Where are we with the Eurozone at the moment

It’s been a while since I’ve written down my impression of what is going on and what is happening with New Zealand – because things are just not changing.  The events in Europe continue to have a significant impact on what is going on in New Zealand, both by lowering businesses willingness to invest in staff and other forms of capital and by lowering the returns to exporters (more than its reduced the price of our imports).

However, we are currently in the middle of a fascinating example of political economy – something I am poorly versed in, and so will instead just link to.

The Eurozone needs a lender of last restort, a credible lender of last resort.  The weird actions going on in Europe are indicative of some institutions recognising this, while other groups who have to take on any perceived risk (eg Germany) are less than willing to do so.

Of course, the belief that the Eurozone needs a lender of last resort depends on the “multiple equilibrium” view of credit markets in Europe – are these banks truly insolvent, or do they just look insolvent because of liquidity/expectations.  If you are in the first camp there is a burden that must be shared in some way, if you are in the second camp there is much less of a real burden – and a strong requirement of a lender of last resort.  The different things being said by different people inside and outside of Europe are not just a result of a normative belief in what is a “fair distribution of the burden”, but also a different implicit model which implies different costs and benefits from different policy actions.

No wonder agreement has been so difficult.

  • Adam Maynard

    It needs more than a lender of last resort, but that would be a good start towards bringing confidence in the market.

    • http://www.facebook.com/nolanmatt Matt Nolan

      A lender of last resort tells us that “normally solvent” banks will not be allowed to fail – with that gone the financial crisis stops for everyone else. Europe still has a rough time, but in NZ it will see credit spreads narrow and firms more willing to invest.

      I tell you what, when this is all done and dusted some people are going to write some interesting books on what happened – its one hell of a political story.

    • http://tvhe.co.nz/ Matt Nolan

      A lender of last resort tells us that “normally solvent” banks will
      not be allowed to fail – with that gone the financial crisis stops for
      everyone else. Europe still has a rough time, but in NZ it will see
      credit spreads narrow and firms more willing to invest.

      I tell you what, when this is all done and dusted some people are
      going to write some interesting books on what happened – its one hell of
      a political story.