Why the ECB refuses to be a Lender of Last Resort

Paul De Grauwe

The euro has a matter of weeks to save itself, with several institutions now preparing for its collapse. Given this, why does the ECB still refuse to bail out Europe’s heavily indebted countries? This column provides an explanation. It says that the ECB may well be behaving rationally but adds that such behaviour is also foolish – and dangerous.

OECD forecast for next year

Seven reasons why the European banking system is again teetering on the edge of the abyss

The European financial system is again in trouble.

Dexia, the Franco-Belgian bank, has just received a government guarantee. European Union finance ministers are again cobbling together late night rescue plans in an effort to prevent the financial crisis from worsening.

So what is going wrong with Europe's banks?  In no particular order, there are seven reasons why European banks continue to struggle:

Why a single European financial supervisor would be a bad idea.

There are few problems facing Europe where a solution cannot be found in Brussels. Exchange rate management, tax policy, the environment, trade, foreign relations, and defence - the European Commission has the answer to every challenge. Furthermore, the answer is always the same; member states should delegate more decision-making authority to the Commission.

Greece; a country on the edge of a nervous breakdown

Greece is  only days away from national humiliation. The Greek government will admit what we all already know-that it can no longer service its debt. It will ask its creditors to restructure and write down government liabilities to more manageable levels.

Understandably, the Greek people have become deeply pessimistic about the future. This is reflected in the latest consumer sentiment surveys. Sentiment has fallen off a cliff, and Greeks are on the edge of a collective nervous breakdown.

Nevertheless, it is wrong to think that Greece is an outlier. It is not a special case. It is not unique. The Greek government made the same mistakes that other European countries made.

Yikes

From the Telegraph.....

The total exposure of foreign banks to the struggling quartet of Greece, Ireland, Portugal and Spain tops $2.5 trillion (£1.6 trillion) once all forms or risk are included, according to the latest data from the Bank for International Settlements.

Taming the CAP monster

At last, European governments have begun to tame the Common Agricultural Policy. There was a time when this insane subsidy for farmers would spin out of control, consuming ever increasing amounts of public expenditure.

If you will pardon the pum, recent reform efforts have bourne fruit. In euro terms, expenditures on financial support to agriculture has been flat since the mid 1980s. Over the last five years, expenditures have actually fallen in nominal terms.

The CAP continues to consume about 80 billion euros a year. This number is still far too high. Nevertheless, the recent fall in expenditures shows that even the most deeply entrenched subsidies can be dismantled if the political will is there.

Italy needs money now

Am I being too cynical....?

Italy has asked for financial aid from the European Union to cope with what it said could become a mass influx of refugees from the uprising in Libya. The interior Minister Roberto Maroni said, somewhat hysterically Italy “cannot be left” to handle the impending exodus alone.

For good or ill, the Libyans seem ready to stay at home. Cecilia Malmstrom, the E.U. commissioner for home affairs, said "For the moment, we have not seen any people coming to Europe from Libya. There has been a considerable decrease of people coming from Tunisia."

It is always good to prepare for every contingency, especially if it involves a large handout from Brussels

The slow tragic death of Germany

Germany is slowly dying. In 2010, it produced just eight children per 1000 of the population, while 11 Germans per thousand passed away. In absolute terms, the German population has started to shrink despite significant inward migration flows.

The German birthrate is shocking. According to the CIA, it ranked 219th out of 223 countries. Only Italy, Japan, Monaco and Hong Kong recorded lower birth rates. Even child hating Britain manages to produce 12 children per 1000.

The slow tragic death of Germany

Germany is slowly dying. In 2010, it produced just eight children per 1000 of the population, while 11 Germans per thousand passed away. In absolute terms, the German population has started to shrink despite significant inward migration flows.

The German birthrate is shocking. According to the CIA, it ranked 219th out of 223 countries. Only Italy, Japan, Monaco and Hong Kong recorded lower birth rates. Even child hating Britain manages to produce 12 children per 1000.

Goodbye Axel Weber and Kevin Warsh - we will miss you

Yesterday, Paul Krugman took another step on his journey from esteemed academic to banal journalist. In the New York Times, he produced a short and nasty piece on the departure of two highly respected central bankers, Axel Weber of the Bundesbank and Kevin Warsh, of the Federal Reserve.

Here is what Krugman had to say:

Germany is booming

What is going on in Germany?

In the third quarter of last year, the German economy expanded 0.7 percent, and clocked up an annual growth rate of almost 4 percent. By recent historical standards, this was an impressive growth rate. In the previous 20 or so years, average quarterly growth was just 0.3 percent. So while the British economy shrinks, Germany is back on the steroids.

Can we have our money back please.....

The German banks want their money back. At least, they want to get it out of other EU countries. Since the crisis began, German banks have reduced their claims i.e. loans to other Europeans by 385 billion euros.

Don't worry, the money seems to be returning very rapidly to Germany.

Recovery and Catastrophe; the two track eurozone

The German economy is definitely showing signs of life. The IFO business climate index hit 110.3 points in January. It is now at its highest level since since it started recording business sentiment 20 years ago. France and Belgium also produced similar positive results in recent business surveys.

Teachers salaries: how does the UK compare?

Who would want to be a teacher? Not me, that is for sure. I would rather leave that task to other more dedicated people. Are we paying our teachers enough to look after those feral children now prowling around the wastelands of Britain.

Eurozone inflation creeps upwards

In December, the Eurozone inflation rate crept above the 2 percent target. Higher food and energy prices were the primary reason for the above target out-turn. However, if these items are extracted from the Eurozone CPI, then inflation was broadly flat at around 1 percent

Portugal on the brink

For the third time in less than a year, a eurozone member state is on the brink of a bailout. Portugal is about to fall. Today, the governor of the Portuguese central bank finally admitted what everyone else already knew - the country needs external assistance.

A grim pattern has now emerged within the eurozone. In the spring, Greece first paved the way. Before Christmas, Ireland traced out the same sorry steps as Greece. Now, it is the turn of Portugal.

The Euro - it is not all bad news

London Property Market is burning up

(click on the graphic for a larger version)

This graphic presents a different way at looking at London property prices.  Dark red represents rapidly growing prices, dark blue represents rapidly falling prices.  The shades in between represents different degrees of price change (remember red means up, blue means down).

Why the Eurozone is not an optimal currency area

What should the ECB do? Should it increase interest rates or leave them where they are?

The property market in Vienna strongly suggests that it is time for a rate increase. Home prices in the Austrian capital jumped 10 percent this year. Property price inflation is outstripping income growth; a sure sign of a bubble. Viennese property speculators need a slap in the face to bring them back to reality. Only a hefty rate hike can do that.