from Mark Weisbrot
World stock markets and European bond markets rallied last week in response to three words that came from the mouth of Mario Draghi, the head of the European Central Bank (ECB): The ECB would do “whatever it takes” to preserve the euro. This was widely interpreted as a promise to intervene in the sovereign bond markets to push down borrowing costs for Spain and Italy.
What does this all mean to the average person in the eurozone, or in Spain where unemployment just hit a record 24.6 percent? Or in developing Asia or Africa or Latin America – or even the U.S.? Most importantly, it means that the ECB has always had, and continues to have, the power to end the immediate crisis in the eurozone, but has refused to do so. Not for any of the economic reasons commonly believed – such as worries about sovereign debt or inflation. Rather, they have refused to end the crisis for a nefarious political reason: in order to force the weaker economies of Europe to accept a regressive political agenda – including cuts in minimum wages and pensions, weakening of labor laws and collective bargaining, and shrinking the state. Read more…
from Dean Baker
It has been a bit over four months since the latest bailout of Greece was negotiated. This bailout featured a write-down of most privately held debt in exchange for further austerity measures.
It is already clear that Greece will not meet its deficit targets from this bailout, the main reason being that cuts to the budget have led to a much steeper recession than official forecasters had predicted. The Greek government now expects the economy to shrink 7.0 percent over the course of the year. That compares with the decline of 4.7 percent that the IMF projected for Greece back in April.
This was hardly the first-time that the IMF and other official forecasters had badly under-estimated the severity of Greece’s downturn. In April of 2011, the IMF had predicted that Greece’s economy would grow 1.1 percent in 2012, after shrinking just 3.0 percent in 2011. In fact, Greece’s economy shrank by almost 7.0 percent in 2011. And, in April of 2010 the IMF was projecting that Greece’s economy would be on a slow and steady growth path in 2012 after shrinking by just 1.1 percent the prior year. Read more…
from Steve Keen
Steve Keen, University of Western Sydney
Matheus Grasselli, Fields Institute, Toronto
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” (Mark Twain)
That the Euro has fallen into crisis a mere decade after its introduction is hardly surprising. The intrinsic problems in its design were evident to economists as widely separated intellectually as Wynne Godley and Milton Friedman. Writing in 1992, Godley observed that Read more…
It takes no extraordinary acuity to see that New York is not Germany, and that Germany is not New York. It takes a little more struggle to wish that they were more similar.
For if Germany were New York it would be part of a transfer union where funds flowed easily and anonymously from one local economy to another within the larger whole. Right now that would imply funds rolling out of Germany towards, for example, Spain without a word of debate. It would just happen. And, hey presto, Spain would be bailed out without having to commit to suicidal and, most likely, unsustainable economic policies.
Instead Germany sits in a very rigid and not well designed union where transfers of funds come only after retribution is exacted, penalties assessed, and horrors inflicted so that the creditors can feel morally justified in ‘helping’ out the, presumably morally inferior, debtors.
The Spanish problem is that it had a real estate bubble of sufficient proportion to blow up its banks. In order to save those banks the Spanish government had to borrow a great deal and thus ruined its own creditworthiness. A private sector problem thus became a sovereign debt problem. Lacking an independent monetary policy, and not having its own currency to devalue, the Spanish government was forced to use its only policy weapon, namely fiscal policy. In other words the full brunt of saving the banks was transferred to the unsuspecting taxpayers of Spain. The result is grinding depression, massive unemployment – in excess of 20% across the economy as a whole – and a drop in economic activity that has only made things worse. The drop in activity has made it impossible to hold debt levels down to the levels that Spain’s creditors would like, so interest rates on new debt have risen enough to burden the budget sufficiently that there now looks as if there is no escape. Spain is going down. Read more…
from Mark Weisbrot
It has become a ritual: every six months I debate the IMF at their annual meetings, most recently represented by their Deputy Director for Europe. It takes place in the same room of that giant greenhouse-looking World Bank building on 19th Street in Washington, D.C. And the IMF’s defense of its policies in the eurozone is not getting any stronger.
Maybe it’s because most economists at the IMF don’t really believe in what they are doing. The Fund is, after all, the subordinate partner of the so-called “Troika” – with the European Commission and the European Central Bank (ECB) calling the shots. And most Fund economists know their basic national income accounting: fiscal tightening is going to make these economies worse, as it has been doing. Those that have tightened their budgets the most, e.g. Greece and Ireland, have shrunk the most – as would be predicted. The Spanish government, which today announced a 52 percent unemployment rate among its youth, has projected that the planned budget tightening for this year would by itself take 2.6 percentage points off of 2012 growth. Read more…
I might be boring the pants off you with my European Central Bank Posts – but what’s happening in Europe is going very fast and it’s important. Power (lots of it) is shifting towards Frankfurt and Brussels. How will this power be used?