The events of the last few weeks have shone a very harsh searchlight on the nature of sovereign debt within the European Monetary Union. Although critics of EMU have always argued that monetary union without fiscal union is “impossible”, it was only when Angela Merkel started to call for a procedure to handle a possible default on the sovereign debt of a member state that the markets began to focus on the fact that such a default really is possible. In substance, nothing much has changed with Mrs Merkel’s remarks: it always was possible for a sovereign state within the EMU to default. But now that the markets have realised that some key elements of “sovereignty” are missing from the EMU member states, market psychology has changed. It will be very hard to put this genie back into the bottle. Read more
The twists and turns in the European sovereign debt crisis have been more than usually bewildering in recent days, so I thought it would be useful to take a step back and look at the longer term budgetary fundamentals which will ultimately decide whether the troubled sovereigns in the eurozone can avoid default. The eurozone as a whole is in better fiscal shape than other developed economies (notably the US and Japan), and even the most indebted economies could yet dig themselves out of the hole they are in. But the eurozone is still plagued by the contradictions of trying to operate a monetary union without supporting this with a fiscal union.
It is becoming clear that these contradictions can only be solved if there is genuine burden sharing inside the eurozone, along with some much tougher budgetary and regulatory rules which prevent this situation ever happening again. Otherwise, there will be more discussion about default, on the lines of Nouriel Roubini’s piece in today’s FT. Or, in extremis, the currency union will be in real trouble. Read more
Ben Bernanke, US Federal Reserve chairman, has announced that the Fed is about to go on a $600bn spending spree by buying $75bn of treasury bonds every month for eight months. Not all of the members of the Federal Reserve Open Market Committee agree that a second round of quantitative easing is a good idea. Read more
If he were still alive today, what would Milton Friedman think of his disciple, Ben Bernanke? This is a matter of some concern to the Fed chairman, who is reported as saying to colleagues on Saturday: “I grasp the mantle of Milton Friedman…I think we are doing everything (he) would have us do.” With libertarian economists tending to be among those most critical of QE2, Mr Bernanke is relying on Friedman’s halo effect to enhance the legitimacy of the Fed’s recent actions. Friedman’s friends say that his opinions were unpredictable, which is what made them interesting. But some some free market economists, like Allan Meltzer, claim that Friedman would have strongly disapproved of QE2. Are they right? Read more
After a week which has been replete with important economic and political news from the US, the bulk of the incoming information has confirmed what we knew already. The Fed has embarked on QE2, more or less exactly as expected. The Republicans took the House but not the Senate, and the President’s initial reaction suggests that the Bush tax cuts will probably be extended, which was the central case before the election. And the economy continues to grow at a pace which is neither fast enough to bring unemployment down, nor slow enough to threaten a double dip. While all of this was broadly as expected, there have been some interesting (and mostly encouraging) developments which are worth noting.
So what do we know today that we did not know a week ago? Three things: Read more
The Fed statement just released indicates that the central bank intends to purchase a net total of $600bn of longer term Treasury securities between now and the end of 2011 Q2, at a pace of around $75bn per month. This was almost exactly in line with what the market had been led to expect, so there was no surprise in the extent and timing of QE2. However, there was no further softening in the Fed’s statement that interest rates are likely to remain exceptionally low for an “extended period”, which may have disappointed some observers who were looking for this language to shift in a dovish direction. Overall, the markets initial reaction was a shrug of acceptance that the Fed has done just about what it told us it would do, but certainly no more. Read more
My Lords, it is a sign of the jittery state we are in that a slower-than-expected slowdown in the rate of growth is hailed as strong evidence of recovery. Of course it is nothing of the sort. It marks the end of a period in which the economy has been supported by fiscal policy, with some help from the depreciation of sterling. Read more
The major global manufacturing surveys for the month of October have now been published, and they are considerably more buoyant than they had been in previous months. Although it could be foolhardy to place too much weight on one month’s data – and survey data at that – these results are certainly not what would be expected if the major economies were headed towards a period of retrenchment in the manufacturing sector. This is a pleasant surprise, since earlier data had suggested that manufacturing growth could peter out during the winter months. This now seems a lot less likely. Read more
Suddenly this month the esoteric world of international finance is resonating to the clash of currencies. On September 27 Brazil’s finance minister stated that an “international currency war” has erupted. In its October 16 issue the London Economist put “Currency wars” on its cover, with evocative imagery of an aerial dogfight between paper planes of currency notes from different countries. Read more