26th Apr - Weekender: Best of the Week

The best articles from the ending week. Last week’s ‘best’ here.

Summary of the week: Austerity’s failure has been wholly or partially admitted by Barroso, Merkel and the IMF, while the ECB remains a hardliner for now. Bad macro from Europe and US, and ECB has all the reasons it needs to ease policy next week. Whether they actually do their job is another matter. The statements coming from the VIPs make me thinking that there is something else going on.. Perhaps Spain or Italy has said “no more”, and Brussels and Berlin have little alternative but to ease off.

As the resistance to more fiscal burden sharing is limited, fragmenting the monetary policy is another way to "taking care of the business", with the additional benefit that the voters won't be asked about it and probably won't even notice anything. Merkel's admittance that different monetary policy is needed in Germany and elsewhere in Europe is strange - to me, it sounds like an admittance that one size does not fit all. 

For couple of weeks now the most important articles have dealt with Germany. In a way this is old news. Germany decides in the end. Besides, it is their elections, and other players give them room to maneuver. Because that’s all that matters – staying in power. That’s why I don’t have my hopes high on Europe’s future. 

Coming up next, short US open, followed by the usual weekender posts on Sat/Sun-

EUROPE

We must re-evaluate the European Union – TradingFloor

Lars Seier Christensen: In the Danish version of former Czech Republic President Václav Klaus' book 'Europe - The shattering of illusions' I wrote a postscript sharing my thoughts on the European crisis and the lessons to be learned.

  AUSTERITY

Barroso: Europe near austerity limit – FT

What is the net of good and bad news from Brussels and Washington? – Bruegel

Two important documents have been issued in the last few days: the In-depth reviews following the so called AMR (Alert Mechanism Report) from the European Commission and the World Economic Outlook from the IMF.

So what’s the plan, Mr Rehn? – El País / Presseurop

Discipline and budget cuts: The cure prescribed for the Eurozone no longer has unanimous support. Unfortunately, voters can not settle this debate as it is between unelected officials, foremost among them, is the Commissioner Rehn.

Austerity absurdity? – Presseurop

“The policy of austerity has reached its limits”, says Barroso, the first time Brussels has questioned its own policy. It’s time we grasped that one path for such varied countries doesn’t work, writes Süddeutsche Zeitung.

The Stupid Cruelty of the Creditor – Mainly Macro

Why is this happening? Because the Eurozone governments that foolishly bailed out Greece after the crisis first developed in 2010/11 want all their money back.

  BANKS

Europe and Depositor Preference – WSJ

When banks fail, should depositors be burned alongside holders of senior bank debt or should debt holders lose money before depositors are touched?

Sympathy For the Dijsselbloem – It’s Not That Simple

It’s about Spain. It’s always been about Spain. This whole sorry spectacle has always been about Spain. Greece and Ireland, forgive me, are small. So’s Portugal. But Spain and Italy are too big to be successfully yaddayadda-ed. And the way that the contagion dominoes have stacked up, it has been clear for a few years that if you win the battle in Spain, you won’t have to fight it in Italy, while if you lose the battle in Spain, you’re probably not going to get a chance in Italy. And Spain (unlike Italy) has always been a case where it’s basically a banking sector problem that has infected the sovereign, rather than basically a sovereign problem that has infected the banks.

  ECB

ECB says ditching austerity would not help euro zone – Reuters

ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much.

The Frankfurt veto – Free exchange / The Economist

Soaring borrowing costs apparently weren't about indebtedness at all, but about uncertainty over the ECB's willingness to act as lender of last resort. That, of course, means that any pivot away from fiscal consolidation in the euro area will require approval from Frankfurt…

Saving the euro – ECB

Speech by Jörg Asmussen, Member of the Executive Board of the ECB, The Economist’s Bellwether Europe Summit, London, 25 April 2013

Pain Trades: A Discussion of Two Troikas – Marc to Market

Given the push back against austerity, the ECB may not want to send a signal that could be interpreted as endorsing the relaxation of fiscal discipline…The once united Troika appears to be fracturing, leaving the ECB as the last defender of the austerity agenda.

Jörg Asmussen – Eurozone cross-fire: the way out of economic recession - Assessment of a realist and a response to idealists and cynics – ECB

  MACRO NUMBERS

Deficit and debt data for 2012 – Eurostat (pdf)

Results of the April 2013 euro area bank lending survey – ECB

European PMIs finally bad enough for ECB to act? – TradingFloor

After the PMI numbers in March I wrote that the numbers were not bad enough. I think today’s numbers however fit the bill and are bad enough. These numbers might just be bad enough to push the European Central Bank into action.

IFO deterioration within expectations – TradingFloor

Juhani Huopainen: The German Ifo-index continued falling in April, but within expectations, leaving markets to digest another year of seasonal euro-sclerosis.

  GERMANY

Merkel says euro members must be prepared to cede sovereignty – Reuters

Merkel said on Monday that euro zone members must be prepared to cede control over certain policy domains to European institutions if the bloc is truly to overcome its debt crisis and win back foreign investors. (ZeroHedge comments)

No German 'hegemony' in Europe, Merkel says – euobserver

Merkel has said there is no German hegemony in Europe, but insisted that euro countries cede more sovereignty to overcome the crisis.

Should Germany Exit the Euro? – Project Syndicate

Hans-Werner Sinn: Those who advocate the creation of Eurobonds do not not recognize the real nature of the monetary union's problems. The ongoing financial crisis is merely a symptom of the eurozone’s underlying malady: its southern members’ loss of competitiveness.

Inside Merkel's Bet on the Euro's Future – WSJ

This account of Ms. Merkel's handling of Europe's crisis, based on interviews with 17 European policy makers, shows Cyprus's bailout flowing directly from principles that will continue to guide German leadership in Europe. In September, Ms. Merkel is expected to win a third term as chancellor. That means her agenda will dominate Europe's crisis response for years. The euro's survival hinges to a considerable extent on whether her strategy works.

Germany’s Trial Balloon Of A “Plan B” – Testosterone Pit

Euro may only last five years, says senior German government advisor – The Telegraph

The euro has a “limited chance of survival” and may only endure another five years, Kai Konrad, one of the German government’s closest economic advisers, has claimed.

Merkel: ECB would have to raise rates if looking at Germany only – Reuters

Beware the Bundesbank – MacroSope / Reuters

German newspaper Handelsblatt has got hold of a confidential Bundesbank report to Germany’s constitutional court, which sharply criticized the European Central Bank’s bond-buying plan. This could be very big or it could be nothing.

  PIIGS

A Slovenia Q&A – alphaville / FT

Shouldn’t be worried? Hey now, that’s not at all what I said. That a problem is solvable is no assurance that it will be solved — especially in Europe, where casual disregard is a leading contrary indicator.

Spain’s economy is in tatters – Credit Writedowns

We saw this when Mario Draghi took the helm of the ECB. Now the Germans are no longer leading ECB policy. With countries like Spain in the midst of Depression, and France and the Netherlands now also over the 3% deficit hurdle, it is only a matter of time before the Troika turns against the Germans. The Spanish will gain allies. In fact, the IMF and the EC head Barroso have already broken ranks.

Is the IMF turning bearish on Spain? – Open Europe

UNITED STATES

Monetary Policy and Financial Stability – Tim Duy’s Fed Watch

If Kocherlakota is correct and monetary policy can only pursue the dual mandate in the context of financial - and, by extension - macroeconomic instability, then we really need to consider which part of the dual mandate needs to be loosened to reduce the reliance on financial instability.  My fear is that if Fed policy makers were asked this question, they would unanimously answer that it is the full-employment portion of the mandate that should be jettisoned.

How does inflation matter? – Free exchange / The Economist

If the Fed believes that its credibility is the reason inflation has been stable during the recovery, then it will almost certainly continue to do too little and unemployment will eventually settle a natural rate substantially higher than the pre-crisis level. If, on the other hand, it determines that wage rigidities are mostly responsible for stable inflation, then the Fed must actively seek a higher inflation rate in order to increase employment growth.

Possible Fed Successor Has Admirers and Foes – NYT

Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014.

Historical Echoes: Fedspeak as a Second Language – N.Y. FED

ASIA

Monitor - Japanese investor flows – Danske Bank (pdf)

A central market theme remains what the spill-over effect of the aggressive Japanese QE programme will be. It is still early days for the BoJ programme and it will take time before a clear pattern is established. Given the magnitude of the BoJ intervention, we expect it to have a positive effect on the European government bond market in coming quarters.

OTHER

On Japan’s widowmaker trade and Reinhart and Rogoff – Credit Writedowns

Major industrialized countries with nonconvertible fiat currencies i.e not using the gold standard or in the euro zone should take the right lessons away from the Reinhart and Rogoff study and from Japan’s experience.

On the virtuous circle of exporting deflation – alphaville / FT

There is a stealth war on to export deflation, ideally in a way that simultaneously imports or steals inflation from elsewhere. In some ways, it was the US which began the whole thing by inadvertently importing deflation from China over the 90s and naughties and without even realising it. And in so doing, it spread its growth effect to China. Japan meanwhile has been trying to export its deflation for decades, with varying success. It is in some ways the original Patient Zero.

Fiscal Sustainability: A 21st Century Guide for the Perplexed – IMF

This paper critically reviews recent work regarding the sustainability of public debt. It argues that Debt Sustainability Analyses (DSAs) should be more than mere mechanical simulation exercises. Instead, a DSA should be linked to some objective regarding the distribution of fiscal burdens and distortions over time (in the tradition of Barro’s 1979 tax smoothing objective). The paper discusses objective functions that yield simple and transparent fiscal policy rules.

Breaking bad inflation expectations – alphaville / FT

QE/government intervention is announced, people interpret this as inflationary, risk-on mentality ensues, a good opportunity to lock-in yield is provided for anyone who recognises the yield curve is mispriced — in the sense it is pricing in too much inflation/higher interest rates — the expectations turn out to have been misplaced, the curve corrects, confidence is lost until a new round of QE or government intervention is announced. And so on.

Special: IMF / G20 / WTO Meeting – MoreLiver’s

Special: Reinhart & Rogoff Debacle – MoreLiver’s

FINNISH

Suomalaiset tyrmäävät EU-talousliiton tiivistämisen – YLE

Puolet suomalaisista on sitä mieltä, että heikkojen euromaiden pitäisi antaa romahtaa, vaikka se pahentaisi työttömyyttä myös Suomessa, kertoo TNS Gallupin tuore kyselytutkimus.

Harmaa eminenssi – YLE Areena

Silminnäkijäkertomus eurooppalaisen unelman, euron, tuhosta. Arvostettu EU- ja talousasiantuntija Johnny Åkerholm vie EU:n kulissien taakse, missä poliitikot tappoivat haaveen taloudellisesta vakaudesta (55 min).

Åkerholm rehellisenä – Toimi Kankaanniemi / US Puheenvuoro

"Suomen teollisuus kärsinyt eurosta" – TE

Ilmarinen hajauttaa salkkua euroalueen ulkopuolelle

Nyt empii komissio: menikö talouden löylykisa överiksi? – Jan Hurri / TalSa

EU-komission ylin johto on ensi kerran myöntänyt, että talouden vyönkiristykset ovat ehkä menneet liian pitkälle. Talouden tosiasioita onkin vaikea kiistää. Kesken velkakriisiä toteutetut vyönkiristykset ovat olleet tehottomia tai jopa vahingollisia. Nyt on löylymestarin vuoro empiä: talouden löylykisat taisivat sittenkin mennä överiksi.

EVA Analyysi: Tulehduksen oireet – EVA

Näin yritysjohtajat näkevät Suomen kilpailukyvyn 19 osatekijää 

Valvottaisiinko välillä maahanmuuttajia – Pauli Vahtera / IL-blogit

Maahanmuuttajat yliedustettuina toimeentulotuen saajissa – HS

Maahanmuuttajien osuus Helsingin toimeentulomenoista on 27 prosenttia, vaikka maahanmuuttajien osuus väestöstä on noin kahdeksan prosenttia.