Asian markets rose this morning as Mario Monti was installed as Italy’s new PM and Japanese GDP rose strongly (as expected). Monti’s appointment does not change the economic picture at all, but it does confirm my view of the politics, which is that politicians will act in their interest — which for the time being in the PIIGS means they will be in favour of bailouts and austerity. The events in Greece and Italy in the past two weeks show that if a single individual, even a prime minister, threatens to upset this course, he is likely to be removed. And they show how strongly this course really is in the interest of national politicians. Berlusconi had survived all manner of scandals and had been a dreadful PM, but even a little foot-dragging on the path to austerity was enough to bring him down. The problem with austerity is not that is is politically unsustainable in the short run; it is that it is not going to work (and may therefore be politically unsustainable in the long run). 

The turn towards technocratic government in Europe is a bad idea. As the FT argued last week, Europe needs strong leaders to win public support for the measures that need to be taken, not grey men to impose “European” solutions. But it is all true to form: scepticism about democracy has always been at the heart of the European project (the EU executive, the European Commission, is an appointed body for that reason). Also true to form is the growing momentum towards further European integration — crisis as a driver of integration has long been a favourite wheeze in the EU. Angela Merkel is starting to argue for fiscal union in Europe. This would presumably follow the path of further bailouts of the periphery by the core, in return for the institutionalisation of the ad-hoc arrangements for the monitoring of weaker countries’ finances. 

The media an the blogosphere have got excited about the idea of the ECB acting as lender of last resort to Eurozone governments. I think that it will take this step if it has to, but that we are not nearly there yet. Political leaders can move further by themselves, and if they can move, they will to stave of crisis. Only if they are no longer able to move do I expect the ECB finally to accept the role that economic logic seems to dictate for it.

I have had a look at the supposed popping of the Chinese housing market. Prices are falling MOM in a number of cities, but are still generally up in YOY terms. I do not yet see evidence of a serious housing collapse.


Prelim. Michigan Sentiment up to 64.2, b.e. Further evidence of an improving US picture.
Japan GDP 1.5% QOQ a.e.
Swiss PPI -0.2% d.e.

This Week:

Mon: Eurozone IP
Tue: French and German prelim. GDP; UK CPI; EZ ZEW and flash GDP; US retail sales, PPI, Empire State, business inventories.
Wed: BoJ rate; UK employment data and BoE inflation report; EZ CPI; US CPI, cap util, IP, TIC, crude inventories.
Thu: US retail sales; US building permits, housing starts, initial claims and Philly Fed.
Fri: German PPI.