A few things to consider about Europe this morning.
1. Tim Duy reports, on his blog, a German news report that suggests that Mr. Schauble is preparing a large post-election austerity plan for Germany. If this is true then it shows just how deep the austerity mania has gone. Germany has no need of austerity. It is interesting to watch seemingly the whole world, including one’s own government, falling so completely for a set of false doctrines. Indeed, the spectacle gives me pause: do they have it right, and not me? And yet there are good reasons to think that austerity is contractionary. Part of the problem, I think, is that politics has its own dynamics. Perhaps if politicians had been less viscerally pro-austerity, populations would not be so; but it now appears that populations in the US and Europe have become so, and that in turn has trapped the politicians. In Japan, things are different — Mr. Noda has just been chucked out, at least partly because his (bureaucrat-driven) obsession with increasing VAT. Perhaps the people of Japan have had time to learn that austerity is not a help.
2. The FT reports that the economic spokesman of Italy’s Democratic Party — presently the front-runner for the forthcoming election — has praised Monti’s government and said that they should co-operate in the new parliament. He also said that the Democrats will not increase government spending unilaterally. Rather, they would like an EU grand bargain, in which the European Commission is given broader powers over national budgets (in the form of a veto) in return for less austerity. They would also like some scope for countercyclical fiscal policy at the European level, and have no intention to renegotiate the fiscal compact or change the balanced-budget amendment to Italy’s constitution. The latter point doesn’t make any sense to me: if national governments have to run balanced budgets, how can there be countercyclical policy at the EU level? The former point is a beautiful example of how European integration advances: it has become in the interest of Italian politician to bargain away sovereignty in return for short-term gain. I can’t understand how anyone who understands that this game is going on can possibly advocate continued British membership of this ghastly political project. From a market point of view, however, further integration should be a positive: more political integration means a lower probability of a revolt of national governments against the logic of the euro, which is the adjustment of regional imbalances by temporary or permanent depression.
3. The FT also reports on a leak of the latest version of the EU bank recapitalisation plan. This has countries having to participate in recapitalisations alongside the ESM, or to guarantee the ESM against losses. This is less than some, and particularly the Irish government, were hoping for.
Things are so good that it is hard to imagine equities falling. That is often a good contrarian indicator; in any case, it is not a bullish one. Also, Nomura comments on the news of strong flows into equity funds in recent weeks, pointing out that this metric, too, is if anything a contrarian indicator. Of course, the thing about sentiment is that it is a matter of playing the odds: sometimes, sentiment is very positive because things are so good.
According to Petromatrix, the Iran P5+1 talks are apparently due to restart soon; Iran and the IAEA meet next Wednesday.
I had a great time over the weekend watching lectures about neural networks. Video lectures really are an excellent way to learn material that would be rather dry in textbook form (I suppose that is why universities teach by lecture!). A recent article in the Economist pointed out that the availability of these things is a more recent phenomenon than I had realised, with several of the providers, including Coursera which appears to be the leader, having been founded only in the past year. Unfortunately I only had time to download the first five lectures before I went off for the weekend, but I will get the rest this week. I am also still working my way through Principles of Forecasting by Scott Armstrong, which discusses a wide range of forecasting methods, along with the evidence for their efficacy and conditions under which they appear to work. It has been a fairly rich seam of ideas, although the advantages of some of the methods are a little speculative for my taste and some of them are nothing more than obvious recombinations or reworkings of the others.