Opinion

Anatole Kaletsky

What’s Europe’s best hope for avoiding a second euro crisis?

Anatole Kaletsky
Aug 29, 2014 16:52 UTC

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This week’s theatrical resignation threat by Manuel Valls, the French prime minister, combined with deep European anxiety about deflation, suggest that the euro crisis may be coming back. But a crisis is often an opportunity, and this is the hope now beginning to excite markets in the eurozone.

Investors and business leaders are asking themselves three questions: Will European governments and the European Central Bank recognize the unexpected weakness of the eurozone economy as an opportunity to change course? If they do, will they know how to grasp it? And will they be allowed to do what is necessary by the true economic sovereign of Europe, German Chancellor Angela Merkel?

First, the opportunity. Europe still has a chance to save itself from a Japanese-style lost decade of stagnation and deflation. And this may well be a last chance, because a lost decade in Europe could produce some very un-Japanese social rebellions and political upheavals. Europe, after all, lacks Japan’s social consensus, national unity and financial cohesion. It is far from clear that Europe could survive 10 years of recession without up the eurozone breaking up and even perhaps the European Union.

Second, what must Europe do to save itself from stagnation and disintegration? The obvious answer is to follow something similar to the “three arrows” program popularised (though not genuinely implemented) by Japan’s prime minister, Shinzo Abe. Abe’s “three arrows” were: aggressive monetary stimulus; fiscal easing requiring suspension of deficit and debt targets, and structural reforms to correct long-term weaknesses in both supply and demand.

Judging by ECB Chairman Mario Draghi’s speech at Jackson Hole, Wyo., all three of these policies are becoming feasible. The central bank is hinting at more growth-oriented monetary policy, the European Commission seems willing to interpret its fiscal rules more flexibly, and national governments are promising to undertake more structural reforms.

Can central bankers succeed in getting global economy back on track?

Anatole Kaletsky
Aug 15, 2014 22:24 UTC

Stanley Fischer, the former chief of the Bank of Israel, testifies before the Senate Banking Committee confirmation hearing on his nomination in Washington

Why is the world economy still so weak and can anything more be done to accelerate growth? Six years after the near-collapse of the global financial system and more than five years into one of the strongest bull markets in history, the answer still baffles policymakers, investors and business leaders.

This week brought another slew of disappointing figures from Europe and Japan, the weakest links in the world economy since the collapse of Lehman Brothers, despite the fact that the financial crisis originated in the United States. But even in the United States, Britain and China, where growth appeared to be accelerating before the summer, the latest statistics — disappointing retail sales in the United States, the weakest wage figures on record in Britain and the biggest decline in credit in China since 2009 — suggested that the recovery may be running out of steam.

As Stanley Fischer, the new vice chairman of the Federal Reserve Board, lamented on August 11 in his first major policy speech: “Year after year, we have had to explain from mid-year onwards why the global growth rate has been lower than predicted as little as two quarters back. … This pattern of disappointment and downward revision sets up the first, and the basic, challenge on the list of issues policymakers face in moving ahead: restoring growth, if that is possible.”

Euro zone’s big problems require big fixes

Anatole Kaletsky
May 16, 2014 12:56 UTC

ECB President Draghi addresses a news conference in BrusselsAt last, the European Central Bank seems ready to inject some adrenalin into the moribund euro zone economy. After last week’s news conference, when European Central Bank President Mario Draghi strongly hinted that action would take place after the June 5 council meeting, there have been a host of interviews and leaks specifically describing the new ideas the bank has in mind.

The biggest measure, now almost a foregone conclusion, will be a cut in the interest rate the ECB pays on bank deposits from zero to negative 0.1 or 0.2 percent. Bank officials have also hinted at several additional stimulus measures: extension of loans to commercial banks at low fixed rates for three years or even five years; ECB purchases of bank loans to small and medium enterprises, packaged into asset-backed securities; and concessional lending to European banks on condition they pass on these funds to small and medium businesses.

The leaks generated a great deal of enthusiasm this week. The euro weakened from almost $1.40 to $1.37; bond yields in Italy and Spain fell to record lows; and European stock markets jumped 1 percent to 2 percent.  Wednesday, the market reaction crossed the Atlantic, with interest rates on U.S. Treasury bonds falling to their lowest levels in six months.

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