Wolfgang Münchau states the obvious

Well, it seems obvious to me at any rate: here. If the EFSF/ESM still doesn’t have enough money to deal with Italy and Spain, then we are still in multiple equilibrium territory: if the markets don’t panic, they will be right, and if they do panic, they will also be right.

Don’t get me wrong: this was a good summit that made some important intellectual breakthroughs. But there are only so many things that one summit can do, and we have had so many bad summits that it isn’t clear to me that the system can now deliver the many needed reforms in time.

42 thoughts on “Wolfgang Münchau states the obvious”

  1. OK Time remains the key variable …

    Munchau’s assertion that Chancellor Merkel is ‘not serious’ about ‘political union’ is …. disturbing … ??? my impression is that she is genuine with her finance minister but following a flawed deutsche nationalistic strategy of imposing her particular bundle of roight germanic values on the rest of the EU (wonder has she read Max Weber)

    Posted below the other evening – worth posting again … A Tactical Retreat – and a serious move to Debunk The Conflationist Fallacy (albeit still standing under the illusion that the EZ financial system must be kept whole)

    06/29/2012 Der Spiegel International
    Yes, for Now
    Merkel Knows the Dealing Isn’t Done

    By Carsten Volkery in Brussels

    To the delight of investors and relief of her euro-zone counterparts, German Chancellor Angela Merkel made some key concessions at Friday’s EU summit. But the celebration is premature because she has still left herself plenty of room for maneuver.

    http://www.spiegel.de/international/europe/merkel-has-plenty-of-room-to-maneuver-despite-euro-summit-concessions-a-841806.html

  2. The media in Germany is not reacting too well with the terrible Bild writing about a bitter night and I think the Sud Deutsche zeit writing about Italy beatin Germany on and off the pitch.

    Thats not helping Merkel’s room for manoeuvre.

    The following twitter from the very enjoyable spoof account is appropriate.

    Angela Merkel (not)‏@Queen_Europe

    A decisive solution: using a fund that doesn’t exist to buy debt that won’t be repaid via a mechanism that hasn’t been agreed.

  3. Don’t get me wrong: this was a good summit that made some important intellectual breakthroughs.

    It’s a sad state of affairs that taking five years to figure out that insolvent banks require a central bailout counts as an intellectual breakthrough in modern Europe. Descartes and Voltaire are spinning in their graves right about now.

    Personally, I doubt that the current leadership—in government, in the markets, or indeed in academia—can summon the required intellectual or moral resources required to sort this out in an orderly fashion.

  4. There are now three threads going in parallel on exactly the same subject. This article has been referenced in the prior thread. John mch mentioned a while ago that Mods were being encouraged to comment as new threads because comments weren’t being read (is that right). This thread is surely something that could have been the brief comment that it is with a link.

    Is this really a good policy?

  5. An EU political union in decades to come will not resemble the German and US federal unions.

    Short of that goal, there will still be opportunities for some debt mutualisation. To have full mutualisation, there would be a need for harmonisation in a lot of policy areas.

    With a weak centre, after every change of government in an EMU country, there would be new demands and tensions.

    On the ESM, the German government will not wish to be in a position of having to raise the funding of the ESM before the German general election in the autumn of 2013.

    The Greens have already got the Constitutional Court to remind Merke of the role of the Bundestag and its budget committee.

    A Der Spiegel article summed up the situation:

    1) the ESM will only be allowed to lend to private banks once a European banking supervision mechanism has been put into place — and that could take a long time. There are still “difficult negotiations” ahead, Merkel said, adding that this “will not be resolved in 10 days.”

    2) The only immediate help for Spain is the agreed to waiver of the ESM’s preferred creditor status (solely for that country)

    3) Each time direct aid for a bank is requested, the German government and the Bundestag can say no. Merkel pointed this out in Brussels in order to counter criticism that she gave in.

    It looks that rescheduling of the Anglo promissory notes is what can be expected by Ireland, in the short-term.

  6. @michael h
    It looks that rescheduling of the Anglo promissory notes is what can be expected by Ireland, in the short-term.

    Did you mean ‘not what can be expected’?

    I read today on the RTE site that Colm McCarthy is batting for a ‘big slice’ of bank debt write-off for Ireland.

    The discount of Greek debt was explicitly stated a as a ‘one off’ event.

    If Ireland achieves a % write down, wouldn’t Portugal (bailout country), Spain and Italy look for something similarly for their banking debts?

  7. @ The Alchemist

    I think that the PNs will be the only or principal area of advance. I just cannot see how so many countries including Belgium could get bailout money back.

    I wish I could feel otherwise as I have a direct interest in a recovery.

    Conall Mac Coille, chief economist at Davy, published this comment after 8:00 am this morning:

    What is the probability of Ireland securing such a favourable outcome? It seems clear from the EU summit statement that the ESM will consider injecting equity into Irish banks, in addition to Spain’s. But the terms of such equity injections are not clear. A starting point would be that any direct recapitalisation of European banks, including Ireland’s, will be on the basis that the ESM will not be expected to make a loss on its investment. What is being proposed is to break the link between government and bank balance sheets – – not necessarily to use the ESM as a vehicle for large fiscal transfers to meet banks’ loan losses. Perhaps any capital injections by the ESM might even be at a discount to current market prices to ensure that the ESM does not make an eventual loss.
    If so, the ability of the ESM to reduce the costs (40% of GDP) of recapitalising Ireland’s banks will be much more limited than the ambitious plans reported over the weekend. It would certainly rule out large capital injections into IBRC where the equity has little value. Sales of existing government stakes in the Irish financial system to the ESM at market levels could yield 5-8% of GDP.

    However, it is large leap, both financially and politically, to expect the ESM to inject capital at levels where it can have little expectation of a return. And it is not clear from last week’s EU summit meeting that European politicians have agreed to the large fiscal transfers required (through the ESM) to reduce Ireland’s debt level to 100% of GDP.

  8. @MH
    re Davy statement:

    “However, it is large leap, both financially and politically, to expect the ESM to inject capital at levels where it can have little expectation of a return.”

    Surely it will be incumbent on the ESM to insist of substantial equity and bank bond write downs, before it writes any cheque to banks.
    The mechanics may not yet be in place but this is clearly the way to go for the ESM.

    The market logic at present should be for a big improvement in state bonds but a disimprovement in bank bonds, as clearly bank bonds are now in the direct firing line, as they should have been from day one.

  9. @MH/ Others

    I should add that the real policy change of the summit is that the policy of “No bank bondholder gets left behind’, is now effectively over.

  10. @joseph r

    “the policy of “No bank bondholder gets left behind’, is now effectively over”

    Just note that ESM recaps would be possible after ECB supervision and before EZ wide resolution mechanism, so it might not be that clear.

    Where it might go that way would be because of the fundamental tension between recaps, the size of the ESM (ie constrained) and the fact that bailing out unsecured sernior bondholders has been a failed policy as a means to maintain meaningful EZ wide bank funding via that market – plus the fact it will be core EZ funds being used.

    The existance or not of actual evidence as opposed to assertion that Ireland was “forced” to bail out its banks’ bondholders could be pivotal to any attempt to have bond writedowns in Spain provide re-funds for Ireland.

    No evidence has yet been made public.

  11. @ Joseph Ryan

    I would hope that pension funds will steer clear of bank bonds.

    The downside of course is that bank funding costs rise and eventually some banks would require the indirect support of sovereigns via the ESM.

  12. Monday, July 2, 2012
    Europe’s small step on a long road

    By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

    The EU summit ended late last week with a better than expected outcome, but as usual the devil is in the details. The summit statement (available below) was as loosely worded as these things come and many decisions are still left to interpretation and future actions.

    Going into the summit my major concern wasn’t so much economic, but political, because the chicken and egg issue of debt sharing and national sovereignty appeared a bridge too far. I therefore think that the major success from Friday’s summit was that it showed that when push comes to shove the Eurocrats will move in order to break an existential debt-lock. That in itself is a big step forward and the banking union, although again very vague at this moment, appears to be a move towards debt-sharing.

    Most of the southern European news agencies appear to have taken the line that this was a huge win by their leaders and a massive capitulation from Germany. The truth, however, maybe a little less clear. Spain and Italy did play hard ball on the “Growth pact” forcing Angela Merkel to agree to concession on direct bank re-capitalisation and the use of the ESM as she required it to get the ESM/fiscal pact vote through her own parliament. Markets have rightly welcomed the news and celebrated the disconnection of banks from sovereigns but this by no means removes conditionality.

    The EU summit statement itself makes this clear:

    We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding.
    […]
    The other issue with the plan is the vague wording in the summit statement:

    “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly”

    So when something that hasn’t happened yet happens, then there could, if we decide to, be the possibility of something happening. Not exactly actionable is it.

    Firstly, the EC, together with the ECB, needs to work out exactly what this mechanism is and build a proposal for it. This proposal would then have to be agreed to by the same heads of nations that were at Friday’s summit. Angela Merkel has already claimed that the German government would have right of veto over any mechanism and any action made by it.
    […]
    Do I somehow think that this summit means that Europe is fixed? No. The problems of Greece, Spain, Italy, Portugal, Cyprus and Ireland exist today as they did on Thursday. The outcome of this summit has further solidified the implementation of the fiscal compact which is guaranteed to slow the economy of Europe further and, although the steps towards a banking union are a start, there is still a very long way to go in a transition towards a true fiscal union.

    Read on:
    http://www.nakedcapitalism.com/2012/07/europes-small-step-on-a-long-road.html

  13. 07/02/2012
    Outfoxed by Club Med
    German Dominance in Doubt after Summit Defeat

    Chancellor Merkel suffered a bruising defeat at last week’s Brussels summit after the leaders of Italy, Spain and France ganged up on her. Europe’s power relations have shifted as a result. It looks like Germany will no longer be calling the shots in the EU. By SPIEGEL Staff

    It was Monti, of all people, who dropped the bomb at 7 p.m. last Thursday. At the European Council summit in Brussels, the Italian prime minister announced he would not agree to the growth pact unless the European heads of state and government did something about the high interest rates Italy is being forced to pay on its government bonds. And Monti wasn’t the only one. His Spanish counterpart, Mariano Rajoy, stood behind him.

    “Are you trying to take us hostage?” Danish Prime Minister Helle Thorning-Schmidt said indignantly. Then the German chancellor spoke up and said: “That’s not helpful.” It’s a sentence Angela Merkel reserves for serious situations.

    The Italian prime minister should not believe that escalating the conflict would change anything, Merkel said, and pointed out: “I have to fly to Berlin at noon tomorrow for a vote in the Bundestag.” But Monti stood his ground, knowing how much leverage he had. The markets were waiting for a decision. “Go ahead and fly home on Friday, and have them vote in Germany,” he told Merkel. “I have until Sunday, and I’ll wait until you return.”

    He didn’t have to wait that long. Less than 10 hours later, he had the chancellor where he wanted her. Merkel relented and rubber-stamped what she had previously rejected. “A simple act of solidarity without getting something in return would be absolutely fatal to the overall development of the euro,” she had previously insisted. For Merkel, it was the reddest of all red lines, and now she had crossed it.

    http://www.spiegel.de/international/europe/german-dominance-in-doubt-after-summit-defeat-a-842056.html

  14. 07/02/2012
    Merkel’s EU Concessions

    ‘Germany Can’t Always Say No’

    In a SPIEGEL interview, German European Commissioner Günther Oettinger, 58, discusses Berlin’s concessions at Friday’s EU summit in Brussels, why he believes euro bonds are “conceivable” and his idea for a European political union that would look a lot like a United States of Europe.

    http://www.spiegel.de/international/europe/interview-with-germany-s-european-commissioner-oettinger-on-euro-efforts-a-842051.html

  15. @David
    Monti is not a Italian.
    He is a operative.
    Do not believe the spin.

    The Germans and the rest of us are best leaving this nightmare of non sovereignty.
    The Euro is not a currency.
    Its a Yield instrument.

  16. @Michael Hennigan

    ‘A journey of a thousand miles starts with the first step.

    #64, Tao Te Ching (more than a couple of thousand years ago …)

    @The Dork

    Seven_of_9 presented me with an ultra_sensitive spin_senser based on the latest galaxian higgs_bosun app. But I leave it swithed off most of the time and breathe the tax_free air.

  17. “If Ms Merkel is right and there are no eurozone bonds in her lifetime..”

    Merkel is a flipper. Her red lines in the sand often get blown out of place by the winds of opportunism .

  18. @ Michael Hennigan

    “Deutsche Welle has a story on thousands petitioning the Constitutional Court on the fiscal pact and the ESM.”

    Slovakia once voted against a bailout too . The little people can vent but they don’t decide anything This is senior international hurling.

  19. Geopolitics
    Reinventing the European Dream
    2 July 2012 Project Syndicate Prague

    On July 1, Nicosia took the rotating presidency of the EU. Gas, relations with Turkey, Middle East policy: Europe should take this opportunity to set a new major Mediterranean project, argues the American political scientist Anne-Marie Slaughter.

    The euro crisis and Queen Elizabeth’s recent Jubilee seem to have nothing in common. In fact, together they impart an important lesson: the power of a positive narrative – and the impossibility of winning without one.

    http://www.presseurop.eu/en/content/article/2268061-reinventing-european-dream

    Hurling Update: Hamburg 3-19 Tooreen 4-23

  20. @ All

    It is not possible to access the site of the Cour de Comptes for the full report, no doubt because of the public interest in it. This report from Le Parisien gives the overall flavour.

    http://www.leparisien.fr/politique/la-cour-des-comptes-valide-les-orientations-du-gouvernement-selon-matignon-02-07-2012-2074409.php

    Hollande has to wake up to the fact that France has to cut her cloth according to her measure. Given that the Emerald Isle is still in dreamland, one wonders how long it will take him!

  21. @ All

    A contribution by Donal Donovan in the IT which cuts through all the academic waffle.

    http://www.irishtimes.com/newspaper/opinion/2012/0702/1224319176119.html

    Notably;

    “However, Friday’s agreement marks a significant shift in the heated debate on a more pressing immediate issue: who is going to pay what part of the debt that has resulted from the excesses of the last 10 years and from the banking debacle? The northern countries (essentially Germany) will foot a greater share of the bill, while the burden to the citizens of the affected debtor countries will be correspondingly less.”

    What must be driving informed German public opinion mad is the fact that Merkel’s ‘hesitation waltz’ has simply increased the size of the bill.

  22. @DOCM

    Would this be the same Donal ‘Conflationist Fallacy’ Donovan who wrote in line with the Fallacy last year in the IT and in the year before that in arguing that the Hibernian_citizen_serfs were to simply upshut and pay up for the fu*k_ups of the dodgy financial system?

    Or are there clones about?

  23. @ All

    These articles are also of possible relevant interest.

    http://www.telegraph.co.uk/finance/comment/liamhalligan/9351267/Eurozone-nations-are-stuck-in-a-doom-loop.html

    http://www.nytimes.com/2012/06/27/opinion/germany-the-euro-winner-hardly.html

    The curious aspect is that there was no grand plan on the part of any of the parties. Everyone did what they were best at. In Ireland’s case, as a retired builder commented to me, anyone who could hold a spirit level became a developer.

  24. Perhaps this should go on the ‘carried away’ thread.

    When it comes to financial support for Irelands banks and particularly, ex-banks:

    ARTICLE 20
    Pricing policy
    1. When granting stability support, the ESM shall aim to fully cover its financing and operating costs and shall include an appropriate margin.
    2. For all financial assistance instruments, pricing shall be detailed in a pricing guideline, which shall be adopted by the Board of Governors.
    3. The pricing policy may be reviewed by the Board of Governors.

    Item 3 would presumably be Enda’s next entanglement. Will they be selling tickets?

  25. European Council
    Monti and Rajoy sign away the sovereignty principle
    2 July 2012 La Vanguardia Barcelona

    Off the rails
    The Bundesnachrichtendienst, or Germany’s Federal Intelligence Service, under the direct control of the Chancellor’s office, will have briefed Angela Merkel in detail about the potential risks of Italy going off the rails politically.

    If we add to that the relevant reports on the actual costs of a possible disintegration of the euro, we can understand the look of disgust on the German leader’s face on Friday morning in Brussels. Merkel had been tightening the screws, but had to let up when she too glimpsed the edge of the abyss.

    http://www.presseurop.eu/en/content/article/2282181-monti-and-rajoy-sign-away-sovereignty-principle

  26. Day 1 on the week post the summit & it looks as if the deal is unravelling. The slow disintegration of the Euro continues. Spanish yields rose rather than decline. The French are trying to pull a fast one on the Belgians by funding 50bn of Spanish real estate loans with Belgian deposits. With friends like that…..

    The Brits have the right idea-get the hell out of dodge ASAP. Meanwhile in Ireland, the Labour parties financial genius and leader in waiting thinks it a good iead to raise taxes on labour to fund over generous SW benefits. Sweet.

  27. I think August 2014 would be quite an appropriate date for the final collapse of the EZ and the disintegration of the EU. Back to the GBP are for us.

  28. Whatever Munchau says, the ESM is going to put half a trillion on the table and the principle of ESM directly recapitalising the banks, which amounts to sharing the burden between countries, has been accepted by Germany.

    Both facts make it more likely that a comprehensive solution will be accepted by Germany et al and by the ECB. They will have made such a commitment if ESM comes in and direct recapitalisation takes place that it is likely there will be further support. Also, electorates in Germany and elsewhere are now being told they will have to help if the project is to survive. It also makes it more likely that the ECB will be permitted to deploy some QE.

    Of course, it doesn’t mean we will have proper bank resolution and the kind of wealth transfer that is needed to get things back on a proper footing. However, there was no prospect of the ECB supporting that anyway.

  29. ECB backed Ireland in getting pledge for bank bailout review

    It emerged yesterday that German ECB executive board member Jörg Asmussen aligned the bank with the Government’s push for a specific reference to Ireland in the communique issued at the end of last week’s EU summit.

    European diplomat said Mr Asmussen’s intervention had a crucial bearing on the outcome when the final draft of the communique came to be written.

    Chief of the European Financial Stability Facility Klaus Regling was also broadly sympathetic to the Irish position, the diplomat added.

    Although the direct reference to Ireland in the final draft surprised some senior figures around the summit table, Mr Kenny successfully defended it in the face of questioning from Dutch prime minister Mark Rutte and Finnish leader Jyrki Katainen.

    http://www.irishtimes.com/newspaper/frontpage/2012/0703/1224319267101.html

    @Jörg Asmussen

    Habermas approves!

  30. from Delusional Economics

    The European Economy Continues to SINK

    I discussed yesterday [see link above] that the success of last week’s EU summit needed to be measured on a political scale not an economic one. There were obviously economic ramifications from the outcome, but the ratification of whatever they eventually turn out to be is likely to take many months of further politicking.

    In the meantime the downward pressure on the economy due to implementation of government sector austerity against de-leveraging private sectors continues to show in the statistics. As I said yesterday:

    Do I somehow think that this summit means that Europe is fixed? No. The problems of Greece, Spain, Italy, Portugal, Cyprus and Ireland exist today as they did on Thursday. The outcome of this summit has further solidified the implementation of the fiscal compact which is guaranteed to slow the economy of Europe further …

    Read on: Good overview …

    http://www.macrobusiness.com.au/2012/07/the-european-economy-sinks/

    @All

    The Economics of the Fiscal Korset remains NONSENSE … and dangerous nonsense at times …

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