From FT.com January 23, 2012

What do eurozone leaders want most at the meeting of the World Economic Forum? To cease being viewed as the source of global economic threats and return to being a source of economic solutions. It is far more fun – let alone more dignified – to lecture others on their faults than to be lectured on one’s own. It is even more humiliating when those lectures are thoroughly deserved.

Unfortunately for the eurozone, there is no chance that its policymakers will escape blame in Davos. They will argue that they are on the way to a resolution. Alas, the more percipient of them, as well as their peers from around the world, know they are not. Their visit to the Swiss mountains will be a discomforting experience.

The eurozone is almost universally regarded as the source of the pre-eminent threat of an economic meltdown. The risk is that both banks and sovereigns could default, probably triggering – or triggered by – a partial or complete break-up of the eurozone. Such a wreck may still be regarded as unlikely, but it is no longer inconceivable.

Continue reading: “Guide to Davos 2012: Confronting follies”

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Posted in Capital inflows, Central banks, Economics, Eurozone, Financial crisis |
From FT.com January 22, 2012

Capitalism in crisis

Three years ago, when the worst financial and economic crisis since the 1930s gripped the global economy, the Financial Times published a series on “the future of capitalism”. Now, after a feeble recovery in the high-income countries, it has run a series on “capitalism in crisis”. Things seem to be worse. How is this to be explained?

Continue reading: “Seven ways to fix the system’s flaws”

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Posted in Capital inflows, Central banks, Economics, Financial crisis, US |
From FT.com January 24, 2012

What can we see in the world economy in 2012? Risks galore, is the answer.

The debt crisis of the high-income countries is already four and a half years old. Yet it shows no sign of abating, particularly in the eurozone. While emerging and developing countries are in reasonably robust condition, they would be vulnerable to an intensification of the crisis, which could hit them via several channels: trade, finance and remittances. Many countries – both high-income and developing – are in a weaker condition than they were in 2008 and would, accordingly, find it harder to respond effectively.

Continue reading: “Yet another year of living dangerously”

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Posted in Economics, Eurozone, Financial crisis, Japan, US |

The delicate balance of fixing the eurozone

January 9, 2012 6:50 pm
AP/Bernd Kammerer

AP/Bernd Kammerer

In the most recent post, I discussed the fullest analysis yet by Hans-Werner Sinn (together with Timo Wollmershäuser), president of the Ifo Institute in Munich, of the role of the European System of Central Banks in funding the balance of payments imbalances inside the eurozone.

While this post elicited many interesting comments, none, I believe, invalidated Professor Sinn’s basic thesis, which is that monetary financing of the balance of payments (ie the current account deficit, plus net private capital flows) is large, growing and decisive in sustaining imbalances inside the eurozone.

Prof Sinn’s work has attracted much controversy. But this is not, in my view, because it is fundamentally wrong (although I think he did initially exaggerate the problems created for managing money and credit in Germany itself), but because it reveals what many policymakers and observers would like to conceal.

Continue reading: “The delicate balance of fixing the eurozone”

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Posted in Central banks, Economics, Eurozone, Financial crisis |

What has the ECB done in the crisis? The role of TARGET balances

December 28, 2011 8:00 am
Mario Draghi

Mario Draghi, December 8, 2011. Image by Getty.

Will the European Central Bank save the eurozone? This is an extremely controversial question. What is clear, however, is that the central bank is the only entity with the capacity and the calling to do so. Without the euro, the ECB ceases to exist. That is true of no other eurozone institution. It gives it the incentive to act. It is also acting on a large scale.

The resistance to funding governments by purchasing bonds on a large scale, even in secondary markets, remains strong, as Mario Draghi, the new president of the ECB made plain in his interview with the FT on December 18.

Nevertheless, he argued, the ECB took important action the week before:

“We cut the main interest rate by 25 basis points. We announced two long-term refinancing operations, which for the first time will last three years. We halved the minimum reserve ratio from 2 per cent to 1 per cent. We broadened collateral eligibility rules. Finally, the ECB governing council agreed that the ECB would act as an agent for the European Financial Stability Facility (EFSF).”

Thus the ECB is determined to fund banks freely, at low rates of interest, thereby subsidising them directly and the governments they lend to, indirectly.

Continue reading: “What has the ECB done in the crisis? The role of TARGET balances”

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Posted in Central banks, Eurozone |
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Martin Wolf is chief economics commentator at the Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism”.

Mr Wolf is an associate member of the governing body of Nuffield College, Oxford, honorary fellow of Corpus Christi College, Oxford University, an honorary fellow of the Oxford Institute for Economic Policy (Oxonia) and a special professor at the University of Nottingham. He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999 and a member of its International Media Council since 2006.

He was made a Doctor of Letters, honoris causa, by Nottingham University in July 2006. He was made a Doctor of Science (Economics) of London University, honoris causa, by the London School of Economics in December 2006.
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