The Great Debate UK

Put the euro zone out of its misery

By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

Let me make a wild guess – just a hunch, a vague feeling, the kind you get when you hear a football club chairman say “the manager has my full support”. My forecast is that the IMF monitors currently poring over the Italian government’s books will uncover a black hole somewhere, probably one big enough to swallow the euro zone, and the discovery will leave them as shocked as Captain Renault when he found there was gambling going on at Rick’s Bar in Casablanca.

My gut feeling is based on a deeply rooted suspicion of Italian statistics dating back to the early 1970’s, when I got my first job in academic life, as a research assistant in the University of Manchester. In that more tranquil era, it seemed possible to uncover a number of stable relationships between macroeconomic variables for all the other countries in the industrial world, but somehow never for Italy, which was always the outlier. Suspicion of the data is reinforced by the well-established claim that as much as 25 percent of Italy’s production is in the economia sommersa, the underground economy, exempt from taxation, unmonitored and unregulated (in fact, the Italian authorities have sometimes seemed to take a pride in its size, notably in 1987, when by a sleight of the statistician’s hand, Italy’s GDP was deemed to have overtaken that of Britain, thanks to an overnight reassessment of the scale of the country’s black market).

Even if Italy’s predicament is no worse than it appears from official statistics, the outlook is grim. It is hard to imagine a Berlusconi-led government successfully enforcing a serious austerity regime, but neither is it likely that an opposition dominated by ex-Communists could succeed where he failed. Moreover, as with Greece, those who are enthusiastic for a non-partisan administration made up of technocrats forget that mustering support in parliament is not enough. Restoring Italy to fiscal health will need a government able and willing to enforce spending cuts, raise taxes (or at least collect them more vigorously) and deregulate labour markets in the face of bitter and potentially violent opposition from trade unions, the professions and probably much of the public. It is not obvious to me that a government of supposedly neutral technocrats is better placed to achieve all this.

Capitalism and democracy under threat from euro zone crisis

By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

It takes quite a lot to make me feel sorry for politicians, especially the European variety, but I must say that Nicholas Sarkozy and particularly Angela Merkel have a right to be livid at the news that the Greek government now proposes to hold a referendum on whether they will agree to be given another gigantic dollop of aid. Having only reached agreement (of a very vague kind) at last week’s summit in the early hours of the morning, you can imagine how the French and German leaders must have felt when they discovered that their marathon negotiating sessions may all have been in vain. It seems the Greeks are now too wary of foreigners bearing gifts to accept their largesse without weeks or months of prior deliberation and debate.

The euro zone marriage is over

By Laurence Copeland. The opinions expressed are his own.

Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.

The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.

Another week, another E.U. bailout agreement

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By Mark Hillary. The opinions expressed are his own.

Once again German Chancellor Angela Merkel has had to dig deep to ensure that the euro zone can limp along for a little longer without any single nation defaulting.

And this story changes day by day. No sooner has Germany rescued the euro, Greece apologises and says they can’t meet the deficit targets – no more savings can possibly be achieved through austerity.

Germany at the crossroads

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By Laurence Copeland. The opinions expressed are his own.

Baby-boomers like me, who grew up in the shadow of World War II, have to acknowledge with gratitude that the Germany which again dominates Europe is in most respects a model democracy – multiracial, prosperous and contented. However, there is one worrying aspect of the German mentality which seems to have survived intact from its unhappy history, and it is an aspect which is likely to be tested to the full in the coming weeks and months.

From the moment when the Maastricht Treaty was dreamed up in the early 1990s to the inception of the euro zone in 1998, Germany had any number of opportunities to kill the project off and indeed, time and again, policymakers in Bonn or Berlin or Frankfurt voiced their reservations in public. The Bundesbank, in particular, with its overwhelming prestige, spoke out forcefully against what it saw as the dangers of premature monetary union.

What message is the CDS market sending us?

By Laurence Copeland. The opinions expressed are his own.

Not many people seem to have noticed, but something almost unthinkable has happened in the Credit Default Swap (CDS) market recently. It is now one point cheaper to insure against a default by Her Majesty’s Government than by the Federal Republic of Germany. Given that only a few months ago, Markit was quoting twice as much to insure against a default on gilts as on bunds, this is a major change – but what is it telling us?

The message is unclear, but my guess is it is not quite the one which Britain’s Chancellor, quite reasonably from his point of view, would have us believe. Yes, the market has faith in our ability and willingness to repay – but that is far from the whole story.

Could Europe be on the cusp of a Lehman moment?

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By Kathleen Brooks. The opinions expressed are her own.

The euro zone debt crisis has now spread from the sovereigns – after the ECB came in and purchased Italian and Spanish debt – to the banking sector. Although the EU authorities put in place a short-selling ban, which has another week to run, the banking sector is back at the pre-ban levels or in some cases even lower.

Europe’s banks are by and large less capitalised than their U.S. peers. They are also exposed to Europe’s sovereign debt and European loan books. Even if a member state manages to avoid a default, growth is now slowing and we could be in line for another recession that would most likely increase bad debts and further erode banks’ profits.

Why is the West bankrupt?

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By Laurence Copeland. The opinions expressed are his own.

The UK, USA, the PIIGS (Ireland and Italy are together in the same stye), France is in poor fiscal shape  – OK, Germany is ostensibly living within its means, but it looks a lot less solvent when you remember that it has underwritten the rest of the euro zone (in large part, to protect its own irresponsible banks). In any case, as I have argued in previous blogs, this or a future German Government is likely to cave in to the pressure from its own electorate and from inflationist economists at home and abroad to join the party and spend, spend, spend. Only Australia and Canada, riding high on the commodities price boom, and a handful of small countries, look stable.

Where will it all end?

With inflation, almost certainly, but beyond that, it is hard to say. However, there is one prediction I would offer for the medium to long term outcome, and it applies not only to the euro zone, but to Britain and America too – in fact to the whole of the comfortable, complacent industrialised world – and it is this.

Greece deal is a compromise and, once again, the banks have won

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By Laurence Copeland. The opinions expressed are his own.

Whenever I see photos of Chancellor Merkel these days, I’m reminded of the lugubrious features of the creature in the Restaurant at the End of the World, as it recommended to guests which part of its own anatomy they should eat. The details of the “Deal to Save the Euro” are still mysterious and have been given a misleading spin in the official releases, but one or two points seem clear.

First, the package is a compromise – a little bit of default (as required by a reality check) plus assistance to Greece which looks very generous but is still not enough to give it a realistic chance of paying its remaining debts. So the can has been kicked further down the same road yet again.

from FaithWorld:

“If I were Pope Benedict, this is what I’d tell them in Berlin …”

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(The Reichstag building, seat of the German Bundestag in Berlin, where Pope Benedict will deliver a speech on September 22. Picture taken on November 22, 2010/Pawel Kopczynski )

Have you ever wanted to write a major speech for Pope Benedict to deliver? What would you say? How much leeway would you have if you were chosen to be the papal ghostwriter?

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