Official? Or False?

The Portuguese request for financial assistance from the EU last week begs an important question: could Spain really be next?

To answer this we may look to any number of sources; however one place we should not expect to find a reliable prediction is the mouth of a public official.

You might remember some of these quotes from the past year:

“We need no bilateral loans. We haven’t asked for any and don’t need any” George Papandreou, Greek Prime Minister, January 2010.

"The state is well funded into June of next year, we have substantial reserves, so this country is not in a situation or position where it is required in any way to apply for the [European Financial Stability Facility]" Brian Lenihan, Irish Minister for Finance, November 2010.

"There are no links between Portugal and Ireland... I've heard a lot of talk of the IMF. The country does not have any need for aid." José Sócrates, Portuguese Prime Minister, November 2010.

‘risk of contagion is absolutely ruled out’ Elena Salgado, Spanish Minister of Economy and Finance, April 2011.

Why do public figures, who undoubtedly recognize the desperate financial situation their countries are facing, feel the need to make these exaggeratedly optimistic statements? Their assertions are essentially a desperate attempt to calm the onslaught of speculation against their nation’s financial credibility. They hope that their steady manner and unreserved, if false, resolution will calm the fears of investors and constrain the spread of their bond yields, thereby reducing their cost of borrowing.

Is it worth a shot? Sure. Does it work? Apparently not.

However, so far the threat of contagion for Spain really does appear to be limited. The government has been decisively tackling the deficit and taking measures to strengthen the banking industry and last Thursday €4.1bn of debt was successfully auctioned. The spread between Spanish and German borrowing costs has remained steady.

Perhaps this time we might believe the official stance...?

Post written by Stephen Devlin - 3rd year MA (Hons) Economics

Austerity cuts

Here is an interesting post concerning the government’s austerity cuts. It answers the question of how, in the face of reduced government spending, the Office for Budget Responsibility can still predict output growth. It expects the private sector to take up the slack. But this is not a story of dynamic private sector entrepreneurs. It is a story of household spending. It expects private sector debt to grow enormously over the next two years. That is, despite squeezed incomes, the recovery relies on household keeping their spending going, and hence borrowing more. The irony, pointed out by the article, is that it was supposed to be excessive private sector debt that caused the problem in the first place.

Crises of Capitalism

For a while I have been interested in hearing the responses of economists to the seemingly widespread anger that society helds against the profession. Economists, many say, have failed society because they failed to predict and prevent the financial crisis that we are now suffering. I do not have yet a fully articulated response to that anger but let me say that two things are clear to me now: 1) Society has a distorted view of what Economics is about and what economists do 2) and that that is not society´s fault but mostly ours as economists because we have been often too shy and sometimes too arrogant to reply back.

Above all, we as economists should not be dismissive of society's arguments nor of arguments coming from "heterodox" or "critical" thinkers such as David Harvey, a Professor of Anthropology at CUNY, with a distinguished career as a social theorist. I wanted to show you this video in which one of Harvey's lectures on the crises of capitalism is illustrated as he speaks. The video is interesting for several reasons. One, because it is very nicely done. Second, because the first half makes a very nice summary of the arguments put forward as explanations of the financial crisis. And finally, because he proposes several arguments, probably wrong, but that can help to ignite some debate. As I said, I do not think that we should dismiss his ideas just because he is a marxist. We should reply with sensibility, arguments and evidence. And I would like to hear your views on it.