The German Court does Europe a favour

- by referring the OMT case to the European Court of

Justice, they have created an opening for a more durable
political and economic solution
by Ashoka Mody on 28th May 2014
From mutual insurance to fiscal federalism
- rebuilding EMU after the demise of the Maastricht
architecture
by Shahin Valle on 2nd June 2014
- the International Monetary Fund and the European Central Bank have both concluded that the crisis is history. If only that were
so.
by Ashoka Mody on 28th May 2014
This article was originally published in Handelsblatt.
In its April 2014 World Economic Outlook (WEO), the International Monetary Fund has concluded that the crisis is history.
The ECB has similarly declared victory and refuses to be troubled by deflationary risks. If only that were so. Italy could come
back to haunt, even though the interest rates paid by its government have declined.
Like past crises, the recent one advanced by opening cracks in fault lines. On March 28, 2007, Ben Bernanke, then
Chairman of the U.S. Federal Reserve, predicted: At this juncture the problems in the subprime market seems likely to
be contained. However, the apparently inconsequential subprime collapse almost triggered a meltdown of the global
financial system.
In the eurozone, the near-run on the Irish banking system in 2008 revealed years of untamed lending, often corrupt, lending
and a regulator asleep at the wheel. European banks were tainted. In late-2009, the deception in Greek fiscal accounts was revealed. European sovereigns
and their banks were joined at the hips, dragging each other down.
We ignore Italy at our peril. At a 135 percent of GDP, Italys projected public debt-to-GDP ratio for 2014 has been revised up from the October 2013 forecast,
and growth prospects and inflation have been revised downwards. The changes are small but they are relentlessly adding up. In April 2010, the Italian public
debt ratio was expected to stabilize around 124 percent in 2014.
The WEO once again projects that Italian debt ratios will start declining in 2015. The presumption is that Italians will undertake extraordinary fiscal
belt-tightening. They will ramp up primary budget surpluses (the budget balance not counting interest payments) to over 5 percent through to 2019.
So extraordinary is this ramp up that in a recent, but largely forgotten pamphlet, Fiscal Space, IMF research staff pronounced it to be infeasible. Written just
about when the WEO was projecting an Italian debt ratio of 124 percent in 2014, the research concluded that, given its past history of primary budget
surpluses, Italian debt ratios could no longer be contained. This was not just the outcome of an unforeseen global crisis, but - in IMF euphemism - the stark
warning was that Italian debt was not on a convergent path even prior to the crisis.
Only once since World War II has Italy achieved the primary surpluses it is being called on generate. Between 1997 and 2000, primary surpluses were above 5
percent of GDP.
Those years were special. Global trade growth was at its most buoyant in decades, growing at 8 percent a year. First the lira and then, after January 1, 1999,
the euro cumulatively depreciated over 25 percent against the dollar, stimulating growth and inflation. Italian GDP grew in nominal terms (including price
inflation) at over 4 percent a year.
In contrast, although last years anemic world trade growth will revive, the World Trade Organizations Robert Azevedo warns that the recovery will be weak.
The euro/dollar exchange rate is about where it was in late 2007. If the near-zero inflation persists, Italian nominal GDP could grow below an annual 2 percent
rate for the next few years.
There may be help. Mateo Renzi, the young Italian Prime Minister, may break the countrys political gridlock and reverse its decades long economic decline.
The consequences of rising debt may be suspended for Italy, like for Japan. Or Mario Draghi, the President of the European Central Bank, may deliver on his
whatever it takes promise.
Italy desperately needs growth and inflation - and it cannot achieve them on its own. Rather than doing whatever it takes after the fact the ECB can act now.
By coyly debating the definition and likelihood of deflation, while hoping for a renewal of inflation, the ECB is ignoring the growing cracks in the Italian fault line.
With every passing day, the Italian debt burden becomes more onerous.
Harvard University Professor, Jeffery Frankel, says that the ECB should stop fretting about its limited options and start buying American securities to achieve a
substantial depreciation of the euro. In a world of slow international trade growth, the only way for Italy - and the rest of the European peripheryto jump start
growth is through a much weaker euro. A depreciated euro will also help raise inflation. The United States and Japan have actively engaged in so-called
Quantitative Easing, which has kept their currencies weak. The eurozone, with the weakest of the three advanced economies, also has the strongest currency.
The ECB may already have waited too late. If called on to do whatever it takes, the market may ruthlessly test the ECBs resolve, not least because of the
legal and political uncertainties underpinning that promise. So, are the Italian authorities consulting smart sovereign debt attorneys to ensure orderly
restructuring? The world has a stake.
The Italian fault line | Ashoka Mody at Bruegel.org http://www.bruegel.org/nc/blog/detail/article/1345-the-italian-fault-line/
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robertbrowne
Buy junk? It's a sure way to devalue your currency when the other currency crashes. There
seems to be some sort of concerted conspiracy to get Europeans go buy American bonds to
devalue their currency by proxy. So Europe and the ECB are impotent?



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The German Court does Europe a favour
- by referring the OMT case to the European Court of
Justice, they have created an opening for a more
durable political and economic solution
by Ashoka Mody on 28th May 2014
From mutual insurance to fiscal federalism
- rebuilding EMU after the demise of the Maastricht
architecture
by Shahin Valle on 2nd June 2014
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