March 29, 2024

Political Economy: A Tool Kit for Future Euro Crises

A big problem with the euro zone’s one-size-fits-all monetary policy is that it risks fitting nobody. That, indeed, was a central cause of the crisis.

Early in the century, countries like Spain and Ireland were booming, while Germany was in the doldrums. Setting interest rates at a level that worked well for the euro zone on average had the effect of inflating the Spanish and Irish property bubbles while pushing wages up, so their economies became uncompetitive. When the bubbles burst, the damage was devastating.

It would be hard to argue that any part of the euro zone is currently booming. Even Germany will eke out growth of only 0.3 percent this year, according to the International Monetary Fund. But it may not be long before the problems of a one-size-fits-all monetary policy are back to haunt the zone. Even though the German economy is not growing strongly, it is still outperforming the average. What is more, labor is in short supply and house prices are rising at a moderate clip — a big contrast to the average among euro zone states, let alone recession-troubled countries such as Italy.

The European Central Bank’s policy of keeping interest rates at the current level of 0.5 percent or lower for an “extended period” is right for the euro zone on average. The weaker countries would benefit from even looser monetary policy. Germany, though, may already need something tighter. If the “extended period” of low interest rates goes on for years, it could experience a boom.

Many observers view one-size-fits-all interest rates as one of the zone’s design defects, about which nothing can be done. Others advocate policies — like full fiscal union — that are not going to be adopted and would not really hit the spot, even if they were. But the outlook is not quite so pessimistic. There are two policies that could considerably mitigate the damage of the common monetary policy — and they do not even require any treaty changes.

The first is for euro zone members to pursue vigorous “macroprudential” policies. Since Lehman Brothers went bust five years ago, it has become fashionable to call for bank regulators to have the tools to prevent future bubbles. The main idea is that they should be able to stop credit and asset prices from growing too fast by directly intervening in the way banks lend. One way of doing that would be to increase the minimum capital buffers banks have to hold if the economy is overheating; another would be to cut the size of mortgages they are allowed to make.

Such macroprudential policies are a good idea everywhere. But they are particularly important for the euro zone because individual countries cannot use interest rates or exchange rates to stop overheating. Using macroprudential policy would not just restrain future booms; it would mean that a country’s banking system would be better placed to weather the subsequent bust.

The European Union is gradually putting the necessary building blocks in place. One element of that effort is giving the regulatory authorities the job of conducting macroprudential policy. Ten of the 28 E.U. members, including Germany, had done so by July, while the rest were working on legislation.

Meanwhile, an E.U. law that sets out broadly the way macroprudential tools should be used comes into effect next year.

Within the euro zone rather than the wider European Union, both the European Central Bank and the authorities in each country will have a say over the use of the antibubble tool kit. That is because, beginning next year, the E.C.B. will add bank supervision to its duty of running monetary policy. The basic principle is that the authorities in each country will be expected to take action, but if the E.C.B. believes they are not doing enough, it can use the tools, too.

It has to be said, though, that both macroprudential policy and the way it would be organized within the euro zone are in their infancy. When it was used by Spain during its housing bubble, it was not very effective. Some observers say the whole policy is overrated; others say it just was not pursued vigorously enough. The best guess is that macroprudential policy would help if it were actively implemented but that it would be wrong to expect it to do the whole job of stopping an economy from overheating. That is why euro zone countries should adopt another approach as well: “countercyclical” fiscal policies.

During the crisis, many countries have been forced to adopt austerity. That has been “procyclical” — exacerbating recessions in those countries. In some cases, like Greece, that was unavoidable because their finances were in such a mess to start with.

But in the future, countries should take exactly the opposite approach: running up fiscal surpluses in the good times and then allowing their budgets to go into deficit in the bad times. That is classic Keynesianism, except that most Keynesians forget the essential part about building up surpluses in booms. Such an approach would not just restrain the booms; it would mean that countries would have the financial wherewithal to run expansionary fiscal policies during busts, rather than being forced into austerity.

Countercyclical fiscal policy is a good idea for all countries. But, as with macroprudential policy, it is particularly appropriate for the euro zone. It needs such tools to mitigate the defects of its one-size-fits-all monetary policy. Before too long, some countries will need the courage to use them.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/09/23/business/global/a-tool-kit-for-future-euro-crises.html?partner=rss&emc=rss

Intel Names New Chief

The company also announced on Thursday that software honcho Renée James, 48, had been elevated to the post of president. Her appointment signaled to some that Intel, while likely intending to stick with its formula of intense investment to keep it ahead in the microchip technology game, is willing to explore new growth areas.

The company said last November that it might go external for its next CEO, raising hopes that it might find someone to shake it out of recent doldrums.

Seen as a frontrunner for the job since November, Krzanich inherits a company with margins of almost 60 percent that has all but extinguished rival Advanced Micro Devices Inc in the past few years, and is now the dominant maker of microprocessors for computers and servers.

But the company is in danger of finding itself sidelined as mobile devices such as tablets and ever more powerful smartphones accelerate a contraction of the personal computer market. The majority of gadgets today run processors based on rival ARM Holdings Plc’s power-saving chip architecture.

“An external candidate might have been a better choice – with no negative reflection on Brian – simply because of the juncture Intel is at with what’s happening in the PC market and the need to take major action outside of PCs,” said Cody Acree, an analyst at Williams Financial Group.

“Brian may very well come in and make those same very difficult dramatic choices, but it’s less likely.”

He will take on the top job at the company’s annual shareholder meeting on May 16, replacing Paul Otellini.

A relative unknown outside the tight-knit semiconductor industry, Krzanich has worked at Intel since 1982, rising to chief operating officer just over a year ago.

The 52-year-old has earned a reputation for being a decisive leader who liked to keep a low profile. Intel on Thursday stressed that he will have a strong partner in James, who in 2011 spearheaded Intel’s $7.7 billion acquisition of No. 2 security software firm McAfee Inc.

She ran software product and service sales as well as a team of engineers focused on improving the performance of Microsoft Corp’s Windows 8 and Google Inc’s Android software when run on the company’s microchips.

Her elevation “puts emphasis on the many businesses Intel is in beyond just chips. This is an important promotion, and it clearly signals the board wants to make Intel a much broader company,” said Jack Gold, who runs research outfit Jack Gold Associates.

Intel shares closed 0.5 percent higher at $24.11 on the Nasdaq on Thursday.

CRUCIAL TIME

Intel’s board took six months to deliberate on who could best helm a company with deep roots in Silicon Valley and computing history. The company today rakes in more than $50 billion in annual sales and runs manufacturing facilities across the globe.

Over the past few months, media reports have mentioned several possible external candidates including Sanjay Jha, former head of Motorola’s mobile device division.

Intel Chairman Andy Bryant said Krzanich is capable of effecting a transformational move. But he also said Krzanich and James made for an “extremely powerful” partnership, and that the pair had co-developed a long-term strategic vision for the company that won the board over.

“They formed a partnership through the last few months that has blossomed into an extremely powerful pair,” he said.

“You’ll see a fairly dramatic change over a period of time,” Bryant told Reuters in an interview. “If you look at Intel’s past, with every CEO we’ve had that.”

Article source: http://www.nytimes.com/reuters/2013/05/02/business/02reuters-intel-ceo.html?partner=rss&emc=rss

Europe’s Small Businesses Continue to Struggle

Small and midsize companies in South European countries like Spain and Italy reported the most trouble making a profit, maintaining revenue and getting loans, according to the E.C.B. survey of 7,500 firms. Underscoring the plight of people in Southern Europe, the Spanish government said Friday that economic growth in coming years could be even worse than previously thought.

But the survey also pointed to signs of trouble in Northern Europe, further raising expectations that the E.C.B. might be all but compelled to cut its main interest rate in the coming week.

“It seems very difficult for the E.C.B. to leave the monetary policy stance unchanged,” Marie Diron, an economist who advises the consulting firm Ernst Young, said in an e-mail. Economists expect the E.C.B. to cut its benchmark rate to a record low of 0.5 percent from 0.75 percent when it meets Thursday.

U.S. economic growth continues to stand in contrast to Europe’s. The American economy sped up in the first quarter of this year, with output expanding at an annual pace of 2.5 percent, according to a U.S. Commerce Department report Friday. That number was lower than the 3 percent forecasters had been expecting, but it is a rosy picture compared with the doldrums in Europe.

Until recently, companies in Germany and other North European countries had come through the euro zone crisis relatively unscathed. But the E.C.B. survey found that a growing number of companies in Germany, the Netherlands and Austria were suffering, with more and more reporting that “finding customers” was now their biggest worry.

Even if the 17 countries in the euro zone are more and more in the same economic boat, though, tensions among their leaders are rising.

In a position paper prepared for a coming political convention, and quoted by the French newspaper Le Monde, leading members of France’s Socialist Party complained of what they said was “the selfish intransigence” of Chancellor Angela Merkel of Germany.

Ms. Merkel, the document said, “cares only for the bank depositors of the upper Rhine, the trade balance in Berlin and her electoral future.”

Ms. Merkel raised eyebrows Thursday when, in remarks to German bankers, she said that Germany should have higher, not lower, interest rates. It is considered taboo for a political leader to try to put pressure on the E.C.B.

In the E.C.B. survey, conducted in February and March and which focused on firms with fewer than 250 employees, companies throughout the euro zone reported declines in profit, except in Germany and Austria. Even in those countries, though, earnings were flat.

Along with separate data from the E.C.B. that showed a dip in bank lending last month, the survey adds to a growing body of evidence that a recovery of the euro zone economy may not materialize until next year. The figures suggest that, while fear of a breakup of the 17-member euro zone has ebbed, the currency union is at risk of long-term stagnation.

Meanwhile, a document has come to light in which Jens Weidmann, president of the German central bank, the Bundesbank, argued that some measures by the E.C.B., which are largely responsible for the decline in financial stress, would be illegal.

Mr. Weidmann made the critique in an opinion he submitted in December to the German Constitutional Court, which is considering a complaint against Germany’s participation in measures designed to keep the euro zone together. The 29-page document was confidential until Handelsblatt, a German business newspaper, published it Friday.

Mr. Weidmann wrote that the E.C.B. would violate its mandate if it bought government bonds of euro zone members on a huge scale, as it has pledged to do if needed to keep down borrowing costs for troubled countries.

The E.C.B. has not needed to buy any bonds because the promise alone has been enough to calm financial markets. In one sign of receding financial tension, bank data compiled by the E.C.B. and published Friday showed no sign of a flight by depositors following turmoil in Cyprus last month, except in Cyprus.

Article source: http://www.nytimes.com/2013/04/27/business/global/27iht-eurozone27.html?partner=rss&emc=rss

Japan’s Nikkei Average Surges

TOKYO — Japan’s Nikkei average surged 3.8 percent Wednesday, closing at its highest point since October 2008, after the yen fell sharply amid expectations of a more aggressive economic policy.

The benchmark rose 416.83 points to 11,463.75, its biggest one-day gain since March 2011, as the Japanese currency dropped to 94.08 against the dollar.

On Tuesday, Masaaki Shirakawa, the governor of the Bank of Japan, said he would step down, along with his two deputies, in March, three weeks before the scheduled end of his five-year term.

Prime Minister Shinzo Abe has put the central bank under relentless pressure to do more to pull the economy out of the doldrums. Mr. Shirakawa’s announcement opened the way for him to quickly appoint a governor who would be bolder in loosening monetary policy.

“There was a very aggressive, solid weakening of the yen in response to what seems like relatively trivial news,” said Stefan Worrall, director of equity sales at Credit Suisse in Tokyo. “But it’s nonetheless news that signals the expectation and recognition that the momentum in Japan is continuing to favor yen weakening,”

Although investors have seen the weak yen as a boon for exporters over the last two and a half months, Mr. Worrall said, there are other benefits to a more competitive exchange rate.

“On a U.S. dollar basis, Japan has yet to break out, particularly if you compare its rally with rallies” in Germany and Australia, he said.

Indeed, brighter profit forecasts from the likes of Toyota Motor and Mitsubishi Heavy Industries helped sustain the optimistic mood Wednesday. Their gains stemmed from the weaker yen, which inflates the value of earnings from overseas.

Toyota climbed 6.1 percent and was the most-traded stock by turnover on the main board, and Mitsubishi Heavy rose 10.4 percent, with both stocks hitting their highest levels since autumn 2008.

Expectations of a new central bank governor also helped inflation-sensitive shares, as the central bank signed onto a new 2 percent inflation target last month with the government. On Wednesday, the real estate sector advanced 4 percent.

Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley, said the central bank might start “open-ended” asset buying in April, well before the 2014 start the central bank committed to at its last policy meeting.

Mr. Fujito said he saw Kazumasa Iwata, a former Bank of Japan deputy governor and a vocal supporter of an asset purchase fund of ¥50 trillion, or $530 billion, as the most likely candidate to succeed Mr. Shirakawa.

Others seen as possible candidates are Haruhiko Kuroda, president of the Asian Development Bank, and Heizo Takenaka, who a decade ago was an economics minister.

Article source: http://www.nytimes.com/2013/02/07/business/global/japans-nikkei-average-surges.html?partner=rss&emc=rss