What happens if the Euroboom fades or dies?

Amidst the excitement ( okay the financial media had little else to do…) of the US ten-year Treasury Note reaching a yield of 3% yesterday there was little reaction from Europe. What I mean by this was that there was a time when European bond yields would have been dragged up in a type of pursuit. But as we look around whilst there may have been a small nudge higher the environment is completely different. Of course Germany is ploughing its own furrow with a 0.63% ten-year yield but even Italy only has one of 1.77%. In fact in a broad sweep Portugal has travelled in completely the opposite direction to the United States as I recall it issuing a ten-year bond at over 4% last January whereas now it has a market yield of 1.68%.

Of course much of this has been driven by all the Quantitative Easing purchases of the European Central Bank or ECB. This gives us a curious style of monetary policy where the foot has been on the accelerator during a boom. Putting it another way there are now over 4.5 trillion Euros of assets on the ECB balance sheet. However in another fail for economics 101 the amount of inflation generated has not been that much.

Euro area annual inflation rate was 1.3% in March 2018, up from 1.1% in February. A year earlier, the rate was
1.5%. European Union annual inflation was 1.5% in March 2018, up from 1.4% in February ( Eurostat)

As you can see the rate is below a year ago in spite of the extra QE.  However some ECB members are still banging the drum.


That is an odd way of putting something which is likely to weaken the economy via lower real wages is it not? Thus confidence goes into my financial lexicon for these times especially as to most people such confidence can be expressed like this.

Global benchmark June Brent LCOM8, -0.18% settled at $73.86 a barrel on ICE Futures Europe, down 85 cents, or 1.1%. It had touched a high of $75.47, the highest level since November 2014. ( Marketwatch)

So in essence the confidence is really expectations of a higher oil price which as well as being inflationary is a contractionary influence on the Euro area economy. Here is Eurostat on the subject.

 Indeed, more than half (54.0 %) of the EU-28’s gross inland energy consumption in 2015 came from imported sources

Sadly it avoids giving us figures on just the Euro area but let us move on adding a higher oil price to the contractionary influences on the Euro area.

Oh and there is an area where one can see some flickers of an impact on inflation of all the QE. From Eurostat.

House prices, as measured by the House Price Index, rose by 4.2% in the euro area and by 4.5% in the EU in the
fourth quarter of 2017 compared with the same quarter of the previous year……….Compared with the third quarter of 2017, house prices rose by 0.9% in the euro area and by 0.7% in the EU in the fourth quarter of 2017

Those who recall the past might be more than a little troubled by the 11.8% recorded in Ireland and the 7.2% recorded in Spain.

Money Supply

I looked at this issue on the 9th of this month.

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn.

The broader measure had slowed too which is awkward if you expect higher inflation for example from the oil price rise. This is because the rule of thumb is that you split the broad money growth between output and inflation. So if broad money growth is lower and inflation higher there is pressure for output to be squeezed.

Other signals

The Bundesbank of Germany told us this yesterday.

The Bundesbank expects the German economy’s boom to continue, although the Bank’s economists predict that the growth rate of gross domestic product might be distinctly lower in the first quarter of 2018 than in the preceding quarters.

The industrial production weakness that we looked at back on the 9th of this month is a factor as well as a novel one in a world where the poor old weather usually takes a beating.

the particularly severe flu outbreak this year ……. The unusually severe flu season is also likely to have dampened economic activity in other sectors, the economists note.

Perhaps we will see headlines stating the German economy has the flu next month. Oh and in the end the weather always gets it.

In February, output in the construction sector declined by a seasonally adjusted 2¼% on the month. This, the Bank’s economists believe, was attributable to the colder than average weather conditions.

So the boom is continuing even though it is not. As this is around 28% of the Euro area economy it has a large impact.

This morning France has told us this. From Insee.

In April 2018, households’ confidence in the economic
situation was almost unchanged: the synthetic index
gained one point at 101, slightly above its long-term

So a lot better than the 80 seen in the late spring/summer of 2013 but also a fade from the 108 of last June. Also yesterday we were told this.

The balances of industrialists’ opinion on overall and
foreign demand in the last three months have dropped
sharply compared to January – they had then reached their
highest level since April 2011.

That makes the quarter just gone look like a peak or rather the turn of the year especially if we add in this.

Business managers are also less optimistic about overall and foreign demand over the next three months;

bank lending

The survey released by the ECB yesterday was pretty strong although it tends to cover past trends. Also it seemed to show hints of what we might consider to be the British disease.

Credit standards for loans to households for house purchase eased further in the first quarter of 2018……..In the first quarter of 2018, banks continued to report a
net increase in demand for housing loans

And really?

Net demand for housing loans continued to be driven
mainly by the low general level of interest rates,
consumer confidence and favourable housing market


The ECB finds itself in something of a dilemma. This is because it has continued with a highly stimulatory policy in a boom and now faces the issue of deciding if the current slow down is temporary or not? Even worse for presentational purposes it has suggested it will end QE in September just in time for the economic winds to reverse course. Added to this has been the rise in the oil price which will boost inflation which the ECB will say it likes when in fact it must now that it will be a contractionary influence on the economy. This means it is as confused as its namesake ECB in the world of cricket.

Such developments no doubt are the reason why ECB members are on the media wires the day before a policy meeting ignoring the concept of purdah. Also I suspect the regular section on economic reform ( the equivalent of a hardy perennial) at tomorrow’s press conference might be spoken with emphasis rather than ennui. From Reuters.

The European Central Bank, after suffering a political backlash, is considering shelving planned rules that would have forced banks to set aside more money against their stock of unpaid loans. The guidelines, which were expected by March, had been presented as a main plank of the ECB’s plan to bring down a 759 billion euro ($930 billion) pile of soured credit weighing on euro zone banks, particularly in Greece, Portugal and Italy.

Also we return to one of the earliest themes of this website which was that central banks would delay any return to normal monetary policy. Back then I did not know how far they would go and now we wait to see if the ECB will ever fully reverse it’s Whatever it takes” policy or will end up adding to it?





18 thoughts on “What happens if the Euroboom fades or dies?

  1. Hi Shaun

    To attempt a one word answer to your question my answer would be:trouble.

    Growth is the solvent, the balm that would ameliorate many of the problems now facing the EZ. With growth fading and even a recession a possibility in some EZ countries deficits will explode and debt (both public and private)will soar, thus exacerbating problem that have existed for years and which show little sign of being resolved. It will turn the screws further on the economies of Italy, Spain and Greece when they have already suffered over a number of years of internal repression.

    The political temperature within the EU has been rising for some time and a slowdown or recession might well deliver the coup de grace to the Euro project in particular as it will clearly demonstrate the futility of a currency without political union which is further away now than it was five years ago. However, as dysfunctional and idiotic as it is, it will not be allowed to die with a bang but rather with a very drawn out whimper, because the Eurocrats know full well that if the Euro goes down then so will the EU. The best trade is, as always, to go long on can kicking.

    • Hi Bob J

      Yes that poor old battered can has taken a lot more than its fair share of punishment over the past decade. As to reform well Eurobonds seem no nearer than ever and there is of course more money required for the EU to replace UK contributions. So I agree that another slow down would cause trouble.

  2. Did you see Gavin Davies’s article in the FT showing the marked drop off in activity in the Eurozone, notably Germany, in the Fulcrum ‘Nowcasts’?

    • Hi hotairmail

      No I had not so thanks and in case others had not.

      ” The latest nowcast results for the eurozone suggest that activity growth has dropped to only 1.2 per cent in early April, with each of the major economies experiencing a sharp decline in growth. Even Germany, which was relatively immune from previous European downturns has recorded a very sharp dip, with growth now down to only around 1 per cent. ”

      What this represents is a success for those who use narrow money trends as a leading indicator as this fits with that. Noo 2 economics who comments on here is a fan and it seems to be working a treat in the Euro area.

  3. The US 10 yr is now over 3% why would anyone with a functioning brain cell by bonds at less than half this yield.
    Should money not be flooding to US causing European yield rise rise and US yields to fall.
    I am missing something here but then I always do why are Japan and US referred to as safe havens when they are literally insolvent?

    • A lot of that has to do with the denomination and ownership of the debt. The US can just print more dollars, while Japanese debt is 2/3 owned by Japanese. In contrast, Oz is about the riskiest developed country for debt for the opposite reasons.

  4. Slightly off topic, but there was a top EU banking bureaucrat on the TV in the USA the week before last stating explicitly that there will be a banking and fiscal union in the EU. As he put it, there may be some populist objections, but it will happen. Perhaps the next EU recession wil be used to overcome those populist sentiments and the Germans will be fine with paying off Italian/Greek debt etc

    • I don’t think they’ll get far

      I have been of the opinion that the original Northern European countries, Germany , France, Benelux, Dutch are close and could have converged – indeed they may still be able to .

      but the PIIGS and now the 27 – 1 will be too far apart

      will that stop a bureaucrat ? no , they’ll try , anything to keep the gravy train going …..

      Mind you I think we did our best to help out….


      • The chief problem here is Italy. Yes there is a move for the seven most dynamic to form a fast lane EU but they are really ignoring Italy’s wishes.

        Or rather the egos of the Italian people, who have already stuck two fingers up by voting in the 5* chappies.

  5. QE(US and UK) and “Whatever it takes”(EU) are here forever, their restoration and continuation are inexorably linked to their respective property bubbles, any sign of falling prices and they will be restarted with a vengeance.

    The problem is, these very property markets in their respective countries are consuming the real economies, by sucking ever greater sums from the real economy, and requiring ever greater stimulus and subsidies from the central banks which in turn make the consumers – the ultimate buyers of the property increasingly unable to afford property, requiring more stimulus.
    It’s not rocket science, but central banks will never change course, as it would require them to 1). admit they were wrong and 2). cause massive losses for their member banks.

    Quite simply, they will never allow it to happen.

    • Hi Kevin

      There was a hint of this highlighted by something in the Guardian earlier.

      “The government has agreed to virtually wipe out a help-to-buy loan on an apartment in a London block with cladding similar to that used at Grenfell Tower, it has emerged.

      It will make the write-down on the grounds that the value of the flat in Greenwich has been reduced from £500,000 to £50,000 because the developer has no plans to remove the cladding.

      The concession raises the prospect of multimillion-pound losses for the government scheme on any flat that goes into negative equity. This is because, unlike high street mortgages, help-to-buy loans can be redeemed on the sale value of the property rather than the value of the original loan.”

      Whilst I have a lot of sympathy for the woman affected this does beg a few questions.

  6. Great blog as usual, Shaun.
    You note: “Those who recall the past might be more than a little troubled by the 11.8% [annual rate of house price inflation] recorded in Ireland and the 7.2% recorded in Spain”. Ireland had the highest housing inflation rate of any EU country, but there were a number of other EU countries that had higher rates than Spain. Of these, the highest rates for EU countries not in the euro area were for the Czech Republic (8.4%) and Bulgaria (8.2%). The Czech Republic, like most of the EU countries still using their own currencies, has no intention of adopting the euro any time soon. On the other hand Bulgaria, which has the EU presidency at the moment, intends to apply to enter ERM2 at mid-year, and could, if things go according to plan, join the euro area on July 1, 2020.
    It appears there is some reluctance, at least from Germany, to accept Bulgaria into the ERM2, although it seems to meet all the formal convergence criteria. The inflation convergence criterion is that the HICP inflation rate of the candidate country be no more than 1.5% greater than the unweighted average of the inflation rates of the three EU countries with the lowest rates of inflation. Bulgaria’s HICP inflation rate was just 1.4% in March, so it would pass the inflation test easily. I suspect it would still pass a convergence test based on an HICP including an owner-occupied housing price index (OOHPI) component, although not so easily, especially if one changed the standard of comparison. Does it really make sense to base this standard on the countries with the lowest inflation rates if one or more of them are undergoing housing busts? If Bulgaria were a euro area country, its 4.8% OOHPI inflation rate for 2017Q4, at 4.5%, would have been the fifth largest, after Latvia (6.0%), Spain (5.6%), Lithuania (5.5%) and Portugal (5.3%). Except for Portugal these are all euro area countries that had a housing boom and bust during the noughties.

    • Hi Andrew and thank you

      I think that they are probably getting cold feet about Bulgaria because of the corruption issues there. We have not heard from ExpatInBG recently but he is our man for that. On a wider issue I wonder why Bulgaria is still keen to join the Euro? Perhaps it wants some ECB QE.

      Thanks for the extra house price data which does make us wonder if to coin a phrase deja vu all over again. Meanwhile I would offer some analysis of the Bank of Canada Governor if I could figure out what he means!


      • Shaun, thank you for the reference to the Reuters article. It was a Conservative senator from New Brunswick, Carolyn Stewart Olsen, who accused him of seeing the economy in rosy terms, when things didn’t look great in her part of the province. One does wonder why the BoC thinks growth will be almost double (2.5% annualized) in 2018Q2 what it backcasted for 2018Q1 (1.3%). There is already the prospect of a trade war between two of our provinces, Alberta and British Columbia, and Houston-based Kinder Morgan may pull the plug on the Transmountain pipeline by the end of May, casting a pall on foreign investment in this country in general. Even the National Hockey League isn’t favouring second quarter growth, only two of seven Canadian teams, Winnipeg and Toronto, made it to the playoffs this year and the Leafs were just eliminated tonight, so only the Winnipeg Jets will play in the second round and could still be playing in June. This is wonderful for them and their fans but Winnipeg is also the smallest Canadian city with an NHL franchise, so the NHL will put much less money in the economy in 2018Q2 than it did last year in 2017Q2.
        Dave Tkachuk, a Conservative Senator from Saskatchewan, accused Poloz of making public remarks about fiscal policy that showed partisanship towards the government, as he certainly has. Poloz used the word “bizarre” so many times in his bad-tempered reply I couldn’t count, but what was really bizarre was that he seemed to think he could show such obvious partisanship in numerous public statements and not be criticized for it by an Opposition Senator.
        The last time that Poloz spoke to this Senate committee was in November, when the methodology for the mortgage interest cost index for the CPI was changed to include flexible rate mortgages. This change and the string of overnight rate increases recently account for the MICI monthly inflation rate being much higher from November forward. The CPI excluding mortgage interest cost had an inflation rate of 2.2% in March, up from 2.1%, while in both months the overall inflation rate was 0.1 percentage points higher. Previously the CPI excluding mortgage interest rate was showing a higher or the same rate of inflation as the overall CPI for a very long stretch. Poloz doesn’t even know how much of the increase in the MICI inflation rate is due to changes in mortgage interest rates.

  7. Again, to sound like a broken record, if QE doesn’t cause inflation then why not do it? What is wrong with your central bank owning a bunch of valuable assets that cost nothing to acquire? It’s free money!
    Also, per Friedman, money supply is still too low in Europe and that is why long term interest rates are low. Pump up the printing presses and you will quickly see interest rates rise.

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