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Eurozone cheap money era comes to an end

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The European Central BankThe meeting of the board of directors in Amsterdam is expected to take the first steps to end the negative interest rate policy and end the bond buying program. We dive into four things to watch out for when Christine Lagarde addresses the press this afternoon.

Meanwhile, the block climate agenda suffered a setback yesterday when the European Parliament voted to weaken a number of bills coming for talks with EU governments and the European Commission (although it maintained a complete ban on CO₂-emitting cars from 2035). We will hear from Internal Market Commissioner Thierry Breton, who expressed disappointment at the development.

End of an era

Christine Lagarde will turn to the era of ultra-cheap money in the eurozone later today, when the European Central Bank president is expected to outline plans to stop buying more bonds and start raising them next month. of interest rates, he writes. Martin Arnoldus in Amsterdam.

Most of the ECB’s 25 board members agree that borrowing costs should be increased after inflation hit a record 8.1 percent in the eurozone in May – doubling the previous record and quadrupling the target set by the ECB. central bank.

However, deep divisions remain about how quickly and how far to raise interest rates to bring inflation back under control. As ECB rate setters meet in Amsterdam this week to discuss the next step, here are four things to keep in mind:

  1. Interest rates:

    With the ECB already lagging behind the US Federal Reserve and the Bank of England, the key question for investors is whether it will raise interest rates by a quarter of a percentage point or half when it meets again on July 21. Lagarde is expected to leave the door open. to a larger increase, while still preferring to start in a more “gradual” manner at 25 basis points.

    Whatever Lagarde says about the magnitude of the ECB’s first rate hike since 2011 will be closely watched by investors, with any hint of a more aggressive move risking a bond market sell-off. “If the ECB turns out more aggressive than expected, it could deter market participants,” said Allianz economists.

  2. Purchase Bonds:

    Lagarde has already said the ECB will stop its remaining €20 billion per month asset purchases early next month, meeting a key condition for raising interest rates. Some ECB board members want the ECB to stop buying more bonds immediately, but they are not sure if this will happen.

    Another important question is how long the ECB will continue to reinvest the proceeds of maturing bonds. The Fed has already stopped doing this – shrinking its balance sheet in the process – but the ECB has said it will continue “for as long as necessary to maintain favorable liquidity conditions and ample monetary accommodation”. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said this is “hardly justifiable”, raising the question of how much longer it will take.

  3. New tool:

    The key question for investors is what the ECB will say about its plans to address the risk of panic in bond markets once it starts raising interest rates. The difference – or the spread – between what Germany and Italy each pay to borrow over 10 years has already risen to its all-time high since bond markets fell at the start of the pandemic in 2020.

    Lagarde has said “if necessary, we can design and deploy new instruments to ensure the transmission of monetary policy”, which is expected to mean buying the bonds of highly indebted southern European countries to avoid any sudden rise in the borrowing costs that threaten to trigger a debt crisis. Several rate-setters support adding a similar commitment to the policy statement it publishes on Thursday without giving more details about the mechanics.

  4. predictions:

    There is broad consensus among economists that the ECB will lower and raise its growth forecasts for inflation over the next three years. Berenberg’s chief economist, Holger Schmieding, underlined how severely recent price pressures have been underestimated and predicted that the ECB would raise its inflation forecast for 2022 by nearly 2 percentage points to 7 percent for the second consecutive quarter.

    Investors will also want to monitor whether Lagarde is placing more emphasis on the upside risks to inflation or the downside risks to growth. The former will be an aggressive signal that yields may need to rise higher than investors expect, while the latter will send a more moderate message.

Chart du jour: challenge in the left field

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Emmanuel Macron’s former far-left challenger in the presidential election, Jean-Luc Mélenchon, has taken advantage of public disillusionment with traditional politics to left alliance that could win a large share of seats in this month’s National Assembly elections and mess up Macron’s legislative agenda.

weakened hand

Industry Commissioner Thierry Breton was one of the first to respond to disappointment when the European Parliament weakened its own position ahead of upcoming negotiations on legislation that aims to cut the bloc’s carbon emissions by 55 percent by 2030, writes Andy Bounds in Brussels.

The main piece of legislation that parliament wants to water down involves expanding a current system that makes heavy industrial polluters pay for their carbon emissions. The European Commission had proposed extending that system to commercial and private real estate, in an effort to accelerate efforts to increase the energy efficiency of buildings.

But given current pressures from rising inflation and record high energy prices, parliament voted yesterday to exclude homes from the emissions trading system (ETS).

MEPs were also unable to agree on the introduction of a carbon border tax – designed to make importers pay the EU for their emissions – and the creation of a social climate fund designed to mitigate the effects of carbon pricing. on poorer households.

The French commissioner told reporters he also had “some reservations” about extending the ETS to housing (think of the yellow vests movement fueled by a climate-related fuel tax?). But in the end, Breton said, he supported the commission’s proposal because “the green deal is extremely important.”

While parliament passed a blanket ban on internal combustion engines from 2035, Breton hinted at possible compromises in the future, as 600,000 jobs in the sector were at stake. Breton also pointed out that other parts of the world would continue to buy internal combustion engines.

“Europe must continue to produce some key components for thermal motors that you will sell outside of Europe. It’s extremely important to help the ecosystem transition smoothly,” he said.

Breton also reiterated his call on Europe to secure the essential minerals for the production of batteries, solar panels and wind turbines, including by mining them at home. After the summer holidays, he comes up with a proposal. “It’s more critical than ever.” In some cases, such as magnesium, the EU is almost completely dependent on China. “We will need 15 times more lithium by 2030,” he said.

What to watch today?

  1. ECB Governing Council meets in Amsterdam

  2. Justice ministers and the internal market ministers individually meet in Luxembourg

Remarkable, Citable

  • Merkel’s response: Former German Chancellor Angela Merkel has spoken publicly about the war in Ukraine for the first time since her resignation, defending her Russian position in statements that sparked strong reactions from Ukrainian officials.

  • Regret, but no regrets: On his maiden trip to Kinshasa, Belgium’s King Philippe expressed “deepest regrets for the wounds of the past”, but waived a formal apology for his country’s decades of brutal colonial rule in what is now the Democratic Republic of the Congo.

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