Change of focus

Key points

• The Omicron variant may change the policy conversation as we wait for answers on its aggressiveness.
• We explore the implications of the German coalition agreement for the macro-management of the Euro area.
• The adverse effects of the loose Turkish monetary policy are so obvious a U-turn should have already happened.

For a few months now the pandemic has been considered as sufficiently manageable for the debate to focus on the effects of the “decompression” of our economies upon reopening and ponder the risks of persistent inflation and, as a corollary, discuss policy normalization. The deterioration on the sanitary front in the East and North of Europe due to the delta wave was a hindrance, but generally seen as unlikely to trigger more than a short-term wobble. The detection of a potentially aggressive variant in South Africa – already found in several locations across the globe – changes the conversation. It may take some weeks before we have answers to the three key questions: i) is the Omicron variant more susceptible to trigger severe forms of the disease; ii) is it resistant to existing vaccines and iii)  does it spread faster than “old” versions : if it does, even if it is not more lethal nor resistant it would still call for an acceleration of the vaccination programmes and possibly some short lockdowns where a significant catch-up is needed. While we wait for this, policymakers will have to be very cautious when making key decisions given the need to contemplate the possibility “hard”, growth-busting sanitary measures may have to be re-instated. It is not too much of a problem for the Federal Reserve (Fed), which upon starting its tapering has retained wide optionality. It’s going to be more complicated for the European Central Bank (ECB) which has a crucial rendez-vous with the market on 16 December. We argue that the “prudence” advocated by ECB board member Panetta in his speech last week should indeed prevail.

We also review the implications of the German coalition agreement for the economic management of the Euro area. The best we expected was “constructive silence”. We had a bit more than that, with some openness to discuss a reform of the Stability and Growth Pact. However, it does not seem Berlin is about to break with the Merkelian era’s reactive, rather than pro-active approach to the European economic agenda. Another issue is that the coalition may not have enough bandwidth to engage much on this topic, between a tough domestic agenda and an external platform which could trigger some tension with China, Russia, and the Eastern members of the European Union (EU).

Finally, we take another look at Turkey. There is no doubt for us that the adverse effects of the current loose monetary policy are already massive and should have already triggered a turnaround. We are concerned Ankara could instead choose economic and financial repression (e.g. capital controls and price controls).

The adverse effects of the loose Turkish monetary policy are so obvious a U-turn should have already happened.