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Gene Ellis

Financial Crisis Far From Over, Says Outgoing Bank of England Chief - 0 views

hereisthecity.com/...s-outgoing-bank-of-england-chi

undefined financial crisis crisis far says bank england chief

shared by Gene Ellis on 26 Mar 13 - No Cached
  • He said that while the eurozone works for some countries, it was obvious that others were unable to keep up. "There is a basic question: what is the right size for a single monetary policy?" In a clear reference to Greece, Portugal and Cyprus, he said the crisis had exposed countries with weaker productivity and higher labour costs.
  • Blanchard said the powers acquired by central banks created a "democratic deficit" that could eventually lead to social unrest. The situation in Europe was a cause for concern, especially when central banks were put in a position of making crucial decisions that affected millions of people's lives, he said.
Gene Ellis

U.S. Textile Plants Return, With Floors Largely Empty of People - NYTimes.com - 0 views

www.nytimes.com/...-textile-factories-return.html

shared by Gene Ellis on 29 Oct 13 - No Cached
  • The problems in India were cultural, bureaucratic and practical.
  • Mr. Winthrop says American manufacturing has several advantages over outsourcing. Transportation costs are a fraction of what they are overseas. Turnaround time is quicker. Most striking, labor costs — the reason all these companies fled in the first place — aren’t that much higher than overseas because the factories that survived the outsourcing wave have largely turned to automation and are employing far fewer workers.
  • In 2012, the M.I.T. Forum for Supply Chain Innovation and the publication Supply Chain Digest conducted a joint survey of 340 of their members. The survey found that one-third of American companies with manufacturing overseas said they were considering moving some production to the United States, and about 15 percent of the respondents said they had already decided to do so.
  • ...8 more annotations...
  • Between 2000 and 2011, on average, 17 manufacturers closed up shop every day across the country, according to research from the Information Technology and Innovation Foundation.
  • yes, it means jobs, but on nowhere near the scale there was before, because machines have replaced humans at almost every point in the production process. Take Parkdale: The mill here produces 2.5 million pounds of yarn a week with about 140 workers. In 1980, that production level would have required more than 2,000 people.
  • But he was frustrated with the quality, and the lengthy process.
  • “We just avoid so many big and small stumbles that invariably happen when you try to do things from far away,” he said. “We would never be where we are today if we were overseas. Nowhere close.”
  • Time was foremost among them. The Indian mill needed too much time — three to five months — to perfect its designs, send samples, schedule production, ship the fabric to the United States and get it through customs. Mr. Winthrop was hesitant to predict demand that far in advance.
  • There were also communication issues.
  • like moving half-finished yarn between machines on forklifts.
  • The North American Free Trade Agreement in 1994 was the first blow, erasing import duties on much of the apparel produced in Mexico.
Gene Ellis

Europe's work is far from over - The Washington Post - 0 views

www.washingtonpost.com/...2-9f54-f3fdd70acad2_story.html

shared by Gene Ellis on 04 May 13 - No Cached
  • Perhaps it should not be surprising that Europe still looks to be in serious trouble. Growth has been dismal; the euro-zone gross domestic product has been below its 2007 level for six years, and little growth is forecast this year.
Gene Ellis

Europe's Galileo GPS Plan Limps to Crossroads - NYTimes.com - 0 views

www.nytimes.com/...-plan-limps-to-crossroads.html

shared by Gene Ellis on 07 Feb 13 - No Cached
  • Galileo — first proposed in 1994, more than 20 years after America started its own system, and initially promoted as a big potential moneymaker — “can’t give a direct return on investment, but politically it is very important for Europe to have its own autonomous system,” said Mr. Magliozzi of Telespazio.
  • It is also designed to be far more precise than the American version.
  • Galileo has been financed almost entirely by the European Union since 2007. It is the first and so far only major infrastructure project managed by the European Commission.
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  • Critics mocked it as “the Common Agricultural Policy in the sky,” a reference to Europe’s program of subsidies for farmers, which eats up nearly 40 percent of the union’s total budget.
  • A 2011 report to the European Parliament listed a catalog of troubles, noting that Galileo had been particularly blighted in its early years by a familiar problem: political pressure from individual countries to skew the project in favor of their own companies and other immediate interests.
  • It quoted the OHB chief, Berry Smutny, describing Galileo as doomed to fail without major changes and “a waste of E.U. taxpayers’ money championed by French interests.” Mr. Smutny, who disputed the comments attributed to him, was fired by the company.
  • Astrium won an initial Galileo contract for four satellites. But contracts worth $1 billion for 22 more satellites have all gone to OHB, now one of the primary corporate beneficiaries of Galileo. British companies have also done well, a boon that has helped erode Britain’s initial hostility to the project.
  • Washington also asked why, when many European nations were increasingly unable to fulfill their military obligations as members of NATO because of defense cuts, they wanted to splash billions on a project that replicated an existing system paid for by the United States.
  • They acknowledge that Galileo, most of whose services will be free like those of GPS, will not earn much.
Gene Ellis

Analysis: Euro zone fragmenting faster than EU can act - 0 views

www.theprovince.com/...story.html

analysis euro zone faster act

shared by Gene Ellis on 14 Jul 12 - No Cached
  • Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.
  • Many banks are reorganising, or being forced to reorganise, along national lines, accentuating a deepening north-south divide within the currency bloc.
  • Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers.
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  • European Central Bank President Mario Draghi acknowledged as he cut interest rates last week that the north-south disconnect was making it more difficult to run a single monetary policy.
  • Two huge injections of cheap three-year loans into the euro zone banking system this year, amounting to 1 trillion euros, bought only a few months' respite.
  • Conservative German economists led by Hans-Werner Sinn, head of the Ifo institute, are warning of dire consequences for Germany from ballooning claims via the ECB's system for settling payments among national central banks, known as TARGET2.
  • If a southern country were to default or leave the euro, they contend, Germany would be left with an astronomical bill, far beyond its theoretical limit of 211 billion euros liability for euro zone bailout funds.
  • As long as European monetary union is permanent and irreversible, such cross-border claims and capital flows within the currency area should not matter any more than money moving between Texas and California does.But even the faintest prospect of a Day of Reckoning changes that calculus radically.In that case, money would flood into German assets considered "safe" and out of securities and deposits in countries seen as at risk of leaving the monetary union. Some pessimists reckon we are already witnessing the early signs of such a process.
  • Either member governments would always be willing to let their national central banks give unlimited credit to each other, in which case a collapse would be impossible, or they might be unwilling to provide boundless credit, "and this will set the parameters for the dynamics of collapse", Garber warned.
  • "The problem is that at the time of a sovereign debt crisis, large portions of a national balance sheet may suddenly flee to the ECB's books, possibly overwhelming the capacity of a bailout fund to absorb the entire hit," he wrote in 2010,
  • national regulators in some EU countries are moving quietly to try to reduce their home banks' exposure to such an eventuality. The ECB itself last week set a limit on the amount of state-backed bank bonds that banks could use as collateral in its lending operations.
  • In one high-profile case, Germany's financial regulator Bafin ordered HypoVereinsbank (HVB), the German subsidiary of UniCredit, to curb transfers to its parent bank in Italy last year, people familiar with the case said.
  • In any case, common supervision without joint deposit insurance may be insufficient to reverse capital flight.
Gene Ellis

The delicate balance of fixing the eurozone | Martin Wolf's Exchange - 0 views

blogs.ft.com/...balance-of-fixing-the-eurozone

shared by Gene Ellis on 17 Jul 12 - No Cached
  • The euro itself was a leading cause of this crisis by ushering in a remarkably swift convergence in interest rates, which had the effect of directing too much capital into countries that formerly had had to pay high interest rates. This undermined the competitiveness of these countries through inflation and gave rise to huge deficits in their current accounts.
  • The euro is not suffering from a mere confidence crisis that can be resolved by assuaging the markets; it is experiencing a profound balance‐of‐payment crisis that is being prolonged by the expansion of public financial aid.
  • Since autumn 2007, long before the official bail‐out initiatives began, some of the crisis‐hit countries have replaced dwindling private capital imports and capital flight with their money‐printing presses (Target credits).
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  • 5. Export surpluses create no real value if they translate into claims vis‐à‐vis countries which ultimately cannot pay their debts,
  • 6. The ECB Council overstepped its mandate when it transferred to Eurozone national central banks, primarily the Bundesbank, the task of financing the public and private deficits of other countries.
  • 7. Germany’s liability for the bail‐out initiatives does not total 211 billion euros, as often cited, but is actually now close to 600 billion euros if the far larger bailout initiatives of the ECB are included in this figure.
  • 8. The Target credits and the purchase of government bonds by the ECB system transfer the investment risk of private investors and banks to the taxpayers of economically sound countries, posing a threat to the euro because they offer debtor countries incentives to advocate inflationary policies at the ECB Council which would help them defer their obligation to repay their foreign debts.
  • 9. Eurobonds would undermine debt discipline, lead to much higher interest burdens for the German state, and anew induce capital flows in Europe that would exacerbate the external imbalances.
  • ) Target debts are to be settled on an annual basis with interest‐bearing, marketable assets as in the US.
  • g) Countries that are not competitive enough to repay their foreign debts should, in their own interest, leave the Monetary Union.”
  • I also appreciate the fact that the declaration envisages a credit boom in Germany that would ultimately rebalance the eurozone economy. Nevertheless, this rebalancing is likely to prove painfully slow and certainly requires a prolonged period of relatively high inflation in Germany, to offset relatively low inflation in the vulnerable countries. It is far from clear that German public opinion is prepared for such an outcome.
  • More important, I do not believe a currency union that takes for granted the possibility of sovereign defaults and even exit would prove workable. It is a recipe for extreme financial instability, with huge runs on credit to banks, private non-banks and governments built in.
  • mechanisms of financing and adjustment. Permanent transfers from some countries to others, merely to offset a lack of
  • competitiveness (rather than accelerate income convergence), are indeed undesirable. Nevertheless, financing needs to be sufficiently large and generous to give vulnerable countries some chance of managing the adjustment to shocks, without sovereign default, mass private bankruptcies and implosion of financial systems.
  • Gene Ellis on 17 Jul 12
     
    The second major article on Professor Hans-Werner Sinn's attack on the premises of the eurozone. TARGET 2 analysis, plus...
Gene Ellis

The Quality of Jobs: The New Normal and the Old Normal - NYTimes.com - 0 views

economix.blogs.nytimes.com/...-new-normal-and-the-old-normal

shared by Gene Ellis on 20 Sep 13 - No Cached
  • Despite 42 consecutive months of gains in private-sector employment, the unemployment rate is still at 7.3 percent; in December 2007 it was only 4.6 percent. The current unemployment rate is higher now than in 2007 across all age, education, occupation, gender and ethnic groups.
  • That’s despite the fact that about four million workers have left the labor force, driving the labor force participation rate to a historic low
  • Although the share of the long-term unemployed has fallen from its peak of 45 percent in 2011 to 38 percent today, it is still far above its 2001-7 average. And about eight million people are working part-time for “economic reasons,”
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  • 60 percent of the net job losses occurred in middle-income occupations with median hourly wages of $13.84 to $21.13. In contrast, these occupations have accounted for less than a quarter of the net job gains in the recovery, while low-wage occupations with median hourly wages of $7.69 to $13.83 have accounted for more than half of these gains.
  • Over the last year, more than 40 percent of job growth has been in low-paying sectors including retail, leisure/hospitality (hotels and restaurants) and temporary help agencies.
  • Based on history, what’s distinctive about this recovery is its sluggish pace, not the composition of its jobs.
  • The economy’s growth rate has been less than half the rate of previous recoveries and the employment losses in the Great Recession were more than twice as large as those in previous recessions.
  • What is distinctive during this recovery relative to earlier ones is the growing disparity in wages across sectors, a trend that was apparent long before the Great Recession.
  • Since then, however, wage growth has fallen far short of productivity growth, and that’s true for workers regardless of education, occupation, gender or race.
  • But technological change and the globalization it has enabled have played major roles, and these driving forces have probably strengthened during the recovery.
  • Jobs that are routine, that do not involve manual tasks and that do not need to be done near the customer are being replaced by computers and automation or are being outsourced to low-cost workers in other countries.
  • According to another study, the top 1 percent of households captured 65 percent of real family income gains (including realized capital gains) between 2002 and 2007 and 95 percent of the gains between 2009 and 2012. In 2012, the top decile claimed more than 50 percent of income, the highest share ever.
Gene Ellis

How Putin Forged a Pipeline Deal That Derailed - NYTimes.com - 0 views

www.nytimes.com/...eline-deal-that-derailed-.html

shared by Gene Ellis on 05 Feb 15 - No Cached
  • How Putin Forged a Pipeline Deal That Derailed
  • The pipeline, known as South Stream, was Mr. Putin’s most important European project, a tool of economic and geopolitical power critical to twin goals: keeping Europe hooked on Russian gas, and further entrenching Russian influence in fragile former Soviet satellite states as part of a broader effort to undermine European unity.
  • The bill that Parliament took up on April 4 was arcane. But it swept aside a host of European regulations — rules that Mr. Putin did not want to abide by — for a pipeline that would deliver gas throughout southern Europe. Continue reading the main story Related Coverage In Diplomatic Defeat, Putin Diverts Pipeline to TurkeyDEC. 1, 2014
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  • In France, the leader of the far-right National Front, Marine Le Pen, recently acknowledged that her party had received a loan for 9 million euros, or about $11 million, from a Kremlin-linked bank.
  • Faced with punishing sanctions, a petro-economy pushed to the brink by plunging oil prices and the wildly gyrating value of the ruble, Mr. Putin this month halted the project.
  • Geological surveys suggested that Bulgaria could be sitting atop an underground ocean of natural gas, enough to be self-sufficient for years, enough to eclipse the advantages of South Stream.
  • On April 4, 2014, soon after Mr. Putin annexed Crimea, Bulgaria’s Parliament gave initial passage to a bill that effectively exempted South Stream from a number of European Union regulations, most important, the one that would have forced Gazprom to allow non-Russian gas to flow through the pipeline.
  • “If I hear one more word about competition, I’m going to freeze your you-know-whats off,” Mr. Putin reportedly shouted.
  • The anti-fracking movement became so broad that in January 2012, Parliament banned not only the extraction of shale gas, but even exploration that would quantify the country’s reserves.
  • When the Bulgarian government refused, the European Union cut off tens of millions of euros in regional development funds.
  • In desperate need of the European funds, the prime minister announced the next day that South Stream would be halted until it had full European Union approval.
  • While “he overreached, and he underestimated the response” to his intervention in Ukraine, said Mr. Gray, the former American diplomat, the Russian leader has been “quite effective” in countries like Bulgaria.“He won a great deal by getting Nabucco stopped,” Mr. Gray said. “Ultimately, his goal is to keep as much control over the former parts of the Soviet empire as possible.”
Gene Ellis

Arctic Shipping Soars, Led by Russia and Lured by Energy - 0 views

news.nationalgeographic.com/...c-shipping-soars-led-by-russia

russia artic shipping

shared by Gene Ellis on 09 Jan 14 - No Cached
  • Although the Arctic provides a shorter route around the world than the traditional course through warmer waters, it is not necessarily cheaper.
  • The ships were expensive to build and operate,
  • The first commercial Chinese vessel and first container ship to transit the NSR, the Yong Sheng, commissioned by state-owned Cosco shipping, arrived in Rotterdam on September 10 laden with steel and industrial machinery. Its 33-day journey from the Chinese port of Dailan was nine days and 2,800 nautical miles shorter than the conventional voyage through the Suez Canal
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  • The Arctic Council's 2009 report estimated that the NSR offers from a 35 percent to 60 percent savings in distance for ships traveling between Europe and the Far East. Ships also can circumvent regional conflicts and the risk of piracy near the coast of Africa or in the Straits of Malacca off Malaysia.
  • Hiring charges for mandatory escort by Rosatomflot's icebreakers vary, but the average cost is about $200,000,
  • the cost of escort through the NSR is roughly equivalent to that of passage through the Suez Canal.
  • Because "container" shipping of goods, (as opposed to bulk shipping of raw commodities like ores and fuel), relies heavily on on-time delivery, Carmel thinks it unlikely the NSR ever will become a major pathway for this kind of global commerce.
  • primary focus on the 22 percent of the world's remaining undiscovered oil and natural gas resources to be found in the far north.
  • Just last month, Novatek signed a deal to supply China National Petroleum Corporation for 15 years with fuel sent from Yamal by tanker
Gene Ellis

Across Eastern Europe, Military Spending Lags - NYTimes.com - 0 views

www.nytimes.com/...ato-and-military-spending.html

military spending europe

shared by Gene Ellis on 03 Apr 15 - No Cached
  • Across Eastern Europe, Military Spending Lags
  • After years in which a combination of fiscal pressures and a complacent trust in the alliance’s protection may have led them to drop their guard,
  • many countries are building from a very limited ability and remain years away from fielding anything resembling a formidable force against a military as large as Russia’s.
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  • NATO asks member states to spend 2 percent of their gross domestic product on their armed forces, yet only a handful of them actually do. Estonia, the small Baltic state at the alliance’s far eastern edge, is one of them, and Poland, by far the largest and richest country on that flank, is at 1.95 percent.
  • Latvia and Lithuania are spending less than 1 percent, though both have indicated they intend to ratchet up to 2 percent by 2020
  • But it will be a decade before the full impact of this modernization is felt in the field, he said.
  • The plan NATO has agreed on — to set up forward supply bases on the alliance’s eastern front in which 4,000 or so troops could be deployed within 48 hours — might be useful in combating a small, stealth insurgency, like the masked gunmen who arrived in Ukraine to set off that crisis, but would be useless in the face of an invasion. “What is required is to be able to hold off any aggression for at least a couple of weeks, to buy some time and provide some sort of sanctuary for reinforcements”
  • In recent years, Russia has massed tens of thousands of troops for exercises just across their borders.
  • When the Baltic states entered NATO a decade ago, they were urged not to spend their limited resources on building large standing armies, but to depend on others in the alliance to come to their aid in an emergency. Instead, the Baltic countries and other former Soviet satellite states focused their military spending on building specialties that they could offer the alliance, such as Estonia’s focus on cybersecurity
Gene Ellis

Big trouble from little Cyprus - FT.com - 0 views

www.ft.com/...e5-11e2-ae9e-00144feabdc0.html

little cyprus trouble

shared by Gene Ellis on 20 Mar 13 - No Cached
  • The banks stand on the edge of collapse. But it is the European Central Bank that has pulled the plug by threatening not to accept Cypriot government debt as collateral against liquidity support.
  • A restructuring of public debt is still likely. As Hamlet advises: If it be not now, yet it will come.
  • Is there no alternative to the bail-ins? Yes: direct bank recapitalisation by the eurozone, for which the sum required is a small matter. If the banking union had been up and running, that would have happened. It is not, presumably because core countries do not want to bail out mismanaged banking systems,
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  • A big question is why ordinary Cypriot taxpayers should rescue banks at all?
  • The first concern is the deal itself. The decision to impose losses on insured deposits is indeed a big error. (Yes, it is a default, not a tax.)
  • Banks have so little loss-absorbing capacity that they stand permanently on the edge of disaster.
    • Gene Ellis
      Gene Ellis on 20 Mar 13
       
      Very good point.  
  • The eurozone must either make the industry far more robust, by hugely increasing equity capital, or consolidate fiscal capacity and tighten regulation, to ensure adequate eurozone-wide oversight and fiscal support.
  • Banking is dangerous everywhere. But it still threatens the eurozone’s survival. This has to change – and very soon.
Gene Ellis

Sasol Betting Big on Gas-to-Liquid Plant in U.S. - NYTimes.com - 0 views

www.nytimes.com/...gas-to-liquid-plant-in-us.html

betting plant natural gas

shared by Gene Ellis on 17 Dec 12 - No Cached
    • Gene Ellis
      Gene Ellis on 17 Dec 12
       
      These are areas with lots of natural gas, and little chance of getting it to market, save for liquefication, but even then lacking access to ports.
  • The process is challenging and complex. First a synthetic gas is made from pure oxygen and methane, the main component of natural gas, which is cleansed of sulfur, metals and other impurities, under intense pressure and heat. Then the synthetic gas is put in giant reactors that make a synthetic crude through the Fischer-Tropsch process. The process essentially forces heated synthetic gas to react with a catalyst, typically cobalt, to convert into a liquid hydrocarbon. Finally that liquid is refined into one fuel or another. The process is far more complex than that at a typical refinery, so the plant is much more expensive to build and operate. Alfred Luaces, a refining specialist at the consultancy IHS, said a conventional oil refinery could be built for $50,000 per barrel of capacity, less than half of what Sasol says it is willing to spend on the proposed Louisiana plant.
  • Sasol is building a gas-to-liquids plant in Uzbekistan with the Malaysian oil company Petronas. It is working with Chevron to build another plant in Nigeria.
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  • Rick Manner, a vice president at consultancy KBC Advanced Technologies who has contributed to gas-to-liquids studies for Sasol and other companies, estimated that the projects must keep capital costs at $100,000 for every barrel a day of production capacity to be worthwhile economically at current prices of about $100 a barrel for oil and $4 per thousand cubic feet for natural gas.
  • Mr. Louw, Sasol’s Qatar president, said that the Oryx plant was designed to be profitable with oil at $25 a barrel. That implies a very low long-term price for the natural gas feedstock. He would not specify what Sasol pays its Qatari partner for gas, but he said it was “not zero.”
  • Gene Ellis on 17 Dec 12
     
    The potential, or lack thereof, of natural gas to diesel conversion.
Gene Ellis

George Soros: how to save the EU from the euro crisis - the speech in full | Business |... - 0 views

www.guardian.co.uk/...ave-eu-from-euro-crisis-speech

shared by Gene Ellis on 09 Apr 13 - No Cached
  • The crisis has also transformed the European Union into something radically different from what was originally intended. The EU was meant to be a voluntary association of equal states but the crisis has turned it into a hierarchy with Germany and other creditors in charge and the heavily indebted countries relegated to second-class status. While in theory Germany cannot dictate policy, in practice no policy can be proposed without obtaining Germany's permission first.
  • Italy now has a majority opposed to the euro and the trend is likely to grow. There is now a real danger that the euro crisis may end up destroying the European Union.
  • The answer to the first question is extremely complicated because the euro crisis is extremely complex. It has both a political and a financial dimension. And the financial dimension can be divided into at least three components: a sovereign debt crisis and a banking crisis, as well as divergences in competitiveness
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  • The crisis is almost entirely self-inflicted. It has the quality of a nightmare.
  • My interpretation of the euro crisis is very different from the views prevailing in Germany. I hope that by offering you a different perspective I may get you to reconsider your position before more damage is done. That is my goal in coming here.
  • I regarded the European Union as the embodiment of an open society – a voluntary association of equal states who surrendered part of their sovereignty for the common good.
  • The process of integration was spearheaded by a small group of far sighted statesmen who recognised that perfection was unattainable and practiced what Karl Popper called piecemeal social engineering. They set themselves limited objectives and firm timelines and then mobilised the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step.
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Excellent point!
  • Unfortunately, the Maastricht treaty was fundamentally flawed. The architects of the euro recognised that it was an incomplete construct: a currency union without a political union. The architects had reason to believe, however, that when the need arose, the political will to take the next step forward could be mobilized. After all, that was how the process of integration had worked until then.
  • For instance, the Maastricht Treaty took it for granted that only the public sector could produce chronic deficits because the private sector would always correct its own excesses. The financial crisis of 2007-8 proved that wrong.
  • When the Soviet empire started to disintegrate, Germany's leaders realized that reunification was possible only in the context of a more united Europe and they were prepared to make considerable sacrifices to achieve it. When it came to bargaining, they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement.
  • The financial crisis also revealed a near fatal defect in the construction of the euro: by creating an independent central bank, member countries became indebted in a currency they did not control. This exposed them to the risk of default.
  • Developed countries have no reason to default; they can always print money. Their currency may depreciate in value, but the risk of default is practically nonexistent. By contrast, less developed countries that have to borrow in a foreign currency run the risk of default. To make matters worse, financial markets can actually drive such countries into default through bear raids. The risk of default relegated some member countries to the status of a third world country that became over-indebted in a foreign currency. 
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Again, another excellent point!
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Not quite... Maggie Thatcher, a Conservative; and Gordon Brown, of Labour, both recognized this possible loss of sovereignty (and economic policy weapons they might use to keep the UK afloat), and refused to join the euro.
  • The emphasis placed on sovereign credit revealed the hitherto ignored feature of the euro, namely that by creating an independent central bank the euro member countries signed away part of their sovereign status.
  • Only at the end of 2009, when the extent of the Greek deficit was revealed, did the financial markets realize that a member country could actually default. But then the markets raised the risk premiums on the weaker countries with a vengeance.
  • Then the IMF and the international banking authorities saved the international banking system by lending just enough money to the heavily indebted countries to enable them to avoid default but at the cost of pushing them into a lasting depression. Latin America suffered a lost decade.
  • In effect, however, the euro had turned their government bonds into bonds of third world countries that carry the risk of default.
  • In retrospect, that was the root cause of the euro crisis.
  • The burden of responsibility falls mainly on Germany. The Bundesbank helped design the blueprint for the euro whose defects put Germany into the driver's seat.
  • he fact that Greece blatantly broke the rules has helped to support this attitude. But other countries like Spain and Ireland had played by the rules;
  • the misfortunes of the heavily indebted countries are largely caused by the rules that govern the euro.
    • Gene Ellis
      Gene Ellis on 09 Apr 13
       
      Well, yes, but this is an extremely big point.  If, instead of convergence, we continue to see growth patterns growing apart, what then?
  • Germany did not seek the dominant position into which it has been thrust and it is unwilling to accept the obligations and liabilities that go with it.
  • Austerity doesn't work.
  • As soon as the pressure from the financial markets abated, Germany started to whittle down the promises it had made at the height of the crisis.
  • What happened in Cyprus undermined the business model of European banks, which relies heavily on deposits. Until now the authorities went out of their way to protect depositors
  • Banks will have to pay risk premiums that will fall more heavily on weaker banks and the banks of weaker countries. The insidious link between the cost of sovereign debt and bank debt will be reinforced.
  • In this context the German word "Schuld" plays a key role. As you know it means both debt and responsibility or guilt.
  • If countries that abide by the fiscal compact were allowed to convert their entire existing stock of government debt into eurobonds, the positive impact would be little short of the miraculous.
  • Only the divergences in competitiveness would remain unresolved.
  • Germany is opposed to eurobonds on the grounds that once they are introduced there can be no assurance that the so-called periphery countries would not break the rules once again. I believe these fears are misplaced.
  • Losing the privilege of issuing eurobonds and having to pay stiff risk premiums would be a powerful inducement to stay in compliance.
  • There are also widespread fears that eurobonds would ruin Germany's credit rating. eurobonds are often compared with the Marshall Plan.
  • It is up to Germany to decide whether it is willing to authorise eurobonds or not. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing eurobonds. In other words, if Germany is opposed to eurobonds it should consider leaving the euro and letting the others introduce them.
  • Individual countries would still need to undertake structural reforms. Those that fail to do so would turn into permanent pockets of poverty and dependency similar to the ones that persist in many rich countries.
  • They would survive on limited support from European Structural Funds and remittances
  • Second, the European Union also needs a banking union and eventually a political union.
  • If Germany left, the euro would depreciate. The debtor countries would regain their competitiveness. Their debt would diminish in real terms and, if they issued eurobonds, the threat of default would disappear. 
Gene Ellis

Op-Ed Columnist - The Making of a Euromess - NYTimes.com - 0 views

www.nytimes.com/...15krugman.html

Krugman Euro Spain Greece economics

shared by Gene Ellis on 24 Apr 13 - Cached
  • No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.
  • Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen.
  • But with its warm weather and beaches, Spain was also the Florida of Europe — and like Florida, it experienced a huge housing boom. The financing for this boom came largely from outside the country: there were giant inflows of capital from the rest of Europe, Germany in particular.
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  • The result was rapid growth combined with significant inflation: between 2000 and 2008, the prices of goods and services produced in Spain rose by 35 percent, compared with a rise of only 10 percent in Germany. Thanks to rising costs, Spanish exports became increasingly uncompetitive, but job growth stayed strong thanks to the housing boom.
  • Then the bubble burst.
  • But the flood of red ink
  • was a result, not a cause, of Spain’s problems.
  • The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.
  • Now, if Spain were an American state rather than a European country, things wouldn’t be so bad. For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida’s housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks. But Spain isn’t an American state, and as a result it’s in deep trouble.
  • None of this should come as a big surprise. Long before the euro came into being, economists warned that Europe wasn’t ready for a single currency.
  • What we’ll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.
  • Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready. More Articles in Opinion »
Gene Ellis

The Two Innovation Economies by William Janeway - Project Syndicate - 0 views

www.project-syndicate.org/...-innovation-by-william-janeway

shared by Gene Ellis on 25 Apr 13 - No Cached
  • The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed.
  • Consequently, innovation at the frontier depends on funding sources that are decoupled from concern for economic value;
  • Financial speculation has been, and remains, one required source of funding. Financial bubbles emerge wherever liquid asset markets exist. Indeed, the objects of such speculation astound the imagination: tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities.
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  • Complementing the role of speculation, activist states have played several roles in encouraging innovation.
  • Occasionally, the object of speculation has been one of those fundamental technologies – canals, railroads, electrification, radio, automobiles, microelectronics, computing, the Internet – for which financial speculators have mobilized capital on a scale far beyond what “rational” investors would provide. From the wreckage that has inevitably followed, a succession of new economies has emerged.
  • In the United States, the government constructed transformational networks (the interstate highway system), massively subsidized their construction (the transcontinental railroads), or played the foundational role in their design and early development (the Internet).
  • For countries following an innovative leader, the path is clear. Mercantilist policies of protection and subsidy have been effective instruments of an economically active state.
  • List noted how Britain’s emergence as “the first industrial nation” at the end of the eighteenth century depended on prior state policies to promote British industry. “Had the English left everything to itself,” he wrote, “the Belgians would be still manufacturing cloth for the English, [and] England would still have been the sheepyard for the [Hanseatic League].”
  • To begin, the “national champions” of the catch-up phase must be rendered accessible to competitive assault. More generally, the state’s role must shift from executing well-defined programs to supporting trial-and-error experimentation and tolerating entrepreneurial failure. And the debilitating “corruption tax” that seems inevitably to accompany economic revolutions must be curbed, as it was in Britain during the nineteenth century and America during the twentieth.
Gene Ellis

European Union Leaders Gather in Brussels Over Budget - NYTimes.com - 0 views

www.nytimes.com/...r-in-brussels-over-budget.html

shared by Gene Ellis on 05 Feb 13 - No Cached
  • He has threatened to veto any new budget that does not at least freeze spending,
  • “Europeans who are attached to the European Union are now in a minority.” Fifty-two percent of those surveyed said they felt little or no attachment, up seven percentage points since 2010. In Britain, only 27 percent felt attached to the union.
  • Ahead of this week’s negotiations, at least seven countries, mostly those that contribute more to Europe’s coffers than they get back in farm subsidies and other payments, have already warned that they may veto a budget that does not give them a better deal. Among these is Austria, where, according to Mr. Ehrenhauser, who sits on the European Parliament’s budgetary control committee, “there is a critical mass building against the European Union.”
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  • The rethink, which would have scrapped spending on agricultural subsidies, ran into heavy opposition and stalled
  • All long-term budget decisions require unanimous approval by the member states, a rule first established when the grouping, then known as the European Economic Community, had just six members, not 27. The power of veto makes any major change to spending all but impossible and entrenches the status quo, no matter how unworkable or unpopular.
  • “It is extremely difficult to change anything,” Mr. Sapir said. “Everyone is always fighting at the margins over narrow national interests. They try to make sure they get money for their own countries and that cuts go to other countries.”
  • After months of arguments, two broad alliances have emerged. The first comprises countries like Britain, Germany and Sweden that are big net contributors and want to keep a tighter rein on spending. The second, known as the “Friends of Cohesion,” after a class of development grants aimed at less wealthy areas, includes Poland, Spain, Portugal and others that want to make sure the union’s largess does not dry up.
  • The European Commission, however, has been far less forthcoming. It told Mr. Ehrenhauser that it could not give a breakdown of spending in recent years on wine because that would require “lengthy research” and “it cannot consider doing this at the present time because of other priorities.”
Gene Ellis

Five lessons from the Spanish cajas debacle for a new euro-wide supervisor | vox - 0 views

www.voxeu.org/...bacle-new-euro-wide-supervisor

lessons spanish debacle supervisor vox

shared by Gene Ellis on 23 Oct 12 - No Cached
  • just the three most problematic Spanish cajas (Bankia, CatalunyaCaixa and Novagalicia) have had capital deficits (to be covered partly or fully by the taxpayer) of €54 billion – over 5% of Spanish GDP, a larger amount than what Spain will have to request from the European rescue funds.
  • Already the first entity that was intervened (CCM) as far back as March 2009, showed that the real NPL levels post intervention (17.6%) were more than twice as large as the reported ones. This should have been the point for the Banco de España to get ahead of the curve by ordering an audit of the whole sector
  • There is no intimation by anyone of outright corruption in the Banco de España supervisory role, and given the professionalism of the institution it is unlikely that there was any.
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  • not surprisingly, Banco de España supervisors had little interest in discovering that Spain’s vaunted regulator had in fact missed the largest financial crisis in the history of the country
  • Unfortunately, often supervisors in charge of the failing entity in the years of the debt run up were the ones charged with uncovering the problems.
  • Spain was the leader in the introduction of a dynamic provision – a provisioning tool that forces banks to increase provisions without reference to any specific loan. The intention of this tool was twofold: to mitigate the bad times, and to cool the booms in the good times (Holmstrom and Tirole 1997). Dynamic provisions were endorsed as part of the Basel III standards in December 2010, in part on the strength of Spain’s experience. And indeed the existing evidence (Jiménez et al. 2012) shows that the tool worked as intended, dampening the credit boom and softening somewhat the credit crunch. However, it is clear by now that their level was not nearly enough, as their size – 3% of GDP at their highest point (2004) – was simply not of a magnitude commensurate with the credit losses.
  • Without the provisions, the reality of the cajas' accounts would have become much faster a concern, and would have imposed itself on the regulator
  • Had the Banco de España ordered an audit of the system after uncovering numerous irregularities in CCM, it would have not been able to deal with the capital shortfalls uncovered as there was no appropriate resolution regime in Spain at the time
  • governance played a critical role in the development of the Spanish crisis. In the Spanish case, the supervisor, confronted with powerful and well connected ex-politicians decided to look the other way in the face of obvious building trouble.
  • More systematic evidence of the role played by these governance issues is provided in a 2009 paper (Cuñat and Garicano 2009b) where we showed that cajas with chief executives who had no previous banking experience (!), no graduate education, and were politically connected did substantially worse in the run up to the crisis (granting more real estate developer loan, up to half of the entire loan book in some instances) and during the crisis (with higher NPLs).
  • Even more important was the role of these political connections in diluting the role of the supervisor after the crisis started, in what was meant to be the crisis resolution stage but which was in fact a crisis cover up stage.
  • What are the takeaways
  • I would suggest five.
  • Second, career concerns of supervisors are crucial.
  • Third, dynamic provisioning is a good idea, but the supervisor must be mindful it may delay decision making in problem cases
  • Fifth, supervision and an appropriately tough resolution regime must go hand in hand.
Gene Ellis

Tourists Also Tell Greece No: Drop in Summer Bookings - WSJ.com - 0 views

online.wsj.com/...4065704577424310175114578.html

tourists greece summer bookings wsj com

shared by Gene Ellis on 29 May 12 - No Cached
  • Greek-vacation bookings from Germany and the rest of Europe are down sharply, as would-be tourists take fright at the prospect of strikes and street protests.
  • Early reservations for this summer's tourist season are down by around 15% from a year ago. Last year's record total of 16.4 million visitors is already out of reach, he says.
  • The industry accounts for about one-sixth of economic activity and nearly one in five jobs.
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  • If the decline in bookings continues, it would mean about 1.5 million fewer tourists coming to Greece this year compared to last, shaving more than a percentage point off gross domestic product and jeopardizing 100,000 summertime jobs.
  • Greece is one of the world's top 20 tourist destinations, traditionally drawing about half of its visitors from other European Union countries—especially from Germany and the U.K.
  • Prices are down some 15% from last year, according to SETE, following a 10% cut in rates charged by hotel and tour operators in 2011.
  • Leading German tour operator TUI AG says its Greek vacation bookings were down 30% up to March. European travel agency Thomas Cook TCG.LN +0.23% said German bookings for Greece so far are also down by 30% compared with 2011, despite discounts of as much as 20%.
Gene Ellis

"A Banking Union Baby Step" by Daniel Gros | Project Syndicate - 0 views

www.project-syndicate.org/...a-banking-union-baby-step

banking union

shared by Gene Ellis on 10 Jul 12 - No Cached
  • The recently created European Banking Authority has only limited powers over national supervisors, whose daily work is guided mainly by national considerations.
  • Moreover, the ECB already bears de facto responsibility for the stability of the eurozone’s banking system. But, until now, it had to lend massive amounts to banks without being able to judge their soundness, because all of that information was in the hands of national authorities who guarded it jealously and typically denied problems until it was too late.
  • Consider the case of a bank headquartered in Italy, but with an important subsidiary in Germany. The German operations naturally generate a surplus of funds (given that savings in Germany far exceed investment on average). The parent bank would like to use these funds to reinforce the group’s liquidity. But the German supervisory authorities consider Italy at risk and thus oppose any transfer of funds there.CommentsView/Create comment on this paragraphThe supervisor of the home country (Italy) has the opposite interest. It would like to see the “internal capital market” operate as much as possible. Here, too, it makes sense to have the ECB in charge as a neutral arbiter with respect to these opposing interests.
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  • Economic (and political) logic requires that the eurozone will soon also need a common bank rescue fund. Officially, this has not yet been acknowledged. But that is often the way that European integration proceeds: an incomplete step in one area later requires further steps in related areas.
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