David Marsh: How Migrants, UK's exit and Negative Interest Rates Are All Connected

The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think tank headquartered in London. David Marsh: Managing Director, Official Monetary and Financial Institutions Forum (OMFIF) In North-South split in Europe, the winner of one battle could win all three LONDON (MarketWatch) — Three psychological battles over Europe’s future will come to a head in the next few weeks, setting daunting challenges particularly for German Chancellor Angela Merkel, British Prime Minister David Cameron, and European Central Bank President Mario Draghi, president of the European Central Bank. There is a broadly comparable North-South split among allies and combatants in the three tussles — over migration into Europe from neighboring conflict zones, the terms of Britain’s referendum over membership in the European Union, and the ECB’s next monetary easing to boost the economy and weaken the euro. So whoever emerges victorious from Europe’s war of nerves may achieve “winner takes all” status — while losers could be defeated across the board. Merkel hopes a combination of administrative controls, better policing, enhanced cooperation with other EU states and more effective patrolling of sea passages between Turkey and Greece will reduce migrants flooding into Germany ahead of crucial state elections on March 13. Entries into Germany fell to just over 91,000 in January, less than half the November level, although this may largely be due to freezing winter weather. Berlin officials expect an underlying rise in arrivals in coming months as desperate refugees make a last-ditch effort to reach German “promised land” ahead of frontier clampdowns. Cameron will watch for signs that EU concessions on British demands — ranging from migrants’ benefits to safeguards for Britain’s noneurozone status in a EU multicurrency bloc — will translate into better opinion poll data ahead of the referendum penciled in for June 23 . A European leaders meeting in Brussels on Feb. 18-19 is expected to enshrine improvements that Cameron hopes will favor the “stay in” vote, despite a virulent British press campaign against the prime minister’s alleged negotiating shortcomings. However, the U.K. row over migrants obscures a much larger dispute over a Europe-wide redistribution of economic riches and industrial and financial jobs if the U.K. leaves the EU. The euro has been strengthening in recent weeks, and is now as strong as it was when the European Central Bank moved to negative interest rates a year ago. The third conflict — over the ECB’s plans for further cuts in negative interest rates and higher quantitative easing monthly bond purchases from €60 billion to €80 billion to combat low inflation — is furthest from the headlines but could be the most explosive. Pressure is building within the ECB’s governing council to head off expected easing at the next policy meeting on March 10 in view of widespread feeling that low inflation is predominantly due to weak world oil prices that the ECB cannot control. Opposition to Draghi’s stated policy of sticking closely to the ECB’s mandate of achieving near-2% inflation over the medium term is led by the German and Dutch central banks, but appears to be growing among the 19 euro members. Although the hawks are still well short of a council majority, they are sharpening their talons. The opposition focuses on the outlook that, in March 2017, the ECB and its constituent central banks will own more than 25% of all eurozone government debt, subverting the Maastricht treaty ban on monetary financing and reducing pressure on governments to curb borrowing. The three thorny issues are interlinked. The countries most worried about a British exit are largely from the Northern, Central and Eastern European states that are most hawkish about interest rates and migration curbs. In view of these interlinkages, a breakthrough on one set of questions could exacerbate Europe’s North-South creditor-debtor divide. Doubts about the ECB’s commitment to further easing, as well as signs that the U.S. will be less aggressive in interest rate hikes, have led to the euro strengthening this year against the dollar. This is highly unwelcome to the ECB, which informally reckons the main impact of QE lies in weakening the currency — part of a worldwide trend towards competitive devaluations that forms one of the gravest weaknesses of the world economy.

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