Opinion

The Great Debate

from Anatole Kaletsky:

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

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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.

from Anatole Kaletsky:

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

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.”

from Hugo Dixon:

EU needs more non-bank finance

The European Union needs more non-bank finance. Banks are on the back foot. On their own, they won’t be able to fund the jobs and growth the EU is desperate for. Non-bank finance needs to take up the slack.

The European Central Bank and Bank of England have made a good start by identifying the importance of reviving securitisation - the process of packaging loans into bond-like securities which can then be traded on the market. The two central banks have just published a joint paper describing blockages in the system which have all but killed EU securitisation since the financial crisis.

But securitisation is only one piece of the non-bank finance landscape. Similar leadership is needed to invigorate venture capital, equity investment, bond issues for small companies, shadow banking and so forth.

Europe risks going the way of Japan

(The views expressed by former British prime minister Gordon Brown are the author’s own and not those of Reuters)

The good news is that Europe is no longer going the way of Greece. The sad news is that it is threatening to go the way of Japan.

After years of hesitation punctuated by panic, Europe has finally accepted the compelling logic that a single currency needs a lender of last resort. Pro-euro voters in the Netherlands have clearly been impressed as the President of the European Central Bank (ECB), Mario Draghi, braved the scowl of the ever-cautious Bundesbank and led his ECB directors to a pledge of unlimited – if conditional – short-dated bond-buying to avert another currency crisis.

Decisive euro action is needed at the G20 summit

The European crisis is no longer a European crisis. It is now everyone’s. Unless Monday’s G20 summit in Mexico coordinates a concerted global action plan right now, we face a global slowdown that will also have a deep impact on the U.S. presidential election and even on China’s transition to a new leadership. This is the last chance.

The standard, but often empty, language of summit communiqués will simply not do when the euro area is finally approaching its own day of reckoning. Whichever way the Greeks vote in Sunday’s election, a chaotic exit from the euro is becoming more likely: Its tax revenues are collapsing, not rising as promised. Unable to regain access to markets, Portugal and Ireland will soon have to ask for their second IMF programs. Sadly Italy – and potentially even France – may soon follow Spain in needing finance as the European recession deepens. Even German banks, which are some of the most highly leveraged, are not immune from needing more capital.

At G8 and G20 summits, world leaders have tended to be mere spectators as Europe has gone from one failed intervention to another. Now they must move decisively as they did in 2009. They must not leave Mexico without agreeing to support a big European firewall to stop contagion. And they must construct a global growth initiative for East and West.

from Jeremy Gaunt:

The unsyncopated rhythm of central banks

The European Central Bank is off and running with its tightening cycle -- raising by 25 basis points last week and talking in tongues enough to persuade markets that another hike is coming by July.  At the same time, the Fed -- despite some hawkish comments recently about QE -- isn't seen actually tightening for some time. Next year, actually.

Bank of America-Merrill Lynch is now wondering whether there is something wrong with this. " Surely one of these central banks is heading to a painful policy mistake? " it says.

Key to the question is the fact that U.S. and euro zone economics are not as far apart normally as one might think. Take growth, where there is a 0.6 positive correlation between the two across business cycles. Or inflation. The correlation there is even greater at a positive 0.75 over a whole economic cycle.

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