I Agree With Soros: At Least, With Regard To The Euro

Soros thinks Germany is leading the Euro into dissolution (excerpt):

Soros calls for Germany to 'lead or leave euro'

International financier George Soros has called for Germany to "lead or leave the euro" days before a crucial ruling on the eurozone's bailout fund by Germany's constitutional court.

Mr Soros argued that the eurozone should target 5% economic growth.

That would require the bloc to abandon German-backed austerity measures and accept higher inflation, he says.

He also backed a new European Fiscal Authority financed by VAT receipts to oversee eurozone government finances.

In an article published in Monday's New York Review of Books, Mr Soros said that Germany should become a more "benevolent" leading country or exit the single currency: "Either alternative would be better than to persist on the current course." …

Talk Boldly And Carry A Small Stick

The ECB has taken out its big guns, but conveniently forgot to take the safeties off (excerpt, emphasis added):

Introductory statement to the press conference
Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area.

Dodging A Bullet

The Greek election results are almost in:

Greece Steps Back From the Brink

Greece isn’t ready to call Europe’s bluff. If early indications from the polls are correct, the top vote-getter in Sunday’s parliamentary elections was the pro-euro New Democracy Party–not the leftist Syriza coalition, which campaigned on a platform of rejecting Europe’s conditions for bailout assistance.

That’s good news for the rest of Europe–and indeed the rest of the world, which would be harmed by a chaotic exit of Greece from the 17-nation euro currency zone.

New York University economist Nicholas Economides, who was in Greece for the elections, said in a telephone interview that “if things go the way it looks like now, the Europeans should breathe a sigh of relief.”

Bloomberg News reported that according to final exit polls, center-right New Democracy had narrowly edged out Syriza, with Pasok, the center-left party, which is also pro-euro, coming in third. It appeared New Democracy and Pasok would have enough seats to win an outright majority in parliament if they formed a coalition government.

I’m not going to go “hurrah!” just yet though. If Europe and Greece have dodged a bullet, there’s plenty more on the way. Fundamentally nothing has changed, except the buying of a little more time. The contradictions underlying European monetary union remain unresolved – wide productivity differentials, huge budget gaps, and a central bank unable and unwilling to rise to the occasion.

Even the bailout of Spanish banks last week, which was far more critical from the point of view of preserving the Eurozone, hasn’t restored market confidence – Spanish government bond yields have hit another all time high.

It’s going to be a hot, tense summer.

Why Is Greece Still In The Eurozone?

Why, oh why, is Greece still in the Eurozone? Two stories from the Beeb yesterday:

Eurozone crisis: Greece 'can't take any more cuts'

The Greek people have been pushed to the limit by austerity measures demanded by the EU and IMF, public order minister Christos Papoutsis says.

He said Greeks had made "superhuman" efforts, and "can't take any more"…

…Greece has been told to make deep cuts in return for a huge bailout package.

Athens is negotiating the terms of a 130bn euro ($170bn, £109bn) deal with the EU and IMF.

The Greek parliament approved an austerity package on the weekend, despite violent protests sweeping the country.

But eurozone ministers demanded a further 325m euros of cuts and insisted that all major Greek parties promise to enact the cuts regardless of who wins a general election scheduled for April.

Malaysia’s European Sensitivity

What would be the impact on Malaysia of a recession in Europe? To look at this question, I’ve come up with a few equations.

First a single equation approach, taking just Malaysia and Europe. I’m using the annual GDP numbers from the IMF’s September 2011 World Economic Outlook database (available here), transformed into logs to translate the results into elasticities, with the following results:

The relationship is statistically significant, and suggests that a 1% increase (decrease) in Eurozone GDP would result in a 1.62% increase (decrease) in Malaysian GDP. Based on this, Malaysia has a high degree of sensitivity to European growth.

Anatomy Of A Recession

What causes a recession? Sometimes it’s overinvestment, other times its debt burdened households.

And sometimes, it’s just simple uncertainty (excerpt; emphasis added):

Insight: In euro zone crisis, companies plan for the unthinkable

(Reuters) - When Novo Nordisk's chief financial officer met marketing colleagues last Friday the conversation moved far beyond the usual discussion of sales and performance. Jesper Brandgaard asked a simple, far-reaching question: how would the firm set prices for two pivotal new insulin products if the euro collapsed?...

Analysing The ECB: The Costs And Benefits Of Inaction

Watching the slow-motion train wreck that is the Eurozone debt crisis, it’s hard for anybody trained in finance or economics to grasp just why the ECB is refusing to act more decisively.

As the Eurozone’s central bank and the only one with the authority to print Euros, only the ECB has the ability to offer unlimited support for indebted governments. Granted that there is a huge pitfall in engendering future moral hazard, but that’s already being handled on the political front via stronger debt rules. The tail risk of inaction is a collapse of the Euro itself.

But the ECB appears to discount that risk:

ECB stance on bond buys to pay off

TOKYO: The European Central Bank's (ECB) refusal to engage in large-scale purchases of the region's sovereign debt will eventually be rewarded as this will preserve price stability and protect the value of the euro over the long term, governing council member Christian Noyer said yesterday.

Explaining Europe

Ryan Avent of The Economist magazine manages to explain the whole Eurozone problem in one paragraph, and the solutions in the next:

Why not blame Germany?

...The crisis in the euro zone is not mysterious. People are proposing lots of different solutions to the problems because they're trying to hit on the magical combination of policies that will win political support from key players—notably the German government. But we know what the matter is. Many members have too much debt. Prior to the crisis, all euro-zone countries were able to borrow on terms which suggested that markets believed the full faith of the euro zone as a whole to be behind individual members, and some governments borrowed too much. After the crisis, markets weren't so sure about what the full faith of the euro zone meant, and spreads between the bonds of different euro-zone governments diverged. For the past year and a half, some euro-zone economies have struggled to make their way out of trouble within the confines of the union: without the ability to depreciate their currencies or set an independent monetary policy. The austerity adopted to try and balance budgets gutted internal demand, leaving those struggling economies dependent on external demand for growth. But where an independent currency would have fallen to help markets clear, euro-zone members were forced to make their adjustment through declines in nominal wages—a difficult and painful process even in countries like Ireland, which have very flexible labour markets. Other euro-zone governments have offered enough help to prevent an implosion of the financial system, but not enough to do much about massive unemployment problems in places like Spain and Greece. Without growth, closing budgets through austerity is like trying to climb a falling ladder...