The ECB strategy review is just more of the same

This week is ECB time and this meeting is a material one on several counts. Things were revved up a bit last week by President Lagarde in interviews with Bloomberg and the Financial Times.

 we now have what I would call a simple, solid, symmetric two per cent target. So we express very firmly that we are determined to deliver two per cent. I think that is a big change.

Actually everyone thought that anyway but tucked in with it was a couple of attempts to mislead.

And maybe the really important third “s” is symmetry, because we affirm very clearly that there may be deviations up or down, either below or above two per cent and we state that we consider both deviations up or down as equally undesirable.

The new central banking mantra is to try to get inflation above target except in something of an echo of the Japanese situation there is a problem. Here is the Lagarde view.

Second, we also recognise the effectiveness of all the tools that we have in the toolbox.

Really? Let me now hand you over to Phillipe Martim a French economist in the Frankfurt Allegmeine today.

At the beginning of his theses there is a reference to “a failure” – that of the ECB. For a long time it has mostly fallen well below its self-imposed inflation target of 2 percent. “In 90 percent of the time between 2015 and today, inflation was below 1.9 percent,” states Martin; even in times of the D-Mark there was more price increase.”

Over a period in which the ECB has thrown the kitchen sink in monetary policy terms at inflation it has in general failed in its objective. Or as Phillipe puts it.

“Today the ECB already holds 25 percent of Europe’s national debt. How far should that go, about 100 percent? Will one day buy 100 percent of the Italian national debt? ”Martin emphasizes that he“ considers the worries in Germany to be legitimate ”. There is a “problem with budget discipline” when a central bank buys massive amounts of national debt. In addition, “the exit can create a crisis”.

I expect it to keep going with QE because it is caught in a trap but would advice caution with 100% numbers as there are some pension and insurance funds who have to hold bonds. So the “free float” available to be bought is probably more like 75% although we are chasing a moving target with so many being issued. As it holds around 40% ( Phillipe is behind the times) there is not the margin you might think.

But we find ourselves at the ECB probem which is that for all the hype it has a record of consistent failure regarding its inflation target. Also if you look at the growth performance of the Euro area it is in trouble too.

There was also a classic Lagarde fail.

 We are all on the same page. There’s a unanimous agreement. There is a total consensus around that foundational document, that constitution of ours.

This took us back to the early days of her Presidency when she promised to end the splits which had been seen in Mario Draghi’s tenure. Meanwhile only a day or two later.

ECB policy makers are split over changes to their language on monetary stimulus in draft documents being circulated before next week’s Governing Council meeting, sources say ( Bloomberg)

Listening To People

This has turned into something of a classic of the genre.

During the events that I participated in myself, and I heard it from other governors, key concerns revolved around, number one, climate change.

Exactly the same as Christine’s own priority. How convenient!

When it does not agree with what the ECB wants it gets neutered. So we have a good start.

The second concern that we heard loud and clear as well, was housing costs. Housing costs us a lot, we Europeans, and this was the case in many countries. Why is it not more taken into account in your measurement of inflation?

First tactic is to delay.

But second, because we know it’s going to take time,

Although as regular readers will recall we have been on this roundabout before as I followed a process which went on for 2/3 years and was then dropped. So in fact it should be quick.

But the next one is to water it down and frankly take away most of the point of doing it.

We will include housing prices through alternative indexes into our assessment of overall inflation.

The cost of owning a house, not house prices, right? 

We will include the consumption part of owning a house. So we will not include the investment part.

As you can see the interviewer saw straight through the attempt to mislead. The reason why she is dissembling is shown below.

Over the period 2010 until the first quarter of 2021, rents increased by 15.3% and house prices by 30.9%. ( Eurostat)

Deeper Negative Interest-Rates

Christine Lagarde clearly has the interest-rate issue on her mind.

given the effective low bound that we are close to, will have to continue being used.

Sadly she was not asked whether she thought it was the -0.5% Deposit Rate or the -1% rate on liquidity for banks? But we saw only a day later the ground being tilled for more,more more on her Twitter feed.

We have decided to move up a gear and start the investigation phase of the digital euro project. In the digital age people and firms should continue to have access to the safest form of money – central bank money.

Notice how it is presented as a gain for the individual which is always a be afraid, be very afraid moment. This is because it is the road to deeper negative interest-rates which Phillipe Martin would in some circumstances apply at 100%.

“If there were the digital euro, that is, the citizens had direct accounts at the central bank, that would be easy: If the money is not spent, it will expire, for example after a year.” Otherwise, prepay cards might also be distributed under certain circumstances that are invalid after one year.”

Even the IMF was only suggesting -3%.

Producer Prices

These may well be throwing another factor into the mix. From Germany earlier.

WIESBADEN – In June 2021, the index of producer prices for industrial products increased by 8.5% compared with June 2020. As reported by the Federal Statistical Office this was the highest increase compared to the corresponding month of the preceding year since January 1982 (+8.9%), when prices rose strongly during the second oil crisis. Compared with the preceding month May 2021 the overall index rose by 1.3% in June 2021.

The real issue here is the monthly increase and they turned last December and since then have been in a range between 0.7% and 1.5%. suggesting a Yazz type situation.

The only way is up baby


Christine Lagarde finds herself in quite a mess and may even have exceeded the Grand Old Duke of York.

Oh, the grand old Duke of York
He had ten thousand men
He marched them up to the top of the hill
And he marched them down again

There was a collective failure in her appointment as after the “Euro Boom” it was considered safe to appoint someone with her track record because Mario Draghi could set policy for the opening year or two. That went wrong quite quickly.

Next comes her claim of healing divisions when it appears they have multiplied. But more importantly there is the issue of policy which is in quite a mess.  There was a signal that the main policy of PEPP bond purchases would be tapered and we were pointed towards its end date of March next year. Personally I do not believe they can stop QE as last time it lasted for only about 9 months. But some believed it with the optimistic economic forecasts.

Sadly back in the real world things are looking much more awkward with the Australian Financial Review suggesting this earlier.

The Reserve Bank will likely backflip on scaling back its $237 billion bond buying stimulus and could lift weekly purchases to $6 billion, according to leading economists including Westpac chief economist Bill Evans.

Reversing that quickly would be quite a record but as Australia has the strength of its commodities to help it, are you thinking what I am thinking? The Euro area does not have that. Will last week’s plans survive until Thursday?

Markets have picked up the pace with the German ten-year going even more negative and passing -0.4% today.



Producer Price Inflation surges in Spain

Some days the economic news just rolls neatly into the current economic debate and this morning is an example of that. If we look at Spain we are told this.

The annual rate of the general Industrial Price Index (IPRI) in the month of May is 15.3%, more than two points above that registered in April and the highest since January

So their version of producer prices is on a bit of a charge and this is repeated in the monthly figures.

In May, the monthly variation rate of the general IPRI is 1.6%.

If we look into the detail we see that this was a major factor.

Energy, whose variation of 2.6% is due to the rise in Oil refining, Production
Of gas; pipeline distribution of gaseous fuels and Production, transportation and
electrical power distribution. The impact of this sector on the general index is 0.824.

So half of the May move is a rise in energy prices and we know that this theme has continued this month as we note that Brent Crude futures are just below US $76 per barrel.

The other factors were.

Intermediate goods, which presents a monthly rate of 2.1% and an effect of 0.601….Non-durable consumer goods, with a rate of 0.6% and an effect of 0.149, caused by the increase in the prices of the Manufacture of vegetable oils and fats and animals.

So we see that energy and intermediate prices are on a bit of a charge but that so far this has not really fed into consumer goods. In terms of a pattern we see that something seems to have changed in November ( up 0.9%) last year and since then we have seen quite an increase overall.

As we will be moving on to consider the implications for the ECB let us note the number it will ask for.

The annual variation rate of the general index without Energy increases more than one and a half points, up to 7.1%, standing more than eight points below that of the general IPRI. This rate is the most since July 1995.

So they lower the number but cannot avoid the general principle of an inflationary push.

Euro area money supply

If we now switch to the money supply we have the ECB trying to pump it up to generate inflation and here are it latest efforts.

Annual growth rate of broad monetary aggregate M3 decreased to 8.4% in May 2021 from 9.2% in April……Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 11.6% in May from 12.3% in April.

This leads to several impressions. Firstly these are high rates of annual growth and next they are slowing. But care if needed with the latter view because the monthly rise in broad money was higher as 65 billion Euros in March and 43 billion in April has been followed by 76 billion in May. It was not narrow money which was virtually the same in May as it was in March after a small dip in April.

The banks are still seeing cash pour in which of course has been a feature of these pandemic times although again the annual numbers show some slowing.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households decreased to 7.9% in May from 8.3% in April, while the annual growth rate of deposits placed by non-financial corporations decreased to 8.9% in May from 12.8% in April. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) increased to 11.4% in May from 8.7% in April.

The actual numbers for deposit increases coincide with this more than the previous ones as we note the increase in overnight deposits has gone 69 billion Euros in March then 45 billion in April, followed by 59 billion in May.


These numbers are hard to interpret right now. This is because they are a lagging indicator of economic activity but got a sharp shove higher in the spring of last year via central bank and government action. However there is one area we can look at from several angles.

The annual growth rate of credit to general government decreased to 15.4% in May from 18.0% in April,

There clearly has been a lot going on here and you will not be surprised to read that there was a clear shift last March. The annual growth rate had been negative for a while signalling a type of austerity but then went positive rising to a peak growth rate of 24% in February. The monthly rate has been falling overall ( 67 billion then 27 then 37 in May) but it is now some 6.1 trillion Euros.

@fwred has been crunching some numbers for the French public debt.

French public debt rose to a new high in Q1, at 118% of GDP

But someone has been buying.

the Eurosystem ( @banquedefrance @ecb ) holds more than 20% of general government debt, returning interest payments to the state eventually. Excluding Eurosystem holdings, French public debt has risen slightly since 2015 and stands at 94% of GDP.

So QE excluded there has not been much change and of course as we observe so often an SPV fixes everything!

 On the upside, the first payout from the European Recovery and Resilience Facility (RRF) should help to ease the deficit. ( Bank of France)

Well until Eurostat makes them include it anyway.

The European Commission has today adopted a positive assessment of France’s recovery and resilience plan. This is an important step towards the EU disbursing €39.4 billion in grants under the Recovery and Resilience Facility (RRF). ( European Commission)


As we have seen today the current central banking challenge is the fact that we are seeing inflation warning signals whilst they are still pumping up the money supply. This provides quite a challenge and reverses past central banking rules. There are various features of this as the ECB like so many central banks funneled cash to the banking sector just before the furlough schemes did exactly the same thing. I note that Isabel Schnabel estimated yesterday that there were 400 billion of excess savings at the end of 2020 so there will be more now. Eventually these will be spent giving the economy another shove at a time of supply issues such as the lack of semiconductors for the motor industry.

There are growing problems with the claims that inflation is low if we return to Spain.

The  Government is  going to approve this Thursday in an   extraordinary Council of Ministers a  lowering of the VAT on electricity from 21 to 10% , as confirmed by sources from  United Podemos  to RTVE in the first instance and sources from Moncloa later.

Also there is the area which escapes the official inflation numbers.


Actually they do not account for it at all but let us give her some credit for at least mentioning the issue.

The long and great depression affecting Greece

Later today we get the policy announcement from the ECB or European Central Bank but I am not expecting much if anything. Perhaps some fiddling with the monthly purchases of the emergency component ( called PEPP) of its QE bond buying scheme. They have been buying around 80 billion Euros a month. But no big deal. So let us look at a strategic issue for the ECB and one which has its fingerprints all over it. We get a perspective from this.

If anyone had doubts about why I keep calling it a great depression the graph explains it. In the west we had got used to economic growth but Greece has replaced that not only with a lost decade but a substantial decline over 14 years. Back in 2007 people might reasonably have expected growth and indeed we have kept receiving official Euro area projections of annual growth of 2% per annum. Including one which (in)gloriously metamorphosed into a 10% decline. Along the way we get a reminder that economic output in Greece is far from even throughout the year.

It is intriguing that Yanis has chosen nominal rather than real GDP for his graph of events. Perhaps it flatters his period in office. If he replies to me asking about that I will post it. But it does open a door because it does provide a comparison with the debt load as most of it ( Greece does have some inflation -linked bonds) is a nominal amount. Of course Greece does not have control over its own currency as it lost that by joining the Euro. Along the way it has seen its debt soar as its ability to repay it has reduced.

National Debt

According to the Greek Debt Office this was 374 billion Euros for central government at the end of 2020 or up some 18 billion. It was more like 150 billion when this century began and really lifted off as a combination of the credit crunch and then the Euro area crisis hit. In 2012 some 107 billion Euros or so was lopped off by the Private Sector Involvement. or haircut although in a familiar pattern debt according to the official body only fell by around 50 billion. The ECB was involved here as it essentially was willing for anyone except itself to see a haircut ( regular readers will recall it insisted all bonds were 100% repaid).

This has meant that the debt to GDP ratio has soared, Initially a target of 120% was set mostly to protect Italy and Portugal  but that backfired hence the PSI. Then there was a supposed topping out around 170% but now we are told it ended 2020 at 205.6%.

There is a structural difference in the debt because so much is in what is called the official sector as highlighted below.

The majority (51%) of Greek debt is held by the European Stability Mechanism and this ensures low interest rates and a long repayment period.

Whilst it has exited in terms of flow the IMF is still there and with the various other bodies means the official sector now holds 80% of the stock.

That 80% is both decreasing and increasing. What do I mean? Well Greece is now issuing bonds again and here is this morning’s example.

The reopening of a 10-year bond issue by Greek authorities on Wednesday attracted 26 billion euros in bids and the interest rate of the issue was set 0.92 percent (Mid Swap + 82 basis points), down from an initial 1.0%. (keeptalkinggreece )

The actual issue is some 2.5 billion Euros and for perspective is much cheaper than the US ( ~1.5%) and a bit more expensive than the UK ( ~0.75%). A vein which the Greek Prime Minister is keen to mine.

Another sign of confidence in the Greek recovery and our long-term prospects. Today we issued a 10-year bond with a yield of approximately 0.9%. The country is borrowing at record low interest rates.

If only record low interest-rates were a sign of confidence! In such a world Greece would soon be surging past the US. Meanwhile we can return to the factor I opened with which is the ECB.

When it comes to ECB QE, Greece is different. The ECB has bought €25.7bn in GGBs under the PEPP so far, which is about €24bn in nominal terms, or 32% of eligible debt securities (GGB universe rose by €3bn in May, and by €11bn ytd). So, what happens next? ( @fwred )

As you can see Greece has been issuing new debt but overall the ECB has bought more than it has issued. There are two ironies here as its purchases back in the day were supposed to be a special case and here it is back in the game. Also Greece is not eligible under its ordinary QE programme. Probably for best in technical terms because if it was it would be breaking its issuer limits.


This is a really thorny issue because this remains the plan for Greece.

Achieve a primary surplus of 3.5% of GDP over the

That is from the Enhanced Surveillance Report of this month. That is the opposite of the new fiscal policy zeitgeist. Not only is it the opposite of how we started this week ( looking at the US) but even the Euro area has joined the game with its recovery plan and funds. The catch here is that everything is worse than when the policy target above was established.

The Greek economy contracted by 8.2% in 2020,
somewhat less than expected, but still considerably more than the EU as a whole, mainly on
account of the weight of the tourism sector in the economy……Greece’s primary deficit monitored under enhanced surveillance reached 7.5% of GDP
in 2020.

In terms of the deficit more of the same is expected this year and then an improvement.

The authorities’ 2021 Stability Programme
projects the primary deficit to reach 7.2% of GDP in 2021 and 0.3% of GDP in 2022.


There is a clear contradiction in the economic situation for Greece. The austerity programme which began according to US Treasury Secretary Geithner as a punishment collapsed the economy, By the time the policy changed to “solidarity” all the metrics had declined and the Covid-19 pandemic has seen growth hit again and debt rise.  The debt rise does not matter much these days in terms of debt costs because bond yields are so low and because so much debt is officially owned. The problem comes with any prospect of repayment as the 2030s so not look so far away in such terms now. That brings us back to the theme I established for the debt some years ago, To Infinity! And Beyond!. But for now the Euro area faces a conundrum as the new fiscal opportunism is the opposite of the plan for Greece.

We can find some cheer in the more recent data such as this an hour or so ago.

The seasonally adjusted Overall Industrial Production Index in April 2021 recorded an increase of 4.4% compared with the corresponding index of March 2021……..The Overall Industrial Production Index in April 2021 recorded an increase of 22.5% compared with April 2020.

Although context is provided by this.

The Overall IPI in April 2020 decreased by 10.8% compared with the corresponding index in April 2019

Plenty more quarters like this would be welcome.

The available seasonally adjusted data
indicate that in the 1st quarter of 2021 the Gross Domestic Product (GDP) in volume terms increased by 4.4% in comparison with the 4th quarter of 2020, while in comparison with the 1st quarter of 2020, it decreased by 2.3%.

For a real push tourism would need to return and as we are already in June the season is passing. But let us end on some good cheer and wish both their players good luck in the semi-finals of the French Open tennis.



France sees the economy double-dip but house prices rise

A feature of these times is that official statisticians are struggling to give us accurate data about the state of play in our economies. The irony is of course that it comes at a time when people are keener that ever to know what is happening. An example of that has been seen in France this morning.

In Q1 2021, gross domestic product (GDP) in volume terms* fell slightly:  -0.1% after -1.5% in Q4 2020. It stood 4.7% below its level in Q4 2019, which was the last quarter before the Covid-19 crisis. ( Insee )

This was rather different to what we had previously been told.

 In addition, the estimate for Q1 2021 was revised by -0.5 points, mainly due to the inclusion of construction data, which was significantly less dynamic than the extrapolations used in the first estimate: the evolution of GFCF in construction in Q1 2021 thus fell from +5.1% to +0.6%.

There are a couple of consequences here. Firstly those who have followed my analysis of UK construction numbers will know that we have also had issues measuring this area. Next is that in the circumstances this GDP reading looks more realistic than the previous one and it has a consequence.

PARIS, May 28 (Reuters) – France, the euro zone’s second biggest economy, fell into recession in the first quarter of 2021 with a 0.1% contraction, revised official data showed on Friday.

Personally I think that the depression issue where the economy is 4.7% smaller than a year before is much more significant than any recession debate.

Looked at in the round the main pressure this time came from trade.

Imports remained relatively dynamic (+1.1% after +2.2%), while exports fell slightly (-0.2% after +4.9%). Imports were thus 6.9% below their pre-crisis level, while exports remained further away (-9.9%). Overall, the external balance contributed negatively to GDP growth: -0.4 points, after +0.7 points.

A feature of this depression has been the various furlough and support schemes which have supported incomes.

Gross disposable household income (GDHI) decreased slightly (-0.2% after +1.9%) but remained above its pre-crisis level (+2.3% compared to Q4 2019).

As the ability to spend has frequently been restricted this has led to quite a rise in savings being recorded overall.

As a result of the decline in GDI and the slight increase in households’ consumption (see above), the households’ savings rate declined: it stood at 21.8% after 22.7% in Q1 2021, but still remained well above its 2019 level (15.0%).

Household Consumption

The pattern here had seen a decline but had become stable in the first quarter.

Households’ consumption expenditure was almost stable (+0.1% after -5.6%) and remained well below its pre-crisis level (-6.8% compared to Q4 2019)

Sadly there was another large drop in April.

Household consumption expenditure on goods fell in April (–8.3% in volume* compared to March 2021). This fall was mainly due to the manufactured goods purchases (–18.9%), and was explained by the implementation of the third lockdown from April 3rd 2021 on the whole territory.

This means that the second quarter started badly in economic terms and the consumption depression strengthened.

Spending is thus 9.5% below its average level in Q4 2019.

A feature of the lockdown era has been the effect on the clothing industry.

In April, spending on clothing and textiles was halved (–50.2%), due to shop closures throughout the country.

So we move on with a weaker first quarter and a downwards shove from household consumption in April.

Business Surveys

On Wednesday the official surveys were released and you will not be surprised to read that the retail sector liked the lockdown easing.

In retail trade (including trade and repair of vehicles), the business climate has gained 17 points, driven by the vigorous rise in the balance of opinion on the general business outlook for the sector, with in particular the reopening on May 19 of the so-called “non-essential” stores.

Ditto for the hospitality sector.

In the services sector, the climate has gained 15 points, due to the sharp increase in most of the balances relating to the near future. It also has gone back well above its average. In particular, in accommodation and food service activities, the business climate has bounced back extremely sharply, probably driven by the schedule of gradual reopening.

These have helped drive an overall improvement in sentiment.

In May 2021, the business climate has improved strongly. The indicator that synthesizes it, calculated from the responses of business leaders in the main market sectors of activity, has gained 12 points. At 108, it has returned above its long-term average (100), for the first time since February 2020, and is even higher than before the health crisis (105).

This is a long-running series so that it has credibility from that although it is also true that the previous peak at the end of 2017 when it rose to just under 112 was followed by a decline rather than a rise in the GDP growth rate.

The Markit IHS puchasing managers survey for the first three weeks of May was also upbeat.

“The French private sector moved up a gear in May
as lockdown restrictions were eased and the
economy began to reopen. There was a clear
underlying improvement in demand as new work
expanded at the fastest rate in over three years,
while output expectations were the strongest since
the composite series was first available in July 2012.”

On the other hand the new restrictions on travel from the UK will certainly not help the tourism industry.

House Prices

The Bank of France will be pleased to see a concrete response to all its monetary easing.

In Q1 2021, the rise in prices of second-hand dwellings in France (excluding Mayotte) continued: +1.4% compared to Q4 2020 (provisional seasonally adjusted results), after +2.4% in Q4 and +0.6% in Q3 2020.

The quarterly rises have led to what are fairly stable annual increases.

Over a year, the rise in prices continued as well: +5.9%, after +6.4% and +5.2%. Since the fourth quarter of 2020, this increase has been larger for houses (+6.5% over the year) than for flats (+5.1%), which had not happened since the end of 2016.

The shift from flats to houses has also been seen in the UK and is a response to the lockdown era it would seem.

If we look back there is scope here for fast promotion for a young central banker clutching their MBA or PhD. This is because house price growth in France went positive in 2015 just as the ECB fired up negative interest-rates and QE. Pointing that out will mean the croissant,espresso and baguette trolley will be a regular visitor to their desk.


It seems to be getting itself in rather a twist. Regular readers will recall it is supposed to be buying more bonds via QE under its PEPP programme, although the actual buying has fallen well short of the claims of Christine Lagarde. This is to reduce yields and restore what it considers to be favourable monetary conditions. Well apparently they are not what they used to be. Here is Isabel Schnabel yesterday.

Rising yields are a natural development at a turning point in the recovery: investors become more optimistic, inflation expectations rise and, as a result, nominal yields go up. This is precisely what we would expect and what we want to see.

Make your mind up. There was something worse there too.

I’ve always stressed that when it comes to favourable financing conditions, it’s insufficient to just look at the numbers.

There is a danger there of echoing Humpty-Dumpty.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”


This has been a curious depression. Hopefully it will be a sharp relatively short-lived one but like the First World War it did not end by Christmas. There has however been quite a boom in asset prices. We have already looked at house prices but all the QE bond buying pushed bonds to record highs as well and even with the recent rises the ten-year yield is a mere 0.18%. The CAC-40 has surged to multi-year highs as well although not back to the level of September 2000.

The slow roll out of the vaccine has meant that France’s economy has stagnated again and ironically after all the debate is probably around level with the UK at the moment. Although the UK has been picking up relatively sharply. Let us hope that Bonnie Tyler was wrong about economic growth in France.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

What are the economic prospects for the Euro area?

We have arrived at Super Thursday but we need not worry too much about the Bank of England for today. The only possible change is that it reduces its rate of QE bond purchases but that is mostly change for change’s sake as the overall total of £895 billion including the corporate bonds looks set to remain. So in short not very super at all. However in terms of economics we can look across the channel to note what the ECB Economic Bulletin tells us about the Euro area.

Following the strong rebound in euro area output in the third quarter of 2020, economic growth turned negative again in the fourth quarter, with continued weak prospects for the first quarter of 2021. Total economic activity contracted by 0.7%, quarter on quarter, in the final quarter of 2020,

As you can see they have not kept up with the news flow as last week we were told this.

In the first quarter 2021, seasonally adjusted GDP decreased by 0.6% in the euro area and by 0.4% in the EU,
compared with the previous quarter……..Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 1.8% in the euro area and by 1.7% in the EU in the first quarter of 2021,

On a superficial level this fulfils the definition of a recession but the truth is that we are in a depression. The numbers above are not especially helpful in calculating the scale of the depression because the Euro area economy was already shrinking at the opening of last year. But if we look back to the end of 2020 the economy has shrunk by around 5.5%.That fits with our favourite guide for the labour market.

The large declines in total hours worked in the first half and the fourth quarter of 2020 reflect the impacts of lockdown measures in these periods. The level of total hours worked remained 6.5% below the level recorded in the fourth quarter of 2019. ( ECB )

Looking Ahead

The Markit IHS business survey told us this yesterday.

April’s survey data provide encouraging evidence
that the eurozone will pull out of its double-dip
recession in the second quarter. A manufacturing
boom, fueled by surging demand both in domestic
and export markets as many economies emerge
from lockdowns, is being accompanied by signs
that the service sector has now also returned to

However much of the growth came from these two.

Germany again led the way in terms of overall
growth, expanding at a marked pace with growth
underpinned by a strongly performing
manufacturing economy.
Spain meanwhile saw growth improve to its
strongest for over two years as service providers
experienced a bounce in activity ahead of planned
business reopening and in line with expectations of
a relaxation of Covid restrictions.

By contrast Markit found growth much harder to come by here.

France and Italy meanwhile registered modest
growth of overall private sector output during April,

Actually they were in the 51s in terms of the spot reading which we have learned may mean no growth at all. Looking into the detail the growth is essentially from manufacturing which explains why Germany is doing well and perhaps Spain is reflecting the way that car manufacturing has been heading south over the years. On that basis we might have expected more out of Italy but that is a pretty much perennial feeling.


Today’s construction PMI surveys were weak with Germany for example reporting this.

April’s construction PMI survey produced another set of
disappointing figures, showing the building sector still
stuck in a slump amid a continued soft patch in order

Actually apart from Italy which is seeing strong construction growth and confirming its exception to almost any rule status.

However this is more troubling.

However, it’s on the supply side where we see the
greatest causes for concern, with shortages of building
materials leading to unprecedented reports of longer
wait-times for inputs and pushing up purchase prices
at rate previously unseen in over two decades of data
collection………..and a threat to demand from sharply
rising prices

because it reinforces the message from the Euro area manufacturing sector.

While the revival in the economy is bringing a rise
in inflationary pressures, these so far seem largely
confined to the manufacturing sector

This issue seems to have created a little concern at the ECB which has looked into shipping costs in its Economic Bulletin.

In the fourth quarter, however, the rise in shipping costs reflected above all the more vigorous recovery in global demand, and only to a smaller extent supply constraints in the shipping industry.[8] The surge in global oil and fuel prices further contributed to the spike in shipping costs.

But never fear as they have pretty much explained it all away.

The analysis suggests that after one year, the pass-through of shipping prices into US Personal Consumption Expenditures (PCE) inflation is rather limited.[10] Even a 50% annual increase in the Harpex – similar to that experienced leading up to January 2021 – could raise annual PCE inflation by up to 0.25 percentage points one year later.

And anyway don’t worry if you are paying more because it will later fall.

As supply adjusts to higher demand freight costs might decline again.

Or of course they may not.

Actually former ECB Vice-President Vitor Constancio seems rather keen on one type of inflation.

Good news for greening policy: the EU price of carbon attained €50 per tonne and more than doubled since the beginning of the pandemic. The EU trading system is working. Still, to achieve EU ambitious targets the price will have to go gradually to more than €100.

Retail Sales

The Euro area consumer was back out spending as we came to the end of the first quarter.

In March 2021, the seasonally adjusted volume of retail trade rose by 2.7% in the euro area and by 2.6% in the EU,
compared with February 2021……..In March 2021 compared with March 2020, the calendar adjusted volume of retail trade increased by 12.0% in the
euro area and by 11.6% in the EU.

The annual figures are heavily distorted by the Covid pandemic but if we look back two years we see that there has been growth of 3.2% so there is hope that the consumer is back.


We can refine the ECB view of the economic future as shown below.

Contacts anticipated growth in the second quarter, but continuing lockdowns and the slow roll-out of vaccines pushed expectations of a more substantial rebound to later in the year. Contacts in the travel industry reported negligible bookings so far for the summer. Several contacts in consumer-oriented services did, however, highlight signs that consumers were very eager to eat in restaurants, shop in physical stores and go on holiday as soon as regulations allowed.

That has been the story of 2021 for the Euro area as its tardy vaccine progress has pushed signs of an economic recovery ever later in the year. Putting it another way we looked ont yesterday at talk of an interest-rate increase in the US. No-one has even remotely suggested that for the Euro area and its rate is lower with the Deposit Rate at -0.5% and funding available for banks at -1%. In some ways those numbers are the most revealing about the state of play.

The interest-rate situation was driven by the fact that the Euro area economy was slowing well before the Covid pandemic. That was why monetary policy was eased in the autumn of 2019 and once this phase is over we will find ourselves returning to that issue. If anything we have gone backwards in the meantime.

Lending for house purchases in the Euro area is having a strong 2021

The last year has seen an extraordinary rise in money supply measures around the world as central banks respond to the economic consequences of the Covid-19 pandemic. There has been something of a tsunami and this morning we see that it is unlikely to stop anytime soon as European Central Bank Vice-President De Guindos has been on the wires.


Then he made a point which would have had past central bankers looking to withdraw some of the stimulus.


If we switch to @LiveSquawk we see that this did not go down so well.

ECB’s De Guindos: Better To Err On Side Of Prudence When Comes To Withdrawing Stimulus

Because the only reply so far has been this.

Prudence in terms of inflation would be the right thing

Whereas the official view is summed up here.

ECB’s De Guindos: Eurozone Inflation Could Be Higher Than 2% At End Of Year………ECB’s De Guindos: 2021 Inflation Increase Due To Temporary Factors

Of course if they are not it is then to late in a reforming of the Yes Prime Minister playbook. This echoes the words of US Federal Reserve Chair Jay Powell from last night. He too has no intention of changing his monthly QE bond purchases or raising interest-rates and the US is in a much stronger economic position than the Euro area. So as we know central bankers are pack animals it looks like it will be quite some time before any change of course from the ECB and it seems unlikely for 2021. Indeed  only a week ago President Lagarde assured us there would be more.

the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.

Although as usual the messaging from President Lagarde was confused.

Now, your question about the weekly numbers: I would like to once again draw your attention to the fact that weekly numbers are not the most relevant numbers. I know that some of you will continue commenting on weekly numbers. Fine, but what matters much more are the monthly numbers,

Either she was introducing a new form of maths or a new version of time. Anyway someone did start buying more last week ( around 22 billion Euros in net terms) as we wonder if the extra was in a rush on Friday?!

Money Supply

At first it looks like there has been a slowing.

Annual growth rate of broad monetary aggregate M3 decreased to 10.1% in March 2021 from 12.2% in February (revised from 12.3%).

But in fact if we look at the monthly increase we see that it was 70 billion Euros as opposed to the 58 billion in February. So we are in fact seeing numbers affected by the fact that the pumping up of the money supply began last March. If we look back exactly a year I noted that in this manner.

Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder.

So we can see if we switch to the narrow money measure that annual growth was likely to also dip and by a fair bit.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 13.6% in March from 16.4% in February.

The actual monthly increase of 70 billion Euros would in normal times be considered large but is just under 200 billion lower than last year. Also there has been a monthly slowing in 2021 probably due to the ECB’s really rather confused attitude to PEPP QE purchases. As that lasted through much of April we may have to wait until the May data for a significant upwards turn again.

Oh and if you want the list of excuses Isabel Schnabel provided them yesterday.

The weekly change in the Eurosystem’s PEPP holdings (at amortised cost) at the beginning of April was affected by redemptions, the reduced number of trading & settlement days due to the Easter holidays and the quarter-end amortisation adjustment.

So the dog are their homework or something like that.

Credit Flows

As we have had a year since the beginning of the push we may now be getting a bit more of a clue into what is a lagging indicator.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 3.6% in March from 4.5% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households increased to 3.3% in March from 3.0% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 5.3% in March from 7.0% in February.

It is not inspiring that the growth numbers are returning to what they were for households but there are annual effects like for the money supply. However drilling into the detail raises a wry smile as all the lending this year has been for mortgages. It has gone 20 billion, 17 billion and now 23 billion. So whilst technically there was an increase in March the overall pattern looks pretty stable. If you are a sole proprietor you chances of a loan seem slim as so far this year they have fallen by a billion Euros and credit for consumption has fallen by 3 billion.

For businesses we see a different pattern as March saw a surge in business lending of 52 billion Euros. That compares to 8 billion total in the first two months of the year. Perhaps banks are rolling on deals begun this time last year and at this point you can take a glass half full view ( investment is booming) or a glass hald empty one ( firms still need to borrow due to the lockdowns affecting business). Reality will be a bit of both but these numbers do not tell us that.


This is the awkward phase for monetary growth in terms of annual comparisons as we are now comparing to the beginnings of the pump it up phase. The last 24 hours have seen confirmations from both the ECB and the US Federal Reserve that policy echoes a Tom Petty album title.

Damn the torpedoes, full speed ahead!

But problems are beginning to gather of which the first is how long they can get away with their claims about inflation? Only yesterday I pointed out the 12% house price growth in the US which is conveniently missing from the inflation numbers. Today has brought this from the European Commission business survey.

Selling price expectations saw the second month of uniform and marked increases across all surveyed business sectors, i.e. industry, services, retail trade and construction.

Or we can look at it from another angle as according to Isabel Schnabel price changes are no big deal for inflation.

Price changes of particular goods are not the same as general inflation. We are currently seeing price increases for some goods, like lumber, which may eventually be transmitted to consumer prices, depending on their weight in the consumption basket.

But climate change by contrast is.

Since climate change affects price stability through physical & transition risks, we must take it into account under our primary mandate.

What can the ECB do for the economic prospects of the Euro area?

The focus switches today to the Euro area and the ECB. This is not only because we wait to see if ECB President Lagarde will make yet another gaffe but because things changed in the central banking space somewhat yesterday. So let us take a journey across the Atlantic to Canada.

Our forward guidance continues to be reinforced and supplemented by our quantitative easing (QE) program. We decided to adjust the program to a target of $3 billion weekly net purchases of Government of Canada bonds. That is down from a minimum of $4 billion per week, while we will be maintaining broadly the same maturity composition of our purchases.

As you can see the Bank of Canada has decided to trim or taper its bond purchases. That is far from unique as for example the Bank of England has reduced its weekly purchases along the way to the present £4.4 billion, but it does contrast with the ECB.

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

That was from the last press conference on the 11th of March. However in spite of a long and convoluted explanation from President Lagarde nobody seems to have told the bond buyers. So here is @fwred on this week’s numbers.

Aaand another NOT significant net weekly ECB PEPP number (€16.3bn purchases per week, or €3.3bn per day, in line with the old normal regime). We’re all in for the jokes and nuances, but this is becoming an embarrassment, and an issue for the ECB’s credibility.

Some have responded by pointing out that the gross purchases at over 28 billion were the highest since last June. But that is not really the metric and anyway you know which bonds are going to mature by simply looking at the calendar. So we end up Genesis.

Can’t you see this is the land of confusion?

It goes without saying that this is another Forward Guidance fail where more purchases were promised but have not happened. In the meantime other central banks have begun to move in the other direction! Although this exposes another issue as the ECB cannot issue an economic forecast like this.

Overall, we now project that the economy will expand by around 6½ percent this year, slowing to about 3¾ percent in 2022 and 3¼ percent in 2023.

So we have an awkward situation for the ECB. There are nuances here as the Bank of Canada is partly responding to a roaring housing market

While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour.

Also it has an economy being boosted by higher commodity prices including lumber. But whichever way the ECB twists here it has trouble.


This is another issue again highlighted by the Bank of Canada.

. Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022.

So we could see an interest-rate increase then. I say could because central banks pursue plans for interest-rate cuts with far more enthusiasm than rises. But the ECB has a deeper issue which is that it did not raise interest-rates even in the Euro Boom of 2017/18. Is it trapped in the icy cold world of negative interest-rates? It has not raised interest-rates for a decade now.

Economic Outlook

Today has brought a couple of hints and it started in the Netherlands.

In February 2021, consumers spent 10.7 percent less than in February 2020, reports the CBS. The contraction is smaller than in January, when consumers spent 12.0 percent less than a year earlier. As in previous months, consumers spent less on services. With the closing of all non-essential stores on December 15, spending on durable goods also shrank exceptionally. ( Netherlands Statistics)

As you see the lockdown has hammered the figures although some confidence seems to be now returning.

The mood among consumers was less negative in April 2021 than a month earlier, reports the CBS. Consumer confidence was -14, against -18 in March 2021. For the first time after December 2018, consumers were positive about the future economy again.

There was something else to cheer the ECB today.

Existing owner-occupied homes were 11.3 percent more expensive in March than twelve months previously. That is the largest price increase after May 2001. The price increase moderated somewhat in 2019, but picked up again in 2020.

It seems they are following the Canadian model of soaring house prices. We get some more perspective from this.

Compared to the trough in June 2013, prices in March were 62 percent higher.

The index which was set at 100 in 2015 is now at 153.9. Those of you who have followed my reports on house prices in the Netherlands will know that they were considered increasingly unaffordable. Well they have just got a lot more expensive as people have got poorer.

Next up was France as we got told this.

In April 2021, the business climate in retail trade and in trade and repair of vehicles as a whole has deteriorated markedly, in connection with the third lockdown. At 90, the indicator that synthesizes it has lost 5 points and has approached its level of last February……According to the business managers surveyed in April 2021, the business climate in services has deteriorated At 91, the business climate indicator that synthetizes it has lost 3 point ( Insee)

Manufacturing is doing better but the overall business index is at 95 giving an impression of a French economy that is struggling again at the moment.

Then we got an update on Italy.

In February 2021 the seasonally adjusted turnover index increased by 0.2% compared to the previous
month (+0.9% the domestic market and -1.3% in non-domestic market)……..With respect to the same month of the previous year the calendar adjusted industrial turnover index increased by 0.9% (+2.3% in domestic market and -1.8% in non-domestic market).

Whether there was a subliminal influence in the order as we started with core Netherlands followed by nearly core France and then Italy I do not know. But France especially seems to be struggling again.


To my mind there are two types of issue for the ECB. The first is that it needs to sort out its policy and how it wishes to present it. There is an irony here as President Lagarde opened her tenure with a promise to sort this out and has ended up with a shambles. In essence it is not hard as the ECB’s role is essentially to finance this.

In 2020, the government deficit of both the euro area and the EU increased significantly compared with 2019, as
did the government debt, in the context of the measures undertaken in response to the COVID-19 pandemic. In the
euro area the government deficit to GDP ratio rose from 0.6% in 2019 to 7.2% in 2020………. In the euro area the government debt to GDP ratio increased from 83.9% at the end of 2019 to 98.0% at the
end of 2020, ( Eurostat)

Also if the Financial Times is any guide to help finance the plans of her predecessor.

Italy’s prime minister, Mario Draghi, will next week announce a €221bn recovery package for a radical restructuring of the country’s economy as it seeks to bounce back from its deepest recession since the second world war.

The next issue is the level of the Euro so that also counts against any tapering of QE. The Canadian Dollar had a strong day yesterday so that gave a signal of what might happen and the ECB is supposed to be pushing the Euro lower.

But if we step back there is a much deeper crisis here. Many countries were facing an issue of lack of economic growth pre pamdemic but the Euro area especially so. The present Covid wave and vaccine go slow means it us set to be one of the last to get back to normal. But what if we go back to slow/no growth? The ECB is trapped in a cycle of QE and negative interest-rates and perhaps via a digital Euro even lower interest-rates and thus presumably even higher house prices. As Elvis so famously put it.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby
Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

What are the economics of the European Super League?

Yesterday brought news that has long been in the offing and it has created quite a stir.

Twelve of Europe’s leading football clubs have today come together to announce they have agreed to establish a new mid-week competition, the Super League, governed by its Founding Clubs.

AC Milan, Arsenal FC, Atlético de Madrid, Chelsea FC, FC Barcelona, FC Internazionale Milano, Juventus FC, Liverpool FC, Manchester City, Manchester United, Real Madrid CF and Tottenham Hotspur have all joined as Founding Clubs. It is anticipated that a further three clubs will join ahead of the inaugural season, which is intended to commence as soon as practicable. ( Chelsea football club).

That begs several questions of which ( and I am not trolling here) the first is how do Arsenal and Spurs ( Tottenham Hotspur) qualify for a Super League? Both have been in the Europa League this season rather than the Champions League and whilst Arsenal are in the semi-finals Spurs were knocked out a while ago.

We find the rationale for the decision below by simply perusing the clubs who have the highest financial revenues according to Deloittes. Suddenly we can see why Arsenal and Spurs are on the guest list.


The geographical concentration acquires another context in that we see Paris St. Germain ( France) and most obvious of all Bayern Munich ( Germany) plainly would be in anyone’s definition of a Super League however you define it.

Also the numbers give us the beginnings of a rationale for all of this.

The top 20 clubs generated a combined €8.2 billion in 2019/20, down 12% on the prior season (€9.3 billion). ( Deloittes).

In fact they think the total decline will be this.

We estimate that this year’s Money League clubs will have missed out on over €2 billion in revenue by the end of the 2020/21 season, including amounts foregone in respect of 2019/20, as a result of the COVID-19 pandemic,

Also the analysis reminds us of a feature of the economics of modern football.

a €937m (23%) drop in broadcast revenue, primarily due to the deferral of broadcast revenues to the financial year ending in 2020 and broadcaster rebates related to the disrupted 2019/20 season;

a €257m (17%) fall in matchday revenue as matches were first postponed and then either cancelled or resumed behind closed doors;

The fall in revenue seen in 2019/20 was driven by lower broadcast or TV receipts and ticket or matchday revenue is much smaller. So the business model will be designed around broadcast revenue rather than ticket prices. Although in another twist I think we can be sure that ticket prices will be high although of course in the UK they are usually that already for these clubs.

Losses Abound

The excellent Swiss Ramble has reminded us of one rationale for the move.

Here’s a clue as to why 12 clubs have signed up for a European Super League: They lost a combined £1.2 billion in 2019/20 before player sales* And that was for a season where only the last 3 months were impacted by COVID… *Liverpool have not yet published their accounts

According to the Swiss Ramble calculation we see quickly why the Italian clubs are involved as AC Milan lost £177 m, Juventus lost £168 million and Inter Milan £117 million. We also see why Barcelona is being much more careful with its spending as it lost £152 million. The only club which looks okay in these numbers is Manchester United with a loss of £13 million and maybe Spurs at £40 million. Although the catch for these two is that this year Spurs will have had only the lower Europa League revenue and Manchester United a sort of hybrid as the were knocked out of the Champions League at an early stage.


This is the next issue and is something that has mostly slipped under the radar. But a world of increasingly zero and in many cases negative bonds yields – this is Europe after all – the official policy has been to encourage debt and the football clubs we are looking at have been singing along with the Kinks.

‘Cause he’s a dedicated follower of fashion
He’s a dedicated follower of fashion
He’s a dedicated follower of fashion

Or as Swiss Ramble puts it.

If we include other debt, such as the amounts owed to staff, tax authorities, suppliers and other creditors, the total debt of the 12 clubs signing-up to the European Super League is a staggering £7.4 bln.

So a bit over £600 million each. Regular readers may recall the phase when the European Central Bank or ECB bought some Bankia bonds as part of one of its asset purchases. I remember pointing out that as this covered the Ronaldo transfer to them we could see the ECB become a football super power should there be any default. From Football Espana back in 2012.

Real Madrid could face having to give up ownership of both Cristiano Ronaldo and Ricky Kaka to the European Central Bank (ECB), reports El Mundo Deportivo.
A financial crisis at Bankia, the bank that lent money from the ECB to help pay for the players, has meant that a knock-on effect of the transaction could result in Real having to relinquish the rights to both.

If we step forwards to now we have seen another nine years of this with negative interest-rates and bond yields adding to the party since 2015. Also the same themes have been in play in the UK and this brings the biggest debtor in this particular pack into play. Spurs who owe just under £1.2 billion of which some £831 million is the category which paid for their new stadium. The ground redevelopment and in this case replacement has been a UK feature as we note that the north London rivals Arsenal got in early replacing their stadium and now have financial debt of £218 million.

Returning to Spurs we got a reminder of the role of central banks these days last June.

THS has met the criteria set by the Bank of England for the CCFF and has issued £175m of Commercial Paper through this facility.

The CCFF is designed to provide short-term loans at commercial rates during the pandemic and is available to companies that have a strong investment grade rating and make a material contribution to the British economy.

As ever the situation is opaque and complex because Chelsea have relatively little debt but that is because much is operated via its owner Roman Abramovich.


This came in the original statement.

 In addition, the competition will be built on a sustainable financial foundation with all Founding Clubs signing up to a spending framework. In exchange for their commitment, Founding Clubs will receive an amount of €3.5 billion solely to support their infrastructure investment plans and to offset the impact of the COVID pandemic.

It looks as though there will be a salary cap at 55% of revenues. Also the funding will be larger according to City-AM.

Arsenal, Chelsea, Liverpool, Manchester City, Manchester United and Tottenham are among the clubs that are set to join the new venture, which has received roughly $6bn (£4.3bn) in backing from JP Morgan.

The terms must be better than existing ones or why do it?


The 12 clubs ( and indeed the other 3 founders when they arrive) must be expecting a situation like this.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
All the things I could do
If I had a little money
It’s a rich man’s world
It’s a rich man’s world ( Abba)

It would  be logical for them to remain in their domestic leagues because that is where so much money comes from especially in the UK. For the 3 Spanish clubs that is also true as whilst total revenues are lower they get the lion’s share. The risk is that they get booted out.

I have written before that the football model is not one of the profit maximisation of economic models.It is a managerial structure or in the player’s case a salary maximisation model. This has changed things enormously because I recall going to Stamford Bridge around 1995 and reading that the match-day revenue for the last game of the previous season had exceeded £500,000 for the first time. Now some players get that a week. But the central point is that if you spend what you earn ( and often more) any decline was always going to cause trouble. Previously football only ever saw growth.

The other factor as I have already explained is the era of cheap money which has oiled the borrowing binges. Oh and how they have binged!

Finally we have the issue of greed. Today I note that coming from those who have run things for their own greed such as UEFA and the various national associations. Greed was just fine for UEFA when it was benefiting via the Champions League. Also the proliferation of often fairly meaningless internationals. It was also fine for the Premier League back in 1992.

In a way VAR ( Video Assisted Referee) has symbolised much of the mess. Technology should help like it does in rugby and cricket. But has ended up taking away some of the joy of a goal being scored and led to some ridiculous offside decisions.

On a personal note I would appreciate it if someone would let me know if I still should be supporting Chelsea’s effort to qualify for next year’s Champions League. Thank you.


The ECB plans for ever more QE and lower interest-rates

Yesterday brought news that there is plenty of work ahead for the European Central Bank or ECB. It came from the European Commission and the emphasis is mine.

The Commission has today taken steps to ensure that borrowing under the temporary recovery instrument NextGenerationEU will be financed on the most advantageous terms for EU Member States and their citizens. The Commission will use a diversified funding strategy to raise up to around €800 billion in current prices until 2026.

Interesting that they claim to know what future bond markets will be doing, but I was already expecting that the ECB will be brought in to buy at least some of the bonds. The borrowing will be large in annual terms and any repayment is kicked safely into the very long grass. The choice of 2058 looks to be driven by the fact that the ECB only buys bonds up to the 30 year maturity.

This will translate into borrowing volumes of on average roughly €150 billion per year, which will make the EU one of the largest issuers in euro. All borrowing will be repaid by 2058.

Then we got confirmation of the role of the ECB in this.

EU will create liquidity buffer at the ECB as part of recovery fund to ensure funding needs are always met – EU official  ( @PriapusIQ )

Ah so “liquidity buffer” is what it is called now! Regular readers will be aware that this fulfills two of the themes we have. Firstly the ECB is increasingly the buyer of first resort for Euro area debt with the kicker that “liquidity buffer” sounds like a euphemism for edging closer to buying in the primary markets. Next that the PEPP capacity ( 1.85 trillion Euros)  will be used, in spite of the regular claims that it may not be. After all at 960 billion it is already much larger than the original plan.

The Governing Council decided to increase the initial €750 billion envelope for the PEPP by €600 billion on 4 June 2020 and by €500 billion on 10 December, for a new total of €1,850 billion.

I suspect it will turn out to fulfill the definition of temporary in my financial lexicon for these times as well.

The PEPP is a temporary asset purchase programme of private and public sector securities.

There was also this in the announcement.

This will also attract investors to Europe and strengthen the international role of the euro.

This is curious as they already have plenty of opportunities to buy Euro area debt should they wish. Also the Euro is widely traded. Perhaps they mean that international investors will be attracted by the ability to front-run the ECB and make an easy turn. Language can be loose here because as I was looking at the debt issuing vehicle the European Stability Mechanism or ESM I spotted this in today’s blog from it.

As a result, the Greek economy was structurally more resilient at the start of the pandemic than it was prior to the sovereign debt crisis.

Really? The economic collapse was on top of a contraction of 20% or so previously. Also the debt to GDP ratio is now north of 200%. Plus the blog seemed to be trying to have its cake and eat it by lauding austerity.

 Past consolidation efforts, though quite painful, enabled the country to enter the pandemic with a very healthy budgetary position.

But also fiscal stimulus.

This allowed the government to combat the effects of the current crisis with countermeasures amounting to approximately 9.4% and 6.5% of GDP in 2020 and 2021, respectively.

This confusion over whether debt and deficits are bad was repeated by the man running this show which is Klaus Regling of the ESM.

And some like to compare the numbers in Europe to the US, but they are comparing apples and pears, I think, because the fiscal deficit, that’s true, is jumping up a lot more in the US, which, by the way, also means that the debt levels in the US are higher than in almost all European countries now.

So debt is apparently bad here rather than strengthening the international position of the Dollar or enhancing growth.


These days central bankers try to tell politicians what to do as this from ECB Vice President de Guindos yesterday shows.

 It is therefore of the utmost importance that the NextGenerationEU plan becomes operational without delay, as it would allow Member States to restart their economies, enhance their resilience and foster innovation.

As an aside the use of “resilience” is always a sign of trouble. For example we are regularly told the bodies below are resilient.

For example, the profitability outlook for banks remains weak as lower-for-longer interest rates dent margins and structural challenges persist.

Returning to the main point things are really rather awkward as an ex-politician now posing as an independent central banker tells current politicians what they should do.

The Digital Euro

This has been gaining news recently and this started with Isabel Schnabel a week ago. She opened this section by getting her retaliation in first.

In our view it is wrong to describe bitcoin as a currency, because it does not fulfil the basic properties of money. It is a speculative asset without any recognisable fundamental value and is subject to massive price swings.

That left her open to this response.

Currencies such as the euro don’t have any intrinsic value either, but are simply based on trust.

The euro is backed by the ECB, which is highly trusted. And it is legal tender. Nobody can refuse to accept euro. Bitcoin is a different matter.

I am sure the ECB is highly trusted in her circles as it provides well paid employment but beyond that? Well it gets worse because whilst Facebook has had issues the rise of Bitcoin clearly shows people are willing to take quite a risk to avoid central banks.

They are surely more likely to trust the ECB than Facebook or other private operators.

Board member Panetta was on the case yesterday and I note he seemed to get in a tangle on the privacy issue.

Let me emphasise, first of all, that a digital euro would in fact increase privacy in digital payments. As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data.

Okay so it will be pretty much completely private. But only a few sentences later we get this.

Digital euro payments could guarantee different degrees of privacy[7], involving different trade-offs with other policy and regulatory objectives such as the need to combat illicit activities.


Even though the headline measure seems a bit stuck with the Deposit Rate at -0.6% and of course money available to banks at -1%, there is quite a bit going on at the ECB. It’s role of supporting fiscal policy means that its QE bond buying looks ever more like a treadmill it cannot turn off. Or a President Lagarde put it in an interview with CNBC last week.

We may well reduce the pandemic emergency programme when the time comes, when we see the crisis coming to an end. Yes, but that’s the emergency programme. We also have another programme of asset purchases. And as I said, net asset purchases will continue until we start looking at raising policy rates.

So the EU Recovery Fund seems set to provide even more bonds for it to buy although of course it has yet to be ratified and is progressing at a sedate and indeed stately place.

It’s backstop looks ever more like being the digital Euro which as I explained back on the 11th of February.

ECB‘S Panetta: Minus 1%-2% Remuneration On Digital Euro Could Not Be Enough To Prevent Capital Flows Out Of Banks In Crisis

Perhaps the -3% suggested by the IMF?




Italy has revised its unemployment rate up by 1% and youth unemployment by 2%

It is time for us to take a look at Italy again and see what has happened to the honeymoon period for its new Prime Minister Mario Draghi? With the rate of turnover of Prime Ministers in Italy, which approaches that of managers in the English football premiership, it was unlikely to last long. It also comes with two contexts of which the first is that many will now doubt wish he was still running the European Central Bank. The second is the way that central bankers and politicians have become interchangeable with him ascending to running Italy as the former French Finance Minister Christine Lagarde took over the ECB. If we look further afield we see more of this in the way that the former head of the US Federal Reserve Janet Yellen is now US Treasury Secretary. Believe it or not some still talk of central bank “independence” which only exists in their minds.

There is a difference though in that in general as head of the ECB Mario Draghi gave orders and they happened. Even “Whatever it Takes”. But running Italy is a different kettle of fish as in some areas he would be in more control in his previous job.


This morning has brought a sign of a big issue at hand and there have been some large ch-ch-changes.

In February 2021 the number of employed persons were substantially stable, whereas a slight decline was
recorded for both inactive and unemployed people……..In the last month, the drop of unemployed people (-0.3%, -9 thousand) concerned men and under50; for
women and over50 a slight increase was registered. The unemployment rate declined to 10.2% (-0.1 p.p.)
and the youth rate to 31.6% (-1.2 p.p.).

The emphasis is mine and it is not because expectations missed by an extraordinary distance even by recent standards. It is because we were previously told this.

The unemployment rate rose to 9.0% (+0.2 p.p.) and the youth rate to 29.7% (+0.3 p.p.).

Those were for December and  we see that a 0.1% decline has suddenly become a 1.2% rise! What has happened?

From 1 January 2021, the new Labour Force survey started, which transposes Regulation (EU)
2019/1700. As reported in detail in the methodological note, the time series of the aggregates disclosed in
this press release have been back-recalculated on a provisional basis, for the period January 2004 –
December 2020.

So we see that they have raised the reported unemployment rate by 1% or so and the youth unemployment rate by around 2%.

If we now move forwards on the basis of the new survey we can see this as the pattern.

In the period December 2020-February 2021, with respect to the previous quarter (September-November
2020), employment dropped (-1.2%, -277 thousand) for both genders……..In the last three months, an increase was registered in the number of unemployed persons (+1.0%, +25 thousand) as well as for inactive people aged 15-64 years (+1.3%, +183 thousand).

So we are left with the view that employment has been declining again. This is reinforced by the annual employment comparison.

Compared to February 2020, employment showed a sharp fall both in terms of figures (-4.1%, -945
thousand) and rate (-2.2 percentage points).
On a yearly basis, the drop of employed people was accompanied by a growth of unemployed persons
(+0.9%, +21 thousand) and a substantial rise of inactive people aged 15-64 (+5.4%, +717 thousand).

As you can see a signal of trouble has been the inactivity level. Regular readers will be aware that I have been reporting on the failure of unemployment measures to tell us anything much at all due to the way the furlough schemes have impacted on their definitions.

But there is more and it brings back our “Girlfriend In a Coma” theme because employment in Italy has been falling since the summer of 2019 and thus quite some time before the pandemic. It peaked around 23.4 million on the three-monthly average and had already declined by at least 200,000 pre pandemic.

If we switch to earnings then the latest official survey was released last week.

Mean annual earnings in 2018 is 35,062 euros and goes up to 36,610 euros in Industry (except Construction), while it reaches the minimum value of 31,967 in Construction sector……The Gender pay gap (GPG), calculated as the difference between the m gross hourly earnings of men
and women expressed as a percentage of those of men, is equal to 6.2%…..mean hourly earnings for temporary employees is 29.7% less than those of
permanent employees. The negative gap rises to 31.1% for part-timers compared to

Economic Outlook

The official surveys tell us this.

In March 2021, the consumer confidence index decreased, passing from 101.4 to 100.9……….As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) made progress from 93.3 to 93.9.

The surveys relate to 2010 being 100 which gives one context and another is that both are around ten points below where they were back in 2019. Also the official business survey for manufacturing is presumably picking up the same as the Markit IHS PMI one.

March data highlighted a further acceleration of Italy’s
manufacturing recovery. Both output and new orders
registered the steepest expansions for more than three years, with panellists reporting surging sales due to improved client demand. Subsequently, firms continued to take on additional staff to cope with workloads, while business confidence remained robust.

So good news for manufacturing although it means other areas must be struggling.

Much of the outlook depends on the vaccine programme according to Governor Visco of the Bank of Italy.

“The main instrument we bave at the
moment is neither monetary nor fiscal,
it is vaccinations,” he said.

This led to an awkward issue.

The G20 meeting this week comes as
the pace of the US’s vaccinati on push
has increased compared with the EU’s.
Economists have forecast that the US
will grow faster than European economies this year.
Visco said progress in the EU’s vacdnation programme meant that the bloc
would not be left behind by the US.

Plainly it has been left behind and added to this Italy decided on its own type of strategy.

Still lost in the EU vaccine supplies/exports drama is the fact that Italy has decided to give away a massive amount of its available shots to the least vulnerable parts of its population……..Government data released yesterday shows 88% of people aged between 70-79 are still waiting for their first vaccine jab, as are 43% of over 80s. Over 80% of Italy’s Covid-19 deaths have occurred in the over 70s. ( Miles Johnson of the Financial Times)


As you can see the Covid-19 pandemic is one issue for Mario Draghi but there are plenty of others from the long-running “Girlfriend In a Coma” theme. An example of the latter was the fall in the population by around 400,000 in 2020. There is also the issue of the Italian banks and the Financial Times has today noted one of the issues are play here.

The Banca d’Italia said the share of the nation’s authorities bonds owned by international traders fell from 25.9 to 23.6 per cent within the first six months of final yr, whereas Italian banks elevated their share from 16.9 to 18.6 per cent………….The debt of Italian banks to home authorities debt hit  €712bn in August, up greater than 9 per cent from February and dipping barely since then.

Ironically the driving forces here have as an architect one Mario Draghi.

Banking laws deal with sovereign debt as a risk-free funding for banks, permitting them to allocate zero capital towards such property. By borrowing cash from the ECB as cheaply as minus 1 per cent, there’s a straightforward “carry commerce” for banks to make cash from shopping for authorities bonds.

They have done well to buy more with the ECB buting so many and here we can move onto something where Mario left a little present for himself. All that QE means that the debt issue has faded as presently it is so cheap as the chart from @BernhardWarner below shows.