While everyone is focusing on the by now default (pardon the pun) assumption that Greece will default, it may be time to redirect attention to the core of the Eurozone, where tomorrow will mark the 6 month anniversary of S&P's threat that it will downgrade a still government-less and AA+ rated Belgium. From December 14: "If Belgium fails to form a government soon, a downgrade could occur, potentially within six months." Newsflash, at least for S&P which appears to need reminding of what garbage it has published in the recent past: tomorrow is the 6 month anniversary of this report. And the conditions for the downgrade are still there. So instead of continuing the "high and mighty" charade with now weekly downgrades of Greece, perhaps it is time to really throw the Eurozone in a loop and remind the world that the line between the PIIGS and the "developed" nations is relaly non-existent.
And in other worthless news, the San Fran Fed has just burned through more thousands of dollars to come up with the brilliant conclusion that according to the Taylor rule peripheral and core Eurozone countries deserve different interest rates.
Figure 3 compares the paths of rates recommended by the Taylor rule for the euro area’s core and periphery with the actual ECB policy target rate. As noted earlier, the ECB’s actual target rate seems to be in line with the Taylor rule recommendation for the euro area as a whole. But things look very different when the Taylor rule is applied separately to the euro area’s core and periphery. The policy target rate recommended by the Taylor rule for the peripheral countries remains negative. The ECB’s actual policy rate is well above the rate recommended by the Taylor rule for the periphery, but below the Taylor rule recommendation for the core. This is not surprising. The core countries are well along the path of economic recovery. But the peripheral countries are still struggling to recover from the sovereign debt crisis. They are implementing a range of reforms and fiscal adjustments, which have impeded overall economic recovery (see Nechio 2011). It is uncertain whether the peripheral countries will be able to grow fast enough to generate the income they need to service their sovereign debt obligations. Increases in interest rates may make reaching such growth levels even more challenging.
Strikingly, Figure 3 shows that a divergence between the ECB’s actual target rate and the rate recommended by the Taylor rule for the peripheral countries is not new, but has reversed itself. Before the 2008 crisis, the ECB target rate lay below the level predicted by the Taylor rule for the peripheral countries. In fact, from the inception of the euro to the 2008 financial crisis, the actual ECB policy rate was below the rate predicted by the Taylor rule for the peripheral countries and more in line with Taylor rule recommendations for the core euro-area countries. During the financial crisis in 2008, the peripheral countries fell into deep recession, which was followed by a debt crisis from which they have yet to recover. By contrast, recovery in the euro-area core has been more robust. These events reversed the historic pattern and positioned the ECB policy rate above the Taylor rule recommendation for the peripheral countries.
When members of a monetary union are experiencing different macroeconomic conditions, a single policy rate is unlikely to fit circumstances in all countries. Currently, the ECB’s target rate seems to be in line with a Taylor rule recommendation for the euro area as a whole. However, economic differences between peripheral and core euro-area countries are sharp. The core countries are recovering, while the peripheral countries still have large unemployment gaps. Thus, the ECB target rate is not in line with Taylor rule recommendations for the peripheral countries.
Yes: this is the quality of content US taxpayers get in exchange for giving the Fed the privilege to print infinite amounts of paper on a whim.