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  • Watching Cyprus

    In Europe, all eyes are out to sea...looking at the island nation of Cyprus. On Saturday, Cypriot leaders agreed to a plan with EU authorities that includes a "one time tax" on bank deposits. This has set off protests in Cyprus and a lot of discussion, whether we will see a run on the banks there, and what the long term effects on the European and global economies will be. The Guardian has a running, minute-by-minute blog following events in Cyprus, here . But for those just getting up to speed on the news, we recommend a short piece from Antonio Fatas When it comes to the government of Cyprus, they are hopeful that everyone will understand that this was a one-time event and that the country can now move forward. From CNBC here is a quote from the Cyprus finance minister Michael Sarris: "Absolutely, there is no capital restrictions, people can move. We hope people will believe us, believe the collective leadership of the European Union, that this was a necessary step, but a single shot at the problem, and that from now on they can be very confident that nothing will happen to their savings." This will not happen, people will not believe them (not to mention the fact that the parliament has postponed the approval of the agreement that was scheduled to happen on Sunday). Prepared for several rounds of panic. I doubt the banking system will be able to operate without some capital restrictions over the coming days. On the other side, there are those who panic that this is the prelude of bank runs in Greece, Spain, Portugal or Italy. This is certainly a possibility and we have already seen withdrawals of deposits in some of these countries during this crisis, but it will take a lot of panic to produce a significant bank run. The reason is that there are still costs or barriers to produce a widespread bank run in these countries. The assumption that all the depositors in these banks will immediately open an account in Germany and transfer all their funds is (fortunately) not obvious. There are significant restrictions in opening of bank accounts even within the Euro area if depositors do not have residence in the country where the bank is established. Of course, there is always the option of hiding all your deposits under your mattress (or a cash vault) but both they represent a risk or they simply are not practical enough. Having said that, in the event where there is a strong perception that a similar "one-time-tax" is about to happen in other countries, these barriers will not be enough, so a bank run cannot be ruled out either. Read the full piece here .

  • The Euro on the Block: Schumpeterian Theory and the Eurozone

    The week begins with a lot of dire talk of the future of Greece, the EU, and the Euro. CNN International's Richard Quest likens a Greek exit from the euro to the Lehman Brothers collapse of 2008 , only worse. The Guardian 's Larry Elliott echoes that sentiment. Elliott writes today that, despite assurances to the contrary, Europe's leaders are not equipped to protect the euro. And he argues that "monetary union" is an outdated model. Despite this monetary chaos, there are still some in Brussels or Frankfurt who argue that the euro has been a success and will go from strength to strength. They sound suspiciously like the members of the politburo who in the 1980s said the Soviet Union was working and would last for ever. The undoubted political commitment to the euro means that there are now calls for a fast-track approach to full political union, but this means repeating the top-down approach used for monetary union and - at a time when the markets are talking about a Greek exit within weeks or months - would take years to finesse. Instead, the realistic options for the euro are that it breaks up or staggers on in a zombie-like condition, with low growth, high unemployment, growing public disenchantment and widely divergent views in Europe's capitals about what needs to be done. As a company, the euro would have gone bust by now. It had a duff business plan, which has been poorly executed. The experiment survived in the benign conditions of the early 2000s but only the core business, Germany, has been able to cope with the much tougher climate of the past five years. There is boardroom squabbling, the workforce is in open revolt and there are no new product lines. The euro, in short, is ripe for what Joseph Schumpeter called creative destruction. Capitalism, according to Schumpeter, was the story of constant, normally gut-wrenching change, in which innovation put established firms out of business and made whole sectors obsolete. Anybody working in the music industry, publishing or newspapers in the past decade understands what Schumpeter was talking about. Read The euro is ripe for creative destruction here .

  • European Central Bank Keeps Interest Rates at 1%, Draghi Predicts Recovery in 2012

    The European Central Bank decided to keep key interest rates unchanged today, meaning rates will stay at 1% rather than go closer to 0 as some were predicting. ECB President Mario Draghi explained the decision at a press conference earlier today. He noted that the ECB sees signs of a "stabilisation" for the EU, but that many downside risks make growth uncertain at best. Inflation rates are likely to stay above 2% in 2012. However, over the policy-relevant horizon, we expect price developments to remain in line with price stability. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest survey indicators for the euro area highlight prevailing uncertainty. Looking ahead, economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Over the last few months we have implemented both standard and non-standard monetary policy measures. This combination of measures has helped both the financial environment and the transmission of our monetary policy. Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner. Let me now explain our assessment in greater detail, starting with the economic analysis . Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest signals from euro area survey data highlight prevailing uncertainty. At the same time, there are indications that the global recovery is proceeding. Looking beyond the short term, we continue to expect the euro area economy to recover gradually in the course of the year, supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. However, remaining tensions in some euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum. As we said previously, this economic outlook continues to be subject to downside risks, relating in particular to an intensification of tensions in euro area debt markets and their potential spillover to the euro area real economy, as well as to further increases in commodity prices. Read the full opening statement from the press conference here . For some helpful analysis of the conference, we recommend the Guardian's coverage , and the Financial Times .

  • Terence Roth on the Bailout of Greece

    After twelve hours of meetings in Brussels, European Union leaders have agreed to a 130 billion euro ($170 billion) bailout of Greece . This was seen as a last minute deal to stave off Greek default. But there is much work to be done. As Dow Jones 's Terence Roth tells his colleague Nick Hastings , this agreement was essential because it gives Greece's leadership just enough time to do all it must do to avoid collapse.

  • Britain Exits Recession

    0.1. Not a very imposing number. But the very fact that it is 0.1 and not -0.1 or even 0.0 is the key. Because in the lat quarter of 2009, Britain experienced 0.1% growth. And that means the UK has finally joined the US and the other major economies in exiting recession. Here's a map from the Guardian that marks European nations that have exited recession at this point: Use an interactive version of the map at The Guardian by clicking here . The Guardian's Ashley Seager points out that the figures are disappointing and lower than economic forecasters projected. And while the announcement brings about a sense of "relief," he is bracing for a slow and difficult recovery: That is not to say that the first quarter could not bring a nasty surprise and show contraction again, as has often happened at the tail-end of previous recessions. Indeed, we always need two consecutive quarters of contraction to say we are in recession . It might be safer to wait for a positive first quarter figure to declare this one definitely over. The question is, though, where do we go from here? The answer is, hopefully, upwards. But in truth the recovery could be a slow, protracted affair . The consumer is still weighed down by debt, and unemployment, though seemingly topping out, is still very high. Household finances are also going to get squeezed by a fiscal tightening that will begin some time after the general election. Remember, too, that the banking system remains extremely fragile and banks largely unwilling to lend. The conditions don't look to be in place for the sort of V-shaped rebound that the economy has seen in the past after recessions. Read Recession's over but we're now out of the woods yet here .

  • Guardian Readers Help The Queen Understand the Credit Crisis

    In November, Queen Elizabeth asked London School of Economics professors why no one had predicted the credit crunch. They had their shot at answering. Now The Guardian is asking readers to answer, and they are coming up with a variety of answers. Surprisingly enough, most commenters do provide nicely thought-out answers, right or wrong. Like this one: Interest rates, particularly longer term interest rates were too low due to the wall of money from Asia buying up government bonds and money from pension funds who were being forced by government legislation to match assets and liabilities which meant buying those same government bonds that Asian central banks were buying. As a result there was a chase for yield, buying assets that yielded more than the equivalent government bond, corporate bonds, utilities, local government bonds and, yes Mortgage backed securities. And in that process risk was either ignored or swept under the carper by the rating agencies who gave very risky assets AAA ratings. Due to this demand for mortgage backed securities the originators of mortgages loosened their lending standards in order to create more 'product' and lent to people who ere in no position to repay, when they started to default the bonds that were previously rated AAA were downgraded and plummeted in value. There you have it, but I'm sure people would prefer something along the lines of, it was all the greedy bankers fault string em up. But the clever comments are worth a read as well. For example: Well, ma'am, you know how nobody is allowed to ask you a direct question because you're too important? Same with the bankers. Read them all here .