Arnold Kling  

Today on the Eurozone Crisis

Of Models and PSST... Valuing Financial Services...

One report on the latest accord:

According to a statement issued after the meeting broke up, governments participating in the agreement will need to have balanced budgets -- which is counted as a structural deficit no greater than 0.5 percent of gross domestic product -- and will have to amend their constitutions to include such a requirement.

If you are in trouble, investors want to see debt growing less rapidly than GDP. To do that, you need GDP growth above the interest rate or a primary surplus (meaning a surplus if you do not count interest payments). Preferably both. In the paragraph above, I mentally substituted "primary" for "structural," but I could be wrong. In any case, this is a plan to have a plan, and in the end it does not mean balancing budgets, much less running surpluses.

There is also an agreement for governments to pool money with the IMF in order to keep countries liquid. I assume that the IMF will buy Italian debt, trying to keep the interest rate down.

To me, the accord sounds as though it did more to satisfy the needs of politicians (for vagueness) than the needs of investors (for clarity). My guess is that the ability of the PIGS to roll over their debts is still in question.

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CATEGORIES: Eurozone crisis

COMMENTS (2 to date)
E. Barandiaran writes:

Arnold, hope you have time to read this

I look forward to your comments.

Snorri Godhi writes:

My understanding is that the meeting was never meant to reassure investors: it was meant to reassure Germans that the money they are spending on keeping Greece et al. afloat is not wasted.

In either case, the meeting could not possibly have succeeded (still in my opinion).
The good news is, at least the money that the Germans and other people are going to spend, is being kept to strict limits. That won't reassure investors but it should assuage the pain for Germans.

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