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EU economy 2011 Part III
Reuters Factbox: Coming events in the euro zone debt crisis as of 4 November 2011
It’s All Connected: An Overview of the Euro Crisis
European leaders are meeting this week to deal with growing debt problems rattling investors worldwide. Here is a visual guide to the crisis.
Special Series (Part 1): Assessing the Damage of the European Banking Crisis
Sovereign Debt: The Expected Problem
The Centrality of European Banking
New Banking ‘Empires’
Read more: Special Series (Part 1): Assessing the Damage of the European Banking Crisis | STRATFOR
Kevin O’Rourke: A Summit to the Death
(Project Syndicate) … the most obvious point about the recent summit is that the “fiscal stability union” that it proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a “fiscal union,” as some have done, constitutes a near-Orwellian abuse of language.
Many will argue that such arrangements are needed to save the eurozone, but what is needed to save the eurozone in the immediate future is a European Central Bank that acts like a proper monetary authority. True, Germany is insisting on a “fiscal stability union” as a condition of allowing the ECB to do even the minimum needed to keep the euro afloat; but this is a political argument, not an economic one. Economically, the proposal would make an already terrible institutional design worse.
Merkel Seeks EU Revamp With Sarkozy as S&P Puts 15 Euro Nations on Review
(Bloomberg) German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their push for new rules to tighten euro-area economic cooperation as Standard & Poor’s said it may downgrade credit ratings across the region.
OECD highlights eurozone contagion risk
European leaders need to provide ‘credible’ firepower to stop the contagion in the eurozone or risk a severe recession, OECD warns
Germany, France Press for Coercive Euro Zone Debt Rules
(Reuters) – Germany and France stepped up a drive on Monday for coercive powers to reject euro zone members’ budgets that breach EU rules, and the United States kept up the drumbeat of demands from the rest of the world for decisive action.
‘New Europe’ Falls Out of Love with the Euro
(Foreign Policy) For all the talk of Greeks and Italians seriously entertaining the thought of dumping Europe’s common currency in exchange for good old drachmas and lira, the more troubling indicator for the decade-old euro may be all the Eastern European countries that have pushed for years to be part of the monetary union but are now having second thoughts.
Germany, France plan quick new Stability Pact: report
(Reuters) – German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means – including a quick new Stability Pact – to fight the euro zone sovereign debt crisis, Welt am Sonntag reported on Sunday.
[The report said] that if necessary Germany and France were ready to join a number of countries in agreeing to tough budget discipline [and] that because it would take too long to change existing European Union treaties, euro zone countries should avoid such delays [by] agreeing to a new Stability Pact among themselves – possibly implemented at the start of 2012.
Why Only Germany Can Fix the Euro
To solve the European crisis and avoid repeating the mistakes of the late 1920s and the 1930s, those sitting in Berlin and Brussels should put down their Andrew Mellon and read Charles Kindleberger.
(Foreign Affairs) In The World in Depression: 1929-1939, Kindleberger argued that “the 1929 depression was so wide, so deep, and so long because the international economic system was rendered unstable by British inability and U.S. unwillingness to assume responsibility for stabilizing it.” Indeed, Kindleberger’s critique of the United States’ role in that era’s crisis summitry might well have been written about Germany today: “The World Economic conference of 1933 did not lack ideas … [but] the one country capable of leadership was bemused by domestic concerns and stood aside.”
Leaders needed, not just managers
In Greece and Italy, a coalition of the old elite, led by a technocrat, will not provide a miracle fix to deeply rooted problems
Euro zone split fears as EU dithers on Italy
(Reuters) – Political and economic crisis in Italy spurred fears of a split in the euro zone with borrowing costs for Europe’s third biggest economy at unsustainable levels and the bloc unable to afford a bailout.
EU sources told Reuters that French and German officials had held discussions on a two-speed Europe with a smaller, more tightly integrated euro zone and a looser outer circle.
Analysis: Euro zone failure could be vast geopolitical shock
Estimates of how likely the currency bloc is to break up, how damaging it might be and what might remain afterwards vary wildly. But with European leaders still struggling to find a credible response to the crisis, the prospect of one or more countries leaving — and effectively defaulting on their sovereign debt as they do so – is seen rising by the day.
Suddenly, pundits, policymakers and other observers find themselves questioning one of their most fundamental assumptions — that an increasingly united Europe would be a key player in a newly multipolar world.
(The Economist) Breaking up the euro — How it could happen; why it would be horrible
German Politicians Shed Few Tears for Berlusconi
(Spiegel) The Italian prime minister has a long track record of offending the Germans, and his relationship with Chancellor Angela Merkel was strained. But some fear that the post-Berlusconi era will mean the return of instability to Italian politics.
(CBC) Berlusconi to resign once reform plan approved — Vote on austerity measures to come next week
Berlusconi plays last cards, denies will resign
(Reuters) … many of those around him believe his days are numbered and that he has no chance of implementing unpopular austerity measures with an extremely fragile majority.
Italy has the third biggest economy in the euro zone and its political turmoil and debt worries are seen as a huge threat in the wider crisis facing the continent’s single currency. Government bond prices would recover and the yield spread would fall by a full percentage point if the government should fall, according to a Reuters survey Intrigue, betrayal in Rome as Berlusconi fights on
G20 summit fails to allay world recession fears
(The Guardian) Summit ends in disarray as world leaders fail to agree increase to IMF and concerns mount over prospects for Italian economy
Italy under IMF supervision — Berlusconi burlesque
(The Economist) Though yields on its bonds have soared alarmingly, Italy has not had to seek a bail-out (not yet anyway). And in an attempt to ensure it does not succumb, bringing down the euro with it, it has been placed under a special preventive regime—placed on probation to ensure it implements the many promises it made to carry out reforms designed to promote growth and balance the budget by 2013.
Eurozone crisis: The possible resolutions
From the BBC, a very concise table of the possible alternatives
Hopes dashed as G20 ends in failure
(Emerging Markets) Hopes that a summit of G20 leaders in Cannes might help put an end to the eurozone debt crisis were dashed on Friday as nations failed to agree on the necessary measures.
Although G20 leaders pledged they were “ready to ensure additional resources could be mobilised [to the IMF] in a timely manner”, they failed to outline a precise amount, or how the funds would be disbursed.
The summit ended without any firm pledges from non-eurozone members to contribute to the European Financial Stability Facility (EFSF), the eurozone’s bail-out fund.
G20 leaders agree to boost IMF resources
(BBC) G20 leaders in Cannes have ended their summit with a plan to boost growth and rebalance the global economy, but no detail on how to save the eurozone. However, according to Bloomberg, G-20 Balks at IMF Aid on Europe’s Failure to Stem Crisis
Italy accepts IMF monitoring, EU looks for support
(Reuters) – Italy, under fierce pressure from financial markets and European peers, has agreed to have the IMF and the EU monitor its progress with long delayed reforms of pensions, labor markets and privatization, senior EU sources said on Friday.
G20 seeks solution to debt crisis
(BBC) The G20 leaders are set to continue their talks on Friday as they seek to find a sustainable solution to the eurozone debt crisis. They are expected to discuss ways to increase the firepower of the International Monetary Fund (IMF).
The hope is that increased resources will help the IMF to support struggling eurozone economies, such as Greece.
Analysis: Europe breaks taboo, opens door to Greek euro exit
(Reuters) – German Chancellor Angela Merkel and French President Nicolas Sarkozy shattered the bloc’s most sacred taboo, conceding openly for the first time that Greece might end up having to leave the tight-knit currency club it joined a decade ago. … what does seem clear is that an exit would spark contagion to other peripheral countries as foreign investors pulled out en masse. This in turn would hammer financial institutions across the bloc, leading to bank runs and forcing the European Central Bank (ECB) to respond with massive liquidity provisions and government bond purchases.
Former European leaders urge growth, not austerity
In a personal message to French President Nicolas Sarkozy, who chairs the G20 Summit this week, dozens of former policymakers and high-profile economists, including the former leaders of Germany, Spain and the UK, said that sorting out the eurozone’s economic crisis was an “urgent priority”. [They] welcomed the Brussels agreement on Greece’s sovereign debt and the “more realistic haircut” for bondholders, an increase in the firepower of the European Financial Stability Facility and bank recapitalization as “decisive, necessary and major steps forward”. But … added: “Europe’s fiscal, banking and political crisis must also be resolved in a way that does not hamper growth prospects in the short term while putting into place credible long-term policies to reduce deficits.
Mohamed El-Erian: How badly did Europe just bungle its best shot yet at avoiding economic catastrophe?
EU Shocked and Furious at Greek Referendum Plan
(Spiegel) The shock announcement by Greek Prime Minister Giorgios Papandreou of a referendum on the Greek bailout has thrown efforts to rescue the single currency into doubt, unsettled global markets and angered EU leaders just days after they agreed a wide-ranging package to contain the debt crisis
Can Europe’s Divided House Stand? Separating Fiscal and Monetary Union
(Foreign Affairs November|December 2011)
Summary: Most pundits argue the eurozone has only two options: break up or create a fiscal union to match its monetary one. In fact, there’s a third, and better, path: adopt tighter market discipline, bailing out illiquid countries while letting truly insolvent ones go bust. The result would be a collection of fitter economies and a Europe strong enough to play a big role on the world stage.
China warns it cannot ‘cure’ eurozone’s debt crisis
(The Telegraph) China has stressed it will not be a “saviour” to Europe as President Hu Jintao embarks on an official visit to the continent that will take in this Thursday’s crucial G20 summit in Cannes.
Europe’s rescue plan
This week’s summit was supposed to put an end to the euro crisis. It hasn’t
(The Economist) In the early hours of October 27th, after marathon talks, the leaders of the euro zone agreed on a “comprehensive package” to dispel the crisis that has been plaguing the euro zone for almost two years. … The scheme is confused and unconvincing. Confused, because its financial engineering is too clever by half and vulnerable to unintended consequences. Unconvincing, because too many details are missing and the scheme at its core is not up to the job of safeguarding the euro.
Unfortunately the euro zone’s firewall is the weakest part of the deal (see article). Europe’s main rescue fund, the European Financial Stability Facility (EFSF), does not have enough money to withstand a run on Italy and Spain.
EU package cures symptoms not illness
(China Daily) The leaders must pay attention to long-term structural reform and measures to stop deficit-running policies, beginning with the tougher controls on the budgets of member countries, integration of taxation, and a new framework for running the eurozone, which they said were on the cards. While these verbal assurances are all very well, it is time to act and translate decisions into action.
Europe’s Dying Bank Model
(Project Syndicate)Two years into the crisis, the authorities have correctly identified four crucial problems – sovereign debt, bank capital, the risk of a Greek default, and deficient growth. But they have yet to agree on cause and effect. Understanding the obsolescence of most European banks’ business models is absolutely crucial to sorting that out.
Euphoria over EU summit deal fades
(AFP) … investors questioned whether the plan would really be able to get to the root of region’s problems.
Euro fund head: no quick China deal; Italy costs up
(Reuters) – The head of Europe’s bailout fund sought financial support from China on Friday to help resolve the bloc’s debt crisis, saying that while no quick deal was in sight he was still confident Beijing would keep buying bonds issued by his fund.
Does the EU bailout deal stand up to scrutiny?
(The Guardian) Any deal was better than no deal on the night – but now critics are asking why China would want to bankroll European debt
Euro zone still unsafe to join despite deal: Poland
Some optimism and a great deal of caution greets the news
James Moore: The PIIGS could derail plans to solve eurozone crisis — however much money is pumped into the European Stability Fund, whatever form it takes, those rates are going to rise, quite likely to unsustainable levels. Even with an agreed rescue deal, the PGS [Portugal Greece & Spain] could yet derail the enterprise. (Forbes) First Thoughts on the Eurozone Summit
Eurozone Summit Statement
Chinese official: Euro zone help in China’s interests – FT
(Reuters) – … “It is in China’s long-term and intrinsic interest to help Europe because they are our biggest trading partner but the chief concern of the Chinese government is how to explain this decision to our own people [emphasis added],” Li [Daokui, an adviser to China’s central bank, told the Financial Times newspaper on Thursday].
(Reuters) – European Union finance ministers have canceled a meeting set for Wednesday but the summit of EU leaders and of the euro zone leaders will proceed as normal, an EU spokesman said on Tuesday. More
Peter Foster: Europe’s systemic irresponsibility — The cancellation of a meeting of European finance ministers that was meant to precede the announcement of a final, final, final debt-crisis package on Wednesday confirms policymakers’ utter disarray and increasing desperation.
France Retreats in German Clash Over Bailout Fund Leverage
France retreated from a clash with Germany over how to expand the power of Europe’s bailout fund as finance ministers entered the second of a six-day marathon to stave off a Greek default and shield banks from the fallout.
Jean Pisani-Ferry : Three Ways to Save the Eurozone
(Project Syndicate) The eurozone’s creeping fragmentation is primarily the result of the mutual dependence of banks and governments. In the eurozone, banks are vulnerable to sovereign-debt crises because they hold a lot of government bonds – frequently issued by their country of origin. Governments, for their part, are vulnerable to bank crises because they are individually responsible for rescuing national financial institutions. Each episode in the current crisis illustrates the fragility caused by this interdependence.
Since the summer, the continuing installments of the Greek crisis have concealed a worrying process of fragmentation in the eurozone. The decision to reform the surveillance of governments and banks, and to boost the European Financial Stability Facility, is a welcome response, but the key issue is how to construct a more robust monetary union
Death of a summit
(The Economist) THE big blanks left in the draft of the euro summit communiqué that was doing the rounds on October 20th said it all.
Leveraging Explained — Europe’s Idea for Maximizing the Backstop Fund
(Spiegel) How can the reach of the euro backstop fund [aka European Financial Stability Facility or EFSF] be maximized without forcing governments to throw more money at it? European leaders are considering a finance tool that would attract private investors and greatly expand the reach of the fund.
(FT) Europe forced into second summit
Banks face penalties in return for bail-outs
(FT) Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs.
The stance – on the agenda at this weekend’s EU summit – has emerged after intense debate between European officials and bankers over whether the plan for forced recapitalisations should be exempt from normal state-aid rules.
Germany and France Divided over Euro Bailout
Euro Leaders’ Crash Crisis Campaign Bogs Down on Divisions Over Timetable
(Bloomberg) While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.
Europe Tries to Stave Off a Reckoning
(NYT) Despite the fact that economists and bank analysts now widely expect that Greece will have to default on its debt, no European leader will say so, at least for the record. Instead, the countries in the euro zone are continuing to act as if measures agreed to in July to shore up Greek finances, and that slow-moving European parliaments have yet to fully approve, are sufficient to contain the crisis. One sign that Europe is preparing to address the problem might be a sudden outbreak of candor about the real condition of Greece, or an acknowledgement that leading European banks that hold sovereign debt of Greece and other troubled countries in the region will need hundreds of billions in new capital to ensure their stability.
But European leaders, especially in France and Germany, whose own banks are exposed, are reluctant to broach the inevitable. Why? Because they do not yet have in place a big pool of funds to ensure that an orderly Greek default does not lead markets to assume that the much larger economies of Spain and Italy will soon follow it into insolvency. And partly because they do not have the political will to commit those funds.