Europe’s Lost Keynesians

Kenneth Rogoff

23 May 2013
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CAMBRIDGE There is no magic Keynesian bullet for the eurozone’s woes. But the spectacularly muddle-headed argument nowadays that too much austerity is killing Europe is not surprising. Commentators are consumed by politics, flailing away at any available target, while the “anti-austeritymasses apparently believe that there are easy cyclical solutions to tough structural problems.
The eurozone’s difficulties, I have long argued, stem from European financial and monetary integration having gotten too far ahead of actual political, fiscal, and banking union. This is not a problem with which Keynes was familiar, much less one that he sought to address.
Above all, any realistic strategy for dealing with the eurozone crisis must involve massive write-downs (forgiveness) of peripheral countries’ debt. These countries’ massive combined bank and government debt – the distinction everywhere in Europe has become blurredmakes rapid sustained growth a dream.
This is hardly the first time I have stressed the need for wholesale debt write-downs. Two years ago, in a commentary called The Euro’s Pig-Headed Masters,” I wrote that “Europe is in constitutional crisis. No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions.”
My sometime co-author Carmen Reinhart makes the same point, perhaps even more clearly. In a May 2010 Washington Post editorial (co-authored with Vincent Reinhart), she described Five Myths About the European Debt Crisisamong them, “Myth #3: Fiscal austerity will solve Europe’s debt woes.” We have repeated the mantra dozens of times in various settings, as any fair observer would confirm.
In a debt restructuring, the northern eurozone countries (including France) will see hundreds of billions of euros go up in smoke. Northern taxpayers will be forced to inject massive amounts of capital into banks, even if the authorities impose significant losses on banks’ large and wholesale creditors, as well they should. These hundreds of billions of euros are already lost, and the game of pretending otherwise cannot continue indefinitely.
A gentler way to achieve some modest reduction in public and private debt burdens would be to commit to a period of sustained but moderate inflation, as I recommended in December 2008 in a commentary entitled Inflation is Now the Lesser Evil.” Sustained moderate inflation would help to bring down the real value of real estate more quickly, and potentially make it easier for German wages to rise faster than those in peripheral countries. It would have been a great idea four and a half years ago. It remains a good idea today.
What else needs to happen? The other steps involve economic restructuring at the national level and political integration of the eurozone. In another commentary, A Centerless Euro Cannot Hold,” I concluded that “without further profound political and economic integration – which may not end up including all current eurozone members – the euro may not make it even to the end of this decade.
Here, all eyes may be on Germany, but today it is really France that will play the central role in deciding the euro’s fate. Germany cannot carry the euro on its shoulders alone indefinitely. France needs to become a second anchor of growth and stability.
Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems. At the same time, France and Germany must both come to terms with an approach that leads to far greater political union within a couple of decades. Otherwise, the coming banking union and fiscal transfers will lack the necessary political legitimacy.
As my colleague Jeffrey Frankel has remarked, for more than 20 years, Germany’s elites have insisted that the eurozone will not be a transfer unión. But, in the end, ordinary Germans have been proved right, and the elites have been proved wrong. Indeed, if the eurozone is to survive, the northern countries will have to continue to help the periphery with new loans until access to private markets is restored.
So, given that Germany will be picking up many more bills (regardless of whether the eurozone survives), how can it best use the strength of its balance sheet to alleviate Europe’s growth problems? Certainly, Germany must continue to acquiesce in an ever-larger role for the European Central Bank, despite the obvious implicit fiscal risks. There is no safe path forward.
There are a number of schemes floating around for leveraging Germany’s lower borrowing costs to help its partner countries, beyond simply expanding the ECB’s balance sheet. For meaningful burden-sharing to work, however, eurozone leaders must stop dreaming that the single currency can survive another 20 or 30 years without much greater political union.
Debt write-downs and guarantees will inevitably bloat Germany’s government debt, as the authorities are forced to bail out German banks (and probably some neighboring countries’ banks). But the sooner the underlying reality is made transparent and becomes widely recognized, the lower the long-run cost will be.
To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumedtrickle-downeffect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly.

The euro crisis

The sleepwalkers

In the euro zone, desperately in need of a boost, no news is bad news

May 25th 2013

YOU may have missed it, but the European Union held a summit this week. Taking in a nutritious working lunch, Europe’s prime ministers, presidents and chancellors devoted half of Wednesday to weighty issues of energy and taxation. Gone are the panic-stricken sessions of last year, dogged by talk of the euro’s imminent failure. Today, Europe’s leaders note, reform is under way across most of the euro zone and some southern European countries are regaining their competitiveness. The government-debt market is back in its box, where it belongs. And over the past year share prices are up by a quarter. Nobody could pretend that life is easy; Europeans understand that hard work and sacrifices lie ahead. But the worst of the crisis is now safely in the past.

It is a reassuring tale, and those worn down by the Wagnerian proportions of the euro saga (who isn’t?) are eager to believe it. Unfortunately, the idea that the euro is yesterday’s problem is a dangerous figment. In reality, Europe’s leaders are sleepwalking through an economic wasteland.

Someone call a somnambulance, quick
The euro-zone economy has just endured a sixth successive quarter of shrinking GDP. The malaise is spreading to core countries including Finland and the Netherlands, which both contracted in the first quarter. Retail sales are falling. Unemployment, above 12%, is a record—with more than one in four Spaniards out of work (see article). In spite of savage spending cuts, government deficits are persistent and high. The sum of government, household and company debt is still excessive. Banks are undercapitalised and international lenders worry about their as-yet-unrecognised losses.

Although official interest rates are low, firms in southern Europe are suffering a cruel credit crunch. All this is causing economic hardship today and eating away at the prospects for growth tomorrow. The euro zone may not be about to collapse, but the calm in Brussels is not so much a sign of convalescence as of decay.

For everyone’s sake, Europe’s leaders must shake themselves out of their lethargy. They must grasp that if they do not act, the euro zone faces stagnation or break-uppossibly both.

After years of crisis, the to-do list is clear. The urgent task is to sever the ties between banks and governments too feeble to support them. That was the aim of the banking union agreed on last year. But, as the pressure has eased, the union has become ensnared in technicalities and a fundamental argument about how much historic bank debt, if any, should be dumped on ithow much, in other words, Germans, Finns and Dutch should bear the burden of other people’s mistakes. This delay is highly damaging. Europe’s banks need funds by whatever means. America has recovered before Europe not just because it has been less austere, but also because it rapidly sorted out its banks so that they could lend again (see Charlemagne).

In addition, the euro zone needs growth-boosting reform. The EU should extend the single market further into services. Instead of thinking up red lines, it should pursue a free-trade agreement on offer from the United States, its biggest trading partner. And it should ease austerity by slowing the pace of budget cuts and using cash from the core euro zone to pay for schemes to boost youth employment and investment in small and medium-sized firms in the periphery.

Clearly, the reason for today’s inaction is not a shortage of things to do, but a shortage of the will to do them. This hiatus is partly caused by elections due in September in Germany, the prime mover in almost any European policy these days. But there is a deeper reason, too. Across Europe voters have grown resentful of both their own politicians and the EU. In France the president, François Hollande, is paralysed by scandal and a dismal approval rating of 24%, another record. A recent survey by the Pew Research Centre found that the share of French voters who say that they look favourably on the EU has fallen from 60% in 2012 to 41% now, less even than in Eurosceptic Britain.

Italy is mired in recession, yet it cannot seem to muster a coherent political platform for change. At the same time, voters want to keep the single currency: 70% of them still support the euro in Greece, which has suffered more in the crisis than any other country. Over the past few years crunch votes in Greece, Ireland, Portugal, Spain and the Netherlands have repeatedly backed staying inside the euro zone.

This is a recipe for inaction. On the one hand, voters want the euro zone to stay together. On the other, they will not back the difficult reforms needed to pull it out of the crisis.

Time was when the bond markets would force politicians to face up to this contradiction. It was the threat of financial panic that kept euro-zone leaders up until dawn hammering out rescue deals and promises of reform. But the financial markets have been anaesthetised ever since Mario Draghi, the president of the European Central Bank (ECB), promised to “do whatever it takes” to protect the euro zone from collapse. Speculators know that to bet against the single currency would be to take on the theoretically infinite balance-sheet of the ECB—and that, at least at first, would mean heavy losses.

Alarm bells
Mr Draghi was right to buy the euro zone time. He was also right to furnish the ECB with the tools to tamp down speculation. The trouble is that the politicians are squandering the chance for orderly reform. Optimists say that everything will be just fine after Germany’s election, when its leaders will have a mandate for euro-zone reform. But German reluctance either to lead or to pay for the rest of Europe runs deeper than that. Besides, Mr Hollande’s woes mean that the Franco-German relationship, always central to the evolution of Europe, has seized up.

And if euro-zone leaders stumble on? Like Japan, Europe will be under a shadow for years to come. The cost will be measured in disillusion, blighted communities and wasted lives. Unlike Japan, though, the euro zone is not cohesive. For as long as stagnation and recession tear at democracy, the euro zone risks a fatal popular rejection. If the sleepwalkers care about their currency and their people, they need to wake up.

Precious Metals & Miners Start Bottoming Process.

Chris Vermeulen

May 27, 2013

Precious metals and their related mining stocks continue to underperform the broad market. This year's heavy volume breakdown below key support has many investors and trader's spooked creating to a steady stream of selling pressure for gold and silver bullion and mining stocks.

While the technical charts are telling me prices are trying to bottom we must be willing to wait for price to provide low risk entry points before getting involved. Precious metals are like any other investment in respect to trading and investing in them.

There are times when you should be long, times to be in cash and times to be short (benefit from falling prices). Right now and for the last twelve months when looking at precious metals cash has been king.

Since 2011 when gold and silver started to correct the best position has been to move to cash or to sell/write options until the next trend resumes. This is something I have been doing with my trading partner who focuses solely on Options Trading who closed three winning positions last week for big gains.

In 2008 we had a similar breakdown in price washing the market clean of investors who were long precious metals. If you compare the last two breakdowns they look very similar. If price holds true then we will see higher prices unfold at the end of 2013.

The key here is for the price to move and hold above the major resistance line. A breakout would trigger a rally in gold to $2600 - $3500 per ounce. With that being said gold and silver may be starting a bear market. Depending what the price does when the major resistance zone is touched, my outlook may change from bullish to bearish. Remember, no one can predict the market with 100% accuracy and each day, week and month that passes changes the outlook going forward.

The chart below is on I drew up on May 3rd. I was going to get a fresh chart and put my analysis on it but to be honest my price forecast/analysis has been spot on thus far and there is no need to update.


Gold Daily Technical Chart Showing Bottoming Process:

Major technical damage has been done to the chart of gold. Gold is trying to put in a bottom but still needs more time. I feel gold will make a new low in the coming month then bottom as drawn on the chart below.

Silver Daily Technical Chart Showing Bottoming Process:

Silver is in a similar as gold. The major difference between gold and silver is that silver dropped 10% early one morning this month which had very light volume. The fact that silver hit my $20 per ounce level and it was on light volume has me thinking silver has now bottomed.

But, silver may flounder at these prices or near the recent lows until its big sister (gold) puts in a bottom.

Gold Mining Stocks Monthly Investing Zone Chart:

Gold mining stocks broke down a couple months ago and continue to sell off on strong volumen. If precious metals continue to move lower then mining stocks will continue their journey lower.
This updated chart which I originally drew in February warning of a breakdown below the green support trend lines would signal a collapse in stock prices, which is exactly what has/is taking place.

While I do not try to pick bottoms (catch falling knives) I do like to watch for them so I am prepared for new positions when the time and chart turn bullish or provide a low risk probing entry point. While I focus more on analysis, forecasts and ETF trading another one of my trading partners who focuses on Trading Stocks and 3x Leveraged ETF's has been cleaning up with gold miners.


Gold, Silver and Mining Stocks Conclusion:

Precious metals continue to be trending down and while they look to be trying to bottom it is important to remember that some of the biggest percent moves take place in the last 10% of a trend. So we may be close to a bottom on the time scale but there could be sharply lower prices yet.

The time will come when another major signal forms and when it does we will be getting involved. The exciting this is that it could be just around the corner.

The Spanish economy

On being propped up

Spain’s pain is likely to continue, despite some promising reforms, unless new sources of growth emerge

May 25th 2013 | MADRID

THE gloom in Spain is almost palpable. Yet two years on from the protests begun in Madrid by young Spaniards known as los indignados, most accept their lot with resignation. The government of Mariano Rajoy is unpopular, but so is the opposition. And whereas many other stricken euro-zone countries blame the Germans for their woes, Spaniards recognise that they are paying for their own excesses, especially the burst property bubble.

The numbers are grim. The economy is in deep recession. In the first three months of the year GDP shrank for a seventh quarter in a row. The public finances remain stretched, with the budget deficit at 7% of GDP. Bond yields have fallen, but the credit crunch for small firms is worsening. Corporate bankruptcies are running at ten times pre-crisis levels. And unemployment is at a record 27%.

Spain could be the biggest test for the euro. Four countriesGreece, Ireland, Portugal and most recently Cyprus—have been bailed out and are in programmes agreed on with the “troika” of the IMF, the European Union and the European Central Bank. But Spain is the only big euro member that has come close to a bail-out. Instead, it last year took a halfway offer of €100 billion ($129 billion) support from the European bail-out fund for its banks (it drew €41 billion). Unlike France, it has made big structural reforms. Unlike Italy, it has a strong government that expects to last until the next election in late 2015.

Moreover, a few glimmers of hope can be discerned amid the gloom. Thanks to the ECB, long-term bond yields have fallen back to pre-crisis levels. Sharp fiscal consolidation has trimmed the budget deficit from 11% of GDP in 2009 to 7% this year. Overspending by fractious regions has been painfully brought under control. And Spain has been given an extra two years to hack its deficit below 3%.

The government’s programme of restructuring and reform has also started to produce results. As many as 38 financial institutions have been merged, mainly local cajas brought down by property lending. The remaining banks have been recapitalised and some €50 billion of their worst assets transferred to a bad bank, Sareb.

Provisioning against bad debts has risen sharply. Unlike many other euro-crisis countries, the public sector is shrinking: 375,000 civil-service jobs have gone.

The real economy is also showing signs of improvement. Measured by unit labour costs, Spain has done more than most to regain competitiveness (see chart). The external current account has switched from a deficit of almost 10% of GDP in 2008 to a surplus, and not only because of import compression. In 2012 exports rose faster than in any other EU country. Reforms last year made it easier to fire workers, so industry is readier to hire again. This new labour-market flexibility is one reason why many car makers are moving production from other EU countries to Spain.

Even so, three big problems could undo this limited progress. One is the credit crunch. Despite lower bond yields, credit for small and medium-sized enterprises remains scarce and expensive compared with northern Europe. And although both capital and provisioning have increased, the banks are still rolling over dodgy debts from many construction firms. Property prices are down by over a third from their peak, and ministers insist the system could absorb a drop of 50%—but if the recession continues, the fall could be larger still.

The second problem is reform fatigue. Spaniards have accepted changes, including wage cuts, to restore lost competitiveness. But more is needed: welfare reforms, a lower minimum wage in some regions, encouraging mini-jobs and part-time work and reducing the burden of pensions. It is not clear that Mr Rajoy’s government has the guts to push such reforms through. Yet without them Spain’s scary level of unemployment is likely to persist. Ministers say the jobs market is more flexible than it looks because in the boom years 5m immigrants came in, and the bust is seeing large net emigration: the population is shrinking. But long-term high unemployment will reduce the quality of the workforce.

Above all is the third problem, insufficient demand and a lack of sources of growth. With public spending, consumption and investment constrained, the government is relying on rising exports. Yet total exports are less than a third of GDP and almost two-thirds go to the recession-hit euro zone. It is hard to see how even strong exports can make up for weak domestic demand. And if GDP growth does not revive, the problems of Spanish banks and the credit crunch will quickly return.

Luis de Guindos, Spain’s finance minister, said last year that Spain was the place where the battle for the euro would be fought. It is also crucial for the future of the EU: the recent Pew report on public opinion found that the favourability rating for the EU had fallen in Spain by fully 34 points, from 80% in 2007 to only 46% now. If this most Europhile, reform-minded country cannot make it, can anybody?

America’s Blinders

Kishore Mahbubani

24 May 2013

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SINGAPOREThe time has come to think the unthinkable: the era of American dominance in international affairs may well be coming to an end. As that moment approaches, the main question will be how well the United States is prepared for it.
Asia’s rise over the last few decades is more than a story of rapid economic growth. It is the story of a region undergoing a renaissance in which people’s minds are re-opened and their outlook refreshed. Asia’s movement toward resuming its former central role in the global economy has so much momentum that it is virtually unstoppable. While the transformation may not always be seamless, there is no longer room to doubt that an Asian century is on the horizon, and that the world’s chemistry will change fundamentally.
Global leaders – whether policymakers or intellectualsbear a responsibility to prepare their societies for impending global shifts. But too many American leaders are shirking this responsibility.
Last year, at the World Economic Forum in Davos, two US senators, one member of the US House of Representatives, and a deputy national security adviser participated in a forum on the future of American power (I was the chair). When asked what future they anticipated for American power, they predictably declared that the US would remain the world’s most powerful country. When asked whether America was prepared to become the world’s second-largest economy, they were reticent.
Their reaction was understandable: even entertaining the possibility of the US becomingnumber twoamounts to career suicide for an American politician. Elected officials everywhere must adjust, to varying degrees, to fulfill the expectations of those who put them in office.
Intellectuals, on the other hand, have a special obligation to think the unthinkable and speak the unspeakable. They are supposed to consider all possibilities, even disagreeable ones, and prepare the population for prospective developments. Honest discussion of unpopular ideas is a key feature of an open society.
But, in the US, many intellectuals are not fulfilling this obligation. Richard Haass, the president of the Council on Foreign Relations, suggested recently that the US “could already be in the second decade of another American century.” Likewise, Clyde Prestowitz, the president of the Economic Strategy Institute, has said that “this century may well wind up being another American century.”
To be sure, such predictions may well prove accurate; if they do, the rest of the world will benefit. A strong and dynamic US economy, reinvigorated by cheap shale gas and accelerating innovation, would rejuvenate the global economy as a whole. But Americans are more than ready for this outcome; no preparation is needed.
If the world’s center of gravity shifts to Asia, however, Americans will be woefully unprepared. Many Americans remain shockingly unaware of how much the rest of the world, especially Asia, has progressed.
Americans need to be told a simple, mathematical truth. With 3% of the world’s population, the US can no longer dominate the rest of the world, because Asians, with 60% of the world’s population, are no longer underperforming. But the belief that America is the only virtuous country, the sole beacon of light in a dark and unstable world, continues to shape many Americans’ worldview. American intellectuals’ failure to challenge these ideas – and to help the US population shed complacent attitudes based on ignoranceperpetuates a culture of coddling the public.
But, while Americans tend to receive only good news, Asia’s rise is not really bad news. The US should recognize that Asian countries are seeking not to dominate the West, but to emulate it. They seek to build strong and dynamic middle classes and to achieve the kind of peace, stability, and prosperity that the West has long enjoyed.
This deep social and intellectual transformation underway in Asia promises to catapult it from economic power to global leadership. China, which remains a closed society in many ways, has an open mind, whereas the US is an open society with a closed mind. With Asia’s middle class set to skyrocket from roughly 500 million people today to 1.75 billion by 2020, the US will not be able to avoid the global economy’s new realities for much longer.
The world is poised to undergo one of the most dramatic power shifts in human history. In order to be prepared for the transformation, Americans must abandon ingrained ideas and old assumptions, and liberate unthinkable thoughts. That is the challenge facing American public intellectuals today.

Kishore Mahbubani is Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is the author of The Great Convergence: Asia, the West, and the Logic of One World.