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Merkel: No, no and ... no The Iron Lady of Europe's most powerful economy is opposing calls for two measures that other policy makers believe could help ease the continent's debt crisis.
Finance ministers from the 16 euro zone nations were meeting in Brussels today and were expected to discuss calls for boosting the EU's bailout fund and at the same time creating a new bond, dubbed the E-bond, that would be joint European government debt.
The latter proposal came from Jean-Claude Juncker, who chairs the euro zone finance ministers group, and Italy's Finance Minister Giulio Tremonti, who outlined their idea in an article they wrote in The Financial Times today.
"In spite of recent decisions by European fiscal and monetary authorities, sovereign debt markets continue to experience considerable stress," the two officials said.
"Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro.
"This can be achieved by launching E-bonds, or European sovereign bonds, issued by a European Debt Agency ... Time is of the essence. The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state."
Such a move, they said, would allow sufficient size for the market to become Europe's most important, "progressively reaching a liquidity comparable to that of U.S. Treasuries."
German Chancellor Angela Merkel wasted little time in saying no - to both ideas, actually - suggesting an E-bond would be on shaky ground legally.
The Dutch Finance Minister backed Ms. Merkel on the issue of increasing the size of the rescue fund, reports said, while Poland's Prime inister was at her side when she rejected such a move at a news conference.
Voters in Germany have become increasingly wary over bailouts, first to Greece and Ireland, and now amid speculation Portugal and Spain could be next in line. An E-bond, meanwhile, could drive up government borrowing costs in Germany, which are low compared to its neighbours and are the European benchmark.
Greek Prime Minister George Papandreou welcomed a serious discussion on the idea of the bonds. But, of course, he would, given the steep borrowing costs his government has faced.
What's clear is that divisions among Europe's leaders continue to haunt investors, at the same time ramping up the pressure on the European Central Bank to try to do the heavy lifting with a one-size-fits-all monetary policy.
"Today's European finance ministers meeting has seen the usual disagreements about how best to deal with the problems in Europe and with Ireland set to vote on its austerity plan tomorrow, event risk remains the main obstacle to further euro gains," said CMC Markets analyst Michael Hewson.
"The IMF has suggested that the current bailout fund should be increased in size, something Germany is opposed to, but which Belgium, among others, is in favour of," he said in a research note.
"This lack of consensus continues to undermine investor sentiment towards the single currency and will continue to weigh on euro sentiment in spite of concerns about further [quantitative easing] measures from the Federal Reserve."
Bernanke warns on unemployment Ben Bernanke got the markets thinking with comments aired yesterday on CBS Corp.'s 60 Minutes, discussing everything from the country's jobless rate to the possibility of further stimulus.
The Federal Reserve chairman said in the rare TV appearance that the economy is virtually stalled, it's possible the central bank could expand its controversial quantitative easing program, and that it could take four or five years before the country's high jobless rate can be brought to down to its "more normal" 5 per cent or 6 per cent. It now stands at 9.8 per cent after a surprise jump in November.
He did, though, suggest a double dip recession doesn't appear to be in the cards.
Fed officials have been out in force defending their latest stimulus initiative, known as QE2, a $600-billion (U.S.) asset-buying scheme aimed at driving down longer-term interest rates through purchases of longer-term Treasuries.
"The increase in the unemployment rate to 9.8 per cent has fuelled speculation that there could be further QE or QE3, which seems a little premature given the Fed is only one month into QE2, but comments by Bernanke on TV over the weekend have lent support to this view," said CMC Markets analyst Michael Hewson.
Natural unemployment rate higher? Higher structural unemployment is helping to keep the U.S. jobless rate elevated, economists at UBS Securities say, and several factors indicate that the so-called natural rate of unemployment has climbed since the recession first began.
The natural rate of unemployment, also known as the NAIRU or non-accelerating inflation rate of unemployment, is a pace of joblessness at which inflation remains tame.
"Reduced labour mobility due to a weak housing market and a skills mismatch between employees and employers are likely the two main drivers of an increase in structural unemployment," the UBS economists said in a report today.
"Additionally, according to research done at the Federal Reserve Bank of San Francisco, the unemployment rate could be boosted by almost a percentage point by the continued extension of unemployment benefits."
To back up their case, the economists cited the elevated level of the long-term unemployed, now at almost 42 per cent, and the gap between how people perceive the jobs market and the number of job openings in the private sector.
The U.S. central bank's policy-setting panel, the Federal Open Market Committee, partly acknowledged an increase in this natural rate in forecasts several weeks ago, UBS said, noting the FOMC projections put longer-term joblessness at 5.5 per cent, up from the pre-recession 4.9 per cent.
Most economists would peg that number higher, greater than 6 per cent, the economists said, and pointed to comments by Nobel laureate Edmund Phelps, author of the concept, who has said he sees the new normal at between 7 per cent and 7.5 per cent.
"A higher structural level of unemployment suggests that reducing the unemployment rate is likely to be a multi-year proces - one that is likely better addressed via targeted fiscal (job retraining, etc.) rather than monetary policy," UBS said.
U.S, China head for bigger battle Trade tensions between the United States and China are heading toward "crisis" levels, a new forecast warns.
"The U.S. administration is clearly wary of picking a fight with China given the latter's strategic and political significance, which is presumably why the U.S. has shied away from designating China as a currency manipulator for so long," Julian Jessor, the chief international economist at Capital Economics, said in a report today.
"But four factors suggest that trade tensions will continue to build to crisis levels, with 2012 likely to be the crunch year."
Tensions between the U.S. and China have been running high as Washington presses Beijing to allow its currency to rise.
His four factors:
- The U.S. recovery will be disappointing, with jobless rates still close to 10 per cent and the economy heading towards deflation.
- Protectionism will soon be the only tool open to policy makers, given there's little hope of further fiscal measures and the Federal Reserves new quantitative easing program will have run its course by mid-2011.
- China's trade surplus wiith the U.S., which continues to build, makes an "easy target."
- Politics in both countries hit a turning point in 2012. "The presidential election campaign in the U.S. is likely to be dominated by demands for action against China, but Chinese policy-making will be paralyzed ahead of the leadership change starting that year in Beijing."
Such a trade war would threaten to spill over to other countries, Mr. Jessop said, though he believes Beijing will do just what it takes to stop short of an all-out battle.
"The upshot is that China will probably do just enough to prevent all-out trade war, but only after tensions escalate much further," Mr. Jessop wrote.
"And it will be years before the benefits are felt in a meaningful reduction in imbalances.
"In the meantime, other countries could be dragged into the conflict. For a start, the U.S. might also take action against other low-cost developing countries (citing weak labour and environmental standards), in order to forestall the redirection of Chinese exports to the U.S. vias these countries. Other developed nations may also join any U.S. action against China to prevent the dumping of cheap Chinese goods in their markets."
If all players act properly, the world economy will be stronger, though that won't happen in the next few years.
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