MacroScope

A Marshall Plan for Greece

The spectacular failure of “expansionary austerity” policies has set Greece on a path worse than the Great Depression, according to a study from the Levy Economics Institute of Bard College.

Using their newly-constructed macroeconomic model for Greece, the Levy scholars recommend a recovery strategy similar to the Marshall Plan to increase public consumption and investment.

“A Marshall-type recovery plan directed at public consumption and investment is realistic and has worked in the past,” the authors of the report said.

Employment in Greece is in free fall, with more than one million jobs lost since October 2008 — a drop of more than 28 percent, leaving the “official” unemployment rate in March at 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years, the Levy Institute scholars said.

The study argues the austerity policies espoused by the “troika,” the group of international lenders who funded Greece’s bailouts, have failed and that continuing those prescriptions will only worsen Greece’s jobs, growth, and deficit outlook.

Spain on the way back … to stagnation

Spain heads the rest of the euro zone pack with second quarter GDP figures at a time when we’re seeing glimmers of hope, with surveys suggesting the currency area could resume growth in the third quarter.

The Bank of Spain has forecast a 0.1 percent drop in GDP from the previous three months. It is usually close to the truth which supports the government’s claim that the economy is close to emerging from recession.

Last week, the Spanish unemployment rate fell for the first time in two years, although at 26 percent of the workforce it remains alarmingly high, and PMI readings have begun to pick up.

An Italian in Greece

Italian Prime Minister Enrico Letta will be in Athens for talks with Greek premier Antonis Samaras today with (whisper it) the prospect of the euro zone enjoying its first summer lull for years, in fact all the way up to German elections on Sept. 22.

No major decisions are likely before that point and who knows what will come afterwards, though continuity is a better bet than a radical shift.

 The latest poll at the weekend showed Chancellor Angela Merkel’s centre-right coalition lost its lead over the three main opposition parties. Merkel’s conservatives held steady at 40 percent but her junior coalition partner, the Free Democrats, lost one point to 5 percent while support for the main opposition parties remained steady.

Is Europe past the worst?

The PMI surveys take top billing today. China’s report showed a further slowdown in manufacturing activity with the index following to an 11-month low and well into contractionary territory.

Flash readings for the euro zone, Germany and France are due later. Whisper it, but it could just be that Europe’s economy is past the worst.

Beijing’s travails will obviously have knock-on effects for Europe, particularly Germany for which China is such a huge market. A Chinese “hard landing” – still not the central scenario – would be the last thing the world economy needs just as it shows signs of life.

Austerity fatigue – the financial world’s latest fad phrase

From the U.S., we’ve had lots of talk of tapering. In Europe, the latest fad phrase in the financial world is “austerity fatigue”.

It’s a strange euphemism, somehow disconnected from reality. More than 19 million euro zone citizens were out of work during May, roughly equivalent to the combined populations of Belgium and Austria. Youth unemployment is on the wrong side of 50 percent in Greece and Spain.

Fatigue here really means growing desperation, a public railing against rounds of budget cuts and rocketing unemployment in euro zone countries.

Central bank guides

The Bank of England will publish the minutes of Mark Carney’s first policy meeting earlier this month which will pored over for signs of how the debate about forward guidance – it’s all the rage in the central banking world now – went, and whether that may herald more money printing or act as a proxy for looser policy.

Carney’s colleague, Paul Fisher, indulged in his own form of guidance yesterday, telling a parliamentary committee that discussions within the Bank were focused on how to give a steer about future policy moves and whether to inject more stimulus, not whether it should start to be withdrawn as the Federal Reserve has signalled it may do before the year-end.

Fisher is one of the three of nine members of the Monetary Policy Committee who has been voting to print more money in recent months, but it was an interesting comment nonetheless. Unemployment data today will give the latest guide to the state of recovery while the independent Office for Budget Responsibility will publish its fiscal sustainability report.

Just a typical euro zone day

Spain will sell up to four billion euros of six- and 12-month treasury bills, prior to a full bond auction on Thursday. Italy attracted only anaemic demand at auction last week and Madrid has already had to pay more to borrow since the Federal Reserve shook up the markets with its blueprint for an exit from QE.

However, yields are nothing like back to the danger levels of last year and both countries have frontloaded their funding this year. Economy Minister Luis de Guindos, who declared over the weekend that the Spanish economy will grow in the second half of the year, speaks later in the day.

The political backdrop is also shaky, and getting shakier by the day, although that doesn’t always infect market sentiment. Prime Minister Mariano Rajoy rejected calls to resign on Monday over a party financing scandal and said his reform programme would continue unaffected.

Portugal, ECB, Turkey — trials and tribulations

How to pull defeat from the jaws of victory in one easy lesson; look no further than Portugal.

After the resignation of both finance and foreign minister last week, Prime Minister Paolo Passos Coelho salvaged things by making the latter – Paulo Portas – his deputy and putting him in charge of dealing with the country’s EU/IMF/ECB lenders.

That could have created tensions and problems but we never got to find out because the president then rocked the political class to its foundations by throwing the deal out.

Turkish trouble

How much time does massive central bank currency intervention buy? About a day at a time in Turkey’s case. It spent $1.3 billion of its reserves yesterday to stop the lira going into freefall having thrown a record $2.25 billion at the market on Monday.

So far this year, the central bank has burned over $6 billion of its reserves which have now dropped below $40 billion. So that can’t go on for long, meaning an interest rate rise which a slowing economy really doesn’t need must be on the cards. The lira hit a record low versus the dollar on Monday.

Much of this is to do with the global emerging market sell-off sparked by the Federal Reserve’s exit plan from money-printing but Ankara has sown the seeds of crisis too, first with the very public standoff with protesters in its main cities who railed against what they see as Prime Minister Tayyip Erdogan’s increasingly authoritarian rule.

Banking on union

The European Commission will present its blueprint for a body to refloat or fold troubled banks, largely in the euro zone. As we’ve said ad nauseam, there is no chance of a great leap forward on this front ahead of Germany’s September elections. The question is whether Berlin’s line softens thereafter.

Brussels will suggest a cross-border body able to overrule national authorities. Germany is opposed and says that would require treaty change which could take many years. Beyond that the EU’s executive appears to have pulled its punches somewhat.

The new authority will have to wait years before it has a fund to pay for the costs of any bank closures since the plan foresees a levy on banks to build a war chest of up to 70 billion euros which is expected to take a decade, leaving the agency dependent on national schemes for years.