Describing the Greek economy these days as a phoenix ascendant from the ashes of crisis is, given the country involved, an apt metaphor. Yet it may be too early to mythologise the Greek economy. Fast money has done well investing in Greece, but the stickier long-term investors that Greece so desperately needs remain sceptical. Until the fundamentals improve, this phoenix still has one wing tied down. Click here for my latest column in the Financial Times.
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I had the great pleasure to teach a course on structural reforms and sovereign debt crisis at the European University Institute near Florence, Italy on Sep 16-17. My partners in crime were George Papaconstantinou (the Greek finance minister when Greece was pushed into its first bailout), Bob Traa (former IMF senior representative in Greece) and Nicola Giammarioli (Secretary General of the ESM).

The course covered the economics behind structural reforms and sovereign debt crises, how to design a reform programme, how to rehaul government budgets and how to devise multiannual budgets. First hand examples were sprinkled throughout, with the teachers representing a bailout country (Greece), the institutions (IMF and ESM) and the markets.

A million thanks to George

They don’t call us dismal scientists for nothing. Nearly 75 per cent of economists surveyed in July by the National Association for Business Economics see a US recession by the end of 2021. But ask for data supporting that forecast and you get no real consensus. There are plenty of theories about trade wars. US growth has slowed. But the usual bubbles and imbalances that trigger recession aren’t yet evident. With consumption accounting for nearly 70 per cent of growth, a recession has to be transmitted through the US consumer. See my latest in the Financial Times for what that might look like.

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I break down the latest trade deficit here on Bloomberg TV with Alix Steele and David Westin.
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My main lesson learned at the Kansas City Jackson Hole’s Economic Symposium: just as the world’s politician’s are increasingly adopting a go-it-alone attitude, central banks are realizing that monetary policy needs to do the exact opposite. Here’s my latest column in the Financial Times.
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Stock market volatility—big swings in the prices of stocks—had actually been relatively low in the period of recovery from the financial crisis through 2017. However, that trend has been changing of late, with several incidences of volatility marked by ‘short, sharp hurricanes,’ rather than the ‘longer storms’ of the past. I discuss some of the changes in technology and financial regulation that contribute to recent volatility alongside Michael Klein, Executive Editor, EconoFact in this video.

(If you aren’t familiar with EconoFact, you need to be! EconoFact’s mission is to provide even-handed analyses of timely economic policy issues drawing on data, historical experience and well-regarded economic frameworks. With an incredible network of academics writing

Here’s an interview I did with Bloomberg TV on my impressions of the proceedings at the Fed’s Jackson Hole Economic Symposium (a veritable econodorkfest in one of the most beautiful places in the world). And yes, that backdrop is real!
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President Donald Trump’s tweeted demands for a weaker dollar, and his subsequent designation of China as a “currency manipulator”, have sparked fears that his trade battles are morphing into a currency war. The last time we had a global competitive devaluation was in the 1930s, as the world descended into the Depression. But today, currency values are set in huge global markets rather than against gold. That leaves the US alone on the battlefield, armed with only the equivalent of a pea shooter.

The US will not succeed in unilaterally weakening the dollar and could spark a global recession, raise political tensions and upend financial markets in trying. Read about it in my latest column in the Financial Times.
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“I think in the US if we look back and think ‘what a wasted recovery,’ the Europeans are going to do it doubly. And that’s partly because there’s just a whole bunch of institutional architecture that still needs to happen in the Eurozone in order for the Euro to really be a sustainable project.”

Here’s a clear-headed, non-sensationalist view of the state of the eurozone (and the US) in an Expert View I did with Real Vision (Click here for the full video, but that one is paywalled).

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I was invited onto BBC Radio 4’s Today Programme to discuss recent market volatility and where the US-China trade war is leading. Listen here:

https://economistmeg.files.wordpress.com/2019/08/bestoftoday-20190808-thursdaysbusinesswithdominicoconnell.mp3Share this

The US equity and bond markets are telling completely different stories about the outlook for the country’s economy. In the first seven months of 2019, the S&P 500 index rose by 10.2 per cent, suggesting firms could continue producing strong corporate earnings off the back of decent economic growth. Over the same time period, borrowing costs on 10-year Treasuries fell from 2.68 per cent to 1.89 per cent, sign-posting lower rates and inflation, and the likelihood of recession ahead. This economic recovery in the United States is the longest on record, and analysts are on the lookout for signs it is ending. Who has it right—equity or bond investors?

Here’s my overview for the US economy in Prospect Magazine: https://bit.ly/2OJbSZJ
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Here’s an interview I did this morning on Bloomberg Surveillance on whether the US is going into recession, what designating China a currency manipulator means and what the US’s options are going forward in the trade (currency?) war against China.

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Some thoughts on how much a 10% tariff on the remaining $300bn of imported goods from China will hit the Chinese economy, how Chinese authorities can counteract it to reflate growth and what tactics China can employ to retaliate: https://www.bloomberg.com/news/videos/2019-08-02/what-are-china-s-tariff-retaliation-options-video
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Here’s everything you need to know about the July jobs data, with analysis from Michael McKee, Subadra Rajappa and myself on Bloomberg TV: https://www.bloomberg.com/news/articles/2019-08-02/-chugging-along-at-a-slower-pace-traders-on-employment-data
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The US manufacturing sector has now contracted for two consecutive quarters, according to the Federal Reserve, raising concerns a general recession is drawing near. But those fears remind me of a triathlon I recently completed. With burning lungs and a pounding heart, I’d really flagged during the swimming section. Then I recovered and finished fine. So does a limping manufacturing sector really mean the American expansion will end? https://www.ft.com/content/9382e6a8-b2b2-11e9-b2c2-1e116952691a

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Everyone has been obsessed with whether the Fed will cut rates and by how much, but the much more important question is: what’s the point? I argue that Fed rate cuts won’t help much: https://www.ft.com/content/b5f4f972-9342-11e9-8ff4-699df1c62544.
For a shorter version of this argument, see my CNBC debate on the topic with Steve Liesman and Kelly Evans. https://www.cnbc.com/video/2019/07/22/heres-why-this-economist-thinks-a-rate-cut-might-be-pointless.html
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For years, the US Federal Reserve steered monetary policy in part by wage growth: drive slack out of the labour market and higher wages, and therefore inflation, should follow. But fishing for inflation in this recovery, the Fed has been using the wrong bait, reading the water incorrectly and getting no bites. I look at why wages aren’t growing and why inflation wouldn’t accelerate even if they did: https://www.ft.com/content/821ee35c-a7a5-11e9-90e9-fc4b9d9528b4
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When European Central Bank president Mario Draghi leaves his post in October, most analysts will say his greatest legacy was saving the euro. That’s nothing to sniff at, but years from now I think we will have discovered an even more important legacy: the ECB has created and implemented the biggest monetary policy bazooka out there and we should all look to adopt it in the next serious downturn: https://www.ft.com/content/58a4af28-80a1-11e9-a7f0-77d3101896ec
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For all the focus on central banks to step in and fight the next downturn, there are tools outside of monetary policy that could be employed. In this Alphachat Podcast, I talk to Jay Shambaugh about fiscal stabilizers and why we should focus on establishing them now while times are good: https://www.ft.com/content/92dea877-1c35-4a98-b24f-9fb8b4d122ec
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Some personal news! I’ve recently started as a Senior Fellow at the Mossavar-Rahmani Center for Business and Government (M-RCBG) at the Harvard Kennedy School. I’ll spend the year doing a little teaching and a lot of writing (my regular Financial Times column, as well as a book). So far it has been fantastic, though if any of you have tips on cycling to work in Boston in the winter, I am all ears…

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Argentina’s Options: What happens after default?

Argentina is probably going to default tomorrow. An Argentinian debt default would clearly not be good for the country economically, but contagion would probably be limited and far less hard hitting than its previous 2001 default. If Argentina does default tomorrow, the biggest casualty would be the process of sovereign debt restructuring, which would become chaotic and haphazard.
How Argentina Made it to the Brink
Argentina has one more day to make an interest payment to bondholders before it officially defaults. The government is perfectly willing and able to pay these bondholders, which agreed to participate in debt restructurings after Argentina defaulted in 2001. On June 30th, the Argentinian government deposited $1 billion with Bank of New York Mellon Corp to show that Argentina has pledged the money to comply with its obligations to its creditors.
The problem lies with Argentina’s holdout creditors, which have refused to participate in the debt restructuring, and picked up Argentinian sovereign debt at a huge discount in the hopes that they would eventually be made whole. In a trial held in the New York Federal court brought against Argentina by some of these holdouts, Judge Thomas Griesa ruled that Argentina cannot pay the restructured bondholders unless it pays the holdouts too.

Will the ECB’s Actions Be Enough?

As has been the case so many times during the Eurozone crisis, all eyes were on the European Central Bank (ECB) to intervene on June 5 following its executive board meeting. Eurozone inflation registered a paltry 0.5 percent in May, a problem for countries with high debt as it makes their debt burdens harder to stabilize.
ECB president Mario Draghi announced a series of measures in an attempt to reverse persistent low inflation. These measures were by the ECB’s standards bold; they would have been unthinkable even two years ago. Here are the three main actions the ECB took, and the possible outcomes of each:
 
The Action: The ECB cut interest rates even lower
The policy rate was cut 10 basis points to 0.15 percent, which is unlikely to make much difference. More importantly, the central bank cut its deposit rate to negative 0.1 percent. This means that banks will be charged to deposit any excess reserves they hold at the ECB overnight. The idea is that banks will be encouraged to lend the cash rather than holding on to it.
The Outcome: Unfortunately, it is unclear that banks will lend their cash. In Denmark when a negative deposit rate was introduced, banks simply passed the charge to part money with the central bank along to their customers, thereby raising borrowing rates for companies and households.

A shift in German policy? Not so fast!

The ECB didn’t take any action at its governing council meeting this past Thursday, but that does not mean nothing happened. ECB president Mario Draghi gave the clearest signal yet that the central bank is committed to using unconventional policies—including controversial quantitative easing (QE)—to address low inflation in the eurozone.

This is the first time the ECB has ever admitted to having serious discussions about QE. Draghi’s comments came off the back of an admission by the biggest opponent to QE—head of the German Bundesbank, Jens Weidmann—that such a policy might be necessary.
Weidmann’s admission flies in the face of German monetary orthodoxy. It is practically in the German DNA to be allergic to anything that might risk stoking hyperinflation. With Eurozone inflation decelerating to 0.5%–compared with a target of just under 2%–in March, hyperinflation is hardly a concern.
Some have hailed these recent developments as a fundamental shift in the German approach to the eurozone crisis. But they are misreading the signs. While QE by the ECB is more likely today than it was a year ago, Weidmann’s comments were merely an attempt to shift investor expectations so the overvalued euro might weaken.
Macro Approach More of the Same
More importantly, Germany’s macroeconomic approach to the eurozone crisis has not shifted at all.

The Eurozone’s Imperfect Banking Union

In her first interview since becoming the head of the new Single Supervisory Mechanism (SSM) in Europe, Danièle Nouy talked a big game about letting European banks fail. Policymakers in Europe have been busy agreeing on a road map for how to save banks and, when necessary, how to resolve them. The progress that has been made on establishing a banking union was unthinkable only 12 months ago. However, the road map that policymakers have agreed to is flawed and fails to achieve the primary goals of banking union.
Breaking the Doom Loop
The ECB is currently gearing up to look under the hood of Eurozone’s 128 largest banks in an asset quality review and stress test before taking over supervision of the biggest banks. There is immense political pressure on the ECB from national supervisors to not find any big capital holes in the banks. If big capital holes were discovered, there is no cash available to fill them. Consequently the ECB is likely to err on the side of leniency in its inspection of European bank balance sheets.
However, banks cannot avoid crystallizing losses for NPLs forever. Now that the SSM has been established, the second step towards banking union is to determine what to do when losses are accepted and a bank gets into trouble.

How Germany Just Undercut the Euro

A German court may have just weakened European Central Bank President Mario Draghi’s most potent weapon in the battle to save the euro.
Back in July 2012, Draghi calmed panicked markets with a pledge to do “whatever it takes” to defend the euro and with a program, known as outright monetary transactions, to stabilize interest rates throughout the euro area by buying the bonds of financially distressed governments. The move was a game changer, shifting the crisis in Europe from acute to chronic. European markets have been relatively calm ever since.
There has always, though, been a significant caveat: The German Constitutional Court had to rule on whether the bond-buying program complied with German law, which forbids monetary financing of the budget. Following a closely-watched debate in the court last September, most analysts expected it would offer a “yes, but” ruling that accepted the bond buying was legal, pending a few small revisions to make the Germans feel they had more control.
Instead, the German court has surprised many analysts by offering a “no, but” ruling: It thinks the bond-buying program violates German law, but recognizes that the European Court of Justice should determine whether the ECB is acting within its mandate.

Berlusconi Prepares a New Italian Drama

A political storm brewing in Italy has the potential to disrupt the calm that has prevailed in the euro area.
Europe’s leaders can only hope that markets will somehow prevent the currency union’s third-largest economy from backsliding too far on efforts to keep its debts under control.
Former Prime Minister Silvio Berlusconi initiated the latest drama on Sept. 27, when he withdrew his support for the country’s coalition government. Five ministers from his People of Liberty, or PDL, party then resigned, prompting Prime Minister Enrico Letta to suggest a vote of confidence will be held this week. As a result, there’s a significant chance that Italy will find itself without a government at a time when it should be passing a budget for next year.
Berlusconi’s stated rationale was that the coalition failed to scrap an increase in the value-added tax planned by the previous technocratic government. In reality, Berlusconi demanded his ministers resign to pre-empt his probable ouster from Parliament following his tax-fraud conviction. If we can count on one thing in Italy, it is for Berlusconi to always look out for Numero Uno.
Whatever Berlusconi’s motivation, his demarche is almost certain to lead to new elections — the only real question is when.

Bulgarian Election Shows Need to Clean House

It looks as though the center-right Citizens for European Development party won Bulgaria’s early elections, the same party that triggered the vote by resigning from government amid protests in February. So has anything changed?
The short answer is yes. The elections show that Bulgarians have lost all faith in a corrupt elite, and the next government — whatever shape it takes — is likely to be weak and unstable.
The previous Cabinet, led by Prime Minister Boyko Borissov, resigned after violent protests around the country. The immediate impetus for this outburst of public anger was high energy prices, but the subtext was disappointment.
Bulgaria has been, in many ways, a model of fiscal probity in recent years. The country’s public-debt burden and government deficit are among the lowest in the European Union. Growth has been modest but positive since the shock of 2008-2009. The unemployment rate is almost 12 percent, which compares favorably with most other southern EU countries.
At the same time, though, Bulgaria is the poorest EU member state, with an average monthly wage of only 400 euros ($519). There is widespread disappointment in the Balkan country that EU membership (Bulgaria joined in 2007) hasn’t noticeably improved living standards.

ECB’s Parking Fees Show Its Weakness

European Central Bank President Mario Draghi surprised markets and analysts last week by saying the central bank is open to an unconventional stimulus tactic: pressuring banks to lend by charging them a fee for parking cash at the ECB.
The development does more to highlight the limits of the ECB’s powers than to demonstrate its boldness in dealing with the euro area’s economic slump.
The euro immediately slumped against the U.S. dollar after Draghi’s statement. This might have been his aim: A weaker currency can help euro-area countries trying to export their way out of the crisis. But it is also possible that Draghi was doing something unusual for a central banker: being candid about the tools under consideration for unblocking the flow of credit in the region.
Most of the euro area’s businesses are small and medium-sized enterprises, responsible for about 60 percent of gross value added and from 60 percent to 80 percent of employment in the European Union in 2012. In the few years leading up to the global financial crisis in 2008, borrowing costs for such businesses rose and fell roughly in line with the ECB’s short-term target interest rate and differed only slightly from one country to the next.
To read the rest, please see the original piece on Bloomberg View.

Germany Should End Austerity, Not Ireland

Anti-austerity fever is sweeping Europe as policy makers decide the way to get from crisis to growth involves higher spending. Well, not so fast.

The fever has already spread to the highest levels. At the International Monetary Fund’s recent spring meetings in Washington, IMF Managing Director Christine Lagarde and her deputy, David Lipton, repeatedly urged euro-area countries to focus on investment rather than budget cuts.
Then came the European Commission president, Jose Manuel Barroso, who said April 23 that austerity has reached the limits of political and social support. A day later, Italy’s prime minister designate, Enrico Letta, wasted no time declaring that “Europe’s policy of austerity is no longer sufficient.”
The argument is compelling: Less retrenchment will allow more money to feed into the economy, which should support domestic investment and consumption, and so stimulate growth. That in turn should reduce budget deficits by increasing tax revenue, creating a virtuous circle.
Yet easing austerity involves trade-offs that might not be worth making for the weaker euro-area economies. Paradoxically, it is healthier euro-area countries such as Germany, which aren’t considering a relaxation of austerity, that should do it.
To read the rest, see the original piece on Bloomberg View.

Slovenia Bailout Would Be Spanish-Cypriot Mongrel

The ink on the provisional bailout agreement for Cyprus was hardly dry last month before bond markets shifted their attention to Slovenia, another small euro- area country with a banking problem. The Slovenian government’s borrowing costs subsequently shot up.
The fear that Slovenia might be the next Cyprus, with international creditors again forcing losses onto bank bondholders and uninsured depositors, is only partly justified. Slovenia isn’t Cyprus, and its rescue program, when it comes, will probably look like a hybrid between the Spanish-style bailout and the Cyprus-style bail-in.
First, the similarities: Like Cyprus, Slovenia has wrestled with a banking crisis for years and the big banks in both countries have made bad lending decisions. In Cyprus, that involved loading up on Greek government bonds that later had to be significantly written down. By the end of 2012, almost 27 percent of bank loans in Cyprus were nonperforming. Unfortunately, this was only slightly higher than in Slovenia, where nonperforming loans for the country’s three largest banks also rose quickly and surpassed 20 percent last year.
Slovenia’s bad loans were caused by a double-dip recession, a burst property bubble and poor corporate governance.