In a new research report by the Nomura Research Institute’s chief economist Richard Koo, he poses the question, Is a Greek exit from eurozone really necessary?
Here’s a synopsis from his thoughts on the matter.
In the last two weeks, data has confirmed a slowdown in China. Back in the U.S., there are rising expectations that the housing market has finally seen prices hit rock bottom.
For Europe, its decelerating activity may have finally extended its tentacles to Germany. Chancellor Angela Merkel has changed her previous position, and has now pledged support for aggressive ECB accommodation.
For China, its slowdown is getting larger, even with the easing stance from its central bank. This is starting to affect the economies and politics of adjacent countries that had once benefitted from China’s boom times.
And for Taiwan, where Koo had just visited last week, the pro-China Ma administration, re-elected in January, had promised an increase in economic growth by developing stronger links with the fast-growing mainland. With China’s subsequent slowdown, it has depressed Taiwanese growth and the government’s public support rating is now in tatters.
Koo further explores Merkel’s support to ECB bond purchases. He wrote that her decision to change course and drink the ECB Kool-aid, is a step forward.
He sees the eurozone suffering from two problems: a balance sheet recession and capital flight, such as Spain’s private savings going to the German government bond market. He does’t expect monetary accommodation to have a great impact on the first, but it could diminish the second.
Koo believes that the ECB’s policy flexibility is a positive development.
But with the ECB purchases of Spanish government bonds, it won’t necessarily take care of the balance sheet recession, triggered by the country’s private sector raising savings and cutting down debt even with near-zero interest rates.
This should visible from Japanese, US, and UK economies, who have still have not recovered even with large purchases of government debt by each of their respective central banks.
On the other hand, bond purchases suggest that money that is not being spent by a debt-minimizing private sector; it is instead being utilized to buy government debt, lower government bond yields and allow these countries to administer at a low cost the necessary fiscal stimulus during this balance sheet recession.
Koo also addressed ECB bond purchases. He believes they’re crucial for the short term, even as longer-term issues stay unaddressed.
He writes the eurozone’s problem is Spain’s surplus and the Irish private savings generated by deleveraging efforts are not being utilized to buy domestic government debt, similar to Japan, the US, or the UK.
Instead it is exiting to government bond markets in venues including Germany and Finland.
Finally…. a nice chart o labor costs:
