End of the Greek euro drama in sight

Wolfgang Münchau in Europa-Skepsis und Griechenland: Mit Vollgas ins Euro-Desaster [Euro-skepticism and Greece: Pedal to the medal into the euro-disaster] Spiegel Online 14.11.2012 isn't laying out a moment in time for the end of the Greek euro drama. But he describes the prospects as bleak:

In dieser Gemengelage werden wir bald in eine Debatte geraten, die Merkel und Wolfgang Schäuble um jeden Preis verhindern wollten - um die Beteiligung des öffentlichen Sektors an einem griechischen Schuldenschnitt. Ich kenne keinen Experten, der das jetzt noch für vermeidbar hält. Die Debatte, ob das Schuldenziel von 120 Prozent im Jahre 2020 oder 2022 erreicht wird, ist an Naivität kaum zu überbieten. Griechenland wird weder das eine noch das andere Ziel erreichen. Insolvenz ist, wenn es nicht mehr geht, beim besten Willen nicht.

Es gibt jetzt nur noch drei theoretische Auswege für Griechenland: Austritt, Schuldenschnitt oder Schuldenvergemeinschaftung. Wer meint, die Griechen sollten doch einfach ihre Schulden zurückzahlen, lügt sich und anderen etwas vor. Es ist aber die offizielle Strategie der europäischen Finanzminister, die sich zu Anfang der Woche darauf einigten, das Leid der Griechen um noch mal zwei Jahre zu verlängern. Im nächsten Jahr wird man dann erneut feststellen, dass die Annahmen, die den Rechnungen zu Grunde lagen, wieder einmal zu optimistisch waren. Ich schätze, dass man die Stunde der Wahrheit nicht einmal bis zur Bundestagswahl hinauszögern können wird.

[In this hodgepodge, we will soon be drawn into a debate that {German Chancellor Angela} Merkel and {German Finance Minister} Wolfgang Schäuble wanted to prevent at any price - on the participation of the public sector on a Greek debt haircut {reduction}. I know no experts who think that can still be avoided. The debate over whether the debt goal {for Greece} of 120% {debt-to-GDP ratio} will be reached in 2020 or 2022 can hardly be exceeded in naivety. Greece will reach neither than one nor the other goal. Being insolvent is when it can't go on any longer, even with the best of will.

We're dealing now with only three remaining ways out for Greece: exit {from the eurozone}, debt haircut or communitarization of the debt {among other eurozone countries}. Anyone who thinks that the Greeks should still just pay their debts back is lying to himself and a bit to others. But it is the official strategy of the European finance ministers to prolong the pain of the Greeks two more years {to 2022}. Next year it will be determined that the assumptions on which the calculations were based were once again too optimistic. I estimate that one cannot postpone the moment of truth even until the Bundestag election {sometime in 2013}.]

Tags: angela merkel, austerity economics, eu, euro, european union, greece, wolfgang münchau

Wolfgang Münchau on the whack-job obsession with a gold standard

Another reminder that gold bugs, including "libertarian" Ron "Papa Doc" Paul, are flaming rightwingers. I'm referring to Wolfgang Münchau's column on goldbugism and the gold bugs who ism it, Die Gold-Michel vom Rechnungshof Spiegel Online 24.10.2012.

Münchau writes about what a silly anachronism the idea of a gold standard is.

Es gibt nämlich keinen größeren ökonomischen Giftstoff als diese Edelmetall, das der Weltwirtschaft die Große Depression in den dreißiger Jahren bescherte. Man lese dazu nur die wirtschaftshistorischen Analysen von Charles Kindleberger oder Barry Eichengreen über die Wirkungsweise des Goldstandards auf die Industriestaaten. Der damals aufgetretene Teufelskreis zwischen Sparen und Rezessionen ähnelt im Übrigen dem, was wir heute überall in Europa erleben.

[There is really no greater poisonous economic substance than this precious metal that brought the world economy into the Great Depression in the 1930s. One need only read the economic-historical analyses of Charles Kindleberger or Barry Eichengreen on the way the gold standard's functioning affected the industrial states. The deadly cycle of that time between austerity economics and recessions greatly resembles what were are experiencing today throughout Europe.]

Presumably he's referring especially to Charles Kindleberger's The world in depression, 1929-1939 (1973/1986)and Barry Eichengreen's Golden Fetters: the Gold Standard and the Great Depression, 1919-1939 (1995), though both have a number of books dealing with financial history and financial crises. Eichengreen claims, immodestly but accurately, "I wrote the book on Europe and the gold standard. Literally."

Ein neuer Goldstandard, also eine Bindung der Geldmenge an die Goldreserven der Zentralbank, wäre das Ende jedes Krisenmanagements. Die Zentralbanken könnten auf Wachstumseinbrüche nicht mehr reagieren, indem sie mehr Geld in Umlauf bringen, dadurch die Zinsen drücken und so die Nachfrage wieder ankurbeln. Krisen würden sich unaufhaltsam ausweiten. Hinter dem Goldwahn steckt eine unausgesprochene Ideologie, die eine Rückkehr in eine vorindustrielle, vordemokratische Welt propagiert.

[A new gold standard, that is, a pegging of the money supply to the gold reserves of the central bank, would be the end of any crisis management. The central banks could no longer react to drops in growth by putting more money into circulation, thereby pushing down interest rates and so to again increase demand for goods. Crises would spread without end. Behind the gold madness hides an unspoken ideology that propagates a return to a pre-industrial, pre-democratic world.]

Tags: gold standard, wolfgang münchau

Euro miseries

Spain lately has been a continuing fountain of bad economic news. Paul Krugman updates us on how the news isn't likely to get better enough to keep Spain in the eurozone with impoverishing the country on a more-or-less permanent basis: The Economic Consequences of Mr. Rajoy 10/03/2012.

Wolfgang Münchau as usual has insightful things to say on the euro crisis.

In Warum schon die deutsche Einheit ein Fehler war Spiegel Online 26.09.2012, he makes a provocative argument that today's problems with the euro lie in Helmut Kohl's approach to German unification:

Die deutsche Vereinigung ist nicht die Kehrseite der europäischen Einheit, sondern ihre Antithese. Die Wiedervereinigung ist nicht nur eine der tiefen Ursachen der Euro-Krise, sie ist auch eine der Ursachen unserer Unfähigkeit, die Krise zu lösen. Genau darin besteht die eigentliche Tragödie des Helmut Kohl: Mit seinem größten politischen Streich (deutsche Einheit) säte er den Kern für die Zerstörung seines größten politischen Traums (europäische Einheit).

[German unification is not the flip side of European unity, but rather its antithesis. The reunification is not only the deep cause of the euro crisis, it is also one of the causes of our {German} unwillingness to solve the crisis. Exactly there lies the real tragedy of Helmut Kohl: with his greatest political strike (German unity) he sowed the seeds for the destruction of his greatest political dream (European unity).]

His argument is that the continuing economic subventions from the western German states to the eastern ones has in reality badly handled and, among other things, build understanable skepticism on the part of German voters for the necessary eurozone transfers to day. And he suggests that if the unification had first taken the form of a confederation of two separate German states, that eastern voters would have been less eager after a few years of that to become part of a unified state with West Germany. And that West German voters and leaders would have been more likely to handle a crisis like the euro crisis better.

This is intriguing. I've thought for a while that Chancellor Angela Merkel has been especially heavily influenced by her perception of the German unification, taking it as a model for managing the EU, and likely understanding it as mainly a takeover of the east by the west. And Münchau hints that he thinks that if Angela Merkel had stayed in East Germany and made her political career there, she wouldn't have the chance to make the mess she's making and continuing to make in the eurozone crisis.

He rightly gives Merkel's Christian Democratic Union (CDU) the main blame for the euro problem, though he clearly understands that the Social Democratic Party (SPD) has some share of the blame.

And in Peer Steinbrücks größte Fehleinschätzung Spiegel Online 26.09.2012, he looks at the likely SPD candidate for the Chancellorship in 2013, Peer Steinbrück, who served as Merkel's Finance Minister during the Grand Coalition (CDU/SPD) of 2005-2009. "Die SPD hat den einzig möglichen Kandidaten nominiert, der die Finanzkrise damals genauso falsch einschätzte wie die Bundeskanzlerin." ("The SPD has nominated as the only candidate possible who misjudged the finance crisis [of 2007-2008] as badly as the Federal Chancellor [Merkel].")

Im September 2008, kurz nach der Pleite der amerikanischen Investmentbank Lehman Brothers, stellte sich Steinbrück vor den Bundestag und polterte, die Krise sei vorwiegend ein amerikanisches Problem. Es war eine der größten Fehleinschätzungen im gesamten Krisenmanagement überhaupt. Steinbrück hatte kein Gespür für die Verflechtungen im internationalen Finanzmarkt, auch nicht für die Auswirkungen auf die Realwirtschaft, die er lange herunterspielte.

Kurz nach der Lehman-Pleite haben Merkel und Steinbrück zusammen die bislang verheerendste politische Entscheidung in der Euro-Krise getroffen. Als man sich am 12. Oktober 2008 zum ersten Euro-Gipfel überhaupt in Paris traf, einigte man sich auf deutschen Druck hin darauf, dass jedes Land für sich einen Schutzschirm über das eigene Bankensystem spannen sollte. Diese Entscheidung war der Auslöser der Euro-Krise.

Steinbruck, writes Münchau, "war der klassisch national orientierte Finanzminister."

And he gives a very good description of how compromised the SPD really is in the euro crisis:

Die Nominierung dieses Kandidaten ist nicht der eigentliche Fehler der SPD, sondern das Versagen, eine inhaltliche Alternative zur Euro-Krisenstrategie zu entwickeln. Es gab keine inhaltlichen Gegenvorschläge zum Fiskalpakt, lediglich die Kopplung eines Ja der SPD im Bundestag an eine Finanzmarktsteuer. Das war purer Populismus, denn eine solche Steuer wird in der Praxis kaum umgesetzt werden, und schon gar nicht im Alleingang. Auch mit seinem Vorschlag, Griechenland mehr Zeit zu geben, unterscheidet sich Steinbrück nicht wirklich von Merkel. Denn das Allerletzte, was die Bundeskanzlerin will, ist eine Griechenland-Krise, die auf den Rest Südeuropas überschwappt, und sicher nicht im Jahr vor der Bundestagswahl.

Die Alternativlosigkeit sozialdemokratischer Politik ist somit konsistent mit der Wahl des Kanzlerkandidaten. Mit Steinbrück als Herausforderer hat Deutschland jetzt schon eine Große Koalition. Und da die Grünen ebenfalls ihre europapolitischen Konturen weitgehend verblassen ließen, von der FDP einmal ganz zu schweigen, bleibt für echte Pro-Europäer nur Platz ganz links außen; bei den Linken und den Piraten, wenn es die dann noch geben sollte. Es ist die eigentliche Tragödie von Steinbrücks aussichtsloser Vizekanzlerkandidatur.

[The nomination of this candidate is not the real error of the SPD, but rather than failure to develop and conceptual alternative to the euro crisis strategy {of Merkel}. There was no conceptual counter to the fiscal pact, merely the coupling of a Yes by the SPD in the Budestag to a financial transaction tax. That was pure populism, because such a tax will in practice hardly be enacted, and certainly not on a single-nation basis. Even with his demand to give Greece more time, Steinbrück doesn't really distinguish himself from Merkel. Because the very last thing the Federal Chancellor wants is a Greece crisis that slops over into the rest of Europe, and certainly not in the year before the Bundestag election.

The alternative-less Social Democratic politics is thereby consistent with the selection of the Chancellor candidate. With Steinbrück as the challenger, Germany really already has a Grand Coalition. And because the Greens in any case have squandered their Euro-political contours, and forget the FDP, for true pro-Europeans there is only a place on the far left; by the Left Party and the Pirate Party, if they still exist. That is the real tragedy of Steinbrück's hopeful candidacy for Vice-Chancellor.]

By that last comment, he means that Steinbrück and the SPD expect to come in second place and form a Grand Coalition, in which the junior party gets the Vice-Chancellorship. Steinbrück may also want to serve as Finance Minister, which he could along with being Vice Chancellor. Joschka Fischer served as Vice Chancellor and Foreign Minister simultaneously during the red-green coalition.

Münchau provides a very good description of how badly the "center-left" parties have failed badly in this depression and euro crisis. He's talking about the German case. But similar observations could be made about the social-democratic parties in France, Spain, Portugal, Greece and other countries.

Tags: angela merkel, austerity economics, eu, euro, european union, neoliberalism, wolfgang münchau

Will the eurozone bank union be an effective arrangement or another Angela Merkel boondoggle?

Wolfgang Münchau of the Financial Times has the distinction of having written consistently informative and well-reasoned commentary on the euro crisis the last couple of years. In Warum die Bankenunion so wichtig ist Spiegel Online 19.09.2012, he continues the practice, in this one writing about the importance of a banking union.

Bank union, putting European banks under a common EU-wide governance that would displace the mainly nation-based system in effect now, is officially one of the highest priorities of the EU. But, as usual, German Chancellor Angela Merkel is dragging her feet, hoping no doubt as always to achieve maximum German benefit at minimal German cost while doing just enough and no more to deal with the immediate problem. That approach has been working terribly so far. But I think Angie is going for a full-blow world-historical disaster on this thing.

The euro crisis really gets back to the weakness of the European banking system. Trying to prevent German and French banks in particular from being further weakened by a Greek default was what kicked off Angie's just-enough-to-get-by plus austerity-austerity-austerity program in 2009. Which, along with the collapse of investment bubbles in Greece and Spain, triggered various balance of payments issues that now have Germany and the rest of the eurozone locked in what increasingly looks like a financial death-grip with each other.

Münchau considers the bank union process, agreed upon as a priority by EU leaders in June, to be the most important priority among various urgent priorities to turn the EU into a fiscal and transfer union that is the only sure way to save the euro. Münchau sees it as key to solving the "Target 2" problem with the inner-eurozone balance of payments. Target 2 is the clearing mechanism that each eurozone country's national bank uses to balance its national accounts when capital moves from one eurozone country to another. When capital flows are one-side as they have been recently with huge amounts flowing from other eurozone countries into Germany seeking a safer haven in German banks, the German central bank (Bundesbank) in effect loans money to the other central banks. If the eurozone collapses, the other countries' central banks will be off the hook for obligations to the Bundesbank in a clearing mechanism for a currency that no longer exists, and the Bundesbank will have to be recapitalized. With their Target 2 loaning at €800 billion or more, that will seriously sting. As Münchau puts it:

Der Status quo liegt somit auch nicht wirklich im deutschen Interesse, denn jeden Monat steigen die deutschen Überschüsse im Target-2-System und damit das Risiko eines Extremverlusts, wenn die Währungsunion auseinanderbricht.

In einer echten Bankenunion würde die Nationalität einer Bank keine Rolle mehr spielen. Dann würden wir auch nicht mehr von deutschen und spanischen Banken reden, sondern nur noch von Banken in Deutschland und in Spanien. Es gäbe dann keinen Grund für eine Bank in Düsseldorf, einen Kredit an eine Bank in Sevilla abzulehnen. Eine Bankenunion ist ohne Zweifel eine Transferunion. Länder mit starken Banken haften dann für Länder mit schwachen Banken, genauso wie das heute schon im nationalen Bereich erfolgt. Als die Münchner Hypo Real Estate in Schwierigkeiten geriet, da sprang ja auch Berlin ein, nicht die bayerische Landesregierung.

[The status quo therefore also does not represent Germany's true interest, because even month the German deficit in the Target 2 system grows, and therewith the risk of an extreme loss if the currency union falls apart.

In a true bank union the nationality of a bank would no longer play a role. And then we would no longer speak of German and Spanish banks, but rather of banks in Germany and in Spain. Then there would be no grounds for a bank in Düsseldorf to extend credit to a bank in Sevilla. A bank union is without doubt a transfer union. Countries with strong banks would then have a liability for countries with weak banks, just as today already happens in the national arena. When Münchner Hypo Real Estate had difficulties, Berlin also interveneede, not the Bavarian state [provincial] government.] [my emphasis]

An effective bank union, in other words, would create an institutional arrangement requiring the richer countries to regularly transfer funds to the poorer countries in the eurozone, which would eventually reduce the great disparities between the two groups.

Tags: angela merkel, austerity economics, eu, euro, european union, greece, wolfgang münchau

Long, hot summer in the European economic crisis

"Italien und Spanien bleiben akut gefährdet. Es wird ein heißer Sommer." ("Italy and Spain remain in acute danger. It will be a hot summer.") - Wolfgang Münchau, Mogelpackung vor dem Bundestag Spiegel Online 18.07.2012

The European economic/financial crisis is in a state where it could stumble along for months or the current patchwork solutions could start unraveling at 2008 "Lehman event" speed on almost any day. We could come up with various metaphors: a dam about to break; an impending avalanche that needs only a small shift in a few rocks to start; a line of traffic traveling 100 miles an hour on the freeway spaced only inches apart from each other so that one driver suddenly braking will cause a multi-car pileup at high speed.

Munchau's metaphor in American English would be that of a long, hot summer where one event could easily set off a catastrophic chain of troubles.

In the non-metaphorical world, the question of the moment is, when will a bank run begin in Spain? A rush of panicky withdrawals from Spanish banks is the most likely event at the moment that could spread rapidly to a bank run in Italy and overwhelm the eurozone's existing rescue arrangements in a matter of days.

The drama will inevitably create false impressions. The particular problems created by the euro common currency zone that are now a reality were identified by a number of economists as risks two decades ago when the eurozone was first being planned. The flood of capital from the wealthier nations to the "periphery" countries in the eurozone such as Greece and Spain were well-known events as they were occurring. The danger of this kind of currency-related bind in an economic downturn was played out in Argentina in 2001-2. The weakness of the European banking system has been highly visible since the current economic depression began in 2007. And the weakness of the banks started manifesting itself as an acute sovereign-debt crisis with Greece in 2009.

So the current crisis didn't develop overnight. And, like the currency problems created by the gold standard during the Great Depression, it won't be solved overnight, nor can all the affected countries be expected to respond at the same pace. For Greece, Ireland, Italy, Portugal and Spain, getting out of the euro and restoring their own currency seems to be their only realistic hope at this point of addressing the economic crisis in their countries in a substantial way any time within the next decade or more.

Even if German Chancellor Angela "Frau Fritz" Merkel's current governing coalition in Germany were to fall apart prior to the scheduled 2013 parliamentary election, there's no obvious prospect that a change of government in Berlin would provide any drastic change in German policy. The main opposition party, the SPD, is on board with Angie's program of impoverishing the periphery countries to enrich the German One Percent and to allow European banking corporation to avoid regulations that would provide more substantial stability to the European financial system.

Wolfgang Münchau's column focuses on a vote in the German Bundestag (lower house of parliament) on Thursday (tomorrow). They have to decide to approve German participation in the European Security Mechanism (ESM) as currently proposed - which includes financial support to the ESM. The ESM is the financial fund designed to provide emergency relief to eurozone countries. The EU summit of two weeks ago agreed that the ESM could provide direct aid to Spanish banks that are currently undercapitalized and going under.

(The option of taking those troubled banks over by the Spanish government and resolving them according to the processes established for routine bank insolvencies seems to be effectively off the agenda, a whole interesting topic in itself.)

The reason the EU summit decision to allow direct aid to Spanish banks from the ESM was important is that Frau Fritz wanted Spain to take on more state debt to bail out the private banks. That would make Spain debt-to-GDP ratio worse, putting upward pressure on bond rates that are already bouncing up to 7% there on some days, a level which would force Spain into bankruptcy. If Spain borrowed the bailout money for the private banks by taking on more sovereign debt, they would find themselves under even more drastic pressure from Frau Fritz and her subservient EU government collaborators for austerity, austerity, austerity for the periphery countries, though not so much in Germany itself.

The EU summit decision looked to optimists (Pollyannas?) like an alternative. The ESM would provide the funding directly to the Spanish private banks and the Spanish government and public debt would be off the hook for that burden.

But, as Münchau points out, Frau Fritz is insisting that the ESM support to the Spanish banks be in the form of credits for which the Spanish government would be on the hook for paying back. Yes, the idea is as "witless" as it sounds, to use Münchau's description. In explaining why it is so, he reminds us of a fact far too little mentioned in discussions of the European crisis (my emphasis):

Indem Spanien seine Banken rettete, geriet der Staat selbst in Schwierigkeiten. Genau das war vor einigen Jahren auch das Problem in Irland. Der irische Staat hatte kein Schuldenproblem, bis er auf deutschen Druck anfing, mit Milliardenaufwand seine Banken zu retten.

[Insofar as Spain rescues its banks, the state itself comes into difficulties. {I.e., the worsening debt-to-GDP ratio} Exactly that was also the problem a few years ago in Ireland. The Irish state had no debt problem until it began under German pressure to rescue its banks with outlays of billions.]

Tags: angela merkel, austerity economics, eu, euro, european union,greece, ireland, italy, spain, wolfgang münchau

Wolfgang Münchau gets "shrill" on the euro crisis

Wolfgang Münchau writes pessimistically about the economic future of Europe in Eurozone crisis will last for 20 years Financial Times 07/06/2012. The dramatic title of his column is actually misleading. What he says is that if you take what German Chancellor Angela Merkel is saying seriously, it would take 20 years to solve the euro crisis. And that don't have that long. He's really writing about the remarkable self-delusion and lack of responsibility being shown by the EU leadership.

He's right to point to the central political failure of leadership in Germany:

What we know now is that Germany will not agree to mutualised deposit insurance. It cannot even agree to give the European Stability Mechanism a banking licence so that it can leverage itself. If Germany cannot do the minimum necessary now, why should anybody think it can agree a political union? This is less credible than the promise by an alcoholic to give up drinking in five years.

The politics of the euro rescue has crossed an important threshold in Germany. A narrow majority is still in favour of the euro, but a majority is against further rescues. A group of 160 economists, led by Hans-Werner Sinn, president of the Ifo economics institute, last week published a manifesto against a banking union. It was full of sound and fury, but the importance of this document is that it reflects a consensus view.

Angela Merkel's answer was revealing. She told them that there is nothing to worry about. The banking union was about joint supervision, she said. There will be no joint deposit insurance. She has a very different understanding of a banking union than the European Central Bank. At most, I expect this new banking union to cover the 25 largest banks, and leave those cajas and Landesbanken in national control. This is like an alcoholic who promises to drink only the better cognacs from now on. [my emphasis]

And he points out what a joke the supposed resistence to Angie's policies on the part of Italy's Mario Monti and Spain's Mariano Rajoy really was:

With interest rates on 10-year government bonds over 6 per cent, neither Italy nor Spain can sustain their membership in the eurozone. This is what Mario Monti and Mariano Rajoy should have made clear to Angela Merkel at the summit. They should have told her that their governments would make preparations for a withdrawal from the eurozone if there was no change in policy. A resolution requires either a eurozone bond – or some other form of debt mutualisation –in both the public and private sectors, and ECB bond purchases. Germany does not accept the former. The ECB does not accept the latter. [my emphasis]

Münchau basically sees two possibilities: let the current situation drag on until some event like a major bank run in Spain triggers a collapse of the eurozone, or, European leaders can find the leadership ability and sense of responsibility so sadly lacking in their actions the last three years on the euro crisis to plan for some kind of controlled unwinding of the currency union. "A collapse would constitute the biggest economic shock of our age," he says.

Tags: angela merkel, eu, euro, european union, spain, wolfgang münchau

The euro crisis and balance of payments

One integral aspect of the euro crisis that doesn't get mentioned in news stories as often as others is the balance of payments/trade deficit part. Looking at that side of the problem is a reminder why the advice of Germany's Chancellor Angela Merkel and her Angie-bots that other eurozone countries should remake themselves in Germany's interest is so absurd in the current situation.

Heiner Flassbeck deals with it in A German end to the Euro vision Euro Intelligence 18.01.2012, as does Wolfgang Münchau in Wir bekämpfen die falsche Krise Spiegel Online 18.01.2012

Germany relies heavily on exports. Most of their exports are to Europe, and a large proportion to other eurozone countries. So Germany has been the single biggest winner to date from the trade advantages of the common currency.

Because Germany exports more than it imports, it typically has a surplus in its balance of trade. Those of its trading partners who import more than they export run trade deficits. We could say that the laws of accounting make impossible a situation where every other eurozone country could develop a similar model to Germany's by running surpluses with lots of other eurozone countries.

Flassbeck:

Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union. A monetary union is in essence a union of countries willing to harmonize their rates of inflation and to sacrifice national monetary policies. A country like Germany, fighting for higher market shares in international markets, tries to achieve the opposite. It has to undercut the cost and price level of its main trading partners by all means. A monetary union formed by already closely integrated countries becomes a rather closed economy and needs domestic policy instruments like monetary policy to stimulate growth time and again. German monetarism asks for the opposite, the absence of any discretionary action of central banks and relies solely on flexibility of prices, in particular wages.

Along these lines the story of EMU’s failure is quickly told. From the very beginning of the monetary union, German politicians put enormous pressure on trade unions to help realise an increase of unit labour cost and prices that was less than in other countries. Since member states no longer could devalue their currencies to maintain competitiveness as they had done hitherto this was a rather easy task. The effects got stronger as small annual effects accumulated over time and, after ten years, created a huge gap in competitiveness in favour of Germany. Germany built up huge current account surpluses and Southern Europe and France accumulated the complementary deficits. [my emphasis]

Münchau discusses this problem in the context of differential rates of development in the eurozone. And he reminds us that even if the European institutions were doing what needs to be done to save the euro in the short run - which they aren't doing and can scarcely be expected to do so at this point - it won't fix the euro's problem in the longer run without a real fiscal and transfer union that would systematically promote more balanced development within the eurozone.

Flassbeck's bottom line on the Merkel/Sarkozy austerity course they've imposed on the eurozone: "Captain Merkozy's boat approaches the rocks at high speed."

One notable aspect of Flassbeck's piece is that he articulates the consequences for peace and democracy of a European Union crackup:

Once upon a time European leaders believed in a step-by-step approach of European integration. Each step would bring Europe closer to the target of closely related but still independent states. According to this vision states would be willing to relinquish more and more of their independence, in order to gain advantages of peace, global strength through political cooperation and economic strength as a result of a big common market. In this approach, the creation of a monetary union was just one of these consecutive and unavoidable steps on the path to strengthen political cooperation and to complete the common market with its indisputable advantages for all European citizens. [my emphasis]

Tags: eu, euro, european union, heiner flassbeck, wolfgang münchau

Waiting for Franz Ferdinand

Wolfgang Münchau thinks it's Summer of 1914 for the eurozone. All that's lacking is the euro-equivalent of the assassination of Archduke Franz Ferdinand. Vergebliche Euro-Rettung.Die Ruhe vor dem großen Knall (The Calm Before the Big Crash) Spiegel Online 14.12.2011.

Both the IMF and the OECD are projected a downturn in the world economy that will heavily affect Europe going into the new year. The EU summit agreement does not empower the European Central Bank (ECB) or the European sovereign bailout fund to act as a borrower of last resort for eurozone countries' bonds. It does not provide the kind of debt relief that Greece and Italy and maybe Spain actually need. It does not create eurobonds whose credit-worthiness would be based on the eurozone as a whole. It does not address the bank crisis in Europe. And it does not create a "fiscal union" (even though German politicians may call it that) or a "transfer union" in which wealthier members systematically subside the less wealthy.

Besides that, the actual treaty language isn't ready yet for the formal changes to be approved by the EU-minus-one nations. And there are real question as to whether the agreements as currently discussed will directly conflict with treaties governing the EU countries, which would require Britain's approval, as well, which will not be forthcoming.

It's a house of cards, in other words. Even the Post Democracy 1.0 regimes in Greece and Italy can't show that they will meet their austerity cuts and revenue targets, which even if they did would only make their debt problem worse. There should be a contest for the euro's goodbye theme song. This is a good possibility:



Münchau writes that no European leader really wants the euro to fail, because the immediate economic consequences are likely to be some degree of really bad. But European leaders also have neither the will, nor the imagination to put through a meaningful solution. As he puts it, "Wir sind also jetzt schon an dem Punkt, wo das, was nötig ist, um die Krise zu lösen, schon längst nicht mehr mit dem überlappt, was politisch und rechtlich möglich ist. ("So we are know at the point where that which is necessary to solve the crisis is no longer overlaps with what is politically and legally possible.")

It could be a default by one of the harder pressed countries that sets of the collapse, Münchau notes. Or a bank crisis, or someone spilling a sack of rice. When it comes, it's likely to move very quickly to a crash of the euro. It's unpredictable enough that it's hard to even speculate about what might be left, e.g., some remaining mini-euro zone of a few countries. But after this, who besides Germany would be interested in such a thing?

Tags: eu, euro, european union, wolfgang münchau

End of the euro, Monday edition

The breaking news has already made Wolfgang Münchau's Dec. 5 column discussed below at tad dated. German Chancellor Angela Merkel met with her junior partner in the destruction of the European Union, French President Nicolas Sarkozy, and they are already fulfilling Münchau's prediction of a fatally flawed, lazy compromise. Based on the early reports, the "Merkozy" team agreed that private banks will not be asked to take any further losses on their eurozone debts except for those in Greece. And it's not clear from what I've seen whether that includes a guarantee to reckless banksters against taking further losses on Greek sovereign debt.

Münchau has been a tough critic of Angie's appalling mishandling of the European bank and sovereign debt crises. In France and Germany look set to fudge it yet again Financial Times 12/05/2011, he looks at the prospects for a successful EU summit on Friday. He makes an important characterization of what Merkel is imposing for Germany's supposedly equal EU partners she apparently sees as satellite countries to Germany:

Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance.

Once again, the purpose of the EU was to promote peace and democracy in Europe. For Merkel, its overriding purpose is to enforce the will of European business lobbies, with Germany acting as their main agent. In Italy and Greece, she and her Foreign Miniter Guido (Guido Westerwelle) have been making the proverbial offers that can't be refused, imposing governments in those two countries that are essentially debt-collection agencies for large European banks.

Wolfgang Münchau outlines the differences between the position taken by Angie and Guido (no European Central Bank [ECB] last-resort lending function, no eurobonds, an insistence that the EU - meaning Angie and Guido - have final control over national budgets), of French President Jacques Chirac (ECB as lender of last resort, eurobonds, no "fiscal union" of EU countries as advocated by Germany), and ECB head Mario Draghi (fiscal union based on austerity as demanded by Angie and Guido, then later maybe consider eurobonds and some for active role for the ECB).

Münchau expects the result at the summit to be yet another lazy compromise between France and Germany which can't solve the problem.

I suppose it will be only in retrospect that we will be able to identify the Game Over moment for the euro. It may have even been in late October, when the "Merkozy" duo first proposed the current failed remedy. But any chance for survival of the euro look slim at this point, and for the EU not much better. The end for the euro will presumably play out as some interacting combination of bank runs and sovereign defaults.

Münchau sees Herbert Hoover austerity economics as being the poison pill:

Of course, a fiscal union is not a quick fix. On the contrary, it may take 10 years, or even longer. The EU would once again have to set up a convention to make a proposal for a treaty change, to be followed by an inter-governmental conference. Some states would hold referendums with uncertain outcomes. There is no way the EU can agree on a fiscal union on Friday, and implement it on Monday. But it would be a big step if the European Council made a clear commitment for a multi-step, multi-year process.

European leaders understand the technical, and legal issues well. I am also certain that most understand that the eurozone faces an existential threat. But I doubt they have ever understood the economic and financial dynamics behind the crisis. Their narrative, which reduces the crisis to a failure of fiscal discipline, is probably the underlying reason why all their crisis resolution efforts have failed so far.

With five days to go, the world is waiting for a big political signal. What I fear is a fudge, consisting of a multi-annual fiscal retrenchment, no eurobond, at most a temporary debt redemption instrument. The ECB will provide liquidity measures to stabilise the financial sector, and it will also provide a backstop for the bond markets. But I find it hard to see how Mr Draghi can agree an unlimited guarantee in the absence of a political union and a eurobond. A strengthened stability pact is not a fiscal union. [my emphasis]

Tags: angela merkel, eu, euro, european union, wolfgang münchau

Wolfgang Münchau starts the countdown on the euro

Wolfgang Münchau in The eurozone really has only days to avoid collapse Financial Times 11/18/2011 says, well, what the headline says, that the time to take advantage of what small chance there is to save the euro in its current form is short:

If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then there is still a risk of a long recession, possibly a depression.

He lists the elements required for a practical solution: the European Central Bank (ECB) acting (directly or indirectly) as the buyer of last resort on eurozone countries' sovereign debt; establishment of eurobonds; and, a formal agreement on a tighter fiscal union.

Münchau writes:

Last week the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

German Chancellor Angela Merkel, the worst head of government the Federal Republic of Germany has ever had, has been dead set against the ECB acting as the buyer of last resort.

The euro crisis was fundamentally a banking crisis that manifested itself publicly as a sovereign debt crisis that became a crisis of confidence in democratic institutions - I don't use the phrase lightly - that has intensified the crisis of insufficient investment resulting from the depression that began in 2007. The various crises are now manifesting themselves simultaneouly.

The same Financial Times reports that European banks are facing a constricted market in their own bonds now. (Tracy Alloway, European banks feel the effects of funding crunch; link is to the 11/27/2011 wire version on CNN) And not a minor one, either:

The funding hole for European banks is deepening following a sharp fall in bond issuance this year as market turmoil leads to a region-wide credit crunch.

European banks have sold $413bn worth of bonds this year, equivalent to just two-thirds of the $654bn that is due to be returned to investors in 2011 as the debts mature, according to data compiled for the Financial Times by Dealogic.

What "returned to investors" means is that the banks have to come up with the cash, either by drawing on their own capital or refinancing. Already facing both official and market-driven demands for increasing their capital cushion, this represents the bank crisis manifesting itself directly.

Investors say they have been deterred from buying bank bonds due to uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.

"Some deleveraging after the financial crisis is clearly needed, but I think banks are being sent on a crash diet that will have wider implications," said Morgan Stanley analyst Huw van Steenis. "It's not just the risk of a European credit crunch, it will have a knock-on effect in Asia and the US." ...

Banks face an even greater redemption hump next year, when $720bn worth of debt is due to mature.

Or, as Münchau summarizes the situation:

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.

I don't think Münchau is being alarmist when he says, "Italy's disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most." The 10 days being the lead-up to December 9. That's Friday of next week. It could give a whole new meaning to the concept of Black Friday.

Münchau expresses more-than-justified doubts about whether the failed current leadership of the EU can pull off anything so complex and important in the next week and a half. One major rumor is that Austria, Finland, France, Germany, Luxembourg and the Netherlands, or some subset of that group, all of which still are considered the best credit risks even though all of them to some degree are having their own troubles in the bond markets, might come together to issue common high-grade eurobonds among themselves. (Gemeinsame Bonds der AAA-Staaten.Verwirrung um Alleingang der Euro-Elite Süddeutsche Zeitung 28.11.2011)

But that won't solve the immediate issue for the existence of the euro.

It's going to be a dramatic week and a half!

Tags: eu, euro, european union, wolfgang münchau

Eurocrisis, Black Friday edition

The eurocrisis is proceeding with a sickening air of inevitability, "It would take a radical reversal of course to save this thing. And so far I see no willingness to face up to that necessity," writes Paul Krugman (Neo-Calvinists and the Euro Crisis 11/22/2011)

Martin Wolf writes in To the eurozone: advance or risk ruin Financial Times 11/23/2011 (lin to Globe and Mail version) about the increasing pressure on bond rates basically across the entire eurozone. He sees two reasons for this:

... eurozone sovereigns lack a true lender of last resort. They are what Charles Goodhart of the London School of Economics calls "subsidiary sovereigns". Their debt bears a risk of outright default rather than mere monetisation. Fearing default, investors create illiquidity, which turns into insolvency. The greater the proportion of foreign creditors, the more plausible default becomes: investors know that politicians are more unwilling to default to their own citizens than foreigners. But, as a result of the currency union, foreigners hold a higher proportion of sovereign debt than before: half of Italian public debt is held abroad.

... there is break-up risk. No currency union is irrevocable. Even countries do not survive forever. But a currency union among discordant states is far more fragile than a country.

He sums up the unencouraging situation as follows:

It seems to me that three lessons shine out from the crisis. First, as André Sapir, of the Université Libre de Bruxelles, pointed out at last week's conference, the eurozone's financial sector must be regulated by a common regulator and backed by a common fiscal authority. Second, the eurozone would, at the least, benefit enormously from a unified bond market that covered a big portion of member country debt. Finally, there needs to be more effective discipline over the structural and fiscal policies of the member states. But none of the above would (or should) be acceptable to democracies without a substantial move towards a political union. Yet everything we have recently seen and heard suggests that this development, ruled out in the 1990s, would be even harder now.

. Wolfgang Münchau in Es ist die Politik, Dummkopf! Spiegel Online 23.11.2011 writes (my translation from the German):

Wer Ursache und Wirkung einer Krise missversteht, wird sie nicht lösen. Das ist das eigentliche Problem mit unseren kombinierten Fiskal- und Inflationslügen. Mit Sparen kommt man aus dieser Krise nicht raus. Auch nicht mit Strukturreformen. Erst recht nicht mit falsch motivierten europäischen Vertragsänderungen. Die Krise ist mittlerweile derart weit fortgeschritten, dass ohne die EZB nichts mehr geht. Und ohne Euro-Bonds ebenfalls nicht.

[Those who misunderstand the origins and processes of a crisis will not solve it. That is the real problem with our [European] compbined fiscal and inflation lies [that serve as justifications for austerity economics]. We won't get out of this crisis with saving. And not with structural reform. And certainly not with falsely motivated changes to European [EU] treaties. Meanwhile, the crisis has gone so far that without the ECB [European Central Bank] nothing can be done. And also not without eurobonds.]

There he refers to the ECB acting as buyer of last resorts for eurozone sovereign debts. By eurobonds, he means bonds backed by the credit of all the eurozone countries together, not by the credit of only individual countries.

Der Grund für den Pessimismus besteht darin, dass wir nur noch wenig Zeit haben, maximal ein oder zwei Monate. Man kann einfach nicht mehr davon ausgehen, dass es der Politik gelingen wird, in dieser kurzen Zeit die verfestigten Narrative zu ändern und dann daraus die richtigen Konsequenzen zu ziehen.

[The basis for pessimism is that we have only a short time left, one or two months at the maximum. One can not simply assume that the politicians will change their hardened narrative and then draw the correct conclusions.]

Between now and the end of January, if we accept Münchau's timetable, we have a big change of a chain of events something like this: a eurozone country (Spain, Italy, Greece, Austria, whoever) declares their immediate exit from the euro; a bank run on that countries bank ensues; that triggers wider bank runs and activates the credit default liabilities held in presumably very large amounts (1, 2, 3 trillion dollars?) by European and US financial institutions; a financial meltdown on the the scale of September 2008 or worse.

Tags: eu, euro, european union, paul krugman, wolfgang münchau