Previously on MoreLiver’s
EUROPE
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
adjustment – bruegel
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 Resilience – IMF
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
impact – The 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 bankers – Europp
/ 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.
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
knowledge – euobserver
"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.
Tensions between the Bundesbank and the ECB are
rooted in concerns about central-bank independence
EUROPE: SPAIN
The Economic Consequences of Mr. Rajoy – Krugman
/ 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.
Luis de
Guindos, Spanish Minister of the Economy and Competitiveness (60 minutes)
Mysterious Mariano – The Economist
Spain’s prime minister battles against the break-up of the euro and his
country
EUROPE: BANKING
The case for structural reforms of banking
after the crisis – BIS (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 disposes – Deus
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 ring – The Economist
A European report recommends yet another way to
ring-fence banks
Bank assets
as % of home country’s GDP
EUROPE: FISCAL UNION
Euro Area Budget? More on Tax Rates – EconoMonitor
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).
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).
EUROPE: CURRENCY UNION
Exchange rates fixed or flexible? Does it matter? – voxeu.org
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.
http://www.voxeu.org/index.php?q=node/8553
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.
USA
Bouncing Bernanke – Free
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 Update – Tim
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 spikes – Sober
Look
Employment report has sent the Citi Economic
Surprise index sharply higher.
FT podcast: World Weekly with Gideon Rachman – The
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.
ASIA
Pettis + Sumner v FE – Free
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 cycle –
ASA
There is no conclusive evidence that economic
growth will pick up after Party Congresses.
Couple of data points that seem to indicate
that Chinese growth has bottomed and is in the process of a turnaround.
China’s state-owned enterprises are increasingly getting it into
trouble—abroad and at home
State-owned enterprises: The state advances – The Economist
The state’s grip on the economy has been
tightening. Could foreign pressure persuade the new leadership to reverse
course?
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?
IRAN
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.
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.
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 in – Sober
Look
Sanctions may be taking their toll as Israel’s prime minister
tries to set a new red line to block Iran’s nuclear plans