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German endgame for EMU draws ever nearer

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by Ambrose Evans-Pritchard
Telegraph International Business Editor
Posted September 4, 2011

For fifty years Germany has invariably stumped up the money required to keep Europe’s Project on track, responding to unreasonable demands with grace and generosity. We will find out to what extent Germany’s constitutional court (pictured) shares these views when it rules this Wednesday on the legality of the EU rescue machinery. Photo: AP


It bankrolled French farmers through the Common Agricultural Policy, that disguised tithe for war reparations. It then bankrolled Spanish farmers as well. It funded each new wave of EU expansion, though reeling itself from the €60bn annual cost of its own reunification. It gave up the cherished D-Mark, the anchor of German economic stability.

We are so used to German self-abnegation for the sake of Europe that we can hardly imagine any other state of affairs. But the escalating protest against EMU bail-outs by Germany’s key insistutions go beyond the banalities of money. The fight is over German democracy itself.

Those who talk of a Fourth Reich or believe that EMU is a “German racket to take over the whole of Europe” – as Nicholas Ridley famously put it – have the matter backwards.

Germans allowed their country to be tied down with “silken cords”. They are the most reliable defenders of freedom and parliamentary prerogative in Europe, precisely because they know their history. Finance minister Wolfgang Schäuble could hardly have chosen a more toxic term than “Bevollmächtigung” or general enabling power when he requested blanket authority from the Bundestag for EU rescues, as if Weimar were so soon forgotten. He was roundly rebuffed.

You can feel the storm brewing in Germany. Within days of each other, President Christian Wulff accused the European Central Bank of going “far beyond” its mandate and subverting Article 123 of the Lisbon Treaty by shoring up insolvent states, and Bundesbank chief Jens Weidmann said bail-out policies had “completely gutted” the EU law.

Both believe the EU Project has taken a dangerous turn. Fiscal powers are slipping away to a supra-national body beyond sovereign control. “This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies,” said Mr Wulff.

Otmar Issing, the ECB’s founding guru, fears that the current course must ultimately provoke the “resistance of the people”. Instead of evolving into an authentic union with a “European government controlled by a European Parliament” on democratic principles, it has become deformed halfway house.

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ECB is euroland’s last hope as bail-out machinery fails to resolve crisis

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by Ambrose Evans-Pritchard

International Business Editor
Posted 14 Aug 2011

THE LEADERS OF GERMANY AND FRANCE HAVE THREE BAD CHOICES AS THEY DECIDE whether to save EMU this week, or pretend to do so. German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet Tuesday in Paris. They can agree to fiscal fusion and an EMU debt union, entailing treaty changes and a constitutional revolution. This implies the emasculation of Europe’s historic nation states.

They can tear up the mandate of European Central Bank and order Frankfurt to go nuclear with €2 trillion of `unsterilized’ bond purchases until the M3 money supply in Italy, Spain, Portugal, Ireland, and Greece stops contracting at depression rates and starts to grow again at recovery speed (5pc). This might destabilize Germany. Or they can try to muddle through with their usual mix of half-measures and bluster. This will lead to a rapid disintegration of monetary union and a banking collapse. It risks a repeat of 1931 if executed badly, as it most likely would be. They have days or weeks to make up their minds, not months.

The EFSF rescue fund was never more than a stop-gap device to avoid grappling with the core issue: the economic chasm between North and South. It has failed. Insistence that it could handle a dual crisis in Spain in Italy was a bluff, and last week that bluff was called when France too was sucked into the maelstrom.

Escalating bail-out costs are eroding French debt dynamics. “Bad” is contaminating “good”. The EFSF has itself become a source of contagion and this would turn yet more virulent if the fund were quadrupled to €2 trillion as some suggest. “The larger the EFSF, the faster the dominos fall,” says Daniel Gross from the Centre for European Policy Studies (CEPS).

“Only Germany can reverse the dynamic of European disintegration,” writes George Soros in the Handelsblatt. “Germany and the other AAA states must agree to some sort of Eurobond regime. Otherwise the euro will implode.” Mr Soros knows that the trigger for the denouement of the pre-euro ERM in 1992 was a quote from a Bundesbanker in the same Handelsblatt hinting that sterling and the lira were overvalued. That was all it took. The Tory government that had tied Britain’s fate to an over-heating Germany was destroyed.

Once again we are all reading the German press, and what we see is subversive commentary once again from Frankfurt, and bail-out fatigue and simmering anger among Bavaria’s Social Christians, Free Democrats (FDP), and Angela Merkel’s own Christian Democrats in Berlin. If Germany is about to immolate itself for the sake of EMU, this is not obvious in the Bundestag.

What German politicians want is yet more Club Med austerity, even though Euroland growth has wilted. The demands have become ideological, going beyond any coherent therapeutic dose. The effect of such fiscal tightening at this stage is to repeat the error of the 1930s Gold Standard when the burden of adjustment fell on weaker states, pushing them into a downward spiral that eventually engulfed everybody. Fiscal cuts make little sense for Italy, where the output gap is 3.1pc. “Increasing potential growth should be the main policy goal. Fiscal tightening could further depress aggregate demand” said the IMF in its Article IV report.

Italy does not have a debt problem as such. Its budget is in primary surplus this year. Total debt – the relevant gauge — is under 250pc of GDP: similar to France, and lower than Holland, Spain, Britain, the US, or Japan. Italy is one of the few EU states to have sorted out its pension liabilities, by linking payouts to life expectancy

What Italy has is a growth problem, rooted in currency misalignment. Having lost over 40pc in unit labour cost competitiveness against Germany since EMU, it is trapped in slump. Per capital income has contracted for a decade. So why is Europe forcing Italy to tighten drastically and run an even bigger primary surplus within two years, and doing so just as the world flirts with a double-dip downturn? Why too is the ECB’s Jean-Claude Trichet acting as the enforcer? His leaked letter to Italian premier Silvio Berlusconi is a diktat, a long list of measures imposed as a condition for the ECB’s action to shore up the Italian bond market.

Mr Berlusconi has capitulated, with a “bleeding heart”. He is slashing payments to regional authorities, though he has resisted wage cuts. “They made us look like an occupied government,” he said. Northern League leader Umberto Bossi accused the ECB of “trying to blow up the Italian government.”

Mr Trichet is moving into dangerous waters dictating budgets to sovereign parliaments. It matters enormously whether citizens have political “ownership” over austerity, or whether it is imposed by outside forces. His former colleague Otmar Issing fears that Europe is becoming a deformed union where officials run roughshod over nations and fiscal power lies beyond democratic control. Such encroachments have “brought war” in the past, he said.

The bank should correct its own errors first. It was ECB tightening that choked Europe’s recovery. “Eurozone monetary weakness has been the key driver of the recent deterioration in global economic and financial conditions,” said Simon Ward from Henderson Global Investors. Real M1 desposits are not only collapsing across southern Europe, they have turned negative in the North as well. This signals big trouble. “It was astonishing that the ECB, which trumpets adherence to monetary analysis, chose to rein back its longer-term repo lending in late 2010 and raise interest rates in April and July. This was a repeat of its error of 2008,” he said.

Mr Ward said the ECB should stop choosing which nations to rescue through “quasi-fiscal transfers” and stick to neutral central banking. It should launch quantitative easing for the whole of EMU.

“At this point the Eurozone needs a massive infusion of liquidity,” said Dr Gross from CEPS. Otherwise there will be a “break-down of the interbank market that would throw the economy into an immediate recession as after the Lehman bankruptcy”.

HSBC’s chief economist Stephen King said the ECB must print money a l’outrance in “exactly the same” way as the Fed. “At the heart of the problem is the ECB’s unwillingness to be seen ‘monetizing’ government debt. Yet if the alternative to QE is the collapse of the euro or a descent into depression, then massive expansion of the ECB’s balance sheet seems a small price to pay.” Such views are rarer in Germany but at last making themselves heard. Kantoos Economics said the ECB has been “extremely tight” and lost sight of its essential purpose. “It is therefore an important cause of the current mess.”

“European policy makers and central bankers are wrecking one of the most fascinating projects in human history, the unity and friendship among the countries of Europe. This is beyond depressing,” he said. The path of least resistance for Angela Merkel and Nicolas Sarkozy on Tuesday is surely to force the ECB to change course, by treaty power if necessary.

Or kiss goodbye to the Kanzleramt, the Elysee, and monetary union

Gold and silver: We were right – they were wrong

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by Brandon Smith of Alt Market
Posted July 25, 2011

ONLY NOW, AFTER THREE YEARS OF ROLLER COASTER MARKETS, EPIC DEBATES, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway.

Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).

Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse.

To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. [And he a Nobel Prize winner!] Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!

So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.

Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.

Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Debt ceiling debate a final warning sign

If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.

Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”

What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.

If the U.S. defaults after August 2, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”.

With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.

Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly. The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.

Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.

If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma. Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+.

Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions).

So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.

This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.

What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…

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A Phony EU Crisis

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from The Daily Bell
Posted July 22, 2011

Europe’s leaders have grasped the nettle. Faced with a spiraling bond crisis in Italy and Spain and the greatest threat to the EU project for 50 years, they have ripped up their bail-out strategy and taken a large stride towards a “liability union.” – UK Telegraph

Dominant Social Theme:
Oh, it is the end of the world. The EU is dead. Oh, it is not the end. Long live the EU and the great men and women who saved it … History is being made … etc. … etc. …

Free-Market Analysis:
We have watched the unraveling of Europe for over a year now and can say with some shock and dismay, as the final act grows near, that what we have been treated to is probably nothing more than an elaborately scripted farce. Or call it a dominant social theme (the EU is in trouble and needs rescue by the great statesmen of Brussels).

Now a deal has been struck to “save” Greece (though it is the banks that are being saved yet again, not Greece). The Germans won’t like it as Merkel seems now to have committed them to guarantee, at least informally, hundreds of billions of euros in PIGS assets. But apparently whether the “little people” like something or not doesn’t matter now in this “new” world.

The only danger is over-reach. The crisis, long expected, may still spin out of control or prove insoluble. But there is no doubt the Eurocrats expected this crisis and planned for it. The idea was to use its chaos to create a closer European federation and that is just what they’re trying to do. Out of chaos, order …

The elites that stand behind the EU are trying to build a one-world order, and they will stop at nothing to get it. The same thing is going on in the US with the debt crisis. An orchestrated agenda. The Americans will eventually get European-style austerity. They simply don’t understand the ramifications yet.

These economic crises cannot be pure happenstance. We’ve suggested they can spin out of control, and perhaps they will; but they are all manmade events, the direct outcome of economic constructs and policies of enormous wealth and control. Somebody set up the 100 central banks around the world that report directly to the Bank for International Settlements in Switzerland. These are quasi-private entities, many of them. Are we supposed to believe that no one takes a profit on them? That there is no way they compensate their creators?

The money and power is unimaginable. The BIS controls the central banks that in turn control the big banks around the world. The stock exchanges with their endless mergers are controlled as well; and the bond markets, it seems. If the elites control the banking industry – and they do – then they must also control currency markets – at least to some extent. And we are supposed to believe that Greece, little Greece, caused such havoc with this financial system that Merkel and Sarkozy had to meet to save it in the nick of time?

Increasingly, we don’t believe it. The entire amount of the Greek default is in the low hundreds of billions. That’s pocket change for these trillionaire, globalist banking families and their corporate, religious and military enablers. It’s walking-around money. They can spend more than that in a day, an hour even.

The whole thing is a set up. It must be. A shadow play. A crisis created to build further global governance. The only question is whether they can control the resultant fallout in the long term, for the damage far exceeds Greece now.

The Internet has certainly made that more questionable, for it has informed Europeans of what’s really going on and helped organize them. Still, the EU grinds on. Dominant social themes of the elite are rarely if ever cancelled. They tend to continue until they meet immovable resistance, either from the marketplace or people.

Constitutions mean nothing. Promises are made to be broken. Treaties are talk for children, merely incremental markers trailing in the wake of global governance. By their actions ye shall know them. As with sharks, their momentum must be never stilled. Here’s more from the Telegraph article:

The three rescued countries of Greece, Ireland and Portugal have in turn been offered a lifeline out of crippling debt-deflation. The tetchy negotiations dragged on for hours, with an irascible Finland at one point demanding that Greece offer the Parthenon, the Acropolis and its islands as collateral for the second €110bn (£97bn) rescue package. France and its allies abandoned their long struggle to prevent a Greek default, opening the way for the first sovereign insolvency in Western Europe since the Second World War. Objections from the European Central Bank were swept aside. Germany has obtained its fig leaf concession: burden-sharing for bankers.

As a quid pro quo, Germany has dropped its vehement opposition to debt sharing and crossed the line in the sand towards fiscal federalism. It has agreed to turn the eurozone’s €440bn bail-out fund (EFSF) into what amounts to a European Monetary Fund, and arguably into an EU Treasury in embryo … Global markets surged as the details of the EU statement leaked. Credit default swaps measuring bond risk on Ireland and Portugal saw the biggest one-day fall on record. Commission chief Jose Manuel Barroso said politicians and markets had finally “come together” for the first time since the crisis began.

Chancellor Angela Merkel said the goal was to “go to the root of the problems”, but she may not find it easy to secure political assent for such sweeping concessions from her own parliament. The accord is a spectacular volte-face. Her mantra until now has always been that “collectivisation of risks” would be a grave error … EU officials hope that a debt rollover plan for Greece can be limited to a short technical default. The ECB has backed down on its threat to reject Greek bonds as collateral. The formula will not be extended to Portugal and Ireland. It is understood that rating agencies will hold fire for the sake of global stability.

How neat is this? Like watching a play where all the problems are resolved in the third act. We even learn that the markets rallied in relief (at least to begin with) after the deal was announced! Yes, the EU has moved one step further (a big one) toward federal consolidation. The question is only whether the Germans, in aggregate, will resist, and what will be the results if they do. The Zero Hedge website claims today that this new deal places Germany in the position of underwriting the whole of the failing PIGS universe. The Germans may wake up in open revolt.

It doesn’t seem bothersome, anymore, than Greek unrest. The shadow play continues. The ECB was immoveable in its rigor up until the last minute. But somehow the ECB backed down. The rating agencies that were so horrible have suddenly retreated. Everyone has “compromised.” Problems have magically evaporated. Frau Merkel had threatened not to attend the meeting, but somehow in a single evening she was able to come to yet another “historic” breakthrough with Nicolas Sarkozy.

Perhaps the Eurocrats are merely desperate. Or perhaps they are following a script. We’ve seen it before. US Congressional Democrats sacrificed their careers to pass the leveling health care Act. Now Merkel is sacrificing her career to prop up the EU. Maybe she has been promised something.

Will the Germans riot in the streets? There is already a German Tea Party movement. How about Greece and Spain? Summer is not over yet. And yet … perhaps not. Perhaps, somehow, the elites can impose a federation on nation-states that have been independent for 2,000 years or longer. We don’t see how, (the EU with its debts seems unworkable) but one thing we’re convinced of now is that the elites are arrogant enough to try. The whole mechanism reeks of arrogance.

There is no end to their mischief and scheming. We’ve been privileged to watch how history operates for the past several years and we’ve paid close attention. We’ve come to the conclusion, as Henry Ford once said, that history is bunk. It’s directed. This EU “grand compromise” has been in the works for months, for years – perhaps for decades.

What a farce! It began with the mysterious leaked argument between Sarkozy and Merkel – like the first shot of a war. The EU then was said to be on the edge of a breakup. Sarkozy had threatened to withdraw France. The union teetered – and the crisis was on! And on … and on … and on …

Endless meetings, constant market movements, the mainstream media bewailing every moment. The EU is on the brink. The euro is on the brink. The Greeks are rioting (that was real); the Spanish are protesting (that was real, too). But it was just an act. It’s all too neat, too well orchestrated.

And now we are starting to see the liniments of what is REALLY planned. “The communiqué called for a “Marshall Plan” to bring the Greek economy back to life. “To be credible, the EFSF needs to be proportional to the scale of contagion: we think €2 trillion is needed,” one top Eurocrat is quoted as saying.

The “transfer” that the Germans were assured would never happen is now starting to take place. Others will pay, too. But in Germany there is the constitutional question, as well. We are told German judges are to evaluate the legality. Yet what judge on earth would pull down the union at this point? If the German people want to stop what’s going on, they will have to do so themselves, non-violently if possible in the streets. Of course that hasn’t yet helped the Greeks.

Step by step, promotions are implemented and international structures are built. The politicians and generals in the modern era are literally actors on the stage. Some stand athwart history and others position themselves “progressively.” Miraculously, accommodations are reached in the nick of the time. Alternatively, war is declared. The narrative is provided. History is “written.”

Even in war, the elites apparently control both sides of the conflict. The goals are achieved via the Hegelian Dialectic that allows the powers-that-be to push the larger social conversation in whatever direction they choose. Of course, that’s always towards a greater global union these days.

Conclusion:
Thank goodness the extraordinary Brussels bureaucrats have once more performed a miracle, salvaging the EU yet again, at least for now. Was there ever any doubt?

Portugal loses patience with Europe

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by Ambrose Evans-Pritchard
Posted July 18th, 2011

 

AT LAST, SOME RAW EMOTIONAL GAULLISTE PATRIOTISM FROM THE VICTIMS of Europe’s Maquina Infernal? Portugal’s new premier Pedro Passos Coelho — a free marketeer — began to growl over the weekend. “We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and wait for Europe to govern Portugal,” he told the party faithful.

For Portuguese readers: “Nós queremos participar num projecto europeu ambicioso e queremos dar o nosso contributo para que a Europa saiba encontrar respostas mais ambiciosas para os problemas, mas como primeiro-ministro nunca ficarei à espera do que a Europa tenha que fazer para governar Portugal”

Please correct me if my loose translation is wrong.

So, it has begun: last week Greece’s premier George Papandreou launched two angry broadsides against EU magnates. How could he do otherwise after Eurogroup chair Jean-Claude Juncker told a German newspaper that Greece’s sovereignty would be “massively limited”?

“Massively limited?” Mr Juncker should be clamped in irons if he dares set foot on Greek soil. Now the leader of what is arguably Europe’s oldest nation state (foundation 868, under Vimara Peres) has shown the first hints of frustration.

Just to remind you: unemployment in Portugal is 12.4pc (youth: 28.1) and about to rise much further as the fiscal punch hits. The figures for Spain are 20.9pc (44.4), Greece 15pc (38.5), Ireland 14pc (26.5), Latvia 16.2pc (32.9). Yet the these countries are all facing further headwinds of fiscal and monetary tightening.

For a serving prime minister to make such remarks at this delicate juncture might be taken by some as a cloaked threat  to walk away from the EU project, if the country continues to be treated in a humiliating and damaging fashion. Mr Passos Coelho is fencing with a double-edged blade. Even to hint at misgivings over EMU is to set matters in motion. The markets were very quick to pick up on political body language during the ERM crisis in 1992. The Portuguese leader also said there was a “colossal” €2bn hole in the public accounts left by… well, somebody. He refrained from blaming the outgoing Socialists. They are needed to help pass laws in the Assembleia. Any other skeletons to be uncovered?

I have great sympathy for Mr Passos Coelho and for the Portuguese people. The German-led creditor states have treated the EMU crisis as if it were a morality tale, castigating Club Med and Ireland for alleged fecklessness. All that is required — goes the argument — is further austerity, a dose of 1930s wage and debt-deflation, and virtue will be its own reward. The Left-wing Bloco calls it “social terrorism”.

Adding injury to insult, Germany has insisted that Portugal, Greece, and Ireland pay a penal rate of interest some 200 to 300 basis point over the cost of funding paid by the EU’s bail-out machinery, though this may soon be cut somewhat. As former US Treasury Secretary Larry Summers said this morning in the pink sheet, such penal rates play havoc with debt dynamics and are driving a string of countries into insolvency and depression.

This Germanic view of events is self-serving and intellectually dishonest. Southern Europe is in trouble because Europe’s monetary union is and always was dysfunctional. The Maastricht process caused interest rates to plunge in the Club Med bloc, setting off credit booms. Portugal’s rates fell from 16pc to 3pc in short order.

The ECB poured further petrol on the fire by tilting monetary policy to German needs in the middle of the last decade, when Germany was in trouble. The ECB breached is own eurozone M3 and inflation targets for year after year. In the specific case of Portugal, the boom occurred earlier, in the late 1990s. No doubt a great many foolish errors were made in those halycon days. (I wrote about them at the time or shortly after, and was roundly reproached for my insolence).

Yet over the last eight years Portugal has been relatively frugal. It did not have an Irish banking bubble, or a Spanish property bubble. It did let social transfer costs creep up to 22pc of GDP — when they should have been falling — but it also passed a string of fiscal austerity packages. Yet at the end of the day it was punished anyway. It has failed to reap any worthwhile benefits. There has been no economic convergence or EMU catch-up effect. Productivity has remained stuck at 64pc of the core-EU average. Portugal switched from surplus on its external accounts in the early 1990s to a deficit of 109pc of GDP today.

Public and private debt has ballooned to 330pc of GDP, one of the highest in the world. Portugal will still have a current account deficit of almost 8pc this year and the budget deficit was still running at a 8.7pc rate in the first quarter. Such a profile two or three years into draconian cuts and demand compression is almost tragic. And now they must implement yet further austerity, without debt relief or offsetting monetary stimulus or devaluation. This policy is a near certain formula for economic asphyxiation..

In Portugal — as well as Greece, Ireland, and perhaps Spain in due course — we are moving closer to the point where national leaders must decide whether to satisfy EU demands, or placate their own citizens, for is it no longer possible to serve these two masters at the same time?

Can there really be any doubt as to the outcome of this tug-of-war

Cracks beneath the Façade

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by ilene
from Stock World Weekly
Posted June 26, 2011

China 

ON THURSDAY, QU XING, DIRECTOR OF THE CHINA INSTITUTE OF INTERNATIONAL STUDIES, a Foreign Ministry think tank, told reporters that China doesn’t want to see debt restructuring in the Eurozone and is working with the IMF and countries involved with the debt crisis in an attempt to avoid it. Speaking at a press conference during a visit to Hungary, Premier Wen Jiabao said, “China is a long-term investor in Europe’s sovereign debt market. In recent years we have increased by a quite big margin holdings of Euro bonds. In the future, as we have done in the past, we will support Europe and the Euro.”. Sunday, on a tour of the Chinese-owned Longbridge MG Motor factory in Birmingham, Premier Wen told BBC it will lend to European countries, and also has plans to stimulate domestic demand and reduce its foreign trade surplus.

China’s stated position prompted Zero Hedge to ask, “Will the third time be the charm for the Chinese ‘white knight’ approach to Europe, where it has so far sunk about $50 billion in bad money after good?” Saturday, Zero Hedge reported that China’s European Bailout (And TBTF) Bid Hits Overdrive, As Wen Jiabao is Now in the Market for Hungarian Bonds. “It seems China has learned from the best, and either knows something others don’t (except for the SHIBOR market of course) or is actively preparing to become Too Biggest To Fail by making sure that if something bad happens to it, literally the entire world will follow it into the depths of hell.  Sunday, ZH wrote, “As expected, China is the new IMF… All this means is that China will do everything in its power to prevent the ECB from launching an outright unsterilized monetization episode, which will double the amount of importable inflation (plunging EUR) to hit the Chinese domestic economy, and destabilize the already shaky stability, so critical for the Chinese communist party.” (China Says It Will Bail Out Insolvent European Countries.)

It’s good to know that China has its problem with inflation now solidly under control.

 

Greece

Greece has a population of just over 11 million people. Compare that to the New York City metropolitan area population estimated at 18.9 million. It may seem strange that Greece’s travails might greatly affect the global economy, but the potential repercussions from a Greek default become more significant when considering leverage and derivatives. Data from the International Monetary Fund (IMF) show that German banks are heavily leveraged, holding 32 Euros of loans for every Euro of capital they have on hand. Other banks are leveraged to the hilt as well. Belgian banks are leveraged 30-1, and French banks are leveraged 26-1. Lehman’s leverage at the time of its collapse was 31-1. U.S. Banks are paragons of sanity by comparison, with an average leverage of only 13-1. (Europe’s sickly banks) France and Germany are the countries most exposed to Greek debt through bank and private lending and government debt exposure (chart below).

Derivatives present another potential minefield. As Louise Story wrote in the NY Times,
“It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate… The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.” (Derivatives Cloud the Possible Fallout From a Greek Default)

Michael Hudson explored the differences between what happened to Iceland and its debt crisis, and what is currently happening in Greece:
“The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury)…

“The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect…

“One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world had learned enough about causes and consequences. The banking profession chooses deliberately to be ignorant. ‘Good accepted practice’ is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets “unexpectedly” are hollowed out and new investment slows as a result of financially bleeding economies, medieval-style, while wealth is siphoned up to the top of the economic pyramid.

“My friend David Kelley likes to cite Molly Ivins’ quip: ‘It’s hard to convince people that you are killing them for their own good.’ The EU’s attempt to do this didn’t succeed in Iceland. And like the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste – all to pursue the banal obsession that banks must not lose money?

“One must conclude that the EU’s new central planners (isn’t that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up…” (Michael Hudson’s Whither Greece – Without a national referendum Iceland-style, EU dictates cannot be binding for more.)

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“Growing your way out of debt” is a fantasy

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by Charles Hugh Smith from Of Two Minds
Originally posted June 22, 2011

ADD RISING INTEREST PAYMENTS AND HIGHER TAXES to declining assets and incomes and you don’t get “growth,” you get insolvency. The Status Quo consensus is that “kicking the can down the road” a.k.a. “extend and pretend” will work because “Greece, Spain, Ireland et al. are going to “grow their way out of debt.” That is a fantasy.

Here’s why.

1. There’s a funny little feature of debt called interest. The Status Quo solution for Ireland, Greece, Portugal, Spain et al. is A) increase their debt load with more loans and B) roll over their old debt into new loans, without the old lenders taking any “haircut” on the principal. Both of these “solutions” add more interest costs. That means more of the national income stream must be diverted to pay the lenders their pound of flesh. That means there is less money in the national economy to buy goods and services, which means the economy must shrink to pay the higher interest costs.

This is why unemployment in Spain and Greece has skyrocketed and why 100,000 small businesses have closed in Greece in the past year.

2. A funny little feature of interest is that when people see you’re at risk of default, they start charging you more to borrow their moneyAnd it isn’t a tiny bit more interest, it’s a lot. Think subprime teaser loan at 3% shooting to 8%, or 28% if you’re trying to sell new debt on the open market. For the E.U. to “help” Greece and Ireland by rolling over their already crushing debt loads into new, higher interest loans is like “helping” a sick patient by sticking a knife into their back.

3. Governments over-promise future benefits to win elections in the here and now. This makes sense, of course, because you win the elections and power now and the problem of paying for these excessive benefits is left to future politicos and taxpayers. But when the phony “growth” (think metasticizing cancer) fueled by rapidly rising debt is finally cut off, then the government has no choice but to raise taxes, and keep raising them, to pay for the extravagant past promises made to citizens.

That means more of the national income is diverted to taxes, only part of which flow through as cash benefits to consumers. Much of the tax revenues flow to cronies, fiefdoms and of course those higher interest payments on the ballooning debt.

4. Cheap abundant credit has a funny little consequence: asset bubbles. When everybody can borrow vast sums of nearly-free money at costs much lower than the outlandish gains being reaped by real estate speculators and punters pouring cash into stocks and commodities, then of course it is a perfectly rational decision to leverage yourself to the max, borrow as much as you can and join the speculative frenzy.

So assets bubble up to frothy levels, and McMansions sprout by the thousands on Irish and Spanish soil. The “demand” is not for shelter; it was all speculative demand for something to flip and churn. So when the debt bubble pops, so too do all the asset bubbles.

5. Leverage has a funny little feature called collateral and that other peculiar feature, interest. The land and house are the collateral for a mortgage (debt). As the real estate bubble popped, then the value of the collateral plummeted. Now the collateral is worth less than the loan–the borrower is “underwater.” The lender foolishly reckoned this would never happen, and now taking the collateral when the borrower defaults is an unsavory option because the lender will have to absorb a huge loss (“haircut”) if they take the property.

So they choose to “extend and pretend,” offering the borrower new terms, lower payments, etc., anything to keep the loan value on the books at 100%.

All of this is just artifice, of course; the borrower is insolvent, and so is the lender. As long as the borrower has to pay interest and principal, then there is not enough income left to “grow” anything. As long as the lender keeps the impaired loan on the books at the bogus valuation, then the lender is treading on the thin ice of insolvency.

6. As the national income and asset valuations both decline, the government imposes “austerity” programs which further cut incomes. A funny little feature of government “austerity” is the cuts come from the citizen’s side of the expense ledger, not from the crony/fiefdom side. Here in the U.S., for example, the library hours are slashed and the parks are closed to save $22 million in a $100 billion annual budget (those are the numbers in California) while various favored fiefdoms continue to get their swag. The “pain” of austerity is anything but evenly distributed.

7. People facing financial uncertainty and duress have a funny little habit called saving. As the reality of instability becomes crystal-clear to all, then people rather naturally rally round and circle the wagons, i.e. start saving money to cushion them through the hard times. Trusting in future benefits and bubbles is obviously foolish, and the only avenue of relative safety is cash (or equivalent) in hand. As people save more of their declining income, there is even less national income left to be spent on goods and services.

8. These forces are self-reinforcing. The worse times get, the more people save. the lower the national income, the more taxes will be raised. The more visible these trends become, the more interest lenders demand as they see the positive feedback loops leading to insolvency.

Once a household or nation is burdened with stupendous debt loads and stagnating earnings, “growing your way out of debt” is impossible. The E.U. may succeed in strong-arming Greece into swallowing even more debt, more austerity and higher interest payments, but that will only speed up the self-reinforcing dynamics of insolvency, and guarantee the losses kicked down the road for a few months will be even more devastating.