The Great Debate UK

Democracy vs. austerity

Photo
-

By Kathleen Brooks. The opinions expressed are her own.

Throughout history it has always been difficult to take something away from someone once you have given it to them. Europe is finding that it is extremely difficult to reign in public finances once they start to go out of control. Democracies don’t like to vote for austerity, which is why Sarkozy lost the Presidency in France, why a radical left party came second in the Greek elections and why the Conservatives got a drubbing at last week’s local elections in the UK.

This tells us something about democracy in the western world. Governments have to manage the public finances directly – they have to sell the debt, do the sums and present budgets. However, the people who vote them into (and out of) power are the public, who rightly in most cases, believe they have worked hard, paid  taxes and deserve the services and retirement promises made to them.

So here we have the problem: some governments in the West have unsustainable debt loads and deficit levels and yet they don’t have the popular mandate to try and bring that under control. That isn’t the story all over the west. The Germans and the Dutch agree that the government books should be balanced. But if you asked the rest of Europe if they wanted to reduce public debt levels to make country finances more sustainable at the expense of public services and jobs, the recent election results suggest that you would get a resounding no.

So there isn’t one unified way of thinking about austerity in the West. Some people see it as a virtue, others as a type of hell. So what to do? Europe’s one-type fits all model that is largely designed by Germany could lead to social disorder and radical political parties grabbing the reins of power in Greece. However, the more people fight against austerity the more unlikely it is that their governments can attract enough investors to buy their debt to fund their public spending needs.

A two-speed economy for Europe’s youth

Photo
-

By Kathleen Brooks. The opinions expressed are her own.

A new dimension to the currency crisis is upon us. First there was the two-speed growth – with richer, predominantly Northern European economies performing well while the weak south was on the cusp of recession. But in recent months an even more worrying divide has started to emerge in youth unemployment.

In Spain the number of under 24-year-olds out of work is 50 percent, in Italy nearly a third of young people are without a job and in France the figure is a quarter.

The euro is on life support, and the on-off switch is in Frankfurt

-

By Laurence Copeland. The opinions expressed are his own.

The short term solution to the problem of how to manage the euro zone crisis may now be right there in front of us. The central issue, as far as Germany is concerned at least, is how to reconcile bailing out the other member countries with keeping up the pressure on them to put their fiscal house in order. Quietly, without any official recognition of the fact, the ECB has taken charge of the situation and is now effectively running fiscal policy for most of the euro zone by simply buying enough Greek, Italian, Spanish and maybe French bonds to keep yields from going too high, but not buying so many as to reduce yields to anything like comfortable levels.

Moreover, treasury officials in every country will be only too well aware that what the ECB giveth, the ECB can take away. Any relaxation in austerity regimes can always be countered by an end to ECB purchases or even by ECB sales in the secondary market, driving yields back up in the space of a few minutes to 7%, 8% and beyond. In short, most of the euro zone members are now  on a life support machine, and the on-off switch is in Frankfurt.

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.

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

Photo
-

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

Photo
-

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?

Photo
-

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.

  •