Angela Merkel feels the urgency (Photo credit: Wikipedia)

Germany and European Union officials are urgently exploring ways to rescue Spain’s debt-stricken banks although Madrid has not yet requested assistance and is resisting being placed under international supervision, European sources said on Wednesday.

Spain, the euro zone’s fourth biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs and appealed to European partners to help revive its banks.

The European Central Bank dashed investors’ hopes of an easing of monetary policy or another flood of cheap liquidity for banks despite saying that the euro zone money market has again become “dysfunctional”. The ECB left interest rates on hold at 1 percent at its monthly meeting.

The move raised pressure on EU political leaders to outline a solution to the bloc’s festering debt crisis at a summit later this month.

Spanish Economy Minister Luis de Guindos said after talks at the European Commission on Wednesday there were no immediate plans to apply for a bailout. Spain would await the results of an IMF report and an independent audit of the banking sector, both due this month, before taking decisions on how to recapitalize the banks, he said.

ECB President Mario Draghi said financial markets were not wrong to be worried about the future of the euro zone but they underestimated the political commitment backing the single currency. He welcomed EU leaders’ agreement to step up work on a long-term vision for a full economic and monetary union.

“Some of the problems in the euro area have nothing to do with monetary policy,” he told a news conference. “I don’t think it is right for monetary policy to fill other institutions’ lack of action.”

Acknowledging that the rate-setting governing council’s decision was not unanimous, he said “a few members, I would say not many” had wanted a rate cut on Wednesday.

Asked whether the central bank would take supportive action if the EU summit agreed to move towards a fiscal and banking union, he said there was no such “horse-trading” but the ECB would monitor developments and stood ready to act.

Read more at Reuters…

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Euros: Are we near the end? (Photo credit: Fernando D. Ramirez)

By Ben Cohen: One of the reason why I enjoy writing about economics is because it is not a topic that came easily to me. I would always ignore the economic and business news and focus on the politics – it was much easier to understand and a lot more fun. That was until I began to understand that politics was economics, that behind every political decision was a economic motivation. I discovered that without understanding the financial side of how countries work, there was no way of understanding why politicians behaved the way they did. Economics isn’t really difficult either – as long as you understand how credit cards and personal saving accounts work, you’re pretty much good to go. There’s a lot of jargon, but when you boil it down it’s pretty simple.

The crisis in Europe is a prime example of economics dictating politics. The political upheavals are a direct result of economic policy gone awry, and it is vital that people understand what is going on behind the scenes.

The big argument in Europe comes down to how much control countries in the Euro Zone should have over their own economies and if they give it up, what direction it should go in. The shared currency was an attempt to create a common market via a more centralized version of Europe’s already deeply integrated economies, and there have been numerous battles over the extent of this centralization. The architects of the Euro envisioned a new ‘super state’ that could compete with America and other rising economies, but given the resistance to conformity by several European countries (Britain for example) it has experienced some major development issues.

The key to understanding this is to know the difference between monetary and fiscal policy – two terms that politicians throw about a lot, but not many people understand.

Monetary policy is dictated by a central banking institution – in America it’s the Federal Reserve, and in Europe, it’s the European Central Bank (ECB). These banks decide how much money there is in the economy – they can either inject money into the economy (usually by buying bonds) and extract money from the economy (usually by selling bonds).

Fiscal policy refers to the government’s use of its taxing and spending power to influence economic activity (it does this by paying for infrastructure, social services etc).

Both are vital in adjusting and maintaining the economic health of a country, but when there are conflicting interests in a larger union like the Euro Zone, it gets very very messy.

In the Euro Zone, there is a huge row over fiscal policy. Because of the huge amounts of debt in countries like Spain and Greece, more stable countries like Germany are demanding their governments drastically cut spending and adhere to austerity measure in order to meet their debt obligations. Up until now, much of Europe has followed the austerity path as governments slash budgets and commit to severely reduced spending in the future. Leftist and independent political movements have sprung up and are demanding governments reverse the austerity measures and start spending in order to stimulate their economies. The problem is, because there is no centralized control over fiscal policy, the structure of the Euro Zone is inherently unstable and susceptible to major upheavals when one country refuses to follow suite.

There are two philosophies that are inherently incompatible in Europe – one is that of austerity, and the other is of Keynesian spending. Now some countries are fighting German lead austerity, it becomes extremely difficult to have a coherent solution to the regions massive economic problems. Niall Ferguson does a great job of crystallizing this very serious structural flaw:

Here’s the choice, Mein Herr. You accept the logic of the Mitterrand/Kohl era, which always was ‘we’re having monetary union in order to get to a federal Europe’ . . . The logic of the 1990s was that ‘monetary union will force us to ever­closer fiscal union, which is hard to sell politically, but we’ll make it happen — we’ll back into it through a monetary union’. That always was the model — which was one reason for being against it as a British Eurosceptic. Now we’re at the moment of truth when you can no longer maintain the fiction that a monetary union can exist independently of a fiscal union … On the other hand — and this is the message to Angela Merkel — to use George Bush’s phrase: this sucker’s going down. We’ve reached that point.

The problem is very complicated as there are so many factors that are difficult to predict. Getting national governments to agree is one thing, but when it comes to the getting the population to get on board with political and economic relationships they have a difficult time understanding, it gets a whole lot trickier.

There are some very hard choices that need to be made in Europe over the coming months, and if the Euro is to survive, it is likely that some sort of framework to unify fiscal policy is reached. Germany will also have to seriously reconsider its strict philosophy of austerity if it wants to be a major player in this, otherwise it risks alienation and rejection by the other Euro members who are quickly turning against it.

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Can Obama persuade Merkel to shift course?

By Ben Cohen: The news that President Obama is set to challenge German chancellor Angela Merkel at the G8 Summit this Saturday on her continued support for austerity in the Euro Zone gives a very strong indication that the Obama administration clearly understands the global economic crisis and plans to campaign on a platform based on spending rather than cutting. Reports the Guardian:

Obama, in a television interview on Tuesday, acknowledged that the crisis could hurt America. “Europe is still weak and that is creating uncertainty for the business community here,” Obama said.

White House spokesman Jay Carney also recognised the potential pitfall. At the daily White House briefing, Carney described the eurozone crisis as “one of the headwinds that we face” and that the White House was monitoring it closely.

“It is another reason why we need to take every action that is fully within our control to assist the economic recovery that we’ve been experiencing, to further insulate ourselves from the kinds of things that could happen globally that could affect our economic growth.”

This acknowledgment is an important one. For too long, Obama has tried to play the middle ground by arguing both sides of the debate on how to best confront the global economic crisis. He has supported government spending while committing to huge and damaging budget cuts, asked for too little money for the stimulus package and not been clear about his plan for growth. Now it seems he is firmly committing to a Keynesian approach to recovery and he is pitching it not only to Americans, but to Europeans as well. Why? Because Europe’s disastrous austerity policies could hurt America’s economy badly, and Obama understands that if the jobs situation gets any worse at home, he could quite easily lose the election this year.

Luckily, Obama has some allies in Europe – the election of socialist Francois Hollande is a big boost when it comes to arguing the case for stimulus spending, and a combined front will put pressure on Merkel to change course or at least relent on the vicious austerity measures being imposed by the German government.  While the US does not have a huge amount of leverage when it comes to dictating European economic policy, he can certainly apply some soft power to cajole Merkel into changing course. The German chancellor knows her position is incredibly unpopular, and coupled with the popular uprisings across the continent, a nudge from Obama may have a significant effect.

If Obama successfully helps negotiate a serious spending package for Europe, it could help shift the argument back at home. If money is injected into the Eurozone it will restore confidence in the economy and could set a path to at least a partial recovery (as it did in the US). Obama can then use that as proof stimulus spending works  and translate it into a powerful campaigning tool. It’s one the American public would likely get behind given the sad state of the economy. According to a report on the HuffPost, the popular resistance to austerity in Europe is not going unnoticed by US politicians:

Politicians are fooling themselves if they think some sort of centrist consensus will save their jobs, said Rep. Brad Miller (D-N.C.). “European elections should remind politicians here not to worry about the approval of pampered, pompous Washington pundits who think the middle class just has it too good,” Miller said. “Washington pundits love austerity, and they’re all clucking with disapproval for European voters. The pundits always think someone else’s belt needs tightening, and it’s always someone who doesn’t go to the same cocktail parties they go to. But there are a lot more middle-class voters than there are Washington pundits.”

Popular opinion on austerity is changing rapidly around the globe, and Obama must ride the wave diligently if he wants to capitalize on it. Obama has shown an incredible knack of getting his political timing right,  and now is the time to flex some muscle in order to get what he wants. It is time to paint himself as the second coming of Franklin Roosevelt and discard the budget cutting rhetoric of Herbert Hoover, and he must try to convince the politicians on one continent, and the people on the other.

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Voters rejected Sarkozy's economic policies. (Photo credit: Wikipedia)

By Ben Cohen: Socialist Francois Hollande’s victory over Nicolas Sarkozy for the French Presidency could mark the beginning of a new economic era, not just in Europe, but the world. Hollande promised to reverse the austerity measures passed by Sarkozy that has yielded few benefits for France in recent times, and adopt a pro growth economic strategy based on government spending. Hollande hopes that he can pave the way for a new direction in Europe, challenging the German led austerity policies. He will face huge opposition to his proposed strategy for the 5th largest economy in the world, but if he pulls it off, it could spark a change that could shift the balance of power between national governments and the banks.

In Greece, the coalition government (made up of the center right party New Democracy, and the center left Pasok) also suffered a huge electoral loss over the weekend, losing their majority in parliament. The Left wing coalition Syriza made big gains coming in second to New Democracy, signalling widespread dissatisfaction with austerity measures supported by the coalition government.

Benedict Brogan of the Telegraph wrote the following:

Mr Hollande’s win, backed by the wholesale rejection of mainstream parties in Greece, the collapse of the Dutch government, protests in Spain and mayhem elsewere, tilts the balance of the European debate sharply away from austerity….This will change the dynamic of European politics in far-reaching ways. All eyes now will be on Angela Merkel and her fight with the SPD.

Hollande has proposed close the budget deficit by hiking taxes on the rich and big corporations, and more importantly wants to renegotiate the EU fiscal pact that has emphasized austerity above everything else. After his victory, Hollande said:

“Europe is watching us. I am sure that when the result was announced, in many European countries there was relief, hope and the notion that finally austerity can no longer be the only option. And this is the mission that is now mine — to give the European project a dimension of growth, employment, prosperity, in short, a future. This is what I will say as soon as possible to our European partners and first of all to Germany, in the name of the friendship that links us and in the name of our shared responsibility.”

Conservatives around Europe have been extremely nervous about the election of Holland, warning that by electing a socialist, Europe’s recovery is at stake. Ian Duncan Smith, Britain’s Work and Pensions Secretary said of Mr Hollande:

“He’s said he’s going to come out, he’s going to spend money, he’s going to raise taxes, everything he says will suddenly change the French economy. If he does any of that, it will have a shockwave effect in Europe. I think it could cause major ructions with Germany right now….If the idea of Francois Hollande is he comes in now with a major set of deficits and with huge debts, to spend huge amounts of money… he’ll put a further burden on the taxpayers of France.”

The victory of Hollande and the Greek electoral upset are proof that the population in Europe are fed up with the status quo and want to follow a different course. They have spoken with their vote and have changed

For over a decade, Europe has been largely run by centrist and center right governments that have deregulated markets, cut social welfare and worked to further the interest of banking institutions. While some economies saw significant growth, much of it was built on financial speculation and massively inflated real estate bubbles – all of which came crashing to an end when the banks were unable to cover their losses. Disastrously, those same center right governments managed to convince their populations that they had the answer to the problems they had created, leading to a prolonged recession and further economic instability after austerity measures were passed. After several years of economic pain and no end in sight, the Right is finally succumbing to reality – their policies are failing and voters want change.

The election of a Socialist to a country as powerful as France sends a message to banking institutions that governments will no longer necessarily do their bidding, and this could have a far reaching effect around the world. For too long the status quo has been accepted as the only course of action in the industrialized world. The religion of the free market has pervaded every aspect of political culture, with parties clamoring to the center in order to remain viable in the eyes of powerful financial interests. This is no longer the case as the Left is beginning to consolidate a new power base built on popular support and a positive vision of the future.

Hollande has a huge task ahead of him – he is the most prominent socialist in the world, and he must build bridges to have a chance of taking on the banks. His victory will encourage left wing parties across the continent, and the dominance of the Right may finally come to an end. Together, populist governments can dent the grip financial institutions wield over the global economy – and that could mean we are now in the beginning of a new economic era.

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Francois Hollande: France's new President (Photo credit: Wikipedia)

French socialist Francois Hollande has won a clear victory in the country’s presidential election.

Mr Hollande – who got an estimated 52% of votes in Sunday’s run-off – said the French had chosen “change”.

Admitting defeat, centre-right incumbent Nicolas Sarkozy wished “good luck” to Mr Hollande.

Analysts say the vote has wide implications for the whole eurozone. Mr Hollande has vowed to rework a deal on government debt in member countries.

Shortly after polls closed at 20:00 (18:00 GMT), French media published projections based on partial results giving Mr Hollande a lead of almost four points.

Turnout was about 80%.

Exuberant Hollande supporters gathered on Place de la Bastille in Paris – a traditional rallying point of the Left – to celebrate.

Mr Hollande – the first socialist to win the French presidency since Francois Mitterrand in the 1980s – gave his victory speech in his stronghold of Tulle in central France.

He said was “proud to have been capable of giving people hope again”.

He said he would push ahead with his pledge to refocus EU fiscal efforts from austerity to “growth”.

“Europe is watching us, austerity can no longer be the only option,” he said.

Mr Hollande has called for a renegotiation of a hard-won European treaty on budget discipline championed by German Chancellor Angela Merkel and Mr Sarkozy.

Mr Hollande’s campaign director, Pierre Moscovici, told AFP news agency that Mrs Merkel had congratulated the president-elect by phone, and that the two had agreed to work together on “a strong Franco-German relationship in the interest of Europe”.

UK Prime Minister David Cameron also called Mr Hollande to congratulate him.

Read more at the BBC…

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François Hollande: Really so dangerous? (Photo credit: Wikipedia)

By Ben Cohen: The Economist Magazine is widely read in the business community for a good reason – it largely validates the world view of the rich and seeks to further the ideology of deregulated markets. In many ways, it’s a great magazine with succinct writing and comprehensive analysis and I read it regularly. But it is often gloriously wrong.

The magazine got their predictions about the state of the world in 2008 so badly wrong that it issued an apology in a article titled ‘About 2008: sorry‘. The Economist failed to predict in any shape or form the gigantic banking collapse that almost took the global economy down  – a rather shocking lapse of judgment given its supposed expertize.

Most of the analysis in The Economist is written with the presumption that monetarism is the only proven economic ideology – the key problem that has lead to some very wrongheaded analysis. Every topic is tackled with the perspective that market discipline solves all problems and government that should do everything in its power to aid business.

Take the current election in France, where conservative Nicolas Sarkozy and socialist Francois Hollande are locked in a close battle for the Presidency. Sarkozy, like every other leader in Europe, has attempted to solve his country’s economic problems with austerity measures. He has cut state expenditures, cut taxes for the wealthy, and is promising more austerity in order to improve France’s recently downgraded credit rating if he gets re-elected. Hollande is promising to do the opposite – he aims to increase spending, renegotiate the EU fiscal pact, and close the budget deficit by increasing taxes on the rich, arguing that Sarkozy’s policies have made the country worse off.

In a deeply irresponsible article titled The rather dangerous Monsieur Hollande, The Economist argued the following:

Mr Hollande’s programme seems a very poor answer to all this [France's economic problems]—especially given that France’s neighbours have been undergoing genuine reforms. He talks a lot about social justice, but barely at all about the need to create wealth. Although he pledges to cut the budget deficit, he plans to do so by raising taxes, not cutting spending. Mr Hollande has promised to hire 60,000 new teachers. By his own calculations, his proposals would splurge an extra €20 billion over five years. The state would grow even bigger.

The magazine offers absolutely no evidence as to why Hollande’s program is a poor answer to France’s economic problem, simply an assumption that austerity and markets are good, and government spending is bad. They don’t provide any figures proving France’s current policies are working, or that its neighbor’s ‘genuine reforms’ are proving successful either. Why? Because they have been a complete failure – a fact the magazine does not want to acknowledge.

The magazine concludes that because Hollande has not built his election campaign around helping big business, he is inherently bad for the country:

Mr Hollande evinces a deep anti-business attitude. He will also be hamstrung by his own unreformed Socialist Party and steered by an electorate that has not yet heard the case for reform, least of all from him. Nothing in the past few months, or in his long career as a party fixer, suggests that Mr Hollande is brave enough to rip up his manifesto and change France (see article)….one thing seems certain: a French president so hostile to change would undermine Europe’s willingness to pursue the painful reforms it must eventually embrace for the euro to survive. That makes him a rather dangerous man.

I’ve written extensively about this topic before – the blind faith in free markets and government austerity that seems to need no evidence for people to believe in – and it is getting tiring arguing the same point over and over again. But it must be done.

The Economist is an influential magazine, and its editorials help frame debate on an international level. Attempting to discredit Francois Hollande by calling him ‘dangerous’ without providing any evidence is beneath The Economist, despite its political and economic leaning.

The truth is that the policies advocated by The Economist and being implemented in Europe (largely at the behest of the conservative German government) are regressing economic growth throughout the continent. Hollande is offering an alternative to the status quo – an economic policy based on growth, and greater equality without cuts to vital services or industry.

Should Hollande win (and it looks likely) he will face a mountain of opposition to his economic plans, namely Germany’s Angela Merkel who has led the way in enacting austerity measures throughout Europe. In the EuroZone, the economies are closely linked together with monetary policy coming from the European Central Bank (ECB). While governments have latitude when it comes to fiscal policy, they do not control the money supply, and are therefore handicapped when it comes to providing stimulus money without high borrowing costs. Hollande will attempt to build coalitions abroad in order to rewrite the EU fiscal pact so that France (and other countries) can borrow money from the ECB at low interest and factor in a plan for growth. Germany is unlikely to give in without a fight, and Hollande may not get a chance to prove his economic model right.

If austerity continues, France’s economy, like others in Europe, will continue to decline and we’ll inevitably see The Economist and other right wing publications blame socialism for its failure.

It’s pretty easy when you don’t have to prove anything with facts.

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A reader writes in response to my post on France's proposed transaction tax on banks:

Read you everyday.

How can this possibly work?  You know as well as I do that any charge applied by the government to the banks will end up being paid for by the consumer.  The cost of doing business regardless of business is always passed on to you and me.

Agreed – that is unless there is multilateral action against the cost being passed on to the consumer. I think it's brave that Sarkozy is attempting to start a chain reaction (although it's not going down well in the UK) as shaming others into action seems like the only way to be effective. 

Of course, the proof will be in the pudding, and we'll have to see how the policy (if implemented) works.

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Not good news – the financial crisis in Greece appears to be worsening, threatening the entire global economy as a result. From the Guardian:

The French president Nicolas Sarkozy and German chancellor Angela Merkel will hold emergency talks on Wednesday in a desperate attempt to hold the eurozone together and formulate a response to the Greek prime minister's plan for a referendum on the austerity measures imposed by his European partners.

George Papandreou's socialist government is on the brink of collapse after his referendum plan sparked an angry reaction within his own party and plunged Europe back into turmoil, just days after a complex rescue deal had been agreed – requiring Greece to embark on tough cost-cutting measures….

Stock markets had reacted with alarm to the prospect that the €1tn deal to rescue the euro currency union was in danger of collapse. The FTSE 100 closed down 2.2% at 5421 after an initial fall of 5%. The German Dax index and French Cac remained 5% down at the close, while the Dow Jones closed down almost 2.5%.

This latest global economic crisis highlights the inherent instability of our modern financial system. Global markets are extremely volatile – beneficial to speculators and the ultra wealthy, but disastrous for everyone else. Due to lack of regulations on capital flow, money shoots from one side of the planet to another in the blink of an eye. A country can literally go bankrupt over night if investors decide to pull their money, giving governments little real control over their country's economic future.

The truth is, financial markets run the world, and they work in the interests of the rich. Lack of regulation leads to riskier investments, bubbles and the inevitable crash. Governments and the public step in to clean up the mess, then it's back to business as usual.The risk is socialized and the profit privatized – the defining characteristic of modern finance that masquerades as free market capitalism.

The idea that a developed industrialized nation like Greece could fall apart over night is a truly terrifying prospect, and a clear warning that the balance of power must shift if we are to attain some sort of functioning global economic system. Hopefully, the Greek crisis can be resolved without plummeting the planet into another recession, but regardless, things must change drastically to prevent this type of vulnerability. It is simply not sustainable in the long run.

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