Tags: Monetary | Union | Fiscal | Union | Fragile

A Monetary Union Without a Fiscal Union Is a Fragile Dance

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Tuesday, 14 Mar 2017 07:40 AM Current | Bio | Archive

Today was supposed to be the day when the long march to EU exit was declared in the United Kingdom.

However, the Scottish First Minister Nicola Sturgeon rather spoiled that plan by asking for the right of holding a referendum on Scottish independence from the UK.

Investors should keep in mind that the government in Westminster needs to agree to such request.

In clear language, all this means that the divorce proceedings of the UK from the European Union (EU) will likely be delayed till the end of the month so that the proceedings don’t get too entangled in the Scottish divorce request from the older United Kingdom (UK) union.

Maybe, the British government could extend the deadline a day and invoke Article 50 of the Lisbon Treaty on April 1.

For the Scottish request, a dominant economic issue is the same as it was in the last referendum of 2014, namely the consequences of breaking a monetary union.

In recent times, we have learned that a monetary union without a fiscal union is a fragile thing.

For enlightening details, anyone can check how things work today, or are not working today, in the Euro area.

One thing for sure is that monetary union breakups are disruptive as we have seen with Latin Monetary Union (LMU), which was a 19th-century attempt to unify several European currencies into a single currency that could be used in all the member states, at a time when most national currencies were still made out of gold and silver. It was established in 1865 and disbanded in 1927.

Now, how such a disruption would be handled in the event of a Scottish independence is not a simple question to answer, but for investors it is important.

This leaves the global political stage today rather empty. The invocation by the UK of Article 50 was supposed to be the headline act today, to distract investors from the conclusion of the Fed’s Federal Open Market Committee (FOMC) deliberations tomorrow.

Today, the US offers 2 independent distractions today. Firstly, we have the NFIB Small Business Optimism Index and secondly, we have producer price inflation (PPI).

The NFIB Small Business Optimism Index release is an opinion poll and therefore it is, economically/fundamentally speaking, not that reliable.

Never forget, there has been evidence in the past that the results of the NFIB survey have been more influenced by the political views of the organization’s membership than by the economic reality that is theoretically being surveyed.

In a politically charged environment, this is therefore not likely to provide a useful reading of the state of the wider US economy, which is a shame as small businesses are the dominant part of the US economy.

Producer price inflation or PPI is more important as an indication of corporate pricing power. It’s a far better indicator than consumer price inflation or CPI because most companies sell to other companies.

From the Euro area, we just got the German final consumer price inflation number that came at 2.2 percent year-on-year (y/y) in February, compared to a 1.9 percent gain in January and in line with the preliminary estimate. It was the highest inflation rate since August 2012, mainly driven by faster increases in cost of energy and food.

Investors could do well taking notice that German inflation is above target while the trend continuous to rise at a time when quantitative and ECB monetary policy are still influenced by the ECB President Mario Draghi’s addiction to easing.

As a point of spin rather than substance, this situation is likely to be an issue when it comes to central bank rhetoric.

We also got in Germany the ZEW economic confidence survey decreased by 6.2 points in February as a consequence of recent unfavorable figures for industrial production, retail sales and exports as well as political uncertainty.

China’s just released economic data show an economy that was performing, more or less, OK around the start on January 27th of the Chines lunar new year.

Industrial production was in line with expectations and came in at 6.3 percent y/y in February while retail sales grew 9.5 percent y/y in January-February missed market expectations of a 10.5 percent rise.

By the way, retail sales growth number was the weakest on record.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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In recent times, we have learned that a monetary union without a fiscal union is a fragile thing.
Monetary, Union, Fiscal, Union, Fragile
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2017-40-14
Tuesday, 14 Mar 2017 07:40 AM
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