by Calculated Risk on 11/27/2011 08:12:00 PM

From Wolfgang Münchau at the Financial Times: The eurozone really has only days to avoid collapse

First, the European Central Bank must agree a backstop of some kind ... The second measure is a firm timetable for a eurozone bond. ... The third decision is a fiscal union. ...

If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse.

See Brad DeLong's post for more excerpts.

From the WSJ: Europe's Leaders Pursue New Pact

The proposal ... would make budget discipline legally binding and enforceable by European authorities. ... A majority of euro-zone governments hope that the pact would be an unstated quid pro quo for massive intervention in bond markets by the ECB. Many policy makers, investors and economists believe that only decisive ECB action can stop the unraveling of euro-zone debt markets ...

From the WSJ: Inner Workings of Market Readied for Euro Breakup

Companies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies. ... Banks, analysts and investors are preparing for what many of them say is an increasing likelihood of a euro-zone breakup, either completely or in parts, leading to the potential return of currencies such as the drachma, German mark or Italian lira.

Interesting times.

Earlier:
• Summary for Week Ending Nov 25th
• Schedule for Week of Nov 27th

by Calculated Risk on 11/27/2011 05:57:00 PM

The two key downside risks to the U.S. economy are contagion from the European financial crisis and more rapid fiscal tightening. On fiscal tightening, there have been several recent reports suggesting that some sort of deal will be reached an the extension of the payroll tax cut.

From the LA Times: Parties look to payroll tax deal after collapse of deficit talks

The Obama administration has asked Congress to extend payroll tax cuts set to expire at the end of the year, and also to renew unemployment benefits. The tax-cut extension could cost the Treasury an estimated $112 billion, but if it lapses American workers will see an immediate tax increase on Jan. 1 that would cost a typical family $1,000 per year.
...
Economists warn that a failure to extend the payroll tax cut and unemployment benefits could cut the economy’s weak growth almost in half next year.

It seems likely that some sort of deal will be reached to extend both the payroll tax cut and emergency unemployment benefits, but there will be some politics first.

Earlier:
• Summary for Week Ending Nov 25th
• Schedule for Week of Nov 27th

by Calculated Risk on 11/27/2011 02:14:00 PM

From Tim Duy at Fed Watch: Europe Scrambles for Solutions. Some excerpts:

Monday morning is fast approaching, and European leaders are scrambling to come up with something credible to float ahead of the market opening. Recall that we ended last week with the S&P downgrade of Belgium, and policymakers would like to have something on the table in response. Most significant is that policymakers now realize that changing the Lisbon Treaty to enshrine fiscal discipline is a far too lengthy process to serve as an effective counterweight to emerging the sovereign debt crisis.
...
The risk here is that market participants read the bilateral agreements as they emerge as an invitation to attack those nations not yet signed up to the plan.
...
Note also that although these ideas are bandied about in terms of "greater fiscal integration," I don't think we are seeing much mention of fiscal transfers, just mechanisms to enforce budget discipline. This is certainly a framework for a two-speed Europe.

In other news, someone is floating rumors that the IMF is preparing a massive lending program for Italy. From Bloomberg:

The International Monetary Fund is preparing a 600-billion euro ($794 billion) loan for Italy in case the country’s debt crisis worsens, La Stampa said.

The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt, the Italian daily reported, without saying where it got the information. Monti could draw on the money if his planned austerity measures fail to stop speculation on Italian debt, La Stampa said.

Details are unclear. Ed Harrison at Credit Writedowns has a translation of a German version of the story that mentions the possibility of ECB funding of the bailout, with an IMF guarantee.

by Calculated Risk on 11/27/2011 09:52:00 AM

With all the "Black Friday" reports, it is important to remember that retail sales are only a small portion of consumer spending.

According to the Bureau of Economic Analysis (BEA), of the $10.8 trillion in personal consumption expenditures in Q3 (seasonally adjusted annual rate), about 34% was spent on goods. From Suzi Khimm at the Wonkblog: Why a Black Friday frenzy doesn’t mean jobs are coming back

Consumer spending on goods is starting to rebound, but spending on services — a key driver of job growth — is lagging significantly farther behind.

And from MarketWatch: Black Friday posts big retail-sales gains vs. 2010

U.S. retailers posted sizable "Black Friday" gains vs. 2010's day-after-Thanksgiving sales results, according to data released Saturday. Store sales, according to Chicago-based ShopperTrak, rose 7%, as shoppers spent $11.4 billion, up nearly $1 billion from a year ago ...

Earlier:
• Summary for Week Ending Nov 25th
• Schedule for Week of Nov 27th

by Calculated Risk on 11/26/2011 06:37:00 PM

As we all know the markets are moving faster than the policymakers in Europe. So it appears the policymakers are going to try to implement a fiscal union quicker.

But will that help? Will it bring private investors back into the bond market? Probably not, but some people think it might allow the ECB to take more aggressive action.

Oh well, the new key date is Friday December 9th.

From the WSJ: Euro Zone Weighs Plan to Speed Fiscal Integration

Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies ... Under the proposed plan, national governments would seal bilateral agreements that wouldn't take as long as a cumbersome change to European Union treaties ... The pact that euro members are considering could be announced before the EU summit on Dec. 9 ... Some German and French officials fear that an EU treaty change could take far too long.
...
A new, binding fiscal regime would not be enough to justify the creation of collective euro-zone bonds, German officials say. But it might be enough to justify ECB action to stabilize bond markets

Earlier:
• Summary for Week Ending Nov 25th
• Schedule for Week of Nov 27th