Sunday, November 13, 2011

Will the economists save Greece and Italy (and Europe)?

I was personally quite heartened to see seasoned economists put in charge of both Greece and Italy. Granted that is no guaranteed silver bullet solution, but at least it is a solid step in the right direction. Both countries, and Europe in general, still have lot of difficult decisions to make about their fiscal policies (and the EU's united monetary policy), but the willingness to give sane economic policies a shot is a very welcome development.
Sure, euro critics/skeptics will continue to remind us that they consider this a mere band-aid that will buy the EU a few months or maybe even just a few weeks or even days and that the euro is doomed, but that's what we should expect them to say, no matter what positive developments occur.
Now, whether the markets continue to respond positively as they did on Thursday remains an open question. It could easily go either way. Thursday's pop could already have discounted any amount of positive news, or maybe not. After the big decline on Wednesday, the partial recovery on Thursday may simply have been a classic "dead-cat bounce" and simply have been due to short-sellers locking in a profit ahead of a long weekend when anything can (and did) happen. Another risk is that a lot of professional speculators may still have a "sell into any rally" bias which weakens the market as it moves higher. That means that even if stock futures are higher, any initial pop at the open could be eroded as the day progresses. But if there is any true underlying bullish sentiment, the market could (maybe) move up through any superficial cynicism.
I don't mean to be cynical about the market outlook for the coming week, but simply to highlight the downside risks despite any superficial good news. There is still plenty of room for excessive volatility.
But getting back to the headline question, I do actually expect that the economists will save Greece and Italy, and Europe as well. Maybe not in a single week but over time.


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