Evolución De La Crisis Económica

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SECRETARIA DE ESTADO DE ECONOMÍA,

MINISTERIO SECRETARÍA GENERAL DE POLÍTICA ECONÓMICA DE ECONOMÍA Y ECONOMÍA INTERNACIONAL Y HACIENDA SUBDIRECCIÓN GENERAL DE ECONOMÍA INTERNACIONAL

CUADERNO DE DOCUMENTACION

Número 91º ANEXO X

Alvaro Espina Vocal Asesor 6 de Septiembre de 2010

BACKGROUND PAPERS

1. 80 Th Annual Report by Chapter, BIS Annual Report 2009/10 … 7 2. The Crisis of Confidence has yet to be Overcome, Spiegel On Line…10 3. Merkel’s Government agrees to Mini-health care reform…12 4. The Coming British Revolution, Open Democracy de Gerry Hassan…14 5. Financial Crisis and its representations, Open Democracy by Anthony Faramelli…17 6. The unemployment emergency, The Washington Post by Eugene Robinson…19 7. A new generation, an elusive American dream, The New York Times by Louis Uchitelle…21 8. Unions outspending corporations on campaign ads despite court ruling, The Washington Post by TW Farnam…27 9. Tough Case, Newsweek by Michael Hirsh …29 10. European interest rates are about to go up, Eurointelligence …31 11. Banks should be somewhat more like Turkey says UBS, Financial Times by Tracy Alloway…33 12. Losing ECB liquidity = two small rate hikes, says Citi Financial Times by Tracy Alloway…36 13. Investors fear rising risk of US regional defaults, FT.com by Nicole Bullock…38 14. Europe’s toothless bank test making matters worse, http://www.telegraph.co.ul/finance by Ambrose Evans-Pritchard…40 15. Recapitalise, or resisting the lure of liquidity, Financial Times by Tracy Alloway…42 16. Una reforma laboral insuficiente (y II), http://www.fedeablogs.net/economia by Samuel Bentolila…44 17. Una reforma laboral insuficiente (I), http.//www.fedeablogs.net/economía by Samuel Bentolila…48 18. Sindicatos para el siglo XXI, http.//www.fedeablogs.et/economía by Samuel Bentolila…53 19. Stress testing the stress tests, Eurointelligence by Wolfgang Munchau…57 20. Gains from long-term Treasurys won’t go on forever, The Washington Post by Allan Sloan…59 21. At SEC enforcement unit, storied chief’s son makes a name for himself, The Washington Post by Zachary A Goldfarb…61 22. In ambitious India, workplace etiquette rounds out the coursework, The Washington Post by Emily Wax…64 23. Are profits hurtins capitalism?, The New York Times by Ives Smith and Rob Parenteau…67 24. Democratic campaign committees losing big Wall Street donors, The Washington Post by TW Farnam and Paul Kane…69 25. Letter from Shanghai: Class and capitalism mix with comedy, The Washington Post, by Andrew Higgins…72 26. Supreme court press, The New York Times by Paul Gewirtz …74 27. A judicial change to believe in, The Washington Post by EJ Dionne Jr…76 28. Bank balance sheets could torpedo recovery, Spiegel OnLine by Beat Balzli, Markus Dettner, Armin Mahler and Christian Reiermann…78

1 29. Stress tests to include 80 banks, Eurointelligence…83 30. Von Hagen on Flexible payroll teax, The Wall Street Journal, by Jurgen Von Hagen…87 31. La deuda externa bate records, El País de Lucía Abellán…88 32. Brussels (EU) to press for higher retirement ages, The Financial Times by Stanley Pignal…89 33. Aix 2010: dix measures pour une croissance européenne, La Tribune …91 34. More evidence that Eurobank stress tests are a Garbage-In, Garbage-Out exercise, Naked Capitalism…100 35. Eurozone rescue fund aims for top rating, FT.com by Gerrit Wiesmann and David Oakley…103 36. 27 days later, Financial Times, Financial Times by Izabella Kamiska…104 37. Spanish savings banks may be concealing mortgage losses, creditsights says, Bloomberg by John Glover…105 38. Punishing the jobless, The New York Times by Paul Krugman…106 39. Japanese interest payments, The Conscience of a Liberal …107 40. A political clash over deficits stalls legislation to address jobs, The New York Times by Ewell Chan…110 41. The Pressimism Bubble, The New York Times by Ross Douthat…114 42. China Fears warning effects of consumer wants, The New York Times by Keith Bradsher…116 43. La banca alerta de un corte del crédito, El País de Iñigo de Barrón…119 44. El BCE y la liquidez, El País de Angel Berges y Santiago Fernández de Lis…121 45. Otra vez el miedo y la falta de liquidez, El País de I de B…123 46. Juego peligroso, El País de José Luis Leal…124 47. Síndrome del alcohólico reahabilitado, El País de Antón Costas… 126 48. Pensar lo impensable, El País de Peter Thall Larsen…128 49. España inventa otra crisis, El País de Rafael Vidal…129 50. Alemania, O; China, 1 de El País de Moisés Naím…130 51. Europa sin esperanza, El País de Ignacio Sotelo…131 52. Catherine Rampell they did their homework, The New York Times by Catherine Rampell…133 53. Spend or scrimp? Two sides in white house debate, The New York Tims by Jackie Calmes…139 54. Results matters most in politics, http://yglesias.thinkprogress.org/…141 55. Zapatero se reúne hoy con el economist jefe del FMI, El País …142 56. La AEB ratifica la solvencia del Popular frente a un artículo de Financial Times, El País…142 57. La eurozona supera la prueba de liquidez, El País de Rafael Vidal…143 58. The G20’s China Bet, The Baselina Scenario by Simon Johnson…144 59. Myths of austerity, The New York Times by Paul Krugman…146 60. The Icelandic post-crisis miracle, The Conscience of a Liberal…147 61. China’s grand strategy in a post-western world, Open Democracy by William A Callahan…148

2 62. US housing market remains fragile despite low mortgage rates, The Washington Post by Dina ElBoghdady…152 63. Will stress tests lead to recapitalization, Eurointelligence…155 64. What comes after inflation targets, FT.com by Samuel Brittan…158 65. The real reason we are in Afghanistan, Spiegel On Line by Rory Stewart…160 66. How the East was lost, Spiegel On Line by Alexander Neubacher…163 67. Europe moves to regulate bankers’ bonuses, Spiegel On Line …174 68. Exposed, The limits of Merkl’s Leadership, Spiegel On Line by Christoph Schwennicke…176 69. Resultado subasta de bonos deuda pública española y Moody’s pone el rating bajo revisión, La Vanguardia.es by Gurus Hucky…178 70. So much for the stress test: Axel Weber wants to impose conditions that render them a farce, Eurointelligence…179 71. Bruselas no dará ayudas a los países que se salten los límites del déficit, El País de Andreu Missé…182 72. Relief at low uptake of ECB Money, FT.com by Ralph Atkins, David Oakley…184 73. Banks borrow less than feared from ECB, http://www.ft.com by Ralph Atkins…185 74. European Central Bank, http://www.ft.com…186 75. German banks expected to call on rescue fund by Gerrit Wiesmann and Patrick Jenkins and David Oakley …187 76. The cost of normalization, Financial Times by Izabella Kaminska…188 77. G20 should worry about global imbalances not exit strategies, Eurointelligence by Marco Annunziata…189 78. Conservatives use Pelosi as face of liberalism in campaign ads, The Washington Post by Karen Tumulty…192 79. Economies in Latin America surge forward, The New York Times by Simon Romero…194 80. Germany’s export boom has trade partners stewing, Spiegel On Line by Armin Mahler, Christian Reiermann, Wolfgang Reuter and Janko Tietz…197 81. Debacle for Merkel as vote goes to third round, Spiegel On Line by Sebastian Fischer, Florian Gathmann, Veit Medick and Severin Weiland…202 82. ¿Son acertados los planes de austeridad de Europa?, Política y Gobierno …204 83. Crisis is back with a vengeance as ECB’s sterilisation auction flops, Eurointelligence…209 84. The double-edged sword of low mortgage rates, Reuters, Felix Salmon…212 85. German presidential election degraded by party politics, Spiegel On Line by Spiegel Staff…214 86. 2. 97 Boy, the bond vigilantes are really on the warpath, The Conscience of a Liberal…218 87. Recession cut into employment for half of working adults, study says, The Washington Post by Michael A Fletcher…223 88. World markets stumble on worries over US., Europe and China, The Washington Post by Frank Ahrens and Howard Schneider…225 89. World stock markets news summary (US, UK, Europe, Asia) SMR by Paddy Power Trader…227

3 90. ECB Weber: EMU debt crisis up to now not affecting recovery, Market news.com …228 91. German banks have foul credits of over €200 bn –highest level in the EU, Eurointelligence…229 92. The end of muddling through is nigh, Financial Times by Wolfgang Munchau…232 93. Guest post: El erian on a disappointing G20 compromise, Financial Times by Guest writer…233 94. Spanish banks rage at end of ECB offer, FT.com by Patrick Jenkins and Victor Mallet and Ralph Atkins …235 95. Spain hopes ECB knows banks’s needs as loan matures, Bloomberg Businessweek …237 96. Greece, Spain lead rise in sovereign debt risk near record high, Bloomberg Businessweek…238 97. Funding jitters push Europe shares to near 3-wk low, Reuters…240 98. Fresh fears over European bank sector, Financial Times by David Oakley…241 99. ECB walks a fine line siphoning off its liquidity, The Wall Street Journal by Brian Blackstone and Nina Koeppen…242 100. BIS’s Caruana certainly raises fear levels for bankers, The Wall Street Journal by Patience Wheatcroft…244 101. El BCE inquieta a bancos españoles al retirar liquidez del Mercado, La Vanguardia.es …247 102. Numbers for LTRO – watchers, Financial Times by Tracy Alloway…248 103. Spains’s long, hot, refinancing summer, Financial Times by Joseph Cotterill…249 104. What is Goldman Sachs thinking?, The Baseline Scenario by Simon Johnson…251 105. El BCE mantiene la barra libre de liquidez a la banca, El País de Juan Gómez …252 106. Top 10 at 10: Spanish Banks fear end of ECB support; a coming war of creditors vs borrowers; Dilbert, Interest.co.nz by Bernard Hickey…253 107. George Soros talks Obama’s book in threat to euro: amity shlaes, Bloomberg by Amity Shlaes…259 108. Preparing for next big one, The New York Times by Andrew Ross Sorkin…262 109. Weber – surplus states should reject stimulus calls, Reuters…264 110. Greece’s best option is an orderly default, Ft.com by Nouriel Roubini…265 111. Concerns over Greek bond sale, Ft.com by David Oakley and Kerin Hope …267 112. In Ireland, a picture of the high cost of austerity, The New York Times by Liz Alderman…268 113. Half-hearted promises and mutual blame, Spiegel On Line by Gregor Peter Schmitz and Philipp Wittrock…271 114. Berlin fears euro rescue could get more expensive, Spiegel On Line …273 115. Stabilizing US debt is the greater of two G 20 challenger, The Washington Post by Lori Montgomery and Howard Schneider…275 116. Savings rate grows faster than consumer spending, The Washington Post by Frank Ahrens…277 117. G20 accord: you go your way, I’ll go mine, Guardian.co.uk by Larry Elliott…278 118. G20 responds to European debt crisis with deficit-cutting goal, Bloomberg…281 119. Another summit that disappoints, Eurointelligence…284

4 120. Finances publiques: la revision constitutionnelle se dessine, Le Monde.fr …287 121. Debt distress rises as Goldman, JPMorgan Vary on Defaults : credit markets, Bloomberg…289 122. Le Guardian met en vente les îles grecques, Coulisses de Bruxelles, UE de Jean Quatremer…293 123. Michael Schuman has the G20 doomed the recovery ?, The Curious Capitalist by Michael Schumann…295 124. Parenteau: Marching to Austeria and other Neolib Fibs, Recent Items, Naked Capitalism, by Rob Parenteau…297 125. Only a closer union can save the eurozone, FT.com by Wolfgang Munchau…301 126. Fresh moves to unlock loan pool by Victor Mallet and Patrick Jenkins…303 127. Déficits: le gouvernement de plus en plus décidé à augmenter la fiscalité, le Monde.fr …304 128. The Third Depression, The New York Times by Paul Krugman…306 129. In the long run, we are still all dead, The Conscience of a Liberal …307 130. Invisible Friends…308 131. Fiscal disarray is the least of the G20’ sins, Ft.com by Clive Crook…310 132. World leaders agree on timetable for cutting deficits, The New York Times by Sewell Chan and Jackie Calmes…312 133. For G-20, a struggle over growth and debt, The Washington Post by Howard Schneider…315 134. President Obama urges G-20 nations to spend; they pledge to halve deficits, The Washington Post by Howard Schneider and Scott Wilson…317 135. G-20 Toronto summit declaration, The Washington Post …319 136. G-20 to set targets to cut deficits, keep flexibility for stimulus plans, Bloomberg by Sandrine Rastello and Tony Czuczka…336 137. Pappandreu defiance of default inspired by gun to throat seizure in Greece, Bloomberg …338 138. Continuismo en Toronto, El País…344 139. Puja por las islas griegas, El País …345 140. Sobre los salarios, El Pais de Josep Reig…346 141. Corbacho vincula el despido objetivo sólo a empresas en peligro, El País …346 142. España opta por reforzar el fondo de garantía en lugar de la tasa bancaria, El País de Miguel González…347 143. Bruselas quiere que la deuda privada cuente en las sanciones por déficit, El País de EFE …349 144. Pekín, Londres y Berlín ganan la partida a Washington, El País de Reuters…350 145. El G20 busca el equilibrio económico para la recuperaciñon, Reuters España …351 146. Estados Unidos y Europa fracasan en su intento de convencer a los países emergentes, El País de Alejandro Bolaños…353 147. Zapatero defiende el modelo español para las nuevas obligaciones de la banca, El País de Miguel González…354 148. Las soluciones nacionales se abren paso ante la crisis, El País de AB…356 149. Pruebas de estrés y de credibilidad, El País de Santiago Carbo y Joaquín Maudos…357

5 150. Reformas financieras descafeinadas, El País de José García Montalvo…359 151. Sin milagro en Wall Street, El País de James Pehokoukis…361 152. Un G20 de dos direcciones, El País de Alejandro Bolaños…362 153. La reforma de los mercados financieros, El País de Jesús Caldera, Josepht Stiglitz, Stephany Griffith-Jones, Jeffrey Sachs, André Sapir, Nicolas Stern…367 154. Las soluciones nacionales se abren paso ante la crisis, El País de AB…369 155. Debt concern in US could hurt Obama at Summit, The New York Times by Jackie Calmes and Sewel Chan…371 156. JP Morgan responds to financial reform: the poison pill strategy, The Baseline Scenario by Simon Johnson…372 157. Germany warns US not to become addicted to borrowing, Spiegel On Line…375 158. Trans-Atlantic tiff brewing ahead of G-20 summit, Spiegel On Line…377 159. El G20 debate sobre los límites de la normativa bancaria, El País de Alejandro Bolaños…380 160. Las tres cumbres del G20 desde el inicio de la crisis financiera, El País de Documentación…381 161. Un balance para Europa, Cinco Días.com de Miguel Ángel Aguilar…384 162. Bond Bubble?, Credit Bubble Bulletin by Doug Noland…385 163. Issing group recommends increase in bank levy for Germany 25.06.2010…388 164. On fiscal size does not fit all – a Korean lesson for Spain, Eurointelligence by Adam Posen…391 165. Suffocating Europe, Eurointelligence by Jorg Bibow…393 166. Quarterly report on the euro area focuses on challenges ahead for euro area exporters…395 167. Why was Poland the only EU country to avoid recession?, Economics One by John B Taylor…397 168. Can gold cause the boom bust cycle?, Mises Daily by Robert P Murphy…3400 169. In Deal, New Authority Over Wall Street, by Edward wyatt and David m. Herszenhorn... 405 170. Cutting and Pasting: A Senior Thesis by (Insert Name), by Brent Staples... 409 171. An Economy of Grinds, by David Brooks... 411

Período: de 25/06/2010 a 12/07/2010 en orden inverso a la fecha

6 BIS Annual Report 2009/10 28 June 2010 80th Annual Report by chapter Table of contents, letter of transmittal Read (PDF, 9 pages, 37 kb) Overview of the economic chapters Read (PDF, 3 pages, 21 kb) I. Beyond the rescue: exiting intensive care and finishing the reforms Abstract | Full Text (PDF, 15 pages, 55 kb) II. From the emergency room to intensive care: the year in retrospect Abstract | Full Text (PDF, 14 pages, 1100 kb) III. Low interest rates: do the risks outweigh the rewards? Abstract | Full Text (PDF, 11 pages, 558 kb) IV. Post-crisis policy challenges in emerging market economies Abstract | Full Text (PDF, 12 pages, 323 kb) V. Fiscal sustainability in the industrial countries: risks and challenges Abstract | Full Text (PDF, 15 pages, 344 kb) VI. The future of the financial sector Abstract | Full Text (PDF, 15 pages, 229 kb) VII. Macroprudential policy and addressing procyclicality Abstract | Full Text (PDF, 14 pages, 82 kb) The BIS: mission, activities, governance and financial results Read (PDF, 103 pages, 373 kb) Overview of the economic chapters 28 June 2010 Chapter I The financial crisis has left policymakers with a daunting legacy, especially in industrial countries. In setting policies, they must adopt a medium- to longterm perspective while they cope with the still fragile and uneven recovery. Households have only just begun to reduce their indebtedness and therefore continue to curb spending. Extraordinary support measures helped to contain contagion across markets, preventing the worst. But some measures have delayed the needed adjustments in the real economy and financial sector, where the reduction of leverage and balance sheet repair are far from complete. All this continues to weigh on confidence. The combination of remaining vulnerabilities in the financial system and the side effects of ongoing intensive care threaten to send the patient into relapse and to undermine reform efforts. Macroeconomic support has its limits. Recent market reactions demonstrate that the limits to fiscal stimulus have been reached in a number of countries. Immediate, front-loaded fiscal consolidation is required in several industrial countries. Such policies need to be accompanied by structural reforms to facilitate growth and ensure long-term fiscal sustainability. In monetary policy, despite the fragility of the macroeconomy and low core inflation in the major advanced economies, it is important to bear in mind that keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial and monetary stability. Fundamental reform of the financial system must be completed to put it on more stable foundations that would support high sustainable growth for the future. Above all, reform

7 should produce more effective regulatory and supervisory policies as part of an integrated policy framework. A new global framework for financial stability should bring together contributions from regulatory, supervisory and macroeconomic policies. Supported by strong governance arrangements and international cooperation, such a framework would promote the combined goals of financial and macroeconomic stability. Chapter II While some emerging market economies are in danger of overheating, GDP in most advanced economies is still well below pre-crisis levels despite strong monetary and fiscal stimulus. The rapid increase of government debt raises urgent questions about the sustainability of public finances. Banks have increased their capital buffers, and profits have been boosted by a number of temporary factors. But banks still remain vulnerable to further loan losses. As recent disruptions in funding markets have shown, banks can face significant refinancing pressures when sentiment turns adverse. Although banks in the crisis countries have made some progress in repairing their balance sheets, this process is far from complete. Efforts to restructure and strengthen the financial system should continue. Chapter III Central banks cut policy rates sharply during the crisis in order to stabilise the financial system and the real economy. Those essential cuts, reinforced by unconventional policy measures to address financial market malfunctioning, helped to forestall an economic meltdown. But there are limits to how long monetary policy can remain expansionary. Low interest rates can distort investment decisions. The financial stability risks that could arise from a prolonged period of extremely low policy rates also need to be very carefully weighed. An extended period of such low policy rates can encourage borrowers to shorten the duration of their debts, facilitate the increased leverage of risky positions and delay necessary balance sheet adjustments. While policymakers can and should address such risks with other tools, they may still need to tighten monetary policy sooner than consideration of macroeconomic prospects alone might suggest. Chapter IV Emerging market economies (EMEs) are recovering strongly and inflation pressures there are rising. Given low policy rates in the major financial centres, many EMEs are concerned that their stronger growth prospects could attract destabilising capital inflows, leading to currency appreciation. Some continue to keep policy rates low and resist exchange rate appreciation by conducting large-scale intervention in foreign exchange markets. Such policies tend to be associated with a sizeable expansion in bank balance sheets, rapid credit growth and asset price overshooting. The risks of domestic overheating thus increase. To promote more balanced domestic and global growth, some EMEs could rely more on exchange rate flexibility and on monetary policy tightening. In addition, prudential tools have an important role to play in enhancing the resilience of the financial system to domestic and external financial shocks. In contrast, while capital controls may have a limited and temporary role, they are unlikely to be effective over the medium term. Chapter V The level of public debt in many industrial countries is on an unsustainable path. Current budget deficits, partly cyclical but also swollen by policy responses to the crisis, are large in relation to GDP. And expenditures related to ageing populations are set to increase considerably over the next few decades. Recent events in Greece and other southern European countries have shown how quickly investors' doubts about the sustainability of public finances

8 in one country can spill over to others. In addition, high levels of public debt may lower long- term economic growth and ultimately endanger monetary stability. These risks underscore the urgent need for credible measures to reduce current fiscal deficits in several industrial countries. Tackling the long-term fiscal imbalances requires structural reforms aimed at boosting the growth of potential output and containing the future increase in age-related expenditures. Such measures may have adverse effects on output growth in the short term, but the alternative of having to cope with a sudden loss in market confidence would be much worse. A programme of fiscal consolidation - cutting deficits by several percentage points of GDP over a number of years - would offer significant benefits of low and stable long-term interest rates, a less fragile financial system and, ultimately, better prospects for investment and long-term growth. Chapter VI The crisis revealed that some business models of financial firms were seriously flawed. For a long time, financial firms earned comparatively low returns on assets but used high leverage to meet targets for returns on equity. They also took full advantage of cheap short-term funding. This strategy made their profits more volatile, especially during periods of market stress. Since the crisis, investors have become more discriminating in their treatment of financial firms, rewarding those with more prudent and resilient models. The priority of policymakers now is to incorporate in the regulatory framework the stronger standards being imposed by the marketplace. Higher-quality capital, lower leverage and more stable funding should buttress the sector's future resilience. This need not undermine medium-term profitability, particularly if restructuring continues and excess capacity is progressively eliminated. In addition, more sound business models should restrain funding costs, thus contributing to strong, stable and sustainable performance in the sector. Chapter VII The stability of the financial system is undermined by distorted incentives and procyclical feedback effects. Macroprudential policy, which broadens the perspective of traditional prudential policy, can readily strengthen the resilience of the financial system to procyclicality by adapting conventional prudential tools. Countercyclical capital buffers, for example, can be built up when credit growth rises above trend during a boom, and released during the downturn. Other measures such as ceilings on loan-to-value (LTV) ratios for mortgage lending can act as automatic stabilisers because they will bind more during a boom when banks typically seek to expand property loans by accepting high LTV ratios. Such approaches could help to restrain credit and asset price excesses and thus mitigate the build-up of systemic financial vulnerabilities. Addressing procyclicality is closely linked to traditional macroeconomic stabilisation policy. A more resilient financial system complements countercyclical monetary and fiscal policy, helping address threats to financial stability in the downturn. That said, monetary policy does need to lean more against the build-up of systemic financial vulnerabilities during the boom. That can be done by lengthening the policy horizon, thereby promoting long-term price stability more effectively. http://www.bis.org/publ/arpdf/ar2010e_ov.htm

9 07/06/20104 04:01 PM Europe and the Euro 'The Crisis of Confidence Has Yet to Be Overcome' The global economy is showing signs of improvement, but financial markets remain jittery. SPIEGEL spoke with the head of the European Bank of Reconstruction and Development, Thomas Mirow, about the future of Europe's common currency union. SPIEGEL: Mr. Mirow, there are now huge rescue funds established for both banks and states. Why are the financial markets still so nervous? Thomas Mirow: As a first step, measures had to be taken that helped in the short term, but a few long-term structural problems have still not been solved. SPIEGEL: What is the likelihood that Greece or Spain will be unable to fully pay back state bonds despite all of the rescue packages? Mirow: It makes no sense to speculate. SPIEGEL: But the banks are acting on precisely this assumption. That is why they are still lending so little to each other. Mirow: It is true that the crisis of confidence has yet to be completely overcome. That is the background to the current debate about the stress tests, which would examine the banks' abilities to withstand any further upheavals. And the tests should also clarify in advance how banks with insufficient capital can be provided with extra equity. SPIEGEL: How many banks would fail another test? Mirow: When it comes to the big banks, the situation looks largely stable. Some Spanish savings banks and German regional banks are expected to look risky. SPIEGEL: Was the rescue package for the euro first and foremost a rescue package for the banks? Mirow: The package was intended to calm the fundamental concerns about the euro, particularly outside of Europe. SPIEGEL: In the US, many fund managers are now assuming that the euro will be dismantled in the end. How often do you have doubts about the euro's ability to survive? Mirow: If the construction errors that became apparent during the crisis can be fixed, then I don't see any reason for doubts. SPIEGEL: Can these deficiencies be removed if those states that are most affected are allowed to help come up with a solution? Mirow: One cannot say for certain. However, the intensity with which Spain and Greece are dealing with questions like budget deficits or competitiveness would have been unthinkable a few months ago. SPIEGEL: Despite all of these efforts, the central problems with the euro remain. Strong economies belong to the same currency union as weak ones like Greece. Is the euro not doomed to failure?

10 Mirow: There are also big differences between the states in the US. The question is, to what degree are the states there for each other and if there are effective balancing mechanisms. That was kept from the public for a long time. SPIEGEL: Then the currency union is a transfer union? Mirow: Yes, it has to be to a certain extent. SPIEGEL: If one had told the public that beforehand, then, in Germany at least, the euro would never have been introduced. Mirow: That may well be. But today the Germans need to be told how much their economy and jobs profit from the euro. SPIEGEL: Does it make sense to allow other Eastern European states to join the euro zone following Estonia? Mirow: Yes. But I don't expect any further members in the near future. SPIEGEL: Because we could be faced with a repeat of Greece? Mirow: Possible candidates are not ready yet. But it is still important that they continue to prepare themselves for entry. SPIEGEL: Allow yourself a prediction: What is going to happen now with the economy and the euro? Mirow: There is still a question mark over the risks on the financial markets. But it's not just the euro and Greece that play a role, but also the sustainability of growth in the US. SPIEGEL: Doesn't the world have to adjust to lower future growth rates? Mirow: The question is really which growth model we want to have in industrialized states. Before the crisis, it was largely determined by the financial sector and the capital markets. Now we need a new perspective. Discussions about stress tests and regulation alone won't make a huge difference. The two worlds of finance and the real economy should not be discussed separately. That is why I found it regrettable that renewable energies and climate protection played hardly any role at the recent G-20 summit in Toronto. SPIEGEL: Are we sliding into an uncertain future without a clear concept? Mirow: There is, at any rate, a lot that still needs to be done to avoid a long period of tiny growth rates in industrialized nations. Interview conducted by Beat Balzli and Armin Mahler

URL: • http://www.spiegel.de/international/europe/0,1518,704767,00.html

11 07/06/20104 06:06 PM Attacking the Shortfall Merkel's Government Agrees to Mini- Health Care Reform Facing a projected shortfall of 11 billion euros for Germany's health care system in 2011, Chancellor Angela Merkel's government agreed on Tuesday to increase contributions. But the plan is a far cry from radical reform, leading to calls for the country's health minister to resign. Germany's government has been arguing for months about how best to reform the country's chronically indebted health care system. On Tuesday, leaders of Chancellor Angela Merkel's coalition finally reached agreement. The deal, presented by Health Minister Philipp Rösler -- from Merkel's junior coalition partner, the Free Democrats -- calls for contributions to rise from 14.9 percent of employee income to 15.5 percent. The contributions remain split 50-50 between workers and employers. In addition, additional charges demanded by insurers to eliminate shortfalls will no longer be capped at 1 percent of employee salaries. "The expected deficit of €11 billion in 2011 will be cancelled out," Rösler told reporters on Tuesday. He said he was optimistic that the new contribution regime would result in lasting stability for Germany's health care finances, but added that the system for how contributions are made must still be reformed. Rising costs have dogged Germany's health care system for years, and multi-billion euro deficits have become the norm. As recently as 2006, Merkel -- then in coalition with the center-left Social Democrats -- proudly announced what she called "far reaching reform." Raining on the Parade Then, as now, however, the reform was a far cry from what was originally promised. In 2006, Merkel's Christian Democrats had sought to radically change the way health care contributions are made -- via joint contributions from employers and employees -- as a way to inject flexibility into the country's labor market. This time around, it was Rösler's Free Democrats who wanted to shake up the system. Rösler had promised the introduction of a per-capita payment system, which would have seen all Germans pay the same amount into the system, though with government assistance for those who couldn't afford it. In 2006, a similar idea was blocked by the Social Democrats. This year, it was the Christian Social Union -- the Bavarian sister party to Merkel's Christian Democrats -- who rained on the parade. The ensuing debate contributed mightily to the widespread impression that Merkel's coalition prefers infighting to governing. Health care costs in Germany are rising at roughly 5 percent each year, according to Peter Altmaier, parliamentary floor leader for Merkel's conservatives. He promised that Tuesday's agreement will be the first step towards a "long term solution." While the plan allows insurers to determine how high the additional charges should be, it calls for assistance for low wage earners. Should the additional charges be higher than 2 percent of their salary, they will receive state help.

12 The plan is a far cry from the radical reform that Rösler had been championing. On Tuesday, Frank-Walter Steinmeier, SPD floor leader, called for the FDP minister's resignation on the grounds that he was clearly unable to push through his preferred plan. Steinmeier said the plan was unfair and would "hit low and middle income earners the hardest." cgh -- with wire reports

URL: • http://www.spiegel.de/international/germany/0,1518,705045,00.html RELATED SPIEGEL ONLINE LINKS: • Crumbling Coalition: Germans Anticipate a Collapse of Merkel's Government (07/02/2010) http://www.spiegel.de/international/germany/0,1518,704249,00.html • Exposed: The Limits of Merkel's Leadership (07/01/2010) http://www.spiegel.de/international/germany/0,1518,704069,00.html • Letter from Berlin: Is Merkel's Government About to Crumble? (06/15/2010) http://www.spiegel.de/international/germany/0,1518,700788,00.html • Letter from Berlin: Has Muddling Merkel Lost Her Touch? (06/10/2010) http://www.spiegel.de/international/germany/0,1518,699970,00.html

13 Created 07/06/2010 - 16:03

The Coming British Revolution Gerry Hassan After the bankers’ crash and the Keynesian moment, we are now ‘back to the future’ of the safety and comfort of the mantras of the Thatcher and Blair eras. This is the coming of another British revolution in the size of the state and public spending. In the streets and parks of Britain everything seems to be as it always has been. This feels like a typical British summer with those totems of modern life passing us by: Glastonbury, Wimbledon and England crashing out of the World Cup after another catastrophic underperformance. Yet behind these comforting cultural moments things are changing dramatically. The new Con-Lib Dem government is presenting the case for public spending cuts the like of which we have never seen in the history of the UK. Its call for a rebalancing of the economy now means taking on the ‘bloated public sector’, rather than as it originally did shifting from the over- dominance of the City of London and financial services. Labour have yet to find their feet, understand the limitations of their record, or an appropriate voice, stuck between tactical and strategic considerations which will crystallise in the forthcoming AV referendum vote. This is both a fast moving situation and a moment with significant openings and opportunities, but also one that is being used to forge a new powerful consensus and commonsense in the political elite and establishment opinion. This is namely, the utilisation of the current economic, social and political crisis to undertake a profound and far-reaching British revolution. A fascinating and revealing gathering of these opinions took place last week under the auspices of The Times newspaper with their CEO Summit who then produced a sixteen page detailed supplement of its deliberations at the end of last week (1). The summit brought together an impressive array of figures from business with The Times announcing that ‘the men and women there represented many of the most powerful companies in the country. Between them, their businesses employ more than five million people and they have a combined value of more than £1 trillion’. No need for block votes here; business knows it has power, legitimacy and respect in the corridors of government! The event was addressed by David Cameron, George Osborne and Jean Chrétien, Canadian Liberal PM responsible for its 1990s programme of public spending cuts, and its aim was in the words of James Harding, editor of The Times ‘to help to shape an agenda for renewed prosperity in Britain’. The Seven Themes of the CEO Summit The day’s deliberations were split into seven task force groups: the deficit, business growth, political reform, public services, Britain’s security, education and skills, and climate change, with each coming up with a short-list of policy ideas and their top five priorities. Sir John Rose, CEO of Rolls Royce, commented that the key message of the entire day was there had been a ‘sea change’ in attitudes towards a ‘rebalancing’ of how money is raised and spent.

14 The priorities agreed in each discussion make for riveting reading and amount to a manifesto by major parts of British industry and commerce. The deficit group’s top policy ideas after its first one of sticking to the government target for deficit reduction, paints a weary picture. They are in order of importance: • Shift a significant amount of government work to the private sector; • Introduce a 5% pension levy for all public sector workers; • Freeze benefit rates for two years; • Cut all pensioner benefits and put one third into the Pension Credit. All of these supposedly deficit reducing measures aid redistributing income, wealth and support away from those who are poorer and disadvantaged, and an implicit call for a recalibrated state which is even less ‘progressive’ than the current one in its priorities. The business growth group decided their top aim was to ‘seek to put the UK at the top of the international tax competitive league’, and talked incessantly of the age old mantras of recent decades: ‘reducing regulation’, cutting ‘red tape for business’ and encouraging ‘labour market flexibility’. The political reform strand was a shard of radical enlightenment compared to the rest of the day, co-chaired by that well-known reformer Vernon Bogdanor [1]. Its list of reforms was a fascinating mix, first wanting to ‘change the voting system for the House of Commons’, second, ‘an appointed, and not elected House of Lords’ with the latter viewed as a ‘political gesture’, third, ‘a written constitution, with input from members of the public’. The public services group decided their top priority was to ‘establish the things that ‘only government’ can do’ and to ‘take on the public sector unions (over pensions, pay and flexible working)’. One participant stated that we needed to ask ‘What does the State really need to do, and what does it not?’ The 'Britain’s security' discussion showed how far this could go by deciding that its most important policy should be how to ‘use the private sector to cut defence procurement and support’. The education and skills group's top aim was how to ‘give heads and governing bodies freedom over the hiring and pay of teachers’. One member of this discussion commented, ‘Heads should run schools as CEOs run companies – with freedom to hire and fire’. The climate change group was not surprisingly pro-nuclear, focused on profits and growth. The Shock Doctrine of the British Crisis The Times CEO Summit Agenda has been ‘delivered’ to Cameron and Osborne, along with Vince Cable and Michael Gove and other Cabinet ministers. It is an accurate statement of the emergence of a new consensus to address the multiple crises. After the bankers’ crash and the Keynesian moment, we are now ‘back to the future’ of the safety and comfort of the mantras of the Thatcher and Blair eras. This is the coming of another British revolution. The crisis of sovereign debt in Greece and the Eurozone which emerged in the course of the 2010 UK general election has been used by the Conservatives and Lib Dems to shift profoundly rightwards and remake British politics. Nick Clegg rejects that he is being used as a ‘figleaf’ to engage in a fundamental transformation of British society, the state and the economy, making it more unequal, harsh and nasty for those who have the misfortune to be poor, or fail, or need temporary support (2). This is not because he is in denial about what is happening but because like a whole swathe of Lib Dems he is as economically liberal and neoliberal as the most uber-Tory.

15 What is being posed is in effect a ‘shock therapy’ to the British economy, society and public spending the like of which has never been seen in a supposedly mature democracy. The only comparisons here are the brutal neo-liberal experiments of the Chilean and Argentinean military dictatorships in the 1970s, and the former Soviet bloc after the fall of Communism. Britain’s proposed cuts are twice as deep as Canada in the 1990s [2], and three times more tough than Sweden in the same period. What isn’t widely realised is the power and hold this ideological dogma now has over parts of British society: elements of all Britain’s three main political parties, business, media and institutional opinion. The assumptions it draws on that the state, public spending and regulation are the problem, and a smaller state, public spending cuts and deregulation the solution are not based on any calm analysis, facts or evidence. Instead, this neo-liberal calling has become a faith, a sect, a kind of calling which has a popular resonance because it is so simple and can be understood and articulated by a taxi driver or pub bore. The public sector has become ‘bloated’, ‘we have been spending more than we earn’, ‘the world does not owe us a living’; we have even seen the return of Margaret Thatcher’s ‘household economics’. Underneath it all the Con-Lib Dems want to see a return to the consumption driven, property fixated, asset bubble of the New Labour era as their own budget figures show! What you won’t find in this worldview or any of The Times CEO Summit is an assessment of the shortcoming of British business, the City and finance. Nothing in the seven discussion groups' top priorities was about business changing its ways, the failures of banks and finances, and nothing at all was put forward about radically altering the structures and cultures of companies and industry. The long view story of this crisis, of the inadequacies of gentlemanly capitalism, the anti-industrial ethos in British society, the limitations of corporate governance and finance, and the addiction to short-termism and instability, didn’t get a mention. The response to this has to recognise the dogma we are dealing with and its hold on the forces of power, wealth and status in our society. The second wave of neo-liberalism that is emerging will not be defeated by calmly pointing out the disastrous effects of their policies, and that thirty years after their palace revolution the UK is the fourth most unequal country in the advanced capitalist world. We have to realise that facts and reality don’t matter to the true believers of this revolution. Therefore, the way to defeat them is to develop an alternative explanation of the current crises, which challenges the current constellation of forces which give legitimacy and voice to neo- liberalism, and which poses this with an understanding of the long view of the British crisis. And we probably need to start thinking about a populist version of this as well: what would the taxi driver in central London say about the current crisis if they were trying to challenge the discussions of The Times summit last week? Do we have even the beginnings of an answer? Notes 1. The Times CEO Summit: Setting Britain’s Summit: Business leaders present their policies to the coalition Government, The Times, July 1st 2010. 2. Channel Four News, July 5th 2010.

Source URL: http://www.opendemocracy.net/ourkingdom/gerry-hassan/coming-british-revolution Links: [1] http://www.opendemocracy.net/ourkingdom/gerry-hassan/official-voice-of-our-broken-constitution- speaks [2] http://www.guardian.co.uk/commentisfree/2010/jun/20/budget-cuts-george-osborne

Published on openDemocracy (http://www.opendemocracy.net) Home > Financial Crisis and its representations

Financial Crisis and its representations Author: Anthony Faramelli Summary: Here's a little taste of what you can expect from the second installment of openDemocracy's Discourses series, Financial Crisis and its representation, opening this Thursday, July 8th at 6pm. There are a few moments during a crisis when a people’s façade breaks away and admissions of cold and brutal truth are made. Such an occurrence happened in 2008 during the melt-down of the global financial system when Alan Greenspan was called to testify on Capitol Hill and admitted that his view of the world, the ideology which he had championed for decades, was wrong [1] and that regulation of the financial sector could have staved off the Financial Crisis. It’s in moments like these, when the discourses that maintain the status quo shatter, that opportunities for real and meaningful change present themselves. However two years down the road we find ourselves in much the same situation: the majority of the people and institutions who directly caused the crisis are still in power, economic recovery is moving slower than anticipated and world leaders still cannot agree [2]what, if anything, needs to be done to safeguard against the next crisis, a crisis which President Obama [3] warns may be just over the horizon. So what went wrong? Why have people not been able to enact meaningful change, choosing instead to sit by and angrily watch as the old status quo returns? Perhaps the problem is not just that a few greedy bankers are causing the total collapse of the world’s financial system just so they can get rich, but that the system itself is broken. Maybe the ways we are taught to understand economics are inherently flawed and new mechanisms of analysis need to be developed that account for and explain instability and irrationality? However the silver lining to all this is that more and more people are asking these questions. The notions that finding new ways to understand economics is not only the responsibility of policy makers, businessmen and bankers, and if we are ever going to create safeguards against future crises, a better understanding of how the financial system works (or doesn’t work) is an important task for everyone to undertake are starting to spread. It is precisely these questions which the second instalment [4] of openDemocracy’s new Discourses [5] series will address this Thursday, July 8th at the Drawers Gallery (438 Kingsland road, E8 4AA [6] in the London Borough of Hackney) with our Financial Crisis and its representations event.

Come join us for an open discussion with the lecturer in International Political Economy at the Centre for International Studies and Diplomacy and former economic adviser to the Venezuelan president Hugo Chavez Stephanie Blankenburg [7]; journalist, social theorist and lecturer in economics at the Anglo-American University in Czech Republic Nikola Ivanovski; and the novelist, writer, poet, economist, artist and visiting Research Fellow at the University of Westminster’s Centre for the Study of Democracy Nitasha Kaul [8] as they explore new ways of examining and understanding global economics. The event will also feature an exhibition by artists Lorenzo Duranitni [9] and Jaroslav Kysa [10] exploring visual representations of the Financial Crisis. The event will open at 6pm, with the discussion starting at 7:30. And, unlike most things in this economic climate, it is free to all! Sideboxes 'Read On' Sidebox: Discourses is a quarterly series of exhibitions, each with a corresponding panel discussion on a contemporary social / cultural issue covering a wide array of topics and themes: from the role of theory in art to financial crises; from subaltern art and representation to architecture and war. These live events will showcase young up-and-coming artists while allowing the general public to interact with both our writers and the artists, fostering a greater understanding of the artists' work as well as the relationship that exists between art and the social,cultural and political theories which often influences and drives it. Related stories:

18 Introducing the Discourses series [11] The economics of turning people into things [12] Corporate rights and responsibilities: restoring legal accountability [13] Topics: Culture

Source URL: http://www.opendemocracy.net/anthony-faramelli/financial-crisis-and-its- representations Created 07/06/2010 - 10:52 Links: [1] http://www.guardian.co.uk/business/2008/oct/24/economics-creditcrunch-federal-reserve- greenspan [2] http://www.nytimes.com/2010/06/19/business/global/19summit.html [3] http://www.whitehouse.gov/sites/default/files/rss_viewer/president_obama_letter_to_g- 20_061610.pdf [4] http://www.facebook.com/pages/Discourses/253685369955?v=app_2344061033&ref=ts #!/event.php?eid=120416301333830&index=1 [5] http://www.facebook.com/#!/pages/Discourses/253685369955?ref=ts [6] http://maps.google.com/maps?f=q&hl=en&q=438 Kingsland Road, E8 4AA, City of London, United Kingdom [7] http://www.cisd.soas.ac.uk/index.asp-Q-Page-E-stephanie-blankenburg--70827883 [8] http://site.nitashakaul.com/ [9] http://www.lorenzodurantini.com/ [10] http://jaroslavkysa.com/portfolio/ [11] http://www.opendemocracy.net/introducing-discourses-series [12] http://www.opendemocracy.net/article/the-economics-of-turning-people-into-things [13] http://www.opendemocracy.net/globalization- institutions_government/corporate_responsibilities_4605.jsp

The unemployment emergency By Eugene Robinson Tuesday, July 6, 2010; A13 The good news is that unemployment has fallen to "only" 9.5 percent. The bad news is that the jobless rate is down only because so many people have given up hope of finding work. Perversely, the jobless who aren't actively looking for jobs are not counted as "unemployed." Perhaps there should be a new category: "mired in existential despair." If anyone in Washington wants to know why people in the hinterlands are angry, one simple answer is that our political leaders seem to be so calculating and unmoved about the parlous state of the economy. The disheartening employment figures released Friday quickly became fodder for the kind of political to-and-fro that has become standard operating procedure. President Obama quickly put his spin on the numbers, noting that the private sector added 83,000 jobs in June. The president's Republican opponents noted that overall, the economy lost 125,000 jobs -- taking into account not just the private-sector gain but the end of 225,000 temporary jobs for census workers. Last month, it was the other way around. The overall number, showing what happened in May, indicated a healthy-looking gain in jobs -- so that was what Obama wanted to talk about. But the increase reflected mostly census hiring, with the private sector adding a paltry 41,000 jobs -- which was the number the Republicans wanted to highlight. All the spinning and counterspinning drives people crazy. And why shouldn't it? The employment numbers aren't just a monthly set of partisan talking points. They represent actual lives. They represent mortgages that might not be paid and college educations that have to be deferred; they tally mental health crises and broken marriages. Those sterile, emotionless figures speak of pain and anxiety. They mock our faith in the American dream. Let me put it in terms that Washington understands: The party that begins to treat the unemployment crisis with the hair-on-fire urgency that it deserves is the party that will do well in November. In the past, a steep fall into recession has often led to an equally steep climb back to prosperity. Clearly, that's not the case this time. In relatively short order, the economy lost about 7 million jobs. So far this year, we've gained back more than 600,000 -- not bad, given that in early 2009 we were shedding that many jobs each month, but not nearly enough to have the kind of impact the nation can really feel. The debate among economists about whether or not this will prove to be a "double-dip" recession is beside the point. For most people, this feels more like one long, uninterrupted dip -- with no end in sight. Adding 83,000 private-sector jobs in June sounds like something of an accomplishment, until you realize that the U.S. economy has to add more than 125,000 jobs a month just to accommodate the natural growth of the workforce. With a gain of 83,000 jobs, we actually lost ground. Our political leaders know that unemployment is on their constituents' minds, so they talk about it. A lot. But we're not seeing either party show the kind of courage that's really needed.

20 Republicans block an extension of unemployment benefits, rail about the deficit and complain that Democrats don't understand that economic renewal will come when the private sector is unleashed. The problem is that since Republicans are in the minority, they have to work with the Democrats to get anything done. I suspect that their strategy -- standing on the sidelines and yelling, "The Democrats are doing it all wrong!" -- will not win as much favor from voters as the GOP hopes. Democrats, on the other hand, do have the power to enact an agenda. But individual members of Congress act as if they are more concerned about their own electoral prospects than about bringing those unemployment numbers down. If a second economic stimulus is the answer, then that's what Democrats should do. If the answer is something else, fine. But they should know that whether they call themselves progressives or Blue Dogs or whatever, voters see them as one party and will hold them accountable. Washington gets all excited when someone commits an embarrassing or impolitic gaffe. Beyond the Beltway, people cannot understand why our leaders can't be similarly focused and energetic about the most tragic spasm of economic dislocation in eight decades. The writer will be online to chat with readers at 1 p.m. Eastern time Tuesday. Submit your questions and comments before or during the discussion. http://www.washingtonpost.com/wp- dyn/content/article/2010/07/05/AR2010070502658.html?wpisrc=nl_pmheadline

21 Business Day Economy

July 6, 2010 A New Generation, an Elusive American Dream By LOUIS UCHITELLE GRAFTON, Mass. — After breakfast, his parents left for their jobs, and Scott Nicholson, alone in the house in this comfortable suburb west of Boston, went to his laptop in the living room. He had placed it on a small table that his mother had used for a vase of flowers until her unemployed son found himself reluctantly stuck at home. The daily routine seldom varied. Mr. Nicholson, 24, a graduate of Colgate University, winner of a dean’s award for academic excellence, spent his mornings searching corporate Web sites for suitable job openings. When he found one, he mailed off a résumé and cover letter — four or five a week, week after week. Over the last five months, only one job materialized. After several interviews, the Hanover Insurance Group in nearby Worcester offered to hire him as an associate claims adjuster, at $40,000 a year. But even before the formal offer, Mr. Nicholson had decided not to take the job. Rather than waste early years in dead-end work, he reasoned, he would hold out for a corporate position that would draw on his college training and put him, as he sees it, on the bottom rungs of a career ladder. “The conversation I’m going to have with my parents now that I’ve turned down this job is more of a concern to me than turning down the job,” he said. He was braced for the conversation with his father in particular. While Scott Nicholson viewed the Hanover job as likely to stunt his career, David Nicholson, 57, accustomed to better times and easier mobility, viewed it as an opportunity. Once in the door, the father has insisted to his son, opportunities will present themselves — as they did in the father’s rise over 35 years to general manager of a manufacturing company. “You maneuvered and you did not worry what the maneuvering would lead to,” the father said. “You knew it would lead to something good.” Complicating the generational divide, Scott’s grandfather, William S. Nicholson, a World War II veteran and a retired stock broker, has watched what he described as America’s once mighty economic engine losing its pre-eminence in a global economy. The grandfather has encouraged his unemployed grandson to go abroad — to “Go West,” so to speak. “I view what is happening to Scott with dismay,” said the grandfather, who has concluded, in part from reading The Economist, that Europe has surpassed America in offering opportunity for an ambitious young man. “We hate to think that Scott will have to leave,” the grandfather said, “but he will.” The grandfather’s injunction startled the grandson. But as the weeks pass, Scott Nicholson, handsome as a Marine officer in a recruiting poster, has gradually realized that his career will not roll out in the Greater Boston area — or anywhere in America — with the easy inevitability that his father and grandfather recall, and that Scott thought would be his lot, too, when he finished college in 2008.

22 “I don’t think I fully understood the severity of the situation I had graduated into,” he said, speaking in effect for an age group — the so-called millennials, 18 to 29 — whose unemployment rate of nearly 14 percent approaches the levels of that group in the Great Depression. And then he veered into the optimism that, polls show, is persistently, perhaps perversely, characteristic of millennials today. “I am absolutely certain that my job hunt will eventually pay off,” he said. For young adults, the prospects in the workplace, even for the college-educated, have rarely been so bleak. Apart from the 14 percent who are unemployed and seeking work, as Scott Nicholson is, 23 percent are not even seeking a job, according to data from the Bureau of Labor Statistics. The total, 37 percent, is the highest in more than three decades and a rate reminiscent of the 1930s. The college-educated among these young adults are better off. But nearly 17 percent are either unemployed or not seeking work, a record level (although some are in graduate school). The unemployment rate for college-educated young adults, 5.5 percent, is nearly double what it was on the eve of the Great Recession, in 2007, and the highest level — by almost two percentage points — since the bureau started to keep records in 1994 for those with at least four years of college. Yet surveys show that the majority of the nation’s millennials remain confident, as Scott Nicholson is, that they will have satisfactory careers. They have a lot going for them. “They are better educated than previous generations and they were raised by baby boomers who lavished a lot of attention on their children,” said Andrew Kohut, the Pew Research Center’s director. That helps to explain their persistent optimism, even as they struggle to succeed. So far, Scott Nicholson is a stranger to the triumphal stories that his father and grandfather tell of their working lives. They said it was connections more than perseverance that got them started — the father in 1976 when a friend who had just opened a factory hired him, and the grandfather in 1946 through an Army buddy whose father-in-law owned a brokerage firm in nearby Worcester and needed another stock broker. From these accidental starts, careers unfolded and lasted. David Nicholson, now the general manager of a company that makes tools, is still in manufacturing. William Nicholson spent the next 48 years, until his retirement, as a stock broker. “Scott has got to find somebody who knows someone,” the grandfather said, “someone who can get him to the head of the line.” While Scott has tried to make that happen, he has come under pressure from his parents to compromise: to take, if not the Hanover job, then one like it. “I am beginning to realize that refusal is going to have repercussions,” he said. “My parents are subtly pointing out that beyond room and board, they are also paying other expenses for me, like my cellphone charges and the premiums on a life insurance policy.” Scott Nicholson also has connections, of course, but no one in his network of family and friends has been able to steer him into marketing or finance or management training or any career-oriented opening at a big corporation, his goal. The jobs are simply not there. The Millennials’ Inheritance The Great Depression damaged the self-confidence of the young, and that is beginning to happen now, according to pollsters, sociologists and economists. Young men in particular lost a sense of direction, Glen H. Elder Jr., a sociologist at the University of North Carolina, found in his study, “Children of the Great Depression.” In some cases they were forced into work they did not want — the issue for Scott Nicholson.

23 Military service in World War II, along with the G.I. Bill and a booming economy, restored well-being; by the 1970s, when Mr. Elder did his retrospective study, the hardships of the Depression were more a memory than an open sore. “They came out of the war with purpose in their lives, and by age 40 most of them were doing well,” he said, speaking of his study in a recent interview. The outlook this time is not so clear. Starved for jobs at adequate pay, the millennials tend to seek refuge in college and in the military and to put off marriage and child-bearing. Those who are working often stay with the jobs they have rather than jump to better paying but less secure ones, as young people seeking advancement normally do. And they are increasingly willing to forgo raises, or to settle for small ones. “They are definitely more risk-averse,” said Lisa B. Kahn, an economist at the Yale School of Management, “and more likely to fall behind.” In a recent study, she found that those who graduated from college during the severe early ’80s recession earned up to 30 percent less in their first three years than new graduates who landed their first jobs in a strong economy. Even 15 years later, their annual pay was 8 to 10 percent less. Many hard-pressed millennials are falling back on their parents, as Scott Nicholson has. While he has no college debt (his grandparents paid all his tuition and board) many others do, and that helps force them back home. In 2008, the first year of the recession, the percentage of the population living in households in which at least two generations were present rose nearly a percentage point, to 16 percent, according to the Pew Research Center.

24 The high point, 24.7 percent, came in 1940, as the Depression ended, and the low point, 12 percent, in 1980 Striving for Independence “Going it alone,” “earning enough to be self-supporting” — these are awkward concepts for Scott Nicholson and his friends. Of the 20 college classmates with whom he keeps up, 12 are working, but only half are in jobs they “really like.” Three are entering law school this fall after frustrating experiences in the work force, “and five are looking for work just as I am,” he said. Like most of his classmates, Scott tries to get by on a shoestring and manages to earn enough in odd jobs to pay some expenses. The jobs are catch as catch can. He and a friend recently put up a white wooden fence for a neighbor, embedding the posts in cement, a day’s work that brought Scott $125. He mows lawns and gardens for half a dozen clients in Grafton, some of them family friends. And he is an active volunteer firefighter. “As frustrated as I get now, and I never intended to live at home, I’m in a good situation in a lot of ways,” Scott said. “I have very little overhead and no debt, and it is because I have no debt that I have any sort of flexibility to look for work. Otherwise, I would have to have a job, some kind of full-time job.” That millennials as a group are optimistic is partly because many are, as Mr. Kohut put it, the children of doting baby boomers — among them David Nicholson and his wife, Susan, 56, an executive at a company that owns movie theaters. The Nicholsons, whose combined annual income is north of $175,000, have lavished attention on their three sons. Currently that attention is directed mainly at sustaining the self-confidence of their middle son. “No one on either side of the family has ever gone through this,” Mrs. Nicholson said, “and I guess I’m impatient. I know he is educated and has a great work ethic and wants to start contributing, and I don’t know what to do.” Her oldest, David Jr., 26, did land a good job. Graduating from Middlebury College in 2006, he joined a Boston insurance company, specializing in reinsurance, nearly three years ago, before the recession. “I’m fortunate to be at a company where there is some security,” he said, adding that he supports Scott in his determination to hold out for the right job. “Once you start working, you get caught up in the work and you have bills to pay, and you lose sight of what you really want,” the brother said. He is earning $75,000 — a sum beyond Scott’s reach today, but not his expectations. “I worked hard through high school to get myself into the college I did,” Scott said, “and then I worked hard through college to graduate with the grades and degree that I did to position myself for a solid job.” (He majored in political science and minored in history.) It was in pursuit of a solid job that Scott applied to Hanover International’s management training program. Turned down for that, he was called back to interview for the lesser position in the claims department. “I’m sitting with the manager, and he asked me how I had gotten interested in insurance. I mentioned Dave’s job in reinsurance, and the manager’s response was, ‘Oh, that is about 15 steps above the position you are interviewing for,’ ” Scott said, his eyes widening and his voice emotional.

25 Scott acknowledges that he is competitive with his brothers, particularly David, more than they are with him. The youngest, Bradley, 22, has a year to go at the University of Vermont. His parents and grandparents pay his way, just as they did for his brothers in their college years. In the Old Days Going to college wasn’t an issue for grandfather Nicholson, or so he says. With World War II approaching, he entered the Army not long after finishing high school and, in the fighting in Italy, a battlefield commission raised him overnight from enlisted man to first lieutenant. That was “the equivalent of a college education,” as he now puts it, in an age when college on a stockbroker’s résumé “counted for something, but not a lot.” He spent most of his career in a rising market, putting customers into stocks that paid good dividends, and growing wealthy on real estate investments made years ago, when Grafton was still semi-rural. The brokerage firm that employed him changed hands more than once, but he continued to work out of the same office in Worcester. When his son David graduated from Babson College in 1976, manufacturing in America was in an early phase of its long decline, and Worcester was still a center for the production of sandpaper, emery stones and other abrasives. He joined one of those companies — owned by the family of his friend — and he has stayed in manufacturing, particularly at companies that make hand tools. Early on, he and his wife bought the home in which they raised their sons, a white colonial dating from the early 1800s, like many houses on North Street, where the grandparents also live, a few doors away. David Nicholson’s longest stretch was at the Stanley Works, and when he left, seeking promotion, a friend at the Endeavor Tool Company hired him as that company’s general manager, his present job. In better times, Scott’s father might have given his son work at Endeavor, but the father is laying off workers, and a job in manufacturing, in Scott’s eyes, would be a defeat. “If you talk to 20 people,” Scott said, “you’ll find only one in manufacturing and everyone else in finance or something else.” The Plan Scott Nicholson almost sidestepped the recession. His plan was to become a Marine Corps second lieutenant. He had spent the summer after his freshman year in “platoon leader” training. Last fall he passed the physical for officer training, and was told to report on Jan. 16. If all had gone well, he would have emerged in 10 weeks as a second lieutenant, committed to a four-year enlistment. “I could have made a career out of the Marines,” Scott said, “and if I had come out in four years, I would have been incredibly prepared for the workplace.” It was not to be. In early January, a Marine Corps doctor noticed that he had suffered from childhood asthma. He was washed out. “They finally told me I could reapply if I wanted to,” Scott said. “But the sheen was gone.” So he struggles to get a foothold in the civilian work force. His brother in Boston lost his roommate, and early last month Scott moved into the empty bedroom, with his parents paying Scott’s share of the $2,000-a-month rent until the lease expires on Aug. 31. And if Scott does not have a job by then? “I’ll do something temporary; I won’t go back home,” Scott said. “I’ll be a bartender or get work through a temp agency. I hope I don’t find myself in that position.” http://www.nytimes.com/2010/07/07/business/economy/07generation.html?th&emc=th

Unions outspending corporations on campaign ads despite court ruling By T.W. Farnam Wednesday, July 7, 2010; A04 Labor unions have dominated spending on independent campaign ads so far this election season, despite a recent Supreme Court decision that freed spending by corporations, a Washington Post analysis shows. The findings are an indication that corporate money is not flooding into campaigns as many predicted would happen after the landmark decision in Citizens United v. Federal Election Commission. So far this year, $24.7 million in independent spending has been reported to the Federal Election Commission, campaign filings show. Unions have spent $9.7 million (or 39 percent of the total), compared with $6.4 million (26 percent) spent by individuals and $3.4 million spent by corporations. Not all spending on political ads is included in the totals. Issue ads, which mention candidates and their positions but offer no candidate endorsement, do not have to be reported to the government unless they run directly before an election. In January, the Supreme Court struck down laws and previous cases that prohibited corporations from paying for hard-hitting campaign ads. But some argue that corporations are still likely to begin spending heavily on campaigns. "We would be very pleasantly surprised if there's not a gusher of special interest money," Rep. Chris Van Hollen (D-Md.) said in an interview. "Very few people play in the primaries - - most of this money is almost always spent in the general election." Van Hollen is pushing a bill the House recently passed that would require funding sources for advertising to be disclosed. The measure faces uncertain prospects in the Senate. Several large corporate-backed groups have yet to fully open their war chests for campaign ads. The conservative group American Crossroads raised $8.5 million in June, said its president, Steven Law. "Donors who are from the center-right side of the spectrum are going to close the gap this year," he said. "There's both an opportunity in this election cycle to achieve real progress and a large sense of concern in the direction of Washington." The group's funding has come from an even split of individuals and corporations, he said. The U.S. Chamber of Commerce, the nation's largest business group, has recently increased its political advertising budget this year, according to one published report. Chamber President Thomas J. Donohue said during a recent speech that the group had upped its political budget from $50 million to $75 million, according to a person at the event who spoke with the Center for Public Integrity. A Chamber spokesman would neither confirm nor deny the report. Groups active in the campaigns are taking different approaches to how they will report spending. A new liberal group called Commonsense Ten recently requested a legal

27 clarification from the Federal Election Commission on the appropriate way to accept corporate money, saying that it will reveal its donors. "Believing that 'sunlight is said to be the best of disinfectants,' Commonsense Ten plans instead to engage in fully disclosed activity as a federally registered political committee," the group wrote. The anti-tax group Club for Growth requested a similar clarification and said it intends to disclose all donors. Law said his group recently established a nonprofit corporation, which means it can accept money from donors without being required to disclose their names. "There are some donors who care about that," he said. Such a nonprofit corporation faces certain restrictions on election spending under the U.S. tax code, however. The Service Employees International Union has disclosed spending $4.6 million on independent ads this year, more than any other group. Americans for Job Security, which is incorporated as a business association, has disclosed the second-highest amount, $1.5 million. The Chamber of Commerce ranked third in spending, with $1.4 million in ads. Several of the top groups were union-backed operations with names such as Working America, Arkansans for Change and Patriot Majority. The House disclosure bill would require those groups to list in advertisements the names of unions backing them. Independent groups spent $8.1 million on the Democratic Senate primary in Arkansas, far more than any other race. Sen. Blanche Lincoln defeated union-backed Lt. Gov. Bill Halter in a June 8 runoff election in that state. Brett Kappel, an election lawyer with Arent Fox who represents corporations and trade associations, said that his clients have been solicited by groups hoping to run election ads and that many corporations will take the court ruling as an invitation to participate in electioneering. "There's nothing corporations like better than clear legal rules," he said, but added: "My impression is they're going to wait and see how this cycle goes before they go into making independent expenditures of their own." http://www.washingtonpost.com/wp- dyn/content/article/2010/07/06/AR2010070602133.html?wpisrc=nl_headline

Tough Case A prosecutor best known for putting terrorists behind bars is about to take on one of the biggest challenges of his career—proving Goldman Sachs committed fraud.

by Michael HirshJuly 03, 2010

Andrew Harrer / Bloomberg-Getty Images Robert Khuzami, director of enforcement with the Securities and Exchange Commission Robert Khuzami spent seven years making big bucks at Deutsche Bank, but it’s tough to find any mementos of his time there. Instead, Khuzami’s office at the Securities and Exchange Commission is decorated with souvenirs of his earlier incarnation as a U.S. prosecutor, the man who helped put Omar Abdel-Rahman behind bars after the 1993 World Trade Center bombing. On his office walls Khuzami has hung two framed court drawings of him taking on the “blind sheik.” Now Khuzami, the SEC’s director of enforcement, is pursuing what could be an even more challenging prosecution, although it isn’t a criminal case. He is trying to prove that Goldman Sachs defrauded its clients by selling them a complex, mortgage-backed security that was secretly designed to plummet in value, all so “short-sellers” would make a bundle on the market drop. The investment bank, which has called the SEC civil fraud charges “completely unfounded,” is scheduled to deliver its formal response in court on July 19. Proving that Goldman committed fraud is going to be hard, many experts say. Goldman and other firms have argued that sophisticated investors knew the risks involved in such deals, and information that short-sellers helped to create the trade wasn’t “material” to anyone’s investment decisions. But Khuzami badly needs a win: investigations of major Wall Street figures complicit in the subprime mortgage scandal have been running aground a lot lately.

29 In recent weeks the SEC and Justice Department, lacking evidence of fraud, declined to file charges against Joseph Cassano, the former AIG financial products chief whom the writer Michael Lewis once called “the man who crashed the world.” (Cassano, in testimony to the Financial Crisis Inquiry Commission on June 30, insisted he had been “prudent” in selling billions of dollars in credit default swaps, despite the government’s $130 billion bailout of AIG.) On June 25 a U.S. District Court judge in New York threw out the SEC’s first-ever insider-trading case in credit default swaps against a Deutsche Bank trader, saying the SEC had no evidence. (Khuzami recused himself, as he does from all Deutsche Bank–related cases.) Many Wall Streeters employ a defense similar to the argument used in the acquittal of two Bear Stearns hedge-fund managers last fall: we were clueless about the crash but not criminal; no one knew how bad things would get. Khuzami says those earlier setbacks are “a reminder to think about how your evidence will play out in a courtroom.” But he insists those decisions won’t “chill” him from “bringing appropriate cases.” He is praised for putting together specialized investigative units that will closely monitor Wall Street’s various businesses. “I think it’s a brilliant move. You need to have SWAT teams and that’s what those things are,” says Joseph Warin, a onetime government prosecutor who was SEC chairwoman Mary Schapiro’s first choice to take Khuzami’s job, but turned it down. (Warin later became Cassano’s lawyer.) The Justice Department is watching Khuzami’s moves closely. Khuzami points to a number of high-profile SEC cases underway—in particular, charges against former Countrywide CEO Angelo Mozilo and executives with New Century Financial and American Home Mortgage, two other major mortgage originators. Still, as Khuzami concedes, most SEC cases are settled in the end. And among some U.S. prosecutors, there is an increasing sense that most senior Wall Street executives will escape charges and conviction in the subprime scandal. “I think that’s a fair assessment,” says one prosecutor. Robert Khuzami’s got a lot of work ahead of him. http://www.newsweekparentsguide.com/2010/07/05/tough-case.html

Eurointelligence Daily Morning Newsbriefing European interest rates are about to go up

06.07.2010 Citigroup predicts an increase in the Eonia rate from 0.33% last week to 0.8% in October, unless the ECB resumes its liquidity policies – or cuts official rates; risk premiums on US bonds are on the rise as investors are switching their attention away from Europe; the eurozone services PMI fell for the first time in five months, to a still robust level of 55.2; Quentin Peel wonders whether the football might save Angela Merkel; Jean-Claude Trichet will meet the chief executives of Europe’s banks two days before the publication of stress tests; Samuel Bentolia says Spanish labour reforms are a step in the right direction, but do not go far enough; Michael Pettis, meanwhile, argues that there will be no global consumption recovery until the banking mess is sorted out.

06.07.2010 European interest rates are about to go up

This must have been our first genuinely slow news days for many months. The summer holiday period is starting, and the media is, temporarily, focusing on other stories. Today’s most interesting piece of eurozone related media content is from FT Alphaville on an interesting research note from Citibank. Due to the gradual reduction in excess liquidity following the roll-over of last year’s one year tender, pressure is on the Eonia to rise. Citibank expect the Eonia to go up from 0.33% a weak ago to 0.45% mid August, to 0.8% by October – which would be the equivalent of two rate hikes. As for policy options, Citibank discussed three possibilities: a repo rate cut (unlikely), full move towards QE (unlikely), and

31 reverting to last year’s liquidity policies, i.e. another one year tender (most likely).

Risk premiums on regional US bonds on the rise The FT reports that of rising risk premiums for US local governments amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits. The yield attached to some forms of infrastructure municipal bonds (Baps) has risen relative to US Treasury bonds by 228 bp, the costs for insuring against default have also risen. There are fears that investors switch attention from Europe to the US regions as some regions struggle to curb their deficits after years of low revenues and as the federal stimulus is tapering off. Service PMI in the eurozone on the fall The services PMI in the Eurozone fell for the first time in five months to 55.5 in June from 56.2 in May, reports La Tribune. Analysts now fear stagnating growth for the eurozone economy and an increased risk of an economic slowdown. New orders fell markedly, led by Germany where the new orders contracted for the first time since last year, raising doubts over the recovery in the German service sector. Employment index is slightly on the rise. Retail sales have recovered though Political consequences of a German success in football Quentin Peel in the FT asks what the chances are that a German success in the World Cup could revive the political fortunes of Angela Merkel. “Germany is back,” trumpeted Rainer Brüderle in parliament last week. “Not just in sport: in the economy and in politics, too.” Yet the economic recovery does not seem to have percolated through to the population in general. People still worry about Greece and the eurozone debt crisis and believe that Merkel is no longer in control of her government. They also fear that the huge austerity package of €80bn will hit them at some point. She failed to forge a team that plays towards the same goals and it is unlikely that she will change her style or her team. So the answer is no, if anything it is the economy that would benefit from a World Cup success. Trichet to meet bank chiefs FT Deutschland reports of a meeting scheduled to take place on July 21st between Jean Claude Trichet and the heads of the largest European banks two days before the publication of the stress tests, which are expected to lead to the re-capitalisation of several European banks. The paper also reports that 16 of the German banks will participate in the stress tests, including all the Landesbanken. Postbank is the bank with the lowest tier 1 rating of currently 7%, according to the paper. On Spanish labour reform The Spanish economics blog Nada es Gratis has been running a couple of articles on labour reform, which the economists writing there consider insufficient. This morning comes the second part in a two part series, written by Samuel Bentolia. Previous parts of the series concluded that in Spain wages do not correspond to productivity, and have actually risen during the recent contraction (unlike in Germany where they continue to stagnate!). In this post Bentolia makes the point that the two main changes – to allow companies to opt out of national wage bargaining under certain circumstances, and to reduce dismissal costs – are relevant, but do not go far enough to break the labour oligopoly. (It is also worth noting that the reduction in dismissal costs from 45 to 33 days still makes Spain one of the costliest

32 countries in the EU for companies to reduce their staff in a recession, at a time when Spain has to make a significant real adjustment effort to increase competitiveness. All that seems to be happening is that Spain still loses competitiveness, albeit at a slower scale than before). Michael Pettis on why we got it wrong on consumption In a very interesting posting, Michael Pettis argues that China’s and Germany’s growth models rests, and will continue to rest, on the assumption that the rest of the world – i.e. the US – will provide the consumption for their current account surpluses. “One way to think about this excess savings is to think about the pressure for exporting capital. China, Germany and Japan export huge amounts of capital and desperately need to continue to do so or else they will see their export industries collapse. Deficit Europe used to import huge amounts of capital, but these capital imports are set to collapse and may soon even become capital exports. The US is the only large importer of capital left, and it wants desperately to reduce these capital imports. So even before we worry about the impact of the banking crises, we have to wonder who is going to absorb all these savings? But the banking crises make matters much worse. With all of the major economies facing banking crises, they must clean up the banks by forcing the household sector to pay the bill. This will put downward pressure on household disposable income and wealth for many years. But we are all betting on the consumer – and inexplicably enough (to me, anyway) many of us are betting most heavily on the hapless Chinese consumer – to come surging back and bring us the growth that we so desperately need. I am pretty skeptical that this will happen. “ He points towards Japan as an example of how consumption can be sustainably affected by a banking crisis, and a see a similar pattern in the rest of the industrialised world now. His conclusion is that until the banking mess is cleared up, consumption is not going to save us. http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2845&tx_ttnews[ba ckPid]=901&cHash=8f5c2e612d# ft.com/alphaville All times are London time Banks should be ‘somewhat more like Turkey’, says UBS Posted by Tracy Alloway on Jul 06 08:15. With stress test results due in less than two-and-a-half weeks’ time, Europe’s investment banks have been busy churning out their own versions. One of the best we’ve seen landed in our inbox on Monday. It’s from UBS, and specifically their banking analysts Alastair Ryan and John-Paul Crutchley. Both of these guys have been pretty on the ball in recent months; covering Greek and Spanish banks, and the general over-reliance of eurozone banks on European Central Bank (ECB) funding. So without further ado, here are the results of the UBS eurozone bank test, click to enlarge:

That’s right, everyone passes. That may seem like something of a damp squib to you. But bear in mind Germany, Spain, Austria and France have already said that their most important banks have passed domestically-administered tests. And UBS is running a relatively simple test — mostly based on credit loss estimates — and not taking into account many differences between eurozone countries. They do, however, assume some US stress test-style features like a 3 per cent haircut on all European government bonds. The point of the exercise is to demonstrate just how useless these stress tests could turn out to be — in terms of satisfying market concerns of sovereign bond losses, loan risk, and ECB usage, anyway. As UBS put it — rather mildly : In this test, we applied exactly the same scenarios to every bank, regardless of individual circumstances. However, the broad spread of European economic environments suggests that this is likely to be a poor guide to actual capital at risk. If the stress tests are useless, from the perspective of assuaging investors’ fears, what should markets be looking at? In UBS’ opinion it should be one thing — wholesale funding. But, as UBS also note, wholesale funding is, for many banks, now harder to come by and probably more expensive: We believe that, in order to potentially offer a turning point in the narrative of this ongoing crisis, a European stress test should realistically seek to answer the question of how much

34 wholesale funding bank balance sheets can support under today’s conditions. We note recent press reports (FT ) that the authorities believe up to €30 billion in equity may need to be raised by the system as a result of the tests. This would equal 0.1% of the systems’ balance sheet, and seems a figure too modest to achieve the change in narrative. We believe the answer is likely to be a potentially more challenging one: that in order to support high levels of wholesale funding, banks may need to demonstrate levels of core tier 1 well in excess of those that most Eurozone banks currently hold. With that in mind, the structure of banks’ balance sheets becomes much more important. And this is where, believe it or not, the Turkish example comes in: We also see another outstanding and challenging issue. If sovereign volatility is going to be with us for some time, as elevated debt levels and deficits suggest, then banking systems may need to seek to reduce their wholesale funding dependence further. At an extreme, Table 6 shows the structure of the Turkish banking system’s balance sheet. It is strikingly straightforward – deposits and equity account for four fifths of the total balance sheet of the system . . . in our view, the agenda in the Eurozone has changed, and sovereigns, the cumulative non-domestic funding requirements of the government and financial sector together, and so on, are more important than since the euro’s creation.

Somewhat more like Turkey

It may therefore be that banks should look somewhat more like the Turkish example, and somewhat less like their own recent history. In Chart 26, we look at the major European banks

35 through this lens. With the average of (deposits + equity) to total assets at 46%, the distance to travel may well be a significant one.

To achieve such lofty deposit/equity to assets ratios, banks will either have to shrink liquid assets or raise more equity — assuming signficiant deposit growth isn’t possible right now. The other choice is to do it now, or wait until later. Says UBS: The advantage of doing it over time is that pre-impairment profits may amortise the issue away without the need for dilutive equity issuance, or government schemes (such as NAMA) to take assets off the banks. The disadvantage is that amortising the problem over time is likely to lead to a chronic lack of credit availability, constraining economic growth. With Europe now almost three years into the financial crisis and no natural end in sight, we believe the option of getting things over and done with is becoming more and more preferable. The future of banking — thy name is recapitalise ? And err, Turkey? http://ftalphaville.ft.com/blog/2010/07/06/279066/banks-should-be-somewhat-more-like- turkey-says-ubs/

ft.com/alphaville All times are London time Losing ECB liquidity = two small rate hikes, says Citi Posted by Tracy Alloway on Jul 05 08:45. The European Central Bank’s 12-month LTRO expired with a whimper, last week. Lower-than-expected roll-over demand for the central bank’s new, albeit shorter-maturity, facilities meant European banks weren’t doing as badly as feared — or, at least some of them weren’t. But the reduction in ECB liquidity could mean something else for money markets; higher rates. Says Citi, in its latest Euro Weekly: Excess liquidity in the euro area, which was around €315bn in the week before the expiry of the 12M LTRO, already dropped to €174bn on July 1. And if our expectations of the use of next week’s MRO are correct, we will see a further decline in excess liquidity to around €115bn next week. And once the bank stress test event is over, a further reduction is likely. Hence, as we have argued in recent reports, upside pressure on market rates is likely to increase further. In that respect and the so-far modest gains in money market rates are likely to accelerate (see Figure 4). We therefore continue to regard EONIA forwards rates of around 0.45% by mid-August and 0.55% by mid-October as being too low. In our view, EONIA rates will be around 0.8% in October, unless the ECB enacts further measures. To be clear, in “normal” time an increase in EONIA from 0.33% just a week ago to 0.8% in October would be equivalent to two small (25bp)ECB policy rate hikes. Citi’s expectations for the MRO — the ECB’s weekly Main Refinancing Operation — are that the surging demand for the facility we’ve seen in recent months is not sustainable.

36 According to the bank, the MRO currently accounts for 40.3 per cent of the ECB’s open market operations, compared to a long-term average (well, since it was introduced in October 2008) of 35 per cent. In other words, there will probably be a ‘normalisation’ in usage, and even more liquidity withdrawn from the eurozone system. The point though, says Citi, is that even as the ECB tries to withdraw liquidity, it probably doesn’t want rates going up. That could hamper eurozone lending and any impending recovery. (Though we gotta ask why the ECB would make for the exits if that was a major concern for the bank). Anyway, according to Citi — the ECB has three options to lower money market rates: 1. The probably most unlikely option in our view would be a reduction in the policy rate. By not cutting rates further last year and instead introducing additional non-standard policy measures — the 12M LTRO and the covered bond purchase program — the ECB signaled that 1.0% is a lower bound for the policy rate, unless it believes that there is a substantial risk of deflation. 2. Ending the sterilization of the Securities Market Program (SMP) — and therefore starting proper QE — would be another option. As ECB officials keep highlighting that the SMP is not designed to provide liquidity to the market, such a move looks unlikely as well. To us, the ECB is likely to use proper QE only in case of a clear risk of deflation. 3. Providing additional longer-term liquidity. While this would be another reversal of the exit from the non-standard measures, it would be in line with previous policy actions and therefore the most likely option. Citi thinks that the third is most likely — probably in the form of a six-month LTRO. The other option — doing nothing and letting febrile markets deal — doesn’t get a mention. Either way, that Thursday ECB meeting looks a whole lot more interesting. http://ftalphaville.ft.com/blog/2010/07/05/278326/losing-ecb-liquidity-two-small-rate-hikes- says-citi/

Investors fear rising risk of US regional defaults By Nicole Bullock in New York Published: July 5 2010 19:30 | Last updated: July 5 2010 20:21 Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some eurozone countries. The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans. US states face hard budget choices - Jun-30 In depth: US downturn - Mar-18 US told to seek foreign partners - Jul-06 Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the eurozone could now infect the US. “The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities, who singled out parts of California, as well as towns and cities in Illinois, Michigan and New York state as among the most vulnerable. “You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market.” If these market swings are sustained, they could push up borrowing costs for local governments, which, in turn, could exacerbate the squeeze on local authority finances and place more stress on the federal budget. “There is more of a perceived risk to munis now,” said Laura LaRosa, director of fixed- income at Glenmede, a private investment manager. US states faced budget deficits of $89bn for fiscal 2011, which began for most of them on July 1, according to the National Conference of State Legislatures. That is after shortfalls of more than $300bn since 2008. Local municipalities can default and, depending on the state, file for bankruptcy. Should a state come to the brink, which is not expected at this time, many believe that it would be likely to receive federal support. The sharpest swings in the muni market have been seen in the $100bn so-called “Build America bonds” – or Babs – a type of US muni debt that has characteristics similar to corporate bonds. This sector has attracted a fresh investor base, which is now demanding greater compensation for risk.

38 Risk premiums, or spreads on Babs relative to Treasuries, have risen to 228 basis points, according to an index from Barclays Capital. The spreads have climbed from a low of 161bp in early May to their highest level since Barclays started compiling the index last October. Absolute yields have risen to 6.03 per cent from 5.97 per cent.“The problems in the eurozone have driven up fixed-income yields overseas – on banks, utilities and sovereigns,” said Matt Fabian, a managing director at Municipal Market Advisors. “Babs compete directly against those issuers for buyers.” The cost of insuring against default for munis also has risen. However, this part of the derivatives market is rather illiquid, and the mainstream part of the muni market has not seen as dramatic a swing as the Babs sector, partly because this is dominated by a traditional base of investors. These include local buyers who receive tax breaks when they buy US muni bonds, and who have historically been relatively loyal. The muni sector has been known for its relatively few defaults and debt service is high in the pecking order of bills that states must pay. However, the threat of default has come to the fore as some states struggled to balance budgets after years of lower revenue and as federal stimulus is tapering off. http://www.ft.com/cms/s/0/fb933f08-885b-11df-aade-00144feabdc0.html?ftcamp=rss

39 http://www.telegraph.co.uk/finance Europe’s ‘toothless’ bank tests making matters worse RBS and other City institutions have warned that Europe’s stress tests for banks are almost useless and may further damage confidence if they fail to cover the risk of large losses on sovereign defaults by Greece and other Club Med states. By Ambrose Evans-Pritchard Published: 9:55PM BST 05 Jul 2010

European Central Bank President, Jean-Claude Trichet, is looking for a way forward for the eurozone. “I don’t think it is going to work,” said Jacques Cailloux, Europe economist at RBS. “These stress tests are not rigorous enough. Investors are already pricing in a 50pc “haircut” on some Greek bonds so this has to be included, and perhaps 30pc for Spain.” “We have had a complete failure of communication by the eurozone over recent months with 16 countries all saying different things, and there is a very high chance of another failure this time.” Related Articles • Why European banks' stress tests and GCSE exams have far too much in common • Ambrose Evans-Pritchard's blog • Jeremy Warner's blog • With the US trapped in depression, this really is starting to feel like 1932 Mr Cailloux, who has issued a “double dip alert” for Europe, said it would be unwise for EU policy-makers to go holiday this summer. Markets are no longer willing to take on exposure to some €2 trillion of household and company debt in Spain, and this gap cannot be plugged for much longer by three-month loans from the European Central Bank. “If by the end of the summer we have not had much more aggressive policy action, we’re back to contagion. This time it is no longer just a peripheral story. It is starting to infect the

40 core eurozone as well, France in particular. I cannot understand why the ECB is not buying Spanish corporate bonds,” he said. Christine Lagarde, French finance minister, said the result of tests would be published on July 23. Details will emerge over coming days on “the exact criteria we apply and of how heavily we stress the system”. The tests will cover up to 100 banks, including many of the Spanish cajas and German savings banks at the eye of the storm. A report by CreditSights said some cajas have disguised the true scale of losses from the housing bust by propping up mortgage securities through purchases of delinquent loans from mortgage pools. The share prices of Allied Irish, Bank of Ireland, Dexia, and Credit Agricole have all fallen hard recently. Mrs Lagarde said the tests will show that Europe’s banks are “solid and healthy”, but it is this tone of certainty that is causing markets to ask whether this is really a “stress test without stress” – as dubbed in Germany’s media. Interbank lending in Europe has been half-paralysed since Greek debt woes escalated into a broader banking and sovereign debt crisis. The authorities hope the stress test will prove a magic cure. Last year’s tests in the US were the turning point for America’s banks, but that is because 10 of the 19 banks failed, requiring $75bn (£49.5bn) of extra capital. Der Spiegel said the test will not include defaults by Greece or other states for fear that this would hurt the credibility of the EU’s new €440bn European Financial Stability Facility (EFSF) designed to shore up eurozone debtors. Hans Redeker from BNP Paribas said the EU authorities are damned if they do, and damned if they don’t. “The are afraid of provoking another shockwave in the market if they even talk about debt-restructuring, but it will be a hard sell to markets if they don’t.” There are fears that any inclusion of haircut levels of specific countries will leak out and become self-fulfilling, triggering an immediate market flight and a systemic crisis. “They are playing with fire,” said one German banker. David Owen, of Jefferies Fixed Income, said the exercise settles nothing. “If you don’t stress- test the worst case scenario, it is not going to reassure anybody. A Greek default is clearly a risk.” Mr Owen said there is a loose parallel with Northern Rock in the lead up to the crisis when regulators weighed the risk of a property crash, but turned a blind eye to the risk of a seizure in the wholesale funding market – which was the real Achilles Heel. Much of the damaged debt held by European banks is in portfolio accounts, and therefore does not have to be “marked-to-market” under accounting rules. There are serious doubts about the EFSF rescue fund itself, which has yet to secure a AAA rating or clarify whether any holdings of Club Med debt would have “senior status” that pushed private holders down the food chain – and deeper into trouble. Most banks will not touch Greek, Iberian, and Irish debt until this is clarified. Some reports have suggested that the test might include a 3pc “haircut” on sovereign debt. It unclear what this means. Mr Owen said that if it covers all eurozone government bonds (including German) this would amount to €47bn of losses, tantamount to a Greek default or greater. But by trying to veil the problem in this way for political reasons the eurozone would merely twist itself into more knots.

41 The tests will be coordinated by the European Committee of Banking Supervisors (CEBS). It is understood that banks will be forced to raise extra capital if their Core Tier 1 ratios fall below 6pc under the test. Some German banks would undoubtedly drop below this line if their reliance on risky hybrid capital is penalized in accordance with the likely Basel III rules. These banks failed to take full advantage of the rally over the last year to boost their capital base, much to the irritation of Germany’s regulator BaFin. Julian Callow, of Barclays, said the stress test looks like a dog’s dinner. “It is badly prepared and it is not going to clear the air. These tests worked in the US because the US Treasury was there to stand behind the banks and it was credible. The great issue in Europe is the credibility of the sovereign states themselves.” http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7873792/Europes- toothless-bank-tests-making-matters-worse.html

ft.com/alphaville All times are London time Recapitalise, or resisting the lure of liquidity Posted by Tracy Alloway on Jun 17 09:00. Presenting ...... the European predicament in 500 words, by the liquidity-averse analysts at Morgan Stanley. And it’s worth reading given the current debate surrounding European bank stress tests . . . Passive QE… When the credit crisis led to the collapse of Lehman Brothers in autumn 2008 and bank funding markets dried up, the ECB and other central banks responded by giving banks virtually unlimited access to central bank loans. Yet, while the Fed and the Bank of England later (in spring 2009) switched to ‘active’ quantitative easing (QE) and started to buy public or private sector bonds in size, the ECB continued to focus on what we dubbed ‘passive’ QE, i.e., satisfying all of the banking system’s need for liquidity through money market operations with maturities of up to one year (from June 2009) . . . … created perverse incentives for banks… With hindsight, the continuation and extension of passive QE postponed a solution of banks’ solvency issues and even contributed to the sovereign debt crisis. For the banks, virtually unlimited liquidity at 1% seemed like a panacea. Rather than raising capital more aggressively in the markets or through the various national TARP-like programmes that European governments had put in place, they were playing the carry game – borrow short from the central bank at near-zero interest rates and buy longer-dated, higher-yielding assets – hoping that this would restore profitability and

42 thus allow them to generate capital internally over time. As private sector credit demand tanked due to the recession and lending to the private sector seemed too risky anyway while purchasing European government bonds didn’t require any capital underlay under Basel II, banks piled into seemingly safe governments bonds, and especially into the higher-yielding ones of peripheral EMU member states such as Greece . . . …thus contributing to the sovereign debt crisis: Financially, governments also benefitted from cheap and plentiful ECB liquidity. The artificially generated demand for higher-yielding government bonds kept bond yields for Greece and others lower than they would have otherwise been. This sent a message to governments that high fiscal deficits, which had swollen due to the recession and governments’ responses to it, weren’t a problem as the market (read: the banks) seemed willing and able to keep funding them . . . Passing the buck on and on: When the markets finally woke up to the fiscal realities earlier this year, and when the ECB set its sights on gradually turning off the liquidity spigot, banks experienced the second round of a confidence and credit crisis. Just as the banking sector crisis and the response to it fed the sovereign debt crisis, the sovereign crisis now fed the bank crisis . . . No easy solution: Given the weakness of governments in many EMU member states, and given the size of the fiscal and banking sector problems, the issues are likely to linger rather than be resolved quickly. Massive outright purchases of government bonds by the ECB would be yet another attempt at papering over the cracks and could easily turn the bank and sovereign crisis into a crisis of confidence in the central bank and the liability it issues – fiat money. Hence, we believe that the only way out is much more aggressive consolidation and recapitalisation of the banking sector, especially in the public space, coupled with radical fiscal and structural reforms in several peripheral and also some core countries. Alas, things will probably have to get worse before governments are finally pushed into action. The lure of liquidity – from the ECB or the EFSF – is simply too strong, it seems. Which is where the bank stress tests come in. The US, you’ll remember, kicked off a massive rally after publishing the results of its stress tests in May 2009. There was plenty of criticism of the test parameters, but markets were still soothed by the results. Banks with capital shortfalls were given time to raise funds, and it was generally understood the US would not let them go insolvent. They would promptly be recapitalised — à la Tarp — or whatever. That word — recapitalise — is probably what’s missing from the current amorphous plans for European stress tests. Despite all the rhetoric, and some acknowledgment that Europe’s banks may be undercapitalised next to their US peers, we don’t think we’ve actually heard anyone mention ‘recapitalise’ just yet. http://ftalphaville.ft.com/blog/2010/06/17/263756/recapitalise-or-resisting-the-lure-of- liquidity/

43 - Nada es Gratis - http://www.fedeablogs.net/economia - Una reforma laboral insuficiente (y II) Posted By Samuel Bentolila On 05/07/2010 @ 09:00 In Samuel Bentolila | 7 Comments El Decreto-Ley de reforma laboral [1] aprobado el pasado 16 de junio se ocupa, entre otros temas, de la negociación colectiva. Y en este caso, como en el del coste del despido (discutido aquí [2]) la reforma es claramente insuficiente. Seguramente esto se debe a la resistencia de lo que voy a llamar el oligopolio laboral. La reforma laboral modifica ligeramente la regulación de la negociación colectiva, como discutió Luis Garicano en una entrada anterior [3]. Aquí voy a describir cuáles son los problemas en este campo, qué limitaciones tiene la reforma aprobada y cómo se podrían abordar de verdad los problemas. El oligopolio laboral En dos entradas anteriores he discutido los principales problemas de la negociación colectiva en España. En la primera [4], conjunta con Florentino Felgueroso, explicamos que los salarios reales responden muy poco al ciclo económico y mostramos que los salarios reales se han acelerado en esta recesión. Luis Garicano ha mostrado gráficamente en otra entrada [5] que en el Reino Unido han caído. En la segunda [6] discutí cómo en España los salarios tampoco responden a las variaciones de la productividad. En España los salarios pactados reflejan casi exclusivamente las variaciones de la inflación, en especial los aumentos. La principal razón es que solo un 10% de los trabajadores tienen convenio colectivo de empresa. El resto está sujeto a convenios de sector a nivel provincial, negociados por agentes que tienen escasa relación con la situación de las empresas. Constituyen el oligopolio laboral, es decir, “funcionarios” de los sindicatos (la ley les protege especialmente del despido, por muy buenas razones) y de la patronal. Como ya argumenté [4], los sindicatos no defienden los intereses de todos los trabajadores, solo los de los indefinidos (y no de los temporales o los parados [7]). Algo similar sucede con la patronal en relación con las empresas pequeñas. [N.B.: Seguramente debería decir oligopolio-oligopsonio u oligopolio bilateral, pero oligopolio laboral es conciso y suficientemente claro.] Esta gran rigidez de los salarios reales, sustentada por la dualidad creada por los contratos temporales, hace que la respuesta a las perturbaciones económicas siempre ocasione ajustes de cantidades y no de precios. Los resultados son una mayor volatilidad del empleo, una tasa de paro mayor y más volátil y, puesto que los salarios relativos tampoco responden a las diferencias de productividad, mayor desigualdad entre las tasas de paro de distintos grupos de la población y entre regiones, además de escasos incentivos para la inversión en capital humano (educación formal y formación en la empresa). Los cambios contenidos en la reforma laboral El decreto-ley de reforma laboral reconoce que la estructura de la negociación colectiva tiene graves problemas y pretende abordarlos. En esencia, ha cambiado dos aspectos. En primer lugar, se reemplazan las cláusulas de descuelgue salarial de los convenios colectivos por cláusulas acerca de cómo se resolverán los desacuerdos salariales. Esto me parece poco relevante.

44 En segundo lugar, se permite que, por acuerdo entre la empresa y los trabajadores, se pueda no aplicar el régimen salarial previsto en los convenios colectivos de ámbito superior a la empresa cuando pudiera dañar al empleo en la empresa. Y se establece un sistema similar para las modificaciones sustanciales de las condiciones de trabajo. Claramente, se trata de un cambio muy positivo. No obstante, su alcance es bastante limitado. La principal restricción es que la desviación del régimen salarial es transitoria, no puede estar en vigor más de tres años. Es decir, que las empresas y sus trabajadores no podrán acordar sus propios salarios libremente, sino solo en malos tiempos y por plazos cortos. Además, la veracidad de la condición del potencial perjuicio al empleo podrá ser impugnada por los sindicatos ante los jueces (con independencia del deseo de los trabajadores de la empresa). O sea, que de nuevo todo podría quedar en manos de decisiones judiciales. Por tanto, sería muy deseable que esta condición fuera suprimida en la próxima tramitación de la reforma como ley. La segunda restricción es que esta vía queda vetada a las empresas de menos de seis trabajadores (presumiblemente para protegerles). Esta es una restricción importante. Según la base de datos Structural Business Statistics [8] de Eurostat, en España las microempresas (menos de 10 empleados) suponen el 38% del empleo privado, así que calculo que las de menos de 6 supondrán como mínimo una cuarta parte del mismo. Además, entre 1996 y 2003, según un estudio de López-García, Puente y Gómez [9], las empresas de menos de 20 trabajadores generaron casi el 50% de la creación de empleo. Enfrentadas a la caída de la demanda sin acceso al crédito, sin flexibilidad laboral, han de destruir mucho empleo (sobre todo temporal). La tercera restricción es que para las modificaciones sustanciales de las condiciones de trabajo, los acuerdos no pueden aplicarse a la jornada de trabajo ni a las funciones, que son dos dimensiones fundamentales de la reorganización de las empresas para poder capear la crisis y sacar partido de las nuevas tecnologías. Un cambio incluido en la reforma que podría mitigar la rigidez salarial es la reducción de los costes de despido de los empleados indefinidos (esencialmente, de 45 a 33 días, véase la entrada anterior [2]). En la medida en que en la negociación salarial no se compensa totalmente el coste del despido, y al reducirse el valor de la opción alternativa de los trabajadores (el paro), debería aumentar la sensibilidad de los salarios a condiciones económicas distintas de la inflación. Pero la reducción del coste del despido no parece suficiente para que este efecto sea grande. ¿Qué hacer? [10] Los problemas de nuestro sistema de negociación colectiva provienen principalmente de su regulación, que fomenta la centralización intermedia al nivel de sector y provincia. Juan F. Jimeno y yo hicimos en 2002 una propuesta de reforma [11], orientada a lograr una mayor descentralización, mediante una menor relevancia de los convenios de ámbito provincial en beneficio de los de empresa. Algunas de las medidas concretas son: (1) Reforzar la representatividad de los sindicatos que toman parte en la negociación, de forma que solo estén legitimados para negociar convenios de ámbito superior a la empresa los que cuenten con un mínimo del 10% de los miembros de los comités de empresa o delegados de personal en el ámbito geográfico y funcional del convenio. (2) Permitir que un convenio de empresa pueda establecer condiciones distintas de las dispuestas en los convenios de ámbito superior, siempre que sea con el respaldo de la mayoría de los trabajadores de la empresa.

45 (3) Suprimir la eficacia general automática de los convenios de ámbito superior a la empresa. Serían automáticamente aplicables solo a los trabajadores de las empresas que estuviesen formalmente representados en la negociación del convenio en cuestión. Los trabajadores de las restantes empresas podrían quedar cubiertos por el convenio si sus empresas se adhirieran voluntariamente, mediante acuerdo entre el empresario y los trabajadores. (Esta medida es sustitutiva de las dos anteriores.) (4) La validez de un convenio colectivo se mantiene indefinidamente hasta que se acuerda uno nuevo. Esto genera mucha inercia, que resulta especialmente costosa en momentos de cambios bruscos e inesperados, como en la actual recesión. Es necesario, por tanto, proporcionar incentivos a la renegociación de los convenios colectivos estableciendo un límite temporal a la misma, incluyendo una solución por defecto si se agota ese límite. (5) Facilitar la consecución de la coordinación en el ámbito nacional de las organizaciones empresariales y sindicales mayoritarias, favoreciendo la constitución anual de una mesa de discusión, a fin de contar con unas líneas generales consensuadas sobre la situación macroeconómica y la evolución salarial compatible con esa situación. Conclusión Un detalle: el Decreto-Ley de la reforma laboral se refiere a la desviación de una empresa con respecto al régimen salarial del convenio sectorial con el término inaplicación. Según el Diccionario de la RAE [12] este palabro no significa no aplicación, sino desaplicación, o sea, “falta de aplicación, ociosidad”. ¿Un lapsus freudiano? Las propuestas anteriores, u otras distintas que fomentasen la descentralización, son difíciles de poner en práctica por consenso. Un desplazamiento hacia la negociación al nivel de las empresas podría reducir el poder de las cúpulas empresariales y sindicales. En consecuencia, durante los dos años del llamado diálogo social no se discutió nada que pudiera alterar seriamente esa regulación. Cuando, tras el fracaso de ese diálogo, se planteó hacer una reforma laboral unilateral, la modificación de la negociación colectiva apenas se había estudiado. ¿Desaplicación? Hide Sites [13]

Article printed from Nada es Gratis: http://www.fedeablogs.net/economia URL to article: http://www.fedeablogs.net/economia/?p=5193 URLs in this post: [1] reforma laboral: http://www.boe.es/boe/dias/2010/06/17/pdfs/BOE-A-2010-9542.pdf [2] discutido aquí: http://www.fedeablogs.net/economia/?p=4899 [3] entrada anterior: http://www.fedeablogs.net/economia/?p=4881 [4] primera: http://www.fedeablogs.net/economia/?p=4435 [5] otra entrada: http://www.fedeablogs.net/economia/?p=5085 [6] segunda: http://www.fedeablogs.net/economia/?p=4659 [7] parados: http://blogs.que.es/parados/2009/1/30/asociaciones-parados-espana [8] Structural Business Statistics: http://epp.eurostat.ec.europa.eu/portal/page/portal/european_business/data/database

46 [9] López-García, Puente y Gómez: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/Documentos Ocasionales/09/Fic/do0903e.pdf [10] ¿Qué hacer?: http://www.librosgratisweb.com/libros/que-hacer.html [11] una propuesta de reforma: http://www.fedeablogs.net/economiaftp://ftp.cemfi.es/pdf/papers/sb/benjimeno.pdf [12] Diccionario de la RAE: http://buscon.rae.es/draeI/ [13] Compartir: # [14] Image: http://buzz.yahoo.com/submit?submitUrl=http%3A%2F%2Fwww.fedeablogs.net%2Feconom ia%2F%3Fp%3D5193&submitHeadline=Una+reforma+laboral+insuficiente+%28y+II%29& submitSummary= [15] Image: http://del.icio.us/post?url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp%3 D5193&title=Una+reforma+laboral+insuficiente+%28y+II%29 [16] Image: http://digg.com/submit?phase=2&url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia% 2F%3Fp%3D5193&title=Una+reforma+laboral+insuficiente+%28y+II%29 [17] Image: http://www.facebook.com/sharer.php?u=http%3A%2F%2Fwww.fedeablogs.net%2Feconomi a%2F%3Fp%3D5193 [18] Image: http://www.google.com/bookmarks/mark?op=edit&output=popup&bkmk=http%3A%2F%2F www.fedeablogs.net%2Feconomia%2F%3Fp%3D5193&title=Una+reforma+laboral+insufici ente+%28y+II%29 [19] Image: http://www.linkedin.com/shareArticle?mini=true&url=http%3A%2F%2Fwww.fedeablogs.net %2Feconomia%2F%3Fp%3D5193&title=Una+reforma+laboral+insuficiente+%28y+II%29 [20] Image: http://reddit.com/submit?url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp %3D5193&title=Una+reforma+laboral+insuficiente+%28y+II%29 [21] Image: http://www.technorati.com/faves?add=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia %2F%3Fp%3D5193 [22] Image: http://twitter.com/home/?status=Check+out+Una+reforma+laboral+insuficiente+%28y+II%2 9+@+http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp%3D5193 [23] Image: http://myweb2.search.yahoo.com/myresults/bookmarklet?u=http%3A%2F%2Fwww.fedeablo gs.net%2Feconomia%2F%3Fp%3D5193&t=Una+reforma+laboral+insuficiente+%28y+II%2 9

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47 - Nada es Gratis - http://www.fedeablogs.net/economia - Una reforma laboral insuficiente (I) Posted By Samuel Bentolila On 18/06/2010 @ 09:00 In Samuel Bentolila | Comments Disabled La reforma laboral [1] recién aprobada es, como en casos anteriores (por ejemplo, 1984, 1994, 1997 o 2002), parcial e insuficiente. Lo que no quiere decir que sea irrelevante. Aunque sus objetivos son los correctos, no crea las nuevas instituciones laborales que necesitaría nuestro país para reducir apreciablemente su tasa de paro. Y suscita dudas sobre la efectividad de las medidas. En suma, la impresión inicial es que se trata de una reforma que se queda corta y de eficacia incierta. ¿Qué problemas debía abordar la reforma? (1) Una tasa de paro estructural altísima y con muy desigual incidencia por edad, nivel educativo, comunidad autónoma y origen nacional. (2) Una excesiva inestabilidad del empleo debida a la dualidad, que sufren especialmente los jóvenes, las mujeres y los inmigrantes. (3) Una falta de respuesta de los salarios al paro, que exagera el efecto de las perturbaciones económicas sobre el empleo. (4) Un anémico crecimiento de la productividad, debido en parte a escasos incentivos para invertir en capital humano (educación), a su vez derivados en parte del divorcio entre los salarios reales y los niveles de productividad individuales. Para abordarlos el Manifiesto de los 100 [2] propuso reformar cuatro áreas: protección del empleo, negociación colectiva, políticas activas de empleo y protección por desempleo. Se han tomado medidas en todas menos la última. Por razón de espacio me ceñiré a la protección del empleo, dejando otros aspectos para el futuro (Luis Garicano se ocupó ayer de la negociación colectiva [3]). Citaré algunos síntomas de nuestro mercado de trabajo como guía para discutir la reforma del Gobierno. Una advertencia: es muy difícil evaluar en tan poco tiempo las implicaciones de tantos cambios simultáneos en los incentivos de los agentes económicos, máxime cuando están sujetos a la incertidumbre sobre las decisiones judiciales. Así que tómese lo que sigue con cautela. Dualidad Un joven que entra en el mercado de trabajo pasa, de media, 5 años hasta conseguir su primer contrato indefinido [4], periodo en que alterna contratos temporales (40 meses) y periodos de paro (20 meses). De los contratos temporales registrados en 2009 cuya duración se conoce, el 60% duró menos de 1 mes [5]. La reforma eleva progresivamente la indemnización en los contratos temporales desde 8 días de salario por año de servicio hasta 12 días. Ésta y otras dos medidas anexas son poco importantes. Como señala Juanjo Dolado [6], ya había 12 días de indemnización en 1984 y eso no mitigó la temporalidad. Estas medidas no reducirán apenas la dualidad, así que no mejorará mucho la situación de los jóvenes. En este caso, la solución correcta es el contrato indefinido con indemnizaciones crecientes con la antigüedad propuesto en el Manifiesto. No obstante, hay otro mecanismo que debería desincentivar la contratación temporal: el cierre de la brecha entre los costes de despido de los contratos temporales y los indefinidos. Este mecanismo, destacado en un artículo reciente [7] de Juanjo Dolado y mío, podría tener un efecto mayor que la indemnización del contrato temporal per se.

48 Despido por causas objetivas En 2009 se destruyeron 851.700 empleos [8] de asalariados en el sector privado, es decir una caída del 6.4%. En el mismo año, de los despidos resueltos en los juzgados, los magistrados de lo social declararon el 79% de los despidos improcedentes [9]. A partir de ahora las causas económicas para el despido concurrirán “cuando de los resultados de la empresa se desprenda una situación económica negativa” (la novedad está en la referencia a los resultados). La empresa tendrá que “justificar que de los mismos se deduce mínimamente la razonabilidad de la decisión extintiva”. Este criterio de “razonabilidad mínima” proviene del Tribunal Supremo y en principio debería facilitar las indemnizaciones de 20 días. Pero la definición de las causas es tan vaga que seguramente generará sentencias contrapuestas en primera instancia, que luego irán a los tribunales superiores autonómicos y finalmente al Supremo. La última vez que hubo algo similar, el asunto se aclaró tras 9 años [10]. (También hay un cambio en la justificación de otras causas objetivas -las técnicas, organizativas y productivas- que podría facilitar el despido, pero no estoy en condiciones de valorarlo.) Así, la convergencia hacia la indemnización de 20 días, si sucediese, podría tardar mucho, y probablemente seguirá habiendo muchos despidos declarados improcedentes. Muchos economistas académicos creemos que sería más eficiente no controlar la causa del despido, verificar que el puesto de trabajo se ha suprimido (como se hace en el Reino Unido) y, si no se han violado los derechos fundamentales del trabajador, hacer que la empresa le pague una indemnización por romper el contrato de trabajo. Contrato de fomento de la contratación indefinida (CFCI) En 2009 la no renovación de contratos temporales originó el 61% [11] de las entrdas en el paro (altas de prestaciones) y el despido disciplinario improcedente de 45 días generó el 28%; solo el 11% provenía de otras vías. En 2009 el contrato indefinido de fomento del empleo solo representó el 17% de los contratos indefinidos [12] firmados. A partir de ahora el despido por causas objetivas en el CFCI tendrá una indemnización de 33 días si el empresario reconoce la improcedencia del despido. Es una extensión del mecanismo ya existente para el despido disciplinario improcedente (o “despido exprés”). También caen el preaviso (de 30 a 15 días) y el máximo de mensualidades de indemnización, de 42 (en el contrato ordinario) a 24 (en el CFCI). Esta es una buena noticia, que supone una reducción del coste del despido del 27% (=12/45) si ignoramos el preaviso. Teniendo en cuenta el preaviso, la diferencia entre ambos contratos es menor, tanto porque aquel es una cantidad fija, independiente de la antigüedad, como porque el despido disciplinario no tiene preaviso. De hecho, al final del primer año el “despido exprés” del contrato ordinario es todavía más barato que el CFCI (45 vs. 48 (=33+15)). Con una antigüedad de, digamos, 5 años, el coste del despido del CFCI con respecto al ordinario es un 20% menor (=180 vs. 225). Si no lo impide el excesivo intervencionismo judicial, el CFCI arrinconará al contrato ordinario. No obstante, habría sido mejor derogar el contrato ordinario (de 45 días) o al menos fijar también en 33 días la indemnización por despido disciplinario para el CFCI (que sigue siendo de 45 días). En cuanto a la brecha entre el contrato indefinido y el temporal, que es lo más relevante para medir el impacto sobre la tasa de empleo temporal, ésta era de 37 días al final del primer año (45-8) y se reduce a 25 días (33-8), es decir, una caída de casi un tercio.

49 Despidos colectivos Es probable que el CFCI se convierta en el contrato dominante y el despido objetivo reconocido como improcedente en el tipo de despido individual dominante. Sin embargo, en los despidos colectivos (ERE), si la nueva definición de las causas objetivas no funciona, como he mencionado antes, entonces la indemnización no convergerá hacia los 20 días. De hecho, se ha perdido una gran ocasión de suprimir la autorización administrativa de los ERE (como propusimos Marcel Jansen y yo en un artículo reciente [13]). Como las autoridades laborales seguirán exigiendo que el ERE sea pactado con los sindicatos, quizá el único efecto esperable es que, al reducirse el valor alternativo (“outside option”) del despido individual, la negociación permita indemnizaciones algo menores. Aquí hay un efecto indirecto potencialmente negativo. Los despidos son colectivos cuando afectan al menos al 10% de la plantilla. Pero las no renovaciones de contratos temporales y los despidos disciplinarios no cuentan para ese umbral. Por tanto, si el coste del despido en los ERE no cae mucho, las empresas seguirán teniendo incentivos para usar esos otros contratos en vez del CFCI como forma de eludir un ERE. De ser así, éste sería otro factor que obstaculizaría la reducción de la temporalidad. FOGASA y el fondo de capitalización El Fondo de Garantía Salarial (FOGASA) pagará 8 días de la indemnización por despido. Esto es totalmente irrelevante. Es sólo para los nuevos contratos que hayan tenido una duración de al menos un año. Es decir, se aplicará a partir de junio de 2011, a un conjunto de contratos relativamente reducido. Y solo estará vigente hasta el fin de 2011, pues en 2012 será reemplazado por el fondo de capitalización (o fondo austriaco). Esta puede ser una buena iniciativa, como discutimos [14] Luis Garicano y yo hace tiempo, pero es imposible valorarla porque su desarrollo se hará en el futuro. En todo caso, si el fondo austriaco no se aplicase a los contratos temporales y en la medida en que parte de la indemnización fuera subvencionada por el Estado –lo que no se debería hacer–, la brecha entre el CFCI y el contrato temporal se cerraría más. Efectos económicos ¿Habrá un gran aumento de los despidos inmediatamente? Es improbable, pues la reforma no afecta a los contratos vigentes. Solo podría suceder si, a diferencia de lo que sospecho, la nueva redacción de las causas objetivas (20 días) fuera efectiva. Salvo en este caso, pues, los efectos de la reforma de la protección del empleo tardará en notarse, salvo que hubiera fuertes efectos de expectativas (que me parecen improbables). La reforma laboral aumentará ligeramente el coste del despido en los contratos temporales y probablemente lo reducirá en mayor medida en los contratos indefinidos. Esto último, según la literatura internacional, contribuirá a elevar la tasa de empleo de los jóvenes [15] y a elevar el crecimiento de la productividad [16]. También debería aumentar la respuesta de los salarios al ciclo económico, al reducir la protección de los indefinidos (“insiders”). También sería necesario valorar (en equilibrio general) la interacción de la reducción del coste del despido con los cambios en otras instituciones, por ejemplo con la modificación del descuelgue salarial. Sin embargo, la reforma es heredera del descabellado proceso de negociación entre los agentes sociales que la precedió. Por ello, a mi juicio no va a mejorar apenas uno de los dos principales problemas de nuestro mercado de trabajo, que es la dualidad. (Obviamente, podría equivocarme, pues es necesario valorar efectos que van en sentidos contrarios.) El decreto mantiene todos los tipos contractuales y los tipos de despido, haciendo cambios marginales en

50 ellos. Como resultado, seguiremos teniendo un mercado de trabajo hiperregulado –que genera mucha extracción de rentas y da de comer a muchos burócratas e intermediarios [17]–. También seguirá estando segmentado, lo que es perjudicial. Así, por ejemplo, el efecto positivo del menor coste de despido sobre el crecimiento de la productividad se verá mitigado por la falta de incentivos para la inversión en capital humano que genera la temporalidad. Si la tasa de temporalidad cae poco, se mantendrá la excesiva volatilidad del empleo. En estas condiciones, no cabe esperar que este aspecto de la reforma contribuya significativamente a reducir la tasa de paro y por ello sería deseable que fuera mejorado durante su futura tramitación como proyecto de ley. — P.S. (19/6/2010). En virtud de los útiles comentarios de los lectores, he revisado el texto en lo relativo al preaviso, la brecha entre el CFCI y el contrato temporal y el efecto del fondo austriaco. Gracias a todos. Compartir [18]

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Article printed from Nada es Gratis: http://www.fedeablogs.net/economia URL to article: http://www.fedeablogs.net/economia/?p=4899 URLs in this post: [1] reforma laboral: http://www.tt.mtin.es/periodico/laboral/201006/RDL_REFORMA_LABORAL.pdf [2] Manifiesto de los 100: http://www.crisis09.es/propuesta/?page_id=37 [3] negociación colectiva: http://www.fedeablogs.net/economia/?p=4881 [4] 5 años hasta conseguir su primer contrato indefinido: http://www.crisis09.es/ebook_propuesta_laboral/Propuesta_reactivacion_laboral_art_6.pdf [5] el 60% duró menos de 1 mes: http://www.mtin.es/estadisticas/ANUARIO2009/MLR/mlr23_top_HTML.htm [6] Juanjo Dolado: http://www.elpais.com/articulo/espana/Doble/decepcion/elpepinac/20100617elpepinac_2/Tes/ [7] artículo reciente: http://5388029117079340080-a-1802744773732722657-s- sites.googlegroups.com/site/samuelbentolilaweb/Samuel-Bentolila- Home/mycabinet/ParoyEmpleoTemporal.pdf?attachauth=ANoY7cplG0cCMFCm_3pkhgLLj h5iRsT4KvNJD6wVjUit-uUMY5qLDAPbQ-lHJE5g70XN4uei_s2vLLscPO96llQLc8- jSsvReHf4lJ6b0GrQTpHZEeK_Udi-7YUZ53L2UCO- drBFuc2OfA2R6j3IOfi4rSkxkUST1dUidbqdm1SoQtHpO9WpQ7ZAZ8xoMjNj5BvQunkapX PY8f6opNRlRpBmREQYLR3uzuGqBYU7wJkkkqFAAsmogB2T5YdtbSwuK0P8lz87ZtJ4jA f9GqcshV1Mvecb_r1UIQ%3D%3D&attredirects=0 [8] se destruyeron 851.700 empleos: http://www.ine.es/jaxiBD/tabla.do?per=03&type=db&divi=EPA&idtab=3 [9] 79% de los despidos improcedentes: http://www.mtin.es/estadisticas/ANUARIO2009/AJS/ajs05_top_EXCEL.htm [10] se aclaró tras 9 años: http://www.fedeablogs.net/economia/?p=2930 [11] no renovación de contratos temporales originó el 61%: http://www.mtin.es/estadisticas/bel/PRD/prd15_top_EXCEL.htm [12] 17% de los contratos indefinidos: http://www.la-moncloa.es/ActualidadHome/2009- 2/050210EnlaceDocumento

51 [13] artículo reciente: http://www.crisis09.es/ebook_propuesta_laboral/Propuesta_reactivacion_laboral_art_7.pdf [14] discutimos: http://www.fedeablogs.net/economia/?p=3936 [15] elevar la tasa de empleo de los jóvenes: http://www.oecd.org/dataoecd/37/42/38569432.pdf [16] elevar el crecimiento de la productividad: http://ftp.iza.org/dp3555.pdf [17] da de comer a muchos burócratas e intermediarios: http://www.cincodias.com/articulo/opinion/reforma-laboral- inutil/20100611cdscdiopi_4/cdsopi/ [18] Compartir: # [19] Image: http://buzz.yahoo.com/submit?submitUrl=http%3A%2F%2Fwww.fedeablogs.net%2Feconom ia%2F%3Fp%3D4899&submitHeadline=Una+reforma+laboral+insuficiente+%28I%29&sub mitSummary= [20] Image: http://del.icio.us/post?url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp%3 D4899&title=Una+reforma+laboral+insuficiente+%28I%29 [21] Image: http://digg.com/submit?phase=2&url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia% 2F%3Fp%3D4899&title=Una+reforma+laboral+insuficiente+%28I%29 [22] Image: http://www.facebook.com/sharer.php?u=http%3A%2F%2Fwww.fedeablogs.net%2Feconomi a%2F%3Fp%3D4899 [23] Image: http://www.google.com/bookmarks/mark?op=edit&output=popup&bkmk=http%3A%2F%2F www.fedeablogs.net%2Feconomia%2F%3Fp%3D4899&title=Una+reforma+laboral+insufici ente+%28I%29 [24] Image: http://www.linkedin.com/shareArticle?mini=true&url=http%3A%2F%2Fwww.fedeablogs.net %2Feconomia%2F%3Fp%3D4899&title=Una+reforma+laboral+insuficiente+%28I%29 [25] Image: http://reddit.com/submit?url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp %3D4899&title=Una+reforma+laboral+insuficiente+%28I%29 [26] Image: http://www.technorati.com/faves?add=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia %2F%3Fp%3D4899 [27] Image: http://twitter.com/home/?status=Check+out+Una+reforma+laboral+insuficiente+%28I%29+ @+http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp%3D4899 [28] Image: http://myweb2.search.yahoo.com/myresults/bookmarklet?u=http%3A%2F%2Fwww.fedeablo gs.net%2Feconomia%2F%3Fp%3D4899&t=Una+reforma+laboral+insuficiente+%28I%29

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52 - Nada es Gratis - http://www.fedeablogs.net/economia - Sindicatos para el siglo XXI Posted By Samuel Bentolila On 24/05/2010 @ 23:07 In Florentino Felgueroso, Samuel Bentolila | Comments Disabled [Conjunto con Florentino Felgueroso] En respuesta a las medidas de consolidación fiscal del Gobierno, los sindicatos mayoritarios han convocado una huelga en el sector público dentro de unos días y amenazan también con convocar una huelga general. Esta reacción, su actuación durante la crisis y su bloqueo de la reforma laboral nos llevan a hacernos la siguiente pregunta: ¿Qué funciones cumplen hoy los sindicatos? Para responderla acudimos a Olivier Blanchard [1], quien destaca cuatro funciones de los sindicatos en el pasado: (1) Asegurar a sus miembros en caso de pérdida del empleo. (2) Protegerles de la explotación empresarial. (3) Extraer rentas de las empresas y del Estado. Y (4) representar los intereses de los trabajadores a nivel nacional. Repasemos la actuación sindical en esta crisis para luego retomar el asunto de su papel futuro. Los dirigentes sindicales se quejan a menudo de que el Gobierno no hace lo suficiente para reducir el paro. Se diría que ellos no influyeran en el nivel del empleo. Sin embargo, ante una reducción de la demanda de trabajo de las empresas por perturbaciones económicas, se puede mitigar la destrucción de empleo reduciendo los salarios reales (es decir, acordando que los salarios crezcan menos que los precios) o las horas de trabajo, reorganizando la producción para aumentar la productividad, etc. ¿Qué ha pasado en España? Veamos, por ejemplo, la evolución del PIB, el empleo y los salarios reales (restando el aumento de precios [2] según el deflactor del PIB [3], que es el más relevante para la competitividad) acordados en los convenios colectivos [4] (y no los salarios medios, para evitar sesgos de composición) desde 2007:

53 Sorprendentemente, el crecimiento salarial real ha ido subiendo a medida que se agravaba la crisis. Los acuerdos salariales pactados por los sindicatos y la CEOE han destruido muchos empleos. Su impacto se amplifica porque los empresarios que han intentado mantener su plantilla negociando con sus propios trabajadores menores aumentos salariales o reorganizaciones internas no han podido hacerlo, pues es dificilísimo descolgarse de los convenios de sector. (También hay que explicar por qué la CEOE pactó esos aumentos salariales, lo que queda para otro día.) Existe una gran desconexión entre las necesidades de los trabajadores y las decisiones de sus representantes. ¿Por qué? Un dato clave es que los convenios colectivos afectan al 90% de los asalariados aunque solo entre el 10% y el 15% están sindicados. Por dos razones principales: (1) El reducido umbral de votos en las elecciones sindicales requerido para que un sindicato pueda participar en la negociación de los convenios colectivos de ámbito sectorial. (2) Los convenios se aplican, con categoría de ley, a todos los ocupados del sector, estén o no sindicados y hayan participado o no en las elecciones (que en las empresas pequeñas no se permiten). Por tanto, no hay incentivos ni para que los trabajadores se afilien ni para que los sindicatos busquen implantarse en todas las empresas. La escasa implantación –que provenía del franquismo– se perpetuó en la regulación actual, que es de finales de los años 70 y nunca se ha reformado, al otorgar representatividad a los sindicatos desde arriba, en vez de requerir que la obtuvieran desde abajo. Como resultado, los sindicatos defienden principalmente los intereses de solo una parte de los trabajadores (los “insiders”), que ha sufrido pérdidas de empleo limitadas. Según Dolado, Felgueroso y Jansen [5] el afiliado típico de un sindicato es varón, mayor de 55 años, con estudios medios, con contrato permanente y trabaja en una empresa de más de 250 empleados. Además, su máxima afiliación está entre los funcionarios. Estos autores calculan que el 99% de la destrucción de empleo entre 2007:3 y 2009:3 recayó en los no afiliados a los sindicatos y el 79% en colectivos sin posibilidad de votar en elecciones sindicales. Incluso si los sindicatos defendiesen a todos los asalariados con contrato indefinido, éstos solo han perdido empleo neto, en términos interanuales, a partir de 2009:2 (mientras que el empleo temporal empezó a caer en 2007:1). Se entiende así la ausencia de moderación salarial durante la crisis como resultado de la escasa amenaza de paro que han experimentado los trabajadores representados por los sindicatos. Dolado, Felgueroso y Jansen también estudian en otro artículo [6] si los trabajadores piensan que una mayor flexibilidad laboral estimularía la contratación. La respuesta afirmativa es más frecuente entre los más jóvenes, los estudiantes, los autónomos, los trabajadores manuales, los que no esperan mantener su empleo y los que lo han perdido durante la crisis. Son características infrecuentes entre los colectivos representados por los sindicatos. Éstos han bloqueado por tanto la reforma laboral, que sería más bienvenida por los temporales y los parados (los “outsiders”). Así, no es raro que casi la única propuesta de reforma apoyada por los sindicatos sea el llamado “modelo alemán”, que subsidia con dinero público la reducción de horas de los empleados permanentes. Retomemos ahora el tema de las funciones sindicales futuras. Como señala Blanchard, hoy en día el Estado es un mejor asegurador de los trabajadores en paro. Y debido a la globalización, tanto las empresas como el Estado tienen muchas menos rentas que los sindicatos puedan ayudar a extraer. Las otras dos funciones que quedan, proteger a los trabajadores de la explotación empresarial y defender sus intereses a nivel nacional requieren que los sindicatos realmente representen a todos los trabajadores.

54 Una nueva regulación legal de la negociación colectiva podría ayudar a este fin, por ejemplo, aumentando el umbral de votos requerido para obtener la legitimidad para negociar en los convenios. También facilitando a las empresas que lo acuerden con sus empleados el descuelgue [7] de las condiciones de los convenios colectivos de sector (véase Bentolila y Jimeno [8]) o, como ha propuesto recientemente Marcel Jansen [9] siguiendo el ejemplo de Alemania, introduciendo una decisión administrativa para la posible extensión de éstos a todas las empresas del sector. También ayudaría la eliminación de la dualidad entre fijos y temporales mediante el contrato único [10], que convertiría automáticamente a todos los trabajadores en “insiders” (otro ejemplo de la complementariedad [11] entre las reformas de distintas instituciones laborales). Los sindicatos se enfrentan a un reto ineludible, pues una representatividad otorgada por ley tiene límites. Su poder de convocatoria seguramente esté en declive. En efecto, se observa una tendencia decreciente en la participación de los trabajadores en huelgas (según la OIT y el Ministerio de Trabajo), incluso en los picos, que corresponden a huelgas generales:

En España hay cierto tabú a la hora de debatir en foros públicos la actuación de los sindicatos. Sin embargo, el mundo ha cambiado y, tanto por su propia superviviencia como para reducir el paro, se necesita un nuevo sistema de relaciones laborales, en que los sindicatos representen a todos los trabajadores y se hagan por ello corresponsables de la evolución del empleo. Pero para que existan incentivos para esta renovación es necesario cambiar las reglas. Lo que resultaría costosísimo para todos sería seguir con el sistema actual. [12]

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55 [1] Olivier Blanchard: http://econ-www.mit.edu/files/655 [2] aumento de precios: http://www.bde.es/webbde/es/estadis/infoest/a0201b.pdf [3] deflactor del PIB: http://es.wikipedia.org/wiki/Deflactor [4] convenios colectivos: http://www.bde.es/webbde/es/estadis/infoest/a2423.pdf [5] Dolado, Felgueroso y Jansen: http://www.crisis09.es/propuesta/wp- content/uploads/propuesta_reactivacion_laboral_art_12.pdf [6] otro artículo: http://www.crisis09.es/ebook_propuesta_laboral/Propuesta_reactivacion_laboral_art_11.pdf [7] descuelgue: http://www.crisis09.es/propuesta/?page_id=37 [8] Bentolila y Jimeno: http://www.fedeablogs.net/economiaftp://ftp.cemfi.es/pdf/papers/sb/benjimeno.pdf [9] Marcel Jansen: http://works.bepress.com/marceljansen/ [10] contrato único: http://www.crisis09.es/propuesta/?page_id=755 [11] complementariedad: http://www.fedeablogs.net/economia/?p=4125 [12] Compartir: # [13] Image: http://buzz.yahoo.com/submit?submitUrl=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F% 3Fp%3D4435&submitHeadline=Sindicatos+para+el+siglo+XXI&submitSummary= [14] Image: http://del.icio.us/post?url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp%3D4435& title=Sindicatos+para+el+siglo+XXI [15] Image: http://digg.com/submit?phase=2&url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp %3D4435&title=Sindicatos+para+el+siglo+XXI [16] Image: http://www.facebook.com/sharer.php?u=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3 Fp%3D4435 [17] Image: http://www.google.com/bookmarks/mark?op=edit&output=popup&bkmk=http%3A%2F%2Fwww.fed eablogs.net%2Feconomia%2F%3Fp%3D4435&title=Sindicatos+para+el+siglo+XXI [18] Image: http://www.linkedin.com/shareArticle?mini=true&url=http%3A%2F%2Fwww.fedeablogs.net%2Feco nomia%2F%3Fp%3D4435&title=Sindicatos+para+el+siglo+XXI [19] Image: http://reddit.com/submit?url=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3Fp%3D443 5&title=Sindicatos+para+el+siglo+XXI [20] Image: http://www.technorati.com/faves?add=http%3A%2F%2Fwww.fedeablogs.net%2Feconomia%2F%3F p%3D4435 [21] Image: http://twitter.com/home/?status=Check+out+Sindicatos+para+el+siglo+XXI+@+http%3A%2F%2Fw ww.fedeablogs.net%2Feconomia%2F%3Fp%3D4435 [22] Image: http://myweb2.search.yahoo.com/myresults/bookmarklet?u=http%3A%2F%2Fwww.fedeablogs.net% 2Feconomia%2F%3Fp%3D4435&t=Sindicatos+para+el+siglo+XXI

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06.07.2010 Stress testing the stress tests By: Wolfgang Münchau

You know the pattern. The European Council makes an announcement to impress the financial markets, and then messes it all up in the implementation phase. Amid the cacophony, the markets panic. Could it happen again over stress tests for European banks? The decision to publish stress tests for 26 banks was the one piece of good news coming from the latest European summit two weeks ago. This was followed by negotiations to extend the tests to 100 banks, including some of the German Landesbanken and Spanish Cajas, considered to be most at risk. There are two reasons why one might want to conduct, and publish, stress tests: the first is to reduce market uncertainty about the banking system as a whole through a credible and transparent process. The second is to recapitalise the most vulnerable banks. For this work, the stress tests themselves must pass three stress tests: they must include realistic scenarios; they must be credible; and they must be backed up by a plausible recapitalisation strategy. First, by realistic stress I mean the inclusion of extreme, not probable, worst-case scenarios. Given the discussions about Greece in recent months, this must include the worst estimates of a haircut – a deduction suffered by bondholders – of about 50 per cent of the face value of Greek bonds. The stress tests will include a uniform haircut on sovereign bonds of 3 per cent, according to a news report in the Financial Times last week. This number is a joke. Some institutions will have a stronger exposure to Greece, Portugal, Ireland or Spain than others, and it is important that those banks are stressed on the assumption of significant haircuts of their sovereign risk portfolios. I can see the politics behind the 3 per cent figure. It is the official policy of the EU to deny the reality that Greece might default or restructure. A genuine stress test might expose the EU’s position as indefensible. Those opposed to any inclusion of sovereign risk into the stress tests argue that the mere assumption of a haircut might turn into a self-fulfilling prophecy. The market would jump to the wrong conclusions. But this is a silly argument. Stress test scenarios are no forecasts. They are only scenarios, of the kind that market participants have already factored into the pricing of bonds. What else is the implication of a 10 per cent yield on ten-year Greek sovereign bonds? Second, the tests must be published in full and simultaneously for all banks subject to a test. I

57 am hearing that they are still fighting over this. At a meeting deep inside the Bundesbank last week, the Landesbanken told Axel Weber, Bundesbank president, that they do not support the idea of full publication. German media reports suggested that Mr Weber opposes the idea to leave that decision to the Committee of European Banking Supervisors, which carries out the stress tests. I have no idea whether that story is true or not. I hope not. It would not be good if Germany gave the impression that it is, once again, a reluctant participant in a European process, interested only its own narrow competitive advantage. There can be no Landesbanken exception. That would defeat the whole point of the exercise. Partial obfuscation suggests that the banks have something to hide. Outside observers will treat a decision to withhold information as an acknowledgement that the bank is insolvent. And finally, the banks need a realistic recapitalisation strategy – one that strengthens the capital base. The capital base of some of the eight German Landesbanken is thin even without extreme assumptions about stress. Unstressed, they all formally pass the official tier- one capital ratio minimum, as required by the Basle capital rules. But a large proportion of their capital base is made up of silent capital, a hybrid debt security. These are securities with bond-like characteristics that entitle the holder to an interest rate cash flow. Despite those characteristics, silent capital is nevertheless classified formally as tier-one capital. It is also noteworthy that the capital injections from the German government’s bank rescue fund come in the form of silent capital. The Basel Committee on Banking Supervision has proposed to tighten the definition of tier one capital to exclude various types of funny money, such as silent capital. Those proposals have yet to be implemented. But since the stress tests are all about the future anyway, they should be based on those future rules, and include the narrow definition of core tier-one capital – genuine equity and retained earnings. This is the benchmark the Spanish authorities are applying voluntary in their own stress tests. The goal of the whole stress test exercise is to not present a smokescreen of apparent solid capitalisation, but to strengthen the actual capital base. The only good news on this front is that the CEBS has raised the minimum “noncore” tier-one pass threshold from 4 to 6 per cent. I get the funny feeling that these tests are devised in such a way that the banks will pass them. But this is not going to help much. Since everybody knows that large parts of the banking are in deep trouble, a good pass result may bring the opposite of reassurance. It would signal to the outside world that the EU is treating its debt crisis, which is a banking crisis at heart, as public relations exercise. [email protected]

http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2846&tx_ttnews[ba ckPid]=901&cHash=08c7378276#

Gains from long-term Treasurys won't go on forever By Allan Sloan Special to The Washington Post Tuesday, July 6, 2010; A07 Financial markets can make you look really foolish, even if you thought your analysis was right, and still do. Today's humbling example: The best investment by far for the first half of this year has been the one that people like me have been warning against: long-term U.S. Treasury bonds. I've also said (and said) that you have to protect yourself against a decline in the value of the dollar because our need to borrow huge amounts to cover trade and budget deficits is eroding the greenback's standing as the world's reserve currency. But guess what: Even though it's been a crummy year for U.S. stocks, the performance of foreign stocks has been considerably crummier. Now, to the numbers, courtesy of Aronson + Johnson + Ortiz (AJO), a Philadelphia money- management firm that tracks investment returns for 48 asset classes. The only investment that showed a double-digit positive return for the first half of this year was . . . long-term Treasury securities. Their total return -- price gains plus interest -- was 13.2 percent. Meanwhile, non-U.S. stocks lost 12.2 percent (price declines and reinvested dividends) for the first half, and U.S. stocks lost 5.6 percent. What's happening, of course, is that we're seeing a somewhat different version of the phenomenon in 2007-08, when scared investors sought refuge in U.S. Treasury securities because they feared a worldwide financial meltdown. This year, it's the European problem that has prompted investors to seek safety in Treasurys. "When the world seems to be about to collapse and you want to stay liquid, the only viable trade is the U.S. dollar and Treasurys," says Brian Wenzinger of AJO. All that money flooding into the Treasury market drove down the interest rate on long-term Treasury bonds. The rate on the index that AJO uses to measure Treasury performance fell to 3.68 percent as of June 30, the firm says, down from 4.45 percent at the end of 2009. That rate decline has driven up the bonds' prices, because a bond yielding 4.45 percent is worth more than face value when a new bond is yielding only 3.68 percent. That difference -- $7.70 a year for each $1,000 of bonds for an extended period -- is worth a considerable amount of money. Hence, long-term Treasury bonds' strong performance for the first half of the year -- and our country's ability to finance its enormous deficits by selling Treasurys at very cheap rates. When interest rates rise, however -- which they're sure to do, sooner or later -- the prices of existing bonds will decline. That's what happened last year, when the rate on bonds was up by almost 50 percent, to the aforementioned 4.45 percent, from 2.97 percent at the end of 2008.

59 Last year, long-term Treasurys had a total return of minus 12.9 percent, making them the biggest loser among the 48 AJO classes. In 2008, long Treasurys were among the best- performing asset classes. How do I explain that my predictions have been so wrong for the past six months? Simply this: In the long run, markets are rational. In the short run, anything can happen. The tech-stock and house-price bubbles lasted far longer than rationalists expected them to, but they ultimately popped. So will the Treasury-bond bubble. Allan Sloan is Fortune magazine's senior editor at large. Allan Sloan Gains from long-term Treasurys won't go on forever July 6, 2010; A07 http://www.washingtonpost.com/wp- dyn/content/article/2010/07/05/AR2010070502533.html?wpisrc=nl_headline

At SEC enforcement unit, storied chief's son makes a name for himself By Zachary A. Goldfarb Washington Post Staff Writer Tuesday, July 6, 2010; A07 It was New Year's Eve when Robert Khuzami, the enforcement director of the Securities and Exchange Commission, called an agency lawyer named Thomas Sporkin into his office to tell him he won a high-profile new job overseeing how the SEC screens tips and other information that could lead to legal action. After the meeting, Sporkin left the fifth-floor office, passing a photograph of his father, and walked to his own office, where he called his dad. It didn't take long for Stanley Sporkin to start telling his son what he ought to do with his new job. "Every day I'm with him, he tells me what I need to do," Thomas Sporkin said. Stanley Sporkin, 78, perhaps the most famous SEC enforcement director, and Thomas "Tommy" Sporkin, 42, a rising star, are a unique pair in the agency's history. Their relationship is in many ways typical of any dad and son in the same field, but it's also a way to look at the ebb and flow of the SEC over the years. The father helped turn the enforcement division into a force to be reckoned with. After years of setbacks and criticism for the unit, the son is now trying to help transform it once again. "The Sporkin family is to SEC enforcement what the Manning family is to NFL football," said Russell Ryan, a securities lawyer who shared an office with the younger Sporkin in the 1990s. A few days after his son got the job, the elder Sporkin was on the line with Khuzami talking shop when he began to choke up a bit. He profusely thanked Khuzami, telling him what pleasure it brings for a father to see his son follow in his footsteps. Khuzami told Sporkin that his son won the position based on the merits. "Stan was clearly very affected, and quite happy, and proud, and a little nostalgic, and a little verklempt -- all wrapped up into one," Khuzami recalled, using a Yiddish word roughly meaning choked up. Tommy Sporkin's job title is officially chief of the Office of Market Intelligence, one of the key new units created to reinvigorate SEC efforts at pursuing cases of financial crime. Time will tell if the son will follow in all of his father's footsteps by one day becoming enforcement director himself. But he slowly has been able to make his own way. "Coming in as the son of the most famous enforcement director was probably not an easy thing to do," said William McLucas, the head of the securities practice of the prominent law firm WilmerHale in Washington. McLucas has seen both father and son in action. When the older man was head of the division in the 1970s, McLucas was a green SEC enforcement lawyer and Sporkin was leading an overhaul of the division, advocating new ways to punish companies accused of wrongdoing, and pushing the limits of accepted law to pursue corporate malfeasance.

61 In 1993, McLucas was head of the enforcement division when Thomas Sporkin joined with his law degree from American University fresh in hand. "Tommy came in as a kid lawyer and was quiet," he said. "Tommy's now at the point where he's coming into his own and having some fun." McLucas added: "I always say that when people in the defense bar, who were also working a generation ago, get subpoenas and letters and see the last name Sporkin, they must think, 'Oh, my God, not again.' " A Sporkin thing Becoming a lawyer -- and focusing on securities law -- was a way for Tommy Sporkin to get to know his dad better. As a child, he tried to understand what his father was always doing at the agency until late at night. "I go to law school and it's the first time I could really communicate with him," the younger Sporkin said one recent Saturday afternoon, sitting in the Chevy Chase home where he was born. At the SEC, the son often reaches out to the father, who went on to be the top lawyer at the CIA and a federal judge in Washington. The younger Sporkin asks for advice on cases -- always on a hypothetical basis, he says -- and for guidance when others at the SEC question his approach. "It was certainly an annoyance to our supervisors sometimes when we'd say that we'd bounced it off Judge Sporkin," said John Stark, who knows both men and tapped the younger Sporkin as his deputy in the SEC's office of Internet enforcement. "But Tommy would never say that. I always did. Tommy in all the years never mentioned his father. He's always asked about it and puts his head down and says, 'Yes, that's my dad,' and smiles." In mid-April, a day after the SEC unveiled a landmark civil fraud case against Goldman Sachs, Tommy Sporkin walked into his father's house and tossed the complaint at him, proud that the agency had filed such a prominent case. The debate that followed was typical of their vigorous discussions -- much like other fathers and sons argue over sports. The elder Sporkin tends to be more tactical, asking why the SEC chooses to file cases in federal court rather than a specialized regulatory court where the odds of prevailing would be better. "You just have to think about every conceivable thing and weigh the advantages and the disadvantages," he urged. The younger responded that bringing suit in federal court can make a point. "If you want to bring a case that changes the way society thinks, then you have to bring that in a court that's not your own -- in a separate court," he told his father. Familiar task While Stanley Sporkin is far more brusque than his son, both are blunt. And Tommy Sporkin sees other ways that he's becoming more like his father. "He worked late at night. I'll be there now to 7:30 myself," the younger Sporkin said. "He wasn't around as much as the other dads, and I'm starting there the same way." His new role in the enforcement division is a significant part of a massive reorganization effort -- the most ambitious since his father's work in the 1970s.

62 "Khuzami to his great credit is trying to look back and say, 'What we created back at the beginning doesn't work anymore,' " father Sporkin said. "It's a house you've got to tear down and build back up." When the younger Sporkin called to tell his father about the new job, the elder Sporkin regaled him with one of his many stories about pursuing financial firms accused of wrongdoing. He urged his son to follow his instincts, to be firm with the public and defense lawyers but also to be fair. "Essentially this meant for him to be himself," Stanley Sporkin said. http://www.washingtonpost.com/wp- dyn/content/article/2010/07/05/AR2010070502544.html?wpisrc=nl_headline

In ambitious India, workplace etiquette rounds out the coursework By Emily Wax Tuesday, July 6, 2010; A01 NEW DELHI -- They call her India's Miss Manners, and she is at the heart of a multimillion- dollar industry to make Indian companies more competitive globally by improving their workers' social skills. Pria Warrick has become the guru of graces for a new generation of call-center techies, chief executives, animation artists, MBAs and Bollywood film stars, all of whom are helping drive India's rise as a world economic power but sometimes without a certain polish. "Backs straight! Napkins on lap. Great. Class, cut your burger neatly," Warrick told a class of young Indian professionals, methodically performing fork-and-knife surgery on a McAloo Tikka patty -- a spicy potato burger from McDonald's -- as practice for dining in Europe and the United States. Warrick's school is part of a fast-growing trend in corporate India to remedy what analysts and recruiters call a serious impediment to India's global economic goals. Although many skilled Indian workers have degrees from top universities, analysts said they are often jaw- droppingly inept at the basics of international workplace etiquette: dressing properly, hosting a meeting, making inoffensive small talk and even using cutlery. Fearing that such deficiencies are hurting India's leadership potential, companies are spending millions of dollars on corporate finishing school for tens of thousands of workers. In many cases, those workers are products of India's burgeoning middle classes who are the first generation in their families to enter the nation's booming and globally minded economy. The outsourcing giant Infosys built a Global Education Center in the southern city of Mysore, teaching more than 50,000 graduates leadership and corporate manners, or "soft skills." The company has also partnered with 400 engineering schools to train 4,400 faculty members to teach more than 80,000 students how to be "industry-ready" when they graduate. "Before my training, I actually lost a client because I barely talked during a presentation," said Srikantan Moorty, vice president of education and research at Infosys, who has helped design the company's soft-skill classes. "The report was technically correct. But I was so shy that it was hard to seem persuasive." Tata Consultancy Services, the country's largest information technology company, has an in- house training center along with an affirmative action program. It has joined with the government to help economically disadvantaged students improve their office and leadership skills. 'Personality Grooming' There are also thousands of neighborhood storefront corporate manners institutes holding packed classes on weekends in cities and small towns across India. In tiny offices, they offer "Spoken English" and "Personality Grooming." The schools are unregulated, and the quality of the programs varies. Many are run by hucksters preying on the ambitious and gullible.

64 Still, analysts estimated that more than half of India's 3 million graduates go to finishing schools, making it a growing, $60 million-a-year industry. "Everyone sees an opportunity right now in finishing schools, from the big corporations to the retired teacher who thinks they have wisdom to share," said Pallavi Jha, managing director of Walchand Dale Carnegie Finishing School, which teaches the art of winning friends and influencing people in an emerging Indian economy. In the northern city of Varanasi, placards in winding alleys advertise classes teaching "Personality Development." One recent evening, in a narrow lane where women cooked over open fires, flight attendants and customer service trainees filled an air-conditioned classroom at the Arora School for Spoken English, Body Language and Accent Training. One student, Rehan Ahmed Khan, 22, said his family has been in the sari-making business for generations. He said he had paid $200 for a four-month course to help him become a "big- business international sari tycoon." "With this school, I feel I can go anywhere and expand my business to the rest of Asia to America," Khan said. "I now know to always smell fresh, never arrive late to a meeting with internationals and look people in the eye. Plus, these skills make me cool." Competitive disadvantage Recruiters say India has some of the world's best-educated engineers, business majors and technology wizards. But their lack of social polish and communication skills puts them behind competitors such as China, where finishing schools are often compulsory. "When an executive doesn't do well at an important international board meeting, it's not just a reflection on the person. It hurts the company, and that hurts India," said Gary Sarang, 36, associate vice president of Industrial Finance Corp. of India, who was sent to Warwick's class when he started working at Citibank in India several years ago. "In India, we're dealing with clients in the Far East and Europe," said Sarang, who was working in the finance world in San Francisco before he returned to India in 2007 because there were more job opportunities in Bangalore than in the Bay Area. "I was coming from California, so I needed to learn not to wear flip-flops or sneakers to a meeting." The larger problem is India's overburdened education system, which is academically rigorous but often emphasizes memorization over critical thinking, said Raja Subramanian, chief executive of Radix Learning, a finishing school for software engineers that charges companies about $150 for training in social skills, thinking and confidence. "Let's face it. In India the demand for education outstrips supply. The number of qualified teachers is very low. There are teachers who just tell you to memorize what's in the book," said Subramanian, a former university professor. "There's so much rote learning that we are producing a lot of social duds. But it's not their fault." In New Delhi, Warrick works in a charming bungalow with stained-glass windows and a lush garden. She looks the part of an etiquette teacher: At 5-foot-9, she has perfect posture, and she wears three strands of pearls over a simple black dress. Warrick, half Swiss and half Indian, studied clinical psychology at Cornell University and was named Miss India America in the 1990s. She has starred in her own reality TV show in Britain, on which she took four ill-mannered, binge-drinking young Britons to India to help them learn poise and respect. Her classes cover everything from dining etiquette to avoiding questions that are acceptable in India but inappropriate elsewhere, such as asking a person's salary or weight.

65 She teaches that it is fine to maintain common Indian habits such as respect for elders and standing when a boss enters the room. But she counsels that others such as recommending skin-lightening cream to colleagues might cause problems. "I learned how to power-dress, wear a tie and not wear my trousers so high -- they can be dropped to the waist," said Kabir Nayar, 30, a technology executive whose company, Bharti- Airtel, sent him to Warrick's school to prepare for a trip to London. Warrick said that her business once catered to "girls marrying rich men" but that once India's economy took off, she was deluged with corporate students. "In India, we have the brains," she said. "But when it comes to soft skills, we are way behind." http://www.washingtonpost.com/wp- dyn/content/article/2010/07/05/AR2010070502914_pf.html

66 Opinion

July 2, 2010 Are Profits Hurting Capitalism? By YVES SMITH and ROB PARENTEAU A STREAM of disheartening economic news last week, including flagging consumer confidence and meager private-sector job growth, is leading experts to worry that the recession is coming back. At the same time, many policymakers, particularly in Europe, are slashing government budgets in an effort to lower debt levels and thereby restore investor confidence, reduce interest rates and promote growth. There is an unrecognized problem with this approach: Reductions in deficits have implications for the private sector. Higher taxes draw cash from households and businesses, while lower government expenditures withhold money from the economy. Making matters worse, businesses are already plowing fewer profits back into their own enterprises. Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses. The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on. Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth. Some may argue that businesses aren’t investing in growth because the prospects for success are so poor, but American corporate profits are nearly all the way back to their peak, right before the global financial crisis took hold. Another problem for the economy is that, once the crisis began, families and individuals started tightening their belts, bolstering their bank accounts or trying to pay down borrowings (another form of saving). If households and corporations are trying to save more of their income and spend less, then it is up to the other two sectors of the economy — the government and the import-export sector — to spend more and save less to keep the economy humming. In other words, there needs to be a large trade surplus, a large government deficit or some combination of the two. This isn’t a matter of economic theory; it’s based in simple accounting. What if a government instead embarks on an austerity program? Income growth will stall, and household wages and business profits may fall.

67 That result might not sound bad for the United States, since lower wages and prices would make American goods more competitive abroad. But falling incomes make it even harder for people to make payments on outstanding loans. And if defaults and bankruptcies cascade through the financial system, credit becomes tighter still. Ultimately, there is a danger that deflation — falling wages and prices — will snowball into a depression. So instead of pursuing budget retrenchment, policymakers need to create incentives for corporations to reinvest their profits in business operations. One way to do this would be to impose an aggressive tax on retained earnings that are not reinvested within two years. Another approach would be a tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business. At the same time, the federal government must continue to encourage investment in the economy — ideally by creating incentives for investments in national priorities, like new energy technologies. The entrepreneurial pursuit of profitable growth has been the vital engine of prosperity since the Industrial Revolution. Yet corporate executives are being rewarded for myopia and speculation, undermining the very operation of capitalism. We need tax and regulatory policies to counter this destructive development, along with wider recognition that government deficits, when they counteract corporate savings, are necessary and salutary. Yves Smith is the author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism.” Rob Parenteau is the head of a global financial advisory firm and the editor of The Richebächer Letter. http://www.nytimes.com/2010/07/06/opinion/06smith.html?th&emc=th

Democratic campaign committees losing big Wall Street donors By T.W. Farnam and Paul Kane Washington Post Staff Writer Tuesday, July 6, 2010; A01 A revolt among big donors on Wall Street is hurting fundraising for the Democrats' two congressional campaign committees, with contributions from the world's financial capital down 65 percent from two years ago. The drop in support comes from many of the same bankers, hedge fund executives and financial services chief executives who are most upset about the financial regulatory reform bill that House Democrats passed last week with almost no Republican support. The Senate expects to take up the measure this month. This fundraising free fall from the New York area has left Democrats with diminished resources to defend their House and Senate majorities in November's midterm elections. Although the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee have seen just a 16 percent drop in overall donations compared with this stage of the 2008 campaign, party leaders are concerned about the loss of big-dollar donors. The two congressional committees have raised $49.5 million this election cycle from people giving $1,000 or more at a time, compared with $81.3 million at this point in the last election. Almost half of that decline in large-dollar fundraising can be attributed to New York, according to a Washington Post analysis of records filed with the Federal Election Commission. Donors from that area have given $8.7 million this year, compared with $23.9 million at this point in the 2008 cycle, with most of those contributions coming from big contributors in the financial sector. New York donors had given congressional Democrats almost twice as much money at this stage of the 2006 midterm campaigns, when Republicans ruled both chambers and held the White House. Reasons for the plummeting donations include concern about the economic recovery and the personalities of the campaign committee leaders, Democratic experts say. But the overwhelming factor is the rising anger among financial executives who think they have not been treated well based on their support of Democrats over the past four years, according to lawmakers, party strategists and fundraisers. Several of the party's biggest New York donors declined through spokesmen to be interviewed. Some Democrats say pushing Wall Street reform is more important than any slippage in political donations. "Democrats worked hard to pass reform with tough oversight, accountability and regulation, and it's no secret the big banks were against it," said Deirdre Murphy, spokeswoman for the Democratic Senatorial Campaign Committee. "But we believe preventing another financial collapse is the responsible thing to do, and at the end of the day, we will have the resources we need to compete in our targeted states, as will our candidates."

69 Major dent In reviewing the FEC records, The Post analyzed fundraising data for New York City and its suburbs in New Jersey, on Long Island and north of the city -- a region that had become an outsized source of Democratic campaign cash. In the 2008 cycle, 28 percent of the two committees' itemized individual contributions came from the region. Manhattan alone accounted for 20 percent. In this election cycle, the percentage raised in New York is less than 10 percent of the total. More than 600 regular donors from the New York area -- whose four- and five-figure checks added up to $10 million for the DSCC and DCCC in 2006 and 2008 -- have so far abandoned their effort to retain the Democratic majorities. Take Jamie Dimon, the head of J.P. Morgan Chase, who is known for his close relationship with President Obama. In 2006 and 2008, he donated $65,000 to the Democratic committees. This election cycle, he has not contributed at all to the DSCC or DCCC. At the end of March, however, he gave $2,000 to the campaign of Rep. Mark Kirk (R-Ill.), who is seeking to claim Obama's former Senate seat. A spokeswoman for Dimon noted that he has given to individual Democratic candidates, just not to the campaign committees. Other prominent Democratic donors who have not given to the Democrats this year include Leon Black, a co-founder of the $53 billion New York-based Apollo Global Management a private-equity firm, and his wife, Debra Black. The couple gave more than $200,000 to Democratic congressional committees over the previous two election cycles but have not given this year, according to the latest disclosure documents. A spokesman for Apollo declined to comment. Lloyd Blankfein, chief executive and chairman of Goldman Sachs, has not donated to the Democrats, either, after giving $50,000 in the previous two cycles. A company spokesman declined to comment. The problem has been particularly acute for Senate Democrats, whose previous DSCC chairman, Sen. Charles E. Schumer (N.Y.), had strong connections to Wall Street. Schumer was succeeded last year by Sen. Robert Menendez (N.J.), whose relationship with the financial sector is not as tight. The DSCC has seen a 69 percent decrease in contributions from the New York area. But, many party strategists say, the drop is so steep that its root cause is deeper than the personalities of the committee stewards. Many Democrats said they first noticed the retrenchment from Wall Street in early 2009, when Obama and congressional leaders began denouncing what they considered excesses that caused the 2008 financial collapse. GOP opportunity Republicans, aware of Wall Street's unease with their former Democratic allies, have tried to reap the benefits, to mixed results. Senate Minority Leader Mitch McConnell (Ky.) and Sen. John Cornyn (Tex.), chairman of the National Republican Senatorial Committee, made a much-touted trip to New York in April, and House Minority Leader John A. Boehner (Ohio) lunched with Dimon in late January. The two Republican committees that are focused on congressional races have received $2.7 million from the New York area, slightly more than at this point in 2008 but less than the $4 million they raised at this point in the 2004 cycle when the party still controlled Congress.

70 The two Democratic committees also have more money on hand than their rivals for this fall's elections -- $46.2 million compared with $30.2 million. "We're aiming for parity," said Rep. Pete Sessions (Tex.), chairman of the National Republican Congressional Committee. He has a long way to go. Sessions had $12 million in the bank at the end of May, while the DCCC had $28.6 million. But Sessions finds himself in far better shape than his predecessor, who trailed Democrats by 8 to 1 in ready cash for the five-month sprint to finish the 2008 campaign season. Democrats have lost financial ground in areas other than New York. As the second-largest source of cash for the party, the San Francisco region's big donors have cut support to the DSCC and DCCC by 34 percent, with donors in the legal and financial sectors dropping the most. Some Democrats said there is an overall enthusiasm gap among large donors, who were energized to help claim the congressional majorities in 2006 and to expand them in 2008 while electing Obama. But that excitement has waned, especially among wealthy liberal donors who are frustrated that the Obama agenda often seems compromised by conservative Democrats on Capitol Hill. "There's something fundamental going on, which is a complete disaffection with the committees," said one New York donor in the finance industry who raised about $3 million for Democrats in the 2008 cycle. The fundraiser, who spoke on the condition of anonymity to discuss the Democrats freely, said progressive donors were reluctant to give the party committees money out of belief that they often back the more conservative candidates. "Progressives have been throwing up their arms," the fundraiser said. "There's a tremendous amount of disaffection with the administration and how the caucuses have performed -- or not performed." http://www.washingtonpost.com/wp- dyn/content/article/2010/07/05/AR2010070502913_pf.html

Letter from Shanghai: Class and capitalism mix with comedy By Andrew Higgins Tuesday, July 6, 2010; A05 Amid throbbing music and wild applause, Zhou Libo waddled onto the stage mimicking the gait and gestures of Mao Zedong, Communist China's founding father. Spotlights played across big, gold Chinese characters trumpeting the theme of the night's performance: "I'm Crazy for Money." In a country where leaders don't take kindly to mockery, proclaim socialism as their guiding creed and demand obedience to Beijing, Zhou is an unusual phenomenon: a stand-up comic who ribs officials, celebrates wealth and extols what he and many others in this most cosmopolitan of Chinese cities view as the superiority of their metropolis. Beneath the gags, delivered in a mix of Mandarin and Shanghai dialect, lurk some of China's most sensitive issues. "I want to make my audience think," Zhou said in a backstage interview shortly before showtime at the Shanghai International Gymnastic Center. "China's political environment is a lot more relaxed than people outside think." While Beijing authorities crack down hard on any stirring of disrespect in Tibet and other areas inhabited by ethnic minorities, they've let Zhou vent -- albeit often in a dialect most Chinese don't understand. He makes cracks about "garlic munchers" in the capital and outsiders who don't share Shanghai's sophisticated ways. Other favorite topics include sky-high real estate prices and the gyrations of the city's stock exchange -- also touchy subjects with China's dour leaders. The comedian's Shanghai shtick has won him a huge following among the city's prosperous bourgeoisie, a class that Mao and a handful of fellow revolutionaries vowed to eliminate when they gathered here in June 1921 to establish the Chinese Communist Party. After starting out in a 700-seat Shanghai theater, Zhou moved his show this year to the Gymnastic Center, which has 3,700 seats. His performances all sold out despite an average ticket price of more than $50, roughly two months' wages for the average Chinese. He has also produced a series of best-selling DVDs and a "dictionary of humor" to help decipher his Shanghainese punch lines, nearly all of which get lost in translation. "My audience is mostly white collar. I talk about fairly complicated things for fairly complicated people," Zhou said. "I let simple people talk for the simple people." This year, he caused a stir by declining an invitation to go to Beijing and take part in a lowbrow TV variety show over Chinese New Year. The show, an annual event on China's main state-run television channel, is pitched mainly at peasants and migrant workers who return to their villages for the holiday. Zhou said he turned down the offer because he knows "nothing about peasants. My culture is urban culture." Shanghai, though itself primarily a city of immigrants, has a long history of looking down its nose at outsiders. But, as in other big cities, the tension has increased

72 sharply in recent years as migrant workers from the countryside have flooded in looking for work. In Shanghai, the animosity bubbled to the surface in December after an incident on a breakfast radio show. Xiao Jun, the show's host, read out on air a text message he'd received from an angry listener: "I beg you not to speak Shanghai dialect anymore. I hate you Shanghainese." Xiao, in rude terms, told the unidentified author of the message -- apparently a newcomer to the city -- to get lost and go home. The exchange prompted a heated discussion, particularly on Web forums. Outsiders blasted Shanghai, with one Web post ridiculing its "aboriginal" dialect. Natives, meanwhile, said there is no place for newcomers who don't show respect. Zhou, the comedian, has sided firmly with the love-it-or-leave-it camp. Shanghai, he said, "is a melting pot like America" but has no place for those who reject its ways. "If you can't fit in, why come?" he said during his show. The audience loved it. Among those applauding was Huang Jianqiu, 47, a designer who took his wife, an office worker, to the performance. Their tickets cost a total of $110.

Zhou "speaks about our lives and our problems," said Huang, who explained that he wouldn't mind his daughter marrying a foreigner but would have "serious objections" if she fell in love with a peasant from Anhui, one of China's poorest regions. "It's a question of culture," he said. Anhui, a major source of migrant labor, looms large in Shanghai's phobias about what many view as uncultured and potentially dangerous bumpkins from the sticks. In a widely followed case, an out-of-work Anhui migrant was sentenced to death last year after a Shanghai court convicted him of murdering a Canadian model who lived in the city. For all his irreverence, Zhou takes care not to go too far. He never challenges one-party rule and, while mimicking Mao and several leaders who are still alive, he's avoided trying to imitate Hu Jintao, China's very buttoned-down party chief and president. Zhou insists this isn't because he might get in trouble but because Hu is just too bland: "Not every leader can be impersonated. Some leaders don't have any clear special characteristic." Special correspondent Wang Juan in Beijing contributed to this report.

http://www.washingtonpost.com/wp- dyn/content/article/2010/07/05/AR2010070502566.html?hpid=topnews

73 Opinion

July 2, 2010 Supreme Court Press By PAUL GEWIRTZ New Haven IT is no secret that the current Supreme Court is an activist one in striking down congressional legislation — just look at the prominent cases from the court’s just-completed term, most notably Citizens United v. Federal Election Commission, in which a 5-4 majority of the court’s more conservative justices struck down key provisions of Congress’s bipartisan campaign finance laws. But “activism” can be measured in ways other than striking down legislation. Indeed, this term’s leading cases highlight another type of Supreme Court activism that hasn’t received much attention: vigorously policing and overturning district court judges who ordinarily would have much more leeway — particularly when those judges had used that leeway in a liberal direction. District courts are the front-line federal courts. Their judges hear evidence, manage trials, make factual findings, provide appropriate remedies and interpret and apply the law. In their interpretation of legal questions, district court judgments are always open to review on appeal. But in the judges’ other roles they usually have wide discretion, both because they have on- the-ground knowledge of a case and because our judicial system would be overloaded if appellate courts routinely second-guessed trial-court judgments. Yet with little public attention, the Supreme Court, led by the more conservative justices, has been intervening in these district court roles. In January, for example, the court took the unusual step of granting an emergency stay to stop a district court in California from televising a civil trial over the constitutionality of that state’s Proposition 8, which prohibits same-sex marriage. The district court had allowed the trial to be televised as part of a pilot program. But a 5-4 Supreme Court majority held that the district court hadn’t allowed enough public comment before making its decision — despite the dissenters’ argument that they could not find a single prior “instance in which this court has pre-emptively sought to micromanage district court proceedings as it does today.” In April, an identical 5-4 majority overturned a district court’s award of fees to a group of civil rights lawyerswho had won a case that transformed Georgia’s foster care system, even though the Supreme Court acknowledged that district courts usually have the power to grant such enhanced fees, and that the award turned on the district court’s fact-intensive and on-site judgment. Also in April, the same 5-4 majority yet again reversed a district court, this time over the enforcement of the court’s own injunction against a constitutional violation, something traditionally left to the district court’s discretion. The underlying issue, which involved the display of a cross on federal land, was an ideologically charged church-state question — but that aspect of the case had been settled by an earlier decision barring the display of the cross.

74 The only legal issue before the Supreme Court was the district court’s enforcement of that previously ordered remedy — a matter traditionally within a district court’s discretion. Labels like “conservative” and “liberal” are simplistic, of course, but in each of these cases a conservative court majority reined in a district court decision that, within an area of traditional discretion, leaned in a direction usually favored by liberals — greater judicial transparency, incentives for lawyers who litigate civil rights cases and insistence on the strong enforcement of church-state separation. By wading into realms where the district courts traditionally have leeway, the Supreme Court majority undoubtedly believes it is correcting lower-court mistakes. But appellate courts usually give district courts flexibility and review trial court decisions only for significant legal errors. Whether they would have made the same decision as the trial court is usually irrelevant. I, for one, personally oppose the televising of district court trials, but also believe that the district court in California had the prerogative to decide differently. To be fair, there were also cases this term in which the Supreme Court deferred to district courts in performing their traditional roles, at times unanimously. And of course district court judges do sometimes make significant legal errors that must be corrected by the Supreme Court, even when affirmed by appellate courts. But there have been enough recent Supreme Court decisions of a different sort to reveal a pattern of intervention in areas of traditional district court discretion. This kind of activism is lower profile than overturning Congressional legislation, since it’s internal to the judiciary itself. But it should get more attention than it has, because it is another important way the current Supreme Court is using its power to shape and restrict government decisions. Paul Gewirtz is a professor at Yale Law School. http://www.nytimes.com/2010/07/06/opinion/06gewirtz.html?th&emc=th

A judicial change to believe in By E.J. Dionne Jr. Monday, July 5, 2010; A13

Something momentous has happened to our struggle over the Supreme Court's role when Republicans largely give up talking about "judicial activism," when liberals speak of the importance of democracy and deference to elected officials, and when judges are no longer seen as baseball umpires. All these things transpired during Elena Kagan's confirmation hearings last week, though you might not know that unless you saw some of the most thoughtful blogs or news stories. And what happened has the potential to transform a listless debate that has been ensnared in conservative categories for at least three decades. The standard account of Kagan's testimony is that she was brilliant, charming and evasive. Brilliant and charming are right, as even her Republican critics on the committee were gracious enough to concede. And it's true that Kagan didn't fall into the trap of declaring how she would rule on this case or that. She wants to get confirmed, after all. But far more than she was given credit for, Kagan did lay out a clear judicial philosophy that (1) sees courts as having an obligation to defer to the choices of elected officials except in the most extreme cases and (2) puts the lie to Chief Justice John Roberts's notion that judges are mere "umpires," as if their task was, in Kagan's cutting word, to be "robotic." And it was Republican senators who seemed to be begging her to be a judicial activist and overturn the enactments of Congress. Thus did Sen. Tom Coburn ask her whether she would rule against a law requiring Americans to eat a certain number of fruits and vegetables. "Sounds like a dumb law," Kagan replied, and then she spoke admiringly of Justice Oliver Wendell Holmes who "hated a lot of the legislation that was being enacted" in the early years of the 20th century "but insisted that if the people wanted it, it was their right to go hang themselves." "Judges," Kagan declared, "should realize that they're not the most important people in our democratic system of government." It's a line that might usefully be engraved on a wall of the Supreme Court building. Yes, Republicans seemed to be admitting implicitly, it is conservatives who are now the judicial activists. That's why they moved on during last week's hearings to a new attack line against liberal jurists as being "results-oriented." This phrase doesn't work any better for conservatives. As law professor Jonathan Turley pointed out on MSNBC, it's hard to think of a more "results-oriented" case than Bush v. Gore, in which a conservative majority declared that its reasoning in making George W. Bush president was not to be invoked in future cases. Nonetheless, the concession that conservatives are being forced to make on the issue of activism is enormous.

76 On the matter of judges as umpires, Kagan could have ducked and let the pitch sail past her. She didn't. The umpire metaphor, she said, has "its limits" because it wrongly suggests that judging "is a kind of robotic enterprise" and that "everything is clear-cut." Sounding rather like retired justice David Souter in his recent Harvard commencement address, Kagan said, correctly, that in the hard cases "there are frequently clashes of constitutional values." That's why "not every case is decided 9-0." Indeed, the umpire metaphor is dangerously and maybe even intentionally misleading. It implies that the answer a particular Supreme Court majority comes up with is the one and only possible answer to a difficult question. If this were true, we would not be having the very political struggle over the court that was so evident during these hearings. And this was the other important milestone of this confirmation battle that bodes well for the future. While Republican senators dominated Justice Sonia Sotomayor's hearings, Democrats this time displayed a degree of discipline you just don't expect from a party that so often sees discipline as a dread disease. One Democrat after another reinforced the argument that a conservative court could bring us back to the Gilded Age by ceding power to corporations and undercutting government's ability to act as a countervailing power on behalf of individuals with weak bargaining positions. Having once made it easy for their opponents to cast them as elitists, progressives are behaving like small-d democrats again. Now that's a change we can believe in -- and an approach that might even win. http://www.washingtonpost.com/wp- dyn/content/article/2010/07/04/AR2010070403846.html?wpisrc=nl_pmheadline

77 07/05/20104 12:54 PM Export Optimism, Financial Fear Bank Balance Sheets Could Torpedo Recovery By Beat Balzli, Markus Dettmer, Armin Mahler and Christian Reiermann Germany's economy is booming thanks to a rapid recovery of global exports. But Europe isn't out of the woods yet. Few know exactly what nasty surprises might be lurking on bank balance sheets across the Continent -- and stress tests might not be enough to reveal them. Strict confidentiality is the order of the day when the elite of the German financial world gather. No pictures were taken of the memorable meeting which took place on Wednesday of last week. Only a laconic press release, nine lines long, informed the public of the event -- after it was all over. The CEOs of the largest banks had accepted an invitation extended by Axel Weber, the president of Germany's central bank, the Bundesbank, and by Jochen Sanio, the head of Germany's Federal Financial Supervisory Authority (BaFin). Deutsche Bank CEO Josef Ackermann didn't attend personally, but he sent a representative -- Chief Risk Officer Hugo Bänziger. It was a fitting choice. Tops on the agenda for the meeting were the risks currently faced by Germany's largest banks. They are to be assessed in a stress test -- and then made public. In a subsequently released statement, the bankers in attendance declared "their fundamental willingness" to back this plan. Still, it remains highly controversial whether such a course of action is a good idea, and the gathered bank representatives hotly debated the issue last Wednesday. Stress tests are designed to enhance transparency and engender trust. But they can also expose new risks -- or reveal old hazards that the public has since chosen to ignore. A high-profile stress test of German banks could thus mean even more stress for an industry that currently needs mutual trust and tranquility more than anything. It could bring a renewed sense of insecurity to the financial markets, which already act with hypersensitivity to every fresh news report. Won't Last? The insecurity can easily be seen in the rapid yo-yoing of the markets in recent weeks. Risk premiums for Greek and Spanish government bonds are rising, even though euro-zone countries have committed themselves to securing the financing of ailing member states. Stock markets often vacillate within hours from depression to optimism and back again. Every bit of not entirely positive news from the US or China is seen as an indication that the world economy could suffer another relapse and the surprisingly rapid recovery won't last. Since the beginning of this year alone, the price of gold has risen by 13 percent. Gold is always in high demand when confidence in economies and currencies flags. The precious metal is seen as a safe haven in times of uncertainty.

78 Positive news has it rough in such times -- it's hardly even noticed and quickly forgotten. And yet there is good news. It comes from companies and from the labor market, and it tells of astonishing growth rates, full order books and new jobs -- particularly in Germany. Economic pundits are looking to the near future with increasing confidence. Recently the Kiel Institute for the World Economy (IfW) significantly revised upwards its growth forecast for this year. The experts in Kiel now anticipate a growth rate of 2.1 percent for 2010. Similar predictions have been made by the German economic research institute RWI in Essen. The German Chambers of Industry and Commerce (DIHK) even expect growth of 2.3 percent. Economic advisors to Chancellor Angela Merkel's government have also been infected by the wave of optimism. In April, Berlin predicted 1.4 percent growth. That forecast has not been officially revised, but there is broad realization that it will ultimately be quite a bit higher. "Everything points to a figure of 2 percent, perhaps even slightly above that," says one government economic advisor. Opposite Has Occurred Even the pundits have been caught off guard by how quickly the German economy is finding its feet again. Only a few months ago, they were predicting that Germany's export-driven economy would lag behind other countries for years. But the opposite has occurred. The global economy will grow by 4 percent this year, and global trade will even soar by 7 percent. The big winners are precisely those companies in Germany that focus on exports. "We have to be part of this -- and we will be part of this," says Economy Minister Rainer Brüderle of the business-friendly Free Democratic Party (FDP). While other countries like France and the UK are still struggling to pull out of the recession, Germany has become the motor for economic growth in Europe. Researchers also don't appear concerned that the German government's austerity program could strangle the recovery. Next year, when the measures go into effect, they expect an effect on growth of just two-tenths of a percentage point, and perhaps lower than that. German Chancellor Angela Merkel of the Christian Democratic Union (CDU) also feels that the concerns are unfounded. She says that the austerity program only makes up a fraction of the federal government's overall budget of some €300 billion ($375 billion). In addition, Merkel points out that Germany's financial policy remains expansive. Her proof: Next year the German government will take on new debts to the tune of €57.5 billion. This is the figure proposed by the government's draft budget, which the cabinet intends to approve on Wednesday. The chancellor feels that there are no grounds to fear that the government is saving money at the expense of economic recovery. Economic Blip The current sense of optimism is driven by developments on the labor market. The German job machine is revving up again, as if the downturn of the past two years were nothing more than an economic blip and not the worst global financial crisis in decades. When orders for core sectors of German industry plummeted by over 40 percent in the wake of the Lehman Brothers bankruptcy, there were already predictions of impending mass unemployment. Month after month, the anticipated onset of this horror scenario had to be postponed because unemployment rose only slightly -- if at all. Billions of euros spent on government-funded programs to reduce worker hours -- known as short-time, or Kurzarbeit in German -- helped as a buffer. Now the labor market is recovering with surprising strength.

79 In June of this year, 3.15 million Germans were out of work, more than a quarter of a million fewer than a year ago. This is the lowest figure since December 2008. The upward trend is particularly strong in eastern Germany, where there were 977,000 unemployed in June -- the lowest figure of the past 19 years. The situation is "significantly better than expected in view of the overall economic conditions," says Germany's Federal Employment Agency. All signs indicate that the number of unemployed could drop below three million in the coming months. Other numbers are equal cause for celebration. The number of those with gainful employment in Germany has risen to 40.28 million. The figure for the months of may was "the highest number since German reunification," Germany's Federal Statistical Office said last week. Experts offer a range of explanations for the German job miracle: the large-scale use of short-time programs during the crisis, the rapid increase in exports and the weaker euro, which makes German goods cheaper abroad. Extreme Unease More than anything else, though, trade unions have practiced wage restraint for many years, which has helped enhance Germany's competitiveness. Unions and employers have agreed to differentiated and flexible working hour systems. The Hartz reforms introduced under the coalition of Social Democrats and Greens led by then-Chancellor Gerhard Schröder stripped much of the structural rigidness from the German labor market. Over the past decade, this has resulted in one of the most robust and flexible economies in the world. Germany is the only European country with an unemployment rate that is lower today than what it was before the outbreak of the global financial crisis in the spring of 2008. Meanwhile, unemployment has doubled in the US. Over the long run, however, the export-dependent German economy won't be able to disengage itself from trends in the global economy, which is already showing initial signs of fatigue, both in the US and China. Some experts even fear that after a brief recovery, the global economy could fall back into a recession as economic stimulus programs run their course. They speak of the possibility of a double-dip recession. Renewed Turbulence Guaranteed Indeed, as long as the financial markets refuse to shed their anxiety, the foundation of the new recovery remains fragile. Renewed turbulence is virtually guaranteed. The banks still have enormous quantities of toxic assets on their books. Nobody knows when or to what extent these debts will have to be written off. In some cases, these bad investments consist of junk bonds from the days before the crisis, including second-class US real estate loans called subprimes. In other cases, they include burdens that hardly anyone was aware of a year ago, like government bonds from Greece and other southern European countries, which were touted as a fairly sound investment at the time. Analysts at the US investment bank Morgan Stanley say that Europe is caught in a "vicious cycle." Instead of using government funds to forcibly recapitalize all banks, as the US did, the euro countries opted for another approach. After the Lehman Brothers bankruptcy, many banks loaded up on cheap cash from the European Central Bank (ECB).

80 According to Morgan Stanley, they have been using this money since October 2008 to finance the purchase of government bonds worth €420 billion. During this spending spree, the banks targeted high-yielding bonds from shaky southern European countries, primarily Spain, Greece and Portugal. They then deposited these bonds with the ECB as security for more loans from the central bank. At the outset these lucrative deals soothed nerves on the markets, but they have now turned out to be time bombs. Nobody knows exactly how these bonds are weighted on the balance sheets -- and even less can be said about what they will actually be worth in the end. Indeed, despite euro-zone bailout packages for ailing members of the currency union, few doubt that Greece will eventually have to restructure its mounting debt. Creditors would be forced to forego some of their claims. Breeding Mistrust Would all banks survive such a haircut? And what happens if further euro-zone members run into trouble, plunging even more banks into difficulties? There is an enormous sense of uncertainty, and that breeds mistrust. Banks recently parked over €300 billion with the ECB overnight for the ridiculously low interest rate of 0.25 percent. Anyone who borrows money for 1 percent, only to turn around and deposit it overnight with the ECB for just 0.25 percent -- instead of earning considerably more by loaning it to the competition -- has one problem above all: fear. Last week the banks borrowed significantly less money in new loans than what they had to pay back to the Bundesbank, but that only briefly reduced the edginess. "There is still a great deal of tension," says Hans-Günter Redeker, head foreign exchange strategist for the major French bank BNP Paribas. He says that the balance sheets are too shadowy. "We need a sound stress test on the table, which will also be made public." This is something, at least in principle, that everyone attending last Wednesday's meeting in Frankfurt also agreed on. But there were differing opinions on what was sound and what wasn't. There have been a number of stress tests in the past. But they weren't made public, and they did not take into account -- of all things --the greatest risk on the banks' balance sheets: the government bonds from the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). Horror Scenario What the markets fear most of all is that these assets could plummet in value -- that these countries could declare bankruptcy and their debts would need to be refinanced. But this horror scenario is not taken into consideration in the current stress test. Otherwise critics could insinuate that the Bundesbank and the BaFin have doubts about the success of the bailout package. Instead, the bank auditors went on the assumption that a deepening of the debt crisis could drive up the price of credit default swaps on bonds from countries like Portugal and Spain, causing their value to drop and leading to write-offs for the banks. An additional routine scenario goes on the assumption that there could be another economic downturn. Many questions remain unanswered, however, and the representatives of the banks, the Bundesbank and the BaFin will no doubt have to meet again soon. Translated from the German by Paul Cohen URL: • http://www.spiegel.de/international/business/0,1518,704663,00.html

81 RELATED SPIEGEL ONLINE LINKS: • Prospering at the Expense of Others?: Germany's Export Boom Has Trade Partners Stewing (06/30/2010) http://www.spiegel.de/international/business/0,1518,703617,00.html • Will Germany's Tab Grow?: Berlin Fears Euro Rescue Could Get More Expensive (06/28/2010) http://www.spiegel.de/international/europe/0,1518,703266,00.html • The Trouble with Stress Tests: Critics Question Soundness of Bank Check-Ups (06/22/2010) http://www.spiegel.de/international/europe/0,1518,702183,00.html • Germany's Economy on the Mend: Berlin Budget Deficit Much Lower than Expected (06/22/2010) http://www.spiegel.de/international/business/0,1518,702114,00.html • Berlin Supports Transparency: German Flip-Flops on European Bank Stress Tests (06/17/2010) http://www.spiegel.de/international/business/0,1518,701256,00.html

DER SPIEGEL Graphic: Growth forecasts become rosier.

DER SPIEGEL Graphic: Crisis Indicators

Eurointelligence Daily Morning Newsbriefing Stress tests to include 80 banks

05.07.2010 More details of the forthcoming stress tests are leaked: 80 banks will be included – which is less than previously assumed (will all 8 German Landesbanken be among them?); full details of the sovereign shock will be released; Credit Suisse has stress tested the French banks, and finds that two need more capital; Wolfgang Munchau says for the stress tests to be credible they, too, need to pass a stress test; Naked Capitalism says Europe is very likely to mess up the stress tests as well; the EFSF is in talks with ratings agency to seek a triple-A rating; George Soros says triple A unlikely; start of EFSF postponed due to Slovakia’s opposition; El Pais says Spain is already making good progress towards reduction of private-sector debt; European Commission proposes an increase in the retirement age; French economists call for a debt-finance industrial policy; Jurgen von Hagen, meanwhile, criticises Germany’s short- term working scheme as a beggar-thy-neighbour real devaluation. 05.07.2010 Stress tests to include 80 banks

Stephen Fidler of the Wall Street Journal has further details on the second round of stress tests. The number of banks to be included, he writes in his Brussels blog, is about 80 in addition to the 26 already tested. We wonder whether all 8 German Landesbanken will be among them. He also writes that the details of the “sovereign shock” will be fully released. While there is a debate in Germany about the wisdom of publishing the tests, he concludes that the tests of the 26 banks will certainly be published (end July, while those of the others will end up being published as well. Stress testing the French banks We are going to hear a lot more of it in the next few weeks. Credit Suisse (hat tip FT Alphaville) has undertaken a very useful exercise in stress testing the French banks on a whole

83 number of criteria – Basel II/III, a bank tax, sovereign debt default, economic downturn etc – and found that Credit Agricole and Societe Generale will probably need a capital increase, while BNPP and Natixis are in a relatively better position. Interesting was the most of the stress does not come from sovereign debt exposure, but from regulatory changes and economic decline – and this despite the fact that the stress included some severe haircuts for Greece in particular. It is worth reading over this report, whose main drawback is that it is full technical jargon. Notice that the unexplained ET1 ratio refers to the equity tier 1 ratio – the hard core capital of a bank without preference shares and other hybrid securities. Here is an overview:

Munchau on stress Wolfgang Munchau writes in the FT that the stress tests themselves will need to pass a stress test. If they are too weak – as they are likely to be – they might be counterproductive, and lead market participants to conclude that the authorities have something to hide. He says a credible test would have to include a realistic worst case scenario for sovereign risk (a Greek haircut of 50%, and not the 3% across-the-board haircut that has been reported), and all the details need to be published for every bank. There should also be recapitalisation strategies in place, focusing on genuine equity, and not on “funny money” – such as silent capital through which German banks tend to bolster their balance sheets. Naked Capitalism on stress Writing in her blog Naked Capitalism, Yves Smith says that the US stress test exercise was mostly a PR number, a tinkerbell story that managed to fool a sufficient number of people into thinking that the US banking system was sounded, when the opposite was the case. She said that the Europeans are unlikely to be able to repeat the exercise, given how poor the Europeans have handled the optics of their various rescue operations.

The EFSF in search for a triple A The European Financial Stability Fund begins its campaign for a triple A rating in a series of meeting with rating agencies, reports the FT. Though the fund would only issue bonds if a eurozone member state asks for it, its chief executive Klaus Regling is keen to get a rating quickly. Only three of the EFSF shareholders – Germany, France and the Netherlands – hold

84 triple A ratings. An important argument in the pledge is that the EFSF would pay 120% of the initial loan in case of default and that borrowers fees would be used to built up EFSF reserves. Investors, such as George Soros, have dismissed the idea of a triple A. (Other market reactions here) The official operational start of the EFSF has been delayed because of the reluctance of Slovakia’s incoming government to approve the initiative, according to the FT. Slovakia is the only eurozone country to raise objections to the fund. At roughly €4.4bn, Slovakia’s contribution to the fund is relatively small. But the centre-right parties that won its June 12 election and are in the process of forming a government campaigned on a platform of no eurozone bail-outs. There is now intense pressure from other governments as well as the European Commission to abandon its resistance. Spanish external debt: it is not as bad as you think El Pais has an article about Spanish external debt of 170% of GDP (public and private), saying that the distrust in Spain’s ability to reduce the debt is exaggerated. There are already signs of reversing the trend: Household savings are up (18.5% of disposable income) and companies, except in the financial sector, start to reduce their funding requirements. The article is promoting the Spanish crisis management and warns that the real danger would be if austerity measures affect growth. This is why a strategy of debt reduction and export led growth is to be pursued. Commission to call for higher retirement ages The European Commission joins the debate about pension reforms, suggesting in a discussion paper this week higher retirement ages across the EU as part of a sustainable public finance strategy, the FT reports. They suggest a pension benefit guarantee scheme at the European level , to compensate for excessive losses of company-backed retirement plans, and harmonised solvency requirements for pension schemes and raising the funding requirements of companies. French economists call for EU debt financed industrial policy The “Cercle des economistes”, an influential French think tank, published 10 measures for Europe to remain a key global player, La Tribune reports. This includes a ‘real’ European industrial policy, focussing on some key sectors (Health, energy, green technologies, transports, etc) funded by large European debt issue, a European Small Business Act, an active macroeconomic policy geared towards growth. They criticise the uncoordinated austerity drive in Europe and warned not to cut public investment or to raise taxes on labour that could impact innovation. (Not really new measures, and very French indeed)

No double dip Official and unofficial opinion in the eurozone seems to move in the direction that there will be no double dip recession. Jean Claude Trichet said in a speech that he was certain that there be no double dip, and that the fiscal consolidation would cement the economic recovery, according to the FT Deutschland. In a separate news story, the paper reported that a large majority of private sector economists polled want the ECB to scale down the bond purchases.

85 Von Hagen says German short-time working arrangement a beggar-thy-neighbour policy Jurgen von Hagen told the Wall Street Journal that Germany’s short-time work arrangements, as part of which the government took over parts of the social contributions, and allowed employers to maintain staff during the crisis, constituted a real devaluation inside the eurozone. It was okay for small countries to act like this, but not for large economies like Germany. He said the Finnish arrangement was different, as it was design for a small country when it was in recession, and the rest of the eurozone was not. http://www.eurointelligence.com/Eurointelligence.901.0.html

July 2, 2010, 8:49 AM ET Von Hagen on Flexible Payroll Tax Jürgen von Hagen, economics professor at the University of Bonn and a noted specialist in fiscal policy, had two main comments on the suggestion (which I wrote about here and here) that other members of the euro zone could benefit from a flexible payroll tax, as Finland introduced in 1999 when it joined the European Monetary Union. First, he says that Germany has done the same thing in a different way. “Part of Germany’s labor market legislation allows the federal government to pay supplementary incomes to workers on ‘work shortage’. Employers can apply to the government for work shortage status. It is granted when the firm does not have sufficient orders to keep its work force busy, when temporary layoffs cannot be compensated with vacation days, and provided the shortage is sufficiently severe. Under those circumstances, the federal government can pay the workers’ social contributions on behalf of the firm. This amounts to the same thing: A reduction in unit labor cost which translates into a devaluation of the real exchange rate.” Second, he says what might work for a few smaller countries shouldn’t be used by a big country like Germany and, if all governments of the euro zone do it, nobody wins and the governments just lose tax revenues. “The German or Finnish arrangement is a smart idea if an individual small country does it. If a large country like Germany does it, it amounts to an old-fashioned beggar-thy-neighbor policy with adverse effects on the labor markets in other EMU countries. Remember that the Finnish arrangement was designed for cases when Finland is in a recession and the rest of EMU in a boom. When all are in a severe recession, as recently, such an action should be regarded much more critically if taken by a large country. Finally, if all do it, then of course nobody gains, and the governments are left with the bill.” Von Hagen on Flexible Payroll Tax July 2, 2010, 8:49 http://blogs.wsj.com/brussels/2010/07/02/von-hagen-on-flexible-payroll-tax/tab/print/

La deuda externa bate récords España, muy dependiente del exterior, debe 1,7 veces su PIB - El mercado mira con lupa las cantidades pendientes de pago LUCÍA ABELLÁN - Madrid - 05/07/2010 Año 2007: España es una potencia próspera cuya capacidad inversora convence a los mercados hasta el punto de captar capital extranjero por valor de casi un 160% del PIB. Año 2010: España es un país con los pies de barro que adeuda al exterior más del 170% de su PIB, lo que siembra dudas sobre una pronta devolución. En menos de tres años, la lente deformadora del mercado ha hecho de dos cifras muy similares una lectura completamente opuesta. La tendencia no arroja lugar a dudas: la deuda exterior de España ha crecido hasta casi multiplicarse por tres desde que existen datos comparables (año 2002). Las últimas cifras del Banco de España publicadas la semana pasada lo confirman: en el primer trimestre de 2010, suma ya 1,78 billones de euros, casi dos veces el PIB, según datos de la balanza de pagos. Y los mercados acechan: la cantidad adeudada al exterior es uno de los indicadores que observan con más detenimiento para juzgar la sostenibilidad del país. Todos los analistas consultados coinciden en el diagnóstico: la deuda exterior no puede crecer indefinidamente y ya se están adoptando medidas para contenerla, pero la desconfianza sobre la capacidad de España para reintegrar esos capitales es exagerada. Un vistazo rápido por países indica que los recelos sobre España van más allá del dato: Francia, Holanda, Bélgica, Austria y Portugal, entre otros, dependen más del exterior que España. Y, paradójicamente, Grecia depende menos, según el Fondo Monetario Internacional. Fuentes financieras destacan la rápida reducción del déficit exterior de España (la diferencia entre los flujos que entran y salen) para vaticinar que la deuda tocará techo pronto como reflejo de esa menor necesidad de financiación. La brecha con el exterior ha pasado de rozar el 10% del PIB en 2008 al 5,53% el año pasado, y sigue bajando. "En Grecia y Portugal no ha ocurrido eso", añaden esas fuentes. El perfil de la deuda exterior ha cambiado en los dos últimos años. Aunque empresas y familias (sobre todo la banca) siguen aportando el grueso, la deuda privada empieza a flexionar. La tasa de ahorro de los hogares está en máximos (18,5% de la renta disponible) y las empresas -salvo el sector financiero- empiezan a disminuir sus necesidades de financiación. Esa es una de las grandes bazas de España. Por el contrario, la deuda pública, muy contenida hasta 2007, crece a buen ritmo. El 53% alcanzado en 2009 representa una cifra moderada, pero los mercados no se fían. Temen que parte del endeudamiento privado se transfiera finalmente al sector público. Para mejorar la imagen exterior, tanto el privado como el público se están sometiendo a curas de adelgazamiento. Pero esa medicina puede acabar convirtiéndose en veneno. "Es muy difícil reducir el nivel de deuda sin que afecte al crecimiento", advierte Vicente Pallardó, director del Observatorio de Coyuntura Económica Internacional de la Universidad de Valencia. Este experto duda de que los acreedores exijan tanta austeridad. "No está claro que los mercados estén aplaudiendo los recortes", reflexiona, al tiempo que advierte de que, si se paraliza, la economía europea no podrá hacer frente a sus pagos.

88 La solución que aporta Pallardó consiste en combinar una doble política: que los países sobreendeudados se ajusten y, al mismo tiempo, que quienes venden al exterior mucho más de lo que compran -Alemania- estimulen sus economías en lugar de enfriarlas. Ese círculo virtuoso requiere "una mayor coordinación internacional". También José Luis Martínez, de Citi, alerta del principal motivo de descrédito en los mercados: "Lo que más penalizan es la falta de crecimiento". Martínez cree que los inversores no miran ahora la letra pequeña de la economía, por lo que insta a las autoridades "a cambiar la percepción que tienen de nosotros". Esa falta de discriminación en cuanto a la composición de la deuda exterior disgusta a Juan Luis García Alejo, jefe de análisis y gestión de Inversis Banco. Este experto recuerda que una buena parte de los créditos en España se han destinado a vivienda. Es decir, cuentan con un activo que los respalde, aunque ahora esté devaluado. En cambio, "la penetración del crédito al consumo es más baja que en la media europea". La fiebre del endeudamiento obedece, en última instancia, al proceso que introdujo a España en un entorno económico entonces blindado, el del euro, con tipos negativos al compararlos con la inflación. El resultado fue un estímulo excesivo al crédito. Federico Steinberg, investigador del Instituto Elcano, relativiza las consecuencias de esa distorsión: "El coste de financiación de la deuda es más alto, pero no hay problemas para colocarla; es lógico que pague más interés que la alemana", algo que no ocurrió durante la bonanza. Steinberg llama a la calma: "Hay demasiado catastrofismo", concluye. http://www.elpais.com/articulo/economia/deuda/externa/bate/records/elpepieco/20100705e lpepieco_2/Tes/#

Brussels [EU] to press for higher retirement ages The Financial Times ^ | 7/4/2010 | Stanley Pignal in Brussels Posted on lunes, 05 de julio de 2010 10:41:01 by bruinbirdman Pensions timebomb threatens European finances Brussels will wade into the fraught pensions debate this week, pushing for higher retirement ages across the European Union as the weight of obligations to pensioners threatens the bloc’s public finances. The European Commission will frame the pensions problem as part of the debate on the bloc’s shaky public finances, in a discussion paper to be launched on Wednesday. “Unless people, as they live longer, also stay longer in employment, either pension adequacy is likely to suffer or an unsustainable rise in pension expenditure may occur,” says a draft of the paper seen by the Financial Times. The need for reform is underlined by the worsening ratio of people working to those in retirement. Currently in Europe, there are four people of working age for every person over 65: by 2060, there will be only two workers for every retiree. “Ensuring that the time spent in retirement does not continue to increase compared to time spent working would support the adequacy and sustainability [of pensions],” says the draft. “This means increasing the age [at] which one stops working and draws a pension.”

89 European pensions are more generous and paid for a longer time than elsewhere, because workers retire earlier. French men leave the labour market before 59, compared with 65 in the US and nearly 70 in Japan, in spite of similar life expectancies, according to the Organisation for Economic Co-operation and Development. Partly because of adverse demographic trends – low fertility rates and the retirement of baby- boomers – and partly because of the financial crisis depleting pension funds, countries across Europe have been forced into long-delayed reforms of their retirement systems. Nicolas Sarkozy, the French president, is looking to increase the retirement age by two years in France, in spite of irate unions. The socialist government in Spain froze pensions as part of its austerity drive. Greece has cut pension pay-outs to help reduce its giant debt pile. The paper acknowledges that EU member states are in charge of their pensions policies, including retirement age. But Brussels gained new powers of “economic governance” during the eurozone debt crisis, giving the EU more say on member states’ expenditure. It also has wide-ranging powers when it comes to regulating pension funds, including the ability to put forward new EU-wide laws. As well as László Andor, the employment commissioner, and Olli Rehn, in charge of economic and monetary affairs, the paper comes under the aegis of Michel Barnier, who oversees financial regulation as internal market commissioner. The Commission will also criticise the supervisory framework around EU pensions as “fragmented and incomplete”, raising the possibility of new legislation to harmonise rules. across the bloc. In particular, the paper will bring up the prospect of a pension benefit guarantee scheme which would address failures in the company-backed retirement plans of workers whose employers go bust, as happens in some member states. Such a scheme, possibly co-ordinated or facilitated at EU level, might also compensate private pensions schemes that experience “excessive losses”, the draft says. Harmonised rules on solvency requirements for pension schemes, which currently differ from country to country, are also mooted .An approach based on the EU Solvency II rules, originally designed for the insurance sector, “could be a good starting point”. That last proposal would raise the funding requirements of companies supporting pensions schemes, which will probably trigger a vigorous lobbying campaign should legislation ultimately be tabled. Such a move “would undermine the financial stability of many sponsoring employers,” according to Jane Samsworth, head of pensions at Hogan Lovells. “Pension schemes are not insurance companies and should not be treated as such,” she added. http://www.freerepublic.com/focus/f-news/2547047/posts

90 DÉCLARATION Actualités / International Source : La Tribune.fr - 04/07/2010 | 14:33 - 4512 mots | Aix 2010 : dix mesures pour une croissance européenne Voici l'intégralité de la déclaration des Rencontres d'Aix du Cercle des économistes. L’objet de cette Déclaration est de décrire et proposer les conditions dans lesquelles les pays de l’OCDE, et d’abord le continent européen, peuvent retrouver une place majeure dans l’économie mondiale dans les cinq prochaines années. Notre perspective résolument optimiste sur l’avenir de l’Europe ne va pas de soi. Pour atteindre cet objectif, il faudra bien plus que des déclarations, il faudra un investissement humain et capitalistique sans précédent. Et puis, sans tomber dans une vision simpliste du développement durable, il est évident que l’Europe doit concentrer une partie de ses efforts sur des domaines qui, minoritaires aujourd’hui, ne le resteront pas et dans lesquels ses atouts de compétitivité de départ sont forts, les technologies et marchés du "green business". Ne perdons pas cet avantage d’avoir perçu les premiers le poids de ces nouvelles contraintes environnementales et d’en avoir tiré un véritable leadership. En tout état de cause, le monde ne pourrait pas connaître de véritable développement si l’Europe, et a fortiori les Etats Unis, étaient en panne de croissance. Ne nous leurrons pas, la crise est loin d’être surmontée, et le débat économique se focalise à juste titre sur les différentes voies possibles de sortie. Néanmoins, les trois prochaines années sont, d’abord et avant tout, les premiers maillons d’une nouvelle forme de croissance. Nous sommes confrontés à la plus forte rupture historique depuis un siècle, et les choix de politique économique définiront radicalement et durablement le chemin de la croissance. Au devant d’un tel enjeu, il est de la responsabilité des économistes de faire preuve d’audace intellectuelle, d’aider à concevoir un nouveau paradigme économique ayant pour composante importante le développement des technologies vertes, de dépasser les contradictions en conciliant croissance de qualité et croissance durable. Mais surtout, le rôle des économistes est de focaliser les énergies en montrant que la croissance est possible. Le monde vit aujourd’hui d’illusions et d’idées reçues qui, prises au pied de la lettre, laissent entrevoir un avenir sombre l’Europe se serait engagée sur la voie d’une marginalisation, nettement plus marquée au Sud qu’au Nord, liée à son vieillissement et à son impossibilité de trouver sa place dans la nouvelle division internationale du travail, et au fait que les niveaux d’immigration auraient atteint le seuil de tolérance ; l’orientation vers le court terme d’une part croissante de la finance serait inéluctable ; le monde se dirigerait vers une société où les innovations de biens et services ne joueraient plus le même rôle qu’au cours de deux derniers siècles ; les inégalités demeureraient à un niveau insupportable, conduisant à des difficultés sociales majeures dans les pays développés, aggravées par l’angoisse de la rigueur ; le continent africain, laissé pour compte de la croissance mondiale, n’aurait que peu d’avenir ; les grandes zones monétaires seraient condamnées à vivre avec la persistance des déséquilibres globaux sur le long terme, notamment commerciaux, synonyme d’une difficulté

91 à gérer l’explosion des liquidités monétaires à l’échelle mondiale, dont on sait qu’elle est à l’origine de la crise ; les taux de change ne seraient que des variables de second ordre, idée renforcée par le silence jusqu’à présent du G20 sur ce sujet ; on ne peut rien faire contre la volatilité des flux de capitaux et contre la succession de bulles financières ; le progrès technique et la prise en compte de l’environnement sont contradictoires et la solution choisie ne peut finalement qu’être un compromis médiocre. la zone euro ne fonctionnerait que dans une vision uniforme des modèles socio économiques tant sur les plans des secteurs d’activité que sur les plans des institutions. Si elles se confirmaient, ces évolutions convergeraient vers un tarissement, à horizon cinq ans, de la croissance mondiale. Cette dernière ne peut s’appuyer, sans tensions graves, sur une moitié du monde en rattrapage rapide et une autre en quasi stagnation. Si l’on ne s’attelle pas dès aujourd’hui à penser la croissance de demain, les prédictions des Cassandre ont les plus grandes chances de se réaliser. C’est pour cette raison que le Cercle des Economistes s’est emparé cette année, dans la poursuite de ce qu’il a développé dans les quatre dernières Rencontres, de ce sujet très prospectif mais pour autant très réaliste. Réalisme c’est revenir à l’essentiel, c’est à dire au grand marché européen, mais qui suppose de la diversité et de la solidarité car les différentes parties de la zone sont confortées dans l’utilisation de leurs avantages comparatifs par la stabilité du change. Ceci inclut obligatoirement des équilibres intra union de flux commerciaux et des transferts de financement. I. Les risques pour l’Europe du nouvel ordre mondial Le modèle du capitalisme mondialisé et financiarisé qui a triomphé au tournant du millénaire arrive à bout de souffle. Des forces tectoniques telles que : la démographie, avec le vieillissement des populations selon une chronologie à peu près définie (d’abord les pays avancés puis les pays émergents) l’épuisement des matières premières qui sont au fondement de la société de consommation actuelle modifient inéluctablement la donne. Le monde change radicalement, des centaines de millions de nouveaux individus vont rattraper le rythme et le mode de consommation des pays développés, rendant la trajectoire actuelle de croissance non soutenable. Compte tenu de ces forces tectoniques, six menaces majeures planent sur le modèle de croissance européen de demain. En réalité, les changements ont lieu simultanément à l’échelle du monde et au coeur de l’organisation sociale de chaque zone et de chaque pays. 1) Les risques de non croissance Un monde qui n’innove plus et qui converge vers la non croissance est un monde qui se meurt. Même si les constats de Malthus sont plus que jamais d’actualité, nous rejetons vigoureusement ses préconisations. La vieille antienne malthusienne, la décroissance, ne prend pas en compte les centaines de millions d’individus sortis de la pauvreté par le progrès technique. Il est indispensable de sortir d’une vision simpliste: la croissance n’est pas ennemie de l’environnement ou de l’écologie. Il faut croire au progrès technique, seule réponse au défi de comment concilier une croissance durable et de qualité, et ne pas voir l’industrie seulement par le prisme de la pollution et des délocalisations. Sortir de la logique malthusienne est une condition sine qua non pour augmenter la croissance potentielle malgré la dynamique démographique défavorable.

92 Mais il y également les risques liés aux déséquilibres environnementaux et aux tensions sur les ressources rares. Le sommet de Copenhague a été le théâtre des égoïsmes. Le Sud veut de l’argent, le Nord ne veut pas sacrifier son confort, et l’Union européenne malgré sa bonne volonté n’a pas été capable de faire avancer. 2) Les risques d’un monde financiarisé, favorisant les investissements à court terme et donc soumis au risque de ralentissement du progrès technique La réforme de la régulation financière n’y changera rien : le monde reste régi par les comportements court termistes de la sphère financière, et le risque systémique n’est pas correctement internalisé. Le capital humain reste attiré par ces métiers, et l’objectif de remettre la finance au service de l’économie réelle n’a jamais aussi été éloigné. Au delà des inégalités qui résultent de l’hypertrophie financière, un danger autrement plus préoccupant apparaît sur le long terme avec un tel modèle économique : le fait d’attirer un nombre excessif de talents dans ce secteur est porteur d’une mauvaise allocation des ressources et d’un ralentissement net du progrès technique. 3) Les risques d’une rigueur mal pensée Une rigueur mal conçue et mal coordonnée pourrait abaisser une croissance potentielle déjà faible dans les scénarios au fil de l’eau. Il serait notamment dangereux de diminuer les dépenses d’éducation, d’infrastructure numérique et/ou d’augmenter significativement la taxation du travail. 4) Les risques liés à la dislocation des modèles sociaux existants C’est le risque clef pour l’Europe. Seules les puissances publiques nationales ont la capacité d’accompagner la transition sur le plan social. La crise révèle aussi les pathologies sociales du monde actuel : le surendettement des ménages camoufle la fulgurante montée des inégalités, le monde du travail s’est dangereusement bipolarisé entre emplois stables qualifiés et emplois précaires de service. Plus fondamentalement, il s’agit de redonner aux classes moyennes le sentiment d’un niveau de vie satisfaisant avec de vraies perspectives. Cela passera obligatoirement par une réorganisation de l’Etat, par une hausse des prélèvements qui ne pénalise pas le travail et par une traque aux rentes de situation, dans des industries comme la finance ou l’extraction des matières premières. 5) Les risques d’une externalisation excessive des moteurs de la croissance On ne peut pas se fier à la croissance débridée des pays émergents, "Bric" en tête, et croire que l’économie mondiale a trouvé en eux le nouveau relais de croissance et de progrès technique tant attendu. Ces économies sont encore largement des économies d’imitation, en phase de rattrapage accéléré des niveaux de richesse occidentaux, et ce modèle économique ne peut porter seul en germe les ressorts de la croissance de long terme. 6) Les risques d’un tête à tête Etats Unis / grands pays émergents La bataille économique a déjà commencé sur le terrain des taux de change, en attendant la course aux ressources minières et le protectionnisme commercial. A coup sur elle se poursuivra pour la captation de l’épargne de long terme. A Copenhague le G2 a triomphé de l’Europe. Mais l’équilibre à deux est toujours instable et conduirait à une croissance insoutenable, d’autant que l’Europe rapidement comme le responsable d’une croissance mondiale déséquilibrée. A la question de savoir s’il est plus probable d’assister à une coopération qu’à la guerre, on ne peut faire preuve d’excès de prudence. L’avenir sera certainement non coopératif. Il faut s’attendre à une cohabitation chaotique entre une croissance douce, équilibrée, égalitaire et décentralisée dans les pays

93 avancés et une croissance de rattrapage forte, déséquilibrée, centralisée et inégalitaire dans les pays émergents suscitant la volatilité des flux de migrants et de capitaux. La bataille économique a déjà commencé sur le terrain de la monnaie et on peut prédire qu’elle va se poursuivre pour la captation de l’épargne de long terme. Quelle utilité dans ce cadre pour le G20 ? Une gouvernance mondiale et une gestion collective des problèmes mondiaux paraissent quelque peu utopiques au vu des derniers G20. Cela dit, le G20 est un apport majeur de ces deux dernières années car il situe les décisions dans le cadre d’une vision globalisée de l’économie. Il revêt en outre un rôle crucial dans cette période de transition. II. Inventer la croissance de demain Une fois affirmé notre espoir dans une croissance forte en Europe, tout reste à faire. Il y a en premier lieu un enjeu méthodologique. Les vocables croissance durable, croissance équitable sont si usités qu’ils ont perdu leur sens et sont devenus des concepts vides. Et puis, malgré les enjeux environnementaux et du réchauffement climatique, nous ne pouvons nous satisfaire d’une croissance "low cost". Une économie trop tertiarisée se développe principalement sur des emplois peu qualifiés aux salaires moyens faibles. En fait, il nous faut déterminer les secteurs et les acteurs porteurs de cette nouvelle croissance. 1) Des nouveaux secteurs En termes sectoriels, nous pouvons énumérer certains moteurs de cette croissance, étant bien entendu que le contenu s’entend en termes industriels qu’en termes de services : a. "Green business" : énergie dé carbonée, transports et bâtiments verts. b. Economie des seniors : la bio ingénierie au service de la santé, sciences du vivant. c. Société numérique, les nanotechnologies, la robotique. d. Repenser aussi les processus de production pour les rendre plus économes en matières premières. e. Agronomie et hydraulique pour répondre à la limitation des terres arables. Mais les premières estimations quantitatives du potentiel en croissance et en emploi de ces nouveaux secteurs indiquent qu’ils sont trop limités et pauvres en emploi pour suffire à tirer la croissance mondiale de demain. Des ruptures technologiques sont donc indispensables dans tous ces domaines pour concilier croissance durable et de qualité. 2) Des ruptures dans les "business models" Ces ruptures technologiques viendront probablement de l’hybridation des domaines scientifiques. Plus que les TIC qui sont désormais matures, des domaines comme les biotechnologies sont riches de promesse. Le développement scientifique rentre dans une phase de synthèse créative. Dans le même temps, nous voyons éclore des nouveaux modes de production et de consommation. La valeur client et l’interactivité (Web 2.0, société du quaternaire) sont les maîtres mots du marketing de demain. Cela s’accompagne logiquement de "business models" émergents, en particulier à l’interface industrie services. Ces nouveaux business modèles posent aussi de nouveaux défis, comme les questions de la propriété intellectuelle, de la gratuité, de la protection de la vie privée, de la sécurité et de l’accès des populations défavorisées ou périphériques dans un monde tout numérique. 3) Des contraintes à gérer

94 On a souvent été tenté d’opposer de manière un peu artificielle croissance de qualité à la Stiglitz et croissance durable à la Stern. Le seul sujet demeure de surmonter les trois contraintes que nous impose un monde à démographie galopante, en fait les trois raretés fondamentales : matières premières, épargne et qualification. Cela suppose d’inventer des technologies économes, d’orienter l’épargne vers les investissements de long terme socialement et économiquement rentables et de créer les formations adaptées aux métiers de demain. 4) Mettre en oeuvre une nouvelle politique industrielle Les puissances publiques doivent activer des leviers précis pour stimuler les facteurs structurels de croissance : l’investissement productif et la productivité globale des facteurs (la R&D, l’innovation, la qualification). Il ne s’agit pas de promouvoir une politique industrielle tout azimut mais une politique sélective faisant le pari d’un petit nombre de secteurs d’avenir sur lesquels se concentrent les efforts de la puissance publique, éventuellement dans le cadre de partenariats public privé. Pour cela il est clair qu’il faut mettre en oeuvre une politique de la concurrence, fondamentale à l’époque de la création du grand marché commun, plus pragmatique, comme la doctrine américaine a su nous le montrer. Plus précisément il s’agit de s’adapter à la compétition mondiale, sans pour autant abandonner l’idée que certains secteurs génèrent des rentes difficilement justifiables. L’économie verte ne verra le jour que si les puissances publiques soutiennent les technologies propres dès aujourd’hui sans attendre une rupture technologique exogène qui diminuerait du jour au lendemain les coûts de l’énergie propre. La machine à innovation doit être amorcée par l’Etat, au moyen de subventions ou d’une fiscalité avantageuse au secteur vert, soigneusement calibrée pour vérifier les effets induits. Ce n’est qu’une fois que ce secteur aura rattrapé son retard technologique sur les industries polluantes que l’on pourra laisser les forces du marché décider de l’allocation des ressources. Mais fixer des objectifs ne suffit pas. C’est ce qu’illustre l’échec de l’agenda de Lisbonne. Il faut catalyser l’effort de recherche par le lancement de grands projets. Diriger la recherche vers les secteurs moteurs de l’économie de demain, par des partenariats public privé et des plateformes technologiques pour définir l’agenda de recherche à long terme. Mais pour développer un système productif équilibré et solide, il faut évidemment solliciter deux politiques majeures : la politique de l’emploi et la politique fiscale. Pour la première, la contrainte majeure consistera à intégrer de manière massive les jeunes, les seniors et les populations immigrées. Quant à une politique fiscale de la production, elle suppose un choix : une subvention (au travers des baisses de charge) sur le travail qualifié ou le travail non qualifié ? 5) L’innovation au coeur de la croissance Les ruptures technologiques entrainent des transformations très profonde de la société. C’est la raison pour laquelle la puissance publique en est évidemment partie prenante. On sait bien que les trajectoires technologiques peuvent être porteuses de croissance ou non. Le rôle des puissances publiques est non pas de fixer autoritairement les grands choix mais d’éclairer les multiples interactions que les technologies ont à terme les unes sur les autres. Orienter, diriger, le changement technique, par une fiscalité (taxe carbone) favorable à l’investissement dans les technologies propres et à l’innovation verte. Un Etat "amorceur". 6) Assurer les risques majeurs de long terme Quel mode de financement pour la croissance de long terme et l’innovation de demain ? Les signaux prix ne suffisent pas pour attirer les investisseurs privés. Le ralentissement de l’innovation et l’absence criant de l’éclosion de technologie de rupture tient en grande part

95 des problèmes de financement. C’est ce qu’illustrent les difficultés de structurer la filière industrielle autour de la voiture électrique. La mise en oeuvre de la nouvelle croissance ne pourra s’effectuer que si les investisseurs de long terme sont au rendez vous. On touche là au défi du financement de cette croissance. L’Etat ne peut plus être l’investisseur de long terme de référence, mais il a un rôle dans la canalisation de l’épargne. Il s’agit d’un renversement épistémologique : l’objectif n’est pas tant quantitatif que qualitatif. La guerre de l’épargne sera remportée si l’on réussit à orienter une épargne privée grandissante vers les investissements productifs de long terme économiquement et socialement rentables. Cela nécessite avant tout de réduire de manière déterminante la forte aversion au risque des capitaux actuels, à l’origine du raccourcissement de l’horizon de l’investissement privé. La puissance publique doit être un facilitateur pour la canalisation de l’épargne dans l’investissement de long terme par le biais d’une allocation des risques de long terme repensée. C’est à la puissance publique, au travers de garanties et cautions, d’endosser les risques majeurs de long terme, celui là même qui est responsable de l’envolée si paralysante du prix du risque. Cette révolution intellectuelle serait in fine simplement le triomphe de la théorie standard de la gestion du risque telle qu’elle est pratiquée par les professionnels de l’assurance – partage du risque entre assureurs et réassureurs. Aux marchés financiers d’absorber le risque marginal de courte et moyenne période, à la collectivité de prendre en charge le risque résiduel, ce risque de long terme non diversifiable aux origines aussi multiples qu’imprévisibles, de nature économique, financier ou géostratégique. La puissance publique doit revêtir le rôle de réassureur de l’économie réelle. III. Dix mesures pour bâtir une croissance européenne Nos pays ont ils encore un avenir ? Résolument oui. L’Europe n’a pas une vision objective ni de sa puissance ni de sa réalité. Première puissance commerciale du monde, elle a réussi à développer un marché unique de 500 millions de consommateurs, ce qui est une force incomparable. L’Europe est également une source d’innovation exceptionnelle, aujourd’hui insuffisamment utilisée, et possède des structures sociales exemplaires. Ces atouts doivent être mis au service d’une croissance dont le contenu se distingue significativement de ce qui existe ailleurs, notamment du modèle "technologie-services" américain. Nous souhaitons conserver une base productive extrêmement solide. Ceci ne signifie pas une réindustrialisation uniforme, mais concentrée sur certains pays, et notamment la France qui a connu un des rythmes de désindustrialisation les plus forts. Sept thèmes apparaissent centraux, qui chacun suppose une vraie stratégie de rupture : Innovation et politique industrielle Education et qualification Financement de la croissance et régulation financière Croissance verte Politique macroéconomique Pacte social Coopération multilatérale. Bien entendu, il serait irréaliste et peu efficace de détailler un catalogue de mesures, mais il est cependant indispensable d’illustrer l’absolue nécessité de changement radical dans les politiques européennes. C’est la raison pour laquelle le Cercle des économistes formule dix mesures pour permettre à l’Europe d’être un acteur clé de la croissance de demain :

96 1. Pour une politique industrielle centrée sur les secteurs porteurs de la nouvelle croissance. Le terme de politique industrielle a beaucoup changé de sens au cours des années, c’est pourquoi il est important d’identifier les trois principes qui permettent de le définir rigoureusement et dans une perspective adaptée à la période. Il s’agit tout d’abord de préciser les secteurs à privilégier : la santé, l’énergie, les technologies vertes, les transports, le numérique et les nanotechnologies. Ensuite les domaines d’actions sont évidemment très diversifiés. Dans certains cas, par exemple l’énergie, il s’agit de grands projets européens. Dans d’autres, de financement en capital. Ou encore, dans le cas des jeunes pousses et des entreprises en développement, d’aider à l’émergence de nouvelles technologies. Enfin, la contrainte est de trouver les moyens de financer cette croissance à long terme, sachant que les Etats ne peuvent plus jouer leur rôle antérieur d’investisseur de long terme mais qu’heureusement l’épargne européenne est très abondante. Il s’agit donc de l’orienter massivement plusieurs centaines de milliards d’euros par an vers des investissements productifs de long terme économiquement et socialement rentables. La difficulté réside dans l’existence d’un climat de forte aversion au risque, qui ne peut être surmonté que par des montages spécifiques de partage de risque entre les puissances publiques et les investisseurs privés, où l’Etat supporte le risque majeur de long terme tel un réassureur. Mais ceci est loin de suffire au financement. Une autre voie qu’il faut envisager naturellement est celle de la création d’une agence de la dette européenne, qui, plus que les Etats membres, pourrait piloter un grand emprunt européen dédié à cette politique industrielle diversifiée. Il faut noter que, pour que les Etats rééquilibrent leurs comptes et puissent ainsi assurer des financements plus traditionnels, il faudra renforcer le poids des prélèvements obligatoires. La contrainte est de ne pénaliser ni le développement de l’innovation ni le travail. 2. Pour une écologisation de la politique industrielle. On l’a vu, Copenhague a été un échec pour les politiques mondiales de l’environnement et Lisbonne un échec pour les politiques européennes de l’innovation. Il nous semble qu’il faut reprendre la démarche de Lisbonne, mais cette fois ci avec un réel engagement des Etats centré sur les technologies vertes. Cette stratégie pourrait déboucher assez naturellement sur une taxe carbone, consacrée exclusivement au financement de la recherche et de l’innovation vertes. Une telle taxe permettrait en outre d’orienter le changement technique vers les technologies propres et pourrait être combinée efficacement à une politique de subvention à la R&D. 3. Pour un "Small Business Act" européen. C’est une ancienne revendication jamais réalisée et pourtant absolument nécessaire. Le SBA américain est un outil d’une efficacité redoutable, puisqu’il permet de financer tant l’innovation que l’investissement traditionnel et de garantir une partie des marchés publics aux PME. C’est dire l’urgence de le mettre en place en Europe en dépit d’éventuelles difficultés juridiques par rapport à l’OMC. Le sujet porte à la fois sur les jeunes pousses et sur les entreprises à croissance rapide. Le SBA européen, comme son homologue, doit mettre en oeuvre une palette d’instruments, concernant aussi bien les marchés publics que le financement. Pour simplifier la démarche, cette politique doit être coordonnée au niveau européen mais peut être pilotée par les régions, sur le modèle d’intervention des Länder allemands. 4. Pour une politique de la formation et de la recherche. Tout a été dit sur le sujet et pourtant peu a été fait. Nous pensons qu’il faut d’abord revisiter l’ensemble des formations élémentaires et secondaires, et cela dans l’ensemble des pays

97 européens. La force européenne c’est sa formation, et celle ci a été quelque peu mise à mal. De la même manière, l’enseignement supérieur est un enseignement de masse pour lequel il faut décider l’allocation de 2% du PIB, supérieurs aux dotations actuelles et inférieures aux dotations américaines. Au delà du LMD, il faut créer un titre de docteur européen et donc également une académie européenne d’évaluation. Enfin, les pôles de compétitivité ont été une initiative très positive dans un certain nombre de pays européens. Afin de leur donner plus d’ampleur, plus de moyens, plus de missions, la création d’un réseau européen est vraisemblablement la meilleure voie pour améliorer le rapport entre recherche et innovation. 5. Pour une régulation des marchés financiers en Europe. Dans ce domaine la démarche ne peut être que mondiale. En revanche l’Europe peut imposer, et cela dès le prochain G20, des priorités à débattre puis à mettre en oeuvre pour rendre le système financier mondial moins risqué. Nous pensons aux trois points suivants : la convergence des normes comptables et prudentielles, notamment entre les Etats Unis et l’Europe ; le contrôle progressif des marchés de gré à gré, et l’instauration de chambres de compensation pour une large partie des produits dérivés ; et la mise en place, en suivant les Etats Unis, de politiques de pénalisation très forte des activités de trading pour compte propre des banques de dépôts. 6. Pour une politique macroéconomique active. En réalité il s’agit d’inverser la logique du Pacte de Stabilité et de Croissance et de lui donner un caractère spécifiquement contracyclique Dans la perspective d’un redressement des fonds publics, il faut être extrêmement rigoureux sur les déficits en période de croissance favorable, et plus laxiste en période de récession. D’une manière plus générale, il faut gérer les taux d’intérêt, le taux de change et le déficit en considérant que l’Europe a une vraie stratégie de priorité à la croissance. Quant à la politique du change mise en oeuvre par la Banque centrale européenne, on ne peut la laisser être soumise, surtout dans les périodes difficiles comme celles que nous allons connaître, à la volatilité imposée par les marchés. La stratégie définie se devrait d’être coopérative, donc débattue avec les autres grandes zones monétaires dans le cadre des réunions sur la stabilité des taux de change. Mais il faut également pouvoir la gérer en tenant compte des intérêts de la croissance européenne. 7. Pour une surveillance macroéconomique intelligente et différenciée. Elle ne peut se limiter au Pacte de Stabilité et doit respecter la diversité des modèles de pays, tout en évitant les divergences et les déséquilibres financiers qui mettent en danger la zone euro. Dans cette perspective, les politiques de rigueur, qui s’étaleront selon toute vraisemblance sur un minimum de cinq années, doivent s’imposer qu’aucune coupe budgétaire ne touche les investissements fondamentaux pour la base productive, et qu’aucun impôt complémentaire ne vienne frapper le travail ou ne soit désincitatif pour l’innovation. 8. Pour une immigration choisie. Pour soutenir le dynamisme du marché de l’emploi européen, nous sommes favorables à une immigration choisie sur la base de la qualification et directement liée à une intégration sur le marché du travail. En particulier, comme cela est le cas dans les autres grandes zones, les politiques d’attraction de jeunes étudiants constituent un facteur puissant de coopération avec le pays d’origine. 9. Pour un marché du travail unifié. Tous les pays européens sont touchés par les conflits intergénérationnels. Les difficultés sont multiples, mais la première des décisions doit porter sur les échanges dans les domaines de la

98 formation et de l’emploi. Si l’on veut un marché du travail unifié, il faut naturellement un marché du travail intégrateur, c’est à dire des passerelles multiples dans la formation, des Erasmus multipliés par dix. Le même souci de rapprochement formation emploi s’applique aux flux migrants. De nombreuses mesures peuvent être envisagées, mais l’une des toutes premières est celle de la portabilité des systèmes de pensions. 10. Pour définir une politique européenne commune de transferts de technologie. L’enjeu des dix années qui viennent sera celui des transferts de technologies. Dans ce domaine là, seule la coopération permet de protéger l’Europe d’un pillage de sa technologie. Le rapport avec l’Afrique est exactement l’inverse. C’est un continent qui surprend par la vivacité de sa croissance et qui aura tendance à se tourner vers des pays émergents soucieux d’obtenir contre la technologie des matières premières. Il représente toujours pour nous une opportunité. Il faut donc renforcer notre politique d’aide au développement, d’investissement, de délocalisation et de formation vers ce continent. En conclusion, après avoir rappelé la gravité de la situation dans la continuité des Rencontres précédentes, le Cercle se veut cette année résolument porteur d’espoir. Nos pays peuvent rebondir s’ils mettent en oeuvre sans plus attendre la transition vers la nouvelle croissance. L’enjeu est de rester en course vis à vis des Etats Unis et des grands pays émergents. A défaut de coopération, il faut apprendre à faire cohabiter une croissance équilibrée, décentralisée des pays européens avec la croissance de rattrapage des pays émergents. latribune.fr http://www.latribune.fr/actualites/economie/international/20100704trib000527080/aix-2010- dix-mesures-pour-une-croissance-europeenne.html

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99 naked capitalism Saturday, July 3, 2010 More Evidence That Eurobank Stress Tests Are a Garbage-In, Garbage-Out Exercise The stress tests conducted on 19 large American banks by the US Treasury in 2009 were an amazingly effective exercise in salesmanship and sleight of hand. Banking industry experts, including Bill Black, Chris Whalen, and Josh Rosner, dismissed the process as mere theatrics: too little staffing and not enough “stress” in the economic forecasts and loss assumptions (particularly on second mortgage). My pet peeve was that the banks ran the tests on their trading books using their own risk models, the very ones that had performed so well in preparing them for them in the runup to the crisis. But the Treasury’s Tinkerbell strategy worked. If they could create enough confidence, if they could get enough people to applaud, the banks would live – at least for a while. The spectacle of daily coverage in the business press of the tests, including the howls-on-cue from the banksters, outraged by supposedly-unreasonable demands the Administration, created the impression that Something Was Being Done. And the Treasury did get one critical bit right: it had a credible process for making sure the banks would be able to plug any capital shortfall it identified, and that was by having able to have the government pony up the money to fill any shortfall they identified that the banks couldn’t fill on their own. Imitation is the most sincere form of flattery. The ECB and European bank regulators are copying the US playbook for the stress tests, with results for 100 banks expected to be released around July 23. But the European authorities seem to have failed to understand why the US effort worked. The first was that Team Obama is particularly good at PR, and it used those skills to full advantage. Despite considerable evidence otherwise, it got the press to convey the message that the tests were tough, and the banks really were sound. Second, Geithner & Co. had a kitty they could draw on. By contrast, the Europeans have been simply dreadful at the optics of their various rescue operations, with disarray and disagreements covered extensively by the media. Admittedly, this exercise is being conducted by bank regulators, so it is likely to be more cohesive, but “more cohesive”, with a process involving agencies in different countries, may not be cohesive enough. And “show me the money” is a major problem. The reason for this exercise is concern over possible sovereign debt losses. Who is going to back up the banks at risk? Um, sovereign states, admittedly ones not considered at risk of default (France and Germany), but whose ability to bail out their own banks is limited for practical and political reasons. A story in today’s Financial Times provides confirmation of the skeptics’ concerns: After another fast-moving news week, as it emerged that about 100 European institutions will be included in the tests – four times the size of the original group – some bankers are confident that the expanded programme will reveal that much of the banking sector is healthier than investors think… But big questions remain about how rigorous the expanded tests will be, particularly with respect to the sector’s exposure to Greek, Spanish and other eurozone sovereign debt

100 Institutions will be asked to disclose their total sovereign debt holdings, and the tests will now include a loss rate or so-called haircut of about 3 per cent on all eurozone sovereign debt investments, according to several sources. Let’s see how this all stands up. Eurobank exposure to Club Med sovereign debt is roughly $900 billion (note this excludes debt to eastern Europe, another possible source of tsuris). A 3% loss on that is $27 billion. Ahem, let’s take a more skeptical view. Eurobank holdings of Greece’s government debt is $190 billion. Williem Buiter, now chief economist at Citigroup and a bit of an expert on sovereign default, estimated the haircut on a Greek restructuring at 20% to 25%. But S&P later downgraded Greece, and remarked: At the same time, we assigned a recovery rating of ‘4′ to Greece’s debt issues, indicating our expectation of “average” (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The ‘AAA’ transfer and convertibility assessment is unchanged. Yves here. Do the math. Even if you assume the low end of Buiter’s now-charitable estimate, banks will take losses on Greece alone of $38 billion, 41% greater than the level provided for in the stress tests. If S&P is nearer to the mark, the losses will be $95 to $133 billion. And the more Greece takes new loans before its debt is restructured (a restructuring or default looks inevitable; no country in the modern era has ever had this high a percentage of debt to GDP in a currency it does not control paid its creditors in full), the worse off the banks that hold debt now will be. The new loans will be senior to the current debt, which means the writedowns on the now-outstanding sovereign debt is likely to be high. Analysts are discussing which banks will need to raise capital: Friday’s edition of the Financial Times reported the expectation among bankers that the likes of Spain’s Banco Popular, and Monte dei Paschi and Banca Popolare di Milano in Italy were likely candidates for capital raisings. All three said they had no capital-raising plans. Banco Popular said it was one of the best capitalised banks in Europe, with a core tier one capital ratio of 8.8 per cent. BPM said its core tier one ratio was 7.9 per cent. Like tier one, core tier one ratio is a measure of capital strength. At the same time, there were suggestions in Spain that policymakers were considering going further than counterparts elsewhere in Europe, increasing the required ratio for passing the tests in an effort to boost the confidence value of the exercise. The FT took note of investor doubts: News of the tests’ increased rigour has not fully eased concerns about transparency. “The stress test idea is a shambles,” said one senior analyst in London. “The whole thing is a complete joke.” He said that the market’s expectations of securing meaningful disclosures through the tests were so low that any useful information would be a welcome surprise. “Ironically you might just get a boost if there are any decent disclosures at all,” he said.

101 Maybe the Europeans will pull a rabbit out of the hat, but the odds do not appear to favor them. John Gapper, in a comment on the stress tests, is doubtful: Even some of those who in principle support the idea of banks being honest with investors are worried about the forthcoming European bank “stress tests” – successors to tests on US banks last year. “I have a horrible feeling that this will turn out to be an exercise in damaging confidence,” says one bank analyst…. The worst case is that southern European banks, loaded with bonds denominated in euros, will turn to governments for relief and trigger another sovereign debt crisis. Spain, which is trying to solve a crisis among its cajas – regional savings banks – is a potential victim…. he tests were certainly a turning point in confidence in Mr Geithner himself, who had suffered a rough few months in the job. Whether it turned the tide for banks is less clear; the US stimulus and other measures to restore consumer and business confidence were large factors. In addition, European banks’ problems are more intractable and complex, and probably less amenable to a quick fix. For one thing, there was little question last year that the US could afford to rescue banks if it had to, whereas European governments are now heavily in debt. Furthermore, European banks have inherent funding problems that their US and Asian counterparts lack – they are far more reliant on wholesale markets. US and Asian banks cover their loans with retail deposits, while Barclays Capital estimates the ratio of loans to deposits at European banks to be 120 per cent. This leaves these banks vulnerable to a liquidity crisis… Europeans do things in one way and Americans in another; Europe believes in discretion while the US likes openness even at the risk of embarrassment. We will soon find out if European banks can be salvaged by American methods and we had better hope so. http://www.nakedcapitalism.com/2010/07/more-evidence-that-eurobank-stress-tests-are-a- garbage-in-garbage-out-exercise.html

102

Eurozone rescue fund aims for top rating By Gerrit Wiesmann in Berlin and David Oakley Published: July 5 2010 02:15 | Last updated: July 5 2010 02:15 The eurozone’s new sovereign rescue fund on Monday begins its quest for a vital triple A credit rating as officials from the European Financial Stability Facility kick off a series of meetings with rating agencies. People briefed on the matter told the Financial Times that Klaus Regling, EFSF chief executive, would meet Standard & Poor’s, Fitch, and Moody’s separately this week to win them over for a top rating for the €440bn ($552bn) fund. Fresh moves to unlock loan pool - Jun-27 European states need to borrow €2,200bn - Jan-25 Eurozone shows its strength in a crisis - Sep-17 Rare German issue of foreign bond - Sep-14 Massive surge in European bond issuance - Sep-10 Appetite for European corporate debt grows - Jul-06 Although the fund would issue bonds only if a nation asked for funds, Mr Regling was said to be keen to get a rating quickly – and if possible achieve it during July – to establish the institution on the financial markets. The EFSF, based in Luxembourg, is intended to serve as a lender of last resort for eurozone nations who, as with Greece this spring, found themselves unable to tap the financial markets because of investor nerves. Although only three of the EFSF’s shareholders – Germany, France and the Netherlands – hold triple A ratings, eurozone nations hope that special mechanisms will allow them to secure the same rating for the fund. An important element is a pledge by all shareholder countries to pay investors willing to lend to the EFSF 120 per cent of the initial loan in case of default; another is to funnel fees paid by borrowers into some form of EFSF reserve. Mr Regling and his staff are working closely with eurozone finance ministries, as well as the German debt agency, which would issue EFSF bonds if they were needed. Officials have also been gauging investor appetite. Officials involved have throughout voiced confidence that a triple A rating was achievable. Some officials believe that the EFSF bond yields would be close to – though not below – those of comparable benchmark German Bunds. Investors remain unsure about whether such constructions can make up for the lower credit ratings of the EFSF’s other shareholders – George Soros, the billionaire investor, for example, has dismissed the idea of a triple A badge. Analysts warn that the meetings between the EFSF and the rating agencies could prove to be tricky as the process over issuing a rating can be long and drawn out – particularly for a body that has been created for a particular purpose.

103 Worries that EFSF shareholders Spain and Portugal could be the fund’s first clients also add questions marks over the ability of eurozone nations to repay EFSF bond holders in case a borrower nation should ever default. “It may take time before the rating agencies decide on what they will do. It is not that simple as this is a new body,” said David Owen, chief European financial economist at the US investment bank Jefferies in London. http://www.ft.com/cms/s/0/13d5f70e-878a-11df-9f37-00144feabdc0.html ft.com/alphaville All times are London time 27 days later Posted by Izabella Kaminska on Jul 05 16:52. Comment. The Baltic Dry Index, which measures the cost of shipping dry bulk goods, headed into its 27th day of losses on Monday. This takes it into its longest continuous slump for five years, according to Bloomberg. Of course, the scale of those losses is still nowhere near the levels seen in 2008:

According to analysts quoted by Bloomberg, the latest 2.8 per cent slump to 2,216 points is mainly down to reduced port congestion pushing up the number of vessels available on the market for hire. http://ftalphaville.ft.com/?segid=70409

104 Bloomberg Spanish Savings Banks May Be Concealing Mortgage Losses, CreditSights Says By John Glover - Jul 5, 2010 Spanish savings banks may be hiding losses on home loans by taking non-performing mortgages out of securitized transactions, according to CreditSights Inc. By carrying the bad loans on their own books the so-called cajas sidestep downgrades to their mortgage-backed securities, the independent bond research firm said in a report. The regional lenders helped fuel the nation’s real-estate bubble, which burst after the collapse of the U.S. subprime market. CreditSights follows a sample of 143 Spanish residential mortgage-backed securities collateralized by 136 billion euros ($170 billion) of loans, with about 45 percent originated by cajas. While the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders, CreditSights said. “Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,” analysts David Watts, John Raymond and Hana Galetova wrote. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,” they wrote. A comparison of loans originated by commercial banks and cajas shows that delinquencies in the savings banks’ mortgages have been higher than those of the commercial banks for at least four years, the report said. Falling incomes caused by government austerity packages “would no doubt precipitate further rises in delinquencies,” CreditSights said. For the cajas, the proportion of mortgages more than 90 days delinquent or repossessed peaked at 4.2 percent in the third quarter of last year and is now 3.7 percent. The rate of serious delinquencies for commercial banks was 2.3 percent in the third quarter and has now “leveled off” at 2.6 percent, according to CreditSights. “By buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books,” according to CreditSights. “The current 3.7 percent serious delinquency rate may flatter the performance of the cajas mortgage books and underestimate their potential losses.” To contact the reporter on this story: John Glover in London at [email protected] http://www.bloomberg.com/news/2010-07-05/spanish-savings-banks-may-be-hiding-home- loan-losses-creditsights-says.html

105 Opinion

July 4, 2010 Punishing the Jobless By PAUL KRUGMAN There was a time when everyone took it for granted that unemployment insurance, which normally terminates after 26 weeks, would be extended in times of persistent joblessness. It was, most people agreed, the decent thing to do. But that was then. Today, American workers face the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks. Yet the Senate went home for the holiday weekend without extending benefits. How was that possible? The answer is that we’re facing a coalition of the heartless, the clueless and the confused. Nothing can be done about the first group, and probably not much about the second. But maybe it’s possible to clear up some of the confusion. By the heartless, I mean Republicans who have made the cynical calculation that blocking anything President Obama tries to do — including, or perhaps especially, anything that might alleviate the nation’s economic pain — improves their chances in the midterm elections. Don’t pretend to be shocked: you know they’re out there, and make up a large share of the G.O.P. caucus. By the clueless I mean people like Sharron Angle, the Republican candidate for senator from Nevada, who has repeatedly insisted that the unemployed are deliberately choosing to stay jobless, so that they can keep collecting benefits. A sample remark: “You can make more money on unemployment than you can going down and getting one of those jobs that is an honest job but it doesn’t pay as much. We’ve put in so much entitlement into our government that we really have spoiled our citizenry.” Now, I don’t have the impression that unemployed Americans are spoiled; desperate seems more like it. One doubts, however, that any amount of evidence could change Ms. Angle’s view of the world — and there are, unfortunately, a lot of people in our political class just like her. But there are also, one hopes, at least a few political players who are honestly misinformed about what unemployment benefits do — who believe, for example, that Senator Jon Kyl, Republican of Arizona, was making sense when he declared that extending benefits would make unemployment worse, because “continuing to pay people unemployment compensation is a disincentive for them to seek new work.” So let’s talk about why that belief is dead wrong. Do unemployment benefits reduce the incentive to seek work? Yes: workers receiving unemployment benefits aren’t quite as desperate as workers without benefits, and are likely to be slightly more choosy about accepting new jobs. The operative word here is “slightly”: recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed. Still, it’s a real effect when the economy is doing well. But it’s an effect that is completely irrelevant to our current situation. When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment

106 benefits may keep employment lower than it would have been otherwise. But as you may have noticed, right now the economy isn’t booming — again, there are five unemployed workers for every job opening. Cutting off benefits to the unemployed will make them even more desperate for work — but they can’t take jobs that aren’t there. Wait: there’s more. One main reason there aren’t enough jobs right now is weak consumer demand. Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending. That’s why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus. And unlike, say, large infrastructure projects, aid to the unemployed creates jobs quickly — while allowing that aid to lapse, which is what is happening right now, is a recipe for even weaker job growth, not in the distant future but over the next few months. But won’t extending unemployment benefits worsen the budget deficit? Yes, slightly — but as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided. So, is there any chance that these arguments will get through? Not, I fear, to Republicans: “It is difficult to get a man to understand something,” said Upton Sinclair, “when his salary” — or, in this case, his hope of retaking Congress — “depends upon his not understanding it.” But there are also centrist Democrats who have bought into the arguments against helping the unemployed. It’s up to them to step back, realize that they have been misled — and do the right thing by passing extended benefits. http://www.nytimes.com/2010/07/05/opinion/05krugman.html?_r=1&th&emc=th

July 4, 2010, 11:31 am Japanese Interest Payments So Dan Senor and I had a little tussle on This Week over how much of Japan’s budget goes to interest payments; he said a quarter, I said that he was wrong. And I was right, of course. But I sort of see where his mistake came from. If you look at the way Japan’s Ministry of Finance reports the country’s fiscal condition (pdf) you see a chart (p. 9) which says that National Debt Service is 22.4 percent of the budget. And you might think that this means interest payments. But it doesn’t. Japan defines debt service as interest payments PLUS redemption of bonds, in effect principal repayments. If you look at the previous chart, you see that interest payments were much smaller — a bit over 10 percent of the budget. Now, the budget includes debt service; so you might want to express interest as a share of non-debt spending, which makes it around 14 percent. Did I know this earlier today? No — but I did know that Japan’s interest payments were in the vicinity of 2 percent of GDP, which meant that Senor’s claim couldn’t be right. When quoting numbers, you really want to have some context; it’s a good way to avoid bloopers. http://krugman.blogs.nytimes.com/2010/07/04/japanese-interest-payments/

107 July 3, 2010, 1:51 pm The Hawks Who Cried Wolf I’ve been taking a bit of a trip down memory lane, looking at older blog posts in aid of a possible future project. And I was struck by something I sort of knew, but hadn’t focused on: the latest round of oh-my-God-the-bond-vigilantes-are-attacking-gotta-cut is the third such round since Obama took office. First, there was a runup in interest rates in the spring of 2009 — mainly a reaction to receding fears of a second Great Depression, but widely interpreted as a sign of impending fiscal doom. Then rates went back down. Second, there was a big scare in the fall of 2009, based on, well, nothing — which is what led me to write my original post on invisible bond vigilantes. And fear of this phantom menace helped scare the Obama administration away from a second stimulus. Finally, there was the bond scare of March, in which we were turning into Greece because of a blip in rates barely visible on the charts. Since then, rates have plunged. It kind of makes you wonder: why do such claims carry any credibility? Bear in mind, too, that anyone who actually acted on these deficit scares — who, for example, believed Morgan Stanley’s prediction of soaring rates in 2010 — has lost a lot of money. But I have a sinking feeling that the next time long rates rise even a bit — say, back to where they were a year ago — we’ll be told that the bond vigilantes have arrived. Really. And Washington will believe it. http://krugman.blogs.nytimes.com/2010/07/03/the-hawks-who-cried-wolf/ November 22, 2009, 5:49 am Role reversal Many people on Wall Street are now warning that there’s a huge bubble in government debt, that interest rates will spike any day now; it’s a warning that clearly has the Obama administration’s ear. A good sample is this piece from Morgan Stanley, according to which “Our US economics team expects bond yields to rise to 5.5% by the end of 2010 – an increase of 220bp that outstrips the 137bp increase in the fed funds rate expected over the same horizon.” Btw: what? Almost everyone expects unemployment in late 2010 to remain close to 10%. Why, exactly, would the Fed funds rate rise sharply? Anyway, I was wondering: it’s my impression that the same people now warning about the alleged Treasury bubble dismissed warnings about the housing bubble. Is this true? I think so. Morgan Stanley, September 2006: The pessimists argue that the bursting of a putative housing bubble means that prices could decline significantly. There is some risk that prices could decelerate faster or even decline in real terms — after all, investment and speculative activity has picked up in the past five years. But the character of housing demand makes the much-feared decline in prices on a nationwide basis unlikely … Hmmm. http://krugman.blogs.nytimes.com/2009/11/22/role-reversal/

108 July 2, 2010, 7:47 am I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser (en los morros) Brad DeLong deals with the substance of this Economist leader; despite complete lack of evidence, the Economist still believes in the confidence fairy. But notice one more thing: the Economist’s blithe declaration that Mr Krugman’s crude Keynesianism underplays the link between firms’ and households’ behaviour and their expectations of future tax and spending policy. All through this debate, a recurring theme among anti-Keynesians has been that Keynesians like me or Brad are ignorant primitives who don’t know anything about modern macro. It’s really hard to see where that comes from, since I’ve done plenty of intertemporal optimizing in my time. Part of the problem seems to be that the people saying this are taken aback by what we’re saying because they don’t actually understand the implications of their own models. But anyway, for the record: I understand the importance of expectations perfectly well — well enough to know that taking such expectations into account makes the case for stimulus stronger, not weaker. http://krugman.blogs.nytimes.com/2010/07/02/im-gonna-haul-out-the-next-guy-who-calls- me-crude-and-punch-him-in-the-kisser/

109 Business Day Economy

July 4, 2010 A Political Clash Over Deficits Stalls Legislation to Address Jobs By SEWELL CHAN WASHINGTON — Members of Congress headed for a recess over the weekend having failed to agree on legislation to address the nation’s fragile employment picture, with both parties placing starkly different bets on the political consequences of their positions. President Obama and his Democratic allies in Congress are hoping that voters will punish Republicans in the midterm elections for obstructing his efforts to extend unemployment benefits, expand lending to small businesses, and increase aid to struggling state and local governments.

Michael Stravato for The New York Times Michelle Greene, an intern with the placement company ChaseSource, accepts résumés at a job fair in Houston last month.

“Republican leaders in Washington just don’t get it,” Mr. Obama said in his weekly video address on Saturday. Republican lawmakers have clung to the view that uneasy voters will instead judge the White House harshly for failing to quickly rein in budget deficits that threaten to shake market confidence and saddle future generations with record public debts.

110 “At some point we have to say, enough is enough,” said Senator Saxby Chambliss of Georgia, who delivered the Republican response to the president’s message. “We have to make tough decisions about spending beyond our means.” After lawmakers return from this week’s Independence Day recess, they will have just a month before they break for the summer. Historically, significant legislation is unlikely to pass in the late summer and early autumn before an election.

Mike Theiler/European Pressphoto Agency Carolyn B. Maloney, a Democrat, worries that some deficit hawks are saying "cut, cut, cut, irrespective of the economic consequences." The opposing positions have hardened even though the unemployment rate, 9.5 percent as of Friday, has barely budged from its peak of 10.1 percent in October. Underlying the divisions are fundamentally diverging diagnoses for what ails the economy. “Somehow the politically correct position on the deficit has become cut, cut, cut, irrespective of the economic consequences,” Representative Carolyn B. Maloney, a New York Democrat and the chairwoman of the Joint Economic Committee of Congress, said in an interview. To liberals like Ms. Maloney, premature belt-tightening not only spells more difficulties for the jobless, but also risks a double-dip downturn. “Most economists agree the economy is too fragile to sustain the kinds of spending cuts politicians are talking about now,” she said. She said she agreed on the need for long-term deficit reduction, but added, “the deficit battle is being played out on the backs of unemployed workers.” Proponents of austerity speak with just as much conviction. In a hearing on Friday, after the Labor Department reported that employers added a mere 83,000 private-sector jobs in June,

111 Representative Kevin Brady of Texas, the top House Republican on the Joint Economic Committee, argued that fiscal discipline was vital to restoring confidence. “Businesses are slow to hire because they fear higher taxes, job-killing regulation and a dysfunctional Washington that is ideologically driven and increasingly anti-business,” he said. Mr. Brady added: “Unless their excessive spending deficits and debt accumulation are quickly reversed, the United States may experience a debt crisis similar to Greece.” Representative Paul D. Ryan of Wisconsin, the top Republican on the House Budget Committee, went even further. “I reject the false premise that only forceful and sustained government intervention in the economy can secure this country’s renewed prosperity,” he said last week. The emphasis on debt reduction has been particularly frustrating to observers from the left. Every effort to dig the nation out of the unemployment abyss “is being stymied by excuses about the deficit,” said Richard L. Trumka, the president of the A.F.L.-C.I.O. “It is a national disgrace that members of Congress are heading home to celebrate our nation’s birthday after having voted repeatedly not to create jobs or to extend unemployment aid.” Heather Boushey, a senior economist at the Center for American Progress, a liberal policy organization, said the White House had been lukewarm about stimulus measures, resulting in uncertainty among its Democratic allies. “We haven’t seen the administration get out in front of some of the more progressive jobs proposals,” she said. “There’s been a wariness among the administration folks.” Mr. Obama’s political aides have tended to emphasize voter worries about the deficit, while his economic advisers have been urging additional stimulus spending. They also have counseled patience. “We will not be able to reverse overnight two devastating years of recession and a decade of declining economic security for the middle class,” Alan B. Krueger, the Treasury Department’s chief economist, said Friday. “Economic recoveries don’t move in straight lines,” he said in a meeting with reporters. “However, the fact that private-sector employment expanded for six months in a row is an indication that the trend line is pointing in the right direction.” In a May hearing of the Joint Economic Committee, Mr. Krueger, the assistant Treasury secretary for economic policy, said that even before the start of the recession in 2007, the United States job market had already been performing weakly, relative both to the 1990s and to the rest of the industrialized world. After gaining 21.7 million payroll jobs in the 1990s, the economy lost 944,000 from December 1999 to December 2009, Mr. Krueger said in his testimony. The fraction of the working-age population that reported being employed peaked at 64.7 percent in March 2000, and fell to 58.6 percent in March 2010, its lowest level since the two recessions of 1980-82, he said. Small businesses, which shed large numbers of workers during the recession, have been particularly slow to resume hiring. While Mr. Krueger’s remarks at the hearing were not widely reported, their implications were clear: raising taxes can support both deficit reduction and job growth. He testified that the tax cuts enacted in 2001 and 2003 “did not result in better performance in the labor market than

112 was achieved in the 1990s, a period when government revenue increased, and the deficit was reduced and eventually eliminated.” Whether that perspective will shape the policy debate will become clear in the coming months. In the meantime, some experts say that job creation and deficit reduction are not mutually exclusive. Mark Zandi, the chief economist at Moody’s Economy.com, told the House Budget Committee last week, “It is important — in fact I’d say it’s vital — that you continue to provide some additional temporary stimulus to the economy.” But he added, “Once the economy is on a sound footing, it is critically important that you do pivot as quickly as possible and address the long-term fiscal situation.” David M. Walker, the president of the Peter G. Peterson Foundation, an organization that has focused on cutting long-term deficits, said the “myth that we cannot address our current economic crisis and our long-term fiscal crisis at the same time” had become an obstacle to bipartisan agreement. “In our view, the answer is to continue to pursue selected short-term initiatives designed to stimulate the economy and address unemployment, but to couple these actions with specific, meaningful actions designed to resolve our long-term structural deficits,” Mr. Walker testified last week to the National Commission on Fiscal Responsibility and Reform, the bipartisan panel named by Mr. Obama. The panel’s report is due Dec. 1 — four weeks after the midterm elections. http://www.nytimes.com/2010/07/05/business/economy/05jobs.html?th&emc=th

113 Opinion

July 4, 2010 The Pessimism Bubble By ROSS DOUTHAT This is a day for hangovers and sunburns, discarded sparklers and spent rockets smoking weakly on brown lawns. Yesterday was all euphoria and patriotism — a chance to forget about the unemployment rate, the deficit, the oil spill and whichever political party you hold responsible for the country’s sorry state. But now it’s time to sit around in your undershirt, put off cleaning the backyard grill and contemplate all the things you spent the Fourth of July trying not to think about. Enough of the star-spangled American dream. Back to the grim American reality. How grim? Well, after the United States limped through five months of anemic “recovery,” last Friday brought news that our economy actually shed jobs in June, thanks to the expiration of more than 200,000 Census positions. It’s now been 30 months since the beginning of the recession, and it looks as if it could take another 30 or so to regain the level of employment we enjoyed in the autumn of 2007. If we regain it at all. The public seems doubtful: in a recent survey, conducted before the latest wave of dismal economic news, the Pew Research Center found that less than half of Americans expect that their children will enjoy a higher standard of living than their own. Economists are throwing around phrases like “lost decade” and “double-dip recession,” and drawing analogies to the Great Depression. And those aren’t even the real doomsayers. On Sunday, The Times profiled the market forecaster Robert Prechter, who’s convinced that the stock market is headed for a sell-off that will send the Dow Jones average below not 10,000, but 1,000. This gloom is understandable, up to a point. The crash of 2008 exposed systemic problems with our way of life that no legislation can resolve: a reckless financial elite, an overextended public sector, and a culture of irresponsibility that’s visible everywhere from our debt-to- income ratios to our out-of-wedlock birth rate. But just as healthy optimism can turn into irrational exuberance, a clear-eyed realism about the challenges facing the United States can gradually inflate a pessimism bubble. Since the financial crisis hit, there’s been a lot of talk about the bubble mentality — how a run of growth and good news persuades people that what goes up need never come back down. “This time is different,” the enthusiasts always say, in a refrain that provided the title for Carmen Reinhart’s and Kenneth Rogoff’s recent history of financial panics. But it never, ever is. A similar mentality, though, can take hold during downturns. The “this time is different” mistake applies to busts as well as booms: when things get dark enough, people start believing that dawn will never come. Pessimism bubbles formed during America’s last two economic crises — the stagflation era in the late 1970s and the post-cold war recession that ushered Bill Clinton into the White House. Go back and read Jimmy Carter’s famous “malaise speech,” which liberals have lately been rehabilitating. With its warnings about retrenchment, rationing and a permanent energy crisis,

114 it feels like a contemporary document. But it isn’t, and Carter’s prophecies were wrong: the grimmest speech any modern president has given was delivered just a few years before America kicked off a long era of impressive economic growth. The same goes for many of the dire predictions ventured in the early 1990s, when America was supposedly entering a period of debt-driven decline, while Japan rose inexorably to dominance. Swap in a rising China for Japan, and Tea Party chants for Ross Perot’s charts, and the fears of that era map neatly onto the anxieties of our own. But the Clinton-era boom pricked that bubble of pessimism soon enough. Maybe this time is different. The recession is deeper. Our debts are piled higher. The gloom is more pervasive. But even now, there isn’t a major power in the world that wouldn’t happily change places with the United States. Our weaknesses are real, but so is our potential for resilience. While our rivals (in Asia as well as the West) face a slow demographic decline, our population is steadily increasing. The European Union’s recent follies make our creaking 200-year-old institutions look flexible by comparison. And China can throw up all the high-speed rails and solar panels it wants, but it won’t change the fact that most of the country is still sunk in rural poverty. All of this is cold comfort if you can’t find a job, or can’t afford your mortgage payments. But historical perspective is important. The more we remember the pessimism bubbles of the past, the better our chances of bursting out of this one. Here endeth the pep talk. Happy Fifth of July. http://www.nytimes.com/2010/07/05/opinion/05douthat.html?th&emc=th

115 Global Business

July 4, 2010 China Fears Warming Effects of Consumer Wants By KEITH BRADSHER GUANGZHOU, China — Premier Wen Jiabao has promised to use an “iron hand” this summer to make his nation more energy efficient. The central government has ordered cities to close inefficient factories by September, like the vast Guangzhou Steel mill here, where most of the 6,000 workers will be laid off or pushed into early retirement. Already, in the last three years, China has shut down more than a thousand older coal-fired power plants that used technology of the sort still common in the United States. China has also surpassed the rest of the world as the biggest investor in wind turbines and other clean energy technology. And it has dictated tough new energy standards for lighting and gas mileage for cars. But even as Beijing imposes the world’s most rigorous national energy campaign, the effort is being overwhelmed by the billionfold demands of Chinese consumers. Chinese and Western energy experts worry that China’s energy challenge could become the world’s problem — possibly dooming any international efforts to place meaningful limits on global warming. If China cannot meet its own energy-efficiency targets, the chances of avoiding widespread environmental damage from rising temperatures “are very close to zero,” said Fatih Birol, the chief economist of the International Energy Agency in Paris. Aspiring to a more Western standard of living, in many cases with the government’s encouragement, China’s population, 1.3 billion strong, is clamoring for more and bigger cars, for electricity-dependent home appliances and for more creature comforts like air-conditioned shopping malls. As a result, China is actually becoming even less energy efficient. And because most of its energy is still produced by burning fossil fuels, China’s emission of carbon dioxide — a so- called greenhouse gas — is growing worse. This past winter and spring showed the largest six- month increase in tonnage ever by a single country. Until recently, projections by both the International Energy Agency and the Energy Information Administration in Washington had assumed that, even without an international energy agreement to reduce greenhouse-gas emissions, China would achieve rapid improvements in energy efficiency through 2020. But now China is struggling to limit emissions even to the “business as usual” levels that climate models assume if the world does little to address global warming. “We really have an arduous task” even to reach China’s existing energy-efficiency goals, said Gao Shixian, an energy official at the National Development and Reform Commission, in a speech at the Clean Energy Expo China in late June in Beijing.

116 China’s goal has been to reduce energy consumption per unit of economic output by 20 percent this year compared with 2005, and to reduce emissions of greenhouse gases per unit of economic output by 40 to 45 percent in 2020 compared with 2005. But even if China can make the promised improvements, the International Energy Agency now projects that China’s emissions of energy-related greenhouse gases will grow more than the rest of the world’s combined increase by 2020. China, with one-fifth of the world’s population, is now on track to represent more than a quarter of humanity’s energy-related greenhouse-gas emissions. Industry by industry, energy demand in China is increasing so fast that the broader efficiency targets are becoming harder to hit. ¶Although China has passed the United States in the average efficiency of its coal-fired power plants, demand for electricity is so voracious that China last year built new coal-fired plants with a total capacity greater than all existing power plants in New York State. ¶While China has imposed lighting efficiency standards on new buildings and is drafting similar standards for household appliances, construction of apartment and office buildings proceeds at a frenzied pace. And rural sales of refrigerators, washing machines and other large household appliances more than doubled in the past year in response to government subsidies aimed at helping 700 million peasants afford modern amenities. ¶As the economy becomes more reliant on domestic demand instead of exports, growth is shifting toward energy-hungry steel and cement production and away from light industries like toys and apparel. ¶Chinese cars get 40 percent better gas mileage on average than American cars because they tend to be much smaller and have weaker engines. And China is drafting regulations that would require cars within each size category to improve their mileage by 18 percent over the next five years. But China’s auto market soared 48 percent in 2009, surpassing the American market for the first time, and car sales are rising almost as rapidly again this year. One of the newest factors in China’s energy use has emerged beyond the planning purview of policy makers in Beijing, in the form of labor unrest at factories across the country. An older generation of low-wage migrant workers accepted hot dormitories and factories with barely a fan to keep them cool, one of many reasons Chinese emissions per person are still a third of American emissions per person. Besides higher pay, young Chinese are now demanding their own 100-square-foot studio apartments, with air-conditioning at home and in factories. Indeed, one of the demands by workers who went on strike in May at a Honda transmission factory in Foshan was that the air-conditioning thermostats be set lower. Chinese regulations still mandate that the air-conditioning in most places be set no cooler than 79 degrees Fahrenheit in the summer. But upscale shopping malls have long been exempt from the thermostat controls and have maintained much cooler temperatures through the summers. Now, as the consumer economy takes root, those malls are proliferating in cities across China. Premier Wen acknowledged in a statement after a cabinet meeting in May that the efficiency gains had started to reverse and actually deteriorated by 3.2 percent in the first quarter of this year. He cited a lack of controls on energy-intensive industries, although the economic rebound from the global financial crisis may have also played a role. Global climate discussions, in pinning hopes on China’s ability to vastly improve its efficient use of energy, have tended to cite International Energy Agency data showing that China uses

117 twice as much energy per dollar of output as the United States and three times as much as the European Union. The implicit assumption is that China can greatly improve efficiency because it must still be relying mainly on wasteful, aging boilers and outmoded power plants. But David Fridley, a longtime specialist in China’s energy at the Lawrence Berkeley National Laboratory, said that the comparison to the United States and the European Union was misleading. Manufacturing makes up three times as much of the Chinese economy as it does the American economy, and it is energy-intensive. If the United States had much more manufacturing, Mr. Fridley said, it would also use considerably more energy per dollar of output. “China has been trying to grab the low-lying fruit — to find those opportunities where increased efficiency can save money and reduce carbon-dioxide emissions,” said Ken Caldeira, a climate change specialist at the Carnegie Institution for Science in Stanford, Calif. “It is starting to look like it might not be that easy to find and grab this fruit.” http://www.nytimes.com/2010/07/05/business/global/05warm.html?_r=1&th&emc=th

118 Los problemas del sector financiero La banca alerta de un corte del crédito El Banco de España desoye las quejas del sector e implanta una contabilidad más severa con los morosos, que frenará los préstamos a empresas

ÍÑIGO DE BARRÓN - Madrid - 04/07/2010 Malos tiempos para las empresas que necesiten créditos. A los conocidos problemas de falta de liquidez para bancos y cajas, se añade ahora una nueva y más exigente normativa para los préstamos. La semana próxima el Banco de España tiene previsto hacerla oficial. Malos tiempos para las empresas que necesiten créditos. A los conocidos problemas de falta de liquidez para bancos y cajas, se añade ahora una nueva y más exigente normativa para los préstamos. La semana próxima el Banco de España tiene previsto hacerla oficial. Según los bancos, causará un encarecimiento y un corte del crédito. El motivo, según las entidades, es que se volverán más selectivos para conceder préstamos sin garantías reales: sin poner inmuebles, dinero o acciones como avales. Habitualmente estos créditos son los que piden las pequeñas y medianas empresas (pymes) y las sociedades de mayor tamaño, así como los que se destinan al consumo (coches, viajes, electrodomésticos, etcétera). Las cajas, que tienen menos negocio de empresas y consumo, no consideran que la nueva normativa les perjudique especialmente. "No cabe duda de que el Banco de España separa radicalmente los créditos con y sin garantías reales, y penaliza estos últimos, que son los que piden las empresas. A partir de ahora, subirán los precios de los préstamos empresariales por el peligro de impago", dice Joaquín Maudos, miembro del Instituto Valenciano de Investigaciones Económicas IVIE y profesor de la Universidad de Valencia. La razón del endurecimiento de las condiciones hay que buscarla en el acortamiento del calendario de los créditos impagados. Cuando un cliente no devuelve el dinero prestado, la entidad tiene que ir sacando de su beneficio la parte que le ha dejado a deber y acumularla en una cuenta. Es lo que se denomina provisionar un crédito. Hasta ahora, el banco o la caja "tenía entre 24 y 72 meses para realizar la provisión desde que se calificaba de dudoso", es decir, desde que pasaban 90 días sin atender el pago, como decía el Banco de España en una nota. Estos largos plazos "daban la oportunidad de negociar una salida con la empresa que estaba pasando un momento de apuro, si de verdad era un buen cliente; ahora, con menos tiempo, es más difícil buscar una salida. Por eso, a partir de ahora los bancos se pensarán más a quién dejan el dinero porque saben que hay menos capacidad de

119 maniobra si llegan los problemas, algo habitual en un momento como este", comenta el responsable comercial de una entidad financiera que pide mantener el anonimato. Nadie ha calculado con precisión en cuánto pueden caer los créditos, ya que la norma todavía no está funcionando. "Para cubrir los préstamos morosos, el nuevo proyecto de circular unifica los diferentes calendarios de provisiones en uno solo, que garantiza la cobertura total del riesgo una vez transcurridos 12 meses. Con ello se recorta sustancialmente el periodo de tiempo para provisionar los préstamos", apunta el supervisor. Es decir, si antes el plazo era de 24 o 72 meses para quitar parte de los beneficios y tapar el agujero dejado por un moroso, ahora son 12. Es cierto que no se provisiona todo de golpe: a los seis meses del impago se coloca el 25% del préstamo moroso; entre seis y nueve, el 50%; entre nueve y 12, el 75% y, al superar el año, el 100%. "Es difícil encontrar un calendario perfecto en provisiones, pero este sistema perjudica a las empresas porque en un año casi no hay tiempo para renegociar una deuda. Sobre todo si es una empresa mediana o grande, con varias entidades implicadas", dice Íñigo Vega, analista de Iberian Equities. Los bancos han pedido al supervisor que sea más flexible en esta norma. De hecho, a algunos de ellos les solicitó simulaciones para ver el efecto que tendría si acortaba el plazo hasta 18 meses. Tras entregarles los resultados, la sorpresa fue grande cuando vieron que la nueva circular establecía el año como plazo máximo para provisionar el crédito impagado. El 26 de mayo pasado, el Banco de España anunció que sometía a consultas el nuevo texto. El plazo ya ha terminado y, según fuentes de toda solvencia, no habrá modificaciones de importancia sobre el texto inicial. Cuando presentó las nuevas reglas de juego, el organismo que dirige Miguel Ángel Fernández Ordóñez explicó que, si bien se endurecía el calendario de provisiones, también aliviaba otras normas, que eran un clamor en el sector desde hacía años. En este sentido, acabó con la obligación de provisionar el 100% de un crédito aunque tuviera como garantía un piso o una oficina. Es decir, dio valor a estas garantías -con una escala en la que valen más las viviendas y menos los solares- para restar esfuerzo en las provisiones. "No cabe duda de que esos cambios nos favorecen", dice el responsable de normativa de un banco mediano. "Sin embargo, tienen dos efectos perversos: por un lado, estaremos más dispuestos a prestar al que ponga inmuebles como garantías y no al que tenga más capacidad de devolución del préstamo. Por otro lado, los bancos podemos acabar quedándonos con muchos inmuebles y, si ocurre, se cerrará más el grifo del crédito para cortar esta tendencia". ¿Qué busca el Banco de España con este movimiento? Las entidades coinciden en señalar que el objetivo es que se hagan más fuertes, al contar con más dotaciones. Este factor se debería valorar mucho por los mercados en un momento como este, cuando todos dudan de todos y no se prestan ni un euro. "Es cierto que se reforzarán los bancos, pero el momento elegido por el supervisor no es el más adecuado porque puede debilitar la economía", apunta Maudos. Sin embargo, este profesor alaba el cambio por el que se gravan progresivamente las cargas por quedarse inmuebles en el balance. "Es una buena forma de que salgan los pisos de la banca al mercado a precios más bajos y se racionalice el mercado", dice. Los bancos también han pedido otros cambios al supervisor: que no se tome como referencia el valor de escritura para los bienes hipotecados y que no se infravaloren las viviendas que no son residencia habitual solo por este hecho. "El piso no vale menos, aunque haya mayor riesgo de impago si no es la primera vivienda", dicen en el sector.

120 Desde las entidades se insiste en la inoportunidad de la mayor severidad en las provisiones. "Esta norma alimenta el bucle maldito: más dotaciones, menos créditos, menos crecimiento económico, menos ingresos financieros, más morosidad, y, otra vez, más provisiones". Los ejecutivos más directos creen que el Banco de España solo mira por la fortaleza del sector, pero eso no es lo que más interesa ahora a una economía en recuperación "y tampoco al Gobierno", apuntan otros. "Parece que no se han puesto de acuerdo y cada uno vela por sus intereses", añaden. http://www.elpais.com/articulo/economia/banca/alerta/corte/credito/elpepueco/20100704elpe pieco_1/Tes

ANÁLISIS: Los problemas del sector financiero ANÁLISIS El BCE y la liquidez

ÁNGEL BERGES Y SANTIAGO FDEZ. DE LIS 04/07/2010 En los últimos meses ha cobrado un especial protagonismo la estrategia del Banco Central Europeo (BCE) en cuanto a sus mecanismos de inyección de liquidez. En la última semana, al hilo del vencimiento de la mayor operación de financiación a largo plazo (un año) llevada a cabo por el BCE, cifrada en 442.000 millones de euros, se ha renovado el interés por este tema en los medios. Merece la pena realizar algunas reflexiones sobre dos aspectos básicos, e interrelacionados, de la estrategia de suministro de liquidez del BCE: su responsabilidad en la distribución de liquidez en los mercados interbancarios; y el reparto de la liquidez básica del BCE entre instituciones y entre países. Tradicionalmente, el BCE -con una obsesión un poco dogmática por el control de las magnitudes monetarias, heredada del Bundesbank- ha inyectado liquidez con un racionamiento de cantidades. En esa situación, los sistemas bancarios (y los bancos individuales) de los distintos países de la eurozona competían entre sí por fondos escasos. Eso no era un problema si la liquidez se distribuía luego de manera eficiente, lo cual ya no es el caso, pues la liquidez no circula y su distribución es deficiente. En medio de la crisis, y ante la necesidad de corregir el funcionamiento defectuoso de los mercados, el BCE optó por modificar el procedimiento de las subastas, y pasó al denominado full allotment (adjudicación total), mediante el cual se adjudican todas las peticiones a un tipo determinado. El exceso de liquidez es absorbido, en su caso, por la facilidad de depósito, pero a un tipo penalizador. El BCE ha anunciado que el full allotment es una medida excepcional, que se levantará en cuanto los mercados se vayan normalizando. El riesgo es que una retirada

121 prematura de esta política, sin que los mercados estén totalmente normalizados, pueda suponer una competencia feroz por la liquidez, que podría elevar los tipos de interés indebida y prematuramente. En este sentido, conviene recordar que el BCE tiene una responsabilidad de mantener la estabilidad financiera. El mal funcionamiento de los mercados interbancarios es un problema de estabilidad financiera de primer orden, no solo porque revela una profunda desconfianza entre las entidades (que quizá la anunciada publicación de los stress test de la banca europea puede contribuir a corregir), sino porque supone una pérdida de eficiencia para el sistema bancario, que pagamos todos. Además, si el interbancario no funciona también falla el mecanismo de transmisión de la política monetaria. En parte por eso, los tipos de interés prácticamente nulos no han sido suficientes para animar el crecimiento de la economía en la eurozona. En un contexto semejante, parece fuera de toda duda que el BCE debe mantener los apoyos. Otra actitud sería irresponsable, porque podría provocar una agudización de la crisis financiera y económica. El BCE debe poner en la balanza riesgos de naturaleza muy diferente: por un lado, el riesgo de desencadenar una grave crisis de liquidez bancaria; en el lado contrario, el riesgo de que se retrase la normalización de los mercados (y quizá, un remoto riesgo inflacionista, que resulta francamente difícil vislumbrar hoy). Se dice que los bancos centrales deben tender a "equivocarse por el lado de la prudencia". En este caso, la prudencia exige continuar con los apoyos de liquidez hasta que sea evidente que se han superado las dificultades. El mal funcionamiento de los mecanismos de redistribución de liquidez en el mercado mayorista europeo, hace relevante otro aspecto en la estrategia del BCE: el reparto de su liquidez entre países. Los bancos españoles han utilizado tradicionalmente poco, en términos relativos, la liquidez suministrada por el BCE, de manera que han estado siempre por debajo de su cuota teórica, según la clave de capital del BCE. Sólo a partir de la segunda mitad de 2008 las peticiones de liquidez de los bancos españoles han superado esta referencia (u otras que pudieran utilizarse, como el peso de su sistema bancario en la eurozona), y hoy lo hacen en aproximadamente cuatro puntos porcentuales. Otros países han superado ampliamente esta cuota en el pasado (por ejemplo, en el caso de Alemania era más del doble hace tres años, y sigue estando por encima con los últimos datos publicados). Pero lo realmente importante es huir del propio concepto de cuotas, que no es congruente con el modelo de la eurozona. Si el mercado interbancario no funciona, es responsabilidad del BCE corregir las deficiencias observadas y paliar sus efectos. Eso exige, por un lado introducir incentivos para que los bancos con exceso de liquidez presten, para lo cual se podría reducir la remuneración de la facilidad de depósito a un tipo cero, o incluso negativo; y por otro dar liquidez a los bancos que la necesiten, sea cual sea su nacionalidad. http://www.elpais.com/articulo/economia/BCE/liquidez/elpepueco/20100704elpepieco_2/ Tes

122 REPORTAJE: Los problemas del sector financiero Otra vez el miedo y la falta de liquidez Los mercados se secan a la espera de conocer el estado de los bancos Las entidades serán más selectivas y subirán los precios de los préstamos El supervisor alivia en parte la situación al valorar más los pisos como avales Í. DE B. - Madrid - 04/07/2010 "Guarda ese miedo que lo vela todo. Diciendo cosas que siempre suenan a triste. Todo ese ruido que el maldito invierno nunca se lleva, nunca se lleva", dice una canción del grupo Maldita Nerea. La letra no está pensada para definir lo que ocurre en los mercados financieros, pero muchos creen que esa psicología negativa es la que reina entre los inversores, que parecen ávidos de malas noticias de cualquier parte del mundo para encontrar razones para hundir mercados. Otros ejecutivos son más directos: "Los grandes inversores ganan dinero con los altibajos del mercado. No podemos estar en sus manos". Pero los Gobiernos, con escasas excepciones, no se han puesto de acuerdo para regular los mercados y el colapso continúa. Desde que empezaron las turbulencias en Grecia, ha regresado la desconfianza y se han cerrado los mercados de liquidez. Nadie presta a nadie porque tienen motivos para pensar que ocultan problemas, es decir, inversiones fallidas. Los bancos franceses y alemanes tienen la mayor parte de la deuda griega, pero los más sospechosos para los inversores son las entidades españolas por las propiedades inmobiliarias que guardan en sus balances. Los esfuerzos del Banco de España para dar transparencia a las cuentas bancarias, ofreciendo datos que no se conocen en otros países, no se han tenido en cuenta. La sequía de los mercados amenaza con cerrar el crédito a los bancos y, por tanto, a las empresas, con lo que se paralizaría la economía. Pese a que España está reduciendo con velocidad su dependencia del crédito exterior, aún necesita que los extranjeros le presten el 5% de lo que demandan las empresas. Otros países de la UE se autofinancian, por lo que viven la tensión de los mercados con menos nerviosismo. Para romper esta situación, el Gobierno español pidió a la UE que acelere la publicación de las pruebas de resistencia o stress test de la banca. Estos cálculos reflejan cómo soportar el capital y la solvencia de un banco un escenario macroeconómico adverso. Zapatero se apresuró a decir que el Santander era el más solvente de Europa y que el BBVA estaba en el grupo de cabeza. Muchos expertos son escépticos sobre la utilidad de estas pruebas. José Carlos Díez, economista jefe de Intermoney, apuesta por una dosis de realismo para que fluya el crédito. "Se deben hacer los stress test con máxima seriedad, con criterios homogéneos en toda Europa y que reflejen qué entidades pueden tener problemas. Para estas se debe ofrecer ayuda pública porque si no es como dejarlos al alcance de los cocodrilos. En EE UU los hicieron, sin apretarles mucho por cierto, y la experiencia fue buena. El crédito empezó a fluir". Pero no todos quieren, sobre todo los alemanes. El presidente del Bundesbank y miembro del BCE, Axel Weber, se reunió con 16 entidades hace días y les dijo que deberían preparar planes de emergencia para ampliar capital por si no consiguieran superar las pruebas de resistencia. Mientras tanto, la mayoría reclama más actividad al Banco Central Europeo (BCE) para dar fluidez al crédito. Esta institución ha terminado con los préstamos a un año y solo lo hace a

123 tres meses. "El BCE es el prestamista de última instancia y debe cumplir su papel. Con las subasta a un máximo de tres meses, no lo está haciendo", dice Joaquín Maudos, profesor de la Universidad de Valencia. Un alto ejecutivo recuerda que cuando se implantó la moneda única, los países renunciaron a sus bancos centrales como financiadores porque estaba el BCE. Aunque llegara su manguera, muchos creen que el dinero del BCE sirve para atender los vencimientos, pero no para dar créditos. Es decir, no es la solución definitiva. "Para romper con este pesimismo es necesario que lleguen buenas noticias macroeconómi- cas, de los mercados de deuda soberana y de los stress test", dice el responsable de una entidad. Demasiado difícil. Seguirán las curvas. http://www.elpais.com/articulo/economia/vez/miedo/falta/liquidez/elpepueco/20100704el pepieco_3/Tes

TRIBUNA: Laboratorio de ideas JOSÉ LUIS LEAL Juego peligroso El peligro que nos acecha es el de prolongar inútilmente la salida de la crisis económica JOSÉ LUIS LEAL 04/07/2010 La crisis económica ha puesto a prueba la Unión Monetaria Europea, iniciada en un periodo de prosperidad que, por el momento, se ha esfumado. Era evidente, desde el principio, que la construcción de la eurozona debía conllevar, tras el éxito inicial del euro, la puesta en marcha de una institución que coordinara las políticas presupuestarias y que fuera el interlocutor del Banco Central Europeo para administrar de manera coherente el espacio de la moneda única y maximizar el crecimiento económico en el marco de la estabilidad de los precios. Desgraciadamente no ha sido así, pues con la creación del Banco Central Europeo solo hemos recorrido la mitad del camino. La otra mitad, la puesta en marcha de una institución que coordine las políticas presupuestarias, es una tarea pendiente. No tanto por la falta de conciencia de su necesidad, sino por la resistencia a ceder soberanía por parte de los Estados. Se ha creado el Eurogrupo, los ministros de Economía se reúnen regularmente en el Ecofin, pero, a la hora de la verdad, cada cual hace lo que estima más conveniente para sus ciudadanos sin tener en cuenta los intereses del conjunto de la eurozona. Ignoran, o pretenden ignorar, que la suma descoordinada de sus decisiones puede ser contraria, en un plazo no muy largo, a sus propios intereses nacionales. El abuso del corto plazo y del interés nacional conduce inevitablemente a la ineficacia del conjunto. Los firmantes de la Unión Monetaria fueron conscientes de estos problemas desde el principio y por ello decidieron apuntalar el euro mediante la doble prohibición de que el déficit público de los Estados superase el 3% del PIB y la deuda pública excediese el límite del 60% del PIB. Al principio todo fue bien, a pesar de que algunos Estados, entre ellos Alemania entre 2002 y 2005, superaron temporalmente el límite del 3%. Los países cuya deuda superaba el 60% del PIB hicieron esfuerzos por reducirla. Gracias a ello, y al peso específico de la eurozona, el euro se ha consolidado como una moneda universal, compitiendo con el dólar como moneda de reserva, lo que constituye un logro importante. El éxito del euro no parece haber impresionado a los alemanes, que tienen el sentimiento de que la moneda única solo les ha acarreado perjuicios. La realidad es muy diferente, lo que hace incomprensible el silencio de los principales responsables políticos sobre este asunto.

124 Según los cálculos de la OCDE, Alemania ha sido el único gran país de la eurozona que ha ganado de manera significativa cuota de mercado desde la entrada en vigor del euro, lo que contrasta con las fuertes pérdidas de Francia e Italia. España también ha perdido cuota de mercado a la exportación, aunque de forma moderada. Es cierto que las empresas alemanas han realizado grandes, y eficaces, esfuerzos por reducir sus costes, pero es indudable que la puesta en marcha del euro les ha ayudado considerablemente. El impacto de la crisis actual, la más severa desde 1929, ha puesto en tela de juicio las bases mismas del sistema. En realidad, deberíamos haber reflexionado antes sobre los peligros a los que nos exponía el obstinado rechazo a ceder soberanía por parte de los Estados. La imposición de límites a los déficits y a la deuda era una forma de desentenderse de las responsabilidades de los firmantes del Tratado de Maastricht, que de alguna manera delegaron en los números -el 3% y el 60% del PIB- las responsabilidades que no fueron capaces de asumir. El paladín de esta actitud fue Alemania, que desde el principio receló de la capacidad de los demás países de la eurozona para abrazar la cultura de la estabilidad que tan buenos resultados le había proporcionado desde el final de la Segunda Guerra Mundial. En vez de acelerar la puesta en marcha de un embrión de gobierno económico para la eurozona, se prefirió la vía, más fácil políticamente, de los límites fiscales. Esta manera de proceder es un juego peligroso que equivale al intento de atravesar la mayor tormenta que se recuerda utilizando únicamente el piloto automático. Pocas personas embarcarían a bordo de un avión en el que se anunciara de antemano que el piloto no iba a intervenir para nada, pasase lo que pasase, en el pilotaje del avión. Y, sin embargo, esto es lo que hemos hecho en la Unión Monetaria. En este contexto hemos iniciado una singular carrera en Europa para ver quién ajusta más y más de prisa. Se ha fijado arbitrariamente el año 2013 para volver al 3% de déficit público y, lejos de intentar acomodar razonablemente los casos más difíciles, se ha decidido que hay que reforzar el piloto automático para dar mayor credibilidad a los ajustes. Es como si, en medio de la tormenta, prescindiéramos por completo del piloto. De nuevo quien más impulsa esta estrategia es Alemania. Jugamos, juegan por nosotros, un juego peligroso. La respuesta, tanto presupuestaria como monetaria, que se ha dado a la crisis actual ha sido en líneas generales correcta y ha evitado una recesión mundial que no sabemos hasta dónde podría habernos llevado. Pero ahora, una vez evitado el mal mayor, parece como si no fuésemos capaces de salir del atolladero, al menos en Europa. Los mercados se han vuelto histéricos, lo cual no es una novedad, y penalizan a los Estados tanto por no ajustar sus economías como por hacerlo. A veces esta histeria se alimenta, consciente o inconscientemente, desde los propios Gobiernos. El peligro que nos acecha es el de prolongar inútilmente la salida de la crisis. No se trata de evitar los rigores del ajuste, sino de conducirlo racionalmente. En el caso de España es evidente que hay que reducir el déficit público, que es uno de los mayores de la eurozona. El Gobierno, más o menos forzado por las circunstancias, está realizando esfuerzos en la buena dirección y lo único que cabe esperar es que persevere. Pero la necesidad de estos esfuerzos no debe ocultar la asimetría de un proceso de ajuste en el que los Estados más fuertes pueden imponer la austeridad a los más débiles, mientras que estos no pueden imponer a los primeros el relanzamiento de sus economías cuando están en condiciones de hacerlo o, al menos, la adecuación de sus procesos de ajuste a los intereses del conjunto de la eurozona. Lo que está claro es que no podremos seguir indefinidamente a medio camino en la institucionalización de la Unión Monetaria. Las crisis suelen poner de relieve los problemas con una intensidad y una urgencia mayor de la habitual. Hay que creer que seremos capaces de avanzar por la senda de la racionalidad y colocar en su lugar unos intereses políticos

125 nacionales que, a la larga, pueden costarnos muy caros. De no hacerlo así, la Unión Monetaria, la Unión Europea y, en definitiva, Europa habrá iniciado el camino que conduce a la irrelevancia en el mundo. http://www.elpais.com/articulo/primer/plano/Juego/peligroso/elpepueconeg/20100704elp neglse_6/Tes

TRIBUNA: Laboratorio de ideas ANTÓN COSTAS Síndrome del alcohólico rehabilitado Los ministros de Hacienda se comportan en las terapias de desendeudamiento como alcohólicos rehabilitados ANTÓN COSTAS 04/07/2010 Hay una cuestión intrigante en la actual política económica de los países europeos: de repente, todos los Gobiernos se han puesto a anunciar masivos planes austeridad, de una magnitud y dureza para la cual la población no estaba preparada, y cuyos efectos sociales y económicos son cuando menos problemáticos. En países como Grecia y España, más que una elección autónoma de sus Gobiernos, esa política ha venido al principio impuesta por los mercados de deuda, a lo que contribuyó también el empujoncito que Barak Obama y algunos líderes europeos le dieron a Rodríguez Zapatero. En otros casos -como el de Alemania o Reino Unido-, la austeridad es una opción política de sus Gobiernos. Pero sea impuesta o por convicción, el hecho es que la política de apretarse el cinturón con fuerza ha sido rápidamente hecha suya por los Gobiernos europeos como el camino de redención. El caso del nuevo y joven Gobierno británico es particularmente ilustrativo. Aunque durante el periodo electoral David Cameron, el nuevo primer ministro, había hablado de la "inevitabilidad" de la austeridad, nada hacía presagiar la dureza y dramatismo de la política anunciada la semana pasada por el nuevo ministro del Tesoro, George Osborne. En esencia, busca acelerar el ritmo de la reducción del déficit y del desendeudamiento, de tal forma que ya en 2015 Reino Unido tenga déficit cero y unas necesidades netas de crédito de solo el 1,1% del PIB, frente al 11% de 2009-10. La magnitud del ajuste y el reducido tiempo en que se quiere lograr implica una austeridad dramática, casi salvaje, cuyo impacto sobre el gasto, el crecimiento y el empleo público será considerable. De ahí que un analista tan cualificado como Martin Wolf se haya referido en su columna del Financial Times a "una masacre para que la que nadie estaba preparado" (A bloodbath one were prepared for, FT, 22 / 06 / 2010). Wolf identifica dos "gigantescas apuestas" implícitas en el plan de Osborne, que en mi opinión son válidas también para las políticas de austeridad de otros países europeos. La primera es el reto que plantea a la capacidad para gestionar el malestar social que va a producir una dura política de recorte del gasto y de los salarios. O los Gobiernos persuaden de forma convincente a sus ciudadanos de la justicia de este esfuerzo o el panorama social y político será complicado. Y no será fácil, porque para lograr reducir el déficit en tan breve plazo habrá que recortar el gasto a martillazos y no con cirugía fina. La experiencia dice que en estos casos quien paga la mayor parte de la factura son los más débiles. La segunda apuesta es acerca del impacto que la austeridad tendrá en el crecimiento. Todos los Gobiernos, incluido el nuestro, admiten que será negativo, aunque esperan que será débil y que se recuperará rápidamente, ayudado por la mejora de las exportaciones. Pero se trata de

126 un deseo piadoso más que de una predicción analítica fundamentada. Además, si todos los países practican a la vez la misma austeridad en el gasto, la posibilidad de exportar para que los vecinos nos compren lo que no consumimos será escasa. La política de austeridad que tan fructífera fue para Alemania en la última década no funciona cuando la practican todos los países a la vez. Si los efectos sobre el crecimiento distan de ser evidentes, ¿cómo explicar que todos los Gobiernos europeos hayan abrazado con fe de converso una política de este tipo? La pregunta no tiene una fácil respuesta. Una primera respuesta a esa cuestión es la idea, adoptada como ortodoxia oficial, de que las raíces de la crisis europea son fiscales. Por lo tanto, la solución ha de ser fiscal. Pero es un error. El consenso general entre los economistas independientes es que el origen ha sido financiero: la enorme burbuja de activos y el enorme endeudamiento privado impulsado por el modelo de crecimiento alemán y holandés (exportar, ahorrar y prestar el ahorro a otros países) y que se ha visto favorecido por el euro. El déficit y el endeudamiento público aparecieron con la crisis, cuando la burbuja pinchó y el sector público tuvo que salir al rescate del sector privado, tanto bancario como empresarial. El camino para el retorno a la estabilidad fiscal es el crecimiento. Pero, como acabo de señalar, no está claro que esta estrategia de austeridad beneficie el crecimiento. Más bien lo contrario. Pero, entonces, ¿cuál es la motivación que impulsa esa dura austeridad? En mi opinión tiene que ver más con motivaciones morales y personales que con el análisis económico. La austeridad se alimenta de lo que podríamos llamar el síndrome del alcohólico rehabilitado. Es conocido que los alcohólicos o los fumadores cuando se rehabilitan utilizan con frecuencia terapias de choque y adoptan conductas ultrarradicales. Pues bien, los ministros de Hacienda europeos se están comportando como alcohólicos rehabilitados en relación con las terapias de desendeudamiento. Por eso algunos proclaman con fervor el déficit cero. Aunque sorprenda, este tipo de motivaciones acostumbran a ser un poderoso acicate para las políticas de austeridad. Además, esas políticas se alimentan también del secreto deseo de algunos políticos de formar parte del selecto club de los ministros de Hacienda con reputación de ortodoxos y duros, capaces de imponer sacrificios e infligir dolor, al margen de su mayor o menor eficacia para promover el crecimiento. Es cierto que en última instancia la política de austeridad era inevitable. Pero el espíritu jacobino con el que se está formulando no es el adecuado. La terapia de choque somete a la economía a un peligroso síndrome de abstinencia de crecimiento. De hecho, el crecimiento será el "test" final de su acierto o fracaso. Por el bien de todos, deseo que acierten. http://www.elpais.com/articulo/primer/plano/Sindrome/alcoholico/rehabilitado/elpepueconeg/ 20100704elpneglse_7/Tes

127 REPORTAJE: Laboratorio de ideas - Breakinviews.com Pensar lo impensable Los reguladores deben diseñar una prueba de resistencia bancaria fiable PETER THAL LARSEN 04/07/2010 Los organismos reguladores europeos se enfrentan a un dilema. Los inversores están preocupados por la exposición de los bancos a la deuda soberana. Los Gobiernos han aceptado someter a pruebas de resistencia a sus entidades de crédito, pero no quieren admitir la posibilidad de que algunos países podrían suspender pagos. Los dos puntos de vista son difíciles de reconciliar. Sin embargo, con un poco de habilidad e imaginación, los reguladores deberían ser capaces de diseñar una prueba que deje a ambas partes satisfechas. Se supone que estas pruebas analizan situaciones extremas. Una suspensión de pagos soberana en la zona euro difícilmente entra en esta categoría. La mayoría de los inversores cree que Grecia reestructurará su deuda en algún momento en los próximos años; una minoría importante cree que Portugal hará lo mismo. Pero a los Gobiernos de la zona euro les preocupa que, con solo admitir la posibilidad, minen la confianza en su paquete de rescate de 440.000 millones de euros. Los reguladores disponen de varios métodos para cuadrar el círculo. Podrían forzar a los bancos a asumir que los bonos soberanos sufran una rebaja considerable de, digamos, tres o cuatro escalones. Si los bonos se consideran menos solventes, la mayoría de los bancos tendrán que conservar más capital para respaldarlos. Sin embargo, este método no es infalible: actualmente, algunos organismos reguladores permiten que los bancos mantengan poco o ningún capital para respaldar la deuda soberana griega, aunque tiene una calificación de basura. Otra opción es obligar a los bancos a mantener reservas de capital más grandes. Los organismos reguladores europeos han establecido una ratio de capital mínima de primer nivel (Tier 1) del 6%, al mismo nivel que las pruebas de resistencia del año pasado en EE UU. Incrementar el límite, otros dos puntos porcentuales, por ejemplo, añadiría un tope adicional al riesgo soberano. Pero una postura tan brusca no serviría de mucha ayuda para distinguir entre los bancos que se han cargado de deuda de la zona euro y los que han sido más responsables. Una alternativa mejor sería forzar a los bancos a asumir que los precios de la deuda soberana sufrirán una brusca caída. Los bonos griegos a cinco años se venden actualmente a 82 céntimos por euro. No es precisamente descabellado imaginarse que caigan hasta los 50 céntimos. Aun así, los reguladores deben permanecer alerta. Algunos bancos centrales de la zona euro han permitido a sus bancos ignorar las pérdidas ajustadas al valor del mercado de los bonos soberanos a la hora de calcular las ratios de capital. Por este motivo, la prueba de resistencia debería dar por sentado que los bancos están obligados a vender sus bonos a precios de saldo. Incluir una venta a gran escala de bonos soberanos sería de cierta utilidad para persuadir a los inversores de que las pruebas de resistencia recogen sus preocupaciones. Incluso en ese caso, las pruebas no serían perfectas, no se toma en cuenta la agitación general que viviría el mercado tras una suspensión de pagos soberana ni el efecto que tendrían en la financiación de los bancos y el crecimiento económico. Pero es preferible eso a una prueba de resistencia que los inversores ignoren. Esto dejaría al sistema bancario de Europa en una situación aún peor que la actual. http://www.elpais.com/articulo/primer/plano/Pensar/impensable/elpepueconeg/20100704elpnegls e_8/Tes

128 bolsa España inventa otra crisis La revisión del sistema energético desconcierta a los grandes inversores RAFAEL VIDAL 04/07/2010 La eurozona ha pasado esta última semana un importante examen como entidad ante los mercados financieros. El vencimiento de los préstamos a un año del BCE, sustituidos por subastas a más corto plazo a partir de ahora, provocó pequeños brotes de histeria entre algunos analistas, temerosos de que algunas entidades no pudieran cumplir sus compromisos de pago. Los mercados de valores sufrieron fuertes presiones, centradas siempre en los valores bancarios y según los criterios de cada cual sobre la capacidad de pago. Los bancos españoles volvieron a recibir la mayor parte de la presión, ahora ya por tradición, aunque todos ellos continúan reclamando la publicación de las pruebas de estrés para sacar de dudas a los más temerosos. La Bolsa española termina esta semana con un recorte del 2,98% y una gran volatilidad, no tanto fruto de la situación de su sector financiero, sino por la incertidumbre creada por los dos principales partidos políticos en torno al sector eléctrico. Según algunos habituales del mercado, el acuerdo Sebastián / Montoro para revisar el sistema energético hace que los grandes inversores internacionales vean a España cerca de Venezuela en cuanto a estabilidad regulatoria. La semana ya comenzó mal para los mercados ante el error en la confección del indicador adelantado de actividad de China que, en lugar de subir el 0,3% en abril bajó el 1,7%. Las esperanzas puestas en China como posible motor de la recuperación se desvanecieron y dieron paso, junto con las generosas dudas sobre la solvencia de la banca europea, a la tercera peor sesión de este año para el mercado español. El Ibex 35 perdió en esa ocasión el 5,45% al no poder los inversores echar mano de ningún argumento para mantener los títulos en cartera. La debilidad de la economía estadounidense, cada vez más evidente, está tomando el relevo a la ya resuelta crisis de liquidez de la eurozona. El BCE está resolviendo bien la situación y el cambio en los plazos de los préstamos se ha producido sin las tensiones que algunos analistas esperaban. En esta semana se han conocido los datos de confianza de los consumidores, varios índices de actividad empresarial, los gastos en construcción y los pedidos a fábrica, y todos ellos han sido negativos. La tasa de paro de junio, sin embargo, bajó dos décimas, hasta el 9,5%, pero se perdieron 125.000 empleos. Para colmo de males, el índice Dow Jones de valores industriales de la Bolsa de Nueva York está en una zona crítica en la que peligran sus soportes y esa falta de apoyo se puede notar en el resto de los mercados de valores. La debilidad de la economía estadounidense parece tan evidente que el mercado del petróleo ha comenzado a descontar un posible descenso del consumo en Estados Unidos y Europa. El precio del barril de crudo ha caído casi siete dólares en Nueva York y 6,5 en Londres. http://www.elpais.com/articulo/dinero/inversiones/Espana/inventa/crisis/elpepueconeg/20100 704elpnegdin_3/Tes

129 MOISÉS NAÍM Alemania, 0; China, 1 MOISÉS NAÍM 04/07/2010 ¿Quién se ha comportado mejor durante esta crisis económica: Angela Merkel, la canciller de Alemania, o Hu Jintao, el presidente de China? El chino. Sé que esta afirmación resultará sorprendente. Nos hemos acostumbrado a oír que, debido a sus bajos sueldos, China presiona a la baja los salarios de sus competidores e incluso contribuye al desempleo en el resto del mundo. China también es acusada de mantener artificialmente bajo el valor de su moneda, lo que abarata aún más sus exportaciones y encarece el costo de los productos que importa. También sabemos de su autoritarismo, sus violaciones a los derechos humanos, sus constantes robos a la propiedad intelectual, su amistad con cualquier tirano dispuesto a darle acceso a materias primas, y que regímenes espantosos como los de Corea del Norte y Myanmar o los genocidas de Darfur cuentan con su apoyo. ¿En qué cabeza cabe, entonces, la defensa del Gobierno chino? He sido un duro y permanente crítico de las prácticas represivas de Pekín. Y lo sigo siendo. Pero debo reconocer que, en esta crisis, la República Popular China ha sido un actor global serio, responsable y competente. Y que Alemania lo ha sido mucho menos. Por eso hoy Hu Jintao merece loas y Angela Merkel reproches. Millones de personas en el mundo conservan su trabajo gracias a las políticas económicas de China. Y otros varios millones en Europa y otras partes no consiguen trabajo debido a las políticas económicas de Alemania. Mientras China contribuye a generar actividad económica en otras regiones, la inacción alemana irradia presiones que la contraen. China se ha transformado en el gran motor de la economía mundial. Cuando la segunda economía más grande del mundo crece al 10% anual levanta a muchos otros países. Gracias a China, por ejemplo, la crisis no tuvo peores consecuencias para América Latina y el resto de Asia. La economía mundial crece al 4% y China por sí sola genera el 1% de este crecimiento. En otras palabras, le debemos a China el 25% de la tasa de expansión económica del mundo. Hu Jintao y su Gobierno reaccionaron ante la crisis con rapidez y efectividad. En 2009 aprobaron un gigantesco estímulo fiscal de 568.000 millones de dólares. Cuando vieron que en 2010 la economía mundial seguía anémica, pisaron el acelerador y aumentaron el crédito. La expansión monetaria creció un extraordinario 30% en solo dos años. Pero Pekín no solo tomó decisiones acertadas; también evitó caer en peligrosas tentaciones. En el peor momento de la crisis, en 2008, Rusia propuso a los chinos que ambos vendieran de manera coordinada y masiva su cartera de bonos de Fannie Mae y Freddie Mac, los dos gigantescos entes financieros estadounidenses. Los chinos se negaron. De haber caído en esa tentación, la crisis para el mundo hubiese sido mucho más grave. Entretanto, en Berlín... Negación, austeridad, prudencia, confusión, lentitud y obsesión por las encuestas y la política doméstica. Alemania tiene las reservas y la fortaleza económica para ayudar a que sus vecinos salgan de su estancamiento. Pero Angela Merkel no las quiere usar. La audacia y seguridad de Hu contrastan con la cautela de Merkel. Él decide, ella duda. Y mientras, una gran parte de Europa sigue parada. Sabemos que la conducta de las naciones no está motivada por el altruismo, sino por sus intereses. Las decisiones de Hu Jintao son tan nacionalistas como las de Angela Merkel. Pero

130 mientras que el líder chino entendió que el bienestar de su país depende de lo que le pasa al resto del mundo, la canciller alemana parece creer que es posible aislar a su país de la catástrofe económica de sus vecinos. Es una gran ironía que la salud de la economía capitalista globalizada esté dependiendo tan críticamente de Hu Jintao, quien en 2004 aún exhortaba al Partido Comunista chino a "defender las grandes banderas del marxismo". [email protected] MOISÉS NAÍM Alemania, 0; China, 104/07/2010 http://www.elpais.com/articulo/internacional/Alemania/China/elpepiint/20100704elpepii nt_9/Tes

IGNACIO SOTELO Europa sin esperanza IGNACIO SOTELO 03/07/2010 El problema es España -baja productividad por una educación deficiente que se plasma en la falta de una ciencia capaz de impulsar una innovación tecnológica propia-, pero lo desconcertante es que se tambalea la única solución que se divisaba en el horizonte, aniquilando la esperanza de que Europa nos vaya a arropar en un decenio en el que con un alto desempleo creceremos poco. Conscientes de que el destino de cada uno de los Estados miembros radica en una Europa unida que funcione, nada tan preocupante como la actual incertidumbre sobre el futuro de la UE. Si evitar que la crisis se repita exige una política económica común que a la larga implique un fortalecimiento de la unión política, hasta ahora solo se percibe un egoísmo descarnado, aliñado con fuertes dosis de populismo, tentado cada país de gritar sálvese el que pueda. La mayor sorpresa la ha dado Alemania, a la que con razón se reprocha ser causa del desequilibrio interno por haber centrado el crecimiento en la exportación -el 40% va a la Europa comunitaria- en vez de aumentar el consumo con salarios más altos y menos recortes sociales. Cuando los países con balanzas comerciales negativas predican la necesidad de mejorar la productividad para exportar más, a Alemania se la critica por conseguir aquello que los demás pretenden, máxime cuando China, que le ha arrebatado el primer puesto como país exportador, lleva a cabo la misma política, produciendo aún un mayor desequilibrio a escala mundial. Como Alemania depende totalmente de que no descarrile el nuevo marco que llamamos euro, sabe que no puede desprenderse de la responsabilidad por el conjunto, pero intentará imponer las condiciones básicas de una política económica unitaria, como en su día lo hizo con el Banco Central Europeo, al priorizar no tanto el crecimiento o el empleo como la estabilidad monetaria. Para los españoles que desde el ingreso en la Comunidad con el apoyo decisivo del canciller Kohl se han movido en la esfera que protagoniza Alemania, resulta muy difícil de entender que en una semana tensísima los rumores sobre la poca fiabilidad financiera de España hayan venido de fuentes gubernamentales alemanas, sin duda presionadas por los bancos acreedores que temen la posible insolvencia de los españoles y tratan de curarse en salud. Habrá que tomar nota de que en momentos difíciles haya fallado el que había sido nuestro principal socio valedor.

131 Empero para confirmar los peores temores basta leer el Proyecto Europa 2030 del Grupo de reflexión sobre el futuro de la UE, presentado en mayo. Sin el menor análisis de una situación tan compleja como la que pasa la UE, se recomienda una economía social de mercado altamente competitiva; flexibilidad, a la vez que seguridad en el empleo; un mejor sistema educativo, con el fin de hacer realidad la sociedad del conocimiento; cambiar la actual tendencia demográfica con una expectativa de vida cada vez más alta y una fertilidad decreciente y asegurar una inmigración de calidad, sin la que Europa no podría sobrevivir; asegurar el abastecimiento energético sin renunciar a la nuclear, recalcando el truismo de que la energía más limpia y barata es la que no se consume, pero sin decir cómo se puede ahorrar energía, manteniendo el nivel de vida, ni explicar cómo se combina la política energética que se propone con la lucha contra el cambio climático; en fin, conseguir el equilibrio correcto entre libertad y seguridad y acercar la UE a los Estados miembros y sobre todo a los ciudadanos. Es difícil no estar de acuerdo en estos objetivos, lugares comunes ampliamente compartidos, que se quiere ver realizados en 2030, sin tomar en consideración si todos resultan compatibles, ni hacer la más mínima alusión a los factores que pueden modificar sustancialmente el futuro, o a las dificultades que seguro surgirán a partir de las distintas posiciones e intereses, así como de la falta de un grupo rector, como antes de 1990 lo fue el eje franco-alemán. Ni siquiera se menciona si el área del euro seguirá ampliándose, o la Unión quedará partida en dos o más grupos con intereses contrapuestos. Cabe temblar ante este afán de salir de la crisis sin que en el fondo cambie nada. http://www.elpais.com/articulo/internacional/Europa/esperanza/elpepuint/20100703elpepiint_ 8/Tes

132 Business Day Economy

July 2, 2010

They Did Their Homework (800 Years of It) By CATHERINE RAMPELL THE advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses.

Mary F. Calvert for The New York Times

Carmen Reinhart and Kenneth Rogoff at Ms. Reinhart's Washington home. They started their book around 2003, years before the economy began to crumble. It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed. “Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart, an economist at the University of Maryland. “They’re wrong. And we can prove it.” Like a pair of financial sleuths, Ms. Reinhart and her collaborator from Harvard, Kenneth S. Rogoff, have spent years investigating wreckage scattered across documents from nearly a millennium of economic crises and collapses. They have wandered the basements of rare-book libraries, riffled through monks’ yellowed journals and begged central banks worldwide for centuries-old debt records. And they have manually entered their findings, digit by digit, into one of the biggest spreadsheets you’ve ever seen. Their handiwork is contained in their recent best seller, “This Time Is Different,” a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly

133 disastrous decisions. It is a panoramic opus, both geographically and temporally, covering crises from 66 countries over the last 800 years. The book, and Ms. Reinhart’s and Mr. Rogoff’s own professional journeys as economists, zero in on some of the broader shortcomings of their trade — thrown into harsh relief by economists’ widespread failure to anticipate or address the financial crisis that began in 2007. “The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.” “People almost pride themselves on not paying attention to current events,” he says. In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor. Much of that theory-driven work, critics say, is built on the same disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations. But in the wake of the recent crisis, a few economists — like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor — have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record. “There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.” [Bourdieu] ONE of Ken Rogoff’s favorite economics jokes — yes, there are economics jokes — is “the one about the lamppost”: A drunk on his way home from a bar one night realizes that he has dropped his keys. He gets down on his hands and knees and starts groping around beneath a lamppost. A policeman asks what he’s doing. “I lost my keys in the park,” says the drunk. “Then why are you looking for them under the lamppost?” asks the puzzled cop. “Because,” says the drunk, “that’s where the light is.” Mr. Rogoff, 57, has spent a lifetime exploring places and ideas off the beaten track. Tall, thin and bespectacled, he grew up in Rochester. There, he attended a “tough inner-city school,” where his “true liberal parents” — a radiologist and a librarian — sent him so he would be exposed to students from a variety of social and economic classes. He received a chess set for his 13th birthday, and he quickly discovered that he was something of a prodigy, a fact he decided to hide so he wouldn’t get beaten up in the lunchroom. “I think chess may be a relatively cool thing for kids to do now, on par with soccer or other sports,” he says. “It really wasn’t then.” Soon, he began traveling alone to competitions around the United States, paying his way with his prize winnings. He earned the rank of American “master” by the age of 14, was a New York State Open champion and soon became a “senior master,” the highest national title. When he was 16, he left home against his parents’ wishes to become a professional chess player in Europe. He enrolled fleetingly in high schools in London and Sarajevo, Yugoslavia, but rarely attended. “I wasn’t quite sure what I was supposed to be doing,” he recalls.

134 He spent the next 18 months or so wandering to competitions around Europe, supporting himself with winnings and by participating in exhibitions in which he played dozens of opponents simultaneously, sometimes while wearing a blindfold. Occasionally, he slept in five-star hotels, but other nights, when his prize winnings thinned, he crashed in grimy train stations. He had few friends, and spent most of his time alone, studying chess and analyzing previous games. Clean-cut and favoring a coat and tie these days, he described himself as a ragged “hippie” during his time in Europe. He also found life in Eastern Europe friendly but strained, he says, throttled by black markets, scarcity and unmet government promises. After much hand-wringing, he decided to return to the United States to attend Yale, which overlooked his threadbare high school transcript. He considered majoring in Russian until Jeremy Bulow, a classmate who is now an economics professor at Stanford, began evangelizing about economics. Mr. Rogoff took an econometrics course, reveling in its precision and rigor, and went on to focus on comparative economic systems. He interrupted a brief stint in a graduate program in economics at the Massachusetts Institute of Technology to prepare for the world chess championships, which were held only every three years. After becoming an “international grandmaster,” the highest title awarded in chess, when he was 25, he decided to quit chess entirely and to return to M.I.T. He did so because he had snared the grandmaster title and because he realized that he would probably never be ranked No. 1. He says it took him a long time to get over the game, and the euphoric, almost omnipotent highs of his past victories. “To this day I get letters, maybe every two years, from top players asking me: ‘How do I quit? I want to quit like you did, and I can’t figure out how to do it,’ ” he says. “I tell them that it’s hard to go from being at the top of a field, because you really feel that way when you’re playing chess and winning, to being at the bottom — and they need to prepare themselves for that.” He returned to M.I.T., rushed through what he acknowledges was a mediocre doctoral dissertation, and then became a researcher at the Federal Reserve — where he said he had good role models who taught him how to be, at last, “professional” and “serious.” Teaching stints followed, before the International Monetary Fund chose him as its chief economist in 2001. It was at the I.M.F. that he began collaborating with a relatively unfamiliar economist named Carmen Reinhart, whom he appointed as his deputy after admiring her work from afar. MS. REINHART, 54, is hardly a household name. And, unlike Mr. Rogoff, she has never been hired by an Ivy League school. But measured by how often her work is cited by colleagues and others, this woman whom several colleagues describe as a “firecracker” is, by a long shot, the most influential female economist in the world. Like Mr. Rogoff, she took a circuitous route to her present position. Born in Havana as Carmen Castellanos, she is quick-witted and favors bright, boldly printed blouses and blazers. As a girl, she memorized the lore of pirates and their trade routes, which she says was her first exposure to the idea that economic fortunes — and state revenue in particular — “can suddenly disappear without warning.” She also lived with more personal financial and social instability. After her family fled Havana for the United States with just three suitcases when she was 10, her father traded a comfortable living as an accountant for long, less lucrative hours as a carpenter. Her mother, who had never worked outside the home before, became a seamstress. “Most kids don’t grow up with that kind of real economic shock,” she says. “But I learned the value of scarcity, and even the sort of tensions between East and West. And at a very early age that had an imprint on me.”

135 With a passion for art and literature — even today, her academic papers pun on the writings of Gabriel García Márquez — she enrolled in a two-year college in Miami, intending to study fashion merchandising. Then, on a whim, she took an economics course and got hooked. When she went to Florida International University to study economics, she met Peter Montiel, an M.I.T. graduate who was teaching there. Recognizing her talent, he helped her apply to a top-tier graduate program in economics, at Columbia University. At Columbia, she met her future husband, Vincent Reinhart, who is now an occasional co-author with her. They married while in graduate school, and she quit school before writing her dissertation to try to make some money on Wall Street. “We were newlyweds, and neither of us had a penny to our name,” she says. She left school so that they “could have nice things and a house, the kind of things I imagined a family should have.” She spent a few years at Bear Stearns, including one as chief economist, before deciding to finish her graduate work at Columbia and return to her true love: data mining. “I have a talent for rounding up data like cattle, all over the plain,” she says. After earning her doctorate in 1988, Ms. Reinhart started work at the I.M.F. “Carmen in many ways pioneered a bigger segment in economics, this push to look at history more,” says Mr. Rogoff, explaining why he chose her. “She was just so ahead of the curve.” She honed her knack for economic archaeology at the I.M.F., spending several years performing “checkups” on member countries to make sure they were in good economic health. While at the fund, she teamed up with Graciela Kaminsky, another member of that exceptionally rare species — the female economist — to write their seminal paper, “The Twin Crises.” The article looked at the interaction between banking and currency crises, and why contemporary theory couldn’t explain why those ugly events usually happened together. The paper bore one of Ms. Reinhart’s hallmarks: a vast web of data, compiled from 20 countries over several decades. In digging through old records and piecing together a vast puzzle of disconnected data points, her ultimate goal, in that paper and others, has always been “to see the forest,” she says, “and explain it.” Ms. Reinhart has bounced back and forth across the Beltway: she left the I.M.F. in Washington and began teaching in 1996 at the University of Maryland, from which Mr. Rogoff recruited her when he needed a deputy at the I.M.F. in 2001. When she left that post, she returned to the university. Despite the large following that her work has drawn, she says she feels that the heavyweights of her profession have looked down upon her research as useful but too simplistic. “You know, everything is simple when it’s clearly explained,” she contends. “It’s like with Sherlock Holmes. He goes through this incredible deductive process from Point A to Point B, and by the time he explains everything, it makes so much sense that it sounds obvious and simple. It doesn’t sound clever anymore.” But, she says, “economists love being clever.” “THIS TIME IS DIFFERENT” was published last September, just as the nation was coming to grips with a financial crisis that had nearly spiraled out of control and a job market that lay in tatters. Despite bailout after bailout, stimulus after stimulus, economic armageddon still seemed nigh. Given this backdrop, it’s perhaps not surprising that a book arguing that the crisis was a rerun, and not a wholly novel catastrophe, managed to become a best seller. So far, nearly 100,000 copies have been sold, according to its publisher, the Princeton University Press. Still, its authors laugh when asked about the book’s opportune timing. “We didn’t start the book thinking that, ‘Oh, in exactly seven years there will be a housing bust leading to a global financial crisis that will be the perfect environment in which to sell this giant book,’ ” says

136 Mr. Rogoff. “But I suppose the way things work, we expected that whenever the book came out there would probably be some crisis or other to peg it to.” They began the book around 2003, not long after Mr. Rogoff lured Ms. Reinhart back to the I.M.F. to serve as his deputy. The pair had already been collaborating fruitfully, finding that her dogged pursuit of data and his more theoretical public policy eye were well matched. Although their book is studiously nonideological, and is more focused on patterns than on policy recommendations, it has become fodder for the highly charged debate over the recent growth in government debt. To bolster their calls for tightened government spending, budget hawks have cited the book’s warnings about the perils of escalating public and private debt. Left-leaning analysts have been quick to take issue with that argument, saying that fiscal austerity perpetuates joblessness, and have been attacking economists associated with it. Mr. Rogoff, because of his time at the I.M.F., has also come under fire. In the years before and during Mr. Rogoff’s tenure, critics including the prominent economist Joseph Stiglitz accused the I.M.F. of having a cold-hearted, doctrinaire approach to its work in poorer countries. Some of that criticism still clings to Mr. Rogoff. For his part, he contends that the I.M.F. did what it could for countries with intractable problems, and that the critics’ approaches would have made troubled economies even weaker. Perhaps because “This Time Is Different” is empirical rather than proscriptive, it has defied categorization. The New York Times Op-Ed columnist David Brooks, for example, praised the book as “the best explanation of the crisis” but referred to it as a history book, rather than a work of economic analysis, since it is “almost entirely devoid of theory.” (The implication being, of course, that genuine “economic analysis” must be hypertheoretical.) Of course, it’s not as if history is an entirely new ingredient in economic study. There have been other vibrant historical recountings of financial crises, including “Manias, Panics and Crashes,” the 1978 book by Charles Kindleberger. Such books have typically been narrative, though, unlike the data- intensive “This Time Is Different.” But even in its quantitative perspective and breadth, the book still stands on the shoulders of an economic classic, “A Monetary History of the United States: 1867-1960,” written by another great male-and-female pair of economists, Milton Friedman and Anna Jacobson Schwartz. “What Friedman and Schwartz did for the U.S. was heroic,” says Ms. Reinhart. “Ken and I have benefited from the use of the Internet to track down books, sources and experts to help us with our work. Friedman and Schwartz did not.” While Professors Reinhart and Rogoff may have had technological advantages in their research, they weren’t able to outsource much of the number-crunching to graduate students — in part because they wanted to be able to stay close to the data themselves, but also because few students are interested in or trained for that kind of work. The economics profession generally began turning away from empirical work in the early 1970s. Around that time, economists fell in love with theoretical constructs, a shift that has no single explanation. Some analysts say it may reflect economists’ desire to be seen as scientists who describe and discover universal laws of nature. “Economists have physics envy,” says Richard Sylla, a financial historian at the Stern School of Business at New York University. He argues that Paul Samuelson, the Nobel laureate whom many credit with endowing economists with a mathematical tool kit, “showed that a lot of physical theories and concepts had economic analogs.”

137 Since that time, he says, “economists like to think that there is some physical, stable state of the world if they get the model right.” But, he adds, “there is really no such thing as a stable state for the economy.” Others suggest that incentives for young economists to publish in journals and gain tenure predispose them to pursue technical wizardry over deep empirical research and to choose narrow slices of topics. Historians, on the other hand, are more likely to focus on more comprehensive subjects — that is, the material for books — that reflect a deeply experienced, broadly informed sense of judgment. “They say historians peak in their 50s, once they’ve accumulated enough knowledge and wisdom to know what to look for,” says Mr. Rogoff. “By contrast, economists seem to peak much earlier. It’s hard to find an important paper written by an economist after 40.” MICROECONOMICS — the field that focuses on smaller units like households and workers, as opposed to big-picture questions about how national economies function — has embraced real-world data-mining. (Think “Freakonomics.”) Macroeconomics has been slower to change, but the popular success of “This Time Is Different” and related work seems to be changing how macro practitioners approach their craft. It has also changed how policy makers think about their own mission. Mr. Rogoff says a senior official in the Japanese finance ministry was offended at the suggestion in “This Time Is Different” that Japan had once defaulted on its debt and sent him an angry letter demanding a retraction. Mr. Rogoff sent him a 1942 front-page article in The Times documenting the forgotten default. “Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.” CATHERINE RAMPELLThey Did Their Homework (800 Years of It) July 2, 2010 http://www.nytimes.com/2010/07/04/business/economy/04econ.html?_r=1&th&emc=th

138 Politics

July 2, 2010 Spend or Scrimp? Two Sides in White House Debate By JACKIE CALMES WASHINGTON — Not since the first years of the Clinton administration has a White House had to debate whether to give precedence to stimulating the economy or reducing budget deficits. Now, as the recovery shows signs of faltering, that debate is playing out within the Obama administration, with a twist compared to the 1990s: the economic and political teams have switched sides. While President Bill Clinton’s political advisers favored more spending and tax cuts coming out of the recession of the early 1990s and his economic team pushed to start reducing deficits, in President Obama’s circle the opposite is true. Political advisers are channeling the widespread public anger at deficits while the economic team argues that the government should further spur the economy to avert another recession. In Mr. Clinton’s day, the economic team, asserting that a credible commitment to fiscal responsibility would reassure financial markets and lead to greater long-term growth, won the argument in favor of deficit reduction, helped by moderate Democrats in Congress. These days, the Obama political team has the edge, again in the cause of emphasizing deficit reduction and with an assist from Congressional Democrats nervous about the midterm elections. Even so, the proponents of additional stimulus got more ammunition on Friday with the government’s release of disappointing jobs numbers for June, confirming that private sector hiring has slowed from earlier this year. The evidence of the shaky recovery underscored the stakes in the continuing debate in the White House and Congress, especially as states and cities are raising taxes and cutting tens of thousands of public employees to balance their budgets, and debt-laden European governments are retreating from stimulating their economies. “We still have a great deal of work to do to repair the economy and get the American people back to work,” Mr. Obama said on Friday. Yet the steps he highlighted to show the government’s concern — some public works projects — are part of the two-year stimulus package he won a month after taking office, rather than new initiatives. Over the last few weeks, Democrats in the Senate have failed to muster enough votes to pass a new package of measures to address the economic weakness, reflecting what some of them see as the political perils of further deficit spending. Within the White House, all of the Obama advisers, along with many outside economists, agree that both things are needed — additional stimulus this year and, before long, a clear sign that the government will soon take actions on taxes and entitlement spending, phased in over time, to reduce a debt that mounted during the recession to the highest levels since World War II. The advisers’ debate is over the timing and scale of any stimulus or deficit reduction. Those pressing for more stimulus measures include Christina Romer, the chairwoman of the Council of Economic Advisers; Jared Bernstein, economic adviser to Vice President Joseph R. Biden Jr.; and the Treasury secretary, Timothy F. Geithner, who took that message internationally to the Group of 20 summit meeting of developed nations last

139 weekend in Canada. Lawrence H. Summers, who as director of the National Economic Council tries to broker what he calls the “brakes-versus-accelerator” debates, nonetheless makes the economic arguments for an additional stimulus, officials say. More focused on deficits — or at least on positioning Mr. Obama to show his concern — are his chief strategist, David Axelrod, other political advisers and Rahm Emanuel, the White House chief of staff, according to Democrats. Their lone supporter among the top economic aides is Peter R. Orszag, the budget director, who will leave the administration this month. Mr. Axelrod, in an interview, said he often argues for emphasizing deficit reduction in part because “it’s my job to report what the public mood is.” He added, “I’ve made the point that as a matter of policy and a matter of politics that we need to focus on this, and the president certainly agrees with that.” But Mr. Axelrod said that he and Mr. Obama are also concerned that cutting the budget too soon could retard the recovery or even provoke a relapse like in the Depression era, when the government’s premature turn from stimulus to cutting deficits spawned another recession in 1937. So while the administration is pursuing “a long-term strategy for reining in these deficits,” Mr. Axelrod said, “I’m very much allied with the economic group, because even as a political matter it would be very shortsighted to take steps that would send us backward.” Critics on the left, however, say that Mr. Obama has hurt the current effort to pass a final spurt of stimulus spending and tax cuts by his rhetorical emphasis on cutting future deficits, along with recent policies for a three-year freeze on domestic appropriations, more power to rescind spending and his bipartisan fiscal commission to recommend ways to shrink the long-term debt. Mr. Obama’s antideficit talk has stoked a skittishness among Democratic lawmakers about adding to the deficit, the critics say, while his failure to campaign consistently for the stimulus measures he proposed in his State of the Union address and in the subsequent budget have allowed those proposals to languish in Congress. The president and his advisers “want economic stimulus but they fear the politics, especially in the Senate, are working against them,” said Roger Hickey, co-director of the liberal group Campaign for America’s Future. “But I think they’ve contributed to that climate of fear about deficits.” Last weekend at the G-20 conference, however, Mr. Obama and Mr. Geithner made a strong pitch for stimulus measures and took issue with Europeans’ plans to cut spending and raise taxes instead. According to administration officials, the president and his Treasury secretary figured the political risk back home of being seen as arguing against slashing deficits was less than the economic risk of another global downturn. In the United States, the administration’s ambivalence about promoting legislation to help create jobs, given public opposition to rising debt, reflects a shift from late last year when the economy, while recovering, was still shedding jobs. Then, officials say, it was the political advisers who told the economic team to come up with a big package of new and extended stimulus proposals. By February, in his annual budget Mr. Obama outlined $266 billion in “temporary recovery measures” to save or create jobs. But as antideficit fever built, and senators grew more nervous about another high-cost stimulus package, the White House advertised only about $100 billion of that. Now the entire agenda is in doubt. JACKIE CALMESSpend or Scrimp? Two Sides in White House Debate July 2, 2010 http://www.nytimes.com/2010/07/03/us/politics/03memo.html

140 http://yglesias.thinkprogress.org/ Results Matters Most in Politics

Jul 3rd, 2010 at 12:58 pm

I don’t know if it’s accurate, but I found this Jackie Calmes story in the NYT to be bone- chilling and I doubt she just fabricated it:

Not since the first years of the Clinton administration has a White House had to debate whether to give precedence to stimulating the economy or reducing budget deficits. Now, as the recovery shows signs of faltering, that debate is playing out within the Obama administration, with a twist compared to the 1990s: the economic and political teams have switched sides.

While President Bill Clinton’s political advisers favored more spending and tax cuts coming out of the recession of the early 1990s and his economic team pushed to start reducing deficits, in President Obama’s circle the opposite is true. Political advisers are channeling the widespread public anger at deficits while the economic team argues that the government should further spur the economy to avert another recession.

The President should almost never side with his political team in a dispute of this nature. The reason is that the single most important factor determining a president’s political fortunes is the fate of the economy. Tradeoffs can exist in the form of things that are short-term economic pain for long-term economic pain. But there’s no real tradeoff between “unpopular but growth-boosting measures that ultimately make you more popular” and “popular but growth-strangling measures that ultimately make you less popular.” When it comes to macroeconomic management, it’s results that matter most. http://yglesias.thinkprogress.org/2010/07/results-matters-most-in- politics/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+matt hewyglesias+%28Matthew+Yglesias%29

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Zapatero se reúne hoy con el economista jefe del FMI Olivier Blanchard visita España dos semanas después del encuentro del presidente con el máximo responsable del organismo EL PAÍS - Madrid - 02/07/2010 Dos semanas después del encuentro entre José Luís Rodríguez Zapatero y el máximo responsable del Fondo Monetario Internacional (FMI), el francés Dominique Straus-Khan, hoy visita España el economista jefe del organismo. El presidente del Gobierno recibirá en el Palacio de la Moncloa al economista jefe del FMI, Olivier Blanchard. El pasado mes de mayo, Blanchard afirmó que el sistema de negociación colectiva de España tenía "efectos perversos" 1, al considerar que la mayoría de las grandes empresas son las que determinan los salarios para todos los sectores. Está por ver cuál será ahora su valoración tras la reforma laboral aprobada por el Gobierno2 de Zapatero el pasado junio y si va en la misma dirección que la de Graus-Khan. El francés alabó la reforma laboral 3-"va absolutamente en la buena dirección", dijo- y la actuación de Rodríguez Zapatero, "en España hay un verdadero liderazgo que no elude el impacto que puedan tener sis decisiones". La visita de Blanchard se produce justo un día después de que la agencia de calificación Moody's rebajase la nota de la deuda a cinco comunidades españolas 4(Castilla y León, Extremadura, Madrid, Murcia y Castilla La-Mancha) y de que haya anunciado que planea rebajar la calificación de la deuda española uno o dos escalones en tres meses. http://www.elpais.com/articulo/economia/Zapatero/reune/hoy/economista/jefe/FMI/elpepueco /20100702elpepueco_1/Tes

La AEB ratifica la solvencia del Popular frente a un artículo de 'Financial Times' EL PAÍS - Madrid - 03/07/2010 El poderoso diario económico Financial Times (FT) fue ayer centro de críticas en el mercado financiero español. El diario británico incluyó al Popular en una lista de 20 entidades que tendrán que ampliar capital tras la publicación de las pruebas de resistencia (stress test, en términos anglosajones), sin citar fuentes. Además decía que el tercer banco español no cotiza en Bolsa, aunque en realidad está entre los 35 valores más negociados. A continuación añadía que la situación del Popular "podría poner la deuda del Gobierno español bajo más presión si el rescate del sector por parte del Estado sale más caro de lo previsto".

1 http://www.elpais.com/articulo/economia/FMI/recomienda/indemnizacion/despido/progresiva/elpepueco/20100511elpepueco_1/Tes 2 http://www.elpais.com/articulo/espana/Gobierno/aprueba/hoy/reforma/laboral/garantias/convalidarla/elpepuesp/20100616elpepunac_1/Tes 3 http://www.elpais.com/articulo/economia/Strauss/Kahn/Zapatero/asienta/bases/decadas/crecimiento/elpepueco/20100618elpepueco_2/Tes 4 http://www.elpais.com/articulo/economia/Moody/s/rebaja/deuda/comunidades/autonomas/elpepueco/20100701elpepueco_4/Tes

142 Pese a esta información, la prima de riesgo de España bajó ayer desde 201 a 194 puntos básicos por encima del bono alemán. La acción del Popular no tuvo caídas en la sesión de Bolsa y cerró con una subida del 1,37% frente al incremento del 0,79% del Ibex 35. Tras el desmentido rotundo del Popular, la Asociación Española de Banca (AEB) defendió que el banco español es uno de los más solventes y capitalizados de Europa. La AEB indicó a Europa Press que debía tratarse de una errata de FT y que no debía referirse al Banco Popular. http://www.elpais.com/articulo/economia/AEB/ratifica/solvencia/Popular/frente/articulo/Fina ncial/Times/elpepueco/20100703elpepieco_8/Tes

ANÁLISIS: MERCADOS DESDE EL PARQUÉ La eurozona supera la prueba de liquidez RAFAEL VIDAL 03/07/2010 La tranquilidad vuelve a los mercados de valores europeos, una vez resuelta la reciente crisis aunque, en realidad, hay quien prefiere considerar que lo que se ha puesto a prueba es la capacidad de Europa para gobernar una supuesta crisis de liquidez. La Bolsa española, una de las más castigadas por las dudas de algunos analistas, fue la que mejor parada salió ayer, con avances generalizados que apenas permitían destacar algún sector concreto. La decisión de Red Eléctrica de adquirir activos de transporte a Endesa, por un importe de 1.400 millones de euros, con cargo a deuda, enfrentó al mercado con las casas de análisis, que castigaron a Red Eléctrica por la incertidumbre normativa en torno al sector eléctrico, en tanto las acciones subían el 3,66% en la Bolsa. En el mercado secundario de deuda también se retiró la presión sobre la deuda española que, últimamente, siempre aumenta cuando hay subasta, y la rentabilidad del bono a 10 años descendió al 4,57%, con lo que el diferencial con Alemania bajó de los 200 puntos básicos. Cada vez son más los inversores que aceptan que las tensiones se están trasladando de Europa a Estados Unidos, bien porque la crisis europea no era como se quería presentar, bien porque el debilitamiento de la economía estadounidense reclama más atención. La tasa de paro descendió en Estados Unidos al 9,5% en junio, aunque se perdieron 125.000 empleos. La batería de datos económicos conocidos a lo largo de esta semana apuntan hacia un enfriamiento serio de la economía estadounidense y algunos analistas señalan a la fuerte caída del precio del petróleo en los últimos días como el mejor indicador adelantado de la debilidad de la economía para los próximos meses. El Ibex 35 recuperó en esta sesión el 0,79%, para cerrar la semana en 9.250,80 puntos, el 2,98% por debajo del nivel del viernes anterior. Como en las jornadas anteriores, la sesión estuvo sobrada de volatilidad, algo propio de los momentos de incertidumbre, en los que es la inversión a corto plazo la que marca la pauta. La contratación en el Mercado Continuo bajó hasta 4.430,66 millones de euros, destacando otra vez las operaciones del "mercado de bloques" con títulos de BBVA. En el "mercado abierto" se movieron 1.879,98 millones de euros. http://www.elpais.com/articulo/economia/eurozona/supera/prueba/liquidez/elpepueco/201007 03elpepieco_12/Tes

143 The Baseline Scenario What happened to the global economy and what we can do about it The G20’s China Bet By Simon Johnson The G20 communiqué, released after the Toronto summit on Sunday, made it quite clear that most industrialized countries now have budget deficit reduction fever (see this version, with line-by-line comments by me, Marc Chandler and Arvind Subramanian). The US resisted the pressure to cut government spending and/or raise taxes in a precipitate manner, but the sense of the meeting was clear – cut now to some extent and cut more tomorrow. This makes some sense if you think that the global economy is in robust health and likely to grow at a rapid clip – say close to 5 percent per annum – for the foreseeable future. With high global growth, it will matter less that governments are cutting back and unemployment will come down regardless. Taking this into account, the IMF is actually predicting (as cited prominently by the G20) that budget “consolidation” actually raise growth over a five-year horizon. There is no question that some weaker European countries, such as Greece, Portugal, and Ireland, had budget deficits that were out of control. Particularly if they are to pay back all their foreign borrowing – a controversial idea that remains the conventional wisdom – these countries need some austerity. But what about those larger countries, which remain creditworthy, such as Germany, France, the UK, and the US? If these economies all decide to reduce their budget deficits, what will drive global growth?The answer in Toronto was obvious: China. China is only about 6 percent of the world economy, measured using prevailing exchange rates, but it has a disproportionate influence on other emerging markets due to its seemingly insatiable demand for commodities. It also has a relatively health fiscal balance – and its fiscal stimulus, working mostly through infrastructure investment, did a great job in terms of buffering the real economy in the face of declining world trade in 2008- 09. Now, however, the Chinese government is trying to slow the economy down – there is fear of “overheating”, which could mean inflation or rising real wages (depending on who you talk to). Chinese economic statistics are notoriously unreliable, so reading the tea leaves is harder than for some other economies, but most of the leading indicators suggest that some sort of slowdown is now underway. The G20 knows this, so the bet is that China will pull off a “soft-landing”, with growth staying in the region of 8-9 percent. China’s recent exchange rate appreciation against the dollar does not help in this regard, and this is one reason why pressure for further appreciation from other governments is likely to remain muted. Even the United States, above all, wants a robust China. Talking to Chinese experts – I was in Beijing over the weekend – there are three major worries. 1) There is already a great deal of wasteful investment in infrastructure. At some level, there is a desire to clean this up and make it more sensible. This implies slower growth. 2) There is much discussion of “overcapacity” in the state sector. Again, there is interest in addressing this – although it is not an easy problem. In any case, this further lowers the

144 incentive for state investment both directly and through various forms of subsidies to government-backed enterprises. 3) The incentives for local government officials have been heavily weighted towards boosting GDP growth; they move up (and presumably down) the government and party hierarchy based on how they do in this dimension. There is now a great deal of thinking that it would be better to also include other objectives, such as impact on the environment. This makes sense – air and water quality are hot issues – but it would also imply slower growth. China’s reported GDP numbers are likely remain robust – the reported statistics are very much part of the broader government management process. But the economy could still slowdown in ways that would impact commodity prices – these are the key variables to watch, including for energy and metals used in industrial production (e.g., for the link to Latin America, see the NYT today). The irony, of course, is that China is also a leading candidate to be at the epicenter of the next boom. In a sense this is what the G20 would like, unless the boom becomes debt-based and unsustainable, as in emerging markets during the 1970s or Japan in the late 1980s. The G20 is betting that China can keep its growth high enough to sustain the global economy while also not getting drawn into some sort of bubble – particularly one that would involve big Western banks. Given the nature of China and the volatility of global capital flows – international investors love you without limit, until the moment they leave you – this is quite a bet. We should also not overestimate the ability of the Chinese government to fine tune its economy. To be sure, the authorities have done well both in terms of high average growth and in terms of managing the impact of regional and global cycles over the past 20 years. Can they really do so well indefinitely? An edited version of this post appeared this morning on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire article, please contact the New York Times. Written by Simon Johnson July 1, 2010 at 6:00 am http://baselinescenario.com/2010/07/01/the-g20%e2%80%99s-china-bet/#more-7804

145 Opinion

July 1, 2010 Myths of Austerity By PAUL KRUGMAN When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions. Which brings me to the subject of today’s column. For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed. This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy. Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off. What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.” Nonetheless, every few months we’re told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight uptick in long- term interest rates was greeted with near hysteria: “Debt Fears Send Rates Up,” was the headline at The Wall Street Journal, although there was no actual evidence of such fears, and Alan Greenspan pronounced the rise a “canary in the mine.” Since then, long-term rates have plunged again. Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don’t slash spending immediately. But don’t worry: spending cuts may hurt, but the confidence fairy will take away the pain. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean- Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”

146 What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.) Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as I can tell, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today. For example, Ireland’s era of austerity-with- growth in the 1980s depended on a drastic move from trade deficit to trade surplus, which isn’t a strategy everyone can pursue at the same time. And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk. Other good soldiers, like Latvia and Estonia, have done even worse — and all three nations have, believe it or not, had worse slumps in output and employment than Iceland, which was forced by the sheer scale of its financial crisis to adopt less orthodox policies. So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation. http://www.nytimes.com/2010/07/02/opinion/02krugman.html?_r=1&th&emc=th

June 30, 2010, 6:09 pm

The Icelandic Post-crisis Miracle

Iceland is, of course, one of the great economic disaster stories of all time. An economy that produced a decent standard of living for its people was in effect hijacked by a combination of free-market ideology and crony capitalism; one of the papers (pdf) at the conference I just attended in Luxembourg shows that the benefits of the financial bubble went overwhelmingly to a small minority at the top of the income distribution: Olafsson and Kristjansson And in the process of building short-lived financial empires, a handful of operators built up enormous debts that their fellow citizens are now expected to repay. But there’s an odd coda to the story. Unlike other disaster economies around the European periphery – economies that are trying to rehabilitate themselves through austerity and deflation — Iceland built up so much debt and found itself in such dire straits that orthodoxy was out of the question. Instead, Iceland devalued its currency massively and imposed capital controls. And a strange thing has happened: although Iceland is generally considered to have experienced the worst financial crisis in history, its punishment has actually been substantially less than that of other nations. Here’s GDP: Eurostat And here’s employment: Eurostat The moral of the story seems to be that if you’re going to have a crisis, it’s better to have a really, really bad one. Otherwise, you’ll end up taking the advice of people who assure you that even more suffering will cure what ails you. http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/?pagemode=print

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China's grand strategy in a post-western world Author: William A Callahan Summary: A number of different visions of China’s future as a leading world power are competing for public attention and influence. Among them are populist ideas that challenge Beijing’s official rhetoric about “building a harmonious world”, says William A Callahan. There is growing debate inside the People’s Republic of China about the country’s proper strategic goals. Many intellectuals and policy-makers are asking how China can convert its new economic power into enduring political and cultural influence around the globe. The key question they are seeking to answer is: “How would China order the (post-western) world?” Beijing’s official view - first outlined by Hu Jintao, China’s president, at the United Nations [1] in September 2005 - is that China is guided by the notion of “building a harmonious world” (和谐世界). But two other visions of China’s purpose in the global arena are growing in influence alongside this one: an unofficial view of a Chinese-style utopian world society, and a quasi-official description of how China can compete to become [2] the world’s “number-one power”. This article examines these different visions of China’s grand strategy in a post-western world, and suggests briefly what kind of response western powers might be best advised to take to them. Official policy: "building a harmonious world” The concept of world order embodied in the idea of “harmonious world” (hexie shijie) is an extension into the arena of foreign relations of Hu Jintao’s [3] domestic-policy equivalent, the “harmonious society". Indeed, Chinese officials and scholars regularly proclaim “harmonious society” - whose formal aim is to use state power to “close the wealth divide and ease growing social tensions” - to be “the model for the world”. By this logic, writers in China explain “building a harmonious world” as a new and better route to “lasting peace and common prosperity” that will allow different civilisations to coexist in the global community. In practice, the official [4] view of hexie shijie lacks detail. The Beijing government tends to describe the policy in terms of vague platitudes, making it hard (for example) to establish whether the strong state [5] thought essential to building a “harmonious society” is also needed to build a “harmonious world”. Other channels are more outspoken; the Hong Kong Wen Wei Po [6] has called on Beijing to be the “‘formulator, participant and defender of world order,’ in order to push the entire world toward harmony.” The ambiguity underlying hexie shijie leaves ample room for varied understandings, where “harmonious world” is understood either as a relatively benign [7] aspiration or as a potentially more ominous ambition of “harmonising the world”. This intellectual vacuum at

148 the heart of the strategic concept also creates space for alternative views of China’s role in shaping the post-western [8] world order. Idealistic world society: Zhao Tingyang’s Tianxia System A group of theorists has emerged in the last decade who argue that “the Chinese century” needs to be understood in terms of distinctively Chinese concepts. Zhao Tingyang’s The Tianxia System: The Philosophy for the World Institution (2005) follows Beijing’s “go global [9]” economic policy to argue that Chinese culture has to go global as well. If China is to be a world power, it must “create new world concepts and new world structures” that exploit its own “resources of traditional thought.” At the core of his own proposal, Zhao - who works at China’s largest think-tank (CASS [10]) - deploys the traditional concept of Tianxia, which prescribes a form of selfless global unity [11] that is at once geographical, psychological, and institutional. Zhao argues that China is revealed in light of this concept as naturally peaceful, orderly and generous, and that Chinese world order will embody the same qualities - in contrast to western hegemony, which has led to violence, chaos and oppression around the world. The establishment of the unified Tianxia system will enable a global hierarchy where order is valued over freedom, ethics over law, and elite governance over democracy and human rights. The official Chinese view of “harmonious world” divides the world into civilisations led by great powers that can have different social systems; in this sense it describes the emerging status quo of a multipolar world. By contrast, Zhao’s unified Tianxia system does not allow for different points of view to coexist; it both outlines [12] a utopia imagined for the long-term future and appeals to the more activist “harmonising-the-world” thread of Chinese foreign policy. The Tianxia System’s main problem [13] is that it doesn’t explain how to get from an unstable and often violent present to the harmonious future. Strategic competitor: Liu Mingfu’s The China Dream Liu Mingfu’s book The China Dream: The Great Power Thinking and Strategic Positioning of China in the Post-American Age (2010) provides another view of future world order. Liu - who teaches at China’s National Defense University [14]- departs from Beijing’s policies of peaceful rise and “harmonious world” by arguing that to support its economic rise, China needs to pursue a “military rise” that allows it to rival American hegemony. A purely “economic nation” (like Japan) is characterised as a plump lamb waiting in the market to be preyed upon by militarily strong countries, declares Liu; a true great power must convert economic strength into military power in order to become the world’s number one. The book presents global politics as a quasi-Olympian competition between civilisations, themselves represented by great powers. Liu calls on China to take advantage of the current “period of strategic opportunity” to surpass [15] American power, and thus “sprint to the finish” to become the global “champion”; that is, “world number one.” The China Dream doesn’t see conflict with the United States as inevitable, but it is informed by a deterrence logic: “China’s military rise is not to attack America, but to make sure that China is not attacked by America.” Liu uses this approach to stress that China must seek peace through strength: the peaceful rise must include a “military rise with Chinese characteristics that is defensive, peaceful, limited, necessary, important and urgent.” The China Dream’s understanding of international politics thus differs from both the official Beijing view of hexie shijie and Zhao Tingyang’s Tianxia system. Rather than “build a harmonious world”, Liu Mingfu envisages [16] a grand geopolitical struggle where competition between nations is natural and good; rather than surpass the state-centric

149 international system to build Tianxia’s unified world order, Liu sees international relations (IR) quite narrowly as “US-China relations”; rather than the win-win solutions suggested by both, The China Dream sees IR as a zero-sum game where victory and defeat are total. “If China in the 21st century cannot become world number one, cannot become the top power, then inevitably it will become a straggler that is cast aside.” While Zhao Tingyang’s The Tianxia System does not chart a clear path to the harmonious world he imagines, Liu Mingfu’s The China Dream is unclear about what China will do once it becomes the champion nation. Yet Liu’s book is fascinating because it reveals the tensions and contradictions of outlook that have accompanied China’s rise. Even as it articulates the goal of China’s global pre-eminence, Liu veers between two positions: a “catch-up mentality” that frames China’s rise within the current international system’s laws, norms and structures, and sees China’s goal as to “surpass” America; and a “new-era mentality” that stresses China’s uniqueness in the geopolitical competition between different civilisational (and racial) models, and thus challenges existing norms. China’s global path Many Chinese texts, official and unofficial, give the impression that China’s victory in the global competition is guaranteed, if not imminent. In fact the PRC is unlikely to catch up [17] with the United States - economically, politically, culturally or militarily - in the next few decades. But the disjuncture between grand intentions and middling capabilities could itself lead to conflict, for Beijing is effectively promising its citizens much more than it can deliver in terms of global power and influence. This “propaganda gap” is likely to increase tensions between China and the US in the next few years - not least as the approach of Beijing’s transition to the “fifth generation” leadership that will assume power in 2012 after the retirement of Hu Jintao and Wen Jiabao is likely to be accompanied by the emergence of populist voices. Indeed, the prominent strategist Yan Xuetong recently lamented the declining status of international relations [18] in the face of popular (and populist) views from outside the security-studies establishment. Many of these populist strategists in China see international politics as a hostile zero-sum game, a grand bipolar civilisational struggle [19], where victory and defeat are total. The views of Zhao Tingyang and Liu Mingfu are interesting and influential in part because they are relative outsiders who offer a sense of the parameters within which vague official policies (such as “harmonious world”) are formulated, implemented, defended – and rejected. The three approaches considered here - hexie shijie, Tianxia, and “world number one” - do not exhaust all the visions on offer for China’s grand strategy in a post-western world. But considering them together suggests that the best way to address the developing debate in China is to with words and actions that are positive-sum and multilateral, which engage China at various levels, and in both official and unofficial spaces. In this perspective, the main issue is not what to do about China’s many-dimensional rise, but how to keep the bumps along China’s development road from provoking a hyper-nationalist backlash. Sideboxes 'Read On' Sidebox: William A Callahan, China: The Pessoptimist Nation [20] (Oxford University Press, 2010) Kerry Brown, Friends and Enemies: The Past, Present and Future of the Communist Party of China [21](Anthem Press, 2009) Foreign Policy [22] Chinese Academy of Social Sciences [10] chinadialogue [23] China Leadership Monitor [24]

150 The China Beat [25] Susan L Shirk, China: Fragile Superpower [26] (Oxford University Press, 2007) China Digital Times [27] China Elections and Governance [28] Sujian Guo, China's 'Peaceful Rise' in the 21st Century [17] (Ashgate, 2010) Sidebox: William A Callahan is professor [29] of international politics at the University of Manchester. His books include Contingent States: Greater China and Transnational Relations [30] (University of Minnesota Press, 2004) and Cultural Governance and Resistance in Pacific Asia [31] (2006). His latest book is China: The Pessoptimist Nation [20] (Oxford University Press, 2010) Also by William A. Callahan in openDemocracy: "A new approach to human rights (and China) [32]" (24 February 2010)

Related stories: A new approach to human rights (and China) [32] China and America: the uses of vulnerability [33] Beijing’s credibility crisis [34] China’s political tunnel [35] China: inside strain, outside spleen [36] China: democracy in action [37] Tiananmen, 1989-2009 [38] Gao Zhisheng and China's question [39] Charter 08: a blueprint for China [40] Chinese nationalism in the global era [19] China and Liu Xiaobo: the weakness of strength [41] China's anniversary tempest [42] China's civil society: breaching the Green Dam [43] China’s seasonal politics [44] China’s shadow sector: power in pieces [45] Chimerica: Obama visits Beijing [46] Xinjiang, Tibet, beyond: China's ethnic relations [47] China’s Tiananmen moment: the party rules [48] China goes global [9] China’s coming struggle for power [49] http://www.opendemocracy.net/print/54951

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U.S. housing market remains fragile despite low mortgage rates By Dina ElBoghdady Washington Post Staff Writer Friday, July 2, 2010; A01

After showing signs of a fledgling recovery from the worst downturn in decades, the U.S. housing market appears to be heading back toward the doldrums, as the expiration of a lucrative tax credit for buyers and increased uncertainty about the economy cause home sales to plummet. The sudden weakness in residential real estate has struck nearly every region of the country, according to recent government and industry data, driving down sales of new and previously owned homes alike in May. On Thursday, the National Association of Realtors said an index that measures sales contracts signed on existing homes plunged 30 percent in May, more than twice what analysts had forecast, to the lowest level since the group started tracking the numbers in 2001. Those sharp declines come despite record-low mortgage rates and historically cheap home prices. The market's renewed fragility highlights concerns about whether the U.S. economy will hurtle back into recession and illustrates the impact of the nation's high unemployment rate, now at 9.7 percent. On Friday, the government will issue jobless figures for June that could signal what is in store for housing and economic growth.

As long as people are without jobs or fear losing their livelihoods, they are unlikely to commit to buying a home and saddling themselves with 30 years of mortgage payments. "It sounds simplistic but it bears repeating: 'No job = No house,' " Mike Larson, an analyst with Weiss Research, wrote in a note to clients Thursday. "With so many Americans unemployed or underemployed, the housing market is going to keep hurting." In a report last month, Harvard University's Joint Center for Housing Studies singled out high joblessness as "one of the biggest drags" on the market. Based on past downturns, the report concluded that job growth is highly correlated to a sustained housing recovery, even more so than falling mortgage interest rates.

152 Many housing analysts are rethinking their predictions for the market's performance for the year. More than half of the 106 economists and analysts surveyed by Macromarkets in June said they expect a dip in home prices; that's up from 40 percent in May. Despite the flash of pessimism, many economists expect the market to stabilize, but they won't have a clean read on its direction until the fall or winter, when the lingering effects of the tax credit clear the system. That credit, which expired April 30, heavily distorted normal home sales patterns by enticing people to buy homes earlier than they had planned, thereby eating into future sales, economists said. "The tax credit was like a Band-Aid over the housing market," said Mark Vitner, a senior economist at Wells Fargo Securities. "Now that the Band-Aid has been ripped off, we've found that the wound has not quite yet healed." Surprising drops Home sales were expected to decline once the credit ended, but May's acute drops have surprised many analysts. If the trend continues through the rest of the year, it could upend the market's tepid rebound and undermine the broader economy. The unsteadiness is further reflected in the fact that the average rate on a 30-year fixed-rate mortgage hit a record low of 4.65 percent this week, but applications for home-purchase mortgages were down for all but one of the past eight weeks, slipping 3.3 percent last week, according to industry data. Complicating the recovery's prospects is an excess supply of unsold homes on the market, swelled in part by increasing numbers of foreclosed properties for sale. Even though the number of homes on the market is down significantly from its peak, the national inventory of vacant homes for sale or rent remains uncomfortably high at 6.5 million. That's 2 million units more than the market needs, Vitner said. Mark Zandi, chief economist at Moody's Economy.com, said he expects the glut of unsold homes will rise because lenders are starting to sell more foreclosed properties to the public. The number of foreclosures for sale rose 11 percent in the first quarter from the previous quarter -- the first quarterly increase since mid-2008, Zandi said. Many lenders have come under political pressure to delay foreclosures and modify troubled loans. But as they get a better handle on which loans are unsalvageable, they are starting to complete more foreclosures and put them up for sale, Zandi said. Government data released last month show that the number of foreclosures completed by the nation's largest national banks and federally regulated thrifts jumped 19 percent in the first quarter from the previous one. Pulling down values Once those foreclosures hit the market, however, they sell at steep discounts and pull down the values of surrounding homes. If the share of these distressed sales rise, as many economists predict, prices will suffer. The recently expired tax break may have diluted the impact of foreclosures by boosting the number of traditional sales, said housing economist Tom Lawler. It also encouraged anxious buyers to bid up prices so they could make their purchase before the tax credit program ended, he said.

153 The tax credit offered up to $8,000 to some first-time buyers and $6,500 for certain repeat buyers. To qualify, buyers had to sign a contract by April 30 and close by June 30. But lenders and real estate agents reported widespread delays in processing a crush of mortgage applications in time for the June deadline. The Realtors group estimates that as many as 180,000 could miss out on the credit as a result of the backlog. To keep the momentum going, Congress week voted this week to extend the closing date on the tax credit to Sept. 30. President Obama is expected to sign the measure Friday morning. With the government's incentives for buyers gone by early fall and a cloudy employment picture, economists seem more keenly aware of the fragile nature of the housing sector's health. "We're kind of sitting here in low tide," said Stuart Hoffman, chief economist at PNC Financial. "We're not sure if the tide is coming in and we're about to drown, or if it's moving out and we'll be left standing there dry as a bone." http://www.washingtonpost.com/wp- dyn/content/article/2010/07/01/AR2010070106483.html?wpisrc=nl_headline

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Eurointelligence Daily Morning Newsbriefing Will stress tests lead to recapitalisation?

02.07.2010 Bankers predict that stress tests will lead to the recapitalisation of up to 20 European banks, leading to an estimate €30bn of new capital injections; Weber told Landesbanken that they should have recapitalisation plans; the US ISM purchasing managers index is still expanding, but at a slower rate; after relatively low demand in a 3-m auction, demand for the 6-day tender was relatively high – at over €100bn; France aims to save some €3.5bn in defence spending over the next three years; Germany wants to expire the crisis fund, a stimulus measure to maintain investment; Samual Brittan makes the case for nominal GDP targeting; Simon Johnson says the G20 is too optimistic on China; Belgium, meanwhile, took over the EU presidency, and nobody cares.

02.07.2010 Will stress tests lead to recapitalisation?

Bankers and analysts expect up to 20 of Europe’s banks to be forced into cash calls as a result of this month’s stress tests, raising up to €30bn of fresh equity amid persistent unease about the outlook for European banks and eurozone sovereign debt, reports the FT. The news came as it emerged that Axel Weber told banks at a meeting on Wednesday that they should prepare emergency capital-raising plans in case they fail the stress tests. (Note also that there are different accounts what actually happened at the meeting. Yesterday we listed a news report according to which Weber supported national stress test, and only partial publication of the results. We also think that Germany is try to put the brakes on the process).

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Manufacturing activity is slowing Manufacturing activity continued to expand in June, though the pace of expansion was again slower in most countries. The ISM purchasing manager indexes suggest that only four countries including Italy experienced faster growth than the previous month, Germany maintained its top position, but manufacturing growth slowed down more than expected in Asia and the US. Wall Street Journal blog list the indices by country. Relatively high demand for six days tender Yesterday, the six days tender of the ECB attracted €111.2bn, allocated to 78 banks. This is relatively high suggesting that there is still some excess liquidity in the market. But analysts are relieved that even with the six day tender liquidity in the eurozone financial system has fallen considerably this week (FT Deutschland). The six day tender was to bridge between the expired €442bn 12-month tender and the ECB’s weekly Main refinancing operation, which saw pretty heavy demand of €162bn fir 157 banks, according to FT Alphaville. The other roll-over bridge was the three-month tender yesterday, which saw lower than expected demand of €132bn. Another posting on FT Alphaville notes that half of the €442 “was used for what was once seen as riskless’ carry-trade. Only the other half was probably used as pure bank funding.” Assuming no bank uses the liquidity for carry trade today, the €111.2bn at the six day tender and the €132bn in the three month tender is still relatively high. Belgium took over EU presidency Relatively unreported is the event that Belgium took over the EU presidency yesterday, and this in a time when its own government is still in transition. Le Monde reports that Yves Leterme is continuing to run current affairs at least until the new government coalition has been built. After a triumphant victory of the Flemish separatist party at the general elections in June, the new government is expected to be installed in October at the earliest. Didier Reynders argues that for the EU it is preferable that Leterme continues until the end of the year though the Belgian authorities assured that they are well prepared. Amid these internal difficulties, Belgium intends to run a modest presidency schedule, in contrast to Spain previously. France to save 3.5bn in defence over three years France is planning to save €3.5bn in its defense budget over the period 2011-2013, reports La Tribune. The Defence ministry thereby hopes to benefit from €2bn of extra income from sales of casern buildings and telecommunications. Savings are expected from unrealised plane order programms and some efficiency in purchases. Germany to end special crisis fund Some of what constitutes “austerity” is merely an ending of stimulus programme. Frankfurter Allgemeine has the story that Germany’s economic minister Rainer Bruderle wants to end the €115bn crisis fund, set up during the crisis to help investment, by the end of this year. So far only €13bn have been taken up – partly because the government linked the granting of funds to strict conditions. The most spectacular rejections was for a request from General Motors to maintain its ailing Opel activities in various German production sites.

156 Samuel Brittan: A great idea whose has come Those of us who know Samuel Brittan will not be surprised to see another column on the need for nominal GDP targeting. This has been one of his recurrent themes over several decades now. But it may just be the kind of great idea whose time may finally have arrived – as the framework of inflation targeting, which seemed to work so effortlessly before the crisis becomes increasingly challenging – from a practical point of view. (It was always a challenge from a theoretical viewpoint). At a time like this, the attractions of nominal GDP target are fairly obvious. Brittan says it would provide overall macroeconomic stability, with minimal inflation on average – though such a policy might generate some inflation at a time of low growth. But Brittan is also aware of the problem associated with nominal GDP targeting. “The answer to “How do you achieve the nominal GDP objective?” is through the normal instruments of monetary and fiscal policy. All nominal GDP can do is to give some sense of direction. It is important not to oversell the nominal GDP. It is no use, for example, to the short-termist. Estimates for this variable are published in the UK every three months, with a lag of a further two. Doubtless if there were sufficient interest, the data could be improved. Even so, it would still fluctuate erratically from quarter to quarter; and, to obtain a meaningful trend, it would be best to take a moving average. Nor would it avoid the need to watch for asset bubbles as a separate concern.” Simon Johnson on China In a very interesting post, Simon Johnson makes the point that the entire strategy of the G20 is based on the assumption of a soft landing in China. He says this is a very heroic, and possibly desperate assumption to make. “The G20 is betting that China can keep its growth high enough to sustain the global economy while also not getting drawn into some sort of bubble – particularly one that would involve big Western banks. Given the nature of China and the volatility of global capital flows – international investors love you without limit, until the moment they leave you – this is quite a bet. We should also not overestimate the ability of the Chinese government to fine tune its economy. To be sure, the authorities have done well both in terms of high average growth and in terms of managing the impact of regional and global cycles over the past 20 years. Can they really do so well indefinitely?”

Will stress tests lead to recapitalisation? 02.07.2010 http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2843&tx_ttnews[backPid]=901&cHas h=4a3fae7c9d#

157 COLUMNISTS What comes after inflation targets By Samuel Brittan Published: July 1 2010 21:55 | Last updated: July 1 2010 21:55 There is more to economic policy than bank regulation, which so often (like other regulation) amounts to closing the stable door after the horses have bolted. We must not forget the traditional aim of providing a framework for economic growth with low inflation. The main instrument for achieving this has been inflation targets pursued by semi-independent central banks by means of a very short-term official interest rate. As Robin Pringle, the editor of Central Banking, remarks in the latest issue of that journal: “The current dominant framework of monetary policy may not survive its association with the crisis, and perhaps does not deserve to.” There is every sign that many central banks want to cling leech-like to this failed framework. Yet I doubt if they will be able to avoid a rethink. The old regime failed for many reasons. The most common criticism was that it focused on inflation to the neglect of growth. Moreover, it focused on only one type of inflation – consumer prices – to the neglect of asset prices. But above all it engendered a false sense of security. There is no magic formula that remedies all these defects. But I have long been in favour of a regime that would be a step improvement. That is to replace our regime of using monetary policy just to target inflation with an approach targeting the flow of spending in the economy, or nominal gross domestic product. A big obstacle to its adoption is the hideous name it has been given by economic professionals. But it should not be a mystery to anyone who can live with the more familiar GDP. It is easy to overlook the manipulation that raw data go through to take inflation or deflation out of the estimate to get real GDP. All that nominal GDP means is income and expenditure at actual prices without this manipulation. It can be presented as demand management with an inflation lock, or as a money supply target adjusted for velocity.

During the Great Moderation of the 1990s and early 21st century, nominal GDP growth hovered in the UK at just over 5 per cent per annum. At the low point of the recession last

158 year it dipped to minus 5 per cent. According to Bank of England estimates it is now growing at 3.5 per cent, but this represents renewed inflation more than real activity. This illustrates perhaps the most important property of a nominal GDP objective. At low rates of inflation it is a growth objective and would be a check on the excessive cautionary zeal now so fashionable in Group of 20 countries. But at higher inflation rates, growth has to recede in favour of price stabilisation. The answer to “How do you achieve the nominal GDP objective?” is through the normal instruments of monetary and fiscal policy. All nominal GDP can do is to give some sense of direction. It is important not to oversell the nominal GDP. It is no use, for example, to the short-termist. Estimates for this variable are published in the UK every three months, with a lag of a further two. Doubtless if there were sufficient interest, the data could be improved. Even so, it would still fluctuate erratically from quarter to quarter; and, to obtain a meaningful trend, it would be best to take a moving average. Nor would it avoid the need to watch for asset bubbles as a separate concern. There are also questions about whether to have a national or international objective and how far an individual country can go out on a limb. Then the old dilemma of whether and how to make formal forecasts arises. Above all there is the question of what to do about “base drift”. Do we need a period of above normal nominal GDP growth to make up for the recent recession? Or do we let bygones be bygones? Of course, similar questions arise in relation to alternative goals such as monetary targets or real GDP. Too many policy discussions concentrate on means without specifying ends. They are like arguments about which route to take without saying where one wishes to go. Nominal GDP at least spells out a destination. www.samuelbrittan.co.uk More columns atwww.ft.com/samuelbrittan Samuel Brittan What comes after inflation targets July 1 2010 21:55 |http://www.ft.com/cms/s/0/14e20968-8545-11df-9c2f-00144feabdc0.html

159 07/01/20104 04:41 PM Why Debate the War? The Real Reason We Are in Afghanistan A Guest Commentary by Rory Stewart NATO has sent tens of thousands of troops to Afghanistan and spent tens of billions of euros. But why? British Member of Parliament Rory Stewart says we have adopted a set of unquestioned beliefs about the region. Acknowledging that those beliefs may be fallacious is almost impossible. Two years ago, I went to Tartu, for an Estonian government conference on Afghanistan. There were German generals, Italian diplomats and representatives from European think- tanks. The three Afghans, who had been brought up in California and Virginia, were practically the only native English speakers in the room. We were reminded that there was "no military solution," lectured on the need for a "comprehensive approach" -- including economic development and good government -- and we were also taught about the intricacies of Pashtun tribal structures. I argued for my belief that we should have neither troop increases nor a total withdrawal but a light long-term footprint. But why were we having this debate? The Estonians did not, it seemed, see Afghanistan as vital to their future. They were there primarily to deepen their relationship with NATO and particularly the United States. So why were the Estonians, or I, or any of the representatives of America's allies -- even those with lots of troops on the ground, such as Germany, France and Italy -- producing power-point presentations on Helmandi government structures, papers on police training and principles for tackling Pakistan? If we drew different conclusions to the United States, would we really be willing to present them or able to implement them? The European debate on Afghanistan seemed almost a ceremonial activity preserved to entertain the public and please visiting dignitaries, particularly from the US -- a ritual which is preserved for the same reasons that the Horse Guards still wave their swords outside Buckingham palace. More Troops, More Tactics, More Time When I moved to the United States, I expected the debate to be more lively because America bore more of the operation's responsibility and costs. It certainly seemed more open. Very senior figures encouraged me to speak out against troop increases. Even the most committed US soldier acknowledged that the project could not succeed without creating an effective, popular Afghan government alternative to the Taliban -- and that that was, to put it politely, "challenging." Richard Holbrooke, would have remembered from Vietnam that generals never admit a mission is impossible and always assume that they need only to have more troops, new tactics, and more time. US President Barack Obama must have been acutely aware of the parallels between his position in Afghanistan and that of his predecessor, President George W. Bush, in Iraq. But did any of these people, even Obama, feel they had a real choice? I would guess that Obama felt trapped by his political position, by his generals and by abstract theories of contemporary foreign policy. He would not want to be perceived as weak on national security. His would not want to be distracted from his focus on health care reform. And he himself had long justified the withdrawal from Iraq on the grounds that Afghanistan

160 was the "good war," vital to US national security -- one which could have been won had resources not been diverted to Iraq. Impossible to Refute General Stanley McChrystal, the recently-released commanding general on the ground, with the implicit consent of Centcom commander General David Petraeus, had publicly declared in the autumn of 2009 that he needed 40,000 more troops. It was understandable that Obama would be reluctant to tell his newly appointed commanding general, with decades in the Special Forces and a row of medals on his chest: "I have not spent any time in Afghanistan and have never served in the army, but I can tell you that you are wrong. You will not defeat the Taliban, additional troops will be a waste of time and I reject your counter-insurgency theory. Instead, we will reduce our troop presence. And as the situation deteriorates in southern Afghanistan and Pakistan, and the Taliban increase their control and the Republicans mock me for my weakness, I will take the full blame for having over-ruled my general's advice. (And I will also take the sole blame if there is another terrorist attack on the United States)." Ultimately, the president succumbed to the dominant assumptions of the last two decades. Just as 8th century Mahayana Buddhists invented world after world, filling them with their distinctive demons and bodhisattvas, our think tanks and governments have also developed their own metaphysical structures, labeling them "failed states," or "counter-insurgency." These theories can be made to seem absurd and indeed future generations may wonder, as we do about 8th century mysticism, why the beliefs of so many powerful and intelligent people were shaped by such eccentric systems. But seen from within our own historical context, or from behind a desk in the Oval Office, these theories are emotionally appealing, intellectually intimidating and often profitable. On their own terms feel almost impossible to refute. Take, for example, the master-concept behind Obama's surge, namely that in order to prevent Afghanistan posing a terrorist threat it was necessary to launch full-spectrum counter- insurgency operations. It is possible, of course, to expose the curious premises, analogies and chains of inductive logic which imply our activities in 2010 are an efficient way of preventing another terrorist attack. And 20 years from now, we may struggle to explain why we once felt Afghanistan required the deployment of 100,000 troops or the spending $100 billion each year -- why it required far more resources and attention than its more powerful and populous neighbors Iran or Pakistan. Leader Always Have a Choice But counter-insurgency is an emotionally appealing theory for us today. Instead of only killing terrorists, it focuses on subjects close to the heart of a humanitarian or a journalist: tackling human rights' abusers, eliminating corruption, establishing the rule of law, building schools and clinics and, ultimately, creating a legitimate, stable state at peace with itself and its neighbors. Who could be against that? It is also not an easy matter, to argue against such an intimidating, developed and detailed theory, enshrined in US army field manuals, justified by historical analysis of 70 previous insurgencies and endorsed by the charisma and experience of victorious generals. Even the basic premise that "the surge worked in Iraq and will work in Afghanistan" could only be refuted through a very detailed analysis of the violence in Baghdad in 2008 and a sophisticated comparison with social and political trends in southern Afghanistan -- an historical analysis which few feel equipped to attempt.

161 Meanwhile counter-insurgency is highly profitable not only to consultants (more than a quarter of the international aid spent in Afghanistan in 2008 was spent on foreign consultants) but also to NGOs. They can easily access money from the US government for repairing a school or rebuilding a clinic on the grounds that development is an important aspect of counter-insurgency. It is neither in the interests of Afghans nor those internationals who care about Afghanistan to quibble with the theory that development projects are making the world safer from terrorism. Finally, creating stable, effective and legitimate government through counter-insurgency fits neatly with our other global theories, such as the importance of fixing failed states. Acknowledging Our Limits The only way in which we could move beyond the counter-insurgency theory, or the hundred other theories which buttress and justify the Afghan war, is by rejecting their most basic underlying premises and objectives. Instead of trying to produce an alternative theory (on how to defeat the Taliban, create an effective, legitimate and stable Afghan state, stabilize Pakistan and ensure that al-Qaida could never again threaten the United States) we need to understand that however desirable such things might be, they are not things that we -- as foreigners -- can do. We can do other things for Afghanistan but the West -- in particular its armies, development agencies and diplomats -- are not as powerful, knowledgeable or popular as we pretend. Our officials cannot hope to predict and control the intricate allegiances and loyalties of Afghan communities or the Afghan approach to government. But to acknowledge these limits and their implications would require not so much an anthropology of Afghanistan, but an anthropology of ourselves. The cures for our predicament do not lie in increasingly detailed adjustments to our current strategy. The solution is to remind ourselves that politics cannot be reduced to a general scientific theory, that we must recognize the will of other peoples and acknowledge our own limits. Most importantly, we must remind our leaders that they always have a choice. Incomprehensible That is not how it feels. European countries feel trapped by their relationship with NATO and the United States. Holbrooke and Obama feel trapped by the position of American generals. And everyone -- politicians, generals, diplomats and journalist -- feels trapped by our grand theories and beset by the guilt of having already lost over a thousand NATO lives, spent a hundred billion dollars and made a number of promises to Afghans and the West which we are unlikely to be able to keep. So powerful are these cultural assumptions, these historical and economic forces and these psychological tendencies, that even if every world leader privately concluded the operation was unlikely to succeed, it is almost impossible to imagine the US or its allies halting the counter-insurgency in Afghanistan in the years to come. Roman Emperor Frederick Barbarossa may have been in a similar position during the Third Crusade. Former US President Lyndon B. Johnson certainly was in 1963. Europe is simply in Afghanistan because America is there. America is there just because it is. And all our policy debates are scholastic dialectics to justify this singular but not entirely comprehensible fact. URL: http://www.spiegel.de/international/world/0,1518,703408,00.html RELATED SPIEGEL ONLINE LINKS: • Photo Gallery: What Next for Afghanistan? http://www.spiegel.de/fotostrecke/fotostrecke-56480.html • Patched Up in Pakistan: Red Cross Hospital Treats Taliban and Children (06/30/2010) http://www.spiegel.de/international/world/0,1518,703871,00.html

162 • SPIEGEL Interview with Former Obama Advisor Bruce Riedel: 'McChrystal Has Made a Fool of Himself' (06/28/2010) http://www.spiegel.de/international/world/0,1518,703243,00.html • Obama's War: Petraeus Appointment a Coup with Risks (06/28/2010) http://www.spiegel.de/international/world/0,1518,703232,00.html • The World from Berlin: 'Washington Can't Afford any More Failures in Afghanistan' (06/24/2010) http://www.spiegel.de/international/world/0,1518,702624,00.html • Before the Endgame: America's Fatal Flaws in Afghanistan (05/26/2010) http://www.spiegel.de/international/world/0,1518,696662,00.html Rory Stewart, 37, made a now-famous march across Afghanistan in 2001-2002 and wrote a book about the journey called "The Places in Between." He then went to work for a British NGO in Afghanistan. Following the invasion of Iraq, he was appointed deputy governor of a province in southern Iraq. Today, Stewart is Member of British Parliament with the Conservative Party. 07/01/2010 04:32 PM Germany's Disappointing Reunification How the East Was Lost By Alexander Neubacher and Michael Sauga July 1 marks the 20th anniversary of the introduction of the deutsche mark in East Germany in the runup to full reunification. But the economic benefits that West German politicians promised failed to materialize. What went wrong?

German Interior Minister Thomas de Maizière, 56, is from Bonn, deep in the west of Germany, but his memories of the days between the fall of the Berlin Wall in 1989 and German reunification in 1990 are those of an East German.

163 Lothar de Maizière, the first and last democratically elected prime minister of East Germany, had asked his cousin whether he wanted a job. Thomas de Maizière agreed, moved into an office on Klosterstrasse in East Berlin and, from then on, sat on the side of the table reserved for East Germans at the negotiations on German reunification. Thomas de Maizière has often asked himself what went wrong at the time. "Objectively speaking, we didn't have enough time. We were under a great deal of pressure," he says. He compares it to a "sudden political birth." The emergency delivery happened exactly 20 years ago. Today, as the federal government's commissioner for the "new German states" (as the former East Germany is known), de Maizière's job is to promote the development of eastern Germany. He is the first interior minister and the first West German in a long time to hold the position, but de Maizière downplays his role. The minister remains reserved in interviews on the subject. And when he does say something, it doesn't sound like what his predecessors said. He has an aversion to official phrases like "harmonization of living conditions in the east and west." Nor is he keen on the term "Aufbau Ost" ("development of the east"), which German governments have used as shorthand for efforts to promote economic development in the former German Democratic Republic (GDR), as East Germany was officially known. "When people from western Germany come to Potsdam, Dresden or Stralsund," he says, referring to three relatively prosperous eastern German cities, "their first impressions prompt them to ask: 'What still needs to be developed here?'" Overnight Change It was 20 years ago that then-Chancellor Helmut Kohl made a lonely decision. The Berlin Wall had come down, and thousands of East German citizens were moving to the West every week. Kohl offered Hans Modrow, the interim communist leader of East Germany at the time, a monetary union for the two Germanys. Experts were annoyed by the proposal, and Karl Otto Pöhl, the then-head of West Germany's central bank, the Bundesbank, warned against it. But Kohl had his way. Money transporters began rolling eastward overnight. The West German deutsche mark was named East Germany's currency on July 1, 1990. Politically speaking, the monetary union was a success. The people were delighted, because they no longer had to travel to the west to get deutsche marks. But the move had a devastating effect on the economy. Overnight, all pensions, wages and savings of up to 6,000 East German marks were exchanged on a one-to-one basis. This was beneficial for East German citizens but not for businesses, many of which went under when they suddenly found themselves having to compete with the highly modern West German economy. "Although there was no reasonable political alternative to the fixed exchange rate, it was a bad move economically," says de Maizière. "Instead of one to one, the exchange rate should have been one to three or one to four, to reflect the economic reality, but this would have had the devastating political consequence of further migration." Lagging Behind the West Today, the eastern German economy is still in a sorry state, and there are no indications that the situation will change. An estimated €1.3 trillion ($1.6 trillion) have flowed from the former West Germany to the former East Germany over the last 20 years. But what has that money achieved? Historic neighborhoods have been restored, new autobahns built and

164 the telephone network brought up to date, but most of the money was spent on social benefits such as welfare payments. The anticipated economic upswing failed to materialize. Some eastern cities, like Leipzig, Dresden, Jena and Erfurt, have experienced economic development. The state of Thuringia has a relatively robust auto industry, and there are successful high-tech companies in Saxony. Research institutes and universities are doing well, thanks in part to generous government subsidies. But the success stories are rare. Most of eastern Germany has turned into an economically depressed region that lags behind the west in all respects: The per capita economic output in the east is only at 71 percent of the western level, with a disproportionately high share of economic output attributable to the public sector. The economic output generated by the private economy is only at 66 percent of the western level. To close the gap, the eastern German economy would have to grow more rapidly than in western Germany, but precisely the opposite is the case. Germany's leading economic research institutes expect the economy in eastern Germany to grow by 1.1 percent this year, compared with 1.5 percent in the west. Since the fall of the Berlin Wall, the population of eastern Germany has declined by almost 2 million people, a trend that is continuing unabated. The proportion of household income derived from welfare payments is 20 percent higher in the east than in the west. Of Germany's 100 largest industrial companies and 100 largest service providers, not one has its headquarters in eastern Germany. Politicians across the political spectrum tend to sugarcoat the meager economic results of reunification. Chancellor Angela Merkel, the leader of the center-right Christian Democratic Union (CDU), is fond of saying that "a great deal has been achieved" in the development of the east. Former Transport Minister Wolfgang Tiefensee of the center-left Social Democratic Party (SPD), who is also a former commissioner in charge of developing eastern Germany, says jubilantly: "We have successfully made it three-quarters of the way." "We are firmly convinced that the creative forces of the people that have now been unleashed will lead to a new Wirtschaftswunder," then-Chancellor Helmut Kohl proclaimed on June 5, 1990, referring to the "economic miracle" of postwar West Germany. But anyone who travels through eastern Germany today, 20 years later, will encounter failed mega-projects, depopulated downtown areas and many people who haven't had a regular job in two decades. The East's Shrinking Cities "Our fellow citizens in East Germany now have the opportunity to achieve rapid and sweeping improvements." (Helmut Kohl, June 21, 1990) Georg-Wilhelm Westrum is not someone who spends much time bemoaning lost opportunities. "In my profession," says Westrum, who is head of the building authority in the eastern German town of Stendal, "you have to face up to reality." Westrum is standing in a drab parking lot in the town's Süd neighborhood. Some 15 years ago, this was a lively area with a string of shops, cafés and a lot of green space, in keeping with Westrum's plans for the city.

165 Now six-foot-tall fences block the sidewalk, the shops are empty and most of the apartment buildings have been torn down. Today, Westrum's job consists of "deconstruction" rather than construction. The head of the building authority seems to think that it's perfectly normal to demolish what was once his model neighborhood. "If we didn't take any action," he says, "this would turn into a slum." Too Much City for Too Few People Since reunification, the German government has pumped hundreds of billions into the construction of housing in eastern Germany, either in the form of direct subsidies or loans. The result, says Berlin economist and real estate expert Harald Simons, was a "double catastrophe." Initially in the post-reunification era, hundreds of thousands of people moved from neglected downtown areas into pre-fabricated high-rise buildings on the outskirts of cities, which the socialist state had built on a massive scale in the 1970s and 1980s and which were expensively renovated after the fall of the Wall. But then billions were spent to restore the downtown areas and historic districts, which triggered a reverse migration. Today about a million apartments are standing empty, paving the way for the third stage in eastern Germany's urban development: The government is now spending billions to demolish surplus high-rise apartment blocks. In Stendal, for example, the population has declined by almost 10,000 in the last 15 years, to its current level of 35,000. Another 5,000 people are expected to leave by 2020. This creates a unique problem for local politicians: too much city for too few people. The city has empty beds in the hospitals, schools with hardly any children and an enormous wastewater system that isn't being fully utilized, so that extra water has to be constantly added in order to flush out sewage. Now the city's administration wants to force residents to move from the periphery back into the downtown area. "We have to be honest with people," says Mayor Klaus Schmotz, "and tell them that we can no longer maintain all city facilities at the level of quality to which they are accustomed." The only question is whether this is a message Stendal's residents want to hear. Reversing Development Westrum, the head of the building authority, is meeting with an old acquaintance. Jörg Michael Glewwe used to be the East German official in charge of a planned nuclear power plant in Stendal. Now he works for a real estate company that owns several apartments in the Süd neighborhood. The two men are standing in Glewwe's office on the ground floor of a run-down apartment building, which Glewwe has equipped with cheap furniture from a second-hand store. They are looking at a color-coded map of Süd, on which buildings that have already been torn down are marked in red and the ones that are still standing are marked in yellow. Westrum would like to see those buildings demolished as well, while Glewwe wants them to be preserved. Westrum's position is backed by the city administration, the current development plan and the prevailing philosophy of focusing on downtown areas. Glewwe's supporters are the building owners plus dozens of unemployed people and retirees who don't want to move out of their inexpensive apartments in the high-rise blocks. Glewwe believes that his campaign will prevail. He hopes to convince the owner of a local discount clothing store to stay in the neighborhood. He wants to install solar cells on the rooftops to generate low-cost energy. Glewwe is a member of the town council for the far-left

166 Left Party, which was formed in 2007 after the successor party to the East German communists, the Party of Democratic Socialism, merged with a left-wing western German party, and which receives strong support in the east. "But the Left Party also voted in favor of the development plan," says Westrum. "As a town council member, I supported it, but as a citizen, I'm against it," says Glewwe. "After all, you can't just expropriate the investors." "One thing is clear," says Westrum, who is now sitting in his official car again. "Developing the city is easier than undoing the development." A Government-Supported Tropical Paradise "I have this to say to my fellow Germans in East Germany: The introduction of the social market economy offers you every chance, in fact, even a guarantee, that (the East German states of) Mecklenburg-Western Pomerania, Saxony-Anhalt, Brandenburg, Saxony and Thuringia will soon become blossoming landscapes in Germany once again." (Helmut Kohl, May 18, 1990) The place some might consider paradise is situated in the eastern state of Brandenburg, just off the A13 autobahn between Berlin and Dresden. It's easy to recognize from a distance. What is probably the world's tallest, freestanding domed roof rises from the sandy soils of Brandenburg, enclosing the "Tropical Islands" resort. According to the brochure, it's the largest tropical landscape in Europe. Everything here is gigantic -- it's part of the business model. The water slide is supposedly the tallest in Germany. The "tropical sauna landscape" is touted as being unique in Europe. And the "indoor rainforest," say the operators of Tropical Islands, is the biggest ever created. The resort was supposed to attract 2.5 million visitors a year. At least, that was the plan when the building was officially opened on a cool winter day in December 2005. For the residents of a region plagued by unemployment and population decline, it sounded like a dream come true. The developers hoped that the facility would put the southern part of the state of Brandenburg on the map, and that it would soon be mentioned in the same breath with world-class attractions like SeaWorld, Disneyland and Copenhagen's Tivoli. The plans were great, the reality less so. Admittedly, everything seems to now be working relatively well at Tropical Islands, after some initial hiccups. The heating system in the building operates perfectly almost all of the time and the plants are developing nicely, thanks to a new roof membrane. The water is clean and the prices are reasonable. But the predicted onslaught of guests hasn't materialized. Last year, only about 900,000 people visited the resort. Water, Water Everywhere The problem is that, unfortunately, Tropical Islands is constantly mentioned in the same breath as the "Lagoon" in Cottbus, the Templin Thermal Spa, the "Bathing Paradise" in Lübbenau and a dozen other water-related recreational venues in the immediate surroundings. It appears that there is hardly a town in Brandenburg that doesn't have its very own aquatic resort. In fact, the rule of thumb appears to be: the more isolated the location, the bigger the recreational facility. The excess capacity is the result of a bizarre policy of subsidization. According to a study by the Cologne Institute for Economic Research, there are more than 90 water parks in eastern Germany. In Brandenburg alone, close to €170 million in subsidies had been

167 spent on swimming pools by 2005. Although newer figures are not available, the wave of water-park construction continues. The city of Potsdam near Berlin is currently considering plans to build a new facility. The plans for the project, which will cost an estimated €20 million to build, were designed by the legendary Brazilian architect Oscar Niemeyer, best known for his buildings in the capital Brasilia. Government Help The future of Tropical Islands will be decided in the next few months. The palm-studded paradise has received about €30 million in development funds. The developers paid relatively little for the building five years ago. The original structure was a massive hangar that was part of the estate in the bankruptcy of the company Cargolifter, which wanted to build high-tech airships to transport industrial payloads. The hangar was also built with the help of government subsidies. Kim Schäfer, the marketing manager, dreams of transforming Tropical Islands into an "international vacation destination." According to the company's master plan, the former hangar will serve as the centerpiece of a resort region complete with several campgrounds and vacation rental communities. The plan looks as if it includes enough space for half of Berlin's residents. Of course, connections to the German capital could be better. In fact, the railroad line between Berlin and Tropical Islands is out of service for at least a year because of maintenance work. Paid to Do Pretend Work "I can say to the Germans in East Germany that no one will be worse off than before, and many will be better off." (Helmut Kohl, July 1, 1990) A light breeze is blowing on this sunny June morning in the forests south of Berlin. Knut Sprenger is standing in front of a trail map near the town of Luckenwalde in Brandenburg, preparing for his workday under a publicly funded employment program. "We'll take the Holbeck circular route today," he says. "We haven't been there in a while." Sprenger works for "Fläming Walk," a 450-kilometer (280-mile) network of hiking trails named after the Fläming region. The participating towns like to tout it as the "biggest Nordic walking park at the gates of Berlin and Potsdam." Sprenger, who is in his mid-50s and deeply tanned, monitors hiking paths, replaces damaged path markers and accompanies groups of hikers. "I spend a lot of time in the great outdoors," he says, "and I always have a destination in mind." A Tradition of Concealment Not everyone in eastern Germany is as satisfied with his or her job. Two decades after reunification, the labor market is the clearest indicator of the ongoing gap between the two Germanys. The unemployment rate in the eastern states is still almost twice as high as it is in the west, and the east has more temporary and seasonal workers. According to a study by the Institute for Employment Research, "central indicators for the job market suggest more of a tendency toward stagnation than catching up." Back in the former East Germany, it was common to conceal the true scope of unemployment behind a large number of unproductive jobs. This tradition was seamlessly extended into the post-reunification era.

168 The government came up with a series of publicly funded employment programs in the years after the fall of the Wall. But there was always an underlying contradiction. On the one hand, the jobs created under these programs were designed to resemble normal jobs as closely as possible, so that participants would be able to eventually return to the regular working world. On the other hand, this parallel labor market could not compete with the real job market. It was not a success, as Germany's Federal Audit Office concluded two years ago in a devastating assessment of one such program involving so-called "one euro jobs." Under the scheme, the long-term unemployed could work a certain number of hours a week in, for example, old people's homes, schools or parks. In return, they received compensation of €1 an hour or more on top of their regular welfare payments. But, according to the report, the government-funded ersatz jobs were displacing many regular jobs and even decreased the chances of participants finding real work. For the majority of long-term unemployed people, the one-euro jobs did not "provide any measurable advantages" in terms of finding work, the auditors concluded. Hundreds of thousands of East Germans were "branded as second-class workers," says Esther Schröder, a former SPD member of the Brandenburg state parliament. Making Sundials for the State Knut Sprenger is familiar with the experience. When Sprenger, a bricklayer by trade, was no longer able to work in construction because of a slipped disc, the job placement office helped him embark on what he describes as a "career in government-funded job programs." He went from one temporary job to the next, but the positions were either pointless or lacked job security. At first, he received a one-euro job as a janitor in a center for the disabled. Even though his new employers praised him as the "man with the golden hands," Sprenger was unable to keep the job, because one-euro jobs are usually only temporary. Then the employment office placed him in a so-called "qualification" program, in which he and other unemployed workers were supposed to build sundials. They were only permitted to use sandpaper and files as tools, and the results of their work disappeared into the basement of the company running the program. The work making sundials was not supposed to resemble an ordinary job in the trades. Sprenger began to question the purpose of the project. "When I finish work in the evening, I have to be able to see what I've accomplished," he says. Hopes of a Job Now he hopes that he'll at least be able to keep his job with Fläming Walk, but the chances aren't good. The federal government program that provides the funding for his current position expires in two years. By now it's early in the afternoon and Sprenger is back at his starting point. In a few moments, he'll report to his boss that he found no significant damage, except for a downed tree that had fallen on another tree behind a small grove. "If it comes loose," says Sprenger, "it could be really dangerous." Too Much Supply and Too Little Demand "It cannot be the goal of our policies that as many people as possible should move from East Germany to West Germany. Instead, it is my goal to provide them with an outlook for a future life there, in their homeland." (Helmut Kohl, Jan. 10, 1990)

169 In the late morning, a peak period in German airspace, the biggest rush is already over at the Ostseeflughafen Stralsund-Barth airport. Two small aircraft have already landed, and a third is parked in front of the tiny hangar. Airport manager Paul Wojtasik is standing in front of a red riding mower. The next plane isn't expected until the afternoon, which gives Wojtasik the chance to catch up on some of his other duties: servicing the fire department vehicle, doing some paperwork and making sure the toilets are clean. "I'm probably the only airport manager in Germany who picks up a toilet brush now and then," he says. After the fall of the Berlin Wall, the economy in eastern Germany suffered as a result of the poor public infrastructure. Many rail lines were in poor condition and the telecommunications network was hopelessly outmoded. After two decades of publicly funded development, the situation has changed dramatically. In fact, today it's more often the case that the private sector is unable to keep up with the rapid pace of expansion of the public infrastructure. The problem is the same as it is with the water parks: too much supply and too little demand. Extremely Well Connected With a population of about 1.7 million, Mecklenburg-Western Pomerania is Germany's second-smallest state, but it is extremely well connected to international aviation. Anyone who chooses to pilot his own aircraft to the state can choose among five fully- equipped regional airports and six smaller business airports: on the island of Rügen, in the Mecklenburg Lakes region, on the Baltic Sea coast and on the island of Usedom. There is only one problem: The world's commercial airlines haven't quite discovered the outstanding conditions for aviation in Germany's far northeastern corner. The government has invested about €130 million in airport expansion over the last 20 years. Nevertheless, almost all of these airports are underused and in the red. The Heringsdorf airport needs annual state subsidies to stay afloat. The management of the privatized Parchim International Airport complains about the stagnant air cargo business. And in the generously expanded terminal building at the Rostock-Laage airport, there are so few passengers that some have even wondered whether it's necessary to heat the building in the winter. Losing Money And at the Ostseeflughafen Stralsund-Barth airport, there is also a gaping void between expenses and profits. In the last few years, the government in the state capital Schwerin has spent more than €4.5 million on a brand-new runway and state-of-the-art lighting system. But annual passenger volume has declined sharply, from just under 28,000 in 1992 to roughly 8,000 today. The operating company, which is owned by the cities of Barth and Stralsund, as well as the Nordvorpommern administrative district, is losing about €250,000 a year. Two years ago, the state audit office concluded: "An improvement in the economic situation is not to be expected." If the rules of economics were applied, the money-losing airport would have been closed long ago. But when it comes to developing the east, economic principles seldom apply. Instead, the old logic used by lobbyists for the transportation industry still applies, which holds that there are no superfluous airports, just airports that aren't receiving enough government funding. Maintaining the Infrastructure

170 Wojtasik, the airport manager, is standing in front of a tall construction fence. A digger is breaking off pieces of concrete from an old East German barracks which once served as the airport terminal. The building was so dilapidated that it wasn't even licensed to house a snack bar. Whenever VIPs landed at the airport, Wojtasik would have their limousines drive directly to the aircraft, so that the passengers wouldn't see the rundown bathrooms. "We couldn't compete with a building like that," he says. That's about to change. Last year, the state government approved about €2.6 million to pay for a new terminal which will include a restaurant, conference rooms and an 11-meter (36-foot) tower. When the building is finished next year, local officials hope that it will finally provide the airport with the boost it needs, bringing in more tourists to stay in nearby hotels and more businesspeople to open offices near the airport. The prospect of fresh state funding has also silenced local airport critics. Until recently, the city of Stralsund had planned to withdraw from the consortium that owns the airport, because the losses had become too significant for city officials. But now the administration has changed its mind. Officials are now saying that if the city were to withdraw, it could be required to pay damages to the remaining partners. Besides, the state subsidies would go to other regions. Although the Stralsund city officials don't have a clue as to where the additional passengers that the airport needs to operate at a profit are going to come from, this isn't their primary concern. According to a city presentation, "The maintenance of high-quality infrastructure is reflected in the budget in the form of costs." An Open-Air Museum Tries to Attract Industry "Naturally, there will be layoffs, but if we were to focus too rigidly on that aspect, we would fail to recognize that an extraordinarily large number of new job opportunities will arise at the same time, not least in the construction sector. For this reason, it is critical that we now establish the necessary conditions for vigorous and dynamic investment." (Helmut Kohl, May 10, 1990) When Joachim Paulick, 52, mayor of the picturesque small town of Görlitz on the border to Poland, has visitors, he doesn't know what to show his guests first. The staircase in the town hall, a "masterpiece of the early Renaissance," according to the guidebooks? The so-called King's Room, a magnificent late-Gothic reception room on the upper floor? Or his office, with its impressive wood paneling? There are roughly 4,000 historic buildings in Görlitz, and even Paulick hasn't seen them all. The town is regarded as the largest contiguous collection of historic buildings in Germany, and its designation as a UNESCO World Heritage Site is on the agenda. Three-quarters of the historic old town, which was uninhabitable in the communist era, now qualifies for historic preservation status. "Never in its history has Görlitz been as beautiful as it is today," says Paulick. But the mayor still isn't satisfied with the status quo. The city treasury is short of €16 million, which represents a significant part of the budget, and Paulick sees no legal way to save an amount this large. He is thinking about levying an additional tourist tax and a second-home tax, as well as raising parking fees. But even these measures will fall well short of putting the budget on a solid financial footing.

171 Problem Zones Görlitz's problem areas are the industrial zones a few kilometers outside the historic city walls. There is a long tradition of machine-building in the region, but few businesses survived German reunification. The only remaining companies today are a railroad car factory, a turbine plant and a brewery. A US investor, lured by the promise of subsidies, manufactured winter clothing in a plant near Görlitz for a while, but then moved on to what it viewed as an even cheaper low-wage paradise. "We spent millions to renovate the city, but in the early years we didn't pay enough attention to attracting and keeping bigger companies," says Paulick. "It was a political mistake, and now we have to correct it." The mayor has sent about 2,500 letters to companies throughout Germany to promote his town, printed on letterhead with the city's coat of arms at the top. Paulick signed each one himself. It makes the letter look much more credible, he says. The letter promotes Görlitz as a business location, but it hardly mentions the old town with its historic buildings. Instead, the mayor's selling points are the city's proximity to Poland, its relatively low wages and the fact that in Görlitz, unlike the rest of Saxony, people don't speak a strong dialect. But companies aren't exactly lining up to move to Görlitz. "A city of this size cannot survive as a kind of open-air museum," says Paulick. "There are worries that it could already be too late."

"I am convinced that (former West German Chancellor) Ludwig Erhard's vision of prosperity for all will also gradually become reality in East Germany." (Helmut Kohl, May 10, 1990) Anyone who wants to know how to improve efforts to develop the east should speak to Edgar Most, the former director of the East German State Bank. After reunification, his insider knowledge enabled him to remain in the financial industry and pursue a career at Deutsche Bank. He has written books about the financial sector, and he likes to hold readings today. He is considered a bestselling author in the east. Thrown to the Wolves On this day, almost 100 people have braved the summer heat to come to Strausberg outside Berlin to hear him speak. "We threw East Germany's capital to the wolves of the west," says Most. The audience, many of them East German retirees, nods approvingly. According to Most, a mentality built around subsidies has developed in the former East Germany. Now the people in the audience are sitting up and listening. "The east is becoming poorer, older and dumber," says Most. At this point, the mood in the room isn't quite as positive anymore. Most was once a member of Gesprächskreis Ost ("Roundtable East"), a group of advisers established by then-Chancellor Gerhard Schröder, which produced a study six years ago on ways to improve development efforts for the east. A key proposal was to concentrate government funding on research and technology, limit bureaucracy and accept that it didn't make any sense to continue pumping subsidies into remote areas that would be better left to their fate. The group of advisers concluded that the best approach would be to concentrate development efforts on the most promising regions.

172 The proposals were never implemented. Instead, government money is still being distributed widely in a kind of shotgun approach. In the small state of Brandenburg alone, with its population of 2.5 million, there are now at least a dozen self-proclaimed "growth centers." Paternalistic Attitude Economists predict that when the so-called Solidarity Pact, an agreement between the national and state governments to support the former East Germany financially, expires in 2019, all of the eastern states will still depend on support from the west. That also includes Saxony, widely viewed as a model state. Experts are under no illusions that the principal blame for the botched economic aspects of reunification does not lie in the east, but with those in the west who made the political decisions. "The west had a paternalistic attitude toward the east, based on the motto: We know what's best for our sisters and brothers in the east," says Interior Minister Thomas de Maizière. "In reality, we didn't know at all." Translated from the German by Christopher Sultan URL: http://www.spiegel.de/international/germany/0,1518,703802,00.html RELATED SPIEGEL ONLINE LINKS: When Less Is More: Eastern German Project Provides Hope for Shrinking Cities (04/09/2010) http://www.spiegel.de/international/germany/0,1518,688152,00.html Interview with Kohl's Top Aide on German Reunification: 'It Was Practically a Miracle' (11/03/2009) http://www.spiegel.de/international/germany/0,1518,656740,00.html 20 Years of Investment: Despite Progress, Former East Germany Still Lags Behind (08/28/2009) http://www.spiegel.de/international/germany/0,1518,645596,00.html Germany's 1989 Generation: Go West, Children of the Revolution (08/04/2009) http://www.spiegel.de/international/germany/0,1518,640157,00.html SPIEGEL 360: 20 Years After the Wall http://www.spiegel.de/international/germany/0,1518,k-7540,00.html 07/01/2010 01:24 PM Goodbye Fat Cats? Europe Moves to Regulate Bankers' Bonuses The European Union has agreed to new rules limiting banker's bonuses in an effort to curtail short-sighted investments. It is the latest EU effort to apply the lessons learned from the financial crisis. Few were more scorned than bank managers and speculators after the financial crisis brought down banks around the world and forced governments to open up their coffers. Now, two years later, the European Union has drawn up a deal to curtail bankers' bonuses, the latest in a raft of international attempts to quell speculation and rein in the financial industry. Starting next year, the new rules will prohibit bankers from receiving more than 30 percent of their bonuses immediately. The rest will be paid out later only if their companies perform well. For those eligible for particularly high bonues, a ceiling of 20 percent is envisioned. "These tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk taking," said Arlene McCarthy, the European Parliament member who helped push for the new legislation.

173 jas -- with wire reports

'Safe and Sound Capital Base' EU member states and the European Parliament have agreed to the new restrictions, meaning that the new rules are almost sure to pass when the parliament votes on the plan next week. It is set to enter force in January. In addition to bonus limits, the new rules puts a cap on "exceptional pension payments" -- essentially eliminating the controversial practice of showering money on disgraced departing executives. Also included are rules on the minimum amount of capital banks must have to cover risk, to go into effect in 2012.

174 With the new rules, the European Union aims to further limit the risky trading practices that contributed to the financial crisis. "These new rules will lay the foundations for a safe and sound capital base and a responsible pay and bonus policy, so that taxpayers don't face the risk of bailing out the banks once again," the European Parliament said in a statement .

Jumping on Short-Term Profit The primary focus of the bonus rules is to steer traders' away from short term gains at the expense of long term stability. Many have blamed the bonus system for having encouraged traders to throw money at risky real-estate investments, thereby augmenting the size of the crash when it finally came. In some cases, traders did not even have a clear understanding of the investments they were buying. The law made special mention of the institutions which needed to resort to a state lifeline in the wake of the crisis. It said that bailed-out institutions would have to "restrain the overall amounts paid in bonuses, encouraging bankers to prioritize a stronger capital base and lending to the real economy over their own pay and perks." Countries in the European Union have pursued a range of options in an effort to rein in financial speculation. Germany slapped a ban on naked short-selling in the spring and has been joined by France in calling for an EU-wide ban. Some in the EU have recently pursued an international tax on financial transactions as well as a bank levy to create a pool should financial institutions require bailouts again in the future. The new rules do not limit the size of bonuses. Rather, they simply limit how much can be paid out immediately.

URL: • http://www.spiegel.de/international/europe/0,1518,704046,00.html RELATED SPIEGEL ONLINE LINKS: • G-20 Summit: Five Ways to Tame the Financial Market Monster (06/22/2010) http://www.spiegel.de/international/world/0,1518,702200,00.html

175 • Europe's Finance Industry Regulations: London's Lobbyists Prepare to Return Fire (05/20/2010) http://www.spiegel.de/international/business/0,1518,695847,00.html • No More Naked: Germany and France Call for an EU Ban on Financial Speculation (06/09/2010) http://www.spiegel.de/international/europe/0,1518,699615,00.html • International Finance Conference in Berlin: Merkel's Difficult Fight to Tame the Markets (05/21/2010) http://www.spiegel.de/international/germany/0,1518,696095,00.html • Europe vs. the Financial Markets: How Serious Is the EU about Regulation? (05/19/2010) http://www.spiegel.de/international/europe/0,1518,695546,00.html

07/01/2010 12:57 PM

Exposed The Limits of Merkel's Leadership A Commentary by Christoph Schwennicke In the end, Chancellor Merkel got what she wanted in German presidential elections on Wednesday. But the tepid result for her tepid candidate exposed the deficiencies in Merkel's leadership style once and for all. Her next major decision may be who to groom as a successor. On Tuesday of this week, German Chancellor Angela Merkel woke up to a radio interview with FDP General Secretary Christian Lindner. Lindner's party is Merkel's junior coalition partner, and his FDP has made her life difficult since elections last September by, among other things, pushing through a reduction in sales tax for hotel stays. Merkel unwillingly went along with the cut, but on Tuesday, as she was sipping her coffee, she listened as Lindner called the move "a mistake." In an ensuing meeting with her coalition partners, her temper was fouler than it had ever been. On Thursday, Merkel awoke to breakfast television describing to viewers how badly her power had been eroded on the previous day. Her center-right majority failed twice on Wednesday to elect her candidate for the German presidency, Christian Wulff. Only in the third round of voting did party discipline trump rebellion. Another coffee. A strong one. A Damper on Improving Moods Originally, Merkel had hoped that Wednesday would put an end to the months of bickering that has characterized her governing coalition since it was sworn in last October. The timing would have been very convenient, had the vote gone well: The global economic recovery has boosted German exports; the feared "double dip" in the economy has not materialized; numbers released on Wednesday show that German unemployment is continuing to drop; and the euro crisis seems to have lost some of its momentum for now. The coalition could have entered the summer break in peace. There is even a chance that Germany could win the World Cup. Could have been. Would have been. Should have been. Wednesday's presidential election has put a damper on the improving moods in Berlin. The FDP's latest about-face on tax policy is sure to provide plenty of grist for political pundits during the summer holiday. The difficulty Merkel had pushing through her presidential candidate lays bare the lack of support the chancellor has from within her own coalition. Merkel could take the easy road and try to pin the blame on others. She tried to do that in the debate over the hotel tax. She blasted the FDP for having insisted on the cut -- together with the Christian Social Union, her party's Bavarian sister -- against her will.

176 She could try to criticize the FDP for its efforts to present itself as innocent on Wednesday. The party insisted that it was unified behind Wulff, and that there were only a couple of renegades who voted for rival candidate Joachim Gauck. But such a course of action would be a mistake. It would be wrong to act as she has in the hotel tax debacle -- as though her hands were clean. This is not a case of the tail wagging the dog. The situation she now faces is a direct result of her actions and her inaction. She is not a victim. Rather, she is a perpetrator. The Question of Who to Groom Merkel cannot credibly vent over the FDP's change of course on tax policy. There is always someone in favor of a nonsensical law, and someone who can prevent it. Merkel, though, did not prevent it. She appears to have reached the conclusion that she was unable to. The search for a candidate to replace President Horst Köhler, who resigned in a huff at the end of last month, proceeded according to the same pattern. Merkel found herself a candidate who was not particularly objectionable, but who was also not terribly inspiring. She spent a few days exploring the alternatives and came to the conclusion that she would have been unable to convince others to support someone else, someone with more charisma. She couldn't even find the courage to nominate an independent conservative candidate with the charisma and appeal of Wulff's rival Joachim Gauck. Instead, she opted for a pragmatic solution. She chose the tepid candidate Wulff, and received a tepid election result. Her choice of candidate and the ensuing election on Wednesday is a perfect example of Merkel's leadership style. It has brought her far, but it won't bring her any further. If she cannot now produce a courageous political surprise, Wednesday's election will mark the beginning of the end of her chancellorship. Wulff was the last of Merkel's potential inner-party rivals. By installing him in the presidency, she has now shoved him aside too. But now, finally, she must inject meaning into her time at the helm of German politics if she wants to be re-elected to a third term. Should she not take advantage of the small window of opportunity left to her, there will be very few issues left on her plate after next year. A series of regional elections are coming up. Should her party struggle, there will be only one decision left for her to make: who to groom as her replacement. URL: http://www.spiegel.de/international/germany/0,1518,704069,00.html RELATED SPIEGEL ONLINE LINKS: • False Start for Christian Wulff: A Difficult Beginning for Germany's New President (06/30/2010) http://www.spiegel.de/international/germany/0,1518,703937,00.html • Merkel's Disaster: Botched Presidential Election Strains Germany's Government (06/30/2010) http://www.spiegel.de/international/germany/0,1518,703916,00.html • Third Round Victory: Christian Wulff Elected New German President (06/30/2010) http://www.spiegel.de/international/germany/0,1518,703932,00.html • Eastern Inspiration: Gauck the Therapist Wants to Put Germany On the Couch (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703658,00.html • Politics as Usual?: Merkel's Man for the Presidency (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703629,00.html

177

Resultado subasta de bonos deuda pública española y Moody’s pone el rating bajo revisión Por Gurus Hucky el 1 Julio, 2010

Hoy tenía lugar la subasta de bonos a 5 años por parte del Tesoro público Español. Los resultados aparentemente no han sido malos, aunque se han deteriorado un poco desde la última subasta de similares características del mes de mayo: Importe colocado en la subasta de bonos: 1 Julio: 3.500 millones de euros vs 2.345 millones de euros en Mayo. Ratio cobertura: Subasta Julio de 1,70 vs 2,35 en la subasta de mayo. Tipo de interés pagado: En la de Julio el 3,657% vs el 3,532 de Mayo. Se ha colocado un importe algo superior, menor ratio de cobertura y coste de la deuda ligeramente al alza. En principio no es ningún drama, sin embargo, como en todo el diablo suele estar en los pequeño detalles, y en este caso lo básico sería conocer quién a comprado los bonos, si el grueso ha sido comprado por la banca española y el BCE (nuevo actor invitado en las subastas de bonos) quería decir que el problema está siendo mayúsculo. En principio, si no dar información de quienes están siendo los compradores, tal y como están las cosas, uno puede pensar lo peor. Julio puede ser un mes complicado, los analistas del Goldman estiman que el Gobierno Español, finalizará el mes de Junio con una saldo de caja de 9.200 millones de euros, y que Julio será un mes deficitario en caja, en unos 13.500 millones de euros, más los vencimientos de deuda a cubrir por 24.700 millones de euros. http://www.gurusblog.com/archives/subasta-deuda-espana-moodys/01/07/2010/

178

Eurointelligence Daily Morning Newsbriefing So much for the stress test: Axel Weber wants to impose conditions that render them a farce

01.07.2010 Bundesbank president supports partial publication, but opposes stress testing on sovereign bonds, complete publication, and also does not want the European banking supervisor to be involved; the banks say that publication would only attract the speculation (they did not say what a lack of publication would attract); demand for the ECB’s three-month tender was surprising low, the day before the rollover of the €442bn 1-year tender; but analysts warn that there are still many banks out there reliant on ECB funding; Merkel gets Christian Wulff elected president in a nail biting third round; Heribert Prantl predicts that the German chancellor will be finished in March 2011, when she face three mid-term elections her party is likely to lose; the European Commission unveils a Draconian sanctions plan for countries that fail to meet the deficit rules; French civil servants face a salary freeze; Berlusconi says Italy’s high savings rates are the reason why the country has done relatively well during the crisis; Paul Krugman, meanwhile, says that Iceland has done a lot better than Latvia, Estonia and Ireland since the outbreak of the crisis – because it eschewed austerity. http://www.eurointelligence.com/index.php?id=901

01.07.2010 So much for the stress test: Axel Weber wants to impose conditions that render them a farce

FT Deutschland has the exclusive story that Bundesbank president Axel Weber supports German banks in their opposition to complete and uncontrolled publication of stress tests.

179 The EU and the German government wanted a complete publication of all stress test results, hoping that transparency would reinstall market confidence. The banks instead fear that the publication of results would only attract speculators. One of the participants in the meeting at the Bundesbank yesterday said “we can thank God that we have Weber”. Weber still promotes publication of results, at least partly, but does not want to leave the control over the stress tests to the CEBS, the committee of European banking supervisors (though the Bundesbank is an influential member of this committee). Weber has changed his position, as he had supported full transparency in June. He risks to be at odds with the EU political leaders and his chances as a successor of Trichet.

Low demand of ECB money in 3-month tender There was much lower demand than expected for the emergency three-month liquidity tender to replace €442bn in 12-month loans that expire on Thursday, the FT reports. Only 171 banks borrowed a total of €131.9bn. The lack of interest suggested eurozone banks were less dependent on the unlimited liquidity from the ECB than analysts had supposed. But banks could also have waited to use the alternative six-days tender the ECB offers today. A final judgement has to wait until these figures are known. Today, more than 1,100 eurozone banks must repay €442bn in 12-month loans. Analysts are still worried about which banks had to use the facility and how reliant they are on the ECB. The market reaction to the news of the low demand for the ECB money was initially euphoric, but the FT reports that the enthusiasm waned shortly after, as equity price continued their downward trend. A Pyrrhic victory in Germany Angela Merkel managed to get Christian Wulff elected German president, in a nail-biting three round electoral contest yesterday, but there is no joy for her and her party. In the first, some 50 members of her coalition voted against the candidate, forcing a second, and subsequently a final round of voting, in which Wulff secured a relative, but not absolute majority. The German press declare this fisco the beginning of the end of the Merkel. Heribert Prantl of Sueddeutsche says that Merkel has no internal rivals. She managed to get rid of all of them one way or the other - Merz, Ruttgers, Koch, now Wulff. The problem is the incredible popular discontent with her style of government, which puts narrow party interest ahead of the country. He predicts that she will last until March, when are three state elections, in which the CDU might lose their majorities. We are cautious about political predictions, but this is clearly one to watch. Commission unveils its sanctions plans The European Commission unveiled its proposal yesterday to suspend all forms of aid in agricultural and fisheries as well as regional aid to countries "that do not meet the recommendations" to correct its deficit (see El Pais for coverage). Under this proposal the Commission would as much attention to debt levels as to deficits. The FT notes that Olli Rehn refused to specify whether such a suspension would be triggered automatically or would require a political approval. Among the proposals is also a scorecard to monitor imbalances inside the eurozone. Countries at risk would receive recommendations to change course, with no risk to be fined.

180

French civil servants face salary freeze French Labour minister Eric Woerth announced that the salary of 5.2m French civil servants will be freezed in 2012 and 2013, Les Echos reports. The final decision will be taken in another round of negotiations in 2011.Trade unions are outraged, see quotes in Le Monde. Berlusconi: Italian families know how to save Silvio Berlusconi is confident that the crisis is the past, at least for Italy, reports La Repubblica. This is what he said "And we're coming out better than other European countries. Italian families - unlike American ones, were able to save. The system of our banks is solid." An Icelandic mircacle Paul Krugman does not miss an opportunity to demonstrate his point that countries that refrain from austerity fare better. He produces a very surprising chart, according to which Iceland’s GDP growth rates surpass those of Lavia, Estonia and Ireland – countries with a similar predicament – since the outbreak of the crisis.

http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2842&tx_ttnews[ba ckPid]=901&cHash=6c73f95e5a

181 La primera crisis del euro Bruselas no dará ayudas a los países que se salten los límites del déficit Un mecanismo con indicadores como los costes laborales alertará sobre posibles desequilibrios - Acuerdo con el Parlamento para controlar las primas de banqueros ANDREU MISSÉ - Bruselas - 01/07/2010 La Comisión Europea propuso ayer suspender todo tipo de ayudas agrícolas y pesqueras así como las procedentes de los fondos estructurales, a los países "que no cumplan las recomendaciones" para corregir los incumplimientos del Pacto de Estabilidad y Crecimiento, según anunció el comisario de Asuntos Económicos y Monetarios, Olli Rehn. La Comisión Europea propuso ayer suspender todo tipo de ayudas agrícolas y pesqueras así como las procedentes de los fondos estructurales, a los países "que no cumplan las recomendaciones" para corregir los incumplimientos del Pacto de Estabilidad y Crecimiento, según anunció el comisario de Asuntos Económicos y Monetarios, Olli Rehn. Bajo la presión de Alemania, en cuestión de meses se ha ido perfilando un auténtico marco de sanciones para los países laxos en el cumplimiento de los objetivos de déficit. Rehn es consciente de "la necesidad de reforzar la credibilidad del Pacto de Estabilidad y Crecimiento, cuya regla principal es la limitación del déficit público anual al 3% del PIB. La propuesta será examinada por el Ecofin del próximo 13 de julio. El objetivo de Bruselas es fortalecer la gobernanza económica de la Unión "para crear unos sólidos y duraderos cimientos para un crecimiento sostenible de la economía y del empleo", según explicó ayer Rehn al presentar los detalles. La política económica de la Comisión se basa en la convicción de que "sin una determinada consolidación fiscal, reformas estructurales y crecimiento sostenido, nuestro modelo de economía social de mercado está en serio riesgo", en palabras del comisario. Para ello se establecerá una amplia gama de "sanciones e incentivos", que serán empleadas preventivamente. En el caso de las sanciones que afectan a los pagos agrícolas, "las suspensiones solo afectarán a las transferencias entre el presupuesto comunitario y los Estados miembros", precisó Rehn. Y advirtió de que en cualquier caso "los Gobiernos continuarían estando obligados a respetar sus compromisos con los agricultores y que, por tanto, no perjudicaría a los beneficiarios finales". En las referencias a las sanciones, ni en la comunicación ni en la intervención del comisario se precisó la posible cuantía. Pero está claro que afecta a todos los recursos que un país puede obtener del presupuesto comunitario. Rehn admitió que "la aplicación de estas sanciones no hubiera supuesto ninguna mejora para Grecia porque el daño ya se lo había hecho el propio país". El primer paso para controlar las políticas de gasto consistirá en "la creación de un sistema único e integrado para la vigilancia fiscal y el funcionamiento económico" a través del llamado "semestre presupuestario". El ciclo empezará en enero con la presentación de un Informe sobre crecimiento anual por parte de la Comisión. En febrero el Consejo aprobará las directrices políticas que deberán ser tenidas en cuenta por los Estados en la elaboración de sus planes de Estabilidad y Convergencia que deberán ser presentados en abril. El Consejo emitirá sus medidas específicas para

182 cada país a principios de julio. Teniendo en cuenta estas directrices los Estados miembros desarrollarán sus presupuestos durante la segunda parte del año. En el proceso habrá una participación del Parlamento Europeo y de los Parlamentos nacionales. También se dará una mayor relevancia a la vigilancia sobre la evolución de la deuda en cada país. De manera específica, Bruselas propone que los países con deudas superiores al 60% del PIB podrían ser objeto de procedimientos por déficit excesivo si la reducción de su deuda no cumple los parámetros establecidos. Además de los aspectos presupuestarios, la Comunicación de la Comisión anuncia la creación de un mecanismo de alerta para identificar a los Estados miembros con posibles desequilibrios macroeconómicos y un mecanismo de disciplina para los países de la zona euro que de manera reiterada incumplan las recomendaciones. El mecanismo de alerta consistirá en un marcador de indicadores complementado por un análisis cualitativo. Los indicadores que se mencionan a modo de ejemplo son el balance por cuenta corriente; las posiciones de activos netas en el exterior; el tipo efectivo de cambio real basado en los costes salariales unitarios y el deflactor del PIB; incrementos reales de los precios de las viviendas; la deuda del Gobierno y el ratio del crédito al sector privado en porcentaje del PIB". El comisario reconoció que si la Unión hubiera contado con este indicador, "se podría haber alertado en los casos de Irlanda y España que registraron un fuerte incremento en el precio de la vivienda y donde la crisis económica se agravó por los desequilibrios económicos subyacentes. El objetivo de Bruselas es salvaguardar la estabilidad macroeconómica. En los casos en que se detecten serios desequilibrios la Comisión podrá hacer recomendaciones específicas e incluso "situar a un Estado miembro en una posición de desequilibrio excesivo". Para los países de la zona euro se prevé un mecanismo de disciplina a los países que incumplan repetidamente. En el supuesto de desequilibrios macroeconó-micos no se especifican sanciones concretas. Por otra parte, los representantes permanentes de los Veintisiete alcanzaron un acuerdo de principio con el Parlamento sobre la directiva de requisitos de capital especialmente en lo referente a las primas de los banqueros. Se propone que a partir de 2011, solo un 30% de las primas podrán pagarse en efectivo. La mayor parte del dinero deberá estar disponible y poder ser recuperado por las entidades si las operaciones no han producido los resultados esperados. El objetivo es vincular las primas a los beneficios a largo plazo. El acuerdo podría sustanciarse en el pleno del Parlamento de primero de julio. http://www.elpais.com/articulo/economia/Bruselas/dara/ayudas/paises/salten/limites/deficit/el pepueco/20100701elpepieco_7/Tes

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Relief at low uptake of ECB money By Ralph Atkins, David Oakley Published: June 30 2010 20:03 | Last updated: June 30 2010 20:03 The European Central Bank eased worries about the eurozone bank system on Wednesday after reporting much lower demand than was expected for emergency three-month liquidity to replace €442bn in 12-month loans that expire on Thursday. The lack of interest suggested eurozone banks were less dependent on the unlimited liquidity from the ECB than analysts had supposed. Only 171 banks borrowed a total of €131.9bn ($161bn, £107bn) in three-month liquidity – compared with forecasts that demand might exceed €300bn. In depth: European banks - Jun-30 Editorial Comment: The ECB begins to make for the exit - Jun-30 German banks expected to call on rescue fund - Jun-30 Banks borrow less than feared from ECB - Jun-30 Lex: European Central Bank - Jun-30 EU deficit offenders face aid cut-off - Jun-30 Speaking in Rome, Jean-Claude Trichet, ECB president, said that the results pointed to “an orderly as possible transition” away from 12-month operations. The ECB wants to wean banks off its emergency liquidity, and worried that providing liquidity for as long as a year was distorting financial markets. But eurozone policymakers are far from being able to give a clean bill of health to the region’s banking system. “This result looks very good on the surface, but we don’t know what is lurking beneath the surface. How many Spanish cajas [unlisted savings banks] or German banks had to use the facility?” asked Don Smith, economist at Icap. With the mood in financial markets still volatile, the ECB sees a return of confidence as depending crucially on the publication of credible “stress tests” for the region’s biggest banks – expected this month – as well as the results of its open market operations. “The stress tests are far more important for restoring confidence in the eurozone than one tender. Unless these are undertaken in a clear and complete manner with credible assumptions and full disclosure, it is hard to see eurozone funding markets reopening,” said James Chappell, financial strategist at Olivetree Securities. Today, more than 1,100 eurozone banks must repay €442bn in one-year loans, taken out when continental Europe was recovering from the worst recession since the second world war. It marks the largest amount provided in a single ECB market operation. Even though demand for three-month liquidity was lower than expected, banks could today exploit an alternative option provided by the ECB, which would allow them to obtain unlimited six-day liquidity to tide them over until a regular offer of seven-day liquidity next week. High demand for the six-day funds would take the gloss off Wednesday’s news.

184 At the same time, the low interest indicated that the problem of banks being reluctant to lend to each other was focused on a relatively small number of finance houses. On average, each of the 171 banks that took part in Wednesday’s offer obtained €771m in three-month funds. That was noticeably higher than the average of €394m in 12- month loans that has to be repaid by 1,121 banks today. The ECB gave no details of which banks bid for the three-month liquidity but analysts suspected many were in countries such as Spain and Greece, where holdings of domestic government bonds have been hard hit. Gary Jenkins, head of fixed income research at Evolution, said: “The lower than expected figure is a good sign, but there are lots of worries over which banks had to use the facility and how reliant they are on the ECB”. Additional reporting by Guy Dinmore in Rome http://www.ft.com/cms/s/0/65faa5ae-8477-11df-9cbb-00144feabdc0.html Banks borrow less than feared from ECB By Ralph Atkins in Frankfurt Published: June 30 2010 11:12 | Last updated: June 30 2010 13:48 European Central Bank hopes of a smooth return of €442bn of emergency loans it made to banks a year ago have been boosted after demand for three-month liquidity offered as an alternative fell far short of expectations. Just €131.9bn in three-month liquidity was taken by 171 banks, the ECB reported on Wednesday. Analysts had feared that banks would demand €250bn or more. The low figure suggested banks’ nervousness about their future funding and inability to tap commercial markets might have been overdone. On Thursday, more than 1,100 eurozone banks have to repay €442bn in one-year loans borrowed a year ago, when continental Europe was recovering from the worst recession since the second world war. It was the largest amount ever provided in a single ECB market operation. Since then, the ECB has stopped providing 12-month liquidity, but offering three-month loans instead. Worries about the impact of the change sparked sharp falls in financial markets this week and pushed the euro lower. Some Spanish and German banks voiced alarm that ECB funds were no longer being provided for such a long period, adding to uncertainty. But the euro rebounded after news of the low take-up of three-month loans, while key money-market euribor futures eased after the ECB announced the results. European bank shares also rallied as signs of funding tensions eased. At the heart of the eurozone, bank stocks gained. On France’s Cac 40 index, BNP Paribas was up 1.4 per cent, Crédit Agricole rose 2.4 per cent and Société Générale was 1 per cent higher. The troubled periphery also saw significant rises. On Spain’s Ibex 35 index, Bankinter rose 1.4 per cent to €5.10, while Banco Santander was up 2.6 per cent.

185 The interest rate charged by the ECB for the three-month loans, in which the central bank met eurozone banks’ demands in full, was 1 per cent – higher than market interest rates. But analysts had expected banks might still take advantage of the offer on a precautionary basis. Ahead of the offer, ECB figures suggested there was about €300bn of excess liquidity in the eurozone financial system, or about €200bn more than normal. Assuming banks were happy to return to more normal levels of liquidity, the return of the €442bn in one- year loans would still have left them looking for more than €200bn of funding from other sources. The result of the three-month liquidity offer will please the ECB, which is keen to wean eurozone banks off its emergency liquidity and feared that providing loans on a 12-month basis was distorting financial markets. However, it is likely to wait before sounding the all- clear. On Thursday, the ECB is also offering unlimited liquidity for a period of six days, which will tide banks over until next week’s offer of seven-day liquidity, when demand will also be met in full. Additional reporting by David Oakley and Matthew Kennard in London http://www.ft.com/cms/s/0/fd60c6cc-842b-11df-b9f8-00144feabdc0.html European Central Bank Published: June 30 2010 09:30 | Last updated: June 30 2010 16:43 Not so fast! The first of the European Central Bank’s one- year emergency loans to eurozone banks is due to be repaid on Thursday amid pleas to renew the 12-month lifeline. Some fear that repayment of the €442bn facility could trigger a credit crunch for eurozone banks such as Spain’s unlisted savings banks, or cajas, and the banks of Greece, Ireland and Portugal, which have struggled to fund themselves in interbank markets and depend heavily on ECB funding. The ECB, although keen to wean banks off its liquidity support, has partially addressed such concerns by offering them three- month loans. Worries may have been overdone anyway: take-up of the short-term liquidity in Wednesday’s auction, at €132bn, was much lower than the €250bn-€300bn expected, suggesting that banks are finding it easier to fund themselves. European bank shares rallied as a result after Tuesday’s heavy sell-off. The ECB, therefore, has been partially successful in its attempt to reduce banks’ dependence on its funding and will drain some €300bn of surplus liquidity from the system. That is no bad thing: its lending to eurozone banks stands at about €880bn, almost double what it was lending before Lehman Brothers’ collapse. The auction’s lower-than-expected takeup, however, does not signal an end to the eurozone bank funding crisis. That 171 banks rushed to snap up over €100bn worth of euros at 30 basis points above 3-month Libor indicates that all is still not well for many lenders.

186 German banks expected to call on rescue fund By Gerrit Wiesmann in Berlin and Patrick Jenkins and David Oakley in London Published: June 30 2010 20:55 | Last updated: June 30 2010 20:55 Germany’s bankers and policymakers are braced for possible emergency capital injections into some German banks after the eight members of the troubled Landesbank sector agreed to undergo stress tests alongside eight other banks. One Berlin finance policy expert said he expected “considerable turbulence”. A senior banker predicted “two, three or four” calls for capital from the German government’s Soffin bank rescue fund. In depth: European banks - Jun-30 Editorial Comment: The ECB begins to make for the exit - Jun-30 Banks borrow less than feared from ECB - Jun-30 Relief at low uptake of ECB money - Jun-30 Lex: European Central Bank - Jun-30 EU deficit offenders face aid cut-off - Jun-30 This comes amid growing fears over the eurozone banking system’s health. Europe’s leaders hope the planned publication of stress tests will help restore confidence. After Tuesday’s sharp stock market falls, bank shares and the euro rallied on Wednesday. Demand for three-month loans by the European Central Bank as an alternative to emergency loans it made a year ago proved less than feared. More than 1,100 eurozone banks on Thursday have to repay €442bn of one-year loans. Representatives from the Landesbanks, owned by Germany’s regional governments and municipal savings banks, and other top banks met regulators from the Bundesbank and the Bafin markets watchdog. Government officials said there was agreement to enlarge the number of stress-tested banks from Deutsche Bank, Commerzbank and Bayerische Landesbank to 16 banks, covering just over half of the market. With seven additional Landesbanks, officials expected high street bank Postbank, co-op banks DZ and WGZ, and specialist lenders HRE, Aareal and IKB to join the enlarged group. The Committee of European Banking Supervisors, Europe’s financial regulation overseer, has extended Europe-wide stress tests to about 100 institutions from 26. Half of each leading country’s banking industry by assets will have stress tests. In part Berlin initially resisted stress testing the Landesbanks fearing that it would expose the weakness of their capital cushions. It has since come to view publication, however, as a tool to force the banks to take action. Germany’s bank rescue fund could step in comfortably as it still has €250bn in credit guarantees and €52bn in capital to disburse – though Landesbanks may look to state governments for help. http://www.ft.com/cms/s/0/35558fec-847f-11df-9cbb-00144feabdc0.html

187 ft.com/alphaville All times are London time The cost of normalisation Posted by Izabella Kaminska on Jun 30 13:22. So — the ECB’s 3-month liquidity operation saw less demand than expected on Wednesday. Approximately €132bn versus consensus expectations of some €250bn, to be exact, which left markets and the euro to rally after the announcement. Nevertheless, as Unicredit’s Luca Cazzulani warned in his LTRO guide, there are some risks associated with too little demand for the facility — specifically demand below the €140bn mark, as has transpired. As he noted previously: If the amount of liquidity rolled over is only 140/150bn, the Eurosystem would revert to“neutral liquidity stance”. This would have a dramatic impact on MM rates, which would most likely jump back towards the refi rate. Bund yields would also suffer, as investors would price out the recent safe-haven rally. Which means: with demand coming in well below €140bn, so-called ‘normalisation’ of the money-markets begins in earnest on Wednesday — especially since all excess liquidity has now essentially been wiped out of the eurozone in one fell swoop. Take for instance Wednesday’s three-month euro Libor. This rose markedly even as other rates stayed steady:

And here, for dramatic effect, is the associated chart of 3-month euro Libor:

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This in itself is a reaction to rising Eonia rates (Euro OverNight Index Average) – the actual overnight euro interbank borrowing rate for interbank deals done on the day. The rate will have been lifted by the active return of banks into the real money market, and also due to the evaporation of excess liquidity. As Barclays Capital noted on Tuesday regarding the potential effect on Eonia: All in all, the liquidity surplus will be substantially lower it has been up until recently, with the potential to push EONIA higher and to make it more volatile in the coming months. This should also tighten FRA-OIS spreads in near maturities. At these levels, all other things being equal, it also highlights that the market expectations of a normalisation of EONIA by end-2011 is quite optimistic (ie, late). The crucial factor therefore comes in how those (distressed?) banks which did have reason enough to borrow from the ECB — at fairly uncompetitive rates versus what the real market has to offer — cope with the potential normalisation of wider rates. After all, the reason the original 12-month facility worked was because it succeeded in driving down overall market rates, via the carry trade it opened up. But now we have the awkward situation in which a two-tiered money market structure may have been developed. Those banks stuck on the ECB drip feed — and those potentially managing their exposure to those very banks. What’s more, what does it say that the average borrowed on a per bank basis has actually doubled? Last year, 1121 banks tapped $442bn, today 171 banks tapped €132bn – which means the average borrowed by banks has gone up from €394m to €771m. The problems in the system hence haven’t gone away — as demonstrated by those banks that see fit to use the facility–they’ve potentially just been localised. In the meantime, all excess liquidity that was there has been sucked up completely. Izabella Kaminska The cost of normalisation on Jun 30 13:22.http://ftalphaville.ft.com/blog/2010/06/30/275216/the-cost-of- normalisation/?updatedcontent=1

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01.07.2010 G20 should worry about global imbalances not exit strategies By: Marco Annunziata

Last weekend’s G20 meeting in Toronto has confirmed that global macroeconomic coordination has lost momentum. Perhaps this is good news: international policy coordination seems to improve only in times of crisis, so maybe the fact that it is now losing steam means that global economic and financial conditions really are improving. Yet, lack of international policy coordination will come back to haunt us. The G20 communiqué was a very elegant reconciliation of widely diverging viewpoints, but the lack of agreement on substantive points or concrete actions was only very thinly veiled. Everyone concurred that both debt sustainability and economic growth should be safeguarded; however, there was no indication of concrete measures to make the two compatible, or of which should take precedence in case of conflict. Pragmatically, the G20 conceded that each member should go at its own pace, with more aggressive fiscal consolidation in countries with the weakest public debt outlook. Indeed, the communiqué emphasized that a staggered approach to fiscal consolidation would minimize risks to the global recovery. But behind the official rhetoric there is still a sharp divergence in views, with the US and Germany on opposite ends, each trying hard to sway the consensus in its favour. Germany sees the greatest threat in lack of fiscal discipline. Not just because of the recent turmoil in sovereign bond markets—German officials have often showed a deep-rooted suspicion of markets — but because of the country’s fundamental belief that sound public finances are essential to stability. The fact that the Stability and Growth Pact has unraveled, requiring large scale bailouts and direct sovereign bond purchases by the ECB, has strengthened Germany’s conviction that asserting fiscal discipline within the Eurozone is a top priority.

190 The US appears much more concerned about the short term risks to a still fragile global recovery, is in no hurry to launch fiscal consolidation measures, and has repeatedly voiced concern that a premature rush to fiscal austerity in Europe might trigger a double-dip recession. So far, so harmless, in my view. Lack of coordination might indeed be a blessing when it comes to exit strategies. Since countries face different policy challenges, an uncoordinated approach could give us exactly what we need, that is fiscal consolidation in the right places and at the right speed. Moreover, I believe that concerns of a eurozone rush to austerity are exaggerated. Ambitious fiscal consolidation plans have been launched in Greece, Ireland, Portugal and to a lesser extent Spain; but these are relatively small countries. In the three largest Eurozone members, France, Germany and Italy, the pace of envisioned consolidation is very moderate: Italy and Germany started off with relatively small fiscal deficits already, and France is counting on faster economic growth to close at least half of its gaping fiscal hole. For the eurozone as a whole, there is no draconian fiscal adjustment underway, and concerns about the near-term negative impact on growth are therefore overdone; moreover, given that we start with extremely high ratios of public expenditures to GDP, there is ample to room to reduce fiscal deficits in a way that actually increases the efficiency and growth potential of these economies. Meanwhile, the recovery in the rest of the world and especially in large emerging markets is robust enough to withstand a short-term loss of growth momentum in Europe. Lack of international policy coordination might be harmless or outright beneficial in the short term, but it may come back to haunt us in the medium term. Behind the US-Eurozone disagreement on fiscal consolidation lies a long standing difference in attitudes towards a bigger issue, namely global macroeconomic imbalances. The US is not just concerned about the short term risks to growth; it also worries that if Europe pulls the brakes at the same time as the EUR has depreciated sharply, and while China still seems reluctant to allow the RMB to appreciate, global growth could once again become overly dependent on US private consumption. A sustained acceleration in global growth would then imply a return of those same global imbalances that helped sow the seeds of the financial crisis. The G20 communiqué politely calls on surplus countries to stimulate domestic demand and on deficit countries to raise domestic savings—but again, with no concrete commitments to back up these laudable goals. This might also be because the Eurozone continues to regard global imbalances as somebody else’s responsibility: since the very onset of the financial crisis, Eurozone policymakers have stressed that as the single currency area has a broadly balanced external position, it could not be blamed for imbalances that would clearly need to be addressed mostly by the US and China. The eurozone, in other words, had already refused to be part of the solution. The concern is that it might now become part of the problem, if exports remain its principal engine of growth. The increasingly concrete prospect of beggar-thy-neighbor tensions of foreign exchange markets, with the impending threat of the return of global imbalances, are where lack of global policy coordination might soon be sorely missed. Marco Annunziata is chief economist of UniCredit Group. http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2841&tx_ttnews[ba ckPid]=901&cHash=c9889e50a0#

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Conservatives use Pelosi as face of liberalism in campaign ads

By Karen Tumulty Washington Post Staff Writer Thursday, July 1, 2010; A01

Beware! Nancy Pelosi is a colossal tax-dollar-engorged monster who ravages small towns and must be brought down by Republican ray guns. Or at least that is what a cartoon version of the House speaker looked like in "Attack of the 50-Foot Pelosi," a television ad that a conservative group called Right Change aired in Pennsylvania last month. A new Web site by the National Republican Congressional Committee portrays her as a malevolent puppet master, yanking the strings of 10 vulnerable House Democrats. And a video on the campaign home page of GOP House candidate Harold Johnson of North Carolina makes her sound like someone out of those creepy cable ads for burglar alarms. "If you're a small-business owner," Johnson says, "you get up every morning and you put your helmet on, because you think that Nancy Pelosi is going to come into your bedroom and hit you over the head with a baseball bat." This is the kind of problem that J. Dennis Hastert, Carl Albert and Frederick Gillett never had to deal with. House speakers, with a few exceptions, have been such colorless legislative insiders that the mention of their names in most of America would have received no reaction beyond quizzical looks. Not this year, and not this speaker. "If you go to almost any grass-roots event and you mention the speaker's name," said Bill Flores, a Republican who is challenging Rep. Chet Edwards (D-Tex.), "you will get a huge response from the audience." Which is why, by Flores's estimate, he manages to drop Pelosi's name into his speeches about as often as he does President Obama's. Pelosi (D-Calif.) has become "the face of liberalism in the Obama era," more so than Obama himself, said Julian E. Zelizer, a professor of history and public affairs at Princeton. Her infamy among conservatives is partly the product of her often-imperious manner, a rougher media culture and a superheated political climate. But it is also a backhanded acknowledgment of how effective she has been. Pelosi has unabashedly wielded the leverage of her office to muscle her agenda through the House. Once dismissed by her opponents -- and even some of her fellow Democrats -- as a lightweight, she has proved to be "the most powerful speaker we've seen in modern history," said political analyst Charlie Cook, whose assessment is shared by a number of congressional scholars. More questionable is whether making Pelosi the bogeywoman of this year's congressional elections will help Republicans win back the House. A Washington Post-ABC News poll conducted in late March, around the time that the speaker engineered the final passage of health-care overhaul in the House, suggested that she stirs both sides.

192 Pelosi's overall approval ratings had not changed much over the previous three months, but the partisan passion that surrounded her had grown more intense. Among Republicans, the number who "strongly disapprove" of her performance jumped from 60 percent to 74 percent, which was greater than their negative view of Obama. But there was a corresponding rise in her approval among Democrats: Thirty-eight percent "strongly approved" of her performance as speaker in late March, up from 22 percent in mid-January. So when the Republican National Committee unfurled a big red "FIRE PELOSI" banner last month from a window of its Capitol Hill headquarters, right above the front door, the Democratic Congressional Campaign Committee sent out a photo of it in its own fundraising e-mail. "Fire Pelosi" became a GOP rallying cry 15 minutes after the health-care vote, when the RNC launched a Web site depicting the speaker engulfed in flames and brandishing her fist. The Republicans say that one appeal raised $1.5 million in less than a week; Democrats called upon her supporters to come up with at least $1 million in response. When Pelosi is asked about the starring role she is playing in this year's campaign, she dismisses it. "I think mostly people are interested in what the comparison is between the candidates," she said. "Let them do what they do." Indeed, making an issue of the speaker is not exactly a new idea. As far back as the 1980 presidential campaign, Republicans aired a television ad that depicted a car running out of gas. Behind the wheel was a beefy, white-haired actor who looked a lot like Tip O'Neill (D-Mass.). "He really has an Irish kisser," the then-speaker said of his doppelganger. Newt Gingrich's staff estimated that his name or image popped up more than 100,000 times in campaign advertising during his stormy four-year tenure. "It can become really demoralizing for your side," the Georgia Republican said. The current effort against Pelosi, he added, "weakens her in her own caucus, as it certainly weakened me in my own conference." But did their assault on Gingrich win the Democrats any seats? "No," said Steve Elmendorf, who was the top aide to then-House Democratic leader Richard A. Gephardt (D-Mo.). "It's very hard in any of these races to make it about the congressional leadership." And Gingrich warned that campaigning against the Democrats -- even one as unpopular with Republicans as Pelosi -- is no substitute for offering voters some idea of how the GOP would govern if Republicans won back the House. "People who think that all the Republicans should do is just yell 'no' are just plain wrong," he said. Especially when your opponent is 50 feet tall. Staff writer Paul Kane and staff researcher Madonna Lebling contributed to this report. http://www.washingtonpost.com/wp- dyn/content/article/2010/06/30/AR2010063005328.html?wpisrc=nl_headline

193 Americas

June 30, 2010 Economies in Latin America Surge Forward By SIMON ROMERO LIMA, Peru — While the United States and Europe fret over huge deficits and threats to a fragile recovery, this region has a surprise in store. Latin America, beset in the past by debt defaults, currency devaluations and the need for bailouts from rich countries, is experiencing robust economic growth that is the envy of its northern counterparts.

Eliseo Fernandez/Reuters

Copper awaiting delivery in Valparaíso, Chile. Latin America has benefited from strong Asian demand for commodities. Strong demand in Asia for commodities like iron ore, tin and gold, combined with policies in several Latin American economies that help control deficits and keep inflation low, are encouraging investment and fueling much of the growth. The World Bank forecasts that the region’s economy will grow 4.5 percent this year. Recent growth spurts around Latin America have surpassed the expectations of many governments themselves. Brazil, the region’s rising power, is leading the regional recovery from the downturn of 2009, growing 9 percent in the first quarter from the same period last year. Brazil’s central bank said Wednesday that growth for 2010 could reach 7.3 percent, the nation’s fastest expansion in 24 years.

194 After a sharp contraction last year, Mexico’s economy grew 4.3 percent in the first quarter and may reach 5 percent this year, the Mexican government has said, possibly outpacing the economy in the United States. Smaller countries are also growing fast. Here in Peru, where memories are still raw of an economy in tatters from hyperinflation and a brutal, two-decade war against Maoist rebels that left almost 70,000 people dead, gross domestic product surged 9.3 percent in April from the same month of last year. “We’re witnessing what are probably the best economic conditions in Peru in my lifetime,” said Mario Zamora, 70, who owns six pharmacies in Los Olivos, a bustling working-class district of northern Lima where thousands of poor migrants from Peru’s highlands have settled. Vibrancy mixes with grit around his pharmacies. A Domino’s Pizza vies for customers with Peruvian-Chinese restaurants called chifas. Motorcycle taxis deliver passengers to nightclubs. Competition, in the form of a newly arrived Chilean pharmacy chain, looms around the corner from his main store. Los Olivos offers a glimpse into the growth lifting parts of Latin America out of poverty, but big exceptions persist. In Venezuela, electricity shortages and fears of expropriations caused gross domestic product to shrink 5.8 percent in the first quarter. But Venezuela, and to a lesser extent Ecuador, another oil-dependent country that lags behind its neighbors in growth, seem to be exceptions to a broader trend. Even small countries ideologically aligned with Venezuela have adopted pragmatic policies and are faring well. While Europe was gripped by fears of contagion from Greece’s debt crisis, the credit rating agency Standard & Poor’s upgraded Bolivia in May, citing its sound public finances. Latin America’s growth largely reflects a deepening engagement with Asia, where China and other countries are also growing fast. China surpassed the United States last year as Brazil’s top trading partner, and is the second largest trading partner in countries like Venezuela and Colombia, Washington’s top ally in the region. Some scholars of Latin America’s economic history of ups and downs say the robust recovery may be too good to last, pointing to volatile politics in some places, excessive reliance on commodity exports and the risks of sharply increasing trade with China. Michael Pettis, a specialist at Peking University in Beijing on China’s financial links with developing countries, said the region was especially exposed to Chinese policies that had driven up global demand for commodities, including what appears to be Chinese stockpiling of commodities. “Within China there is a ferocious debate over the sustainability of this investment-driven growth,” Mr. Pettis said. “I’m worried that too few policy makers in Latin America are aware of the debate and of the vulnerability this creates in Latin America.” Other economists, including Nicolás Eyzaguirre, director of the Western Hemisphere department of the International Monetary Fund, suggest that low international interest rates, another factor supporting Latin America’s growth, will not last much longer. Even so, they applaud home-grown policies that are supporting growth. Chile, for instance, saved revenues from copper exports when commodities prices climbed, allowing it to enact a stimulus plan last year and rebound from the February earthquake.

195 Chile’s economy grew 8.2 percent in April from the previous month, its biggest increase since 1996. “This time around, the positive shock is probably even better, since some countries saved at least part of their windfall from the good years,” Mr. Eyzaguirre said. Within the fund itself, Latin America’s recovery is translating into new political sway, particularly for Brazil, which has paid its debt to the fund and is seeking to enhance its voting stake in it. As Brazil posts China-level growth, President Luiz Inácio Lula da Silva is nurturing soft-power ambitions, with ventures like a state television station that will broadcast to African nations. David Rothkopf, a former Commerce Department official in the Clinton administration, pointed to the dozens of embassies and consulates that Mr. da Silva has opened around the world. “Like other Latin American countries, Brazil needs to improve its infrastructure and train more engineers,” Mr. Rothkopf said, “but it embodies the rise of emerging powers, one of the great themes of this century.” Peru, whose economic growth is expected to rival or outstrip Brazil’s over the next several years, exemplifies the challenges remaining in a sizzling economy. The country boasts nimble companies like Ajegroup, founded during the chaos of the 1980s. Now the company’s soft drinks compete with giants like Coca-Cola, not just in Peru but in other Latin American countries as well. Foreign investment has flowed into Peru, largely in mining. But this investment reveals both weaknesses and strengths. Mining accounts for about 8 percent of economic activity, but about half of tax revenues, creating problems if commodities prices fall, said Pedro Pablo Kuczynski, a former finance minister here. Deep inequalities also persist, especially between the capital, Lima, and the Andean highlands and the forests of the Amazon basin, where factions of the Shining Path guerrilla group feed off the cocaine trade. As much as 70 percent of the labor force still works outside the tax system, depriving workers of benefits and the government of revenue. But some of what glitters in Peru’s boom seems to be paving the way for lasting prosperity. Felipe Castillo, 60, mayor of Los Olivos, is investing tax proceeds in a new low-tuition municipal university for 4,000 students. He gazed recently at the 11-story structure, in a slum that has begun to take on the trappings of a lower-middle-class district. “Maybe the students at this institution will look at the mistakes of our economic policy in the past as the tragic features of a bygone era,” Mr. Castillo said. Andrea Zárate contributed reporting from Lima. http://www.nytimes.com/2010/07/01/world/americas/01peru.html?th&emc=th

196 06/30/2010 11:44 AM Prospering at the Expense of Others? Germany's Export Boom Has Trade Partners Stewing By Armin Mahler, Christian Reiermann, Wolfgang Reuter and Janko Tietz The German economy is rapidly improving, with many manufacturers struggling to keep up with demand. But not all are happy with the country's recovery. Many say that Germany's export gains are coming at the expense of its trading partners. Only a year ago, the German company Getrag was on the brink of bankruptcy. An auto parts supplier based in southwestern Germany, the company had been hit hard by the economic crisis. Revenues had dropped by 25 percent, to about €2 billion ($2.45 billion), and the company was forced to reduce its workers' hours under the government's "short work" program. Only a state loan guarantee saved Getrag from falling victim to the crisis. Today the company is inundated with orders. BMW alone orders 140 transmissions a day, even through Getrag can only manage 120 per day. "Week after week, I sign requests by the company to have its employees work on Saturdays, Sundays and holidays," says Frank Iwer of the district office of the metalworkers' union IG Metall in the southwestern state of Baden- Württemberg. Iwer is familiar with many cases like Getrag's: the machine builder that is hiring large numbers of new workers; the manufacturer of packaging machines that has retrieved almost all of its employees from the "short work" program; the small supplier that rehired all 24 workers it had recently laid off because the business climate unexpectedly improved. Suddenly there is good news coming from German companies again. Some are so busy that they have added extra shifts, while others have shortened their summer shutdown periods to satisfy global demand. The German economy was more severely affected than most by the global recession -- few other economies are so skewed toward exports and so dependent on the global economy. When the global economy took a nosedive after the near-collapse of the financial markets, the German economy shrank by 5 percent in 2009. Some companies saw revenue declines as high as 50 percent. Back on Track But now, the world economy is back on track and growing even faster than expected. Demand for German machines and automobiles has spiked upward. Sales are still not back to pre-crisis levels, and setbacks cannot be ruled out given the tense situation on the financial markets. Nevertheless, Germany's comeback has sparked renewed criticism of the German economic model. Germans are living at the expense of others, say detractors, because the country's trade surpluses mean that countries with already large deficits will have to borrow even more. The Germans, they say, are also gaining competitive advantages in unfair ways, because of the weak euro and a reluctance to increase wages. On top of all that, Germany refuses to stimulate domestic demand, say critics, which would improve foreign producers' prospects of selling their goods in Germany.

197 For decades, the Germans were admired around the world for their export industry and high- quality products. Now, that has changed. Now, Germany is seen as an egoist who refuses to play by the rules. Once a role model, Germany is now the global bogeyman.

Leading the charge are US President Barack Obama and Treasury Secretary Timothy Geithner. They are supported by Paul Krugman, the Nobel laureate in economics, and billionaire George Soros, who cultivates the self-image of the enlightened speculator. They are all calling on countries like Germany to abandon their thrifty policies and launch new economic stimulus programs. There is also pressure from Europe. Politicians like French Finance Minister Christine Lagarde accuse Germany of growing at the expense of other euro-zone countries. The crux of the accusations is Germany's effort to curb increases in unit labor costs, thus taking market share from others. Greece uses the same argument when blaming Germany for being partly responsible for its dire fiscal problems. At its heart, the critique is aimed squarely at Germany's export industry. Many economists hold that global trade imbalances are one of the causes of the economic crisis. They are thus calling upon the Germans to do nothing less than embrace an entirely new economic model.

198 Thrown Out of Balance It is hard to deny that the world has been thrown out of balance. The United States, for example, has been living beyond its means for decades. It imports far more than it exports, and it pays for this deficit by borrowing from others, mostly China, which has already accumulated foreign currency reserves worth $2.5 trillion. But if the US is living beyond its means, then, according to this line of thinking, surplus countries like China, Germany and Japan are living well within theirs. They produce more than they consume, which forces them to invest their excess cash abroad -- in American and Greek government bonds, for example. Surpluses are only possible when others have deficits, and the greater the imbalance, the greater the risk that the growing tensions will eventually erupt. Global leaders agreed to address the problem last September at the G-20 summit in Pittsburgh. But the question remains: How? In an ideal world, this occurs automatically through exchange rates. Exports provide a country with profits, resulting in rising wages and more expensive products. This automatically curbs exports. In addition, the leading industrialized nations often require payment for their exported goods in their own currencies. This means that as a country's exports grow, so does the demand for its own currency, thereby increasing the value of the currency. This currency appreciation likewise curbs exports by making them more expensive. The unfettered interplay of these economic forces produces a tendency toward equilibrium. Competition creates affluence, which in turn counteracts competitiveness. Artificially High So much for theory. In practice, the Chinese have invalidated this principle with a trick: Instead of being paid for their exports in their national currency, they are paid in dollars, which they then use primarily to buy American treasury bonds. This keeps the value of the dollar artificially high, while the Chinese yuan remains relatively weak. As a result, Chinese goods are dirt cheap, enabling the country to unseat Germany as global export leader. A new equilibrium can only develop if China stops keeping its currency artificially undervalued. In the past, the country has consistently rejected the West's demands that it alter its currency policy. But shortly before last weekend's G-20 summit in Toronto, Beijing signaled that it might be willing to budge. The announcement that the country planned to revalue its currency triggered euphoria on global markets. Disillusionment quickly set in when it became clear that Beijing only intends to make minor adjustments in the value of the yuan. Nevertheless, the move enabled China to redirect criticism toward other countries with trade surpluses, including Japan and, most of all, Germany. But what should Germany do? The country doesn't have its own currency that it could appreciate to make German exports more expensive. Even worse, critics say, Germany is benefiting massively from the current weakness of the common European currency. Several member states have gambled away their creditworthiness, resulting in the euro's recent freefall. But the euro's woes are a boon for the German economy, which can now sell exports more cheaply abroad. Merkel Says Criticism Is One-Sided Within the euro zone, the lack of an exchange rate balancing mechanism has led to growing tensions as economies develop at different rates. If the euro didn't exist, the deutschmark

199 would likely have become more expensive in recent years, which would have reined in German competitiveness. Many experts believe that if Germany were to withdraw from the euro group today, its currency would immediately appreciate by at least 30 percent, which in turn would lead to a sharp increase in unemployment. Precisely because Germany derives such great benefit from the common currency, particularly in times of a weak euro, the Germans are now coming under growing pressure to do their part to eliminate the imbalances. Critics say that the Germans should increase wages and borrow more instead of saving. Germany should bring itself into line with the remaining euro countries when it comes to wage levels and debt, says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD). Critics of the German position warn that if this does not happen, and if, instead, the weak emulate the strong by saving more and reducing wages, this could lead to a downward spiral. Irritating the Chancellor As is so often the case in economics, the controversy pits two irreconcilable camps against one another. The one faction fears that if governments save too much, the result will be deflation, a vicious cycle of falling prices and shrinking economic output. The other faction is worried that uncontrolled borrowing will hamstring the government and fuel inflation. When Chancellor Angela Merkel is confronted with accusations that Germany is exporting its way out of the crisis at the expense of its partner nations, her irritation is difficult to miss. In a semblance of fatalistic resignation, she typically rolls her eyes and is likely to ask: "Who exactly has the prerogative of defining when imbalances are serious?" Merkel argues that nations with deficits bear at least as much of the blame as those with current account surpluses. People in countries with deficits, she says, have lived beyond their means for years, buying cars, houses and stocks on credit, while governments did nothing to slow their greed. The chancellor believes that, in light of demographic changes, the Germans should not be chided, but should in fact be praised for not being as wasteful, for saving their money and for providing for their old age. Besides, Merkel adds, the relative lack of pay increases in recent years, for which Germany is frequently criticized, is not the result of government economic policy. In Germany, as she points out, wage and salary increases are subject to negotiation between unions and employers' associations, not government decrees. And in her view, Germany's export successes are also not the result of government control. If German companies are successful abroad, says Merkel, this simply proves that they offer decent quality at reasonable prices. No Alternative The government believes that the criticism of German surpluses is far too one-sided, because without the German surpluses, the balance of trade for the entire euro zone would not be almost level, as it is, but would be deeply in the red. By implication, this means that Germany's export success contributes to the stabilization of the common currency. "Since we already have a common European domestic market, we should no longer be treated as an individual nation," says Merkel. Merkel's economic advisors are also convinced that Germany's trading partners will benefit from the country's export strength as the recovery begins. They argue that if the German economy grows by 2 percent this year, because it will benefit more and earlier from the global

200 economic recovery, income and profits will increase, and Germans will spend at least some of the additional money on foreign products. Plus, few see much of an alternative to the current economic model. "We cannot slow down the pace so that other countries have more time to do their homework," says Anton Börner, head of the Federation of German Wholesale and Foreign Trade (BGA). If the Germans relinquish their position in global markets, Börner argues, others -- the Koreans, the Indians and, most of all, the Chinese -- will simply pick up the slack. The rapidly growing Asian economies often expand their industrial capacity under government direction. They build state-of-the-art factories and do everything in their power to acquire the necessary know-now for the latest developments in machine building and auto manufacturing. German industry's competitive advantage shrinks with every newly minted Chinese graduate of a university engineering program. Half-Empty About 25,000 Chinese are now enrolled in technical universities and regular universities in Germany. "We are feeding the dragon every day," says Carl Martin Welcker, chairman of the German Machine Tool Builders' Association. It would not do the Americans any good if the Germans lost their export strength. Plus, orders from Asia have become far more important to the German economy then orders from the US. Jürgen Fleischer bears witness to this new reality. Fleischer heads up European activities for MAG, an international maker of specialist machines, and also has an office on Madison Avenue in New York. But even though MAG generates about half of its sales in the United States, Fleischer hasn't been spending much time at all in his New York office lately. "China is the key growth market," says Fleischer. "When I'm flying west, the plane is usually half-empty. But when I'm heading east, there are usually two flights in a row." Translated from the German by Christopher Sultan. URL: http://www.spiegel.de/international/business/0,1518,703617,00.html RELATED SPIEGEL ONLINE LINKS: G-20 Differences: Half-Hearted Promises and Mutual Blame (06/28/2010) http://www.spiegel.de/international/world/0,1518,703235,00.html US-China Currency Dispute: 'No-One Is Going to Be Bought Off by a Tiny Revaluation' (06/26/2010) http://www.spiegel.de/international/world/0,1518,703062,00.html Savings Salvoes: Merkel Defends Herself Against Criticism from Washington (06/24/2010) http://www.spiegel.de/international/germany/0,1518,702579,00.html Trans-Atlantic Turbulence: Nobel Economist Krugman Slams German Austerity (06/21/2010) http://www.spiegel.de/international/business/0,1518,701894,00.html Germany's Economy on the Mend: Berlin Budget Deficit Much Lower than Expected (06/22/2010) http://www.spiegel.de/international/business/0,1518,702114,00.html Opinion: How Much Euro Decline Will Obama Tolerate? (05/20/2010) http://www.spiegel.de/international/business/0,1518,695963,00.html

201 06/30/20104 02:45 PM Dramatic Presidential Election Debacle for Merkel as Vote Goes to Third Round By Sebastian Fischer, Florian Gathmann, Veit Medick and Severin Weiland Chancellor Angela Merkel's nominee for the post of German president, Christian Wulff, failed to secure the necessary absolute majority in the two rounds of voting in the Federal Assembly on Wednesday. A third round of voting will be held in the coming hours. The shortfall is a debacle for Merkel. Editor's note: SPIEGEL ONLINE International will be updating its coverage of the German presidential election until a final result is reached after the third round of voting this evening. Rebels in Chancellor Angela Merkel's coalition dealt her a stinging blow on Wednesday by refusing to back Christian Wulff, her candidate for the post of German president, who failed to secure an absolute majority in the first two rounds of voting in the Federal Assembly. The vote was billed as a test of Merkel's authority. The large number of rebels in her coalition -- at least 44 in the first round and 29 in the second -- is a strong sign of dissatisfaction in her own ranks after months of in-fighting and setbacks that have led to a slump in popularity It has heightened speculation that her days as German chancellor may be numbered. Wulff again got most of the votes for the largely ceremonial post of head of state, with 615 out of 1,238 valid votes. But he fell short of the absolute majority needed to become president. Merkel's coalition of the conservative Christian Democratic Union (CDU), the Bavarian Christian Social Union (CSU) and pro-business Free Democrat Party (FDP) has 644 delegates, which means at least 29 members of that bloc refused to vote for the chancellor's candidate. In the first round the number of rebels was at least 44. Third Vote Imminent A third round will be held later on Wednesday in which candidates will no longer need an absolute majority -- more than 50 percent -- to win. They will only need a simple majority -- more votes than their rivals. The Federal Assembly is made up of delegates from the Bundestag, Germany's federal parliament, and from the 16 regional parliaments. Wulff's main rival for the presidency, Joachim Gauck, a popular former civil rights activist from eastern Germany, got 490 votes in the second round, down from 499 in the first. The center-left opposition parties that nominated him, the Social Democratic Party (SPD) and the Greens, together fielded only 460 delegates, which means he managed to attract votes from other parties as well. At a closed-door meeting after the first vote, Merkel had urged conservative delegates to rally behind Wulff for the second round. "We have common responsibility for the common political goals," she told them. The glum, deeply concerned faces of Merkel and her allies contrasted with smiles and laughter among opposition politicians. "This means the CDU and FDP are evidently having major problems closing their ranks," said Andrea Nahles, the general secretary of the SPD.

202 "It's positive because delegates are clearly voting for the man they prefer. It shows we have a lively democracy." A Slide in Popularity There has been speculation that Merkel's coalition could break apart if Gauck beats Wulff, but it is unclear whether and how that would happen. If Merkel doesn't want to quit, there are major constitutional hurdles that would make it difficult to oust her. Still, it could be the twilight of her term as chancellor. Wulff, widely regarded as a safe but uninspiring choice for the post, was nominated by Merkel and her center-right coalition government after the previous incumbent, Horst Köhler, resigned a month ago. Nominally, Merkel's coalition of conservatives and the pro-business Free Democratic Party command a comfortable majority of 21 in the Federal Assembly. Opinion polls show a majority of Germans would prefer Gauck, 70, a former Protestant pastor who campaigned against the East German regime in 1989 before the fall of the Berlin Wall. Critics said the election has been hijacked by party political interests and that delegates had not been truly free to pick the candidate they really wanted. Several members of Merkel's coalition had said in recent weeks they would prefer Gauck because his personal history gave him a powerful message of freedom and democracy for Germans. Merkel needs Wulff to win to underscore her leadership following a steep decline in her popularity since her re-election last September due to acrimonious rifts in her coalition, criticism of her handling of the euro crisis and anger at an €80 billion ($97 billion) austerity program that even some members of her own party regard as socially unjust. Environment Minister Dirk Niebel of the FDP said after the vote: "It was to be expected that the first round would be used to settle scores." A senior member of the CDU, Peter Altmaier, said he remained optimistic that Wulff "will end up as president." cro -- with wire reports URL: • http://www.spiegel.de/international/germany/0,1518,703824,00.html RELATED SPIEGEL ONLINE LINKS: • Photo Gallery: Electing a President in Berlin http://www.spiegel.de/fotostrecke/fotostrecke-56557.html • Letter From Berlin: German Presidential Election Degraded by Party Politics (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703575,00.html • Eastern Inspiration: Gauck the Therapist Wants to Put Germany On the Couch (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703658,00.html • Politics as Usual?: Merkel's Man for the Presidency (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703629,00.html • Letter from Berlin: Is Merkel's Government About to Crumble? (06/15/2010) http://www.spiegel.de/international/germany/0,1518,700788,00.html

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Boletín de Universia-Knowledge@Wharton http://www.wharton.universia.net 30 Junio- 13 Julio, 2010 ¿Son acertados los planes de austeridad de Europa? Siguiendo la promesa de Grecia de reducir drásticamente su deuda por medio de una combinación de recortes de gastos y el aumento de impuestos por parte del Gobierno, otros países, entre ellos España, Alemania y Francia —y, recientemente, Reino Unido—, también decidieron seguir por el camino de la austeridad. Aunque muchos se pregunten si un país como Grecia estará en condiciones de cumplir sus promesas sin recurrir a la reestructuración de la deuda nacional, la gran duda, en realidad, es si las medidas de austeridad funcionarán, tal y como proponen sus defensores. “Esos países se metieron en la situación en la que se encuentran y ahora no consiguen salir de ella”, dice N. Bulent Gultekin, profesor de Finanzas de Wharton. Eso sólo será posible si reducen los gastos, aumentan los impuestos o ambas cosas, es decir, si adoptan un régimen de austeridad. La gran preocupación de varios países europeos, durante toda la primavera en el hemisferio norte, era si serían capaces de hacer frente a sus deudas. Hubo una rebaja de las calificaciones de crédito de los países; aumentaron los tipos de interés de la deuda soberana, y se presionó al euro fuertemente. Por último, el 10 de mayo, los ministros de Finanzas de la Unión Europea (UE), junto con el Fondo Monetario Internacional (FMI) tomaron una decisión decisiva: la creación de un fondo de emergencia por valor de US$ 930.000 millones (€ 750.000 millones). Para diversos expertos, el paquete de ayuda, anunciado mucho después de que estallara la crisis, no llegó en el mejor momento. El 27 de abril, la agencia de calificación de riesgo Standard & Poor’s rebajó la deuda soberana de Grecia hasta el nivel de “bono basura”. Al día siguiente, los ingresos sobre los títulos de diez años del Gobierno griego alcanzaron un 11,24%. Pero el balance patrimonial del país ya había estado deteriorándose desde hacia años. El déficit presupuestario de Grecia este año superará el 10%, el ratio deuda/PIB alcanzó un 112% en 2009, y hay previsiones de que vaya a empeorar aún más durante los próximos años. Mientras tanto, la economía griega se reducirá un 4,6% este año, después de crecer, de media, más del 4% al año entre 1998 y 2007. Cuando se supo que se habían ocultado partes significativas de la deuda griega, el país se vio obligado a reconocer que sus problemas financieros habían pasado de graves a extremadamente graves. Como consecuencia de eso, el 2 de mayo, el país aceptó el paquete de ayuda ofrecido por la UE y por el FMI por valor de US$ 146.000 millones. Junto con el dinero se impusieron restricciones severas a los socios europeos de Grecia, sobre todo por parte de Alemania. Una de las restricciones más contundentes exigía a Grecia que redujera el déficit anual del presupuesto a menos del 3% del PIB en 2014, una medida que exigirá recortes de gastos del 5,3% del PIB, aumento de los impuestos del orden del 4% del PIB,

204 además de reformas económicas que, se espera, estimulen el crecimiento económico. Desde que Grecia aceptó la ayuda, ningún otro país europeo se ha visto forzado a recurrir al fondo de emergencia, aunque la UE y el FMI —pocos días después de salvar a Atenas— anunciaron la existencia de un fondo de ayuda por valor de US$ 930.000 millones para países con graves problemas fiscales en la zona del euro. Si un país cualquier decide aceptar esa oferta, sabe que tendrá que enfrentarse a medidas de austeridad semejantes a las de Grecia. Recortar gastos para crecer En el caso de algunos países europeos con problemas financieros, la cuestión de la austeridad tal vez no haya sido nunca un problema. Cosas más graves, dicen los expertos, sobre todo respeto a la escala y al tiempo, así como si la austeridad exigida sería adecuada para la envergadura del problema. En un mundo ideal, un país endeudado simplemente encontraría una solución a sus dificultades por medio del crecimiento. En el caso de Grecia, por ejemplo, la escasa posibilidad de crecimiento económico es considerada por mucha gente como parte sustancial de la razón por la cual el futuro fiscal que espera al país es sombrío. Una segunda estrategia consistiría en reprogramar o reestructurar la carga tributaria —en realidad, un impago negociado—, pero esa solución es muy problemática. “La reestructuración sería racional en algunos casos”, dice Gultekin, “pero en tales circunstancias, los mercados se quedarían paralizados y francamente desestabilizados”. Una tercera opción sería devaluar la moneda, una medida que puede dar vida nueva a la economía abaratando los productos. Pero el país, al estar en la zona del euro, no tiene control sobre su moneda y tendría que dar un paso radical: salirse de la eurozona para hacer posible la devaluación. Como tales alternativas no están disponibles o son demasiado amargas, los países en dificultades se ven obligados a recurrir a ayudas financieras o a “la bondad de extraños”, observa Richard J. Herring, profesor de Finanzas de Wharton. Sin embargo, es normal que tales paquetes de ayuda traigan consigo medidas de austeridad. Aunque el concepto detrás de la austeridad sea simple, hacer que se cumpla en la práctica no es nada fácil. En primer lugar, los accionistas —principalmente los sindicatos laborales europeos— tienden a resistirse con fuerza a tales medidas. Ese conflicto ha sido muy evidente en Europa durante los últimos meses. El 5 de mayo, en Atenas, la violencia se hizo patente en las calles durante las protestas contra los recortes en los gastos del orden de US$ 38.000 millones que reducían los salarios de los funcionarios, aumentaban impuestos sobre los cigarrillos y el alcohol e introducían normas más severas para la jubilación. El saldo fue de tres muertos, lo que no impidió que la ley fuera aprobada al día siguiente. El 16 de junio, sindicatos franceses anunciaron que convocarían una huelga para el día 24 para protestar contra la intención del Gobierno de elevar la edad de jubilación de 60 a 62 años. Los sindicatos españoles amenazaron con una huelga en septiembre para protestar contra medidas como el recorte de salarios en el sector público en un 5% y la reducción del montante de la indemnización a los trabajadores despedidos. El segundo desafío a la introducción de medidas austeras se debe al hecho de que los problemas fiscales, como bien se sabe, suelen manifestarse de forma más grave en los peores momentos del ciclo económico: durante las recesiones y las recuperaciones frágiles. En momentos así suben mucho los gastos del Gobierno, ya que la población desempleada necesita desesperadamente el salario de desempleo y otros servicios. Al mismo tiempo, la recaudación de impuestos sufre las consecuencias de la desaceleración

205 económica. El resultado, según los especialistas, son desequilibrios fiscales controlables que pueden, de repente, volverse incontrolables. Los planes de austeridad son normalmente anunciados en esos momentos, sin embargo una característica desafortunada de las medidas tomadas es que reducen la demanda agregada, lo que puede empeorar las dificultades económicas del país o incluso contribuir al surgimiento de un ciclo de deflación. Muchos historiadores económicos creen que tales políticas contribuyeron a que el mundo tomara el rumbo que llevó a la Gran Depresión. El gran debate “Existe una discusión muy grande en torno a las medidas de austeridad: ¿tienen sentido o podrían acabar perjudicando la recuperación del país?”, se pregunta Mauro F. Guillén, profesor de Gestión de Wharton. Uno de los expertos que más cuestionan esa austeridad en el escenario económico actual es el profesor de economía de la Universidad de Princeton, Paul Krugman, que ha usado su columna en New York Times para defender la idea de que países como Alemania y EEUU sólo conseguirán profundizar el desempleo recortando gastos en un momento en que la economía mundial se encuentra en una situación de fragilidad. Alberto Lesina, profesor de economía de la Universidad de Harvard, tiene un punto de vista diferente: “El recurso a la austeridad en la gestión de los gastos tendrá un efecto limitado sobre el crecimiento, si es que lo tiene”. No importa de que lado se posicionen las personas, otra cuestión es la forma en que se introducen esas medidas, mucha gente aún asocia ese tipo de cosas a las políticas tan criticadas por el FMI en el pasado. Durante la crisis financiera asiática de finales de los años 90, por ejemplo, el FMI aconsejaba a los países desesperados como Indonesia a no sólo aumentar impuestos y recortar gastos, sino también a elevar los tipos de interés y cerrar bancos. Para Herring, el FMI aplicó “la misma estrategia prefabricada que había aplicado en América Latina y que no tenía cabida en el caso de los problemas a los que se enfrentaba Asia”. Esas medidas, de acuerdo con Christian Weller, profesor de políticas públicas de la Universidad de Massachusetts, han sido ahora “desautorizadas por aquellos que han seguido de cerca esos problemas”. La crisis de la deuda latinoamericana de los años 80 tenía que ver, en gran medida, con préstamos hechos por los gobiernos en moneda extranjera. Pero los gobiernos asiáticos, dice Weller, habían puesto en práctica una disciplina fiscal rigurosa y seguían una política monetaria saludable y, aún así, el FMI les exigió que “introdujeran medidas severas que, a fin de cuentas, empeoraban aún más una situación que ya era mala”. La crisis asiática, y también la crisis de Argentina de 2002, tenían que ver con préstamos privados contratados en gran cantidad en moneda extranjera. No se trataba de préstamos públicos. Las crisis estallaron cuando se volvió más difícil contratar nuevos préstamos. Incluso los defensores del FMI ya no abogan por las medidas que defendían para Asia en los años 90, “han cambiado desde entonces de estrategia prefiriendo el análisis específico de las condiciones existentes”, dice Uri Dadush, director del programa de economía internacional de Carnegie Endowment of International Peace. “Adoptaron una posición minimalista”. De hecho, dice Dadush, las condiciones más severas impuestas a Grecia cuando el país aceptó el paquete de ayuda no fueron consecuencia de alguna imposición del FMI, sino de otras naciones europeas, incluyendo a Alemania, “muy presionada internamente para que Grecia fuera castigada”. Pero la desconfianza respecto al FMI persiste. Gultekin destaca que, el año pasado, cuando países como EEUU estaban poniendo en práctica medidas sin precedentes de

206 estímulo a la economía en respuesta a la crisis financiera mundial, el FMI no defendía ningún tipo de austeridad. Ahora que los países de la periferia de Europa se enfrentan a dificultades, “el órgano ha cambiado de posición. Por lo tanto, ahora la gente ve cierto cinismo en la institución”. Ese cinismo puede convertirse en un obstáculo no sólo para la introducción de medidas austeras, sino también para la adopción de otras reformas que, de acuerdo con muchos economistas, son necesarias para que los países con problemas fiscales en el sur de Europa puedan poner la casa en orden. En primer lugar, son necesarias reformas en el mercado de trabajo como, por ejemplo, la reducción de indemnizaciones elevadas y la eliminación de normas que hacen extremadamente difícil que se despida a alguien. En Grecia, en Portugal, en Italia y en España, dice Gultekin, “despedir a alguien es tan difícil que muchos empleadores prefieren no contratar”. Eso funciona como una especie de barrera al crecimiento, lo que ya es malo, pero también es complicado en términos fiscales porque, según explica Alesina, “cuando hablamos de la relación deuda/PIB, el numerador tiene que disminuir y el denominador, aumentar”. ¿Funcionará? ¿Las medidas de austeridad serán adecuadas para los problemas fiscales de los países del sur de Europa y de otras regiones? De acuerdo con los especialistas, la respuesta parece ser un sonoro “sí”, con la posible excepción de Grecia. La crisis fiscal griega es tan grave como se dice. El FMI prevé que la relación deuda/PIB del país llegará a cerca del 150% en 2012, aunque se impongan medidas extremadamente duras. Para algunos, como Dadush, será difícil imaginar una manera de que Grecia se escape del problema de la deuda. Él cree que “el país es el que más oportunidades tiene de necesitar reestructurar la deuda o de conseguir algún tipo de perdón”. En otros países en dificultades en el sudeste europeo —Portugal, España e Italia—, la presión fiscal es grande, sin embargo menos severa que en la angustiada Grecia. De esos tres, Portugal es el que está en peor situación. Muchos creen que, después de Grecia, el país será el próximo en tener que reestructurar su deuda. La situación de España también es grave —el desempleo alcanzó el 19,7% en abril—, sin embargo, de acuerdo con Guillén, “el déficit presupuestario del país no es malo. Se trata de algo que se puede evitar, aunque el desempleo sea grande”. España ya ha empezado a tomar medidas para sanear sus desequilibrios fiscales: de entrada, se comprometió a reducir su déficit presupuestario primario a menos del 3% en 2012, frente a un 9,9% en 2010 y; en segundo lugar, ha dado los primeros pasos para poner en práctica una reforma laboral. Italia, por su parte, está en mejor situación que los demás, ya que el déficit del país, dice Dadush, “se encuentra dentro de límites razonables”. Pero los problemas fiscales derivados de la crisis financiera internacional pueden ir más allá de la zona del euro. En Reino Unido, el primer ministro David Cameron anunció, algunas semanas después de tomar posesión, que sería preciso tomar decisiones dolorosas en relación al presupuesto en el futuro próximo. El día 22 de junio, su Gobierno detalló un plan que preveía recortes de US$ 168.000 millones y un aumento significativo de impuestos sobre ventas. Los gastos medios de los ministerios serán recortados en un 25%, mientras el impuesto sobre el valor añadido pasaría del 17,5% al 20%. Los números, sin embargo, indican que la capacidad de Reino Unido de honrar sus deudas es superior a la de muchos otros países. La relación deuda/PIB, por ejemplo, aunque sea alta — en torno a un 69% —, no es motivo de pánico. Igualmente importante es el hecho de que el RU tiene también una óptima reputación de Gobierno, asegurando a los inversores que, no importa lo que suceda, se les devolverá el dinero. Además del continente europeo, los especialistas señalan a dos países que llaman la

207 atención por la deuda enorme que poseen: Japón y EEUU. Japón, a primera vista, parece ser, entre las principales economías del mundo, la que más problemas fiscales tiene. El ratio deuda/PIB del país es de un asombroso 219%. El nuevo primer ministro japonés, Naoto Jan, anunció el día 11 de junio que la carga tributaria podría llevar, un día, a una situación de crisis semejante a la de Grecia. De momento, sin embargo, observadores de fuera de Japón no parecen muy preocupados con la situación fiscal del país. Eso se debe, en gran medida, al hecho de que la deuda japonesa está denominada en yenes y es financiada en buena parte por los propios japoneses a tasas de interés muy bajas. Por lo tanto, observa Takatoshi Ito, profesor de la Escuela Superior de Economía de la Universidad de Tokyo, “cuando tenga lugar una crisis fiscal en Japón, el resto del mundo también se verá afectado, pero en grado mucho menor que con la crisis subprime en EEUU y en otras crisis parecidas”. Sin embargo, para un país que tiene una deuda monumental, ¿qué tipo de medida austera estaría en condiciones de resolver su problema? Ito recomienda el aumento gradual del impuesto sobre el valor añadido, cuya cuota actual es del 5%, hasta un 25%. De acuerdo con Dadush, Japón no está bajo una amenaza inmediata de crisis: “Ellos aún tienen algún espacio de maniobra. Pero si de aquí a tres años están en la misma situación de ahora, habrá dificultades”. Ito cree que lo mismo vale para EEUU, un país cuyas finanzas se encuentran bajo considerable estrés a causa de la baja recaudación de impuestos como consecuencia de la crisis financiera mundial, además del incentivo a los gastos y del dinero utilizado para financiar las guerras de Afganistán y de Oriente Medio. Sin embargo, el desgaste más serio y más a largo plazo para las finanzas americanas ocurre como consecuencia del aumento de los gastos de salud, lo que tiene como resultado un escenario fiscal “nada agradable”, dice Kent Smetters, profesor de Seguros y de Gestión de riesgo de Wharton. “Las deficiencias son enormes, especialmente en Medicare”. Smetters resalta que los desfases fiscales proyectados representan, en valores actuales, prácticamente el doble del valor de los títulos de capital del país: sus “tierras, edificios, casas y empresas privadas y públicas”. Pero, como en el caso de Japón, los inversores no manifestaron, de momento, un nerviosismo muy grande en relación a la deuda americana. Gultekin dice que la situación de reserva monetaria mundial del dólar americano “es un factor tremendo de flexibilidad”. Aunque diversos países, Europa y otros se hayan metido en problemas a causa de préstamos excesivos, “se aprende reparando”, dice Gultekin. “En las democracias, y en cualquier lugar, no se aprende nada si no hay que enfrentarse a sus propios problemas”. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1911

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Eurointelligence Daily Morning Newsbriefing Crisis is back with a vengeance as ECB’s sterilisation auction flops

30.06.2010 Global equity markets are plunging as investors are spooked by the European sovereign and banking crisis, amid signs that the US is falling back into recession; an €55bn ECB sterilisation auction flopped yesterday, as banks are hogging liquidity; Conference board consumer indicators plummets; Robert Shiller says another housing recession is possible; Paul Krugman is warning about the Third Depression; a story that Spanish banks complained about the expiry of the one-year fixed rate refinance operation also spooked the market, raising concerns about the health of the European banking sector; Europe agrees to widen the stress tests to 60-120 banks; Germany’s Landesbanken say they do not want to publish their results; Bundesbank to meet German bank chiefs today to discuss the situation; the stress test results for three German banks are leaked – they all passed – but the tests did not include any sovereign stress; Wolfgang Munchau takes a closer look at the BIS’ warning that central banks should not keep interest rates too low for too long; Royal Bank of Scotland, meanwhile, warns that much, much more quantitative and monetary easing may be on the way.

30.06.2010 Crisis is back with a vengeance as ECB’s sterilisation auction flops

After a brief lull, during which the crisis seemed almost forgotten, the financial market reverted to crisis from, with what FT Alphaville called a generalised bloodbath across major equity markets. Overnight, Asian markets continue to lose.

209 One of the reasons for the panic was concern about the state of the European banking system, and the surprising news was that the ECB’s €55bn fixed-term deposit flopped spectacularly, as it managed to managed to raise only €31.866bn at an average interest rate of 0.54%. This means that financial institutions continue to hog liquidity. Another reason was an unexpected decline in the Conference Board consumer confidence indicator, the latest indicator to suggest that the global recovery is running out of steam. There is a lot of gloom in the US at the moment. We have no time today to go in detail, but here some pointers. Robert Shiller says another housing recession is possible, and Paul Krugman is getting really, really gloomy and angry. US 10-year bond yields were down to below 3% last night. The FT reports on new turbulences in financial markets, as the ECB’s decision not to renew one-year loans to financial institutions spooked investors and prompted concerns about the ability of some eurozone banks to access interbank borrowing markets for funding. Financial shares dropped 4.5%, European interbank borrowing rates jumped to the highest level for nine months and the euro reached lowest exchange rate level against the yen for the last eight years. The cost of insuring Greek government debt is now second only to that of Venezuela, Bloomberg reports. Credit swaps signal there’s a more than 67 percent chance Greece won’t meet its commitments within the next five years. Greek government bonds have now overtaken Argentina. Greek debt was 115% of GDP last year, compared to 60% for Argentina when it defaulted. Europe widens stress tests The Wall Street Journal’s Brussels blog reports that some more details on the stress tests for European banks have now been settled. The scope of the tests will be widened from 26 banks to 60-120 banks, including Landesbanken and Cajas. The tests will incorporate banks in all countries. The results will be released on a bank-by-bank basis. The banks will be tested for sovereign default. All tests to be completed by mid-July. Last year’s forecast mistakes will be taken into account. Quite specific information, so this is probably based on a real leak. Stressed by the stress tests It had to happen. Germany’s Landesbanken, along with some other private and co-operative banks, say they are unhappy about the stress tests, and want to refuse the request of complete publication of the stress tests, according to FT Deutschland. Bafin and the Bundesbank will today discuss the details of the stress tests with 16 of the German banks. The two controversial issues are which of the scenarios are to be published and the conditions for a haircut of sovereign bonds. The final decision is with the CEBS, the committee of European bank supervisors. Bankers argue that such haircut tests might lead to more speculation and instability in the European bond market. In Germany there is no obligation to participate in the stress tests, though the German finance ministry expects the banks to cooperate. Oh and by the way, three German banks all passed the stress tests. Naked Capitalism’s headline – “Deutsche Bank, Commerzbank Rumoured to Pass Meaningless Stress Test” says it all. FT Alphaville made the point that the interest part is not that they passed, but that the test did not include any sovereign stress, in contrast to a draft EU document, according to which sovereign stress should be explicitly included. FT Alphaville points out that if the three German banks have passed the passed with a sovereign component, then the other 23

210 banks will also have been stressed without a sovereign component, in contrast to the draft document. FT Deutschland carries a whole range of stories on the subject, including one which quotes lawyers as saying that a failed stress test would entitle the government to recapitalise the bank against its will. The lawyers make the point, however, than banks cannot be forced to agree to a publication of the tests, and that a change in the legislation might after all be required. Royal Bank of Scotland warns that we should prepare for much, much more QE in the US and the UK The expectations are getting more alarming. Royal Bank of Scotlands warns of a ”monster QME” (quantitative monetary easing) with the intention to bring down the yields of 10-year US government bonds to below 2%. The note also refers to an article in the Daily Telegraph, according to which the Fed is pondering whether to double its QE programme to take its balance sheet to $5 trillion. Wolfgang Munchau on the BIS annual report In his FT Deutschland column, Wolfgang Munchau says the Bank for International Settlements had a disturbing good track record during the crisis, and that one should listen when it says that persistently low interest rates would cause a rerun of the crisis. He says such a recommendation is not rooted in any macroeconomic models currently in use, but he suspects that the BIS might be right nevertheless, that ultra-low nominal interest rates play a significant role during the built-up of bubbles – a role that may not yet be sufficiently understood.

Crisis is back with a vengeance as ECB’s sterilisation auction flops 30.06.2010http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2840&tx _ttnews[backPid]=901&cHash=97716b09cf#

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Felix Salmon: Getting up to fetch the Tabasco The double-edged sword of low mortgage rates JUN 28, 2010 16:05 EDT Long-term interest rates are tumbling further today: 10-year Treasury yields are now a hair’s breadth away from breaking the 3% barrier. And where long-term interest rates go, mortgage rates are bound to follow. So it’s easy to see why the purple line is falling on this chart, which comes from Barry Ritholtz and which is doing the rounds today:

Meanwhile, it’s equally easy to see why the red line is rising. It’s the ratio of rents to prices, and the first-order effect of falling prices is rising rent-to-price ratios. But Paul Kasriel of Northern Trust reads a lot into this chart: it’s cheaper to buy than to rent, and therefore now is a good time to buy. Indeed, he says, “housing is about as an attractive a purchase as it has been in the past 40 years.” Certainly housing is more attractive now than it was, say, five years ago: both prices and mortgage rates are significantly lower than they were back then. But back then we were near the top of the biggest housing bubble this country has ever seen, and finding house prices now

212 attractive in relation to house prices then is akin to getting excited by Yahoo stock now, on the grounds that it costs so much less than it did in 2000. The big picture, in terms of house prices and interest rates, is clear: prices go up when rates are falling, and they go down when rates are rising. That stands to reason: people buy what they can afford. When you’re selling your house you care about the headline price, but when you’re buying it you mostly care about how much money you’re going to have to spend each month in mortgage, taxes, and maintenance. If mortgage rates go up, the amount of mortgage you can get for any given monthly payment goes down, and so house prices have to come down lest they become out of reach. In a housing bubble, this arithmetic is temporarily sidelined, as people buy houses they can’t afford. So where will prices from here, given that mortgage rates can only go up rather than down? Essentially, there are only two choices. Either buyers remain rational and only buy what they can afford, in which case prices are bound to fall sooner or later, when interest rates rise. Or else buyers stop being rational, start buying houses they can’t afford, and we have another bubble. As for rents, they tend to lag prices: they never rose as much as prices did during the bubble, and they haven’t fallen as much as prices have during the bust. But as homeownership rates fall and America’s stock of foreclosed houses starts being rented out, the natural pressure on rents is likely to be down rather than up. Plug negative annual rent increases into the NYT’s buy vs rent calculator, and it’s really hard to make the case that buying is better than renting over any timeframe. More generally, I simply don’t believe any chart which seems to imply that you can buy a house and rent it out for literally double what you’re paying on your mortgage. That might conceivably be possible in a few of the areas hardest hit by the housing bust, and I’ll happily advise anybody who finds such a market to go ahead and buy right now. A lot of the time, of course, it’s very hard to tell: American neighborhoods often have very few renters, and there’s really no such thing as the market rent in such places. There can also be serious local-market disconnects: it’s not uncommon to find would-be renters saying that there’s nothing available at any price, even as would-be landlords say that they can’t find a renter at any price. If I could ask Kasriel one question, it would be this: when was the last time that historically low mortgage rates signalled a good time to buy, in any country? In pretty much every such case, I think, prices have only gone up if rates have fallen lower still. But now we’re bumping along the zero lower bound, and the only way that mortgage rates are falling significantly from these levels is if we get another monster recession. Which certainly won’t help house prices. http://blogs.reuters.com/felix-salmon/2010/06/28/the-double-edged-sword-of-low-mortgage- rates/

213 06/29/2010 05:34 PM Letter From Berlin German Presidential Election Degraded by Party Politics By SPIEGEL Staff When parliamentary delegates meet in the Reichstag in Berlin on Wednesday to elect a new German president, they won't be free to pick the best candidate for the job. This election is about power, revenge and the fate of Chancellor Angela Merkel. Party politics has robbed the vote of its dignity. Chancellor Angela Merkel faces what amounts to a vote of confidence in her leadership on Wednesday when a special parliamentary assembly will elect a new president. Her popularity has plunged since her re-election in September due to growing rifts in her center-right coalition, criticism of how she handled the euro crisis and anger at an austerity package many believe is socially unjust. She urgently needs the result to go her way or she could face the biggest crisis of her political career. Merkel has nominated Christian Wulff, 51, a career politician from her conservative Christian Democratic Union (CDU) party who has been governor of the northern state of Lower Saxony for the last seven years. He is regarded as a safe but uninspiring choice for the largely ceremonial post as German head of state which became vacant after the surprise resignation in May of previous incumbent Horst Köhler. Unfortunately for Merkel, the opposition center-left Social Democrats and Greens have nominated a more popular candidate who even members of Merkel's own coalition believe would make a better president than Wulff -- Joachim Gauck, 70, a former anti-communist human rights activist in East Germany, who was in charge of the administration of the Stasi secret police files after German reunification. Merkel's CDU, along with its Bavarian sister party, the Christian Social Union (CSU), and their coalition partner, the pro-business Free Democrat Party (FDP), have a majority of 21 in the parliamentary assembly of 1,244 delegates that will convene at noon, German time, to elect the president. Crucial Vote for Merkel The Federal Constitution states that delegates are free to vote for whomever they want, but delegates have come under intense pressure from their party chiefs to toe the line. The coalition parties know what is at stake -- if Merkel fails to get her candidate approved, her authority will be so badly damaged that her chancellorship could be in danger. The Federal Assembly, a body which only convenes for presidential elections, has in fact been hijacked by party political interests. Wednesday's vote will not be a true election. Merkel picked Wulff to pacify her restless, dissatisfied party. The opposition picked Gauck to damage Merkel because they knew he would be an attractive candidate for conservatives. After all, the charismatic pastor espouses traditional conservative views on the economy and immigration that his backers in the SPD and Greens find hard to swallow. Several delegates from Merkel's coalition have broken ranks and said publicly that Gauck's biography is compelling -- his is a powerful story about the struggle for freedom and democracy. He has something to say to Germans, and he's a political outsider. No one is quite

214 sure what Wulff's message would be after a lifetime spent in career politics during which he came up with few policy initiatives of note. "This presidential election is riddled with party politics and the conservatives really aren't covering themselves in glory," says Eckhard Jesse, a political analyst at Chemnitz University. Another analyst, Heinrich Oberreuter from Passau University, says: "Presidential elections always were party political elections, but with this election the party political aspect is unusually prominent." What gives parties the right to take the state and other public institutions hostage? Their dominance is particularly blatant this time. Christian Wulff is a product of this political system. Joachim Gauck has led a very different life. No Free Choice It would be intriguing to see what would happen if the assembly were really free to choose between these two candidates. But it isn't free because this election isn't about picking the best candidate. Instead, Wednesday's vote is about how long Angela Merkel will be able to remain chancellor. If her candidate fails, the rumblings in her coalition could escalate into outright unwillingness to carry on governing together. The 1,244 delegates -- half of them are the members of the Bundestag, Germany's federal parliament, and the other half are dispatched by the legislatures of the 16 regional states -- will have to decide whether they dare to make a free choice, and how seriously they take Paragraph 7 of the law on the election of the president by the Federal Assembly which states: "The delegates are not bound by mandates or instructions." But June 30 is more likely to be a day of cold political calculation. Even Angela Merkel's support for Wulff won't be wholehearted. It's an open secret in Berlin political circles that Wulff, behind a façade of friendly smiles, rarely misses an opportunity to badmouth the chancellor behind her back. Merkel knows that. So why did she nominate him? Merkel, who spent the first 36 years of her life in communist East Germany before making a lateral move into politics, was never a typical CDU member. That gave her the freedom to reform the party, to make it more environmentally friendly and to nudge it to the left. In doing so, she sidelined a powerful bloc of western party barons and gradually bled it dry. One of her main detractors, Hesse Governor Roland Koch, a conservative hardliner, resigned last month. Wulff is the last of those CDU strongmen left. In her fight to keep them at bay and modernize the party over the last decade, Merkel, the Protestant easterner, has used up a lot of credit in the western, Catholic-dominated CDU. At this point she doesn't have the confidence to test her party's tolerance any further, for example by nominating an independent candidate for the presidency, or Labor Minister Ursula von der Leyen, who would have been an obvious choice as Germany's first female head of state. Choosing Wulff Betrayed Merkel's Weakness Merkel, the expert power-broker, was suddenly powerless. She admitted as much to Bavarian Governor Horst Seehofer, the head of the CSU. She told him she would face resistance in the CDU to von der Leyen, a political ally of hers. She didn't want to overstretch her party, so she nominated Wulff. It wan an act of weakness, intended as a sedative for a party troubled by a slide in opinion polls and her own weak performance as steward of an unhappy center-right alliance with the FDP.

215 But the choice of Wulff backfired because the SPD and Greens landed a coup with their rival nominee. Gauck's conservative views make him a tempting candidate for the CDU, as members of Merkel's party informed her to her evident displeasure. The CDU leadership responded by trying to streamline the makeup of the Federal Assembly as much as possible. Potential coalition delegates who have voiced a preference for Gauck have either been dropped or had their arms twisted to change their minds. The former interior minister of the eastern state of Brandenburg, Jörg Schönbohm, had already been selected as a delegate when he said in remarks published in SPIEGEL that he favored Gauck. He quickly backtracked, saying Wulff would of course be elected in the first round "and will also be getting my vote." Two former presidents from the CDU, Richard von Weizsäcker and Roman Herzog, have said the vote should be free. Their remarks haven't made life easier for Merkel. Party leaders of the CDU and FDP have tried to ensure that the regional parliaments only send delegates who can be trusted to vote along party lines. But some CDU delegates are rebelling and backing Gauck out of revenge for Merkel's center- left policies over the years. In Hesse, some also blame her for Koch's resignation, saying he quit because she refused to give him an attractive job in her cabinet. Among delegates from the Bundestag, there are several who are angry at having being passed over for jobs in the new government. 'Wulff Needs to Explain Why I Should Vote for Him' No one knows how many rebels there will be or the level of their determination. The FDP has four delegates who have openly said they will back Gauck. And there are many in the party who appear to be of two minds. The head of the FDP's parliamentary group in the state assembly of Thuringia in eastern Germany, Uwe Barth, said last week he hadn't decided yet who to vote for. "My heart favors Gauck," he says, adding he wanted to have a one-to-one conversation with Wulff before the vote. "He first needs to explain to me why I should vote for him. The reason that it would stabilize Merkel and her coalition isn't enough for me." The leaders of the SPD and Greens who picked Gauck claim their choice is evidence of their openness. But isn't Gauck also a means for them to get Merkel into trouble? "If the ruling coalition should stumble, it will be its own fault and not as a result of the choice of president," says the general secretary of the SPD, Andrea Nahles. It is true that the election has become a cliff-hanger because the coalition is in such a desolate state and its own members wouldn't shed many tears if it were to collapse. But the SPD and Greens wouldn't mind things getting a bit more desolate than they already are. The Left Party, parts of which has its roots in the communist party that ruled East Germany bitterly opposes Gauck, the affirmed anti-communist, because of his role in uncovering the history of the Stasi secret police. The party has fielded its own candidate, former journalist Luc Jochimsen, 74, a member of the Bundestag. But even some members of the Left Party may feel tempted to switch allegiance to Gauck if it comes to a third round of voting. The president must win an absolute majority -- meaning more than 50 percent -- of votes to get elected but if he fails to get that majority in the first two rounds of voting, a third round is held in which the candidate wins who gets the largest number of votes. No one knows if Merkel would actually fall if Wulff failed to get elected. If she doesn't want to quit, there are major constitutional hurdles to ousting her. So how can the presidential election be freed from the shackles of party maneuvering? Jesse at Chemnitz University suggests having presidents directly elected by the people, but that

216 would greatly enhance the political clout of the office and shift the balance of power in German politics. One alternative would be to ban any active politicians from being nominated. That would lead to a search for candidates outside the political sphere. But even Wednesday's vote could be different. Merkel only has to say that every delegate should feel free to choose the candidate they think would make the best president. She would hand the election back to the delegates, and the Federal Assembly would regain its dignity. In the Bundestag, imposing party discipline often makes sense because it prevents a breakdown in the mechanisms of power. But the president stands above the everyday politics of power, so other rules can apply to his election. If the election were liberated in this way, no one -- not Merkel's party, not her coalition partner, not the opposition and not the media -- could interpret a defeat for Wulff as a blow to her authority. Merkel would deserve respect for taking such a decision. STEFAN BERG, RALF BESTE, ANDREA BRANDT, MARKUS FELDENKIRCHEN, JULIA HERRNBÖCK, KERSTIN KULLMANN, DIRK KURBJUWEIT, FRIEDERIKE SCHRÖTER, MERLIN THEILE

URL: http://www.spiegel.de/international/germany/0,1518,703575,00.html RELATED SPIEGEL ONLINE LINKS: Politics as Usual?: Merkel's Man for the Presidency (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703629,00.html Photo Gallery: The Uninspiring Christian Wulff http://www.spiegel.de/fotostrecke/fotostrecke-55588.html Eastern Inspiration: Gauck the Therapist Wants to Put Germany On the Couch (06/29/2010) http://www.spiegel.de/international/germany/0,1518,703658,00.html Photo Gallery: Joachim Gauck Runs for the Center-Left http://www.spiegel.de/fotostrecke/fotostrecke-56499.html Controversy Over Afghanistan Remarks: German President Horst Köhler Resigns (05/31/2010) http://www.spiegel.de/international/germany/0,1518,697785,00.html Letter from Berlin: Is Merkel's Government About to Crumble? (06/15/2010) http://www.spiegel.de/international/germany/0,1518,700788,00.html Merkel's Candidate for German President: A Sheep in Wulff's Clothing (06/04/2010) http://www.spiegel.de/international/germany/0,1518,698734,00.html

217 Paul Krugman June 30, 2010, 2:09 am 2.97 Boy, the bond vigilantes are really on the warpath: June 2010 1 3 6 10 20 Date 1 yr 2 yr 3 yr 5 yr 7 yr 30 yr mo mo mo yr yr 06/01/10 0.14 0.16 0.23 0.35 0.78 1.26 2.09 2.74 3.29 4.03 4.19 06/02/10 0.13 0.16 0.22 0.38 0.82 1.30 2.14 2.81 3.35 4.08 4.24 06/03/10 0.13 0.14 0.22 0.38 0.82 1.31 2.17 2.84 3.39 4.12 4.29 06/04/10 0.12 0.14 0.22 0.34 0.72 1.17 1.98 2.65 3.20 3.95 4.13 06/07/10 0.10 0.12 0.21 0.35 0.74 1.17 1.95 2.62 3.17 3.93 4.11 06/08/10 0.10 0.12 0.19 0.34 0.74 1.21 1.98 2.63 3.18 3.92 4.10 06/09/10 0.08 0.10 0.17 0.33 0.74 1.19 1.99 2.64 3.20 3.94 4.12 06/10/10 0.06 0.10 0.18 0.34 0.79 1.27 2.12 2.78 3.33 4.06 4.25 06/11/10 0.04 0.08 0.16 0.30 0.75 1.21 2.03 2.68 3.24 3.97 4.15 06/14/10 0.02 0.07 0.15 0.31 0.77 1.23 2.07 2.73 3.28 4.02 4.20 06/15/10 0.03 0.09 0.16 0.31 0.79 1.26 2.10 2.77 3.32 4.06 4.23 06/16/10 0.06 0.10 0.17 0.30 0.75 1.22 2.06 2.73 3.27 4.00 4.18 06/17/10 0.05 0.09 0.16 0.28 0.72 1.18 2.01 2.67 3.21 3.95 4.13 06/18/10 0.04 0.11 0.17 0.30 0.74 1.20 2.04 2.70 3.24 3.97 4.15 06/21/10 0.05 0.12 0.17 0.29 0.74 1.21 2.05 2.72 3.26 3.99 4.17 06/22/10 0.08 0.13 0.18 0.29 0.71 1.15 1.98 2.64 3.18 3.92 4.10 06/23/10 0.07 0.13 0.19 0.30 0.66 1.11 1.93 2.58 3.13 3.87 4.05 06/24/10 0.07 0.13 0.19 0.29 0.67 1.10 1.93 2.59 3.14 3.91 4.09 06/25/10 0.05 0.13 0.20 0.29 0.65 1.07 1.90 2.57 3.12 3.89 4.07 06/28/10 0.07 0.17 0.22 0.30 0.62 1.03 1.83 2.49 3.05 3.82 4.01 06/29/10 0.09 0.15 0.22 0.31 0.61 0.99 1.78 2.43 2.97 3.76 3.94 07/01/10 0.16 0.17 0.22 0.32 0.63 1.01 1.80 2.43 2.96 3.71 3.88

June 29, 2010, 9:00 am The Conventional Superstition Calculated Risk points us to a speech by Kevin Warsh that strikes me as almost the perfect illustration of the predicament we’re in, in which policy is paralyzed by fear of invisible bond vigilantes. Warsh isn’t an especially bad example — but that’s the point: this is what Serious People sound like these days.

218 The bottom line of Warsh’s speech — although expressed indirectly — is that it’s time for fiscal austerity, even though the economy remains deeply depressed; and no, the Fed can’t offset the effects of fiscal contraction with more quantitative easing. In short, the responsible thing is just to accept 10 percent unemployment. And why is this the responsible thing? On fiscal policy, market forces are often more certain than promised fiscal spending multipliers. Um, but those market forces are currently willing to lend money to the US government at an interest rate of 3.05 percent. But never mind: unanticipated, nonlinear events can happen (http://www.federalreserve.gov/newsevents/speech/kevin20100628a.htm) So it’s these “unanticipated, nonlinear events” that are “more certain” than the direct effects of fiscal policy? I’m confused. And on monetary policy, The Fed’s institutional credibility is its most valuable asset, far more consequential to macroeconomic performance than its holdings of long-term Treasury securities or agency securities. That credibility could be meaningfully undermined if we were to take actions that were unlikely to yield clear and significant benefits. OK, but why, exactly, does it help the Fed’s institutional credibility to do nothing to help a deeply depressed economy? The point here is that Warsh’s argument basically rests on assertions not about what markets are saying now, but about presumed market reactions to policy. And these assertions about how markets will react are (a) not based on any actual evidence (b) actually assume that markets will behave irrationally This goes for both fiscal and monetary policy. Again, right now the bond market doesn’t seem worried about US solvency. And rationally, stimulus spending shouldn’t change that view: with the long-term real interest rate well below 2 percent, current borrowing has only a trivial effect on the long-run state of the budget. You may say that markets will see short-run austerity as a signal of our willingness to make long-run sacrifices; but why? What the United States needs to do in the long run, mainly controlling health care costs and increasing revenue, has nothing to do with the question of whether we have a second stimulus package. On monetary policy: again, the large expansion of the Fed’s balance sheet so far doesn’t seem to have worried markets: right now, the 10-year TIPS spread is 1.9, showing no sign of exploding inflationary expectations. And for that matter, a rise in inflation expectations would actually be a good thing right now, encouraging more spending — unless you believe that markets will someone react badly, for reasons not specified, to the Fed’s impaired “credibility” defined as … well, I’m not sure what. So what we’ve got here is an assertion that bad things will happen if you do certain things, without either any evidence to that effect or any explanation of why those things should happen. Yes, maybe bond markets will punish us if we don’t slash spending right now; also, maybe we’ll have bad luck if we step on cracks, or fail to turn aside when Basement Cat crosses our path. But why does this pass for judicious policy discussion?

219 http://krugman.blogs.nytimes.com/2010/06/29/the-conventional-superstition/#more-10059 June 29, 2010, 7:59 am Learned Helplessness In Macro Mark Thoma and Brad DeLong point us to James Morley’s critique of modern macro (pdf). I actually wrote about much of this some time ago. As I said then, the basic story of “modern” macro runs like this: 1. Lucas and his disciples agree that the economy looks Keynesian — that is, it surely looks as if monetary and fiscal policy have real effects — but argue that an equilibrium approach with imperfect information can explain why, while rejecting Keynesian policy implications. And they ridicule Keynesian economics. 2. By 1980 — three decades ago! — it is already clear that the Lucas project has failed. Equilibrium models with imperfect information cannot, in fact, explain key facts about business cycles, especially the way recessions persist even though everyone knows that they’re in a recession. 3. Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down; they decide to forget about what they used to know about the apparent effects of demand shocks, and explain the business cycle in terms of real shocks. 4. This approach also falls short; in an attempt to rescue the models, ever more epicycles are added, and whatever clarity may once have existed gets lost. 5. Freshwater economists declare that the business cycle is deeply puzzling, and that we need much more research before we can make policy recommendations. In short, what we’re looking at is learned helplessness. Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make. It’s only if you’re committed to a failed research project — a project that failed a generation ago, but refused to admit it — that you’re baffled. Learned Helplessness In Macro June 29, 2010, 7:59 am http://krugman.blogs.nytimes.com/2010/06/29/learned-helplessness-in-macro/ June 29, 2010, 3:31 am A Terrible Ugliness Is Born Liz Alderman offers an excellent, if depressing, portrait of Ireland in austerity. To fully appreciate its significance, you want to juxtapose it with what the apostles of austerity are saying. Jean-Claude Trichet: “As regards the economy, the idea that austerity measures could trigger stagnation is incorrect,” Trichet said, according to an English-language transcript published on the ECB’s Internet site. “I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.” Uh-huh.

220 The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence. That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing. Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more. http://krugman.blogs.nytimes.com/2010/06/29/a-terrible-ugliness-is-born/ June 28, 2010, 11:37 am The Invisible Bond Vigilantes Continue Their Invisible Attack Ten-year bond rate now down to 3.05 percent. Clearly, we must slash spending immediately to satisfy the market’s demands! (Chicago Options: ^TNX)

The Invisible Bond Vigilantes Continue Their Invisible Attack June 28, 2010, 11:37 am http://krugman.blogs.nytimes.com/2010/06/28/the-invisible-bond-vigilantes-continue-their-invisible-attack/

221 November 19, 2009, 3:39 pm Invisible bond vigilantes Back in 1993, James Carville — frustrated over the way fear of rising interest rates was crimping the Clinton agenda — declared, I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. Right now, however, the bond market seems notably unworried by deficits. Long-term interest rates are low; inflation expectations are contained (too well contained, actually, since higher expected inflation would be helpful). No problem, right? Alas, I’m getting the sense that the Obama administration is intimidated all the same. We’ve got the president telling Fox News that he’s worried about a double-dip recession if he doesn’t reduce the deficit soon — as opposed to the concern I and other have that he’ll have a double dip if he doesn’t provide more support. (And why is Obama talking to Fox News, btw?) And the buzz is that admin economic officials are telling him that the bond market needs to be appeased, even though rates are low. This is truly amazing. It’s one thing to be intimidated by bond market vigilantes. It’s another to be intimidated by the fear that bond market vigilantes might show up one of these days, even though you’re currently able to sell long-term bonds at an interest rate of less than 3.5%. Yet that, according to rumors, is what’s happening. Let’s hope the rumors are false. For we really need to be doing more about employment — and the debt outlook isn’t that dire, at least by comparison with past experience in advanced countries: OECD, IMF It would be a very, very bad thing if the administration is intimidated into passivity in the face of an employment disaster — or, worse, into neo-Hooverism — by the threat from invisible, and probably imaginary, enforcers.

Invisible bond vigilantes November 19, 2009, 3:39 pm http://krugman.blogs.nytimes.com/2009/11/19/invisible-bond-vigilantes/

222

Recession cut into employment for half of working adults, study says By Michael A. Fletcher Washington Post Staff Writer Wednesday, June 30, 2010; A13 The recession has directly hit more than half of the nation's working adults, pushing them into unemployment, pay cuts, reduced hours at work or part-time jobs, according to a new Pew Research Center survey. The economic shock has jolted many Americans into a new, more austere reality, which is likely to have lasting consequences for an economy fueled mostly by consumer spending. More than six in 10 Americans say they have cut down on borrowing and spending, the survey found. The reason: Nearly half of the survey's respondents say they are in worse financial shape as a result of the downturn, which destroyed 20 percent of Americans' wealth. "We're going to see much lower consumption going forward," said Dean Baker, co-director of the Center for Economic and Policy Research. He blames diminished spending on the drop in housing prices. "People who thought they had equity in their homes have seen it disappear," he said. The longest and deepest recession since the Great Depression has exacted a punishing toll that continues nearly a year after the economy started growing again. Hardest hit are the 9.7 percent of workers who have been out of a job for an average of nearly six months. Many Americans are delaying retirement and others have lower expectations for their children's futures, the Pew poll found. Among adults 62 and older who are still working, 35 percent say they have postponed retirement. Six in 10 working adults between ages 50 and 61 say they may be forced to do the same. Meanwhile, half of the survey respondents say they have whittled down their mortgages, credit card balances, car loans and other borrowing. Four in 10 adults say they have tapped savings and retirement accounts to make ends meet. Others have sought help from friends and family. Almost a quarter say they have borrowed money from someone. And one in 10 -- including 24 percent of workers from 18 to 29 years old -- say they moved back in with their parents to weather the economic storm. The new, more frugal lifestyles may outlast the recession and its immediate aftermath, the survey indicated. Nearly half of respondents say they plan to save more; nearly a third say they plan to spend less and 30 percent say they plan to borrow less. While a broad swath of Americans have been hurt by the recession, blacks, who have a 15.5 percent unemployment rate, and Hispanics, whose jobless rate is 12.4 percent, have suffered disproportionately. Not only have they endured massive job losses, but they also have been hardest hit by housing foreclosures. Still, black and Hispanic workers are among the most upbeat groups about their personal financial situations and the national economy, the survey found.

223 "One likely explanation for these seemingly counter-intuitive patterns is that the election of Barack Obama (which came at the height of the recession in November 2008) appears to have put his most enthusiastic supporters -- especially blacks, Democrats and young adults -- in a more positive state of mind about many aspects of national life, including their perceptions of the economy," the report said. Overall, Democrats are now much more optimistic than Republicans about the economy, even though they have lower incomes and less wealth and have suffered more job losses during the recession. For most of the time that President George W. Bush was in office, Republicans were more upbeat than Democrats about the economy. Even as they continue to reel from the downturn, most Americans are beginning to believe that the worst is over. More than six in 10 respondents say they expect their personal financial situation to improve in the next year, which the report called the rosiest outlook since before the recession began in December 2007. Similarly, 61 percent predict that the damage caused by the recession will be temporary. Results for the Pew survey are based on telephone interviews conducted May 11 to 31 on landline phones and cellphones with a nationally representative sample of 2,967 adults 18 and older. The margin of sampling error is plus or minus 2.2 percentage points for the overall results. Interviews were done in English and Spanish by Princeton Survey Research Associates International. Market indicators, consumer confidence and home prices

SOURCE: Bloomberg, The Conference Boar, Standard & Poor's/Case-Shiller | The Washington Post - June 30, 2010 http://www.washingtonpost.com/wp-dyn/content/graphic/2010/06/29/GR2010062905894.html?sid=ST2010063000026 Michael A. Fletcher Recession cut into employment for half of working adults, study says Wednesday, June 30, 2010; A13 http://www.washingtonpost.com/wp- dyn/content/article/2010/06/30/AR2010063000022.html?wpisrc=nl_headline

224

World markets stumble on worries over U.S., Europe and China By Frank Ahrens and Howard Schneider Washington Post Staff Writer Wednesday, June 30, 2010; A01 Growing fears of a double-dip recession, driven by signs of a slowdown in China, worry over the strength of the European banking system and a big drop in U.S. consumer confidence, pushed stocks on Tuesday near their lowest levels of the year. The global sell-off began in Europe and hammered U.S. markets, where the three major indices fell between 2 and 4 percent Tuesday. Major exchanges in Britain, Germany and France closed down between 3 and 4 percent, and early trading in Asia followed suit. After huddling at the White House with his top economic advisers, President Obama acknowledged that the United States faces economic "head winds" from Europe. The worldwide drop seemed to be a verdict from investors on the results of the recently concluded Group of 20 summit in Toronto. World leaders' pledge to cut government deficits and sustain economic growth will be easier said than done, the markets judged. Investors appear to have little faith in the fragile U.S. recovery and in the ability of governments overseas to rein in their massive debt and deficit problems. Now add China to the list of global worries. The Asian economic giant, which has enjoyed double-digit growth in recent years, saw its prospects for growth downgraded by a New York research firm Tuesday, further hurting stocks. "There's concern creeping up around the world that a potential double-dip [recession] is going on here," said Linda Duessel, equity-market strategist at Federated Investors in Pittsburgh. She said market worries about China are exacerbating those about Europe. Europe endured the same financial crisis as the United States in 2007 and 2008, but it has not benefited from a similar, albeit wobbly, recovery. Debt crises in Greece, Spain, Portugal and elsewhere have overwhelmed stimulus attempts by governments to jump-start the continent's recovery, and now U.S. investors worry that problems in Europe and around the globe could drag the U.S. economy back into recession. U.S. stocks were battered Tuesday, as the Dow Jones industrial average shed nearly 270 points and crashed down not only through the 10,000 level but the 9900 level, as well, losing 2.6 percent on the day to close at 9870.30. All 30 Dow stocks finished in the red. The broader Standard & Poor's 500-stock index closed down 3.1 percent, and the tech-heavy Nasdaq composite index fell 3.8 percent. A lonely bright spot among tech stocks Tuesday was Tesla Motors, the electric-car company that launched its initial public offering this week. Particularly hard hit on Tuesday were stocks in the heavy-manufacturing sector, such as Boeing, Caterpillar and aluminum giant Alcoa. That means investors are taking a dim view of global growth that relies on big-ticket investments. Also Tuesday, troubled megabank Citigroup became the second stock to trigger the Securities and Exchange Commission's two-week-old "circuit-breaker," a five-minute trading pause, after a 17 percent drop for the company's stock. The erroneous trade was later canceled.

225 The stock market saw right through good housing news released Tuesday, as data showed that April home prices rose for the first time in seven months. The increase, however, came almost solely from government tax credits that spurred sales before expiring. Surprising Wall Street on Tuesday was a June consumer-confidence figure that fell off the table. According to the Conference Board, an economic research firm, the index tracking U.S. consumer sentiment dropped to 52.9 points in June from 62.7 in May. Economic forecasters expected the number to remain largely unchanged from May, which means that they have been overestimating Americans' comfort with spending. If global worries pushed down U.S. stocks at opening on Tuesday, then the consumer-confidence shocker kept the boot on the neck all day. Now investors and traders look toward Friday's jobs report for June, which could bring more bad news. Forecasters expect the June unemployment rate to stay unchanged at 9.7 percent. Even if the report shows that new jobs were added to the economy last month, traders and investors will scrutinize it to see where they came from. (Nearly all of the 431,000 new jobs created in May came from census workers, and they will go away when the decennial count concludes this fall.) "Another disappointing jobs number Friday would be a big disappointment for the market," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. Tuesday's Wall Street sell-off follows a confluence of news that reinforced doubts about global growth, particularly in Europe. Banks on the continent are scheduled to release stress tests in coming weeks to resolve doubts about their health, and there is concern that a poor result could further undercut growth in European countries that already trail the rest of the world. The European Central Bank this week also ends one of its main emergency lending programs, adding a new strain to the system. In a Monday speech in Switzerland, the head of a key world financial organization cautioned that some banks are still perilously weak, and warned against governments leaving support programs in place for too long or protecting weak institutions. "The essential task of reducing leverage and repairing balance sheets is simply not finished," said Jaime Caruana, general manager of the Bank for International Settlements, an organization of major world central banks, including the U.S. Federal Reserve. "Most government support measures for the financial industry were intended to last only long enough for banks and other financial firms to adjust -- to absorb the losses from toxic assets, to raise new equity capital, to develop more stable sources of funding. . . . Authorities should be proactive in getting banks to make more progress." The process is considered to have lagged particularly in Europe, and financial stocks were among the continent's biggest losers in the day's trading. In some cases, losses exceeded 7 percent. Staff writer Sonja Ryst contributed to this report. Frank Ahrens and Howard Schneider World markets stumble on worries over U.S., Europe and China June 30, 2010; A01 http://www.washingtonpost.com/wp- dyn/content/article/2010/06/29/AR2010062905518.html?sid=ST2010063000026

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World stock markets news summary (US, UK, Europe, Asia)

(June 29, 2010) Date: 29 June 2010 Contributed by Paddy Power Trader By Paddy Power Trader

The head of the IMF, Strauss-Kahn, said he would like to consider putting CNY into the basket of currencies that make up the Fund’s Special Drawing Rights (SDR) “the sooner the better”, but its value first needed to be freely determined by the market. (RTRS) UK News Business chiefs back deep and early cuts. (The Times) Leaders of some of Britain’s biggest businesses last night gave their emphatic endorsement of the coalition government’s decision to cut spending immediately in order to pay down the deficit. Senior business executives voiced their support for the approach at a summit organised by The Times and attended by the Prime Minister, the Chancellor and the Business Secretary. US News T-notes finished higher on Monday on month, quarter and half-year end buying. Treasuries were also buoyed by relatively tame inflation data and by tech based purchases after the T-note yield breached 3.06% to touch on the lowest levels since April last year. At the close; t-notes closed up 20+ ticks at 122.04. The US benchmark 10-year Treasury yield touched its lowest level since April 2009 overnight, as weakness in regional equities helped spur flight to safety buying of government bonds. USTs were trading at 122.15+, up 11 ticks, at 0644 BST. Fed’s Lacker, asked whether FOMC’s extended period language should be dropped, says “not now, may be soon” (RTRS) Lacker says softer US data and European debt woes have not substantially affected his outlook for continued growth in the US and says it’s impossible that US credit markets would freeze up because of Europe. Also says US deflation fears are a bit ‘overrated’. Fed’s Warsh says Fed should consider eventual sales of MBS, but any sale of assets should not signal that policy rates are soon moving higher. (RTRS) Warsh says actual sales of assets will not take place in the near term and says Fed funds is dominant tool going forward. Says the Fed is carefully considering aspects of its balance sheet policy. Also says if financial market volatility persists at high level, recovery could falter and says only when employment market revives will housing market achieve sustained recovery. Elsewhere, says problems in financial markets seem to pose downside risks to global economy, including the US. San Francisco Fed says state budget pain ahead, but drag from cuts on US economy to be modest, says state fiscal crises likely to get worse before getting better. (RTRS)

European News

227 ECB’s Weber says economic recovery is surprisingly robust, and debt crisis doesn’t seem to be hurting recovery yet. (RTRS) Weber says German GDP will probably only get back to pre crisis levels in 2013. Stress tests on EU banks should assess sovereign-debt risks when calculating how lenders would perform against shocks to the banking system, according to a draft EU document. (Sources) Spanish banks are asking the ECB to ease the effects of the end of a USD 542bln funding programme, which terminates this week, according to bank executives. (FT) Greece best option is a orderly default. (FT) Roubini writes in today’s FT that an orderly restructuring of Greece’s public debt is achievable and desirable for the debtor and its creditors. If Europe wants to avoid a deepening crisis, it is unavoidable too. Bar Cap month end extension: Euro +0.10 years Asian News Benchmark 10-year JGB futures rose to a two-year high overnight, taking cues from falls in Japanese share prices and other stock markets in the region. JGBs were trading at 141.43 (+0.34) at 0631 BST. (RTRS) Japan Jobless Rate (May) M/M 5.2% vs. Exp. 5.0% (Prev. 5.1%) Japan Industrial Production (May P) M/M -0.1% vs. Exp. 0.0% (Prev. 1.3%); Y/Y 20.2% vs. Exp. 20.3% (Prev. 25.9%) (RTRS) Japan’s industrial production slipped in May and unemployment rate unexpectedly increased, in signs that the recovery of the world’s second-largest economy may slow. Japan’s finance minister Noda said that country’s tax revenues will likely be JPY 1.9trl more than previously expected for the year that ended in March. (RTRS) The Conference Board corrected its April gauge for the outlook of China’s economy, saying its leading index for the country rose the least since November, rather than registering the biggest gain in 14 months. (Sources) Forex Japanese exporters are likely to sell EUR for JPY, pushing the 16-nation common currency down further, according to sources. (Nikkei English News) Australian Prime Minister Julia Gillard and resource companies are seeking to resolve their dispute over a planned mining tax by July 2, according to sources. (The Australian) http://www.stockmarketsreview.com/reports/world_stock_markets_news_summary_us_uk_e urope_asia_20100629_17855/

ECB Weber: EMU Debt Crisis Up To Now Not Affecting Recovery Monday, June 28, 2010 - 12:21 BERLIN (MNI) - The Eurozone's debt crisis has so far not hurt the ongoing solid economic recovery, ECB Governing Council member Axel Weber said in a text of a speech to be delivered in the southwestern German city of Freiburg on Monday. Pointing to increasing worries about the sustainability of public finances, especially in the Eurozone, the Bundesbank President asserted that the global economic and financial crisis has now entered its third phase. Yet the debt problems "at least up to now seem not to affect the heterogeneous but surprisingly robust economic recovery," Weber said. He acknowledged, however, that the events of recent weeks have shown that confidence in public finances even of developed economies can reach its limits. In other remarks, Weber rejected calls for countries with high current account surpluses to stimulate their economies further with more expansive fiscal policies and larger wage hikes. Those calls are frequently aimed at Germany. "Such a policy...would be in clear contradiction to the goal of sustainable growth," Weber argued. http://imarketnews.com/node/15652

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Eurointelligence Daily Morning Newsbriefing German banks have foul credits of over €200bn – highest level in the EU

29.06.2010 Estimate suggests that the problem of foul credits in Germany is much higher than generally estimated; figure is likely to increase substantially in 2010 and beyond; Spanish banks are furious about ECB’s decision to end the 1-year liquidity facility; BIS tells central banks not to leave interest rates to low for too long, or risk another financial crisis; investors are warning Greece not to return to the markets too soon; Nouriel Roubini says it is time to recognise that Greece has a solvency problems, not just a liquidity problem; Greek trade unions are to hold their fifth national strike this year today; austerity is taking its toll on Ireland; more austerity in France, as Elysee garden party is cancelled; Mohamed El Erian, meanwhile, says the disappointing G20 meeting condemns the world economy to a lost decade.

29.06.2010 German banks have foul credits of over €200bn – highest level in the EU

It is was always clear that Germany would be the most affected country in the EU by the global financial crisis, given its persistent and large current account surpluses. Yesterday came an alarming estimate of the scale of the problem from PriceWaterhouseCoopers, according to which the bad debt problem was €213bn at end-2009, a 50% increase from

229 2008. Now we suspect that the figure must have gone up since, and of course, this does not include any shocks from what German banks have yet to expect from their exposure to southern Europe. The German banks’ end-2009 exposure exceeds that of British banks of €155bn, and Spanish banks €55bn (why no French banks?), according to FT Deutschland. (Now these numbers are not strictly comparable since the auditor used national accounting rules as the benchmark to establish the estimate. Last year, the German bank regulator produced a worst-case scenario of some €800bn in write-offs. And while we are not there yet, it is quite alarming to see that by end 2009, we were already a quarter of way there. Expect them to rise significantly over the next couple of years). Spanish banks furious about the ECB ending its 1year liquidity facility Spanish banks are fighting for the ECB to renew the €442bn liquidity facility which runs out this Thursday, accusing the central bank of “absurd” behaviour in not renewing the scheme, reports the FT. This facility was special as it had a maturity of one-year with a 1% interest rate. Now the ECB’s policy is to no longer provide maturity of more than three months, which is harshly criticised by desperate banks. With the inter-bank funding market virtually non-existent, banks still rely heavily on the ECB funding, even after three years. Calculated Risk notes that there is no liquidity shortage for maturities of one week to three months, but the concern is that the shortening of the maturity leads to less lending in Spain. BIS tells central banks not to maintain zero rates for too long The Bank of International Settlements, in its annual report, warned central banks not to maintain a policy of zero interest rates for too long, or otherwise risk another financial crisis. Here is the abstract: “...there are limits to how long monetary policy can remain expansionary. Low interest rates can distort investment decisions. The financial stability risks that could arise from a prolonged period of extremely low policy rates also need to be very carefully weighed. An extended period of such low policy rates can encourage borrowers to shorten the duration of their debts, facilitate the increased leverage of risky positions and delay necessary balance sheet adjustments. While policymakers can and should address such risks with other tools, they may still need to tighten monetary policy sooner than consideration of macroeconomic prospects alone might suggest.” Investors warn Greece not to return to markets Investors stepped up warnings on the danger for Greece to return to international capital markets next month, the FT reports. Greece is to roll over short-term debt at three-monthly intervals under the terms of the bail-out memorandum with the EU and the IMF. Greece needs to refinance €4.56bn ($5.6bn) maturing in July. This includes €2.16bn of one-year and six-month bills and another €2.4bn of 13-week paper due in July. The Greek government seems determined to stick to the letter of the memorandum even if it has to pay very high yields. Greek three-month bills currently trade at 4.10%, six-month bills at 6.92% and one- year yields at 7.31%. The government expects that yields will come down once the parliament approves the pension reform bill on July 8.

230 Nouriel Roubini says Greece should restructure its debts Writing in the FT, Nouriel Roubini says it is time to recognise that Greece is not facing a liquidity crisis, but a solvency crisis. The EU’s bailout only delays the inevitable – a restructuring of Greek debt. He makes the point that the impact on the Europeank banks that hold Greek debt would not as severe as some people have suggested. “... most of the banks holding Greek debt are keeping it in their “to maturity” bucket rather than their “trading book” bucket. So long as the face value of the debt is not reduced they can still pretend – as they are doing now – that it is still worth 100 cents on the dollar when the actual market value is already lower.”

Greece on strike Greek unions today hold their fifth general strike of the year, halting ferries, public transport and other state services to protest government plans to cut pension benefits and loosen labor laws, Bloomberg reports. Reform of pensions as well as hiring and firing procedures were part of the deal with the EU and the IMF in exchange for the €110bn emergency loan. Greek pensioners live on 96% of their work salary and companies are prevented from dismissing any more than 2% of their workforce in any given month. Pension reforms include a retirement age 65 for both genders, curtailing early retirement and increasing number of contribution years (for more details see Kathimerini). Labour reforms would allow to fire 5% of their workers. Tomorrow, catering and tourist industry employees plan another 24-hour strike. Ireland’s price for austerity The New York Times features an article on the Irish role model for austerity and its consequences (hat tip Irish Economy blog). Ireland was forced two years ago to cut public spending and raise taxes, the same type of measures financial markets now expect from other nations today. The article notes that “ In Ireland, wage cuts were easier to impose because people remembered that leaders moved too slowly to overcome Ireland’s last recession.” This time, the prime minister agreed with labour unions to cut wages up to 20%...”But pay cuts have spooked consumers into saving, weighing on the prospects for job creation and economic recovery. And after a decade-long boom that encouraged many from the previous years of diaspora to return, the country is facing a new threat: business leaders say thousands of skilled young Irish are now moving out, raising fears of a brain drain. “ The only hope currently is an export led recovery. The French are getting serious about austerity France seems ready to kick old habits. Ministerial interference with tax controls, commonly practiced under Mitterrand, will now be taboo (Les Echos). Gone is also the Elysee garden party on 14 July, and the presidential hunt, 10000 cars and 7000 residencies, according to La Tribune. This is Nicolas Sarkozy’s way of showing solidarity with those affected by the crisis. Mohamed El Erian on the G20 Another missed opportunity. This is what Mohamed El Erian had to say about the G20 summit. From FT Alphaville. “I worry that, absent some urgent mid-course corrections, this weekend’s G20 gathering has failed to mark a much needed turning point for a slowing global economy with persistently

231 high unemployment in industrial countries. Instead, it reinforces the concern than we are in for a future of muted growth, deleveraging, periodic debt dislocations in some countries, and higher protectionist pressures. Populations in Europe and the US may have much more to worry about than seeing so many of their teams knocked out early from the World Cup tournament in South Africa.” http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2839&tx_ttnews[b ackPid]=901&cHash=1c0e44724e#

29.06.2010 The end of muddling through is nigh By: Wolfgang Münchau

I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far. There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union. I have noticed that whenever the European Council meets in Brussels, the European bond markets tend to slump with short delay. Yields are now close to the level they were at in early May, when the European Council set up the €440bn ($540bn, £360bn) European Financial Stability Facility and when the European Central Bank started to buy bonds. This crisis goes on and on. The reason is that investors have lost confidence in the political economy of the eurozone. European politicians such as Wolfgang Schäuble, German finance minister, praise their own long-termism. But investors ask with some justification: what is long-termist about a bank bail-out without bank resolution? Or a sovereign bail-out without fiscal union? I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban naked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the naked short sales it purports to ban. Helmut Schmidt, the former German chancellor, said later that he almost died laughing when he heard about this

232 legislation. The proposed ban is the latest reminder that European Union members, and Germany in particular, have not learnt a single lesson from their serial communication failures during the crisis. In February, they made the mistake of announcing a political agreement on a Greek rescue package without backing it up for another three months. In May, they hailed the stability facility as a historic breakthrough in political governance; it then turned out to be little more than bail-out facility. I only hope that they know what they did when they recently announced the publication of the stress tests for 25 banks. Once these are published, the markets will immediately demand to see the tests for all banks. Once that happens, in turn, governments will need to produce a convincing recapitalisation strategy. I fear, however, that they are once again committing themselves to going down a road without a map. Without an endgame, this exercise will end in disaster. At some point the markets will realise that large parts of the German and French banking systems are insolvent, and that they are going to stay insolvent. You might think that Europe’s policy elites cannot be so stupid as to commit themselves to stress tests without a resolution strategy up their sleeves. But I am afraid they probably are. Europe’s political leaders and their economic advisers are, for the most part, financially illiterate. Is there a way out? Yes there is, but the chance of a resolution to the crisis is starting to fade. The first step would have to be a serious attempt to resolve bank balance sheets. This is as much a German and French banking crisis as it is a Greek and Spanish debt crisis. You need to resolve both problems simultaneously. Resolution would require a large fiscal transfer, not from Germany to Greece, but from the German public sector to the German bank sector – in the form of new capital. The same would apply to France. Beyond this restructuring, the eurozone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. And you have to be very naive to think that peer pressure is going to resolve anything. There is no point in beating about the bush and issuing polite calls for the creation of independent fiscal councils or other paraphernalia. This is not the time for a debate on second-order reforms. I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms. But that is the choice the EU’s citizens and their political leaders will have to make – a choice between reverting to dysfunctional and, as it transpires, insolvent nation states, or jumping to a political and economic union.

Wolfgang Münchau The end of muddling through is nigh29.06.2010http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2838 &tx_ttnews[backPid]=901&cHash=cca2dee726#

233 ft.com/alphaville Guest post: El-Erian on a disappointing G20 compromise Posted by Guest writer on Jun 28 13:00. Pimco’s chief executive Mohamed El-Erian considers whether the G20 Summit in Toronto created a constructive compromise on financial stability, or generated a losing plan to turn around a slowing global economy. ______We are digesting this morning an unusually long communique from the G20 Summit in Toronto. This self-congratulatory statement is worth reading for what it says and how it says it-both of which make me worry even more about the future of a post-global financial crisis world that is in desperate need for better cross-border policy coordination and harmonization. Some will attribute the length of the “G20 Toronto Summit Declaration”-49 main points and another 82 in 3 annexes-to the pronouncement in the very first paragraph that this was the “first Summit of the G20 in its new capacity as the premier forum for our international economic cooperation.” And we should have no doubt that the G20 is a much more representative global policy forum than the outmoded G7/G8. Yet, there may be much more to the unusual length of the communique. I suspect that many veterans of multilateral gatherings will see this communique as typical of those drafted by a committee whose members have different views and priorities, and speak to different national audiences. Indeed, we are already seeing the G20 communique being spun very differently in national capitals. If anything, the outcome of the G20 is a confirmation of what many expected and feared- namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world. If anything, we are being exposed this morning to the realities of different national historical experiences, different national initial conditions, and different national views on how economies should and do work. The differences are most visible in the sections on fiscal adjustment and growth. They are also evident in the discussion of financial sector reform. Indeed, there is something for everyone! Before we rejoice too much about the ability of the G20 to deliver constructive compromises, we should think carefully about the consequences of leaving major issues unresolved and, thus, essentially kicking the can down the road when it comes to serious analysis and courageous decisions. Consider the following three points as a partial illustration of this risk. First, the communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms. The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes. Second, taken at face value, the communique speaks to a relative world in which the US will be the only major country to pursue expansionary policies while others focus on addressing budgetary consolidation-either because they have to or because they wish to. This is yet another factor that points to an increasingly unstable global configuration over time.

234 Third, we will likely face growing bilateral frictions due to the inability to use this weekend’s G20 gathering to properly address what I argued in a Friday FT column to be an incomplete and narrow characterization of the “growth now” versus “austerity now” debate. The bottom line is as follows: I worry that, absent some urgent mid-course corrections, this weekend’s G20 gathering has failed to mark a much needed turning point for a slowing global economy with persistently high unemployment in industrial countries. Instead, it reinforces the concern than we are in for a future of muted growth, deleveraging, periodic debt dislocations in some countries, and higher protectionist pressures. Populations in Europe and the US may have much more to worry about than seeing so many of their teams knocked out early from the World Cup tournament in South Africa. ______The writer is chief executive and co-chief investment officer of Pimco. El-Erian’s previous commentary on the G20’s earlier Busan summit is available here. Guest post: El-Erian on a disappointing G20 compromise Jun 28 13:00http://ftalphaville.ft.com/blog/2010/06/28/272671/guest-post-el-erian-disappointing- g20-compromise/

Spanish banks rage at end of ECB offer By Patrick Jenkins and Victor Mallet in Madrid and Ralph Atkins in Frankfurt Published: June 28 2010 19:43 | Last updated: June 29 2010 10:53 Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme. On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer Lex: Bank regulation - Jun-28 Podcast: Banking Weekly - Jun-03 Global Insight: Watchdogs against reform - Jun-28 Money Supply: Time is running out for Spanish banks - Jun-29 In depth: Euro in crisis - Jun-10 Move to reassure banks on tough rules - Jun-28 One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.” Another top director said: “The ECB’s policy is that they don’t want to provide maturity of more than three months. But they have to adapt.”

235 Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non- existent. The €442bn ECB facility, which charges interest at a rate of 1 per cent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities. A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year. “The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.” BarCap estimates that at least €150bn of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending. Spain’s banks have been among the hardest hit by the faltering confidence in the eurozone economies in recent months following problems with the country’s smaller savings banks, or cajas. The bigger commercial banks, led by Santander and BBVA, feel unfairly tarred. The euro’s monetary guardian has also come under pressure from German banks to provide one-year loans. It stopped offering such loans late last year, when it began unwinding exceptional measures taken after the collapse of Lehman Brothers. It resisted reintroducing such offers even when its “exit strategy” was thrown into reverse last month by the escalating eurozone debt crisis. ECB policymakers worry that providing cheap loans for such a long period distort markets and could restrict the room for manoeuvre in monetary policy. Lending by eurozone banks to businesses and households is improving only modestly, in spite of the pickup in economic activity. Loans to the private sector grew at an annual rate of 0.2 per cent in May, up from 0.1 per cent in April, according to ECB figures released on Monday. Lending to households was strongest, although the annual rate of decline in lending to corporations also slowed. http://www.ft.com/cms/s/0/aea96aa6-82e2-11df-b7ad-00144feabdc0.html

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Tuesday June 29, 2010 Spain Hopes ECB Knows Banks’ Needs as Loan Matures June 29, 2010, 11:18 AM EDT More From Businessweek • Shenzhen Composite Tumbles; China Small Caps Slide on Valuations • Greece, Spain Lead Rise in Sovereign Debt Risk Near Record High • ECB’s Weber Says Economic Recovery Is ‘Surprisingly Robust’ • European Bond Spreads Widen on Concern Debt Crisis Deepening • German Business Confidence Probably Declined for Second Month Story Tools • e-mail this story • print this story • digg this • save to del.icio.us • add to Business Exchange (Adds bank share prices in eighth paragraph.) By Emma Ross-Thomas June 29 (Bloomberg) -- Spanish Finance Minister Elena Salgado said she hopes the European Central Bank is aware of lenders’ cash needs as the ECB’s first 12-month loan expires. Banks on July 1 need to repay 442 billion euros ($540 billion), the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. “The ECB doesn’t like governments telling it what to do, I would just say that I hope that on this occasion, as on others, the ECB is conscious of the needs of our financial system,” Salgado said on Cadena Ser radio in Madrid today. Spanish policy makers are concerned about the expiry of the 12-month facility as Europe’s sovereign debt crisis makes banks wary of lending to each other. The Frankfurt-based ECB, which continues to lend banks as much money as they need at its benchmark rate of 1 percent, no longer offers 12-month loans. It will offer three-month money at a tender tomorrow. International capital markets are “closed” to most Spanish companies and banks, Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest bank, said on June 14. Uncertainty over the strength of Spain’s savings banks, which are going through a series of mergers with support from a government rescue fund, has helped send the risk premium on Spanish government debt to a euro-era record. Risk Premium

237 The extra yield investors demand to hold Spanish 10-year bonds rather than the benchmark German equivalents rose to 199.4 basis points today from 195.1 basis points yesterday. The spread reached a euro-era record of 221.2 basis points on June 16. Spanish bank shares plunged. Banco Santander SA, the country’s biggest bank, fell 5.5 percent to 8.56 euros at 4:16 p.m. in Madrid and Banco Bilbao Vizcaya Argentaria SA, the second biggest, dropped 5.9 percent to 8.468 euros. “The ECB, the eurosystem, will do everything so that the necessary liquidity is there,” ECB Governing Council member Christian Noyer said today on France’s Europe 1 radio. “It’s an important deadline. There are some banks that are in a less good situation that could suffer. But we’ll make sure there is no problem and that all of this goes well.” French banks will have “no problem” with the expiry of the 12-month loan as they haven’t borrowed “that much,” Noyer said. Eliminating the yearlong tender is part of the ECB’s long- term exit strategy and the bank has taken “every precaution” to avoid a liquidity squeeze, Governing Council member Ewald Nowotny said in Vienna today. “The decision not to renew the 12-month tender is to be seen as a long-term exit strategy,” he told reporters. “In the meantime there have been special actions taken, but the basic strategy -- the long-term exit strategy -- this is valid.” Salgado said Spanish banks are strong, and that will be made clear by stress tests, which Spain will ask European finance ministers to publish as soon as possible. “At the next Ecofin meeting in two weeks, Spain’s request will be for our stress tests to be published immediately, to show that our whole banking system has an excellent solvency position,” she said. --With assistance from Mark Deen in Paris, Zoe Schneeweiss in Vienna and Charles Penty in Madrid. Editors: Matthew Brockett, Andrew Atkinson To contact the reporter on this story: Emma Ross-Thomas in Madrid at [email protected] To contact the editor responsible for this story: John Fraher at [email protected] http://www.businessweek.com/news/2010-06-29/spain-hopes-ecb-knows-banks-needs-as- loan-matures.html

Tuesday June 29, 2010 Greece, Spain Lead Rise in Sovereign Debt Risk Near Record High June 29, 2010, 9:50 AM EDT More From Businessweek • Greece Needs Restructure to Avoid Default, Roubini Writes in FT • German Stocks Fall, Extending Weekly Decline; Daimler Drops • Greece Unlikely to Default, Restructure Debt, Eurobank Says

238 • Banco Popolare Rated ‘Buy’ in New Coverage at Societe Generale • Stress Tests Must Gauge Sovereign Risk, EU Draft Says Story Tools • e-mail this story • print this story • digg this • save to del.icio.us • add to Business Exchange By Kate Haywood June 29 (Bloomberg) -- Greece and Spain led a surge in the cost of insuring against losses on sovereign debt to near a record as protests over austerity measures and concern banks may struggle to fund themselves triggered a credit-market sell-off. The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments rose 6.5 basis points to 165, the highest level in three weeks and approaching the all-time high of 168.5 on June 4, according to CMA DataVision. Corporate risk gauges climbed the most in more than a month. Greek workers downed tools for the fifth time this year to protest against pension cuts and looser labor laws. Swaps on Spanish banks jumped after the Financial Times reported they are asking the European Central Bank to ease the effects of the end of a $540 billion funding program, which terminates this week. “Markets remain very fragile and easy to spook,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in London. “It just doesn’t take much to scare the market.” Credit-default swaps tied to Greek debt jumped 13 basis points to 1,101, having closed at an all-time high of 1,125 on June 4, according to CMA. Spanish contracts rose 9 to a record 275 basis points before retreating to 270.5. Contracts on Banco Santander SA, Spain’s biggest bank, gained 10.5 basis points at 210.5 and Banco Bilbao Vizcaya Argentaria SA jumped 15 basis points to 276. The Markit iTraxx Financial Index tied to the senior debt of 25 banks and insurers rose 5 basis points at 170, JPMorgan Chase & Co. prices show. Refinancing Operation Banks must repay 442 billion euros ($540 billion) July 1 that they borrowed from the ECB a year ago under the so-called Long-Term Refinancing Operation. Lenders in Spain, Ireland, Greece, Italy and Portugal have about 151 billion euros of central bank loans coming due this week, according to Barclays Capital estimates. Corporate bond risk also rose after the Conference Board revised its leading economic index for China to show the smallest gain in five months in April. Stocks plunged, Treasury two- year note yields dropped to a record low and the yen strengthened on concern that growth in the main engine of the world’s economic recovery is slowing. Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 29 basis points to 574.5, according to JPMorgan, the highest since May 25. A basis point on a credit-default swap contract protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

239 --Editors: Michael Shanahan, Andrew Reierson To contact the reporters on this story: Kate Haywood in London at [email protected]; To contact the editor responsible for this story: Paul Armstrong at [email protected] http://www.businessweek.com/news/2010-06-29/greece-spain-lead-rise-in- sovereign-debt-risk-near-record-high.html

Funding jitters push Europe shares to near 3-wk low Tue Jun 29, 2010 7:53am EDT Stocks: Barclays PLC BARC.L 267.35p -18.00-6.31% 4:35pm UTC+0200 BNP Paribas S.A. BNPP.PA €43.75 -3.26-6.92% 4:37pm UTC+0200 Banco Bilbao Vizcaya Argentaria, S.A. BBVA.MC €8.35 -0.65-7.24% 4:35pm TC+0200 FTSEurofirst 300 index down 2.1 pct * Euro STOXX 50 testing key support level * Banks fall; funding concerns weigh * Commodities down over economic recovery woes * For up-to-the minute market news, click on [STXNEWS/EU] By Harpreet Bhal LONDON, June 29 (Reuters) - European shares fell to a near-three week low on Tuesday, as concerns over bank funding weighed on the sector ahead of a 442 billion euro ($539.4 billion) repayment to the European Central Bank (ECB) later this week. By 1135 GMT, the pan-European FTSEurofirst 300 .FTEU3 share index was down 2.1 percent at 1,004.75 points, retreating for the fifth time in six sessions, while the Euro STOXX 50 .STOXX50E, the euro zone's blue chip index, was down 3 percent at 2,589.88 points. The Euro STOXX 50 failed on Monday to close above the key 38.2 percent retracement of its fall from an April high to a May low, and was testing the 23.6 percent retracement level at 2,584.75, a key support level for the index. Banks were among the heaviest fallers, with Barclays (BARC.L), BNP Paribas (BNPP.PA) and BBVA (BBVA.MC) down 3 to 4.1 percent as banks prepare to pay back money borrowed a year ago at rock bottom rates, leaving a potential liquidity shortfall in the financial system of over 100 billion euros. Key euro-priced bank-to-bank lending rates hit their highest levels in more than nine months ahead of the expiry of the ECB's first-ever one-year loans, which formed part of the emergency support the central bank put in place at the height of the financial crisis. [ID:nLDE65S0BV] "As usual the market's persistent concerns about the eurozone area, especially as the ECB expires its funding programme this week, are also adding to the jittery nerves," said Arifa Sheikh, a trader at GLC. Across Europe, the FTSE 100 .FTSE index slipped below the 5,000 point level and was down 2 percent. Germany's DAX .GDAXI and France's CAC 40 .FCHI shed 2.2 and 2.7 percent. The Thomson Reuters Peripheral Eurozone Countries Index .TRXFLDPIPU fell 3.6 percent.

240 RISK AVERSE The VDAX-NEW volatility index .V1XI rose 9.4 percent to hit its highest level in nearly three weeks, indicating a rise in risk aversion among investors. The higher the volatility index, which is based on sell and buy options on Frankfurt's top-30 stocks <0#.GDAXI>, the lower investor appetite for risky assets such as equities. Energy stocks were under pressure as investors worried demand for oil would slow, with crude CLc1 falling below $77 as risk aversion took hold. BP (BP.L) shed 1.7 percent after it said on Monday its plan to nearly double the amount of oil it can capture from the Gulf of Mexico leak, the biggest U.S. oil spill ever, will be delayed for about a week by high waves expected from tropical storm Alex. [ID:nN28110040] Mining shares were lower, as metals prices retreated on worries about economic recovery. Rio Tinto (RIO.L), Vedanta Resources (VED.L) and Eurasian Natural Resources ( ENRC.L) shed 3.8 to 4.4 percent. Macroeconomic indicators from the U.S. due on Tuesday include the S&P Case/Shiller Home Price Index for April, due at 1300 GMT, and the Conference Board's June consumer confidence data, due at 1400 GMT. (Editing by Sharon Lindores) ($1=.8194 Euro) http://www.reuters.com/article/idUSLDE65S15K20100629

ft.com/frontpage From MARKETS 1:34pm Fresh fears over European bank sector

Reuters Euribor rates spike to nine-month highs • European bourses hit by banking liquidity fears • Euro plunges amid bank loan fears • Spanish banks rage at end of ECB offer • More banks to face stress tests • FT Alphaville Numbers for LTRO-watchers Fresh fears over European bank sector By David Oakley, Capital Markets Correspondent Published: June 29 2010 13:34 | Last updated: June 29 2010 13:34 Fears rose over the health of the European banking system on Tuesday as interbank rates jumped to nine-month highs amid worries that the European Central Bank may be reducing emergency financial support to financial institutions too soon.

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BUSINESS JUNE 29, 2010 ECB Walks a Fine Line Siphoning Off Its Liquidity By BRIAN BLACKSTONE And NINA KOEPPEN The European Central Bank is scrambling to reassure markets that Thursday's expiration of a €442 billion ($547.46 billion) bank-lending program won't destabilize the financial system, even as banks across the region remain wary of lending to one another. The ECB introduced the 12-month lending facility last summer to encourage private-sector lending and ensure adequate liquidity within the 16-member currency bloc. Since then, the program, which represents more than half the ECB's liquidity operations, has become a lifeline to banks in Greece, Spain and other countries hit by the region's debt crisis.

Associated Press The European Central Bank, led by Jean-Claude Trichet, above, is trying to calm markets as a loan program ends. The cost of borrowing euros in the interbank market rose to an eight-month high Monday, as banks prepared for the one-year loan's expiration. The euro slid on worries that repayment will expose Europe's financial system to new threats. Yields on German bunds, seen as a haven, fell. Some investors worry that vulnerable euro-area banks, unable to borrow in the interbank market, could have difficulty replacing that funding, despite repeated assurances from the ECB that it will provide funds on similar terms, albeit for only three months, beginning Wednesday. "We are confident that this very large financial transaction can take place without disruptions," ECB governing council member Ewald Nowotny said Friday. Banks in the region have been preparing for the event, hoarding cash by borrowing through the ECB's other lending operations. A total of 114 banks participated in the ECB's latest main refinancing operation, up from 101 bidders at the previous week's auctions. The ECB provides roughly €870 billion in temporary funds to banks in the region.

242 "We expect a huge takeup in the upcoming three-month refinancing operation," said RBS economist Nick Matthews. He estimated demand for the funds could top €250 billion, a record. The ECB finds itself in a tough situation as it tries to wean European lenders off its liquidity drip while also seeking to contain stress in the banking sector. It announced the end of the operation in December, before the Greece crisis sparked fears about the level of government debt in the euro zone. At the time, the ECB was eager to signal that it was committed to quickly removing emergency supports. Since then, however, the situation in Europe's financial system has worsened. That reality has forced the ECB to create new lending facilities that will give banks access to cash when the 12-month loan expires. The ECB has said it will provide funds for three months at an interest rate of 1% on Wednesday. It also will carry out a special six-day-loan operation on Thursday. "That's a very tricky exercise for the ECB to navigate," said Julian Callow, economist at Barclays Capital. "Of course, the ECB is replacing the 12-month funds" with three-month loans, he said, "but the expiry of the 12-month tender will result in a shortening of the maturity profile," putting more pressure on banks to look for funds elsewhere. View Full Image Bloomberg News The cost of borrowing euros in the interbank market rose to an eight-month high Mondayas the expiration of an ECB bank lending program approached. The Euro sign sculpture sits outside the European Central Bank headquarters in Frankfurt, Germany.

Still, the ECB's steps should keep interest rates on corporate and other private-sector debt from rising too much, analysts said. "We expect that liquidity will stay abundant after July 1," said Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley.

243 Patrick Jacq, an interest-rate strategist at BNP Paribas in Paris said "a takeup of between €250 billion and €300 billion at the three-month operation and six-day tender should prevent significant tensions in money markets." Moreover, the ECB could consider extending the three-month-loan facility or reintroduce six- month loans if stress continued beyond the next couple of months, said Mr. Jacq. But easing stress on banks comes at a price for ECB officials. If they keep flooding the banking system with cheap loans, they could create inflationary pressure down the road. In a report Monday, the Bank for International Settlements warned that loose monetary policy can lead to asset-price increases and delay the restructuring of bank balance sheets. —Nick Andrews and Neelabh Chaturvedi contributed to this article. Write to Brian Blackstone at [email protected] and Nina Koeppen at [email protected] http://online.wsj.com/article/SB10001424052748703964104575334573853687984.html#print Mode

AGENDA JUNE 29, 2010 BIS's Caruana Certainly Raises Fear Levels for Bankers By PATIENCE WHEATCROFT When he retires from the Bank for International Settlements, Jaime Caruana should consider a new career writing horror stories. The general manager of the BIS certainly has the skill to frighten an audience and leave them petrified about what may be lurking round the corner. At the bank's annual general meeting Monday he just avoided hissing "Be afraid, be very afraid" but, as he summed up the state of economies and banks, his view was that the situation remained precarious and there could be plenty of nasty happenings ahead. View Full Image Agence France-Presse/Getty Images BIS general manager Jaime Caruana delivers his speech on Monday.

244 Grudgingly in some cases, countries are moving to deal with their budget deficits. The G-20 meeting at the weekend marked a further step in that direction, with the voice of reason, that cuts could not be delayed, prevailing over those who wanted to put off the pain. Promises of action have now to be translated into deeds, which are harder and the prospects for some countries, most notably Greece, still look precarious. Nevertheless, the problems have been acknowledged and the need for change accepted. So it was what Mr. Caruana had to say about banks that was most spine-chilling, not least because the BIS, the central bankers' bank, is well placed to have an informed view of the sector. It isn't a pretty picture. "Some banks have yet to recognize in a transparent way the scale of losses on their balance sheets," says Mr. Caruana. This is surely the case. It is equally surely the case, as he points out, that governments have now exhausted their ability to wade in and alleviate the worst effects of another banking crisis. As the BIS annual report puts it: "Macro-economic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis—it will be difficult to find a source of further treatment should another emergency arise." There is plenty of work going on to impose new restraints on banks, both by individual countries and at an international level. This week, President Barack Obama will put his signature to legislation that will significantly curb U.S. banks' proprietary trading activities and there is a widespread move toward insistence on much higher capital ratios. Many of the systemic flaws that led to the banking crisis are being gradually addressed: dangerous compensation structures, failures in risk management and dismal regulatory supervision. Yet the implication of Mr. Caruana's remarks is that some banks remain at risk. The BIS report raises the specter of further crisis-related losses yet to hit. It is European banks, in particular, which are the object of its concern. There has been much speculation that some European banks haven't yet acknowledged the losses that their property lending has incurred. When the BIS echoes that fear, it moves out of the realm of idle speculation to become informed comment. In Ireland and the U.K., for instance, commercial property prices have fallen by 39% and 46%, respectively, since their peak. It is when property prices are at their peak that banks just seem unable to stop themselves from pouring in the cash rather than calling for a slowdown. The surest pointer to the imminent end of a property boom, and the crash that always follows, is when the landscape is covered with cranes funded by generous loans to developers from optimistic bankers. This cycle has been true to the pattern. Now some banks are rolling over loans rather than foreclosing, postponing the day of reckoning that will inevitably have to come. "Losses on European bank balance sheets are expected to mount over the next few years," concludes the BIS. Many of those same European banks have heavy exposure to some of the riskier European sovereign debt. At the end of 2009, five euro-area banking systems, those of Belgium, France, Germany, Italy and the Netherlands, held roughly 17% of all outstanding Greek government debt and they were similarly exposed to Spain and Portugal, countries which not for nothing have been relegated to the PIGS category of economies. "Some banks may find it difficult to earn their way out of the crisis, given the prospects of further loan losses, higher funding costs and significant refinancing pressure," said Mr. Caruana. And the BIS raises doubts about whether that refinancing, if required, will even be available, given the expected demand for funds from governments forced to raise cash.

245 Mr. Caruana tried to end his speech on a more optimistic note, talking enthusiastically of the financial reforms that are now in train. "The reforms will quickly generate significant benefits from enhanced resilience," he assured his audience. Any comfort that they might have taken from that sentiment, however, was quickly erased by his next sentence. "This is all the more true when—as now—the probability of further shocks is elevated." Fear levels should certainly be elevated after hearing him. Rating a change Governments fear being down-graded by the ratings agencies and seeing the cost of borrowing soar. The agencies' power persists despite their less than glorious role in the financial crisis. The BIS report succinctly sums up their position. "Ratings agencies, overwhelmed by the avalanche of complex structured products yet unable to resist the profits from taking on the business, failed to correctly evaluate the probability that borrowers would repay." Now Peter Sands, the chief executive of Standard Chartered Bank, has come up with a proposal to bar the agencies from rating the most complex financial products in return for a fee from the issuer. He believes it would instantly discourage the creation of such products. That would be a positive. Yet having any rating paid for by the organization being rated has an inherent and uncomfortable conflict. Write to Patience Wheatcroft at [email protected] http://online.wsj.com/article/SB10001424052748703964104575334770091013824.html?mod =WSJEUROPE_hpp_MIDDLETopStories#printMode

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29 de junio 2010 Economía El BCE inquieta a bancos españoles al retirar liquidez del mercado La entidad financiera tomará de todos modos medidas para tranquilizar al sector financiero, que ve con preocupación la medida 29/06/2010 | Actualizada a las 17:39h | Economía Frankfurt. (dpa) - El Banco Central Europeo (BCE) retirará el jueves del mercado financiero la ingente cantidad de medios líquidos que inyectó hace un año, lo que según información difundida en Alemania produce gran inquietud entre los bancos españoles. MÁS INFORMACIÓN La bolsa española cae en picado por el fin de las ayudas del BCE y el Ibex 35 pierde el 5,45%

La entidad financiera tomará de todos modos medidas para tranquilizar al sector financiero, que ve con preocupación la medida. "El BCE garantizará que no haya ningún problema", señaló hoy el miembro del Consejo de la institución bancaria Christian Noyer en declaraciones a la emisora "Europa 1". En junio de 2009 más de 1.100 bancos solicitaron préstamos al BCE por 442.000 millones de euros, y ahora vence el plazo para que ese dinero sea devuelto. Para que la oferta de crédito no se reduzca, el BCE anunció que seguirá prestando a los bancos a un interés de 1,0 por ciento, aunque a un plazo máximo de tres meses. El BCE excluye plazos mayores, para así mantener su flexibilidad y no introducir elementos de distorsión en los mercados. El "Financial Times" informó hoy, que sobre todo los bancos españoles presionan al BCE para que la nueva serie de préstamos tenga también un plazo de vencimiento de un año, para así poder evitar nuevos problemas de liquidez. El periódico cita, sin identificarlo, al gerente de un banco español que califica de "absurda" la posición del BCE. "Todo banco central tiene que poner liquidez a disposición de los bancos privados, pero no es lo que hace el BCE", lo cita el diario. Para los bancos españoles resulta especialmente difícil encontrar fuentes de refinanciación en los mercados. Sobre todo las cajas de ahorro sufren la presión, como consecuencia del derrumbe del mercado inmobiliario. En general, la preocupación del sector financiero es que plazos breves como tres meses puedan aumentar la presión y obligar a los bancos a buscar fuentes alternativas de liquidez. Con lo cual, la demanda de los préstamos a tres meses servirá de indicador del estado de los los institutos financierosen el espacio euro. "Los bancos que participen en estas subastas pondrían en evidencia que tienen dificultades para acceder al crédito del mercado", explicó a dpa el experto de UniCredit Luca Cazzulani. Lo anterior se debe a que la refinanciación resulta actualmente más cara mediante el BCE que en el mercado.

247 Durante la crisis financiera, el BCE y otros bancos centrales inundaron de dinero los mercados debido a que los bancos dejaron de prestarse fondos unos a otros por la desconfianza mutua y el sistema estaba paralizado. Debía evitarse una parálisis crediticia. A fines de 2009, los guardianes del euro declaron que lo más álgido de la crisis financiera estaba superado, que comenzarían a reducir la política expansiva y dejarían de poner a disposición de las instituciones bancarias liquidez ilimitada durante un año. Desde entonces, la situación sin embargo se ha agudizado por la crisis de deuda de Grecia y otros países europeos. Para los bancos españoles y portugueses es cada vez más difícil conseguir liquidez en los mercados.

http://www.lavanguardia.es/economia/noticias/20100629/53954349449/el-bce-inquieta-a- bancos-espanoles-al-retirar-liquidez-del-mercado.html ft.com/alphaville All times are London time Numbers for LTRO-watchers Posted by Tracy Alloway on Jun 29 09:20. Just two days to go until the July 1 expiry of the European Central Bank’s one-year LTRO. The Long-Term Refinancing Operation added €442bn in liquidity back in June 2009. And now — much to some banks’ chagrin — it’s due to come to an end with no matching-maturity replacement. Instead, the ECB is offering unlimited three-month LTROs to coincide with the end of the 12-month one. The €422bn question then, is how much of the one-year LTRO will roll into the three-month operation. Different numbers for the roll-over amount will tell us different things about the state of banks and the future of money markets. For instance, ‘too much’ money staying at the ECB could indicate that banks aren’t comfortable, or able, to fund themselves in the interbank market. But a smaller-than-expected figure could be an indication that financials are capable of operating sans-ECB liquidity largess. With that in mind, we thought it might be useful to present some of the estimates we’re seeing from analysts about the size of the rollover — and the flashpoints that might indicate ‘too much’ reliance on the ECB, and those that might suggest some better-than-expected independence. So far, consensus seems to be that about €220bn, or half of the €442bn 12-month LTRO liquidity, will stay with the ECB. The troublesome level looks to be if more than €300bn is rolled into the three- month. A ‘good result’ is rather more contentious; less than €150bn or less than €250bn. In other words, pretty much anything could happen in markets come Thursday. Deutsche Bank Roll-over estimate: €221bn Good: less than €150bn Bad: more than €300bn Goldman Sachs: Roll-over estimate: €150-200bn Bad: More than €300bn RBS: Roll-over estimate: Over €250bn

248 IFR Capital Markets: Roll-over estimate: Max €220bn Bad: More than €300bn. UniCredit: Good: About €240-€250bn Bad: More than €400bn Barclays Capital: Roll-over estimate: €250-300bn Good: Less than €250bn Bad: More than €300bn (Some notes from the above banks available in our LTROverview in the Long Room) Related links: The €442bn question – a guide – FT Alphaville July 1 could be the day liquidity dies – FT Alphaville LTROpprobrium - FT Alphaville This entry was posted by Tracy Alloway on Tuesday, June 29th, 2010 at 9:20 and is filed under Capital markets. Tagged with ecb, Eurozone banks, liquidity, LTRO, Money markets. http://ftalphaville.ft.com/blog/2010/06/29/273376/numbers-for-ltro-watchers/ ft.com/alphaville All times are London time Spain’s long, hot, refinancing summer Posted by Joseph Cotterill on Jun 25 17:03. Markets can be very impatient when it comes to states trying to refinance near-term obligations during a sovereign debt crisis, don’t you find? Exhibit A — Greece, April-May 2010. Exhibit B — Spain, June-July 2010? The Spanish government is indeed facing a large funding need for July. Spain has to finance a cash deficit of between €10bn and €15bn, plus €24.7bn in redemptions on bonds, according to Goldman Sachs’ Javier Pérez de Azpillaga on Friday. But it’s not clear if this could create a funding crisis. As Goldman’s analyst writes: As with Greece earlier this year, investors are trawling through the details of the Spanish government’s financing needs for the very near term. The focus is not so much on the government’s long-term solvency—which depends mainly on economic performance and fiscal policy—but on its ability to raise enough funds to cover the monthly cash deficits (the difference between tax receipts and outlays) and the refinancing of maturing debt. The fact that this ability is being examined is in itself bad news if only because of the potentially self-fulfilling results of that questioning. How cheering. So let’s look at the size of the problem — assessed by Goldman with data plus some educated assumptions: - The government raised €8.3bn in June on a net basis (€16.5bn in new issuance minus €8.2bn in t- bill redemptions). - We assume a cash deficit of €17.5bn in June and of €13.5bn in July, a shade below the corresponding prints in 2009. - The Treasury had €18.3bn in cash at its disposal at the end of May.

249 - We assume the government raises €16.5bn through gross issuance in July, the same as in June. With redemptions coming due in July amounting to €24.7bn, net issuance will be negative (- €8.2bn). From these data and the assumptions made, Pérez de Azpillaga estimates that Spain’s Treasury will already have depleted its reserves of cash by €9.2bn by the end of June — to make up the difference between that month’s cash deficit and the net issuance. Plug in the remaining €9.1bn reserves to help cover July’s funding needs, and we seem to be left with a €12.6bn shortage. All these assumptions are based on available data. Pérez de Azpillaga also observes that the government could have reduced the cash deficit already, by cutting spending or delaying payments. But if it hasn’t: …the government may issue bigger amounts of paper than we have assumed, even if it has to pay more for it. In this vein, the government has indicated it will issue a special, syndicated bond in Q3—it issued one such bond in February, for €5bn. More speculatively, the government has large amounts of financial assets (apart from the €18.3bn in cash it had at the end of May). While most of these assets are illiquid—public loans, shares, foreign loans—some may be more easily sold or given as collateral against commercial borrowing. Finally, the Treasury has arranged credit lines with commercial banks, which can be used as a last resort. Which is all very striking, in that a) the credit of Spanish banks themselves isn’t looking rosy at the moment; and b) a source in Spain’s economy ministry informed Reuters only recently that Spain doesn’t have to issue any more bonds to help deal with the redemptions coming due in July. Well, we wonder about that. http://ftalphaville.ft.com/blog/2010/06/25/271066/spains-long-hot-refinancing- summer/

250 The Baseline Scenario What happened to the global economy and what we can do about it What Is Goldman Sachs Thinking? with 74 comments By Simon Johnson The next financial boom seems likely to be centered on lending to emerging markets. Sam Finkelstein, head of emerging markets debt at Goldman Sachs Asset Management, summed up the prevailing market view – and no doubt talked up his own positions – with a prominent quote in Monday’s Financial Times (p.13, front of the Companies and Markets section): “Debt-to-GDP ratios in the developed world are about double those in emerging markets and they’re growing. This makes emerging markets interesting because you’re pick up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.” This is a dangerous view for three reasons. First, against all historical evidence, it assumes that the only macroeconomic risks we should worry about – in general or for emerging markets – are related to standard measures of government fiscal policy. “Less risk” and “more yield” was exactly what securitized subprime mortgages and their derivatives were purported to offer; this combination typically proves illusory. Second, emerging markets got into serious trouble through private sector overborrowing both in the 1970s (Latin America, communist Poland and Romania) and in the 1990s (many parts of Asia). In some crises, the government stepped in and ended up holding a great deal of debt – but this does not change the fact that the exuberance was all about private sector banks (in the US and Europe) lending to private sector corporations (financial and nonfinancial) in a mispricing of risk that started out at modest levels but grew over the cycle. Third, when your ability to borrow depends in part on the value of your collateral – see the academic work of Ben Bernanke and the experience of Japan in the late 1980s (e.g., the classic Hoshi-Kashyap volume) – then rising asset prices enable you to borrow more. This does not necessarily have to go bad in a macroeconomic sense, but experience over the last 30 years is not encouraging. Global moral hazard – the idea that someone will provide a bailout – does not mix well with free capital flows and this kind of financial accelerator. Goldman Sachs knows all this, of course. But, as they will tell you correctly, reforming incentives or even discouraging this kind of cycle is definitely not their job. Their role is to make money, pure and pretty simple given their market share. It’s the responsibility of government to make the world financial system less dangerous. Judging from the G20 summit (see my comments on the communique) this weekend, we are making no progress at all in that direction. Written by Simon Johnson June 29, 2010 at 6:16 am http://baselinescenario.com/2010/06/29/what-is-goldman-sachs-thinking/#more-7791

251 Pro memoria 11/06/2010

El BCE mantiene la 'barra libre' de liquidez a la banca El Tesoro tiene que pagar más para adjudicar 3.900 millones JUAN GÓMEZ / EL PAÍS - Berlín / Madrid - 11/06/2010 El Banco Central Europeo (BCE) ha frenado la iniciativa de abandonar las medidas de liquidez excepcionales adoptadas durante la crisis. El BCE decidió ayer dar liquidez ilimitada a los bancos durante el tercer trimestre del año en las tres subastas de refinanciación previstas, que serán a tipos de interés fijos y con un vencimiento de tres meses. Las tensiones financieras de las últimas semanas han endurecido las condiciones del mercado. Y a la vista de las dificultades, el eurobanco, que había comenzado a retirar las medidas extraordinarias, ha decidido mantener esta fuente de financiación para la banca. Además, el BCE ha elevado levemente sus pronósticos de crecimiento en la eurozona para este año, pero ha rebajado los del próximo. Los economistas del BCE esperan que el PIB crezca entre el 0,7% y el 1,3% este año y entre el 0,2% y el 2,3% el que viene. Trichet mantuvo los tipos de interés en el 1%, su mínimo histórico alcanzado hace ya 13 meses. El francés se enfrentó en Francfort a las críticas por comprar bonos públicos, decisión tomada el 10 de mayo. El BCE ha comprado bonos por 40.400 millones. Los detractores, entre los que está el jefe del Bundesbank y potencial sucesor de Trichet, Axel Weber, consideran que el BCE vulneró su mandato primordial, prevenir la inflación. Por otra parte, varios banqueros e inversores alertaron en Viena del peligro de una regulación bancaria excesiva, que podría generar menos empleos y cerrar aún más el grifo de los créditos, lo que a su vez estrangularía el ya menguado crecimiento económico, con un impacto estimado del 3%. Este es el diagnóstico del Instituto de Finanzas Internacionales (IIF), que reúne a más de 400 entidades del mundo. En España, el Tesoro Público adjudicó ayer 3.903 millones en la subasta de bonos a tres años, muy cerca del máximo de la banda de 3.000 a 4.000 millones que esperaba captar. Además, la demanda duplicó con creces la oferta y más de la mitad procedió del exterior. La contrapartida de este dato, que muestra la confianza de los inversores por la deuda española, es que España ha tenido que pagar, como se preveía, un precio mucho mayor para financiarse: mientras que el tipo marginal alcanzó ayer el 3,394%, en la anterior subasta, en abril, había sido del 2,030%, el mínimo histórico de estos títulos. Con todo, la conclusión gneral es que el Tesoro había pasado la prueba con nota. Los mercados dieron ayer un segundo día de respiro. La Bolsa madrileña subió un 3,72% -el tercer mayor repunte del año- después de que el día anterior lo hiciera un 2,3%. Además, la prima de riesgo que paga España para financiarse respecto a Alemania cayó por segundo día consecutivo. Tras tocar el martes los 216 puntos básicos -el máximo de los últimos 14 años-, la prima de riesgo se quedó en 186. http://www.elpais.com/articulo/economia/BCE/mantiene/barra/libre/liquidez/banca/el pepieco/20100611elpepieco_15/Tes

252 interest.co.nz Top 10 at 10: Spanish banks fear end of ECB support; A coming war of creditors vs borrowers; Dilbert By Bernard Hickey Created 28 Jun 10, 11:44am Here are my Top 10 links from around the Internet at 10 to 12pm. I welcome your additions and comments below or please send suggestions for Wednesday's Top 10 at 10 via email to [email protected] [1]

[2] 1. The European crisis is far from over - The FT.com reports [3]that the European Central Bank is set to end its 442 billion euro special funding programme for banks this Thursday and the Spanish banks are very worried that it is not being extended. We could be in for some euro fireworks in the next couple of days. Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent. The €442bn ECB facility, which charges interest at a rate of 1 per cent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities. A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year. “The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.” BarCap estimates that at least €150bn of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending. 2. Spreads blow out again [4] - Meanwhile, the Greece to German bond spread has blown out again to over 800 basis points, which is just below the worst levels in those panicked days before the European bailout plan, CalculatedRisk points out. [4]

253 3. Essential reading - The Economist has a wide-ranging look [5]at the issue of debt and concludes: "The battle between borrowers and creditors may be the defining struggle of the next generation". I'd recommend a click through to read it. Here's a taste. HT Andyh Also check out this excellent interactive graphic on debt globally. [6] Hyman Minsky, an American economist who has become more fashionable since his death in 1996, argued that these debt crises were both inherent in the capitalist system and cyclical. Prosperous times encourage individuals and companies to take on more risk, meaning more debt. Initially such speculation is successful and encourages others to follow suit; eventually credit is extended to those who will be able to repay the debt only if asset prices keep rising (a succinct description of the subprime-lending boom). In the end the pyramid collapses. In the aftermath of the latest collapse it is clear that the distinction between debt in the private and public sector has become blurred. If the private sector suffers, the public sector may be forced to step in and assume, or guarantee, the debt, as happened in 2008. Otherwise the economy may suffer a deep recession which will cut the tax revenues governments need to service their own debt. If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity. This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation. 4. More falls to come - Barry Ritholz speaks at CNN [7]about another likely fall in US house prices. He points to house price to income ratios being over 4 as a problem. Let's hope no one tells him what they are in New Zealand (6-8 depending on where you are). HT AndyH. Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Hence, demand is far below what it was during the past decade. Home prices are still unwinding from artificially high levels, and remained over-priced. Inventory is elevated. Unemployment remains high.

254 A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. We are barely halfway through a decade long foreclosure surge. Whether we are looking at US housing stock as a percentage of GDP or Median income vs home prices or even ownership vs renting costs, prices remain elevated. Indeed, we see prices remain above historic mean. Consider price relative to income. From 1977 to 2010, the median US home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. Same with home prices relative to rentals, or housing value as percentage of GDP. Further, we should not assume that prices will merely mean revert back to historic levels. In most markets, a near 3 standard deviation price move is resolved not by reverting to the mean, but by by careening far below it.

[7] 5. Back on again? [8]- New Australian Prime Minister Julia Gillard wants to restart the carbon credits trading regime dumped by Kevin Rudd. But not until after the election, Guardian.co.uk reports. [8] Gillard, in her first comments to the media after former prime minister Kevin Rudd stepped down earlier on Thursday, said she believed in climate change, backed renewable energy and that the nation needed a price on carbon emissions. But she also said emissions trading laws would lead to a significant structural shift in the resources-rich nation and they needed to be explained properly to the community. "It is as disappointing to me as it is to millions of Australians that we do not have a price on carbon," Gillard told reporters.

255 "And in the future we will need one. But first we need to establish a community consensus for action."

[9] 6. The bankers are back - Bloomberg reports [10] that the bankers are back to their big spending and hiring ways, offering pay deals 30-40% above expectations and guaranteed bonuses of US$2-4 million. They're thrilled the Congressional reforms have been watered down and they can get back to their happy ways leveraging up with Federal Reserve money and a government guarantee because they are Too Big to Fail. Is it any wonder US voters are revolting? Barack Obama will lose his congressional majorities in the November elections. “Candidates are now getting multiple offers, and companies risk losing their desired candidates if they don’t act quickly enough -- and that’s a real change,” said Constance Melrose, managing director of eFinancialCareers North America, which has seen a 75 percent rise in investment banking jobs posted on its website from a year earlier. The removal of uncertainty regarding Congress’s financial reform bill may reinforce the hiring rebound. A deal reached by members of a House and Senate conference last week diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private- equity funds. The demand for investment bankers and traders has led some firms to offer pay packages as high as $8 million, including guaranteed bonuses, which are paid regardless of an employee’s or the company’s performance, recruiters said. That recalls Wall Street compensation practices before the credit crisis forced banks to cut more than 345,000 jobs worldwide. While most new hires aren’t receiving guarantees, banks including Nomura and UBS have offered top prospects one-year guarantees paying between $2 million

256 and $4 million, people briefed on the offers said. Some managing directors have been offered two-year guarantees, recruiters said. 7. At least I'm not as bad as a telemarketer - This Readers Digest list of New Zealand's [11] most and least trusted has gotten a lot of play this time around. Somehow, Rodney Hide and Hone Harawira are trusted less than Mark Bryers. And journalists are trusted less than tow truck drivers and fast food servers. Although, to be fair, journalists are trusted more than sex workers, politicians and telemarketers in that order. Colin Meads, who promoted Provincial Finance, was seen as 6th most trusted.

[12] 8. The ultimate insult [13]- Now when you want to insult someone you say their debt is as bad as Greece's. However, it turns out many US states are in just that position, Bloomberg reports. [13] Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to US$112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP. “States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.” 9. Nothing to see here. Move along now [14]- Felix Salmon from Reuters [14] has the best summary of the G20 pronouncements and commentary entitled: "The G20 tee up another crisis. [14] Essentially the world is now split between the printers (the United States) and the cutters (Europe and UK). None of them are reforming their banks to fix the problems that caused the crisis. Everyone is extending and pretending. Everyone is passing the parcel

257 of debt and hoping growth ... or something... will happen to stop the debt bomb from going off. The U.S. is going to stay on its borrow-and-spend course, while Europe sees huge fiscal cuts. That, we could do without the G20. And it guarantees that the global imbalances the G8 and G20 have been so worried about since long before the financial crisis are going to get worse rather than better. There’s no solution in sight, which almost guarantees that the world is going to see another crisis, this time surrounding U.S. interest rates and the dollar rather than credit. The only question is when. [12] 10. Totally irrelevant video - This is a fascinating video of a speech talking about how typical monetary incentives don't actually incentivise performance for the important stuff. HT Sargon via email. Source URL: http://www.interest.co.nz/opinion/top-10-10-spanish-banks-fear-end-ecb-support- coming-war-creditors-vs-borrowers-dilbert

Links: [1] mailto:[email protected] [2] http://dilbert.com/strips/comic/2010-06-28/ [3] http://www.ft.com/cms/s/0/aea96aa6-82e2-11df-b7ad-00144feabdc0.html [4] http://www.calculatedriskblog.com/2010/06/misc-greece-spreads-widen- spanish.html?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed: CalculatedRisk (Calculated Risk) [5] http://www.economist.com/node/16397110 [6] http://www.economist.com/blogs/buttonwood/2010/06/indebtedness_after_financial_crisis [7] http://www.cnbc.com/id/37975955 [8] http://www.guardian.co.uk/environment/2010/jun/24/julia-gillard-australia-carbon-trading [9] http://www.telegraph.co.uk/comment/cartoon/ [10] http://noir.bloomberg.com/apps/news?pid=20601109&sid=aHbUuvjNE4ZY&pos=10 [11] http://media.nzherald.co.nz/webcontent/document/pdf/NZHA29JUN10A003.pdf [12] http://editorialcartoonists.com/#top [13] http://noir.bloomberg.com/apps/news?pid=20601109&sid=atxrhPqbty_4&pos=10 [14] http://blogs.reuters.com/felix-salmon/2010/06/28/the-g20-tees-up-another-crisis/

258 Bloomberg George Soros Talks Obama's Book in Threat to Euro: Amity Shlaes

Amity Shlaes, 28/06/2010 George Soros has been making what he calls a “grave accusation” against Germany. The financier- philanthropist said last week that Germany is endangering the European Union by keeping wages down and pursuing a balanced national budget too aggressively. Germany’s parsimonious attitude, Soros suggests, may bring down the euro. You get the feeling that Soros is speaking directly to Angela Merkel, trying to give the German chancellor a kindly tutorial. In a speech at Humboldt University, Soros said that Germany had understandable reasons for pursuing thrift. But, he added, the country should spend more and advocate aggressive spending and looser money by the European Investment Bank and the European Central Bank, respectively. Soros implied that Germany should look to the U.S., where President Barack Obama has spent vigorously and Federal Reserve Chairman Ben Bernanke has created money for the greater good. Soros, the tutor again, underscored that Germany clearly “does not know what it is doing.” It is time to turn the question around, and make a grave accusation against Soros. It is Soros who is endangering the euro by advocating these spending and loosening policies. They are policies that may give Europe budget problems that render its currency vulnerable to attack by Soros-like traders. Perhaps, like Merkel, Soros is doing his endangering for understandable reasons. Nonetheless, the danger is there, and worth laying out. Currency Strains Start with the euro’s creation, as Soros has. Europe unified its monetary policy through the euro before it unified politically, therefore sustaining member countries’ abilities to pursue the kind of independent fiscal policies that can strain a joint currency. Soros labels this construct “patently flawed.” Clever is another way to describe it. The enormous carrot of access to the euro-land market incentivizes nations to apply the stick of fiscal discipline to themselves. Under that plan, countries that fail to apply the stick with alacrity face the unpleasant choice of initiating extraordinary tax increases and budget cuts to curtail debt or being forced out of the monetary union. That happened to the U.K. back in the early 1990s, when Soros cost the country $3 billion while he made $1 billion by forcing Britain out of the European Exchange Rate Mechanism, the euro precursor.

259 What Merkel Knows As a former East German, Merkel has visceral knowledge of the enormous waste of human capital that takes place in countries lacking good currencies. Because the East German mark of her young adulthood was a political fantasy rather than a genuine currency, scientists such as Merkel couldn’t purchase the equipment they needed to compete with Western scientists. Germans like Merkel recall better than Americans what happened when Soros’s raiders hit the U.K., so they know how brutally any non-dollar currency, even the currency of a regional leader, can be brought down. Beyond Merkel’s personal memory there is the German national memory of the 1920s hyperinflation. That resulted from the decision of a desperate Weimar Republic to inflate its way out of war debts. That hyperinflation so punished middle-class savings and so weakened the 1920s economy that the average German became more susceptible to maniacs like Adolf Hitler and the communists. Pressure on Germany from Soros, and for that matter, from the Obama administration, makes it harder for Merkel or other European leaders to heed their own sound instincts. Soros’s pressure also obscures a desirable policy path for Germany, one in which it practices fiscal discipline and growth creation so well that other euro nations emulate it. False Choice The Keynesian argument that the choice is binary, between spending and pain, is untrue. For one thing, deflation isn’t always painful -- in the 1920s, even as Germany agonized, the U.S. thrived during an American deflation. Budget tightening, especially in combination with competitive tax codes, may put all Europe on a growth path that renders its currency a true competitor for the role of global leader over the long run. The best defense of Soros is that Soros-recommended stimuli by Germany and in euro-land will indeed yield strong growth, and prevent one recession, just as he says. But what happens after that recovery? Europe, like the U.S., isn’t growing fast enough to continue spending its way out of every recession. It is likely that German-tolerated euro-spending on a big scale in 2010 or 2011 would render Europe’s nations the very sort that vulnerable currency traders specialize in annihilating. The Obama administration for its part is being disingenuous when it makes spending recommendations. As my colleague Sebastian Mallaby at the Council on Foreign Relations notes, the dollar’s status as the currency of reserve amounts to a sort of Kevlar vest against the bullets of currency raiders. The euro possesses no vest. Soros wants to help the Obama administration and the Keynesian spending that Democrats favor. If Europe spends, that makes the U.S. look less isolated. A big spending Europe also makes the euro less of a threat to the dollar. In any case, it is hard to imagine that what Soros alleges about Germany is true for Soros: that he just doesn’t understand what he is doing. (Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) To contact the writer of this column: Amity Shlaes at [email protected]. Amity Shlaes George Soros Talks Obama's Book in Threat to Euro: Amity Shlaes28/06/2010 http://www.bloomberg.com/news/2010-06-29/george-soros-talks-obama-s-book-in-threat-to- euro-amity-shlaes.html

260 10-year Treasury yield below 3% By Hibah Yousuf, staff reporterJune 29, 2010: 7:52 AM ET

NEW YORK (CNNMoney.com) -- Treasury prices continued to surge Tuesday, pushing the 2-year note's yield to a record low and the 10-year note's yield below 3% for the first time since April 2009, as the looming expiration of Europe's bank lending program boosted demand for the safety of government debt. What prices are doing: The benchmark 10-year note jumped 10/32 to 104-12/32 and its yield sank to 2.99% from 3.03% on Monday. Bond prices and yields move in opposite directions.

The 30-year bond climbed 20/32 to 107-3/32 with a yield of 3.97%. The 2-year note gained 1/32 to 100-1-32 and its yield was 0.62%. Earlier, the 2-year note's yield fell to 0.59%, a record low. What's moving the market: The European Central Bank's year-long lending program to boost liquidity expires Thursday. As banks in the euro zone gear up to pay back €442 billion, investors are nervous that end of the program could further rock the financial system. The mounting fears are pressuring the euro world and markets , and increasing the appeal of safe-haven assets including Treasurys. Because Treasurys are backed by the U.S. government, they are viewed as low-risk investments and are attractive during times of economic uncertainty. What analysts are saying: "Treasury rates this low typically signal a real slowdown in economic activity, or even a recession," said Peter Cardillo, chief market strategist at Avalon Partners. "But I think this is a heightened fear factor and a flight to quality as opposed to any real economic meltdown." He added that investors are concerned that when banks pay back the loans, the market will face another credit crunch. "The market is now set for a major reversal that could happen at any time," he said. "But if this grossly exaggerated fear factor continues, yields could go lower." http://money.cnn.com/2010/06/29/markets/bondcenter/treasurys/index.htm

261 Business Day

June 28, 2010 Preparing for Next Big One By ANDREW ROSS SORKIN The next Great Crash is coming. Guaranteed. Maybe not today and maybe not tomorrow. But, in all likelihood, sooner than we think. How can I be so sure? Because the history of modern markets is a story of meltdowns. The stock market crashed in 1987, the bond market in 1994. Mexico tanked in 1994, East Asia in 1997. Long-Term Capital Management blew up in 1998, Russia that same year. Dot- coms dot-bombed in 2000. In 2007 — well, you know the rest. And that was just the last 20 years or so. The stagflation of the 1970s, the Depression of the 1930s, the panics in the 1900s ... and back and back and back it goes, all the way to the Dutch and their tulip bulbs. In those giddy years before the Great Recession, it seemed as if we had grown accustomed to the wild ride. Wall Street certainly had. Jamie Dimon, the chairman and chief executive of JPMorgan Chase and Company, likes to say that when his daughter came home from school one day and asked what a financial crisis was, he told her: ‘It’s the kind of thing that happens every five to seven years.’ ” No one should be surprised, Mr. Dimon insists, that booms go bust. That’s the way markets work. Most Americans probably find that answer unsatisfying, to put it politely. After all, millions have lost their homes, their jobs, their savings. But now here comes the Dodd-Frank Act, which is supposed to ensure that we never repeat that 2008 finale of Wall Street Gone Wild. The bill, if signed into law, might help us avoid another sorry episode like that. But one thing it won’t do is prevent another crisis — if only because the next one probably won’t be like the last one. So amid all the back-and-forth over this bill, keep in mind one of the most important aspects of the act: it would give Washington policy makers a powerful tool to mitigate the next too-big-to-fail blowup, however that blowup manifests itself. For the first time, Washington would have what is known as resolution authority, that is, the power to wind down a giant financial institution that runs into trouble. If policy makers had had that power during the tumultuous autumn of 2008, they might have averted the catastrophic failure of Lehman Brothers. They might have placed the teetering American International Group into conservatorship. And they might have taken over Bank of America and Citigroup, and possibly even Goldman Sachs and Morgan Stanley. Senior management would have been tossed out. “We will have a financial crisis again — it’s just a question of the frequency,” said the economist Kenneth Rogoff, who, with Carmen M. Reinhart, wrote a terrific book titled “This Time Is Different: Eight Centuries of Financial Folly.” The title says it all. We’ve been through this before and will go through it again. While Dodd-Frank might avert another crisis in the short term, Mr. Rogoff says the legislation itself is less important than how regulators act on it — and keep acting on it over the years.

262 Before World War II, “banking crises were epidemic,” Mr. Rogoff said. Then things settled down because “regulation had become pretty draconian” and laws were actually enforced. But memories fade. “Having a deep financial crisis is the best vaccination for another right away,” Mr. Rogoff said. Down the road, a lot will depend on the regulators. Ten or 15 years after a crisis, and sometimes a lot less, the watchdogs start to doze. Political winds change. Regulators loosen up. Many on Capitol Hill insist Dodd-Frank means the end of the “too big to fail” culture, period. Many on Wall Street insist it means the end of American finance. Bankers and their lobbyists argue that American businesses and consumers will ultimately suffer, since all these rules will end up throttling the vital flow of credit through the economy. Neither side is entirely correct. Businesses in general, and Wall Street in particular, often overreach in search of profits. And regulators, however stringent the laws, often struggle to keep up. We haven’t found a way to legislate around that sober reality. Consider the 2002 Sarbanes-Oxley law, which sought to reform corporate America after the Enron and WorldCom scandals. The Supreme Court upheld the constitutionality of Sarbanes-Oxley on Monday. It is a strong law that sought to hold executives accountable for accounting shenanigans. Many business people screamed that the law was too strict. Few experts ever argued that the law was too lax. Have companies engaged in financial fraud since? You bet. After the Exxon Valdez oil spill in 1989, the government enacted the Oil Pollution Act. Did that legislate away oil spills? Of course not. Strong regulation is important. And Dodd-Frank goes a long way toward cracking down on some of the worst practices that led to this financial crisis. But my bet is that next time, the culprit won’t be C.D.O.’s or swaps, or shady subprime mortgages. No, the culprit will be some other financial instruments — something someone somewhere is probably dreaming up right now. In his memoir, Henry M. Paulson Jr., the former Treasury secretary, recalled telling President George W. Bush in 2006 that it was impossible to spot a coming financial blowup. “We can’t predict when the next crisis will come,” Mr. Paulson told the president. “But we need to be prepared.” Dodd-Frank, whatever its pros and cons, helps prepare us for the next Big One — whatever that might be. But it won’t stop it. The latest news on mergers and acquisitions can be found at nytimes.com/dealbook. http://www.nytimes.com/2010/06/29/business/29sorkin.html?ref=business

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Weber - surplus states should reject stimulus calls BERLIN Mon Jun 28, 2010 12:15pm EDT June 28 (Reuters) - Bundesbank President Axel Weber called on Monday for governments to resist pressure to boost their economies using expansive fiscal policies, instead urging them to tend to their strained public finances. The comments from Weber, who is also a member of the European Central Bank's Governing Council, came after U.S. President Barack Obama earlier this month urged other Group of 20 states to address public finance problems in the medium term. Weber said the restoration of healthy public finances was "a necessary condition for sustainable and high growth." "Attempts to steer global demand via expansive fiscal policy and higher wage agreements to give an economic boost, as seen with calls to countries with current account surpluses, should clearly be rejected," Weber added in the text of a speech. Germany runs a current account surplus and has faced calls from other G20 countries and billionaire investor George Soros to stimulate its domestic demand. World leaders agreed on Sunday to take different paths for cutting budget deficits. [ID:nN26228300] Weber said Germany 's gross domestic product (GDP) would probably only reach pre-crisis levels in 2013. He called for the European Union's budget rules to be toughened to ensure countries put public finances in order. "To harden the Stability and Growth Pact and to ensure stringent adherence to it, tougher sanctions, combined with an increased automisation in their enforcement, will be necessary," he said. (Writing by Paul Carrel) http://www.reuters.com/article/idUSBAF00414520100628

264 COMMENT Greece’s best option is an orderly default By Nouriel Roubini Published: June 28 2010 22:56 | Last updated: June 28 2010 22:56 It is time to recognise that Greece is not just suffering from a liquidity crisis; it is facing an insolvency crisis too. Rating agencies have started to downgrade its public debt to junk level, while spreads on Greek sovereign bonds last week spiked to new highs. The €110bn bail-out agreed by the European Union and the International Monetary Fund in May only delays the inevitable default and risks making it disorderly when it comes. Instead, an orderly restructuring of Greece’s public debt is needed now. The austerity measures to which Greece signed up as a condition of its bail-out require a draconian fiscal adjustment of 10 per cent of gross domestic product. This would prolong the country’s recession and still leave it with a public debt-to-GDP ratio of 148 per cent by 2016. At this level, even a small shock is likely to trigger a further debt crisis. Sharp austerity may be needed – as agreed by the Group of 20 over the weekend – to stabilise debt-to-GDP ratios by 2016 in advanced economies; but for Greece such “stabilisation” would be at levels that are unsustainable. Austerity pros and cons preoccupy markets - Jun-28 Greece set to return to finance markets - Jun-27 More banks to face stress tests - Jun-27 Münchau: Only union can save eurozone - Jun-27 Business leaders fear for eurozone survival - Jun-28 Compare Greece today with Argentina in 1998-2001, a crisis that culminated in a disorderly default. Argentina’s fiscal deficit at the onset was 3 per cent of GDP; Greece’s is 13.6 per cent. Argentina’s public debt was 50 per cent of GDP; Greece’s is 115 per cent and rising. Argentina had a current account deficit of 2 per cent of GDP; Greece’s is now 10 per cent. If Argentina was insolvent, Greece is insolvent to the power of two or three. Those arguing that Greece can escape debt restructuring point to previous sharp fiscal cutbacks made by countries such as Belgium, Ireland and Sweden in the 1990s. But such examples are irrelevant, having occurred over longer periods and in times of economic growth. They also took place against a backdrop of falling interest rates, with depreciating currencies helping to boost growth. Others think a Greek restructuring would see massive losses for the European financial institutions that hold most of the country’s public debt. Yet while a pre-emptive restructuring could limit this damage, postponing will only make it worse. As both Argentina and Russia’s crisis in 1998 showed, support from the IMF does not prevent an eventual default. Indeed, it can actually cause greater damage to the country and its creditors when the former is insolvent. When official money is used to keep a country afloat, those lucky investors whose debt claims are about to come to maturity often exit scot-free as IMF/EU support allows them to be paid in full. But when the eventual default comes, losses to the remaining creditors are more severe, because public creditors get the first slice of what remains. In short, orderly restructurings – as happened in Pakistan and Ukraine in 1999 and Uruguay in 2002 – are

265 better for most private creditors, the debtor nation and multilateral institutions than an Argentine-style botched bail-out. Pakistan, Ukraine and Uruguay all restructured their debt by swapping old obligations to creditors with new deals that extended for many years the time over which the countries had to pay back. These agreements also capped the interest rates on the new debt to sustainable and below-market levels. Importantly, the total face value of the debt was not reduced, as normally happens in abrupt defaults. Of course, giving nations longer in which to pay and helping with generous rates mean creditors experience losses. But their loss is much less than under an outright default. Since the market value of their existing debt has already fallen sharply, there will be no additional mark-to-market losses either, which is part of the reason why these orderly restructurings saw the vast majority – more than 90 per cent – of creditors sign up. Indeed, restructuring Greece’s debt should be even easier. In those three emerging market economies, public debt was issued in foreign jurisdictions – namely London and New York – creating a risk that creditors would hold out and sue to regain their assets, as sovereign immunity is limited in foreign courts. But 95 per cent of Greek debt was issued in Greece itself, where domestic sovereign immunity laws greatly reduce the risk of hold-outs and litigation. Another advantage is that most of the banks holding Greek debt are keeping it in their “to maturity” bucket rather than their “trading book” bucket. So long as the face value of the debt is not reduced they can still pretend – as they are doing now – that it is still worth 100 cents on the dollar when the actual market value is already lower. The bitter pill of debt restructuring could be taken with appropriate sweeteners, such as credit enhancements supported by the IMF and EU. Certainly, it would be better to use a small amount of public money to tempt creditors into a pre-emptive deal now than waste €110bn of it trying to prevent an unavoidable restructuring later. Such public resources would be better used to help ring-fence other embattled eurozone economies – such as Spain – whose debt may come under renewed pressure. In short, an orderly restructuring of Greece’s public debt is achievable and desirable for the debtor and its creditors. If Europe wants to avoid a deepening crisis, it is unavoidable too. The writer is professor of economics at the Stern School at New York University and chairman of Roubini Global Economics. He is also co-author of Crisis Economics: A Crash Course in the Future of Finance Nouriel Roubini Greece’s best option is an orderly default 28 2010 22:56 |http://www.ft.com/cms/s/0/a3874e80-82e8-11df-8b15-00144feabdc0.html

266 Concerns over Greek bond sale By David Oakley in London and Kerin Hope in Athens Published: June 28 2010 19:22 | Last updated: June 28 2010 19:22 Investors stepped up warnings on the dangers for Greece on Monday over its decision to return to international capital markets next month for the first time since it was offered emergency loans in May. Greece is committed to rolling over short-term debt at three-monthly intervals under the terms of the bail-out agreement with the European Union and International Monetary Fund. In depth: Greek debt crisis - Jun-28 Greece set to return to finance markets - Jun-27 Bomb kills senior aide to Greek minister - Jun-24 Editorial: Two more twists in the Greek tale - Jun-16 Shipping tycoons party as Greece struggles - Jun-11 Greece seeks investments from Libya - Jun-08 Greece needs to refinance €4.56bn ($5.6bn) maturing in July. This includes €2.16bn of one- year and six-month bills due on July 16 and another €2.4bn of 13-week paper due on July 23. “Next month’s return to markets is foreseen under the terms of the EU-IMF memorandum, so the decision has effectively been taken,” said Yiannis Stournaras, head of the independent Athens economic think-tank IOBE. The regular issuance of treasury bills would continue throughout the three-year programme, according to the memorandum, he added. David Owen, chief European financial economist at Jefferies, said: “It seems a very odd thing to do. The Greek banks may buy the bonds, but there is a danger the government will have to pay very high yields that could undermine confidence not just in Greece, but across the eurozone.” On Monday, Greek three-month bills were trading at yields of 4.10 per cent, six-month bills at 6.92 per cent and one-year yields at 7.31 per cent. These rates are much higher than the country has to pay for emergency loans as part of its rescue plan. At the last auction in April, yields doubled compared with the January sale. The yield for three-month bills rose to 3.65 from 1.67 per cent. The Greek government appears determined to stick to the letter of the memo in spite of record yields on Greek bonds – a situation that had not been anticipated when the €110bn bail-out for Greece was put together last month. Philippos Sachinides, deputy finance minister, said three-, six- and 12-month treasury bills expiring in July would be rolled over.The government hopes yields will fall after parliament approves a radical overhaul of the pension system, expected on July 8 and seen as critical to Greece’s fiscal consolidation. Jason Manolopoulos, portfolio manager at Dromeus Capital in Athens, said he expected yields to fall once the pensions law raising the retirement age is approved.Separately, the European Central Bank said on Monday that it had bought another €4bn of eurozone government bonds. It has bought €55bn in total. http://www.ft.com/cms/s/0/2949df6e-82e0-11df-b7ad-00144feabdc0.html

267 Global Business

June 28, 2010 In Ireland, a Picture of the High Cost of Austerity By LIZ ALDERMAN DUBLIN — As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight. Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations. “When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ” Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession. Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent. Now, the Irish are being warned of more pain to come. “The facts are that there is no easy way to cut deficits,” Prime Minister Brian Cowen said in an interview. “Those who claim there’s an easier way or a soft option — that’s not the real world.” Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier. Other European nations, including Britain and Germany, are following Ireland’s lead, arguing that the only way to restore growth is to convince investors and their own people that government borrowing will shrink. The Group of 20 leaders set that in writing this weekend, vowing to make deficit reduction the top priority despite warnings from President Obama that too much austerity could choke a global recovery and warnings from a few economists about the possibility of a much sharper 1930s style downturn. “Europe is in a tough bind,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a Harvard professor. “If you want to escape default, the

268 Irish path is the only way to go. But the Ireland experience points to the profound challenges that the current strategy implies.” Politicians here have raised taxes and cut salaries for nurses, professors and other public workers by up to 20 percent. About 30 billion euros ($37 billion) is being poured into zombie banks like Anglo Irish, which was nationalized after lavishing loans on developers. The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate. Drained of cash after an American-style housing boom went bust, Ireland has had to borrow billions; its once ultralow debt could rise to 77 percent of G.D.P. this year. “Everybody’s feeling quite sick at what happened because things were going so well for Ireland,” said Patrick Honohan, the Irish central bank governor. “But we don’t have the flexibility to do a spending stimulus now. There’s no one who is even arguing for it.” Mr. Honohan predicts growth could revive to a rate of about 3 percent by 2012. But that may be optimistic: Ireland, as one of the 16 nations in Europe that has adopted the euro as its common currency, is trying to shrink the deficit to 3 percent of G.D.P. by 2014, a commitment that could weaken its hopes for recovery. These troubles sting many Irish, given the head start Ireland has on most members of the euro club. Its labor market is one of Europe’s most open and dynamic. After its last major recession in the 1980s, it lured knowledge-based multinationals like Intel and Microsoft — and now Facebook and Linked-In — with a 12.5 percent tax rate, giving Ireland one of the most export-dependent economies in the world. Now, the government is pinning nearly all its hopes on an export revival to lift the economy. Falling wage and energy costs, and a weaker euro, have improved competitiveness. Turning statistics into jobs, however, will be a herculean task. “Exports alone don’t drive a significant number of jobs,” said Paul Duffy, a vice president at Pfizer in Ireland. Wage cuts were easier to impose here because people remembered that leaders moved too slowly to overcome Ireland’s last recession. This time, Mr. Cowen struck accords swiftly with labor unions, which agreed that protests like those in Greece would only delay a recovery. But pay cuts have spooked consumers into saving, weighing on the prospects for job creation and economic recovery. And after a decade-long boom that encouraged many from the previous years of diaspora to return, the country is facing a new threat: business leaders say thousands of skilled young Irish are now moving out, raising fears of a brain drain. David Stronge returned to Dublin in 2006 from an architecture job in Britain. “I wanted to come back here and get a piece of this action,” he said. “And I did for about a year. But then it started to tank.” He moved to reinvent himself, returning to school with thousands of other Irish, in hopes that a higher degree would lead to better prospects. Mr. Stronge plans to seek alternative energy jobs in Britain once he gets his master’s degree in August. “Ireland isn’t going to spend on infrastructure probably for another 10 to 15 years,” he said. “So you have to go to where the opportunities are.” At the D Café, a sandwich shop facing a stretch of empty buildings in Dublin’s Docklands enclave, even that dream seems impossible. “If you’re self-employed and lose your job, you’re entitled to nothing, not even the dole,” said Debbie, the owner, who would only give her first name.

269 She transformed her convenience store into a deli when Liam Carroll, a property baron, threw up the nearby developments. But the tenants never came, and her business evaporated. “It’s so destroying,” she said, gazing out the window. “We all live day by day, and we don’t know when it will ever pick up.” Signs of the decline encrust Dublin’s streets. Boisterous crowds still mash onto the cobbles of Temple Bar. Yet farther out, “To Let” posters obscure the hollowed shells of once-vibrant cafes and clothing shops. Fifteen minutes north of the city center, hulks of empty buildings form stark symbols of why Ireland must now hunker down. At Elm Park, a soaring industrial and residential complex, 700 employees of the German insurer Allianz are the lone occupants of a space designed for thousands. In the impoverished Ballymun neighborhood, developers began razing slums to make way for new low-income housing. Halfway through the project, the financing dried up, leaving some residents to languish in graffiti-covered concrete skeletons. “Welcome to Hell,” read one of the tamest messages. Now the government is debating whether to demolish developments it inherited from the banks it nationalized, and restore them to green pasture. A bitter sense of regret punctuates chatter at any Irish bar, where the topic often turns to vilified bankers and politicians, or the latest jobless figures. While no one is marching in the streets, the Irish do have a tipping point: Prime Minister Cowen, whose popularity has plummeted, agreed last week not to cut public wages again in the next budget. Many voters, having experienced the pain of austerity, are expected to express their anger in the 2012 elections. “Then,” said Paul Sweeney, economic adviser to the Irish Congress of Trade Unions, “the Irish for once are going to have their revenge served cold.” http://www.nytimes.com/2010/06/29/business/global/29austerity.html?th&emc=th

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G-20 Differences Half-Hearted Promises and Mutual Blame By Gregor Peter Schmitz and Philipp Wittrock in Toronto The G-20 summit in Toronto ended with yet more vague promises. The rich nations pledged to slash their budget deficits, without making any real commitments. The result is a setback for President Obama, who failed to find support for new stimulus programs in Europe. At least Chancellor Angela Merkel managed to look happy. The German team had just beaten England 4:1 at the World Cup as a radiant Merkel addressed the press at the summit of the 20 leading developed and emerging economies in Toronto. "This was a great game and a great victory," she said after watching the second half of the game together with British Prime Minister David Cameron. "I am still very moved." The chancellor, who was wearing a garish reddish-orange blazer, was in a jubilant mood. She wanted to immediately announce another victory -- this time one of her own. "This is more than I expected," Merkel said, referring to the agreement by the G-20 states that the developed industrial nations would halve their budget deficits by 2013. From 2016 onwards, they will work toward reducing their debt levels. "Countries will then have balanced budgets, so they can look at reducing total debt," Merkel said. The dates happen to correspond exactly to Germany's own timetable for reducing its debts, as anchored in its constitution under the 2009 "debt brake" amendment. "The fact that this (timetable) has been accepted by the industrialized countries is a success," the chancellor commented. Merkel has said in the past that she doesn't like to think in terms of winners and losers. But speaking in Toronto, the German leader seemed to be feeling ever-so-slightly triumphant. She also appeared to have temporarily forgotten her own maxim that global summits should not set unrealistic objectives. In reality, the results of the G-20 summit are much less impressive than Merkel would have the press believe. The expectations for the Toronto meeting had been low -- and they were not exceeded. Another Weak Agreement At first glance, the promises of the G-20 nations, which were meeting in this format for the fourth time, sounded impressive. National deficits will be "at least" halved by 2013, according to the summit's closing statement. But the agreement has no teeth, given that it does not foresee any binding mechanisms to make sure that the commitment is kept. Every country will manage its own cost-cutting efforts, with some taking action sooner, others later. The measures will be "tailored to national circumstances," the statement reads. The discussion of possible new rules for the financial sector was postponed to the next summit in South Korea, which is scheduled for November. Merkel was not able to find sufficient allies to push through a worldwide bank levy or a global financial transaction tax. France and Germany are now working on a EU plan for a financial transaction tax. The G-20 members may have been united during the crisis, but now they are diverging -- both in terms of regulation and their economic health. National interests have once again become more important than the big picture.

271 Merkel wants to economize. The British have no other choice but to do so. China is allowing its currency to slowly appreciate against the dollar. And the Americans are expected to continue with their strategy of racking up new debt, at least for the time being. Divided on Economic Growth Different countries have "differentiated responses," US President Barack Obama said Saturday. It's a formulation that is intended to save face. Obama insisted that countries shared the goal of "long-term sustainable growth" that creates more jobs. In the run-up to the G-20 summit, the US and Germany had traded salvoes over their differing approaches to tackling the economic crisis. Obama wants more stimulus spending in Europe to ensure that the fragile economic recovery isn't jeopardized, while Merkel is adamant that austerity measures are the correct response to the European debt crisis. Already on Friday, at the G-8 summit that preceded the G-20 meeting, Obama had made it clear that he did not want open confrontation over growth strategies, according to sources in the German delegation. Then, speaking at the start of the official G-20 dinner on Saturday evening, Obama praised European efforts to reduce their deficits, something that the German side interpreted as a signal of reconciliation. He left the dirty work to others, such as US Treasury Secretary Timothy Geithner. "Without growth now, deficits will rise further and undermine future growth," Geithner said. History shows the devastating consequences of a premature end to state stimulus spending, he argued, citing the example of the Great Depression. This line of argument did not, however, make much of an impact in Toronto. Geithner and his boss Obama also seem to be losing support on this issue among US voters. The Mutual Blame Game The G-20 is now threatening to become a club of members that blame each other for their problems. Even before the summit, the Europeans had reacted with annoyance to Washington's lectures. "Governments should not become addicted to borrowing as a quick fix to stimulate demand," German Finance Minister Wolfgang Schäuble said. "The greatest risk, if there is a risk out there, is the sovereign debt risk," said the British finance minister, George Osborne, in an interview with the Globe and Mail. The dispute, it seems, is set to continue. China, meanwhile, managed to cleverly avoid having the alleged undervaluation of its currency become an issue at the summit, by announcing prior to the meeting that it would allow the renminbi to appreciate slightly against the dollar. Optimists saw the move as a signal that Beijing would stop subsidizing its exports through an artificially low exchange rate. On the sidelines of the summit, Obama promptly invited Chinese President Hu Jintao for a state visit to the US. But the Chinese delegation put the brakes on the exuberance, leaving no doubt that China will in the future continue to make currency-related decisions independently and not in response to external pressure. "Beijing is practiced at making concessions that are just enough to cool external pressure without really amounting to substantive policy shifts," Andrew Small, an expert on China at the German Marshall Fund, told SPIEGEL ONLINE in an interview. The currency concession "does not represent some greater move towards responsibility on Beijing's part," he explained. "The goal is still very much to use China's stronger power position to ensure that it can concentrate on a relatively narrow set of domestically focused interests." Creating Jobs at Any Price

272 Now, regulations for the global financial system are to be discussed further at the next summit in South Korea. It won't be easy, particularly given the different strategies in use to combat the crisis. The International Labour Organization, for example, issued a report earlier this month which found that global unemployment rose by 212 million as a result of the crisis -- an unprecedented jump of 34 million, despite economic stimulus measures. The report did find, however, that without such measures, a further 55 million jobs would have been lost. The big question now is: Will the stimulus efforts already undertaken be enough? Or will the bad economic news once again dominate the headlines? In the US, the unemployment rate has so far refused to budge from 10 percent -- a level that is unusually high for the US. The number of long-term unemployed is growing. Obama wants to create jobs, no matter what the cost, and he has little time to reflect on his setback on the global stage. Indeed, the White House released details of the president's next trip even as he was attending the G-20 summit in Toronto. He will be flying to Racine, Wisconsin on Wednesday for a town hall meeting. The subject: the situation of the US economy. URL: • http://www.spiegel.de/international/world/0,1518,703235,00.html RELATED SPIEGEL ONLINE LINKS: • Photo Gallery: The G-20 Summit in Toronto http://www.spiegel.de/fotostrecke/fotostrecke-56444.html • US-China Currency Dispute: 'No-One Is Going to Be Bought Off by a Tiny Revaluation' (06/26/2010) http://www.spiegel.de/international/world/0,1518,703062,00.html • The G-20 Debate: Germany Warns US Not to Become 'Addicted to Borrowing' (06/25/2010) http://www.spiegel.de/international/business/0,1518,702849,00.html • Savings Salvoes: Merkel Defends Herself Against Criticism from Washington (06/24/2010) http://www.spiegel.de/international/germany/0,1518,702579,00.html • G-20 Summit: Five Ways to Tame the Financial Market Monster (06/22/2010) http://www.spiegel.de/international/world/0,1518,702200,00.html • SPIEGEL 360: The Euro Crisis http://www.spiegel.de/international/europe/0,1518,k-7612,00.html

06/28/20104 12:00 AM Will Germany's Tab Grow? Berlin Fears Euro Rescue Could Get More Expensive Germany is the leading contributor to the European Union- and IMF-led fund to shore up the battered euro. An emergency provision in the agreement for the 750 billion euro rescue package, however, could see the country paying a lot more than the upper ceiling of 148 billion euros. German taxpayers have already had to dig deep into their pockets to fund the bailout for nearly insolvent Greece and the triple-digit billion fund reserved to provide guarantees for euro zone member states if they run into trouble. Some members of the German government, though, are concerned that the tab for taxpayers could get even bigger.

273 Members of German Chancellor Angela Merkel's government fear that country's contribution to the rescue of financially troubled euro zone member states could surge above the €148 billion ($183 billion) ceiling promised by Berlin. Although the emergency fund agreement does reference the ceiling, it also has a provision for emergency situations that, in the worst case scenario, could see Germany's participation go well beyond the amount originally pledged. The provision states that, in an emergency, if a nation is unable to contribute its share to the bailout package, it can call upon other contributing countries for assistance in providing its share. If the request is approved unanimously by the partners to the agreement, the struggling nation'sshare can then be assigned to other countries. Under this scenario, there are no caps on the total amount. Massive Pressure for Germany? Despite widespread popular opposition, German lawmakers approved Germany's contribution to the package, totalling €750 billion (around $1 trillion) in late May, and Europe's biggest economy stood to contribute up to €148 billion in loan guarantees to shore up the euro zone after markets lost trust in the European common currency and its value began to plummet. Politicians in the government coalition -- which is comprised of Merkel's conservative Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the business-friendly Free Democratic Party (FDP) -- fear the pressure placed on the goverment in Berlin could be massive if the currency is faced with another crisis. Experts, some of them from the Finance Ministry, have pointed out that the absolute cap for Germany's contribution is anchored in national legislation. But that will only make it as binding as the political will of the day. After all, German laws have been changed multiple times and at times within a matter of days as the government responded to the recent financial and economic crisis. SPIEGEL

URL: • http://www.spiegel.de/international/europe/0,1518,703266,00.html RELATED SPIEGEL ONLINE LINKS: • The Party's Over: Zapatero Tries to Cure Spain's Economic Hangover (06/24/2010) http://www.spiegel.de/international/europe/0,1518,702567,00.html • Trans-Atlantic Turbulence: Nobel Economist Krugman Slams German Austerity (06/21/2010) http://www.spiegel.de/international/business/0,1518,701894,00.html • German Judges Reject Request to Block Aid: High Court Refuses to Issue Injunction on Euro Bailout (06/10/2010) http://www.spiegel.de/international/germany/0,1518,699986,00.html • Bundestag Backing: Merkel Pushes Euro Rescue Deal Through Parliament (05/21/2010) http://www.spiegel.de/international/germany/0,1518,696258,00.html

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Stabilizing U.S. debt is the greater of two G- 20 challenges By Lori Montgomery and Howard Schneider Washington Post Staff Writer Tuesday, June 29, 2010; A13 An international push to cut deficits in half by 2013 may sound impressive, but the United States already is on track to meet that target without significant policy changes. The harder task for President Obama will be achieving a second goal adopted by the nation's largest economies over the weekend: stabilizing the soaring U.S. debt. Official forecasts show the U.S. budget deficit plummeting as the economy recovers, tax revenue rebounds and spending on last year's economic stimulus package finally winds down. In January, the Obama administration predicted that the deficit would exceed $1.5 trillion this year -- the world's largest -- but dwindle to just over $700 billion by 2013. Some analysts note that the Obama forecast assumes much stronger economic growth in 2011 and beyond than many analysts and the International Monetary Fund consider probable. But even the less optimistic Congressional Budget Office has predicted that the U.S. deficit would shrink from more than 10 percent of the economy this year to about 4.5 percent in 2013 under Obama's budget blueprint. "The short-term goal is neither particularly ambitious nor particularly relevant. You get most of the way there just from the economy picking up," said Robert Bixby, executive director of the nonpartisan Concord Coalition, which advocates deficit reduction. However, to rein in the debt, Bixby said, "they really are going to have to get into undoing some policies that are popular." As in other advanced economies in the Group of 20 nations, which adopted the deficit goals in Toronto this weekend, U.S. government spending is being driven inexorably upward primarily by health spending and social safety net programs for the poor and a growing population of old people. U.S. taxes, meanwhile, remain extraordinarily low by international standards; in the most recent ranking of 30 developed nations, the United States had the fifth- lowest tax burden, as a proportion of economic output. Only Mexico, Turkey, South Korea and Japan had lower burdens. Obama has acknowledged that reining in the national debt, which now exceeds 56 percent of the U.S. economy's annual output, may require changes to Social Security, Medicaid and Medicare -- and to a "tax system that is messy and unfair," as he said Sunday in Toronto. But Obama has sought to postpone that reckoning until after this fall's midterm elections, creating an independent, bipartisan commission to develop a long-term plan to rebalance the federal budget. In the meantime, Obama is making the same argument on Capitol Hill that he took to Toronto: The most powerful means of deficit reduction is a growing economy. If businesses make money and individuals get jobs, they all pay more taxes and seek fewer government subsidies.

275 To spur growth, Obama is seeking a fresh round of stimulus spending focused on supporting unemployed workers and shoveling cash to state governments to prevent layoffs of public employees -- two of the most efficient ways to channel money into economic activity and invigorate a sluggish recovery, according to the CBO and other independent analysts. And the administration has backed off less-efficient proposals, such as extending Obama's signature Making Work Pay tax cut. Unlike aid to the unemployed, which tends to flow to shops and landlords immediately, some portion of any tax cut is saved rather than spent. Still, Congress is balking at the added expense in an election year, as Republicans accuse Democrats of out-of-control spending and as many rank-and-file Democrats struggle to justify an increase in already sky-high deficits. Europe's pivot toward government austerity is helping to fuel the anti-spending mood in Congress. Highly indebted European countries are slashing spending with varying degrees of urgency, depending on whether they have come under pressure from bond markets, such as Greece and Spain, or are working to avoid it, such as Britain. In the most extreme example, Greece instituted wage and job cuts and took other steps to immediately reduce its deficit -- steps that the IMF acknowledged would keep the country in recession and unemployment high. France took a more tempered approach, and was encouraged by the IMF in a recent study to do more. The agency praised a recent French decision to raise the retirement age to 62, but added, for instance, that the country needed "urgent" action to control health-care costs. The new British government this month introduced a broad and highly contentious set of measures that would raise the value-added tax -- essentially, a tax on retail sales and other consumption -- and some income taxes, while freezing most public-sector wages and cutting public benefits. In an interview, IMF Managing Director Dominique Strauss-Kahn said a desire to support growth is not inconsistent with the G-20's deficit-reduction goals. "Everyone has to look at fiscal consolidation, but they can do it at a different pace," Strauss-Kahn said. "It would be a disaster if all the countries were tightening. It would totally destroy the recovery. We need somehow today to go on supporting growth except for those who are really constrained." Strauss-Kahn said the specific targets for when and how much to cut deficits are less important than whether countries "implement the right measures." In a report for the Toronto summit, the IMF encouraged nations to adopt "growth-friendly" policies as they seek to reduce deficits, for example by shifting from income and payroll taxes to consumption taxes. In the United States, that might mean adopting a value-added tax (or VAT) of up to 8 percent on all goods and services. The idea of a VAT has been broached in Washington -- most prominently by Obama economic adviser Paul A. Volcker -- but has so far failed to gain political traction. Instead, the debate has focused on reductions in Social Security and health benefits, cuts in Pentagon spending and a freeze for other government programs http://www.washingtonpost.com/wp- dyn/content/article/2010/06/28/AR2010062805101.html?wpisrc=nl_headline

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Savings rate grows faster than consumer spending By Frank Ahrens Washington Post Staff Writer Tuesday, June 29, 2010; A13 Americans socked away more savings in May than at any time since September, as they continued to be cautious spenders, according to government data released Monday. According to the Commerce Department, the personal savings rate in May -- the part of every paycheck that goes unspent -- rose to 4 percent, the highest amount in nearly a year, as worried consumers saw stocks tumble in the United States and debt problems spread across Europe. Though virtuous, an increase in personal savings creates a paradox for the gross domestic product, 70 percent of which is based on consumer spending. The personal savings rate dropped to barely more than 1 percent in 2005 when the housing boom was at its height, as consumers borrowed from their homes to buy goods. This pushed the economy higher, but left consumers cash-poor when the housing bust hit and unemployment left nearly 10 percent of Americans out of work. Now, consumers are saving again. And, as this is so far a jobless recovery -- the June unemployment figure, due out Friday, is forecast to remain unchanged at a very high 9.7 percent -- hopes for a recovery rest in consumer spending. The Monday data came shortly after top government officials from around the world left the Group of 20 summit in Toronto and as they are considering whether to extend or pull the plug on taxpayer-subsidized stimulus spending. One choice drives debt higher; the other threatens to kneecap a wobbly economy. In May, consumer spending rose only 0.2 percent compared with April, which was unchanged from March. Historically, this is a weak showing. Spending has been rising at a rate of 2.5 percent per quarter since the recession ended last year. That's less than half of the growth that followed the deep recession of the early 1980s. Stagnant wage growth is partly to blame. Personal income in May rose by only 0.4 percent, which was less than expected. More worrisome is the fact that almost all the wage growth is coming either from the government -- via temporary census jobs, which will end when the decennial count concludes in the fall -- or from businesses that have received government stimulus funds. In short, very little growth is coming from the private sector. Miller Tabak equity strategist Peter Boockvar wrote that forecasters and government policymakers should see the trend toward consumer savings as a long-term one, as "consumers rely less on asset prices to drive spending decisions and more on income earned and saved." This means that consumers will be less apt to buy things just because they're on sale and more likely to make a decision based on whether they can afford a good or service. http://www.washingtonpost.com/wp- dyn/content/article/2010/06/28/AR2010062805097.html?wpisrc=nl_headline

277

G20 accord: you go your way, I'll go mine The Toronto summit shows that now the threat of a second Great Depression has passed, it will take another crisis for the G20 to redress global economic imbalances

Larry Elliott, Economics editor The Guardian, Monday 28 June 2010

A protester at the G20 summit kicks a burning police car in Toronto. Will it take another financial conflagration to force the leading economic powers to act? Photograph: Ryan Remiorz/AP Born out of necessity in the dark days of late 2008, the cracks are beginning to show in the G20. Developed and developing nations were united when confronted with the collapse of world trade and the shrivelling of industrial output but are finding it harder to keep the show on the road now that the immediate crisis is over. The communique from the weekend's meeting is easily summed up: do your own thing. The Americans cannot persuade the Europeans to hold off from fiscal tightening until the recovery is assured; the Germans and the British think the risks of a sovereign debt crisis are far more serious than the possibility of a double-dip recession. That was not the only contentious issue this weekend. Canada, Australia, China, India and Japan were unhappy with the idea that their banks – which proved resilient during the financial crisis – should have to pay the levy backed by Washington, Berlin, Paris and London. Again, it was a case of go your own way. Cause of friction Meanwhile, the summit danced around a long-standing cause of friction; China's unwillingness to allow its currency – the yuan – to appreciate to a level that might help reduce its trade surplus with the US. In one sense, the public manifestation of these differences should come as no surprise. They were buried during the period of maximum danger – September 2008 to April 2009 – but the G20 no longer believes that the world economy is about to descend into a second Great

278 Depression. For the super-optimists, the return of diplomatic "business as usual" might even be seen as a good thing to the extent that it means normality has returned. That, though, is a perverse way of looking at things. The G20 was meant to be rather more than a crisis-resolution body; it was meant to be an institution that, through the inclusion of China, India and Saudi Arabia, could better deal with the chronic imbalances in the global economy that caused the crisis in the first place. On the evidence of Toronto, it will take a second, perhaps even bigger, crisis to lead to such an outcome. Barack Obama thinks that remains a possibility despite his emollient words to David Cameron at their bilateral meeting on Saturday. Before explaining how a second crisis could already be brewing, it's worth sketching out a couple of alternative scenarios. One is that the full effects of the colossal stimulus administered 18 months ago have yet to be felt. Growth will surprise on the upside over the coming months, so policymakers should be fretting about the risks of inflation. Andrew Sentance, the Bank of England monetary policy committee member who voted for an increase in interest rates this month, is from this camp. Unless the recovery is far stronger and broader than it appears, it is unlikely that the global economy could withstand a synchronised rise in interest rates prompted by an inflation shock. Even if it could, there would only be a short sweet spot before old problems resurfaced: ever bigger surpluses in the export-dependent countries and ever bigger deficits in the US. A second scenario is the one George Osborne envisages for Britain: a long and relatively joyless period of cold turkey after the excesses of the early and mid-noughties. The Treasury view of the world envisages consumer spending growing only modestly, with investment and exports the main engines of growth. The Germans, the Greeks, the Irish, and the Spanish – not to mention Japan, the US and the fast-growing emerging nations of China – all see their economic future in much the same way. Just how every country in the world can enjoy export-led growth has not yet been explained. The risks of a period of sub-par growth are acknowledged, but deemed as a price worth paying to keep the financial markets happy. Governments are terrified that they will be punished severely if they fail to take deficit reduction seriously; investors will demand a higher price for buying the bonds that have to be sold to finance the deficit, which in turn drives up long-term interest rates for those home-buyers with fixed-rate mortgages and businesses with bank loans. Better to slash spending and raise taxes so that monetary policy can remain loose. That is the advice Osborne has been getting from Mervyn King, governor of the Bank of England. Jean-Claude Trichet at the European Central Bank thinks the same way. There are two points to mention here. The first is that King and Trichet, eminent though they may be, are not infallible. King voted to keep interest rates above 5% in summer 2008 even though the economy was already in recession and the strains in the financial system that culminated in the collapse of Lehman Brothers were already in evidence. Trichet seemed oblivious to the threat posed to the whole of the eurozone by the crisis in Greece. As for the markets, it is certainly true that sovereign debt is their concern this month. But next month they may be getting in a lather about the slow growth caused by the austerity programmes they themselves have necessitated. The risk is that satisfying the capricious whims of the financial markets leads to policy error and the doomsday scenario. It goes something like this: even before the sovereign debt crisis erupted this spring, there were some tentative signs that the recovery that began in the spring of 2009 was losing momentum. The US has just revised down its growth for the first quarter

279 and has yet to see the pick-up in the labour market that it enjoyed in previous recoveries. Europe's expansion over the winter was barely perceptible. China has been pounding along but Beijing has been seeking to tighten credit conditions after 2009's monetary laxity. Spare capacity The sluggish recovery has meant that core inflation in the US and eurozone is already below 1%. They are one recession away from deflation, and perhaps not even that. There is so much spare capacity – particularly in European and North American labour markets – that a marked slowdown in activity rather than falling output would do the trick. Central banks are terrified by the prospect of deflation, not least because none of them – outside of the Bank of Japan – have any experience of coping with it. They would have every right to be worried. Deflation raises the real level of debt; it would hurt consumers, businesses and – crucially – banks. Having barely survived the near-death of the global financial system in October 2008, central banks have no desire for a repeat performance. They would feel the need to act decisively to prevent a deflationary spiral, but with interest rates already hovering just above zero could only do so through quantitative easing (QE) – creating electronic money through the banking system. To have an impact this would need to be aggressive. The trouble is that central banks know very little about the effects of QE and the chances of getting it wrong would be high. Attempts to cure deflation could easily turn into the opposite problem: hyperinflation. In terms of chronology, it would pan out like this: sharp slowdown in US and European growth in the second half of 2010. Pressure on heavily indebted banks intensifies as deflation becomes a reality in the first half of 2011. Second leg of the financial and economic crisis in the second half of 2011. G20 get serious in early 2012. http://www.guardian.co.uk/world/2010/jun/28/g20-summit-economics-global- imbalances/print

280 Bloomberg G-20 Responds to European Debt Crisis With Deficit- Cutting Goal

Canada's prime minister Stephen Harper speaks at a news conference during the Group of 20 summit in Toronto. Photographer: Norm Betts/Bloomberg

Play Video June 28 (Bloomberg) -- Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, talks with Bloomberg's Susan Li about the Group of 20 leaders' plan to cut deficits and pursue higher capital requirements for banks once their economic recoveries take root. Kirkegaard, speaking from Washington, also discusses the shift in China's currency policy. (Source: Bloomberg) Group of 20 leaders responded to the European debt crisis with deficit-reduction targets and agreed to pursue higher capital requirements for banks once economic recoveries take hold. Advanced G-20 economies will aim to halve deficits by 2013 and start to stabilize their debt- to-output ratios by 2016, the group said in a statement yesterday after a meeting in Toronto. Leaders said nations can move at their own pace and also pledged to fulfill existing stimulus plans. While President Barack Obama is pushing his counterparts to focus on spurring growth, leaders in the U.K. and Germany are already tightening spending to bolster investor confidence. U.S. and European stocks both had their biggest weekly drops in more than a month last week as investors renewed concerns that countries may be unable to repay debts. “The view of the business community is that we need fiscal restraint in order to ensure confidence and therefore sustainable economic growth,” Gordon Nixon, chief executive officer of Toronto-based Royal Bank of Canada, the country’s biggest bank, said in a telephone interview. “These targets are very important.” Canadian Prime Minister Stephen Harper said his country could meet the targets, which as chairman of the meeting he had proposed earlier this month, as soon as next year. The agreement still amounted to a compromise that lacks strength, said Stephen Roach, Morgan Stanley’s Asia chairman.

281 ‘Underwhelmed’ “I am underwhelmed,” said Roach in an e-mail. “By attempting to finesse the trade-off between America’s call for ongoing stimulus and Europe’s penchant for fiscal consolidation the G-20 has come up with a multi-purpose recipe with no enforcement mechanism.” U.S. Treasury two-year yields were near the lowest level this year after the G-20’s pledge to cut deficits. The two year note yielded 0.66 percent as of 7:35 a.m. in London, according to data compiled by Bloomberg. The U.K.’s announcement last week about its planned budget cuts spurred an increase in gilts and the pound, and led Fitch Ratings Ltd. to say Britain would keep its AAA credit rating. “With respect to deficits, markets are giving Europe direction, and markets are more powerful than words from President Obama,” said Tony Fratto, who served as a White House and U.S. Treasury official under President George W. Bush. ‘Unacceptable Levels’ G-20 leaders called the global recovery “uneven and fragile,” noting that unemployment remains at “unacceptable levels” in many nations. In the U.S., economists surveyed by Bloomberg News expect the Labor Department to report that in June employment fell for the first time this year. Concerns about the global recovery have added to stress in the credit markets. Company debt offerings declined 3.8 percent last week to $38.6 billion, according to data compiled by Bloomberg. Renault SA, France’s second-biggest carmaker, reduced a bond sale by 20 percent, citing “more difficult” market conditions. “To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand,” the G-20 statement said. “At the same time, recent events highlight the importance of sustainable public finances.” The balance struck by the G-20 means “everyone can sell it at home as a victory,” said Carsten Brzeski, an economist at ING Group in Brussels. “The announcement to halve fiscal deficits by 2013 is huge.” ‘Draconian’ The leaders addressed resistance to the deficit-reduction goals by limiting them to advanced economies. Brazil’s Finance Minister Guido Mantega on June 26 said the targets were “draconian.” Mantega represented Brazil at the meeting because President Luiz Inacio Lula da Silva stayed home after floods ravaged the northeastern part of his country. The phrasing meant “we are going to treat President Lula of Brazil with respect,” said John Kirton, director of the G-8 Research Group and co-director of the G-20 Research Group at the University of Toronto. “It’s the advanced industrial economies that have the problems, so the G-20 agrees that those with the problem have got to do the solution.” “It’s a powerful statement,” said Craig Alexander, chief economist of Toronto-Dominion Bank, Canada’s second-largest bank by assets. “The emphasis now is on fiscal restraint.” Bank Tax The G-20, which accounts for about 85 percent of the global economy, replaced the G-8 last year as the world’s foremost international policy-coordinating forum. The larger group means developed and emerging economies are trying to find common ground amid differences in prosperity that vary from the U.S.’s $46,400 in GDP per capita to India’s $3,100.

282 The G-20 leaders said banks need to have “significantly higher” capital, while giving lenders more flexibility to implement the changes. Countries should adopt the new standards by the end of 2012, and banks will be allowed to phase in capital increases during a transition period. Leaders said they will seek final agreement at a summit in Seoul in November when the Basel Committee of Banking and Supervision, made up of international central bankers, will propose a road map. The U.S. pushed for stricter new capital rules while Europeans stressed the need for a phase-in period. The group didn’t support the implementation of a bank tax, whose backers include the U.K. “Some countries are pursuing a financial levy,” the G-20 said. “Other countries are pursuing different approaches.” Banking Industry Royal Bank of Canada’s Nixon called the statement “quite positive,” saying, “I don’t think there’s any surprises to the banking industry.” The group agreed to refrain from increasing or imposing new barriers on trade until the end of 2013 and reiterated support for the Doha round of World Trade Organization talks. Even so, both the G-20 and the G-8 stopped short of calling for completion of the Doha trade accord by a certain date, and the G-8 emphasized the need for regional and bilateral agreements. G-8 leaders also sounded warnings on international political issues. G-8 officials singled out Iran for a “continued lack of transparency regarding its nuclear activities” and said they “deplore” the March 26 attack on the South Korean warship Cheonan. An international panel blamed the attack on North Korea. Neither the G-8 nor the G-20 mentioned China’s currency, though the G-20 did call for “greater exchange rate flexibility in some emerging markets.” China indicated on June 19 that it was scrapping the yuan’s two-year-old peg to the dollar and reiterated the aim at a media briefing on June 26. Security Fence “Our Chinese friends don’t like to be singled out within a communique,” French President Nicolas Sarkozy told reporters. Outside the security fence that surrounded the meeting, protests turned violent for both days of the summit. Protesters set fire to cars, smashed store windows and threw rocks at First Canadian Place, headquarters of the Bank of Montreal. Police have detained more than 500 people since June 18, said Tim Garland, a spokesman with the Integrated Security Unit, a coalition of police forces providing security for the summit. To contact the reporters on this story: Theophilos Argitis in Toronto at [email protected]; Kristin Jensen in Toronto at [email protected]. http://www.bloomberg.com/news/2010-06-28/g-20-aims-to-boost-confidence-amid-europe- crisis-with-budget-cutting-goals.html

283

Eurointelligence Daily Morning Newsbriefing Another summit that disappoints

28.06.2010 G20 fails to agree on common rules for a bank tax; reaches token agreement on deficit reduction, according to which fiscal deficits should be halved by 2013 – which is consistent with most country’s current plans in any case; G20 also agrees that everything is not binding; common capital rule requirement downgrade from a target to an aim; in Spain, the newspapers focused on the fact that Zapatero was allowed to sit next to Merkel for the entire meeting; Clive Crook says the G20 has become a waste of time; France is now discussing austerity measures in detail; the Camdessus group recommends adoption of a German- style balanced budget rule; German political parties move towards consensus over an increase in the top tax rate; the financial crisis is now hitting the next asset class – corporate bonds; ten European banks gang up to create a pan-European market for securities products, similar to Pfandbriefe or covered bonds; Wolfgang Munchau, meanwhile, argues that the EU’s institutions and the financial markets remain world’s apart.

28.06.2010 Another summit that disappoints

All our newspapers agree that the G20 watered down their commitment to implement new bank rules, but with respect to the other critical issue, deficit reduction, the FT is by far the most pessimistic. The G20 countries committed to halve their budget deficits by 2013 and stabilise their debt to national income ratios by 2016. The FT writes that “these targets are not likely to require new policy action because G20 countries are already planning austerity measures on this scale, according to the recent International Monetary Fund fiscal monitor.”

284 The targets are non-binding and there will be no sanctions for countries who fail to do so. Senior G20 sources said they hoped it would send a signal to financial markets that the global community is serious about deficit reduction. As for banks, G20 countries continue to insist on tougher capital rules in principle but there were considerable differences over what a capital buffer means and the speed of adoption. They came up with a least common denominator on adoption, with the previous target date of 2012 no longer a “target” but an “aim” and allowing a phasing-in of the new rules (according to this story from the FT). Final agreement on the rules and its adoption is left for the summit in Seoul in November, after the BIS presented its roadmap. El Pais made the observation that Zapatero was sitting next to Angela Merkel for the entire duration of the G20 summit, whilst emphasising the country’s continued solvency. The article also mentioned that Zapatero wants to make some changes to the Spanish bank rescue fund, to turn it into a full-blown policy instrument. As always, it is worth looking at the full communiqué, which can be downloaded here. Clive Crook on the G20 In his FT column, Clive Crook makes the point that the G20 has become a total failure. “The first Group of 20 summit in November 2008 proclaimed a new era of “global solutions to global problems”. Less than two years later, with the economic crisis barely contained, the partners are at odds. Reaching agreement was not the main challenge in Toronto this weekend. They knew that was not going to happen. Mainly, they hoped to put the best face they could on disunity.” He said the real problem is not the G20’s failure to coordinate fiscal policy, but the sheer incompetence of fiscal policy in individual countries, co-ordinated or not. The French on their way to austerity Early May the government talked about €5bn more income for budget consolidation over the next two years; last week Francois Fillon raised the bar to €8.5bn and on Sunday the budget minister even talked about €10bn, according to Le Monde. The money shall come from removing exemptions in the tax and social security system. The government shies away calling it a tax rise, but that is what it is de facto. These exemptions have been key to political arbitrage in the past and are now up for scrap. The latest government reaction came after Jean Francois Cope, the parliamentary UMP leader, called for 10% cut for all spending ministries, to yield some €10bn over the next two years (hat tip Les Echos). Every niche should be considered, though the government already said that the VAT reduction for restaurants is not touched upon.

A French constitutional budget rule proposal A working group under Michel Camdessus presented its report last Friday on how to include a budget rule in the constitution, reports Le Monde. The group suggests that binding budget framework that includes a trajectory to budget equilibrium and a European dimension. Every two years the parliament is to verify whether the budget laws are in line with the provisions of the framework, which would be under the auspice of the constitutional court. If considered as not satisfactory, the government could be obliged to take up austerity measures within the following two years. There are also provisions to limit the use of fiscal exemptions within the budget. Under the proposal the government still retains the right to fix the target date for budget equilibrium.

285 The Germans now are planning even more austerity In a Germany a cross party consensus is emerging towards an increase in the top tax rate, currently 42% to close to 50%. The SPD, which has been driving this campaign, favours an increase in the top rate to 48%, and an increase in the threshold above which this rate applies from €50,000 to €80,000 according to FT Deutschland. Politicians from the Bavarian CSU and the FDP, both coalition partners to Angela Merkel, also favour an increase in the top tax rate. (So much for the idea that a miraculous increase in economic growth is going to get us out of this mess). And now for the corporate bond crisis We have this from Bloomberg, via Naked Capitalism. “The percentage of corporate bonds considered in distress is at the highest in six months, a sign that debt investors expect the economy to slow and defaults to rise. The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7 percent of the total, the highest share since December, according to Bank of America Merrill Lynch index data…” A new securitised product for the wholesale finance market Ten of the biggest European banks are seeking to revive the struggling wholesale finance market with a new kind of enhanced securitised product designed to attract lenders such as pension funds and hedge funds, according to the FT. Bankers compare the new idea to Germany’s “Pfandbrief” covered bond standard. Bond issuers would be expected to keep some 5 -10% of the issue, and enhanced due diligence would be conducted on the underlying loans. The initiative comes amid tensions between Germany and southern European economies such as Spain about the role of the ECB in assisting bank liquidity. The proposed securitisation structure will not see the light for several months. Wolfgang Munchau on the irreconcilable worlds of the EU and the financial markets In his FT column, Wolfgang Munchau writes that the EU and the financial markets are world’s apart, which is one of the reason for the serial policy errors, committed by the European Council in the handling of this crisis. The first was bad and inconsistent communication, which raised doubts about the EU’s resolve in crisis resolution. The second is legislation, like short sale bans, with the sole purpose to demonise investors. The third is the combination of publishing stress test, whilst having no credible crisis resolution strategy. Munchau concludes that the EU’s political establishment is financially illiterate. http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2837&tx_ttnews[b ackPid]=901&cHash=e4f5f92c56#

286

Finances publiques : la révision constitutionnelle se dessine LE MONDE pour Le Monde.fr | 25.06.10 | 15h00 • Mis à jour le 25.06.10 | 22h42

nnoncée par Nicolas Sarkozy lors de la dernière conférence sur les déficits, la révision constitutionnelle nécessaire pour assurer le retour à l'équilibre des finances publiques se précise. Michel Camdessus, gouverneur honoraire de la Banque de France, qui a présidé le groupe de travail sur le sujet, dévoile au Monde les propositions qui ont été retenues au terme des discussions et qui sont rendues publiques vendredi 25 juin : une loi-cadre de programmation des finances publiques devra être instituée pour préciser la trajectoire du retour à l'équilibre et ses dimensions européennes. Elle sera contraignante, autrement dit le plafond des dépenses et le quantum des recettes devront être respectés. Cette loi-cadre aura la primauté sur les lois de finances annuelles. Tous les ans, au printemps, une délibération aura lieu au Parlement pour vérifier que la loi de finances annuelle est conforme aux engagements de la loi de programmation. Ce nouveau dispositif sera placé sous le contrôle du juge constitutionnel. En cas d'écart, le gouvernement aura obligation de prendre des mesures de redressement au plus tard dans les deux ans. Une deuxième disposition est prévue, limitant aux seules lois de finances la possibilité de comporter des dispositions fiscales. Cette restriction vise à éviter l'inflation de niches fiscales ou sociales dans les projets de loi ordinaires. Michel Camdessus précise que la révision constitutionnelle portera sur l'article 34 de la Constitution qui devra être modifié pour intégrer ces deux innovations. Il précise que le groupe de travail, qui comprend notamment des parlementaires, des universitaires, des juristes et des représentants étrangers, n'a pas estimé qu'il était de sa compétence de fixer une date à laquelle le retour à l'équilibre devra s'effectuer . "C'est de la responsabilité du gouvernement", a expliqué le groupe de travail . Une autre idée n'a pas fait l'unanimité : la création d'un comité de consultation d'experts indépendants qui aurait éclairé le gouvernement et le Parlement sur la conformité des hypothèses retenues aux objectifs de retour à l'équilibre. "Cela aurait ressemblé à un gouvernement des sages", fait valoir un membre du groupe. Le premier ministre, François Fillon, devrait démarrer rapidement les consultations politiques en vue de cette révision constitutionnelle. Mais le plus dur reste à faire : trouver au Parlement la majorité des trois cinquièmes nécessaire à son adoption.

287 Françoise Fressoz

Le rapport inspirera "très directement" le gouvernement

François Fillon devrait engager prochainement des consultations politiques sur la réforme constitutionnelle d'équilibre des finances publiques, sur la base du rapport que lui a remis Michel Camdessus, annonce vendredi 25 juin un communiqué de Matignon, approuvant très largement le travail de la commission dirigée par l'ex-directeur général du FMI. "Ce rapport inspirera très directement le gouvernement dans la préparation de cette réforme essentielle pour le rétablissement durable de nos comptes publics", indique le communiqué. http://www.lemonde.fr/web/imprimer_element/0,40-0@2-823448,50-1378828,0.html

288 Bloomberg Debt Distress Rises as Goldman, JPMorgan Vary on Defaults: Credit Markets

Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc. in Washington. Photographer: Chris Kleponis/Bloomberg The percentage of corporate bonds considered in distress is at the highest in six months, a sign debt investors expect the economy to slow and defaults to rise. The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7 percent of the total, the highest share since December, according to Bank of America Merrill Lynch index data. The ratio compares with 9.2 percent on April 30, which was the lowest since November 2007. Junk bond sales slumped to a 15-month low in June amid concern government efforts to control spiraling budget deficits will hamper global growth and drive up borrowing costs for the neediest borrowers. The 2010 default rate in the U.S. may jump as high as 6 percent by year-end from 1.3 percent currently, according to analysts at Goldman Sachs Group Inc. “The default driver will be a reversal of easy refinancing conditions,” said Charles Himmelberg, the chief credit strategist at Goldman Sachs in New York. JPMorgan Chase & Co. analysts led by high-yield credit strategist Peter Acciavatti wrote June 25 that the rate will be 2 percent in 2010. The views are diverging as investors weigh the effects of Europe’s sovereign debt crisis and on mounting concern the U.S. economy may tip back into recession. ‘Macro Uncertainty’ “I could never have imagined this amount of macro uncertainty,” said Don Ross, who helps oversee $9.5 billion of assets as global strategist for Cleveland-based Titanium Asset Management Corp. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt is poised to widen the most this quarter since 2008, prices of leveraged loans are set to fall, emerging market debt spreads are headed for their first quarterly increase since the final three months of 2008 and asset-backed debt sales are slowing. The gap in yields between corporate and government debt ended last week at an average 195 basis points, or 1.95 percentage points, up from 149 at the end of March, according to Bank of

289 America Merrill Lynch’s Global Broad Market Corporate Index. The last time spreads widened as much was when they expanded by 130 basis points to 489 in the final quarter of 2008, when Lehman Brothers Holdings Inc. collapsed. The yield on the index, which tracks 8,516 issues with a par value of about $6 trillion, is 3.99 percent, little changed from the end of March and down from 4.4 percent in December. Positive Returns Returns on company bonds as measured by the Bank of America index average 0.8 percent this month, following a loss of 0.4 percent in May. Year-to-date returns total 4.46 percent, compared with a loss of 6.1 percent for the MSCI World Index of stocks. High-yield issuance globally has totaled $8.3 billion in June following $8.6 billion in May, the least since March 2009, compared with an average of $32.4 billion in the previous four months, according to data compiled by Bloomberg. “Risk aversion remains elevated,” JPMorgan debt strategists including Srini Ramaswamy in New York said in the bank’s U.S. fixed-income report dated June 25. In terms of Europe’s sovereign debt crisis, “we are at an inflection point with respect to the potential impact on U.S. economic growth, which is likely to cause fixed income markets to remain highly reactive to the tone of economic data,” they said. The bank increased its year-end investment-grade spread forecast to 150 basis points from 125. The Commerce Department said June 25 that the U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than the 3 percent previously calculated, reflecting a smaller gain in consumer spending and a bigger trade gap. Credit-Default Swaps The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, fell June 25 to 113.96 basis points, a drop of 5.7 basis points, the most since May 31, according to Markit Group Ltd. For the week, the index rose 4.1 basis points. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings fell 3.5 on June 25 to 126.08. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 6 basis points to 133 basis points as of 8:20 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit- default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The S&P/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar- denominated first-lien leveraged loans, rose 0.02 cent to 88.81 cents on the dollar last week. The index has lost 3.2 percent this quarter, after gaining 4.7 percent in the first three months of the year. Emerging Markets In emerging markets, relative yields widened the most last week in more than a month. Spreads rose 12 basis points to 321 basis points, the biggest weekly increase since climbing

290 42 basis points in the period ended May 21, according to JPMorgan’s Emerging Market Bond index. For the quarter, the gap in yields has risen 72 basis points, the first increase since it widened 277 basis points in the three months ended Dec. 31, 2008. In the asset-backed market, U.S. supply will total about $25 billion of bonds this quarter, down from $30 billion in the first quarter, JPMorgan strategists estimate. They predict sales will total $105 billion for the year. Goldman’s Default Forecast Defaults on high-yield, high-risk debt in the U.S. will drop to 2.7 percent by the end of the year, or as high as 5.8 percent under a “pessimistic” economic scenario, from 7.9 percent in May, Moody’s Investors Service said June 6. Standard & Poor’s forecast on June 4 that the pace of defaults will decline to 5 percent, from 6.7 percent at the end of last month. The rate may increase to 6.9 percent by 2011 under S&P’s pessimistic scenario. Goldman Sachs’s default forecast translates into about 58 defaults in the next two quarters, compared with 16 from January through June, based on Moody’s data of 1,241 issuers. S&P said two global corporate issuers defaulted last week, boosting the year-to-date 2010 tally to 41. By region, 29 issuers have defaulted in the U.S., two in Europe, four in the emerging markets, and six in the other developed regions, such as Australia, Canada, Japan, and New Zealand. Distressed exchanges accounted for 13 defaults, while Chapter 11 filings and missed interest or principal payments are responsible for 11 each, according to S&P. Regulatory directives and receiverships account for one each, and the remaining four defaulted issuers are confidential, it said. ‘Residual Default Risk’ “Residual default risk beyond the one-year forecast horizon could increase because of the significant overhang of surviving leveraged corporate issuers,” S&P said in a June 25 report. “The substantial decline in risk premiums for lower- rated borrowers and the return of what we view as questionable practices and structures in some recent deals, such as raising bond funds to pay out shareholder dividends or sponsors, further raise flags that the optimism might be overdone.” In Asia, South Korean developers Byucksan Engineering & Construction Co., Joongang Construction Co. and Namkwang Engineering & Construction Co. said in separate regulatory filings that they will discuss out-of-court debt restructuring with creditor banks. Speculative-grade debt has returned 0.09 percent this quarter, the worst performance since losing 17.6 percent in the final three months of 2008, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index. High-yield debt is rated below Baa3 by Moody’s and lower than BBB- by S&P. ‘Good Companies’ Yield spreads rose 8 basis points last week to 690 basis points, up from an almost three-year low of 542 on April 26. The current low default rate and wider spreads make the debt an “excellent buying opportunity,” said Ann Benjamin, Chicago- based chief investment officer of leveraged asset management strategies at Neuberger Berman LLC.

291 “It’s not like we’re back in the early 2000s when you have over-levered companies with no cash flow,” said Benjamin, who helps oversee $7.5 billion of high-yield bonds and $5 billion in loans. “These are good companies with solid and predictable cash flows.” Corporate profits increased 8 percent in the first quarter, the Commerce Department report on June 25 showed. Earnings were up 34 percent from the same time last year, the biggest year- over-year gain since 1984. Employment fell in June for the first time this year, reflecting a drop in federal census workers as the decennial population count began to wind down, economists said before a report this week. Payrolls declined by 110,000 last month, according to the median estimate of 51 economists surveyed by Bloomberg News ahead of a Labor Department report July 2. Private employment, which excludes government jobs, rose for a sixth consecutive month, the survey showed. “It’s somewhat self-fulfilling, if the capital markets are willing to finance you, you don’t default,” said Tad Rivelle, head of fixed-income investment at Los Angeles-based TCW Group Inc., which has $115 billion in assets under management. “In the current environment, what seems to be uppermost in investors consciousness is, are we headed for a double dip?” To contact the reporters on this story: Bryan Keogh in London at [email protected]; John Detrixhe in New York at [email protected] http://www.bloomberg.com/news/2010-06-27/bond-distress-rises-as-goldman-jpmorgan-vary- on-defaults-credit-markets.html

292 Coulisses de Bruxelles, UE Jean Quatremer Le Guardian met en vente les îles grecques Vendredi, le Guardian, quotidien de gauche qui n’a rien d’un tabloïd, titre, en première page que la Grèce se prépare à vendre des îles pour rembourser sa dette souveraine et sauver son économie (« Greece starts putting island land up for sale to save economy »). La Bild Zeitung, tabloïd allemand, aurait donc été entendue, elle qui, en février dernier, le suggérait à la Grèce, soutenue par des députés conservateurs de la CDU (comme Josef Schlarmann) et libéraux du FDP (comme Frank Schäffler)! Évidemment, l’histoire est aussi bidon que la soi- disant décision de la Banque centrale chinoise, « révélée » par le Financial Times, de se débarrasser de ses euros.

L’article de mon confrère britannique affirme que la Grèce, « désespérément » à la recherche d’argent frais pour rembourser « ses montagnes de dettes », se prépare à vendre ou à louer à long terme (bail emphytéotique de 99 ans) quelques-unes de ses 6000 îles. Très renseigné, le journal écrit qu’un tiers de Mykonos, le Saint-Tropez grec, serait prochainement mis sur le marché, tout comme une partie de Rhodes ou encore Nafsikia. Un acte de désespoir qui montre à quel point la situation est désespérée en Grèce. De quoi paniquer un peu plus des marchés qui n’en demandent pas tant. Évidemment, la nouvelle, telle qu’elle est présentée, est totalement fausse. Mais pourquoi laisser les faits entraver une belle histoire ? Le gouvernement grec n’a pas du tout gouté la plaisanterie : alors qu’il met en œuvre un plan d’austérité sans précédent, il n’a pas besoin que l’on rajoute de l’huile sur le feu et que l’on fasse croire aux Grecs que l’on brade leur pays. Les officiels que j’ai rencontrés ces derniers jours ne décoléraient pas et le porte-parole du gouvernement s’est fendu d’un communiqué qualifiant ce papier de « tromperie ». Ce qui est tout à fait vrai. D’abord, parce que l’affaire n’a rien de nouveau : des terrains, appartenant ou non à l’État, sont régulièrement à vendre. La Grèce comptant de nombreuses îles, il arrive qu’ils soient situés sur des…îles. Ainsi, Nafsika, une île ionienne, est sur le marché depuis longtemps. Ensuite, l’article fait comme si les négociations actuelles d’une société grecque avec des investisseurs chinois ou russes pour développer l’activité touristique à Rhodes revenait à « vendre » Rhodes.

293 Enfin, il est vrai que l’État grec est engagé dans un vaste programme de privatisation et de vente de terrains publics (estimés entre 150 et 300 milliards d’euros). Mais, évidemment, cela ne veut pas dire que la Grèce brade son territoire. C’est comme si l’on disait que la vente d’une villa de la Côte d'Azur à un oligarque russe revenait à vendre une portion du territoire français aux Russes. Ou comme si Eurodisney avait permis aux États-Unis d’acheter un bout de Seine-et-Marne… La Grande-Bretagne, dont toute l’industrie est entre des mains étrangères, n’a jamais considéré qu’elle avait vendu son territoire aux Allemands, Français, Américains ou Russes. Comme le dit le porte-parole du gouvernement, de « telles allégations font naître de sérieux doutes sur les motivations qui ont conduit le Guardian à publier un tel article en “une” »… Rédigé le dimanche 27 juin 2010 à 23:23 dans http://bruxelles.blogs.liberation.fr/coulisses/2010/06/le-guardian-met-en-vente-les- %C3%AEles-grecques.html#more

294

The Curious Capitalist Commentary on the economy, the markets, and business

The Curious Capitalist Feed Read more: http://curiouscapitalist.blogs.time.com/2010/06/27/has-the-g-20-doomed-the- recovery/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+timeblog s%2Fcurious_capitalist+%28TIME%3A+The+Curious+Capitalist%29&utm_content=Google +Reader#ixzz0s8p2s11m Michael Schuman Has the G-20 doomed the recovery? Posted by Michael Schuman Sunday, June 27, 2010 at 10:46 pm 1 Comment • Related Topics: fiscal policy, recovery, sovereign debt So they've gone and done it. Even though the G-20 called the recovery “uneven and fragile” in the final declaration from its weekend confab in Toronto, the advanced economies also pledged to at least halve fiscal deficits by 2013 and stabilize or reduce government debt-to- GDP ratios by 2016. The statement read: Recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth- friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. So how will the G-20's position impact the rebound? Though there is no clear consensus among economists on whether or not fiscal retrenchment will sap the recovery, I think the way the G-20 is going about the process can only be negative. Here's why: The problem is that the G-20 countries aren't fulfilling other aspects of their program that would act as a counterweight to the promised fiscal adjustment and ensure the global recovery keeps humming along. For example, the declaration warned that budget cutting has to be closely matched to a rebound in the private sector and coordinated across countries: The path of adjustment must be carefully calibrated to sustain the recovery in private demand. There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. But isn't that exactly what the G-20 is calling for, a “synchronized” retrenchment across the developed world? By putting in place a promise that all industrialized nations dramatically cut their deficits, the G-20 has set in motion the very rush to the exits that it says is a danger. I agree with the American position on the matter, that more or less got snuffed out at the summit, that countries that don't suffer from severe sovereign debt issues or large fiscal deficits (whether in the emerging world, like China, or the developed, like Germany) should delay or slow their fiscal adjustment in order to sustain the global recovery and help those

295 other nations that can't wait to cut their budgets (Greece, Portugal). But that's not happening. Germany is leading the charge on fiscal austerity instead of coming to the aid of its neighbors and stimulating Europe's economies. The other promise made at the G-20 to keep growth going is also likely to get ignored. That's the one about rebalancing the global economy. The declaration read that fiscal adjustment “should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path.” Some members of the G-20 with large current account surpluses are at least making an effort (like China) or recognizing the need for change (like Japan). But others – and I'm thinking Germany here – seem to simply revel in their surpluses. The process of rebalancing is not happening quickly enough to counteract the drag on the global economy from fiscal cutbacks. So in the end, the G-20 only set targets for the one factor that can hurt the recovery – fiscal adjustment – while not properly coordinating those efforts or holding its members to clear guidelines on the rebalancing that could support growth. That sounds like a recipe for a slower rebound from the Great Recession.

Read more: http://curiouscapitalist.blogs.time.com/2010/06/27/has-the-g-20-doomed-the- recovery/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+timeblog s%2Fcurious_capitalist+%28TIME%3A+The+Curious+Capitalist%29&utm_content=Google +Reader#ixzz0s8owSpb5

http://curiouscapitalist.blogs.time.com/2010/06/27/has-the-g-20-doomed-the- recovery/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+timeblog s%2Fcurious_capitalist+%28TIME%3A+The+Curious+Capitalist%29&utm_content=Google +Reader

296 naked capitalism

Recent Items • Links 6/28/10 - 06/28/2010 - Yves Smith • Parenteau: Marching to Austeria* and Other Neolib Fibs - 06/28/2010 - Yves Smith • More on the Coming European Bank Stress Test Fiasco - 06/28/2010 - Yves Smith • Concerns About BP Relief Well Success Rise Along With Evidence of Chemical Damage, Spread of Oil - 06/27/2010 - Yves Smith • Corporate Default Expectations Rise, Emerging Market Spreads Widening - 06/27/2010 - Yves Smith Monday, June 28, 2010 Parenteau: Marching to Austeria* and Other Neolib Fibs By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute Richard Alford has correctly identified the need to address global imbalances – rather than simply slouch our way back to some milder version of status quo before the pre- Lehman meltdown arrangement, as we presently appear to be doing – if we are to have any hope of finding a sustainable global growth path. On this much we can surely agree. As to the method of addressing global imbalances, however, and perhaps even the true nature of these imbalances, we find ourselves deeply at odds with some of his diagnosis and most of his prescriptions. Richard specifically takes issue with those of us who have been warning about the pursuit of large, prolonged fiscal retrenchment paths in the eurozone. He believes this is a bit of a diversionary tactic on our part, akin to a stance John Connolly once took, of restating our problem as their problem to deal with, not ours. The solution to the US problem is plain and simple in Richard’s mind: stop fighting austerity policies abroad, and start advocating their implementation at home. Now it is true, as a matter of double entry book keeping, that if the US as a nation is going to reduce the gap between its spending and its income (which would reduce the currently widening trade deficit by definition), then nations that are major trading partners of the US must be prepared to reduce their net saving. Just as it takes two to tango, there are two sides to every exchange or transaction. One nation cannot increase its financial balance or net saving with the rest of the world unless the rest of the world is prepared to reduce its net saving. So from a rational perspective, rebalancing global growth does, as a matter of fact, require both sides to move in the right direction. This is not a theory – it is simply an accounting reality. One side can initiate the move, but both must be prepared to move. Frequently, we are told by neoliberals, who dominate the economics profession and policy making circles, that there is something called the “twin deficits” that must be recognized and addressed in the US. The twin deficit story goes like this: an increase in the fiscal deficit will tend to lead to an increase in the current account (or trade) deficit. Therefore, if reducing the US current account deficit is a desirable if not a necessary policy objective, then it is surely

297 necessary to reduce the fiscal deficit. We have been hearing this story for nearly three decades from the neolibs. The problem with the twin deficit story is the facts do not seem to bear the theory out. Below you may observe a chart for the US the shows the current account balance as a share of GDP, and the combined government fiscal balance as a share of GDP. You will notice the twins seem unrelated – not even separated at birth. Specifically, look at the entire decade of the ‘90s, when the twins moved in opposite directions. The fiscal balance increased, while the trade balance fell. This is supposedly impossible under the neoliberal twin deficits story. Then observe the shaded bars, which encompass recessions of the past 45 years. Lo and behold, in nearly each of the recessions of the past nearly half century, the fiscal balance has fallen while the trade balance has risen. The facts indicate the twin deficit story is at best an incomplete or unreliable story (click to enlarge). Why might this be the case? The neoliberals are not playing with a full deck – or at least they are keeping some cards up their sleeves. In prior articles, policy briefs, and public presentations, we have traced out the fact that while for the economy as a whole, total saving out of income flows must equal total investment in tangible assets (houses, plant and equipment, etc.), this is not true for any one sector of the economy. Breaking the economy down into three sectors – government, foreign, and domestic private sectors – we can derive the following identity which must hold true at the end of any accounting period (we can provide the simple algebra to derive this upon request – it appears in other publications of ours, as well as in much of the research Wynne Godley performed while at the Levy Institute):

Domestic private sector financial balance + government financial balance – current account balance = 0 Or DPSFB + GFB – CUB = 0 This means in order for the current account (CUB) and the fiscal balance (GFB) to be twins, as the neoliberals often assert, such that a fall in the fiscal balance (say an increase in the fiscal deficit) leads to a commensurate fall in the current account balance (say an increase in the trade deficit), then there must be little or not change in the domestic private sector financial balance (DPSFB). This, it turns out, is empirically false. The DPSFB is rarely stable, especially in the past two decades of serial asset bubbles, when both the household and nonfinancial business sectors have gone deeper than ever into deficit spending territory under the influence of asset prices kiting ever higher.

298 So what is the true twin of the trade deficit? We can split the DPSFB, as we hinted just above, into the household and nonfinancial business sectors. DPSFB = HFB + NBFB When we do so, we notice a new set of twins arises from the historical data. The true twin of the CUB is the HB, or household financial balance. And of course, this makes perfectly good sense since most of the trade deficit is in the area of tradable consumption goods (click to enlarge). So if we decide the US CUB needs to turn around, we best find a way to increase the HFB, or the net saving positions (saving minus investment) of the household sector. How can this be achieved? Expanding and rearranging the accounting identity above, we find: HFB = CUB – GFB – NBFB If we want to get the two true twin financial balances increasing in value (thereby reducing the current account or trade deficit) then we have two choices available. Either reduce the government financial balance (increase fiscal deficits) or reduce the NBFB (get businesses to run down their free cash flow positions by reinvesting more of their profits in tangible capital equipment). If we rule out the former on neoliberal concerns about fiscal sustainability, we are left with but one choice to improve the position of the true twins, and that is a higher reinvestment rate in the domestic business sector. And this, dear reader, brings us to the heart of the matter. Remember the global savings glut you keep hearing about from Greenspan, Bernanke, Rajan, and other prominent neoliberals? Turns out it is a corporate savings glut. There is a glut of profits, and these profits are not being reinvested in tangible plant and equipment. Companies, ostensibly under the guise of maximizing shareholder value, would much rather pay their inside looters in management handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment. What we have here, in other words, is a failure of capitalists to act as capitalists. Into the breach, fiscal policy must step unless we wish to court the types of debt deflation dynamics we were flirting with between September 2008 and March 2009. So rather than marching to Austeria, we need to kill two birds with one stone, and set fiscal policy more explicitly to the task of incentivizing the reinvestment of profits in tangible capital equipment. A program to do so would include the following measures: 1) a prohibitive tax on retained earnings that are not reinvested with a 24 month period after they have been booked; 2) a financial asset turnover tax that raises the cost to businesses of playing casino games in various financial asset markets, rather than reinvesting profits in the productive capital stock; 3) a reinvigorated public or public/private investment program that helps speed up the shift to, and lower the costs of production of new energy technologies. Regarding the last proposal, we must be willing to recognize the history of US economic development includes a number of very large and very bold public and public/private investment initiatives that provided numerous business opportunities and the basis for breakthrough technologies to emerge. The canal, railroad, highway, and other initiatives were hardly the doorway to the communist gulag they are made out to be. Indeed, if anything, Asia

299 has mastered the use of this approach to push one of the most rapid adoptions of capitalism ever. We know we need to reconfigure our energy infrastructure – we knew it over thirty years ago. It is time to act, and the third proposal could include such measures as solarizing all government buildings in the southern states in order to drive unit costs of solar cell production down, which in turn would increase the competitiveness of US producers of solar cells in global markets. There are undoubtedly more proposals we could bring to bear on the business sector to break the global corporate saving glut and force capitalists to act as, well, capitalists, but for the moment, this is a good enough place to start. To conclude, Richard summarized his recent Naked Capitalism piece as follows: “The structural problems are reflected in mutually determined unsustainable current account and fiscal deficits, as well as depressed saving rates.” Notice how his statement fingers the wrong twins – the fiscal and current account deficits are asserted to be mutually determined. Neoliberals tell this fib all the time. Empirically, we have shown you this is false, at least for much of the last four decades of US history, Theoretically, we have shown you this is also a suspect assertion: if you bother examine the macrofinancial balance equation in its full form, you find the neolib fib requires an implicit assumption that the DPSB show little or no change over time, which again is empirically false. Notice the emphasis on depressed savings rates needing to be reversed and revived, when, as we argued above, the real source of US and global imbalances is a corporate savings glut. Firms are earning generous profits, but they are not reinvesting them in tangible productive assets. This visibly short circuits long run growth prospects, and is the foundation of the structural problem Richard alludes to, but we doubt he would recognize it as such. That neoliberals with credentials, credibility, tenure, and positions of policy influence can continuously assert these glaring misconceptions is either malpractice, malfeasance, or both. It is not our place to speculate on their motives, though we have our own hunches (here is a heavy hint: just follow the money). Call it innocent fraud if you must, but neoliberals would have us marching to Austeria on the basis of their hollow, unsubstantiated slogans. It is high time for the neolibs to finally drop their fibs and step out of the way. Sorry Lady Thatcher, but there is an alternative to Austeria. *Earlier in the month we coined the terms Austeria and Austerian Economics. We introduced these concepts in our June 10th BNN TV interview, and in our June 11 Richebacher Letter Weekly Alert to describe the policy stance we saw the G-20 embracing for Austeria, formerly know as the eurozone. (And yes, bloggers elsewhere who have been erroneously attributing these terms to Mark Thoma’s subsequent June 17th use of it at Economist’s View – please consider doing a little fact checking now and again). http://www.nakedcapitalism.com/2010/06/parenteau-marching-to-austeria-and-other-neolib- fibs.html

300 COLUMNISTS Only a closer union can save the eurozone By Wolfgang Münchau Published: June 27 2010 19:52 | Last updated: June 27 2010 19:52 I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far. There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union. I have noticed that whenever the European Council meets in Brussels, the European bond markets tend to slump with short delay. Yields are now close to the level they were at in early May, when the European Council set up the €440bn ($540bn, £360bn) European Financial Stability Facility and when the European Central Bank started to buy bonds. This crisis goes on and on. The reason is that investors have lost confidence in the political economy of the eurozone. European politicians such as Wolfgang Schäuble, German finance minister, praise their own long-termism. But investors ask with some justification: what is long-termist about a bank bail-out without bank resolution? Or a sovereign bail-out without fiscal union? I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban naked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the naked short sales it purports to ban. Helmut Schmidt, the former German chancellor, said later that he almost died laughing when he heard about this legislation. The proposed ban is the latest reminder that European Union members, and Germany in particular, have not learnt a single lesson from their serial communication failures during the crisis. In February, they made the mistake of announcing a political agreement on a Greek rescue package without backing it up for another three months. In May, they hailed the stability facility as a historic breakthrough in political governance; it then turned out to be little more than bail-out facility. I only hope that they know what they did when they recently announced the publication of the stress tests for 25 banks. Once these are published, the markets will immediately demand to see the tests for all banks. Once that happens, in turn, governments will need to produce a

301 convincing recapitalisation strategy. I fear, however, that they are once again committing themselves to going down a road without a map. Without an endgame, this exercise will end in disaster. At some point the markets will realise that large parts of the German and French banking systems are insolvent, and that they are going to stay insolvent. You might think that Europe’s policy elites cannot be so stupid as to commit themselves to stress tests without a resolution strategy up their sleeves. But I am afraid they probably are. Europe’s political leaders and their economic advisers are, for the most part, financially illiterate. Is there a way out? Yes there is, but the chance of a resolution to the crisis is starting to fade. The first step would have to be a serious attempt to resolve bank balance sheets. This is as much a German and French banking crisis as it is a Greek and Spanish debt crisis. You need to resolve both problems simultaneously. Resolution would require a large fiscal transfer, not from Germany to Greece, but from the German public sector to the German bank sector – in the form of new capital. The same would apply to France. Beyond this restructuring, the eurozone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. And you have to be very naive to think that peer pressure is going to resolve anything. There is no point in beating about the bush and issuing polite calls for the creation of independent fiscal councils or other paraphernalia. This is not the time for a debate on second-order reforms. I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms. But that is the choice the EU’s citizens and their political leaders will have to make – a choice between reverting to dysfunctional and, as it transpires, insolvent nation states, or jumping to a political and economic union. [email protected] Wolfgang Münchau Only a closer union can save the eurozone June 27 2010 19:52http://www.ft.com/cms/s/0/c5708036-8214-11df-938f-00144feabdc0.html

302 Fresh moves to unlock loan pool By Victor Mallet and Patrick Jenkins in Madrid Published: June 27 2010 22:30 | Last updated: June 27 2010 22:30 The biggest European banks are seeking to revive the struggling wholesale finance market with a new kind of enhanced securitised product designed to attract lenders such as pension funds and hedge funds, according to a senior commercial banker. International money markets have periodically seized up since the credit crunch of 2007, and many European banks and savings banks, especially those from Spain, are currently unable to access them. More banks to face stress tests - Jun-27 In depth: European banks - May-06 Wolfgang Münchau: Only union can save eurozone - Jun-27 They have been forced to rely almost entirely on the European Central Bank for the liquidity they need, instead of packaging their mortgages and other loans and selling them to other banks and outside investors. But in recent weeks, the chief executives of 10 of Europe’s biggest banks have been in regular dialogue in a bid to give urgent impetus to efforts to revive European securitisation markets. The so-called “Potomac Group” of big European banks such as HSBC and Santander was an initiative suggested by Italy’s UniCredit last year to discuss the wholesale funding crisis and other European concerns and revive the moribund securitisation market. “It began about a year ago at the technical level, but in the last few months it has taken more political push,” said the banker. “Now it’s on the agenda of the chief executives.” They last met in Geneva on the sidelines of another meeting two weeks ago. The idea, which has the backing of the European Central Bank, is to devise a type of covered bond that would be attractive to large institutional investors. Fund managers, including BlackRock, the world’s biggest, are understood to have been consulted. “They would need some kind of [securities] that would be more buyable,” said the banker, adding that the paper would benefit from “a kind of quality stamp”. Bankers compare the new idea to Germany’s “Pfandbrief” covered bond standard. Bond issuers would be expected to keep some 5 to 10 per cent of the issue as “skin in the game”, and enhanced due diligence would be conducted on the underlying loans. The initiative comes amid tensions between Germany and southern European economies such as Spain about the role of the ECB in assisting bank liquidity. The proposed securitisation structure is unlikely to see the light of day for several months and will therefore not solve the short-term liquidity problems of European banks. Even for the longer term, there are sceptics. “I don’t think these initiatives will come off,” was the verdict of another senior banker in Spain. “It’s basically an issue of credibility and the eurozone has to get its credibility back.” http://www.ft.com/cms/s/0/efb5d0de-8224-11df-938f-00144feabdc0.html?ftcamp=rss

303

Blogs 27 juin 2010 Déficits : le gouvernement de plus en plus décidé à augmenter la fiscalité

Qui dit mieux ? Début mai, le gouvernement parlait de 5 milliards d’euros à “récupérer” sur deux ans sur les niches fiscales et sociales. Vendredi 25 juin, le premier ministre, François Fillon avait évoqué un objectif de 8,5 milliards d’euros. Dimanche 27 juin, sur Europe 1, le ministre du budget, François Baroin a placé la barre encore plus haut : ce sont 10 milliards d’euros qu’il conviendrait plutôt, selon lui, de regagner sur les deux ans qui viennent sur ces dispositifs d’exonération fiscale qui représentent un manque à gagner annuel de quelque 75 milliards d’euros pour l’Etat. “Sur les deux ans qui viennent, je pense qu’il faut qu’on s’approche plutôt des 10 milliards, entre 8,5 et 10 milliards, ce qui sera probablement nécessaire pour que nous atteignions notre objectif” en matière de réduction des déficits publics, a expliqué M. Baroin. Il avait déjà évoqué ces chiffres, mercredi 23 juin, lors de l’émision “Les questions du mercredi” France Inter/le Monde/Dailymotion. Chaque jour qui passe - depuis quelques jours - voit donc le gouvernement de plus en plus décidé à jouer la carte de la hausse de la fiscalité pour ramener le déficit public de 8 % du produit intérieur brut (PIB) cette année à 3% en 2013. Quitte à reconnaître désormais ouvertement que l’on parle bien de hausse des impôts - comme l’a fait François Fillon, vendredi 25 juin - pour parvenir à ce redressement des finances publiques qui représente un “effort financier” de 100 milliards d’euros en trois ans. Pour l’exécutif, cette augmentation des prélèvements passe en priorité - pour le moment - par un “rabotage” des niches fiscales. C’est ce à quoi l’a invité, entre autres la semaine dernière, la Cour des comptes qui a elle-même avancé le chiffre de 10 milliards d’euros à récupérer sur les niches fiscales. Le coup de rabot que le gouvernement entend donner aux niches fiscales épargnera toutefois les dispositifs destinés à aider “les publics les plus fragiles”, a assuré M. Baroin. Interrogé sur la TVA réduite dans la restauration entrée en vigueur il y a un an, le ministre du budget l’a qualifiée de “très, très grosse niche fiscale” et a indiqué ne pas être “très heureux de voir se promener un truc à 3 milliards chaque année”. “Si on me laissait faire, je la mettrais dans le (coup) de rabot”, a-t-il ajouté.

304 M. Baroin avait déclaré au cours de l’émission “Les questions du mercredi” France Inter/Le Monde/Dailymotion, qu’une remise en question de cette mesure était en débat. Dimanche il a indiqué : “on a pas pris encore de décision là dessus“. “Efforts supplémentaires” Le ministre n’a par ailleurs pas caché que des efforts d’austérité supplémentaires devraient sans doute être annoncés à la rentrée, si les prévisions de croissance du gouvernement pour 2011 (+ 2,5 %) devaient s’avérer trop optimistes. “Si la croissance n’était pas au rendez-vous par rapport à nos ambitions, nous proposerons fin août-début septembre pour la loi de finances (…) des mesures supplémentaires, c’est-à-dire des efforts supplémentaires”, a déclaré M. Baroin. Il a annoncé qu’en l’état actuel des choses, ce sont 10 milliards d’économies qui seront faites sur le fonctionnement de l’Etat entre 2011 et 2013, assurant que 10 000 voitures de service seraient supprimées, que 10 % des postes seraient supprimés dans les administrations centrales et que les crédits de communication seraient réduits de 20%. M. Baroin s’est également prononcé contre des augmentations de salaires des fonctionnaires hors des ajustements automatiques : “Tout le monde devra faire un effort”, a-t-il dit. http://bercy.blog.lemonde.fr/2010/06/27/deficits-le-gouvernement-de-plus-en-plus-decide-a- augmenter-la-fiscalite/#xtor=RSS-32280322&mf_sid=191768999

305 Opinion

June 27, 2010 The Third Depression By PAUL KRUGMAN Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses. We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt- tightening when the real problem is inadequate spending. In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer. But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps. In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy. As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The

306 Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels. Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard- liners’ medicine. It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self- defeating. So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times. And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again. http://www.nytimes.com/2010/06/28/opinion/28krugman.html?th&emc=th

June 25, 2010, 5:04 am In The Long Run, We Are Still All Dead So, reading Mohamed El-Erian, I’m somewhat at a loss about what he’s actually saying; what, exactly, is the policy recommendation? But in any case, here’s what struck me: he writes, The world is facing deep structural challenges yet its leaders are stuck in a short-term, cyclical mindset. I disagree. If anything, we’re suffering from the opposite problem. Talk to German officials about high unemployment and the looming threat of deflation, and they ramble on about the demographic challenge and the cost of pensions. I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem.

307 So saying that we need to focus on the long term, and not worry our little heads about trivial short-term issues like the highest long-term unemployment rate since the Great Depression, may sound like wisdom — but it’s actually folly. Oh, and one more point — not about El-Erian, but about quite a few policymakers and economists: the attempt to shift the discussion away from the short run is not, as often portrayed, an act of vision of courage. On the contrary, it’s an act of cowardice, an attempt to evade responsibility for a disastrous state of affairs that we could fix, but choose not to. Keynes had it right: But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. June 27, 2010, 2:48 pm Invisible Friends

I’ve written before about the strange power of invisible bond vigilantes: It’s one thing to be intimidated by bond market vigilantes. It’s another to be intimidated by the fear that bond market vigilantes might show up one of these days, even though you’re currently able to sell long-term bonds at an interest rate of less than 3.5%. Yet that, according to rumors, is what’s happening.

308 Since I wrote that post, by the way, the long-term interest rate has dropped to 3.12%. But even stranger, in a way, is the power of invisible bond market friends, who will reward you if you just scourge yourself hard enough. Consider this article in Reuters, which tells us that A market backlash against countries seen to be dragging their feet on cutting debt and deficits has sparked budget cutbacks all over Europe as governments try to rein in spending. This seems to imply that countries that haven’t dragged their feet have been rewarded, right? And this is often reported as something that has, in fact, happened — because it’s what’s supposed to happen. But the rewards to austerity remain, well, invisible. Ireland’s risk spreads are worse than Spain’s, even though Ireland wasted no time on self-flagellation while Spain hesitated. Market confidence in Greece has declined since the government accepted the IMF austerity plan. Strange: it’s as if bond markets don’t believe that short-term pain that doesn’t improve your long-run budget prospects, but does lead to depression and deflation, makes you a safe bet. But I’ve got an invisible 6-foot rabbit over here who says they’re wrong. Hello, Mr. Smith. June 27, 2010, 3:37 pm A Brief Note On German Unemployment Brief because I’m sitting at an outdoor cafe in Luxembourg … A number of commenters have pointed out that unemployment has been falling in Germany over the past few months. Um, yes — but not in the eurozone as a whole. And that is what we’re talking about here, aren’t we? Or is European monetary and fiscal policy to be run solely based on how things are going in one country? Also, bear in mind Germany is benefiting from the manufacturing bounceback, partly driven by inventories; it’s worth noting that over the past few months unemployment has been falling fairly quickly in the East North Central region of America — the industrial midwest — too. The point is that what amounts to a regional development within an ailing European economy doesn’t signify much. http://krugman.blogs.nytimes.com/2010/06/27/a-brief-note-on-german-unemployment/

309 COLUMNISTS Fiscal disarray is the least of the G20’s sins By Clive Crook Published: June 27 2010 19:34 | Last updated: June 27 2010 19:34

The first Group of 20 summit in November 2008 proclaimed a new era of “global solutions to global problems”. Less than two years later, with the economic crisis barely contained, the partners are at odds. Reaching agreement was not the main challenge in Toronto this weekend. They knew that was not going to happen. Mainly, they hoped to put the best face they could on disunity. How much do these divisions matter? The main bone of contention in Toronto was fiscal policy. Here, I would argue, simple ineptitude seems to be a bigger problem than disinclination to co-operate. In 2008 and 2009 it was obvious that powerful fiscal and monetary stimulus was necessary everywhere. When everybody wants the same thing, co-operation is easy. How easy? You would have got the same result without it. Last year, co-operation cost nothing and, as compared with the alternative, achieved nothing. In 2010 circumstances have changed. Some countries still have room for fiscal manoeuvre. Others have less and some have none. Co- operation is therefore more difficult – and, you could argue, more necessary. In a world of suppressed demand, where cross-border flows of saving and investment need rebalancing, the textbook case for fiscal co-ordination is clear. Countries with external deficits and encroaching borrowing constraints should rein in fiscal stimulus; countries with external surpluses and untapped debt capacity should maintain or increase it. With agreement on which country falls under which dispensation, governments could optimise fiscal adjustment and support better-balanced growth. Disagreement, which is what we have, increases the risk of another global downturn.

310 In principle, optimal fiscal co-operation would certainly be nice. Looking around, though, one would happily settle for ordinary inward-looking competence. The real worry is that as the recovery stutters on there is so little sign of that. Germany is being called a bad global citizen for tightening fiscal policy despite its external surplus and unstressed borrowing capacity. The criticism is fair. But forget the debilitating implications for Europe and the world: unforced austerity is bad for Germany (though it might be good politics for Angela Merkel). Britain’s new government has a much more serious public debt problem but its fiscal plans – which gave rise to much boasting in Toronto – also look needlessly severe. Europe as a whole seems intent on one-size-fits-all austerity, despite limping output and very low inflation. Some countries have no choice but to curb their borrowing immediately. All should make a credible commitment to fiscal consolidation in the medium term: deficit hawks are right that if you wait until the bond market hammer comes down, you have waited too long. But with economies still so weak – remember Japan – this should not dictate a universal headlong rush to fiscal retrenchment. Under these circumstances one could forgive the US for lecturing others on fiscal policy, were it not for the fact that (a) poor US financial regulation and inattentive monetary policy caused the crisis in the first place, and (b) its own fiscal policy is a shambles. President Barack Obama is telling other countries to maintain fiscal stimulus even as his own fades and the US Congress is denying his modest requests for extra spending. For this, Mr Obama himself is mostly to blame. He and his allies in Congress bungled last year’s stimulus. A big package was needed, and was duly delivered. But its design was poor: too much spending on shovel-ready projects that weren’t; too little in tax cuts. It was seriously oversold, leaving voters sceptical that more stimulus would do any good. Worst of all, with public debt through the roof, the administration has failed to give the smallest sign of its exit strategy. Last week its budget director, Peter Orszag, disclosed his own. He said he was quitting; colleagues said (though he denied) that he was frustrated by White House indecision over medium-term fiscal control. The complaint after Toronto is that nations are concentrating on their own economies and ignoring global welfare. So far as taxes and spending go, my reaction is: if only. Attending to strictly national demands would get the world most of the way to the budget policies it needs. In other areas, however, unilateralism is less productive and co-operation not just valuable but essential. Financial regulation and trade are the most salient cases. This is where the failure to get along really counts. Unco-ordinated financial rules are self-defeating because of regulatory arbitrage. In financial reform governments have, or ought to have, the same goal: systemic safety, domestically and internationally. There is no excuse for pursuing financial reform as if other countries did not exist. On trade, the calculus is subtler. Politics pushes for protectionism. Governments know that this approach is pure beggar-my-neighbour, collectively ruinous; some may even understand that the welfare-maximising policy is unilateral free trade. On either view, they need co-operation to make open markets politically feasible. The G20’s performance in both areas, needless to say, has been lamentable. The US looks ready to pass its new financial regulation law – but agreement on the Basel III rules on bank capital, which are more important, has receded. As for the Doha round, what Doha round? The G20 richly deserves its bad press, but not for failing to co-ordinate fiscal policy. That is the least of its sins. http://www.ft.com/cms/s/0/b786743a-8214-11df-938f-00144feabdc0.html

311 Global Business

June 27, 2010 World Leaders Agree on Timetable for Cutting Deficits By SEWELL CHAN and JACKIE CALMES TORONTO — Leaders of the world’s biggest economies agreed Sunday on a timetable for cutting deficits and halting the growth of their debt, but also acknowledged the need to move carefully so that reductions in spending did not set back the fragile global recovery. The action at the Group of 20 summit meeting here signaled the determination of many of the wealthiest countries, after enacting spending programs to counter the worldwide financial crisis, to now emphasize debt reduction. And it underscored the conviction of European nations in particular that deficits represented the biggest threat to their economic stability. President Obama and Treasury Secretary Timothy F. Geithner had consistently advocated a measured approach to debt reduction that would not stymie growth and lead to a double-dip recession. The United States, however, joined other countries at the summit meeting, which was met by protests and several hundred arrests, by endorsing a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Canada’s prime minister, Stephen Harper, had proposed the targets, backed by Germany and Britain. To assuage objections from the United States, Japan, India and some other countries, the timetable was couched as an expectation, rather than a firm deadline. The G-20 joint statement explicitly stated that Japan, which is heavily dependent on domestic borrowing, was not expected to meet the targets. The divisions were in contrast to the unity that characterized the previous three G-20 leaders’ summits, when the urgency of a potential global collapse produced solidarity and a unified economic approach. Although Mr. Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.” In essence, the leaders were blessing their decision to go their own ways. The joint statement acknowledged both sides of the debate. “There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery,” the statement said. “There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.” In a news conference at the conclusion of the summit meeting, Mr. Obama referred only indirectly to the disagreement with Europe, saying, “We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.” His concern about stimulus was echoed by some economists who viewed the pledge on deficits as imperiling the prospects for growth. “China’s growth, specifically, is not seen as sustainable at current rates,” Ronald A. Kurtz, professor of global economics and management at the Massachusetts Institute of Technology, said in an e-mail message. “The G-20 declaration therefore amounts to saying ‘assume a miracle’ for global growth.” He said Europe’s fiscal austerity plans would also slow growth.

312 But Dominique Strauss-Kahn, head of the International Monetary Fund, said he thought the risks of a new downturn were minimal. “We don’t forecast any double dip,” he said. “Double dip was not discussed at the meeting.” It is the first time the G-20 has set dates for deficit reduction, but the timetable, which is not binding, will probably not require new policy actions. Most of the governments, including the United States, have already put forward budget proposals in line with the targets. The leaders also discussed banking regulations, but could not agree on a proposal for a global bank tax, supported by the United States, Britain and the European Union, but opposed by Canada and Australia. And while the G-20 reaffirmed a deadline — their next meeting, in November in Seoul, South Korea — for agreeing on new capital standards for banks, they signaled that several countries might not implement the standards by 2012, as initially planned. “While the illusion of progress is good, I don’t see real action to alter the imbalances that brought us to this crisis,” said Raghuram G. Rajan, a former chief economist at the International Monetary Fund who is now a professor in the Booth School of Business at the University of Chicago. The United States, he said, continues to run large trade deficits financed by Germany, China and Japan. “The U.S. has been the world’s consumer of first resort,” he added, “and because it has been unable to persuade other countries to spend more or to reform quickly, it is likely to take up that position once again.” Though Mr. Obama did not prevail in his emphasis on stimulus, he did arrive in Canada with three victories under his belt. European leaders had agreed to conduct stress tests on their big banks, an exercise successfully undertaken in the United States last year, in an effort to restore market confidence. China had announced that it would allow a gradual appreciation of its currency. And Congressional negotiators had agreed on a far-reaching overhaul of financial regulations. But those accomplishments did not alter the mix of lagging growth, heavy debts and anxious voters that pushed European leaders to press for austerity. “The U.S. may be concentrated on premature fiscal tightening, but most other countries are looking with a nervous eye to the sovereign debt mess in Europe,” said Kenneth S. Rogoff, a Harvard economist and former I.M.F. chief economist. “Aiming for a gradually improving debt-to-G.D.P. ratio by 2016 is hardly wild-eyed fiscal conservatism.” In that light, the G-20 outcome was a victory for Chancellor Angela Merkel of Germany, who argued that without actions to rein in spending, investors would drive up governments’ borrowing costs, as they did in Greece. Mr. Obama said, “We helped to draft this communiqué, which reflects our policies,” and added, “Keep in mind that we had already proposed a long time ago that we were going to cut our deficits in half by 2013.” He continued, “We can’t all rush to the exits at the same time.” But he also said that for all the talk of German austerity, it was actually reducing its spending gradually, and not any more quickly than the United States. While aides to Mr. Obama said that the G-20 statement was in line with budget plans he had already announced, others said it was a move toward austerity.

313 “The best thing that countries with fiscal challenges can do is to show that they can live within their means,” George Osborne, Britain’s chancellor of the Exchequer, said. “Barack Obama has recognized that.” The mood here was far less anxious than in November 2008, when the G-20 leaders converged for the first time, in Washington, to battle a still-raging financial crisis. But it was hardly cheery. While China did not make any new commitments, the G-20 statement appealed to China to increase spending on infrastructure, let its currency fluctuate and strengthen social protections. Those actions are part of what economists call rebalancing — a reorientation of the world economy to be less reliant on debt-financed spending by North American and Western European consumers. China is the largest growth engine but its workers save too much and spend too little, some economists say. At China’s urging, the G-20 leaders removed from their joint statement a proposed clause that would have praised China for agreeing to greater exchange-rate flexibility. Mr. Harper said he understood China’s wish not to be singled out, for either criticism or praise, but added, “When you make commitments on the world stage, you will be held accountable for them.” http://www.nytimes.com/2010/06/28/business/global/28summit.html?th&emc=th

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For G-20, a struggle over growth and debt By Howard Schneider Washington Post Staff Writer Sunday, June 27, 2010; A04 TORONTO -- The world's developed countries have built extensive public health systems, promised citizens a paycheck for life and erected a welter of protections around some industries and types of jobs. Now their leaders are conferring over a singular dilemma: how to take some of it back without undermining the economies they are trying to sustain. In economic terms, it is a bit like creating a perpetual motion machine -- cutting tens of billions of dollars in public spending would almost certainly slow growth but is considered necessary to tame record levels of government debt. And in a series of recent reports, the International Monetary Fund has suggested that it might be just as tricky to demand unheard- of levels of coordination among the world's major economies and require politicians to sustain what might prove to be a painful reform process for several years. An IMF report to the Group of 20 major economies "has to go through a lot of contortions" to show that developed world debt can be brought down without undermining growth, said Eswar Prasad, a senior economist at the Brookings Institution and former IMF economist, who has reviewed the document. "They have been tweaking their methods -- the message is that you need to have fiscal retrenchment, but if you do it the right way you won't have negative growth effects." The needed changes range from an overhaul of financial regulations to a retooling of world trade, topics U.S. officials broached at the start of the talks this weekend. President Obama pledged to pursue passage of a U.S.-South Korea free trade agreement by fall in hopes of boosting American exports, while Treasury Secretary Timothy F. Geithner said the pending approval of a U.S. financial overhaul package should be complemented by strong actions by other countries on issues such as the rules for bank capitalization. The G-20 -- industrialized countries and major emerging powers that include China and India -- meets Sunday amid debate about the risks that public debt in the developed world poses to the global recovery and how to respond to it without creating another set of problems. Heading into the session, even some of the group's closest allies seemed divided. "This summit must be fundamentally about growth," Geithner said on arriving in Canada, just hours after Canadian Prime Minister Stephen Harper emphasized the "strong consensus on the need for medium-term consolidation plans in advanced countries" -- in other words budget cutting. Can the two be resolved? The IMF has published a "Ten Commandments for Fiscal Adjustment in Advanced Economies" that includes an admonition from its top economists to "obey these . . . and chances are high that you will achieve fiscal consolidation and sustained growth." The document acknowledges that the level of budget cutting being planned by the developed world is risky given the weakness in the world economy. Deep cuts are underway in Greece and Spain, and have been proposed in Britain and recommended for the United States and others to begin by next year.

315 But the document also contends that a commitment to more-balanced public spending will stabilize bond markets, bring down interest rates as governments borrow less, and encourage more private investment -- all "growth-friendly" results that will help offset any reduction in government budgets. In addition, the agency says that for the process to work, budget cutting must be accompanied by a broad set of other reforms that would improve economic performance. Public retirement and health programs are singled out: "You shall pass early pension and health care reforms as current trends are unsustainable" is commandment No. 5. Much of the projected increase in future public spending in developed countries is related to the aging of their populations, and changes such as an increase in the retirement age improve future balance sheets without cutting current spending. Labor markets need to be overhauled to make it easier for people to find and change jobs or enter new markets; in recent reports on Greece and France, the agency singled out rules that protect retailers, pharmacists and others from competition. Product markets need to be deregulated. Taxes almost certainly need to increase. And on top of all that, the world's wealthiest nations will still need some help from emerging markets such as China that have benefited from large trade surpluses in recent years and tucked trillions of dollars of currency reserves into the vaults of their central banks. The emerging markets need to boost their own spending and shift to "internal demand" for future growth, and rely less on spending from developed nations, the IMF said. Synchronizing those efforts on a global scale will be a task in itself. The G-20 asked the IMF to begin the process by collecting economic projections and policy plans from its members, and vetting them to see how they complement -- or conflict with -- each other, and square with the IMF's own forecasts. According to officials who reviewed the IMF's report, the developed countries appeared too optimistic in their expectations for growth and the recovery of the private sector and too timid in the political decisions being planned to restructure their economies. That, according to one Canadian official, will be a centerpiece of the weekend's discussions. "Each country is coming in saying here is what we are going to do," said the official, who is familiar with the talks but is not authorized to speak publicly. The IMF estimates that properly coordinated policies could add about $4 trillion and 30 million jobs to the world economy in coming years, and "we don't want to leave $4 trillion on the table," the official said. Howard Schneider For G-20, a struggle over growth and debt June 27, 2010; A04http://www.washingtonpost.com/wp- dyn/content/article/2010/06/26/AR2010062604314.html?sid=ST2010062604320

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President Obama urges G-20 nations to spend; they pledge to halve deficits By Howard Schneider and Scott Wilson Washington Post Staff Writer Monday, June 28, 2010; A01 TORONTO -- President Obama warned Sunday that the world economic recovery remains "fragile" and urged continued spending to support growth, an expansionist call at the end of a summit marked by an agreement among developed nations to halve their annual deficits within three years. The president's remarks tempered the Group of 20's headline achievement at the summit, a deficit-reduction target that had been pushed by Canadian Prime Minister Stephen Harper, the host of the meeting and a fiscal conservative. Although there is broad agreement that government debt in the developed world needs to be reduced, there is concern that cutting too fast and too deeply will slow growth and possibly spark a new recession. In a news conference at the meeting's conclusion, Obama said that the world's largest economic powers had agreed on the need for "continued growth in the short term and fiscal sustainability in the medium term." "A number of our European partners are making difficult decisions," Obama said. "But we must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today." The group's closing statement included the specific deficit-reduction target, but it was couched in caveats -- that deficit reduction needed to be "calibrated" to avoid harming growth, paced differently in each country and paired with other reforms to strengthen the economy. Obama and European leaders, in particular, came to the meeting with sharply different views of the strength of the global economic recovery, with the U.S. president more pessimistic. The declaration, in the works for weeks, gave each side what it wanted, although the specific deadlines went further than the Obama administration had preferred before the meeting. The administration accepted the deadlines in order to avoid standing against Harper and such important economic powers as Germany. In his closing remarks, Obama stressed that "every country will chart its own unique course, but make no mistake -- we're moving in the same direction." The International Monetary Fund's managing director, Dominique Strauss-Kahn, called the deficit target an "oversimplification" of the problem; he said it was more important for individual countries to craft the right economic policies to sustain growth, not blindly cut for the sake of meeting a goal. Along with pledging to cut their annual budget deficits by 2013, the developed countries committed to stabilizing their overall debt by 2016. Obama recently set similar goals for the United States. Despite the seeming division between the United States' deficit-reduction target and the slower approach favored by Canada and Germany, Obama said there was "violent agreement"

317 within the group about the need to find proper balance -- with some highly indebted countries such as Greece needing to cut immediately and others supporting the recovery with higher spending. Overall, the group's final statement reflects its consensus theory for how the world economy needs to change, with the heavily indebted Western nations steadily taming government deficits, and surplus-rich nations "rebalancing" to boost local spending and demand. Strong emerging markets such as China, the document said, need to guard against a slowdown by encouraging their governments and people to spend more, investing more on infrastructure, establishing better social safety nets to give families more income, and allowing exchange rates to fluctuate more freely -- a quiet reference to China's managed currency policies. China is a member of the G-20. "Advanced surplus" countries -- developed nations that run large trade surpluses -- committed to try to narrow the gap between imports and exports, a particular concern in Europe, where Germany's powerful export-led economy is blamed by some for economic weakness in Greece and elsewhere. But the G-20 delegations also left Toronto with much of the heavy lifting on new global financial rules still ahead of them. Discussion of a global bank tax -- once considered a major issue for the group -- ended with a commitment that the financial sector would make a "fair" contribution to the cost of resolving financial crises, but leaving it to each nation to decide how and when the contribution would be collected. The group also committed to requiring banks worldwide to hold a "significantly higher" amount of capital to buffer them against financial shock. But acknowledging the difficulty that will pose to some institutions, the group's statement opened the door for a transition period to give weaker companies time to raise the funds. The G-20 hopes by the end of this year to have new capital rules for banks in place, and leaders consider the issue a core element of global financial reform. But an early test of proposed bank capital rules found that they risked undermining economic growth. Even banks in relatively healthy systems, such as Canada, would have been in a bind and forced to raise substantial new funds, according to bankers and officials familiar with the matter. "We have the confluence of two forces. One is about making sure there are no more crises, but we have to make sure we don't destroy our domestic banking systems," said Hyun Song Shin, senior economic adviser to the South Korean government. "What you don't want to do is strangle bank lending." http://www.washingtonpost.com/wp- dyn/content/article/2010/06/27/AR2010062701754.html?wpisrc=nl_headline

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G-20 Toronto Summit Declaration Sunday, June 27, 2010; 6:12 PM June 26 -- 27, 2010 Preamble 1. In Toronto, we held our first Summit of the G-20 in its new capacity as the premier forum for our international economic cooperation. 2. Building on our achievements in addressing the global economic crisis, we have agreed on the next steps we should take to ensure a full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced global growth. 3. Our efforts to date have borne good results. Unprecedented and globally coordinated fiscal and monetary stimulus is playing a major role in helping to restore private demand and lending. We are taking strong steps toward increasing the stability and strength of our financial systems. Significantly increased resources for international financial institutions are helping stabilise and address the impact of the crisis on the world's most vulnerable. Ongoing governance and management reforms, which must be completed, will also enhance the effectiveness and relevance of these institutions. We have successfully maintained our strong commitment to resist protectionism. 4. But serious challenges remain. While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt. Strengthening the recovery is key. To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand. At the same time, recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. This should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path. Further progress is also required on financial repair and reform to increase the transparency and strengthen the balance sheets of our financial institutions, and support credit availability and rapid growth, including in the real economy. We took new steps to build a better regulated and more resilient financial system that serves the needs of our citizens. There is also a pressing need to complete the reforms of the international financial institutions. 5. Recognizing the importance of achieving strong job growth and providing social protection to our citizens, particularly our most vulnerable, we welcome the recommendations of our Labour and Employment Ministers, who met in April 2010, and the training strategy prepared by the International Labour Organization (ILO) in collaboration with the Organisation for Economic Co-operation and Development (OECD). 6. We are determined to be accountable for the commitments we have made, and have instructed our Ministers and officials to take all necessary steps to implement them fully within agreed timelines. The Framework for Strong, Sustainable and Balanced Growth

319 7. The G-20's highest priority is to safeguard and strengthen the recovery and lay the foundation for strong, sustainable and balanced growth, and strengthen our financial systems against risks. We therefore welcome the actions taken and commitments made by a number of G-20 countries to boost demand and rebalance growth, strengthen our public finances, and make our financial systems stronger and more transparent. These measures represent substantial contributions to our collective well-being and build on previous actions. We will continue to co-operate and undertake appropriate actions to bolster economic growth and foster a strong and lasting recovery. 8. The Framework for Strong, Sustainable and Balanced Growth that we launched in Pittsburgh is the means to achieving our shared objectives, by assessing the collective consistency of policy actions and strengthening policy frameworks. 9. We have completed the first stage of our Mutual Assessment Process and we concluded that we can do much better. The IMF and World Bank estimate that if we choose a more ambitious path of reforms, over the medium term: · global output would be higher by almost $4 trillion; · tens of millions more jobs would be created; · even more people would be lifted out of poverty; and · global imbalances would be significantly reduced. Increasing global growth on a sustainable basis is the most important step we can take in improving the lives of all of our citizens, including those in the poorest countries. 10. We are committed to taking concerted actions to sustain the recovery, create jobs and to achieve stronger, more sustainable and more balanced growth. These will be differentiated and tailored to national circumstances. We agreed today on: · Following through on fiscal stimulus and communicating "growth friendly" fiscal consolidation plans in advanced countries that will be implemented going forward. Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt. The path of adjustment must be carefully calibrated to sustain the recovery in private demand. There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. Recognizing the circumstances of Japan, we welcome the Japanese government's fiscal consolidation plan announced recently with their growth strategy. Those with serious fiscal challenges need to accelerate the pace of consolidation. Fiscal consolidation plans will be credible, clearly communicated, differentiated to national circumstances, and focused on measures to foster economic growth. · Strengthening social safety nets, enhancing corporate governance reform, financial market development, infrastructure spending, and greater exchange rate flexibility in some emerging markets; · Pursuing structural reforms across the entire G-20 membership to increase and sustain our growth prospects; and · Making more progress on rebalancing global demand.

320 Monetary policy will continue to be appropriate to achieve price stability and thereby contribute to the recovery. 11. Advanced deficit countries should take actions to boost national savings while maintaining open markets and enhancing export competitiveness. 12. Surplus economies will undertake reforms to reduce their reliance on external demand and focus more on domestic sources of growth. 13. We are committed to narrowing the development gap and that we must consider the impact of our policy actions on low-income countries. We will continue to support development financing, including through new approaches that encourage development financing from both public and private sources. 14. We recognize that these measures will need to be implemented at the national level and will need to be tailored to individual country circumstances. To facilitate this process, we have agreed that the second stage of our country-led and consultative mutual assessment will be conducted at the country and European level and that we will each identify additional measures, as necessary, that we will take toward achieving strong, sustainable, and balanced growth. Financial Sector Reform 15. We are building a more resilient financial system that serves the needs of our economies, reduces moral hazard, limits the build up of systemic risk, and supports strong and stable economic growth. We have strengthened the global financial system by fortifying prudential oversight, improving risk management, promoting transparency, and reinforcing international cooperation. A great deal has been accomplished. We welcome the full implementation of the European Stabilization Mechanism and Facility, the EU decision to publicly release the results of ongoing tests on European banks, and the recent US financial reform bill. 16. But more work is required. Accordingly, we pledge to act together to achieve the commitments to reform the financial sector made at the Washington, London and Pittsburgh Summits by the agreed or accelerated timeframes. The transition to new standards will take into account the cumulative macroeconomic impact of the reforms in advanced and emerging economies. We are committed to international assessment and peer review to ensure that all our decisions are fully implemented. 17. Our reform agenda rests on four pillars. 18. The first pillar is a strong regulatory framework. We took stock of the progress of the Basel Committee on Banking Supervision (BCBS) towards a new global regime for bank capital and liquidity and we welcome and support its work. Substantial progress has been made on reforms that will materially raise levels of resilience of our banking systems. The amount of capital will be significantly higher and the quality of capital will be significantly improved when the new reforms are fully implemented. This will enable banks to withstand -- without extraordinary government support -- stresses of a magnitude associated with the recent financial crisis. We support reaching agreement at the time of the Seoul Summit on the new capital framework. We agreed that all members will adopt the new standards and these will be phased in over a timeframe that is consistent with sustained recovery and limits market disruption, with the aim of implementation by end-2012, and a transition horizon informed by the macroeconomic impact assessment of the Financial Stability Board (FSB) and BCBS. Phase-in arrangements will reflect different national starting points and circumstances, with initial variance around the new standards narrowing over time as countries converge to the new global standard.

321 19. We agreed to strengthen financial market infrastructure by accelerating the implementation of strong measures to improve transparency and regulatory oversight of hedge funds, credit rating agencies and over-the-counter derivatives in an internationally consistent and non-discriminatory way. We re-emphasized the importance of achieving a single set of high quality improved global accounting standards and the implementation of the FSB's standards for sound compensation. 20. The second pillar is effective supervision. We agreed that new, stronger rules must be complemented with more effective oversight and supervision. We tasked the FSB, in consultation with the IMF, to report to our Finance Ministers and Central Bank Governors in October 2010 on recommendations to strengthen oversight and supervision, specifically relating to the mandate, capacity and resourcing of supervisors and specific powers which should be adopted to proactively identify and address risks, including early intervention. 21. The third pillar is resolution and addressing systemic institutions. We are committed to design and implement a system where we have the powers and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers ultimately bearing the burden, and adopted principles that will guide implementation. We called upon the FSB to consider and develop concrete policy recommendations to effectively address problems associated with, and resolve, systemically important financial institutions by the Seoul Summit. To reduce moral hazard risks, there is a need to have a policy framework including effective resolution tools, strengthened prudential and supervisory requirements, and core financial market infrastructures. We agreed the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the financial system or fund resolution, and reduce risks from the financial system. We recognized that there are a range of policy approaches to this end. Some countries are pursuing a financial levy. Other countries are pursuing different approaches. 22. The fourth pillar is transparent international assessment and peer review. We have strengthened our commitment to the IMF/World Bank Financial Sector Assessment Program (FSAP) and pledge to support robust and transparent peer review through the FSB. We are addressing non-cooperative jurisdictions based on comprehensive, consistent, and transparent assessment with respect to tax havens, the fight against money laundering and terrorist financing and the adherence to prudential standards. International Financial Institutions and Development 23. The International Financial Institutions (IFIs) have been a central part of the global response to the financial and economic crisis, mobilizing critical financing, including $750 billion by the IMF and $235 billion by the Multilateral Development Banks (MDBs). This has underscored the value of these institutions as platforms for our global cooperation. 24. We commit to strengthening the legitimacy, credibility and effectiveness of the IFIs to make them even stronger partners for us in the future. 25. Towards this end, we have fulfilled our Pittsburgh Summit commitment on the MDBs. This includes $350 billion in capital increases for the MDBs, allowing them to nearly double their lending. This new capital is joined to ongoing and important reforms to make these institutions more transparent, accountable and effective, and to strengthen their focus on lifting the lives of the poor, underwriting growth, and addressing climate change and food security. 26. We will fulfill our commitment to ensure an ambitious replenishment for the concessional lending facilities of the MDBs, especially the International Development Association and the African Development Fund.

322 27. We have endorsed the important voice reforms agreed by shareholders at the World Bank, which will increase the voting power of developing and transition countries by 4.59% since 2008. 28. We underscore our resolve to ensure ratification of the 2008 IMF Quota and Voice Reforms and expansion of the New Arrangements to Borrow (NAB). 29. We called for an acceleration of the substantial work still needed for the IMF to complete the quota reform by the Seoul Summit and in parallel deliver on other governance reforms, in line with commitments made in Pittsburgh. 30. Today we build on our earlier commitment to open, transparent and merit-based selection processes for the heads and senior leadership of all the IFIs. We will strengthen the selection processes in the lead up to the Seoul Summit in the context of broader reform. 31. We agreed to task our Finance Ministers and Central Bank Governors to prepare policy options to strengthen global financial safety nets for our consideration at the Seoul Summit. Our goal is to build a more stable and resilient international monetary system. 32. We stand united with the people of Haiti and are providing much-needed reconstruction assistance, including the full cancellation of all of Haiti's IFI debt. We welcome the launching of the Haiti Reconstruction Fund. 33. We have launched the SME Finance Challenge and commit to mobilizing funding for implementation of winning proposals, including through the strong support of the MDBs. We have developed a set of principles for innovative financial inclusion. 34. We welcome the launch of the Global Agriculture and Food Security Program in fulfillment of our Pittsburgh commitment on food security, an important step to further implement the Global Partnership for Agriculture and Food Security, and invite further contributions. Looking ahead, we commit to exploring innovative, results-based mechanisms to harness the private sector for agricultural innovation. We call for the full implementation of the L'Aquila Initiative and the application of its principles. Fighting Protectionism and Promoting Trade and Investment 35. While the global economic crisis led to the sharpest decline of trade in more than seventy years, G-20 countries chose to keep markets open to the opportunities that trade and investment offer. It was the right choice. 36. As such, we renew for a further three years, until the end of 2013, our commitment to refrain from raising barriers or imposing new barriers to investment or trade in goods and services, imposing new export restrictions or implementing World Trade Organization (WTO)-inconsistent measures to stimulate exports, and commit to rectify such measures as they arise. We will minimize any negative impact on trade and investment of our domestic policy actions, including fiscal policy and action to support the financial sector. We ask the WTO, OECD and UNCTAD to continue to monitor the situation within their respective mandates, reporting publicly on these commitments on a quarterly basis. 37. Open markets play a pivotal role in supporting growth and job creation, and in achieving our goals under the G-20 Framework for Strong, Sustainable and Balanced Growth. We ask the OECD, the ILO, World Bank, and the WTO to report on the benefits of trade liberalization for employment and growth at the Seoul Summit. 38. We therefore reiterate our support for bringing the WTO Doha Development Round to a balanced and ambitious conclusion as soon as possible, consistent with its mandate and based on the progress already made. We direct our representatives, using all negotiating avenues, to

323 pursue this objective, and to report on progress at our next meeting in Seoul, where we will discuss the status of the negotiations and the way forward. 39. We commit to maintain momentum for Aid for Trade. We also ask international agencies, including the World Bank and other Multilateral Development Banks to step up their capacity and support trade facilitation which will boost world trade. Other Issues and Forward Agenda 40. We agree that corruption threatens the integrity of markets, undermines fair competition, distorts resource allocation, destroys public trust and undermines the rule of law. We call for the ratification and full implementation by all G-20 members of the United Nations Convention against Corruption (UNCAC) and encourage others to do the same. We will fully implement the reviews in accordance with the provisions of UNCAC. Building on the progress made since Pittsburgh to address corruption, we agree to establish a Working Group to make comprehensive recommendations for consideration by Leaders in Korea on how the G-20 could continue to make practical and valuable contributions to international efforts to combat corruption and lead by example, in key areas that include, but are not limited to, adopting and enforcing strong and effective anti-bribery rules, fighting corruption in the public and private sectors, preventing access of corrupt persons to global financial systems, cooperation in visa denial, extradition and asset recovery, and protecting whistleblowers who stand-up against corruption. 41. We reiterate our commitment to a green recovery and to sustainable global growth. Those of us who have associated with the Copenhagen Accord reaffirm our support for it and its implementation and call on others to associate with it. We are committed to engage in negotiations under the UNFCCC on the basis of its objective provisions and principles including common but differentiated responsibilities and respective capabilities and are determined to ensure a successful outcome through an inclusive process at the Cancun Conferences. We thank Mexico for undertaking to host the sixteenth Conference of the Parties (COP 16) in Cancun from November 29 to December 20, 2010 and express our appreciation for its efforts to facilitate negotiations. We look forward to the outcome of the UN Secretary- General's High-Level Advisory Group on Climate Change Financing which is, inter alia, exploring innovative financing. 42. We note with appreciation the report on energy subsidies from the International Energy Agency (IEA), Organization of the Petroleum Exporting Countries (OPEC), OECD and World Bank. We welcome the work of Finance and Energy Ministers in delivering implementation strategies and timeframes, based on national circumstances, for the rationalization and phase out over the medium term of inefficient fossil fuel subsidies that encourage wasteful consumption, taking into account vulnerable groups and their development needs. We also encourage continued and full implementation of country-specific strategies and will continue to review progress towards this commitment at upcoming summits. 43. Following the recent oil spill in the Gulf of Mexico we recognize the need to share best practices to protect the marine environment, prevent accidents related to offshore exploration and development, as well as transportation, and deal with their consequences. 44. We recognize that 2010 marks an important year for development issues. The September 2010 Millennium Development Goals (MDG) High Level Plenary will be a crucial opportunity to reaffirm the global development agenda and global partnership, to agree on actions for all to achieve the MDGs by 2015, and to reaffirm our respective commitments to assist the poorest countries.

324 45. In this regard it is important to work with Least Developed Countries (LDCs) to make them active participants in and beneficiaries of the global economic system. Accordingly we thank Turkey for its decision to host the 4th United Nations Conference on the LDCs in June 2011. 46. We welcome the Global Pulse Initiative interim report and look forward to an update. 47. Narrowing the development gap and reducing poverty are integral to our broader objective of achieving strong, sustainable and balanced growth and ensuring a more robust and resilient global economy for all. In this regard, we agree to establish a Working Group on Development and mandate it to elaborate, consistent with the G-20's focus on measures to promote economic growth and resilience, a development agenda and multi-year action plans to be adopted at the Seoul Summit. 48. We will meet next in Seoul, Korea, on November 11-12, 2010. We will convene in November 2011 under the Chairmanship of France and in 2012 under the Chairmanship of Mexico. 49. We thank Canada for hosting the successful Toronto Summit. ANNEX I The Framework for Strong, Sustainable and Balanced Growth 1. As a result of the extraordinary and highly coordinated policy actions agreed to at the Washington, London and Pittsburgh G-20 Summits, the global economy is recovering faster than was expected. Our decisive and unprecedented actions over the past two years have limited the downturn and spurred recovery. 2. Yet risks remain. Unemployment remains unacceptably high in many G-20 economies. The recovery is uneven across G-20 members both across advanced economies and between advanced and emerging economies. This poses risks to the continued economic expansion. There is a risk that global current account imbalances will widen again, absent further policy action. While considerable progress has been made in moving ahead on our financial sector repair and reform agenda, financial markets remain fragile and credit flows restrained. Concerns over large fiscal deficits and rising debt levels in some countries have also become a source of uncertainty and financial market volatility. 3. The G-20's highest priority is to safeguard and strengthen the recovery and lay the foundation for strong, sustainable and balanced growth, including strengthening our financial systems against risks. We therefore welcome the actions taken and commitments made by a number of G-20 countries. Among more recent measures, we particularly welcome the full implementation of the European Financial Stability Mechanism and Facility; the EU decision to publicly release the results of ongoing tests on European banks; and the recent announcements of fiscal consolidation plans and targets by a number of G-20 countries. These represent substantial contributions to our collective well-being and build on our previous actions. We will continue to cooperate and undertake appropriate actions to bolster economic growth and foster a strong and lasting recovery. 4. The Framework for Strong, Sustainable and Balanced Growth we launched in Pittsburgh is the means to achieving our shared objectives. G-20 members have a responsibility to the community of nations to assure the overall health of the global economy. We committed to assess the collective consistency of our policy actions and to strengthen our policy frameworks in order to meet our common objectives. Through our collective policy action, we will ensure growth is sustained, more balanced, shared across all countries and regions of the world, and consistent with our development goals.

325 5. We have completed the first stage of our Mutual Assessment Process. As we requested in Pittsburgh, G-20 Finance Ministers and Central Bank Governors, with the support of the IMF, World Bank, OECD, ILO and other international organisations, have assessed the collective consistency of our individual policy frameworks and global prospects under alternative policy scenarios. 6. The assessment is that in the absence of a coordinated policy response: global output is likely to remain below its pre-crisis trend; unemployment remains above pre-crisis levels in most countries; fiscal deficits and debt in some advanced economies reach unacceptably high levels; and, global current account imbalances, which narrowed during the crisis, widen again. Moreover, this outlook is subject to considerable downside risks. 7. We concluded that we can do much better. The IMF and World Bank estimate that if we choose a more ambitious path of reforms, over the medium term, we could: · raise global output by up to $4 trillion; · create an estimated 52 million jobs; · lift up to 90 million people out of poverty; and · significantly reduce global current account balances. If we act in a coordinated manner, all regions are better off, now and in the future. Moreover, increasing global growth on a sustainable basis is the most important step we can take in improving the lives of all, including those in the poorest countries. 8. We are committed to taking concerted actions to sustain the recovery, create jobs and to achieve stronger, more sustainable and more balanced growth. These will be differentiated and tailored to national circumstances. We agreed today on: · Following through on fiscal stimulus and communicating "growth-friendly" fiscal consolidation plans in advanced countries and that will be implemented going forward; · strengthening social safety nets, enhancing corporate governance reform, financial market development, infrastructure spending, and increasing exchange rate flexibility in some emerging markets; · pursuing structural reforms across the entire G-20 membership to increase and sustain our growth prospects; and · Making further progress on rebalancing global demand. Monetary policy will continue to be appropriate to achieve price stability and thereby contribute to the recovery. 9. We agreed to follow through on fiscal stimulus and communicating "growth friendly" fiscal consolidation plans in advanced countries that will be implemented going forward. Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt. The path of adjustment must be carefully calibrated to sustain the recovery in private demand. There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. Recognizing the circumstances of Japan, we welcome the Japanese government's fiscal consolidation plan announced recently with their growth

326 strategy. Those with serious fiscal challenges need to accelerate the pace of consolidation. Fiscal consolidation plans will be credible, clearly communicated, differentiated to national circumstances, and focused on measures to foster economic growth. 10. We have agreed on a set of principles to guide these fiscal consolidation plans by advanced economies: · Fiscal consolidation plans will be credible. They will be based on prudent assumptions with respect to economic growth and our respective fiscal positions, and they will identify specific measures to achieve a target path that ensures fiscal sustainability. Strengthened budgetary frameworks and institutions can help underpin the credibility of consolidation strategies. · The time to communicate our medium-term fiscal plans is now. We will elaborate clear and credible plans that put our fiscal finances on a sustainable footing. The speed and timing of withdrawing fiscal stimulus and reducing deficits and debt will be differentiated for and tailored to national circumstances, and the needs of the global economy. However, it is clear that consolidation will need to begin in advanced economies in 2011, and earlier for countries experiencing significant fiscal challenges at present. · Fiscal consolidation will focus on measures that will foster economic growth. We will look at ways to use our fiscal resources more efficiently, to help reduce the overall cost of our interventions while targeting resources to where they are most needed. In addition, we will focus on structural reforms that will promote long-term growth. 11. Advanced deficit countries should take actions to boost national savings while maintaining open markets and enhancing export competitiveness. 12. Surplus economies will undertake reforms to reduce their reliance on the external demand and focus more on domestic sources of growth. This will help strengthen their resilience to external shocks and promote more stable growth. To do this, advanced surplus economies will focus on structural reforms that support increased domestic demand. Emerging surplus economies will undertake reforms tailored to country circumstances to: · Strengthen social safety nets (such as public health care and pension plans), corporate governance and financial market development to help reduce precautionary savings and stimulate private spending; · Increase infrastructure spending to help boost productive capacity and reduce supply bottlenecks; and · Enhance exchange rate flexibility to reflect underlying economic fundamentals. Excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. Market-oriented exchange rates that reflect underlying economic fundamentals contribute to global economic stability. 13. Across all G-20 members, we recognise that structural reforms can have a substantial impact on economic growth and global welfare. We will implement measures that will enhance the growth potential of our economies in a manner that pays particular attention to the most vulnerable. Reforms could support the broadly-shared expansion of demand if wages grow in line with productivity. It will be important to strike the right balance between policies that support greater market competition and economic growth and policies that preserve social safety nets consistent with national circumstances. Together these measures will also help unlock demand. These include: · Product, service and labour market reforms in advanced economies, particularly those economies that may have lost some productive capacity during the crisis. Labour market

327 reforms might include: better targeted unemployment benefits and more effective active labour market policies (such as job retraining, job search and skills development programs, and raising labour mobility). It might also include putting in place the right conditions for wage bargaining systems to support employment. Product and service market reforms might include strengthening competition in the service sector; reducing barriers to competition in network industries, professional services and retail sectors, encouraging innovation and further reducing the barriers to foreign competition. · Reducing restrictions on labour mobility, enhancing foreign investment opportunities and simplifying product market regulation in emerging market economies. · Avoiding new protectionist measures. · Completing the Doha Round to accelerate global growth through trade flows. Open trade will yield significant benefits for all and can facilitate global rebalancing. · Actions to accelerate financial repair and reform. Weaknesses in financial sector regulation and supervision in advanced economies led to the recent crisis. We will implement the G-20 financial reform agenda and ensure a stronger financial system serves the needs of the real economy. While not at the centre of the crisis, financial sectors in some emerging economies need to be developed further so that they can provide the depth and breadth of services required to promote and sustain high rates of economic growth and development. It is important that financial reforms in advanced economies take into account any adverse effects on financial flows to emerging and developing economies. Vigilance is also needed to ensure open capital markets and avoid financial protectionism. 14. We welcome the recommendations of our Labour and Employment Ministers, who met in April 2010, on the employment impacts of the global economic crisis. We reaffirm our commitment to achieving strong job growth and providing social protection to our most vulnerable citizens. An effective employment policy should place quality jobs at the heart of the recovery. We appreciate the work done by the International Labour Organization in collaboration with the OECD on a training strategy that will help equip the workforce with the skills required for the jobs of today and those of tomorrow. 15. We are committed to narrowing the development gap and that we must consider the impact of our policy actions on low-income countries. We will continue support development financing, including through new approaches that encourage development financing from both public and private sources. The crisis will have long lasting impact on the development trajectories of poor countries in every region of the world. Among these effects, developing countries are likely to face increased challenges in securing financing from both public and private sources. Many of us have already taken steps to help address this shortfall by implementing innovative approaches to financing, such as advance market commitments, the SME challenge and recent progress with respect to financial inclusion. Low-income countries have the potential to contribute to stronger and more balanced global growth, and should be viewed as markets for investment. 16. These measures need to be implemented at the national level and tailored to individual country circumstances. We welcome additional measures announced by some G-20 members aimed at meeting our shared objectives. 17. To facilitate this process, the second stage of our country-led, consultative mutual assessment will be conducted at the country and European level. Each G-20 member will identify the measures it is taking to implement the policies we have agreed upon today to ensure stronger, more sustainable and balanced growth. We ask our Finance Ministers and Central Bank Governors to elaborate on these measures and report on them when we next

328 meet. We will continue to draw on the expertise of the IMF, World Bank, OECD, ILO and other international organisations, as necessary. These measures will form the basis of our comprehensive action plan that will be announced in the Seoul Summit. As we pursue strong, sustainable and more balanced growth, we continue to encourage work on measurement methods to take into account social and environmental dimensions of economic development. 18. The policy commitments we are making today, along with the significant policy measures we have already taken, will allow us to reach our objective of strong, sustainable and balanced growth, the benefits of which will be felt both within the G-20 and across the globe. ANNEX II Financial Sector Reform 1. The financial crisis has imposed huge costs. This must not be allowed to happen again. The recent financial volatility has strengthened our resolve to work together to complete financial repair and reform. We need to build a more resilient financial system that serves the needs of our economies, reduces moral hazard, limits the build-up of systemic risk and supports strong and stable economic growth. 2. Collectively we have made considerable progress toward strengthening the global financial system by fortifying prudential oversight, improving risk management, promoting transparency and continuously reinforcing international cooperation. We welcome the strong financial regulatory reform bill in the United States. 3. But there is more to be done. Further repair to the financial sector is critical to achieving sustainable global economic recovery. More work is required to restore the soundness and enhance the transparency of banks' balance sheets and markets; and improve the corporate governance and risk management of financial firms in order to strengthen the global financial system and restore the credit needed to fuel sustainable economic growth. We welcome the decision of EU leaders to publish the results of ongoing tests on European banks to reassure markets of the resilience and transparency of the European banking system. 4. We pledge to act together to achieve the commitments to reform the financial sector made at the Washington, London and Pittsburgh Summits by the agreed or accelerated timeframes. Transition horizons will take into account the cumulative macroeconomic impact of the reforms in advanced and emerging economies Capital and Liquidity 5. We agreed that the core of the financial sector reform agenda rests on improving the strength of capital and liquidity and discouraging excessive leverage. We agreed to increase the quality, quantity, and international consistency of capital, to strengthen liquidity standards, to discourage excessive leverage and risk taking, and reduce procyclicality. 6. We took stock of the progress of the Basel Committee on Banking Supervision (BCBS) towards a new global regime for bank capital and liquidity and we welcome and support its work. Substantial progress has been made on reforms that will materially raise levels of resilience of our banking systems. · The amount of capital will be significantly higher when the new reforms are fully implemented. · The quality of capital will be significantly improved to reinforce banks' ability to absorb losses. 7. We support reaching agreement, at the time of the Seoul Summit, on a new capital framework that would raise capital requirements by:

329 · establishing a new requirement that each bank hold in Tier 1 capital, at a minimum, an increasing share of common equity, after deductions, measured as a percentage of risk- weighted assets, that enables them to withstand with going concern fully-loss-absorbing capital -- without extraordinary government support -- stresses of a magnitude associated with the recent financial crisis. · moving to a globally consistent and transparent set of conservative deductions generally applied at the level of common equity, or its equivalent in the case of non-joint stock companies, over a suitable globally-consistent transition period. 8. Based on our agreement at the Pittsburgh Summit that Basel II will be adopted in all major centers by 2011, we agreed that all members will adopt the new standards and these will be phased in over a timeframe that is consistent with sustained recovery and limits market disruption, with the aim of implementation by end-2012, and a transition horizon informed by the macroeconomic impact assessment of the Financial Stability Board (FSB) and BCBS. 9. Phase-in arrangements will reflect different national starting points and circumstances, with initial variance around the new standards narrowing over time as countries converge to the new global standard. Existing public sector capital injections will be grandfathered for the extent of the transition. 10. We reiterated support for the introduction of a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to Pillar I treatment after an appropriate transition period based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonized internationally, fully adjusting for differences in accounting. 11. We acknowledged the importance of the quantitative impact study currently being conducted by the BCBS that measures the potential impact of the new Basel standards and will ensure that the new capital and liquidity standards are of high quality and adequately calibrated. The BCBS- FSB macroeconomic impact study will inform the development of the phase-in period of the new standards. 12. We welcomed the BCBS agreement on a coordinated start date not later than 31 December 2011 for all elements of the revised trading book rules. 13. We support the BCBS' work to consider the role of contingent capital in strengthening market discipline and helping to bring about a financial system where the private sector fully bears the losses on their investments. Consideration of contingent capital should be included as part of the 2010 reform package. 14. We called upon the FSB and the BCBS to report on progress of the full package of reform measures by the Seoul Summit. We recognize the critical role of the financial sector in driving a robust economy. We are committed to design a financial system which is resilient, stable and ensures the continued availability of credit. More Intensive Supervision 15. We agreed that new, stronger rules must be complemented with more effective oversight and supervision. We are committed to the Basel Committee's Core Principles for Effective Banking Supervision and tasked the FSB, in consultation with the International Monetary Fund (IMF), to report to our Finance Ministers and Central Bank Governors in October 2010 on recommendations to strengthen oversight and supervision, specifically relating to the mandate, capacity and resourcing of supervisors and specific powers which should be adopted to proactively identify and address risks, including early intervention.

330 Resolution of Financial Institutions 16. We are following through on our commitment to reduce moral hazard in the financial system. We are committed to design and implement a system where we have the powers and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers ultimately bearing the burden. These powers should facilitate "going concern" capital and liquidity restructuring as well as "gone concern" restructuring and wind-down measures. We endorsed and have committed to implement our domestic resolution powers and tools in a manner that preserves financial stability and are committed to implement the ten key recommendations on cross-border bank resolution issued by the BCBS in March 2010. In this regard, we support changes to national resolution and insolvency processes and laws where needed to provide the relevant national authorities with the capacity to cooperate and coordinate resolution actions across borders. 17. We agree that resolution regimes should provide for: · Proper allocation of losses to reduce moral hazard and protect taxpayers; · Continuity of critical financial services, including uninterrupted service for insured depositors; · Credibility of the resolution regime in the market; · Minimization of contagion; · Advanced planning for orderly resolution and transfer of contractual relationships; and, · Effective cooperation and information exchange domestically and among jurisdictions in the event of a failure of a cross-border institution. Addressing Systemically Important Financial Institutions 18. We welcomed the FSB's interim report on reducing the moral hazard risks posed by systemically important financial institutions. We recognized that more must be done to address these risks. Prudential requirements for such firms should be commensurate with the cost of their failure. We called upon the FSB to consider and develop concrete policy recommendations to effectively address problems associated with and resolve systemically important financial institutions by the Seoul Summit. This should include more intensive supervision along with consideration of financial instruments and mechanisms to encourage market discipline, including contingent capital, bail-in options, surcharges, levies, structural constraints, and methods to haircut unsecured creditors. 19. We welcomed the substantial progress that has been made regarding the development of supervisory colleges and crisis management groups for the major complex financial institutions identified by the FSB. 20. We continue to work together to develop robust agreed-upon institution-specific recovery and rapid resolution plans for major cross-border institutions by the end of 2010. We further committed to continue working on ensuring cooperation among jurisdictions in financial institution resolution proceedings. Financial Sector Responsibility 21. We agreed the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the financial system or fund resolution.

331 22. To that end, we recognized that there is a range of policy approaches. Some countries are pursuing a financial levy. Other countries are pursuing different approaches. We agreed the range of approaches would follow these principles: · Protect taxpayers; · Reduce risks from the financial system; · Protect the flow of credit in good times and bad times; · Take into account individual countries' circumstances and options; and, · Help promote a level playing field. 23. We thanked the IMF for its work in this area. Financial Market Infrastructure and Scope of Regulation 24. We agreed on the need to strengthen financial market infrastructure in order to reduce systemic risk, improve market efficiency, transparency and integrity. Global action is important to minimize regulatory arbitrage, promote a level playing field, and foster the widespread application of the principles of propriety, integrity, and transparency. 25. We pledged to work in a coordinated manner to accelerate the implementation of over- the-counter (OTC) derivatives regulation and supervision and to increase transparency and standardization. We reaffirm our commitment to trade all standardized OTC derivatives contracts on exchanges or electronic trading platforms, where appropriate, and clear through central counterparties (CCPs) by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories (TRs). We will work towards the establishment of CCPs and TRs in line with global standards and ensure that national regulators and supervisors have access to all relevant information. In addition we agreed to pursue policy measures with respect to haircut-setting and margining practices for securities financing and OTC derivatives transactions that will reduce procyclicality and enhance financial market resilience. We recognized that much work has been done in this area. We will continue to support further progress in implementing these measures. 26. We committed to accelerate the implementation of strong measures to improve transparency and regulatory oversight of hedge funds, credit rating agencies and over-the- counter derivatives in an internationally consistent and non-discriminatory way. We also committed to improve the functioning and transparency of commodities markets. We call on credit rating agencies to increase transparency and improve quality and avoid conflicts of interest, and on national supervisors to continue to focus on these issues in conducting their oversight. 27. We committed to reduce reliance on external ratings in rules and regulations. We acknowledged the work underway at the BCBS to address adverse incentives arising from the use of external ratings in the regulatory capital framework, and at the FSB to develop general principles to reduce authorities' and financial institutions' reliance on external ratings. We called on them to report to our Finance Ministers and Central Bank Governors in October 2010. 28. We acknowledged the significant work of the International Organization of Securities Commission (IOSCO) to facilitate the exchange of information amongst regulators and supervisors, as well as IOSCO's principles regarding the oversight of hedge funds aimed at addressing related regulatory and systemic risks. 29. We called on the FSB to review national and regional implementation of prior G-20 commitments in these areas and promote global policy cohesion and to assess and report to

332 our Finance Ministers and Central Bank Governors in October 2010 if further work is required. Accounting Standards 30. We re-emphasized the importance we place on achieving a single set of high quality improved global accounting standards. We urged the International Accounting Standards Board and the Financial Accounting Standards Board to increase their efforts to complete their convergence project by the end of 2011. 31. We encouraged the International Accounting Standards Board to further improve the involvement of stakeholders, including outreach to emerging market economies, within the framework of the independent accounting standard setting process. Assessment and Peer Review 32. We pledged to support robust and transparent independent international assessment and peer review of our financial systems through the IMF and World Bank's Financial Sector Assessment Program and the FSB peer review process. The mutual dependence and integrated nature of our financial system requires that we all live up to our commitments. Weak financial systems in some countries pose a threat to the stability of the international financial system. International assessment and peer review are fundamental in making the financial sector safer for all. 33. We reaffirmed the FSB's principal role in the elaboration of international financial sector supervisory and regulatory policies and standards, co-ordination across various standard- setting bodies, and ensuring accountability for the reform agenda by conducting thematic and country peer reviews and fostering a level playing field through coherent implementation across sectors and jurisdictions. To that end, we encourage the FSB to look at ways to strengthen its capacity to keep pace with growing demands. 34. We called upon the FSB to expand upon and formalize its outreach activities beyond the membership of the G-20 to reflect the global nature of our financial system. We recognized the prominent role of the FSB, along with other important organizations including, the IMF and World Bank. These organizations, along with other international standard setters and supervisory authorities, play a central role to the health and well-being of our financial system. 35. We fully support the FSB's thematic peer reviews as a means of fostering consistent cross- country implementation of financial and regulatory policies and to assess their effectiveness in achieving their intended results. We welcomed the FSB's first thematic peer review report on compensation, which showed progress in the implementation of the FSB's standards for sound compensation, but full implementation is far from complete. We encouraged all countries and financial institutions to fully implement the FSB principles and standards by year-end. We call on the FSB to undertake ongoing monitoring in this area and conduct a second thorough peer review in the second quarter of 2011. We also look forward to the results of the FSB's thematic review of risk disclosures. 36. We acknowledged the significant progress in the FSB's country review program. These reviews are an important complement to the IMF/World Bank Financial Sector Assessment Program and provide a forum for peer learning and dialogue to address challenges. Three reviews will be completed this year. Other International Standards and Non-cooperative Jurisdictions

333 37. We agreed to consider measures and mechanisms to address non-cooperative jurisdictions based on comprehensive, consistent and transparent assessment, and encourage adherence, including by providing technical support, with the support of the international financial institutions (IFIs). 38. We fully support the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes, and welcomed progress on their peer review process, and the development of a multilateral mechanism for information exchange which will be open to all interested countries. Since our meeting in London in April 2009, the number of signed tax information agreements has increased by almost 500. We encourage the Global Forum to report to Leaders by November 2011 on progress countries have made in addressing the legal framework required to achieve an effective exchange of information. We also welcome progress on the Stolen Asset Recovery Program, and support its efforts to monitor progress to recover the proceeds of corruption. We stand ready to use countermeasures against tax havens. 39. We fully support the work of the Financial Action Task Force (FATF) and FATF-Style Regional Bodies in their fight against money laundering and terrorist financing and regular updates of a public list on jurisdictions with strategic deficiencies. We also encourage the FATF to continue monitoring and enhancing global compliance with the anti-money laundering and counter-terrorism financing international standards. 40. We welcomed the implementation of the FSB's evaluation process on the adherence to prudential information exchange and international cooperation standards in all jurisdictions. ANNEX III Enhancing the Legitimacy, Credibility and Effectiveness of the IFIs and Further Supporting the Needs of the Most Vulnerable 1. The global economic and financial crisis has demonstrated the value of the International Financial Institutions (IFIs) as instruments for coordinating multilateral action. These institutions were on the front-line in responding to the crisis, mobilizing $985 billion in critical financing. In addition, the international community and the IFIs mobilized over $250 billion in trade finance. 2. The crisis also demonstrated the importance of delivering further reforms. As key platforms for our cooperation, we are committed to strengthening the legitimacy, credibility and effectiveness of the IFIs, to ensure that they are capable of helping us maintain global financial and economic stability and supporting the growth and development of all their members. 3. To enhance the legitimacy and effectiveness of the IFIs, we committed in London and Pittsburgh to support new open, transparent and merit-based selection processes for the heads and senior leadership of all International Financial Institutions. We will strengthen these processes in the lead up to the Seoul Summit in the context of broader reform. MDB Financing 4. Since the start of the global financial crisis, the MDBs have been playing an important role in the global response by exceeding our London commitment, in providing $235 billion in lending, more than half of which has come from the World Bank Group. At a time when private sector sources of finance were diminished, this lending was critical to global stabilization. Now more than ever, the MDBs are key development partners for many countries.

334 5. We have fulfilled our commitment to ensure that the MDBs have appropriate resources through capital increases for the major MDBs, including the Asian Development Bank (AsDB), the African Development Bank (AfDB), the Inter-American Development Bank (IADB), the European Bank for Reconstruction and Development (EBRD), the World Bank Group, notably the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC). As major shareholders at these institutions, we have worked together with other members to increase their capital base by 85%, or approximately $350 billion. Overall, their total lending to developing countries will grow from $37 billion per year to $71 billion per year. This will improve their ability to address the increasing demand in the short and medium terms and to have enough resources to support their members. We support efforts to implement these agreements as quickly as possible.

Pre-Crisis Annual New Annual MDB Capital Increase Lendinga Lendingb

AfDB 200 percent increase $1.8 B $6 B

AsDB 200 percent increase $5.8 B $10 B

EBRDc[1][1] 50 percent increase $5.3 B $11 B

IADBd c 70 percent increase $6.7 B $12 B

IBRD 30 percent increase $12.1 B $15 B

$200M selective capital IFC $5.4 B $17 B increase http://www.washingtonpost.com/wp- dyn/content/article/2010/06/27/AR2010062702887.html?sid=ST2010062604320

335 Bloomberg G-20 to Set Targets to Cut Deficits, Keep Flexibility for Stimulus Plans By Sandrine Rastello and Tony Czuczka - Jun 27, 2010

German Chancellor Angela Merkel lobbied her counterparts at a G-8 meeting to pursue "solid" fiscal policies. Photographer: Andrew Harrer/Bloomberg Group of 20 leaders are poised to endorse targets to tackle deficits, while giving nations flexibility to carry out their stimulus plans, according to excerpts of a draft of the statement sent to reporters. Advanced economies would aim to at least halve deficits by 2013 and stabilize their debt-to- output ratios by 2016, according to the draft. German Chancellor Angela Merkel said the language “will be part of the final document” produced as the G-20 meeting wraps up today in Toronto. “Honestly, this is more than I expected, because it is quite specific,” Merkel told reporters. “It’s a success that industrialized countries as a group accepted this.” The G-20 will also pledge to maintain existing stimulus plans and take “concerted actions” to sustain the recovery. Recent events highlight the need for countries to establish “properly phased” plans to rein in deficits. Emerging market economies pledged to take measures to strengthen social safety nets, increase infrastructure spending and enhance exchange rate flexibility. The draft of the statement includes targets championed by Canadian Prime Minister Stephen Harper, who sought to bridge differences between the U.S. and Europe by proposing minimum deficit and debt reduction goals. Bridge the Gap The G-20 has to bridge a gap between leaders such as President Barack Obama who want to focus on growth and officials such as Merkel who favor budget cuts. The statement says the global recovery, which has been faster than expected, remains fragile and uneven. Efforts to rein in deficits and sustain the recovery will be differentiated and tailored to national circumstances, according to the statement. “Here is the tightrope we must walk,” Harper told the G- 20 leaders in his opening remarks today. “To sustain the recovery, it is imperative that we follow through on existing stimulus plans. At the same time, advanced countries must send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order.” Countries such as Brazil have opposed the specific deficit targets, saying it will be hard for some G-20 members to meet them without stifling economic growth. Draconian, Difficult

336 “It is draconian, a little difficult, a little exaggerated,” said Brazilian Finance Minister Guido Mantega. “Some countries would not be able to do it. It is clear that a cut is needed, but at what velocity? It can’t be too fast.” Mantega cited Italy and Japan as nations that may not be able to meet those goals. The agreement would effectively endorse the austerity plan set out by the U.K., which has the highest deficit in the group, while acknowledging U.S. concerns that countries shouldn’t be required to start cutting public spending until their own recoveries are fully entrenched. “The speed and timing” of fiscal consolidation “must be tailored to national circumstances, so we do not derail the recovery under way,” Australian Deputy Prime Minister Wayne Swan told a business audience in Toronto yesterday. The G-20, which accounts for about 85 percent of the global economy, replaced the G-8 last year as the world’s foremost international policy-coordinating forum. The larger group means developed and emerging economies are trying to find common ground amid differences in prosperity that vary from the U.S.’s $46,400 in GDP per capita to India’s $3,100. Same Direction Yesterday, leaders emphasized areas of accord in their fiscal policies, with Obama saying he and U.K. Prime Minister David Cameron are “aiming at the same direction.” French President Nicolas Sarkozy said he saw no “clash” between countries on the issue, and Harper called it a “balancing act.” “As recovery takes hold at different rates around the world and as domestic political pressures figure more prominently than the threat of a global meltdown, one can expect these declarations to become increasingly general,” said Dan Price, who served as former President George W. Bush’s G-20 negotiator. European nations have led the charge on the deficits. Merkel said in an interview with ZDF television that she lobbied her counterparts at the G-8 meeting to pursue “solid” fiscal policies and defended her own plan to reduce Germany’s budget deficit by about 10 billion euros ($12.4 billion). U.S. Treasuries are having their best year since 1995, returning 5 percent through June 24, according to Bank of America Merrill Lynch index data, as investors seek alternatives to Europe, where Greece and Spain had their credit ratings downgraded. ‘Near Death’ “European countries just had a near-death experience over Greece,” said Tony Fratto, a former Treasury and White House official under Bush. “Some are afraid of suffering the same fate.” U.S. Treasury Secretary Timothy Geithner urged G-20 leaders to focus on growth. The world economy is still emerging from the “fires of the crisis” and “the scars of this crisis are still with us” he said in prepared remarks for a press conference. “We’re aiming at the same target, which is world growth and stability,” Cameron told reporters as he met with Obama in Toronto yesterday. “But it means those countries that have big deficit problems like ours” have to take “action in order to keep that level of confidence in the economy.” Obama agreed that rising debt is an issue.

337 “We have long-term deficits that have to be dealt with,” Obama said. “There are going to be differentiated responses between the two countries because of our different positions, but we are aiming at the same direction.” Outside the security zone that surrounds the meeting forum, protests turned violent yesterday as thousands of demonstrators marched through central Toronto. Protesters set fire to cars; others threw rocks at the windows of First Canadian Place, headquarters of the Bank of Montreal, and spray-painted “Bomb the banks” on the building. Toronto police have made 584 arrests, including 100 today, Constable Wendy Drummond said today in a telephone interview. To contact the reporters on this story: Theophilos Argitis in Toronto at [email protected] Kristin Jensen in Toronto at [email protected]

http://www.bloomberg.com/news/2010-06-27/g-20-may-stress-need-to-cut-deficits-as- leaders-split-on-urgency-of-target.html Bloomberg Papandreou Defiance of Default Inspired by Gun-to- Throat Seizure in Greece 25/06/2010

Greece's Prime Minister George Papandreou pauses during an interview in New York. Photographer: Peter Foley/Bloomberg

The Papandreou family pose in this undated handout photograph with George Papandreou, now the current prime minister of Greece, front center, and front row, left to right, his brother Nick Papandreou, and his sister Sophia Papandreou. Back row left to right, George Papandreou's father, Andreas Papandreou, and Papandreou's grandfather, George Papandreou. Source: Papandreou family via Bloomberg

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George Papandreou from his 1970 yearbook at King City Secondary School. Source: King City Secondary School via Bloomberg

George Papandreou, now the current prime minister of Greece, center, speaks into a microphone, with his brother Nick Papandreou, fourth right, looking on during the election campaign in 1993. Source: Papandreou family via Bloomberg As a child in the U.S., Greek Prime Minister George Papandreou’s family bunked in roadside motels during their week-long cross-country car rides from California to New York. He dispensed street justice as a young man in Greece, using his martial arts skills to level two men who had smashed an ice cream cone in an old man’s face. He and his siblings took odd jobs, including as gas station attendants and window washers. A dreamer known to strum Bob Dylan songs, he wooed Ada, his wife, with Greek love songs in a late night window serenade in Athens, according to his brother, Nick. Now Papandreou, 58, must draw on all three traits -- a work-a-day sensibility, a drive to do the right thing and seduction -- if he is to achieve financial stability for Greece and ultimately the euro-zone, Bloomberg Businessweek reports in its June 28 issue. At the heart of a sovereign debt crisis that’s shaken the foundations of the European Union’s common currency, the euro, the scion of a political dynasty argues it is every Greek’s duty to accept wage cuts and higher retirement ages while fighting ingrained corruption and tax dodging in a battle to keep Greece from defaulting. Saving Greece “We saved Greece from default,” he said in a June 20 interview in New York, where he was heading a meeting of the Socialist International, the organization of social democratic, socialist and labor parties he heads. “Now we have to change Greece because if we don’t change Greece, we’ll be back here at the edge of the precipice again some years down the road. And I think that’s something people really understand.”

339 Greece disclosed in October that its budget deficit was likely to be more than four times the level allowed under rules protecting the euro, the common currency shared by 16 European countries. In May, Papandreou clinched a rescue package totaling 110 billion euros ($135 billion) in loans from the European Union and the International Monetary Fund. Papandreou “gives people the feeling and the trust that they can invest in helping Greece because there is somebody trustworthy,” said Yossi Beilin, former justice and economy minister for Israel, and president of Beilink Business Foreign Affairs, who has known Papandreou for about 20 years. “He is a guy who would like to solve problems and compromises and find solutions, without compromising himself.” Convincing Ackermann In a Viennese palace decorated with frescoes of the deeds of Hercules, Papandreou surprised a roomful of skeptical bankers this month. Over a dinner of wild char, filet of beef and Welschriesling wine on June 11, more than 400 bankers, lawyers and regulators listened as Papandreou promised to bring Greece through its debt crisis even if it cost him his job. At the end, the group rose to its feet with an ovation. And Deutsche Bank AG’s chief executive officer, Josef Ackermann, who last month said he doubted whether Greece would be able to pay back what it owes, reversed himself, telling the room he had changed his mind because of Papandreou’s personal commitment. Papandreou, in the New York interview, said losing his job for making unpopular decisions would be a small sacrifice compared with the persecution endured by his father and grandfather, both Greek prime ministers, to keep the Mediterranean country free for democracy. His view fits a sense of public responsibility that advisers, family and longtime friends say led Papandreou reluctantly into politics. Family Tradition “My father was in jail twice in his life for fighting a dictatorship, my grandfather six times, and exiled a number of times,” Papandreou said. “He was almost executed basically fighting for democracy. So, you know, this has been part of the tradition.” As a young teenager, Papandreou was threatened at gunpoint when the army seized power in Greece in 1967 and came to the family house looking for his father, Andreas. Papandreou’s maternal grandfather, a tough, World War I veteran from Chicago, refused to let them in, Papandreou said. “He said ‘Get out of here,’” Papandreou recalled. “And he closed the door on them, as a good soldier would. So they broke the door down.” George, armed with a shotgun, raced with his father up to the veranda on the roof. Realizing they were surrounded, he cached the weapon and his father hid. Then one soldier came through the veranda door and held a machine gun to 14-year-old George’s throat, asking the whereabouts of the father. Getting Over Trauma The senior Papandreou emerged from hiding and surrendered. He was beaten with guns and rifle butts, recalls Papandreou’s brother, Nick, 53, a former World Bank economist turned writer who lives in Athens. “That was the moment that turned George from an extrovert to an introvert,” Nick Papandreou said. “It took George a long time to get over the trauma. He was more quiet after that. He seemed to think of the world differently.”

340 The firearm motif has played prominently in Papandreou’s hectoring of the EU to provide support for Greece. He called in March for a “gun on the table,” or tangible measures from the EU, to halt a rise in the country’s borrowing costs. On April 23, he used a televised address to call for the activation of a financial lifeline of as much as 45 billion euros in what was an unprecedented test of the euro’s stability and European political cohesion. Speaking from the island of Kastellorizo, the most distant Greek outpost, population 430, Papandreou also called on Greeks to make it a national priority to turn around the country. Under a bright sun, with a small fishing port and blue sea and sky in the background, he evoked Odysseus, the hero of Homer’s epic poem, who battled monsters and vindictive gods to return to his island of Ithaca, and said Greece was “on a new Odyssey.” ‘Forced Hand’ Papandreou still must navigate difficult political terrain to bring Greece’s economy and debt into balance. While he now has Ackermann’s support, more than half of Greeks surveyed in June say they believe the country could go bankrupt, according to a poll by MRB for Mega TV. “There’s a saying that politicians are made by events,” said Stefanos Manos, a former economy minister. “The events have forced Papandreou’s hand to do things I am dead certain he would never have done on his own.” Those events include violence. A bomb blast at the country’s police ministry in Athens killed one person yesterday. “At a time when our country and people are battling daily to exit a crisis, cowardly murderers want to harm normality and our democracy,” Papandreou said in a statement. “The terrorists’ goals won’t be achieved.” Long Political March Papandreou himself endured a long political march between 2004 and 2009. During that period he ran for prime minister and lost twice, scoring the lowest vote total for his party in a quarter century in 2007 against Kostas Karamanlis, another scion of a political dynasty. He had to fend off an internal challenge for party leadership. Papandreou’s victory ushered the Panhellenic Socialist Movement, or Pasok, the party his father Andreas founded in 1974, back to power after five years in opposition. “This guy is very resilient and people tend to underestimate him,” Finance Minister George Papaconstantinou, said. “In 2004 when we lost the election and in 2007 when we lost again, very few people were betting on him becoming prime minister.” Returning to Greece has always figured prominently in Papandreou’s life. When the family lived in California, and before planes became affordable, Papandreou’s father took advantage of fellowships away from university teaching to take the family on an American Odyssey. They drove from Berkeley to New York, traversing the country in a new station wagon that they would sell in New York before boarding a ship for a two-week trip to Piraeus, Greece. American Roots His strongest memory: “Those boring plains that I would see for hours and hours when you got to the Midwest of the United States, which I’m also from, of course, not only because of Minnesota. But my mother’s a Chicago girl,” Papandreou said.

341 Born in St. Paul, Minnesota, where his father was an economics professor at the University of Minnesota, George Papandreou lived in the U.S., Canada, Sweden and Greece for much of his early life, attending eight different schools in four countries over 12 years. In Minnesota, he said his father campaigned for civil rights pioneer Hubert Humphrey, a senator for the state until his election to the Vice Presidency in 1964 under Lyndon B. Johnson. Studied Sociology With a father who earned a Ph.D. in economics from Harvard, Papandreou said he consciously chose to break with tradition and study sociology, gaining degrees in the field from Stockholm University, Amherst College in Massachusetts and a master’s degree from the London School of Economics. “I think it was also a normal reaction you know, I might do something different, although in the end I followed politics,” Papandreou said. His sociology training has helped him in the political world by acquainting him with a wide breadth of problems, he said. “Economics is much more mathematical,” he said. “Maybe that’s one of the problems with economics now - too much mathematics, too many models.” “Sociology brings to you a little bit less of a hubris, let’s say, about what you can do and what you can’t do.” Years in Sweden Papandreou’s years in Sweden also attuned him to northern European goals for social dialogue and consensus, both in his management style for cabinet meetings and his political philosophy, said Papaconstantinou, the finance minister. “He’s one of these people who actually believes in the process of dialogue, not just as a means to an end, but that it’s an educational process, which sometimes is very tiring,” Papaconstantinou said. At the end of the day, however, the process is extremely worthwhile and productive, Papaconstantinou said. In Sweden, and then in Canada, Papandreou also got a first- hand look at functioning, if costly, welfare states. “I think vilifying the welfare system -- and that’s one thing I would say here in the United States -- as the culprit for sovereign debt is wrong,” Papandreou said in New York. He added that Greece was paying too much for health care and for education even though families pay for 40 percent of the costs themselves. “There are countries that are very competitive with very strong welfare systems, the Nordic countries or Canada, Australia, just to give a few. They don’t have generally the problem of sovereign debt.” Two of the Nordic countries Papandreou lauds do pay the highest taxes among 30 of the member-countries of the Organization for Economic Cooperation and Development. Total tax revenue was estimated at 47.1 percent of Sweden’s economic output, while Denmark’s was equal to 48.3 percent, according to the OECD. The U.S. was at 26.9 percent and Greece at 31.3 percent. Talking Vietnam War During his time at Amherst, George would hang out with friends after dinner drinking a little ouzo, talking about Watergate and the Vietnam War, according to dorm mate and friend Henry Boom, a medical professor and director of the tuberculosis research unit at Case Western Reserve University in Cleveland.

342 The two bonded over their shared experience of having an American mother and foreign father, said Boom, whose father is Dutch. As Amherst had yet to go co-ed, they and their friends would often hang out with Italian and French women who went to nearby Smith College, he said. Boom said he still sees Papandreou occasionally and talks to him several times a year. “He really values his old friends because at that level you don’t know who your friends are and like to remember simpler times,” he said. Lapses in Grammar While the years outside of Greece allowed Papandreou to master multiple languages, including English and Swedish, he has been ridiculed in parliament and in newspapers for lapses in Greek grammar. On May 6, when he was again derided for clumsy speech during a debate over the European rescue package for Greece, Papandreou fired back: “I am a Greek of the diaspora not because I chose it but because my father found himself exiled twice.” It was a rare moment of anger for a man whose family and friends describe him as calm and cool. “He is always soft-spoken, pensive, has a gift for listening to others,” said Richard Parker, an economist at Harvard’s Kennedy School of Government who talks with Papandreou several times a week as an informal adviser. Papandreou’s affinity for the 1960s grates on some observers. “He seems to believe that no man is evil, every man is good, provided you help him to see the good,” said Stephanos Kassimatis, a political columnist at the Greek daily Kathimerini. “‘Love will find a way.’ Spare us, please.” Papandreou’s winning campaign last year seemed to take its cue from the U.S. “Roll up our sleeves” was a motif of his campaign, while one of his slogans was “Together, we can,” a nod to Barack Obama’s “Yes we can.” Obama Comparison “I can see why people compare the two, the quiet determination and substance they have is very comparable,” said Kemal Dervis, a former minister for economic affairs for Turkey when Papandreou was Greece’s foreign minister. First elected to Greece’s parliament in 1981, at age 29, George only agreed to run when his brother convinced him that there was a real chance to change the country, he said in a 2001 interview. Papandreou served in the education and culture posts under his father and as junior foreign minister. In 1999, he was promoted to foreign minister after his predecessor was forced to resign over a botched attempt to harbor Abdullah Ocalan, the Kurdish rebel leader that Turkey blamed for the deaths of more than 30,000 people. Turning Point Papandreou used compassion to forge a turning point in relations between his country and Turkey. He built close personal ties with his Turkish counterpart, Ismail Cem, and when an earthquake struck Turkey in 1999, Papandreou was quick to send rescue teams and public condolences. When an earthquake struck Greece just three weeks later, Turkey reciprocated. The question today is whether all of the aspects of the man put him in a position to make good on his commitment in Vienna. Even Papandreou says this crisis will define his country. “It’s a moment where people looked at the edge of the cliff and said, ‘you know, something’s wrong here,” Papandreou said.

343 At the end of Papandreou’s speech in Vienna, Dimitris Paraskevas, an Athens-based lawyer attending the three-day conference said the vast majority of people in the audience didn’t believe Greece would pay its debt. Before responding, Papandreou scanned the frescoed ceiling, looking, he said, for baby Hercules wrestling snakes. “We will honor our contracts with the financial community and, yes, we will pay our debt,” Papandreou said. To contact the reporters on this story: Alan Katz in Paris at [email protected]; Maria Petrakis in Athens at [email protected]; Ashley Lutz in New York at http://www.bloomberg.com/news/2010-06-25/papandreou-defiance-of-default-inspired- by-gun-to-throat-seizure-in-greece.html Imprimir

EDITORIAL Continuismo en Toronto El G-20 no logra armonizar los estímulos públicos de Obama con los ajustes que impone Merkel 28/06/2010 La cumbre del G-20 en Toronto ha optado por no ahondar en la división estratégica que existe entre la visión europea sobre la crisis (estabilidad y reducción drástica de los déficits públicos) y la concepción económica de la Administración de Obama, partidaria de mantener los programas de inversión e inquieta ante la retirada precipitada de los estímulos públicos. En Toronto se ha concedido libertad a los países para implantar la tasa bancaria (impuesta ya por Estados Unidos y que en Europa quieren aprobar Alemania, Reino Unido y Francia) y se ha recurrido a un subterfugio para encubrir las abismales diferencias de criterio entre Europa y EE UU: la consolidación fiscal se ajustará a las circunstancias de los países. El forcejeo para conseguir un acuerdo entre los países miembros que comprometiera a los más desarrollados a reducir el déficit público a la mitad el año 2013 revela las diferencias de fondo entre Europa y EE UU. La legitimidad del G-20 es indiscutible y en estos momentos supera la del G-8. Es muy importante que los países emergentes estén implicados en las decisiones sobre la crisis financiera y tomen conciencia de su papel creciente como motores de la economía mundial. Pero hay que recordar que está vinculada a dos objetivos principales: la recuperación del crecimiento y del empleo y la prevención de crisis financieras como la actual. Hacer todo esto de forma coordinada entre los actores económicos más importantes del mundo, despejando cualquier amenaza de proteccionismo, era la condición mínima que se puso sobre la mesa en la primera reunión de esa instancia. Pero en Toronto los resultados no han sido muy alentadores. No ha aparecido por ningún lado la coordinación urgente de las políticas económicas de los 20 (ni siquiera la de los ocho países más desarrollados del G-8). Y, sin embargo, este es el problema más acuciante que plantea la crisis. Las políticas de ajuste del gasto son necesarias, pero deben modularse de forma que no todos los países contraigan sus inversiones y presupuestos al mismo tiempo. Porque de sea forma se niega la posibilidad de que algunas economías actúen como impulsoras de las más afectadas por los costes de la recesión. En no pocas economías europeas, España entre ellas, puede haber recaídas en la

344 recesión, y la creación de empleo se retrasará en demasía. El G-20 tiene que ejercer un papel de coordinador que por el momento no ha aceptado. El G-20 tampoco ofrece una respuesta a la presión de los mercados. EE UU ha proclamado una reforma financiera, menos radical que la que Barack Obama quería, pero bastante más intensa que la que están siquiera dispuestos a considerar en Europa. Y, sin embargo, la reforma de los mercados, para controlar las desviaciones especulativas que pueden acabar en catástrofes como el crash financiero actual, es una contrapartida indispensable a los programas de ajuste que las tensiones en los diferenciales de deuda imponen a países como España, Portugal e Irlanda. http://www.elpais.com/articulo/opinion/Continuismo/Toronto/elpepuopi/20100628elpepiopi_ 1/Tes

ANÁLISIS: EL ACENTO Puja por las islas griegas 28/06/2010 El Gobierno griego está recurriendo a un singular procedimiento para aliviar sus gravísimos problemas económicos: la venta de una parte de su patrimonio insular. De las 6.000 formaciones de tierra emergida, algunas pura roca a flor de agua que pueblan el mar de la Hélade, apenas algo más de 270 están habitadas, y la idea de que algunas sean de propiedad privada, aunque a reserva siempre de los derechos últimos de soberanía de Atenas, no es nueva. El naviero multimillonario Aristóteles Onassis, poseía un islote en el que en una ocasión un paparazzo -antes de que el apelativo estuviera plenamente acreditado- fotografió desnuda mientras tomaba el sol a Jacqueline Bouvier, viuda de Kennedy, y segunda esposa del magnate. El hecho pareció a comienzos de los años setenta lo bastante singular como para que el Times de Londres -entonces todavía diario de gran recato- diera la noticia, aunque sin ilustración, en primera página. Algunas islas de altísimo reclamo turístico como Santorini podrían ser parcialmente privatizadas, como quien pone en venta las reservas de oro del Estado para equilibrar el presupuesto. Y la medida tampoco carece de pedigrí histórico. Rusia vendió a Estados Unidos una Alaska que tampoco tenía medios para retener, por algo más de siete millones de dólares en 1867, y España obtuvo una compensación de 20 millones de dólares, siempre de la entonces gran potencia emergente, por haber perdido rápida aunque cruentamente Cuba, Puerto Rico y Filipinas en 1898. La plataforma continental que se prolonga por casi todo el subsuelo del Egeo es lo que da a Grecia soberanía sobre la casi totalidad de esas islas, lo que es viva, aunque inútilmente, discutido por Turquía, cuya autoridad solo se extiende a unos cuantos islotes prácticamente soldados a la costa. La propia isla de Rodas, feudo histórico de los caballeros templarios, desde la que en un día claro puede verse Turquía, es griega hasta las cachas. De momento, el Gobierno griego solo agiliza los trámites para pignorar islas; pero si la crisis aprieta, ahí está el mar de la civilización occidental para acudir al rescate financiero. http://www.elpais.com/articulo/opinion/Puja/islas/griegas/elpepuopi/20100628elpepiopi_ 3/Tes

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Sobre los salarios JOSEP REIG, (doctor en Medicina y profesor de Universidad.) - Barcelona - 28/06/2010 Que alguien me explique cómo es posible que en Francia, con un producto interior bruto (PIB) apenas un 4% más alto que el español (un 3,88%: España tiene un PIB que supone el 103% de la media europea y Francia, un 107% de dicha media para 2009; EL PAÍS, 22 de junio), el salario mínimo francés para ese año sea superior al español en un 80%, y que el salario medio francés (los datos más recientes que encontré son de 2006) sea un 45% superior al español. Los niveles más altos de productividad del trabajo y de precios franceses no pueden explicar tamaña diferencia. Para que luego digan algunos, entre ellos el premio Nobel de Economía Paul Krugman, que en España los salarios son demasiado altos en relación con la productividad. Desde luego, con respecto a Francia no, sino todo lo contrario.- José Antonio Pozo Maqueda. Madrid. He leído con estupor los extractos, publicados por diversos medios de comunicación, de la disertación del señor Miguel Boyer en un acto organizado por Nueva Economía Fórum. Para Boyer, "si se siguen bajando los salarios o manteniendo los que hay ahora en la alta Administración, pronto solo llegarán los analfabetos a la dirección del Gobierno". Así que yo soy un analfabeto, ya que mi sueldo no llega al de un ministro del Gobierno, aunque soy doctor en Medicina, he aprobado el examen MIR y he obtenido diversas plazas de profesor universitario. Pero reitero que, según Boyer, soy un analfabeto, ya que me conformo con un sueldo ridículo que no sería digno de un alto ejecutivo bancario, es decir, de algunos de aquellos a los que debemos agradecer, en buena medida, la situación económica en la que nos encontramos. Quizás no se ha parado a pensar cuáles pueden ser las ventajas de mantener esos sueldos "bajos", según su parecer. Yo, sin embargo -un pobre analfabeto-, sí que veo una gran ventaja en ello, como sería el mantener apartados de los cargos públicos a dos de las especies depredadoras más dañinas para la cosa pública: por un lado, los sujetos henchidos de un ego patológico que les hace creerse superiores a los demás y, por otro, los trepas que utilizan cualquier medio para medrar. No es raro que ambas circunstancias coincidan en un mismo individuo. http://www.elpais.com/articulo/opinion/salarios/elpepuopi/20100628elpepiopi_7/Tes

Corbacho vincula el despido objetivo sólo a empresas en peligro El titular de Trabajo plantea que los resultados negativos de una compañía no son motivo suficiente EL PAÍS 28/06/2010 El ministro de Trabajo, Celestino Corbacho, apuesta por que el despido por causas económicas se justifique solo si la viabilidad de la empresa peligra. Y no si la entidad se

346 encuentra en una situación económica negativa, como recoge el actual proyecto de Ley de reforma laboral. Así se ha expresado Corbacho esta mañana en una entrevista con Rne; el ministro, según se desprende de sus palabras, quiere estrechar la disposición ambigua del texto del Gobierno sobre las causas económicas del despido. Hasta el final del debate, el 14 de julio, se espera que los grupos políticos lleven sus propuestas al Parlamento. El proyecto de Ley del Gobierno no concreta tanto como Corbacho. Pero Corbacho ve a su vez "imposible" detallar todos los motivos para despedir: "¿Cuántas causas podemos establecer para determinar que están todas?". "Si el juez comprueba razonablemente que se dan esas causas [posible desaparición de la empresa] estaríamos razonablemente ante un despido objetivo", ha continuado el titular de Trabajo. Respecto a prestaciones como los 420 euros para parados y otros subsidios, Corbacho ha indicado que "la voluntad del Gobierno es no tocarlos". No obstante, el ministro ha hablado de probables (nuevos) recortes en los Presupuestos Generales del Estado para 2011. http://www.elpais.com/articulo/economia/Corbacho/vincula/despido/objetivo/solo/empr esas/peligro/elpepueco/20100628elpepueco_3/Tes

El nuevo orden financiero mundial España opta por reforzar el fondo de garantía en lugar de la tasa bancaria El Gobierno ampliará el mecanismo español a más productos que los depósitos Zapatero niega que haya un dilema entre crecimiento y reducción de déficit La reforma supondrá un mayor desembolso para el sector español MIGUEL GONZÁLEZ (ENVIADO ESPECIAL) - Toronto - 28/06/2010 España no está dispuesta a renunciar al Fondo de Garantía de Depósitos porque ha demostrado ser un "instrumento útil" para hacer frente a las crisis de entidades financieras (la última, la de Caja Castilla La Mancha), pero lo adaptará al acuerdo que se alcance en el seno de la UE y lo ampliará para que afecte también a pasivos distintos de los depósitos, tales como las emisiones de bonos o los productos del mercado interbancario. España no está dispuesta a renunciar al Fondo de Garantía de Depósitos porque ha demostrado ser un "instrumento útil" para hacer frente a las crisis de entidades financieras (la última, la de Caja Castilla La Mancha), pero lo adaptará al acuerdo que se alcance en el seno de la UE y lo ampliará para que afecte también a pasivos distintos de los depósitos, tales como las emisiones de bonos o los productos del mercado interbancario. Así lo explicó la vicepresidenta segunda del Gobierno, Elena Salgado, en un receso de la cumbre del G-20, reunido en Toronto. El presidente José Luis Rodríguez Zapatero ratificó anoche que el Fondo "puede ser revisado, complementado y ampliado" y "puede cumplir una función equivalente a la llamada tasa bancaria". No obstante, se mostró partidario de esperar a que los Veintisiete perfilen su iniciativa para que haya homogeneidad entre los países europeos. "Seguro que no lo acogerán con gran entusiasmo", respondió, cuando le preguntaron por las críticas que la propuesta ya ha

347 suscitado entre destacados banqueros, pero "no parece que el modelo sea que los Estados tengan que salir al rescate" de las entidades, añadió. Aunque reconoció que en España no ha sido necesario inyectar ingentes fondos públicos para salvar a la banca, defendió actuar con carácter preventivo. El foro que agrupa a los países más ricos del mundo y a las economías emergentes no se ha puesto de acuerdo para crear la tasa bancaria propuesta por Europa y EE UU. Sin embargo, el Consejo Europeo ya decidió el pasado día 17, con acuerdo o sin él, implantar su propio gravamen sobre la banca. La opción del Gobierno es reformar y ampliar los mecanismos de carácter preventivo con los que cuenta España -el Fondo de Garantía y las provisiones anticíclicas-, para que afecten también a otros productos, como los préstamos que los bancos se hacen entre sí, lo que ampliará notablemente la base de cálculo y supondrá un mayor desembolso para las entidades. En la actualidad, bancos y cajas están obligados a aportar el uno por mil de los depósitos de los clientes, lo que garantiza la recuperación de 100.000 euros a cada depositante residente en España. Zapatero nadó ayer entre dos aguas frente a los países que apuestan por una rápida reducción del déficit público (básicamente los europeos, encabezados por Alemania) y los que advierten de que una brusca retirada de los estímulos fiscales puede abortar la todavía incipiente recuperación (EE UU y los emergentes). "No hay dilema. Todos los países tienen la responsabilidad de reducir el déficit y propiciar el crecimiento económico", proclamó Zapatero. El presidente agregó que en los países que, como España, tienen un abultado déficit, "hay que fomentar el crecimiento sin gasto público, y ello solo es posible con reformas estructurales". Salgado indicó que la consolidación fiscal es una condición indispensable para recuperar la confianza de los mercados, y que sin ella no es posible el crecimiento. La vicepresidenta subrayó que el ajuste se hará mayoritariamente a través del gasto (recorte de presupuestos), y no del ingreso (aumento de impuestos), lo que, en su opinión, afectará menos al crecimiento. Los deberes que ha puesto el G-20 a sus miembros (reducción del déficit a la mitad en 2013 y estabilización de la deuda en 2016) son mucho más laxos que los fijados por la UE (reducción del déficit a la cuarta parte y estabilización de la deuda en 2013), por lo que "España los cumplirá con creces", dijo. "No vamos a vacilar" en reducir el déficit, añadió Zapatero, quien reconoció que este objetivo requiere "un gran esfuerzo nacional". El presidente también pidió a sus socios del G-20 que no renuncien a aumentar la transparencia del sistema financiero, cuya opacidad y falta de regulación está en el origen de la crisis. El sábado por la noche, Zapatero departió brevemente con el presidente de EE UU, Barack Obama, quien le felicitó por las medidas de ajuste que ha adoptado y especialmente por la iniciativa de hacer públicos los resultados de las pruebas de resistencia (stress test) de la banca europea, según dijo Zapatero. "Tenemos la responsabilidad de imponer deberes a los mercados", añadió tras pedir que se encargue al Fondo Monetario Internacional (FMI) un informe sobre mecanismos para contener la especulación, que debería discutirse en la cumbre de noviembre en Seúl (Corea del Sur). El nuevo sistema de regulación financiera (Basilea III), con el reforzamiento de los mecanismos de supervisión y los requisitos de capital, será uno de los temas centrales de la próxima cumbre del G-20. Salgado ya ha advertido de que, aunque las nuevas normas entren en vigor el año próximo, será necesario un "periodo transitorio, lo más corto posible", para que su aplicación "gradual" no obstaculice el crecimiento. El FMI presentará también en noviembre un informe sobre los países del G-20 con "recomendaciones detalladas" sobre cómo conjugar la consolidación fiscal y la reducción del déficit con el crecimiento.

348 Zapatero, que se sentó junto a la canciller alemana Angela Merkel en el plenario del G-20, aprovechó la ocasión para defender la solvencia española y exponer las medidas de ajuste y reformas estructurales ya adoptadas o en curso: el recorte presupuestario, la reestructuración de las cajas de ahorro, la reforma laboral y la del sistema de pensiones. http://www.elpais.com/articulo/economia/Espana/opta/reforzar/fondo/garantia/lugar/ta sa/bancaria/elpepueco/20100628elpepieco_5/Tes

El nuevo orden financiero mundial Bruselas quiere que la deuda privada cuente en las sanciones por déficit EFE - Bruselas - 28/06/2010 La Comisión Europea propondrá este miércoles que el nivel de endeudamiento privado se tenga en cuenta en el procedimiento sancionador que el Ejecutivo comunitario abre contra los países que han incurrido en un déficit excesivo, según han informado fuentes europeas. Bruselas incluirá esta idea en la propuesta que presentará esta semana para endurecer la vigilancia presupuestaria en la UE, reclamada con insistencia por países como Alemania para evitar otra crisis de deuda como la griega. La legislación europea fija en el 60% del producto interior bruto (PIB) el nivel máximo de deuda pública en el que pueden incurrir los Gobiernos, pero este factor no es vinculante a la hora de abrir un procedimiento o sancionar a un país. Bruselas desea aprovechar la concienciación que ha originado la crisis del euro para incluirlo como un elemento decisivo, junto al nivel máximo de déficit, establecido en el 3% del PIB. Perjudicial para España La deuda privada no sería un componente vinculante a la hora de sancionar, pero sí sería tenida en cuenta, según fuentes comunitarias. Esto afectaría negativamente a países como España, con una deuda privada (hogares y empresas) 61 puntos porcentuales superior a la media europea. Los líderes europeos ya respaldaron la posibilidad de dar "un papel mucho más destacado a los niveles de deuda" en el proceso de vigilancia presupuestaria. Sin embargo, el grupo de trabajo que lidera el presidente del Consejo Europeo, Herman van Rompuy, excluye hasta ahora poner en marcha un procedimiento para la "deuda excesiva" y prefiere la opción de "iniciar el procedimiento de déficit excesivo más pronto para los países que no reduzcan la deuda con suficiente rapidez". Por otro lado, el comisario de Asuntos Económicos y Monetarios, Olli Rehn, también abordará el miércoles el endurecimiento de las sanciones. La Comisión descarta castigos políticos, como la retirada del derecho de voto a los países que violen la disciplina presupuestaria de forma recurrente, posibilidad que defiende Alemania, pero que requeriría una reforma del Tratado de Lisboa. Bruselas, que descarta esta reforma, prefiere castigos basados en la suspensión de ciertas ayudas a los reincidentes. http://www.elpais.com/articulo/economia/Bruselas/quiere/deuda/privada/cuente/sanciones/def icit/elpepueco/20100628elpepieco_4/Tes

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Pekín, Londres y Berlín ganan la partida a Washington REUTERS - Toronto - 28/06/2010 La cumbre del G-20 ha servido para mostrar cómo el grupo de las mayores y más emergentes economías tiene prioridades diferentes y, en este pulso, unos países salieron mejor parados. Alemania, Reino Unido y China serían en cierto modo los países victoriosos. Y es que el discurso de austeridad del Gobierno alemán prevaleció y logró inclinar ligeramente la balanza en el comunicado final del G-20 hacia el lado de ajuste fiscal. Europa no logró el consenso global para impulsar una tasa bancaria, pero sí logró el respaldo para algún tipo de contribución del sector financiero para pagar el coste de las intervenciones públicas en este sector. Aunque no fue posible el acuerdo para el impuesto, debido al rechazo de los países emergentes, el presidente francés, Nicolas Sarkozy, sacó brillo al hecho de que los países hayan reconocido la legitimidad sobre estos países que Francia y otros países europeos quieren imponer. "La posibilidad de gravar a los bancos ha sido reconocida como legítima", destacó ante los periodistas. El primer ministro británico, David Cameron, también puede reclamar una suerte de victoria en su primera cumbre del G-20, como el reconocimiento implícito a su batería de medidas de ajuste presupuestario. Además, Cameron logró relajar tensiones y cultivar una relación fluida con Obama -viajó incluso en el helicóptero presidencial- y evitar una ruptura pública con relación al desastre de la petrolera británica BP en el Golfo de México. Obama cede terreno Las cosas también han ido bien para China. Pekín se salió con la suya y logró excluir del comunicado un elogio por mejorar la flexibilidad cambiaria del yuan. China quiso evitar el precedente de que su moneda salga señalada en una declaración formal del G-20, aunque sea de forma positiva. EE UU, en cambio, sería uno de los perdedores. Barack Obama podía esperar que la cumbre resultase triunfal para él, después de haber logrado sacar adelante la reforma financiera, pero se vio obligado a ceder a las exigencias europeas de austeridad presupuestaria. Por su parte, el presidente brasileño, Luiz Inácio Lula da Silva, canceló su participación en la cita para lidiar con las consecuencias de las graves inundaciones de su país, lo que redujo la visibilidad de esta economía. http://www.elpais.com/articulo/economia/Pekin/Londres/Berlin/ganan/partida/Washington/el pepueco/20100628elpepieco_11/Tes

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El G-20 busca el equilibrio económico para la recuperación domingo 27 de junio de 2010 18:07 CEST

TORONTO (Reuters) - Los líderes de las 20 mayores economías daban el domingo los últimos retoques a sus planes para cementar una economía global más estable, aunque abandonaron las promesas de soluciones únicas después de que dos años de crisis dieran paso a una recuperación desigual. Equilibrio fue la palabra más utilizada. El Grupo de las 20 economías ricas y emergentes (G- 20) quiere reducir a la mitad los déficits presupuestarios para 2013 sin paralizar el crecimiento y tomar medidas drásticas ante el comportamiento arriesgado de la banca sin ahogar los préstamos. También deberá mostrar progresos sobre la promesa hecha en septiembre de volver a equilibrar la economía mundial. Esto significa que las naciones que dependen de las exportaciones, como China y Alemania, deben buscar crecimiento en el interior, mientras que los países endeudados como Estados Unidos necesitan cambiar sus formas de préstamos y gastos. Fuertes del G-20 dijeron a Reuters que no habría referencias a la divisa de China en un comunicado final que se entregará el domingo, al final de las reuniones. Una versión anterior del documento, obtenida por Reuters, acogía la reciente medida de Pekín de aflojar su control sobre el yuan. El mandatario de Estados Unidos, Barack Obama, el presidente chino, Hu Jintao, y los líderes del resto del Grupo de los 20 se reunieron por cuarta ocasión desde que la crisis iniciada en Estados Unidos en 2007 sembró el temor a una nueva Gran Depresión. El G-20, que abarca a las potencias económicas emergentes así como las economías desarrolladas donde se iniciaron los problemas, se unió el año pasado para entregar miles de millones de dólares a la batalla contra la recesión. El grupo se ha convertido desde entonces en el foro predominante para coordinar el combate a los desafíos económicos globales. "Con una recuperación que sigue frágil, nos incumbe actuar con la misma unidad de propósito, el mismo sentido de urgencia, y el mismo compromiso con el ejercicio ilustrado de nuestras soberanías nacionales como hicimos en las profundidades de la crisis", dijo el primer ministro canadiense, Stephen Harper, en una declaración en la apertura de la reunión del G-20.

351 FUENTES DE FRICCION Los líderes mundiales tomaron asiento poco después de las 9.00 hora de Toronto (1300 GMT). La canciller alemana, Angela Merkel, se sentó junto al británico David Cameron, que bromeó anteriormente esta semana diciendo que intentaría no "luchar con ella en el suelo", mientras Alemania e Inglaterra jugaran en el Mundial de fútbol en Sudáfrica. Con un lento crecimiento en muchos países desarrollados en este momento, Washington teme que la campaña de Europa por reducir la deuda después de la recesión interrumpa la recuperación, una preocupación que también expresaron otros líderes del G-20, incluido el primer ministro indio, Manmohan Singh. El secretario general de Naciones Unidas, Ban Ki-moon, dijo que entendía la presión a la que se enfrentan las finanzas públicas para regresar a un camino sostenible, pero pidió a los líderes del G-20 que fueran conscientes de quién se llevaba la mayor parte de la carga. "No debemos equilibrar los presupuestos en las espaldas de la gente más pobre del planeta", dijo Ban durante una cena del G-20 el sábado por la noche. Los líderes del G-20 anunciarán un esfuerzo concertado para reducir a la mitad el déficit del sector público dentro de tres años y estabilizar la deuda de los Gobiernos, pero además reconocerán que el proceso ocurrirá a diferentes ritmos, según un borrador del comunicado obtenido por Reuters. http://es.reuters.com/article/topNews/idESMAE65Q05A20100627?sp=true

352 El G-20 descarta generalizar los impuestos al sector financiero Estados Unidos y Europa fracasan en su intento de convencer a los países emergentes ALEJANDRO BOLAÑOS | Enviado especial a Toronto 26/06/2010 Estados Unidos y Europa estaban de acuerdo en establecer nuevos impuestos a los bancos , según el tamaño y riesgo de sus activos. Y estaban dispuestos incluso a debatir una tasa universal a todas las transacciones financieras. El Fondo Monetario Internacional (FMI) apoyaba estas iniciativas. Pero el consenso de EE UU, UE y FMI, siglas asociadas antaño al monopolio del poder político mundial, ya no basta. "No habrá acuerdo en el seno del G-20 sobre la aplicación de un impuesto a la banca, ya ha quedado claro", sentenció el primer ministro italiano, Silvio Berlusoni , pocas horas antes de que una cena oficial diera inicio en Toronto (Canadá), en la madrugada de hoy, a la cuarta cumbre de líderes de países ricos y emergentes. Los mandatarios europeos y estadounidenses hicieron un último intento por vencer la resistencia de las potencias emergentes y de algunos países avanzados, como Canadá y Australia, cuyos bancos no necesitaron de la ayuda pública para reforzar su solvencia. El golpe de mano del presidente de Estados Unidos, Barack Obama , al lograr esta misma semana el visto bueno de la Cámara de Representantes a su reforma financiera, había reabierto el debate. Por la mañana, en su mensaje radiofónico semanal, grabado antes de su llegada la ciudad canadiense, Obama insistía en la necesidad de "poner una tasa a los bancos , que fueron los máximos beneficiarios del rescate con dinero de los contribuyentes en el peor momento de la crisis". Y funcionarios estadounidenses citados por Reuters aseguraron que el presidente de EE UU insistiría en extender esa medida en sus encuentros bilaterales con otros líderes. Pero fue en vano. "Por lo que sé de los trabajos preparatorios de las negociaciones, debemos esperar una decisión negativa", comentó la canciller alemana, Angela Merkel , una de las más firmes partidarias de generalizar los impuestos al sector financiero. "Lamentablemente no hemos logrado el consenso en el G-20, ya sea para el impuesto a la banca o para las transacciones financieras", expuso a la finalización de la cumbre del G-8 (el grupo formado por Alemania, Rusia, Japón, EE UU, Italia, Francia, Reino Unido y Canadá), que antecede a la reunión del foro de países ricos y emergentes. Con esta decisión, el comunicado final del G-20 se limitará a dejar que cada país adopte la decisión que más le convenga. Los impuestos ya están a punto de ser realidad en varios países avanzados, aunque con enfoques distintos. EE UU tramita aplicar una tasa del 0,15% sobre los activos de los 50 mayores bancos para recaudar 67.500 millones de euros en 10 años, y compensar así el dinero público que se comprometió en el rescate de varias entidades. Reino Unido y Francia revelaron esta misma semana que aplicarán impuestos similares a los bancos, aunque con tipos y recaudación más bajos (2.500 y 1.000 millones al año, respectivamente). En ambos casos, los ingresos irán directamente a los presupuestos. La fórmula alemana (25.000 millones en 25 años) es distinta: el impuesto dotará un fondo que se utilizaría para financiar la reestructuración de la banca en próximas crisis. EE UU también hará que los bancos financien un fondo de resolución similar. Y es esta fórmula preventiva la que EE UU y Europa pugnaban por extender a los países del G-20 que no necesitaron reforzar la solvencia de sus bancos con dinero público.

353 La insistencia de EE UU y Europa, que quieren evitar así una distorsión en la competencia entre bancos, logró cambiar de opinión a Japón, pero poco más. A su llegada a Toronto, el nuevo primer ministro, Naoto Kan, se mostró abierto a debatir la iniciativa. Pero otros dejaron claro que no estaban dispuestos a seguir por ese camino. "Probablemente no habrá acuerdo sobre un impuesto común a la banca", anticipó en un encuentro con la prensa Len Edwards, alto funcionario de la delegación canadiense. El Gobierno mexicano envió un comunicado en el que defendía que la mejor opción para minimizar el riesgo de futuras crisis son los cambios regulatorios, no los fondos financiados con impuestos a la banca. Y en declaraciones a la agencia Bloomberg, un asesor del presidente ruso, Dmitri Medvédev, también rechazó la medida. El argumento que repitieron las delegaciones de países emergentes, como India o Brasil, es que la banca debe pagar solo allí donde actuó de forma irresponsable, es decir, en algunos países avanzados. Si los Gobiernos de EE UU y Europa echaron el resto para lograr un acuerdo sobre los impuestos a la banca, las ONG presionaron para que se tome en consideración una tasa universal a las transacciones financieras, una idea que la UE se había comprometido a llevar a la asamblea de los líderes del G-20. "Con un tipo muy pequeño se podría desincentivar operaciones especulativas con derivados y se generarían recursos no sólo para los presupuestos, también para fondos mundiales contra el cambio climático o contra la pobreza", argumentó Susana Ruiz, experta de Intermón Oxfam. Según cálculos de los socialistas europeos, con un tipo del 0,05% sobre las transacciones financieras podrían recaudarse unos 500.000 millones de euros al año. Pero si no hubo pacto para generalizar impuestos a la banca, mucho menos aún para desarrollar una tasa universal que exigiría la creación de instituciones globales para hacerse cargo de la recaudación y de fijar las necesidades que se financiarían con esos fondos. La esperanza de las ONG de lograr una vía estable de recursos para dotar la ayuda de los países más pobres se esfumó. ¿Quién es la joven que vuela con Berlusconi al G8? Ha bajado del Airbus presidencial italiano en Toronto justo detrás del sonriente primer ministro, Silvio Berlusconi. Vestida de blanco, rubia, joven, ha disparado el interés de los periodistas. ¿Quién es esa señorita que llega al G8 con la reducidísima delegación italiana? El equipo del presidente no responde, pero las webs italianas aseguran que se trata de Federica Gagliardi, ex colaboradora de la gobernadora del Lazio, Renata Polverini, ex modelo y conocida por un apodo ligado a su aspecto: Barbie. MIGUEL MORA http://www.elpais.com/articulo/economia/G- 20/descarta/generalizar/impuestos/sector/financiero/elpepueco/20100626elpepueco_3/Tes

El nuevo orden financiero mundial Zapatero defiende el modelo español para las nuevas obligaciones de la banca MIGUEL GONZÁLEZ (ENVIADO ESPECIAL) - Toronto - 27/06/2010 El presidente José Luis Rodríguez Zapatero llegó anoche a Toronto (Canadá) con el propósito de defender ante los líderes de los países que representan el 85% del PIB mundial la solvencia de la economía española, las medidas de ajuste y las reformas estructurales aprobadas por el

354 Gobierno, así como la imposición de una tasa bancaria semejante a la que ya se aplica en España. El presidente José Luis Rodríguez Zapatero llegó anoche a Toronto (Canadá) con el propósito de defender ante los líderes de los países que representan el 85% del PIB mundial la solvencia de la economía española, las medidas de ajuste y las reformas estructurales aprobadas por el Gobierno, así como la imposición de una tasa bancaria semejante a la que ya se aplica en España. Es la cuarta vez desde noviembre de 2008 que Zapatero participa en una reunión de este foro, que agrupa a los países más ricos y a las economías emergentes, del que se ha convertido en invitado fijo, a pesar de que oficialmente no forma parte de él. Aunque hasta el miércoles sigue ostentando la presidencia de turno de la UE, Zapatero no representará a los Veintisiete, un papel que corresponde al presidente permanente del Consejo Europeo, Herman van Rompuy, y al de la Comisión, José Manuel Durão Barroso, pero defenderá los acuerdos alcanzados el pasado día 17 en Bruselas por los mandatarios de la Unión. Entre ellos figura de manera destacada la imposición de un gravamen a las entidades bancarias y otro sobre las transacciones financieras, para evitar que el peso de futuras crisis recaiga de nuevo sobre las espaldas de los contribuyentes. Zapatero es un firme defensor de esta tasa -que promueve el presidente estadounidense, Barack Obama, y a la que se oponen Canadá y Australia, además de los países emergentes-, pero sostiene que en España no será necesario implantarla, pues ya cuenta con el Fondo de Garantía de Depósitos (al que bancos y cajas deben aportar hasta el uno por mil de su pasivo) y las provisiones anticíclicas, que se ponen como modelo para otros países. Aun así, fuentes gubernamentales admiten que la normativa española tendrá que adaptarse a lo que la UE acuerde en otoño, aunque la tasa tendrá carácter nacional. Zapatero también defenderá la publicación de las pruebas de resistencia (stress test) de la banca -acordada hace 10 días por la UE a iniciativa suya, como un ejercicio de transparencia destinado a combatir las especulaciones- y el actual proceso de reestructuración de las cajas de ahorros; dos medidas dirigidas a despejar incertidumbres y desatascar la circulación del crédito con las que pretende despejar las incertidumbres que estrangulan la concesión de préstamos. Menos entusiasta es el Gobierno con el nuevo impuesto sobre las transacciones financieras, que a su juicio solo debería aplicarse si se diera un más que improbable consenso en el G-20 y con la cautela de no distorsionar el mercado ni obstaculizar la aún frágil recuperación económica. Ideológicamente, Zapatero está cerca de las posiciones de Obama, quien rechaza una retirada precipitada de los estímulos fiscales ante el riesgo de recaer en la recesión. En la práctica, se ha visto forzado a un drástico plan de ajuste (del 11,2% al 6% del PIB en solo dos años) para atajar un déficit que se volvía insostenible ante el alarmante aumento del diferencial de interés de la deuda española con la alemana. España parte de la base de que es a otros países (a las economías emergentes, China o la propia Alemania) a los que debe mirar Obama para que aumenten su consumo y tiren del comercio mundial, que ha languidecido por la crisis y la adopción de medidas proteccionistas. El propio presidente de EE UU felicitó el lunes a Zapatero por la adopción de medidas "dolorosas" y reformas estructurales, como el recorte del sueldo de los empleados públicos, la reforma del mercado de trabajo o, en los próximos meses, el sistema de pensiones.El secretario del Tesoro, Timothy Geithner, dijo ayer en Toronto que "es muy importante que [países como España y Grecia] se muevan con mucha rapidez para demostrar a los mercados que tienen voluntad de actuar". Zapatero tenía previsto reunirse en Toronto con el presidente de Brasil, Luiz Inácio Lula da Silva, a quien dio plantón en la reunión del Foro de la Alianza de Civilizaciones en Río de

355 Janeiro en mayo pasado, pero este se quedó finalmente en su país, debido a las recientes inundaciones. Fuentes de La Moncloa indicaron que no se descartaba algún otro encuentro bilateral, necesariamente breve, pues apenas pasará 24 horas en Canadá. El presidente no ha sido invitado a la cumbre del G-8, el club de los más opulentos del mundo, en el que Aznar pugnó por entrar y que se ha vuelto cada vez más irrelevante, tras pasar al G-20 la agenda de la gobernanza económica global. http://www.elpais.com/articulo/economia/Zapatero/defiende/modelo/espanol/nuevas/obli gaciones/banca/elpepueco/20100627elpepieco_2/Tes

El nuevo orden financiero mundial Las soluciones nacionales se abren paso ante la crisis El consenso entre países ricos y emergentes pasa a segundo plano A. B. - Toronto - 27/06/2010 ¿Quién da más? Los días previos a la cumbre de líderes de países ricos y emergentes han tenido el tono de una puja. Si China anunciaba la apreciación de su moneda, Estados Unidos aceleraba la aprobación de su reforma financiera. Si India recortaba los subsidios a los combustibles, Reino Unido y Francia desvelaban nuevos planes de ajuste contra el déficit. ¿Quién da más? Los días previos a la cumbre de líderes de países ricos y emergentes han tenido el tono de una puja. Si China anunciaba la apreciación de su moneda, Estados Unidos aceleraba la aprobación de su reforma financiera. Si India recortaba los subsidios a los combustibles, Reino Unido y Francia desvelaban nuevos planes de ajuste contra el déficit. Si España forzaba a la UE a hacer público en qué estado está la banca del Viejo Continente, Japón se obligaba a congelar la emisión de deuda. Todos son objetivos que pueden relacionarse con directrices marcadas por el G-20. Pero ahora los Gobiernos blanden estas medidas para evitar que se les obligue a tomar más. Salvo que los líderes del G-20 logren dar hoy la vuelta a la situación, el comunicado final de la cumbre de Toronto remitirá en muchos casos a una solución país por país, antes que a un pacto internacional para adoptar las mismas medidas. Cuando no recogerá principios directamente excluyentes. "La cumbre debe centrarse principalmente en el crecimiento", reiteró ayer el secretario del Tesoro de EE UU, Timothy Geithner. "Nuestro primer compromiso es con la estabilidad presupuestaria", opuso el presidente francés, Nicolas Sarkozy, que aprovechó para anunciar que Niza será la sede de la cumbre prevista en Francia en 2011. Ante las diferencias entre las tesis estadounidense y europea sobre cómo de rápido eliminar los estímulos públicos al crecimiento para atajar el déficit, Canadá ensaya una propuesta intermedia. En las conclusiones preliminares redactadas por la delegación canadiense se fija como objetivo reducir el déficit a la mitad de aquí a 2013, un ritmo de recorte más bajo que el que han asumido los europeos, pero más intenso del que prevé EE UU. La opción de que se adopten soluciones nacionales ante la imposibilidad del consenso va más allá del ritmo al que cada país reducirá el déficit. Es también la solución que se propone en el borrador del comunicado para la imposición de impuestos a la banca (en estilo directo, que cada país haga lo que quiera). O la que ya anunciaron los ministros del G-20 hace unas semanas para que cada Gobierno gradúe la exigencia de los nuevos requisitos de capital y liquidez a la banca, aún pendientes de aprobación. Las dificultades para acordar requisitos

356 similares al sector financiero abren el camino a fijar principios generales y a dejar en manos del regulador de cada país su aplicación. La disparidad de opciones amenaza con debilitar el consenso. A pequeña escala, ocurrió algo parecido con las manifestaciones de grupos de activistas, que se concentraron en las calles de Toronto. Su objetivo era protestar contra la cumbre de países ricos y emergentes, pero la miríada de motivos exhibidos en sus pancartas ponía difícil captar un mensaje común. En las protestas hubo heridos y algunos arrestos. http://www.elpais.com/articulo/economia/soluciones/nacionales/abren/paso/crisis/elpepu eco/20100627elpepieco_3/Tes

TRIBUNA: SANTIAGO CARBÓ Y JOAQUÍN MAUDOS Pruebas de estrés... y de credibilidad SANTIAGO CARBÓ Y JOAQUÍN MAUDOS 27/06/2010 El sector bancario europeo se encuentra en una situación de incertidumbre en la que podría resultar demasiado peligroso dejar en manos del azar su destino y tal vez sería más conveniente asumir los sacrificios que impone la necesidad. Con los mercados interbancarios y de bonos cerrados, y con algo más que dudas sobre la viabilidad de muchas entidades, parece necesario pasar a la acción. Además, España se convierte en una de las principales referencias en este contexto, entre otras cosas porque nuestras entidades concentran montantes muy elevados de deuda y tienen que hacer frente a corto plazo a vencimientos significativos. Asimismo, la incertidumbre se deriva de la inquietud que despiertan más allá de nuestras fronteras los resultados del proceso de reestructuración y las necesidades adicionales de recapitalización y saneamiento que pueda tener parte de nuestro sistema bancario una vez se pase página al FROB. Si bien la cifra no es definitiva, la cantidad que hasta el momento ha aprobado el FROB -10.000 millones de euros, a los que hay que añadir los 3.775 millones de saneamiento de CCM a través del Fondo de Garantía de Depósitos- está lejos de las que se manejan en los estudios más recientes, que estiman la "necesidad de saneamiento" de nuestro sector bancario. La presión que están ejerciendo los mercados sobre la economía española y sobre nuestro sector bancario explica la propuesta de José Luis Rodríguez Zapatero, aceptada por el Consejo Europeo, de publicar el próximo mes de julio los resultados de las pruebas de estrés. En particular, la propuesta es publicar los resultados de estas pruebas de resistencia de las principales entidades europeas, sin que de momento se haya confirmado si se publicarán los de todos y cada uno de los bancos europeos o solo los de los más grandes. Si bien es lógico que los bancos que salgan mal parados tengan temor a ser castigados en el mercado, siempre es mejor ser transparente si las pérdidas estimadas se acompañan de soluciones adecuadas. En el caso español, las mayores dudas residen en el posible desajuste entre el valor que realmente tienen los activos a precios de mercado (en particular, los de naturaleza inmobiliaria) y el que figura en los balances. Y es que puede que el sector bancario español tenga que acudir a los mercados de bonos y descontar sus títulos asumiendo una importante quita (haircut) sobre su valor contable, puesto que muchos de ellos son de naturaleza inmobiliaria y el mercado internacional no estima sino que exige un descuento del precio más acorde con la pérdida de valor de estos activos. En estos momentos hay una elevada incertidumbre en la magnitud de la pérdida esperada y la necesidad de recursos propios para hacer frente al deterioro de los activos bancarios. En marzo de este año, por ejemplo, el Banco de España cuantificó la exposición problemática en la actividad relacionada con la construcción y la promoción inmobiliaria en 165.500 millones

357 de euros, lo que implica una tasa de morosidad real del 37,2%. Si bien esa cifra es elevada, el regulador nos tranquiliza diciendo que la cobertura con provisiones es del 35% y que llega al 71% incluyendo el margen de explotación de 2010 (que supone, y es mucho suponer, que se mantiene en el nivel de 2009). En abril, el FMI estimó las pérdidas esperadas y las necesidades de capital en dos escenarios alternativos utilizando tanto datos agregados como datos entidad por entidad. Con datos individuales y en el escenario pesimista, las necesidades de capital ascendían a 22.000 millones de euros. En mayo, JP Morgan estimó entre 22.000 y 111.000 millones de euros - sorprende la dispersión entre estas dos cifras- las pérdidas en la exposición del riesgo en la construcción y promoción inmobiliaria del sector bancario español. En este mes de junio, tres informes han estimado las pérdidas esperadas y, en algunos casos, las necesidades de capital. Citigroup, en un informe específico para las cajas de ahorros, estima entre 24.000 y 34.000 millones de euros el capital necesario para alcanzar una Tier 1 del 8%. El servicio de estudios del BBVA estima en un 5% del PIB (unos 50.000 millones de euros) las necesidades de capital del sector bancario español para alcanzar una Tier 1 del 7% en un horizonte de proyección hasta finales de 2013. Y esta misma semana Standard & Poor's ha revisado al alza, de un 5,2% a un 6,1%, el porcentaje de préstamos con pérdidas al sector privado no financiero, con una pérdida estimada de 99.300 millones de euros. El mero hecho de que recientemente hayan aparecido tantos informes estimando las necesidades de saneamiento y recapitalización del sector bancario español es, de por sí, una señal clara de la gran incertidumbre reinante y la necesidad de una mayor transparencia. En todo caso, hay enormes discrepancias en la estimación de la pérdida esperada asociada al deterioro de activos de la banca española y sigue siendo una incógnita la inyección de capital necesaria para asumir las pérdidas. Además, conforme pasa el tiempo, la estimación de la magnitud de las necesidades de capital es mayor por el deterioro de la economía, a lo que se ha unido el problema de la deuda pública. Y a ello hay que añadir que en todos los informes las pérdidas estimadas están referidas al deterioro de activos en construcción y promoción inmobiliaria, que serían seguramente mayores si se incluyera el crédito hipotecario y, sobre todo, el crédito al consumo y a empresas. Y superiores, incluso, si se incorporan las necesidades adicionales derivadas de las nuevas propuestas de Basilea III que La Caixa cuantificó hace escasos días en 48.000 millones de euros. Frente al azar de esperar una recuperación que parece débil y lenta, parece necesario y casi perentorio ofrecer, con transparencia, la magnitud de la pérdida esperada y calibrar qué soluciones y planes de ayuda (dentro del marco del FROB o más allá) serán precisos para recapitalizar y sanear el sistema bancario español de un modo definitivo. En un contexto en el que los mercados desconfían de la economía española, es necesario despejar cuanto antes las dudas existentes sobre la solvencia de nuestro sector bancario, ya que la incertidumbre reinante está dificultando a los bancos españoles captar financiación en los mercados mayoristas, lo que afecta negativamente al tan necesario grifo del crédito bancario. En consecuencia, bienvenida sea la decisión del Consejo Europeo de publicar los resultados de las pruebas de resistencia o stress tests (y ojalá se confirme que el Banco de España ofrecerá los resultados de todas las entidades españolas y no solo de las que ocupan las primeras posiciones del ranking de los grandes bancos europeos en términos de capacidad de resistencia). Además, incluso acometiendo esta suerte de ejercicio de contrición y transparencia a escala doméstica, aún estaría por ver cómo nos afectaría lo que algunos ya llaman "segundo acto de la crisis financiera" -Soros dixit-, que podría surgir a raíz de la crisis de la deuda soberana europea y que augura que las graves tensiones financieras están lejos de terminar.

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Versión para imprimir

TRIBUNA: JOSÉ GARCÍA MONTALVO Reformas financieras descafeinadas JOSÉ GARCÍA MONTALVO 27/06/2010 Por fin el Congreso y el Senado de Estados Unidos llegaron a un acuerdo sobre la reforma financiera. Tardaron veinte horas. Ni Isner y Mahut tardaron tanto en decidir el ganador del partido de tenis en Winblendon. El peloteo entre los representantes del Senado, el Congreso, los miembros de los grupos de presión, el Tesoro, etc. parecía interminable. Finalmente el partido acabó, aunque no se sabe muy bien quién ha ganado. El acuerdo implica descafeinar algunas de las reformas más importantes introducidas en el Senado. Por ejemplo, la nueva Agencia de Protección de los Consumidores de Productos Financieros salió del Senado con un mandato que se extendía hasta los créditos para la compra de coches. El acuerdo con el Congreso ha eliminado estos créditos entre los productos bajo la protección de la agencia, a pesar de que el sector del crédito para la adquisición de vehículos es uno de los que presenta mayores niveles de quejas de los consumidores. Teniendo en cuenta que la propuesta original de la Administración Obama era prohibir la venta a los consumidores de productos financieros que no fueran simples créditos a tipo fijo, el acuerdo deja muy descafeinados los objetivos de esta agencia. Menos sorpresa causa la práctica desaparición de la llamada propuesta Lincoln para evitar que los bancos comerciales pudieran negociar en mercados de derivados. Cuando se aprobó en el Senado la opinión generalizada era que se mantenía con respiración asistida y que no sobreviviría el siguiente paso, como así ha sucedido. No solo los banqueros se oponían a esta propuesta. Los pesos pesados de la Administración Obama en materia económica también se oponían. El Senado también introdujo la llamada regla Volcker para restringir que los bancos comerciales pudieran hacer inversiones que no generaran beneficios directos para sus clientes. El Senado no llegó a votar una enmienda para adoptar de nuevo la Ley Glass-Steagall, que separaba las actividades de banca comercial y de banca de inversión y que fue derogada en 1999. El acuerdo del viernes permite excepciones a la regla Volcker para que los bancos comerciales puedan seguir invirtiendo en fondos de alto riesgo -hedge funds- y empresas privadas no cotizadas mientras no superen el 3% del capital. Esta aparente restricción es muy poco efectiva, dado que la mayoría de los bancos comerciales no superan esa proporción. Más allá del contenido concreto del acuerdo alcanzado en Estados Unidos hay cuestiones importantes sobre la reforma financiera que transcienden este avance legislativo. Tanto la regulación acordada en Estados Unidos como la propuesta Larosière o la del Foro de Estabilidad Financiera son maximalistas. Intentan cambiarlo todo simultáneamente: aumentar los requerimientos de capital, regular los mercados de derivados y las entidades demasiado grandes para quebrar, crear entidades para controlar el riesgo sistémico, para proteger a los inversores y a los consumidores, aumentar el control de las agencias de calificación, regular las remuneraciones de los ejecutivos bancarios, etc. Esta visión maximalista de la regulación financiera tiene múltiples problemas. Al afectar a tantos sectores la oposición de los afectados

359 es feroz, lo que generalmente acaba por descafeinar la mayor parte de los elementos de la reforma y puede convertirla en ineficaz. Además, el intentar aprobar enormes paquetes de medidas retrasa su aplicación y, por tanto, los participantes en estos mercados siguen funcionando durante mucho tiempo con los incentivos perversos que condujeron a la crisis. Recordemos también que gran parte de la crisis financiera fue causada por problemas de supervisión y no tanto de regulación. Un dato a tener en cuenta: el documento conjunto del Senado y el Congreso de Estados Unidos ocupa 3.000 páginas. La Ley Glass-Steagall, que ha sido considerada como una fuente esencial de estabilidad financiera desde su aprobación en 1933 hasta su derogación en 1999, tenía la friolera de... 34 páginas. Por último, una reforma maximalista afectará necesariamente al crédito disponible. Después de inyectar capital en muchos bancos, dejarles descontar casi cualquier activo en los bancos centrales y ofrecerles barra libre a tipos ínfimos para evitar que quiebren y fomentar el crédito, ¿qué sentido tendría que se impusieran tantas restricciones para que el crédito se contrajera y los bancos no pudieran completar su capitalización? Sería más acertado adoptar una aproximación más gradualista a la reforma financiera, pero de aplicación inmediata. Más regulación no es siempre mejor. Cualquier regulación tiene un coste que hay que contrastar con su beneficio. Lo importante es concentrar inicialmente todas las energías en un aspecto de la cadena de incentivos perversos que generó la crisis. Las agencias de calificación serían un buen objetivo. El hecho de que su modelo de negocio implique que cobran una comisión de los emisores de los títulos, y no de los inversores, generó una enorme inflación de calificaciones. Si un emisor no conseguía la calificación deseada, amenazaba con irse a otra agencia, lo que automáticamente le proporcionaba el rating anhelado. Cambiando el sistema de incentivos de las agencias de calificación se podría romper la cadena de incentivos perversos que condujo a la crisis y favorecer la estabilidad financiera. Supongamos un intermediario financiero que quisiera empaquetar y vender un montón de productos financieros de muy baja calidad -por ejemplo, hipotecas subprime- y las agencias de rating calificaran apropiadamente la emisión como bono basura. Sería difícil encontrar inversores para esos productos. En consecuencia, los bancos de inversión no estarían interesados en empaquetar esas hipotecas. Por tanto, los bancos comerciales no intentarían vender hipotecas a gente que no pudiera pagarlas, lo que haría menos necesaria una agencia de protección de los consumidores de productos financieros. Y así sucesivamente. En el caso español el encadenamiento de incentivos perversos fue diferente. El elemento fundamental fue la inflación en los precios de tasación, que permitió a familias que no podían pagar los elevados precios que alcanzaron las viviendas, acceder a créditos enormes para la compra. El incentivo perverso se origina cuando más del 50% de las tasaciones son realizadas por empresas controladas por bancos o cajas de ahorros. La escasa información disponible indica que los precios de tasación en algunas financieras eran, de media, un 30% superior a los precios efectivamente pagados. Una forma sencilla de detener esta espiral en el futuro sería ligar el montante del crédito hipotecario al valor de la vivienda que aparece reflejado en las escrituras. Este sencillo mecanismo dificulta mucho la formación de otra burbuja y, como efecto colateral, puede reducir el fraude fiscal. En resumen: para mantenerse despierto ante la innovación financiera es mejor una taza de café expreso que diez tazas de descafeinado. http://www.elpais.com/articulo/primer/plano/Reformas/financieras/descafeinadas/elpep ueconeg/20100627elpneglse_5/Tes

REPORTAJE: Laboratorio de ideas - breakingviews.com

360 Sin milagro en Wall Street El 'lobby' bancario no logra suavizar la reforma financiera en EE UU JAMES PETHOKOUKIS 27/06/2010 Incluso cuando faltaba poco para el amargo final, los grandes bancos esperaban que el Congreso se reservara sus mejores golpes. Pero la ley de reforma regulatoria que acordaron el viernes los negociadores de la Cámara de Representantes y el Senado de Estados Unidos asesta unos buenos mazazos. Aunque no les deja KO, sí parece que limitará los riesgos, y los beneficios, de Wall Street. Naturalmente, según la manera de ver las cosas de los reformadores más radicales, los bancos se han hecho las víctimas y les ha salido bien. Pese a la crisis financiera más grave desde la Gran Depresión, no se les ha disuelto como se hizo con los carteles estadounidenses de principios del siglo XX. Y seguirán estando autorizados a hacer cosas que van mucho más allá de los préstamos a negocios y consumidores. Pero será mucho más complicado convertir eso en un derroche de beneficios y primas. Los bancos no tendrán totalmente prohibido gestionar lucrativas plataformas de derivados. Pero para variedades de instrumentos más arriesgadas, tendrán que delegar las contrataciones en una filial con capitalización separada. La mayoría de los derivados también tendrán que autorizarse centralmente. Es probable que ambos cambios afecten a bancos como JPMorgan. La Regla de Volcker también ha sobrevivido las más de 20 horas de negociaciones a la desesperada. Los bancos tendrán prohibido en gran medida hacer operaciones por cuenta propia. El sector financiero sí ha obtenido una concesión en el frente de los fondos de cobertura y de capital riesgo, al obtener permiso para realizar pequeñas inversiones en relación con su capital, en lugar de ninguna, como se había propuesto inicialmente. Los grandes bancos y fondos de cobertura también tendrán que pagar la aplicación de la ley con una inesperada cuota basada en los riesgos. Esto les costará 19.000 millones de dólares a lo largo de cinco años, nada catastrófico, pero sí un lastre más. El efecto que estas y otras medidas tendrán en los beneficios no está claro. Un analista de Citigroup ha probado a hacer un pronóstico y calcula que los ingresos de Goldman Sachs y Morgan Stanley podrían disminuir un 20%. Pero estos cálculos hay que verlos con reservas. Llevará un tiempo asimilar del todo las repercusiones de la ley de 2.000 páginas. Y los detalles de otros cambios clave, como el incremento de los requisitos de capital en EE UU y en todo el mundo, aún están por concretar. Fijémonos en la Regla de Volcker. Aunque la relativamente estricta versión definitiva parece ser una derrota para el sector financiero, el proceso de aplicación es complicado. Los bancos quizá tengan hasta siete años para adaptarse. En términos políticos, esto significa varias elecciones al congreso y miles de oportunidades para suavizar los límites. De modo que, a lo mejor, cuando las medidas entren en vigor, los letrados y cabilderos ya habrán conseguido hacer que la ley sea menos dolorosa para los bancos, aunque esto no ocurriera durante su tránsito por el Congreso. Por ahora, los banqueros pueden consolarse pensando en que su negocio sigue más o menos intacto y en que saben con mayor certeza qué reglas lo gobernarán. http://www.elpais.com/articulo/primer/plano/milagro/Wall/Street/elpepueconeg/2010062 7elpneglse_8/Tes

361 Un G-20 de dos direcciones

Los drásticos planes de ajuste en la Unión Europea chocan en Toronto con el objetivo de afianzar la recuperación económica que abandera EE UU - El foco de tensión ha pasado de Grecia a Portugal, y ahora, a España - La UE aboga por una aplicación gradual de la reforma financieraLa lista de paraísos fiscales está vacía. Es un éxito de la cumbre de Londres

En Europa, la retirada de los estímulos es ya una carrera contrarreloj La deuda de los países ricos ha subido del 70% al 100% del PIB Europa tiene como aliados a Japón y a Canadá en su esfuerzo ahorrador Obama: "Lo primero debe ser salvaguardar el crecimiento" "Reequilibrar las finanzas públicas es la prioridad", dice la ministra francesa EE UU, China y Brasil quieren que Alemania reactive la demanda China marca el ritmo de la cumbre con la apreciación de su divisa

Hay todavía diferencias sobre la conveniencia de un impuesto a la banca ALEJANDRO BOLAÑOS 27/06/2010 Los bancos, origen de la mayor crisis económica en décadas, vuelven a acumular beneficios, si es que alguna vez dejaron de tenerlos. Las compensaciones multimillonarias a los ejecutivos del sector financiero apenas se resienten. Los Gobiernos aplican severos ajustes y promueven reformas impopulares. Los paraísos fiscales siguen captando miles de millones de euros. Los especuladores hacen su agosto con la deuda pública, desorbitada por los rescates financieros y las consecuencias de la crisis. El paro crece en todas las economías avanzadas. La mirada, cada vez más escéptica, se vuelve al G-20, el foro que se refundó en otoño de 2008 para lidiar con la recesión y acabar con "una era de irresponsabilidad". La cuarta cumbre de líderes de países ricos y emergentes, que culmina hoy en Toronto (Canadá), está llamada a dar respuestas, pero lo que abundan son las dudas. Y, esta vez, casi todas empiezan y acaban en Europa. El gasto público, en retirada. "La economía mundial se recupera más rápido de lo previsto, aunque a un ritmo desigual". Esta frase o una similar preside el arranque de los comunicados del G-20 desde la cumbre de Londres (abril de 2009). Entonces, el Fondo Monetario Internacional (FMI) anticipaba un crecimiento mundial del 2% para este año; en Pittsburgh (septiembre de 2009), el vaticinio se elevó al 3%. Y ahora, cuando Toronto alberga la cuarta cita de los líderes de países avanzados y emergentes, el pronóstico del Fondo para 2010 ronda ya el 4%. Así que, tras la abrupta recesión de 2009, buena parte del objetivo fijado en Washington hace menos de dos años - "reestablecer el crecimiento económico"- se ha logrado. Para llegar hasta aquí se desplegó una batería de estímulos fiscales sin precedentes y se relajó la política monetaria, con tipos de interés en zona cero, hasta niveles históricos. Pero lo que hace unos meses en Pittsburgh se planteaba como una "retirada gradual" de la intervención pública, en Europa es ya una vertiginosa carrera contrarreloj. ¿Qué ha ocurrido en estos nueve meses? Los mercados y el deterioro de las cuentas públicas se han combinado para gestar un nuevo foco de tensión: primero se le llamó Grecia; luego, Portugal, y últimamente, España. Todos los expertos, con los estadounidenses Kenneth Rogoff y Carmen Reinhart a la cabeza, habían anticipado que una crisis de origen financiero, como esta, desembocaría en un intenso repunte de la deuda pública: los rescates de la banca, los incentivos a la demanda para paliar la sequía de crédito privado y el aumento de la protección social (como las prestaciones por desempleo) conducen a un enorme desfase presupuestario. Resultado: el endeudamiento de los Estados avanzados ha pasado en tres años

362 de poco más del 70% del PIB conjunto a cerca del 100%. Un matiz: los inversores, con el susto de la debacle de las Bolsas aún en el cuerpo, recibieron con los brazos abiertos las emisiones de deuda pública y aceptaron rentabilidades bajísimas (financiación barata para los Estados) a cambio de seguridad. Hasta que llegó el fiasco de Grecia. Desde que se confirmó en enero que las cuentas públicas griegas se habían falseado y que la capacidad del país de afrontar la deuda quedaba en entredicho, los especuladores hincaron el diente en Europa. Se podía elegir presa: Grecia lo había dejado fácil, pero también los países afectados por el estallido de burbujas inmobiliarias y con sectores privados muy endeudados (España o Irlanda), países con tasas de crecimiento anémicas (Portugal), niveles de deuda pública ya muy altos (Italia) o emergentes con pies de barro (Lituania, Hungría). Son argumentos que se agigantaron al hacerse patentes las dificultades y dudas de la zona euro para respaldar a Grecia -salvadas in extremis con un fondo de rescate de 750.000 millones para países con problemas-. De paso, ponían en evidencia también a la banca europea, cuyos balances se habían llenado de títulos de deuda pública que perdían valor a toda pastilla. Una voz unánime se levantó entonces en las cancillerías del Viejo Continente: llegó la hora del ajuste del sector público. Cuanto más rápido e intenso, mejor. Recortes al salario de los funcionarios, recortes a la inversión pública, recortes a los subsidios sociales, cancelación de los programas de estímulo fiscal, subidas de impuestos... La receta se extiende por todos los Gobiernos europeos, y es esa unanimidad la que plantea dudas. El tijeretazo en Grecia, España o Irlanda, como línea de defensa ante la presión de los mercados, se extiende a Francia, Alemania o Reino Unido, pese a que el coste de endeudarse para estos países sigue siendo muy bajo, y el sector privado crece aún a un ritmo muy débil. "Nuestra mayor prioridad en Toronto tiene que ser salvaguardar el crecimiento; no podemos perder vitalidad ahora", fue la advertencia que lanzó el presidente de EE UU, Barack Obama, antes de viajar a la ciudad canadiense. En la Administración estadounidense ha calado la idea de que el ajuste concertado de Europa se parece mucho a una "retirada prematura de los estímulos fiscales", precisamente lo que se pactó evitar en Pittsburgh. La prensa estadounidense lo ha bautizado como un "momento Hoover", en recuerdo del presidente estadounidense al que se atribuye el error de reducir el gasto público demasiado pronto y prolongar así la Gran Depresión de 1929. En el horizonte, el riesgo de una recaída. EE UU ha hecho bandera de graduar la retirada de los estímulos fiscales. La Administración Obama pelea en el Congreso estadounidense por prorrogar las ayudas a los parados o los beneficios fiscales para las empresas, pese a acumular también elevados niveles de déficit (11% del PIB) y deuda pública (más del 92%). Pero, aunque en el comunicado que se publique hoy se brindará de nuevo por salvaguardar la recuperación económica, la presión europea para dar más relevancia a la consolidación fiscal es enorme. Por la vía de los hechos - ajustes presupuestarios ya en marcha- y de las palabras. "Para la inmensa mayoría, reequilibrar las finanzas públicas es la prioridad; para una minoría, la prioridad es el apoyo público al crecimiento", sintetizó la ministra de Economía francesa, Christine Lagarde, en la reunión preparatoria de la cumbre, hace tres semanas, en Corea del Sur. El Gobierno británico, que hasta ahora compartía la óptica de EE UU, acaba de echar el freno al gasto público con un plan que promete nuevos ajustes. La UE, además, ha sumado como aliado a Japón -el recién elegido primer ministro, Naoto Kan, anunció que limitará los incentivos a la demanda privada y congelará el presupuesto- y a Canadá, que pretende incluso fijar objetivos de déficit y deuda pública para los próximos años. Enfrente, además de EE UU, se sitúan potencias emergentes como China y Brasil, que creen que los Gobiernos de algunos países avanzados (y de forma singular, Alemania) deben hacer más por reactivar la demanda interna para favorecer el comercio internacional.

363 La reforma financiera pasa de largo. Los líderes del G-20 redoblarán su compromiso de culminar la amplia reforma financiera que se pactó en Londres. Pero el propio calendario establecido por el club de países ricos y emergentes limita los posibles logros de la cumbre canadiense. El Consejo de Estabilidad Financiera hará público un informe sobre los cambios regulatorios que se están adoptando para afrontar, en caso de crisis, la liquidación ordenada de grandes entidades, determinantes en el sistema financiero internacional. Y sobre cómo endurecer el control sobre estas entidades (con más poderes a los supervisores y mayores requerimientos de capital). Pero el examen definitivo tendrá que aguardar a la cumbre de noviembre, en Corea del Sur. También se analizará entonces el trabajo del comité de Basilea (que aúna a los bancos centrales) para elevar la calidad del capital exigible a las entidades financieras, promover la acumulación de activos que sirvan como colchón de liquidez o establecer una medida homogénea del nivel de endeudamiento admisible. En Pittsburgh se acordó que el desarrollo de estas medidas, que persiguen limitar la apuesta de la banca por inversiones excesivamente arriesgadas, se haría de forma gradual entre 2011 y 2012, para evitar que el aumento de las exigencias de capital se traduzca en menos préstamos a empresas y familias, justo cuando el crédito privado escasea. Varios Gobiernos europeos, con Alemania y Francia en vanguardia, sostienen que ese periodo puede ser incluso demasiado corto y defienden una aplicación a la carta para evitar recaídas económicas. Una hipótesis que también se abrió paso en la reunión preparatoria de la cumbre de Toronto. Es un argumento similar al que emplea la banca, que teme un drástico recorte de beneficios y presiona para limitar los daños. El Instituto de Finanzas Internacionales, que reúne a las principales entidades de los países avanzados, sostiene que las nuevas normas reducirían el PIB de Europa, Japón y EE UU hasta un 3% entre 2011 y 2015 por el descenso del crédito, lo que destruiría 10 millones de puestos de trabajo. Nout Wellink, que dirige el comité de Basilea, cree que esos cálculos son "una locura" y limita el impacto a un 0,5% del PIB mundial. Otras áreas de la reforma financiera, como la equiparación de las normas contables, el registro y supervisión de los hedge funds (fondos de alto riesgo) o el desarrollo de normas para dar más transparencia al mercado de los derivados financieros, siguen su curso en el seno de los organismos reguladores internacionales, el Senado de EE UU (Obama cuenta con sacar adelante sus propuestas en julio) o en las instituciones europeas. Obama lo vuelve a hacer. La cumbre del G-20 en Londres, en marzo del año pasado, fue el estreno internacional del nuevo presidente estadounidense. Y Barack Obama lo hizo a lo grande, con el anuncio de una amplia reforma de la supervisión del sector financiero en Estados Unidos, cuando apenas llevaba tres meses en la Casa Blanca. Ahora, cuando el G-20 evidencia las dificultades para acordar nuevas normas de regulación y garantizar su aplicación universal, Obama vuelve a lograr una posición ventajosa en el debate tras lograr que la Cámara de Representantes y el Senado se pusieran de acuerdo, apenas 48 horas antes de la cumbre, para aprobar la reforma que anunció en 2009. La nueva, y muy compleja, normativa estadounidense, debe pasar aún por la votación definitiva del Senado y el Congreso. Y durante su tramitación parlamentaria se ha dejado pelos en la gatera, como los resquicios abiertos para que la banca pueda seguir invirtiendo en derivados. Pero la maratoniana jornada legislativa del pasado viernes permite de nuevo a Obama predicar con el ejemplo, un valor al alza en las cumbres del G-20, donde abundan las palabras huecas. Buena parte de la reforma internacional sigue pendiente aún, pero el presidente estadounidense afrontará el debate definitivo, de aquí a final de año, con el aval de

364 que cumple con los compromisos. Y la constatación de que se mueve más rápido que los líderes europeos. China se sacude la presión. La incorporación de los países emergentes al puesto de mando mundial, y sobre todo, del gigante asiático, trastoca la marcha de las grandes cumbres, antaño cocinadas a fuego lento desde ambos lados del Atlántico. Cuando el G-20 apostó por los incentivos fiscales, China dejó atrás a Europa y EE UU al poner en marcha el paquete de medidas más ambicioso, con un multimillonario plan de inversiones públicas. Cuando el G-20 abordó la lucha contra los paraísos fiscales, fue China la que presionó para limitar las exigencias de transparencia (el abuso del secreto bancario cunde en Hong Kong y Macao) y estuvo a punto de dar al traste con las negociaciones. Cuando el G-20 anunció que iba a triplicar los recursos a disposición del FMI, China se apresuró a ofrecer 100 millones de euros -la cantidad final fue luego menor-, reforzando así su exigencia de más poder en el Fondo. Ahora, con la apreciación del renminbi, vuelve a marcar el ritmo. En Toronto se pone la primera piedra de lo que EE UU dio en llamar Marco para un Crecimiento Sostenible. Desde la cumbre de Pittsburgh, el Fondo Monetario Internacional ha recabado información de los países del G-20 para aconsejar cambios en los modelos de crecimiento y mitigar así los desequilibrios que potenciaron la crisis económica. El ejemplo más claro es, precisamente, la relación EE UU-China. El tradicional consumismo estadounidense creció en paralelo a las exportaciones chinas. Y China reinvirtió buena parte del superávit comercial en el mercado financiero estadounidense, lo que contribuyó a abaratar el crédito y, entre otras cosas, a elevar de nuevo el consumo y facilitar las apuestas financieras arriesgadas. El estudio del FMI tenía las cartas marcadas. La crisis ha hecho parte del trabajo que se le exige a EE UU, al forzar a las familias y empresas estadounidenses a aumentar sus tasas de ahorro. Todo estaba preparado para elevar la presión sobre China: debía apreciar su moneda, devaluada de forma artificial, para encarecer sus exportaciones y favorecer las importaciones. Pero Pekín, al desanclar la cotización del renminbi del dólar y permitir una ligera apreciación, desbarató la estrategia. La medida le viene bien para reactivar el consumo, pero sobre todo para mantenerse al timón. No hay ningún compromiso sobre hasta cuándo permanecerá abierta la banda de fluctuación (0,5% sobre el valor de cierre), pero el paso ha sido suficiente para ganarse el unánime aplauso internacional, justo cuando el Congreso estadounidense debatía medidas de represalia. Berlín, tenemos un problema. La nueva doctrina para mitigar los desequilibrios dicta que países con superávit comercial persistente (como Alemania) y altas tasas de ahorro (como Alemania) deben hacer lo posible por animar su demanda interna. Que es justo lo que el Gobierno de Angela Merkel ha decidido no hacer. "Alemania debería mantener sus estímulos fiscales y ampliarlos hasta 2011, en lugar de comenzar ahora con su mal concebida austeridad", preconiza el economista estadounidense Nouriel Roubini en un reciente artículo. Y, sin embargo, el Ejecutivo de Merkel se ha puesto a la cabeza de la procesión del tijeretazo, con un ajuste fiscal valorado en 80.000 millones de euros a partir de 2011. En un imposible ejercicio de equilibrio, el director gerente del FMI, Dominique Strauss-Kahn, mantuvo hace una semana durante su visita a Madrid que Alemania cumplía con la máxima de la retirada gradual de los estímulos fiscales. Pero lo cierto es que, con su decisión, Alemania obliga a otros países europeos con peores perspectivas económicas a hacer ajustes

365 más severos aun para que el coste de su deuda pública no se dispare en los mercados, volcados ahora en comprar títulos alemanes. Merkel insiste en las últimas semanas en extender el culto a la austeridad fiscal, recogido incluso en la Constitución alemana, a todos los países avanzados. "No hay que continuar con los estímulos cuando ya se ha afianzado la recuperación económica", sostuvo esta semana. Su celo por la contención del gasto público, que le llevó a retrasar el fondo de rescate a Grecia hasta asegurarse de que el Gobierno heleno tomaba drásticas medidas de ajuste, contrasta con su resistencia a publicar y extender las pruebas de fortaleza financiera hechas a las principales entidades europeas. El impuesto a la banca, en el laberinto. Un nuevo indicio de que el poder combinado de EE UU y Europa ya no es lo que era. La Administración Obama ultima un impuesto que gravará con un 0,15% los activos de las principales entidades estadounidenses para conseguir más de 70.000 millones de euros en los próximos 10 años. Y el Consejo de la UE acaba de aprobar el establecimiento de una tasa a la banca, amén de defender que el G-20 "estudie y desarrolle" una tasa a todas las transacciones financieras. Pero ni los países emergentes, que no se sienten responsables de la crisis financiera, ni algunos países avanzados, como Canadá o Australia, cuyas entidades no incurrieron en excesos, están por la labor. Tampoco lo está el gobernador del Banco de España, Miguel Ángel Fernández Ordóñez. Y la posición europea, ahora hegemónica, puede agrietarse cuando se ponga negro sobre blanco. Alemania y la Comisión Europea defienden que el nuevo impuesto a la banca nutra fondos nacionales que sirvan para reestructurar a las entidades en futuras crisis, mientras que Francia y Reino Unido quieren que se trate como un ingreso más del presupuesto de cada país. España entra en escena. Ha estado en boca de todos en las últimas semanas. El permanente castigo de los inversores a los títulos del Tesoro, pese a que el Gobierno anunció un cuantioso plan de ajuste y una amplia reforma laboral, se retroalimentaba con rumores sobre la solvencia del Estado español, y sobre todo, de la banca, golpeada por el estallido de la burbuja inmobiliaria y muy endeudada con entidades alemanas y francesas. El Ejecutivo de José Luis Rodríguez Zapatero negó desde el principio que España necesitara acudir al fondo de rescate de la UE, pero lo que sí hubo fue una suerte de rescate moral, con encendidas muestras de apoyo de Strauss-Kahn y Obama, en contraste con la calculada ambigüedad de Merkel. Pero fue la decisión de publicar las pruebas de resistencia hechas a la banca española, antesala de una iniciativa similar en toda la UE, lo que permitió aflojar la presión. "¡Dios salve a Zapatero!", llegó a proclamar Wolfgang Münchau, editorialista de cabecera del diario británico Financial Times. EE UU y Reino Unido echan en cara a la zona euro falta de transparencia sobre la situación real de la banca. Paraísos fiscales, bonus y otros olvidos. La lista negra de paraísos fiscales, uno de los principales éxitos de la cumbre de Londres, está ya vacía. La mayoría de los centros financieros implicados se limitó a cumplir con la exigencia mínima impuesta por la OCDE (firma de acuerdos de intercambio de información con 12 países), lo que ha llevado al Parlamento europeo a plantear nuevos requisitos, como obligar a las multinacionales a publicar la información económica y fiscal de todas sus filiales o a generalizar el intercambio de información. No ha habido sanciones, como no las hay en el caso de las remuneraciones de los ejecutivos. Los impuestos a los bonus en Reino Unido o Francia han aumentado la recaudación, pero no han limitado las compensaciones. Y aunque se extiende la petición de información más

366 detallada, a los supervisores solo les queda la opción de exigir a las entidades que eleven su capital en caso de que el pago de esos bonus incentive el riesgo. En el fondo de la agenda queda también la negociación para un nuevo acuerdo de comercio internacional: el compromiso es cerrar la llamada Ronda de Doha este año, aunque una promesa similar quedó incumplida ya en 2009. http://www.elpais.com/articulo/primer/plano/G- 20/direcciones/elpepueconeg/20100627elpneglse_2/Tes

TRIBUNA: Jesús Caldera, Joseph Stiglitz, Stephany Griffith-Jones, Jeffrey Sachs, André Sapir, Nicholas Stern La reforma de los mercados financieros Jesús Caldera, Joseph Stiglitz, Stephany Griffith-Jones, Jeffrey Sachs, André Sapir, Nicholas Stern 27/06/2010 Existe un amplio consenso acerca de la necesidad de reformar los mercados financieros internacionales. El sector financiero ha sido el principal causante de la crisis global actual, que se originó en el sistema financiero estadounidense, extendiéndose luego al resto de países del mundo, para convertirse finalmente en una crisis de la economía real con un impacto particularmente negativo en Europa. Los Gobiernos de los países desarrollados han hecho esfuerzos fiscales importantes entre 2007 y 2010 para sostener sus sistemas financieros, evitando quiebras bancarias que podrían haber llevado a un colapso económico generalizado. A la vez, pusieron en marcha planes de estímulo de la demanda agregada, que había caído drásticamente como consecuencia de la falta de confianza y el mal funcionamiento de los mercados de crédito. Estos esfuerzos fiscales, esenciales para la recuperación en una primera fase, unidos a la reducción de los ingresos públicos debido a la menor actividad económica, han disparado los niveles de déficit y de endeudamiento público hasta niveles muy elevados. Este ha sido el caso principalmente de Europa, pero también de EE UU, si bien ambos están dando respuestas distintas del problema. En el caso de la Unión Europea, las turbulencias financieras de abril y mayo de 2010, desencadenadas por la crisis de la deuda pública griega y la especulación contra la deuda emitida por otros Estados miembros, han llevado a la UE a iniciar un proceso de consolidación fiscal. Así, todos los países europeos están adoptando planes de control y recorte del déficit público, como el anunciado por el Gobierno de España, que tiene el objetivo de devolver el déficit del 11% al 3% del PIB entre 2010 y 2013. Por otro lado, la UE se ha visto obligada a establecer con carácter de urgencia un fondo de 750.000 millones de euros como señal clara a los mercados financieros de la voluntad de los Gobiernos de contrarrestar cualquier ataque especulativo contra el euro. Es vital que este proceso de consolidación se lleve a cabo a un ritmo adecuado, ya que una consolidación excesivamente rápida podría llevar a una ralentización de la economía, o incluso a una doble recesión. Para mitigar los efectos adversos de la reducción de la demanda agregada se deberá prestar una atención particular a la estructura de los gastos, así como al sistema impositivo. Asimismo, estas medidas deberán acompañarse de una estrategia clara para la economía sostenible, con reformas que introduzcan incentivos para mejorar el control

367 de la deuda, la equidad intergeneracional y la sostenibilidad medioambiental, así como una mayor agilidad, cohesión y productividad en los mercados financiero y laboral, en línea con las que el Gobierno español está poniendo en marcha. En EE UU también existe un debate sobre la consolidación fiscal, si bien la Administración Obama es consciente de los riesgos de un recorte prematuro de los gastos. En el Congreso, el apoyo a una ley de empleo fuerte e incluso la extensión de los beneficios por desempleo, cuando cientos de estadounidenses están llegando al final del periodo de percepción de los subsidios, parece limitado. Los problemas de los mercados hipotecarios, entre otros, han llevado a los analistas a ser pesimistas en cuanto a la pronta vuelta al pleno empleo. Aunque el ajuste fiscal de la UE era una medida sensata que en principio debería haber satisfecho a los mercados, con su desarrollo ha surgido una nueva amenaza: los potenciales efectos negativos de los recortes de los gastos públicos sobre el crecimiento podrían traducirse en unos coeficientes deuda pública/PIB más elevados y, por tanto, en un empeoramiento de la calificación de la deuda pública. Parece, a la vista de los últimos acontecimientos, que el poder económico ya no está en manos de los Gobiernos democráticos y, por tanto, de los ciudadanos, sino en manos de los a menudo caprichosos mercados financieros que originaron la crisis. Es, por tanto, cada vez más urgente que los Gobiernos del mundo se coordinen dentro del G-20 y reaccionen contra estas tendencias. No se puede aceptar que un volumen importante de operaciones financieras no se conozca ni esté regulado, al llevarse a cabo fuera de los mercados organizados. Por otro lado, el sector financiero no paga impuestos acordes con sus beneficios, con los bonos que reciben sus ejecutivos ni con las externalidades negativas que, como está quedando patente, su actividad puede conllevar. El ejemplo más claro de los problemas del sistema de incentivos y la falta de regulación existentes en los mercados financieros son los CDS en descubierto (naked credit default swaps), producto que permite a los inversores contratar un seguro sobre el posible impago de un bono de deuda pública de un país sin tener la propiedad de ese bono. Como la historia ha demostrado hace siglos en el transporte marítimo, cuando para un inversor resultaba legal contratar un seguro sobre un barco que no era de su propiedad, el inversor tenía un claro interés en hacer que el barco se hundiera. Muchos barcos desaparecieron entonces por esa causa, hasta que la norma se reformó. Igualmente, en el caso de los CDS, si la institución que contrata el seguro sobre el impago de la deuda es un gran fondo de inversión o una agencia de rating que puede tener influencia en el mercado de deuda pública, su interés es lograr que el país se hunda y se produzca el impago. Además de reformar la regulación de los mercados y productos financieros, también es conveniente que el G-20 se plantee la introducción de impuestos sobre los mercados financieros, para cambiar los incentivos adversos existentes, haciendo que los operadores financieros compensen a las empresas por las externalidades negativas que en ocasiones generan sus actividades. En un informe elaborado por la Fundación IDEAS, presentado en Madrid el 28 de mayo de 2010, se analizaban varias alternativas de impuestos a los mercados financieros. Según este estudio, el instrumento que mejores propiedades muestra es el impuesto sobre transacciones financieras, basado remotamente en la vieja idea de la tasa Tobin, pero aplicado a todas las transacciones y no solamente en los mercados de divisas. Esta tasa, con un tipo impositivo muy bajo, de alrededor del 0,05%, reduciría el volumen de operaciones especulativas a corto plazo y, por tanto, la volatilidad del mercado, a la vez que recaudaría un volumen de ingresos considerable, entre 1.600 y 6.300 millones de euros al año solo en España.

368 El debate sobre la introducción de impuestos financieros está abierto y más vivo que nunca, lo que ya representa un progreso importante. No obstante, las palabras deben llevarse a la práctica. Los líderes reunidos en la cumbre del G-20 en Toronto deberán superar las presiones internas de sus sistemas financieros para poner en marcha un sistema impositivo en los mercados financieros que sea a la vez eficiente y justo. Ya se han dado pasos significativos en este sentido. Así, los miembros de la UE han acordado recientemente mantener una posición común en la cumbre con respecto a la introducción de un impuesto sobre la banca, que adoptarán independientemente de los resultados de la cumbre en el seno de la UE, así como con respecto el establecimiento de un impuesto sobre las transacciones financieras muy parecido al propuesto por IDEAS. El resultado de las negociaciones que están teniendo lugar este fin de semana puede marcar una gran diferencia para el futuro. Todos los ciudadanos del mundo están pendientes y a la espera de que sus líderes muestren la determinación necesaria para acometer las reformas que el sistema claramente necesita, eliminando algunos de los problemas que han desencadenado la crisis y evitando de este modo que se repitan en el futuro. De lo contrario, los costes políticos y económicos serán cuantiosos. - http://www.elpais.com/articulo/primer/plano/reforma/mercados/financieros/elpepueconeg/201 00627elpneglse_3/Tes

369 intermedia. En las conclusiones preliminares redactadas por la delegación canadiense se fija como objetivo reducir el déficit a la mitad de aquí a 2013, un ritmo de recorte más bajo que el que han asumido los europeos, pero más intenso del que prevé EE UU. La opción de que se adopten soluciones nacionales ante la imposibilidad del consenso va más allá del ritmo al que cada país reducirá el déficit. Es también la solución que se propone en el borrador del comunicado para la imposición de impuestos a la banca (en estilo directo, que cada país haga lo que quiera). O la que ya anunciaron los ministros del G-20 hace unas semanas para que cada Gobierno gradúe la exigencia de los nuevos requisitos de capital y liquidez a la banca, aún pendientes de aprobación. Las dificultades para acordar requisitos similares al sector financiero abren el camino a fijar principios generales y a dejar en manos del regulador de cada país su aplicación. La disparidad de opciones amenaza con debilitar el consenso. A pequeña escala, ocurrió algo parecido con las manifestaciones de grupos de activistas, que se concentraron en las calles de Toronto. Su objetivo era protestar contra la cumbre de países ricos y emergentes, pero la miríada de motivos exhibidos en sus pancartas ponía difícil captar un mensaje común. En las protestas hubo heridos y algunos arrestos. http://www.elpais.com/articulo/economia/soluciones/nacionales/abren/paso/crisis/elpepueco/2 0100627elpepieco_3/Tes

370

Global Business

June 26, 2010 Debt Concern in U.S. Could Hurt Obama at Summit By JACKIE CALMES and SEWELL CHAN TORONTO — President Obama came to the summit table this weekend with a strong hand to press his case to foreign leaders for tougher financial regulations throughout the developed world, after Congress agreed to a far-reaching overhaul of the American regulatory system. The opposite is true for his effort to persuade other governments to keep stimulating their economies rather than attacking deficits. While Congress allowed Mr. Obama to pack the big victory on banking regulation as he left for the Group of 20 summit talks, the Senate separately dealt him a significant setback that no doubt resonated with the foreign leaders here pushing fiscal austerity: Democratic leaders shelved an economic stimulus package of aid for the long-term unemployed and financially strapped states, along with assorted tax cuts. The Senate set aside the effort after failing for a third time to get the 60 votes needed to overcome a Republican filibuster and the fear of some Democrats that it would add to big deficits. And that package was a scaled down version of what Mr. Obama had proposed in January to give the slowly recovering economy a last push. At home as abroad, Mr. Obama is confronting the limits of the consensus that took hold after the economic crisis began in 2008, which favored bigger deficits to spur job creation. At stake, as the administration sees it, is continued global recovery or a relapse into another recession. Even within Mr. Obama’s administration there are fault lines on how much additional stimulus is desirable. Some news reports in recent days suggested that Peter R. Orszag, the budget director who recently announced that he would be leaving in late July, was resigning partly out of frustration that he had lost the argument that the country must cut projected deficits — and sooner rather than later. Advisers and associates of Mr. Orszag insist that is not so, however, and Mr. Orszag was moved to address the issue late Friday in his blog on the Web site of the Office of Management and Budget. “After nearly four years in public service — first as head of the Congressional Budget Office and then as director of OMB — and since I will be getting married this fall, it was simply time for me to move on,” Mr. Orszag wrote. He recounted the deficit-reduction steps that Mr. Obama has proposed: a three-year freeze after this fiscal year for nonsecurity domestic appropriations, $1 trillion in reductions over the coming decade and a bipartisan fiscal commission — a priority of Mr. Orszag’s — that is to try to make recommendations for reducing the debt by Dec. 1. “The president has made it clear to his economic team that he is seriously committed to tackling our fiscal problems,” Mr. Orszag wrote.

371 Indeed, Mr. Orszag has complained to associates that the debate over job creation versus deficit reduction is a false one; the only disagreement is over timing. In advance of the G-20, two other administration officials — Timothy F. Geithner, the Treasury secretary who is closer in his thinking to Mr. Orszag, and Lawrence H. Summers, the director of the White House National Economic Council, and a proponent of more short-term stimulus measures — co-authored an op-ed column in The Wall Street Journal to project a united front on the issue. “We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth,” they wrote. “Without growth now, deficits will rise further and undermine future growth.” But in Europe especially, leaders are moving to raise taxes and cut spending, led by Germany’s chancellor, Angela Merkel, and by Britain’s new prime minister, David Cameron, who arrived in Canada fresh from proposing the biggest austerity package in his country in a half-century. “Look, the threat to the British economy is not taking action on the deficit,” Mr. Cameron told Sky News on Friday. “I think that this G-8 will actually conclude that those countries with the worst problems need to accelerate their action, which is what we have done.” Mr. Cameron was to have his first meeting as prime minister with Mr. Obama later on Saturday. Canada’s prime minister, Stephen Harper, the host of this fourth G-20 meeting since the global economic crisis began, on Friday praised Mr. Cameron for his economic initiative, saying it was the sort of fiscal constraint that Mr. Harper wanted the rest of the G-20 nations to adopt. On Saturday, an adviser said Mr. Harper would press for a commitment among the countries to fully implement “existing” stimulus plans — suggesting no appetite for additional spending measures — and to cut their annual deficits in half by 2013 and put them on a downward trajectory thereafter. That deficit-reduction path is similar to the one Mr. Obama has proposed as the goal of his fiscal commission. And several officials from other countries said they believed apparent disagreements between the United States and Europe over the pace of fiscal belt-tightening could be resolved. “We can make economic growth compatible with fiscal consolidation measures,” said Kazuo Kodama, a spokesman for the Japanese Foreign Ministry, describing the position of Japan’s new prime minister, Naoto Kan. He said Mr. Kan “recognizes the importance of striking a balance between fiscal consolidation and robust growth. The important thing is how to strike a balance.” The American delegation likewise has sought to play down differences. A senior administration official, speaking on condition of anonymity because he was not authorized to speak publicly about the situation, said that the G-8 leaders’ exchange of views at a luncheon on Friday suggested a broad consensus. “The president reiterated his strong belief that we need to maintain our commitment to durable growth in the global economy” in the short term, the official said, and that the leaders agreed on the need for “fiscal consolidation and deficit reduction in the medium term.” Defining the “medium term” is the tricky part. Ángel Gurría, the secretary-general of the Organization for Economic Cooperation and Development, said the Europeans’ tilt toward belt-tightening now is understandable in the wake of debt crises threatening Greece and several other countries on the Continent. “Greece was an alarm bell, a signal, to say the speed at which debt is being accumulated, and the size

372 of the deficits, are now becoming a subject of concern for markets,” said Dr. Gurría, an economist and former Mexican foreign minister. “If you don’t deal with the question of the deficits and the debt, you cannot have sustained growth,” he said. “But will there be a short-term cost in terms of growth when you do the adjustments? Yes, there will be.” But he predicted that the cost will “tend to be modest and it will largely be compensated” by an improvement in market confidence as European countries consolidate their balance sheets. This article has been revised to reflect the following correction: Correction: June 26, 2010 An earlier version of this article misstated the commitment year sought for countries to cut their annual deficits in half. It is 2013, not 2015. JACKIE CALMES and SEWELL CHAN Debt Concern in U.S. Could Hurt Obama at Summit June 26, 2010http://www.nytimes.com/2010/06/27/business/global/27summit.html?hp

373 The Baseline Scenario What happened to the global economy and what we can do about it JP Morgan Responds To Financial Reform: The Poison Pill Strategy By Simon Johnson While the financial reform negotiation process grinds to its meaningless conclusion, the real action lies elsewhere – in Jamie Dimon’s executive suite. Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup. This is terrific corporate strategy – and very dangerous for the rest of us. Jamie Dimon clearly wants to become too big to fail, too interconnected to fail, and – above all – too global to fail. He knows that the reform package will, among other (very small) things, create a resolution authority that will give the government more power – in principle – vis-à-vis failing financial institutions in the future. This is a central part of Tim Geithner’s vision for financial stability. But Mr. Dimon also knows – as a board member of the NY Fed and sometime White House/Treasury confidante – that a US resolution authority will do precisely nothing to make it easier to handle the failure of a large global bank, e.g., Citigroup, doing business in over 100 countries. The reason global megabanks will get bailouts in the future is simple – policymakers will fear the chaos that would ensue when competing bankruptcy claims swarm over a defaulted institution, much as happened for Lehman (e.g., in London) in September 2008. Mr. Dimon and his colleagues – who include some top former global regulators – are also well aware that the G20 (and everyone else) will not make any serious push towards creating a cross-border resolution mechanism. The best way to signal to creditors that they will be protected in all potential future crises is to make JP Morgan bigger and more global. This will lower the funding costs for the organization and in turn make this global expansion more profitable when times are good – and when times are bad, there will be government support. In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government. This is so simple, so brilliant, and so dangerous that it should take your breath away. If you press serious administration officials, in private, on how they will use the new resolution authority for Citigroup or (now) JP Morgan Chase, they are quite candid: they would create a conservatorship, as with AIG or Fannie/Freddie. But there is a huge difference between conservatorship and resolution. Resolution is about winding down the company, typically involves firing, and should imply losses for unsecured creditors. Conservatorship is about managing the company as a going concern – and would almost certainly in this context involve full creditor protection. It is perhaps ironic that Jamie Dimon argued strongly, early in the reform process, for a heavy weight to be placed on a resolution authority as a way to prevent future bailouts. His actions now to undermine the effectiveness of such an authority further suggest that this administration was unwise and naïve to rely on his advise in the early formative phases of reform. The White House may now be waking up to the profound dangers that Mr. Dimon and his successors will pose, but they are still unwilling to do anything meaningful about it. Written by Simon Johnson June 26, 2010 at 8:00 pm http://baselinescenario.com/2010/06/26/jp-morgan- responds-to-financial-reform-the-poison-pill- strategy/#more-7787

374 06/25/2010 01:23 PM The G-20 Debate Germany Warns US Not to Become 'Addicted to Borrowing' The US has heavily criticized German austerity measures in recent days. Now, Germany's finance minister has fired back, warning against becoming addicted to deficit spending and noting that history has made the country extremely wary of national debt and inflation. Conflict, it would seem, will be everywhere in Toronto this weekend as world leaders gather for the G-20 summit to discuss possible reforms to the global financial system. Already, new British Prime Minister David Cameron has said that he may end up trying to avoid sitting next to German Chancellor Angela Merkel on Sunday. "I'm not sure if that will be safe. We might get a bit carried away," he said. Cameron's comments were, of course, tongue in cheek. He was referring to Sunday's World Cup battle between Germany and England in South Africa. Still, there is little doubt that sparks will fly this weekend, particularly when it comes to competing views on fiscal policy between Europe and the United States. Indeed, German Finance Minister Wolfgang Schäuble poured more fuel on the fire in a contribution published Friday in the business daily Handelsblatt. Referring to US demands that Germany abandon austerity in favor of additional economic stimulus measures, Schäuble said that "governments should not become addicted to borrowing as a quick fix to stimulate demand. Deficit spending cannot become a permanent state of affairs." The Longer View Schäuble said that he cannot relate to accusations that Germany hasn't done its part to stimulate the economy, pointing out that Berlin passed a massive stimulus package in 2008. "Additionally," he said, "we also have so-called automatic stabilizers (such as high social welfare expenditures) that do not play as big a role in the countries that are now criticizing us." Merkel's finance minister also pointed out that "while US policymakers like to focus on short- term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation." Schäuble remarked that, while US economic history has taught the country to be wary of deflation, Germany's history has resulted in widespread fear of deficits and inflation. Schäuble's remarks were just the latest in a trans-Atlantic back-and-forth that has continued all week. US President Barack Obama's letter to G-20 leaders , in which he wrote, "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," kicked off the debate late last week. Most interpreted the line as a warning directed at Berlin. Merkel has since been energetic in her defense of Berlin's focus on debt and deficit reduction, telling German public broadcaster ARD on Thursday that "I don't think we should relent."

375 'No More Room for Deficit Spending' Berlin has received support in recent days from European Central Bank President Jean-Claude Trichet. Speaking to the Italian daily La Repubblica on Thursday, he said "with regards to economic growth, it is wrong to believe that the (European) austerity measures will result in stagnation." European Commission President Jose Manuel Barroso also backed up the German chancellor, telling reporters in Toronto that "there is no more room for deficit spending." US Secretary of the Treasury, Timothy Geithner, appeared eager to play down the disagreement on Thursday, telling BBC World News America that "our job is to make sure we're all sitting together, focused on this challenge of growth and confidence because growth and confidence are paramount." Still, even if Europe and the US agree to disagree when it comes to the austerity versus stimulus debate, there are plenty of other items on the agenda that are likely to result in discord. A European proposal for a global tax on financial transactions appears to be headed for the dustbin in Toronto. Similarly, a worldwide levy on banks to build up a fund for the next crisis is likely to be rejected. China, Australia and host Canada -- all countries that did not have to bail out their banking industry during the financial crisis -- are opposed to the measures. cgh -- with wire reports URL: http://www.spiegel.de/international/business/0,1518,702849,00.html FORUM: Should the EU Save or Spend? http://forum-international.spiegel.de/showthread.php?t=790&goto=newpost

RELATED SPIEGEL ONLINE LINKS: The World from Berlin: Trans-Atlantic Tiff Brewing Ahead of G-20 Summit (06/25/2010) http://www.spiegel.de/international/world/0,1518,702854,00.html Savings Salvoes: Merkel Defends Herself Against Criticism from Washington (06/24/2010) http://www.spiegel.de/international/germany/0,1518,702579,00.html Germany's Economy on the Mend: Berlin Budget Deficit Much Lower than Expected (06/22/2010) http://www.spiegel.de/international/business/0,1518,702114,00.html G-20 Summit: Five Ways to Tame the Financial Market Monster (06/22/2010) http://www.spiegel.de/international/world/0,1518,702200,00.html Norway Takes Aim at G-20: 'One of the Greatest Setbacks Since World War II' (06/22/2010) http://www.spiegel.de/international/europe/0,1518,702104,00.html Trans-Atlantic Turbulence: Nobel Economist Krugman Slams German Austerity (06/21/2010) http://www.spiegel.de/international/business/0,1518,701894,00.html Reforming the Markets: Setbacks for Merkel at the European Union Summit (06/18/2010) http://www.spiegel.de/international/europe/0,1518,701471,00.html RELATED INTERNET LINKS Obama's Letter to G-20 Leaders on Upcoming Meetings in Toronto http://www.america.gov/st/texttrans-english/2010/June/20100621111451bpuh0.780769.htmlSPIEGEL ONLINE is not liable for the content of external web pages.

376 06/25/20104 01:56 PM The World from Berlin Trans-Atlantic Tiff Brewing Ahead of G-20 Summit The G-20 talks in Canada this weekend are to focus on shoring up the global economy but German commentators are not expecting much in the way of agreement. Ahead of the summit Germany and the US have been trading barbs about whether the best strategy is to save or spend. A trans-Atlantic tiff has been brewing ahead of this weekend's G-8 and G-20 summits as the US and Europe disagree on how to best ensure recovery from the global economic crisis. Ahead of the meetings at a lakeside resort north of Toronto, US President Barack Obama wrote a letter to the G-20 leaders urging a pro-growth policy in what seemed a thinly veiled criticism of German plans to slash spending in a bid to tackle the country's deficit. It "is critical that the timing and pace of consolidation in each economy suits the needs of the global economy," Obama wrote. Chancellor Angela Merkel, however, is not backing down from austerity. On Thursday she told German public broadcaster ARD that her center-right coalition was going to "implement the efforts we have agreed to," adding: "I do not think we should relent." She said that sustained growth could only be guaranteed by getting a grip on deficits and debt. "I and the EU will argue this position. There are others who are not yet so convinced of this exit strategy." Keeping a Lid on Germany's Deficit Berlin is concerned at the spiralling deficits across Europe, particularly since Germany, Europe's largest economy, has been forced to shoulder the lion's share of the rescue package for Greece and other struggling European countries. To that end, Merkel's government announced sweeping cuts of some €80 billion ($98 billion) over the next four years in order to keep a lid on Germany's deficit. Obama, meanwhile is concerned that the austerity measures in Europe could choke off the tentative recovery and even plunge the world into a double-dip recession, repeating the mistakes of the 1930s that led to the prolonged Great Depression. German Finance Minister Wolfgang Schäuble joined the debate this week with a guest contribution to the business daily Handelsblatt, writing that "governments should not become addicted to borrowing as a quick fix to stimulate demand. Deficit spending cannot become a permanent state of affairs." The tit-for-tat interviews and letters ahead of this year's summit are a far cry from the unprecedented united front just two years ago. Back in 2008 the G-20 leaders found it easy to agree on a response to the global economic crisis by assembling giant stimulus packages to restart growth and financial rescue plans for the frozen banking system. Now that financial meltdown has been averted and economies are tiptoeing towards renewed growth, divisions are opening up on how best to proceed.

377 Germany is not the only European country opting for saving over spending. The new government in London introduced a drastic budget on Tuesday aimed at tackling the deficit by cutting public spending and raising taxes. On his way to Canada, new British Prime Minister David Cameron told reporters that "this weekend isn't about a row over fiscal policy. We all agree on the need for fiscal consolidation. For me this G-20 is about putting the world economy on an irreversible path to recovery." Yet it is unlikely that the summit will manage anything close to harmony. Merkel herself has admitted that she is expecting "controversial discussions." On Friday German newspapers take a look at the summit and most are expecting little in the way of substantive agreements. The center-left Süddeutsche Zeitung writes: "The wars in Afghanistan and Iraq, as well as the financial and economic crisis, have brought America to the limits of its power. At the same time countries like China and India are gaining influence globally while Brazil and Iran are striving for regional dominance. Obama stretches out his hand (not always successfully) to all of these countries and seeks to expand power through involvement and cooperation. The superpower's new radically pragmatic motto is: give and take." "This policy doesn't take much notice of old alliances, or surviving sentimentalities. Above all the Europeans -- for decades privileged partners and NATO allies -- have felt this. They experience the change of climate in Washington as coldness. And they are freezing. Obama may have mobilized new sympathy for the US among European people. However, in the seats of power across the old world there are increasing complaints that the president disdainfully sees Europe only according to how useful it can be." "Ahead of Toronto, Obama's negotiators brazenly rejected all of the ideas that the Europeans had for regulating the financial markets. Germany was castigated as a parasite of the global economy. Obama's friends in the Democratic Party are currently working on a law that could threaten even close US allies with sanctions if they trade with Tehran. And in Afghanistan, Obama acts without consulting first: The outspoken Stanley McChrysal was not only a US general, he was also the NATO commander. The allies only learned about the change of personnel in Kabul by watching TV." The center-right Frankfurter Allgemeine Zeitung writes: "Save or take on more debts on a grand scale? This in short will be one of the conflicts at the summit. The chancellor has so far not been persuaded by the president's requests to support the economy with more stimulus measures. And in Canada she will also oppose the claim that Germany is not doing enough for the global economy. That is plainly nonsense. But because the trans-Atlantic dispute cannot be allowed to go too far, when it comes to growth strategies, both sides will read into the final communiqué whatever suits their own domestic agendas." The financial daily Handelsblatt writes: "There are no political solutions for most economic problems. The point is not that economic power is more in the hands of Bill Gates and Jeff Immelt or companies like Microsoft or General Electric. Rather it is that economic power is widely distributed." "The World Trade Organization doesn't manage world trade, the International Monetary Fund doesn't control the world's currencies and the G-20 does not decide the future of the global economy. In the market system, no one manages trade, money or the entire economy."

378 "But the illusion that these kinds of summits are about big decisions is maintained by both sides. By the politicians who travel there and by the demonstrators who protest outside. The meetings are really only interesting for those who take part. Whether they have any meaning at all for anyone else is written in the stars." -- Siobhán Dowling

URL: • http://www.spiegel.de/international/world/0,1518,702854,00.html FORUM: • Should the EU Save or Spend? http://forum-international.spiegel.de/showthread.php?t=790&goto=newpost

RELATED SPIEGEL ONLINE LINKS: • The G-20 Debate: Germany Warns US Not to Become 'Addicted to Borrowing' (06/25/2010) http://www.spiegel.de/international/business/0,1518,702849,00.html • Savings Salvoes: Merkel Defends Herself Against Criticism from Washington (06/24/2010) http://www.spiegel.de/international/germany/0,1518,702579,00.html • G-20 Summit: Five Ways to Tame the Financial Market Monster (06/22/2010) http://www.spiegel.de/international/world/0,1518,702200,00.html • Germany's Economy on the Mend: Berlin Budget Deficit Much Lower than Expected (06/22/2010) http://www.spiegel.de/international/business/0,1518,702114,00.html • Trans-Atlantic Turbulence: Nobel Economist Krugman Slams German Austerity (06/21/2010) http://www.spiegel.de/international/business/0,1518,701894,00.html RELATED INTERNET LINKS • Obama's Letter to G-20 Leaders on Upcoming Meetings in Toronto http://www.america.gov/st/texttrans-english/2010/June/20100621111451bpuh0.780769.htmlSPIEGEL ONLINE is not liable for the content of external web pages.

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El G-20 debate sobre los límites de la normativa bancaria La discusión revela que se suavizarán las propuestas en aras del acuerdo.- El secretario del Tesoro de EE UU pide a la UE que intensifique la política de estímulos.- El primer acuerdo, a iniciativa candiense, ha sido crear un fondo de asistencia a la maternidad ALEJANDRO BOLAÑOS - Toronto - 26/06/2010 La reforma que ultima EE UU corresponde a la primera oleada de cambios que el G-20 prometió desplegar hace más de un año. La crisis dejó en evidencia que la compraventa de activos muy arriesgados había desestabilizado el sistema financiero. Y, también, que la dimensión e implicaciones de ese negocio pasaron desapercibidas a los supervisores. Pero la discusión sobre cuánto elevar las exigencias de capital y liquidez a los bancos para reforzar su solvencia está aún pendiente. La cumbre del G-20 que se inicia mañana en Toronto (Canadá) permitirá anticipar qué posibilidades hay de lograr un acuerdo este año. Y, de paso, calibrar la capacidad de presión de la banca. "Necesitamos acelerar en la reforma para fortalecer el capital y liquidez de nuestros bancos", proclamó el primer ministro británico, David Cameron, en un artículo publicado en el diario canadiense Globe and Mail . Es el último de una serie de llamamientos de líderes de países avanzados y emergentes del mismo tenor: el calendario aprieta y aunque no se espera un resultado definitivo hasta la próxima cumbre del G-20 (en noviembre, en Corea del Sur) el debate en la reunión de Toronto será definitivo para el éxito del proceso. Lo que trasluce de esa discusión es que se suavizarán algunas de las iniciativas previstas para facilitar el acuerdo. Hace unas semanas, en la reunión preparatoria del G-20, ya se dejó entrever que las nuevas exigencias de capital y liquidez a la banca se aplicarán de forma gradual, más allá incluso del periodo de dos años previsto. La iniciativa la abanderan los Gobiernos europeos que asumen aquí buena parte de los argumentos de la banca: si no se hace así, justifican, el crédito ofrecido a empresas y familias, ya en declive en Europa, podría caer aún más. Tras aquella cita ministerial también quedó claro que las posibilidades de acuerdo sobre la aplicación en todos los países de nuevos impuestos al sector financiero, como pretende la UE, son muy pequeñas. El debate técnico sobre las nuevas exigencias de liquidez y capital a la banca corresponde al comité de Basilea, que reúne a los bancos centrales. Su informe definitivo no estará hasta julio, pero en Toronto presentará a los líderes unas conclusiones preliminares. Según publicó ayer Financial Times, el comité abrirá la opción de reemplazar una de las iniciativas que menos gustan a la banca: la fijación de un nivel de liquidez, que permita asegurar que las entidades tienen activos de venta rápida en el mercado para cubrir sus compromisos de deuda a largo plazo. La alternativa es dar más poderes a los supervisores para que verifiquen que las entidades tienen liquidez suficiente, renunciando así a fijar un nivel concreto. El G-20 comenzará con algunas ausencias notables. El presidente brasileño, Luiz Inacio Lula da Silva, anunció que se quedará en su país por las inundaciones. Tampoco asistirá la primera ministra australiana, Julia Gillard, recién elegida para el cargo. Donde sí hubo pleno de mandatarios fue en la cumbre del G-8, que comenzó anoche con una recepción del primer ministro canadiense, Stephen Harper. El grupo (formado por EE UU, Canadá, Rusia, Reino

380 Unido, Francia, Alemania, Japón e Italia) se ha comprometido con varios países africanos a revisar sus reiterados incumplimientos en las promesas de fondos para la lucha contra la pobreza. 6000 millones para un fondo de asistencia a la maternidad El G-8 sumó ayer una nueva promesa de fondos para los países en desarrollo. El club de los países más ricos se adhirió a una iniciativa canadiense para financiar la atención sanitaria a las madres y reducir así la mortalidad en los partos. El Gobierno de Harper arrancó del resto de países el compromiso de dotar este nuevo fondo con 4.000 millones de euros, una cantidad a la que un grupo de países que no pertenece al G-8 (entre ellos, España)y varias fundaciones sumará otros 2.000 millones. "Será dinero adicional, no está incluido en otros fondos", aseguró Harper en conferencia de prensa. Canadá, con una aportación de 800 millones, impulsó una propuesta que se queda muy lejos de los 20.000 millones comprometidos para un fondo agrario en la anterior cumbre del G-20, celebrada el pasado verano en L´Aquila (Italia).

http://www.elpais.com/articulo/economia/G- 20/debate/limites/normativa/bancaria/elpepueco/20100626elpepueco_1/Tes

Las tres cumbres del G-20 desde el inicio de la crisis financiera DOCUMENTACIÓN EL PAÍS - Madrid - 21/06/2010 El Grupo de los Veinte (G-20) se creó formalmente durante la reunión de los ministros de Hacienda del G-7 celebrada el 26 de septiembre de 1999. La reunión inaugural tuvo lugar en Berlín, el 15 y 16 de diciembre de 1999. Los miembros del G-20 son los ministros de Hacienda y los gobernadores de bancos centrales del G-7 y Rusia y las 11 economías emergentes más importantes: China, Corea del Sur, India, Indonesia y Turquía, en Asia; Arabia Saudí, en Oriente Próximo; Argentina, Brasil y México, en América Latina; Suráfrica en el continente africano; y Australia, en Oceanía ; también la Unión Europea, representada en la Presidencia del Consejo (cargo que se alterna), y el Banco Central Europeo. Se creó como "foro de cooperación y consultas entre países en temas relacionados con el sistema financiero internacional". Como consecuencia de la crisis económica, se celebró en noviembre de 2008 la cumbre extraordinaria de Washington. A medida que se profundizaba en la crisis, el grupo asumió una función cada vez más activa en cuestiones económicas mundiales. Este proceso culminó en la Cumbre de Pittsburg, donde los dirigentes designaron al G-20 como el "principal foro para nuestra cooperación económica internacional". Cumbre de Washington Los días 14 y 15 de noviembre de 2008 se celebró en Washington una cumbre extraordinaria convocada por la Casa Blanca con el fin de rediseñar el sistema financiero mundial, inmerso en una grave crisis desencadenada principalmente por las hipotecas de alto riesgo ("subprime") estadounidenses. La cumbre mundial se gestó por una iniciativa del presidente francés, Nicolás Sarkozy: la convocatoria de una reunión de dirigentes mundiales, elGrupo de los 20, que abrillantara su presidencia de la Unión Europea y abordase la convulsionada situación de los mercados globales. La debilidad de EE UU por el descalabro de Wall Street le ofreció una excelente oportunidad para robustecer la influencia europea.

381 A esta cumbre extraordinaria acudieron, por primera vez, los Jefes de Estado y/o de Gobierno de los Veinte, además de los de España, Holanda y la República Checa (que no son miembros del G-20). Una cumbre a dos velocidades cuyo formato era inédito y, 24 horas antes de su inicio, aún se discutía cómo intervendría cada país y cómo se formalizarían los acuerdos.Una improvisación muy marcada por el hecho de que la cita la organizaba un Gobierno de EE UU a la defensiva y con los días contados. El presidente francés, Nicolas Sarkozy, ofreció a España uno de sus dos puestos en la cumbre (como integrante del G-20 y presidente de turno de la UE). Asistieron el presidente Zapatero, el vicepresidente segundo Pedro Solbes y el secretario de Estado de Economía David Vegara. España defendía su permanencia en el seno del G-20 para asistir a posteriores cumbres. La cuarta silla de la que disponía la delegación española fue cedida a la República Checa, presidente de turno de la UE en el primer semestre de 2009. El primer ministro de Holanda ocupó la silla que correspondía al ministro de Finanzas francés. La cumbre extraordinaria del G-20 arrancó con dos visiones enfrentadas : un país anfitrión, Estados Unidos, escéptico sobre el calado de las reformas que se habían de acordar en Washington; y una Unión Europea con más ansias reformistas. La cumbre de Washington finalizó con el acuerdo de una acción pública masiva y una extensa declaración de principios y propuestas de reformas de los mercados financieros. Además, los mandatarios adoptaron un "plan de acción" para desarrollar estos principios. El presidente español José Luis Rodríguez Zapatero anunció al término de la cumbre financiera mundial un plan de reactivación económica , basado en la inversión pública. El jefe del Gobierno español salió satisfecho de su primera reunión de este nivel, aunque se mostró cauto sobre su participación en la próxima cumbre de este tipo, que se celebraría en abril en Londres. Foto de familia de la Cumbre del G-20. Cumbre de Londres Esta cumbre se celebró el 2 de abril de 2009 y contó con la presencia del nuevo presidente de EEUU, Barack Obama, que reconoció la responsabilidad de su país en el origen del actual desastre económico. Los líderes de los países desarrollados y emergentes llegaron a un acuerdo para intentar superar la crisis económica, que incluía una reforma del sistema financiero y un fondo de 1 billón de dólares (743.000 millones de euros) para los organismos multilaterales, según anunció el primer ministro británico, Gordon Brown. Al grito de "abolición del dinero" y "muerte a los banqueros", unos 5.000 activistas aglutinados bajo la bandera G20 Meltdown (referencia a la catástrofe resultante de la fusión de un reactor nuclear) intentaron romper el fuerte cerco policial en la Square Mail, zona privilegiada de los bancos, compañías de seguros y otras entidades financieras, algunas de ellas parapetadas ayer con tablones de madera. El acuerdo de Londres se logró tras "duras" negociaciones -como subrayó la canciller alemana, Angela Merkel- entre los países que, como Alemania y Francia , daban prioridad a la regulación del sistema financiero internacional y los que, como EEUU, abogaban por estímulos fiscales para impulsar la economía. Sarkozy y Merkel exigieron a Obama una regulación financiera más dura . La conferencia de prensa conjunta de Merkel y Sarkozy fue el colofón de una catarata de declaraciones con un único objetivo: dar una vuelta de tuerca más al documento en el que se plasmarían los resultados de la cumbre para incluir reglas más ambiciosas y detalladas sobre las zonas más opacas del sistema financiero.

382 Documento íntegro de la cumbre de los líderes del G-20 tras la reunión de Londres. Cumbre de Pittsburg (EEUU) Se celebró los días 24 y 25 de septiembre de 2009 y fue presidida por Barak Obama. Era el tercer encuentro en un año de este foro al máximo nivel, constituido a marchas forzadas ante la dimensión del descalabro económico, aunque la mayoría de las economías del G-20 hubiera dejado ya atrás la recesión. El G20 salió de esta cumbre convertido en el gran foro económico que tomará el relevo del G8 en la toma de decisiones globales, lo que le ha convertido en el diseñador del nuevo orden económico mundial. Los gobernantes apoyaron una serie de medidas para evitar la destrucción de más empleo por la crisis, la supresión paulatina de las subvenciones a los combustibles fósiles, la lucha contra el proteccionismo y que los países ricos transfieran un 5% de su voto en el Fondo Monetario Internacional (FMI) a los menos desarrollados. El G20, aunque atascado en la reforma financiera , también se comprometió a adoptar medidas para aumentar la transparencia en los mercados de derivados, aumentar las reservas de capital de los bancos y poner freno a las hasta ahora exorbitantes compensaciones de los banqueros. En una cumbre del G-20 oscurecida, al menos en Estados Unidos, por la crisis de Irán, el presidente norteamericano, Barack Obama, destacó que gracias a la coordinación de las principales economías, se consiguió "sacar al mundo del borde del abismo" en el que se encontraba hacía tan sólo seis meses. http://www.elpais.com/articulo/economia/cumbres/G- 20/inicio/crisis/financiera/elpepueco/20100621elpepueco_9/Tes

383 CincoDias.com Un balance para Europa Miguel Ángel Aguilar - 25/06/2010 Concluye el semestre de la presidencia rotatoria española de la Unión Europea y andamos de balance. El del presidente del Gobierno, José Luis Rodríguez Zapatero, es positivo. El del jefe de la oposición, Mariano Rajoy, es de catástrofe. Algunas de las ocasiones más lucidas se evaporaron como por ejemplo la de la cumbre UE-Estados Unidos que hubiera traído a Madrid al presidente Barack Obama. Otros encuentros se quedaron en la espuma. La crisis económica coloreó la situación. Nuestro país recibió los embates más duros a partir del estallido griego. Los mercados que se alientan de impresiones y de oportunidades de negocio enfocaron su atención hacia nuestras debilidades. Pasaron por alto los buenos ejemplos que habíamos dado con el comportamiento de la banca. Los aprendizajes de nuestra crisis bancaria de los años ochenta habían inducido un escarmiento en términos de provisiones obligatorias y estricta supervisión por el Banco de España. Otros socios de la UE fueron los que se vieron precisados a prestar socorro y capitalizar sus instituciones financieras en graves dificultades, mientras en España no hizo falta. Pero nadie resiste un examen focalizado, a base del microscopio electrónico. La burbuja inmobiliaria apareció en todo su esplendor y afloraron los problemas de las cajas de ahorro para las que se ideó un sistema de fusiones en caliente o en frío que les permitieran sanearse, ganar tamaño y acceder a los fondos del FROB bajo autorización de Bruselas. Luego nosotros, que estábamos tan contentos porque a pesar del deterioro de otras variables como el déficit podíamos presentar unas cifras de deuda pública comparativamente favorables, fuimos instruidos acerca de la gravedad de la deuda privada. Aprendimos que nuestros bancos y nuestras empresas estaban endeudadas en el extranjero y que enseguida vencerían los plazos para renovar esos compromisos. Así que nos tenían enganchados. Mientras tanto, se puso en marcha la máquina de los rumores perversos. Procedían de Alemania y del Reino Unido y en alguna ocasión hubieron de ser desmentidos en Bruselas. Pero nuestra Angela Merkel daba en Berlín esa clase de respuestas que hubieran merecido el dicho de Cantinflas de "no me defiendas compadre". A la presidencia rotatoria española le correspondió inaugurar las instituciones nacidas del Tratado de Lisboa que entraba al mismo tiempo en vigor. Teníamos que habérnoslas con el nuevo presidente del Consejo Europeo, posición para la que fue designado Herman van Rompuy. Reconozcamos que la actitud española fue impecable al respecto. Que no hubiera pugna alguna por el protagonismo podría figurar en nuestro haber, aunque los críticos vean en este comportamiento una incapacidad para ocupar el propio espacio institucional. En todo caso la maquinaria de la Administración española funcionó también al servicio de un desvalido van Rompuy sin fricciones. Los consejos de ministros sectoriales trabajaron en sus ámbitos de competencia bajo la presidencia de los titulares respectivos de las carteras ministeriales españoles. Avanzaron de manera desigual. Se dejó notar ese espíritu apostólico que caracteriza la etapa de Zapatero. Fue visible el afán de contagiar a la UE cuanto se refiere a los nuevos derechos en el plano de la violencia de género y otros concomitantes no siempre bien recibidos por los socios de la UE. La prioridad de reconducir el déficit hubo de ser abordada con recortes que enseguida aplicaron nuestros hermanos mayores en Alemania, Francia o el Reino Unido. De manera que el estigma de ser una economía intervenida, un país bajo protectorado quedó desacreditado. Ahora nos encaminamos hacia la reunión del G-20, mientras observamos a nuestros aliados del otro lado del Atlántico decididos a sostener los estímulos fiscales para reanimar la economía sin obsesión alguna por el déficit. Europa empieza a dudar de su modelo y se siente cercada por los de Pekín y Washington. Como señalaba la viñeta de El Roto en El País donde sobre las ruinas del Partenón campeaba la leyenda según la cual para salir adelante solo cabía instalar un McDonald's o poner un restaurante de comida china. Una vez más queda claro que o Europa contagia prosperidades o importará precariedades y que o difunde derechos y libertades o importará esclavitudes. Veremos. http://www.cincodias.com/articulo/opinion/balance-Europa/20100625cdscdiopi_1/cdsopi/

384 credit bubble bulletin Bond Bubble? by Doug Noland , June 25, 2010 “I find it truly amazing to see how many pundits refer to the bond market as if it is in some sort of a bubble. How can a security whose price is constantly projected to decline by the economics community be in a bubble? How can any asset class be in a bubble where the capital is guaranteed and which pays out a coupon twice a year? It makes no sense.” David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, writing in the Financial Times, June 21, 2010 As an analyst of Bubbles, the economic community’s price sentiment is not high on my list of key Bubble indicators. And it is the nature of Bubbles to flourish specifically because of perceptions of seemingly guaranteed returns (tech stocks only go up, home prices have never gone down, governments don't default, etc.). I have theorized that policymaker response to the 2008 bursting of the Wall Street/mortgage finance Bubble unleashed a Bubble in sovereign debt – the “Global Government Finance Bubble.” I see ongoing evidence supporting this thesis. Yet there remains a contentious debate on whether Treasury bonds are in a Bubble. The bond bulls – most with strong views anticipating a deflationary backdrop – see Treasury prices well-supported by underlying inflation trends. The best I can tell, the bullish camp doesn’t venture far away from prices when it comes to Bubble analysis. They also tend to view Bubble risk in terms of the probability for imminent major price declines. My Bubble focus is on structural effects, both financial and economic. I am reminded of the discourse back in the Bubble period 2004-2007. Many, including Federal Reserve Chairman Greenspan, argued forcefully that housing wasn’t in a Bubble. The Bubble apologists were fond of the presumption that “there can’t be a national housing Bubble because real estate markets are always local.” Such shallow commentary ignored the national dynamics of the mortgage Credit marketplace. It also disregarded the speculative dynamics that had come to command both mortgage finance and our real estate markets. And, importantly, the apologists failed to factor in the major structural distortions wrought from trillions of mispriced mortgage Credit. Bubble analysis must focus first and foremost on the underlying sources, quantity and dynamics of the underlying Credit. Are there unusual supply and/or demand dynamics at work fueling self-reinforcing market distortions? Is over-issuance of Credit fundamental to the market’s perception of minimal asset price risk? Are other dynamics at play providing market participants assurance that risks can be downplayed or even ignored? Bubble analysis should de-emphasize near-term price fluctuations/prospects and instead focus on ongoing structural Credit, market, and economic effects/impairments. The major rally in Treasurys and the dollar over the past couple of months helped solidify the bullish view that our nation’s fiscal situation is relatively benign and that the U.S. retains its premier safe haven status. An alternative explanation posits that much of the rally has been “technical” - the result of the crowd caught on the wrong side of global leveraged speculations. Moreover, I strongly believe that both Treasurys and the dollar have benefited from the markets’ perception that the U.S. enjoys a competitive advantage in “reflation” – that our policymakers continue to enjoy great flexibility and latitude for both fiscal and monetary stimulus. In stark contrast to Greece, a prevailing bullish view holds that massive ongoing U.S. fiscal and monetary stimulus ensures U.S. assets (debt and equity securities and real

385 estate) retain both an inflationary bias (prices tending to rise) and less downside (Credit dislocation) risk. Back in November - and in spite of gross borrowing excesses - the markets were fine lending to Greece for two years at about 2%. Two-year Greek yields traded today at 10%, down from as high as 18% last month. Were Greek bonds in a Bubble this past autumn? I would argue an emphatic “yes” and then question why analysts would not contemplate that similar misperceptions and speculative dynamics might be in play in our debt markets. The markets were convinced that Greek debt was essentially guaranteed by the Eurozone – as well as backstopped more generally by global policy-induced market liquidity excess. As such, underlying fundamentals were not a primary market concern. This fateful market misperception was similar to the mortgage finance Bubble belief that Fannie, Freddie, the Fed and Treasury would ensure uninterrupted liquidity and stability throughout the mortgage, MBS and housing marketplaces. These are precisely the types of major market distortions that virtually ensure spectacular booms and busts. As long as ample new borrowings – Greek debt or U.S. mortgage Credit – were forthcoming, a semblance of stability and sustainability was maintained. But as soon as market yields rose – and more fundamentally-based risk premiums took hold – the true state of underlying structural debt problems were illuminated and the bubbles soon burst. For an extended period, the market accommodated Bubble excesses, only to see the Bubble falter almost the moment that this accommodation began to wane. Are Treasury bonds a Bubble? Well, I certainly believe major market misperceptions are deeply ingrained and significantly distorting prices. I see a marketplace where the prospect for ongoing massive issuance is having minimal impact on prices and risk perceptions. I see over-issuance of Treasury debt significantly impacting the pricing and perception of risk throughout our securities and asset markets. The unprecedented expansion on government debt is surely having a major influence on the flow of finance throughout the economy and, over time, having deleterious effects on the underlying financial and economic structures. I see self-reinforcing dynamics where the over-issuance of government Credit foments speculation – in many markets. And I would argue that underlying fundamentals are masked by ongoing Credit excesses and the attendant mispricing of risk. Market underpinnings would deteriorate rapidly with any significant change in market perceptions and a resulting rise in yields. Market perceptions are in the process of changing. Municipal Credit default swap (CDS) prices jumped again. This week, California CDS prices surged 46 bps to 346 bps. Illinois CDS rose 48 bps to 360 bps. New York State increased 35 bps to 284 bps, and New York City CDS rose 21 bps to 237 bps. While changing perceptions may not yet be manifesting in higher Treasury yields, it is apparent that the markets are taking a much dimmer view of U.S. debt risks. In particular, muni debt protection costs have risen dramatically, and junk bond spreads have widened about 200 bps over the past six weeks. It is also worth noting that dollar strength has begun to wane. Perhaps subtle, but a case can be made that market concern for structural debt problems is shifting to the U.S. At the early stage of a changing market risk focus, one would expect the marginal borrowers (muni and junk) to begin to suffer (as Treasuries, for now, retain their bulletproof status). In an op-ed piece in Wednesday’s Financial Times, German Finance Minister Wolfgang Schauble defended Germany’s focus on reining in German and European fiscal deficits: “To the question of what caused the recent turmoil in the eurozone, there is one simple

386 answer: excessive budget deficits in many European countries. It comes therefore as a surprise, to me at least, that one of the most passionately debated economic issues of the day should be whether Germany is acting prematurely in reining in its deficit and thereby choking the rebound at home and in our neighbours’ markets. My response is an emphatic no.” Later in the article Mr. Schauble wrote, “Behind the calls for us to pursue a more expansionary fiscal course lie two different approaches to economic policymaking on each side of the Atlantic. While US policymakers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.” The Eurozone and the UK now recognize the necessity for a more “austere” approach to government debt growth. The U.S. has not – and likely won’t until the market forces its hand. So there is now a clear policy divide for the markets to contemplate. In Europe, there appears a willingness to accept some short-term pain for the good of long-term stability. Here at home, there remains a stubborn adherence to inflationism. The markets are still sorting out new post-Greek crisis realities. For some time, the markets have gladly sided with the inflationists. Are the vigilantes quietly coming out of hiding? I would expect the markets to increasingly appreciate that the Europeans are moving in the right direction while we are resisting. Prior to Greece, the markets perceived rapid government debt growth was a stabilizing force. More recently, the marketplace is coming to grips with the reality that runaway fiscal deficits are destabilizing and problematic. How this appreciation manifests in the markets over the coming weeks and months will be something to watch and analyze. Higher Treasury yields? Do tighter financial conditions throughout the U.S. Credit market stop recovery in its tracks? A weaker dollar? And could renewed dollar weakness – in concert with European stabilization and Asian expansion - help reignite some global reflationary forces? There are at least a few ways Treasurys could disappoint. http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10394

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Eurointelligence Daily Morning Newsbriefing Issing group recommends increase in bank levy for Germany25.06.2010

25.06.2010 The bank levy is now essentially a global policy response: in the US, a $19 bank levy has emerged as a compromise in late night negotiations on the finance bill; in Germany an advisory group headed by Otmar Issing recommends a level totally some 5% of GDP – to be accumulated over several years; and after the UK imposed a £2bn, France also intends to introduce a levy into its forecoming budget; if you haven’t noticed, the bond market crisis has actually returned this week, with yields touching the early May peaks (and a scary chart to prove it); Mohamed El Erian says the growth vs austerity debate is beside the point: success is about fiscal consolidation that enhance long-term growth potential; and if you though that Eurointelligence is unduly pessimistic, you should read what real pessimists have to say: Albert Edwards predicts a double dip recession, and that’s even before private-sector deleveraging has started (with a really scary graph to demonstrate this); Michael Pettis, meanwhile, says and that Greece will stay in depression until the moment it defaults.

25.06.2010 Issing group recommends increase in bank levy for Germany

An advisory group to the German chancellor, headed by Otmar Issing, is recommending to increase the bank levy to beyond €1.2bn as currently discussed. The levy is meant to ensure that the banks participate in coverage of the risk, which have hitherto been covered by the taxpayer, according to Frankfurter Allgemeine. The group found that the levy has to be a minimum threshold size, in order to have an influence on the decision making of banks. The group recommends an upper ceiling for the accumulated revenues of 5% of Germany GDP, which would around €120bn. The extent of the levy should depend on the systemic risk of

388 each bank. The levy should be come in the form of warrants. The group recognises that the banks will almost certainly try to recoup the costs through higher charges, which could lead to a reduction to credit supply. US banks face $19bn levy The FT reports that a bank levy has emerged as a surprise element in US Congressional late night negotiations on financial reform. It quotes Barney Frank, chairman of the Financial Services Committee, as saying that a $19bn fee has been agreed on, but only for large banks with assets of more than $50bn and hedge funds with assets of more than $10bn. The reform bill will also ban proprietary trading of banks. The FT says there was some qualified celebration on Wall Street because would be able to invest up to 3% of their tier one capital into hedge funds. France also plans levy – but on a more moderate scale The FT reports that Christine Lagarde wants to raise between €300m and €1bn a year from a proposed bank levy – which the paper says is considerably less than what the British finance recently announced in his budget (which is £2bn). The FT says the smaller levy simply reflects the fact that there are fewer banks in France. So if you thought the crisis was over, look at this We have a lull in our European crisis in the sense that the newspapers start writing again about other stories, but as so often such lulls can prove very deceptive. If you thought that the crisis was over, just look at the following chart, compiled by the Atlanta Fed, and reproduced by Calculated Risk.

The FT writes that contagion has returned to eurozone bond markets this week, amid worries about the health of the global economy and European sovereign debt. Greek 10-year bond yields are now back into double-digit yields – a reflection that the financial markets expect a

389 Greek default.

El Erian on austerity Mohamed El Erian has some wise comments about the increasingly frantic austerity versus growth debate. He says the key to combine fiscal consolidation with reform that enhance structural growth: “Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind. This means first enhancing human capital, including retraining parts of the labour force, and increasing labour mobility. Then new emphasis on infrastructure and technology investment is needed, with greater support for scientific advances that promise increased productivity. Finally all nations must begin an honest assessment of the social frictions coming in the next few years. In some countries (like the US) this means an urgent bolstering of social safety nets. “ And now for some real pessimism If you thought that we at Eurointelligence tend to be extremely pessimistic, you should read what some of the financial market guys have to say about the implication of our crisis. Here are two. Albert Edwards This is from FT Alphaville, which quotes Albert Edwards of SocGen, who predicts a double- dip recession accompanied by deflation. FT Alphaville says his prediction of a recession by the end of the year is not the worst part. The worst part is that private sector deleveraging has not even started in earnest.

Michael Pettis Here is Michael Pettis, an expert on Chinese finance, about this crisis. He makes five predictions: 1. The euro will not survive in its current form. 2. This is the big one (i.e. the big, existential financial crisis, that represents major adjustment in the world). 3. The European crisis will be accompanied by a trade shock 4. The economic recovery in the affected country will not begin until they are recognised as insolvent 5. Greek’s insolvency will not be recognised for many years. In a long post, he gives details arguments for each of his propositions. http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2834&tx_ttnews[b ackPid]=901&cHash=820d160ec2#

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25.06.2010 One Fiscal Size Does Not Fit All – a Korean lesson for Spain By: Adam Posen

Twelve years ago, the Asian Financial Crisis hit. The International Monetary Fund took a common approach across the crisis countries, prioritizing fiscal austerity. In retrospect, outside observers and the Fund itself came to the conclusion that this was a mistake – while appropriate for Indonesia, the ‘It’s Mostly Fiscal’ approach made the situation worse than it needed to be in South Korea, with negative spillovers for the rest of the region. The euro area governments, under pressure from Berlin and Brussels, are repeating this mistake. European politicians, particularly in Germany, are visibly sick of Americans and others telling them that imposing uniform austerity beyond Greece and Portugal is in error. But facts are facts, and it is an error. The experience of the Asian Financial Crisis is directly relevant, and the willingness of the IMF to reconsider its position in the time since would be a good example to follow. What matters is getting policies right, not adhering to a foolish consistency, either in policy recommendations across countries or in publicly taken positions. To recap, in 1997-98, a few small East Asian economies came up against limits after extended booms funded by capital inflows. Indonesia and Thailand had run large current account deficits and accumulated public debt. They also had significant structural problems which made their high rates of growth unsustainable. Just as in the euro area today, financial markets suddenly woke up to this reality, and began pulling out money. Interest rates rose for these countries, and their solvency problems turned into shortages of liquidity. As usual, ratings agencies had backed their borrowing on the way up, and turned on these economies accelerating their difficulties on the way down. So far, so simple, though also sad. Similar to Greece and arguably Portugal, today, the Asian economies that had lived beyond their means found it had caught up with them. Their creditors, public and private, were understandably upset - though of course the creditors were the ones that made the mistaken assumption that exchange rate pegs assured repayment of debts, justifying the loans at low interest rates. The IMF came in to perform its primary role of financing and designing adjustment plans, with an appropriate emphasis on austerity in Indonesia and Thailand. The much bigger and much sounder South Korean economy then fell into difficulties. The

391 direct effects of contraction in its neighboring trading partners hurt Korea. Despite being far more advanced in what it produced and at a higher income level than the rest of non-Japan Asia, Korea also suffered competitively from depreciations and wage falls in its region. Worst of all, financial panic prompted in part by worries about the exposures and funding of Korean banks fed a downwards spiral. And thus the IMF came in there, too. Yet, then the austerity treatment was taken too far. Rather than differentiating its requirements of South Korea to reflect the better fundamentals of the economy (and its size), sharp fiscal tightening was made a requirement of IMF lending there as well. The austerity had significant contractionary effects, because lack of confidence in Korean solvency beyond the panic was unjustified. No benefit accrued from these measures – interest rates dropped when the panic ended, but not through a consolidation channel. The contraction in South Korea was longer and deeper than it had to be as a result. The effects were not limited to this honest though costly mistake, which the IMF to its credit has since recognized and not repeated. The deeper contraction in Korea sent around the world the effects of the Asian financial crisis with renewed force. It arguably led in part to the Russian default and global difficulties of October 1998. Less obviously, put probably doing more lasting damage, this set of policies in Korea also gave renewed vigor to the complaints among Asian emerging markets that the IMF was unfair and autocratic. Desire to avoid future IMF involvement has fed the accumulation of reserves through exchange rate undervaluation, and thus mercantilist or protectionist policies, from Beijing to Kuala Lampur, and beyond. That in turn has contributed to the global imbalances we have today, the ongoing political fragility of the open world economy, and the inability of the G20 to gain agreements beyond immediate crisis response. That is an awful lot of damage from one misguided application of austerity to a country that could have had a less costly adjustment. But those are the facts. That kind of costly mistake is what the governments of the euro area are now potentially repeating in their treatment of Spain. Spain is not Greece or Portugal. Spain has much stronger fundamentals and has suffered less justifiably from financial panic than its neighbors or Ireland. The voluntary disclosure of stringent stress test results on Spanish banks is a commendable and constructive policy move by the Spanish government – a brilliant way of differentiating itself to markets by doing something right and that will be economically enhancing. On this measure, it beats out South Korea for bravery, since Korea did allow its banking problems to last. Yet, if excessive austerity is imposed on Spain, the result will be even more miserable than for Korea, with at least as bad international impact. South Korea in the end was able to recover through a significant currency devaluation and expansion of trade. That is not available to Spain, especially if its major trading partners within the Euro Area contract their own demand and compress their own wages. The unfairness, perceived and actual, of such an outcome for the Spanish economy will promote political resentment across borders if not outright conflict – and that is much more harmful within a political union than with regard to some far off international institution like the IMF. There is still time for the euro area to learn from and avoid repeating the South Korean mistake. The IMF did. The author is Senior Fellow, Peterson Institute for International Economics, and an external member of the Bank of England’s monetary policy committee.

One Fiscal Size Does Not Fit All – a Korean lesson for Spain http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2835&tx_ttnews[backPid]=901&cHa sh=064f3bd1a7#

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25.06.2010 Suffocating Europe By: Jörg Bibow

A grand idea has gained currency among Germany’s political elite: Germany must no longer be too shy to set its own national interest ahead of the European project. The chauvinism behind it is so modestly camouflaged that the Bild-Zeitung is having a ball in thrashing it onto the common man in ways that has no parallels in democratic Germany. What are they thinking, if they are thinking at all? Were Adenauer, Schmidt and Kohl really traitors who sold out on Germany’s national interests? Today, Germany once again thinks it knows what is best for itself. Unilateralism is back, setting out to conquer Europe by economic storm. Take it or leave it, Europe! Germany’s political leadership will soon have to answer what spooked their minds in believing that suffocating Europe might be in Germany’s national interest. For suffocating Europe is precisely what Germany set out to do in its new-found egomania. At this weekend’s G-20 summit meeting Germany will try to defend its politcy of unconditional austerity to the rest of the world. At home the Merkel government hammered out an austerity deal dreamed of as making compliance with the constitutional balanced-budget rule come true; budget cuts no matter what as far as the eye can reach. This will boost confidence and thereby the recovery, we are made to believe. Europe should follow Germany’s unilateral move and sign up to constitutional balanced-budget rules. At the very least Europe needs a new “Stability and Growth Pact” with real bite, profligacy and German taxpayer-sponsored bailouts must end here and now. Germany never believed in fiscal stimulus anyway. Only when exports were falling off the cliff did Germany reluctantly agree to contribute to the EU and globally-coordinated crisis response. The Bundesbank president recently declared that a mistake. Apparently, the stimulus package has caused the budgetary troubles of today. Pronouncements like these will be widely believed. As the stupefying effects of decades of Bundesbank indoctrination have left a wasteland in public understanding of matters of economics. As soon as the ECB took some trivial amounts of government bonds off the market to counter contagious market stresses that had been triggered by Germany’s inept handling of what was originally a local issue, did the Frankfurter Allgemeine Zeitung declare that hyperinflation was just around the corner. Those bonds, of course, were mainly Greek of origin, and Greece has come to crystallize anti-European sentiment in Germany as no other. Things will hardly get any better now that Germans will taste austerity at home only shortly after “bailing out the lazy Greek”; or so they think. Misled by their egomaniac political leadership and unspeakably irresponsible journalism, Germans feel duped by their European partners. Nothing could be further from the

393 truth. Germany has itself to blame for the wreckage caused at home, just as it will have itself to blame once the European wreckage in the name of German national interest is complete. The real irony in this German tragedy is that German beggar-thy-neighbor policies have effectively forced a fiscal union upon Europe. Or, rather, if not a fiscal union, a general default it will be. The point is that Germany's notorious trade surpluses vis-à- vis its European partners must by necessity have a financial counterpart. In one way or another, German banks financed the country's export successes by lending to today's crisis countries. They did so as willing borrowers were hard to come by at home when the country - duped by its own political leadership and powerful export lobby - prescribed itself a decade of belt-tightening, flat real wages, and flat consumption growth, that is. Public celebration of repeated wins of the world export championship title made the duped Germans even feel good about it. Once credit markets stop lending, trade surpluses cannot continue either. A creditor country government may then realize that it might want to step in instead. For if it does not, its intra-area trade surpluses will have to evaporate over night, while its banks will face corresponding writedowns on debtor country debts. The German taxpayer is not bailing out Greece but German banks, while lending new money to make those export surpluses continue. Repayment of those debts would only be possible if competitiveness positions and intra-regional trade imbalances were reversed at some point. For that to happen, Germans would need to re-learn appreciating wage increases and consumption growth, including long vacations in Greece and Spain, rather than fasting on vain championship titles and mindless austerity. Not even nominal wages are rising any more though. And the German government has bravely declared that German competitiveness must not be compromised by adjustment in Europe. This can only imply one of two things. Either Germany will have to continue lending which, by forcing bankruptcy upon its debtors at some point, must turn into fiscal transfers eventually. Or, much of the rest of Europe must embark on restoring competitiveness and resolving intra-regional imbalances through wage-price deflation. Likely outcomes range from stagnation to outright debt deflation. Continent-wide austerity can only raise the burden of debt. And nothing of this is in Germany’s national interest for sure. For a pre-crisis analysis of Euroland’s regime flaws see: Bibow, J. and Terzi, A. eds. (2007). Euroland and the World Economy – Global Player or Global Drag?, London, Palgrave- Macmillan. For a post-crisis analysis see: Bibow, J. (2009). The euro and its guardian of stability: The fiction and reality of the 10th anniversary blast, Levy Economics Institute, Working Paper no. 583."

Suffocating Europe25.06.2010 http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2833&tx_ttnews[b ackPid]=901&cHash=fd4d019649#

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Quarterly Report on the Euro Area focuses on challenges ahead for Euro area exporters

Reference: IP/10/819 Date: 24/06/2010

IP/10/819 Brussels, 24 June 2010 Quarterly Report on the Euro Area focuses on challenges ahead for Euro area exporters Euro-area exports, their pre-crisis performance and the challenges lying ahead, is the theme of the focus section of the second issue of the Quarterly Report on the Euro Area in 2010. During the decade preceding the crisis, euro-area exporters benefited from robust growth in neighbouring emerging markets and a strong specialisation in some key export sectors that acted as powerful export drivers. Their relatively strong competitive position augurs well for their capacity to exploit the opportunities offered by the ongoing recovery in world trade. This will, however, require tackling a number of important challenges revealed by the crisis. By creating incentives for innovation and improving the business environment policy-makers can help companies face these challenges. In addition to trade, the report also sheds new light on the causes of the recent recession in the euro area and the impact of the crisis on cyclical convergence between euro-area Member States. The recent crisis and the severe turbulences in world trade have drawn the attention to the role of the external sector in propagating shocks. The focus section of the report looks in more detail into the export sector of the euro area and tries to assess its strength and weaknesses with a view to better understanding its likely performance in the post-crisis world. The report finds that the export performance of the euro area was relatively strong in the decade before the crisis. This is all the more remarkable that the euro was on a broad appreciating trend during this period. The roots of the relatively strong export performance of the euro area lie in the structural features of its export sector. Euro-area exporters benefited from a strong position in fast growing neighbouring destinations such as Russia and the new EU Member States. The product structure of euro-area’ exports, although it shows less specialisation in ICT products and more concentration in labour-intensive goods than US or Japan, proved rather conducive to growth. In particular, euro-area exporters performed well in some key export sectors, which acted as strong export drivers. Among those are high-tech sectors such as pharmaceuticals, for which world demand has been growing fast, but also medium-tech, slower-growing sectors such as machinery and transport, in which the euro area has gained market shares. There is also evidence that exporters have weathered competition by specialising in the production of the higher-quality segments of a particular product group. Notwithstanding the relatively good pre-crisis performance, euro-area exporters have been strongly affected by slump in world trade during the crisis. The post-crisis world is also likely to bring a number of challenges. First, emerging economies in Asia and Latin America are set to gain importance in world trade. This will open new opportunities for exporting companies in advanced economies but, at the same time, enhance competition on globalised markets. Second, the need for balance-sheet adjustment in some important trade destinations of the euro area, such as in Eastern Europe or the US, will potentially have a lasting negative effect on foreign demand for euro-area exports. Finally, the crisis has revealed structural imbalances in some key euro-area export sectors, most importantly the transport sector. The future of euro-area exporters thus depends on how companies will adjust to these developments. In a separate section, the report also explores in more depth how non-price factors such as innovation and the business environment influence export growth. The econometric results show that innovative economies with favourable conditions for doing business export more. Therefore, by creating favourable conditions for entrepreneurship and innovation in domestic economies policy-makers can help euro-area companies to take advantage of the ongoing rapid recovery in world trade. Better understanding the causes and the mechanics of the recent financial and economic crisis remains an

395 important topic which is also addressed in this issue of the QREA. On the basis of the latest version of the Commission's QUEST model, the report assesses quantitatively the relative importance of various factors in explaining the recession in the euro area. According to the analysis a strong fall in productivity and a decline in investment were the primary factors behind the drop in euro-area GDP. The recession was exacerbated by the slump in world trade. At the same time, other factors that attracted a lot of attention during the crisis, such as the bursting of the housing bubble and the tightening of credit conditions for households do not appear to have been central driving forces of economic decline in the euro area. Another crisis-related topic analysed in the report is the impact of the crisis on business cycle differences within the euro area. While the economies of the Member States have moved closely in tandem since the launch of the euro (i.e. their cyclical peaks and troughs have remained closely aligned), some Member States benefited from a comparatively stronger cyclical expansion in the few years preceding the crisis (IE, EL, ES and FI). This can mostly be ascribed to strong credit cycles (IE, EL, ES) and a high exposure to booming world trade (FI). The phase of cyclical dispersion has recently been followed by renewed convergence as the countries concerned have experienced comparatively stronger recessions due to the need to consolidate overstretched balance sheets. The convergence may, however, be only temporary. In economies which are insufficiently flexible, deleveraging processes can be protracted. Renewed cyclical divergence due to a sluggish recovery in some of the countries with strong deleveraging needs can therefore not be excluded in the medium-term. http://ec.europa.eu/economy_finance/publications/qr_euro_area/2010/pdf/qrea201002_en.pdf http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/819

396 Economics One A Blog by John Baylor

Taylor's web page with John B. Taylor Thursday, June 24, 2010 Why Was Poland the Only EU Country to Avoid Recession?

Poland is the only country in the European Union which did not have a recession during 2009, as shown in this chart. And among all the OECD countries, Poland had the best real growth performance in 2009. I visited Poland this past week to give some talks and to better understand Poland's resiliency. One particularly enjoyable talk was joint with Leszek Balcerowicz the former central bank governor and finance minister who deserves much of the credit for transforming Poland’s economy from central planning to a market economy back in 1989.

397 What are the reasons for Poland's extraordinary performance in 2009? Good economic policy had much to do with it. As with some other emerging market economies Poland was in a much better macroeconomic position in 2009 than it was 10 years ago. It kept its inflation rate and its debt levels low, limited its borrowing in foreign currencies, and accumulated a large amount of foreign reserves. It also did not overact to the financial crisis, despite urging of many inside and outside of Poland to do more to stimulate the economy with discretionary fiscal policy. By not overacting it prevented the kind of panic seen in other countries.

Some say that the flexible exchange rate was a factor in avoiding recession as the depreciation of the Zloty helped keep net exports from declining as sharply as in other countries. However, the Zloty appreciated before the crisis which would have had negative effects, and the subsequent depreciation essentially took the exchange rate back to about where it was before that appreciation, as shown in the second chart. While Poland still needs to be vigilant and keep its government debt from rising as a share of GDP, it is currently in far better shape than other countries according IMF data on debt, including the United States. Thursday, June 17, 2010 Macroeconomic Lessons from The Great Deviation Each year for the past 25 years the National Bureau of Economic Research has sponsored a conference on macroeconomics with a special emphasis on empirical research with policy relevance. The results are published in the NBER Macroeconomics Annual. Initiated by Martin Feldstein when he was president of the NBER, the conference and the annual volume has had a distinguished group of editors over the years, including Stanley Fischer, Olivier Blanchard, Julio Rotemberg, Ben Bernanke, Daron Acemoglu, Kenneth Rogoff, and Michael Woodford. This spring I gave the dinner talk at the 25th meeting of the Macro Annual, summarizing the empirical work I have been doing on the financial crisis. I called the lecture, Macroeconomic Lessons from the Great Deviation, and began with the following explanation of the title of the talk: I know economists use the word “Great” too much, but I think it is quite fitting here. We all know what the Great Moderation was and we have debated what caused it. Many have argued that good policy, especially good monetary policy, played a big role. And we all know what the Great Recession was and that it marked the end of the

398 Great Moderation. You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from the practice of at least the previous two decades, and from the recommendations of most macroeconomic theory and models. My general theme is that the Great Deviation killed the Great Moderation, gave birth to the Great Recession, and left a troublesome legacy for the future. I then went on to list a dozen policy actions and interventions that I would put under the rubric of the Great Deviation and reviewed each. The full talk is here. http://johnbtaylorsblog.blogspot.com/2010/06/why-was-poland-only-eu-country-to- avoid.html

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June 28, 2010 Mises Daily

Today's other Mises Can Gold Cause the Boom- Dailies: Bust Cycle? Aristotelian Self- by Robert P. Murphy on June 28, 2010 Sufficiency through the Middle Ages by Michael A. At the Mises Academy we are just wrapping up the inaugural Heilperin class, on the Austrian theory of the business cycle. During the class, one issue that came up repeatedly was whether the Japan's Gift to FDR by Mises/Hayek story of the trade cycle could occur on a Bettina Bien Greaves completely free market, using gold as money and a banking system that operated on 100 percent reserves. As any good (and annoying) teacher would, I avoided giving a definitive answer one way or the other. Instead, I tried to give the best possible case for each answer, to prod the students to think it through for themselves. In this article, I summarize how even a Rothbardian could plausibly answer this question either in the affirmative or the negative. Review: ABCT under Fiat Money and Fractional-Reserve Banking Before jumping into the hard case, let's do the easy one first. According to Mises, Hayek, and Rothbard, the modern commercial banking system triggers the familiar boom-bust cycle when it floods the credit market with "excess" money. Suppose we have an economy that is originally in equilibrium, where the interest rate reflects the genuine amount of savings that private individuals are taking out of their incomes. Suddenly, the commercial banks decide to grant $100 million in new loans even though this new credit doesn't correspond to anyone's extra saving. (I describe the process here.) Because of the greater supply of credit, the market interest rate drops. This "false signal" leads entrepreneurs to borrow more funds and start longer projects than they otherwise would have. A false, unsustainable boom starts, giving most people an illusory sense of prosperity. Later on, when the banks become worried about rising price inflation, they will slow down or even reverse their injections of unbacked new money. The market interest rate will rise back toward its correct value, and many businesses will be caught with their pants down. They'll need to reduce output, or even shut down altogether. Workers and other resources will be released from those sectors that were stimulated the most during the boom. A general bust or recession sets in. What If Gold Is Money, and Banks Maintain 100% Reserves? Now the hard part: Suppose we were in a dream Rothbardian world, where gold itself is money—price tags are quoted in ounces of the yellow metal, people walk around with actual gold coins clinking in their pockets, and so forth. Furthermore, the banks practice 100 percent reserves with their demand deposits (checking accounts).

400 In this scenario, isn't it theoretically possible that the Misesian boom-bust cycle could still occur? Specifically, suppose that the owner of a gold mine stumbles upon the mother lode. In a very short time, he gains physical possession of several tons of new gold that nobody knew existed the month before. Instead of going to the casino or the yacht dealership, the gold miner goes to his bank and explains, "I am lending you this new money. I recognize that you run a tight 100-percent- reserve ship, but I am adding this to my savings account, not my checking account. I know that I am giving up my money now, in exchange for your promise to pay me back the loan, with interest, down the road." Now the bank can enter the credit markets with a huge influx of loanable funds. This new supply of savings will clearly push down the market rate of interest, allowing many businesses to expand and start long-term projects that were unprofitable before the gold discovery. We finally see the conundrum: Is this an example of an unsustainable boom? After all, nobody in the community restricted consumption in order to free up physical resources. So how is this scenario essentially different from the case where the fractional-reserve bankers simply create new loans out of thin air? As I explained in the introduction, I am not here to say what the definitive answer to this question is. I want to show that one could give a fairly "Rothbardian" answer that goes either way. I think modern Austrians who subscribe to Rothbard's 100-percent-reserves dictum might come down on different sides of this question. Door #1: The Gold Influx Would Cause an Unsustainable Boom Both Mises and Rothbard viewed interest as a "real" phenomenon. They both argued that in the undisturbed market economy, the "natural" interest rate reflects the subjective preferences people have for consuming sooner rather than later. Mises and Rothbard also stressed the point that there was no "optimum" quantity of money. Any amount of money could perform its services as a universally accepted medium of exchange, once prices adjusted. The community would obviously grow wealthier (per capita) if farmers harvested more wheat, or if musicians held more concerts. But if the government printed up more paper money, this didn't make the community richer on average, because the same amount of real goods and services were produced. The new money simply raised prices. Indeed, even in the case of a commodity money such as gold, new quantities delivered to the market did not make the community richer, except insofar as the new gold was used for industrial or commercial applications. For example, if some of the newly mined gold went towards arthritis treatment, or toward the production of more necklaces, then this increase would be socially beneficial. But the crucial point is that in its monetary capacity, five million tons of gold is just as useful as one million or ten million. After stressing these standard Misesian and Rothbardian insights on the nature of interest and money, one could very plausibly argue that our mother-lode scenario would trigger an unsustainable boom. After all, suppose the gold miner didn't dump the new tons on the credit market, but instead spent them on consumption goods. Clearly this would just redistribute wealth from the rest of the community into the hands of the miner. Consider: The total production of cars, food, clothing, and houses wouldn't go up simply because someone stumbled on a bunch of yellow metal. Therefore, the increased consumption of the gold miner could only come at the expense of others in the community, who did not get their hands on the new gold until late in the game.

401 Note that there is nothing unethical or dubious about a gold miner spending his justly acquired property in order to boost his consumption. We are merely arguing that this extra gold "production" is not socially useful in the same way that extra production by the farmers or dentists would be. If we can see that spending the new gold on consumption would merely rearrange the same total quantity of real goods and services, then it is clear that the community's real income hasn't risen on account of the discovery of the mother lode. Finally, if the analysis so far has been correct, then it obviously follows that if the gold miner takes his new money and lends it out at interest, he will distort the production structure away from its proper configuration. At the lower interest rate, businesses will borrow more money (consisting in ounces of gold) for investment spending. Yet nobody in the community will have cut back on consumption just because some guy happened to stumble on a few tons of new gold. If anything, people will consume more once interest rates drop. Thus we see that a standard Rothbardian analysis could very plausibly conclude that a boom– bust cycle is theoretically possible on a free market. Door #2: An Unsustainable Credit Expansion Can't Happen on a Free Market Although the above analysis was purposely constructed along Rothbardian lines, it presents a problem: Murray Rothbard thought that the boom-bust cycle could not possibly happen on a genuinely free market. That's why he placed the analysis of Austrian business cycle theory in the section dealing with government intervention in his treatise Man, Economy, and State. To my knowledge, Rothbard never specifically addressed the theoretical scenario we are imagining in this article. But if a Rothbardian wanted to deny that a free market could lead to a boom-bust cycle, even under these hypothetical conditions, how might he argue? First, let's be a bit more concrete in our description of the normal, month-to-month operations of the gold miner. Other businesses collect payment from their customers in physical gold, and they pay their expenses the same way. At the end of each month, the net income of the business is the excess revenues over expenses, measured in gold ounces. But for the man who owns a gold mine, things are different. He has to pay employees in gold ounces (or grams), and he has to pay for his electricity, gasoline, and other inputs with gold ounces too — just like any other businessman. The difference is that the revenues of the gold miner come, not from paying customers, but from the new gold that is brought to the surface. In this hypothetical economy, the man is literally finding money buried in the ground. After suitably polishing it up (and perhaps having someone turn it into recognizable coins), these hunks of yellow metal are perfectly interchangeable with the other units of money in people's pockets. Now we have to ask: is there anything odd or illegitimate about this constant stream of income for the gold miner, month after month? After all, he is able to use his gold production each month to pay his business expenses and to enjoy a nice lifestyle himself. When push comes to shove, it is hard to see how a Rothbardian could, in any way, object to the miner's real income (assuming he had acquired ownership to the mine in a legal and proper fashion). In the first place, the new gold lowers the purchasing power of an ounce of gold, allowing everyone to benefit more readily from gold's nonmonetary uses (dental work, jewelry, etc.). If we try to argue that the portion of gold that goes into cash balances (as opposed to necklaces and tooth fillings) is somehow socially useless, we run into the problem that these

402 transactions occur on a voluntary basis, and the people trading for the gold would definitely report that they gained from the exchange. "It's not our job as economists to say whether the customers' preferences are 'legitimate' or 'socially useful' from some objective standpoint." Generally speaking, Rothbardians don't think economic science can deny the social utility of an exchange, so long as it is truly voluntary and no one else's property rights are violated. If a producer wants to burn half his coffee crop in order to extract more revenues from his customers, Rothbard has no problem with that outcome — again, so long as the government plays no part in the restrictive policy. In this light, then, it's hard to see how a Rothbardian could claim that the gold miner's net income is somehow less deserved or "real" than anyone else's. After all, a Rothbardian would say that a fortune teller's monthly income is due to her "marginal productivity," as measured by her customers' willingness to pay. It's not our job as economists to say whether the customers' preferences are "legitimate" or "socially useful" from some objective standpoint. If we've come this far, it's a short step to say that a massive gold discovery doesn't change the essence of the argument. If it's perfectly legitimate and "efficient" for the gold miner to bring, say, 1,000 new ounces of gold to market every month, there's no reason our opinion should change if he suddenly brings 10 tons of gold to market. That is still his income, and the community is that much richer, in nominal terms. It's true, we might quibble and say in real terms — adjusted for price inflation — the community isn't richer. That is fine. We can look at the increase in the gold prices of milk, eggs, gasoline, and so forth, to account for the fact that a new influx of 10 tons of gold will cause (gold) price inflation. That still doesn't change the fact that the gold miner's nominal income was what it was, and is just as legitimate as it would have been had he only brought 1,000 ounces of gold to market, as usual. We've finally reached our destination: If we accept that the gold miner's nominal income — measured in gold — is every bit as "legitimate" as anybody else's, then if he decides to save 9.5 tons of his new gold holdings by lending them out, it is perfectly accurate to say that the amount of savings in the community has increased. Again, if we wish we can bring up the distinction between nominal and real (price-inflation adjusted) savings, but as good Misesians we must not lose sight of the "driving force of money." We can't fall into the mainstream trap of thinking about the economy as a set of "real" exchanges, and then throwing money on as an afterthought. Yes, the new influx of gold will drive up the gold-prices of goods and services in the community, and this rise in prices will cause lenders to insist on a higher nominal interest rate than they would otherwise. This inclusion of a "price premium" in the gross-market interest rate will work in the opposition direction of the increased savings, keeping the interest rate from falling as much as it otherwise would have. In any event, it is difficult to see how a Rothbardian could claim that the gold miner's actions — bringing new gold to market, which everyone is eager to acquire, and then deciding to save a large portion of his windfall income, rather than blowing it on Caribbean cruises — are somehow detrimental to the rest of the community. Rothbard argued against the very concept of a negative externality, so long as everyone's property rights were respected. The "correct" market interest rate in our hypothetical scenario would be just as we have described — it is the interest rate that would spontaneously emerge from the voluntary trades of everyone in the community, including the gold miner.

403

Conclusion In this essay I have deliberately ignored certain tensions between the two sides, lest I come down one way or another on the issue. We know that it can't be the case that the two trains of thought above are both correct, because they lead to opposite conclusions. And yet, the reader must agree that each is a plausible application of Rothbardian thought. In the real world, of course, the real danger of credit expansion and the boom-bust cycle comes from fiat money and fractional-reserve banking. Yet it is still important for economists in the Austrian tradition to think through hypothetical scenarios in order to refine our thinking and weed out any inconsistencies in our principles. Robert Murphy is an adjunct scholar of the Mises Institute, where he will be teaching "Principles of Economics" at the Mises Academy this fall. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives.

404 Politics

June 25, 2010 In Deal, New Authority Over Wall Street By EDWARD WYATT and DAVID M. HERSZENHORN WASHINGTON — An overhaul of the nation’s financial regulatory system, reached after an all-night Congressional horse-trading session, will vastly expand the authority of the federal government over Wall Street in a bid to curb the free-wheeling culture that led to the near collapse of the world economy in 2008. The deal between House and Senate negotiators, sealed just before sunrise on Friday, imposes new rules on some of the riskiest business practices and exotic investment instruments. It also levies hefty fees on the financial services industry, essentially forcing big banks and hedge funds to pay the projected $20 billion, five-year cost of the new oversight that they will face. And it empowers regulators to liquidate failing financial companies, fundamentally altering the balance between government and industry. But after weeks of intense lobbying and months of debate, Congress in the end stopped short of prohibiting some of the practices that led to the crisis two years ago, betting instead that a newly empowered regulatory regime can rein in the big financial players without shackling the markets and drying up the flow of credit to businesses. “We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression,” President Obama said on the South Lawn of the White House, before leaving for the Group of 20 meeting in Toronto, where he was expected to press other nations to tighten their financial rules. Democrats predicted that the full Congress would approve the legislation next week and that they would meet their goal of sending the bill to Mr. Obama for his signature by the Fourth of July. The financial industry won some important victories, even if they face significantly heightened regulation. They fought off some of the toughest restrictions on their ability to invest their own funds. Most significantly, they thwarted an attempt to make them give up their highly profitable derivatives trading desks. And big lobbying fights remain in the future, when regulators begin the nitty-gritty task of turning complex, sometimes vague laws into real-world rules for these businesses to follow. Industry analysts predicted that banks would most likely adapt easily to the new regulatory framework and thrive. As a result, bank stocks were mostly higher Friday, prompting some skeptics to question if the legislation, in fact, would be tough enough to rein in the industry and prevent future shocks to the economy as a result of bad gambling. Even architects of the bill acknowledged that it might take the next financial crisis to truly determine the effectiveness of the changes. On Friday morning, after a 20-hour final negotiating session, lawmakers, Congressional aides, lobbyists and the banking industry were still sorting through the legislative rubble of a frantic night of deal-making, edits and adjustments that left even some of those who worked most closely on the bill confused about exactly how some of the final details turned out. At points in the debates, lawmakers seemed to have trouble following their own deliberations.

405 “Can somebody explain to me what’s in Tier 1 capital?” Representative Melvin L. Watt, Democrat of North Carolina, pleaded, referring to the core measure of a bank’s financial strength. “I just don’t have enough knowledge in this area.” The White House’s desire to get a bill before the Fourth of July break drove the day. At 11 p.m. Thursday, Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee who presided over the conference proceedings, began to show signs of impatience. When the senior Republican on the committee, Representative Spencer Bachus of Alabama, asked for another minute to finish a statement, Mr. Frank cut him off. “I would object to that,” he snapped. “Not at 11 o’clock at night.” As midnight turned to early morning, lawmakers cast rapid-fire votes on amendments hastily scrawled in the margins of rejected proposals. With C-Span carrying the proceedings live, the last half-hour of the session featured sometimes confused lawmakers repeatedly asking about what happened to various proposed amendments. While the televised proceedings at times provided a remarkable window into the minutiae of legislating, many of the deals to complete the bill were cut outside the conference room, in private discussions between Democratic lawmakers and the Obama administration, with some of Washington’s most influential lobbyists trying to weigh in as best they could. One major bank on Friday scrambled to figure out what happened to six words that to its surprise and dismay were apparently cut from an amendment on proprietary trading, potentially posing a threat to its business. The final bill vastly expands the regulatory powers of the Federal Reserve and establishes a systemic risk council of high-ranking officials, led by the Treasury secretary, to detect potential threats to the overall financial system. It creates a new consumer financial protection bureau, and widens the purview of the Securities and Exchange Commission to broaden regulation of hedge funds and credit rating agencies. The measure restricts the ability of banks to invest and trade for their own accounts — a provision known as the Volcker Rule, for its chief proponent, Paul A. Volcker, the former Federal Reserve chairman — and creates a tight new regulatory framework for derivatives, the complex financial instruments that were at the heart of the 2008 crisis. But in a late-hour compromise, the bill does not include the tough restrictions on derivatives trading championed by Senator Blanche L. Lincoln, Democrat of Arkansas, which would have forced banks to jettison their most lucrative dealings in this area. Instead, in a deal negotiated between Mrs. Lincoln and a bloc of House members called the New Democrat Coalition, banks will be required to segregate their dealings only in the riskiest categories of derivatives, including the highly structured products like credit-default swaps based on bundles of mortgage loans, and in certain types of derivatives that are based on commodities that banks are already prohibited from investing in, like precious metals, agricultural products and energy. But derivatives that have clear business purposes like helping manufacturing companies to hedge against the cost of raw materials or swings in foreign exchange rates would continue to be allowed. And nonfinancial corporations would be allowed to set up their own financial affiliates to create and trade derivatives related to their businesses. The derivatives deal also headed off a last-minute rebellion by some New York lawmakers concerned about the effect of Mrs. Lincoln’s proposal on Wall Street businesses.

406 “We wanted to make sure we didn’t drive all the derivative business out of New York,” said Representative Gregory W. Meeks, a Democrat from Queens, who served on the conference committee. The bill also does not include some of the more draconian proposals debated in recent months, including re-establishing a firewall between commercial and investment banking. And the nation’s auto dealers won exemption from oversight by the new consumer protection bureau, which will regulate most consumer lending. Some business groups angrily denounced the final product, saying it was ill-conceived and would have unintended consequences harmful to the economy. “Far from effective reform, this legislation includes provisions totally unrelated to the financial crisis which may disrupt America’s fragile economic recovery and increase instability and risk,” said John J. Castellani, president of the Business Roundtable, which represents chief executives of top American companies. The conference report approved Friday is subject to approval by both chambers of Congress, a process that is expected to begin on Tuesday with action by the House and then by the Senate — where 60 votes will be required to end debate. The vote in the conference committee was on party lines, with Democrats in favor and Republicans opposed. House conferees voted 20 to 11 to approve the bill and Senate conferees voted 7 to 5. Republicans repeatedly complained that the bill would do nothing to tighten regulation of the government-sponsored mortgage companies, Fannie Mae and Freddie Mac, which were at the heart of much of the housing crisis. Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee who with Mr. Frank led the negotiations, said the bill would prevent the corporate bailouts required in 2008 and allow the United States to become a global leader in financial regulation, potentially providing decades of stability. “Never again will we face the kind of bailout situation as we did in the fall of 2008 where a $700 billion check will have to be written,” Mr. Dodd said in an interview. But he acknowledged that the effectiveness of the legislation would be learned only over time. “I don’t have the kind of ego that would tell you we have absolutely solved these problems,” he said. “We won’t know until we face the next economic crisis.” Republicans, however, warned that the bill would extend the reach of government too far. At one point during debate over whether banks should be allowed to trade for their own profit, Representative Jeb Hensarling, Republican of Texas, asked what the issue had to do with the financial crisis. “How much riskier is proprietary trading than investment in certain forms of residential real estate?” Mr. Hensarling asked. “If we’re not going to bail them out with taxpayer money, what they do with their money is their business.” He said, adding: “This is one more occasion where we see something in the bill that did not have a causal role in the crisis.” While regulatory bills often get watered down as they grind through the legislative process and interest groups and industry press for changes, the financial bill mostly gained strength as the debate lengthened and lawmakers seized on public frustration that rich financial institutions, recently bailed out by taxpayers, showed no signs of curtailing their risky practices or their outsize pay packages. Raymond Hernandez and Binyamin Appelbaum contributed reporting. http://www.nytimes.com/2010/06/26/us/politics/26regulate.html?_r=1&th&emc=th

407 Business Day Published: June 25, 2010 Financial Regulation: The Hope and the Worry Highlights of the financial regulation legislation and critics’ concerns.

Legislation Effects Concerns For the first time, establishes federal Creating an open Some parts of the market could oversight of derivatives, complex products marketplace could reduce the shift overseas, beyond the that bet on the future movement of cost of common kinds of scrutiny of U.S. regulators. Derivatives underlying securities. Requires most deals to derivatives, allowing a wide Companies that still need be insured by a third-party clearinghouse and range of companies to hedge customized derivatives could traded on public exchanges. risks more cheaply. face higher prices.

Creates a federal regulator to write and Lenders could be required to Banks may cut back on free enforce rules protecting consumers of provide plain-English checking as they spread costs Consumer financial products like checking accounts, disclosures, price more evenly across the customer mortgages and payday loans. Increases the comparisons with alternative base, rather than relying on a protection authority of state regulators to enforce products and clear tripwires minority of customers to make protections. before fees are assessed. bad choices.

Creates a council of regulators to watch for The success of these changes Requiring banks to provide systemic risks. Gives the Federal Reserve is meant to be judged by reams of additional data will Financial new authority over large financial companies. things that don't happen — create jobs for lawyers and Consolidates banking regulators, merging the by financial disruptions analysts, but will it produce regulation Office of Thrift Supervision into the Office avoided or minimized. better results? of the Comptroller of the Currency.

Authorizes regulators to impose restrictions Regulators have considerable Large foreign banks may not on large, troubled financial companies. leeway to impose restrictions face comparable restrictions, Too big to Creates a process for the government to on the largest financial which could place American liquidate failing companies at no cost to companies, which could give banks at a competitive fail taxpayers, which is similar to the F.D.I.C. smaller banks competitive disadvantage in both domestic process for liquidating failed banks. advantages. and foreign markets.

Giving shareholders a formal The demand for independent Requires companies to have executive opportunity to register directors with financial Shareholder compensation set by independent directors. concerns about experience may outstrip the Gives shareholders a nonbinding vote on compensation could place supply of qualified people protections those decisions. pressure on companies to willing to shoulder the expanded adjust pay practices. responsibilities.

Restricts banks from making speculative The departure of Goldman Sachs has estimated investments with their own money, a sophisticated traders who that 10 percent of its revenue Proprietary provision known as the Volcker Rule, but often enjoyed information comes from activities that could allows banks to take small stakes in advantages could benefit be defined as proprietary trading investment funds including hedge funds and private traders and smaller trading; other banks have less at private equity funds firms. stake.

Requires companies selling certain complex The changes could help The new rules will reduce profit Investor financial products, most notably mortgage- restore the willingness of margins, raising concerns that backed securities, to retain a portion of the investors to provide money banks and investors may choose protections risk. Allows investors to sue credit ratings for mortgages and other to put their money in other agencies. consumer loans. places. http://www.nytimes.com/interactive/2010/06/24/business/20100624-financial- regulation.html?ref=politics

408 Opinion

July 12, 2010 Cutting and Pasting: A Senior Thesis by (Insert Name) By BRENT STAPLES A friend who teaches at a well-known eastern university told me recently that plagiarism was turning him into a cop. He begins the semester collecting evidence, in the form of an in-class essay that gives him a sense of how well students think and write. He looks back at the samples later when students turn in papers that feature their own, less-than-perfect prose alongside expertly written passages lifted verbatim from the Web. “I have to assume that in every class, someone will do it,” he said. “It doesn’t stop them if you say, ‘This is plagiarism. I won’t accept it.’ I have to tell them that it is a failing offense and could lead me to file a complaint with the university, which could lead to them being put on probation or being asked to leave.” Not everyone who gets caught knows enough about what they did to be remorseful. Recently, for example, a student who plagiarized a sizable chunk of a paper essentially told my friend to keep his shirt on, that what he’d done was no big deal. Beyond that, the student said, he would be ashamed to go home to the family with an F. As my friend sees it: “This represents a shift away from the view of education as the process of intellectual engagement through which we learn to think critically and toward the view of education as mere training. In training, you are trying to find the right answer at any cost, not trying to improve your mind.” Like many other professors, he no longer sees traditional term papers as a valid index of student competence. To get an accurate, Internet-free reading of how much students have learned, he gives them written assignments in class — where they can be watched. These kinds of precautions are no longer unusual in the college world. As Trip Gabriel pointed out in The Times recently, more than half the colleges in the country have retained services that check student papers for material lifted from the Internet and elsewhere. Many schools now require incoming students to take online tutorials that explain what plagiarism is and how to avoid it. Nationally, discussions about plagiarism tend to focus on questions of ethics. But as David Pritchard, a physics professor at the Massachusetts Institute of Technology, told me recently: “The big sleeping dog here is not the moral issue. The problem is that kids don’t learn if they don’t do the work.” Prof. Pritchard and his colleagues illustrated the point in a study of cheating behavior by M.I.T. students who used an online system to complete homework. The students who were found to have copied the most answers from others started out with the same math and physics skills as their harder-working classmates. But by skipping the actual work in homework, they fell behind in understanding and became significantly more likely to fail. The Pritchard axiom — that repetitive cheating undermines learning — has ominous implications for a world in which even junior high school students cut and paste from the Internet instead of producing their own writing.

409 If we look closely at plagiarism as practiced by youngsters, we can see that they have a different relationship to the printed word than did the generations before them. When many young people think of writing, they don’t think of fashioning original sentences into a sustained thought. They think of making something like a collage of found passages and ideas from the Internet. They become like rap musicians who construct what they describe as new works by “sampling” (which is to say, cutting and pasting) beats and refrains from the works of others. This habit of mind is already pervasive in the culture and will be difficult to roll back. But parents, teachers and policy makers need to understand that this is not just a matter of personal style or generational expression. It’s a question of whether we can preserve the methods through which education at its best teaches people to think critically and originally. http://www.nytimes.com/2010/07/13/opinion/13tue4.html?src=me&ref=general

410 Opinion

July 12, 2010 An Economy of Grinds By DAVID BROOKS If you go to business conferences, you know that at lunch it is definitely better to be seated next to a prince than a grind. Princes, who can be male or female, are senior executives at major corporations. They are almost always charming, smart and impressive. They’ve read interesting books. They’ve got well-rehearsed takes on the global situation. They can drop impressive names as they tell you about their visits to the White House, Moscow or Beijing. If you’re having lunch or dinner with a prince, you’re going to have a good time. Grinds, on the other hand, tend to have started their own company or their own hedge fund. They’re often too awkward to work in a large organization and too intense to work for anybody but themselves. Over lunch, they can be socially inert. You try to draw them out by probing for one or two subjects of interest to them. But as often as not, you find yourself playing conversational ping- pong with a master of the monosyllabic response. Every once in a while you’ll run into one who can’t help but let you know how much smarter he is than you or anybody else in the room. Sitting at this lunch is about as pleasant for him as watching a cockroach crawl up his arm. He’d much rather be back working in front of his computer screen. Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint. As Sebastian Mallaby shows in his superb book, “More Money Than God,” the smooth operators at the big banks were playing with other people’s money, so they borrowed up to 30 times their investors’ capital. The hedge fund guys usually had their own money in their fund, so they typically borrowed only one or two times their capital. The social butterflies at the banks got swept up in the popular enthusiasms. The contrarians at the hedge funds made money betting against them. The well-connected bankers knew they’d get bailed out if anything went wrong. The solitary hedge fund guys knew they were on their own and regarded their trades with paranoid anxiety. In finance, as in other realms of business life, social polish doesn’t always go with capitalist success. Often it is the most narrow, intense, awkward people who start the best companies, employ the most people and create the most value. Sadly, this recovery has been great for princes and horrible for grinds. The people who work at the big corporations are critical of the Obama administration, but the fact is they are doing very well. The big companies are posting excellent earnings. They’re sitting on mountains of cash.

411 The aspiring grinds, meanwhile, are dead in the water. Small businesses are not growing. They are not hiring. They are struggling to stay alive. Princes can thrive in a period of slow, steady growth, but grinds need a certain sort of psychological atmosphere. They need a wide-open economy with plenty of creative destruction. They need an atmosphere of general confidence, so bankers will feel secure enough to lend them money, so big companies will feel brave enough to acquire their start- ups, so they themselves will feel the time is ripe to take on their world and show their brilliance to all of humanity. The princes can thrive while the government intervenes in the private sector. They’ve got the lobbyists and the connections. The grinds, needless to say, don’t. Over the past decade, professionals — lawyers, regulators and legislators — have inserted themselves into more and more economic realms. The princes are perfectly at home amid these tax breaks, low-interest loans and public-private partnerships. They went to the same schools as the professionals and speak the same language. The grinds try to stay far away and regard the interlocking network of corporate-government schmoozing with undisguised contempt. The upshot is that we have an economy that is inching toward recovery but that is not creating much in the way of new innovations and new jobs. It’s not that the overall labor markets are shrinking. It’s just that very few grinds are bringing new ideas to scale and hiring workers to enact their us-against-the-world schemes. For jobs to recover, the grinds have to recover, but it’s hard to see how that will happen so long as households are still so leveraged, government debt is still so unnerving and the business climate is still so terrible for entrepreneurs. We’ve been mired in debates over macroeconomic models recently. But maybe the real issue is how we are going to light a fire under the country’s loners, its contrarians and its narrow, ambitious outsiders. http://www.nytimes.com/2010/07/13/opinion/13brooks.html?src=me&ref=general

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