Central banks / bond markets

The reconstruction fund is not a gamechanger

After tough wrangling, Poland and Hungary have given up their opposition to the EU reconstruction fund. If the EU Parliament also agrees, the fund can probably be launched in the first half of 2021, later than originally hoped. Southern Europe in particular is eagerly awaiting the billions in payments. Hopes are high that the funds will not only mitigate the economic damage caused by Corona, but also that there will now be financial leeway for creative economic policy. Rightly so? The EU funds will certainly help selectively, but they are probably not a „gamechanger“ for the core problem of growing economic divergence within the EU. A look at where the funds will mainly go and where the problems lie makes this clear. In order to ensure that the funds are used as efficiently as possible, the states cannot dispose of the funds as they wish; they must submit plans for…

A dispute rarely comes alone

The political dispute within the tripartite alliance in Italy threatens to escalate. For days now there has been disagreement between the government and the Five-Star Movement (M5S), which is part of the government, about the reform of the ESM. However, cracks are now opening up within the government as well. The dispute revolves around the procedure regarding the use of the money that Italy is expected to receive from the EU reconstruction fund. Specifically, Prime Minister Conte plans that the use of the funds will be coordinated primarily by him and Finance Minister Gualtieri, and both will be supported by managers with comprehensive powers. The remaining members of the cabinet, especially those from Italia Viva and the PD, view this as an affront and also take their criticism to the public.The strongest criticism currently comes from the small government partner Italia Viva. Former Prime Minister Renzi is demanding that Conte…

Ultimatum with consequences

Brussels seems to be losing patience in the dispute with Poland and Hungary over EU finances, including the EU Reconstruction Fund (NGEU). Instead of using the summit of heads of state and government on 10 and 11 December for negotiations, Budapest and Warsaw are supposed to give up their blockade attitude beforehand. As a means of exerting pressure, the Reconstruction Fund is being discussed as a multilateral construct without Poland and Hungary, if necessary. Both Central European states would then go away empty-handed for the time being. Up to now, they have mainly resisted the idea that both payments from the NGEU fund and regular EU budget funds should be tied to principles of the rule of law. While the principle of unanimity within the EU applies to financial issues, the remaining EU states could tie EU payments to conditions of the rule of law even against the will of…

Is the ECB oriented towards the Fed?

Against the background that many central banks have been failing to meet their self-imposed inflation targets for years despite an ultra-expansive monetary policy, the question can be asked as to the appropriateness of these targets. The Fed has now moved forward and announced new targets for the inflation rate and employment development. The ECB, too, announced some time ago that it would be reviewing its monetary policy strategy and possibly adjusting its target inflation rate from the current „close to but below 2% in the medium term“, which it has been using since 2003. In our opinion, the ECB should also be guided by an average inflation rate in its strategy review, which is to be completed by the middle of next year. We believe it is very likely that the ECB will take its lead from the Fed and will aim for a more flexible inflation target. The Fed’s…

New Fed targets

New Fed targets Yesterday’s speech by Fed Chairman Powell was eagerly awaited, as he gave clues about the longer-term strategic direction of US monetary policy. On the market side, it was assumed that the Fed would explicitly allow the inflation target to be exceeded. Inflation target has been missed in the past Powell has fully met these expectations. The Fed will no longer be guided by the achievement of a specific inflation rate, but by an average inflation rate of 2% over time. The background to this adjustment is that achieving this target has already caused problems in previous years and inflation has been lower. As part of the strategic review of its monetary policy, which began in November 2018, the Fed examined this issue and has now adjusted its target system as a result. Average inflation – but no precise timing Powell announced at the Federal Reserve Symposium in…

Emerging markets under corona stress

The COVID-19 crisis is a major challenge for the emerging markets. The growth dynamics of the countries are visibly suffering and at the same time the risk appetite of investors is decreasing. Capital withdrawal and lower investments are the result. For the Turkish economy, the Corona pandemic is a special challenge, as it is still weakened by the consequences of the last currency crisis two years ago. In Turkey, two important industries, the export industry and the tourism sector, have been hit hard. In contrast to the currency crisis two years ago, they are now completely absent as a support. The Turkish economy is therefore likely to suffer greater damage in the current year than in the currency crisis of 2018 and the financial crisis of 2009. The Turkish economy is expected to shrink by 8% in 2020 compared with the previous year. The development of the currencies reflects the…

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