Keywords: Europe Euro Economy Exports Growth
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Keywords: China Dollar Renminbi Exchange Rate
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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
Links to selected MarketObservation posts:
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
The Guardian, UK
Guardian: Hungary to ask for 'precautionary' ?10bn??20bn bailout from EU and IMF; Budapest seeks new credit line in case European economic situation deteriorates; Country will run larger deficit than planned next year, July 2, 2010
Spiegel Online International
Previous assorted links on the European problem:
Concerns are rising that the economic rebound is stalling, but a strong jobs report on Friday would go a long way towards assuaging those fears.
Conversely, a report showing private employers failed to create many jobs in June will amplify worries that the recovery is weakening and won't be strong enough to put many of the 15 million unemployed back to work anytime soon.
"The economy is losing some momentum," said Ryan Sweet, senior economist at Moody's Economy.com. "We need to see private hiring really accelerate." read more in the Washington Post
Vice President Biden predicts that this, at long last, will be “the summer of recovery.” The stimulus bill is working, he said, and “more people are going to be put to work this summer.” But that’s not the way things are shaping up.
The latest jobs report shows that the economy shed 125,000 jobs in June. That’s more than in any month since October. Some of that was expected. The end of the census meant the disappearance of 225,000 temporary government jobs. But the crucial indicator of whether the economy is likely to add more jobs is the number of private-sector jobs created. While it's good news that private-sector payrolls have increased for six months straight, June's 83,000 new private-sector jobs aren’t enough to keep up with the more than 100,000 new workers who enter the labor force each month. And they’re just a small fraction of the 7.4 million jobs that have disappeared since the start of the recession.
The fact that the nominal unemployment rate actually fell slightly to 9.5% is misleading. That decline is due to the fact that people who have stopped looking for work?even if they have simply given up?aren’t counted. The broader measure of those who would like work but can’t find it stayed steady at around 16.5%, and the underlying labor force participation rate slipped 0.3%. At the same time, the mean length of time people have been looking for jobs jumped to a record?and incredible?35.5 weeks. read more
The German economy is rapidly improving, with many manufacturers struggling to keep up with demand. But not all are happy with the country's recovery. Many say that Germany's export gains are coming at the expense of its trading partners.
Only a year ago, the German company Getrag was on the brink of bankruptcy. An auto parts supplier based in southwestern Germany, the company had been hit hard by the economic crisis. Revenues had dropped by 25 percent, to about ?2 billion ($2.45 billion), and the company was forced to reduce its workers' hours under the government's "short work" program. Only a state loan guarantee saved Getrag from falling victim to the crisis. Today the company is inundated with orders. BMW alone orders 140 transmissions a day, even through Getrag can only manage 120 per day. "Week after week, I sign requests by the company to have its employees work on Saturdays, Sundays and holidays," says Frank Iwer of the district office of the metalworkers' union IG Metall in the southwestern state of Baden-Württemberg. Iwer is familiar with many cases like Getrag's: the machine builder that is hiring large numbers of new workers; the manufacturer of packaging machines that has retrieved almost all of its employees from the "short work" program; the small supplier that rehired all 24 workers it had recently laid off because the business climate unexpectedly improved. read more
Nobel prize-winning economist Paul Krugman says that Germany has begun imposing austerity measures far too soon and that it could endanger fragile economic growth. His comments are just the latest in a trans-Atlantic dispute about fiscal policy. read more
Find here some contrarian views:
or 10 commandments how sovereign debt could be reduced without harming the economy too much:
Finding the Tipping Point - When Sovereign Debt Turns Bad
Caner, Mehmet, Grennes, Thomas J. and K?hler-Geib, Friederike (Fritzi) N. , Finding the Tipping Point - When Sovereign Debt Turns Bad (May 20, 2010). Available at SSRN: http://ssrn.com/abstract=1612407
"Public debt has surged during the current global economic crisis and is expected to increase further. This development has raised concerns whether public debt is starting to hit levels where it might negatively affect economic growth. Does such a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? What happens if debt stays above this threshold for an extended period of time? The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 99 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points. The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP."
Estimating Implied Default Probabilities and Recovery Values: The Case of Greece During the 2010 European Debt Crisis
Vrugt, Evert B., Estimating Implied Default Probabilities and Recovery Values: The Case of Greece During the 2010 European Debt Crisis (June 25, 2010). Available at SSRN: http://ssrn.com/abstract=1630525
"This paper develops a framework to estimate implied recovery values and risk-neutral default probability term-structures from sovereign bond prices. The model is applied to Greek bonds during the European debt crisis of 2010. In April and May 2010, the probability of a Greek default quickly rises from 5% to 40%. On Monday 10 May 2010, after EU finance ministers, the ECB and the IMF agree on a EUR 750 billion EU-wide rescue package, the default probability drops instantaneously below 10%. The implied recovery value remains between 40 and 60 cents on the euro and does not get revised materially during this period."
Banking and Debt Crises in Europe: The Dangerous Liaisons?
Candelon, Bertrand and Palm, Franz C., Banking and Debt Crises in Europe: The Dangerous Liaisons? (March 2010). CESifo Working Paper Series No. 3001. Available at SSRN: http://ssrn.com/abstract=1582866
"The potential mutation of the Sub-Prime banking crisis into a sovereign debt one in Euro area countries is investigated. After reviewing the criteria used to measure the debt vulnerability, the balance sheet approach (BSA) is presented in order to illustrate the potential connections between these two types of crises. A graphical analysis yields evidence that at the end 2009 the probability of observing a Euro area country defaulting is less likely than six month before. Nevertheless, the serious threats, which concern Greece and Ireland, do not permit us to exclude the occurrence of a contagious, or self-fulfilling, sovereign debt or currency crises in Euro area in the future."
Crash Risk of the Euro in the Sovereign Debt Crisis of 2009-2010
"Economic-political instability of a country, which is tied with its credit risk, often leads to sharp depreciation and heightened volatility in its currency. This paper shows that not only the creditworthiness of the euro-area countries with weaker fiscal positions, but also that of the member countries with more sound fiscal positions was an important determinant of the deep out-of-the-money euro put option prices which embedded information of the euro crash risk during the sovereign debt crisis of 2009-2010. Using the information of the option prices under the stochastic-volatility jump-diffusion model, the euro’s crash probability of 11% in a year with crash size of 14% is estimated at the end of April 2010. During the period of the global financial crisis between the Lehman default and September 2009 before the debt crisis began, the estimated crash size however reflects potential sharp devaluation of the US dollar that might result from quantitative easing in the US."
Here is an excerpt:
"Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won't be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes. The Madrid paper, a summary of his views, was influential enough to be cited in the official communiqué of the EU finance ministers' meeting."
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