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.
Essays and comments posted in World Future Society and THE FUTURIST magazine blog portion of this site are the intellectual property of the authors, who retain full responsibility for and rights to their content. For permission to publish, distribute copies, use excerpts, etc., please contact the author. The opinions expressed are those of the author. The World Future Society takes no stand on what the future will or should be like.
Free Email Newsletter
Sign up for Futurist Update, our free monthly email newsletter. Just type your email into the box below and click subscribe.
This is my last posting for the next few days. I will be taking my office apart so that we can move to our new apartment downtown next Tuesday. I will be unplugged and disconnected except by tablet. Expect me to be back in the saddle before the end of next week probably in time to provide you with some more headlines. In the interim these are the stories I share with you this week:
Today, literally thousands of alternative transportation vehicles are coming out of the woodwork and they nearly all have the same problem – no place to drive them. Most are banned from biking and hiking trails, and they are neither licensed, nor licensable, for use on the streets. I’d like to discuss some new possible solutions and why Colorado is poised to take the lead in the alternative transportation marketplace.
In a recent conference promoting not only their latest gizmos but their company's animating vision as well, Google executives declared they were working toward a future in which technology "disappears," "fades into the background," becomes more "intuitive and anticipatory." Commenting on this apparently "bizarre mission for a tech company," Bianca Bosker warns that their genial and enthusiastic promotional language masks Google's aspiration to omnipresence via invisibility, an effort to render us dependent and uncritical of their prevalence through its marketing as easy, intuitive, companionable.
Occasionally during meetings one of my staff – an avid birder – will elbow me and I’ll look up and glimpse a bald eagle. Each time, I am in awe. I live in Washington State, which is home to a plethora of eagles, where pods of Orca ply the waters near the San Juan Islands, and where roads are sometimes blocked by herds of elk.
In this month's Report on Business Magazine, a supplement that comes with The Globe and Mail, one of Canada's national newspapers, Stanford University's Mark Jacobson provides a best case scenario
According to The Hollywood Reporter, celebrity tech CEO Peter Thiel is upset that movies like The Matrix and Avatar make technological innovation seem "destructive and dysfunctional."
A team of researchers are asking the public to help them locate and count all the sources of CO2 coming from power plants on the planet.
Initial results from a selective breeding program at the National Institute of Agricultural Botany based in Cambridge in the UK, indicate the successful creation of a new super wheat.