Category: UK & Europe

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When debt levels turn cancerous – Telegraph Blogs

The professoriat has been a little too cavalier in arguing that debt does not really matter for the world as a whole because we all owe it to ourselves. Debtors are offset by creditors (not always from friendly countries). Common sense suggest that this academic solipsism is preposterous, and so it now proves to be.

“As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing…..There are intrinsic differences between borrowers and lenders; non-linearities, discontinuities… It is the asymmetry between those who are highly indebted and those who are not that leads to a decline in aggregate demand.”

Creditors do not step up spending to cover the shortfall when debtors are forced to retrench suddenly. So the economy tanks.

via Ambrose Evans-Pritchard|When debt levels turn cancerous – Telegraph Blogs.

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Polish Economy Defies Europe’s Woes – WSJ.com

Poland’s economy expanded robustly in the second quarter despite slowing growth in the euro zone, outpacing Central European peers more dependent on exports to Germany.

……Much of the strength in Poland’s domestic demand was the result of government spending on infrastructure, supported with European Union subsidies, which more than offset a slight slowdown in the rate of growth in private consumption.

via Polish Economy Defies Europe’s Woes – WSJ.com.

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The Second Great Contraction – Kenneth Rogoff – Project Syndicate

…The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

via The Second Great Contraction – Kenneth Rogoff – Project Syndicate.

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Struggling with a great contraction – FT.com

Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become.

…… the dire consequences of soaring risk aversion, against the background of such economic fragility. In the long journey to becoming ever more like Japan, the yields on 10-year US and German government bonds are now down to where Japan’s had fallen in October 1997, at close to 2 per cent. Does deflation lie ahead in these countries, too? One big recession could surely bring about just that. That seems to me to be a more plausible danger than the hyperinflation that those fixated on fiscal deficits and central bank balance sheet find so terrifying.

via Martin Wolf|Struggling with a great contraction – FT.com.

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Euro Bond Splits Brussels – Real Time Brussels – WSJ

European Council President Herman Van Rompuy: “We can’t make…the same mistake that some have made with the launching of the single currency. We launched a common currency but we forgot about having a common economic policy. Now we will launch euro bonds without having a much stricter and much more unified fiscal policy. We can’t make the same mistake.”

But officials are clear that EU Economics Commissioner Olli Rehn won’t be dropping the idea. Mr. Rehn’s view is the exact opposite of Mr. Van Rompuy’s. Rather like the supporters of the euro in the 1990s, he believes that by launching the euro-bond project first, politicians will then ensure that fiscal convergence eventually follows.

via Euro Bond Splits Brussels – Real Time Brussels – WSJ.

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No European trend

The Euro is testing resistance at $1.455 after consolidating between $1.40 and that level for the last two months. Twiggs Momentum oscillating in a tight band around zero reflects no real trend and this is likely to continue unless the Fed introduces a new round of quantitative easing.

Euro EUR

* Target calculation: 1.45 + ( 1.45 – 1.40 ) = 1.50

The Pound is testing resistance at $1.66 against the greenback. Breakout above the 2011 high of $1.67 would signal another primary advance, but Momentum is falling and we can expect strong resistance between $1.66 and $1.70.

Pound Sterling GBP

* Target calculation: 1.65 + ( 1.65 – 1.60 ) = 1.70

The Swiss Franc is testing support at $1.25 against the greenback. Respect of support is likely, but breakout above $1.30 is also unlikely in the short-term unless Ben Bernanke announces further quantitative easing.

Swiss Franc CHF


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Portugal Braces for Austerity Battle – WSJ.com

Portugal has little choice but to take tough steps. The country sought international help in April after failing to convince investors it was doing enough to shore up its shaky finances. In exchange for a €78 billion, three-year loan, Lisbon promised the European Union and the International Monetary Fund that it would slash its deficit and make structural changes to spur growth in key sectors.

The problem is these efforts are expected to prolong the economic slump at least two years and drive up unemployment, already at 12%.

via Portugal Braces for Austerity Battle – WSJ.com.

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FTSE 100 tests support

The FTSE 100 Index is testing support at 5000. Breakout is likely and would offer a target of 4400*.

FTSE 100 Index

* Target calculation: 5000 – ( 5600 – 5000 ) = 4400

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Europe crashes

Germany’s DAX Index is testing support at its 2010 low of 5400. 13-Week Twiggs Money Flow below zero warns of further selling pressure. Failure of support would offer a target of 4500*.

Germany DAX Index

* Target calculation: 5500 – ( 6500 – 5500 ) = 4500

France has fallen well past its 2010 low, testing support at 3000. 13-Week Twiggs Money Flow again warns of further selling pressure. Breach of 3000 would test the 2009 low of 2500.

France CAC-40 Index

* Target calculation: 3000 – ( 3700 – 3000 ) = 2300

Secondary markets are as badly affected. The Amsterdam AEX Index fell below its 2010 low, while 13-week Twiggs Money Flow below zero warns of selling pressure.

Netherlands Amsterdam AEX Index

* Target calculation: 300 – ( 340 – 300 ) = 260

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New Economic Perspectives: ARE WE APPROACHING THE ENDGAME FOR THE EURO?

[The] core problem at the heart of the euro zone is NOT a problem of “Mediterranean profligacy”. Many people, particularly in Germany, express the view that the Italian, Greek or Portuguese governments (and by association their people) are to blame for this crisis – accessing cheap loans from Northern European banks, not paying enough taxes, not working hard enough, etc…..

One thing is clear from the remarks that continue to emanate from Europe’s main policy makers. They do not understand basic accounting identities.

…….The European Monetary Union bloc as a whole runs an approximately balanced current account with the rest of the world. Hence, within Euroland it is a zero-sum game: one nation’s current account surplus is offset by a deficit run by a neighbor. And given triple constraints — an inability to devalue the euro, a global downturn, and the most dominant partner within the bloc, Germany, committed to running its own trade surpluses — it seems quite unlikely that poor, suffering nations like Greece or Ireland could move toward a current account surplus and thereby help to reduce its own government “profligacy”.

via New Economic Perspectives: ARE WE APPROACHING THE ENDGAME FOR THE EURO?.

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