The Great Debate UK

from Felix Salmon:

Larry Summers’s inadequate plan for Europe

Larry Summers reckons that "with last week’s tumult in Italian markets, the European financial crisis has entered a new and far more dangerous phase"; he's right about that. But his prescriptions for what must be done, laid out in the second half of his column, are a mess. For one thing, they're impossible to implement from a political perspective. For another, they contradict Summers's own diagnosis of what the problem is, as laid out in the first half of his column. And in any case they're a textbook case of too little, too late: even if implemented they wouldn't actually fix the problem.

Summers is quite right, in the first half of the column, to write this:

The approach of lending more and more from the official sector to countries that cannot access the market at premium rates of interest is unsustainable. The debts incurred will in large part never be repaid, even as their size discourages private capital flows and indeed any growth-creating initiative.

It's hard to see how he can square that with his prescription in the second half of the column:

First, for program countries. Interest rates on official sector debt will be reduced to a European borrowing rate defined as the rate at which common European entities backed with joint and several liability by all the countries of Europe can borrow. A default to the official sector will not be tolerated so there is no reason to charge a risk premium, since charging a risk premium needlessly puts the success of the whole enterprise at risk.

Units and unities: can currency change really resolve the Greek tragedy?

As the Greek tragedy goes into what looks like its final act, there is increasing talk of the country leaving the euro zone and refloating the drachma. Perhaps the Athens street mobs favour this “solution”, but what would it involve, and would it work?

It is a bizarre situation, without precedent as far as I am aware (though I am no economic historian). Usually, new currencies are introduced to replace old ones which have become discredited (typically after hyperinflation), whereas here we are talking about the absolute opposite: abandoning the euro because it is too strong, in favour of a new drachma, which will be a weak currency by design – rather like launching a ship, in the hope it will sink!

from Felix Salmon:

Could the EFSF engineer a Greek restructuring?

We're now close enough to a Greek default that the likes of Daniel Gros are coming up with schemes for how to avoid such a thing:

The European rescue fund -- European Financial Stability Facility, or E.F.S.F. -- should offer holders of Greek paper an exchange into E.F.S.F. paper at the current market price. Banks could be "induced" by regulators to accept the offer.

The death of the euro is greatly exaggerated

-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own.-

The Governor of the ECB, Jean-Claude Trichet has raised interest rates by 0.25 percentage points – and quite right too. For us in the UK, blaming rising prices on temporary disturbances in the world’s commodity markets is a figleaf to hide the fact that we are actually embarking on a partial default-by-inflation. For Europe, it is a different story. For one thing, the Germany-Austria-Netherlands bloc is, if not booming, at least chugging along at a highly respectable rate, and as the ECB Governor said today in response to a question about the impact of the rate rise on Portugal, his job is to set interest rates for the Eurozone as a whole, not just for the benefit of one of its smallest and weakest members.

Would the euro solve Switzerland’s problems?

By Kathleen Brooks. The opinions expressed are her own.

While some market commentators are questioning if the euro zone should even exist, authorities in Switzerland might be looking with envy at the 27-member currency bloc.

But why would a nation as renowned for political as well as financial stability like Switzerland desire the euro? The chief benefit is for its export sector.  Swiss companies including watch marker Hublot have complained recently about the strong Swiss franc weighing on their competitiveness. And watch markets are not alone. Exporters in sectors as diverse as cheese and chocolate to engineers, pharma companies and chemical firms are all suffering from the same problem: a strong franc.

from Felix Salmon:

Why Europe’s periphery should restructure their bonds

The drumbeat for debt restructurings on Europe's periphery is becoming too loud to ignore. The Economist has now come out strongly in favor; its leader gives the strongest case for biting the bullet now. And Mohamed El-Erian has now officially signed on:

You do not solve a debt problem by adding new debt on top of old debt. Yet it seems that European officials are fixated on this approach...

from Felix Salmon:

Restructuring European debt

Are we going to see debt defaults in Europe? Yes—and Barry Eichengreen has a positively crystalline explanation why. It's a first-rate example of economic concepts being explained in plain, easy-to-understand English:

The more that countries reduce wages and costs, the heavier their inherited debt loads become. And, as debt burdens become heavier, public spending must be cut further and taxes increased to service the government’s debt and that of its wards, like the banks. This, in turn, creates the need for more internal devaluation, further heightening the debt burden, and so on, in a vicious spiral downward into depression.

from Felix Salmon:

Why European debt defaults are necessary

Jim O'Neill of Goldman Sachs is now going around saying that the eurozone needs "solidarity," and that Germany in particular needs to get with the all-for-one-and-one-for-all program, after getting itself into this mess by encouraging far too many countries to join the euro in the first place. At the same time, the survival of the euro, he says, "requires Germany to be not so noisy and aggressive about how other countries should run their economies."

You can see the problem here: if enacted, it would mean that the European periphery can run up massive debts, safe in the knowledge that Germany will pay them off. Willem Buiter calls this by its proper name—permanent fiscal transfer—and says that it's "most unlikely" even in Ireland, let alone in (say) Greece.

from James Saft:

Pension savers get the boot

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

Why we have to support Ireland

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

Supporting Ireland to the tune of a few billion quid must look like a no-brainer to the British Government. We should not make the same mistake as the Germans, who managed to get the worst of both worlds over Greece – forced by the scale of their bank exposure to support Greece, but providing the money with ill will, causing bitterness rather than gratitude – and now repeating the error in the Irish case.