For starters, the European Central Bank’s “outright monetary transactions” program has been incredibly effective: interest-rate spreads for Spain and Italy have fallen by about 250 basis points, even before a single euro has been spent to purchase government bonds.
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The Eurozone's Delayed Reckoning by Nouriel Roubini - Project Syndicate - 0 views
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The introduction of the European Stability Mechanism (ESM), which provides another €500 billion ($650 billion) to be used to backstop banks and sovereigns, has also helped, as has European leaders’ recognition that a monetary union alone is unstable and incomplete, requiring deeper banking, fiscal, economic, and political integration.
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But, perhaps most important, Germany’s attitude toward the eurozone in general, and Greece in particular, has changed. German officials now understand that, given extensive trade and financial links, a disorderly eurozone hurts not just the periphery but the core.
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GDP continues to shrink,
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Moreover, balkanization of economic activity, banking systems, and public-debt markets continues, as foreign investors flee the eurozone periphery and seek safety in the core.
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Likewise, competitiveness losses have been partly reversed as wages have lagged productivity growth, thus reducing unit labor costs, and some structural reforms are ongoing.
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either the eurozone moves toward fuller integration (capped by political union to provide democratic legitimacy to the loss of national sovereignty on banking, fiscal, and economic affairs), or it will undergo disunion, dis-integration, fragmentation, and eventual breakup.
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but countries like Germany, which were over-saving and running external surpluses, have not been forced to adjust by increasing domestic demand, so their trade surpluses have remained large.
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German leaders fear that the risk-sharing elements of deeper integration
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imply a politically unacceptable transfer union whereby Germany and the core unilaterally and permanently subsidize the periphery.
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Of course, Germany fails to recognize that successful monetary unions like the United States have a full banking union with significant risk-sharing elements, and a fiscal union whereby idiosyncratic shocks to specific states’ output are absorbed by the federal budget. The US is also a large transfer union, in which richer states permanently subsidize the poorer ones.
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These are key features, built into the over-representation of the poorer, smaller, more agricultural, states; as well as in the central institutions.
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But the fundamental crisis of the eurozone has not been resolved, and another year of muddling through could revive these risks in a more virulent form in 2014 and beyond. Unfortunately, the eurozone crisis is likely to remain with us for years to come, sustaining the likelihood of coercive debt restructurings and eurozone exits.
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Merkel's good politics and bad economics - FT.com - 0 views
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the ECB gears up to go full throttle into a business that, according to its statutes, is verboten: buying the debt of member states.
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Of course, Mr Draghi mumbles about conditionality: cheap cash only in exchange for deficit-slashing and market reforms. Sure. And when Mr Monti and Mariano Rajoy, Spanish prime minister, instead bend to the wishes of their electorates, what then? Will Mr Draghi stop buying and let their bonds go through the floor? Of course not. You do not have to be a central banker to predict the obvious: no market pressure, no reform.
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The ECB is about to turn into a money machine, into a lender of last resort, and damn the treaties that mandate an inflation-fighting commitment to “price stability”. The magic phrase now is “capping bond yields”, meaning the ECB buys up the debt of Italy and others in order to depress their borrowing costs.
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Look beyond the debt crisis and take the longer view. European growth has been slowing for 40 years. During this period its share of global gross domestic product has shrunk by 10 percentage points; that of the US has held steady.
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Otmar Issing, the ECB’s former chief economist, recalls how, before 1981, “the Italian Treasury set yields for government debt. All the bonds that couldn’t be sold at that price had to be bought up by the Banca d’Italia.” Hence easy money, exploding debt, double-digit inflation – and no change in the country’s frozen politics. Why reform when you can always devalue?
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After the fall of the Berlin Wall, chancellor Helmut Kohl offered the D-Mark to President François Mitterrand in exchange for French acceptance of German reunification. This noble gesture of self-containment was not, of course, an entirely selfless act. As part of a hard-headed bargain in return for giving up the symbol of German economic primacy, Europe’s monetary and fiscal policy would be “Germanised”.
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Mr Weidmann is right to fear the moral hazard contemplated by the ECB and its lackadaisical allies from Madrid to Berlin.
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"Which Eurobonds?" by Jeffrey Frankel | Project Syndicate - 0 views
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Any solution to the eurozone crisis must meet a short-run objective and a long-run goal. Unfortunately, the two tend to conflict.Illustration by Paul LachineCommentsView/Create comment on this paragraphThe short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio). Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.CommentsView/Create comment on this paragraph
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it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.
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The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly. There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities.
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But Germany remains opposed on moral-hazard grounds: a joint guarantee of Eurozone members’ liabilities would strengthen individual national governments’ incentive to spend beyond their means.
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The German Council of Economic Experts has proposed a European Redemption Fund (ERF). The plan would convert into de facto 25-year Eurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP.
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But this seems upside down.
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it offers absolution precisely on the 60%-of-GDP margin where countries will have the most trouble resisting temptation.
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the main explanation for the absence of US moral hazard is that the right precedent was set in 1841, when the federal government let eight states and the Territory of Florida default.
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Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk.
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Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have been avoided.
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the expansion in the US took place at the federal level, where spending today amounts to 24% of GDP, compared to just 1.2% of GDP for the European Union budget.
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The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status.
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The point is that the enforcement mechanism would be truly automatic: market interest rates would provide the discipline that bureaucrats in Brussels cannot.
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Of course, the eurozone cannot establish a blue-bond regime without first solving the problems of debt overhang and troubled banks. Otherwise, the plan itself would be destabilizing, because almost all countries would immediately be in the red.
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But one thing seems clear. German taxpayers, whose longstanding suspicion of profligate Mediterranean euro members has been vindicated, will not be happy when asked to pay still more for the cause of European integration. At a minimum, they will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.
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Utilities Switch Off Investment in Fossil Fuel Plants - NYTimes.com - 0 views
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utilities switch investment fossil fossil fuel fuel plants
shared by Gene Ellis on 10 Jan 14
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workers at the large power station known as Keadby 1 are preparing to shut it down at the end of the summer, with the loss of about 40 jobs.
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fluctuations in global energy markets have made the natural gas power plant unprofitable
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It has also delayed new energy investments and is planning to close almost a quarter of its fossil fuel power plants,
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European energy companies, struggling to respond to weak demand in a flatlining economy, say they need guaranteed pricing to keep open unprofitable plants or to invest in new ones.
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Their revenue is being hit by dwindling demand for electricity and by new wind and solar projects that undercut the price of the energy produced from many fossil fuel plants.
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At the same time, record-low prices on carbon emissions trading markets, which were introduced to encourage clean and efficient energy production and use, have perversely become a disincentive to investment.
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Many of the Continent’s aging power stations, particularly those that burn highly polluting coal, are earmarked for closure by 2020 to meet stringent local environment regulations.
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Without these investments, industrial companies in Europe may face higher energy prices when local economies eventually recover,
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“Energy utilities are facing a perfect storm,”
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In a bid to generate 20 percent of the European Union’s electricity from renewable sources by 2020, Germany, Spain and other E.U. countries have provided hefty subsidies to wind and solar farms, which now constitute a sizable minority of daily electricity generation, often surpassing the 20 percent target.
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In effect, a cheaper overall form of energy (non-renewables) had to compete with heavy subsidies to renewables, which, once built, had low operating costs. They cannot compete and do not invest, and there are major problems w/investing more in renewables (they are overall more expensive, and they have built-in faults, producing electricity erratically, or during the wrong times.) The high costs of energy also lie with government, who cemented long-term deals with the ex-USSR linking other energy prices to the price of oil. In short, they shot themselves in the foot. Several times.
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Despite the upfront costs associated with green energy projects, they are inexpensive to run. In contrast, Europe’s gas and coal plants, which also provide backup power when renewables cannot operate, need constant spending on fossil fuels.
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European utilities like E.On of Germany have announced plans to shut down less-polluting natural gas-fired plants that have been undercut by dirtier coal-burning generators benefiting from a flood of low-cost coal imports and low carbon emissions prices.
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Policy makers are debating a system of support payments to keep uneconomic power plants open,
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“Without long-term signals of energy prices, investment won’t happen.”
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Some analysts also expect domestic regulators to eventually create financial incentives for companies
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Rent Seeking: The Concise Encyclopedia of Economics | Library of Economics and Liberty - 0 views
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Tullock’s insight was that expenditures on lobbying for privileges are costly and that these expenditures, therefore, dissipate some of the gains to the beneficiaries and cause inefficiency. If, for example, a steel firm spends one million dollars lobbying and advertising for restrictions on steel imports, whatever money it gains by succeeding, presumably more than one million, is not a net gain. From this gain must be subtracted the one-million-dollar cost of seeking the restrictions. Although such an expenditure is rational from the narrow viewpoint of the firm that spends it, it represents a use of real resources to get a transfer from others and is therefore a pure loss to the economy as a whole.
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For India in 1964, for example, Krueger estimated that government regulation created rents equal to 7.3 percent of national income; for Turkey in 1968, she estimated that rents from import licenses alone were about 15 percent of Turkey’s gross national product.