A blog on the political, economic and social causes and implications of the crisis in the Southern periphery of the Eurozone.

I'm a political scientist working on political parties and elections, social and economic policy and political corruption, with a particular focus on Italy and Spain. For more details on my work, see CV here, and LSE homepage here. For media or consultancy enquiries, please email J.R.Hopkin@lse.ac.uk.

Saturday, December 24, 2011

Peter Hall tells it how it is

Excellent analysis of the Euro crisis by Peter Hall. In particular, he summarizes the macroeconomic imbalances, and their inevitability, very succinctly here:

In the past, (Southern Europe followed) growth strategies led by domestic demand and then devaluing their currencies to offset the inflationary effects of such strategies on their external competitiveness. In EMU, they were unable to do that. Instead, not unreasonably, they took advantage of the cheap credit flowing from northern Europe to promote economic growth. But, unable to offset the inflationary effects through devaluation, they lost competitive advantage to the north. The result can be seen in the gross imbalance of payments between the two parts of the Eurozone.

Pity so few influential policy-makers seem to have figured this one out.

Thursday, December 22, 2011

Print and be damned

It looks that the ECB is finally, by a circuitous route, doing what needs to be done. It remains to be seen whether it will do enough, but the combination of nearly half a trillion euros - in one day - in cheap loans to banks, with the acceptance of troubled sovereign debt as collateral, is a step in the right direction. The direction, that is, of acting as a lender of last resort, despite German protestations.

This is a smart move by Mario Draghi, who talked tough on bail-outs, then effectively ate his words, but did so in such a way as to leave most German voters unsure as to what has really happened.

Anyway, this is just a start. The austerity medicine will still depress Southern European economies, and monetizing slices of their debt just as we approach the abyss is not exactly going to resolve the problem.

Wednesday, December 21, 2011

Is there such a thing as moral hazard for nations?

Just in case you needed any more reasons to oppose austerity, here's another, outlined in this neat and evocative Guardian piece ('Europeans migrate south as continent drifts deeper into crisis): emigration.

Yes, in a development that has probably never occurred to Europe's blinkered political leaders but is blindingly obvious to anyone residing in the real world, young, ambitious and dynamic European citizens are escaping from the misery of austerity and seeking a new life elsewhere, often outside the EU. It is hardly worth pointing out the obvious implication - that austerity is even less likely to work if the most productive sections of society are bailing out and leaving the pain behind.

This is neat in all sorts of ways, but what I find intriguing about it is the stark distinction it draws between the collective responsibility of debtor nations and the individual responsibilities of their citizens. So Greece must suffer for its mistakes, otherwise moral hazard will encourage it to behave badly in the future; but of course there is nothing stopping individual Greeks leaving the sinking ship and evading the punishment.

This reminds me of a neat piece of prose on the crisis by John Lanchester, who has made more sense out of this mess than many economists. In a piece published in the London Review of Books last summer, he noted the following:

From the worm’s-eye perspective which most of us inhabit, the general feeling about this new turn in the economic crisis is one of bewilderment. I’ve encountered this in Iceland and in Ireland and in the UK: a sense of alienation and incomprehension and done-unto-ness. People feel they have very little economic or political agency, very little control over their own lives; during the boom times, nobody told them this was an unsustainable bubble until it was already too late.

In consequence, people don't feel that the crisis was in any real sense caused by them:

The austerity is supposed to be a consequence of us all having had it a little bit too easy (this is an attitude which is only very gently implied in public, but it’s there, and in private it is sometimes spelled out). But the thing is, most of us don’t feel we did have it particularly easy. When you combine that with the fact that we have so little real agency in our economic lives, we tend to feel we don’t deserve much of the blame. 

It's difficult to argue with this. But irrespective of whatever moral responsibility an individual Greek may bear, there is no law whatsoever against him or her leaving the country and starting afresh, washing their hands of the whole mess.

A kind of citizen's default. So much for moral hazard.

Saturday, December 10, 2011

One step from disaster

A pretty good assessment of yesterday's summit outcome from Tim Duy's Fed Watch (via Mark Thoma).

In the end, this mess is entirely a political one. Not that economists aren't in large part to blame, but the key point is that some economists have figured out what the answer is, but too many politicians find it convenient to stick to the line that made some kind of sense until 3 years ago, but makes no sense at all now.

So what we need is a theory of economic policy lunacy.

Thursday, December 8, 2011

Weber's revenge

Markets have faith in Protestants (% of Protestants in population, by logged 5 year CDS price today).
The Rsq without Greece is .45, meaning that Protestantism predicts almost half the variation in the log of CDS prices.

Quite why Protestantism is related to the perception of fiscal responsibility is one for another post.

Tuesday, December 6, 2011

Ever closer union

The Guardian reports that Radical eurozone shakeup could see Brussels get austerity powers.

Is this really what 'ever closer union' was supposed to mean...?

Monday, December 5, 2011

When will Germany start living beyond its means?

In most of my posts on the southern Europe debt crisis I've focused on the contractionary nature of fiscal retrenchment, and the 'paradox of thrift' it engenders - that by retrenching, Southern Europe risks shrinking its GDP, thus cancelling out any putative gains from austerity.

Paul Krugman, in response to Ezra Kleinreminds us that there is another big obstacle to this strategy: that Southern Europe cannot recover without unwinding its trade deficit, and its trade deficit is the counterparty to the German trade surplus.

In other words, are the Germans willing to run a trade deficit to make this happen? Because if they are not, it's not going to work. And nothing I've heard out of Berlin recently sounds like coming close to recognizing this.

Elementary, Signor Monti

Fascinating stuff - yields on Italian debt dropped sharply today (FT Alphaville » Signor Monti, sensazionale). Monti's €27 billion of contractionary budget cuts and tax rises really did the trick...

The fact that Spain's yields did much the same suggests a momentum behind the Euro crisis management strategy of Merkel and Sarkozy. It also suggests that should this week's summit fail, we could pretty quickly be back to where we started last week.

All of this goes to show that policy's real effects seem to matter less than their effects on expectations, and that countries like Italy and Spain are only at risk of default if markets think they are at risk of default. There is nothing remotely rational about our current financial arrangements.

'via Blog this'

Munchau is depressed

Reading Wolfgang Munchau is not a lot of fun at the moment. His doom-laden pronouncements are all the more depressing for the fact that he is almost certainly right to predict that France and Germany look set to fudge it yet again.

In any case, at least the scenario is becoming clearer. The ECB will probably act if given the political backing, as Draghi suggested the other day. But Merkel only seems to want ECB action if the Southern Europeans commit to open-ended austerity. This is politically implausible, as well as being almost certainly economically counter-productive.

So here we are. If we were a game theorist, I could probably write a nice paper about this. It's basically a Prisoner's Dilemma game, but I fear it's an unbalanced one, because I'm not sure the Germans even understand what the cooperative outcome would be. So they dig in their heels.

Let's just hope they blink, because they're going to be dragged down by this as much as anyone else. What price those years of 'sacrifice' for competitiveness if they end up with a Swiss exchange rate and an insolvent banking system?

Sunday, December 4, 2011

The Monti treatment

Contractionary measures for contractionary times (Monti outlines tough measures for Italy). €27 billion taken out of a stressed economy, which is also suffering financial uncertainty on a colossal scale.

Can any of this work? Yes, but only as an offer to the Gods of austerity, giving them the political offer to authorize a monetary bailout through the ECB.

Peculiar how entirely irrational policies can become rational, if they are designed to encourage irrational leaders to do rational things.