Tag Archives: European Union

Maybe Germany needs to be kicked out of the Eurozone

From Foreign Policy

Last year, Germany racked up a record trade surplus of 217 billion euros ($246 billion), second only to China in global export dominance. To some, this made Germany a bright spot in an otherwise anemic eurozone economy — a “growth driver,” as the German finance minister, Wolfgang Schäuble, puts it. In fact, Germany’s chronic trade surpluses lie at the heart of Europe’s problems; far from boosting the global economy, they are dragging it down. The best way to end this perverse situation is for Germany to leave the eurozone.

Germans usually respond to such charges with a kind of hurt confusion. We run trade surpluses, they patiently explain, because we are simply much more competitive than most of our trading partners. Can you blame us, they ask, if the world prefers to buy superior German goods (and has nothing we want in return)? So goes the argument: The rest of the world just needs to up its game, get its house in order, and become a bit more like Germany. In the meantime, don’t hate us ‘cuz we’re beautiful….

Contrary to popular mythology, however, there’s absolutely no reason why being “competitive” should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out that the optimal basis for trade is comparative, not absolute, advantage. In other words, even if a country is better at everything, it should export what it is best at and import what it is less better at. Having an across-the-board advantage does not imply that it makes good economic sense to produce everything yourself, much less to sell more than you want in return. Or, to put it a bit differently, there’s no inherent reason why earning more can’t mean spending more, on consuming both public and private goods, as well as investing in future productive capacity.

Trade surpluses take place when a country chooses to spend less than it produces — when it has excess savings, beyond its domestic need for credit. It lends that excess savings abroad, financing another country’s ability to spend more than it produces and, by running a trade deficit, purchase the lender’s excess production. It’s true that a highly productive country might have the wherewithal to conjure up excess savings, while a less productive country might be inclined to borrow rather than scrape up the savings it needs. But fundamentally, trade imbalances arise not from competitive advantage but from choices about how much to save and where that savings should be deployed — at home or abroad.

Does it ever make sense to run trade imbalances? Sure it does. In the 19th century, Britain’s Industrial Revolution enabled it to reap vast earnings from expanded output, some of which it invested in the United States. The money lent to a rapidly growing American economy generated higher returns than it would have back home, while creating a market for British-made goods. The potential productivity gains made it a win-win: It made sense for the Americans to borrow and for the British to lend. But the case also highlights something that’s easy to forget: Running a trade surplus means financing someone else’s trade deficit.

The eurozone crisis is often called a debt crisis. But, in fact, Europe as a whole did not have an external debt problem, but an internal one: German surpluses and mounting debt in Europe’s periphery were two sides of the same coin. Germans saved (a lot), and the single currency induced them — rather than save less or invest it at home — to lend it to their eurozone trading partners, which used the money to buy German goods. By 2007, Germany’s trade surplus had reached 195 billion euros, three-fifths of which came from inside the eurozone. Berlin might call this “thrift,” but it’s hard to argue that Germany’s excess savings, which its banks often struggled to put to use, were well invested. Instead, they gave Germans the illusion of prosperity, trading real work (reflected in GDP) for paper IOUs that might never be repaid.

The solution? 

So what should be done? The best solution — and the least likely to be adopted — is for Germany to leave the euro and let a reintroduced Deutsche mark appreciate.

It will never happen but it is a solution that makes sense.

Is Putin winning the confrontation with NATO?

The Guardian thinks he is

It’s different for dictators or authoritarian regimes. Flick a switch, pull a lever, and things happen, often instantly. Which is one reason why the Putin-versus-Europe contest in Ukraine is so one-sided; why one side acts and the other struggles to react; why one side is consistently ahead of the curve, the other behind it – in the short-term, at least.

Six months after the Kremlin stunned Europe with its land grab in Ukraine, a Nato summit in Wales unveiled its ideas for shoring up security in eastern Europe. For more than two decades, the alliance had been beset by self-doubt. Having won the cold war, what was the point any more?

Putin gave the military planners at Mons and the armies of bureaucrats in Brussels a new lease of life. Nato’s core purpose – facing down and containing Russia – was newly legitimised.

The summit decided to put a spearhead force at brigade strength, more than 5,000 men, into Poland and the Baltics at short notice: small units of special forces within hours, bigger reinforcements within days, at the first hint of trouble.

That was six months ago. But since the September summit, the plan has atrophied, bogged down in endless circular discussions of who does what, when and where. Who pays for it? Where is the kit coming from? Will the Americans step up to relieve the Europeans? Who will be in command?

First of all, NATO did not win the cold war, Ronald Reagan and Margaret Thatcher did for the exact reasons mentioned.  It won’t win this conflict unless the United States has a stronger foreign policy and from what we have seen from Barack Obama, it will have to come from the next President.

The Return of the Euro-Crisis

A coalition of radical leftist parties seem poised to take power in Greece. Could the troubled country really leave the euro zone?

SYRIZA has promised to cancel the austerity measures Greece adopted as part of the bailout package and renegotiate its debt obligations. This could trigger a confrontation with Athens’ lenders in Europe and the IMF, potentially resulting in a Greek exit (or “Grexit”) from the eurozone. Prime Minister Samaras is playing up this risk. “We shed blood to take the word ‘Grexit’ away from the mouths of foreigners, and SYRIZA is bringing this word back to their mouths,” he said in a speech late last year.

It seems Samaras is getting help in this campaign from Berlin. By 2012, Merkel had decided Greece must be kept in the eurozone to mitigate the risk of a “contagion” effect that could hasten the departure of other members and threaten the common European currency. This position implied Greece had some leverage, because its exit would hurt Germany and other eurozone members, as well. Now, according to the German news magazine Der Spiegel, Merkel appears willing to accept a Greek exit, and her government is preparing for that possibility. Officially, of course, Berlin’s policy hasn’t changed: It wants to keep the eurozone intact. But it’s hard to read the unnamed “German officials” who spoke to Der Spiegel and not conclude that Germany wanted to send a message to SYRIZA that Berlin will call its bluff if Athens demands onerous concessions or scuttles austerity.

Tsipras publicly scoffs at the possibility that Greece will be forced to leave the eurozone. “We are through with the possibility of a Grexit, and there is only a Samaras-exit,” he has said—a nifty bit of sloganeering that has failed to soothe the nerves of Greeks who worry a SYRIZA victory will result in tumult between Greece and its creditors. Tsipras has tried to lessen those fears. The closer he gets to power, the softer his rhetoric has become. Only six months ago, says Economides, it looked like a SYRIZA victory would result in a Grexit. “Now they’ve talked their way out of that corner, and they’re leaving it open that they’ll do their utmost to stay in the eurozone,” he says.

Canadian rhetoric makes no difference

The tough talk that has been coming out of Ottawa towards Moscow; it makes no difference at all.

The Conservative government’s tough rhetoric over Russia’s actions in Ukraine may play well to some voters domestically, but analysts doubt it will have any impact on curtailing Moscow’s policies in the region.

“I think the only people Putin’s going to pay any attention to, if he pays any attention at all, are going to be the United States and the European Union, above all Germany,” said Randall Hansen, director of the University of Toronto’s Centre for European, Russian and Eurasian Studies.

“The United States, because it’s the global super power, and Germany because it’s a major importer of Russian gas, which on the one hand gives Putin leverage, and on the other hand, he’s also dependent on Germany.

“Canada doesn’t matter in this in the slightest. We can rant and yell and threaten. It will make no difference.”

He’s not alone

Piotr Dutkiewicz, a political science professor at Carleton and the former director of the Institute of European, Russian and Eurasian Studies, said it’s relatively easy for the government to criticize because Canada doesn’t have extensive economic relations with Russia and there are no large Russian investments in Canada.

However, he notes that Canadian companies do have $3-billion worth of investment in Russia and the government should take that into consideration when speaking out.

“I think we should take a more balanced, I’m not saying uncritical, I’m saying more balanced position, taking into the equation Canadian interests in Russia,” Dutkiewicz said.

“If the Canadian government decides to be critical it should be critical, but at the same time we should watch what others are doing and how, by our criticisms, we’re really helping Ukraine.”

Dutkiewicz said that Canada is losing its reputation as a negotiator and instead is engaging in rhetoric stronger than that of the U.S., Germany or France.

“With their very heated rhetoric and no action we’re becoming a paper tiger in this process,” he said. “I really don’t like Canada to be seen as a paper tiger who is roaring without having any tools to implement its outrage.”

But the experts agreed that the government’s words have little to do with foreign policy.

“Harper and Baird, I think, are both principled democrats and have a principled commitment to liberal democracies such as Israel and a principled opposition to autocratic governments,” Hansen said. “But this is really about domestic politics. So they’re making a play to the Ukrainian community in Canada.

The Germans are losing patience

From the Economist

The Germans are not yet openly angry. That would be out of character in a people who have, since the second world war, been eager to atone for the past and be good European partners. In one recent poll, 34% of Germans even said they empathised with the wrath of the southern Europeans. But the mood is shifting. The southerners may see Germany as forcing excessive austerity on them and showing insufficient solidarity, but Germans have a different view.

First, they feel they have already shown solidarity. Almost a quarter of a century after the fall of the Berlin Wall they still pay a solidarity tax to eastern Germany. Some also transfer taxes to weaker German states such as Bremen. Many conclude that, once in place, solidarity ceases being voluntary and instead becomes a yoke. They also bear much of the risk of euro bail-outs, even though a study released this week by the European Central Bank showed that the average German household has less wealth than the average Spanish, Italian and Cypriot one (though this is partly because German households tend to contain fewer adults and are more likely to be in rented accommodation).

Second, they argue that Germany recognised a decade ago that it was not competitive and undertook painful reforms that are now paying off. The crisis countries should follow suit. And third, Germans think the euro crisis was largely caused by rule-breaking (even by Germany itself), which must not be repeated. As one diplomat puts it, “solidarity is important, but it should follow rules. It is not just ad hoc giving.”

The Sick Man of Europe is Europe

From Foreign Policy

Beyond the Arab Awakening, the financial crisis has also undermined Europe’s embryonic attempt to develop so-called "strategic partnerships" with the world’s great powers. Realist powers such as China and Russia have long attempted to play Europeans off against each other. But in the last few years, member states had gradually begun to realize that they have a European interest in agreeing to a common position before negotiating with the Chinese or Russians. In particular, 2011 was supposed to be the year in which the European Union implemented a new approach to China based on unity and reciprocity. Rather than maintaining separate approaches to Beijing, member states were supposed to present a united front in order to increase their leverage. For example, they were aiming at opening Chinese public procurement markets (for projects like road- and dam-building) that are currently closed, while Chinese firms can bid for European markets.

Instead, Europe’s crisis turned into China’s opportunity. Cash-strapped member states sought to secure investment rather than open Chinese markets and, more importantly, independently petitioned Beijing to buy their sovereign bonds. As a result, while the European Commission made valuable efforts to open up China’s public procurement markets and ensure access to rare-earth minerals, Brussels often fought alone on these issues while member states individually sweet-talked Beijing and prioritized their bilateral ties. Europeans did have some collective successes with China — on Libya and climate change, for example — but these pale in comparison with the shift in the balance of power that took place in 2011. In late October, in between a European Council meeting and the G-20 summit he was about to host, French President Nicolas Sarkozy called his Chinese counterpart, Hu Jintao, to see whether China would contribute to an enlarged eurozone bailout fund (the answer was no). It is hard to rebalance a relationship or insist on a revaluation of the yuan when you come begging. It’s no surprise, then, that an EU-China summit and a high-level economic dialogue were canceled in November.

A new world order that doesn’t include Europe seems not only possible but probable.  Especially when Europe as a concept doesn’t seem to exist as it once did.

The euro crisis thus seems to have encouraged the reassertion of national reflexes among EU countries, including the ones that matter most. The Libya operation will be remembered as a success for Europeans, but as a disaster for the European Union, which cannot exist when major powers are not aligned. A ray of hope might be coming from some smaller member states that are increasingly punching above their weight and showing leadership on specific issues. This is particularly the case with Poland and Sweden — two countries, not coincidentally, outside the eurozone that have not been badly affected by the economic crisis. Their relative success and the mediocre performance of the European Union as a whole in 2011 suggest that if Europe still hopes to retain its influence in the world in the future, it must first solve the euro crisis as a prerequisite for pursuing a coherent and effective foreign policy. Otherwise, the United States might one day confront the specter of a world without Europe — a world where its most reliable international ally is weakened, where the evolution toward competitive multipolarity is accelerated, and where the values of integration and multilateral cooperation have lost their champion.

The real cause of Spain and Italy’s debt problem

Paul Krugman in the New York Times.

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Which brings us back to the impeccable E.C.B.

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

When do you stop spending?

Jim Flaherty said today that he would spend to defend Canada from another recession

Under questioning from opposition MPs, Flaherty said for the first time that the Conservative government would move in with another round of stimulus spending if the world economy suffers a double-dip recession.

“We would obviously do what is needed” if there was a “dramatic deterioration” in the economies of the United States and Europe, he told the committee.

But for now, Flaherty said, the government is not changing its budget plan despite the turmoil on financial markets and debt crises in the United States and Europe. The plan calls for spending cuts of $4 billion a year to eliminate the annual federal budget deficit — now $32-billion annually — in a few years.

Pressed by opposition MPs about how Ottawa would react to a renewed global slowdown, Flaherty said he would change course and develop a pro-growth spending plan as the Conservatives did during the recent recession.

Here is my problem with this problem.  Do any of us think that the United States/Europe is going to fix their problems in the next recession.  I am not saying Flaherty is wrong but does this look like it’s going away.  Jeff Rubin points out that with global demand the way it is, as we come out of a recession, prices will increase and drive the economy back into it which means, how many of these recessions will we be able to afford to ride out until we are looking at Mulroney-esqe debt loads and Devine type deficits again.

We are looking at a default or massive bailouts for Greece, Italy, Spain, Portugal, and the too big to fail banks in Germany.  There is a dysfunctional governance system in the United States, and even China has some long term economic problems.  Does anyone think this next recession is going to be a quick one or we won’t be experiencing a triple or quadruple dip recession before this is all said and done?  No, me neither.

I know Jim Flaherty has been seeking out the advice of economic experts like former Calgary Flames captain Jim Peplinski but may the alternative might be figuring out ways to reinvent Canada’s economy to thrive in a world where recessions will be the norm, not the exception.

Someone think of the hamsters

Especially in France where they have been found guilty of not protecting the Great Hamster.

The Court of Justice in Luxembourg, the European Union’s highest court, ruled Thursday that France had failed to protect the Great Hamster of Alsace, sometimes known as the European hamster, the last wild hamster species in Western Europe. If France does not adjust its agricultural and urbanization policies sufficiently to protect it, the court said, the government will be subject to fines of as much as $24.6 million.

It was a tough loss to swallow for French politicians.

The chief of staff for Nathalie Kosciusko-Morizet, France’s minister of ecology, sustainable development, transport and housing, said Thursday evening that Ms. Kosciusko-Morizet would make no comment on the ruling.

The editorial staff of jordoncooper.com was pretty choked up about it as well.

Is the end of the Euro near?

From Business Week

If the euro zone were to break up, it would make sense for member nations to regroup in more defensible configurations—ones more nearly resembling the optimal currency areas described by Columbia’s Mundell. To stop the market terror before it engulfs all of the euro zone, the fiscally strongest nations should gather behind an impregnable "cordon sanitaire," argues Simon Johnson, the former chief economist of the International Monetary Fund, who is a professor at Massachusetts Institute of Technology and a Bloomberg News columnist. As Johnson sees it, those strong nations would trust each other enough to promise one another unlimited financial support if any of them ran into trouble, which would stop the bond market vigilantes cold. In that group he puts Germany, Austria, the Netherlands, Finland, Slovakia, Slovenia, Luxembourg, and tiny Malta.

The scary thing about Johnson’s cordon sanitaire is that it would leave France, Italy, Spain, Belgium, Portugal, Ireland, Greece, and Cyprus on the outside, unshielded from market forces. At least a couple of the weaker shunned nations would be likely to default. In the long run, though, it could be a blessing for them to be spared from monetary and fiscal policies that just don’t suit them and debts that are, frankly, unpayable. Like serial defaulter Argentina, they would still find it possible to borrow money, albeit at a higher rate. And with depreciated national currencies, they would be able to match their exports to their imports.

The biggest downside of such a scenario would be the death of the dream of a united Europe. It appears, though, that Europe still isn’t ready for a full union. As in the nucleus of the elusive ununquadium atom, the forces of repulsion remain stronger than the forces of attraction. It might be wiser to acknowledge that reality than to sacrifice a generation of indebted Europeans to an impossible ideal.

Bill Clinton makes the case for bailing out Greece

He compares it to the Mexican financial crisis in 1995

The year 2010 is the 15th anniversary of the Mexican peso crisis — the financial crisis in Mexico. And Bob Rubin said, you know, Mexico’s got two hours to live and if we don’t give them a loan guarantee, they’re going to go belly-up tomorrow.

The leadership of the Republican and Democratic parties had previously promised to support me in Congress. But they came and said, we can’t deliver any votes because there had been a poll in the paper that morning which said that by 79 to 18, the American people were against — strongly against — my giving financial assistance to Mexico.

And so they came in and we had a little debate. Bob Rubin made the case. Somebody made the arguments against it. I said, this is not close. Give them the loan.

And all the younger people there in the room literally thought I should be given immediate psychiatric care. They said, look, we just lost the majority in the Congress after the mid-term elections.

You just got your brains beat out once. Now you’re doing something that 79% of the people are against. Are you out of your mind?

I said, okay, let’s not do it. Let’s tell him, sorry.

Then, a year from now when Mexico is still reeling, when people have been hurt south of Mexico, when we have another million illegal immigrants, when there are more narcotics coming across the border, when every Mexican hates our guts because they think we’re greedy and selfish and uncaring about our neighbors, people in the United States will ask me what in the daylights are you doing letting this mess develop.

And my answer is going to be, well, on the day I could have stopped it, there was a poll saying 79% of you were against it? And it quieted all the opposition.

Stimulus Packages From Around the World

Since all our countries (sans Germany) are offering stimulus packages these days, I thought I would see how they stack up against each other.  The American one is by far the biggesest while Iceland’s economy took the hardest hit.  Many economists believe a lot of the figures being announced involved a mixture of truly new money and recycling of existing commitments, so it remains hard to evaluate the impact.

Japan :: The Finance Ministry’s draft budget suggested a spending increase of 6.6 percent to 88.5 trillion yen ($990.9 billion) for the next fiscal year — the biggest ever figure in an initial proposal.  The world’s second-largest economy fell into a recession in the third quarter, and the signs since then point toward more misery ahead. The latest outlook by the Cabinet Office projects Japan’s economy to shrink this fiscal year and manage only flat growth the following year.  The budget proposal said general spending will rise to 51.7 trillion yen ($578.9 billion) in the year starting April, even though tax revenue is projected to fall 13.9 percent to 46.1 trillion yen ($516.2 billion).  As a result, Japan will see its primary budget deficit jump to more than 13 trillion yen ($145.6 billion) from 5 trillion yen ($56 billion) this year, and will boost bond issuances by 31.3 percent to cover the revenue shortfall. – Source: IHT

USA :: Well, according to some sources, to put the bailout dollar amounts into proper historical perspective.   The current Credit Crisis bailout is now the largest outlay In American history. Crunching the inflation adjusted numbers, we find the bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

Bailout Cost: $4.6165 trillion dollars.  Of that $4.6 trillion dollars, $1.6 billion went to U.S. bank executive bonuses.

Plus, many economists are predicting another $400 billion in stimulus money once Barack Obama comes to office in January.

Source: BoingBoing

European Union :: In comparison to the American bailout, it is pretty small at $260 billion (1.5% of GDP) but this is on top of IMF interventions in some nations and on top of national efforts as well.   The British government earlier this week announced it would provide a 20 billion pound ($30 billion) fiscal stimulus, centered on a 13-month reduction in the value-added tax charged on most goods and services to 15% from 17.5%.   Germany has announced a package it says will spur investments worth as much as 50 billion euros. France is also mulling measures.  – Source: Marketwatch  For what it is worth, the IMF doesn’t think $200 billion is enough money.

Iceland :: The good news is the small Icelandic economy which was devastated by the credit crunch is recovering according to the IMF.  The economy is still a mess with a $1 billion deficit and Iceland’s key interest rate is currently at 18 percent, the highest in Europe.  The IMF has already paid out some 827 million dollars to Reykjavik, and the rest will be paid out in eight intervals of 155 million dollars provided Iceland meets its quarterly IMF reviews. The government has meanwhile forecast that the public debt would increase from 29 percent of GDP at the end of 2007 to just over 100 percent of GDP at the end of 2009. The IMF said at the end of October it expected the island’s economy to contract by a massive 10 percent next year.  Check out the Financial Times for more indepth news on Iceland’s economy.

Canada :: $30 billion over the next four years.  The Prime Minister doesn’t want to spend that money but the political reality may force him.  While the Canadian banks are doing well, they are hoarding cash right now and not making loans to businesses who need them.  There is also some debate over on how to create the stimulus.

Russia :: The financial crisis is presenting Russia’s ruling elite with the most serious challenge to its power in a decade. The Kremlin has responded by offering a bailout package and economic stimulus measures between them worth over $200 billion.  Russia’s sovereign debt was downgraded by Standard & Poor’s for the first time in 10 years on Dec. 8, stocks have lost about 70 percent of their value since May, and the central bank has spent $160.3 billion in a bid to support the rouble. – Source: Reuters

China :: A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure and transportation. Source: Xinhua

Argentina :: $3.8 in stimulus plus government intervention in pension funds and a $21 billion public works program – Source: New York Times

Australia :: 1% of GDP or $10 billion Source: Scoop