Survival of the fittest political economies through natural selection

I believe that in more ways than one international integration is a process akin to evolution. As they are faced with a shock, our fragmented political economies must adapt to the changed environment in which they dwell. Of course this does not proceed immediately. Adaptation is an uncomfortable process, that takes time and luck as Jared Diamond so clearly illustrates in Collapse.
Not all crises have known solutions and as such it is impossible to know whether or what reforms will work. The best we can do in such cases is to recognise that the status quo is no longer viable and that we need a change. This, in and of itself is an achievement, and the first necessary condition to move in the right direction.
What that change ends up looking like will be a function of the forces at play (veto players and collective action problems), and success is not guaranteed. Moreover, luck is a factor because we cannot exclude the possibility of making type one or type two errors. Finally, we may not have the luxury of time and slow learners may be penalised.

India in the Security Council: better or worst?

To answer the second question of this post, i should consider the purpose if the Security Council. Now I could be wrong, but I believe it is to ensure peace, international stability and the compliance of UN parties to their international commitments and responsibilities.
There are 3 problems from my point of view.

Unanimity
The first is the need for unanimity from the 5 permanent member states. This complicates decisions, due to preference differences.

Intergovernmentalism: The cooperation problem
Secondly, even if it were the case that not a single member state would have a veto (which would be the preferable case) it would still be very difficult to get things done, because this is a purely intergovernmental arrangement. There is no security council secretariat that proposes motions, to my knowledge. The initiative resides completely with the members of the council. If the secretariat was responsible for monitoring security issues in the world and if it's proposals were carried unless there was a blocking minority or no available funds, then the UN would be much more active. As it is, the standard outcome is deadlock and status quo.

Arbitrarity: Why not someone else?
My last concern is that the creation of a permanent seat and veto for India is even more arbitrary than the attribution these properties to the winnersof WWII. At least they won. Why should India get a seat rather than Pakistan or Saudi Arabia, Brazil, Canada.

No veto and no permanent seats: a new formula
My point is that no one should have a permanent seat and no one should have a veto. The security council should have votes attributed as a proportion of income/capita and or as a proportion of population size. There should be elections at the General Assembly level, to select a certain number of members of the security council. Each would then be given a number of votes proportional to the support they received in the general assembly. Thus the votes that the EU would have if it sat on the security council wouldn't be the result of it's size, but of the total size of it's support. 15 representatives should be diverse enough a number. Probably 7 would have been fine but I didn't want to seem cheap.

May be if the aliens invade, after WWIII, if we learn to exploit dark energy or at least nuclear fusion this will be put in place, but I doubt otherwise that the status quo will change.

Anyway giving India a permanent seat in the Security Council seems to only make things worse.

Is international aid bad?

Here are my comments on whether aid is bad

Why aid is not bad
This was not something I came up with, but a conversation I stumbled on. The argument that was made against it was that it distorts local economic incentives. It's the same argument as the one made against welfare programmes. If people get stuff for free, they won't need or want to work and thus it'll trap developing countries in a vicious circle of poverty. This seems a bit simplistic.

What aid is bad
A better argument though is not so much to do with aid in general as with the types of aid, and it is one with which I sympathise more. This is because of the aider's inability to monitor some form of aid distribution once it arrives at the destination country. Financial aid, commodities (grain and fuel) and pharmaceutical products would be good examples. Aid programmes and NGOs, if they act only as suppliers, can control the goods distribution. This'll cause warlords or corrupt local officials to take the resources and sell them for their own personal gain. In these cases aid enriches the oppressors at the detriment of the oppressed.

What aid is good
Education aid, where NGOs fund and staff schools and where the funds are tightly kept track of however, do not involve such monitoring problems. First, they are generally smaller in scale, which means is easier to keep track of things. Secondly, they require, at their most basic, very little infrastructural resources (no large trucks of food, or the need to have soldiers around to help fend off eager would-be intellectuals. Thirdly it requires devoted teachers on the ground. Due to the living conditions in these countries, there is a selection bias, in that of those people are there voluntarily, but if they are foreigners, then they are there by choice, and this devotion. If they are natives, the signalling process may be less certain, but the sorting can be dine in a number of ways (think of nuns, and other such groups). Either way, the frugality of the resources which they handle is such that there is very little incentive to steal, so it is fair to assume that the staff in these projects is more reliable. Moreover, and by association they'll also be cheaper to monitor.

Why some aid has to be good
More importantly though, developing countries with low growth have a lot of slack in the economy, I.e.: a lot of unused productive inputs, such as labour and commodities, the latter of which are sold abroad instead of invested at home. Moreover their labour force is fairly unproductive given the low prevailing levels of education in some of these countries.
Thus, much like in an economy in a recession, spending on public good provision may have a large multiplier and is beneficial to the economy. In the worst of developping countries it probably decrease the rate of negative growth. In that context aid could play a relevant role, as long as it's distribution to those who need, rather than those who will sell it, is well monitored.

Aid is for survival not for growth
To argue that aid should not be given because it'll make starving people lazy and decreases economic growth is a tricky point to argue. First off it assumes aid is meant to stimulate economic growth. This might be so, but my impression is that financial (Paris Club debt clearing) and food aid is mostly meant to guarrantee survival and stability, not to stimulate growth.

Efficiency and Equity
Moreover, laziness and growth concerns are efficiency concerns, which have little time for equity considerations. Thus in a sense they require one's willingness to overlook all non efficiency concerns. As such such a perspective would be perfectly satisfied with the situation in Angola where one individual controls the lion share of the economy while many live in poverty and starvation.
Economic efficiency requires political expediency
Such a perspective would also accept enlightenned despotism as a viable SR political arrangement, because the existence of only one veto player would stream line decision making. However such a perspective would also need to provide an appropriate path to finding that leader.

Full, absolute efficiency requires no Market failures
In the absence of such an appropriate process, and in order to make the pure laissez-faireargument, then one would have to be assuming that there are no market failures, and that we don't need government. There is always full information and conplete markets; there are no asymmetries of information that allow insiders to take outsiders for a ride; there are no public goods that would require provision from an inexistent ruler or from one whose arbitrary rule could lead to under provision of such a good; there are no transport, storage or menu costs, as well as no negative externalities; finally, individuals in that market economy have neither behavioural biases nor are they bounded in their ability to collect and process any amount of information at any given speed.

These are more caveats than I can feel comfortable with.

No more EU musings

I have recently realised that my posts have become overwhelmingly EU oriented. Although an obvious function of my interests this is a pity, as it has effectively led me astray from the stated intent of this blog. As such, and in order to bring this blog back to its original scope, I have decided to move all of my exclusively EU and € musings to a new blog.

Place du Luxembourg, will be exclusively focused on European affairs, mostly on the politics and economics, but also, on occasion, on foreign relations and defence. I've decided to call it that, in honour of the square in front of the European Parliament Building in Brussels famous as an after work hang out for EU civil servants. Please drop by if you want to continue following as I cover the most recent developments.

Anyway, hopefully this will herald a golden era of appropriate contribution to this blog!

Aid and India in the Security Council

Though I'll be posting less frequently, I will continue to post, here. Hopefully this move will help me refocus this blog, and my messy ideas.
So, and as a starter here are two questions that popped to mind:

1) Is international aid worst to the benefitting country than no aid?

2) Would giving India a permanent seat in the UN's security Council actually help that organisation?

My thought on them in upcoming posts

Is the Deauville Agreement half dead? Hopefully!

So our enlightened leaders have met in Brussels to discuss a number of issues, first among which, economic governance and I must say that the result is looking mighty good, and very much along the lines of what I had hoped for.

Everyone was reporting with various levels of detail on what seemsto have been a Council meeting dominated by discussions of the Deauville Agreement. This was a joint call by France and Germany to introduce two EU treaty changes.

First, one empowering a majority of the council to withdraw votes from member states not complying with the SGP3 (opinions the SGP3 here).

The second change was proposed to facilitate the establishment of an alternative mechanism to the EFSF in order to deal with sovereign debt crises. This is because Germany fears that its Constitutional Court may consider any permanent version of the EFSF to be unconstitutional in the absence of a EU treaty revision. It is also motivated by the fear of a German negative public opinion who bears a large part of the weight of the bail out fund.

However, the shape of this mechanism was not very clear. It could have involve d the creation of a permanent fund and the creation of a proces for orderly debt restructure; or only the latter. Fortunately, the comments to the press from the President of the Council of the EU confirm that it is both.

It seems that the main points of contention were the appropriateness of withdrawing voting rights and whether there is an actual need for treaty change.
To be quite fair the first proposal faced overwhelming opposition in the media(Der Spiegel, the FT. ) from the Commission (Barroso and Reding, but not Oli Rehn) the European liberal and leftist leaders

On this issue I must admit that I am impressed at the strength with which the Commission opposed those two countries. Barroso's words could not have been clearer. Moreover,centre-left governments are also in opposition, as are some liberals and most likely the UK's Cameron and Sweden's Reinfeldt.

This means that it was possible to focus more attention on the second issue, of appropriate mechanisms for dealing with sovereign debt crises. Apparently the Finns had a neat little idea, where

Thus the conclusion is that the biggest losers so far are France and Germany. They postured before and came out half empty. It was still better than the rest. At least they got to shape the agenda. France however seems like the biggest loser. It flip-flopped on an extremely unpopular measure only to see it being opposed by all of it's EU partners. Moreover, Sarkozy's reaction to Vivianne Reding's comment made him look even more petty. You don't hear this kind of comments from Merkel...
France has known better EU days.

Freedom and Corrution in the world

Very quickly:

Map of Freedom 2010

Corruption Perception Index 2010

3 Comments on the SGP3

I would like to contribute three comments regarding the recent Franco-German agreement arrived at recently. This post is a poor contribution to more enlightened commentators’ criticisms of the proposed SGP3.

The first, is a criticism to the article from Charlemagne, which completely fails to mention what I think is probably the most important part of the agreement. The last four paragraphs describe the issues both countries want to see changed that require treaty changes. It fascinates me how the Economist would fail to mention that apparently France has come on board with Germany in terms of cancelling council voting rights. This isn't the most intelligent proposal that's ever come out of a Franco-German agreement, and is offensive to the intellect of anyone reading it and makes a mockery of European solidarity and democracy. It's an insult to the intellect, because anyone who expects every single country in the Euro-zone (much less in the EU) to approve a treaty change denying any given Member state of the EU the right to representation is either disconnected from reality or seriously thinks the rulers of small countries are stupid and their citizens inert.

If we have learned anything since the creation of the Eurozone and the misfit application of the SGP, is that indeed we are not at all equal. Several countries have failed their SGP obligations. Portugal in 2002, Germany and France in 2003, Italy and the Netherlands in 2004 and finally Greece in 2005 all failed to live up to the SGP. The only country that ever came close to being punished was Greece. When the problem hurt France and Germany they decided to change the rules. That's why we are now talking of the SGP3 rather than SGP2. As Caballero, Cababllero and Losada 2006 and Chang 2005 describe, Germany and France are clearly more equal than the rest of the Member states. Call them primus inter pares. As Thornhallson 2006 explains this is understandable. However, it is morally highly objectionable. It should be clear to anyone dedicating even a minute of their time to the ongoing debate about the reform of the SGP, that although France is endorsing a German proposal to withdraw votes from countries not fulfilling their obligations under the SGP, neither France nor Germany will ever let other countries do that to themselves. This is a policy for others and shamefully so.

SGP3: Opinions from VoxEU

So the proposals of the European Commission for reforming the SGP have provoked s number of reactions from the good people at VoxEu.org. There seems to be an agreement as to the vagueness of the extra indicators, and their difficult enforcement. The SGP remains a legalistic punishment mechanism rather than a tool incentivising good counter-cyclical fiscal policy. Finally there seems to be dome disagreement about the appropriateness of the debt requiremen, while consensus is still that more can be done to increase ex post credibility of the pact. Wyplosz' "Not yet fiscal discipline, but a good start" : First, he identifies the two prevailing and competing opinions about the failures of the SGP. The "Germans" argue the penalties aren't tough enough, while the "institutionalists" argue that it is the objectives and the framework itself that isn't good enough. Apparently the EC focuses enough on the one but not enough on the second. This might be aided by the creation of a permanent EFSF. He does not consider the debt criterion appropriate but maintains that the way the commission found around the 60% limit is clever. Manasse's view, expressed in his contribution "SGP: Counterproductive Proposals" is much more negative. He criticises the SGP's continued obsession with ex-post punishments as an incentive for good behaviour in food times. He rightly argues that this fixation painfully continues to leave the cyclicality of fiscal positions out of any meaningful discussion. He also finds it difficult to formally impose new limits on debt, which would expose every country to penalties and on the loosely defined "macroeconomic imbalances" causing fragilities. Nonetheless, he praises the introduction of medium-term fiscal plans and the implementation of best practices for fiscal policy across the eurozone. Giavazzi and Spaventa, call the proposals for the SGP empty and useless. For them, the indicators added by the Commission's to help identify unsustainable policy courses are vague, and corrections to them are difficult to enforce. They also criticise the commission for focusing too much on ex post punitive actions against the states, rather than ex-ante preventive steps. Finally they maintain that the biggest problem has been private debt and as such praise the creation of the ESRB.

SGP 3 Update: The Franco-German Compromise

France and Germany seem to have reached a compromise over the SGP3. As Charlemagne describes it, the Germans seem to have dropped their "hawkish" demands about the semi-automaticity of fines at the preventive stage and in return got the French to accept supporting the German ideas of creating a debt restructuring mechanism for the Euro-zone and extending the EFSF forever. According to the communiqué, only the later of these proposals would require a treaty change. This was all agreed over the week end and came to light in the last day or so. The German press was not amused, and I am certainly not impressed. However, I leave more comments for later.

Access to improved water source in a developing country

Very recently, I had to write a policy essay as part of the application process to an American University. I chose to focus on a problem that is common to many Sub Saharan countries: water provision. Although it is relatively large, I guess it could be posted here (of course, I'm open to any comments and criticism of the opinions expressed). Goal number 7 of the United Nations Millennium Development Goals (MDG’s) is to Ensure Environmental Sustainability and one of its targets is to halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation. While, overall, the world will be able to meet or even exceed this target if it maintains its current trend, progress in this area has been uneven, with Sub-Saharan Africa (SSA), for instance, clearly failing this target – according to the African Development Bank (Stampini et al. 2009), coverage of improved drinking water improved from 49% in 1990 to only 58% in 2006. Universal access to safe drinking water, besides satisfying basic needs, carries several positive externalities, such as health improvements, which in turn reduce illness rates and mortality, thus reducing medical costs and enhancing productivity (Dagdeviren and Robertson 2009). Having water access nearby also allows for reducing the time burden faced by women, who generally spend more time on domestic work (Costa et al. 2009), thus allowing them to spend more on remunerated activities, on leisure, or attending school (Costa et al. 2009; Hailu and Tsukada 2009) – in either case, contributing to gender empowerment. It comes as no surprise, then, that returns from water coverage are very large, ranging from US$3 to US$34 for each US$ invested (Hailu and Hunt 2008; Dagdeviren and Robertson 2009). Such large externalities (and returns) further stress the importance of extending water coverage. Zambia is a case in point. Although data on water access differs – World Bank (2006) estimates water supply coverage decreased from 73% in 1990 to 53% in 2005, while other sources point to a slow progress, from 50% in 1990, to 54% in 2000 (the year MDG’s were established) and 58% in 2006 – it is clear that, whichever data source is used, at the current rate, Zambia will fail to attain this particular goal of the MDG’s by 2015. Zambia opted for fully public water provision until 1989 when the central government, confronted with its budget problems, opted to initiate commercialization process, thereby beginning the process of creating 10 municipal utilities that were commercially run, though publicly owned (Chisala et al. 2006). With commercialization of water provision, full cost recovery became the main goal. However, this policy, while prioritizing cost recovery, produced results that can be portrayed, at best, as weak:

• Tariff hikes of between twofold and eightfold in real terms mean that water is unaffordable (considering a threshold of income spending on water of 3%) for 60% of the population (Dagdeviren and Robertson 2008);
• Despite tariff increases, cost recovery was not attained by any of the 10 utilities (Chisala et al. 2006);
• Persistent underinvestment in water and sanitation sector – between 1998 and 2002, investments were less than 3% of what was required just to maintain existing access rates (Dagdeviren and Hailu 2008);
• Also as a result of underinvestment, major inefficiencies persisted, with water losses representing about 50% of total supply (during the commercialization period) and 25% of the billed amount remaining uncollected (Dagdeviren and Hailu 2008).

Privatization and commercialization were also pushed by donors and International Financial Institutions, although some now recognize that they made a mistake, with the OECD recognizing privatization’s weak results in SSA, while the World Bank now accepts that private participation in infrastructure had been disappointing and that case specific solutions are required, as opposed to universal solutions (Bayliss and McKinley 2007; Hall and Lobina 2009). Privatization does not necessarily yield bad results. However, where it worked, it relied on some basic features:

• Current developed countries (e.g., USA or UK) did not develop their water systems through full cost recovery and only privatized water provision when access had already reached 100% (much higher than Zambia’s; Hailu 2008) and when their real GDP per capital was much larger than that of Zambia today;
• Even today, the EU continues to support investment on water improvements in its poorer members (Hall and Lobina 2009), any of which is still vastly richer than Zambia;
• Brazil has successfully opened up the water sector to private participation, with the positive outcome apparently coming from contract design (which included investment obligations, for example) and from the existence of staff capable of monitoring and enforcing such contracts (Rossi de Oliveira, 2009). Despite some progress, Zambia still suffers with poor contract design and lack of regulatory capacity (Dagdeviren and Robertson 2008).

It seems clear that, in a low income country with limited coverage, the emphasis should not necessarily be on privatization (or commercialization) and full cost recovery, since that will almost certainly keep the poorest sectors of the population excluded (by not extending coverage and/or by making tariffs so expensive that they become unaffordable). It appears to be what happened in Zambia, trapped in a vicious circle of unaffordable tariffs, low coverage, low investment and high system losses. Therefore, opting for public provision might be the best option available, but even if they should decide to continue with commercialization, some steps should be taken:

1. Contracts should set clear accountability systems, besides penalty and incentive schemes that are indexed to performance, while also setting the obligation to serve the poorest segments of the population, placing emphasis on extending affordable coverage (through the use of progressive tariffs, or income-based subsidies or cross-subsidy that specifically and efficiently target the poor), which would also allow to absorb network benefits (Brown 2009);
2. Institutional framework improvement, both through the clear establishment of laws and rights and through the human resource training that allows the regulator to actually enforce existing contracts;
3. At best, the measure set out in 1. would likely allow for covering variable costs. Therefore, the Zambian government would still need to find a way for financing the construction of infrastructure that would allow it to expand water access. Although its public debt level is low (under 25% of GDP in 2009), it is unclear whether it would be able to secure the required funds without compromising other crucial areas for its development. Therefore, infrastructure expansion would likely be dependent on external aid. Unfortunately, Zambia (and many other low income countries plagued by both very high poverty rates and inequality) seems to be highly dependent on that factor to be able to break the existing vicious circle that dooms the poorest segments of its population.

The myth of the American Dream

Several months ago, Filipe was kind enough to invite me to this blog. For a variety of reasons (mostly related to very little free time), I kept on delaying my 'effective entry' here. But I guess 'late is better than never'. Since I think I am clearly more leaned to the left of the political axis than Filipe, it's quite likely we'll often disagree (which, from my point of view is entirely positive). Getting on to the post itself (the graph was taken from here, by the way), the message is really quite simple: why is it that we keep talking of an "american dream" if, in reality, among developed countries, it shows such a low level of social mobility and such a high level of income inequality? Is there any way to reconcile these two basic facts with such a "dream" (I wasn't able to do so)? Isn't such a "dream" more likely to be fulfilled in Scandinavia than in the USA? From a leftist point of view (and for anyone aiming for anything close to "equality of opportunities"), I guess there are not really many doubts: if we must emulate another society we would be better served by looking north(east) rather than across the Atlantic. Update: very basic question, Filipe: I had broken down the post in three paragraphs, any idea why they vanished?

We need an EU Attorney General and a EBI rather than the Europol

The title of this post is fairly self-explanatory. By "EBI" I mean a European Bureau of Investigation, à la FBI. The EBI should investigate and the EU Attorney should investigate. He should be appointed by the European Commission upon confirmation by the Council and the European Parliament. Why? Well there are a lot of arguments in terms of more efficient cross border policing, particularly relevant for the struggle against organised crime. However my concern is obviously closer to my comfort zone. This institution also makes sense from the point of view of a more coordinated fiscal policy.

European Defence: "why?", past, present and future,

So it seems that as budgets get presented again, it is time for the USA to once more tell Europe that it needs to honour its defence commitments under NATO. Everyone will complain that they can't and leave it to the USA to pay. Given their own financial dire straits, one is left to wonder for how much longer we'll be able to do this... Why should we have a EU army? Because size matters Now if anyone's reading and if this isn't the first post you're going through, you've probably figured out that I'm pretty pro-European integration. So, it won't surprise anyone that I'm in favour of a single European Army. There are 3 main reasons for this:

The media industry and selection of information supply

The issue of the role of the media is a very interesting one, and one that keeps on creeping back in the back of my mind. The last time it did so was during this summer over the coverage of the so called "mosque" in what was referred to as "on ground-zero" in Manhattan. This is a stupid debate. First of all it's private property. Second of all, it's a building to be used for religious purposes in the first country to defend the right to freedom of religion. But even looking over that. If those were not reasonable reasons to shut up about it, one would be confronted by the fact that this is not a mosque, but an interfaith centre, albeit one headed by a Muslim foundation. Finally it is not going to be build on ground zero, but some neighbourhoods away from it. Apparently there's an mosque much closer anyway. It's just a ridiculous debate. I had talked about the media in the past, trying to figure out it's role in the middle of the whole health care debate ( which was a debacle), in the USA. This came in the middle of a fairly lengthy and technical discussion of the pros and cons of private and publicly financed and provided health care. For most of the next lines I reiterate what I said then, but I try to add the little contribution from the above mentioned article, about seasonality of news cycles and their target audiences.

Keeping inflation down in a Currency Union: A Policy for Germany but not for many more...

In this post I describe how monetary union without fiscal union creates a fertile ground for permanent exposure to the damage of asymmetric shocks. One side of this equation is that the economy not affected by the negative shock still benefits from the low interest. This in turn leads to high rates of inflation. This should be a concern for any country, as the cheap credit may stimulate a bubble. For a country like Germany, there's the added cost of loss of competitiveness. It hit me a while ago that there's a simple solution to this problem: Germany can unilaterally tax loans. By doing this it should increase the cost of borrowing back up, and it shouldn't be particularly hard to figure out what the tax rate would have to be, given the decrease in the interest rate, to leave the after tax interest rate of Germany untouched, in order to abort the bubble before it grew.

Signalling a restructuring of Greek debt?

I mentioned back on sunday, that there had been some chatter from a ECB executive about the IMF extending the deadline for Greek debt payments.
Apparently this was followed by similar comments by the IMF's director DSK as well as by comments from the Greek finance minister, to the same effect. Now the European Commission and Germany are denying or opposing this.
What's to be made of all this back and forth?
A Greek economist says that this public discussion is actually the subtle way that these institutions found to start talking about restructuring in veiled terms. This is because it is becoming an accepted fact that this will be inevitable.
But what would be the consequences if this happened? If depreciation is not necessary, the consequences shouldn't be very bad. Greece would be shut out of the Market for a while before it returned at high coupons at least for a while.
However it is likely that depreciation would have played an important role, at least as a motor of economic growth, and in consequence of increase government revenues, which should lead to lower interests on Greek sovereign debt. So, the most accurate thing is to say we don't really know what would happen. That's not a very reassuring place to start from, if you ask me...

The creation of the EFSF - such gripping drama

The FT has a fantastically well researched and sourced article on the events that led to the creation of the European Financial Stability Fund, "Dinner at the edge of the abyss", written by the great Tony Barber. Really good for anyone interested in the history of European integration and about what country stands for what in that debate.

Interesting Contributions: Daniel Gros

EU or Euro-zone seat at the IMF

How to avoid trade war: A reciprocity requirement

How to deal with sovereign default in Europe: Towards a Euro(pean) Monetary Fund

News and bond Markets: predicting the effects of ECB comments about IMF on Greece

So Bloomberg has an article where a member of the executive board of the ECB says the IMF may extend the duration of Greece's debt relief package. Now, assuming that bond markets use similar signals as the one forex and libor markets use (ie: the news broadcasted around them), this piece of information should have some effect on the bond markets tommorrow. What I'm going to try to do is to try to guess today and check what happened tomorrow at the end of the day. My idea is that bonds will be trading at fairly low prices at the beginning of the day and will remain so unless some new piece of information arises. The logic is that all that this piece of information says is that Greece is in worst shape than anyone has dared to admit. It doesn't say that the IMF will do it. It says that it is considering it and that it is feasible. Funnily enough this shock to the coupon (or nominal) yield will push them so high that it might in the end fulfil the prophecy that Greece does indeed need more time to deal with this situation, simply by making the short run more unbearable for Greek bonds. As the miserable state of the Greek economy is made clearer to investors, prices will decrease and the nominal (coupon) yields of its bonds will rise until Greece's medium term access to credit is made clear, at which point if there ate no other news of relevance, things should calm down. Let's see if that's what happens or if I'm just full of it...

The EMF - EFSF - has a website

A little note on the European Monetary Fund:

It is officially not called that. It's called the European Financial Safety Facility, or EFSF for short (created as a societé anonyme under Luxembourg's law), and there's a website that one can access here, with among many other things, a very interesting F.A.Q. PDF file.

Is saudade why all the Frenchmen fear English?

So I came across this post from the very liked (by me) Jean Quatremer of "Libération".

In that article he elaborates on the fact that the English language is all too pervasive in the EU institutions and how that's bad for everyone, particularly his country's elite. His argument, although I don't agree with it, should not be dismissed altogether. As the national of a small country with a beautiful and flexible language and a phenomenally imponent body of European, African and South American literature, I understand the "saudade" we may feel towards our own languages but to use it to argue what he argues seems insulting, sad and oh so cliché for a Frenchman to do.

His hypothesis runs something like this: "Language is an important channel of communication. Some ideas are inherently better articulated in one language than in another, if for no other reason that they might have developed in the context of the evolution of that (language's) society. So to favour one language to another (or many others), deprives us of the contributions (intellectual and, in this specific case, political) originating elsewhere (where another language is spoken)."

This is tantamount to arguing that some ideas are inherently French, or for that sake, English, Portuguese, Hungarian, Swedish, or whatever. And not in the sense that they belong to that culture, but that they can only be expressed in that language. So I don't agree.

Trade, Exchange rates and Democracy

So I've been thinking: Should trade policy be related with democracy? Are countries who are bigger, poorer and undemocratic more likely to be protectionist? If so should we create added trade barriers to these countries, is it irrelevant or does this hypothesis not imply the need for trade barriers?

EU-China: We push them, they push back...

Here's how the much touted EU-China summit ended. So not so well... Now what's next? Do we sanction them and risk alienating them? Or do we just wait it out and alienate our electorates further. It'll be interesting to see how things process from here, but clearly there's no clear cut answer to this problem. China is too big a risk...

Wofgang Munchau on the Chinese Renmimbi Manipulation

If you are interested in what happens in the world, please read this article by the FT's Wolfgang Munchau.It summarises the economic logics underlying the discussions about Chinese monetary intervention. More importantly it argues for a forceful approach to Chinese monetary manipulation. I'm a big fan of his blog, and even if I don't always agree with him, he is always insightful, clear and fair. He mentions an article from VoxEU contributor and Centre for European Policy Studies' Director Daniel Gros, which very intelligently argues for the use of reciprocity in arguing for capital controls, which would be legal, apparently, against the much touted trade wars.I agree with these means, as it seems nothing better exists. However, I believe his analysis may be slightly myopic.

International Cooperation: China-EU Relations

So there has been a lot of interaction between EU and China, as of recently. I'll start with the following article from the Chinese Embassador to the EU, where he praises the Lisbon treaty and it's ability to increase European integration, thus endowing the EU with a new authority and consequent ability in international relations, fundamental to the EU-China foreign strategic relationship (whatever it may be...).

Then we follow with the renewed calls for Beijing to allow the renmimbi to float, which is really to say that the EU and the USA want it to appreciate.

The Chinese on the other hand want to leave it be for fear it'll create chaos, which I'm assuming they fear would be large enough to topple the single party regime.

At the same time the Chinese seem to have requests of their own, involving European countries giving up some of their IMF seats.

What does all this chatter mean?

SGP3: The European Commission initial proposals

The news report from EUobserver The official description provided by the European Commission: In General terms, Strengthening the SGP, The preventive and Corrective measures and Chronology and overview of the new framework of surveillance and enforcement (where they fail to mention the chaos of 2002-2005 and the SGP2 reform of 2005). Finally, here and here are the highlights and the arguments in favour from the European Commission at VoxEU.

Chinese Economics and the USA

The FT had an interesting article about monetary policy in china and it's effects on the us economy.

Link: "A dinner as bitter as bile" @ http://blogs.euobserver.com/persson/

I found this blog post and couldn't let it go by. It was posted by Matt Persson, a regular contributor with his own blog at euobserver.com. I am posting it here for fear that it may be erazed in the future. It is a transcript from a homonimous article of Le Monde. If, as according to the article it is a reliable account of what went on, then one should be really concerned... On the other hand, Berlusconi's contributions are as ridiculous at the EU level as anywhere else!

European Fiscal Federalism (Part 5): Democratic deficit, Budgetary empowerment, institutional competition and shifting the status quo

Steps in this direction:

In the previous posts ( 1, 2, 3) I have described the economic logics for an EU fiscal policy and the political economy argument for delegation of such powers to the European Commission (4). In this context, I would like to highlight the recent report that a group of European Socialists are lobbying their party to pursue US style primaries to appoint their candidate for the 2015 European Commission Presidency. There is an equivalently irrefutable logic behind this type of process, which has been explored by Hix and Follesdal in a 2006 article on the EU's democratic deficit. This initiative could also be the beginning of something along the lines of the Wallstrom candidacy imagined by Hix.

European Fiscal Federalism (Part 4): Institutional Framework and Credible commitments

Until now, this analysis has completely ignored who should be in charge of this redistributive policy. We have agreed that it should be the EU running the show, but which institution should be responsible for this?

European Fiscal Federalism (Part 3): Pigouvian taxation, and redistribution - Externalities, mobile assets, and euro interest rates

So far, I’ve been describing the economic logic for fiscal federalism. However I have not qualified it. It's all nice and easy to argue that we need to tax the richest and subsidise the poorest, but how do you do this? Which pockets should the EU reach into and what should it pay for?

In the next lines I propose the following Euro-level fiscal tools : (1)Taxes on mobile factors that cause negative externalities, (2)an Income tax, and the maintenance of a (3)common education policy as well as a (4)common defence policy, with a tendency for expansionary military R&D expenditure during recessions. Finally I also argue in favour of (5)the establishment of an European Monetary Fund (EMF) to switch from cooperation to coordination of euro-area fiscal policies. This would be the best tool to keep and improve the theoretically good monitoring devices created by the SGP, while replacing its very ineffective legalistic procedures, in order to improve fiscal stability across the board.

I believe these are the necessary tools for the EU to minimise its risks of suffering from asymmetric shocks, while endowing it with the policy tools to deal with them, should they arise, as they inevitably will. They may however not be sufficient...

European Fiscal Federalism (Part 2): OCA theory and the effects of asymmetric shocks

The first part of the comment described in the previous post belongs to a part of economics which is highly relevant for the Euro area, known as OCA (Optimum Currency Areas), their characteristics and their behaviour when faced with internally asymmetric (-like) economic shocks. Charles Wyplosz and Richard Baldwin have an extremely good book on the economics of the EU, which discusses this at length. DeGrauwe's book has a somewhat more superficial dicussion of a similar scenario, focused on the interest rate, while von Hagen and Mundschenk elaborate more thoroughly on a scenario closer to DeGrauwe's. Finally, Beetsma, Debrun and Klassen also provide some insights. The scenario discussed below is inspired by Baldwin and Wyplosz' but I've added some details.

EU Financial Reform: First steps

I've been trying to post something for a while about recent fiscal developments at the EU level and suggestions of a EU tax. However it's taken a lot of time as I keep on getting distracted.

In the mean time some tentative words on the agreement reached recently on EU reform, between the Commission, Parliament and the Council. Some extracts below from...

European Fiscal Federalism (Part 1): Introduction to the “irrefutable”

It seems that weekends are only reserved for Lady Ashton. On Sunday 8 August, Mr Janusz Lewandowski, the (Polish) EU budget commissioner started floating around the idea of a European tax to be levied by the European Commission on banks, financial transactions, carbon emissions (permits) and air traffic. Berlin, Paris and Westminster were not amused, but Poland, Austria, Belgium and Spain seemed to not dislike the idea too much. Anyway, this is part of the ongoing process of preparation for the 2014-2019 budget which will be presented by the afore mentioned Commissioner at the end of September 2010. Most interestingly of all for me was the response that the proposal received from the Financial Times. I believe that unless you've subscribed to the ft, even if only for free, you can't read this article. It's not complicated but I assume not everybody can be bothered to do it. As such I feel compelled to report some of the comments which are rather strong:

Russian barley and weat and Collapse of civilizations

I'm not quite sure why I though of Jared Diamond's "Collapse" when I read the FT today. May be it was the fact that these three news appeared right after each other:

"Drought doubles price of barley in six weeks"

"Russian farmers on brink of bankruptcy"

"Air Pollution levels soar in Moskow"

"Flash floods hit central Europe"

... I'm not sure. It seemed to me as though some of these bad news might have had something to do with global warming... It probably had something to do with the fact that they say it is the warmest summer in Russia for 100 years, or something like that.

I really hope we are not Middle Age Icelanders or that stupid frog in the pan of boiling water...

Wikileaks - Julian Assange gets an "insurance"

I'm no specialist in Law, or Human Rights. That's for someone else... ;)

Not withstanding that I came accross this news report and found it compelling enough to share it on this blog (despite no one reading it.... ;) ). Now, this website is not about conspiracy theories, or else I would never shut up about UFOs, but I do think that wikileaks is a fascinating, and may be, paradigm changing tool.

The relevant file can be found here at the bottom of the page (if you want to get AES Crypt, necessary to read the file once the encryption key is made available, it can be found here . It's open source material, so it is available to everyone, for free). If for some reason this does not work, please just type "wikileaks Julian Assange insurance" on Google and something along the lines of this will show up.

I encourage everyone to download it. I don't know what it is, but it's 1.4 Gb of something in the middle of files lower than 1Mb in size, so even if it's nothing it's got to be something...

... Hey for all I know it could be something about UFOs... ;D

Anyway, the whole concept of wikileaks is interesting, in that it substancially increases the amount of information available to the public. This is very good, because there's a point where too much information makes it difficult to find what is relevant for you. That is why websites like that one, wikipedia and google are important. Their search engines decrease the length of the sorting out process, thus facilitating the relevant information to the relevant people at the blink of an eye.

Less theoretically so, I guess there's a problem of accountability. "Whoever died and made wikileaks distributor of sensitive information?" you might ask... well this is the problem with the internet. A guy in Sweden can post sensitive material about the USA... Whoever put him in charge? No one. He is just a service provider. It is, however, fair to assume that there is or might come to be some internal panel within "wikileaks" corp that decides whether some files are too sensitive, or whether parts of some files are too sensitive to be made available (names, times, places) in order to protect innocent bystanders. If they don't have that yet, than they ought to come up with it on their own... before someone else does.

The Impunity of the USA

Here's something different. This was brought to my attention, and one can't fail to be disturbed by these facts. Below this paragraph you can find the extract of an article from the Guardian, published on Thursday, 20 May 2004, reporting on the abuses endured by female prisoners in Iraq. These abuses seem to fall within the category of human rights abuses and international law violations. Anyway, it's depressingly true. I for one must admit that the most troubling thought I am left with is that of impunity. I wonder what happens to the individual perpetrators... No one wonders about their leaders. It reminds me of that quote from Thucydides that in war "the strong do what they have to and the weak accept what they must"... sad that after some 2500 years the world still works the same way... "

The other prisoners

Most of the coverage of abuse at Abu Ghraib has focused on male detainees. But what of the five women held in the jail, and the scores elsewhere in Iraq? Luke Harding reports

The note claimed that US guards had been raping women detainees, who were, and are, in a small minority at Abu Ghraib. Several of the women were now pregnant, it added. The women had been forced to strip naked in front of men, it said. The note urged the Iraqi resistance to bomb the jail to spare the women further shame.

Late last year, Swadi, one of seven female lawyers now representing women detainees in Abu Ghraib, began to piece together a picture of systemic abuse and torture perpetrated by US guards against Iraqi women held in detention without charge. This was not only true of Abu Ghraib, she discovered, but was, as she put it, "happening all across Iraq".

In November last year, Swadi visited a woman detainee at a US military base at al-Kharkh, a former police compound in Baghdad. "She was the only woman who would talk about her case. She was crying. She told us she had been raped," Swadi says. "Several American soldiers had raped her. She had tried to fight them off and they had hurt her arm. She showed us the stitches. She told us, 'We have daughters and husbands. For God's sake don't tell anyone about this.'"

Astonishingly, the secret inquiry launched by the US military in January, headed by Major General Antonio Taguba, has confirmed that the letter smuggled out of Abu Ghraib by a woman known only as "Noor" was entirely and devastatingly accurate. While most of the focus since the scandal broke three weeks ago has been on the abuse of men, and on their sexual humilation in front of US women soldiers, there is now incontrovertible proof that women detainees - who form a small but unknown proportion of the 40,000 people in US custody since last year's invasion - have also been abused. Nobody appears to know how many. But among the 1,800 digital photographs taken by US guards inside Abu Ghraib there are, according to Taguba's report, images of a US military policeman "having sex" with an Iraqi woman.

Taguba discovered that guards have also videotaped and photographed naked female detainees. The Bush administration has refused to release other photographs of Iraqi women forced at gunpoint to bare their breasts (although it has shown them to Congress) - ostensibly to prevent attacks on US soldiers in Iraq, but in reality, one suspects, to prevent further domestic embarrassment.

(...)

In Iraq, the existence of photographs of women detainees being abused has provoked revulsion and outrage, but little surprise. Some of the women involved may since have disappeared, according to human rights activists. Professor Huda Shaker al-Nuaimi, a political scientist at Baghdad University who is researching the subject for Amnesty International, says she thinks "Noor" is now dead. "We believe she was raped and that she was pregnant by a US guard. After her release from Abu Ghraib, I went to her house. The neighbours said her family had moved away. I believe she has been killed."

Honour killings are not unusual in Islamic society, where rape is often equated with shame and where the stigma of being raped by an American soldier would, according to one Islamic cleric, be "unbearable". The prospects for rape victims in Iraq are grave; it is hardly surprising that no women have so far come forward to talk about their experiences in US-run jails where abuse was rife until early January.

One of the most depressing aspects of the saga is that, unaccountably, the US military continues to hold five women in solitary confinement at Abu Ghraib, in cells 2.5m (8ft) long by 1.5m (5ft) wide. Last week, the military escorted a small group of journalists around the camp, where hundreds of relatives gather every day in a dusty car park in the hope of news.

The prison is protected by guard towers, an outer fence topped with razor wire, and blast walls. Inside, more than 3,000 Iraqi men are kept in vast open courtyards, in communal brown tents exposed to dust and sun. (Last month, nearly 30 detainees were killed in two separate mortar attacks on the prison; about a dozen survivors are still in the hospital wing, shackled to their beds with leather belts.) As our bus pulled up, the men ran towards the razor wire. They unfurled banners and T-shirts that read: "Why are we here?" "When are you going to do something about this scandal?" "We cannot talk freely."

The women, however, are kept in another part of the prison, cellblock 1A, together with 19 "high-value" male detainees. It is inside this olive-painted block, which leads into a courtyard of shimmering green saysaban trees and pink flowering shrubs, that the notorious photographs of US troops humiliating Iraqi prisoners were taken, many of them on the same day, November 8 2003. A wooden interrogation shed is a short stroll away. As we arrived at the cellblock, the women shouted to us through the bars. An Iraqi journalist tried to talk to them; a female US soldier interrupted and pushed him away. The windows of the women's cells have been boarded up; birds nest in the outside drainpipe. Captain Dave Quantock, now in charge of prisoner detention at Abu Ghraib, confirmed that the women prisoners are in solitary confinement for 23 hours a day. They have no entertainment; they do have a Koran.

Since the scandal first emerged there is general agreement that conditions at Abu Ghraib have improved. A new, superior catering company now provides the inmates' food, and all the guards involved in the original allegations of abuse have left. were they arrested? were they tried? Court-martialled?

Nevertheless, there remain extremely troubling questions as to why these women came to be here. Like other Iraqi prisoners, all five are classified as "security detainees" - a term invented by the Bush administration to justify the indefinite detention of prisoners without charge or legal access, as part of the war on terror. US military officials will only say that they are suspected of "anti-coalition activities".

(...)

The women appear to have been arrested in violation of international law - not because of anything they have done, but merely because of who they are married to, and their potential intelligence value. US officials have previously acknowledged detaining Iraqi women in the hope of convincing male relatives to provide information; when US soldiers raid a house and fail to find a male suspect, they will frequently take away his wife or daughter instead.

The International Committee of the Red Cross, whose devastating report on human rights abuses of Iraqi prisoners was delivered to the government in February but failed to ring alarm bells, says the problem lies with the system. "It is an absence of judicial guarantees," says Nada Doumani, spokesperson for the ICRC. "The system is not fair, precise or properly defined."

During her visit to Abu Ghraib in March, one of the prisoners told Swadi that she had been forced to undress in front of US soldiers. "The Iraqi translator turned his head in embarrassment," she said. The release of detainees, meanwhile, appears to be entirely arbitrary: three weeks ago one woman prisoner who spoke fluent English and who had been telling her guards that she would sue them was suddenly released. "They got fed up with her," another lawyer, Amal Alrawi, says.

Last Friday, about 300 male prisoners were freed from Abu Ghraib, the first detainees to be released since the abuse scandal first broke. A further 475 are due to be released tomorrow, although it is not clear if any of the women will be among them. General Geoffery Miller, who is responsible for overhauling US military jails in Iraq, has promised to release 1,800 prisoners across Iraq "within 45 days". Some 2,000 are likely to remain behind bars, he says. Iraqi lawyers and officials aredemanding that the US military hands the prisons over to Iraqi management on June 30, when the coalition transfers limited powers to a UN-appointed caretaker Iraqi government. Last week, Miller said "negotiations" with Iraqi officials were ongoing.

Relatives who gathered outside Abu Ghraib last Friday said it was common knowledge that women had been abused inside the jail. Hamid Abdul Hussein, 40, who was there hoping to see his brother Jabar freed, said former detainees who had returned to their home town of Mamudiya reported that several women had been raped. "We've know this for months," he said. "We also heard that some women committed suicide."

While the abuse may have stopped, the US military appears to have learned nothing from the experience. Swadi says that when she last tried to visit the women at Abu Ghraib, "The US guards refused to let us in. When we complained, they threatened to arrest us."

"

Seven EU banks fail stress tests

According to the BBC:

"They include five Spanish banks - Diada, Espiga, Bianca Civica, Unnim and Cajasur.

The other two were Germany's Hypo Real Estate and Greece's ATEBank."

Here´s what the European Commission has to say about it, and here´s what the CEBS (Committee of European Banking Supervisors) has to say about it.

These stress tests and the transparency they endow the banking industry with are relevant to the extent that they decrease asymmetries of information, and the ensuing uncertainties about the quality of the EU´s banks´ balance sheets. They should thus revive investor confidence in EU banks, and the industry, if as expected they are, overall, good.

For those banks who fail to pass these tests, recapitalization awaits; either through a private take-over(Germany and Greece?) or through public lending (Spain?).

Understanding the financial crisis through the UK's LIBOR

Inspired by the previous post, here's a similar analysis of the Leading interbank offered rates for the pound. I've been compiling some data to do the same for Euribor rates, but it's taking me a while. The source for the events is the BBC.

No contagion: The irrelevance of greek debt restructure to healthcare service suppliers

John Dizard of the FT warns us that "Greece is restructuring debt". Now this is misleading but it is well written. It is misleading, because Greece is not restructuring all of its debt, only the debt of the healthcare system. It's a well written title because the author only refers to debt, which implies some debt, not all. It's beautiful when the media uses semantics to say one thing while subliminarly implying its hyperbole. Anyway, this news seems to have been picked up by Yves Smith at naked capitalism who has some further comments on it. Moreover this restructuring is happening despite it's fantastic performance, according to the IMF (via Tony Barber of the FT). Is this horrible? Well its not good, particularly if you are the relevant pharma companies. However I would guess that this is debt that Greece can afford to restructure and that the rest of the EU can afford to let it restructure. I would suppose that Greece's small size makes it a fairly small customer and thus it would have little effect on the world market for health care products. Alternatively, and because I know nothing of the market and regulations of healthcare in the EU, other than what this article tells me, if healthcare is a protected industry then whatever economic hailments may befal the pharma companies will be limited to such Greek companies. In conclusion, there cannot be much or any contagion from this restructuring. This reality of healthcare suppliers is clearly opposed to the contagion that would happen if central government would default to banks . This implies that Greece can restructure all debt that will not affect its economy to a large extent or spread to the economy of its neighbours. As a result, I would expect markets to not react much to this recent revelation as according to the logic I have just outlined central government's agencies' bonds are not the same as central government's bonds. Therefore the restructuring of one should not imply the restructuring of the other. At the same time, according to John Dizard "What the pharmas do [when payment stops or slows] is supply only the basics like penicillin or insulin. At the end they stop doing even that." Now as you'll see from his original post this was said in the context of the Soviet Union, so I don't think that that insight is transferable to Greece, and that we won't see patients dying because the state cannot pay for their medicines. Naked capitalism has some very "inspired" comment on what would happen if this were to happen in Greece... But it seems rather inappropriate to compare Greece to the USSR.

Markets, Information, Communication and the Euro-zone Fiscal crisis

Above you can see a segment from an extremely good article by Carmassi and Micossi which can be found at VoxEU. It is about the chronology of the fiscal crisis in Greece and how miscommunication between the European Commission and Germany may have made a mess. To be honest it should be said that they do survey a very limited and rather biased sample of newspapers (Thompson-Reuters and the FT), but it is a fairly acceptable simplification from constructing a weight matrix for a larger number of newspapers that would provide a rather limited improvement of the explanation. A "must read" nonetheless!

Jean Quatremer interviews the Greek finance minister

The full article as it was published online in his blog at the website of Libération, can be found here. I've excluded the introduction. I am impressed by the apparent serenity of the Greek official. Please check ou the original website for more content. There's a particularly intriguing article about British disinformation and the Greek isles of the Aegen sea... You do however need to read French to follow the article. Alternatively run it through google translate. Here it is:

VoxEU and Policies for a Europe in a Fiscal Crisis

VoxEU, that "not-for-profit" beakon of economic thinking, has released a very good eBook on the ongoing fiscal crisis, edited by Richard Baldwin and Daniel Gros. I take the liberty of pasting the table of contents from the link above. If you have any interest in economic policy and the future of the EU, you can't miss this.

---------------------------------------------------------------------------------

The eBook’s Table of Contents

Completing the Eurozone rescue: What more needs to be done? Edited by Richard Baldwin and Daniel Gros

Introduction: The euro in crisis – What to do? Richard Baldwin and Daniel Gros

Drawing a line under Europe’s crisis Barry Eichengreen

The Eurozone needs a political union, or at least elements of one Paul De Grauwe

The Eurozone's levitation Charles Wyplosz

Eurozone governance: What went wrong and how to repair it Jean Pisani-Ferry

The European bicycle must accelerate Angel Ubide

What more do European governments need to do to save the Eurozone in the medium run? Thomas Mayer

The narrative outside of Europe about Europe’s fiscal crisis is wrong Avinash D. Persaud

Rethinking national fiscal policies in Europe Philip R Lane

A credible Stability and Growth Pact: Raising the bar for budgetary transparency Michael C. Burda and Stefan Gerlach

Fiscal policy at a crossroads: The need for constrained discretion Antonio Fatás and Ilian Mihov

Fiscal consolidation as a policy strategy to exit the global crisis Giancarlo Corsetti

German spending is not the cure Alberto Alesina and Roberto Perotti

The long shadow of the fall of the wall Daniel Gros

EU and China

I'm juggling quite a lot of stuff, so that's why I haven't posted. Plus you know the World Cup... But I'd like to paste the following article by the Economist, for your consideration:

The EU and Economic reform in June 2010: Not Enough...

EU to publish bank ‘stress tests’

Europe: A tent to attend to

‘Shared sense of direction’ at EU summit

Reining in Europe’s deficits is first step - By David Cameron and Fredrik Reinfeldt

What are PGS doing?

What are Portugal, Greece and Spain doing about their fiscal positions?

Here's an account. It is rather incomplete, but it gives some insights. For simplicity, and because it is originally in Portuguese, I include the picture below in this post. The conclusion is that they are doing something, and except the unavoidable tax hikes, the reforms seem to be quite positive for productivity, savings and growth. Hopefully some of these reforms will be permanent...

I will also try to see if I can find the links to the Stability and Growth programmes that these countries submitted to the European Commission.

-----------------------

(This is a late addition to the original post)

For another overview of the situation with the PIIGS, here's what The Economist has to say.

How to read exclusive articles on the FT's website

I've made a comment about this in a previous post, but I'll make a more thorough point about it now in this post, if for no other reason that I'll refer to this post each time I'll link anything to a FT article.

Many times when I link to the FT's website, the article will not seem to be accessible. A message will pop up saying that you need to subscribe to access that type of article or that you have reached your limit for the number of article that you can view for a specific period of time (generally 30 days).

So here's the disenchanted magic: If you use firefox for example, although you won't be able to see the title of the article inside the window, because it is covered by the error message, you can still see it on the top left-hand corner of the screen, as the title of the window. All you have to do is to copy the title of the relevant article into google and search for it. Among the results that you'll obtain you'll find what seems, by all accounts, to a link to the window you were just redirected from this website. The only difference is that the link from google works, where as the link from this blog, or for that sake from the FT's own website does not.

So there you go. That's the googly magic of FT articles!

It's so annoying I'm starting to get depressed...

I feel for European Integration, particularly the economic part of it. It never has any respite. It is constantly attacked from every corner. Today the Euro is attacked for being too weak as a result of the fiscal crisis. Yesterday it was accused of threatening European competitiveness because monetary policy was too strict thus causing exchange rates between the Dollar and the Euro to be too high. Before that the problem was that European currencies fluctuated too much among themselves, thus creating comercial tensions between the EU's member states. We are sklerotic, we are Byzantine and we are lazy. We don't innovate and we are too rigid. Now we are too flexible and soon we'll be extinct. It seems that the only time we were happy was during the "30 glorious" years after WWII. How ridiculous that support for Europe is dependent on economic growth. This crisis will pass as all others have and as the next ones will. The world will not fall apart, and the Eurozone won't desintegrate. The European Dream will survive, but nay sayers will always find an excuse to say that it is falling apart.

It's going to be painful,but European economies will pull through. Commentators are talking as if this was the first time we had to tighten our belts... Portugal had to be bailed out by the IMF in the 1980s. My country has a lot of problems, but we pulled through. There's no reason Greece, or any other country, won't. We'll fix our houses; Germany, France, the Benelux, Sweden and Finland will make sure of this. In some years we'll be fine. The Euro will be close to parity with the USA, and eventually inflation will calm down. We might even experience a little bit of an export led boom, and hopefully the weight of fiscal pressures will revive budget rationalisations about defence expenditure. Not withstanding my ideosincracies though, Gideon Rachman is depressed... and his is a pretty contagious sort of depression. On the other hand, there's always Liberation's Jean Quatremer, who at least is slightly more realistic about the cyclical nature of this pessimism. Charles Wyplosz also offers some comfort in this article from Bloomberg.

The Southern European Problem: Not Speculation, Not Just Fiscal Profligacy, but Structural inconsistencies

Wolfgang Munchau of the FT has a very good article published online last night, about the problems in the Eurozone, particularly in its southern members. (here's a little trick for accessing restricted news reports from the FT: Copy paste the title of the relevant article on google and click on the relevant link. For some reason this grants you access to otherwise restricted articles) It says that the problem is not speculative financial attacks on the debt of these countries, nor that it is just fiscal profligacy. It argues instead that the root problem is structural, and that there is a need for economic reform of the labour market, where wages are much above productivity. As a result these countries are not competitive vis à vis its northern neighbours.

I completely agree with it. But I need data to confirm this. I'll be updating this post.

What future for the Euro after the bail out?

5 very interesting articles from www.VoxEU.org :

"Greece: The start of a systemic crisis of the Eurozone?" by Paul De Grauwe, from Leuven

"Greek lessons", by Michael Burda and Stefan Gerlach, felows of CEPR

"European Stabilisation Mechanism: Promises, realities and principles", by Charles Wyplosz, CEPR fellow

"Financial Stability beyond Greece: Making the most out of the European Stabilisation Mechanism", by Daniel Gros and Thomas Mayer, CEPS and Deutsch Bank respectively

"How to deal with sovereign default in Europe: Towards a Euro(pean) Monetary Fund", by Daniel Gros and Thomas Mayer, CEPS and Deutsch Bank respectively

Worrying about structural reform in Europe (late post from 11/05/2010)

Now everyone calms down... Some insightful views on the EU and its economic future: Europe is unprepared for austerity, by FT's Gideon Rachman Markets rally runs out of steam, by the FT's Tony Barber, Ralph Atkins, David Oakley and Justine Lau "Le retour à l'équilibre des finances publiques est un impératif catégorique", an interview of Laurence Boone, by Jean Quatremer and finally, Project Europe 2030- Challenges and Opportunities, a report on the future of Europe by the Gonzalez Committee

Bailing out Greece: A great business deal!!

This note was posted as a comment on the FT, Brussels Blog at http://blogs.ft.com/brusselsblog/2010/05/mother-of-all-rescue-plans-buys-europe-time-but-can-it-work/#comments:

"Germany is all “abuzzing” about the costs of bailing out “lazy” Greeks. But how much did it cost Germany to bail out Greece? Well apparently letting Greece scare the markets and then bailing it out is a good business model. As it turns out, Germany made at least a €8.6Bn profit off it. May be even as much as €25.4Bn. How? Let’s see:

The cost of bailing out Greece was €22.4 Bn over 3 years, according to Der Spiegel. (http://www.spiegel.de/international/europe/0,1518,693579,00.html)

However this saved German banks from a balance sheet hole of as much as €33Bn, due to their exposure to Greek sovereign debt. (http://www.spiegel.de/international/europe/0,1518,693579,00.html)

It also turns out that a weak Euro, caused by Greek fiscal profligacy probably helped German exports. It is hard to say by how much, but given that exports had grown by 1% on average over the last year or so, and that they grew by 21% in March, I have generously considered that 14.81Bn out of the total 85.6Bn of German Export may have been caused by the low value of the Euro. (http://www.ft.com/cms/s/0/f6e35528-5c1f-11df-95f9-00144feab49a.html ) Finally it seems that the DAXX regained all the losses it incurred last week. (http://markets.ft.com/ft/tearsheets/performance.asp?s=569857&ss=WSODIssue)

So I propose two estimates of the German economic profit from rescuing Greece:

If you think that my estimated effect of the low Euro is exaggerated, which it probably is, then at worse, the bail out saved German banks from incurring those losses. As such Germany made an economic profit of as much as €8.6Bn from saving Greece.

None the less the low value of the Euro must have had some impact on Germany’s. Although the effect might not have been as high as to account for a whole €14.8 Bn worth of added exports, I guess one could establish that as a decent ceiling of how good the devalued Euro might have been for Germany. If that’s so, then we have to accept that Germany might have made a total of up to €25.4Bn from rescuing Greece.

Not such a bad deal after all… "

uau!! €500Bn is a lot of money!!

As Jean Quatremer (notice the reference to the IMF) of Liberation writes the Eu revolutionized itself last night, by creating the puffiest safety cushion on earth:

Markets rally on €750bn EU bail-out - FT

EU Crafts $962 Billion Show of Force to Halt Crisis - Bloomberg

EU Turns to 'Nuclear Option' to Halt Euro Speculation - Der Spiegel

“Mother of all rescue plans” buys Europe time - but can it work? - Tony Barber from Brussels Blog at the FT

Wolfgang Muchau of the FT joins his colleague on a gloomy analysis of the Fiscal package. He makes two interesting points. One about fiscal union and another about national economic reform:

On the first he says that "this deal is going to be ineffective beyond the very short term, unless it is followed up by substantive reforms – the introduction of a single European bond, an agenda to co-ordinate economic reforms with specific relevance for the monetary union, policies to reduce economic imbalances, much tighter supervision of fiscal policies that kick in well before budgets have already been announced, and, in my view also a kernel of a fiscal union – in essence all the things over which the EU has been, and still is, in denial."

I guess I must take issue with this. It As I have shown in this post, there is already a single European Bond, which has existed in theory since 1988. The ECOFIN already is a forum for coordinating economic reforms, and it is expected to be revamped by the commissions' proposals to be presented in two days. This will probably see the implementation of tighter supervision.

I agree that this is not tantamount to fiscal Union, but it leads the way for it, under enhanced cooperation.

Regarding to economic reform, Mr Munchau says that "the private sector [in Portugal is and in Spain ]massively indebted. The prices of assets that serve as collateral are still falling. The Spanish government, as guarantor of the banking sector, will be lumbered with rising debts at a time of stagnating economic growth. We should remember that solvency is not primarily related to financial markets’ willingness to lend. That’s liquidity. You are solvent when you can stabilise your debt as a proportion of income. Southern Europe’s solvency position is thus unaffected by the billions."

Here I must agree with it, but according to the general argument this is a problem intrinsic to the Eurozone. Because there is only one interest rate for all 16 countries, it cannot effectively target everyone. As a result the rates are too low to contain inflation in Portugal and Spain and too high for Germany and the Benelux. However there's a problem with this argument, it completely disregards the fact, that banks as intermediators should price debt better than they do in Portugal and Spain. Just because they can borrow cheaply, it does not mean that they cannot lend more expensively. My guess is that this has been possible in Portugal because a lot of people were guaranteed to pay their debts because so many people work for the state. In Spain the mechanism must have had something to do with the economic growth and the real estate boom. However this conjuncture has been changed and with the reforms to be implemented, it should change even more. As unemployment increases, as civil servants' salaries are frozen and as other such austerity measures are implemented (please stop hiring new civil servants!!) banks should start to price risk at a higher rate and thus the cost of borrowing should increase, thus increasing the rate of savings in countries like Portugal and Spain. More over it should also force them to move their money abroad, to less risky investments. This is of course if publicly owned banks don't loan at lower rates than those of the market for political and electoral reasons. The hope is that this won't lead to a debt deflationary crisis.

Before I go though, here's the council communiqué from last night about the fund/Financial Stability Facility in question. As you can see it is sparse on details and qualitative clarity. It is very clear quantitatively though!

What do you think?