November 18, 2017

Economic Outlook: Conflicting Signals for End of One-Way Policy Traffic

LONDON — Financial markets have become convinced in the past two weeks that two years of one-way policy traffic from the developed world’s central banks is coming to an end.

The difficulty, on the evidence of the last few days, is the mass of conflicting signals on how shaky things still are, or how much better they will get — and as a result, getting from here to actual changes in policy will probably take months.

Since the euro zone’s sovereign debt crisis administered another jolt to the global economy three years ago, central bank decisions on more monetary easing have not so much been a question of if, but when. The same has largely gone for a fragile U.S. recovery.

That is not the case in 2013, even if global growth looks likely to disappoint again this year.

Faced with fewer immediate threats but still under pressure to nurse the world economy back to more convincing health, central bankers have been grasping at a disparate and volatile set of economic indicators for a guide on policy.

“That’s a fairly difficult challenge at the best of times, and we’re hardly in the best of times,” said Craig Wright, chief economist at Royal Bank of Canada in Toronto.

Data from the United States last week summed up the problem.

Depending on the indicator, there was a case for the Federal Reserve maintaining support for the economy by pressing on with its $85 billion-a-month bond purchase program for a long time, or scaling it back soon.

U.S. manufacturing activity unexpectedly fell to the lowest level in four years, economists said — a sign that the Fed will refrain from winding down its program anytime soon.

On the other hand, the news Friday that U.S. employers had stepped up hiring was interpreted as a sign of economic resilience, suggesting that the Fed could begin to scale back its stimulus this year.

The Fed’s officials are split, too, meaning it could be months until a consensus emerges. But most economists expect a scaling back of bond purchases by the end of the year, and a sizeable number expect reduced buying as early as September. Of course, central bankers have to take into account developments in economies other than their own, and the economic data from the rest of the world has been similarly volatile.

“The indicators are mixed across the globe, some countries look a little more convincing than others. I’d put the U.S. and Canada as looking like a recovery is taking hold,” said Mr. Wright, contrasting that with a situation in Britain and the euro zone that “is still hit and miss.”

While a fairly quiet week for economic data lies ahead, central bankers and top officials from the World Bank, the Organization for Economic Cooperation and Development and the Asian Development Bank are expected to give their views on the world economy Monday at the 2013 Conference of Montreal.

For Europe and Japan, the question is whether more still needs to be done.

Early doubts about the effectiveness of a growth strategy outlined by Prime Minister Shinzo Abe of Japan, dubbed Abenomics, pushed Japanese stocks to two-month lows Friday after their worst week in two years.

This week will provide a better idea of whether that was a blip in the aftermath of the Bank of Japan’s announcement of $1.4 trillion in monetary stimulus, or a sign that it might not be enough to right the Japanese economy.

“Recent weakness in the market represents a little bit of a disappointment for Abenomics,” said Kenji Shiomura, an analyst at Daiwa Securities.

“But it would be too extreme to say that hopes for Abenomics have faded completely because the biggest impact Abenomics gave the market was monetary easing, and it is still continuing.”

Perhaps the biggest worry for Japanese officials is the yen’s spike to its strongest in two months against the dollar. While the government showed little concern about the Friday surge, the calm response masks a lack of solid policy options should the yen strengthen further and stamp on the country’s ability to export.

European policy makers, like their U.S. counterparts, have had a hodgepodge of numbers to deal with.

Economic confidence figures have surprised on the upside in the euro zone over the last month, but harder data like business surveys still point to a dearth of demand. And like the Fed, the lack of a clear guide for the economy means the European Central Bank is sitting on the fence when it comes to the question of stimulus.

“There was a common assessment that the changes that have taken place are not sufficiently one-directional as to grant action now,” the E.C.B. president, Mario Draghi, said after leaving policy unchanged last Thursday.

Britain has been leading the way in Europe of late, according to the latest business surveys. But like the United States, there is little certainty about whether Britain will keep up the momentum.

“I think when you look at turning points in the cycle, which is hopefully where we are in Europe, you do get these mixed signals. And that’s what we’re seeing,” said Mr. Wright.

Article source: http://www.nytimes.com/2013/06/10/business/global/10iht-econ10.html?partner=rss&emc=rss

Latvia Steps Toward a Tarnished Prize, the Euro

FRANKFURT — The small Baltic nation of Latvia received official endorsement for membership in the euro currency union Wednesday, in a move that European leaders clearly hoped would demonstrate the endurance of the euro zone despite its dismal economic performance and damaged reputation.

“Latvia’s desire to adopt the euro is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong,” Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said in a statement.

Both the European Commission, the European Union’s main policy-making body, and the European Central Bank said that Latvia had met the requirements for membership, which include limits on inflation and government debt. Latvia also had to demonstrate that its laws on issues like central bank independence are in line with European Union standards.

Latvia’s application still requires review by the European Parliament and endorsement by European Union political leaders, a process that is likely to result in formal approval in July.

Latvia would join on Jan. 1, becoming the 18th European Union country to adopt the euro.

The country, with 2.2. million people and economic output last year worth about 20 billion euros, is often held up as a model for advocates of austerity because the country responded to a severe banking crisis in 2008 by slashing government spending.

Economic output plunged, unemployment soared and wages fell, but the Latvian economy gradually recovered. The country’s economy grew 1.2 percent in the first quarter of 2013 compared with the previous quarter, second only to neighboring Lithuania among European Union countries.

“Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger,” Mr. Rehn said.

However, opinion polls indicate that most Latvians are reluctant to join the euro, even though they have a powerful political incentive to do so. Like Estonia, another Baltic nation, which was the most recent country to join the euro in 2011, Latvia is anxious to tie itself to Europe and distance itself from its former Russian masters.

The Latvian government did not hold a voter referendum on euro membership. In many ways, the country is already a de facto member. The country has kept its currency, the lat, closely tied to the euro. And Latvian bank loans are commonly denominated in euros.

In its report, the European Commission said it had concluded that Latvia “has achieved a high degree of sustainable economic convergence with the euro area.”

The European Central Bank was also generally positive about Latvia, but expressed some concerns about the country’s readiness.

About half the deposits in Latvian banks come from outside the country, primarily Russia. That raises the risk of a sudden exodus of money in the event of a crisis. Earlier this year, Cyprus, another tiny euro zone member, was forced to limit withdrawals to prevent a bank run by Russian depositors.

But Latvia is considered less vulnerable to a Russian deposit flight than Cyprus because most of the money is linked to genuine business ties. Cyprus was regarded as a place where Russians parked their money to avoid taxes or because of fears that Russian authorities might one day seize assets.

The European Central Bank also expressed some concern whether Latvia could continue to meet the inflation targets required of euro members. While inflation has been well below 2 percent lately, Latvia has experienced huge swings in prices during the last decade, the central bank said, ranging from deflation to annual inflation of more than 15 percent.

The governor of the Latvian central bank will automatically join the European Central Bank’s governing council and have a vote in decisions on interest rates and other monetary policy issues. It is unclear who that person will be, since the term of the current governor, Ilmars Rimsevics, expires at the end of this year.

Historically, though, Latvia has stuck to the kind of conservative policies favored by Germany, Finland and other northern European countries. Government debt last year equaled about 41 percent of gross domestic product, well within limits set by treaty and much lower than Western European countries like France or Italy.

Still, recent experience with countries like Greece and Ireland has shown that nations can have trouble maintaining fiscal and economic discipline after they have joined the euro club.

“The temporary fulfillment of the numerical convergence criteria is, by itself, not a guarantee of smooth membership in the euro area,” the European Central Bank said in its report.

James Kanter reported from Brussels.

Article source: http://www.nytimes.com/2013/06/06/business/global/latvia-is-endorsed-to-adopt-the-euro.html?partner=rss&emc=rss

Ray of Light in European Economic Data

FRANKFURT — In what passes for good news in Europe these days, a survey Monday showed that manufacturing in the euro zone was deteriorating more gradually than preliminary estimates had indicated. The slight improvement in economic data fed hope that the euro zone was in a temporary downturn and not stuck in a recession that could last for years.

The data, along with an expression of mild optimism by the president of the European Central Bank, suggested that makers of monetary policy were likely to continue to resist calls for more forceful action to prevent the euro zone from slipping into long-term torpor.

“The economic situation in the euro area remains challenging but there are a few signs of a possible stabilization,” Mario Draghi, the president of the E.C.B., said Monday at a conference in Shanghai. The central bank still expects “a very gradual recovery starting in the latter part of this year,” he said.

The E.C.B. will hold its regular monetary policy meeting on Thursday, but the chances of a rate cut or other action, which were already slim, fell after the release Monday of a survey of purchasing managers by Markit, a data provider. The Markit data pointed to a continued decline in economic activity, but at a slower rate than before.

Despite such tentative signs of improvement, a growing chorus of economists is warning that the euro zone could be facing prolonged stagnation of the kind that has gripped Japan for decades. They have asked the E.C.B. to act more aggressively to stimulate lending to struggling businesses in countries like Spain and Italy. Lack of credit is making it impossible for many businesses to invest in expansion or hire more workers.

“We do think more could be done by the E.C.B” to unlock credit in the struggling countries, Nemat Shafik, deputy managing director of the International Monetary Fund, said at a gathering of economists and policy makers in the northern Italian town of Trento on Sunday, Reuters reported.

The I.M.F. continued to express concern about prospects for the euro zone economy. In a separate report published Monday, the organization said it expected Germany to grow only 0.3 percent this year, half its previous forecast. Recession in the rest of the euro zone has made German businesses reluctant to invest, the I.M.F. said. The organization has forecast that the euro zone as a whole will decline by 0.25 percent this year.

The E.C.B.’s options to stimulate the euro zone economy are limited, however. Last month, the central bank cut the benchmark interest rate to 0.5 percent from 0.75 percent. Most analysts do not expect the rate to fall again this month.

There has also been speculation that the central bank could buy packages of outstanding commercial loans known as asset-backed securities, as a way to push down interest rates. Mr. Draghi has said that the E.C.B. is exploring ways to stimulate the moribund market for asset-backed securities.

However, such unconventional action would risk a split on the E.C.B. governing council between members who would like to effectively print money and conservatives led by the Bundesbank, the German central bank, who fear inflation. That potential dispute has kept the E.C.B. from embarking on the same large-scale intervention as other central banks like the U.S. Federal Reserve and the Bank of England, which bought huge swaths of bonds in an effort to bring down rates and stimulate economic growth, a practice known as quantitative easing.

Mr. Draghi said in Shanghai that there were limits to what the E.C.B. could do to repair troubled economies. He again urged political leaders to remove barriers to hiring and firing and take other steps to promote growth. “It is the responsibility of national governments to eliminate uncertainty about growth and the sustainability of public finances,” Mr. Draghi said.

Germany, under pressure to deploy its economic strength to help its troubled euro zone allies, is considering a program that would funnel €1 billion, or $1.3 billion, in loans to small and medium businesses in Spain, The Associated Press reported, citing a document it had seen.

Germany also faced criticism for holding up progress on a so-called banking union that would centralize bank regulation and establish a way to close ailing banks without burdening taxpayers.

Ahead of national elections this autumn, Chancellor Angela Merkel of Germany is anxious to avoid any appearance that voters might be liable for banking problems in other countries, said Mujtaba Rahman, director for Europe at Eurasia Group, a political risk consultancy.

“Agreement on the two most important political questions — who decides and who pays — is still a long way off,” Mr. Rahman said in a note to clients.

Article source: http://www.nytimes.com/2013/06/04/business/global/04iht-ecb04.html?partner=rss&emc=rss

Low Inflation and Falling Imports Confirm Slump in Euro Zone

BRUSSELS — Falling prices in Germany and France pulled euro zone consumer inflation to a three-year low in April, while imports fell 10 percent in March, as new data showed the depth of the bloc’s downturn.

The sharp drop in annual consumer inflation to 1.2 percent, confirmed by the European Union’s statistics office, Eurostat, on Thursday, highlights the risk of deflation in the euro zone, which slipped into its longest ever recession at the start of this year.

Prices in Belgium, Germany, Greece and France fell in April from March, and Greece remained in deflationary territory for a second month, along with Latvia, which is due to become the euro zone’s 18th member next year.

Falling world oil prices are behind the drop in inflationary pressures, and the European Central Bank cut interest rates to a record 0.5 percent low this month, aware that inflation could fall further below its target of just under 2 percent.

Energy prices fell 1 percent in April from March in the euro zone, the single biggest drop in Eurostat’s index.

But falling prices also highlight how households are not spending and companies are not investing, dampening the pace of a recovery that could emerge later this year.

The euro zone, which generates almost a fifth of global output, wallowed in recession for a sixth straight quarter at the start of this year, Eurostat said on Wednesday, and economists do not expect growth until next year.

The impact of the bloc’s debt and banking crisis was evident in the euro zone’s international trade balance for March. A €22.9 billion, or $29.5 billion, surplus was due to a 10 percent decline in imports and no increase in exports compared to the same month a year ago, on a non-seasonally adjusted basis.

Demand in Asia and the Americas for the euro zone’s cars, wine and luxury goods is one of the few things that could help lift the bloc out of recession. The lack of export growth in March is likely to be of some concern to policymakers.

While Spain is regaining some of its business dynamism and exports are growing again, Germany and France, Europe’s two largest economies, have stagnated, with the French economy tipping into recession in the first quarter of this year.

Confidence in the euro zone’s economy dropped for a second month in a row in April, and morale darkened significantly in the core countries, particularly in France and Germany.

Article source: http://www.nytimes.com/2013/05/17/business/global/low-inflation-and-falling-imports-confirm-slump-in-euro-zone.html?partner=rss&emc=rss

Cyprus Gets First Installment of Bailout Funds

PARIS — After striking an unprecedented deal in March to make many bank depositors help pay for an international bailout, Cyprus on Monday received €2 billion, the first installment of that money, aimed at buttressing the economy after the near-collapse of its banking sector.

European officials say the release of the funds, equivalent to $2.6 billion, was recently approved by a working group of the 17 euro zone finance ministers, who gathered Monday evening in Brussels for their regular monthly meeting. Cypriot efforts to stabilize the economy may be on the agenda. A second allocation of up to €1 billion will be transferred by June 30, officials said.

That session was a prelude to the planned meeting Tuesday of all 27 European Union finance ministers, where the focus is expected to be on proceeding with a European banking union that could stabilize the financial system and avoid future debacles like the one in Cyprus. Officials on Tuesday were to consider a single set of rules for dealing with failing banks throughout Europe, as well as discuss continuing efforts to curb tax havens.

The thorniest issue revolves around whether depositors in any other European country should be made to suffer losses if their banks require an international rescue, as happened in Cyprus in an unprecedented and still controversial provision for a euro zone bailout.

In exchange for a €10 billion emergency aid package, Cyprus in March agreed to E.U. demands to effectively confiscate up to 60 percent of any depositor’s holdings above €100,000 held in two of the country’s largest banks, Bank of Cyprus and Laiki Bank. At the same time, Laiki Bank was forced to fold, merging into the Bank of Cyprus.

On Tuesday in Brussels, part of the debate will involve where depositors should be placed in the hierarchy of creditors in the future rules on shutting down failing banks. The main focus is what to do with depositors holding more than €100,000. Some countries want all E.U. members to have the same rules, while others want the flexibility to decide where savers should be in the hierarchy.

The president of the European Central Bank, Mario Draghi, said at his recent monthly news conference that ordinary depositors should be affected only after people who took risks by buying bonds in banks were forced to take losses. “If it can be avoided,” he said, “uninsured depositors should not be touched.”

In Cyprus, the issue came to a head after Germany and some other E.U. countries insisted on finding a new way to pay for a bailout of troubled Cypriot banks, which held large deposits from wealthy Russians. There were questions about the origins of some of the money, meaning it would be hard for Berlin to justify using German taxpayer funds to clean up Cyprus’s mess. In the end, E.U. and Cypriot officials agreed that wealthy depositors would effectively have to help foot the cleanup bill.

The president of the Cypriot central bank, Panicos Demetriades, said last week that most of the depositors who lost money under the deposit-seizure system were foreigners. “Seventy percent of the value of the deposits concerned overseas residents, leaving Cypriot households and businesses unaffected to a greater extent than was possibly expected,” he said at a news conference.

Cypriot and Brussels officials had abandoned an earlier, even more controversial plan to skim a percentage of insured deposits — those under €100,000 in Cypriot banks. They pulled back that proposal after it set off tremors in global financial markets and raised the specter of a run on euro zone banks because of concerns that even insured deposits might not be safe.

It was still in an emergency atmosphere, though, that Cyprus imposed capital controls in March to prevent a flood of money from leaving banks operating there. Those restrictions have been eased gradually since then, but remain in place for all but a handful of foreign banks, despite initial promises by the government that the strictures might be quickly removed.

The entire episode has dealt a sharp blow to the Cypriot economy.

With restrictions on how much money individuals and businesses can withdraw or transfer from their Cypriot bank accounts, spending has been sharply curtailed. The economy, already in recession, is expected to contract at least 12.5 percent in the next two years. Unemployment, at 12 percent, is forecast to rise as the shrinking of the outsize banking system, demanded by Cyprus’s creditors, curtails lending and leads to job losses.

The bailout has also set off geopolitical tension over a trove of natural gas recently found in Cypriot waters, which the country’s creditors hope could be tapped in the future to help pay off the country’s loans. Last week, the E.U. commissioner for economic and monetary affairs, Olli Rehn, pressed for the four-decade-old division of Cyprus into Greek and Turkish territories to be abolished, saying reunification would give Cyprus a “major boost to economic and social development.”

Such a move could also pave the way for faster exploration of extensive natural gas reserves off the coast of Cyprus, which Turkey, Russia and the European Union are all interested in pursuing.

Cyprus has been divided since 1974, after Turkey invaded the north. Turkish officials have warned the Cypriot government in recent months not to proceed with gas extraction unilaterally, saying it would risk further inflaming political tension with Ankara.

James Kanter contributed reporting from Brussels.

Article source: http://www.nytimes.com/2013/05/14/business/global/Cyprus-Gets-First-Tranche-of-Bailout-Funds.html?partner=rss&emc=rss

Europe Inches Closer to Establishing a Banking Union

BERLIN — Europe inched closer Wednesday to establishing a European banking union for the Continent’s largest lenders after the cabinet of the German cabinet approved legislation that would grant to the European Central Bank oversight of such institutions.

The decision by the cabinet of Chancellor Angela Merkel came a day after Finance Minister Wolfgang Schäuble, indicated that he supported moving ahead with efforts to create a banking union, despite Germany’s official stance that the step would ultimately require changes to European treaties.

The legislation, which awaits action by the German Parliament, would grant the E.C.B. the authority to oversee the Continent’s largest lenders: those worth more than €30 billion, or $39.5 billion, or the three largest banks in each of the 17 European Union countries using the euro.

As part of efforts to help resolve the debt crisis in the euro zone, E.U. leaders agreed last year to establish a banking union with the aim of preventing overly indebted states from having to bail out failing banks.

While the German cabinet’s decision moves a banking union a step closer to becoming reality, it does not resolve arguments over how to unwind failing banks, one of the problems a banking union would address.

Jörg Asmussen, a member of the E.C.B.’s Governing Council, emphasized in comments Wednesday in Brussels that Europe needed a strong authority capable of making quick and impartial decisions on winding up banks.

“Only then we will be able to break the negative interaction between sovereigns and their banking systems,” Mr. Asmussen told a European Parliament committee, Reuters reported.

But the question of how to regulate banks under a banking union has been politically contentious as the European debt crisis continues.

German officials, in particular, have been viewed as dragging their feet in arguing that establishing a sound, lasting bank supervision authority was more important than speed. Mr. Schäuble has said that creating a mechanism would require changes to E.U. treaties, a process that could slow the effort considerably.

Martin Kotthaus, a spokesman for Mr. Schäuble, said Wednesday: “For a new central authority, we would need treaty change because there is no enabling power for such an authority. It must be completely watertight.”

Article source: http://www.nytimes.com/2013/05/09/business/global/09iht-germanbank09.html?partner=rss&emc=rss

Pierre Moscovici, Finance Minister Under Fire

“France has too much debt,” Mr. Moscovici said bluntly in an interview. “We must reduce deficits to keep our sovereignty and our credibility.”

He is attacked from the right for not being firm enough in cutting public spending and for not digging hard enough to uncover the tax fraud of the disgraced former budget minister, Jérôme Cahuzac. He is attacked from the left for being too moderate, too pragmatic and too willing to cut public spending in a period of stagnation. In other words, for being insufficiently socialist.

Mr. Moscovici, 55, rejects both sets of criticism, but as the man in charge of the economy he is clearly an easy target for political sniping and ideological anger. Asked why the French are so angry and depressed, he said: “As I sometimes say, I’m not a psychoanalyst; my mother is.”

The president he serves, François Hollande, is the first Socialist president in 18 years, elected in May on promises of economic growth and job creation. But Mr. Hollande is already the most unpopular president in the Fifth Republic, and a main reason is the parlous state of the economy that Mr. Moscovici oversees.

Growth is almost nil, and unemployment is at record levels, with the number of people looking for work higher now than at any time in France’s postwar history; youth unemployment is at 24.4 percent, with 80 percent of new jobs actually temporary contracts.

At the same time, France is committed to budget deficit targets as a member of the euro zone, and even if the targets are stretched, Mr. Hollande and Mr. Moscovici know they may have to make significant cuts in spending to remain credible with European partners and the markets. In the ambiguous land between “no austerity” and spending cuts, there is much room for metaphor and euphemism.

Even as France is asking Brussels and main partner Germany for more time and space to meet its commitments, Mr. Moscovici likes to talk of a “serious budget” and “structural reforms.” He speaks of the political risks of austerity and the need for politicians to gauge the tolerance of their voters, their political allies — and, in France’s case, its small but powerful unions.

The argument against austerity, pressed by Mr. Hollande with the support of the troubled southern rim of the euro zone, is gaining ground, especially as Germany faces an election and Chancellor Angela Merkel’s conservatives face a renewed challenge from the Social Democratic Party. Even Wolfgang Schäuble, the German finance minister and one of austerity’s leading champions, speaks with understanding of the French dilemma.

“Of course, France must continue on the path of structural reforms,” he said on Thursday. “You cannot make changes overnight — that must happen step by step, then it will be credible. Then you can indeed be flexible on the question of in what year you have a deficit.”

Of course the centrality of France to the euro zone means that it will always get more leeway than a smaller country — especially given its overall strengths in demography, infrastructure and innovation. As Mr. Moscovici is fond of pointing out, France is the world’s fifth-largest economy and ranks fourth in attracting foreign investment. While it has problems with labor costs and declining competitiveness, “we are not the sick man of Europe,” he said angrily, accusing much of the Anglo-Saxon and German press of “French-bashing.”

Mr. Moscovici also can get annoyed when discussing the “neoliberalism” and “orthodoxy” of the technocrats of the European Commission, which sets the rules. At one point, when discussing the demands of Eurocrats to keep the annual budget deficit at or below 3 percent of gross domestic product, Mr. Moscovici burst out and said: “There is a mainstream view in the European Commission that is neoliberal, or orthodox. But I’m a socialist, a social democrat!” In France, he said, “we have elections, we have political choices, and we are defending our own way.”

Article source: http://www.nytimes.com/2013/04/30/world/europe/pierre-moscovici-finance-minister-under-fire.html?partner=rss&emc=rss

Scottish Independence Would Mean Loss of Pound, Osborne Warns

LONDON — With the euro crisis still smoldering, currency unions have a pretty bad name in Europe right now. That raises an awkward question for supporters of independence for Scotland: Could Scots opt to leave Britain but keep their currency, the pound?

On Tuesday, the British chancellor of the Exchequer, George Osborne, said the answer was no and warned that Scotland would enter “unchartered waters” if it voted for independence next year. Drawing lessons from the euro zone’s continuing problems, Mr. Osborne added, London would be unlikely to agree to share the pound sterling with an independent nation that might pursue incompatible economic policies.

The pro-independence Scottish government accused him of scaremongering and published a study suggesting that sterling would continue to circulate in Scotland if the country votes yes to independence in a referendum planned for September 2014.

But the testy exchange illustrates the passions being stoked by the debate over Scotland’s future, and the extent to which economic, legal and constitutional questions remain unanswered.

Unhappily for supporters of Scottish independence, the argument is unfolding against the backdrop of recession or stagnation in the euro zone — one of the worst advertisements imaginable for the notion of a currency union.

Advocates of independence argue that if Scots vote yes next year, it would be in everyone’s interest to agree to an amicable divorce. Pragmatism will prevail and the terms under which Scotland stays within a British currency union will be quietly resolved, they say.

By contrast, opponents portray independence as a leap into the unknown. They point to the euro zone as a warning of what can go wrong if economies of differing sizes pursue divergent economic policies with a common currency.

The lesson of the euro crisis, they say, is that to keep the pound, an independent Scotland would need to adhere to rigid directives on taxation and spending, and to establish with the remainder of Britain joint structures like a banking union.

Yet doing so would negate the very point of independence, which is to bring economic decision-making from London to Edinburgh.

Wading into the controversy, Mr. Osborne argued Tuesday that a vote for independence would force Scots to confront a series of unpalatable options, including setting up their own currency, joining the euro zone, or using sterling as Panama uses the U.S. dollar.

“Let’s be clear,” Mr. Osborne told the BBC. “Abandoning current arrangements would represent a very deep dive indeed into uncharted waters.”

His comments followed the publication of a report by the Treasury in London that also warned that an independent Scotland would “have a narrower economic and fiscal base, and be exposed to a number of volatile sectors such as finance and energy (including North Sea oil and gas).”

A separate report, commissioned by the Scottish government, considered the options of keeping sterling, joining the euro, having a Scottish currency pegged to sterling, or having a currency that was fully flexible.

While it said that Scotland “could choose any of these options and be a successful independent country,” the report recommended retaining sterling as part of a formal monetary union.

The Scottish finance secretary, John Swinney, said the Treasury was “playing with fire” by deploying arguments that implied that Scotland would no longer be able to use sterling if it voted for independence.

Mr. Osborne’s comments and the Treasury report were the latest in a string of veiled warnings from London on the repercussions of Scottish independence.

In February, the British government released the text of a legal opinion holding that Scotland would have to renegotiate membership in the European Union and other international organizations if it voted for independence in a referendum next year.

Last month, the defense secretary, Philip Hammond, warned that an independent Scotland would be hard pressed to defend itself with its share of the Royal Navy: one frigate and a handful of aircraft.

Article source: http://www.nytimes.com/2013/04/24/business/global/scottish-independence-would-mean-loss-of-pound-osborne-warns.html?partner=rss&emc=rss

Europe Split Over Austerity as a Path to Growth

The tension between those realities will be on full display in Washington this week, as top economic officials from around the world gather for the spring meetings of the monetary fund and its sister institution, the World Bank. Once again, sluggish growth in advanced economies, and in particular the unfurling economic and fiscal afflictions in the euro zone, will be the central topic of discussion.

Political and economic officials agree that most countries, particularly in Europe, desperately need more growth. But they remain sharply divided on how to get it. Officials strongly influenced by the Great Depression thinking of John Maynard Keynes, including some from Europe, want an easing of austerity measures, more expansionary monetary policies and even some stimulus. But powerful northern European officials, including those from Germany, have argued that balanced budgets and fiscal consolidation are prerequisites for restoring sustainable growth.

In a somewhat dissonant posture, the monetary fund has split the difference: reassessing its views on austerity, pushing strongly for aggressive measures to bolster growth but all without repudiating its existing programs.

“We believe that for most European countries, fiscal consolidation is a must, simply given the level of debt,” said Christine Lagarde, the monetary fund’s managing director, speaking in New York this month. But she qualified that statement by saying that not all cuts need to be “brutal or abrupt or massively front-loaded.” She added, “There is a balance to be had between how much is called for and how much is tolerable.”

Economic fortunes during the recovery from the Great Recession have diverged, with new estimates of growth by the monetary fund expected on Tuesday. But they will not change the basic picture, which Ms. Lagarde has taken to describing as a “three-speed” world. Developing and emerging economies are growing apace. Some advanced economies, including the United States, are gaining strength.

But a third category of countries remains mired in stagnation or recession. Japan has struggled with a stalled-out economy, but has recently engaged in an athletic campaign of fiscal and monetary stimulus. The true laggard is Europe, suffering from rising unemployment and another bout of economic contraction — seemingly without the political consensus or economic mechanisms to tackle those problems.

“The European Union’s precrisis growth performance was disappointing enough, but the performance has been even more dismal since the onset of the crisis,” the European research group Bruegel concluded in a recent report, saying weak growth is undermining efforts to reduce debt and fueling bank fragility, all while skills erode for the unemployed. “Low overall growth is making it much tougher for the hard-hit economies in southern Europe to recover competitiveness and regain control of their public finances.”

Bruegel concluded that a failure to turn things around might render Europe’s social contract “unsustainable.”

In light of that reality, the monetary fund and its European partners, the European Commission and the European Central Bank — the so-called troika — have come under continued criticism for the austerity measures imposed on countries including Spain, Portugal and Greece, where unemployment rates extend well into the double digits. The criticism has become louder since the fund said it had determined that austerity had a far worse impact on weak economies than it once thought.

That assessment came in the form of a highly technical analysis of what economists term “fiscal multipliers” — essentially, a measure of how changes in a government budget affect growth at a given time. At the urging of the monetary fund’s chief economist, Olivier Blanchard, its research division last year started to investigate why the fund had overestimated rates of growth for some countries and underestimated them for others.

The researchers found that the multiplier used to forecast growth rates had not magnified the impact of government spending policies enough: Both austerity and stimulus had proved stronger-than-expected medicine.

Article source: http://www.nytimes.com/2013/04/16/business/global/europe-split-over-austerity-as-a-path-to-growth.html?partner=rss&emc=rss

I.M.F. Director Urges Banks to Retain Loose Money Policy

Global growth is likely to remain tepid this year and central banks should keep their easy monetary policies in place, the head of the International Monetary Fund said on Wednesday.

“Thanks to the actions of policy makers, the economic world no longer looks quite as dangerous as it did six months ago,” Christine Lagarde, the I.M.F. managing director, told the Economic Club of New York.

While there were signs that financial conditions were improving, Ms. Lagarde said those changes were not translating into improvements in the real economy.

“In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative,” Ms. Lagarde said.

“We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth,” she added.

She said a three-speed recovery was under way, led by fast-growing emerging economies, followed by countries like the United States that are on the mend, and with the euro zone and Japan trailing.

In January, the I.M.F. trimmed its 2013 forecast for global growth to 3.5 percent from 3.6 percent, and projected a 4.1 percent expansion in 2014. It said the world economy grew 3.2 percent in 2012.

Ms. Lagarde said the exceptionally loose monetary policies of central banks in advanced economies was a concern for emerging economies, which fear a sudden reversal of the large capital flows that have flooded their economies in recent years as investors have sought higher yields.

“Right now, these risks appear under control,” Ms. Lagarde said, but she urged emerging economies to increase their defenses to deal with possible repercussions when the Federal Reserve and other central banks start to cut back their monetary stimulus.

Article source: http://www.nytimes.com/2013/04/11/business/imf-director-urges-banks-to-retain-loose-money-policy.html?partner=rss&emc=rss