Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Categorized | Economy

Europe’s flirtation with deflation


Posted on October 31, 2013

The US government could not have chosen a better day to attack Germany for pushing the eurozone into deflation. Hours after the US Treasury published a report that was highly critical of Berlin’s large current account surpluses, fresh statistics showed that inflation in the eurozone fell to 0.7 per cent in October, a four-year low.

The US is clearly not in a position to lecture any country on economic policy making. For weeks, Congress has flirted with a US default, which would have been calamitous for the global financial system. This game of Russian roulette may well resume next February, when the US is expected to hit its debt ceiling again. Yet, the faults of the messenger do not invalidate what he has to say. While the blame for the eurozone’s disinflation does not rest with Berlin alone, the US Treasury’s analysis is both correct and timely.

    The eurozone’s slow march towards what some see as Japanese-style deflation began in crisis-hit countries, where companies cut prices to counter chronically feeble demand. Germany should help its weaker partners during this difficult transition, cutting taxes and letting wages rise. German workers would have more cash to spend on imports, some of which would come from countries such as Spain, Greece and Italy. Yet Berlin has repeatedly ignored this prescription. As the US Treasury notes, in 2012 Germany’s nominal current account surplus was larger than China’s.

    While fiscal expansion in Germany is desirable, it will not, on its own, rescue the rest of the eurozone from a lengthy depression. There is only so much money that Germans can spend on an extra holiday in Rhodes or a new designer bag made in Milan. Saving the eurozone from deflation requires a concerted effort among its institutions, starting with the European Central Bank.

    After buttressing the single currency with its conditional bond-buying scheme, the ECB has done little to stop inflation undershooting its target of close to (but below) 2 per cent. A rate cut in May and a promise to keep monetary policy loose until growth returns was all Frankfurt had to offer. When the ECB’s governing council meets next week, it should immediately cut its policy rate from 0.5 to 0.25 per cent. A new round of cheap loans to the banks – perhaps linked to how much they lend to companies – should also be on the cards. Germany should not oppose these moves. A stronger eurozone is in the interest of Berlin and of the rest of the world.