President of the European Council, Herman van Rompuy, proposed last week a single European bond, according to Financial Times Deutschland. But the response was unenthusiastic, FT writes, citing French finance minister Christine Lagarde. The paper says Germany vehemently opposed such a bond on the grounds that it would increase domestic borrowing costs.
Likewise, van Rompuy says Germany’s proposals for an orderly bankruptcy of member states have no support in the euro-group. So it looks we are stuck. According to FT Deutschland, van Rompuy has four priorities: early fiscal planning, reform of the sanctions regime, internal imbalances, and crisis resolution.
It looks as though we have reached the moment when EU leaders are making the straight transition from complacency to panic, as Jose Manuel Barroso now starts to attack Angela Merkel, his protégé, for failing to explain the politics of the euro rescue package, the eurointelligence.com points out.
Barroso also did so in an interview in Frankfurter Allgemeine, in which he also criticised the German government’s proposals for a reform of the stability pact as “naive” on the grounds that there is no way the EU is going to withdraw voting rights from fiscally irresponsible governments.
Spain’s In Trouble
It is the front page news in FT Deutschland, but significantly lower down the list of news items in El Pais:
The IMF launches a severe criticism of the lack of reform policies in Spain, and says that Spain should not rely on fiscal austerity alone to get through this crisis.
The fund calls for radical labour reform policies, and warns that a historic opportunity to reform the Spanish labour market should not be missed.
In particular, the IMF criticised the Spanish policy of wage indexation.
The IMF’s criticism has in turn been criticized by the Spanish trade union, which are currently negotiating labour market reforms with the government and the employers federations.
The IMF is asking for reforms in three areas, labor, pensions, and banking. On the latter, according to another article in El Pais, the IMF is proposing that the Cajas be freed from the clutches of politicians and subjected to market forces.
In particular, it should be possible for banks to take a stake in the Cajas.
And The Euro Keeps Falling
The Spanish story has contributed to further weakness in the euro, which has paired its gains at the end of last week, and is now trading back at around $1.23. Global stocks markets had another bad day yesterday, and the overnight futures point to a weak start today.
Calculated Risk says that Libor was “going nutty” suggesting that money market tension resurfaces.
Simon Johnson and Peter Boone invoke von Hayek’s Road to Serfdom in their criticism of the bailout cum monetisation package, which leaves both Europe and the world exposed to severe economic shocks in the years to come.
They propose four measures: Debt restructuring, bank resolution, debt guarantees, and G20 support for further euro devaluation.
Is The Euro Zone Insolvent?
Wolfgang Munchau wonders whether the euro zone itself might be insolvent if it keeps guaranteeing the liabilities of the banking system and of government debt, without forcing genuine structural reform in either category.
He cites comparison of the euro zone economy with than of a CDO, and concludes that in the absence of banking reform investors should treat the euro zone the way they should have treated subprime CDOs.
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- IMF warns on Spanish economy (americablog.com)