Saturday, January 14, 2012


A day before S&P downgraded France, Spain, and Italy, I said that the euro crisis was easing. Did I make a fool of myself? I don't think so. The relatively successful Spanish and Italian bond auctions were encouraging (although Trisha Craig isn't so sure about the Italian case). French bonds have been trading at a premium for months, so the markets had already priced the downgrade in (mostly: French 10-yrs rose 10 basis points, from 3 to 3.1%, on the news). "Bad news but not a catastrophe," as François Baroin said in his characteristically subdued and mellifluous tone. (Is he as bored with the role of finance minister as he often appears to be? Or perhaps on tranquillizers? But I digress.)

Meanwhile, the Greek situation has worsened, and default seems almost inevitable. But Greece has been in de facto default for more than a year.

The big question now is how deep a recession will result from the austerity imposed by the ECB as the condition of its three-year repo promise--call it a bailout, quantitative easing, emergency rescue, whatever: the result is the same, namely, investors are now willing to hold the debt of troubled countries like Italy, Spain ... and, to an even greater extent, France, since there is an implicit ECB guarantee. This means that Europe might be able to muddle through, but only if the politics of austerity don't blow up in one of these countries, leading to a rejection of the euro deal or perhaps the EU altogether. It will be a close-run thing.

Does this mean that I've abandoned Paul Krugman in his tireless campaign against the Very Serious People who insist that the imposition of pain is the only way out of any crisis? No. I think we are far from adopting a first-best policy in Europe, but first-best seems out of the question, and second-best as well, barring a massive change of hearts and minds in Germany primarily but elsewhere as well. So let us hope that third-best will be good enough. As Mrs. Thatcher used to say, "There is no alternative."

Additional comment here.


Trisha Craig said...

It's not that I don't think the Italian bond sale was successful. It was, in that it sold its target and the yield dropped below 5% on its 3 year bonds. If the Spanish auction, which was incredibly successful both in terms of much exceeding the target sale and achieving a big drop in yield, hadn't happened just before and raised hopes for the Italian sale, Italy could be considered a fairly good result. But in comparison, it looked tepid and I think highlights how worried the markets are about Italy's ability to follow through on reforms. That uncertainty and distrust in Italy's political capacity I fear is going to keep Italy's borrowing costs high unless European institutions step into help.

Anonymous said...

I disagree with Mrs. Thatcher: there's always a worse alternative.

Anonymous said...

From Médiapart
"En un mandat, Nicolas Sarkozy aura réussi l’exploit d’accumuler autant de dettes à lui seul que ses quatre autres prédécesseurs.

La Cour des comptes a déjà donné la lecture qu’il fallait faire de ces chiffres : la crise, argument avancé inlassablement par le gouvernement, n’est responsable qu’à hauteur d’un tiers de cette dérive financière. Tout le reste est issu des choix politiques faits par le gouvernement Sarkozy. "

How does Sarkozy plan to get reelected ?