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In January 2004, I attended a property conference in Switzerland, to give a talk on the European economy. I talked about the end of European catch-up on US productivity levels. But the most interesting part of the conference was a workshop in which I argued that a number of European countries, the UK being one, had dangerous property booms.
The most dangerous of all, I suggested, was Spain’s, because it is a large European country which was experiencing a huge rise in property prices and, as a result, a huge boom in property development and a correspondingly overheated construction sector. The results could be extremely painful. This remark led to a heated altercation with a Spanish property developer. I understood why he was so angry. But he was wrong, of course.
The Spanish property sector created a huge boom and a huge crash. The big question is what the Spanish authorities should (or could) have done about it. Read more
“Against the background of renewed market tensions, euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. We welcome the significant actions taken since the last summit by the euro area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth. In this context, we welcome Spain’s plan to recapitalize its banking system and the eurogroup’s announcement of support for Spain’s financial restructuring authority. The adoption of the fiscal compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs. The imminent establishment of the European Stability Mechanism is a substantial strengthening of the European firewalls. We fully support the actions of the euro area in moving forward with the completion of the Economic and Monetary Union. Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance. Euro area members will foster intra euro area adjustment through structural reforms to strengthen competitiveness in deficit countries and to promote demand and growth in surplus countries. The European Union members of the G20 are determined to move forward expeditiously on measures to support growth including through completing the European Single Market and making better use of European financial means, such as the European Investment Bank, pilot project bonds, and structural and cohesion funds, for more targeted investment, employment, growth and competitiveness, while maintaining the firm commitment to implement fiscal consolidation to be assessed on a structural basis. We look forward to the euro area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the euro area.”
Let us examine it closely.
“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”
The crucial word here is “necessary”. We can safely say that agreement on what this means is altogether lacking. Read more
One of the salient characteristics of Germany’s policy-making in the eurozone crisis ‑ or, more precisely, of the German chancellor, Angela Merkel ‑ has been the view that time is on its side. In a noteworthy speech delivered in Italy on June 2 2012, George Soros, the investor and philanthropist, has challenged this notion directly.
In the penultimate paragraph, Mr Soros writes:
“. . . The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work for Europe today. Germany then could enjoy an export-led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs, which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fuelling a real-estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it (My emphasis).”
I believe Mr Soros is right on the amount of time left. Read more
This issue is a relatively new one, so far as I know. But it is extremely important.
One of the questions raised in the subsequent discussions is why the possibility of illiquidity-induced default (as in the Spanish sovereign debt market) should be any different in impact from the possibility of a devaluation and inflation (as in the gilt market).
I have three suggested answers. Read more