Juncker’s secret letter to Athens (not quite so secret any more)

 

Kathemerini has a scoop this morning, a “secret letter “ sent by Juncker to Greek finance minister Papakonstantinou last Thursday, in which Juncker effectively tells the Greeks that they have to reboot their entire economy. This is what the letter says:

1.       Force wage moderation in the public sector in line with the euro area own inflation target

2.       Government should adopt a new pricing policies, as Greek price get out of line

3.       Restore competitiveness to the Greek economy

4.       Make the statistical services independent

5.       Open the professions, especially those of importance to the Greek economy, such as road transport;

6.       Speed up the adoption of a new tax bill

7.       Increase the tax on liquid fuels, the lowest in the euro area

8.       Revise the 2010 budget

On Monday, Mr Papakonstantinou replied to say he has decided that he would prepare  a supplementary 2010 budget if necessary. The newspaper also remarked that the Greek seems willing to accept the austerity call from Brussels, and in particular that they are “willing to go to a substnatial fiscal adjustment.”

 

Euro rising again, gold at $1200, as market move back into risky assets

Dubai interrupted the budding global bubbles only briefly. Gold is now at $1200, equity markets have been shooting up again overnight, and the euro is at $1.51. The reports that the latest US futures data suggest that the S&P 500 is about to open at a level close to the annual high. Volatility is down, as the Vix index fell 10.6% on Tuesday, another sign that optimism is back, according to the FT. That is optimism by traders incidentally, not by the rest of us.

 

Euro area unemployment up to 10 year peak

Euro area unemployment reach a 10 year peak in October, with a rate of 9.8% on seasonally adjusted basis. The FT writes that the rise in unemployment has been muted to government short-time work sponsoring schemes, and Germany even recorded a small fall in seasonally adjusted  unemployment during October, of 8.1%. And one further statistic. The total number of unemployed in the euro area was 15.6m, the largest total number since statistics began in the 1980s, and an increase of 3m on a year ago.

 

 

Sarkozy revises growth upwards

Sarkozy is boosting with confidence when he declared yesterday that his stimulus programme was a full success . Giving priority to investment rather than consumption in the programme is now paying off. As a consequence France has suffered only the smallest of all recessions. En passant Sarkozy was revising the GDP forecast for 2009 upwards from an official -2.25% to -2% or -2.1% reports Les Echos.

 

Conference board forecasts large output gap to persist

FT Deutschland quotes Bart Van Ark of the Conference Board, who predicts that the output gap is likely to remain large for many year to come, and may still be 3.2% in the OECD countries by 2011. The article concludes that inflationary pressures are likely to remain subdue for many years as well, though it cites some who say that the output gap might be lower, as the crisis may have done structural damage to potential output. (We believe that the notion of an output gap is indeterminable at a time such as this, which is why the Taylor rules offers no reliable guide for central bankers, until our estimates of potential output stabilise, which is unlikely to happen for several years.)

 

The risk of a doube-dip recession in the US

Paul Krugman says he never believed in the prospect of a double dip recession, but he says the probability is rising. The first reason is that the present recovery is due to the stimulus, which is already past its peak in terms of its effect on growth. And the manufacturing recovery is mostly an inventory story, which is also about to end shortly. Since private-sector demand remains down, the chances of a double dipper are rising.  

 

Germany considers half-hearted action against credit crunch

When faced with a credit crunch, you can either force the banks to recapitalise, or can try to fix some of the symptoms. Today, Merkel is going to meet with industrialists who complain about credit shortages, and they are most likely to focus on some pseudo-schemes to help some lobbyists without solving the problem. Under discussion, according to Frankfurter Allgemeine, is a giant SIV-type structure, where the state-owned KfW bank provides guarantees to a credit portfolio of banks, which cannot be trade likely asset-backed securities, and thus have to remain on the banks’ balance sheet, but at a reduced valuation – due to the guarantee. In other words, the scheme reduces the riskiness of the assets – and thus gives banks more room for maneuver to make new loans.

 

Munchau on a V-shaped recovery

In his column in FT Deutschland, Wolfgang Munchau writes that a V-shaped recovery is very unlikely to occur in Germany for two reasons. The first is the real effective exchange rate that has been appreciating at an extreme pace, a trend that get worse as the US dollar weakens. The second is the continued under-capitalisation of German banks, which puts the country into a position of a permanent credit crunch. The optimal policy response in such a situation is a grand bank recapitalisation scheme – based on bank closures, nationalisation, forced mergers – and a much more aggressive exchange rate policy, especially in respect of countries like China that have recently devalued against the euro.

 

 

Tito Boeri on the Italian budget

Writing in Lavoce, Tito Boeri gave a very critical assessment of Giulio Tremonti’s 2010 budget. There is are €8bn in funds, to be earmarked for tax cuts and spending – a line item known in Italy as manovra – so it is not a consolidating budget. It is not a budget that contains new ideas, it is not even a conservative budget, as it opens several new spending taps that might be difficult to close later. But worst of all, this is once again a budget that fails to address the issue of poverty in Italy, a country in which 3m people are considered to fall below the poverty line. Boeri proposes a number of ideas to help fight poverty.

 

Petis on competitive devaluations

Michael Petis, writing in the FT, warns about the effects of competitive devaluations on global trade, after last week’s devaluation by Vietnam, and in view of China’s continued dollar peg. Once again it seems we are going to make the same mistake. “Countries that can expand their share of global demand by competitive devaluations are seeking to do so. Countries that cannot will almost certainly consider more direct forms of intervention. We should worry. Without serious global co-ordination, in which the US and Europe forswear protectionism in exchange for significant appreciation of undervalued currencies, rising tariffs appear inevitable.”

 

The end of Buiter

So there goes another blog. Willem Buiter is about join Citigroup as chief economist, and will thus stop blogging and start writing columns. ”Academics have no duty other than to state the truth as they see it - to ’speak truth to power’.  This gives them the ability to be undiplomatic, blunt, tactless and outspoken in ways that are unacceptable in the wider world - the world of grown-ups.” 

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