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    EcoFlash of 13 September 2019
    The ECB delivered a strong message. The eurozone monetary authorities announced the implementation of a new series of monetary easing measures that went beyond expectations. The Frankfurt-based central bank largely wielded its policy tools by strengthening forward guidance, lowering the deposit rate, easing long-term lending conditions for banks and reactivating net securities purchases. Although the effectiveness of such measures remains uncertain, the ECB’s proactive approach was welcomed. Aware that certain policies could have some perverse effects, the central bankers are now demanding that governments use fiscal policy to pick up the slack for quite some time to come.
    EcoFlash of 05 September 2019
    A general election will be held on 29 September, as the coalition between ÖVP and FPÖ fell apart in May. The ÖVP is likely to increase its seats in parliament, but probably has to turn to the FPÖ again to obtain a majority. The policy is unlikely to change and remains focused on budget consolidation and the reduction of the tax burden. The next government will be confronted with a less supportive economic environment. GDP growth is expected to slow to around 1.2% in 2020.
    EcoFlash of 16 July 2019
    Since the mid-1990s the Italian economy has seen a significant economic uncoupling, which has worsened since the 2008 financial crisis. Its difficulties include a level of productivity that is one of the lowest in the advanced economies, a demographic decline and a relatively inefficient labour market, which still excludes too many young people. Structural reforms were introduced under the government of Mario Monti, from 2011 on, bringing a recovery in fiscal and trade accounts, but it remains to be seen what the current government will now do.
    EcoFlash of 20 June 2019
    From 2008 to 2013, the eurozone experienced a sharp decline in investment. Despite a belated turnaround in 2014, total investment is still holding below its pre-crisis level. There are wide disparities between countries. After the crisis, the investment rate dropped off sharply in Spain, for example, but rose in France. The share of investment allocated to intangible assets, notably research and development, has increased to the detriment of tangible assets.
    EcoFlash of 05 June 2019
    What do the results of the European elections tell us? Does Prime Minister May’s resignation change things?Can the Withdrawal Agreement still be saved? Is there still a risk of a no-deal Brexit? Are we heading towards early elections? How is the UK economy holding up?
    EcoFlash of 14 May 2019
    In 2019, French households are expected to benefit from major purchasing power gains, which we forecast at roughly 2.5%, the biggest increase since 2007. Several factors will contribute to this big gain. Tax cuts will be the most visible source, but measures to support earned income and social benefits will also play a key role. Milder expected inflation will also help, but this factor could be reversed, especially if the current upturn in oil prices continues.
    EcoFlash of 30 April 2019
    The General Court of the European Union has annulled the European Commission’s decision that the support measures granted to Banca Tercas by the Italian deposit guarantee fund (FITD) constituted State aid. The General Court found that the European Commission did not have sufficient evidence to conclude that the measures in support of Banca Tercas entailed the use of State resources and were imputable to the State. The cost of the support measures was estimated to be lower than the cost of using the deposit guarantee scheme if Banca Tercas had been placed under compulsory liquidation. The measures, adopted voluntarily by a consortium of banks in support of one of its members, was therefore intended to protect their private interests. Those private interests happened to coincide with the public interest. Since the bank’s capital needs were met solely with private resources, the measures did not circumvent the framework provided for by the European Bank Recovery and Resolution Directive (BRRD) or rules on State aid. As a result, the outcome is not an exception to the bail-in principle.
    EcoFlash of 29 April 2019
    Shareholders in Norddeutsche Landesbank (NordLB) and the German Savings Banks Association (DSGV) have submitted a EUR 3.6 bn restructuring proposal for NordLB to the European authorities for approval. It seems possible that the European Commission will interpret the plan as state aid, given that it draws solely on public resources. If it is judged not compatible with the rules of the internal market, the plan could be rejected, opening the way to NordLB being sold (possibly through a privatisation) or put in resolution. We believe that the criteria for analysing the support provided to NordLB should not be limited just to the nature of the resources used (which are certainly public) but should also include the nature of the contributors (its shareholders and the mutual protection fund S-Group). Indeed, European legislation (CRR, BRRD) considers the mutual support structures provided by Institutional Protection Schemes (IPS) as recovery measures that are private in nature. Ultimately, the support plan for NordLB offers, for the first time, an opportunity to question the coherence of European state aid rules and the existence of IPS with state-owned members.
    EcoFlash of 09 April 2019
    Since 20 March, American banks have been making overnight transactions with base money at higher rates than the US Federal Reserve pays on their current accounts. At a time of abundant central bank reserves (compared to pre-crisis standards), this unusual structure for money market rates comes as a surprise. This rate structure reflects the tensions on central bank liquidity over the past year, in terms of both demand (driven up by new liquidity requirements) and supply (squeezed by a more attractive repo market). Without an intensification of transactions in the interbank market, the Fed is unlikely to change its decision to continue reducing its balance sheet through the end of September. Yet there are clear signs that central bank liquidity is under pressure, although it is going undetected because it is occurring outside of the money market and thus off the monetary authorities’ radar. In the end, the Fed may have to reinject central bank money notably via Treasury repurchase agreements (repos). Reducing reverse repo operations with foreign central banks would be a faster solution that would not change the size of its balance sheet.
    EcoFlash of 02 April 2019
    In 2018, according to preliminary INSEE estimates, France’s fiscal deficit narrowed by 0.3 points compared to 2017, to 2.5% of GDP. This is a good surprise compared to the government’s target of 2.7%. Mandatory levies and public spending both declined slightly as a share of GDP, by 0.2 and 0.4 points, respectively. The public debt ratio levelled off at 98.4% of GDP. Although the ratio has yet to decline, at least it did not increase either, for the first time since 2007. Thanks to the better-than-expected figure for 2018, the temporary slippage of the fiscal deficit above the 3% threshold in 2019 is likely to remain limited.

On the Same Theme

ECB: Mario Draghi passes the baton 9/13/2019
Market expectations were elevated but the Governing Council did not disappoint. The comprehensive nature of the package, with the introduction of state-dependent forward guidance, take away the need to envisage additional measures in the foreseeable future. ECB watching has been narrowed to monitoring the gap between inflation and the ECB target. Given certain negative side effects of the current monetary mix, which are acknowledged by the Governing Council, fiscal policy, where leeway is available, is now requested to step up to the plate, so as to foster growth and speed up convergence of inflation to target. The policy baton has been passed.
Is there fiscal space in the euro area? 9/9/2019
Recent economic data confirm that global and European growth is slowing, with fears of a recession in Germany. The ECB stands ready to do more if necessary, but one may also wonder if there is enough leeway for fiscal support.
Fragile economic equilibrium between manufacturing and services sectors 9/6/2019
The latest economic indicators still send a mixed signal. The months pass but nothing seems to change. While GDP growth is declining (+0.2% q/q in Q2 2019 after +0.4% in Q1), activity in manufacturing remains subdued and the Purchasing Managers Index (PMI) of this sector is well below its long-term average. Conversely, the services sector resists and the PMI is globally in line with expectations. In this environment, headline inflation remains pretty far from the 2% target, and surprised to the downside. The core component of the CPI keeps oscillating around only 1% (+0.9% in July).
ECB meeting preview: QE again? 9/6/2019
Is there a risk of over-promising and under-delivering? Since the start of the summer, ECB communication has created elevated expectations about a comprehensive package of measures to be announced at its meeting of 12 September.
Eurozone: Employment and private consumption growth 9/4/2019
Private consumption is the biggest component of eurozone GDP: 54% in 2018. It is also more resilient to shocks than GDP. This characteristic is particularly important when activity is slowing. A key driver of household spending is real disposable income, which in turn very much depends on employment growth (wages also play a role obviously). Employment growth has been declining since the second half of 2017, which more or less corresponds to the peak of the eurozone growth. Judging by the employment component of the IHS Markit composite PMI, which is highly correlated with growth in employment, growth of the latter should continue to go down and hence weigh on consumer spending growth.  
ECB: committed to ease in September, but how much? 7/26/2019
The Governing Council has tasked Eurosystem committees to examine its monetary policy options. Given the insistence on its determination to act, Thursday’s meeting outcome was basically a pre-announcement of easing in September. Being aware of the importance of maintaining the ECB’s inflation targeting credibility, Mario Draghi was very explicit in expressing his dissatisfaction with current inflation and its outlook, adding that a highly accomodative monetary policy is here to stay for a long period of time.
Eurozone: An uncertain economic climate and fresh monetary stimulus 7/26/2019
Continued deterioration in manufacturing could end up dragging the services down, given the significant linkages between both sectors. The ECB is ready to intervene in response to the current economic slowdown and any sign of a drop in inflation expectations.
Pockets of inflation in a low inflation world 7/19/2019
Despite an increase in June, core inflation in the eurozone remains stubbornly low. The dispersion is significant between countries and between the expenditure components of the price index. Inflation is low for clothing and footwear, furnishings and household equipment, transport and communications. It is higher for housing-related items, restaurants and hotels, miscellaneous goods and services and recreation and culture Non-energy industrial goods price inflation is very low. Should this continue, it would imply that the acceleration of inflation which is the ECB is pursuing by renewed policy easing, has to come from services. However, research shows that it takes more time for services prices to respond to monetary policy and economic activity. Monetary accomodation is here to stay. 
Margin erosion in the eurozone: how low can they go? 7/17/2019
Since the 3rd quarter of 2017, a year of strong economic growth, non-financial corporations’ margin rate* in the euro area has fallen steadily. In the 1st quarter of 2019 they hit their lowest point since early 2014, at less than 40% of value added. This trend echoes the increase in unit labour costs, which has resulted both from increasing wage growth and slowing labour productivity. Forming part of a wider pattern of slowing growth in the euro area over a number of quarters and with high level of uncertainty, this narrowing of margins reflects the difficulties companies are experiencing in passing higher costs through to prices. Underlying inflation remains particularly inert. If it continues, this narrowing of margins could affect trends in investment. * Calculated here as the ratio: (Gross operating surplus + Mixed income) / Value added, Seasonally and calendar adjusted
Credit pulse 7/12/2019
The credit impulse picked up very slightly in May 2019 in the euro area for households whereas it declined for non-financial corporations. The annual growth of loans to private non-financial sector stabilized at around 3.3%. Demand for credit is expected to rise in the third quarter of 2019 across all loan categories, stimulated by the easing of financing conditions, except for home loans, for which lending conditions are expected to tighten slightly.

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