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Showing posts with label EuroFinancialCrisis. Show all posts
Showing posts with label EuroFinancialCrisis. Show all posts
National budget problems and a single currency shouldn't be linked

National budget problems and a single currency shouldn't be linked

I have always thought that the claim that saving the Euro was essential to saving the EU.  From the WSJ: 
Contrary to what is claimed daily in the media by politicians and many economists, there is no "euro crisis." The single currency doesn't have to be "saved" or else explode.
The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. Specifically, these are public-debt problems, stemming from bad budget management by their governments. But there is no logical link between these countries' fiscal situations and the functioning of the euro system. . . .
The public debt problem becomes a euro problem only insofar as governments arbitrarily decide that there must be some "European solidarity" inside the euro zone. But how does mutual participation in the same currency logically imply that spendthrift governments should get help from the others? Whenever a state in the U.S. has a debt problem, one never hears that there is a "dollar crisis." There is simply a problem of budget management in that state. . . .
The Debate over Spain's Austerity Program heats up

The Debate over Spain's Austerity Program heats up

Reuters reports:

Recession-plagued Spain unveiled new austerity measures on Wednesday designed to slash 65 billion euros from the public deficit by 2014 . . .
The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition. . . .
Madrid won softer deficit targets from its European Union partners this week and also negotiated rescue aid of up to 100 billion euros ($123 billion) from the euro zone's bailout fund for its crippled banking sector. . . .
The Economist magazine talks about the kooky claimed "Multiplier" effect from government spending. I am not thrilled by the increase in marginal taxes, but that isn't the concern of the Economist.
More important, this is incredibly counterproductive. The Spanish economy is imploding. Without the ability to offset these cuts with a very aggressive monetary policy, the multiplier on this austerity will be substantial. There can't be much confidence that this austerity plan will generate any fiscal improvement given the likely cyclical hit to revenues and the resulting impact on banks, which could well feed back into greater sovereign obligations. It's more economic pain for no fiscal gain. . . .
There are two problems with this claim. 1) It ignores that the money has to come from someplace. 2) The multiplier implies that government spends all of times money, but private individuals don't. Yet, as I have tried to explain many times before, people essentially spend all of their money. If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money. To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. David Malpass says that this is a false austerity, that they are really just moving money to other areas of spending.
Germany won't back down on its austerity plans

Germany won't back down on its austerity plans

German is holding firm.  It is amusing to see that they are starting to speak down to Obama in the same way that he has constantly been lecturing them.  Are they behaving irrationally?   From Der Spiegel:

German Finance Minister Wolfgang Schäuble rebuffed recent criticism of Germany's handling of the euro crisis from Barack Obama, telling the US president to get his own house in order before giving advice.
"Herr Obama should above all deal with the reduction of the American deficit. That is higher than that in the euro zone," he told German public broadcaster ZDF on Sunday night. It is easy to give advice to others, he added,Obama, worried about the impact of the debt crisis on the global economy and financial markets -- and on his own prospects for re-election --has been urging Europe to step up its efforts to tackle the problem.
In the interview, Schäuble also reiterated his opposition to euro bonds, saying countries must remain individually liable for their public debt as long as they were taking sovereign decisions on how the money was being spent.
"If you spend the money from my account, you won't be frugal with the money," said the finance minister. He added that he was against devoting large sums of money -- for example from the European Central Bank -- to fight the crisis. The roots of the crisis needed to be fought credibly, he said, adding that that was succeeding in Ireland and Portugal, which have both received international bailouts. "It's not succeeding so well in Greece," he added. . . .
UPDATE: George Soros weighs in an interview with Der Spiegel:

'A Tragic, Historical Mistake by the Germans'With the EU summit set to start on Thursday, pressure is on European leaders to find a way out of the euro crisis. Investor George Soros is pessimistic that a solution will be found and says time is extremely short. In an interview with SPIEGEL ONLINE, he warns that Germany could develop into a hated, imperial power.
SPIEGEL ONLINE: In Germany, once the motor of European integration, people are openly discussing the possibility of leaving the euro zone. Many Germans believe that a return to the deutschmark would be cheaper than to remain stuck in a flawed currency union. Are they right?
Soros: There is no question that a breakup of the euro would be very damaging, very costly, both financially and politically. And the biggest loss would be incurred by Germany. Germans have to bear in mind that, effectively, they have suffered practically no losses so far. Transfers have all been in the form of loans, and it is only when the loans are not repaid that real losses will be incurred. 

Here is a question: why exactly would countries returning to their own currencies be so bad?  Here are the 10 EU countries who are not using the Euro.
United Kingdom Bulgaria Czech Rep. Denmark Hungary Latvia Lithuania Poland Romania Sweden
Are they doing worse relative to other countries?  It is hard to see how that is the case.  Poland for example has done very well without being in the Euro and so has Germany.  The difference between countries seems to depend a lot more on whether the countries followed an austerity type policy, with those controlling government spending doing much better.

And the Greek election accomplished what exactly?: Pro-bailout parties want to delay deficit reductions for two years

And the Greek election accomplished what exactly?: Pro-bailout parties want to delay deficit reductions for two years

Remember all the fears about what would happen if the radical left anti-bailout Syriza party won the election?  That they would insist on the bailout being renegotiated.  Well, the pro-bailout parties also said that they wanted more favorable terms and it is finally clear what they want.  From the BBC:

Greece's new coalition government has proposed an extension to the deadline for it to reduce its budget deficit by at least two years, to 2016.
In a policy document, the government said its aim was for the fiscal target envisaged by the bailout deal to be met without further cuts to salaries and pensions. . . .
Nor does the future for this coalition sound extremely promising.

All three parties have signed a agreement to fully support the coalition, giving it a majority of 29 in parliament.  However, the cabinet is dominated by the conservative New Democracy party, after its left-wing partners Pasok and Democratic Left barred their MPs from joining.  They are represented by two party officials each. It is believed that they may not want to be associated with austerity measures. . . .

Estonia doing well with "austerity" budgets, and Spain is not an example of "austerity"

Paul Krugman, the guy who kept predicting disaster for Germany's austerity program, has gone after Estonia for what he calls being the "poster child for austerity defenders."


There are a couple of things that Krugman leaves out of his discussion.


1) Estonia was getting worse relative to other countries when it followed more of a Keynesian policy and has been growing relative to other countries since then.  Figure from The Global Post (click to make larger).  As that publication wrote: "Still, its recovery, after implementing austerity, is intriguing."  By the way, the publication also accuses Krugman of cherry picking data to show.


2) As the Figure above shows, Estonia has been growing relative to the US since mid 2009.


Note on Spanish "austerity."  Spain is in a lot of trouble, but it isn't because of "austerity."  From the WSJ.com.
In 2011, total public-sector spending in Spain was 13% higher than in 2007. . . .
Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Government forces banks to lend money to risky borrowers.  Now they force banks to lend money to governments.  When will the government learn that forcing banks to take on more risk than they want causes problems?  From CNBC:

US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.
Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently." . . .
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