Archive for the ‘Europe’ Category
RIP Vaclav Havel “Living in Truth.”
A person dearest to their heart has left the Czechs & Slovaks.
Thousands of Czechs braved the freezing cold Monday in Prague to pay their respects to former President Vaclav Havel, who died Sunday at age 75. Judy Woodruff discusses the extraordinary life of the writer, dissident and president with former Secretary of State Madeleine Albright.
When the System is afraid of you, they put you away. Déjà vu Julian Assange, Bradley Manning, …
More from BBC here, from Jeffrey Sachs here, and from The Economist here.
Some original words of wisdom from Václav Havel:
“Of course, in politics, just as anywhere else in life, it is impossible and it would not be sensible always to say everything bluntly. Yet that does not mean one has to lie. What is needed here are tact, instinct and good taste.” (Václav Havel, International Herald Tribune (29 October 1991))
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There are no exact directions. There are probably no directions at all. The only things that I am able to recommend at this moment are: a sense of humour; an ability to see the ridiculous and the absurd dimensions of things; an ability to laugh about others as well as about ourselves; a sense of irony; and, of everything that invites parody in this world. In other words: rising above things, or looking at them from a distance; sensibility to the hidden presence of all the more dangerous types of conceit in others, as well as in ourselves; good cheer; an unostentatious certainty of the meaning of things; gratitude for the gift of life and courage to assume responsibility for it; and, a vigilant mind.
Those who have not lost the ability to recognize that which is laughable in themselves, or their own nothingness, are not arrogant, nor are they enemies of an Open Society. Its enemy is a person with a fiercely serious countenance and burning eyes. (Address upon receiving the Open Society Prize awarded by Central European University (24 June 1999))
The Making of a New Monetary System and Economic Model?!
Without any commentary. A collection of accounts and descriptions of the situation WE are in.
The debt ceiling crisis – Running out of money
Jul 29th 2011, 8:45 by Buttonwood
PERHAPS the oddest thing about the debt ceiling debate to an observer from the east side of the Atlantic is the process itself. In Britain (and in the rest of Europe, as far as I am aware), the government proposes a Budget, the opposition votes against it and that is it. If the government is defeated on a key issue of financing (which the debt ceiling surely represents), then the administration resigns, an election is held and a new government comes to power. Finance is so essential to the nature of government that the idea of separating the budgeting power from the executive branch seems no way to run a country. Yesterday’s shenanigans, where the House spent all day trying and failing to pass a bill that faced automatic rejection in the Senate, resemble a Dickensian satire featuring the Circumlocution Office, a body designed to ensure that nothing gets done.
Anyway, it seems that US may soon have a problem that featured in a column a few weeks ago, running out of money. In the modern world, debt is money and money is debt; the ability to issue debt is essential to the state.
[...]
From a historian’s point of view, what is fascinating is that these problems are re-emerging after 40 years of a shift to fiat money, a change that seemed to remove all constraints on money creation. I have argued before that this shift drove most of the developments of the last 40 years from the rise of the finance sector to asset bubbles, and that the 2007/2008 crisis was a watershed moment (like the 1930s and 1970s) from which a new system will emerge. I assumed it would take a decade or so for the ramifications to work through, but the US Congress seems determined to accelerate the process.
Finance and Economics. Jul 30th 2011 | from the print edition
Buttonwood – Running out of options
Governments in the rich world have painted themselves into a corner
ECONOMIC policy in the developed world over the past 25 years has followed one overriding principle: the avoidance of recession at all costs. For much of this period monetary policy was the weapon of choice. When markets wobbled, central banks slashed interest rates. A by-product of this policy was a series of debt-financed asset bubbles. When the last of those bubbles burst in 2007 and 2008, the authorities had to add fiscal stimulus and quantitative easing (QE) to the policy mix.
The subsequent huge rise in budget deficits was largely the result of a collapse in tax revenues that had been artificially inflated by the debt-financed boom. Britain and America ended up with deficits of more than 10% of GDP, shortfalls that were unprecedented in peacetime.
Those deficits may have been necessary to avoid a repeat of the Depression. Economists will probably still be debating this issue in 75 years’ time, just as they still discuss whether Franklin Roosevelt’s New Deal programme was effective in the 1930s. But the “shock and awe” approach to Keynesian stimulus has an unfortunate consequence. Any decline in the deficit, even to a still whopping 8% of GDP, acts as a contractionary force on the economy: either the government is spending less or taxing more.
As a result governments are reluctant to cut the deficit too quickly for fear of sending their economies back into recession. But unless there is a rapid recovery, the debt will keep piling on, making the ultimate problem harder to solve.
Turning to monetary policy, interest rates are 1.5% or below in most of the developed world and are negative in real terms (the Bank of England kept rates at 2% or more for the first 300 years of its existence). In a normal recovery central banks would be looking to increase rates from crisis levels by now. But high debt ratios (particularly in the household sector) make central banks very uneasy about raising interest rates for fear of ushering in another round of the credit crunch. With the big exception of the European Central Bank, most have repeatedly postponed the moment at which monetary policy is tightened. The parallels with Japan, where interest rates have been at rock-bottom for a decade, are striking.
As for QE, it is hard to tell how successful it has been as a strategy in reviving the economy although it certainly seems to have helped to prop up equity markets. Central banks seem reluctant to push it much further at the moment. But there is no suggestion that the economy is strong enough for them actively to unwind the policy by selling assets back to the markets.
In all three cases the story is the same. Governments and central banks have thrown a lot of stimulus at the economy and the result has been a fairly sluggish recovery. They have painted themselves into a corner. They cannot go forward, in the sense that there is little political or market appetite for more stimulus. But it is also hard for them to go back.
Withdrawing stimulus is not just risky economically, but hard politically, too. In Britain a sluggish second-quarter growth rate of 0.2% has led to talk that the coalition government needs to slow the pace of its austerity programme. But if you actually look at the data, the government has barely begun its deficit-cutting work. In the first three months of the fiscal year public spending is £5.2 billion ($8.5 billion) higher than in the same period of 2010-11, or £3.6 billion higher if interest payments are excluded. An increase in joblessness, leading to higher benefit payments, is not the cause: the unemployment rate is lower than it was a year ago. A rise in value-added tax may have eaten into consumer demand (tax revenues are £5.3 billion higher than in the same period of 2010-11) but VAT also rose in January 2010 and GDP jumped by 1.1% in the second quarter of that year.
The danger for Britain is not just that its deficit-cutting strategy may have an adverse effect on growth. It is also that sluggish growth may prevent it from cutting its deficit significantly. Tim Morgan of Tullett Prebon, a broker, calculates that if the British economy grows at 1.4% annually, half the expected rate, the budget deficit will still be more than 8% of GDP in 2015.
In a sense, the bill has come due for the past 25 years. A policy of avoiding small recessions has resulted in the biggest downturn since the 1930s. Public finances turned out to be weaker than politicians thought. As a result, they have used up all their ammunition tackling the current crisis. Governments in the rich world will have very few options left if the economy weakens again.
Non-independent investment research (Saxo Bank)
STEEN’S CHRONICLE – Another step towards Crisis 2.0? by Steen Jakobsen
[...]
The Keynesian endpoint
Since the crisis hit in 2008, world policy makers have basically operated on the idea that creating more debt could create more growth – the basic tenet of classic Keynesian policy. I am increasingly convinced that we are reaching what some have dubbed the “Keynesian endpoint”, where the failure of this Keynesian approach to turn the economic ship yields to a more balanced approach to monetary- and fiscal policies (rather than bail everything out all the time). This turn will occur not because it makes sense, but because circumstances simply leave no alternative.Time is up
The second point is the increased likelihood that “time is up”. This idea came from my friend and hedge fund manager Dan Arbess of Xerion Capital : “Here’s the thing. Every politician likes to spend, that’s how they get elected. Republicans don’t like taxes, but boy can they borrow. That game is ending so now, there are no more options for spending without taxing. It’s going to get interesting with two totally different worldviews: Democrats tax and spend, Republicans cut taxes and spend…Democrats tend to think government is the solution, Republicans think it’s the problem”. Well put and time is up for the US spending juggernaut, regardless of how it will be stopped.If we look at key indicators for the EU and the US there is increasingly clear evidence, to which the market has been paying insufficient attention , that time is indeed up and the alarm bells are ringing:
[...]
The real risk to Italy, Belgium, Spain, Denmark and other countries remains their internal domestic economic- and political agenda: zero growth means by definition that the debt burden will increase when you are running a budget deficit. This you can live with in transition periods, but we are well into the 10th year of below long-term trend growth and in many countries barely even making it to positive growth. There is a price for this: downgrades, increased yields to finance the debt and a desperate need to keep a primary balance at zero or positive (the budget deficit before interest expenses = primary deficit).
[...]
The next few days are important as political events, but the most likely long-term impact is…surprise, surprise: more of the same:
The US dollar will continue to weaken 3-5% per year, the politicians will buy some time into the next election cycle, yields will creep higher and higher for non-core countries, equities will be over-bid relative to bonds as investors are losing faith in governments, and the disparity between the rich and poor will only yawn wider as the latter suffer on the inevitable standard of living declines that are forced upon them by wages that fail to keep pace with cost of living increases.
We have dealt with bigger crises than this before – you only need to go back to your own grandparents – they lived through wars, booms and a depression, and still created wealth beyond anyone’s dream. The big difference? They grew up respecting and expecting hard times, hard work and each other. Today we all want to believe that the last thirty years will be extended by another five to ten years before we start the rebuilding. We are now definitely in Crisis 2.0 early stages, I constantly meet clients and investors who keep complaining I’m too negative – but am I really negative, or am I merely trying to make you aware that the light at the end of the tunnel is not the exit but an approaching freight train? I hope I am wrong. I really do (and I often am) but a touch more reality would help us all.
currencythoughts.com – by Larry Greenberg
Debt Problems and the Currencies July 29, 2011
[...]
The U.S. debt crisis has been framed by analysts and investors around the political stalemate that is real and in everyone’s face day after day. The markets wonder how close to the August 2 deadline will officials delay making a deal, and the possibility of no deal until closer to mid-August emerged this week. Expectations have been lowered regarding the composition of an agreement and how much time it will buy before the next fabricated crisis surfaces as has occurred time and again in the euro area.
But a less discussed dimension of the problem is now pushing its way into the spotlight, and this concerns the tolerance of the advanced economies against fiscal and monetary restraint. Sufficient deficit reduction might not be possible under either an all-partisan Democrat plan or an all-partisan Tea Party plan. These strategies need adequate economic growth to succeed, but the U.S. economy is more crippled than generally realized.
- Real GDP expanded just 0.8% annualized in the first half of 2011 when the bulk of QE2 was provided. A year ago, the FOMC was forecasting a real GDP growth range in 2011 of 3.5-4.2%, and private-sector projections were centered somewhat above 3.0%. The optimism of these estimates highlights that the economy’s usual resilience isn’t as strong as such was.
- U.S. real GDP expanded only 1.6% in the year between 2Q10 and 2Q11 and managed only a 0.2% annualized pace during the four years between the second quarter of 2007 (just before the financial crisis began) and the second quarter of this year.
- Anemic U.S. growth is part of a fairly universal phenomenon among advanced economies. Japan’s “lost decade” between 1Q91 and 1Q01 saw real GDP there climb at a 1.1% annualized rate. In the ensuing decade between 1Q01 and 1Q11, real GDP rose even more slowly, 0.5% per annum. The 20-year growth rate between 1Q91 and 1Q11 was 0.8% per annum. In Britain where a Conservative-led government has begun massive fiscal restraint, real GDP rose less than 1.5% annualized in the first half of 2011 and 0.7% over the four quarters between 2Q10 and 2Q11. Growth since the onset of the global financial crisis four years ago has averaged negative 0.4% per year in Britain. Euroland GDP rose by a decent 2.5% over the latest four reported quarters to 1Q11, but the distribution of results among members was highly diverse and included a drop in Greek output of 4.8%. Moreover, euro area GDP during the past four years averaged just 0.1% per year.
I take away three lessons from Japan’s experience. First, the hangover from a financial system can endure more than a generation. Second, the bigger one is, the harder one can fall, and third, reining in public debt requires more than a will to act. One needs an economy that is sufficiently repaired to tolerate austerity. Otherwise, macroeconomic restraint just digs a deeper hole. The Bank of Japan has wanted to normalize rates for fifteen years but is still stymied against doing so, and Finance Ministry officials were looking for an exit strategy when debt was approaching 100% of GDP and are still waiting for the right opportunity as debt hovers near 200% of GDP now.
The U.K. experience offers more warnings to be heeded. British July purchasing manager survey results will be published next week, but recent trends through June portray a difficult time coping with fiscal austerity. The manufacturing PMI fell from 61.5 in January to 51.3 in May, while the service-sector reading declined from 57.1 at the end of the first quarter to 53.9 in June. Slow growth hampers public-sector revenues, and Britain’s budget deficit was no smaller in the first quarter of the current fiscal year than it had been in the first quarter of the previous financial year.
Economic circumstances in the euro area’s peripheral nations have been very difficult as well. Market players love to mock the “clowns” who decide policy in Europe and America but fail to fully comprehend that in representative democracies, policymakers tend to be sounding boards of viewpoints found in the rank and file citizenry, only they hold such positions more extremely. Excessive household and corporate debt tend to be a pre-existing condition for excessive government debt, and Keynesian economic theory suggests that it’s best that balance sheet reductions not be undertaken on a massive scale simultaneously in all three areas.
Another lesson for the United States from Europe is that whatever is done to cauterize the debt problem proves insufficient in the eyes of market players, who pass judgement with their money. To be sure, euro zone leaders have offered up a series of packages that treat symptoms rather than causes of the region’s fiscal mess. It has been said that if half of the concessions made eventually had been taken early in the crisis, market order would have been restored, meaning reduced peripheral bond yield spreads. I suspect not and believe also that nothing the Congress and Obama Administration undertake in the next week or two will manage to correct America’s structural problems or satisfy investors for more than a transitory while.
Lessons from past Sovereign Debt Crisis
- Time works against you in environments of crisis, fear, uncertainty and contagion effects.
- Public bickering about possible solutions is not helping, is unproductive.
- Solution needs to be European for a European problem through and through. They have to take ownership. All have to be in the same boat.
Nothing new about a “challenging policy framework” for UK
In early May I quoted Nouriel Roubini and his description (“challenging policy framework”) for England’s economy and its monetary and fical policy decisions it took.
Now BNP Paribas is backing him up and joining the guard of economists who see a decade of sub-par growth for the developed world (exclude Germany and other export and resource based nations like Scandinavians or Australia) while the emerging nations speed ahead in a New Normal (PIMCO) world (aka multi-speed world (IMF)).
[T]he Bank of England will achieve little by raising rates from their record 0.5pc low in a bid to rein in the pace of price rises, they argued.
“We do not believe the Bank of England will raise rates this year or next,” said Paul Mortimer-Lee, global head of market economics at BNP Paribas. “There is no point in hiking rates to slow the economy — it’s too slow already and fiscal consolidation will stop it from overheating.
“The only reason for a rate hike is to keep inflation expectations and wage rises down. [But] unemployment is already subduing wages.”
Mr Mortimer-Lee holds that one-off shocks — rises in the global cost of oil and food, a fall in the pound and the recent rise in VAT — explain away much of the UK’s inflation problem. That should mean CPI inflation will fall quickly next year as these factors ebb away, ending 2012 around the 2pc target.
In the meantime, increasing the cost of borrowing through a rate rise would do little to tackle inflation, since prices are being driven up by global thirst for oil and other commodities, rather than robust domestic demand.
Others counter that a rate rise is needed to stop expectations of ever-rising prices become entrenched, and so becoming self-fulfilling.[...]
The predictions came as economists at Royal Bank of Scotland said economic growth looked on track to come in at just 0.6pc for the second quarter of this year.
Growth was 0.5pc in the first quarter of 2011, but this merely reversed the 0.5pc fall seen as the snow hit in the final three months of 2010 — signalling that the economy had flatlined for six months.
A weak growth figure for April to June would reinforce expectations the Bank will hold rates for a while yet.
And after George Osborne put out his first budget, the OBR raised the concern that the governments growth outlook will only work if private sector stops deleveraging in aggregate and picks up what the public sector is intending to cut in real terms.
The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year, in the belief that families and individuals will respond to straitened times by extra borrowing. Average household debt based on the OBR figures is forecast to rise to £77,309 by 2015, rather than the £66,291 under previous projections.
Economists say the figures show that George Osborne’s drive to slash the public deficit and his predictions on growth are based on assumptions that debt will switch from the government’s books to private households – undermining his claims to be a debt-slashing chancellor.
Latest mention of OBR figures are here.
“When it becomes serious, you have to lie.”
[C]ourtesy of the WSJ blog, we learn that, for the first time in history, a spokesman for Jean Claude Juncker, the PM of Luxembourg, and the head of the Eurogroup council of eurozone finance ministers, admits openly to having lied to media outlets.
[...]
“There was a very good reason to deny that the meeting was taking place.” It was, he said, “self-preservation.””
“When it becomes serious, you have to lie.” – Luxembourg PM Jean-Claude Juncker
(via ZH)
It is a tragedy that politicians have mistaken Economics and Finance with … Politics. But only in latter occupation do you still have a pension even when you were full of c*** during your term-time.
What is the difference between Ireland and Iceland?
1 Letter and the Euro!
*Patiently waiting for the first details on the deal they struck … it is now 6:15pm BST*
… and a comprehensive bailout package and the loss of sovereignty.
Update Monday 1:30pm BST (Statement from Sunday evening below)
Kicking the can down the road.
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“Ministers unanimously agreed today to grant financial assistance in response to the Irish authorities’ request on 22 November 2010. Ministers concur with the Commission and the ECB that providing a loan to Ireland is warranted to safeguard financial stability in the euro area and the EU as a whole.
Euro-area and EU financial support will be provided on the basis of a programme which has been negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB.
Ministers welcome the staff-level agreement on a three year joint EU/IMF financial assistance programme for Ireland. The Irish Government approved the programme on 28 November. Ministers unanimously endorse the measures announced today.
Building on the strong fundamentals of the Irish economy, the programme rests on three pillars [conditions of the bailout]:
- An immediate strengthening and comprehensive overhaul of the banking system
- An ambitious fiscal adjustment to restore fiscal sustainability, including through the correction of the excessive deficit by 2015
- Growth enhancing reforms, in particular on the labour market, to allow a return to a robust and sustainable growth, safeguarding the economic and social position of its citizens.
The financial package of the programme will cover financing needs up to 85 billion euros, including 10 billion euros for immediate recapitalisation measures, 25 billion euros on a contingency basis for banking system supports and 50 billion euros covering budget financing needs. Half of the banking support measures (17.5 billion euros) will be financed by an Irish contribution through the Treasury cash buffer and investments of the National Pension Reserve Fund.
The remainder of the overall package should be shared equally amongst:
- (i) the European Financial Stabilisation Mechanism (EFSM),
- (ii) the European Financial Stability Facility (EFSF) together with bilateral loans from the UK, Denmark and Sweden, and
- (iii) the IMF (22.5 billion euros each).
The main elements of policy conditionality, as endorsed today, will be enshrined in Eurogroup and Council Decisions to be formally adopted on 6 and 7 December. The Eurogroup will rapidly examine the necessity of aligning the maturities of the financing for Greece to that of Ireland. [meaning Greece got an extra four-and-a-half years to repay the emergency loans totaling 110 billion euros to match the seven-year term under Ireland’s deal.]”
Annex : Distribution of the Loan to Ireland Total Programme Volume (Billions of euro) Contribution by Ireland 17.5 External support 67.5 Total 85.0External Support Breakdown IMF (One-Third)* 22.5 Europe (Two-Thirds) 45.0 Total 67.5European Breakdown EFSM 22.5 EFSF (Plus Bilaterals) 22.5 Total 45.0EFSF (Plus Bilaterals) Breakdown EFSF (Effective) euro area 17.7 United Kingdom 3.8 Sweden 0.6 Denmark 0.4 Total 22.5
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And while Irish finance minister bargained on the conditions of the bailout (12.5% corporate tax rate will be untouched), Germany and France pressed further ahead to ‘introduce “collective action clauses” for debt issued after a temporary crisis facility (EFSF) expires in 2013′. So that investors share rescue costs with taxpayers for future bailouts.
Talking heads (Bloomberg)
Bloomberg’s Elliott Gotkine reports on Ireland’s 85 billion-euro ($113 billion) bailout package
4 years of Austerity to repay bailout package, principal plus interest (5.8%).
Ireland’s government plans to cut spending by about 20 percent and raise taxes over the next four years to reduce its budget deficit to 3 percent of gross domestic product by 2014, from 32 percent this year, [...]
FT’s Wolf Interview on Ireland’s Aid Package, Euro Outlook
Bailout = 50% of GDP. Bank problem is now fiscal problem. This will come to haunt them. EFSF probaply have to be increased, and PIIGS nightmare is still unravelling. “It can spread to everybody except Germany.” EURO will exits for much longer but not in current form and with its current member states.
Callow on Irish Bailout (Chief European economist at Barclays Capital)
Bailout package might be able to defuse the situation in Ireland, takes out some degree of uncertainty. But Portugal and Spain are still up for debate. Portugal got difficult task at hand. Fiscal tightening might push Portugal back into recession. Spain very different. Large challenges ahead, not dissipating very soon.
Nomura’s Maloney on Irish Bailout (Sean Maloney, an interest rate analyst at Nomura)
Bailout for banks mean better than last week, calming down the situation in the short-term (2013). Politicians/Officials buying time, liquidity and solvency. Portugal will not challenge EFSF, but Spain could.
Other good commentary and analysis via Zero-Hedge
- The move [Ireland using pension fund assets to foot the bill] reflects a willingness by governments to use long-term assets to fill short-term deficits,
- Ireland would save the world from much misery by defaulting now and driving the vampire banks into liquidation,
- policy announcements made today testify the Eurozone’s authorities’ ongoing resolve to address the repercussions of the credit crisis. As we wrote last week, however, investors are likely to continue to focus on the Iberian peninsula, namely Portugal’s chronic twin deficits, and the potential unrecorded losses in the non-listed Spanish banks.
At the cost of future generations!
And A Fistful of Euros blog asserts correctly that “the EFSF’s powder has been kept dry in case it’s needed elsewhere”, and that “[m]ost of the Irish contribution to the package comes from the [Ireland's] National Pension Reserve Fund (NPRF), which was sold at inception as pre-funding public sector pensions from 2025 onwards. In truth, the NPRF had already become a banking sector intervention vehicle since 2008. [...] So the pension money goes to the banks, and it’s left to a future Irish government to sort it out with Ireland’s 2nd most effective lobby group (the public sector unions, after the banks) how this gets paid for. The current government, its time horizon limited by an inevitable 2011 election loss, was happy enough to oblige. The current opposition, and likely future government, wasn’t at the table. That’s another EU democracy deficit.” Short-term thinking at it’s best because of the lack of accountability.
Means that after many years of austerity, taxes have to be increased considerably to cover the gaping hole in the public pension fund. The future lack of growth in OECD countries is a self-fulfilling prophecy. Oh joy.
Nationalism Trumps Money
Peace in the Middle East: Is Capitalism the Answer?
Complete video at fora.tv.
Geoffrey Kemp, author of The East Moves West, speculates on whether Israel and Saudi Arabia could work together economically to transform the Middle East. He describes an attempted economic collaboration between the two countries during the early ’90s, but concludes that such endeavors are doomed to fail unless deeper, nationalistic concerns are addressed first.
Geoffrey Kemp is the Director of Regional Strategic Programs at the Nixon Center. He received his Ph.D. in political science at M.I.T. and his M.A. and B.A. degrees from Oxford University. He served in the White House during the first Reagan administration and was Special Assistant to the President for National Security Affairs and Senior Director for Near East and South Asian Affairs on the National Security Council Staff.
Jean-Claude Trichet, President of the ECB: “Confidence is the most important ingredient in the industrialised world.”
EMU – Economic Monetary Union.
Restore confidence to consolidate the recovery: confidence in the household for consumption and investment; confidence in the entrepreneurs and corporate businesses for their own investment and pathing the way for the future; and confidence in the investors. If governments and parliaments can demonstrate that they have the appropriate plan to sustainable pace of fiscal policy, then we are increasing confidence. And it plays for the recovery consolidation.
Economic Collapse can be averted. But not the pain ahead …
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… the pain of Stagnation in the West (incl Japan) [via de-leveraging, balance-sheet recession, deep structural change, re-balancing of the global economy, surplus labor, ...]
Written by Michael Jung
December 29, 2011 at 2:08 am
Posted in Change, comment, economics, Europe, Germany, history, How Things Are, Politics, Reflection, Society & Culture, UK, USA
Tagged with european monetary union, global financial markets