The ECB's persistently high forecasts in the last five years are painfully apparent. But what interests me is not the forecasts, but the outturns. The entire chart shows a marked downward trend. Inflation in the Eurozone has never been stable. Not once, in its entire history. What the chart shows is systematic policy failure by the ECB. It has ne...

I always find the views of former policymakers fascinating, not least because of their tendency to become much more outspoken once they are out of office. Some express much more radical views than they did while in office: Larry Summers springs to mind, and Adair Turner. Others become critical of the institutions that they ran: Mervyn King, for example. The latest former policymaker to reveal what he really thinks is Vítor Constâncio, Vice President of the ECB from 2010 to 2018. In a fascinating lecture at the London School of Economics, he discussed the causes of the Euro crisis, the policy responses to it, and what should be done to prevent such a disaster happening again. The entire lecture is on an LSE podcast (audio only, sadly), but Vítor released four of the slides from his presentation on Twitter, with brief comments . The slide that has attracted the most attention is this one: Many people seem to have interpreted this as some kind of mea culpa. And the slide doe...

Germany's Finance Minister Wolfgang Schaueble has long been critical of ECB monetary policy,. But now, as Reuters says,  the gloves are off . In a speech at a prizegiving for an ordoliberal economics foundation last Friday, Dr. Schaeuble effectively demanded that the ECB raise interest rates. The justification? Very low interest rates hurt Germany's savers, which are the bedrock of its economy. There is a political dimension to this. Dr. Schaueble's party, the CDU, is losing popularity and desperate for pensioner votes. Dr. Schauble even went so far as to blame ECB monetary policy for the rise of the right-wing eurosceptic AfD: "I said to Mario Draghi...be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy," Mr. Schäuble said. This is outrageous. Dr. Schaueble is a politician, not a central banker. His attempt to influence the conduct of ECB monetary policy to ga...

In my last post, I warned about "siren voices" calling for tighter monetary policy while the Eurozone economy is stuck in a toxic equilibrium of low growth, zero inflation and intractably high unemployment. Specifically, the so-called "German Council of Economic Experts (GCEE)" has called for the ECB to reduce or unwind QE: ...the European Central Bank should slow down the expansion of its balance sheet or even phase it out earlier than announced. Of course, the GCEE is only concerned with Germany. Perhaps, given that their focus is entirely national, they are justified in expressing concern about the continuation of monetary stimulus if the German economy doesn't need it? Well, no, they aren't. The ECB's concern is the Eurozone as a whole, not one particular bit of it. If the Eurozone's overall economic performance justifies QE, then the ECB should do QE, and if that means Germans have to tolerate higher inflation and lower interest on thei...

" The euro area economy is gradually emerging from a deep and protracted downturn. However, despite improvements over the last year, real GDP is still below the level of the first quarter of 2008. The picture is more striking still if one looks at where nominal growth would be now if pre-crisis trends had been maintained." So said Peter Praet, Member of the Executive Board of the ECB, in a recent presentation to the FAROS Institutional Investors' Forum. He's not wrong. From his presentation, here is a chart showing the difference between current output, current (estimated) potential output and projected output prior to 2007: That is indeed a striking gap. It is reflected in this chart from Eurostat (August 2015): So, the fall in GDP growth between 2007 and 2015 has resulted in a rise in unemployment of nearly 4 percentage points. Currently, across the Euro area as a whole (population about 340m), adult unemployment stands at 11% and youth unemployment ...

Everyone has been so transfixed by Yanis Varoufakis's "Plan B" revelations that his defence of the ECB's Mario Draghi passed unnoticed. Here it is, transcribed from the Lamont tape by Peter Spiegel at the FT: Mario Draghi has handled himself as well as he could, and he tried to stay out of this mire, the political mire, impressively. I have always held him in high regard. I hold him in even higher regard now, having experienced him over the last six months. Having said that, the European Central Bank is set up in such a way that it is so highly political, it is impossible not to be political. Don’t forget the ECB, the central bank of Greece – because that’s what the ECB is, it’s the central bank of all our member states – the central bank of Greece is a creditor of the Greek state, and therefore it is also [break in audio] once it is the lender of last resort, supposedly, and the enforcer of fiscal austerity. Now, that violates, immediately, the supposed disti...