Italian Elections & German Coalition Result Draw Near, Trump Unveils Spending Plans Amidst Deficit Concern…


Two important events take place in the Euro Zone in just over two weeks time. On Sunday March the 4th, the Italian elections will be held where the ‘anti-establishment‘ Five Star Movement are currently favourites to gain the most votes but not an overall majority. March the 4th is also the day when a result is due on whether members of the German SPD party will sanction a coalition deal agreed with Angela Merkel’s CDU. 464,000 people are eligible to vote.

Beginning with the German situation, SPD leader Martin Schulz resigned on Tuesday in what is being described as a move to stabilize the party and ensure members vote to ratify a coalition deal. An interim leader, Andrea Nahles, has been chosen before a new leader is selected on April the 22nd.

Schulz is the man who in December last year called for the European Union to transform into a ‘United States of Europe‘:

I want a new constitutional treaty to establish the United States of Europe. A Europe that is no threat to its member states, but a beneficial addition.

Opponents to this vision would automatically lose their EU membership. One of Schulz’s key demands was for the EU to be granted a greater level of power in how individual member states conduct domestic affairs. This would inevitably include control over fiscal policy. A fully fledged fiscal union is something that the European Union has yet to establish a consensus on. A monetary union was secured twenty years ago with the creation of the Euro and the European Central Bank (ECB).

Should SPD members reject a coalition with the CDU, a new round of elections will likely be called. As it stands the Alternative for Deutschland (AfD) are the third largest party in the Bundestag (having not had a single representative before last year’s indecisive election). Despite the AfD being regarded as far right, anti immigration and a throwback to Nazi fascism, recent polling suggests they are less than 2% behind the SPD.

In Italy, the Five Star Movement are apparently seeking that the EU consider a restructuring of public debt. According to the FT, Italy’s total sovereign debt stands at €2.3 trillion:

The debt restructuring push is based on a proposal published online by the Centre for Economic Policy Research in 2014. That would involve the European Central Bank helping countries reduce their indebtedness by buying up government bonds and then in effect writing off the debt. Such proposals are likely to unsettle Germany, where many politicians and officials have inveighed against bailing out profligate southern EU states.

One figure who has been pushing the virtues of a fiscal union for many years is Bundesbank chairman Jens Weidmann. With Italy being the third largest economy in the Euro Zone, a destabilization of public debt would impact on the EU as a whole, creating the conditions for a fiscal crisis.

On a wider scale, calls were made last year for widespread reform of the European Union, first by Jean Claude Juncker and then by Emmanuel Macron. Deeper integration was the overriding message. Macron took this a stage further at the recent World Economic Forum in Davos:

We need a stronger Europe. It’s absolutely key. This year will be the year where we have to redesign a ten-year strategy for Europe […] because in this current environment, Europe has a responsibility and a role to play vis-a-vis China and the U.S.

Globalists at both the political and economic levels routinely use the method of gradualism when undertaking reforms to international institutions.  Electorates in the European Union would not accept relinquishing fiscal control of government finances to the EU level without some degree of catastrophe.

Rejection of a German coalition and political turmoil in Italy would play to the perception of a rudderless EU, at a time when Brexit negotiations are ongoing and the ECB edge closer to ceasing assets purchases and raising interest rates. Right now the ECB have little in the way of political distractions to detract away from their behaviour.

As documented in previous posts, central bankers were gathered at the Bank for International Settlements (BIS) at the time of the UK’s EU referendum, and again on the night of Donald Trump’s election victory. The BIS hold bimonthly meetings in Basel (the Global Economy Meeting, the Economic Consultative Committee and the All Governors’ Meeting) that take place on a Sunday and Monday. Judging by former Fed Chair Janet Yellen’s calendar, these meetings appear to take place in January, March, May, July, September and November.

Unfortunately, because the BIS do not directly disclose the timing of bimonthly meetings, we have no way of establishing if on March the 4th central bankers will once again be gathered at a time when significant election results are due.

Therefore, we wait to see if the EU is pushed into a constitutional crisis or if the status quo is resumed.

Reuters: Bank of England’s Vlieghe says further rate rise likely

  • Vlieghe, who was once considered to be the BoE’s strongest advocate for moving slowly on rate hikes, said rapidly rising consumer borrowing, signs of a pick-up in wages and a robust global economy all helped to make the case for higher rates.
  • “A further rise in interest rates is likely to be appropriate if all those trends continue and we are on a trajectory. It wasn’t just one hike in November and then we take a very long break,” he said during a discussion about household debt held by the Resolution Foundation think tank.

Reuters: Bank of England chief economist says “no rush” to raise rates

  • Andy Haldane, on a visit to northeast England, referred to the BoE’s statement after its policy meeting on Thursday that interest rates were likely to need to rise somewhat faster and to a somewhat greater extent than it had previously thought.
  • “We have a very strong eye on inflationary developments, and they’re currently ahead of our target,” the Newcastle Chronicle newspaper reported him as saying.
  • “That’s why we’ve raised rates once already and why … we said that, on the balance of probabilities, it seems likely that some further tightening of policy might be needed over the period ahead,” he added.

Guardian: Interest rate rise would hit millions in UK who depend on cheap credit

  • The Resolution Foundation said almost half of low-income families were in debt distress before Threadneedle Street said last week that it needed to increase the base rate at an accelerated pace over the next two years.
  • A study by the foundation showed the proportion of households in some form of debt distress rose to 45% among the poorest fifth of working age households, with more than a third experiencing difficulty in paying for accommodation and one in six in arrears on either their mortgage or consumer debts.

BBC: UK inflation still at 3% despite fall in food prices

  • UK consumer price inflation remained at 3% in January, the same level as in December.
  • The rate, as reported by the Office for National Statistics (ONS), is close to November’s six-year high of 3.1%.
  • Most economists were expecting a small fall in the CPI to 2.9%.

CNBC: Consumer prices jump much more than forecast, sparking inflation fears

  • U.S. consumer prices rose considerably more than expected in January, fueling fears that inflation is about to turn dangerously higher.
  • The Consumer Price Index rose 0.5 percent last month against projections of a 0.3 percent increase, the Labor Department reported Wednesday. Excluding volatile food and energy prices, the index was up 0.3 percent against estimates of 0.2 percent.
  • Investors also began to price in the likelihood that the Federal Reserve will raise interest rates at least three times this year.

Zero Hedge: Don’t Expect A Central Bank Bailout This Time, ECB’s Nowotny Warns

  • On Sunday, Austrian central bank Governor and ECB member, Ewald Nowotny – in the most direct warning to liquidity addicts and market bulls yet – said “the recent drop in equities is a normalization, a reasonable wake-up signal to show that stock markets can’t just keep rising all the time,” speaking on Austrian television.
  • “Behind [the drop] there is an expectation in markets that central banks will increasingly raise interest rates, and there are certain good reasons for that. The U.S. is expanding. However, one has to say that the task of central banks isn’t to satisfy markets but to ensure overall economic stability. So if necessary, interest rates will have to rise and markets will adapt to that.”

Bloomberg: Powell Suggests Fed to Go Ahead With Rate Hikes Despite Market Turmoil

  • “We are in the process of gradually normalizing both interest rate policy and our balance sheet,” he said Tuesday in the text of his ceremonial swearing-in speech in Washington, adding, “We will remain alert to any developing risks to financial stability.”
  • “Today, the global economy is recovering strongly for the first time in a decade,” Powell said.
  • He said the Fed was moving to normalize monetary policy “with a view to extending the recovery and sustaining the pursuit of our objectives.”
  • “The financial system is incomparably stronger and safer, with much higher capital and liquidity, better risk management, and other improvements,” he said.

Bloomberg: U.S. Budget Director Warns Interest Rates May ‘Spike’ on Deficit

  • The U.S. will post a larger budget deficit this year and could see a “spike” in interest rates as a result, but lower deficits are possible over time based on sustained economic growth from Donald Trump’s tax cuts, said Budget Director Mick Mulvaney.
  • “If we can keep the economy humming and generate more money for you and me and for everybody else, then government takes in more money and that’s how we hope to be able to keep the debt under control,” Mulvaney said.
  • In a separate interview on CBS News’s “Face the Nation,” Mulvaney said rising budget deficits are “a very dangerous idea, but it’s the world we live in.”

Guardian: Trump pledges to fix infrastructure but $200bn plan falls well short

  • Donald Trump unveiled a $200bn plan to fix America’s crumbling infrastructure – a plan that falls woefully short of the trillions civil engineers say is needed to rebuild the country’s tattered backbone and is likely to face intense opposition from Democrats and Republicans.
  • Trump has earmarked $200bn in federal funds to encourage states, cities and private enterprise to rebuild the nation’s dams, roads, bridges, airports and other essential infrastructure. The aim is to encourage $1tn of extra investment.

CNBC: Big-spending budget pact rattles markets, threatens ‘next fiscal crisis’

  • “Fiscal policy could become a drag on the economy by 2020 if Congress failed to agree on a new deal to raise spending levels again, and the previous caps were re-imposed,” economists Andrew Hunter and Michael Pearce at Capital economics wrote in a report for clients.
  • “Furthermore, there is a risk that Congress’ new-found largesse is sowing the seeds of the next fiscal crisis when a recession inevitably hits,” the analysts added.

Zero Hedge: Household Debt Rises By $572 Billion, Ends 2017 At All Time High

  • Aggregate household debt increased for the 14th straight quarter, rising by $193 billion (1.5%) to a new all time high, and as of December 31, 2017, total household indebtedness was $13.15 trillion, an increase of $572 billion from a year ago – the fifth consecutive year of increases – equivalent to 67% of US GDP, versus a high of around 87% in early 2009. After years of deleveraging in the wake of the 2007-09 recession, household debt has risen more than 18% since the trough hit in the spring of 2013.

CNBC: January retail sales post biggest decline in 11 months

  • U.S. retail sales unexpectedly fell in January, recording their biggest drop in nearly a year, as households cut back on purchases of motor vehicles and building materials.
  • The Commerce Department said on Wednesday that retail sales decreased 0.3 percent last month, the largest decline since February 2017.

CNBC: Market drop is a ‘welcome correction’ for the IMF, says Christine Lagarde

  • Speaking to CNBC at the World Government Summit in Dubai, IMF Managing Director Christine Lagarde acknowledged the last week’s frenzied market sell-off, which saw the Dow Jones suffer its worst week in two years. Asked if this was something to worry about from the IMF’s perspective, Lagarde was unfazed.
  • “There has been quite a bit of market volatility from one day to the other, particularly led by the U.S.,” she said. “But if you compare market valuations from a week ago, there’s been a market correction of anywhere between 6 to 9 percent. Which frankly, given where asset prices were — very high — it’s in our view a welcome correction.”

CNBC: Janet Yellen calls stock market, real estate valuations ‘high’ in last interview before exit as Fed chief

  • Yellen said in an interview with CBS News that market valuations are the source of some concern as she headed into private life following a 14-year Fed career, the last four as the chair.
  • “Well, I don’t want to say too high. But I do want to say high,” she said. “Price/earnings ratios are near the high end of their historical ranges.”
  • In addition to elevated equity prices, Yellen also said commercial real estate is “quite high” compared with rents.
  • “Now, is that a bubble or is too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high,” she said.

CNBC: EU regulators warn consumers cryptocurrencies are ‘highly risky’ and unsuitable for investment

  • The European Supervisory Authorities (ESAs) for securities, banking and insurance and pensions said in a joint statement that they were “concerned” about an increasing number of people buying virtual currencies without being aware of the risks involved.
  • “The ESAs warn consumers that VCs (virtual currencies) are highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products,” the regulatory agencies said.

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