
Europe’s sovereign-debt crisis
Scaling the summit
Once again, EU leaders have raised high hopes of a solution

SECOND marriages supposedly represent the triumph of hope over experience. Similarly, in the lead-up to every EU summit, investors become optimistic that this time—finally—leaders will manufacture a solution to the debt crisis. So it was with the latest summit on December 8th and 9th, due to take place after The Economist went to press. Beforehand, Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, the French president, had thrashed out a deal which promises future restrictions on the ability of euro-zone countries to run large fiscal deficits.

The hope was that this would be enough to persuade the European Central Bank to open its wallet and buy more government bonds. The leaders also agreed to bring forward to next year the creation of the European Stability Mechanism (ESM), a fund designed to bail out ailing countries—reducing the risk that the likes of Italy and Spain would struggle to refinance maturing debts. The markets were also boosted by a promise that, unlike the Greek deal, future bail-outs would not require a write-off for private-sector creditors. Italian and Spanish bond yields fell sharply (see chart 1).
Standard & Poor’s, a rating agency, added to the pressure on the leaders to come up with a convincing deal by placing all euro-zone countries on negative “credit watch” with a view to reducing their ratings. The agency cited “continuing disagreements among European policymakers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial and fiscal convergence among euro-zone members.” It also worried about the rising risk of a recession in the euro zone in 2012.
Europe’s leaders face an agonising dilemma. They needed to produce a plan to limit the region’s debt accumulation over the long run. But too great an emphasis on austerity in the short run risks sending the continent’s economy into a deep recession; the latest data on Italian industrial production showed an annual fall of 4.1% in October, even before budget cuts were introduced by the new government. In protest against the reforms, Italian trade unions called private- and public-sector national strikes.
Some feared that the outline of the Merkel-Sarkozy deal looked remarkably like the Stability and Growth Pact, which failed to control deficits over the past decade. Countries will apparently be required to keep to a deficit target of 3% of GDP, on pain of automatic sanctions (under the pact, penalties were usually waived).
“The EU has learned nothing about the shortcomings of the previous Stability and Growth Pact,” says Simon Smith, chief economist at FxPro, a foreign-exchange broker. “Investors would be correct in doubting the EU’s ability to enforce any debt or deficit rules.”
Andrew Benito of Goldman Sachs laments that “two options that would have resolved the past impasse most cleanly have been ruled out. Chancellor Merkel has ruled out the Eurobond that would have directly ‘mutualised’ excessive debt in the peripheral economies. President Sarkozy, meanwhile, has ruled out the fiscal intrusion that would have given a formal veto against national budgets.”
Back to the pact
Market optimism was tempered a little on December 7th when hopes were dashed that the ESM would be combined with the existing European Financial Stability Facility to create a much larger rescue fund. Indeed, S&P warned that the EFSF’s credit rating would be downgraded along with the countries that backstop the facility. Even a package that successfully bails out European countries in the short term would not deal with the long-term problem that has afflicted the region—that some countries have become less and less competitive, relative to Germany.
Another worry for the markets is the continued pressure on banks. The co-ordinated action of central banks on November 30th gave European banks cheaper access to much-needed dollars; they borrowed $50.7 billion from the ECB under the latest three-month deal, compared with just $395m under the previous facility, which levied an interest rate twice as high.

Nevertheless, banks remain wary of lending to each other, as is shown by the gap between their borrowing costs and official interest rates (see chart 2). Banks may respond by cutting credit to firms and households, worsening the pressure on the economy.
The danger is that the markets will repeat the pattern that followed previous summits—a rally on news of a deal that peters out once investors examine the fine print. Only a move to full fiscal union, with the northern countries subsidising the periphery, or unlimited bond purchases by the ECB, seems likely to satisfy investors. Before the summit, Jonathan Loynes of Capital Economics said that “we remain to be convinced that the proposals will bring the debt crisis to an end and ensure that the euro survives in its present form.”
Money talks: December 5th 2011
An enormous multilateral achievement
Dec 5th 2011, 21:52 by The Economist online
America's economy improves a bit, Europe holds another summit and we mark the tenth anniversary of China's membership in the WTO
American economics indicators depict positive trend particularly in manufacturing and agricultural sector to recovering slowly.
The main reasons are to some sorts of reforms programs in monetary and fiscal sectors which are agreed to endorse by opposition and ruling party that retain the confidence of investors.
The strength of American economy is quiet different than Europe because of resources both natural and industrial.
American military industrial complex is extremely based on high-tech and no one can match, recently large weapon deal with Saudi Arab and trade deal with Asia Pacific countries stand the confidence of military and economic power among the investors to fear less invest in money and goods market.
Obama reveals that ‘America is back’ during his visits in Asia Pacific region to maintain the confidence of its Allies about economics and military protection against emerged power China. This gives enough support to erosion the wrong thought about American economy and military might in front of regional powers.
Destiny of European economy is not as monetary union rather fiscal union. Monetary union demands to be equilibrium parity among the union members of resources regarding industrial, agriculture technology and labors skills.
Except of German and France the other members are not capable to chase the economy values against the countries beyond Europe.
Hence, PIIGS economy becomes the liabilities of the union to provide borrow to fill the gaps of budget deficit.
Finally, members are considered to convert the monetary union into fiscal union are appreciable to revert economy on positive path.
China being of member of WTO is achieved trade successes in the region Europe, America and Asia to chase the competitive market of its consumer’s product though effective cost of production.
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