Wednesday, November 30, 2011

End of the euro, Wednesday edition

Valérie Pécresse, the French Minister of the Budget, said on French TV that Germany and France are working on a plan under which eurozone countries would balance their budgets by 2016. (Francia adelanta que el pacto de estabilidad exigirá déficit cero en 2016 EP/Cinco Días 29.11.2011) This just sounds like more mindless austerity-economics dogma to me. They need to save the euro and ensure there will even be a eurozone in 2016, fix their banks and get their economies growing against using, yes, borrowed money, before they start worrying about symbolic gestures to the gods of fiscal virtue.

The bankers' collection agency currently known as the government of Italy says it will balance Italy's budget by 2013. In other news, flying pigs have been discovered in the vicinity of Rome.

Herman Van Rompuy, President of the Council of Europe, says the new debt-collector governments of Italy and Greece as well as the new conservative Spanish government are just wonderful. I mean, unless prosperity for the 99% and the practice of democracy are high priorities for you. The way things are going, it's not entirely clear how many of the 1% are likely to benefit from austerity policies that are slamming Europe and probably the US into another recession.

Brad Plumer uses manufacturers' new orders data to show how closely US growth, or decline thereof, has tracked with Europe's (How Europe could drag down the United States, in one chart Wonkblog 11/29/2011). check out the nasty little downturn on the most recent data on the European blue line.

I can't say that this report of President Obama's statement on the euro crisis is terribly encouraging (Obama Presses EU Leaders for Debt Resolution PBS Newshour 11/28/2011):

What we see him saying in this report is:

If Europe is contracting or if Europe is having difficulties, then it's much more difficult for us to create good jobs here at home, because we send so many of our products and services to Europe. It is such an important trading partner for us.
That statement in itself doesn't articulate the more immediate worry, which is that a run on European banks and a collapse of the euro will take down some large European banks, with unregulated credit default swaps (CDS) and other financial links then taking down some large American banks. Saying that would be tantamount to admitting that the Administration didn't even try to put in the kind of regulations that could have prevented another 2008-style financial meltdown.

Martin Wolf describes the immediate risk this way (What the IMF should tell Europe Financial Times 11/30/2011):

The world has reached a new and potentially even more devastating stage of the financial crisis that emerged in the advanced countries in the summer of 2007. Its epicentre is the eurozone. Unwilling to focus on the critically ill patient in front of it, eurozone leaders spend their time on designing an exercise regime to ensure he never has another heart attack. This is displacement activity. ...

How bad might things become? The OECD explores a downside scenario that starts from a disorderly sovereign default in the eurozone. The outcomes of such events are unpredictable. But a default by a significant advanced country is likely to be a huge blow to confidence. Adverse effects would be felt directly - and via contagion - on both other sovereigns and financial institutions and markets. Other countries might be directly affected by the need to rescue their banks. As economies weakened, fiscal positions would come under greater strain everywhere. A vicious downwards spiral in confidence and activity could emerge, with results far beyond the eurozone itself.
Central banks have been pumping extra funds to banks this week. (And maybe even the Lord doesn't know how many bazillions the central banks are loaning private banks at cut rates in secret loans and guarantees.) That provided some happy hours for the stock exchanges around the world. (Central banks join forces to ease debt crisis Los Angeles Times 11/30/2011)

But that's a very short-term palliative. Pessimistic commentary on the fate of the euro has been easy to find the last couple of weeks. Thomas Schmoll in the Financial Times Deutschland (Schuldenkrise und kein Ende: Der Countdown zur Euro-Rettung läuft 30.11.2011) sees the coordinated action of the central banks as a sign of how far gone the situation is: "Der Vorgang erinnert an die Finanzkrise nach dem Lehman-Desaster, als die Banken auf ihrem Geld sitzen blieben - wenn sie denn überhaupt noch welches hatten." ("The action is reminiscent of the financial crisis after the Lehmann disaster, when the banks were just sitting on their money - if they still even had any.")

The EU summit on Dec. 9, a week from Friday, is shaping up to be a dramatic moment. Even assuming that German Chancellor Angela Merkel and her French junior partner in economic wrecking, Nicolas Sarkozy, have previously unseen capabilities of statesmanship that has so far been nowhere in evidence and are able to manifest those capabilities between now and next Friday, the panic among banks and investors may be too far advanced to stop either a euro collapse or an intensified crisis of financial institutions. Tony Barber et al report in Calamity contingencies/Business and eurozone: Looking for the exit Financial Times 11/30/2011:

For months it has been the best-kept secret of European business. In spite of the most solemn declarations from the continent's political leaders that they will move heaven and earth to save the euro, are more and more companies quietly trying to protect themselves against the possible disintegration of the 17-nation currency? The general opinion of dozens of business executives interviewed by the Financial Times this month is that although a eurozone break-up would be both undesirable and fiendishly difficult to plan for, to cross one's fingers and hope for the best is emphatically no longer an option.

As politicians prepare for another make-or-break European Union summit in Brussels on December 9, the persistent inability of governments to find a comprehensive solution to the eurozone's troubles is forcing companies, especially big multinationals, to think the unthinkable.
And if the level of seriousness at which Europe's Very Serious People are working is a proposal for every eurozone country to balance its budget by 2016, then those unseen reserves of Angie's and Nick's statesmanship are likely to remain forever hidden.

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