Galileo Galilei and the €-crisis

Just a few days it ago was the 450th anniversary of the birth of Galileo Galilei and this suggested me a comparison with the €-crisis.

Legend says that when Galileo Galilei exited, on the 22nd of June of 1633, from Santa Maria sopra Minerva, in Rome, where the Catholic church held a process against him, he pronounced the famous sentence: “And yet, it moves”, referring to the fact that, contrary to the view of the then majority of people, it was the earth that moves around the sun and not the opposite.  Since that day, the case of Galileo Galilei has become the archetypal case to demonstrate that the majority, even when supported by a strong institution such as the catholic church, is not always necessarily right.

Trust in Europe paid handsomely!

Over the first few days of January, the prices of sovereign bonds of peripheral €-area countries have recorded large increases. This has been matched by positive developments in market access and issuance. In some market commentaries these developments were noted with something of a surprised tone (for having made wrong forecasts about the demise of the €?). Such surprise is indeed surprising, since the posting of large gains by sovereign peripheral bonds is a persistent development that has brought large capital gains to those investors, included the ECB, which bought peripheral bonds when their prices were stressed.[1]

Should German workers be paid more? Or, Do we have an omitted variable bias?

A recurrent problem in regression analysis is the omitted variable bias: if you estimate a regression and you do not include on the right side a variable that belongs to the model and is correlated with some included variables, the OLS estimates will be biased. The gist of this post is whether we have something of an analogous problem in addressing the current macroeconomic problems in the €-area, namely by not considering the possible influence of income distribution.  

A China-USA monetary Union?

Much has been made, while discussing the euro-area crisis, of the fact that countries using the euro have lost the ability to correct their imbalances through changes in nominal exchange rates. So, taking the most extreme example, Greece could not devalue its exchange rate towards Germany to deal with its imbalances. The statement is of course correct, but needs three qualifications.