Wednesday, June 9, 2010

First Thoughts on Merkel's Address

Via WSJ:

The measure spent much of the session above that level but quickly fell through it as Ms. Merkel defended Germany's €80 billion austerity package for the next four years, saying Wednesday that the time to withdraw stimulus has come and lessons from the debt crisis must be learned.

Investors said Ms. Merkel's comments that the bailout package only buys time for the euro zone spooked the market. Coming from Germany, considered the strongest economy in Europe, the remarks underscore the euro zone's problems.

If this signals the start of austerity for Europe, so much the better, as long as the necessary measures are still taken by politicians should something unexpected happen to the economy. What does this affect the big picture?

• Under macroeconomic theory, a combination of tight fiscal policy and loose monetary policy is likely to depreciate the currency of a country.
• This adds some fun to the game of euro, as we see FX responding immediately; however,
• A depreciating currency is beneficial to economic recovery, and corresponds to recent export-oriented recovery schemes.

If you ask me, I'd say the woman from Germany has got some guts. Politics is one of the rare field where saying something actually has the equal, if not more, weight as doing something. Her defense for the austerity plan changes the tone of the game, and might have the extensive influence of pushing other European countries to follow suit. After all Germany has the healthiest balance sheet of the continent. As Europe adjusts its debt level by adopting a tight fiscal policy, and given that the rest of the world is likely to grow at a higher pace economically, we should be more confident that the euro will becomes weaker in the future.

Yi Gao
SUmmer Analyst
Analyze Capital LLC

1 comment:

  1. Couldn't agree more with your sentiment on Politics: Politics is one of the rare field where saying something actually has the equal, if not more, weight as doing something."

    I am skeptical that austerity measures will seamlessly implement themselves into a still young Monetary Union. Better put, The bailout won't work in its current state. The IMF has too many responsibilities. The American tax payer will not be happy when they find out the U.S. funds 17% of the IMF's annual budget. Japanese Taxpayers won't be happy either, they fund 6% of the budget per anum.


This Blog has been developed by Analyze Capital LLC, and as an independent organization we provide “AS IS” information without warranty. The ideas and opinions expressed by the contributers of this blog are personal and do not represent the actions or policies of Analyze Capital LLC. The contents of this blog do not intend to assert recommendations or to offer advice of any kind. We are not responsible the consequences, be they gains or losses, that may result from using any of the information from this blog.