Many governments are coming to realize that the most effective way to get their respective economies moving again is through a fiscal stimulus. With monetary policies and various central bank actions still proving insufficient in jumpstarting capital markets and inducing consumer spending, the only clear government action left is through fiscal action.
Fiscal stimuli can take many forms: tax refunds, transfer payments to consumers (stimulus checks), or direct subsidies to retailers.
There’s just one thing I am wondering about now. There is no denying that world is now more inter-linked and inter-dependent now than ever before. Global trade is deeper now than the last time a major economic stimulus was taken on the scale necessary today.
Given this, just how much of a local stimulus is likely to trickle away to a nation’s top trading partners. In other words, if the US undertakes a huge fiscal stimulus, so as to induce local consumers to consume, who are going to be its direct beneficiaries?
Sure, the local US stores will benefit. The local logistics chains will also likely pick up business. But the ultimate beneficiaries will likely be the manufacturers and high value-added producers that produce the goods that the consumers will buy. These would come from the biggest net exporting nations to the US. In short, a big US fiscal stimulus will likely also pick up the economies of these fortunate nations.
Is this the reason the Harper government in Canada is waiting for the Obama government’s plan before deciding to undertake on its own stimulus? If it is, and the Harper solution is similar to the preferred solution of governments the world over, then we are only going to propagate the unsustainable balance of the US being the consumer of last resort while the rest of the world over-produces. We need to have a new focus of economic development. It is long over-due.
Saturday, November 29, 2008
Monday, November 24, 2008
The 3 laws of risk, and their implications for an inter-connected financial system
The last half-dozen years has seen a steep rise in the use of Credit Default Swaps in the banking system. That’s a principal reason the financial crisis has reached the epic proportions it has. One, this created moral hazard among banks who, feeling they have managed risk away, began to take on more risk, and two, the greater risk was dispersed more broadly across the financial system.
When one bank wants to manage its risk of a financial contract being defaulted on by a major counterparty bank, it buys a credit default swap the way a normal person buys accident insurance. Another bank that sells the swap, acts as the default risk counterparty. As I described in an earlier post, that counterparty bank’s assumed risk is much like that of an insurance company covering a specific event risk.
In the case of credit default swaps, the event risk is a major bank becoming insolvent, and defaulting on its obligations. If the risk event being insured against does not happen, the CDS seller pockets the premium as profit. If the bank sells enough derivatives CDSs, this transaction can become very profitable.
What happens if the insurance buyer and seller are in the same line of business? What happens when the party being covered by a CDS insurance is also in the same line of business? In the last half-dozen years, commercial banks have been significant buyers and the sellers of credit default swaps. The buyers were buying protection from default by still other banks.
Because banks have taken out billions of credit default swaps with one another, banks have succeeded in becoming intermediaries of risk. If a major financial counter-party fails, what happens to the entire financial system? This financial crisis has amplified for us what I would consider as three basic laws of risk. There could be more, but let me focus of the three, and they all apply to what the CDS experience has come to demonstrate:
The 3 Laws of Risk
1. For every potential return created, we create an opposite potential risk. If banks wish to earn investment income, they need to engage in a financial transaction. The more transactions they entered, the greater the potential income and risk.
2. Risk, once created, cannot be destroyed or absolutely decreased (unless potential return is also decreased or given up). It can only be transferred, shared, or dispersed. As mentioned, banks managed their greatly increased credit risk by engaging in mortgage bond securitization and entering into CDSs.
3. In a system where risk has been shared and dispersed among interconnected institutions, any random adverse change in risk in any locality will adversely change the risk in other localities of the system. This is true of all kinds of risk, whether credit default risk, market risk, volatility risk, interest risk, currency risk, sovereign risk, or capitulation risk. They are all inter-connected. This is where the financial system is in now.
These three laws then lead us into extrapolating five major implications of risk on a financial system.
5 implications of risk on a financial system
1. Any firm trying to earn additional return by taking on the risk of another party, either by entering into a swap, selling an option, guarantee, or insurance to the other party, incurs a potential risk of loss that runs up to a maximum of the loss of the counterparty. AIG and Citibank, more than any others, have learned this the hard way.
2. Any firm that tries to hedge this risk by entering into a swap with another party only succeeds in transferring the original risk to another party. That’s what Lehman’s bondholders were successful in doing.
3. Worse, if each party in the chain that offers to be a counterparty in this risk management process tries to earn a minimal return on the transaction, it creates additional counterparty risk that was not there before. Hence the more firms involved in a chain of counterparty swaps and derivatives transactions, each trying to make a return for itself, the greater the resulting risk created in the system. Again, AIG and Citibank learned this the hard way. Hence, any and all returns earned from entering into these types of transactions should not paid out to employees or shareholders of the firms, but kept as capital buffer in the event of such systemic meltdown.
4. The more interconnected a system, and the more of these types of transactions it has, the greater the likelihood of a systemic meltdown. Due to risks of moral hazard, which includes potential need of a bailout by innocent taxpayers, inter-connected firms crucial to the continued functioning of the system should not be allowed to enter into derivative transactions. American taxpayers learning this the hard way now.
5. There is no such thing as a benign or risk-free environment. You can never create an environment where risk has been controlled or made benign. It only means risk has been put at rest. But the more risk is put at rest, the greater its potential blowup energy. You may only succeed in causing it to implode more fiercely, and in unexpected ways. This makes the case for having a centralized clearing house that more important. With a clearing house, we can better track where in the system risk is building up, and we can correspondingly require greater collateral protection before something unexpected blows up.
Economic growth will now have to come from real value creation. There is only so much growth that can come from shifting resources around. The latter is not sustainable as a stand alone source of growth. Risk comes with all value-creating activities.
When one bank wants to manage its risk of a financial contract being defaulted on by a major counterparty bank, it buys a credit default swap the way a normal person buys accident insurance. Another bank that sells the swap, acts as the default risk counterparty. As I described in an earlier post, that counterparty bank’s assumed risk is much like that of an insurance company covering a specific event risk.
In the case of credit default swaps, the event risk is a major bank becoming insolvent, and defaulting on its obligations. If the risk event being insured against does not happen, the CDS seller pockets the premium as profit. If the bank sells enough derivatives CDSs, this transaction can become very profitable.
What happens if the insurance buyer and seller are in the same line of business? What happens when the party being covered by a CDS insurance is also in the same line of business? In the last half-dozen years, commercial banks have been significant buyers and the sellers of credit default swaps. The buyers were buying protection from default by still other banks.
Because banks have taken out billions of credit default swaps with one another, banks have succeeded in becoming intermediaries of risk. If a major financial counter-party fails, what happens to the entire financial system? This financial crisis has amplified for us what I would consider as three basic laws of risk. There could be more, but let me focus of the three, and they all apply to what the CDS experience has come to demonstrate:
The 3 Laws of Risk
1. For every potential return created, we create an opposite potential risk. If banks wish to earn investment income, they need to engage in a financial transaction. The more transactions they entered, the greater the potential income and risk.
2. Risk, once created, cannot be destroyed or absolutely decreased (unless potential return is also decreased or given up). It can only be transferred, shared, or dispersed. As mentioned, banks managed their greatly increased credit risk by engaging in mortgage bond securitization and entering into CDSs.
3. In a system where risk has been shared and dispersed among interconnected institutions, any random adverse change in risk in any locality will adversely change the risk in other localities of the system. This is true of all kinds of risk, whether credit default risk, market risk, volatility risk, interest risk, currency risk, sovereign risk, or capitulation risk. They are all inter-connected. This is where the financial system is in now.
These three laws then lead us into extrapolating five major implications of risk on a financial system.
5 implications of risk on a financial system
1. Any firm trying to earn additional return by taking on the risk of another party, either by entering into a swap, selling an option, guarantee, or insurance to the other party, incurs a potential risk of loss that runs up to a maximum of the loss of the counterparty. AIG and Citibank, more than any others, have learned this the hard way.
2. Any firm that tries to hedge this risk by entering into a swap with another party only succeeds in transferring the original risk to another party. That’s what Lehman’s bondholders were successful in doing.
3. Worse, if each party in the chain that offers to be a counterparty in this risk management process tries to earn a minimal return on the transaction, it creates additional counterparty risk that was not there before. Hence the more firms involved in a chain of counterparty swaps and derivatives transactions, each trying to make a return for itself, the greater the resulting risk created in the system. Again, AIG and Citibank learned this the hard way. Hence, any and all returns earned from entering into these types of transactions should not paid out to employees or shareholders of the firms, but kept as capital buffer in the event of such systemic meltdown.
4. The more interconnected a system, and the more of these types of transactions it has, the greater the likelihood of a systemic meltdown. Due to risks of moral hazard, which includes potential need of a bailout by innocent taxpayers, inter-connected firms crucial to the continued functioning of the system should not be allowed to enter into derivative transactions. American taxpayers learning this the hard way now.
5. There is no such thing as a benign or risk-free environment. You can never create an environment where risk has been controlled or made benign. It only means risk has been put at rest. But the more risk is put at rest, the greater its potential blowup energy. You may only succeed in causing it to implode more fiercely, and in unexpected ways. This makes the case for having a centralized clearing house that more important. With a clearing house, we can better track where in the system risk is building up, and we can correspondingly require greater collateral protection before something unexpected blows up.
Economic growth will now have to come from real value creation. There is only so much growth that can come from shifting resources around. The latter is not sustainable as a stand alone source of growth. Risk comes with all value-creating activities.
Wednesday, November 19, 2008
Is the TARP a 'bait and switch' plan?
Did Hank Paulson lie when, in defence of opting out of buying troubled assets, he said “It was clear to me by the time the (TARP) bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.”
Or did he actually plan on using the TARP from the very start simply to purchase bank assets and not to purchase troubled assets at all?
This seems to be the theme of speculation in Naked Capitalism’s post. During the TARP negotiations in Congress, Treasury was resisting the idea of inserting language that would allow for capital injections into banks but that some members of Congress thought it was necessary, and put statements into the Congressional record via floor debates to allow for that interpretation.
Yves Smith says Either Paulson let his intentions be misrepresented via his silence, or he is now falsely claiming to have changed direction earlier than he did….. The bill was drafted to be extraordinarily vague and sweeping, and yet did not clearly give Paulson the authority he now says he realized back then that he needed while it was still being renegotiated.
The way I understand this, it seems Paulson took the stance of resisting equity capitalization as a solution to the bank solvency crisis, such that Congress inserted that as a vague provision in the legislation, with no specific guidelines, limits, or constraints on how Treasury should do it, or conditionalities it should insist from those who end up getting the money.
It turns out that much of the money went to healthy banks, because as Pauslon put it, we need to put money into healthy banks before they became unhealthy, and to encourage the less healthy banks to also participate. In his words, if some banks participated and others did not, those who did would be in effect declaring they were weak and scaring away depositors and investors. The stigma argument does carry some weight.
So as soon as TARP was enacted, Paulson unveiled plans to provide $125 billion to nine banks on terms that were more favorable than they would have received in the marketplace. The government, however, offered no written requirements about how or when the banks must use the money. Treasury's new program provided that a bank can exit by repurchasing Treasury shares with newly raised private capital.
Does this indicate that TARP was negotiated to allow preferred banks get the bailout money at the best terms possible, given the circumstances?
Monday, November 17, 2008
In the survival of the fittest, will small be the new big?
Will the next few years belong to the micro-size businesses?
A few months back, we said here that today belongs to the big companies. The reasons were obvious under an inflationary environment: geographic advantage; bigger cash pipeline; buyer bargaining advantage; product diversity; greater rational to seek government help.
Now that the environment is one of recession and deceleration, this means bad tidings for companies with large overhead.
We already see a lot of large companies starting to fail in banking, financial services, and automobile industries, perhaps soon, in the retail and in the tech industries. General Motors may soon file for bankruptcy. Dell and Apple are starting to lose traction. Of course, everybody knows all the names that have gone under in the financial industry, Lehman, AIG, Bear Stearns, and many others worldwide. More may soon follow. Government appetite for bailout is rightly waning as business after business seeks for protection from the inevitable.
Being big is no protection when no product is rolling out the door. In this kind of environment, small and informal may be more appropriate. Large and extensive only translates into heavy and expensive.
If the global recession proves to be deep and long, how many more large businesses will we see fail? I also have to re-think the usefulness of consolidation among financial institutions from here on...
A few months back, we said here that today belongs to the big companies. The reasons were obvious under an inflationary environment: geographic advantage; bigger cash pipeline; buyer bargaining advantage; product diversity; greater rational to seek government help.
Now that the environment is one of recession and deceleration, this means bad tidings for companies with large overhead.
We already see a lot of large companies starting to fail in banking, financial services, and automobile industries, perhaps soon, in the retail and in the tech industries. General Motors may soon file for bankruptcy. Dell and Apple are starting to lose traction. Of course, everybody knows all the names that have gone under in the financial industry, Lehman, AIG, Bear Stearns, and many others worldwide. More may soon follow. Government appetite for bailout is rightly waning as business after business seeks for protection from the inevitable.
Being big is no protection when no product is rolling out the door. In this kind of environment, small and informal may be more appropriate. Large and extensive only translates into heavy and expensive.
If the global recession proves to be deep and long, how many more large businesses will we see fail? I also have to re-think the usefulness of consolidation among financial institutions from here on...
Tuesday, November 11, 2008
Can capitalism save itself this time around?
This post is more a question rather than a statement or rant. Can capitalism save itself this time around?
I have four reasons for having to ask.
1. Economic power and wealth are now more concentrated among fewer people. A key component of capitalism is competition. To gain competitive edge against competitors, many market participants engage in strategies and activities that increase their monopolistic power. All this is well and good when it translates into better products for the consumer.
But a private, for-profit company’s objective is first and foremost to make a profit. If the company’s shareholders happen to be of the shareholder value maximization school, they will want to maximize profits first and foremost. Any gains in monopolistic power that translate into greater economies of scale can therefore lead to greater opportunities for these same players to further increase their gains over competitors.
Moreover, because of the downward effects of the globalization of processes, many of the displaced and existing workers in the developed countries could no longer demand increasing wages from their employers. Thus power shifted from many competitors and market participants, and from the masses of employees, to a few select large corporations able to shift resources and processes anywhere it suits them best.
This development undermines a key component of capitalism – free market competition.
2. Asymmetrical information abounds in most economic transactions. Wikipedia defines this as transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. This undermines a key component of capitalism – perfect competition.
And because of both economic concentration and asymmetrical information, there are now, more than ever, opportunities for moral hazard. Moral hazard is defined as instances where the ignorant party lacks information about performance of the agreed-upon transaction or lacks the ability to retaliate for a breach of the agreement. This also refers to instances where market actors can act with impunity, with the expectation of relatively low downside due to societal bailouts of failure. This was the case in many of the recent financial transactions that have recently undermined the capital markets.
Moral hazard undermines a most key component of capitalism – trust, which leads to the third…
3. There seems to be massive investor and consumer capitulation this time around. In environments of decelerating or contracting economies, everybody cuts down on consumption. Everybody wants to save. Everybody wants to earn cash inflow, but do not want cash outflow.
Everybody’s individual behavior, taken into the aggregate, results in further decelaration or contraction of economies. Businesses run out of clients. Businesses without clients lay off their workers. Laid off workers cut down on their spending further.
Nobody wants to invest in economic enterprises, and everyone prefers to take a wait and see stance. No one want to move first, for fear that nobody else will follow, and they will end up the only ones outside when the door of the free market completely closes.
This undermines a key component of capitalism – confidence in the viability of economic transactions.
4. A significant chunk of the world population is now in danger of a coordinated financial armageddon. This time, the world has come to realize that it is more and more inter-connected, and that mistakes made in one sector of one country can affect the economies of entire nations. If a major US institution falls, whose links with large institutions worldwide are too great, the ripples and after-effects to other economies globally could sink the world into a deep recession.
And with the US finally forced to follow the same economic growth formula as the rest of the world, which is to rely on a growth strategy where others are supposed to buy your goods, we are now missing a key ingredient to keep the global growth engine humming – the willing and able consumer. This comes at a time when the rise in energy and food and materials prices earlier this year had already resulted in significant demand destruction in many economies.
This undermines a significant component of capitalism – the ability of markets to self-heal.
With so many crucial components of capitalism seemingly absent, I ask again, can capitalism save itself this time around? Or do we need something more drastic, even than market intervention?
Thursday, November 6, 2008
The imperatives for joining a regional currency bloc: Dispatches from the Eurozone
The current financial turmoil is going to be a boon on the Eurozone – the group of European counties that use the common Euro currency. Members of the European Monetary Union (EMU) have remained relatively stable, compared to their non-member peers.
Currently, its roster of member states includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia and Spain. Slovakia will join in 2009. More and more, countries that still maintain their own currencies have had a harder time trying to stay afloat.
Recent news dispatches could be signs of things to come. This from portfolio.hu, a financial website in Hungary, which is now contemplating of joining the Eurozone:
A series of countries learned the hard way how good it is to have a common currency. The common denominator for Iceland, Hungary, Latvia, Denmark, Sweden and the UK is not only the fact that the capital market crisis undermined the stability of their economies, but also that they drew the same conclusion from it: euro zone membership could prove to be a sturdy shield against such turmoils.
The stabilisation force of the single currency bloc is known for long. For small and open economies it is especially advantageous to enter a highly stable fixed exchange rate system, thus shaking off the nuisances of shepherding their own national currencies. In an instant, there are no more excessive exchange rate fluctuations, risks of a currency crisis or contagion and the balance of payment limitation will also be softer.
Similar to Hungary, now Denmark, Iceland, and Sweden are also contemplating of joining the Eurocurrency group of nations. Denmark is coming to terms with the reality of needing to join for very much the same reasons as Hungary. This from the Independent in UK:
Danes were now having to carry a "very heavy burden", Mr Rasmussen said, after the Danish Central Bank's move to raise interest rates to 5.5 per cent to support the krone. The Danish currency is closely pegged to the euro and has come under fierce pressure as investors dump it in favour of bigger and safer currencies.
The Danish and Swedish governments have begun preparing the ground for referendums on joining the euro, as part of a huge political reversal across Europe's northern fringes in favour of the single currency. Although voters have overwhelming rejected the euro in the past, both countries are now pointing to the recent damage inflicted on their national currencies as evidence that staying out has left them dangerously over-exposed to market vagaries.
"The financial turmoil has made it clear to all Danes that there is both a political and economic cost of staying out of the eurozone and that's why we should join it as soon as possible," the Danish Prime Minister Anders Fogh Rasmussen said this week.
Still, joining the Eurozone will not be a bed of roses for these countries. The sacrifices and difficulties involved with coordinating monetary policies with the rest of the Eurozone was precisely the reason these countries did not join in the first place. Businessweek reports: Conditions to join the euro are tough, with countries being required to have inflation and budget deficits at sustainable low levels, something many eastern European countries are failing in due to unreformed public finances and soaring budget deficits.
The Danish concerns, according to the Independent: But despite the current enthusiasm, both governments will struggle to address deep-rooted fears among their voters that giving up their currencies would tie them closer to the EU.
On the Drottninggatan, a shopping street in Stockholm, Swedes were divided. One man in his fifties held out a handful of coins, saying: "I know the value of this money, it's safe and I don't see reason to change." A mother fretted about rising prices if the euro was introduced. "Things will just get more expensive like they did in other countries."
Hungary, which is currently in a delicate state, has asked for leniency on the Euro’s standards. Expectations of the request being granted are however low. All in all, it would be a folly if Hungary hoped for leniency from the EU's part - EU officials would certainly reject such a request hands down, anyhow.
What Hungary has to do is pursue a great economic policy for three years and adopt the single European currency in 2012. Should the country try to run faster than that towards EMU membership, it could find itself in an even bigger slump than the current one. If it ran slower than that, though, it would only put its future on the line - just like over the past years.
Despite the potential short-term hardships, opinions in Denmark have already turned towards joining. Eubiness.com reports: Denmark, which was granted its opt-outs after it initially rejected the EU's Maastricht Treaty in a June 1992 referendum, has said "No" to the European single currency once before in a plebiscite in September 2000. A poll published Tuesday by television channel TV2 News indicated that 48 percent of Danes were in favour of adopting the euro and 44 percent opposed.
But concerns still weigh heavily against the move in some eastern European nations, ironically the same countries most vulnerable to further financial turmoil. Businessweek reports: The euro debate has also heated up in eastern Europe. In Poland, President Lech Kaczynski at first supported government plans to shoot for euro adoption by 2012, but later appeared to change his mind.
"I have serious doubts. We have to think of those who have no savings and for whom the price rises linked to euro adoption could take away 10 percent or more of their income," he said on Thursday, Gazeta Wyborcza reports.
Business leaders in the Czech Republic have also called for swift entry, but the message was quashed by the country's central bank chief Zdenek Tuma on Thursday, who said the financial crisis is not a good time for policy-making. "At a time when the waters are stormy, even a good swimmer will not take a dive. For me, no decision should be made now," Tuma said, AFP reports. "We will know better next year."
Still, if the financial crisis continues its beating of small emerging economy currencies, I’m pretty sure the debate about the benefits of joining a major currency group will become moot. We’ll perhaps begin to see regional currency blocs forming around the world.
Currently, its roster of member states includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia and Spain. Slovakia will join in 2009. More and more, countries that still maintain their own currencies have had a harder time trying to stay afloat.
Recent news dispatches could be signs of things to come. This from portfolio.hu, a financial website in Hungary, which is now contemplating of joining the Eurozone:
A series of countries learned the hard way how good it is to have a common currency. The common denominator for Iceland, Hungary, Latvia, Denmark, Sweden and the UK is not only the fact that the capital market crisis undermined the stability of their economies, but also that they drew the same conclusion from it: euro zone membership could prove to be a sturdy shield against such turmoils.
The stabilisation force of the single currency bloc is known for long. For small and open economies it is especially advantageous to enter a highly stable fixed exchange rate system, thus shaking off the nuisances of shepherding their own national currencies. In an instant, there are no more excessive exchange rate fluctuations, risks of a currency crisis or contagion and the balance of payment limitation will also be softer.
Similar to Hungary, now Denmark, Iceland, and Sweden are also contemplating of joining the Eurocurrency group of nations. Denmark is coming to terms with the reality of needing to join for very much the same reasons as Hungary. This from the Independent in UK:
Danes were now having to carry a "very heavy burden", Mr Rasmussen said, after the Danish Central Bank's move to raise interest rates to 5.5 per cent to support the krone. The Danish currency is closely pegged to the euro and has come under fierce pressure as investors dump it in favour of bigger and safer currencies.
The Danish and Swedish governments have begun preparing the ground for referendums on joining the euro, as part of a huge political reversal across Europe's northern fringes in favour of the single currency. Although voters have overwhelming rejected the euro in the past, both countries are now pointing to the recent damage inflicted on their national currencies as evidence that staying out has left them dangerously over-exposed to market vagaries.
"The financial turmoil has made it clear to all Danes that there is both a political and economic cost of staying out of the eurozone and that's why we should join it as soon as possible," the Danish Prime Minister Anders Fogh Rasmussen said this week.
Still, joining the Eurozone will not be a bed of roses for these countries. The sacrifices and difficulties involved with coordinating monetary policies with the rest of the Eurozone was precisely the reason these countries did not join in the first place. Businessweek reports: Conditions to join the euro are tough, with countries being required to have inflation and budget deficits at sustainable low levels, something many eastern European countries are failing in due to unreformed public finances and soaring budget deficits.
The Danish concerns, according to the Independent: But despite the current enthusiasm, both governments will struggle to address deep-rooted fears among their voters that giving up their currencies would tie them closer to the EU.
On the Drottninggatan, a shopping street in Stockholm, Swedes were divided. One man in his fifties held out a handful of coins, saying: "I know the value of this money, it's safe and I don't see reason to change." A mother fretted about rising prices if the euro was introduced. "Things will just get more expensive like they did in other countries."
Hungary, which is currently in a delicate state, has asked for leniency on the Euro’s standards. Expectations of the request being granted are however low. All in all, it would be a folly if Hungary hoped for leniency from the EU's part - EU officials would certainly reject such a request hands down, anyhow.
What Hungary has to do is pursue a great economic policy for three years and adopt the single European currency in 2012. Should the country try to run faster than that towards EMU membership, it could find itself in an even bigger slump than the current one. If it ran slower than that, though, it would only put its future on the line - just like over the past years.
Despite the potential short-term hardships, opinions in Denmark have already turned towards joining. Eubiness.com reports: Denmark, which was granted its opt-outs after it initially rejected the EU's Maastricht Treaty in a June 1992 referendum, has said "No" to the European single currency once before in a plebiscite in September 2000. A poll published Tuesday by television channel TV2 News indicated that 48 percent of Danes were in favour of adopting the euro and 44 percent opposed.
But concerns still weigh heavily against the move in some eastern European nations, ironically the same countries most vulnerable to further financial turmoil. Businessweek reports: The euro debate has also heated up in eastern Europe. In Poland, President Lech Kaczynski at first supported government plans to shoot for euro adoption by 2012, but later appeared to change his mind.
"I have serious doubts. We have to think of those who have no savings and for whom the price rises linked to euro adoption could take away 10 percent or more of their income," he said on Thursday, Gazeta Wyborcza reports.
Business leaders in the Czech Republic have also called for swift entry, but the message was quashed by the country's central bank chief Zdenek Tuma on Thursday, who said the financial crisis is not a good time for policy-making. "At a time when the waters are stormy, even a good swimmer will not take a dive. For me, no decision should be made now," Tuma said, AFP reports. "We will know better next year."
Still, if the financial crisis continues its beating of small emerging economy currencies, I’m pretty sure the debate about the benefits of joining a major currency group will become moot. We’ll perhaps begin to see regional currency blocs forming around the world.
Tuesday, November 4, 2008
President Obama, the new leader in the fight against economic decline
This year has really been one for the books. Major changes in the world economy, in the world financial infrastructure, and now in politics and society.
America now has its first multi-racial president.
This comes at a crucial time in history. A time when the world has come to realize more and more that it is inter-connected, that mistakes made in one sector of one country can affect the economies of entire nations. A time when the world has come to realize that the only thing that can save the world from complete economic destruction is multi-national cooperation, not economic isolation or beggar-thy-neighbour policies. A time like no other to reach global multilateral agreements for common objectives.
Let’s hope that President Obama will actualize what he has come to embody - a more united, more inclusive America. Most importantly, he should embody an America that recognizes that there is a world out there beyond its shores, and that the future of the world depends as much on the efforts and aspirations of other nations as much as theirs. Let’s hope that he will lead an America that leads more out of moral suasion than imposition of economic might.
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