Financial crisis

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Speaking on television earlier this year, Manuel Valls, the French prime minister, declared that his government’s budget would not be written to “satisfy Brussels”, adding – “We are a great nation . . . France is a sovereign country.”

The consensus, such as it is, on the eurozone crisis was neatly summed up on Monday by Hugo Dixon, author and editor at large of Reuters News: “The euro crisis is sleeping, not dead.”

What about the crisis in Greece? Over the past four to five years Europe, supported by the International Monetary Fund, has invested more time, effort and money in Greece than in any other struggling eurozone state. The aim is to reform a country so inefficiently governed, so riddled with corruption and so burdened with debt that it seemed, for certain spells in 2011 and 2012, to pose a threat to the eurozone’s survival.

So it seems reasonable to ask: if this time, effort and money have not changed Greece for the better, what has it all been for? Read more

The focus in last week’s European elections was on the seismic waves of the distinct currents of Euro-populism and reaction that “earthquaked” to the top of the polls in France, Britain (or at least England), Denmark and Greece. But arguably the most intriguing insurgency was Podemos (We Can) in Spain, a phenomenon worth examining outside the swish and swirl of populism.

Much of what I have seen written about Podemos has them “coming out of nowhere” – a cliché employed by politicians and analysts that means “we didn’t see them coming”. Yet a three-month-old party with a budget of barely €100,000 shot into fourth place with one and a quarter million votes and five seats in the European Parliament – similar to Syriza, the Greek left-wing party they plan to hitch up with.

The eruption of Podemos and its compellingly outspoken leader, Pablo Iglesias, has already triggered the fall of Alfredo Perez Rubalcalba, the Socialist secretary general who has presided over the party’s worst electoral performance since democracy was restored in 1977-78. But while obviously a rising current of a new left, Podemos could be a broader catalyst for political change in Spain and beyond. Read more

The fragile middle
Decades of rapid growth have created a new middle class in the developing world, prompting multinational companies to invest heavily in emerging markets as they attempt to serve millions of new consumers. But rising inequality and slowing growth has presented a risk to this new middle class and is forcing companies to rethink their strategy. In this week’s podcast, Ferdinando Giugliano is joined by Shawn Donnan, world trade editor and James Kynge, emerging markets editor to discuss this nascent middle class and its prospects in the face of slowing growth

The news that Greece is returning to the markets as an issuer of sovereign-debt is symbolic of the resurgence of interest in Europe among international – and particularly US – investors. As ever there is a circular logic in play here.

Because most investors no longer fear a collapse of the euro, Greece can come back to the markets. And the sight of Greece returning to the markets will confirm the prejudices of those who argue that the crisis in the eurozone is over.

But just as international investors were, in retrospect, too panic-stricken about Europe in 2012 – I suspect they are probably too relaxed now.

Greece’s return to the markets is one striking sign of this. Another is the fact that 5-year Spanish bonds now have a lower yield than their US equivalent – despite the fact that Spain is barely growing, that its budget-deficit continues to bust EU rules, while unemployment is more than 25 per cent. Read more

By Gideon Rachman
“Whatever it takes.” Mario Draghi’s declaration that he would save the euro could well go down as the most effective three-word statement by a Roman since Julius Caesar’s veni, vidi, vici.

By Gideon Rachman
Germany has surrendered and the euro is saved. That seems to be the markets’ interpretation of last week’s ruling by the German constitutional court on the European Central Bank’s “whatever it takes” policy to save the single currency. The judges’ ruling essentially boiled down to this: “We don’t like what the ECB is doing. We think it illegal. But only the European Court of Justice can strike it down.”

German Constitutional Court (Matthias Hangst/Getty Images)

We don’t like what the European Central Bank is doing – but if someone is going to drop a nuclear bomb on the eurozone, it won’t be us. This seems to be the main message in today’s judgment from Germany’s constitutional court on the ECB’s Outright Monetary Transactions programme.

The OMT is an initiative aimed at saving the eurozone with large-scale ECB purchases of the bonds of governments vulnerable on financial markets, in return for a commitment to deep-seated economic reforms. Germany’s Bundesbank and much of the German public have never warmed to the OMT – even though the programme has never actually been used and, some experts think, never will be.

So the German court’s judgment will come as a relief to Mario Draghi, the ECB president, and all those who hold that the OMT, unveiled in August and September 2012, is the single most important reason why Europe’s monetary union no longer appears in mortal danger. But mixed with this relief will be a feeling that the German court’s judgement is not entirely helpful – and that some of its arguments are not particularly well-founded. Read more

Ask a German politician or pundit to account for the strength of Germany’s economy. I’ll bet you a plate of Nürnberger sausages that he or she will praise the labour market and welfare reforms adopted about 10 years ago by the government of Gerhard Schröder, Chancellor Angela Merkel’s predecessor.

The “Hartz reforms” tightened the terms on which unemployed Germans claim welfare benefits. They laid the emphasis on putting people quickly back into jobs, at lower pay if necessary. Nowadays German unemployment is remarkably low (5.1 per cent of the workforce in December 2013, according to Eurostat, versus 27.8 per cent in Greece, 25.8 per cent in Spain and 12.7 per cent in Italy).

However, some newly published research by four German economists challenges the argument that the Hartz reforms are the main cause of the nation’s economic recovery. Their carefully written study, entitled “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy”, should be required reading for everyone concerned with boosting the eurozone’s economic performance. Read more

By Gideon Rachman
In 1996 a friend of mine called Jim Rohwer published a book called Asia Rising. A few months later, Asia crashed. The financial crisis of 1997 made my colleague’s book look foolish. I thought of Jim Rohwer (who died prematurely in 2001) last week as a I listened to another Jim – Jim O’Neill, formerly of Goldman Sachs – defending his bullish views on emerging markets in a radio interview.

(c) WEF

Every year, there is debate at Davos about what is hot – and what is decidedly not. This year, the emerging markets are definitely in the second camp.

Never mind the fact that the streets of Davos are full of cheery posters proclaiming the joys of Malaysia, India or Brazil – or that Nigerian food was being served to Davos delegates at lunch (complete with snail stew.) Also ignore the determinedly upbeat messages emanating from a host of officials from the BRICs nations.

Behind the chirpy smiles, a new mood of anxiety is stalking the emerging markets delegations, amplified by the recent dramas around Argentina. And that marks a stark contrast to recent years, when the emerging markets were regarded as the new saviours of global growth – and their leaders strutted around the Davos corridors with pride. Read more

Lawrence Summers (c) WEF

On Thursday, I moderated a fascinating lunch-time discussion on “secular
stagnation” with Lawrence Summers, former US treasury secretary,
who has recently propounded this idea.

Other participants were Motoshige Itoh of Tokyo university, Edmund Phelps, Nobel laureate, director of the Center on Capitalism and Society, Columbia University, Adam Posen, director of the Peterson Institute for International Economics, Helene Rey of the London Business School and Kenneth Rogoff of Harvard. This was a notably heavy-weight panel.

The discussion was rich and complex. But here are some conclusions.

First, since the crisis in 2007 and 2008, the equilibrium long-run real interest rate in the high-income countries has been ultra-low and the equilibrium real short rate has been negative. There is no disagreement on this. This was an obvious indicator of sustained and chronic weakness of demand.

Second, the main instrument we have used to deal with condition this has been hyper-aggressive monetary policy. But this creates substantial problems (in some views, at least, including mine): it distributes income towards both the financial sector and the rich, while also generating bubbles. Read more

Chris Giles, economics editor, finds a mood of optimism among economic experts on the first day of the World Economic Forum in Davos, but concerns remain over the strength of the recovery.

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The West is forever petrified of Chinese and Indian growth that might destroy advanced economy standards of living. Politicians fuel that fear. In the UK, David Cameron, prime minister, talks repeatedly about a “global race” and the need for sacrifices so Britain can succeed in that race. His predecessor Gordon Brown used to repeat one of his favourite statistics that there were 4 million graduates a year coming out of China and India and only 250,000 in the UK.

In a panel on the world of work, business leaders with experience in working in both advanced and emerging markets had a very different story to tell. There was a huge shortage of skilled workers, they all agreed, and a surfeit of unskilled. Emerging economies education systems were not up to scratch and there was still a need for ex pats and a lot of investment in basic education in emerging markets. Read more

GEORGES GOBET/AFP/GettyImages

Here is a startling prediction from the European Commission. In the absence of comprehensive economic reforms, living standards in the eurozone, relative to the US, will be lower in 2023 than they were in the mid-1960s.

This forecast, contained in the Commission’s latest quarterly report on the euro area economy, deserves to be displayed prominently on the wall of every president and prime minister’s office in Europe.

It is a sobering prediction for two reasons. First, it contrasts starkly with the comforting tales of economic recovery and financial market stability on which Europe’s leaders are congratulating themselves in these early weeks of 2014. Second, it raises profound questions about Europe’s relative weight in the world and, in particular, about its military alliance and economic partnership with the US. Read more

An elderly woman walks through a wintry Spanish city, sadly bemoaning her country’s fate. “All the studies show we always come last in the rankings,” she exclaims, shuffling past a placard highlighting Spain’s poor performance in international education tests.

She bumps into old friends, all of whom tell her of their plans to leave the country and “become foreigners”. At a nearby market, stalls advertise the benefits of becoming German, Scandinavian or British. She meets a tousle-haired man clutching his German certificate: “I want to know what it feels like when everyone owes you money – not the other way around.” Read more

Want to make your own mind up over Reinhart-Rogoff? Here are links to the original working papers that gave us the mother of all economic dust-ups, the responses of the two sets of authors, and some great secondary sources.

PRIMARY sources:

The working paper by Carmen M Reinhart and Kenneth S Rogoff, published in January 2010:

The critique of the Reinhart-Rogoff research, by Thomas Herndon, Michael Ash and Robert Pollin, published on April 15 2013:

Reinhart and Rogoff respond:

Ash and Pollin respond to the response:

And a selection of SECONDARY sources:

Here’s the post by Rortybomb blogger Mike Konczal that brought the critique to the attention of the masses. Konczal notes that the episode is “good evidence for why you should release your data online, so it can be properly vetted.”

Over at Slate, Matthew Yglesias asked:

FT Alphaville’s Cardiff Garcia and Joseph Cotterill shared their thoughts on the debate:

Paul Krugman has been busy:

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By Gideon Rachman
Travelling between Madrid and Barcelona on a recent weekday afternoon, I wandered into the first-class section of the train. There was only one passenger, snoozing on the black leather seats – and he turned out to be the conductor, who looked up startled at the sound of an intruder.

In the week of Margaret Thatcher’s funeral – and with the euro-crisis bubbling along – it is interesting to take a look back at what Thatcher had to say about the single currency. Much of the commentary since her death has portrayed Thatcher’s views on Europe as irrational and backward-looking. For example, Anne-Marie Slaughter in the FT, wrote that “her attitude to Europe was a throwback to the 19th century”. For good measure, Prof Slaughter adds that Thatcher’s views were “deeply anachronistic and dangerous”. Of course, there was a strong element of emotion in Thatcher’s views of Europe. So what? It is more interesting to note that she also made some quite precise criticisms of the European single currency that look increasingly prescient, as time wears on. Read more