Scally and Münchau on the euro zone crisis

“For Dr Merkel, limited treaty change to allow EU budgetary supervision is the sugar-coating she needs to sell to her voters the bitter pill of greater ECB market intervention or even eurobonds.”

I’m not convinced. I think she’s done her focus groups and they tell her the voters won’t buy it.

I love the word ‘insane’ …

“Sugar coating” for political purposes points in the right direction, but I think a lot of observers are out here by an order of magnitude. I keep reading disparaging comments directed towards Germany and the ECB, along the lines that it is all so very obvious and why don’t they just get on with what all the clever people know has to be done – basically, just copy the Americans.

I get the impression that a fair proportion of this stuff comes from people who have developed a reasonably recent habit of following the credit cycle. Try forgetting bond spreads for a while and think about something that connects with people (eg politicians and businessmen they admire) a lot more easily.

Here is the S&P500; select the 5 year tab and look at it for more than 30 seconds to get some context.

http://www.bloomberg.com/quote/SPX:IND/chart

(note, most EZ markets are not too different in essence)

Having done that, contrast the complete lack of actual equity “market turmoil” or “share prices plumbing multi year lows” etc, with what was going on in 2008 and spring of 2009. Then, very seasoned market observers were relaying to anyone that would listen, that the global economy was perhaps beyond the brink, and was disappearing down the plughole fast. Now there is frustration and confusion with high bond yields, arguments about austerity being a good or bad idea, slow implementation, and self-interested PIGGY politicians

Those who were watching carefully at the time will recall the stock market decscending several cliffs failed to get US legislators to sign off Treasury plans – two goes at it along with rumours of the deployment of tanks on the streets were required. Republicans were outraged that the Fed thought it could just go off and buy up debt.

People may look at the US as a shining template for what Europe should do now – but it didn’t look at all clever or broadly supported at the time. Remember AIG being lined up to join Lehman (and being within 24 hours of it), and the complete lack of a plan or idea what the consequences would be. It was almost whimsical.

How realistic is it for Germany to ditch its whole approach, its strategy, its economic playbook, when there is so much less of an easily visible economic dislocation going on around them than those sophisticates in the US had, spurring them on?

Here is the volatility that is currently discounted by investors, again select the 5 year tab:

http://www.bloomberg.com/quote/VIX:IND/chart

The VSTOXX foe Europe looks similar.

The Vix has been hovering around 30 or so. When the US made big policy decisions this measure of financial market uncertainty was more than twice as high.

There is just no comparison, and the US authorities have most of he press on their side in dealing with the subsequent popular disapproval because of the context at the time. Selling a line about Spanish bond spreads as justification for what many Germans would view as a sell-out, would not be that easy.

Both Wolfgang/Derek are selling the theory that Merkel can veto anything she can’t politically sell to her euroceptic coalition: what about policy-making decisions which are jointly put forth by EP and Commission on conceptual framework of Eurobonds and stricter fiscal oversight in EZ – after Juncker departs – and finally approved in Council?

First, Merkel has today agreed to discuss Borrosso’s official Commission policy paper on Eurobonds prepared by (the guy who’s most likely to replace Juncker) Rehn.

Second, Monti is going to surprise Wolfgang (FT included) because his principal focus is on sectoral macro-growth while bringing spreads under manageable levels. The market is already reacting positively to Monti’s declarations. Let’s wait and see if he gets majority support in Parliament or not on fiscal issues.

Bottom line, Merkosy have their fellow political partners now in Madrid and Rome and Athens. If they can’t do business with them and get the crisis under control – we’re really in big trouble; Merkosy know it.

Institutional reforms will be inevitable given the crisis with stability fund and how to leverage it. That’s why I think Merkel has agreed to discuss Eurobonds proposal by the Commission .

@John McHale

never too late – we are in 24/7 every week on this one; even probable that the global financial system has over_dosed on its drug of choice and is effectively brain dead – and only movement is due to the illusion of life-support; really really scary stuff …

@all FYI Bond, seafoid, and all Lewis fans and confused citizen_serfs

New York Review of Books

Boomerang: Travels in the New Third World
by Michael Lewis
Norton, 213 pp., $25.95

Boomerang is about what he has come to see as the larger phenomenon behind the credit crunch: the increase in total worldwide debt from $84 trillion in 2002 to $195 trillion now. The thesis is that “the subprime mortgage crisis was more symptom than cause. The deeper social and economic problems that gave rise to it remained.” It is these deeper problems that are dominating economic news at the moment, and led to the desperate measures announced at the European summit on October 27 and to the aborted Greek plan to hold a referendum that followed. The G20 Economic Summit of November 3–4 was dominated by discussion of the Eurozone crisis, but ended with no coherent plan in view, and none has emerged since. Boomerang tells the story of how we got here, and in the course of doing so gathers together an extensive arsenal of data at the top end of my 0–10 Reykjavik waitress scale: the fact that Greek railways have €300 million in other costs; the fact that the Californian city of Vallejo spent 80 percent of its budget on the pension and pay of police, firemen, and other “public safety” workers; the fact that between 2003 and 2007, Iceland’s stock market went up ninefold; the fact that in Ireland, a developer paid €412 million in 2006 for a city dump that is now, because of cleanup costs, valued at negative €30 million.

http://www.nybooks.com/articles/archives/2011/dec/08/how-we-were-all-misled/?utm_medium=email&utm_campaign=December+8+2011+issue&utm_content=December+8+2011+issue+Version+B+CID_73cb2650f3da6d354999dbb13f257abd&utm_source=Email+marketing+software&utm_term=How+We+Were+All+Misled

I am afraid that neither commentator is reliable in this particular context, not because they are not good, they are excellent, but Munchau has gone into the prediction business – a dangerous occupation for anybody and especially a journalist – and Scally has become too close to his subject.

The reality is that Merkel is mistress of all she surveys but pride cometh before a fall. She, and the constitutional court, are making the German electorate extremely nervous. The most recent decision of the court to remove the 5% hurdle for elections to the European Parliament, against the background of a burgeoning scandal with regard to the nefarious activities of the extreme right, has caused particular concern and drawn a withering criticism from the former German president of the European Parliament.

Even the newspaper of the home of conservatism can carry an opinion piece such as the following. (Google Translate does a reasonable job).

http://www.sueddeutsche.de/politik/merkel-will-lissabon-vertrag-aendern-medizin-fuer-europa-1.1195176

Der Spiegel also becoming critically self-reflexive … and usually a good indicator of Deutsche mood …

Germany is selling itself during the crisis as a haven of stability – and the financial markets even believe it. But, in truth, it’s hardly better off than the others. And its public role of disciplinarian is arrogant and dangerous, writes Spiegel Online.

Luxembourg Prime Minister Jean-Claude Juncker is therefore right to get worked up about German domineering. Spain, for example, with a debt ratio of 69.6 percent, is considerably closer to complying with the Stability Pact than Germany is. Even the Dutch (64.2 percent) and the Finns (49.1 percent) have more right to put themselves forward as European disciplinarian than the Germans do.

http://www.presseurop.eu/en/content/article/1194641-myth-german-economic-discipline

@ Hari Naidu

FYI

http://www.bloomberg.com/news/2011-11-21/merkel-remains-opposed-to-joint-euro-bonds-as-eu-seeks-action.html#

Of course, she would say that!

@ All

As an example of the high-wire style of politics practised by Merkel, I copy a post from another thread which is probably more relevant to this one.

@ All

Under the new Six-Pack arrangements, countries must debate the compatibility of their economic policies. Apart from having no lessons to give in the matter of overall indebtedness, Germany must also address its approach to other issues, notably that of deliberately engineered distortions in its economy that favour exports over domestic consumption. A recent, and really classic example, is now the subject of coverage in the German press viz. the exemption of heavy industry from a large element of the cost of the nuclear energy u-turn agreed between the CDU and the FDP, with the acquiescence of the SPD and the active support of the Greens but with zero consultation with other EU countries.

http://www.stern.de/wirtschaft/news/strompreis-entlastung-fuer-unternehmen-privathaushalte-zahlen-die-zeche-1753625.html

The usual argument that “Europe” must stay competitive internationally will be trotted out but it simply a smokescreen. The net result is to depress disposable consumer income in Germany and to add to the trade imbalances within the EZ that are the cause of the current crisis.

Of course, it must be said that other EU countries have participated in the charade in relation to energy. The new chapter on the subject in the Lisbon Treaty states (Article 194.2) that any measures “shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choices between different energy sources and the general structure of its energy supply”!

@ Grumpy

You’re not alone in your reading.

http://dublinopinion.com/2011/11/18/marker-of-shame/

Scroll down to the graph.

Show’s over lads – time to move on….

@ DOCM and all

I did read the stuff in Bloomberg and was not impressed.

I’ve a feeling even Wolfgang is likely to revise his own wisdom and recognize that Germany and Merkel are not infalliable. At some point she’ll have to admit that her idea of pushing through the stability fund was too rushed and no one (to my knowledge actually did a feasibility study!).

Now she is faced with a cogent argument coming from (Finnish) Rehn’s feasibility of a socalled bond which can become a realistic measure to support the perceived weakness by the market – lack of any leverage or lender of last resort.

BTW the argument she wants to take nation-states to European Court of Justice is absolute nonsense in the view of EP. They won’t support it primarily because it is the job oif politicians to

@ DOCM and all

I did read the stuff in Bloomberg and was not impressed.

I’ve a feeling even Wolfgang is likely to revise his own wisdom and recognize that Germany and Merkel are not infalliable. At some point she’ll have to admit that her idea of pushing through the stability fund was too rushed and no one (to my knowledge actually did a feasibility study!).

Now she is faced with a cogent argument coming from (Finnish) Rehn’s feasibility of a socalled bond which can become a realistic measure to support the perceived weakness by the market – lack of any leverage or lender of last resort.

BTW the argument she wants to take nation-states to European Court of Justice is absolute nonsense. EP won’t support it primarily because it is the job of politicians/leaders to abide by the agreed laws and conventions under the Lisbon Treaty.

@all

Soryy first two entries are caused by false key on my pc.

@Hari

“”We have a choice,” Merkel said on Friday in reference to euro bonds. “We can rush into a hurried European unity. That would lead to a short-term calming of the markets — but it would also lead to a drastic reduction in European competitiveness. I don’t want to have a part of that.”

@ Paul Hunt

Ireland is in much less need of structural reform than Germany. But that is no help if you lose control of your public finances.

The wider point is that this entire debate is about nation states dealing with one another and each manoeuvring to gain advantage. There is nothing new in this other than the fact that the EU was supposed to guarantee that this would happen under the rule of law.

I remain optimistic. But maybe I am under-estimating the stupidity of the politician involved. At least no timetables have been set for troop-trains.

@ Grumpy

FYI

http://bruxelles.blogs.liberation.fr/Moody%27s%20France.pdf

@DOCM
“but Münchau has gone into the prediction business “-

He has been on the money since the subprime thing erupted. In 2008 he said the worst thing wouldn’t be a Minsky Moment. It would be a crisis that went on and on. And that is what it looks like now.

http://www.ft.com/intl/cms/s/0/9c760d54-4bc0-11dd-a490-000077b07658.html

@DOCM,

Indeed. But when the law is drafted by an elite and enacted by sovereign governments that have been captured by those exercising economic power and which use their executive dominance over their national parliaments to transpose these laws without securing the necessary democratic legitimacy, then the resolution of the inevitable disaster will be long drawn-out and messy. The lack of understanding of the extent of structural and institutional reform required both at the EU and national level will render the process even longer drawn-out and messier – with no guarantee of a successful outcome. One lives in hope.

@ DoD

Did you read that Lewis piece about California in Vanity Fair ?

http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

California is a tragic country – like Palestine, like every Promised Land. – Christopher Isherwood.

@ObsessiveMathsFreak

I think you are correct that the bond panic would eventually spread to germany but long before it did the market for Spanish and Italian bonds would dry up. So I think the end game will be before next spring. By then the ECB will be a LORL or Italy will not be able to roll over it’s debt and default.

On Germany leaving the Euro. If they did I see no reason why the remaining 16 would not stay.   A Euro without Germany would have an ECB that is a LOLR. Also they would have less of an internal trade imbalance. Overall it would function better that the current version.

Merkel and Schauble are pragmatic and intelligent people unlike our economic garsúnes, Kenny/Gilmore:

The latter want inflation made by Eurobonds or EFSF QE a la China or even Bric countries, but they won’t get it.

Reason -> MerKozy and Schauble know pouring inflation and QE into debt colanders represented by a FIRE economy such as Ireland, stagnant, deficit led peripherals, zombie default economies such as Greece and over leveraged core economies such as France/Italy, simply isn’t possible.

We’ve reached the point of too much debt; instead of stabilising current debt levels more debt will only worsen and further destabilise the EMU.

Breached and holed beneath the waterline the EMU is finished as we know it. EUSSR beckons, a failed socialism for the banks that failed in the USSR beckons in a new Bundustag led EMU under the cloak of closer fiscal and political union.

But this is no solution as we’ll all vote no to further austerity and closer fiscal/political union.

I’d say Merkel and Schauble are about to pull the curtains on the whole mess.

@DOMC

FT is superficial in it commentary including Quentin. I don’t know why they simply can’t ask the more difficult q’s.

FT.de as an Exclusive with Commissioner Rehn confirming more or less what I wrote above on socalled *Stability or Euro bonds* and Rehn is arguing there is no serious reason for Treaty changes, as requested by Merkel, because there is no study on the subject to advise what’s wrong.

There is a lot there in German which interests this particular blog tonight.

May be you can link it here ( I tried!) but I’m not teksmart guy!

@ DOMC & ALL

WSJ is giving a lot of space to N Ferguson (surely known to Irish econs).

2024 he moves Merkels Euro Project to Vienna (Habsburg Kingdom!). It includes all of former Yugolslavia and whatnot….

Oh! Ireland returns to the bossom of Cameron’s Empire!

I think the guy is crazy. He’s longing for another Empire – after losing Brittannnica.

@seafoid

following your link, read Lewis on California over weekend – unbelieve_able stuff – perception changing …. and leads to a greater understanding of how …

…. The Tea Party Kon was pulled …

In this definitive socio-political analysis of the Tea Party, Anthony DiMaggio examines the Tea Party phenomenon, using a vast array of primary and secondary sources as well as first-hand observation. He traces the history of the Tea Party and analyzes its organizational structure, membership, ideological coherence, and relationship to the mass media. And, perhaps most importantly, he asks: is it really a movement or just a form of “manufactured dissent” engineered by capital? DiMaggio’s conclusions are thoroughly documented, surprising, and bring much needed clarity to a highly controversial subject.

http://monthlyreview.org/press/books/pb2471/

@ DoD

This fella was very good in 2009

http://www.youtube.com/watch?v=zOZnRUZKf48&feature=player_embedded

but this seems to be his last video: .

“I’m ready for the Tea Party”

http://www.youtube.com/watch?NR=1&v=AFFm3yEXOok

I wonder what happened to him

I don’t get this Germany large & powerful meme – its a weakling that specialises in the production of designer mechanical products for the financial sector.
A country whose soul mission is to satisfy the lads on Top Gear.
People need to hit the books – I would recommend “The First World War Vol 1 to arms by Hew Strachen.
The expenditure on Dreadnoughts was astronomical for the time.
The most dramatic example was the Royal Navy of course which in 1914 consumed 25% of all HM Tax revenue !!.
Whatever about the rights & wrongs of pre & post Keynesian war spending it illustrates something is very wrong with the Industrial production process in the so called post industrial West.
It should of course be called the outsourced west.
Much of the unsexy non fashionable heavy production should be happening in the Belgium / French coal / canal country but it is not due to the CBs using overvalued money itself as a weapon of war.

Of course spending on war only works out if you win and take your opponent’s resourse base – but the same principles could be used to create a technological capital base without a shot being fired.
Much of the Dreadnought development for instance perfected the modern cargo ship although the previous shift to a oil based Navy had hugely negative long term strategic implications for the Empire.
But such is a geopoltical life.

@Seafoid

thanks for posting that 08 article by Munchau….his articles on the crisis had resonated strongly with me but had not realised how much he was agead of the pack with his views – his analysis back then was very good

@ OMF

the hopes of those who believe that the ECB can be persuaded to ‘do the needful’ are at odds with the German Constitution,the Maastricht Treaty and the political landscape of Germany

I am with you in believing that it is over for the Euro as we know it – Germany will be the first to leave

even if the ECB relented tomorrow and no treaty changes had to go through ,the scale of the debt problems and the actions required to deal with them are too severe to be resolved while keeping everyone on board

@All Spaniards

Tuff times ahead. How about an alliance?

Rajoy won’t have time to celebrate victory [PressEirope Review Spanish Press]

On the eve of the election, the Spanish economy sank into the bailout zone alongside Italy — yet another reason for outgoing Prime Minister Rodríguez Zapatero and his newly elected successor, Mariano Rajoy, to make a joint gesture, as early as Monday, which clearly shows that Spain can quickly and effectively adopt all of the necessary economic decisions before the return of further uncertainty about European debt,. … A rapid deterioration of the political capital that voters have given to the new administration would not only be a worrying perspective for the PP, but also for the entire country, which has to contend with a crisis that will require significant sacrifices. Rajoy, who avoided mentioning these sacrifices during his campaign, stressed the virtues of a simple change of government. … However, the gravity of the economic situation is such that he now has to put an end to any ambiguity by presenting his government’s programme and the team that he has designated to implement it.

http://www.presseurop.eu/en/content/press-review/1194881-rajoy-won-t-have-time-celebrate-victory

The EU Commission are producing proposals on Eurobonds because they were asked by the EU Parliament to do so. I am sure that Germany will “constructively engage” with the Commission on its Eurobond proposals in exactly the same way that Ireland will “constructively engage” with the Commission on its CCCTB proposals, i.e. they’ll politely tell the Commissioners what they can do with their documents.

Given that Germany has spent the last six months or so completely opposing any increase in its liability for the EFSF, there isn’t a shred of evidence that Germany is going to change its position at this point, and agree to any increase in its contingent liabilities.

Also the fact that Germany wants some new “rules” is just normal operating procedure, and cannot be taken as a sign that a big change in policy is imminent. It is like background radiation – it would only be noteworthy if it stopped.

The ECB’s reluctance to “print money” has little to do with some collective memory of wheelbarrows full of Reichsmarks in 1923, and everything to do with becoming the largest creditor to Italy etc. and then taking a write-down when Italy eventually defaults, and then “going bust” as a central bank. While central banks are not capital constrained in any way as far as I can tell, Draghi is not going to want to be known as the guy in charge when the ECB went bust. hence he spends a lot of time talking about credibility. If the ECB does need to be recapitalized then German (and other EU) taxpayers are on the hook for this, hence Germany’s reluctance to print money also.

It is still hard to see how this will play out without ending up with a smaller Eurozone, which I think is what the AAA countries want, though whether this can be practically engineered is another question. I imagine there are a lot of ‘green papers’ on topics such as “dual currencies”, “currency redenominations”, “capital controls in the EZ” etc. being drafted right now.

@OMF

I can buy Germany being the one to leave the Euro as a plausible scenario and it’s one I have mooted on this blog more than once. She might even take a small core with her too… but no country that was so big they might consider themselves an equal – quelle horreur.

Consumer sentiment is shifting with all this carry on. I was at a market research briefing last night – looking for reactions to different financial products – and I picked up a strong current of people wanting to only keep their money in short term/quick access accounts. Everyone seems frightened they’re going to wake up one morning and find their savings are worth nada or the government has taken a slice of them over the weekend. A lot of people also said they are currently keeping more cash at home than they usually do. I wonder if burglars know that?!

I wonder when France will get its downgrade? If they can downgrade the USA I’m sure they will do the same to France – having bought the put options and placed the spreadbets beforehand of course.

@Brian G,

The EU commission brings the proposals to the Parliament and council of ministers. The commission supposidly works by getting feedback from all stakeholders and then producing proposals. Pehaps they looked at Philip lane and co’s proposal. on ESBIes So they wouldnt be directed by parliament to come up with Eurobonds.
The EU parliament and council of ministers should approve the commissions proposals.
If the commission and paliament are going to be sidetracked or ignored completly on such a major issue then the EU is being run by a German French axis.
They are the institutions responsible for looking after all Europeans. Dr. Merkel is responsible for Germans.
In anycase Sarkosy and Merkel have both spoken of the need for further economic and political integration.

Things are getting strange, I’m starting to worry
This could be a case for Münchau and Scally.

I didn’t know that Belgium has quite so high a debt per capita figure. See link (you can slide it along the years)

http://www.payplan.com/debt-news/2011/11/22/the-eurozone-debt-crisis-explained/

@Chris

In this case the EU Parliament requested the EU Commission to produce these proposals, though I’ve no doubt that many in the Commission were happy to accept the request. Here’s the resolution – note that the EU Parliament helpfully included all the Powerpoint bullet items for the “value-proposition/benefits” slide just in case the EU Commission didn’t get it.

Calls on the Commission to carry out an investigation into a future system of Eurobonds, with a view to determining the conditions under which such a system would be beneficial to all participating Member States and to the euro area as a whole; points out that Eurobonds would offer a viable alternative to the US dollar bond market, and that they could foster integration of the European sovereign debt market, lower borrowing costs, increase liquidity, budgetary discipline and compliance with the Stability and Growth Pact (SGP), promote coordinated structural reforms, and make capital markets more stable, which will foster the idea of the euro as a global ‘safe haven’; recalls that the common issuance of Eurobonds requires a further move towards a common economic and fiscal policy;

You might think they would have looked at Philip Lane’s proposal, but they didn’t. There’s an Annex on a “Review of the Literature on Stability Bonds” which references about 20 papers, but I didn’t find any reference to the ESBies one.

@ DoD

The boomerang review is excellent

Worldwide debt was $82 tn in 2002 and is $195tn today. Wow. What was it at the dawn of Thatcherism? $20 tn maybe.

How many planets to service $200tn ?

” The Irish wanted to be not Irish any longer”. I suppose the Irish are back to being Irish “in a very real sense” again.

And California spends $6bn on prisons and $4.7bn on Higher education. That prison fetish is going to bankrupt the US if healthcare doesn’t get there first. I have heard a few investment pros say the US will sort itself out faster than Euroland because it always does but I think that underestimates the level of dysfunction operational in US society today.

http://www.youtube.com/watch?v=Tb34jE-Uf6k

Low on tolerance, high on ridicule
Even the infirmary’s inhospitable
Assembly required
Metal detectors seeming unjust but inspired by shots fired
Terms like zero-tolerance and lock-down
Aging out, if you ask me, does not sound
Like education
But I suppose that’s a ’cause and effect’
When the city spends more on incarceration

How many planets to service $200tn ?

Seven_of_9: “You gotta be kiddin me! The Earth is quarantined. I can’t even go home. The Federation, on the advice of its senior Ferengi advisor, will have nothing more to do with such odious idiocy. Even The Borg are fearful of flying anywhere close to Earth due to the fear of contagion. You humans!”

Mmmmm, glad I went for the Garrett Ace 250.?