There has been a heavy debate about Cesifo's Hans-Werner Sinn's argument that there were "hidden bail outs" in the Eurozone whereby the Bundesbank has been lending money to the crisis-stricken Eurozone members via the Target system on the order of €300 billion.
In a new paper, Hans-Werner Sinn and colleague Timo Wollmershäuser provide more detailled data on the capital flows within the Euro System:
Heavy opposition to Sinn's argument came from Citi's Willem Buiter and Karl Whelan:
June 21, 2011
Keywords: US Economy, Unemployment, Investments, CAPEX
"Concerns about export growth within the euro area peripheral countries due to a lack of competitiveness within the euro area are a key policy issue. Our analysis suggests that: (i) Long-term price elasticities for intra-euro area exports are at least double those for extra-euro area exports, so traditional real effective exchange rate indexes may overstate the effectiveness of euro depreciation in restoring exports growth in the euro area periphery and; (ii) There are surprisingly wide divergences across alternative relative price measures and even when relative price data suggest a steady loss in intra- (and extra-) euro area competitiveness, the pace of deterioration depends on the measure of relative prices used."
Keywords: Euro Area, Euro Area Growth, Euro Area Export Growth
The New York Times puts the planned Greek austerity program into perspective and virtually applies the relations to a similar program in the US:
Here is an excerpt from the article:
"To put that in perspective, spending cuts and tax increases of a similar scale in the United States would amount to $1.75 trillion, considerably more sweeping than even the most far-reaching proposals for reducing the American federal budget deficit. And Greece has promised to generate another $72 billion by selling off prime state assets, which many Greeks consider a fire sale of national patrimony.
While the commitment to austerity will allow Greece access to a fresh infusion of international aid, a growing chorus of economists say that the government’s new program will at best delay default and a restructuring of its debt, which is already more than 150 percent of the country’s gross domestic product. Steeper budget cuts and tax increases, they say, are the enemy of economic growth, which Greece desperately needs to make its debt burden lighter."
Keywords: European Crisis, Greek Crisis, Austerity
Following article in The Economist lays out the options for European decision makers regarding Greece well:
The author concludes:
"No matter what fictions they concoct this week, the euro zone’s leaders will sooner or later face a choice between three options: massive transfers to Greece that would infuriate other Europeans; a disorderly default that destabilises markets and threatens the European project; or an orderly debt restructuring. This last option would entail a long period of external support for Greece, greater political union and a debate about the institutions Europe would then need. But it is the best way out for Greece and the euro. That option will not be available for much longer. Europe’s leaders must grab it while they can."
Keywords: European Crisis, Greek Crisis
It seems that Harvard's Jeffrey Frankel and colleagues bringt it to the point: They mention that the cyclicality of a country’s fiscal policy is inversely correlated with the country’s institutional quality which includes measures of law and order, bureaucracy quality, corruption, and other risks to investment."
It might be astonishing for many people that they point out that institutional quality of various emerging markets has improved tremendously during the past years and in some cases has surpassed that of highly developed nations. They mention Chile as an example:
"Chile’s institutional quality has risen strongly since the early 1980s, during which time its fiscal policy has turned from procyclical to countercyclical. A country with good institutional quality in the general sense of rule of law can help lock in countercyclical fiscal policy through specific budget institutions. Frankel (2011a) explains how Chile did it, with the structural budget reforms of 2000 and 2006. Chile’s approach could be emulated by others.
Fiscal rules, such as the Eurozone’s Stability and Growth Pact, may accomplish little in themselves. Rules can actually worsen the tendency of governments to make overly optimistic forecasts for economic growth and budget balance (Frankel 2011b). Chile’s key innovation was to give responsibility for forecasting to independent expert commissions, insulated from politicians’ wishful thinking.
Keywords: Cyclicality of Fiscal Policy, Wishful Thinking of Politicians
June 21, 2011
Keywords: Euro Crisis, Eurozone
An impressive group of speakers presented different views. Great material!
Edmond Alphandéry, Arnoud W.A. Boot, Lee C. Buchheit, Charles W. Calomiris, Youssef Cassis
Mitu Gulati, Martin Hellwig, Janet Kersnar, Ramon Marimon, Wolfgang Münchau, Erik F. Nielsen, Fabio Panetta, Helmut Siekmann, David A. Skeel, Jr., Karl Whelan
Keywords: European Crisis, EU, Euro, European Defaults
Simon Johnson about a potential bail out of the European elite:
Keywords: European Crisis, European Elite, Greek Crisis, IMF, China
Once more an important blog post by Gary S. Becker. This time about reasons for the slow economic recovery in the US. Becker thinks that the US needs a favorable tax environment, a clean up of the public household and better predictability of regulators:
Keywords: Gary S. Becker, US Economy, US Recovery, US Public Household
The greatest issue facing innovation in business is the country's deficit, Silver Lake co-founder Glenn Hutchins tells a CFO panel.
Tue 21 Jun 11 | 04:38 PM ET
Keywords: Greek Crisis, Euro Crisis, World Bank
Keywords: Central Bank, Inflation, Inflation Targets, Monetary Policy
Keywords: Euro Crisis, Chronicle of the Euro Crisis
Posts about the "Euro Crisis" on MarketObservation in a chronological order:
Keywords: Global Economy, US Debt Problem, European Problems in the Periphery
Jim O'Neill, chairman of Goldman Sachs Asset Management, on the Greek Crisis:
Keywords: Greek Crisis, Greek Restructuring
The Mises Blog yesterday published some excerpts from Philipp Bagus book "Tragedy of the Euro" (2010). It is good food for thought:
Following excerpt explains the mechanism which has been a major cause of today's Euro crisis:
"Although the external effects of a monopolistic money producer and a fractional-reserve banking system regulated by a central bank are common in the Western world, the establishment of the euro implies a third and unique layer of external effects. The institutional setup of the Eurosystem in the EMU is such that all governments can use the ECB to finance their deficits.
A central bank can finance the deficits of a single government by buying government bonds or accepting them as collateral for new loans to the banking system resulting. Now we are faced with a situation in which several governments are able to finance themselves via a single central bank: the ECB.
When governments in the EMU run deficits, they issue bonds. A substantial part of these bonds are bought by the banking system. The banking system is happy to buy these bonds because they are accepted as collateral in the lending operations of the ECB. This means that it is essential and profitable for banks to own government bonds. By presenting the bonds as collateral, banks can receive new money from the ECB.
The mechanism works as follows: Banks create new money by credit expansion. They exchange the money against government bonds and use them to refinance with the ECB. The end result is that the governments finance their deficits with new money created by banks, and the banks receive new base money by pledging the bonds as collateral.
The incentive is clear: redistribution. First users of the new money benefit. Governments and banks have more money available; they profit because they can still buy at prices that have not yet been bid up by the new money. When governments start spending the money, prices are bid up. Monetary incomes increase. The higher the deficits become and the more governments issue bonds, the more prices and incomes rise. When prices and incomes increase in the deficit country, the new money starts to flow abroad where the effect on prices is not yet felt. Goods and services are bought and imported from other EMU countries where prices have not yet risen. The new money spreads through the whole monetary union."
Source: Excerpt from "Tragedy of the Euro", by Philipp Bagus
Keywords: Euro, European Crisis, European Central Bank, ECB, Monetary Policy, Property Rights
Keywords: Markets, Prices, Informational Asymmetries
Latest New York Times column by Harvard's N. Gregory Mankiw:
Keywords: Keynesian, Chicago School of Economics, Austrian School of Economics
Swedish economist Johan Norberg is the host of the new documentary Free or Equal, which retraces and updates the 1980 classic Free to Choose, featuring Milton and Rose Friedman. Like the Friedmans, Norberg travels the globe to look at the conditions under which prosperity and freedom flourish - and under what conditions they wither and die. Made by the same producer who created Free to Choose, Free or Equal will be appearing on PBS in 2011.
Keywords: Capitalist Economies, Market Forces, Equality
For energy planners, economic union planners, social welfare planners etc. etc.
Keywords: Planners, Economic Planners, Trying to Remove Problems through more Planning, Unpredictability of Politics, Destroying Investment Climate by unpredictable Policies
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