22nd Sep - Weekly Links #4168

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EUROPE
Macroprudential policy could have reduced imbalances in the euro area – voxeu

The boom-bust cycle in the euro area periphery has almost toppled the euro. This column suggests that region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances. In contrast, common monetary policy could have stabilised output in both the periphery and the core slightly better, but it would have been incapable of significantly influencing either housing markets or the periphery’s trade balance. The column also offers policy guidelines in case internal imbalances should arise again in the euro area.

Europe's Politics Is in Chaos and That's a Wonderful Thing – BB

All across Europe, support for traditional parties is fracturing. That brings instability but also a renaissance of representative democracy.

Global lessons from Euroscepticism – voxeu

Taking citizens’ concerns seriously and addressing salient issues, building on a sense of togetherness, and caring about public trust. Insufficient progress along these dimensions has played a key role not only in Brexit, but also in the backlash against the multilateral world order underpinning globalisation.

Germany Isn't Listening to Mario Draghi – BB

Some people are taking heart from an apparent fiscal softening by Berlin and the Netherlands. But the details don’t bear out the optimists.

Google to Invest $3.3 Billion to Grow European Data Centers – BB

Plans include another expansion of Hamina complex in Finland * Google CEO also unveils renewable energy projects in Europe

Bonds’ Biggest Threat Is Germany Beginning to Splash the Cash – BB

Netherlands and Finland announce plans to borrow more * Germany has yet to commit to overhauling strict deficit rules

Dutch delivering on Draghi’s demands? – ING

ECB President Mario Draghi called upon governments with fiscal space, most notably Germany and the Netherlands, to fiscally “act in an effective and timely manner” and urged all eurozone members to “achieve a more growth-friendly composition of public finances”. Did the Dutch government deliver in its 2020 budget?Germany Isn't Listening to Mario Draghi – BB

Some people are taking heart from an apparent fiscal softening by Berlin and the Netherlands. But the details don’t bear out the optimists.

Dutch Break Debt-Cutting Habit With Plan for Investment Fund – BB

Netherlands rolls out economic stimulus plan as downturn looms – FT

Tax cuts and extra investment come after ECB urges governments to do more to boost growth

  CLIMATE POLICY
Hey, EU, Don’t Make Climate Promises You Can’t Keep – BB

 “Green Deal” talk is cheap. Carbon neutrality by 2050 isn’t, especially for the poorer European countries of the east.

Editorial: Angela Merkel Has One Last Chance to Help the Climate – BB

A German carbon tax would be ideal. But at this point, any progress would be worth celebrating.

Merkel’s Climate Deal Will Cost Billions And Everyone Hates It – BB

Environmentalists and industry lobbies attack new measures * Leaders worldwide are coming under pressure to be bolder

Germany’s Green New Deal Doesn’t Do Much for the Climate – BB

Angela Merkel again balances everything and pleases nobody.

  EUROPEAN CENTRAL BANK

Draghi’s gamble leaves Lagarde with work to do – ABN AMRO

Large-scale fiscal stimulus is unlikely to come through, while markets were not impressed with the package

The weight of evidence is on the side of the ECB’s doves – FT

Neither experience nor theory supports the case of the hawks.

 

The ECB cut its IOR to minus 0.5%; it should have been minus 50% - Scott Sumner

Hans-Werner Sinn: ECB’s Beggar-thy-Trump Strategy – Project Syndicate

The ECB's decision to cut interest rates still further and launch another round of quantitative easing raises serious concerns about its internal decision-making process. The ECB is pursuing an exchange-rate policy in all but name, thus putting Europe on a collision course with the Trump administration.

Restarting asset purchases in the euro area – voxeu

Recent economic performance in the euro area has once again raised the possibility of the ECB conducting asset purchases. This column sorts security-level portfolio holdings data by investor type and across countries in the euro area to study portfolio rebalancing during the ECB purchase programme from 2015-17. There was a material difference in the impact on investors by geography – with foreign investors selling more than half of purchases.

Draghi Leaves It to Lagarde to Pick Up the Pieces – BB

The incoming president of the ECB will have to face down a revolt over her predecessor’s decision to restart quantitative easing. 

TLTRO - low take up, but ECB should not be concerned – Danske Bank

First TLTRO-III a big disappointment – Nordea

Demand at the ECB’s first new TLTRO totalled a paltry EUR 3.4bn, meaning excess liquidity will continue to fall until net asset purchases become the main driver. The low number should put some upward pressure on bond spreads and yields.

Bank take up of ECB loans meagre – ABN AMRO

Too early to draw strong conclusions about weak TLTRO take-up 

UNITED STATES

  FEDERAL RESERVE

NY Fed examines banks’ role in money market turmoil – FT

Central bank questions hesitance to lend as overnight repo rates soared this week

Did the Fed Deliver a Hawkish Cut? – Marc Chandler

The Federal Reserve delivered the widely anticipated 25 bp rate cut, but by not validating expectations for another cut. The market reacted is if they wanted to clearer dovish signal. The dollar strengthened, and equities fell. 

A Hawkish Rate Cut? No. – PIIE

Financial markets had been hoping for at least one more cut this year and interpreted the median projection as a hawkish sign. The markets have it wrong, however. A correct interpretation of the projection materials shows that at least one more cut this year is likely.

FOMC Review – Daiwa

Still divergent views on rate path; no one wildly dovish

Fed could be about to resume balance sheet expansion – ABN AMRO

Noncommittal but with a dovish bias * Resumption of balance sheet expansion could also have implications for policy * Long run repo loans or asset purchases are options to expand balance sheet

Powell plays the ‘insurance’ card again – Pictet

In spite of internal divisions, the Fed may go for a third rate cut in October and step in to alleviate pressure in repo market.

Balance sheet decision expected in October – ABN AMRO

Asset purchases to resume, but unlikely to have monetary policy implications

Editorial: The Fed’s Job Isn’t Getting Any Easier – BB

Uncertainty on every front, but especially trade, leaves monetary policy diminished.

Fed cut with no quick fix to tight liquidity conditions – Danske Bank

OTHER

Martin Wolf: why rigged capitalism is damaging democracy – FT

Economies are not delivering for most citizens because of weak competition, feeble productivity growth and tax loopholes

A Long-Despised and Risky Economic Doctrine Is Now a Hot Idea – BB

Next slump may see new central bank tools -- but less autonomy * Helicopter money on horizon as Dalio, Fischer draw up plans

China: Why Taiwan is unfinished business for Xi Jinping – FT

As Beijing gears up for the 70th anniversary of Communist party rule, its greatest unresolved legacy has resurfaced

China Watch: More support likely, as weakness deepens – ABN AMRO

US and China made some goodwill gestures, with new talks on the horizon, after an escalation of tensions over the summer * Sort of (interim) deal would not mean strategic competition is over * ‘Cold war 2.0’: US and China much more integrated than US-USSR back then * August data show that economic momentum has weakened further, building the case for additional (piecemeal) stimulus

Low-carbon trade agreements – voxeu

The world’s climate change strategy and the global trading system are both in need of an infusion of fresh momentum. This column argues that the climate and trade diplomatic communities need each other more than they know, and it is time to bring them together. The best way to reinvigorate both climate and trade diplomacy is to think and act outside the box of the Paris Agreement and conventional free trade agreements and push for low-carbon trade agreements.

Could Ultra-Low Interest Rates Be Contractionary? –Project Syndicate

Although low interest rates have traditionally been viewed as positive for economic growth because they encourage businesses to invest in enhancing productivity, this may not be the case. Instead, extremely low rates may lead to slower growth by increasing market concentration and thus weakening firms' incentive to boost productivity.

Global trade protection and the role of non‑tariff barriers – voxeu

Trade protection had in started before Trump, in the form of non-tariff barriers. An empirical analysis reveals that the average trade dampening effect of such barriers is comparable to that of trade defence instruments such as anti-dumping duties. However, this negative effect can be mitigated by free trade agreements.

Trump’s Next Trade Feud Has Parcels From China in Its Sights – BB

US & China trade: Who is “winning?” – ING

US – China trade tensions are an obvious threat to supply chains and corporate profitability. Businesses are trying to adapt to the new environment with third party countries seemingly benefiting from the impasse at the expense of both China and the US

  IRAN

Mike Pompeo Just Ended Any Hopes for Iranian Oil – BB

The chances of the U.S. easing sanctions fell to zero after the secretary of state blamed Tehran for the attack on Saudi Arabia’s Abqaiq facility.

Attack on Saudi Arabia Demands a United Response – BB

A strike on its oil and gas infrastructure is an assault on the world economy.

Yes, Iran Was Behind the Saudi Oil Attack. Now What? – BB

This latest escalation is yet another reason the U.S. should not pursue talks with the regime.

Does the World Have Enough Oil to Cope With Saudi Attacks? – BB

Emergency national stockpiles should be adequate to cover any shortfall from the Abqaiq attacks, if needed. A broader Gulf conflict would be a real test.

Game Theorists Will Never See Iran’s Godot Coming – BB

Markets are pricing in little or no escalation because the alternative is so terrifying. There’s plenty of room below if they’re wrong.