QE in the Euro area

Mario Draghi made it clear at  his press conference in early April that the ECB had no qualms about using QE if additional unconventional monetary policies were deemed necessary. The Bank may have come late to the party and asset purchases are not a given but the message has been reiterated over the past few weeks and that possibilty has been instrumental in driving peripheral bond yields in the euro area to levels few expected to see in a short time frame. The ECB is also more openly concerned about the euro’s relative strength  and its implications for the economic outlook  and some see QE as a means to weaken the currency, although the recent performance of the euro implies that not many in the foreign exchange market believe that QE is imminent or that it is negative -indeed traders have opened up speculative long positions in the currency.

In fact the  evidence on QE  elsewhere indicates that it can work through different channels and that it  may not precipitate a currency depreciation. Quantifying the impact of asset purchases is difficult as one can never know how the economy would have performed in its absence and expectations  can also  play an important role  but there are various statistical and econometric methods available which can at least give some approximations. The most recent work on the topic was published in a discussion paper by the Bank of England (‘What are the macroeconomic effects of asset purchases’, Weale and Wieladek, April 2014) comparing the effects of QE on the US and UK economies. The paper finds that QE does indeed have a significant impact on real activity and inflation, with asset purchases equivalent to 1% of GDP having a much bigger impact on real GDP in the US (a rise of 0.38%) than in the UK (0.18%) although a similar impact on inflation ( 0.38% in the US versus 0.3%)

The study also found that QE impacted the respective economies through different channels. The US is far less dependent on bank credit than the UK and longer term interest rates on financial instruments are much more important. Consequently, QE’s impact on longer term bond yields appears to have been the decisive channel in the US. In contrast,  the main impact  in the UK was through shorter term rates, which were  expected to remain lower for longer, and  reduced market volatility. The FX impact also differed; sterling’s real exchange rate was not seen to be affected by QE whereas the dollar did depreciate according to the study.

What are the implications for QE in the euro area?. Well, we know that the market for private sector bonds in Europe is not large so any purchases  by the ECB would probably concentrate on longer term government bonds (hence the rally of late) , although, again, shorter term rates and bank lending probably have a much bigger impact on the euro economy. That suggests that the impact on GDP would be nearer to the UK than the US experience and that  €1000bn in QE (around 10% of euro GDP) would boost GDP by some 1.8%. Inflation in the euro area is much stickier than the US or UK so one doubts if the CPI would rise by the  3% or more indicated by the BoE study. Nor is it  a given that the exchange rate would depreciate-indeed, by lowering the risk premium on peripheral bonds  QE may  actually support the euro.

Of course the ECB may decide to do nothing for a while longer, particularly given the prospect of stronger growth in the euro area in the first quarter, and in a sense the mere  promise of QE may have already achieved at least some of its aims. An actual announcement may  therefore  risk disappointment and lead to some selling of bonds  ( ‘buy the rumour. sell the fact’) . So if the ECB does want a weaker euro, negative interest rates might well prove a better bet  than QE given the mixed results elsewhere.

Irish Austerity Budgets: why more may be needed

The 2014 Irish Budget was the eighth in succession since 2008 (there were two  in 2009) which cut government spending or raised taxes with the total fiscal adjustment amounting to €30bn, including around €11bn in tax measures. These austerity Budgets were undertaken in order to reduce Ireland’s fiscal deficit and  therefore  comply with strictures under the EU excessive deficit procedure , with the State required to reduce the deficit to under 3% of GDP by  the end of 2015( last year’ it was 7.2%). The Troika may have gone but that requirement remains and Ireland, like others in the same predicament, has to produce a Stability Programme Update (SPU) each April, which sets out medium term forecasts for the economy, the fiscal outlook and the debt situation.

The latest SPU, just published, revealed that the  Government expects this year’s cash deficit to emerge €0.9bn below that initially forecast but that the General Government deficit ( the preferred EU budget measure) will still be about €8bn or 4.8% of forecast GDP, as per the original projection. Real growth in the economy is expected to be marginally stronger than envisaged last October , at 2.1%, although the Department of Finance is now much more upbeat about domestic spending, including a 2% rise in personal consumption and a 15% surge in investment spending, and now expects the external sector to have a negative impact on GDP, with export growth of only 2% offset by over 3% growth in imports.

The main change to the outlook relates to inflation, however, with price pressures across the economy now projected to be much weaker following the trend in 2013. Consequently nominal GDP  is now forecast follow a lower trajectory  in the medium term than previously thought; the 2014 forecast is for GDP of €168.4bn instead of the original €170.6bn , with similar shortfalls over the following few years That  change affects the debt dynamics and although the burden is still expected to fall from last year’s 123.7% of GDP the decline is now slower; the 2014 debt ratio is now forecast at 121.4% instead of the original 120%.

The growth forecast also envisages the economy gathering momentum into 2015 and beyond (although previous projections were too optimistic in that regard) and further strong gains in employment, a combination that might imply less need for further austerity measures. The Minister for Finance has signaled otherwise and to understand  why that may be  the case it is  necessary to delve a little deeper into the SPU document. The Irish economy, according to the EU, is actually operating very close to capacity and to full employment, a view which would surprise many and one that has met with some opposition, most recently from the ESRI in its latest ‘Quarterly Economic Commentary’. That debate may seem arcane but, unfortunately, it has serious implications for Irish households because on the EU view the Irish deficit is virtually all structural and therefore will not disappear with stronger growth. The actual deficit will shrink but if one adjusts for the economic cycle the structural deficit would still remain, requiring policy measures to reduce government spending and/or increase tax revenue. Moreover, Ireland is charged with reducing the structural deficit to zero  by 2019 from last year’s 6.2% of GDP, which implies the post-2015 fiscal landscape will not be as sunlit as some expect. A given economy’s position in the economic cycle is not observable and estimates are just that,so convincing the EU that far more of the  Irish deficit is cyclical would have a big impact on the perceived scale of  the fiscal adjustment required.

Irish household savings ratio continues it decline

The household savings ratio, the percentage of disposable income not spent on personal consumption, can be seen as a residual in the national accounts and in Ireland’s case is subject to sizeable revisions. Consequently it is not a robust  base for an economic projection yet many  forecasts are in part predicated on changes in the ratio and the widely held expectation that Irish consumer spending will pick up this year and next  explicitly or implicitly assumes a fall in the ratio i.e. that households will make a conscious decision to spend more from a given income. In fact, as the latest CSO figures reveal, the ratio has been falling steadily since 2009, and that against a backdrop of a declining trend in consumer spending.

The CSO figures refer to gross savings which are defined as that fraction of gross disposable income not spent, so it does not equate directly with a flow of money into savings products. The use of income to repay debt, for example, would class as saving on that definition, and we know from other sources that households have in fact been deleveraging for some time. The decision to save is also likely to be influenced by a host of other factors including interest rates, changes in the tax system, inflation and the state of the economy, with high and rising unemployment often seen as a catalyst for higher savings as households react to uncertainty. Similarly, an improvement in the economic climate and a decline in unemployment is viewed by forecasters as likely to precipitate a fall in the savings ratio and hence generate a rise in consumer spending above that indicated by the change in disposable income.

Gross savings fell in Ireland  at the peak of the boom, declining to under €6bn in 2007, but rose sharply over the following two years following the onset of the economic and financial crisis, exceeding €15bn by 2009. Savings in that year amounted to over 16% of disposable income (against a ratio of only 6% a few year earlier) but  the ratio declined steadily from there and fell back into single figures last year, at 9.4%.

The actual amount saved annually has also fallen steadily, to just over €8bn last year, but Irish households have also seen a significant decline in disposable income , which fell again marginally in 2013 to under €87bn from a peak of €102bn in 2008. Consumer spending has also fallen since the peak of the boom and the decline is therefore not driven by a rise in household saving- the weakness in consumption over recent years clearly reflects pressure on household incomes rather than any surge in precautionary savings. Indeed, the  fall in the savings ratio can be seen as households seeking to contain the fall in consumption by dipping in to savings.The savings ratio is still higher than it was prior to the crash, it must be said,  but is probably not the font for additional spending envisaged by many forecasters, including the IMF. The scale of data revisions also cautions against hanging any projection for an upturn in consumption on a change in the ratio.

Irish Consumer Spending continues to Disappoint

According to the CSO’s first estimate, the Irish economy, as measured by real GDP, contracted by 0.3% in 2013. This was well below the consensus , which envisaged modest growth, largely reflecting an unexpected plunge in activity in the final quarter, which left real GDP in q4 0.7% below the figure a year earlier. This in turn now makes it less likely that average growth in 2014 will be above 2% as the current consensus expects.

Much has been made of the impact from the Patent Cliff on Irish merchandise exports and hence GDP ( the corollary, a fall in multinational profits, helped to boost GNP, the income of Irish residents, by 3.4%) but a key concern for the Government must be the continued weakness of consumer spending. Personal consumption in volume terms fell by 1.1% last year against a Department of Finance expectation of -0.2%. Moreover, consumption fell in the final quarter and the annual change in q4 was also -1.1% which makes the Department’s forecast of 1.8% average growth in consumption this year look a little optimistic.

A number of indicators would point to stronger consumption than has emerged. Consumer confidence, for example, has risen sharply and is currently back at levels last seen in early 2007. Employment is also rising strongly, by  2.4% on average last year, which offset a 0.7% decline in average wage earnings implying a net increase in total wage income. The retail sales data has also been positive, with a volume  rise of 0.7% in 2013 or 0.8% if one excludes cars.

The value of retail sales fell last year, however, implying that retailers have to cut prices to boost sales, and spending by tourists is excluded from the personal consumption figure as it is meant to capture expenditure by Irish residents. In addition spending on services accounts for over half of personal consumption and that remains weak. One factor may relate to the nature of the employment gains, with some half due to a growth in self employment, and there is no guarantee that the self employed will make money. Indeed, income tax receipts are flat on the year, and weak self employed earnings may be responsible, at least in part. The CSO also believes that the disposable income of Irish households fell over the first nine months of last year (that measure includes transfers and other sources of income alongside wages and adjusts for taxes on income). Households are also continuing with the deleveraging trend evident since 2008, with the repayment of another €5bn  of  debt in the first three quarters of 2013 bringing the total over the five years to €35bn. We do not have figures for recent months but net lending by banks and outstanding credit card debt is still falling, with  a decline of €416bn in net mortgage lending in January the highest monthly fall on record.

The trend in employment. if maintained, does provide the main argument supporting the expected pick up in consumer spending and buoyant car sales have given retail sales a strong start to the year but the trend in wages and deleveraging may also continue as drags on spending and hence GDP, with household’s attitude to debt a particular area of uncertainty.

 

The Future of the Euro

I was recently involved in a panel discussion on the euro at  the Cass Business school on March 3rd 2014, hosted by the London Irish Graduate Network. Tadhg Enright was in the chair and the other participants were  Graham Bishop and Martin Wolf from the FT.  Although there were no set speeches I took the opportunity to gather some thoughts on the euro, produced below.

The euro is now well into its second decade, having survived what appeared to be an existential crisis, and by most attributes of a sound currency can be viewed as a success. This is particularly true for the euro as a store of value; its internal purchasing power has been supported by stable and low inflation around 2% per annum and its external value has also been broadly maintained over time-the trade weighted exchange rate is currently about 5% above its level at birth according to BIS data. Yet few would argue that the original eleven members fulfilled the criteria normally required for an optimal currency area and the economic performance across those countries has hardly been uniform; Finland recorded a 20% rise in real GDP per head from 1999 to 2013 according to IMF data, followed by Germany (19%), Austria and Ireland (18%), in contrast to the zero growth experienced by Portugal over that period and the 3% fall seen in Italy. Of course we will never know how they would have performed absent the euro but it is clear that monetary policy at least has been far from optimal for individual countries- a simple Taylor rule, for example, would suggest that rates were far too low in Ireland in the first half of the noughties. Adjustments to imbalances are also clearly asymmetric, with the burden solely on debtor countries to shift resources to the external sector while creditor countries are not required to expand domestic demand to make that adjustment less painful. The notion of punishment for miscreants is a strong undercurrent in creditor country thinking and the penal rates on the original official loans from the Troika to those in bail outs were only abandoned as the threats to solvency became stark.

Differences in regional growth rates are not unusual of course and can persist for long periods. One can point to the fifty US States as an example, although a shared culture, language, legal and education system allows for mobility of labour and capital, which is not the case for the euro. The Federal budget in the US also acts as an automatic stabilizer, providing a partial cushion for weaker States in a way that is impossible in Europe given that the EU Budget is only around 1.5% of GDP.

Currency unions generally evolve from political initiatives rather than any compelling economic case and the euro clearly fits that model-remember all EU members are supposed to adopt the currency when meeting the entry requirements (although currently 2 have opt outs and a third, Sweden, an implicit opt out) which implies a membership of at least 25 over time, from the current 18. The flaws in the original construct have also been exposed: the monetary union created is part of an economic union but each country was left with fiscal sovereignty and control of its own banking system and, crucially, without a Lender of Last Resort such as the Fed or the BoE. Consequently the eruption of the global financial crisis from 2008 put huge stress on euro peripheral bond markets as, to some degree, those governments were borrowing in a ‘foreign’ currency, backed only by their ability to raise tax revenue in euros, as they had no mechanism to print euros to meet debt obligations. The ECB and the main government players also saw the explosion in fiscal deficits as the cause rather than a symptom of the crisis and confused investor concern about specific credit risks with an attack on the currency, pledging that ‘no euro bank will default’, so compounding the sovereign debt issue and the ‘doom loop’ between sovereigns and banks. That view had a particularly profound implication for Ireland, with the State injecting €64bn or some 40% of GDP into the banking system, with equity holders and sub-debt holders shouldering some of the bank losses. Ireland also had ‘first mover disadvantage’ as it is now proposed that senior debt holders can be ‘bailed in’, a policy then prohibited by the ECB.

The euro crisis precipitated a series of emergency, ad-hoc and sometimes contradictory policy responses  by the Eurogroup and the ECB, with the latter eventually promising to do ‘whatever it takes ‘ to save the currency, including  a conditional pledge to buy secondary market sovereign debt in unlimited amounts, in contrast to the misconceived and half-hearted Securities Market Programme. The commitment has never been tested but the market response indicates that investors probably perceive that the euro now has a Lender of Last Resort, at least of a sort, and is comforted by that fact, shrugging off doubts about its legality and degree of support within the Governing Council, although that sanguine view may change as events unfold. The fall in peripheral bond yields  may also be driven by investors giving some probability to  QE eventually emerging from the ECB.

The conventional view among commentators is that the euro project has now to evolve into a banking union and ultimately a full fiscal union. Steps have been taken in terms of the former, albeit hesitant ones, with the burden of bank resolution still State dependent for up to a decade. The tide of public opinion in Europe also appears to have shifted away from Federalism and so the concept of debt mutualisation is a long way from realization. Moreover, new euro fiscal rules will further limit discretionary budgetary policy within member states, so leaving governments and hence electorates with no macro tools to affect aggregate demand; domestic policy levers can now solely impact the supply side of the economy given the loss of sovereignty over fiscal, monetary and FX policies.

The conventional wisdom on banking and fiscal union requires political agreement on the way forward and it is by no means certain that electorates will support these moves. Indeed, the risk remains that debt fatigue or creditor fatigue will eventually result in the election of governments willing to risk leaving the single currency even though the costs of exit are seen as high and the outcome uncertain. What would Ireland do, for example, on a break up- a floating punt is unlikely so would it anchor again with sterling or adopt some range against the DM, as in the ERM? That uncertainty and perceived costs of exit may well continue to trump discontent within most or all the debtor members of the euro and the stagnation evident in the French economy may help precipitate a more expansionary monetary and fiscal mix in Europe – the respective performances of the US and UK economies relative to the euro area since the Great Recession surely cannot be put down to supply side responses alone.  One can never say that the fear of euro exit will always be the case, however, and that the single currency will inevitably survive in its present form.  Yet it is foolish, as some have done, to predict the date and time of exits as it will be political events that will determine the euro’s fate, which is appropriate for what is, after all, a political construct.

Irish House Building appears to have bottomed

The Department of the Environment publishes  official figures on house completions in Ireland, based on connections to the ESB network,  and puts the 2013 total at 8,300 which is modestly below the 2012 figure of 8,488 and as such marks a new low in the house building cycle. Indeed the figure is the lowest since records began in the early 1970s in absolute terms and implies a 0.4% addition to the housing stock (estimated at around 2 million)  which is also less than the obsolescence rate commonly assumed for the Irish housing market. Last year’s outturn also stands in  contrast to the 93,000 completed at the peak of the cycle in 2006 and alongside the plunge in prices and mortgage lending is a stark commentary on the scale of the  housing bust in Ireland.

Evidence that the cycle is turning is apparent from last year’s data on house prices and the recent trend in completions also supports the view that the supply side of the market has bottomed out, despite a  further fall in annual completions last year. That reflected a weak first half of the year, with 3,700 completions, but the second half saw a pick up, with over 4,600 units built. My own model of completions now points to a figure around 9,500 for 2014, although any forecast is subject to event risk.

Some readers may even  view the  completions total as high given the scale of vacant houses revealed in the 2011 census ( 230,000 nationally excluding holiday homes) and one clue as to the reason is revealed by a composition breakdown of the total, as 57% were single houses, presumably built to demand, and this type of completion amounted to only a quarter of the total six years ago. The share taken by apartments has halved, to around 11%, with less than 1,000 completed last year , and housing schemes make up the residual, accounted for 32% of the total from a peak of over 50%. Consequently the amount of what one might term speculative building is still extremely low , albeit having risen slightly as a share of the total last year, and may tick up further this year assuming that prices do not resume their fall.

The trend in completions  is  also not uniform across the country, with half of the 34 counties and city councils recording some gains. These increases were generally very small in absolute terms, nonetheless,  with the largest being in Dun Laoghaire-Rathdown, where 260 units were completed, a rise of 85 from 2012. That figure was around 2,500 a year at the peak of the boom with building in South Dublin even higher at over 3,300 , but completions in that area amounted to only 203 last year and that was marginally down on 2012. Completions in the City of Dublin  were broadly unchanged around 500 units but rose marginally in the cities of Waterford, Limerick and Galway, albeit from very low levels.

A number of studies on the Irish housing collapse concluded that prices probably overshot on the downside  and although it is less obvious that the same can be said for house building there is a big difference between where people want to live and where there is an excess supply of housing, and so 2013 may  also  mark a turning point in terms of house completions.

 

Irish Household debt, Deleveraging and Wealth

Consumer spending in Ireland accounts for around half of GDP and in 2013 probably amounted to some €83bn or €11bn below the peak year of 2008. Consumption is largely driven by  real household income  which has fallen sharply in recent years, but household wealth also plays a role and so the housing collapse has also had an impact, with households deleveraging in order to rebuild net wealth. Annual consumption appears to have fallen again in 2013 but picked up through the year after a very weak first quarter and the  latest retail sales data showed a strong end to the year in term of High street spending, with sales excluding cars rising by 2.8% in volume terms over November  and December. The consensus view sees that upturn translate into a rise in real consumption this year (the Budget is predicated on a 1.8% increase), largely driven by a recovery in household income, and the latest data from the Central Bank is also  potentially supportive in terms of the trend in household wealth although deleveraging is still very much in evidence, adding downside risks.

Household wealth comprises financial assets and housing, with the latter dominating in Ireland. Net wealth (i.e. the value of assets minus debt) peaked at well over €700bn in 2008  and then plunged to less than €450bn largely as a result of the collapse in house prices. Indeed, the net financial worth of the household sector bottomed in late 2009 and has been on a rising trend since, increasing to €148bn in the third quarter of 2013 ( on a 4-quarter moving average, the measure preferred by the Central bank), which is a new high. Around a half of gross financial wealth is in the form of equity reserves in pension  and insurance funds and the recovery in stock markets  has had a big influence as the amount held by households in cash and bank deposits has not greatly changed of late. The pick up in house prices is also significant as it has boosted housing wealth with the result that total net wealth is now some €50bn higher than it was a year ago, rising to €490bn in the third quarter.

The improvement in the net worth position also reflects a significant decline in household debt. That peaked in the final quarter of 2008 at €204bn (total liabilities were and still are around €10bn higher but the Central bank concentrates on loans owed to financial institutions) and has fallen by €35bn since then, to €169bn in the third quarter of 2013. Deleveraging on that scale has also resulted in a fall in the debt burden (debt relative to disposable income) but the decline in the latter has been slower reflecting falls in the denominator, with the latest reading at 196% of income from a peak of 214%, recorded as recently as the second quarter of 2011. The debt ratio is still very high by international standards and  although the rise in net wealth is a positive for the economy and will have some influence on the future pace of deleveraging no one really knows when the latter will come to an end and that adds to the degrees of uncertainty surrounding any consumption forecast.

Dublin House price inflation likely to slow this year

Irish residential property prices fell by 4.5% in 2012 according to the CSO index  and by 2.5% in Dublin, and although most commentators expected the market to pick up a little in 2013 few if any envisaged the pace of price appreciation that developed in the capital; Dublin prices rose by 15.7% last year with apartments outstripping houses, appreciating by 20.8% against 15.3% for the latter. Residential prices  in the capital have still fallen by some 49% from the peak but the strength of the recent rally has prompted some to forecast further double digit gains in 2014. That appears unlikely for a number of reasons.

The case for some further price appreciation nationally and in the capital  can certainly be made. A range of studies since 2012, including work from the Irish Central Bank, the IMF and the OECD, have signaled that Irish house prices probably fell too far in relation to housing fundamentals, such as income and rents. The latter has risen strongly now for a few years ( the latest CSO data for November puts the annual increase in national residential rents at 8.5%) and house prices relative to rents are now well below the long term average. That is the equivalent of stating that the average yield on residential property ( i.e the average rent divided by the current price ) is also well above the longer term trend and on my data base is just shy of 6%, the highest in a decade. Affordability is also a plus for the market; a new 25-year mortgage absorbs 24% of income in 2013 which is well below the 29% long term average on my affordability index and back to levels last seen in 1998. Employment is also rising and  price expectations have also probably shifted, with more people expecting prices to rise and hence helping to bring forward purchases. House building is also at record lows ( averaging around 2,000 a quarter in 2013), albeit bottoming out, and the vacancy rate in parts of the capital is low. There would not appear to be a significant supply shortage in apartments, however, yet apartment prices appreciated faster than house prices  last year both nationally and in Dublin, albeit from a lower base, which implies that supply is not the sole explanation for the trend in prices.The vacancy  rate outside the capital is much higher nonetheless, so in theory at least there is  more excess supply to meet the increase in demand, which helps to explain why prices outside Dublin were broadly flat last year, but having fallen by 6.1% in 2012.

Dublin property price inflation may well decelerate this year,  although still rising at a single digit rate. In part this expectation reflects the nature of the market last year, with  cash transactions  probably accounting for slightly over half the total recorded  by the Property Price register ( the IBF data on mortgage drawdowns is not yet available for the full year) although the proportion funded by credit did rise through the year and may have been around 54% in the final quarter. Ultimately housing is largely driven by credit and mortgage lending may well pick up this year but is still likely to be a a level which is not compatible with further price appreciation at the pace seen last year in Dublin. Repossessions are also on the rise which may dampen price pressures somewhat while the trend in the price  index itself  in 2013 is another factor arguing for deceleration; prices rose by 2.4% in the second quarter, by 9.5% in q3 and 3.9% in the final quarter and so  annual property price inflation in Dublin is likely to slow in the second half of 2014 as those base effects kick in.

Stagnation and relative performance in the euro area

The new year has brought greater optimism in relation to the global economic outlook, with a number of international economic organizations revising up their growth forecasts or indicating that such a move is imminent. Time will tell whether the more upbeat mood is warranted ( the last few years have seen initial forecasts subsequently revised down) and it is noticeable that the ECB remains very cautious on prospects for the euro area, pointing to downside risks, although the Bank is in line with the consensus in expecting a modest upturn, with growth of 1.1% forecast for this year and 1.5% in 2015, following a 0.4% contraction in 2013 and a 0.6% fall the previous year. Those figures refer to the euro area as a whole, of course, and are a weighted average of the constituent countries, and as such can hide significant variations across the zone.

Indeed, the divergence in  relative economic performance since the inception of the euro in 1999 is extraordinary. Eleven countries adopted the single currency at that time (the total has now risen to eighteen following Latvia’s entry at the turn of the year) and some of that initial group has prospered while others have stagnated, as measured by real GDP per capita. According to the IMF’s data on the latter , Finland has been the best performer over that period, with  real income per head rising by 20%, marginally outstripping Germany (19.4%) . Austria is in third position, at 18%, followed by Ireland in fourth, with a cumulative gain of 17.6% despite a sharp decline since 2007. These figures are better than that achieved by the major advanced economies over the same period, led by the UK at over 16% followed by the US around 15%,

The figures cover a fourteen year period and so even the strongest performance, such as  that of Germany, translates into  annual average  growth in GDP per head of 1.25% with the majority of the original eleven euro members not achieving 1% per annum. France is notable in that regard, with average growth per head of only 0.6% and a cumulative increase of just 8.7%, putting it in eighth position. That is only marginally better than the that of Spain, which is often portrayed as a chronically poor performer. Portugal is viewed through a similar lens but the data is still surprising, showing zero growth in Portuguese real income  per head since 1999. Yet that dismal statistic is dwarfed by the figures for Italy, as real GDP per capita is actually 3.5% lower now than it was at the birth of the single currency.

Economic growth in the medium to long run is the product of growth in the labour force  and the capital stock alongside technological progress so this pronounced divergence in performance could be put down to  respective differences in these ‘real’ factors  and not to the single currency per se- hence the emphasis from the ECB and the European Commission on ‘structural’ reforms in the euro area, which one takes to mean measures to boost the supply side of the economy and potential growth. Yet it is also undeniable that some countries have found it very difficult to cope within a monetary union dominated by a super-efficient industrial powerhouse and it is remarkable  that the electorates in those economies  have apparently learned to live with that stagnation.

Press Conferences, the ECB and the Fed

The ECB and the Fed differ at many levels, including their respective mandates (the latter is charged with  maintaining full employment as well as price stability ) and the frequency of policy-setting meetings (one a month for the ECB but only eight a year for its US counterpart). The Fed’s Open Market Committee, which sets monetary policy, has twelve voting members and releases minutes of its deliberations, including the voting pattern, whereas the ECB Governing Council’s  membership is double that, with no published minutes, at least to date. They do have one thing in common though- press conferences hosted by the Head of the institution- although the Fed has only recently adopted that practice and limits it to one a quarter, as against the ECB’s regular slot on the first Thursday of the month.

The press conferences also differ markedly however. Ben Bernanke has held court at all of the Fed’s to date, and things may change when Janet Yellen takes over, but  there is a much more open  atmosphere than in Frankfurt and it probably reflects more than the personalities involved. This may in part be due to the nature of the audience, which is smaller in number than for the ECB and made up largely of ‘Fed-watchers’, who like the Kremlinologists of old are attentive to the slightest hint of any change in policy. Few, if any, foreign journalists appear to be present and the questions are usually to the point and illicit equally straightforward responses from the Chairman. One senses that there is an implicit belief that the population have a right to know what the Fed is thinking and the questioners seek to tease out any areas where there is a lack of clarity, although of course central bankers are not omniscient and any statement of intent is always contingent on events.

The ECB conference is more formulaic ( the President opens by reading a much longer statement than that issued by the Fed ) and the atmosphere feels very different, at last as viewed on television,  with the ECB President often striking a defensive and sometimes peevish tone, with attempts to justify past policy decisions (‘ the events of the past month have vindicated our  stance’). One is always left with the impression of an audience seeking to illicit answers from a Bank reluctant to elaborate,  which leaves an unsatisfied taste. A good case in point is OMT, which is regularly raised and is met with the response that all has been explained at some earlier meeting  although if that were the case the question would not arise. The sheer numbers involved in setting ECB rates inevitably makes for differing views in the Council and that may explain the President’s  caution in response to some questions but at times the dichotomy between the Bank’s  current stance  and its stated policy aims is glaring; the ECB is  forecasting inflation in 2015 at 1.3%, for example, which does not appear consistent with its definition of price stability (‘below but close to 2%’) and implies monetary policy is too tight, even after the recent rate reduction.

Monetary policy in the euro area is  certainly more pragmatic under Draghi and the ECB has moved a long way from its Bundesbank-centred roots. The  press conference has  also ditched some of  the rituals common in President Trichet’s time, when everyone listened for some key words, like ‘strongly vigilant’, as a signaling mechanism- what’s wrong with saying  that ‘ we are likely to raise rates at the next meeting in the absence of unforeseen events’ rather than use some code?. The questions  also vary in quality and relevance it also has to be said, with some journalists seeking comments on specific country issues which are beyond the remit of the ECB (‘Draghi praises Ireland’s/ Portugal’s/ Italy’s/  stoic adherence to fiscal rectitude’). One final point. President Draghi’s pledge ‘to do whatever it takes to preserve the euro’ was queried by a (German) journalist at one press conference, with the latter pointing out that Governments and ultimately electorates would decide the single currency’s fate. An unusual intervention , highlighting that the ECB is ultimately accountable to the citizens of the  euro area, and that it is their Central Bank.