Saturday, September 10, 2011

Eichengreen Is Also Pessimistic


European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.
If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one.
But Europe doesn’t have months, much less years, to resolve its crisis. At this point, it has only days to avert the worst. It is critical that leaders distinguish what must be done now from what can be left for later.

Bad Business

It's an ancestral fear. Something deep inside me gets very nervous when a secret policeman declares his allegiance to a party of the extreme right. Yves Bertrand, former head of the Renseignements généraux, hasn't gone quite that far. After several meetings with Marine Le Pen, arranged by a "common friend," he has merely called for an end to the supposed "demonization" of the FN. But the handwriting is on the wall.

Endgame for the Euro?

Paul Krugman hopes not, but he thinks that Jürgen Stark's departure from the ECB may trigger a self-fulfilling doom:
By resigning from the ECB, Juergen Stark has conveyed, deliberately or not, the message that there will be no such lender of last resort, that there isn’t enough political cohesion in the eurozone to stand behind countries under market attack. And this translates directly into soaring spreads for Spain and Italy; the self-fulfilling crisis is on.

Help from China

The Chinese haven't said no but remain cautious:
China already has apparently poured tens of billions of dollars worth of foreign reserves into euro-denominated investments this year. But Chinese officials are still cautious about taking big risks with the country’s $3.2 trillion nest egg. When considered in the context of China’s 1.3 billion people, that nest egg is not necessarily an infinite treasure.

“China is a poor country with only $4,000 per capita income,” Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee said in an interview in China. “To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”

China is ready to help, Mr. Yu said, “but European countries first should show that they have a clear road map and convincing policies to preserve the euro and solve their problems as well as the political will to make necessary sacrifices.”