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."
Find following an excellent Econbrowser post about China's need to rebalance towards an economy which is also focussing on increasing domestic consumption:
"From Arthur Kroeber, in China Economic Quarterly "Economic rebalancing -- Twin peaks: fiscal and financial reform" [not online]:
A major theme of recent discussions of China's economy is the need for "rebalancing" -- a shift away from an investment- and export-intensive growth model that created excess industrial capacity, big trade surpluses and bloated corporate profits, to a more domestically-driven growth pattern where consumer spending plays a bigger role.
The house view on this hot topic is straightforward. We believe that China's external "imbalance" -- a current account surplus that peaked at over 11% of GDP in 2007 -- mainly reflected domestic structural problems. The undervalued exchange rate that obsesses foreign analysts was decidedly secondary. The path to rebalancing therefore lies in comprehensive domestic reforms, including increased social service spending (to reduce household precautionary saving), deregulation of service markets (to encourage more private investment in non-tradable sectors), infrastructure investment (to better integrate domestic markets) and financial and fiscal reforms to discourage excessive investment in heavy industry and real estate. If these reforms occur -- and some are already underway -- then exchange-rate policy can play a useful supporting role. If they do not, currency revaluation by itself will accomplish little."
WSJ: The Global Jobs Competition Heats Up; In a new study, corporate leaders say the U.S. business environment is losing its edge when compared countries like China, India and Brazil, by Martin Neil Baily, Matthew J. Slaughter and Laura D'Andrea Tyson, July 1, 2010
For generations, coal miners gauged the health of their workplace with a critical indicator: canaries. Any buildup of carbon monoxide and other gases would silence the singing canaries before reaching levels toxic to humans.
Today, another leading indicator—multinational companies headquartered in the U.S.—is signaling widespread and legitimate concerns about the health of the U.S. economy. A new McKinsey report that the three of us advised argues that all Americans should heed their message.
U.S. multinational companies have long been among America's strongest firms. Although they comprise far less than 1% of U.S. companies, they account for about 19% of all private jobs, 25% of all private wages, 48% of total exports of goods, and a remarkable 74% of nonpublic R&D spending. For decades, U.S. multinationals have driven an outsized share of U.S. productivity growth, the foundation of rising standards of living for everyone. They are responsible for 41% of the increase in private labor productivity since 1990.
Despite the common allegation that multinationals simply "export jobs" out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10 million from 4.8 million. During that same period, employment in U.S. parent companies rose to 22 million from 17.7 million. read more
The U.S. economic recovery appears to have been solid through second quarter 2010. However, with fiscal stimulus measures and the inventory correction nearing an end, there are reasons to be concerned that growth will slow in the second half of the year.
Moderate Second-Quarter Growth Likely
The outlook for second-quarter growth is bright. Gross domestic product (GDP) grew by 3 percent in the first quarter and is expected to grow at an even faster pace in the second. This outlook is supported by the Institute for Supply Management (ISM) manufacturing and nonmanufacturing indexes (Chart 1). The indexes are good early indicators of GDP growth because they are timely, subject to minimal revision and cover a broad portion of the economy. The averages for both indexes are estimated to be higher in the second quarter of 2010 than in the first, suggesting an acceleration in economic activity. (Any ISM reading above 50 indicates growth. The higher the reading, the faster is the implied growth rate). read more
After a brief lull, during which the crisis seemed almost forgotten, the financial market reverted to crisis from, with what FT Alphaville called a generalised bloodbath across major equity markets. Overnight, Asian markets continue to lose.
One of the reasons for the panic was concern about the state of the European banking system, and the surprising news was that the ECB’s €55bn fixed-term deposit flopped spectacularly, as it managed to managed to raise only €31.866bn at an average interest rate of 0.54%. This means that financial institutions continue to hog liquidity.
Another reason was an unexpected decline in the Conference Board consumer confidence indicator, the latest indicator to suggest that the global recovery is running out of steam. There is a lot of gloom in the US at the moment. We have no time today to go in detail, but here some pointers. Robert Shiller says another housing recession is possible, and Paul Krugman is getting really, really gloomy and angry. US 10-year bond yields were down to below 3% last night. read more
To understand the challenge government economists have faced over the past year and a half, it is useful to imagine the case of a physician trying to treat an ill patient. The patient presents herself in terrible shape; the physician has never treated a condition with symptoms quite like hers before; and the causes of the ailments are unclear. The doctor remembers reading about a similar case in medical school — and, trying to recall as much of his training as possible, he endeavors to come up with a theory as to why the patient is sick and to determine what will make her better. read more
Fears that government austerity packages will hinder global growth have combined with fresh anxiety about the health of European banks to hammer investor confidence.
Shares on both sides of the Atlantic dropped heavily amid warnings that markets were on a "cliff edge".
In jittery trading ahead of a crucial repayment by Europe's banks of a €442bn (£362bn) European Central Bank loan on Thursday the rates at which banks lend to each other in euros rose to their highest levels in eight months as rumours swirled that some banks were finding it difficult to raise funds in the money markets. read more
here are the 10 commandments by Blanchard and Cottarelli:
•Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within 4–5 years).
•Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.
•Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilisation at post-crisis levels.
•Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.
•Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.
•Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.
•Commandment VII: You shall implement wide reforms to boost potential growth.
•Commandment VIII: You shall strengthen your fiscal institutions.
•Commandment IX: You shall properly coordinate monetary and fiscal policy.
•Commandment X: You shall coordinate your policies with other countries.
NORTH AFRICANS risk their lives to try to cross the Mediterranean to southern Europe. Mexicans pay “mules” to get them across the border with the United States. Afghans camp outside Calais in filthy surroundings, waiting to cross into Britain. Everywhere, it seems, there are people trying to get into another country. Even those who seek to move legally in order to work face huge barriers to entry in certain countries. People on work visas account for 70% of legal migrants to Germany, for instance, but only 5.6% of those entering America, the original land of opportunity. Most of the rest get in because a member of their family is already in the country. America’s annual quota of visas for the highly skilled can run out in a matter of weeks. More people want to move to rich countries than are able to. read more
All our newspapers agree that the G20 watered down their commitment to implement new bank rules, but with respect to the other critical issue, deficit reduction, the FT is by far the most pessimistic. The G20 countries committed to halve their budget deficits by 2013 and stabilise their debt to national income ratios by 2016. The FT writes that “these targets are not likely to require new policy action because G20 countries are already planning austerity measures on this scale, according to the recent International Monetary Fund fiscal monitor.” read more
Recommended search items and names(click on terms):
BIS Quarterly Review, Case Shiller Index, IFO Outlook, Institute for Supply Management, Michigan Consumer Sentiment Index, Philadelphia Fed Regional Index,
ECONOMIC INDICATORS AND OUTLOOKS (click on names):
George A. Akerlof, Bernanke, Olivier Blanchard, Alan S. Blinder, Buffett, Tyler Cowen, Niall Ferguson, Bruno S. Frey, Milton Friedman, Herb Greenberg, Greenspan, Michael Jensen, L.S. Karp, Charles Kindleberger, Krugman, Gregory Mankiw, Robert C. Merton, Nouriel Roubini, Kenneth Rogoff, Carmen Reinhart, David Rubenstein, Schumpeter, Anna Schwartz, Amartya Sen, Robert J. Shiller, Jeremy Siegel, Hans-Werner Sinn, George Soros, Joseph Stiglitz, Paul Volcker, Martin Wolf, Janet Yellen, Luigi Zingales, _________________________________________________________________________________ ________________________________________________________________________________________________________ _________________________________________________________________________________
RECOMMENDED SEARCH NAMES(click on names):
LEADING ECONOMISTS DEBATE THE CRISIS:
ECONOMICS AND BUSINESS:
ECONOMICS, LAW AND POLITICS:
LINKS TO SELECTED WORKING PAPER SITES:
|<< <||> >>|