Sorry, no EMF – can’t be done

 

So here they make the biggest governance proposal in the history of the euro, and it looks like they messed it up. A treaty change is needed to implement Schauble’s proposal, as Merkel now admits and the French also think it is not realistic.  Schauble’s big proposal is in the process of being relegated as a long term goal. The FT quotes Angela Merkel as saying that she supports the plan, especially the independence from the IMF, but she does not think it is realistic right now. The FT quoted Merkel as saying she thought the plan was “interesting”. It is obviously not her plan.

Jurgen Stark wrote in Handelsblatt that an EMF violated the existing treaties and would undermine the public’s trust in the euro. What was needed was a stricter application of the budget rules. The ECB said Mr Stark’s views did not represent those of the ECB, but were personal.

The FT has an editorial which condemns the EMF plan as addressing the wrong issue. “Europe is more in need of a system to press surplus countries to consume than it is of further punishments for its already pummelled debtors. One reason to have an EMF would be to do this: to harass the overprudent as well as the prodigal so that deleveraging does not mean depression. But that is not what Mr Schäuble has in mind.”

 

The case for an EMF

Writing in the FT Giancarlo Corsetti and Harold James make the case for a European Moneatary Fund. They write that the discussion goes back to the 1970s, a time when the EU was subject to signficant market instability. The say the IMF is not the right institution, as it would send the wrong signals, and as it might not act fast enough. “ In the long run, Europe needs something like an EMF, through which support operations can be calmly negotiated without exciting political passions. Designing such an institution may take some time, but it would be an important complement to existing European institutions, and even perhaps a complement to the IMF. In the short run, Europe may have to make do with the IMF.”

 

<a name=" EuroIntelligence Headline2"></a>Wilder on competitive devaluation

Rebecca Wilder (aka Paul Krugman) is worried about competitive devaluation in the euro area. “The battle for exports has begun. Compared to the same period in 2008, Q1-Q3 2009 annual hourly labor costs growth are down 4.9% in Lithuania, 0.8% in the U.K., and 0.5% in Estonia. In fact, every country across the 26 countries listed except Belgium, Germany, Greece, and Spain, saw the rate of hourly wage growth decrease since 2008. The currency is pegged, so the only mechanism to increase external competitiveness is through price (wages) declines. To be sure, this growth model cannot work for the Eurozone as a whole.”

Krugman made a comparison with Andrew Mellon: “It’s the euro version of Andrew Mellon: liquidate Latvia, liquidate Greece, liquidate Spain, purge the rottenness ….”

 

 

 

Austria’s consolidation targets for 2011

The Austrian government is set to enact €1.7bn in expenditure cuts and €1.7bn in tax increases (of which €1.1bn will remain at the federal level)  on to reach its deficit target for 2011, Der Standard reports. The government needs to raise €2.8bn to reduce the deficit from currently 4.7%of GDP to 4%.  The plans, which are to be agreed upon by the cabinet today, also include  expenditure cuts of 2.6% for pensions and social security and 3.5% budget cuts for all departments. On the revenue side, the discussion is still open and includes bank charges, higher taxes on foundations, carbon taxes and VAT.

 

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A financial conditions index

James Hamilton has an interesting article about a new financial conditions index, worked out by a group of five economists from the private and academic sectors, which purports to be a leading indicator of future GDP growth. While it is well know that financial indicators emit important signals about the real economy, there are tons of technical difficulties in producing a composite index, in this case, including 44 time series. Hamilton describes the econometric details in detail. We are reproducing the index here:

 

It shows a renewed deterioration, despite the fact that other financial indicators, such as the steep yield curve, low TED spreads and booming stock markets would normally point to a recovery.  

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