Draghi says Italy needs to cut taxes
After years in which the consensus in Italian politics has been that deficit-cutting must have the utmost priority in Italian economic policy, Mario Draghi, the governor of the Bank of Italy, arrives at a very different conclusion. In a big speech he made the point that Italy’s two biggest problems are excessively high taxes – for families and for companies – and that productivity is not sufficiently large enough, according to a report in Il sole 24 ore. To remedy this must be the priority of economic policy. Draghi also made the point that the global economy is currently threatened by two parallel developments – the rise in global inflation and the US slowdown. In a sombre response, prime minister Silvio Berlusconi said it was a serious diagnosis, but added that he agreed with the governor.
Economics and Finance Committee warns about risk to banking system
The EU’s economics and finance committee has produced a report – obtained by Financial Times Deutschland – warning that the different systems of deposit insurance could wreck havoc on the European banking system if there is a banking crisis. At present, the deposit insurance schemes vary widely across the EU, but also across different types of deposits within countries. If a EU-wide bank were to go broke, it would extremely difficult to sort out how much to compensate savers. The committee has produced a paper on this issue which is to be discussed by the Ecofin meeting. The main point is that the euro area’s fragmented regulatory and banking supervisory systems are not working optimally.
Who with whom: Germany is in the midst of a coalition bazaar
The SPD is testing out the idea of alternative alliances after the 2009 elections. Over the weekend, Kurt Beck, SPD chairman, said his party would be open to a coalition with the FDP and the Greens – after previously having opened the party to a coalition with the Left Party – the post-Communists. Frankfurter Allgemeine reports that the FDP responded sceptically over the weekend. At its annual congress, the FDP has voted in favour of a radical simplification of tax policy – and a tax cut – with tax bands of 15, 25, and 35%. The SPD has recently moved in the opposite direction, when it suggested a tax regime that would effectively preclude any salaries over and above €1m.
Is Germany really as strong as people think?
Wolfgang Munchau, writing in the Financial Times, argues that France is currently making greater strides towards liberalisation than Germany, and that the last meaningful German reform dates back to the end of 2005. He says the country is moving to the left – not only across parties but also within parties. The country is in the midst of an anticapitalism debate that has gripped the entire political spectrum. Also it is very likely that the post-Communists may form part of a winning coalition not too long from now.
The French are warming to the ECB…
The French seem to be warming to the ECB’s current interest rate policy. Here are three interesting views. Le Monde has an article which argues that the recent rises in inflation vindicates the ECB’s interest rate policy, and that the rise in the euro is the best thing that could have happened as it puts pressure on imported prices – without it, inflation would be much higher, and so would be the interest rates themselves. The articles with the observations the President Nicholas Sarkozy appears to have great difficulty understanding the ECB’s policy than most European citizens.
Also writing in Le Monde, Patrick Artus argues that the euro is becoming a global reserve currency, and already beginning to enjoy what Americans call “exorbitant privilege”, essentially a rent-seeking way to enrich yourself on behalf of the rest of the world. Artus said the Americans have not used it cleverly, and the Europeans are somewhat restricted by the stability pact. But he says the exorbitant privilege that comes with world currency status should allow the euro area to make raise investment spending.
Jean Quatremer has become one of the few journalists to dare predict that the next ECB rate move is going to be a rate increase, he says in his latest blog entry, conditioned on the euro area decoupling from the US. It is a strong condition, of course, and not entirely clear what it means in practice, but his comments suggests that the ECB may not be as isolated as some people think when they try to push up interest rates.
… though clearly not all the French
The Le Monde article also made the point that the Versailles appeal court had its own way of celebrating ten years of the ECB, by allowing civil proceeding to be brought against Jean-Claude Trichet in the Credit Lyonnais affair over falsified accounts ahead of privatisation.
The ECB at ten
At Eurointelligence we care less about anniversaries than the newspapers. But we should mention that the ECB is ten today, and there lots of articles commemorating this fact. Among those is a long article by NRC Handelsblad which says the ECB has finally proven its mettle, while an FT article point out that we are once again no-interest-rate-move environment, which has happened from time to time in the history of European central banking. El Mundo also weighs in with a chronicled highlight of the main events in the ECB’s 10 years.
Krugman says alarm about inflation overdone
Paul Krugman has blog entry in which he challenges Wolfgang Munchau’s assertion that global inflation is on the rise, and that the central banks have misjudged the situation. He makes the New Keynsian argument that the prices that matter most for the inflation expectations are embedded prices – such as measured by core inflation indices. Oil and food prices are quoted minute-by-minute. It is only when sticky prices start to rise that an inflationary shocks transmits to the general price level. He concludes that the Fed is right not to worry about inflation, but on saving the financial system.
There is more discussion on this issue by Mark Thoma in the Economists View blog, who has a lengthy quote by Michael Woodford explaining Krugman’s point in a more detail and technical manner. Woodford concludes that its optimal to control
Why the credit crisis is not over yet
Jan Hatzius, chief economist of Goldman Sachs, writes in Frankfurter Allgemeine that the subprime crisis may be over, but the property crisis is not. As the US property market gets further into troubles, more and more borrowers are likely to default. While the defaults will be lower in prime mortgages than in subprime, the prime market is about five times the size, and the overall loses could be the same. Worse still, the losses are not restricted to a few large banks, but to many mid-sized financial institutions in the US. So this crisis is going to get a lot worse before it gets better.
Larry Summers on the regulatory lessons of the crisis
Hardly a week passes by without some economic commentators giving x-point list of the regulatory consequences of the financial crisis. Larry Summers has written up his proposals in the FT. Here is six point list: no choice of regulators for financial institutions; imposing external capital requirements (also for non-bank financials); regulators must not base their decisions on market prices, but should take into account economic shocks; the focus of regulation should shift away from the prudential supervision of individual institutions towards a focus on the financial system as a whole; the need to regulate the parallel banking sector; prevent contagion of risk. (We find the idea that we could have prevented this crisis through better regulation completely absurd. Of course, there are multiple problems with the regulatory system, but Summers et al are shifting the entire blame for this crisis onto bad regulation, not on bad policy.)
Willem Buiter against Martin Wolf
After Martin Wolf argued in the FT that the UK should not join the euro area, Willem Buiter responded in his blog that the UK should. He makes two principled arguments. The first is that the exchange rate and independent monetary policy does not effectively constitute protection against an asymmetric shock. Far more effective are portfolio diversification and exchange-rate diversification. The second is the Bank of England’s inability to act as a market maker of last resort for the financial sector non-sterling exposures. The only two monetary regions that matter are the US and the euro area. The UK is more like Iceland, than either of the two.
Too many central bankers
Writing in Vox, Helge Berger and Volker Nitsch make the point that the ECB’s governing council is too large. It continues to expand as new economies adopt the euro. Their column presents empirical evidence that the optimal central bank committee size is seven to ten members – far fewer than the 22 members the ECB will have come 2009.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.