A solution at last, or the last of the solutions?

European leaders finally unveiled a new package of measures to tackle the Eurozone’s debt crisis on 27 October. Support for the European Financial Stability Facility (EFSF) is to be increased from €440 billion to €1 trillion and private holders of Greek sovereign debt are to be offered 50% of their outstanding debt holdings. The markets initially welcomed the deal, with bank stocks rebounding impressively and major stock indices around the world registering 2-5% gains on the day.

While it will take at least a generation to get the Greek economy back on track, pledges to offer insurance on Eurozone members’ debt and attract greater private and public investment into the Eurozone are to be welcomed. Yet French president Nicolas Sarkozy was perhaps more prescient than he knew when he triumphantly described the agreement as “a credible and ambitious and overall response to the Greek crisis”. Continue reading

The power of the rising east

The Brazilian central bank’s decision to cut its main interest rate from 12% to 11.5% on 20 October has been cited as further evidence of the slowdown in the global economy. The argument goes that if one of the world’s biggest emerging markets is concerned about slowing growth, then the industrialised world really should sit up and take notice. Indeed, Brazilian GDP is now expected to grow by just 3.5% this year, far less than the 7.5% recorded last year, partly because of difficulties in the country’s key export markets but also because last year’s figure was buoyed by increased oil production.

There is a great deal of truth in this view but many analysts are missing the bigger picture in their relentless dash towards doom and gloom. The interest rate cut came after five successive increases and was prompted by the Banco Central’s desire to rein in the economy to dampen inflationary pressures. It is clear that Brasilia fears an economic slowdown and has now taken its eye off the perceived evil – inflation – to join in the western hemisphere’s battle against the four horsemen of the economic apocalypse: recession, stagflation, unemployment and collapsing confidence. Continue reading

Great idea; poor function

As evidenced by the meeting of G20 nations in Paris, global concern over economic instability in the Eurozone is growing. As the international political economy becomes ever more closely integrated, weak or non-existent growth in the European Union has major ramifications from Brazil to Japan, particularly given ongoing problems to kick-start the world’s second biggest economic entity, the United States. Yet as global financial institutions struggle to contain European economic decrepitude, the soft underbelly of the European project continues to creak like a ship in a storm.

Despite relatively modest public debt levels, Standard & Poor’s followed in the footsteps of Fitch by cutting Spain’s credit rating, in this instance from AA to AA-, as a result of high levels of private sector debt and weak growth. Ireland will take a generation to recover from its collapse; Greece remains as far from economic sanity as ever and traders show no let up in dragging Italy into the mix. The credit ratings on a host of major international banks have been cut, most recently on UBS, Lloyds and Royal Bank of Scotland. As long as the EU’s more prosperous states fail to provide the engine for more rapid growth, the European fringe will continue to struggle. Continue reading

The moving goal posts of international finance

It is often said that armies train to fight the last war rather than prepare for the next conflict. By the same token, governments are usually seen tackling the previous financial crisis, rather than the most likely sources of future instability. For much of the 1980s and 90s, governments considered 1970s-style inflation to be the biggest threat to financial stability and were quick to use interest rates as a break on economic overheating.

So was the Bank of England (BoE) right to launch a second round of quantitative easing (QE) on 6 October, just as other governments have sought to blow the embers of economic activity by boosting money supply? Well, as so often in such cases, it is easy to argue both in favour and against. Yes, because stagflation is currently a bigger threat than inflation; but no, because there is too little concrete evidence to show whether and how QE actually works. Continue reading