Greece

The Greek tragedy from another angle

”People in Greece are suffering; they cannot cope with their day-to-day life; they cannot buy food; they are evicted from their homes,” says Jannis Barbantonis, president of the Greek Association in Norway to NRK, the Norwegian Broadcast Corporation.

This desperate situation is, according to Jannis Barbantonis, the background for Prime Minister Papandreou’s decision to call a referendum on the EU crisis bail-out packet.

The packet is not a light at the end of the tunnel for the Greeks who want to re-negotiate the conditions of the loans, with a lower rate of interest and a 40 year maturity, he says, and continues to point out that the bail-out does not reduce the debt by half. The fact is, says he, that out of the €380 billion Greek debt €260 is in government bonds which are not included in the bail-out.

German Professor to challenge Euro-bailout

EXECUTIVE INTELLIGENCE REVIEW PRESS RELEASE:

Prof. Joachim Starbatty, one of the four German Professors who will file a constitutional complaint against the EU bailout policy, has given an exclusive interview to the Executive Intelligence Review. The interview will be immediately posted on the German EIRNA website and will appear in the coming issue of Neue Solidarität, and will also come out in the next issue of EIR.

In the interview, Starbatty says that as soon as the German government issues a bill for participation in the Greek bailout, the four professors “will proof the text and immediately act.” If the Constitutional Court supports the complaint, “this will create a dynamic situation. This means that an exit of Germany [from the Euro] is not excluded.” If this happens, other nations would follow, giving birth to “a new, stable bloc, he said. This would be less painful than it seems, and “the United States would gain an ally in any future reorganization of the world currency system and the global economy”.

The EU intention to introduce a control mechanism on national budgets amounts to “the development of the EU into a quasi-federal state through the back door. This conflicts with the ruling of the German Constitutional Court on the Lisbon Treaty,” Prof. Starbatty says. Article 136 of the Lisbon Treaty, used by EU leaders to back their intentions, “is no basis for a transfer of political competencies. The Bundestag must express its opinion on that.”

Prof. Starbatty exposes the shock therapy to be imposed on Greece as “fatal.” He added: “It is like German Chancellor Brüning’s policy in the early 1930s: in a severe recession, to cut expenditures, increase taxes, freezing and cutting wages. Brüning did that in order to gain reputation on the international capital markets. The Greeks are currently in a similar situation. No other industrial country carries out this Brüning-like policy because it leads from a recession to a depression.”

Instead, Greece should leave the European Monetary Union (EMU) and its “Euro-debts should be cut down according to the [currency] devaluation. The banks should participate in the consolidation; they consciously took a high risk.”


Another article on the technical background of the Greek crisis:

Is Titlos PLC (Special Purpose Vehicle) The Downgrade Catalyst Trigger Which Will Destroy Greece?

And and article from the Financial Times by Wolfgang Munchau:

Europe’s choice is to integrate or disintegrate

Monday, 3 May 2010

The aim of the rescue package agreed for Greece cannot conceivably have been to prevent a default. For all the daunting austerity and structural reform it requires, the numbers do not add up. The main purpose I can detect is to reverse the rise in Greek bond yields and stop contagion.

We should not knock this deal from Athens. The eurozone might not have survived otherwise. This column would have been an obituary. I am also glad to note that those in charge gave a positive answer to a question I posed last week, which was whether the authorities would ever get ahead of the situation. They did, and they deserve credit.

But in spite of the readiness to accept extreme austerity, Greece will not get by without some form of debt forgiveness. I can understand why the International Monetary Fund and the European Union did not want to open that can of worms at this point. It would have prolonged the negotiations. In the middle of an acute bond market crisis one has to manage expectations very carefully.

A debt restructuring will eventually be necessary, however, because Greece’s debt to gross domestic product ratio is going to rise from its current 125 per cent to about 140-150 per cent during the adjustment period. Without restructuring, Greece will end up austere, compliant, and crippled.

The decision to take Greece out of the capital markets for three years will prevent immediate ruin but has only a marginal impact on the country’s future solvency. The underlying assumption of the agreement is that Greece can sustain austerity beyond the time horizon of the accord, without falling into a black hole. The latter is particularly optimistic. Standard & Poor’s, the rating agency, last week estimated that Greece would not return to its 2009 level of nominal GDP until 2017.

Last week gave us an inkling of the vicious circles at play in such a crisis. First, a country’s financial situation deteriorates. Then a rating agency downgrades the debt, which in turns triggers a rise in market interest rates. That leads to a further financial deterioration.

Another such loop goes via the banking sector. If a government’s solvency is in doubt, so is the solvency of the banks, whose liabilities are guaranteed by the government. Last week, the banking sector in large parts of southern Europe was in effect cut off from the capital markets.

Angela Merkel and her inexperienced economic advisers have no idea about the dynamics of sovereign crises. They never bothered to look at the experience of other countries, notably Argentina. Waiting until the moment a country is about to fail - which is how the German chancellor interpreted the political agreement she accepted in February - constitutes an abrogation of leadership that is bound to end in financial ruin. It means that everybody, Germany especially, has to pay billions of euros more than would have been the case if the EU had sealed this in February.

On my estimate, the total size of a liquidity backstop for Greece, Portugal, Spain, Ireland and possibly Italy could add up to somewhere between EUR 500bn ($665bn, £435bn) and EUR 1,000bn. All those countries are facing increases in interest rates at a time when they are either in recession or just limping out of one. The private sector in some of those countries is simply not viable at those higher rates.

As I have argued before, three things are required if the eurozone is to survive in the medium term: a crisis resolution system, better fiscal policy co-ordination, and policies to reduce intra-eurozone imbalances. But this is only the minimum necessary to get through the next few years. Beyond that, the eurozone will almost certainly need both an embryonic fiscal union and a single European bond.

I used to think that such constructions would be desirable, albeit politically unrealistic. Now I believe they are without alternative, as the experiment of a monetary union without political union has failed. The EU is thus about to confront a historic choice between integration and disintegration.

Germany can be relied on to resist every one of those measures. In the meantime, European leaders will treat each new crisis with the only instrument they have available: an injection of borrowed liquidity. But this instrument has a finite lifespan. If it is not blocked by popular unrest, it will be blocked by constitutional lawyers.

On one level, I agree with those lawyers. There can really be no doubt about what the “no bail-out” rule was intended to mean. It meant that Greece should not be supported. The EU had to resort to some unseemly legal trickery to argue that advancing junior loans at a massive scale to an effectively insolvent country does not constitute a bail-out. The clause - Article 125 of the Lisbon treaty - is irresponsible. If you follow it, you end up breaking the eurozone. So far, the choice has been to break the clause instead, and now would be the right moment to change it.

So what is the endgame of the eurozone’s multiple crises? For Greece it will be debt restructuring, a polite term for negotiated default. The broader outcome is more difficult to predict: it will either be deep reform of the system or a break-up.

Spain's economy thrown into chaos

Spain’s economy was thrown into chaos on Thursday when its credit rating was cut, sharpening fears that Britain may suffer a similar fate.

The turmoil came just a day after Greece’s rating was cut, increasing concerns of a Europe-wide financial crisis.

The euro fell sharply and the interest rates European governments pay to borrow money jumped after Standard and Poor’s, a credit ratings agency, downgraded Spain.

Last night the government in Madrid appealed for calm, promising an “austerity programme” to cut spending.

But economists fear that events in Spain show that financial “contagion” is spreading from Greece, as investors are scared off investing in any European country with significant government deficits.

from Telegraph

Greek crisis begets a German backlash

by David Marsh

(The writer is senior adviser to Soditic-CBIP LLP, chairman of SCCO International and author of “The Euro - The Politics of the New Global Currency”)

Financial Times, Wednesday 27 April 2010

When Josef Joffe, then foreign editor of the German daily Süddeutsche Zeitung, wrote a 4,000-word essay in December 1997 attacking the planned formation of the European single currency, he published it first in English, in the New York Review of Books. “Never in the history of democracy have so few debated so little about so momentous a transformation in the lives of men and women,” noted Mr Joffe. As if to confirm his point, the article appeared in an abridged German translation in the Süddeutsche Zeitung more than a month later, unobtrusively buried in a weekend supplement.

The episode illustrates past barriers to plain speaking about economic and monetary union (EMU). Many ordinary Germans always feared the euro would be less stable than the D-Mark. Yet, reflecting postwar belief that German interests ineluctably overlapped with Europe’s, there was little discussion of the risks. This went beyond Germany. One senior Dutch central banker, now retired, says most European governments - including his own - agreed the Maastricht treaty 20 years ago without understanding what they had signed into law.

In April 1998, Germany’s parliament voted through the euro with only minimal opposition. Now, the German-in-the-street is making up for lost time. Popular antagonism to public funding for struggling euro members makes Chancellor Angela Merkel highly cautious on emergency aid for Greece.

There is an air of déjà vu. Wilhelm Hankel, Wilhelm Nölling, Karl Albrecht Schachtschneider and Joachim Starbatty, four German professors who launched an unsuccessful anti-euro lawsuit at the constitutional court in 1998, are preparing fresh legal action. Their claims of infringements to the EMU rules, in particular over the “no bail-out clause” preventing joint payment of weaker states’ debts, have a much greater chance of success this time.

As Greece approaches a possible debt restructuring and even a euro exit, questions are due on why warning signals went ignored that weaker eurozone countries were building up unsustainable borrowings. In technical reports during the past two years - well before the recent Greek budget deficit controversy - the European Commission voiced worries about rapidly rising short-term external debt in Greece and Portugal, caused by huge current account deficits. Yet the Commission’s widely publicised, largely laudatory report on the euro’s first decade in May 2008 devoted only three paragraphs in 328 pages to current account imbalances.

Jean-Claude Trichet, European Central Bank president, has been caught off-guard by the German backlash. When criticism of Greek accounting irregularities first erupted in 2004-05, Mr Trichet stated “we must learn from past experience” to prevent recurrence. That such efforts have failed has dented the ECB’s image.

Inadequate discussion of the eurozone’s problems has been particularly acute on the issue of whether monetary union required political union. Both the Bundesbank and Helmut Kohl, the former German chancellor, suggested in 1991 that without political union, Emu would eventually fail. In the intervening years, leading German figures softened their views. In 2006 Otmar Issing, former chief economist at the Bundesbank and then the ECB, said monetary union “can work and survive … without fully fledged political union”. Now Mr Issing says: “In the 1990s many economists - I was among them - warned that starting monetary union without having established a political union was putting the cart before the horse.”

Leading German figures never explained that large deficits in countries such as Greece would eventually impinge on Germany’s own finances. Germany, the main surplus country, has inevitably become the largest creditor of the eurozone’s heavily indebted peripheral nations. As Mr Issing said in 1999, the no bail-out clause was meant to prevent the “negative external effects of national misbehaviour” from spilling over elsewhere. In fact, German taxpayers will have to pay for Greece: directly, through emergency government loans; indirectly, through supporting German banks that will be hit by a Greek debt restructuring; or, conceivably, both.

This is one of many costly facts about monetary union now bursting disagreeably to the surface.


Comment by Anthony Coughlan:

The article from today’s Financial Times points to the lack of public debate across the EU on the real implications of the 1992 Maastricht Treaty’s proposal to abolish national currencies and replace them with the euro.

In Ireland’s 1992 referendum on the Maastricht Treaty the main thrust of public debate was on the Abortion Protocol attached to that Treaty.

There was virtually no discussion of the economics involved, apart from the fact that it would make it easier for Irish tourists to go on holiday on the continent and that it would give us permanently low German-level interest rates! The latter in due course helped impel our early-2000s borrowing binge.

The article mentions Professor Albrecht Schachtschneider and his colleagues, who launched a constitutional challenge to Germany’s ratification of the Maastricht Treaty at the time. This led to the Court’s well-known Brunner judgement, which laid down the constitutional principles governing Germany’s adherence to Economic and Monetary Union.

My colleagues and I had the pleasure of welcoming Professor Schachtschneider when he came to Ireland last September to show solidarity with those urging a No vote to the Lisbon Treaty.

We wish him and his colleagues every success if they now take action in the German Constitutional Court against the breach of the EU Treaties which a financial bail-out of Greece or any other EU State in face of the current bond-market crisis would constitute.

Greece formally requests EU-IMF aid

EUOBSERVER / BRUSSELS - Greece has formally placed a request to activate a €40-45 billion EU-IMF aid package, a day after new budget deficit figures revealed the country’s 2009 shortfall to be worse than previously forecast.

The only slight problem he has (Brits can still do understatement as well) is that Germany has refused to put in place enabling legislation that will allow Merkel to put her euros in the pot. As with all participants behind the €30bn (£26bn) of eurozone loans, they will need to pass new laws from scratch before handing over any cash.

This, we are told, stretches the timeline into the second half of May before the “colleagues” can deliver, which is going to make it a close-run thing. The Greeks have bonds worth €11.6 billion maturing at the end of that month. They are going to have to rely on the IMF to bail them out.

Fresh figures released by the EU’s statistics office, Eurostat, on Thursday revealed Greece’s 2009 deficit to be 13.6 percent of GDP, significantly higher than the previous 12.7 percent forecast.

Markets subsequently leapt on the new EU data, sending the yield on 10-year Greek bonds to 8.83 percent, the highest since 1998, and prompting credit rating agency Moody’s to cut the country’s sovereign rating from A2 to A3. On Friday, bond yields retreated marginally following the formal aid request.

From EUobserver and EU Referendum.

Greece will default (but not this year)

by Wolfgang Münchau, Financial Times, Easter Monday 5 April 2010

I am willing to risk two predictions. The first is that Greece will not default this year. The second is that Greece will default. The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default.

The adjustment effort needed to prevent a debt explosion is extremely large. The Nordic countries achieved adjustment on a similar scale during the 1980s and 1990s, but they had two advantages over Greece. They did it in a different global environment; but more crucially they were, in part, able to devalue and improve their competitiveness.

As a member of a large monetary union Greece can improve its competitiveness only through relative disinflation against the eurozone average, which in effect means through deflation. But as the French economist Jacques Delpla has pointed out, this will invariably produce a debt-deflation dynamic in the Greek private sector of the kind described by the economist Irving Fisher during the 1930s.

So Greece will not only have to make an extremely large public sector deficit reduction effort but it will also have to do this under a condition of disinflation, and possibly deflation, which would push its nominal growth rate to negative levels during the adjustment period. That, in turn, would jeopardise the debt reduction programme of both the public and private sectors. Under those circumstances, there is no way that Greece could ever stabilise its debt-to-gross domestic product ratio, no matter how hard the government of George Papandreou tries.

To get out of this mess, one of five things will have to happen. The first, and most optimistic, solution would be a significant fall in the euro’s exchange rate, say to parity with the US dollar, coupled with a strong recovery in the eurozone. This might just do the trick to sustain Greek growth as it adjusts. The second is that Greece gets access to low interest rate loans from the European Union and the International Monetary Fund. The third would be a private sector debt restructuring to prevent a Fisher-style debt-deflation dynamic. The fourth is that Greece leaves the eurozone. The fifth is default.

If you go through the options one by one, you realise that the first is improbable. The EU has in effect ruled out the second. The third would require an unlikely additional bail-out of the European banks. While option four would be most convenient for the Germans, the Greeks are not so stupid as to leave the eurozone. That leaves them with option five: to default inside the eurozone. It is the only option that is consistent with what we know.

But it would throw the eurozone into a potentially terminal crisis. Spain and Portugal have problems of a different kind but of a similar dimension. Spain will have to go through a disinflation/deflation period that will produce a formidable private sector debt-deflation spiral. Without devaluation, or the possibility of a sustained fiscal boost, the Spanish depression could last forever, or at least for as long as the country stays in the monetary union. Portugal, like Greece, suffers from a combined public and private sector debt problem.

When a country such as Greece pays 300 basis points over the yield of a supposed risk-free bond, this means, mathematically, that investors see a probability of around 17 per cent that they will lose 17 per cent of their investment. So in other words, a spread of 300 basis points is a valuation in which default is still considered improbable. If those perceptions changed from improbable to, say, moderately probable, the yield spreads between southern European countries and Germany would explode.

For the time being, Greece can get by because of its excellent debt management, which is why I am confident that Greece is not going to need an immediate bail-out. But given the political economy of the EU, this might turn out to be a disadvantage. Europe’s complacent leaders will only step in if a crisis is both imminent and visible. The really treacherous aspect about the Greek crisis is that the country’s liquidity position is better than its solvency position. Insolvency is a gradual, invisible process. The negative effects of debt-deflation dynamics have not yet begun, but will become inevitable as the Greek public and private sectors go through a simultaneous debt reduction process. In such an environment my assumption of a 2 per cent rate of nominal growth might be far too optimistic. And even with such an unrealistically optimistic assumption, default would be hard to avoid.

There have only ever been two intellectually honest views about economic and monetary union. The first is that it could not work, as it would eventually produce a situation in which a country’s national interest conflicts with the interest of the monetary union at large. The second is that it could work, but only for as long as member states are ready to co-ordinate economic policy in the short run, and move towards a minimally sufficient fiscal union in the long run. The message from the EU, and from Germany in particular, is that the latter has now been ruled out.

Statement of solidarity with trade union colleagues in Greece

From (Labour Movement) CAEF - Campaign against Euro-federalism (in Britain)

To our trade union colleagues in Greece. We express solidarity with the actions taken by trade unions in Greece against the draconian criteria of the EU’s Growth and Stability Pact, and the dictats of the European Central Bank.

It is clear that cuts in Public Expenditure are part of an EU wide onslaught by big capital, the European Round Table of Industrialists, European Commission and Germany in particular.

These interests want the working class to “tighten their belts” and pay for and resolve the ills of the fiscal and economic crisis. At the same time it is an attempt to hand everything to the private sector and remove democratic accountability without any regard for the social consequences.

It is clear that for Greece and other EU Member States, including Britain, in a similar situation that the only rational course is to fully recover the right to self-determination and national independence and democracy.

We wish you every strength in your actions in this crucial period.

John Boyd
Secretary

CAEF is a member of TEAM

The Making of a Euromess and other articles

The Making of a Euromess

By PAUL KRUGMAN, New York Times, February 14, 2010

The real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.
None of this should come as a big surprise. Long before the euro came into being, economists warned that Europe wasn’t ready for a single currency. But these warnings were ignored, and the crisis came.
It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Germany’s Choice

By Marko Papic and Peter Zeihan, STRATFOR, February 8, 2010

And so the rest of the eurozone is watching and waiting nervously while casting occasional glances in the direction of Berlin in hopes the eurozone’s leader and economy-in-chief will do something to make it all go away. To truly understand the depth of the crisis the Europeans face, one must first understand Germany, the only country that can solve it.

The eurozone’s next decade will be tough

By Martin Wolf, Financial Times

What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck.

Are we about to see the end of the much-vaunted eurozone?

By Peter Oborne, The Observer, 3 January 2010

Before their decision to abandon economic sovereignty and sign up to the euro, policymakers had a tried and tested response to the kind of global setback of the last two years – depreciate the currency and loosen fiscal and monetary policy. This has been the answer produced by Britain, mercifully outside the euro thanks mainly to John Major’s brave, far-sighted and universally denounced decision to opt out of monetary union when he signed the Maastricht Treaty in 1992. But inside the euro, individual countries are stripped of the ability to manage their own economies. That is why the global recession has been far, far more devastating for some eurozone members than would otherwise have been the case – in just the same way that membership of the ERM inflicted wholly unnecessary damage on the British economy in the early 1990s.

Should we divorce the euro?

By David McWilliams, Sunday Business Post, January 10, 2010

Joining a currency union is the economic equivalent of a marriage. If a country decides to give up its currency and get into bed with another currency, it would seem ludicrous to entertain this move without being sure that the union was suitable. As we all know, there is a difference between fancying someone and making the thing last. To avoid single currency arrangements going sour, there is also a ‘matchmaker’ in economic theory. The economic matchmaker goes by the typically incomprehensible name of the ‘optimal currency area theory’. This theory is a checklist of economic attributes which need to line up in order for a monetary union to work. For a currency union to work for a country, the most important thing is that the country trades overwhelmingly with the other members of the monetary union. Like those Catholic fundamentalists who suggested that divorce would threaten the fabric of our society, the euro fundamentalists who run policy in Ireland suggest that, to leave the euro, would undermine the fabric of our economy. Like all fundamentalists, the thing they hate most is a sceptic. Lets hear it for the sceptics.


Still some never learn:

Former Mexican foreign minister calls for ‘North American union’, unified currency

Bloggers4UKIP report: EU flexes Lisbon muscle in Greece

Danish trade unions warn that Commission's demand for pay-cuts in Greece will jeopardise Danish euro-membership

The WSJ reports that the European Commission has said it will accept Greece’s plan to reduce its government budget deficit, but warned that further spending cuts and new taxes might be needed to fix the country’s public finances. According to FT Deutschland, the European Commission has put Greece under de-facto EU supervision.

Trade unions in Denmark have reacted strongly to suggestions that the Commission could demand pay-cuts in Greece, Danish paper Politiken reports. The FOA, a Danish trade union which represents most of the country’s public sector workers, has warned that the Commission’s demands could force the union to recommend a No vote in a future Danish referendum on euro membership. “That the EU intervenes in setting [national] wages is completely unacceptable”, Dennis Kristensen, head of the FOA, is quoted saying. The FOA has previously stayed neutral in referenda questions.

The Telegraph quotes EU Monetary Affairs Commissioner Joaquin Almunia saying the Greek targets will be enforced vigorously: “Every time we see or perceive slippages, we will ask for additional measures to correct these slippages. Never before have we established so detailed and tough a system of surveillance”.

The Guardian looks at the possibility of a Greek bail-out and quotes a senior official in Brussels saying, “For political reasons there can be no bailout, but the eurogroup can act with the Greeks to reform. We have a monetary union, a system for supporting the currency, interdependence.”

Die Welt reports on a study by the Cologne Institute for Economic Research, which favours IMF intervention as a solution for Greece, with a researcher quoted saying that “one could question whether EMU institutions have the necessary powers to persist and sanction budgetary discipline”, adding “it’s better that the IMF imposes disciplines on the indebted countries than that Eurozone countries fight amongst each other and political tensions emerge.”

Meanwhile, the FT reports that eurozone governments have borrowed a record €110bn from the markets so far this year, forcing up borrowing costs for those countries with the weakest public finances.

via Open Europe

No solidarity in the Eurozone

Bundesbank President says EU assistance for Greece would be politically impossible

The Telegraph reports that Axel Weber, President of the German Bundesbank and a member of the ECB Executive Board, has said that any EU aid for Greece in response to its economic problems would be counterproductive. He told the German Boersen Zeitung financial paper, “Politically, it would not be possible to tell voters that one country is being helped out so that it can avoid the painful savings that other countries have made”. He added that such a bail-out “is not provided for and, as a general rule, I think such aid, whether it is conditional, or - even worse - unconditional, is counterproductive”.

EUobserver reports that ECB Chief Economist Juergen Stark said yesterday that the state of EU governments’ public finances could lead to further credit rating downgrades and market turmoil. The Commission is expected to give its assessment of deficit cutting measures in four EU member states - Hungary, Latvia, Lithuania and Malta - today. The FT reports that Portugal’s government last night unveiled its budget proposals for 2010 aimed at bringing the country’s budget deficit under control, which stands at 9.3% GDP in 2009.

Meanwhile, in an interview with Les Echos, ECB President Jean-Claude Juncker said “I have been arguing for stronger economic policy coordination within the Eurozone for many years, but I never managed to gain support from all Eurozone countries”. He added, “If we want to turn the Eurozone into an influential monetary, economic and political entity, then we must stop giving the impression that we focus only on budgetary consolidation. The time has come for us to set up an integrated strategy to get out of the crisis”.

thanks to Open Europe

Plus WHY EUROPEAN UNION IS NOT AN OPTIMAL CURRENCY AREA: THE LIMITS OF INTEGRATION

Deutsche Bank Chief Economist: Eurozone faces potential break down or high inflation

The Wall Street Journal stated on 21 January that the financial markets are unconvinced by the Greek government’s assurances that it isn’t seeking outside help from either the EU or the IMF with its public debt. Analysts said the government is moving too slowly to address Greece’s fiscal problems and investors are showing their disbelief by selling down Greek stocks and bonds. A Commission spokeswoman denied yesterday’s reports that the EU was preparing a loan for Greece, saying she wasn’t aware of any financial bail-out packages being arranged.

Die Welt features an interview with the Chief Economist of Deutsche Bank Thomas Mayer. When asked if he is worried about the euro, he answers “The situation is more serious than it has ever been since the introduction of the euro. The trouble in Greece plays a key role for future development.” When asked what the worst case scenario could be, he answers: “If the Greece situation is handled badly, the Euro-zone could break down, or suffer major inflation”.
He added that “Neither the European Central Bank nor the Commission nor any other EU body can force Greece to implement necessary reforms in exchange for help.”
Meanwhile, the Wall Street Journal notes that the euro has lost value and that “persistent fears about Greece’s fiscal situation have turned trade in the euro into a vote on the currency bloc’s credibility.” A new publication by Econ Journal Watch, entitled “It can’t happen, It’s a bad idea, it won’t last: U.S. Economists on the European monetary union and the euro, 1989-2002” looks at the experiences with the euro and its prospects.

source: Open Europe

Greece defies Europe as EMU crisis turns deadly serious

Euroland’s revolt has begun. Greece has become the first country on the distressed fringes of Europe’s monetary union to defy Brussels and reject the Dark Age leech-cure of wage deflation.

By Ambrose Evans-Pritchard
(Telegraph, London, Monday 14 December 2009)

While premier George Papandreou offered pro forma assurances at Friday’s EU summit that Greece would not default on its £298bn (£268bn) debt, his words to reporters afterwards had a different flavour.

“Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state,” he said.

Were we to believe that a country in the grip of anarchist riots and prey to hard-Left unions would risk its democracy to please Brussels?

Mr Papandreou has good reason to throw the gauntlet at Europe’s feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pc of GDP. The Commission says it will reach 125pc by late 2010. It may top 140pc by 2012.

If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral.

Ireland may just pull it off. It starts with lower debt. It has flexible labour markets, and has shown a Scandinavian discipline. Mr Papandreou faces circumstances more akin to those of Argentine leaders in 2001, when they tried to cut wages in the mistaken belief that ditching the dollar-peg would prove calamitous. Buenos Aires erupted in riots. The police lost control, killing 27 people. President De la Rua was rescued from the Casa Rosada by an air force helicopter. The peg collapsed, setting in train the biggest sovereign default in history.

Economists waited for the sky to fall. It refused to do so. Argentina achieved Chinese growth for half a decade: 8.8pc in 2003, 9pc in 2004, 9.2pc in 2005, 8.5pc in 2006, and 8.7pc in 2007.

London bankers were soon lining up to lend money (our pension funds?) to the Argentine state - despite the 70pc haircut suffered by earlier creditors.

In theory, Greece could do the same: restore its currency, devalue, pass a law switching internal euro debt into drachmas, and “restructure” foreign contracts. This is the “kitchen-sink” option. Such action would allow Greece to break out of its death loop.

Bondholders would scream, but then they should have delved deeper into the inner workings of EMU. RBS said the UK and Ireland have most exposure, with 23pc of Greek debt between them (mostly for global clients). The French hold 11pc, Italians 6pc.

Remember, Athens holds the whip hand over Brussels, not the other way round. Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of manifest destiny that has driven EU integration for half a century.

I don’t wish to suggest that Mr Papandreou - an EU insider - is thinking in quite such terms. Full membership of the EU system is imperative for a country dangling off the bottom of Balkans, all too close to its Seljuk nemesis. But Mr Papandreou cannot comply with the EU’s deflation diktat.

No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be “days away”. While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece’s debt, drawing out the agony. What Greece needs - unless it leaves EMU - is a permanent subsidy from the North. Spain and Portugal will need help too.

The danger point for Greece will come when the Pfennig drops in Berlin that EMU divergence between North and South has widened to such a point that the system will break up unless: either Germany tolerates inflation of 4pc or 5pc to prevent Club Med tipping into debt deflation; or it pays welfare transfers to the South (not loans) equal to East German subsidies after reunification.

Before we blame Greece for making a hash of the euro, let us not forget how we got here. EMU lured Club Med into a trap. Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in a destructive property and wage boom.

The ECB was complicit. It breached its inflation and M3 money target repeatedly in order to nurse Germany through slump. ECB rates were 2pc until December 2005. This was poison for overheating Southern states.

The deeper truth that few in Euroland are willing to discuss is that EMU is inherently dysfunctional - for Greece, for Germany, for everybody.

Greece economy falls within the EuroZone constraints

Euro membership blocks every way out of Greek debt crisis

In the Telegraph, Ambrose Evans-Pritchard notes that “Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.”

He adds: “Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.”


When EU-critics were warning of the problems of the Optimum Currency Area EU was planning new conquests.

Now the fit hit the shan.

Join the (EU) Navy

Star Wars XXXIV: Empire strikes ze pirates

This initiative clearly demonstrates the Empire’s determination to combat criminal acts.

Op ATALANTA will involve six warships and three surveillance aircraft with contributions expected from the provinces of Britannia, Frankia, Hellas, Hispano, and Germania, patrolling a million square lightyears of the Indian Galaxy and Rings of Aden where pirates have captured several vessels and taken numerous hostages this aeon alone.

In a time of crisis EU's fasade is falling down

Every country for itself as European unity collapses in an attack of jitters

Germany became the latest EU member to put its national interest first by announcing its own guarantee for bank deposits

Roger Boyes for TIMES ONLINE - whole article here

Germany shattered any semblance of European unity on the global credit crisis last night by announcing that it was ready to guarantee €568 billion of personal savings in domestic accounts.

The move – which came as Berlin announced a new rescue package for an ailing mortgage bank – is sure to anger France which, holding the European Union presidency, tried to create the illusion of a common front at a weekend summit in Paris. Instead, the message coming loud and clear from Berlin is that it is every man for himself. Or as President Nicolas Sarkozy would prefer not to say: sauve qui peut.

The massive liquidity crisis in the banking system has already nudged the Irish Republic and Greece into unilateral – and probably illegal under EU law – action to guarantee the deposits in national banks. Faced with a choice between the possible collapse of their banking systems and violating EU competition rules, the two countries opted for what they saw as the lesser evil. Now Germany, which at the weekend rejected French plans for an EU lifeboat fund, has taken the decisive protective step, and it is said to be plain that other European states will have to follow suit.


Those critics of Euro (€) of which one of the strongest has always been TEAM’s long-time member The Bruges Group who have based much of their convictions on the rather hidden cracks within the “Optimum currency area theory” have also kept clear mind about the long term prospects of the Euro-zone.
Here is one of their excellent papers titled Is Europe Ready for EMU? Theory, Evidence and Consequences.
One of the basic structural criterions of OCA theory which at first has not been emphasized enough has later been graded as more relevant. Here is a short .pdf presentation from the year 2005 (this one not from The Bruges Group but much more favourable towards Euro) from which we’ll quote some interesting details:

The “New” OCA Theory

Focuses primarily on political issues of forming a currency union:

  • Fiscal Transfers
  • Homogenous Preferences
  • Solidarity

Homogeneity of Preferences Criterion

  • Common view on how the ECB reacts to (symmetric) shocks
  • Problem:
    – Every country wants to put its interests before those of the member states, jeopardizing the CU

Solidarity Criterion

  • Solidarity among the member states has to outweigh national interests
  • Problem:
    – Solidarity is only easy in “golden years”

Even though the authors of this presentation have predicted bright future for the Euro the word “Solidarity” or rather the lack of it in these days discloses much more than it should for the Europhile political elites.

Thank you Ireland, Part II. - Youtube

Below are some of the videos posted to Youtube from countries across Europe thanking the Irish people for voting no to the Lisbon Treaty:

Netherland:

Great Britain:

Germany:

Poland:

Greece:

Finnish, Estonian and Greek MPs in their last disgraceful assault

It just had to happen. Finnish, Estonian and Greek parliaments have today proved for the last time before the Irish spectacle that current European national political elites have flown far, far away from their electorates.

Shame on them, shame on us for having such representatives.

A large majority of Finnish deputies – 151 out of 200 – on Wednesday (11 June) voted in favour of the document, while 27 opposed it and 21 were absent, according to AFP news agency.

A little later on Wednesday afternoon, the Estonian parliament also approved the Lisbon treaty. Its vote was almost unanimous: 91 votes in favour and one against. Nine MPs abstained.

The Greek parliament ratified the Lisbon treaty with 250 to 42 votes late on Wednesday, just hours before Irish citizens vote on the document. With Greece, 2/3 of EU states have started or completed the treaty’s ratification.

More on that in EUobserver.

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