Little clashes at the G-20

link to italian version Is Europe a little and unarmed Pearl Harbour, 2.0? Is it subject of a subtle currency war coming from Japan?

Well, no…keep calm, Weidmann, Schäuble, Asmussen and Draghi go on repeating…

“the definition <currency> war is not proper here, the € is strengthening because of a renewed confidence on the international markets, and the exchange policy can’t be a target of the monetary policy.”

Politicians and diplomats at the G20 are expressing this concept as well, with different words maybe. The mystification lays in the un-distinction between what is not supposed to be done (that is, using a monetary policy for manipulating the exchange-markets) and what is actually happening (the BoJ is expressly and knowingly working for a devaluation of the Yen). They are not supposed to do so, and we all agree on that. But they are doing so.

Now, it is quite clear that if we get it, hence Draghi and co. are actually well aware of the situation – then, let’s classify the statements above as “polite set phrases” or, broadly speaking, as “diplomacy”.

For sure, there’s a fringe considering this phase as the step 1 of an educational path: there’s no possibility of creating growth from debt (and this step is our current bitter lesson), nor from monetary devaluation. Growth must be pursued through reforms, research, innovation, and increase in productivity. The German mark had always been a strong currency – and this hadn’t prevented Germany from being…Germany. Then, from the “Frankfurt perspective”, a € similar to the mark is a great way to educate Europeans to be a little more…Germans.

But it’s necessary to survive in order to get more German – being dead is not an effective way to implement reforms. And what’s going on in Europe, from the sovereign debt crisis on, is that the Eurozone growth came from exports. Hence, watching the BoJ and the FED acting “irresponsibly” and obtaining their goals without raising any objections would be highly self-destructive:

It’s right and proper to be satisfied of the renewed confidence of the markets in the € (Draghi is not lying on this, he’s just…underscoring some aspects and pretending to forget the others), it’s fair to look positively at the banks decisions to go on with the LTRO repayments (we’re well over the 30% of repaid capitals). The fact is, if the ECB Governor said that “this LTRO repayments are not the beginning of an exit strategy from an accommodating monetary policy, supporting growth,” his verbal reassurance clashes with reality – European monetary basis is contracting in some areas and expanding in others.

It’s then reasonable to expect off the records negotiations at the G20 and the ECB to counteract this situation, while it is necessary to show détente, as Angel Gurría (OECD Secretary-General) expressed today:

“American and Japanese monetary policies are justified, their scope is solely supporting growth. There is no currency war. I do not agree with anyone saying there is an ongoing currency war, because the FED is acting for easing its monetary policy in order to get growth for the US. And I do not agree with anyone saying Japan is doing anything different from trying to restore growth. These countries are simply using the tools they have at their disposal.”

What’s the OECD recipe for a country like, for instance, Italy? Let’s have a look at OECD Going from Growth, released today at the Moscow G20:

“Keep up with the labour reform, making hiring and termination easier, shortening the times of legal actions, with a simultaneous realization of the already planned universal social protection network. As well as for labour (which is suffering a “dual market” with an excessive protection for some contractual forms, while the social protection network is fragmented) it is necessary to act on taxes in order to reduce labour costs: tax wedge on low-wage workers is high, as well as tax evasion. Action is require on the school system – suffering poor results in spite of high expenses – on barriers and competition (remarkable public property included) and on a poor law enforcement, which suggests not to accept initiatives as tax amnesties.”

In Italy, the GDP per capita has been contracting for years, being significantly lower than the OECD average value. Italy is at the 19th place out of 34 Member States, 45th at world level – we’re even behind Spain, with its monstrous unemployment rate [document]. It is necessary to find a way out for Italy, to restore a position which would be more suitable for a G7 Member State. One path could be the one suggested by the OCED – protections should be shifted from keeping a workplace to keeping an income, but it’s necessary to move some ships in Pearl Harbour first… 

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About bimboalieno

Operatore finanziario professionale dal 1998; ha collaborato con diverse banche italiane ed estere. Si può scoprire dell'altro cliccando qui. Oggi é responsabile di un centro di Private Banking. Professional financial trader since 1998; he has worked with several Italian and foreign banks. You can learn more here. Bimboalieno is currently in charge of a Private Banking centre.