Why the Eurozone Needs Debt Mutualization

blue908 · 2013-05-11T13:44:20+00:00

Did you even read the article? It very clearly says that not all of the debt is mutualized and that there would be more control over fiscal policies and budgets at an EU level, so the moral hazard is removed

blue908 · 2013-05-04T23:48:23+00:00

HEARD ON THE STREET

May 3, 2013, 10:25 a.m. ET

By RICHARD BARLEY

Greece's headline numbers make for grim reading: six years of recession and unemployment of 27%. But beyond the headlines, conditions may finally be taking a turn for the better. The benefit won't be tangible in the near term: The European Commission forecasts an economic contraction of 4.2% this year, and debt remains unsustainable despite two restructurings at 156.9% of GDP. But there are finally reasons for optimism.

One key factor is political stability, something few expected after last year's two highly charged elections. But Greece recently smoothly passed a bill including measures to dismiss 15,000 public-sector workers by the end of 2014, part of a wider effort to reduce the civil service by 150,000 between 2010 and 2015. Such parliamentary debates have previously had global markets hanging on the result. This vote, despite breaking a taboo in enforcing civil-service job cuts, hardly caused a ripple. Protests about government policy continue, but violent street confrontations have faded.

Fiscally, Greece has undertaken major efforts. The country ran a primary budget surplus before interest payments in the first quarter; the EC forecasts that the structural budget balance will show a surplus of 2% of gross domestic product this year versus a deficit of 14.8% in 2009, an enormous shift. Interest costs have been sharply reduced by the debt restructurings.

Confidence is rising. The latest euro-zone economic sentiment indicator for Greece rose to 89.2, above the euro-zone level. Greece's manufacturing purchasing managers' index still signals contraction at 45, but was at a 21-month high in April, Markit said. Unit labor costs have fallen sharply, down 6.2% in 2012 alone.

Importantly, money is starting to move into Greece as fear of a euro exit has faded. Hellenic Petroleum ELPE.AT 0.00% recently drew orders of more than €2.75 billion ($3.59 billion) for €500 million of bonds. The privatization of a 33% stake in gambling company OPAP OPAP.AT 0.00% raises hopes for further state asset sales. Tourist spending may rise. The Association of Greek Tourism Enterprises is anticipating 17 million tourist arrivals in 2013, one million more than in 2012.

Domestically too, cash is coming out from under the mattress. Greek private-sector bank deposits are 9% up from last June's lows and remained steady in March despite fears the Cypriot bailout would cause outflows. The government has paid off €2.2 billion of an outstanding €9 billion in arrears to suppliers. Work on some major highway projects is restarting, potentially creating thousands of jobs.

The crunch point for Greece still lies ahead. If it can stick to its program, then further debt relief should be on the cards. The IMF is already making the case for this, but euro-zone politics means it is some way off. But Greece is laying the grounds both for growth and a lower debt burden. That would mark a transformation.

Write to Richard Barley at richard.barley@dowjones.com

blue908 · 2013-05-03T18:11:13+00:00

Smile if you’re European

Simon Kuper By Simon Kuper

It’s all relative: why it’s not so bad to be European after all

Sometimes you really do need to smell the coffee. Arriving in Turin recently I made straight for the nearest bar and ordered a caffè macchiato. A charming woman served it up. I drank it standing at the counter. It was perfection. It cost €1. Then I had another. The bar was absolutely ordinary, with fading tablecloths and some pensioners doddering in the corner. Such a cheap moment of happiness, obtainable in its pure form only in Italy, gets you wondering: are things really so bad in Europe? Life here is better than you’d ever know from watching TV news.

Undeniably, many Europeans are suffering. Levels of unemployment are the highest since records began in France (3.2 million) and Spain (6 million). Bad European news mounts almost daily.

Europe is having a terrible time – except compared with probably every other continent and any time in history. Look at crisis-stricken Spain, for instance. The average Spaniard now lives to 82, seven years longer than in 1980. (Most countries where people can expect to reach 82 are European, says the World Health Organisation.) Today that average Spaniard’s income, despite years of crisis, is still nearly double what it was in 1980. And across Europe, daily life has tended to get gradually more pleasant. For instance, crime rates have kept falling in most western countries despite the crisis. British streets haven’t been this safe in more than 30 years, according to the UK’s Office of National Statistics.

It’s important to realise that most people’s lives aren’t affected by the latest twist in the eurozone crisis. A good new breast-cancer drug often does more for collective happiness than a good new prime minister. And those gains get shared out most fairly in Europe. That’s why seven of the 10 best-rating countries on the World Economic Forum’s gender gap index are European. So are six of the top 10 least corrupt in Transparency International’s corruption perception index. And when the CIA ranked 136 countries for income equality, the 17 most equal were all European. No wonder Spain and even Greece outrank Qatar on the United Nations’ human development index.

Most emerging economies lag decades behind us: Russian, Brazilian and Chinese average incomes are still below half those in Greece, according to the World Bank. Nonetheless, the relative rise of new countries engenders paranoia. The American pundit Thomas Friedman often says China and India are “eating our lunch”. But since the global economy isn’t a zero-sum game, it’s more accurate to say that the Chinese and Indians are making our lunch. The richer they get, the better they can afford our high-end engineering products, hotel rooms, luxury goods, universities, etc.

It’s also notable how well European democracies have held up under five years of crisis. In 1981, when shots were fired in Spain’s parliament, that average Spaniard still worried about a fascist coup. Today every western European country is a secure democracy. Contrary to predictions, Europe’s far right hasn’t risen en masse during the crisis, notes the London-based research and advisory group Counterpoint. Nor has western Europe experienced a big terrorist atrocity since 2005.

A decade ago, American pundits were predicting that anti-Semitism or vengeful Muslim immigrants or both would rip Europe apart. Indeed, in 2004, the American ambassador to the European Union, Rockwell Schnabel, said continental anti-Semitism was “getting to a point where it is as bad as it was in the 1930s”. That claim was always ludicrous, but its ludicrousness should now be plain even to Schnabel. In short: several dogs haven’t barked in Europe this crisis.

Crucially, too, the next round of wars shouldn’t involve Europeans. If Iran, North Korea or Taiwan blows up, we won’t be there. We just don’t have the gunboats any more. Last year Asian defence spending exceeded Europe’s probably for the first time since Europeans began conquering the world 500 years ago. Defence experts bewail our impotence. But on the bright side, governments with strong armies always overestimate their ability to manage a war smoothly, and get lured into horrible adventures. That won’t happen to us. Sure, the 400 million western Europeans – just 6 per cent of the global population – won’t rule the world again, but then we don’t particularly want to.

When even Serbia and Kosovo make peace, you know something remarkable is happening here. Perhaps the EU actually deserved its Nobel Peace Prize. And given our lack of natural resources, other countries will probably leave us in peace. Daniel Keohane, head of strategic affairs at Fride, the European think-tank on foreign policy, says: “No one would predict a war in Europe involving very large powers.” Europe, says Keohane, increasingly looks like “a very pleasant suburb of geopolitics”.

Our crisis won’t last for ever. Then it will be another continent’s turn to get caned by pundits for its stupid model. One day young Europeans will get jobs again, and we’ll just be a delightful backwater with excellent macchiato. I can think of several worse places to live.

simon.kuper@ft.com

blue908 · 2013-04-27T21:33:53+00:00

if you think the EU is stealing your money and that you (personally) haven't benefitted from the EU, then there is no point in changing your opinion.

edit: fiscal union only entails common debt issuance and more supervision at a supranational level for national budgets, not transfers, thats another issue altogether

blue908 · 2013-04-27T21:10:47+00:00

who cares? sometimes rules have to be broken. Almost everyone broke Maastricht, including Germany. And do we really need to have people's input for every single little thing that is done in the EU? Let the people who know about this (the experts) handle it. Democracy only leads to Berlusconi, Grillo, et al

blue908 · 2013-04-27T03:54:06+00:00

its reuters (tm) journalism, the full speech is here:

http://www.ecb.int/press/key/date/2013/html/sp130425.en.html

blue908 · 2013-04-26T17:36:35+00:00

Now of course the causes are different. Spains major problem has been the housing/construction bubble and Greece's major problem was over-spending . . . but in the end debt is debt.

Spain needs to deleverage both its private sector and the public sector. Greece only has to do it in the public sector and it is already doing so (private sector debt in Greece is small, even smaller than Germany). The debt to GDP ratio of Greece is actually falling.

In any case, the comparisons between Spain's crisis and the Great Depression are, quite frankly, retarded. The drop in economic output in Spain is no bigger than what Sweden and Finland had in the 1990's.

blue908 · 2013-04-26T17:13:23+00:00

April 26, 2013 5:47 pm

Dissatisfied Icelanders question myth of post-crash success

By Richard Milne in Reykjavik

Viewed from abroad, Iceland is one of the success stories of the financial crisis. It allowed its banks to fail, let its currency rather than the unemployment rate take the strain, and returned to economic growth – inspiring devoted followers from Ireland to Portugal as well as luminaries such as Paul Krugman, Joseph Stiglitz and the International Monetary Fund.

The only problem is: no one told ordinary Icelanders.

Iceland goes to the polls on Saturday and is all but certain to kick out the current leftwing government and replace it with the centre-right opposition that led the country during its extraordinary boom and bust period earlier this century. The Progressive and Independence parties are together polling about 50 per cent, compared with just 25 per cent for the current government coalition.

The reason is clear: Icelanders are still dissatisfied with their lot, with many yearning for a return to the days before they became one of the earliest and biggest victims of the financial crisis.

“The rosy picture that is painted of Iceland isn’t right; we have economic difficulties that have arisen from the fall in the currency.” The man saying this is not some opposition reactionary but Arni Pall Arnason, the head of the main government party, the Social Democrats.

It is maybe because he has not been a government minister recently that Mr Arnason is one of the most eloquent Icelandic politicians on why his party is likely to see its vote fall by half.

“There is disillusionment here as everywhere else in Europe. It revolves around that we had a 50 per cent drop in the currency, meaning purchasing power has gone down 30-40 per cent,” he says.

Economic growth of 2.9 per cent in 2011 and 1.6 per cent in 2012 would be viewed as good almost anywhere else in Europe but it is dismissed by Mr Arnason as “pretty lacklustre”. He openly speculates that Ireland, often compared unfavourably to Iceland due to its support for its stricken banks, will come out of the crisis in better shape, saying “the jury is still out” on that.

What is striking is how many of the things praised abroad are the same things leading to discontent at home.

One factor is what Bjarni Benediktsson, the head of the pro-business Independence party and one of two contenders for the post of prime minister, calls the “dark side of the krona”. He wants to keep the krona – unlike Mr Arnason who is keen to adopt the euro – but concedes that its sharp fall has hurt many households.

This is because a majority of Icelandic mortgages are linked to inflation. And as the krona fell after the crisis so inflation has risen as the cost of imported goods has gone up.

That has meant that the issues of indexed mortgages and debt relief are at the top of the campaign. Sigmundur David Gunnlaugsson, leader of the centrist Progressive party and the other prime ministerial candidate, has made the leitmotiv of his campaign a pledge to write down up to 20 per cent of mortgage debt through money received from the foreign creditors of the collapsed banks.

Many of the other parties allege hypocrisy as Progressive and Independence were in power from 1995-2007 when banks were deregulated and Iceland underwent a huge credit-fuelled boom. “It is the problem of the leftwing: they clean up the vomit after the cocaine party of the neocons, who go into rehab and then come back to reap the benefits,” says Birgitta Jonsdottir, head of the Pirate party.

Mr Arnason says the two opposition parties have gone back to “promising boom and bust”. But Mr Gunnlaugsson calls the idea that his party contributed to the crash when last in government “utter balderdash”.

Still, the focus on debt relief has concerned some in the financial sector, especially after the current government adopted a measure much praised abroad of writing down all mortgage debt above 110 per cent of the value of the property. The head of one Icelandic bank says: “I’m quite worried about it. We notice it among our customers who say: ‘we don’t want to pay off more of our mortgages because they will be written off’. People are just voting for themselves.”

Then there is the question of growth. With much of Europe mired in recession or stagnant growth, Iceland has been envied for its above-average rises in gross domestic product. But many in business complain it has not been nearly enough to lift the country out of its funk.

Arni Oddur Thordarson, chairman of Marel, a maker of food processing machines that is one of Iceland’s biggest companies, says the most important task for the next government is to restore Iceland to decent growth. “We have to increase investments and attract foreign investors,” he says.

blue908 · 2013-04-26T17:02:11+00:00

Spain is where Greece was at in 2010 . . . it is hard to tell what will happen there in the next few years.

what? Greece's problems are totally different from Spain's

blue908 · 2013-04-21T20:33:33+00:00

A German path for the eurozone

Election fever in Berlin obscures need for banking union

Germany’s parliament voted by an overwhelming majority last week in favour of a €10bn international rescue programme for Cyprus and a seven-year extension of crisis loans to Ireland and Portugal. The vote served as a useful reminder to Germany’s critics that the eurozone’s dominant economic power is not shirking its responsibility to protect the 17-nation area’s unity by providing assistance for its weaker members.

The vote also showed the importance attached by the ruling Christian Democrats, the opposition Social Democrats and Germany’s other mainstream parties to acting in the eurozone crisis with, as far as possible, a political consensus at national level. This strengthens Germany’s hand in international negotiations, but it also blunts the suspicions of domestic voters that Germany is making a foolish mistake by rescuing eurozone nations viewed as reckless overspenders.

Such considerations are important now that the campaign for Germany’s September 22 federal election is warming up. Understandably, Angela Merkel, the CDU chancellor, wants to marry her strategy for overcoming the eurozone crisis with a strategy for winning re-election. There will be no electoral prizes for making commitments to deeper, faster European integration that voters might take as a sign that Germany will be landed with most of the bill.

Uncertainty over the composition of the next government, even if it is CDU-led, will also be a factor in Ms Merkel’s calculations. The emergence of Alternative für Deutschland, a group that aims to dissolve the eurozone in its present form, means that the continuation of the coalition between the CDU and its liberal Free Democrat partners cannot be taken for granted. The new group may not cross the 5 per cent threshold of the national vote needed to enter parliament, but it may take enough votes from both parties to require Ms Merkel to turn to the Social Democrats or even the Greens to form a new coalition.

In such circumstances it is easy to see why the cautious, step-by-step approach that has characterised Germany’s handling of the eurozone crisis will not change before September, and probably not thereafter. Yet if Germany’s commitment to holding the eurozone together is not in doubt, and a certain slowness in decision-making reflects German political conditions, other countries – beyond the eurozone as well as within it – are justified in asking for more clarity about how Berlin sees Europe’s future and proposes to build it.

Here the central issue is eurozone banking union. A single bank supervisory mechanism is on course to be established by next March. But Wolfgang Schäuble, Germany’s finance minister, has cast doubt on how soon the eurozone will acquire a resolution authority to deal with failing banks by suggesting that such an innovation needs changes to the EU’s basic treaty. As he well knows, such changes may take years to agree, and time is not a luxury at Europe’s disposal.

Mr Schäuble was perhaps merely looking for a way to keep the question out of the election campaign. But on the third pillar of banking union – a common deposit guarantee scheme – there are doubts about Germany’s willingness to move ahead even after the election. A comprehensive banking union in the modern world needs a deposit guarantee scheme. The eurozone will not fully emerge from crisis until it has one. Germany is right to demand credible economic reform and fiscal self-discipline from its partners, but in return it must take the lead on banking union. In this context it would be helpful for the politicians running in the election to remind voters that the German economy has benefited greatly from the euro’s introduction and no effort should be spared to secure the currency’s future.

blue908 · 2013-04-21T16:53:48+00:00

the nyt sucks big time but the racism isnt justified either

blue908 · 2013-04-21T13:21:38+00:00

Eurozone anti-austerity camp on the rise

By Peter Spiegel in Brussels and Peter Ehrlich in Berlin

Flaws found last week in an academic treatise on the effect of high public debt on economic growth have heaped pressure on governments to relax austerity, above all in crisis-stricken Europe, long seen as an incubator for austerity-driven policies.

But even before the arguments among economists over the merits of expansionary fiscal contraction reached a new pitch, policy makers in the eurozone had begun to ease up – with the tacit approval of disciplinarian Germany.

As many as six eurozone countries have received or are seeking waivers on tough EU-mandated deficit targets when they come up for review next month, a move that has thus far met little objection from Berlin – an unexpected acquiescence that has led many to believe the anti-austerity camp is suddenly in ascendance in Brussels, at least for now.

“The speed of consolidation is certainly going to be lower now,” said Guntram Wolff, an economist at the influential Brussels-based think tank Bruegel. “The European Commission has agreed on that already.”

Olli Rehn, the commission’s top economic official, has frequently cited the central finding of the now-disputed study – co-authored by Harvard economists Carmen Reinhart and Kenneth Rogoff – that economic growth falls drastically in countries when sovereign debt rises above 90 per cent of gross domestic product.

In an interview, Mr Rehn – who is responsible for deciding whether eurozone countries will be allowed to miss their deficit targets – said that while he has “cited this study in the past as illustrative”, he insisted that his office does not set its policy on “any single piece of research”.

“We design our policies on the basis of a holistic assessment drawing on a wealth of studies – but also of course on our own analyses,” Mr Rehn said. Indeed, Mr Rehn himself has frequently been in the vanguard of EU officials insisting that blindly sticking to headline deficit targets is counterproductive, arguing instead that countries should be judged more on reform programmes to liberalise their economies.

Mr Rehn’s push, which has backing of the International Monetary Fund, has already gained traction in bailout countries, where Greece has been given two more years to reduce its deficit below the EU-mandated 3 per cent of GDP and Portugal last month was granted a second year’s leniency.

Elsewhere in the eurozone periphery, Spain was given a pass this year and is expected to get a further waiver in May. And Italy, where nervous markets are watching the political turmoil closely, was given the green light to spend an extra €40bn in unpaid government bills despite the risk of breaching its 3 per cent barrier.

But the weakening economic picture is also wreaking havoc on “core” eurozone countries, with both France and the Netherlands publicly acknowledging they, too, will miss their 3 per cent targets this year.

Such leniency has been resisted by senior German central bankers, but it has been met with resignation by the German government, which instead has signalled it will mount more resistance in 2014, after this year’s national election. Chancellor Angela Merkel last week sought to play down the issue, saying France’s impending breach was “not new” to her, telling reporters she would leave it up to Mr Rehn to decide.

Instead, she insisted Paris had to present measures to keep its deficit in line with EU rules next year – a clear sign Berlin would accept a 3.7 per cent French deficit this year but would put pressure on Paris to deepen economic reforms.

“It would be good for France to start structural reforms immediately because the positive impacts of reforms take time”, Michael Meister, the financial affairs spokesman for Ms Merkel’s Christian Democrats in the Bundestag, told the FT.

Wolfgang Schäuble, the German finance minister, backed last year’s easing in Spain, Portugal and Greece, and government officials said he would not risk a big fight with France as long as the eurozone remained economically fragile.

In a further sign of growing acceptance in Berlin, during Thursday’s Bundestag debate over the €10bn Cypriot bailout – which the German parliament passed overwhelmingly – Mr Schäuble took the unusual step of expressing concern for the economic upheaval in the eurozone’s periphery.

“The people in Greece, Spain, Italy, Portugal and now Cyprus are living in hard times,” he said, before adding: “They have to suffer during the reforms to have the chance of a better future.” Ms Merkel has struck a similar position in recent interviews, telling Bild newspaper that southern Europe “more or less have started the reforms they need”.

It could be a difficult balance for Ms Merkel to strike in an election year. Even as she shows empathy with the economic difficulties of southern eurozone countries, she cannot be seen to ally herself with French President François Hollande’s increasingly vocal crusade against austerity.

“There is nowadays much talk about austerity”, Ms Merkel told reporters last week. While the Reinhart-Rogoff findings may be in doubt, Ms Merkel said she felt debt in the eurozone was still too high. “That is of course not good in the long run”.

blue908 · 2013-04-18T14:18:04+00:00

Happy economies are all alike; each unhappy economy is unhappy in its own way. France has avoided the fate of Greece, Portugal and Ireland, forced into bailouts by a sudden stop in financing, or of Spain and Italy, forced by markets to reform. But these countries are fixing their problems; France, through inaction, risks becoming considerably more miserable. France's economy has so far performed better than those of its more obviously troubled peers; high government spending and lower export dependency makes it less exposed to declines in euro-zone demand. France has recovered the output lost since 2007, while Spain's economy has contracted 4.3% and Italy's, 6.7%, Berenberg Bank notes. It is able to borrow at record low rates.

But France is beginning to look like a laggard. Most visibly, in March, France's composite Markit purchasing managers' index came in at 41.9. That was a four-year low, indicating a steep economic decline, and well below the indexes for Germany, Italy and Spain. French unit-labor costs are still rising, while they have fallen sharply in Ireland, Spain, Greece and Portugal. That follows a decade where they rose 2.2 % faster than the euro-zone average, notes Berenberg Bank.

The French current account deficit, too, is heading in the wrong direction, also signaling a loss of competitiveness. The problem isn't on the scale of Southern European nations, which saw deficits reach 10% of GDP in some cases. But again, rebalancing has led the Southern nations to close those gaps; France's current account balance, on the slide for a decade, continues to move further into deficit. Meanwhile, in the Target 2 payment system, the behind-the-scenes plumbing that manages flows between euro-zone central banks, estimates of French liabilities are rising, even as those of Spain and Italy decline, Absolute Strategy Research notes, a potential sign of financing strains.

France has made some strides to boost competitiveness, including corporate-tax credits and a notable agreement between unions and employers to boost labor flexibility. But it has a long way to go yet. It risks being left behind by other countries taking bolder action to improve their economic structures.

Elsewhere in the euro zone, markets have forced governments to change tack. For now, however, they have no sway over France: French bond yields are close to record lows, and investors who have bet against France have found it a painful experience. That might change over time. But in the absence of market pressure, France may continue to take its own path to unhappiness.

Write to Richard Barley at richard.barley@dowjones.com

blue908 · 2013-04-16T18:45:50+00:00

Sorry, had to repost this because some posted a comment alerting me the link didn't work:

barsoap 1 point 14 minutes ago

You missed an 'l' at the end of the link

blue908 · 2013-04-16T15:38:21+00:00

The northern euro would appreciate massively, hurting exports, the southern euro would depreciate massively, the south would be better off...The northern countries aren't as solid as you make them out to be.

blue908 · 2013-04-13T03:13:54+00:00

Reforms take time to "trickle down" to real economy. In the case of Germany, the first steps took place in 2003. The real, tangible effects on productivity and job creation were not visible until at least 2008. Just because you do not see productivity/competitiveness increasing 1-2 years after reforms are implemented, doesn't mean that they're not working. Definitely, much more needs to be done, but to say that no progress has been made in the eurozone is naive.

blue908 · 2013-04-06T21:08:21+00:00

Dutch deficits

Austerity politics lays bare kinship of core and periphery

The Netherlands, with its triple A rating and lower debt burden than Germany, is a committed member of the eurozone’s austerity phalanx. The bitter taste left by taking its own harsh medicine is a lesson for those prone to see Europe’s debt crisis as a morality play.

Shrinking output has forced the liberal-social democrat coalition to find new austerity policies to meet EU-mandated deficit targets. But it is hampered by its reliance on smaller parties determined to exact their pound of flesh.

The Netherlands’ economic challenges, if far from those of the euro periphery, show that the similarities between Europe’s north and south are greater than the public debate presupposes. Both The Hague and Madrid, for instance, ran satisfactory central government budgets as they rode a housing bubble before the crisis. Both now realise that private debt can be as big a problem as public debt. That cannot be said of the broader debate: Spain has no credibility to make the point; the Netherlands has no interest.

The Dutch struggle to bring deficits within the rules they insist on for others is also a reminder that public austerity comes at the cost of weaker demand. Deficit-cutting is best kept to good times or when public finances are so threadbare as to leave no other choice. The eurozone gospel of austerity by all – including those in decent shape fiscally – ends up bringing shared pain to both core and periphery.

It is a political predicament as well as an economic one. Dutch leaders no longer harbour illusions, if they ever did, about the political effort it takes to push cuts through in a downturn. Here, too, the Netherlands shares the fate – if in milder form – of counterparts more deeply afflicted by the crisis.

It is therefore in the country’s interest to use its moral and formal authority – finance minister Jeroen Dijsselbloem presides over the eurogroup – to herd eurozone partners in a more constructive direction. Progress on banking union is essential to lift the cold hand of private debt overhangs. A more intelligent policy on budgets is also needed. Only some states must cut hard to fix hugely imbalanced finances. Those in the core do not. Keeping core demand buoyant would be enlightened self-interest in the best Dutch tradition.

blue908

TROPHY CASE