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Wednesday, August 31, 2011

Juppé's Polemic

In an interview with today's FAZ, French Foreign Minister Alain Juppé made the following, rather striking statement:
“The dissolution of the eurozone is not acceptable, because it would also be the dissolution of Europe. If that happens, then everything is possible. Young people seem to believe that peace is guaranteed for all time…But if we look around in Europe there is new populism and nationalism. We cannot play with that.”
This threat to peace is, of course, the justification for doing "whatever is necessary to ensure the cohesion of the eurozone."

Does Juppé really believe that people are still willing to buy into this transparent scare-tactic? He has simply turned the logic of current events on its head and confused cause with effect.

After all, the rise of populist parties, which Juppé cites as a threat to European peace no less, has been a response to the attempts to preserve the eurozone at all costs, with many of them using opposition to the bailouts to their electoral advantage.

The True Finns are perhaps the most prominent example of this strategy, which has both pushed them to the top of opinion polls and enabled them to influence the Finnish government from the outside. The argument over Greek collateral in return for Finnish bailout loans is a case in point. The protests against EU-backed austerity measures on the streets of Athens are another manifestation - the EU flag's 12 peaceful stars distorted by Greek protesters into a golden swastika should be enough to make us think twice. This tense situation is particularly damaging for Germany, which is now increasingly being seen as Europe's bully, reawakening some pretty unpleasant stereotypes.

The rise of anti-euro parties point to a situation in which the politics of the eurozone could become explosive. Juppé's polemic, and the mindset that gave birth to it, only makes such a scenario more likely. Shutting down or ignoring peaceful means of registering legitimate protest is the surest way to push people to extremes (though, just to be clear, populist parties around Europe are more diverse in their make-up and origin than is often understood, i.e. the True Finns and FPÖ are not the same). If voters' message is ignored, what options do they have left to register their opposition to and fears about the eurozone elite's consensus?

Former ECB board member Otmar Issing made the point in the FT earlier this month that:
"Any attempt to 'save' monetary union via agreements which transfer sovereignty to a European level, where violations of fundamental treaties have become a regular event, lacks any logic. In the end it will only further alienate the people from Europe itself...

...This type of political union would not survive. Its collapse would be brought by resistance from the people. In the past cries of 'no taxation without representation' have brought war. This time the consequence would be to threaten the collapse of the most successful project of economic integration in the history of mankind."
Similarly, in the FT this week, the standard-bearer of the German anti-bailout movement, Hans-Olaf Henkel, argued,
"Instead of uniting Europe, the euro increases friction. Students in Athens, the unemployed in Lisbon and protesters in Madrid not only complain about national austerity measures, they protest against Angela Merkel, the German chancellor. Moreover, the euro widens the rift between countries with the euro and those without."
Now, talk of the eurozone crisis bringing down the entire EU with it is clearly premature at this stage and, putting it in these terms, on either side of the debate, risks upping the stakes so far as to make the argument self-fulfilling.

However, with the fiscal union versus dismantling of the eurozone choice on the horizon (however distant) the politics of this issue are only going to get more fraught until politicians start addressing the genuine concerns of their citizens. Juppé's remarks are unlikely to help.

Losing Faith In The Commission?

Today's Le Monde has a juicy example of one of the upcoming policy priorities in the European Commission's in-tray. A study* has apparently been submitted to the Commission recommending the introduction of EU-wide standards to reduce the amount of energy consumed by...household electric coffee machines (we kid you not).

The article notes that Barroso & Co. will make a decision on this delicate matter over the next few months. The Commission could either opt for introducing a new regulation or choose to negotiate with producers on a voluntary basis.

We recently noted that the euro crisis, and particularly France and Germany's response to it, has sidelined the European Commission in favour of national governments. Le Monde's front page editorial applies this theme to the coffee machine/energy issue. It concludes,
"That's how things go in a Europe of which the Commission is no longer the engine. But let's reassure ourselves, the aforementioned Commission finds something to do. These days, it bustles about regulating the energy consumption of our electric coffee machines. Our filter and espresso machines are too voracious of kilowatts; we need - we're told - to introduce a new rule as a matter of urgency. Some days, being a European is a matter of faith."

* Update 16:10: Here is a link to the study mentioned by the article. It looks like a huge research project...

Tuesday, August 30, 2011

Playing With Fire

Before we start:

For our Italian-speaking readers, you can listen to our interview with the European Council on Foreign Relations on the situation in Italy and its potential implications for the future of the single currency.

Now straight to the point:

Two weeks ago, the Italian government unveiled its second austerity package in less than a month. It was immediately clear that not too many people were happy about the new measures, and not just among opposition parties. Unsurprisingly then, Italian Prime Minister Silvio Berlusconi met with key members of his own party and Lega Nord in his well-known villa in Arcore yesterday evening to try and hammer out a more satisfactory deal. Leave the final savings of €45.5bn for 2012-2013 untouched was the only rule, all the rest was negotiable.

In the end then, the result was, as one might expect, a rejigged package which has very little in common with the initial set of measures. For starters, the 'solidarity contribution' - an extra levy on high incomes, the introduction of which made Berlusconi's heart "drip with blood" (his imagery not ours), and even triggered a strike of Serie A footballers last weekend - has been scrapped, together with the almost €4bn it was expected to raise over the next three years. Lega Nord got it its way on cuts to transfers to local administrations, which in the new draft are reduced by around €2bn.

Crucially, it looks as if the Italian government is a bit confused on what to do to cover for these adjustments, which are clearly driven by political rather than economic reasons. Officials from the Italian Finance Ministry have warned that, at the moment, there's a 'hole' of at least €4.2bn in the package adopted yesterday compared to the previous version. Where will this money exactly come from? Well, the mooted VAT increase has been ruled out - Italian Finance Minister Giulio Tremonti was never too keen on it. Other, more ambitious proposals to abolish all Italian provinces and halve the number of parliamentarians are indeed impressive on paper, but they both require amendments to the Italian Constitution - i.e. several months of discussions in the Italian parliament and a two-thirds majority in both chambers if a referendum is to be avoided. In other words, neither of them could guarantee savings in the short term.

The government maintains that a new intervention on pensions plus stricter controls against tax evasion will be enough, but given the Italian government's history in tackling tax evasion we're sure you'll forgive us our misgivings in this case.

The draft package was presented to the Budget Committees of both houses of the Italian parliament this morning and will be discussed by the Italian Senate from next Monday. It's still unclear whether the opposition will be allowed to submit its own amendments - something which would likely make the debate even longer.

The general impression is that Italy's ruling coalition is playing with fire. As we argued here, if the Italian government fails to get serious on this, it may have to plan for a future outside of the eurozone. Unfortunately, so far, Italian governing politicians seem more focused on trying not to disappoint their electorates rather than grasping the gravity of the situation (the fact that they are only the latest in the long line of politicians to do so in this eurozone crisis does little to help their standing). Italy's problems are structural, and the markets won't forgive the Italian government for failing to address them indefinitely.

An un-makeable eurobond, Part II

In yesterday's FT we had the following letter, responding to the idea of the UK issuing eurobonds - as suggested last week by Chris Giles, a columnist for the paper:

Sir, Chris Giles’ argument that “Britain should bite the bullet and back a eurobond” (Comment, August 25) is thought-provoking but politically and economically flawed. Total eurobond issuance would probably be in the region of £1,000bn-£2,000bn a year, depending on the proportion of national issuance retained – a £34bn UK share as suggested by Mr Giles would hardly be enough to give Britain substantial influence over the eurozone under his “pay to play” logic. Due to this small share, the UK’s participation would not do much to boost the rating of eurobonds either; nor would it act as an effective inflation deterrent.

In order to have the suggested effects, the UK’s share would have to be far larger, which in turn could increase its debt to gross domestic product and its own borrowing cost, while also exposing the UK to unacceptable exchange rate risks. In addition, even if it can be achieved legally and politically, it is far from clear that the half-hearted mix between eurobonds and national bonds that currently is being discussed will actually end the crisis. Such an arrangement would discourage fiscal discipline while possibly even increasing overall borrowing costs for indebted economies, as the national share of the bonds would face alarmingly high rates if eurobonds were implemented on existing debt.

Friday, August 26, 2011

Pushing the limit

In the early hours of this morning, Spain's ruling Socialist party, PSOE, and the conservative opposition, PP party, brokered a deal on amending the constitution to include limits on public deficit and debt. An idea that was pushed by Germany and France just last week.

The very fact that the opposing PSOE and PP have managed to agree to something as big as a constitutional change in the space of just a few days is indicative of the depth of the economic problems facing this peripheral member state. The speed of the deal also demonstrates that Spain is committed to dealing with the economic crisis head on.

Despite widespread reports yesterday that the PSOE had "serious" divisions over the amendment, the deal looks to have been reached with substantial political support. All autonomous communities, except Andalucia, said they would support the amendment yesterday, despite entrenched economic problems and a joint deficit of more than €13bn. This isn't necessarily a surprise considering that the PP now hold the lion's share of autonomous communities' seats, and as leader Rajoy likes to point out, the PP has been calling for a deficit limit for quite a while.

The constitutional amendment will not fix limits itself, but will be accompanied by a law limiting the structural deficit at 0.4% of GDP from 2020 (the 0.4% limit breaks down into 0.26% for the central government and 0.14% for Spain's regional governments). This is far stricter than the mooted 3%, which was rumoured to be the target level over the past week (in line with the original Growth and Stability Pact). The amendment also comes with a rather interesting get-out-clause, as it allows deficit limits to be overridden in cases of natural disaster, economic recession or other exceptional circumstances.

This undoubtedly gives any future government significant scope to suspend the limit, as long as it can count on an absolute majority in the Spanish Parliament. Add in the fact that the specific levels which the limits are set at are enshrined in law rather than in the constitution directly (making them much easier to amend), and the proposal begins to look more like a gesture to Germany and the ECB than a substantive shift.

While political support for the measure has been strong, it's certainly not universal. Many have argued that a constitutional change shouldn't be made in such a small period of time and without the consent of the people. It's only the second amendment made to the constitution since it was written in 1978 after the fall of Francisco Franco's dictatorship.

Spanish unions and the United Left coalition yesterday threatened to mobilise calls for a referendum and said they would put the constitutional change at the heart of their election campaigns. If twitter is anything to go by, this could be a popular move. Following the announcement on Tuesday, the public turned to twitter to call for a referendum as #yoquierovotar (i want a vote) trended. The next day the second biggest left-wing daily Público led the calls for a referendum (pictured above).

Despite this, neither PSOE nor PP have even publicly contemplated the idea of a referendum. Now that a formal proposal has been made, Parliament will vote next Friday, and it will go to the Senate the week after. In both chambers it needs a three-fifths majority.

Even though introducing the debt and deficit limit is a positive move and should gain Spain some leeway with the markets, it doesn't change the fact that the problems that led Spain to this point were not ones of massive public debt or deficit but a huge real estate bubble, excessive private sector debt (both leading to banking sector troubles) and a decade of lost competitiveness.

Thursday, August 25, 2011

An un-makeable bond?

In today's FT columnist Chris Giles suggests that Britain should not only back eurobonds - but also issue some of them itself.

He argues:
"There is much less difference between the British position and Germany’s than the chancellor cares to admit. For someone who believes eurobonds are a necessary feature of a rescue plan for the whole of Europe’s economy, there is an easy option to help remove blockages to their creation – offer to take part."
And how would this work? Simple, says Giles:

"Mr Osborne could pledge the UK issues as many eurobonds as it issues index-linked gilts over the next five years. In 2010-11 that would have meant issuing about £34bn, about a fifth of the deficit. It would lend Britain’s triple A credit rating to roughly six times this amount of eurobonds issued by other countries.

...To limit the risk Britain has to stump up for Italian debts, the eurobonds should have a dedicated tax stream as collateral, as suggested by Barclays Capital, which would apply even if a country defaulted."

And the quid pro quo?

In return for this generous offer, Mr Osborne could demand a voice in European fiscal consolidation efforts and that the eurozone goes further in issuing joint sovereign debt.

"Such a suggestion will leave as many in the Conservative party spluttering, but the logic of Britain issuing part of its sovereign debt in eurobonds is compelling", notes Giles.

Really, only the Conservative party? Credit to the columnist for coming up with something thought-provoking, but this idea is politically and economically flawed.

For the UK:

- Total Eurobond issuance would likely be in the region of £1-2 trillion per year, depending on the proportion of national issuance retained - a £34bn UK share, as Giles suggests, would hardly be enough to give Britain substantial influence over the eurozone, under Giles ‘pay to play’ logic. It's clear in the eurozone that the biggest guarantor (Germany) gets the final say in many matters, why the UK would get a influential role without putting up the necessary gurantees is far from clear and seems a massive assumption on Giles' part.

- Giles also suggests that the UK's Triple-A rating could boost that of eurobonds as a whole. But again, given the small issuance on the part of the UK and therefore its small share of guarantees this seems unlikely. As the EFSF and other Eurobond proposals show the ultimate rating of these instruments will be determined by the share of guarantees provided by higher rated countries. Adding the small share of the Triple-A rated UK into the mix won't make much of a difference.

- Economically, at a time of uncertainty, it would be illogical for the UK to expose itself to the exchange rate risk that comes with borrowing in euros – on any scale - effectively linking part of its debt to the ECB’s monetary policy. This is because part of the UK's debt would be determined in euros, the value of which is ultimately impacted by the ECB's decisions and the overall health of the eurozone economy. This may settle after eurobonds, but given the lack of clarity in this plan it is far from certain. In any case, the suggested benefits of issuing in euros is likely to be minimal at best.

- Similarly, the idea that these share of eurobonds would act as an inflation deterrent for the UK or an guarantee against inflation for investors seems overblown given the overwhelming amount of issuance still in pounds sterling.

For the eurozone:

- Apart from the huge legal and political hoops (i.e. national democracy), it's a heroic assumption that eurobonds would actually solve the current eurozone crisis - at least in the form they're currently being discussed. As Alvaro Nadal of the Spanish Partido Popular, on path to win the national elections there in October, recently told an Open Europe event, Eurobonds would be “suicide” for Spain as they discourage fiscal discipline while possibly even increasing overall borrowing costs, as the national share of the bonds pick up the slack. (We've detailed this problem and many more with eurobonds generally here).

As with most of the eurobond ideas out there, this one is undermined by taking the half-measure approach and failing to fully reconcile the economic and political shortcomings. More time and print space should be given to workable proposals, which so far have been few and far between.

Wednesday, August 24, 2011

Collateral Thinking

The eurozone's embarrassing collateral-for-loans spat continues, with member states disagreeing over whether Finland should be allowed to get collateral from Greece in return for giving Athens fresh loans. Who should guarantee the guarantees remains the thorny question.

To re-cap:
Under a special deal with Greece, agreed on the sidelines of the 21st July summit, Finland would get collateral of some form, in a bid to appease taxpayers at home. The exact nature of the collateral wasn't agreed, and as it turned out, the creditor countries had very different interpretations of the exact meaning of the deal. It was almost as if they hadn't thought it through properly (shock horror!)...

Unfortunately for the Finns, the deal between Athens and Helsinki now has to be ratified by all eurozone governments. The reason is simple: since the collateral that Greece will post with Finland will probably come from the bailout funds (Athens is a bit short of cash) it will be other eurozone countries that actually underwrite the collateral that Finland has demanded. Hardly surprising, not everyone is happy - Austria, the Netherlands, Slovakia, Slovenia and also Germany have all rejected the collateral agreement, calling it unfair.

This has left the eurozone in yet another tricky situation. If everyone asks for collateral, the second Greek bailout will go down the tube, as Greece won't be left with enough cash. But if the Finnish deal isn't approved, Helsinki has threatened not to participate in the bailout - or it may be forced to go back on its word to taxpayers, in turn leading to a political backlash at home.

So now what? Here's the latest from the five main protagonists.


With the anti-euro "True Finns" party (which continue to lead in the polls) breathing down its neck, the Finnish government is sticking to its guns, with Prime Minister Jyrki Katainen unequivocally answering "yes" when asked if Finland would pull out altogether of the second Greek bailout if it were denied the requested collateral, adding,
"It is our parliament's decision that we demand it as a condition for us joining in."
Finnish government representatives have repeated the “no collateral, no loans” mantra - at least when speaking to a home audience (internationally, the tone has been more accommodating). And with the Finnish Presidential elections coming up - in January 2012 - no candidate is keen on explaining to voters why the government has 'sold out' to Europe (sounds familiar?). That would be a gift for the True Finns.

However, the Finnish are also pragmatists and derailing international agreements doesn't come naturally to them. As Katainen has pointed out,
"Of course the Finland-Greece collateral deal cannot block the [bailout] package, but in any case we demand that collateral."
In fact, in recent days, he has stressed that he's flexible on the nature of the collateral (gold, cash, land, etc). But there needs to be some sort of collateral nonetheless, begging the question whether the eurozone can reach a minimalist deal that will allow Katainen to save face.


In a letter to the Dutch Parliament, Dutch Finance Minister Jan Kees de Jager insisted that the Greco-Finnish agreement needs to be ratified by all eurozone member states and the IMF - signalling that it would veto it:
"Finland has unilaterally announced the bilateral agreement. Because of that, the incorrect image has emerged that there would be a legal agreement between Finland and Greece...To execute the current proposal is unworkable."
The Dutch Social-Democrats, whose support is needed for the second Greek bailout to go through the Dutch Parliament, added,
"It can't be the case that the Finns obtain guarantees at the expense of the Netherlands. That's not acceptable and if it comes that far, the Netherlands should veto it."

And there's not much love from Vienna either. The Austrians don't necessarily consider collateral a precondition for lending more money to Athens, but if Helsinki obtains it, then everyone should get it. Austrian Finance Minister Maria Fekter said,
"It's not a viable option when Finland makes a deal with Greece to receive 20% collateral and all the other euro countries should pay."
Last week, Austria put forward an alternative plan, under which the amount of collateral would be inversely proportional to each country’s private banking sector exposure to Greece. Countries (including Austria) whose banks have little exposure to Greek debt would be allowed to get collateral from Greece, while countries whose banks are heavily exposed (Germany and France spring to mind) would not get any collateral at all. A bit cheeky, but not entirely unreasonable.


Slovakian Finance Minister Ivan Miklos - clearly not a fan of the eurozone bailouts in the first place - has made it clear that he considers it
"unacceptable for any country to not have the collateral if other countries have it. Because if this is a loan, and that is what everyone is calling it, the debtor should have no problem offering collateral for the loan."
Incidentally, Prime Minister Iveta Radičová said on Monday that Slovakia will be the "last country" to ratify changes to the EFSF - the eurozone's temporary bailout fund - and to agree to the establishment of its permanent successor, the ESM. The Freedom and Solidarity (SaS) party - a junior partner in the Coaliton government - doesn't support expansion of the EFSF. Negotiations between the parties are ongoing. Speaker of the Slovakian Parliament and SaS leader Richard Sulík said,
"I'm not aware of any reason why Slovakia ought to rush to be the first to put itself in a position that's not good for us. Let the rest of the EU reach agreement or not, we'll follow up with discussion then."

German Labour Minister Ursula von der Leyden - who is also a prominent leader of German Chancellor Angela Merkel's CDU party (see picture) - broke ranks yesterday when she suggested that Greece should post either gold or stakes in state-owned companies as collateral in return for further loans. However, her proposal was quickly dismissed by the German government. Also, in a meeting with CDU MPs, Merkel voiced her opposition to the Greco-Finnish agreement, reportedly saying,
"It can't be that one country gets extra collateral."
So, in short, eurozone leaders have landed themselves in a right old mess. You have to wonder why no one saw this coming on July 21st.

Tuesday, August 23, 2011

EU've just been Ashtonised!

An interesting op-ed in Le Monde from Bastien Nivet of the Paris-based IRIS think-tank notes,
"A new notion is beginning to dominate the debate on the international action of the European Union: the Ashtonisation of the EU. Inspired by the surname of [EU Foreign Minister] Catherine Ashton, this notion describes a skillful mix of lack of anticipation, reactivity and diplomatic coherence, of absence of strategic ambitions and leadership by the EU, and of the abandonment of a timid europeanisation of stakes in foreign, security and defence policy to the benefit of the re-appropriation of this process by some member states."
This is certainly an unfortunate neologism, but, as Nivet points out, this "Ashtonisation" is also a result of member states realising that the EU architecture is too unwieldy:
“Paris is about to succeed in the incredible challenge of reducing the ambitions and the interests of the European Security and Defence Policy at a pace and with an effectiveness that not even the most eurosceptic Britons would have dreamed of…Paris now seems to have come to a decision: what is ambitious will be done with the Britons outside of the EU framework, what is not will be done with them as well, within the EU framework.”
Monsieur Nivet concludes his piece with a warning: a number of factors are combining to make the EU an “Ashtonised actor, which doesn’t keep up with the global strategic changes under way.”


Berlusconi's choice

Over on EUobserver we look at Italy - and what the country now needs to do in order to secure a future inside the eurozone.

We note,
Following recent market panic, the European Central Bank’s (ECB) decision to step in and buy Italian bonds has given Rome some breathing space. Market fears were driven by a frightfully simple prospect: if Italy, the EU’s fourth largest economy, goes, so does the euro.

To avoid the worst, Italy now has one, possibly final, chance to push for radical economic reform and break its chronic growth problem. Failing this, Silvio Berlusconi & Co. may have to plan for a future outside the single currency.

....The current period of relief may prove short-lived since the ECB’s lifeline comes with a likely cut-off date. Italy is simply too big to bail. With its gigantic €1.8 trillion public debt, neither the ECB nor foreign governments can guarantee Italy’s finances in the long-term.

We note that, in order for Italy to get out of the woods, several things need to happen: Berlusconi has to go, the centre-right parties need to form a credible coalition (as a left-leaning coalition is likely to block vital pro-growth reforms), the regions need to accept cuts and reforms - and, most importantly, we note that,

Freeing up the labour market is essential: Radical reform of the labour market should be the top priority for any Italian government. Firing and hiring simply has to become far easier, which in turn lowers barriers to entering the job market. In addition, the tax burden on businesses should be reduced, particularly on SMEs where Italy’s economic strength lies. At the end of the day, Italy cannot live on austerity alone. It’s these kinds of reforms that will win investors’ confidence.

We conclude,
Will all these reforms take place? We shall see. But both Italy and Europe need to be fully aware of the consequences of Rome failing to deliver deep-rooted and necessary change. It’s time to finally bite the bullet or Berlusconi may soon have to add yet another, less than flattering point of note to his CV: bringing down the eurozone.
Read the full piece here.

Monday, August 22, 2011

Joining the Euro? Not in my lifetime

Last week we asked in passing when Swedish PM Frederik Reinfeldt would drop his support for Sweden joining the euro. Well, it turns out that he may not have to, as the main opposition party - the Social Democrats - have made that decision for him. Tommy Waidelich, formerly a pro-euro advocate in the 2003 referendum and current economic spokesperson for the Swedish Social Democrats, has made Swedish euro membership a distant dream (or nightmare).

In an interview with Europaportalen he clarifies his new position and that of his party, whose official line in the 2003 vote was also Yes to the euro. Waidelich says:
"[Swedish euro membership] is not on the agenda for the foreseeable future – during my lifetime, as long as I make the decisions."
Not in his lifetime? This is a clear shift, which probably means that the prospect of Sweden joining the euro has gone from lukewarm, to cold, to completely dead in the water. Swedish Finance Minister Anders Borg hasn't exactly been enthusiastic about euro membership either of late. In a recent interview, he said,
"In this type of crisis it is an advantage that the exchange rate and the krona can absorb part of the blow. This will help both the forestry industry and other sectors of the economy, as well as the job situation. It is clear that this is a big blow to the confidence of euro cooperation. I would still vote yes, but during the current circumstances it is an advantage for Sweden to be outside the euro.”
More widely, the development signals a triumph for the common sense of the Swedish people over the short-sightedness of the country's political elite on this particular issue (though there were several notable exceptions, and the centre-right govenrment in Sweden is generally very sensible on economic matters). In the 2003 referendum campaign, all the main parties apart from the tiny Greens and Left party, were in favour of Sweden joining, yet in the referendum, 55.9% of the electorate voted against, vs. 42% in favour. There were, of course, the usual scare stories about how Sweden would be sent back to the stone age and left isolated if it did not join (mixed with some more rational arguments relating to the removal of exchange rate risk for example - which are still valid). But the public's common sense - bondförnuftet - won the day.

With a 4.5% growth rate and lower borrowing costs than Germany, very few Swedes seem to have regrets - apart from a handful of politicians, and provincial leader writers for papers such as Göteborgs-Posten and Dagens Nyheter (the Japanese holdouts after World War II spring to mind- the soldiers, if you recall, who were found on various remote islands in the pacific decades later, still fighting, either unaware of, or unwilling to accept, that the war had ended).

In a recent opinion poll, 64% of Swedes said they would vote no the euro - with only 24% in favour. See the graph illustrating the recent surge in opposition to the euro (Click to enlarge. Nej=No, Ja=Yes, Vet ej=Don't know).

Game over in other words.

"Europe" won't leave the Coalition alone

The weekend's papers saw several interesting articles on the Coalition's Europe policy in the wake of the eurozone crisis.

Here's Tory MP Dominic Raab, hitting the nail on its head in the Sunday Times:
"This fluid geopolitical landscape opens opportunities for a third choice for Britain — between integration and withdrawal. And it is popular. YouGov found 50% want to halt or reverse integration; it would win over many of the 37% who favour withdrawal.

What would such a plan look like? Britain should ditch its ideological baggage in favour of a pragmatic euro-realism. Take the free movement of goods, services, capital and people — a potent force for good, promoting business growth and jobs. The single market is not perfect. Some aspects won’t get better unless the UK negotiates at the table to liberalise services and curtail state aid and agricultural subsidies. There is no economic reason why Britain could not opt out wholesale of the EU social and employment regulations, which cost our economy an estimated £148 billion between 1998 and 2008. Likewise, Britain could insist on immigration controls on prospective members such as Turkey.

The crossroads ahead offers Britain a unique opportunity to come up with a positive blueprint for our relationship with Europe."

Meanwhile, the Sunday Telegraph looked at the formation of a new group of Tory MPs, which is gaining traction, due to the initiative of Chris Heaton-Harris, George Eustice and Andrea Leadsom (amongst others) aimed at reversing European integration. In his Sunday Telegraph column, Tim Montgomerie made this very astute observation:

"...there are two good reasons why [Tory MPs] shouldn’t be in a rush to renegotiate the relationship with Brussels. First, any deal that happens soon will have to be signed off by Nick Clegg. The Liberal Democrats are Britain’s most Europhile party, and they won’t allow a big departure from the status quo. Renegotiation will be more substantial if it happens at the end of the parliament, and David Cameron can turn the terms of a deal into an election issue. Second, there is no plan for renegotiation. Tory Eurosceptics are large in number, but there’s a People’s Front of Judea quality to their organisation."

We hasten to add that, in general, Tory Eurosceptics also need to develop a better understanding of exactly how fluid and fast-moving the situation in Europe is - and of the various forces at work - if they want to achieve a strategic vision of how to capitalise on the shifting politics. Sounds obvious, but Europe can no longer be reduced to some sort of black-and-white struggle between 'federalists' and 'eurosceptics' (it probably never could but even less so now), nor a sceptical Britain vs. the Rest.

Looking at the Franco-German deal last week, we note over on Guardian Comment is Free that,
"aside from the disappointing content, the latest Sarko-Merkel political charge is very interesting for wider reasons – particularly for the UK. Alas, it has been widely misunderstood in Britain and beyond. First, it is not part of some sort of German grand plan to again become the dominant force in Europe – no one in Germany is interested in "colonising" countries in any form."
We go on to argue - and this is important:
"Second, the Franco-German proposal is not a step towards "EU federalism" per se. In fact, the letter circulated by the two leaders envisages a limited role for the European commission in the eurozone's economic governance, with the eurogroup's 17 members instead meeting separately.

In Brussels speak, this is known as intergovernmentalism, often described as the opposite to federalism...Why does this matter? Because British reflexes tend to favour intergovernmentalism modelled around decisions made by sovereign states rather than the Brussels-based institutions. Far from counteracting British thinking, this Franco-German proposal seems to reinforce it."

There is another reason, we note,
"why the agreement seems in line with what many Brits would instinctively argue for: European variable geometry. Responding to the opposition this proposal generated in many capitals, German foreign minister Guido Westerwelle said in private (according to Financial Times Deutschland) that any member states that don't implement the Franco-German plans "shouldn't be allowed to stop the rest" from doing so, adding that "there should be more differentiated co-operation", presumably both in the EU and eurozone.

This is an acknowledgement that, in order for it to work, the EU simply needs to be broken down into smaller units. It's the type of flexible approach to European co-operation which many in the UK would feel most comfortable with – and also a reminder to those who argue a two-speed Europe is defined by euro membership alone (with Britain in the slow lane) that such a division is simplistic.

If the EU, in the wake of this crisis, is heading towards a more intergovernmental, variable approach to European co-operation – sometimes merging policies and institutions, at others keeping them separate, as national democratic preferences dictate – this could well be in Britain's interest."

This is not an endorsement of the content of the Franco-German deal (which we hopefully have made abundantly clear) nor an endorsement of the greater role envisioned for Council President Herman Van Rompuy. It's merely a reflection on the fact that, when European policy strikes at the heart of national democracy (the eurozone crisis has now fully entered the domain of taxation and spending as opposed to regulations, complex treaties or judicial cooperation), intergovernmentalism is still king.

Although we shouldn't read too much into it, the subtext of the Franco-German summit may prove to be a turning point.

Friday, August 19, 2011

EU taxes: distracting, impractical and asymmetrical

The dual pressures of the eurozone crisis and looming negotiations on the new long term EU budget have given a fresh impetus to Brussels policymakers' long-held desire for greater EU powers, direct or indirect, over EU taxation.

Chancellor Merkel and President Sarkozy have put EU taxes firmly back on the agenda this week, with their public backing of the introduction of a financial transaction tax (FTT) at the EU-level. This comes hot on the heels of the European Commission's proposals to fund the 2014-2020 budget with a new EU VAT and an EU FTT.

In a new briefing published today we explain why ten of the potential options for EU taxes, including those proposed by Merkel, Sarkozy and the Commission, will not work. We look beyond the (incredibly important) arguments regarding national sovereignty and democratic accountability to illustrate that all ten options recently considered for EU taxation also fail on economic and practical grounds.

We also estimate that the potential impact of an EU FTT could be to cost financial markets across the EU between €24.3 billion and €80.9 billion and across the UK between €17.5 billion and €58.2 billion (£15bn and £49.9bn). A large part of these costs will be passed on to consumers (our figures are based on the Commission’s proposed rate of 0.1% for bonds and shares and 0.01% for derivatives and without a burden-sharing system; the range accounts for uncertainties regarding the degree of relocation and evasion following the introduction of an FTT).

We're clearly talking about more than small change here and when it comes to potentially using the FTT to fund the EU budget a whole new can of worms is opened. The Commission, and the European Parliament which is also in favour of an FTT, has failed to explain what mechanism, if any, will be used to make an EU FTT equitable, since, as things stand, the UK is home to roughly 72% of financial transactions across the EU. Such a mechanism would undoubtedly be hugely complex, making the EU budget only more difficult for taxpayers to understand.

This is not to mention that, should the EU go it alone with an FTT without global agreement, firms would simply relocate away from the EU altogether - a warning made by Swedish PM Fredrik Reinfeldt, who was talking from experience.

The nine other options we consider suffer similar problems regarding disproportionate effects (either on particular member states, societal groups or businesses), and increasing the complexity of the budget rather than reducing it.

The real crux of the matter is that the debate surrounding EU taxes is simply a distraction from tackling the real issues. For Merkel and Sarkozy, it is resolving the eurozone debt and banking crisis, for the Commission it is fundamentally reforming an EU budget that is no longer fit for purpose - ultimately, the complexity and lack of transparency regarding the budget has far more to do with its size and the logic underpinning the EU’s spending programmes than how it is financed.

But, unfortunately, this doesn't mean the subject of EU taxes will go away any time soon.

A very different kind of tea party

Angela Merkel and Nicolas Sarkozy’s pledge on Monday to save the euro, with the help of some cosmetic distractions, called economic policies, certainly haven’t won over the markets this week, nor Europe’s people nor their fellow EU leaders.

Last night, on Polish TV channel Polsat, Poland’s Finance Minister Jan Vincent-Rostowski, who also holds the rotating chair of the EU’s council of finance ministers, expressed his feelings about one of the proposals to come out of the meeting (for the eurogroup to meet separately under the lead of Council President Herman Van Rompuy):
“They’ll meet twice a year, have a little coffee and call this an economic government”
A vote of confidence then?

Collateral damage

This week saw another twist in the ongoing soap opera which is the eurozone bailouts. The Finnish government - no doubt feeling the anti-bailout True Finns (currently the largest party in the polls) breathing down its neck - has for some time demanded that Greece puts up some sort of collateral in return for coughing up the cash for the fresh rescue package.

On Tuesday, the Finnish media reported that a deal had been reached between the two countries, which would see Greece provide €1bn in cash as collateral, deposited with the Finnish government in the eventuality that Athens is unable to pay back the loans. Bizarrely, the amount would effectively cancel out the Finnish share of the bailout. In other words, Helsinki lends €1bn to Athens, while Athens sends €1bn to Helsinki, begging the question: who guarantees the collateral?

The Greek and Finnish governments have since said that it's a bit more complicated than that. As reported today by Ekathimerini:
"Greece will deposit cash equivalent to a large chunk of the money it is to receive from Helsinki in a state account that Finland will use to invest in AAA-rated bonds. The interest generated will raise the amount to match the required collateral. Finland will return the money, plus interest, once the bailout loan is repaid"
The problem is that others countries now want this too, with Slovakia, Slovenia, Austria and the Netherlands all demanding collateral in return for their participation in a second Greek bailout.

“If there is a model for collateral, Austria would also make a claim,” said Austrian Finance Ministry spokesman Harald Waiglein. Slovakian Finance Minister Ivan Miklos chimed in,“I consider it unacceptable for any country to not have the collateral if other countries have it.Because if this is a loan, and that is what everyone is calling it, the debtor should have no problem offering collateral for the loan.”

Eurozone leaders are already balancing on a knife's edge over the second Greek bailout deal with approval from increasingly restless national parliaments still pending (expected in the autumn). The original target of having the new deal in place before the next bailout installment (from the first deal) due in September, could now potentially be at risk. Not to mention the continuing problems in raising the targeted amounts from private sector involvement.

Also, Greece doesn't exactly have cash to spare (and they're reluctant to put up state assets as collateral). The demands - while fully understandable from the creditors' point of view - could put further strains on Greek public finances.

Fundamentally, this shows how complex - and unsustainable - the politics of cross-border bailouts are. And how, at the end of the day, eurozone leaders are politicians who are elected by voters (taxpayers) and who answer to national parliaments. They're acting within a democratically defined mandate. While you can stretch that mandate when it comes to complex EU treaties, regulations or the role of obscure EU judges, for example - taxpayers' cash is too close to home for this to work.

German lessons

Simon Heffer's piece in the Daily Mail on how "Germany is using the financial crisis to conquer Europe” has made the news in Germany, with Handelsblatt noting yesterday:
"Although the Second World War is over 66 years ago, Europe's fear for the Germans is older…at crucial turning points in European history, Europe's fear of a supposedly all-powerful people at its centre always flares up again"
The article goes on to quote Margaret Thatcher saying, "We've beaten the Germans twice. Now they're back!", a comment that Germany's former Chancellor, Helmut Kohl, claims she made to him in reference to Germany's reunification in 1989. The article alos makes a reference to a recent piece in Italian newspaper Libero featuring a cartoon of Angela Merkel looking like Adolf Hitler, in an SS costume, with the title "Heil Merkel".

To take issue with how important national economic decisions are now increasingly being taken by multilateral institutions controlled by bigger members, such as Germany, is one thing. However, to claim that anyone in Germany actually has an an interest in "colonising" other countries in any way just isn't correct.

Quite the contrary, Germany’s default position is to take a non-interventionist stance in regards to other countries. Just have a look at its approach to the Libyan and Afghanistan interventions. One of the reasons that Germany decided to abstain on the UN vote on Libya, is precisely because its public are hesitant about mixing in other countries’ affairs. The ongoing political fights about its intervention in Afghanistan also prove this.

The German government is desperately trying to find a solution to the eurozone crisis, stuck between their voters, the bundesbank, exporting industries, the economic elite, and the Constitutional Court. The country's position is far too complex to lend itself to stereotypes or a single explanation.

The German government still believes that the eurozone crisis is simply a matter of budget discipline - or rather lack thereof. As we've argued many times before, the eurozone crisis is fundamentally about the loss of competitiveness in the periphery and the the inevitable tensions created by having one monetary policy for a whole set of very different economies (though excessive spending and debt clearly is a key driving force as well). But the point here is that the Germans genuinely feel that replicating its rules-based model at the European level, is the best way to the get eurozone economies back on track. We may disagree with that but there's nothing sinister about it. And seriously, who can blame the Germans - who at the moment provide €120bn+ in loan guarantees in addition to underwriting a huge share of the wobbly ECB - for asking other countries to make a bit of an effort?

For all those who are still suspicious that Germany is secretly trying to take over Europe, it's worth taking a look at some privately-made comments by Germany’s Foreign Minister Guido Westerwelle, which featured on the front page of yesterday’s Financial Times Deutschland. He said that any member states that don’t implement the Franco-German plans "shouldn't be allowed to stop the rest" from doing so, adding that "there should be more differentiated cooperation", highlighting the possibility of a two-speed EU.

Incidentally, the idea that some countries could go-it-alone with others opting out, within a more flexible European framework, fits pretty well with British thinking on the EU. In fact, the Franco-German deal was inter-governmental rather than federal, sidelining the Commission in favour of Council President Herman Van Rompuy (increasingly emerging as a Franco-German vessel). An intergovernmental Europe broken up in smaller units, which on key issues operates outside the reach of the EU's centralising tripod (the European Parliament, European Court of Justice and European Commission) - isn't that sort of what the UK should be pushing for?

Just a thought.

Wednesday, August 17, 2011

The day after the night before

Yesterday's Franco–German summit produced two major proposals (or re-proposals if you like), aimed at saving (again) the euro and the eurozone economies: a Financial Transaction Tax (FTT) and a 'debt brake' for all 17 eurozone members.

After plenty of initial confusion, Merkel’s spokesman, Steffen Seibert, today clarified that the FTT should be implemented by the entire EU-27, not just the eurozone, saying:
“When you look at the measures the Chancellor and Sarkozy presented yesterday, many of them affect all 27 [member states] and that is the intention with the financial transactions tax.”
That might be a problem because taxation is still protected by national vetoes. The UK today repeated its opposition to such a tax, with a Treasury spokesman simply saying that:
“Any tax on financial transactions must be implemented worldwide.”
Swedish Prime Minister Fredrik Reinfeldt has also slammed the idea. In other words, an FTT at the level of all 27 member states looks like a non-starter at the moment (which is good news, since the idea would create a whole lot of losers and very few winners).

As for that other idea, the debt brake, Merkel and Sarkozy stated:
"Before the Summer of 2012, we want that all 17 eurozone member states adopt the golden rule in writing in their Constitutions, the rule that national budget laws are aimed at achieving a balanced budget."
As this is effectively a purely national measure, it will be completely up to individual member states whether to go along with the idea. Finnish Finance Minister Jutta Urpilaninen has already expressed her opposition, saying:
“Finland successfully takes up its responsibilities for national debt with its government programme and there is no need to write this [i.e. the 'golden rule'] into the constitution.”
Changing constitutions in countries like the Netherlands isn't exactly straightforward either, requiring the dissolution of the Lower House of parliament and fresh elections, which takes time and is politically messy. In Italy, a two-thirds majority is needed in both houses, while in Ireland we might possibly be looking at a referendum.

Calling MPs back from their vacations to rubber stamp yet another bailout package/EU Treaty change is one thing, but asking them to risk their jobs to rubber stamp a constitutional rule to prevent them from spending too much money is another entirely. That's not to say that we don't agree with the principle of spending within one's means.

Only one day after the latest Sarkozy-Merkel summit, two of their headline-grabbing proposals already seem dead in the water. Today, Trends, the leading Belgian business magazine depicts EU leaders (and US President Obama) and carries the title "who still believes these people?".

Let's not answer that question.

Right said fred

This is some very sensible stuff, from the usually very sensible Swedish Prime Minister Frederik Reinfeldt, reacting to yesterday's meeting between Merkel and Sarkozy.

On economic governance

“The best thing would be clear formulas for advancing decontamination of public finances.”

On financial transaction tax

“I do not believe in this idea, if it is not adapted globally, for everyone at the same time. What was expressed yesterday was the idea to only impose it in the Eurozone.”

“Sweden is interesting because we are the only country with any real experience on this type of transaction tax. If it is only imposed on one part of a market, our experience is that it brings small amounts of income, but transactions move away. If this is imposed on the Eurozone, it is easy to see how a large part of international transactions move to London, or why not Stockholm?”

On Eurobonds

“In reality this means that well managed countries accept higher interest rates, in order to push rates down in less well managed countries."

All of which of course is true, though a rules-based system for public spending - where Sweden clearly takes a similar line to to Germany - is fine in theory, but difficult in practice (read: national democratic politics).

Incidentally, when will Reinfeldt come out against Sweden joining the euro? The Swedish centre-right parties' support (their leaderships, not members) for the euro - a manifestly flawed project which has nothing to do with liberal economics - remains one of the greatest political anomalies in Europe today.

Tuesday, August 16, 2011

Much ado about nothing?

And so passes another fatefully underwhelming summit on the eurozone crisis - at least as far as markets are concerned

You’d have thought by now that Sarkozy and Merkel would have learnt that holding a meeting without having anything meaningful to say is often worse than not having a meeting at all. Alas, that was not the case and markets dropped following the rhetoric filled press conference in Paris this afternoon. As ever, markets move infinitely faster than EU politicans can act.

However, the conclusions from the meeting do carry political significance, as they essentially reinforced German and French desires to press ahead with more centralised control over eurozone countries' economic policies (on Franco-German terms, if those can be agreed). The meeting also seems to be paving the way for turning Council President Herman Van Rompuy into more of a Franco-German puppet than what he already is, with a proposal floated to give the Belgian the effective chairmanship over the eurogroup, that now is to meet separately twice a year. It's politically significant as that would effectively institutionalise the eurogroup, which could have consequences for non-euro members, including the UK.

The discussion seemed to focus on long term issues and was lacking short term policies or any inventive ideas – not particularly surprising but by holding a meeting people, markets in particular, always seem to get their hopes up slightly, making the inevitable let down worse than it might have been.

The key points to come out of the discussion were:
• ‘No’ to Eurobonds right now from both leaders, although Sarkozy did suggest they might be possible one day (with more democratic legitimacy and as a last resort Merkel added). Notably, Merkel didn't seem to completely rule them out long-term.
• Refuse to enlarge the EFSF. Sarkozy suggested it is large enough and is now the suitable instrument to help save the euro (which is slightly delusional)
• Agreement to hold biannual eurozone summits and to elect (from within leaders - don't think for a second that voter will be involved) a eurozone president to sit for two and a half years (again, with Herman Van Rompuy as the likely candidate to fill the position initially)
• Will put forward proposals to include a debt brake in the constitutions of all 17 eurozone member states by the summer of 2012
• Reiterated their joint support for a financial transactions tax, possibly to help fund future eurozone bailouts (which would be big), plan to present proposals next month
• Create a common corporate tax base for France and Germany, to take effect from 2013 – interesting given the exemptions and confusion surrounding the French corporate tax rates and gulf between the French and German tax systems in general. Again, this is politically very significant in the medium-term.
• Emphasised need for struggling countries to enact necessary economic reforms and repeated their continuing commitment to defending the euro (nothing new)
• No plans to rewrite any EU Treaties, but Merkel also noted that the Lisbon Treaty isn't the "last EU Treaty we'll ever sign".
If this was a summit meant to convince markets, as they all seem to be nowadays, it looks to have failed off the bat - judging by the swift drop in US markets (good thing European ones were closed). But it was another piece in the evolving puzzle that is a Franco-German-led eurozone economic government, with more central control over taxation and spending policies (both Sarkozy and Merkel have floated this before, though France has historically been much keener than Germany on enhanced economic governance in the eurozone as opposed to at the level of all 27 member states).

We hastened to add that it might be worth sparing a thought for the ECB during all of this, given that the continuing failure of leaders to soothe markets (and possibly actually antagonise them) makes the ECB's job significantly more difficult, particularly in terms of bond buying. It's likely that markets could push up the Italian and Spanish cost of borrowing over the next few days forcing the ECB to purchase more than it intended to, thereby leading it further down the rabbit-hole of an opaque, bloated and risky balance sheet and into the realms of fiscal policy.

So to sum up: the meeting was politically important but economically irrelevant - at least in the short-term race to assure markets.

Eurozone crisis fatigue

It has reached crunch time in Europe. French President Nicolas Sarkozy and German Chancellor Angela Merkel have had yet another round of emergency talks in Paris today in a bid to solve the eurozone crisis for the umpteenth time. On Wednesday, the Swiss Central Bank is holding a meeting to discuss how it can prevent its currency’s strong appreciation against the euro; to peg or not to peg? And also this week, the Dutch parliament is holding a round of parliamentary debates on the country’s participation in the EFSF. These debates are significant because come October, there will be key votes in national parliaments on some of the rescue measures which have yet to be approved.

And the popular opinion in Triple A countries seem to showing signs of some serious bailout fatigue - spilling over to fading support for the euro itself (and probably the European project as a whole). On Saturday, a poll commissioned by Dutch paper AD found that 48% of those questioned wanted the Netherlands to leave the euro and would prefer a return to the Dutch guilder.

A separate poll published on Sunday by Maurice de Hond and No Ties BV was more damning, showing that 54% of Dutch voters want Greece and other peripheral countries expelled from the eurozone rather than being rescued again. It also found that 60% want the Netherlands to stop lending money to other eurozone countries while 48% of respondents believe that the euro’s negatives outweigh its benefits. Pretty heavy stuff.

It will be interesting to see how much these parliamentary debates are influenced by the recent poll results, and whether the Liberal-Christian Democrat coalition can muster the support from opposition parties needed to pass the bailout legislation. Despite domestic opposition, our bet is on the latest bailout rounds being passed fairly comfortably in the Dutch parliament.

Over in Germany, the picture looks very similar. A survey recently conducted by the German institute Emnid and published by German paper Bild am Sonntag showed that 31% of Germans believe the euro will disappear by 2021.

Another poll carried out by British pollster YouGov, reveals that 44% of Germans respondents want Germany to leave the eurozone, compared to 48% who want Germany to stay in. And 58% of respondents in Germany and 53% in France said they want Greece to leave the eurozone.

Meanwhile, in Finland, a Helsingin Sanomat poll conducted in July revealed that 44% of Finns questioned said Greece should leave the euro. Although, only 23% said they wanted to return to their previous currency - the Markka.

As ever, the question is when such public sentiments will seriously begin to feed through to national elections - and when politicans will begin being thrown out of office over them.

Monday, August 15, 2011

À la recherche du temps perdu

Tomorrow, another meeting between the leaders of Germany and France will take place in Paris.

For anyone who has lost track of all those EU summits designed to fix the eurozone, we've made an attempt here to compile a list. We start at the beginning of 2010, when the eurocrisis really emerged:


February 11 – Informal European Council meeting. EU leaders reach deal to bail out Greece. European Council President Herman Van Rompuy says "Euro area member states will take determined and co-ordinated action if needed to safeguard stability in the euro area as a whole. The Greek government has not requested any financial support."

March 25 – Eurozone leaders agree on EU-IMF safety net topping "20-22 billion euro" for Greece.

May 2EU and IMF decide on €110 billion bailout for Greece.

May 9 – EU and IMF decide on "nuclear" €750 billion bailout package (just after UK General Election and during local German elections). The UK, despite not having an elected government in place and not being a member of the eurozone, decides to take part in the €60bn EFSM bailout fund but not the larger €440bn EFSF.

June 17 ­– EU summit discusses European "economic governance".

October 18 – Merkel and Sarkozy, meeting in Deauville, France, agree on EU treaty change to handle future crises. Proposals for confiscating EU voting rights, preemptive and automatic sanctions for budget sinners.

October 28-29 – EU summit "sealed a solid pact to strengthen the euro", says European Council President Herman Van Rompuy. A permanent fund will be set up to bolster the euro in times of crisis, and the EU will have extra powers of scrutiny over national budgets.

November 28 - EU finance ministers give go-ahead to a €85bn bailout package for Ireland at emergency meeting in Brussels.

December 16-17 – EU summit decides on changes to the EU's governing treaty to set up a European Stability Mechanism (ESM) to replace the temporary bailout facilities post-2013.


4 February 2011 - EU leaders fail to reach agreement on Franco-German “pact for competitiveness” that would see stronger coordination of six areas of fiscal and economic policies in the eurozone, in return for increasing the size and scope of the EU’s temporary bail-out fund.

March 11 – Summit of Eurozone leaders decide on "Pact for the Euro which establishes a stronger economic policy coordination for competitiveness and convergence", agree to boost lending capacity of the EFSF to €440bn and determine ESM will be €500 billion.

March 24-25 – EU summit endorses eurozone decisions on permanent eurozone bailout mechanism post-2013 and economic governance plan, but fails to decide on Portuguese bailout.

May 3 - Portugal announces that it has reached an agreement with the EU/IMF for a €78bn bailout.

May 6 – “Secret” meeting of EU finance ministers in Luxembourg discusses private sector contribution to possible second Greek bailout. Eurogroup chief Jean-Claude Juncker says Eurozone economic policies should only be conducted in "dark secret rooms".

May 17 - EU finance ministers agree Portugal's €78bn bailout.

June 23-24 – EU leaders decide on Mario Draghi to become new ECB President, as Greece is forced to agree to more austerity cuts, after the EU/IMF/ECB had found a €5.5bn black hole in the existing austerity package.

July 21Eurozone leaders agree second bailout for Greece worth €109 billion and widen scope of EFSF so that it can issue “precautionary lines of credit” to possibly Italy and Spain, aid in the recapitalisation of struggling banks and purchase government bonds on the secondary market.

August 16 ­ – Merkel and Sarkozy meet in Paris. German government plays down expectations of investors. Both governments rule out Eurobonds, for now.

Keep your diaries clear because this list is likely to get considerably longer before we're through.

Friday, August 12, 2011

Gold fever

Bild Zeitung, one of Europe's most-read newspapers features a recommendation on its website for readers to buy gold, also known as "the barbarous relic".

The price of gold in euros has spiked over the last month (and year), and gold is being praised by the tabloid as "one of the most certain assets in times of crisis". Its front page yesterday pushed its readers to take part in a contest to win some gold.

While we would hesitate to take any investment advice from newspapers (remember Handelsblatt recommended buying Greek bonds back in May 2010), combining it with the strong rally in Gold prices over the summer, it does suggest that investors in Europe and around the world are in the midst of a 'flight to safety' after seeing their trust in politicians ability to deal with the eurozone crisis and restore the eurozone economy to economic growth significantly dented. (Undeniably other factors have played a part, but with the eurozone crisis rumbling on for the past year and into the future it must be seen to have played a significant role in undermining trust in the global economy).

Handelsblatt also featured a front page this week with the title "gold becomes the reserve currency", reporting how the central banks of Russia, China and South Korea are buying up gold, accentuating the feeling in the German press that trust in the euro is quickly being eroded.

A senior Bundesbank official told journalist Michael Lewis that, if the ECB did face significant losses on its exposure to peripheral economies, leading to a recapitalisation request (as Open Europe has highlighted), the German central bank already has a plan in place to some extent, saying:
“We have 3,400 tons of gold (...) We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.”
Given the massive increase in gold prices recently, which show little sign of slowing down, and the suggestions that gold could become the world's reserve currency again (putting aside questions over whether its rise is a bubble or not), surely one would think twice about reducing gold holdings in an attempt to support a floundering currency, particularly to cover the losses from a sovereign default within the euro which could bring it down in any case.