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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Cyprus would be better off to leave the euro than accept the terms of the bailout imposed by the European Union, International Monetary Fund and European Central Bank.

Until recently, Cyprus was a prosperous island economy thriving through strong tourism, shipping and maritime related activities, and a significant international financial sector.

Its major banks have branches in Russia, the Ukraine, the U.K. and other overseas locations, and have attracted large offshore deposits. Cyprus has gained great popularity as a portal for western investment into Russia, Central and Eastern Europe, China and India.

Much like New York City, London and other big-city European banks, the Cypriot banking sector attracted deposits much larger than it could productively use lending in its local economy and invested in other financial instruments–Cypriot banks invested heavily in Greek sovereign debt.

The 2012 Greek government bailout engineered by the EU, IMF and ECB imposed losses greater than 50% on foreign bondholders–among those, Cypriot banks. Hence, the Troika, which is now imposing severe conditions in exchange for aid to bail out Cypriot banks, bears substantial responsibility for the present sad state of their balance sheets.

During the recent U.S. financial crisis, the Federal Deposit Insurance Corp. was adequate to restructure and secure deposits at smaller banks; however, the Federal Reserve printed hundreds of billions of dollars to purchase and work out souring bonds held by larger banks, and the Treasury borrowed similar sums to inject new capital into those banks. More importantly, depositors–large or small–did not lose any money during or after the U.S. crisis.

The ECB lacks the tools to participate in such bank workouts, and the EU lacks the borrowing authority of the U.S. Treasury–and the taxing powers to back up bonds. Hence, banks in Cyprus, just like those in Ireland and Spain in their banking crisis, lack a lender of last resort to keep them afloat while they restructure and work off losses through new, sounder business activities.

In the U.S. stockholders lost equity when banks went sour, but it kept the banks open and depositors kept their money. The Troika, in exchange for 10 billion euros ($13 billion) in aid, will likely impose losses of at least 20% on large depositors and require Cyprus to slash the size of its banking sector, relative to gross domestic product, to the average for the EU as a whole.

If such a condition were imposed on New York City, its economy would collapse and the Big Apple would suffer massive unemployment and huge population losses, as workers sought employment opportunities elsewhere. Continue reading…

 These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The European summit this week will feature a standoff between German Chancellor Angela Merkel advocating austerity and French President Francois Hollande promoting stimulus to boost growth.

Neither position is without merit, but neither by itself will solve what ails Greece and other failing European nations. Sadly, none of the leaders involved, including the insurgent left most likely to win the next Greek elections, appear willing to accept that a successful strategy to put Europe back on track will require abandoning the euro and returning to national currencies.

After the single currency was introduced in 1999, productivity growth was slower and prices rose faster in southern Europe than in Germany and other northern states owing to both cultural and immutable geographic conditions. Consequently, the north enjoyed growing trade surpluses at the expense of deficits in the south.

Trade deficits can instigate high unemployment and curb tax revenue, and to support employment and social programs on a par with their northern neighbors, the Greek, Italian and Portuguese governments borrowed too much.

In Spain, northern Europeans purchasing second homes and vacationing in its sunny climate instigated a rush of foreign funds into its banks to build dwellings and hotels. Spain actually had budget surpluses prior to the 2008 global financial crisis, and its trade deficits were financed by bank borrowing from foreign sources and questionable loans to homeowners: the U.S. model of excess. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Ousting Silvio Berlusconi won’t make Italy’s fiscal mess any easier–with or without him, its debt is impossible, and Italy is headed for default.

Italy’s problems are fundamentally different than some other troubled countries, such as Greece. Like others, its social benefits are too generous but substantially curbing them won’t bring its books into balance. It is simply too late.

Italy’s budget deficit is about 3.6% of GDP–less than half of the U.S. gap, but its total debt, amassed over many years, is 130%. That is an amount well above what economists consider manageable even for a country, like the United States, that can print money, and it is even worse for one like Italy without its own currency.

Although the final act of the Berlusconi government was to craft austerity measures that will lower the deficit to less than 2% of GDP, or about EUR25 billion, it must borrow in 2012 EUR300 billion–a massive 19% of GDP–in private capital markets to repay maturing debt. Italy is simply not growing fast enough in a Europe crippled by crises in Ireland, Greece, Spain, and Portugal for private investors to take that bet. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Prime Minister George Papandreou apparently lost his governing majority when Socialist Finance Minister Evangelos Venizelos bolted in protest over the decision to place to a referendum the Greek acceptance of the European bailout for Athens’ finances. Apparently, democratic decision making is now a threat to the One Europe designs of the continental elite.

French President Nicolas Sarkozy, and German Chancellor Angela Merkel and other leaders see a referendum, and the chaos that would follow the fall of the Papandreou government, as placing their cherished euro in jeopardy. That is sad–the false obsession with a single currency places at great peril the welfare of the Greek people and their democracy.

The bailout plan would cut in half the privately held Greek sovereign debt. However, to receive this concession and other aid from richer EU governments, Greeks must accept draconian austerity measures. These would further drive up unemployment, and shrink Greece’s economy and tax base at an alarming pace, placing in jeopardy eventual repayment of Athens’ remaining debt. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

European efforts at economic integration have not delivered sustainable prosperity in poorer nations like Greece and Portugal. Instead, they have left Mediterranean governments teetering on bankruptcy and at the mercy of Germany and other rich states who exploit European unity to live well at the expense of their poorer brethren.

The 1992 Maastricht Treat, which considerably harmonized product and safety regulations and methods of taxation across Europe, was supposed to remove untold barriers to growth. It didn’t, because it did not moderate European labor laws and social programs that discourage individual ambition and investment.

The euro, created in 1999, floats against the dollar and yen, and its value reflects an average of the competitiveness of its entire membership. This leaves higher productivity economies like Germany with an undervalued currency and trade surpluses, and lower productivity economies like Greece with an overvalued currency and in constant need to borrow from foreign investors.

With Maastricht and the euro, German manufactures and technology became more valuable in a more integrated European market. However, Greece, Portugal and others are not able to use their lower labor costs to capture assembly plants to the degree, for example, that the U.S. South attracts automotive and high-end electronics manufacturing.

Moreover, Germany and other rich states continue subtle forms of protection that discourage outsourcing even to other EU member states, and this frustrates the EU single-market promise to more effectively equalize employment opportunities and prosperity between the prosperous core and southern Europe. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Just a year after wealthier European governments rescued Athens from default with $157 billion in loans, Greece is slipping into crisis again.

After seeing its credit rating sharply downgraded on Monday, and unable to meet deficit-reduction targets laid down by Germany and others, Greece is getting desperate–and Europe is getting anxious.

Officials are floating euphemistic phrases like “voluntary restructuring,” but make no mistake: The painful concessions Greece would probably require from creditors amount to a default. If that happens, the broader European economy will be on its knees, its credibility shattered. So what should Greece do?

The only real solutions are for Greece and other low-income countries to abandon the euro and for Europe as a whole to rethink its welfare state.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Wednesday, Federal Reserve Chairman Ben Bernanke will discuss with reporters decisions taken by the Federal Open Market Committee. For this unprecedented press conference to be successful, Bernanke must venture where Fed chairmen are most reluctant to go–into politics.

Economists have long held that transparency about goals and means makes monetary policy more effective. However, genuine transparency requires that Bernanke acknowledge the limits imposed on the Fed policy by the actions of Congress, the administration and foreign governments.

Inflation is heating up, thanks to rising oil, food and other commodity prices. Many in Congress and financial markets blame QE2–the Fed’s policy of purchasing Treasury securities to moderate interest rates on mortgages, corporate bonds and the like–but easy money is not causing inflation.

China and several other Asian governments choose to keep their currencies substantially undervalued against the dollar and regulate domestic gasoline and other commodity prices. Those policies boost Asian exports and growth, slow U.S. and European growth, and push up global prices for oil and other commodities.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Friday, the U.S. Labor Department reported consumer prices were up 0.5% in March, driven by 3.5% and 0.8% jumps in energy and food prices.

This is the fourth straight month of large gains in consumer prices. While food and energy prices may be volatile, international conditions indicate commodity prices will continue surging, and the Fed’s emphasis on core inflation is absolutely misplaced.

With inflation running at 6% a year, it will be tough for the Federal Reserve to deny inflation and continue quantitative easing and low interest rates generally. Similarly, with unemployment likely to remain above 8% for the balance of the year, the Fed will find it tough to raise interest rates too much.

The U.S. economy is headed for stagflation thanks to failed banking and international economic policies that lie largely beyond the Fed’s control.

Continue reading…