Tuesday, 6 August 2013

Asset Bubbles Become Policy Bubbles

By Gordon Kerr and Kevin Dowd, with Enrico Colombatto

Leaders, institutions and markets are all looking for guidance to get out of the present crisis. Government confidence is at stake, institutions' credibility is jeopardized and banking is close to fraud and collusion.
Leaders looking for a compass

In the first phase of the current financial crisis, most political leaders and experts claimed that banks must be rescued whatever the cost.  But as the years slip by, this rhetoric has weakened.  The crisis has now triggered power shifts in at least 10 of the 17 eurozone nations (Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia, Netherlands, France, Cyprus).  Nearly all governments are now coalitions.  Just as the splits in public votes show confusion, so the decision making of coalitions seems increasingly weak, with all looking for a policy bandwagon upon which to jump, or for means to prevent them becoming the next Cyprus.

Throughout this decline in government confidence, the official spin has consisted in believing that expansionary monetary policy combined with bank bailouts and the assumed (but not agreed) future banking union will see EU nations return to growth and national debts brought under control.

These hopes have not been fulfilled. In fact, evidence of the absence of growth appears every month in the inexorably upwards ratcheting eurozone unemployment figures which in May increased by another 0.1% to 12.1%.

The last countries witnessing to this lack of political direction are Bulgaria and Portugal. Bulgaria’s previous government collapsed in April over concerns that its then government had too cosy a relationship with foreign monopolies. The ensuing elections saw a coalition led by the centre left party of Plamen Oresharski, but it is now in deep trouble over corruption suspicions. The country’s President, Rosen Plevneliev, strongly hinted July 6 that further elections might be held to quell the now daily protests in Sofia.

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