Europe Macro – December 15, 2021

Leo Nelissen | December 15th, 2021

In a key week filled with central bank news, we take a closer look at ECB inflation expectations. Its expectations seem low as global inflation rates are expected to remain elevated in 2022 and likely even in 2023. This includes food security risks as fertiliser prices remain elevated due to supply issues. The same is the case in energy markets as European natural gas prices continue to rise. We also take a closer look at the severity of Omicron.


1.1 ECB Forecasts Show Inflation Below 2% Target After Next Year – Bloomberg

The European Central Bank’s new projections show inflation below the 2% target in both 2023 and 2024, according to officials familiar with the matter, giving President Christine Lagarde ammunition to argue against a swift increase in interest rates.

While consumer-price growth for next year will be stronger than the 2.2% predicted in September, it will then slow over the forecast horizon, the officials said. They asked not to be identified because such numbers are confidential.

The projections, which extend to 2024 for the first time, are a key input in formulating the ECB’s post-pandemic policy path. The outlook isn’t official until published by the Governing Council after its decision on Thursday. An ECB spokesman declined to comment.

[…] Most economists don’t expect the first rate increase until 2023 at the earliest, while money markets are betting on a 10 basis-point hike in December 2022.

Lagarde has been at pains to guide investors against anticipating such an early move, insisting that the current surge in inflation, which is now at 4.9%, is transitory. An outlook that shows consumer-price gains below 2% over the horizon might bolster that view.

Still, the strength of that argument might depend on how far under the goal inflation falls to in the projections. The closer it is to 2%, the easier it might be for hawkish policy makers to stress the threat of price pressures becoming entrenched.

According to one official, the outlook will show inflation only just under the target in both 2023 and 2024, and it doesn’t account for elements that could prove upside risks.

Such factors include the cost of owner-occupied housing — a new consideration since the ECB’s strategy review released in July — and a number of announced but not-yet implemented policies such as a 25% increase in Germany’s minimum wage, the official said.

Comment: Remember when central bankers made the case that inflation had been too low prior to the pandemic that above-2% inflation wouldn’t be the worst thing? Average 2% inflation on a longer-term period is now the goal. Fast forward a year and the house is on fire. Everyone who buys stuff knows that inflation is out of control. While the ECB already admitted that 2022 inflation will likely be above 2% it now suggests that 2023 and beyond are below 2%. Their communication better be spot-on because if their 2%ish forecast for 2022 is based on persistent supply chain issues, they might have to change their 2023 outlook before going public on Thursday.

After all, as prior newsletters showed, industry insiders do not see an end to ongoing supply chain problems. Labour shortages and related are lasting and likely to keep inflation above the ECB’s target.

One other thing – the ECB forecasts imply a continuing bias towards 2%, whether inflation is above or below the forecast. Such a bias has led to the undershoot experienced for so long pre-Covid.

1.2 ECB should take a clear stance towards politics – Handelsblatt

When the monetary policymakers of the European Central Bank (ECB) meet on 16 December, the topic will of course be inflation, which is clearly too high.

But in truth there is an even more important item on the agenda: how clearly does monetary policy distinguish itself from fiscal policy? How clearly does the ECB send a signal to European heads of government and finance ministers that they can no longer dispose of their problems in Frankfurt? The central bank should be clear on this point.

This is precisely the signal that is at stake in the decision on the PEPP emergency programme. The ECB will probably decide to let it expire next March. But what comes after that?

With a total volume of 1.85 trillion euros, PEPP was and is not only a particularly large programme for buying bonds. It is also particularly flexible. Under PEPP, which is due to the corona pandemic, the ECB can specifically help individual governments with purchases of government bonds, whereas otherwise it is largely bound to certain weightings. Admittedly, the ECB has only made very limited use of this freedom. But the very fact that it can help discourages the capital markets from speculative attacks on individual euro countries.

The question now is whether the ECB will give up this flexibility or whether it will leave a loophole open to help individual governments. It could take advantage of the fact that PEPP continues to replace maturing paper even after the official stop of net purchases. Or explicitly indicate that PEPP can be renewed at any time. Or use APP to flexibly spice up another current purchase programme.

It should do none of these things. Any open backdoor signals to government leaders that they don’t have to worry too much about debt, because they could unload it on the ECB again at any time. And if that leads to inflation in the long run, they can point the finger at Frankfurt.

To avoid misunderstandings: It is primarily, but by no means exclusively, about governments taking responsibility for their own debt. It is also crucial that the financial equalisation created because of Corona is continued at the European level within a reasonable framework.

In a single market, as within individual countries, there will always be a need for equalisation between stronger and weaker regions, between exporting and importing countries. The question is not whether, but how this will take place, because export surpluses can only exist if the bottom line is that people elsewhere are buying on credit.

Comment: A great comment covering an issue that is often overlooked: direct and specific funding of single euro area countries through ECB QE. Almost more important than the ECB’s view on inflation is its exit strategy. The ECB is getting entangled in fiscal policy and could get trapped if it doesn’t work on an exit. The way things are currently is not sustainable because the ECB is buying up to 100% of issued government bonds in the EU. Especially in Italy, this causes a feeling of safety that things are under control. In reality, things are not under control. IF (not when) the ECB were forced to quickly taper QE and hike rates to combat runaway inflation, it could trigger a sovereign debt crisis and a massive loss of confidence in the euro area.

So, yes, a lot is at stake here.

1.3 IMF warns Bank of England against inaction on interest rates – The Telegraph

The International Monetary Fund has told the Bank of England that it cannot wait much longer to raise interest rates as it warned that inflation could hit a thirty-year high next year.

In its annual report on the British economy, the fund said the UK had staged a stronger-than-expected recovery from the pandemic, but cautioned that the Omicron variant could trigger a “mild slowdown” over the coming months.

The Washington-based institution, which has 190 member countries, said the steep rise in the cost of living was at risk of becoming entrenched, with inflation set to peak at 5.5 per cent — levels not seen since the early 1990s.

The downbeat forecast came with the Bank of England to meet on Thursday to decide whether to raise borrowing costs for the first time since 2018.

The surge in consumer prices has become acute, with inflation rising to a 10-year high of 4.2 per cent in October — more than twice the official 2 per cent target. Yet the Bank of England is expected to keep interest rates at the historic low of 0.10 per cent this week because of uncertainty over how the new Covid-19 variant will hit the nation’s health and the economic outlook.

[…] “Careful communication would be needed to lay the groundwork with markets for potentially more frequent policy moves,” it said.

The IMF expects the UK economy to expand by 6.8 per cent this year and 5.0 per cent in 2022 — in line with a forecast from October. Output shrank by a record 9.8 per cent last year after the economy was buffeted by Covid-19.

Comment: Yes, the IMF is right. It’s time to raise interest rates. Inflation is getting out of control and unlike the ECB, the BoE does not need to fund “bankrupt” nations using ZIRP.

Interestingly enough, the IMF also urged Sunak to bring back furlough and related measures to support businesses in times of COVID. Kristalina Georgieva, managing director of the IMF, said face-to-face industries would need particular support in a lockdown. “Should there be the need for more restrictive measures, especially affecting contact-intensive sectors, then the policy support will have to be calibrated accordingly,” she said.

It comes after business groups called on the Chancellor to offer more support to companies hit by falling sales as commuters were urged to work from home instead of travelling into city centres. The British Chambers of Commerce said VAT should be cut back to 5pc for the hospitality and tourism industries, repeating the emergency tax cut offered last year.”

While stimulus is expected to be limited, it’s still inflationary. So, it’s interesting that that the IMF is in favour of higher rates to pressure inflation and economic support given the impact from COVID. Markets expect the recent surge in COVID to lead to delayed hikes. Either way, the BoE needs to clearly communicate its game plan. In case of no-hike, the market needs to know what to expect and why that is. The BoE cannot follow the ECB with its terrible communication strategy.

1.4 Highest inflation in a decade heaps pressure on Bank over interest rates – The Telegraph

Inflation has surged to its highest level in a decade at 5.1pc, piling pressure on the Bank of England to raise interest rates this week.

Consumer price inflation outstripped economists’ expectations in November, as petrol prices jumped almost 30pc and second hand car costs shot up by more than one-quarter, the Office for National Statistics (ONS) said.

November’s figure is a leap from inflation of 4.2pc in October and more than double the Bank of England’s 2pc target.

Prices have not risen this fast since late 2011 when inflation peaked at 5.2pc in the aftermath of the financial crisis.

Grant Fitzner, chief economist at the ONS, said “a wide range of price rises contributed to another steep rise in inflation”.

He added: “The price of fuel increased notably, pushing average petrol prices higher than we have seen before. Clothing costs – which increased after falling this time last year – along with price rises for food, second-hand cars and increased tobacco duty all helped drive up inflation this month.

“The costs of goods produced by factories and the price of raw materials have continued to increase significantly to their highest rate for at least twelve years.”

[…] Suren Thiru, head of economics at the British Chambers of Commerce, said the Bank’s Monetary Policy Committee was unlikely to raise rates from their emergency low of 0.1pc tomorrow.

He said: “Despite surging inflation, a December interest rate rise remains improbable given concerns over Omicron. While rates will rise sooner rather than later, with the current inflationary spike mostly driven by global supply constraints and price pressures, higher rates will do little to curb further price rises.

“Greater support is immediately needed for those businesses impacted by Plan B, including making additional grant funding available and reverting the VAT for hospitality and tourism back to its emergency rate of 5pc.”

Comment: Headline CPI inflation – monitored by the BoE – delivered another overshoot, coming in at 5.1%, its highest level in a decade. While inflation in services remained somewhat subdued, cost pressure across both goods and services remained high, which indicates that high inflation is likely persistent. 

The BoE will likely refrain from hiking as there is not yet an indication of second-round wage effects and the associated impact on domestic cost pressures – the same goes for the ECB. 


2.1 Inflation tracker: the latest figures as countries grapple with rising prices – FT

Much of the world is experiencing a dramatic bout of inflation. Yet many central banks are keeping interest rates at or close to record lows, despite the rise in prices caused by higher energy costs, strong consumer demand and the disruption to global supply chains wrought by coronavirus and its latest variants. House prices have also soared.

Some fear a general return to the chronic inflation of the 1970s. The one exception to the worldwide pattern of rising consumer prices are East Asian countries such as China and Japan. But even here, there are signs that inflation is starting to rise.

This page provides a regularly updated visual narrative of consumer price inflation around the world, both now and for next year. It separates inflation into its main components: what higher food prices mean for consumers; and where investors think inflation is heading over the medium term. It also tracks house prices.

[…] Yet even among those who believe that inflation will fall next year, there is an acceptance that the inflationary shock will last longer than first estimated. Economists polled by Consensus Economics, a company that collates the predictions of leading forecasters, have steadily revised up their expected inflation figures for 2022.

[…] Rising consumer price inflation is a challenge for central banks, not least those G7 countries that have a price stability target of 2 per cent. To reach that goal, central banks can adjust monetary policy to curb demand. But such tools are less effective in tackling inflation created by lack of supply. As the governor of the Bank of England, Andrew Bailey, has said, monetary policy “doesn’t get more gas, more computer chips, more lorry drivers”.

The rise in energy prices, which has driven inflation in many countries, is a case in point. In one sign that inflation may be spreading beyond energy, the price of many other items is also increasing — especially in countries where consumer demand is strong enough for businesses to pass on higher costs.

Comment: The chart showing 2022 inflation forecasts by date is beautiful as it showed that during the summer months, analysts realized that inflation was not transitory. Germany is on course to expect inflation almost 100 basis points above the ECB target rate.

Central banks know that they are unable to tackle inflation caused by supply chain issues, which is why they can cause stagflation by acting too fast. Central banks need to hike gradually and adjust their QE programs accordingly. But even more important, communication is the best tool to deal with market uncertainty. Give the market a forecast and explain what the risks are. This is more important for the ECB than the BoE, as the ECB is still thinking that 2022 will see much lower inflation followed by sub-2% inflation in 2023.

2.2 Spain November inflation remains at 29-year high, pushed by food and fuel costs – WTVB

Spain’s inflation remained at a 29-year-high in November for the second month in a row, propelled by food and fuel prices, final monthly data from the National Statistics Institute (INE) showed on Wednesday.

Consumer prices rose 5.5% year-on-year in November, the fastest pace since 1992, according to final data from INE, up from 5.4% in October.

The flash estimate for November released late last month was 5.6%. The monthly inflation rate in November was 0.3%.

Food and transport prices rose 3.3% and 13.5% from a year ago, the INE said in its more detailed second reading, pushed by high fuel prices.

Core inflation, which strips out volatile food and energy prices, was 1.7% year-on-year, compared with a reading of 1.4% a month earlier, INE added.

High inflation threatens Spain’s growth prospects. Bank of Spain Governor Pablo Hernandez de Cos said on Tuesday that rising inflation, supply bottlenecks and a surge in COVID-19 cases in Europe would hit the Spanish economy and prompt a slight downward revision of growth forecasts in the fourth quarter and early 2022.

Meanwhile, the European Central Bank is maintaining its message that rapid price growth is temporary. ECB President Christine Lagarde said earlier this month that euro zone inflation had already peaked and may soon begin a decline that will continue through next year.

Comment: Core inflation is just 30 basis points shy of the ECB’s 2% target. However, these numbers are rather meaningless as energy and food push inflation to a 29-year high – unless people stop using energy and food, of course.

Over the next few months, it needs to be seen how energy and food inflation impact services. If wage inflation increases, inflation in services could lift core inflation above 2% – creating a tricky situation the ECB wants to avoid at all costs.


3.1 Fertiliser prices continue to rise steeply – and 2022 will be even worse – Agrarheute

Calcium ammonium nitrate (KAS) now costs 625 euros per tonne at German import ports! So anyone who thought that fertiliser prices would not continue to rise – was mistaken.

And this is not only the case in Germany and Europe. Fertiliser prices continue to rise steeply in all other countries as well.

In the USA, a farmers’ organisation has therefore called on the Department of Justice to investigate the price development. They are not necessarily questioning the price increase caused by the high gas prices, but the competition that has been eliminated by the high market concentration on very few companies and the additional price surcharges and allegedly non-market prices that result from this.

In Europe, the situation is hardly different on the part of fertiliser producers and farmers. An end to the price escalation is still not in sight, as the further rising fertiliser prices on both sides of the Atlantic show.

One US farmer said about this in a chat room: “My thought is: as bad as these prices are, it could get worse for 2023. If that’s the case, I can barely use nitrogen fertiliser for a year.”

Normally, farmers in the US but also in Europe stockpile a good part of the fertiliser for the new season in winter. But this year everything is different. The prices of the most important nitrogen fertilisers in Europe are three times higher than last year, if goods are available at all. One farmer from the USA told the agraronline service AgFax that his dealer said: “If you pay in advance now, we guarantee delivery, but we only take advance payment for what we actually have in stock.” 

The situation is apparently no better for crop protection products: as far as herbicides are concerned, they are almost unavailable and there is no talk about prices for the time being. The conclusion for the farmer was that if he is to pay in advance with these high fertiliser prices, he will have to sell maize and wheat – much more and much sooner than he had originally planned.

Comment: While agricultural commodities have weakened a bit, fertilizer prices have not. The situation remains dire as farmers are unable to get the supplies needed – regardless of the price. In this case, it applies to crop protection as well, which will have a major impact on next year’s crop yields. It’s highly likely that the bull market in agriculture continues in 2022 – maybe even at a faster pace. Here’s Goehring & Rozencwajg’sview on the matter:

“Fertilizer production (especially nitrogen and phosphate) is very energy intensive. China has already restricted production of both fertilizers to help conserve energy and has announced export restrictions. The ramifications are huge: China produces half of global urea and nearly 60% of global phosphate-based fertilizers making it the world’s largest exporter.

In the near term, these restrictions will put huge upward pressure on fertilizer prices. Over the medium term, less available fertilizer will negatively impact crop yields leading to higher grain prices as well.

Over the last 30 years, global crop yields have surged, driven in part by much greater availability of fertilizers. If fertilizer supply falls and prices rise, there will be a clear negative impact on crop yields as farmers are forced to reduce applications.

The global agricultural crisis has now entered its first phase. We continue to recommend investors maintain significant exposure to agricultural-related equities, with a special emphasis on fertilizer producers.”


4.1 Energy markets under the spell of geopolitics: Nord Stream dispute and Iran staelmate drive prices for gas, electricity and oil – Handelsblatt

Sometimes a few words are enough to trigger chaos on the markets – this is also the experience of German Foreign Minister Annalena Baerbock (Greens) these days: On the weekend, she said on ZDF that she currently sees no possibility of approving the Nord Stream 2 gas pipeline. Since then, there has been no stopping the prices for natural gas in Europe. The price of gas for delivery in one month briefly climbed to over 122 euros per kilowatt hour on Tuesday at the Rotterdam trading centre.

The European gas price thus rose again to the record level of mid-October, when numerous industrial companies had to curb their production due to high energy prices and the first gas suppliers on the European continent filed for insolvency.

Electricity prices in Europe have already been soaring for weeks. According to data from the financial service Bloomberg, the price of electricity in Germany for delivery next year rose to 192 euros per megawatt hour – more than twice the average price this year; and six times the price in 2020.

The increased electricity prices also affect the price of CO2 certificates: The tight supply situation is fuelling demand for emission certificates, which allow the emission of greenhouse gas under the European Trading Scheme ETS. The right to emit one tonne of CO2 currently costs over 82 euros – only just below last week’s record high of around 89 euros per tonne.

[…] But traders are concerned about the empty gas storage facilities. According to Commerzbank data, they are currently only about 60 per cent full. One reason: “Russian gas deliveries have remained at a reduced level until recently,” says Commerzbank expert Carsten Fritsch.

Normally, gas storage facilities are about 80 per cent full at this time of year. The current level is usually not reached until January. The consequence: “If the winter turns out to be colder and lasts longer, gas supplies could run low at the end of the winter. In our opinion, natural gas prices will therefore continue to rise,” explains Fritsch.

At the same time, another geopolitical conflict field ensures that little relief can be expected from the oil market. Negotiations on Iran’s nuclear programme in Vienna have recently stalled.

No breakthrough in the negotiations is expected in the coming weeks, says Helima Croft, commodity markets and geopolitics expert at the investment bank RBC Capital Markets. This also means there is no prospect of the USA easing sanctions against Iran and Iranian oil finding a legal way back onto the world market.

Comment (John Kemp – Reuters): European natural gas futures prices for delivery in Jan 2022 surged to a record high above €128/MWh this morning The contract is becoming increasingly volatile in the run up to expiry as traders try to price in the probability that confrontation between the United States, European Union and Russia over Ukraine will result in financial and economic sanctions being imposed and in response a reduction in gas deliveries in the first quarter of 2022. EU28 gas inventories are on track to the end winter at a critically low level, driving the March-April calendar spread into a backwardation of €41/MWh:


5.1 Nightmare before Christmas as businesses warn of lockdown by stealth – The Telegraph

[…] New guidelines rule people who show symptoms from Wednesday morning and later test positive for coronavirus must isolate for 10 days. 

That period now breaches Christmas day, meaning those forced to quarantine will lose any remaining opportunity to buy presents on the high street or revel in pub celebrations.

On Sunday Boris Johnson warned Britain faced a “tidal wave” of infections, with the booster jabs campaign the last chance to save festivities. Combined with new government guidance on home working and mask wearing, many are being put off travelling and eating out.

It has prompted warnings of a “lockdown by stealth”, where retail, hospitality and leisure businesses remain open but are powerless as “confusing” and sometimes contradictory official diktats drain consumers’ confidence.

“While we have measures to keep the economy open, we have messages that have ended up closing much of it down,” Tony Danker, director-general of the Confederation of British Industry (CBI) told  BBC Radio 4’s Today programme.

“People should be worried enough to go and get a booster urgently but not so worried to stop going to shops or restaurants or airports, and that’s what’s not working.

[…] Others, including Goldmans, HSBC and Deutsche Bank, have taken an opposite approach and sent all employees home for the holidays.

Industry group UKHospitality argued the Government’s Plan B guidance would “significantly impact consumer confidence and be particularly devastating to city and town centre venues”.

Meanwhile, the Night Time Industries Association has warned businesses face “12 days of Christmas misery”. It accused ministers of “allowing businesses to trade but heavily implying that consumers should reduce contacts and socialising”.

[…] Industry leaders say this misses the point, arguing that pubs and restaurants are already emptying as people feel the underlying message is to go out less.

CBI’s Danker acknowledged this was an unintentional consequence of government action but is very evident. “If you look at what’s happening on our trains and buses, or pubs and restaurants, nobody can pretend there’s just been a modest effect on demand. There’s been a massive effect,” he said.

Comment: The consumer confidence chart speaks volumes. Despite the recovery, it’s still below pre-pandemic levels and way below pre-Brexit levels. The British aren’t fooled and call it what it is: a semi-lockdown. Consumer confidence is down because of fear spread by the media and government measures that suppress services demand. 

It all comes down to dealing with this pandemic without creating panic, and that’s where the UK fails (almost all western countries fail). Jeremy Warner makes the case that the NHS should prove itself because of massive funding:

“Even factoring in the Government’s careless, open cheque book approach to the pandemic, it is nonetheless a remarkable outcome. In 2020, we spent 12.8 percent of GDP on healthcare, against an average of just under 10 percent per annum in the previous ten years.

This was more than France, and more than Germany, both of which started from much higher levels of healthcare spending. Admittedly, the UK still trailed the US, which was chugging along at more than 16 percent of GDP even before the pandemic, but we are no longer that far off. Broadly speaking, that level of spending has continued since then.

[…] What’s more, we still have far fewer beds and intensive care units per head of population than most other advanced economies. Only Sweden has less. Beds per 1,000 in 2019, for instance, were 2.4 in the UK, against 7.9 in Germany, making the UK almost uniquely unprepared for the high levels of hospitalisation inflicted by the pandemic.

[…] We must have a health service that can cope, more particularly if global pandemics are about to become a more frequent occurrence, as many epidemiologists fear.”

He is spot-on as we need to live with the virus. It’s coming back every year during flu season and it will continue to mutate. Vaccinate the vulnerable, invest in ICUs and keeping the economy open will create winners in a world where economies shut down on an annual basis if this is a trend.

5.2 Omicron may be no worse than flu, says government adviser – The Telegraph

Britain’s omicron wave may be no worse than a flu pandemic, an expert has said, as the first major study into the new variant suggests it is less severe than delta.

The first real-world study looking at 78,000 omicron cases in South Africa found the risk of hospitalisation is 29 per cent lower compared with the Wuhan strain, and 23 per cent lower than delta, with vaccines holding up well.

Far fewer people have also needed intensive care from omicron, with just five per cent of cases admitted to ICU compared to 22 per cent of delta patients, the study shows.

Professor Robert Dingwall, a government Covid adviser, from Nottingham Trent University, said it was clear from the South African data that panic was unjustified. Speaking in a personal capacity, Prof Dingwall said: “The omicron situation seems to be increasingly absurd. There is obviously a lot of snobbery about South African science and medicine but their top people are as good as any you would find in a more universally developed country.

“They clearly don’t feel that the elite panic over here is justified, even allowing for the demographic differences in vulnerability – which are probably more than cancelled by the higher vaccination rate. 

“My gut feeling is that omicron is very much like the sort of flu pandemic we planned for – a lot of sickness absence from work in a short period, which will create difficulties for public services and economic activity, but not of such a severity as to be a big problem for the NHS and the funeral business.”

Comment: According to the UK Health Security Agency, 200,000 cases of Omicron have already occurred – compared to 60,000 confirmed and 40,000 suspected cases. At this rate, even a much milder virus would still overwhelm hospital capacities.

A study by Discovery Health, a South African private health insurance administrator, based on 211,000 positive tests results showed that the hospitalization rate is 30% less than the previous variants.

If delta has a hospitalization rate of 2%, a reduction by a third but double the cases would still result in more hospitalizations. Pfizer achieved 70% protection against hospitalisation, which is not enough given that European hospitals are overwhelmed already.

We should also be aware that South Africa has a younger population that most European countries and that some people who have been double vaccinated with Pfizer and AstraZeneca show no antibodies whatsoever.

So far, Omicron is mainly in the news in the UK. Continental Europe has been spared so far. What’s important to bear in mind is that it’s a milder version. Younger people will be safe to a very large extent. It comes once again down to insufficient IC capacities. This will be made worse through vaccine mandates. Also, it’s not a new problem as European hospitals had issues even way before the pandemic. 

Jab the vulnerable, expand IC capacities, drop that ridiculous vaccine mandate for healthcare workers and make healthcare more efficient. Fear mongering isn’t helping as social tensions in Europe show.


6.1 “The rules are obsolete”: Greek PM calls for new EU debt targets – Handelsblatt

Greece’s Prime Minister Kyriakos Mitsotakis advocates reforming the rules of the EU Stability and Growth Pact. “We need a new framework that ensures financial sustainability,” Mitsotakis said in an interview with Handelsblatt. At the same time, however, this framework must ensure that “unnecessary austerity” does not kill growth. The prime minister did not specify concrete limits.

The pact provides for an upper limit on the budget deficit of three per cent of gross domestic product (GDP) and a public debt ratio of a maximum of 60 per cent of GDP, but was suspended in the corona pandemic. “The current targets are obsolete,” Mitsotakis said. Among other things, he proposes “treating different types of expenditure differently in the deficit calculation”.

Mitsotakis also advocates making the more than 720 billion euro EU Reconstruction and Resilience Fund (RRF), which is supposed to cushion the economic consequences of the pandemic, a permanent instrument. This was necessary “to cheaply finance crucial investments for the future of the EU”.

The conservative prime minister, who has been in office for two and a half years, is thinking above all of infrastructure investments to cope with the climate crisis.

Comment: It’s not a surprise that Greece, one of the world’s most indebted nations (relative to its GDP) calls for looser debt rules. Prior to the pandemic, the nation had a 180% debt-to-GDP ratio and below investment grade bonds, which means that the ECB cannot apply QE to Greek bonds unless it’s “emergency” QE like the current PEPP program, which runs out in the first half year of 2022.

Hence, it’s also no surprise that Greece is calling for a permanent EU reconstruction fund to support investments in the EU. That’s a big step and would basically mean that “richer” EU countries fund even more projects in weaker EU countries. It’s also a huge step towards a federal EU (United States of Europe).

These plans are not new, but they will be a hard sell in frugal countries like the Netherlands, Austria, or Denmark. Even Germany will have a hard time dealing with these ideas despite its chancellor Scholz being in favour of a more united EU.

It’s also no surprise that Greece is working with Italy and France on its plans to “unite” the EU. All of these southern countries have high debt levels and the desire to finally get rid of these annoying debt rules. If these countries make progress and are indeed able to create a permanent fund for investments in the euro area, it blows the door wide open for Eurobonds.


7.1 Turkish lira plunges to fresh low ahead of anticipated interest rate cut – CNBC

Turkey’s battered currency fell to a new low Monday past 14 to the dollar, ahead of what investors expect to be rate cuts from the central bank despite soaring inflation.

The lira was trading at 14.33 to the dollar at 1:25 p.m. in Istanbul, according to Reuters data, a slight recovery from the record low of 14.99 earlier in the day and the first time the currency has surpassed 14 to the greenback. By evening local time it had recovered somewhat, trading at 13.81 to the dollar around 7 p.m.

Turkey’s central bank subsequently announced it would intervene directly in the foreign exchange market on Monday, selling dollars to prop up the lira.

Turkish Finance Minister Nureddin Nebati said Monday the country is determined not to raise interest rates — in an echo of President Recep Tayyip Erdogan’s hardline stance against raising rates — which economists agree would actually aid the currency and rein in inflation, which is now around 20% in the country of 84 million.

“We won’t raise the interest rate; you will see that we can do this without raising rates,” Nebati said, adding that he did not know if the central bank’s monetary easing would stop. The central bank has cut interest rates by 400 basis points since September, against the pleas of many investors, economists and former Turkish finance officials. Erdogan has long railed against interest rates as the enemy of growth and the cause of inflation, rather than being a tool that cools inflation.

The central bank’s intervention by selling dollars is mostly aimed at limiting depreciation pressure on the lira, “a temporary measure to slow things down,” according to Erik Meyersson, senior economist at Handelsbanken Macro Research in Stockholm. But with already low foreign exchange reserves, it’s not likely to be a sustainable solution.

“Turkey’s FX reserves aren’t large enough to either reverse or even stabilize the lira’s losses in the medium- or longer term,” Meyersson told CNBC. “The cost in reserves of each intervention is also likely to increase, as the lira continues to depreciate. Whatever slowdown in the rate of depreciation the TCMB (Turkish central bank) comes at an arguably too large a cost in FX reserves.”

Comment: The lira is now down roughly 40% versus the dollar since the start of the year. 28% of it happened last month. On Monday, the central bank sold between $1.5-2.0 billion worth of dollars to support the lira. It’s risky as the central bank is depleting its foreign reserves. 

Erdogan is not expected to change his views on interest rates and the finance minister blames lira weakness on manipulative, speculative transactions inside the country to which the central bank is forced to respond.


8.1 Spain’s €70bn problem: how to spend EU pandemic aid fast enough – FT

In the wake of the financial crisis a decade ago Spain agonised over how to cut spending to meet Brussels’ demands. Today Madrid has the opposite dilemma: can it ramp up spending enough to use up vast quantities of EU coronavirus aid?

With the vast majority of €70bn in EU recovery fund grants scheduled for 2021-2023, the resources are without precedent for Spain, the programme’s second-biggest beneficiary after Italy.

“This is the absolute priority; this is an opportunity for the whole country,” Gonzalo García Andrés, minister of state for the economy, said in an interview. “When the money starts coming into the economy, it is not going to stop.”

The money is at the heart of the economic and political strategy of the government of Pedro Sánchez, under whose watch the economy contracted by a savage 10.8 per cent in 2020, and which faces elections by the end of 2023.

Spain’s share is part of the bloc’s €800bn coronavirus recovery fund, intended both to deliver a medium-term boost to the continent’s economy and to transform it longer term, by funding a green energy transition, digitalisation and training as well as structural reforms.

The vast sums testify to a volte face by Europe. A decade ago, austerity was the response to crisis. Spain labels that a mistake, and, with the aid of France, Italy and crucially, Germany, has won the EU around to a much more expansive approach.

[…] Problems with managing the funds range from the complexity and number of projects to vexed negotiations with Brussels about the rules, and fear of taking legal risks by hurrying.

Spain had initially budgeted €27bn from EU funds for this year, forecasting the money would contribute 2.6 percentage points to 2021 growth. But such hopes have been dashed by bottlenecks and delays.

[…] Brussels requires money from the programme to be allocated by the end of 2026, to draw a line under the pandemic. Madrid intends to front-load the disbursements, planning to spend 77 per cent of its total €70bn in grants over 2021 to 2023.

Analysts say this implies spending the money quicker than Spain ever managed with billions of past EU aid. Almost half of the €60bn of European structural funds for Spain during the 2014-2020 period have yet to be spent, according to commission figures.

[…] The government says the pace of disbursement is speeding up and will be maintained over two years. On Tuesday it said that more than €15bn — almost two-thirds of the recovery funds planned for this year — had already been transferred to beneficiaries or was being awarded through tenders. However, this figure includes €11bn transferred to regional authorities, much of which is unlikely to have been spent.

A further big roadblock was removed last week when, after months of negotiations with Madrid, Brussels approved the use of €3bn in recovery funds to subsidise companies helping produce electric vehicles, which manufacturers have said is vital for Spain.

Comment: Spain is making progress. However, the country needs to get labour reforms done first. This Is still a challenge as the country is involving both labour unions and the labour association.