Archive for August, 2010
What hand wringing there has been recently on both sides of the Atlantic as the major European economies pursue austerity in their budgets and social programs! But is it not overdone? Europeans and Americans need only look east—to the European Union’s new eastern members—to see that austerity can deliver growth and improve the efficiency of the European economic and social systems.
Latvia, Lithuania, Estonia, Hungary, Romania, and Bulgaria were hit by profound financial crisis in late 2008, but their cure has proven effective. Almost all East European economies are growing and their public sectors have become leaner and more efficient.
On August 15, India celebrated 63 years of independence. Many hail it as an economic powerhouse but also point to the lopsidedness of its growth. Despite being home to some of the world’s leading technology companies, poverty is still widespread, physical and social infrastructure still woefully inadequate, employment opportunities still limited, and access to basic and higher education still insufficient. Nearly 40 percent of the population is still illiterate, and 25 percent is below the poverty line. India ranks 133rd (out of 183 countries) on the World Bank’s ease of doing business index—169th on starting a business and 182nd on enforcing contracts—way behind several countries in sub-Saharan Africa and Latin America. As Edward Luce observed in his In Spite of the Gods: The Rise of Modern India, “India finds itself higher on the ladder than one would expect it to be. It is just that most of its people are still sitting at the bottom.”
Morris Goldstein finds that the stress tests announced July 23 indicate a reluctance in Europe to admit the seriousness of the banks’ difficulties.
Steve Weisman: How reassuring have the European bank stress tests been to those concerned about the stability and health of the European banking system? This is Steve Weisman at the Peterson Institute for International Economics with Morris Goldstein of the Institute, senior fellow here who’s been looking at the stress tests that were out today, July 23. Morris, thanks for joining me.
Morris Goldstein: Delighted to be here, Steve.
Steve Weisman: So should we be reassured by these stress tests?
Nicholas R. Lardy explains China’s nuanced approach to letting the air out of its housing bubble, providing potential lessons for the United States.
Steve Weisman: Is China undergoing an asset and housing price bubble similar to the one that the United States went through that led to the current crisis? This is Steve Weisman at the Peterson Institute for International Economics with Nicholas Lardy, senior fellow at the Institute, who’s been studying China and looking at this phenomenon recently. Thanks, Nick.
Nicholas Lardy: Thank you, Steve.
The European banking stress test results announced on July 23 combined encouraging features with disappointing ones, which explains the paradoxical mix of reactions: Markets rose, even as many analysts denounced what they saw as a sham. Their publication is unlikely to single-handedly bring the interbank market back to soundness. But it may prove an important step, depending on what policy initiatives come next.
On the plus side, there is unprecedented data on sovereign risk exposures, individually and consistently reported by all tested banks except one Greek and six German institutions. The wealth of information adequately addresses investors’ biggest current concern. After having repeatedly called a sovereign default out of the question, the authorities could not include one in their stress scenarios, but they have done the next best thing. They have empowered investors to do it in their place. Further good news is that a Greek default appears potentially manageable, with losses spread around the system and unlikely to threaten any key institution outside Greece and Cyprus.