Thursday, 27 May 2010
Monday, 24 May 2010
Wednesday, 19 May 2010
Even before it began, Europe's moment as a major world power in the 21st century looks to be over. Richard Haass
The euro is in danger…If the euro fails, then Europe fails. If we succeed, Europe will be stronger. Angela Merkel
Tuesday, 18 May 2010
Let me begin with my aprioris.
1. I consider Luis Amado one of the most intelligent and well prepared Portuguese politicians -- in fact, one of the very few.
2. I think that the only way out for the Euro to go on is for the Area to embark on some sort of fiscal federalism.
Hence my interpretation: Luís Amado is setting the stage for such a reform, as well as the Portuguese committment to it: a European fiscal federalism that may be accepted by Germany and the other relevant countries in the Area; only with fiscal rules would the big European countries accept it.
The European history seems to suggest that the "democratic way" is a receipt for failure, as regards economic reforms. Thus, I think that the way things seem to be going is the right one: politicians should cook everything carefully and have the Parliaments approving fiscal federalism (the problem here are constitucional laws... ok, I'm doing some wishfull thinking here)
Finally, let me stress that fiscal rules are of the outmost convenience for Portugal and the likes. If only we've had fiscal discipline imported, in the past, as we have imported monetary discipline...
About the idea, given the reputation of Southern countries spending too much, this could be a credible commitment if the mechanisms in action in case of non-compliance are clear, transparent and fair. What can they be? not sure, suggestions ?
Wednesday, 12 May 2010
Tuesday, 11 May 2010
Saturday, 8 May 2010
Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling. -- Ricardo Cabral
Thursday, 6 May 2010
A graph is worth a thousand words. Still I will give you a story. Portugal trade balance (TB) deficit has always been present (from 1985 to 2008 the average was -7.4% per year). It is intrinsically structural and has a large negative effect on the current account (CA). From 1985 to 1995 the surplus in invisible current transactions (including those without a quid pro quo) kept the CA balanced. The decrease in transfers and the expected participation into the EMU spurred an increase in consumption and investment worsening the CA. Today the CA deficit is larger in absolute value than the TB deficit. A dry story. Portugal must reverse the CA trend and the consequent deterioration in its external position. Within the EMU the old short run fix offered by a devaluation (it might have worked in the 80's but was massive) is not possible anymore. I wonder what part of the CA can be timely influenced by policy. Should short run rebalancing focus on the invisible transactions? The current transfers cannot be controlled (meaning they are at other's discretion). Can a better management of the external Investment have some effect? I suspect that long run rebalancing will only come with a transformation from a net importer into a net exporter (as it is suited to a small open economy). I might have an intuition on how to do it but I need to dig a little deeper into the details and anyway it is long run idea. Another graph.
Wednesday, 5 May 2010
Private debt in the Portuguese economy increased sharply after the mid-1990s – households and non-financial firms’ debts increased from 26% and 47% of GDP, in 1995, to 99% and 115%, in 2009, respectively. Lower inflation rates and interest rates (that followed the adhesion to the EMS and to the Euro), high GDP growth rates until 2000, development of the financial system and urbanization are among the main causes of that trend. Although consumption smoothing is the obvious explanation for households’ behaviour, the causes of the huge non-financial firms’ indebtedness is not so obvious (it does not show up in productivity statistics, for example). Public debt as a percentage of GDP was fairly stable in this period, despite the increasing weight of public expenditure in GDP. The increasing trend in private debt coincided with a decreasing trend in households’ savings. Greece, Spain and Ireland shared some of those trends and its corollary: significant current account deficits.
In the first years of the euro, there was a scholarly discussion on the implications of current account deficits in the context of the European Monetary Union. The position that prevailed in this debate was that external imbalances were benign and should not be the cause of concern: poorest countries were catching up and needed more investment (which was expected to get a higher return in these countries). This was also the conclusion of Olivier Blanchard and Francesco Giavazzi, in 2002, published in Brookings Papers in Economic Activity:
The fact that Portugal and Greece are members of both the European Union and the euro area, and the fact that they are the poorest members of both groups, suggest a natural explanation for today’s current account deficits. They are exactly what theory suggests can and should happen (…).
(…) we discuss whether the current attitude of benign neglect vis-à-vis the current account in the euro area countries is appropriate, or whether countries such as Portugal and Greece should take measures to reduce their deficits. We conclude that, as a general rule, they should not.
The behaviour of interest rates suggests that, until the disruption of the international financial crisis, markets shared that view, that is, they seemed to have taken Germany and Portuguese debt as almost perfect substitutes.
The recent increase in the risk premium of Portuguese debt seems to be an adjustment to reality. We hope there is not too much overshooting in that process. And, of course, we should improve our reality.