I'm back from my trip to Singapore, but I'll be mostly offline today as I'm breaking in a new laptop.
In the meantime, just some quick impressions from yesterday: I attended a briefing by Capital Economics, a private economic research house on the topic of the global sovereign debt crisis - very appropriate under the circumstances. No really big surprises in their presentation, though they've been notably more pessimistic than the consensus. They don't believe the Euro will survive in its present form for much longer, and while the US looks better, the long term liabilities from a dysfunctional healthcare system presents a long term threat to fiscal stability. Emerging markets are in a much better position, with any fallout from a disorderly disintegration of the Eurozone falling mainly on Emerging Europe.
I'll try and cover some of these topics at a later date, but I think my thinking has begun to crystalise on the subject of Europe. To me the most interesting chart presented (and there were a few nice ones, like the UK's Debt/GDP ratio going back to 1700!!) was on unit labour costs in Europe. I think the way out for Europe really depends on two things:
From a policy perspective, the Euro's problem isn't Greece or Portugal or Ireland or Italy or Spain - it has always been about Germany. Taking Germany out of the equation would undercut the ECB's inflation fighting credentials, which is not good. But it would substantially boost the ECB's credibility in supporting growth and financial stability - and these two factors are of more immediate importance to the Euro's survival.
In the meantime, just some quick impressions from yesterday: I attended a briefing by Capital Economics, a private economic research house on the topic of the global sovereign debt crisis - very appropriate under the circumstances. No really big surprises in their presentation, though they've been notably more pessimistic than the consensus. They don't believe the Euro will survive in its present form for much longer, and while the US looks better, the long term liabilities from a dysfunctional healthcare system presents a long term threat to fiscal stability. Emerging markets are in a much better position, with any fallout from a disorderly disintegration of the Eurozone falling mainly on Emerging Europe.
I'll try and cover some of these topics at a later date, but I think my thinking has begun to crystalise on the subject of Europe. To me the most interesting chart presented (and there were a few nice ones, like the UK's Debt/GDP ratio going back to 1700!!) was on unit labour costs in Europe. I think the way out for Europe really depends on two things:
- A change in the mandate for the ECB to include economic growth and financial stability, not just price stability - so they can start acting like a central bank;
- Germany (that's right, Germany) has to leave the Euro zone.
From a policy perspective, the Euro's problem isn't Greece or Portugal or Ireland or Italy or Spain - it has always been about Germany. Taking Germany out of the equation would undercut the ECB's inflation fighting credentials, which is not good. But it would substantially boost the ECB's credibility in supporting growth and financial stability - and these two factors are of more immediate importance to the Euro's survival.
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I hesitate between "Bull's eye" or "Spot on" !
ReplyDeleteThat just turned my world upside down. It makes sense but I hadn't thought of that before.
ReplyDeleteStill, the trade effect from the divorce of Germany will be dangerously large given that more than 30% if its exports and more than 30% of its imports go to or come from the Eurozone. Whatever trade gains due to monetary union will become undone.
The divorce will make sense for Germany and the rest only if the trade loss is smaller than the benefits of separate currencies.
Looking pre-1999 before the euro came to force, the Deutche Mark was the benchmark currency and others merely maintained some bands around the DM most of the times. If the exit of Germany will only return to Europe to the pre-1999 case, I'd say might as well just keep the monetary union.
Besides, these are all are nominal considerations. In the long run, all real prices within the Eurozone will adjust accordingly. So too will "competitiveness".
That just turned my world upside down. It makes sense but I hadn't thought of that before.
ReplyDeleteStill, the trade effect from the divorce of Germany will be dangerously large given that more than 30% if its exports and more than 30% of its imports go to or come from the Eurozone. Whatever trade gains due to monetary union will become undone.
The divorce will make sense for Germany and the rest only if the trade loss is smaller than the benefits of separate currencies.
Looking pre-1999 before the euro came to force, the Deutche Mark was the benchmark currency and others merely maintained some bands around the DM most of the times. If the exit of Germany will only return Europe to the pre-1999 case, I'd say might as well just keep the monetary union.
Besides, these are all are nominal considerations. In the long run, all real prices within the Eurozone will adjust accordingly. So too will "competitiveness". Again, might as well keep the union.
Yes, it's a bit contrarian isn't it?
ReplyDelete"If the exit of Germany will only return Europe to the pre-1999 case, I'd say might as well just keep the monetary union."
That's highly unlikely...assuming a German exit, we'd probably see the Euro drop considerably (maybe up to 50%) compared to a revived DM. The difference in competitiveness is that big.
"In the long run, all real prices within the Eurozone will adjust "
Yeah, but going the dual currency route, you avoid a lot of the pain because most of it will come from an external price adjustment, instead of an internal price adjustment where you have to deal with downwards-sticky nominal prices and debt contracts. A currency adjustment would also have the attraction of being almost immediate.
Germany leaving the Eurozone sounds like an attractive idea, but I don't think it is politically palatable at all. It would be like the boat captain jumping off a sinking ship. It will not cure any of the Eurozone's problems.
ReplyDeleteIn the short run, yes, it will slow down the downward spiral, but the structural issues remain. Devaluing the Euro will only create artificial competitiveness but the fact is that none of the other European countries are as hardworking as the Germans.
It seems like this is going to be a very painful process now. As Tim Duy puts it, the choice is now between a severe recession and a depression. It is really like watching a tragedy unfold in slow motion, much like being on the sinking Titanic. Everyone knows it is sinking and there is nothing anyone can do about it.
While this analogy is not entirely accurate as I do think that there are things that can be done, but no one is really stepping up to the plate.
Yeah, I agree it's a pipedream, even if it's the most elegant solution.
ReplyDeleteDevaluing the Euro will only create artificial competitiveness but the fact is that none of the other European countries are as hardworking as the Germans.
But that's the whole point - if the Germans are perennially more hard working, putting anybody with them in a currency union will always risk the same kind of stresses that the Euro is going through now. So the best solution is to have Germany go.
but no one is really stepping up to the plate.
Goat No 1: the ECB.
Im currently persuing degree in economy.. so my knowledge is quite narrow.. sir, can you please tell us how significant the effect of euro crisis to Malaysia?
ReplyDeleteRight now, not much. The policies being pursued by the Eurozone countries - fiscal austerity and tight money leading to lower aggregate demand - is having more of an impact than contagion from the debt crisis. Europe's trade with Malaysia is about 10% of Malaysia's total trade, and we're already seeing some falloff in demand, but this is so far being offset by recovery in Japan and the US.
ReplyDeleteIf any of the bigger Euro countries like Italy or Spain start falling, things might change drastically.