Friday, September 30, 2011

August European Unemployment

Data are out today from Eurostat and Eurozone unemployment was basically flat at 10%.  I guess that counts as good news under the circumstances - at least it's not getting worse.   It looks stagnant but not recessionary, so far.

My read on the European situation at present is as follows:
  • If European governments and institutions don't take adequate action, disaster will ensue and there will be another round of global banking/financial crisis.
  • Adequate actions are potentially open to them if they can come up with a sufficiently beefy centralized mechanism for funding and then gradually writing off the excessive private and public debts in the periphery and then recapitalizing banks as necessary.
  • Adequate action is currently politically infeasible, but may become politically more feasible as the consequences of inadequate action becomes clearer.
  • At the moment, there's no way to tell reliably whether or not, when push comes to shove, the political will can be found to do what's necessary.
  • Therefore global markets are sort of in a holding action with everything going more or less sideways while everyone waits for the European picture to clarify.
I guess one way of thinking about it was this: was Lehmann enough?  With Lehmann, American policy makers tried the experiment of allowing a major financial institution to go under.  The consequences of that were so severe that it was not tried again during the 2008 events.  I imagine it will be a very long time before US policymakers try that particular experiment again.  So now the question is does the lesson still hold sufficient force three years later and across the Atlantic that European policymakers will do whatever it takes to avoid failure of a major financial?  Or will they need to repeat the experiment to see what happens this time?  Or will their publics kick them out and bring in more radical policymakers who will repeat it?

On another note, the European inflation preliminary estimate came out at 3% in September, up from 2.5% in August.  That will not make the rather hawkish bankers at the ECB happy.


ColdNorth said...

"Adequate action" to address this problem means solvent governments will be buying bad debt. This makes sense in a context where growth can resume. In an context where oil prevents meaningful growth for the OECD, addressing the problem is a form of turning private errors into public debt, and re-inforcing further high-risk investment by major institutions. Can Germany swallow the debt of all the PIGS?

Letting institutions fail means panic - no government wants to wear that legacy.

The answer: serious haircuts for lenders and "managed care" for the prolifigate spenders. This sets expectations lower, hopefully to a level compatible to what the available oil supplies will permit.

Ugly, but...

Nick G said...


Have you read "This Time is Different - 8 centuries of Financial Folly" yet?

Greece seems to have defaulted regularly about every 25 years over the last 2 centuries.

The book seems to suggest that sovereign defaults are not nearly as rare or calamitous as everyone is assuming.