The International Monetary Fund on Thursday upgraded its 2010 global growth forecast, on the back of robust growth in Asia and renewed U.S. private demand, but flagged big risks to the recovery from Europe's debt problems. read more
Daniel Gros explains why the huge European Euro 750 billion rescue package has left markets unimpressed:
Here is an excerpt of the article, giving reasons:
"A key reason why Europe’s financial markets remain nervous is that, officially, there is no problem. Officially, Greece does not have a solvency problem, and restructuring of its public debt is not an option. Similarly, in Spain, the official line is that the domestic banking sector is well capitalized.
The first rule of dealing with financial-market turbulence should be to acknowledge the truth and scale of the problems at hand. Greece’s experience has shown that pretending that problems do not exist can result in a self-reinforcing spiral of increasing risk premia and declining confidence.
In this respect, the publication of the results of “stress tests” conducted on the EU’s 100 largest banks, promised for the end of July, is a clear step forward.
But there is a second and more disturbing reason why financial markets remain unsettled: large swathes of the European banking system remain vastly undercapitalized. According to ECB statistics, eurozone banks have about ?20 of liabilities (including interbank debt) for every euro of capital and reserves. This implies that for every capital loss of one euro lurking in some bank, there will be about ?20 of doubtful debt."
Keywords: Rational Behavior, Trust, Revenge
Are governments right to start cutting their deficits? This column presents good news and bad news. It supports a strongly precautionary approach to fiscal consolidation, but warns of the macroeconomic costs that come with each additional cut in the deficit. The financial crisis is not over yet. Read more on Vox
Keywords: Austerity, Fiscal Consolidation, Deficit
Keywords: Eurozone, Euro, Job Losses
Keywords: Europe Euro Economy Exports Growth
Will China’s decision to ditch the dollar peg help rebalance the global economy? This column argues that China’s action may facilitate a concerted appreciation in Factory Asia, helping the region redirect production away from western markets and towards domestic consumers. read more on Vox
Keywords: China Dollar Renminbi Exchange Rate
This is one of the current year's top videos on BigThink:
How economically minded are car thieves? This column presents evidence from the Netherlands suggesting that car thieves stay away from cars in unpopular colours because of their relatively low resale value. It argues that driving a car in a bright, uncommon colour such as yellow is a highly effective deterrent against car theft ? about as effective as an expensive security device. read more
With everything that was going on in the U.S. economy this past winter, the beginnings of the crisis facing the Greek economy were certainly easy to miss. As that crisis has now come to full flower, American observers overlook it at their peril: Greece’s problems, and those of other European countries, might well represent a possible future for the U.S. economy if we cannot get our fiscal house in order.
Like a canary in a coal mine, the crisis in Greece should serve as a warning that polluting the fiscal air with large budget deficits, a growing public sector, and high debt-to-GDP ratios is a sure way to kill an economy. A serious examination of the situation in Greece should lead other Western countries to think carefully about the paths they are on. Continuing growth in government expenditures means continued deficits, which means growing debt?which means temptation to inflate and the possibility of default. read more
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Here is an excerpt of the article. The authors believe that the Eurozone should be able to manage its problems. However, they indicate that Greece might have to undergo a financial restructuring of its debts:
"Will austerity measures prove adequate to the fiscal problems facing countries in southern Europe and beyond? Experts say the answer seems a qualified "yes" -- with the possible exception of Greece. The fiscal crisis in Greece is just as severe as advertised. The IMF projects that the country's debt-to-GDP ratio will register close to 150% by 2012 -- even if very strong austerity measures are imposed. Some, including Dadush, find it difficult to imagine how Greece can escape its debt problem and believe that "it is the one country most likely to end up with some sort of restructuring or forgiveness."
In the other troubled countries of southern Europe -- Portugal, Spain and Italy -- the fiscal pressure is significant, but less severe than that afflicting Greece. Of those three, Portugal is in the worst bind, and is considered the country after Greece most likely to seek debt restructuring. Spain's problem is real -- the unemployment rate there hit 19.7% in April -- but according to Guillén, its "budget deficit is not that bad. It is something that can be addressed, even though unemployment is so high." Spain has already begun taking ambitious steps toward redressing its fiscal imbalances, first by pledging to reduce its primary budget deficit to less than 3% by 2012, compared to 9.9% in 2010, and second by making initial moves towards labor market reforms. Italy, meanwhile, is in the least severe position because the nation's deficit, says Dadush, "has stayed within reasonable bounds."
But fiscal problems in the wake of the global financial crisis extend far beyond the euro zone. In Britain, Prime Minister David Cameron announced just weeks after taking office that painful budgetary decisions lay ahead. On June 22, his administration detailed a plan that includes $168 billion in budget cuts and a significant increase in sales taxes. Average government department spending is to be slashed by 25%, while the value added tax will rise from 17.5% to 20%. Numbers indicate that Britain's ability to confront its debt exceeds that of many other countries, however. For example, its debt-to-GDP ratio, while high at about 69%, is not quite panic inducing. Just as important, Britain controls its own currency, meaning that in a pinch it could devalue. And the country also maintains a high reputation for governance, giving investors confidence that, no matter happens, they will get their money back."
Source: Excerpt from article linked to above
Airtime: 7/2/2010 10:37:48 AM
Some see the Eurozone crisis as a harbinger of a more perfect union, others as the euro’s death knell. In contrast, this essay explains the current situation as something in-between; the Eurozone is levitating on the hope that an exit strategy can soon be found. The key is to establish fiscal discipline in every Eurozone member. As a real European government is politically impossible, this must be based on national institutions that can guarantee fiscal discipline. read more
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