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Beyond Greece

Beyond Greece:

OVER the weekend, a colleague wrote at Schumpeter on a conference he'd recently chaired:

At an Economist Conferences event for CFOs and finance directors in London this week, I asked the audience whether Greece would end up leaving the euro zone. Every single hand went up. Asked whether more countries than Greece would leave, roughly two-thirds of the audience agreed they would...

It is already happening, after all: a 70%-plus fall in the net present value of private-sector bonds counts as a pretty severe pasting for investors. The worry is the unpredictable impact of a euro-zone exit, not just for Greece but for the rest of the euro zone. The Economist has argued for a Greek default for a year, but always on the presumption that default need not mean exit. But it is ever harder to envisage a situation in which official creditors take a loss on their Greek bond holdings, which is needed to put Greek debt on a sustainable footing, but also agree to keep funding the country until it starts running a primary surplus. Default and exit are becoming inseparable.

Which brings us to the third reason why exit is likely. The prospect of euro-zone departures (even multiple ones) doesn’t scare people as much as it should. The overall mood of the delegates at the conference was relatively sanguine about the effects of an exit. Contingency plans were in place at their firms to deal with it; this wouldn’t be another 2008.

Yet 2008 is what the current situation ominously resembles...

Default and exit are increasingly intertwined, because the political limits to support for the Greek economy are looming, if not already breached. With great difficulty, euro-zone leaders agreed a new bail-out plan for the struggling Greek economy, but it is far from clear that the obstacles to implementation—financial and political—will be managed. Even if they are, another bail-out will probably be needed; the fiscal and growth goals for the Greek economy built into the new bail-out are extremely optimistic by several analyses—including one prepared for euro-zone finance ministers. It's hard to imagine another billion-euro package being put together for the struggling Greeks.

Not least since euro-zone leaders seem to think they're prepared for exit. And maybe they are; they have had almost two years to cut exposure to Greece and prepare for the worst. My colleague is right, though; officials don't allow terrible things to happen if they can help it, and usually when terrible things happen it's because leaders didn't think they'd be so bad—like the Lehman bankruptcy.

This week, the European Central Bank will shower the euro-zone banking system with another burst of cheap liquidity via its second round of long-term refinancing operations. Since the first round of LTRO lending back in December, there has been a substantial recovery in most (though not all) of the prominent crisis indicators. Measures of financial stress reversed, equities rose, and Spanish and Italian sovereign-debt yields came back to manageable, though still elevated, levels. This dynamic, I think, is a big reason why there is such complacency about a Greek exit.

What the LTRO has not necessarily improved, however, is the state of the peripheral economy. A reduction in the threat of broad financial crisis has allowed the German economy to regain its footing. Across the periphery, however, the bad news continues to accumulate. Output will probably contract across southern Europe in 2012. Portugal's situation, especially, looks dire. A contraction of 3.3% is forecast for the year. Its government is on track to hit its short-term fiscal goals—thanks largely to one-off measures that can't be repeated in future.

Whatever happens to Greece, it is becoming increasingly difficult to pretend that the most unpleasant dealings with that economy—repeated bail-outs, private-sector involvement in debt restructuring, and missed deficit targets—will not be allowed to occur elsewhere. Europe is breathing easier about a Greek exit. If it wants to ensure that a departure isn't a swift route back to acute crisis, its leaders need to do far more to establish a firewall between the damned and the purgatorial. But that's what people have been saying since the beginning of this mess.

Nothing to see in Portugal, please keep moving

Nothing to see in Portugal, please keep moving:

THE troika wishes to convey that Portugal will be just fine, thank you, provided they keep at it:

The programme is on track, but challenges remain. Policies are generally being implemented as planned, and economic adjustment is underway. In particular, the large fiscal correction in 2011 and the strong 2012 budget have bolstered the credibility of Portugal’s front-loaded fiscal consolidation strategy. Financial sector reforms and deleveraging efforts are advancing, while steps are taken to ensure that credit needs of companies with sound growth prospects are met. Reforms to increase competitiveness, growth, and jobs have also progressed, although many reforms still await full implementation. The broad political and social consensus that is underpinning the programme is a key asset.

Looking ahead, the Portuguese economy will continue to face headwinds. In 2012, trading partner import growth is expected to weaken further, while domestic demand adjusts, and unemployment and bankruptcies are rising. As a result, GDP in 2012 is expected to decline by 3¼ percent, following a fall of 1½ percent in 2011. In 2013, a slow recovery should take hold, mainly supported by private investment and exports. External adjustment is proceeding.

Here's a graphic representation of the establishment of fiscal credibility:

[inline|iid=12832]

That large drop in early February corresponds to the adoption of Portugal's strong 2012 budget. Wait, strike that, the large drop in early February corresponds to a flood of European Central Bank money. I'm sure the drop from renewed fiscal credibility is in there somewhere; kindly point it out in comments.

The IMF reckons Portugal's debt load will stabilise around the arbitrary yet all-important 120% of GDP threshold. At least some private forecasters anticipate the possibility of a peak at a much higher level. What seems clear, however, is that Portugal can't afford any nasty surprises from the resolution of the Greek debt mess. That sort of thing could have a serious negative impact on the government's hard-won credibility.

In praise of structural reform

In praise of structural reform:

THIS OECD chart is making the rounds and prompting derisive laughter across Twitter:

[inline|iid=12810]

The joke, of course, is that the more reforming an economy seems to have done of late, the worse off it appears to be. It's almost as if, Twitter seems to be concluding, the OECD and other big institutions have got their policy prescriptions all wrong!

Well, yes and no. Recommendations for reform, like advocacy for deficit reduction, often function as a mark of seriousness within some intellectual and policymaking circles. It's tempting to chalk economic failure up to profligacy, or insufficient adherence to a set of commonly accepted economic principles. Some leaders seem anxious to misdiagnose crises, intentionally or unintentionally, in order to seize the opportunity to foist preferred policies on vulnerable economies. It's going too far to argue that European Central Bank officials are engineering a demand shortfall in the euro zone, the better to keep the pressure on peripheral governments and force reform. Yet the ECB's own actions invite the criticism.

Economics isn't a morality play, and the solution to many economic crises is to print more money or borrow more money or both. At the same time, economies do suffer from structural problems. These problems are occasionally crippling in their severity. Consider a quote recently blogged by Tyler Cowen, from economist Megan Greene:

A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales. However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 18h and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee.

Now look, this is not the reason that Greece has been mired in recession for four years. It is not the reason that its current downturn rivals the worst of the 1930s. It is, however, a serious economic problem. Absurd Spanish labour-market rules are not the reason that country suffered a terrible recession. They are, however, a serious economic problem, and one which has exacerbated the present economic crisis. America's weak labour-market recovery is not primarily due to an explosion in onerous occupational licensing requirements, to kudzu-like growth in regulatory red tape, or to increasingly stringent zoning rules that make prosperous cities unaffordable to working households. These are real economic problems, however, which can constrain growth over the long run, distort the returns to growth toward more capable rent-seekers, and slow the process of recovery by impairing the economy's natural adjustment processes.

Structural reform is also not synonymous with austerity. An economy with unsustainable public finances may choose to delay austerity if the impact of spending cuts on growth seems likely to blunt any fiscal improvement. This is an acute concern within the euro zone, where countries lack an independent monetary policy or currency. Indeed, it would be far better for everyone in Europe if officials focused much less on short-term budget cuts and much more on actual reforms: to make it easier to hire and fire workers, start new businesses, and so on. European officials more interested in establishing their own seriousness by calling for painful cuts than in actually helping peripheral economies are undermining the cause of reform. But that doesn't make structural reform any less valuable.

It is possible to argue simultaneously that an economy could use both demand stimulus and structural reform. In many cases, the two are complementary—the euro zone is a very good example. We can all criticise people and organisations which learned nothing when previous reforms failed to generate expected benefits, and we can condemn officials who advocate needless pain for struggling economies. It does no good to pretend that structural reforms never matter, however, or to argue that illiberal rules which keep millions of people poorer than they ought to be shouldn't be scrapped. The economics of many of these issues are fairly clear, and if the bitter nature of the policy debate prevents us from acknowledging that many economies suffer from two, or multiple, ills at once, then that's a serious concern.

We shouldn't conclude that helpful prescriptions aren't helpful just because jerks* occasionally agree.

 

* I am not arguing that the hardworking folks at the OECD are all jerks. Just to be clear.

Crunch time at the Fed

Crunch time at the Fed:

ON FRIDAY, Brad DeLong blogged a slide from a Christina and David Romer lecture on practical monetary policy at the zero lower bound. The slide contains the Fed's language on low rates from the latest statement and then adds:

Fed isn't promising to keep rates low even if output is back to normal; they are saying they expect to want to keep rates low because output will be low.

So let's back up. At the zero lower bound, the only way to reduce the policy rate is to raise expected inflation. The Fed's communication strategy seems designed to raise expected inflation, by promising to keep rates low in the future when the economy will probably be stronger. To the extent that markets interpret the statement in that way, inflation expectations should rise, the real interest rate should fall, and economic activity should accelerate.

But, as the text in the slide indicates, a strict reading of the Fed statement suggests that the central bank is planning to keep rates low because the economy is likely to remain weak. In that case, the rate forecast wouldn't be expected to raise inflation and wouldn't be stimulative. I shy away from the strict interpretation of the statement, because it would make no sense to add the language in the first place if that's what the Fed were actually saying. Perhaps too charitably, I lean toward a view that the Fed is trying to raise inflation expectations without spooking its critics, internal and external. If I had to marshall evidence for this view, I'd note that general conditions improved from the December to January meeting (and the projected unemployment rate dropped from November to January), yet the Fed pushed out the period through which low rates were probably into 2014.

Unless the Fed continues with its enhanced communications strategy up to the point at which communications are actually enhanced, we'll all be left wondering about the meaning of the statement until the point at which the Fed is forced to show its hand. Unfortunately, oil-price dynamics may interfere.

Tim Duy has a nice discussion of some of the issues here. A few points bear mentioning. First, the Fed targets headline, not core, inflation. Second, it nonetheless uses core as a guide to future headline inflation—strictly targeting headline inflation may lead to nasty procyclicality in policy (see: Jean-Claude Trichet). The trouble, as Mr Duy points out, is that an increase in short-term inflation due to rising commodity prices does not necessarily translate into lower real interest rates. It is expected inflation that matters, and inflation expectations may actually fall in response to higher commodity prices. A fun intellectual discussion might be to try and pick apart whether the drop in future expectations is due to the contractionary nature of dear oil or the central-bank response or something else. Whatever the cause, the upshot is that a rise in commodity prices which pushes up headline inflation but reduces medium-term inflation expectations is strictly contractionary at the zero lower bound.

The right monetary policy reaction is not only to accommodate the oil shock but to ease into it. That will unquestionably be a hard sell to a central bank that understands all too well the lack of appreciation for the subtleties of monetary policy in Congress (and, honestly, at the top of many regional reserve banks). Try telling Ron Paul that you need to buy more assets to raise inflation, because higher oil-induced inflation is reducing expectated inflation. That's where America may find itself, however. In short, a big enough rise in oil prices that translates into a big enough decline in expected growth and inflation may nudge the Fed from the rates-will-be-low-because-we-want-catch-up-growth interpretation toward the rates-will-be-low-because-the-economy-will-be-weak interpretation. Which would dial down the stimulative impact of the language from something to nothing.

It's enough to get one thinking that a non-inflation-rate target (like nominal GDP, for instance) might be more attractive from both an economic and a political economy standpoint. Perhaps unsurprisingly, Mrs Romer is on board.

Excellent News For Scott Walker!

Excellent News For Scott Walker!:

New numbers from Public Policy Polling suggest Gov. Scott Walker will have a serious fight on his hands in the upcoming recall against him.

Presented By:

Presented By::

The terrifying race to the loony right

The terrifying race to the loony right: As Santorum and Romney battle for the extremist vote, progressives should be worried, not gloating

Metal scare over hip replacement joints

Metal scare over hip replacement joints:

Tens of thousands of people with all-metal hip replacements to be called in for annual blood checks

Nearly 50,000 people with all-metal hip replacements are to be called in for annual blood checks because of fears that metal particles shearing off the joint could cause them harm.

The Medicines and Healthcare Regulatory Authority (MHRA) issued new guidance hours before the British Medical Journal (BMJ) was due to publish an investigation into the implants, linked to a Newsnight programme in the evening.

The BMJ and Newsnight allege that hundreds of thousands of people around the world have been exposed to dangerously high levels of toxic metals in their bodies as a result of the introduction of metal-on-metal implants. One type, the DePuy ASR, was banned by the MHRA after it became clear that it caused problems and needed replacing much sooner than others.

But critics argue that the regulators have been slow to act against other metal-on-metal implants which shed metal particles into surrounding tissue. There have been a small number of cases where, it is claimed, toxic chromium and cobalt ions have leaked into the lymph nodes, liver and kidneys before leaving the body as urine.

Concerns about some of the metal-on-metal hip implants were first voiced in 2008 by surgeons who saw patients with swellings in the hip area, said the MHRA. From 2010 it advised that all patients with metal-on-metal implants should have annual tests to establish the level of metal ions in their blood.

On Tuesday the MHRA said that some types of metal-on-metal hip replacements – those with a metal ball and socket under 36mm diameter – did not appear to cause problems. Patients with those implants, about a third of the 65,000 total since 2003, did not need blood checks unless they had symptoms.

However those with implants with larger metal balls – over 36mm diameter – should have blood tests every year for the life of the implant, not just every five years as previously recommended, and an MRI scan if their ion levels are seen to be rising, which could indicate a need to replace the joint.

Patients who did not know whether they had a metal-on-metal joint should see their GP, said the MHRA.

• Health
• Medical research

Sarah Boseley

guardian.co.uk © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

Met failed to tell MP of extent of phone hacking commissioning, inquiry hears

Met failed to tell MP of extent of phone hacking commissioning, inquiry hears:

Simon Hughes says police had evidence seeming to indicate 'at least three' NoW staff asked Mulcaire to access his voicemail

Scotland Yard failed to tell a senior Liberal Democrat MP for five years that police had evidence in their possession that appeared to indicate that "at least three" News of the World journalists were involved in commissioning the hacking of his phones by a private investigator.

Notes seized by the Metropolitan police from the home of Glenn Mulcaire in 2006 contained detailed information about Simon Hughes's telephone numbers and the names of three journalists in the margins of the notes, referring to reporters who are thought to have commissioned the investigator's hacking work.

However, giving evidence to the Leveson inquiry, Hughes said he was never shown any of Mulcaire's notes about him when he was told by police his phone messages had been intercepted in October 2006. He was only shown the notes by police at a meeting on May 25 2011, and was "shocked" at the level of personal detail they contained.

Back in 2006, the police were preparing a case against the News of the World's royal editor Clive Goodman and Mulcaire, both of whom were sentenced to jail for phone hacking-related offences in January 2007.

"I find it impossible to find a good explanation for why that happened," said Hughes who said there had been "significant failure" on the part of the police. When Hughes asked detectives in 2006 whether other journalists were involved in phone hacking, he was told that the investigation was not proceeding against anybody else.

The MP added in his written statement: "I suspect that the police had shut down this investigation, much to the delight of News Group (publishers of the News of the World), and ignored evidence of long-standing and widespread criminality. I do not know of any good or persuasive reason why this should be, and it makes me extremely suspicious."

Hughes was one of a group of five non-royal phone-hacking victims to be selected to support the police case in the Mulcaire and Goodman trial but said it wasn't until he was approached by police last year that he discovered the extent of evidence against the News of the World. Others included PR man Max Clifford and Gordon Taylor, chief of the Professional Footballers' Association.

"There was no prosecution against anybody other than Clive Goodman, and Clive Goodman only because of his work with the royal family, whereas there was a whole range of people clearly acting in concert, either directly or indirectly, illegally, and they were not touched," he said.

Hughes told Leveson he was "surprised and disappointed" that only two people were taken to court not just because there were three people allegedly involved in ordering phone hacking apart from Clive Goodman, but that there was also evidence from Mulcaire's notes that there were hundreds of victims outside the handful the police were using in the trial in 2006.

"Clearly employees were engaged, and therefore the whole panoply of other people, who it now appears had their voicemails hacked on the instructions of people in News of the World, were not in any way used as evidence against the employees," he added.

Hughes also told Leveson that Goodman and Mulcaire were tried on the basis that the private investigator had received £12,300 for his services. But it now appears the police had evidence that Mulcaire could have received up to £1m. This figure emerged at the Leveson inquiry on Monday and is far higher than previous information on Mulcaire's earnings from his alleged phone hacking and blagging activities.

It emerged last week from evidence disclosed after an application from the Guardian that Mulcaire earned about £100,000 a year between 2001 and 2006.

Today Hughes disclosed a new table of alleged payments to Mulcaire which show he may have earned anything from £775,786 to £849,470 from News International between 1999 and 2007 – far more than was disclosed to the court at the time of Mulcaire's trial.

"The court sentenced Goodman and Mulcaire on the basis that £12,300 was the known transaction payment. It is clear from here and clear, as counsel knows, from other evidence, that there was at least £500,000 of certain payment by News of the World to Mulcaire," Hughes told Leveson.

The Lib Dem MP said Mulcaire's notebooks showed that the News of the World had tried to stand up stories about a man and a woman linked to him "based on a salacious assumption".

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• Phone hacking
• Simon Hughes
• Leveson inquiry
• Metropolitan police
• Newspapers & magazines
• National newspapers
• Newspapers
• Press intrusion
• Liberal Democrats
• Police
• London

Lisa O'Carroll

guardian.co.uk © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds