Europe reaches its bogus goal

There is one thing you can say about Europe, they never waste a crisis, the side show soap opera spectacular continued last night.  It has been going on for so long now that the market seems to have set itself false goals and then managed to convince itself that they equate to something important when they get there. A resolution of the political issues in Greece and Italy, not that we are there yet, matters very little at this juncture. It has very little to do with the actual problems of the European economy and at this stage equate to little more than a shuffle of chairs on the Titanic.

If you are , however, wondering whether these moves will lead to a loss of sovereignty by both the Italian and Greek citizens then you need not go no further than this paragraph from an article from the Wall Street Journal posted today:

German Chancellor Angela Merkel thanked Mr. Papandreou on Monday “for his courage and decisiveness” in leading Greece throughout the financial crisis.

Ms. Merkel had expressed in a phone call her “respect for the decision” by Mr. Papandreou to step down, and said Greece’s new government must be ready to implement reforms decided in Brussels in late October.

Maybe the Italian and Greek people are happy to handover the steerage of their country to some unelected European bureaucrats, but I am sure they would want to vote on it first.

Overnight Berlusconi lost control of his parliament and after some deliberation seems to have decided to quit, but with strings attached:

Italian Prime Minister Silvio Berlusconi confirmed on Tuesday that he would stand down after a new budget law is approved in parliament.

“After the approval of this finance law, which has amendments for everything which Europe has asked of us and which the Eurogroup has requested, I will resign, to allow the head of state to open consultations,” he told his own Canale 5 television.

The comment, which confirmed an earlier statement from President Giorgio Napolitano, came after his center-right coalition failed to secure a majority in a crucial vote in the lower house, securing only 308 votes in the 630-seat chamber.

“This parliament today is paralysed, as far as the lower house is concerned,” he said.

“In the Senate, the center-right still has a good majority. However with the defection of seven members of the ruling majority today, the government does not have the majority we thought we had and so we have to take account of this situation realistically,”

He said Italy was in a “difficult position” with regard to financial markets and had to demonstrate that it was capable of serious reforms. He added that the only realistic option as far as he could see was new elections.

Berlusconi will now step down, but only after the parliament has implemented budgetary changes to satisfy the rest of Europe. Although he is calling for new elections it is not his decision. Once he steps down the Italian President has the ability to re-form parliament under a new leader if it can be negotiated. It is yet to be seen, however, whether a junior coalition party, the Northern League, would come on board with such a plan given they have been calling for fresh elections in the event that Berlusconi resigns. If that turns out to be the case then the parliament may only be able to go as far a Greece and form a unity government to steer the country into new elections. There is obviously a lot more to come on this, but it is likely the President will want to avoid the instability of elections if he can.

I am also a little skeptical that Berlusconi won’t try to lob a pertard on his way out, he certainly has form. Which gestures at an irony in this resolution for Italy. At least Berlusconi’s Machiavellian dealings with Europe held the austerity juggernaut at bay. Any smoothing of political resistance to further fiscal cuts can only worsen the consequences for Italy’s already crashing actual economy.

The Greece situation has been dragging on but appears to be coming to a resolution:

Greece’s Socialist Prime Minister George Papandreou asked his ministers to prepare their resignation letters Tuesday and was expected to name former European Central Bank Vice President Lucas Papademos as prime minister of an interim government, barring any hitches.

The announcement follows days of talks between the Socialist government and the opposition New Democracy party over a new leader to head the government.

Mr. Papademos was seen as the front-runner, but his candidacy appeared to run into hurdles Monday after he placed conditions under which he would serve. “Mr. Papandreou is meeting with Mr. Papademos and many of Mr. Papademos’s requirements have been met,” a senior official said. “Unless there is a last-minute breakdown, I expect him to be the interim prime minister.”

Government spokesman Elias Mossialos said he expected the ruling Socialists and their conservative rival, New Democracy, to make an announcement soon, adding that talks on the new government were still under way. He also said Mr. Papandreou asked his cabinet ministers to be ready to make way for the new government.

In far more important news, Eurozone finance ministers have announced that they plan to finish technical work on increasing the EFSF bailout fund to around 1 trillion euros by the end of November to prepare it for deployment in December. It is still to be verified which actual ‘leverage’ mechanism the facility is going to use. Obviously the big concern about the fund is whether anyone will want to actually ‘invest’ in it. If this weeks bond offer is anything to go by then the answer is NO:

Top officials of the euro zone’s bailout fund played down the subdued demand it drew Monday for a 10-year bond offer, and one told a newspaper the fund was working on plans to tap shorter-term debt markets.

The European Financial Stability Facility’s Financial Officer, Christophe Frankel, told Boersen-Zeitung the transaction, in which subscriptions only just covered the 3 billion euros of debt on offer, reflected an unstable market environment rather than funding risks.

“In addition investors are uncertain with a view to the (future role of the) EFSF. For this reason, orders were weaker than usual,” he said, adding the transaction — which also paid higher yields than previous EFSF bond sales — was “solid.”

In Brussels late Monday, EFSF head Klaus Regling also cited the “very difficult” market climate and uncertainty about the fund’s future profile as factors in the sale.

You can read more on the actual sale here, but struggling to raise 3 billion euros and at the equivalent of 177bp over the Bund isn’t looking convincing.

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Comments

  1. I lived in Europe and I think the steps taken here are bloody fantastic. Since when did the Western countries adopt direct democracy instead of the representative democracy we’ve employed for decades.

    The steps taken here are first steps to the solution of the underlying problem.

    United States of Europe… I would love such a thing. You guys didn’t loose your freedom after Federation did you? If anything, Federation may actually strengthen democracy, so much is already taken care of at European levels that it is about time that the democratic institutions caught up.

    Min you, that was the intention of the European Constitution but populism and fearmongering prevented that.

    This week has seen the creation of the first coalition in ages in a memberstate where the political discourse is usually adverse to the extreme (like Oz, basically). That’s a step I’d say.

    This crisis also instilled some awareness in the southern European memberstates about the need to have your finances in order. That’s another step.

    MB is constantly attacking the push for austerity but I think it is the only long term strategy that’s going to amount to something. Sure, it would be fantastic if the memberstates can grow their way out of this mess but they won’t. Even if they could it would still leave behind a broken system ready to crash another day.

    This crisis is exactly what Europe needs in order to take a huge hurdle that has been there since after the Maastricht Treaty.

    I need to stop reading this blog. The constant negativity and bias (yes, bias) is getting old.

    • Well, yes but.

      “Southern Member States” are not going to suddenly starting coming over all Germanic are they? Not done it for the past 1000 years, think they’ll start now at the barrel of a gun?

      Its absolutely immoral that the EU and the financial elite should attempt to ride roughshod over national sovereignty. The austerity you crave will condemn several of these countries to 10-20 years of depression.

      That said, I agree that their finances are not sustainable, though very few Western countries could be said to have sustainable finances. But they should be able to take these decisions themselves not have them taken for them by unelected officials and financial cabals.

      • Last time I checked their governments were the ones making the decision. Germany and other nations are simply pointing out the choices available.

        a) sustainable finances.
        b) out you go.

        I think the decision made by the governments of the southern members states were quite clear and entirely their own. 70% of the Greek public wants to stay in the EU and retain the Euro. I absolutely do not subscribe to the image being portrait on MB daily.

        Culture can change, the difference in work ethics and mentality in Spain after they joined the Union (20 year timespan) is quite profound.

        • Well I dont only read MB, and the coverage in most UK papers (left and right) is more “biased” that you will find here. UK right is anti-Europe, but left is not.

          Its immensely arrogant and short-sighted of Germany and others to act like they havent benefited from the EU policies which have greatly contributed to the situation in PIIGS countries. They have enjoyed a far weaker currency than they otherwise would have enabling them to bask in a long export-led boom. The bill for this is now due.

          True that Greek people want to remain in the EU, but on what (and whose) terms?

          • I think the fact that Germany and other nations have already spent a considerable amount of money is because they know they have benefited immensely. I’m not so naive to think the actions are based on a romantic idea of a united Europe.

            Everything which is happening is based on the self-interest of member states. That is exactly the genius behind the EU. When the ECSC first started back in 1951 its main intention was to make war on the European continent impossible by linking nations’ self-interest with the interest of other nations. It has been a incredible success and apparently it still works that way.

            I don’t agree with this being “a bill that is now due”. Germany’s stance is a reaction to blatant and outrageous mismanagement. Greece is not in this position because they were taken advantage off.
            The Greek government have employed many tricks to keep things going for as long as they have, putting the other member nations in a tough spot. (for example: selling 25 years of State Lottery profits and putting that on the balance sheet for one year, all in one go).

            I think the other member states are entitled to be cautious in their dealings with Greece and it’s only natural to be asking things in return for the amount of money (and risk to their own economies) needed to get things going again.

            I do agree that the discourse and generalisation has gone overboard (hence my use of “Southern Member States” instead of the disrespectful PIIGS).

            Regarding UK, just an interesting snippet: It was Churchill who called on France to lead Germany into a United States of Europe all the way back in 1946. Interesting fact that, considering what is currently going on and the British position on it all. 🙂

            The UK media is just as appealing as the Australian media imho.

    • AnonNL thanks for your comments. I can’t say I agree with your perception of bias. I am not even sure exactly what I am bias of ? Maybe you can clear that up for me.

      What I am doing is pointing out to our readership the logical errors in policy being put forward by the EU area financial ministers and co. and the likely outcome from that policy.

      I am sorry if my opinion offends you but I am simply pointing out the financial facts as I see them in order to educate our readership about the financial risks presented by Europe. They are very large and very real, the last 18 months is surely proof enough of that point.

      Simply forcing euro bound nations with the macroeconomic characteristics of Greece, Italy, Spain , Portugal and France to stop spending without making other adjustments to macroeconomic policy will simply force up levels of unemployment, kill production and therefore make said countries unable to service their debts and therefore their external obligations. No matter what you think about the politics of Europe makes no difference, this is is failed policy for everyone involved, creditors, debtors and citizens.

      Your comment:

      >MB is constantly attacking the push for austerity but I think it is the only long term strategy that’s going to amount to something.

      This is not true. I don’t constantly attack austerity. I attack austerity in the abscense of counterbalancing policy from the surplus nations to re-balance competitiveness, because the single currency does not provide that counterbalance. That is the only policy that can work in the long term, austerity by itself is destructive for the reasons I mentioned above.

  2. What I don’t understand is ignoring the macroeconomic data. Without this Greek, Italian and EFSF crisis, the headlines would be pointed to the sharp slowdown across Europe, likely leading to a recession.

    Almost every indicator is coming in below expectations recently. Yet in the midst of this likely recession they want more austerity and increased leverage. I’m not saying they shouldn’t, they have to as the alternative stimulus spending would shut many nations out of the bond markets, but they are just trading a crisis now for a crisis later. Either way, how will they contain the crisis if they slip into a recession? There won’t be any stimulus except money-printing.

    I hope that anyone who buys their EFSF bonds doesn’t whinge when they suffer a loss. A 10-year time frame is more than long enough for the can kicking to hit a wall. Unfortunately, it seems that Europe is managing to spread the risk to the entire world with many nations likely to support Europe. We’re all going to end up as suckers, and Gillard is doubling up on the Europe bet.

    • Gillard shoud do what Putin is doing to the IMF. Make Lagarde negotiate and give up something meaningful. She just got some air time and a G20 meeting in 2014. Big deal! Seriously she should stop giving up, understand the power she has and force deals with the likes of mining, greens, clubs, industry, unions, etc.

    • Last news I heard, Prime Minister Gillard was explicitly stating Australia would not be funding any bailout of Europe.
      Did I hear incorrectly?

  3. The markets are sick of Greece, etc. When even mainstream media is obsessed by it, you know the markets have well and truly priced it in.

    Any day now I expect my mum will ask me, “what do you think about all that bad stuff going on in Greece?” …

      • Right. She knows domestic terminal and international terminal, though. As long as her kids find their way back home safely through one of those, she’s happy.

  4. As I commented last week that it was like watching 9/11 in slow motion; The tacit admission by Merkozy that Greece might be forced out of the union if they attempt some real democracy (by asking the people to vote on their future *gasp*) has broken the previously inviolable rule that no-one leaves the Euro, thus creating widespread market unrest and panic that a euro default and exit is now a realistically considered option. So that’s one of the founding pillars of EU unity crippled beyond repair.

    It appears we are now up to the point where the first plane hits.

  5. Hmm yep, borrow short and lend long. That works!

    They really are rolling out every conceivable parallel with the credit crunch: borrowed credit ratings, leverage, off balance sheet SPVs, asset-liability mismatch…

  6. Not one statesman prepared to stand up and say the things that really need to happen to the world’s western economies. That is why we are screwed.

  7. If there is one constant in post-feudal European politics, it is the tension between nationalist inclinations and pan-Europa aspirations. The same tension is present in the current situation, where local affiliations, institutions and habits are in uneasy cohabitation with the products EU treaties and its artificial quasi-state structures.

    The current EU monetary institutions are an attempt to graft pan-European mechanisms onto the vestiges of national institutions. This is inherently incomplete and unstable, but can only be taken further by popular consent.

    On past performances – to venture an opinion – you would have to think local/national affiliations will win. As we have seen many times, whenever Europeans have been asked to approve deeper institutional and political integration, they have refused. The failure of the Lisbon Treaty, in far more favourable circumstances than now exist, should persuade us of that.

    At the end of the day, it is very difficult to imagine that German, Dutch, Finnish, Austrian or Slovakian tax-payers will agree to any system in which their incomes will be levied to support the social welfare systems and retirement incomes of Italians, Belgians or Spaniards. So fiscal union cannot get off the ground. And without this, there can be no stable democratic federation in Europe.

    Were they asked, Europeans would be most unlikely to cede their local identities, freedoms and affections to a construct in Brussels or Strasbourg that may turn out to be not much more than a client of Frankfurt, Amsterdam and Berlin.

    So the European system will continue to generate crisis. That is to say, since the status quo is inherently unsustainable, it must either break down or be changed in some way. Since further integration is not achievable, it follows there will be a partial dis-assembly of the European order.

    This will provoke great financial losses, but these are unavoidable in any case and will only worsen if reform is postponed (as it has been since 2008). In the end, the fear of ever-greater losses will impel EU-reform and the restoration of economic and monetary sovereignty to the lesser Euro states.

  8. “AnonNL

    Last time I checked their governments were the ones making the decision. Germany and other nations are simply pointing out the choices available.

    a) sustainable finances.
    b) out you go.

    Culture can change, the difference in work ethics and mentality in Spain after they joined the Union (20 year time span) is quite profound.”

    A couple of things……regardless of cultural change, Spain has been running net external income deficits all along.

    But beyond this, simple arithmetic requires that for every EU 1.00 that accumulates as a surplus in Germany, EU 1.00 accumulates as a deficit somewhere else. So this is not about morality, democracy or culture. It is about policy.

    The Germans have ALWAYS run their economy tight, which means they depress domestic demand and force their firms to look outside Germany for sales. As a result, until recently surpassed by China, Germany was for decades the largest exporter in the global system. That is to say, German prosperity has always relied on the willingness of other economies to import and to run net external income deficits.

    Rather than remarking on how incredibly wise and prudent they are, the Germans should recognize they have been the beneficiaries of demand generated by others.

    To the extent that Italian or Greek finances are unsustainable (and they are), German finances are also unsustainable (and they are). The dynamics of the European system generate recurring imbalances. To reiterate, since not all economies can be in surplus with each other at the same time, this is not a matter of “culture” but of a mathematical necessity. By way of evidence, consider Italy, which managed to run a modest primary income surplus for decades prior to the adoption of the Euro.

    Having said this, it is precisely because the EU system has benefited the German economy so much that they want to ensure it survives. The trouble is, the system is broken. It has now reached the point where it is imploding internally. There is capital flight out of the deficit economies into surplus economies and out of the Euro zone all together. The banking sector is shrinking its assets and repatriating capital from the European periphery and from sovereign debt markets.

    At the same time, the debt dynamics of the debtor-states mean they can neither shrink their way nor grow their way to fiscal stability. This means financial distress is now intensifying and cannot be relieved by any orthodox means.

    This is the result of German, Dutch and Austrian “success”. This Saxon canard should be rejected by all. The fruits of such success is pan-continental bankruptcy.

    • So Australia should start bailing out China (for the sake of argument we assume that would be possible) when the Chinese economy hits the wall simply because Australia has benefited from China’s demand for coal and ore?

      Germany didn’t force their product onto anyone. I’d like to think people are responsible for their own choices.

      Damn, I just realised I’m a Dutchman sticking up for Germany. Best argument the EU works imo. 😉

  9. AnonNL, The EU monetary system creates winners and losers. It is rigged. Italy is on the cusp of insolvency because of this system. France, for 700 hundred years the foremost economy of Western Europe, will very soon lose its AAA credit rating and be tossed into an economic vortex because of the Euro monetary system.

    The inevitable outcome of the Euro system is crisis. This is not an accident or a matter of “choices”. It is unavoidable. The imposition of “austerity” in the deficit economies will only produce fiscal stability if demand is so compressed that they achieve net external surplus. That is, they will become so intensely contracted that they will reduce their imports faster than their exports. If this is successful (which in any case it cannot be) the surplus economies will lose their export markets and see their surplus income evaporate, while also being thrown into contraction.

    This is obviously a policy of self-imposed hardship all round. Aside from being almost impossible to see through to completion – because it will bankrupt everyone, including the surplus economies – such a policy is intrinsically unnecessary.

    This system is not built to last. It is built to fail. The Russians tried the Soviet system. Other Europeans tried the Euro. Neither system is durable and they will end the same way – in dissolution.

  10. DE, good post.

    briefly, excellent analysis of the Euro’s weaknesses and inevitable failure.