Spain’s budget deficit likely to surpass 3% next year
El Pais reports that the Spanish government’s new stimulus programme, to be announced at the end of next week, is likely to push the 2009 public sector deficit to above 3%, after a deficit of 1.5% this year. This is the worst public sector performance since the late 1990s. The stimulus will not come in the form of tax cuts, but investment expenditure research and development, and innovation. The size of the programme is still open, as Spain does not want to stimulate more than other countries for fear that a Spanish stimulus would mainly benefits importers.
Stark warns against stimulus excess
Jurgen Stark says government should heed the experience of the 1970s when stimulus programmes turned into a long-term increase in public debt, and ultimately higher taxes. The programmes to stabilise the banking sector themselves were justified, he was quoted by Frankfurter Allgemeine Zeitung. Discretionary fiscal policy did not work in the past, he said, so why should they work in the future?
Reserved reaction to CEE ambitions to join the euro
The euro area is becoming fashionable again, now considered as a save heaven against exchange rate instability and speculation. Hungary but also Poland accelerate their efforts to join the euro area. Even in the Czech Republic the debate regained momentum. But inside the euro area there is more reservation. Le Monde cites an unnamed source saying that the crisis only amplifies that those countries are not ready yet and that it would be the wrong solution for Hungary and the Baltic states. Le Monde also quotes from within the central bank saying that there is no need to rush for those countries as it would deprive them an important adjustment instrument. –its exchange rate.
Martin Wolf on why Britain should not join the euro area
In the UK there is now an intense debate on whether the country should join the euro area or not. Martin Wolf argues in his column that the country now needs a strong depreciation in the real exchange rate, and that what some consider a sterling crisis is actually good news. Membership of the euro area would mean a decade-long grinding adjustment through the real economy, instead of the exchange rate. He lists six reasons why the exchange rate has to fall, a rapid fall in house prices, excessive indebtedness of households, damage to the financial sector and credit supply, heavy reliance on finance for well-paid jobs, excessive trade deficit of 6.4% of GDP, and change to a net importer of oil and gas. And he explicitly refutes arguments in favour of euro entry by Willem Buiter and Wolfgang Munchau.
EP tones down 10-year report on the euro
Pervanche Beres and Werner Langen were forced to tone down the European Parliament’s report on 10-years of the euro, which in its original version contained a criticism of the ECB’s announced inflation target of HICP growth of “below but close to” 2%. The new wording, according to Frankfurter Allgemeine, says inflation is a global phenomenon, and could not successfully fought by purely national means (actually it can, the question is whether you prepared to pay the price).
EU agrees group supervision for insurance after all
Not too long ago, it appeared as though the concept of cross border group supervision for insurance company had to sacrificed to reach agreement on Solvency 2, a wideranging regulatory and capital adequacy framework for the European insurance industry. FT Deutschland reports on its website that it has received information that EU ambassadors have reached agreement to retain the principle of group supervision, albeit in a watered-down form. Opposition from the European Parliament is also expected.
What the G20 missed out on
Writing in the FT Carmen Reinhart and Kenneth Rogoff said the G20 avoid to talk about the need for greater regulatory independence. While international financial institutions are far from perfect, a well-endowed, professionally staffed international financial regulator – operating without layers of political hacks – would offer a badly needed counterweight to the powerful domestic financial service sector lobbies. The independence argument is in addition to the well-recognised need for better mechanisms for co-ordinating regulation to reduce regulatory arbitrage in a world of global capital markets.
Writing in Lavoce, Vito Tanzi says rereading the final G20 communique raises serious doubts about its effectiveness. The main problem of the document is that it does not distinguish sufficiently between what countries have to do right away, and what steps should be taken later. Many important details are missing, which means that it give rise disagreement among governments. He also bemoans the lack of understanding of global macroeconomic imbalance as a cause for this crisis. In other respects, the communiqué lists banalities, for example in terms of the future role of the IMF.
What is the cause of the financial crisis?
Wolfgang Munchau, writing in FT Deutschland, says the underlying causes of past financial crisis were normally not fully understood at the time. This was particularly true for the Great Depression, and he suspects it is true for this crisis as well. He does not think this crisis, while it plays out in the financial markets, is a financial crisis at its core, but an economic crisis, as global imbalanced causes excessively low US interest rates over long periods, which in turn triggered a number of booms – in property and credit – and which causes a depletion of the US private sector savings rate. But as of yet, we have no full theory, let alone a consensus, and the G20’s solemn assertion that they have reached agreement on the causes of the crisis is pure hogwash.
And now for some real gloom
Writing in Vox, Nicholas Bloom says every economist is predicting a macabre 2009, but no one knows for sure how bad things will get or who will survive. Comparing the current crisis to uncertainty shocks of the last 40 years, he predicts that GDP growth could be reduced by as much as 4.5%. But, if politicians protect free markets, growth should be back in 2010.
Turmoil in Ireland over bank capital fears
Irish stock markets took a hit yesterday amid fears that the banks need to be recapitalized, reports the Irish Independent. The ISEQ index of shares finished the day off nearly 4% at 2,570.58 points, while the financial index lost 11.63%. The government is coming under increasing pressure to intervene and pump money into the sector, as their exposure to a falling property market may increase the need to intervene. Last month, all four of the publicly traded banks were among the six Irish financial institutions that signed up to the Government's €440bn scheme, which guaranteed all their liabilities for two years. Bank of Ireland, which had a core tier 1 capital ratio of 6.3% by September, appears to come under increased pressure, canceling the cash dividend to boost capital.
Towards a new Grand Coalition in Austria
Austria is most likely to get a Grand coalition once more again reports Der Standard. Negotiations are again in full swing, some details already emerged especially about the tax reform. Der Kurier got the information that the level of taxable income was raised from €10000 to €11000, the tax rate lowered from 38,3 to 36,5%for low income and 43,6 to 43,2% for middle income. There are also many family allowances. Open points for discussion are EU policy (remember Alfred Gusenbauer’s call for a referendum on EU enlargement brought down the last government), pensions and savings within the administration.
More democracy for the EU presidency
To prepare its EU presidency in 2010, the Belgian government will use the internet to consult the opinion of the people about Europe. It just installed new website forum2010.belgique.be where people can post their comments on how they think what Europe should be, reports Le Soir . The site is available in French, Dutch, English and German. From January 2009 onwards comments will be summarized to serve as a basis for a series of seminars to be held ahead of its presidency (it reminds us of Segolene Royal’s famous site Desir d’avenir). Those without access to the web can write a letter to the government.
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