Have Reports of the survival of the eurozone been greatly exaggerated?

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Reports of the survival of the eurozone may have been greatly exaggerated

Last week’s surprise interest rate cut by the European Central Bank (ECB) was largely a response to the looming danger of deflation in the eurozone





one Euro coin stands on a map of Brussels on December 9, 2011 in Berlin, Germany

Economists said that while there was evidence banks had used ECB funds to buy government bonds, they were still not lending to businesses and households Photo: Getty Images



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Roger Bootle
By Roger Bootle

9:30PM GMT 10 Nov 2013

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Just when you thought it was safe to go back into the water… Last week’s surprise interest rate cut by the European Central Bank (ECB) may have been taken as good news by the markets, but it was largely a response to the looming danger of deflation in the eurozone. And that is not good news at all.


It is a severe problem of economic forecasting that if you manage to identify a major force that is going to have significant effects, you are rarely able to see quite when these will occur. You can give up, retire or die before the forecast events finally come to pass.


The long-running crisis of the euro is a case in point. Like Mark Twain’s death, forecasts of the euro’s demise have proved premature. Yet at the heart of the simmering crisis lie two debilitating problems with the potential for a devastating interaction. The first is a loss of competitiveness by the peripheral countries, that has left them with depressed levels of GDP and high rates of unemployment. The second is appallingly high government debt.


The response of the eurozone to the debt problem has been to enforce austerity in the form of cuts in government spending and increases in taxes. That has been successful in reducing the size of the deficits in the peripheral countries. The policy for regaining competitiveness has focused on so-called internal devaluation, whereby the peripheral countries force their inflation rates to low levels. Deflation – that is to say, falling prices – if it occurs, would simply be a continuation of this policy. The faster prices fall, the sooner the affected countries will return to full competitiveness.


At first sight, it seems as though these two policies are consistent with each other. After all, the austerity drive helps price and wage increases to moderate because it depresses aggregate demand and releases resources, including labour.


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But when you look at the feedback loop from prices to the debt problem, things look much worse. For if prices fall then, even if real GDP is static, its money value would fall.

Meanwhile, the money value of government debt would remain constant. This means that the ratio of government debt to GDP would rise.

As it happens, the ratio of debt to GDP has recently been on a rising trend even without deflation because, although government deficits have fallen in the peripheral countries, any deficit at all means that the stock of debt is rising. Meanwhile, until recently anyway, the GDP of the peripheral countries has been falling.

So what are the chances of deflation happening in the eurozone? Very high. The latest inflation figure showed a drop from 1.1pc to 0.7pc. Nor was this simply the result of a statistical quirk. The core rate of inflation also dropped to only 0.8pc. And in Greece, prices are already falling. The latest inflation figure was minus 1.9pc. Meanwhile, the price index is roughly flat in Ireland, Spain and Portugal. Inflation is stronger in the core countries, but it is still very low – about 1pc in France and 1.3pc in Germany.

What’s more, in September producer price inflation for the eurozone was minus 0.9pc. And wage inflation is very low, too. In the second quarter of this year, hourly wage costs rose by only 0.9pc year on year. In Greece, pay has fallen by about 10pc over the year.

Wage growth may well get weaker across the eurozone as a whole. Unemployment has started to rise again. In September, it stood at 12.2pc, a record high. In Spain and Greece, the rate is more than 25pc.

If external price pressures turn negative because commodity – and especially energy – prices fall, then a drop into deflation would come sooner. This is where the exchange rate of the euro is critical. It has been extraordinarily strong. When it was launched in 1999, the euro traded

at an exchange rate of $1.17. Subsequently, it fell to below parity against the dollar. Yet it has recently been trading at well over 1.30 against the dollar. The strong euro is directly reducing the cost of imports into the eurozone and it is making it more difficult for the zone to export.

The ECB has indicated that it has more ammunition to deploy if things worsen. It may start to impose negative interest rates on banks for making deposits at the ECB. This, plus the threat of quantitative easing or QE, which the Bank has so far shunned, at least in the pure form, may serve to bring down the exchange rate and thus avert the deflation danger.

But I would not bank on it. Divisions in the ECB council will continue to make ECB action hesitant. Germany is not keen on more stimulative measures and it would surely oppose outright QE.

And as we know from the Japanese experience, a hesitant central bank has great difficulty in effecting the all-important psychological changes necessary to stop prices from falling. For deflation is just like inflation. It is at its most dangerous and is most difficult to dislodge when it gets into the mind. Deflation has been lodged in the mind of the average Japanese person for the best part of 20 years.

Germany holds the key to this problem. What is needed for the eurozone is a combination of a weaker euro and stronger growth of German domestic demand, perhaps facilitated by looser fiscal policy. This would mean Germany putting up with a somewhat higher rate of inflation.

Yet there seems no sign of Germany embracing either a weak currency or a boost to demand.

The result is that the eurozone faces many years of grinding austerity, continuing catastrophe in the labour market and a period of very low inflation, or even deflation. As debt ratios continue to rise in the peripheral countries, at some stage the financial markets may come to worry again about their ability to stay in the euro. At that point bond yields will rise, thereby making the fiscal position worse.

The crisis of the euro is a slow-burning affair. Just like Japan. Of course, the eurozone problems are different from Japan’s but they are just as deep-seated. As I argued a few weeks ago, Japan may seek escape from its debt problem though higher inflation. The troubled peripheral countries of the eurozone cannot do that on their own.

They could only do it if the ECB – and Germany – agree. And that looks unlikely. The risk of some countries defaulting, and/or leaving the euro, is still very much with us.

Roger Bootle is managing director of Capital Economics. Email him on roger.bootle@capitaleconomics.com

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Moody's warns on Spanish banks


22 Nov, 5:32 AM

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International credit rating agency Moody's has warned that Spain's banks still face significant challenges, despite nearly completing a €41 billion ($A59 billion) eurozone-financed bailout.

Spain announced this month it would emerge from the rescue program in January, without seeking further financial aid from the European Stability Mechanism safety net.

The news was "credit positive" for investors in Spanish bank debt securities, who risked being forced to accept some losses if the banks tapped the ESM for further help, New York-based Moody's said.

"However, we do not interpret the exit from the European support program as a clean bill of health for Spain's banks," said a report by Moody's Investors Service senior analyst Alberto Postigo.









"The country's banks still face significant credit challenges stemming from very high non-performing loans, insufficient internal capital generation in relation to loan-loss provisioning requirements and weak capitalisation relative to European peers."

Risky loans, mostly linked to the Spanish property sector, which collapsed in 2008, climbed by €6.9 billion from the previous month to an unprecedented €187.8 billion in September, a Bank of Spain report showed this week.

The bad loans rose to 12.68 per cent of all credit extended by banks in Spain in September from 12.14 per cent in August, representing a fourth consecutive record high.

The non-performing loan ratio "far exceeds" the nine per cent reached during the financial crisis of the early 1990s, Moody's said.

"Although the exit from the financial assistance program eliminates the more immediate threat of burden-sharing, we believe that risks for creditors have not dissipated."

Last year, the eurozone agreed to make a rescue loan of up to €100 billion to fix the banks, of which Madrid used €41 billion.

The European Union this week welcomed efforts by Spain to repair its banking sector and said investor confidence was back.

But it warned that Spain's economy, emerging gingerly from a two-year recession with a jobless rate of 26 per cent, posed the most significant risk to banks.

Spanish Prime Minister Mariano Rajoy's conservative government has hailed the return of investors to Spain.

"Confidence in the Spanish financial system is back," Economy Minister Luis de Guindos said in an interview this week with Spanish public television.

"There are no doubts about the liquidity and solvability of the Spanish banking sector," he added.











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Following the Ukraine’s refusal to sign an association agreement with the EU, Europe cannot afford to lose the confidence of other Eastern Partnership countries. At the upcoming Vilnius summit, it must send a clear political message to Moldova and Georgia, writes Die Welt.

Gerhard Gnauck
When was the last time protesters waved the starry banner of the European Union with such fervor? In the 1950s, on the German-French border? In 1989, and then in the "Velvet" revolutions from Bucharest to Tallinn? And today, at demonstrations in the Ukraine, and a few weeks ago in the Republic of Moldova. There, "Europe" is still synonymous with hope. To put it more precisely: for prosperity first, security second, and freedom third. Three conditions of life that are dear to everyone.

The rallies in Moldova spoke of confidence. The protests in the Ukrainian cities were marked by sorrow and anger. On Friday, at a summit in Lithuania, which current holds the Presidency of the Council, the EU will take stock of a project whose name has so far promised much more than it has delivered: the Eastern Partnership. It should have been a way to bind the states in eastern Europe more closely to the EU. But Russia discouraged the idea immediately. Among the republics of the Caucasus, resource-rich, authoritarian Azerbaijan distanced itself from the project; and now so too has Armenia, strongly dependent on Russia. As has Belarus, essentially run by a dictator.

With the other three countries – the Ukraine, Georgia, Moldova – the EU has negotiated association agreements. These are far-ranging documents, which provide for legal harmonisation (of the eastern neighbours with the west), the consolidation of democracy and the market economy – and finally more free trade, and fewer customs duties. Can anyone be against that? Far from it. Rather, a piece of old wisdom is verified: the most pious man cannot live in peace if it does not please his wicked neighbour.

Carrots and sticks
Prosperity, security and freedom for the neighbours – that would be pretty much the last thing that would please the hegemon of Russia, grown stronger under Vladimir Putin. In the search for an explanation, simpler natures may encounter a Russian proverb: If two farmers live side by side, and one has a cow and the other has none, what does the poorer neighbour wish for? That the cow of the rich farmer will snuff it. Russia wants to prevent different models of government and society from emerging in its own back yard, perhaps even – horribile dictu – a confident civil society. In two scheduled meetings called at short notice, Putin apparently brandished carrots and sticks at the Ukrainian President Viktor Yanukovych. Now it’s the European Union that has the egg on its face. Last Thursday, the Ukraine – incidentally, the largest state in Europe proper – stepped down off the train leading to an association with the EU.

If the momentum of the EU falters, if the Moldovans get no clear signal in the form of visa-free travel, the Communists could win the electionIt sounds paradoxical, but the EU will soon have to prove itself – its ability to take the political initiative in its eastern neighbourhood – to Moldova and Georgia. Is there humble pie to eat there? Both states want to initial their EU agreement in Vilnius, which would be the last step before the signing. European politicians have played obstetrician at the birth of EU-friendly governments in Moldova like nowhere else. But European Union elections are coming up in six months, and six months later elections in Moldova. If the momentum of the EU falters, if the Moldovans get no clear signal in the form of visa-free travel, the Communists could win the election.

Frozen conflicts
Admittedly, both countries suffer from "frozen" conflicts: Georgia, because Russian troops still occupy one-third of the country; Moldova, because Russia is backing separatists who are running their own “state” on a strip of Moldovan territory. But that may not be permitted to stop the clock of history, as both countries can of course be stablised and brought into the EU. Today it isn't about membership: it’s about trade and commerce. About what is important and realistic. That Cyprus, an EU member, is divided, we had almost forgotten as well; that partition has now become the permanent state of affairs.

The alternative? That Russia would again build up a sort of Imperium around its borders. With significant differences from the former Soviet Union, however. At that time Moscow had to grant a standard of living to the republics bordering Europe that was higher than the standard of living of the Russians themselves, to keep the borderlands quiet. Things would be different this time: the new satellites are to be a degraded zone of poverty and instability that will send millions of undocumented workers out into the world, to build new office towers from Moscow to Madrid. And their wives, left at home, will sooner or later throw the faded flags of Europe into the trash.

Translated from the German by Anton Baer

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Grand coalition: ‘Germany can no longer serve as an example to Europe’
28 November 2013PresseuropFrankfurter Allgemeine Zeitung, Die Welt, Der Spiegel, Die Tageszeitung Tools
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‘The grand coalition presents: More spending, more charges’
‘The grand coalition presents: More spending, more charges’

Heiko Sakurai The contract for a new grand coalition government between Angela Merkel’s Christian democrats and the Social Democratic Party, which was presented on November 27, has not met with much enthusiasm in the German press. For some, the long-awaited deal is too generous to the left, while others argue that it fails to take into account the interests of Europe.

Frankfurter Allgmeine Zeitung is strongly critical of the deal, and in particular of the “social entitlements”, which include a minimum wage of €8.50 and full retirement at age 63 (for a minimum of 45 years worked) instead of age 67, that the socialists obtained from Chancellor Angela Merkel. For the conservative daily, it amounts to an “overcooked mush” that will be “easy for everyone to digest” —

Frankfurter Allgemeine Zeitung, Frankfurt A grand coalition always has a big heart. That is why the people prefer them to small coalitions. From this point of view, Germans will not be disappointed by the third grand coalition [in the history of the Federal Republic]. Each of the three parties has shown that they can be generous to the little people, and the result is a pact that has overturned the the horn of plenty to douse the country with social entitlements. With the minimum wage, mothers’ retirement [an extra €28 euros per month and per child from 2014] and dual citizenship, there is something in it for everyone. [...] [But] many Germans will be affected by the hidden cost of these blessings, even if it only weighs on future generations.
Die Welt is outraged for the same reasons: “This coalition has no idea either of itself or of what it can demand from this country,” announces the newspaper, which argues that in view of its decision to fatten up its welfare state, Germany can no longer serve as a model to Europe —

Die Welt, Berlin This coalition contract oozes with post-heroic, narcissistic state socialism. The freedom of action established by former [social-democratic] chancellor Gerhard Schröder to bring prosperity to the national economy and fight mass unemployment has been systematically destroyed. The message it sends to Europe is disastrous. Having preached austerity to crisis stricken countries, we have now decided to fatten up our already chubby welfare state instead of putting it on a diet. Germany can no longer serve as an example to Europe.
"The new government is ignoring the crisis in Europe," adds Wolfgang Münchau on German web site Spiegel Online. The leader writer regrets that on the issue of banking union, only small changes were made to the contract.

Logo – Der Spiegel, Hamburg The lack of change in crisis management policies shows that we will not move forward on one of the most significant issues of economic policy. A true banking union with a common European fund for the dissolution of banks and a common guarantee for savings instruments would be a significant contribution to resolving the crisis. Even more important is a policy to quickly cancel debt. With this grand coalition, the SPD and Angela Merkel are committing the historic error of delaying bankruptcy.
As for German daily Die Tageszeitung, it emphasises the fact that Angela Merkel imposed her will regarding taxes – which will not be increased for the wealthy, contrary to the demands of the Social Democrats – and regarding the management of the euro crisis. However, the left-leaning paper hails the introduction of a minimum wage saying it will lead to –

Die Tageszeitung, Berlin better conditions for the working poor. Everywhere, even if it only goes into effect as of 2017, there will be a minimum wage of €8.50/hour. Unstable jobs will be better regulated. The tone has been set: those who work must not be exploited as was the case before. [...] This coalition contract is a sort of manual for repairing the damaged fabric of society.

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Italy: The burdensome legacy of Il Cavaliere
28 November 2013La Repubblica Rome Tools
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Mauro Biani Silvio Berlusconi has been expelled by his peers from the Senate and stripped of his immunity in a long-awaited vote on November 27. Despite no longer being in Parliament, Il Cavaliere has indelibly left his mark on this era and society, writes Barbara Spinelli.

Barbara Spinelli
Following the vote to expel Berlusconi from the Senate there is a great temptation to consign to history the 20 years that Berlusconi, four times president of the Council since 1994, has been in power. It’s a temptation we know well: once the anomaly has been neutralised, one gets back to normality. As if the anomaly – a momentary digression – had never really existed.

In 1944, it was not an Italian but an American journalist, Herbert Matthews, who declared in the columns of the literary magazine Mercurio of Alba de Céspedes: ”You have not killed it! Far from being dead, fascism continues to live on in the minds of Italians. Of course, not in the same terms as yesterday, but in the way of thinking, of acting.”

The infection, our “disease of the century”, has lasted a long time. This also applies to the alleged fall of Berlusconi. It is a relief to know that he will no longer be a critical factor for the parliament and the government. But Berlusconism is still here. And it will be not easy to wean ourselves off this drug that has fascinated not only politicians and parties, but the entire society.

I say “the alleged fall” because even after his removal, Berlusconism will continue. This means the battle will also go on for those who aspire to rebuild democracy and not just to stabilise it. The two decades of Berlusconi should finally be assessed: how was Berlusconism born? How could it have taken root?

No toothless tiger
Once stripped of his office, sentenced to community service, the leader of Forza Italia will still have two formidable weaponsOnce stripped of his office, sentenced to community service, the leader of Forza Italia will still have two formidable weapons: an intact media apparatus and “monstruous” financial resources – even more monstrous in lean times. Barred from the Senate, he will communicate with the Italians by interposed video messages.

More fundamentally, though, it is his cultural and political heritage – his ways of thinking, acting, the "disease of the century" – that will persist. Without a profound look deep into our conscience, this legacy will continue to intoxicate Italy. To start with, the conflict of interest, then the incestuous relationship between politics and racketeering: the two endure as the modus vivendi of politics. Berlusconi’s expulsion absolutely does not delegitimise them.

Another legacy is the total separation of politics from morality, or even opposition to the latter. It has become a habit, a creed that has turned into a plague. [The poet] Giacomo Leopardi has already called Italians cynics, because they are more cunning, more careless and less romantic than the peoples of the North. Nothing has changed. One still clings to Machiavelli, who distinguished politics from morality and is used to argue that the end justifies the means. But this outrageousness embodies our deepest vices: the means become the end (power for the sake of power) and change that end.

The myth of a civil society is another legacy of the last two decades: the notion that the people is better than its leader, that its verdicts overrule those of the courts. Made sovereign by democracy, civil society embodies the general will, which never errs. What’s more, wrote Salvatore Settis, an art historian and Italian intellectual, civil society is ”often regarded not only as distinct from the State, but as its adversary, almost as if the State (embodied by temporary governments) was by its nature destined to be the enemy of the common good”.

Bad education is becoming a characteristic of the elite, which seeks to use politics as leverage, even against the rulesThis formula, so disfigured, has its emulators. The oligarchic cannibalisation of civil society (or of the “technocrats”) is increasingly discrediting politics and bringing the culture of amorality and illegality more and more to the fore. Bad education is becoming a characteristic of the elite, which seeks to use politics as leverage, even against the rules. And this elite eventually creates permanent exceptions, perfect congruences between necessity, the lack of an alternative, and stability.

Recognising the monster
The same goes for secular society. Over these past 20 years, it was not only held at a distance; it has been held in horror. The pontificate of Pope Francis has changed nothing there, since the Church will benefit more broadly than ever from a positive bias, even on issues such as the reform of the Church promised by the new Pope. The secular battles will find it hard to find room in an Italian political scene that welcomes its dependence on the Vatican.

And then there is Europe. In the reconstruction of the story of his fall in 2011 Berlusconi blamed a string of cunning tricks played on him by the European Union, Germany, and France. Yet again, with the prowess of a demagogue, he put his finger on the biggest shortcoming of Italy: the ”Italy enslaved” unmasked by Dante [Purgatory, Song VI].

No, we have not wiped out Berlusconism, because the society has been corrupted. We will emerge from these 20 years of amorality, immorality and illegality only if, looking at ourselves in the mirror, we recognise our own image behind the monster. The civil strife and the policy of emergency directed by Berlusconi has blocked the civil and economic growth of our country. An entire generation has been sacrificed on the altar of imaginary stabilities.
On the web
Original article at La Repubblica it
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Il Giornale article it
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“His faithful followers will not leave him all alone”
“His faithful followers will not leave him all alone”
Silvio Berlusconi's media allies greeted the news that he was expelled from the parliament with a certain scepticism regarding whether this would mean his disappearance from the political scene. "The current situation in Italy is paradoxical," says conservative daily Il Foglio, adding "indeed, three of the main political leaders (or potentially so) – Beppe Grillo leader of the [Five Star Movement], Matteo Renzi of the Democrat Party] and now Silvio Berlusconi – are not in parliament". For the paper, the three men are the most popular with the voters especially because they reject the austerity imposed by the European Union, to which the government of Enrico Letta is, for its part, very attached.

This view is shared by Il Giornale, a daily owned by the Berlusconi family, which runs a headline warning of nothing less than a "Coup d'Etat" and claims, that "they are chasing away Berlusconi and will raise taxes immediately afterward." The paper also warns opponents of the former prime minister that –

No one should have the illusion that the revocation will impede Silvio Berlusconi from being the political leader of millions of Italians who still hope for a free and liberal country. [...] Let no one think of busting our chops with stories of stability. There is no stability without fiscal efficiency, without freedom and without justice. [...] Berlusconi must not think this will be a walk in the park. It will be tough, but his faithful followers will not leave him all alone. That is a certainty.

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United Kingdom: Populism trumps practical in migrant debate
2 December 2013European Voice Brussels Tools
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Mayk UK Prime Minister David Cameron’s decision to withhold benefits from new migrants betrays his lack of moral courage and a propensity for the populist, rather than admitting the reality that Britain’s economy needs immigrants, blasts an editorial in the European Voice.

European Voice
David Cameron, the prime minister of the United Kingdom, is running scared and so resorts to scaremongering. It is a most unedifying spectacle.

What he is scared of is the UK Independence Party, an anti-immigration, Eurosceptic party that looks as if it will perform strongly in May's elections to the European Parliament. His scaremongering is about immigration, specifically migration by other EU citizens to the UK.

The prime minister announced this week the introduction of requirements that would make it harder for migrants to the UK from elsewhere in the EU to claim benefits. He claimed that the restrictions were comparable to those applied elsewhere in the EU and that they comply with EU rules.

If those requirements pass the scrutiny of the European Commission, fair enough. But what does not pass the test of common sense or good taste is the rhetoric and misinformation with which Cameron has accompanied his announcement.

Read article in full at European Voice (English)

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: ‘Referendum decision to be written into constitution’
2 December 2013PresseuropVečernji list Večernji list, 2 December 2013
The definition of marriage as “matrimony between a man and a woman” was adopted by referendum on December 1 with the backing of 65.76 per cent of the vote.

Even though the turnout was only 36 per cent, the definition will now be written into the constitution, and effectively block any attempt to introduce same-sex marriage. For Vecernji list —

… in practice, the referendum will not make any change to the statute of marriage, which, until now has been defined as the union between a man and a woman. However, it will likely result in a shake-up of Croatia’s political system. It probably amounts to the most major and radical change to have emerged in the Croatian political landscape since the establishment of democracy, which has enabled us to grow accustomed to the decorative alternation of the [conservative nationalist] HDZ and the [ruling social-democratic] SDP

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Germany: ‘Fear of social tourism’
3 December 2013PresseuropDie Welt Die Welt, 3 December 2013
On December 2, a court in North Rhine-Westphalia found in favour of a Romanian family who applied for welfare benefits in Germany. In its ruling the court specifically cited the freedom of movement and of residence of EU citizens, which is guaranteed by the Charter of Fundamental Rights of the Euopean Union, explains Die Welt.

Reporting on the fears of conservative political parties which are worried that “social tourism” could overstretch the financial resources of German local governments, the daily writes —

… people who lose their jobs have the right to social welfare, and that is only fair. However, the right to immigrate to our social welfare system does not exist, nor is it racist to point this out.

Die Welt further recommends that European commissioners should “rein in their moral indignation” against countries that want to restrict access to their social welfare systems. “The application of European law is the best way to fight the populists,” the newspaper concludes

=============================

So how come Cameron thinks he is bowing to pressure when he says immigants cannot claim for the first 3 months???? Somebody ought to tell him.

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Europe repeating all the errors of Japan as deflation draws closer

The whole eurozone must have a higher inflation rate to lift the South far enough above the deflation line to gain breathing room





A one euro coin is melted with a welding torch



Image 1 of 5

Europe's slide towards deflation is replicating what happened in Japan in the 1990s at the onset of its lost decade Photo: Reuters
















































Ambrose Evans-Pritchard
By Ambrose Evans-Pritchard

9:13PM GMT 04 Dec 2013



Comments193 Comments





Europe is one shock away from a deflation trap. A surprise anywhere in the world is all that it needs: an upset in China as the credit bubble pops, or a global bond shock as the US Federal Reserve winds down monetary stimulus.


Producer price inflation (PPI) fell to -1.4pc in the eurozone in October. This is how deflation becomes lodged in the price chain.


"Prices are sticky for a while as you approach zero inflation, but once you break through the ice into deflation things can move fast, as we've seen in Greece," said Julian Callow, global strategist at Barclays. "The European Central Bank needs to act before the horse has already bolted."





Rollover for sound







Mr Callow said excess industrial plant in China is exporting deflation across the world. China's fixed capital investment over the past year has been $4 trillion, compared with $3 trillion for the entire EU and $3 trillion for the US. This has grown eightfold in a decade. It is a vast new source of supply for a saturated global economy.


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China itself is now in PPI deflation. Factory gate prices fell 1.5pc in October. This has the makings of an almighty profits squeeze since wages have risen 13.6pc over the same period. There is a school of thought that China's investment glut will prove very hard to manage and this will trigger the next big round of angst in the world economy, but exactly when this will happen is anybody's guess.



Europe's slide towards deflation is replicating what happened in Japan in the 1990s at the onset of its lost decade, when trouble crept up on the country unawares. Near zero inflation seemed harmless until world events suddenly intruded: the Russian default and the East Asian crisis of 1998, the dotcom bust in 2001-2002.

The Bank of Japan's paralysis seems extraordinary to us now, and so do the arguments made by the governors of the day, Masaru Hayami and Toshihiko Fukui. Mr Hayami almost seemed to welcome deflation, thinking that it would force the political class to ram through root-and-branch reform, although it did no such thing. "I am not worried about the fall in prices," he said famously in January 2001.

Mr Fukui even said rising unemployment was a "good thing". It would hold political feet to the fire. The details are recounted in "Princes of the Yen" by professor Richard Werner, now at Southampton University. The result of tight money was that fiscal policy had to carry the entire burden instead. Budget deficits exploded as Japan battled the slump. Public debt ballooned to 245pc of GDP. "Their behaviour was shocking, and the Europeans are now making the same mistakes," said Prof Werner.



Put crudely, the EMU debt crisis strategy is to switch stimulus on and off for political purposes, tightening the screw on recalcitrant countries. The vogue term for this is the Nash Equilibrium, "game theory" doctrines that have so corrupted economics.

The trouble with the Byzantine politics of the eurozone is that you never quite know why people are pushing different agendas. Nothing is what ever seems to be, and economics has little to do with it.

Is this Nash strategy simply a cover for creditor enforcement of its own narrow interest? Or intellectual varnish for what is really a set of cultural tastes? Or Calvinist beliefs, a deeply-held assumption that pain is somehow cleansing - the "haunting fear that someone, somewhere, may be happy", to borrow the immortal words of HL Mencken?

The ECB has been roped into this game, writing secret letters to Italian and Spanish leaders dictating detailed changes in labour law and such matters. It has no mandate to act in this fashion, and certainly has no delegated authority from any elected parliament to serve as enforcer.

Monetary stimulus is being withheld because it might help slackers off the hook - the definition of slacking determined by a tiny cell in the German finance ministry - even when needed to cushion fiscal austerity.



This pollution of monetary policy is a key reason why the ECB has let M3 money growth fall to 1.4pc, disastrously undershooting its 4.5pc target, and why it has let inflation drop to near zero on a six-month basis. It is not true that the ECB is a replica of the old Bundesbank. The Bundesbank would never have let M3 growth fall so low for so long in Germany during the D-Mark era.

Since April, prices (adjusted for taxes) have fallen in Greece, Italy, Netherlands, Portugal, Slovenia and Slovakia, as well as the non-EMU group of Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary and Romania. Prices have been falling in Spain since May, in France since June and even in Germany over the past three months.

"It is past time to recognise the deflation danger facing Europe," said Jean Pisani-Ferry, head of French policy planning in Paris. The ECB should stop kowtowing to "policy hawks" and deliver on its mandate. "The ECB must be prepared to make that choice," he said, echoing a view that is taking hold in the French establishment.

The ECB's Mario Draghi undoubtedly shares this view. He told an audience of very suspicious officials in Berlin two weeks ago that the bank had been forced to cut rates to a record low of 0.25pc to ensure a “safety margin against deflationary risks”, although everybody in the room knew that the two German ECB members had voted against it. He also warned that if inflation is allowed drift too low it becomes "much harder" for the Club Med states to claw back competitiveness under internal devaluations. "Adjustment runs into major head winds as demand suffers and real debt burdens rise,” he said.

This is the nub of the matter. If Club Med states have to deflate, their debt trajectories risk spinning out control. The two policy objectives of EMU crisis strategy are in contradiction, as the OECD spelled out last month.

Falling nominal GDP means the debt burden is rising on a shrinking base. The "denominator effect" is deadly when the public/private debt stock is high: 276pc in Italy, 300pc in Greece, 330pc in Spain and 389pc in Portugal. It is why Italy's public debt has jumped from 119pc to 133pc GDP in just over two years despite draconian austerity and a primary budget surplus.

Ebrahim Rahbari from Citigroup said the policy is pushing the South into debt-deflation and is likely to prove self-defeating. Officials in Brussels and Berlin are counting on exports to rescue Club Med, but Mr Rahbari says the ratio of exports to GDP is just 34pc for Spain and 30pc for Italy, giving them too little gearing.

These countries now face another problem as the euro grinds higher. More than half their sales go outside the eurozone, mostly on thin margins. A 6pc rise in the exchange rate this year is eclipsing any gains from cuts in unit labour costs. They face a Sisyphean task.

It is far from clear in any case whether the feat of closing the current deficit in Spain, Portugal and Greece is meaningful given the levels of mass unemployment, which erodes labour skills through "hysteresis" and therefore lowers the long-term economic growth rate, and that in turn makes it harder to tackle the debt mountain.

A case can be made that the hysteresis damage of EMU policies is greater than the benefits of reform. If so, it is a brutishly stupid policy as well as causing great suffering. German Chancellor Gerhard Schroder said he needed to let the budget deficit rise for a while to cushion the effects of his Hartz IV reforms.

The only way for Europe to break out of this trap is to lift the South far enough above the deflation line to gain breathing room. The whole eurozone must have a higher inflation rate.

Fabio Bassi from JP Morgan says the ECB will surprise everybody, proving just as aggressive in fighting deflation as it was in fighting inflation. Let us hope so, but I doubt that any of the measures now being floated will make much difference. A cut in deposit rate or another burst of lending to banks will not boost the M3 money supply.

The ECB has been behind the curve for most of the past three years, needlessly causing a double-dip recession that caused havoc to public finances, and too late at every stage since, despite the heroic efforts of Mr Draghi. It may now take full-blown quantitative easing to head off deflation, with bond purchases across the board. There is no chance of this before the German constitutional court rules on the legality of emergency measures next year, and little chance after that.

Almost nobody is making the case for QE in the German press, economics profession or policy circles. It is view as anathema across the political spectrum. Yet to push it through against German protest would set off a political firestorm. We are moving nearer to the final battle for control of EMU where there can be no compromise.

[Panda]

Douglas Carswell
Douglas Carswell was first elected to Parliament in 2005 by a slender 920 votes. He was returned as MP for Clacton in 2010 with a 12,000 majority. He is the author of The End of Politics and the Birth of iDemocracy and believes that the internet is making the world a vastly better place.


LATEST POSTS
DECEMBER 13TH, 2013 17:32
The debate in Europe is moving our way only because we are threatening to quit

Britain's negotiating position in Europe has never been so strong, explained the brilliant Ambrose Evans-Pritchard yesterday. Before going on to explain how we might hand it all away.
The In / Out debate in Britain is redundant, claims Ambrose, "the case for British exit … diminishing".
Why? All that "ever closer union" stuff is old hat, apparently. The EU ultras are in retreat and the assault of sovereign nation states is over, he claims.
Hmmm. I have spent my adult life listening to politicians telling us that Europe is moving our way. Douglas Hurd said Maastricht was the high water mark of federalism. Tony Blair said that he was winning the case for fundamental reforms. Remember all that talk about subsidiarity?
It never happens.
Ambrose, I fear is making the mistake that all empirically minded Englishmen make. Because something is not working, we assume people won't keep

[Panda]

Banking: ‘ECB to get tough on sovereign bond risks’
12 December 2013PresseuropFinancial Times Financial Times, 12 December 2013
The European Central Bank (ECB) is to push Eurozone banks to hold capital reserves against their sovereign bond holdings, as it seeks to prevent weak lenders from buying up the debts of countries left vulnerable by the euro crisis.

Sovereign bonds are often thought of as risk free, however, the new drive would force banks to hold capital reserves as a proportion of their sovereign bond holdings.

The shift would be introduced as part of the ECB’s “health check” of the Eurozone’s largest 130 banks, writes the Financial Times, adding –

The vicious cycle that has seen banks use central bank cash to buy government bonds has been partly blamed for prolonging the Eurozone financial crisis.

[Panda]

France a 'concern' with competitiveness key issue
French manufacturing hits a seven-month low with competitiveness a 'key issue' while the eurozone overall hits a 31-month high
A recreation of the Eiffel Tower is created with a drop of water by French photographer Vincent Xeridat in Miramas, France
France's manufacturing PMI slipped to 47, lower than the flash estimate of 47.1, and below the 50 mark which separates expansion from contraction. Photo: Xeridat / Barcroft Media
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By Rebecca Clancy11:22AM GMT 02 Jan 2014 Comments8 Comments
France has been called a 'concern' after manufacturing slipped to a seven-month low, the lowest of the eurozone countries, as export losses widen.
France's manufacturing PMI slipped to 47, lower than the flash estimate of 47.1, and below the 50 mark which separates expansion from contraction. That marks the 22nd consecutive month of contraction for factory activity in the eurozone's second largest economy.
France, along with Greece, were the only nations to report lower levels of new export business, despite the overall level for the eurozone rising for the sixth consecutive month and at a pace close to November's two-and-a-half year peak.
"France remains a concern. While Germany, Italy and Spain are seeing the strongest output growth since early 2011, buoyed to varying degrees by improved export sales, France is seeing a steepening downturn, in part the result of widening export losses," said Chris Williamson, chief economist at Markit, the author of the survey.
"This suggests that competitiveness is a key issue which the French manufacturing sector needs to address to catch up with its peers."
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With the level of new orders dropping, France also saw a faster decline in its workforce.
But overall, the picture for the whole of the eurozone was much brighter, as the PMI manufacturing survey hit a 31-month high of 52.7.

Greece had a particularly strong finish to the year, with its PMI hitting a 52-month high of 49.6. While that still indicates a contraction, it is the closest the debt-laden country has been to the 50 stabilisation point in more than four years.
Spain moved back into expansion territory, hitting 50.8, while Germany, the eurozone's largest economy, beat its flash estimate of 54.2, to record growth of 54.3.

But it was the Netherlands which saw the fastest rate of expansion to hit a 32-month high of 57.

"A strengthening upturn in the manufacturing sector is helping the euro area recovery become firmly established," Mr Williamson said.
"It’s also encouraging to see prices rising slightly, suggesting firms are seeing some improvement in pricing power."
The strong finish to the year in the eurozone meant the sector was on track to notch up growth of 1pc in the final quarter of 2013, he added

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http://www.telegraph.co.uk/motoring/10554415/Motorists-face-60mph-speed-limit-on-motorways.html

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We want a United States of Europe says top EU official

Voters must decide for or against a United States of Europe during EU elections this spring, says vice president of the European Commission





In the run up to the springtime pan-European vote, the EU is gearing up to mount an unprecedented campaign for the hearts and minds of voters

In the run up to the springtime pan-European vote, the EU is gearing up to mount an unprecedented campaign for the hearts and minds of voters Photo: ALAMY



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Bruno Waterfield
By Bruno Waterfield, Athens

5:52PM GMT 08 Jan 2014







A campaign for the European Union to become a "United States of Europe" will be the "best weapon against the Eurosceptics", one of Brussels' most senior officials has said.


Viviane Reding, vice president of the European Commission and the longest serving Brussels commissioner, has called for "a true political union" to be put on the agenda for EU elections this spring.


"We need to build a United States of Europe with the Commission as government and two chambers – the European Parliament and a "Senate" of Member States," she said.


Mrs Reding's vision, which is shared by many in the European institutions, would transform the EU into superstate relegating national governments and parliaments to a minor political role equivalent to that played by local councils in Britain.


Under her plan, the commission would have supremacy over governments and MEPs in the European Parliament would supersede the sovereignty of MPs in the House of Commons.


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National leaders, meeting as the European Council, would be reduced to consultative, second chamber role similar to the House of Lords.

Nigel Farage, the leader of Ukip, said that Mrs Reding had revealed the true choice for British voters to make at polling stations.

"For people in power in Brussels that is the only choice on offer, no reform just a United States of Europe. On 22 May the British people must ask themselves if they want this and vote accordingly," he said.

"I am sure people will say no to this centralist fanaticism."

Mrs Reding's comments illustrate the growing gulf between a Europe committed to "ever closer union" and Britain, which is pushing to reduce the EU's powers.

"We assume Britain's leaving the EU so we don't even bother thinking about British sensitivities at the moment," said an official.

While Britain may have been written off, concern is mounting because hostility has reached unprecedented levels across continental Europe and anti-EU parties are leading the polls in France, the Netherlands and Greece.

Senior EU figures, such as Mrs Reding, want the European elections in May to move beyond debates over eurozone austerity by embracing a grand vision of Europe.

"This debate is moving into the decisive phase now. In a little more than four months' time, citizens across Europe will be able to choose the Europe they want to live in," she said.

"There is a lot at stake. The outcome of these elections will shape Europe for the years to come. That is why voting at these elections is crucial.

This will be our best weapon against the Eurosceptics: to explain to our citizens that their vote really matters."

In the run up to the springtime pan-European vote, the EU is gearing up to mount an unprecedented campaign for the hearts and minds of voters.

Speaking in Athens, José Manuel Barroso, the commission president, signalled that the EU would use the centenary of World War One to warn that Euroscepticism, far-Right and populist anti-European parties could bring war back to Europe.

"No other political construction to date has proven to be a better way of organising life to lessen the barbarity in this world," he said.

"It is especially important to recall this as we will commemorate this year the start of the First World War. We must never take peace, democracy or freedom for granted. It is also especially important to remind this as in May the peoples of Europe will be called to participate in European elections."

The attempt by Mr Barroso and Mrs Reding to raise the stakes in the EU elections have not been well received by all governments.

"Federalist hyperbole about a United States is the opposite of helpful to the majority of countries who want a reformed EU to work better," said a European diplomat.
=================================

The EU will always be divided because of the different languages and an EU turnaround every 6 months of the leadership, which dictates for all Countries, unlike the USA.

[Panda]

http://www.telegraph.co.uk/finance/financialcrisis/10561677/Mario-Draghi-denies-eurozone-is-sinking-into-Japanese-deflation.html

[fuzeta]

So much wheeling and dealing to get everything as they want it to save that stupid currency. No thoughts whatsoever for the people that live in the Eurozone, they have to take whatever is thrown at them. Their standards of living dropping and hardships they are having mean nothing to the powers that be,

[Panda]

So much wheeling and dealing to get everything as they want it to save that stupid currency.  No thoughts whatsoever for the people that live in the Eurozone, they have to take whatever is thrown at them.  Their standards of living dropping and hardships they are having mean nothing to the powers that be,

I think the way Europe is heading, Britain won't be the only Country to want out. What started out as a "Common Market" has morphed into a Dictatorship and it was a pipedream to expect the EURO to be a common currency with so many Countries with different languages, cultures , economies,

[fuzeta]

I think if they had asked passers by in the street if they thought a currency for all would work. They would have all said no. It does not take a lot of thinking about. Yet the powers that be decided in their wisdom it was a good idea and they know best!!

[Panda]

I think if they had asked passers by in the street if they thought a currency for all would work. They would have all said no.  It does not take a lot of thinking about.  Yet the  powers that be decided in their wisdom it was a good idea and they know best!!

 
I think all the Countries which have received bail-outs will be the first to leave, the EU are accepting newcomers , but none of them has a strong economy , The German Bundesbank has said it will not lend any more money, Merkel has had to accept a coalition and we both know how well that has worked between the Tories and LibDems....we shall see. 

Forgot, Hollande is having a fling with quite a Beauty , while the French have a laissez faire approach to infidelity, he is not doing a very good job a as
President .

[fuzeta]

Yes I saw that Panda. he is making a bit of a cock up of everything!  

[Panda]

Yes I saw that Panda. he is making a bit of a cock up of everything!  

How can a six month stint for every EU Country's Leaders work,Fuzeta??? The EU are not going to admit it but the economy , like most Countries is not looking good......we shall see.

[Panda]

http://www.telegraph.co.uk/news/politics/ed-miliband/10579368/Ed-Miliband-promises-reckoning-with-big-banks.html

The arrogance of the Banks, thinking they can still pay the Bonuses is really unbelievable , yet the Government which owns 82% of RBS does nothing. The shareholders too have been very quiet , no AGMs where they could make their demands.

[Badboy]

Greece is having cases of malaria etc

[Panda]

I can't post the link because it is on page 2 of the Daily Express today.

Briefly, the EU wants another £2.4 billion from the U.K to help plug a hole in it's colossal budget,which is the equivalent of £200 for every household in the U.K..The EU wants £20 billion in total from various Countries to make up for overspending on projects in poorer member Countries like Greece, Bulgaria and Rumania.


I don't think the EU has ever been able to balance it's Books which is why the Auditors don't sign off the Accounts.

To top it all, George Osborne wants new legislation on this historic in out poll to be included in the Queen's speech programme of forthcoming measures.
Nick Clegg rejected it together with David Laws, the Lib Dems schools Minister.

This is all Cameron's fault for putting off the vote until after the Election, IF HE WINS.!!!! I think he will be replaced before the next Election, he has been a disaster.

[Panda]

http://www.telegraph.co.uk/finance/economics/10681349/Mario-Draghi-hints-at-ECBs-all-or-nothing-policy.html


Draghi took big risks in lending to EU Countries in need , their economy is weak, will they be able to pay?

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