Why Eurobonds Are the Wrong Solution

Common sense (at last!) by an economist, Daniel Gros, ,here.

A Balanced Assessment of the Current Situation

By Ambrose Evans-Pritchard in The Telegraph  here. Closely reasoned as usual and thought provoking.

 

Are the 1930s Back?

A frightening parallel in Kantooseconomics.com, here, especially regarding a comparison of the return to the gold standard (then) and the creation of the euro (now).


It is time to remember a forgotten lesson of the Great Depression. How to get out of it: (a) drop out of the gold standard, and (b) devaluate your currency by an adequate monetary policy.

The Economics of British Riots

Read Posner and Becker on the topic here . The reasons for seemingly irrational behavior.

The Euro Endgame

Mohamed A. El-Erian develops and analysis quite similar to mine (see for example my post of yesterday) for Project-Syndicate, even though his title is misleading, reflecting an ECB-centered preoccupation with its independence and future rather than expressing a concern for global welfare in Europe.

Excerpts:

“Whichever way you look at it, the ECB … is being forced into an endgame with three once-improbable outcomes. That endgame will play out in week and months, not quarters and years. (see my comments on the durability of cartels, JJR).  …

The first is a disorderly breakup of the eurozone. …

The second is the one preferred by political scientists and European visionaries (he means “the politicians of the zone”, JJR): greater fiscal union … or, in blunt terms, German willingness to do for the eurozone what it did for Eastern Germany – namely, write large checks for years to come. (most unlikely, despite the "eurobonds" babble, JJR).

The third alternative is the one embraced by several economists. It involves creating a smaller and more economically coherent eurozone which would consist of core and near-core countries within a tighter fiscal union. … In the process, 2-3 peripheral economies would take a sabbatical from the euro. (See again my post on that. It is not a preference, but the logical consequence of the fundamentals of optimal currency areas theory, supplemented by politicians' preference for centralization, JJR). 

Although the endgame is close, it is impossible to predict which alternative will prevail.    … My sense is that politicians will opt for a weak variant of greater fiscal union, but that, ultimately they will fail to execute it for the eurozone as we know it today.   …  the coming endgame will be neither simple, nor orderly. (That’s precisely what I explained in my book, and in yesterday’s post, JJR).”

Additional comment:

El-Erian didn’t, however, mention a fourth alternative that we develop with two colleagues in today’s French daily Les Echos (for those of you who can read French look here: a major devaluation of the euro following a drastic cut of the ECB interest rates, that would stimulate all the economies of the eurozone, including the German one. It would buy some more time for politicians before they resolve to adopt the most likely shrinking of the eurozone into a DM-zone.

How Long Will the Euro Monetary Cartel Survive?

A paper by Margaret C. Levenstein and Valerie Y. Suslow, “What Determines Cartel Success?” ( Journal of Economic Literature, March 2006 ), potentially provides  elements of information that lead to an answer.

First, remember my analysis in a recent book, “L’euro: comment s’en débarrasser” (Grasset, 2011), of the euro as a cartel of currencies intended to maintain a high price of the jointly created substitute currency (the euro, which replaced the DM, Franc, Lira and other national currencies), in order for the big borrowers – banks, governments, and firms -- to lower the cost of the funds they borrow.

Second, read the abstract of the Levenstein/Suslow paper:

… “We conclude that many cartels do survive, and that the distribution of duration is bimodal. While the average duration of cartels across a range of studies is about five years, many cartels break up very quickly (i.e. in less than a year). But there are many others that last between five and ten years, and some that last decades.   …  Cartels break up occasionally because of cheating or lack of effective monitoring, but the biggest challenges cartels face are entry and adjustment of the collusive agreement in response to changing economic conditions. Cartels that develop organizational structures that allow them the flexibility to respond to these changing conditions are more likely to survive.”

Now the euro was born more than ten years ago, in 1999. It has obviously been submitted to cheating by many if not all of its member states, via the repeal of the “stability pact” and overborrowing by several governments that breached the quota limitations that are essential for a cartel to survive. It has faced entry by new members and its collusive agreement is confronted to severe and changing economic conditions.

But on the other hand it clearly developed an “organizational structure” in the guise of the European Central Bank, which, like all other central banks is an instrument of collusion and defense of the interest of financial institutions.

My guess is that this cartel is going to disintegrate, maybe to be replaced by a smaller, more homogenous one. Its life span is already respectable but it has an important comparative advantage over other cartels: the compulsory collusion organizer that is the ECB. So I would be surprised if it disappeared right now. I rather expect a protracted process of progressive disintegration (that could suddenly accelerate) by the exit of one country after another.

However, as I wrote in the book, the game with 17 players is too complex to allow a precise forecast, either regarding the scenario, or its timing. But right now the ECB has been compelled to renege also on its charter by bailing out a few overleveraged governments of the South. A policy which was strictly forbidden by the initial agreement. So watch out.

The Globalization … of Development

Project Syndicate undertakes the publication of new, weekly series The New Global Economy in which senior officials from various countries, international business leaders, and economists will comment on a world in mutation.

Excerpt from the presentation:

“Ten years ago, rich countries dominated the world economy, accounting for two-thirds of global GDP. Since then, their share has fallen to just over half. In ten years, it could decline to a mere 40%, with emerging markets producing most global output.

The pace of this shift in economic power is unprecedented, and raises as many questions as it does hopes.”

Indeed, much has been said and written about the financial aspect of globalization, but the real aspects of the world economies’ rebalancing may be more important in the medium run.