Keywords: US Economy, Economic Forecast, Double Dip
Why I've been wrong about Europe
"If only mentally, I predicted a worse summer for the European economies than they seem to be experiencing; furthermore the euro is back up in the 1.30 range. Why was I wrong? I was believing those economies have more wage stickiness than they actually do. In this regard a lot of Keynesians and market-oriented economists have been making similar mistakes, albeit for different reasons. Sticky wages are a core part of the Keynesian worldview, whereas many non-Keynesian economists are quite skeptical of European labor markets and their inflexibilities.
These days I browse British, Irish, Spanish and German newspapers with reasonable frequency. I am struck by how many accounts of falling nominal and real wages I see. Outside of Germany, the proverbial cat hasn't quite bounced, but it seems to have hit the pavement.
One theory is that most wages are actually fairly flexible, but we don't usually like to cut wages or have wages fall. When needed, many wages can fall quite readily. In other words, sometimes it is easier to cut wages by a lot than by a little.
I hardly think the European economies, or the Euro, are in the clear. Differential rates of productivity growth, and the absence and impossibility of a common fiscal sovereign, still will make the arrangement unworkable. But it's worth explicitly noting that so far my forecast has been off the track."
WHILE most of our attention has been on the equity and government bond markets, the foreign exchange market has undergone one of its occasional changes in trend. The euro is no longer the whipping boy. Having dipped below $1.19 in early June, the European single currency is in sight of $1.30.
In part, this is down to the recent economic data. Whereas most European data (such as last week's Ifo survey) have been stronger than expected, the US numbers have been generally weaker. To the extent that investors were buying the American growth story in the first half of the year, they are now less convinced. It helps of course that the talk of imminent euro break-up has subsided a bit.
However, is growth likely to be the driver of currency movements over the long term? From time to time, other factors have driven the markets, such as yield differentials and current account deficits. Two of the strongest currencies over the long term have been the Swiss franc and the Japanese yen, neither of which has been renowned for their growth performance over the last 20 years. Instead, they are known as low-inflation countries. read more
Keywords: Currencies, Exchange Rates, Growth and Exchange Rates
"Most European countries are rather small, yet we know little about their monetary history. This book analyses for the first time the experience of seven small states (Austria, Belgium, Denmark, The Netherlands, Norway, Sweden, and Switzerland) during the last hundred years, starting with the restoration of the gold standard after World War I and ending with Sweden's rejection of the Euro in 2003. The comparative analysis shows that for the most part of the twentieth century the options of policy makers were seriously constrained by a distinct fear of floating exchange rates. Only with the crisis of the European Monetary System (EMS) in 1992?93 did the idea that a flexible exchange rate regime was suited for a small open economy gain currency. The book also analyses the differences among small states and concludes that economic structures or foreign policy orientations were far more important for the timing of regime changes than domestic institutions and policies.
? First book to treat monetary history of seven small European states across the twentieth century ? Shows the crucial importance of economic ideas and monetary theories in policy making ? Results are relevant for understanding the current financial and economic crisis"
Keywords: Monetary Policy, Exchange Rates
Keywords: Currencies, Currency Values
Fed Chairman Ben Bernanke on July 21, 2010, talked about the economy as part of his semi-annual report on monetary policy before the Senate Banking Committee. The stock market tumbled that day after his remarks about the "unusually uncertain" economy:
July 21, 2010
July 21, 2010
Keywords: Ben Bernanke, US Economy, Economic Recovery
IMF: INTERNATIONAL MONETARY FUND, EURO AREA POLICIES; Staff Report for the 2010 Article IV Consultation with Member Countries, Prepared by the European Department, Approved by Ajai Chopra and Tamim Bayoumi, July 1, 2010
I. From Global to Euro Area Crisis
A. Slow Recovery after the Global Crisis
B. Market Disruptions Generated a Strong Crisis Management Package
II. Heightened Risks Threatening Moderate Recovery
III. Overcoming The Crisis: Sustainability, Stability, and Growth
A. Adjusting and Consolidating Public Finances
B. Addressing Weaknesses in Banks
C. Reinvigorating Growth
IV. Inflation and the Role of Monetary Policy
V. Addressing Intra-Euro area imbalances
VI. Reforming Policy Frameworks
A. Strengthening Fiscal Policy Surveillance and the Stability and Growth Pact
B. Improving Governance over Structural Reforms
C. Rising to the Challenge of Financial Sector Reform
VII. Staff Appraisal
The FT got the first leaks from the stress tests, which seem to confirm the worst expectations: far fewer banks than expected have failed the test. German banks, including Landesbanken, indicated in private that they had passed the test, following similar indications in recent days from regulators and politicians in France and Italy. read more
Keywords: European Banks, Stress Test
Keywords: US Debt, US Budget Deficit
Guy Sorman thinks that European politicians would need a better communication strategy and a vision when explaining their actions to the people:
Here is an excerpt:
"Economic stagnation has come to appear endless. Jobs are scarce, and the future looks bleak everywhere. The Greek crisis has cast a pall over the entire eurozone. The common currency is now looked at with suspicion. On the fringes of public opinion, some people are even muttering suggestions that their countries should revert to their ancient national currencies – which of course would only bring disaster in the form of an even more confusing state of affairs, as EU countries are indebted in euros. To quit the eurozone would only increase their level of indebtedness.
What makes this desolate economic landscape even gloomier is the striking inability of European leaders to explain what has happened and is happening to their citizens. Indeed, I believe that it is here that the seminal reason for their plunging poll ratings lies. Europe’s leaders seem to lead nowhere, because they have no vision on which to draw."
Gary Shilling, president of A. Gary Shilling & Co., talks on Bloomberg TV about Europe's sovereign debt crisis and the prospects for the euro and U.S. Treasury market.
July 19, 2010
Keywords: European Crisis, European Sovereign Debt, Deleveraging, European market watch, US Treasury market
The IMF and Hungary will eventually reach an accord in September on the country's bailout program, Economy Minister Gyorgy Matolcsy said.
Airtime: Mon. Jul. 19 2010 | 10 07 00 ET
Keywords: European Debt Crisis, Sovereign Debt
Related post on MarketObservation:
Harvards' Josh Lerner and Dani Rodrik present their views.
Find following a link to Tyler Cowen's (George Mason Universtity) New York Times article about Germany's attempts to reduce its debt. The article shows that:
Budget discipline matters!
Reliability and long-term planning matter!
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