Ambassador Fernando M. Valenzuela,

2009 -   Ambassador/Head of Delegation of the European Union to the Russian Federation

Extended Interview - Ambassador Fernando Valenzuela



Person  of the week: The President of the European Central Bank Mario Draghi

Date of birth: 3 September 1947
Place of birth: Rome, Italy
Education
1970: Degree in Economics, Sapienza University of Rome
1977: PhD in Economics, Massachusetts Institute of Technology (MIT)
Professional career
1975-1981: Professor of Economics at the universities of Trento, Padua and Venice
1981-1991: Professor of Economics and Monetary Policy at the University of Florence
1984-1990: Executive Director of the World Bank
1991-2001: Director General of the Italian Treasury
2002-2005: Vice Chairman and Managing Director at Goldman Sachs International
2006-October 2011: Governor, Banca d’Italia
2006-October 2011: Chairman of the Financial Stability Board (former Financial Stability Forum)
Since 2006: Member of the Board of Directors at the Bank for International Settlements
Since November 2011: President of the European Central Bank
Since November 2011
Chair of the European Systemic Risk Board
Other posts
1993-2001: Chair of the Italian Committee for Privatisations
1997-1998: Chair of the Committee set up to revise Italy’s corporate and financial legislation and to draft the law that governs Italian financial markets (also known as the “Draghi Law”)
1999-2001: Chairman of the OECD’s Working Party No 3
2000-2001: Chairman of the European Economic and Financial Committee
Since 2003: Honorary Trustee of the Brookings Institution
Since 2009: Member of the Board of Trustees of the Princeton Institute for Advanced Study

Q: What inning are we in with Greece until we know if we’re at the resolution to end all resolutions?

Mario Draghi: I don’t know baseball. But if we didn’t have that package finalized, there would be no game. So this could be the beginning of a new world for Greece where the pending financing problems have been addressed. Now the policies will have to be enacted. The Greek Government has undertaken very serious commitments in the fiscal policy and in the structural policies areas. But there are implementation risks and probably oncoming elections. The Eurogroup gave reasonable probabilities to the success of the program if the measures, especially the structural measures, were undertaken.

Also one could see that there is a different awareness in the Greek public opinion to the extent that what’s happening is painful but necessary. The number of people, who favour default, inflation or even exit from the euro doesn’t seem to be prevalent in Greece.

Q: Do you think the acute phase of the crisis has passed? It struck us this week that once the deal was decided, we didn’t see the kind of elation we’ve seen after past programs.

Draghi: It’s hard to say if the crisis is over. Let us look at the positive changes of the last few months. There is greater stability in financial markets. Many governments have taken decisions on both fiscal consolidation and structural reforms. We have a fiscal compact where the European governments are starting to release national sovereignty for the common intent of being together. The banking system seems less fragile than it was a year ago. Some bond markets have reopened.

But the recovery is proceeding very slowly and remains subject of downside risks. I was surprised too that there was no elation after the approval of the package and this probably means that markets want to see the implementation of the policy measures.

Q: When you look at the risk profile of the package and the deal, is the greatest risk arising from the streets of Greece, or is the greatest risk arising from a lack of growth in Greece?

Draghi: In the end it seems the greatest risk is lack of implementation. Some measures are directly targeted to enhance competitiveness and job creation. Others foresee a radical fiscal consolidation. The two are very complementary to ensure a return to growth after the unavoidable contraction in economic activity.

Q: But some people say Greece is really suffering depression-like conditions, GDP off 15% or 16% peak to trough. What is your view of these austerity policies in the larger strategy right now, forcing austerity at all costs in order to bring the budget deficits down?

Draghi: This is actually a general question about Europe. Is there an alternative to fiscal consolidation? In our institutional set up the levels of debt-to-GDP ratios were excessive. There was no alternative to fiscal consolidation, and we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately, and that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.

Q: Austerity means different things, what’s good and what’s bad austerity?

Draghi: In the European context tax rates are high and government expenditure is focused on current expenditure. A “good” consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.

Q: Bad austerity?

Draghi: The bad consolidation is actually the easier one to get, because one could produce good numbers by raising taxes and cutting capital expenditure, which is much easier to do than cutting current expenditure. That’s the easy way in a sense, but it’s not a good way. It depresses potential growth.

2011-Cheng-Carbon.pdf

Europe's financial crisis has put many people out of work. The government of the Netherlands fell last weekend, after failing to reach an agreement on a new austerity budget. Greece is still experiencing great job market uncertaincies. First round of voting in France's presidential election has put President Nicholas Sarkozy on a line.  Greece, Spain, and Portugal continue with their austerity budgets if core European countries, such as France and the Netherlands, get new governments? And what are the implications for the United States in an election year?

The U.S. economy's growth slowed in the first three months of the year. Consumers spent more than expected, but companies invested less in new equipment even though profits were surprisingly strong. Economists say businesses need to grow more to drive the economy forward.

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Would the real economy please stand up?
At the moment, economists don’t seem to know what to make of the start-and-stop nature of the data.
MarketWatch consensus
See economic calendar
DATE REPORT   CONSENSUS  PREVIOUS
May 15 Retail sales  0.0%   0.8%
May 15  Retail sales ex-autos 0.0%   0.8%
May 15 Consumer price index 0.0%   0.3%
May 15 Core CPI  0.2%   0.2%
May 15 Empire state index 10.0   6.6
May 15 Inventories  0.4%   0.6%
May 15 Home builders' index 27   25
May 16 Housing starts  689,000  654,000
May 16 Industrial production 0.7%   0.0%
May 16 Capacity utilization 79.1%   78.6%
May 17 Weekly jobless claims 365,000  367,000
May 17 Leading indicators 0.2%   0.3%
May 17 Philly Fed  12.0   8.5
Steven Ricchiuto, chief economist of Mizuho Securities, recently compared the current state of the economy to a “sputtering but not stalling” British sports car. “At any moment the economic engine could shut down and the recovery would falter,” Ricchiuto said. “Alternatively, the problems keeping the engine from running smoothly could simply abate and a sustainable recovery could take hold,” he said. The varied economic data to be released this week — with reports on retail sales, manufacturing, housing and inflation — may offer clues on what lies ahead. The April retail sales report will be key to ascertaining the health the recovery, as consumer spending accounts for more than two-thirds of U.S. economic growth. Economists surveyed by MarketWatch expect a soft report, with retail sales flat last month, after strong gains in the first three months of the year. One factor in the deceleration is that April sales were soft at big retailers. On the manufacturing front, economists are anticipating better results from factories after a series of downbeat reports.
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Two factors were behind the recent softness in manufacturing, which had been the bright star of the recovery, economists say. One was that manufacturers rushed late last year to take advantage of expiring bonus depreciation tax breaks. In addition, inventories have risen sharply, leading to a cutback in capital spending. Industrial production is expected to rise 0.7% in April after remaining flat in March. Regional reports from factories in New York and Philadelphia are also expected to show improvement in May. Meanwhile, the depressed housing market may show more hints of better days ahead.
Housing starts are expected to rebound by 5.5% to 690,000 in April, completely retracing the decline in the previous month. Permits rose sharply in March, a sign that builders are becoming more optimistic.
Home-builder sentiment is expected to rise in May after dropping last month for the first time in seven months. Inflation should to moderate in April due to a drop in gasoline prices, analysts said.
The consumer price index is expected to be unchanged after rising 0.3% in March. Core prices are seen rising 0.2%, matching the March gain. Mike Moran, chief economist at Daiwa Capital Markets America, said the week’s data will reflect an economy “doing a bit better than just muddling along.”
With activity held down by a debt-strapped consumer and weak state and local governments, things can only get better gradually, he said. “It is not going to be a like turning on a light switch,” he said.
Greg Robb is a senior reporter for MarketWatch in Washington.

The European Economic Advisory Group at CESifo (EEAG)* has released its eleventh Report on the European Economy  in Brussels. The pan-European group of scholars expects world GDP to slow to 3.3 percent this year, down from 3.8 percent in 2011. An anticipated improvement in consumer and producer confidence in advanced economies during the second half of 2012, however, should stimulate growth somewhat towards the end of the year. Once again, the emerging economies are expected to deliver the strongest contribution, while North America and Europe will remain below their potential. The growth in world trade, in turn, will continue to slide, falling from 12.2 percent in 2010 to 6.2 percent in 2011 and to 3.9 percent this year.

The United States’ continuing deadlock in Congress and the upcoming presidential election are sources of great uncertainty, but the healthy corporate profits generated particularly by large companies, combined with low interest rates, will raise the country’s growth rate, after a slowdown during the first half of 2012, to 1.9 percent for the entire year, versus 1.7 percent in 2011.

China is projected to grow by 8.1 percent, India by 6.5 percent, Russia by 3.5 percent, and Latin America by 3.5 percent. The Latin America figure is a weighted average for Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.

By contrast, the European Union’s economy, after experiencing negative growth during the last quarter of 2011, will see its GDP stagnate during the first quarter of 2012,  with a paltry 0.2 growth for the entire year, compared to 1.6 percent in 2011. Inflation will drop from 3.0 percent last year to 1.5 percent in 2012, while unemployment will creep from 9.7 to 9.9 percent.

Within the euro area, domestic demand will be particularly weak in France, Italy and Spain, as well as in the periphery, but it will remain relatively robust in the region’s northern countries. Germany will grow by 0.4 percent, while the economies of France, Italy and Spain will contract by 0.3, 0.6 and 0.6 percent, respectively. Greece’s economy will shrink by 3.6 percent and Portugal’s will do likewise, by 3.0 percent. The best performers will be Estonia and Slovakia (2.4 and 2.0 percent, respectively). Overall, the euro area’s GDP will fall by 0.2 percent in 2012, after growing by 1.5 last year. Inflation will be subdued, at 1.2 percent for the year, but unemployment will inch to 10.7 percent, from 10.2 percent last year. The worst performers in terms of unemployment will be Spain (23.0%), Greece (19.6%), Ireland (14.9%), and Portugal and Slovakia (both with 13.9%).

All European countries outside the euro area will grow, with the United Kingdom achieving 0.8 percent, Sweden and Poland surging by 2.6 percent, and Hungary managing just a meagre 0.2 percent.

In other chapters of the Report, the authors present a thorough analysis of the euro area’s balance of payments problems, providing some possible avenues for correcting the imbalances. One of the more salient proposals is the introduction of a system of short-term treasury bills that they dub Euro Standard Bills, that would be standardised and collateralised by each corresponding government with state-owned real estate or senior rights to future tax revenue. These bills would facilitate monetary policy transactions of the ECB and could be used to gradually redeem the 800-billion-euro Target debt that up to now has been accumulated between the euro area’s national central banks.

The authors also perform case studies on two strikingly contrasting countries in terms of economic performance, Sweden and Hungary, that can provide useful lessons to countries both within and outside the euro area. Sweden went from a severe financial crisis to an enviably solid position, while Hungary went from a front-runner in convergence and reforms to one of the most financially vulnerable countries in Central and Eastern Europe.

The authors once again tackle banking regulation, analysing what has been done to date and what should be done in order to improve oversight and banks’ resilience. Finally, they devote a chapter to putting a price on climate change, analysing current policies and reviewing the lessons we have learned so far that can help to improve the approaches to combat global warming.

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