Monday, October 6, 2008

Now What?

. Monday, October 6, 2008

European governments appear "dazed and confused," said Jim Reid, a strategist at Deutsche Bank. "And this isn't helping confidence and will probably end up costing them more in the long run." Not surprising that they are dazed and confused, given the sharp about face that has occurred in most EU members in the last two days. Seems that guaranteeing bank deposits is not such a bad idea after all.

Press reports hint that Sarkozy is seeking an emergency G8 meeting this week. Not obvious that this is a good idea. Market reactions to the non-agreement EU-4 summit and post-non-agreement scramble to bailout Hypo Real Estate and other European financial institutions suggest that market participants do not believe that EU governments fully appreciate the stakes. "Until now the solutions have appeared to be uncoordinated, so perhaps it's time for a more coordinated approach globally," said Torsten Slok, an economist at Deutsche Bank AG in New York. Indeed. Yet, calling an emergency G8 summit merely adds fuel to the fire unless EU governments have a meaningful coordinated response to announce at its conclusion. (H/T to Calculated Risk).

Krugman posted a short paper elaborating his thoughts on contagion. He makes a concise argument about why the EU can't hide.

Update: Just noticed that Tuesday's NY Times has a piece that (finally) criticizes EU governments for their head-in-the-sand attitudes and failure to embrace a coordinated response. “It’s mind-boggling that the Europeans have coordinated so little up until this point” (Simon Johnson, former Chief economist at the IMF).

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