Portugal´s rescue

Our neighbour are on  the verge of being rescued. Socrates, resigned PM , has call for it. (http://www.ft.com/cms/s/0/e2916ace-607e-11e0-9fcb-00144feab49a.html#axzz1IZzec400)

The rescue of Greece and Ireland have not improved the performance of these countries nor  others in difficulties. Greece must now pay a 16% for its  10 years treasury bonds.

The rescues have been  a flawed way to protect the assets of euro banks, loaded with sovereign bonds. But this attitude has impeached to remove the bad assets of european banks, which in turn has delayed the last solution of  bank problem.

Three years ago, the solution would have been to emerge bad assets and some hair cut to the creditors. Now, the hair cut will  be much more hard, in spite of which the rescue only translate the problem to the future, and volume.

The Euro and Taylor rule

The Taylor rule (see http://www.stanford.edu/~johntayl/Papers/Discretion.PDF) is a formula to estimate the best interest rate for a central bank. I don´t believe very hard in it. But I think that it is useful in comparing the different cycle of economies members of a monetary union.  If we use the same parameters calculating the optimal interest rate for different countries, the  interpretation of the result can only be straightforward.

Taylor rule  says that the optimal interest rate is a function of the differences between the current growth rate ant the desired one, and between current inflation and the desired inflation.

In the figure, I suppose a optimal GDP growth of 2% for Germany and a 2,5% for Spain. For both an optimal inflation 2%. Dotted line is the actual rate of ECB.

Easy is  to see that the euro has been very pro-cyclical for both countries! but for opposed reasons, indeed: except when the crisis arrived in 2007

The ECB rate has been to high for Germany and too low for Spain before 2006. In 2006, the ECB rte is too low for both countries; after 2007, to high…

(I´m sorry not to be able to get a better image)

More on interest and prices: the coffin of Europe

Trichet is on the verge of rising interest rate, probably in the regukar meeting of April, up to 1,25%. That will be the “coup de grâce” for Spain (and Europe, BTW). Here I plot % annual increase (or decrease) of CPI;  GDP  deflactor and wage. I suggest you concentrate in wage (red line): the adjustment to the 20% of unemployed has been impressive. After annual increase of more than 5%, wage are now 0,4% below the level of one year ago. But that compared to the increase of 3,3% in CPI, shows the huge contraction of real wage. Falling real wage and employment will trigger the fall of consumption and GDP. More unemployment.

Where can you see the risk of inflation when wages really decrease?  I see one risk only: the risk of crumbling. The euro will be the coffin of Europe (And Trichet the grave-digger).

It´s the politic, stupid!

Today we learn by Wolfgang Münchau in the FT:   http://www.ft.com/cms/s/0/6100d1f0-42a8-11e0-8b34-00144feabdc0.html#ixzz1FF9X5HNA

very interesting things about the stress of Germans with the membership of euro:

“It is time to stop pretending that we are about to see a “grand bargain” for the eurozone in March. Last week, the political developments in Germany shifted dramatically in the wrong direction. The Bundesbank, the parliament, the small business community and influential academics have all come out openly against an extension of the various support mechanisms. German society as a whole is in open revolt against the eurozone.

The single most important event was the decision by the three coalition parties in the Bundestag to reject, categorically, bond purchases by the European stability mechanism. The ESM will be the permanent anti-crisis institution from 2013. The Bundesbank came to a similar conclusion in its monthly report. On Thursday, 189 German economists wrote a letter to a newspaper denouncing the ESM, calling for immediate bankruptcy proceedings of insolvent eurozone states. It is no longer just the constitutional court that puts a break on the process.”

So, more and more angry German with their participation in the cost of maintain the Euro´s show; a show that become every day increasingly expensive.

Münchau criticize all the package to save the euro in the name of sovereignty. It is too late to worry about this neglected aspect of the affair, when the euro was launched, ten years ago.

But the sovereignty has much to do with economic result. A counter example is Poland, an EU country that decided rightly not to enter in the euro. Its astonishing result to save Poland of the crisis are compelling: see why in


Poland has not contracted in 2009, thanks to its monetary sovereignty. Probably it has been the country better managed during it, as the

Marcus´graph shows:

Münchau is a fan of the Euro, so he is not suspected of anti-system position. In spite of what, he is sceptical on the ay Germany and France has decided to follow without the rest of members.

Here, his latter words:

“The EU’s crisis resolution strategy is to draw attention away from the underlying causes of the crisis: that you cannot have nationally controlled and undercapitalised banking systems in a monetary union with structural current account imbalances. The difficult job is to translate this technical statement into a language understood by politicians and their constituents, and to do so without lying. This is not a fiscal crisis. It is not a crisis of the south. It is a crisis of the private sector and of undercapitalised banks. It is as much a German crisis as it is a Spanish crisis. This acknowledgement must be the starting point of any effective resolution system. A veto in March is thus a necessary first step in crisis resolution.”

The euro has become a monster that need continuous ad hoc resolution for it doesn´t crumble. This resolutions are destroying the solemn (and successive) Treaties on which the Euro was funded. Don´t worry: there is no easier think in Europe than change  Treaty.

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