Is the Bundesbank living in the past?

Wolfgang Münchau (FT) is right (See FT's "Draghi is devil in Weidmann’s euro drama"). While the ECB is evolving into a Fed, the Bundesbank lives in the past. Hence it is not Europe that has to "speak" German as CDU's Kauder said a year ago, but the German policy/econ elite that must start "speaking" American!

Models: The Fed vs the ECB

Does the Euro crisis show that the Fed (US Federal Reserve) model is more effective than the ECB model?

The latter focuses on minimization of inflation, a "single directive" (think by analogy "The Terminator" robot and its single directive) inherited (mainly) from the Bundesbank whereas the Fed's model cares about employment and other economic parameters, not just inflation.

Food for thought!

Extra question:

Why did the makers of the Euro give such a narrow mandate to the ECB?

Does the Eurozone need a new central bank (part 2)?

Further to Part 1 (July 7, 2011), while the Fed this week pledged to keep interest rates near zero for another 2 yrs, the ECB's President has boasted for having kept Euro inflation lower than Germany did during the DM days (1)!!! Does it take an economist or MBA to figure out that there is something wrong with that? The effects on the price of the Euro and thus on Eurozone's firms, over-priced for a large part of 2002 - present, not only in foreign markets compared to US, Chinese or even non-Eurozone EU made products (and services, see eg tourism) but also in the Eurozone and even home markets!

Europe, wake up! Anti-inflation fixation is suffocating the real Eurozone economy!

To be fair to the ECB, see also my post (Aug 4): Why does the ECB need to keep its rates higher than the Fed and the Bank of England?

(1) New York Times, August 5, 2011: Euro Builder Ends His Career on a Bitter Note: "... As he never tires of reminding journalists, since the introduction of the euro in 1999, the central bank has held inflation below the official target of about 2 percent — a better record than the Bundesbank in the heyday of the German mark...."

Why does the ECB need to keep its rates higher than the Fed and the Bank of England?

Both the European Central Bank (the central bank of the Eurozone17) and the Bank of England have today decided to keep their interest rates (on rhe Euro and on the Pound) stable.

But whereas the 0.5% interest rate of the BoE has been stable since the bank decided to react to the effects of the 2008 economics recession (and so has the Fed, with a 0-0.25% rate), the ECB has already raised the Euro interest rate twice this year, from the 1% it had moved to in order to address the global recession.

The situations with Italy and Spain are being addressed by various measures that are beyond the scope of this post/analysis.

The issues are:

1) Why does the ECB insist with this anti-inflation obsession? It should have lowered its interest rate back towards 1% as a policy measure to ease the tension on Greece, Portugal and Ireland as well as Italy and Spain and the whole of the Eurozone. Especially since Eurostat data released on August 2 (2 days before) showed that in June 2011 compared with May 2011, the industrial producer price index remained stable in both the Eurozone and the EU. In May prices fell by 0.2% and 0.3% respectively.

In a June 2011 - June 2010 comparison, industrial producer prices gained 5.9% in the Eurozone and 6.9% in the EU, down from 6.2% and 7.1% respectively in the May 2011 - May 2010 comparison. The Eurozone figure had peaked at 6.8% in March 2011-March 2011 and April 2011-April 2010 comparisons. Thus it was in June 2011 900 basis points below the peak. Since producer prices are an indication of the inflation (consumer prices index) a few months down the line, one can appreciate that the high annual industrial producer prices were a cause for inflation concern down the line in the Eurozone. And coupled with the inflation obsession of the ECB, the Bundesbank and a few other circles in Europe and globally, one can see why the ECB raised its rates 2 times this year. See but not fully appreciate, because those hikes had significant effects on other key socio-economic parameters, in some states more than others, but in all.

2) Which brings one to the following issue:

Why does the ECB have to offer such a premium for the Euro interest rates compared to the Pound and the USD?

It was already a premium at 1%, compared to the Pound's 0.5% and the USD/Fed's 0-0.25%, ie +50 bps to +75 to +100 bps (basis points). Now it is at +100 bps vis-a-vis the Pound and +125 to 150 bps vis-a-vis the USD!!!!

What on Earth (or in the systemics of the EU - Eurozone economy) requires such a premium, other than a premium of inflation-obsession?

Is it the cost of the absence of genuine economic and political union that translates into a Eurozone economy that lacks key elements that the US and UK economies have? Eg movement of labour? And in general the sub-performance in the functioning of the Single Market? The absence of EU or Eurozone economic policy? Tha forces the ECB to use interest rates and a premium to keep the Euro in balance with the USD and the Pound?

In view of 2.7% stable Eurozone inflation, was the ECB rate hike needed after all?

According to the Eurostat:

June 2011 Eurozone annual inflation stable at 2.7% (ie same as in May).

In the EU (27( it is down to 3.1%

Was the ECB new rate hike from 1.25% to 1.5% needed last Thursday then?

Why?

Note: Maybe the May industrial producer prices? See my "What is driving Eurozone prices up?" post July 7.

Does the surprise June drop in UK CPI from 4.5 to 4.2% validate ...

Does the surprise June drop in UK CPI from 4.5 to 4.2% validate Bank of England's decision last Thursday not to raise its rates?

Compare that with ECB philosophy/decisions!!!

What does one get when one tries to balance Bundesbank logic and Logic?

That's what one gets when one tries to balance Bundesbank logic and Logic:

Today's ECB decisions! See my previous post

Does the Eurozone need a new (!!) central bank?

"With the unemployment rate above 9%, Fed officials are reluctant to boost its target for short-term rates" reports the WSJ.com in "ECB's Trichet Extends A Hand to Portugal", July 7, 2011.

Today, while the Bank of England kept its rate unchanged, in spite of inflationary pressures (yet very low growth) plus a very high (No. 1 in the EU) May 2011 (compared to May 2010) industrial producers prices hike, the European Central Bank raises its basis rate for a second time in 3 months. from 1.25% to 1.5%.

It seems that the Eurozone urgently needs a different central bank!!! One eg that, lie the Fed, cares about employment as much as it cares about inflation. The ECB seems too "dependent" on Bundesbank's preoccupation (or should one call it obsession) with inflation.

Note: While the Fed & the Bank of England have kept their recession rates of 0%-0.25% & 0.5% the ECB has raised its rate frm 1% to 1.5% in 3 mo

Industrial producer prices in April, Eurozone vs USA

In my June 7 post "What are the high Industrial Producer Prices in April (EU, Eurozone) a sign of?" I noted that according to Eurostat (June 6) in April 2011 compared with April 2010, industrial producer prices gained 6.7% in Eurozone and 7.8% in the EU! With UK, +13.1% in April, having the highest hike in the EU27!

Producer prices are an indication what the retail/consumer prices will look like a few months down the line. And of course they worry economists. Yet last Thursday, both the Bank of England and the ECB chose not to raise their interest rates (yet the ECB did raise its rate 2 months ago, from 1.00% to 1.25%).

For a wider picture see my post of June 10 "While the ECB and the Bank of England kept their rates stable: ECB, BoE and Fed, 3 different central banking philosophies".

Today, I decided to have a look at what is happening on other side of the Atlantic, in the USA.

I found a table: Producer Price Index, Industrial Commodities (1982=100) in PDF format at the site of the Bureau of Labor Statistics of the US Department of Labor (US Bureau of Labor Statistics, PPI Program, last update: May 12, 2011).

I note that the index for April 2011 is 203.9 whereas the index for April 2010 was 187.0. I assume that by the operation: (203.9-187.0)/(187.0 x 100) I can get a number that I can compared with the UK, Eurozone and EU ones. That number is: +9.04%

Assuming the above assumption is correct, then the Eurozone industrial producer prices hike in April 2011 (compared with April 2010), +6.7%, is quite lower than the US one, +9.04%. That seems to imply that inflationary pressures from industrial goods at the producer stage are less strong in the Eurozone than in the USA. But I am not an expert in those things.

But remember, the USD (Fed) rate is 0 to 0.25% and the Euro (ECB) one 1.25%. And that the Fed, like the Bank of England, and unlike the ECB, has to raised its rate for a long time!

By the way, the US April inflation year-on-year was 3.2% (see: Reuters, May 14) whereas the April one in the Eurozone was 2.8% and the flash estimate of the Eurostat for May is 2.7%. The 3.2% US inflation is the highest since October 2008.

The US GDP: Compared with the first quarter of 2010, US GDP in the 1st quarter of 2011 grew by 2.3% in the United States (source: Eurostat) while in the Eurozone and the EU it was 2.5%.

This is all, for now.
What do you make of all the above?

Is an independent central bank part of a democratic deficit?

Oh my, another post of mine on central banking!
But I cannot help it!
2 stimuli

1) Today's Reuters interview with the governor of the central bank of India: Greater need to ensure autonomy to central banks - RBI
This argument may be valid re India's specific case, but http://www.blogger.com/img/blank.gifin light of JC Junker's recent comments at the European Parliament that there is a need for an exchange rate policy and that the Euro is over-valued, the reverse argument is probably more applicable for the EU (the Eurozone actually).

2) Simon Johnson's (MIT professor, my alma mater (SB 1985) and former chief economist at the IMF) article in the New York Times (June 9): The Banking Emperor Has No Clothes.
It is a must read article, which refers to Tim Geithner inspired by a major speech Geithner made earlier this week to the American Bankers Association’s international monetary conference. A Treasury Secretary in the Obama administration, Mr Geithner was the governor of the NY Fed, one of 12 Federal Reserve Banks in the US that in turn "participate" in the US Federal Reserve Bank.
BTW, who "owns" the NY Fed (and most of the other 11 regional Feds in the US. as far as I know)? The banks! Ie the ones being supervised by the Fed in question. Oh my!
Dr. Johnson, whose views on the Euro crisis I do not usually agree with, makes though some interesting criticism of T. Geithner's philosophy and views, especially re which of the 2, the US or the UK, has the "lighter" financial regulations.

My main point:

Both of these articles stimulated me to think the following (yes, I am word playing around with the economic stimulus thing):

There is lots of criticism, by the so called Eurosceptics, whose main den is to be found in the UK but they are basically all over the place (ie planet), of an EU "democratic deficit".
Side note: I do not see the consistency of such an argument, especially when it talks of "unelected Eurocrats" (referring to the Commissioners etc) when it is coming from active citizens of a country/polity whose upper house has members that are not elected! But on this occasion my point is this:

Is central bank independence (which is nevertheless prescribed in the current EU Treaties in the case of the ECB) not an element of democratic deficit?

To the extent that the central bank, via market operations, sets a central interest rate that in turn affects liquidity thus inflation but also affects the price of the currency in the world markets vis-a-vis other currencies, how can a givernment of any kind have the ability to have an exchange rate policy as the President of the Eurogroup suggested the Eurozone should have, earlier this week?

Analyse this (or more precisely, factor this in in your understanding of the systemics of the world we live in)!

While the ECB and the Bank of England kept their rates stable: ECB, BoE and Fed, 3 different central banking philosophies?

Yesterday (June 9), both ECB (European Central Bank) and the Bank of England kept their "central" rates steady! But the difference between them is 75 basis points (Euro 1.25% vs Pound 0.5%, instead of the 50 that changed when the ECB raised its interest rate 25 basus points a couple of month ago (April 7) citing fears of inflationary pressures in the Eurozone (from global oil and food prices hikes).

For context read my post of April 7 2011: "Eurozone: That 2% obsession"!

Yesterday's respective decisions were made in the following context:

Eurozone:

1) 75/2011 - 31 May 2011
Eurostat May 31 release of its flash estimate for May 2011 annual inflation at 2.7%. Down 10 basis points from the 2.8% (annual) in April but way above the ECB's target of 2%.

2) Industrial producer prices in April up 6.7% compared with April 2010 (vs 7.8% in the EU)!

3) Second estimate (Eurostat, June 8) for the first quarter of 2011 GDP at +2.5% compared with the first quarter of 2010 (same rate for EU).

4) Seasonally-adjusted unemployment rate 9.9% in April 2011, same as in March (Eurostat, May 31)

UK:

1) Annual inflation rate in April at 4.5%, up from 4% in March.

2) Industrial producer prices in April up 13.1% compared with April 2010 (highest in the EU)

3) Second estimate (Eurostat, June 8) for the first quarter of 2011 GDP at +1.8% compared with the first quarter of 2010 (vs 2.5% in EU as a whole and in the Eurozone).

4) Unemployment rate for the three months to March 2011 7.7%

So the UK had a +1.8% growth (GDP) rate in Q1 vs 2.5% in the Eurozone but its unemployment situation is better than the Eurozone's (7.7% in the 3 months to March vs 9.9% in April) but its industrial producer prices is much higher than the Eurozone (13.1% vs 6.7% in April) and April inflation is 4.5% vs 2.7% in the Eurozone.

The Bank of England seems to have opted to resist the temptation to address the high inflation and industrial producer prices and did not "tighten" (ie raise interest rates, same 0.5% rate for 27 months in a row). In short it opted to growth and jobs (although jobless rate lower than Eurozone's) instead of inflation curbing.

That is the opposite than what the ECB had opted for 2 months ago! But then the ECB is only "responsible" for a 2%inflation target, not jobs or growth (as eg the Fed in the US that has kept is central interest rate at 0% to 0.25% for a long time now)!

And what is more, as BBC News reports "In his press conference, ECB president Jean-Claude Trichet pledged to exert "strong vigilance" on inflation, a signal to the markets that rates will be raised at the next meeting. "I would say... that it means that we are in a mode where there might be in the next meeting an increase of rates," he said. "But we are never pre-committed," he added."

Ouch! The ECB sounds like the Terminator robot in the well known series of films that only has one "directive" (order or goal): inflation minimisation. Unlike the Fed and the BoE decision yesterday.

What I do not understand is why the Pres of the ECB had to say anything re next months meeting and decision at all! Correct me if I am wrong, but the only thing the Bank of England "says" is to release, many days later, a record of the vote of its 9 member board.

Oh well.

Mind you, JC Junker, the Pres of the Eurogroup has taken the view (April 20, 2011) 'that "European leaders should discuss monetary policy in private talks", arguing that public discussions feed speculation'

And this week (June 6) Mr. Junker said that “European Central Bank President Jean-Claude Trichet’s proposal to create a euro-area finance ministry “‘won’t work.”". He was speaking to a European Parliament committee meeting and also said that "the euro area has no exchange-rate objective" adding that “I’m more inclined to think that we should have an exchange-rate policy".

"The euro is “rather overvalued” against other major currencies, he told the committee.
Some euro-area “member states see their life made difficult by the rather overvalued rate at the moment,” Juncker said." reports Bloomberg

Loyal readers of my blog know what my position is on these above issues!

More soon!

Notes:
1) See some economic theory re the 2% inflation target in my post: "Why a 2% inflation target for the Eurozone and other myths & realities!" (March 5, 2011)

2) I strongly recommend reading "Rethinking Macroeconomic Policy", by Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro, Feb. 12., 2010.

Is Trichet's EU Minister of Finance proposal paving the way for a Merkel-Sarko plan for move to federal political union?

"Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?" asked (proposed) today the ECB's President Jean-Claude Trichet (read Bloomberg's news coverage here)

IMO, yes it would be too bold, unless this EU Minister of Finance was part of a EU federal government cabinet (including Ministers for Transport, Employment & Social Policy, Environment, etc), led by an EU Prime Minister, on the basis of the number of seats of political parties in the European Parliament. In other words, as part of a move to federal political union in the EU with a number of the 27 states (maybe the 17 of the Eurozone, maybe the 23 of the Europlus, maybe 26 but that last one not that likely).

So why is Mr. Trichet making this bold (and IMO incomplete) proposal and why now?

a) Maybe he is expressing his view on the portfolio (Finance or ECO/FIN) that is related to his role of (near end of term) President of the ECB.

or

b) Is he paving the way for one or two national leaders, let's say Angela Merkel and Nicolas Sarkozy to propose what is within their own scope, ie the EU government and political union I referred to above! Who knows, maybe at this very minute, their advisers are working on a proposal that could be brought up even as early as the next European Council, later this month! The same way they introduced the Pact a few months ago! Sci-fi, you say? We shall see! The scenario makes sense in many ways.

That anti-inflation obsession: from Bundesbank to the ECB and now to the IMF?

Would the appointment of a former Bundesbank governor at the head of the IMF "export" Bundesbank's anti-inflation "obsession" philosophy to the IMF too (after the ECB)?

For context, see my April 7, 2011 "Eurozone: That 2% obsession" post

Let us keep in mind that in effect the IMF lends money to economies in trouble but in return for those loans dictates the socio-economic policies of the recipient country. Thus the IMF is not a mere "fund" or even a mere "bank". In return for loans, it almost runs a country's economic governance (that is why DSK will be missed and why IMO Christine Lagarde, France's Minister of Finance and and ex-businessperson, is the best candidate for the job).

It is not a good time to export dogmatic Economic thinking to the IMF.

To paraphrase Bill Clinton, "The (Eurozone) periphery stu...."

Today the ECB decided to keep the Eurozone rates at 1.25%, following the increase from 1% to 1.25% last month (see eg BBC's news report)

Thank god for Eurozone exports (to the rest of the Eurozone, the EU and world markets as well as their competitiveness vis-a-vis cheap third country imports) and tourism (Spanish, Italian, Greek, Portuguese, Irish, etc)!

I am beginning to think that ECB philosophy is either too German or not German enough (or both at the same time)! In any case, it is "off".

I felt that I am not alone in the Universe when I watched excerpts from N. Roubini's speech at the Estoril Conferences in Portugal yesterday: Inter alia, he did point that expensive Euro was a "nail in the coffin" of PIIGS economies! (and still is IMO). He opined (and I so agree) that with the Euro being worth 1.5 or even 1.4 Euros the PIIGS economies have a hard time being competitive vis-a-vis non Eurozone cheap products! And he did "accuse" German economic policy of not increasing its domestic demand to help the PIIGS' (intra-Eurozone) exports!

Eurozone: That 2% obsession

Update: Also today, the Bank of England has kept its interest rate at 0.5% in spite of 4.4% inflation. The conclusions are yours!

Is the Eurozone a victim of dogmatic economics?

Today the ECB has raised its rate from 1% to 1.25%. This may be marginally good in preserving the purchasing power of Eurozone citizen/consumer but what does it do to his/her chances of finding a job or keeping his/her job in a Eurozone company that is trying to sell products or services (eg tourism) against the expensive Euro?

Is the fixation/obsession with a 2% inflation target one of the main reasons of the problems of the Eurozone? IMO, yes. It did lead to interest rates and thus very expensive Euro for much of the 2002-2009 and still does. Even in the last 2 years, the Euro interest rate at 1% was higher than the UK's (0.5%) and of course the Fed's (0-0.25%)! Even before the increase today, the Euro has been higher than 1.40 USD/Euro.

Dear Mr. Trichet, what is so wrong re eg a 3% inflation target as opposed to the 2% one?

See some economic theory re the 2% inflation target in a recent post of mine: "Why a 2% inflation target for the Eurozone and other myths & realities!" (March 5, 2011)

I strongly recommend reading "Rethinking Macroeconomic Policy", by Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro, Feb. 12., 2010.

So with the Euro interest rate is up 25 basis points, the US, China, non-Eurozone EU, etc exporters must be having a party to celebrate! How many Eurozone companies can compete in their own markets against US, Chinese, and even non-Eurozone EU economies (UK, Denmark, Sweden, etc) with a 1.3, 1.4, 1.5 USD/Euro rate. If the Yuan is too low for the USD, how much lower it is for a Euro that is 1.3, 1.4, 1.5 USD?

Why, why, why an interest rate increase now in the Euro, when the Fed shows no signs of moving and the inflation is driven by energy and food costs, ie these could prove temporary ones (remember the 2008 world prices crisis in staple foods and oil?)? Marketwatch.com had a very good report, IMO: "Europe leads U.S. in rate cycle — perhaps to cliff"

IMO a Treaty change is needed to make the ECB more like the Fed, ie force it to consider other factors than inflation in its rate decisions.

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?

Eurostat 2nd estimates for EU GDP Q4 2010:

+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?

Pact, reform, meetings, IP, jazz and inflation hawks

1) Some 36 hours before the EPP and Socialists' meetings in Helsinki and Athens to discuss the Merkel-Sarkozy competitiveness pact, a very important opinion article by Guy Verhofstadt, Jacques Delors & Romano Prodi re the pact appeared in the FT: Europe must plan a reform not a pact

One of the things that the Delors, Prodi & Verhofstad article misses IMO is that if European Commission is involved that means also UK & Czech Rep, ie won't lead to the type of breakthrough needed. But they are right that a pact is not enough!

In a relevant communique, ALDE stresses that Europe needs a Community Act for economic convergence & governance

IMO, and for political union! EMU of 17 or 27 cannot work w/o real single market & real federal budget - income tax! It's now or ....!

2) According to The National, the UAE and Qatar are to help out Spain

3) According to the CBI: UK IP is fundamental to growth.

IMO, Intellectual Property is the capital of the 21st century (as opposed to land & financial equity/bonds etc) but how does one defend it? Via ACTA??

4) The jazz (hype) re innovation reminds me of the jazz re HR (Human Resources & Human Capital etc) before the current crisis. All was forgotten when the crisis arrived!

5) According to France24 (EN) The French lament their shrinking role on world stage
C'est la vie? IMO only EU can play such a role anymore, not France, neither the UK or any other EU country on its own.

6) BBC News reports that the ECB said that Eurozone interest rates could rise in April
The inflation hawks are out! Oh my! Are some in the Eurozone trigger-happy re anti-inflationary measures (ie raising interest rates)? Can the Eurozone afford anti-inflation mania?

If the ECB interest rate goes up next time (because of inflation-phobia?) what will be the effect on financing cost & access of SMEs & the GIIPS (PIIGS)? What is the effect on Eurozone firms' ability to a) export b) defend their markets since the Euro will rise vs USD, Yuan, Pound etc? Effect on jobs in the Eurozone?

So why this monolithic fear/phobia of inflation? For a long time now ECB interest rate is 1%, UK 0.5%, US 0.0-0.25%! So policy-wise, if the EU has higher propensity than UK & US for inflation consider that maybe that is because of its incomplete single market & union! Who realises that the EU;s micros & SMEs (and people) need EU-wide single laws in everything for the EU to work and provide jobs?

Euro interest rate by ECB stable

On January 14, the European Central Bank kept its central interest rate at 1% for yet another month.

ECB keeps Euro interest rate at 1%

The European Central Bank (ECB) has decided to keep its central interest rates on the Euro at 1%. Since October 2008 the ECB's rate has gone from 4.25% to the current record low rate of 1% in May where it has remained since.

Several central banks decided to cut their interest rates today.

Several central banks decided to cut their interest rates today.

The European Central Bank has cut interest rates in the Eurozone to a record low of 1%, from 1.25%. It is the seventh time the ECB has lowered its key rate since October 2008, when it stood at 4.25%.
Iceland's central cut rates from 15.5% to 13% in its third cut this year. Denmark cut rates from 2% to 1.65% and the Czech central bank cut rates from 1.75% to 1.5%.