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2014/06/04

Deflation risk: What will Europe do?

By Mark Thompson @MarkThompsonCNN

chart european inflation

The last time the European Central Bank cut interest rates, it took investors by surprise. It will be a shock if the central bank doesn't cut them further Thursday.

Expectations of new action to boost the economy have increased sharply over the past month as evidence mounts that Europe's recovery is stuck in first gear.

Growth this year has been disappointingly weak, and France and Italy in particular are hurting.

Last month, consumer prices in the eurozone rose just 0.5%, reinforcing fears of stagnation.

Very low inflation can be as damaging to an economy as excessive price increases.

If households and businesses expect inflation to stay depressed for a long period, they may postpone spending and investment, triggering a downward spiral and raising the risk of outright deflation.

It also makes it harder for countries to pay off debts, and forces weak European economies to make real cuts to wages to compete with countries like Germany.

ECB President Mario Draghi dropped the heaviest of hints a month ago that the bank was readying a variety of weapons to counter those risks.

"The governing council is comfortable with acting next time, but before, we want to see the staff projections that come out in early June," he said.

The ECB will review those updated forecasts for growth and inflation before announcing its policy decisions at 7.45 a.m. ET Thursday.

Draghi said in May the bank stood ready to cut rates or print money through a program of Federal Reserve-style asset purchases if necessary.

The main interest rate has been at a record low of 0.25% since November 2013, the last time rates were cut.

Why is the bond market freaking out?

Public remarks by Draghi and other ECB officials since the May meeting have reinforced expectations that action will be forthcoming.

The euro has fallen 2% against the dollar as a result, bringing some relief to exporters and easing the pressure on prices by making imports more expensive.

So what will Draghi do?

Cutting the main interest rate to 0.15% or even 0.10% looks like a done deal. Many economists also expect the central bank to take a step into the unknown by cutting its deposit rate from zero into negative territory.

That would have the effect of charging banks for parking spare cash with the ECB, in theory providing an incentive to lend that money to firms and consumers instead. But there is a risk that the experimental move could backfire.

There's also a good chance the ECB will offer cheap, long term loans to banks, possibly with the explicit aim of boosting lending to the thousands of small businesses that form the backbone of the European economy and lack access to other sources of finance.

Draghi is likely to stop short of launching a full-blown quantitative easing progam, but will keep the option firmly on the table.

First Published: June 4, 2014: 11:13 AM ET

2014/05/15

Pinch me! Europe grew faster than U.S.

By Mark Thompson @MarkThompsonCNN

European economic growth was weaker than expected in the first three months of 2014, but still managed to outpace the U.S. for the first time in three years.

Gross domestic product across the 18 countries in the eurozone grew at an annual pace of 0.9% in the first quarter, the European Union's statistical office said Thursday.

That compares with growth of 0.1% in the U.S. in the first quarter, when harsh winter weather was blamed for depressing exports, housing and business investment.

Eurozone growth compared with the fourth quarterof 2013 was 0.2%, about half the rate expected by economists, reflecting a weak performance by big countries such as France, Italy and the Netherlands.

But it confirmed that the recovery from the region's devastating debt crisis remains on track, if slow and uneven.

"The best that can be said ... was that at least the eurozone has now managed to grow for four successive quarters, following six quarters of contraction through to the first quarter of 2013," noted IHS chief European economist Howard Archer.

The last time the eurozone was growing more strongly than the U.S. was in the first quarter of 2011, just before the region plunged into its longest recession on record.

Bad weather hit economy hard

In contrast to the U.S., parts of Europe got a boost from the weather this winter -- a factor that will fade in the second quarter.

Germany, the eurozone's biggest economy, grew by 0.8% over the previous quarter, and by an annual rate of 2.3%. The German statistics office cautioned, however, that the extremely mild weather helped drive the acceleration.

The EU does not publish a detailed explanation with its first GDP estimate, but economists said trade may have acted as a brake as exporters find life tougher due to a stronger euro.

Mixed signals from the first quarter, and the prospect of little improvement in the second, will keep up the pressure on the European Central Bank to do more to help stimulate the economy. Risks that the Ukraine crisis could damage business and consumer confidence only cloud the picture still further.

The ECB is already worried about very low inflation and has been dropping heavy hints that a rate cut -- and other measures -- could be forthcoming when it meets on June 5. The euro has already fallen about 4% from recent highs near $1.40 in anticipation of even easier monetary policy to come.

It Is Ugly In Europe

JOE WEISENTHAL

Europe is getting smashed today.

Italian stocks are down 2.5%.

Greece is down 4%.

France and Germany are down, but a bit less.

A few things are going on.

One is that European GDP overall came in weaker than expected. Italy showed an unexpected economic contraction. France is flat-lining. Portuguese growth fell 0.7%. The Greek economy shrank by 1.1%. So suddenly the economic comeback looks fragile.

Peripheral bond yields are shooting higher as well.

Meanwhile, opinion polls in Greece are showing gaining support for both the hard-right and the hard-left parties.

Combine all this with comments last night from hedge funder David Tepper, who expressed nervousness about the market, and you have the recipe for an ugly day.

2014/05/13

Europe's top court supports 'right to be forgotten' in Google privacy case

By Ivana Kottasova, CNN

In a landmark data protection case, Europe's top court said Google is responsible for information it links to.

People have the "right to be forgotten" and search engines like Google must remove certain unwanted links, Europe's top court decided in a surprise ruling Tuesday.

The case, which spotlighted the clash between privacy and freedom of information advocates, centered on a Spanish man's efforts to remove historic links to his debt problems.

In its decision, the European Court of Justice found operators of search engines such as Google were the "controller" of information. They were therefore responsible for removing unwanted links if requested.

"An Internet search engine operator is responsible for the processing that it carries out of personal data which appear on web pages published by third parties," the judges said in a statement about the ruling.

A Google spokesman, in an email to CNN, said the ruling was "disappointing," and that the company needed time to "analyze the implications." Google had previously argued it was only hosting the data and said it was up to the individual websites to remove the data.

The decision came as a surprise to the industry and legal experts, as it ran contrary to the court's Advocate General opinion, whose guidance is usually followed.

"For Google, this result creates a headache -- and potentially huge costs," University of East Anglia Law School lecturer Paul Bernal said. "The ruling looks like a strong decision in favor of privacy and individual rights -- and against the business models of search engines, and certain aspects of freedom of speech."

The case arose in 2010, when Mario Costeja Gonzalez complained to the Spanish Data Protection Agency about an old newspaper notice detailing his social security debts.

The advertisement was placed in a Spanish newspaper by the Ministry of Labour in 1998. It detailed a property auction being held to recover the debts.

Gonzalez argued that he had long resolved his debts and the information was no longer relevant. He complained that details about his old debts were coming up in Google search results, which he said violated his data protection rights.

The Spanish privacy watchdog rejected the complaint against the newspaper, saying it was right to publish the information at the time of the auction.

However, it also said that Google had no right to spread the news about Gonzalez further and ruled that the search engine must remove the link from the list of results. Google challenged the ruling with the Spanish High Court which referred the case up to EU's top court.

International watchdog Index on Censorship said the ruling "violates the fundamental principles of freedom of expression."

"It allows individuals to complain to search engines about information they do not like with no legal oversight. This is akin to marching into a library and forcing it to pulp books." Index said in a statement.

Read more: Authors' case against Google Books dismissed
Read more: Google, don't be secretive
Opinion: Google privacy ruling could change how we all use the Internet

2014/02/05

Google search results changing in Europe

By Alanna Petroff @AlannaPetroff

Google's search results in Europe will look very different after the company agreed to changes that should settle a long-running antitrust case.

Google (GOOG, Fortune 500) has agreed to give more prominence to competitors such as Yahoo (YHOO, Fortune 500), Microsoft (MSFT, Fortune 500) andExpedia (EXPE), according to the European Commission, which regulates business competition in the region.

The Commission said in a statement that Google had guaranteed that whenever it promotes its own specialized search services on its web page, the services of three rivals will be displayed in a comparable way.

The EU's top antitrust official, Joaquín Almunia, said he was happy with Google's latest proposal, and it should put the issue to rest.

"Turning this proposal into a legally binding obligation for Google would ensure that competitive conditions are both restored quickly and maintained over the next years," he said.

Google General Counsel Kent Walker said the changes to operations were significant, and the company looked forward to resolving the case.

Almunia has been investigating Google since 2010, unhappy that the search engine giant gave too much prominence to its own content and blocked out competitors.

A legally binding agreement is expected soon, though competitors still get to weigh in with their views.

A lobby group backed by Microsoft and other tech companies said the proposals may not go far enough, and said they should be thoroughly market tested before Google is let off the hook.

"Without a third party review, Almunia risks having the wool pulled over his eyes by Google," the Initiative for a Competitive Online Marketplace said in a statement.

Why Google wants robots

Almunia said in December that Google was running out of time to settle the case, indicating he might be ready to penalize the company.

The Commission has the power to impose fines of up to 10% of a company's global sales.

The U.S. government concluded a similar two-year investigation into Google in January 2013 with a ruling that the search engine company did not breach U.S. antitrust laws.

The outcome of the EU case means that Google search will look quite different in Europe compared to the U.S.

Google is still facing another EU investigation over its Android operating system, with competitors worried it is monopolizing the mobile marketplace and controlling consumer data.

2013/10/18

Christine Lagarde warns against 'complacent' Europe

The head of the International Monetary Fund is warning European governments against complacency despite the region returning to growth earlier this year for the first time since 2011.

Speaking at the Fund's headquarters in Washington DC, managing director Christine Lagarde told CNN's Richard Quest that member states cannot afford "fatigue" on their commitments to create jobs and to shore up the region's banks.

"They need to move on with the European banking union," she said, "continue structural reforms so their economies can unleash growth and create jobs."

Lagarde's comments come after the eurozone economy grew 0.3% in the second period of this year following six consecutive quarters of contraction.

Europe out of limelight

Europe has been spared some market scrutiny recently, as headlines shifted to the U.S. debt ceiling negotiations and the Federal Reserve's bond-buying program.

Europe's energy challenges

Solving Portugal's economic woes

Lagarde said that leaders in the currency union will be eager to remain out of the limelight.

Is Serbia ready for EU membership?

She told CNN: "[In the past two years] I don't think there has been a single G20 or IMF meeting without the eurozone being at the center of the debate and they don't want that to happen again."

Lagarde added: "If they want that to last they have to continue doing the work that they have started."

Since the crisis began, European governments have had to contend with spiraling borrowing costs and state bailouts as nations struggled to repay their debts.

In four years, Greece, Portugal, Cyprus and Ireland have received over 400 billion euros ($534 billion) in bailout packages from the euro-area's rescue funds.

And last year European finance ministers approved a 39.5 billion euro ($51.6 billion) lifeline for Spain's banks, struggling after the property bubble went bust.

In return for state aid, creditors have imposed strict rules on debtor nations, forcing them to carry out harsh austerity measures.

However, that strategy has come under question. Mujtaba Rahman, Europe director at Eurasia Group, said Germany may believe austerity is working but "clearly there's a strand that believes otherwise."

Some eurozone economies, he noted, believe they have improved after easing off on austerity.

Tackling youth unemployment

Lagarde, a former French finance minister, also highlighted youth unemployment as the biggest priority on the policy-making agenda.

She said: "Countries have to do their job; the IMF will help the process as well so we have to partner goodwill, the money available and political determination to focus on the right issues."

Youth unemployment in Spain and Greece is above 50%, where strict austerity programs are in place, while rates in Portugal, Italy and Ireland are all above 30%.

Widespread unemployment has led to anti-austerity protests in the worst-hit nations with many demonstrations turning violent.

But Rahman believes that youth unemployment is a problem that must be tackled by domestic governments rather than at the European level.

He added: "It's clear that politicians are not willing to mobilize a large amount of resources within the EU budget to tackle the problem of youth unemployment, not in a meaningful way."

He added: "At the margin there may be a commitment do something but this isn't meaningful."

CNN's Oliver Joy contributed to this report

2013/06/03

Has Europe given up?

By saying it's officially OK to skirt debt ceilings, Europe is abandoning austerity and reigniting the risk of another sovereign debt crisis.

By Cyrus Sanati

FORTUNE -- Europe's largest economies shouldn't be able to skirt European Union debt ceilings rules just because it's "too hard" or "unpopular." To do so would not only be hypocritical, as they have insisted on crippling austerity measures in much smaller and more vulnerable EU member countries in the past, but it is also dangerous, as it risks reigniting the sovereign debt crisis.

It is still possible to have economic growth while pursuing belt-tightening policies if meaningful structural reforms are made -- something that the big European economies have been slow to recognize.

The result of such inaction has been overblown deficits and negative growth -- a trend that will surely continue if Brussels allows countries too much leeway as they have recently done this week. Failed promises and unrealistic fiscal targets just won't cut it anymore. While the markets have cut the EU some slack post-Cyprus, it has proven to be mercurial in the past. It is much better to take reforms on now when it is calm than to do so under pressure from an angry market.

It has been over three years since the European sovereign debt crisis paralyzed the continent. While there has been much progress made in fixing the fiscal imbalances in Europe's periphery, such as in Greece, Portugal, Spain, and Ireland, Europe's core, namely France, Italy, the Netherlands and Belgium, have failed to take on the tough reforms necessary to have a meaningful impact on their own fiscal mess. While the periphery had a much larger hill to climb in respect to pension, labor, and tax reform, the time has come for the core countries to follow suit and align their fiscal policies to match their economic output.

MORE: Lloyd Blankfein is wrong about Europe

From the inception of the euro, member countries have been required to adhere to a number of fiscal measures to ensure the strength and stability of the single currency. The most important measure was the so-called stability and growth pact, which stated, among other things, that a nation could not run a budget deficit that exceeded 3% of its GDP in any given year. If a nation broke that rule there would be consequences, ranging from fines to ejection from the monetary club. But in the decade leading up to the sovereign debt meltdown, Brussels failed to seriously enforce this key rule. As a result, pretty much all EU states, including supposedly prudent ones, like Germany, consistently ran deficits exceeding the 3% rule. This eventually led to an unbalanced and debt-ridden eurozone.

The 3% threshold seems like an arbitrary line in the sand, one that some believe should be seen as a goal rather than a threshold. But given the troubles of the last few years, that line has come to symbolize to the markets and sovereign debt investors the true creditworthiness of a nation.

It is no surprise that those nations that had consistently run afoul of the 3% threshold are the same ones that have faced the wrath of the bond market vigilantes. Greece, for example, never ran a deficit below 3%. Its budget deficits in the decade or so since it joined the euro have ranged from 4.5% in 2001, the first year it joined, to as much as 16% in 2009, the year it started to melt down. Ireland seems to have taken the prize, running a budget deficit of 31% of its GDP, more than 10 times that of the threshold, when the government decided to take on the bad debts of its banks to avoid a total economic meltdown.

The periphery has a long way to go to get their fiscal houses in order, no doubt, but many have made great progress. Ireland, for one, was successful in lowering its debt levels to 7.6% of GDP in 2012. But for others, namely Greece and Portugal, harsh austerity measures imposed by their richer neighbors in the core of Europe have caused their GDPs to shrink to such a degree that it has made their budget deficits jump even after massive cuts in government spending. This has led some leaders in the core of Europe to say that austerity isn't the answer to solve the eurozone's problems. As a result, governments in France and Italy have reversed austerity measures and tax increases implemented by former, more prudent, regimes, in an effort to prove their theory.

MORE: Former Treasury official: Let's keep running big deficits

The core European nations have far different economic problems than that of their nouveau riche neighbors on the periphery so it is understandable why some are jockeying for a "different" solution. But austerity is still needed in core nations, just not to the extent as was needed in, say, Greece. The core's main problems are legacy issues, namely that of pension and retirement benefits, and inefficiencies dealing with taxation and employment. But unless they get their spending under control, they will never be able to create workable solutions to those long-term issues.

France, in particular, is in need of a total economic makeover, but its leaders refuse to do anything about it. France had a budget deficit of 4.8% in 2012, well above the 3% threshold. But instead of fining or forcing Paris to change its course, Brussels this week gave it a two-year grace period. As things currently stand, France will bust through that 3% threshold again, postingbudget deficits of 3.9% in 2013 and 4.2% in 2014.

Brussels has chastised François Hollande, France's President, for reversing changes to the pension laws instituted by former President Nicholas Sarkozy, who raised the pension age from 60 to 62. As a result, France is expected to have a pension deficit of around 20 billion euros by 2020. While Hollande says his government will reveal pension reforms later this year, it is doubtful that he will propose anything that will go far enough to address this dangerous overhang in the system.

France was just one of the nations taken to task by Brussels for violating the budget deficit rules this week, but it seems to be the only one that lacks a credible plan of action to put the country back on sound economic footing. Hollande has tried to excuse his inaction by saying austerity doesn't work. Unfortunately, praying for growth doesn't work, either. France can easily maintain fiscal prudence if it wanted to, but it is choosing not to. It still has one of the most generous social welfare systems and unemployment schemes in the EU, something that Brussels highlighted this week. Bringing the country in line with its neighbors, which by U.S. standards are already super-generous, is a no-brainer. Raising the pension age and reforming archaic employment laws would go far to increase French competitiveness, which has a much better chance of boosting growth and lowering budget deficits than by reversing pension reforms or taxing your richest citizens at 75%.

MORE: Investors cast doubt on Spain's rosy economic picture

Brussels may be too weak to enforce its own rules, but the markets aren't going to stand for such arrogance indefinitely. The governments of France and other core European nations who are violating budgetary rules are playing with fire. Why would investors continue to park their money with governments that are on a one-way trip to insolvency?

Just because funding costs are low now doesn't mean it will stay that way forever -- the market is fickle, and as we have seen, rates can explode overnight. While such a scenario was deeply troubling when it played out in Greece and Ireland, if it were to play out in Italy and France the results would be catastrophic. There simply isn't a bailout fund or a printing press big enough to keep the likes of Italy and France going for very long. But if the markets see the core nations taking concrete steps to correct their bad budgetary behavior, that will go a long way to rebuilding trust, helping to avoid yet another "crisis."