Why Europe Keeps Failing........ merged with "EU Seizes Cypriot Bank Accounts"

[Edward Campbell]

The Globe and Mail's Report on Business has an article which is headlined "Spain raises red flag as G7 holds emergency meeting."  Essentially Spain has changed its tune; no longer does it proclaim that it can raise enough in the bond market to refinance its own debt. Spanish bonds are now perilously close to selling at above 6%, a rate which most economists regard as unsustainable ~ those (6%+) are Greek levels.

This is from the article:

A senior G7 source, speaking shortly before the teleconference, said it was set to turn into a “Germany-bashing session”, with other partners applying severe pressure on Berlin to do more to stimulate growth and help the euro zone.

The source, who requested anonymity due to the confidential nature of the call, confirmed that Germany was pushing Spain to accept an international rescue, as Greece, Ireland and Portugal have done, to help it recapitalize stricken banks.

“They don’t want to. They are too proud. It’s fatal hubris,” the source said of the Spanish government.

Berlin and the European Central Bank have so far resisted pressure from Madrid to ride to its rescue without forcing Spain into the humiliation of an internationally supervised bailout.

French Foreign Minister Laurent Fabius said Europe must find a solution to the Spanish banking crisis that does not add to Madrid’s already heavy budget deficit.

This sets Europe up for a showdown between overextended France and frugal Germany.

The Germans are, fundamentally right: nations need to "bite the bullet" and get their fiscal houses in order, as Germany did in the 1990s. But fundamentals may not be enough ~ the markets are driven by emotion, not reason, and Americans, especially, are at near panic levels. German intransigence may be all that is need to tip the whole world back into an even deeper, longer Great Recession.

 

[dapaterson]

No man is an island, nor is any nation.  Germany is reliant on exports, and the Euro helps Germany remain competitive.

Imagine if the other Euro members, rather than pressuring Germany to change, instead ousted Germany, forcing them to return to the Deutchemark.  The mark would spike upwards; Germany's exports would be uncompetitive, and the economies of the rest of Europe would expand to take up the slack.

 

[GAP]

Wouldn't that upset the applecart.... ;D

 

[dapaterson]

Interesting analysis: Currency union of all countries in the world whose names start with "M" is more logical than the Eurozone.

http://www.theatlantic.com/business/archive/2012/05/the-funniest-graph-ive-ever-seen-about-why-the-euro-is-totally-doomed/256793/

 

[Edward Campbell]

Two articles caught my attention today (it's raining in HK  :'(  ): one by Martin Wolf in The Financial Times and the other by Niall Ferguson in Newsweek. Both aim to explain what's happening in Europe but both, it seems to me are more prescriptive than explanatory and both appear to prescribe the same harsh remedy: union.

It seems to me that the EU has been, broadly, a runaway success story. The European civil wars that dominated 20th century history are over: Germany failed to unite Europe by force but, now, as Ferguson said, Germany risks losing all it has gained - and make no mistake Germany is the big winner in the EU - by being timid and isolationist. It is time to save the euro (€)  the EU itself by going the next step: a confederation. Some countries, notably the UK but, likely, also Denmark and Norway and Switzerland (which are not even in the EU) will not wish to join the new union but they will wish to revise the European Free Trade Area and secure a full free trade deal with the union.

But isn't the EU already a union? Yes, but not a full one; that's why it can even consider kicking Greece out of the Eurozone and that's why it cannot have sane, sensible economic policies. What else must they do? First they need to make themselves look a lot more like Canada: a very loose, highly decentralized federation but one in which a single, sovereign government sets economic (fiscal and monetary) policy, trade and foreign policy and even defence policy.

I would suggest that the new Union of European States (or whatever one wants to call it) should be even looser than Canada. The member states should have full control over their social policies and programmes - but they must be able to fund them through their own state taxes and through a system of transfer payments copied, in aim but but not in too much detail, from Canada. They must pay taxes to the new, federal superstate for areas of federal responsibility, which includes M. Hollande's call for growth because, right now, the EU/Eurozone cannot "do" growth - austerity is the only course open - because it has no resources of its own. Nations should retain their "own" armed forces but some fixed amount (say 75% of manning levels) must be assigned to be "under command" of the superstate's MOD. (It must be recognized that states have legitimate internal security requirements that requires state level "national guards," but hundreds of thousands of European men and women must be enlisted in national ships and units (flying squadrons and wings, regiments, brigades, divisions and even corps) which will serve under a combined command.) (NATO will have to die.) The superstate will be big, strong and rich and able to pursue a strategy comparable to, say, America's or China's.

Oh, and since the new superstate will set foreign and defence policy I am about 99.99% certain that the French nuclear forces are gone.

Thus, I see a three level structure for Europe:

1. European Free Trade Group: the new European superstate plus Britain, Denmark, Iceland, Ireland, Norway and Switzerland;

2. Independent states, which includes the new European superstate and all other states in Europe including the ones mentioned above plus Russia, Ukraine, Turkey, etc; and

3. "Member states" of the European superstate which still have "national" identities, are likely UN members, maybe even have "national" passports, but are no longer independent in economic, foreign or defence policies.

I'm pretty sure the Germans don't want it and French will hate it, but ...

Prime Minister Harper appears to agree. In an article in the Globe and Mail (based upon his comments in a CBC interview) Stephen Harper suggests that the EU is "running out of runway here." What he means is that the current structure and rules do nor permit he EU to do enough to cope with the crisis. He also makes the very valid point that he EU has the necessary resources (its GDP is about $17 Trillion, compared to about $15 Trillion for the USA, $7 Trillon for China and a mere $1.7 Trillion for Canada) to solve the problem, but it cannot, as current organized, mobilize those resources.

Harper suggests that "there is a need for deeper financial integration" in the EU; using my secret decoder ring I read that as suggesting that European countries must sacrifice more sovereignty, specifically over monetary and fiscal policy.

 

[Edward Campbell]

Andrew Coyne of he National Post although no fan of Prime Minister Harper, is a pretty good economist and, in this article, from the National Post, he offers a pretty good overview of the European crisis and of Prime Minister Harper's 'solutions' to it. Note, especially, this:

Europe today is essentially a multi-player game of chicken. The Greeks, or at least the Greek left-wing, are gambling they can reject the terms of the bailout to which the previous government had agreed and still keep the euro, on the premise that, however harmful leaving the euro would be to them, it would be even worse for Europe. The Spanish, likewise, are gambling they can force the rest of Europe — by which everyone understands Germany — to bail out their banks, on similar reasoning.

Coyne concludes, correctly, that blaming austerity, in and of itself, as most European want to do, is nonsense. But, equally, as Stephen Harper says, austerity, all by itself, is not the answer, instead we, they must get supply side economic right - without the "tax cuts = prosperity" rubbish (there is a time and a place for tax cuts, now is not the time and neither America nor Europe is the place). But Europe can slow its borrowing and promote growth at the same time - starting with the realization that, absolutely contrary to President Hollande's contention, governments do not grow the economy, business does.

 

[Kirkhill]

Andrew Coyne of he National Post although no fan of Prime Minister Harper, is a pretty good economist and, in this article, from the National Post, he offers a pretty good overview of the European crisis and of Prime Minister Harper's 'solutions' to it. Note, especially, this:

Coyne concludes, correctly, that blaming austerity, in and of itself, as most European want to do, is nonsense. But, equally, as Stephen Harper says, austerity, all by itself, is not the answer, instead we, they must get supply side economic right - without the "tax cuts = prosperity" rubbish (there is a time and a place for tax cuts, now is not the time and neither America nor Europe is the place). But Europe can slow its borrowing and promote growth at the same time - starting with the realization that, absolutely contrary to President Hollande's contention, governments do not grow the economy, business does.

Hollande thinks that taking his foot off the brake and watching the speedometer rise is the same as adding gas.

On Top Gear a little while back they were doing a retrospective on SAAB and describing SAAB's first car which had a 2-Stroke engine.  To prevent the engine over heating and seizing up you had to keep feeding it gas.  Even when you were going downhill.  Even as you were standing on the brake......

SAAB eventually saw the wisdom of the 4-Stroke engine with a separate control loop for cooling allowing for braking, accelerating and cooling each to be independently monitored and controlled.

I wonder if that analogy holds in the economic world.  Can we separate the control functions or are they all inextricably linked like SAAB's 2-Stroke engine powered car?

 

[a_majoor]

The problem with Europe isn't the linkages between the various systems; it is the people manipulating these linkages have been pushing/pulling the levers to maximize their benefit without any regard for the rest of the system for a long time. Just like individual voters rarely ask "who is paying for my free (insert government benefit here)?", voters and even governments in the PIIG zone were not asking pointed questions about the sources of their funds (especially identifying the people lending them and asking questions like "when will they want to be repaid?" or "What do they want from us in return for all this cash?").

This should not be any real surprise, people and organizations work to maximize their own benefits, and follow incentives (something Adam Smith recognized centuries ago), now the incentives are ending and people are trying to hand the bag to someone else before the music stops. Normal banking rules and incentives would have stopped this nonsense long ago; French banks tempted by higher yields from Greek bonds would not jump in so deeply without the real or implied incentive of a potential bailout by the EU; just like the subprime mortgage disaster in the United States was allowed to run so long with the implied (and eventually real) guarantees of government cash to backstop mortgage "investments" backed by mortgages held by Freddy Mac and Fannie Mae.

 

[Edward Campbell]

The headline in today's Globe and Mail (front page, above the fold in my (Ottawa) print edition) is: PM's EU stand angers Germany. The article is a pretty straight forward explanation of the Canadian position ...

Ottawa insists the IMF exists to help the world’s developing countries, not Europe, and Canada takes the position that it is standing up for non-G20 countries that are uncomfortable with IMF funds going to the euro zone ... [but] the Prime Minister’s stand isn’t likely to make him popular at this month’s G20 summit in Los Cabos, where the Mexican hosts are making the collection of new contributions a key priority for the meeting.

What is really interesting is the comments section (sort them by highest score); a generally strongly anti-Harper commentariat is (almost) wholly behind him on this issue:

Does anyone else find it a little ironic that Germany refuses to bail out Euro PIIGS by approving the concept of EuroBonds, yet (apparently) criticizes Canada for refusing to do something equally undermining of good fiscal prudence.

In other words, Germany says EuroBonds (and other measures they are resisting) would make it too easy for the PIIGS to avoid serious changes to their irresponsible debt and deficit way of life.

Canada is essentially saying the same thing about using IMF funds to bail out Europe.

I agree with Canada's position.

I'm with the PM on this one.

Is there any fool in Canada (other than Mulcair) that wants Canada to BORROW more money to lend to the EU! DUMB DUMB DUMB!

Etc, etc, etc ...

 

[a_majoor]

Expecting Germany to bail out the EUzone is a mugs game, Germany does not have the resources to do so, and a look at the structural setup of Europe suggests that many of the proposed "solutions" fail because there isn't enough trade between Germany and the distressed nations to shift the balance of payments or boost the affected economies:

http://www.washingtonpost.com/opinions/can-germany-come-to-the-euro-zones-rescue/2012/06/10/gJQAVz2ITV_story_1.html

Can Germany come to the euro zone’s rescue?
Robert J. Samuelson

Can Germany save Europe?

It’s tempting to think so. Costs are mounting; over the weekend, European leaders offered Spain up to $125 billion to prop up its shaky banks. German Chancellor Angela Merkel has been cast as Europe’s Scrooge dispensing austerity and discouraging recovery. If Germany would only open its wallet, Europe’s instability and suffering would shrink. Well, maybe. But this seductive theory may be wishful thinking, overstating Germany’s power and understating Europe’s problems. The dark truth may be that even a willing Germany can’t rescue Europe.

Let’s start with facts. Germany’s economy is the colossus of the euro zone (the 17 countries using the euro), representing 27 percent of the total. German unemployment, 5.4 percent in April, is half the euro zone’s 11 percent average. Global investors so trust Germany that they’ve beaten down interest rates on its 10-year government bonds to a puny 1.3 percent.

What might Germany do? For starters, it could stimulate its own economy, hoping that spillovers would help Europe’s other economies. Next, it might embrace “eurobonds” backed by all 17 euro countries that, in effect, would be guaranteed by Germany. Weaker countries would benefit from Germany’s strong credit rating; they could borrow at lower interest rates.

Finally, Germany could prod the European Central Bank (ECB) — Europe’s equivalent of the Federal Reserve — to be more aggressive in supporting shaky banking systems and in promoting faster economic growth, even if that created somewhat higher German inflation.

Unfortunately, the effects would be modest. A “rise in domestic demand is unlikely to translate into much growth support for other countries,” concludes a report from the Organization for Economic Cooperation and Development. The reason: Exports to Germany represent only 3 percent of the economies (gross domestic product) of France and Italy, 2 percent for Spain and 1 percent for Greece.

As for eurobonds, they would have to be issued in huge amounts to have a noticeable impact. In 2011, the euro zone’s GDP totaled 9.4 trillion euros ($11.75 trillion). Floating 10 billion or 15 billion in eurobonds would be a nonevent. But large volumes of eurobonds might hurt Germany’s credit rating. “Interest rates would go down for everyone else and up for Germans,” says Stephen Silvia of American University, an expert on Germany.

Indeed, Germany’s costs of saving the euro could be immense. A report by Carmel Asset Management, an investment company, puts the bill at more than 500 billion euros, an amount that would raise Germany’s debt/GDP ratio from 2011’s 81 percent to 103 percent. The report is titled: “Achtung Baby: Germany Is Riskier than You Think.”

It’s true that the ECB, providing deposit guarantees for banking systems, might foster stability — that is, prevent things from getting worse. But with the ECB’s main interest rate at 1 percent, further cuts might not much increase economic growth. If different inflation rates emerged between Germany (where labor markets are tight) and debtor countries (where they aren’t), debtor countries could become more cost-competitive. But this would take years.

There’s a yawning gap between the rhetoric and the reality of what Germany might do. Merkel is understandably reluctant to make large commitments to pay other countries’ costs. In surveys, about four-fifths of Germans oppose eurobonds.

Fortune is fickle. Germany’s economy may not always be as strong as now. Its low birthrate (1.4 children per woman) virtually guarantees a shrinking labor force. Only a decade ago, Germany was regarded as Europe’s “sick man,” losing competitiveness to low-wage factories in former Soviet bloc countries.

“From Bavaria, it’s only an hour’s drive to the Czech Republic,” says Thomas Kleine-Brockhoff of the German Marshall Fund. “You could almost hear the sucking sound of the German industrial economy moving eastward.” But Germany adjusted. Unions and firms adopted wage restraint. From 1996 to 2007, annual gains in German compensation per worker averaged 0.9 percent compared with a euro zone average of 2.4 percent. Germany engineered a huge shift in competitive advantage.

To Germans, other European countries must now adjust to new, if unpleasant, realities. Chief among these is that the economies of many European countries are no longer strong enough to support their welfare states. Economic growth is too low, populations are aging and demands on pension and health-care systems are too high. Benefits must be cut or taxes raised without doing too much damage to economic growth or the social fabric.

It’s a tall order that would be aided by a large and stable source of credit: a rescue fund allowing embattled countries to borrow at low rates while instituting essential policy changes. So far, Europe’s response has been a series of stopgaps, the Spanish loan being the latest.

But Germany is not wealthy enough to anchor such a fund. Together, Italy’s and Spain’s economies equal Germany’s. What if France gets in trouble? Only the United States along with China and other countries with large foreign exchange reserves could create such a fund. That this now seems politically impossible is one measure of global peril.

 

[GAP]

NOW 80% DEMAND VOTE TO QUIT EU
Article Link
Tuesday June 12,2012 By Alison Little

DEMANDS for the British people to have a say on our role in Europe got a huge boost yesterday.

A new poll showed more than 80 per cent of voters are crying out for a referendum.

Nearly half of voters – 49 per cent – want their voices heard straight away, according to the survey.

A further third, 33 per cent, believe that there should be a vote “in the next few years”.

in revealing people’s deep dissatisfaction with Brussels in our popular crusade to get Britain out of the EU.

We have consistently said Europe has changed so dramatically since 1975 – when Britons last had a referendum – that another is long overdue.

Yesterday’s survey by Populus underlined the strength of feeling and will fuel many MPs’ calls for greater urgency.

Labour MP and former minister Kate Hoey said: “This poll shows that the message the Daily Express has been carrying for many months is resonating with the public. A referendum is not a sideline issue – it is crucial to the public and must happen.”

Leading Tory eurosceptic MP Peter Bone said: “The political elite are scared of asking the question. They know people don’t want the EU, they don’t want the £41billion membership fee, they want border controls returned, they want decisions made in Parliament.”
More on link

 

[Sythen]

Article Link

Link not working for me

 

[GAP]

fixed

 

[Edward Campbell]

Two articles caught my attention today (it's raining in HK  :'(  ): one by Martin Wolf in The Financial Times and the other by Niall Ferguson in Newsweek. Both aim to explain what's happening in Europe but both, it seems to me are more prescriptive than explanatory and both appear to prescribe the same harsh remedy: union.

It seems to me that the EU has been, broadly, a runaway success story. The European civil wars that dominated 20th century history are over: Germany failed to unite Europe by force but, now, as Ferguson said, Germany risks losing all it has gained - and make no mistake Germany is the big winner in the EU - by being timid and isolationist. It is time to save the euro (€)  the EU itself by going the next step: a confederation. Some countries, notably the UK but, likely, also Denmark and Norway and Switzerland (which are not even in the EU) will not wish to join the new union but they will wish to revise the European Free Trade Area and secure a full free trade deal with the union.

But isn't the EU already a union? Yes, but not a full one; that's why it can even consider kicking Greece out of the Eurozone and that's why it cannot have sane, sensible economic policies. What else must they do? First they need to make themselves look a lot more like Canada: a very loose, highly decentralized federation but one in which a single, sovereign government sets economic (fiscal and monetary) policy, trade and foreign policy and even defence policy.

I would suggest that the new Union of European States (or whatever one wants to call it) should be even looser than Canada. The member states should have full control over their social policies and programmes - but they must be able to fund them through their own state taxes and through a system of transfer payments copied, in aim but but not in too much detail, from Canada. They must pay taxes to the new, federal superstate for areas of federal responsibility, which includes M. Hollande's call for growth because, right now, the EU/Eurozone cannot "do" growth - austerity is the only course open - because it has no resources of its own. Nations should retain their "own" armed forces but some fixed amount (say 75% of manning levels) must be assigned to be "under command" of the superstate's MOD. (It must be recognized that states have legitimate internal security requirements that requires state level "national guards," but hundreds of thousands of European men and women must be enlisted in national ships and units (flying squadrons and wings, regiments, brigades, divisions and even corps) which will serve under a combined command.) (NATO will have to die.) The superstate will be big, strong and rich and able to pursue a strategy comparable to, say, America's or China's.

Oh, and since the new superstate will set foreign and defence policy I am about 99.99% certain that the French nuclear forces are gone.

Thus, I see a three level structure for Europe:

1. European Free Trade Group: the new European superstate plus Britain, Denmark, Iceland, Ireland, Norway and Switzerland;

2. Independent states, which includes the new European superstate and all other states in Europe including the ones mentioned above plus Russia, Ukraine, Turkey, etc; and

3. "Member states" of the European superstate which still have "national" identities, are likely UN members, maybe even have "national" passports, but are no longer independent in economic, foreign or defence policies.

I'm pretty sure the Germans don't want it and French will hate it, but ...

Prime Minister Harper appears to agree. In an article in the Globe and Mail (based upon his comments in a CBC interview) Stephen Harper suggests that the EU is "running out of runway here." What he means is that the current structure and rules do nor permit he EU to do enough to cope with the crisis. He also makes the very valid point that he EU has the necessary resources (its GDP is about $17 Trillion, compared to about $15 Trillion for the USA, $7 Trillon for China and a mere $1.7 Trillion for Canada) to solve the problem, but it cannot, as current organized, mobilize those resources.

Harper suggests that "there is a need for deeper financial integration" in the EU; using my secret decoder ring I read that as suggesting that European countries must sacrifice more sovereignty, specifically over monetary and fiscal policy.

And now former US Federal Reserve Chairman Alan Greenspan adds his support for "the political consolidation of Europe." He is reported (in an article in the Globe and Mail) to have made the comment in a panel discussion following a speech to the to the International Forum of the Americas in Montreal.

 

[a_majoor]

Cue the scary music; even if the election is "favourable" the economic chaos and withdrawl of funds and economic activity as Greek citizens hunker down could lead to a self fulfilling prophecy:

http://m.heraldsun.com.au/election-apocolyse-greeks-stock-up-on-canned-food/story-e6frfm30-1226395368597

Election apocalypse: Greeks hoard canned food
From: news.com.au
June 14, 2012 11:40AM

Greek retailers say consumers are stocking up on non-perishable foods like pasta and canned goods. Picture: Thinkstock Source: news.com.au

NERVOUS Greeks are withdrawing up to 800 million euros ($1.01 billion) a day and stocking up on canned food as they fear the country will be forced to leave the eurozone after this Sunday's election.

Greek citizens fear the ramifications of a return to the country’s previous currency, the drachma, if the radical left-wing party and strong election contender SYRIZA wins this weekend.

Bankers said daily withdrawals from the major banks were hitting €500-€800 million ($631.8 million-$1.01 billion), Reuters reported.

Meanwhile, retailers say consumers are stocking up on non-perishable foods like pasta and canned goods.

Analysis: What the Greek elections mean for all of us

Latest polls showed the conservative New Democracy party, which supports a €130 billion international bailout, is running neck-and-neck with the leftist SYRIZA party.

And if SYRIZA wins, expect the austerity program to be dumped in favour of "growth" (apparently the EU codeword for stimulus spending, not economic growth the way we think of it).

 

[Edward Campbell]

Cue the scary music; even if the election is "favourable" the economic chaos and withdrawl of funds and economic activity as Greek citizens hunker down could lead to a self fulfilling prophecy:

http://m.heraldsun.com.au/election-apocolyse-greeks-stock-up-on-canned-food/story-e6frfm30-1226395368597

And if SYRIZA wins, expect the austerity program to be dumped in favour of "growth" (apparently the EU codeword for stimulus spending, not economic growth the way we think of it).

The Greeks, no matter which party wins, cannot spend what they cannot borrow and what they cannot borrow, because no one will buy their bonds - no matter what the premium is - are euros.

My guess: 1) Greeks elect one of the lunatic parties; 2) Greece exits the euro; consequently 3) Greece leave the EU; and 4) Greek 'democracy' collapses - a military coup ensues ...

Turkey smiles ...

 

[GAP]

As both Thucydides and ER have pointed out repeatedly, the EU will not last until there are consistant standards in budgets, and expenses across the whole spectrum.

Anything else is simply wishful thinking, and I'm still waiting for the toothfairy to come......

 

[Edward Campbell]

As both Thucydides and ER have pointed out repeatedly, the EU will not last until there are consistant standards in budgets, and expenses across the whole spectrum.

Anything else is simply wishful thinking, and I'm still waiting for the toothfairy to come......

And you cannot have them as long as some members are willing and allowed to flout the rules and even lie about their finances.

I think you can have a three tier EU:

1. Top tier: Germany plus several others in a currency union;

2. Second tier: led by France - members unable to qualify for the currency union;

3. Third tier: led by the UK - members unwilling to join a currency union or even the Schengen Agreement but who want to be in the free trade area.

In other words you have a large European Free Trade Area (20± members) within which exists a "deeper" European Union (15±) members, and within that there is a smaller (5 to 10) Eurozone which is, de facto, a loose federation, the members of which have sacrificed some sovereignty in order to share common fiscal and monetary policies.

 

[tomahawk6]

Socialism [communism light] is killing Europe. They cant raise taxes high enough to pay for the welfare state. The only hope is to privatize national healthcare and to encourage economic growth which in turn will generate more taxes.

 

[Edward Campbell]

Socialism [communism light] is killing Europe. They cant raise taxes high enough to pay for the welfare state. The only hope is to privatize national healthcare and to encourage economic growth which in turn will generate more taxes.

Actually, healthcare in Europe is relatively 'private' - no European country has as fully 'public' a health care system as does Canada. Healthcare costs in every modern European country are lower, as a percentage of GDP, than in the USA and 'outcomes' are universally better.