From The Economist:
But the City can compete successfully with other financial centres only if Britain has the right policies on regulation, tax and immigration. On regulation, there is an understandable fear that an outsized financial-services industry means an outsized risk for taxpayers. The proposals from Britain’s Vickers Commission go a long way to deal with this, dividing a tightly regulated domestic banking system (the bit that puts taxpayers at risk) from a more freewheeling international market for global capital. By contrast, the thrust of many of the proposals coming out of Brussels looks harmful. Some, such as the financial-transactions tax, can be blocked by a British veto. The rest are subject to majority vote, and Mr Cameron’s stand-off with his European partners last month—supposedly to protect the City, but really to avoid having to sell a more integrated Europe to Tory Eurosceptics—has now given London’s rivals the excuse to hamstring the City.
The British government’s own policies on tax and immigration are also doing a lot of damage. The 50% tax rate, introduced by the previous Labour government in 2010, brings in little money and has made London the most taxed out of ten financial centres for high net-worth individuals. The present generation of financial bosses, who live in and like London, may tolerate it for a while, but younger ones are feeling the pull of Switzerland, Hong Kong or Dubai. As for immigration policy, the best way to win Asian business is to lure the young Asian financiers to London. Tight limits on talented immigrants damage the City’s prospects—and indeed the prospects of every bit of British business.
For those of you who are a bit confused about what exactly is happening, or not happening, in Europe.
This post is for Americans who know nothing about the debt crisis in Europe. I am going to try to provide a big picture framework and draw attention to what I think should matter most to Americans. If you have expertise in this topic I hope you’ll help me improve my analysis. This topic is somewhat new for me.
I think of the European debt crisis in three layers:
national debt crises in several European countries;
a structural crisis of the Eurozone; and
potential banking crises in Europe and the U.S.
Most current press coverage is about the middle layer: can European leaders prevent the Eurozone from dissolving? The top and bottom layers deserve more attention than they are receiving. American policymakers need to think hard about and plan for the possibility that a really bad outcome in Europe leads to another American banking crisis.
Why ultimately should the US care? (As a background, the author of this post, Keith Hennessey, is the former Assistant to the U.S. President for Economic Policy and Director of the U.S. National Economic Council under ‘W.’ Hardly a liberal.)
The bottom layer, the interaction between European sovereign governments and banks in Europe and the U.S., is not getting nearly enough policy or press attention, and it worries me a lot. From an American self-interest perspective, the direct economic effects of a Eurozone collapse on U.S. exports would be very bad and could easily tip the U.S. into recession. But the effects of a collapsed Eurozone or an Italian default on European banks, and the indirect effects that are passed through to American banks, could be far, far, worse. Think 2008 financial crisis worse. The worst case scenarios for Europe appear to pose a low probability, high consequence threat of another horrific U.S. banking crisis. This is why American policymakers should care deeply about Europe — because if the Europeans screw it up badly, it could do serious damage to the American economy, transmitted through still flawed and vulnerable banking systems.
Read the full post here.
Nouriel Roubini, a professor from NYU most famous for predicting the housing collapse, sees more disaster ahead. Writing in the Financial Times, Roubini, nicknamed Dr. Doom for predicting disaster in the housing market when everyone else was riding high, spells out the problem facing Europe, and thus the rest of the world.
Italy is too-big-to-fail, but also too-big-to bail. Even if it restructured its debt (2.58 trillion USD), it would still suffer from “a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity.” To resolve those problems Italy may “need to exit the monetary union and go back to a national currency, thus triggering an effective break-up of the eurozone.”
Until recently the argument was being made that Italy and Spain, unlike the clearly insolvent Greece, were illiquid but solvent given austerity and reforms. But once a country that is illiquid loses its market credibility, it takes time – usually a year or so – to restore such credibility with appropriate policy actions. Therefore unless there is a lender of last resort that can buy the sovereign debt while credibility is not yet restored, an illiquid but solvent sovereign may turn out insolvent. In this scenario sceptical investors will push the sovereign spreads to a level where it either loses access to the markets or where the debt dynamic becomes unsustainable.
So Italy and other illiquid, but solvent, sovereigns need a “big bazooka” to prevent the self-fulfilling bad equilibrium of a run on the public debt. The trouble is, however, that there is no credible lender of last resort in the eurozone.
He explains that Eurobonds are out of the question due to German politics – they’ve bailed out enough people, they say (rightly) – and the ECB is prevented from doing so: “as unlimited support of these countries would be obviously illegal and against the treaty no-bailout clause.” Roubini also dismisses other discussed options as ineffective or unrealistic.
The austerity necessary to pay down the debt and save the credit ratings, he argues, will make the recession worse: “Raising taxes, cutting spending and getting rid of inefficient labour and capital during structural reforms have a negative effect on disposable income, jobs, aggregate demand and supply. ”
Even a restructuring of the debt – that will cause significant damage and losses to creditors in Italy and abroad – will not restore growth and competitiveness. That requires a real depreciation that cannot occur via a weaker euro given German and ECB policies.
If you cannot devalue, grow, or deflate to a real depreciation, you must abandon the Euro. The eurozone could survive Greece or Portugal doing so, but not Italy (or Spain). That would effectively break-up the eurozone. That “slow-motion train wreck is now increasingly likely.”
Only if the ECB became an unlimited lender of last resort and cut policy rates to zero, combined with a fall in the value of the euro to parity with the dollar, plus a fiscal stimulus in Germany and the eurozone core while the periphery implements austerity, could we perhaps stop the upcoming disaster.
There are even odds that this will happen. Berlusconi has resigned as prime minister, but that will only calm the markets for so long. The structural problem of their debt remains. As does the threat of the collapse of the euro. They will continue regardless of who hosts the next bunga bunga party.
The BBC has a great primer on the global economy, especially the Eurozone. Through a series of 60-second video clips, they explain the IMF, how banks go bust, quantitative easing, and the role of the ECB. They also have several articles that tackle those and similar subjects in both the Eurozone and the world economy. Very straightforward, nonpartisan information, and recommended for those who are a bit confused when reading today’s headlines.
French satirical weekly Charlie Hebdo was firebombed around 1 AM this morning in an apparent response to the publication’s decision to move forward with a special “sharia” edition “guest edited” by the prophet Muhammad.
The newspaper’s intention was to mock Tunisia’s first democratic elections, which resulted in a victory for the moderate Islamist An-Nahda party, as well as the Lybian interim government’s announcement that sharia law would rule over the liberated nation.
The offices of Charlie Hebdo — which had renamed itself “Sharia Hebdo” for the issue — were destroyed, and most of their contents were burned after a single Molotov cocktail was thrown at the building. Two people are suspected to have taken part in the attack.
I appluad their response. “‘We cannot, today, put together a paper,’ said the paper’s editor-in-chief, Charb. ‘But we will do everything possible to do one next week. Whatever happens, we’ll do it. There is no question of giving in.'” If only more people had their courage to respond to such violence.
I don’t have time to post these by themselves. They’ve been sitting in my “to do” pile for too long, but I find them all to be interesting reads. Read what interests you.
“How to Prevent a Depression” by Nouriel Roubini.
France imposes a “fat tax” on sugary soft drinks to combat obesity.
CNAS publication: “Hard Choices: Responsible Defense in an Age of Austerity,” by LtGen David Barno, Nora Bensahel, and Travis Sharp.
Megan McArdle: “By 2020, cases of throat cancer caused by the human papillomavirus may outnumber those of HPV-caused cervical cancer.”
Hitch on the killing of Anwar al-Awlaki.
Maurizio Viroli: Silvio Berlusconi and the moral malaise of Italy.
“The Value of Values: Soft Power Under Obama” Mark P. Lagon
A debate on whether too many students are in college. (My answer is yes.)
Cliff May, “Autocracies United: Why “reset” with Russia and “engagement” with Iran have failed”
A journalist on the argument for better football helmets, and an economist on the trade-off.
Lot of stuff going on here. Enjoy.