Re: New EC Thread

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Angela Merkel is enjoying more popularity and has the trust of the German people.

The reluctance of Rajoy to take a bail-out is cause for concern , but he doesn't want to take on the austerity that Greece

has had to undertake, nor give up Sovereignty.

France is said to be pressing Spain to accept a bail out because Merkel is concerned.

Deutchebank is to sell some of it's assets and reduce it's investment strategy .

There is growing resentment that Merkel is unyielding in the austerity measures imposed on those Countries which have had a bail-out because the Euro decline has been very beneficial for German exports. Germany also has a healthy bank balance .

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12 September 2012 Last updated at 16:22








Dutch vote overshadowed by eurozone debt crisis


The eurozone crisis has dominated the election campaign
Continue reading the main story
Related Stories

• Dutch vent frustrations at euro
  
• Centrists battle for Dutch vote
  
• Dutch question EU but want to stay
  

Voters in the Netherlands are going to the polls in an election overshadowed by concerns about the eurozone debt crisis.

The result is expected to be a close contest between the centre-right VVD Liberal party of Prime Minister Mark Rutte and the centre-left Labour Party.

Mr Rutte wants to bring down the Netherlands' deficit and stimulate the economy by investing in infrastructure.

Labour's Diederik Samsom is promoting spending on job-creation programmes.

Pollsters said turnout at 14:00 local time (12:00 GMT) was at 27%, the AFP news agency reports.

Hours before voting was due to start, the main party leaders took part in a final TV debate on Tuesday night with opinion polls putting the two pro-European parties almost neck-and-neck.

Continue reading the main story
Analysis


Matthew Price BBC News, The Hague

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The final TV debate focused first on Europe and the euro. It was fertile territory for the populist nationalist Geert Wilders who spoke of the "garlic economies" of southern Europe.

But it's a more pragmatic view, as ever in the Netherlands, that appears to have prevailed more generally. What really gets voters exercised right now are jobs and the economy, taxes and public spending cuts. It's the same debate - in essence - that's playing out across all of Europe as the euro crisis winds on.

The current Prime Minister Mark Rutte spoke of how a strong Europe, created through a continuation of his austerity-first approach (also advocated by his close ally Angela Merkel) is best for a trading nation like the Netherlands. The Labour party under Diederik Samsom argues that approach has damaged the Dutch economy.

Who'll win? It looks like the centre ground - either Rutte or Samsom - will be leading the next coalition. The Dutch have had years of centre-right governments. Maybe they'll feel it's time for a change. But it's going to be close.

Mr Rutte described the race as "extremely exciting".

Freedom Party (PVV) leader Geert Wilders, who brought down the government by withdrawing his support for its fiscal policy, was outspoken in his criticism of Mr Rutte, accusing him of aligning himself with Germany in the eurozone crisis.

"(Mr) Rutte has the vision of an ostrich, the backbone of a mussel and the reliability of Pinocchio," Mr Wilders said, at one point referring to the countries in need of bailouts from the EU as "garlic economies".

Mr Rutte, however, emphasised the importance of the Netherlands staying in the eurozone while strongly opposing further financial assistance for Greece.
Coalition likely
Mr Samsom said EU states should work together over the crisis and rejected the idea that the Netherlands would be guided either by France or Germany in its approach to the eurozone.

Mr Samsom's approach has been broadly seen as a nod to the policies of France's recently-elected Socialist President Francoise Hollande, who wants to increase spending and raise taxes on the rich.

Mr Rutte's policy echoes German Chancellor Angel Merkel's plans of strictly adhering to austerity measures that are designed to force down the country's deficit.

Analysts say the outcome will be significant for Germany's campaign for fiscal discipline in the eurozone.

Whichever party wins, a new coalition is the likely result.

The election was called after the anti-immigration Freedom Party withdrew its support for Mark Rutte's budget cuts six months ago.

Anger at Brussels and eurozone bailouts for countries crippled by the crisis has emboldened right wing parties to some extent, but the latest polls show that they have been largely squeezed out of the campaign.

The Freedom Party, which is also campaigning for a withdrawal from the euro as well as the EU, is expected to lose several seats.

The final opinion polls on Tuesday night suggested the Liberal and Labour parties were heading for between 34 and 36 seats each in the 150-seat parliament.

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12 September 2012 Last updated at 10:48

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EU Commission chief Barroso calls for 'federation'





Jose Manuel Barroso: "Europe's member states on their own are no longer able to effectively steer the course of events"

Continue reading the main story

Eurozone in Crisis

• Who's afraid of the euro crisis?
  
• Is it game over for Greece?
  
• EU austerity drive by country
  
• Why Greece's problems matter
  

EU Commission President Jose Manuel Barroso has called for the EU to evolve into a "federation of nation-states".

Addressing the EU parliament in Strasbourg, Mr Barroso said such a move was necessary to combat the continent's economic crisis.

He said he believed Greece would be able to stay in the eurozone if it stood by its commitments.

Mr Barroso also set out plans for a single supervisory mechanism for all banks in the eurozone.

He called the plans a "quantum leap... the stepping stone to the banking union".

The European Central Bank would get much greater powers of oversight and regulation of Europe's 6,000 banks under the plan.

Mr Barroso said said eurozone countries should not rely on bailouts from the ECB, saying the bank "cannot and will not finance governments".

"But when monetary policy channels are not working properly, the Commission believes that it is within the mandate of the ECB to take the necessary actions - for instance, in the secondary markets of sovereign debt," he added.

With respect to Greece, Mr Barroso said he believed the eurozone had reached a "turning point".

Continue reading the main story
Analysis


Chris Morris BBC News, Strasbourg

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This was a very federalist speech. Mr Barroso made it clear that the creation of a single banking supervisor, and moves towards full banking union, are just a first step. He wants the EU to become a federation of nation states.

No-one will be forced to come in, he said, but the speed should not be dictated by the slowest or the most reluctant. Before the next European elections in 2014, the European Commission intends to put forward explicit ideas on how to change EU treaties to reflect moves towards closer political union.

There will be huge arguments ahead - there are big differences within the Eurozone about the pace of political change. But countries like the UK, which don't want to take part in any further integration, are going to have to work out how best to protect their interests as other EU member states pool more of their sovereignty.

"If Greece banishes all doubt about its commitment to reform, but also if all the other countries banish all doubts about their determination to keep Greece in the euro area, we can do it," he said to applause from MEPs.
Big first step
Mr Barroso said he was not calling for a "superstate", but rather "a democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty".

"Creating this federation... will ultimately require a new treaty," Mr Barroso said.

The inability of governments thus far to respond effectively to economic developments was "fuelling populism and extremism in Europe and also elsewhere", he added.

The banking union would be a big first step in the creation of closer union within the eurozone, the BBC's Chris Morris in Strasbourg reports.

There will be opposition to the plans - the German government, for example, says far fewer banks should be involved, our correspondent says.

Britain does not want to take part but supports the idea of a single supervisor for the eurozone, as long as it does not affect the integrity of the wider EU single market, he adds.

Last week Michel Barnier, the EU commissioner in charge of financial regulation, said he hoped such a scheme could be set up by early 2013.

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German Decision on Euro Fund Is Good, But Not Enough


By the Editors Sep 12, 2012 5:10 PM GMT+0100

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The euro dodged another bullet with today’s decision by Germany’s constitutional court not to block the creation of a European Stability Mechanism, the latest just-in-time measure by the continent’s leaders to save the currency. That’s good news, but not enough.

Far from being reassured, Chancellor Angela Merkel should take the decision as the starting point for a campaign to explain to Germans why saving the euro is in their best interest. If that doesn’t work, she should call a referendum on Europe.

Had the judges in Karlsruhe refused to allow the fund’s ratification, Europe’s already sick economy could have imploded, dragging down the rest of the world with it. So the ruling came as a huge relief, cheering the equity markets and boosting the euro.

But the case also shows that Germans remain reluctant as a nation to do “whatever it takes,” in the words of European Central Bank President Mario Draghi, to rescue the common currency. That reluctance on the part of the euro area’s main creditor will probably continue to prevent a lasting solution to the debt crisis.

That needs to change, and the spectacle of global markets, governments and central banks awaiting the words of eight Germans dressed in red robes and white bibs helps explain why.

High Hurdle


The constitutional court placed a heavy condition on its approval of the ESM’s ratification by Germany. Any action by the fund that would increase German liability, beyond the country’s 190 billion-euro ($245 billion) capital commitment, would now require German parliamentary approval. That’s a high hurdle that Merkel will try to avoid because her party has proved reluctant to make such politically unpopular moves. If the 500 billion-euro fund doesn’t look big enough at any point, that will perpetuate uncertainty in financial markets over whether Europe will do what’s needed to underwrite Greece, Italy, Portugal or Spain.

It’s understandable that Germans want to control a process that could impose unlimited liability on their economy for the mistakes of others. But as we have argued before, a distorted narrative has taken hold in Germany that has led to a failure to understand how Germans benefited from the euro; how their exporting success contributed to southern debt troubles; and how German banks (which by 2009 had lent $704 billion to Greece, Ireland, Italy, Portugal and Spain) gained from the subsequent bailouts.

More worrying for the future is a popular failure to recognize that a euro collapse would probably cost Germans a great deal more than would a full commitment to rescue troubled governments. Bloomberg View has calculated that had a permanent federal transfer system of the kind that exists between states in the U.S. been set up in 2001, the total cost to Germany by 2012 would have been roughly 11 billion euros, or about 0.03 percent of gross domestic product. Of course, that fund doesn’t exist, so the costs of fixing the euro as a result of the current crisis would be much higher -- but again, not as high as the economic collapse that a euro-area breakup might trigger.

Merkel and other German leaders need to start making it clear to citizens why rescuing other economies would be in Germany’s national interest -- a case they have failed to make effectively so far. They have a duty to explain how the euro has expanded markets for German exports in Europe and created jobs at home. They also must tell Germans that those markets would shrivel and the jobs would disappear should the euro break up. Merkel must also tell Germans that, should the euro disintegrate due to Germany’s reluctance to foot the bill, the rancor would inflict lasting damage on the European Union itself.

Union Supporters


That’s a vital point, because while Germans are ambivalent about the euro, they remain strong supporters of the EU, a project that brought Germany in from the cold after World War II, generated prosperity and enabled German reunification after the collapse of the Soviet bloc.

There are signs that Merkel and Germany’s elite recognize the risk that the euro crisis will blind Germans to collateral damage on the EU. Last month, a group of German think tanks, backed by the country’s big media groups, started a public-relations campaign called “I want Europe,” devoted to reminding Germans why the EU is still worth protecting. Merkel endorsed the campaign.

By now, the narrative of bad Greeks and virtuous Germans is so ensconced that even a frank and determined message from Merkel might not work. If it doesn’t, she should call a referendum on whether Europe’s largest economy wants to further the EU’s integration in a way that will ensure the euro’s long-term survival. This is something that individual judges on the German constitutional court and Finance Minister Wolfgang Schaeuble have already called for.

A referendum on Europe would delay an end to the prolonged crisis, and it would be risky -- history shows such referendums can be lost, even in pro-European countries such as France, Ireland and the Netherlands. It would require an act of great political courage for Merkel to call one, given that failure could kill her chances of re-election next year.

Yet the risk that the crisis will deepen through the next year on the back of uncertainty presents an equal threat to Merkel’s election prospects. She is more popular than her party precisely because voters think she has handled the euro crisis well, helping Germans to escape largely unscathed so far. If that changes, and the crisis spins out of control, she could lose the election -- and go down as the German chancellor who lost Europe

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Italy Sells 3-Year Debt at Lowest Yield in Almost 2 Years


By Lorenzo Totaro - Sep 13, 2012 11:37 AM GMT+0100

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Italy sold three-year debt at the lowest rate in almost two years, a day after Germany’s top constitutional court paved the way for the European Central Bankand the European Union to buy bonds of nations in distress.

The Rome-based Treasury sold 4 billion euros ($5.2 billion) of its benchmark three-year bond to yield 2.75 percent, down from 4.65 percent at the last auction of the same securities on July 13. That was the lowest Italy paid on three-year debt since October 2010, according to Bloomberg data. Investors bid for 1.49 times the amount offered, down from 1.73 times on July 13.





Enlarge image

Italy Sells 3-Year Debt at Lowest Yield in Almost 2 Years




Alessia Pierdomenico/Bloomberg

Customers walk beneath Italian national flags while browsing fruit and vegetable produce at an indoor market in Rome.

Customers walk beneath Italian national flags while browsing fruit and vegetable produce at an indoor market in Rome. Photographer: Alessia Pierdomenico/Bloomberg

“In a word, storming demand, full volume sold, with yields struck at auction well below secondary market levels, and cover strong, at least by Italian standards,” Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London, said in a note to investors. “This really does highlight how much good news is now being priced into the peripheral markets on the back of the OMT, the German ESM ruling and also hopes for QE3 today.”

The bond auction was the first for Italy since the ECB’s announced on Sept. 6 its Outright Monetary Transactions program to make unlimited purchases of sovereign bonds, which led to a plunge in borrowing costs of distressed debt in Spain and Italy. The sale also came a day after Germany’s Federal Constitutional Court ruled the government can ratify the euro-region’s permanent bailout fund, the European Stability Mechanism, a decision that could pave the way for EU and ECB bond buying.

Italy’s 10-year bond yield rose 2 basis points to 5.06 percent at 12:35 p.m. in Rome, leaving the difference with comparable maturity German bunds at 345 basis points.

Long Maturity


Italy also sold 1 billion euros of five-year debt today at 3.71 percent and 1.5 billion euros of bonds due in 2026 at 5.32 percent, the longest-maturity bonds sold this year. The sale came two days before 10.4 billion euros of bonds mature. Italy auctioned 12 billion euros of Treasury bills yesterday.

Prime Minister Mario Monti, who reiterated this month that Italy doesn’t plan to request bond buying for now, called yesterday’s ruling “excellent news.” He also said conditions in the court’s decision won’t slow efforts to lower yields.

“I think the sentence only says that to increase the total commitment of Germany the two houses of parliament have to intercede,” Monti told reporters in Rome yesterday. “That doesn’t seem surprising to me.”

Italy’s 10-year bond yields fell to the lowest in April yesterday and have declined more than 50 basis points since ECB President Mario Draghi gave details of the Frankfurt-based bank’s plans to buy bonds in tandem with the ESM to try to lower borrowing costs.

Italy’s total government debt declined in July for the first time in five months, the Bank of Italy said in a separate report today. The debt load decreased to 1.967 trillion euros from 1.973 trillion euros in June. Even with that fall, Italy’s total borrowing is the euro region’s second largest in nominal terms after Germany.

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Markets are sceptical that Draghi plan will work .

The Dutch population voted in a middle of the road Government and have been less vocal about not contributing to a bail-out for Greece.

Italian Bond Sales encouragingly had a lower yield.George Soros again says Europe is heading for disaster.

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Barroso utters the dreaded word



13 September 2012
PresseuropSvenska Dagbladet, Der Standard, România libera & 2 others

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Ruben L. Oppenheimer

In proposing a federation of nation states, the President of the European Commission has outlined an ambitious course of development for the EU. For the European press, however, such an initiative inevitably raises questions about the role of Brussels and the role of member states.

At a critical moment for the European Union which is struggling to emerge from crisis, José Manuel Barroso set out to mobilise hearts and minds. In his 12 September State of the Union Address the European Commission President formulated several proposals, chief among them a plan for a “democratic federation of nation states” to be established by a new European treaty.


“Barroso did not mince his words”, announces Svenska Dagbladet. The Swedish daily notes that –

... the proposal for a banking union to reinforce supervision was expected. But he went much further by affirming that the EU “must” set its sights on a fiscal union that will ultimately lead to the formation of a federation. There is apparently no limit to what Barroso believes should reasonably be managed by he and his colleagues. […] Barroso’s idea is neither reasonable nor desirable to the point where one wonders if he himself can think it is realistic. The proposal may be a means to test how far the EU can go in proposing measures to increase its own power. And although this sounds like a conspiracy theory, it is not necessarily the case. There is a great love for the European project in Brussels, where there is a romantic belief in the positive aspects of a union that constantly brings countries closer together. However, that does not mean that this idea is rooted in reality. [...] If countries at the heart of the EU are increasingly oriented towards a tightly knit federation, the outcome of a multi-speed union will be the most likely result.

Adopting a more indulgent tone, Der Standard remarks on the emergence of a new Barroso, a “type of politician that we looked for in vain over the last eight years: a real fighter”. For the Viennese daily, the Commission President has presented –

... a good plan. What has happened? For years, Barroso was notorious for sticking to his notes. The reason for the transformation becomes clear when analysis takes into account the fact that when he was a student, the Portuguese conservative fought the dictatorship in his country. He is worried about the possible collapse of the European project if does not move forward — with the attendant risk of the dismantling of democracy that can be observed in several crisis stricken states in the EU.

As described in his address to the members of the European parliament, the Commission President’s vision “is blatantly modeled on Germany’s vision for a united Europe”, announces România Liberă in Bucharest. It is a vision –

... that assumes there will be responsible fiscal and budgetary management, a reduction in the competitiveness and productivity gap between North and South, and prudent political integration that does not erase national differences. [The German constitutional court ruling on the euro rescue fund shows that] Berlin is keen to avoid transforming the European federation into a superstate. [...] The victory of the German project has wiped out virtually any possibility of an alternative vision.

Perhaps this is the only way to save the euro, concedes The Times in London, which has traditionally opposed further European integration –

In decades of EU opinion polling, citizens across the Continent have never been so resistant to the founding fathers’ dream of ever-closer union [...] The idea of restarting the torture machine of treaty negotiation is the last thing most politicians want. But it is the big paradox of the euro emergency that, despite the Union’s unpopularity, most governments — including Britain’s — now agree that the currency can be saved only by its member states giving up more sovereignty. In French, this is called la fuite en avant — running away forwards.

This development, notes the Daily Telegraph, will boost the demand for a referendum on the United Kingdom’s membership of the EU. The daily even affirms that government officials have set to work on a “recommendation that Britain stays in the EU without joining a political union”, which will be delivered in the event of a referendum. However, the timing of a debate on Europe “could not be worse for David Cameron” –

... as it would come in the run-up to a general election in 2015 and put the deeply divisive issue of Europe at the top of the political agenda

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Catalonia warns EU that million-strong march cannot be ignored


Leader of Spain's wealthiest region suggests separatist feeling could be dampened if Catalonia kept more of its taxes

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  Giles Tremlett in Madrid
  
• guardian.co.uk, Thursday 13 September 2012 20.05 BST
  
• Jump to comments (113)
  

Catalan regional leader Artur Mas said of the 1.5 million people who marched for independence in Barcelona: 'This was not a sudden summer fever.' Photograph: Gustau Nacarino/Reuters

The European Union must prepare itself for the breakup of countries within its frontiers, the regional prime minister of Catalonia warned on Thursday, adding that Madrid could not simply ignore a huge independence demonstration held in Barcelona this week.

Artur Mas said: "Europe will at some time have to think about this. It wouldn't make sense if, because of some rigid norms, it was unable to adapt to changing realities."

His comments came after the European commission president, José Manuel Barroso, indicated this week that any new state would have to apply to join the EU.

Mas said there would be no looking back for Catalonia after the march, which police said was attended by 1.5 million people – a fifth of the population of the north-eastern region. He also warned the Spanish prime minister, Mariano Rajoy, and his conservative People's party (PP) government that they would be foolish to try to ignore the apparent desire for greater autonomy.

"This was not a sudden summer fever," he said. "In Barcelona there was a vast, peaceful multitude of people … The biggest possible mistake would be to minimise what is happening.

"It was very important both quantitatively and qualitatively. The feeling was that Catalonia cannot continue on the current path, that it needs its own project."

His words came as the state television company, TVE, apologised for relegating the demonstration to fifth place in its evening news, a move that underlined the growing disconnection between Madrid and Barcelona. "This news item was poorly placed on the evening news," a spokesman admitted. "That was an error."

Mas, from the Catalan nationalist Convergence and Union coalition, suggested that independence was not the only solution. Many members of his regional government were at the march and his party is often accused of calculated ambiguity on the matter.

"I identify with the popular outcry," he said, adding that only his responsibilities as regional prime minister had prevented him from joining the demonstrators. "Catalonia needs a state," he added. "For years we thought it could be the Spanish state."

But just as northern Europe was getting fed up with the south, and vice versa, so Catalonia and the rest of Spain were now fed up with one another, Mas said.

He implied that one way for Rajoy to dampen the surge in separatist feeling would be to agree to a change in funding, allowing Spain's wealthiest region to hold on to more of the tax it generates.

Catalonia wants to be able to collect its own taxes and send a share to Madrid, rather than the other way around. That would make it different from most of Spain's other 16 regional government, but similar to the northern Basque country.

Mas will see Rajoy next week to discuss what he called an issue of "fiscal sovereignty". Popular outrage at Catalan money going elsewhere amid health and education cuts was fuelling the thirst for independence, he suggested.

Mas said that whatever changes came after this week's demonstration, Catalans wanted to stay in the EU and the euro. "We haven't gone mad," he said.

Catalonia enjoys a high degree of self-government, running health, education and local policing, but allowing it to form a separate state would be both extremely difficult and potentially explosive. A legal separation would require a change in the Spanish constitution and approval by voters in other parts of the country in a referendum – which seems unlikely.

"Unilateral secession does not fit in Spain's constitutional framework," foreign minister José Manuel Garcia-Margallo declared on Thursday. "A declaration of independence by a region does not fit."

Officials in Brussels have also said that Catalonia would automatically leave the EU, and might have to abandon the euro and print its own currency.

"A new state, if it wants to join the European Union, has to apply to become a member like any state," Barroso said this week. "And all the other member states have to give their consent."

Garcia-Margallo warned that Catalonia or any other Spanish region that achieved independence would find itself at "the back of the queue" for joining the EU.

The independence demonstration sets a further challenge for Rajoy as he copes with 25% unemployment and a double-dip recession, and decides whether to request a bailout by the European Central Bank and fellow eurozone countries.

"Catalonia has serious deficit and employment problems and this is not the moment for messing around," Rajoy said before the demonstration.

Mas's government has launched several austerity programmes as it struggles to bring down its deficit, and ratings agencies give its debt junk status.

Economists doubt it will hit deficit targets set by the central government this year, however, and Rajoy's government – which is keen to persuade fellow eurozone countries it can control overspending regional governments – has threatened to intervene and take direct control of regional finances where that happens.

Mas has threatened to call elections if that is done in Catalonia, believing it would provoke a wave of nationalist sentiment. Catalans pay between ¤12bn and ¤16bn more in taxes each year to Madrid than they receive back, with the excess going to poorer regions such as Andalusia and Extremadura.

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Italy's tax authorities target art world


Semi-militarised revenue guard identifies 24 galleries and auction houses it believes may be behind €2m in unpaid taxes

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  John Hooper in Rome
  
• guardian.co.uk, Thursday 13 September 2012 18.19 BST
  

Taxmen in Italy are shining a light on the country's art industry, which they believe may be responsible for short-changing the exchequer. Photograph: Reuters

They have raked through business accounts in upmarket ski and beach resorts; they have made spot checks on the owners of high-powered cars and luxury yachts; some have even donned swimwear to root out tax-dodging by the firms that rent umbrellas and loungers to sunbathers along the Italian coast. But it was only on Thursday,Italy's tax sleuths revealed a new target for their searchlight: art.

The semi-militarised revenue guard, the Guardia di Finanza, said two "noted art galleries" in Rome and the north-eastern city of Padua had been temporarily closed as the result of a sweeping investigation into tax fraud and money laundering in the art world.

It said 24 galleries and auction houses had been targeted with help from the copyright office of Italy's arts and entertainments industry. The revenue guard said it had succeeded in tracking down more than €2m of unpaid taxes on so-called artists' resale rights (ARR).

Known in Italian as diritto di seguito, ARR entitles the creator of a work of art to a percentage fee each time it is resold by an auction house, gallery or dealer. The statement did not make clear whether the tax was payable on ARR paid to, or withheld from, the artist or artists in question.

The guard said it had also uncovered illicit investments and evidence of money-laundering offences involving much bigger sums. It said it had tracked around €3m in cash payments above the permitted limit and suspicious transactions worth some €14m that had not been reported to the authorities by the auction houses that had dealt with them.

Italy's revenue guard has been given an increasingly free hand to clamp down on tax evasion as Italy struggles to close the gap between its state income and expenditure so that it can start paying off a public debt of almost €2 trillion.

In December, its officers made the first in a succession of headline-grabbing raids on hotels, restaurants and shops in resorts frequented by the rich. Soon after a non-party government headed by a sober economics professor, Mario Monti, took office, they swept into the Alpine resort of Cortina d'Ampezzo, where they stopped more than 100 high-powered cars and cross-checked by computer to see what sort of incomes their owners were declaring on their tax returns. They found more than a third were claiming to earn less than €22,000 (£17,500) a year. A similar proportion came under suspicion as the result of a more recent check on yachts berthed on the Adriatic coast.

The revenue guards have also found widespread evidence of luxury boutiques not giving out tax receipts as required by law. Since the raid on Cortina d'Ampezzo, establishments in Portofino on the Italian Riviera and in Rome and Florence have also been targeted.

More than €100bn of income is believed to go undeclared each year, and Italy's underground economy is estimated to account for about 17.5% of its gross domestic product.

The culture of tax-dodging took root under the Christian Democrats, who dominated most of Italy's post-war governments until the early 1990s. It was seen as a way of encouraging small, family-owned businesses. But the result has been to create a sharp division between the self-employed, many of whom pay little or nothing to the treasury, and employees, who have high taxes deducted from their wages at source.

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Has the ECB Provided the Missing Piece to Resolve the EU Debt Crisis?


by Warren Coats




Warren Coats retired from the International Monetary Fund in 2003 as Assistant Director of the Monetary and Financial Systems Department, where he led technical assistance missions to central banks in over 20 countries.

Added to cato.org on September 11, 2012

This article appeared on Cato.org on September 11, 2012.


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On September 6, Mario Draghi, president of the European Central Bank (ECB), announced that the ECB would engage in unlimited secondary market purchases of government bonds of member countries adhering to the policy conditions agreed to with the IMF and EU (and thus qualified to borrow from the European Financial Stabilization Fund — EFSF — or the European Stabilization Mechanism — ESM) to the extent needed to promote the efficient transmission of monetary policy throughout the Euro area. The overall liquidity impact of such purchases will be sterilized (offset by the sale of some other ECB assets), as needed, in order to preserve the ECB's inflation objective of an inflation rate below but near 2% over the next two years. What does this add to the existing European tool kit and is it enough to resolve the EU debt crisis?

All responsible government officials recognize and accept that in the long run nations, like individuals, must live within their means (pay fully for what they consume). Their standard of living will depend on what they are able to produce (productivity). Eliminating government deficits requires reducing government spending and/or increasing tax revenue. Increasing the sustainable standard of living of its people (the level of consumption they can fully pay for with what they produce) requires liberalizing restrictions on labor and product markets and investment that will increase the productivity and thus output of workers and businesses. The debate is primarily over the optimal pace of introducing the measures needed to balance budgets and increase productivity and competitiveness. This matters in that it takes time for the economy to adjust to reforms before it enjoys the benefits of more rapid growth. In the interim continuing but declining deficits must be financed either in the market (if market lenders have confidence in the effectiveness of the measures being taken), or by the IMF/EU/ECB until market confidence can be established.

I have elaborated these points in earlier blogs: "European debt crisis: causes and cures"; "Saving Italy and the euro"; "Buying time for Italy"; and "Saving Greece-Austerity and/or Growth."


Warren Coats retired from the International Monetary Fund in 2003 as Assistant Director of the Monetary and Financial Systems Department, where he led technical assistance missions to central banks in over 20 countries.




Throughout the crisis Germany has demanded that Greece and other over-indebted and uncompetitive countries undertake the needed corrective measures before being granted the financing needed for the transition back to normal market borrowing. Events have proven Germany to be right, as earlier "bailout" commitments have led to a suspension or slow down in policy reforms thus prolonging recovery. For the same reason Germany has vigorously opposed (correctly in my view) the adoption of Eurobonds, which would allow Greece and others to borrow at the same interest rate as Germany and all other EU members. The moral hazard of bad fiscal behavior when market discipline over borrowing is removed is a real and serious issue.

On the other hand, Germany is also pushing for Fiscal Union in order to gain better EU-wide control over excessive national deficits. This may or may not be a good idea for Europe (I have my doubts); but it is certainly not, contrary to much opinion, essential for the viability of the Euro. The idea behind the German push for Fiscal Union stems from the markets' failure to properly price the risk of lending to Greece, Portugal and some other overly indebted countries and Germany's belief that the only way it can protect its taxpayers from supporting inflated living standards to the South is by gaining control over their governments' expenditures. Until the past few years, the governments of Greece and Portugal could borrow in the market at interest rates very close to the rates paid by the German government, which by the way has borrowed quite a lot itself (the ratio of German government debt to its GDP is currently above 81%). These governments spent and over promised future benefits recklessly on the (temporary) basis of relatively cheap debt financing in the market.

It is certainly a fair question to ask why the market failed in this regard and over-lent to a number of governments that now have difficulty repaying. The expectation that Germany and other Northern EU countries would not allow the profligate southern ones to default made such lending seem risk free and the market priced it accordingly. Fiscal Union and/or EU-wide fiscal rules are one way to limit such excessive borrowing and unfunded future promises. Improved market discipline of borrowing via more accurate risk premiums on market lending is another, and in my opinion, superior approach. Greece's orderly default (75% haircut) on its publicly held debt and the current crisis have restored a large measure of market discipline to sovereign borrowing. Greece and Portugal do not need to borrow from the market for several more years as long as they implement and adhere to the reforms demanded by the IMF/EU/ECB. However, Spain and Italy closely watch the now far more sensitive interest rates demanded by the market when lending to them. Given the substantial outstanding debt of these countries, those interest rates can make the difference between the success or failure of reform efforts. Ireland, which has successfully, though painfully, implemented all of the conditions of the IMF et al. "bailout," is well on the way to full recovery and is now able to borrow again in the market at reasonable interest rates.

The missing piece in the EU/ECB tool kit to manage the ongoing debt crisis is the availability of sufficient temporary adjustment financing for larger countries such as Spain and Italy should markets lose confidence in one or both of them before their reforms have had time to bear fruit. The resources of the EFSF/ESM, still waiting for the German constitutional court's approval, are not sufficient to finance stabilization programs with both countries. This leaves markets uneasy and volatile. Market interest rates on ten-year Spanish government bonds have varied this year between under 5% to 7.6%. German government bond rates have varied between 1.24% and 1.85%. Mario Draghi's commitment of ECB funds to buy short-term sovereign debt (with maturities of up to three years) in secondary markets does not augment the resources available to the EFSF/ESM to finance adjustment programs with the IMF, but by buying such bonds in the secondary market should liquidity in a program country dry up, the ECB should be able to significantly reduce the prospects of what it considers unrealistically high risk premiums for such bonds. The ECB would only buy bonds of countries meeting the conditionality of an IMF supported adjustment program. Outright secondary market purchases are a standard and traditional liquidity management tool for central banks. What is unique in the European context is that open market purchases must be for the bonds of individual countries and the choice of countries matters. It is for others to determine whether, as Mr. Draghi claims, the new initiative is consistent with the ECB's mandate.

This past week I attended a meeting of the Mont Pelerin Society in Prague. Friedrich Hayek, Milton Friedman and a few other free market champions founded the MPS in 1946. Czech President Vaclav Klaus, an economist and MPS member, hosted this year's meeting. President Klaus has opposed the Czech Republic's adoption of the Euro. It has kept its own currency, which the Czech National Bank has managed very well under an "inflation targeting" policy regime. However, Spanish economist Jesus Huerta de Soto spoke at the meeting in defense of the single currency. He favors a return to the gold standard but convincingly argued that the monetary discipline on Spain provided by giving up its own currency to the Euro was a good second best. The key to success or failure of the Euro for the overly indebted countries that use it is whether they reform deeply enough to live within their own means within a few years and to sufficiently improve their competitiveness with the rest of Europe and the rest of the world. Failure to do so will harm the defaulting country far more than it will harm the Euro. I wish them well.

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France's smash-and-grab tax laws will lead to 'brain drain'



By Jonathan Isaby, Special to CNN
September 10, 2012 -- Updated 2331 GMT (0731 HKT)



Bernard Arnault, France's richest man, says he will remain a tax resident of France despite a new 75% tax rate.


STORY HIGHLIGHTS

• Bernard Arnault, France's richest man, reportedly applying for Belgian citizenship
  
• Arnault insists he will remain a tax citizen in his native France
  
• Isaby: New 75% tax rate will lead to 'brain drain' in France
  

Editor's note: Jonathan Isaby has been Political Director of the TaxPayers' Alliance -- a UK campaign for lower taxes -- since 2011.

(CNN) -- No one knows for the time being as to what exactly Bernard Arnault, France's richest man, intends to do in order to escape the punitively high 75% tax rate being proposed by President Francois Hollande.

But it should come as no surprise that he and scores of other wealthy French citizens are looking to organize their financial affairs differently so as to reduce their exposure to what amounts to little more than a smash-and-grab raid on the country's most successful businessmen that will in all likelihood prove counter-productive.



Jonathan Isaby
After all, we live in a world where different countries operate with different tax regimes, competing (I would hope) to attract businesses -- and therefore jobs -- to their shores. So if one country creates an environment where those who have done well for themselves are suddenly stung with a massive hike in the money the state wants to confiscate from them, they cannot be blamed for wanting to rearrange their finances, their domicile or even their nationality.

And, lest we forget, those with the greatest financial resources are those who will find it easiest to relocate in that way. Hence, in the past, we have spoken of a "brain drain" when tax in a particular jurisdiction has become excessively high. And when those individuals relocate, not only will the country's treasury miss the additional tax that they would have paid, but it most likely loses all the revenue that they were paying beforehand. That is one of the ways in which increasing a tax rate can reduce the total tax yield, thereby defeating the whole supposed object of the tax-raising exercise.

But don't just take my word for that. In the final report of the UK's 2020 Tax Commission, published earlier this year by the TaxPayers' Alliance and Institute of Directors, we reviewed literature by academics the world over and looked at tax changes introduced in a number of different countries to demonstrate the folly of punitively high tax rates.

Most students of economics are familiar with the Laffer curve, named by Dr. Art Laffer, which demonstrates how higher taxes do not necessarily mean a higher tax yield, with there being a point (the peak of his curve) after which total revenue falls when the tax rate increases.

That lower tax rates increase the tax take has been demonstrated time and again in the real world: remember how JFK said in 1962 that "the soundest way to raise the revenues in the long term is to cut the rates now"? And then of course we saw that principle again put into practice by President Reagan and Prime Minister Thatcher on their respective sides of the Atlantic in the 1980s.

In the 2020 Tax Commission report, we also cite the work of Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva, who have looked at the effects of tax changes specifically on the richest one per cent, amongst whose number Mr. Arnault features in France:

"The incomes of the top one per cent respond to taxes in three ways: (1) the standard supply-side channel through reduced economic activity, (2) the tax avoidance channel, (3) the compensation bargaining channel through efforts in influencing own pay setting. In other words, high earners will either respond to lower taxes by doing more productive work, by putting less effort into avoiding taxes or by putting more effort into negotiating for higher pay, as the post-tax rewards for all three are now higher."

Conversely, the opposite is clearly true, with higher taxes making them less productive, more likely to find ways of avoiding taxes and so on.

Tax evasion is illegal and cannot be condoned, but tax avoidance is when people devise mechanisms which contravene an interpretation of the spirit of the law but are nonetheless perfectly legal and intended wholly or primarily to reduce their liabilities.

The onus should be on governments to change tax systems and close the loopholes that they allow to exist rather than to suggest that those using such schemes are to be condemned. Lower tax rates will reduce people's incentive to avoid tax and a simplified tax code should also provide fewer opportunities for avoidance in the first place.

So if things get to the point where people are seriously considering changing nationality to reduce their tax bill, then that is a symptom of a tax system that has become seriously dysfunctional and in urgent need of reform.

As we can see, President Hollande is doing the French and their government's coffers a disservice with the introduction of his new top rate of tax -- and that ought to be a salutary lesson for anyone seeking to emulate it elsewhere.

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Eurozone crisis: Greece may gain more time to pay debts


Eurozone finance ministers hinted that Greece may be given more time to pay its debts, though they ruled out a third bailout

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  Phillip Inman, economics correspondent
  
• guardian.co.uk, Friday 14 September 2012 18.48 BST
  
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EU financial ministers pose for the group photo at the conference center during an informal European economic and financial affairs council in Nicosia, Cyprus. Photograph: Petros Karadjias/AP

Eurozone finance ministers hinted on Friday that Greece may be given more time to pay its debts, though they ruled out a third bailout, which most economists believe will be needed before Athens can get back on its feet.

At a meeting of the 17-nation currency bloc in Nicosia, Cyprus, there were signs of increasing flexibility and optimism, but Spain appeared to be moving closer to making a formal request for financial assistance.

The Greek finance minister said the atmosphere had eased after previously strained talks between Athens and its creditors and a deal could be signed before the end of October.

"It seems to us quite clear that Greece has already produced a huge effort but will have to continue to do so," said IMF boss Christine Lagarde. "And the target when it comes to achieving debt sustainability is very high, so there are various ways to adjust: time is one, and that needs to be considered as an option."

Stock markets rallied across the world, continuing a strong run since the ECB said it was prepared to lend unlimited amounts to distressed sovereign nations, though with strict conditions. The FTSE jumped 95 points to 5915 while the French CAC leaped 2.3% to 3581.

The new Greek coalition government is seeking a two-year extension to 2016 for meeting a budget reduction programme. The threat of a general strike and violent protests over a further round of cuts that will result in 50,000 public sector job losses have strengthened the hand of Greek negotiators, along with predictions that a five-year recession will result in a total 20% fall in GDP in 2013.

But the smiles among finance ministers as the meeting closed disguise huge disquiet at protests in Spain and Portugal this week. Spain, deflecting pressure to spell out whether it needs more European financial support, told eurozone finance ministers it will set clear deadlines for structural economic reforms by the end of the month. "We will adopt a new set of reforms to boost growth … It will be in line with the recommendations of the European commission," economy minister Luis de Guindos said.

However, Madrid is in deep financial trouble and faces calls from several of its regions for the country to break up rather than continue deep austerity cuts. More than 1 million people marched in Barcelona this week in favour of Catalan independence .

There was also confusion in Spain over the stance on a proposed €300bn bailout package that is understood to be under discussion in Brussels between EU officials and Mariano Rajoy's right of centre government.

Several eurozone officials have speculated that Spain may apply in time for the next meeting of eurozone finance ministers, on October 8, while Rajoy has dismissed talk of a further bailout. He is also resisting the terms of the bond buying programme announced by the ECB, which he says is draconian and would intensify the cuts imposed on welfare spending.

Spain's 2013 budget and a detailed audit of the capital needs of its banking sector are both due in a fortnight.

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Democracy
Put citizens at the heart of the Union



14 September 2012Gazeta Wyborcza Warsaw

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Beppe Giacobbe

Europe today is suffering an erosion of representative democracy, citizenship and solidarity, making emerging from the crisis that much harder. If the Union cannot encourage an upswing in citizen participation it will not survive in its current form, warns a Polish columnist.

Jacek Żakowski

To answer the questions, “What kind of Europe do we need?” and “What kind of Europe is within our means,” we have to take a look at the Europeans, those of today and those of tomorrow. After all, we are talking about a real construction, of an existing thing, which is and will be like the people that are building it – not only intellectuals, politicians, and bureaucrats, but ordinary people too. Those who vote and those who do not, those who are interested in public affairs and those who are not, who elect presidents and parliamentarians both wise and foolish by fully exercising or not exercising at all their civil, political and economic rights.

I have the feeling that we are passing too lightly over the problem that Europe has with its own citizens, the Europeans, even if this problem is not unique to the European continent. The citizens have certainly changed and are no longer the same as those who were led half a century ago by major European leaders like De Gasperi, Schuman, Adenauer and de Gaulle. This change influences not only the democracy of today and tomorrow in the nation states, but the current form and the future of the European Union as well.

We cannot think of the Union without reflecting on some general truths. The Union was born out of the trauma of World War II and was built by the societies that emerged from that trauma. Knowing too well the risks of bad politics, the citizens interested themselves in public affairs. They read newspapers, took part in elections, and were active in political parties and trade unions. The first three decades following the war were truly a golden age of citizenship in the West.

In the decades that followed the sociology and methods of democracy underwent great changes. Gradually, the consumer has taken the place of the citizen. In the public sphere, public debate and information have been pushed aside by entertainment. The traditional political parties based on ideology and rigid social classes capitulated before a no-name ideology that has pushed the economy into all walks of life, and then, hand in hand, took the path of submission to ‘cost-saving’ ideas.


Strengthened solidarity



The future will tell if this is good or bad. There has, however, already been a profound change in the culture of Western societies, in their social structures, levels of knowledge, human relationships and hierarchies of values. It is this change that political scientists and sociologists have been referring to for some decades as the source of the crisis of democracy in its traditional forms of representation.

Can representative democracy, challenged in the nation states (Jürgen Habermas struggled against this with his concept of deliberative democracy), overcome the crisis of the European Union? I think not. In fact, I do not understand how the representative model, based on the idea of a sense of civic responsibility that is fading away at the national level, would stop the decay of supranational institutions. Familiar not only with the thought of Habermas but with that of John Keane, I would rather search out solutions that are more innovative and better adapted to our times, such as the institutionalised and pan-European forms of deliberation and participation for those who want it.

That being said, it is essential to know if these innovations, which are steering a very difficult course at the national and even local government level, have any chance at breaking through into and working at the EU level. I'm not sure they can. This means that we must choose between a solution that is certainly ineffective and one that is probably impossible.

Change is necessary and urgent. The inability of the EU to make decisions is leading us to disaster. Strengthening the traditional mechanisms of democracy in the EU may be able to unblock the decision-making processes in the short-term, but seems counter-productive in the long term. For example, direct presidential elections would obviously bring to power a stronger personality than Herman Van Rompuy – but would we be better off if, with the support of Mediaset and News Corporation, that other person would be Silvio Berlusconi?

The erosion of social solidarity is another element of our current societies. In most countries one observes a growing resistance to transfers. The rich are less inclined these days to share their wealth with the poor, and they have a strong ideology that justifies their refusal. This applies equally well to transfers among classes, between generations, and even between regions.

Without strengthened solidarity, however, we can neither effectively overcome the crisis nor preserve the EU in its current form. That’s not only because the gap between certain countries that currently are serious trouble and others that are in relatively good shape is widening, but also because the whole of Europe is afflicted by a common problem – namely, that globalisation and various changes in society will lead in the near future to a palpable decrease in the standard of living of all of us (some expect a fall of 20 percent). In such a situation it is even harder to expect any enthusiasm for solidarity.


Crisis of representative democracy



These two factors, the erosion of citizenship and solidarity, lead me to say that neither the crisis facing the European Union nor the remedies proposed to solve it are of an institutional nature. The shape of the European institutions and their powerlessness reflect the socio-cultural situation, while the deepening crisis is the expression of the erosion of the social and cultural foundations of the Union.

This is not a death sentence. I do not believe the Union will die, because I see no acceptable life for the present generations without it. Everyone would lose from a collapse of the euro (Germans probably the most), and the collapse of the EU would be a disaster comparable to a major war. Fortunately, awareness of this is broadly shared in Europe, at least among the political elites.

The shrewd little technical, institutional, legal and constitutional ploys, however, will not work in the long term if we do not manage to change the culture and the institutions. The crisis of the economy (financial and debt) and of the political underpinnings is a consequence of the crisis of representative democracy.

The crisis of representative democracy is cultural in origin and results from the erosion of citizenship and solidarity. The effective remedies must, whatever the intellectual and political difficulty, grow out of the social and cultural nature of the current tensions, and not just out of the day-to-day management of this unidentified creature that the European Union is today.

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ECB Bank Oversight
By Rebecca Christie, Jim Brunsden and Maud van Gaal - Sep 15, 2012 10:00 PM GMT+0100


German Finance Minister Wolfgang Schaeuble led criticism of the euro area’s rush toward common bank oversight as France, Spain, Italy and the European Commission pressed for speedy action.

European Union finance ministers were sharply divided over proposals to introduce a single supervisor in January within the 17-nation currency zone. Schaeuble, backed by ministers fromSweden, the Netherlands and Poland, said the EU must be cautious before the European Central Bank takes on its supervisory role, with the promise of direct bank bailouts from the euro’s firewall fund.

Schaeuble said it will take time to build the “sizeable apparatus” required for the ECB to oversee more than 6,000 euro-area financial institutions. Banks that could pose broad risks should move to the new system first, he said.

“We plead very much that stress tests be conducted before systemically-relevant banks get transferred from the national supervisor to the European,” Schaeuble told reporters yesterday after the meeting of ministers in Nicosia, Cyprus.

Schaeuble’s comments raised the prospect of excluding troubled banks from the new supervisor’s purview. Stress tests could be used to limit taxpayer exposure to losses, similar to requiring physical examinations for people who want to buy health insurance, Guntram Wolff of the Brussels-based Bruegel research institute said in an interview in Nicosia.

Health Checks


The German finance minister did not mention such health checks in the negotiating room yesterday, according to two officials who sat in on the deliberations. The Brussels-based European Commission wants troubled banks that already receive government aid to be in the first group of lenders to come under ECB oversight.

Germany has broadly backed the banking union plans, while emphasizing the need for national regulators to monitor most of the euro area’s banks. “As far as the issues are concerned, we’re not that far apart,” Schaeuble said.

EU leaders called for a single supervisor in June as a condition for allowing euro-area banks direct access to the euro are’s 500 billion-euro ($656 billion) permanent bailout fund, the European Stability Mechanism. Spain, in the early stages of a 100 billion-euro bank bailout, would benefit if the new system is in place fast enough to take over capital injections into Spanish lenders.

“We need to stick to the timetable,” Spanish Finance Minister Luis De Guindos told reporters. “The objective for now has to be ambitious.”

‘Ambitious Timetable’


French, Belgian and Italian finance ministers also pressed for rapid progress. “We can’t waste time,” French Finance Minister Pierre Moscovici said.

“We, the government, absolutely support the project and the commission’s ambitious timetable,” Italian Finance MinisterVittorio Grilli said at a press conference.

It is “obvious” that the new system would apply first to systemic and state-supported banks, Belgian Finance Minister Steven Vanackere told reporters. This initial group of banks would include Dexia SA (DEXB), which is being broken up by the French and Belgian governments and has received more than 50 billion euros in state guarantees.

“It is important to keep up the pace,” Vanackere said.

The European Commission is pressing to finish debate on bank supervision this year so the ECB can assume the role in January. EU Financial Services Commissioner Michel Barnierdefended the “ambitious” timetable, telling reporters “it’s possible and it is necessary.”

Oversight Systems


The proposed common supervisor needs to be approved by all 27 EU members. Non-euro members would be allowed to opt in. There also are proposed safeguards to keep the ECB from dominating disputes among the bloc’s supervisors.

The ECB is investigating ways to allow non-euro members to have a say in oversight decisions if they volunteer to sign on to the common system, said ECB Vice President Vitor Constancio. He also pledged the ECB would abide by decisions taken by the European Banking Authority, a London-based agency that mediates disputes among financial regulators.

Swedish Finance Minister Anders Borg said his nation opposed the common supervisor because it didn’t include enough protection for those outside the currency union.

“It’s undesirable and not acceptable to have the ambition to take these decisions by year-end,” Borg said. “There are some fundamental problems here where we cannot really assess the risk.”

Capital Injections


EU taxpayers have provided 4.5 trillion euros in capital injections, guarantees and other forms of support to their lenders since 2008, exacerbating strains on public finances that have led Greece, Portugal, Ireland, Spain and Cyprus to seek external aid.

Ministers from euro-area nations emphasized the need for national regulators to continue to play a strong role after the ECB takes on its new duties. The U.K., which has voiced concerns that it and other non-euro nations might be drowned out of financial rulemaking if the plan goes through, mostly stayed on the sidelines. Chancellor of the Exchequer George Osborne did not comment publicly.

Luxembourg Finance Minister Luc Frieden said euro-area efforts to create a common bank supervisor should take place alongside talks on how to backstop bank deposits and when to shut down failing banks.

Frieden said the ECB could be phased in as the common supervisor, without necessarily taking up an immediate mandate over all of the banks in the currency zone.

“Luxembourg believes that all banks should come under the ECB supervision, but for practical reasons there might be a need to adopt a step by step approach,” Frieden said in an interview. “This also depends on the other aspects that we believe should be discussed in parallel, such as resolution and deposit guarantee.”

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Spain And Portugal Hit By Austerity Protests


Tens of thousands of people have staged rallies against punishing austerity measures brought in to stave off financial collapse.


10:42am UK, Sunday 16 September 2012



Video: Anger At European Austerity Measures
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Tens of thousands of people have staged rallies in Spain and Portugal to protest against punishing austerity measures.

Demonstrators threw tomatoes and fireworks at the Portuguese headquarters of the International Monetary Fund in Lisbon and two people were arrested.

In Madrid, buses transporting protesters blocked several major roads on Saturday before a march began in the Spanish capital.

The Spanish and Portuguese governments have both implemented austerity measures to prevent their countries from financial collapse.

Spain is stuck in a double-dip recession with unemployment close to 25%.

The conservative government of Prime Minister Mariano Rajoy has introduced stinging cuts and raised taxes to reduce the deficit and reassure investors.

That situation could get worse in coming weeks.

At a meeting of eurozone finance ministers in Cyprus on Friday, Spain revealed it will present a new set of economic reforms by the end of September - raising concerns it might ask for financial help from the ECB.

In Portugal, another package of recently announced government austerity measures could spark further angry protests.

One man was taken to hospital with burns after reportedly attempting to set himself on fire in the northern town of Aveiro.

Last week, Portuguese Prime Minister Pedro Passos Coelho announced an increase in workers' social security contributions from 11% to 18% of their monthly salary - equivalent to a month's wages.

Finance Minister Vitor Gaspar said income taxes will go up next year and public employees will lose either their Christmas or holiday bonus.

Tax hikes and spending cuts imposed since last year's bailout have contributed to record unemployment in Portugal above 15% and pushed the economy into its worst recession since the 1970s.

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It's alright for Germany, a good Bank Balance and high employment to go for these austerity measures , but dangerous for those Countries in dire straits and a growing public unrest. Yes, adopt austerity measures, but wait until the World economic situation improves.

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Draghi Euro Humbles Thought Leaders Seeing End of Union


By John Detrixhe, Liz Capo McCormick and Allison Bennett - Sep 17, 2012 10:08 AM GMT+0100

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European Central Bank PresidentMario Draghi, embracing policies dismissed by his predecessor, is forcing euro bears to capitulate.

Since July 26, when Draghi said he would do “whatever it takes” to save the 17-nation euro, the currency has appreciated versus each of its 16 major counterparts tracked by Bloomberg. The cost to protect against a default on government debt in western Europe tumbled to a 15-month low and confidence in the region’s banking system is improving, with bank stocks rallying 33 percent since June 1, exceeding the 18 percent gain in the Stoxx Europe 600 Index.





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Draghi Euro Humbles Thought Leaders Seeing End of Union




AP Photo/Dimitri Messinis

President of the European Central Bank Mario Draghi, right, shares a laugh with the German Finance Minister Wolfgang Schuble, bottom, the Member of the Executive Board of UCB Jorg Asmussen, left and the Managing Director of IMF Christine Lagarde prior of the Informal European economic and financial affairs council in capital Nicosia, Cyprus, Friday, Sept. 14, 2012.

President of the European Central Bank Mario Draghi, right, shares a laugh with the German Finance Minister Wolfgang Schuble, bottom, the Member of the Executive Board of UCB Jorg Asmussen, left and the Managing Director of IMF Christine Lagarde prior of the Informal European economic and financial affairs council in capital Nicosia, Cyprus, Friday, Sept. 14, 2012. Photographer: AP Photo/Dimitri Messinis




5:50
Sept. 17 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses the impact of the Federal Reserve's bond-buying program on currencies including the euro, yen, New Zealand dollar and Australian dollar. He talks with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)



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European Central Bank President Mario Draghi




Hannelore Foerster/Bloomberg

Mario Draghi, president of the European Central Bank (ECB).

Mario Draghi, president of the European Central Bank (ECB). Photographer: Hannelore Foerster/Bloomberg

While former ECB President Jean-Claude Trichet kept the central bank from propping up debt-laden governments by limiting purchases of their securities as the almost three-year crisis deepened, Draghi has done the opposite since he took over in November. His decisions are placing everyone from former International Monetary Fund (MERKX) Chief Economist Kenneth Rogoff to fund manager Axel Merk on the wrong side of the market.

“It has been a game changer, and Draghi has done the heavy lifting,” Merk, president and founder of Merk Investments LLC in Palo Alto, California, said in a Sept. 13 telephone interview. His $526 million Merk Hard Currency Fund has jumped 3.38 percent in the past month, beating 92 percent of its peers, according to data compiled by Bloomberg.

Breakup Odds


Draghi, 65, has shown a greater willingness than Trichet to use the ECB’s balance sheet to aid Spain and Italy, and he relaxed his predecessor’s insistence that senior bondholders at crippled banks shouldn’t suffer losses in bailouts.

Merk, who said he was “very negative” on the euro earlier this year because of what he called the dysfunctional process in resolving Europe’s crisis, has turned into a buyer. “The euro has much higher to go from here, though it’s not out of the woods yet,” he said.

Chances of a breakup of the monetary union by the end of 2013 fell to 50 percent from more than 60 percent in late July, according to Dublin-based Intrade.com data, after Draghi gave details last week of a plan announced in August to buy debt of members including Spain and Italy.

The euro soared to a four-month high of $1.3169 on Sept. 14, before trading at $1.3102 as of 10:05 a.m. London time todat. It appreciated 3.6 percent over the past month against a basket of nine other developed-market currencies, including the yen, pound and Australian dollar, and is the biggest gainer, according to Bloomberg Correlation-Weighted Indexes.

Highest Forecast


What European policy makers “have shown so far is their willingness to support the currency union and do as much as they can,” said Mary Nicola, a New York-based currency strategist at BNP Paribas SA.

BNP Paribas has the joint highest year-end estimate for the euro of any of the 46 strategists surveyed by Bloomberg, calling for the currency to strengthen to $1.35. The euro’s lifetime average since it was created in 1999 is about $1.21.

Rising confidence in Europe is helping global markets. TheMSCI All-Country World Index (MXWD) of equities has soared 17 percent since its low this year on June 4. The Standard & Poor’s GSCI Index of commodities is up 25 percent from its 2012 bottom on June 21. Corporate bonds have returned 4.8 percent since the end of March, including reinvested interest, according to Bank of America Merrill Lynch index data.

Bank stocks in the Stoxx Europe (SXXP) 600 Index have climbed to their highest level since March 21.

Sentiment Switch


Just three months ago bets against Draghi’s ability to hold the monetary union together reached record highs.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 214,418, the most ever, on June 5, figures from the Washington-based Commodity Futures Trading Commission show. That amounts to a $33.4 billion bet against the euro.

Protection against losses on the senior debt of 25 banks and insurers with credit-default swaps rose more than 50 percent between March and July. Yields on 10-year Spanish bonds jumped to a euro-era record of 7.75 percent on July 27 as the nation sought a bailout of its banks.

Rogoff, who is now an economics professor at Harvard University in Cambridge, Massachusetts, told Tom Keene on“Bloomberg Surveillance” July 27 that while he expected Greece, which held consecutive elections in May and June amid public opposition to spending cuts after undergoing the largest ever sovereign-debt restructuring, to “ultimately” leave the euro, “the real question is what is going to happen to the broader euro?”

`Viable Solution’


Carmen Reinhart, also a professor at Harvard and the co-author with Rogoff of “This Time Is Different: Eight Centuries of Financial Folly” said at the Bloomberg Markets 50 Summit inNew York Sept. 13 that euro-area governments must pursue deeper debt reduction if they are to end the region’s three-year fiscal turmoil. “A viable solution is being put off the table,” she said. “Attempts to work on debt restructuring apart from austerity is what’s required within the euro.”

The debt turmoil has slowed economic growth. The Kiel-based Institute for the World Economy said Sept. 13 in an e-mailed statement that growth in Germany, Europe’s biggest economy, will slow to 0.8 percent in 2012 from 3 percent last year. The euro zone may shrink 0.5 percent this year, according to the median of 50 forecasts in a Bloomberg survey.

Market Divergence


Foreign-exchange strategists cut their forecasts for the euro throughout the summer. They expect the common currency to fall to $1.23 by the end of the year, compared with the median estimate of $1.28 in a May survey. That’s the second-largest decline among major currency pairs behind franc-dollar forecasts, which have dropped 2 percent.

That has led to the biggest divergence between 2012 fourth-quarter forecasts and current trading levels in 14 months.

Rising borrowing costs and diminished confidence in the euro prompted Draghi to signal in a July 26 speech to the Global Investment Conference in London that the ECB was ready to buy bonds to curb rising yields and boost confidence.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said. “Believe me, it will be enough.”

What’s different from Trichet’s policy is that the plan proposed by Draghi is open ended and doesn’t require the ECB to be treated with more seniority than other bondholders. The ECB’s balance sheet swelled by about 442 billion euros ($580 billion) to 2.33 trillion euros during Trichet’s last year as ECB president. The central bank’s holdings have increased by 745 billion euros since Draghi took over in November.

A ’Genius’


ECB Governing Council member Panicos Demetriades said the bank might not have to spend a cent on government bonds. The threat of unlimited buying under the ECB’s new bond-purchase program may mean that “in the end, action is not needed,”Demetriades, who heads the Central Bank of Cyprus, said Sept. 12 in an interview in Nicosia.

Germany’s top constitutional court on Sept. 12 rejected efforts to block a permanent 500 billion-euro euro-area rescue fund, which is meant to work in tandem with the unlimited bond-purchase program aimed at containing interest rates in countries such as Spain and Italy. The ECB may buy bonds with maturities as long as three years on the secondary markets of countries that ask Europe’s bailout fund to purchase their debt on the primary exchanges.

“The way he proceeded, I’ve called him a genius,” Merk said of Draghi. “He has managed to do what the politicians haven’t been able to do without becoming too political. He’s moving the responsibility to political bodies.”

Dollar Depreciation


The currency is also getting a boost from a weakening dollar, as the Federal Reserve embarks on a third round of bond purchases, or quantitative easing, buying $40 billion a month in mortgage bonds to inject cash into the economy and attempt to bring down unemployment.

Intercontinental Exchange Inc.’s Dollar Index slumped as much as 19 percent to 72.696 from 89.624 as the Fed printed currency to buy $2.3 trillion of mortgage and Treasury debt in two rounds of QE from December 2008 to June 2011. It’s down more than 6 percent from its intraday high this year of 84.1 on July 24 to 78.781.

The Markit iTraxx SovX Western Europe Index of credit swaps on 15 governments fell to 188 basis points last week, the lowest level since the series started trading in March. A previous version of the index that included Greece was last this low in May 2011.

Options Bets


A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Options traders have eased bets the euro is going to fall against the dollar by year-end since Draghi hinted the ECB would purchase debt at the Aug. 2 central bank meeting.

The three-month so-called 25-delta risk reversal rate was minus 0.79 percent today, signaling greater demand for euro puts that give the right to sell the shared currency, versus calls. The rate was minus 2.05 percent on Aug. 2 and minus 4.39 percent on Nov. 17, the most since at least 2003 based on data compiled by Bloomberg.

Futures traders decreased their bets that the euro will decline against the U.S. dollar last week, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, so-called net shorts, was 93,658 on Sept. 11, compared with net shorts of 102,306 a week earlier.

Mighty ECB


“We are expecting some more upside on euro-dollar to develop,” said Ian Stannard, head of European foreign-exchange strategy in London at Morgan Stanley, which capitulated last week on its call for a lower euro.

Morgan Stanley said in a report dated Sept. 13 that it now expects the currency will rise to $1.34 by Dec. 31, rather than fall to $1.19.

“Over the years, global investors have learned that it does not pay to fight the Fed,” Holger Schmieding, chief economist at Berenberg Bank in London, said this month in an interview. “Those betting on the demise of the euro may now have to realize that the ECB is as mighty as the Fed.”

[Panda]

Is democracy shrinking?


14 September 2012

• 
  

With national leaders apparently unable to act, such institutions as the European Central Bank, the German constitutional court, and the European Court of Justice are playing an increasingly influential role in European affairs. French political analyst Antoine Vauchez argues that their intervention amounts to a bending of the rules of democracy which urgently needs to be addressed.

Is there any better illustration of the current paradox of European democracy than the fact that its fate hangs in the balance in the decisions of the board of the European Central Bank and the rulings of the German constitutional court? European political leaders have become so convinced of their lack of legitimacy and their inability to win the “battle of credibility” that opposes sovereign states and the markets, they are voluntarily giving up their room for manoeuvre to “independent” institutions and automatic penalties (the notorious fiscal compact), thereby enabling judges (both national and European ) and central bankers to dominate the daily conduct of European affairs.

Better still, in a remarkable demonstration of upside down logic, these “independent” officials are monopolising the debate on the future of the political union, extending the scope of their intervention well beyond their mere mandate as civil servants: to wit the magic worked by the management of the ECB who have transformed a brief to maintain price stability into a platform from which they can demand structural reforms (labour market, wage agreements etc…) and, more recently, intrude on discussions on the architecture of the future political union…

And, let’s not forget that they are already directly intervening in the drafting of future treaties, as is currently the case with the mission attributed to the group of four so-called “wise men” who head the ECB, the European Commission, Eurogroup and the European Council.


Direct elections



Finally, we have been treated to the supreme irony of these “independents” calling on member states to fulfill their democratic obligations, with Bundesbank President Jens Weidmann and ECB President Mario Draghi banging on about the need for “democratic responsibility” in new institutional structures, and the German constitutional court positioning itself as the last line of defence for the country’s parliament etc…

All of this has served to highlight the precariousness of democratic legitimacy in the union, and the solid control exercised by “apolitical” institutions: courts, central banks, and other authorities and agencies etc. In spite of two decades of wishful attempts to reinforce the powers of the European parliament, the chain of delegation that connects democratically elected representatives to “independent” institutions has continued to lengthen.

In this context, it is hard to believe José Manuel Barroso when he says, as he did last June on the occasion of the G20 summit, that Europe does not need to “receive lessons” in democracy from emerging countries. Any attempt to reorient the course of the European project would have a greater chance of success if it took as its starting point the more realistic observation that European democracy is shrinking.

With this in mind, the introduction of direct elections for the presidency of the European commission – the current credo of German diplomacy – will not be enough to create a fresh momentum to push European politics towards greater democracy. This measure could even have the opposite impact if it is accompanied – as many German conservatives ardently hope it will be – by the granting of greater powers to the European Central Bank and the European Court of Justice.


Black boxes



The overhaul of the political union should in fact prioritise the bid to develop new forms of democratic connection with Europe’s “independent” institutions. In all likelihood, it is probably too late to restrict the scope of their competency, but there is still time to rethink the two pillars on which their authority has been based: a certain notion of their independence sustained by belief in their separation from vested interests on the one hand, and a certain assumption of scientific objectivity in their analyses and verdicts on the other.

Concerning the first of these points, the introduction of a form of representation for social partners and political minorities would act as a safeguard for an authentic ‘independence’ by ensuring that these emergent spaces for the conduct of European politics are not monopolised by particular groups, political camps or ideologies.

Such a pluralist approach is the only way to expand the scope of the debate on indissociably technical and political issues so that it is not the sole preserve of lawyers and economists: this is the second point. While they still have control over the nomination of the members of these institutions, national governments will have to take the initiative to open these black boxes. If they do not Europe’s democratic institutions – and in particular the European parliament – will be mere smokescreens.

[Panda]

Angela Merkel says solution will not be found by end of Year.

Germany broadly backs ECB Banks monitoring, but says it should only be the bigger Banks.

Sweden, which is not part of the Euro asks why their Banks should be monitored by the ECB.

Cameron hasn't commented yet, but the Daily express is running a Referendum campaign and this might well gather momentum, especially with some MP's backing it. Britain is by far the largest Banking system in Europe, the ECB has already said they will bring in a charge for share trading which affects Britain . However, the British Banking system does need monitoring after the Libor scandal.

Merkel says she will not delve into ECB decisions which fall into the Realm of monetary policy. Bond buying by the ECB may well cover the terms of the Treaty.

Finance Ministers in Cyprus are squabbling. It could have something to do with the find of Gas out at Sea on the Nicosia side, what will Northern Cyprus have to say .

Stocks fall slightly as Spanish situation getting worse with protest marches. it is reflected in the Bond yields which are slightly higher. It is thought that the situation in Spain is forcing Rajoy to accept a bail-out , very reluctantly because he doesn't want to commit to any more austerity.

[Badboy]

I SEE GREECE IS TO HAVE A QUICKFIRE SALE OF STATE OWNED ASSETS,ROYAL PALACES,EMBASSY BUILINGS,ISLANDS ETC,FILMING TO BE ALLOWED AT ACROPOLIS.

[Badboy]

PORTUGAL IS TO REVISE AUSTERITY CUTS AFTER BIG PROTESTS.

SPAIN NEEDS 60 BILLION EUROS TO BAIL BANKS OUT

[Badboy]

there are suspicitions that greece will not receive nect lot of euros

[Panda]

7 September 2012 Last updated at 20:35

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Spain budget imposes further austerity measures


Comments (931)



Deputy Prime Minister Soraya Saenz de Santamaria on Spain's 2013 budget

Continue reading the main story

Eurozone crisis

• Six burning questions for Spain
  
• Who will help Greece now?
  
• Q&A: What went wrong in Spain?
  
• Crisis in graphics
  

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment.

Deputy Prime Minister Soraya Saenz de Santamaria called it "a crisis budget designed to exit the crisis".

The new programme of savings, tax rises and structural reforms will be overseen by an new budget authority.

Expectations are growing that Spain will seek a financial bailout from its eurozone partners.

On Friday, results of a stress test on Spain's banks are due to be released.
Revenue surprise
Among the key points presented were:

• a 12% average cut in ministerial spending
  
• a freeze in public sector pay for the third consecutive year
  
• a new independent authority to monitor government finances
  
• an increase in pensions funded by drawing on 3bn euros of reserves
  
• a new 20% tax on lottery wins above 2,500 euros (£2,000; $3,200)
  
• a new car scrappage scheme
  

Ms Saenz de Santamaria said that efforts to close the government's deficit would focus more on spending cuts than tax rises.

The only areas of spending to increase in 2013 would be pensions, student scholarships and interest payments.

Individual pension payments would increase by 1% next year, the government said, while the overall pension budget would rise by 4%.

Spending cuts would reduce the deficit by 0.77% of GDP in 2013, while revenue adjustments would yield 0.56%.

The government expects the deficit this year to come to 6.3% of GDP, although many analysts expect this target to be overshot.

However, the government said that tax revenues were proving to be higher than budgeted for this year, and were expected to increase by a further 3.8% in 2013.

The deputy prime minister also said that the government would introduce 43 new laws to reform the country's economy.

The reforms went further than what was required by Brussels, according to Economic Affairs Commissioner Olli Rehn.

"I particularly welcome the ambitious plans to establish an independent fiscal council, to further liberalise professional services, and to effectively reduce the fragmentation of the internal market in Spain," Mr Rehn said.

Market rebound

Meanwhile, Castile La Mancha has become the fifth of Spain's 17 regional governments to say that it will draw on a rescue fund set up by Madrid.

The central Spanish region said it would request 848m euros from the 18bn-euro Regional Liquidity Fund, joining Valencia, Murcia and Catalonia, who have collectively requested 3bn euros, and Andalucia, which has yet to specify how much it needs.

The Spanish stock exchange's Ibex index held steady on Thursday, ending the day down just 0.15%, having lost 3.9% the previous day.

Other European stock markets experienced modest rebounds of about 0.25%.

Stocks fell sharply on Wednesday, as markets were rattled by violent protests in Madrid and Athens, as well as a statement from the Spanish central bank that the country's economy had continued to shrink in the third quarter of the year.

However, the more optimistic sentiment was boosted on Thursday when the Greek finance minister, Yannis Stournaras, said that a "basic agreement" had been reached with lenders on the austerity measures required for the release of Greece's next tranche of bailout money.

On the bond markets, the Spanish government's long-term cost of borrowing fell slightly, to an implied interest rate of just under 6% for 10-year debt.

The 10-year rate had risen by a quarter percentage point on Wednesday, as lenders' fears over the government's ability to repay its debts, or stay within the euro, resurfaced.

The BBC's Tom Burridge, in Madrid, says that it seems investors are losing patience.

Spain will hope that Thursday's austerity measures will mean fewer economic conditions if it asks for a second bailout.
'Significant' fall
Prime Minister Mariano Rajoy fuelled expectations that Spain would ask for a bailout when he told the Wall Street Journal on Wednesday that if borrowing costs were "too high for too long", then "I can assure you 100% that I would ask for this bailout".

At the press conference to present the new budget, economy minister Luis de Guindos said the government was still analysing the conditions of the bailout, which would trigger purchases of Spanish government debt by the European Central Bank.

The economic situation remains grim, with comments from the central bank on Wednesday indicating that the country's recession deepened in the last three months.

"Available data for the third quarter of the year suggest output continued to fall at a significant pace, in an environment in which financial tension remained at very high levels," the Bank of Spain said in a monthly report.

Last week, Spain's second biggest bank, BBVA, estimated that up to another 60bn euros (£48bn; $78bn) will be needed to bail out the banking sector.

About 20bn euros has already been allocated to troubled banks.

Spain, the eurozone's fourth largest economy, fell back into recession in the last quarter of 2011, the second recession since the bursting of the country's property bubble.

But with a shrinking economy and unrest in the country, reducing the deficit via further austerity measures may prove a difficult task for the government.

Your comments (931)

[Panda]

There were massive protest marches in Greece and Spain yesterday and I don't think the public will accept these austerity measures.

I bought a 2013 Calender the other day and the Owner of the shop had just come back from Spain. He said 50% of adults are unemployed and 25% of the younger generation. Banks holding mortgages for properties are going to substantially reduce the price of them so anyone with cash to spare can pick up a real bargain.



The new austerity measures Greece has to adopt to receive the 11 billion Euros will not be accepted by the population and I think Greece has no option but to default.

The World is in recession so how can Greece or Spain improve their income? The EU is a shambles and Germany must relax the rules a bit or leave the Euro .

[Badboy]

GOOD TO SEE YOU BACK,PANDA

[Panda]

26 September 2012 Last updated at 15:02

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Funding the gap: Where next for Greece?

By Matthew Wall Business reporter, BBC News
Extra borrowing over a longer period could bring more economic pain
Continue reading the main story

Eurozone crisis

• Six burning questions for Spain
  
• Q&A: What went wrong in Spain?
  
• Crisis in graphics
  
• How eurozone crisis affects you
  

Mythologists might say Greece is navigating a treacherous course between Scylla and Charybdis, the twin perils that threatened to destroy the hero Odysseus.

More prosaically, we might say the debt-burdened country is stuck between a rock and a hard place.

To qualify for the next 31.5bn-euro (£26.6bn) tranche of its 130bn-euro bailout it needs to deepen its already drastic austerity measures.

With this aim, Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras have just finalised their long-awaited debt reduction package worth 11.5bn euros, with another 2bn euros expected to come from tax revenue.

But even they admit this is unlikely to be enough.

Now they just need to get the plan past the fractious coalition government on Thursday, not to mention the troika of inspectors from the European Union, the International Monetary Fund (IMF), and the European Central Bank (ECB), due in Athens on Sunday.

Meanwhile the people are rebelling, with Wednesday's 24-hour general strike just the latest in a long series of protests against the strong medicine being imposed by the eurozone authorities.

How much more pain can the people take?

If the troika does not approve the plan and agree that Greece is making sufficient progress reforming its finances, it means no more eurozone bailout funds.

And without bailout funds the country faces likely bankruptcy, ejection from the euro and social chaos.
Emergency funding
Worryingly for Greece, troika approval is by no means guaranteed, with reports suggesting that the IMF will not agree to the debt reduction plan unless the government commits to reducing the country's debt level to 120% of gross domestic product by 2020.

Campaign posters in Athens during the general strike read SOS
Greece has already asked for a two-year extension to the terms of its bailout. But funding this extension could cost an extra 15bn euros, Finance Minister Yannis Stournaras told Reuters on Tuesday.

Who would plug the extra funding gap and how?

In the game of pass the debt parcel, no-one wants to be left holding the package when the music stops.

The IMF is reportedly worried about becoming stuck as a long-term funder of the country, when its primary remit is to provide short-term, emergency funding.

So in Washington on Monday, IMF head Christine Lagarde suggested that eurozone countries may have to take a haircut on loans they have made to Greece, agreeing to write off part of what they are owed.

In addition, the ECB might also have to take losses on the estimated 40bn-euro worth of Greek bonds it owns.

"The Greek debt will have to be addressed," she said.

Michael Hewson, senior market analyst at CMC Markets, agrees: "Either the eurozone lenders, the IMF and the ECB take a haircut on their Greek debts or they have to let Greece leave the euro - it's a straight binary choice," he told the BBC.
State financing
Greece had certainly been hoping the ECB would help ease the pain by extending the maturity of its Greek bonds.
Continue reading the main story






Crisis jargon buster

Use the dropdown for easy-to-understand explanations of key financial terms:
Troika
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Troika
The term used to refer to the European Union, the European Central Bank and the International Monetary Fund - the three organisations charged with monitoring Greece's progress in carrying out austerity measures as a condition of bailout loans provided to it by the IMF and by other European governments. The bailout loans are being released in a number of tranches of cash, each of which must be approved by the troika's inspectors.
Glossary in full

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But the ECB could be unwilling to take the hit and Germany in particular is opposed to giving any more financial aid to Greece.

ECB executive board member Joerg Asmussen, speaking to German newspaper Die Welt on Tuesday, said: "The ECB would not be able to take part in any such restructuring because this would constitute state financing, which is forbidden."

If Mr Asmussen reflects the view of the ECB board as a whole, his response is a slap in the face to Greece and a rebuff to the IMF as well.

So if the ECB won't budge and eurozone countries are unwilling to cough up, how else will Greece plug the gap?

Mr Stournaras has said his country could raise short-term debt or negotiate lower interest rates on its borrowings. But how realistic are these options?

Megan Greene, director of European research at Roubini Global Economics, is pessimistic: "Greece could raise short-term funds selling Treasury bills, but this is high risk, expensive and doesn't solve the problem.

"If the troika aren't prepared to make concessions, I think this Greek government is likely to fall and the country will have to leave the euro in a negotiated exit next year."
Austerity measures
But some analysts believe there is still hope for Greece.

Dr Vassilis Monastiriotis, senior lecturer at the European Institute of the London School of Economics, told the BBC: "If Greece convinces the authorities it is on track with its debt reduction measures, the decision to allow the two-year extension is easy - and by implication - the 15bn-euro funding that goes with it."

Dr Monastiriotis argues that, despite Mr Asmussen's assertion, the ECB will agree to help fund the extension by delaying the repayment of its Greek bonds.

"If the extension is agreed it means the austerity measures can be less drastic and this will stimulate the economy, leading to higher tax revenues, thereby reducing the cost of the extension to the eurozone.

"I remain convinced that Greece will stay in the euro."

An EU summit on 18-19 October is expected to make a decision on the Greek extension request.

Yet again, the future of Greece hangs in the balance, as the Greek people wonder how much more pain they will be asked to endure and for how long.

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