With summer over, Italy is back at the forefront of the news – this time not as a holiday destination but in its other capacity, as chief source of market worries. The way things are going, the worries are only just beginning.
When the bank of central banks warns about financial stability, you have to take notice — even if the warning comes in the Bank for International Settlements usually dry, academic style.
The BIS recently published a paper about the effect of prolonged interest rates on financial stability, and it makes worrying reading. (However, as most people are on holidays in August, unless they are reading it on the beach it will largely go unnoticed).
Speeches and releases from various European Central Bank officials don’t make the best summer reading, that’s for sure. But it might be a good idea to go through a couple of recent ones, which give a hint of what the future might bring.
If Britain goes ahead and leaves the European Union in March next year as a consequence of the referendum held in June 2016, the positives of such a move would be greater for the EU than for the UK.
As the major central banks are slowly retreating from their policy of asset purchases, we will probably witness some of the side effects of this withdrawal.
Warren Buffett famously said that “Only when the tide goes out do you discover who’s been swimming naked.” The tide is going out only slowly, but we are beginning to see, at least in the UK, the damage the ultra loose monetary policy has done.
What a spectacular lesson the first half of the year delivered for investors. At the beginning of the year, it looked like the UK’s vote to leave the European Union was a great idea: the eurozone seemed on the brink of disintegration.
The European Central Bank (ECB) will find itself the only game in town soon. It is the only major central bank still buying bonds hand over first, and therefore it is dictating the pace for private investors.
Beyond the depressing, backward-looking policies that the Brexit vote and the election of Donald Trump as US president seem to have brought, there is a ray of hope.
People elsewhere in Europe, seeing the first ugly consequences of populism, might find enough motivation to go to the polls in elections just to try to keep populists out of government. I am talking about the decent people who are tired of politicians but aren’t seduced by the populists’ siren calls.
This is going to be a crucial year for the European Union. There are more and more voices predicting its disintegration. With the political events that are ahead, it’s not a possibility that should be taken lightly.
Politics are back in play in most of Europe, and this doesn’t bode well for central bankers. Even the almighty European Central Bank had a moment of weakness last week, when it broadcast a message so complicated to markets that it should not be surprised it fell wide of the mark.