First was flush the world with cheap money.
Second increase the cost of that money to reduce its velocity.
However, how successful stage 1 is will depend how productivily that capital will be used. Read annual reports and see what companies are doing.
Flush the world with cheap money because money was not moving. Counterparties did not accept the credit risk of financial institutions, only sovereign. So sovereigns had to come in and provide the credit and guarantees to get the financial system moving again.
Second level of problems started in Europe when investors started questioning sovereign risk, as they may also do in the US in the future.
Now in Europe as realise there should be an interest rate differential. However, at the moment some countries cant get financing, let alone borrow at a higher rate! They must go to the ECB.
Question if there is a single unified Europe supporting each other fiscally, or will credit risk for each country be separated. Yet the EURO rises. The market believes this project will not end. But writedowns for each individual country is possible, so each country is responsible for there own fiscal position.
However doubt in soveriegn credit are generating a policy of budget deficit reduction to regain crediability. However, cutting costs from the only body that was previously spending will reduce GDP growth, which will increase the weight of the debt. Since the currency cannot adjust to make regions more competitive, this forces price and wage reductions: deflation. Countries experiencing deflation in europe, hence relative hardship is what is required to make Europe competitive? Did lived to well and now need to suffer to equilibriate their progress! Is this what German minds are thinking. The longer we wait, the more deflation they will suffer and it will help Europe grow later.
However, weakening governments and potential write downs will affetc teh European banking system. Hence should be encouraged to raise equity now! Writedowns, or their fears, will reduce lending, which will not support economic growth.
Company funding can only come from the capital markets, and if poor clarity in how Europe will evolve will affect their cost of borrowing, the Europeans are not using capital efficiently, paying too much for it by not committing to a plan now.
This lack of clarity was noticed when the weaker European countries needed to be bailed out by the IMF, i.e. Hungary
Different European countries have different economies and suffer different inflation, have different structured economies and need different interest rates. When Spain could borrow at 4%, it encouraged the country to borrow to fund its lifestyle whihc was being de graded by a lack of wage increases relative to the cost of living. Will fiscal union help solve this problem? Different countries should borrow at different rates hence affect the cost of borrowing in a different country. Part of a countries GDP should contribute to the EC, which can help in other services, ie funds to help develop Europe. The EC will help to oversea countries to ensure European funds are to help the country to become more productive, not to help speculation.
Each countries fiscal position should be transparent so each country has its own cost to borrowing.
Should let Portugal write off its debt and then help re build a new European structure. There must be punishment, destruction, to help build the new.
If want a unified Europe, need a unified regulator that each country contributes relative to their GDP in an amount agreed by everyone.
European funding should not be provided if company does not have a competitive advantage, ie better than money goes elsewhere in Europe? Or to start a new facility and then judge if they are good or not. It is to start an opportunity, not to leave countries as they are today in the future. Need to give them an opportunity. If they dont take it, they dont get further funding in that area. Let Europe compete against each other under a common curerncy!
Development of the EU was a piece by piece process of social engineering. This must continue if europe will improve. But not based on automatic feedback mechanism, but based on generating a small solution to a big problem continuously. The European way.
Maastrict treatty suggested no more budget deficit then 3%, and gobt debt not more than 60% of GDP. But no adequate enforcement mechanism. Ie no punishment by receiving fewer European funds, or funds from the ECB more expensive, or market rates more expensive because no explicit bailout. The EU should simply be a structure that allows more efficient movement around Europe, not telling a country how to be ruled or bail it out if it does something wrong. It is a framework that should allow countries to interact more easily should they want to be a common law and rules and a common currency. That is it. That is all it can afford to be at the moment.
Really it is a banking crisis rather than a fiscal crisis? Banks hold the below par bonds and they have not been marked to market. So European banks need to be recapitalised. Banks cannot access short term financing? Need to go to ECB?
Stress tests out in July.
If create fiscal discipline but have loose monetary policy (ie ECB buys Spanish debt) there may be no Spanish fiscal crisis? Especially if Spain eliminates the huge burden of unncessary admin.
Europe needs to grow itself out of problems. First solve the banking problem. This can be the first positive sign. If tighten fiscal policy, loosen monetary (they increased rates). Invest in education and infrastructure to increase innovation and the connection between Europe.
G20 endorsed a budget deficit reduction by half for 2013. A deflation risk.
The worlds leaders have to lead markets, not follow them. Need to forge a consensus under a common agreement, but enough flexibility that each country can do their own.
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