The Ugly Spectre of EU Self-interest……
A recent survey has indicated that most companies based in the eurozone believe a British decision to leave the European Union would hurt the region as it struggles with a sluggish economy and a migration crisis.
79% of firms based in the eurozone said a Brexit would be bad for the area, with less than 4% saying it would have a positive impact, according to the report from accountants Grant Thornton.
“What’s abundantly clear from our research is that European business leaders overwhelmingly view a Brexit as a negative development for the EU,” Francesca Lagerberg, a senior tax partner at Grant Thornton, said.
She said business confidence was strong considering the various potential threats the region faced from low growth, high unemployment, migration and a potential Brexit.
“Any one of these flaring up over the next few months could see that optimism wobble if the economic shocks undermine business leaders’ ability to plan and invest,” she added.
The survey was based on interviews with more than 2,500 senior executives conducted in January and February.
The result is in keeping with the view of senior business leaders in Britain who are largely in favour of Britain staying in the EU. Most economists expect an exit would deal a blow to Britain’s economy in both the short- and longer-term.
The Grant Thornton report showed 68 percent of British-based firms believe Brexit would have a negative impact on Europe.
Parts of the eurozone have struggled with a debt crisis in recent years which, on the heels of the global financial crisis, has stifled growth and left many unemployed. Unfortunately, quite a high percentage of Europe’s unemployed appear to be headed for the UK.
In addition, many recent migrants to the EU stated their first choice of refuge as the UK. Many of those will be arriving here in a few years….when Germany and other states hand them EU citizenship.
The region as a whole remains at odds over how to contain the continuing flow of migrants to the region.
It is regrettable that neither the UK political leadership, nor the Brussels Commissars have any idea about Managing Change on a macro scale because the sociological change within the #EU is probably they biggest issue that will need to be addressed within the next five to ten years.
Both sides are doing their best to frighten the electorate into voting for their point of view. There has also been an attempt at what can only be described as The Blackmail of a Nation – especially by the IN camp and the leadership’s foreign banking and political friends..
The fact is that BOTH sides have valid arguments but instead of helping the average UK citizen to make a reasonable choice whilst at the same time preparing for change, BOTH sides prefer to persuade through the medium of fantasy rhetoric, insinuation and slur.
Meanwhile, mainland Europe, surrounded by the Ring of Chaos, which encompasses Ukraine, then east to Turkey and south to North Africa, sits and waits for more handouts and UK opportunities for its unemployed.
Euro zone corporate lending growth slows to near zero in September
Growth in lending to eurozone corporations slowed almost to a halt in September while a broader measure of money circulating in the euro zone was unchanged, the European Central Bank said on Tuesday.
Lending growth to non-financial corporations slowed to an annualised 0.1 percent in September from 0.4 percent a month before, while lending growth to households picked up to 1.1 percent in September from 1.0 percent in August.
Sparse lending to companies has dogged the struggling euro zone economy although the picture improved slightly over the summer months before September’s dip.
The ECB last week raised the prospect of providing more monetary stimulus to the euro zone economy, possibly as soon as December, to boost inflation and growth.
The M3 measure of money circulating in the euro zone, which is often an early indicator of future economic activity, grew by 4.9 percent in September, unchanged from August and missing forecasts for 5.0 percent. (Reuters)
EU urges Greece to ‘stop wasting time’ on reform
(Reuters) – The head of euro zone finance ministers has urged Greece to “stop wasting time” and buckle down to serious talks and implementation of a reform programme to secure urgently needed fresh funds from its international creditors.
“Little has been done since the last Eurogroup (meeting two weeks ago) in terms of talks, in terms of implementation,” Eurogroup chairman Jeroen Dijsselbloem said on arrival for a meeting of ministers of the 19-nation currency bloc.
“We have to stop wasting time and really start talks seriously,” he said, adding that euro zone partners stood ready to support Greece if it continued on the economic reform path.
Euro zone officials were not persuaded by a letter sent by outspoken Greek Finance Minister Yanis Varoufakis on Friday outlining seven planned measures. They said it was only a starting point and no basis for releasing frozen bailout money.
Varoufakis irritated EU partners in a weekend newspaper interview by dangling the prospect of a referendum.
Dijsselbloem said earlier the steps outlined were “far from complete”, adding that it would be very difficult to complete the reform programme during the four-month extension of Greece’s European Union/International Monetary Fund bailout that runs until end June.
Shut out of capital markets and with international loans frozen against a background of falling tax revenues, Greece could run out of cash later this month.
Hardline German Finance Minister Wolfgang Schaeuble told reporters Athens must start implementing its obligations and refrain from unilateral changes to its commitments.
Varoufakis, who wants a negotiated restructuring of Greece’s debt to official lenders, was quoted by Italy‘s Corriere della Sera on Sunday as saying the leftist-led government could call a referendum or early elections if European partners rejected its debt and growth plans.
The finance ministry later clarified that the Marxist former academic had been replying to a hypothetical question and that any referendum would “obviously regard the content of reforms and fiscal policy” and not whether to stay in the euro.
French Finance Minister Michel Sapin said on leaving Paris for the meeting that while he was not worried about a risk of Greece defaulting, “things are serious”.
A source at the European Central Bank said the cash position of Greek banks, on a drip-feed of emergency funding, appeared to be stabilising after heavy deposit outflows from December to late February. The ECB would not allow Greece to increase its issuance of short-term treasury bills because it could not allow monetary financing of the government, the source said.
A senior politician in German Chancellor Angela Merkel’s conservative bloc said Greece would be better off outside the 19-nation euro zone, suggesting that Schaeuble privately agreed.
“By leaving the euro zone, as Finance Minister Schaeuble has suggested, the country could make itself competitive again from a currency perspective with a new drachma,” former transport minister Peter Ramsauer, a member of the Bavarian Christian Social Union (CSU), wrote in Bild.
Merkel and Schaeuble have both said publicly they want to keep Greece in the currency area. But in a sign that German sentiment may be shifting, Ramsauer said a temporary “Grexit” would be a “great opportunity” for the country to boost its economy and administration “making it fit to return to the euro area from a position of strength”.
GREEKS WANT TO STAY
Seeking European support for his government’s efforts to alleviate deep hardship caused by austerity, leftist Greek Prime Minister Alexis Tsipras will meet European Commission President Jean-Claude Juncker on Friday.
A Greek official said they would discuss how Greece can use EU funds to tackle what he called the humanitarian crisis.
Juncker has been trying to mediate between the new Athens government and its EU creditors, notably Germany, but his efforts have irritated Berlin, the euro zone’s main paymaster, which is keen to avoid sending mixed messages to Greece.
German Deputy Finance Minister Steffen Kampeter said in a radio interview he did not expect substantial decisions on Greece at Monday’s Eurogroup meeting because ministers were waiting for more financial details on the reform plans.
He criticised Varoufakis’ talk of a referendum or returning to elections, saying it would only delay what needed to be done.
An opinion poll on Monday showed a large majority of Greeks want Athens to reach a compromise deal with lenders to avoid having to leave the euro.
Some 69.6 percent of Greeks say the new leftist-led government should look for an “honourable compromise” to resolve the crisis, according to a Marc survey for the newspaper Efimerida Ton Syntakton. Only 27.4 percent of those questioned wanted Greece to refuse any compromise, even if that meant having to leave the euro zone.
Tsipras won power in January promising to renegotiate the bailout package and end austerity, but was forced to accept a four-month conditional extension to avert bankruptcy.
(JAN STRUPCZEWSKI AND INGRID MELANDER with Additional reporting by Robin Emmott, Tom Koerkemeier, Renee Maltezou and Robert-Jan Bartunek in Brussels, Toby Sterling in Amsterdam, Stephen Brown and Noah Barkin in Berlin, Steven Scherer in Rome and Angeliki Koutantou in Athens; Writing by Paul Taylor Editing by Jeremy Gaunt.)
In the last fortnight, there has been an appreciable increase in articles and analysis of the Eurozone economy. Couple that to the ECB becoming involved in a semantic argument as to what does and what doesn’t constitute Quantitative Easing, one can almost sense nascent rumblings of the economic Richter Scale. Hopefully, it’s a false alarm and the seismograph stops twitching soon…..(Eurozone UNEMPLOYMENT steady at 11.5%)
Euro Christmas Wishes
My best wishes for an environmentally friendly, socially responsible, low stress, non-addictive, gender non-specific celebration of the Winter Solstice holiday, practiced with the most enjoyable traditions of religious persuasion or secular practices of your choice with respect for the religious/secular persuasions and/or traditions of others, or their choice not to practice religious or secular traditions at all and a fiscally successful, personally fulfilling recognition of the onset of the generally accepted Gregorian calendar year 2014. This of course does not imply any disrespect to other calendars which, in certain cases, are accepted to predate the generally accepted measurement method and are not considered to be any less valid.
If you live within the Eurozone, we shall of course meet in one month’s time to discuss the above wishes and possibly renegotiate them as they are always subject to clarification or withdrawal. Moreover they can be withdrawn should one member not be in full agreement or should they personally not perform as expected within the usual application of good tidings, the above-mentioned fiscal success and ongoing cooperation from the Holy banking system.
The Wisher also accepts without reservation that especially within the political sphere, there may be, because of election, death or resignation, changes of Wishee. In such cases, the above is fully transferable in perpetuity, to subsequent Wishees but only subject to ongoing membership and cooperation.
Immigrants – we NEED them!
According to the Office for Budget Responsibility (OBR), the UK needs SEVEN MILLION migrants over the next 50 years to help keep down national debt levels.
The OBR warns that the UK’s ageing population was squeezing public finances and said there was “clear evidence” that migrants, who tend to be working age, have a “positive effect on the public sector’s debt dynamics”.
The OBR has also warned that increasing pensioner numbers and a strained healthcare system means an extra £19 BILLION of spending cuts or tax increases are needed to combat an “unsustainable” pressure on the nation’s public finances.
It IS possible that while we continue to live too long and not produce enough, those much maligned immigrants could be the solution to our economic problems.
That should please UKIP!
HERE’S the Executive Summary of the OBR’s Fiscal Sustainability Report.
The risks of a Greek Collapse
While Greece seems to be engrossed in its “success story,” the country’s partners appear more concerned with its “stability story,” in other words whether or not the country will stay on an even keel. There are several reasons why this is what they are most interested in.
Portugal is on the brink of a major political crisis; Italy seems unable to find solutions to its problems, and an out-of-control collapse in Greece would complicated this already tenuous situation. There are also broader geopolitical reasons. The Americans and the Europeans are becoming quite frightened by the chaos in the Middle East, especially at a time when Israel is particularly isolated. Their stance toward Turkey has also changed as they grow more and more concerned by the instability there and Prime Minister Recep Tayyip Erdogan’s arrogant behavior. A Greek “accident” is seen as very dangerous in such a climate. Of course there are those who expect Greece to fail, but argue that even if does, it will find a way to get back on its feet. The majority of international observers and officials, however, do not take the possibility of a Greek collapse so lightly.
So what is the problem? The Greek political system and public administration are nowhere near achieving reform targets, even when these are lowered. The international community is aware that it can exert pressure on Athens until the end of the year when Greece hobbles to a primary surplus. But, as that time approaches and it feels that it only has a few more months to exert influence, the more pressure it will apply. And this is where the danger lies: Greece’s creditors may cause the crash by applying too much pressure.
In the middle of it all are the markets, either in the form of large funds willing to invest in the new low-cost Greece or in the form of lenders who would like to see the Greek bond market operate again.
Prime Minister Antonis Samaras believes that maintaining calm is the top priority. He hopes that an excellent summer in terms of tourism, public works projects due to begin imminently, the TAP pipeline and some good investment news will create a positive climate come the fall.
At the same time he is equally aware that the people are about to be hit with a cascade of taxes and that if these are not collected the fiscal gap will be hard to manage. No one can predict whether there will be a sense of positive shock or an even greater feeling of misery in the fall.
All of this, meanwhile, is taking place ahead of an anticipated clash between Berlin, the International Monetary Fund and Brussels right after the German elections over whether Greece should receive a further debt writedown and a different policy mix.
©Alexis Papachelas : Ekathimerini.com
Equity Euphoria. Why?
The Markets are in the wrong place. For about two years, I have been suggesting that market sentiment bears absolutely no relation to what is really happening in the real economy.
Yesterday’s Markit manufacturing figures clearly show that Europe’s manufacturing sector is in a mess. At 12% , Eurozone unemployment is at an all time high with further austerity measures to follow.
In spite of all that and with increasing hand-wringing from economists, the markets are buoyant at near-record and record highs, the euro is showing only modest losses and for Bond investors it’s business as usual!
What is going on?
One thing that we can see from the manufacturing figures is that there is quite a marked divergence between Germany and the rest. Although manufacturing activity is shrinking to 5-6 month lows, the so-called “financial fragmentation” across the Eurozone has become increasingly obvious. The Eurozone does NOT have a uniform monetary policy which means that Italian and Spanish banks, for instance, pay much higher funding costs than Germany. That means that certain manufacturers are paying much more than German ones for their cash. On the face of it, that seems to be anti-competitive – but that unfortunately is just one of the many anomalies of the Eurozone – in fact of the entire European Union.
“The poorer you are, the more you pay for your heating fuel.”
This is the backdrop to a largely blinkered , almost “autistic” equities market where we appear to have reached the stage of self-amplification where , because of the abysmally low bank rates, EQUITIES is the only game in town. Self-amplifying? Yes – as more and more investors pile into stocks – mainly because they don’t want to lose out on a rally which they themselves are now fuelling.
The only cautionary note should be for investors who are only just coming into the market to ask themselves “What is the real likelihood of me making a profit?”
When will it stop? History shows us that rallies such as the current one can stop pretty suddenly!
There will come a point at which traders, especially those with short positions will decide “Enough!” – in spite of the fact that currently, there is no obvious level at which to climb out and possibly take a loss.
Once one jumps, the rest are sure to follow.
We could go down so fast that you’ll get a nose bleed!
European stock markets slumped and the euro dropped under $1.28 for the first time in four months Wednesday owing to concerns over fallout from the Cyprus bailout and a disappointing bond sale in Italy, analysts said.
London’s FTSE 100 (FTSE: ^FTSE – news) index of leading companies fell 0.69 percent to stand at 6,355.10 points in afternoon deals, as Frankfurt’s DAX 30 (Xetra: ^GDAXI – news) shed 1.44 percent to 7,766.11 points and in Paris the CAC 40 (Paris: ^FCHI – news) slumped 1.46 percent to 3,693.95 points.
Madrid tumbled 1.90 percent and Milan lost 1.59 percent. The Athens stock exchange, a low volume market, plunged 6.83 percent.
Italian borrowing rates fell slightly in a 10-year debt auction on Wednesday, but borrowing rates were higher for five-year debt and demand was weak amid concerns of political deadlock in the recession-hit country following inconclusive elections.
Stock indices were falling “as the ongoing issues in Cyprus continue to weigh on sentiment,” said Alpari trading group analyst Craig Erlam.
Gold prices slipped to $1,591 an ounce from $1,598 Tuesday on the London Bullion Market.
Troubled eurozone nation Cyprus on Wednesday scrambled to finalise capital controls to avert a run on banks, a day before they are due to reopen after a nearly two-week lockdown while the island secured a huge bailout.
Meanwhile there are fears that the controversial terms of the bailout could be mirrored in any future financial rescues of indebted eurozone members.
Nicosia early Monday agreed a last-minute deal with its international lenders that will see it receive a $13 billion rescue package to help pay its bills.
And while the decision to tax bank savings above 100,000 euros raised fears of a similar move in future rescues — reinforced by comments from the head of the Eurogroup of finance ministers — officials have since insisted that Cyprus is a special case.
“The negative sentiment is also enhanced by rumours that this format will be adopted as a template for any further bailout schemes,” said Currencies Direct trader Amir Khan.
“Although top officials deny any such move in the future, markets are still wary that this format will leave the banks with fewer deposits and in turn will allow them to lend less, shrinking growth.”
Elsewhere on Wednesday, in indebted eurozone member Italy there was weak demand at an auction of 5- and 10-year bonds, with bid-to-cover ratios of 1.2 and 1.3.
Ratios of above 2.0, where submitted bids are double those accepted, are considered strong.
The Italian treasury took in 3.91 billion euros at a rate of 3.65 percent, a five-month high.
However the yield on 10-year bonds dipped 4.66 percent, compared with 4.83 percent at the last similar auction on February 27, with three billion euros raised.
The European Commission meanwhile said its key business and consumer confidence index for the eurozone fell 1.1 points in March to 90 points, reflecting a downturn in the manufacturing and service sectors while consumer sentiment was steady overall.
Amid the gloom in Europe, US stocks moved lower Wednesday in early trading.
The Dow Jones Industrial Average gave up 0.33 percent, the broad-based S&P 500 sank 0.36 percent, while the tech-rich Nasdaq Composite Index dropped 0.26 percent.
The retreat followed strong gains Tuesday that resulted in a record high for the Dow and a near-all-time high to the S&P 500.
“Follow-through has been lacking this morning for reasons that are both convenient and clear,” Patrick O’Hare of Briefing.com wrote. “Headlines out of Europe are largely to blame.”
— Dow Jones Newswires contributed to this report —
For 24 hours, the world has been focused on the Cypriot small savers who are likely to lose a slice of their cash to the god Euro. However, there are others who may lose a lot more.
According to Moody’s, the Cyprus debt crisis has endangered many Russian banks who work with companies owned by Russian oligarchs who are registered in Cyprus. They stand to lose BILLIONS if the Cypriot government defaults.
HERE’S what Spiegel said about all this last November.
As usual, Eurozone politicians have allowed a drama to develop into a potential tragedy.
The Nature of Modern Democracy
The concept of political power crystalised as a left/right divide is in its death throws. UK Political Parties constantly confirm this by this by the politicians’ constant playground squabbles over the political “centre- ground”. Beppe Grillo’s recent success in the Italian elections also suggests that perhaps electors are looking for something concerned more with themselves rather than belonging to one of the “ancient” political herds.
In the UK, the search for a distinction between the two main parties, has returned us to the Class War which we all thought had burned itself out in Margaret Thatcher’s and John Major’s day. It certainly wasn’t apparent during Tony Blair’s tenure at No 10 Downing Street.
In the current “model”, it is usual for two major political herds to constantly battle whilst the smaller factions watch with puny impotence.
So where do the “little ones” glean their support? In the UK, smaller parties such as the Liberal Democrats can do no more than feed off the scraps of those at either end of the rapidly- shrinking political spectrum.
The Left- Right nonsense continues to have ‘legs’ primarily as a result of the efforts of the media ‘opinion-formers’ . Their prejudices and fixed views ensure that the Class War continues to simmer.
Instead of a contrast between the Working Classes and the Upper Classes, the modern argument is between the ‘haves’ and the ‘have nots’ – which nowadays is a subtly different distinction. Nowadays you cannot really spot a ‘have not’ because they may be wearing the uniform and displaying the behaviour of a ‘have’.
We need to find a new set of values……and quickly!
Let’s forget flat-caps, whippets, bowler hats and black rolled umbrellas but at the same time, let’s accept that there are several components which we would ALL like to be included in our new thinking.
Our current political ‘values’ have their roots in past tradition.
We need political values to be in accordance with the one thing which tends to be the MAJOR STUMBLING BLOCK in any political system.
HUMAN NATURE ……married to our basic instinct – not of ‘Community’ but of selfishness. We do it for OURSELVES and NOT our neighbours. That’s why Communism failed.
These are three components which are non- negotiable:
1. FREEDOM 2.SOCIAL JUSTICE 3. EGALITARIANISM.
These basic components do NOT need to be overlaid by a PARTY POLITICAL system because these are ABSOLUTES.
In order to achieve the three components above we need to include an element of both Personal and National WEALTH CREATION.
We therefore also need to promote the dynamic of the BUSINESS ETHOS.
Unfortunately, the word ‘BUSINESS’ has become a bit of an emotive topic BECAUSE of the old (present) LEFT- RIGHT Political system and Feudal thinking.
Business is all about trade, vocation, craft, employment, industry, enterprise, commerce, bank transaction, negotiation, merchandising, making and most important of all – work and employment.
Unfortunately, because of the L-R divide, business has come to mean bosses, workers, management, greed, oppression and profit.
We need to generate a pretty major adjustment in perception and from that, a new ideology.
Capitalism, Communism, Socialism, Democracy etc are not concepts which have been around for ever. However, they do appear to be running out of steam.
Currently we assume that these labels are the only ones which work or have worked. Unfortunately, human experience tells us otherwise.
Imagine existing Political Parties in say 100 years time. They will still be confronting each other in that theatrical way we have come to love. Left and Right hacks will still be stoking the fires of discontent because that’s their job. The Left- wingers will continue to highlight the Politics of envy whilst the Right will continue to be disrespectful to everyone.
Here in the UK, we have a change of administration every 5 years but all that happens is that The Elected Ones merely continue the ‘blame game’ and the playground bickering.
There are visionless “little” people who ALL suffer from politically-induced Tunnel-Myopia. In the grand scheme of things, they are insignificant.
Meanwhile, whilst the puny jousts and rhetoric continue, the interests of the ordinary voter are sacrificed on the twin altars of blind political and corporate interest.
As the politicians become more and more irrelevant to the irreversible arrow of ‘progress’, democracy is being diminished daily.
Unfortunately the politicians’ self- serving vanity and an over- developed sense of belonging (to a Party) continues to cloud their already flaky judgement.
New thinking is needed. It needs a new METHODOLOGY – one based on expertise plus knowledge and NOT in the combative ‘here today- gone tomorrow’ nonsense of partisan politics.
Rhetoric must give way to implementation of scientifically and rationally-derived policies which are untainted by political dogma.
It is most definitely NOT about economics. Economics, as the main divider of political thinking does not, for instance, have anything to say about human nature or morality or human values – which are the factors which destroy every Economic Theory.
The mathematical formulae and conjectures of the economists are no longer enough.
We do need Capitalism. We need a form of Welfare Capitalism but we need it with a healthy dose of Sociology and Anthropology but with its roots embedded firmly in pragmatism rather than the economics-derived abstract thought and conjecture.
The New Thinking needs to start now- especially since five years ago, when capitalism was effectively destroyed by the Rentier Capitalism Kleptocracy of the United States – which is now becoming increasingly apparent in Europe. Spain is the last economy to fall to Rentier Capitalism.
What we considered to be a benign form of Capitalism has been infected by its malign cousin and currently no-one has a cure. The cause remains while politicians and bankers continue to attempt to cure some of the symptoms with what appears to be the wrong medicine in ever-increasing volumes. For example, the latest craze of Quantitative Earning.
Quack economic cures will soon have to give way to nothing less than major surgery, followed by a totally uncompromising cure.
An example of the “compromises” which highlight the schizophrenia of the current Party-based political and economic system is clearly demonstrated by the double-think of Thatcherism.
The Thatcher years are remembered for two apparently opposing concepts: The dismantling of many State controls running alongside increased State control.
Nationalised organisations were privatised, thus removing them from State control. State aid was removed from dying industries. Prices and incomes as well as Financial Services Regulation were no longer State controlled and many State organisations were encouraged (forced) to ‘contract out’ many of their functions to the Private Sector, (NHS, Education etc).
At the same time State control was tightened in other areas. Education and Local Government became more centrally controlled, as did the Police. State power was used to control the Unions and State power was used to prevent price- fixing in private industry and commerce.
This sort of Political Schizophrenia continues to this day and clearly demonstrates a lack of ideological coherence.
In fact, it also highlights the traditional view of the two main parties. The intellectual social dogmatism of Labour versus the Conservative avoidance of any real systematic political theory.
Hence the Conservatives’ preference of viewing themselves as the ‘party of common sense’- a phrase one often hears from its leadership.
‘Freedom’ is another often-quoted concept. But is it a REAL concept or maybe just empty rhetoric?
America is (some may argue) the MOST Capitalistic country in the world. It has awarded itself the sobriquet ‘The land of the free’. In fact, there is little understanding of the word.
People do NOT feel ‘free’ because they are told that they are free.
Therefore any new political theory need to examine questions of Social Ethics as well as peoples’ psychological needs.
TRUE democracy HAS to be DIRECT. Modern democracy has dissipated the individuals voice in favour of its citizens handing their voice to someone they may or may NOT have elected.
The Eurozone Crisis has clearly demonstrated that you can have too much Democracy – especially if it generates intransigence because Left and Right views plus upcoming Elections cloud economic judgment.
The changes we need are NOT economic – they need to be a root and branch rethink of the Nature of Democracy and what really underpins it.
ECONOMIC CHAOS ?
The piece below is over 2000 words long and I have just completed it for a client .
It is about the random nature of an economic system.
Have you ever wondered why ALL economic predictions are wrong? Have you noticed that in spite of a proven record of error, economists and politicians continue to bang their heads against the forecast-wall and refuse to do anything else but continue to predict outcomes which by now, they must realise will be incorrect?
They certainly use all the latest computer models which have been empirically derived and used for many years.
So, are there any incorrect assumptions about “fundamentals”?
Is the economic process Stochastic (a sequence of random variables)? Or is it Deterministic (when the output of a system is totally dependent on its initial state and subsequent inputs – and therefore, predictable)?
(Mind you, to add to the confusion, deterministic systems may occasionally produce random and therefore unpredictable results. )
Is economics a question of Stochasticity v Determinism?
Why do I ask the question? Because there appears to be a total absence the ‘stable equilibrium’ predicted by classical economists.
On the contrary, Market Economics behaves like a collection of dynamically unstable systems. The instability is attributed to external ‘shocks’ rather that any fault in the basic concept. There is what can only be described as ‘non lineality’.
One solution to this ‘non-lineality’ is CHAOS THEORY!
So far, no real evidence has been produced of ‘low – dimensional’ Chaos in economic processes but there are definitely discrepancies between the ‘expected’ according to classic economic models and the ‘observed’. Just look at any economic prediction within your memory. It was probably incorrect.
We still have a ‘mechanistic’ view of the world and economics as a ‘hangover’ from 18th century SCIENCE.
Scientific thinking is very simple: ‘Measure, predict and adjust until you no longer have any more surprises. Then keep measuring to confirm that what you measured in the first place can be replicated’.
Economics was conceived on that same principle . It was established as a ‘science’. That’s where the Determinism crept in.
It was at this time that man first considered the possibility of his own intellect being so unconstrained that he would eventually understand the ‘Universe and everything’ through the medium of scientific reasoning.
This principle was applied to all sorts of activities and thinking – including economics.
The so-called ‘Enlightenment Policy’ would help man in his pursuit of happiness. Especially in the sciences. Science was cool and now in the early 21st Century it is enjoying a bit of a revival.
Of all the subjects on offer, Physics became the admired Paragon for Enlightenment and so it continues.
The way Physics works is simple: Carefully describe an environment and you should be able to predict the outcomes of any experiment conducted within that environment.
Likewise in Economics: Know the initial environment and you should be able to predict outcomes based on subsequent inputs.
The belief stemming from that philosophy is that EVERYTHING is governed by ‘NATURAL LAWS’ which are a set of ‘cause-effect’ regularities. That means that everything can be predicted.
These same principles have been applied to Economics.
A simple scientific rule is that ‘The state of any system is a consequence of what it was in the preceding moment…..and so on.’
In the beginning, random occurrences had no place in such linear thinking. Everything was governed by Mathematics and Laws.
However, there is one major flaw in the way that we ‘do’ science: That is our ignorance of the CAUSES which generate phenomena and events.
For instance, we know the effects of gravity – which we can measure but we don’t really know the CAUSE.
However, in spite of our ignorance of the exact causes of events added to the imperfection of our analyses, we still cannot have 100% certainty about the vast majority of phenomena.
Economists also appear to have forgotten both the imperfection of analysis and their ignorance or (at best) of the exact CAUSES of events.
What is the solution? What is to be done about our comparative blindness?
Our ‘crutch’ is the science of probability. Chance.
Current economic thinking is a throwback. In economics, the world is still viewed as totally deterministic.
‘STOCHASTIC’ is non-existent – as is uncertainty because uncertainty is treated as ignorance or a failure to understand the deterministic rules of a very complex system.
Yet, with ALL our processing power, no-one has yet been able to establish those rules which should predict outcomes.
So, as Chaucer wondered in The Nonnes Priest Tale – Travelling from A to B: Freewill or Predestination?
Looking at the unpredictability of economic outcome, we move from linear to non-linear dynamics, from certainty to probability, from Economic Theory to Chaos Theory.
Theories of economics have been shaped by the assumption of ‘Rational Man’ who behaves in accordance with a known set of rules.
The evolution of economics into a science was ‘booted’ into becoming a science when it was ‘mathematicised’. Formulae arrived and suddenly, it became a bona fide branch of Applied Mathematics.
Many of the original people who translated economics into a mathematical form were physicists, engineers and mathematicians…… and it still shows. At that time, their view of the world was ‘linear’.
Does that work in economics? The short answer is ‘no’. That is why economists are struggling, interpreting and making excuses.
Marshall in his ‘PRICIPLES’ compared the study of economics to the study of tides. The number of variables affecting tides means it is impossible to create a consistent dynamic picture.
Even nowadays, there isn’t enough processing power to generate an accurate picture of such a dynamic system, especially as the number of variables affecting such a system is, for all intents and purposes – infinite.
Imagine random stones being thrown into the sea or small outcrops of rock or variations in the seabed. They all have an effect on the ‘shape’ and speed of the tide.
And so it is with an economic system: lots of rocks, stones and other variables.
It is not possible to formulate or predict a picture of such an infinitely dynamic system.
Currently, economic theory appears to predict that any shock to such a dynamic system will (obviously) have an effect on the system but that it will ultimately converge-to or seek either a new equilibrium or ‘tend’ towards its original equilibrium because, after all – that’s what ‘systems’ are supposed to do!
Economic Theory assumes a tendency towards stability and equilibrium with certain ‘oscillatory happenings’ on the way.
So we have a situation where economic thought was (and still is, in most cases) linear, deterministic and quasi-dynamic. That is to say, the ‘set-in-concrete’ notions of certainty, invariant economic laws and sameness……………..rather than approximation, probability and infinite variety.
For instance, the Bank of England predicts an inflation rate one year ahead, based more on hope than fact or perceived fact. But when such predictions are (always!) wrong, there is no revisiting of the thought process, merely another prediction with little or no basis in anything-in-particular.
Often, both ‘inputs’ and predicted outcomes are decided by committee and vote!
All predictions appear to be based on an assumption of an ultimate convergence of economic process to stability, via those periodic cycles which, although not understood are treated with a certain sense of fatalism.
Chancellors are so locked into predictions based on erroneous facts that they will even massage their outcomes in order to land somewhere near the expected landing point – purely in order to retain credibility not only for themselves but also for ‘the system’.
What cannot possibly be countenanced are the random fluctuations of what is most likely a permanently unstable economic system. We don’t do that sort of thing because it may suggest a lack of control!
Let’s have a look at non-linear Economic Dynamics.
Actual (REAL) economic results indicate little resonance with the symmetry and regularity suggested by a linear mechanistic dynamic system. (Something that moves predictably along a pre-determined path).
On the contrary, fluctuations and movements are totally unpredictable. That means that regular Deterministic Laws cannot apply.
If we look at an economic situation in say, the Eurozone at a particular point in time, we may try to predict an outcome in say, 10 years’ time.
However, a small variant or an incorrect assumption in our analysis of the initial economic situation will have an effect on the ultimate outcome. The earlier that variation occurs, the more devastating will the effect be.
For instance Greece’s hidden debt at the time of its accession to the Eurozone, undetected at the time, is having a huge effect on the Eurozone’s economic outcome.
Meanwhile, the economists, bankers and politicians crave and need the comfort of ‘stability’. They know that the further the Eurozone travels from the initial conditions at Greece’s entry into the Euro, the more anomalies“The Greek Effect” will generate. It’s a self-amplifying issue.
Consequently, the bulk of the work of Eurozone politicians is now concentrated on creating a series of ‘faux’ stabilities.
It is the fallout from Stochasticity which is causing fear with Determinism being their comfort and shelter.
It was only 60 years-or-so ago that stochastic considerations were appended to classical economic theory.
But the so-called New Classical Macroeconomics was no more than a compromise. “Let’s introduce a Factor X because we can no longer ignore it.”
Yet, the economists still needed their ‘models’ – because deep down they were still the mathematicians and physicists of old.
A formula was devised (SLUTSKY) which took the linear dynamic business cycle model and added random (not necessarily economic) terms which attempted to explain the real ‘actualités’!
At last, an attempt had been made to explain ‘exogenous shocks’ to an economic system by the introduction of nothing more than random error terms.
But what was REALLY missing in classical economic reasoning was the concept of NON-LINEARITY.
So, the battle was between a Linear Model with a Stochastic Term (a fiddle factor) versus a pure Non-Linear Model.
Obviously by now – 200 years from the beginning, we have to assume that the evidence for linearity in economics has been overestimated!
So, if we agree that we do need a new non-linear model of econonomics, what are we searching for? What are the other ingredients and how do we ‘work them in’?
Do we want a synthesis of economics, psychology, politics and sociology? Or do we simply stick to the notion of determinism?
Human evolution is viewed as a random process (although the way it is often expressed makes it seem as if scientists view it an ‘inevitable linear’).
The evolution of an economic system is also pretty random, except that, applying psychology, politics and sociology, it can never be a system that can develop naturally. (For example, Survival of the Economically Fittest).
Mind you, economists have already had several attempts at introducing the concept of non-linear economics.
Followers of Keynes developed theories which generated Real Business Cycle Theory but any exogenous shocks to the new non-linear system were considered as merely ad hoc disturbances.
Economists could NOT break away from LINEAR THINKING. Linear thinking was being applied in an attempt to imprison a loose and free system, which tended to CHAOS.
The result? More economic models that you can shake a stick at!
It is only fair to say that our understanding of economic phenomena has been greatly enhanced by all these models and formulae…… but still no cigar. No General Theory of Economics. No equivalent of E =mc2….+εe
So Chianella, Pun, Goodwin, Kaldor, Baldrin, Woodford, Barmal, Benhabib etc have all done their bit but we’re still NOT QUITE there.
Unfortunately, for all intents and purposes, many of the models did no more than introduce the concept of economic ‘white-noise’.
Chaotic systems generate their own randomness without need for external input. Therefore in a chaotic system, predictions can ONLY be very short term and even if there were deterministic rules within such a chaotic system, an inability or failure to 100% ‘book’ the initial conditions of the system will always yield forecasting errors.
This all suggests that economic forecasting (except that on a very short time-scale) is a nonsense. PLUS – the bigger the system, the bigger the CHAOS.
That would suggest that a proposal such as a EUROPEAN ECONOMY is a flawed concept because there is very likely to be an exponential amplification of Chaos.
The dynamic of a mega-economy is very different to a housewife balancing the books at home – although economists are still applying the same principles to both.
Unfortunately so far, classical economists continue to resist economic chaotic concepts.
The reason for this apparent intransigence is simple: it is very difficult to extract evidence of chaotic dynamics from economic data – especially on a meaningful scale. Especially if another dose of chaos is injected into the ‘mix’ by erroneous or spurious data.
In order to predict in a chaotic system a VAST (infinite) amount of data is required – far more than is normally available and so far, the search for Chaos in economics has not been successful.
Meanwhile it is Chaos which is making long-term economic forecasting totally impossible and increasingly sophisticated and precise measurement of ‘initial conditions’ incredibly difficult and potentially prohibitively costly.
If we imagine an economy to be like a cloud – subject to all those forces that clouds are subject to, we can see the impossibility of a mathematical model which can predict the size, shape and exact direction of the cloud or even its shape and volume as it travels.
Its ultimate shape will always remain a mystery.
Politicians, bankers and economists ought to be able to say ‘I don’t know’ without us constantly expecting magic answers which do not exist.
For example: ‘Mr Chancellor or Mr Banker – what will be the effect on the economy of billions in Quantitative Easing?’ Correct answer? ‘We don’t know.’
“The initial conditions of a system are always uncertain, while Chaos guarantees that these uncertainties make prediction impossible.” (Heisenberg)
THAT is the essence of Chaos within an Economics System.
World Economy: The lunatics ARE running the Asylum!
Today, I was asked what I thought about this year’s European economic outlook. It isn’t great!
One factor which I have consistently underestimated is the ability of politicians to “wheelbarrow” a tragic set of circumstances from one meeting to another without even aiming for a holistic solution. Plus, I have always been conscious of the symbiotic relationship between politicians and bankers but, like an illicit love affair, it has grown over the years. Not into a mature loving relationship but instead, it has acquired all the charming qualities of an incestuous shotgun marriage.
I have been feeling very pessimistic about the world’s banking system for years – even before the 2007/2008 crisis. HERE!
Today, the ENTIRE financial system remains in crisis with both bankers and politicians apparently reduced to the role of observer. Their well-timed occasional “good news” is both ritualistic, orchestrated and largely illusory.
The problem is most acute in Europe where all major banks are barely managing to contain gut-busting levels of very bad government bonds.
Asian banks are at risk as Japan has begun to print and we all owe them money. Plus, we been in the habit of paying for their goods with money which they’ve lent us.
As a result of the sharp decrease in world demand, Asian economic growth has slowed very sharply.
Meanwhile, the United States was becoming addicted to the easy “fix” of Quantitative Easing, but nevertheless, in spite of the supply of virtual money, many of its institutions remain on life support.
Now we have the frightening prospect of the Fed stopping its money printing and the U.S economy having to go “cold turkey”. That won’t be a pretty sight!
Because nothing has really been done post the 2008 banking system collapse, I fear that we may be soon heading for an action replay.
The so-called “stress tests” which various governments have been performing on the banks have been less than useless as an indicator of banking “health” because the entire banking industry has been dispensing the wrong information to those who dare to try and measure what they’re doing and what they’ve got.
Bankers have only ever told us what they feel we ought to hear.
We are all aware of how badly the Rating Agencies managed to mess things up prior to 2008 and guess what…………the likelihood is that they’re still doing it! It is clear that, for instance, the Eurozone is about to suffer Cardiac Arrest but the Agencies are still telling us that everything is (more-or-less) fine!
The Rating Agencies have a history:
In a landmark 1994 study of the rating agencies, the U.S Government Accountability Office (GAO) concluded that Standard & Poor’s didn’t issue a “vulnerable” rating for one of the biggest failed companies, Fidelity Banker’s Life, until SIX DAYS before the failure … and for another, Monarch Life, until 351 days AFTER the failure! Similar instances of outright neglect were true of Moody’s as well as A.M. Best .
The Enron Failure of 2001: The New York Times reported that ratings agencies saw signs of Enron’s deteriorating finances but did little to warn investors until at least five months later – long after more problems had emerged and Enron’s slide into bankruptcy had already accelerated. It wasn’t until four days before Enron filed for Chapter 11, that the major agencies first lowered their debt ratings below investment grade!
What about the U.S mortgage meltdown of 2007 and 2008? EVERYONE now agrees that triple-A ratings on mortgage-backed securities grossly overestimated the investments’ credit quality and that this played a pivotal role in the debt crisis and that the primary factor behind their inflated ratings were multiple conflicts of interest between them and the issuers.
In the United Kingdom, the collapses or near-collapses of Northern Rock, HBOS, RBS etc were also a surprise to everyone except a few impotent accountants and auditors.
Do you remember anyone commenting on the “ratings” of the companies which had been bankrupt for months or even years? Me neither.
Nearly all ratings issued by the major agencies are paid for by the issuers — in other words, by the companies that are supposedly being rated!
In addition, the ratings agencies have often earned substantial additional consulting fees to help structure the very Securities which they rate!
To add insult to injury, it’s been proved that the major ratings agencies have often revealed their ratings formulas to issuers, helping their clients to pre-manipulate their data and “adjust” reporting in order to achieve the highest rating.
During the first phase of the financial crisis (2008), and largely because of the inherent conflicts of interest, the major ratings agencies continued to feed investors disinformation. (b******t).
For example, on the day of Bear Stearns’ failure, Moody’s maintained a rating on the company of A2 — the same rating it had published from June 1995 through to June 2003.
S&P was equally generous, giving the firm an A rating until the day of failure.
And Fitch assigned Bear Stearns an A+ rating for 18 straight years all the way up until the day it imploded!
The same basic facts apply to Lehman Brothers and all the other companies that either went belly up or were acquired for pennies.
The major ratings agencies have failed time and again to provide adequate warnings on collapses in all kinds of stocks, bonds, and even entire companies.
The scariest thing today is that European banks are now on the verge of being decimated just like Lehman, Bear Stearns and other firms were back in 2008.
The world economy is slowing from one end of the globe to the other. With massive debts piling up, unemployment rates soaring and the world’s banks still HIGHLY leveraged (overborrowed), it’s only a matter of time before the entire system blows up.
Nowhere is the crisis more acute than in Europe — and nowhere are the risks so great.
The key reason is that European banks are so HUGE relative to their home economies.
The aggregated European economy is roughly equivalent to that of the USA. However, European banks have almost THREE TIMES the assets of our American cousins. Now THAT’s disproportionate power!
That makes it all but impossible for European countries to successfully bail out their banks without jeopardizing their own credit standing and crushing their citizens under the weight of massive tax increases.
Greece, Spain, Portugal, Italy and soon France, have been lined up like fairground ducks under the jackboot of austerity by tax-starved governments.
That’s why we’re seeing sovereign credit ratings fall, bank share prices decline, and policymakers scrambling from one end of the continent to the other in a desperate attempt to find some kind of workable solution!
The problem? THERE ISN’T ONE!
The perfect recipe for an epic, global financial collapse that will sweep up major banks around the world!
It’s STILL all Greek!
Eurozone Ministers have arrived at a “pact” in respect of Greece. The pact allows the release of those much-needed loans that have taken up so much of the Eurozone’s time and energy. You may think that this is all very good news for the Greek people.
However, the central core of the agreement is that Greek Public Debt should fall to 124% of Gross Domestic Product by 2020 and is to be achieved via a raft of more debt-cutting steps and continuing austerity.
This “tentative” agreement should see the release of up to €44 billion in bailout funds to Athens, otherwise….. formal insolvency beckons.
Once again, we are going to be witnessing a process of German dissidence, the continued rise of the IMF, performance-related stage payments, delays etc….as the Greek funding is parsimoniously unlocked in three increasingly painful stages.
The formal decision and an agreement on how these disbursements are to be managed will me made by 13th December. One thing that we can be sure of is that each payment will involve a similar process of troika visits, meetings and procrastination.
Apart from cuts to the interest rate which Greece is having to pay on all of its loans, there will be an 15 year extension of the bilateral and EFSF loans plus a deferral of 10 years on interest payments on EFSF loans.
So what difference will all of the above make to the average Greek in the street?….NONE.
Yesterday, Bank of Greece Governor George Provopolous said that the Greek economy is expected to grow in 2014. He feels that by then, Greece’s fiscal problems will have been eliminated.
He did not specify how the country’s political, social and institutional issues will have been dealt-with.
The main effect is that the Markets will now enjoy a few more days in the Greek sunshine…….as they await the next cloud………
Money printing – a simple question.
Today, the Head of Germany’s Bundesbank, Jens Weidmann, has asked a very simple but critical question about Quantitative Easing and its cousin, the Unlimited Bond Purchase:
“If a central bank can create unlimited money from nothing, how can it ensure that money remains sufficiently scarce to retain its value?”
Money is a commodity and was invented when someone did not have goods or skills to trade in return for a commodity he wanted. He was able to offer “money” which could be redeemed at a later date for something that the original “seller” wanted or needed.
However, if there is a too much of a commodity, its price goes down.
So, if there is too much money, its price WILL go down.
THAT is why Central Bankers are playing a very dangerous game.
The simple answer to Herr Weidmann’s question is that a Central Bank CANNOT ensure that by increasing the money supply, it can even begin to ensure that the money will retain its value.
What they’re doing is the equivalent of fixing a stalled car engine by painting the car…..again….and again….and again…..
Eurozone: Decisions Decisions
LONDON: Global stocks and the euro dipped yesterday as investors cashed in some of last week’s sharp gains ahead of a German ruling on the euro zone’s new bailout fund, Dutch elections and potential new stimulus from the US Federal Reserve.
The European Central Bank’s statement last week, indicating that it was prepared to buy an unlimited amount of strained euro zone government bonds pushed European shares to a 13-month high and the euro to a four-month peak on hopes it could mark a turning point in the bloc’s 2-1/2 year crisis.
Investors started the week by taking some of that profit off the table. The MSCI index of top global shares was down 0.1 ahead of the opening bell on Wall Street, with the euro and stock markets in London, Paris and Frankfurt all slightly lower.
US stock index futures also pointed to a lower open on Wall Street, with futures for the S&P 500, Dow Jones and Nasdaq 100 all down just over 0.2 percent.
Europe faces another testing week, with Dutch voters going to the polls and Germany’s constitutional court set to rule on new powers for the European Stability Mechanism, the euro zone’s new bailout fund, both on Wednesday.
Since ECB President Mario Draghi first mooted the ECB’s new crisis plan on July 26, world stocks have rallied more than 8 percent, euro zone blue chips have jumped almost 20 percent and the euro has risen more than 4 percent. Analysts are wondering whether the gains can continue.
“The Draghi effect obviously helped the markets hugely, so people are likely to be a bit more hesitant this week,” said Hans Peterson, global head of investment strategy at SEB private banking.
“Risk appetite is likely to be on the way up, but we have to clear some hurdles, and the things in Europe have to go according to plan. The key issue this week is the approval of the ESM by the German constitutional court.”
Strategists at Goldman Sachs also issued an upbeat note on equities, saying that while there were worries over China’s wobbling growth, the brighter European news and signs of gradual improvement in the US were both positives.
There is still room for market rallying,” they said, citing their target for the Eurostoxx 50 to hit 2,700 points in the next 12 months. “From current levels, however, we expect further gains through to year-end, but at a slower pace,” they added.
The euro followed the downward trend, easing against the dollar, but stayed close to a near four-month high hit on Friday after below-forecast US jobs data fanned speculation the Federal Reserve may launch more monetary stimulus this week.
Hopes that powerful ECB intervention in Italian and Spanish bond markets could finally draw an end to the seemingly endless euro crisis has seen massive upward shifts across global markets, from European stocks and treasuries to commodity-reliant economies.
Spanish 10-year yields have tumbled more than two percentage points from an unsustainably high 7.8 percent to around 5.6 percent, while the reduced demand for safe-haven German debt has pushed equivalent yields up 36 bps from their record lows to stand at 1.48 percent.
Spain’s borrowing costs hit a fresh five-month low on Monday while German Bund futures bounced around in choppy conditions, supported initially by worries over Greece’s fiscal repair plans and Fed aid hopes before going into negative territory around midday.
U.S markets are waiting eagerly to see whether the latest data have convinced the Federal Reserve that more stimulus is required.
The benchmark S&P 500 index rose 2.3 percent last week, its biggest weekly gain in three months.
SEB’s Peterson said it was still uncertain whether the US central bank would act and cautioned that any new support was likely to provide a temporary rather than a long-term lift.
“What is really important here is the wider macro picture, whether the euro zone sorts itself out and what happens in China and Asia,” he added.
Fresh data from China on Monday showed exports grew at a slower pace than forecast last month while imports surprisingly fell, underlining weak domestic demand as the global economic outlook dims.
Oil markets are riding high, underpinned both by hopes that economic stimulus around the world will fuel growth and geo-political tensions in parts of the Middle East, the world’s most important oil-producing region.
Brent crude futures for October delivery were trading 46 cents higher at $114.71 per barrel by 1248 GMT, after settling up 76 cents on Friday. US crude was trading up 7 cents at $96.49 per barrel.
“Chinese data had been expected to be weak, so to some extent it has been taken into account in oil prices, but having said that, it basically caps the upside,” said Masaki Suematsu, energy team sales manager at Newedge Japan.
Copyright spygun/Reuters, 2012
ECB Mario Draghi’s Statement……….. 6th September 2012
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and by the Commission Vice-President, Mr Rehn.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2 percent throughout 2012, to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent over the medium term. Economic growth in the euro area is expected to remain weak, with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment. A renewed intensification of financial market tensions would have the potential to affect the balance of risks for both growth and inflation.
It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area. We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.
In order to restore confidence, policy-makers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building. At the same time, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines. The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted and to be effective. Details of the Outright Monetary Transactions are described in a separate press release.
Furthermore, the Governing Council took decisions with a view to ensuring the availability of adequate collateral in Eurosystem refinancing operations. The details of these measures are also elaborated in a separate press release.
Let me now explain our assessment in greater detail, starting with the economic analysis. Recently published statistics indicate that euro area real GDP contracted by 0.2 percent, quarter on quarter, in the second quarter of 2012, following zero growth in the previous quarter. Economic indicators point to continued weak economic activity in the remainder of 2012, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually. The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.
The September 2012 ECB staff macroeconomic projections for the euro area foresee annual real GDP growth in a range between -0.6 percent and -0.2 percent for 2012 and between -0.4 percent and 1.4 percent for 2013. Compared with the June 2012 Eurosystem staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The risks surrounding the economic outlook for the euro area are assessed to be on the downside. They relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. These risks should be contained by effective action by all euro area policy-makers.
Euro area annual HICP inflation was 2.6 percent in August 2012, according to Eurostat’s flash estimate, compared with 2.4 percent in the previous month. This increase is mainly due to renewed increases in euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could turn out somewhat higher than expected a few months ago, but they should decline to below 2 percent again in the course of next year. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.
The September 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.4 percent and 2.6 percent for 2012 and between 1.3 percent and 2.5 percent for 2013. These projection ranges are somewhat higher than those contained in the June 2012 Eurosystem staff macroeconomic projections.
Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation. The main downside risks relate to the impact of weaker than expected growth in the euro area, particularly resulting from a further intensification of financial market tensions, and its effects on the domestic components of inflation. If not contained by effective action by all euro area policy-makers, such intensification has the potential to affect the balance of risks on the downside.
Turning to the monetary analysis, the underlying pace of monetary expansion remained subdued. The annual growth rate of M3 increased to 3.8 percent in July 2012, up from 3.2 percent in June. The rise in M3 growth was mainly attributable to a higher preference for liquidity, as reflected in the further increase in the annual growth rate of the narrow monetary aggregate M1 to 4.5 percent in July, from 3.5 percent in June.
The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) remained weak at 0.5 percent in July (after 0.3 percent in June). Annual growth in MFI loans to both non-financial corporations and households remained subdued, at -0.2 percent and 1.1 percent respectively (both adjusted for loan sales and securitisation). To a large extent, subdued loan growth reflects a weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. Furthermore, in a number of euro area countries, the segmentation of financial markets and capital constraints for banks continue to weigh on credit supply.
Looking ahead, it is essential for banks to continue to strengthen their resilience where this is needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.
To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.
lthough good progress is being made, the need for structural and fiscal adjustment remains significant in many European countries. On the structural side, further swift and decisive product and labour market reforms are required across the euro area to improve competitiveness, increase adjustment capacities and achieve higher sustainable growth rates. These structural reforms will also complement and support fiscal consolidation and debt sustainability. On the fiscal front, it is crucial that governments undertake all measures necessary to achieve their targets for the current and coming years. In this respect, the expected rapid implementation of the fiscal compact should be a main element to help strengthen confidence in the soundness of public finances. Finally, pushing ahead with European institution-building with great determination is essential.
We are now at your disposal for questions.
Eurozone Meetings Merrygoround
This week, Angela Merkel meets Herman Van Rompuy, Mario Monti meets Francois Hollande who also meets David Cameron.
The new Meeting Season seems to indicate that Eurozone leaders have decided that meeting in plenary will be punctuated by the new craze of meeting in pairs.
I thought that it may be useful to compute how many meetings 0f TWO, could be managed by 20 politicians.
They are: the 17 Eurozone leaders + Van Rompuy + Barroso + Cameron = 20.
So, how many meetings would 20 politicians generate if they met in pairs?
Using the formula n!/(r!(n-r)!)……… (n = number of leaders and r = 2, as they meet in pairs)
The total number of “pair meetings” achievable by 20 politicians is 20!/(2!(20 – 2)!) = 190
We have to double that, because they each will want to meet twice so that each one has TWO meetings with every one. (One Home and one Away).
Therefore 20 politicians can generate 380 meetings – if they confine themselves to meeting TWO at a time.
That of course is on TOP of the monthly Eurozone Crisis Meetings, EU meetings and special meetings – for instance, when Spain decides to take the €500 billion we all know it needs or the next time Greece is (once again) about to go down the Grexit toilet.
We can see therefore that any attempt to solve the European Crisis would only serve to interfere with what is already a very heavy meeting schedule.
Eurozone – a new religion?
The Eurozone has gradually and imperceptibly acquired all the unsavoury aspects of a religion – and we don’t even appear to have noticed!
For instance, Greece is having to do PENANCE (austerity) as punishment for its past sins. Others are already gathering to follow the Greek example. The HOLY EURO demands it!
All believers need HOPE in order to believe. The Eurozone hope is provided by the ECB which may or may not decide to help. Sometimes it is merciful but yet on other occasions it gives the impression that perhaps Euromortals should be allowed to make their mistakes and then clear up the mess themselves. Freewill or Predestination?
Then of course, any religion worth its salt has its Unique Selling Proposition. The most simple and powerful is the promise of an afterlife or , more accurately, the choice between TWO afterlives. One where the Euro remains intact and everyone lives happily ever after (HEAVEN). The other is the threat of HELL should the Euro break up. However, the Eurozone High Priests have provided a third way – PURGATORY – where the genuinely penitent can suffer for a while so that their transgressions (SINS) may be forgiven.
(Greece is currently languishing in PURGATORY with its cilice so tight that it has begun to draw blood).
Every religion has a DOGMA. That is provided by the strong belief that Monetary Union is the only true Path of Righteousness.
The DOCTRINE is extracted from the many words which have been handed down over the years. They are true because it has been written that they are true. (See Maastricht Treaty).
There are RITUALS – every religion has its rituals. The Eurozone rituals are mysterious and enacted during the frequent MEETINGS of the High Priests with the important rituals being acted-out in THEIR own Vatican, which is in Brussels but some believe that it is in Berlin. Every such ritual generates words for the believers – but just like every other religion, the words have become repetitive and Mantra-like with little real meaning or relevance.
There has to be a MYTH. Something which , even in the face of overwhelming evidence , remains sacred. Theirs is THE HOLY EURO…..
Every religion has its DETRACTORS – those who may wish to modify or change either the beliefs or the mode of worship. There are those who would REFORM. Europe has such an enemy within – it’s own JUDAS. It is called the United Kingdom – which is sometimes viewed (by High Priestess Merkel) as the DEVIL incarnate.
It is appropriate to highlight the New Religion this week because it is the time when the new round of meetings and pilgrimages begins.
At the end of this Holy Euro Week, there will be no changes but the faith of many will be strengthened by the promises of the High Priests.
Amen. May the blessings of the Euro be with you.
Buy or Rent?
Remember, if you take a mortgage to “buy” a house, you are effectively RENTING from your bank – but YOU are taking the capital risk plus YOU pay for the maintenance and insurance of the BANK’S asset. If you fall behind with your “rent” to a bank, you have less legal protection that you would have if you were renting from a private landlord.
Nevertheless, we Brits continue to be OBSESSED by “ownership” – or should I say, BORROWING in order to invest in a house. If you think about it, we are doing EXACTLY what the banks are doing – BORROWING in order to invest – except that they may call it “leveraging”.
However, not all nationalities are the same………
For instance while Brits buy, the Germans rent. A town such as Hamburg has 20% home ownership, whereas the German average is only about 40%.
Ever heard of a German Housing Bubble?
(Germany has the HIGHEST proportion of people renting in the European Union.)
Venizelos’ Oral Plan
1. There is need for immediate actions by Greece in the period of August-September that will concern high-level contacts with the leaders of the EU member states and also the institutional partners (European Commission, European Central Bank and International Monetary Fund), and also for shielding the domestic front. The national negotiating team must be formed and the opposition called on to contribute to the effort. Venizelos said it would be a “mistake” and “insult to the country” for it to be said that it has been inert with respect to the structural changes, adding that the changes effected from 2010 to the present are “unprecedented” and the reproduction of such stereotypes at Greece’s expense must stop.
2. The country must manifest its strong determination to promote structural changes, and noted the 77 obstacles pinpointed by the Fund for privatisations, which he stressed need to be immediately eliminated through legislation.
3. The end fiscal target must immediately be confirmed, so that from a deficit of 11.5 billion euros we will go to a primary surplus, and a 2.6 percent growth rate must be achieved.
4. The fiscal adjustment period needs to be extended to 2016.
5. It is necessary to draft an updated programme for the period 2012-2016, so that the 2012 budget may be closed and a draft budget drawn up for 2013, which should be tabled in parliament in early October.
6. A proposal should be drawn up for full itemisation of the programme for 2012-2014, without across-the-board cuts that affect small and medium incomes.
7. Improvement of the macroeconomic climate which, if improved, will enable an easier implementation of the second stage of fiscal adjustment in 2014-2016.
8. Immediate and tangible measures must be taken to increase employment in tandem with a reduction of the cost of money, as well as measures to control prices.
9. Measures must be taken to reinforce social cohesion.
10. The international communications framework that is negative towards Greece must change, in cooperation with the partners.
The “must be” phrase is the one which gives the illusion of action but in fact means absolutely nothing. It is not even a statement of intent. You will notice (in bold above) that Venizelos is using exactly the language which I outlined HERE .
Political pronouncements would carry far more gravitas if they sometimes contained dates and more definite verbs. For example, looking at just ONE of the items on Mr Venizelos’ shopping list:
See the wording of No 8 (above)…NO amount…NO date…..in fact, NOTHING definite. Here’s a slight modification:
8. Immediate and tangible measures must be taken to increase employment in tandem with a reduction of the cost of money, as well as measures to control prices.
A modified version:
8. Directly through the Treasury, we are allocating €5 billion to be available to employers, specifically for them to hire new people. This money is available now and the employer will be paid the equivalent of six months of the new employees salary on Day 1 of that employee joining the business. This facility will be open only to those employers with an annual turnover of under €500,00 per year. All start-up businesses will be completely tax-exempt for 12 months.
(The figures are only for illustration purposes but they do shed some light on the difference between empty political words and a PLAN.)
It looks as if Mr Venizelos continues to practice exactly what Eurozone politicians have been indulging themselves in for the last FOUR years:
ORAL POLITICS : Words WITHOUT actions.
Italian Prime Minister, Mario Monti is on fine form today with yet another observation on the Eurozone crisis: “It is a tunnel but … some light is appearing at the end of the tunnel. We and the rest of Europe are approaching the end of the tunnel.”
Never a truer word has been spoken by a Eurozone politician. They are approaching the end of the tunnel.
However, does he realise that the light at the end of the Euro tunnel is runaway train heading in their direction?
The Eurozone’s Déjà vu Economics
For years, regulators have been trying to control bad banking. Governments have been failing to control bad sovereign fiscal governance. That’s the nature of the Eurozone. This flawed approach has only left one solution – at some stage, both the banks and sovereigns will have to be properly underwritten by the European Central Bank (ECB).
One day soon, the ECB will become the lender-of-last-resort.
However, possibly for reasons of either dull-wittedness or maybe just some good old-fashioned showmanship, the ECB never makes a move until there is a proper danger of a crisis. (Think Superman grabbing that train on a railway bridge just seconds before it falls into the ravine.)
Unfortunately, this economic scenario appears to be played out on a perpetual “loop”.
Déjà vu Economics.
Currently, markets are once again applying severe pressure to Eurozone public debt and Euro politicians are repeating the “We are determined” and “Whatever it takes” mantras. The markets continue to fluctuate “in vacuo” with little regard to the “real” conditions, further confusing the politicos who, for some unknown reason, believe that the solution to everything lies in greater Eurozone union and organisational changes. (Bless them! It’s all they know!)
The next stage is simple (and it began last week): a few mealy-mouthed statements from Euro leaders which attempted to shove the crisis-cursor forward a few weeks until after the end of the Summer Holidays – whilst Spain and Italy (both standing on the trapdoor) have issued “holding statements”.
The well-worn and rapidly failing policy response from the Euro Gods is those potentially explosive “Austerity Measures” – the only other technique in their repertoire. Yet another case of the cure being more painful than the disease. Ask Greece.
In 2010, the Greek Government (just before it lost access to the markets) po-pooed the idea of needing help. “We are not Latin America!” they scoffed. Now it’s Spain’s and Italy’s turn: “We are not Greece!”
Oh yes you are – only bigger, hungrier and therefore more dangerous – and remember this, when you too lose access to the markets, you will need a bailout.
Euro politicians do play with a very limited repertoire, so Spain and Italy will have yet more austerity. That will accelerate the deterioration of their economies – although their politicians will talk (a lot) about “growth”.
This (just like in Greece) will result in lower tax revenues and austerity targets being missed (although the “Troika” continues to believe that, contrary to all the evidence, an economic miracle will manifest itself . Suddenly, as if by magic, they hope that the Perpetual Spring of Eternal Economic Growth will materialise out of the ashes of Austerity!!).
Then, the banks will need yet more and we’ll end up discussing when Spain and Italy will leave the Eurozone. Then France…..
That will return the cycle to Square One with the politicians once again being “Determined” and promising to do “Whatever ir takes”.
Another dose of Déjà vu Economics.
Meanwhile, should the crisis look really dangerous, the ECB’s Marion Draghi will find a telephone box, change and fly-in to save the day. “To calm the Markets”
The banks have spent four years watching and secretly hoping that this ridiculous loop continues forever, Why? Because once the ECB steps in and protects sovereign debt, those debts will have a price. Banks will have to revalue any debt they are holding (downwards), resulting in quite a few of them going to the wall.
There will be yet more “haircuts” for private investors too!
Just like a rapidly expanding non-working retired population needs more and more support from an increasingly taxed but shrinking working population, so the Eurozone is becoming an arrangement whereby more and more non-producing and increasingly reliant countries have to be supported by a rapidly shrinking collection of fully-functioning states.
The tipping point is not too far away – the point at which there are more (economically) broken states than those in reasonable health which can continue to support them.
Meanwhile, let’s have some more Déjà vu. Again.
Whatever It Takes (WIT)
Every European politician is now resorting to the “Whatever it takes” mantra. This week they will do whatever it takes to safeguard the sacred cow that is the Eurozone. That pampered sacred cow which feeds and feeds without actually producing much in return.
The politicians don’t appear to realise that this is a nonsense phrase but they certainly DO realise that it is a phrase which excites the traders because it is code, designed to convey the fact that the ECB , the Fed and all the other usual suspects will once again indulge the banks by creating yet more cash for them to play with.
Another Central Bank Bonanza!
That is why the markets have risen today. This is how it works:
As soon as Central Banks start handing out cash, the investment banks use a proportion of that cash to purchase equities. That in turns “ups” prices. So, if investors convince themselves that next week, the banks will start splashing money like a lonely Chardonnay-fueled celibate on ebay, they also realise that NOW is the time to buy.
Anything they buy today is bound to increase in price, once the Central Banks open the Banking “All-you-can-eat” Buffet.
In fact, the banks will be buying today in anticipation of Central Bank handouts. Once again, there’s the heady whiff of “empty profit” in the air.
Last week, the ECB’s Mario Draghi said that he would do “Whatever. It. Takes”. Today it was the latest Euro double-act of Merkel and Monti who joined the W.I.T chant.
The next stage will be expressions of “confidence”, followed by “meetings”, the establishment of a “by the end of the year” deadline and then the announcement of “reforms”.
(Reforms are good because they give the illusion of progress.)
One such reform is rumoured to be the granting of banking licences to the EFSM, EFSF, ESM and any other European quango or organisation beginning with Capital “E”.
That will enable them to print yet more money to distribute among the needy….er…banks!
When they say “WHATEVER it takes” – they mean it!
Merkel Gives No Ground on Demands for Oversight in Debt Crisis
(Bloomberg) — Chancellor Angela Merkel gave no ground on Germany’s demands for more European control over member states in return for joint burden-sharing as she conceded that the bloc has yet to master the debt crisis.
The German leader said yesterday she hadn’t softened her stance at last month’s summit in Brussels and that a so-called banking union involving a bloc-wide financial overseer will have to include joint oversight on a “new level.” She chided member states who had sought to slow moves toward greater central control “since the first summit” in the 30-month-old crisis.
“All of these attempts will have no chance with me or with Germany,” Merkel said in an interview with broadcaster ZDF in Berlin.
Two weeks after a European Union summit aimed at bridging differences over crisis resolution, euro leaders are still squabbling over details of how to lift the bloc out of the turmoil. Merkel hardened Germany’s position that any attempt to share burdens in Europe — such as jointly issued euro bonds or common banking bodies — must first be met with greater cooperation and a handover of some sovereignty to Brussels.
The euro fell to its lowest level against the U.S. dollar in more than two years last week, sliding to as low as $1.2163 on July 13. Europe’s most credit-worthy government bonds climbed, with German two-year note yields down to a record minus 0.052 percent, as investors sought havens from the euro crisis.
Diverging rates and capital outflows within the 17-member monetary union signal that the single currency is “slowly unraveling,” Stephen Gallo, senior foreign-exchange strategist at Credit Agricole SA in London, told Bloomberg Television’s “The Pulse” in a July 13 interview.
“The whole project is unraveling, that’s what’s essentially happening now,” Gallo said.
While Merkel said that Europe is on the “right course” toward putting an end to the crisis, euro-area leaders “haven’t solved the problems conclusively.”
German lawmakers will interrupt their summer vacations and return to Berlin on July 19 to vote to approve 100 billion euros ($122 billion) in rescue loans to Spain. After Spanish Prime Minister Mariano Rajoy last week announced 65 billion euros in welfare cuts and tax increases, Merkel reiterated yesterday that financial assistance would not be doled out without conditions.
“Whoever receives assistance and where liabilities are taken over, there has to be control,” Merkel told ZDF.
French President Francois Hollande, Italian Prime Minister Mario Monti and Spain’s Rajoy have pressed for faster action, including joint liabilities, while Merkel has called jointly issued debt the “wrong way” to fix the crisis. Merkel last month castigated a blueprint for the summit by EU President Herman Van Rompuy as too focused on “collectivization.”
Euro officials this month have also sparred over the timetable for establishing a euro-wide bank supervisor, a benchmark required before they implement one of the decisions from the June 28-29 summit — direct bailout funding for banks. Investors have viewed such a step as a way to sever the link between banking debt and sovereign debt.
Euro-area finance ministers will confer on Friday, July 20, to complete an agreement on Spain’s bank bailout. On July 10, the minister’s announced 30 billion euros of aid would be made available by the end of this month.
Klaus Regling, who heads the euro’s bailout funds, told Welt am Sonntag yesterday that governments could avoid liability for bank rescues under proposals for a regional supervisor. That contradicts German Finance Minister Wolfgang Schaeuble, who said July 9 that he expects governments to guarantee loans even if they go directly to banks, Welt said.
Merkel said leaders hadn’t yet reached an agreement on the terms for bank rescues.
German Bundesbank President Jens Weidmann said euro leaders had caused damage by failing to define more clearly their conclusions at the summit. He told Dutch newspaper Het Financieele Dagblad on July 14 that euro nations “should discuss giving up sovereignty with the same openness as the question of how to resolve the debt problem collectively.”
As governments in Spain and Italy struggle under the burden of higher borrowing costs, Weidmann, Germany’s chief central banker and a European Central Bank GoverningCouncil member, told Boersen-Zeitung that Italy’s higher yields don’t justify a request for bailout assistance. Euro bailout funding should be deployed only as a last resort, he said.
“If Italy stays the course on reforms, it’s on a good path,” Weidmann told the newspaper in an interview. Asked whether the euro area’s third-largest economy needs to tap the fund, he said, “No, I don’t see Italy in that situation.”
Italian Prime Minister Mario Monti has sought a “debt shield” against spillover from a Spanish banking crisis.
Euro-area leaders have given Spain an extra year, until 2014, to drive its budget deficit below the euro limit of 3 percent of gross domestic product, a concession that may foreshadow leniency for other indebted states in the bloc.
In Greece, an MRB poll published in Athens-based Real News newspaper showed that almost three-quarters of Greeks want Prime Minister Antonis Samaras’s coalition government to insist on a renegotiation of the country’s international bailout.
Seventy-four percent in the survey said the government should insist on discussing the terms even if negotiations steer toward the prospect of Greece leaving the euro; 15.5 percent said the government should stick to current conditions.
Volker Kauder, the parliamentary leader of Merkel’s Christian Democratic Union, told Welt am Sonntag that he doesn’t want to give Greece more time to meet economic targets.
Merkel, asked the same question during the ZDF interview, said she would await a report by Greece’s international creditors, known as the troika.
With assistance from Tony Czuczka in Berlin, Paul Tugwell in Athens, Guy Johnson in London and Fred Pals in Amsterdam. Editor: Dick Schumacher.
To contact the reporter on this story: Patrick Donahue in Berlin at firstname.lastname@example.org
To contact the editor responsible for this story: James Hertling at email@example.com
Νύχτα των Κρυστάλλων ?
“Greeks are lazy, Greeks are corrupt, Greeks are dishonest, Greeks refuse to obey the rules……”
Are they? Do they?
Hearing that certain countries are already thinking about “doing something” about future Greek immigration sent a shiver down my spine.
The Eurozone states and their limp politicians are beginning to treat Greeks like pariahs – in the same way that the Nazis treated the Jews in the 1930s.
What will be the the natural conclusion? Make no mistake – it could be tragic.
Is there going to be the modern equivalent of the 1938 Kristallnacht ?
Will Greek-owned shops and businesses all over Europe be vandalised because of negative anti-Greek Eurozone propaganda?
Kristallnacht was the starting point for intense economic and political persecution of Jews – with the end game being played-out during WW2. No further reminders needed.
Then, as now, it all started with an excuse. In 1938, it was the assassination of German diplomat by a Polish Jew.
The 2012 excuse is nothing more than an anticipated refusal of Greece to comply with over-strict German-inspired ” necessary” austerity rules.
Propaganda is a very powerful device. Let us hope therefore that the gradually amplifying and insidious vilification of the Greek people does not result in yet another European catastrophe.
Eurozone “plan” – an Oxymoron.
Talk of “firewalls” and “rebuilding” balance sheets and other construction-related metaphors are wearing a bit thin.
So far, they’ve clearly demonstrated that they would have difficulty in planning their way out of a wet paper bag.
Greek Texas Hold ‘Em
The Greek Syriza leader has the measure of the Eurozone sheep.
You may not agree with his politics but Alexis Tsipras is THE ONE that Eurozone leaders do NOT want to negotiate with.
They have been bluffing that they’re “ready” for a Greek Euro exit. It’s all talk!
They are NOT ready and Tsipras KNOWS IT . He also knows that a Greek exit (forced or otherwise ) would not-only create economic and banking havoc but that the after-shocks would be felt all around the world.
He’s willing to call their bluff because he realises that countries such as China & Russia are standing-by and would immediately move in with investment.
German Hypocricy knows no bounds – especially in respect of Greece!
Twice during the 20th Century, Germany left Europe in a mess. Now, in the 21st Century, it is their intransigence rather than their high explosives which may once again create European chaos.
Germany had to pay reparations after WW1. However, after its defeat in WW2, reparation payments were NOT resumed. In addition, there was another outstanding debt comprising of what the German Weimar Republic had been using to pay reparations. They had to borrow to pay.
In 1953, an international conference decided that Germany could could defer some of the debt until East and West Germany were reunified – although because a reunification was though to be unlikely, this was effectively a debt write-off.
By 1980 West Germany had repaid some of the debt although the remainder (according to the 1953 agreement) would be serviced for another 20 years.
The final payment was due on 3 October 2010 which was the the 20th anniversary of German reunification.
Over 10% of this debt, about 20 million euros, has never been paid.
So please Germany, remember that Europe has shown you mercy on more than one occasion.
Time to return the compliment and defer the WHOLE of Greece’s existing debt for – what shall we say? 30 years?
….and YOU can pick up ALL the interest payments.
(THAT, my Greek friends, is how to negotiate with the Germans.)
Greek party leaders seek deal as bankruptcy looms
By NICHOLAS PAPHITIS
ATHENS, Greece (AP) — Greek party leaders on Tuesday will seek a long-delayed agreement on harsh cutbacks demanded to avoid looming bankruptcy, amid intense pressure from its bailout creditors to reach a deal, a general strike disrupting public services and thousands of protesters taking to the streets of Athens.
Heads of the three parties backing the interim government will confer with Prime Minister Lucas Papademos on new income cuts and job losses, which Greece’s eurozone partners and the International Monetary Fund are demanding to keep the country’s vital rescue loans flowing.
A general strike against the impending cutbacks stopped train and ferry services nationwide, while many schools and banks were closed and state hospitals worked on skeleton staff.
Police said up to 14,000 people took part in two peaceful anti-austerity demonstrations in Athens. The separate marches were to converge on central Syntagma Square, outside Parliament, which has been the focus of demonstrations over the past two years of economic pain.
On Monday, Prime Minister Lucas Papademos’ government caved in to demands to cut civil service jobs, announcing 15,000 positions would go this year, out of a total 750,000. The decision breaks a major taboo, as state jobs had been protected for more than a century to prevent political purges by governments seeking to appoint their supporters.
Athens must placate its creditors to clinch a euro130 billion ($170 billion) bailout deal from the eurozone and the IMF and avoid a March default on its bond repayments.
Among the measures the EU and IMF are pressing Greece for is a cut in the euro750 ($979) minimum wage to help boost the country’s competitiveness. This reduction would have a knock-on effect in the private sector – because private companies also base their salaries on the minimum wage – and even unemployment benefits. Unions and employers’ federations alike have deplored the measure as unfair and unnecessary.
“It is clear that there is a lot of pressure being put on the country. A lot of pressure is being placed on the Greek people,” Finance Minister Evangelos Venizelos said during a break in talks with EU-IMF debt inspectors late Monday.
He called on coalition parties to work more closely together.
“To save Greece … will involve a huge social cost and sacrifices,” Venizelos said. “On the other hand, if the negotiations fail, bankruptcy will lead to even greater sacrifices.”
“No one is as strong as Hercules on his own to face the Lernaean Hydra,” a swamp monster in Greek mythology, he said. “We must all, together, fight this battle, without petty party motives and slick moves.”
A disorderly bankruptcy by Greece would likely lead to its exit from the eurozone, a situation that European officials have insisted is impossible because it would hurt other weak countries like Portugal.
But on Tuesday, the EU commissioner Neelie Kroes, in charge of the bloc’s digital policies, said Greece’s exit wouldn’t be a disaster.
Kroes told Dutch newspaper De Volkskrant that “It’s always said: if you let one nation go, or ask one to leave, the entire structure will collapse. But that is just not true.”
Greece has been kept solvent since May 2010 by payments from a euro110 billion ($145 billion) international rescue loan package. When it became clear the money would not be enough, a second bailout was decided last October.
As well as the austerity measures, the bailout also depends on separate talks with banks and other private bondholders to forgive euro100 billion ($131.6 billion) in Greek debt. The private investors have been locked in negotiations over swapping their current debt for a cash payment and new bonds worth 50 percent less than the original face value, with longer repayment terms and a lower interest rate.
Greek government officials say they expect private investors to take losses of an estimated 70 percent on the value of their bonds.
The EU-IMF bailout will also provide an estimated euro40 billion ($52 billion) to protect Greek banks from immediate collapse. Domestic lenders and pension funds hold some 34 percent of the country’s privately-owned debt.
However, the bailout has to be secured for the deal with private investors to go ahead as about euro30 billion from the bailout will be used as the cash payment in the bond swap deal.
Greece’s coalition party leaders held a first key meeting on the austerity measures on Sunday, and postponed a second round of talks by a day so Papademos could complete negotiations with EU-IMF debt inspectors that ended early Tuesday.
The leaders have already agreed to cut 2012 spending by 1.5 percent of gross domestic product – about euro3.3 billion ($4.3 billion) – improve competitiveness by slashing wages and non-wage costs, and re-capitalize banks without nationalizing them. But the details remain to be worked out.
Creditors are also demanding spending cuts in defense, health and social security.
European Commission spokesman Amadeu Altafaj Tardio said Monday that Greece was already “beyond the deadline” to end the talks.
Also Monday German Chancellor Angela Merkel warned that “time is pressing,” and “something has to happen quickly.”
While Greece remains cut off from international bond markets – where it would have to pay interest of about 35 percent to sell 10-year issues – it maintains a market presence through regular short-term debt sales.
On Tuesday, the public debt management agency said Greek borrowing costs dropped slightly as the country raised euro812 million ($1.06 billion) in an auction of 26-week treasury bills. The coupon was 4.86 percent, compared to 4.90 percent in a similar auction last month, while the auction was 2.72 times oversubscribed.
Derek Gatopoulos in Athens and Gabriele Steinhauser in Brussels contributed to this report.
EU official: Greece needs extra $20 billion
BRUSSELS (AP) — Greece needs about an extra euro15 billion ($20 billion) to get its debt down to manageable levels — and the rest of 17-country eurozone is being asked to help foot the bill.
Debt-ridden Greece is close to a deal with private investors to reduce its debt burden by about euro100 billion and that — plus an agreement to enact deep spending cuts — could pave the way for a euro130 billion bailout from its European partners and the International Monetary Fund. But on Thursday a European Union official said this plan was not enough to help fix Greece’s problems, which are getting worse as the effects of the recession take hold.
In order to bring Greece’s debt burden to a sustainable level — 120 per cent of its economic output in eight years’ time — the country’s international debt inspectors calculate that Greece needs an additional euro15 billion — a shortfall it believes should be made up by the rest of the 17-country eurozone, the European official. The official spoke on condition of anonymity because of the sensitivity of the matter
The extra money, in theory, could come either from the other euro countries or by having the European Central bank, its national counterparts and state-owned banks like France’s Caisse de Depots taking a loss on their Greek bond holdings, the official said. Analysts estimate that the European Central Bank holds euro50 billion to euro55 billion in Greek bonds by face value but it can’t simply write them down without breaking the EU treaty, which prohibits the bank from financing governments. Writing off a debt would be, in effect, transferring money directly to a government.
The new push for Greece’s public and government creditors to take a cut on their investments — dubbed the official sector involvement, or OSI — is a new front in the battle to save the country from a potentially devastating default. So far the eurozone and the International Monetary Fund have given billions in bailout loans to the struggling country, but they haven’t been asked to take losses.
It is also an acknowledgment that Greece’s economy is in such a dire state that the country’s debt inspectors — the so-called troika of the Commission, the European Central Bank and the IMF — are having a hard time finding more ways in which Athens can save money.
Greece has been at the heart of Europe’s debt crisis since it revealed in 2009 that its debt was far larger than its official estimates. It piled on the debt during a decade in which the government overspent and its economy was growing. Those fortunes turned when the world went into recession in 2008.
The challenge now is reducing the debt at a time when the economy is shrinking. Spending cuts, tax increases and the general uncertainty of the crisis have already pushed Greece into a deep recession, which in turn has eliminated many of the gains from the austerity measures.
Asking private creditors like banks and investment funds to share the burden of saving Greece was the first reaction to this problem; getting the public sector creditors involved is the next.
The official said a deal with private creditors to take losses on their holdings will have to be announced before the end of the week to make sure it can be implemented before Athens has to pay back euro14.5 billion in bonds on March 20.
Experts from national finance ministries will examine the details of the deal on the so-called private sector involvement — or PSI — on Friday, and will likely also discuss how the euro15 billion gap can be closed, the official said.
People familiar with the tentative deal have said it would see investors take losses of more than 70 percent of their holdings. On top of having to accept a 50 percent cut in the face value of their bonds, investors will also receive lower interest rates of between 3.5 per cent and 4.5 per cent and give Greece 30 years to pay back the debt.
If agreed, the deal would end negotiations with bondholders that started this summer and have become increasingly tenuous in recent weeks.
Getting public creditors like central banks or sovereign wealth funds to take a hit may be even more controversial, since any losses or foregone profits ultimately come out of taxpayers’ pockets. Germany, the strongest economy in the eurozone, is also one of the strongest opponents of OSI.
Germany’s finance minister, Wolfgang Schaeuble, said on n-tv television Thursday that he didn’t see the need for “any extra contributions from the public sector; we’re carrying everything anyway.”
Schaeuble didn’t address the issue of the euro15 billion funding gap.
The majority of the ECB’s Greek bonds were bought at a discount in the summer of 2010, when the central bank was trying to stabilize their prices. Even though it is bound by the rules of the EU treaty, it could find a way to give up the substantial profit it would earn by holding the bonds to maturity. It could do that by selling the bonds to the eurozone bailout fund or to Greece at the knockdown prices it bought them for.
However, the ECB has so far given no indication that it is willing to do so, with some of its governing board members saying that giving up on profits would clash with the bank’s ban.
Alternatively, eurozone states could boost their bailout loans beyond the promised euro130 billion, or provide some, more-limited, relief by further lowering interest rates on these loans.
Analyst Carsten Brzeski at ING in Brussels said the ECB and President Mario Draghi might be open to giving up the profits on the bonds. But the bank will wait to take action so it does not appear to be acting at the request of politicians.
The bank is legally independent and the EU treaty forbids it to take instructions from government officials.
“I think Draghi could live with it, but they will not bow very easily,” said Brzeski. “It has to look like it is their own idea, their own initiative.”
While officials have stressed the need for Greece’s financing to be set before the bailout goes through, the main players have been flexible before and “it’s not as hardball as it looks.”
On the official side, “someone will have to bite the bullet, or everyone,” he said. European officials are trying “to have everyone take part in the burden sharing and thereby get the ECB involved.”
The euro130 billion second bailout package also still depends on labor market reforms that the EU and IMF are asking Greece to implement. Unions and employers resumed talks on Thursday over troika demands to lower wage costs in the private sector and possibly lower the minimum wage.
AP Business Writer David McHugh contributed from Frankfurt.
Copyright © 2012 The Associated Press. All rights reserved.
Action points should be very much more than vague statements of unspecific intent. Proper action points should contain elements such as amount or time.
In addition, there has been a noticeable increase in the use of a very strange new language . It has been used by Eurozone leaders during their various pronouncements over the last (many) months.
The rhetoric adopted by current Eurozone Commissars is frighteningly similar to the Soviet-style nonsense spouted by dead-eyed Party apparatchiks of the 1960s. It is the empty “old-school” Party-designed exhortatory language of the minor government Soviet official.
In common with the good old Berlin Wall days, these pre-written Euro-statements appear to promise much but actually, say nothing. They have a smell about them. It is the smell of long-demolished East German Trade Mission offices – a mixture of damp buff-coloured pocket folders, dusty Party rubber stamps, wax floor polish, wet mops and lever-filled fountain pens.
Until very recently, apparatchik-speak was a dead language.
There is ONE significant word which appears to be “de rigeur” because it implies a level of forcefulness and “doing” which is designed to suggest imminent action.
So far, it has fooled most of the people – especially those who plunder the Stock Markets. They crave warm words.
The words are empty but they provide hope – just like the old Soviet insistence on increased wheat production quotas – last transmitted on Short Wave from Radio Moscow.
These are actual extracts from recent Eurozone communiqués and statements:
“Our action must be determined…”
“We must do more…”
“We must modernise our economies and strengthen our competitiveness … This is essential to create jobs and preserve our social models …”
“These efforts must be made in close cooperation with the social partners.”
“The March European Council must pay due attention…”
“EU legislation… must be rapidly and fully implemented…”
“National supervisors and the EBA must ensure that bank recapitalisation does not lead to deleveraging…”
This strange almost admonitory style, detached from any real analysis of the problems has a quaint nostalgia, which those of us who are used to modern management or political idiom do find both unsettling and hollow.
…and the band plays on.
German Chancellor Angela Merkel is one of the Euro leaders who appears to be slightly too relaxed about the fact that the Greek government has not yet finalised an agreement with creditors in respect of its Sovereign Debt. Now there is the rumour of a German Government memo indicating that Eurozone Banks are just about ready and able to cope with a Greek default. If that is the case then it would seem that the Greeks have been “played” while Euro reorganisation has been taking place behind their backs. The latest wheeze is the IMF expressing dissatisfaction about Greece’s progress in implementing those draconian austerity measures. That means that Greece’s next tranche of bailout money is nowhere near being agreed. It is now possible that even if Greece does capitulate and agree to everything that the IIF demands, it is still not guaranteed a bailout. Tempus Fugit.
Central Bankers – The Fifth Estate.
Nowadays, the bank to government to Central Bank and back to bank cross-border flows of money (both real and imaginary), the constant borrowing and re-borrowing , the bond auctions etc. appear to be behaving as if controlled by a separate, non-governmental , non-economic entity.
Sovereign bond auctions have now become a weekly sport, generating the sort of interest formerly reserved only for TV soap operas.
European banks gather around the European Central Bank like pigeons at feeding time.
Rather worryingly, this new pseudo-economic essence behaves as if it is more-or-less dislocated from what we call “the Global Economy”.
It is the Macro Banking System. The FIFTH ESTATE.**
It is behaving as a totally separate, self-perpetuating, high-level mutant economy which exists for its own sake and is presided over by senior bankers and financiers with politicians merely fetching and carrying.
One of the symptoms which we are currently witnessing is the demise of democratically-elected officials. Their status seems to be diminishing day-by-day, to the extent that their job is simply to row the boat according to the drumbeat set by very senior bankers – the New Rulers.
The very people who created this financial crisis four years ago have gradually created a brand-new debt-fuelled edifice which has become anchored both in the economy as well as in our collective psyche. We have come to see the Debt Mountain as our Saviour with Central Bankers in the role of its High Priests.
The concept has become so embedded, that we have grown to believe that only they (the High Priests) can save us.
This new entity appears divorced from the old-fashioned concepts of growth, production and distribution and now only needs sovereign economies to feed it occasionally.
This gradual power-shift has only occurred in the last year-or-so and so, imperceptibly, we have entered an age where politicians have finally become subservient to the bankers.
The jury is still out as to whether the development of this new ruling financial class is good or bad or even sinister. The Conspiracy Theorists have notions of Bilderbergers, a New World Order and all sorts of other conspiracies – I do NOT subscribe to that view.
Politicians have shown that they do not have the intellectual or technical capacities to deal with a multi-causal, multi-faceted, vastly complicated economic crisis, borne more out of greed-conceived chaos, rather than the usual rules of Keynesian economics.
We have to take a leaf out of the politicians’ book.
Heads bowed, we wait.
** First Estate – Clergy. Second Estate – Nobility. Third Estate – Commoners. Fourth Estate – the Press.
In January 2011, French President Nicolas Sarkozy proclaimed that by the end of the year, France was ready to implement a financial transactions tax (FTT) to help poor countries. The German Chancellor, Angela Merkel, also expressed her support.
Sarkozy promised: “My conviction has always been that the FTT is the best form of innovative financing…. France is prepared to implement innovative financing mechanisms even if other countries should choose not to join. Because there is a moment in time where you have to go from discourse to setting an example.”
But, surprisingly, no agreement has yet been reached.
It’s urgent that France and Germany take concrete action to drive this joint proposal forward and to ensure that the revenues will be used to help reach the Millennium Development Goals.
France’s and Germany’s generosity is to be admired and we should do all we can to encourage this initiative, especially in the wake of such momentous upheavals within the Eurozone.
One trusts that our Prime Minister takes the time to gently remind the French and the Germans of this more-than-generous gesture.
The petition is here: http://www.thepetitionsite.com/takeaction/825/474/357/
Dreamy British Eurosceptics fantasize about UK leaving the EU – but their arguments are weak
This article is by Keith Nuthall, Editor and Director at International News Services. It is reproduced here with Keith’s full permission. CLICK HERE.
Britain’s recent refusal to sign a new European Union (EU) treaty that would impose tougher controls over the level of budget deficits EU governments can run might seem like prudence, given the appalling state of the Euro. But the failure of Britain to negotiate itself a real say in how Eurozone members control public spending poses grave risks for the UK and its financial sector.
By standing aside from this agreement, Britain has cleared the way for Euro-zone members to agree their own financial industry legislation, which could ultimately make it easier for Euro trades to be made in Frankfurt than in London – and that might prove a bitterly expensive pill to swallow. The irony is that the senior partner in Britain’s ruling coalition government – the Conservative Party – has always been a pro-business party. And yet, the visceral nationalism and Euro-scepticism of some of its members threatens the financial health of this key constituency.
And if fears about losing City of London business to Frankfurt really did grow, just watch the UK follow Euro-zone financial regulations anyway. In this scenario, it would lose more sovereignty than it will gain by sitting in less-than-splendid isolation while others make decisions that will shape the UK’s future. It is a bit like the Swiss – they profess absolute neutrality over everything. And yet, they are always signing up to this or that bit of European legislation – recently doing away with border controls with EU member states.
The financial players in the City of London know all of this of course. For they trade around the world, and they know that the big corporations in America and the giant emerging market countries want to trade with one single European market, not a patchwork of 27 states. And if Britain retreats to being a semi-detached part of this union, its influence over the trade policies of the EU could dwindle. And this really matters, because the EU still controls trade agreements made for its members and will continue to do so. Some Conservatives retain wistful rose-tinted fantasies of Britain quitting the EU and then governments of the Commonwealth (once the British Empire) would strike replacement trade deals – maybe for old time’s sake, given the UK was supposedly such a civilised coloniser. This is romantic hogwash. The BRICs countries (inside and outside the Commonwealth) want to do business with the EU – not little Britain – which will remain a comparatively small market.
The same applies to trade with the US – another common Eurosceptic dream – that Britain should ally its trading and regulatory policies to that of America not Europe. This ignores the reality that the EU, USA, others are already getting together on harmonising their rules and regulations on a huge variety of issues. It is why the US likes the EU – because it enables their big companies and regulators to get their rules in sync with those governing the EU’s 500 million people.
A good example came just a couple of weeks ago – under the auspices of the UN Global Forum for the Harmonisation of Vehicles Regulations (yes it exists!). There, the USA, EU and Japanese auto industries and regulators got together to write the global rule book on how to make, run and charge electric vehicles – which we’ll all be driving in 20 years’ time. It’s a huge law – it will cover utilities; auto makers; safety regulators etc etc… And there are many more examples like this – medicines – the European Medicines Agency and the FDA of the USA will from January conduct joint safety inspections on all the medicines we use – working from a common rule book. Food – scientific safety standards for all WTO members (basically the whole world once Russia joins in the New Year)…are all based on a Rome-based body, the Codex Alimentarius. If a country (or the EU for EU member states) decides it wants to block the import of a foodstuff on health grounds – those grounds have to comply with Codex rules – or you get hammered by retaliatory duties at the WTO. I could go on and on (G20 rules on financial disclosures preventing another 2008 meltdown etc).
This is the coffee that has to be smelt by Britain’s dreamy Eurosceptics – national sovereignty over huge areas of our daily lives has been signed away for years. The EU is just part of a huge process of global law and regulatory harmonisation that has been happening and – crucially – will continue. There are similar processes in NAFTA, ASEAN (SE Asia), Mercosur (Latin America) and elsewhere.
This means that Britain can never ‘go it alone’ from Europe – because its key would-be trading partners want it to follow European rules, not only to make exports easier, because they want to follow the same rules too to help imports as well. It’s all just good business. And campaigners wanting Britain to withdraw from the EU can pretend this reality isn’t there if they like – but the markets won’t, and they demand to be heard.
Merkel: All is not well. Referendum?
BERLIN (Reuters) – A leading figure in Germany’s Free Democrats resigned unexpectedly on Wednesday amid a brewing battle for control of the beleaguered party that shares power with Chancellor Angela Merkel’s conservatives.
Christian Lindner, general secretary of the FDP and long seen as the liberal party’s rising star, quit in a dramatic move that exacerbated the party’s leadership crisis and appeared to be linked to a divisive referendum of party members on euro zone rescue moves.
Coalition sources said Lindner wanted to distance himself from besieged FDP chairman Philipp Roesler by lobbing a farewell grenade at his boss, who is under attack for persistent weakness in opinion polls and poor management of the referendum.
Turmoil in the FDP could cause instability for Merkel’s coalition even though the next election is not due until 2013. Speculation is growing that the FDP will dump Roesler and turn to veteran parliamentary floor leader Rainer Bruederle, 66.
Lindner, 32, and Roesler, 38, made brief statements on Wednesday to journalists in Berlin and did not take any questions. There have been rumours of behind-the-scenes tensions between the FDP’s two youthful leaders.
Merkel faced further turbulence from a growing scandal engulfing President Christian Wulff, an ally she nominated for the largely ceremonial post last year. Wulff has denied accusations he misled a regional parliament over a private loan.
Merkel’s spokesman said she had full confidence in Wulff and has no reason to doubt his comments about a private 500,000-euro loan for his house. Bild newspaper reported Wulff obtained the loan from a businessman friend at favourable interest rates.
Wulff told the regional parliament last year when he was state premier he had no business dealings with the friend. Bild said the businessman’s wife had lent him the 500,000 euros. German editorials attacked Wulff for being less than forthright.
“Merkel has full confidence in the person and conduct of Mr. Wulff,” said spokesman Steffen Seibert. “He’s a good president.”
‘BAMBI’ LINDNER LOST HIS NERVE
The Lindner resignation exposed deep splits in the party over whether to support Merkel’s efforts to bolster weak euro zone members. If they widen, it could destabilise her coalition.
“He lost his nerve,” a senior FDP official told Reuters when asked about Lindner’s move.
But a former senior leader in the conservative party said Lindner was attacking Roesler while saving his own skin.
“Roesler’s in over his head and Lindner wanted to get out before it was too late,” he said. “The whole country is fed up with these too-smooth, lightweight amateurs who have run the FDP into the ground. They need someone with experience.”
Lindner had responsibility for organising the referendum which was forced upon the party leadership by a group of eurosceptics within the FDP. Lindner was given the unflattering nickname “Bambi” by a FDP leader years ago and it stuck to the photogenic young man with the baby face.
His departure is the latest setback for the FDP, a pro-business party whose support has fallen to just 3 percent in opinion polls after it won a record 14.6 percent in the 2009 election, helping Merkel secure a second term.
“It’s possible that Lindner wanted to abandon ship before it was too late,” said Gero Neugebauer, political scientist at Berlin’s Free University. “In any event it will exacerbate the FDP’s crisis. The FDP has lost touch with its grass roots.”
The normally loquacious Lindner made a short, terse statement to journalists at FDP headquarters in Berlin, but then left without taking questions, saying only “Auf Wiedersehen.”
“There comes a time when you have to make room to allow for a new dynamic,” said Lindner, a polished speaker who previously worked in the advertising industry. “The events in recent weeks and days have strengthened my belief that this is the case.”
Angry that the FDP leadership was backing Merkel’s euro rescue moves, eurosceptics led by lawmaker Frank Schaeffler led a campaign in recent months to collect signatures within the party for the referendum, which is non-binding.
Their idea was send a signal to the leadership by showing them that grass-roots FDP members opposed euro rescue moves.
The referendum, whose results are expected to be published on Friday, may not pass because Roesler said the required quorum of FDP members is not expected to be reached. Of the 64,000 members of the party, 21,000 needed to take part for it to be valid.
Roesler said in an interview on Sunday the quorum would not be reached and said that was a victory for him. After that thousands of FDP members cast their ballots, FDP officials said.
Lindner married a newspaper reporter in August. He also obtained a license to drive racing cars two years ago.
(Additional reporting by Thorsten Severin, Andreas Rinke and Madeline Chambers, writing by Erik Kirschbaum; editing by Noah Barkin and Alistair Lyon)
The Merkozy Love-in.
This week sees yet another meeting of Eurozone leaders. On previous form, I would bet that the only outcome will be a series of half-measures and promises which will be primarily designed to reassure fund managers, investors and to placate the banks. The fate of the Euro will yet again, be postponed as millions of Europeans continue to stand in the fast-growing unemployment queue.
Theoretically, Euroleaders (or should I say Frau Merkel) will be deciding not-only the fate of the Euro but the fate of every economy in what used to be known as the “advanced industrial world”.
Austerity has become the new growth with the INEVITABLE result of ever-lengthening unemployment queues and increasingly turbulent currents of social unrest.
Received wisdom is that deficit reduction is more important than job creation through fiscal stimulus. The downside is that for countries which have already launched themselves on a deficit reduction programme, it is beginning to look as if there can never be quite enough deficit reduction because of rapidly decreasing tax revenue.
There will always be that no-man’s land between deficit reduction and fiscal stimulus. Not a single economy has arrived there yet.
However, what is even more worrying, is that there isn’t a single politician, banker or economist who can even begin to put a time frame on the process. Currently, it looks like an open-ended arrangement.
One thing that the average punter does NOT realise that there are initiatives and money movements within the banking system which he knows nothing about – unless of course, it is such a big move that the banking authorities decide that would be prudent to go public. Last week’s sudden announcement by central banks that they would “assist” European banks which needed US dollars was a case in point.
The coordinated move was so huge that the most likely cause was that one or two major European banks must have made THE phone-call to their own Treasury to say that they were about to go under. The U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Bank of Canada lowered their rates for borrowing dollars from each other by a 0.5 percentage point to “ease strains in financial markets.” (a meaningless phrase).
They went on: “At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,”
Even China took steps to stimulate domestic demand by lowering its central bank interest rate.
Make no mistake – there was a crisis.
Every action so far by central banks and politicians has been a temporary fix. They are still trying to figure out the cure – if indeed there is one.
Last week, the central banks merely threw a rope for Eurobanks to cling onto – but that does NOT solve – or even begin to solve the still-spreading sovereign debt crisis.
This week, communiques are being written, meetings are being conducted and financial horse-trading is taking place as under-qualified politicians attempt to put together a package which, in one fell swoop should solve the global financial crisis.
The whole circus will culminate in a December 9th Brussels summit ( another one) during which the 17 Eurozone leaders will be joined by the 10 non-Euro-participants and a series of agreements will be promulgated.
The ONLY agreement that they really need to pull out of the hat is a “contract” to coordinate Eurozone fiscal policies.
Merkel’s dream of a Federal Europe will have taken its first faltering step.
So far , the Markets have tended to play ball with the floundering politicians but even those eternal optimists are fast running out of patience.
The latest rally has no legs because the current assumption is that somehow (for the first time ever), Eurozone leaders will provide a solution.
So, what is the likelihood of a TARP (Toxic Asset Relief Programme)? What is the likelihood of a coordinated programme to recapitalise ALL the banks? What is the likelihood of Germany changing its mind on ever-increasing austerity programmes which are driving weak Euro economies to Depression (these days, mere Stagnation seems like an attractive alternative – an aspiration!)
So far, the Eurointransigence has been destructive: Unemployment, demotivated and desperate countries, amplifying hardship, collapsed governments.
The evidence so far suggests that those believing that this week will provide the Miracle in Brussels will be disappointed.
The weeks events began with today’s meeting between Chancellor Merkel and Nicolas Sarkozy – The Merkozy Meeting. The output was predictable with an early hint of further postponement.
German Chancellor Angela Merkel has called for “structural changes” after the keenly-watched meeting with French President Nicolas Sarkozy in Paris today. The two leaders said that they had agreed on a “comprehensive” agreement to be proposed on Friday at the summit. (What he meant was is that he had agreed with everything that Frau Merkel had proposed)
“This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability,” said Merkel.
Among the proposals were that the European Court of Justice will have a say when countries break the legally established limit for public debt of 3% of GDP. Also, both leaders rejected the need for the joint issuance of European debt by member states, adding that socialising debt burdens is no solution. (Another Merkel victory).
Sarkozy has added that he expects all of the necessary negotiations to be finalised by March (no surprises there!) and that changes to the Treaty will be ratified in France, following the next national elections in March.
The pair indicated that it is yet to be seen if the changes will be adopted by all 27 European nations or simply the 17 Euro states.
Lastly, they also made it clear that it is their intention to continue working with the International Monetary Fund and to bring forward the implementation of the permanent rescue fund by a full year, to 2012.
Here in the United Kingdom, where politicians have recently voiced concerns on how EU treaty changes could affect Britain, Downing Street has said that there will be no referendum on the EU treaty changes.
A spokesman for Prime Minister said, “What is being talked about is a new set of rules for the Eurozone and how those countries that are members of the euro organise themselves on fiscal policy. There is no proposal on the table for a transfer of powers from the UK to Brussels. That is not what is being talked about…No-one has put that on the table and I don’t think it is likely to be on the table.”
At the end of the first day, it seems that we are about to be served-up yet another portion of bland European procrastination – but what an object lesson in Blatant Brinkmanship from the Germans!
Chancellor’s Autumn Statement – just the facts
“We will do whatever it takes to protect Britain from this debt storm” in Europe.
Office for Budget Responsibility does not predict a recession in UK.
OBR forecast: GDP growth estimated at 0.9% in 2011. 0.7% in 2012 (down from 2.5%).
Borrowing falling but not as fast as forecast.
OBR sees additional borrowing of £5bn in 2011/12, £20bn in 2012/13 and £30bn in 2013/14.
Public sector pay awards set at average of 1% increase after the pay freeze ends next Spring.
NHS and schools budgets protected.
Deal on public sector pensions is “fair”.
Basic state pension to rise by £5.30 next April. Pension credit also uprated by £5.30.
In 2026 – state pension age will rise to 67.
Benefits uprated by 5.2% next April.
Credit Easing to help small business – ceiling of £40bn. National Loan Guarantee Scheme to use country’s record low interest rate to ease interest rates charged to firms who borrow from banks.
Country’s low rate to benefit families too through mortgage indemnities. Will reinvigorate “right to buy” to also help construction sector.
Bank Levy rate to rise from January 1st.
National Infrastructure Plan to get Britain building to improve roads, bridges, rail, schools etc. It will be paid for through”British savings for British jobs.” £20bn to come from pension schemes.
£5bn of additional Government spending on infrastructure plan – 90% of homes will have access tosuper-fast broadband.
Regional Growth Fund for England to get extra £1bn.
£0.5bn for science projects.
Health & Safety red tape to be cut further for small firms.
Corporate tax rate to fall to 25%.
Business rates holiday extended until April 2013.
8.7% unemployment rate forecast for next year by OBR.
New Youth Contract to offer work experience and assistance getting into private sector to help ease youth unemployment.
Extra £1.2bn to schools with 100 extra ‘free schools’. Maths Free schools to help UK’s science industry.
Free nursery places for 40% of the country’s 2-year olds (260,000)
Planned 3p per litre fuel duty increase in January is cancelled. August’s planned increase to be reduced.
Rail fares capped at 1% higher than CPI inflation
EFSF Accounting Gymnastics.
Last night , Eurozone finance ministers (sort of) agreed a deal to increase the firepower of the European Financial Stability Facility (EFSF).
Unfortunately, this time it really IS a case of too little too late or perhaps, someone didn’t get his sums quite right. Some of the €440 which the EFSF has to play with has already been allocated to help Portugal and Ireland. There is also the small matter of the EFSF contribution to the next Greek bailout.
Nevertheless, it was agreed that the EFSF will guarantee 20 to 30% of the value of any bond issued by a Eurozone member, allowing the fund’s “assets” to be “leveraged”. That, in effect means that say, €1 billion of EFSF assets can underwrite about €3 billions’ worth of Eurobonds. A dangerous game – especially as the EFSF’s real apacity is so limited.
In reality the EFSF’s capacity might only be between €500 and €700 billion, which is not really even big enough to bailout Italy and Spain. Meanwhile, Greece will run out of cash in two weeks’ time and is already standing in the wings, hands out, awaiting its next €8 billion bailout.
Also embedded in the backdrop to all this accounting wizardry, is a secret Euro report which states that Italy will need to beef-up its austerity measures , otherwise it will soon become insolvent.
The ECB has its own issues, centering around its difficulty in securing support from banks in respect of balancing its sovereign bond purchases. Because banks are so unsure of what is going to hit them next, they wish to maintain liquidity. That means that they are no too keen on even depositing short-term money with the ECB.
When agreeing such initiatives, it is quite normal to “test the water” by soliciting the views of investors. Chris Frankel CFO and Deputy CEO of EFSF said ‘Following extensive discussions with investors covering all types and geographical regions, “a number of them” have given their positive views and signalled their willingness to participate.’
That simply means that institutions which are already government-underwritten will invest in lower-risk bonds as a result of centralised underwriting. Consequently, they will be willing (in theory) to accept lower bond yields.
All of the above is being promulgated as a “done deal” but others believe that the whole arrangement is far to complex and too difficult to understand. It certainly smacks of desperation.
What is really needed is a fund which can operate quickly and simply.
In spite of very strong opposition from Germany, it would seem that the only eventual way forward will be not-only for the ECB to start printing Euros. but to become European lender of last resort.
One thing is definite – the whole thing is hanging by a thread and just one more “Eurosurprise” would be devastating.
And the IMF? Another statement declared: “The 17 Euro Finance Ministers have agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility.” Make of that what you will.
One thing is for sure, everything MUST be done to boost the EFSF’s effectiveness and for the “stop-gap accords” to stop. So far, all the temporary “fixes” and retro-crisis-management have failed to protect Italy and Spain from surging bond yields and both Standard and Poors as well as increasingly cynical investors now have France in the crosshairs.
Today is a big day for the Eurozone.
The uncertainty is not helped by statements such as the one from EFSF Chief Executive Officer Klaus Regling who said “It is “impossible to give one number” for the total firepower of the EFSF because market conditions change over time.”
Or ECB President Mario Draghi saying that the ECB’s 18-month- old bond-buying program is “temporary and limited.”
In spite of all the meetings, organisational complexity and communiqués, there are still two vital ingredients missing – a coherent strategy and leadership with direction.
The Band Plays on………and on………
Markets are continuing to gyrate quite wildly and it will not be long before they finally wake up and pluck up the courage to realise that the nth solution to the Sovereign Debt crisis is not going to work any better than the (n-1)th solution or even the (n+1)th attempt next week. Greece is still bogged-down in a political and fiscal mess – in fact EVERY SINGLE DAY it is sinking further into the mire. Italy and its change of main players is also becoming unhinged, while everyone else in Europe is keeping their head well below the parapet, cringing in horror at the thought of having to produce increasing amounts of bailout money which DOES NOT EXIST. Countries such as the United Kingdom take scant comfort from changes in growth and forecasts measured in no more than a few basis points. Meanwhile bankers are bracing themselves for the tidal wave of “sell” orders which are about to swamp their offices. Suddenly the Christmas Holiday seems such a long way away.
Eurozone ‘faces sovereignty loss’
Eurozone countries will have to swallow “a big loss of national sovereignty” by pooling resources and control over fiscal policy to restore long-term stability to the single currency, Chancellor George Osborne has said.
Mr Osborne said that the global economy was at its “most dangerous moment” since the crash of 2008, with real risks to British jobs and growth.
But he insisted once again that the UK will not be part of any EU fiscal integration and will not bear the financial cost of bailing out the single currency.
Writing in the Evening Standard, Mr Osborne said: “The financial risks of standing behind the currency will ultimately be borne by eurozone citizens. The eurozone has the financial capacity to restore stability. They now need to deploy it without delay.”
Mr Osborne also restated his opposition to a Europe-only Financial Transaction Tax, warning that a levy on trading in shares and derivatives which does not include the US or China would be “economic suicide” for Britain and Europe.
The European Commission launched proposals for an FTT in September, and they have the backing of France and Germany, who think the levy could help finance the eurozone bailout. Meanwhile, campaigners want some of the revenues from a “Robin Hood Tax” to go towards aid for the poor world.
But the Chancellor said: “Proposals for a Europe-only Financial Transactions Tax are a bullet aimed at the heart of London… The EU should be coming forward with new ideas to promote growth, not undermine it.”
Despite “grounds for optimism” following the formation of new governments in Greece and Italy, Mr Osborne warned that “this remains the most dangerous moment for the world economy since Lehman Brothers went down in the autumn of 2008”.
And he added: “The epicentre may be across the Channel in the eurozone, but the risks to Britain are no less real.
“Jobs and growth in our country have already been damaged by this euro crisis. In such uncertain times, this coalition Government’s priority is to help Britain ride out this storm instead of being consumed by it.”
Copyright © 2011 The Press Association. All rights reserved.
The moves by both Greece and Italy towards a Technocratic -style government are both reassuring and frightening. The increased complexity of global economics has really exposed elected politicians as being incapable of making the right decisions, except at the most superficial level. The worrying thing is that Austerity Economics has become a modern Mantra and so has come to be viewed as a modern divine truth. In fact, Stimulus Politics is what is needed. Currently, the cure is killing the patient. The United Kingdom experience is an excellent example of a policy which clearly demonstrates that austerity measures gradually KILL economic growth but that political dogma always wins out. Greece has been an extreme example where austerity has done little more than accelerate economic collapse. Italy has followed and now French austerity economics are set to cause even more economic havoc.
October 2011 Eurozone Output
This is what they said:
1. Over the last three years, we have taken unprecedented steps to combat the effects of the world-wide financial crisis, both in the European Union as such and within the euro area. The strategy we have put into place encompasses determined efforts to ensure fiscal consolidation, support to countries in difficulty, and a strengthening of euro area governance leading to deeper economic integration among us and an ambitious agenda for growth. At our 21 July meeting we took a set of major decisions. The ratification by all 17 Member States of the euro area of the measures related to the EFSF significantly strengthens our capacity to react to the crisis. Agreement by all three institutions on a strong legislative package within the EU structures on better economic governance represents another major achievement. The introduction of the European Semester has fundamentally changed the way our fiscal and economic policies are co-ordinated at European level, with co- ordination at EU level now taking place before national decisions are taken. The euro continues to rest on solid fundamentals.
2. Further action is needed to restore confidence. That is why today we agree on a comprehensive set of additional measures reflecting our strong determination to do whatever is required to overcome the present difficulties and take the necessary steps for the completion of our economic and monetary union. We fully support the ECB in its action to maintain price stability in the euro area. Sustainable public finances and structural reforms for growth
3. The European Union must improve its growth and employment outlook, as outlined in the growth agenda agreed by the European Council on 23 October 2011. We reiterate our full commitment to implement the country specific recommendations made under the first European Semester and on focusing public spending on growth areas.
4. All Member States of the euro area are fully determined to continue their policy of fiscal consolidation and structural reforms. A particular effort will be required of those Member States who are experiencing tensions in sovereign debt markets.
5. We welcome the important steps taken by Spain to reduce its budget deficit, restructure its banking sector and reform product and labour markets, as well as the adoption of a constitutional balanced budget amendment. Strictly implementing budgetary adjustment as planned is key, including at regional level, to fulfil the commitments of the stability and growth Pact and the strengthening of the fiscal framework by developing lower level legislation to make the constitutional amendment fully operative. Further action is needed to increase growth so as to reduce the unacceptable high level of unemployment. Actions should include enhancing labour market changes to increase flexibility at firm level and employability of the labour force and other reforms to improve competitiveness, specially extending the reforms in the service sector.
6. We welcome Italy’s plans for growth enhancing structural reforms and the fiscal consolidation strategy, as set out in the letter sent to the Presidents of the European Council and the Commission and call on Italy to present as a matter of urgency an ambitious timetable for these reforms. We commend Italy’s commitment to achieve a balanced budget by 2013 and a structural budget surplus in 2014, bringing about a reduction in gross government debt to 113% of GDP in 2014, as well as the foreseen introduction of a balanced budget rule in the constitution by mid 2012. Italy will now implement the proposed structural reforms to increase competitiveness by cutting red tape, abolishing minimum tariffs in professional services and further liberalising local public services and utilities. We note Italy’s commitment to reform labour legislation and in particular the dismissal rules and procedures and to review the currently fragmented unemployment benefit system by the end of 2011, taking into account the budgetary constraints. We take note of the plan to increase the retirement age to 67 years by 2026 and recommend the definition by the end of the year of the process to achieve this objective.
We support Italy’s intention to review structural funds programs by reprioritising projects and focussing on education, employment, digital agenda and railways/networks with the aim of improving the conditions to enhance growth and tackle the regional divide. We invite the Commission to provide a detailed assessment of the measures and to monitor their implementation, and the Italian authorities to provide in a timely way all the information necessary for such an assessment. Countries under adjustment programme
7. We reiterate our determination to continue providing support to all countries under programmes until they have regained market access, provided they fully implement those programmes.
8. Concerning the programme countries, we are pleased with the progress made by Ireland in the full implementation of its adjustment programme which is delivering positive results.Portugal is also making good progress with its programme and is determined to continue undertaking measures to underpin fiscal sustainability and improve competitiveness. We invite both countries to keep up their efforts, to stick to the agreed targets and stand ready to take any additional measure required to reach those targets.
9. We welcome the decision by the Eurogroup on the disbursement of the 6th tranche of the EUIMF support programme for Greece. We look forward to the conclusion of a sustainable and credible new EU-IMF multiannual programme by the end of the year.
10. The mechanisms for the monitoring of implementation of the Greek programme must be strengthened, as requested by the Greek government. The ownership of the programme is Greek and its implementation is the responsibility of the Greek authorities. In the context of the new programme, the Commission, in cooperation with the other Troika partners, will establish for the duration of the programme a monitoring capacity on the ground, including with the involvement of national experts, to work in close and continuous cooperation with the Greek government and the Troika to advise and offer assistance in order to ensure the timely and full implementation of the reforms. It will assist the Troika in assessing the conformity of measures which will be taken by the Greek government within the commitments of the programme. This new role will be laid down in the Memorandum of Understanding. To facilitate the efficient use of the sizeable official loans for the recapitalization of Greek banks, the governance of the Hellenic Financial Stability Fund (HFSF) will be strengthened in agreement with the Greek government and the Troika.
11. We fully support the Task Force on technical assistance set up by the Commission.
12. The Private Sector Involvement (PSI) has a vital role in establishing the sustainability of the Greek debt. Therefore we welcome the current discussion between Greece and its private investors to find a solution for a deeper PSI. Together with an ambitious reform programme for the Greek economy, the PSI should secure the decline of the Greek debt to GDP ratio with an objective of reaching 120% by 2020. To this end we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready to provide additional programme financing of up to 100 bn euro until 2014, including the required recapitalisation of Greek banks. The new programme should be agreed by the end of 2011 and the exchange of bonds should be implemented at the beginning of 2012. We call on the IMF to continue to contribute to the financing of the new Greek programme.
13. Greece commits future cash flows from project Helios or other privatisation revenue in excess of those already included in the adjustment programme to further reduce indebtedness of the Hellenic Republic by up to 15 billion euros with the aim of restoring the lending capacity of the EFSF.
14. Credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks.
15. As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution.
16. All other euro area Member States solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole. Stabilisation mechanisms
17. The ratification process of the revised EFSF has now been completed in all euro area Member States and the Eurogroup has agreed on the implementing guidelines on primary and secondary market interventions, precautionary arrangements and bank recapitalisation. The decisions we took concerning the EFSF on 21 July are thus fully operational. All tools available will be used in an effective way to ensure financial stability in the euro area. As stated in the implementing guidelines, strict conditionality will apply in case of new (precautionary) programmes in line with IMF practices. The Commission will carry out enhanced surveillance of the Member States concerned and report regularly to the Eurogroup.
18. We agree that the capacity of the extended EFSF shall be used with a view to maximizing the available resources in the following framework: • the objective is to support market access for euro area Member States faced with market pressures and to ensure the proper functioning of the euro area sovereign debt market, while fully preserving the high credit standing of the EFSF. These measures are needed to ensure financial stability and provide sufficient ringfencing to fight contagion; • this will be done without extending the guarantees underpinning the facility and within the rules of the Treaty and the terms and conditions of the current framework agreement, operating in the context of the agreed instruments, and entailing appropriate conditionality and surveillance.
19. We agree on two basic options to leverage the resources of the EFSF: • providing credit enhancement to new debt issued by Member States, thus reducing the funding cost. Purchasing this risk insurance would be offered to private investors as an option when buying bonds in the primary market; • maximising the funding arrangements of the EFSF with a combination of resources from private and public financial institutions and investors, which can be arranged through Special Purpose Vehicles. This will enlarge the amount of resources available to extend loans, for bank recapitalization and for buying bonds in the primary and secondary markets.
20. The EFSF will have the flexibility to use these two options simultaneously, deploying them depending on the specific objective pursued and on market circumstances. The leverage effect of each option will vary, depending on their specific features and market conditions, but could be up to four or five.
21. We call on the Eurogroup to finalise the terms and conditions for the implementation of these modalities in November, in the form of guidelines and in line with the draft terms and conditions prepared by the EFSF.
22. In addition, further enhancement of the EFSF resources can be achieved by cooperating even more closely with the IMF. The Eurogroup, the Commission and the EFSF will work on all possible options. Banking system
23. We welcome the agreement reached today by the members of the European Council on bank recapitalisation and funding (see Annex 2). Economic and fiscal coordination and surveillance
24. The legislative package on economic governance strengthens economic and fiscal policy coordination and surveillance. After it enters into force in January 2012 it will be strictly implemented as part of the European Semester. We call for rigorous surveillance by the Commission and the Council, including through peer pressure, and the active use of the existing and new instruments available. We also recall our commitments made in the framework of the Euro Plus Pact.
25. Being part of a monetary union has far reaching implications and implies a much closer coordination and surveillance to ensure stability and sustainability of the whole area. The current crisis shows the need to address this much more effectively. Therefore, while strengthening our crisis tools within the euro area, we will make further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline. We will develop the necessary policies to support the functioning of the single currency area.
26. More specifically, building on the legislative package just adopted, the European Semester and the Euro Plus Pact, we commit to implement the following additional measures at the national level:
a. adoption by each euro area Member State of rules on balanced budget in structural terms translating the Stability and Growth Pact into national legislation, preferably at constitutional level or equivalent, by the end of 2012;
b. reinforcement of national fiscal frameworks beyond the Directive on requirements for budgetary frameworks of the Member States. In particular, national budgets should be based on independent growth forecasts;
c. invitation to national parliaments to take into account recommendations adopted at the EU level on the conduct of economic and budgetary policies;
d. consultation of the Commission and other euro area Member States before the adoption of any major fiscal or economic policy reform plans with potential spillover effects, so as to give the possibility for an assessment of possible impact for the euro area as a whole;
e. commitment to stick to the recommendations of the Commission and the relevant Commissioner regarding the implementation of the Stability and Growth Pact.
27. We also agree that closer monitoring and additional enforcement are warranted along the following lines:
a. for euro area Member States in excessive deficit procedure, the Commission and the Council will be enabled to examine national draft budgets and adopt an opinion on them before their adoption by the relevant national parliaments. In addition, the Commission will monitor budget execution and, if necessary, suggest amendments in the course of the year;
b. in the case of slippages of an adjustment programme closer monitoring and coordination of programme implementation will take place.
28. We look forward to the Commission’s forthcoming proposal on closer monitoring to the Council and the European Parliament under Article 136 of the TFEU. In this context, we welcome the intention of the Commission to strengthen, in the Commission, the role of the competent Commissioner for closer monitoring and additional enforcement.
29. We will further strengthen the economic pillar of the Economic and Monetary Union and better coordinate macro- and micro-economic policies. Building on the Euro Plus Pact, we will improve competitiveness, thereby achieving further convergence of policies to promote growth and employment. Pragmatic coordination of tax policies in the euro area is a necessary element of stronger economic policy coordination to support fiscal consolidation and economic growth. Legislative work on the Commission proposals for a Common Consolidated Corporate Tax Base and for a Financial Transaction Tax is ongoing. Governance structure of the euro area
30. To deal more effectively with the challenges at hand and ensure closer integration, the governance structure for the euro area will be strengthened, while preserving the integrity of the European Union as a whole.
31. We will thus meet regularly – at least twice a year- at our level, in Euro Summits, to provide strategic orientations on the economic and fiscal policies in the euro area. This will allow to better take into account the euro area dimension in our domestic policies.
32. The Eurogroup will, together with the Commission and the ECB, remain at the core of the daily management of the euro area. It will play a central role in the implementation by the euro area Member States of the European Semester. It will rely on a stronger preparatory structure.
33. More detailed arrangements are presented in Annex 1 to this paper. Further integration
34. The euro is at the core of our European project. We will strengthen the economic union to make it commensurate with the monetary union.
35. We ask the President of the European Council, in close collaboration with the President of the Commission and the President of the Eurogroup, to identify possible steps to reach this end. The focus will be on further strengthening economic convergence within the euro area, improving fiscal discipline and deepening economic union, including exploring the possibility of limited Treaty changes. An interim report will be presented in December 2011 so as to agree on first orientations. It will include a roadmap on how to proceed in full respect of the prerogatives of the institutions. A report on how to implement the agreed measures will be finalised by March 2012.
Ten measures to improve the governance of the euro area There is a need to strengthen economic policy coordination and surveillance within the euro area, to improve the effectiveness of decision making and to ensure more consistent communication. To this end, the following ten measures will be taken, while fully respecting the integrity of the EU as a whole:
1. There will be regular Euro Summit meetings bringing together the Heads of State or government (HoSG) of the euro area and the President of the Commission. These meetings will take place at least twice a year, at key moments of the annual economic governance circle; they will if possible take place after European Council meetings. Additional meetings can be called by the President of the Euro Summit if necessary. Euro Summits will define strategic orientations for the conduct of economic policies and for improved competitiveness and increased convergence in the euro area. The President of the Euro Summit will ensure the preparation of the Euro Summit, in close cooperation with the President of the Commission.
2. The President of the Euro Summit will be designated by the HoSG of the euro area at the same time the European Council elects its President and for the same term of office. Pending the next such election, the current President of the European Council will chair the Euro Summit meetings.
3. The President of the Euro Summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits. The President will also inform the European Parliament of the outcome of the Euro Summits.
4. As is presently the case, the Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability. Whilst respecting the powers of the EU institutions in that respect, it promotes strengthened surveillance of Member States’ economic and fiscal policies as far as the euro area is concerned. It will also prepare the Euro Summit meetings and ensure their follow up.
5. The President of the Eurogroup is elected in line with Protocol n°14 annexed to the Treaties. A decision on whether he/she should be elected among Members of the Eurogroup or be a full-time President based in Brussels will be taken at the time of the expiry of the mandate of the current incumbent. The President of the Euro Summit will be consulted on the Eurogroup work plan and may invite the President of the Eurogroup to convene a meeting of the Eurogroup, notably to prepare Euro Summits or to follow up on its orientations. Clear lines of responsibility and reporting between the Euro Summit, the Eurogroup and the preparatory bodies will be established.
6. The President of the Euro Summit, the President of the Commission and the President of the Eurogroup will meet regularly, at least once a month. The President of the ECB may be invited to participate. The Presidents of the supervisory agencies and the EFSF CEO / ESM Managing Director may be invited on an ad hoc basis.
7. Work at the preparatory level will continue to be carried out by the Eurogroup Working Group (EWG), drawing on expertise provided by the Commission. The EWG also prepares Eurogroup meetings. It should benefit from a more permanent sub-group consisting of alternates/officials representative of the Finance Ministers, meeting more frequently, working under the authority of the President of the EWG.
8. The EWG will be chaired by a full-time Brussels-based President. In principle, he/she will be elected at the same time as the chair of the Economic and Financial Committee.
9. The existing administrative structures (i.e. the Council General Secretariat and the EFC Secretariat) will be strengthened and co-operate in a well coordinated way to provide adequate support to the Euro Summit President and the President of the Eurogroup, under the guidance of the President of the EFC/EWG. External expertise will be drawn upon as appropriate, on an ad hoc basis.
10. Clear rules and mechanisms will be set up to improve communication and ensure more consistent messages. The President of the Euro Summit and the President of the Eurogroup shall have a special responsibility in this respect. The President of the Euro Summit together with the President of the Commission shall be responsible for communicating the decisions of the Euro Summit and the President of the Eurogroup together with the ECFIN Commissioner shall be responsible for communicating the decisions of the Eurogroup.
Consensus on banking package
1. Measures for restoring confidence in the banking sector (banking package) are urgently needed and are necessary in the context of strengthening prudential control of the EU banking sector. These measures should address: a. The need to ensure the medium-term funding of banks, in order to avoid a credit crunch and to safeguard the flow of credit to the real economy, and to coordinate measures to achieve this. b. The need to enhance the quality and quantity of capital of banks to withstand shocks and to demonstrate this enhancement in a reliable and harmonised way.
2. Guarantees on bank liabilities would be required to provide more direct support for banks in accessing term funding (short- term funding being available at the ECB and relevant national central banks), where appropriate. This is also an essential part of the strategy to limit deleveraging actions.
3. A simple repetition of the 2008 experience with full national discretion in the setting-up of liquidity schemes may not provide a satisfactory solution under current market conditions. Therefore a truly coordinated approach at EU-level is needed regarding entry criteria, pricing and conditions. The Commission should urgently explore together with the EBA, EIB, ECB the options for achieving this objective and report to the EFC.
Capitalisation of banks
4. Capital target: There is broad agreement on requiring a significantly higher capital ratio of 9 % of the highest quality capital and after accounting for market valuation of sovereign debt exposures, both as of 30 September 2011, to create a temporary buffer, which is justified by the exceptional circumstances. This quantitative capital target will have to be attained by 30 June 2012, based on plans agreed with national supervisors and coordinated by EBA. This prudent valuation would not affect the relevant financial reporting rules. National supervisory authorities, under the auspices of the EBA, must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging, including maintaining the credit flow to the real economy and taking into account current exposure levels of the group including their subsidiaries in all Member States, cognisant of the need to avoid undue pressure on credit extension in host countries or on sovereign debt markets.
5. Financing of capital increase: Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support , and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of Eurozone countries. State Aid
6. Any form of public support, whether at a national or EU-level, will be subject to the conditionality of the current special state aid crisis framework, which the Commission has indicated will be applied with the necessary proportionality in view of the systemic character of the crisis
José Manuel Durão Barroso is a very able, bright and distinguished politician. He is the lawyer-economist who is President of the European Commission.
His speech of 12 October 2011 to the European Council was going to tell the world what was going to be done about an issue which for the past two years, even during Middle Eastern revolutions, earthquakes and hurricanes , has consistently been one of the TOP THREE news items: The European Economic Crisis.
During that time, politicians, economists and bankers have adopted a strange general, non-specific tone, laced with metaphor and euphemism and we have all become seduced by this new trick of being told nothing, yet imagining that we have been told everything.
Last week, I analysed Bank of England Governor Mervyn King’s latest statement and found that true to form, it was flooded with generalisations and platitudes with a sprinkling of occasional metaphor.
Mr Fact has become a stranger and fear appears to have driven away the the art of realistic economic ambition and goal-setting.
Most of us have come across the goal-setting model S.M.A.R.T.
A goal has to be structured as follows. It has to be SPECIFIC, MEASURABLE, AGREED, REALISTIC and TIME-BASED.
So, if a politician says that “something will be done as soon as possible”, it fails on all counts. However, if a politician says (and the figures do not matter!):
” It has been agreed with all members of the Eurozone as well as the IMF and the ECU that the European Central Bank will hand-over $250 billion to the Greek Government on November 1st 2011 with an additional $50 billion on March 31st 2012″, then we have a definite statement of intent – a goal.
If a Chancellor said “The Austerity programme is NOT an open-ended precaution. On January 1st 2013, the VAT rate will be reduced to a zero rate until the end of the First Quarter 2014 and every viable SME with a turnover of less than £100,000 will be given a grant of £20,000” would also be a goal.
“Boosting Capital”, “Rebuilding Balance Sheets”, “Banks have to lend more” etc. are further examples of empty non-goal-based rhetoric.
The text of Mr Barroso’s speech is reproduced below. I have highlighted certain phrases.
Brussels, 12 October 2011
Presidency in office of the Council,
The European Council of 23 October will be held against a backdrop of urgency over the threat of systemic crisis now unfolding. There are many issues on the European agenda. The Minister of the Polish Presidency mentioned most of them. I will not of course go into detail of the many important challenges, from the conference in Durban to very important external items. I will today focus on the urgent response needed to the financial and economic crisis.
To break the vicious cycle of uncertainty over sovereign debt sustainability and over growth prospects, we need comprehensive solutions now.
In my State of the Union address to this Parliament two weeks ago I promised responses. Today we are delivering. I can announce that the Commission has just adopted a roadmap to stability and growth. And we have set out concrete terms and timelines to implement it. You are the first to whom I communicate the main elements of this roadmap. I am sending to the President of the European Parliament the document that we have first adopted some time ago.
Over the last three years, the European Union has come out with specific responses to different aspects of the crisis. Now is the time to bring them all together. To once and for all meet the depth of the crisis with a full comprehensive and credible response.
The elements in this roadmap are interdependent. They must be implemented simultaneously. They must be implemented immediately. This is the only way that the European Union can convincingly:
- Give a decisive clear response to the problems of Greece;
- Enhance the euro area’s backstops against the crisis;
- Make a coordinated effort to strengthen the banking system including through recapitalisation;
- Frontload stability and growth-enhancing policies and;
- Build a more robust and integrated economic governance.These are the five points of the roadmap I put before this House today and that I will take to the European Council on October 23rd as a coherent and comprehensive plan for Europe that embodies a Community approach.
Here is how.
First, on Greece, we need a decisive solution. Doubts and uncertainties over Greece’s future jeopardise stability in the entire euro area and beyond. The time has come to definitively remove these doubts. This means three immediate and sustained actions:
- paying the sixth tranche of the loans to Greece. The result of the Troika mission has sent a positive signal in this respect;
- deciding a sustainable solution for Greece within the euro area. This should be through an effective second adjustment programme, based on adequate financing through public and private sector involvement, backed up with robust implementation and monitoring mechanisms;
- We also understand that Greece must fully carry out its programme in a timely manner, with continued support from the Commission’s Task Force and maximised disbursement of structural funds focused on growth.
But there is a more general problem in the euro area.
Despite the assurances given by Heads of State or Government on 21 July to support countries under programmes, and despite their assurances that private sector involvement would be strictly limited to Greece, contagion risks have not been contained. To decisively put a stop to this threat that is hampering all our efforts, we must strengthen the euro’s firewalls. We must have credible, stronger instruments.
At the European Council I will strongly urge Heads of State and Government of the euro area to complete and complement the measures they agreed on 21st July.
This is crucial to give a much-needed injection of confidence to market participants.
It means making operational the agreements taken to increase the flexibility and effectiveness of the EFSF and the future ESM, to allow for precautionary programmes based on conditionality, on which the Commission and ECB should be consulted in advance. Stronger monitoring and surveillance could be included as part of the Stability and Growth Pact.
But, the EFSF must be more than just a firewall.
It should have real firepower. We should maximise its capacity.
And, to further cement the expression of unity and responsibility inherent in these crisis resolution mechanisms, we must accelerate the adoption and entry into force of the permanent ESM – preferably to mid-2012.
We must trust that the European Central Bank will continue to provide the background of financial stability necessary for all this to be done.
The strengthened and more flexible EFSF is in the interest of all euro countries, including the Slovak people. Our common currency plays a crucial role in investment decisions, in growth, in jobs, all over Europe. I commend those in Slovakia who have risen above partisan attitudes and voted in favour of what is important for all Slovak citizens, for the euro area and for the European Union as a whole. And I call upon all parties in the Slovak Parliament to rise above the positioning of short term politics, and seize the next opportunity to ensure a swift adoption of the new agreement.
The third element of the roadmap is the need for a coordinated approach to strengthen the banking system. Let us be clear – over the last three years huge efforts have been deployed to this end. Billions of euros in aid and guarantees. An overhaul of banking supervision. Boosting capital requirements and protecting citizens’ deposits.
However, all this has not yet been sufficient to lift the weight of uncertainty hanging over the banking system, or to halt the volatility and pressure on the European banks. While these doubts persist and spread, sufficient confidence cannot be restored to allow liquidity to flow again and to oil the growth that our economies so badly need. For confidence to return we need to fix the sovereign debt problem, which can only be done through a coherent package.
We must therefore urgently strengthen the banks, because in fact those two issues – the sovereign contagion and the banks are now, whether we like it or not linked. This must be coordinated through the Member States, the European Banking Authority, the ECB and the Commission. The strategy should comprise 5 key steps:
- It should include all potentially systemic banks identified by the European Banking Authority across all Member States;
- It should take account of all sovereign debt exposure in full transparency;
- It should involve a temporarily higher capital ratio after accounting for exposure;
- Banks that do not have the required capital should present and then implement plans to have it in place as swiftly as possible. And until they have done so, they should be prevented from paying out dividends and bonuses by the national supervisors.
- Banks should use private sources of capital first. If necessary the national government should provide support as a next step, as a last resort, drawing on a loan granted from the EFSF. Any public support should be compatible with the state aid rules. The Commission intends to extend the existing state aid framework for bank support beyond the end of 2011.
Naturally, details on capital ratios and evaluation methods should be proposed by the EBA with national supervisors, who are best placed to judge on this.
At the same time, the ongoing work on a new financial regulation system should be completed as swiftly as possible. To that end, the Commission will present its remaining proposals to implement the full G20 commitments by the end of this year. We also urge rapid adoption of the Financial Transaction Tax I presented to you two weeks ago.
The fourth element is to frontload policies that consolidate stability and boost growth.
We all know that most Member States do not have much room for fiscal stimulus. Those who have should use it. However, all Member States do have at their disposal means to implement structural reforms, to focus spending on priority areas, and to remove obstacles to growth.
As I said to you in my State of the Union address, growth is within our reach if we can break down the barriers that stop money, services and people flowing through our Union as they should.
This means first – getting more out of what has already been agreed at the – European level.
I am talking about implementing for instance the services directive, delivering on the digital agenda. I’m talking about maximising our trade agreements.
These are measures we can take today, that don’t require significant additional investments or budgetary effort, but that can have immediate and significant benefit for our companies, for our citizens, for our economy.
This means second – accelerating adoption of what is on the table. There are many proposals on the table that we can fast-track for adoption. I am talking about unitary patent protection. I am talking about the energy savings directive. I am talking about concluding ongoing trade agreements.
And it means third – fast-tracking the most urgent growth-boosting proposals. I am talking about the Single Market Act, about forthcoming proposals to facilitate access to venture capital because today there is a lack of venture capital in Europe and this is especially felt by SME’s. I am talking about the Young Opportunities initiative to increase youth employment.
And where agreement on fast-tracking proves difficult, we should be able to use enhanced cooperation so that those who want to move forward are not held back. Frankly dear members of the Parliament it is time to say that the speed of the European Union should not be the speed always of its slowest member. We need sometimes to use reinforced cooperation.
All this should be done in conjunction with targeted investment at European Union level, such as through the Europe 2020 Agenda where we propose also our Project Bond Initiative, the Commission will propose it next week, and will maximise the resources of the European Investment Bank so that it can lend to the real economy.
So reforms, implementation of everything we have agreed and also try to fund some of these efforts through new sources of investment using the appropriate instruments we have and some we can create like the Project Bonds.
The fifth and final element of the Commission’s proposed roadmap to stability and growth is the pursuit of sound economic policies by the Member States, especially of the euro area, reinforced by stronger Community governance.
We now have the six pack– and I thank you for your support in getting the ambitious proposals approved. We have the European Semester and all that it entails in strengthening governance. But we must go further to match the ambitions of our monetary policy with those of our economic policies. As we have said we have to complement the monetary union with a real economic union. The future of the single currency also depends upon it.
In its roadmap, the Commission is proposing a much stronger euro-area dimension in planning, implementing and assessing national policies. This dimension is backed up by strict constraints enforceable at the Euro-area level and is based on an enhancement of the Community approach, which will reinforce the role of the European Parliament in economic governance. We will further reinforce the role of the Commissioner for economic and monetary affairs in full respect of the Treaty.
There are other actions we can take very quickly, without change in the Treaty:
- We must improve working methods and crisis management between the European Commission, the European Council and the Eurogroup. Proposals to this end will be made soon, in line with the agreements of 21 July, by the President of the Council, Commission President and President of the Eurogroup and the aim is to have a more streamlined process between the Euro area summit, the Eurogroup and the Euro area working group.
- Second, we should streamline and reinforce the instruments we have. Not only by rapidly implementing the six-pack, but also by strengthening the European Semester by intensifying surveillance and integrating the Euro Plus Pact into the Semester – hence reinforcing the Community method in the Union.
- And we must also go further than the measures set out in the six-pack, by setting out provisions for strengthening the economic and budgetary surveillance of Euro area Member States requesting or receiving financial assistance from the EFSF, ESM, or other institutions. The Commission will make a proposal to the Council and the European Parliament under Article 136.
- We must monitor the national budgetary policies of Member States in excessive deficit procedure or countries under programmes through a Commission-Council procedure which will enable the European Union to intervene. For example, in serious cases it could request a second reading of draft budgets, to suggest amendments in the course of the year and to monitor budgetary execution. The Commission will make a proposal to the Council and the European Parliament under Article 136 setting out the graduated steps and conditions that should apply in such cases. You see, honourable members, that we are really speaking seriously when we mention we urge for more discipline, more integration. It means more Europe that, I think, should be the goal of all of us.
- All this is in addition to the proposals on a more unified external representation for the Euro area and options for ‘stability bonds’ the Commission will bring forward by the end of this year.
One final point on governance – In the State of the Union address I said the Commission would present a single, coherent framework for better economic governance based on the Community method. We are developing that right now.
The proposal will ensure the compatibility between the euro area and the Union as a whole. It will be done in a way that aims to integrate the Euro Plus Pact because coordination and integration must be carried out on a single, Community level. How can we speak about coordination and integration in a disintegrated manner. It is obvious that we need a Community approach to do that. Yes, we need stronger governance. Yes, we need the Euro area heads of government to meet more frequently. But no, we do not need to create yet more institutions or yet more titles, when we already have the structures in place to do the job.
It is essential that we do not create a division between the 17 members of the euro area and the 27 members of the European Union – most of whom wish to join the euro. Such a division could deeply harm the European Union as a whole, put in question the Single Market, be an invitation for renationalisation of Community policies. That is why we need to have stronger governance for the countries that are in the euro area, but have it in full compatibility with the rules and the acquis for the European Union as a whole. This is why it is essential to keep the Community institutions – this European Parliament, the European Commission – at the core of the process of coordination and integration.
The role of these institutions is also to guarantee this link, to guarantee that no Member State is jeopardised, to guarantee that Europe remains strong and united.
The solutions to Europe’s crisis, I believe, are known by most of us. But to grasp them requires courage and political will. To do so is to fully acknowledge our interdependence and to take a bold leap towards further integration. The problem of Europe is not too much integration. It is in fact a lack of a European approach. Such changes to the nature of our Union may need to be enshrined in changes to the Treaty. Changes that must keep the Community method at their core.
But one thing is for sure – as the crisis narrows in on us, I see no other option but to act now, so the fact that we are considering for the future more ambitious changes should not be an excuse not to adopt the decisions now and this is why we need to act together in a unified and coherent way.
This crisis is not partial. The response cannot be partial. Our responses cannot be piecemeal. That is why this roadmap is a single, comprehensive approach and all its elements must be implemented in parallel.
This is the message I intend to take to the European Council on 23rd October and for which I would like to have your support – the support for a united and stronger Union.
Thank you for your attention.
You know when an organisation, government or even a collection of governments is in trouble. The directors, senior management – the leaders – instead of thinking strategically, concern themselves with day-to-day issues.
Some call it Crisis Management.
That’s exactly the zone in which Eurozone politicians are currently operating.
I share the frustration of many others who have been watching the painfully slow process that Eurozone leaders have embarked upon in respect of the terrible and complex financial mess which currently envelopes Europe. In spite of their rank, it would seem that many high-level politicians are incapable of reaching decisions within an appropriate time-scale. Hence the sudden appearance of the ” kicking the can along the road“, ” into the long grass” and the other modern economic metaphors.
We are all frustrated.
The decision-making processes at National and pan-National level are based on the depersonalised mechanistic value system of bureaucracy-based thinking.
However, we live in a very turbulent environment in which many activities – especially those affecting economies have become both differentiated as well as interdependent. In addition, there has been a subtle change in organisational values which have become more based on humanistic-democratic ideals.
Political decision-making is now lagging behind and, under the guise of “democracy”, refuses to become more adaptive and integrated in order to meet the rapidly changing economic and political environments which, from now on, will remain in a constant state of flux.
To put it simply – by the time politicians have provided a solution to a problem, they have been overtaken by the next issue which makes their initial solution redundant.
Decision-making groups should be thinking along organic rather than mechanical lines and leadership and influence should fall to those who seem most able to solve the problems rather than to pre-programmed role expectations – especially those tainted by various flavours of political dogma.
We need adaptive temporary systems of diverse specialists, co-ordinated through say, non-political civil service link-pins to replace the current theory and practice of political bureaucracy.
Imagine, say our current economic issues being solved by individuals who are differentiated not according to rank or role but according to skills.
Certainly NOT politicians.
Currently, the same politicians who decide how often our bins are emptied or the number of hospital beds, are the same ones who make multi-billion economic decisions.
So, hopefully someone somewhere will have the will and the strength to realise that our present decision-making processes at “Macro (international) level” are outdated and ineffective.
The future is with more “Organic-adaptive” structures.
In addition, a combination of centralised and decentralised control mechanisms needs to be adopted – control mechanisms which recognise that , for instance, the various Euro states are significantly different from each other and therefore require different methods of both management and control.
Half-hearted attempts at control such as the largely discredited occasional bank stress-tests or toothless financial “authorities” are just that – cosmetic attempts.
The solution to the flaky political decision-making process is not intellectual – it is organisational.
Greece and the Deutschebond
Hopefully, Europe is NOT relying on yesterday’s conference call between Angela Merkel, Nicolas Sarkozy and Greek Prime Minister, George Papandreou.
Lets not beat around the bush. The Greek government lied in order to gain entry to the Eurozone. It did it with the connivance of Goldman Sachs who were paid $190 million for their trouble. CLICK HERE.
Euro auditors ought to be in Athens performing Due Diligence in order to make sure that the numbers stack-up and more importantly, that Athens really is making progress and reducing its budget deficit.
The days of “My word is my Bond” are over.
Greece is an economic Basket Case which will be a drag on the Eurozone economy for ever. Historians will also know that Greece tends to make a habit of going bust and defaulting.
The destructive influence of Greece is now causing rifts within Europe and there is now a very real danger of the German government disintegrating.
Finally, empty pronouncements by senior European officials which are designed to manipulate Stock Market prices MUST stop.
The ONLY morsel of common sense was delivered yesterday by Guido Westerwelle, Germany’s Foreign Minister. He said: “….we believe you can’t fight debt in Europe by making it easier to take up debt.”
We all know that economic GROWTH is the answer. That’s something that Greece will not be capable of for years – if ever.
I pointed out a few days ago that it seemed as if there was an orchestrated effort by politicians and bankers to put-out weekly or bi-weekly “Statements of Intent” — purely in order to placate the Markets as well as to postpone the inevitable collapse of the Euro. That means NOT actually doing anything but promising to do something, sometime in the future. It’s the new “Weapon of Choice” for politicians whose ideas have run out.
THIS week is shaping up as a very special example of this comparatively new phenomenon.
Today, the Markets have responded well to yet more wind and wee from a politician. So whose turn was it THIS time?
None other than European Commission President himself – Jose Manuel Barroso!
Let’s have a close look at what he said and maybe ascertain whether his statement actually contains any “doing” words.
He said that he will put forward moves to tackle the Eurozone crisis. “Put forward”? “Moves”? What moves?
He will urge the Eurozone countries to issue joint bonds. “Urge”? “Joint Bonds”? How will he “Urge”?
Unsurprisingly, Italian Finace Minister Giulio Tremonti supports Eurobonds. Italy is vastly over-borrowed – to the extent that its attempt to borrow even more from China was given very short shrift by the Chinese – even though the Italians were offering security.
The fact that George Soros (no less) has backed the concept of Eurobonds was weaved into the equation. Ancient George’s ONLY motivation is to save Uncle Sam – not Greece or Italy.
The main player in the Eurofarce , Germany, is NOT even remotely interested in the Eurobond because, effectively, it with be the “Deutschebond”. German Charity.
Barosso wants a United States of Europe. Pure and Simple.
He went on:
“I want to confirm that the Commission will soon present options for the introduction of Eurobonds.” Soon? How “soon”, Jose? “Options”? WTF?
Jose does NOT give up easily: “Some of these could be implemented within the terms of the current treaty, and others would require treaty changes.” “Treaty changes“, Jose?
That’s lots of meetings and could take years. That might just keep the markets interested!
He really declared his hand when he said that “the measure” on its own was not enough to solve the Eurozone debt crisis. (What “measure”, Jose? So far,we’ve only heard Eurobullshit)
He said Europe needed a “Federalist Moment” to rescue it. He argued that the solution to the crisis would have to involve the “Community method” which presumably, like the Rhythm Method involves someone being screwed. For instance: the Taxpayer and the Investor?!
( Isn’t it amazing how few NUMBERS there are in a statement about fiscal deficits?)
The Greek Entry.
Last week I predicted that it was Sarkozy’s turn to deliver yet another mealy-mouthed statement. Looks as if it’s this afternoon!
The question is CAN he save the French Banks whilst convincing an increasingly cynical public and sceptical markets that it’s all about saving Greece?
Money Market Funds have been selling French Bank Shares for about a year, during which time they have reduced their holding in French banks by about 50%.
After Sarkozy (or Angela Merkel) tells us that Greece is “doing the right things” or that ” it is making good progress“, it will be interesting to see what the markets make of it all.
The MOST likely outcome of today’s meeting between Sarkozy, Merkel and Greek Premier Papandreou is a statement indicating that Greece needs more time.
The Euro and the Eurozone both need time – another commodity which is fast disappearing.
Today’s summit has an interesting sub-plot. Rating agency Moody’s has just downgraded France’s two major banks. Credit Agricole has been busted down from Aa1 to Aa2 and Société Générale from Aa2 to Aa3.
Once again, this has come as both a surprise and relief to the experts because the downgrades were “not as bad as expected“. It seems that these days, NOTHING is as expected.
For politicians and most economists, these are indeed The Days of Mystery!
The seriousness of not-only the Greek but the entire Eurozone situation is exemplified by the fact that The US treasury secretary, Tim Geithner, will be attending Friday’s meeting of EU finance ministers.
Even the Americans can see that Greece is the No1 domino!
The hard fact is that Greece ought never have been allowed to join the Euro. It was a predictable accident waiting to happen.
As many politicians will attest – especially those who attended boarding school, the “Greek Entry” was always going to be painful.
Banks? It won’t be long!!
When the big boxes of money arrived in Libya yesterday, I bet that there were several European states who were slavering and wishing that someone would send them a box too!
Especially Greece. Plus other states who don’t really want to admit it!
Greece has been back to the well for another 109 billion Euro bailout. That bailout could well be the last one because the well is now well and truly dry.
Even quiet and up-to-now compliant Finland is becoming a little bit fractious and will not contribute any more money to the bottomless pit that is Greece without a Charge on Greek assets. The Finns want collateral – and who can blame them?
The German electorate and many politicians are also beginning to voice their displeasure at having to hand over vast volumes of cash to the Greeks, no doubt followed by others.
Quite rightly, German Chancellor Angela Merkel insists she won’t be “blackmailed” into backing Eurobonds and the Germans have every reason to be worried! If they put their national balance sheet at risk just to support countries like Greece and Ireland, Germany’s borrowing costs would be driven up by an unsustainable additional 50 billion euros!
The simmering Eurocrisis could explode at virtually any moment because the politicians’ “Let’s wait and see” tactics have failed.
That is what sent European bank stocks lower today. They tanked!
The other day, Warren Buffett threw $5 billion at “near-death” Bank of America. In spite of Warren’s munificence, the bank has now been asked to sort out any potential problems. The bank’s fire sale continues with them now trying to offload their non-profitmaking Countrywide lending unit.
Does the Fed know something that we don’t?
America and Europe do NOT have a liquidity crisis! It is a MAJOR SOLVENCY problem.
Banks do not have enough capital to absorb losses on all the European sovereign debts that they are now loaded down with.
Pan-Western bank failures are now inevitable!!
The politicians? They will be doing what they do best.
Observing, having meetings and telling us not to worry.
p.s Sorry of this post does not make total sense. It was typed in a hot un-airconditioned dump on a Blackberry and then emailed for tarting up. But hopefully, you get the gist.
States of the economies.
The next economic and banking collapse is going to make the 2008 crash look like a slight adjustment.
Once-powerful Western economies are booking quarterly GDP growths of 1% or less. For the non-mathematicians, that is within a rounding error of ZERO growth. So when you hear a Chancellor deriving solace from an economy achieving a growth of say 1.5% which was “better than the expected” 1.3%, we know that they and we are in trouble.
Politicians and central bankers have exhausted their entire repertoire on a THREE YEAR attempt to put their economies in order whilst at the same time propping-up a broken banking system. None of it has worked!
They all know that the tsunami is coming but there is no high ground to run to.
European politicians are rushing about, turning inaction into an art-form whilst economies and banks are merely standing on the trapdoor and holding hands hoping that somehow all this will go away and the entire system will somehow self-right. Their impotent prevarication can (and will) only result in two things – collapse and bankcrptcy.
Bankruptcy of governments, business and of private individuals.
Last week we had the very first example of a banker who more-or-less threw-in his hand, admitting that there was little-else that money could do. The Federal Reserve’s Ben Bernanke had the choice of either printing more empty dollars or not. The so-called Quantitative Easing 3 would have increased US inflation and made Investment Bankers happy. It would have enabled the bankers to further plunder the markets and create more of those illusory profits. They’ve been operating on that basis for two years now and perhaps Bernanke decided that enough was enough.
Mainlining money is never the long-term solution – it’s too addictive!
However, No U.S Quantitative Easing has simply accelerated the collapse of the United States economy.
Yes! It’s as clear-cut as that.
In the end, Bernanke took a leaf from the politicians’ book and decided to do nothing but sit and wait. NO mention of QE3 and no steps to promote economic growth.
He has decided to kick the the whole thing forward yet another month in the vain hope that Congress can deliver the next promise. THAT’S what you call a long-shot!
For the moment both Europe and the USA appear to be quite content to pause and doze in the middle of their joint economic tightrope until someone else (as yet unknown, probably China) comes along to coax them out of their torpor.
Unfortunately, America and Europe are entwined in such a way that if Europe falls, so will the USA.
We used to dismiss the PIIGS nations as the ones heading for the econo-slaughter house — Portugal, Italy, Ireland, Greece and Spain. Their problem is very simple – they have debts so huge that there is absolutely NO prospect of them ever being repaid. Their politicians are also waiting for something miraculous to happen sometime in the future.
The Euro saviour WAS supposed to have been the “strong man of Europe”, the one with the largest economy – Germany. Unfortunately,Germany has also hit the economic buffers. It’s growth in this year’s second quarter was just 0.1 percent!
France, Europe’s second-largest Euro-economy, has also ground to a halt. President Sarkozy’s has followed the UK route with huge budgetary cuts. That certainly looks good on paper and may lower deficits but will produce an impossible drag on an already-waning economy. THAT will inhibit growth and ultimately lower tax revenues – which will inevitably result in higher taxation.
The United Kingdom’s Chancellor can take the credit for showing everyone else the way to economic stagnation through the triple whammy of Government budget cuts, rising inflation and plunging consumer confidence. EXACTLY the conditions to discourage anyone from risking any sort of entrepreneurial initiative or borrowing from the banks to fund commercial expansion. That is, if the banks weren’t continuing to sulk.
Europe is frantically cutting spending in a desperate attempt to postpone the inevitable debt meltdown. Meanwhile Washington continues to rack-up up its national debt at the eye-watering rate of more than 10 percent per year.
All that America has achieved so far is to have its credit-rating slashed by Standard & Poor’s while its local governments, states and cities frantically try everything from releasing prisoners early to selling off the family silver.
The ENTIRE Western economy has ground to a shuddering halt with the weird unwanted bolt-ons of climbing inflation and consumer confidence at near an all-time low.
So what IS the solution?
The solution is comparatively simple and should be attempted in stages.
The first would be to reconcile ALL sovereign debt.
Secondly, the markets and banks would collapse – but at a controlled rate.
Thirdly, it should be admitted that the Euro and the Eurozone were both very bad ideas which developed into a grotesque sacred cow.
Then we could ALL start again.
The alternatives are greater budget shortfalls, greater deficits, even faster growths in government debt, followed by catastrophic collapses and Depression.
The former all require political decisions of such magnitude that even the politicians have come to realise that we do not have anyone with even remotely the courage to raise his or head above the parapet to take control.
So for the moment, it seems as if we’re knowingly headed for an economic holocaust.
So, unless the politicians wake up soon, we need to create hell and not wait for it.
From “Brother, Can You Spare a Dime,” lyrics by Yip Harburg, music by Jay Gorney (1931)