In this working paper, the ECB studies the ‘confidence effects’ of fiscal consolidation, or what many call austerity politics. There are some ifs and buts but by and large this study confirms what Keynesians warned about: budget cuts in the middle of crisis have great negative effects.
It is of course one thing to have these statements in a working paper. It would be quite something else for the ECB to admit it has been repeatedly wrong (remember Trichet?) and furthermore, fiscal policy considerations are not quite supposed to be the terrain of the ECB anyway. But they now can share their wisdom with ECOFIN and the Commission.
Please read this link and the post by Francesco Saraceno that I reblogged. It really seems that the ECB has been extremely political in its decision yesterday. Who can still believe it will negotiate in good faith? This stuff is escalating faster than I though possible…
Naked Capitalism has been quite pessimistic on the prospects of Yanis Varoufakis to turn the situation around, despite his considerable skills in economics and game theory. Some links on this (in chronological order):
Syriza Walks Back Initial Defiance
The ECB Ready to Put a Choke Chain on Syriza
Greek Finance Minister Varoufakis Retreats on Debt Writedowns, Public Spending Promises
The ECB now decides to play hardball. The most important thing that Greece needed was time. Time to negotiate, time to build an alternative discourse, time to make connections. The ECB put an end to that hope. The deadline now is the end of the month. Please read: The ECB Tightens the Choke Chain on Greece
With a bank run underway and funds unlikely to return any time soon, Greece is utterly dependent on ECB support unless it is willing to have its banking system collapse. And that blow in an already prostrated economy is something that Syriza cannot responsibly inflict on voters, particularly when it shifted its campaign in the weeks before election to a moderate, pro-Eurozone posture. The ECB has issued its diktat and Greece has no choice but to fold. Varoufakis may still win some concessions around the margin, but the message is clear: he will get no big breaks on any of his major issues. The most he can hope to get is whatever the Troika is willing to trade for the Syriza’s commitment to taking on the oligarchs and reforming its tax system.
This does not end well. Before you know it, there will be a new election, because the ECB crushed the new government, and then the Greek Nazis will come to power. Well played, Europe.
Raúl Ilargi Meijer has a post which should induce a good amount of scepticism about the results of the official bank stress test. The Swiss test did indeed find out that some major Dutch, French and German banks could be in trouble in a crisis.
Wouldn’t it better to let an independent bureau do these tests, instead of the ECB which obviously has huge political skin in the game? Or are we all too afraid of what might come out?
Will the markets actually feel more confident, or are they going to fake that too? Was this really a yearlong audit, or did it only take that long because the spin doctors needed to make sure the lipstick was applied correctly on the pig?
We all deserve better than a yearlong exercise in futile tepid air. But Europe’s taxpayers deserve it most of all.
The time we are living in is, to put it mildly, disturbing. Not only should we act on climate change, there is an on-going war in many parts of the Middle East, Chinese real estate markets may implode and closer to home, we have the mismanagement of the Eurocrisis and the Ukraine crisis.
Although the Finnish foreign minister apparently concluded that the Finnish parliamiant is nearly unanimously convinced who is responsible for the Ukraine crisis, there are many who are not so sure. The situation is nonetheless so complicated, that I do not want to get into discussion about who is to blame, but I would like to post Mathew D. Rose’s text on the connection between the Ukraine Crisis and the Eurocrisis. He makes very valid points, which sadly also mean that in neither case a solution is likely to emerge any time soon.
Some commentators (notably Ambrose Evans-Pritchard) have warned for a long time Italy is the elephant in the room, and not only because its companies are competing directly with Chinese companies (and quite likely losing out).