Global News Journal

Europe can’t put out the blaze

If the world thought that Europe’s finance ministers were running in to put out the blaze spreading through Athens and Rome this week, it might come as a surprise to learn they still don’t agree on the size of the fire or how to deal with it.

Any training course will tell you that if a small fire isn’t tackled quickly, it could make things a lot worse. The Greek crisis is like a small electrical fire that has grown into a dangerous inferno now threatening to gut Italy.

But ministers meeting in Brussels have clearly not been on any fire extinguisher training courses lately — they don’t know their water from their foam and their dry powder. In fact, they appear to be pouring oil on the fire.

Belgium’s Finance Minister Didier Reynders says it is best to try to smother the blaze with a small cloth soaked in a chemical called a financial transaction tax, while Sweden’s Anders Borg and Austria’s Maria Fekter say they can’t spare any of their CO2 extinguishers.

“Italy can achieve a lot from its own doing,” Fekter told reporters who were watching the fire grow closer. Borg, Fekter and others are sure the Italians in the burning building down the street will be able to sort things out themselves.

Spain’s Elena Salgado is meanwhile clearly upset that the smoke from that fire is billowing into her garden, but France’s Francois Baroin says there was no need to reach for a fire hose: “Tout va bien” (Everything’s going well), he said, wiping his brow from the heat. A combustible mix of hot air and faulty wiring seem to be one assessment of the causes of the euro zone flames, which no one is really willing to consider. But as the sound of emergency sirens grows louder, it may be time to remove the safety pin from the extinguisher marked “European Central Bank” — it may be the only way to remove all the oxygen feeding the fire.

from Jeremy Gaunt:

Democracy and Chaos are both Greek

It seems as if almost everyone was surprised by Prime Minister George Papandreou's decision to hold a referendum on the euro zone's bailout package for his country. At the very least, it can probably be said that he is weary of being hammered from all sides --  his own party, the opposition, the people on the street, Germany, the tabloid press, you name it.

A lot will obviously depend on what question is asked. Do you want an end to austerity, would get a clear yes vote. Do you want to leave the euro zone -- perhaps not.

Financial markets, however, do not initially appear content to wait.  Talk of an end-of-year rally is off the table (at least for now).  It's not exactly χάος (chaos) out there, but Papandreou's  experiment  in δημοκρατία (democracy) has sent the whole euro zone project into a new, risky phase.

It was a typo, but RBS's take on the Greek referendum this morning will have had some resonance:

"We view this as a major negative for Greece and the rest of the momentary union".

Whatever happened to Europe’s debt crisis?

If people stop commenting on the financial crisis, does it still exist?

A month ago, Europe was in the throes of fretting about Greece’s debt problems and whether they were going to spill over to Portugal and Spain, bringing down the euro and a decade of monetary union with it. At the same time there was intense anxiety about impending results from stress tests on nearly 100 European banks.

Every day — and sometimes several times a day – European Union officials, ministers, leaders or central bank governors would say something about the crisis, providing more fodder for frazzled financial markets to make another round of cliff-hanging calls over whether things were getting better or worse.

The market gyrations would prompt more questioning of officials, adding more verbal fuel to the fire, keeping the merry-go-round twirling.

Of course, decisions were also being taken that helped calm fevered brows — Greece took steps to cut government spending, the stress test results largely proved reassuring, and Portugal and Spain financed their debts through the markets without too much disruption.

But mostly, officials just stopped commenting on the crisis. Why? In large part because European went on holiday.

The European Union effectively shuts down in August — the Commission holds no briefings, the European Parliament is in recess and there are no leaders’ summits. This year most headed for the beaches in the last week of July.

EU squabbles feed market frenzy

  The European Union can rarely have been more in need of a show of unity than now, as it tries to convince financial markets it can handle the euro zone’s debt crisis.

    Hardly a day goes by without a European leader underlining the need to act together, but hardly a day passes without signs of differences among them that undermine the impression of unity.

    This week is no exception. European Commission President Jose Manuel Barroso said in a speech in Brussels on Tuesday: “We can turn today’s challenges into opportunities only if we stand together, give a collective response.”

    But comments he made in an interview published hours earlier showed the EU’s leaders are anything but united in their vision of how to tackle the crisis.

    In the interview with Frankfurter Allgemeine Zeitung, Barroso dismissed as “naive” Germany’s call for the EU treaty to be modified to prevent a repeat of Greece’s debt crisis — and Germany hit back quickly.

    Economy Minister Rainer Bruederle said he was surprised at the remarks and went on to criticise a joint euro bond proposed by European Union President Herman Van Rompuy, saying it would create the wrong incentives and reward member states that do not pursue sensible budget policies.

    “What we need are clear signals for solid state finances in order to secure trust in the euro over the long term, and to prevent future crises,” Bruederle said.

Germany’s euro-zone bind

Whichever way you look at it, Germany is in a bit of a quandry.

For the past 11 years, since the launch of the euro single currency, Europe’s biggest economy has enjoyed steady current account surpluses as it has exported its manufactured goods around the world, while keeping labour costs down and productivity steady at home.

Its economic growth may not have been stunning in recent years, but it has experienced none of the huge budget-deficit and debt problems of its euro zone partners, particularly those in southern Europe such as Spain, Greece, Portugal and Italy. And it has none of the nagging competitiveness issues that all those countries also face.

Essentially it has a modern, open economy and has pursued steady, prudent economic management.

So when Greece’s debt crisis exploded — leaving the euro zone with effectively three choices: have Greece leave the euro, let Greece default, or bail Greece out — Germany was none too thrilled about any of them. Least of all, though, did it want to bail Greece out, believing that it wasn’t up to hard-working German taxpayers to pay off Greece’s debts when the country had spent the best part of a decade spending at will and doing nothing to overhaul its economy.

Alas Berlin, the heartbeat of the euro zone, naturally ended up having to be a central part of Athens’ bailout. And what’s more, the biggest contributor to the $1 trillion rescue package the IMF and European Union put together to prevent Greece’s problems spreading throughout the euro zone.

In reply, what Germany won from its euro zone partners — particular the profligate, uncompetitive, southern European ones — was a commitment to overhaul their economies. Greece, Spain and Portugal have basically promised to make changes to their public sector models, raising retirement ages, cutting state payrolls , raising some taxes, slashing spending and improving competitiveness. It’s going to take time and serious commitment, but Germany is hoping the southern European economies will ultimately look a bit more like Germany does.

Playing with inflated numbers

Most people would agree that the European Union and the euro single currency are part of a grand political and economic vision. But at times they are also a bit of a numbers game.

As Greece has shown with its less-than-reliable economic statistics, numbers can be fiddled to get budget deficits and debts down and meet the criteria to join the euro.

But the European Commission, the EU’s executive, is not above a bit of numerical jiggery-pokery itself, even if no one is suggesting that the Commission has made any numbers up. Its figures just don’t make much economic sense. 

Take the case of Estonia and inflation.

The Commission announced on Wednedsay that Estonia would be allowed to adopt the euro next year.  One of the criteria the Commission said it had met was the EU treaty’s inflation target. The treaty says a euro candidate country’s average inflation over 12 months must be no higher than 1.5 percentage points above the average of the three “best performers” in the EU.

By “best performers” the treaty means those countries with the lowest inflation rates.

In this case that was Portugal, Estonia and Belgium, which had inflation in the 12 months to March of -0.8 percent, -0.7 percent and -0.5 percent respectively. With 1.5 percentage points added on, the inflation target became 1.0 percent.

Markets call euro zone’s bluff on Greek aid

The surge in the spread of Greek bond yields over German ones since European leaders issued a promise of emergency loans to Greece last month indicates financial markets do not believe the pledge of euro zone support is anything more than a bluff.

And they are itching to call it.

Euro zone leaders have been betting that a promise of loans to Greece and strong words of political support will be enough to calm markets and allow Athens to borrow at more reasonable rates, therefore rendering any real aid — the dreaded bailout — unnecessary.

That seems to be the reason why the details of the support mechanism — the interest Greece would be charged, the duration of the loans, the conditions attached, the exact way the aid would be triggered — have been left undecided. A verbal intervention was supposed to be enough, with no real money committed. Keep it vague but strongly worded and hope the Greek ship of state rights itself.

But markets are not so easily convinced. They are not buying the rhetoric. They want to know the nitty-gritty of any aid package. As a result, the spread of Greek 10-year paper over equivalent German bonds surged to a record 463 basis points on Thursday, some 100 basis points more than when the euro zone leaders made their promise.

The vagueness of the terms the euro zone is offering is most likely the result of political differences between major states, which makes the offer even weaker. Germany, in particular, is known to have deep reservations about helping Greece out at all, and Germany has to be part of any deal.

The lack of euro zone detail could be a way of keeping markets guessing about where any intervention on the Greek bond market would come — similar to the calculated vagueness authorities employ when they verbally intervene in foreign exchange markets.

from MacroScope:

Frustrated Greeks

The Greek debt crisis appears to be entering a new phase, in which the country is no longer just waiting to get needed help but getting concerned that others -- including euro zone powerhouse Germany -- may actually be making it hard for them to recover.

First, there is Prime Minister George Papandreou (right in photo). His concern is that speculators are pushing  the cost of borrowing so high that it is undermining the plans he has put in place  for deficit reduction.  Papandreou is known for being a mild-mannered sort, so any kind of irritability is worth noting.

But Theodoros Pangalos (left), the deputy prime minister and once foreign minister, has no such reputation to hold him back.   He has launched an attack on Germany, saying that a) it is allowing its banks to mess around with Greek bonds and b) that it suits Berlin in any case to let the euro fall.

Pangalos is famous for his undiplomatic outbursts. He once referred to Germany as a giant with a child's brain. Another time he suggested that the then -French president was essentially belly-dancing in front of the Turks to get their business.

So perhaps a pinch of salt should be taken re Pangalos. But put together, the two bouts of finger-pointing do suggest that at the very least the Greeks are getting frustrated with the substance-less expressions of support they keep getting.

What flesh will be put on the bones of an EMF?

In the space of a few weeks, the idea of creating a European Monetary Fund to rescue financially troubled EU member states has gone from being a high-level brainwave from a pair of economists to a major policy initiative backed by powerbroker Germany. In EU terms, that’s Formula One fast.

Yet while German Chancellor Angela Merkel appears to be behind the concept, even if she has concerns about a possible need to change the EU’s treaty, no one has put much flesh on the bones of the idea apart from the original proponents — Daniel Gros of the Centre for European Policy Studies and Thomas Mayer, the chief economist of Deutsche Bank.

Gros and Mayer set out their proposal in an academic paper and synthesised it in a column in The Economist last month. In essence the idea — and it remains to be seen if EU policymakers take it up wholesale or develop something along different lines — is fairly straightforward.

It would involve fiscally slack members of the EU — those with debt and deficit ratios above the EU’s Maastricht treaty ceilings of 60 percent and 3 percent of GDP respectively — paying into the fund in proportion to how much over the limits they are.

For example, Greece has a debt-to-GDP ratio of 115 percent (55 percentage points over the limit) and a deficit of around 13 percent  (10 points over). That would mean it paying 0.65 percent (55+10) of its GDP into the fund, or about 2 billion euros.

If such a fund had been created in 1999, at the same time as the euro single currency came into being, and all those who exceeded the Maastricht criteria had paid in accordingly, the fund would now have about 120 billion euros in it. That’s nowhere near the $825 billion the IMF can ultimately call on from its 186 member countries, but it would be enough to help out one or two medium-sized EU economies should they face a similar crisis to Greece.

That may be all well and good, but there are two immediate problems. One is that no one thought of the fund 11 years ago so it doesn’t have anything in it yet. To get up to 120 billion euros according to Gros and Mayer’s formula could take at least another decade of countries paying in, far too much time to help out Greece with its current problems and with the risk that one or two financial crises could affect other EU member states in the meantime.

from MacroScope:

Falling out of the euro zone?

The periphery economies of the euro zone are suddenly in the spotlight.  Credit rating agency Standard & Poor's has cut its outlook on Ireland's sovereign debt to negative. It worries that fiscal measures to recapitalise banks and boost the economy might not improve competitiveness, diversity and growth -- all making it harder to manage debt.

Next came Greece. S&P basically put the country on watch with a negative bias. The global financial crisis has increased the risk of a difficult and long-lasting struggle to keep the Greek economy on track, it said.

All this is a long, long way from the unravelling of the euro zone -- it just got a new member, Slovakia, after all. But the subject has been raised. Gary Dugan, chief investment officer of Merrill Lynch's wealth management arm, told a group of reporters in London recently that he expected political calls to quit the currency to be heard in some member countries as the global recession bites. He added that it wouldn't happen, but that the talk could weaken the euro.

The Centre for European Reform, meanwhile, says the idea of ructions in the euro zone should not be dismissed out of hand.

     -- The current economic crisis threatens to exacerbate the tensions within the euro zone. There is a serious risk that the growth prospects of struggling euro zone economies will be handicapped for many years by their inflexibility and the external surpluses of other euro zone member states. If so, investors will lose confidence in the credit-worthiness of governments and firms in these countries, leading to a dramatic increase in their borrowing costs -- 

It cites various options for the euro zone to deal with this. The 'nuclear option' would be for insovent countries to default and leave.

Fanciful or the next big crisis?