The Great Debate UK

Economic quagmire adds pressure for monetary policy change

–Darren Williams is Senior European Economist at AllianceBernstein. The opinions expressed are his own.–

Bank of England governor-elect, Mark Carney, has raised hopes that the central bank may soon switch to a nominal GDP target. Although the costs seem to outweigh the benefits, the attractions of a radical new approach will grow if the economy remains stuck in the doldrums.

In recent years, the Bank of England has been among the world’s most proactive central banks. It has reduced official interest rates to 0.5% and boosted the supply of central bank money by 18% of gross domestic product (GDP). This is considerably more than in either the US or the euro area over the same period.

This aggressive monetary expansion has been accompanied by a huge decline in the exchange rate. Since the first half of 2007, the pound has fallen by 20% in trade-weighted terms, far more than the drop in the US dollar (11%) or euro (5%) over the same period. Yet the UK economy has still performed poorly.

from The Great Debate:

The year ahead in the euro zone: Lower risks, same problems

Financial conditions in the euro zone have significantly improved since the summer, when euro zone risks peaked because of German policymakers’ open consideration of a Greek exit, and the sovereign spreads of Italy and Spain reached new heights. The day before European Central Bank President Mario Draghi’s famous speech in London in which he announced that the ECB would do “whatever it takes” to save the euro, bond yields in Spain and Italy were at 7.75 percent and 6.75 percent, respectively, and rising. When the ECB announced its outright monetary transactions (OMT) bond-buying program, the euro zone was at risk of a collapse.

Since then, risks have abated significantly, thanks to a number of factors:

    The ECB’s OMT has been incredibly successful in reducing the risks of breakup, redenomination and a liquidity/rollover crisis in the public debt markets of Spain and Italy. Although the ECB has yet to spend a single additional euro to buy the bonds of Spain and Italy, both short-term and longer-term sovereign spreads against German bonds have fallen substantially. Following a number of political and legal hurdles, the successful operational start of the European Stability Mechanism (ESM) rescue fund provides the euro zone with another €500 billion of official resources to backstop banks and sovereigns in the euro zone periphery, on top of the leftover funds of its predecessor, the European Financial Stability Facility (EFSF). Realizing that a monetary union is not viable without deeper integration, euro zone leaders have proposed a banking union, a fiscal union, an economic union and, eventually, a political union. The last is necessary to resolve any issue of democratic legitimacy that might result from national states transferring power from national governments to EU- or euro zone-wide institutions. This transfer of power also would have to involve the creation of such institutions to ensure solidarity and risk-sharing are developed in the banking, fiscal and economic unions. The open talk in the summer by some German authorities about an exit option for Greece has turned into a tentative willingness to prevent and postpone such an exit. There are several reasons for this. First, Greece has done some austerity and reforms in spite of a deepening recession, and the current coalition is holding up. Second, an orderly exit of Greece is impossible until Spain and Italy are successfully isolated. Such an exit would lead to massive contagion, which would hurt not only the euro zone periphery but also the core, given extensive trade and financial links. Third, an economic disaster in Greece would be damaging to the CDU Party’s chances of winning the German elections. Thus, even when Greece inevitably underperforms on its policy commitments, Germany and the troika (the IMF, EU and ECB) will hold their noses and keep the funds flowing as long as the current coalition holds up.

Given these developments, the risk of a Greek exit in 2013 has been significantly reduced, even if the risk of an eventual Greek exit from the euro zone is still high, close to 50 percent by my estimation. Meanwhile, the narrowing of Spanish and Italian sovereign spreads has significantly diminished the risk that either country will fully lose market access and be forced to undergo a full troika bailout like Greece, Portugal and Ireland. Both Spain and Italy may in 2013 opt for a memorandum of understanding (MoU) that opens the taps of ESM and OMT support, but such official financing would inspire confidence as it would not be associated with rising, unsustainable spreads and a loss of market access.

The morally blind leading the arithmetically blind

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

You’ve got to admire the endless inventiveness of our politicians. Just when you think there’s nothing new under the sun, they catch you out by coming up with an idea so bad nobody seems to have thought of it before.

from John Lloyd:

A church married to the wrong side of history

After the attack on the Twin Towers in September 2001, the evangelical preacher Jerry Falwell took some time to tell his fellow Americans that homosexuals (along with abortionists, feminists and pagans) were at least in part to blame. “I point my finger in their face,” he said, “and say, ‘You helped this happen.’”

Later, in a “did I say that?” moment, he apologized.

It was a low moment, but not an unusual one. Falwell is in the hate-filled corner of the religious spectrum. But even those religious leaders at the mild and inclusive end must, more in sorrow than in anger, generally tell gay men and women that as much as they respect them, they can’t officiate at their marriages. That’s a bridge over too-troubled waters.

from Reihan Salam:

Does Britain’s austerity hold lessons for the United States?

The dog’s breakfast of a deal that “resolved” the fiscal cliff fell far short of expectations. In the hours after it passed, deficit hawks at the Committee for a Responsible Federal Budget and the tag team of former Senator Alan Simpson and former Clinton White House chief of Staff Erskine Bowles all expressed disappointment in a bargain that was anything but grand. Senate Republicans gritted their teeth to accept a small increase in taxes on America’s highest-earning households while Senate Democrats made permanent the bulk of the Bush-era tax cuts. A number of tax provisions that hark back to the 2009 fiscal stimulus law were extended, as were unemployment benefits, thus delivering a modest income boost to a large number of low-income households. But the Social Security payroll tax cut, a Republican-backed replacement for the more narrowly targeted Making Work Pay tax credit that was part of the stimulus law, which benefited a wide range of affluent households as well as families of more modest means, was allowed to lapse. Long-term spending levels, meanwhile, were left largely untouched, which is why rebellious House Republicans came close to scuttling the delicately constructed compromise.

One group that offered at least two cheers for the deal were deficit doves, who believe that premature fiscal consolidation poses a grave threat to America’s sluggish economic recovery. Paul Krugman, the prominent economist and popular left-of-center New York Times columnist who never shrinks from apocalyptic pronouncements, was almost pleased to see that the deal avoided any serious spending cuts and that it entailed relatively modest near-term tax increases.

Fiscal cliff deal is depressingly European

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

The deal to break the deadlock in the US looks awful, far worse than going over the cliff, which I suspect would have been a lot less damaging than is usually assumed.

from The Great Debate:

Will this be the year that Israel goes to war with Iran?

Israel did not bomb Iran last year. Why should it happen this year?

Because it did not happen last year. The Iranians are proceeding apace with their nuclear program. The Americans are determined to stop them. Sanctions are biting, but the diplomatic process produced nothing visible in 2012. Knowledgeable observers believe there is no "zone of possible agreement." Both the United States and Iran may believe that they have viable alternatives to a negotiated agreement.

While Israel has signaled that its "red line" (no nuclear weapons capability) won't be reached before mid-2013, it seems likely it will be reached before the end of the year. President Barack Obama has refused to specify his red line, but he has made it amply clear that he prefers intensified sanctions and eventual military action to a nuclear Iran that needs to be contained and provides incentives for other countries to go nuclear. If and when he takes the decision for war, there is little doubt about a bipartisan majority in Congress supporting the effort.

from The Great Debate:

What CEOs can learn from Sherlock Holmes

This essay is excerpted from Mastermind: How to Think Like Sherlock Holmes, published this week by Viking.

How do we make sure we don’t fall victim to overly confident thinking, thinking that forgets to challenge itself on a regular basis? No method is foolproof. In fact, thinking it foolproof is the very thing that might trip us up.

How helping the working poor can deliver economic recovery

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By Stephen Evans.  The opinions expressed are his own.

Following the Autumn Statement last week, pressure remains on Chancellor George Osborne to tackle the continuing fall in living standards and the growing divide between the UK’s highest and lowest earners.

While battles rage about the nature of the Government’s welfare reforms, it was refreshing to see a growing number of commentators acknowledge that it is not just those out of work that are struggling to get by. Indeed those in work will feel the greatest impact from the Government’s upcoming benefits cap, as tax credits, maternity pay and other in-work benefits are affected.

from The Great Debate:

A two-state Middle East solution hangs in the balance as Obama waits

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President Barack Obama may have believed he had at least until his inauguration next month to renew efforts to forge a two-state solution to the Israeli-Palestinian conflict, but events since he won re-election have put fresh demands on the president.

Since the U.S. election, we have witnessed another mini-war between Israel and Hamas in Gaza; the upgrading of the status of the Palestinians to a non-member state at the United Nations General Assembly; and most recently a series of retaliatory moves by Israeli Prime Minister Benjamin Netanyahu. These included a decision to build thousands of housing units in East Jerusalem and the West Bank and holding back some tax receipts that Israel collects on behalf of the Palestinian Authority.

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