ECB Code Words for Dummies

The Wall Street Journal's finance blog "The Source" analyzes European Central Bank chief Jean-Claude Trichet's use yesterday of the phrase "strong vigilance" in reference to the prospect of forthcoming interest rate raises, and what this means in numerical terms for market watchers. The Financial Times alternatively terms the code a "traffic light system" that indicates rate rises with a certain reliability.

Particularly interesting is the article's chart of ECB verbal expressions and their corresponding interest rate change metrics, which should demystify for all of us non-economists (myself included) some of the opaque language used by economists and finance folks on each side of the Pond. 

By the FT's count, the ECB has invoked the words "strong vigilance" and then raised rates seven out of nine times since 2005. 

The WSJ article surmised that Trichet's most recent use of the expression "strong vigilance" can be translated in layman's terms to, "we are worried about inflation and are leaning toward raising interest rates." 

Trichet's hawkish if nuanced rhetoric is widely perceived as a way of projecting a confident public front for the ECB in the face of grave concerns over the EU's economic recovery strategy on the eurozone's sovereign debt and the global financial crises.

If the past six years are anything to go by, turns of phrase such as "vigilance," "monitor closely" and in particular "strong vigilance" all preceded actual interest rate shifts orchestrated by the ECB. As the piece puts it,

“During the last tightening cycle, ‘strong vigilance’ was used one month prior to all policy moves (except for the one in March 2006, when only ‘vigilance’ was used). In addition, some form of ‘monitor closely’ or ‘monitor very closely’ was used in other months to signal that the rate normalization was not yet complete. Such code words could be used again this time."

Sources have varied widely on whether Trichet's words should be considered worrisome. Reuters says that the Frankfurt-based bank "stunned markets by indicating it could raise interest rates as soon as next month." In contrast, Seeking Alpha puts the odds of a rate hike at "above zero, [but] not much higher." 

Krugman's US-Euronomics

Consider this an info-dump of Nobel Prize winner Paul Krugman's latest postings at the New York Times. If this seems like something of an antidote to EurAmerican's atypically hawkish and euroskeptic posts from this week's Wall Street Journal, so much the better. Balance in partisanship -- that's what we like!

Krugman's pieces grow from the spark provided in this piece, also from the NYT, which takes the pulse of the current "we told you so" debate going on between Europe's solvents and debtors. It traces the germinations of the euroskeptic debate back to an obscure 1992 report from the Financial Times. In it the politologue Ed Balls observed a crucial and possibly disastrous difference between the nascent euro currency project and the environment of the US, another continent-wide monetary zone. The report concluded, to borrow the NYT piece's shorthand, that "Europe lacked the type of federal taxes and transfer payments used in the United States to ease economic divergences among its many states." 

Courtesy The New York Times

The NYT piece goes on to juxtapose prominent voices from the euroskeptic and the pro-EU antipodes. Speaking about the current troubles, Norman Lamont, the former Conservative chancellor of the exchequer, had this to say about the euro in the near future:

“I have always said that the euro will break up,” Mr. Lamont said in a recent interview. “Not after the first crisis today, but after the second crisis, which could be 10 years away. This is, after all a political project, not an economic project.” 

In contrast, Jerzy Buzek, the current head of the European Parliament, used with these words during December's opening of the Europe House, headquarters of the European Union delegation in London:

“We remember what happened in the last big crisis — it was something horrible, and such a threat is always waiting for us... Let us answer by having more solidarity. Overcoming history is an imperative for us.” 

It bears noting that Buzek's tone on the euro crisis -- which is far from finished ravaging great swathes of Europe and the world -- suggests that the "last big crisis,"  as he puts it, is already past, and belongs to history. These pictures provide a markedly more compelling argument that the euro crisis is both ongoing and far more serious the Buzek's seemingly clueless tone would indicate.

US Pessimism on Euro Crisis, New START

Two noteworthy US media pieces have blipped on the Euro-pessimism radar, so I thought I'd echo them. 

EurAm doesn't necessarily endorse these views in their entirety, though it's certainly closer to these than the euphoria sweeping parts of the anti-nuclear set. Regardless, at the end of the day, it's about the sharing of Europe commentary -- especially what's taking place outside of Europe, especially what's candid and controversial -- that allows you the reader to cut to the heart of transtatlantic debate.  

So away we go:

1) Count on The Hudson Institute for consistently euro-pessimistic, moderate-conservative commentary from Washington. In today's Wall Street Journal, Hudson's economic policy expert Irwin Stelzer lays out acid commentary characteristic of his firm in a 2010 EU year in review, excerpted below. Note the passing reference to the US Constitution, lending a spontaneously Euro-American comparative view to the succeeding lines. Stelzer also leaves off with an intentionally troubling final thought on China, and the economic and geopolitical capital it could gain as the eurozone tailspin continues.

"All else that happened in Euroland in 2010 pales into insignificance when compared with the decision to set up mechanisms for replacing—some say supplementing, some say monitoring—national decision-making on fiscal policy with control by the Brussels-based Eurocracy, amending the Lisbon Treaty to make that possible. This is the step that the founders of the euro always knew would some day be necessary. That day has now arrived, and they are delighted.

Hewitt on Europe and Youth in 2010

Gavin Hewitt of the BBC has posted a wrap-up of the year 2010 in Europe. I'd like to underscore his recurring theme of the beleaguered status of European youth. He begins with three sketches of young people down on their luck: seemingly intelligent and educated young Spaniards queuing for unemployment benefits; a roomful of raised hands when Hewitt asks trade school students if they anticipate emigration; young Italians ready to riot at the broken promises of their government and the generation in power. 

Hewitt goes on to describe their lives in the crushing uncertainly of economic souring, and the new civic religion called "austerity" that most accept only begrudgingly -- because they see no other choice. The year 2011, according to Hewitt, portends to be no less bleak.

"Youth unemployment and austerity are a dangerous cocktail that will play out on the streets of 2011. Austerity challenges a deeply-held idea of a European way of life where the state offers layers of protection. Old certainties are being swept away. Social contracts snapped. An ever-expanding public sector is being pruned. Europe, in the long term, may benefit from a smaller state sector, but no one should underestimate the shock of the new. [...]

In 2011 the orthodoxy of austerity, I suspect, will be challenged. The Greeks are tiring of the lean years that seem to stretch out before them. A new government in Ireland may try and renegotiate the terms of the EU/IMF loan. Increasingly voices question the fairness of it all. In Ireland the banks' debts were taken onto the government's books and the country headed for insolvency. A proud country [and in Ireland's case, an overwhelmingly young one] has sacrificed its independence - that's how many in Ireland see it.

It is a fair bet that in 2011 one or more country will restructure its debt.

Increasingly, when one returns from the streets of Greece or France or Italy, Brussels seems a side-show. While the unemployment lines lengthen for young people Europe's elite is preoccupied with institutions, with their place in the world. They have strategies for growth - but in the distant future. The discussions too often appear inward-looking. Occasionally there is a flicker of reality. The European Parliament, for instance, led the way in challenging bankers' bonuses. [...]

Roubini on European Recession : "Hangover"

The economist fabled to have predicted the global financial crisis shoots from the hip on European recovery -- and describes a still-dire bill of economic health for the Old Continent. Nouriel Roubini, professor at New York University, dubs the European condition a "hangover" and one sure to continue galling livers for a good while to come.

The professor employs a host of disparaging idioms in his take on the EU's present status, decrying 1) the policies that "stole demand from the future," 2) the laughable "stress tests" (quote marks his) that only "kicked the can down the road,"  and 3) the lingering "fundamental problems of the eurozone." He singles out sitting EU president and Belgian head of state Yves Leterme as "unable to keep his own country together, let alone unite Europe."

He also dismisses the notion that the EU bail-out created anything beyond transient relief. Though Brussels policy heads managed in May to slap together a rescue fund, risk spreads have returned to their pre-bail-out levels for several European countries. Roubini sniffs that operatives "fudged" this summer's round of financial "stress tests" for European markets, serving to pep up world markets' frail confidence only temporarily -- a move that is already beginning to wear thin.

Even the sunniest eurozone example, Germany, suffers Roubini's ire, and he shrugs off that country's supposed promise as the EU's post-crisis front-runner:

"Even Germany’s temporary success is riddled with caveats. During the 2008-2009 financial crisis, GDP fell much more in Germany – because of its dependence on collapsing global trade – than in the United States. A transitory rebound from such a hard fall is not surprising, and German output remains below pre-crisis levels."

In what may bear nightmarish implications,  the "double dip" recession so feared throughout the world may actually be taking root as we read his words.

"Indeed, the latest data from Germany – declining exports, falling factory orders, anemic industrial-production growth, and a slide in investors’ confidence – suggest that the [double dip] has started."

His forecast on current and future European politics provides little sustenance for optimists. He cites a litany of bummer political events ranging from Angela Merkel's recent shallacking in German regional elections, to unlikely odds that Sarkozy will initiate real (Roubini says "cosmetic") structural reforms in France -- and that is concurrent with sobering competition prospects from the Socialist Party's presidential likely, one Dominique Strauss-Kahn. Similarly unpopular leaders also face grim predictions across the EU's southern belt, from the vulnerable Presidents Silvio Berlusconi (Italy) and Jose Luis Rodriguez Zapatero (Spain), to the bete noire of EU fiscal cohesion, George Papandreou (Greece).

If all that wasn't enough, Roubini finishes by going for broke on two scenarios for the eurozone's future. The first, the "best" case scenario (though hardly a good one) says the monetary bloc limps on some years longer. The second -- this is the 800-pound gorilla whose presence EU public officials from across the 27 states refuse to entertain -- predicts that "the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies."