The ECB’s Strategy Post author By Philip Lane Post date December 21, 2011 The Free Exchange blog has a useful entry here. Categories In Uncategorized 74 Comments on The ECB’s Strategy ← Olivier Blanchard. 2011 In Review: Four Hard Truths → How Bad Ideas Worsen Europe’s Debt Meltdown: John H. Cochrane 74 replies on “The ECB’s Strategy” Its hard to turn a Goldbug into a $ bug but the ECB is giving it a good go, fair play to them. Their core objective seems to be all about transferring European potential wealth to the US / China. Fiscally neutral budgets at this leverage is some kind of sick joke. Its clear as mud that the ECB could not give a flying f…. about future European wealth creation – its a strange concept to them as their clients already have all the wealth – why would you want more ? You would just want to play with your toys under such circumstances. They just seem to want a return on bank “investments” – return on what exactly ? Wealth remains constant at any given time , however if your policies are all about destroying stocks of capital to get a paper return on malinvested credit then what is your true objective ? Growth through entropy is a very Orwellian concept. There is some very deep agenda here above mere Nations that I can’t quite put my finger on. I can not stress this enough: f@ck the ecb! Pathological defenders of banks. If one good thing comes of this at least they’ll be out of a job. Alex comments on European strategy http://www.telegraph.co.uk/finance/alex/ Merry Christmas Bill Gross on why QE type strategies are going to run into the sand. http://www.ft.com/intl/cms/s/0/b5f3af76-2712-11e1-b9ec-00144feabdc0.html#axzz1h7OE2VGG @DoC: “Growth through entropy is a very Orwellian concept.” delta S > q/K “Hey up! Olivier, try get this to go to equilibrium, there’s a good chap!” Orwellian KO! Brian The quality of analysis presented by the ‘teenage scribblers’ in The Economist has been on a long term trend decline with the occasional blip. This seems to be one of the blips. What the ECB is doing, belatedly, is buyng some time and space for the politicians to craft a solution; but this is not a solution or the solution, but it is a necessary part of the solution. There is little consensus on what generates economic growth but if you can’t export your way out of trouble or if you don’t have a growing, young, well-skilled, eager-for-work workforce with a declining depdendency rate, then the answer is increased productivity and efficiency which means structural reform. And the nature of structural refrom varies from economy to economy depending on the customs and practices that have developed over time. Neither financial repression nor excessive wage repression are options as both capital and labour are mobile. This is certainly one area where one template does not fit all. But the requirement to reduce dependence on sovereign bond markets is common to all and the ‘fiscal pact’ is an attempt to do this, but it is also a means, how ever blunt and crude, of compelling governments, politicians, policy-makers and voters in badly governed countries to accept the requirement for meaningful structural reforms to ameliorate the impact of fiscal retrenchment. There is some evidence that this penny has dropped in most of the PIIGS – and even in France and Belgium. But Ireland stands proudly alone confident in its victimhood at the hands of the ECB, in the endless bounty-generating capability of its MNC export enclave and in the remarkable resilience of its non-sheltered sectors. And all of this allows it to ignore – and to cunningly conceal – the glorious and economy-sapping dysfunction in its sheltered sectors. Sure, ’twill be grand while it lasts. If it lasts. I believe that the analysis from Free Exchange is broadly correct. A key sentence for me is this one: “Here again, the ECB may have been underestimated. While it believes politicians have certainly made matters worse, first in their initial insistence (since recanted) on private-sector haircuts and regulatory pressure on banks to deleverage, the ECB still believes the ultimate solution is political: the commitment by sovereign governments to fiscal balance.” So, the ECB believes that issues of public finances are at the root of this crisis. This is the key delusion in this whole crisis. I advise everyone to take a look at the bond yields of Slovenia: more than 6% on the 10Y when I took a look last week. Slovenia has a debt to GDP ratio of 39% … This is a very perceptive comment – for The Economist at any rate – as it underlines the link between the monetary, economic and political dimensions of the crisis. However, it fails to adequately recognise that the European Union is based on law. The respect that the participating countries have for the rule of law is, quite literally, the cement that holds the entire undertaking together. (In normal circumstances, by way of example, the behaviour of the present Hungarian government, in failing to respect what are considered elementary democratic standards in the other countries of the EU, would dominate political discussion in Europe). As I have remarked on another thread, the EU cannot be viewed as some form of horse opera with set stereotypical roles being assigned to the various players. Each must respect its legal mandate and each has its own legal service – like the Member States – to ensure that it does (and to take other institutions or countries to the European Court of Justice if there are perceived breaches). The ECB is at the very limit of its mandate. It is for governments to deal with the other aspects of the crisis. Unfortunately, despite the best efforts of Martin Wolf, there is still no general academic recognition that at its core the crisis is one of commercial imbalances. An article in FT Deutschland underlines the nature, still growing, of the problem of the impact of the mercantilist policies followed by Germany for the past ten years; an export surplus with 20 of the 26 other countries in the EU (according to calculations carried out for it by the Ifo-Institut). The exceptions are countries such as the Czech Republic and Slovakia as these deliver parts to the auto industry (from factories shifted there, one would assume). Dani Rodrik is quoted as agreeing that these imbalances are the core cause of the crisis. http://www.ftd.de/politik/konjunktur/:export-europas-unwucht-aus-deutschland/60145777.html Lagarde’s reference to it “taking two to tango”, and for which she was slapped down at the time, gets a mention as does German lobbying in Brussels to ensure that trade surpluses not be considered in any way as a matter for sanction in the context of the Six-Pack. (This is, of course, obvious. What has to be sanctioned is administrative behaviour that blocks full implementation of the internal market and which artificially suppresses the general level of wages. Other major EU countries are as successful as Germany with regard to the first, shooting themselves in the foot in the process because they have been incapable of restraining wages). To add to the general insanity, the French press is now reporting that Sarkozy met Schroeder earlier this week to discuss the “successful” formula introduced by him and called Agenda 2010 and seems set on making it an element in his election campaign i.e. precisely five, if not ten, years too late. @ All A fairly predictable development! And in the right newspaper! http://www.thesun.co.uk/sol/homepage/news/politics/4014750/David-Cameron-EU-turn-over-treaty-Britain-may-sign-a-new-version.html But what weight do Clegg and Westerwelle have to recover the ground lost by their respective leaders at 5 in the morning? There’s related discussion on QE here as well: http://www.irisheconomy.ie/index.php/2011/12/19/mccarthy-time-for-a-whole-new-strategy-on-negotiations/#comments Frankly I find almost unlimited QE for the banks a sickener. They’ve taken over the politicians and the political process and are setting the agenda for democracies at this stage. Those who would like to examine what is at stake here should look at the life of Abraham Lincoln and the struggle against private banking. It’s a daft laugh that they can borrow their way out of their problems with the ECB lifting all their boats, meanwhile the sovereigns and taxpayers shafted by them, get to carry the can. So where’s IBRC in all of this? Are they not borrowing say ¢50 bn and buying all the ELA ¢3bn + annual repayments the ECB have shafted Irish taxpayers with? The QE for all banks will reward all the Anglos in EMZ. I notice this move occurs with the focus on German/French banks. Needless to say this dramatically highlights the daft guarantee once again. With ECB moves to rescue banks in this way, it shows the power of ECB re banks; it should have been handed the Anglo problem, which should on no account have been given to taxpayers’ …… So, can taxpayers set up their own bank and grab say ¢60 bn of the loot, and buy up all mortgage debt in negative equity in Ireland, repackage it as an OTC and sell it on to other banks in Europe or elsewhere. ECB bond auctions over? Honahan/Elderfield asleep at the wheel again and missed all the action? So, who got what? Which banks, where, how much? It all went well until I got to the nine last words of the second last sentence; “…their banks can no longer finance a growing economy?” Credit money is indeed needed for investment, but investment for producing stuff that you can sell abroad, repratriate the surplus and pay back both your principal and interest. A FIRE economy will never be able to do this, not ever. And a Production Consumption economy can no longer generate the required surplus either. Well, you can if you steal, cheat, pollute and lie. Add into this, that energy prices (a growing economy has a mandatory requirement for energy) will remain a significant proportion of overall economic costs (they will probably dip for a while before rising again) and you have a disaster in the making. No, let me correct that, the disaster is now, its arrived. I mentioned this predicament several times: you can ‘print’ all the money you do not need, but do not attempt that stunt with fossil fuels. You will get a most disagreeable suprise. No economy will ‘grow’ if its total debt payments are in excess of its surplus income. It regresses. Now, either our dear leaders are aware of this immutable fact: they are attempting to hide it from their publics, or they have clueless economists advising them. In case anyone was wondering what delta S> q/K is – (its in my post above): its the Second Thermodynamic Law. Trumps ALL other laws in this universe – especially the pseudo-laws of economics. S = disorder; q is a proxy for GDP; K is degree Kelvin. Brian Paul Hunt refers to reforms and while big picture visions are the default expectations of European leaders and institutions such as the ECB, if we go by the contributions to this blog, the impression is that the individual response puts a stress on legal parsings and hair splittings. The effort by the ECB is welcome and with the widening of collateral rules, it’s likely to increase its ‘non-standard measures.’ Mario Draghi knows better than most on the governing council that political decisions are paramount in particular to bring change to his native country Italy. Given Italy’s stagnation during a boom period, it’s stupid to expect a final solution to the debt crisis in the short-term. Before there can be a closer union, there must be reforms of failed systems. France’s 36-year straight run of annual deficits, raising the debt from 30% to 90% of GDP had to come to an end at some point. Ireland remains in denial and yesterday Enterprise Ireland bragged that 2011 was a record year for the sale of Irish companies to multinationals. So the taxpayer supports young companies only to see the promoters and early investors cash out before they provide any payback to the economy. Finland in 2011 has a negative net government debt as a ratio of GDP of 55%; in the year of the SSIA maturities, Michael McDowell said that the Exchequer was taking in too much money. @ DOCM I note that you’re back on your German hobbyhorse. Most of the trade surplus is ex-Eurozone. What would you like? Do as Apple did and outsource all its manufacturing to China. Domestic consumption is rising but Germany has a high public debt of more than 80% of GDP. Don’t just quote Martin Wolf but present your own more in-depth analysis of German trade links. The number of world class companies is a big factor in trade and the reason why Italy has so few cannot be solved by Germany. Think about that point. @incognito So, the ECB believes that issues of public finances are at the root of this crisis. This is the key delusion in this whole crisis. It is a theory that is totally unsupported by the facts, laughed at by those economists outside the Eurozone who saw the crisis coming and its disastrous logic demands solutions that are procyclical, guaranteeing that the crisis will become worse for those countries already in recession while benefiting those doing well from the crisis. However it is also a theory that suits the political base of the dominant political party in the dominant country in the EU, broadly suits the market liberal ideology dominant among European governments and the European Comission and one that also suits the European central bank as it fits in with its effective brief to protect the value of Euro savings and the profitability of the European Financial Services sector. History will not look kindly on the ultra-monetarists and their quest to sacrifice growth, social progress and equality to protect wealth. @DOCM, Germany is torn between two strategic objectives: (1) looking outwards and building on its strengths (and those of its economcially aligned neighbours) to allow a German EU to punch its weight globally with the BRICs and CIVETs and (2) looking inwards to ensure the EU retains the internal cohesion to support this global objective. It is trying to square this circle by making the less well-goverened parts of the EU more ‘German-like’. But this requires Schroeder-Hartz ‘wage repression’ – and your comment suggests that Sarkozy may be buying in to this. Politically, this will prove impossible to extend and sustain, but some structural reforms, whether under centre-left or centre-right governments, are unavoidable in the less well-governed member-states. In any event, the global mercantilist imbalances driven largely by China will subside eventually driven by internal governance dysfunction and demographic pressures. Ireland has no control over these forces. All it can do is to ensure its economy is flexible, resilient and efficient to deal with the impact of these global forces. It’s falling a long way short of the mark and there’s little indication that the ‘powers-that-be’ have any understanding of what is required. @Paul Hunt @DOCM The beauty of a left wing analysis is that it has predictive power:. The Euro has effectively forged solidarity between Europe’s wealthy and mobile upper classes (who collaborate) while dividing European labour (which has to complete) and marginalizing the unemployed still further. Can it be long before Europe’s now emboldened right plans a continent wide Hartz style assault on social welfare in the name of greater European coordination and competitiveness? You guys should try it sometime, beats blind faith in market solutions being optimal every time. @ Colm the ECB LTRO has been designed to safeguard Italian and Spanish banks much more than French and Germans ones. I reckon Italians took down 25-30% of yesterday’s action. I think that the New York Times analysis is more pertinent than the Economist’s http://www.nytimes.com/2011/12/22/business/a-central-bank-doing-what-central-banks-do.html?hp @ Shay Begorrah Blind faith? The lady doth protest too much, methinks. So the lessons of the financial crash means that state monopolies are always best? The individuals running them and the workforce ALWAYS put the public interest first! If you own the PC you’re using guess why it’s so inexpensive compared one that would be produced by a monopoly? There is no good or bad system; regulation is necessary in some areas as competition drives innovation and benefits the consumer in others. @Shay, DOCM can answer for himself if he wishes, but I think you are well aware that I strongly hold the view that those who make the most noise about advancing ‘free markets’ absolutely loathe, hate and detest such markets and will do everything in their power to secure and abuse market power, to suborn governments to provide concessions and subsidies and to rig and distort these markets to advance their narrow sectional interests in every way they possibly can. And, in a mirror-image of this crass and self-serving dissimulation, those on the left, either deliberately or unwittingly, but certainly conveniently, view this very antithesis of efficient, consumer-benefitting, competitive markets as the ‘real thing’ and use it to advance the benign omnipotence and omniscience of an all-embracing state apparatus staffed by paragons of virtue without a single selfish bone in their bodies. It’s bad enough trying to debunk one pernicious, but widely accepted, piece of bunkum; but trying to debunk two is a bridge too far. I give up. @ Paul Hunt Why give up when you are winning ? All you need is a week in the sun 🙂 Steve Bell http://www.guardian.co.uk/commentisfree/cartoon/2011/dec/21/steve-bell-ecb-loans-cartoon @ Bond, http://www.economist.com/node/17902827 Spain is exposed approx ¢360 bn to construction and property developers, two major banks need to redeem ¢100bn in 2012. Major revamp of their banking system with amalgamations especially in the highly secretive caja sector. http://www.reuters.com/article/2011/12/21/ecb-3yr-loans-idUSL6E7NL1OG20111221 Agree the effort is targeting Spain/Italy, but, alas, this is only a big sticking plaster to conceal the real problems, which is the underlying state of the economy itself, of which problems in banking is itself a system. Still believe German/French banks are siphoning this off as well. Why do we not have charts describing the take up on a one for one basis? Confirms for me with this action how little was done for us. Also confirms my own view we should get out and join with Osborne/Cameron in a protem sterling zone, that staying will be much worse than leaving both economically and politically and democratically! Doubt if any of those Spanish banks will be daft enough to purchase Spanish sovereign debt. But the casino is so gamed in favour of house rules, who knows what deals have been done; what banks have been told to buy useless sovereign chips. What the banks cannot do is fully control the viability of the underlying economy; if the underlying economy is made of paper and toxic banks only, no amount of liquidity poured onto it, is going to prevent it burning away to nothing. itself a symptom.. @Bond Eoin Bond That’s interesting. So Draghi’s spin that he wanted small banks to participate in Order to lend to SMEs was really camouflage for a rescue of a really big Italian bank. Stigma and all that. I think we can work out which bank was on the verge..the markets have. @Colm Brazel If Spain or Italy defaults,their banks are dead,so there is effectively no sovereign default risk for those banks.For that reason you can be sure they will buy sovereign debt of their own country with a maturity of less than three years and enjoy the spread between the cheap money of the ECB and the interest rate of those short-term sovereign debt. The rates of adjudications on this short term financing started falling the day of the ECB adjudication.It works! @Overseas commentator: from your nytimes link “There is no assurance that the banks will use all, or even most, of the money they borrowed, to buy government securities. It would be nice if some of it were lent to the private sector to spur growth and investment. But the logic of putting it in two- or three-year government notes is obvious.” What a ponsi scheme? All it does is blow more hot air into the bubbles in the hopes more hot air won’t burst them. When those bubbles go to the real market, they’ll burst 🙂 @Paul Quigley, Only a week in the sun; I think I need at least a year 🙂 There’s no ‘winning’ in this; one just ends up offending people right, left and centre. Things will take their course; it’s just galling and frustrating when a better course exists but is wilfully ignored or rejected and so many lives are damaged and blighted unnecessarily. In any event, posts fall here, albeit on interesting topics, like confetti and it is almost impossible to maintain a discourse that might lead to settled positions. Perhaps this is not an appropriate medium. And, anyway, it wouldn’t have the slightest impact on the decision made by the ‘powers-that-be’. I suspect that, in so far as they might be aware of it, they see it as a valuable safety valve for the sounding off of opinions. @ Paul Hunt Paul, It’s easy to feel that you’re wasting your sweetness in the desert air. There is a need for a new mindset but there is little evidence of radicalism and academics with tenure opine on what should be done in Europe but generally remain silent on the big changes that are needed at home. Kevin Walsh on another thread explained why 19th century Whitehall provided guarantees of permanent employment in the British civil service in contrast with the system encountered by Ulysses S. Grant in the lobby of the Willard Hotel on Pennsylvania Ave where thousands of favour-seekers pleaded for jobs. Apart from the constitutional protection of the judiciary, with the legal protections available for all employees, why is this system not being challenged? However, what is being contemplated is a system where people with the same level of responsibility and doing the same work, will have different pay and conditions. This will only go on until stagnation in an international market that is very different to the late 1980s will force change. The late American historian Daniel Boorstin, wrote in an essay, “The Amateur Spirit and its Enemies,” published in his book “Hidden History”: “In the United States today there is hardly an institution or a daily activity where we are not ruled by the bureaucratic frame of mind — caution, concern for regularity of procedures, avoidance of the need for decision” — all of which, Boorstin suggested, was best summed up – – “on a sign over the desk of a French civil servant: ‘Never do anything for the first time’.” Boorstin used the word “amateur” in its original meaning (from Latin amator lover, from amare to love – – rather than a primary motivation of money and personal position) and concluded his essay with a question: “Can we continue to breed leaders who draw on the expertise of professionals without suffering the contagion of the professional fallacy, who enlist the loyalty and industry of the bureaucrats without being paralysed by their caution? Only leaders informed by the amateur spirit can prepare us for the one certainty in history — which is the unexpected.” @ Ceterisparibus These conspiracies are so exciting. Natioanal central bank were urging their banks acrossthe Eurozone to avial of the facility. @Michael Hennigan My “Self righteous babbling of a non-economist” alarm is going off so I’ll contribute no more to this thread except to say this. Our world is one where there are unsolved issues of increasing energy costs, it has financial markets that allocate resources badly and banks that are no good at estimating risk. When coupled with the very serious difficulties in attempts to regulate large private enterprises it means that the mixed economy needs to swing back to a larger proportion of state (and democratic) control of economic priorities as a practical matter as well as a moral one. Stiglitz’s last Vanity Fair article tried to capture this and the Marxists already get it. Sadly it suits Western capitalists to diagnose this crisis of of the current flavour of international capitalism as a crisis in social democracy. Now I understand that Richard Fedigan, Paul Hunt and your good self think that the defeat of social democracy by global capitalism, “free trade” and market liberalism is inevitable and believe that by accelerating the collective surrender of the EU to these forces you are actually helping us but it does not feel like help to most people. Populist I know. @Shay These guys pretend to not understand the concept of exponential interest. Its easy just look at a parabolic curve on a X Y diagram. What can one say – Interest return is all about extraction , its all extracted out, partially because there was little core capital investment for at least 30 years , if not forever. We went from wood , to coal , to oil , then stopped a bit – splitting atoms was just not as profitable given its capital intensity which does not favour bank profits , so we ran the system down and expressed this as a tempory profit on the books. At its core there is nothing complex about all this. @MH That was a record time for your latest barb. But never mind. Others have opinions too. @ Overseas commentator The NYT article is pretty good. However, it is rather mechanistic in terms of its analysis. The ECB has never denied its responsibility for lending to banks to meet liquidity requirements. Indeed, it has defended its role in this respect. But, even with the new arrangements, the solvency baby is left with the member country governments of the Euro Area. That is the crucial distinction. @ All On the link to the Sun article above, there was also a leader. http://www.thesun.co.uk/sol/homepage/news/sun_says/244723/The-Sun-Says.html This is an intriguing situation. If the story is to be believed, which is a big if, the junior partners in two struggling coalitions in two countries are sending peace feelers out to one another in an attempt to recover from a situation which three phenomenally incompetent leaders have created. These leaders were, in fact, looking at an open goal; the compromise tabled by Van Rompuy. Herewith the link to the Van Rompuy paper in case bloggers have lost sight of it. Paragraphs 10, 11 and 12 are the relevant ones. http://www.lefigaro.fr/assets/pdf/rapport-van-rompuy.pdf If they could agree on the other elements dividing them and return to it, the trio could actually come out of the next European Council saying “this is what we have just decided” rather than “this is what we have agreed to do, provided that, and subject to etc. etc.” But politics is never that simple. Hostages given to fortune are very hard to recover alive. Especially if in the process one reveals one’s own political ineptitude. The latest opinion polls in Germany show that the SPD would need an alliance with the Greens and Die Linke to form a government. The FDP is at 2%, well below the 5% election threshold. In France, Sarkozy is still well behind Hollande and just barely ahead of Le Pen. (The head of the Greens is arguing for a 32 hour week!). In terms of electoral strategy, the obvious question is which of the trio is first for the high jump. The answer is rather obvious. And Merkel must be eyeing another Grand Coalition with the SPD (despite the strenuous denials of the latter that they would be in any way interested). @ Michael Hennigan If what I am consistently saying, about the implications for the euro of the conduct of German economic policy, can be viewed as riding a hobby horse, there are a lot of governments, and respected commentators, riding it with me. @Paul Hunt “In any event, posts fall here, albeit on interesting topics, like confetti and it is almost impossible to maintain a discourse that might lead to settled positions. Perhaps this is not an appropriate medium. And, anyway, it wouldn’t have the slightest impact on the decision made by the ‘powers-that-be’. I suspect that, in so far as they might be aware of it, they see it as a valuable safety valve for the sounding off of opinions.” Paul, all we can do is observe and try to figure what they are really at. And avoid the pitfalls. Keep up the good work. @Shay, Your pigeon-holing and tar-brushing won’t work. The post-war social democratic consensus failed eventually due to inherent flaws. It can and must be restored and reconfigured for this era. The responsibility falls on the liberal centre and progressive left as it did originally on FDR, Beveridge, Keynes and his disciples, Clem Attlee and his colleagues, Gunnar Myrdal and those throughout Europe who followed in their footsteps. But utopian visions based on naive views of human nature won’t cut it; it must deal with the crooked timber of humankind or fail. And fail it will while the progressive left and liberal centre pour the scorn on each other that should be reserved for their common enemy. Of course, one could question whether it really is a ‘strategy’ – or an emergency reaction to an early stage coronary in the European financial system. Then again, with the sovereigns frozen last week and the banks freed this week with an XMas bonus of half a trillion (an ECB_undesbank action), it looks like there may be an overarching strategy; an I don’t like the look of it. @DOD I don’t like the look of it either. It that doctrine of unintended consequences that bothers me. @Paul H: We might not ‘get’ them Paul, but Nature sure as hell will. Awful bitch is Nature. Hubris before the fall? Brian. @ DOCM All I’m saying is that trade relations are more complicated than they appear to be. China gets about $6 value added from each iPhone it produces but it’s export cost is a lot higher. Germany became a net exporter of food and drink for the first time in 2008. It has an enviable business system and their sales are not just dependent on price. The biggest part of its surplus should be welcome in Europe. If only the issues of imbalances in Europe could be solved by an increase in German consumption. Individual countries have to first reform; if it’s such a hassle in a country to even set up a startup business, there is little point in worrying about Germany. @ Paul Hunt Just as the postwar social democrat system failed in the stagflation of the 70s the post post war market fundamentalist backlash crashed 3 years ago. We urgently require a workable system. Inequality is at its most savage in the US so perhaps change will come from there first. Buttonwood innthis week’s Economist: This sniffy attitude towards commerce was not confined to Britain, nor did it die out with liveried footmen and debutante balls. Aristocrats across Europe were equally suspicious of the nouveaux riches. And their modern descendants, the middle-class intelligentsia who populate the continent’s universities and staff its public sector, have a tendency to despise the businesspeople who generate the wealth needed to fund their way of living. There is great distaste at the idea that political choices should be dictated by “the markets”; investors should just hand over their money and not ask whether it will be paid back. French politicians will defend to the death the agricultural subsidies granted to their farmers. After all, the farmers comprise la France profonde, the heartland of villages and vineyards. But the same politicians are withering about the idea that David Cameron, the British prime minister, might relegate Britain to the fringes of Europe in order to protect the country’s financial-services industry. One can see a similar attitude in the debate about Germany’s role in creating the current euro-mess. Who are these Germans, with their work ethic, their competitive industrial sector and their success in exporting to Asia? Other Europeans may regard Germany with grudging admiration, but they see it less as an example to be copied than as a tiresome nag, forever blathering about fiscal probity. Let the Germans soil their hands with trade while the rest of us live off the prosperity it brings. @ seafóid The system of free trade that brought prosperity to countries as diverse as Ireland, Botswana and China, following the cuts in tariffs that began in the West in the 1950s remains intact. The Wall Strett system crashed but I have seen no evidence that monopoly telcos and airlines are on the way back or that in general the post-war free trade measures are about to be reversed. @seafoid Yes. Steve Bell is CARTOON OF THE DAY …. http://www.guardian.co.uk/commentisfree/cartoon/2011/dec/21/steve-bell-ecb-loans-cartoon So there is a massive financial problem at present as we all know with sovereign debt, the proximate cause being overspending by national governments. Possibly a solution of some sort is out there, but I’m increasingly coming round to the view that compound interest should be prohibited due to the insane constant exponential growth it requires and all future banks must use simple interest to generate returns. @ the dork in cork seems to get it. Without this step it will be only a matter of time before there is another crisis. I work for a bank by the way. @micheal There is a deeper wealth then what business people generate. Yes core wealth is of little use unless you have the skills to manufacture & distribute it but without a base industrial ecosystem you cannot build anything. I would prefer to have cheap wine , bread & electricity rather then the newest Teutonic boutique consumer gadget. Germany is in deep trouble – as are all high value mercantile economies when a depression comes , but they have played a great game so far – using the greed & avarice of the peripheral petty elite to transfer dead credit deposits into German Bunds. Still sticking solar power thingies on Berlins & other apartments over 50 degree lat did not work out too well. http://www.iea.org/stats/pdf_graphs/DETPES.pdf Me prefer warmer cheaper Bordeaux http://www.iea.org/stats/pdf_graphs/FRTPES.pdf @DOD I don’t see Weidmann there…wonder what he thinks of the latest wheeze. Simon Johnson has an interesting take on Geithner in the NYT today.. http://economix.blogs.nytimes.com/2011/12/22/no-one-is-above-the-law/?hp @ Shay Social Democracy here we come! Possibly. In spite of obvious pitfalls, I’m a touch heartened at the year end by: (a) The increasingly brackish IMF – who may yet come over all salty (missus). (b) The slow but clear development of an EU bank resolution programme. the one that suggests that maybe if banks fail, it wouldn’t be a good idea for taxpayers to pay for it – though why the unemployed should have to remains a mystery. Lots to come and lots as yet to play out on the streets. @ Michael Hennigan You seem to assume that I favour the idea that increased consumption in Germany and a forced reduction in the country’s exports should be engineered in some fashion. An artificial limitation on the country’s competitiveness, so to speak.. Nothing could be further from the truth. What I view as required is a stop to distorting government policies – not just in Germany – which favour the export sector at the expense of the domestic; which is quite a different thing. This can be engineered in a variety of ways, including many technical barriers both in relation to trade in products and services. Stopping these policies is the only way to create a genuine internal market which is, in my view, the essential concomitant for a successful single currency (as in the case of the US). To achieve this result, there has to be a no holds barred confrontation of national policies right across the entire gamut of sectors. In other words, a “reinforced economic union”. This would include, for example, a common European energy policy, agreed parameters for labour legislation etc. All this is possible within the existing treaties. Such a debate would raise uncomfortable issues for Ireland. But we are largely incidental to it. It is the large Continental economies that have to get their act together. Nothing could illustrate their inability to do so better than the saga of the European Patent. http://www.bloomberg.com/news/2011-12-16/agreement-on-eu-wide-patent-unlikely-this-year-poland-says.html Germany issues the largest number of patents every year. It suited the Big Three to agree a deal on the language regime which met their requirements but not those of Italy and Spain. Germany, I understand, is also insisting on the office being located in Munich. This is the type of blind pursuit of national interest, of which Germany is not the only exponent by any means, that will eventually lead to the destruction of the EU. The proximate cause is the euro. It does not allow for such behaviour. I would be equally critical of any other country conducting a near totally mercantilist policy. Silver CARTOON OF THE DAY Diplomacy Who to call in Europe 22 December 2011 Liberté Alger http://www.presseurop.eu/en/content/cartoon/1318621-who-call-europe @Ceterisparibus Yes – good insights on Geither … and on the power of Too_Big Financials http://economix.blogs.nytimes.com/2011/12/22/no-one-is-above-the-law/?hp Shannon front row still on standby to pass him the U Owe US €30 billion if when he lands in Ireland again. Yesterday was part of the chat between Geithner and Weidman in Frankfurt recently … with Lagarde in on the conversation …. Picture of the Day – The Winter Solstice … worth a zoom .. http://www.spiegel.de/international/0,1518,805432,00.html @David No reports of ritual sacrifices on Achill yet ? I thought they might break the new temple in today. Course we could compare it with the FED’s 29 Trillion .. and where most of that went … There is a fascinating new study coming out of the Levy Economics Institute of Bard College. Its titled “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson. The study looks at the lending, guarantees, facilities and spending of the Federal Reserve. http://www.ritholtz.com/blog/2011/12/bailout-total-29-616-trillion-dollars/ @The Dork For Druids it’s New Year already. @ Michael Hennigan Maybe you need a picture http://krugman.blogs.nytimes.com/2007/09/18/introducing-this-blog/ There was a time pre the Kerry 5 in a row attempt when a working class person from say Finglas working Sundays and overtime could save enough money to get on the housing ladder and buy a house based on 2.5 times income. That was before FF went all neoliberal. @ ceterisparibus 7:23 From your link “Our biggest banks pose a real threat; if you hold them accountable for their past actions, they will collapse. The only credible way to counter to this threat – and the only reasonable way to protect our democracy – is to break them up.” Absolutely concur! Our biggest threat is now the ECB. It has inherited the mantle from Anglo. It should be broken up. Perhaps its malignant threat to democracy, its disenfranchisement of taxpayers and the Dail, the raw deal it has meted out this this country, will finally waken people to the need to leave the ECB casino of debt behind. IT was regarded as a safe haven for this country ensuring financial stability, durability, reliability, trust, dependability in the financial sense. Its revealed itself instead as a predatory and reckless Casino turning a blind eye to ponsi bubble scams across the EMZ, badly managed by Trichet, and turned blind by the CB’s meant to guide it. ITs bubbling of the banks, its latest wheeze, is a recipe for disaster; its, ‘thou shalt not default’ to Ireland, is another disaster. The biggest disaster of all is its austerity driven mantra for sovereigns which in the absence of ‘default’ is a builder of an avalanche of mess that will wreck Europe’s economies on a grand scale. @2nd half here, Steve Keen, ‘Minsky Moment’, when debt leading to growth suddenly turns to debt leading decay http://rt.com/programs/keiser-report/episode-226-max-keiser/ @ Michael Hennigan I wonder if the full significance of this element in the reformed JLC/REA arrangements has been recognised. “•the general level of wages in comparable sectors, including, where appropriate, a fair and reasonable assessment of wages in such comparable sectors in other relevant jurisdictions” What, precisely, does “other relevant jurisdictions” mean? The UK and/or the countries of the Euro Area? The New York Times has an editorial today (Friday) strongly in favor of the ECB strategy, although stating that it is only part of the solution. http://www.nytimes.com/2011/12/23/opinion/timely-aid-for-europes-banks.html?ref=opinion @ DOCM On the European patent, to me Italy and Spain are the petty spoilers. Last April the European Commission said that under the current system, the process involves considerable translation and administrative costs, reaching approximately €32,000 when patent protection is sought in the EU27, of which €23,000 arises from translation fees alone. In comparison, a US patent costs €1,850 on average. A European patent validated in 13 countries costs up to €20,000, of which nearly €14,000 relates to translations. The Commission said the cost of a European patent with unitary effect in 25 member countries would be €680, after a transitional period during which costs would still be less than €,2500. To me it’s not unreasonable that German be included with English and French. Germany as you say is the biggest economy and the biggest filer of patents. It has taken a long time to get this far and if any more languages were included, the reform would become a waste of time. On the JLC/REA, the relevant comparison will be with NI rates and the rest of the UK — the biggest tourist market. @ DOCM Real hourly pay has risen almost 30% since the mid-1980s in Germany. In the US, hourly pay has risen 6% since 1985. The median pay of the American male has been static since 1969. German pay only rose 0.6% in 2010, just ahead of Greece and Ireland. However, it is clear from the US experience in manufacturing, a sector where pay tends to be higher than other sectors with non-third level qualifications in both the US and Germany, the latter avoided lower pay overall by keeping the bulk of its manufacturing jobs at home. Between 2000 and 2010 the United States lost more than 5 million manufacturing jobs, amounting to nearly one-third of its manufacturing employment. @ Michael Hennigan You seem to be making some of my points for me. What the situation with regard to the European Patent demonstrates is the unwillingness all round to compromise i.e. the participants are behaving as nation states not members of an organisation that has the stated treaty ambition to achieve “an ever closer Union among the peoples of Europe”. The patent language issue, for example, is equally important for Spain because of the links to Latin America. The appropriate solution would be agreement on the single language of English because it is effectively a scientific international lingua franca and now also, I understand, the dominant language for the registering of patents. It would also, of course, make the patent even cheaper in the broader interest of the EU. The argument that French should be included in the language regime is no stronger than that for Spanish or Italian and that it should include German because most patents in Europe are submitted in Germany is an argument for “to him that already has shall be given”, an approach which is anathema to balanced economic development in Europe. On the JLC/REA issue, I only mention it in the broader context of this discussion viz. the need to confront labour policies in all the participating states in the Euro Area where it would be logical to examine whether there has been an active official policy of wage suppression or one which inadvertently gave rise to such an impact (the latter has been the case, in my view, in Germany because of the unintended consequences of Hartz IV in particular). This, according to the Irish Times, is what the unions think that the “relevant jurisdictions” means; “Separately, the JLCs will have to observe new criteria in setting pay rates. These include the level of unemployment and pay rates in comparable sectors at home and in “other relevant jurisdictions”. Unions have said this does not just include pay rates in Britain and the North. However, it remains to be seen just how meaningful this distinction proves in practice”. Is it Boston or Berlin? @ Michael Hennigan I do not know what the US has got to do with it. It is not in the Euro Area. Of course, one of the arguments trotted out in defence of German policy, especially by Schaeuble, is that Europe must stay competitive internationally, which is true, but Germany cannot be the only economy to do so, especially if it is at the expense of all the others in the Euro Area. @ All On the link to the Sun article above, the FT is reporting that the French Foreign Minister has offered an “olive branch” to the UK. However, on reading the report of what he had to say, half a branch would be the better description. There is no hint that Sarkozy is willing to budge on the IAREU. http://www.ft.com/intl/cms/s/0/c007c6cc-2ca4-11e1-8cca-00144feabdc0.html#axzz1hLwocJTV A knotty one for Angela! @DOCM, I think your last comment confirms something I’ve long been pointing out about the conflicting strategic objectives of the well-governed ‘Germanic’ parts of the EU – how to maintain global competitiveness while ensuring sufficient internal EU cohesion with the less well-governed parts of the EU. Effective democratic governance that supports resilience, flexibility, efficiency and productivity is the only answer for the PIIGS – and for France and Belgium. If Germany and its better governed neighbours seek to impose their template it will provoke a strong popular – and populist – reaction. The desire for better governance has to come from within – and we’ve seen little evidence of this in the PIIGS and nothing but window-dressing and cross-bearing in Ireland. This FT article (sorry it is behind the paywall) also takes a positive slant on the ECB strategy (like the NYT editorial linked above). http://www.ft.com/intl/cms/s/0/270fbc1e-2bef-11e1-98bc-00144feabdc0.html#axzz1hLz6rWGV @Gregory Connor, This might get those interested behind the wall: http://www.ft.com/cms/s/0/270fbc1e-2bef-11e1-98bc-00144feabdc0.html#axzz1hMHKdNii Apologies. Needs a bit of googling. @ DOCM I do not know what the US has got to do with it. It is not in the Euro Area. Simple really. Many US high paying manufacturing jobs were outsourced overseas and overall pay fell as new jobs in services tended to be lower paying. Germany reformed its collective bargaining system and kept the manufacturing jobs at home. This first horseman of the apocalypse is passing the baton of sovereignty from nation states to the the EU ECB IMF Troika. With the provision of seigniorage aid to Greece, the appointment of technocratic government in Greece and Italy, and with Mario Draghi providing the Long Term Refinancing Operation, LTRO, that is the ECB’s funding facility, whereby the ECB takes in distressed securities and loans out money for three years, at the average of the ECB’s benchmark rate, currently 1%, over the period of the loan, the seigniorage of fiat money, that is the moneyness of fiat money, is failing, and the seigniorage of diktat is increasing. The Sovereign Lord God, Psalms 2:4-5, is operating through the first horseman of the apocalypse to bring forth a New Europe, where the Sovereign, Revelation 13:5-10, and his banking partner, the Seignior, Revelation 13:11-18, will rule over a federal Europe, with fiscal rule and fiscal sovereignty coming through a fiscal union, and the ECB or the Bundesbank, empowered a federal bank. The ten toes of regional global governance presented in Daniel 2:31-33, being mired in the iron of diktat and clay of democracy, will eventually crumble, and the Sovereign and the Seignior will eventually rise to rule the world, and install a one world government, Daniel 7:7, a one world currency, and provide global seigniorage, Revelation 13:17-18. Other horsemen will follow in the first horseman’s steps to assure that regional global governance rules over all of mankind, red symbolizing violence and war, black symbolizing starvation and misery, and pale symbolizing devolution and death. The first horseman has a single crown (Gk. stephanos) of victory, whereas in Revelation 19, Jesus has many crowns (Gk. diademata), signifying His sovereignty. In our increasingly credit devalued and currency depreciated world, only diktat can provide order and security. People will be amazed by this, they will marvel, and place their trust in diktat; they will give their full allegiance to it, Revelation 13:3-4. If one perceives freedom and choice, then enjoy it while one may. Open Europe relates that Welt and FTD report the former chairman of the Federation of German Industries Hans-Olaf Henkel, a well-known critic of the euro, has joined the ‘Free Voters’ political platform, which will run in the 2013 German national elections. A comment piece in FT Deutschland notes that “with Henkel, all those voters who are critical of eurozone bailouts can have a political voice.” Mr Henkel is an anachronism in the Age of Diktat, where only the Sovereign and the Seignior have political voice, and use their political capital to replace fiat money, as well as to rule in a totalitarian collective. The Zero Hedge report Swiss, Germans Set To Unleash Capital Controls, foretells draconian authoritarian measures over investments are coming. The statue of the progression of human governments, Daniel 2:31-44, reveals that God has purposed for an eternal kingdom which will be ruled by His Son, Revelation 2:26-27. Blind Biddy is off on another joust in Frankfurt, with her recently manufactured Higgs_Boson Generator in her handbag. The Higgs_boson, apparently, does wonderful things to odious financial system debts …. @ Michael Hennigan I still cannot see what this has to do with the problem of commercial imbalances in the EU. It is well known that the organised skilled workforce in Germany negotiated pay moderation in return for jobs being kept in Germany. This is a compliment to to the “social market economy” (words which Germany, with France, insisted be inserted in the treaties as amended by the Lisbon Treaty) as compared to the free-for-all that exists in the US. But Hartz IV was not about these workers but the very large sectors of the German labour market where skills were low and workers were not organised. The statistics as to the deterioration in the living conditions of the latter are incontrovertible. This has had an inevitable impact, depressing the overall level of demand in the German economy and resulting in fairly mediocre overall growth figures. These are now improving as steps are taken to open up the domestic economy. However, without the European consumer in other countries, the German economy would not be doing as well as it is. There are major savings in transaction costs because of the existence of the euro and guaranteed open access to these markets. In short, Germany is the biggest winner, a fact grudgingly accepted by German politicians but hardly recognised at all by the general population because of populist misrepresentation by the self-same politicians. @ Paul Hunt That some countries in Europe are better governed, and their economies better managed, than others is indisputable. That any are paragons of virtue is an illusion. Each fights its corner, some much more successfully than others. That’s it! @ All The pre-Christmas jockeying for New Year negotiating advantage continues, especially in the UK. As Juppé the French foreign minister pointed out, the UK faced its “moment of truth” and Paris would like to keep it that way. http://www.thisislondon.co.uk/standard/politics/article-24024175-clegg-to-set-the-agenda-at-next-euro-summit.do#readerComments http://www.thisislondon.co.uk/standard/article-24023873-no10-plays-down-german-move-to-support-diluted-euro-treaty.do CARTOON OF THE DAY Austerity Father €hristmas 23 December 2011De Groene Amsterdammer Amsterdam http://www.presseurop.eu/en/content/cartoon/1313981-father-hristmas Hello to Iceland from Madrid … Eurozone crisis Iceland is our modern Utopia 23 December 2011 Público Madrid Iceland is not Utopia. It is known that there can be no kingdoms of liberty within the Empire of necessity of late capitalism. But it is a recognition of a dramatic absence. Iceland is proof that capital does not own all the truth there is to this world, even when it aspires to control all the maps we can lay out. http://www.presseurop.eu/en/content/article/1319821-iceland-our-modern-utopia David Ireland is not Iceland ……Ah, those heady days of 2009 when our government laughed at the pesky fishbotherers… @Philip II Well … they haven’t forgotten how to sling a harpoon. Comments are closed.