We kick off another week with some thoughts from the EconoMonitor community. Here is what’s on the minds of the EconoMonitor bloggers. We would love to hear what’s on your mind.
Is This Europe We Are Talking About?
–Edward Hugh (Don’t Shoot the Messenger)
This weekend I have been thinking a lot, and reading a lot, about the implications of Greece’s recent election results. At the time of writing this, it still isn’t clear whether or not there will be an interim government or whether the country is headed straight back to the ballot box.
At the end of the day here the only difference may turn out to be one of timing. If the country does go to elections, the most likely victor would be Alexis Tsipras of the anti-bailout, anti-Troika party Syriza. If he won, and started to form a government then the second bailout money would undoubtedly be immediately stopped.
But even if the country doesn’t go to elections, and a last minute compromise government of New Democracy, PASOK and Democratic Left is formed, it is very unlikely they would be able to agree on and present the new set of measures the Troika are looking for in June, in which case the money would also be stopped.
It is what happens next that leads to all the speculation. The international press has been full all through the weekend of statements from one European leader after another suggesting that Greece may need to exit the Euro. But things don’t look that way in Athens, where even Mr Tsipras would just like to end the austerity and stay in the Euro. So I have no idea what will then happen. Many assume that the country would run out of money, but there are a variety of devices that the Greek central bank could use to generate its own Euros, and enable the government to pay pensioners, civil servants, etc.
Then, so the story goes, the ECB would have no alternative but to shut Greece off from the Eurosystem. To some this might seem like an act of war. This wouldn’t be Greece leaving, this would be Greece being turfed out. Then there is the Guardian’s Julia Kollewe, who spells out for us a number of highly unpleasant consequences which would follow, including a rush for the door by a lot of young Greeks. Kollewe paints a bleak picture:
“Mass unemployment is likely, as is an exodus of young skilled workers. If tens of thousands of Greeks headed to the borders, they might even be closed. Greek soldiers patrolling the roads and ports to keep their fellow citizens in? It is not impossible”.
And I ask myself, is this Europe we are talking about here, or is this some kind of dream I am having? Is this where all those high minded ideals led us, to a Greece where the young people get locked in, like in the old days of the USSR? Is this what the real outcome of the election of Francoise Hollande as President of France is going to mean? I hope not, since it would surely split Europe right down the middle, and not just by drawing a line running from East to West.
To Avert Fiscal Disaster, Hug the Monster?
-Ed Dolan (Ed Dolan’s Econ Blog)
Writing on the ABC News website, Bill Blakemore talks about how to transform fear of climate change into a force for action. Good piece—can we apply the idea to fear of fiscal Armageddon, too?
Blakemore draws on a concept used by military trainers:
“Hug the monster” is a metaphor taught by U.S. Air Force trainers to those headed into harm’s way.
The monster is your fear in a sudden crisis — as when you find yourself trapped in a downed plane or a burning house.
If you freeze or panic — if you go into merely reactive “brainlock” — you’re lost.
But if your mind has been prepared in advance to recognize the psychological grip of fear, focus on it, and then transform its intense energy into action — sometimes even by changing it into anger — and by also engaging the thinking part of your brain to work the problem, your chances of survival go way up.
An unsustainable fiscal policy is a lot like climate change: It is scary, you know it is going to happen, you know you should do something before it is too late, but you don’t. The warnings are there for all to see. The Simpson-Bowles Commission report is to fiscal policy as the IPCC is to climate change. Yet both parties are in brainlock. Democrats are in the Augustinian “make me chaste, but not yet” mode, while Republicans are pushing the “austerity now” panic button, which would risk taking the United States down the same drain as Greece and Spain.
Let’s get angry. Then, let’s put the thinking part of our brains to work on this problem.
Two Tales of a Crisis
-Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
You are probably familiar with the two distinct narratives of the Eurozone crisis, the balance of payments and the fiscal profligacy views- what I tend to call the Krugman and the German tales. In any case, I provide a summary of both accounts in my latest Hürriyet Daily News column, making use of a recent presentation Paul Krugman gave in Brussels. As I mention in the column as well, I am more sympathetic to the Krugman view. That’s kind of expected: After all, your friendly neighborhood economist is an economist turned columnist and blogger as well. It is equally straightforward why Turkish policymakers and government officials are ardent followers of the German view. As I like to say, a well-drawn picture is better than a thousand words:
Turkey looks really well in terms of its debt. That’s why you see government officials mentioning the low Turkish debt to GDP ratio, like a turntable that is stuck, at every international conference. But when you look at the balance of payments, it is another story: With a current account deficit that is second highest in the world in absolute terms, after the United States, and one which is financed by significant short-term flows, Turkey doesn’t really have a strong balance of payments story. The current account has been showing some early signs of adjustment, but it is not certain that will carry on to the second half of the year, as growth picks up and the Central Bank doesn’t let too much lira depreciation to keep inflation at bay.
Anyway, unlike in the Eurozone, monetary policy or the exchange rate could work as adjustment mechanisms should a sudden stop hit, but the Turkish adherence to the German view could just be a reflection of the country’s relative strengths and weaknesses more than anything else…
New Wave of Strategic Energy Sector Investment?
-Efraim Chalamish (Efi Chalamish’s Economic Development and Security Blog)
The issue of diversification is crucial for government-sponsored funds. Recently, on this platform, I raised the question if the new sovereign funds should invest locally or globally and how they should do it (see http://www.economonitor.com/
Markets just learned that Qatar Investment Authority is planning to buy a significant stake in the UK-Dutch oil giant Shell. This strategic investment, unlike QIA’s investments in financial institutions since the 2008 financial crisis, does involve local markets as Shell already owns production facilities in Qatar, such as the Pearl Gas to Liquids plant. It remains to be seen in the coming days and weeks if this is a beginning of a new wave of strategic investments in the energy sector while giving up new alternative assets in foreign markets. The trend may have both geo-strategic and economic consequences.
On Taking Stock with Pimm Fox Looking Under the Hood of J.P. Morgan in its Week of Embarrassment
-Daniel Alpert (Daniel Alpert’s Two Cents)
On Friday I sat down with Pimm Fox of Bloomberg News to discuss JPMorgan Chase & Co.’s $2billion trading loss, the hedging of risk in the current environment and the outlook for U.S. financial regulation.