Showing posts from December, 2011

Merry Christmas and a Happy New 2012!

The new 2012 bears a lot of questions on the eurozone, UK, US, China and so on, but lacks to provide many answers. Unemployment is still at high levels and is likely only to rise. Output on the other hand, as well as investments, are likely to fall. Stagnation is upon us. The reports of the most prominent world institutions predict this, but they also predict a bounce back in 2013. This is a bias their models hold, since no one takes into account the possible reactions if the euro falls, or if the Chinese bubble finally bursts. The picture is gloomy and the politicians are realizing this more quickly than before as their election dates are closer. The current situation of postponing the necessary solutions is only pilling up the pressure on them and is increasing the dissatisfaction and antagonism among voters. Sooner or later, we will all have to face the necessary consequences and accept painful solutions. Balanced budgets and increased bailout funds will result only in more debt ac…

The Great Mismatch between the labour market and universities

The ever high unemployment levels worldwide and particularly the upsurge of youth unemployment is getting more and more people worrying. The hardship of finding a proper job for a recent graduate has become next to impossible in 45%-youth-unemployed Spain or 42%-youth-unemployed Greece. Other countries aren’t far behind. Europe’s youth is locked in an unemployment trap and some go so far to call it a ‘lost generation’. I refuse to be that pessimistic as the amount of brilliant young minds created is increasing with the technological development, student ‘migration’ and widening exposure to new ideas and ways of thinking. However, the fact that they remain unemployed stands and the solutions are lacking. Although I won’t go in much detail on how to fix youth unemployment here (as I see the problem of unemployment being solved through restoring confidence and removing uncertainty in the economy in order to increase private sector investment and eventually hiring) I will touch upon the m…

Graph of the week

This week we take a look at an interesting figure showing the target levels of the new eurozone treaty (signed last week).

Source: The Economist, Daily chart

As the Economist says, "this time we really mean it!" The level of insubordination of the eurozone countries is astonishing. While some were balancing around the target in pre-crisis times, trying to cope with it, others were outright irresponsible, particularly right about after the credit squeeze in 2009, when the debt levels and the deficits soared. The debt levels are at an even worse state, knowing that the Maastricht target was 60% of GDP. How will the automatic punishments suppose to handle all of this and prevent further political mischief is still rather puzzling to me.

The path towards a fiscal union

One part of this post was published at the ASI blog, titled "Europe's road to serfdom"

The deal was struck. The EU and the eurozone are on a new path toward a more strict fiscal union. And with the deal, it is very likely a move towards a double speed Europe, or a union within a Union. Britain has isolated itself from the new treaty by a veto from its PM David Cameron. Whether such a move is good or not for the UK, only time will tell. It would be frivolous to make predictions now, as it is very likely that Britain will remain a part of the EU, only now left out of some main decision making and possibly regulatory standards. This isn’t necessarily bad, as Britain mostly suffered under various EU labour and financial market restrictions, but it is a question on how Britain might suffer politically. Loss of power and influence within the EU is certain, and it is left to see how this will impact Britain’s future motivation and public opinion regarding the EU. The break-up of…

Graph of the week

Here's a figure depicting the history of eurozone sovereign bond spreads vs. 10-year German Bunds, from 1990 to 2011. 

Source: FT Alphaville, original source: Pictet
It is an interesting proof to the propositions madeherethat the introduction of the euro equalized the risks across eurozone which gave the peripheral countries an opportunity to borrow cheaply. This opened the scope for excess borrowing and fueling domestic growth with consumption and government expenditure. As an effect all the peripheral countries experienced severe current account deficits
What is interesting in the figure is how the spreads were much more volatile before the euro and the rapid decrease of volatility (and hence risk) once the euro was introduced. It appeared that every eurozone country could borrow as if it were Germany. It is obvious that this was fiscally unsustainable. The US spillover effect can be seen in 2008, but the credit squeeze that came about in 2009 fully uncovered the eurozone's i…

Never fear, the Supercommittee is here?

Did anyone really believe that after the August US credit rating downgrade caused by political quarrels, stubbornness and instinctive self-preservation, a committee made of an equal number of Democrats and Republicans would actually reach a favourable conclusion? I didn’t think so.
After all the pleas for the Supercommittee to go big and seize the chance to create an impact and make a credible reform, in more than three months work, last week they’ve announced the inevitable failure.
I admit, on first sight it seemed like a good idea. Any form of political indulgence of the deal was removed. The Senate couldn’t use its filibuster power, there was going to be no amendments in the Congress; it was supposed to be a simple yes or no policy effective immediately. However, then I remembered that the topic was the US deficit and the actors were US politicians, the same ones responsible for the US debt downgrade and market panic in August this year, and I quickly came to realize any hopes of …

Investment should be left to the private sector not the government

This blog post was also published at the Adam Smith Institute blog

Regarding the UK Chancellor’s last week’s autumn statement, if anyone had any doubts, one thing was made clear – the UK, much like the US, is embracing fully on a Keynesian path to recovery.  
The government took the plunge to direct private sector investment decisions. It is calling on pension funds to invest into infrastructure projects and even putting in some money by itself, it is calling on businesses to hire more young people (introducing an age boundary and a waiting list boundary) and offering them money to do so, it is calling on banks to lend more money to businesses by offering guarantees for these loans thereby setting a stage for another asset bubble, it is underwriting mortgages and driving the housing supply and finally it is doing all this in hope of satisfying narrow interests and in hope of ensuring political success.
The government is centrally planning the country’s development. And they are doing…

Graph of the week

I will be introducing a new category on the blog, inspired by the economist's daily chart, I will randomly select and/or make interesting charts and comment them briefly. If it turns out to be popular, maybe I'll turn the category into 'graph of the day'. 
The first one is taken from the Economist's daily chart:
Source: The Economist, Nov 28th 2011.

It is the OECD GDP growth forecasts for the year(s) to come. It appears that 2012 will be the year of the double-dip recession. This will be particularly emphasized in case of a euro break-up. The European countries in the figure reflect this the most. On the other hand the US economy is expected to slightly increase growth to a steady 2%, while Japan is expected to rebound from its earthquake tragedy earlier this year. The developing economies will also be affected by the european slowdown as their exports are expected to fall.  It is worth noting that the OECD have made the predictions based on the fact that the current …