Europe Defended Against Krugman

by Dollars and Sense

In a New York Times op-ed Monday, Paul Krugman criticized European governments for under-reacting to the financial crisis:

The clear and present danger to Europe right now comes from a different direction—the continent’s failure to respond effectively to the financial crisis.

Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.

On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing.

The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.

A strong rebuttal appears on the Models & Agents blog (also posted on RGE Monitor). Here's an excerpt:

Krugman’s latest “prey” are European policymakers, in an op-ed piece that is so shallow and uncorroborated in its assertions, and so one-size-fits-all in its prescriptions, that it might have well been written by an American freshman student of European studies in a rush to finish his midterm exam.

Complacent? The ECB was the first to act back in August 2007 upon the first signs of funding pressures and liquidity hoarding by banks. It did so by providing banks with ample amounts of liquidity at longer maturities. A year later, when the (real) fireworks began, the ECB expanded its support measures by providing unlimited liquidity with maturities of up to six months, and by expanding considerably the list of eligible assets that banks could pledge as collateral.

As a result of these measures, the ECB’s balance sheet increased by 600 billion euros compared to its pre-crisis level. This is about 6% of eurozone GDP, which, actually, is almost the same as the Fed’s own balance-sheet expansion in GDP terms! Critically, Trichet has by no means signaled the end here. Au contraire!

“Shied away from any strong measures to unfreeze credit markets”? Given the above, I take it that by “strong measures” Krugman refers to the likes of the TALF or the MBS purchase program—i.e. measures taken by the Fed to bypass the banking system and support targeted dysfunctional credit markets directly (e.g. housing or credit card loans, auto loans, etc).

The ECB has yet to go that far and for a good reason. Bank-based lending is far more predominant in Europe than in the US, where capital markets play a substantial role in allocating credit. Addressing any dysfunctions in the banking sector in order to jumpstart bank lending is therefore of utmost importance in Europe, with TALF-like measures only secondary.

In fact, I would go as far as to suggest that restoring bank health is as important in the US (see here why) and any thought that the TALF could help revive credit by bypassing the US banking system is wishful thinking.

Read the whole piece here.

Labels: Europe, european central bank, financial crisis bailout, Paul Krugman

 

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3/18/2009 11:13:00 AM 0 comments

 

Eastern Europe's Economies Tanking

by Dollars and Sense

From RGE Monitor, Nouriel Roubini's outfit. Who knew that the Baltic countries have been running current account deficits much larger (relative to GDP) than the United States?

Eastern European Tinderbox: How Explosive Could It Get?

The Central and Eastern Europe (CEE) region is the sick man of emerging markets. While the global crisis means few, if any, bright spots worldwide, the situation in the CEE area is particularly bleak. After almost a decade of outpacing worldwide growth, the region looks set to contract in 2009, with almost every country either in or on the verge of recession. The once high-flying Baltics (Estonia, Latvia, Lithuania) look headed for double-digit contractions, while countries relatively less affected by the crisis (i.e. Czech Republic, Slovakia and Slovenia) will have a hard time posting even positive growth. Meanwhile, Hungary and Latvia’s economies already deteriorated to the point where IMF help was needed late last year.

The CEE’s ill health is primarily driven by two factors—collapsing exports and the drying-up of capital inflows. Exports were key to the region’s economic success, accounting for a significant 80-90% of GDP in the Czech Republic, Hungary and Slovakia. By far the biggest market for CEE goods is the Eurozone, which is now in recession. Meanwhile, the global credit crunch has dried up capital inflows to the region. An easy flow of credit fueled Eastern Europe’s boom in recent years, but the good times are gone. According to the Institute of International Finance, net private capital flows to Emerging Europe are projected to fall from an estimated $254 billion in 2008 to $30 billion in 2009. Whether or not this is formally considered a ‘sudden stop’ of capital, it will necessitate a very painful adjustment process.

Classic Emerging Markets Crisis In The Works?

What is especially worrisome is that the days of easy credit flows were accompanied by rising external imbalances that rival or even exceed the build-up of imbalances in pre-crisis Asia—e.g. current account deficits in Southeast Asia from 1995-97 fell within the 3.0-8.5% of GDP range, while those in CEE were in the double-digits in Romania, Bulgaria and the Baltics in 2008. As examined in a recent RGE analysis piece, the vulnerabilities in many CEE countries—high foreign currency borrowing, hefty levels of external debt and massive current-account deficits—suggest the classic makings of a capital account crisis a la Asia in the late 1990s.

Read the whole piece here.

Labels: Eastern Europe, economic crisis, Europe, Nouriel Roubini

 

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2/25/2009 10:24:00 AM 0 comments

 

The Whole World Is Rioting--Why Aren't We?

by Dollars and Sense

A nice piece by Joshua Holland, economics editor over at AlterNet, and sometime D&S author. Hat-tip to D&S collective member Arpita Banerjee.

The Whole World Is Rioting as the Economic Crisis Worsens—Why Aren't We?

Americans are rightfully angry about the economic decline, but with a few small exceptions, quietly so. Why? It depends on whom you ask.

Explosive anger is spilling out onto the streets of Europe. The meltdown of the global economy is igniting massive social unrest in a region that has long been a symbol of political stability and social cohesion.

It's not a new trend: A wave of upheaval is spreading from the poorer countries on the periphery of the global economy to the prosperous core.

Over the past few years, a series of riots spread across what is patronizingly known as the Third World. Furious mobs have raged against skyrocketing food and energy prices, stagnating wages and unemployment in India, Senegal, Yemen, Indonesia, Morocco, Cameroon, Brazil, Panama, the Philippines, Egypt, Mexico and elsewhere.

For the most part, those living in wealthier countries took little notice. But now, with the global economy crashing down around us, people in even the wealthiest nations are mad as hell and reacting violently to what they view as an inadequate response to their tumbling economies.

Read the rest of the article.

Labels: Europe, financial crisis, recession, rioting

 

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2/04/2009 11:40:00 AM 1 comments