Wednesday, July 20, 2011

Update on the Eurozone Crisis

Back on the Eurozone crisis front we find find some great lines from Michael Darda and Marshal Auerback on the latest developments.  Here is Darda from his latest newsletter:
Although there seems to be some optimism in European equity markets that Thursday’s finance ministers’ powwow will bring a “shock and awe”  announcement, we would not wait to exhale. As we’ve argued before, eurozone nominal GDP is about 10% below trend. This has caused tax revenues to collapse and debt burdens to mushroom. Since the ECB has tightened liquidity and raised rates instead of lowering  them and adding liquidity,  we simply  see  no path to  a  recovery in nominal GDP (and solvency) for the European periphery, whose costs and prices are out of whack with the rest  of the eurozone. Rearranging the deckchairs with  alphabet soup bailout schemes and fiscal austerity measures has failed for 14 months and will continue to fail unless accompanied by  a much more  supportive monetary policy by the ECB, in our view...Sterilized interventions -- when a central bank buys an asset but sells another asset so that the money supply remains unchanged -- is like attempting procreation with contraception. It’s set up to fail.
 And here is Auerback in his latest article:
In the past, I have called the euro zone a “roach motel”. But as usual, I’ve been outdone in the metaphor design department by the Italians: Guilio Tremonti, the Italian Finance Minister, last week compared Germany and its small-minded Chancellor Angela Merkel to a first-class passenger on the Titanic. The underlying message is the same: You can be sailing in coach or you can be in the 1st class compartment. But when the ship hits the iceberg, everybody goes down together — Germans, Italians, Greeks, Irish and French alike. All euro zone members have an institutional wide problem of not being able to fund deficits, given that the countries of the euro zone have all acceded to impose gold standard conditions on themselves by forfeiting their fiscal freedom.
To repeat: this is not a problem confined to the periphery. The sovereign risk problem applies to the central core countries, such as Germany and France, as it does to the Mediterranean “profligates”. Once a run on the currency starts and moves into the banking sector, then none of the governments will be able to do anything other than to oversee financial and economic collapse while the fiddlers in Brussels and Frankfurt try to spin some line about “special circumstances” or something without admitting the whole system they imposed on the area is the cause of this crisis. 
I concur with Auerback that the ECB has been fiddling while the Eurozone slowly burns. I just hope it does not turn into an other Lehman-type event.  Should it come to that, here is how I would have the Federal Reserve prepare for such an outcome.


  1. The ECB has to print more money.

    Is letting the economy rot for 10 years or more to achieve ultra-low inflation rates worth it?

    Consider China vs. Japan. In which country would have you liked to have started a business 20 years ago?

  2. Ray Dalio just said that Greece goes into a depression, as it is stuck to Euro, and it will take decades to deleverage.

    This is smart monetary policy?