Tag Archives: Government

September 15, 2011 · 14:02

Goodbye Eurobonds! (Or Hello?)

It could have been a part of a possible solution to prevent a collapse of the European monetary system – the eurobonds. But as pointed out in numerous articles here at EconoTwist’s, it is not possible for the euro zone governments to agree on anything fundamental as long as there’s no real union of Europe. Some of you may be familiar with the term “Tragedy of the Commons” – the story about the eurobonds turns out to be yet another illustration of this human imperfection.

“Eurobonds are an appealing concept in theory, but cannot be implemented in today’s Europe characterized by a large debt overhang, and the absence of a credible system to enforce even the weak elements of economic governance we have now.”

Daniel Gros

“The current upheaval in financial markets has reinforced the voice of those who call for the introduction of Eurobonds as the only way to end the euro debt crisis.  However, August 2011 might well be remembered as the month during which the idea of eurobonds was murdered by the Italian political system,” Director of the think tank CEPS in Brussels, Daniel Gros, writes in commentary article at www.eurointelligence.com.

Well, if the Italians didn’t do it, somebody else would have…

The idea of introducing a new financial instrument – another way to issue more sovereign debt – might have provided the European banks with another temporary source of income.

But that’s about it…

Besides, the practical issues related to an implementation of such bonds is not possible to solve in today’s political environment in Europe.

Maybe the eurobonds belongs to the future. But for now it’s just another nice thought – much like the very basic idea of the “United States of Europe“.

Director of the think tank CEPS in Brussels, Daniel Gros, does a pretty good job explaining the details in the following article, syndicated by www.eurointelligence.com:

The basic facts of the Italian drama are well-known: in early August, when interest rates on Italian government debt soared and the Italian banking system got under pressure, the ECB started buying Italian debt on the understanding that Italy would quickly adopt a multiannual program to reduce its deficit and promote growth.

This understanding was made explicit in a letter send by the present and future presidents of the ECB to the Italian government.

Initially it appeared the country would react in a matter of days. 

But as the pressure from financial markets abated somewhat the government, under pressure from different parts of the ruling coalition, continued to change its mind on what taxes to increase and what expenditure to cut.

Growth enhancing measures went out of the window and the revenues assumptions underpinning the budgets plans became ever more shaky.

The ECB had thus little choice, but to stop buying Italian bonds, whose yields then soared again.

This finally convinced the Government that it had no choice but to toughen the budget again so as to ensure renewed support by the ECB.

Given this experience it is instructive to speculate what might have happened if Eurobonds had already been implemented by early 2011.

What variant of Eurobonds?

Imagine first, that Italy could still have issued substantial amounts of Eurobonds.

In this case the Italian government would have continued to defend its position that Italy’s fundament position was sound (relatively low deficit and strong domestic savings); and that there was therefore no need to implement a strong fiscal adjustment now.

There are always valid arguments to delay action. 

The Italian government might even find a Nobel prize laureate who would support the notion that any attempt to implement a fiscal adjustment now would be self-defeating because it would depress demand so much that in the end the deficit would not improve.

Defenders of Eurobonds would say that ‘the EU’ (i.e. the eurogroup of finance ministers) might have imposed the adjustment anyway.

This is possible, but not likely, because in the absence of a clear market signal the need for action can always be disputed.

But what would have happened even if “the EU” had ordered Italy to do a fiscal adjustment now?

It is quite possible that the government might not have been able to find a majority in Parliament.

What then? Fines?  Why would the prospect of fines, which only embarrass the government, suddenly produce a consensus on reforms?

What if Italy had already exhausted its allocation of Eurobonds (or the EU had not allowed it to issue any more)?

In this case the price of all the Italian “non eurobonds,” i.e. those Italian bonds not guaranteed by its partners, would have tanked even more as financial markets would perceive that these bonds would be first in line in case of trouble.

Total Italian government debt is about 1.800 billion euro.  If one assumes that eurobonds might have been issued for about one half of this one would still be left with 900 billion euro, enough to drive large parts of the EU’s banking system into insolvency should the country default on it.

With or without Eurobonds, the ECB would have faced the same unpleasant choice: intervene in the secondary market or risk a collapse of the European banking system.

The Italian “summer theatre” of 2011 illustrates once more that the problem is not that a government will openly defy its euro zone partners, but rather that its parliament is so divided that the government cannot push through the measures that are required.

Greece has already shown that countries default not because they deliberately choose to, but because society at large is so divided that it is impossible to make the necessary adjustment to ensure orderly debt service.

This leads to the final thought: What would happen to the “eurobonds” issued by a country which does not comply with conditions set in Brussels or Frankfurt? 

Would financial markets really believe that Germany would honour its guarantee if the country concerned had not abided by its own obligations?

The German government might well argue that the country had destroyed the essential elements (‘Geschäftsgrundlage’ in German) for eurobonds.

Depending on the exact legal basis for Eurobonds, i.e. what jurisdiction would apply, this uncertainly could very well lead to significant yield differentials between the Eurobonds issued by different member states.

Eurobonds are an appealing concept in theory, but cannot be implemented in today’s Europe characterized by a large debt overhang, and the absence of a credible system to enforce even the weak elements of economic governance we have now.

.

Daniel Gros is Director of the think tank CEPS in Brussels.

 

LATEST: EU Commission ready to announce eurobond proposal 

So, the confusion continues…

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September 5, 2011 · 16:08

IMF Director Christine Lagarde Sees “Crisis of Confidence”

There seems to be some kind of revival sweeping over Europe these days, with both economists, regulators and politicians suddenly starting to realize what so many have pointing out for several years: The global crisis is actually just getting started, the stimulus and the austerity measures are just not working and the financial markets has ditched most of what little confidence they once had in governmental and institutional leaders’ ability to solve basically systemic flaws in our economic system. Today, as the markets keeps tumbling, newly appointed IMF-boss, Christine Lagarde, is telling us that a “crisis of confidence” have aggravated the situation.

“The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009.”

Christine Lagarde

“It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle,” Mrs. Lagarde says in the interview with Der SPIEGEL. But when it comes to concrete solutions, she’s just as vague as any other politician. 

The journalists, Marc Hujer and Christian Reiermann, from Der Spiegel asks all the right questions.

But Mrs. Lagarde is an experienced politician, and her answers are exactly as precise or foggy as they need to be from the IMF point of view.

Here’s the first part of the interview:

SPIEGEL: Ms. Lagarde, the global economy is slowing, markets are volatile and banks have all but ceased lending each other money. Does the situation remind you of 2008 just before the investment bank Lehman Brothers collapsed?

Lagarde: Each moment in history is different from previous situations and it’s wrong to try to draw comparisons. At the International Monetary Fund, we see that there has been, particularly over the summer, a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken.

SPIEGEL: What does that circle look like?

Lagarde: It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle.

SPIEGEL: What should be done?

Lagarde: When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks.

SPIEGEL: Don’t you think that your warning that €200 billion ($285 billion) might be missing in the balance sheets of European banks aggravates the situation of those banks?

Lagarde: In the course of our work on global financial stability, we are looking at the situation in Europe. We will publish the results of this work in a couple of weeks. More generally, we do see a need for recapitalization of European banks so they are strong enough to withstand the risks coming from sovereign borrowers and from weak growth. This is key to cutting the chains of contagion.

SPIEGEL: Is the world on the brink of a renewed recession?

Lagarde: We are in a situation where we can still avoid it. The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we’ll avoid the recession.

SPIEGEL: At the moment, however, exactly the opposite would appear to be happening. Many governments have introduced austerity packages in order to make up for the vast expenditures made during the crisis. Is that wrong?

Lagarde: I wouldn’t pass general judgement on that because it’s going to be country-specific. For some countries, the path is fine and should continue as is. For others, some of the measures that have been taken are so strong, given the current deficit situation, that they can accommodate some relaxation — especially if the economy weakens further, and provided there is a clear medium-term consolidation path.

SPIEGEL: Do you consider Germany to be one of those countries which could do more to stimulate the global economy?

Lagarde: In the course of our annual country checks, our experts recently visited Germany. Their conclusion was that, under the circumstances, the fiscal consolidation path adopted by Berlin was perfectly fine.

SPIEGEL: For now.

Lagarde: Of course these things always depend on circumstances. Given Germany’s heavy reliance on exports, if demand weakens so much that it really changes the equilibrium, then it would need to be revisited.

SPIEGEL: By, for example, stimulating domestic demand?

Lagarde: Domestic demand is good for both the German economy and for the other economies surrounding Germany. I do think that domestic demand in Germany has improved since the time when I floated this idea as finance minister in France.

SPIEGEL: Given the economic climate, do you not think it dangerous when countries pass laws mandating a balanced budget, as France is considering?

Lagarde: It’s clearly a signal to market players. It shows investors the seriousness of the government’s commitment to the principle of balanced finances. The general intention behind it is good.

SPIEGEL: Would you like to see the US implement such a “debt brake” rule?

Lagarde: Each country must find the best way to signal to the markets that they are serious about public finances. The IMF has a lot of experience and we would be very happy to give a hand to those countries that actually are in the process of implementing a debt brake.

SPIEGEL: Do you think the austerity measures recently agreed to in the US go far enough?

Lagarde: Which ones do you mean?

SPIEGEL: The commitment, after weeks of disagreement about the debt ceiling, to cut federal expenditures by at least $2.4 trillion over the next 10 years.

Lagarde: Such long-term commitments are a good principle because they credibly signal an intention to reduce the deficit and consolidate public finances on a more stable course, for example in health care spending. It can indicate that a country will reduce the deficit in the medium term and yet still have enough room in the short term to put in place measures that will actually stimulate growth and help create employment.

SPIEGEL: Does the US need a new stimulus package?

Lagarde: We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.

Read part 2 of the interview with Chrisitine Lagarde at SPIEGEL Online:

“European Leaders Have Made Very Strong Commitments”

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August 31, 2011 · 00:23

Europe: “Time to Get Angry”

It’s not often that I get the chance to present you with a real essay: This one I found at der Spiegel ONLINE last week, and I would like to share it with you. The writer teaches sociology at the London School of Economics and at Harvard University. His name is Ulrich Beck. In his essay, he draw parallels to the historic times in Europe, nearly 40 years ago, when the Berlin wall was teared down by angry young people, and the East-European communist regimes collapsed.

“It is European youth, in particular, who have drawn the short stick.”

Ulrich Beck

Freedom Wall of Berlin

Finally, the heavy wheigthers of European political economy is catching on. Perhaps there is hope that “the crisis of a lifetime” will turn into “the possibility of a lifetime,” and become the most important turning point in history of  our modern society – as described in one of my most read articles ever, published October 2008.  

My conclusion from 2008, however, still stands: There are probably not enough political courage to pull this thing through.

But Mr. Beck - who has been one of the most respected researchers of sociology and political economy for many years – presents the leaders of Europe with the knowledge they need to make the necessary reforms, and a sketch (or a blueprint) on how to do it.

And he points out – as also the manifesto of EconoTwist’s states – it’s time to get involved:

“The European common currency is in trouble, several EU countries are facing mountains of debt and solidarity within the bloc is declining. It is European youth, in particular, who have drawn the short stick. Closer cooperation is the only way forward,” Ulrich Beck writes:

Germany’s European policy is about to undergo a transformation as significant as Ostpolitik –the country’s improvement of relations with the Soviet bloc — was in the early 1970s. While that policy was characterized
by the slogan “change through rapprochement,” Berlin’s new approach might be dubbed “more justice through more Europe.”

In both cases, it is a question of overcoming a divide, between the East and the West in the 1970s and between north
and south today . Politicians tirelessly insist that Europe is a community of fate. It has been that way since the establishment of the European Union.

The EU is an idea that grew out of the physical and moral devastation following World War II.

Ostpolitik was an idea devoted to defusing the Cold War and perforating the Iron Curtain.

Unlike earlier nations and empires that celebrated their origins in myths and heroic victories, the EU is a transnational governmental institution that emerged from the agony of defeat and consternation over the Holocaust.

But now that war and peace is no longer the overriding issue, what does the European community of fate signify as a new generational experience? It is the existential threat posed by the financial and euro crisis that is making Europeans realize that they do not live in Germany or France, but in Europe.

For the first time, Europe’s young people are experiencing their own “European fate.” Better educated than ever and possessing high expectations, they are confronting a decline in the labor markets triggered by the threat of national bankruptcies and the economic crisis. Today one in five Europeans under 25 is unemployed.

A New Age of Risky Confusion

In those places where they have set up their tent cities and raised their voices, they are demanding social justice. In Spain and Portugal, as well as in Tunisia, Egypt and Israel ( unlike Great Britain ), they are voicing their demands in a way as nonviolent as it is powerful.

Europe and its youth are united in their rage over politicians who are willing to spend unimaginable sums of money to rescue banks, even as they gamble away the futures of their countries’ youth. If the hopes of Europe’s young people fall victim to the euro crisis, what can the future hold for a Europe whose population is getting older and older?

News programs offer new visual material for the dawning of a new age of risky confusion — the “world risk society” — on an almost daily basis.

The headlines have been interchangeable for some time: Insecurity Over the Future of the Global Economy, EU Bailout Fund in Jeopardy, Merkel Attends Crisis Meeting with Sarkozy, Rating Agency Announces Downgrade of US Debt. Does the global financial crisis signal the deterioration of the old center?

Ironically, it is authoritarian China that is playing the moral apostle on the financial front, with its sharp criticism of both democratic America and the EU.

There is one thing the financial crisis has undoubtedly achieved: Everyone (experts and politicians included) has been catapulted into a world that no one understands anymore.

As far as the political reactions are concerned, there are two extreme scenarios that can be juxtaposed.

The first is a Hegelian scenario, in which, given the threats that global risk capitalism engenders, the “ruse of reason” is afforded a historic opportunity.

This is the cosmopolitan imperative: cooperate or fail, succeed together or fail individually.

At the same time, the inability to control financial risks (along with climate change and migration movements) presents a Carl Schmitt scenario, a strategic power game, which opens the door to ethnic and nationalist policy.

Taking Europe for Granted

The community of fate is inescapable in both models, because, no matter what we do, global risk capitalism creates new existential divisions and bonds across national, ethnic, religious and political boundaries. How can Europe even prevail in this environment?

Paradoxically, the success of the EU is also one of its biggest obstacles.

People have come to take many of its achievements for granted, so much so that perhaps they would only notice them if they ceased to exist.

One only need imagine an EU in which passport controls are reintroduced at borders, there are no longer reliable food safety regulations everywhere, freedom of speech and of the press no longer exist under today’s standards (which Hungary is already violating, thereby exposing itself to strict scrutiny), and Europeans traveling to Budapest, Copenhagen or Prague, or even Paris, Madrid and Rome, are forced to exchange money and keep track of exchange rates.

The notion of Europe as our home has become second nature to us. Perhaps this explains why we are prepared to jeopardize its existence so carelessly.

We must recognize and acknowledge the reality that Germany has become a part of the European community of fate — in exactly the way former German Chancellor Willy Brandt described during the first session of parliament following German reunification:

“Let us hope that being German and being European are now one and the same, today and forever.”

Does the Hegelian idea that reason ultimately prevails throughout history, despite many diversions, still apply?

Or is Carl Schmitt’s belief that hostility among nations must invariably prevail more fitting to conditions in the world today?

Unlike the community of fate between two rivals that exists between the United States and China, Europe’s community of fate is based on shared laws, a shared currency and shared borders, but also on a “never again!” principle.

Instead of invoking a noble past, the EU attempts to ensure that the past will never repeat itself.

Instead of becoming a super-state or a mechanism that represents enlightened national interests in the best of cases, the EU has taken on a third form.

Its most important role is to orchestrate. It facilitates the networking of commitments and entities that include sovereign states, as well as transnational organizations, municipal and regional governments and the organizations of civil society.

An Accumulation of Impositions

Within this framework, the bailout funds for southern European countries have engendered a logic of conflict between donor and debtor nations.
 

The donor nations must implement domestic austerity programs and, for this reason, are exerting political pressure on the debtor nations at a level exceeding the pain threshold. In contrast, the debtor nations see themselves subject to an EU dictate that violates their national autonomy and dignity.
 

Both stir up hatred of Europe, because everyone sees Europe as an accumulation of impositions. And then there is the perceived external threat.

Critics of Islam, which claim that Muslims are abusing the West’s values of freedom, managed to connect xenophobia with enlightenment. Suddenly it was possible to be opposed to the encroachment of certain immigrants, all in the name of enlightenment. As a result, three destructive processes are overlapping and being reinforced in Europe: xenophobia, Islamophobia and anti-European sentiments.

Many envision the end of politics when they think about politics. How can anyone be so blind?

In big and small ways, and at the national, European and especially the global level, Hegel, the believer in reason, and Schmitt, who sees enemies everywhere, are at odds.

When it comes to the eternal crisis called Europe, this conflict over the model of the future raises the following questions:

To what extent does the revolution among outraged youth actually transcend national borders and promote solidarity?

To what extent does the feeling of being left behind lead to a European generational experience and new European policy initiatives?

How are workers, the unions and the center of European society behaving? Which of the major parties, in Germany, for example, has the courage to explain to citizens what Europe as a homeland is worth to them?

Merkel adheres to the Hegelian idea by preferring the detours of reason.

To use the metaphor of dance: two steps backward, one step to the side, then a magical, lightning-quick about-face, softened by a tiny step forward — in much the same way as the coalition government in Berlin is hopping, stumbling and tumbling its way forward, dancing to music that neither the Germans nor the other Europeans can hear or comprehend.

While former Chancellor Helmut Kohl warned against a German Europe and sought a European Germany, Merkel advocates a German euro-nationalism, putting her faith in the ability of Berlin’s regulatory and economic policy to heal Europe’s wounds.

Time for More Hegel

But in light of the financial crisis, European policy today should play the same role as the Ostpolitik of the 1970′s did in divided Germany: a unification policy without borders.

Why was the enormously expensive reunification with East Germany self-evident, and why, on the other hand, is
the economic integration of debtor nations like Greece and Portugal frowned upon?

It isn’t just a question of paying the piper. In fact, the real challenge is to rethink and reshape Europe’s future and its position in the world.

The introduction of euro bonds would not be a betrayal of German interests. The road to a union characterized by solidarity, much like the recognition of the Oder-Neisse border between a unified Germany and Poland, is indeed in Germany’s well-considered interest. It is an expression of European and German realpolitik.

Why shouldn’t Europe introduce a financial transaction tax, which would establish a financial scope for a social and environmental Europe, which in turn would promise workers security through Europe, and in doing so address the greatest concerns of young Europeans?

The concept of more justice through more Europe contains an appeal in terms of a transnational community of solidarity.

“Be outraged, Europeans.”

Just as many demonized Brandt’s talk of rapprochement with the communist bloc as treason, today’s call for “more Europe!” is a blow in the face of national self-awareness.

Merkel’s back-and-forth and forward-and-backward approach could also create an opportunity for a future project involving the Social Democrats and the Green Party.

As soon as the SPD and the Greens have explained that a social Europe is more than an introverted tightwad, but rather — using Hegel’s argument — a historic necessity, even the SPD will regain stature and win elections.

This, of course, is predicated upon its having the courage to declare Europe to be its main project, just as Ostpolitik was more than 40 years ago.

By Ulrich Beck    (Translated from the German by Christopher Sultan)

"Never Again"

Ulrich Beck, (67), teaches sociology at the London School of Economics and at Harvard University.

He is also a professor at Munich’s Ludwig Maximilians Universität. He is the author of several books, including “Cosmopolitan Europe,” published by Polity Press.

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