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Italy's prime minister, Mario Monti put it best when he said in a speech in Brussels in April 2012: "If a country becomes more productive and competitive, but there is no demand for its products domestically or around it, growth will not materialize." There is a new shift in opinion towards a balance of fiscal discipline with growth measures to get Europe back on track. The feeling in different parts of Europe is that the German view of austerity alone will not work for Europe. And the view is coming from the far right to the far left, from Marie Le Pen, far right presidential candidate in France, to the far right leader whose move to withdraw support to the government in Netherlands on the issue of austerity measures led to its collapse. Geert Wilders, leader of the Freedom Party in the Netherlands, said: "we don't want our pensioners to bleed just to meet the dictates from Brussels." The IMF has put out research that questions what is now called "the German hypothesis." The "German hypothesis," is based on the unique experience of Germany with the Hartz reforms under chancellor Schroeder which were based on wage restraint by workers, the German "kurzarbeit" program of government support for retaining workers with lower pay during cyclical downturns, improving competitiveness of German companies, and conservative budget practices. There appear to be two exceptions to this. One is that demand has to be strong outside or domestically for a country to reduce unemployment and improve productive capacity utlilization as it increases competitiveness. This was the case as Germany made the Hartz reforms under Schroeder. Wage restraint acts as a form of devaluing currency for reducing the cost of its products to improve exports. All leading parties and the unions are now in favor of wage restraint and lowering wages to preserve jobs to improve France's competitive position. Germany had the benefit of a decade to implement these reforms to reduce unemployment, because demand was not declining domestically or around it during its reforms. The situation is different in Spain where in all likelihood demand would shrink further with unemployment rising from 25% to higher levels, and higher sales taxes. This is why Francois Heisbourg, special advisor at the Paris based Foundation for Strategic Research, says about the current situation in Europe, that destroyiing Greece with strict austerity alone wasn't something the EU can look back at with the sense of having done the right thing, for Spain it appears misguided and lacking careful thought. The editors of the Wall Street Journal expressed the same sense when they described the March 2012 bailout of Greece as a tragic sideshow, because the main purpose was to buy time and insulate the other larger economies in the EU by giving the French, Spanish and German banks time to improve their financial position. The Journal called it bad for Greece leaving it with debt at 120% of GDP till 2020 and no economic growth, and bad for democracy as it was done against overwhelming Greek public opinion- The Tragic Greek Sideshow, Feb. 22, 2012. Volker Perthes, director of the German Institute for International and Security Affairs, a Berlin think tank, says the Germans have always viewed German leadership in Europe with discomfort, and would prefer a leadership where several states, France, Italy, Spain, and other countries in the EU coalesce around consensus positions. This is historically true for the German position since chancellor Adenauer. With the Free Democrats in decline, and the Social Democrats and the Pirate party doing well in recent German elections and favoring consensus in Europe, Merkel's Christian Democrats need to rethink their policy to give greater weight to economic growth for a consensus position in Europe. ...

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Chile's experience in Latin America stands out for the painful experience of the dictatorship years and the mismanagement of the economy by the government preceding it. The governments of the last 20 years of the Concertacion have studied the mistakes of these years and corrected them to aremarkable degree, like no other country in Latin America. The new politicians decided that the economy had to be managed so that inflation was under control and these Concertacion administrations produced budget surpluses in all but 4 years says Finance Minister Velasco. Velasco himself was 13 years old when the dictatorship of Augusto Pinochet was set up, and his father a law professor had to leave the country for criticizing human rights abuses. He studied economics at Columbia University, and his principal focus there was he says, " to understand how did this happen to Chile and how do we make sure it will nhot happen again." His finding was that runaway inflation had created so much unrest among the people that coup plots could take place, and that political stability could not be maintained without good management of the economy. It also meant that Chile must avoid extremes, try to take amoderate position, which meant preserving the free market reforms that had taken place, and introducing policy measures, projects and investment which helped to bring up the vast majority of the people including the least well off of society. Velasco also studied the history of Latin American economies with their boom and bust cycle, the situation in countries especially Argentina and sometimes in Brazil and other countries since the fifties. He found as he says that when " a country seems very creditworthy, everyone wants to lend to you, capital flows in and consumption booms." At some point excessive amounts of capital flow in which cannot be absorbed and is wasted in unproductive ways, which becomes adebt burden as the bust part of the cycle takes hold. So Chile has been careful to control speculative inflows of capital. But Velaco went further. In 2006 he left a Professorship at Harvard University to become finance minister of Chile under President Ms. Bachelet. Copper prices were surging and Velasco insisted on caution. In 2006 he pushed through a law requiring the annual budget to be based on an independedt committtee's estimate of the average price of copper in the next 10 years. Any copper income above the budgeted price goes into a savings fund maintained outside the country. In 2007 the copper price used in the calculation was $1.21 a pound, while the market price was $3.23 a pound. The profits $6 billion for 2007 went into the rainy day fund, which is invested conservatively in government bonds or money market instruments denominated in dollars, euros and yen. This fund is now at$20 billion. What is remarkable for Velasco is the way this was executed. The price used was conservative, the political pressures from unions and students and other groups was resisted effectively, and the whole exercize was carried out to successful conclusion even as popular support for the government dropped. When the crisi hit in December 2007 copper prices plummeted. Velasco announced a stimulus package, getting the $4 billion stimulus package through both Houses of Congress in January 2009. Chile expects only adrop of 0.5% in GDP in 2009 year over year. $500 million was given to stae owned bank BancoEstado, which reduced consumer lending rates by half. The package offers subsidies for businesses to hire younger workers, $700 million for large infrastructure program designed to create 60,000 jobs in road paving, airport upgrades and housing construction. And 1.7 million families, the poorest 40% of the population received cash stipends from the government equivalent to $70, with another stipend due in August....

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The best that can be said about all the efforts to stabilize the housing markets is that they help in the context of the credit crisis that hit the economy hard with the Bear Stearns crisis and help to provide an orderly retreat for housing prices and ways to soften the blow to homeowners and lenders caught up in the wave of foreclosures. But housing prices themselves have not declined anywhere near what one would expect. In fact BW, p17, April 7, 2008 shws percentage changes for existing homes from Feb 2007 to Feb 2008 with data from the National Association of Realtors. And they are surprising when you consider sales for the northeast down 26% and prices up slightly 0.4%. Elsewhere the sales are down 29% in the Western states for a 13% price decline, sales down 20% for a 7% price decline in the Midwestern states, and sales are down 22% for a 9% decline in the Southern states. Jobless rates are 3.9% in Austin, Texas and Birmingham, Alabama and only Detroit, St Louis and Cleveland have jobless rates above 6%. What this suggests is that the unemployment situation has not seen the brunt of this credit tightening and drop in capital investment. As house prices have not declined much declines over 10% mostly in the western states and places like Detroit but not in the northeast and across the south, and unemployment still low across many regional communities, consumption spending has not seen the brunt of this credit tightening. Once tightened credit conditions hit payrolls as companies cut their workforce and unemployment moves up then expect to see greater housing price declines as more houses go into foreclosures, and then expect consumption spending to feel the impact which would reduce sales and further trim payrolls as companies run their factories at less and less production capacity. This sequence would continue and bring the economic crisis to more and more parts of the country in a manner that we have hardly see upto this point. What we have seen is the unfolding of a collapse of mortgage securities firms and of mortgage securites insurance providers like ACA, and with it the huge writedowns about $150 billion taken by the investment houses and the banks. And this has happened as a wave of foreclosures took place in 2006. And the collapse of Bear Stearns with the effects felt in global stock markets. In the communities themselves in the areas of consumption spending and in jobs the conditions will only now begin to be felt and the real impact not felt till the end of 2008 and into 2009 with the Fed action to shore up confidence adding several months in slowing the process. See the link to BW, Bernanke the Reluctant Revolutionary, where the BW estimate is that Americans took on about $3 trillion in additional debt between 2000 and 2006 from what they would have taken if they had followed the trajectory of spending patterns that had prevailed upto that point, with their recent free spending ways. It would take abot 3 to 4 years conservatively for Americans to work down all that debt. Another way of saying this is that consumption spending is going to take a big hit and with it sales of companies and consequently higher unemployment and more part time labor force with less benefits, which would tend to depress consumption even more. The winds of housing, credit, consumption and unemployment would all hit the economy in about 12 months time. Credit will further tighten as BW estimates about $130 billion of additional writedowns still expected....

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The Liberal Party led by Justin Trudeau wins an absolute majority in Canada's parliament with 184 seats, defeating the Conservatives. The NDP gets 20% of the vote but only 44 seats.

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Italy's borrowing costs increased by one percentage point one week after the July 22, 2011 eurozone debt deal for Greece. The Italian Treasury sold 2.7 billon euros of 10 year bonds with a yield of 5.77%. The yield in late June for a similiar bond issue was 4.94%. Yields on Spain's 10 year bonds increased to 6%. German bonds are getting investors with a 10 year bond yield that has decreased to 2.62%, which means the gap between the German bonds and the bonds of southern European countries is widening.

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World Bank chief Zoellick sees advantages for China to remake its industrial structure and its society especially boosting local wages and increasing the purchasing power of ordinary Chinese through a strengthening of the yuan.

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Over 50% of respondents in the 2012 Gallup poll view Japan as the U.S.'s most important partner in Asia, compared to 39% for China. The shift in how Americans view China is pronounced in the last 3 years. In 2010 the two countries were tied 44%-44%. In 2011 China was 39% to Japan's 31%. In 2011 India, S. Korea and Australia were added to the poll as partners. Among "opinion leaders" such as business executives, government officials, academics and journalists, China gets 54% to Japan's 40%. The poll is conducted by Gallup for the Ministry of Foreign Affairs of Japan since the 1960's. The analysis shows that respondents picked China for economic reasons not for political reasons. A survey of the general population shows 84% view Japan as a dependable ally, up 2% froom 2011, with similiar trend for opinion leaders.

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Sales of new vehicles are in even steeper decline in Japan than in Germany. Germany saw a boost with reunification with East Germany. Eastern Europe is next door for sales and manufacturing. Sales declined 7.6% in 2007 over 2006 to reach 3.406 million vehicles, the lowest level since 1972. With 9 new models Toyota's sales declined by 6% in 2007. Something is happening in the developed country markets that shows the markets there are declining relative to the new markets in Asia and other emerging markets. How automakers fare in the future and which survive and grow will depend on how they prepare and execute strategies for these markets focussing on new design, efficient manufacturing and new technologies These markets will bring a different set of customers looking for improvements.

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This report in the WSJ points out that president Trump's much hyped infrastructure plan is not the $1.5 trillion federal spending plan as reported, but more in the range of $200 billion over a decade. This means fixing the crumbling infrastructure in transport, energy and water systems remains uncertain under the Trump administration, and will leave this problem to a future administration to tackle. Jakab cites the basket of 10 infrastructure stocks that lag behind the broader market in Feb. 2018. Further evidence cited is the ratio of four to one of nonfederal money to federal money under the Trump infrastructure plan, and that much of the nonfederal  money has to come from state and local governments than private entities.  Additional problem is that with the tax cut leading to a growing federal budget deficit, rising bond yields would make borrowing more costly for state and local governments.  About $100 billion will be needed for the Highway Trust Fund over the next decade to keep it solvent. Jakab of the WSJ sees overall spending stagnant, with the $100 billion Trump Incentives program for infrastructure offset by cuts elsewhere. Bottom line the revenue side is absent making this more hype than substance for much needed infrastructure spending, that is once again being postponed in America. ...

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Britain's FSA takes the initiative to put in new liquidity rules to prevent afuture banking crisis. It puts pressure on financial services firms to buy 110 billion pounds of government bonds that would remain liquid in a financial crisis. The rules would be borught in over several stages over the next few years. A week earlier the British government met with executives of the 5 largest banks to agree to install limits to bonuses laid out at the G-20 Summit. THe British are the first to take these steps.

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The IMF predicts UK budget deficit at 13.2% of GDP in 2010. And that public debt could hit 98% of GDP by 2014. Ctigroup expects that inflation will be 3.4% in 2010 and the expectation is that the Bank of England will raise interest rates before the ECB or the Federal Reserve. The large deficits and debt are affecting the value of the pound which is in steady decline.

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German plan takes shape Saturday as Finance Ministers of the 14 eurozone countries meet in Paris after the G7 meeting in Washington. It will include capital injection into banks in exchange for equity stakes, but further details are being worked out including the size of the plan.

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Experts say China's official GDP figures are unreliable and cannot be verified. Transparency is sorely lacking. The methodology, inflation assumptions and other basis for the calculations are not presented, so that many of the numbers cannot be reproduced. The official figure for 1st quarter GDP growth is 7%, from China's Bureau of National Statistics. GDP growth estimates developed by Capital Economics show 4.9% growth, by Citi 4.6%, by the China Center of the Conference Board 4%. Since 2012 the Capital Economics estimates are just above 5%, and the Conference Board estimates about 4%, showing that the growth rate has slowed markedly since 2012. As Communist party chief of Liaoning province, the current prime minister showed serious doubts about the GDP numbers and preferred to rely on figures for rail cargo, electricity consumption, bank loans.

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Krugman says China's inflation is raising labor costs in China, and in this way gradually reducing the undervaluation of the yuan vs the dollar. But he cautions this would take a long time, 4-5 years. The U.S. faces the costs of high unemployment close to 10% today, and this requires serious efforts now to reduce the undervaluation. It alone will not solve America's problems. It is one of a number of actions that need to be taken and not put off again.