Saturday, March 5, 2011

Why a 2% inflation target for the Eurozone and other myths & realities!

1) With February Eurozone inflation at 2.4% (Eurostat flash estimate & 2.3% in Jan 2011), above the traditional 2% fixed (ie permanent) target of central banks, the potential for a rise in the ECB interest rate in April exists (with many side-effects for EZ economies & firms).

But is a fixed inflation target the best policy?

a) See "Rethinking Macroeconomic Policy", by Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro, Feb. 12., 2010.

b) What really bothers me about all that can be described in the following (part of which I mentioned before recently):

How many policy makers at the EU and the 27 national levels really care about what happens to the micros & SMEs? Especially, the Eurozone ones?

If the EU or the Eurozone has a higher propensity than the UK & US for inflation then consider that maybe that is because of its incomplete single market & union! Then rather than monetary policy, the solution, albeit not of immediate application should be more focused towards making the single market more real and in deciding to move to political union (at EU or EZ level)!

But who has the "nerve" to propose that and tear down many myths?

So why this monolithic fear/phobia of inflation? (1A) should shed some light into that!

Note that for a long time now the ECB rate is 1%, the UK 0.5%, the US 0.0-0.25%! To my MBA and policy mind that means that the Eurozone needs (?) to maintain a higher interest rate than the US and the UK in order to be in equilibrium. Or is it something else? Eg the result of economic dogma? Who's dogma?

I would urge policy makers in Brussels and acroos the Eurozone and the rest of the EU to consider the effect on Eurzone firms' ability to a) export b) defend their markets since the Euro will rise vs USD, Yuan, Pound etc. And the effect on jobs.

PLus: If the ECB interest rate goes up next time (because of what I dare call "inflation-phobia" by some) what will be the effect on financing cost & access to funding of SMEs & of the GIIPS?

Who realises that the EU;s micros & SMEs (and ppl) need EU-wide single laws in everything for the EU to work and provide jobs? I do think that a key part of the EU and EZ problems in insuffcient integration. Another reason why sovereignty IMO can only be achieved at EU level instead of UK, French, German, etc levels. The other has to do with systemics and dynamics outside the EU (see developments in China, USA, SE Asia, Russia, South America, Africa, etc).

Finally, for now, there is a way for the German taxpayer (some like to call Germany the "paymaster of Europe", yikes) to bear less burden in the financing of the EU - Eurozone:

A US-style EU or Eurozone "federal" income tax!
Then instead of Germany or the German taxpayer being the "paymaster" of the EU/EZ, the high income earner in the EU or EZ will! Only fair! Right> So, who is in favor of an EU/EZ federal income tax?
A Catch 22? A Gordian Cord? Who will be/prove Europe's Alexander the Great?

2) German-French Competitiveness Pact: EPP & Socialist summits in Helsinki and Athens

It is Saturday morning and news from Helsinki from Friday's intra-EPP discussion (see Bloomberg's "Merkel Rebuffs Bid by Ireland's Kenny to Cut EU Bailout Costs") show that A. Merkel has the choice: a) Win next fed election or b) Make European history but of course there exists the possibility A Merkel, via her tactics, will lose next German fed election as well as "destroy" EUrope!

3) More on the inflation issue and the apparent willingness of some EZ central bankers to raise interest rates. All we know re February is a flash inflation estimate from Eurostat that puts Eurozone inflation at 2.4%. How about January? Back on Feb 28, Eurostat had published the inflation stats for January 2011. These do not show a significant impact of staple foods.
Read for yourselves:

Euro area annual inflation up to 2.3% , EU stable at 2.7%
Euro area annual inflation was 2.3% in January 2011, up from 2.2% in December 2010. A year earlier the rate was 0.9%. Monthly inflation was -0.7% in January 2011.
EU annual inflation was 2.7% in January 2011, unchanged compared to December 2010. A year earlier the rate was 1.7%. Monthly inflation was -0.4% in January 2011.

Inflation in the EU Member States (Jan 2011)
In January 2011, the lowest annual rates were observed in Ireland (0.2%) and Sweden (1.4%), and the highest in Romania (7.0%), Estonia (5.1%) and Greece (4.9%). Compared with December 2010, annual inflation rose in fifteen and fell in twelve Member States.
The lowest 12-month averages up to January 2011 were registered in Ireland (-1.4%), Latvia (-0.7%) and Slovakia (1.0%) and the highest in Romania (6.2%), Greece (4.9%) and Hungary (4.5%).

Eurozone
The main components with the highest annual rates in January 2011 were transport (5.1%), housing (4.5%) and alcohol & tobacco (3.7%), while the lowest annual rates were observed for clothing (-0.6%), communications (-0.2%) and recreation & culture (0.1%). Concerning the detailed sub-indices, fuels for transport (+0.58 percentage points), heating oil (+0.19) and electricity (+0.11) had the largest upward impacts on the headline rate, while garments (-0.14), telecommunications (-0.08) and rents (-0.07) had the biggest downward impacts.
The main components with the highest monthly rates were housing (1.2%), transport (1.0%) and health (0.6%), while the lowest were clothing (-13.3%), recreation & culture (-2.1%), household equipment and hotels & restaurants (-0.5% each). In particular, fuels for transport (+0.18 percentage points), electricity (+0.12) and restaurants & cafés (+0.07) had the largest upward impacts, while garments (-0.71), package holidays and footwear (-0.16 each) had the biggest downward impacts.

4) A key factor is rising prices of oil and many staple foods (a repeat of the 2008 crisis in the world prices of staple foods and oil or worse?)
A BBC News - Q&A (Feb 3): "Why food prices and fuel costs are going up" is insightful!
Note: According to the BBC "the FAO says speculators who trade commodities on the financial markets are not to blame for the huge rise in prices, but they have made matters worse".

5) Some more recent Eurozone and EU stats (from Eurostat), to get a better picture on dynamics & systemics:

5a) On March 3, Eurostat, published EU and Eurozone volume of retail trade stats (1st estimates):
In January 2011, compared with December 2010, the volume of retail trade was +0.4% in the Eurozone and +0.6% in the EU27
In December 2010, retail trade fell by 0.4% and 0.3% respectively.
In January 2011, compared with January 2010, the retail sales index increased by 0.7% in the Eurozone and 1.9% in the EU27.

Food, Drinks, Tobacco:
In January 2011, compared with December 2010, “Food, drinks and tobacco” gained 0.1% in the euro area, but fell by 0.3% in the EU27.
In January 2011, compared with January 2010, “Food, drinks and tobacco” fell by 0.8% in the euro area and by 1.3% in the EU27.

5b) One day before, on March 2, Eurostat had published industrial producer price stats
In January 2011 compared with December 2010, the industrial producer price index rose by 1.5% in the Eurozone and by 1.4% in the EU27
In December 2010, prices increased by 0.8% and 1.2% respectively.
In January 2011 compared with January 2010, industrial producer prices gained 6.1% in the Eurozone and 6.5% in the EU27. Why?

Monthly changes
In January 2011, compared with the previous month, prices in total industry excluding the energy sector increased by 0.8% in both the Eurozone and the EU27.
Prices in the energy sector rose by 3.2% and 2.5% respectively.
Among the Member States for which data are available, the highest increases in the total index were recorded in Spain (+2.4%), the Netherlands (+2.1%), Belgium and Portugal (both +1.9%). Decreases were observed in Sweden (-1.3%), Denmark (-0.5%) and Cyprus (-0.1%).
Annual changes
In January 2011 compared with January 2010, prices in total industry excluding the energy sector increased by 3.9% in the Eurozone and by 4.0% in the EU27. Prices in the energy sector gained 12.5% and 12.7% respectively.
Among the Member States for which data are available, the largest increases in the total index were observed in Bulgaria (+11.1%), Lithuania and the Netherlands (both +10.3%), and the smallest in Malta (+0.8%), Slovakia (+1.9%) and Sweden (+2.5%).


6) To what extent though is growth in some of the EU and Eurozone member states is pushing prices up?

+0.2% from Q3 2010 and +2.1% from Q3 of 2009

Eurostat 2nd estimates for Eurozone GDP Q4 2010:
+0.3% from Q3 2010 and +2.0% from Q3 of 2009

Let's see what the Q4 2010 GDP compared to Q4 GDP 2009 stats look like, ie how fast Eurozone and other economies are growing (source Eurostat data):

Eurozone 16 (whole) and Eurozone 17 (whole): both 2.0%
EU27 as a whole: 2.1%

Belgium 1.8%
Germany 4.0% (!)
Estonia 6.6%
Ireland N/A
Greece -6.6%
Spain 0.6%
France 1.5%
Italy 1.3%
Cyprus 2.2%
Lux N/A
Malta N/A
NL 2.4%
Austria 2.7%
Portugal 1.2%
Slovenia 1.9%
Slovakia 3.4%
Finland 5.0%

Estonia and NL based on not seasonally adjusted data

Thus only Estonia, Germany, Finland and Slovakia are growing (Q4 2010) at rates that are above 3%, a threshold many claim is needed for employment creation.

So is the Eurozone overheating with a 2.1% GDP growth rate (Q4 2010 vs Q4 2009)? To the extent that a 2.3% inflation in January and a flash estimate of 2.4% in February (against a traditional and somewhat "dogmatic" target of 2.0%) aided by global issues in the prices of some staple foods and oil justifies serious consideration by "some" central bankers in the Eurozone to raise the interest rate in the near future?

7) On Monday: Employment, Social Policy, Health and Consumer Affairs Council, 7 March 2011, Brussels. Read more via EUROPA - Press Releases

8) On Monday 7 March at 12.00 CET, the European Commission will issue a decision and press release concerning the historical aviation emissions

9) Antitrust: The European Commission closes probe into Hollywood studios after they change terms of contracts for digitisation of European cinemas.

10) Scottish parliament elections May 5. According to the Guardian, the LibDems are trailing very badly in the polls, as low as 8%!

11) Finally: BBC News reports that China says it will boost its defence budget in 2011.
Let me remind you that according to the CIA World Factbook (estimate) in 2006 China tied with Greece at No21 in military spending/capita, way above USA & all EU except Greece!

PS. So, what it is gonna be: pact or reform? EU27 or Eurozone17+? Schengen style or not?

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BRs
Nick

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