From Brian Carney’s weekend interview with Bernard Connolly:
…But even if the Greeks were undisciplined, he says, “both the sovereign-debt crisis and the banking crisis are symptoms, not causes. And the underlying problem has been that there was a massive bubble generated in the world as a whole by monetary policy—but particularly in the euro zone” by European Central Bank policy.
The bubble formed like this: When countries such as Ireland, Greece and Spain joined the euro, their interest rates immediately dropped to near-German levels, in some cases from double-digit territory. “The optimism created by these countries’ suddenly finding that they could have low interest rates without their currencies collapsing, which had been their previous experience, led people to think that there was a genuine rate-of-return revolution going on,” he says.
There had been an increase in the rates of return in Ireland “and to some extent in Spain” in the run-up to euro membership, thanks to structural reforms in those countries in the pre-euro period. But by the time the euro rolled around, money was flowing into these countries out of all proportion to the opportunities available…..
Read more at The Weekend Interview with Bernard Connolly: Why the Euro Crisis Isn't Over – WSJ.com.
Good comparison of relative unit labor costs for EZ countries in this article by Paul De Grauwe. Germany is lowest at 85-90. Greece and Portugal highest at 110-115, with Italy, Spain and Belgium next at 105-110. Ireland has made the most spectacular recovery, falling to 95 from a high 115-120 in 2007.
The position of Germany stands out. During 1999-2007, Germany engineered a significant internal devaluation that contributed to its economic recovery and the build-up of external surpluses.
via The eurozone’s double-dip recession is entirely self-made. | EUROPP.
The World Economic Outlook (WEO) presents the IMF staff’s analysis and projections of economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries.
[time: 38 minutes]
From the outside it looks like these [Eurozone] countries are faced with a debt crisis. From the inside it looks a lot more like a jobs crisis. Check out the chart below…….
via There’s No Solving Europe’s Debt Crisis Without Solving the Jobs Crisis – Bloomberg.
Hat tip to @10yearBonds
By GEOFFREY T. SMITH
The ECB will buy in the secondary market only government bonds with remaining maturities between one and three years without announcing any limits in advance, and as long as the government in question is under a program approved by the euro zone.
The measures will primarily benefit fiscally troubled countries like Spain and Italy, which are facing difficulties financing their budget deficits…
via ECB Unveils Bond-Buying Program – WSJ.com.
Simon Wren-Lewis, professor at Oxford University and a Fellow of Merton College, says the ECB failed to undertake quantitative easing at the appropriate time because of mis-diagnosis of the problem:
The story told by many is that the Eurozone crisis is a result of fiscal profligacy in some countries, and the need to put that right quickly because of market pressure. This account misses two essential underlying causes of the crisis, which have to be recognised if a solution is to be found. The first missing element ….. private sector demand was too strong, encouraged by large capital inflows from abroad and real estate bubbles…..The second key feature of the current crisis is also a result of excess private sector demand in periphery countries, and that is a banking crisis.
……There is an underlying pattern behind Eurozone policy errors. They reflect a view that macroeconomic difficulties are primary due to bad government decisions, while private sector decisions within a free market environment do not create problems. Whatever label we want to give this view (Ordoliberal or Anti-Keynesian), it is the fundamental cause of the current Eurozone crisis. Its persistence despite all the contrary evidence allows the crisis to continue and threatens the integrity of the Eurozone itself.
via The work of John Maynard Keynes shows us that counter-cyclical fiscal policy and an easing of austerity may offer a way out of the Eurozone crisis. | EUROPP.
By Ambrose Evans-Pritchard,
9:39PM BST 20 Aug 2012
“A currency can only be stable if its future existence is not in doubt,” said Jörg Asmussen, the powerful German member of the ECB’s executive board. He signalled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law.
via Germany backs Draghi bond plan against Bundesbank – Telegraph.
Only the ECB has the necessary firepower to move the market. Senior German officials say the ECB’s help is what [Italian premier Mario] Monti has really been after all along. The Italian leader is convinced that the June 28 summit provided political cover for the ECB to take bold action, in the knowledge that euro-zone governments—including Germany—won’t oppose it.
“I have no doubt that the night before the disintegration of the euro, the ECB will do whatever is necessary to save it,” Mr. Monti says. “The question is: Do we need to get to the night before?”
via Italian’s Job: Premier Talks Tough in Bid to Save Euro – WSJ.com.
Nouriel Robini on Bloomberg TV: The Euro summit was a failure… markets were expecting much more. Either you have debt neutralization [EFSF purchases of government bonds] or debt monetization by the ECB or EFSF/ESM be doubled or tripled using leverage ….or you will have a worse crisis in the next few weeks.
The ability of politicians to kick the can down the road will run out of steam in 2013…..next year could be a global perfect storm
Bloomberg TV: Roubini Says 2013 `Storm’ May Surpass 2008 Crisis
Christian Rickens: Merkel’s concession is more than compensated for by a diplomatic victory she scored in the run-up to the summit: Late last week, she managed to get new French President François Hollande to sign off on her fiscal pact, which is deeply unpopular in Paris, in return for her support on the €130 billion ($165 billion) European Union “growth pact.”
The inequality of the deal is difficult to overstate. The growth pact is made up of little more than empty promises and dreams that can never come true. Though it won’t spur any growth in Europe, at least it won’t cost Germans any more money either.
Should one be looking for a summit loser, in fact, it necessary to look no further than Hollande. Not Angela Merkel. She merely did what she always does on the EU stage. She made compromises. And pretty clever ones at that.
via Merkel Concessions at Euro Crisis Summit Smarter than they Seem – SPIEGEL ONLINE.
Bruno Waterfield: On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.
…..Under the deal, Spanish banks will be recapitalised directly by allowing a €100 billion EU bailout to [be] transferred off Spain’s balance sheet after the European Central Bank takes over as the single currency’s banking supervisor at the end of the year.
……[and] a pledge to begin purchases of Italian bonds using EU bailout funds to reduce Italy’s borrowing costs with a lighter set of conditions…..
via Debt crisis: Germany caves in over bond buying, bank aid after Italy and Spain threaten to block ‘everything’ – Telegraph.
Anatole Kaletsky: With every day that passes, and especially since the French election, it is becoming clearer that the problem country for the euro—the odd man out in terms of economic structure and the chief obstacle to any political resolution of the euro crisis—is not Greece, Spain or Italy. It is Germany. It is Germany that refuses even to talk about mutual debt and banking guarantees. It is Germany that insists on self-defeating fiscal austerity and intolerable political conditions for the debtor countries. It is Germany that vetoes quantitative easing by the ECB, which could cap bond yields and relieve deflationary debt traps. And it is Germany that makes the other euro countries uncompetitive, discourages devaluation of the euro against the dollar and refuses even to relax its own domestic fiscal policies to reduce its trade surplus and support growth….
via John Mauldin’s Outside The Box
“The single-minded concentration on austerity policy (in the 1930s) led to mass unemployment, a breakdown of democratic systems and, at the end, to the catastrophe of Nazism,” said Ewald Nowotny [Austria’s central bank governor and member of ECB governing council] at a financial conference in Vienna. He added that central bankers during the start of the financial crisis had been very keen to avoid the mistakes of the 1930s.
Mr. Nowotny also cautioned against trying to impose a “moralistic” solution to the euro zone’s current debt problems. “It is not about punishing children who have behaved badly,” he said, adding that it was important not to let the concept of moral hazard turn into an excuse for not taking “practical initiatives.”
via ECB’s Nowotny Cautions Against ‘Single-Minded’ Austerity – Real Time Economics – WSJ.
Greek “final exit polls” please remember these are Greek “final exit polls” suggest that New Democracy and Syriza and Pasok will have 159 seats in the 300 seat Parliament. The important point is to win, as the party with the most votes gets an additional 50 seats in Parliament. Its still pretty close but it looks from the “final exit polls” that there will be a sigh of relief in equity markets tomorrow.
via Greek “final exit polls” suggest a New Democracy/Pasok coalition | The Big Picture.
Chancellor of the Exchequer George Osborne and Bank of England Gov. Mervyn King announced plans to flood banks with cheap funds in a dual attempt to jump-start lending to British households and businesses and to fend off potential financial problems at big U.K. lenders. The programs resemble some of the emergency measures enacted by central banks in Europe and the U.S. during peak crisis periods in recent years.
via U.K. Aims to Mute Impact of Crisis – WSJ.com.
Mark Hulbert: Investors appear to be betting that the Fed and European central banks now have no choice but to stimulate their economies to a much greater extent than previously planned. Since much of that additional liquidity would find its way into equities, the stock market responded favorably.
To put it crudely: The news is so bad it’s good.
via Stock market is saying ‘Don’t fight the Fed’ – Mark Hulbert – MarketWatch.
Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of a eurozone break-up would be astronomically high – for themselves as much as anyone.
After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the eurozone remains the destination for 42 per cent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.
via Berlin is ignoring the lessons of the 1930s – FT.com.
Andy Xie, an independent economist in China, said European countries without a competitive advantage must simply work harder or spend less. Alternatively, if they want to keep living it up, they will have to accept wrenching labor reforms and deregulation.
Xie saw no popular consent for either course of action. Nor did he detect that Europe was tightening its belt as urgently as Asia did after its 1997/98 financial crisis. “While eurozone economies have contracted a bit, people seem to be bent on enjoying life as usual,” Xie wrote in New Century weekly, a Chinese publication. “China cannot save Europe. No one can. Only Europeans can, through increasing work relative to leisure.”
via How Europe Can Save the EU: Work Harder, Spend Less.