Many people assume that politics and economics are separate spheres. We find ourselves often harkening back to the even older tradition of referring to “political economy”. After all it was Harold Laswell, who is regarded as the father of modern political science, that famously defined politics as who gets what, when and how. Isn’t that the role of the price mechanism and the market economy?
The highlight of the holiday-shortened week (Japan on Monday, U.S. on Thursday) ahead are two official meetings. The EU and OPEC. There are three issues at the EU meeting that will be important for investors. First, the new European Commission will assess the 2015 budgets. Although the outgoing commission let France and Italy slide with some financial sleight of hand to improve from their initial offering, the two countries still stopped shy of the previously agreed on targets. If there is truly a new sheriff in town (and we are not convinced there is), France may be subject to a fine up to 4 bln euros or 0.2% of national income for breaching the fiscal rules.
To be clear, this is not a defense of the austerity fetish, rather it is a recognition of the untenable situation. Despite its violations, France has not made a clear break of the ordo-liberal diktat, nor does it enact strong measures to boost aggregate demand. France is neither fish nor fowl, but its goose is cooked as the political elite is intellectually bankrupt, and the National Front are the only ones promising change.
Second, EC President Juncker is expected to unveil a new three-year 300 bln euro infrastructure program of the European Investment Bank that will be administered by local governments. Preliminary reports suggest that the funds will be used to facilitate private investment, but is mostly funds already earmarked. Less than a third is can be considered what the Japanese call “real water”. While we are sympathetic to the idea that what ails Europe is not something that monetary policy alone can fix, the program is far too small of a scale to make much of a difference. It is not even 1% of GDP per annum.
It is also too small given the capacity. With the EIB, European officials have a rare opportunity. Specifically, bonds issued by the EIB, do not count toward any country’s deficit/debt levels. It appears to be a financial black hole. Moreover, as the ECB looks for other assets it can buy to expand its balance sheet, we have suggested that EIB bonds have much to recommend themselves. ECB purchases of supra-national bonds, which include EU, EIB, EFSF, and ESM bonds, would be far less controversial that a sovereign bond purchase program. It would also be much easier to administer than a corporate bond purchase program, which has been floated as well.
