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Europe's Vicious Spirals
BERKELEY "“ The euro crisis shows no signs of letting up. While 2011 was supposed to be the year when European leaders finally got a grip on events, the eurozone's problems went from bad to worse. What had been a Greek crisis became a southern European crisis and then a pan-European crisis. Indeed, by the end of the year, banks and governments had begun making contingency plans for the collapse of the monetary union.
None of this was inevitable. Rather, it reflected European leaders' failure to stop a pair of vicious spirals.
The first spiral ran from public debt to the banks and back to public debt. Doubts about whether governments would be able to service their debts caused borrowing costs to soar and bond prices to plummet. But, critically, these debt crises undermined confidence in Europe's banks, which held many of the bonds in question. Unable to borrow, the banks became unable to lend. As economies then weakened, the prospects for fiscal consolidation grew dimmer. Bond prices then fell further, damaging European banks even more.
The European Central Bank has now halted this vicious spiral by providing the banks with guaranteed liquidity for three years against a wide range of collateral. Reassured that they will have access to funding, the banks again have the confidence to lend.
Cynical observers suggest that the ECB's real agenda is to encourage the banks to buy the crisis countries' bonds. But that would only further weaken the banks' credit portfolios at a time when European regulators are desperate to strengthen them. The ECB's decision to provide the banks with unlimited liquidity does not solve governments' debt problems, nor is that its intent. But it at least prevents the debt problem from creating banking problems, which, in turn, worsen the debt problem without end.
Europe's second vicious spiral runs from fiscal consolidation to slow growth and back to fiscal consolidation. Tax increases and cuts in public spending are still needed; there is no avoiding this reality. But these demand-reducing measures also reduce economic growth, causing deficit-reduction targets to be missed. Getting fiscal consolidation back on track then requires more spending cuts, which depress growth still further, causing budget performance to worsen even more.
At some point, recession and unemployment will provoke a political reaction. Angry electorates will boot out austerity-minded governments. And uncertainty about what kind of governments come next will not reassure investors or positively influence growth.
Interrupting this second vicious spiral will require jump-starting growth, which, under current circumstances, is easier said than done. The external environment is not favorable. Economic growth in the United States is still weak, and growth in emerging markets seems poised to slow.
So what are Europe's policymakers to do? Restarting growth requires a two-handed approach that addresses both supply and demand.
Consider first the supply side. Research on the European economy has shown that small and medium-size enterprises (SMEs) are engines of employment creation. But SMEs need credit in order to grow and hire, which underscores the importance of the ECB's recent steps to restore liquidity to the banking system.
The other supply-side measures will have to be taken by governments. The Italian parliament, for example, has agreed to remove limits on store-opening hours as a first step toward liberalizing the retail sector. But taxi drivers and pharmacists have successfully resisted efforts to open their professions and make provision of their services more flexible and efficient. The need to placate such interest groups is a serious obstacle to jump-starting economic growth, because comprehensive reform is more effective than piecemeal reform.
Getting all of the stakeholders to go along will require compensating losers. And here Europe's social model can be an asset rather than a liability. The losers from reform can be provided generous but temporary unemployment benefits. They can enroll in government-funded, industry-organized training schemes. European governments that promise to aid the losers are more likely to retain political support. They will be better able to stay the reformist course.
Likewise, taxi drivers will be more agreeable to the award of additional medallions if demand for their services is buoyant. Hence the continuing need for demand-side measures, which puts the ball back in the ECB's court.
Cutting interest rates will not be enough. Pushing up asset prices and pushing down the euro's exchange rate will require the ECB to buy bonds on the secondary market "“ not the crisis countries' bonds per se, but those of all eurozone members. In other words, it will require quantitative easing.
Nothing is guaranteed. But Europe can still escape its vicious spirals if everyone does their part.
Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley.
Copyright: Project Syndicate, 2012. www.project-syndicate.org
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Username Password New registration Forgotten password gamesmith94134 10:42 11 Jan 12
Gamesmith94134: global finance's Supply-chain Revolution
"Open feedback mechanisms ensure a supply chain's ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up." It was because there is no firewall available during the crisis, and the pipeline was open with few operators in the financial control like Mr. Sheng said, also, there is even fewer currencies like Euro-dollar only was available in most transactions, even though the public funds like sovereignty debts were being privatized in the open trade, and it create the explosion by volume in sum of money was credited. Firewalls I took off the technical terminology means there is no safety transitory zone established physically, that our financial system allowed the flow in the supply chain freely as the computerized transaction allowed, and there is less time available for reexamination on lack of control, source of origin, birth of credits.
Especially, when the parties took the international reserves for granted that Fed and ECB cut it interest rates to its minimal for the non-inflationary measure that many would consider money are free if they can beat the time. Generally, the 22 players turned the international financial market into their casino. When their governments were the ones who called to upbeat its economies from the recession after the expansion of the debts hitting it fiscal ceiling, and the slow down cut their productivity in near recession. At the same time, the rigid exchange rate went lopsided that created the tension between the debtor and creditor. It exploded.
At present, the financial system must evolve itself with firewalls that stop contagion of the collateral damage over the money with no backing, and shrink the pool of cash for credit lending. Some might call it deleverage of the past 20 years mishaps, or change of climate in our global financial that the supply-chain must stop and check itself; besides, most of us would know by now that money supply and productivity are not on the same parallel at certain point under the influence of inflation an deflation. Without the assurance of the balance payment or imbalance of its exchange rates, the supply-chain will reverse itself.
Perhaps, I like it better if the sovereignty debt and private investment should not be classified as same in enjoying the low interest rate, that sovereignty debt should be handled separately by the Central Banks and World Bank if it does affect the exchange rate when evaluated by IMF for it answer to lack of control.
Transfer Unions must be established to void unsafe transaction and the Trans-continental Zoning to confirm the source of the origin on all transactions when the transaction is registered to enter its zones, or cut hot cashes that undervaluing ones currency from another that influences the international currency exchange rate. Besides, I see the floating rate system is a joke if it put sovereignty in defensive; and it should go with its yardstick like performance that values at each quarters.
Finally, international banks are "too big to fall" should became a legend only, and they must be downsized that international is not licensed to evade sovereignty. There are more of reforms available in regional account and obey to safety net where it allows. Perhaps, if the banker can purchase these sovereignty bonds and metro bonds from the central bank like FED or ECB instead of chasing the wild goose in the open market; the general public can have some credits available for doing business.
If someone question on the equities dealing among the banks, why only the politicians who talk over the policy on financial and there is no financial police system to oversight the banking as a whole. I think the United Nations Security Council can build a better division on financial security than G7 or G20, and it is inclusive for the globalized finance and my past experience tells me so. Evolve or not, we may stand by and watch the outcome of our present crisis and it not over yet till everyone would feel safe from hegemony through these firewalls. If some suggest cooperation from community in forgiving ones' debt, it would be worse than my New Year project in losing weight every year, and I have been laughing at myself all my life. Without firewall in safeguard one's wealth, each would isolate itself from contagion for a long, long time.
May the Buddha bless you?
ChumBucket 12:47 12 Jan 12The fundamental problem in the EU is that Germany, the bastion of economic responsibility and France who would like to think themselves part of this same club, are attempting to cram down fiscal responsibility upon the periphery as their only hope of shoring up confidence in the EU. The club med countries are countering that tightening their belts will only cause their economies to further spiral downward into recession, thereby exacerbating the question of solvency and their ability to repay their debts. The conundrum, of course, is that both sides are precisely correct. Moreover, with the periphery being the principal export market for Germany (and with Q4 GDP turning negative) any forced austerity in the periphery can only further hurt Germany’s export markets and thus further drive their economy into recession.
The EU problem is further compounded by the fact that a healthy portion of this troubled debt of the periphery is both held by German and French banks and yet grossly overvalued on their books. Legitimate marks would not only bankrupt the overleveraged and undercapitalized banks, but exceed the capacity of the sovereigns to bail them out. As the markets will quickly discover, this is not a problem solvable by Merkel or Sarkozy or through quantitative easing by the ECB. There is pain to be shared and, unfortunately, there will be plenty to go around.
gamesmith94134 02:32 12 Jan 12
Gamesmith94134: Islamic Finance unbound
IMF would urge BRIC and emerging nations set up funds for the settle the near crisis, and some would suggest the write-off for those debts; but how could one give away money for uncertainty? At present, I would propose a "Seven Percent Solution" which will balance the low interest payment and build up the assets for the sovereignty debtors in the 3% coupon for tax and 3% equity build up through investment; plus 1% insurer fee for the global observers who run its development and collect repayment. For example:
would you put your asset in the 10 million Euro worth of bonds in full to the World Bank which garantees a 3% annum in coupon? The coupon to you is tradable in open market to your exporters, and serves for tax credit to your nominated soveriegnty nation like Greece, and the 10 million Euro worth of bonds is withheld a parcel which the World Bank will guarantee Greece will return in full parcel in nominated currency or equity applied. Since the parcel may not adequately applied with equity or privatized assets, such parcel will come through arbitration by World Bank to ensure Greece will comply with integrity for its liabilities. Thereon, the quarterly payments of 4% will come from Greece that 1% no- refunable applies to the services and reserves to World Bank; and 3% will subsidize privatized programs would be used as collerateral, under the scrutiny of the global observers. The funding of these installments are used to promote growth within Greece in order to create its foundation in the tax system to make it affective in the fiscal processing and politicians. What if Greece default again on its installments of the loan or the loan? The 3% of investment in the privatised programs will goes to China, and the parcel can settle on the prerformance after arbitration.
It sounds naieve to accept such "Seven Percent Solution" when inflation rate is way higher than 7% in China, but what if Euro or its currency dropped over 7%. However, it is more important that the stand-off in the liabilities in both sides, then, rebalancing both the exchange rates or economies could make the situation worsen; then, not even the 3% is garanteed. If the slowdown of EU or US is contagious to the system, I doubt China can run on its 8% growth in the next year; but, the funding to the 7% coupon can stop Euro going with a run-off to 1.4 to 1.8 or RMB 4.5 to a dollar; or 15% write-off is demanded by the banking of China after default.
"As a matter of fact, reward in the Hereafter (AAKHIRAT) should have been the main purpose of Islamisation. It might not have attracted many people, but the foundation would have been firm." Islamic financing arrangements used in Islamic banking
(MUSHARIKA, MURABIHA, QARDE AL'HASANA, IJAREH, MUDARABA)
Author: EHSAN ZARROKH 2007-04-06
I pondered how the Islamic finance can help if usury is not acceptable under the Sharia'h. If the IJARAH with 3% withheld by the World Bank, as insurers "?tankaful' using 1% in financing and supervising developments in "USUFRUKT", the privatized investment through agribusiness, or for the exchange of the coupon in deferred tax; then this Seven Percent solution can help to release the tension on the rollover sovereignty debts, and the debtor nation may not have to suffer further austerity program in shrinking its economy and restraining its growth. Some fantasy"”but I like Islamic finance better than hoarding the currencies more for growth.
May the Buddha bless you?
utilitus 03:17 12 Jan 12So such conventional ideas aren't the only things circling the drain.
ohneeigenschaften 05:22 12 Jan 12Can someone explain how liberalizing the taxi and pharmacy markets in Italy, whatever its intrinsic worth, is going to make much of a difference to Italy's fiscal or current account deficits? It strikes me that rectifying the real exchange rate imbalance in export industries, particularly with respect to Germany, is what really matters, and I don't count taxis and pharmacies among export industries. Either German nominal wages have to rise, or Italian ones fall, to restore this balance, but the latter has obvious deflationary implications. Plus sluggish Italian (and Spanish) productivity growth has to be boosted, something to which taxis and pharmacies have very little to contribute in any meaningful way.
AUTHOR INFO Barry Eichengreen Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar. MOST READ MOST RECOMMENDED MOST COMMENTED Fragile and Unbalanced in 2012 Nouriel Roubini Occupy the Classroom? Dani Rodrik Rethinking the Growth Imperative Kenneth Rogoff The New International Economic Disorder Mohamed A. El-Erian Why India is Riskier than China Stephen S. Roach A New World Architecture George Soros Did the Poor Cause the Crisis? Simon Johnson America's Political Class Struggle Jeffrey D. Sachs To Cure the Economy Joseph E. Stiglitz No Time for a Trade War Joseph E. Stiglitz Rethinking the Growth Imperative Kenneth Rogoff When China Rules Ivan Krastev The French Don't Get It Martin Feldstein Two Models for Europe Hans-Werner Sinn Macedonia's Man of Peace Christopher Hill ADVERTISEMENT PROJECT SYNDICATEProject Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 56 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
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Gamesmith94134: global finance's Supply-chain Revolution
"Open feedback mechanisms ensure a supply chain's ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up." It was because there is no firewall available during the crisis, and the pipeline was open with few operators in the financial control like Mr. Sheng said, also, there is even fewer currencies like Euro-dollar only was available in most transactions, even though the public funds like sovereignty debts were being privatized in the open trade, and it create the explosion by volume in sum of money was credited. Firewalls I took off the technical terminology means there is no safety transitory zone established physically, that our financial system allowed the flow in the supply chain freely as the computerized transaction allowed, and there is less time available for reexamination on lack of control, source of origin, birth of credits.
Especially, when the parties took the international reserves for granted that Fed and ECB cut it interest rates to its minimal for the non-inflationary measure that many would consider money are free if they can beat the time. Generally, the 22 players turned the international financial market into their casino. When their governments were the ones who called to upbeat its economies from the recession after the expansion of the debts hitting it fiscal ceiling, and the slow down cut their productivity in near recession. At the same time, the rigid exchange rate went lopsided that created the tension between the debtor and creditor. It exploded.
At present, the financial system must evolve itself with firewalls that stop contagion of the collateral damage over the money with no backing, and shrink the pool of cash for credit lending. Some might call it deleverage of the past 20 years mishaps, or change of climate in our global financial that the supply-chain must stop and check itself; besides, most of us would know by now that money supply and productivity are not on the same parallel at certain point under the influence of inflation an deflation. Without the assurance of the balance payment or imbalance of its exchange rates, the supply-chain will reverse itself.
Perhaps, I like it better if the sovereignty debt and private investment should not be classified as same in enjoying the low interest rate, that sovereignty debt should be handled separately by the Central Banks and World Bank if it does affect the exchange rate when evaluated by IMF for it answer to lack of control.
Transfer Unions must be established to void unsafe transaction and the Trans-continental Zoning to confirm the source of the origin on all transactions when the transaction is registered to enter its zones, or cut hot cashes that undervaluing ones currency from another that influences the international currency exchange rate. Besides, I see the floating rate system is a joke if it put sovereignty in defensive; and it should go with its yardstick like performance that values at each quarters.
Finally, international banks are "too big to fall" should became a legend only, and they must be downsized that international is not licensed to evade sovereignty. There are more of reforms available in regional account and obey to safety net where it allows. Perhaps, if the banker can purchase these sovereignty bonds and metro bonds from the central bank like FED or ECB instead of chasing the wild goose in the open market; the general public can have some credits available for doing business.
If someone question on the equities dealing among the banks, why only the politicians who talk over the policy on financial and there is no financial police system to oversight the banking as a whole. I think the United Nations Security Council can build a better division on financial security than G7 or G20, and it is inclusive for the globalized finance and my past experience tells me so. Evolve or not, we may stand by and watch the outcome of our present crisis and it not over yet till everyone would feel safe from hegemony through these firewalls. If some suggest cooperation from community in forgiving ones' debt, it would be worse than my New Year project in losing weight every year, and I have been laughing at myself all my life. Without firewall in safeguard one's wealth, each would isolate itself from contagion for a long, long time.
May the Buddha bless you?
The fundamental problem in the EU is that Germany, the bastion of economic responsibility and France who would like to think themselves part of this same club, are attempting to cram down fiscal responsibility upon the periphery as their only hope of shoring up confidence in the EU. The club med countries are countering that tightening their belts will only cause their economies to further spiral downward into recession, thereby exacerbating the question of solvency and their ability to repay their debts. The conundrum, of course, is that both sides are precisely correct. Moreover, with the periphery being the principal export market for Germany (and with Q4 GDP turning negative) any forced austerity in the periphery can only further hurt Germany’s export markets and thus further drive their economy into recession.
The EU problem is further compounded by the fact that a healthy portion of this troubled debt of the periphery is both held by German and French banks and yet grossly overvalued on their books. Legitimate marks would not only bankrupt the overleveraged and undercapitalized banks, but exceed the capacity of the sovereigns to bail them out. As the markets will quickly discover, this is not a problem solvable by Merkel or Sarkozy or through quantitative easing by the ECB. There is pain to be shared and, unfortunately, there will be plenty to go around.
Gamesmith94134: Islamic Finance unbound
IMF would urge BRIC and emerging nations set up funds for the settle the near crisis, and some would suggest the write-off for those debts; but how could one give away money for uncertainty? At present, I would propose a "Seven Percent Solution" which will balance the low interest payment and build up the assets for the sovereignty debtors in the 3% coupon for tax and 3% equity build up through investment; plus 1% insurer fee for the global observers who run its development and collect repayment. For example:
would you put your asset in the 10 million Euro worth of bonds in full to the World Bank which garantees a 3% annum in coupon? The coupon to you is tradable in open market to your exporters, and serves for tax credit to your nominated soveriegnty nation like Greece, and the 10 million Euro worth of bonds is withheld a parcel which the World Bank will guarantee Greece will return in full parcel in nominated currency or equity applied. Since the parcel may not adequately applied with equity or privatized assets, such parcel will come through arbitration by World Bank to ensure Greece will comply with integrity for its liabilities. Thereon, the quarterly payments of 4% will come from Greece that 1% no- refunable applies to the services and reserves to World Bank; and 3% will subsidize privatized programs would be used as collerateral, under the scrutiny of the global observers. The funding of these installments are used to promote growth within Greece in order to create its foundation in the tax system to make it affective in the fiscal processing and politicians. What if Greece default again on its installments of the loan or the loan? The 3% of investment in the privatised programs will goes to China, and the parcel can settle on the prerformance after arbitration.
It sounds naieve to accept such "Seven Percent Solution" when inflation rate is way higher than 7% in China, but what if Euro or its currency dropped over 7%. However, it is more important that the stand-off in the liabilities in both sides, then, rebalancing both the exchange rates or economies could make the situation worsen; then, not even the 3% is garanteed. If the slowdown of EU or US is contagious to the system, I doubt China can run on its 8% growth in the next year; but, the funding to the 7% coupon can stop Euro going with a run-off to 1.4 to 1.8 or RMB 4.5 to a dollar; or 15% write-off is demanded by the banking of China after default.
"As a matter of fact, reward in the Hereafter (AAKHIRAT) should have been the main purpose of Islamisation. It might not have attracted many people, but the foundation would have been firm." Islamic financing arrangements used in Islamic banking
(MUSHARIKA, MURABIHA, QARDE AL'HASANA, IJAREH, MUDARABA)
Author: EHSAN ZARROKH 2007-04-06
I pondered how the Islamic finance can help if usury is not acceptable under the Sharia'h. If the IJARAH with 3% withheld by the World Bank, as insurers "?tankaful' using 1% in financing and supervising developments in "USUFRUKT", the privatized investment through agribusiness, or for the exchange of the coupon in deferred tax; then this Seven Percent solution can help to release the tension on the rollover sovereignty debts, and the debtor nation may not have to suffer further austerity program in shrinking its economy and restraining its growth. Some fantasy"”but I like Islamic finance better than hoarding the currencies more for growth.
May the Buddha bless you?
So such conventional ideas aren't the only things circling the drain.
Can someone explain how liberalizing the taxi and pharmacy markets in Italy, whatever its intrinsic worth, is going to make much of a difference to Italy's fiscal or current account deficits? It strikes me that rectifying the real exchange rate imbalance in export industries, particularly with respect to Germany, is what really matters, and I don't count taxis and pharmacies among export industries. Either German nominal wages have to rise, or Italian ones fall, to restore this balance, but the latter has obvious deflationary implications. Plus sluggish Italian (and Spanish) productivity growth has to be boosted, something to which taxis and pharmacies have very little to contribute in any meaningful way.
Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 56 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
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