Writing in the FT, Wolfgang Munchau argues that the OMT idea has made things worse in the Eurozone by taking off the pressure for a full banking union. This seems to me to be a funny way of looking at it. Crises are often solved by pledges of action by authorities with the resources to end them — that is, the action is often not required. I had long said — for much of the duration of the Eurozone crisis, in fact — that the situation could only get as bad as the ECB allowed it to get. In late 2011, the ECB demonstrated, with the LTRO announcement, its willingness to act to stave off an immediate crisis. In mid-2012, it set out, with OMT, the conditions for further action. It was not at all surprising that the ECB was prepared to act to avert disaster; but the market is not very bright, so it was a help to tell it so, and it was a genuine advance for the conditions of aid to be thought through and made public. The point is that a self-fulfilling crisis was brought to an end in a pretty standard way — a pledge of action that, if taken, would stop the self-fulfilling spiral. And it was definitely an improvement. Banking unions and all the rest of it can come later (after all, the panic of 1907 happened (you guessed it) in 1907, but the Fed was not created until the end of 1913).
The RBA held its benchmark rate at 3%. Mr. Stevens made a number of points:
– The inflation outlook means that there is scope for further easing if required.
– The fact that unemployment is edging higher means that labour-cost pressure should be contained.
– The economy is now expected to expand below trend this year — a downgrade.
– There are some signs of improvement in some durable goods, house prices and housing construction.
– But, on the other hand, the exchange rate is “higher than might have been expected” on the basis of declines in export prices, demand for credit is low and some households and firms are seeking to reduce their debt levels.
Should AUD be weakening or strengthening? I am not at all sure. Separately, Australia’s trade balance narrowed sharply as exports increased and imports fell.
Democrats are going on a retreat at which they will talk about how to deal with the sequester. A proposal is apparently that they will seek effectively to delay it by five months. I am not sure why delay is such an appealing idea for Democrats — they have already allowed the Republicans to gain the upper hand in spending negotiations by delaying the sequester once. Harry Reid has said that the delay package should include some revenue increases, and there there is lots of “low-hanging fruit” in the form of spending items that Republicans have previously agreed to in negotiations. The first part of that is clearly a negotiating position — Republicans will not agree to any tax increases (on account of being mental) — but there could be something in the second part.
The media reports are full of “European concerns” today, as an explanation for the decline of stock markets yesterday. Well, that may be a short-term concern. But try to get a handle on exactly what the markets fear might happen, and you can’t get very far. Is any party in Italy suggesting a repudiation of the fiscal compact? No. Would Mr. Rajoy’s departure mean a fundamental change in policy? I do not know of any reason why it should. So what are the “concerns”?