There was talk of whether Greece would be allowed to default.
If left to its own devices it could have opted to leave the euro, which in turn could have created contagion, forcing the departure of other member states. Political risk is no longer just instability in the developing world or avoiding war-zones. The global financial system has become a battleground that affects every company from Audi to Lego and McDonalds to Zara. Sanctions, consumer boycotts, preferential treatment for national champions, and the creation of gated markets can see long nurtured investments disappear overnight.
Europe must not cut, but spend money'. The financial crisis was caused by too much confidence, too much money lending and to much spending, but the irony is that the crisis can only be solved by more confidence, even more more money to lend and spend, says Larry Summers , the former US Minister of Finance October 29, during the annual Tinbergenlecture at the Dutch National Bank. The former Harvard president and economic advisor to President Obama is known as a gifted economist.
Summers was named last year as the new chairman of the Federal Reserve, the US central banking system. He is known for his direct and sometimes blunt manner. Summers brought his message outspoken. The US economy is performing 'properly', but not great, he said. Certainly not given the massive stimulus the central bank has taken since the outbreak of the crisis.
The eurozone economy is doing even "lousy" and remains far behind the expectations. Europe has not yet noticed that it is on the Japanese road. There is the situation of prolonged underperformance, where interest rates of around 0 percent and deflation seems inevitable. Japan is trying to turn the tide by creating large amounts of money, but so far only partly succeeds. Recently the central bank announced to pump tens of billions a year extra into the economy. In the eurozone too, the inflation is coming closer to zero.
There is talk of "secular stagnation" says Summers: 'sickly recovery that dies in infancy', he quoted Alvin Hansen, the Keynesian economist who described the mechanism in According to Hansen, the only way is that governments start issuing a lot of money in order to stimulate investment and spending. Of course it feels counter-intuitive, he said, to provide just more money in tough times. When I ask an American audience who is proud of Kennedy airport no one raises his hand.
I say: now you can fixing up 'with money you borrow at negative rates.
When will there be again an opportunity pass? Policies that they can not justify to the younger generations, Summers said. They will then have a carry a much heavier bvurden than an interest rate of zero percent, he predicts. France had just at this point quite right, when earlier this month a too broad a budget proposal was submitted to Brussels and was rebuffed. Demanding structural reforms from France, the European Union and Germany ahead, are not the solution for secular stagnation'.
Moreover, it is attempted in the eurozone for years. Also, monetary policy can not offer a real solution, the economist thinks. It is questionable whether a major expansion program, such as has just finished in America and Japan is performing now, is effective in the eurozone. I have no objection, but the knowledge we now have notes that more public investment would be better.
Whether this is politically feasible in Brussels, depends on who it represents, says Summers. If it comes from an Italian career civil servant, it is taken a lot less serious than when it is suggested by someone from a country where the budget is generally in order. George Soros , Prof Robert J. Shiller and Jean-Paul Rodrigue , dept. Soros lectured that markets are not out of trouble yet. What we see now is a period of instability and uncertainty.
Maintaining stability has to be the objective of the authorities by a more semantic rule of regulations. Not only money supply but also credit supply and hedgefunds need to be controlled. He also stated there is a commodities bubble still in the growth phase.
Prof Shiller stated that the huge rise in house prices in the U. On the debt issue, Prof. The developed countries must find a way to navigate between the Scylla of insufficient stimulus for their weak economies and the Charybdis of excessive issuance of public debt, which would endanger its risk-free status and thus deprive their economies of an indispensable benchmark. To ward off the threat of a worldwide depression that loomed at the end of the s, governments opted to run up substantial fiscal deficits.
In doing so, they sowed the seeds of the sovereign debt crisis. Doing so too rapidly, however, will choke growth.
Faced the debt dilemma, Japan and the United States have pursued growth policies while the euro area members are quickly trying to rebalance their budgets. There are respective risks associated with these two strategies and for the international monetary and financial system of developing countries. The commentary draws a systematic comparison between the two countries over the decade before the crisis and the management of the crisis.
Overall it suggests that there may be little left to do for Greece to avoid a repeat of the Argentine default, but in larger scale. Debt reduction without default? This paper by Daniel Gros and Thomas Mayer proposes a two-step, market-based approach to debt reduction: offer holders of debt of the countries with an EFSF programme an exchange into EFSF paper at the market price prior to their entry into an EFSF-funded programme and once the EFSF had acquired most of the debt, it would assess debt sustainability country by country.
Key characteristic of a boom is the expansion of leverage i. The key characteristic of the subsequent bust is the explosion of public debt as private debt cannot be serviced. The economies of Ireland and Latvia and to some extent Spain offer good examples of this trend of adjustment difficulties in the piigs club.
Within the euro area, however, it is no longer possible to make such a clear distinction between public and private debt given that no euro area country has access to the printing press. Imbalances within the euro area have been a defining feature of the crisis. It shows that relative price adjustments have been proceeding gradually. Real effective exchange rates have depreciated by percent, driven largely by reductions in unit labor costs due to labor shedding. While exports have typically rebounded, subdued demand accounts for much of the reduction in current account deficits.
Hence, the current account balance of the euro area as a whole has shifted into surplus. Internal rebalancing has come with subdued activity—notably very high unemployment in the deficit economies—and made continued adjustment more difficult. To advance rebalancing further, the paper emphasizes the need for:. Already much is written about macroeconomic imbalances in the euro area and symmetry in the eurozone.
Lax financial conditions can foster credit booms, that led to large capital flows across the world, including large movements of resources from the Northern countries of the euro area towards the Southern part. After , these flows have suddenly stopped, creating severe adjustment pressures. The challenge is to strike a delicate balance between providing liquidity for solvent institutions while keeping the overall pressure on for a rapid correction of the imbalances.
The divergence of the competitive positions that have built up since the early s is one of the major problems of the eurozone. Both President Barroso and M. El-Erian addressed the dilemma of expansion versus austerity. Without it tax receipts implode, investment is turned away, and meeting future debt payments is harder.
Worst of all, Paul Krugman is comparing their ideas to disgusting insects. On Wednesday, commission economists fired back at their critics in nearly 3, eye-glazing words of economics jargon. Supporting De Grauwe and Ji is the fact that the relative market calm the euro zone now enjoys arrived only after the European Central Bank announced it would buy unlimited quantities of bonds of countries that sign up for a bailout program.
Budget deficits in the periphery are falling; so are current-account deficits, suggesting an improvement in the underlying competitiveness of these countries. The burden of proof seems to lie with the commission on this one, since the effect of the ECB pledge was so dramatic. The commission believes yes, and it notes the International Monetary Fund and the Organization for Economic Cooperation and Development believe so too.
Therefore budget austerity is, in fact, necessary? But what if it is not admitted? Clearly Greece, Portugal and Ireland, facing severe market pressure, needed to cut. All of these countries faced low funding costs throughout the crisis and no immediate need for austerity.
Doing so would also have increased long-dormant domestic demand in the euro-zone core and helped the periphery recover through export-led growth. The commission is on board with this point. The commission notes that Germany is edging towards better policies. German officials have said they are willing to allow stronger wage increases, which will help German consumers buy goods made by Greek, Italian, Portuguese, Spanish and Irish factories.
The problem is, this is arguably too little, too late. Germany has been cutting its deficit for the last two years. And that continues to be the case. Without higher inflation and stronger domestic demand in the euro-zone core, the periphery is facing a long, nasty period of adjustment.
The commission also defends itself against the charge of being inflexible.