As I posted this morning the latest EU summit has wrapped up with 25 of the 27 nations signing up to a somewhat watered down version of the European economic suicide pact.
The treaty is yet to be ratified by member states, but it is already clear that the UK and the Czech Republic aren’t on-board. It will be interesting to watch over the next few months how many of the other 25 can manage to ratify the document. The Irish are already making noises that they may want to have a referendum on the matter, and the statements from Sarkozy after the summit suggest that France’s position is already in doubt:
France is unlikely to ratify the European Union treaty on fiscal discipline before the country holds two rounds of presidential elections in April and May, President Nicolas Sarkozy said.
“The treaty will be agreed in March, and as you know parliament doesn’t meet during the election campaign, so I think it would be unreasonable to expect the treaty to be approved before the elections,” he said at a press conference in Brussels and an EU summit.
Socialist challenger Francois Hollande, who leads Sarkozy in the polls, has said he’d renegotiate the treaty.
Obviously, like any statement from a politician, we will have to see if that is actually true if Mr Hollande is successful in his campaign.
Either way, David Cameron’s speech after the summit made it fairly clear that there were still many hurdles ahead for the treaty even if the UK wasn’t going to directly stand in its way.
The summit also approved the early introduction of the 500-billion-euro ($656 billion) European Stability Mechanism (ESM). The mechanism is now set for activation on July 1, one year before its original planned debut. It will run in parallel with the EFSF but the combined limit is still technically only 500-billion euro. That does initially sound like quite a bit of money, but once you understand the mechanisms it really is quite under-whelming. Please read this post for more on this topic.
The other thing to come out of the summit was the oddly named statement entitled “Towards growth-friendly consolidation and job-friendly growth” which contains some wonderful ideas but as far as I can tell nothing of much substance:
The EU will support those efforts, notably by:
- as a first step working with those Member States which have the highest youthunemployment levels to re-direct available EU funds towards support for young peopleto get into work or training;
- enhancing the mobility of students by substantially increasing the number of placementsin enterprises under the Leonardo da Vinci programme;
- using the ESF to support the setting up apprenticeship-type schemes and support schemes for young business starters and social entrepreneurs;
- enhancing cross-border labour mobility, through the revision of EU rules on the mutual recognition of professional qualifications, including the European professional card andthe European Skills Passport, the further strengthening of EURES, and progress on theacquisition and preservation of supplementary pension rights for migrating workers.
I would like to be supportive of this type of document but after two long years of analysing Europe’s failed economic policies it is hard to take this seriously. Everyone knows the best way to help young people into employment is to give them a job. In order to create jobs you need demand for goods and services, but I see nothing at all in the new EU treaty that will create either private sector demand or increased industrial capacity to deliver such things, and all we have seen out of Europe for the last 18 months is policies that do the exact opposite.
I could feel a little more confident in this document if I saw it was part of a well-defined longer term strategy for Europe, but we know that this is not the case. What this document represents is yet another knee-jerk reaction to the failed crisis response from Europe.
More evidence of that failure appeared overnight:
The Spanish economy continues to struggle with the abysmal growth pace, surging unemployment, frail financial sector, and fiscal imbalances.
The economy ended 2011 with contraction as the GDP fell 0.3% and on the year recorded slim growth of 0.3% according to the figures from the National Statistics Institute that were in line with the estimates published earlier this month from the Bank of Spain.
We can surely see the struggling economy faltering again into recession and the Bank of Spain also printed a bleak outlook expecting the nation to contract 1.5% this year and joblessness to surge to 23.4% if the government is to meet its austerity goals.
And just so you understand how way off the mark the economic ideology in Europe is:
“We’re going to present a new macroeconomic framework, but the current one says that we’ll have GDP growth of 2.3 percent this year, these are the last macroeconomic projections in Spain, but it is evident that it won’t end up like this,” Rajoy told reporters after talks with European Commission President Jose Manuel Barroso
We also saw downgrades for French growth:
France has cut its economic growth forecast for 2012 to 0.5 percent from 1 percent, Prime Minister Francois Fillon said Monday. The revision was made to “take into account the deterioration of the economic situation,” Fillon said.
And obviously we can’t forget this:
As I have explained so many times previously, government austerity policy applied to a private sector that is already deflating leads to lowering of GDP. If a government cuts its spending while households are trying to cut their levels of consumption then the aggregate demand of the economy will fall and therefore national income will fall along with it. This falling income will not only counteract the desire of the private sector to save, but it will also reduce the income of the government sector meaning its aims will fail. In parallel this will reduce the demand for imports and, where possible, push the external sector into surplus. This is a positive outcome in the long run, but only if (and it is a BIG IF) there is no expectation that the nation will meet its existing debt obligations.
But this is exactly what is expected of the European periphery which is why austerity is failing and why I have stated numerous times that the plan in Europe is backwards.
What is also concerning about the statement from the EU summit is this point:
It is vital to take measures to prevent the present credit crunch severely limiting the ability of enterprises to grow and create jobs. The recent measures taken by the ECB as regards long-term lending to banks help very much in that respect. National supervisors and the EBA must ensure that bank recapitalisation does not lead to deleveraging which would negatively affect the financing of the economy. Supervisors should ensure a rigorous application by all banks of EU legislation restricting bonus payments.
Lovely words, but completely disconnected from what is actually happening within the Eurozone. Please read this, this and this for more.
So, as I said in the lead up to the previous summit, the only thing that matters is whether we see a credible plan that will transition the Europe you see today into the Europe as defined in the “fiscal compact”. I once again see no such thing, which means I can only conclude one thing from the outcome of this summit.
The ECB will continue to be very busy.
and then there’s this nice graphic:
http://demonocracy.info/
(note it’s slow – you might prefer this:
http://demonocracy.info/infographics/eu/debt_piigs/images/demonocracy.info-who_loaned_piigs_the_money-watermark-large.jpg
)
p
Thank you for the article, DE, and thank you, The Peak Oil Poet, for the amazing site with infographics/eu/debt. I always remember how my professor tried to make us visualize the public debt in his lecture almost 40 years ago, he described it like a rolling down the mountain snow ball ending as a disastrous avalanche. He was a very good professor…
Thanks for the update DE.
It looks like they intend to proceed slowly along their chosen path, unless (until!) they are interrupted by another mini-crisis. A mini-crisis originating from the markets, or as the Punk Economics clip predicts, from the people.
just spoke to somebody a few weeks ago
from a well known international bank
(a senior ‘TV’ economist)
-they are buying aussie bonds
- lets just say the ECB has been
printing for some time
deflationary spiral is not an option,
they will push the austerity as far as it can go, so the banks can get some of their money back while it is still worth
something…(trade into pms)before the populous goes completely apeshit, then print!
its a bit a of shandy really
- austerity, printing, deleveraging
can they muddle their way through?
wweellll, they can muddle.
“European economic suicide pact.”
really? is this like your LTRO “fizzer”
Again ??? Ok for the entertainment value
In answer to your primary question “Is European economic suicide pact like your LTRO ‘fizzer’”?
The answer is “No, it is far far worse”
In response to your secondary assertion, apart from my sub-editor’s over- excitable titling please point to the part of the article that you find so offensive.
http://www.macrobusiness.com.au/2011/12/ecb-bazooka-is-a-fizzer/
And… I am sure you haven’t forgotten our previous conversation in which I point out some of the failings of the LTRO
http://www.macrobusiness.com.au/2012/01/greece-poised-to-default/#comment-119484
Lol, fun!
You all know my position, still an optimist. I think they did alright.
I’ll sit back and watch GB and DE slug it out on this one. No energy left after a week of frustration with Australia’s woes.
My money is on DE. His analysis of Eurogeddon has so far (12months) been first class and on the money each and every time.
+1
eurogeddon! where do you guys come up with this stuff? let me guess, a story starring bruce willis and ben affleck where a spanish and italian default leads to a break up of the eurozone that plunges the global economy into depression and everyone is doomed? when are you guys going to realise YOU ARE IN THE FICTION SECTION?
meanwhile, in the real world, german unemployment drops to a 2 decade low and eurozone stocks continue to rally….
…you mean it “lives” because it changes tthe nature of the mix via centralised, endorsed transfer mechanisms??
Funny that…
if the suicide pact is worse than the fizzer i better buy some more stocks then.
the LTRO doesn have any failings though DE. it did exactly what is was designed to do…bring down bond yeilds and help recapitalise banks.
it wasnt meant to or expected to fix all the problems at once.
How exactly has it recapitalised banks?
GB, the LTRO cannot fix Greece’s balance of payments problems and it cannot create fiscal stability in the Euro-zone. It has helped stave off a credit collapse in Euro-banking, but this is really just applying a palliative. It does nothing to divert the rising tide of insolvency that is washing away the foundations of European economies.
“Pallative” –> can-kicking –> transfer mechanism.
Certain entities can still do very well in a sever downturn if they are the beneficiaries of systemic privilage, normally from Govt endorsed transfer mechanisms (“for the greater good”).
My 2c
Yessiree Bob!
I think it should pointed out that the Irish public are the ones calling for a referendum on fiscal integration (which will be defeated if it is called), but that the government is trying to weasel its way out of having to call a referendum because they know it will fail if called.
All while the Irish prime minister was in Davos trying to look the big man saying Ireland’s woes were the result of “mad borrowing” by the Irish public. Clearly the banks were totally innocent then.
And you think Wayne Swan is bad…
The hedge funds of course are just trying to make an honest dollar….basically they are threatening to detonate the Improvised Explosive Device otherwise known as the CDS market unless they are bought out at a profit: talk about gaining from the misery of others.
I watched LaGarde’s interview on Bloomberg last night. She seemed less than certain that everything is going to work out in favour of stability.
Briefly as you mentioned CDS’s have a listen to this link that was sent to me today. It’s old news IMO, but this guy is saying default of the top five US banks this week. I don’t believe a word of it, but like most on MB I don’t buy the ISDA’s view on sovereign credit events triggers.
http://www.youtube.com/watch?v=9802NwSSS6U
I posted this last night, but if you’ve not seen it, it’s worth a a look.
http://ftalphaville.ft.com/blog/2012/01/30/857331/from-preston-to-guernsey-via-geneva/
Can we quantify the value of the CDS “problem” briefly?
Being an OTC product and “governed” by the ISDA the situation is rather opaque.
Who is the real money / heavy hitter behind the ISDA?
I see a parliament of plutocrats.
The hedgies best watch out.
“The Irish are already making noises that they may want to have a referendum on the matter…”
Ah, the Irish – what a free, liberated group of people. Of course, there was a time when the Irish were as free as the Swiss. The Irish Free State Constitution provided that:
Article 14.
All citizens of the Irish Free State without distinction of sex, who have reached the age of twenty-one years and who comply with the provisions of the prevailing electoral laws, shall have the right to vote for members of Dáil Eireann, and to take part in the Referendum and Initiative.
Article 48.
The Oireachtas may provide for the initiation by the people of proposals for laws or constitutional amendments. Should the Oireachtas fail to make such provision within two years, it shall on the petition of not less than seventy five thousand voters on the register, of whom not more than fifteen thousand shall be voters in any one constituency, either make such provision or submit the question to the people for decision in accordance with the ordinary regulations governing the Referendum. Any legislation passed by the Oireachtas providing for such [laws] initiated by the people shall provide that such proposals may be initiated on a petition of fifty thousand voters on the register; that if the Oireachtas rejects a proposal so initiated it shall be submitted to the people for decision in accordance with the ordinary regulations governing the referendum: and that if the Oireachtas enacts a proposal so initiated such enactment shall be subject to the provisions respecting ordinary legislation or amendments of the Constitution as the case may be.
Perish the thought that the Irish, as a free democratic people, would abdicated their sovereignty to self-serving megalomaniacs in the EU.
But as 3d1k observed, direct democracy simply does not matter for economic performance…
You’re obsessing!
I am. And stalking. But I agree with you – there is absolutely, unquestionably no way giving the Stinking Masses a voice which serves as an ‘add on’ to existing decision making rules could possibly limit rent-seeking behavior and hare-brained “one size fits all” policies politicians’ dream up.
I’m curiously waiting for the day when one or more of the European leaders will dare to speak of the need to strengthen the European Union (EU), even if the structure of the European Monetary Union (EMU) falters.
EU youth unemployment if you haven’t seen it:
http://www.businessinsider.com/today-we-saw-this-chart-literally-make-peoples-jaws-drop-2012-1
I saw I shook me ‘ed
Greece: Bank customer’s debt forgiven
Sunday Jan 29, 2012
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_5_29/01/2012_424895
“In what could turn out to be a significant ruling for Greeks suffering from the economic crisis, a court in Hania, Crete, has become the first in the country to order that the majority of the debt owed to banks by someone still in full employment be wiped out.”
ZH Link to the same
http://www.zerohedge.com/news/landmark-case-greek-court-writes-employed-bank-customers-debt
A possible political stunt for the French
French Bank, Crédit Municipal de Paris, Cancels The Debts Of Its Poorest Customers
01/30/2012
http://www.huffingtonpost.com/2012/01/30/french-bank-credit-munici_n_1241986.html?ncid=edlinkusaolp00000003