Academic: "The Euro may not survive"

Academics are jumping on the bandwagon. I have been talking about the dangers and the possibility of dissolution on this blog incessantly, but the fact that academics are starting to notice and think similarly probably means I am wrong now...

This probably merits a post regarding academics and the social "sciences", but I will save those thoughts for another day.

November 26, 2008
Author: Martin Feldstein, George F. Baker Professor of Economics at Harvard University

CAMBRIDGE, Massachusetts - The European Economic and Monetary Union (EMU) and the euro are about to celebrate their 10th anniversary. The euro was introduced without serious problems and has since functioned well, with the European Central Bank delivering the low inflation that is its sole mandate.
But the current economic crisis may provide a severe test of the euro's ability to survive in more troubled times. While the crisis could strengthen the institutions provided by the EMU, it could also create multiple risks, of which member countries need to be aware if they want to avoid them.
The primary problem is that conditions in individual EMU members may develop in such different ways that some national political leaders could be tempted to conclude that their countries would be better served by adopting a mix of policies different from that of the other members. The current differences in the interest rates of euro-zone government bonds show that the financial markets regard a breakup as a real possibility. Ten-year government bonds in Greece and Ireland, for example, now pay nearly a full percentage point above the rate on comparable German bonds, and Italy's rate is almost as high.
There have, of course, been many examples in history in which currency unions or single-currency states have broken up. Although there are technical and legal reasons why such a split would be harder for an EMU country, there seems little doubt that a country could withdraw if it really wanted to.
The most obvious reason that a country might choose to withdraw is to escape from the one-size-fits-all monetary policy imposed by the single currency. A country that finds its economy very depressed during the next few years, and fears that this will be chronic, might be tempted to leave the EMU in order to ease monetary conditions and devalue its currency. Although that may or may not be economically sensible, a country in a severe economic downturn might very well take such a policy decision.

Two Trillion dollar question...

How can governmental intervention guarantee lending standards be relaxed? It can provide liquidity, and indeed bolster the balance sheets of banks, but there remains informational asymmetry. Banks know more about their prospects and their customers than governments do. They also understand that this is a wonderful environment to let other make the first mistake...and then buy up foolish banks who heeded the governments call to "lend, lend LEND!". Much of this is basic warfare - keep your ammunition sources in good condition.

Capitalism and private enterprise generally does a much better job of allocating capital than centralized government. But it does have its limits. George Soros wrote about credit inflation/deflation bubbles in "The Alchemy of Finance", first published in 1987. Euphoric markets tend to under and overshoot "reality".

With this much intervention, price identification in credit, currencies, equities, interest rates, indeed every financial asset will take time. Operators find it difficult to deploy capital when the fundamentals are blurred, and thus park their funds in "risk free" instruments. Thus, some new price bubbles (like bonds from "safe" jurisdictions) are appearing.

How do you translate "Bush Doctrine" to Hindi?

Doctrinal fashion hits the shores of the Indian subcontinent. Pakistan looking very much like a "failed state" (THE target of choice for preemptive strikes).

and then there is Thailand...


Govt mulls strike on Pak terror bases
ATTACK ON MUMBAI: THE AFTERMATH
BS Reporter / New Delhi December 3, 2008, 1:20 IST

The Manmohan Singh government is weighing various options including a strike on Pakistan to dismantle its terror bases in response to the recent Mumbai terror attack. External Affairs Minister Pranab Mukherjee today hinted about military option when he told a news channel, “As and when it takes place, people will come to know, it’s not publicised. Every sovereign country has the right to protect its territorial integrity and take appropriate action and when it feels necessary to take that appropriate action.”

“What will be done, time will show and you will come to know,” Mukherjee earlier told reporters on the sidelines of a conference today.

Singh convened a Cabinet committee meeting on security today to discuss the issue. Last week, he met the Army, Navy and Air Force chiefs to take stock of the current situation and take their inputs to decide the nature of India’s response to the alleged Pakistan-sponsored terror strike in Mumbai.

US Secretary of State Condoleezza Rice is coming to New Delhi on Wednesday and top government sources suggest the issue of attacking Pakistan will be discussed with her. The US has resorted to unilateral hot pursuit for Taliban terrorists hiding inside Pakistan near its border with Afghanistan.

As a strike on Pakistan will invariably lead to a full-scale war between the two nuclear-armed countries, India is maintaining a cautious approach and wants to gauge every possible ramification of its decision.

“An assessment of the pros and cons of an attack on the terror bases in Pakistan is currently underway. The final decision will be taken only on the considerations of national interest,” said a top government official.

Reclaiming the satellites...

The Russian bear is flexing its commodity muscles to one of its former captive republics. I cannot emphasize enough that we are is an extraordinary environment and this article is yet another demonstration that the shift of perception amongst nations to realpolitik (active competition, exaggerated nationalism to protect incumbent governments, protectionism, etc.) from a more relaxed attitude of cooperation and free trade is extremely dangerous to average citizens of said nations.

Note the timing...just as winter is beginning.

I expect an avalanche of propaganda from nation states emphasizing sovereignity, national pride, and acts to create a feeling of serendipity ("thank goodness you, an average citizen, have your government to protect you from the bandits of the world").

Russia's Gazprom warns Ukraine to clear gas debts

MOSCOW (AFP) — Russian energy giant Gazprom said Sunday that Ukraine
had paid only part of its huge gas debt and threatened Kiev with a
more than double price hike unless all arrears were cleared this year.

"We already have the first payments (but) this is not yet the full sum
we agreed upon," Gazprom's spokesman Sergei Kupryanov told the state
television channel Rossiya.

The Russian firm says that Ukraine, which is severely dependent on
Russian gas, owes 2.4 billion dollars.

"Until the debt is settled, the only price we can speak of is the
European price, 400 dollars per 1,000 cubic meters. We see our task in
settling all problems with our Ukrainian colleagues before the New
Year," Kupryanov said.

Currently Ukraine pays Russia 179.5 dollars for 1,000 cubic metres of
gas, while for other European countries the price is set at around 400
dollars.

Gazprom has threatened to cut supplies if the debts are not settled,
in a move that would risk a repeat of the interruptions to gas
supplies to Europe in 2006.

Bernanke's testimony

"...[currency] swap arrangements pose essentially no credit risk because our counterparties are the foreign central banks themselves, which take responsibility for the extension of dollar credit within their jurisdictions."

Essentially no credit risk? What "essence" comprises credit risk for these types of derivatives? He completely discounts the (low probability but still possibility) that the ECB dissolves. This is taking a rather myopic view based on post-communist history. I certainly hope he is merely pandering and selling the Fed's decision rather than completely misunderstanding the risks involved.

And, if there were any doubts regarding the continued politicization of the Fed, the following snippet will dissolve them:

"Expanding the provision of liquidity leads also to further expansion of the balance sheet of the Federal Reserve. To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed's balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy."

South America...

...commentators in the article assume Mr. Chavez will not seek to influence (read: "rig") elections.

Another precipitating event for the Obama doctrine. (see previous post)
Chavez seeks indefinite re-election, again

By CHRISTOPHER TOOTHAKER, Associated Press Writer
Sun Nov 30, 9:49 pm ET
CARACAS, Venezuela – President Hugo Chavez asked supporters Sunday to petition for a constitutional amendment that would let him seek indefinite re-election and buy more time to build a socialist economy in Venezuela.
Chavez, who was first elected in 1998, is barred from running again when his current term expires in 2013. He sought to abolish term limits last year, but Venezuelan voters rejected the bid, voting down a package of proposed constitutional changes.
"Last year, when we lost the referendum, I said I should accept the majority's decision," the former paratroop commander told a crowd of red-clad government supporters at a rally in Caracas. But now, he added, "I say you were right: Chavez will not go."
Any new attempt at a reform, which must be approved in a nationwide referendum, would open a new front for tensions between government-backers and their rivals — many of whom warn that Chavez wants to be president for life.
Opposition leader Gerardo Blyde said Chavez's plan to end presidential term limits would be overwhelmingly defeated.
"It's going to be an uphill battle for him," said Blyde, who suggested that many Chavistas are losing faith in "El Comandante" as his government struggles to curb 36 percent annual inflation in Caracas, fight rampant crime and rebuild crumbling infrastructure.
Neighboring Colombian President Alvaro Uribe, meanwhile, recalled his top diplomat in Maracaibo, Venezuela's second largest city, hours after Chavez threatened to expel the official for privately praising the opposition for winning five governoships and two important mayor's office in elections in Venezuela last week.
In a clandestinely record private telephone conversation, Consul Carlos Galvis called the opposition's gains "very good news." The recording was broadcast on state television.

Ironic

It is somewhat ironic that the Chinese version of dialectical materialism is now fraying at the edges due to geo-political and economic concerns.

Hu Sees China Losing Its Competitive Edge
President Cites Reduced Global Demand
By Maureen Fan
Washington Post Foreign Service
Monday, December 1, 2008; A12

BEIJING, Nov. 30 -- Chinese President Hu Jintao warned at a weekend meeting of the Communist Party's elite Politburo that China is losing its competitive edge as international demand for its products is reduced, according to official state media reports Sunday.

China's growth rate has been forecast to be about 9 percent in 2008, down from 11.9 percent the year before and close to the 8 percent that economists say China must maintain in order to keep the labor market stable.

"China is under growing tension from its large population, limited resources and environment problems, and needs faster reform of its economic growth pattern to achieve sustainable development," Hu said, according to the People's Daily, the official Communist Party newspaper. He did not provide specifics.

"External demand has obviously weakened, and China's traditional competitive advantage is being gradually weakened" as international demand is reduced, Hu told members of the Political Bureau of the party's Central Committee, according to the state-run New China News Agency.

Protectionism has also started to increase in investment and trade, Hu added. China's export growth in October was 19.2 percent, down from 21.5 percent in September.

His comments came as China prepares to celebrate next month the 30-year anniversary of the opening and reform policies begun by Deng Xiaoping, who led the country from the late 1970s to the early 1990s. The anniversary has prompted both hard-liners and reformers to weigh in on the path China must now take, and Hu is striving to strike a balance.

A recent editorial in the People's Daily, for example, urged China to master information technology in order to get its message out and "safeguard the nation's ideological security." The piece, by a general named Xu Tianliang, underscored a deep debate within the party about how to commemorate the anniversary, said David Bandurski, a researcher at Hong Kong University's Journalism and Media Studies Center.