Roach Sees ‘Relatively Contained’ Recession in Europe

Stephen Roach told Bloomberg television earlier today that he does not expect the recession in Europe to be severe. Therefore, he believes the impact on other economies, particularly in Asia that depends on Europe for external demand for exports, will be limited. Video below

If no trade reversal now, then when?

The best resolution, and the one Keynes urged without success on the US in the 1920s and 1930s, is that Germany take steps to reverse its trade surplus. It could boost disposable household income and household consumption by cutting income and consumption taxes. If Germany imposes austerity, unemployment will force the peripheral countries into the unenviable choice either of absorbing that surge in unemployment themselves, or of forcing the unemployment back onto the core countries by abandoning the currency that is at the heart of their lack of competitiveness

Japan and China: Small Beer

Understanding the financial agreement within the context of that rivalry is more important than what it means for the future of the dollar as the world’s more important reserve currency, invoicing currency and vehicle currency. Nor will the agreement impact the outlook for either the yuan or the yen

Italy Braces Itself For The Full Monti

The bottom line is that Italy is both too big to fail and too big to be bailed out, which is why it is still hanging dangerously in limbo-land. Since, as I argue in this article, some sort of restructuring or other is well nigh inevitable in the Italian case, the sooner Europe’s leaders work up a credible plan on how to achieve this, the better. Otherwise it will not only be Italy’s citizens who are subjected to the Full Monti, Europe’s leaders may also find themselves with their credibility stripped naked

America: What to Do with North Korea?

North Korea’s dear leader, Kim II, died a few days ago. His 3rd son is now in charge, as Kim III, Kim Jong Un (pictured). There is no better time to talk about North Korea than now, as evidenced by some timely expert opinions. So it’s time for me to chip in my two cents. I will briefly but succinctly answer five pertinent questions as follows

Is Finland Really A Closet Member Of The Eurozone Periphery?

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

China: Lots of news, signifying nothing new

I don’t think there is a whole lot to say about this week’s numbers beyond what I have been saying for the past several months. Nothing substantial has really changed. China’s external account is worsening, and will continue to worsen since global imbalances have no choice but to adjust. Growth in China is slowing but remains relatively rapid, and as unhealthy as ever, but there is little likely to be done to improve the quality of growth until 2013. Beijing will continue veering back and forth between stomping on the credit accelerator and stomping on the credit brakes as the only way they can manage the economy

The ECB now wants export-driven growth for the whole of Europe, not just for Germany

The ECB President admitted that budgets cuts and tax increases are contractionary -“in the short term” he added – but there are two ways to lessen their negative impact on growth: the confidence-enhancing effect that will follow the new “fiscal compact” or “if you enhance the competitiveness, you can actually count on your external demand, on your net exports”

China and Europe

China has an interest in preventing the total collapse of the largest buyer of its exports, but it also has an interest in forcing Europe to divest its overseas assets. Chinese banks and companies are in a position to be a buyer of some of those assets

Charts of the day: Understanding the latest economic data out of China

The weak November HSBC PMI for China has added to market bearishness. This is not the official PMI but we do note that while the HSBC measure has been below 50 for 4 of the 5 past months, the official PMI has yet to fall below 50, but it was reported at 50.4 in October, the lowest since February 2009. A further drop in the official PMI below 50 seems hard to avoid. Slowing in the Chinese economy is inevitable given the deteriorating external environment as well as PBOC tightening measures taken in 2010-

Germany must do it, not China

So how do we explain the European crisis? One theory is that the European crisis was caused by the moral turpitude and spendthrift habits of lazy Europeans along the periphery, in sharp contrast to the hard-working and thrifty countries of the center. According to this theory it is unfair to demand that Germans clean up the mess.

If you believe this theory, you are going to have to explain what happened in 2000 that turned thrifty Italians, French and Irish into spendthrifts, and that turned ordinary Greeks, Portuguese and Spaniards into even worse spendthrifts. You will also have to explain why spendthrift Germans in the 1990s suddenly morphed into the stolid, thrifty creatures of legend.

An alternative theory is that the imbalances were caused by internal policies – perhaps the creation of the euro and the gearing of monetary policy to German needs at the expense of the periphery? – which led to the severe internal imbalances. These imbalances created employment growth in the countries that suppressed consumption, and forced the countries that didn’t to choose between debt and unemployment. Of course since the latter countries had no control over monetary policy, the choice was largely made for them by the ECB with its excessively low interest rates, and their debt levels surged.

I find this alternative theory a lot easier to understand, and if it is true it places responsibility for saving the euro squarely in Germany’s hands. The only way to save the euro (and incidentally to prevent Germany’s banks from being forced to absorb huge losses on peripheral European debt) is for Germany to spur consumption and investment enough to reverse the current account surplus. Only this will allow peripheral Europe to grow and to earn the euros needed to repay the debt

The euro zone is one giant vendor financing scheme

Here’s an interpretation of the euro zone I have been meaning to run by you and I touched on it in the update to my post on how austerity in Europe works. In a fixed exchange rate environment like the euro area, you don’t have currency fluctuation issues. So persistent current account imbalances as we see within the euro zone are really a form of vendor financing