EU-DIGEST

Fiscal ruin of the Western world beckons - by Ambrose Evans -Pritchard

"For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state. No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base. As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency. France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us. My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin."

Labels: Interest rates, meltdown, World Economy

Political Economy: Zero Bound - by John Cranford

In the past few months, Bernanke has deployed the central bank’s powers in extraordinary and flexible ways to flood the banking system with cash. At latest count the Fed has created at least a half-dozen new lending programs for institutions that aren’t its traditional borrowers and broadened its lending to ordinary banks. The amount of credit outstanding from the Fed is well in excess of $500 billion. That’s billion, with a “b.” A year ago, it was $500 million, with an “m.”

The next year or two will be trying as the Fed navigates yet another expanse of uncharted water. Bernanke has proved adept so far at finding creative ways to use the Fed’s resources, and it’s safe to expect him to continue doing so. But the days of just moving interest rates up and down to steer the economy are long past.

Labels: Interest rates, US Economy

The ECB Pulls the Rate-Hike Trigger citing inflation risks

Unlike the Federal Reserve, the European Central Bank has one policy mandate: maintaining price stability. And the ECB put its money where its mouth is on July 3, raising its benchmark interest rate 25 basis points to 4.25%. The Swedish Riksbank also raised its benchmark rate 25 basis points, to 4.5%, earlier in the day. The ECB's move was widely expected by financial markets. Recent hawkish comments and the reaction to rising overall interest rates in the euro zone, along with stronger economic data, at least from Germany, had changed expectations to a rate hike in recent months.

Labels: ECB, EU, Interest rates