Below is Erik Nielsen's latest dose of European permabullishness. At this point it is pretty much pointless to keep track of who is who at Goldman - the last attempt to reignite "The Ponz" is going gull blast, and every single person has forsaken their credibility in order to pitch the propaganda line. How Goldman's strategists pretend to be even remotely relevant any more is a mystery to anyone. The bottom line, and cutting through all the bullshit, is that Germany will do almost everything to keep the Euro, and thus import the periphery's monetary weakness, keeping its exports cheep, absent a fiscal union, no matter what the petrified bureaucrat Schauble says. Luckily Angela Merkel gets it... for now. Which is why all those who were expecting the WSJ interview with the German finance minister to push the EURUSD higher in Monday trading are in for a disappointment judging by the early action in the pair.
From Erik Nielsen
It’s a beautiful winter day here in Chiswick today: cold and crisp and high blue sky. For Northern Europe, you couldn’t ask for more in mid-December. And Europe is still standing; here’s the way I see it:
- Merkel’s and Sarkozy’s statements on Friday provide a welcome return to the German-French leadership of Europe.
- Whatever scepticism one might have had, one cannot doubt the political commitment to the European project – and we haven’t yet seen even half the intrusive measures implemented elsewhere.
- Last week provided a mixed bag of data – still strong, but less clear-cut than expected.
- The European Commission has – finally – come around to accept a more appropriate accounting of payments to pension funds. Good for – particularly - Central Europe.
- Lots of great feedback on our numbers for Euro-zone financing needs in Thursday’s European Weekly Analyst; but look out for the definitions used.
- Next week will see the last EU summit of the year; we’ll get approval on the permanent rescue mechanism.
- The Irish parliament is scheduled to debate the overall package (the conditionality) on Wednesday.
- Euro-zone data this coming week will focus on the PMIs; they should move slightly higher.
- UK data this coming week includes inflation (3.1%) and unemployment numbers.
- The Swiss National Bank is likely to leave rates unchanged at their meeting this week; their monetary policy assessment is likely to be interesting reading.
- The Swedish Riksbank is likely to hike rates by 25bp.
- Norges Bank will leave their rates unchanged.
- And Poland will print inflation and IP numbers; the former particularly important for MPC decisions early next year.
-1 After loads of confusing communication and unclear commitment, I think Europe may have crossed the Rubicon this past Friday. Merkel and Sarkozy (along with their cabinets) met in Freiburg, and if the statement out of their previous meeting caused some confusion (remember “private creditor participation” out of Deauville?) Friday’s message could hardly be any clearer. To the sceptics, Sarkozy said that "we will defend the euro, because the euro is Europe. Our determination, both German and French, is total" – and he was talking about the “European project”, not the specific value of the Euro. Merkel added that Germany and France will set an example on questions of structural reforms and competitiveness, reaching well "beyond pure budget policy” – something they’ll bring to next week’s EU summit, as discussed below. But even on budget policies Merkel said that she had no disagreement with her finance minister Schaeuble, who has talked about ultimately pooling parts of fiscal policies as well. (Incidentally, if you haven’t seen it yet, you ought to see the FT’s video interview with Schaeuble earlier this week after he was voted European finance minister of the year; impressive and comforting! – admittedly, I had voted for Papaconstantinou for his incredible efforts – and success so far – in correcting decades of mismanagement.) Sarkozy said that "we have agreed to the convergence of German and French tax policies” (listen up, Ireland!) And while much has been made of the reported German refusal to augment the EFSF, this is what Merkel had to say on that topic on Friday: "I'd say for us in Germany that the question of expanding the rescue mechanism is not now on the table … less than 10% of the rescue mechanism has been used.” Note the word “now” - to me that sounds pretty pragmatic; not a categorical refusal at all. And on the so-called e-bond proposal - the rejection of which by Germany caused the absurd accusation by Juncker of Germany being “un-European” - received this one from Sarkozy: "I don't think we were consulted before this idea was proposed, so it shouldn't insult anyone if we say we are not in agreement with it," adding that neither German nor French taxpayers will accept "mutual" euro zone debt.
-2 To me, Friday provided the first clear signs of European leadership in quite a while. There is no doubt that these regular German-French get-togethers and policy initiatives cause concerns (of being left outside) among many other Euro-zone members, and probably nowhere more so than in Italy. However, reality is that when the “European project” has been working in the past it’s always been on the back of French-German leadership – and Friday’s statements represented a unity not seen for quite a while: We’ll do what we have to do to work through this crisis, and the European project is not at risk! We in the market tend to get nervous when we don’t know all the details of “how” it’ll be resolved, but uncertainty is indeed part of life. My team has tried on many occasions to illustrate what it’ll take in terms of numbers for financing, but as I also have argued repeatedly, if there were to be a complete “investor strike” then extra-ordinary measures would have to be taken, just like in other countries when truly systemic risks arise. In the UK, banks were nationalised; in the US shorts were banned, money was injected in financial institutions and something resembling nationalisation took place in some instances. We are not even close to this level of government intervention in the Euro-zone so far, but why think the authorities wouldn’t take equally drastic actions if the overall stability of Europe were at stake, as it was in the UK and US two years ago? As Sarkozy said: “Our determination … is total.” And in this context, I have sometime been impressed with the conviction expressed by investors on what specific European political constituencies will accept or not accept. And, with all due respect, the further you get away from the Euro-zone, the stronger these views tend to get. There are exceptions, of course. I have earlier pointed to Barry Eichengreen. Another such exception is Jacob Funk Kierkegaard at the Peterson Institute in Washington. If you haven’t read it yet, his latest “How Europe can muddle through its crisis” from last Thursday is definitely worth a read: http://www.piie.com/realtime/?p=1893 While social tensions surely are rising around Europe, they are all focused on budget cuts (as also experienced in the UK this past week), bankers in general and – to some extent – on immigration from outside the EU. To my knowledge, there has not yet been a single serious demonstration or even a voice in the Euro-zone against the “European project,” including the Euro! If you see one, please do let me know!
-3 Europe was thin on macro numbers last week, and what we got – industrial production numbers for October - was a mixed bag, to be honest. In the Euro-zone, German IP jumped an impressive 2.9%mom, more than erasing the small decline in September, while the French and Italian IPs declined by 0.8%mom and 0.1%mom, respectively, rather than staging the expected small positive increases. All in all, this means that Q4 didn’t start on quite the impressive note that we had thought, namely 1.0%mom for the Euro-zone as a whole, but something slightly less but still above trend; the number is out on Tuesday. But remember these series are volatile, so a single month like this does not shake our confidence in our constructive overall GDP forecast. Outside the Euro-zone the picture was also mixed. UK manufacturing output increased by 0.6%mom in October, about double the expected rate and surely a number which will have caused some headache for the bearish part of the Bank of England. Meanwhile, Sweden printed +0.2%mom, also well below expectations, but still a whopping 11.3% above October 2009.
-4 Also on Friday, I got one of these wonderful flash-backs to years long gone by when I saw the press release from the Polish Finance Ministry saying "The European Commission is no longer negating the fact that pension reform costs have to be accounted for when calculating public debt and deficit." This is great news! Poland (and others transitioning to private fully funded pension systems) have argued for years that the additional budget costs of this transition should not be counted as part of the deficit under Maastricht because – ultimately – its an investment in a more sustainable system for the future. As I wrote about way back in my Central European days, the argument is pretty obvious, and it has mystified me why the rest of Europe didn’t see it that way. But now the Commission seems to have agreed; the issue will be formally considered by the heads of state at the summit this coming week, as discussed below. If you want to discuss this issue and its implications, please call or email Magdalena Polan in my team, who is on top of it all. In cash-flow – and funding – terms, this decision has no impact, of course, and the irony is that since it reduces the possibility of pressure for further fiscal measures (since the reported deficit will drop by at least 2% of GDP in Poland), it could be bad for policies. Personally, I’m not worried about Poland, however, but Hungary – who’ll also benefit from this decision – is worthwhile watching. Ironically, Hungary is scheduled to decide tomorrow Monday on a (bad) pension reform to effectively force people to move to the state system and then spend pension assets to fund current expenditure and reduce public debt.
-5 Finally, many thanks for all the great feedback we received on Thursday’s European Weekly Analyst and all the numbers compiled and estimated by Nick Kojucharov on Euro-zone members’ financing needs during the next four years. Our bottom line was that – from a fundamental point-of-view - it all looks pretty manageable and indeed unexceptional. A few people seemed slightly confused by some of the individual country numbers (compared with national sources), but this reflected the fact that we used consistent Maastricht-based numbers for general (not central) government, and that we used consistent assumptions across the Euro-zone with respect to the distribution of financing between short term roll-overs and longer term debt financing, which in some cases differ from national announcements for 2011. Do let us know if you have questions on the numbers or the arguments in the piece.
Turning to the week ahead:
-6 The highlight of this coming week will no doubt be the EU summit on Thursday and Friday. The agenda includes decisions on a “permanent crisis mechanism”; consideration of the Commission’s legislative proposal for the impact of pension reforms (as discussed above; important accounting-wise for Central Europe); a discussion of how the common budget might be used to reflect the degree of budget consolidations by member states; and a discussion of the EU’s recent work in the foreign policy space, specifically with its “strategic partners.” In addition, as stated by Merkel and Sarkozy on Friday, they’ll also discuss policy coordination. On the first issue, EU president Van Rompuy said last week that "we have agreed to set up a permanent financial stability mechanism for after mid-2013, and the Eurogroup has already agreed upon some key features of this mechanism; I expect the European Council [will] decide on a very limited treaty change to this end." This seems all done and dusted, although many of the details still need to be hammered out. But there’ll basically be a European IMF, i.e. a mechanism that can lend money to crisis-hit member states against policy conditionality (along with the IMF), and – like with the IMF – there might be cases when the situation has run off track to an extent that the debt is no longer sustainable; in which case private creditor participation will be required. But, so long as nobody has come up with a way of restructuring existing debt in an orderly manner, this will apply only to future debt issued with collective action clauses. The third item (the use of the budget) will be interesting to follow as they might try to establish various incentive mechanisms for good budget policies.
-7 Before we get to the summit, we’ll have the Irish parliament’s debate on the EU-IMF bail-out on Wednesday. Parliamentary approval is not required, but the government decided to put it to Parliament to strengthen the broader political support for the underlying reform agenda (the conditionality.) The EU and IMF will await this debate before formally approving the bail-out.
-8 On the data front in the Euro-zone, the flash PMIs (EMEA-Map relevance scores of 5) on Thursday will clearly be the highlight of the week. We think both will edge a tad higher to something like 55.5 and 55.6 for manufacturing and services, respectively. The German Ifo on Friday (EMEA-Map relevance: 3) will also be closely watched; that one should also edge higher, maybe to about 109.7. Before these numbers come out we’ll have Euro-zone employment growth for Q3 on Wednesday, which we think will edge marginally higher. Finally, the final November CPI inflation numbers will come through this coming week; they’ll probably stay at the preliminary number of 1.9%, bang on the ECB’s target.
-9 The UK is set to print CPI inflation on Tuesday, labour market data on Wednesday, retail sales on Thursday and public borrowing on Friday. As reported by Ben Broadbent, on inflation we’re marginally below consensus at a still whopping 3.1% versus 3.2% for November, while we are in line on both unemployment (unchanged at 7.7%) and retail sales volumes (+0.4%).
-10 The Swiss National Bank meets on Thursday. We expect them to leave rates unchanged and the tone of the communication to remain just as cautious as it was in September. Maybe more interesting will be their December Monetary Policy Assessment. As Dirk Schumacher has discussed in recent weeks, we find it difficult to rationalise – even on the SNB’s own assumptions (as far as we can infer them) – the sharp downgrade made by the central bank to its inflation forecast path.
-11 The main event in Sweden this coming week will also be the central bank meeting on Wednesday. Contrary to the Euro-zone and Switzerland (but not to the UK), Swedish growth and inflation have been boosted by the FX depreciation, so we think the Riksbank will hike by 25bp to 1.25%. As discussed by Lasse Holboell West Nielsen, since February of last year, we have maintained our forecast that the Riksbank would start tightening in Q3 2010, a view that was significantly more hawkish than both market and consensus expectations until recently. Now that this has materialized, we continue to be more hawkish on rates next year, expecting the policy rate to reach 2.5% by end-2011. In addition to the decision, the Riksbank’s baseline repo rate path is likely to attract interest. The lowering of the repo rate path following the last meeting seemed to impact the market more than the hike itself, given that the latter was priced in. Deputy Governors Svensson and Ekholm favoured an even further lowering at the last meeting, and both are likely to remain of this view, especially given the fiscal tensions in Europe. These tensions are also likely to make the other Members remain more cautious on future rates. However, given how output growth has outperformed both the Riksbank’s and our own growth estimates by some margin in recent quarters (the Riksbank’s projection for Q3 GDP growth was 1.2%qoq compared with the initial release showing 2.1%qoq), tighter capacity might warrant a less accommodative monetary policy stance in the medium term.
-12 Norges Bank also meets on Wednesday; we expect them to keep rates on hold at 2%; a level we expect to remain until early summer, increasing to 2.75% by end-2011.
-13 Finally, a couple of important data releases out of Poland this coming week: The November CPI inflation prints on Tuesday (we expect 2.9%), but anything higher than that will seriously increase the probability of a rate hike early next year. On Thursday we’ll get November IP numbers; it should be a strong one given the very PMI numbers already out.
… and that’s the way it all looks to me. I’ll now be heading to the high street to enjoy the sun (and a coffee) for a bit – I predict lively activities in the local retail business in spite of rapidly increasing prices!
Erik F. Nielsen