Showing all posts tagged: eurozone
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.
Official Warmth and Public Rage for German Leader in Athens - Rachel Donardio and Nicholas Kulish via NYTimes.com
Indeed, even as the prime minister greeted Ms. Merkel as “a friend of our country,” in a crisis that has revealed the deep divisions and even hostility within Europe, Ms. Merkel’s visit sometimes seemed more akin to President Richard Nixon’s famous 1972 visit to the People’s Republic of China than a routine bilateral summit between allies.
Three years of grinding austerity in exchange for foreign funding to pay back banks and meet expenses has seen Greece’s gross domestic product shrink 25 percent. Unemployment is now at 50 percent for young people and 24 percent overall. A series of governments has dramatically cut spending without improving the functioning of the state, resulting in cuts to essential services like hospitals.
[…]
In the news conference, Ms. Merkel acknowledged the “suffering” that the Greek people had endured as the government forced through deep spending cuts in the midst of a recession that has lasted for years. But she said the country was headed in the right direction. “I am convinced that the path, which is a difficult path, will lead to success,” Ms. Merkel said.
But many Greeks disagreed. “It’s just spin, it means nothing,” said Vassiliki Tsitsopoulos, a literature professor who attended Tuesday’s demonstration. “It’s never been worse, it’s just going to get worse, there’s no bottom, there’s just spin.”
“We’re just keeping up appearances,” Ms. Tsitsopoulos added. “Including the demonstrators. At this point we’re part of the scenery.”
Others believed the protests were necessary. “This is pure provocation, we have to answer back,” said the nurse, Christina Amanti, 37. “It’s like she’s visiting her protectorate. What’s she going to do, pat us on the back and tell us to keep getting poorer, that it’s good for us?”
While German policy makers have complaints about their struggling partners, the realization appears to have dawned on Ms. Merkel and officials in her chancellery that with Mario Monti in Italy, Mariano Rajoy in Spain and Mr. Samaras in Greece, Ms. Merkel has the most cooperative partners she is ever going to have to work with.
And the Greek government has lost the trust of the Greek people.
Here’s a scenario: The Greeks will fail to achieve the necessary ‘reforms’ — cuts in spending, increased taxation, reduction of services — and the Europeans will delay or block the next round of funds (which are just more loans). The Greeks will default on at least some of their debt payments, which will lead to many calling for their expulsion from the eurozone and the EU. The Greeks will throw out the technocrats that the troika wanted, and Syriza will take office and push to leave the eurozone. They will nationalize the banks, and devalue the currency.
Behind all this is magical dreaming about growth. There cannot be enough growth in time to save the debt holders: the banks and the rentiers want to get paid back, and are unwilling to accept the obvious: they have to write off these bad debts based on real estate and other high risk speculation that all collapsed in 2008. But they are managing the world’s governments to avoid the losses, and instead composed these technocrat governments to gouge the money out of the people who had no upside in the gambles being made, and now are being forced to pay back the losses from their savings, pensions, jobs, and future prospects.
The people will finally rise up and revolt. They always do.
Spain, Italy and other troubled countries have begun taking steps to improve growth by deregulating their labor markets, removing barriers to entrepreneurship and other measures. But such changes typically take years to bear fruit and in the meantime stir political turmoil because of resistance from unions or other interest groups.
Jack Ewing, Euro Zone Economy Declines, Putting Pressure on Leaders via NYTimes.com
Ok, stop. ‘Improving growth by deregulating labor markets’? Is this Fox News? No, this if the NY Times. Let’s clarify: you don’t improve grwoth by deregulating labora markets. Look at Germany. It hasn’t deregulated its labor markets, and its the healthiest economy in Europe.
I know the NY Times editors do spell checking: could the please do dumb checking? Could the NY Times figure out what its economic editorial policy is, and stay consistent? Or, to turn that around, if they believe that deregulating labor markets is a good idea, why did they oppose Scott Walker’s efforts as the Governor of Wisconsin to break the public unions there?
If Germany cannot do the minimum necessary now, why should anybody think it can agree a political union? This is less credible than the promise by an alcoholic to give up drinking in five years.
Wolfgang Münchau, Financial Times
It lasted for about a week — and then reality set in. After an initial confidence boost after last month’s European Union summit, yields on Spanish and Italian government bonds (reflecting the interest rates those countries must pay to borrow money) have resumed their upward march. Alarm bells are ringing about Spain: yields on its debt have breached the critical seven per cent level. Borrowing costs are simply unsustainable at this level — previous countries that have breached this threshold have gone on to require bailouts. (Spain has already called for aid to prop up its banks. Further help may now be needed by the government itself.)
To Wolfgang Münchau, none of this is surprising. The problem, as he has long argued, is Germany. Specifically, Chancellor Angela Merkel has consistently refused to support the measures necessary to backstop the Eurozone. At the moment, that’s a banking union, complete with mutualised deposit insurance. Germany only talks about region-wide supervision and monitoring. But that doesn’t address the critical problems many European governments are now facing. Improved supervision won’t stop indebted banks — and governments — from toppling over.
Münchau sees only two options on the table now. One, everyone sits back and waits for the inevitable: a chaotic breakup of the Eurozone. Alternatively, policymakers could start planning for the breakup. That would need to be done carefully to avert panic. In fact, it’s basically impossible: any exit would trip so many wires, given the mess of laws and contracts in place, that there is no way to neatly untangle it all.
Option one it is then. Buckle up.
(via nickford)
Others are now suggesting what Joachin Starbatty proposed in early 2010: Germany should leave the Euro (and maybe other strong northern European nations), taking enormous monetary pressure off Greece, Spain, Portugal, Ireland and other besieged economies:
To Save the Euro, Germany Must Leave It - NYTimes.com
AS the European economic crisis continues to intensify, policy makers are faced with the need to take ever more extreme measures to prevent a financial cataclysm. Tomorrow, European Union leaders will meet in Brussels to discuss the latest proposals: centralizing banking regulation and putting limits on national spending and borrowing.
A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves.
Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.
The remaining Euro countries would get immediate releif, as the Euro would fall, in essence effecting a default since the remaining Euro countries would be paying back future debt with lower-value euros. And they would become more attractive to outside investors, too.
However, the brokenness of the euro would remain: a bunch of countries without a central bank, and lacking a cohesive political union. Even if Germany took this step, it might only be the first to flee.
It’s taken less than a year for the unthinkable and impossible to become likely or perhaps even inevitable. And why? Austerity economics has eliminated all hope of growth and economic rebound, leaving little or no chance to recover. Next: how to bail out economies deemed too big to fail?
Landon Thomas Jr, Euro Zone at a Crossroads, With the Union on the Line - NYTimes.com
Spain is sitting on an estimated 220 billion euros, or about $273 billion, in failed real estate loans alone — a number that surpasses the entire output of the Greek economy. And with the fourth-largest euro zone economy — behind Germany, France and Italy — there is little doubt that Spain is too big to fail. Or, more precisely, to be allowed to fail.
[…]
Analysts estimate that a comprehensive rescue for Spain would cost 350 billion euros, and one for Italy even more. Sums that large would quickly overwhelm the 500 billion euros available in the new European rescue fund, the European Stability Mechanism.
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It is the nub of the euro zone’s existential quandary: how to get taxpayers in northern creditor countries like Germany to provide funds to countries like Greece and Spain that are unwilling to accept the loss of sovereign control over their banks and budgets that would be a consequence of such assistance.
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Analysts estimate that the amount needed to backstop failing Spanish banks is 60 billion to 80 billion euros, which could come from Europe’s rescue fund.
The sticking point is that Spain wants Europe to inject money directly into these banks, as in the bank bailout program in the United States in 2008 and a similar effort by the British government.
Germany, however, has no desire to swallow the bill for Spain’s bad banks, so it is insisting that funds be disbursed to the Spanish government and that strings be attached. It wants more draconian spending cuts and perhaps even losses for the mostly Spanish investors who hold the stocks and bonds of these failed banks.
The newsmagazine Der Spiegel reported that Germany’s finance minister, Wolfgang Schäuble, last week pressed Spain’s economy minister, Luis de Guindos, to accept a bailout from the European Financial Stability Facility; Mr. de Guindos rebuffed him. But as Berlin and Brussels butt heads with Madrid over who pays what, when and how, money continues to flee Spain at an alarming rate. According to figures from the Spanish central bank, 66 billion euros left the country in March as investors sold Spanish stocks and bonds with abandon. And in April, the outflow of deposits from Spanish banks also picked up, with 31 billion euros leaving the Spanish banking system, according to the European Central Bank.
Simply put, the number of investors willing to hold Spanish assets of any kind is shrinking by the day. Moreover, with many money managers now concluding that Greece will return to the drachma after elections June 17, the attack on Spain has broadened into an attack on the euro itself, as reflected by the currency’s precipitous fall to a two-year low of 1.23 against the dollar.
Cue the funereal soundtrack, and fade to black.
[…] the €130 billion, or $162.2 billion, European bailout that was supposed to buy time for Greece is mainly only servicing the interest on the country’s debt — while the Greek economy continues to plummet.
If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Union’s member governments — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has beset Athens and clouded the future of the euro zone.
As they pay themselves, though, the troika is also withholding other funds earmarked for keeping the Greek government in operation.
Last week, the Athens office that tracks revenue said Greece could run out of money by July. If so, Greece could default on its debts — except those due to the E.C.B., the I.M.F. and the European Union.
“Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt.
In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.
“Why are we doing it like this?” Mr. Mayer said. “Because we’re Europe.” ‘
- Liz Alderman and Jack Ewing, Athens No Longer Sees Most of Its Bailout Aid via NYTimes.com
Bailout Theater.
The next time you hear people invoking the European example to demand that we destroy our social safety net or slash spending in the face of a deeply depressed economy, here’s what you need to know: they have no idea what they’re talking about.
Paul Krugman, What Ails Europe? via NYTimes.com
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 NYTimes.com
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.
The European ‘debt crisis’ is not about debt, it’s about recession and the unwillingness of Europe’s leaders to take Keynesian steps to stimulate demand. They continue to preach austerity during a massive recession, which threatens their financial union, and could lead Europe and the rest of the world into a protracted depression.
It’s like watching a drunk fall down the stairs, at this point.
Nelson Schwartz via NYTimes.com
Despite a move by the European Central Bank on Dec. 21 to provide 489 billion euros in cheap, long-term credit to European banks, the central bank remains reluctant to take more aggressive steps to become the lender of the last resort as the Federal Reserve did in the wake of the financial crisis in the United States in 2008.
In particular, the European bank has remained steadfast in its opposition to buying up sovereign debt outright, for fear of encouraging a return to the kind of deficit spending that got countries like Greece — which continues to rely on bailout money — into trouble in the first place. But the bank’s move to inject liquidity on Dec. 21 was seen as a kind of backdoor way of supporting government bonds, since it is likely that a substantial portion of the money the banks borrowed was quickly parked in sovereign bonds.
[…]
Despite a move by the European Central Bank on Dec. 21 to provide 489 billion euros in cheap, long-term credit to European banks, the central bank remains reluctant to take more aggressive steps to become the lender of the last resort as the Federal Reserve did in the wake of the financial crisis in the United States in 2008. In particular, the European bank has remained steadfast in its opposition to buying up sovereign debt outright, for fear of encouraging a return to the kind of deficit spending that got countries like Greece — which continues to rely on bailout money — into trouble in the first place. But the bank’s move to inject liquidity on Dec. 21 was seen as a kind of backdoor way of supporting government bonds, since it is likely that a substantial portion of the money the banks borrowed was quickly parked in sovereign bonds.
Meanwhile the Germans are making bank on increased exports given a weakening Euro, and have the lowest unemployment rate in Europe, but this beggar-my-neighbor stance cannot last. The people of Europe’s rim countries — Greece, Italy, Spain, Portugal, and Ireland — are bearing the brunt of austerity policies so that banks can get paid back for debts incurred in the real estate bubble by other investors. This situation will not last, and I predict widespread unrest starting as soon as winter begins to abate. Technocratic governments imposed by Europe’s central banks — led by Germany and France — will be hounded out of office.
But it may all come too late to avoid the crash and the dissolution of the Eurozone and maybe the EU, which I think will happen in early summer 2012.
