Ireland on the Brink: 1931 Credit Anstalt Talk Is Resurfacing [View article]
Edward I believe you have your head around this fiendishly complex mess which will more than likely lead to serious modifications to the eurozone, which was inherently unworkable from day one. It's bureaucrats dream; a taxpayers nightmare.
Like the bailout of Greece, the EFSF is simply another palliative to delay the inevitable which will include, among other things, default, haircuts and a likely breakup of the zone. The special purpose vehicle created as part of the EFSF will attempt high credit ratings by member countries contributing capital of 120% of contemplated borrowing. The so called "capital", though, is simply a blend of debt and guarantees.
Jacques Cailloux, chief European economist at RBS, recently examined what would happen to Spain and the eurozone in the event of a “credit event” that would lead to a 30 per cent haircut on just Spanish sovereign debt.
"Our analysis suggests that a sovereign credit event of that magnitude would lead to huge financial losses – around Eur400bn for Spain and Eur1.3tr for the rest of the euro area, equivalent to 40% and 15% of Spanish and euro area GDP respectively. On top of these financial shocks the real output losses following the default based on historical precedents would be of 10ppts for Spain and of 1ppts for the rest of the euro area."
This, of course, excludes Ireland, Portugal and Greece but does hint at the ramifications and scale of required haircuts which why they will avoided through expanded ECB funding. Thus, Pritchard suggests Bundesbank chief Axel Weber might fairly conclude that it is impossible at this stage to reconcile the needs of Germany and the big debtors.
"If the ECB prints money on the scale required to underpin the South, it would set off German inflation, destroy German faith in monetary union, and perhaps run afoul of Germany’s constitutional court. If EMU must split in two, it might as well be done on Teutonic terms."
Ireland in Decline, Or, What Austerity Looks Like [View article]
Krac is correct and if we are going to pillory Hoover let's do it for the right reason. Between 1929 and 1932 federal expenditures increased 48% and increased another 50% between 1935 and 1940- over three times the level in 1929. There was never a lack of spending notwithstanding claims to thecontrary.
And all of this spending led Roosevelt's Treasury Secretary, Henry Morgenthau, in 1939 to describe things thusly:
"We have tried spending money. We are spending more than we have ever spent before and it does not work. ...We have never made good on our promises... I say after eight years of this Administration we have just as much unemployment as when we started... And an enormous debt to boot."
Both Hoover and Roosevelt, however, share the dubious distinction of increasing taxes in a stressed economic environment; in 1932 Hoover raised the top rate from 25% to 63% and Roosevelt, not wanting to be outdone, increased the top personal income tax rate to 79% in 1936.
Obama, not being able to differentiate between investment and consumption and not wanting to waste a crisis and shuffle about resources to favored constituences, will surely persist with policies of wasteful spending and then join Hoover and Roosevelt and increase taxes. And to add insult to injury, he and his crack economic team will do this with the benefit of hindsight.
Ireland in Decline, Or, What Austerity Looks Like [View article]
The timing of your article is a bit unfortunate as it follows a report that Ireland's economy grew at 2.7% rate in 1Q10, undermining most, if not all, of what you press for; Ireland's rate of growth is exactly that of the US' which is suggested to have benefitted from stimulus.
Problems remain in Ireland as the employment level remains unacceptably high but there is nothing to suggest greater public spending will create more jobs unless such spending is directed towards investment. If not, you end up funding consumption with public debt.
And this brings us to the crux of the matter: as long as Ireland wishes to remain with the eurozone it must adhere to the provisions of the Maastricht treaty and other agreements.
Spain Should Never Have Joined the Eurozone [View article]
While I do not disagree with the author, I'm shocked that nobody anticipated the shock coming to the eueozone as it was as plain as day that Germany productivity was increasing, German unit labor costs were falling vis-a-vis other eurozone members, that Germany was running a current account surplus and that the states within the southern periphery were running increasingly large deficits accompanied by growing public debt.
The root problem in Spain lies in the structural distortions produced by the massive overheating of the economy during the boom years of construction, leading to excessive inflation, large-scale dependence on imports, and a complete loss of competitiveness in the non-tradeable sector which spilled into loss of competitiveness of the tradeable sector. As in the US, everybody just watched and enjoyed the prosperity party not knwoing it would end.
In addition to tax receipts falling after the bubble popped, Spain embarked upon a program of widely expanded state spending which some criticize as not focusing enough upon improving private competitiveness in tradeable goods.
Ireland on the Brink: 1931 Credit Anstalt Talk Is Resurfacing [View article]
Like the bailout of Greece, the EFSF is simply another palliative to delay the inevitable which will include, among other things, default, haircuts and a likely breakup of the zone. The special purpose vehicle created as part of the EFSF will attempt high credit ratings by member countries contributing capital of 120% of contemplated borrowing. The so called "capital", though, is simply a blend of debt and guarantees.
Jacques Cailloux, chief European economist at RBS, recently examined what would happen to Spain and the eurozone in the event of a “credit event” that would lead to a 30 per cent haircut on just Spanish sovereign debt.
"Our analysis suggests that a sovereign credit event of that magnitude would lead to huge financial losses – around Eur400bn for Spain and Eur1.3tr for the rest of the euro area, equivalent to 40% and 15% of Spanish and euro area GDP respectively. On top of these financial shocks the real output losses following the default based on historical precedents would be of 10ppts for Spain and of 1ppts for the rest of the euro area."
This, of course, excludes Ireland, Portugal and Greece but does hint at the ramifications and scale of required haircuts which why they will avoided through expanded ECB funding. Thus, Pritchard suggests Bundesbank chief Axel Weber might fairly conclude that it is impossible at this stage to reconcile the needs of Germany and the big debtors.
"If the ECB prints money on the scale required to underpin the South, it would set off German inflation, destroy German faith in monetary union, and perhaps run afoul of Germany’s constitutional court. If EMU must split in two, it might as well be done on Teutonic terms."
Ireland in Decline, Or, What Austerity Looks Like [View article]
And all of this spending led Roosevelt's Treasury Secretary, Henry Morgenthau, in 1939 to describe things thusly:
"We have tried spending money. We are spending more than we have ever spent before and it does not work. ...We have never made good on our promises... I say after eight years of this Administration we have just as much unemployment as when we started... And an enormous debt to boot."
Both Hoover and Roosevelt, however, share the dubious distinction of increasing taxes in a stressed economic environment; in 1932 Hoover raised the top rate from 25% to 63% and Roosevelt, not wanting to be outdone, increased the top personal income tax rate to 79% in 1936.
Obama, not being able to differentiate between investment and consumption and not wanting to waste a crisis and shuffle about resources to favored constituences, will surely persist with policies of wasteful spending and then join Hoover and Roosevelt and increase taxes. And to add insult to injury, he and his crack economic team will do this with the benefit of hindsight.
Ireland in Decline, Or, What Austerity Looks Like [View article]
The timing of your article is a bit unfortunate as it follows a report that Ireland's economy grew at 2.7% rate in 1Q10, undermining most, if not all, of what you press for; Ireland's rate of growth is exactly that of the US' which is suggested to have benefitted from stimulus.
Problems remain in Ireland as the employment level remains unacceptably high but there is nothing to suggest greater public spending will create more jobs unless such spending is directed towards investment. If not, you end up funding consumption with public debt.
And this brings us to the crux of the matter: as long as Ireland wishes to remain with the eurozone it must adhere to the provisions of the Maastricht treaty and other agreements.
Spain Should Never Have Joined the Eurozone [View article]
The root problem in Spain lies in the structural distortions produced by the massive overheating of the economy during the boom years of construction, leading to excessive inflation, large-scale dependence on imports, and a complete loss of competitiveness in the non-tradeable sector which spilled into loss of competitiveness of the tradeable sector. As in the US, everybody just watched and enjoyed the prosperity party not knwoing it would end.
In addition to tax receipts falling after the bubble popped, Spain embarked upon a program of widely expanded state spending which some criticize as not focusing enough upon improving private competitiveness in tradeable goods.