Tag Archives: Euro

Our Daily Warning

As the government of Romania falls as another victim of the economic crisis, the global political risk factor continue to rise and the odds of even more social unrest gains a few more percentage points. EconoTwist’s and many bloggers , analysts and researchers,  have been warning about this for years. But perhaps it’s time for another warning?

 “With people already questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse.”

Edoardo Campanella

Romanian Prime Minister Emil Boc on Monday announced his resignation after three weeks of anti-government protests in the country, following in the footsteps of Giorgio Papandreou and Silvio Berlusconi.

He said he took this decision in order to calm “social tensions” and so the “economic stability of the country” is not affected.

Well, the resigning of the PM’s in Greece and Italy doesn’t seem to have helped much in that matter.

See: World Erupts in Anger: “You Can’t Eat Money!” (Photo Coverage)

It seems more like political leaders fleeing from their responsibility.

And if someone don’t claim that responsibility soon, and start doing something about it, we may very well find ourselves in a helluva lot more trouble than we’re already in.

ReadEurope: “Time to Get Angry”

In case there is still anyone who not quite grasp the depth of this crisis, here’s the adviser for the Italian senate, Edoardo Campanella, to explain:

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The Social Consequences of the Euro Crisis

About a year ago the Arab spring taught the world an important, predictable lesson. When young people cease to be the engine of the economy and are excluded from the decision-making process, long-run economic growth is endangered and political stability undermined.

This lesson holds true for dictatorial regimes as well as for long-established democracies.

In Europe, a deteriorating youth marginalization is creating the preconditions for a social earthquake capable of shaking the old continent and impairing the survival of the Euro.

Until now, safety nets and intra-family transfers have prevented peaceful Indignados-style protests from turning into violent Arab-ones.

However, the shortfall of resources due to a new imminent recession, along with fiscal austerity measures, will impair this channel, whereas frustration and social resentment will keep growing

The figures are already alarming.

According to a report recently released by the European Commission, one in five young people is at risk of falling into poverty or social exclusion, only one third of young people are employed, and one in three has been out of work for over one year.

Moreover, 40 per cent of the unemployed are under 30, to the amount of 9 million people. On the other extreme of the age scale, the trend is reversed.

The employment rate for people aged 60-64 increased from 23% in 2000 to 34% in 2010.

In peripheral countries the situation is extremely acute.

The Portuguese government urged its young unemployed to leave Europe for better opportunities elsewhere, in Italy almost 120.000 young talents left the country last year, and in Spain thousands of people are pouring into former colonies in South America.

Across Europe, and even in Germany or Sweden, young workers are experiencing in-work poverty due to what economists call labor market dualism.

Unlike their older colleagues, they just have access to temporary contracts, which pays on average 14%  less than permanent contracts and are more vulnerable to sudden layoffs.

The medium-term economic and social consequences of such youth marginalization are huge.

  • First, an economy that is not nourished by fresh ideas loses competitiveness, becomes vulnerable to interest groups, suffocates material as well as intellectual progress, and is fated to stagnation or even prolonged recessions.
  • Second, high income volatility and job insecurity discourage the creation of new family units that are essential to generate social cohesion as well as inter-generational solidarity.
  • Finally, economic uncertainty tends to lower fertility rates with negative spillovers on the size of tomorrow’s workforce, population ageing, and the sustainability of public finances. The political implications could even be more disastrous.

Therefore, what begs asking is whether these economic factors could contribute to the eruption of an Arab spring in Europe.

There are, of course, huge economic and political differences between North Africa and Europe. The latter, unlike the former, is graying, prosperous, and democratic. But, paradoxically, the combination of these diverging demographic trends and opposite institutional features, along with the same aspiration for a better future, could lead to an identical result.

In North Africa young people represented the demographic majority of a despotic regimes, in Europe the political minority of a democratic system.

The former fought for an economic progress they just started to savor but that was hampered by the elite in power. The latter would fight for a material wellbeing that is only benefiting their older fellow citizens at their expenses.

Either way, young people can improve their situation and gain power only through violent rather than legal channels.

What event, if any, will inflame the upheaval in Europe, which country will be the epicenter of this social earthquake, and what impact it could have on the institutional, democratic order remain uncertain.

However, it is still possible to predict part of the effects.

With people already questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse.

Edoardo Campanella

To avoid this catastrophe, European governments should start promoting the role of the youth in their societies through family friendly policies, career paths related to productivity rather than to seniority, cross-country mobility, and the eradication of dual labor markets.

Spring is approaching. European leaders should act soon.

Edoardo Campanella is economic adviser to the Italian Senate.

This article is syndicated by www.eurointelligence.com.

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The Best of Nigel Farage

A great collection of the most memorable moments in the European Parliament over the last years – starring British MEP Nigel Farage.

Enjoy!

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UKIP leader Nigel Farage meets the press following a mock funeral cortege held in honour of the euro-corpse.

“European banks are going to take a hit at some point anyway, if you are a bank owed a great deal of money it’s better to get 50% of it than none of it. Down the path we are going now is heading for a total bust.”

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Nigel Farage MEP, UKIP, Co-President of the EFD Group in the European Parliament (Europe of Freedom and Democracy)

The conclusions of the EU Summit 23-24 June 2011 here:

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The EU End Game: “Sixth Set”

Despite Wimbledon week, the main centre court contest that many economists are watching is that between the German government and the ECB, now entering the sixth set of the European endgame.

“A default – however sugar-coated – is still a default.”

George Irvin

As the contestants at Wimbledon enters Center Court to end this years tournament, the EU leaders are entering the final stage of the European end game. And – just as in the tennis game – there are no obvious favorites. Who will win? Who will lose?

An abbreviated summary of the action so far is as follows:

The German Finance Minister, Herr Schäuble, initially appeared to gain the advantage by admitting that the Greek situation is so perilous that they should be allowed in effect to default – the phrase he used was “voluntary restructuring.”

Monsieur Trichet then fought back hard arguing that a Greek default would be catastrophic and implying that euro zone governments (not the ECB) should continue lending.

The ECB even threatened to stop accepting Greek Eurobonds as collateral for its continued lending to the Greek central bank, a move that would effectively pull the plug on the Greek banking system.

Who will prevail?

Well, Professor of Economics and European expert, George Irvin, have just posted the following analysis on his blogsite at the EUobserver.com :

On the face of it, Herr Schäuble has a strong case, albeit rendered more palatable to his critics by such sweeteners as having Greece sell off public assets, voluntarily ‘reprofile’ its sovereign debt and so forth.

The real case for default, though, is that the retrenchment medicine is not working and risks killing the patient. Instead of extracting a vengeful levy entirely from ordinary Greeks, German and French banks should be made to pay their fair share – a ‘haircut’ variously estimated as between 35% and 70% of the bonds they hold.

Indeed, given the dramatic turn of events in Athens in recent days, default now looks almost certain.

But here is the rub. A default – however sugar-coated – is still a default.

The ECB argument is that if Greece is allowed to do so, other highly indebted members will follow suit and, as contagion spreads, the markets will cease buying members’ sovereign debt altogether.

The ECB would be left to bail out not just the small peripheral economies, but probably Spain and Italy too.

That would spell the end of the euro.

That is partly why Jean-Claude Trichet will be replaced in October by another tough conservative, Italy’s Mario Draghi who famously prefaced an interview with the Financial Times by the phrase “The euro is not in question.”

On the face of it, then, the first set of the match will almost certainly end in a nail-biting tie break.

But whoever wins, the match will be far from over.

To borrow Wolfgang Münchau’s phrase, the existing union is too weak to function properly, but too strong to blow up.

Assuming the euro zone does not blow up, how might it be strengthened?

The central pillar of a new economic architecture for the euro zone would be the creation of a Treasury Secretary with a secretariat; ie, an embryonic euro zone Treasury (Ministry of Finance).

Indeed, the idea was floated earlier in June by Monsieur Trichet himself who added that such a Ministry would also carry out “all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services, and third, the representation of the union confederation in international financial institutions.”.

The key points to retain are, first, that such a Ministry would have real power (ie, it could override national bickering in the Council); and secondly, that the euro zone would have a single banking system.

Another pillar would be fiscal-financial. Like its US counterpart, a euro zone Treasury would need to be able to emit E-bonds jointly guaranteed by all members.

Not only would this enable the euro zone to supersede the now-discredited system of relying on national Eurobonds, it would greatly strengthen the euro as a reserve currency since euro-assets would be far more desirable (and available) to hold.

Additionally, a Euro-Treasury might start by improved ‘co-ordination’ of member-states’ fiscal policy, but it would soon need to raise significant amounts of revenue.

A useful mechanism would be to follow up on a suggestion by Spain a decade ago that a tax on member-states (ie, a share of their VAT receipts) be levied progressively in proportion to their per capita income.

The third pillar would be political.

The euro zone cannot survive unless its citizens benefit from its existence.

And here is where serious political courage is needed – the courage to set up a euro zone unemployment benefit scheme, and/or for that matter, a euro zone pension scheme.

Initially such schemes would complement the national schemes already in place, but as they grew in size, they would come to play the same macroeconomic stabilisation and redistributive functions as the US Treasury.

How do these proposals relate to the current contest between the Germans and the ECB?

The answer is straightforward.

Although the Greeks, the Irish and other countries at risk will doubtless be offered further loans, at the end of the day what we are witnessing is a slow-motion default.

Why? Because ‘internal devaluation’ and the fiscal straightjacket imposed upon the weakest members means they can never repay.

Ultimately, Germany, France et al will have to bail out their own banks.

If slow-motion default leads to another major financial crisis, we shall all pay.

In truth, euro zone member states already live in a ‘transfer union’, and the sooner members realise it and adopt a common macro-economic framework, the better.

The practical details may take a long time, but one thing is certain: the gruelling match on Centre Court is far from over.

By George Irvin

I guess that means we can look forward to another entertaining weekend in Europe…

Related by the EconoTwist’s:

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