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Gene Ellis

PORTFOLIO.HU | Blanchard: Eurozone integration needs to go forward or go back, but it c... - 0 views

www.portfolio.hu/...it_cant_stay_here.24931-2.html

shared by Gene Ellis on 04 Oct 12 - No Cached
  • There is no question that, when it was introduced, inflation targeting represented progress. But we have learnt that it has serious limitations. You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks. It’s very clear that, to deal with all these issues, just using the policy rate is not enough.
  • The way to think about monetary policy in the future is that the central bank has in effect two sets of tools. One is a traditional one, the policy interest rate. The other is the set of macro prudential tools, from loan to value ratios, to cyclical capital ratios, etc. If there is a housing boom, you do not want to kill it through an increase in the policy rate which would affect the whole economy. You want to use measures that will limit mortgage lending to households.
  • I think that it has either to go forward or to go back, but it cannot stay where it is. I think nobody really wants to go back, so it has to go forward.
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  • I suspect that, in order to limit country specific shocks, euro members may have to actively use macro prudential tools such as rules on the amount of liquidity that banks should hold, or upper limit to loans to value ratios, much more so that they have in the past.
  • If the U.S. and a number of other advanced countries are going to decrease their current account deficits, then some countries will have to decrease their current account surpluses. And for this to happen, there has to be, among other changes, an adjustment of the exchange rates. Put more bluntly, most emerging markets have to accept an appreciation.
Gene Ellis

The Limits to ECB Policy - The Euro Crisis - WSJ - 0 views

blogs.wsj.com/...the-limits-to-ecb-policy-2

shared by Gene Ellis on 08 Mar 13 - No Cached
  • Although it has yet to be implemented or even clearly delineated, the mere threat of an ECB bond-buying program, which is what the OMT boils down to, has been enough to drive down yields and reopen the fixed-income markets to the single currency’s struggling sovereigns.
  • Those in employment don’t want their salaries to adjust downwards and insist on maintaining regulations that protect them from competition from the unemployed. Impossible to justify regulatory barriers to entry remain in many employment sectors (such as French rules that make becoming a ski guide almost as onerous as it is to get a pilot’s license).
  • ultimately, politicians will have to make the decisions on whether the euro zone can be saved by choosing to accept either inflation or massive, and unlimited, cross-border transfers or painful unwinding of past excesses through internal devaluation and restructuring.
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

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

Tracing Germs Through the Aisles - NYTimes.com - 0 views

www.nytimes.com/...-germs-through-the-aisles.html

antibiotic animals

shared by Gene Ellis on 10 Jan 14 - No Cached
  • More than 70 percent of all the antibiotics used in the United States are given to animals.
  • Agribusiness groups disagree and say the main problem is overuse of antibiotic treatments for people. Bugs rarely migrate from animals to people, and even when they do, the risk they pose to human health is negligible, the industry contends.
  • He is comparing the genetic sequences of E. coli germs resistant to multiple antibiotics found in the meat samples to the ones that have caused urinary tract infections in people (mostly women).
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  • Urinary infections were chosen because they are so common. American women get more than eight million of them a year. In rare cases the infections enter the bloodstream and are fatal.
  • A new strain of the antibiotic-resistant bug MRSA, for example, was first detected in people in Holland in 2003, and now represents 40 percent of the MRSA infections in humans in that country, according to Jan Kluytmans, a Dutch researcher. That same strain was common in pigs on farms before it was found in people, scientists say.
  • He thinks the Food and Drug Administration’s efforts to limit antibiotic use on farms have been weak. In 1977, the F.D.A. said it would begin to ban some agricultural uses of antibiotics. But the House and Senate appropriations committees — dominated by agricultural interests — passed resolutions against the ban, and the agency retreated. More recently, the agency has limited the use of two important classes of antibiotics in animals. But advocates say it needs to go further and ban use of all antibiotics for growth promotion. Sweden and Denmark have already done so.
  • Ms. Slaughter said aggressive lobbying by agribusiness interests has played a major role in blocking passage of legislation.
  • But the economics of food presents perhaps the biggest obstacle. On large industrial farms, animals are raised in close contact with one another and with big concentrations of bacteria-laden feces and urine. Antibiotics keep infections at bay but also create drug resistance.
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

Shinzo Abe's Monetary-Policy Delusions by Stephen S. Roach - Project Syndicate - 0 views

www.project-syndicate.org/...save-japan-by-stephen-s--roach

shared by Gene Ellis on 18 Jan 13 - No Cached
  • The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.
  • The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles – property and credit – fueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.CommentsView/Create comment on this paragraph
  • US consumers have pulled back as never before.
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  • Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.
  • Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged,
  • Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.
  • Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.
  • That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.
Gene Ellis

Robert Samuelson: A dishonest budget debate - The Washington Post - 0 views

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

budget debate washington

shared by Gene Ellis on 18 Mar 13 - No Cached
  • t’s the math: In fiscal 2012, Social Security, Medicare, Medicaid and civil service and military retirement cost $1.7 trillion, about half the budget.
  • As a share of national income, defense spending ($670 billion in 2012) is headed toward its lowest level since 1940.
  • States’ Medicaid costs will increase with the number of aged and disabled, which represent two-thirds of Medicaid spending. All this will force higher taxes or reduce traditional state and local spending on schools, police, roads and parks.
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  • Almost everything is being subordinated to protect retirees.
  • “for how long will we continue to sacrifice investments in our nation’s children and youth ... to spend more and more on the aged?”
  • In a Pew poll, 87 percent of respondents favored present or greater Social Security spending; only 10 percent backed cuts. Results were similar for 18 of 19 programs, foreign aid being the exception.
  • an aging America needs a new social compact: one recognizing that longer life expectancies justify gradual increases in Social Security’s and Medicare’s eligibility ages; one accepting that sizable numbers of well-off retirees can afford to pay more for their benefits or receive less; one that improves generational fairness by concentrating help for the elderly more on the needy and poor to lighten the burdens — in higher taxes and fewer public services — on workers; and one that limits health costs.
  • Government is being slowly transformed into a vast old-age home, with everything else devalued and degraded.
Gene Ellis

Cyprus adds to Europe's confusion - FT.com - 0 views

www.ft.com/...4a-11e2-a4fa-00144feabdc0.html

shared by Gene Ellis on 29 Mar 13 - No Cached
  • First, the eurozone does indeed have the capacity to do the right thing in the end, though not before first exhausting all the alternatives.
  • It protects the small deposits and imposes a rational resolution process.
  • Second, a euro is indeed not a euro everywhere.
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  • A consensus on the principle that creditors, not taxpayers, should pay if a bank becomes insolvent does not yet exist across the eurozone. Does anybody imagine the German government would not rescue Deutsche Bank if it were in trouble? Of course it would.
  • Yet, as Guntram Wolff of Bruegel notes, a currency union with internal exchange controls is a contradiction in terms. Only the willingness of the European Central Bank to finance Cypriot banks without limit could end these controls in the near future. Will it be willing to act soon?
  • The outcome in Cyprus underlines the fact that the value of a euro of bank liabilities depends on the solvency of the bank itself and the solvency of the government standing behind the bank. If both bank and state are insolvent, lenders are likely not only to lose a big proportion of their money outright, but to find that the rest is frozen behind controls,
  • The ideal conclusion from the Cypriot imbroglio would be that all eurozone banks should have more capital.
  • A final lesson of this crisis is that what I have called the “bad marriage” that binds the eurozone members together has become worse.
  • Thus the eurozone limps on through crisis after crisis. Can – or will – this continue indefinitely? I do not know.
Gene Ellis

Fear of Fracking by Jeffrey Frankel - Project Syndicate - 0 views

www.project-syndicate.org/...o-shale-gas-by-jeffrey-frankel

fracking

shared by Gene Ellis on 19 Apr 13 - No Cached
  • CAMBRIDGE – Against all expectations, US emissions of carbon dioxide into the atmosphere, since peaking in 2007, have fallen by 12% as of 2012, back to 1995 levels. The primary reason, in a word, is “fracking.”
  • Just ten years ago, the natural-gas industry was so sure that domestic production was reaching its limit that it made large investments in terminals to import liquefied natural gas (LNG). Yet fracking has increased supply so rapidly that these facilities are now being converted to export LNG.
  • Natural gas emits only half as much CO2 as coal, and occupies a rapidly increasing share of electricity generation – up 37% since 2007, while coal’s share has plummeted by 25%.
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  • Meanwhile, the share of coal – the dirtiest fuel – has been rising, not falling, in the rest of the world’s energy mix.
  • Moving beyond economics, America’s reduction in net energy imports – which have already fallen by one-half since 2007 – means that its foreign policy will be less constrained by events in the Middle East. In Europe, the new technology could similarly break Russia’s politically troublesome stranglehold on natural-gas supplies.
  • Put differently, if the world continues to build coal-fired power plants at the current rate, those plants will still be around in 2050, regardless of what other technologies become viable in the meantime.
  • Even a serious fracking mishap would be unlikely to cause as much damage as the Deepwater Horizon oil spill in 2010, the Fukushima nuclear catastrophe in 2011, or coal-mining tragedies that play out dramatically in frequent explosions and collapses (and more insidiously in the form of lung disease, water pollution, and soil erosion).
Gene Ellis

Solutions Remain Elusive After Financial Crisis - NYTimes.com - 0 views

www.nytimes.com/...ve-after-financial-crisis.html

shared by Gene Ellis on 24 Apr 13 - No Cached
  • In this world, financial bubbles matter, capital flows are of dubious merit, low interest rates fail to stimulate growth and government spending becomes the only tool with real traction to spur economic activity.
  • With total government debt in the rich world stuck at around 100 percent of its combined economic output, there is a legitimate fear that a rise in interest rates could tip off a financial death spiral. Moreover, if countries with debt levels well under 50 percent of G.D.P. were so devastated by the crisis, it is hard to imagine what might happen to them if another were to hit them.
  • If so, the urgent task is what kind of limits should be imposed on banking and the rest of finance to temper its propensity to careen toward disaster.
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  • What good does the modern financial system do, for the rest of us? What determines financial fluctuations and shocks? How do they affect the broader economy? What can governments do to make them less disruptive? Economists have few answers.
Gene Ellis

ECB Resisting Calls to Cheapen Euro as Currency War Rages - SPIEGEL ONLINE - 0 views

www.spiegel.de/...rrency-war-rages-a-882462.html

shared by Gene Ellis on 21 Feb 13 - No Cached
  • The central bank chief is coming under increasing pressure because he can't quite bring himself to embrace the concept of quantitative easing, the latest fashion in the world of finance. It involves central bankers engaging in the large-scale purchase of bonds issued by their governments and other securities, thereby injecting huge sums of money into the financial system. In this way, they hope to stimulate the domestic economy and keep their own currencies cheap, thereby strengthening exports.
  • The US central bank, the Federal Reserve Bank, has also been printing money to a previously unimaginable extent since the financial crisis. Calling its efforts QE 1 and QE 2, the Fed has pumped more than a trillion dollars into the US economy.
  • The country is in the process of "boldly rebuilding" monetary policy, Prime Minister Shinzo Abe declared. Indeed, the Japanese yen has lost 12 percent of its value against the dollar in the last two months.
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  • For years, China has defended its currency by pegging the exchange rate to the dollar, and the Swiss National Bank now only permits appreciation of the franc up to a certain limit, because investors have viewed the Swiss currency as one of the last safe currencies since the outbreak of the sovereign debt crisis in Europe.
Gene Ellis

Europe Can't Handle the Euro - 0 views

www.nber.org/...wj020800.html

shared by Gene Ellis on 31 May 12 - No Cached
  • When leaders of the 11 nations that agreed to combine their currencies gathered in January 1999, they predicted great things: the single currency would shift global portfolios to euro assets, depressing the value of the dollar relative to the euro, and the new eurozone would be a strong player in the global economy, reflecting the size of an integrated European market. Instead the euro plummeted, Europes economy remains weak, and unemployment is more than twice the U.S. level.
  • The ECB will eventually be judged not by its words but by whether it achieves low inflation and does so without increasing cyclical unemployment. I am not optimistic about either part of this goal.
  • The ECB must make monetary policy for "Europe as a whole," which in practice means doing what is appropriate for Germany, France and Italy, the eurozones three largest countries. Last year demand conditions in those countries were relatively weak, while demand conditions in Spain and Ireland were very strong. That meant a monetary policy that was too expansionary for Spain and Ireland, causing a substantial acceleration of their inflation and threatening their competitiveness.
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  • Such disparities of demand conditions will undoubtedly persist in the future because European countries differ substantially in industrial composition and in a variety of economic policies.
  • the time will come when the ECB will set a policy that is too tight for the outliers, leading to substantially higher unemployment than if they were free to set their own monetary policies. Even without discretionary monetary policies, the interest rates in countries with weak demand would naturally decline, and the external values of their currencies would fall, both acting as offsetting stabilizers of the countries weak demand. But this will not be possible within the EMU, where a single interest rate and a single exchange rate prevail. Result: higher average cyclical unemployment.
  • In the U.S., a fall in regional demand leads to lower wages, which help to maintain employment; to movements of labor to regions where demand is stronger; and to a net fiscal transfer from Washington (because lower regional income means lower federal tax liability). None of this happens in Europe, where wages are inflexible, mobility is severely limited by language and custom, and there are no significant fiscal transfers.
  • Politicians can now blame the ECB for high unemployment and complain that it is a powerful force beyond national control. Instead of seeking to make labor markets more flexible, European governments are talking more about "social wages," about mandatory 35-hour workweeks, and about rolling back even the small reductions in social benefits Germany achieved under Helmut Kohls government. Worse yet, there are attempts to eliminate differences in labor practices and even differences in wages among the EMU countries.
  • Moreover, these policies reduce the international competitiveness of many European industries and encourage the adoption of protectionist policies to keep out non-European products.
  • Forcing a single monetary policy on all of Europe will cause the countries that suffer what they regard as unnecessarily high unemployment to resent the actions of others. Attempts to force a Europewide tax system, especially if taxes are used to redistribute incomes among European countries, will compound the potential for conflict.
  • EMU is meant to be a marriage made in heaven with no possibility of divorce.
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.
Gene Ellis

One more summit: The crisis rolls on | vox - 0 views

www.voxeu.org/...one-more-summit-crisis-rolls

summit crisis rolls vox

shared by Gene Ellis on 18 Jul 12 - No Cached
  • Reading the official documents from the June 28 summit requires linguistic and divination skills.
  • The clearest result is that EFSF/ESM funds can be used directly to support banks.
  • The summit attendees seem to have successfully drawn the conclusion that this was necessary from the disastrous impact of their mid-June decision on new lending to Spanish authorities to shore up their banks. Within hours, the main conclusion drawn by the markets was that the Spanish public debt had grown by €100 billion, bringing Spain closer to the fate of Ireland (bad bank debt dragging down a government with an otherwise healthy fiscal position).
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  • The new agreement suggests that in the future, banks will be bailed out by the collective effort of Eurozone countries.
  • First, this arrangement is to be finalised by the end of the year. This means that, in the end, the Spanish debt will rise by €100 billion (the market participants who enthusiastically celebrated the decision by raising the price of Spanish bonds will eventually understand that). Ditto in the not unlikely case that some Italian or French banks wobble before December.
  • Second, conditions will be attached to such a rescue. These recommendations could be clever if they require “Swedish-style” bank restructuring whereby shareholders and other major stakeholders are made to absorb first the losses, and if a new clearly untainted management replaces the previous one. Such interventions limit the costs to taxpayers; they can even turn a profit. Of course, the conditions could also be silly, raising the costs to taxpayers to huge levels.
  • Third, the arrangement is linked to the establishment of a “single supervisory mechanism involving the ECB”. This could be a single Eurozone supervisor built inside the ECB, which would go a long way to plugging one the worst mistakes in the Maastricht Treaty (lack of a joint regulation and resolution regime for banks).
  • But this is not what the official text says, which makes one suspect that policymakers have not agreed to something simple and clean. Most likely, they will keep negotiating and come with the usual 17-headed monster that exhausted diplomats are wont to invent.
  • This is important because a contagious banking crisis that hits several large banks would require much more money than is available in the EFSF-EMS facilities.
  • Light conditionality, as they requested, is bound to collapse at the foot of the Bundestag, which must approve every single loan.
  • There was no knock-out winner in this summit, but on points I’d have to say that the winner is the crisis.
  • There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries.
  • Charles Wyplosz
Gene Ellis

Talking Troubled Turkey - NYTimes.com - 0 views

www.nytimes.com/...n-talking-troubled-turkey.html

shared by Gene Ellis on 31 Jan 14 - No Cached
  • Talking Troubled Turkey
  • probably because most countries placed restrictions on cross-border capital flows, so that international borrowing and lending were limited.
  • a bigger version of the same story unfolded in Asia: Huge money inflows followed by a sudden stop and economic implosion.
  • ...2 more annotations...
  • And the same forces that sent money sloshing into Turkey also make the world economy as a whole highly vulnerable.
  • If this is a good description of our situation, and I believe it is, we now have a world economy destined to seesaw between bubbles and depression
Gene Ellis

As Prime Russian Trading Partner, Germany Appears Crucial to Ending Crisis - NYTimes.com - 0 views

www.nytimes.com/...-crucial-to-ending-crisis.html

shared by Gene Ellis on 04 Mar 14 - No Cached
  • As Prime Russian Trading Partner, Germany Appears Crucial to Ending Crisis
  • Germany is now heavily reliant on Russia for its energy needs, importing more natural gas from Russia than any other country in Europe
  • the German chancellor has called for a more diplomatic solution, preferring more limited actions like many of her European counterparts.
  • ...3 more annotations...
  • Germany is the second-largest foreign investor in Ukraine behind Cyprus, which is a transit point for Russian money.
  • About three-quarters of the gas and oil that Germany imported in 2013 came from Russia. The country also acts as a major gas transit hub for countries like France.
  • “Germany in particular is dependent on Russian gas,”
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