I really enjoyed this piece by Perry Mehrling on the lethal embrace between sovereign debt and banks, and on how to dissolve it. Alex Barker and George Parker on the Financial Times seem to think that the only way to have a banking union is to have a fiscal union (which makes the proposal impossible to implement). Mehrling disagrees, and explains how this could be done.
I am no expert in finance, but he seems rather convincing. And for once, here is a proposal that does not call for a grand solution (unfortunately, very unlikely), but for a step-by-step process.
Also, i really enjoy reading what happens at INET (yes, this is called advertising).
Give a look at Dani Rodrick on Project Syndicate (in a number of languages). The scary thing is that it is not completely implausible…
Countries like the United States, Japan or the United Kingdom can finance their debt at zero or negative real interest rates. This in spite of debt levels higher than those of the euro area, and growth forecasts that are not necessarily better. Meanwhile, the eurozone peripheral countries have to deal on a daily basis with the mood of markets, and to pay interests on debt at the limit of sustainability.
The reasons for this state of affairs are clear, and have been repeatedly mentioned. Eurozone countries are forced to borrow in a currency that they do not issue: the euro is in effect a foreign currency. To quote Paul de Grauwe,
In a nutshell the difference in the nature of sovereign debt between members and non-members of a monetary union boils down to the following. Members of a monetary union issue debt in a currency over which they have no control. It follows that financial markets acquire the power to force default on these countries. This is not the case in countries that are no part of a monetary union, and have kept control over the currency in which they issue debt. These countries cannot easily be forced into default by financial markets.
In other words, peripheral eurozone countries are in the same situation of Latin America in the eighties: they are forced to pay high risk premia to markets fearing the risk of default, induced by the vicious circle austerity-recession-debt burden.
Last week I had a short interview with France 24 in which I tried to squeeze in just a few minutes the contrast between the global imbalances view and the Berlin view.
Larry Summers has a very interesting piece on yesterday’s Financial Times.
He argues that a few countries (the US, Germany, Japan, the UK; I would also add France) enjoy extremely low borrowing rates, both short and long run. In particular, real rates (nominal rate minus inflation) are negative or zero for maturities up to 5 years, and extremely low for longer ones. Summers’ conclusions are then straightforward:
- Focusing on further quantitative easing is not particularly useful; given the already very low rates, further reductions are unlikely to trigger private spending (it has a name: liquidity trap. And Paul Krugman has been insisting a lot on this, for example here)
- More importantly, government should borrow now, like crazy, taking advantage of the favorable conditions to reinforce their long term fiscal sustainability. This is what any reasonable CEO would do, and there is no reason why governments should act differently.
Summers makes a point that is almost obvious: Any project that has positive expected return would improve the country’s fiscal position, if financed with debt at negative real rates: This is the time for example to borrow to buy government buildings that are currently leased. Or to accelerate the rate of replacement of aging capital; or again, to engage in long term infrastructure building/renovation. Makes sense, right? It makes so much sense, that chances are that it will not be done…
I would like to add two considerations. The first is to stress that to get private demand started, it is important that growth perspectives are stronger. Firms today do not invest, not because of borrowing costs, but because even at very low interest rates, expected demand is so low that investment is not profitable. The second is that, for Europe, increased borrowing in Germany, France and the UK would be crucial. Countries enjoying low rates could not only significantly improve their long term prospects, as Summers argues. They could also sustain demand in countries that are consolidating, thus favoring the rebalancing I have repeatedly argued for.
The April data on Italian unemployment are out, and they look no good. Not at all. The overall rate (10.2%) is at its maximum since the beginning of monthly data series (2004), and youth unemployment is above 35%. The rest of Europe is not doing any better, with more than 17 millions people looking for a job in the eurozone alone.
We already knew. The latest data just add to the bleak picture. We also know (I discussed it) what the consensus diagnosis is: Too many rigidities, excessively high labour costs, both because of wages and of taxes on labour (the so-called tax wedge). Therefore, let’s have lower wages, and all will be well! Unemployment will disappear, growth will resume. Mario Draghi said it rather nicely:
Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.