Austerity Europe

by Evan Soltas

We hosted our New York Pub Quiz on Wednesday night. Congrats to the winning team, Lower Expectations, who defended their title from last year’s event by answering 53 out of 70 questions correctly, eking out a win over the team Paul Volcker Rules, William Miller Drools by just a single answer. We had a blast producing the event and were honoured to have been joined by former Fed chair Paul Volcker, who co-hosted the economics and history section of the quiz and even submitted a few questions of his own. For more on the night’s activity, you can scroll down through the #FTPubQuiz hashtag on Twitter, and be sure to listen to the vox-pop segment of this week’s Alphachat, in which producer Aimee Keane asked attendees for their views on the Fed and the likelihood of a China crash. First up are the questions alone (for those who want to test themselves), and halfway down begins the same set of questions with the answers provided. ROUND 1 NAME THAT FINANCE MINISTER

They say crises define movements and people. If that’s the case, purveyors of fintech payment solutions could soon be defined as those who stood ready to exploit a Greek national bankruptcy crisis for the benefit of “onboarding” users.

Conventional wisdom holds that it would be an unmitigated disaster for Greece if it left the euro. This is, after all, why the country has continued to cling to the single currency despite the catastrophic decline in employment and output. But what if those costs have been grossly overstated? An intriguing new note from Gabriel Sterne at Oxford Economics argues that, judging by the historical record, things really can’t get that much worse. According to Sterne, staying in the euro promises only years of stagnation and crushing joblessness, while leaving offers a chance, even at this late date, of rapid growth and the end of the depression that began seven years ago. In particular, he argues that leaving the euro would provide a fillip to the private sector’s balance sheet, boost trade competitiveness, and, perhaps most importantly, end the uncertainty over default and devaluation that has been choking off credit and investment.

OK, we’ll bite. The Telegraph’s Jeremy Warner has a column with a headline which tends towards alarmist: Negative interest rates put world on course for biggest mass default in history The text actually says nothing of the sort. Jeremy notes the extent of widespread negative yields for sovereign debt in Europe, and rehearses how this came to be in terms of secular stagnation and a lack of demand. Where some might find fault is the final line: Both Keynsian and monetary economics seem to be in some kind of end game. What comes next is anyone’s guess.

You can sign up to receive the email here. The UK has come under fire from the Obama administration, which has accused it of ‘constant accommodation’ of China, after Britain decided to join a new China-led financial institution that could rival the World Bank.

A standoff continues between Greece and its creditors. Peter Doyle, an economist and former IMF staffer, argues that much more is at stake in the eurozone. _____________________

Always something of a subjective question, Simon Wren-Lewis, economics professor at Oxford, has had a go at putting the recent performance for the UK in context. It is, after all, a mere 98 days to the UK election, and economic managment may feature in the pre-poll debates. Here is a very simple fact. [3] GDP per head (a much better guide to average prosperity than GDP itself) grew at an average rate of less than 1% in the four years from 2010 to 2014. [1] In the previous 13 years (1997 to 2010), growth averaged over 1.5%. So growth in GDP per head was more than 50% higher under Labour than under the Conservatives, even though the biggest recession since the 1930s is included in the Labour period! Which, given that anti-austerity politicking is all the rage now that Syriza has taken power in Greece, is in large part an attempt to reopen questions about the broad effect of reductions in government spending at a time of weak aggregate demand. (Or, so far as Simon is concerned, persuade journalists to challenge Conservative claims about a successful track-record of economic management).

In this guest post, Alex Bellefleur, global macro strategist at Pavilion Global Markets, writes that the Bank of Canada was prudent to loosen monetary policy in response to the decline in oil prices. Last week the Bank of Canada (BOC) surprised markets by cutting interest rates 25 basis points, leaving them at 0.75%. While some argue this move was unnecessary, we are of the view that the cut is needed as a pre-emptive manoeuvre to counter private sector deleveraging.

The Congressional Budget Office has just come out with its latest ten-year projections on spending, revenue, and debt. As has been the case for a while, the boffins estimate that the deficit will continue to shrink for a few years and then gradually widen, eventually raising the government debt to GDP ratio. The actual arguments in the body of the report contradict elements of this forecast, however. It’s quite possible that, for at least a few years before the next recession, the combination of strong growth and previous austerity measures will combine to produce a budget surplus and an associated scarcity of safe assets.

A brief collection of reaction to Sunday’s election in Greece follows. Before we hear from the professional financial crowd, however, a word from Eric LeCompte, executive director of Jubilee USA… This election was a referendum on austerity and debt policies. The people of Greece voted and said no to austerity and yes to renegotiating Greece’s debt. Austerity programs can be likened to trying to help a patient on life support by punching them.

You can sign up for the email here or read it in full below. “The Greek people have given a clear, indisputable mandate for Greece to leave behind austerity,” said Alexis Tsipras in his victory speech.

As ever, George Osborne reeled off lots of lots of numbers to suggest the economy and public finances were extremely healthy. Underneath the boasts, the reality is rather darker, showing serious shortfalls in tax revenues and assumptions of huge austerity still to come. In fact Mr Osborne was only saved from something worse by enormous downward revisions to forecasts of future debt interest. The Office for Budget Responsibility’s document does not help to get to the bottom of things much this time. Hopefully, these nine charts enable you to avoid all the pain of looking at the official documents. It is all you need to understand the new UK forecasts of the economy and public finances. 1. Growth slows quite fast

Peering into the near future, Europe’s largest economy remains central to the direction for Europe as a whole. And, judged by the recent long profile of chancellor Angela Merkel in the New Yorker, there is self-confidence in the Bundestag. Here she is dismissing the Russian president, after a macho incident with a labrador: I understand why he has to do this—to prove he’s a man,” she told a group of reporters. “He’s afraid of his own weakness. Russia has nothing, no successful politics or economy. All they have is this. Political economy is the point, however.

It’s no secret that spending cuts (and tax hikes) have retarded America’s growth for the past four years. But data from the Bureau of Economic Analysis suggests that the era of austerity may finally have ended. The following chart shows the contribution of government and private spending to annual GDP growth, since the start of 2005:

While reading Dan Drezner’s The System Worked, I kept thinking of the well-publicised conversation between Barack Obama and Tim Geithner that took place shortly before Obama’s inauguration as president in January 2009.

Fighting continues on Iraq Syria border || Argentina default threat || Apple settles ebook lawsuit || UK house prices rise 10 per cent || UK consumer price inflation at four year low || Ireland must stick to austerity, says watchdog || BG to sell stake in North Sea gas pipeline ||European stocks up

We detect a theme. It may be that with financial markets becalmed a new subject is needed. Perhaps it reflects the way Piketty has become an instant bookshop-to-shelf classic, but something has investment strategists reaching for insight from an eighth century theologian. “And those people should not be listened to who keep saying the voice of the people is the voice of God, since the riotousness of the crowd is very close to madness.” — Alcuin to Charlemagne, 798 A.D.

Some nice charts courtesy of Credit Suisse on Friday comparing European inflationary trends with those of Japan in the 1990s:

Some expansive credit-related thoughts arrive from Alberto Gallo at RBS, for a quiet May Day when Europe’s capitalists take the day off in honour of its workers. In short, its the safe stuff that may not be safe anymore as/if/when the continent’s economy expands:

Holcim and Lafarge outline cement merger deal || BlackRock positions potential successors to Fink || Dropbox and Square raise new credit facilities || Nigeria almost doubles GDP in recalculation || Former adviser attacks European Commission over austerity || Markets

After a half-century with the FT, Sir Samuel Brittan retired last week, signing off with a valedictory essay and video chat. I was new to journalism when a friend bought for me Against the Flow, a collection of Brittan’s essays published in 2005. My friend thought I might enjoy the book based on an enthusiastic review in The Economist, which proclaimed it “so good that rivals in the field will, like this reviewer, put it down not knowing whether to feel inspiration or despair”.

We’ve featured one study that claimed to find bias in sovereign ratings, written in the measured tones of academia, which was enough to set off some tit-for-tatting between S&P and the authors. Well the members of UniCredit’s economics team have decided to enter the debate, and they have no intention of holding back on “the damaging bias in sovereign ratings”. The low down to follow, but lets skip to the conclusion: In light of our findings, we suggest that credit rating agencies should be stripped of their regulatory powers and these transferred to an international body. Failing that, the ratings agencies should be forced to substantially increase transparency, including publishing a separate breakdown of the objective and subjective components of ratings, the minutes of the rating committees, and the voting records.

Markets: A week that began with a global shift away from risky assets was on track to end with broad equity gains. China’s tightly controlled currency, the renminbi, strengthened against the dollar for a fourth straight session, following its biggest weekly loss in nine years last week. (FT’s Global Markets Overview)

From the introduction to a new IIF paper: The already acute financial pressures appear to have intensified further in recent weeks, with bank deposits falling sharply, the government out of funding and foreign exchange reserves likely to have tanked to as low as $12 billion by late February. The political change in Kiev has increased odds that Ukraine would receive the urgent financial assistance needed soon enough to avert default. With the Russian bailout likely to be put on hold, this assistance should amount to at least $20 billion this year alone. However, this would require the prompt formation of a new government able to undertake the reforms needed to alleviate the acute macroeconomic imbalances and put the economy on sound footing.

Markets: Asian equity markets pulled back in response to more signals that the US economy slowed down last month. US equities were held back from reclaiming record highs after a survey of US homebuilder confidence saw its biggest monthly drop on record, blamed on snowstorms that hit the eastern seaboard. A reading of New York state manufacturing conditions also disappointed. (FT’s Global Markets Overview)

This post is just to flesh out a point in this great piece by John McDermott — so read that first. But we think it’s an important point. An alternative title for this post: What’s under your gilt? After all, it is the debt that has enabled Her Majesty’s government to turn so breezily confident that currency union with an independent Scotland “is not going to happen”, fully seven months before an independence referendum.

Who thinks UK base rates will go higher this year? We ask because Economics Editor Chris Giles made precisely that bold prediction in the FT’s collection of holiday prophesy. Will the Bank of England raise interest rates in 2014? Yes. It is fashionable to think this is an absurd question to which the answer is obviously no. But not for the first time, fashion sucks. The British economy is growing at an annualised rate of more than 3 per cent, unemployment is rapidly falling towards the Bank of England’s 7 per cent threshold when it considers rate rises and inflation has been above the central bank’s 2 per cent target for all of the past four years. The reason the BoE would keep rates on hold at 0.5 per cent amid a fast expansion is a rapid improvement in productivity, allowing recovery to coexist with an absence of inflationary pressure.

As we’ve noted before it’s all feeling a little 1999 out there. Lombard Street ‘s Dario Perkins agrees. He’s just released research entitled “Party like it’s 1999″, in he notes:

David Roche and Bob McKee at Independent Strategy have put out a strongly worded riposte to Larry Summers’ argument that the world may be beset by secular stagnation. From the note, their main points are: