Free exchange

CHINA'S working-age population fell last year as a proportion of the total, according to figures released by the National Bureau of Statistics last week. Chinese aged 15-64 represented 74.4% of the population in 2011, compared with 74.5% the year before. The statistic prompted one or two stories speculating about the end of cheap China.

But how useful is this ratio as a guide to wage pressures? Note, first of all, that China's working-age population is NOT yet falling in absolute terms. Judging by the NBS figures, it increased by about 3.45m in 2011. In fact, China's working-age population numbered over 1 billion (74.4% of 1,347,350,000) in 2011 for the first time.

China's dependency ratio (the number of Chinese not of working age as a percentage of those who are) is still low, compared with its past or its peers. It was lower in 2011 than in any recent year except 2010. It was also lower than the ratio in all but five countries, according to UN figures.

This is largely because China's one-child policy restricts the number of young dependants a family can add. (The ratio of elderly Chinese, relative to those aged 15-64, has been rising steadily since the mid-1960s.) The one-child policy has kept China's dependency ratio artificially low, but it has also begun to slow the flow of new entrants into the workforce. The number of 15-29 year olds--the nimble-fingered youngsters who man China's assembly lines, stitching, twisting, fixing and stamping--peaked in 2011 at 326.6m, according to UN estimates. That number will fall this year, the UN projects. 

Another telling statistic was divulged by the NBS earlier in the week. It noted that the number of migrant workers (living outside their home province) increased by 3.4% last year. That's a slower rate of increase than the 5.5% recorded in the previous year. As a consequence perhaps, the income of migrant workers rose by 21.2%, the NBS reckons, to 2,049 yuan a month. If true, that's an extraordinary surge. The average increase from 2005 to 2010 was only about 14.1%. Some migrants, at least, had good news to boast about on their return home for the Spring Festival holiday.

REGULAR readers know that my view of the likely outcome of the crisis in Europe is a gloomy one. This hasn't changed. Given a number of positive developments in the euro zone—like fairly successful debt auctions for Spain and Italy, and corresponding drops in bond yields—it's worth keeping a close eye on the situation to make sure that something important and positive hasn't actually happened.

The European Central Bank's introduction of its long-term refinancing operations late last year has had several significant effects on the dynamic in the euro zone. First, it had an immediate impact on the liquidity crunch that threatened to bring down the euro-area banking system. Banks that were having an increasingly difficult time rolling over the short-term financing they need to survive were given the opportunity to borrow huge amounts of money from the ECB at very low rates and fairly long—3 year—durations. Boy did they seize it. the first LTRO provided some €489 billion to European banks. The next round, to take place in February, may involve even more lending. For now, that seems to have removed a major, immediate threat to the euro zone.

Secondly, the ECB's action took the air out of sovereign debt markets at a very fortuitous time. Lots of observers were very worried about the large amounts of debt Italy and Spain were scheduled to sell in the first month or two of this year. Bond yields were at or above unsustainable levels toward the end of 2011, and both Italy and Spain faced the risk of a fiscal death spiral. Intentionally or not, the ECB has helped shepherd these sovereigns through this period (so far, anyway) without adding too much to their long-run financing costs. How?

Well, the sovereigns weren't the only ones needing to rollover a lot of debt early this year; banks, too, were facing a financing crunch. The ECB stepped in to assist in this situation, via its LTRO. And conveniently, it broadened its collateral rules so that banks could gobble up the new Spanish and Italian issuance, take it to the ECB as collateral, and take care of their financing needs. It's a pretty neat little operation, when it comes down to it. Italian banks are estimated to have taken care of about 90% of their financing needs for 2012. Their rush to solve their own money problems helped the Italian government through a tight spot. Based on the way these activities have played out so far, the ECB's LTRO looks like a big success.

My sense, however, is that Europe is a long way from being out of the woods. One problem is that because European banks have provided a lot of the demand for sovereign debt and European banks have already made big progress meeting their financing needs for this year, European bank demand for sovereign debt may be about to dry up. The ECB has bought time for the Italian and Spanish government, which matters, but it won't be long before yields start rising once again. This is of particular concern given that the periphery continues to fall behind stated goals for fiscal consolidation.

A big reason that the periphery is missing those goals, of course, is the dire outlook for the euro-zone economy. So far, it's tough to find signs that the easing of the bank funding crunch has translated into a rise in credit provision to the real economy of the euro-zone periphery. A lot of the liquidity directed to the banks has been parked back at the ECB as reserves. Many banks seem to be deleveraging by cutting loans to the private sector. While that's the case, the euro-zone economy will continue to contract, and a long-term solution to the crisis will prove elusive. Many forecasters anticipate that euro-zone GDP will drop by around 1.2% in 2012 (with much larger declines in the hard-hit south). That could make for a nerve-wracking year.

Control over short-term interest rates is one of the ways the ECB knows that its monetary policy is being transmitted, and so the decline in short-term yields over the past couple of months has been very heartening. Spreads between short-term Spanish and Italian bonds and bunds are still elevated, however, and spreads for Ireland, Portugal, and Greece are huge (Portuguese spreads have gotten much worse in recent weeks). Financial conditions in those countries remain bleak at best.

Taking a step back, the ECB clearly did something momentous and positive late last year, and that's the sole reason we're now able to wonder whether a corner has been turned. The economic situation in the euro zone remains objectively bad, however. There will be a recession this year, there will be further episodes of market revulsion to peripheral debt, and Europe will have a hell of a time trying to figure out what to do with Greece and Portugal. Progress on the underlying fundamentals around the periphery, including growth, deficits, and current account balances, is occuring at a glacial pace. Muddling through isn't out of the question, but muddling through does leave one vulnerable to unexpected shocks.

And it's always the unexpected shocks that ruin the day. I think I'm a touch more optimistic about the euro zone now than I was in November of last year. All in all, that's not saying much.

INFLATION, we're led to believe from an early age, is bad. And sometimes it is. Reckless monetary expansion when an economy is close to potential simply leads to accelerating price increases which can cause anything from moderate economic pain to total economic disaster. But it is widely accepted that a low and stable rate of inflation is a good thing, both because it provides a cushion against deflation in the face of a recession and because it facilitates real wage adjustments in the presence of downward nominal wage rigidities. Further, it isn't clear that a low and stable inflation rate of 5% is really any more problematic than a low and stable inflation rate of 2%.

Several important economies have been reporting new inflation figures this week, and coverage tends to orient itself around the narrative with which we're all familiar and comfortable. Officials in Britain are greeting continued signs of falling inflation with sighs of relief. Annual inflation in the British economy peaked at 5.2% in September and has since fallen steadily, resting now at a 4.2% annual pace. In America, annual consumer-price inflation has fallen from 3.9% in September to 3.0% in December. Annual core inflation seems to have leveled off at 2.2%.

Is this news actually good? There are aspects of the news that are unambiguously good, from the perspective of the domestic economies of America and Britain. Headline inflation numbers have fallen in part because of a moderation in resource prices. That raises household spending power and removes a supply-side constraint on production. It should be good for growth right the way round. But the fall in prices—and declining annual inflation rates do represent an actual slide in many prices over the past few months—spans a broader range of goods and services than those directly affected by, say, the price of oil. And once we start thinking about the dynamics of these developments, the latest inflation news seems a bit less cheery.

Prices, remember, are determined by the interaction of supply and demand. Prices rise when there is excess demand for existing production, and they continue to rise if production is unable to expand in response to the price signal. This is how runaway inflation develops. Consumers find themselves with more money and take it to shops to spend it. If producers have too little inventory to meet demand, prices must rise to clear the market and producers will explore a production increase. If the economy is running at capacity, producers will struggle to raise output; to hire workers away from other firms or to retain their own employees wages must rise. Wage increases put more money in the pockets of workers, who take that money to stores to spend, and on the cycle goes. If the central bank does not intervene, then inflation expectations may rise and the process may accelerate.

If the economy is not at capacity, however, then rising prices will trigger increased production. Supply will rise to meet demand and, if the central bank wishes it, price increases eventually moderate. Moderation may tip over into outright decline; in some sectors, as I mentioned, this is beginning to occur. For prices to fall, there must be too little demand for current output. Falling prices are a signal to reduce production, which some firms may well begin to do. Reduced production might lead to layoffs, which can in turn lead to less money in the consumer's hand, which may in turn lead to further price declines and production cuts. (If prices and wages were perfectly flexible, then employment need not fall—prices and wages could adjust perfectly to ensure that resources are always fully utilised—but they aren't.)

In the long run, in other words, inflation is about the central bank's policy goals (and depending on the central bank's independence, about the conduct of fiscal policy). In the short run, inflation is both the result of shifts in aggregate demand relative to supply and the mechanism by which aggregate demand is increased (and more specifically by which the central bank raises aggregate demand).

Continue reading "Are falling prices good news?"»

THE first two weeks of 2012 have been less newsy than the first fortnight of 2011. The impression of growing stress across much of the world economy is nonetheless inescapable. Trouble is brewing. It's been brewing; it's spilling over the brewpot, for god's sake won't someone stop this damned brewing.

The World Bank provides a big picture take on the shaky world economy today, with the release of its Global Economic Prospects report. Global growth is expected to slow slightly in 2012, and the euro-zone economy is forecast to shrink 0.3% for the year. The chart at right gives a sense of how much darker the global picture has grown over the past 7 months. The outlook for the euro zone has deteriorated most rapidly, but diminishing optimism is quite widespread.

It's quite difficult to read the World Bank report and not conclude that more downward revisions of expectations are likely to occur. It's chock full of looming risks. The euro area is obviously the point of greatest concern, but other regions are vulnerable and may succumb to crisis pressure. Many emerging markets, the report notes, have less fiscal room to battle a slowdown than was true in 2007. Many will also need to finance plenty of their own debt this year, and could find themselves in significant trouble if ongoing euro problems suck more capital back to the continent.

The authors of the report game out two potential downside scenarios to the baseline forecast. One, a "small contained crisis", projects the impact of a serious credit squeeze on one or two small euro-area economies, resulting in a decline in their output similar to that already experienced in Greece. In that case, the world economy would grow by 1.7 percentage points less than forecast, for a net expansion of just 0.8%. In the other case, the credit squeeze impacts two larger euro economies (like, oh, Spain and Italy). In that event, the World Bank says, the euro-zone economy is likely to contract by nearly 6% in 2012, and the world economy will fall back into recession.

During the previous global recession, in 2009, emerging market growth, in China especially, helped prevent a far bigger worldwide collapse. At first blush, that would seem to be a cheery possibility this time around, as well. Just yesterday, after all, China reported year-on-year economic growth in the fourth quarter of 2011 of 8.9%, a bit above market expectations. Most economists expect the slowdown to continue, however, and there are some fears that growth might fall to uncomfortably low levels. The air is coming out of China's housing boom, and a slowdown in construction will knock a healthy chunk off of GDP:

“If they build the same amount (in 2012) that they did last year, which is still a phenomenal rate of construction, then it would take GDP down to 6.6 percent,” said Patrick Chovanec, an economist who teaches at Tsinghua University’s School of Economics and Management in Beijing.

That would be a dramatic slowdown from 2011′s 9.2 percent growth, and it doesn’t even include potential indirect impacts that typically come with a housing slowdown, such as falling demand for building materials or a rise in banks’ bad debts.

Having fired up the investment engine in 2008 to combat the sharp decline in its export markets, China might be unwilling or unable to provide sufficient fiscal stimulus in the event of further global weakening. Monetary stimulus will be forthcoming, but it remains to be seen whether consumers will respond (or will be able to respond) appropriately. The timing of the global slowdown is tricky. China is expected to undergo a broad change in top leadership this year, even as its economy slows to the threshold rate considered safe for social stability. Chinese economist Yu Yongding reiterated this week that growth below 7% would signal economic or political crisis (or both).

Perhaps unsurprisingly, the IMF is seeking to boost its resources and is rumoured to be looking for an additional $500 billiont to $1 trillion in capital. The hope seems to be that if sufficient ammunition is arrayed against the markets, then they'll cease to express their lack of confidence in a successful resolution of the euro-zone crisis. Certainly, markets have been remarkably quiescent in recent weeks under assault from a barrage of ECB liquidity. There are near-limitless opportunities ahead, however, for the euro zone to demonstrate once again that trouble is beyond its management, beginning with a Greek crisis that is once more flaring up. And Europe rarely fails to disappoint.

STATE pensions in American are in trouble.  Just how underfunded they are depends on how you calculate their assets and liabilities. Some estimates suggest the unfunded liability is several times larger than all outstanding municipal debt.

Many states assume that their investments will generate about an 8% annual return. States justify this assumption based on the fact that most of their assets, about 70%, are invested in equity. But whether or not stocks will return 8% is uncertain. If you invested in a well diversified equity fund over the last ten years you’d have been lucky to average 2% annually. And so some critics argue that 8% is almost certainly too high. I am not convinced 8% is necessarily so terrible, however. When estimating the equity-risk premium states should use decades of data because state pension funds have a long investment horizon. And if you estimate the equity premium using several decades of data, you can justify an 8% annual return. Perhaps the equity market has entered a new era with permanently lower returns, but that's unknowable at this point. Based on long history alone, an 8% annual return is not totally crazy.

What does bother me about the 8% assumption, however, is that states don’t adequately account for risk. Average equity returns may well be 8%, but that comes with about a 20% standard deviation. Riskier portfolios do typically pay higher returns, but with the obvious downside of higher risk. What’s outrageous is that states use their expected return as the discount rate when they calculate their liabilities. The discount rate you apply to a series of liabilities is supposed to reflect the likelihood that the payment will be made. It forces you to account for the fact that you still may still have to make payments when markets are down and capital is dear. It’s written into many state constitutions that pension benefits are guaranteed, so benefits are as close to risk free as they come (though there may be scope for states to cut benefits in real terms by adjusting how much they're indexed to inflation). States must make payments no matter what happens in financial markets, even if markets crash and asset values plummet.

The expected return as a discount rate is often rationalised because, the thinking goes, states can always get more revenue from the taxpayer. But this is precisely what troubles me; states are free to invest how they like and all the risk is borne by the taxpayer. It gives states every incentive to use a high return assumption because it increases projected assets and lowers liabilities. They can always justify higher expected returns by investing in riskier, higher yielding assets. Assume a high enough return and your short-fall disappears altogether.

When I researched this briefing on the state pension crisis, no one I spoke to thought that accounting rules actually induced states to take on more risk. That was a few years ago. I wonder if, after states saw their funding ratios decimated in the financial crisis, that’s still true. Lately states seem to have been investing in riskier assets; moving more into private equity.

At the same time, pension plans everywhere are also desperate for yield. Pension plans are reportedly underfinanced by anywhere from $700 billion to as much as $4 trillion, depending on the calculations. Poor returns over the last few years have not helped. Over the last five years, the average state and local pension fund has returned 4.7 percent, according to Callan Associates.

Pension plans hope to make up these lost years and reach performance targets that in some cases are still set at a hopeful 7 to 8 percent a year. Private equity has traditionally been a high-performing asset class, and shifting more assets into this and other alternative investments like hedge funds is seen as a possible solution. Wilshire & Associates recently found that the average pension fund had increased its allocation to private equity to 8.8 percent in 2010 from 3 percent in 2000.

States investing in private equity is not necessarily a scandal. If these are superior assets to which pensioners don’t have direct access, it may be a positive development. But what worries me is the risk and fees involved. The accounting rules give pension funds every incentive to chase whatever asset has the highest expected return and to stick the beleaguered taxpayer with the downside.

THE political situation with Iran has grown much more tense in recent weeks, and especially since the apparent assassination of an Iranian nuclear scientist. Some rich countries are now proposing tightened sanctions against Iran, and Iran continues to threaten to close the Strait of Hormuz, through which some 20% of world oil production passes. James Hamilton provides analysis of the potential impact:

The most likely outcome of an embargo on oil purchased from Iran is that the countries participating in the embargo buy less oil from Iran while other countries not participating in the embargo by more oil from Iran...While this would produce some dislocations, if total world oil production doesn't change, it would have little effect on either Iran or oil-consuming countries, and would basically be a symbolic gesture.

If instead the embargo is successful in reducing the total amount of oil sold by Iran, then the shortfall for global consumers would have to be met by some combination of increased production elsewhere and oil price increases sufficient to bring down global petroleum demand.

As for the first possibility, there appears to be only a limited amount of excess oil-producing capacity at the moment, and certainly far short of the 4.3 million barrels per day that Iran produced in the first three quarters of 2011.

Iran's production capacity represents about 5% of the world total. Mr Hamilton notes that supply disruptions of that magnitude in the past were associated with oil price increases of between 25% and 70%—and with American recessions. The American economy may have become slightly less sensitive to oil price shocks in recent years as consumers reduced their exposure after being burned by the spike in 2008. In general, demand for petroleum would seem to still be fairly price inelastic. And as Mr Hamilton notes, supply is very constrained in the short term. So one interesting thing to note is that Iran could potentially send America into recession all by itself, simply by halting its oil production for a few months. That wouldn't be good for the Iranian economy, of course, but perhaps that's a small price to pay for the smiting of one's enemies, and so forth. America couldn't easily respond with force as it would in response to, say, a nuclear attack. Closing the Strait of Hormuz would be a different geopolitical animal but would, if successful, bring the global economy to its knees.

Brad Plumer offers some additional information:

According to a U.S. Energy Information Administration analysis, a $20 increase in the cost of a barrel of oil — roughly what we saw last year — is estimated to shave roughly 0.4 points off GDP growth in the first year alone and boost unemployment by 0.1 percentage points. So if Iran threatens to close the Strait of Hormuz (through which about 20 percent of the world’s oil flows) and prices start screaming upward from $107 per barrel to $120 or beyond, that would put a very noticeable dent in growth.

What’s more, oil shocks tend to have long-lingering effects. The EIA estimates that a $20 price increase continues biting into the economy for at last another year thereafter. James Hamilton, an economist at the University of California, San Diego, has suggested that the consequences of a price spike can persist for several quarters, as the resulting slowdown in consumer spending takes some time to ripple through the economy. That’s true even if the spike is only temporary and recedes quickly.

Here’s another way of looking at it: In 2011, the United States paid about $125 billion more for oil imports than it did in 2010 (thanks, in part, to the disruptions caused by civil war in Libya). That “oil tax” was essentially enough to wipe out the entire stimulative effects of Barack Obama’s middle-class tax cut. A similar oil spike this year would cancel out a hefty chunk of the benefits of extending the $200 billion payroll tax cut bill that Congress is fighting over.

Dear oil has, in recent years, given a big boost to domestic fossil-fuel production in America, which is increasingly providing a meaningful if modest contribution to GDP and employment growth. Good as that is for the American economic outlook, there isn't remotely enough domestic supply to offset serious production losses elsewhere. To really insulate itself from these kinds of geopolitical hazards, America needs to dramatically improve its ability to substitute away from oil consumption. Progress is being made there, but not enough and not sufficiently quickly.

THE decision by Standard & Poor’s (S&P) to lower the AAA ratings of France and Austria, and to downgrade seven other countries, Italy and Spain among them, earned a string of “Friday the 13^th” headlines this weekend. In truth, there is no new information in the downgrades. Do not look to S&P for contrarian thinking: the rationale for demoting France and the rest is both cogent and unsurprising (read more here).

But the moves do capture the shifting relationship between euro-zone states. The table below shows a snapshot of S&P ratings for euro-zone members at five-yearly intervals since 1995 (ie, before they became members and after). They broadly tell a story of upward mobility until the middle of the last decade, by which time all of the 17 current members of the single currency enjoyed ratings of A or above. All rich-world countries were being buoyed at this time by an apparently benign economic environment, of course, but the ratings also reflected narrowing gaps in the perceived creditworthiness of euro-area countries. This was part of the so-called “convergence play”.

* After January 13^th announcement

Source: Standard & Poor’s

Since the start of the debt crisis member states have dispersed again, with Greece plunging most steeply but everyone visibly scattering. The S&P downgrades have accelerated this process of divergence.

The question is how this pattern will evolve. Earlier in the crisis, it was thought that greater divergence would characterise the euro zone of the future. Member states might share a common currency but they would no longer have convergent borrowing costs. The likes of France would pay less, the likes of Portugal much more.

But the euro zone is now moving towards common rules on fiscal policy as a way of preventing future crises and, in time, quite possibly toward some kind of debt mutualisation. In this set-up, states’ debt profiles, budgetary stance and credit ratings ought to resemble each other more, not less.

So if the euro zone stays together, the logical outcome might be a convergence play of a very different sort. Unlike last time, this is not the sort of convergence where everyone rises towards the level of the most creditworthy member. This convergence will be towards the average, not the top, as the gold-plated states accept greater responsibility for their fellow-members and as ratings take mutualisation into account.

The S&P verdict on France and Austria, and the other member states, could be capturing two very different dynamics, in other words. One is a continued dispersion of euro-zone states as the single currency fragments into individual countries. The other is a recalibration of the point of convergence in a reconfigured euro zone, where the AAA countries are more likely to be dragged down by others than to pull them higher. If so, the loss of France’s AAA rating may be less important than the retention of Germany’s AAA rating. Might Germany need to suffer a downgrade, too, before the euro project can be declared truly safe?

THE short-term outlook for the world economy seems to hinge on whether a resolution to Europe's debt crisis can be found. A resolution, in turn, will be difficult to come by if the euro zone falls back into recession. If output is shrinking and unemployment rising, then austerity measures are likely to make economic conditions worse while raising very little new revenue. The euro zone may fall ever deeper into a hole.

That's an unnerving possibility given the outlook for the euro-zone economy. The euro-zone economy probably contracted in the fourth quarter, according to an analysis of recent data points by Now-Casting, which publishes "real-time" economic forecasts. You can see the information that goes into their forecast in the interactive chart below. A negative fourth quarter has been a real possibility since July. Recent data do suggest that the fourth-quarter decline may not have been as bad as once seemed possible, and output in the first quarter is close to returning to positive territory. Early signs indicate that expansion may be back in the cards as of the second quarter. Moderation in industrial output figures that not long ago were showing big declines helps explain some of the rebound. Improvement in the euro zone's trade balance also helped. Imports were flat in November, thanks to weak domestic conditions. But exports rose, pushing the euro area's November surplus to €6.9 billion, up from just €1 billion in October.

THIS publication is called The Economist, and we take our coverage of the world of economics—both the profession itself and the global economy it studies—quite seriously. The last few years have been very important ones for economics, both because of dramatic activity across the global economy and exciting stirrings within the field, most notably the development of a deep and thriving community of online debate and discussion. This blog—Free exchange—has been a part of both stories. As its contributors have weighed in on the big issues of the day, we've also had a front-row seat for the maturation of a remarkably vibrant world of economics bloggers, tweeters, and commenters.

As an acknowledgment of the growing inseparability between economic debate and the online economics community, we are renaming our weekly print column on the subject. You can read the first instalment of the re-christened column, which covers last week's annual meeting of the American Economic Association, here. It closes:

Technology, at least, is helping to keep the profession more honest. Bloggers, well-represented even among a record estimated attendance of around 11,500 delegates, provide a source of public oversight and a way to popularise neglected ideas. In a session on the increasing importance of the medium, Alex Tabarrok of George Mason University hailed blogging as “the return of political economy”, a reference to the 19th century when economics was more conversational and relevant.

In recognition of this shift The Economist is changing the name of this column from “Economics focus” to “Free exchange”, linking it more closely to our blog of the same name. In economics, as in politics, greater scrutiny can only help.

Here's to continuing the conversation.

THE European Central Bank (ECB) kept its main interest rate at 1% following its meeting on January 11th. Speaking after the decision, the bank’s president, Mario Draghi, was cautious in his assessment of the economy. There were tentative signs of stabilisation in activity but only at weak levels and the downside risks to the economy from financial-market tensions remained “substantial”, he said. The latest money-supply figures, though weak, do not suggest that there is a credit crunch. But such problems can take a while to emerge so credit supply will need to be monitored.  

Mr Draghi was more positive about the effects of ECB’s long-term refinancing operation (LTRO), carried out on December 21st, at which commercial banks were able to borrow €498 billion for three years at a low interest rate. The scheme had been effective, said Mr Draghi. Some markets for unsecured bank lending had reopened. The banks that bid hardest for the three-year ECB loans were often those that had debts maturing in the present quarter, when some €200 of bank bonds are falling due. The operation may thus have prevented a bank-funding crisis.

What is more, there are signs that the borrowed money is flowing around the economy. The ECB’s balance-sheet shows a big rise in deposits held by commercial banks as excess reserves alongside the increase in ECB lending to banks. But Mr Draghi cautioned against a judgment that banks had borrowed money only to hoard it. The more liquidity the ECB provides, the larger the liabilities side of the ECB’s balance-sheet (which includes deposits) must become. By and large the banks that have borrowed from ECB are not the same as those depositing with it, he said. This suggests that much of the borrowed money had first washed through the financial system before being parked at the ECB.  

The flood of liquidity may have helped lower government borrowing costs. Yields on long-dated bonds for Italy and Spain fell sharply today, after successful auctions of bond and bills in both countries. But there was yet not enough evidence to link the fall in long-term rates to buying by banks flush with ECB cash, said Mr Draghi.   

Mr Draghi did nothing to suggest that the ECB is ready to cut interest rates again in February. Monetary policy is already accommodative, he said, but the ECB would respond to worsening conditions. The vote to keep rates steady was unanimous, in contrast to the one on the cut in December. One of the likelier dissenters, Germany’s Jürgen Stark, has departed to be replaced on the bank’s executive board by Jörg Asmussen, previously Germany’s deputy finance minister. The other new face around the table was Benoît Coeuré, formerly a senior official at the French Treasury. Their arrival has not obviously shifted the ECB’s stance towards greater activism. But after a hyper-active meeting in December (when rates were cut and the three-year LTRO was announced) that was not a huge surprise.

TODAY'S recommended economics writing:

• Are we almost out of the liquidity trap? (Paul Krugman)

• Alien employers (David Andolfatto)

• In Greece, fears that austerity is killing the economy (Washington Post)

• A cold wind from Budapest (beyondbrics)

• The special theory of employment, interest and money (Scott Sumner)