Scally and Münchau on the euro zone crisis

This post was written by John McHale

Wolfgang Münchau and Derek Scally each have thoughtful (and complementary) pieces on what it will take to solve the euro zone crisis.  (Apologies for linking to these so late in the day.)

Not mincing his words, Wolfgang Münchau makes it clear what won’t work:

The consensus view in Brussels and Berlin is that the crisis can be solved by technocratic governments imposing structural reform and austerity. That proposition is, in my view, insane. In any case, it will be tested shortly. Mario Monti, Italy’s new prime minister, is about to introduce a programme of reform and austerity. I wish him luck, but I doubt the bond markets will change their view on the sustainability of Italy’s debt in the absence of outside intervention. We have gone way beyond the point at which this crisis is solvable by standard instruments of economic policy. The survival of the euro will now depend on whether Ms Merkel or Mr Draghi, or both, will blink.

Derek Scally provides a useful window on German thinking.   I would be especially interested in thoughts on his closing paragraphs.

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.

Far from holding the euro zone hostage to its hyperinflation history, some German analysts see Merkel readying herself for a euro zone deal, aided by her two new pragmatic allies in Frankfurt.

“Pushing for a new euro zone regime of rules is exactly what was to be expected from Berlin,” said political analyst Jan Techau, director of the Carnegie Europe think tank in Brussels.

“What people don’t understand is that this package of rules is the political price Merkel needs for German concessions on the ECB.”

71 Responses to “Scally and Münchau on the euro zone crisis”

  1. PR Guy Says:

    “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’ …

  2. The Dork of Cork Says:

    Maybe if the Irish are allowed to produce Mefo bills on the sly like.
    We can then purchase Eurofighters to stimulate the core , we can also reduce our unemployment by turning our Air Core into a Force……… a win win situation.
    We can Guard the western shores of the Reich while dogfighting with the boys in blue.
    The Few were always overrated anyway……. we can take them Gunther.
    http://www.youtube.com/watch?v=ZWPBj4xiNRk ………. maybe.

  3. grumpy Says:

    “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.

  4. Brian Woods Snr Says:

    Now tell me again. The good olde US of A never paid a penny (aka: cent) to bailout a devastated West-Germany. Now that would not be the same West-Germany which hadsuch a problem with its uber-strong D-Mark in the 60s, and zunk the U-UK now would it? Not a chance!. And that would not be the same Germany which has ‘defaulted ‘ on some of its WWII reparations, now would it? Not a chance! That’s all right then? Noooooo

    “I know the world is flat - ’cause it sez so in the Annals of the Heroic Society of the Flat Earth”

    On the QT - and very hush-hush, I know DoK reads this mag tooo! ;-)

    Brian

  5. hari naidu Says:

    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 .

  6. seafóid Says:

    @Pr Guy
    I love the word ‘insane’ …

    In German you could say sinnlos which means “nuts” but also “without (Prof) Sinn”

  7. David O'Donnell Says:

    @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

  8. hari naidu Says:

    (con’t)

    US beltway politics on deficit reduction may impact EZ and rest of Fx market more than anticipated. USD hegemony may be running out due to another kind of insanity - poitical.

  9. DOCM Says:

    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

  10. David O'Donnell Says:

    @grumpy

    So the highest volatility when the Irish Bank Guarantee announced - and the low point on the stock market reached on nationalization of Anglo-Irish Bank! It follows that Fianna Fail saved the global financial system? And business as usual in Berlin.

    I’m feeling better now - there must be some phenomenon out there of such exceptional resilience (which I take to be your ‘plausible!’ key point) that it simply trundles along regardless … we must all be in the MatrixsQuid Zone … and can simply lie back and live, and dream, and die happily in delusion … a little too deterministic methinks … but great to be able to think for 30 seconds …

  11. David O'Donnell Says:

    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

  12. David O'Donnell Says:

    Ja! Something is up …. purely on intuitive sense of Spiegeil Lebenswelt Herr Meneutics speaks!

    Merkel Under Pressure to Say ‘Ja’ to Euro Bonds

    Chancellor Angela Merkel hates the idea of euro bonds. But with the European Commission set to present a feasibility study on Wednesday, pressure is mounting for her to change her tune. If she doesn’t, say some, the debt contagion will simply continue to spread.

    http://www.spiegel.de/international/europe/0,1518,798994,00.html#ref=nlint

  13. DOCM Says:

    @ 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!

  14. Paul Hunt Says:

    The bond markets need to calm down. They bought into, and perpetuated, the fiction that sovereign spreads had no relevance in the EZ - and that lending to banks required a negligible spread over the sovereign (and we know of one major player who profited from a previous Greek government’s deception). It will take some time for politicians to secure the democratic legitimacy to sort out this mess, because voters everywhere were misled - and, as a result, they require considerable reassurance.

    If the bond markets don’t, they will invite all sorts of ill-thought through, populists reactions in terms of transaction taxes, restraints on ratings agencies and the outlawing of shorts. But both the markets and the governments of the ‘creditor’ countries need to realise that imposing fiscal austerity (which may be codified and quantified in a set of legal rules and sanctions) on the PIIGS will be counter-productive without developing equally stringent and quantifiable rules and sanctions governing structural reforms. Even the most well-intentioned government will find ample excuse to duck and dive when it comes to implementing meaningful structural reforms. We can see this in Ireland where the Government is making a total mockery of the Troika’s intent about structural reforms.

    They’ll fudge and fiddle and they simply won’t implement them, nor I suspect will the Portuguese nor new Spanish government, without effective external pressure and detailed supervision. The technocratic regimes in Rome and Athens may have the intent, but they are relying on politicians with the backbone of a chocolate eclair.

    If external pressure is to be applied it needs to be applied in terms of both fiscal adjustment and structural reforms. Eliminating structural inefficiencies and reducing rent-seeking and consumer-gouging will offset the impact of the fiscal adjustments on the vast majority of citizens. Absent this, the economies will flat-line and popular opposition to fiscal adjustment will grow.

    The PIIGS may bridle at this increased circumscription of their sovereignty, but needs must and it might engender some popular interest in ensuring effective democratic governance when the external governance is relaxed so that a requirement for sich external governance is never again required.

  15. DOCM Says:

    @ 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”!

  16. David O'Donnell Says:

    Blind Biddy is totally and absolutely opposed to the idea of EuroBonds - and will die before she signs any Treaty changes to such effect

    - ‘Why’, says she, ‘did Hanafin rob me pinshun’ only to put into those EuroBonds” … ‘and DeutscheBank’ …. **&&%^$$ ‘course if St. Joan gives me back me bit o da pinshun, and the ECB write off at least €60 billion of dat odious vichy_banking system debt so that poor Patricia the Irish Sovereign_in_lonely_exile can come home - then and only then let my signature be written on the tweak to the treaty. I still remember Limerick, youknow.’

    Thank you Biddy; I’m sure An Taoiseach will take notice.

  17. disgruntled observer Says:

    @ Grumpy

    You’re not alone in your reading.

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

    Scroll down to the graph.

  18. Paul Hunt Says:

    @DOCM,

    Structural reforms are required more widely than the PIIGS - even if they are the most egregious offenders and stand to gain the most if they were properly implemented. And, yes, these should be directed using the Community method. But how will this be possible when, for example in the area of energy and climate change policies, the Commission, aided and abetted by the Council and Parliament, has created a paradise for subsidy-grabbers, rent-seekers, regulator-capturers and consumer-gougers?

  19. Eureka Says:

    Show’s over lads - time to move on….

  20. ObsessiveMathsFreak Says:

    Derek Scally provides a useful window on German thinking. I would be especially interested in thoughts on his closing paragraphs.

    Far from holding the euro zone hostage to its hyperinflation history, some German analysts see Merkel readying herself for a euro zone deal, aided by her two new pragmatic allies in Frankfurt.

    For what it’s worth, I think these German analysts are dangerously incorrect in their conclusions. For what it’s worth, here are mine.

    It has now become apparent that the Euro crisis will continue without resolution until finally something or someone gives. I believe that someone will in fact be Germany, but I disagree with the generally accepted opinion that when Germany “blinks”, it will simply start printing money.

    Firstly, I believe that the final event which precipitates a German reaction will be when their own borrowing rate begins to rise; These are currently at 2%, down from ~3.5% in May. However, following the now inevitable rise of Italian, Spain, and finally French borrowing rates, Germany’s rates too will following. I believe that the German’s will crack when their own bond rates rise above about 5%.

    As the short trader Kyle Bass is so fond of mentioning recently, Germany’s debt to GDP ratio is currently 80%, and they have not yet recapitalised their banking system. Once German bond rates begin to rise to Italian levels–which they are guaranteed to do as the crisis continues without resolution–Germany will begin to have trouble financing itself and the last domino in Europe will begin to teeter.

    Now secondly: The general consensus among Anglophone analysts is that at this point, Germany will cave in and allow the ECB to print money, buys bonds and generally start the party again. Note that I said anglophone analysts and I would include many US/UK trained German analysts in this cohort. The academic and mostly historical experience of such analysts is that government’s under pressure devalue their currencies and print money to bail out banking systems.

    I believe that their conclusions are fundamentally wrong when it comes to Germany and I hold this for two reasons:

    Firstly, the German experience of hyperinflation has achieved the status of a collective folk memory, and will present an impossible emotional and intellectual obstacle to any acceptance of the kind of quantitative easing which ECB will require to resolve the crisis. The German public and public establishment will collectively be unable to rationalise, justify, or accept money printing on any large scale, regardless of alternative consequences.

    Secondly, the enormous deposit flows into Germany over the course of this crisis places the country in a strong position in the event of any eurozone breakup. As the country with the greatest percentage of Euro cash deposits, Germany will have the flexibility to dictate to a large extent the new exchange rate of its Deutschmark-2.0 with the emerging plethora of national currencies. Of particular note here is the presence of large amounts of personal savings of foreign nationals within Germany. The German’s have the flexibility to denominate these in whatever currency they please in the event of a breakup.

    In summary, for these reasons, I believe that the euro crisis will evolve as follows:

    a) The crisis will continue without resolution, past Italy, Spain and France until
    b) German interest rates rise above 5% and the German banks and State begin to have difficulty financing themselves. At this point
    c) Germany will not do as the Anglophones expect and allow mass printing of Euros but instead
    d) Germany will unilaterally leave the Euro, using its control of euro deposits to mitigate unfavourable exchange rate developments and protect its own national(s) banking system.

    At this point
    e) The eurozone will break up into 17 national currencies once again and for a week or so
    f) OMG!!! TEH ATMS WILL STOP WORKING (chaos!)
    g) but will be back within the week, and individual countries will resolve their banking systems and sovereign debts each in their own way, as it was in the beginning.

    I also postulate that:
    h) As a result of the continued incompetence, mismanagement, and disconnect on the part of democratic leaders, as well as sue to long term unemployment and austerity measures, faith in government and the democratic system and rule of law will weaken across the continent, and in addition
    i) Continental culture will experience a decade of anarchism, nihilism and hedonism as a response to societies general loss of faith in itself, similar to what occurred during the 1970s.

    In short, expect a lot of devaluations, nationalism, poverty, drugs, and new age punk rock before 2021 rolls around.

  21. hari naidu Says:

    @ 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

  22. hari naidu Says:

    @ 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

  23. hari naidu Says:

    @ 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.

  24. bazza Says:

    “What people don’t understand is that this package of rules is the political price Merkel needs for German concessions on the ECB”

    What?!? The ECB is not totally independent from the German government??? You’d never guess!!!

    The ECB is not a German institution and Sarkozy and Merkel do not run the EU. Germany is only in the driving seat because of the demand that they exported to the periphery over the last 10 years. And Ireland has contributed disproportionately to bank stability in Europe.

    The Irish and other governments need to assert this at every opportunity.

  25. hari naidu Says:

    @all

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

  26. Ceterisparibus Says:

    @PR Guy
    Insane! Noticed a northern European study recently which had 40% of the population suffering some form of depressive illness and an American study last week said one in five people were taking Psychiatric Drugs.

    Do you think there could be a connection?

    @Grumpy
    This thing won’t open your charts. What’s the essence?

  27. Ceterisparibus Says:

    @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.”

  28. David O'Donnell Says:

    @John McHale

    On Scally - don’t think so - rules too simple - and one doesn’t need an encyclopedia of social science to know that “rules” are regularly broken and to interpreted differently in different cultures: similar to simple idea that David Cameron happy with a change in Working Time Directive from Dr Merkel … much bigger

    I now suspect that it is FEAR - FEAR that the Big Big Black Hole in the German FIREd Financial system can no longer be hidden - and that Germany may need the ECB as much as the rest of the EZ - and Geithner now in Tango with Dr Merkel as Nikki stages left: Simon Johnson
    …..
    Simon Johnson (link from DOCM in earlier thread)

    Deutsche Bank and, if necessary, the German government should be required to inject substantially more capital into Taunus. Allowing business as usual is asking for trouble, particularly as Deutsche wants to remain focused on relatively risky investment banking. Recently it named as chairman Paul Achleitner, the finance director at Allianz SE, the German insurance company, and an ex-Goldman Sachs executive, worrying even some of its shareholders.

    This would be a good time for Congress to dig more deeply into the risks that Deutsche Bank poses to financial stability in the U.S. and around the world.’

    The PLOT Thickens! The MatrixsQuid really does rule the western world. Could the Tanus Mountains outside Frankfurt become Angela’s Tora Bora? She certainly doesn’t want to be remembered in history as outLehmann_ing LehMann - which it would be were one of the major DeutscheBankes to wobble …

    http://www.bloomberg.com/news/2011-11-21/johnson-deutsche-bank-could-transfer-contagion.html

  29. DOCM Says:

    @ 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

  30. DOCM Says:

    @ Hari Naidu

    For the latest cf. FT

    http://www.ft.com/intl/cms/s/0/1e021a3e-1463-11e1-8367-00144feabdc0.html#axzz1dhbb5nUH

    Stark does not seem to be up to speed. The essential point about the “Third Option” (as opposed to the “Third Man”, now that Austria is increasingly in the frame) is that it would not be very different from the present CDO, sorry EFSF, but that hard cash would be required to provide the necessary credit enhancements.

  31. seafóid Says:

    @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

  32. hari naidu Says:

    @All

    Mario Monti is meeting Merkosy In Strassbourg on Thurday. I hope they learn a few things from Monti on Eurobonds.

    @…pribus

    Of course the logic of policy decision-making process is changing faster than we can keep up with and Merkel is learning (also) from Weidmann that fiscal consolidation is paramount because of German debt/GDP levels. Weidmann must know how they book entries in German balance sheet.

    Evidence above shows Germany is not an *exception* - at this point in time.

    But Krugman had the most silly column today about *European Romantics* whom he called technocrats (like himself!). I challenged him on historical evidence that Rome Treaty (1957) was based on *No More Wars*. De Gaulle and Adenauer signed it because that was a political process which demanded it after two great wars and slaughter on the continent….(My comments were not published because I called his nonsense!)

  33. Paul Hunt Says:

    @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.

  34. The Dork of Cork Says:

    @Obsessive.
    Germany does not have to accept the printing of Euros.
    It could for example Print a Bill of Exchange if it remained credible.

    This Bill of exchange must be for future real organic growth rather then insuring past flawed growth as in the Anglo Promissory note.

    For example it may decide to go for almost Guaranteed future Growth to insure the stability of the note.
    Therefore Germany could declare its developing a French scale nuclear programme and paying for it via Bills of Exchange.
    This would eventually result in higher Coal & Gas consumption in the other parts of the Eurozone - stimulating Eurozone growth.
    Euro Crisis over - but the Russians would not be pleased.

  35. seafóid Says:

    @ 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.

  36. seafóid Says:

    @ DOCM

    What Münchau said in that piece is worth a reread considering where we are now with 50% house price falls anyway

    “Under this setting, the priority might be not to impede the fall in asset prices. Real house prices in the US, the UK and several other economies might end up falling by some 40-50 per cent, peak-to-trough, in the downward phase of this cycle. Let this happen and do not implement policies to prevent this fall - such policies might alleviate some pain in the short run for some people but will make the adjustment last a lot longer.

    Second, monetary policy should be geared towards price stability first and foremost. When inflation expectations rise, real interest rates should be positive. This would necessitate a large interest rate increase in the US and further interest rate increases in the eurozone as well.

    Third, allow some defaulting banks to go bust.

    Fourth, implement long-term policies designed to reduce volatility. Among these are: a change in the monetary policy framework to take explicit account of asset price developments; the removal of pro-cyclical incentives in the banking sector; stricter regulation of mortgages, such as the encouragement of fixed-rate loans and the imposition of maximum loan-to-value ratios; more exchange-rate flexibility in countries with fixed or semi-fixed exchange rates and, of course, the development of alternative energies to reduce our reliance on oil.

  37. PeterJ Says:

    @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.

  38. DOCM Says:

    @ seafóid

    It is sheer dread of a Minsky Moment that will cause the various parties to find a compromise. In fact, it would be interesting to hold a competition to make up a list of such possible moments between now and the fifteenth final farewell performance of the Merkozy duo on 9 December.

    My favourite is that one or other of the rating agencies, probably Moody’s, will be stupid enough to downgrade France.

  39. Colm Brazel Says:

    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.

  40. Brian Woods Snr Says:

    @ Seafóid: “… the development of alternative energies to reduce our reliance on oil.”

    That will take longer than this mess takes to sort itself out: two decades min. The financial crisis will be surely be over before Christmas. 8)

    Brian

  41. hari naidu Says:

    @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!

  42. The Dork of Cork Says:

    Nah - nothing will change until the monetory system divorces or at least separates itself from external oil. (Therefore as it Depletes its token money will deplete)
    Creating interest free money to build Real Energy Capital is the only mechanism - the Financiers don’t like it though.
    They prefer to continue the rundown of western Industrial systems that began in the late 60s.
    They are heavily invested in entropy as I am - as I think they are winning God bless them.
    Only their Mothers love them I guess , but Mammy & Gold is enough for some.

  43. hari naidu Says:

    @ 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.

  44. Joseph Ryan Says:

    @Grumpy

    re the necessity for sugar coating unpalatable medicine in Germany.

    Unpalatable medicine is never easy to take. The controlling physicians showed little sympathy for the patients in the case of the PIIGS.
    Now that a major section of the European body politic needs to swallow a solidatité pill, it is a big big deal.

    Germany, however large and powerful, must accept that it is part of a currency union that is falling apart and that it has pushed every failed solution over the past three years. Yet Germany and the ECB despite the demonstrable failure of their solutions, stands firmly in the breach of alternative solutions.

    It is now make up your mind time. In or out.
    Back to the Dmark at 30% to 50% revaluation or backstop the slide to chaos either through some QE or Eurobond or indeed through buying back German bonds in Non German EZ countries.

    The pill that Ireland swallowed not only had no sugar on it but a large coating of moral hazard salt was applied just to make sure we got the taste.
    In such circumstances it is a bit hard to swallow the necessity of sugar coating the physicians medicine.

  45. David O'Donnell Says:

    @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/

  46. David O'Donnell Says:

    Interview with Anthony DiMaggio on the Tea Party here:

    http://monthlyreview.org/press/news/thoughts-on-the-tea-party/

  47. seafóid Says:

    @ 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

  48. seafóid Says:

    Are we there yet?

    http://www.youtube.com/watch?v=wRwwUZLV-IE

  49. The Dork of Cork Says:

    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.

  50. Joseph Ryan Says:

    @Seafoid

    He’s probably working in Walmart unloading the containers coming from China.

  51. PaulM Says:

    @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

  52. The Dork of Cork Says:

    Hew Strachan
    Chapter 5 The War in Northern Waters 1914-1915
    “it impinged directly on their lives in a way which a small imperial professional army , committed to imperial policing , could not.
    Naval spending , having more then doubled between 1884 and the end of the century , doubled again by 1914………..the navy was paid out of taxation and by 1914 consumed a quarter of total tax yield, Thus British seapower was a means by which fixed capital was brought into circulation , and wealth redistributed ;thus too,by 1914 Britain unlike France or Germany, already had the machinery to pay for war out of income…the cost of the navy had a second,albeit more indirect , democratizing effect.
    The commitment to cheap food and the refusal to protect British agriculture, the symbols of liberalism attachment to free trade , made Britain disproportionately dependent on grain from overseas……indirect subsidy for the populations food supply……the need to remain at the forefront of new technology made it a force for innovation & investment in British engineering and heavy industry - by 1913 one sixth of the British workforce - according to one presumably exaggerated but significant calculation was dependent on naval contracts.
    These links between the navy & the nation was kept active by a flair for publicity & propoganda…….. made a nonsense of the idea of a silent service”

    I am not advocating war spending but what I am saying is that western spending post 1980 has certainly been based on depletion - once the Empire kept naval spending high yes it would deplete India but that does not mean that spending itself cannot create wealth.
    The large French Nuclear industry is probally the only example of this philosophy remaining on this planet but is slowly being run down now as it enters a neoliberal stage of regression.

    PS notice it was the war itself that destroyed Britian not the technological capital investment pre 1914.

  53. David O'Donnell Says:

    @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

  54. Chris Says:

    The Germans want tighter control, the perihpery wants Eurobonds. The comission is saying we need controls and Eurobonds.
    Its not that complicated. A fiscal union is nessecary including fiscal transfers as well as bonds.
    OF course its more beneficial to the perhiphery. Where did Germnay think it was going with integration, did it think it could stop at Monetary Union without Economic Union?
    Germany doesn’t really have a choice. Its just delaying.

  55. Bryan G Says:

    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.

  56. seafóid Says:

    @ Bryan G

    “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”

    Do Germany’s exporters want a currency that is 20% more expensive than the piggy Euro compared to the dollar ?

  57. PR Guy Says:

    @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.

  58. PR Guy Says:

    And as we all know, if Germany found itself out of the Euro with a newly minted, expensive currency…. well the Chinese seem to have found a way to keep the value of their currency down and they are not the only ones to learn from. There’s always the option to stoke up domestic demand with a call to patriotism too. And so what if they are a bit more expensive than the PIIGS? Never mind the cost, feel the quality. This is not an insurmountable hurdle.

  59. Chris Says:

    @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.

  60. PR Guy Says:

    Spain’s Rajoy has said he won’t give any details on his plans for the economy until just before Christmas. I wonder what ‘the markets’ will think of that? I guess in Spain they know a lot about waving a red cloth at a bull.

    ‘Feliz Navidad’ Mariano.

  61. Ahura Mazda Says:

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

  62. shaun byrne Says:

    @Ahura Mazda
    Good one!!
    Although before the week is out it may not be funny

  63. PR Guy Says:

    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/

  64. Bryan G Says:

    @seafóid

    At this point it is a question of choosing the least bad option. For Germany a smaller EZ would provide fewer benefits for exporters, but also fewer headaches for politicians. Also if higher German taxes to pay for fiscal transfers in a size 17 EZ, are included, the net gain due to the artificially low exchange rate is reduced.

  65. Bryan G Says:

    @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.

  66. Mickey Hickey Says:

    A lot hinges on the closing comment:

    “What people don’t understand is that this package of rules is the political price Merkel needs for German concessions on the ECB.”

    That is the nub of the matter and as long as our Gov’t continues on the current path of propping up the privileged and uncompetitive we will continue to become more indebted as each month progresses.

  67. seafóid Says:

    @ 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

  68. David O'Donnell Says:

    @Mickey Hickey

    … propping up the privileged and uncompetitive’ … and they don’t even need an Irish Tea Party

    @seafoid

    Yes - empirical confirmation by DiMaggio of my suspicions - allied to top 4 contributors to tea partiers in Washington as [1] big arms corp I [2] american banking [3] big arms corp II [4] de K__ochBrooz … [the leetle peeple contribut but 4% of their funding dosh - top 4 measured in millions each ………
    I see parallels in gobbelzian manipulative strategy with the rise of a certain party in mittel europa in the 1930 - gettting the desperate and fearful lower middle class on board and providing them with an appropriate scapegoat on which they can project their existential insecurity is the key …. Erich Fromm Escape from Freedom (1941) still worth reading …

    …. and Lewis grabbed this well in California on the ‘all tax bad’ projection …. polar opposite to the Swiss canton where practically all citizens actually do vote on local tax matters ….

  69. David O'Donnell Says:

    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!”

  70. Chris Says:

    @ Brian G.
    Thanks for the link to the commissions stability bonds proposal and the info that it was directed by parliament.
    This is where we are heading.
    Interesting to see M. Montis wrok referenced.
    After reading this it seems Monti has a strong understanding of where things are and the challenges the EU faces.
    Of course gaining consensus from the council of ministers on every new proposal is a major slower of progress. e.g U.K. on the financial transaction tax, Germany on Eurobonds. Then making sure proposals are enforced is another headache.
    He mentions that it may be better to have a qualified majority of the council of ministers give the commission power to enforce new proposals. Treaty change needed for that.
    A larger step is needed really - a EU treasury would have the power to delay transfers to states and keep them in line while helping growth in the periphery.

  71. Mariann Sutulovich Says:

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

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