Soros on the Euro Crisis

An interesting speech by George Soros on the euro crisis and the financial crisis. While not endorsing all of his points, it is worth a read.

Doom and Gloom

The news remains bad.  A NY Times article reports that the Greek government may not have enough revenues to pay its bills, such as paying employees, as early as July. The steep recession is reducing government revenues. Another article reports that Spain may need help soon because the risk premium on their bonds is becoming too high. The G-7 are holding meetings on the crisis in Europe and maybe something will come out of that. (Article here). 

A column by Martin Wolf is entitled, "Panic Has Become All Too Rational." He notes a lot of reasons to be gloomy about he world economy.  He describes the West as in a contained depression. Deflationary forces are at work as households are reducing debt levels by spending less and savng more. Government policies have prevented it from becoming a full-fledged depression, but austerity is altering that. The scariest comment he makes is that he used to wonder how the 1930s could have happened. Now he understands. Clearly, Wolf thinks it could happen again.

Air Quality Monitoring in Beijing

Having lived in Pasadena, California for four years, I know something about polluted air.  During a visit to Beijing with a group of students. it was clear (pun intended) that Beijing's was at a whole other level. The best description I heard from someone who lived there was "apocalyptic." The Asia Pacific edition of the NY Times has an article on the Chinese government wanting embassies to stop monitoring and tweeting on the air quality in Beijing. The picture with the article is of the Beijing I saw while there in March.  I was told by an American living in Beijing that the readings on the meters are often at the maximum--the readings are off the chart.  China's policy appears to be concentrate on economic growth and then clean up. Come to think about it, that is what most of the industrial countries today did.

Is Europe Lurching Toward a United States of Europe?

Being in Germany and reading a lot on the euro crisis, I wonder if it is similar to what it would have been like in the months leading up to the Constittutional Convention that generated the U.S. Constitution in 1787.  The loose confederation of states was perceived as not working well. The men at the convention tried to hammer out a new government that would provide more integration among the states and establish a federal system with checks and balances, powers retained by states, and a federal government above all.

Each day here new articles appear that suggest further integration, then counter views, and then another step towards further integration.  Today is an example. According to an article in today's NY Times,  Germany is signalling some willingness to pooling of debt but not eurobonds. (Article is here). An article in Financial Times writes of Germany banks oppositon to some forms of a stronger banking union. The European Central Bank meets Wednesday and some speculate it may try to do more because Europeans are getting very nervous about the euro crisis. (Article is here.)

A Financial Times op-ed argues that Europe needs a Lehman moment and a Greek exit could provide that. A former head of UK Investments with Lehman Brothers, Michael Tory, writes that the American public suffered from bailout fatigue after bailouts to Fannie Mae, Freddie Mac and Bears Stearns.   Attempts to stop contagion bank by bank wasn't working and a recapitalization of the banking system was needed. There was just no political will for that action.  The Lehman bankruptcy changed things. Quickly action was taken as Ben Bernanke and Treasury Secretary, Hank Paulsen, scared Congressional leaders into action. TARP was the end result.  Tory argues a Greek exit could provide the same stimulus to action and force European leaders to take action. Tory writes, "They would face a very clear choice: unite immediately behind a comprehensive fix to secure the countries next in line (Spain, Portugal, Ireland etc) or watch the entire eurozone project disintegrate."

One part of the Lehman story Tory leaves out.  The American public did not like TARP. This is true for those on the left and the right.  Republicans who voted for TARP faced Tea Party candidates in primaries in the 2010 elections and most of them lost to the Tea Party candidates.  The politicians may have done the right thing, but they paid a price for doing so.  Might some European politicians take that as a lesson from the American experience?

Spain Calls for Centralized Control of National Budgets

Spain has called for centralized control of national budgets in the euro zone. Clearly, this is a move toward more fiscal coordination or even control by Brussels. An article in today's NY Times suggests the euro zone is lurching towards a crossroads--either it will move towards more centralization of fiscal policy or the euro will fall apart. There are renewed calls for creation of a Eurobond, which Germany still rejects.  Germany has called for increasing the powers of the European Commission in Brussels.  Ms Merkel's plans are longer term, requiring treaty changes.  Spain doesn't have that much time. Throughout the "Greek crisis" many have noted that the real concern isn't Greece but Spain. The latter is a much larger economy and any bailout at a scale large enough to be effective will be very expensive.

Not All the Employment News is Bad

The most recent job numbers was disappointing and growth remains anemic. However, there is some good news in the economy, especially for the Midwest. A report on the resurgence of American manufacturing shows that jobs in manufacturing have been growing. The report also mentions some of the top jobs in terms of new hiring and a likely replacement rate for the decade.  Exports tend to be fueling much of the increase.  Tyler Cowen has a piece in The American Interest in which he discusses the implications of an export-oreiented America.  Until recently, the U.S. has been the leading exporter in the world. We often forget that for two reasons--(1) we often ran trade deficits, i.e., we exported a lot but imported more, and (2) exports are not large relative to GDP. But manufacturing has also changed. The new hires have to be more skilled some robotics do most of the assembly work.  The new hires have to be skilled to work with the equipment.  Manufacturing output is increasing much faster than manufacturing employment. This trend is unlikely to change.

In the U.S. in recent decades, the gap between earnings of college graduates and high school graduates as increased.  America is increasingly a country specializing in human capital and humans working with computer-based capital. But college degrees are not needed for all good jobs.  Instead, skills as machinists, welders, and similar trades can provide good jobs as well. Skills are needed in today's marketplace. One question is: Does our education system provide learning opportunities for skills as well as for college preparation?

Is Germany Ready for More Integration?

An article in yesterday's Financial Times states that there are substancial discussions going on behind the scenes in Germany regarding further integration.  The official position of Germany fails to indicate that because Germany is concerned that comments might negatively influence some important elections coming up--the Irish referendum, elections in Greece, and parliamentary elections in France.  Further, there is always a concern of spooking financial markets.

According to the article, there is a broad consensus among the two major parties and the Green Party that greater fiscal integration is needed. It quotes Joschka Fischer, former foreign minister and member of the Green Party, “We are now very close to break-up,” he said. “Either we move ahead very fast, or we will go back to disintegrating. Will we share our wealth? Will we integrate our debt? Will we transfer our power to common institutions?”

Presumably, Germany is willing to put all of these on the negotiating table, but further fiscal integration also has to be on the table. The author also cites a recent Pew Global Attitudes Poll that shows a majority of Germans favor more integration, that is not the case in France, Italy or Greece.

This is not the impression one gets from most news stories and op-ed pieces.  The poll also found Chancellor Merkel the most respected leader in most countries--Greece excepted--which is inconsistent with the reporting that Merkel is isolated from the rest of the leaders.