Euro problems and solutions

To simplify the problems in the Euro, it is possible to say it was flawed from the beginning. The exchange rate at which the Euro countries went in to the single currency is unreasonable, and trying to force together these very differently structured economies has proved remarkably unsuccessful.

Common sense suggests that trying to force together different economies which are performing very differently together under one inflexible exchange rate just isn't going to work. It seems to me as if the grand plan of the Euro was to stop a WW3, but it appears to be happening at the cost of ecomonic collapse and significant hardships for citizens in many countries.

I think Amartya Sen (Guardian) sums this up nicely in one of his blog posts:

" The euro, with fixed exchange rates for all countries in the zone – economies that fall behind in the productivity race tend to develop lack of competitiveness in exports, as countries such as Greece, Spain or Portugal have been experiencing already. Competitiveness can, of course, at least partly be recovered through slashing wages and living standards, but this would lead to great suffering (much of it unnecessary), and generate understandable popular resistance. Sharp increases in inequality between regions can be remedied, to be sure, by large-scale migration within Europe (for example, from Greece to Germany). But it is hard to assume that persistent population inflow to the same countries would not generate political resistance there.
The inflexibility of fixed exchange rates of the euro is inherently problematic when the economic performance of countries continues to differ. A unified currency in a politically united federal country (such as in the US) survives through adjustment mechanisms (including large internal migration and substantial transfers) that cannot yet be a norm in a politically disunited Europe.
If European economic policies have been economically unsound, socially disruptive and normatively contrary to the commitments that emerged in Europe after the second world war, they have been politically naive as well. The policies have been chosen by financial leaders with little attempt to have serious public discussion on the subject.
Decision-making without public discussion – standard practice in the making of European financial policies – is not only undemocratic, but also inefficient in terms of generating reasoned practical solutions. For example, serious consideration of the kinds of institutional reforms badly needed in Europe – not just in Greece – has, in fact, been hampered, rather than aided, by the loss of clarity on the distinction between reform of bad administrative arrangements on the one hand (such as people evading taxes, government servants using favouritism, or unviably low retiring ages being preserved), and on the other, austerity in the form of ruthless cuts in public services and basic social security. The requirements for alleged financial discipline have tended to amalgamate the two in a compound package, even though any analysis of social justice would assess policies for necessary reform in an altogether different way from ruthless cuts in important public services.
The problems we are seeing in Europe today are mainly the result of policy mistakes: punishments for bad sequencing (currency unity first, political unity later); for bad economic reasoning (including ignoring Keynesian economic lessons as well as neglecting the importance of public services to European people); for authoritarian decision-making; and for persistent intellectual confusion between reform and austerity. Nothing in Europe is as important today as a clear-headed recognition of what has gone so badly wrong in implementing the grand vision of a united Europe."
http://www.guardian.co.uk/commentisfree/2012/jul/03/austerity-europe-grand-vision-unity 

Libor Scandal

I recently read a post from Angus Armstrong, Director, Macroeconomic Research, NIESR regarding this Libor Scandal. I think he summarises the situation well...in much better terms than I am qualified to do.
I have quoted below a few paragraph's of his story to help give an understanding of the scandal:

"The damage to the City of London of the revelations of manipulation in the London interbank market cannot be overestimated. The City is the global centre of foreign exchange trading (37% of global turnover), the home of the money markets and half of the $650 trillion global over-the-counter derivatives market.[1] The London Interbank Offer Rate (LIBOR) is the benchmark interest rate on which these transactions are priced, as well corporate loans and even mortgages. According to the IMF’s Article IV Spillover Report the UK's dominance in finance is reinforced by its "robust" market infrastructure, including the setting of LIBOR - the global benchmark interest rate.

LIBOR is not an actual borrowing rate. It is a (trimmed) average of interest rates that banks report that they could borrow funds in a reasonable size just prior to 11am each day.  So in periods of distress there is an incentive for banks which borrow at typical rates (so not trimmed) to submit lower interest rates to avoid this perverse signalling effect. Collusion could be an even more powerful way of forcing interest rates lower. Moreover, modern banks also hold very large positions in over-the-counter derivatives which are priced relative to LIBOR. This creates a second direct incentive to influence the reference rate."

My personal concern about this story is the effect on the reputation of the City and our banks. The speed with which we can deal with this situation will be fundamental in determining the international reaction to it. If we let this rumble on, which may be because we end up with a full legal, judge led inquiry, then we may face unforeseen repercussions which have an impact on the City.

If we were not in the middle of a financial crisis, at a time when bankers are still receiving large bonuses even though they are the cause of this chaos, then there would probably not have been as large a backlash as there has been.

I just hope the situation is dealt with efficiently, with any other banks involved being fined appropriately, and criminal charges brought as necessary.
http://notthetreasuryview.blogspot.co.uk/2012/07/libor-scandal-and-reforming-banking.html#more

General Introduction

I have decided to create this blog to repost and comment on blog posts from around the web. The focus will be on economic headlines, inevitably politics will feature too.
I hope that for anyone who does not have time to read many different blogs, this will provide one place you can come to see reactions to news headlines.