Coppola Comment

Eurozone inflation is in the doldrums again. After perking up to 1.7% in April, it slumped back to 1.2% in May. According to Bloomberg , this was "lower than expected". But I wonder who, apart from the ECB, really expected anything else. Core inflation has been well below target for the last five years: (chart from Bloomberg) And although the headine HICP measure increased in 2016-18, this was mostly due to the oil price bouncing back from its 2014-15 slump: (chart from Macrotrends) The wild swings in the energy inflation rate can be clearly seen on this chart from Eurostat: It's perhaps not obvious at this resolution, but the movement in headline HICP is almost entirely due to the energy price. In fact comparing the inflation and oil price charts, it is hard to see much justification for the ECB's claim that it started QE in March 2015 because inflation expectations were becoming "unanchored". Headline HICP briefly dipped below zero

Sectoral balances can tell us so much about what is going on in an economy. Especially when they are expressed as a time series, as in this remarkable chart from the ECB : Although it is a time series, this is not a rate-of-change chart. The y axis is in billions of Euros, not in percentage growth rates. But the chart nevertheless shows that Eurozone net saving has risen steadily since the financial crisis, except during the Eurozone crisis of 2011-12 when it dipped slightly. What do we mean by "net saving"? The legend appears to conflate saving with investment, and the brief explanation at the bottom of the chart doesn't really help. So here's some simple algebra to sort it out. In national accounting, "saving" is the excess of income over desired consumption. For the private sector, it looks like this: S p = Y - T - C where Y is the net income of the private sector from all sources, T is tax payments, and C is all other consumption. Thus, &q;

Over at Bruegel, Zsolt Darvas takes the ECB to task for systematic forecasting errors in the last five years. He shows that the ECB has persistently overestimated inflation and unemployment, and on this basis he questions the ECB's decision to end QE in December 2018. I share his concern that the ECB has tightened too soon, though as the ECB's QE program is seriously flawed and very damaging, I am not sorry to see the back of it. But I think that in focusing on the last five years, he has underestimated the scale of the ECB's failure. Here is his lovely chart showing Eurozone inflation since the creation of the Euro: The ECB's persistently high forecasts in the last five years are painfully apparent. But what interests me is not the forecasts, but the outturns. The entire chart shows a marked downward trend. Inflation in the Eurozone has never been stable. Not once, in its entire history. What the chart shows is systematic policy failure by the ECB. It has ne

I always find the views of former policymakers fascinating, not least because of their tendency to become much more outspoken once they are out of office. Some express much more radical views than they did while in office: Larry Summers springs to mind, and Adair Turner. Others become critical of the institutions that they ran: Mervyn King, for example. The latest former policymaker to reveal what he really thinks is Vítor Constâncio, Vice President of the ECB from 2010 to 2018. In a fascinating lecture at the London School of Economics, he discussed the causes of the Euro crisis, the policy responses to it, and what should be done to prevent such a disaster happening again. The entire lecture is on an LSE podcast (audio only, sadly), but Vítor released four of the slides from his presentation on Twitter, with brief comments . The slide that has attracted the most attention is this one: Many people seem to have interpreted this as some kind of mea culpa. And the slide doe

  "The EU's greatest achievement is the Euro", said Michael Portillo on the BBC's This Week programme last Thursday. No, Michael, it isn't. It is the EU's worst mistake. As Yanis Varoufakis entertainingly explains in an interesting lecture published in the Australian Journal of Political Economy, the creation of the Euro led inexorably to the buildup of unsustainable debt - both private and public - in the Eurozone periphery countries: The problem is that creating a monetary union is a little bit like invading Russia. At first, there is rapid progress, as the French troops, Napoleon or the Wehrmacht found when they stormed the country, taking large tracts of land without much resistance. Then slowly, as the heavy winter sets in, the Cossacks and the Russian partisans start blowing up your convoys. Eventually you end up with blood on the snow and a hasty retreat. Recall the 1920s – after the Great War the Gold standard had created ‘the Roaring 20s’.

Should Greece leave the Euro? That was the title of the Oxford debate at the Prague Summit in which I had the pleasure of participating yesterday. But this is the wrong question. Unless there is a considerable shift in Eurozone politics, Greece WILL leave the Euro - eventually. The question is when, and how. To see this, we need to look at the motivations of all the players involved in the negotiations. The Greek negotiations resemble a "prisoner's dilemma", in which the best outcome for everyone is achieved through collaboration but the participants don't trust each other enough to collaborate. Games are fundamentally psychological, and their outcome is often determined by unspoken or even unconscious drivers. In this case, despite the collaborative rhetoric of the Memorandum of Understanding , distrust and self-interest are the real drivers of the negotiations. In such a situation, true collaboration is impossible and the eventual outcome must be negative f

The Eurogroup (part of which is pictured above) has produced a statement on the outcome of the latest debt talks with Greece. As ever with Eurogroup statements, it confuses more than it enlightens. So here is my attempt at translating Eurogroup-speak into plain English. __________________________________________________________________________________ The Eurogroup welcomes that a full staff-level agreement has been reached between Greece and the institutions.  Phew. We got that through before the Brexit referendum. Also, the Eurogroup notes with satisfaction that the Greek authorities and the European institutions have reached an agreement on the contingency fiscal mechanism, which is in line with the Eurogroup statement adopted on 9 May in particular as regard the possible adoption of permanent structural measures, including revenue measures, to be agreed with the institutions. It therefore provides further reassurances that Greece will meet the primary surplus targets of t

Notes from a talk given at Trinity Business School, Dublin, on 26 th May 20164 Well, it depends what sort of crisis you mean. Have we done enough to prevent a crisis like the last one? Yes. We have scared ourselves so much about the dangers of disorderly bank failure that no way are we going to allow that to happen again – at least, not until we who lived through the crisis, and our children and grandchildren whom we tell about the crisis, are long gone and our legacy forgotten. No-one now would allow a bank like Lehman to fail. We might close it down, but we wouldn’t simply allow it to go bankrupt overnight. We learned from the 2008 crisis that systemically-important banks must not be allowed to fail. And since we do not really know which banks are systemically important and which are not, that means that anything large enough to save, must be saved. Only very tiny banks can fail. The rest will be rescued, one way or another. Most often, banks are rescued by