May 28, 2013

Winning the Peace Prize: The EU and the Ignoble Institution

October 13, 2012 by

European Union flag. Rock Cohen/Flickr

One wonders whether having a peace prize makes an assumption about redundancy and diminishment in advance. Ever year, the arguments seem to mount. This year, the choice of the European Union being the recipient of the Nobel Peace Prize struck many as daft, dangerous and redolent with black humour. In a more distinct sense, it suggested that Alfred Nobel would turn in his grave. When you start considering that the man who fronted the cash and the name for the award was a dynamite fiend and pioneer, very little will be making him stir. From the start, the prize has been something of a running joke, an award susceptible to manipulation.  What has struck some critics as peculiar is that of awarding an entity rather than an individual. Not only that, it is an entity that does not work.


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Has Mario Draghi Saved the Euro?

September 13, 2012 by

European Central Bank President Mario Draghi. Monika Flueckiger/swiss-image.ch

Germany’s Constitutional Court gave a green light on Wednesday for the country to ratify Europe’s new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.

In an eagerly anticipated ruling that has had investors on tenterhooks for months, the court in the southern city of Karlsruhe insisted the German parliament be given veto rights over any increase in Berlin’s contribution to the 700 billion euro European Stability Mechanism (ESM). There were strings attached to its endorsement of the ESM and a separate European pact on budget rules, and a relief rally has occurred as another apparent impediment to a euro “solution” appears to have been eliminated.


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Greece is being kept alive by the ECB’s Emergency Lending Authority

August 10, 2012 by

Mario Monti, Mario Draghi and Angela Merkel in Brussels. Image via European Council

Greece has moved off center stage, as Spain has become the preoccupation de jour for Europe’s increasingly embattled authorities. But one has to wonder how the Greek banking system has managed to sustain itself over the past several months, given widespread deposit flight and the country’s ongoing solvency challenges. Well, we now have a better idea, courtesy of a leak to the German weekly news magazine Der Spiegel, which has published information about ECB plans to keep Greece on its feet until the next tranche of European Union-International Monetary Fund aid is paid out.


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Financial Predators v. Labor, Industry and Democracy

August 3, 2012 by

Euro currency and houses. Image via Images Money

The Eurozone lacks a central bank to do what most central banks are supposed to do: finance government deficits. To make matters worse, the Lisbon Agreement limits these deficits to 3% – too small to pull economies out of depression by offsetting private-sector debt deflation.  Even if central banks could monetize higher levels of deficit spending, there are good reasons not to subsidize unfair tax systems and tax cuts on the real estate and financial “free lunch” windfalls that classical economists urged to be the tax base.

Under classical tax policy, Europe would not have had a land-price bubble in the first place. “Free lunch” economic rent would have become the tax base, not capitalized into bank loans to be paid out as interest. Government budgets would have been financed in a way that kept down property prices.

But bank lobbyists have blocked the Eurozone from creating a true central bank to finance public budget deficits. They also have reversed classical tax policy, un-taxing real estate and finance while putting the burden on labor, corporate profits and consumers by the turnover tax (VAT). These twin financial and fiscal policies have strengthened the wrong sectors and made the current sovereign debt crisis inevitable, turning it into a general economic and political crisis.


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The Politics of the Economic Crisis

July 31, 2012 by

Perhaps the most surprising aspect of the Libor scandal is how familiar it seems. Sure, for some of the world’s leading banks to try to manipulate one of the most important interest rates in contemporary finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?

– Eduardo Porter for the The New York Times

A useful summary of the situation as of today. But of what? What is this? We have been through many answers starting with credit squeeze, then a real estate bubble that burst, toxic assets, credit swaps, hedge funds, derivatives—bets with the money of other people, yours and mine—all finance and banking. A psychologism was added at an early stage, that of greed. Small savings banks wanted to be in it, the pattern was contagious and spread from Wall Street to the Euro zone. Bailout vs. Stimulus, Wall Street vs. Main Street. But as big banks are too big to fail there was bailout for the former and austerity for the latter, resulting in misery.


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How Far is the ECB Prepared to Go to Save the Euro?

July 29, 2012 by

ECB President Mario Draghi with Ramon Tremosa. Image via European Council

Re-reading Mr Draghi’s market-moving remarks last Thursday, one gains a sense that the European Central Bank chief recognizes that the ECB has a banking run on its hand. Most market participants have understandably focused on Mr. Draghi’s pledge that the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough,” he told a conference in London.  We prefer to focus on other aspects of the speech.

It is particularly salient that Mr. Draghi highlights the fatal flaw of the euro zone noted by Professor Peter Garber some 14 years ago: As long as there was no perceived probability of euro exit by any euro nation, the established transfer system coupling private markets with European system of Central Bank support (Target 2, ELA, ECB repos) would function like any other monetary system in a single nation state.


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Greece on the Brink…Again

July 22, 2012 by

European Union and Greek flags fly near the Parthenon. Simon Dawson/Bloomberg

Just one month after the so called “make or break” election, the state coffers in Greece are running low as tax revenues continue to miss targets as the economy slows further. The election outcome, dubbed by European political leaders as a victory for the euro, was supposed to ensure that the bailout programme be implemented in order to move Greece back onto a sustainable economic path.

Since then the emphasis in Greece has shifted towards a renegotiation of the bailout conditions as the austerity measures hit living standards. A recent statistic published by Eurostat claimed that 27.7 percent of Greeks are now living on or below the poverty line. Such rhetoric is falling on deaf ears elsewhere in Europe as leaders in countries such as Germany, Finland and the Netherlands struggle to sell each of the bailouts to their respective electorates further highlighting the North-South divide in the Eurozone.


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The ECB is Quickly Running out of Options

July 10, 2012 by

European Central Bank President Mario Draghi. Image via European Parliament

When policymakers are lacking in credibility and competence, confidence in their ability to govern is likely to be in short supply. This is particularly notable in reference to the Eurozone and its steadily deteriorating economy – most acutely felt by the ’sin states’ of the Mediterranean.

With Europe’s leaders now finally in admission of the debt fuelled malaises, the emphasis has turned to crisis and resolution management, and the markets are feeling uneasy.


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Paul De Grauwe is Right: All Roads Lead Back to the ECB

July 5, 2012 by

Italy’s Mario Monti with Prime Minister Enda Kenny. Image via European Council

I have always been a fan of Professor Paul De Grauwe from the University of Leuven, who has consistently pointed out the structural flaws inherent in the original structures of the EU.  Recently, Professor de Grauwe wrote an excellent analysis explaining why the latest “rescue plan” cobbled together by the Eurozone authorities is destined to fail.


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The Mysterious François Hollande

June 27, 2012 by

French President François Hollande. Image via Ministère des Affaires étrangères

Not since Charles De Gaulle has a French president confronted an economic and international situation as tumultuous as the one faced by François Hollande.

François Hollande, who took over the presidency from Nicolas Sarkozy last month, is facing an unemployment rate in the double digits and a national debt that stands at 90% of GDP. In addition to his domestic challenges, François Hollande finds himself at the center of a deepening European crisis, with Greece on the brink of collapse and most euro-zone countries in a recession. While the challenges facing the new president are enormous, there seems to be little consensus on how he will govern.


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Angela Merkel’s Nein Problem

June 26, 2012 by

President Obama with Angela Merkel in Washington. Denzel/Bundesregierung

The pattern is becoming despairingly familiar. The embattled periphery countries, led by Italy and Spain but also endorsed by France, propose more fiscal integration in the form of mutual debt pooling and shared financial liability.  Such reforms are met with resounding rejections from Germany who instead point to the long run benefits of austerity in terms of promoting a sustainable economy.

Similar responses are also reserved for Greece who is seeking to renegotiate elements of its bailout agreement following a recent general election which resulted in the formation of an awkward coalition government.


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The Eurozone Still Faces Several Challenges

June 25, 2012 by

European financial officials are preparing their policy package to deal with the current crisis for the meeting scheduled next week. It is not clear whether any of the proposals will be able to stop the ongoing bank run.  Here are some of the rumored proposals:

* Euro members jointly issue short term bills – in effect, short term euro bonds.
* A debt redemption fund as proposed by economic advisors to Merkel.
* New procedures for euro area banking supervision.
* Using the ESM to purchase peripheral nations’ bonds in order to reduce their sovereign interest rates.

French President Hollande is advocating the ESM purchase program. He is also advocating that the ESM be given a banking licence linked to the European Central Bank’s balance sheet. This makes sense as it addresses the solvency issue.


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No Solution for Europe without Reaffirming the Lisbon Strategy

June 23, 2012 by

European Commission President Jose Barroso addresses the EU Parliament. Photo by E.Scagnetti

Back to the good old days of the Lisbon Strategy (when the Union was proclaimed to be the most competitive, knowledge-based economy of the world), the Prodi and Barroso Commissions have both repeatedly stressed, “at present, some of our world trading partners compete with primary resources, which we in the EU/Europe do not have. Some compete with cheap labor, which we do not want. Some compete on the back of their environment, which we cannot accept.”

The over-financialization and hyper-deregulations of globalized markets has brought the low-waged Chinese worker into the spotlight of European consideration.  Thus, in the last two decades, the EU economic edifice has gradually but steadily departed from its traditional labor-centered, to an overseas investment-centered construct.

This event, as we see now with the Eurozone dithyramb, has multiple consequences on both the European inner cultural, socio-economic and political balances as well as on China’s (overheated) growth.


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Future of Greece and the Eurozone Remains Uncertain

June 19, 2012 by

Prime Minister Antonis Samaras. alex@faraway/Flickr

So for the short term, it appears we won’t have a “Grexit”, which has led many commentators to suggest (laughably) that a crisis has been averted. Typical of this sentiment is a headline in Bloomberg today “Greece avoids chaos; Big Hurdles Loom”. To paraphrase Pete Townsend, meet the new chaos, same as the old chaos.

It is worth pondering how acceptance of the Troika’s program (even if cosmetic adjustments are made) will help hospitals get access to essential medical supplies (see here), whilst the government persists in enforcing a program which is killing its private sector by cutting spending and not paying legitimate bills, and an unemployment rate creeps towards 25 per cent and 50 per cent for youth.


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Not so Super Mario Brothers

June 17, 2012 by

Mario Monti, Mario Draghi and Angela Merkel in Brussels. Image via European Council

This week Italy was carted into the spotlight of the Eurozone crisis as its benchmark 10 year borrowing costs moved above 6 per cent for the first time since January and with Italy now beginning to suffer as contagion spreads from the currency block’s other problem areas it is clear that tensions are rising in the Euro area.

In a further sign of disunity between the Eurozone’s Latin bloc and other EMU member states on Tuesday, Italian Prime Minister, Mario Monti, was forced to reject claims from the Austrian Finance Minster that Italy would require financial assistance. Italy is now seen as the final battleground of the euro project with any bailout for Italy likely to be the final nail in the coffin of the Eurozone.


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