October 6, 2011
The eurozone is confronted with a crisis of not just labour costs and prices – but culture. Between 1999 and the first quarter of 2011, there has been a continuous net transfer of goods and services shipped from the north to the south. Northern Europe in effect has been subsidising southern European consumption from the onset of the euro on January 1 1999. It is not a recent phenomenon.
I recall that in the early years of the eurozone there was a general notion in the markets that the Greeks were behaving like the Germans. But there is scant evidence that on embracing the euro southern members significantly altered their behaviour – behaviour that precipitated chronically depreciating exchange rates against the D-Mark.
Euro-north has historically been characterised by high saving rates and low inflation, the metrics of a culture that emphasises longer-term investments rather than immediate consumption. In contrast, negative saving rates – excess consumption – have been a common feature of Greece and Portugal since 2003.
If the euro is to remain a viable currency across the eurozone, members must behave in the responsible manner contemplated in the Maastricht treaty. But it is not clear that culture, so integral to a nation’s personality, can be easily altered.
I recall that in the early years of the eurozone there was a general notion in the markets that the Greeks were behaving like the Germans. But there is scant evidence that on embracing the euro southern members significantly altered their behaviour – behaviour that precipitated chronically depreciating exchange rates against the D-Mark.
Euro-north has historically been characterised by high saving rates and low inflation, the metrics of a culture that emphasises longer-term investments rather than immediate consumption. In contrast, negative saving rates – excess consumption – have been a common feature of Greece and Portugal since 2003.
If the euro is to remain a viable currency across the eurozone, members must behave in the responsible manner contemplated in the Maastricht treaty. But it is not clear that culture, so integral to a nation’s personality, can be easily altered.
October 6, 2011
Charles Schumer is stirring up tensions between the US and China again. It is the fourth time the Democratic senator from New York has proposed legislation aimed at imposing high tariffs on “currency manipulators”, a pseudonym for China. But this bill is unlikely to fare any better than the previous incarnations because it shoots America in the foot.
The US would not have a smaller trade deficit if the Chinese renminbi appreciated against the dollar. And a strengthened renminbi would not reduce Chinese exports to the US as much as many expect. In part, this is because Chinese exporters are able to absorb the costs of moderate appreciation. But another reason is that China’s trade surplus has been entirely created by processing trade, where imported components are assembled at factories in the country. This is less sensitive to the appreciation of the currency than ordinary trade because companies can save on the imports, even while exports suffer.
Instead of pressing for the renminbi’s appreciation, it would be much wiser for Mr Schumer to work to persuade both governments to enter a free trade agreement. A trade deal would not add any burden to the US, while a revaluation may force American consumers to pay higher prices. The Chinese authorities would also love the idea, not so much because it corrects the country’s trade imbalances, but rather because it symbolises America’s acknowledgement of China as a country of its rank.
The US would not have a smaller trade deficit if the Chinese renminbi appreciated against the dollar. And a strengthened renminbi would not reduce Chinese exports to the US as much as many expect. In part, this is because Chinese exporters are able to absorb the costs of moderate appreciation. But another reason is that China’s trade surplus has been entirely created by processing trade, where imported components are assembled at factories in the country. This is less sensitive to the appreciation of the currency than ordinary trade because companies can save on the imports, even while exports suffer.
Instead of pressing for the renminbi’s appreciation, it would be much wiser for Mr Schumer to work to persuade both governments to enter a free trade agreement. A trade deal would not add any burden to the US, while a revaluation may force American consumers to pay higher prices. The Chinese authorities would also love the idea, not so much because it corrects the country’s trade imbalances, but rather because it symbolises America’s acknowledgement of China as a country of its rank.
October 5, 2011
Once again US Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.
Many within China thought that given recent developments, criticisms of its exchange rate policies would become more muted. After all, it has continued its policy of gradual appreciation of five to six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. And although reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.
While a full-blown trade war is not in China's interests, its leadership will not let any perceived negative action go unchecked. If Congress gets its way, the net impact will not be more American jobs, but reduced global demand and higher prices for US consumers. America should worry more about maintaining its position at the upper end of the technology spectrum than futile currency wars.
Many within China thought that given recent developments, criticisms of its exchange rate policies would become more muted. After all, it has continued its policy of gradual appreciation of five to six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. And although reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.
While a full-blown trade war is not in China's interests, its leadership will not let any perceived negative action go unchecked. If Congress gets its way, the net impact will not be more American jobs, but reduced global demand and higher prices for US consumers. America should worry more about maintaining its position at the upper end of the technology spectrum than futile currency wars.
October 5, 2011
The absence of political leadership in addressing the crisis of the euro is not surprising, given the fact that whatever is done – or not done – will lead to some redistribution of wealth and income. Until four simple truths are explained to, and accepted by, Europe’s electorates, it will be impossible to move forward.
What cannot happen, in the short term, is for one or more countries leave the euro. Leaving a currency that will continue to exist elsewhere, within a single financial market, is highly problematic. Pressing the ejector button now could send the whole aircraft tumbling earthwards.
What leaders must explain is that, firstly, over the medium term there is no alternative to some form of federal fiscal arrangements. Second, that in the period before longer term fiscal transfer arrangements can be put in place, some euro area governments will need debt relief. And lastly, that the European Central Bank will need support, from governments and their taxpayers, to provide indefinite liquidity to maintain the machinery of day-to-day economic activity. This need not affect its operational independence.
Until the eurozone’s leaders have explained these four unavoidable facts we will all be going up blind alleys, when time is of the essence in averting potential economic and social disaster.
What cannot happen, in the short term, is for one or more countries leave the euro. Leaving a currency that will continue to exist elsewhere, within a single financial market, is highly problematic. Pressing the ejector button now could send the whole aircraft tumbling earthwards.
What leaders must explain is that, firstly, over the medium term there is no alternative to some form of federal fiscal arrangements. Second, that in the period before longer term fiscal transfer arrangements can be put in place, some euro area governments will need debt relief. And lastly, that the European Central Bank will need support, from governments and their taxpayers, to provide indefinite liquidity to maintain the machinery of day-to-day economic activity. This need not affect its operational independence.
Until the eurozone’s leaders have explained these four unavoidable facts we will all be going up blind alleys, when time is of the essence in averting potential economic and social disaster.
October 5, 2011
Europeans, and with them the rest of the world, are discovering what all doctors know – a persistently misdiagnosed and incorrectly treated infection can eventually threaten even the healthiest part of the body, thus requiring more drastic medical intervention whose effectiveness is less assured. This is what is happening in Europe today. A debt and growth crisis in the outer periphery of the eurozone has been allowed to destabilise the inner periphery and the outer core. In addition, signs of dislocations are now visible in the inner core – both through the banking system and directly.
In one case, that of Dexia, European governments are being forced to counter worrisome fragility. Spreads on German credit default swap have quietly widened to around 120 basis points in the last few days. And the stress is no longer limited to the continent. Reflecting the high interconnectivity of global banking, some American institutions have also come under pressure.
Many around the world have witnessed the deepening crisis with a mix of astonishment, concern and, now, fear. Those who already rang the alarm in the hope of spurring effective policy actions are being joined by others who previously refrained from doing so. The priority now is to contain a crisis that risks seriously undermining global economic growth, jobs, financial stability and social cohesion.
In one case, that of Dexia, European governments are being forced to counter worrisome fragility. Spreads on German credit default swap have quietly widened to around 120 basis points in the last few days. And the stress is no longer limited to the continent. Reflecting the high interconnectivity of global banking, some American institutions have also come under pressure.
Many around the world have witnessed the deepening crisis with a mix of astonishment, concern and, now, fear. Those who already rang the alarm in the hope of spurring effective policy actions are being joined by others who previously refrained from doing so. The priority now is to contain a crisis that risks seriously undermining global economic growth, jobs, financial stability and social cohesion.
October 4, 2011
Whether or not laws were broken in the lead up to the 2008 financial crisis, the lack of discipline and inadequate controls around many lending and risk taking practices certainly merit some version of the vigorous rethink of the regulatory apparatus that is now in process. That said, however, it’s still possible to feel Jamie Dimon’s pain as he vented his frustration over new regulatory proposals at Mark Carney, Bank of Canada governor - while perhaps not always loving his tonality.
As the chief executive of JPMorgan, Mr Dimon presides over a bank that both emerged least scathed from the meltdown and arguably conducted itself more responsibly than most of its peers. For its trouble, JPMorgan is now at the short end of the stick: potentially penalised for being American and penalised again by elements of the proposed Basel III rules. That may be unfair but it’s not totally surprising. As New York was at the epicentre of the debacle, it’s only logical that Washington would take a stronger hand in reworking the rules and the oversight.
Yet what is much more urgently needed – but sadly nowhere on the horizon – is a comprehensive, worldwide system of regulation and supervision for a financial system that constitutes a sort of global circulatory system. While Mr Dimon may not agree with all the rules that would emerge from such an arrangement, at least all lenders would be competing on a level playing field.
As the chief executive of JPMorgan, Mr Dimon presides over a bank that both emerged least scathed from the meltdown and arguably conducted itself more responsibly than most of its peers. For its trouble, JPMorgan is now at the short end of the stick: potentially penalised for being American and penalised again by elements of the proposed Basel III rules. That may be unfair but it’s not totally surprising. As New York was at the epicentre of the debacle, it’s only logical that Washington would take a stronger hand in reworking the rules and the oversight.
Yet what is much more urgently needed – but sadly nowhere on the horizon – is a comprehensive, worldwide system of regulation and supervision for a financial system that constitutes a sort of global circulatory system. While Mr Dimon may not agree with all the rules that would emerge from such an arrangement, at least all lenders would be competing on a level playing field.
October 3, 2011
The end of 2012 will mark a once in twenty year overlap of a presidential election in the US with a leadership transition in China. France chooses its president in the spring of next year, Germany its chancellor later in 2013. Unfortunately, election year pressures threaten to complicate an already very difficult and unpredictable policy dynamic, particularly as the European crisis goes from bad to worse.
The US, Europe and China all have huge decisions to take over how their economies and societies are to be shaped in the future. If existing or new leaders emerge from the upcoming elections with a clear mandate, perhaps we will see the kind of structural reform that will help growth and stability over the longer term. But if the overhang of elections exacerbates paralysis around difficult policy decisions, it will create huge potential for amplification at the worst possible time. Even under the best scenario, 2012 promises to be a year of even great politically induced volatility than 2011.
The US, Europe and China all have huge decisions to take over how their economies and societies are to be shaped in the future. If existing or new leaders emerge from the upcoming elections with a clear mandate, perhaps we will see the kind of structural reform that will help growth and stability over the longer term. But if the overhang of elections exacerbates paralysis around difficult policy decisions, it will create huge potential for amplification at the worst possible time. Even under the best scenario, 2012 promises to be a year of even great politically induced volatility than 2011.
September 29, 2011
Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.
Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debt at a very low cost. These steps would calm the markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.
Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debt at a very low cost. These steps would calm the markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.
September 29, 2011
Martin Wolf talks to Lawrence Summers about the European crisis
September 29, 2011
European Commission president José Manuel Barroso has proposed, for the umpteenth time, a financial transactions tax. The tax would raise, he assumes, around €50bn, half of which would go back to member states, and half would end up in his own pocket at the commission.
The timing of the move is poor, but more importantly you cannot take €50bn out of the economy without a significant economic impact. James Tobin distanced himself from those who wanted to adopt his tax as a disguised revenue raiser.
The timing of the move is poor, but more importantly you cannot take €50bn out of the economy without a significant economic impact. James Tobin distanced himself from those who wanted to adopt his tax as a disguised revenue raiser.
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