The euro is still falling: NOT good news.

[Beet]

After this weekend's 110 billion euro bailout package, the euro should be surging. After all, if approved, it would mean that the risk of Greece default is put off for the short term, as is the intent of the plan. Instead, the euro is falling this morning. This suggests either the market has growing concerns that it will not be approved, or something else was happening.

Either way, this was a critical weekend and the currency markets do not seem to be pleased with what has come out of it.

"May 3 (Bloomberg) -- The euro fell from a one-week high against the dollar on concern a 110 billion-euro ($146 billion) bailout package for Greece will fail to contain the region’s sovereign-debt crisis.
Europe’s currency also weakened versus 14 of its 16 major counterparts on speculation the European Union will struggle to win agreement from its members on the aid plan for Greece, damping the allure of the euro area’s assets.

The euro dropped to $1.3216 as of 10:25 a.m. in Singapore from $1.3294 in New York last week, after earlier rising as high as $1.3361, the strongest since April 27. "

http://www.businessweek.com/news/2010-05-02/euro-declines-on-concern-greece-bailout-won-t-halt-debt-crisis.html

[phk]

It was as low as $1.25 in November 2008 and only from April 2007 to October 2008 was it strictly higher than the prices today. I think the Euro may be tracking its true value perhaps?

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1272860770895&chddm=2309032&q=CURRENCY:EURUSD&ntsp=0

[Beet]

Perhaps, phknrocket1k. It is worth remembering that in 2000, the euro was under par for the dollar. Sam has been saying that it was going there since the early part of last year. The critical variable now may be German politics.

More details have been released on the rescue package, for which I have two questions. First, the details:

"Spending Cuts:

*Reducing the so-called 13th and 14th holiday payments for civil servants and cutting bonuses by a further 8 percent to save 1.1 billion euros in 2010. Workers earning less than 3,000 euros a month will get payments of 250 euros at Easter, 250 euros in summer and 500 euros at Christmas. Employees at state- run companies will have wages cut by 3 percent.

*Reducing the 13th and 14th holiday payments to pensioners to save 1.5 billion euros in 2010. Retirees receiving less than 2,500 euros per month will get 200 euros, 200 euros and 400 euros for each period.

*Postponing the second tranche of so-called solidarity bonuses to 2.5 million poorer Greeks, a pre-election pledge, to save 400 million euros in 2010.

*Cutting public investment plan by 500 million euros this year.

Revenue Raising:

*An increase in the two main sales-tax rates to 23 percent from 21 percent and to 11 percent from 10 percent. That’s equivalent to 800 million euros in 2010 and 1 billion euros in 2011.

*Cigarette, fuel and alcohol tax increases to raise 450 million euros in 2010 and 600 million euros in 2011.

Economic Forecasts:

*Economic contraction of 4 percent this year and 2.6 percent in 2011. Growth will return in 2012 at 1.1 percent and 2.1 percent in 2013 and 2014.

*Debt will rise from 133.3 percent of GDP this year to 145.1 percent in 2011, 148.6 in 2012 and peak at 149.1 percent in 2013. It is projected to fall to 144.3 percent in 2014.

*Budget deficit will shrink to 8.1 percent this year, 7.6 percent next year, 6.5 percent in 2012, 4.9 percent in 2013 and below the 3 percent demanded by the European Union in 2014."

------

This, of course, depends on numerous factors, including
1. The projections are accurate. Personally, I find them quite pessimistic, so the problem might not be here.
2. The Germans uphold their side of the deal, as noted above. I believe that a eurozone breakup would be a true calamity for Germans, because of the impact on the German banks and economy of a general euro crisis. However, it is up to Chancellor Merkel and the German political leadership to effectively communicate this to the legislators enough to push through the package.
3. The Greeks uphold their side of the deal. The Greek record of upholding austerity promises has not been historically good. They will need the IMF and the other eurozone members to police them closely and also have to rely somewhat on the integrity and genuine intentions of Papandreou.

Now, my questions
1. Prior to this last week, under the older, looser austerity package, Greece was supposed to have gotten its deficit down to 3 percent of GDP by 2012. Now, even though the additional revenue and cuts are proposed, this has been pushed back to 2014. The only explanation I can think of is the old projections were based on grossly unrealistic GDP expectations that have been pushed down by the recent crisis.

2. The article claims debt will fall as a percentage of GDP by 5 points in 2014; however Greece is still supposed to be running a deficit of just under 3 percent of GDP that year, and growth is only supposed to be 2 percent. Someone help me understand where the math adds up here.

[Tender Branson]

Perhaps, phknrocket1k. It is worth remembering that in 2000, the euro was under par for the dollar. Sam has been saying that it was going there since the early part of last year. The critical variable now may be German politics.

More details have been released on the rescue package, for which I have two questions. First, the details:

"Spending Cuts:

*Reducing the so-called 13th and 14th holiday payments for civil servants and cutting bonuses by a further 8 percent to save 1.1 billion euros in 2010. Workers earning less than 3,000 euros a month will get payments of 250 euros at Easter, 250 euros in summer and 500 euros at Christmas. Employees at state- run companies will have wages cut by 3 percent.

*Reducing the 13th and 14th holiday payments to pensioners to save 1.5 billion euros in 2010. Retirees receiving less than 2,500 euros per month will get 200 euros, 200 euros and 400 euros for each period.

*Postponing the second tranche of so-called solidarity bonuses to 2.5 million poorer Greeks, a pre-election pledge, to save 400 million euros in 2010.

*Cutting public investment plan by 500 million euros this year.

Revenue Raising:

*An increase in the two main sales-tax rates to 23 percent from 21 percent and to 11 percent from 10 percent. That’s equivalent to 800 million euros in 2010 and 1 billion euros in 2011.

*Cigarette, fuel and alcohol tax increases to raise 450 million euros in 2010 and 600 million euros in 2011.

Economic Forecasts:

*Economic contraction of 4 percent this year and 2.6 percent in 2011. Growth will return in 2012 at 1.1 percent and 2.1 percent in 2013 and 2014.

*Debt will rise from 133.3 percent of GDP this year to 145.1 percent in 2011, 148.6 in 2012 and peak at 149.1 percent in 2013. It is projected to fall to 144.3 percent in 2014.

*Budget deficit will shrink to 8.1 percent this year, 7.6 percent next year, 6.5 percent in 2012, 4.9 percent in 2013 and below the 3 percent demanded by the European Union in 2014."

------

This, of course, depends on numerous factors, including
1. The projections are accurate. Personally, I find them quite pessimistic, so the problem might not be here.
2. The Germans uphold their side of the deal, as noted above. I believe that a eurozone breakup would be a true calamity for Germans, because of the impact on the German banks and economy of a general euro crisis. However, it is up to Chancellor Merkel and the German political leadership to effectively communicate this to the legislators enough to push through the package.
3. The Greeks uphold their side of the deal. The Greek record of upholding austerity promises has not been historically good. They will need the IMF and the other eurozone members to police them closely and also have to rely somewhat on the integrity and genuine intentions of Papandreou.

Now, my questions
1. Prior to this last week, under the older, looser austerity package, Greece was supposed to have gotten its deficit down to 3 percent of GDP by 2012. Now, even though the additional revenue and cuts are proposed, this has been pushed back to 2014. The only explanation I can think of is the old projections were based on grossly unrealistic GDP expectations that have been pushed down by the recent crisis.

2. The article claims debt will fall as a percentage of GDP by 5 points in 2014; however Greece is still supposed to be running a deficit of just under 3 percent of GDP that year, and growth is only supposed to be 2 percent. Someone help me understand where the math adds up here.

On question 1:

The actual 2009 deficit has turned out to be far bigger than originally thought. Not 12%, but more like 14% or more. That´s why it`ll take longer to go down below Maastricht criterias again.

Once again I repeat: Cut your damn 6% of GDP defense spending, Greeks - instead of letting the ordinary small people bleed to death !! It´s not like Turkey will attack you !!

[opebo]

Actually if the Euros would just print their way out of their 'deficits', we could do the same competitively, and increase our government spending another 800 Billion per year, giving us the V-shaped recovery.

(By the way the easiest and best economic booster right now would be to monetize the 'state and local' deficits, obviating cuts in state and local spending)

[Beet]

Actually if the Euros would just print their way out of their 'deficits', we could do the same competitively, and increase our government spending another 800 Billion per year, giving us the V-shaped recovery.

(By the way the easiest and best economic booster right now would be to monetize the 'state and local' deficits, obviating cuts in state and local spending)

And face higher interest rates and / or inflation. There are differences between what the ECB would do in this case and what the Fed did last year, fwiw. The Fed was dealing with a collapse in the money multiplier, so it could effectively monetize large amounts that would be sterile and not contribute to inflation. If the ECB monetizes public spending, the result could be different.

Secondly, further regarding the austerity measures agreed to this weekend, I have noticed that while they are all well and good from the government budget perspective, it does not directly address what a devaluation would have addressed, which is labor competitiveness in the private sector. What really needs to come down in Greece are private sector wages until they are commensurate with the relative level of Greek productivity vis-a-vis Greece's trading partners. Without that, the second Greece's economy starts to recover, it will start running a big current account deficit again, just like Spain.

This is a serious issue that still needs to be addressed, but once again will involve facing down the unions on yet another matter. Good lord.

[Free Trade is managed by the invisible hand.]

When is it bad for a currency to devalue?
Does this effect imports/exports somehow?

[Gustaf]

When is it bad for a currency to devalue?
Does this effect imports/exports somehow?

Too vague to be answered meaningfully
yes

[k-onmmunist]

You know, this would be funny if it weren't for the fact this is going to hurt Britain too. Thanks alot EU.

[opebo]

When is it bad for a currency to devalue?
Does this effect imports/exports somehow?

In fact it is generally very stimulative for an economy to have its currency devalue.  So, unless the economy is in danger of inflation (and certainly Europe is more in danger of deflation than inflation at the moment), devaluation is all to the good. 

As a happy side effect the US can also be more stimulative to try to competitively devalue as well. 

Regarding imports/exports, obviously if you devalue your exports go up, as for imports, generally they will go down as they get more expensive, though this link is somewhat less direct.

[Tuck!]

Not good news for the LibDems.

[Gustaf]

When is it bad for a currency to devalue?
Does this effect imports/exports somehow?

In fact it is generally very stimulative for an economy to have its currency devalue.  So, unless the economy is in danger of inflation (and certainly Europe is more in danger of deflation than inflation at the moment), devaluation is all to the good. 

As a happy side effect the US can also be more stimulative to try to competitively devalue as well. 

Regarding imports/exports, obviously if you devalue your exports go up, as for imports, generally they will go down as they get more expensive, though this link is somewhat less direct.

Less direct? If anything it is more direct, I'd say. It's usually considered an important part of the stimulative effect since it makes people buy more domestically.

Devaluation is useless in the long run though.