The case against the optimists

By: Wolfgang Münchau

There are two kinds of euroyone optimists: stupid ones, and dangerous ones.

This is a Test Only

Testing

Europe's illusion of financial strength

The stress test exercise turned out to what was expected – finely calibrated so that only those banks failed that needed to be restructured in any case; 7 banks failed, including 5 Cajas, one German and one Greek bank; total new capital need is only €3.5bn, an implausibly low sum; Morgan Stanley estimates that a pass rate of 7% would have result in 24 bank failures; the tests did not stress any sovereign defaults; there were some criticisms that the German banks did not disclosure the sovereign exposures; Spain celebrated the results, also because the Spanish tests were tougher than those of the others; Gerald Braunberger says the tests are useful, but the problem of a lack of capital still persists; Das Kapital criticises that the prevalence of hybrid capital invalidates the results; Wolfgang Munchau says the three weaknesses are the treatment of hybrid capital, the lack of sovereign default assumptions, and the exclusion of some of the most toxic banks; A troika of European Commission, ECB and IMF are visit Greece to pave the way for the second tranche of the loan; an FT editorial, meanwhile, makes a strong plea in support of the Basle committees’ new proposals to redefine the capital requirements.

One Fiscal Size Does Not Fit All – a Korean lesson for Spain

By: Adam Posen

Twelve years ago, the Asian Financial Crisis hit. The International Monetary Fund took a common approach across the crisis countries, prioritizing fiscal austerity. In retrospect, outside observers and the Fund itself came to the conclusion that this was a mistake – while appropriate for Indonesia, the ‘It’s Mostly Fiscal’ approach made the situation worse than it needed to be in South Korea, with negative spillovers for the rest of the region. The euro area governments, under pressure from Berlin and Brussels, are repeating this mistake.

Suffocating Europe

By: Jörg Bibow

The real irony in this German tragedy is that German beggar-thy-neighbor policies have effectively forced a fiscal union upon Europe. Or, rather, if not a fiscal union, a general default it will be.

Why this crisis will go all the way

By: Wolfgang Münchau

What has happened is that global investors have realised a deep underling truth about our European sovereign debt crisis – that at its core, it is not a sovereign debt crisis at all – but a highly interconnected banking crisis about to blow up. There is a dynamic at work that the macroeconomic data does not convey – and that the political response to the crisis does not address.

What do markets want?

By: Kevin O’Rourke

Markets want debts to be kept under control, but in the long run they also want economic growth and low unemployment. Too much austerity at the wrong time will not make governments more credible, but less so.