Friday, November 25, 2011

The Religion of an Increasingly Godless America

An interesting post by Amanda Marcotte for Reuters.

“Listening to the national discourse, one could be forgiven to imagining that America is becoming an ever more religious place. The amount of God talk in the public square has dramatically increased in a generation. Prior to the 70s, the concept of “the religious right” had barely existed, but now it’s a powerful lobbying force with multiple groups from Focus on the Family to Concerned Women for America, all sitting on more money than most liberal special interest groups could ever hope to accumulate.”

“If you poll actual Americans, you’ll find that the trend is not towards more religiosity, but towards less. Much less, in fact.”

How come?

“The heightened emphasis on religion in politics is the death throes of the old order.  … It’s only when (Christian) started to feel their power threatened (that) they become defensive, and in doing so, became much louder.” And the Americans are becoming more fond of the separation of church and state.

Read more here.

The Coming Euro Depreciation

Simon Johnson agrees with the first step towards a solution of the euro problem that I suggested in my book, “L’euro: comment s’en dĂ©barrasser”. Namely, a substantial euro depreciation that would stimulate growth in the eurozone.

In his post for Project Syndicate on November 23, “Does Europe Have a Korean Option?” he writes:

“The obvious escape route leads through economic growth, which would reduce the debt-to-GDP ratio that make interest payments look reasonable. But the standard ways to stimulate the European economy are not available: fiscal policy is constrained by already-high debt levels; and the European Central Bank, fearing inflation, has kept a tight rein on monetary policy.
None of the other ideas on the European table, including various kinds of “structural reform,” will provide fast growth in the short term.

  A genuine devaluation, on the other hand, would work wonders for the real economy. The moribund Italian economy would spring to life if the euro fell by 30%, adjusted for inflation.”

Some observers wonder how the euro could be depreciated, given that it is a floating currency, the price of which is market determined. But Johnson explains the obvious:

“If the ECB agreed to loosen monetary policy or provide enough “liquidity” to support various bailouts, investors would fear inflation, weakening the euro. On the other hand, if the ECB preferred to let major countries, such as Italy, default on their debts, this would likely weaken the euro even further, as investors feared a contagion of defaults.
While depreciation would never be eurozone officials’ stated policy, it currently looks like all roads lead in that direction.”

There are major obstacles in the way of a conversion of the ECB to a loosening of its monetary policy: first the statutes of the institution that assign it only one aim, price stability. But also the German aversion to inflation, due not so much to a memory of the 1923 hyperinflation, but more to the re-export model of the German economy that rely on a strong currency and non increasing wages.

An increase of inflation would fuel wage increases in Germany and a depreciating euro would inflate the cost of buying intermediate industrial components from Central Europe and elsewhere, thus jeopardizing the competitiveness of German exports. 

As a result it seems to me much more likely that the German government will stick with its “brinkmanship” policy leading to Greek and probably Italian governments defaults. Indeed, austerity programs (the shrinking of government spending), while necessary in the medium term, bring the southern economies closer to default.

As explained in The Economist article “Is this really the end?” (November 26), here:

“Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012 – with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.”

And it will lead to a major depreciation of the euro. It has started already with today’s temporary low point of 1,33 to the dollar, and one can only hope that it continues all the way to something like a 1 to 1 parity or even less.

This would alleviate the current pressure leading to a break up of the euro. But it is the only way out of the crisis and it would make the exit of individual countries from the eurozone much easier, avoiding the high cost of total collapse.     

Wednesday, November 23, 2011

Germany’s Only Concern Is …

... Germany! That’s what David Beckworth explains quite well today in a Seeking Alpha post. Meanwhile, the rest of the eurozone is marching to "Eurogeddon".

There are two possible explanations: either the German public does not fully appreciate the consequences for Germany itself of a severe recession or even an economic collapse in the rest of the zone, and believe they can rapidly force the other countries of the zone to become more “German-like”, or, in the case the eurozone breaks up, they expect to return happily to their “beloved Deutsche Mark with a relatively resilient German economy”.

My comment: Maybe the only solution for the coming crisis in a Europe completely lacking of any “affectio societatis” is to let Germany break free from the euro ….

Sunday, November 20, 2011

Centralized and Undemocratic Europe

Ross Douthat’s column on “Conspiracies, Coups and Currencies” in the New York Times is a must read: here.

What is now urgently required in Europe is a new polarization of political life: anti-federalist democrats versus centralizing technocrats. The main priority is to save the democracy, not the euro.

Thursday, November 10, 2011

Euro: When Money Stops Flowing

Felix Salmon (Reuters, Opinion) predicts a roller coaster coming in “The euro breakup thrill ride begins”.

He also quotes an unnamed EU diplomat that forecasts major political consequences: “This will redraw the map geopolitically and give rise to new tensions.”

Read the whole post here.

Sunday, November 6, 2011

American and Chinese Realistic Views of Europe

Jim O’Neill, the chairman of Goldman Sachs Asset Management, and Jin Liqun, the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, correctly diagnose, together, the two main weaknesses that plague the European economies.

O’Neill notes that members of the eurozone, in its present configuration, cannot hold together, and the more so if it were to put in place a single Treasury, as the French and German say they want to do. A eurozone finance ministry would induce Portugal, Ireland, Finland and Greece to pull out of the single currency. Anyway, only Germany, France and Benelux of the original joiners were the ones that were ideal for a monetary union (I personally doubt very much that this is true of France. But a “mark zone” makes sense, economically).

Jin Liqun on the other hand said, according to a Telegraph article , that:

“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies.  … I think that the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of wack.”

Indeed, several American economists including Edward Prescott and Alberto Alesina have explained the rather low total hours of work of the European population compared to that of the US population as the result of higher and growing taxes on labour in European countries.

These are precisely the two causes of European low growth and unemployment that I diagnosed in my 1998 book “L’erreur europĂ©enne” (Euro Error, Algora, 1999) and in several subsequent papers.

But while the “euro error” is now widely recognized, even though its solution – euro exit – is still rejected by politicians and business leaders, the problem of the labour tax is not understood at all. In particular extremely few people seem to understand that the current extensive insurance coverage of health care, and the vertical redistribution of income by which high wages employees pay for a significant part of the health insurance of low wages ones, could be maintained but at a much lower labour tax level, thus encouraging more work and a higher income growth in most European countries.

This will be the next intellectual and political major debate following the structural redefinition or the collapse of the euro. The managers of big American and Chinese financial institutions seem to be more knowledgeable of these European realities than European politicians and business people.

Friday, November 4, 2011

Calomiris: Greece Should Leave the Euro

Have a look at Bloomberg’s TV interview of Columbia University finance professor here.

Makes sense. Economists that do not depend for their career on European political authorities tend to agree ...

Kenneth Rogoff on the Surprising Strength of the Euro

“Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months?

The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems.”

Read more of the Project Syndicate post here. 

Wednesday, November 2, 2011

Greek Democracy

 Competitive politics, i.e. democracy, should bring out in the open available information. Here is a valuable contribution by Ambrose Evans-Pritchard (“Revenge of the Sovereign Nation” in The Telegraph),  here
about the Europeans' so-called "rescue plans" supposedly meant to "save" Greece, but in reality pushing the Greek economy over the brink in order to try to save the euro.


… “the Greeks are stripping away the self-serving claims of the creditor states that their “rescue” loan packages are to “save Greece”.

They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state, without any offsetting monetary stimulus or devaluation.

The economy has so far collapsed by 14pc to 16pc since the peak – depending who you ask – and is spiralling downwards at a vertiginous pace.
The debt has exploded under the EU-IMF Troika programme. It is heading for 180pc of GDP by next year. Even under the haircut deal, Greek debt will be 120pc of GDP in 2020 after nine years of depression. That is not cure, it is a punitive sentence.

Every major claim by the inspectors at the outset of the Memorandum has turned out to be untrue. The facts are so far from the truth that it is hard to believe they ever thought it could work. The Greeks were made to suffer IMF austerity without the usual IMF cure. This was done for one purpose only, to buy time for banks and other Club Med states to beef up their defences.
It was not an unreasonable strategy (though a BIG LIE), and might not have failed entirely if the global economy recovered briskly this year and if the ECB had behaved with an ounce of common sense. Instead the ECB choose to tighten.

When the history books are written, I think scholarship will be very harsh on the handful of men running EMU monetary policy over the last three to four years. They are not as bad as the Chicago Fed of 1930 to 1932, but not much better.

So no, like the Spartans, Thebans, and Thespians at the Pass of Thermopylae, the Greeks were sacrificed to buy time for the alliance.

The referendum is a healthy reminder that Europe is a collection of sovereign democracies, tied by treaty law for certain arrangements. It is a union only in name.”

Excellent summary.