Waiting in Vain for the Quick Fix

by Jeffrey Sachs

Huffington Post
August 6, 2012

Investors are awaiting the miraculous delivery from crisis by the ECB and the Fed, but they are waiting in vain. The economic problems in the U.S. and Eurozone are mostly structural, not monetary. Unfortunately ideologues and politicians on both sides of the spectrum are interested in quick fixes rather than the real groundwork of economic progress.

Consider the new U.S. unemployment announcement. If you are a college graduate, there is no employment crisis. 72.7 percent of the college-educated population age-25 and over is working. The unemployment rate is 4.1 percent. Incomes are good.

If you have less than a high-school diploma, however, you are barely scrapping by. Only 40.4 percent of those without a high-school diploma have a job. Their unemployment rate is 12.7 percent. Incomes are too low to make ends meet.

There are two Americas: the college-educated crowd that may have taken a hit in their retirement accounts, but who are generally doing well. Then there are the rest, around 60 percent of the population, who are increasingly dropping out of the middle class. Nearly one-half of American households are now classified as low-income, within twice the poverty line.

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How the ECB Plans to Use Its Bazooka

Spiegel
August 6, 2012

Until recently, Mario Draghi was regarded as a man who understood the markets. The head of the European Central Bank (ECB) worked at investment bank Goldman Sachs for years, and he had studied under such renowned economists as Paul Samuelson and Franco Modigliani. At receptions in Frankfurt, the German banking capital, the elegant Italian was as adept at discussing the latest accounting guidelines as he was at talking about golf handicaps. He was known in the financial world as "Super Mario."

That reputation has been tarnished since last week. Shortly after Draghi began a highly anticipated press conference last Thursday, following a meeting of the ECB Governing Council, stock prices plunged and there was talk of "frustration," "irritation" and "cold showers" in the world's financial centers. A broker on New York's Wall Street railed that the ECB chief had treated investors like a bunch of "idiots."

In fact, Draghi had done the worst thing a central banker can do to traders: He had disappointed their expectations. Stock and bond prices had been going up for a week after Draghi had suggested, at a conference in London, that the ECB would soon be buying up Southern European sovereign bonds on a large scale once again.

But when Draghi appeared before journalists in Frankfurt last Thursday, there was no talk of quick purchases, but rather of "conditions" for the debtor countries. The central bank chief mentioned various "options" that could be extensively reviewed by commissions and possibly implemented at some point -- "could" being the operative word, rather than "must." Instead of "Big Bertha," as Draghi otherwise likes to call his rescue programs, this time he was offering the markets something with a somewhat smaller caliber.

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Draghi and friends just want your money

by Bill Gross

Financial Times
August 6, 2012

Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money!

They’ve wanted it for years now but you are resisting by holding on to it or investing it at negative interest rates in Switzerland, Germany and a growing number of other countries considered to be European Union havens. They want you to be less frugal and more risk-seeking. They want your money as a substitute for theirs in Spain, Italy and, of course, Greece, but they don’t mention that any more. The example would be too off-putting. “Investors,” they plead, “show us your money!”

The ultimate goal of monetary and fiscal policy in the EU is to re-engage the private sector. The EU needs the private sector as a willing (but not necessarily equal) partner in funding its economy. This often gets lost in the noisy details of all too frequent promises such as the one to defend the euro made by Mr Draghi, European Central Bank president.

Investors get distracted by the hundreds of billions of euros in sovereign policy checks, promises and IOUs that make for media headlines but forget it’s their trillions that are the real objective. Even Mr Hollande in left-leaning France recognises that the private sector is critical for future growth in the EU. He knows that, without its partnership, a one-sided funding via state-controlled banks and central banks will inevitably lead to high debt-to-GDP ratios, rating service downgrades and a downhill vicious cycle of recession.

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Europe’s Crisis of Tongues

by Edoardo Campanella

Project Syndicate
August 6, 2012

When history repeats itself, it is rarely gentle. Today, as in the era of colonialism, tens of thousands of ambitious young people from Europe’s periphery are escaping the old continent in search of better opportunities in America, Africa, and Asia. But, unlike in the colonial era, the human outflows are not compensated by inflows of natural resources or precious metals. European emigrants used to contribute to the glory of their homelands; now, their exodus is contributing to Europe’s decline.

In an extreme attempt to address his country’s job shortage, Portuguese Prime Minister Pedro Passos Coelho recently urged his country’s young unemployed to emigrate to Portugal’s former colonies, such as Brazil or Angola. Last year, for the first time since 1990, Spain was a net exporter of people, with 31% of emigrants going to South America. Even in countries with no imperial past, but with an enduring migratory tradition, like Ireland, the brain drain to Australia and North America is accelerating.

The severity of Europe’s economic downturn, deficiencies in the euro’s design, and ill-conceived fiscal-austerity measures are all fueling the exodus. But the main driver is culture, not economics. Europe’s high degree of linguistic fragmentation does not allow the eurozone to absorb a self-inflicted crisis, so people move out of the currency area rather than within it.

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'Greece Should Leave': Patience with Athens Nearing an End in Germany

Spiegel
August 6, 2012

The good news is that Greece is not going to go bankrupt -- at least not this month. Despite Athens facing a €3.2 billion ($3.96 billion) bond repayment in August and rapidly running out of cash, the European Central Bank (ECB) last week rubber-stamped a request from the Bank of Greece, allowing it to boost the amount of money it can loan to the Greek government. The move should keep the country's head above water at least until September.

After that, though, all bets are off. The country's international creditors, represented by the troika of the European Commission, the ECB and the International Monetary Fund, left Athens on Sunday, but not before getting the government of Prime Minister Antonis Samaras to agree to push forward far-reaching reforms and further savings measures -- all of which promise to be difficult to push through in the face of increasing weariness on the part of Greek voters.

Furthermore, there are new indications that the euro zone's biggest paymaster, Germany, is rapidly losing its appetite for footing the bill and that Chancellor Angela Merkel will have difficulties keeping her coalition together in the face of difficult currency challenges to come.

"According to my forecasts, Greece should leave the euro zone by the end of the year," said Bavarian Finance Minister Markus Söder, a member of the Christian Social Union (CSU), the Bavarian sister party to Merkel's Christian Democratic Union (CDU) and a crucial part of her governing coalition.

That, though, wasn't all. "Each new aid measure, every easing of the demands, would be the wrong path," Söder said in comments to the Sunday tabloid Bild am Sonntag. He added that "Athens must become an example demonstrating that this euro zone also has teeth." Just in case his message hadn't quite gotten through, he added: "At some point, everyone has to move away from mommy. For Greece, that time has come."

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Statement by the European Commission, the ECB and the IMF on Greece

International Monetary Fund
Press Release No. 12/290
August 5, 2012

Staff teams from the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) concluded today a visit to Greece to discuss with the new authorities the economic policies needed to restore growth and competitiveness, secure a sustainable fiscal position, and underpin confidence in the financial system in line with the objectives of the economic adjustment program that is being supported by the three institutions. The discussions on the implementation of the program were productive and there was overall agreement on the need to strengthen policy efforts to achieve its objectives.

The Greek authorities are committed to proceeding with determination in their work over the next month, and the EC/ECB/IMF staff teams expect to return to Athens in early September to continue the discussions.

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Mario Draghi Cannot Save the Euro

by Simon Johnson

Bloomberg
August 6, 2012

European Central Bank President Mario Draghi has been making pronouncements that many have interpreted as positive for the future of the euro.

I think his words mean things are going to get ugly.

On July 26, Draghi said his institution would do “whatever it takes” to preserve the euro, and reinforced this with a nice turn of phrase: “Believe me, this will be enough.” He followed this up last week with a more official statement that the ECB “may undertake outright open market operations of a size adequate to reach its objective,” signaling that the bank is preparing to buy more bonds to lower the borrowing costs of struggling governments such as Italy and Spain.

Optimists hope that Draghi is trying to put an end to the policy uncertainty that has characterized the euro crisis. In the run-up to 2008, many investors thought there were big potential bailouts implicit in the structure of the currency union -- a view reflected in the nearly identical yields on German, Greek, Italian and Spanish bonds. This confidence collapsed as events in Greece, Ireland and Portugal demonstrated that the ECB would not support all government debt irrespective of the circumstances. Now, the logic goes, if Draghi could just restore the promise of unconditional and unlimited “support,” he would put the genie back in the bottle.

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Wall St banks prepare for euro break-up

Financial Times
August 5, 2012

Wall Street banks are increasingly telling counterparties and borrowers to restructure contracts or find another bank as they prepare for the potential exit of a country from the eurozone.

Using hedges, such as credit default swaps, US banks have reduced their net exposure to troubled eurozone countries. But they are also engaged in more work behind the scenes to ensure that if a country leaves the eurozone they will not have to receive payments in a devalued drachma or peseta.

The eurozone continues to be the predominant concern of US bank executives, ahead of the faltering US recovery. Last summer the worsening of the eurozone crisis produced wild swings in US banks’ stock prices and led the Securities and Exchange Commission to demand they provide more disclosure of assets in Spain, Greece, Italy, Ireland and Portugal.

An analysis of regulatory filings since then shows JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs have generally trimmed their exposure but the picture is not uniform.

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A Dose of Dr. Draghi's 'Whatever It Takes'

by Simon Nixon

Wall Street Journal
August 5, 2012

Going anywhere nice this summer? I asked the chief executive of one of the U.K.'s biggest banks last week. "Not sure yet," he said. "I've got a feeling something nasty could happen at any moment in the euro zone, so I am playing it by ear."

Just a week earlier, Spanish and Italian bond yields has soared well above 7%, raising the risk both countries could require some form of bailout that the euro zone seemed financially and politically unable to provide. The situation became so serious that only the intervention of European Central Bank President Mario Draghi, who promised to do "whatever it takes" to save the single currency, prevented a wider meltdown. But the markets were still skeptical Mr. Draghi could deliver on his promise: at a news conference on Thursday, he may have said enough to ensure Europe's bankers can head to the beaches this month. But the risk of something nasty happening hasn't gone away.

Optimism in the euro zone's ability to dig its way out of its crisis has eroded fast since the start of the year. Back in December, it seemed that euro-zone policy makers had stepped back from the abyss and were genuinely committed to do what was necessary to save their currency. Greece was to be given a new bailout, removing the immediate threat of a euro break-up; Spain elected a new government with a mandate to overhaul the economy; and technocratic governments were installed in Rome and Athens, raising hopes that crisis countries were serious about cutting their debts and restoring competitiveness. Above all, the European Central Bank's promise of cheap funding for the euro zone's banks removed the imminent risk of a systemic banking collapse.

But as so often during the global financial crisis, central bankers had bought time and politicians had failed to use it.

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Greek bank head sent savings abroad

Financial Times
August 5, 2012

A political row has erupted in Athens after the former head of a big Greek state bank admitted to transferring €8m of personal savings abroad to buy a London property months before his Agricultural Bank headed towards insolvency.

Theodoros Pantalakis, former chief executive of Greece’s Agricultural Bank (ATEbank), strongly denied any wrongdoing, telling Realnews, a Greek website, that he had declared the transaction to authorities in 2011 and had paid tax on the amount transferred.

“I’m on holiday and I don’t plan to say anything more until I come back to Athens,” Mr Pantalakis told the FT from his villa on the Aegean island of Paros. He is expected to testify on his three years at the helm of ATEbank before a parliamentary committee at the end of August, said a person with knowledge of the dispute.

Dozens of wealthy Greeks, among them politicians, bankers and shipowners, have bought high-end properties in London in the past three years seeking shelter from the country’s deepening debt crisis, which has left millions of ordinary Greeks squeezed by tough austerity measures.

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Time to bet on Greek long-term growth

by John Dizard

Financial Times
August 5, 2012

The consensus path for the institutional investor these days is to go to a combination of cash and very expensive (ie low yield) investment-grade bonds.

I understand the whole liquidity preference thing, but steady, long-term growth with low volatility just isn’t on offer at a reasonable price. Too many ageing pensioners, life insurance beneficiaries, and other savers are around, attacking you with their canes and walkers so as to grab away even 4 and 5 per cent returns.

And while most of you think that there will be some sort of a renewed world recession or a further decline in risk asset values, you (and I) don’t know when that will happen. After it does, there is also likely to be a recovery of some sort in economic growth and in at least some asset prices, but that timing is even less certain.

So alongside those Canadian dollars, Swiss franc notes and gold bars piling up in your version of Scrooge McDuck’s Money Bin, you should find a way to buy long-dated, out-of-the-money, cheap calls on future economic growth and risk investments.

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Draghi breaks the ultimate euro taboo

by Gavyn Davies

Financial Times
August 5, 2012

When Mario Draghi said on 26 July that a “convertibility risk” was preventing the smooth functioning of the ECB’s monetary policy across national borders inside the eurozone, he was breaking a taboo which has been stubbornly followed by all of his predecessors in the project to create a durable single currency. That taboo is that no-one in the ECB should ever admit that the euro might break apart. The objective of the taboo (which admittedly has previously been broken in the “special case” of Greece) has always been to ensure that markets should not feel the need to reflect any concerns about possible foreign exchange risk among the member states which comprise the euro.

By admitting that this “convertibility risk” now exists, the ECB president has implicitly acknowledged that the permanence of the single currency is not fully credible in the financial markets. The recognition of redenomination risk after a potential devaluation is one reason, he implies, why sovereign bond yields are now so high in Spain and Italy. He has said that this prevents the ECB from transmitting its intended monetary stance into those economies, which gives the ECB the right to take direct action to reduce these bond yields.

After last Thursday’s ECB meeting, it appears that this direct action will be to purchase short dated government bonds in Spain and Italy, provided that these governments have previously applied for support from the EFSF/ESM mechanism, and have accepted any conditions attached. The question is whether this action will be enough to put the convertibility genie back into the bottle.

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Government bonds and their investors: What are the facts and do they matter?

by Jochen Andritzky

Vox
August 5, 2012

Public debt held by non-residents has been on the rise over the last few decades – that is until the global crisis. This column looks at how the ownership of government bonds in the G20 and the Eurozone. It finds that increased foreign bondholders bring costs as well as benefits.

Prior to the start of the global crisis in late 2008, global imbalances, reserve accumulation and regulatory changes fostered greater cross-border integration of sovereign debt markets as measured by the share of government securities held by non-residents.

Today, this integration has reversed. Aside from safe haven flows, domestic investors are relied on to take up and roll over a larger stock of government debt (Presbitero et al. 2012). This resembles the situation in Japan since its crisis in the 1990s, where domestic institutional investors increased their share of Japanese government securities in their portfolios, compounding sovereign-financial linkages. Recent Eurozone policy changes have strengthened the trend in Europe (Wyplosz 2012).

New evidence

In a new paper, I analyse the composition and evolvement of the investor base across the advanced G20 countries and the Eurozone (Andritzky 2012). The analysis shows that a ten percentage point increase in the share of bonds held by non-residents is associated with a drop in yields by about 40 basis points and higher volatility.

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Read the Paper

The European Sovereign Debt Crisis

by Philip R. Lane

Journal of Economic Perspectives
Vol. 26, No. 3, Summer 2012

The origin and propagation of the European sovereign debt crisis can be attributed to the flawed original design of the euro. In particular, there was an incomplete understanding of the fragility of a monetary union under crisis conditions, especially in the absence of banking union and other European-level buffer mechanisms. Moreover, the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis. After diagnosing the situation, we consider reforms that might improve the resilience of the euro area to future fiscal shocks.

Read the Paper

Greece faces difficult odds with privatization

Washington Post
August 4, 2012

The gods lived at Mount Olympus, but the gamblers live at a casino on Mount Parnitha, and, lately, Greek leaders have been praying to strike it big here.

The Greek government owns an unusual half-stake in this mountaintop casino, the second-largest in the country, and Prime Minister Antonis Samaras has vowed that selling it — along with dozens of other properties, buildings and companies across the country — will be a top priority in last-ditch efforts to save the Greek economy.

But with time ticking on Greece’s bailout, and the country’s future on the shared euro currency ever more in question, the odds are stacked against him.

Greece owns large swaths of sectors like gambling that in other countries are in private hands. The arrangement helped derail Greece’s finances in the first place, with powerful unions bidding up workers’ salaries to unsustainable levels and money leaking to politically connected contractors. Now, few investors want to bet their money on these properties in the middle of what Samaras has called “our version of the Great Depression.” And it is not politically attractive to sell off Greece’s crown jewels at fire-sale prices.

If Greek leaders don’t hit it lucky, though, international officials are more ready than ever to pull the plug on the bailout that is keeping Greece from collapse. The consequences would be even worse than the recession that by year’s end is likely to shrink the economy by more than a fifth of its 2008 heights.

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Η δημοκρατία της αχρηστίας

του Δημοσθένη Κούρτοβικ

Τα Νέα
4 Αυγούστου 2012

Σε ένα από τα βιβλία του ο Κούντερα παρατηρεί ότι σε όλες τις χώρες του κόσμου οι μυστικές υπηρεσίες παρακολουθούν τηλέφωνα πολιτών, αλλά μόνο στην κομμουνιστική Τσεχοσλοβακία το διαλαλούσαν κιόλας, μεταδίδοντας από το ραδιόφωνο τις μαγνητοφωνημένες συνδιαλέξεις που υπέκλεπταν. Ο χαφιεδισμός, δηλαδή, δεν ήταν μόνον απενοχοποιημένος αλλά και αναγνωριζόταν ως μέρος της κανονικότητας στην καθημερινή ζωή. Ηταν κι αυτό μια μορφή διαφάνειας.

Δεν ξέρω αν η Τσεχοσλοβακία είχε πράγματι την παγκόσμια αποκλειστικότητα σ' αυτό το ευγενές πεδίο. Η Ελλάδα, όμως, την έχει σίγουρα, με τρόπο εντελώς ανάλογο, στο εξίσου ευγενές πεδίο της διαφθοράς. Η διαφθορά σ' εμάς δεν ντρέπεται να εμφανιστεί ως αυτό που είναι, γιατί ξέρει ότι χαίρει όχι μόνον ασυλίας αλλά κι ενός είδους προβολής όπου υπολανθάνει ο θαυμασμός, ένα κρυφό «βρε, δες πώς τα κατάφερε ο άτιμος/η άτιμη!». Μόνο στα ελληνικά, άλλωστε, ένα επίθετο μπορεί να συναρτά την απουσία τιμής με την παρουσία θετικών ιδιοτήτων: καπατσοσύνης, μαγκιάς, ακόμα και τσαχπινιάς («ατιμούλικο εσύ!»).

Έτσι θα εξηγείται γιατί ένας πρώην υπουργός που θησαύρισε από μίζες δεν διστάζει να κάνει από το κελί της φυλακής μαθήματα εθνικού χρέους και πολιτικής αποτελεσματικότητας στους κυβερνώντες• γιατί συνδικαλιστές που αποκαλύφθηκε ότι έκαναν ιδιωτικά ταξίδια πολυτελείας με δημόσιο χρήμα δεν αισθάνονται την ανάγκη να κατεβάσουν έστω τόσο δα τους τόνους της επιθετικής ρητορικής τους περί «προστασίας της περιουσίας του λαού»∙ γιατί πανεπιστημιακοί που διέλυσαν τα πανεπιστήμιά τους με χαμερπείς συναλλαγές και σκαστές λαμογιές εμφανίζονται ως πρόμαχοι της «ανεξαρτησίας της γνώσης»• γιατί δημοσιογράφοι που είναι γνωστό ότι έχουν κάνει του κόσμου τις απατεωνιές είναι πετυχημένοι εκδότες και κήνσορες της ηθικής ή του πατριωτισμού των άλλων∙ γιατί δικαστικοί και μεγαλοδικηγόροι που διέπρεψαν στο παραδικαστικό κύκλωμα συγγράφουν απομνημονεύματα με την άνεση και την αυτοπεποίθηση ενός σταρ∙ γιατί αρχιερείς που θα τους σιχαινόταν και ο υπόκοσμος ζητούν και τα ρέστα, όταν και αν καθαιρούνται.

Αυτό συμβαίνει μάλλον επειδή η χώρα μας είναι η μόνη στον κόσμο που εφαρμόζει την υπέρτατη αρχή της δημοκρατίας, εκείνη που διακήρυξε στα χρόνια της Γαλλικής Επανάστασης ο λαϊκός δικαστής Φουκέ-Τενβίλ πριν στείλει στην καρμανιόλα τον μεγάλο χημικό Λαβουαζιέ. Οταν ο τελευταίος ζήτησε αναβολή της εκτέλεσής του για να ολοκληρώσει ένα σημαντικό πείραμα, η απάντηση που πήρε ήταν «Η δημοκρατία δεν έχει ανάγκη από μεγαλοφυΐες». Ορθότατο! Και, όπως είπα, μόνον εμείς το κατανοήσαμε σε όλο του το βάθος. Ετσι, την προωθημένη δημοκρατία μας τη χαρακτηρίζει η ύπαρξη τριών κατηγοριών πολιτών: των χρήσιμων άχρηστων, των άχρηστων άχρηστων και των άχρηστων χρήσιμων.

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Οι εκλογές μάς φόρτωσαν νέο χρέος

του Γιώργου Προκοπάκη

Τα Νέα
3 Αυγούστου 2012

Την Τετάρτη 1/8 πληροφορηθήκαμε ότι η κυβέρνηση μάλλον θα προχωρήσει σε έκδοση εντόκων ομολόγων (βραχυπρόθεσμος δανεισμός) ύψους €6 δισ. μέσα στον Αύγουστο για να καλύψει τις ανάγκες της. Την προηγουμένη ο κ. Σταϊκούρας είχε ενημερώσει το πανελλήνιο ότι τα διαθέσιμα τελειώνουν. Μαθαίνουμε επίσης ότι για την έκδοση των εντόκων το συζητάει με τους εταίρους.

Το πρώτο ερώτημα είναι «γιατί χρειάζεται να διαβουλευθεί η κυβέρνηση με την τρόικα για να δανειστεί από τις ελληνικές τράπεζες;». Για δύο πολύ απλούς λόγους: (α) η όποια ρευστότητα υπάρχει στις ελληνικές τράπεζες προέρχεται από την προσωρινή παροχή εποπτικών κεφαλαίων €18 δισ. έναντι της επανακεφαλαιοποίησης των τραπεζών και δεν προορίζεται για κρατικό δανεισμό και (β) πρέπει να υπολογιστούν οι δημοσιονομικές επιπτώσεις. Στην κυβέρνηση ελπίζουν ότι οι «χαμηλού επιπέδου τεχνοκράτες» της τρόικας θα κάνουν τα στραβά μάτια σχετικά με το πρώτο. Ας μιλήσουμε για το δεύτερο λοιπόν.

Οι τροϊκανικές εκταμιεύσεις που έπρεπε να είχαν γίνει από τον Μάρτιο, προέβλεπαν ένα ποσόν €2 δισ. για εξόφληση εντόκων γραμματίων, χωρίς να αναχρηματοδοτηθούν. Δηλαδή, ισόποσος βραχυπρόθεσμος δανεισμός με επιτόκιο 4,6% θα μετατρεπόταν σε μακροχρόνιο με επιτόκιο 1,8%. Αντ' αυτού, λόγω της τρίμηνης ανυπαρξίας λόγω εκλογών και των καθυστερήσεων, το ελληνικό Δημόσιο έχει ήδη εκδώσει έντοκα γραμμάτια €4 δισ. Σε αυτά θα προστεθούν και τα προγραμματιζόμενα €6 δισ. του Αυγούστου. Μέρος των εντόκων γραμματίων του Αυγούστου θα καλύψουν την αναχρηματοδότηση του ομολόγου λήξης 20/8 που βρίσκεται στα χέρια της ΕΚΤ και κεντρικών τραπεζών (€3,2 δισ.). Το ποσόν αυτό επρόκειτο να καλυφθεί από τις τροϊκανικές δόσεις που δεν ήλθαν.

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Draghi's Short-Termism May Pay Off

by Richard Barley

Wall Street Journal
August 3, 2012

Mario Draghi's bond-buying plans are still on the drawing board. But the European Central Bank president's statement that any new bond purchases would focus on short-term debt has already reduced two-year Spanish and Italian bond yields to levels last seen in May. For Spain, two-year yields are now just above 4% from their recent peak above 7%. Mr. Draghi may have played a shrewd hand.

Short-dated debt purchases are more palatable for the ECB than buying longer-dated bonds. Mr. Draghi argued they are closer to "classical" monetary policy, perhaps in an effort to assuage German concerns about bond-buying programs. Buying short-term debt, which usually carries lower credit risk, is closer to providing liquidity than solvency support. Such purchases also better match the ECB's aim of repairing the monetary transmission mechanism, or the way in which policy rates influence other borrowing costs in the economy.

True, Spain and Italy aren't off the hook: Borrowing costs at longer maturities remain high with 10-year yields at over 7% for Spain and over 6% for Italy. That means policy makers can't ease up on overhauling their economies. The fall in two-year yields improves their financing position and access to markets. But they cannot rely only on borrowing at two- or three-year maturities as that will increase their reliance on markets for refinancing, likely deterring investors.

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One Money, (Too) Many Markets

by Hans-Helmut Kotz

Project Syndicate
August 3, 2012

Europe’s monetary union is screeching toward the abyss, unintentionally, but apparently inexorably. Greece will most likely not meet the criteria to receive further financial assistance from its eurozone partners and the International Monetary Fund. Europeans will then need to decide whether to let Greece go. The exit option would not improve Greece’s chances of successful adjustment, and it would come at a steep price for the eurozone: it would be “in the money” – and priced accordingly.

A Greek exit could, one hopes, be managed. The European Central Bank would contain the collateral damage by flooding Europe’s banking system with liquidity (against subpar collateral). Or it will reluctantly re-launch its purchases of public-sector debt in secondary markets, capping the other peripheral eurozone economies’ interest-rate spreads relative to the core.

Thus, dire circumstances would once again force the ECB’s hand. As the strongest European institution, it is systematically vulnerable to being taken hostage, compelled to underwrite a further lease on life for the euro. In this light, ECB President Mario Draghi’s recent vow to do “whatever it takes” to save the euro came as no surprise.

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Eurodämmerung

by Harold James

Project Syndicate
August 3, 2012

To understand the euro crisis, you obviously need to know about economics. But you also need to know about the deep cultural orientations of European societies.

With the summer holiday season in full swing, it is instructive to look at Europe’s leisure activities. When Europeans play and relax, they produce a counterpart of their financial and economic struggles. It is not just a question of what they do. How they do it – and, above all, who does it – helps to reveal the deep nature of Europe’s difficulties.

In June, the Euro 2012 football (soccer) championship readily lent itself as an analogy to the turmoil surrounding Europe’s single currency. Defeated teams were described as having “left the Euro.” Greeks were proud that their country survived the elimination round to reach the quarterfinals.

The semifinal between Italy and Germany presaged the apparent willingness of Chancellor Angela Merkel to give in to Italian demands for support of the government bond market. Italian Prime Minister Mario Monti was rapidly dubbed “super Mario,” and a photomontage in the press depicted him with the idiosyncratic Mohawk hairstyle of Mario Balotelli, the player who scored the two Italian goals.

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Why Eurobonds are Un-American

by Daniel Gros

Project Syndicate
August 3, 2012

The emerging consensus in Europe nowadays is that only “debt mutualization” in the form of Eurobonds can resolve the euro crisis, with advocates frequently citing the early United States, when Alexander Hamilton, President George Washington’s treasury secretary, successfully pressed the new federal government to assume the Revolutionary War debts of America’s states. But a closer look reveals that this early US experience provides neither a useful analogy nor an encouraging precedent for Eurobonds.

First, taking over a stock of existing state debt at the federal level is very different from allowing individual member states to issue bonds with “joint and several” liability underwritten by all member states collectively. Hamilton did not have to worry about moral hazard, because the federal government did not guarantee any new debt incurred by the states.

Second, it is seldom mentioned that US federal debt at the time (around $40 million) was much larger than that of the states (about $18 million). Thus, assuming state debt was not central to the success of post-war financial stabilization in the new country; rather, it was a natural corollary of the fact that most of the debt had been incurred fighting for a common cause.

Moreover, the most efficient sources of government revenues at the time were tariffs and taxes collected at the external border. Even from an efficiency point of view, it made sense to have the federal government service public debt.

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Draghi’s bold move in euro chess game

Financial Times
Editorial
August 2, 2012

Last week, European Central Bank president Mario Draghi challenged investors doubting his determination to make the euro work. On Thursday, he launched a bold gambit in the eurozone’s game of chess with markets and elected leaders.

Far from moderating his forceful London remarks, Mr Draghi made clear that the ECB is ready to act to stop the disintegration of eurozone financial markets. In a significant step for the ECB’s interpretation of its own role, he left no doubt that the central bank considers it “squarely” within its mandate to counteract “convertibility risk” – the market effect produced by doubts that the euro will survive intact. Mr Draghi, in combative mood, declared that the euro is here to stay: it is “pointless” to bet against it – a big statement.

Within weeks the ECB will announce plans for buying government bonds – more transparently than before, in quantities it sees fit and only at short maturities. Mr Draghi was also explicit that the governing council may adopt other “non-standard monetary policy measures” should it consider it necessary to fix the dysfunctions in the financial markets.

None of this lets off the hook eurozone politicians or investors. Mr Draghi set clear and necessary conditions for ECB intervention: governments in trouble must press on with fiscal consolidation and structural reform, since monetary action cannot substitute for the hard work of keeping national economies compatible with currency union. And before central bank funds are unleashed to undo the cost of scepticism that the euro is here to stay, the countries in question will have to sign up to the eurozone’s rescue funds.

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Now for a dose of Draghi’s monetary medicine

by Stephen King

Financial Times
August 2, 2012

The eurozone crisis may have started out as a fiscal crisis but it is now most definitely also a monetary crisis. The eurozone’s monetary system has begun to fragment. No longer is the European Central Bank able to set interest rates for the eurozone as a whole. Paranoia about an eventual eurozone break-up has persuaded financial institutions – with some encouragement from national regulators – to keep their money at home. So, the cross-border interbank market is more or less shut and peripheral nations are suffering.

An Italian bank hoping to borrow money for a year or so has to pay an interest rate of 2.7 per cent. A Spanish bank pays 3.8 per cent. A German bank pays nothing at all (indeed, others are now paying Germans to look after their money). Something has gone horribly wrong. There may be a single currency but its constituent parts are in danger of slipping towards a messy divorce.

In earlier phases of the eurozone crisis, government bond spreads widened not so much because the euro itself was seen to be in terminal decline but, instead, because countries had their own idiosyncratic local difficulties: Greek government debt was spiralling out of control, the Irish banking system was heading to the rocks and Spain’s autonomous regions were, as it turns out, just a bit too autonomous. The choices were simple: austerity, bailout or default. These were specifically fiscal – indeed, political – options providing the perfect excuse for the ECB to take a back seat.

No longer can the ECB afford to do so. Mario Draghi, the ECB President, admitted as much when he observed last week that “these premia have to do more and more with convertibility they come into our mandate”. In other words, as the ultimate guardian of the single currency, the ECB has to act to avoid terminal fragmentation. The problem is simple. The ECB’s job is to deliver price stability in the medium term. It can do this only if its decisions feed through to the economy at large. Policies made in Frankfurt should trickle down to Barcelona, Berlin and Brindisi in roughly the same way. That no longer seems to be the case.

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ECB Follows Words With More Words

by Richard Barley

Wall Street Journal
August 2, 2012

The market verdict was clear: Mario Draghi had written a check he couldn't cash.

The European Central Bank president promised last week to do "whatever it takes" to save the euro but the ECB didn't actually do anything at Thursday's meeting. Ten-year Spanish bond yields promptly rose back above 7%, and stock markets and the euro fell.

But the market reaction isn't entirely fair. Mr. Draghi's previous comments may have raised expectations too high, but he has provided the broad outlines of a plan for ECB intervention in government-bond markets. That certainly is a step forward.

In particular, Mr. Draghi made two important points. First, that the ECB would intervene in markets only alongside the euro zone's bailout funds. This is crucial for the ECB because only the European Financial Stability Facility and its successor, the European Stability Mechanism, can ensure binding conditionality. A weakness of the ECB's previous bond-buying programs was that it relied on policy promises that politicians then failed to keep.

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Draghi will do what it takes (give or take)

by Stephanie Flanders

BBC News
August 2, 2012

Financial markets got some clarity from the European Central Bank (ECB) president today on what the bank was prepared to do to help troubled eurozone economies. There was also some genuine news in what Mario Draghi said on the issue of seniority.

But - as Mr Draghi said himself - there are plenty of details still to be filled in. As I suggested in my blog on Saturday, he's going to make sure that governments get their act together first.

The ECB president confirmed that the bank was willing to buy government bonds in the secondary market, but there were three key conditions.

First, the country concerned must have already applied for support from the European rescue funds - the European Financial Stability Facility (EFSF) and/or the European Stability Mechanism (ESM).

Second, that support would need to have strings attached - conditionality. In other words, the beneficiary government would need to have made appropriate promises on fiscal policy and structural reforms.

And third, the ECB governing council would itself have to decide that central bank bond purchases are also needed. Here, Mr Draghi was very clear that "monetary policy remains independent": conditions one and two are necessary for the ECB to act, but there's no guarantee that it will.

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Draghi’s Inaction Is a Blow to Traders and Obama

by Paula Dwyer

Bloomberg
August 2, 2012

He talked the talk but, well, you know the rest. Mario Draghi said today that he may use the European Central Bank's balance sheet to resume buying government bonds in the open market to ease the euro area's debt crisis.

The high yields that countries like Spain and Italy must pay to borrow in capital markets are “unacceptable and ... need to be addressed in a fundamental manner,” Draghi, the ECB president, said at a press conference in Frankfurt. “The euro is irreversible,” he added, while also urging euro-area countries to begin using a rescue fund they control to purchase sovereign bonds as well.

It's what Draghi didn't say that disappointed traders, investors and surely President Barack Obama, whose reelection may rest on Europe's ability to stop its recessionary slide. Draghi didn't say the rescue fund should get a banking license so that it could borrow from the ECB and leverage its firepower. He didn't present a plan spelling out how coordinated bond intervention would work. He didn't lower the benchmark interest rate, now 0.75 percent. He didn't address bond-market fears that the central bank would demand seniority to other investors on any bonds it purchases. He didn't even promise to intervene in sovereign debt markets -- he said only that he may. Add it all up, and Draghi failed to deliver on last week's pledge to do “whatever it takes” to save the battered euro.

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What Happened to Europe?

by Amartya Sen

New Republic
August 2, 2012

About fifty years, in 1961, Jean-Paul Sartre complained about the state of Europe. “Europe is springing leaks everywhere,” he wrote. He went on to remark that “it simply is that in the past we made history and now history is being made of us.” Sartre was undoubtedly too pessimistic. Many major achievements of great significance have occurred in the last half a century in Europe, since Sartre’s lament, including the emergence of the European Union, the reunification of Germany, the extension of democracy to Eastern Europe, the consolidation and improvement of national health services and of the welfare state, and the legalization and enforcement of some human rights. All this went with a rapidly expanding European economy, which comprehensively re-built and massively expanded its industrial base and infrastructure, which had been devastated during World War II.

There is indeed a long-run historical contrast to which Sartre could have pointed. For centuries preceding World War II, a lot of world history was actually made in Europe. And this generated much admiration, mixed with some fear, around the world. But the situation changed rapidly in the second half of the twentieth century. When I first arrived in Cambridge as a student from India in the early 1950s, I remember asking whether there were any lectures given on the economic history of Asia, Africa, and Latin America. I was told that there were indeed such lectures—and that they were given for a paper called “Expansion of Europe.” That view of the non-European world would seem a little archaic now, not merely because the grand European empires have ended, but also because the balance of political prominence and economic strength has radically changed in the world. Europe is no longer larger than life.

There is, of course, nothing particularly remarkable—or lamentable—in the changing role of the different regions of the world. This has happened again and again. What is really striking is not the historical re-balancing of the different parts of the world, but the mess that Europe has managed to get into in the last decade or so, particularly over the last couple of years. There is a lot of discussion right now—appropriately enough—about how Europe is going to liberate itself from its financial disarray, economic misery, and political chaos. “What to do now” is certainly an important issue today, but “what not to do” is no less important in looking at Europe’s immediate past. This is so not just because past mistakes are relevant in deciding on what to do in Europe (even though what has been done cannot be readily undone—there is no automatic translation from past follies into present rectifications), but also because the negative lessons are essential if we are to avoid similar adversities in the rest of the world.

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ECB Disappoints Investors with No Euro Action

Spiegel
August 2, 2012

Investors had been hoping for a clear signal from Mario Draghi that the European Central Bank was ready to take action to prop up the euro. But in his press conference following the ECB monthly meeting on Thursday, all he offered was more promises. Markets plunged as a result.

Anticipation ahead of Thursday's European Central Bank (ECB) meeting was high. Last week, ECB head Mario Draghi had pledged that the bank would "do whatever it takes to preserve the euro." The comments set offa mini rally on stock markets the world over, and even the euro began gaining back some lost ground. Investors were eager to find out what exactly he intended to do.

Draghi, it would seem, was unable to live up to their expectations. "The Governing Council … may undertake outright open market operations of a size adequate to reach its objective," the ECB president said. "We will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks, we will design the appropriate modalities for such policy measures."

Markets plunged before he was even finished with his press conference. Germany's blue chip stock index DAX plummeted immediately by 1.88 percent, and the euro cratered in value from $1.24 to below $1.22. American stock futures, which indicate how stock markets in the US might perform on a given day, slumped as well, signalling a potentially rotten day on Wall Street.

"After the strong recovery since the middle of last week, the market wanted to hear something other than that modalities will be designed in the coming weeks," one frustrated trader in Frankfurt told German newswire DPA.

Draghi's comments were consistent with a report in the Thursday edition of the daily Süddeutsche Zeitung, which indicated that Draghi intends to resume the ECB's controversial program of buying sovereign bonds from struggling euro-zone member states on the secondary market. The report also indicated that Draghi backs a proposal whereby the euro zone's permanent bailout fund, the European Stability Mechanism (ESM), would buy sovereign bonds directly from crisis-stricken countries. On Thursday, Draghi said that euro-zone bailout funds "must stand ready" to intervene in bond markets.

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Promises, promises: The reform programme is badly behind schedule

Economist
August 4, 2012

By late July Greece had completed only about 100 out of more than 300 reform benchmarks set by international lenders after their last visit to Athens in February. Two elections this year have not helped to speed things up. And despite two bail-outs since May 2010, left-of-centre politicians are still trying to dilute or delay a raft of fiscal and structural measures needed for Greece to stay in the euro zone and pull the economy out of a five-year slump.

Take, for example, Evangelos Venizelos, leader of the PanHellenic Socialist Movement (Pasok), a junior partner in the six-week-old coalition government led by Antonis Samaras, the conservative prime minister (pictured left, with José Manuel Barroso, president of the European Commission). When he was finance minister, Mr Venizelos pushed through parliament a €11.5 billion ($14.1 billion) package of spending cuts agreed upon in March as part of the second bail-out. They are to be implemented in 2013 and 2014 and the details are being worked out. Yet on July 29th Mr Venizelos, trying to rebuild Pasok’s popularity with Greek voters, defiantly suggested the reforms be spread out over four years, not two (he later backtracked).

Greece has legislated plenty of reforms but failed to implement many of them, say frustrated officials from the “troika” (the European Commission, the International Monetary Fund and the European Central Bank) responsible for overseeing the process. A former government adviser says: “A huge amount of work has been done, yet almost nothing has actually been completed to the satisfaction of our partners.”

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Une rentrée chaude

Economist
August 4, 2012

What a miserable summer for Europe’s leaders. Away hiking in northern Italy, Angela Merkel spoke by phone to Mario Monti to promise to do “everything necessary” to preserve the euro. The Italian prime minister then toured European capitals seeking help to hold down his country’s borrowing costs. Meanwhile Wolfgang Schäuble, the German finance minister, hosted the American treasury secretary, Tim Geithner, during his holiday on the German island of Sylt. And the man everybody is watching, Mario Draghi, president of the European Central Bank (ECB), promises: “I will not be going to Polynesia—it’s too far.”

But if the holiday is already a write-off, September promises to be worse: a rentrée chaude, a “hot” return to work. Several things are likely to bring the euro crisis to a head. These include the prospect that Greece may run out of money and drop out of the euro, continuing meltdown in Spain, awkward elections in the Netherlands, a legal challenge in Germany’s constitutional court and political resistance to a more integrated euro zone. All told, the autumn of 2012 may determine the fate of the euro.

Start with Greece. Come September the wreckage of Greece’s public finances will become more obvious. The matter lies half-hidden behind technical discussions, but the “troika” of officials from the ECB, the European Commission and the IMF will eventually have to produce a report. The word is that the shortfall in Greece comes to tens of billions of euros.

To stay afloat, Greece needs both more austerity and more money. Both may prove politically impossible. Having already agreed to two bail-outs for Greece, its exasperated creditors are in no mood to provide a third—particularly not one that may require them to forgive a big chunk of Greece’s official debt.

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Greece fails to muster enthusiasm for 2012 Olympics despite ties

by Helena Smith

Guardian
August 2, 2012

Few events trigger greater national pride than the sight of Greece's Olympians striding into the stadium at the start of the biggest show on earth. By dint of their contribution to the Games – as birthplace of the ancient Olympics and cradle of their modern reincarnation – the Greeks always enter the arena first. And so it was on Friday. But this time, as the delegation kicked off the parade, there was no hiding the truth.

The smiles and laughter that are part of the enthusiasm of the moment could not conceal the dark mood that appears to have taken hold of the team – and the nation at large.

A litany of incidents, many improbable, account for the gloom. The assertion by Jacques Rogge, the president of the International Olympic Games, that the Games "are coming home tonight" – made during his speech to assembled spectators at the opening ceremony – immediately triggered howls of protest.

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The One-Two Punch to Put Europe Back on Its Feet

Bloomberg
Editorial
August 2, 2012

A year ago, Europe’s sovereign debt problem reached the crisis stage. Since then, troubled governments have had to pay interest rates on bonds that have pushed them to the brink of insolvency.

European banks, holding much of that debt, are woefully undercapitalized. The European Central Bank practically gave away $1.2 trillion to banks to prod them to lend again, which they mostly haven’t. Greece defaulted on its debt, forcing bondholders to accept heavy losses; it also had to beg for a second bailout, destroying an already weak economy in the process. Heads of state toppled in France, Greece, Italy, Portugal and Spain. Spain sought a rescue package; Italy might yet need one.

None of the steps taken by European officials have been big or bold enough to convince the markets that the crisis is contained. Meanwhile, Europe is crumbling. On Tuesday, unemployment hit its highest level ever at 11.2 percent, or nearly 18 million people, in the 17-nation euro area. Joblessness among those younger than 25 in the currency bloc is 22.4 percent.

Economic activity has ground to a halt. Euro-area banks report declines in corporate demand for loans. Savings and investment are fleeing Greece, Italy and Spain, where they are most needed, for the safer confines of Germany, where three-year notes pay below-zero rates.

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Sovereign Debt Restructurings 1950 - 2010: Literature Survey, Data, and Stylized Facts

by Udaibir S. Das, Michael G. Papaioannou and Christoph Trebesch

International Monetary Fund
Working Paper No. 12/203
August 1, 2012

This paper provides a comprehensive survey of pertinent issues on sovereign debt restructurings, based on a newly constructed database. This is the first complete dataset of sovereign restructuring cases, covering the six decades from 1950–2010; it includes 186 debt exchanges with foreign banks and bondholders, and 447 bilateral debt agreements with the Paris Club. We present new stylized facts on the outcome and process of debt restructurings, including on the size of haircuts, creditor participation, and legal aspects. In addition, the paper summarizes the relevant empirical literature, analyzes recent restructuring episodes, and discusses ongoing debates on crisis resolution mechanisms, credit default swaps, and the role of collective action clauses.

Read the Paper

Challenges of Europe's Fourfold Union

by Nicolas Véron

Prepared statement presented before the US Senate Committee on Foreign Relations Subcommittee on European Affairs hearing on "The Future of the Eurozone: Outlook and Lessons"
August 1, 2012

Thank you, Chairman Shaheen, Ranking Member Barrasso, and distinguished members of the Subcommittee for the invitation to appear at today’s hearing.

The euro area has many problems. Based on the lessons from the past five years, I will argue today that the core of the current crisis, what makes it unique, is Europe’s insufficient ability to make authoritative policy and political decisions for the region as a whole. To correct this weakness, Europe must build a fourfold union that would allow such executive decisions to be made. The four components are: (1) a banking union, (2) a fiscal union, (3) a competitiveness union, and (4) a political union, i.e. institutional reform to embed democratic accountability more solidly in decision making.

In the second part of my testimony, I will explore a few topical questions about the first of these four components, namely banking union.

Read the Testimony

Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups

by Anders Åslund

Peterson Institute for International Economics
Policy Brief 12-20
August 12, 2012

One of the big questions of our time is whether the Economic and Monetary Union (EMU) will survive. Too often, analysts discuss a possible departure of one or several countries from the euro area as little more than a devaluation, but Åslund argues that any country’s exit from the euro area would be a far greater event with potentially odious consequences. A Greek exit would not be merely a devaluation for Greece but would unleash a domino effect of international bank runs and disrupt the EMU payments mechanism, which would lead to a serious, presumably mortal, disintegration of the EMU. It would inflict immense harm not only on Greece but also on other countries in the European Union and the world at large.

When a monetary union with huge uncleared balances is broken up, the international payments mechanism within the union breaks up, impeding all economic interaction. Åslund’s critical argument for a domino effect is that the EMU already has large uncleared interbank balances in its so-called Target2 system. Exit of any country is likely to break this centralized EMU payments mechanism. These rising uncleared balances are a serious concern because nobody can know how they will be treated if the EMU broke up. Any attempt to cap them would risk disruption of the EMU. These balances need to be resolved but in a fashion that safeguards the integrity of the EMU. However, this can hardly be done by anything less than fully securing the sustainability of the EMU. If the euro area does break up, Åslund says, the damage will vary greatly depending on the policies pursued. On the basis of prior dissolutions of currency zones, such as the ruble zone in 1992/1993, he suggests that an amicable, fast, and coordinated end of the EMU would minimize the harm.

Read the Policy Brief

The Future of the Euro Area

by Simon Johnson

Prepared statement presented before the US Senate Committee on Foreign Relations Subcommittee on European Affairs hearing on "The Future of the Eurozone: Outlook and Lessons"
August 1, 2012

Successive plans to restore confidence in the euro area have failed. The market cost of borrowing is at unsustainable levels for euro banks and a significant number of governments.

Two major problems loom over the euro area. First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe's periphery to plunge into recession. This has increased the financing needs of troubled nations well into the future.

With governments reaching their presumed debt limits, the European Central Bank (ECB) is now treading a dangerous path. It feels compelled to provide adequate "liquidity" to avert systemic financial collapse, yet must presumably limit its activities in order to prevent a loss of confidence in the euro—i.e., a change in market and political sentiment that could lead to a rapid breakup of the euro area.

Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations "hypercompetitive" in the near future, (3) supportive monetary policy from the ECB, (4) the introduction of mechanisms that credibly achieve medium-term fiscal sustainability, and institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.

Europe's leaders have mainly focused on a potential long-term fiscal agreement, and the ECB under Mario Draghi is setting a more relaxed credit policy; however, the other elements are essentially ignored.

Read the Testimony

Greeks seek better life in home of austerity

by Gerrit Wiesmann

Financial Times
August 1, 2012

Konstantinos Tsanas has had a terrible summer since moving to Germany from Athens in April. But apart from the depressingly wet north European weather, he says he is happy in a country cursed by many Greek politicians because of its insistence on tying financial aid to strict austerity.

“Ignore the politicians – Greeks and Germans get along, I feel at home here,” he says of Essen, the industrial city on the Ruhr in north-west Germany that he has chosen as his new home. Here his wife, who speaks German, quickly landed the kind of office job she had been unable to find in Athens.

“We don’t want to be rich,” says Mr Tsanas, 43, who quit a job as a radio producer in Greece. “We just want a better life than in Greece, to live without grovelling.”

That hope is making Germany home to a growing number of Greeks. Some 25,300 of them came last year, according to the German statistical office, with the net number of “German Greeks” rising by 14,000 to just under 400,000 – a significant jump after a net outflow in the preceding years.

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Europe's Dangerous Dream of Unlimited Money

by David Böcking

Spiegel
August 1, 2012

This week, some euro-zone members have been calling for the permanent bailout fund to be provided with a banking license that would provide it with unlimited access to money from the European Central Bank. The "bazooka" option might help crisis countries in the short term, but it would entail massive risks in the long run.

The bazooka isn't just the name of a portable American antitank weapon. Recently it has also become the synonym for a financial super weapon that is supposed to end the euro crisis once and for all. There also used to be a chewing gum called Bazooka that was sold in German supermarkets until the 1980s. Once the pink stuff got stuck somewhere, it was hard to get rid of -- not unlike the current discussion about a euro crisis bazooka.

The bazooka debate heated up after a suggestion from some countries, including Italy and France, that the permanent euro rescue fund, the European Stability Mechanism (ESM), should be equipped with "unlimited firepower" through a banking license. In concrete terms, it would enable the ESM to borrow unlimited amounts of money from the European Central Bankand use it to shore up euro-zone member states threatening to buckle under the weight of the crisis.

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Mario Draghi’s Guns of August

by Kemal Derviş

Project Syndicate
August 1, 2012

August has been a dangerous month in European history, but this year it could be the turning point for the eurozone – and perhaps for the world economy. On July 26, Mario Draghi, President of the European Central Bank, declared that his institution would do “whatever it takes” to preserve the euro, and added: “Believe me, it will be enough.”

Draghi’s strong – indeed, unprecedented – statement was widely interpreted as signaling that the ECB would soon revive its bond-purchase program, focusing on Spanish debt in particular. Stock markets around the world soared. Jens Weidemann of the Bundesbank immediately expressed reservations, but the next day German Chancellor Angela Merkel and French President François Hollande issued a joint statement expressing their determination “to do everything in order to protect the eurozone.”

I recently argued that the ECB, working with the nascent European Stability Mechanism (ESM), was the only institution that could save the eurozone. It could do so by buying Italian and Spanish bonds in the secondary market with the pre-announced intention of keeping their sovereign interest rates below a certain threshold for a certain time.

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Can Draghi do 'whatever it takes' to save euro?

by Robert Peston

BBC News
August 1, 2012

As we wait to see whether Mario Draghi and the European Central Bank will tomorrow announce "whatever it takes" to save the euro (to use his resonant phrase of last week), it is worth reminding ourselves of the eurozone's unhealthy lifestyle (forgive my anthropomorphising please).

Since 2009, its history has been of fiscal and banking crises that force eurozone leaders to make modest reforms, which provide calm for just a few weeks and months, till there is another crisis and more modest reforms.

So if you were the eurozone's physician, here is why you would be concerned.

The crises have become progressively more serious: the €500bn or so that Spain may need in a bailout is more than four times Greece's initial rescue needs in 2010.

But there has been limited progress towards the kind of political union - or central control of budget-making, borrowing and supervision of banks - that many would see as necessary to the eurozone's long-term survival.

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Economic Thinkers Try to Solve the Euro Puzzle

New York Times
July 31, 2012

Most people have heard of the Marshall Plan. Some might even know what Brady bonds are. But they have not yet heard of the Brunnermeier plan. Or Bishop bonds. Or the Gros accord.

That is because they do not exist yet — except as dreamy proposals by economic thinkers to fix the European debt crisis.

While dealing with Europe’s financial difficulties has been a grim slog for the Continent’s austerity-weary citizens and its frustrated policy makers, it is the opportunity of a lifetime for ambitious idea merchants looking for fame.

If any of them can come up with a plan that is adopted by Europe, they will have secured a coveted place in history — like George C. Marshall, the secretary of state who fashioned the plan to help rebuild Europe after World War II, and Nicholas F. Brady, the Treasury secretary whose introduction of a class of investor-friendly bonds helped end the Latin American financial debacle in the early 1990s.

Three in particular who are respected in top policy circles and have access to the right people are Markus K. Brunnermeier, Graham Bishop and Daniel Gros.

Each is proposing a grand plan to save the euro zone from financial ruin — and to do it in a way that may break through the political impasse that has made a solution so elusive. None of them, or anyone else, are assured of success, given the depth of Europe’s problems and the difficulty of reaching consensus among the 17 European Union countries using the euro.

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Now Germany Needs to Let Draghi Do ‘Whatever It Takes’

by Clive Crook

Bloomberg
August 1, 2012

Did Mario Draghi, president of the European Central Bank, announce a big change in monetary policy in his widely reported speech last week? Or was he misunderstood? The financial markets at first hailed a breakthrough. Now doubts have set in.

We’ll know more after Thursday’s meeting of the ECB’s governing council. The euro’s future may turn on what that body decides. Draghi has raised expectations and it’s important that he meets them. If he does, Europe will be taking a big step toward recovery, albeit only one of many that will be needed over the coming months and years.

If the markets decide his bold new departure meant nothing after all, brace yourself. Europe’s financial crisis is about to get worse. Draghi’s pledge that the ECB “is ready to do whatever it takes to preserve the euro” seemed clear enough, and what splendid news that was. Finally, the ECB is willing to act as lender of last resort to Spain and other distressed sovereign borrowers. Draghi wants to revive and extend the bank’s dormant bond-buying program, and he’s pressing Europe’s governments to let him get on with it.

The speech as a whole, though, was ambiguous and puzzling. Parts were barely intelligible. You could read almost anything into what Draghi said. Even the crucial phrase began with the words “within our mandate.” That’s a problem. The ECB isn’t sure from one day to the next what it is required or allowed to do, and the euro area’s governments are divided on the point.

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Biggest dangers hiding in plain sight

by James Mackintosh

Financial Times
July 31, 2012

Markets can be single minded to the point of obsession. Little matters other than today’s meeting of the US Federal Reserve and Thursday’s of the European Central Bank. Either could offer a short-term boost; but neither is likely to provide more than temporary balm for what ails their economies.

Meanwhile, investors are ignoring at least three major problems of which they are well aware. The most immediate is Greece, which has simply been screened out since its election last month. Market focus moved on to the more important problems of Spain.

Yet Greek cash reserves have reached “almost zero”, its deputy finance minister says, and it has to repay €3bn to the ECB in three weeks. Fractious politicians are still resisting cuts demanded by international creditors. Yet investors simply assume the eurozone will hand over more money.

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