Wednesday, June 9, 2010

O'Rourke on the European Economy


Rodrik on Europe's Fate


Kerviel Trial

The defense has successfully demonstrated that SocGen knew what Kerviel was up to and didn't care:

And his team is doing a good job at presenting him as a victim who was egged on tacitly to ever more reckless gambling as long as he made a profit. In December 2007 -- a month before his downfall --  the bank was pleased when it found that he had earned it 1.4 billion euros in concealed trades. Part of the evidence is a transciption of a recording then in which Kerviel's immediate boss tells him: "If you have earned 1.4 billion, you're bloody good. What you have done is a pain, but it's not serious." A month later, he was found to be holding a position of 50 billion euros -- more than the bank's worth.  Some 30 witnesses over the next three weeks may of course change the picture. And Kerviel, who now earns 2,300 euros a month as an IT consultant,  may be ordered to pay the damages demanded by SocGen: five billion euros.  

Krugman: "European Masochism"


Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included?
We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a whole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)
Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. Nonetheless, something much like this transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem.
Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.