FOMC on European crisis and Sooth Sayer Bernanke

The FOMC has been much too fast to aid the sagging european mess and puting a stop for the world markets. The minutes contain additional minutes of telephone Meet on 28th of November 2011 apart from the minutes of scheduled meet on 13th December 11

Well ! Watch the lines about the communication changes and FED Fund Target Rates Forecast will now be added in the coming meet. While, Growth and Inflation forecasts are now followed by this Rate Forecast. This will essentially be conditional and mearly forecasts. It seem FED now wants to turn into sooth sayer thereafter.

It is essential appriciable the efforts and creativity being used Mr Bernanke and Kuddos.

However, It seems FED is doing many things right .

9/11 to 31/11 Dollar is back in the Game

It was 9/11 when the US empire was shot in the knee, and was made to bend forward in pain. The financial world responded with awe and disdain. The markets collapsed and FED under Greenspan responded with great strike. The Incident followed with Bush's attack on Iraq under the false allegation and deceit of Chemical warfare. The Iraq war destabilised the US more than it helped. The dollar fell.The deficit soared and economy perplexed and succumbed in 2008.


President Obama took it with All the Big Promise than ever before. But the Dollar continued its weakness. Bernanke marshalling FED threw the money from the Helicopter on the terraces of the Big banks and some fell down on the wall street. Dollar weakened more.
Many doubted the validity of Dollar to remain ' Reserve Currency'. I.D R. were brought from the shelf of I.M.F. The Gold Rallied as if America was submerging in Pacific. Many took the shelter in other precious metals and China's Renminbi was seen the future of the world currency. The value lies in the perception.

The Failure of US government to sort out dead lock with opposition and its political weakness to rule the country, on its own terms saw the typical democratic impasse. The S& P down graded the US and its army of Merchant Bankers, funds and so on. Apparently, it was a scratch on the Surface.

The seizure and execution of Osama Bin Laden, the ouster and killing of die hard Libyan leader Col. Gaddafi. backed up the political and military might of US. Thus, Dollar got its physical support. The European economic crisis slammed on the face of Euro as an alternative currency, replacing dollar. and Thirdly, the exit from Iraq, will now further back up drain US exchequer.

From 9/11 to 31/11, Dollar has moved the cycle of weakness and withstood the doubters.

The beginning of this New Year dollar has re-established and enshrined to currency of this decade.

EURO will Glitter more when out of FIRE...

Its not data and its not the statement of any European leader. The close reading of the press and market trading pattern indicate that EURO Will be saved.
Well, this may not appear sensational but the currency trading much higher than its low made earliear this year and rallied hard thereafter.  Inherently, the rise coincides with fall of $ and conjoins with rise in Gold and other precious metals. The FED's easing and twisting is abetting the fall of Euro, as an indirect back up.

Euro as an Alternative to Dollar was a serious talk, among many asian and European economists and Politicians. US has turned the tables and saved the currency. at least, for the next foreseeable future. The epithet of PIGS a Wall street consecrate for slinging the Euro. While, the debt markets more controlled by Wall street bankers and Independent countries are beneficiaries of the crisis. Its pay back for the European, for the Mutiny against Greenback.

Alan Greenspan and co., never appreciated the even existence and abhorred its Rise. US always felt threatened and greenback was actually challenged by China, alongwith Germany and France. Post 2008, the questions about Dollar's existence as Reserve Currency were raised, threatening the US's economic might. In last 18 months now Euro is on the brink of a deep fall, straight away in the grave. The fears of Euro to end in next week or in a month are now being discounted .

The currency markets have yet to write off , Euro. Its still trading as a vary credible currency. It shows the health of the currency and indicates the bankruptcy of the Dollar. As a matter of fact the pair traded at 1.15 in the beginning of the crisis, at the start of this year, which is currently much above that.

The interest rate in Euro zone is above that is prevailing in US, but much below that in many Asian countries like India, China and Brazil.

Albeit, inherent and technical coordination in constituents of Euro are dissipation of political bankruptcy and short sightedness.

Euro's fission thus appears to be unreality. While, the political conviction to keep EURO afloat appears to be dwindling in to the oblivion.

Still, its unlikely that Euro will be break, as a matter of fact, in case, the weaker part of EURO exit the consortium, which may strengthen the intrinsic Euro value.

The stitching and patching exercise is making EURO undeniable and a strong currency. In Times to come Only, to replace the Gold. But, Wait for it, to  come out of this dreadful Night

Even, Gold has to meets fire first, then Glitters.

Euro Chart weakens showing declining Investor confidence

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The Investor confidence is weakening as matter of each passing day The Euro/Dollar chart shows it in a much simple way. The European Currency is again on the Break Down pattern. The Loss of Investor Confidence appears to be sucking the juice.

The Greek Budget showing the ' Failure to meet' in 2011 and 2012 should post the bad start to the New Month 

All Eyes on Europe--- All Facets Covered

Mark Kiesel 

• Germany and other strong sovereign balance sheet nations in Europe have to make a choice: continue to provide financial assistance to countries with more debt and assist in helping to restructure the debt of some European peripheral countries, or potentially move forward with a smaller, stronger group of countries - or at the extreme walk away from the Euro and the European Union all together.
• Without bold and coordinated action from European policymakers and the ECB, we can expect financial markets remain on edge; causing volatility to remain elevated until equity capital is injected into weaker European banks and permanent term financing is provided to those solvent European peripheral sovereign countries.
• We believe investors should wait to see whether policymakers can be effective in formulating a coordinated and credible solution for Europe before taking on more risk. In the near term, we favor focus on maintaining higher-than-normal cash balances, investments in areas with strong fundamentals and balance sheets and staying defensive in non-cyclical sectors as well as in investments senior in the capital structure.
• 
  
• ​The question on everyone’s mind these days is whether policymakers can contain the European sovereign debt crisis. Europe has roughly the same amount of government debt as a percentage of GDP as the United States. However, the magnitude of Europe’s total debt is not the issue in our opinion, it is the distribution. Germany has a lower, sustainable debt level whereas some peripheral European countries do not, particularly at current interest rates. As part of Europe’s entire Economic and Monetary Union (EMU), participating countries don’t have the benefit of an independent currency and monetary policy. This means countries with higher debt lack the ability to devalue their currencies in an attempt to improve exports. Monetary policy is also set for the EMU by the European Central Bank (ECB), which limits options for peripheral countries needing more accommodative policies. For many peripheral European countries these factors are major headwinds to growth which means to stay competitive these countries must move forward with structural reform. Yet, significant fiscal austerity and reform may prove so challenging that a few of the most leveraged European peripheral countries, like Greece, may have to restructure and leave the Euro in order to restore competitiveness and debt sustainability. Ultimately, Germany and Europe’s other strong sovereign balance sheet nations will have to make a choice: continue to provide financial assistance to countries with more debt and assist in helping restructure the debt of some European peripheral countries in order to keep the EMU intact, or potentially move forward with a smaller, stronger group of countries – or at the extreme even walk away from the Euro and the European Union.The importance of the European sovereign debt crisis should not be underestimated. Simply put, Europe remains a main driver of “animal spirits” and volatility (see Figure 1) in financial markets and can significantly shape the outlook for the global economy. The risks associated with the sovereign debt crisis are significant. What was initially perceived as a liquidity crisis is increasingly becoming a solvency crisis for a growing list of European countries. Timing is critical as financial markets appear to be moving faster than policymakers’ ability to come up with a credible solution. 
As interest rates increase on higher-debt European countries in the south, debt sustainability will be increasingly tested. The fact that financial markets are effectively marking-to-market European government bonds and interest rates in real time means the European financial crisis is spreading quickly into their banking system since many banks have large exposure to European sovereign debt. While central banks have provided liquidity support so banks can get short-term funding, a fiscal and growth solution is needed to restore confidence in vulnerable European sovereign balance sheets as well as in numerous European banks (see Figure 2), which increasingly appear under-capitalized and exposed to deteriorating sovereign credits.
  
  
  
  
  
  Balance sheets not engaging
  The longer policymakers wait, the more likely Europe’s financial crisis will deteriorate. And, all eyes are on Europe now for good reason because the risk of a global liquidity trap has increased as many healthy balance sheets around the world are also refusing to engage. Multinational companies which have low leverage and high cash balances aren’t aggressively spending and hiring due to an uncertain outlook. Emerging market sovereign balance sheets have yet to commit to provide significant financial assistance to Europe as these nations want to see a united Europe and clarity from policymakers, mainly from the German government, given the country’s leading role in shaping policy for the region. While the healthiest sovereign balance sheets in Europe have the ability to help, many appear to lack the will. As an example, many Germans want to see more austerity, significant deficit reduction and structural change in peripheral countries before they increase financial support beyond current commitments. Yet, too much deleveraging at once could throw Europe into a severe recession which would have significant negative implications for the global economy.
  On the policy front, a wait-and-see or “conditional love” approach to solving the European crisis will not be effective in our opinion given that the asset sides of European banks’ balance sheets are being marked-to-market in real time by financial market participants who seem to increasingly fear the unknown and refuse to take heightened levels of risk. We believe European policymakers should take several actions to help restore confidence in markets. 
  First, policymakers should make clear which European sovereigns will be backed unconditionally through explicit guarantees and assist those sovereigns whose debt will ultimately be restructured. 
  Second, the European Financial Stability Fund (EFSF) should be converted into an equity funding vehicle which can reequitize banks and provide term financing to solvent European sovereigns at interest rates which allow for sustainable debt service. 
  Third, while many European peripheral countries will likely need to embrace significant budget cuts and challenging austerity measures, policy leaders should balance higher taxes and spending cuts with pro-growth structural reform which promotes privatization and allows for workers to remain productive and employed longer given the need to increase retirement ages.
  Fourth, a few of the highest debt European peripheral countries deemed to be insolvent may have to exit the EMU and Euro currency in order to restore debt sustainability and competitiveness. Finally, the ECB should ease monetary policy and stand more aggressively behind solvent European sovereigns by acting decisively as a lender of last resort.
  Without bold and coordinated action from European policymakers and the ECB, we can expect financial markets to remain on edge; causing volatility to remain elevated until equity capital is injected into weaker European banks and permanent term financing is provided to those solvent European peripheral sovereign countries. In the meantime, we expect the global banking system and other balance sheets around the world will continue to hoard cash. Without a unified Europe and a bold plan of action, we face the risk of a global “paradox of thrift” where balance sheets won’t engage and credit creation will remain restricted without stronger fiscal commitments. This ultimately puts Germany and the other northern European countries in the driver’s seat in influencing whether or not the EMU will remain together or break apart. Yet, the longer Europe’s crisis lingers the more likely we could experience a disorderly outcome.
  
  
  Global growth slowing
  
  The timing of the European sovereign debt crisis could not be worse as global economic growth is already slowing in both the developed and developing world. In developed economies, fiscal policy may be less able to offset a deleveraging private sector as government debt has reached a high enough level in many developed countries that fiscal stimulus is simply not an option. In the U.S., total federal, state and local government debt has increased from 53% of GDP in the 2nd quarter of 2008 to 81% today (see Figure 3). While some may argue the U.S. still has some near-term ability to stimulate fiscally, growing political opposition to deficit spending and political gridlock, combined with the need to reduce longer-term deficits, suggest that going Keynesian in a major way is increasingly unlikely. Given these conditions, fiscal policy in many regions of the developed world is becoming a less viable option.
  
  In addition to constraints on the fiscal side, monetary policy is also becoming less effective in the developed world due to what many believe has become a liquidity trap, particularly in the U.S. As an example, multi-national companies in the U.S. continue to focus on hoarding cash (see Figure 4) and rebuilding balance sheets while consumers increase savings, pay down debt and remain extremely pessimistic (see Figure 5). With companies concerned about an uncertain outlook in Europe as well as a delevering consumer in the developed world, the outlook for hiring and capital spending will likely remain challenging. As such, we believe monetary expansion is less effective in developed economies that lack aggregate demand and animal spirits. Simply put, many balance sheets in the developed world are refusing to engage due to an uncertain outlook. Overall, we expect real economic growth in developed economies to approach stall speed or zero over the next year due to weak consumer and investment spending as well as governments transitioning into a headwind to economic growth because of their stretched public sector balance sheets.
  
  
  In the emerging markets, countries such as China, which went Keynesian in 2009 through an enormous fiscal stimulus program targeting infrastructure, now appear focused on a longer-term transition toward domestic consumption in order to prepare their economies for more balanced growth and stability over a secular horizon. In addition, policymakers want to keep inflation under control. As such, Keynesian fiscal stimulus on a global scale appears less likely in emerging markets. In fact, emerging market leaders appear hesitant to put their sovereign balance sheets at risk in providing financial support to Europe without more clarity and certainty. While countries in emerging markets have significantly less public and private sector debt (see Figure 6) than in the developed world, their economies will likely be negatively impacted by weaker growth in developed economies. While a weaker global growth outlook could lead to more monetary stimulus in emerging market economies, we expect real economic growth to slow in the emerging markets to a level of roughly 4–4 ½% (with the large economies of Brazil, Russia, India, China and Mexico expected to grow at a combined 5–5 ½% real rate) over the next year due to weaker export and investment growth.
  
    
  Investing in an uncertain world 
  
  European sovereign concerns, an increasingly fragile European banking system and slowing global economic growth suggest investors should consider a more defensive and conservative approach. Balance sheets around the globe are watching whether European leaders have the ability and willingness to restore confidence in both European sovereign balance sheets as well as in European banks.
  We believe investors should wait to see whether policymakers can be effective in formulating a coordinated and credible solution for Europe before taking on more risk. The ECB and other central banks are helping to inject liquidity into the system, which is providing near-term support for European banks. Nevertheless, banks generally remain extremely hesitant to lend to one another (see Figure 7). In addition, without a fiscal solution, the capital needs of European banks will likely remain unresolved as investors will watch the prices and yields on European government bonds, a major holding on bank balance sheets, adjust in real time.
  
  The uncertainty caused by the lack of clarity surrounding whether or not European peripheral government debt is “money good” or not will keep investors on the sidelines. European governments with significant debt levels as well as European banks with exposure to weaker European sovereigns are increasingly likely to be cut off from the capital markets until a credible and decisive fiscal solution evolves. This will likely negatively impact the flow of credit in the private sector by tightening credit availability and raising borrowing costs in an economy which is already fragile. 
  
  
  What to do?
  
  In the near term, we believe a higher-than-normal cash balance focus and favoring select investments in areas where fundamentals remain healthy to be attractive. Specifically, we believe investments in the following select areas deserve consideration:
  • The equities and debt in select multinational companies with strong balance sheets
  • Emerging market equities and sovereigns, and corporates where growth remains supportive
  • Bank loans (see Figure 8) and senior secured debt with significant asset coverage
  • U.S. bank debt (senior) given strengthening capital and balance sheets (see Figure 9)
  • High quality municipal bonds in states with strong balance sheets and in essential services such as water and sewer, power and airports
  • Hard assets and resources with favorable demand and supply dynamics
  
  
  
  
  
   

  Despite an uncertain global macro environment, we are finding some opportunities in the above sectors where we feel valuations are compelling. We believe investments in these areas have the potential to increase a portfolio’s yield by owning what PIMCO refers to as “safe spread.” In an environment where the 10-year U.S. Treasury is yielding less than 2%, we are finding that select credit investments with strong fundamentals can potentially increase those yields while maintaining a defensive posture. The above areas are specific sectors where we believe growth and balance sheets are strong, credit fundamentals are stable-to-improving and valuations are compelling.

  Given a slower growth outlook, we favor BB-rated credits in the high yield market as opposed to CCC-rated and highly levered companies. In addition, we believe credit risk should be taken at the top of the capital structure as well as in non-cyclical, defensive sectors. Our credit analysis is focused on stress testing companies and investments in a slower global growth environment where the risk of recession has increased. In addition, our research is focused on a company’s sources and uses of cash, debt maturity profiles and cash flow analysis. We believe less leveraged companies with high cash balances and low near-term funding needs should perform well. We favor U.S. credit within the developed markets, particularly relative to European credit (see Figure 10) as their corporate credit trades too tight relative to the sovereign. Emerging markets are favored over developed markets given stronger balance sheets and a healthier growth outlook.
  
  All eyes on Europe
  
  Given slowing global economic growth and significant uncertainty surrounding the European sovereign debt crisis, we believe it is wise to take a conservative and defensive stance. For many reasons previously discussed, both public and private sector balance sheets are not engaging and are instead taking a wait-and-see approach. High public sector debt in many developed economies has led to a lack of will to go more Keynesian. Importantly, this isn’t just a public sector issue. Healthy balance sheets which appear to have the ability to stimulate are currently not engaging. As evidence, many companies are hoarding cash, which we believe is increasing the risk of a global “paradox of thrift” where higher saving and lower spending suggest a more challenging outlook for global economic growth. This dilemma, combined with what many have described in the U.S. as a liquidity trap, further explains why fiscal and monetary policy have become less effective in the developed world where the private sector lacks animal spirits and continues to delever.
  
  The lack of policy coordination and a unified front in Europe combined with increasingly stretched sovereign balance sheets in the developed world are proving to be significant challenges for the global economy. It also suggests politics may increasingly influence outcomes, financial markets and the economic outlook. In our opinion, the effectiveness of policymakers should also be questioned given that fiscal and monetary stabilizers appear to have become less useful in a world which continues to lack confidence and faces significant uncertainty, particularly in developed economies where aggregate sovereign debt levels remain elevated and where fiscal stimulus is becoming less viable.
  The combination of political, economic and policy implementation risks all argue for maintaining a conservative, defensive approach. We believe investing in a world of heightened uncertainty means maintaining higher cash balances than normal, focusing investments in areas with strong fundamentals and balance sheets and staying defensive in non-cyclical sectors as well as in investments senior in the capital structure. When looking to increase risk, we will remain patient and continue to focus on Europe for signals as to whether or not European policymakers can establish a united front, act decisively and deliver on a bold, sizeable and coordinated solution to the European sovereign debt crisis. In the meantime we focus on select investments where fundamentals remain supportive; such as equity and debt in select multinational companies, emerging market equity, sovereign and corporate debt, bank loans and senior secured debt, U.S. bank debt at the top of the capital structure, high quality municipal bonds and hard assets and resources with favorable demand and supply dynamics.
  
  Mark Kiesel

  Managing Director
  23 September 2011

European Parliament hard vibes on defaulting Euro Nations : Poland Stick

Poland's finance minister said Friday that after a yearlong dispute his European Union counterparts have signed off on tougher budget rules that punish overspending governments.

Jacek Rostowski said that the 27 ministers approved at their meeting in Wroclaw, Poland, a compromise that Polish officials had worked out with the European Parliament earlier this week.

Under the new rules, it will be easier to put sanctions on governments that breach the EU's limits on debts and deficits. Governments who ignore warnings that they risk breaking debt rules can also be punished.

For years European countries — including Germany and France — have broken the EU rule requiring deficits to be kept below 3 percent of gross domestic product. Experts say that the lack of accountability has helped cause the rise in government debt that is currently afflicting the region.

The eurozone ministers are under intense pressure to find solutions to the debt crisis that has hobbled their 17-nation currency union for almost two years.

U.S. Treasury Timothy Geithner's presence at the informal meeting — the first time for an American Treasury chief — was an indication of the international pressure building on European officials to fix their crisis and keep it from hurting the global economic recovery.

German Funding European Neighbourhood now winding up..?

Head of Germany’s high court, Andreas Vosskuhle, left, pronounces the judgment, while judge Rudolf Mellinghoff,right, looks on in the court room in Karlsruhe,Germany, Wednesday Sept. 7, 2011. Germany’s high court on Wednesday upheld the country’s participation in eurozone bailout funds, but ruled that parliament should be more involved in such decisions. 


 Presiding Judge Andreas Vosskuhle said even though the Federal Constitutional Court had rejected lawsuits arguing that Germany’s participation had violated parliament’s right to control spending of taxpayer money, it was not giving a rubber-stamp to the chancellor’


The ruling means that while Germany’s agreement to take part in the financial rescue of Greece will not be affected, participation in future bailouts might become more complicateds office. 

Swiss National Bank rocks currencies

PRESS RELEASE

6 September 2011 - Statement of the Governing Council of the ECB on the decision of the Swiss National Bank

The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”

The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its responsibility.

US Banks can handle Greece,Ireland & Portugal. But..?

 The exposure of U.S. banks to Greece, Ireland and Portugal is manageable and quite small, Federal Reserve Chairman Ben Bernanke told U.S. Senator Bob Corker in a letter written in July that was released Tuesday. The nearly $200 billion exposure the Bank for International Settlements has reported capture only one side of banks' credit-default swap exposure, Bernanke said. Confidential supervisory information and CDS data from the Depository Trust & Clearing Corp.'s trade information warehouse indicate that the exposures are "quite small." Bernanke does note a sovereign credit event could affect a broad range of markets and financial institutions.








Note :
What is possibly stuck is the ' Sub Prime Mortgages' and the Contagion of the smaller three on the make up of Euro and dereference in growth. The FOMC decesion to keep interest rate low till, at least mid 2013 and its declaration in minutes, possibly reflect the risks involved. In a case, where Germany is politically affected by ' cuddling' of the European debt, shall create fissure within Euro zone and taking cue from this shall be approaching French Elections. However, the apprehensions about the Italy and more so Spain, may also have cascading effect.
As, the Euro plunged towards $1.40 today, speaks volume. 
The question of Euro zone dissipation appears to be the ' Sword ' dangling the all markets and will have ' Largest' ramifications post ' turbulences'  like Mid-70's.

What World wants out of father Trichet's Euro..?

Well, the Sir Trichet is a very stubborn Banker and is much too straight forward, than markets wants him to be one.
Cohesive Euro ..?
1)  Monitory Policy..
 From the word Go to European Union, and creation of common currency namely Euro, the World disbelieved its existence and durability. Alan Greenspan, and many other were forthrightly against the idea of an currency without common Monitory Policy and its Instrument that is Bond. The uneven and imbalances were less significant then, were in fact forgotten in mid of last decade when many thought Euro to replace Dollar.

2) Currency de-frags : Euro is now currency for 27 states, but three state viz Germany, France and England still carry there own currencies. Where as the smaller countries are tugging along like an non entity. This is creating  a subordination and discord. The dual Policies within this distort the inter state stresses , disproportionate valuations.

3)  While, ECB agrees to the facts of diversity and disproportion within the Euro Zone, its not ready to accept the reality of the divisive values and uneasy differentiations of the prospects of the growth and economic strangle.

4)  The recent talks between Merckel- Sarkozy, which were expected to bring the realities to the ground, ended with an ' Transaction Tax ', which appears to be the ' Bailing Cost' on European Banks. The Increasing regulations, uneven growth prospects, differential Socio-Political structure and Varied Ambitions mounting the stress and are loading on Franco-German Banks.

   The Unwillingness to issue ' Euro Bonds ' is portraying the all that said and doubted. The stress on smaller Euro nation by the Stronger Economies like Germany and France, may soon become Tyrannical. It seems Euro may soon will have to decide on the issues, than at the point of no return. The concerns of the market and absence of the structural footing are the ' Black Swan ' on the horizons, lurking to surprise inter-connected world and  is a profuse fissure.

Father Trichet Bangs Jackson Hole with More Regulation

Achieving maximum long-term growth

Speech by Jean-Claude Trichet, President of the ECB
at the Jackson Hole Economic Symposium
Panel: Setting priorities for long-term growth
Jackson Hole, U.S.A., 27 August 2011

The title of our panel today is Setting Priorities for Long-Term Growth. Given all of our recent struggles to regain our reference growth paths, it may strike some as something of a luxury to think about the long run; central bankers and policy makers have had to devote unprecedented attention to higher-frequency economic developments. Many new lessons have been learned; many policy and institutional innovations have been introduced.

The recent financial crisis has produced a large and persistent downturn in our economies; a downturn, moreover, that threatens our long-run growth potential. It is therefore entirely natural that policy makers do not lose sight of the prerequisites for stable sustainable growth.

This is especially so for most of the advanced economies, including the euro area, characterized (as it has been in recent decades) by declining potential growth rates. In the face of any economic predicament, one should ask oneself two questions – what got us here, and what can get us out? In the wider case of sustainable growth for the euro area, what matters is a commitment to structural reforms and sound macroeconomic policies. In the case of the financial matters, a robust macro prudential and supervisory framework is key. I will address both these issues in my coming remarks.

Likewise, some may consider it unusual to solicit views on matters of long-run growth from the President of a central bank. After all, pick up just about any growth-theory textbook and you'll find few references to inflation and fewer still to monetary policy. Monetary policy is fundamentally viewed as neutral over the long run.

And indeed, inflation is ultimately a monetary phenomenon. Growth, in turn, is ultimately a real one reflecting, in particular, technology, education and training, capital accumulation, institutional quality.

Nonetheless, monetary-policy institutions can play and have played a fundamental role in supporting long-run, sustainable growth. In many ways, I see a parallel between the theory and practise of monetary-policy making and the shaping of modern growth analysis which emphasises the role of sound/proper institutions.

That achieving high and sustainable growth matters, however, is easy to motivate. On the subject of growth differences across countries, Lucas (1988) memorably wrote: The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.

I. WHAT DRIVES GROWTH IN THE LONG RUN?

So let’s start to think: what does drive growth in the long run? In fact, growth theory – much like central banking – has come a long way. As everyone knows, Solow’s work in the late ’50s produced two startling insights. ^[1] First, that smooth factor substitutability could rid us of the Harrod-Domar boom-bust cycle. This, in fact, paved the way for a proper analysis of sustainable growth. ^[2] His second insight was that growth was driven not only by factor accumulation but also by technological progress.

Fundamentally, technological progress and innovation are, over the long run, the prime drivers of economic growth and also important reasons for differences in international economic performance, even though demographic differences are also very relevant. Higher growth rates of technical innovation raise output and can lower the non-inflationary rate of unemployment.

But what is technical change? Cracking open the Solovian black box of technical progress has taken us from theories of learning-by-doing, to the impact of R&D on product variety and quality. The latter theories being underpinned by Paul Romer’s reflection on the fact that ideas are fundamentally non rival. ^[3] This concept, by the way, was not really new. The famous letter of Thomas Jefferson to Isaac McPherson expressed it very clearly in 1813. ^[4] The bottom line in all of this is that knowledge spillover between open, dynamic economies could benefit everyone. Not surprisingly, these new developments in growth theory came replete with policy prescriptions.

A more recent but allied literature suggested the following: how close an economy is to the technological frontier and whether its institutions facilitate convergence to that frontier are vital considerations. ^[5] In effect, a laggard country gains by implementing (or jumping to) frontier technologies. ^[6] But an economy near the frontier – or with an appetite to define that frontier – should increasingly favour innovation over imitation.

Like many close to European policy ^[7], I find this an attractive framework. Indeed, following World War II, the European economies were remarkably catching up in productivity and technological terms and today are leaders in many fields, in particular as concerns the embedding of technological innovation in manufacturing processes. ^[8] Yet, there is still an enormous potential to tap, to reform our economies and boost their growth potential and job creation. ^[9]

II. GROWTH PATTERNS IN THE EURO AREA AND US

Debates about the US versus the euro area have become common place in recent years. To my mind, though, such debates often fall short of a careful, nuanced analysis required. Some international comparisons areindeed informative and yield important insights. Others – given lack of harmonized data, data concept or data unit – are more suspect. The crisis, though, has taught us that growth is only meaningful if it is sustainable and balanced. Growth that is not sustainable but follows boom-bust cycles, carries enormous costs in terms of economic well-being. These costs go far beyond pure GDP numbers; the deepest of these costs is that they, in some cases, put a strain on the fabric of our societies. For that reason alone, sustainability is a key qualification to associate to growth. The second key term is the balance of growth, both in domestic and external terms. Domestically balanced growth implies a broadly acceptable distribution of economic well-being within societies in terms of income and wealth as well as the avoidance of misalignments especially of asset prices; and externally balanced implies the need to avoid excessive international disequilibria.

Since the introduction of the single currency in 1999, the euro area has experienced a per-capita growth rate that, at around 1% a year, is comparable to that in the United States (1.1%). This is the first fact that is often overlooked in international comparisons. In such comparisons, we often look at headline growth numbers; yet, demographics are very different. Adjusted for population growth, there has been virtually no difference between US and euro area growth over the first decade since the introduction of the single currency. The euro area, though, has created more jobs: 14 million compared with 8 million in the US. Further, over recent decades differences in country and state dispersion rates of growth and inflation in the euro area and US are remarkably similar. On employment, moreover, it will be interesting to compare our different evolutions in the coming years. What we all want to avoid is excessively volatile employment where human capital is all too easily lost and inequality deepens.

Table 1 shows a detailed comparison of the euro area with the US over recent decades. This makes the standard growth accounting of contributions into employment and labour productivity. Labour productivity itself can be further decomposed into changes in labour composition, Information and Communication technologies (ICT) and non-ICT usage per hour and (residual) TFP growth. The interest in the distinction between ICT and non-ICT reflects recent evidence that the ICT sector has been strongest where most growth has emerged across the world economy.

Looking over the contributions, we note a significant difference in labour productivity (1.7 for EU13 vs. 2.9 for US). The main drivers in this comparison of labour productivity are ICT capital services per hour (0.4 vs. 1.0) and, perhaps more significantly from our standpoint, economy-wide TFP (0.5 vs. 1.1). Although having said that, there turns out to be quite some heterogeneity among countries,

Moreover, see Table 2 analysing the sectoral decomposition of TFP growth. TFP in the production of goods is slightly larger in the euro area than in the US. Rather, the higher overall TFP growth in the US is driven by stronger TFP growth in services, in particular in distributive trade (0.2 vs 0.5). ^[10] Although, in passing, we should remember that productivity and technical improvements in Services are plagued by measurement difficulties.

But of course TFP numbers always represent a rough metric. ^[11] The TFP residual will be contaminated by measurement errors, erroneous assumptions about market structure, or the nature and existence of the aggregative production function. The residual will also be a catch-all of neglected factor utilization, factor quality improvements over time, statistical complications associated in calculating factor rewards (appropriate tax and depreciation allowance for capital income etc).

But the wider perspective is: (1) the services and distributive sector is now a dominant and growing part of the euro area economy’s output (around 60%) and employment share; (2) the Service sector typically more regulated and thus less flexible to changes and open to innovation ^[12] although certainly recently there has been progress in the deregulation of network industries and progress through the new Services directive; (3) evidence is mixed but the Service sector in general is often thought to have inherently lower productivity and employment generation mechanisms relative to the more open manufacturing sector.

III. Diversity within the United States and the euro area

Allow me, next, to take a closer look at the developments both across US states and euro area Member States.

For the euro area it is very common to look at the level of its constituent countries and focus on the diversity among individual states, because a number of economic policy choices that affect productivity are national.

For the US, this exercise is rarely done. It is often conjectured that relevant policies are federal, and therefore by definition uniform at the level of the federation; and that, as a consequence, differences at the state level play much less a role. In essence, it is therefore often assumed that the US economy would be significantly more homogeneous than the economy of the euro area.

Looking more closely at the regional dispersion across US regions and euro area economies does not confirm this. In fact, the dispersion of many of the key indicators is surprisingly similar.

Let me share with you some findings from our analysis that we started some months ago and begin with inflation. ^[13] Before the crisis, the dispersion of HICP inflation in euro area countries had remained broadly stable since the late 1990s, at a level similar to the 14 US Metropolitan Statistical Areas. ^[14] During the crisis we saw a temporary increase in inflation dispersion in the euro area but this has been reversed over the past 12 months.(Chart 1.)

The picture is similar for the dispersion of GDP growth. Before the crisis the dispersion of growth rates was around 2%, in both the euro area and the United States. Dispersion rose somewhat during the crisis in both currency areas but remained broadly in line with pre-crisis patterns overall. ^[15] (Chart 2.)

Going one step further, investigation of the sources of this growth dispersion in the US and euro area economies reveals parallels even in the root causes of dispersion in economic performance and productivity. On the one hand, both currency areas comprise regions that experienced a significant boom and bust cycle over the past decade. On the other hand, both also contain regions that are facing significant structural challenges of a more long-term nature.

In the United States, for example, Nevada, Arizona, Florida and California experienced increases in house prices that outpaced the national average by a wide margin. The steep house price increases accompanied above average growth in these states. This could probably be explained, at least in part, by the impulse that these states received from the housing-related sectors such as construction, which saw its share in terms of value added increase at the national level during the years of the housing boom. In the crisis, the sharp fall in house prices in Florida and the south-western US states turned boom into bust. These states experienced the harshest recession among the US states. ^[16]

Similarly, in the euro area some countries experienced asymmetric boom-and-bust cycles. Several euro area countries had higher than average growth in the pre-crisis years. In Ireland and Spain particularly, strong growth was accompanied by strong increases in housing prices.

At the same time, other US states, particularly the former manufacturing powerhouses in the “Great Lakes” region, have seen a long episode of below average growth. Below average performance of the region – and particularly weaker growth rates in the states of Michigan and Ohio – are related to strong reliance on manufacturing. Structural shifts in the US economy towards services have gradually reduced the value added of manufacturing relative to GDP, with implications for areas with a high concentration of companies in manufacturing industries other than information and communications technology. During the crisis, GDP growth in the ''Great Lakes'' region, which was below average before the crisis, remained below average.

Similarly, other countries in Europe – Portugal, for example – have experienced growth persistently below the euro area average for the past decade due to structural rigidities that are now being addressed.

Just a few years ago, the low-growth group of countries included Germany – labelled the “sick man of Europe” at that time. Yet Germany is now an example of how big the dividends of reform can be if structural adjustment is made a strategic priority and implemented with sufficient patience.

The effect of the crisis on the different euro area economies follows a similar pattern to those of comparable US states. The countries in the euro area that have been hit hardest are those in which either large asset-bubble driven imbalances unwound or structural problems were left unaddressed before the crisis. Those countries that have yet to implement more far reaching structural reforms also have relatively low growth prospects after the crisis. These relatively low growth rates are linked to a deterioration of competitiveness, driven, for example, by persistent above average unit labour costs.

Precisely as regards the evolution of unit labour costs, that are so important for growth, dispersion both ahead of the crisis and during the crisis was quite similar in the euro area and the United States. (Chart 3.)

At the same time, it is worth noting that both currency areas include regions with persistently above or below average unit labour cost growth. Again leaving aside the countries to join the euro area most recently, here, Greece, Portugal and Ireland, in particular, had progressively lost competitiveness vis-à-vis their main trading partners in the euro area. They are now engaging in catching-up, adjustment strategies. Germany, which had lost competitiveness in the reunification process, by contrast, has been able to restore this competitiveness over the same period of time. (Chart 4.)

Similar persistent losses and gains in unit labour costs are also observed in the United States. Taking a look at the upper and lower bound of the spectrum of US states over the same period as the euro area reveals that some states have experienced large or persistent increases in unit labour costs, currently exceeding the national average by as much as 20%. Other states have been improving their labour cost competitiveness vis-à-vis the national average over the past decade. (Charts 5,6 and 7.) In summary, there are strong indications that economic diversity in the euro area and the United States has not been significantly very different over the past 12 years.

The observation that very large, continental economies of the size of the US or of Europe are probably necessarily diverse should not be reason for complacency. The fact that advanced economies of the size of more than 300 million people have a tendency to be significantly diverse calls for a solid economic governance framework and explains why the ECB Governing Council has been so vocal in this ground since the inception of the euro area.

And this inherent diversity of advanced economies of large size is an additional reason to resolutely engage in the structural reforms that would permit to accelerate the completion of the European single market in all sectors, and to enhance the growth potential of each individual European economy and of the euro area as a whole.

IV. Setting Priorities for Long-Run Growth

Let us get back to our central theme - Setting Priorities for Long-Run Growth. Let me make some suggestions – three to be precise. A first, and overwhelming, priority – notably for the euro area – is the vigorous implementation of structural reforms . A second, but by no means unrelated priority, is the continued attention to external and internal imbalances . A final priority is greater flexibility on the part of policy institutions. Let’s take them one by one, with a particular emphasis on the euro area.

First, structural reforms. We earlier noted the primacy of institutions in modern growth theory. Sound institutions are essential to encourage a flexible, cutting-edge, knowledge-based economy. There is substantial evidence from industry-level studies on regulation as well from firm-level studies on the dynamics of firm performance that confirm the need for such a conducive environment to generate productivity growth. ^[17]

Douglas North defined institutions as … the rules of the game in a society … the humanly devised constraints that shape human interaction. ^[18] And being “humanly devised constraints” (rather than exogenous geographical or climactic constraints), their major impact was through the setting of incentives. ^[19]

And one can see the remaining challenges for many advanced economies as follows:

• Employment regulation needs to help more proactively outsiders, low-skilled, young and older workers.
• In Europe, the single market needs to be advanced especially in the area of services. ^[20]
• Tax, benefit and pensions systems should not discourage labour participation and create weak incentives for investment and innovation.
• The distribution of wealth and general economic well-being needs to ensure some acceptable social balance.

Several remedial policy proposals have been suggested and implemented in the recent past. The most well known is the European Council’s Lisbon Strategy for Growth and Jobs, followed by the Europe 2020 Strategy. ^[21]The latter is the Agenda that the European Union and its Member States have decided to help Europe recover from the crisis and come out stronger, both internally and at the international level. ^[22] The Agenda sets targets for the European Union in 2020 in terms of employment, research and development, energy and education.

The Agenda puts particular emphasis on structural reforms in the labour and services markets. These two markets are still over-regulated and not directly subject, given their largely non-tradable dimension, to the competitive forces originating from within and outside the single markets. ^[23] At the EU-level, the necessity and shape of structural reforms is acknowledged, but the gap between awareness and implementation is far from closed.

That said, we would do well to understand why political systems abide distortionary, inefficient structures and resist more efficient alternatives. Do structural reforms imply a J-curve of long-run gain but short run pain that sits ill with the decision making process in our democracies? Do vested interests strategically and systematically block change?

A second priority is vigilance against imbalances. I spoke at the last Jackson Hole symposium of the risks of chronic global imbalances and costs involved in unravelling the excessive private leverage, unsustainable fiscal and trade positions. Establishing more reasonable borrowing, restructuring and strengthening the balance sheets of firms, households and governments in an orderly manner remain key to smooth and continuous global growth. In all this, central banks are not immune. Tensions in financial markets and severe global imbalances deepen uncertainty and, therefore, profoundly challenge monetary-policy setting.

Precisely these dangers underpin the Mutual Assessment Process of the G20 framework. The indicative indicators – agreed in February this year – identify imbalances in public, private and external positions as the key culprits preventing balanced global growth, and a key input in shaping corrective policies. Seen in that light, a country’s economic success should be judged also on these indicators and not only on its last few years’ growth figures.

However, another imbalance – which has gained currency following the financial turbulence – is income imbalances. Naturally, extremes of income inequality and restricted opportunity challenge our values and strain the fabric of our societies.

In short, growth skewed towards the few (or absent for a large minority) risks social tensions, undermines institutions and encourages policy failures of one kind or another. Structural reforms, particularly in the form of re-training, improving job matching, providing flexibility and incentive for job creation and innovation remain the best policy options for encouraging well-balanced growth, and an environment of low and credible inflation the best environment to encourage matters from a central-banking perspective.

Finally, a priority for medium and long-run growth is that our policy institutions remain attuned to an ever-changing landscape. We have seen in recent years the near-Knightian uncertainty policy makers endured and how boldly they responded. The ECB was among the first central banks to react to the outbreak of the financial turmoil in August 2007 in providing liquidity to distressed institutions. Another example of flexibility by ourselves and in the wider central banking community is in the swap agreements with other central banks as an example of internationally co-ordinated means of swiftly responding to the crisis.

Since then, we acted with what I have previously (here in Jackson Hole) called ‘credible alertness’. ^[24] This includes implementing both non-standard monetary policies and our interest rate policy. Interest rate policy depends on the outlook for price stability. The use of non-standard measures depends on the functioning of the monetary policy transmission and must be commensurate with the level of malfunctioning or disruption of money and financial markets and segments of markets. Our non-standard measures do not in any way impinge upon our capacity to design our monetary policy stance to deliver price stability in the medium term.

Despite all the ups and down of recent years, our key challenge remains as it has always been: to create strong, sustainable, balanced, non-inflationary growth. Credibility and the medium-term orientation in monetary policy allows, where needed, scope and flexibility to address various types of severe shocks. Over the long-term a commitment to price stability anchors expectations, improves the workings of the price mechanism, reduces transaction costs, protects savers and reduces uncertainty. This is what I meant at the outset when I said that the theory and practice of monetary policy making paralleled developments in growth theory – namely, both are now seen to hinge on institutional quality.

V. CONCLUSIONS

Let me conclude. Ultimately growth is driven by technical progress. This is especially important where there are limiting demographic factors. In the euro area, there is ample of scope to realize efficiency gains from existing and prospective technological changes given structural reforms and more vigilant implementation of the existing policy agenda. The remarkable resilience of the German labour market in the last few years ^[25], where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms.

Although there have been improvements in the euro area in recent years, there is still evidence of regulatory and market-based barriers to entry in selected professions which have to be actively corrected.

Structural reforms – re-training, improving job matching, providing flexibility and incentives for job creation and innovation – remain the best policy options for encouraging well-balanced growth, and an environment of low and credible inflation the best environment to encourage matters from a central-banking perspective.

Likewise, alertness against savings and trade imbalances across the global economy is a fundamental concern. Such imbalances – if unchecked or conveniently rationalized away – make our entire, inter-connected economies more fragile and more risk prone. We have seen how rapidly negative financial impulses can transmit through the global economy and pull down economic activity. Alertness means alertness. I have learned whilst discussing global imbalances and financial transmission channels – much of it done here at Jackson Hole – that appropriate improvements in regulation and multilateral surveillance frameworks can yield large gains. We should work hard to maintain momentum.