Category Archives: Europe

Fear of Fracking: The Problem with the Precautionary Principle

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An amazing thing has happened over the last five years.   Against all expectations, American emissions of carbon dioxide into the atmosphere, since peaking in 2007, have fallen by 12%, back to 1995 levels.  (As of 2012. US Energy Information Agency).   How can this be?   The United States did not ratify the Kyoto Protocol to cut emissions of greenhouse gases below 1997 levels by 2012, as Europe did.  

Was the achievement a side-effect of reduced economic activity?   It is true that the US economy peaked in late 2007, the same time as emissions.   But the US recession ended in June 2009 and GDP growth since then, though inadequate, has been substantially higher than Europe’s.  Yet US emissions continued to fall, while EU emissions began to rise again after 2009 (EU).  Something else is going on.  read more

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Should Bond Benchmarks Shift from Traditional to GDP-Weighted Indices?

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Some prominent institutional bond investors are shifting their focus away from traditional benchmark indices that weight countries’ debt issues by market capitalization, toward GDP-weighted indices.   PIMCO (Pacific Investment Management Company, LLC, the world’s largest fixed-income investment firm) and the Government Pension Fund of Norway (one of the world’s largest Sovereign Wealth Funds), have both recently made moves in this direction.  

There is a danger that some investors will lose sight of the purpose of a benchmark index.   The benchmark exists to represent the views of the median investor dollar.  For many investors, going with the benchmark is a good guideline – especially those who recognize themselves to be relatively unsophisticated and also those who think they are sophisticated but really aren’t.   This is the implication of the Efficient Markets Hypothesis (EMH), for example.   read more

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Can the Euro’s Fiscal Compact Cut Deficit Bias?

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     Europe’s fiscal compact went into effect January 1, as a result of its ratification December 21 by the 12th country, Finland, a year after German Chancellor Angela Merkel prodded eurozone leaders into agreement.   The compact (technically called the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) requires  member countries to introduce laws limiting their structural government budget deficits to less than ½ % of GDP.  A limit on the “structural deficit” means that a country can run a deficit above the limit to the extent — and only to the extent — that the gap is cyclical, i.e., that its economy is operating below potential due to temporary negative shocks.   In other words, the target is cyclically adjusted.  The budget balance rule must be adopted in each country, preferably in their national constitutions, by the end of 2013. read more

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