EUCOM Economic Analysis - Part I

[davidbfpo]

An intriguing Kings of War blog post by David Betz, albeit with a strange opening part, OK it is the season of goodwill, but Yoko Ono. Anyway I digress.

This part struck me, although citing Anglo-French military co-operation we would be foolish to think that is the only instance:

Case in point: today’s intervention by the head of France’s Central Bank to downgrade UK first. Can someone remind me why it is a good idea to share major defence assets with people whose first instinct when crisis hits is to cry ‘shoot him first!’?

There are other strategic points raised, notably the decline of (Western) Europe, the rise of China (big assumption author notes) and whether the BRIC are competitors or partners.

Link:http://kingsofwar.org.uk/2011/12/hap...s-war-is-over/

[Fuchs]

There's a difference between shareholders of a stupid corporation being on the hook while hoping that they get their returns and taxpayers paying and seeing how towns in another region rebuild themselves while theirs decay.

[Surferbeetle]

Draghi warns on eurozone break-up, By Ralph Atkins and Lionel Barber in Frankfurt, December 18, 2011 10:44 pm, Financial Times, www.ft.com

Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis.

Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets.

EU demands £25bn lifeline from the UK, By Tim Ross and Bruno Waterfield9:51PM GMT 18 Dec 2011, The Daily Telegraph

European finance ministers will aim to agree a new €200 billion (£167.7 billion) loan to the International Monetary Fund as part of a deal to save the single currency.

Three quarters of the money is expected to come from eurozone members, but Britain will also be asked to provide funds.

Figures suggest European Union officials expect British taxpayers to be the second largest contributor. The Prime Minister has repeatedly promised not to provide any extra funding for the IMF for the specific purpose of saving the euro and Britain is already liable for £12 billion of loans and guarantees to Ireland, Greece and Portugal.

Financial tricks to get out of debt, By James Mackintosh, Last updated: December 18, 2011 3:39 am, Financial Times, www.ft.com

Something funny has been going on in Greek debt markets. Even as the yields available on bonds maturing in just a few months have soared to silly levels, the government has been able to raise money at perfectly reasonable rates.

Last Tuesday, for example, Greece issued a bill – a short-dated debt instrument – that matures in June. It raised €3.7bn ($4.8bn), paying 4.95 per cent, annualised. By the standards of ordinary times this would be a disaster; Germany is paying zero interest on similar bills.

What is going on in Greece is a reworked version of the old principle of printing money to pay government debt (“monetising” it), this time via the banks. Such tricks are likely to become increasingly common as governments grapple with horrific debts.

Crisis fears fuel debate on capital controls, By Gillian Tett, December 15, 2011 7:53 pm, Financial Times, www.ft.com

Is the world stealthily sliding towards capital controls? That is the question which is starting to hover, half-stated, on the edge of policy debates, as financial anxiety spreads across Europe.

But now, a new salvo has been fired into this debate from an unexpected source: the Bank of England. Earlier this week, the Bank released a paper on global capital flows written by three of its economists, William Speller, Gregory Thwaites and Michelle Wright, which draws heavily on earlier research by Andy Haldane, the Bank’s head of financial stability.

Financial Stability Paper No. 12 – December 2011, The future of international capital flows, William Speller, Gregory Thwaites and Michelle Wright, Bank of England

The experience of the past decade has demonstrated the challenges that international capital flows can pose for financial stability. The build-up of global imbalances (large net capital flows) was one of the preconditions for the recent financial crisis. Increased interconnectedness between countries’ financial sectors (large gross capital flows) created channels through which the initial shock could spread around the world. In these respects, the scale and volatility of international capital flows were crucial determinants of the depth and breadth of the crisis which followed Lehman Brothers’ demise.

These dramatic events demonstrate that it is incumbent upon policymakers to develop strategies to deal with these risks in the future. But however great the challenges policymakers may have faced in the most recent episode, these are set to become even greater in the future as large emerging market economies (EMEs) increasingly integrate into the global financial system.

The key challenge for policymakers is to mitigate the potential financial stability risks associated with much larger future international capital flows while simultaneously preserving the key benefits that financial globalisation has to offer. The increase in capital flows will have implications for many policy issues, including, but not limited to: the elimination of data gaps; policies which limit the build-up of balance sheet mismatches; the Basel III international capital and liquidity standards; macroprudential policies; the use of capital controls; and reforms to the international monetary and financial system.

[Surferbeetle]

Hal S. Scott

Hal S. Scott is the Nomura Professor and Director of the Program on International Financial Systems (PIFS) at Harvard Law School, where he has taught since 1975. He teaches courses on Capital Markets Regulation, International Finance, and Securities Regulation. He has a B.A. from Princeton University (Woodrow Wilson School, 1965), an M.A. from Stanford University in Political Science (1967), and a J.D. from the University of Chicago Law School (1972). In 1974-1975, before joining Harvard, he clerked for Justice Byron White.

When the Euro Falls Apart, Hal S. Scott, Harvard Law School, International Finance 1:2; 1988 pp. 207-228, http://www.law.harvard.edu/programs/...ch/15scott.pdf

The paper then focuses primarily on two significant problems related to a break-up. First, a country seeking to leave EMU, particularly after the transition period, may have difficulty re-establishing its national currency unilaterally, as its economy is likely to have become thoroughly 'euroized'. Second, any break-up accompanied by re-denomination of existing euro obligations, including government bonds, will create great legal uncertainty and costly litigation. There are no continuity of contract rules for exiting EMU equivalent to those for entering. Both problems require cooperative and deliberative solutions and will be difficult and costly to solve.