Wednesday, 25 April 2012

Europe staggers and reflation drives Wall Street

On the face of it, and despite the austerity backlash, two things are almost certain not to happen:
  • One is that the European Central Bank (ECB) will not change its colours. Its ethos is based around the view that the single greatest contribution it can make to economic growth in the eurozone is nothing other than price stability. Only through a change in the charter laying out its statutes could its behaviour be altered but such a change would not be viable or acceptable under the lead role played by Germany’s Bundesbank and probably not viable either under the Presidency of Mario Draghi.
  • Another is that the European Commission (EC), with the backing of the ECB and the IMF, is unlikely to let the Reinforced Growth and Stability Pact be picked apart by Hollande, Samaras or any other would be political leader. This Pact underlies the Inter-governmental Treaty setting out the framework for the fiscal adjustment intended to put the European Union onto the medium term path to debt sustainability and to which all but two EU members (the UK and the Czech Republic) have signed up.
Under Prime Minister Rutte’s coalition government that was until yesterday, the Dutch were committed to the Pact and to fulfilling the obligation to achieve budget deficit targets. That meant budget cuts of some 9.5 billion euros, or 1.7 percent of GDP (other figures put the cuts at 15 billion euros or 2.5 percent of GDP). The coalition government resigned after losing the support of the Freedom Party headed by Geert Wilders. Rutte and his cabinet remain in charge of a caretaker government ahead of elections that are now to be called. In the meantime, Rutte and his Finance Minister are determined to secure support for the discipline it intended following and to preserve the triple A rating on sovereign debt. This includes submitting a budget to the EC before the April 30th deadline. More >

Mike Lenhoff
Chief Strategist

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