Erratic inquiries of Stowe Boyd, who means well, despite everything.
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Posts tagged with ‘eu’

Slovakia Rejects Euro Bailout - →

Slovakia rejects most recent round of bailouts, demonstrating exactly how rickety the 17 country ratification process is. It is unclear whether a new government there — the existing one fell as a result of the bailout ratification effort — will recant, and now EU officials are talking about a ‘workaround’: basically preparing to move ahead with the bailout without ratification by the Slovaks.

It is often said that Europe needs tighter political and fiscal integration to save the euro, but there is no political will for that, and likely never will be. […] The reason Europe lacks a lender of last resort is that its citizens don’t want one.

— Joe Nocera, How Not to Solve a Crisis via

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is no sign of this happening.

In a way, it doesn’t really matter how Spain got to this point — but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.

So if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is actually fairly clear. The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.

What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that in effect locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasizing the bank’s willingness to raise rates at the slightest hint of higher inflation.

So it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff. And the whole world will pay the price.

Europe’s Economic Suicide - Paul Krugman via

Europe’s leaders seem intent on driving the Eurozone off the cliff, instead of turning things around. Time to break up the EU.

If troubled countries find that they cannot comply with the loan conditions — and their richer neighbors grow increasingly impatient — they may have to follow Greece’s lead.

The idea with Greece was that private investors, not just governments, needed to foot some of the cost of the country’s aid package, so they were pressured to accept losses on Greek government bonds. If another country finds it difficult to comply with European Union and International Monetary Fund targets, “Germany and other countries will support the idea that the private sector has to pay its fair share of the debt relief,” Mr. Peruzzo said.

Darren K. Williams, an analyst at AllianceBernstein, said: “I think that would be a huge error that could cause all sorts of other problems. It’d make Greece a template.”

The big risk is that investors, fearing forced debt reductions in many countries, would dump European government bonds, leading to new financial and economic weakness in Europe.

But some investors see few options for countries like Italy, whose debt is at 120 percent of gross domestic product, and whose government bond market is among the largest in the world.

“Italy is essentially in a sovereign debt trap,” said Richard Batty, global investment strategist at Standard Life Investments.

For Italy’s debt to be sustainable, the country’s economy either needs to grow at a nominal rate of 5 percent a year, or the interest rate on its 10-year bond needs to be 3.6 percent, Mr. Batty estimates. During Europe’s most recent boom period, from 2002 to 2007, Italy’s nominal G.D.P. grew at an average rate of 3.6 percent, Mr. Batty said. Meanwhile, its 10-year bond, even after a big rally this year, has a yield of 5.43 percent.

If such optimistic results play out, Italy and other troubled countries may just muddle through this period of uncertainty. But if they don’t, the markets and the economy may be in for a bumpy ride.

“I don’t think we’re anywhere near the endgame,” Professor Rogoff of Harvard said.

- Peter Eavis, For Greece, a Bailout; for Europe, Perhaps Just an Illusion -

So, after the euphoria of a ‘deal’ for Greece, after the champagne bottles are empty, analysts return to the fundamentals: Europe cannot muscle its way out of the debt crisis by austerity, there must be growth — and lots of it — or countries like Italy, Portugal, Spain and Ireland will hit the wall.

Greece is the leading indicator: austerity is crushing the life out of the country, and anyone with eyes to see knows that the terms are unsustainable: the country cannot possibly meet its debt obligations, given the austerity regime. Impossible levels of growth are needed to turn the corner, and there is no impetus to create a context for growth. So it is inevitable that a populist government will rise and abdicate the existing terms. In the absence of a military occupation by the EU, Greece will be out of the EU in short order.

And then are the other weak economies going to follow, like dominoes falling? What is to stop the fall in the absence of huge and unanticipated levels of growth?

See a trend here? Yes, it looks like the end of the EU on the horizon.

See a trend here? Yes, it looks like the end of the EU on the horizon.

Greek Parliament Passes Austerity Plan as Riots Rage - Niki Kitsantonis and Rachel Donadio via →

Huge unrest in Greece after technocrats manage to coerce the Parliament to agree to more austerity measures demanded by the troika — European Central Bank, the European Commission, and the International Monetary Fund — even when many believers the austerity is being imposed as a way to get northern Europeans to accept the costs of salvaging Greece, even while the austerity measures are not linked with turning Greece’s troubled economy around. And, even after all that, consensus seems to be shifting toward the inevitable failure of these measures:

Niki Kitsantonis and Rachel Donadio via

The new austerity measures include, among others, a 22 percent cut in the benchmark minimum wage and 150,000 government layoffs by 2015 — a bitter prospect in a country ravaged by five years of recession and with unemployment at 21 percent and rising.

But the chaos on the streets of Athens, where more than 80,000 people turned out to protest on Sunday, and in other cities across Greece reflected a growing dread — certainly among Greeks, but also among economists and perhaps even European officials — that the sharp belt-tightening and the bailout money it brings will still not be enough to keep the country from going over a precipice.

Angry protesters in the capital threw rocks at the police, who fired back with tear gas. After nightfall, demonstrators threw Molotov cocktails, setting fire to more than 40 buildings, including a historic theater in downtown Athens, the worst damage in the city since May 2010, when three people were killed when protesters firebombed a bank. There were clashes in Salonika in the north, Patra in the west, Volos in central Greece, and on the islands of Crete and Corfu.

Greece and its foreign lenders are locked in a dangerous brinkmanship over the future of the nation and the euro. Until recently, a Greek default and exit from the euro zone was seen as unthinkable. Now, though experts say that the European Union is not prepared for a default and does not want one, the dynamic has shifted from trying to save Greece to trying to contain the damage if it turns out to be unsalvageable.

“They’re trying to lay the ground for it, trying to limit the contagion from it,” said Simon Tilford, the chief economist at the Center for European Reform, a research institute in London. Still, he added, letting Greece go would set a dangerous precedent, and it would be “fanciful” to think otherwise.

Greece’s limping economy yields large trade and budget deficits, and none but the European Central Bank, the European Commission and the International Monetary Fund — known collectively as the troika — are willing to lend the nation the money it needs to stay afloat. The troika is demanding more concessions to placate Germany and other northern European countries, where the bailout of Greece is a hard sell to voters. For its part, Greece is trying to preserve social and political cohesion in the face of growing unrest, political extremism and a devastated economy that is expected to worsen with more austerity. And the feeling is growing here and abroad that the troika’s strategy for Greece is failing.

The likely outcome — because the alternatives are completely unsustainable for the presumed duration of the big payback of all these loans, devalued or not — is that the technocratic government will be voted out of office in April, and a populist movement will win office on a platform of default and exiting the Eurozone (and probably the EU). And continued riots and unrest until then.

At least with a default, and the return to a devalued Drachma, the Greeks can begin to turn their economy around. This will immediately increase productivity and exports. And while there will be enormous disruption in the economy, it will be a disruption of their own making, and one that will force a great deal of the pain onto investors and banks, and will not solely be borne on the backs of Greek citizens.

Europe Now Doubts That Greece Can Embrace Reform - Rachel Donadio and Niki Kitsantonis via →

The inevitability of Greek default is becoming (finally) obvious to the apparatchik:

Rachel Donadio and Niki Kitsantonis via

The markets have taken into account a voluntary default by Greece, most experts say. But financial experts fear the possibility of an “involuntary” default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession.

Fanning those fears is a growing conviction among the Greek political establishment and the country’s lenders that the old dynamic — with Greece pretending to make structural changes and its lenders pretending to save it from default — has become untenable, people close to the talks say.

As recently as November, Greece and its lenders were optimistic that the country’s newly installed prime minister, Lucas Papademos, a well-respected financial technocrat, would stabilize Greece’s soaring debt and help nurse the country back to health.

But since then, his interim government — stocked not with technocrats but with politicians gunning for national elections as soon as March — has been paralyzed. Although it passed the 2012 national budget, it has failed to put into effect most of the unpopular changes mandated by the loan agreement that the previous government made back in 2010, when the country first admitted it was broke.

The old agreement — ’ Greece pretending to make structural changes and its lenders pretending to save it from default’ — is broken. The bond holders seem to want the dafualt to move forward wehre they might — in principle — collect on credit default agreements. The background concern is that the actual demand that such agreements be paid would lead to a cascade of bank failures because our laughable international banking system does not require banks to hold enough capital to pay off these insurance agreements.

Of course, why should the average Greek — whose wages are down 40% over the past three years — care about bankers in some other country, or even bankers in Greece? And their leaders may realize that the only way out for Greece, as a nation, is to default, like Argentina did.

Greeks Reeling From Health Care Cutbacks - Suzanne Daley via →

The immediate impacts of Greek austerity: the health care system is collapsing.

Suzanne Daley via

Many experts say that Greece’s public health system was bloated and corrupt and in dire need of reform. But they say also that the cuts have been so deep and have come so fast, that they have hit like a tsunami.

In just two years, the government has cut spending on health care to $17 billion from $19.5 billion — a 13 percent decrease. And under its agreement with its creditors, Greece must find even more health care savings next year — as much as $915 million, government officials said.

At the same time, public health facilities have seen a 25 to 30 percent increase in patients because so many Greeks can no longer afford to visit private clinics.

Dr. Olatz Ugarte, an anesthesiologist at the Saint Savvas Cancer Hospital in Athens, said that breast cancer patients often have to wait three months now to have tumors removed. “Waiting that long can be life or death for these patients,” she said.

In a recent letter to the medical journal The Lancet, a team of English researchers warned that a “Greek tragedy” could be in the making, pointing to rising suicide and H.I.V. rates and deterioration of services at hospitals under financial pressure. “In an effort to finance debts,” the researchers said, “ordinary people are paying the ultimate price: losing access to care and preventive services, facing higher risks of H.I.V. and sexually transmitted diseases, and in the worst case losing their lives.”

At the Perama clinic, which is run by the international nonprofit Doctors of the World, doctors say they are seeing many families that cannot afford bus fare, let alone the new $6.50 fee at public clinics.

Technically, those Greeks who cannot pay are entitled to free care. But the bureaucracy can be overwhelming. Ms. Ragamb, a former hairdresser whose unemployment benefits and health insurance ran out six months ago, said she was still waiting to get the right papers.

The story did not surprise Dr. Liana Mailli, the pediatrician who was seeing Ms. Ragamb’s son, Elias. The 3-year-old got a diagnosis of diabetes only a few months ago, after he fell into a coma. Dr. Mailli has heard of such bureaucratic troubles from many patients. Even more often, she said, parents have fallen behind in paying their health insurance contributions, or their employers do not pay and so they are no longer covered.

One development that Dr. Mailli said she found particularly disturbing was that a growing number of children had not had their basic vaccinations.

If nothing is done, she said, polio, diphtheria and whooping cough could all return to Greece. “This is such a serious thing,” she said. “But these vaccines are expensive.”

This is just one indicator that the Greeks will rise up, overthrow the government, put a populist in place that will exit Greece from the EU, and reinstate the drachma. And the sooner the better.

All the moralizing of the northern Europeans about southern Europe’s fat pensions and tax evasion pale to insignificance when people’s children start dying from totally preventable health problems.

Doubts Emerge After European Union’s Euro Deal - Steven Erlanger and Nicholas Kulish via →

The recent tweak to the EU Treaty intended to place more control of national finances in the EU and which seemed to be settled last week is starting to look iffy. Most important, Germany is backing away from near-term support of printing money to inflate away from some of the problems, while some of the EU nations are stating they need to read the small print before signing on:

Steven Erlanger and Nicholas Kulish via

[…] the head of Germany’s central bank, the Bundesbank, Jens Weidmann, repeated that his country opposed using the European Central Bank too rashly to back up governments that need to reform themselves first. Mr. Weidmann also said the Bundesbank would provide new money as a loan to the International Monetary Fund only if countries outside Europe did so as well.

In a speech on Wednesday at the German Finance Ministry in Berlin, Mr. Weidmann called the Brussels deal “encouraging,” but insisted that the idea of “creating the necessary money through the printing presses” be abandoned. He spoke instead in the moralizing tones for which the Germans have become known during the crisis.

“It would be fatal to completely remove the disciplinary effect of rising interest rates,” Mr. Weidmann said. “When credit becomes expensive for states, the appeal of further borrowing sinks. Good fiscal policy must be rewarded through the credit costs, bad punished.” Rescue funds, Mr. Weidmann said, can accomplish only one thing: “Buying time, time that must be used to solve the fundamental problems.”

Meanwhile, at least four more European Union members — none of them using the euro — have expressed reservations about the agreement, which only Britain definitively opposed at the summit meeting. Some leaders said in Brussels that they wanted to consult their parliaments. Hungary, Sweden, Denmark and the Czech Republic now say they want to see the text of the proposed treaty, which is meant to enforce strict limits both on members’ annual budget deficits and on their cumulative debts, before fully committing themselves. France and Germany hope to have a draft of the treaty approved by the end of March and ratified by the end of 2012.

The fiscal strictures are meant to prevent future crises, but the financial markets appear to be much more focused on whether the euro zone nations will put their money where their mouths are now, when they say they will defend the euro and its members. Beyond the bailout funds already in place, the Brussels agreement calls for member nations’ central banks to provide 200 billion euros ($259 billion) to the I.M.F. to create a bigger “firewall” of money that would help protect heavily indebted euro zone states from speculative pressure.

Germany is deeply committed to this crisis as a passion play, highlighting the battle between good (German) frugality and bad (southern European) profligacy. Meanwhile, the kitchen is on fire, and the roof is starting to catch.