Are European Capital Flows a Problem?

OK, it is not a good thing if, say, Spanish banks are constrained in their sources of funding and do not want to rely excessively on short-term funding from the ECB. It means that they do not grow their assets. But is there any other reason to worry about capital outflows from Spain? Some argue that the growth of TARGET2 liabilities — which is what is allowing the outflows from Spain to happen without the banks going under — is a problem. But if the euro survives, and the Eurosystem remains a single central bank, then TARGET2 is just an accounting mechanism to keep track of what the branches of the central bank are doing. If the euro does not survive, TARGET2 assets might become a problem for Germany (but only insofar as they would mean losses for the Bundesbank, which might or might not be considered a problem) — but that does not mean that TARGET2 is a reason why the euro should break up. The Eurosystem is like a footballer’s marriage. If the husband “works” and pays for the WAG’s lifestyle, then they could account for this by saying that the WAG has an ever-growing liability to the footballer, and that the footballer has an ever-growing asset in the form of a claim on the WAG. But the fact that the two are a legal unit means that this is just a way of accounting for the transfers, not a reflection of reality (I suspect that most accounting within marriages is actually on a cash-flow basis, but that does not mean that you couldn’t do it this way).

Incidentally, while I am on the subject, a couple of observations about Spain. First, Oliver Wyman and Roland Berger were supposed to have completed their initial assessment of Spanish banks’ capital needs on Monday. Has their assessment not been released? I can’t find it. Second, Spain sold 1-year debt yesterday at 5%. It is wrong to think of Spain as having no access to the markets.


The latest talks between Western powers and Iran in Moscow have been rather a disappointment. All that has been agreed is that “technical experts” from the two sides will meet to discuss the prospects for some kind of deal, and senior diplomats will then speak by telephone. Iran did, apparently, at least discuss the question of uranium enrichment for the first time, but basically the talks have gone nowhere and US and EU sanctions are likely to come into force in full.

Isn’t He Nice

People who are less powerful are more compassionate, according to a report ( This is no surprise. I have observed that people who feel themselves to be less powerful tend to be “nicer” than people who feel themselves to be more powerful. For this reason, niceness — or, if you like, compassion — impresses me much less in the less-powerful than in the more-powerful.

It is a problem that, as they say, “the trouble with the rat race is that even if you win, you’re still a rat.” One of life’s big challenges it to become both more powerful (i.e. successful, or rich, or esteemed, or whatever) and at the same time to become more compassionate.

Bank of England Minutes

Wow. Mervyn King and three other MPC members voted to increase asset purchases at the previous meeting, but they were outvoted. Why did King allow this to happen? Perhaps he wanted to put down a marker for more purchases in the future.


  • US building permits 0.78m b.e. and rose to a new post-crisis high, May.
  • US housing starts 0.71m a.e. and fell back from the previous month’s post-crisis high, May.
  • Japan trade balance -0.66tn d.e. May. Widened on rising energy imports.
  • Australia housing starts -12.6% QOQ d.e. Q1. Fourth quarter of decline.
  • UK claimant count change 8.1k d.e. May. Biggest rise since last September.
  • UK unemployment rate 8.2% a.e. and flat, April.

Coming Up

  • FOMC
  • Global Flash PMI’s
  • Eurozone current account
  • UK retail sales