Archive for November 20th, 2008

Will UK go the Iceland way?

November 20, 2008

Willem Buiter has a great blog but is always difficult to read. It is very detailed and has loads and loads of information and facts. Most of his posts are like a research paper. He says clearly he writes the blog for himself as it helps him.

I had pointed to his superb study on how and why Iceland failed. In taht study he says:

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:
(1) A small country with (2) a large, internationally exposed banking sector, (3) its own currency and (4) limited fiscal spare capacity relative to the possible size of the banking sector solvency gap.

Countries that come to mind are:

  • Switzerland
  • Denmark
  • Sweden

and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

In his latest post, he works on UK economy and provides evidence why UK could go the Iceland way. A must read.

Comparison between US and Euro policies?

November 20, 2008

I came across this wonderful speechby Lorenzi Bin Smaghi, ECB member comparing the economic policies between US and Euroarea. He analyses policies across spectrum- monetary, fiscal etc.

The United States and the euro area are the two main economic and monetary areas in the world and they are reasonably similar in size, with a population of over 300 million (300 million in the United States and 320 million in the euro area) and GDP of around €10,000 billion at current prices (at the going rate of exchange of around USD 1.30 to  the euro – US GDP is worth around €11,000 billion, while euro area GDP is worth around €9,000 billion).

After this, he points to how policies are determined in the two regions:

In recent years, the two economies have been compared in a largely asymmetrical way, possibly a hangover from an obsolete institutional setup and analytical reference framework. While in the United States economic policies are mainly assessed on the basis of the US economy’s underlying state, in the euro area the assessment is made on the basis not only of European economic fundamentals, but also, and indeed above all, with reference to economic policy decisions made on the other side of the Atlantic. On our continent, monetary and budgetary policies are often judged in relation to what is decided in the United States rather than in their own right. However, it is very rare that the opposite happens.

This kind of asymmetrical assessment was perhaps alright under the Bretton Woods system, in which the European countries pegged their currencies to the dollar, and under the subsequent fluctuating system in which the individual European countries were relatively small, which allowed them to benefit from a certain amount of autonomy from the decisions reached on the other side of the Atlantic. But with the creation of the euro and the development of the euro area to levels akin to the US economy, it would have been rather ironic if economic policy decisions in Europe simply mirrored the conduct of other authorities.

He then points why policies in Euroarea ought to be different compared to in US economy. US economy is more dynamic compared to Euro and impact of shocks differ in both regions requiring different policy responses.

Very insightful speech.

Assorted Links

November 20, 2008

1. WSJ Blog points to a new report which says that US fin system needs additional $ 1-1.2 trillion

2. . WSJ Blog points deflation scare in US. Maniw also points to rising deflation fears.

3.  WSJ Blog also points to 3 choices for UA automakers.

4. TTR points to bailut fund for indian cos

5. Krugman points corporate cost of borrowing is rising

6. Rodrik points to a new paper on financial globalisation and emerging economies

7. Econbrowser points – crisis in one picture

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