The currency and fiscal battleground front lines in Europe remains the same. France wants QE, fiscal stimulus, and more leeway on meeting fiscal deficit targets. Germany doesn’t. And the fighting has strengthened.
The idea that ECB can produce nirvana by devaluing the euro is ridiculous. Yet, that’s the battle cry of the day.
Bloomberg reports France Asks for More Action From ECB to Correct Overvalued Euro.
French Prime Minister Manuel Valls called for more action from the European Central Bank to lower the value of the euro, amid concerns the 18-nation region might be headed toward deflation.
“The monetary policy has started to change,” Valls said today in a speech made at the Socialist Party’s summer school in La Rochelle, France. While he called the ECB’s package of measures taken in June a “strong signal,” he also said that “one will have to go even further.”
Valls’s comments come after ECB President Mario Draghi, who’ll meet French President Francois Hollande tomorrow in Paris, signaled that declining inflation expectations are pushing the central bank toward introducing quantitative easing. Policy makers will gather in Frankfurt on Sept. 4 for their monetary-policy meeting.
Inflation in the currency bloc slowed to 0.3 percent in August from a year earlier, the lowest since 2009, compared with an ECB target for price growth of just under 2 percent. Draghi has said that the ECB stands ready to embark on unconventional measures such as broad-based asset purchases to avoid a deflationary spiral of falling prices and households postponing their spending plans.
In his speech, Draghi also called for complementary action on a European level and “a large public investment program.” German Chancellor Angela Merkel was disgruntled with the comments and called Draghi to ask if the ECB had changed course on austerity, Der Spiegel reported, without saying where it got the information.
The magazine’s assertion that Merkel “demanded answers” from Draghi “in no way corresponds to the facts,” Merkel spokesman Steffen Seibert said in a text message.
Inflation Won’t Cure France
Contrary to popular belief, inflation will not spur consumer spending. Nor will inflation create any jobs or cause wage inflation.
Nonetheless, France demands the ECB wizards fix something that cannot be fixed by monetary policy.
Problem number one is the eurozone itself. The euro is fatally flawed. In addition, France’s problem is that it is not competitive with Germany and arguably even Spain, not that the Euro is too high.
France desperately needs structural reforms.
- It is nearly impossible to fire someone in France, so businesses are reluctant to hire.
- Government and union rules on everything are sheer madness.
- France seeks to save local bookstores by taxing online retailers and elimination of free shipping.
- Agricultural subsidies to save inefficient French farms (at great expense to the rest of Europe) are inane.
- Pension rules need fixes, and the retirement age needs to increase.
- The “French way of life” is incompatible with rising productivity, especially on a relative basis, so France is increasingly left behind.
How is QE supposed to fix all that? It can’t and it won’t, but it increasingly looks as if the ECB may give it a try.
Mike “Mish” Shedlock