The article suggests that a way to end this cycle of reckless borrowing and spending is with a "lender-of-last-resort." The idea is that a lender, who is well endowed and confident about lending large loans, gives as much money to do "whatever it takes." In plain language, this means that the ECB will buy a country's bonds in unlimited amounts under certain conditions. This is called the "Outright Monetary Transactions." While the ECB (and Germany) have done everything necessary to keep the euro from sinking, there still remains a problem with fostering economic growth. Fears of further austerity policies and tight money in southern European economies have already begun. It will be interesting to see in the following months how the ECB and Germany will give southern European countries a plausible solution to reducing unemployment and debt and improve financial growth.
Thursday, February 28, 2013
The onset of Italian elections and their potential impact on the Euro
With the upcoming elections in Italy looming it seems that the euro crisis may come to fruition once again. This time it is not financial markets that are threatening another recession, but a political one that could create another financial mess. The transfer of money between rich states is necessary in order to salvage the euro. Germany outlined two options for the struggling states, Greece and Italy, telling them that they can either borrow loans from Germany or allow the European Central Bank to print more money. However, this policy comes at a price: Germans demand austerity. With massive unemployment and stagnant economic growth in Italy, many citizens are fed up with austerity measures and demand new policy changes.
The article goes on to list a few of the candidates on this years ballot along with their own austerity measures. However, economist Paul Krugman shows in his chart that the austerity policies they create only increased debt levels. He states that the more austerity measures Italy adopts, the more debt they'll incur because it hinders growth and does little to reduce borrowing costs. Countries that borrow in a currency they don't control can face defaults because they are unable to print it. Spain is another country facing similar issues, in which German chancellor has expressed cautious measures for support. Another issue arises with interest rates as investors demand higher interest rates, putting more strain on the government's budget leading to a "bank run on a country."
The article suggests that a way to end this cycle of reckless borrowing and spending is with a "lender-of-last-resort." The idea is that a lender, who is well endowed and confident about lending large loans, gives as much money to do "whatever it takes." In plain language, this means that the ECB will buy a country's bonds in unlimited amounts under certain conditions. This is called the "Outright Monetary Transactions." While the ECB (and Germany) have done everything necessary to keep the euro from sinking, there still remains a problem with fostering economic growth. Fears of further austerity policies and tight money in southern European economies have already begun. It will be interesting to see in the following months how the ECB and Germany will give southern European countries a plausible solution to reducing unemployment and debt and improve financial growth.
The article suggests that a way to end this cycle of reckless borrowing and spending is with a "lender-of-last-resort." The idea is that a lender, who is well endowed and confident about lending large loans, gives as much money to do "whatever it takes." In plain language, this means that the ECB will buy a country's bonds in unlimited amounts under certain conditions. This is called the "Outright Monetary Transactions." While the ECB (and Germany) have done everything necessary to keep the euro from sinking, there still remains a problem with fostering economic growth. Fears of further austerity policies and tight money in southern European economies have already begun. It will be interesting to see in the following months how the ECB and Germany will give southern European countries a plausible solution to reducing unemployment and debt and improve financial growth.
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This post is great considering that the professor did talk about the elections in Italy just in last class. I think this is interesting because it is true that political forces could cause a financial problem, not simply financial mishaps. The ECB and Germany are involved so that the euro does not come to ruin, however the austerity demanded seems to have caused more issues. I do like the "lender of las resort" proposal, but my only thought would be if the ECB would be willing to do "whatever it takes"? I look forward to seeing what happens with elections and their effect on the euro.
ReplyDeleteYes, this article also fits very well with chapter 10 and fixed exchange rates and the issue of not having sovereign authority over currency policy, which has been a problem for countries like Spain and Italy. This article also ties in well with Iverson, Toben, and Cusacks paper concerning the increase of the welfare state due to internal changes. They briefly mention the influence of internal political orientations of left and right governments having an impact on the relative degree of welfare and social security programs in their paper.
ReplyDeleteThis post is sort of frustrating. I feel for Germany, who seems to be taking a pragmatic approach to salvaging Greece and Italy's economies with still maintaining some spending integrity. This situation parallels US's current spending crisis as well. Germans demand austerity measures attached to loans while the citizens of Italy and Greece seem to not be in a position to have any more government spending cut from them.
ReplyDeleteTo be honest, I'm not too sure how this issue will end. Spending and printing more has failed to recover Italy and Greece from their economic (and political) crises thus far. So is it worth bringing down the EU as a whole to save two member states that bring little to the table? For security concerns, most people will say yes. I'm interested in any debates about expulsion from the EU.
ReplyDeleteThis post also ties into our previous discussion about the roles defined within international lending institutions. Seeing that the ECB will be buying a country's bonds in unlimited amounts under certain conditions as a response to the cycle of reckless borrowing and spending , is similar to what the IMF had to due in Ireland during the European Sovereign Debt Crisis. Ireland's private banking sector defaulted and the country acquired all of the debt. As a response, the IMF started to implement conditional lending to help ensure that new austerity policies were met. Both the ECB and the IMF reacted to each specific economic crisis by engaging in harsher austerity guidelines. These stringent austerity policies consequently had worse results in proportion to the extent to which they were initially imposed. Krugman notes this consequence in the article linked above as well.
ReplyDeleteRecent news articles have expressed that since the 2 months from the election, Italy's economic status has not improved. Italy still has not been able to form a proper government. An article in Yahoo states, "Buoyed by very cheap money in the United States and Japan, international markets are choosing to ignore Italy’s deteriorating economic and political fundamentals. Instead markets seem to be taking comfort in the European Central Bank’s commitment to do “whatever it takes” to save the euro in general and to provide a backstop to the Italian and Spanish government debt markets in particular by buying unlimited quantities of those countries’ bonds"
ReplyDeletehttp://finance.yahoo.com/blogs/the-exchange/not-well-italy-000824113.html