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Eurozone

Tag Archives | Eurozone

What Does Merkel’s Victory Mean for Europe?

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German Chancellor Angela Merkel in front of her election campaign tour bus before a meeting in Berlin.  Fabrizio Bensch/Reuters

A few days before the German federal election, the American commentator Bob Kuttner called upon German Chancellor Angela Merkel to use the election victory that was clearly in the making to change tack regarding the European Periphery.

German Chancellor Angela Merkel in front of her election campaign tour bus before a meeting in Berlin. Fabrizio Bensch/Reuters

Focusing on Greece, Kuttner added to a chorus of commentators who have called for a Marshall Plan, accompanied by a generous degree of debt forgiveness, as a ‘second phase’ of the program of budget austerity and reform imposed on Greece over the past three years. Kuttner even suggested labeling it The Merkel Plan, so as to afford the Chancellor a timeless legacy for genuine ‘tough love’, as opposed to being permanently remembered, at least in the Mediterranean, for unremitting heartlessness toward citizens of countries bankrupted when the Eurozone’s architecture was found wanting.

The problem with Kuttner’s noble suggestion is that Germany cannot afford such largesse. For it is impossible to imagine that Greece will be treated to a therapeutic combination of debt relief and large scale investments without similar overtures towards at least Portugal and Ireland, the other two original ‘fallen’ Eurozone member-states which, it must be said, had sunk less into the mire of debt than Greece and have since displayed a great deal more ‘moral enthusiasm’ for adopting austerity measures.

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Who is Mark Carney?

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Mark Carney, the current governor of the Bank of Canada and on July 1 is set to govern the Bank of England. Photo: Jolanda Flubacher

Mark Carney is the current governor of the Bank of Canada heralded for having shielded Canada from calamity during the 2008 global financial crisis.

Mark Carney, the current governor of the Bank of Canada and on July 1 is set to govern the Bank of England. Photo: Jolanda Flubacher

Through active tutelage of monetary policy Carney was able to control inflation, increase central bank liquidity and keep interest rates at the lowest levels in Canadian history. The affect was to secure investor confidence and make Canada the best performing state in the G7 nations during the crisis. In fact, Canada recovered to pre-crisis GDP growth rates quite quickly compared to its G7 peers. On July 1, 2013 Mark Carney is set to govern the Bank of England.

It will be the first time in history that a non-Briton will be governing the Bank of England. While Carney may not be a well-known figure outside of Canada, his economic insights developed in Canada will soon be tested in the ever-evolving Eurozone crisis. Is Carney up to the task? Is his central banking experience of a single state enough to prepare him for the political and economic battleground that the European Union has become? A look at his past will answer these questions.

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Europe’s Perpetual Crisis

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Defaced Bank of Greece sign referencing austerity demands being made by Germany. Source: Foreign Policy

Defaced Bank of Greece sign referencing austerity demands being made by Germany. Source: Foreign Policy

Back in the 1960s, the U.S. peace movement came up with a catchy phrase: “What if the schools got all the money they needed and the Navy had to hold a bake sale to buy an aircraft carrier?” Well, the Italian Navy has a line of clothing, and is taking a cut from a soft drink called “Forza Blu” in order to make up for budget cuts. It plans to market energy snacks and mineral water. Things are a little rocky in Europe these days.

Unemployment is over 25 percent in Greece, Spain and Portugal—and far higher among young people in those countries—and most economies are dead in the water, if not shrinking. Relentless austerity policies have shredded Europe’s traditional social compact with its citizens, fueled a wave of debt-related suicides in the continent’s hard-hit south—Greek suicide rates jumped 37 percent from 2009 to 2011—and locked much of the continent into a seemingly endless spiral: austerity means layoffs, fewer jobs equal less revenue, lower revenues leads to more austerity=the classic debt trap.

“The economic situation in Europe is moving from bad to catastrophic,” says Douglas McWilliams, chief executive for the Centre for Economic and Business Research. “There is a danger that economic problems will spill over into social breakdown.”  So why hasn’t the U.S. Treasury pressured lending agencies, like the International Monetary Fund (IMF) and the World Bank to shift from austerity formulas to stimulation policies? Why is the Obama administration pressing Europeans to increase military spending? And what should it matter to Washington if Britain remains in the European Union (EU)?

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Could the Global Bond Market cause another Global Financial Crisis in 2013?

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Ben Bernanke, Chairman of the Federal Reserve pictured with Treasury Secretary Timothy Geithner in the background

With Christmas and New Year cheer and optimism still bubbling away for most of us we now need to turn our attention to the major risk factors that are likely to impact upon the world economy and financial markets during 2013.

Ben Bernanke, Chairman of the Federal Reserve pictured with Treasury Secretary Timothy Geithner in the background

While the world economy is estimated to have grown by over 3 percent in 2012 overall and has enjoyed such a remarkable escape from the paralysis affecting some of its constituents like Europe, a major issue is whether this stable growth trajectory will continue for the foreseeable future. At the end of the day the global stock market has been a secular bear market for over a decade and we are now at the juncture of ascertaining whether the bear will have its final growl in 2013 or we will enter a new market phase.

The economic fundamentals are very strong for world economic growth, thanks to a relatively soft landing for China. However, a number of world risk factors prevail that could upset the world’s economic and financial stability. The major risk factor emanates from the global bond market where yields have been driven down to historic lows on both sides of the Atlantic due to Quantitative Easing [QE] or the printing of money. This has had a knock on effect in emerging markets, through the interest rate parity mechanism and emerging economy sovereign debt yields are also historically very low, despite their high level of political risk and this may be why emerging economies outperformed the world’s average GDP growth by around 2 percent because of lower financing costs.

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Redefining Regionalism: David Cameron’s ‘Big Europe’

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President Barack Obama talks with British Prime Minister David Cameron following their joint press conference at Lancaster House in London, England, May 25, 2011. Pete Souza/White House

President Barack Obama talks with British Prime Minister David Cameron following their joint press conference at Lancaster House in London, England, May 25, 2011. Pete Souza/White House

The current world order is in disarray with broken nations and fragmented regions, combining together to form a disjointed amalgam of social, economic, political, religous and environmental attributes, we term the global village. Uncertainty, as measured in terms of volatility is ubiquitous and rages across all frontiers and regions are imploding.

However, new proposals will be put on the table later this month by David Cameron in his ‘Big Europe’ speech which is likely to be about redefining regionalism rather than a knee-jerk reaction to the current malaise. The US and the rest of the world are well placed to benefit from such paradigm realignment as it is a strong supporter of ‘Open Regionalism’ and should welcome David Cameron’s forthcoming important stance.

Globalization failed long ago and hence the rise of regionalism in the world was viewed as a means to better state actualization by building more manageable economic entities that had more bargaining power at the trade negotiation table through regional integration. Strong experimental regionalism as that exhibited by the EU is under siege because monetary union has been pushed faster than political union can bind the long memory, path-dependent cultural heritage and hang-ups of independent nation states. Federalists versus Statist Rights agendas have often recruited unsuitable members to the jolly EU band of groupies and misfits when they were probably better off on their own.

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Winning the Peace Prize: The EU and the Ignoble Institution

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European Union flag flying outside of the Brandenburg Gate in Berlin. Rock Cohen/Flickr

One wonders whether having a peace prize makes an assumption about redundancy and diminishment in advance.

European Union flag flying outside of the Brandenburg Gate in Berlin. Rock Cohen/Flickr

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.

“The EU,” claimed a puzzled editorial of The Bangkok Post, “is involved in so many different areas not related to peace building, and frankly, some probably at odds with peace building, that trying to justify awarding it the Nobel Peace Prize becomes an argument in the abstract.” The editors feel that the worthier choice would be Malala Yousafzai, a 14-year-old Pakistani girl who was gravely wounded by the Taliban for campaigning for girls’ rights to an education.

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Has Mario Draghi Saved the Euro?

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Mario Draghi, President, European Central Bank. Monika Flueckiger/World Economic Forum

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.

Mario Draghi, President, European Central Bank. Monika Flueckiger/World Economic Forum

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.

That said, in rejecting several applications for injunctions to block the ESM and a parallel “fiscal compact”, the constitutional court warned that it would only issue a final judgment later. Officials said that could be before the end of the year or in early 2013. Although the final judgment is unlikely to differ in substance from Wednesday’s ruling, the judges warned that they may also then investigate the legality of the European Central Bank’s move last week to resume buying periphery government sovereign bonds to reduce the excessive cost of borrowing. So, is all not clear for the euro? Certainly, the ECB’s involvement in an “unlimited” form (to use Mr. Draghi’s own words) appears to ensure that the euro fat tail risk of “vaporising” has been reduced, but at what cost?

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Left Behind: Re-Evaluating American Hegemony

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President Barack Obama and President Hu Jintao of China attend a meeting with business leaders in the Eisenhower Executive Office Building of the White House, Jan. 19, 2011. Samantha Appleton/White House

President Barack Obama and President Hu Jintao of China attend a meeting with business leaders in the Eisenhower Executive Office Building of the White House, Jan. 19, 2011. Samantha Appleton/White House

Over the past decade, amidst appalling civilian casualties in one war of questionable legality and another of dubious wisdom, American foreign policy became the great bogey-man of the political left the world over. For liberal Americans, the bullish behavior of the Bush Administration induced the pretension of Canadian citizenship abroad and a previously unimaginable mainstream audience for leftist favorites Howard Zinn and Noam Chomsky at home. Polled Europeans named the United States as the greatest threat to world peace.

Failure to intervene in Darfur only added further evidence to the conclusion that American foreign policy was, as Bill Clinton said in reference to Rwanda, driven by American interest, and American interest alone. Just as American foreign policy seemed excessively unilateral, Europe’s cohesive opposition to the Iraq campaign rendered perceptively possible an alternative world-order. In a decade in which the United States was the lawless school bully and Europe the measured school principal, when principled Continental opposition illuminated self-interested American hubris, America’s critics had the luxury of imagining a rules-based international system characterized by regulations governing everything from torture to pollution.

With this alternative in mind, liberal-leftists were right to leverage a no-holds-barred critique of the ends to which the United States leveraged its hegemonic might.

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

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From left to right: Mario Monti, Prime Minister of Italy; Mario Draghi, President of the European Central Bank; Angela Merkel, Federal Chancellor of Germany

Greece has moved off center stage, as Spain has become the preoccupation de jour for Europe’s increasingly embattled authorities.

From left to right: Mario Monti, Prime Minister of Italy; Mario Draghi, President of the European Central Bank; Angela Merkel, Federal Chancellor of Germany

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.

According to Der Spiegel, the ECB has chosen a detour via the Greek central bank under its so-called “Emergency Liquidity Assistance” (ELA) program: “Now, information has leaked regarding how the ECB plans to keep Greece on its feet until the next tranche of European Union-International Monetary Fund aid is paid out. The ECB has chosen a detour via the Greek central bank. It will allow it to issue additional emergency loans to the country’s banks. These in turn are supposed to use the money to buy up Greek bonds with short maturities. This will scrape together €4 billion, according to the plan.” Although the context of the Der Spiegel article suggests that the ELA has been activated here for Greece as a short-term bridging measure, it is almost certain that the program has already been used extensively by the ECB to keep Greece alive. Perhaps this is what Mr. Draghi meant when he suggested that he would do “whatever it takes” to keep the euro alive?

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Financial Predators v. Labor, Industry and Democracy

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Source: 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.

Source: Images Money

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

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Bank of England

Bank of England

“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.

Jobless growth in the United States, 17 percent unemployment in the European Union; “stocks slump worldwide and euro sinks as bond rates soar to record” (IHT, July 24, 2012). So on and so forth. Whatever it is, the effect is an enormity. It stands to reason that the causes should be commensurate. True, the system could have reached a tipping edge and tumbled down after one small step, but then that tipping edge is a huge cause. Why didn’t we know about it? Was it ignorance or sloppy theory? There could be other causes.

See it as bad finance, economics and banking practice at work—and the structural violence hitting the old, the poor, the underprivileged is without parallel since the Great Depression. See it as politics, as intended acts of commission—and it becomes direct violence hitting people whose only wrongdoing was to trust the system. One hypothesis does not exclude the other. The question becomes: “How much was banking gone mad, how much was politics as usual?”

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

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European Central Bank's Mario Draghi with Ramon Tremosa. Source: 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.

European Central Bank’s Mario Draghi with Ramon Tremosa. Source: European Council

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. However, Garber recognized that if there arose the prospect of a euro exit and, therefore, a devaluation risk for holders of deposits in the banks domiciled in the country slated for exit (e.g. Greece or Spain), the European monetary system would be exposed to a bank run. Under the EU treaty capital mobility was guaranteed.

Under the common currency deposit transfers from domestically domiciled banks in countries at risk of euro exit (e.g. Greece, Spain) to banks domiciled in other euro nation states (e.g. Germany, Netherlands) was costless. Faced with any non-negligible perceived risk of a euro exit and thereby a devaluation loss, rational market participants should move all their deposit funds from the banks domiciled in the country at risk of euro exit to banks domiciled in nations at the Eurozone’s unassailable core.

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Greece on the Brink…Again

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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.

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

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.

Recent figures released suggest that Greece is making progress towards reducing its deficit as the figure for the first six months of 2012 came in at 12.3 billion euros well ahead of the Troika target of 14.9 billion euros and down from 13.1 billion euros from the same period in 2011. However, a closer inspection reveals that, whilst spending cuts are being met, the required taxation income was 1 billion euros behind the plan during the first half of 2012. One consequence of this is that Greece will struggle to survive financially until September when the next bailout tranche is due to be made payable.

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Geithner: Europe Can’t be Left Hanging on the Edge of Abyss

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Treasury Secretary Timothy Geithner

Michael Kinsley once defined a gaffe as “when a politician tells the truth – some obvious truth he isn’t supposed to say.”

Treasury Secretary Timothy Geithner

On that basis, the recent headline that just popped up might well represent a major gaffe of the Kinsley variety by Treasury Secretary Tim Geithner. Speaking on CNBC’s “Delivering Alpha” conference, the Treasury Secretary argued, “What is very important is that [Eurozone officials] not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.” In essence, Geithner is letting the cat out of the bag. He is implying that Europe is hanging on the edge of the abyss. Only Germany can prevent it from falling in, and at the same time it appears that Berlin has now moved into a position where they cannot or will not prevent that disasterous scenario, either for economic or legal reasons.

The decision by Germany’s constitutional court to delay its approval of the German Parliament’s ratification of the ESM and fiscal compact may be a warning. The court could have moved to approve quickly. Instead, it will not rule on emergency appeals for an interim injunction against the parliamentary approvals until the end of this month. If the court rules in favor of an interim injunction, the final decision on the ESM and fiscal compact may not be made for several months.

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The Chinese Central Bank’s Delicate Tap Dance

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People’s Bank of China (PBOC) in Beijing. Sim Chi Yin/Bloomberg

This past week’s release of China’s second quarter GDP growth number – at 7.6 percent - was viewed as an ominous sign of the future direction of the global economy by some pundits, while others see the Chinese government’s stimulus measures as a hopeful sign that its economic growth will be higher in the second half of the year.

People’s Bank of China (PBOC) in Beijing. Sim Chi Yin/Bloomberg

It is important to understand that the root cause of the decline in China’s economic growth this year is not the trouble in Europe or funk of the global economy, but rather the unsustainable economic bubbles that have been created by the government, and the collapsing demand that has accompanied it. The central bank’s latest tap dance won’t fix that.

Central banking maneuvering can at best serve to sustain the over-leveraged economy and avoid a systematic short-circuit of debt financing for now. There won’t be much liquidity invested in lending capacity or job creating projects, since there is insufficient demand, so the economic return on credit will deteriorate. If these structural deficiencies aren’t properly addressed by the central government - and soon – the longer-term deterioration of the Chinese economy can only continue. The inevitable chain reaction will accelerate, and China will face its economic end game.

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