Whither the euro?

German Chancellor Angela Merkel has finally secured a new rescue package for the Eurozone’s struggling economies, propping up her own domestic position in the process. In the event, the Bundestag vote was more convincing than expected, with 523 votes in favour of increased German support for the European Financial Stability Facility (EFSF), with only 85 against. The ruling Christian Democratic Union and is partners did not even need the support of opposition parties, so the message was clear: Germany still fully supports the European project and will not allow the euro to fail.

Yet increasing the size of the EFSF from €440 billion to €780 billion appears to be too little too late. Greece’s economic woes show no sign of fading, while Italy moves ever closer to the precipice of economic disaster. Perhaps most importantly, the markets took little heart from Merkel’s victory and it is worth noting that stock markets within the Eurozone, including Germany’s Dax and France’s Cac 40 suffered greater losses following the German vote, than those, such as London, on the outside. Continue reading

Save Euro and Democracy

Published in The Moscow Times
By Andrey Borodin

The issue that has loomed large over the past months has been the extent to which the European Union’s institutions are willing and allowed to intervene to support individual countries and their banks.

Although Britain is outside the euro zone, an interim report from the country’s Independent Commission on Banking described the problem of bank guarantees well. “Large banking systems can threaten the perceived creditworthiness of governments, through the presence of an implicit guarantee. The social costs of sovereign default, or even the risk of it, are very large indeed,” according to the report. “So bank guarantees, by placing the creditworthiness of the government in question, can risk costs for society that would dwarf the direct cost or value of the subsidy to the banks.”

The main problem facing the euro zone is that there are a variety of governments pursuing their own policies, but there is only one monetary authority and guarantor of the whole banking system that is trying to act in the best interests of the single currency area as a whole. Continue reading

The return of stagflation?

Stagflation isn’t a word that has been used much in recent years, but, in a number of countries, there are hints that we may need to dust off the term.

One of the most explicit comments came last week from India’s Finance Secretary, Mr Gujral, who told Reuters, ‘The Indian government is concerned about high inflation and slowing growth.’ That followed a 25 basis point rise in the repo rate, to 8.25%, the 12th increase in 18 months. However, with inflation at a 13 month high of 9.78%, that still leaves the official rate in negative real territory, so analysts are expecting further rate increases over the next few months.

Growth is expected to reach 8.5% for the fiscal year to March 2012 – a rate that Western nations can only dream of – but with real wages now falling, consumers are feeling the pain of higher prices, and fuel price increases in particular are helping to make the Indian government hugely unpopular.

Amongst the other BRICS, consumer price inflation is at 7.2% in Brazil, 8.2% in Russia, 6.2% in China and 5.3% in South Africa. Continue reading

A Greek Tragedy Unfolds

The next tranche of international support for the beleaguered Greek economy is due, with Friday being the deadline for banks and other private sector holders of Greek sovereign debt to participate in the bail-out plan by agreeing to exchange or roll over their bond-holdings for up to 10 years. Without this private sector support, the €8bn of aid from the IMF and European Union will be blocked.

But investor and government concerns are mounting on whether the country can meet the conditions set to qualify for the loans, resulting in Greek one year bond yields rising to a record 82.1 per cent this week. Continue reading

Time for a new paradigm

A number of well known and respected economists, central bankers and commentators are starting to call for a complete re-think of Western economic and financial policy. The US and the Eurozone have chronic deficits and tiny interest rates, yet despite such stimulative fiscal and monetary policies, both areas are facing the very real possibility of a double dip recession.

A recent paper by Andrew Haldane, Executive Director of the Bank of England’s Financial Stability division puts it down to psychology. He says, ‘Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster. In these situations, psychological scarring is likely to result in risk appetite and risk-taking being lower than reality might suggest. Risk will be over-priced. Today, the very disaster myopia that caused the crisis may be retarding the recovery.’ Continue reading