Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
February 8, 2012

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FEATURED
 
  Congressional Testimony
The Outlook for the Euro Crisis and Implications for the United States

C. Fred Bergsten
   
  C. Fred Bergsten The United States has a major national interest in successful resolution of the European crisis. A breakup of the euro area would push Europe into a sharp recession or worse with substantial spillover to the United States. The Europeans should continue to provide the bulk of the resources needed to resolve their crisis, as they are already doing, but there may be domestic political limits on those contributions in Europe, and the rest of the world may thus need to help. Hence the International Monetary Fund (IMF) may be called upon to help and the United States should strongly support that initiative.

Many people believe that the United States should also contribute to any such IMF role. This would be inappropriate, however. The objective is for the IMF to borrow from creditor countries that are running large trade and current account surpluses, most notably China but also Japan, Russia, oil exporters in the Middle East, Korea, Brazil, Singapore, Hong Kong, and several others in Asia. If the United States, as the world's largest debtor country, were to lend to the IMF, it would have to borrow even more from China and its foreign creditors; the Fund should borrow from those countries directly.

At the same time, it is imperative that the US Congress work with the Administration to pass the legislation needed to implement the IMF quota reforms agreed at the G-20 summit in Seoul in November 2011. That agreement included a doubling of the IMF's quotas and thus its basic resources; even more importantly, it redistributes quotas and thus voting rights at the Fund away from the grossly over-represented Europeans to the grossly under-represented emerging markets, which will be an essential part of any "grand bargain" under which they will lend substantial additional resources to the Fund to enable it to help Europe. The United States can thus provide crucial support for resolving the European economic and financial crisis through the IMF without spending any additional money.

The final and very important point is that the United States also needs to see the euro crisis as a wakeup call and take the time that is now available to it, partly due to the euro crisis, to combine short-term stimulus with decisive actions to correct the budget imbalance and debt buildup over the next three to five years. A failure to do so would mean the United States has learned nothing from the euro crisis.


>> Read full testimony
>> See also: Policy Brief 12-1: The Coming Resolution of the European Crisis

 
In Focus
The Euro Crisis


Congressional Testimony
The Outlook for the Euro Crisis and Implications for the United States
C. Fred Bergsten
February 1, 2012

Congressional Testimony
Outlook for the Euro Area
Simon Johnson
February 1, 2012

Interview
Will French Voting Test Franco-German Ties?
Nicolas Véron
February 7, 2012

Interview
Is Europe's Shadow Lifting from the United States?
Jacob Funk Kirkegaard
February 3, 2012

Event
The Euro Crisis
C. Fred Bergsten, Simon Johnson, Jacob Funk Kirkegaard, and Peter Boone present differing analyses of the euro crisis.
January 19, 2012

Policy Brief 12-1
The Coming Resolution of the European Crisis
C. Fred Bergsten
Jacob Funk Kirkegaard
January 2012

Policy Brief 12-4
The European Crisis Deepens
Peter Boone
Simon Johnson
January 2012

Wall Street Journal
At One Think Tank, Two Opposing Views on the Euro-Zone Outlook
January 19, 2012

Interview
Europe vs. the Rest of the World
Edwin M. Truman
January 20, 2012

Interview
Making an Example of Greece
Jacob Funk Kirkegaard
January 19, 2012

Working Paper 12-2
Financial Reform after the Crisis: An Early Assessment
Nicolas Véron
January 2012

See also related
RealTime posts

  Congressional Testimony
Outlook for the Euro Area

Simon Johnson
   
  Simon Johnson Successive plans to restore confidence in the euro area have failed. The market cost of borrowing is at unsustainable levels for euro banks and a significant number of governments. Two major problems loom over the euro area. First, the introduction of sovereign credit risk has made nations, and subsequently banks, effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe's periphery to plunge into recession. This has increased the financing needs of troubled nations well into the future. Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations "hypercompetitive" in the near future, (3) supportive monetary policy from the European Central Bank, (4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability, and (5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector. However, there is little political will to take these necessary steps. Europe's economy remains, therefore, in a dangerous state.

>> Read full testimony
>> See also: Policy Brief 12-4: The European Crisis Deepens

  Op-ed
Heated Open Discussions at the Gaidar Forum

Anders Åslund
   
  Anders Åslund The Gaidar Forum, one of Moscow's major economic conferences, offered a good overview of Russia's current ongoing economic policy discussion. The dominant concern is economic growth. It has slipped from 7 percent a year to an anticipated 2–3 percent a year, and the question is whether it will be possible to raise it to 5–6 percent a year. Everyone is painfully aware of the euro crisis, but the direct risks it poses to Russia are not perceived as great. Instead, two indirect risks arouse worries: the price of oil and capital flows. Finance Minister Anton Siluanov acknowledged that the federal budget for 2012 will balance only at an oil price of $117 per barrel. Yet, with strong oil demand from emerging economies and the risk of conflict in the Middle East still hovering, officials are not too concerned in the short term. Russia experienced a net capital outflow of $84 billion in 2011. It consisted of three major elements: oligarchs and corrupt officials who wanted to diversify their political and commercial risks; Western European banks that have deleveraged and withdrawn funding on a large scale from Moscow to raise their capital-to-assets ratio; and third, many medium-sized businessmen, exhausted by red tape and lawlessness, have sold their Russian assets and moved to the West. Intellectually, Russia is ready for an excellent economic policy. The question is whether political preconditions for such a policy will finally be created.

>> Read full op-ed


Peterson Perspectives Interviews

audio  Will French Voting Test Franco-German Ties?
Nicolas Véron assesses the contest between President Nicolas Sarkozy and the socialist Francois Hollande, and the implications for European integration.

audio  Taking the Measure of China's Future Leader
Nicholas R. Lardy says the United States will use the visit of Vice President Xi Jin Ping to assess where US-China relations are going in the next decade.

audio  Is Europe's Shadow Lifting from the United States?
Jacob Funk Kirkegaard argues that the latest progress in solving the euro debt crisis is easing the threat of damage to the fragile US recovery.

audio  Economic Crisis in Egypt: Enter the IMF
Mohsin S. Khan discusses why Egypt has reluctantly turned to the International Monetary Fund for help and the outlook for negotiations to rescue its economy.



Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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How Euro Brinkmanship Is Beginning To Succeed

The Markets' Favorable Response to Italy's Major Steps Ahead

How to Discourage Currency Manipulation: Tax It Heavily

Michael Mussa (1944–2012): Challenging Conventional Wisdom

Michael Mussa (1944–2012): Integrity, Courage, and a Gift for Friendship
  Can Affordable Housing Sustain China's Economic Growth?

Chinese Housing Market Correction Update

Beware False Prophets of Rebalancing Part II

Beware False Prophets of Rebalancing

Why Soccer Is a Lot Like the Stock Market In China
  China Update: from Words to Deeds

Hoovering up the foreign exchange

Wanted: Handwriting Analyst

Robert Park and Genocide and Torture II

Slave to the blog: war, aid, the stockmarket, KIC, turtles and fishes


PIIE Noted in the News and on the Web

C-SPAN
Senate Budget Committee's Outlook for the Eurozone
C-SPAN provides coverage of testimony by C. Fred Bergsten and Simon Johnson.

Washington Post
World Economy's Uncharted Territory
Robert Samuelson summarizes C. Fred Bergsten's analysis of significant shifts in the global economy.

Wall Street Journal
Hard Times Call for Hard Measures
The Wall Street Journal's Neal Lipschutz conducts a video interview with Carmen M. Reinhart at the World Economic forum in Davos. Reinhart avers that "the notion that one can reduce debt painlessly is like saying you can lose weight without diet and exercise."

China Central Television
Government's Role in Chinese Property Markets
Nicholas R. Lardy tells CCTV the drop in property values in China is more structural than cyclical and notes that China is investing nearly twice as much in residential property as a share of GDP than the United States was at its housing peak in 2005. Lardy is author of Sustaining China's Economic Growth after the Global Financial Crisis.

China Daily
China, US Huge Potential for Economic Co-op
With a global economic turndown, it is even more important for the world's two largest economies, China and the United States, to expand bilateral economic cooperation, says Nicholas R. Lardy.

Russia Forum 2012
Panel Discussion: Russia in Transition
Anders Åslund participates in a panel discussion at the Russia Forum 2012 focused on issues facing Russia's economic and social development.



Preview of Our Next Issue

Policy Brief
Interest Rate Shock and Sustainability of Italy's Sovereign Debt
William R. Cline

Op-ed
Europe's New Fiscal Compact Treaty Does Not Outlaw Keynesianism and Is a Stepping Stone to More Progress
Jacob Funk Kirkegaard

 
 
In This Issue
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Event
Nicholas R. Lardy Sustaining China's Economic Growth after the Global Financial Crisis

China expert Nicholas R. Lardy presents the findings of his latest book.
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