Thursday, May 20, 2010

Austerity

Paul Champsaur and Jean-Philippe Cotis are the authors of a report to the president which argues that neither growth nor inflation will suffice to restore French state finances to a healthy condition. Additional efforts will be needed, they say, to reduce state expenditures over the next decade. The word "austerity" has been banned from the public vocabulary, so perhaps we'll have to say simply that il faudra sarkozyr le budget de l'État (see previous post).

Meanwhile, the president, taking a leaf out of the German playbook, has announced a constitutional amendment that would require each president to set forth his budget goals for the quinquennat upon taking office. This, I imagine, will be a bit like a marriage vow: the newly elected president, like the newly wed husband (wife), will swear fidelity and promise to adhere to the highest principles. What he (or she) then does will depend, however, on his (her) character rather than the sworn oath, although, to be sure, one can expect broken oaths to be cited in subsequent domestic spats and/or divorce proceedings. Promises of virtue are unlikely to sway investors, however, who rather resemble divorce lawyers in viewing romantic effusions with a jaundiced eye.

Meanwhile, Sarko is less enamored of another German initiative, to ban "naked shorts" and credit default swaps in certain markets. Frau Merkel characterizes this measure as an attack on speculation, while cynics see it as protection for German banks holding bonds vulnerable to speculative attack. Whether the idea is good or bad, the unilateral German initiative points up the utter lack of European coordination (let alone international cooperation, with the US still dickering over its financial regulation bill), which is as unsettling to markets as speculation.

1 comment:

TexExile said...

The German ban on short-selling, if it has any coherent rationale at all (which is open to doubt), must be prompted by a desire to protect the German banks. No other explanation suggests itself. Even that I question, since there are ways even now for the banks to dispose of them, but never mind.

The more relevant point is that no one has ever presented serious evidence that short-selling has played or is playing a significant role in precipitating the Greek crisis. The crisis is the result of fiscal indiscipline and errors of macroeconomic policy. Even the line about CDS trades pushing the Greeks to the brink early this year does not hold water.

That is not to say that there is nothing to be done. There are plenty of options that need to be considered and, when it comes to financial speculation, in particular, it would make a lot of sense to require derivatives to be traded on exchanges and centrally cleared. This would make derivatives markets more transparent and efficient.

A ban on short-selling, if it could be enforced (which is open to doubt -- I reckon it will just generate additional distortions and arbitrage games), would also confine risk-hedging operations to the stone age.

Anyway, the real danger in the current conjuncture comes from the statements of people like Mrs Merkel who create tremendous opportunities for realistic speculators to skin the gullible by making seriously misleading statements about where all this is heading.

Greece will default. The question is not if but when (if they are smart, they will get the primary deficit down to zero and then default). Greece will survive that event and so will the euro.