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Saturday, October 6

6th Oct - Weekender: Europe, US, Asia, Iran

My usual weekend's reading package comes this week with a special section on Iran. The "Liikanen paper" on banking reform, Spanish crawl to bailout request, plans for fiscal union and continuing trouble with Greece were the main themes of the week. All of these will move to closer focus ahead of the European summits.

Previously on MoreLiver’s

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Brussels blog round up for 29 September – 5 October: Georgia votes, the third phase of the eurocrisis, and is Mitt Romney anti-EU?Europp / LSE
Chris Gilson and Stuart A Brown take a look at the week in Brussels blogging.

Chart of the week: Wage stickiness and painful adjustmentbruegel
This article studies labour cost adjustment in the euro area. We find that wages are sticky and nominal wages rarely fall except in the most severe crisis circumstances. Second, unit labour cost (ULC) reductions are often associated with significant increases in unemployment. Third, the relative adjustment is forecast to continue and accelerate during 2012/13.  

Tests of German ResilienceIMF
Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries’ standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany’s ability to act as global locomotive has been limited.

The IMF and the euro crisis: Less cash, more impactThe Economist
The IMF needs to change tack if Spain asks for a bail-out

Poll: Is the Objection to Using the ESM’s Bailout Money to Purchase Bad Loans Appropriate?CFA Institute
72% Yes. Each of the objecting nations sees the ESM as a negotiating lever to ensure that troubled eurozone nations implement conservative fiscal policies and that their troubled banks rebuild the sanctity of their capital structures. In other words, bailout monies are only to be used as a final option once all other measures are exhausted.

While Europe’s political leaders continue their diplomatic dance, real power in the eurozone has shifted to central bankersEuropp / LSE
Since the beginning of the eurozone crisis European leaders have attended summit after summit, which tend to result in little effective action. In light of the European Central Bank’s recent decision to buy stricken country’s bonds, Federico Castiglioni argues that the power to shape Europe’s financial and fiscal future may now be vested in the monetary policy of central banks.

Should Europe be Fracking?Daniel Gros / Project Syndicate
The global energy community is abuzz with excitement about hydraulic fracturing, or “fracking,” a newish technology that has opened formerly inaccessible reserves of so-called shale gas. But there are good reasons why Europe should refrain, at least temporarily, from jumping on the bandwagon.

Multi-million-euro market for inside EU knowledgeeuobserver
"Monitoring" - the trade term for detailed surveillance of EU institutions - accounts for 60 to 70 percent of EU lobby companies' activities in Brussels, contacts at leading firms say.

Inside Germany’s central bank: Europe’s monetary oppositionThe Economist
Tensions between the Bundesbank and the ECB are rooted in concerns about central-bank independence

The Economic Consequences of Mr. RajoyKrugman / NYT
History suggests that unless Spain gets serious help from a broader euro boom, and in particular some inflation in creditor countries, it faces a near-impossible task.

(audio) Spain's Economic Policy Strategy LSE
Luis de Guindos, Spanish Minister of the Economy and Competitiveness (60 minutes)

Mysterious MarianoThe Economist
Spain’s prime minister battles against the break-up of the euro and his country

The case for structural reforms of banking after the crisisBIS (pdf)
Erkki Liikanen, Governor of the Bank of Finland and Chairman of the High-level Expert Group on the structure of the EU banking sector, at the European Commission, Brussels, 2 October 2012.

The Liikanen report - is size the elephant in the room?bruegel
A more fundamental point is that it is not clear that legal separation reduces governments’ incentives to bail-out troubled banks and lowers systemic risk instead of shifting it to other parts of the banking sector. The reasons for saving troubled banks go beyond protecting insured depositors…From an economists’ point of view the question then becomes, should you prefer structural regulation (i.e. quantity regulation) or price regulation through higher capital requirements or high taxes for big banks.

Erkki proposes, Michel disposesDeus Ex Macchiato
EU is already trying to build a banking union and is short of resources to implement a change as radical as Liikanen proposes. Politics will now take over, with the majority of the work being done under the Irish presidency next year. No one can predict where this will end up, but if I were a betting man I would not put a lot of money on Erkki’s proposals surviving unscathed into the new year.

The Liikanen review: Into the ringThe Economist
A European report recommends yet another way to ring-fence banks

Who Really Calls The Shots In EuropeZH
Bank assets as % of home country’s GDP

Euro Area Budget? More on Tax RatesEconoMonitor
Normalizing taxes across national borders will be a difficult task. One would need to establish a ‘federal rate’, thereby allowing the 17 municipalities (countries) flexibility to set their own policies but with bound budgets (i.e., no support for local, or municipal budgets).

Germany backs pooling of debt, no joint liabilityeuobserver
The idea of a debt redemption fund for eurozone countries is not completely unpalatable to the German government, provided each state remains liable for its own debt, a German finance ministry official said on Friday (5 October).

Exchange rates fixed or flexible? Does it matter?
For many observers, one central flaw of the Eurozone is that countries lose the ability to manipulate their exchange rates to suit their needs. But this article argues that flexible exchange rates are often more likely to make things worse than make things better.

On the (In)effectiveness of Fiscal Devaluations in a Monetary UnionFED
This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal policies and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilized by the central bank and on whether the tax shift is anticipated.

Bouncing BernankeFree exchange / The Economist
The Fed is clearly explaining that rates will remain low even after economic conditions would justify an increase. That implies that future inflation will be above the Fed's target, and inflation expectations are responding. Mr Bernanke's name probably won't make the evening news tonight. Yet the Fed effectively loosened monetary policy today, in a manner that should raise the return, in growth and hiring, of its ongoing asset-purchase plans.

FOMC Minutes: "Most participants agreed numerical thresholds could be useful"Calculated Risk

Data UpdateTim Duy’s Fed Watch
Not yet seeing a dramatic shift in the direction of the US economy; that doesn't mean such a shift isn't coming.  Underlying growth likely slow and steady, although external factors are clearly working to drag growth even lower, with manufacturing showing stress.  Without a doubt, these are a matter of concern, and "slow and steady" is not obviously enough to allow the economy to shrug off a negative shock.  This is especially true with fiscal cliff looming.  But, overall, nothing to make me believe the Fed would change course anytime soon.  Nothing to make me sleep much easier at night either.

Citi Economic Surprise Index spikesSober Look
Employment report has sent the Citi Economic Surprise index sharply higher.

FT podcast: World Weekly with Gideon RachmanThe World / FT
Is Romney’s debate victory a game-changer? The consensus after the first US presidential debate last night was that Republican challenger Mitt Romney was the victor over president Barack Obama. But will this be enough to change an election in which Mr Romney has consistently trailed Mr Obama in the polls? Richard McGregor in Denver and John Gapper in London join Gideon Rachman.

Pettis + Sumner v FEFree exchange / The Economist
Michael Pettis and Scott Sumner disagree about China. But they both agree that a recent Free Exchange column about China's investment spending is bunkum. To be honest, I'm having my doubts about the column too.

Chinese political cycle has no clear influence on economic cycleASA
There is no conclusive evidence that economic growth will pick up after Party Congresses.

China dodges a bullet?Humble Student
Couple of data points that seem to indicate that Chinese growth has bottomed and is in the process of a turnaround.

China’s state capitalism: Not just tilting at windmillsThe Economist
China’s state-owned enterprises are increasingly getting it into trouble—abroad and at home

State-owned enterprises: The state advancesThe Economist
The state’s grip on the economy has been tightening. Could foreign pressure persuade the new leadership to reverse course?

Bank of Japan and Central Bank IndependenceMarc to Market
The meeting would hardly be noteworthy, except that Economic Minister Maehara will be attending.  Can one imagine Treasury Secretary Geithner attending an FOMC meeting; or, Germany's Roesler or the EU Commissioner Ollie Rehn sitting in on an ECB meeting?  

How Does a Currency Drop 60% in 8 Days? Just Ask IranThe Atlantic
Iran's currency has collapsed in two ways -- gradually and then suddenly. Iran is very much in the sudden phase right now. It took 24,600 rials to buy one dollar on September 24. It took 39,000 rials to buy one dollar on October 2. That's good for a 59 percent drop in just a week. This kind of currency cliff-diving is basically a bank run on the rial -- a bank run U.S.-led sanctions set off.

As Iran’s Currency Keeps Tumbling, Anxiety Is RisingNYT

Iran blames economic "conspiracy" as price rises loomReuters
Iran will defeat a "conspiracy" against its foreign currency and gold markets, an adviser to supreme leader Ayatollah Ali Khamenei said on Friday, as pressure mounts on authorities to deal with the rapid collapse of the rial.

How Politics Nuked Iran’s EconomyThe Diplomat
For the leaders of the Islamic Republic, the real enemy is within.

Iran's currency trades at 65% discount to the official exchange rate as hyperinflation sets inSober Look

Iran’s nuclear programme: A red line and a reeling rialThe Economist
Sanctions may be taking their toll as Israel’s prime minister tries to set a new red line to block Iran’s nuclear plans

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