Tag Archives: Southern Europe

“Euro Zone Crisis is Germany’s Fault”

Now, this is an interesting point of view: According to Director of the Division on Globalization and Development Strategies at UNCTAD Heiner Flassbeck, the European financial crisis are all Germany‘s fault. Here at econoTwist’s, however, we belive that the responsibility should be shared among several others – like the incompetent EU parliament and the ridiculous artificial institution called the EU Council. But Mr. Flassbeck makes some valid arguments, and it’s certainly a theory worth taking into account.

“Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union.”

Heiner Flassbeck

“There is no solution to the current euro zone crisis as long as no one effectively challenges the consistency of Germany’s economic policy strategy with the logic of a monetary union. Captain Merkozy’s boat approaches the rocks at high speed,” Heiner Flassbeck writes.

This commentary is syndicated by www.eurointelligence.com:

A German End to the Euro Vision

Once upon a time European leaders believed in a step-by-step approach of European integration.

Each step would bring Europe closer to the target of closely related but still independent states.

According to this vision states would be willing to relinquish more and more of their independence, in order to gain advantages of peace, global strength through political cooperation and economic strength as a result of a big common market.

“Germany is considered by many as the role model for the rest of the union. That is the biggest mistake and the real reason why Europe is committing economic suicide instead of tackling its problem at the root.”

In this approach, the creation of a monetary union was just one of these consecutive and unavoidable steps on the path to strengthen political cooperation and to completethe common market with its indisputable advantages for all European citizens.

Unfortunately, twelve years after the start of the European Monetary Union (EMU) reality tells a different story.

EMU is in troubled water and captain Merkozy is steering the boat towards some dangerous rocks that could mark the end to a long and peaceful ride of a formerly war torn region.

Much has been said about the folly of pushing countries to cut public expenditure, increase taxes and put pressure on wages in the middle of one of the deepest recessions in modern history.

However, even the outspoken critics of the Merkozy approach rarely discuss Germany’s economic policy approach.

To the contrary, Germany is considered by many as the role model for the rest of the union. That is the biggest mistake and the real reason why Europe is committing economic suicide instead of tackling its problem at the root.

“Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union.”

A monetary union is in essence a union of countries willing to harmonize their rates of inflation and to sacrifice national monetary policies.

A country like Germany, fighting for higher market shares in international markets, tries to achieve the opposite. It has to undercut the cost and price level of its main trading partners by all means.

A monetary union formed by already closely integrated countries becomes a rather closed economy and needs domestic policy instruments like monetary policy to stimulate growth time and again.

German monetarism asks for the opposite, the absence of any discretionary action of central banks and relies solely on flexibility of prices, in particular wages.

Along these lines the story of EMU’s failure is quickly told. From the very beginning of the monetary union, German politicians put enormous pressure on trade unions to help realise an increase of unit labour cost and prices that was less than in other countries.

Since member states no longer could devalue their currencies to maintain competitiveness as they had done hitherto this was a rather easy task. The effects got stronger as small annual effects accumulated over time and, after ten years, created a huge gap in competitiveness in favour of Germany.

“Germany built up huge current account surpluses and Southern Europe and France accumulated the complementary deficits.”

The ECB, in good German monetarist tradition, celebrated the achievement of the two percent inflation target, while ignoring the fact that this was built on two-sided violation of the inflation target.

Without Germany’s undershooting of the target the overshooting in Southern European countries would not have been compatible with two percent overall.

The result is disastrous for the southern European economies as they are losing permanently market shares without being able to successfully retaliate the German attack. They would need a number of years with falling wages to come back into the markets.

However, the time to do that is not available.

Falling wages mean falling domestic demand and recession especially in countries like Italy or Spain with small export shares of some 25% of GDP. The resulting depression would be politically unbearable.

“Even a political tour de force would in vain as long as Germany is blocking the indispensable short and medium term relief measures.”

Until EMU as a whole recovers strongly, deficit countries will remain in current account deficits and will not be able to reduce their budget deficits.

What would be required is direct intervention by the ECB to bring down bond yields as well as Eurobonds to bridge the time until the deficit countries’ competitiveness is restored.

These measures are blocked by the German economic policy doctrine.

There is no solution to the current euro zone crisis as long as no one effectively challenges the consistency of Germany’s economic policy strategy with the logic of a monetary union.

Captain Merkozy’s boat approaches the rocks at high speed.

By Heiner Flassbeck

Director of the Division on Globalization and Development Strategies at UNCTAD.

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The Last Optimist – Alive and Kicking

There’s an old saying amongst investors that claims that the market bottom is reached only when the last optimist turns pessimistic. Former Goldman Sachs European analyst, now UniCredit chief economist, Erik Nielsen, is a natural-born optimist. And he’s still hanging on, still looking for something positive to tell his clients… God bless his soul!

“While few people like to see their individual benefits being cut, or their individual taxes hiked, the broader sentiment in Southern Europe is that people want core-European quality-institution and stability.”

Erik Nielsen

“Big political changes are now sweeping through the euro zone, putting, at least for now, the many skeptical political observers to shame.  I can’t tell you how often I have been told by investors and economists during this crisis that its only a matter of time before Southern Europe refuses the adjustment medicine and brings into power radical political forces which will eventually take them out of the euro zone, and that Germany will soon refuse to lend any further money to the south.  Interestingly, some 90% of those having predicted this outcome happen to be residing outside the euro zone,” Nielsen points out.

Here’s the rest of Mr. Nielsen’s commentary, published at www.eurointelligence.com today:

The Case for Optimism

Well, so far it is moving in the opposite direction: In Greece, Lucas Papademos was sworn in as prime minister, and Italy is about to hand power to Mario Monti.  And next Sunday when Spain goes to elections, and assuming the opinion polls are remotely accurate, Spain will elect the conservative Partido Popular with a wide absolute majority.

What’s the common picture in these three countries? People want more Europe, not less.  While few people like to see their individual benefits being cut, or their individual taxes hiked, the broader sentiment in Southern Europe is that people want core-European quality-institution and stability. 

Meanwhile, in Germany, Stern magazine rewarded Angela Merkel‘s performance during recent weeks by putting her on the front page – her picture tattooed onto the bicep of a strong arm and with a sub-title of “how Merkel runs Europe”.  Stern’s weekly ranking of politicians sent her top of the group, followed by – equally important – other pro-European opposition politicians, with the more sceptical ones (the Left and FDP) way down.

For us believers in the European project, this is clearly good news. 

But will the market appreciate it?  Well, one day it will, but I am not completely sure that it will get it quite yet.  At the end of the day, we are living through this highly peculiar period where investors will rather buy bunds or gilts with a virtually guaranteed erosion of real wealth, than being paid 6%-7% for an equivalent Italian bond with a virtually certain better outcome in two years.  But with leverage and mark-to-market and a year of generally poor performance, two years is a long time.

Everybody in the asset management industry seems preoccupied with career risk. 

It is a sad reality, sad because when the collective guardians of our savings prefer negative real return rather than maximizing return on capital, then this will come with a cost to long run growth.

What should be the policy response this bizarre state of affairs? 

So far, the European response has been out of the good old text-book, to which I still subscribe:  When you have an excessive fiscal imbalance, then you adjust it as fast as you can, accepting the short-term pain for the longer term gain.  And until very recently, the market subscribed to the same philosophy, discounted the future benefits of the tougher policy, and rewarded the faster adjustment over the slower one.  

Now, however, markets seem to like slower, or no, adjustment over the fast adjustment, predominantly because investors have turned themselves into pseudo political scientists, predicting a demise of the politics in the countries undertaking tough reforms.

So far, the common political “wisdom” on Europe on Wall Street has been wrong.  Will it change now on this latest evidence?  I don’t know.

If it doesn’t, then I would propose the following: if markets do not properly reward fundamentally good adjustment policies in a country, which the Troika deems sufficient and therefore eligible for a credit line, then it would be only reasonable for the ECB to draw a line in the sand and announce a maximum funding cost for that country for a period of time. 

For example, if Italy puts into law the required structural reforms, and the market does not bring funding costs down sufficiently on the back of the prospect for better growth in the future, then – with a Troika approved credit line – the ECB ought to tell the market that during the next year (or two) and so long as those policies remain in place, the 2-5 year sector of the Italian curve shouldn’t be above, say, 4%. 

I suspect that the ECB would not have to spend much money getting that result, if any. 

The parallel is the Swiss National Bank’s decision to change their exchange rate policy “from leaning against the wind” with a clear and defendable floor of 1.20 Swiss Francs against the euro. 

It was a gutsy call by the SNB, which suddenly  everyone agreed with once implemented and successful.

I suspect the same would be true if a member of the European Central Bank‘s executive board were to propose a temporary ceiling on yields of 4%.

This would quickly put to an end the current phase of the crisis – and, almost certainly, the build-up of sovereign debt on the ECB’s balance sheet.

By Erik Nielsen, chief economist of UniCredit.

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Citigroup: Euro Zone No Longer A Single Economy

In a commentary article in Financial Times, equity strategist Jonathan Stubbs at Citigroup warns investors of continue to treat the euro zone as a single economy. It shows how investors are already lining up to exploit the widening imbalances of the euro zone. This is something of which the EU’s political class is largely unaware off.

“In particular, it is important for global investors to realize that Europe is a region where one size does not fit all.”

Jonathan Stubbs


European fund managers and global asset managers have in the past treated the euro zone as a single investment entity. But in a short commentary in the Financial Times the equity strategist for Citigroup, Jonathan Stubbs,  makes an extraordinary statement that investors would be unwise to continue to treat the euro zone as a single economy.

Citi’s economics team, headed by Willem Buiter, believes that the southern European countries will persistently underperform against the northern.

Stubbs also writes that countries with weak balance sheets would try to arbitrage the strong corporate sector balance sheet by raising taxes and increasing regulation.

The troubles of the south will keep a lid on euro zone interest rates, and the Citi-strategist’s advice to investors is to get exposure to the beneficiaries of cheap money – i.e. the north of the euro zone.

The growing economic divergence across Europe means that the return of investing on a country basis should be more than just a passing phase, according to Jonathan Stubbs.

He writes that while it has paid to take a country by country approach in Europe recently, it is still an alien concept to many investors, especially those European fund managers who have been brought up on a diet of industry selection during the past decade, and global investors who treat Europe as one.

“In particular, it is important for global investors to realize that Europe is a region where one size does not fit all. Our economists expect ongoing economic underperformance from southern Europe relative to northern Europe over the coming quarters and years.”

Mr Stubbs points out that countries with weak balance sheets may well look to arbitrage the strong corporate sector balance sheet by raising tax rates and increasing regulation.

“Structurally this is likely to maintain the better earnings momentum for the north over the south. We believe backing earnings momentum will remain a successful strategy,” he writes.

“The problems in the south are allowing much of the north to be freeriders. Interest rates and the euro are set to be lower for longer. Getting exposure to the beneficiaries of cheap money is likely to be an important driver of performance,” Jonathan Stubbs concludes.

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2010 EU Deficit Exceed 7% – Commission Suggest “Cold Showers”

EU Deficit Increased By14 Billion Euro In First Quarter Of 2010

Deficit Crisis: Cyprus, Denmark And Finland Join The Watchlist

DnB NOR Finds Markets Participants EURNOK Expectations “Remarkable”

Fitch: Spanish House Prices To Fall Another 20%

Pressure On Spain To Cut More

EU Prepares For Spanish Bailout, Newspaper Says

EU Officials Fears Second Depression And War

Warns Against Euro Zone “Elite”

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