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Europe, Italy

The European Scene

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A cura di Paul Krugman – This is the week we’re supposed to hear the ECB’s plan for monetary expansion; the German media are already howling, with Bild warning that Draghi’s expected actions will reduce the pressure for reform in “crisis-hit countries such as Spain, Greece, Italy, or France.” Above are European long-term interest rates as of close of business yesterday.

So, first of all, look at “crisis-hit” France; investors are so worried about France that they won’t hold its bonds unless offered, um, 0.64 percent, the lowest rate in history. But never mind — everyone knows that the French must be in crisis, because they still believe in social insurance, and besides, they’re French.

Notice also that crisis-hit Spain is now paying a lower interest rate than Britain. It’s surely a higher interest rate in real terms, because Spain faces the prospect of years of deflation. But this should — but won’t — put an end to all the talk about how low British rates are the reward for austerity, and so on.

More generally, those very low rates reflect market expectations that (a) the European economy will remain very weak and (b) that the ECB will continue to fall far short of its inflation target. German 5-year bonds are yielding minus 0.05 percent; index bonds of the same maturity are yielding -0.44 percent. So the market is saying both that there are very few good investment opportunities out there — few enough that paying the German government to protect the real value of your wealth is a good move — and that inflation over the next five years will be around 0.4 percent, not the target of 2 percent.

Will the QE policy turn this around? Unless it’s shockingly larger and more aggressive than expected, it’s hard to see how. Unconventional monetary policy works, if it does, largely by changing expectations; but the markets know this is coming, and are notably unimpressed.

Oh, and the markets don’t believe that the US is immune to these ills. Market expectations of inflation, as embodied in the 5-year break-even, have fallen off a cliff — it’s a bigger decline than the one that preceded the beginning of QE2 in 2010. Fed officials seem weirdly complacent about this, and about the risk that we, too, could find ourselves in a low-inflation trap.

Worrying times.

Fonte: http://krugman.blogs.nytimes.com/2015/01/19/the-european-scene/?module=BlogPost-Title&version=Blog Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

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