The ECB and the riddle of the markets


Probably the biggest surprise of 2013 so far has been the dogged optimism of the financial markets. When the economic news is good, share prices rise. But when the news is bad, they often seem to go up as well.

It's a puzzle for economists everywhere, and there's no better example than this week's hotly anticipated European Central Bank meeting.

"Everyone is so excited about whether the ECB will cut rates," Michala Marcussen, head of global economics for Societe Generale, told me. "You have to wonder why - when everyone also seems to agree that a rate cut will not do much to help the real economy."

The answer to the riddle is that it might not help the real economy, but it's a fair bet that it will help equities. In fact, that is probably why the markets have been rising on bad economic news - because, other things equal, bad news suggests that central banks will keep the markets bathed in super-cheap liquidity for that much longer.

But, you might well ask, doesn't the real economy eventually have to start to reward all that market optimism? Don't European companies eventually have to start delivering the revenue and earnings growth built into all those rising share prices?

That is the big question hanging over the ECB meeting today and over all European policymakers, waiting for any sign that the depressed eurozone economies are on the mend.

Politicians and officials have generally been happy to have the market run ahead of the real economy in the past six months, because they felt that the more positive mood would turn into a self-fulfilling prophesy. Higher confidence would beget lower borrowing costs, which would beget rising lending to companies, which would finally lead to some growth.

Has that happened? Well, the first part of the chain has. Borrowing costs in the distressed economies have fallen for firms and governments.

But not nearly as much as the markets have risen. And that improvement in credit conditions has yet to offset the deflationary impact of continued fiscal austerity, which - if anything - will be greater in 2013 than it was in 2012 in countries such as Spain and Portugal.

Last week, the average unemployment rate for the eurozone as a whole hit 12.1%. It's less than half that figure in Germany - just 5.4%. While in Spain, the rate of joblessness is now pushing 27% - with youth unemployment much higher than that.

Mario Draghi has again made clear in recent speeches that fixing the structural economic problems of Spain and the rest cannot be the job of the ECB. But he has also said the ECB will continue to fight the balkanisation of European finance.


These charts from a recent speech by ECB Vice-President Vitor Constancio show that, although borrowing costs have fallen in much of the periphery when it comes to households and companies, there's still a wide gap between German interest rates and rates at the periphery.

In the jargon, the "transmission mechanism" for the ECB's monetary policy is still impaired, and credit is still crunched in the countries that need it most. All of which may help to explain why market expectations surrounding this ECB meeting have been so high - and expectations among economists are so low.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 92.

    @91.Ivan The Cerebral
    This does not represent confidence in the future of business.

    It represents the hope that the business will be able to continue to pay dividends. As such it is a vote of confidence in that business.
    It might be misplaced confidence, of course!

  • rate this

    Comment number 91.

    When you look at dividends versus deposit interest, the riddle is soon solved,

    Standard Life shares for instance are paying about 5%. Savers are being compelled, by negative real interest rates to find something better and are seeking refuge in shares. This does not represent confidence in the future of business.

  • rate this

    Comment number 90.

    #89 JfH there is nothing alarmist about the report on endowment mortgages. What it shows is a small problem: 260,000 with no plan for repayment, and a much larger group of people who have a plan, although may be underestimating. Many of the interest only mortgages still have over 15 years to run so even small monthly overpayments make a big difference

  • rate this

    Comment number 89.

    88 +

    'House debt' = the £71,000 average mortgage debt of 1/3 of mortgagees!

    'Drop in costs' = reduction in the costs of the masses - a drop in the cost of homes & rents is vital for there to be a recovery.

    Sorry, banks/building society - YOU ARE BUST! You should never had loaned money to people who could not repay (as you did during the noughties etc.)

    Policy is prolonging the Depression!

  • rate this

    Comment number 88.

    On decision making... why zero interest rates and QE can not create jobs!

    Earlier it was said that what is needed is more money in the hands of the masses so that they can spend it and create growth.

    1. If the masses are worried they will save rather than spend any money left (see house debt!)

    2. Free capital makes automation the choice - not jobs

    A drop in costs is the best way to get growth!

  • rate this

    Comment number 87.

    and the banking cabal must keep vanilla assets high whilst they try to unwind the pyramid ponzi that is the derivative market.. difficult with unsigned, hidden contracts that have a fictional mark to market. Poor fundamentals and a bleak outlook, remember, "markets can remain irrational longer than you can remain solvent".. when does the flock start shorting again, JP or GS to roll the ball?

  • rate this

    Comment number 86.

    As I and many have said for the past few years... if you want to know why the banks haven't been lending, look to the froth on the equity and driv markets. QE cash is the answer, simple. Giving gamblers a bank roll normally means that the money ends up on the table...

    Know when to hold 'em, know when to fold 'em... know when to run. They should have been folded in 2008.

  • rate this

    Comment number 85.

    QE proves that govt spending restraints are self imposed
    that monetary stimulus alone cannot unlock entrenched
    weak demand
    driving long term interest rates towards 0% will not put
    more spending power into peoples pockets neither will supporting
    savings help demand
    growth in mass consumer economies depends on spending increasing
    net wages growing but govts can spend what they like as QE show

  • rate this

    Comment number 84.

    the real economy suffers from entrenched weak demand
    monetary stimulus cannot correct this
    whatever it does to help speculation on asset prices
    cheap loans we not yield profits without increased sales
    supply needs demand signals which austerity dampens
    banks holding non performing loans must tighten lending criteria
    govt can spend more and cut taxes so we can spend more
    fiscal stimulus needed

  • rate this

    Comment number 83.

    It is very simple. To make big profits, and profits translate to traders bonus payments, markets have to rise and fall so the traders make sure this happens. There does not have to be a real reason. Some very basic analysis will show values currencies, commodities, etc going up and down cyclically. Why because without these changes there would be no profit for the traders!

  • rate this

    Comment number 82.

    It's simple. Savers and investors have few other options.

    There's no other meaning and it certainly isn't the light at the end of the tunnel. Those who think they see the light at the end of the tunnel have probably gone round the bend.

  • rate this

    Comment number 81.

    There is no riddle. Markets have not been up for six months, they have been up for eleven months. And for pretty obvious reasons. And they will continue to grow.

    QE is there to drive down interest rates and drive up assets. It is working and the march of coordinted QE is growing. The days of big gov and eating the seed corn are over.

  • rate this

    Comment number 80.

    The puzzle for economists appears to be that their training precludes them from noticing that the 'real economy' is comprised of a number of different components. Fortunately I have no training in economics so I've been able to notice components like government; people ie 'consumers'; and business. Business is well managed and doing fine. Unlike government.

  • rate this

    Comment number 79.

    I work primarily for the money. This is a necessity.

    Beyond that, I do work I enjoy. This is my motivation.

    JfH & both get it. Well, some of it.

  • rate this

    Comment number 78.

    Myron was a duck but you have expert knowledge of thevFed, my dear.

  • rate this

    Comment number 77.

    27 Minutes ago

    You don't get it!


    No. You don't get it.
    If a business prospect is profitable, it will get done.
    Money might, at the moment, have no investment opportunities. This does not mean that money is worthless. You can still spend it.
    Have a good time, and don't invest!

  • rate this

    Comment number 76.

    The days when the stock market operations were rooted in the reality of company balance sheets are long gone. What part of 'casino market' do the economists not get? They've been inventing more and more wierd and wonderful instruments to add spice/risk to the basic activity of buying and selling. They don't particularly need the balance sheets any more.

  • rate this

    Comment number 75.


    The other bad error that you make is in how real investment decisions are made, and employment.

    Always there is a flexible mix of automation/employment. Free money kills jobs and maximised automation. This means that workers do not have money to spend, as they don't get jobs, and so the economy continues to go down and down.

    Rates must rise BEFORE we get a recovery.

    4% now = recovery!

  • rate this

    Comment number 74.


    You don't get it!

    Nobody will run a business, will bother to run a business, for nothing!

    The something they want is ALWAYS evaluated in terms of MONEY, either in a plan or as an outcome.

    When Money is virtually worthless there is no incentive to invest. Ditto for as long as money is WORTHLESS there will be very little investment.

    The idiots in the BoE, like you, don't get it!

  • rate this

    Comment number 73.

    But don't forget that FTSE is not inflation adjusted so it is still well down on 2008 levels even at 6400


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