Posts Tagged ‘Greek debt crisis’
by Grant Williams
25 October 2011
With deference to European readers, I have removed (most of) the original baseball references. Please forgive, Grant!! – Aurick
“Everyone needs the ECB to step up to the plate. The ECB has no excuse not to act. In trying to keep its monetary virginity intact, the bank threatens to destroy the Euro Zone. If that happens, nobody will be able to profit from its virginity.”
– Paul de Grauwe
The total overall cap [of the ESM] is 500 billion Euros
160 billion Euros has been spent
340 billion Euros remains
340 billion Euros + zero Euros = 940 billion Euros“
– Mike Shedlock, on the latest European ‘Masterplan’ to merge the EFSF + ESM
“The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine”
– Abraham Lincoln
Right now, the team comprising the ECB, EU and the various parliaments that make up that fractured and faltering alliance are sending, in baseball parlance, pitcher after pitcher to the mound (sometimes in groups of two or three) trying to combine for the perfect game that they NEED in order to escape the debt trap they have backed themselves into.
Being in a situation where you lose unless you can pull something off against odds of multiple-thousands to one and pitch a ‘perfect game’ is a ridiculous spot in which to find yourself, but as this month has rolled by, it has become ever-more apparent that that is precisely where the Brussels Eurocrats now find themselves. It appears as though, as the pressure has ratcheted up this week, we are now in the ninth inning.
Personally, my own belief (as regular readers are by now well aware) is that the very best the Eurocrats can hope for is to extend the game by an inning or two, but their arms are tired, their bullpen is empty and, at some point, we are going to see an absolute avalanche of runs scored against them as the whole thing finally topples under its own weight.
This past week has been nothing short of farcical as the tension has built towards a crescendo that seemed at first to be willfully engendered in order to generate just enough sense of impending crisis to enable a resolution to be forced through in a similar fashion to that which preceded Henry Paulson and Ben Bernanke’s now-infamous closed-doors fright-fest (hyphenation alert!) that led to the passing of the TARP in late 2008.
Obviously, any and all capitulation towards outright bailouts (or ‘QEU’) must at least be seen to be against the will of the Germans and that proviso goes a long way towards explaining the raft of headlines that have flooded the Reuters and Bloomberg screens of investors all around the world this week. We have seen misdirection, scaremongering, u-turns and abject incompetence as well as the kinds of ‘leaks’ that are, frankly, laughable – the prime example being the ‘leaked’ draft copy of the Euro Summit statement which was printed, in its entirety, in the Daily Telegraph on Thursday – coincidentally at the precise moment when things were starting to come unglued as it became clear that this Sunday’s Summit would NOT produce the magic bullet required.
The statement itself is priceless. It begins with a bit of back-slapping for the passing of the EFSF (after no less than six months of wrangling and an eleventh-hour drama in Slovakia):
The strategy we have put into place encompasses determined efforts to ensure fiscal consolidation as well as growth, support to countries in difficulty, and a strengthening of euro area governance. 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 strengthen our capacity to react to the crisis.
The agreement on a strong legislative package within the EU structures on better economic governance represents another major achievement. The euro continues to rest on solid fundamentals
It then moves on to more familiar ground; an agreement to display their strong determination to fix things. Nothing concrete, of course, but they sure as hell are determined:
The crisis is, however, far from over, as shown by the volatility of sovereign and corporate debt markets. Further action is needed to restore confidence. That is why today we agree on additional measures reflecting our strong determination to do whatever is required to overcome the present difficulties.
The rest of the text, should you want to read it, is here, but allow me to summarise it through a few select phrases that will save you the trouble of doing so:
“blah, blah, blah… All Member States are determined, blah, blah, blah… We want to reiterate our determination, blah, blah, blah… We reaffirm clearly our unequivocal commitment that, blah, blah, blah… All other euro area Member States solemnly reaffirm their inflexible determination, blah, blah, blah… The euro area Heads of State or Government fully support this determination, blah, blah, blah… All tools available will be used in an effective way to ensure financial stability in the euro area, blah, blah, blah… We fully support the ECB, blah, blah, blah… “
See. I told you they were determined.
But, buried deep in the draft are (amazingly enough) some specific measures that will surely help solve the crisis:
• 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
• 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
• The President of the Euro summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits
• As is presently the case, the Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability.
• 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
• Work at the preparatory level will continue to be carried out by the Eurogroup Working Group (EWG)
• The EWG will be chaired by a full-time Brussels-based President. He/she should preferably also chair the Economic and Financial Committee
…and my personal favourite:
• Clear rules and mechanisms will be set up to improve communication and ensure more consistent messages.
It’s at this point that the non-Europeans amongst you are possibly finally beginning to get the joke that anybody caught in the tractor beam of ineptitude that is ‘Europe’ (and by ‘Europe’ I mean the bureaucratic construct rather than the land mass) has understood for years.
THIS IS HOW EUROPEAN BUREAUCRACY WORKS, PEOPLE!!!!
Millions of Euros spent on days of‘talks’ to come up with solutions that fail to address any REAL problems.
Don’t believe me?
Article 47 of the Common Fisheries Policy will ensure that every fish caught by an angler is notified to Brussels so that it can be counted against that countries quota. If you go out for a day’s fishing and catch a couple of cod or mackerel you will now be required to notify the authorities or face a heavy fine.
There are EU regulations on the greenness of the person on the pedestrian crossing lights.
There are 3 separate EU directives on the loudness of lawnmowers.
Regulation (EC) 2257/94 – a great read, by the way – stated that bananas must be ‘free from malformation or abnormal curvature of the fingers’. It also contained stipulations about ‘the grade, i.e. the measurement, in millimetres, of the thickness of a transverse section of the fruit between the lateral faces and the middle, perpendicularly to the longitudinal axis’ …
And then there are cucumbers:
Under regulation (EEC) No 1677/88 cucumbers are only allowed a bend of 10mm for every 10cm of length.
Do you think any of those were drawn up in ten minutes on a single piece of paper?
No. (Actually, in fairness to Europe, they don’t have a monopoly on silly legislation: there IS a law in Alaska that makes it illegal to push a moose out of a moving aircraft.)
The Brussels bureaucracy has always been something of a laughing stock amongst the people of Europe – since long before the final creation of the EU, in fact. Way back in 1955, with a European union freshly on the drawing board ten years after the end of WWII, Russell Bretherton, an English Civil Servant was dispatched to Brussels to inform European ministers what Britain thought of plans for an ambitious new European treaty. Upon arrival, he had these words of wisdom for those assembled:
“Gentlemen, you’re trying to negotiate something you will never be able to negotiate. If negotiated, it will not be ratified. And if ratified, it will not work”
Three years later, the Treaty of Rome was signed, establishing the European Economic Community and from that day to this, the degree of meddling, interference and sheer bureaucracy has increased year after year until we find ourselves here.
Europe is broken and the people charged with trying to fix it are clearly not up to the job. There are way too many vested interests, too many national peccadillos and way too many good, old-fashioned egos in play for it to come down to anything but a last-ditch solution when they are forced into it – and that solution WILL be the printing of money in some shape or form which will help to magically inflate the debt away. The other alternatives are either just too painful (default/ forgiveness) or plain unworkable (growth).
A look at a selection of newsflashes that hit screens this week shows just how ridiculous things have become as everybody involved in trying to sort out the mess that is Europe attempts to get themselves in front of a microphone in order to let the world know just how important they are. Some of these appearances, it would seem, are stage-managed for maximum effect on markets – others are simply self-important politicians who just can’t bring themselves to utter the words “no comment”:
by Tyler Durden
Posted Zero Hedge on September 14, 2011
THE MOST SCATHING REPORT DESCRIBING IN EXQUISITE DETAIL the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies, and specifically its chief market strategist David Zervos. “The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place.
Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way.
The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks – even though it is probably a more cost effective solution for both the German banks and taxpayers….Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. ” Must read for anyone who wants a glimpse of the endgame. Oh, good luck China. You’ll need it.
In most ways the excess borrowing by, and lending to, European sovereign nations was no different than it was to US subprime households. In both cases loans were made to folks that never had the means to pay them back. And these loans were made in the first place because regulatory arbitrage allowed stealth leverage of the lending on the balance sheets of financial institutions for many years. This levered lending generated short term spikes in both bank profits and most importantly executive compensation – however, the days of excess spread collection and big commercial bank bonuses are now long gone.
We are only left with the long term social costs associated with this malevolent behavior. While there are obvious similarities in the two debtors, there is one VERY important difference – that is concentration. What do I mean by that? Well specifically, there are only a handful of insolvent sovereign European borrowers, while there are millions of bankrupt subprime households. This has been THE key factor in understanding how the differing policy responses to the two debt crisis have evolved.
In the case of US mortgage borrowers, there was no easy way to construct a government bailout for millions of individual households – there was too much dispersion and heterogeneity. Instead the defaults ran quickly through the system in 2008 – forcing insolvency, deleveraging and eventually a systemic shutdown of the financial system. As the regulators FINALLY woke up to the gravity of the situation in October, they reacted with a wholesale socialization of the commercial banking system – TLGP wrapped bank debt and TARP injected equity capital. From then on it has been a long hard road to recovery, and the scars from this excessive lending are still firmly entrenched in both household and banking sector balance sheets.
Even three years later, we are trying to construct some form of household debt service burden relief (ie refi.gov) in order to find a way to put the economy on a sustainable track to recovery. And of course Dodd-Frank and the FHFA are trying to make sure the money center commercial banks both pay for their past sins and are never allowed to sin this way again! More on that below, but first let’s contrast this with the European debt crisis evolution.
by Karl Denninger
Posted September 12th, 2011
THERE IS PERSISTENT CHATTER ABOUT A GREEK DEFAULT over the weekend, which Greece denied, but the denier refused to be named. If it’s not true, then put your damned name on the statement or be considered what you are – liars. Greece failed to place their short-term bill rollover. That’s a declaration by the market that even for short-term paper the market has utterly lost confidence in Greece and the Euro.
Germany’s DAX market relative to the United States just hit a five year low today. To add to the “liar liar pants on fire” calls Germany is now reported to be working a plan to recapitalize their banks if Greece defaults.
This in turn means three things:
• A Greek default is considered credible by Germany and they are taking official actions related to that possibility. So much for the denials.
• German banks (and presumably French banks and all the other big banks too) are insolvent as they are carrying these bonds at well above their actual value in the marketplace. If the bonds were carried at the claimed “loss” values, which is quoted as 50%, then there would be no need to recapitalize them would there? This is an official statement of proof that the banks are lying about asset values and are in fact insolvent.
• Remember that we were just told days ago that these banks were fine and needed no capital and in fact calls for more capital by the IMF were officially refused. The same claim has been made about our banks. You were just told officially by Germany that their claim of adequate capital just days ago was a lie as they are now planning to recapitalize the banks. Do you believe our banks are not similarly exposed and also insolvent? YOU’RE BETTING YOUR FUTURE ON THE BELIEF THAT THEY ARE, SO THIS QUESTION IS QUITE GERMANE AND TIMELY: ARE YOU SURE YOU’RE NOT BEING LIED TO EXACTLY AS WE WERE ABOUT GERMAN BANKS?
Coincident with this hitting the wires there was a massive flow of money into the Japanese Yen – and out of the Euro. A monstrous safety trade – people fleeing the European common currency for what they perceive as a “safe haven.” At the same time our markets are down 300 DOW points, the S&P is down 2.5% on the day and more than forty points off the early-morning top — and there’s no sign that things are stabilizing at all.
I said the Euro was going to par, and that might be too conservative. With that our stock market will get cut in half — or more — from here and once again the banks, insurance companies and everyone else will start crying poor mouth.
The problem is that this time there’s no money to bail them out with in the US and as a result if this outcome manifests they will fail. The embedded losses in those institutions on mortgages alone total trillions, which is several times the available debt ceiling and so far beyond the FDIC’s reserves that there is no way to cover you, the average person.
Nobody – and I do mean nobody – in our political establishment from either party gives a damn about the lies and outright fraud in our financial system. Neither political party, including some very specific representatives that have railed about various problems in capital markets, the IMF and similar over the last couple of years will even open their damn mouths, say much less demand structural changes and an end to the frauds. I have been making attempts to break through that “glass ceiling” now for four years with several representative and senatorial offices. How many speeches have you seen on this topic, or even questions directed at like people such as Bernanke under oath?
I’ll answer that for you: ZERO.
The opportunity to fix these problems has been there since 2007 and I have steadfastly put forward plans that will work to resolve these issues, albeit at the cost of there being no more leverage-driven asset-stripping games. I’ve written over four thousand Tickers [Market-Ticker.org] since 2007 and a couple of White Papers and distributed them to Congressional offices by postal mail and fax. In addition there are literal hundreds of staffers that access The Ticker on a regular basis along with every three-letter government agency, including the law-enforcement ones.
There can be no claim that “nobody saw this coming” because I assure you that not only did plenty of people see it coming I have repeatedly warned of the “end game” and consequences – loudly.
Nobody from either party will address this or even discuss this and the reason should be obvious – the banks own the politicians. That’s fine – they can both hang on the rope of their own construction through their willful and intentional acts of malfeasance and fraud. Absolutely none of this was a mistake.
by Ambrose Evans-Pritchard
Posted 11 September 2011
BILD ZETUNG POPULISM HAS PREVAILED. Germany is pushing Greece towards a hard default, risking the uncontrollable chain reaction so long feared by markets. Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself. Photo: AP
First we learn from planted leaks that Germany is activating “Plan B”, telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece’s return to the drachma. German finance minister Wolfgang Schauble has chosen to do this at a moment when the global economy is already flirting with double-dip recession, bank shares are crashing, and global credit strains are testing Lehman levels. The recklessness is breath-taking.
If it is a pressure tactic to force Greece to submit to EU-IMF demands of yet further austerity, it may instead bring mutual assured destruction.
“Whoever thinks that Greece is an easy scapegoat, will find that this eventually turns against them, against the hard core of the eurozone,” said Greek finance minister Evangelos Venizelos. Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself, and Greece has certainly been provoked.
Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been “Unconditional Capitulation”, and “Terrorization of Greeks”, and even “Fourth Reich”.
Mr Schauble said there would be no more money for Athens under the EU-IMF rescue package until the Greeks “do what they agreed to do” and comply with every demand of ‘Troika’ inspectors.
Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.
Let us be clear, the chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy – 16pc of GDP of net tightening in three years – without offsetting monetary stimulus, debt relief, or devaluation.
This has sent the economy into a self-feeding downward spiral, crushing tax revenues. The policy is obscurantist, a replay of the Gold Standard in 1931. It has self-evidently failed. As the Greek parliament said, the debt dynamic is “out of control”. We all know that Greece behaved badly for a decade. The time for tough love was long ago, when the mistakes were made and all sides were seduced by the allure of EMU.
Even if the Papandreou government met every Troika demand at this point, it would not make any material difference. Greek citizens already understand this, and they understand that EU loan packages are merely being recycled to northern banks. Instead of recognizing the collective EU failure at every stage of this debacle, the creditor powers are taking out their fury on what is now a victim.
We have never been so close to EMU rupture. Friday’s resignation of Jurgen Stark at the European Central Bank is literally a kataklysmos, a German vote of no confidence in EMU management. Dr Stark is not just an ECB board member. He is the keeper of the Bundesbank’s monetary flame.
The vehemence of his protest against ECB bond purchases confirm what markets suspect: that the ECB cannot shore up Italian and Spanish debt markets for long without losing Germany. “I look at what is happening in EMU and the words that spring to mind are total and utter disaster”, said Andrew Roberts, credit chief at RBS. He thinks German Bund yields could break below 1pc in the flight to safety.
Citigroup and UBS both issued reports last week on the mechanics of EMU break-up, both concluding with touching faith that EU leaders cannot and will not allow it to happen.
“The euro should not exist,” said Stephane Deo from UBS. It creates more costs than benefits for the weak. Its “dysfunctional nature” was disguised by a credit bubble. The error is now “painfully obvious”. Yet Mr Deo warns that EMU exit would not be as painless as departing the ERM in 1992. Monetary unions do not break up lightly. The denouement usually entails civil disorder, even war.
If a debtor such as Greece left, the new drachma would crash by 60pc. Its banks would collapse. Switching sovereign debt into drachma would be a default, shutting the country out of capital markets. Exit would cost 50pc of GDP in the first year. If creditors such as Germany left, the new mark would jump 40pc to 50pc against the rump euro. Banks would face big haircuts on euro debt, and would need recapitalization. Trade would shrink by a fifth. Exit would cost 20pc to 25pc of GDP. UBS concludes that the only course is a “fiscal confederation”, a la Suisse.
by Wolf Richter – www.testosteronepit.com
Posted September 7th, 2011
“WE’RE ON THE WAY TO A WORLDWIDE FINANCIAL DICTATORSHIP governed by bankers,” said Peter Gauweiler, German Bundestags Representative (CSU), in an interview published Monday in the Welt Online. “We don’t support Greece,” he said. “We support 25 or 30 worldwide investment banks and their insane activities.”
Successful lawyer, he fought back in the German Supreme Court, claiming that the money-printing and bailout operations by the European Central Bank (ECB), and Germany’s role in them, violate the constitution. The court’s decision is expected on Wednesday. The foundation of the euro was the Stability Pact, he said—a contract that now has been broken. And he wonders if “the euro can still function as a value-retaining currency.”
This, just as Wolfgang Schäuble, Finance Minister, has been dealt a defeat of sorts by his own governing coalition during the trial vote for the expansion of the current European Financial Stability Facility (EFSF) whose purpose it is to bail out an ever lager circle of debt-sinner countries. 25 members of his coalition voted against it or abstained. The actual vote is scheduled for September 29.
And the numbers are ugly. 89% of the population oppose the expansion of the EFSF and doubt that ever larger amounts will solve the debt crisis, according to a recent poll. 80% demand that parliament must agree each time before Germany can take on additional burdens and risks. And 85% demand that financial institutions, rather than taxpayer, take the first losses when a country defaults. What galls them is that they have to shoulder these risks and burdens so that debt-sinner countries can borrow even more at lower interest rates.
“The ECB’s bond buying program was a mistake,” laments Hans-Werner Sinn, President of Ifo Institute for Economic Research. Opening the money spigot removed the incentives for the affected countries to undergo needed budgetary and structural reforms. He holds up as proof Italy’s currents effort to weasel out of budget cuts and tax increases and Greece’s resistance to reform.
“It would be a lot cheaper for German taxpayers” if Greece exited the eurozone, said Hermann Otto Solms, financial expert of the FDP, the government’s coalition partner, in an interview in the Südwest Presse. Greece has violated repeatedly the condition for the aid package, and “in the long run, that cannot be permitted.” Otherwise, the system of mutual support will lose credibility, and other countries will be tempted to manage their own budgets at the expense of stronger countries. Of course, Greece’s debt would have to be restructured, and banks may have to be bailed out again, just like after Lehman, but it would cost less than endless support. Greece would also be better off. It would get rid of much of its debt. And drastic devaluation of its new currency would make it competitive in a globalized economy.
Meanwhile, Italy is backpedaling on its “blood-and-tears plan” to raise taxes and cut its budget by €45 billion. In Spain and Italy, people are demonstrating in the streets, and strikers are paralyzing Italian air traffic. Austerity plans aren’t popular. It’s easier to borrow and print than to get your financial house in order.
This is exactly what Jens Weidmann, president of the Bundesbank, warns about in an interview published in the Börsen-Zeitung. Euro-Bonds would undermine the incentives for heavily indebted countries to build solid budget policies, he said. “The jump into common liability without limits on national sovereignty could unravel the institutional framework of the Monetary Union.”
Already in August, the Bundesbank had lashed out fiercely at its omnipotent sister, the ECB, for its decision to print money and buy sovereign bonds of debt-sinner countries. These attacks put the Bundesbank on collision course with export-oriented industrialists and financial institutions that have been the primary beneficiaries of its neighbors’ borrowing binge, something Germans tend to forget in the heat of the battle. But it’s not just Germans.
“Let the euro die its natural death,” said Marine Le Pen (article in English) in her populist manner. The media-savvy and vocal president of the Front National of France is one of the top contenders in the 2012 presidential election. Populists in other European countries are gaining ground as well. People have always perceived the euro as an invention by the elite for the elite, and many of the current problems in Europe are blamed on it. So whether or not the eurozone will survive in its current form and with its current members is at least partially a question of its ability to run counter the will of its people, and get away with it.
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