A simple measure of competitiveness in the Euro Area

Renewed competitiveness and structural reforms are expected to be the recipe for growth and employment in the Euro Area. The target is to change the growth framework in order to generate productivity gains.
These discussions were very interesting but the question we can have now is the following: which country has done something? Continue reading

French Labor Market: A change in regime? Yes but not for the good reasons

A French version with more details is available on my French blog

Numbers at the French labor agency (Pôle Emploi) have improved a lot in August. The number of people registered at Pole Emploi has dropped for the first time since April 2011. This clearly shows a more satisfying labor market behavior but there are so many surprising numbers in this report that we cannot imagine a homogenous improvement.

The first surprising number is this large drop in people registered. In August the number was -50 000. Such a number has not been seen since November 2000. It was a long time ago and growth was stronger than what is currently seen. In 2000 GDP growth was 3% and explained easily the labor market improvement. This is not currently the case. In the Budget for 2014 that has been presented today by the French government, expectations for 2013 GDP growth are just at a mere 0.1%. What is puzzling is that the carryover growth number for 2013 at the end of the first half is already 0.1%. This means that the government does not expect a stronger momentum for the third and the fourth quarters. (Carry-over growth at the end of the first half is the calculation of the average growth rate for 2013 with Q3 and Q4 GDP level equals to Q2 GDP number.) – There is still fragility in the French labor market. Continue reading

A new LTRO for the ECB

This post in pdf can be found here : LTRO-ECB-PW-24-09-2013

During the Questions and Answers session at the European Parliament, Mario Draghi has spoken of the possibility of a new LTRO. LTRO (Long-Term Refinancing Operation) is a tool that the ECB can use to increase liquidity to the banking sector. Usually these operations are short-term but the ECB has already made 3 year operations. It’s a long-term swap where the ECB provides liquidity against collateral. The specificity is that it’s a full allotment operation at a defined interest rate. Its consequence is to provide a large amount of liquidity to the money market (for precisions see here page 9 box 1)

There are five reasons that can explain this operation Continue reading

Euro Area – USA: Monetary Policy Expectations

In a recent post (see here) I mentioned the dependency of the Euro Area monetary policy to the Fed’s monetary strategy. On a chart I showed monetary policy expectations on both side of the Atlantic.
In a nutshell, the point was to say that the short part of the bond market in the Euro Area seemed to be more dependent on the US market than on the Euro Area monetary policy. Continue reading

Fed’s monetary policy : weak growth is the explanation

This post in pdf here : Fed Monetary Policy

Last spring Ben Bernanke spoke clearly about the Fed’s intention to reduce its asset purchases but to keep its interest rate at a very low level [0; 0.25%] for an extended period. During the June meeting the majority of the monetary policy committee (FOMC) agreed to keep them at this level at least until 2015.
To calibrate expectations, Ben Bernanke at the press conference in June was more precise on the way the new strategy could take place. He said that lower purchases could be effective during this fall and that all purchases would stop when the unemployment rate would be at 7%. He also said that the FOMC wouldn’t change Fed’s interest rates level until unemployment rate converges to 6.5% and that inflation rate expectations be higher by at least 0.5% from the Fed’s target of 2%. Bernanke also said that there was no commitment for the future in the way they manage asset purchases. It would be dependent on the economic situation. The Fed wanted to have the possibility to increase or decrease its purchases.

The reason of this change was very clear according to Ben Bernanke. Downside risks on economic activity have receded and it was rational to imagine an exit from the very accommodative monetary policy. The exit from this very accommodative monetary policy was expected to take two or three years.

Looking at all these elements, economists were persuaded that the start of the process would be in September. It was a meeting with a press conference to explain the new strategy and at this meeting new forecasts were published. The other meeting with the same characteristics was in December. But taking December as a benchmark was risky as the unemployment rate could be very close to 7% at this moment. And Bernanke’s commitment was to stop purchases at 7%. This would have a strong impact on the market and it was problematic. That’s why September’s meeting was preferred.

With these elements in mind and with moderately positive economic data the forecast was a reduction of purchases of USD10 to 15bn in September.

This scenario was not the good one Continue reading

Europeans are also dependent on the Fed’s decision

This post in pdf FedFunds&Euro Area-Sept-16-2013

The Fed’s meeting on 17 and 18 September has been much discussed because of the announcement Ben Bernanke could do on financial assets purchases. I will not discuss this issue here.

What interests me is the first chart below, which shows the evolution of the two-year interest rate in one year. It reflects, via short bond yields, an anticipation of monetary policy by investors.
Since last May after Ben Bernanke’s testimony at the Congress the U.S. curve rises. This makes sense because it reflects the anticipation of a more stringent policy in the future. If indeed the U.S. central bank exits from its highly accommodative policy this will go through higher short-term interest rate that will push long-term interest rates higher* Continue reading

Larry Summers will not be next Fed’s President

Larry Summers has declined the opportunity to be appointed Chairman of the Federal Reserve to replace Ben Bernanke whose term will end on January 31. (The letter is available in pdf format here Summers’ Letter )
This reopens the debate on the successor to Ben Bernanke. Janet Yellen could become a favorite. However if she has a strong support by economists (see the petition here) she does not seem to have a strong support of the White House. Continue reading