Eurozone Watch

Fourth part of our series on Sarkozy and Europe

At Eurozone Watch, we have been saying since our very first comment on Nicolas Sarkozy that any great hopes of him being a true liberal politician are misplaced. In his fourth month in office he has (again) proven our point that he has two faces: Whilst apparently standing for (selective) liberalisation in France, he is transposing his true protectionist thinking to the European level.

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Over the past weeks, the ECB has confused markets in how it will react to the recent market turmoils. When the cut in the discount rate by the US Fed triggered speculations that the ECB might abandon the interest rate hike it had signalled for September 6, European central bankers tried hard to dispel them. On Monday, ECB president Jean-Claude Trichet then finally hinted at a conference in Budapest that the ECB might delay their rate hike after all. If one looks at it from a political economy perspective, an interest hike at the moment would clearly be a very risky decision for the ECB.

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The top issue of the past weeks has clearly been the turbulences in money, credit and equity markets and the question in how far the problems might spill over to the real economy. With the first sentiment data having been published last week (German ZEW, the Belgian business climate and European PMIs all declined), and market volatitily having receded somewhat, we can draw first preliminary conclusions on the fall-out from the crisis. Assuming that market volatitliy does not get much worse, but declines further over the coming weeks, the following conclusions seem to be well based in the past week’s data:

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Since 2004, the drive of the new EU members to adopt the euro has clearly slowed. Ognian Hishow, senior research fellow at the Stiftung Wissenschaft and Politik has offered us a guest commentary why he thinks that this tendency is dangerous for the countries in question:

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Yesterday, statistical offices all over the eurozone published GDP figures for Q2. As had already been harbingered by the Italian GDP figures, growth slowed significantly in the euro-area from 0.7 percent quarter-on-quarter at the beginning of the to only 0.3 percent, the slowest quarterly growth rate since 2004 (see here for Eurostat details).

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Today, for the second day in a row, the ECB acted as a fire bregade for financial markets. After running a special tender on Thursday and pumping an extra €95 bn of over-night money into the market, it today again provided banks with €61 bn of extra liquidity. [Just to put those figures into perspective: Total euro base money adds up to about €800 bn, of which a little above €400 bn is borrowed by commercial banks from the central bank. The ECB on Thursday thus temporarily added more than 10 percent to the monetary base and almost 25 percent to the borrowed base.]

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These last weeks, the IMF – in the usual twelve months term – has on several occasions commented on EMU developments. On Tuesday, the Board of Directors of the IMF issued  a summary of their discussions on EMU policies.

In line with the IMF staff report on the Eurozone issued in July 2007, the Board underlined the overly positive economic prospects for the Eurozone: “The euro area economy is doing well on the heels of a supportive external environment and generally sound policies. Real GDP growth has been running around 2½ percent; fiscal deficits are markedly lower than a few years ago; and strong export growth, improving profitability and balance sheets, and accommodative financial conditions have fostered a broad-based upswing of investment and employment.”

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