The Euro Crisis Is Back From Vacation

In June, it seemed as if any day might bring about collapse of Greek economy and with it, the entire euro zone and its decade-old currency. Then in July and August, it seemed as if everyone was on vacation. Now they’re back, finance officials and political leaders have been flying all over Europe to meet with one another, and along with them the crisis that has been raging for the last two years. Here is a guide to the new season’s most intriguing (and terrifying) story lines. 1. What’s the first big matchup? This month, Greece’s Parliament needs to approve an additional 11.5 billion euros in spending cuts for 2013-14. If it does, it will most likely prompt big protests in the streets. If it doesn’t, the so-called troika (the European Commission, the I.M.F. and the European Central Bank) won’t lend Greece the money to keep its economy afloat. If all sides get through September intact, they’ll still be at loggerheads during the next phase of budget negotiations. 2. Will France’s 1 percent pick up and leave? President François Hollande was elected, in part, for criticizing austerity measures of Nicolas Sarkozy. Now Hollande is expected to cut more than 30 billion euros from his 2013 budget. So what’s a poor Socialist to do? Go after the rich! Hollande has promised to increase the tax rate to 75% on incomes above 1 million euros, and he has imposed a one-time wealth tax on people worth more than 1.3 million euros. Some may have packed their bags for Belgium, but the tax isn’t as scary to the rich as it might appear. Very few people make 1 million euros in salary. On balance, this and other taxes on banks and businesses are expected to bring the government more money (7 billion euros a year) than they will scare away. France has become a Tea Partier’s nightmare. France has a Socialist president and strong unions, and government expenditure is 53% of G.D.P. And yet over last decade its economy has grown. The average French salary (about $40,000) is closer to U.S. average (about $54,000). France has as many Fortune Global 500 companies as Germany, a strong role in industries as varied as agriculture, nuclear energy, insurance and public transport. So most of its wealthiest citizens probably aren’t going anywhere. 3. What lurks in the mind of Super-Mario? Since most countries left the gold standard over last century, a currency’s value is based entirely on collective faith. With the dollar or the pound, people’s faith is rooted in centuries of good judgment by central bankers. But the euro is so young and under so much stress that, in many ways, its value is determined every day by what people think about the man in charge, Mario Draghi, the president of European Central Bank. Draghi could theoretically solve everything in an instant. The E.C.B. could buy up all the sovereign debt of Europe’s struggling countries, or at least enough of it to stop the world from panicking. That would allow each country to lend to its own troubled banks. Germany, fearing inflation, is telling him not to. But many economists are telling Draghi to do just that and more, and to do it quickly. What will Draghi do? That’s central question of the crisis. The bond market’s relative calm suggests that investors believe Draghi will act on one or all of enormous options in front of him. (If they didn’t believe that, there wouldn’t be much foreign money in any European country.) Of course, only Draghi knows for sure. 4. Is Europe a Lehman in waiting? (…..)



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6 Responses to The Euro Crisis Is Back From Vacation

  1. Professor Uziel Nogueira says: The good news is that the euro came to stay as a major world currency. The bad news is (1) some countries are not fit to keep the currency and, (2) the debt trap crisis will not go away. The common currency project will continue to be under severe stress. Despite the setback, the European integration process will continue unabated; it is irreversible. Greece is the KEY to figure out how the euro + debt crisis will be played out in the second half of the year. It is clear that a democratic elected Greek government cannot implement the deficit reduction measures asked by the troika. Ms. Merkel is facing a conundrum: how to solve the Greek question without a major financial-political upheaval in Europe. In the short term, there is no optimal (or cheap) solution except muddle through. Germany’s political and business elite made a huge MISTAKE in 1999 when accepted structurally underdeveloped economies to share the common currency. The monetary mistake was compounded for not insisting in a workable fiscal integration. The euro is a flawed monetary project that cannot be easily undone without major economic, financial, political and social costs. At this juncture, the most cost effective solution for Germany –and other 15 member countries– is to guarantee Greece’s public debt in return for the Hellenic country to leave the common currency voluntarily.

    If that works out, a new clause will be created for countries to opt out the euro zone.

  2. Volker Bouffier has always portrayed himself as the last true conservative in Germany’s center-right Christian Democratic Union (CDU). Bouffier is the governor of Hesse, the western German state where Germany’s financial capital Frankfurt is located, and is known for raging against gay marriage, multiculturalism and school reforms. On questions of monetary policy, he has always been a champion of traditional German virtues. “The European Central Bank cannot become an institution that compensates for the failures of individual government budgets, such as Italy’s,” he said recently. “That isn’t part of its mandate.” But on Monday of last week, Bouffier seemed to be a changed man. He had invited Jens Weidmann, 44, president of the German central bank, the Bundesbank, to a meeting at the Hesse state chancellery. For weeks, Weidmann had sharply opposed the ECB’s plans to buy up large quantities of Italian and Spanish sovereign debt. In the meeting with Bouffier and his cabinet, Weidmann had just reiterated his position in the ongoing dispute with ECB President Mario Draghi when Bouffier, to the surprise of everyone in attendance, announced his new priorities.

    Apparently, the values of Southern European bonds on the balance sheets of Frankfurt banks are now more important than his conservative values. Of course he still supported stable prices, Bouffier said, but noted that the mood in financial markets had become extremely fragile. And despite his characterization of the ECB’s debt-buying plans as sinful, he said that there were no longer any alternatives to massive intervention by the central bank.

    “The political tools have been exhausted,” Bouffier said. The Bundesbank president is becoming increasingly isolated, and not just in provincial German politics (…..)

  3. (…..) Merkel and Weidmann have talked a lot in recent weeks, sometimes by telephone and sometimes in private at the Chancellery in Berlin. As a result, they have reached a sort of temporary truce. Weidmann, who doesn’t see himself as being isolated, will continue to openly voice his criticism of the Draghi program, but he will not torpedo the effort for the time being. He will implement the ECB decisions and will not file a complaint with the European Court of Justice. In return, Merkel will show an understanding for Weidmann’s positions, but she will not support them.

    It’s a stalemate that benefits both Weidmann and Merkel. Weidmann doesn’t want to overdo the conflict, given his ambitions to eventually head the ECB himself. Merkel, on the other hand, has no interest in having a fundamental dispute with the Bundesbank.

    As a minister in the cabinet of former Chancellor Helmut Kohl, she realized that it didn’t pay off for members of the government to tangle with the central bank. When then Finance Minister Theo Waigel wanted to have the Bundesbank’s gold revalued in 1997, he faced a storm of protest in the media and was forced to drop the idea. Merkel knows that many members of the ruling coalition parties are more likely to support Weidmann than her today. “It isn’t helpful to add to the problems by printing new money in Frankfurt,” warns Rainer Brüderle, the floor leader of the pro-business Free Democratic Party (FDP), the junior partner in Merkel’s coalition government. Bavarian Governor Horst Seehofer, leader of the CDU’s Bavarian sister party, the Christian Social Union (CSU), believes that it is “fatal to keep buying up new bonds from indebted countries.” CDU economic expert Michael Fuchs supports Weidmann “wholeheartedly,” saying the ECB cannot become a money press. Draghi’s plan doesn’t just upset the traditional division of tasks between fiscal and monetary policy; it also puts a strain on the relationship between the head of the Bundesbank and the chancellor. The conflict is manageable, as long as the euro crisis doesn’t escalate and no ECB interventions are necessary. But if the central bank were to buy Southern European sovereign debt for hundreds of billions of euros once again, the truce would quickly end.

    To retain his credibility, Weidmann would eventually have to oppose the program. Then Merkel would drop him — just as she drops everyone who gets in her way.

  4. France’s biggest banks are preparing to pull out of Greece in the coming weeks, the latest large international business to abandon the country as it grapples with a debilitating recession and nagging questions about its future in the euro zone. Société Générale said on Wednesday that it was in advanced discussions to sell its 99.1 percent stake in Geniki Bank, one of Greece’s biggest financial institutions, to Piraeus Bank of Greece. On Tuesday, Crédit Agricole, another large French lender, said it expected to sign a deal to sell its troubled Greek arm, Emporiki Bank, to another Greek bank in a matter of weeks. The French banks had embarked on a strategy of expanding in Greece and other Southern European countries when times were good, moving to take advantage of buoyant housing markets and rapid economic growth. When a deterioration in Greece’s finances helped ignite the European debt crisis three years ago, Société Générale and Crédit Agricole wound up being among the most exposed of any European banks to Greece. Their earnings were hit last year when a swath of Greek government bonds they had invested in failed to perform as the crisis deepened. At the same time, losses mounted at their Greek operations as the country’s economy plunged, leading to a surge of defaults on loans to consumers and businesses. Fears that Greece could exit the euro zone had also raised uncertainty for the banks, leading them to follow in the footsteps of other large international companies like Carrefour, the big French supermarket chain that two months ago sold off all of its Greek operations. Prime Minister Antonis Samaras of Greece has been on a charm offensive in European capitals recently to reinforce the message that Greece wants to stay in the euro zone, despite renewed calls from some German politicians for it to leave and a resurgence in bets by investors that a Greek exit from the currency union may be inevitable (…..)

  5. Professor Uziel Nogueira says: Greece is moving rapidly into a ” 2001 Argentina type of financial event.” During the weeks previous to the implosion of the fixed exchange rate of 1 dollar = 1 peso in December 2001, international banks were under stress by angry clients demanding their dollars deposits. Before a massive bank run went out of control, the Minister of economy Domingo Cavallo froze all bank deposits and withdraws. Clients could not get access to their money deposits. Post 2001 debacle, international banks suffered heavy losses by clients that demanded them in Argentina’s courts and got their dollars back. French banks withdrawing from Greece is a bad omen. They don’t want be trapped in an Argentina type of event. Certainly, other international banks have already left or are in the process of following the French example. Few international banks want to be present in case of a bank run by panicked small Greek depositors demanding their euros back.

  6. “Too Close to State Financing Via the Money Press”. Jens Weidmann, the 44-year-old head of Germany’s central bank, has made a name for himself by championing price stability and opposing bond purchases by the European Central Bank. In a SPIEGEL interview, he criticizes the ECB’s latest plans and insists he only wants to secure the euro’s long-term future.


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