Italy’s election: Send in the clowns

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Send in the clowns

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Italy's election

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How Beppe Grillo and Silvio Berlusconi threaten the future of Italy and the euro

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A SENSE of humour in adversity can be attractive, but it is not always useful. Confronted by the worst recession in their country since the 1930s and the possible implosion of Europe’s single currency, the people of Italy have decided to avoid reality. In this week’s election a quarter of the electorate—a post-war record—did not even bother to show up. Of those who did, almost 30% endorsed Silvio Berlusconi, whose ruinous policies as a clownish prime minister are a main cause of Italy’s economic woes. And a further 25% voted for the Five Star Movement, which is led by a genuine comedian, Beppe Grillo. By contrast, Mario Monti, the reform-minded technocrat who has led Italy for the past 15 months and restored much of its battered credibility, got a measly 10%.
This result is a …

via Economic Crisis http://www.economist.com/news/leaders/21572763-how-beppe-grillo-and-silvio-berlusconi-threaten-future-italy-and-euro-send?fsrc=rss

The euro crisis: Far from over

PAUL KRUGMAN quips:This is the way the euro ends: not with the banks but with bunga-bunga.As he says, the market gyrations spurred by Italy’s discomfiting election are not a sign of the single currency’s imminent demise, but they are a clear warning that Europe’s crisis is anything but over. There are quite simply too many ways for things to go wrong and so few ways for things to go right. An exit from recession remains elusive—unsurprisingly, given the continent wide commitment to budget cuts and too-tight monetary policy. And recession is exerting consistent and intense pressure on governments across many different countries. For the crisis to remain in check, political systems in every country must withstand that pressure. Because when they don’t, there are spillover effects; Italy’s mess is generating a rise in Spanish bond yields.Today’s market jitters are the creaks and groans of a shaky euro-zone infrastructure straining under the heavy weight of macroeconomic weakness. Ideally, Europe’s leaders would work to shore up that infrastructure and lesson the economic load. Instead, they seem determined to make us all wait and watch, to see if the flimsy structure will stand or collapse. Maybe it will stand. But it only takes the failure of one little strut to bring the whole thing down. And there are so many little struts.

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/02/euro-crisis-2?fsrc=rss

The euro crisis: (Fading) light at the end of the tunnel

MARTIN WOLF condenses my recent euro-crisis fretting into a succint point:Those who believe the eurozone’s trials are now behind it must assume either an extraordinary economic turnround or a willingness of those trapped in deep recessions to soldier on, year after grim year. Neither assumption seems at all plausible.We can’t yet speak to the willingness of those trapped to soldier on. The extraordinary economic turnaround, however, remains a distant dream. Flash estimates of euro-zone economic activity showed a quickening downturn in February, ruining hopes that the slower pace of contraction in January might represent green shoots. The worst news? French economic activity slowed ever faster, touching a 47-month low. And so the pressure in the cooker rises…

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/02/euro-crisis-1?fsrc=rss

Multiple equilibria: A simple model of growth crises

TYLER COWEN says he “still [does] not believe that the Chinese ‘recovery’ is for real”. He quotes a recent Financial Times story, which reads in part:Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat.And he adds:I will admit, at the very least, to needing to revise my views on how often the fires can be restoked. I had been expecting 3 to 5 percent “real growth” for China in 2012.Mr Cowen goes on to cite some interesting new estimates of Chinese growth for 2011 and 2012. One, by Standard Chartered economist Stephen Green, suggests that the economy expanded by just 7.2% in 2011 and 5.5% in 2012. What exactly is Mr Cowen worried about? Well, there are plenty of ways for an economy in China’s position to fail. One, and this may be Mr Cowen’s worry, is to squander resources needed to secure future growth. China, in other words, may be misdirecting investment in an effort to prop up growth, leading to a corresponding underinvestment in public goods needed to maintain future growth and development. Future growth might then prove disappointing, leading to downward revisions of assessments of China’s ability to service public and private debts, thereby sparking a period of stagnation or crisis.I don’t know how much to fear such things. Is China actually skimping on important …

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What QE means for the world: Positive-sum currency wars

Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. Headline writers and policy makers have resurrected the phrase to describe the Japanese government and central bank’s pursuit of a much more aggressive monetary policy, motivated in part by the strength of the yen.The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves. Currency warriors regularly invoke the 1930s as a cautionary tale. In their retelling, countries that abandoned the gold standard enjoyed a de facto devaluation, luring others into beggar-thy-neighbor devaluations that sucked the world into vortex of protectionism and economic self-destruction.But as our leader this week argues, this story fundamentally misrepresents what is going on now, and as I will argue below, what went on in the 1930s. To understand why, consider how monetary policy influences the trade balance and the exchange rate.Typically, a central bank eases by lowering the short-term interest rate. When that rate is stuck at zero, it can buy bonds, i.e. conduct quantitative easing (QE), or verbally commit to keep the short rate low for …

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Labour’s influences: The most important chart in British politics?

Ed Miliband’s fortunes have improved of late. His personal polling is close to that of David Cameron at the same stage in his leadership. His conference speech last year, which ushered in the slogan “One Nation Labour”, drew praise from acolytes and critics alike. The latest Guardian/ICM poll gives Labour its largest lead since 2003—and puts the party ahead of the Conservatives on the economy.So far, so mid-term. Most Tories are relatively sanguine. All oppositions do well between elections, they say, pointing to Labour’s two-time election loser, Neil Kinnock. Even a modest economic recovery would give David Cameron a compelling electoral argument, they add: now things are finally getting better, do you really want to give the keys back to the people who crashed the car?This flirts with over-confidence. All the same, Mr Miliband needs a riposte. In a speech this morning, he ventured one: economic recovery is only half of the battle; ensuring that the benefits of growth flow to ordinary folk is the other. The two imperatives are mutually dependent, he argued, and the government is failing on both.Though its emphasis was on the current government’s failings, the Labour leader’s argument spanned the economic policies of the last 30 years. His contention was that even before the economic downturn, the British economy was out-of-gear: even when the engine (growth …

via Economic Crisis http://www.economist.com/blogs/blighty/2013/02/labours-influences?fsrc=rss

The global economy: Phoney currency wars

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The missing $20 trillion

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The global economy

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The world should welcome the monetary assertiveness of Japan and America

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OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.
Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish …

via Economic Crisis http://www.economist.com/news/leaders/21571888-world-should-welcome-monetary-assertiveness-japan-and-america-phoney-currency-wars?fsrc=rss

The Italian election: Who can save Italy?

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The missing $20 trillion

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The Italian election

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Europe’s most sluggish economy needs more of Mario Monti’s reforms

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THE danger for Europe’s single currency seems to have abated. Bond yields in peripheral countries have fallen; worries that some members might be forced out have dissipated; budget deficits have shrunk; the first signs of recovery are showing in Ireland and even Spain. Yet the euro zone’s crisis is far from over. Rather, its acute phase has become chronic. The concern has moved from just bust budgets and broken banks, to a lack of jobs and slow growth.
Lost competitiveness, high unemployment and stagnation were always the biggest long-term risks for Europe’s single currency. These problems may be most obvious in the usual peripheral suspects—Greece, Spain and Portugal, but are not confined there. The euro zone remains in recession. The economies of Germany and France shrank in the fourth …

via Economic Crisis http://www.economist.com/news/leaders/21571891-europes-most-sluggish-economy-needs-more-mario-montis-reforms-who-can-save-italy?fsrc=rss

European economy guide: Taking Europe’s pulse

Europe’s economies

CurrencyEconomyGDP per personUnemploymentYouth unemploymentDebtPublic debtBudget balancePrimary balanceGrowthLatest GDP change2012 GDP estimate2013 GDP forecast

Source: The Economist

Source: Eurostat

Source: Eurostat

*15-24 year olds

Source: Eurostat

Source: European Commission

Source: European Commission

…

via Economic Crisis http://www.economist.com/blogs/graphicdetail/2013/02/european-economy-guide?fsrc=rss

Monetary policy: The wisdom of Scott Sumner

BACK in December, Scott Sumner mused:People form their views of politics and economics when they are young, and are given the reins of power when in their late fifties. Any thoughtful person in the 1930s could have easily predicted what would go wrong in the 1960s. The generation that grew up in the Great Depression would have a single-minded obsession with boosting [aggregate demand] to prevent mass unemployment. They would see everything as a demand issue, and ignore the supply side. Thus the “Liberal Hour” of 1961 turned into the Great Inflation.Any thoughtful person in the 1970s could have easily predicted the policy mistakes of the 2000s. The generation that came of age during the 1970s would be obsessed with the threat of inflation—seeing it just around the corner whenever there was a spike in the money supply, a dip in interest rates, or a blip in the CPI from commodity prices. The 1970s generation (including me) would overreact until NGDP growth was driven so low that interest rates fell to zero, making conventional monetary policy impotent. The inflation targeting consensus turned into the Great Recession.The young people today have grown up in a world dominated by two giant bubbles…Any thoughtful person today can predict that the macroeconomics policy failures of 2040 will be produced by a generation of late middle-aged policymakers obsessed with preventing …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/02/monetary-policy-0?fsrc=rss