Europe’s Banking Crisis: Solved or Postponed?
Just as Italy outplayed Germany on the football field in the European championships Sunday, the consensus view today is that Italy’s Monti outplayed Germany’s Merkel, forcing her to allow direct recapitalization of Spanish and Italian banks through the bailout fund called the European Stability Mechanism (ESM). But is this really a turning point in the crisis or just another kicking of the can down the road? The markets seem to think the former, with the Dow and the Euro both up significantly. But is this really the case? The answer is no.
First of all, the ESM recapitalization scheme doesn’t solve Europe’s banking crisis, it merely postpones it. Just as the earlier ECB LTRO refinancing operations were supposed to buy three years of time for the banks to sort out their balance sheets (but the effect lasted three months), so this is really just another attempt to solve a solvency problem (your banks are full of assets that are not coming back) with a liquidity instrument (lots of cheap ESM money). In the short term that may lower sovereign bond spreads, but in the long term no amount of liquidity can solve a solvency problem.
Second, even if the banking problem were solved, the underlying competitiveness problems of almost every economy against Germany remains. German industrial exports have the lowest price elasticities in the world. In plain English, it doesn’t matter if the BMW goes up ten thousand dollars it still sells. That is not true for FIAT or Renault. Being in the same currency with Germany places the strain of adjustment on domestic wages and prices in deficit countries, hence austerity policies. But such policies are self-defeating. Denied their own currency to devalue against the Germans, the result is eternal recession in the periphery. There’s a limit to how much recession an economy can take.
So two cheers for Monti’s scheme. It buys Europe more time. But time to do what remains in doubt.
About the author: Mark Blyth is a professor of International Political Economy in the Department of Political Science at Brown University and a Faculty Fellow at Brown's Watson Institute for International Studies. This essay was reposted with permission from Brown.edu.
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Economic Crisis
NOWADAYS WE HEAR A LOT OF ECONOMIC GURUS TALKING ABOUT THE ORIGINS AND PREDICTIONS OF THE CURRENT ECONOMY CRISIS.
IN ORDER TO MAKE THIS MESSAGE MORE INSPIRING I I COULD LIST A LOT OF THE THEORIES BUT I REFUSE TO DO SO BECAUSE YOU CAN FIND THOSE IN EVERYDAY NEWSPAPER, MAGAZINES, TV, RADIO, BOOKS , ETC, ETC.
INSTEAD I WILL GIVE A DIFFERENT APPROACH
FIRST SOME NECESSARY INITIAL INGREDIENTS NUMBERS TO REACH THE ANSWER:
• 1945 IT WILL BE SET AS A STARTING POINT OF POST WORLD II MODERN ECONOMY AND CAPITALISM
• 4 ARE THE AVERAGE YEARS OF AN ADMINISTRATION IN MOST DEMOCRATIC COUNTRIES
• 65 ARE THE YEARS FROM 1945 TO 2010
• DIVIDING 65 BY 4 GIVES US 16 ADMINISTRATIONS PER DEMOCRATIC COUNTRIES FROM STARTING ANALYSIS DATE 1945
• 150 COUNTRIES THAT HAVE ............LETS CALL IT SOME DEGREE OF DEVELOPED OR EMERGING OR UNDERDEVELOPED ECONOMY WITH WORLD TRADE ( UN MEMBERS ) BUT LET ME BE CONSERVATIVE .................75 COUNTRIES
• 10.000 IS SET AS AN AVERAGE OF PEOPLE INVOLVED IN AN ADMINISTRATION FROM PRESIDENT TO SMALLEST OFFICES IN A COUNTRY ( INCLUDE LOBBIESTS, BUREAUCRATS ETC)
• 1 MILLION IS THE AVERAGE OF LETS CALL IT MISMANAGEMENT OF FUNDS ( I AM TRYING TO BE POLITE WITH THE WORDING IN THIS POINT ) PER FUNCTIONARY OR PERSON AT SOME DEGREE INVOLVED IN THE ADMINISTRATION
OK LETS DO SOME MATHS:
16 x 75 x 10.000 x 1 MILLION = 12.000.000.000.000 OR 12 TRILLION
12 TRILLIONS HAVE DISAPPEARED IN LAST 65 YEARS AND THE FIGURE WILL KEEP ON GROWING
THIS NUMBER COULD BE COMPARED TO A LOT OF THINGS BUT I WANT TO BE VERY GRAPHICAL HERE ...................IS THE 2005 US GDP
SO MY POINT FELLOWS IS THAT THE CURRENT CRISIS WAS AND CONTINUES TO BE ORIGINATED BY THE LOVERS OF OTHERS PEOPLE MONEY ( AGAIN POLITE ) THAT ARE IN OUR ADMINISTRATIONS PEOPLE THAT WE VOTE FOR SERVICING AND THAT THEIR GOAL IS POWER AND MILLIONS.
HEY............CONCEDE ME SOME DEGREE OF OPTIMISM; I'M NOT INCLUDING IN THE LIST ISSUES AS DRUGS, ARMAMENT, HUMAN TRAFFIC, DICTATORSHIPS AND OTHER ATROCITIES, JUST....................BASIC..................DEMOCRATIC GOVERNMENTS.
TAKE YOUR OWN CONCLUSIONS IT’S JUST ANOTHER WAY OF SEEING THINGS.
PS I COULD HAVE MADE A NICE POWER POINT , HIGH EFFECT PRESENTATION, BUT LET THOSE THINGS FOR THE FELLOWS ABOVE MENTIONED, I JUST WANTED TO KEEP IT SIMPLE.
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