Economic developments and forecasts

These are the Key Macro Events for the upcoming week.

Trade between European member states is less intensive than trade between the 50 American states. Consequently, the benefits of scale and specialization remain underutilized, resulting in lower productivity growth compared to the US. One reason for the disparity in trade intensity is the complex regulations that hinder the internal market. The complexity of European regulations is not primarily due to the inferiority of individual member states' regulations compared to those in the US, but rather the lack of harmonization among the member states. Simplifying rules, as the European Commission currently aims to do, does not necessarily resolve this issue. A truly unified, common market with low transaction costs becomes feasible when member states can no longer easily negotiate exemptions or establish additional rules. Therefore, member states will need to relinquish some sovereignty. Furthermore, new regulations should be consistently evaluated for effectiveness (do the rules achieve the intended outcomes?), efficiency (are these outcomes achieved at the lowest possible cost?), consistency (do the rules align with policies in other areas?), and enforceability (can compliance be effectively monitored?). This evaluation task was previously assigned to the European Commission. However, as the Commission's role has become more political, and compromises are often required to strike deals, it is less able to perform this task effectively. Consequently, this responsibility should be assigned to an independent body.

The ECB’s Governing Council decided to cut its policy rates by 25bp, taking the key deposit rate to 2%. The move was widely expected by analysts and priced in by financial markets. The comments in the press conference suggested that the Council considers it is nearing the end of its rate cut cycle. However, we think that further interest rate cuts are still likely. Indeed, we maintain the view that the ECB will cut policy rates further, with the deposit rate reaching 1.5% by September. The ECB’s more hawkish tone does raise the possibility that the rate reductions may take longer than that to materialise, with a pause possible at the next meeting.