More austerity in Spain despite its unpopularity

From Bloomberg:

European leaders are testing the latest version of their debt crisis strategy in Spain, granting Prime Minister Mariano Rajoy more time to reduce the budget deficit in exchange for deeper spending cuts.

Rajoy yesterday announced 65 billion euros ($80 billion) of austerity measures in a renewed effort to meet European Union budget targets after he was granted a one-year extension on the deadline to meet EU limits.

“Europeans are learning from past mistakes,” said Christian Schultz, a senior economist at Berenberg Bank in London and a former European Central Bank official. “The stick is necessary but the carrot is also good.”

Europe’s concession to recession-wracked Spain has raised expectations in Ireland and Portugal that they can win more time to rein in their budget deficits after Germany’s hardball tactics in Greece spurred a rebellion against bailout politics there.

Spanish bonds rose for a third day today. The extra yield investors demand to hold Spanish 10-year debt instead of the benchmark German bunds dropped 4 basis points to 527 basis points at 11:15 a.m. in Madrid.

“People can see that they are serious,” said Javier Morillas, professor of international economics at San Pablo CEU University in Madrid. “I don’t think these are the last measures we’ll see, and they certainly aren’t the last cartridges Rajoy has left.”

Rajoy’s budget package came as Spain finalizes the conditions of a 100 billion-euro bank rescue bank that will allow International Monetary Fund officials to intervene in the process of restructuring the banking system and tightens scrutiny over spending plans.

European leaders also held out the prospect of buying Spanish debt to trim yields as long as Rajoy complies with their conditions, which include transferring powers from the Economy Ministry to the Bank of Spain and bolstering the central bank’s independence.

Rajoy is also seeking additional cuts from the 17 regional governments, which control health and education. Even as Spain’s own access to capital markets is narrowing, the central government is planning to help states fund themselves on markets.

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From the BBC:

World leaders meeting at a G20 summit in Mexico have urged Europe to take all necessary measures to overcome the eurozone debt crisis.

They voiced unease over what one top official described as “the single biggest risk for the world economy”.

But European Commission President Jose Manuel Barroso said “the challenges are not only European, they are global”.

Sunday’s victory of a pro-bailout party in the Greek election did not give stock markets the expected boost.

Antonis Samaras, the leader of the New Democracy party that narrowly won the poll, has now begun urgent talks to form a coalition.

Mr Samaras also reiterated that he would seek changes in the terms of a bailout agreement reached with the EU and IMF.

BBC World Service economics correspondent Andrew Walker says that while Europe is clearly the big danger, there are also problems elsewhere in the world’s major advanced and emerging economies, starting with the two largest national economies, the US and China.

The slowdown in India is something else for the G20 to fret about at the Mexican resort of Los Cabos, our correspondent adds.

A draft of the statement to be released on Tuesday is expected to call for a co-ordinated global plan for job creation and growth, reports say.

And if growth weakens, the proposed document says, countries without heavy debts should “stand ready to co-ordinate and implement discretionary fiscal actions to support domestic demand”, according to Reuters.

In a separate development, China pledged $43bn (£27bn) to the IMF’s crisis-fighting fund.

The move comes after a meeting of the Brics group of emerging economies – Brazil, Russia, India, China and South Africa. The five nations all offered to increase their contributions to the IMF in exchange for greater influence in the organisation.

US President Barack Obama and Russian President Vladimir Putin held talks on the sidelines of the summit, urging an immediate end to violence in Syria.

In a joint statement following their first meeting since Mr Putin returned to the presidency, they said they shared a belief that Syrians should determine their own future.

The two countries have been at odds over how to resolve the crisis.

On Monday, many world leaders expressed alarm in Los Cabos at what they saw as a lack of progress in dealing with the eurozone crisis.

World Bank chief Robert Zoellick said: “We are waiting for Europe to tell us what it’s going to do.”

Meanwhile, Jose Angel Gurria, the Mexican head of the Organisation for Economic Co-operation and Development (OECD), said the crisis was “the single biggest risk for the world economy”.

Pascal Lamy, the head of the World Trade Organization (WTO), warned about the danger of contagion from the eurozone crisis.

He said that global volatility and uncertainty was fuelling a trend towards protectionism, which was not only stalling free trade but starting to reverse it.

Canadian Prime Minister Stephen Harper called on eurozone leaders to make structural changes to solve the debt crisis.

But Mr Barroso mounted a strong defence of the EU’s handling of the crisis so far.

“Frankly, we are not coming here to receive lessons in terms of democracy or in terms of how to handle the economy,” he told reporters.

He added that he expected G20 leaders to “speak very clearly in favour of the approach the EU is following”.

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Banks still have the final say over policy in the EuroZone

From the Independent:

The eurozone is preparing to bow to the will of the financial markets as leaders attempt to ease fears ahead of crucial elections in Greece this weekend.

A draft of the text that will be discussed at the European Union summit later this month was leaked, showing national leaders are set to go ahead with a pan-European banking union and closer integration, the two areas where frightened investors have been clamouring for progress.

“There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance,” said the draft, which was obtained by Reuters.

Investors have been pulling money out of banks in struggling eurozone states in recent months, motivated by fears that their deposits could be devalued if the eurozone breaks up. Figures released by the Greek central bank showed total deposits fell by 17 per cent in 2011. There have also been reports of large withdrawals from the Spanish banking system, for which the Madrid government has requested a bailout of up to €100bn.

Senior European policymakers, including the European Commission President, José Manuel Barroso, have suggested that a move to a banking union, with central guarantees of all deposits, will calm investors. The European Central Bank President, Mario Draghi, has also called for such a union.

However, the leak of the draft yesterday failed to make a positive impression. Spanish 10-year borrowing costs rose again, closing at 6.76 per cent. Italy also faced higher borrowing costs. The country had to pay 3.97 per cent to raise €6.5bn, up from 2.34 per cent last month.

Markets were also unsettled by German Finance Minister, Wolfgang Schäuble, who expressed doubts about Athens’ ability to stick to the savings programme imposed under the EU’s bailout. He was said to have told a meeting of his ruling Christian Democratic Party this week that the “Troika” of EU, European Central Bank and International Monetary Fund officials would soon find out that Greece will not keep to its commitments.

“When the Troika next visits Athens they will see that Greece cannot fulfil the programme,” Die Welt newspaper quoted him as saying. He said that no matter who won Sunday’s election, Athens would not manage to keep to the conditions. Die Zeit newspaper also said Greece was behind schedule on implementing its savings programme and warned Germany might have to consider a third bailout before summer ends.

Ambassadors will discuss the draft summit text today, ahead of the formal meeting in Brussels on 28-29 June. Mr Barroso has said a banking union could be established next year without any new European treaties being required.

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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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Do banks really need more lobbyists?

By Maeve McClenaghan: City big guns are lobbying hard in Europe to thwart moves aimed at curbing annual bonuses.

The Association for Financial Markets in Europe (AFME), one of the City’s most powerful financial lobby groups, is against capping bankers’ bonuses. It has written to members of  the European Parliament to vote against rules that would drastically limit them.

The European Parliament’s economics and monetary affairs committee is due to vote today on amendments to the Capital Requirements Directive (CRD). The amendments could impose a fixed one-to-one ratio between a banker’s salary and bonus. But many bonuses in the City far surpass this salary ratio.

It is perhaps hardly surprising that the City wants to block these restrictions, but a glimpse at the level of lobbying occurring was provided by a story reported in the Sunday Telegraph. According to the newspaper the industry group wrote to Members of the European Parliament this weekend. The letter, seen by the Sunday Telegraph, was signed by Simon Lewis, chief executive of AFME. Lewis warns that amending the CRD to include a cap on bankers bonuses could result in banks simply raising basic salaries.

Lewis goes on to state, ’we believe that if decisions are taken in the very limited time that has been available for reflection and debate, there is a risk of material unintended consequences for the European economy.’

Should the resolution fail to pass today, there is a separate tabled resolution which would limit bonuses to 0.75 times annual salary.

The AFME is made up of over 190 members including all pan-EU and global banks, key regional banks, brokers, law firms, investors and other financial market participants.

City AM has previously reported on AFME consulting with lawyers Clifford Chance over suing the EU if Brussels imposed such restrictions.

This article was originally published on the Bureau of Investigative Journalism

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Stocks tumble in Europe as Greeces prepares for Euro Zone exit

European stock markets have fallen sharply as concerns mount over Greece’s future in the euro.

Shares fell after a report quoted former Greek Prime Minister Lucas Papademos saying that the Greek government may be making preparations for leaving the euro.

By lunchtime shares in London, Paris and Frankfurt were down about 2%.

Adding to the negative mood, Germany’s central bank said the developments in Greece were “highly alarming”.

“Greece is threatening not to implement the agreed reforms and consolidation measures,” the Bundesbank said in its latest monthly report.

It said that scenerio could create “substantial” challenges for the eurozone and Germany, but the situation would be “manageable via careful crisis management”.

In an interview with Dow Jones Newswires, former Greek Prime Minister Lucas Papademos said: “It cannot be excluded that preparations are being made to contain the potential consequences of a Greek euro exit.”

“The risk of Greece leaving the euro is real and it depends effectively on whether the Greek people will support the continued implementation of the economic programme,” he said.

Despite the prospect of Greece leaving the euro, the head of the IMF, Christine Lagarde, is keeping up the pressure on Greece to fix its finances.

In an interview with the BBC, Ms Lagarde said there had to be more tax collection and structural reform.

That is despite the deep unpopularity of austerity measures imposed on Greece by the IMF and European Union in return for bailout funds.

Greek politicians are divided over whether to continue supporting those austerity measures and face a 17 June election.

“The Greek population has made huge efforts. But they have more to do. There are more structural reforms to be had, there is more tax to be collected and that has a price,” Ms Lagarde said in an interview with the BBC’s Today programme.

Many analysts think that Greece may abandon the austerity measures and be forced out of the euro.

Ms Lagarde said the IMF did not like the that prospect, but that it was “prepared for all possible situations”.

Read more at theBBC….

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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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Greece close to exiting the Euro

Prolonged electoral uncertainty has put Greece into a state of deep freeze, meaning whoever finally emerges as the new leader will take over a country already falling behind on its promises to lenders.

The European Union and International Monetary Fund demanded extensive cuts and reforms as part of a 130 billion euro bailout package agreed in March.

But Greece has had no elected government since an inconclusive election on May 6, and paralysis will continue for at least another month, even as funds dry up in the treasury.

Senior judge Panagiotis Pikrammenos was sworn in as interim prime minister on Wednesday, but he will not be empowered to take any political decisions – only to steer the country to a new vote on June 17.

“The only thing we are doing is waiting,” said a government official who declined to be named.

Another Greek official close to bailout negotiations said ministers in the outgoing cabinet have not been authorised to negotiate with Greece’s lenders since the May 6 election. A senior party official said the caretaker government would not publish any decrees and all tender procedures were suspended.

Leftists now favoured to win the next election have alarmed Europe by threatening to tear up the bailout altogether. But even if the next Greek government wants to keep to the agreement, it will have catching up to do from day one.

A privatisation programme already many times cut back has been suspended, a multi-billion euro spending cuts plan is far from being ready, tax collection continues to be weak and a bank recapitalisation plan is in limbo.

One consequence already became clearer on Wednesday: sources at the European Central Bank said it had withheld liquidity for some Greek banks because the bank recapitalisation plan had not yet been successfully implemented.

Even before the May 6 election, many reforms were put on the backburner to avoid antagonising voters, officials involved in bailout talks say. These include a plan to slash spending by over 11.5 billion euros in 2013-2014, which Greece must agree by late June to meet a key bailout target.

Read more at Reuters….

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Negotiations on forming a new Greek government have ended after an hour but will resume on Tuesday.

Three previous attempts to form a government have failed. If the parties cannot agree on a coalition, new elections must take place next month.

The left-wing Syriza bloc – the second largest in parliament – did not attend the talks, saying it would not join any coalition making further cuts.

Syriza rejects the terms of the EU/IMF bailout, which demand more austerity.

“Things are very difficult. I’m not optimistic,” said Evangelos Venizelos, leader of the Socialist Pasok party, after the talks, according to the Reuters news agency.

A majority of Greek voters backed parties opposed to the austerity needed to meet the terms of the 130bn euro ($170bn; £105bn) bailout agreed with the EU and International Monetary Fund (IMF).

European markets and the euro fell sharply on Monday. The euro stood at $1.2845, down 0.54% from Friday.

The leaders of the centre-right New Democracy, Pasok and moderate Democratic Left parties arrived at the presidential palace shortly after 19:30 (16:30 GMT) on Monday for talks.

They left an hour later. President Karolos Papoulias called another round of talks for Tuesday, to include all parties except the far right.

Mr Papoulias has proposed a technocratic government.

Syriza’s leader Alexis Tsipras rejected the invitation from the Greek president to join the coalition talks on Monday, saying he would not be a party to what he called a crime.

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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