Time for Bankers to Intervene

Ben Bernanke, the chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank, have both argued correctly that the slowing global economy requires decisive action by political leaders. Mr. Bernanke has come as close to pleading with Congress as a Fed chairman can, telling lawmakers on several occasions that the Fed alone cannot repair the economy and asking them for “help,” “support” and “collaboration”. That’s all Fed-speak for “more federal spending, now, please”. Mr. Draghi, for his part, has sternly said, “It is not right for monetary policy to fill other institutions’ lack of action,” a reference to urgent need for Europe’s leaders to resolve euro crisis. But what if politicians refuse to act? In the United States, legislative obstructionism is the approach of Republicans who do not want the economy to improve before Election Day. In Europe, a European Union summit meeting later this week will give leaders yet another chance to deliver on stimulus, banking reforms and political strategies to stabilize the eurozone. But the experience of the past two years suggests that they will do too little, too slowly. Meanwhile, growth is faltering. The Fed now expects United States economy to expand by 1.9 percent to 2.4 percent in 2012, down from its forecast of 3.5 percent a year ago. The European Central Bank’s economic forecast for eurozone this year is -0.5 percent to 0.3 percent growth. And that’s being optimistic. Bernanke and Draghi would clearly prefer to act in concert with politicians. But with the economy relapsing, more aggressive action is overdue. For the Fed, that means renewed quantitative easing, an attempt to lower long-term borrowing rates and spur demand by creating money with which to purchase bonds. To send the message that help will be provided as long as the economy remains weak, a bond-buying program or other support should be tied to specific goals for lower unemployment, higher inflation or stronger overall growth. European Central Bank can start with the obvious: cutting its benchmark interest rate below 1 percent, coupled with resurrecting its own moribund bond-buying program. Growth and inflation that could result from these measures would help to counteract the ills unleashed by excessive and premature fiscal austerity. In recent Congressional testimony on growth and jobs, Mr. Bernanke again told lawmakers that Fed could not fix economy on its own. “I’d feel much more comfortable if Congress would take some of this burden from us and address these issues”. We all would. Likewise, people in Europe surely expect more from their political leaders, though expectations have gone unmet. European Central Bank policy setters meet next week. The Fed meets again at the end of July. It’s past time for them to take stronger action. (source: Editorial – NYTimes – 27/06/2012)


Acerca de ignaciocovelo
Consultor Internacional

4 Responses to Time for Bankers to Intervene

  1. Professor Uziel Nogueira says: The solution of the serious problems in the euro zone cannot be solved by monetary policy alone. It’s well above the pay grade of Mr. Mario Draghi and the ECB. Ms. Merkel will stand fast on her strategy to deal with the problem. Namely, make sure that politicians understand that the euro is NOT an entitlement, a short cut to prosperity without sacrifice. Greece is the first country to be disciplined by Germany. Clearly, Greece cannot afford the euro as currency. The crisis will get worse before a long term solution is found collectively.


  2. Chancellor Angela Merkel reinforced her Nein to euro bonds on Wednesday and sharply criticized euro zone reform proposals presented by top EU officials this week. Her remarks set the stage for what promises to be a difficult, fractious EU summit on Thursday. In a statement to Germany’s lower house of parliament, the Bundestag, Merkel made clear that she will not bow to intense international pressure on Germany to agree to joint bond issues that would calm the euro crisis by stabilizing ailing euro-zone member states like Italy and Spain. She said the blueprint for closer financial integration drafted by European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Euro Group President Jean-Claude Juncker and European Central Bank President Mario Draghi contained major shortcomings, and that she would seek support for her own ideas in Brussels. “I profoundly disagree with the stance taken in the report that precedence is given to mutualization, and that more control and enforcable commitments take second place and are phrased in very imprecise terms,” said Merkel, to applause from conservative parliamentarians. “There is a clear discrepancy between liability and control in this report, so I fear that the summit will once again talk too much about all kinds of ideas for possible joint liability, and much too little about improved controls and structural measures.” She said instruments such as euro bonds, short-term euro bills and a common debt repayment fund would be in breach of the German constitution in any case, and that she regarded them as “economically wrong and counterproductive” (…..)


  3. (…..) Rather than suffer on all these fronts, Germany would do well to support the weak periphery. Bailouts and rescue packages might look large in the headlines, but ultimately they impose burdens far lighter than the economic and financial costs implicit in any Eurozone dissolution, complete or partial. Still, in opting for bailouts, Germany, quite understandably, has no desire to play the chump. If money must flow from north to south in Europe, Berlin wants assurances that it will go to ease the debt situation and not to feed additional profligacy. If German financial resources must carry the bulk of the rescue burden, Berlin surely wants to ensure that France, the Netherlands and other stronger members of the zone do not get a free ride and carry at least some of the burden. Even if Germans are vaguely aware of the great competitive advantages they have enjoyed and feel an obligation to help those who suffered disadvantages in the common currency, they still see little value in carrying the entire burden or turning aid into charity. Facing such constraints and unattractive options, German negotiators seem likely to push along three lines: First, Berlin will insist on austerity to ensure its aid does something to alleviate fiscal pressures, but its need for as broad a zone as possible will lead it to make concessions in order to keep aid recipients within the zone. Second, to ensure that Germany does not carry the entire burden, Berlin will insist on safeguards such as resisting Eurozone bonds (unless they are highly circumscribed) and any zone-wide banking union (unless it offers significant protections for German liabilities and also considerable control). Lastly, while insisting on tight, typically-German monetary policy, Berlin increasingly should look for ECB help with rescues, pressuring the bank to soften its former reluctance to add liquidity to European markets and banks. Whether such a three-part strategy will prove sufficient to defuse the crisis remains an open question, but it surely would help for Berlin to show its commitment and purpose clearly.


  4. (…..) The Germans have yet to fully spell out what they mean by a political union, but it largely involves the surrendering of more national authority to the region’s administrative capital in Brussels. Merkel’s influential finance minister, Wolfgang Schaeuble , last week re­inforced calls for a directly elected president of the European Commission, as well as a new finance minister for Europe capable of overruling national governments. German Foreign Minister Guido Westerwelle called a forum of his peers together last week to float notions including the integration of European defense into a single, standing army. “Only a long-term perspective for Europe will restore the confidence that we also need to come out of the debt crisis now,” Westerwelle told the Financial Times. But to a large measure, countries such as France, the Netherlands, Italy and Spain see the surrendering of power to a central authority as living under a German diktat by a different name. If, for instance, the region ever embraces a parliament or president elected by proportional representation, Germany could, by nature of its size, have the biggest say. In the Netherlands, for instance, a poll this month by Maurice de Hond found that 64 percent of those asked were opposed to Merkel’s calls for a political union. In Paris, where Merkel was meeting Wednesday evening with France’s new president, Francois Hollande, there is still strong skepticism of ceding national powers. Hollande, a socialist, has warned Merkel that a quid pro quo would be required, balancing steps toward integration with more willingness from Germany to put cash on the table. “Integration as much as necessary, solidarity as much as possible,” Hollande said Wednesday night in Paris in a joint news conference with Merkel. Increasingly isolated and under pressure from other leaders, Merkel has held firm to her line on short-term fixes to the crisis: Countries that overspent and over­borrowed must now endure lean times. The chancellor is set to agree this week to only a modest new growth plan pumping a relatively small amount of new cash into Europe’s moribund economy. But that position is also based partly on a deep sense in Germany that the 21 / 2-year debt crisis is simply not as bad as the rest of Europe thinks it is. If the situation takes a sharp turn for the worse — say, if Italy spirals into a deeper crisis — many think the Germans will feel boxed into a corner and will ultimately accede to more and quicker concessions on short-term measures. “I have some sympathy for the German position,” said Karel Lannoo, head of the Center for European Policy Studies in Brussels. “Angela Merkel is being forced to sell bailouts to her own population that has lived within its means. We have to be careful in Europe not to alienate the German public, because Europe really needs Germany now.”



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