SECRETARIA DE ESTADO DE ECONOMIA Y APOYO A LA EMPRESA
MINISTERIO DE ECONOMÍA Y DIRECCION GENERAL DE POLÍTICA ECONOMICA COMPETITIVIDAD '$' UNIDAD DE APOYO
CUADERNO DE DOCUMENTACION
Número 97
ANEXO I
Alvaro Espina 10 de Junio de 2013
ENTRE EL 26 DE MARZO 2013 Y EL 15 DE ABRIL DE 2013 Rethinking Macro Policy II: Getting Granular Prepared by Olivier Blanchard, Giovanni Dell'Ariccia, Paolo Mauro IMF Staff Discussion Note SDN/13/03 INTERNATIONAL MONETARY FUND, Research Department April 15, 2013
CONTENTS
Executive Summary ...... 3
I. Introduction ...... 4
II. Monetary policy ...... 4 A. Should Central Banks Explicitly Target Activity? ...... 5 B. Should Central Banks Target Financial Stability? ...... 6 C. Should Central Banks Care about the Exchange Rate?...... 7 D. How Should Central Banks Deal with the Zero Bound? ...... 8 E. To Whom Should Central Banks Provide Liquidity?...... 10
III. Fiscal policy ...... 11 A. What Are the Dangers of High Public Debt?...... 11 B. How to Deal with the Risk of Fiscal Dominance? ...... 13 C. At What Rate Should Public Debt Be Reduced? ...... 15 D. Can We Do Better Than Automatic Stabilizers? ...... 16
IV. Macroprudential instruments ...... 17 A. How to Combine Macroprudential Policy and Microprudential Regulation? ...... 18 B. What Macroprudential Tools Do We Have and How Do They Work? ...... 18 C. How to Combine Monetary and Macroprudential Policies? ...... 20
V. Conclusions ...... 22
References...... 23
EXECUTIVE SUMMARY
The 2008–09 global economic and financial crisis shook the consensus on how to run macroeconomic policy. It reminded us of the dangers associated with financial sector imbalances; showed the limitations of monetary policy and cast doubt on some of the tenets of its intellectual foundations; and led to a reevaluation of what levels of public debt can be considered safe. This prompted a healthy reconsideration of what worked and what did not, and a debate on how to fix things, ranging from nitty-gritty technical points to broad-based institutional design questions. Five years from the beginning of the crisis, the contours of a new macroeconomic policy consensus remain unclear. But 1 policies have been tried and progress has been made, both theoretical and empirical. This paper updates the status of the debate. The crisis rekindled old debates and raised new questions about monetary policy and the role of central banks. The large costs of busts and doubts about the effectiveness of new regulatory tools reopened the “lean versus clean” debate on how to deal with asset- price and credit bubbles. The extension of liquidity to non-deposit-taking institutions, specific market segments, and (indirectly) sovereigns raised questions about what the scope of central banks’ traditional lender-of-last-resort function should be. The recourse to unconventional measures in the face of the zero lower bound on interest rates brought about a discussion of the relative role of interest rate policy, forward guidance, and open market operations going forward. The increasing disconnect between activity and inflation triggered a reevaluation of the appropriate intermediate target of monetary policy. On fiscal policy, the crisis in the euro area periphery (with the associated risk of self- fulfilling runs and multiple equilibria) raised new doubts about what levels of public debt are safe in advanced economies. The widespread need for major fiscal adjustment and the difficulties associated with austerity programs rekindled a debate on fiscal multipliers, the optimal speed of fiscal consolidation, and the design of medium-term adjustment programs to reassure market participants and the public at large. The simultaneous presence of fiscal needs and large asset-purchase programs by central banks led to a discussion about the role of financial repression in past consolidation episodes, set off concerns about a possible shift to fiscal dominance, and induced consideration of ways to support central bank independence. Macroprudential tools may provide a new policy lever to curb dangerous booms and contain imbalances. But evidence about their effectiveness is mixed and we are a long way from knowing how to use them reliably. Their relation with other policies is not yet fully understood; they are fraught with complicated political economy issues; and there is little consensus on how to organize their governance.
I. INTRODUCTION The 2008–09 global economic and financial crisis and its aftermath keep forcing policymakers to rethink macroeconomic policy. First was the Lehman crisis, which showed how much policymakers had underestimated the dangers posed by the financial system, and demonstrated the limits of monetary policy. Then it was the euro area crisis, which forced them to rethink the workings of currency unions, and fiscal policy. And, throughout, they have had to improvise, from the use of unconventional monetary policies, to the initial fiscal stimulus, to the speed of fiscal consolidation, to the use of macroprudential instruments. We took a first look at the issues in 2010, both in a paper (Blanchard and others, 2010) and at an IMF conference in 2011 (Blanchard and others, 2012). There was a clear sense among both researchers and policymakers participating in the conference that we had entered a “brave new world” and that we had more questions than answers. Two years later, the contours of monetary, fiscal, and macroprudential policies remain unclear. But policies have been tried and progress has been made, both theoretical and empirical. This paper updates the status of the debate in preparation for a second conference to be hosted by the IMF on the same topic this spring.
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A few observations on the scope of the analysis: The paper focuses on the design of macroeconomic policy after the global economy emerges from the crisis, rather than on current policy choices—such as the design of exit policies from quantitative easing, or the pros and cons of money-financed fiscal stimulus. The two sets of issues are obviously related, but our objective is to analyze the general principles to guide macroeconomic policy in the future, rather than the specific measures to be taken today. We also take a relatively narrow view of macroeconomic policy, leaving out a discussion of structural reforms and financial regulation. Although the border between financial regulation and macroprudential policies is fuzzy, we concentrate on the cyclical component of financial regulation rather than the overall design of the financial architecture. The paper is organized in three main sections: monetary policy; fiscal policy; and, what may be emerging as the third leg of macroeconomic policy, macroprudential policies. ……………….. V. CONCLUSIONS To go back to the issue raised in the introduction: despite significant research progress and policy experimentation in the last two years, the contours of future macroeconomic policy remain vague. The relative roles of monetary policy, fiscal policy, and macroprudential policy are still evolving. We can see two alternative structures developing: at a less ambitious extreme, a return to flexible inflation targeting could be foreseen, with little use of fiscal policy for macroeconomic stability purposes, and limited use of macroprudential instruments as they prove difficult or politically costly to use. At a more ambitious extreme, central banks could be envisaged to have a broad macroeconomic and financial stability mandate, using many monetary and macroprudential instruments, and more actively using fiscal policy tools. Where we end up is likely to be the result of experimentation, with learning pains but with the expectation of more successful outcomes.
http://www.imf.org/external/pubs/ft/sdn/2013/sdn1303.pdf
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iMFdirect The Future of Macroeconomic Policy: Nine Tentative Conclusions Posted on March 13, 2011 by iMFdirect By Olivier Blanchard
(Version in Français, Español) The global economic crisis taught us to question our most cherished beliefs about the way we conduct macroeconomic policy. Earlier I had put forward some ideas to help guide conversations as we reexamine these beliefs. I was heartened by the wide online debate and the excellent discussions at a conference on post-crisis macroeconomic policy here in Washington last week. At the end of the conference, I organized my concluding thoughts around nine points. Let me go through them and see whether you agree or not. 1. We’ve entered a brave new world in the wake of the crisis; a very different world in terms of policy making and we just have to accept it. 2. In the age-old discussion of the relative roles of markets and the state, the pendulum has swung—at least a bit—toward the state. 3. The crisis made it clear that there are many distortions relevant for macroeconomics, many more than we thought earlier. We had ignored them, thinking they were the province of the micro-economist. As we integrate finance into macroeconomics, we’re discovering distortions within finance are macro-relevant. Agency theory—about incentives and behavior of entities or “agents”—is needed to explain how financial institutions work or do not work and how decisions are taken. Regulation and agency theory applied to regulators is important. Behavioral economics and its cousin, behavioral finance, are central as well. 4. Macroeconomic policy has many targets and many instruments (that is, the tools we use or variables to implement policy). There are many examples of this that were discussed at the conference, but here are two. • Monetary policy has to go beyond inflation stability, adding output and financial stability to the list of targets, and adding macro-prudential measures to the list of instruments. • Fiscal policy is more than just “G minus T” and an associated “multiplier” (the proportion or factor by which changes in government spending or taxes affect other parts of the economy). There are potentially dozens of instruments, each with their own dynamic effects that depend on the state of the economy and other policies. Bob Solow made the point that reducing discussions about fiscal policy to what is the right multiplier does not do service to the issue. 5. We may have many policy instruments, but we are not sure how to use them. In many cases, we are uncertain about what they are, how they should be used, and whether or not they will work. Again, many examples came up during the conference. • We don’t quite know what liquidity is, so a liquidity ratio is one more step into the unknown.
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• It was clear that some people believe capital controls work and some don’t. • Paul Romer made the point that, if you adopt a set of financial regulations and keep them unchanged, the markets will find a way around, and ten years later, you’ll have a financial crisis. • Mike Spence talked about the relative roles of self-regulation and regulation. Both are needed, but how we combine them is extremely unclear. 6. While these instruments are potentially useful, their use raises a number of political economy issues. • Some instruments are politically hard to use. Take cross border flows. Putting in place a multilateral regulatory structure will be very difficult. Even at the domestic level, some macro-prudential tools work by targeting specific sectors, sets of individuals, or firms, and may lead to strong political backlash by those groups. • Instruments can be misused. The more there are, the more the scope for misuse. It was clear from the discussion that a number of people think that, while there may be an economic case for capital controls, governments could use them instead of choosing the right macroeconomic policies. Dani Rodrik argued for using industrial policy to increase the production of tradables—goods or services that can be traded among countries—without getting a current account surplus. But in practice we know the limits of industrial policy, and they haven’t gone away. 7. Where do we go from here? In terms of research, the future is exciting. There are many topics on which we should work—namely macro issues with, as Joe Stiglitz said, the right micro foundations. 8. Things are harder on the policy front. Given we don’t quite know how to use the new tools and they can be misused, how should policymakers proceed? While we have a good sense of where we want to get to, a step-by-step approach is the way to do it. • Take inflation targeting. We can’t, from one day to the next, just give it up and have, say, a system with five targets and seven instruments. We don’t know how to do it and it would be unwise. We can, however, introduce gradually some macro-prudential tools, testing the water to see how they work. • Increasing the role of Special Drawing Rights in the international monetary system is another example. If we go in that direction, we can move slowly from, say, creating a market in private SDR bonds to exploring the possibility for the IMF to issue SDR bonds to the private sector and then, if feasible, issuing them to mobilize funds in times of systemic crisis. Pragmatism is of the essence. This was a general theme that came up, for example, in Andrew Sheng’s discussion of the adaptive Chinese growth model. We have to try things carefully and see how they work. 9. We have to keep our hopes in check. There are going to be new crises that we have not anticipated. And, despite our best efforts, we could have old-type crises again. That was a theme in Adair Turner’s discussion of credit cycles. Can we, using agency theory and the right regulations, get rid of credit cycles? Or is it basic human nature that, no matter what we do, they will come back in some form? I was asked whether the conference was “Washington Consensus 2“. It was not intended to be and it was not. The conference was the beginning of a conversation, the beginning of an exploration, and we look forward to your contributions. http://blog-imfdirect.imf.org/2011/03/13/future-of-macroeconomic-policy/#comment- 24021
5 iMFdirect Observations on the Evolution of Economic Policies Posted on March 25, 2011 by iMFdirect Guest post by Michael Spence, New York University, Professor Emeritus Stanford
University, and co-host of the Conference on Macro and Growth Policies in the Wake of the Crisis It was a privilege to participate in the IMF conference devoted to rethinking policy frameworks in the wake of the crisis. Highly encouraging was the openness of the discussion, the range of views, the willingness to question orthodoxy, and the posture of humility. One gets the impression that the crisis has triggered a response that it should trigger, and we have embarked on a path of rethinking conceptual frameworks and policy choices in a way that will contribute to the stability of the system. That said, the good news is that we recognize that in finance and parts of macroeconomics the models or frameworks are incomplete. That represents a challenge to the academic community. But it also means that, in the short run, participants and regulators will be operating with incomplete models. This will require judgments (which will be uncomfortable in contrast to the earlier sense of certainty). There will be mistakes. And, as Olivier Blanchard said in his excellent summary, we will proceed step-by-step, evaluating the impacts of policy choices and sometimes reversing course. This is relatively familiar territory in developing countries, where changes in the institutional depth of the economy mean that models (especially advanced country models) are not very precise in predicting market responses to policy choices. Nevertheless theory is still useful when used judiciously. In that context, you can think of this as analogous to navigating with charts that are incomplete. Having said that, we do in principle have the option of returning to old patterns while waiting for different or more complete models to be developed and tested, I think there is a widespread recognition that this would be a risky mistake. I offer some thoughts stimulated by the spirit of the conference; not as a summary, or even an ordered set of priorities, but as a contribution to a general discussion that we all hope might stimulate further research and policy analysis, and ultimately progress. 1. The Dynamics of Risk in the Financial System The dynamics of the risk characteristics of the financial system are not well understood by the participants or the regulators. Fixing this represents a central challenge and opportunity for economists. I think it is one of the hardest challenges in the area of economic and financial theory. With most investors paying more attention to risk factors, and the costs and benefits of liquidity, they are constantly adjusting their investments and the structure of the assets they hold. So, relationships between assets, prices and risk may only remain stable for a few months at a time. The old model with stable relationships, implemented through a largely fixed asset allocation framework is broken. That doesn’t mean that diversification is a silly idea. But the challenge is to implement it effectively. Most of the discussion concerns adjustments to the regulatory approach. This is too narrow. Although self-regulation failed in the run up to the crisis, and cannot be relied as the principal element of stability, it remains important. A financial system in which the participants and regulators accurately perceive risk will behave differently, and defensive action by participants when is accurately perceived will be a contributing factor. 2. Multiple Targets and Instruments 6
It may not be unanimous, but it is close, that the single target – single instrument approach to policy is not sufficient for achieving financial and macroeconomic stability. Nor are policies that focus on the flow of funds or resources, and prices likely to be sufficient. And given the state of our knowledge, at this point, we are going to have to pay attention to balance sheet variables and linkages at the micro and macro levels. There will be warning signs or puzzles, and we are going to have to be willing to act on them without being able to give air tight arguments that there are problems. That is at variance with our earlier mindset in which the preferred course was inaction unless there was a clear case for intervention. This asymmetric attitude needs to be abandoned in favor of a more balanced assessment of the benefits and risks of inaction versus action. 3. Understanding Structural Changes in Advanced Economies The structure of all economies evolves in ways that affect the income distribution and employment opportunities. This evolution is driven by powerful market forces operating in the global economy. And, after these changes, economies don’t return to their previous average behavior. The vast majority (by population) of the emerging economies only become big once. Major technological innovations can also produce shifts in structure. Paying attention to structural evolution and incorporating it into longer term policy frameworks seem to me important and worth institutionalizing, with supporting research. It is of course easier to think about efficiency and market failures and even stability, than it is to address distributional issues and consider interventions that may adversely affect dynamic efficiency at the global level. But the alternative, ignoring the distributional and structural issues, doesn’t seem right and has risks. There are more and less harmful ways to nudge structural evolution. Ignoring the issue raises the risks of choices that run toward the more harmful end of the spectrum. 4. Ban High Speed Trading I would ban high speed trading—the automated, computer-driven trading of large volumes of financial assets in a short timeframe—by introducing lags in the trading process or increasing capital requirements or both. As far as I can see, it is entertaining, but it’s largely a zero-sum game, using resources, contributing potential volatility in markets. The economic benefits in terms of enhancing the pricing, capital allocation and risk spreading functions of the financial system, seem negligible. 5. Financial Regulation Financial regulation is a huge subject, rightly receiving lots of attention. These are just a few thoughts. At the macro level, it seems clear that we need to restrict excessive leverage. Ditto for banks. Regulating the shadow banking system is crucial. The crisis experience surely tells us that. I would have liked to hear much more about what is needed to properly regulate this part of the financial system in order to ensure stability. This involves ratings, capital requirements, incentives, and structures that, unlike the present ones, allow the unwinding of securitized assets in an efficient way after a shock or crisis. As far as I can tell, the procedures for dealing with underwater mortgages held in trusts supporting securitized assets are essentially broken. This makes recovery from crisis, shocks, and asset bubbles less efficient and much too lengthy. Finally, it seems to be that the current structure of the financial system—as it has evolved with a pattern of reduced regulation with respect to the separation of functions—is shot through with actual and potential conflicts of interest. These adversely affect incentives and performance and perhaps more importantly trust. This needs to be addressed by regulators, but also by the industry itself. There remains much more to be done, particularly on the industry side. http://blog-imfdirect.imf.org/2011/03/25/observations-on-the-evolution-of-economic-policies/
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04/15/2013 05:57 PM EU Comissioner Time to Move 'Quicker and Harder' Against Tax Evasion In a SPIEGEL interview, European Union Tax Commissioner Algirdas Semeta discusses the post-"Offshore Leaks" debate on fighting tax havens and why he believes cooperation and information exchange between the United States and Europe could create the global standard. SPIEGEL: The finance ministers of France, Germany, Italy, Spain and the United Kingdom want to step up the fight against tax evaders. In a letter, they announced a computerized exchange of information between their tax authorities. Would this help? Semeta: If the five countries push for more ambitious information exchange, allowing all European Union member states to collect the taxes they are due, it would certainly be a positive thing. Automatic exchange of information has been our standard in the EU for years now, and the European Commission has been pushing to expand its scope to make the fight against tax evasion much stronger. With five of the largest member states also looking to achieve this same goal, we could expect good results. And I think the best way to achieve this now is to quickly adopt the large package of anti-evasion measures which the European Commission has put on the table. SPIEGEL: Does that explain the shift by Luxembourg, and likely Austria, which, because of secrecy within their banking sectors, declined in the past to exchange information with other tax authorities? Semeta: I can only welcome the readiness of Luxembourg to adopt the EU standard for greater transparency through automatic exchange of information. And Austria will certainly not want to remain isolated. SPIEGEL: The Americans not only have an automated system for sharing information between states, but they take measures such as forcing Swiss banks to cough up information about tax evaders. Is something like this also intended for Europe? Semeta: The EU is the pioneer of the automatic exchange of information model, upon which the United States' Foreign Account Tax Compliance Act (FACTA) is based. As a result, we have very good structures and tools in place which we can use to exchange information with other countries, including those outside of the EU. In our negotiations with the US when FATCA was first conceived, we agreed that information will be exchanged between governments, rather than financial institutions. This is less costly for all parties involved. The other advantage of the agreement is that information flows are not a one-way street. With a combined approach in the EU and the US, we will suddenly see a vast expansion in the automatic exchange of information globally. SPIEGEL: The European Savings Tax Directive, which is meant to regulate the taxation of savings across the EU, leaves many loopholes for tax evaders. Semeta: The savings directive has many merits, but it is true that we identified important loopholes which were being exploited by tax evaders. Already in 2008, the Commission set about trying to close these loopholes and strengthen the EU rules. But, up until now, member states have not managed to agree on a revised directive, because
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Austria and Luxembourg have blocked efforts. Now that Luxembourg has changed its stance on bank secrecy, and with Austria hopefully soon to follow suit, I hope we will see the fast adoption of a stronger savings directive. SPIEGEL: But dividends and other investment income are excluded from the exchange of information? Semeta: The new rules that entered into force this year foresee a gradual but significant expansion of the automatic exchange of information. Starting in 2014, it will apply to labor income, pensions, director's fees, life insurance and revenue from property. The next step is to extend the information exchange to dividends, royalties and capital gains. But maybe now with the current appetite to move quicker and harder against tax evasion, the member states will seek to speed up the wider application of automatic exchange foreseen in our legislation. SPIEGEL: What are the chances for the successful prosecution of tax evaders in havens like the British Virgin Islands or the Caymans? Semeta: Last year, I put forward a new coordinated EU stance against tax havens, which would include a common definition, coordinated blacklisting and sanctions. If implemented by the member states, this approach could serve as a real deterrent to tax havens. I also suggested criminal sanctions for tax evaders. But for many EU countries that was going too far. I hope there will be a growing willingness to act. Interview conducted by Christoph Pauly URL: http://www.spiegel.de/international/europe/eu-tax-comissioner-discusses-efforts- to-combat-havens-and-evaders-a-894418.html Related SPIEGEL ONLINE links: • Pirates of the Caribbean: Global Resistance to Tax Havens Grows (04/08/2013) http://www.spiegel.de/international/world/0,1518,892977,00.html • Tax Haven Revelations: German Offenders Face Tough Road Ahead (04/05/2013) http://www.spiegel.de/international/germany/0,1518,892728,00.html • Offshore Leaks: Vast Web of Tax Evasion Exposed (04/04/2013) http://www.spiegel.de/international/business/0,1518,892505,00.html
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April 14, 2013 The Antisocial Network By PAUL KRUGMAN Bitcoin’s wild ride may not have been the biggest business story of the past few weeks, but it was surely the most entertaining. Over the course of less than two weeks the price of the “digital currency” more than tripled. Then it fell more than 50 percent in a few hours. Suddenly, it felt as if we were back in the dot-com era. The economic significance of this roller coaster was basically nil. But the furor over bitcoin was a useful lesson in the ways people misunderstand money — and in particular how they are misled by the desire to divorce the value of money from the society it serves. What is bitcoin? It’s sometimes described as a way to make transactions online — but that in itself would be nothing new in a world of online credit-card and PayPal transactions. In fact, the Commerce Department estimates that by 2010 about 16 percent of total sales in America already took the form of e-commerce. So how is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable. When you transfer bitcoins to someone else, it’s as if you handed over a paper bag filled with $100 bills in a dark alley. And sure enough, as best as anyone can tell the main use of bitcoin so far, other than as a target for speculation, has been for online versions of those dark-alley exchanges, with bitcoins traded for narcotics and other illegal items. But bitcoin evangelists insist that it’s about much more than greasing the path for illicit transactions. The biggest declared investors in bitcoins are the Winklevoss brothers, wealthy twins who successfully sued for a share of Facebook and were made famous by the movie “The Social Network” — and they make claims for the digital product similar to those made by goldbugs for their favorite metal. “We have elected,” declared Tyler Winklevoss recently, “to put our money and faith in a mathematical framework that is free of politics and human error.” The similarity to goldbug rhetoric isn’t a coincidence, since goldbugs and bitcoin enthusiasts — bitbugs? — tend to share both libertarian politics and the belief that governments are vastly abusing their power to print money. At the same time, it’s very peculiar, since bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air. Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment. However, let’s leave that strangeness on one side, along with the peculiar “mining” process — actually a process of complex calculation — used to add to the bitcoin stock. Instead, let’s focus on the two huge misconceptions — one practical, one philosophical — that underlie both goldbugism and bitbugism.
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The practical misconception here — and it’s a big one — is the notion that we live in an era of wildly irresponsible money printing, with runaway inflation just around the corner. It’s true that the Federal Reserve and other central banks have greatly expanded their balance sheets — but they’ve done that explicitly as a temporary measure in response to economic crisis. I know, government officials are not to be trusted and all that, but the truth is that Ben Bernanke’s promises that his actions wouldn’t be inflationary have been vindicated year after year, while goldbugs’ dire warnings of inflation keep not coming true. The philosophical misconception, however, seems to me to be even bigger. Goldbugs and bitbugs alike seem to long for a pristine monetary standard, untouched by human frailty. But that’s an impossible dream. Money is, as Paul Samuelson once declared, a “social contrivance,” not something that stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment. Actually, you’d expect the Winklevosses, of all people, to get this, because in a way money is like a social network, which is useful only to the extent that other people use it. But I guess some people are just bothered by the notion that money is a human thing, and want the benefits of the monetary network without the social part. Sorry, it can’t be done. So do we need a new form of money? I guess you could make that case if the money we actually have were misbehaving. But it isn’t. We have huge economic problems, but green pieces of paper are doing fine — and we should let them alone. http://www.nytimes.com/2013/04/15/opinion/krugman-the-antisocial- network.html?partner=rss&emc=rss&wpisrc=nl_wonk&_r=0
April 15, 2013, 9:00 am 1 Comment Europe in Brief Tim Duy asks, when can we all admit that the euro is a failure? The answer, of course, is never. Too much history, too many declarations, too much ego is invested in the single currency for those involved ever to admit that maybe they made a mistake. Even if the project ends in total disaster, they will insist that the euro didn’t fail Europe, Europe failed the euro. But it it occurs to me that it might be a good idea for me to recapitulate my view of what really ails Europe, and what could yet be done. So, start with Europe as it was in the late 1990s. It was a continent with many problems, but nothing resembling a crisis, and not much sign of being on an unsustainable path. Then came the euro. The first effect of the euro was an outbreak of europhoria: suddenly, investors believed that all European debt was equally safe. Interest rates dropped all around
11 the European periphery, setting off huge flows of capital to Spain and other economies; these capital flows fed huge housing bubbles in many places, and in general created booms in the countries receiving the inflows. The booms, in turn, caused differential inflation: costs and prices rose much more in the periphery than in the core. Peripheral economies became increasingly uncompetitive, which wasn’t a problem as long as the inflow-fueled bubbles lasted, but would become a problem once the capital inflows stopped. And stop they did. The result was serious slumps in the periphery, which lost a lot of internal demand but remained weak on the external side thanks to the loss of competitiveness. This exposed the deep problem with the single currency: there is no easy way to adjust when you find your costs out of line. At best, peripheral economies found themselves facing a prolonged period of high unemployment while they achieved a slow, grinding, “internal devaluation”. The problem was greatly exacerbated, however, when the combination of slumping revenues and the prospect of protracted economic weakness led to large budget deficits and concerns about solvency, even in countries like Spain that entered the crisis with budget surpluses and low debt. There was panic in the bond market — and as a condition for aid, the European core demanded harsh austerity programs. Austerity, in turn, led to much deeper slumps in the periphery — and because peripheral austerity was not offset by expansion in the core, the result was in fact a slump for the European economy as a whole. One consequence has been that austerity is failing even on its own terms: key measures like debt/GDP ratios have gotten worse, not better. At a couple of points, this ugly scene has threatened to create an immediate European meltdown, with political unrest causing a loss of financial confidence causing a run on sovereign debt causing a run on the banks, and so on into a vicious circle. So far, however, the ECB has managed to contain the threat of meltdown by intervening, indirectly or directly, to support sovereign debt. But while financial panic has been contained, the underling macroeconomics just keep getting worse. What could Europe be doing differently? From early on in the crisis, critics like me urged a three-part response. First, ECB intervention to stabilize borrowing costs. Second, aggressive monetary and fiscal expansion in the core, to ease the process of internal adjustment. Third, a softening of austerity demands on the periphery — not zero austerity, but less, so that the human costs would be less. We eventually got part 1, more or less — but nothing on parts 2 and 3. And European officials remain in deep denial about the fundamentals of the situation. They continue to define the problem as one of fiscal profligacy, which is only part of the story even for Greece, and none of the story elsewhere. They keep declaring success for austerity and internal devaluation, using any excuse at hand: a spurious surge in measured Irish productivity becomes evidence that internal devaluation is working, the decline in bond yields following ECB intervention is proclaimed as a vindication of austerity. So that’s where we are. And it’s hard to envisage a happy ending. http://krugman.blogs.nytimes.com/2013/04/15/europe-in-brief/
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April 14, 2013, 9:12 am 98 Comments Milton Friedman, Currency Debaser Brad DeLong links to a Forbes piece by Tim Lee from last year that I missed, which in turn quotes Milton Friedman on the macroeconomic views that prevailed in the early 1930s: Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms. Friedman viewed this as evident nonsense, and commended instead the then Chicago view that banks should be rescued, government should act to reflate the economy, and that there was a strong case “for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times.” But as Lee notes, the doctrine Friedman considered self-evident nonsense is now more or less the official doctrine of the Republican party, while the Chicago view he praised are now, according to conservatives, tyrannical socialism. http://krugman.blogs.nytimes.com/2013/04/14/milton-friedman-currency-debaser/
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APRIL 14, 2013, 9:36 PM A Tax System Stacked Against the 99 Percent By JOSEPH E. STIGLITZ LEONA HELMSLEY, the hotel chain executive who was convicted of federal tax evasion in 1989, was notorious for, among other things, reportedly having said that “only the little people pay taxes.” As a statement of principle, the quotation may well have earned Mrs. Helmsley, who died in 2007, the title Queen of Mean. But as a prediction about the fairness of American tax policy, Mrs. Helmsley’s remark might actually have been prescient. Today, the deadline for filing individual income-tax returns, is a day when Americans would do well to pause and reflect on our tax system and the society it creates. No one enjoys paying taxes, and yet all but the extreme libertarians agree, as Oliver Wendell Holmes said, that taxes are the price we pay for civilized society. But in recent decades, the burden for paying that price has been distributed in increasingly unfair ways.
About 6 in 10 of us believe that the tax system is unfair — and they’re right: put simply, the very rich don’t pay their fair share. The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes. Conservatives like to point out that the richest Americans’ tax payments make up a large portion of total receipts. This is true, as well it should be in any tax system that is progressive — that is, a system that taxes the affluent at higher rates than those of modest means. It’s also true that as the wealthiest Americans’ incomes have skyrocketed in recent years, their total tax payments have grown. This would be so even if we had a single flat income-tax rate across the board. What should shock and outrage us is that as the top 1 percent has grown extremely rich, the effective tax rates they pay have markedly decreased. Our tax system is much less progressive than it was for much of the 20th century. The top marginal income tax rate peaked at 94 percent during World War II and remained at 70 percent through the 1960s and 1970s; it is now 39.6 percent. Tax fairness has gotten much worse in the 30 years since the Reagan “revolution” of the 1980s. Citizens for Tax Justice, an organization that advocates for a more progressive tax system, has estimated that, when federal, state and local taxes are taken into account, the top 1 percent paid only slightly more than 20 percent of all American taxes in 2010 — about the same as the share of income they took home, an outcome that is not progressive at all.
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With such low effective tax rates — and, importantly, the low tax rate of 20 percent on income from capital gains — it’s not a huge surprise that the share of income going to the top 1 percent has doubled since 1979, and that the share going to the top 0.1 percent has almost tripled, according to the economists Thomas Piketty and Emmanuel Saez. Recall that the wealthiest 1 percent of Americans own about 40 percent of the nation’s wealth, and the picture becomes even more disturbing. If these numbers still don’t impress you as being unfair, consider them in comparison with other wealthy countries. The United States stands out among the countries of the Organization for Economic Cooperation and Development, the world’s club of rich nations, for its low top marginal income tax rate. These low rates are not essential for growth — consider Germany, for instance, which has managed to maintain its status as a center of advanced manufacturing, even though its top income-tax rate exceeds America’s by a considerable margin. And in general, our top tax rate kicks in at much higher incomes. Denmark, for example, has a top tax rate of more than 60 percent, but that applies to anyone making more than $54,900. The top rate in the United States, 39.6 percent, doesn’t kick in until individual income reaches $400,000 (or $450,000 for a couple). Only three O.E.C.D. countries — South Korea, Canada and Spain — have higher thresholds. Most of the Western world has experienced an increase in inequality in recent decades, though not as much as the United States has. But among most economists there is a general understanding that a country with excessive inequality can’t function well; many countries have used their tax codes to help “correct” the market’s distribution of wealth and income. The United States hasn’t — or at least not very much. Indeed, the low rates at the top serve to exacerbate and perpetuate the inequality — so much so that among the advanced industrial countries, America now has the highest income inequality and the least equality of opportunity. This is a gross inversion of America’s traditional meritocratic ideals — ideals that our leaders, across the spectrum, continue to profess. Over the years, some of the wealthy have been enormously successful in getting special treatment, shifting an ever greater share of the burden of financing the country’s expenditures — defense, education, social programs — onto others. Ironically, this is especially true of some of our multinational corporations, which call on the federal government to negotiate favorable trade treaties that allow them easy entry into foreign markets and to defend their commercial interests around the world, but then use these foreign bases to avoid paying taxes. General Electric has become the symbol for multinational corporations that have their headquarters in the United States but pay almost no taxes — its effective corporate-tax rate averaged less than 2 percent from 2002 to 2012 — just as Mitt Romney, the Republican presidential nominee last year, became the symbol for the wealthy who don’t pay their fair share when he admitted that he paid only 14 percent of his income in taxes in 2011, even as he notoriously complained that 47 percent of Americans were freeloaders. Neither G.E. nor Mr. Romney has, to my knowledge, broken any tax laws, but the sparse taxes they’ve paid violate most Americans’ basic sense of fairness. In looking at such statistics, one has to be careful: they typically reflect taxes as a percentage of reported income. And the tax laws don’t require the reporting of all kinds of income. For the rich, hiding such assets has become an elite sport. Many avail themselves of the Cayman Islands or other offshore tax shelters to avoid taxes (and not, 15 you can safely assume, because of the sunny weather). They don’t have to report income until it is brought back (“repatriated”) to the United States. So, too, capital gains have to be reported as income only when they are realized. And if the assets are passed on to one’s children or grandchildren at death, no taxes are ever paid, in a peculiar loophole called the “step-up in cost basis at death.” Yes, the tax privileges of being rich in America extend into the afterlife. As Americans look at some of the special provisions in the tax code — for vacation homes, racetracks, beer breweries, oil refineries, hedge funds and movie studios, among many other favored assets or industries — it is no wonder that they feel disillusioned with a tax system that is so riddled with special rewards. Most of these tax-code loopholes and giveaways did not materialize from thin air, of course — usually, they were enacted in pursuit of, or at least in response to, campaign contributions from influential donors. It is estimated that these kinds of special tax provisions amount to some $123 billion a year, and that the price tag for offshore tax loopholes is not far behind. Eliminating these provisions alone would go a long way toward meeting deficit- reduction targets called for by fiscal conservatives who worry about the size of the public debt. Yet another source of unfairness is the tax treatment on so-called carried interest. Some Wall Street financiers are able to pay taxes at lower capital gains tax rates on income that comes from managing assets for private equity funds or hedge funds. But why should managing financial assets be treated any differently from managing people, or making discoveries? Of course, those in finance say they are essential. But so are doctors, lawyers, teachers and everyone else who contributes to making our complex society work. They say they are necessary for job creation. But in fact, many of the private equity firms that have excelled in exploiting the carried interest loophole are actually job destroyers; they excel in restructuring firms to “save” on labor costs, often by moving jobs abroad. Economists often eschew the word “fair” — fairness, like beauty, is in the eye of the beholder. But the unfairness of the American tax system has gotten so great that it’s dishonest to apply any other label to it. Traditionally, economists have focused less on issues of equality than on the more mundane issues of growth and efficiency. But here again, our tax system comes in with low marks. Our growth was higher in the era of high top marginal tax rates than it has been since 1980. Economists — even at traditional, conservative international institutions like the International Monetary Fund — have come to realize that excessive inequality is bad for growth and stability. The tax system can play an important role in moderating the degree of inequality. Ours, however, does remarkably little about it. One of the reasons for our poor economic performance is the large distortion in our economy caused by the tax system. The one thing economists agree on is that incentives matter — if you lower taxes on speculation, say, you will get more speculation. We’ve drawn our most talented young people into financial shenanigans, rather than into creating real businesses, making real discoveries, providing real services to others. More efforts go into “rent-seeking” — getting a larger slice of the country’s economic pie — than into enlarging the size of the pie. Research in recent years has linked the tax rates, sluggish growth and rising inequality. Remember, the low tax rates at the top were supposed to spur savings and hard work, and thus economic growth. They didn’t. Indeed, the household savings rate fell to a
16 record level of near zero after President George W. Bush’s two rounds of cuts, in 2001 and 2003, on taxes on dividends and capital gains. What low tax rates at the top did do was increase the return on rent-seeking. It flourished, which meant that growth slowed and inequality grew. This is a pattern that has now been observed across countries. Contrary to the warnings of those who want to preserve their privileges, countries that have increased their top tax bracket have not grown more slowly. Another piece of evidence is here at home: if the efforts at the top were resulting in our entire economic engine’s doing better, we would expect everyone to benefit. If they were engaged in rent-seeking, as their incomes increased, we’d expect that of others to decrease. And that’s exactly what’s been happening. Incomes in the middle, and even the bottom, have been stagnating or falling. Aside from the evidence, there is a strong intuitive case to be made for the idea that tax rates have encouraged rent-seeking at the expense of wealth creation. There is an intrinsic satisfaction in creating a new business, in expanding the horizons of our knowledge, and in helping others. By contrast, it is unpleasant to spend one’s days fine- tuning dishonest and deceptive practices that siphon money off the poor, as was common in the financial sector before the 2007-8 financial crisis. I believe that a vast majority of Americans would, all things being equal, choose the former over the latter. But our tax system tilts the field. It increases the net returns from engaging in some of these intrinsically distasteful activities, and it has helped us become a rent-seeking society. It doesn’t have to be this way. We could have a much simpler tax system without all the distortions — a society where those who clip coupons for a living pay the same taxes as someone with the same income who works in a factory; where someone who earns his income from saving companies pays the same tax as a doctor who makes the income by saving lives; where someone who earns his income from financial innovations pays the same taxes as a someone who does research to create real innovations that transform our economy and society. We could have a tax system that encourages good things like hard work and thrift and discourages bad things, like rent-seeking, gambling, financial speculation and pollution. Such a tax system could raise far more money than the current one — we wouldn’t have to go through all the wrangling we’ve been going through with sequestration, fiscal cliffs and threats to end Medicare and Social Security as we know it. We would be in sound fiscal position, for at least the next quarter- century. The consequences of our broken tax system are not just economic. Our tax system relies heavily on voluntary compliance. But if citizens believe that the tax system is unfair, this voluntary compliance will not be forthcoming. More broadly, government plays an important role not just in social protection, but in making investments in infrastructure, technology, education and health. Without such investments, our economy will be weaker, and our economic growth slower. Society can’t function well without a minimal sense of national solidarity and cohesion, and that sense of shared purpose also rests on a fair tax system. If Americans believe that government is unfair — that ours is a government of the 1 percent, for the 1 percent, and by the 1 percent — then faith in our democracy will surely perish. http://opinionator.blogs.nytimes.com/2013/04/14/a-tax-system-stacked-against-the- 99-percent/?ref=opinion
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Opinions Lawrence Summers: When gridlock is good By Lawrence Summers, Apr 14, 2013 11:49 PM EDT The Washington Post Monday, April 15, 1:49 AM Lawrence Summers, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and economic adviser to President Obama from 2009 through 2010. With the release of the president’s budget, Washington again has descended into partisan squabbling. There is pervasive concern in the United States about the basic functioning of democracy. Congress is viewed less favorably than ever, and revulsion runs deep at political figures seemingly unable to reach agreement on measures to reduce future budget deficits. Pundits and politicians alike condemn “gridlock.” Angry movements such as Occupy Wall Street and the tea party are active on the extremes of both sides of the political spectrum. Meanwhile, profound changes are redefining the global order. Emerging economies, led by China, are converging toward the West. Beyond the current economic downturn lies the even more serious challenge of the rise of technologies, which may increase average productivity but which also displace large numbers of workers. The combination of an aging population and the rising costs of health care and education will put pressure on future budgets. Anyone who has worked in a political position in Washington has had ample experience with great frustration. Almost everyone in U.S. politics feels that much is essential yet infeasible in the current environment. Many yearn for a return to an imagined era when centrists in both parties negotiated bipartisan compromises that moved the country forward. Yet fears about the functioning of the federal government have been a recurring feature of the political landscape since Patrick Henry’s assertion in 1788 that the spirit of the revolution had been lost. It is sobering to contrast today’s concern about political paralysis with that which gripped Washington during the early 1960s. Then, the prevailing diagnosis was that a lack of cohesive and responsible parties for voters to choose from precluded clear mandates necessary for decisive action. While a flurry of legislation passed in 1964 to 1966 after a Democratic electoral landslide, Vietnam and Watergate followed, all leading to President Jimmy Carter’s declaration of a crisis of the national spirit. Despite today’s rose-tinted view, there was hardly high rapport in Washington during Ronald Reagan’s presidency. In American history, division and slow change has been the norm rather than the exception. While often frustrating, this has not always been a bad thing. There were probably too few checks and balances as the United States entered the Vietnam and Iraq wars. There should have been more checks and balances in place
18 before the huge tax cuts of 1981, 2001 and 2003, or to avert the many unfunded entitlement expansions of the past few decades. Most experts would agree that it is a good thing that politics thwarted the effort to establish a guaranteed annual income in the late 1960s and early 1970s, as well as the effort to establish a “single-payer” health- care system during the 1970s. The great mistake of the gridlock theorists is to suppose that progress comes from legislation, and that more legislation consistently represents more progress. While people think the nation is gripped by gridlock, consider what has happened in the past five years: Washington moved faster to contain a systemic financial crisis than any country facing such an episode has done in the past generation. Through all the fractiousness, enough change has taken place that, without further policy action, the ratio of debt to gross domestic product is expected to decline for the next five years. Beyond that, the outlook depends largely on health-care costs, but their growth has slowed to the rate of GDP growth for three years now, the first such slowdown in nearly half a century. At last, universal health care has been passed and is being implemented. Within a decade, it is likely that the United States no longer will be a net importer of fossil fuels. Financial regulation is not in a fully satisfactory place but has received its most substantial overhaul in 75 years. For the first time, most schools and teachers are being evaluated on objective metrics of performance. Same-sex marriage has become widely accepted. No comparable list can be put forth for Japan or countries in Western Europe. Yes, change comes rapidly to some authoritarian societies in Asia, but it may not endure, and it may not always be for the better. Anyone prone to pessimism about the United States would do well to ponder the alarm with which it viewed the Soviet Union after the launch of the Sputnik satellite or Japan’s economic rise in the 1980s and the early 1990s. One of America’s greatest strengths is its ability to defy its own prophecies of doom. None of this is to say that the United States does not face huge challenges. But these are not because of structural obstacles. They are about finding solutions to problems such as rising income inequality and climate change — issues for which we do not quite know the way forward. These are not problems of gridlock but of vision. http://www.washingtonpost.com/opinions/lawrence-summers-when-gridlock-is- good/2013/04/14/8bfeab9c-a3c3-11e2-9c03- 6952ff305f35_story.html?hpid=z2&wpisrc=nl_wonk
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Daily Morning Newsbriefing 15, 2013 Germany goes really slow on banking union The confrontation over the shape of the banking union has come head to head at the informal Ecofin in Dublin where Wolfgang Schaulbe said Germany insisted on a treaty change as a condition for a genuine resolution authority. Frankfurter Allgemeine quotes him as saying that the legal basis for such a mechanism was too thin at the moment. Germany in particular would risk a constitutional challenge that might succeed. The paper pointed out that at its December summit, the European Council had demanded a European resolution mechanism. Michel Barnier said in Dublin that he would present such a mechanism, without giving details whether he would integrated this into the ESM or some other institution. The paper said his proposal would include a common resolution fund, which, in the long run, should be funded by the banks themselves. Vitor Constancio is quoted as saying that a sole reliance on national funds – which is what Germany is proposing – is not sufficient. A blueprint after all So much for these “not a blueprint” lies. Die Welt reports that Michel Barnier will enshrine a Cyprus type resolution mechanism in his proposal. The pecking order of those to be bailed-in are: shareholders, bondholders, and then depositors with deposit of over €100,000. Only then, will the EU mechanisms start to kick in. That seemed to be the consensus in Dulbin. Jorg Asmussen favoured the notion of a pecking order. Jens Weidmann said depositors should understand that the reward of higher interest rates comes with a greater risk. European finance ministers decided seven year extension for Ireland and Portugal Ireland and Portugal will get more time to pay off their EFSF loans as European finance ministers agreed to extend maturities by an average of seven years. The step, which needs to be formally agreed by member states, would protect Portugal and Ireland "from refinancing risks stemming from developments in other euro area programme countries like Cyprus," the ministers said according to Europe online. Friday's decisions would delay Ireland’s repayment of roughly €21bn of its €35bn of EFSM/EFSF loans maturing over the next decade by an average of seven years, so the Irish Examiner. No figures were available for Portugal. Extending Portugal’s loan maturities is conditional on Lisbon finding new ways to meet its budget targets for this year. The troika arrives in Lisbon today to validate the €1.3bn shortfall in the 2013 budget, after the constitutional court ruled parts of it unconstitutional. The new measures have to be ready by May 15, writes Diario
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Economico. The Portuguese government also decided to postpone a 10y bond issuance, according to another article in Diario Economico. Markets reacted positively to the news. Ireland’s 10-year government bond yield hit 3.89%, the lowest level since December 2006, Bloomberg reports. Portugal’s 2y notes dropped six basis points to 2.91%, the longest run of gains since 2001. German Eurosceptic party in formation One of the reasons why this party may ultimately become a political force is that massive press coverage it is received. This weekend, the Alternative fur Deutschland, Germany’s new anti-euro party, held its founding Congress, attended by an enthusiastic crowd of mostly grey-haired man, waving German flags. One of the attendees had attached a 100 Deutschmark note to his tie. Frankfurter Allgemeine has a good report on the congress, which was attended, among others, by an observer from the European Commission, who was booed by the crowd, when the main speaker tried to welcome her. Party boss Bernd Lucke said the party would focus on the euro, Europe, justice and democracy. He then said it was important that the party first approves the electoral platform before discussing it in detail – which the party duly did. Wise men group deliver verdict The group of 10 wise men, appointed by President Giorgio Napolitano, has finished its work, as Il Messaggero reports. The proposals to end the political deadlock are similar to a broad political programme. The proposals include cuts in the costs of politics, a new electoral system in which only the Lower House would have political functions, new measures to improve competitiveness and secure an economic recovery, justice reform and a new fiscal system. The wise men group also proposed asking the EU Commission to let Italy exceed the 3% deficit limit for make investments and especially for projects that receive EU funds. The group also said Italy needed a law on conflicts of interest. Prodi for president? The Italian Parliament will begin the consultations to find a new President of the Republic next Thursday. Romano Prodi is the favourite, Il Corriere della Sera reports. The former EU Commission president denies any interest, but according to the newspaper this is only tactical. The old guard of Partito Democratico backs Prodi. Nichi Vendola, the leftist ally of Pier Luigi Bersani, backs Prodi as well. If elected, Prodi could return the favour and give Bersani another mandate to form a government. Other candidates mentioned are Emma Bonino, Massimo D’Alema, Franco Marini and Giuliano Amato. Italy gridlock gets worse There is no solution to the statemate in Italian politics, as the parties are digging into their entrench position. Silvio Berlusconi has called for a grand coalition, but says if this is not possible, he wants new elections. As Il Giornale reports, he attacked both Bersani as well as the wise men group, for wasting valuable time. He added that he would run again as candidate for PM. La Repubblica reports that Grillo wants a parliamentary rule, whereby parliament implements structural reforms without a government (or rather Mario Monti as a lame duck PM. Specifically, Grillo urges for measures to help country’s SMEs, cut the costs of politics and break the mingling between politics and banks.
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Matteo Renzi, in an interview with TG5, said his party was wasting valuable time, and that it was a huge mistake for Bersani to flirt with Grillo’s movement. He said he was willing to run against Silvio Berlusconi if there are new elections. Confindustria says time is running out Giorgio Squinzi, the business lobby Confindustria chief, says the time was running out for Italy and the country’s companies, as Il Sole 24 Ore reports. He plaised the new government decree to pay back to entrepreneurs over €40bn of debts, but warns over the gridlock. According to Confindustria estimates, the effect of the current stalemate on the real economy could be worse than expectated. Squinzi forecast that the first 45 days without a government had cost at least €1.6bn. He also said the credit crunch is the worse it has ever been. Scalfari says broad government is the only chance A broad government is the only (and last) solution to solve the current political gridlock in Italy, Eugenio Scalfari writes in La Repubblica. The confidence of Italians in active politics is gone, but there’s one hope. According to Scalfari, Pier Luigi Bersani should rise above the political infighting in his party and decide, as a first step, to propose a candidate for the presidency who is bipartisan, pragmatic and crisis-oriented. Demonstration for a 3rd Spanish Republic on anniversary of 2nd On Sunday, a large demonstration in the centre of Madrid commemorated the 82nd anniversary of the proclamation of the 2nd Spanish Republic reports Europa Press. This year specially, the demand for a 3rd Republic was tied with the economic crisis and the controversies surrounding the Royal Household. Spain's United Left party IU was one of the 50-odd organizations behind the event, and European Left parties such as Die Linke or Syriza were represented. The leader of IU told the press that a 3rd Spanish Republic would bring "a more social and egalitarian system where democracy is not hijacked by the Troika and financial powers that be". Spanish local and regional governments oppose proposed reforms Spanish government plans for a sweeping legal reform of local government has met with strong opposition from Spain's Federation of Municipalities and Provinces, who argue that the reform infringes on the constitutionally protected autonomy of local government, writes El Confidencial. Although a majority of the mayors are from the PP, they oppose the PP national government on this issue with the support of Socialist mayors. The Spanish government intends to save over €7bn in 2014 through an elimination of overlapping competences between different levels of the public administration, and by enforcing balanced-budget criteria on local and provincial governments. In their document, more than 100 pages long, the Federation opposes government proposals such as • preventing mayors of towns with less than 1,000 inhabitants from receiving a salary; • capping the salaries of mayor and local councillors to the level of a Secretary of State; • the possibility that local government auditors depend from the central government and not from the local governments; • the ability of the finance minister to intervene a local governments who fail to keep a balanced budget and have fewer than 5,000 inhabitants;
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• the ability of the central government to fix the price of municipal services. Europa Press reports that, after failing to reach an agreement in negotiations with the Spanish government, the regional government of the Basque Country has lodged an constitutional complaint against a balanced-budget decree from 9 months ago. At issue are the infringement of the region's exclusive competence to regulate its own public employees, because of the central government's order to reduce pay by 1/14 on account of the December "extra wage"; and also changes in the regulation of commercial opening times and sales periods. European Commission hints at reform demands on Spain ABC reports on an advance of the European Commission's recommendations to Spain on structural reforms, contained in a report issued last Wednesday. The Commission will make official recommendations to the member states at the end of May. ABC lists the following: • expansion of Spain's export base; • kickstarting the transition to a new growth model with investment in R&D, improved independence for industry regulators, and a reduced dependence on oil imports; • focusing on education and training for jobs, reducing the duality in the labour market, and tie wages to productivity; • foster a housing rental market, including with tax incentives, to help labour mobility; • completing the restructuring of the financial sector. Spanish judges develop standards to stop evictions Last month the European Court of Justice issued an opinion that Spanish foreclosure procedures were contrary to EU consumer protection norms. Now, El Pais (English edition) writes that Spanish judges are sharing ideas on how to legally curb abusive mortgage clauses or stop evictions, as long as the current law isn't reformed. Examples, intended to avoid contradictory rulings from different judges, include: • Barcelona and Valencia judges have agreed to limit late fees to low multiples of legal interest rates; • Barcelona judges will inform people facing eviction of the possibility to allege abusive mortgage clauses to stop it; • Bilbao judges have virtually stopped evictions since last November. Irish trade unions to decide on public wage deal this week Key Irish trade unions are to publish in the coming days their ballot vote results on the new Irish public service wage agreement, Corke Park II. The Irish Times writes that the overall vote is expected to be very close with many observers predicting a very narrow majority for the “Yes” side. Three trade unions already rejected the proposal (six according to the Irish Examiner). Enda Kenny has said that the Government would introduce legislation to allow for cuts to the pay and pensions bill if staff rejected the new Croke Park proposals.
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Slovenia eyes bank privatisation Slovenia’s prime minister Alenka Bratusek said her government to have a plan ready to put to parliament in two weeks to sell off state assets, probably including a bank, Reuters writes about her first major news conference in Ljubljana since taking office last month. After the messy Cyprus deal, Slovenia got into financial market focus, with some expecting it to be next to ask for a bailout. Yields on Slovenia’s 10-year benchmark bond rose to 6.61% on Friday, up from 4.77% on March 15, the day before the Cyprus bailout deal. Greece hopes to conclude troika talks today Greece hopes to conclude negotiations with the troika by Monday, AFP cites the head of the country's socialist party said Saturday. "We have come up with a proposal we all agree on and which I hope the troika will accept by tomorrow night," said Evangelos Venizelos, after an hours-long meeting with Prime Minister Antonis Samaras and of the third coalition partner. According to media reports, Samaras and his government's two junior partners have decided to cut 4,000 jobs in the public sector by the end of 2013. "The constitution does not forbid the dismissal of civil servants whose position is abolished," Samaras said in a Saturday interview with daily Imerissia, paving the way for the move. The troika concluded its review on Friday with staff level agreement, according to Reuters. Krugman on internal devaluation Paul Krugman is pointing to recently published data by Eurostat, which show that despite the crisis nominal wage have mostly not adjusted in the eurozone, except in Greece. These are the percentage changes from 2008 to 2012: Greece -11.2 Ireland +0.8 Spain +8.3 Estonia +7.0 Latvia +1.3 Lithuania-1.4 He says that some competitiveness adjustment has taken place, but not nearly enough, and the data are showing that downward nominal wage rigidities are well in place.
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Munchau says ECB wealth study shows that the euro is no longer a valid unit of account In his FT column, Wolfgang Munchau puts forward the theory that the large and counter-intuitive wealth gap in the ECB’s recent study, showing that southern Europeans are richer than northern Europeans, has a completely different meaning. This is not a case of “poor Germans bailing out rich Cypriots”, but a real-exchange effect – as the euro in Germany has a much higher purchasing power than a euro in Cyprus. In fact, they may have become two separate currencies. He says the euro is no longer a reliable unit of account for cross-border measurements, as a result of which such comparisons are hugely distorted. The data are, however, a very good metric for imbalances in the eurozone. Eurozone Financial Data Previous day Yesterday This Morning
France 0.547 0.553 0.552 Italy 3.033 3.086 3.078 Spain 3.372 3.443 3.441 Portugal 5.087 5.067 5.119 Greece 10.080 10.193 9.98 Ireland 2.598 2.653 2.682 Belgium 0.802 0.804 0.802 Bund Yield 1.301 1.257 1.265
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.307 1.3076
Yen 129.320 128.23
Pound 0.850 0.8535
Swiss Franc 1.216 1.2167
ZC Inflation Swaps
previous last close
1 yr 1.56 1.5
2 yr 1.53 1.51
5 yr 1.75 1.74
10 yr 2.06 2.05
Euribor-OIS Spread
previous last close
1 Week -5.457 -5.857
1 Month -2.929 -4.429
3 Months 2.629 2.629
1 Year 30.686 32.586
Source: Reuters
http://www.eurointelligence.com/professional/briefings/2013-04- 16.html?cHash=ca3001bf70a948075a3ae951cdb4b359
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ft.com comment Columnists April 14, 2013 6:36 pm The riddle of Europe’s single currency with many values
By Wolfgang Münchau The euro is not worth the same across the region – Spain and Germany have different currencies
©Dreamstime A European Central Bank survey shows that households in northern Europe have a much lower net wealth than those in southern Europe. Average German net assets per household are just under €200,000, while they are €300,000 in Spain and €670,000 in Cyprus. No, this not a typo. German newspapers screamed that poor Germans are bailing out rich Cypriots. This interpretation is wrong but the truth behind these counter-intuitive findings is even more disturbing. What the survey shows is not wealth differentials but the de facto exchange rates between the eurozone economies. They are not measures of net wealth but of imbalances. And they are enormous. More ON THIS STORY/ The World What Thatcher got right about the euro/ Cyprus ranks near top for household wealth/ FT Alphaville Who’s eurozone’s poorest?/ Money Supply Eurozone wealth/ Brussels blog Bailout oddities ON THIS TOPIC/ Pensions investment set to grow in Spain/ Inside London Bin €500 notes to spread debt burden/ Gavyn Davies Cash boost for troubled eurozone/ Marcel Fratzscher Scapegoating Germany is wrong
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WOLFGANG MUNCHAU/ ECB priority is to fix southern Europe/ Economics will catch up with the euro/ Eurozone break-up edges even closer/ EU ministers risk bank run Since the start of the eurozone, wages and consumer prices have remained broadly constant in Germany. In southern Europe, the general level of wages and prices has increased year in, year out. Over the period, this persistent inflation gap has led to a large discrepancy in asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan. In the frantic German debate about these figures, the focus is on median wealth – the statistic that pinpoints the exact middle if one were to rank households by wealth. Looking at the median, the gap becomes even more extreme. In countries with extremely large wealth differentials such as Germany, where a few super-rich people own a large share of the land and real estate, the median is significantly lower than the mean. Measured in terms of the median, German households occupy the last place among all eurozone countries, with net wealth of a mere €51,000, while the median Cypriot household has net wealth of €267,000. The explanation for this gap is the low property ownership rate in Germany – well under 50 per cent. This means that the median German does not own a house, while the median Cypriot or Spaniard does. The median is the statistic to quote when you want to say that your typical German is poorer than your typical Spaniard. But that is a meaningless statement because it is based on distributions within countries. If you want to compare across countries, it is better to take the mean. The gap is not quite as dramatic but it is still very large. If mean German net wealth is €200,000 per household and mean Spanish net wealth is €300,000, and if I further believe that the Germans are not really less wealthy as a nation, measured per household, then this gap tells me the minimum extent by which Germany and Spain would need to adjust their real exchange rates. In truth, the gap is likely to be larger. I happen to believe that your average German household is richer than the average Spanish household. If my assumption is right, then the imbalance between Germany and Spain, as expressed by those figures, would be even higher. In a monetary union, adjustment can only occur through real movements in wages and prices. Since Germany is not inflating, and is not likely to inflate in the future, I see no chance of that happening, even in the long run. My conclusion is that, in the long run, this adjustment will eventually happen through a nominal change in the exchange rates – which means that somebody has to quit the eurozone or resort to a parallel currency. To put it another way: if the same unit of account gives us a higher wealth figure for Spain than for Germany, and when you also know that this cannot be true, then there must be something wrong with the unit of account. The other potential solution is that there could be a problem with the data, but I see no fault with the statistical techniques used by the ECB. Maybe they got the house prices wrong. Statisticians do have difficulty capturing the declines of house prices after bubbles. But this type of discrepancy could not account for such a wide gap. Indeed, this view also ties in with anecdotal evidence. Looking back to 1999, my own experience was that restaurants and taxis in Berlin were cheaper than restaurants or taxis
27 in Brussels or Paris, but the differences have now become extreme. Curiously, the price gap also affects tradeable goods: European cross-border retail markets are not working efficiently. This leaves me to conclude that the unit of account is not really the same across the eurozone – that Spain and Germany have a different euro. This is also the reason why I believe southern Europeans have a rational reason to shift their savings to bank accounts in the north – because this would present the only way to preserve the value of their euros in the long run. Of course, I would not expect the ECB or any other European institution to conclude that the euro is not the same in Germany as in Spain. It is their job to deny this. But the imposition of capital controls in Cyprus has set a precedent. It now has a new currency. I call it the Cypriot euro. According to the ECB’s study, Germany also has its own currency – the German euro – and it is massively undervalued. http://www.ft.com/intl/cms/s/0/67f9afde-a2c5-11e2-bd45- 00144feabdc0.html#axzz2QWrQs0dF
ft.com World Europe April 14, 2013 6:23 pm Berlin demands treaty change for bank reforms By Alex Barker in Brussels Germany laid down a big barrier on the fast track to European banking union, insisting a revision of EU treaties is necessary to create a single authority to wind up banks, even if it took several years to accomplish. Wolfgang Schäuble, the German finance minister, strongly voiced his legal concerns at an informal meeting of EU finance ministers Dublin over the weekend. His comments point to the high political stakes involved in forging a common institution to shut down troubled financial groups. More ON THIS STORY/ Germany suffering worker shortage/ Merkel faces snub over women board quotas/ Merkel rival calls for curbs on capitalism/ Germany Angela’s choice/ Merkel popularity at a record high ON THIS TOPIC/ IMF urges speed on EU banking union/ Global Insight MPS bailout puts Draghi mission in focus/ Battle looms over failed lenders/ Lex Banking union – first step IN EUROPE/ Turkish pianist given suspended jail term/ ‘War of lists’ chills US-Russia ties/ French ministers fear ‘caviar left’ tag/ French push evasion to top of EU agenda His intervention in Dublin was a shot across the bows of the European Commission as it prepares to publish a blueprint for the resolution reforms in June – as well as a reality- check for reformers pushing for the full banking union framework to be agreed in the coming 12 months. By throwing his weight behind the need for a treaty revision in the medium term, Mr Schäuble also raised Britain’s hopes of opening a path to an eventual repatriation of powers from the EU.
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George Osborne, the UK finance minister, made clear that Britain’s backing for treaty change would come at a price. “That sent a chill around,” said one person in attendance. The controversial bailout of Cyprus - which included haircuts for depositors - brought new urgency and extra scrutiny to the longstanding EU reform-drive on resolution, which aims to shift the burden of handing failed banks from taxpayers to creditors. Year-old proposals for new national resolution tools are still to be agreed. But Mario Draghi, the European Central Bank president, also sees the more ambitious common resolution system – with a single fund and independent decision making powers – as an essential foil to the single bank supervisor, whose work he will oversee from 2014. Under the current EU treaties the legal options for pooling such important decision making within a single authority are limited. Such reforms also require a huge sacrifice of sovereignty over a decision that presents toxic political choices: when should a troubled bank be wound up and who should foot the bill? During a debate among finance ministers, Mr Schauble forcefully warned against raising market expectations over the pace of banking union reforms and said his lawyers concluded the creation of a single resolution authority would not be legal under current treaties. “A banking union only makes sense if we have mechanisms for the restructuring and resolution of banks,” Mr Schauble said after the meeting. “But if we want these European institutions, we need treaty changes.” As a stop-gap arrangement, Berlin backs the creation of a European body to coordinate between national authorities when shutting down a cross-border bank – an alternative that senior EU officials argue will not be enough to face up to the task. Michel Barnier, the EU commissioner responsible for the banking union reforms, told ministers a centralised single authority was essential. “It is possible to do this rapidly within the framework of the current treaties,” Mr Barnier said after the debate. France, Luxembourg, Denmark and the Netherlands were among those backing the rapid completion of a banking union, according to one person at the meeting. The ECB’s perspective was voiced by Jorg Asmussen, an ECB executive board member: “It is key that we now move on swiftly to agree all elements of the banking union . . . We need a single resolution authority and a privately funded European resolution fund.“
Veterans of the talks on a single bank supervisor noted it was not the first time Mr Schäuble had made bold statements on the need for treaty change. “It may be crying wolf again,” said one participant in the resolution debate. Others also pointed out that Angela Merkel, the German chancellor, had appeared more convinced that progress should be made under existing EU law. http://www.ft.com/intl/cms/s/0/eea3918c-a51b- 11e2-8777-00144feabdc0.html#axzz2QWrQs0dF
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ft.com/World UK Politics & Policy
April 14, 2013 6:44 pm Cameron buoyed by Merkel EU reform stance By Kiran Stacey, Political Correspondent David Cameron has returned from a three-day trip to Germany buoyed by what advisers say were positive signs that Angela Merkel could back the changing of EU treaties to enshrine further eurozone integration. British officials say the German chancellor told the prime minister she was willing to pursue the option of treaty change, which the UK hopes will give it a chance to renegotiate Britain’s membership of the union. More ON THIS STORY/ Business fears impact of EU withdrawal/ UK diplomats cheered by German position/ Cameron woos Merkel on EU reform /Eurozone industrial production edges up ON THIS TOPIC/ Mandelson attacks EU referendum move/ Philip Stephens ‘Six Moments of Crisis’ by Gill Bennett/ Van Rompuy hits at Cameron on treaty change/ PM appears to falter on EU vote pledge IN UK POLITICS & POLICY/ Some NHS fees would have conditional support/ Lib Dems keep Lords reform hopes alive/ BBC accused of using students as shield in N Korea/ Italian, Polish PMs to attend Thatcher funeral This came as European finance ministers in Dublin published proposals for a new eurozone banking regulator, and said member states were “ready to work constructively on a proposal for treaty change”. The moves have given the British government hope that it can face down French resistance to such a change, although any move is likely to happen only after the German elections in September. Mr Cameron returned on Sunday from his trip – part of which was spent with his wife and three children at Schloss Meseberg, the German chancellor’s castle outside Berlin. Advisers said the rare invitation to another leader to the castle showed the “warm relationship” the two centre-right leaders enjoyed. They added that progress had been made on a range of issues, including moves towards a US-EU trade agreement and a crackdown on international tax avoidance. But Mr Cameron has not yet persuaded Ms Merkel to lend her weight to joint moves by the British and French to relax the sanctions on arming rebels in Syria. The arms embargo is due to be renewed next month, and officials from London and Paris are hoping to loosen its terms to provide more support to those opposing the Assad regime. Meanwhile, George Osborne, the chancellor, also discussed tax avoidance with his counterparts at the Dublin talks. He told reporters he was close to finalising moves that would force banks in the Cayman Islands and British Virgin Islands to reveal details about customers suspected of hiding money offshore. http://www.ft.com/intl/cms/s/0/dbd9fc96-a50f-11e2-8777- 00144feabdc0.html#axzz2QWrQs0dF
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ft.com comment Columnists April 14, 2013 6:59 pm Why the US is looking to Germany
By Edward Luce When it comes to the labour market, America is suffering from a rising case of ‘German envy’ When asked by Tony Blair for the secret of her country’s resilience, Angela Merkel, the German chancellor, said: “We still make things.” It is a question you often hear in the US nowadays. It would be an exaggeration to say Germany is back in fashion. There is too much disapproval of Berlin’s handling of the eurozone crisis for that. Yet when it comes to the labour market, the US is suffering from a rising case of “German envy”, as one analyst puts it. “People are continually asking me how we do it,” says Eric Spiegel, the US chief executive of Siemens, which has the distinction of being cited by Barack Obama in his last two State of the Union speeches. Getting a “shout out” from the US president may sound trivial – although executives at unuttered competitors, such as General Electric, do not see it that way. But Mr Obama was only repeating what was being widely said by many business leaders and trade unionists in the US. “Can we replicate the German model?” asks a centrist Democratic senator. More ON THIS STORY/ US jobless claims fall sharply/ US job figures set alarm bells ringing/ Lex US jobs and retail/ Resilient US suffers setback over jobs/ US has lost 2m clerical jobs since 2007 ON THIS TOPIC/ Fed urged to taper QE through Treasuries/ Marriage evolution truly in the making/ Founder follows his gut instincts/ Edward Luce Timid US visa reform will deter workers EDWARD LUCE/ US inequality will define the Obama era/ The Dispensable Nation; The Obamians; The Secretary/ As Congress sleeps the 2016 race begins/ View from Washington Chance to upgrade relationship stymied by events on the border As a package, the answer is no. Germany channels roughly half of all high-school students into the vocational education stream from the age of 16. In the US that would be seen as too divisive, even un-American. More than 40 per cent of Germans become apprentices. Only 0.3 per cent of the US labour force does so. But with the US participation rate continuing to plummet – last month another 496,000 Americans gave up looking for work – many US politicians are scouring Germany for answers. It is turning into something of a pilgrimage. Rick Snyder, the Republican governor of Michigan, and John Kasich, Republican governor of Ohio, have both recently toured vocational academies in Germany. The German embassy in Washington has even set up a programme called the “skills initiative” to cater to all the questions from the heartlands. “The US is not a developing country so we don’t need to send teams of technical advisers into the field,” one German diplomat said. “We are just trying to respond to the curiosity about the German model.”
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The longer the US recovery continues, the more that curiosity increases. The US faces a deepening mismatch between what its labour market needs and what the education system is producing. There are two sides to this paradox. First, the US is underskilled. It has high unemployment at a time when there are 3.5m job vacancies, according to the Bureau of Labor Statistics. Some economists argue that the US “skills gap” is imaginary – a shortage of engineers would have shown up in salary inflation, which has not happened. The average hourly cost of a US manufacturing worker is $32. In Germany it is $48. Yet US employers insist the shortage of skilled labour is a growing problem. US states tend to outbid each other with tax breaks. This works well for casinos. But many states, such as Michigan and Ohio, are realising that what desirable investors most covet is skilled labour. According to the OECD, the US comes last out of 29 countries in terms of the work readiness of its high-school leavers. And 46 per cent of those who go to college fail to complete their four-year degree within six years. “Getting a tax holiday does not make up for having a bad business plan, it just delays the pain,” says a senior US executive at Daimler, the German carmaker, which has several US plants. “If you have a good plan, what you are really looking for is good people.” Second, the US is overqualified. Almost half of Americans with a degree are in jobs that do not require one, according to a study by the Center for College Affordability and Productivity. Fifteen per cent of taxi drivers in the US have a degree, up from 1 per cent in 1970. Likewise, 25 per cent of sales clerks are graduates, against 5 per cent in 1970. An astonishing 5 per cent of janitors now have a bachelor’s degree. They must offer endless nocturnal moments to repent those student loans. Only at the top of the system do the labour and education markets mesh well. PhDs and postgraduates are the only US category to enjoy rising incomes, often dramatically so. For a company such as Siemens, which has 60,000 American employees and recently reintroduced train manufacturing to the US (in a plant near Sacramento), the answer is simple. The US needs to rejuvenate its community colleges, which offer two-year vocational degrees but are often starved of funds. And it needs to fall back in love with apprenticeships. Benjamin Franklin started off as a printer’s apprentice in Boston. Many US trade unions, such as the pipe fitters and boilermakers, used to train their own. Perhaps they should remember their history. Siemens, meanwhile, is angling for a third Obama mention. The group recently had 2,000 applications for 50 vacancies in North Carolina. Only 10 per cent passed the aptitude test. At a cost of $165,000 an apprentice, Siemens is training six local high- school leavers in “mechatronics”, a hybrid of mechanical engineering and computer science. These are robot supervisors. The company hopes apprenticeships will catch on in the US. It graduates 10,000 a year in Germany, a country that seems to have fewer problems with the underskilled or the overqualified. “There is a great potential for the reshoring of manufacturing to the US,” Mr Spiegel says. “But if companies have problems finding qualified people, a lot of it won’t happen.” http://www.ft.com/intl/cms/s/0/52ad8b04-a2c6-11e2-bd45- 00144feabdc0.html#axzz2QWrQs0dF
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Sunday, 14 April 2013 Why a Dual Mandate is Essential Monetary policy has two crucial roles. The first is to set the medium/long term inflation rate. Pretty well everyone understands this. The economy will not by itself settle down to an inflation rate of 2% or whatever - it needs monetary policy to set this rate and help achieve it. The second is to ensure that aggregate demand matches aggregate supply. Now here there is sometimes confusion, even among the best economists. [1] The basic idea is that there is a ‘natural’ level of output determined by supply side factors, like how much people want to work, the degree of monopoly in the labour market, the state of technology etc. [2] There will be a real rate of interest associated with this level of output, which we can call the natural interest rate. On the other hand how much firms produce in the short run is largely determined by aggregate demand: firms tend to set prices, and do not ration demand. There is no reason why aggregate demand has to equal supply in the short run in a monetary economy. The difference between actual output and natural output is the output gap. If the output gap is not zero, problems will arise. For example with excess demand we get inflation, and with deficient demand we can have wasted resources and the misery of involuntary unemployment. Aggregate demand depends on real interest rates. As monetary policy can influence real interest rates in the short run, then its job is to try and match aggregate supply and demand, by bringing the real interest rate as close as possible to the natural interest rate. [3] These two roles for monetary policy map nicely into the two objectives macroeconomists typically ascribe to policy makers: minimising excess inflation and the output gap. With two goals there will also be conflicts, producing a trade-off between short run inflation stability and eliminating the output gap. Macroeconomics has extensively examined what to do when these conflicts arise. A permanent non-zero output gap is not compatible with stable inflation in the long run. As a result, it is possible to reduce both roles to one single objective, the stabilisation of inflation, as long as that stabilisation is done ‘flexibly’. Hence the idea of a single, but flexible, inflation target. I now believe having only an inflation target, or making it 'primary', is an important mistake for two reasons. We can label each mistake as MPC and ECB for short. The first (MPC) is due to persistent shocks to the relationship between the output gap and inflation (or equivalently to the Phillips curve). This sets up a potential conflict between the two goals. Although we know how to optimally deal with this conflict, the policy that results can appear inconsistent with inflation targeting, which puts a strain on an inflation targeting policy. The problem can be ‘solved’ by making inflation targeting even more ‘flexible’, but this in turn makes the policy less clear. Of course macroeconomists have always acknowledged this possibility, but have thought that the impact of excess or deficient aggregate demand would always be strong
33 enough for this not to matter in practice. However, as the recent IMF study I discuss here shows, either low inflation or credible inflation targets (or both) seem to have weakened the impact of the output gap on inflation, which makes the problem of persistent cost-push shocks more important. This has been the problem the MPC in the UK have been grappling with in recent years, and I believe the lack of a dual mandate has made their decisions less optimal. More generally, as Paul Krugman says here, thinking that stable low inflation must mean everything is OK could be very wrong. The second (ECB) is that, in the wrong hands, the flexible inflation targeting regime can become a severely non-optimal policy that pays too little (or asymmetric) attention to the output gap, even in the absence of supply side shocks. In academic language, we could express this in terms of Rogoff’s conservative central banker (giving less weight to the output gap than the public does), but it also allows bad policy enacted by an incompetent central bank (that does not understand the importance of the output gap) or a malevolent central bank (that wants to achieve its own objectives that may not just involve hitting an inflation target). There is a nice quote by Duisenberg from February 2003 contained in this paper by Jörg Bibow (page 35) that a comment from an earlier post pointed me to. In discussing what price stability meant, he said it “implies that, in practice, we are more inclined to act when inflation falls below 1% and we are also inclined to act when inflation threatens to exceed 2% in the medium term.” [4] Now Andrew Watt and others would argue that this is not a good reading of the ECB’s actual mandate, but it seems to me a good reading of what they actually do, and it is one that a single rather than a dual mandate helps them to get away with. So what is the objection to a dual mandate? As it reflects how an academic thinks about monetary policy, it should not lead to suboptimal policy in the hands of an informed and benevolent policy maker. So the fear must be that it will misdirect an uninformed policy maker, and encourage non-benevolent behaviour. The exemplar here is the 1970s, but for reasons I discussed here, I do not think that period should be used as evidence against the dual mandate. I discuss here why I think the standard inflation bias story is also overrated in this respect. Is there any evidence that the US with its dual mandate has done better compared to inflation targeters? There has been some discussion of that recently (e.g. here and here), although the data analysis is not very sophisticated. [5] Until we see good evidence that having a dual mandate worsens outcomes, then I believe the presumption must be that the dual mandate is better because it reflects the two goals of monetary policy. My argument here concerns higher level objectives. It is not about how best to achieve those objectives, which is where I would locate questions about the wisdom of nominal GDP targets. It does not address the relative weight that the two objectives should have, or the extent that the objectives should be vague or concrete. My own view is that the benefits of a publicly announced inflation target are overwhelming - indeed so much so that I recently forgot how new this ‘innovation’ was for the Fed. How best to express the goal of matching aggregate demand with supply is more difficult, because of the uncertainties involved in measuring the output gap. However output gap uncertainty is not so great that we should ignore the concept, and so this uncertainty cannot justify a single inflation mandate. There are lots of things in life that are difficult to define, but which are still worth striving for.
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[1] See, for example, Brad DeLong here. The reasons for this confusion are interesting, but I have speculated on this elsewhere and do not want to get distracted. Of course none of this implies that the natural level of output and its associated interest rate need be in any sense optimal or efficient, but that should be a different and separable question. [2] There is nothing mysterious about the natural level of output. It is the output which pretty much every macroeconomist not investigating problems of aggregate demand analyse. It could be called the level of output that comes out of an RBC model, for example. It is often described as the level of output that would occur if prices were completely flexible, and here I do have a quibble, because at a zero lower bound and with inflation targets I cannot see how increasing the flexibility of prices will ensure that output reaches the natural level. [3] If monetary policy cannot do this, then fiscal policy can help reduce the output gap. We could describe this as fiscal policy raising the natural interest rate, but an equivalent and more intuitive description is that fiscal policy just raises aggregate demand. There are plenty of caveats to this econ 101 account, such as the possibility that actual output might have an influence on longer term aggregate supply. [4] If the implied asymmetric differentiation between actual and possible future here was a slip, I’m tempted to suggest it was a Freudian one. [5] For example, MPC decisions since the recession have tended to define flexibility as ‘seeing through’ actual inflation and focusing on expected inflation two years out. Inflation targets then become a constraint when the impact of cost-push shocks persist for two years or more. http://mainlymacro.blogspot.com.es/2013/04/why-dual-mandate-is- essential.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+Ma inlyMacro+(mainly+macro)
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OPINION EDITORIAL Olvidado crecimiento El Eurogrupo debe estimular la demanda y ampliar plazos para cumplir el déficit público EL PAÍS 14 ABR 2013 - 00:01 CET Los detalles de la condicionalidad asociada a la ayuda a Chipre y la ampliación de vencimiento de las ayudas a Irlanda y Portugal eran asuntos centrales en la agenda de la reunión del Eurogrupo que acaba de reunirse en Dublín. Bienvenida ha sido también la pretensión de controlar la evasión fiscal en la UE. En relación al primer asunto, es destacable el acuerdo que ha habido con las decisiones adoptadas por las autoridades chipriotas para reestructurar y recapitalizar el sistema bancario: se satisfacen las condiciones para la ayuda financiera de 10.000 millones. En cuanto a Irlanda y Portugal, y de acuerdo con el informe de la troika, se extenderán los vencimientos de las ayudas para facilitar el acceso a los mercados financieros de ambos países, protegiéndolos de los todavía evidentes riesgos de refinanciación; especialmente de Portugal, cuyas dificultades se han acentuado tras el dictamen del Tribunal Constitucional. La imposición de decisiones adicionales de ajuste presupuestario con el fin de compensar los recortes invalidados por los jueces no facilitará el camino para la recuperación del crecimiento, la capacidad de atender la deuda y, mucho menos, la estabilidad social. Editoriales anteriores/ Chipre como muestra (24/03/2013)/ Alivio para el euro (26/03/2013)/ Sembradores de miedo (27/03/2013)
Abundar en la aplicación de duras condiciones de ajuste fiscal en un contexto de pronunciada recesión y desempleo no garantiza la normalización de las condiciones de financiación. Ni de esos dos países ni de otros, como Italia o España, que siguen soportando elevados costes de financiación. Las mejoras de los últimos meses responden al anuncio del BCE en septiembre de que intervendrá en los mercados de bonos cuando lo soliciten los gobiernos y, mas recientemente, de las inyecciones de liquidez de los bancos centrales de EE UU y Japón. Aunque menos explícita, entre las preocupaciones del Eurogrupo se encuentra la muy distinta canalización del crédito en el seno del área monetaria. Las pequeñas y medianas empresas españolas e italianas soportan mayores restricciones en el acceso al crédito bancario y costes muy superiores a los aplicados en las economías centrales, a pesar de que tienen un mayor peso específico en la actividad económica de sus países. En una reacción tardía, el Gobierno español reclama al BCE actuaciones específicas para neutralizar esa asfixia financiera. Pero las reticencias de los bancos no serán fácilmente paliadas por el BCE porque es la ausencia de crecimiento, de solvencia, lo que subyace en las resistencias a dar crédito. Sin estímulos a la demanda, sin expectativas de reducción del desempleo, cualquier actuación sobre los flujos de crédito será apenas un paliativo. Ampliar plazos de saneamiento de las finanzas públicas y fortalecer la demanda son condiciones básicas para que economías como la española requieran más fondos europeos para seguir nutriendo el capital de los bancos. El Eurogrupo ha de priorizar la recesión como problema. http://elpais.com/elpais/2013/04/13/opinion/1365873832_434291.html
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COLUMNA El canódromo Mientras el FMI habla de la “fatiga” ciudadana ante los recortes, Bruselas exige otra vuelta de tuerca JOAQUÍN ESTEFANÍA 14 ABR 2013 - 00:00 CET La imagen corresponde a alguien tan poco sospechoso de antieuropeísmo como Felipe González: el escenario europeo se parece cada vez más a un canódromo, el lugar donde se celebran las carreras de galgos. El galgo que corre (los Estados nacionales, en este caso España) trata de alcanzar a una liebre mecánica (la Unión Europea), que le lleva con la lengua fuera. Cuando el galgo está a punto de coger a la liebre mecánica, quien conduce a esta (Berlín) pega otro tirón y la liebre se aleja de nuevo obligando al galgo a un nuevo esfuerzo. La metáfora recuerda lo sucedido la pasada semana, cuando la Comisión Europea se reunió para abordar la supervisión y corrección de los desequilibrios macroeconómicos de los países, y suspendió a España en 6 de los 10 indicadores abordados. Tras asegurar algo tan retórico como que España va en el buen camino, conminó al Gobierno a presentar un plan integral de reformas (léase “recortes” en la mayor parte de los casos), entre las que figuran una reforma laboral aún más agresiva (reducción de la indemnización por despido improcedente), pensiones, subida de impuestos, etcétera, a cambio de flexibilizar una senda de reducción del déficit que todo el mundo, absolutamente todo el mundo, sabe que es imposible de cumplir, so pena de introducir a España en una depresión todavía más profunda. El Gobierno sostiene que el análisis hecho por Bruselas acaba en 2011 (Zapatero), y no refleja la corrección que se ha producido el año pasado y que da como resultado la mejora en ocho indicadores. El problema es que los dos que empeoran son el paro (que superará el 27% de la población activa) y la deuda pública, que en un solo ejercicio ha crecido 15 puntos y que en 2015 llegará a un 100% del PIB (otros 16 puntos más). Hay un cierto cambio en el punto de vista del Gobierno sobre nuestro papel en el canódromo. El hartazgo se manifestó en el Congreso el pasado miércoles, donde pareció estarse estableciendo un nuevo consenso entre las fuerzas políticas. Esta vez sobre “la limitación europea” más que sobre “la solución europea”. Hasta ahora, el pensamiento dominante indicaba que estar en Europa, pertenecer a Europa hacía a nuestro país más democrático y más justo. En los últimos sondeos se manifiesta que por primera vez desde que España ingresó en el club a mitad de la década de los ochenta, este no es observado por los ciudadanos como la solución a sus dificultades, sino como un problema en sí mismo. Desde que comenzó la crisis económica, España es el país en el que más se ha deteriorado la imagen de la UE, un malestar desconocido por su intensidad. El FMI, uno de los tres miembros de la troika que vigila a los países europeos intervenidos, y que da una de cal y otra de arena en sus mensajes, mencionaba hace unos días el peligro de “fatiga” de los ciudadanos ante una austeridad tan larga, tan autoritaria y tan única. http://elpais.com/elpais/2013/04/12/opinion/1365778182_787901.html
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TORMENTAS PERFECTAS Crisis de régimen En Europa entra en quiebra el sistema de participación de unas democracias disfuncionales LLUÍS BASSETS 14 ABR 2013 - 00:00 CET ¿Hasta dónde está llegando la crisis? ¿Es ya una crisis de régimen? La crisis social ya está aquí y arrastra la crisis política, que se traduce por de pronto en el ascenso de nuevas fuerzas, frecuentemente más extremistas y populistas, y a medio plazo en propuestas de cambios drásticos en las reglas de juego. Estas son preguntas y observaciones que empiezan a tener sentido en un buen puñado de países en los que se acumulan los ingredientes para una explosión social e incluso política: desempleo insoportable, recortes salariales, pérdida de derechos sociales, pobreza creciente, escándalos de corrupción e incapacidad de partidos y gobiernos para ofrecer un mínimo horizonte. A la vez, entra en quiebra el sistema de participación de unas democracias disfuncionales en las que los ciudadanos no cuentan en las decisiones que más les afectan. Es una ironía, amarga aunque estimulante, que desde Cataluña se reivindique el derecho a decidir en el preciso momento en que nada pueden decidir los ciudadanos europeos sobre cualquier cosa que les concierna. La crisis desborda a cada uno de los países y es europea. Así la identifica el ministro francés Arnaud de Montebourg en unas declaraciones a Le Monde: “Si hay crisis de régimen es en el ámbito de la Unión Europea, donde no hay debate democrático alguno sobre las causas y las consecuencias de esta política de austeridad que nos está arrastrando a una espiral recesiva”. Su idea de crisis vale también para su país, donde el presidente Hollande, su Gobierno y la oposición conservadora se hallan bajo mínimos, y solo el Frente Nacional se relame los labios ante el estado de confusión de la opinión pública: “Hay crisis de régimen cuando el sistema institucional es incapaz de responder a la pérdida de confianza”. Si también Francia entrara en una crisis de su actual régimen político, Montebourg tiene la fórmula de sustitución, en la que el presidente se limitaría a ejercer como árbitro, como en Italia o Portugal, y se pasaría del actual presidencialismo a una democracia parlamentaria. Montebourg encabeza desde 2001 un grupo de reflexión denominado Convención para la VI República, pero de momento solo se fija en la austeridad europea y rechaza en cambio que Francia se enfrente a una crisis de régimen: “No estamos todavía en esta situación, porque las decisiones que el Gobierno va a tomar servirán para restablecer la confianza”. Nada distinto a lo que dice Mariano Rajoy, aunque al presidente español ni siquiera le pasan por la cabeza ideas de cambio de régimen. Lo peor de este tipo de cambios es que no esperan a los dubitativos ni a los perezosos. Si nadie se atreve a conducir las transformaciones políticas por las buenas de un reformismo sensato, con sus pactos y sus consensos renovados, suelen llegar igualmente, aunque por las bravas del rupturismo y del estropicio institucional. http://elpais.com/elpais/2013/04/11/opinion/1365688954_659664.html
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ARISTÓBULO DE JUAN EX DIRECTOR GENERAL DEL BANCO DE ESPAÑ CÉSAR MOLINAS ENSAYISTA “Si no se inyecta más capital a la banca, no habrá crédito” Las autoridades se centraron en promover fusiones de cajas sin reconocer problemas de solvencia ÍÑIGO DE BARRÓN 12 ABR 2013 - 21:51 CET108
Aristóbulo de Juan experto en economía y César Molinas. / GORKA LEJARCEGI Aristóbulo de Juan (Madrid, 1931) fue director general del Banco de España en los años ochenta. Ha dirigido el saneamiento y venta de docenas de bancos. Sabe lo que es entrar en una entidad y echar a todo el consejo de administración y parte de la dirección. Fue secretario general del Fondo de Garantía de Depósitos y asesor del Banco Mundial. Con esa experiencia, se ha convertido en un oráculo de sabiduría financiera para los más altos banqueros, autoridades nacionales, gobernadores del Banco de España y autoridades internacionales como el FMI y la Comisión Europea. En América Latina es considerado el padre de la supervisión. En sus artículos de 2007 y 2008 advirtió de que se abandonaba el camino correcto en la supervisión bancaria. No se le hizo caso y llegó el abismo. Como veterano y consultor, se ha convertido en una opinión libre que muchas veces va contra corriente. En un encuentro con César Molinas, financiero y ensayista (que ultima su próximo libro ¿Qué hacer con España?), al que asistió EL PAÍS, insistió en que la banca necesita más crédito para cubrir agujeros ocultos. CÉSAR MOLINAS. El expresidente Zapatero, en septiembre de 2008, decía que el sistema financiero estaba entre los mejores del mundo y que el PIB de España superaría pronto al de Francia, tras haber sobrepasado a Italia. La caída de Lehman Brothers en 2008 no hizo cambiar la opinión en España sobre la banca. ¿Cuándo se dan cuenta las autoridades de que nuestro sistema financiero, básicamente en las cajas de ahorro, no es tan sólido como parecía?
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ARISTÓBULO DE JUAN. Tras un largo desconcierto, las autoridades se entretuvieron en promover fusiones de cajas sin reconocer problemas de solvencia. Hasta entonces, en España solo se aplicaron medidas de liquidez por la vía de compra de activos buenos y concesión de avales. La primera vez que se habla oficialmente de la falta de capital es en febrero de 2011. Habían pasado dos años y medio desde la caída de Lehman y tres y medio desde la crisis de las hipotecas subprime. Se promulgó un decreto ley en que se fija un agujero irrisorio de 15.000 millones de capital. Pero se comete el grave error de pedirles que salieran a Bolsa, y la operación resultó un gran fracaso con serias consecuencias. C. M. Esto fue el decreto Salgado. Luego tuvimos dos decretos del ministro Guindos… A. J. En febrero de 2012, tan solo un año después del decreto Salgado, llegó el primer decreto ley de Guindos, según el cual el sector necesitaba otros 54.000 millones. Luego, un segundo decreto del mismo ministro, en mayo, reclama otros 30.000 millones. Posteriormente llegó José Ignacio Goirigolzarri a la presidencia de Bankia y detectó una necesidad de 24.000 millones, solamente para su entidad. Por último, el análisis de la consultora Oliver Wyman, que sumó hasta 58.000 millones adicionales. Todo esto suponía que el sector necesitaba más de 150.000 millones, y no los 15.000 millones aflorados en 2011. Ha habido una gran mejora en la transparencia del sistema y un esfuerzo más realista en la capitalización. Pero me pregunto si será suficiente... C. M. Pero estamos mejor, ¿no? A. J. Sí. Hemos recibido 42.000 millones de Europa, las entidades han hecho fuertes provisiones, se ha impuesto una quita a los inversores y se ha creado el banco malo, la Sareb, para limpiar los activos inmobiliarios. Lo mejor es que hay algunas entidades que tienen mejor acceso al mercado que hace un año, la prima de riesgo ha bajado y ya empieza a haber no pocos inversores interesados en comprar activos. Pero… sigue sin haber crédito. Si no hay crédito, la economía no crece, hay más paro y desciende el volumen de negocio, todo lo cual realimenta los problemas de la banca. “Se enmascaran como buenos muchos créditos refinanciados” C. M. ¿Por qué la obsesión de las autoridades por incrementar el capital de los bancos? A. J. Porque es un colchón para posibles pérdidas, un freno hipotético para el crecimiento desmesurado y una fuente de recursos sin coste. Pero el capital no debe ser un concepto normativo. De poco sirve apurar a la banca con altas cifras de capital si se ignora la caída del negocio. ¿De qué sirve tener un 9% de capital si las empresas cierran y el margen cae? En un año no lo cumplirán. C. M. Esto es clave. ¿La búsqueda de la solvencia agudiza la falta de crédito? A. J. No. Lo que agudiza la falta de crédito es el exceso de endeudamiento, los malos créditos y los malos resultados. EL PAÍS. ¿Tienen razón los banqueros que dicen que si se pide más capital se provoca la sequía de crédito? A. J. Yo creo lo contrario: que un mayor capital te permite más nivel de crédito y que las provisiones, que no son otra cosa que beneficios retenidos, suponen más recursos para poder prestar. Además, la dotación adecuada de provisiones evita pagar impuestos y dividendos injustificados, los cuales dañan los resultados y la liquidez. Lo que ocurre es que hay bancos que no cumplen las exigencias reales de capital porque se enmascaran como buenos una gran masa de activos improductivos refinanciados.
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EL PAÍS. ¿En qué créditos falta más cobertura? A. J. Tal vez en la gran masa de créditos no incluidos del sector inmobiliario: la industria auxiliar de la construcción, el crédito a pymes o a empresas mayores. Incluso en las hipoteca, que son 630.000 millones. C. M. Si no cambian las normas de capital, ¿qué le debería pedir el Gobierno a los bancos? A. J. Se debe imponer mayor rigor en las provisiones y reconfigurar las partidas que computan como capital. No puede considerarse como capital, aunque sea legal, artificios como el crédito fiscal, las plusvalías en activos no realizados, las preferentes... El capital de verdad es el suscrito y los beneficios retenidos. El camino es simple: más provisiones, más capital. Si se llega así a menos beneficios reales, entonces menos dividendos. “Algunos banqueros no reconocieron pérdidas por mantener su silla” EL PAÍS. ¿Y si parte del sector no puede sobrevivir al aplicar esta medicina? ¿Qué se debe hacer? A. J. La intervención temporal, un saneamiento profundo y la venta de la entidad a instituciones fuertes, sin demora. Yo recomendaría otras medidas. En lugar de pedir 41.400 millones de préstamos a Europa, como ha hecho el Gobierno, sobre un límite disponible de 100.000 millones, solicitaría más. Eso no debiera suponer condiciones más rigurosas que las ya impuestas. Se deben allegar los fondos que sean necesarios para sanear el sistema a fondo sin llegar a los 100.000 millones. De lo contrario, tendremos un sistema financiero más que mediocre que acabará costando mucho más a la economía y al fisco. Es mejor pasar el trago de una vez y conseguir un sistema fuerte, como ocurrió en la crisis de los años ochenta. EL PAÍS. ¿Qué cifra real puede necesitar la banca? A. J. No lo sé. Hasta que no se entra en las entidades con mando en plaza no se conocen las verdaderas necesidades. Además de aumentar los saneamientos, las ayudas deben llegar con dinero en efectivo, no con deuda. Los problemas no se solucionan sustituyendo deuda por deuda. EL PAÍS. Pero la ayuda de Fráncfort está beneficiando a la banca… A. J. Todo lo que proporciona liquidez para sobrevivir es bienvenido a corto plazo, pero no soluciona la insolvencia. Cuanto más tarde, más caro. EL PAÍS. ¿Y qué deben hacer los grandes bancos? A. J. Todos los bancos a los que falte liquidez deberían vender activos y reducir su tamaño. La troika obligará a seguir ese camino. Pero aún hay bancos importantes muy endeudados, cuyos créditos fueron y siguen financiados en proporciones enormes por los mercados mayoristas y no por los depósitos. Hasta que esta proporción no baje, no habrá crédito. Por eso todas deben vender activos, aunque sea a pérdidas. C. M. ¿Hay ofertas de los inversores para comprar activos? A. J. Empieza a llegar, aunque no abundan. C. M. ¿Se pueden vender también las carteras de créditos? A. J. Sí, pero no las buenas, sino las dañadas.
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EL PAÍS. Entonces, si faltara más capital ¿quiere decir que la morosidad actual no es la correcta? A. J. Exacto. Cuando hay problemas, la morosidad publicada por las entidades no es un indicador fiable. En mi experiencia, en tiempos malos los peores créditos nunca están clasificados como morosos. Es mi axioma. La morosidad puede incluso ser un indicador equívoco que respalde el maquillaje y que lleve a tomar malas decisiones. Refleja la tendencia, pero no refleja el volumen real de pérdidas subyacentes. EL PAÍS. ¿Por qué indicador se podría sustituir el de morosidad? A. J. El mejor es el de las pérdidas esperadas. Lo mejor sería que cada entidad y el supervisor revisen con realismo los archivos de cada cliente y comprueben su capacidad de pago y provisionar lo que haga falta. C. M. Los máximos responsables de un banco ¿saben realmente cuáles son los créditos malos? ¿Tienen buena información sobre su entidad? A. J. Deben saberlo con sistemas de control interno. Los grandes problemas de los bancos se generan en las sedes centrales y a los más altos niveles. EL PAÍS. ¿Se han seguido de cerca los problemas? A. J. Yo creo que sí se han conocido los problemas, pero muchos no quisieron aflorarlos para ganar tiempo y evitar una intervención. A las autoridades pudo ocurrirles que prefieran el ineficaz expediente administrativo como medida correctiva. C. M. ¿Qué incentivos tienen los banqueros para no aflorar todas las pérdidas? A. J. En España, en 2008, las autoridades preveían algo ilusorio: que los precios inmobiliarios iban a recuperarse en dos años. Pudo ser por buena fe o no, pero esta presunción condujo a estrategias equivocadas que agravaron los problemas y los hicieron más costosos. El primer incentivo del banquero para maquillar sus cuentas es ganar tiempo en espera de una mejoría. Pero si afloran los problemas, se debe salir al mercado a por capital o buscar nuevos socios para reforzarse. Pero esto puede cambiar el equilibrio de poder en el banco, sobre todo si el nuevo socio es el Gobierno. En definitiva, se trata de conservar la silla. EL PAÍS. Luego todo se reduce a mantener el poder… A. J. Bueno, el poder, la relevancia pública, los dividendos y otras ventajas económicas. C. M. Un regulador obsesionado por la solvencia puede pensar que lo que ocurre en el sector bancario no repercute en la economía. Así exigirá altos coeficientes de capital. En España, por ejemplo, tenemos un sector bancario que no ayuda a que la economía se recupere porque, poco a poco, la falta de crédito afecta en cascada a más y más empresas. ¿Cree que ha terminado el deterioro del balance bancario? A. J. La obsesión por la solvencia no es mala, pero, para ser útil, debe ir acompañada de la búsqueda de resultados, liquidez, la gestión y la generación de crédito, parámetros que no son incompatibles, sino al contrario. En cuanto al deterioro, creo que ha disminuido bastante, pero no ha terminado. Porque probablemente subsiste una insuficiencia de cobertura de las pérdidas esperadas y el negocio bancario está en declive, lo cual se traduce en que las empresas no tienen crédito, cierran, sube el paro… y todo esto realimenta los problemas de los bancos. Es un círculo vicioso. Algunos dicen que lo mejor es solo esperar a que la economía se recupere. Creo que hay que actuar de manera definitiva sobre el sistema financiero. Es el nudo gordiano del problema. 42
EL PAÍS. ¿Quién debe recapitalizar más el sistema financiero? A. J. Las entidades, y si no pueden, el Estado. ¿Por qué no a medias? En las crisis hay que limitar los daños para la economía. No hay vuelta de hoja. C. M. Se puede decir que nos hemos creído que veíamos la situación completa, como en una película, pero en realidad era un fotograma y la película continúa. A. J. Así es. La crisis aún colea. Y la clave, el botón del no es el crédito. EL PAÍS. ¿Qué le parece aunar en parte a las tres grande entidades públicas: Bankia, Catalunya Banc y Novagalicia Banco? A. J. Muy mal. Si permanecen, y además vinculadas bajo la égida del Estado, es un peligro nacional. Porque es inevitable que los nombramientos tengan influencia política y es más que probable que se concedan créditos a proyectos no viables y se descuide su recuperación. Son 12 antiguas cajas aunando esfuerzos: no vayamos a crear otro monstruito. EL PAÍS. En Bankia está Goirigolzarri. ¿No es una garantía? A. J. Es muy bueno, pero siempre existe el peligro. C. M. Es curiosa la situación, porque venimos de un mundo en el que cada vez las entidades son mayores… A. J. Eso es cierto, pero no son necesariamente estatales. Además hay otros problemas que suelen darse en las entidades públicas: la falta de transparencia. Y si se trata de promover el crédito y fuera cierto que no hay demanda de crédito solvente, ¿qué es lo que va a financiar el consorcio? ¿la demanda insolvente? C. M. El problema es tan agudo que la banca no financia ni el circulante de las empresas incluso cuando tiene pedidos en firme… A. J. No se atiende porque sus prioridades son los vencimientos mayoristas. Y si hay un sobrante de liquidez, se dedica a la compra de deuda pública para sobrevivir. C. M. Es curiosa la gran coherencia entre cómo han abordado la crisis bancaria los Gobiernos de Zapatero y Rajoy: que no tenga coste para el contribuyente. Incluso se dijo que tendría a coste cero o incluso beneficio. Los analistas internacionales no lo creyeron nunca, porque saben que, estadísticamente, una crisis bancaria cuesta como mínimo un 10% del PIB. A. J. Tratar de minimizar el coste de la crisis es un error. El coste debe ser el que es, o sea, el que cubra la pérdida real y asegure una rentabilidad sostenible. Otra cosa es que haya reparto de la carga entre Estado, el sistema y los inversores. En la crisis de los ochenta se compartió al 50% entre los contribuyentes y el sistema. Si un Gobierno dice que no ha tenido coste para él, es que no ha resuelto el problema. EL PAÍS. ¿Habrá una banca zombi? A. J. Si no se toman las medidas que faltan, es una posibilidad. Espero que no ocurra. C. M. ¿Qué significa rentabilidad sostenible? A. J. Que los beneficios no se compongan de atípicos y que las entidades puedan mantenerse en el tiempo por sus propios medios, como ocurrió en España entre 1985 y el 2000. C. M. ¿Por qué hay que rescatar a los bancos si ponemos a la gente en la calle?
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A. J. Nunca debe rescatarse a los banqueros, pero sanear a los bancos es otra cosa. La banca es el sistema de pagos, la circulación de la sangre de la economía. La caída de un pequeño banco puede provocar un gran contagio a todo el sistema y una catástrofe generalizada. Pero si el Gobierno sanea un banco deben desaparecer los accionistas y cambiar a los administradores y a los máximos ejecutivos que causaron o toleraron la crisis. C. M. La magia del sistema financiero es que todo ocurre porque la gente tiene la confianza en que va a suceder. Si se quiebra algún eslabón en la cadena de confianza, deja de suceder, y un billete de 500 euros se convierte en un papel sin importancia… A. J. Por no hablar de la posible huida de capitales que puede desencadenar la caída de una pequeña entidad… o un pequeño país. EL PAÍS. ¿Cómo están los bancos europeos? A. J. En Europa los sistemas bancarios no están saneados. Además de los cuatro sistemas ya intervenidos, basta mencionar Italia, Reino Unido, Bélgica y parte de Alemania. Pero esa realidad no nos debe llevar a bajar la guardia. Porque mal de muchos… EL PAÍS. ¿Qué le ha parecido la resolución de la crisis de Chipre? A. J. Desacertada, improvisada e incierta. El daño psicológico sobre la seguridad de los depósitos está hecho. Veremos qué ocurre en el propio Chipre y en los países más vulnerables. http://economia.elpais.com/economia/2013/04/12/actualidad/1365794404_277301.html
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Economía El Gobierno designa a 12 expertos para diseñar la nueva reforma de pensiones El comité tendrá que elaborar un informe sobre la definición del factor de sostenibilidad Manuel V. Gómez Madrid 12 ABR 2013 - 15:42 CET123 El Gobierno ya ha dado el primer paso para la siguiente reforma de pensiones: ha designado a la comisión de expertos que tiene que elaborar un informe para el diseño del factor de sostenibilidad. El comité estará integrado por 12 especialistas en diversas áreas relacionadas con las pensiones y la Seguridad Social (sociología, demografía, derecho, economía y actuariales) y será presidido por el catedrático de Sociología, Víctor Pérez-Díaz. En principio, la encomienda no tiene un plazo cerrado, explican en el Ministerio de Empleo, pero sí que se espera que el informe esté listo en junio. Para confeccionar la comisión, nombrada en Consejo de Ministros, Empleo ha recabado la opinión y las propuestas de agentes sociales, oposición y también de académicos. Y eso se aprecia al ver el perfil de los integrantes. El objetivo es que el diseño del factor de sostenibilidad —probablemente una de las reformas de pensiones más importantes que se puede hacer— parta de un consenso amplio y que no suceda como ha pasado con los últimos cambios en la jubilación anticipada y parcial, que ha provocado el rechazo de sindicatos y oposición. El Gobierno ha aceptado los nombres propuestos por el PSOE: el catedrático de Seguridad Social, José Luis Tortuero, y el catedrático de Economía Aplicada, Santos Ruesga, también colaborador habitual de UGT. No obstante, este sindicato ha emitido un comunicando afirmando que no se le ha consultado en estos nombramientos. También integra la comisión el economista Miguel Ángel García, jefe del gabinete de estudios de CC OO. Por parte patronal, integra el comité Miguel Ángel Vázquez, periodista de formación, procede de UNESPA, la patronal de las aseguradoras, donde ocupa la dirección del departamento de Análisis y Estudios. Junto a ellos está el profesor de Economía de la Universidad Complutense, José Ignacio Conde-Ruiz, también subdirector de la Fundación de Estudios Aplicados, Fedea. Tiene un perfil similar Rafael Doménech, es economista jefe para Europa del servicio de Estudios del BBVA. También integra la lista José Enrique Devesa Carpio, profesor de Ciencias Actuariales de la Universidad de Valencia. La única mujer que formará parte de la comisión de expertos es Mercedes Ayuso, profesora de Econometría y Estadística en la Universidad de Barcelona. Otros integrantes de la comisión son los catedráticos de Hacienda Pública Francisco Castellano y Manuel Lagares, y el catedrático de Economía Financiera y Contabilidad, José María Marín Vigueras. http://economia.elpais.com/economia/2013/04/12/actualidad/1365774171_333537.ht ml
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Daily Morning Newsbriefing April 12, 2013 Leaked troika report shows options for Ireland and Portugal The FT got hold of the leaked troika report on maturity extension prepared for today’s ECOFIN meeting, outlining five options on how to extend loan maturities for Ireland and Portugal: extend the payment schedule a few months; by 2.5 years; 5 years; 10 years or more; or a compromise of 7 years. Newspapers have reported earlier that the debate is converging towards the 7 years, recommended in the report, but there are still reservations in Germany to overcome. Another aspect revealed by the leaked troika document is their pessimistic assessment of Portugal, saying that while extension will certainly help Portugal it will not be enough to return to markets, as noted by Jornal de Negocios. According to the FT Brussels blog the report makes clear that Portugal will have a very hard time avoiding a second bailout, since its financing needs in 2014 and 2015 – its first years after bailout funding runs out in July 2014 – will be substantially higher than they were during the pre-crisis period. The report also says that unlike Ireland, Portugal has yet to re- establish a proven track record with the financial markets: “At this stage Portugal’s market access can only be considered as limited and opportunistic.” Attracting a stable investor base for future emissions with longer maturities, is one of the main challenges. The report notes that 5y bond auction in January attracted mainly "speculative investors" like "hedge funds" and asset managers with extremely low participation of institutional investors. Ireland might chose to exit bailout without precautionary credit line Finance minister Michael Noonan said on Thursday Ireland wasn't actively pursuing to secure a precautionary credit line before bailout exit saying that it is not essential, according to the Irish Examiner. A Reuters source also stated that if Dublin can prove it has enough cash and that its troubled banks are in reasonable shape, it may not seek one. The IMF said last week it had begun talks on Ireland's bailout exit, including the possibility of extending a precautionary credit line, a safety net the European Commission has said it could also provide. A precautionary credit line would require a new memorandum of understanding which countries might not be keen on negotiating. Opting not to take a precautionary credit line would also rule Ireland out of qualifying for the ECB’s new OMT bond-buying scheme, another potential post-bailout backstop that Dublin said it was examining. Moody's, the only ratings agency that ranks Ireland's debt as "junk," said last month that gaining eligibility for the OMT scheme via a precautionary line would be "viewed positively."
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Judicial report will confirm Barcenas papers The investigative judge Pablo Ruz had subpoenaed the official PP accounts and researchers are said to have matched all entries in the Barcenas papers except for one. The resulting report has still not been submitted to the judge. This would substantially confirm claims by different newspapers during the last 3 months, that several prominent business leaders made large cash donations to the PP over the years, going against the pre-2007 party finance law both in form (donations should have been to a dedicated bank account) and amount (many exceeded the limit of €60k or 10M pesetas). The fact that the firms in question contracted with public administration also made them ineligible to donate. Meanwhile, ABC led with an account of how former PP parliamentarian Jorge Trias leaked the Barcenas papers to El Pais. ABC claims it has had access to a written account by Trias himself, which the latter admits authentic but doesn't want it published, under threat of lawsuits. It allegedly describes how Trias came to write an op-ed for El Pais last January stating matter-of-factly that cash payments to PP party cadres were had been routine for years, and how this led to him giving the Barcenas' photocopied accounts to El Pais. Trias appears to have come into possession of the photocopies when, at the start of the 'Gurtel case' investigation, he acted as Barcenas' legal counsel. The relationship between the two later cooled and is now adversarial due to Trias leaking the papers. At one point, Barcenas is supposed to have confided in Trias, frustrated that the party was snubbing him despite many years of loyal service. Trias also writes that he passed the papers to El Pais through the newspaper's lawyer Gerardo Viada. Trias knew Viada because they had been on opposite legal teams in a high profile case in the 1990s. Back then, El Pais was suing judge Javier Gómez de Liaño for prevarication, which ended in the judge's conviction. Social conflict on the rise in Spain At the end of March we reported on a new wave of protests in Spain, called 'escrache', in which the homes of politicians are picketed. The government has now reacted to this by issuing a sort of restraining order keeping protests away from politicians' homes, Reuters reports. Protests intensified, targeting the home of deputy Prime Minister Soraya Saenz de Santamaria among other PP parliamentarians, after the PP eliminated from legislation being debated the provision that repossession would count as full and final payment of outstanding mortgage debt. The European Commission, meanwhile, has figured out that Greece, Portugal and Spain are the countries where there were the most demonstrations, protests and strikes against structural reforms and budget cuts between 2008 and 2012. The Commission's report on industrial relations advocates a revamping of social dialogue so that reforms can be implemented faster, writes Europa Press. Spanish market regulator report shows Bankia bad practices El Diario writes that an as yet unpublished report by Spain's securities market regulator CNMV claims that Bankia's predecessors Caja Madrid and Bancaja, and later Bankia itself, engaged in "bad practices" in relation with the trading of preferred shares. The report is a consequence of the civil case over Bankia's failure, being investigated in the Spanish courts. The CNMV warned the banking sector as early as mid-2010 about badly managed conflicts of interest between existing preferred shareholders who wanted to liquidate their investment and new clients to whom the Cajas sold the shares to provide liquidity. At issue was an apparently deliberate overpricing of the shares to
47 advantage the old shareholders at the expense of the new. The CNMV launched an official investigation in the spring of 2011, as the the situation hadn't improved. Bankia was floated on the stock exchange in mid-2011, and later that year the CNMV finally forced it to correct the bad practices. The group 15MpaRato (a play on the phrase 'the 15M movement will last' and Rodrigo Rato's name) which is one of the plaintiffs in the Bankia case, has said they will attempt to use this report to take Bankia and its former management to the criminal courts for fraud. Italy plans more austerity The sheer infeasibility of Italy’s fiscal targets became apparent with this story in Corriere della Sera, showing that to meet the fiscal goals, Italy will have to enact further austerity measures. The expiry of the IMU tax on the first house will require a new compensating measures of equal size – which makes a permanent tax increase. In addition, new measures have to be found to cover the gap by the constitutional court’s ruling of the new prescription charges. The article says that even to meet the current year’s target, the new administration will have to enact unforeseen savings, such as layoffs of public workers, and cuts in Italy’s military engagements abroad. Corriere has taken a look at the detail fiscal plan (DEF), which came out yesterday, and which the newspaper says implies the need of new austerity measures. If Italy really wanted to reduce its debt-to-GDP ratio and maintain a balanced structural budget, further measures of €20bn in the 2015-2017 period will be needed if the current housing tax is maintained, but this would go up to €60bn if not. The article also quotes Fabio Penetta, deputy director of the Bank of Italy, as saying that Italy experienced the deepest crisis since WWII, with a fall of GDP by 7% since 2007. The only thing that can get Italy out of this whole would be a resumption of growth. There is no way that structural reform can achieve this. The lags are too long, and the reforms likely to be politically agreed will not sufficiently large enough. With the continuation of the political deadlock, Italy’s sustainability in the eurozone is becoming increasingly questionable. Italy’s true unemployment rate is 22.3% There is more and more evidence that the official unemployment numbers vastly underestimate the true impact of the crisis. Reuters has the report that while Italy’s headline unemployment rate of 10.7% seems in line with the eurozone average, discouraged workers make up 11.6% - yielding a total unemployment rate of 22.3%. (Please note, we are adding those numbers together, Istat does not.) In Spain and Greece, according to Istat, there are also discouraged workers, but far less than in Italy, where they outnumber the those officially registered as unemployed. The combined number is consistent with the type of recession currently experienced by Italy. Greek unemployment rate now at 27.2%, youth unemployment at 59.3% Latest ELSTAT data shows that Greece's unemployment rate hit a new record of 27.2% in January, with some 3400 people losing their job every working day, Kathimerini reports. Youth unemployment among the 15-24 year olds soared up to 59.3%. The only ‘good’ news is that the pace of unemployment increases slowed down compared to January figures last year. Troika talks continue in Greece to find compromise on civil service dismissal
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Talks with the troika in Athens are likely to continue until Tuesday to find agreement on the last outstanding issue about civil service dismissals, according to Kathimerini. Administrative Reform Minister Antonis Manitakis reportedly objects to committing to a specific number of layoffs by a certain deadline and said the troika’s call for 20000 layoffs by the end of next year is over and above what Greece committed to in the second loan agreement. The troika seem to be ready might give Athens some extra time – possibly until summer – to speed up the process by which oath-breaking civil servants are found guilty or exonerated so that dismissals can begin. A spate of surprise inspections last week on ministries and state organizations suggests that a significant proportion of civil servants are consistently failing to turn up to work, 20% in the education ministry were absent without good reason. Cyprus extends capital controls, but relaxes thresholds The government of Cyprus has extended the capital controls for another week, but relaxed the restrictions. The Wall Street Journal reports that the size of domestic transfers for businesses has been increased from €25,000 to €300,000, and the limit on transfers abroad from €5000 to €20,000. Travellers can now take €2,000 on a trip abroad. But the daily withdrawal limit at cash machines remains capped at €300. Coeure dampens expectations on SME lending Bernard Coeure said the ECB had no magic wand in reanimating lending to small companies, Reuters reports. He said the ECB can assure that bank funding is not a source of financial fragmentation, but it cannot compensate for a misallocation of equity, nor could it alter the credit risk of individual borrowers. He called for better access by SMEs to capital markets, and for the use of ABS. http://www.eurointelligence.com/professional/briefings/2013-04- 12.html?cHash=fb7cf2ece07b56ea7f01f1c56c93422a
April 11, 2013, 10:33 AM ET IMF tells Europe that credit-default swaps are just fine Memo to the European Union from your friends at the International Monetary Fund: Sovereign credit- default swaps are just fine. That’s a message that will not be greeted by any cheer in Europe, where a ban on so-called naked sovereign CDS has been in place since November. (A naked purchase is one where the buyer does not have an underlying position to hedge.) But a study as part of the IMF’s global financial stability report found CDS to be the target of myths. In the IMF’s eyes, sovereign credit-default swaps are good market indicators of sovereign credit risk, and they aren’t any more prone to high volatility than other financial markets. “There is little indication that they raise sovereign funding costs—in other words, not much evidence that ‘the tail wags the dog,’” the IMF says. In any case, credit-default swaps on Europe’s most at-risk countries have come in considerably in recent months. The price to insure $10 million of Italian government debt against default for five years costs $266,000, down from $578,000 in July, according to data from Markit. Read a related Tell blog on an IMF study about the risks to banks from quantitative easing. – Steve Goldstein http://blogs.marketwatch.com/thetell/2013/04/11/imf-tells-europe-that-credit-default-swaps-are-just-fine/
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Market sees rising bank default risk from global QE policies, IMF study finds April 11, 2013, 9:33 AM The market is pricing in rising risks of future bank defaults due to surprise monetary easing, according to an International Monetary Fund study released Thursday. The study makes up a chapter of the IMF’s global financial stability report, due to be released next week. The IMF focused on the unprecedented easing undertaken by the U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan, and the risks from those actions. On the equity side, bank prices weren’t really moved by surprise central bank actions in the U.S., though they fell in the U.K. and the euro area. But the interesting element the IMF found was the risk of future bank default rising as a result of a surprise monetary easing. Measured by widening spreads between medium-term bank bonds and government bonds, each basis point of surprise easing increases spreads by between 0.071 and 0.154 basis points, the study found. Why would that be? On the profit side, low interest rates basically amount to a wash — yes, they keep funding costs low, but they also keep revenue on new loans in check. But low rates may put banks at risk by giving an incentive to roll over nonperforming loans. “A delay in balance sheet repair could be one reason for the market expectations of an increase in bank default risk over time that was found in the event study,” the IMF said. More broadly, the study said central bank policies have not given rise to any “serious immediate degradation of financial stability.” But some medium-term risks include the aforementioned balance sheet repair delay; a rise in interest rates that could hit some banks’ holdings of government bonds; market disruptions from central banks selling securities; and the difficulty of restarting interbank lending markets.
– Steve Goldstein http://blogs.marketwatch.com/thetell/2013/04/11/market-sees-rising-bank-default-risk- from-global-qe-policies-imf-study-finds/
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April 11, 2013, 7:22 am 100 Comments Monetary Policy In A Liquidity Trap I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness. But I gather that some readers are confused – haven’t I been arguing that monetary policy is ineffective in a liquidity trap? The brief answer is that current policy is ineffective, but that you can still get traction if you can change investors’ beliefs about expected future monetary policy – which was the moral of my original Japan paper, lo these 15 years ago. But I thought it might be worthwhile to go over this again. So, at this point America and Japan (and core Europe) are all in liquidity traps: private demand is so weak that even at a zero short-term interest rate spending falls far short of what would be needed for full employment. And interest rates can’t go below zero (except trivially for very short periods), because investors always have the option of simply holding cash. Incidentally, this isn’t just a hypothetical: there has been a surge in currency holding, although a lot of it is $100 bills held overseas:
Under these circumstances, normal monetary policy, which takes the form of open- market operations in which the central bank buys short-term debt with money it creates out of thin air, have no effect. Why? Well, the reason open-market operations usually work is that people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the
51 central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process. But if rates are zero, there is no cost to liquidity, and people are basically saturated with it; at the margin, they’re holding money simply as a store of value, essentially equivalent to short-term debt. And a central bank operation that swaps money for debt basically changes nothing. Ordinary monetary policy is ineffective. (Some readers may wonder about purchases of long-term debt, which doesn’t have a zero rate. That will have to be a subject for another post; but it makes little if any difference). The flip side of this, by the way, is that all those fears about how “printing money” in this slump would lead to runaway inflation were predictably wrong. If you paid attention to the Japanese story from the last decade, you knew that simply expanding the central bank’s balance sheet did little, and certainly wasn’t inflationary:
Here’s the thing, however: the economy won’t always be in a liquidity trap, or at least it might not always be there. And while investors shouldn’t care about what the central bank does now, they should care about what it will do in the future. If investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy. So the central bank can still get traction if it can change expectations about future policy. The trouble is that central bankers have a credibility problem – one that’s the opposite of the traditional concern that they might print too much money. Instead, the concern is that at the first sign of good news they’ll revert to type, snatching away the punch bowl. You can see in the figure above that the Bank of Japan did just that in the 2000s. The hope now is that things have changed enough at the Bank of Japan that this time it can, as I put it all those years ago, “credibly promise to be irresponsible”. And that’s why I’m bullish on the Japanese experiment, even though current monetary policy has little effect. http://krugman.blogs.nytimes.com/2013/04/11/nobody-could-have-predicted-4/
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ft.com/global economy EU Economy April 11, 2013 1:35 pm Ex-IMF official warns austerity ‘untenable’ By Jamie Smyth in Dublin A senior official with the International Monetary Fund who helped negotiate Ireland’s bailout in November 2010 has admitted the troika of international lenders botched the €67.5bn programme by focusing almost exclusively on austerity. Ashoka Mody, the IMF’s former mission chief to Ireland, said on Thursday it was time to ease up on Europe’s policy of austerity, warning further delay in changing course risked dragging out the continent’s economic recovery. More ON THIS STORY// Lisbon struggles to avoid second bailout/ Gavyn Davies Cash boost for troubled eurozone/ Brussels blog Trouble ahead for Portugal/ Lagarde warns over three-speed world/ Brussels rebukes France on pace of reforms ON THIS TOPIC/ Portugal’s austerity plan fails to deliver/ Portugal bailout blown off course/ Philip Stephens Spend and borrow will not save the left/ Philipp Hildebrand Europe needs to focus on reform IN EU ECONOMY/ Russia slashes 2013 growth forecast/ Latvian hopes awash with Russian money/ Rome raises forecasts for public debt/ Cyprus ranks near top for household wealth “We are seeing a belated recognition of the fact that the constraint imposed by only [having] austerity was untenable,” he told Irish radio in an interview. Mr Mody said he was concerned Europe’s change of policy was being implemented in “driblets”. “A cleaner and more consistent break in terms of easing the burdens is much more desirable because it allows the readjustment process to occur quickly rather than dragging it out,” he said. Mr Mody made the comments as European finance ministers began arriving in Dublin for a two-day informal meeting on Friday and Saturday to discuss the eurozone debt crisis and ways to ease the bailout conditions on Ireland and Portugal. An options paper circulated to ministers recommends extending the average maturity on both country’s EU bailout loans by an average of seven years to ease their financing requirements as they exit their bailouts. The paper says extending the maturity on bailout loans “may act as an important catalyst for the full restoration of market access, enabling Ireland and Portugal to finance themselves without further official funding”. Both countries face significant financing hurdles as they seek to return to international bonds markets when their bailout programmes end next year. Between 2016 and 2020 Ireland needs to refinance €20bn per year, which is about 12 per cent of the country’s economic output in 2013.
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In depth Portugal bailout // Portugal is the third eurozone country to seek EU financial assistance over crippling sovereign debt problems Portugal’s overall debt is expected to peak in 2014 at about 124 per cent of gross domestic product. In the immediate post programme years – 2014 and 2015 – Lisbon will have to issue €14bn and €15bn to service IMF loans and private bonds. The paper warns Portugal’s market access at present can only be considered “limited and opportunistic” and the country remains vulnerable to “adverse market and political developments” in other periphery countries. A formal decision on whether to extend the maturities on the bailout loans is not expected at the informal meeting. Dublin is hoping a political decision can be reached between ministers, allowing sign-off to take place at the next formal meeting in May. However, Berlin has said any substantial change to an EU-IMF programme would require a vote in the Bundestag. There have been suggestions that opposition lawmakers could make their support for the easing of the Irish and Portuguese programmes contingent on them adopting new reform measures to improve their economies. A ruling by Portugal’s constitutional court last week blocking certain austerity measures could also complicate the issue. http://www.ft.com/intl/cms/s/0/66ff0b2c-a29a-11e2-9b70- 00144feabdc0.html#axzz2PrIpeB3U
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Economía Rajoy se impacienta y cuestiona el ritmo, el diseño y la gestión de la UE Duras críticas a Bruselas del Gobierno y de toda la oposición en el Congreso Fernando Garea Madrid 11 ABR 2013 - 00:07 CET67 Del “euroescepticismo” al “eurotemor” y la “euroangustia”, según las expresiones utilizadas ayer por Alfredo Pérez Rubalcaba. Antes la solución casi siempre se esperaba de Europa; ayer, del pleno del Congreso salió la impresión de que de Bruselas llegan ahora el freno, la dificultad para salir de la crisis, las medidas contraproducentes y hasta episodios como el de Chipre, que dañan aún más la economía española. La mayoría de esas críticas a Bruselas no son nuevas, pero sí lo es que el presidente del Gobierno se sume al lamento y la impaciencia por la política de la UE, con obvios elogios a lo que ha supuesto para España la integración, pero con un malestar que Mariano Rajoy dejó claro en su intervención ante el pleno del Congreso. Fuentes de La Moncloa completaron luego las frases del presidente en el hemiciclo con la explicación de su enorme malestar porque las medidas que se adoptan tardan en ponerse en marcha; porque no se termina de reconocer el sacrificio de los recortes con flexibilización de exigencias, por ejemplo, para el déficit; porque el Banco Central Europeo no cumple su papel de apoyo a las economías con problemas, y también porque se actúa de forma vacilante y errática, como con Chipre. Por eso, Rajoy señaló expresamente a Jeroen Dijsselbloem, presidente del Eurogrupo, al que achacó declaraciones “desafortunadas” sobre Chipre “que nos han perjudicado a todos” y errores de gestión. El presidente comparecía ayer en el pleno para dar cuenta, casi un mes después, del Consejo Europeo del 14 de marzo, del que no salió ninguna decisión relevante, según todos los portavoces que intervinieron, y que estaba tan desfasado como que después el Eurogrupo agitó los mercados con el rescate a Chipre y con medidas para limitar los depósitos bancarios en ese país. No se recuerda unanimidad igual en contra de la UE, porque a la impaciencia de Rajoy se sumó la denuncia expresa de Rubalcaba contra la política de “recortes de la derecha europea que encabeza la alemana Angela Merkel”; el lamento de Josep Sánchez Llibre (CiU) sobre la falta de liquidez en la economía; la expresión del “papelón” que, según Pedro Azpiazu (PNV), hace Bruselas; el “desasosiego en todos los ciudadanos europeos que ahora temen por sus depósitos” del que habló Rosa Díez, y la intervención de hecho de Europa en la economía española que denunció Joan Coscubiela (ICV), entre otros. Bajo el discurso europeísta y de jefe de Gobierno de Rajoy se escondía entre líneas una dura crítica a la UE por el ritmo premioso en la puesta en marcha de las medidas para salir de la crisis, las resistencias a cambiar su propia estructura y la gestión política. Por eso habló de “repensar” sus objetivos, la intensidad de su integración o su diseño político y pidió un “ritmo superior” en los trabajos y una “mayor intensidad”. Según dijo, si el Banco Central Europeo funcionara ya como tal, no se hubiera producido la crisis de Chipre. Rajoy exigió “el apoyo del resto de los socios y de las instituciones, para que el esfuerzo y los sacrificios que estamos realizando no se hagan a costa de la cohesión” y que la UE actúe como hizo en el momento de “la gran aventura de la ampliación”. Pese a todo, mostró su voluntad de seguir con las reformas con una cita de un primer ministro sueco y socialdemócrata, Göran Persson: “Decía que hay que elegir entre hacer lo que debo y no ser reelegido o no hacer nada y no ser reelegido. Hizo lo que debía y fue reelegido”. Rubalcaba lamentó la gestión de Rajoy ante la UE y le pidió mayor contundencia sobre el objetivo de déficit, porque no se podrá alcanzar y porque el margen que se logre puede servir para favorecer el crecimiento. Por eso habló de brecha entre el norte y el sur de Europa y le pidió que haga piña con Portugal, Italia, Francia y Grecia. http://politica.elpais.com/politica/2013/04/10/actualidad/1365617630_750564.html 55
Bloomberg Businessweek Go To Businessweek.com How to Beat a Dead Horse, by Nobel Economist Paul Krugman Posted on April 11, 2013 Part of the answer is paying attention to events, looking for the illustration, looking for the dramatic motivating example. It kind of helps to use various people as foils. If someone has said something that’s demonstrably at odds with experience or just demonstrably stupid, I use it. Jean-Claude Trichet [former president of the European Central Bank] delivered some wonderful quotes. Olli Rehn [vice president of the European Commission] has been doing beautifully helpful quotations. I’m not being unfair to him. The austerity thing has been helped on a great deal as an argument by unfolding events in Europe. In 2010 it was based mostly on the logic of the case, not the evidence. Now I can say, “Look, you’ve done this thing. Look what’s happened. Look at Britain. Look at Portugal.” Metaphors, if you can find good ones, are helpful. Sometimes you can mull over an issue for years before the right thing comes to you. “Confidence fairy” has been a good friend to me. That one just came out of the blue in 2010. “Zombie ideas” is not original with me, but it’s been very useful. It also helps if you’re going to make the same point many times that it’s a very important point worth making. More on the blog than in the column, I follow research. When there’s new papers, that can be helpful. The ideas evolve, too. I wasn’t thinking much about the importance of having your own currency at first. I learned about that a couple of years into this Don Quixote role—some mixture of Don Quixote and Cassandra. One thing about Cassandra is that she was always right. A lot of what I’ve been doing is telling people they’re about to make a terrible mistake, watching them make the mistake, and then saying, “See, you made a terrible mistake.” With austerity we’ve had this monstrous exercise in unethical human experimentation. I came out with some assertions that were very much at odds with what other people were saying. The duration of the slump, the likely path of interest rates and inflation. I haven’t batted a thousand, but it’s been pretty good. This having-been-right thing helps sustain me in pounding on the issues. I do mix it up once in a while. I may have reached the point where I need to mix it up quite a lot. To some extent, people have gotten the message. My next column will be about food and recipes. No. Anyway, something different. A lot of it’s just persistence. In any kind of communications profession, the point is above all to have something to say. I look at a lot of people in the punditry business and I think they’re trying to be clever and counterintuitive. They’re viewing themselves as being in the entertainment business. That’s not what it’s about. From a professional standpoint, you end up with a dedicated readership if you actually stand for something and stick to your guns. Don’t give up just because other people don’t like what you’re saying. —As told to Peter Coy • Krugman, a Nobel prize-winning economist, is a columnist for the New York Times. http://www.businessweek.com/articles/2013-04-11/how-to-beat-a-dead-horse-by-nobel- economist-paul-krugman
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Daily Morning Newsbriefing April 11, 2013 Dijsselbloem and Rehn push for deal on maturity extension this weekend A new troika report recommends extending maximum average maturities by seven years for Ireland and Portugal as an “important catalyst for the full restoration of market access”. The report, seen by The Irish Times, warns of a “potentially challenging” situation “if market conditions become more adverse again” and, after presenting five options, proposes a seven-year maximum average maturity extension on loans as “the best compromise” to ease a return to markets. The report be discussed this weekend by the informal Ecofin. Both Eurogroup president Jeroen Dijsselbloem and Commissioner Olli Rehn said yesterday that a deal needs to be reached at a two-day meeting which starts tomorrow, according to the Irish Independent. They contradict previous statements from the Michael Noonan and the German government who both said a deal to extend repayments was not likely until next month. Hollande’s agenda of transparency plus austerity In his attempt to limit the fallout of the Cahuzac scandal, Francois Hollande unveiled a series of measures to tackle tax fraud in a second TV appearance, promising a "relentless fight" against financial crime and to eradicate tax havens. He announced that there will be a new agency to fight financial fraud and French banks will be forced to detail activities in tax havens. Le Monde and Les Echos wrote that despite the strong wording doubts about his leadership persist. Montebourg’s coup to turn the spotlight from transparency to austerity with his interview in Le Monde yesterday infuriated the prime minister, according to Le Monde. The new budget minister Bernard Cazeneuve played down Montebourg’s push in an interview with Les Echos saying it is all very nice to have an ideological debate but that reality is different. No growth without recovery of public finance, no credibility without keeping on track. Cazeneuve said the plan is to reduce the structural deficit by 1.8pp of GDP this year and 1pp of GDP next year to reach a structural deficit of 1% of GDP in 2014. Stournaras expects troika talks to continue next week Marathon talks between the Greek government and troika officials ran late into the night on Wednesday as the two sides struggled to reach a compromise on a contentious plan for layoffs in the civil service, Kathimerini reports. Finance Minister Yannis Stournaras told reporters that negotiations were unlikely to be resolved by Friday’s informal Ecofin in Dublin and would continue next week. “There are lots of issues still open,” Stournaras said.
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Greece recorded primary surplus in Q1 despite revenues falling behind targets Greece reached a primary surplus of €508m in the first quarter of 2013 despite revenues falling short €351m of their target, Kathimerini reports. The primary surplus was the result of cutting expenditure by €1.8bn more than budgeted, with primary expenditure cut by €1.1bn and Public Investment Programme spending reduced by €671m. Taxes fell short of their target with indirect tax revenues as the biggest problem. VAT revenues missed their target by 7.3% in Q1, or €260m, €126m alone from fuel VAT. The shortfall is growing in percentage terms every month. A major lag is also observed in the special consumption tax on tobacco and alcohol, their target missed by €144m. Those shortfalls were partly offset by revenues from property taxation, exceeding the target by €100m, while income tax receipts were €31m higher than expected. Why assuring that deposits are safe is not reassuring at all The blog Keep talking Greece asks whether the repeated official reassurances that “deposits in Greek banks are fully protected and thus regardless of the amount” is instead of calming down increase worries of deposit holders, prompting them to take their money and run. Greeks “have lost trust in government promises and deals heralding success that they do not materialize at the end of the day, the week, the month, the year… “ Italy face another year of recession The Italian parliament has approved the government’s economic blueprint for 2013 with huge revisions, as Linkiesta reports. For 2013, the Economic and Finance Document (DEF) forecasts a deficit-to-GDP ratio of 2.9% in absolute terms. The debt-to-GDP ratio is revised upwards from 126.1% to 130.4%. At the same time, Vittorio Grilli says the government expects Italy's GDP to fall by 1.3% this year. However, Grilli affirms that country’s GDP should increase 1.3% in 2014, while the growth should be 1.4-1.5% in 2015. In addition, the DEF includes revenues from privatizations equal to approximately 1% of GDP each year from 2013 to 2017. According to Mario Monti, the public finances are on a sustainable path and the target of balancing the budget in structural terms has been hit. In other words, the worst of crisis is over. PD hit by divisions Matteo Renzi is clearly hoping for another electoral round, as soon as possible, for obvious reasons. According to Il Corriere della Sera, the Mayor of Florence and rising star of Partito Democratico, said that Italians should return to elections tomorrow morning. Every day that is lost is time lost for Italy, he added. His party PD leader, Pier Luigi Bersani, has ruled out this possibility, and is now holding talks with Silvio Berlusconi. Commission warns Italy on imbalances The European Commission says Italy’s macroeconomic imbalances required urgent attention and decisive policy action, La Stampa reports. Italy’s political deadlock is worse than forecast, as well as the macroeconomic developments and the underlying loss of competitiveness, combined with the high public indebtedness and missing growth potential. According to the Commission, Italy’s subdued growth deserves continued attention in order to reduce the risk of adverse effects on the functioning of the Italian economy and of the EMU. The next EU review will be held in June, according to La Stampa.
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The Italian political stalemate costs €1.6bn, at least Giorgio Squinzi, head of the Italian business lobby Confindustria, warns that the current political deadlock would cost at least 1% of GDP, or €1.6bn, according to Il Sole 24 Ore. In particular, the absence of a government for the last 45 days has caused a stalemate with a huge impact on Italian economic policy. The technical government has reached its fiscal targets, but Italian firms are choked by a massive tax burden, combined with the rise of retail interest rates, Squinzi says. The priority for Italy should be to solve the stalemate and form a working government, he added. Italian industrial production suffers another drop Il Messaggero reports on another drop in Italian industrial production. As ISTAT reports, Italy’s industrial production was down by 3.8% in February against the same month in 2012 - in other words, the 18th consecutive drop in the year-on-year seasonally adjusted data. According to the national statistics agency the output in February was 0.8% lower than in January, despite a little rebound thanks in the first part of the year. Grillo accuses PD and PDL of staging a "state coup" Beppe Grillo attacks the Partito Democratico and Popolo della Libertà over the political talks to form a government, as La Repubblica reports. The Movimento 5 Stelle continues to hold the balance of power in Parliament with its 25% of votes. Grillo demands a new parliamentary commissions be set up immediately to solve the current crisis and he accuses the established parties of staging a "state coup," because the claim that the commissions cannot be set up until a new government is sworn in was a lie used by Partito Democratico and Popolo della Libertà to stop M5S introducing reforms that would change the country. That’s why Grillo says he won’t support any government deal between PD and PDL. Bill Emmott's girlfriend is no longer in a coma, but dead Italy is facing collapse, but Italians are not recognising it, Bill Emmott says in an interview to Il Fatto Quotidiano. Corruption, economic disease, lack of competitiveness: the crisis of Italy is due to Berlusconismo, the political doctrine introduced by Silvio Berlusconi during the last 20 years, and a lack of reforms, according to Emmott. The votes for Beppe Grillo are the last rattle of a dead country, he said. And the rage, expressed by the vote for Grillo is not the recipe for the country that will continue its decline despite the government announcements, as Emmott affirms. Demetriades under pressure to resign The governor of the Bank of Cyprus, Panicos Demetriades is under pressure to resign over his role in his country’s crisis, the FT reports. Leaders of several political parties, including that of President Anastasiades, have backed a parliamentary investigation into his role in the collapse of Laiki. If the ethics committee of the parliament decides that he acted against the public interest, he might face charges. The inquiry will begin next week. The specific allegation is that Demetriades had provided insufficient information in response to a request for details of depositors who had transfers money abroad in the days before the haircut was agreed. The ESM, meanwhile, yesterday laid out in a proposal that the average maturity of the bailout loans to Cyprus will be 15 years, with the longest being 20 years, Reuters reports. Cyprus will be charged 10bp over financing costs, plus 50bp up-front for
59 every disbursement. The proposal is dated April 23, which suggests that this may be the formal date when the agreement is expected to be signed. Spain's industrial production continues to drop Spain's National Statistics Institute (INE) updated its industrial production index (IPI) to February (see press release [PDF]). On a year-on-year basis, the index dropped 8.5%. This measure appears to be rather noisy, as the year-on-year drop was 3.6% in January but 8.6% in December. Adjusted for calendar days, the IPI dropped by 7.1% in December, 4.9% in January and 6.5% in February. The index has been in decline for nearly two years. Commission urges Spain to double down on austerity and "reform" In its newly released macroeconomic imbalances report, the European Commission urged Spain to undertake decisive reforms by the end of the month. El Pais reports that the European Commission demanded from Spain further tax hikes, pension cuts, labour reforms and to eliminate the so-called tariff deficit which is effectively a subsidy of electricity prices. Olli Rehn warned against the tangible threat of a vicious cycle generating a prolonged recession, deleveraging and financial volatility. Rehn advised Spain to prioritize spending cuts and make the necessary reforms. Also, Rehn demanded cheaper unfair dismissal, ending the duality between permanent and temporary employment, and measures to allow a faster wage drop, all of this compensated by active employment policies. The Commission's report includes calls to strengthen the sustainability of the pensions and social security systems, which is code for reducing entitlements. Finally, the report suggests raising the reduced VAT rates and shifting more categories of products to the headline rate. Spanish region of Andalusia to commandeer empty housing On Tuesday, the regional government of Andalusia (PSOE-IU) announced a decree allowing the expropriation of usage rights of residential property from banks in case of eviction of a family at risk of social exclusion, reported El Pais. In addition, the decree to be published in the region's official journal on Thursday, will allow fines of up to €9,000 to be imposed on banks and their subsidiaries if they don't rent out the property they own. On Wednesday, the national PSOE urged the national government to follow suit, writes Cadena Ser, as it announced that it will introduce similar measures as amendments to the proposed legislation on mortgage reform which is currently being debated in the Spanish parliament. Forget the SPD There are quite a surprisingly large number of people who think the SPD would make a big difference on the eurozone crisis if it were to win the elections, or enter as a junior coalition partner in a Merkel-led coalition. In a long analysis on German politics in the FT, Quentin Peel produced the clearest and most ambiguous evidence yet of the SPD’s total lack of ambition. He quotes Angelica Schwall-Düren, Europe minister for North Rhine-Westphalia and a former deputy leader of the SPD in the Bundestag, as saying: “…it might be possible to use eurozone bonds in the form of project bonds. But I must say very clearly that won’t be a central theme of the SPD campaign. The election is more about the social foundation of our society.”
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Belgium accuses German of wage dumping BBC News carries the story that Belgium has lodged a complaint with the European Commission about low wages at some German firms, which the Belgium describe as "social dumping" – an English expression more common on the European continent than in English-speaking countries, where you often have to translate it. Specifically, the complaint is about Germany’s "mini-jobs", under which workers get paid €3-4 per hour, without any social protection. There are 7.5m people in mini jobs. More heat on the ECB’s study on net assets Holger Steltzner is a journalist with a mission. His goal seems to be to whip up political action over the ECB’s recent study on the distribution of net wealth in the eurozone, showing that the Germans are the poorest, and the Cypriots the second richest. Steltzer says in his latest FAZ editorial that these data are explosive. He says the scandal is not that the Germans are poor – it is a surprise, but not a scandal. The true scandal is that the ECB has delayed the publication of this information until after the decision on the rescue of Cyprus. The ECB is thus increasingly becoming a political actor. Mark Schieritz refutes Steltzner point by point, and says the true scandal, and probably the reason why the ECB felt it needed to the publication, is how people like Steltzner are abusing this information. Reaction to Soros George Soros’ proposal that Germany should either accept eurobonds or quit the euro has stirred up a debate in Germany – with drastically different comments in Die Welt and Spiegel Online. Florian Eder writes in Die Welt that the German commitment to the euro was unshakable. He talks about “simplistic solutions”, which had now attracted great minds like those of George Soros. He says this extremist proposal of a choice between isolationism or uncertain federalism would serve nobody interest except for large investors. He quotes a Forsa study, according to which two thirds of the Germans want the euro, which is the highest rating since the introduction of the euro. He says the Germans are not going to give up on the euro. He concludes he way to save the euro is to do what the German politics is doing – provide conditional help to others. And is somebody has to leave, it should not be the strong countries. Wolfgang Munchau writes in Spiegel Online that he has come to the conclusion that Germany is not a country with which others can co-exist in a monetary union – except for a small number of countries with similar economic structures. He agrees with Soros that there is a stark choice between the acceptance of eurobonds, and a different approach to economic policy, or a break-up. The latter would be best accomplished through a German departure. He says the political pendulum has been swinging firmly against eurobonds, as even the SPD no longer supports them. He says that while he personally disagrees with the goals of the anti-euro party AfD, he acknowledges that their position is internally coherent – unlike those of the CDU and the FDP – who want to retain the euro, but refuse transfers and burden sharing. What we thought was revealing about Eder’s comment is that it is based entirely on political arguments. But while the euro is without a doubt a political project, and while the political forces keeping it together are strong, economic history has taught conclusively that the long-term sustainability of any monetary union is determined by
61 economic force, not political will. There is very little recognition of that in the German debate. Eurozone Financial Data This Previous day Yesterday Morning France 0.535 0.566 0.555 Italy 3.094 3.018 3.033 Spain 3.465 3.339 3.357 Portugal 5.225 5.124 5.148 Greece 10.460 10.000 10.01 Ireland 2.697 2.633 2.637 Belgium 0.763 0.806 0.797 Bund Yield 1.262 1.303 1.288
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.310 1.307
Yen 130.290 130.17
Pound 0.855 0.8527
Swiss Franc 1.220 1.2184
ZC Inflation Swaps previous last close
1 yr 1.56 1.57
2 yr 1.53 1.55
5 yr 1.75 1.75
10 yr 2.06 2.06
Euribor-OIS Spread
previous last close
1 Week -5.486 -5.786
1 Month -3.600 -3.6
3 Months 4.500 3.3
1 Year 29.643 31.943
Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-04- 11.html?cHash=2cba3dee334dc3e1b24421ac101f43c6
62 iMFdirect How To Make A Graceful Exit: The Potential Perils of Ending Extraordinary Central Bank Policies Posted on April 11, 2013 by iMFdirect By Erik Oppers Deputy Division Chief for the Global Financial Stability Division in the Monetary and Capital Markets Department. He contributes to the Global Financial Stability Report and works on a range of financial sector policy issues This spring monetary policy is the talk of the town. It is everywhere you look, it’s unique, and you’ve never seen anything quite like it before: short-term interest rates at zero for several years running, and central bank balance sheets swelling with government bonds and other assets in the euro area Japan, the United Kingdom, and the United States. But the meteoric rise of this once dusty topic can’t last. The end of these unconventional monetary policies will come and may pose threats to financial stability because of the length and breadth of their unprecedented reign. Policymakers should be alert to the risks and take gradual and predictable measures to address them. The risk of a rapid rise in interest rates Our new analysis in the latest Global Financial Stability Report looks at the consequences for financial stability of recent central bank policies, and also touches on the issue of how to end them and return to normal policies. The economic objectives of central banks, like low and stable inflation and—for some—low unemployment, as well as market conditions will guide this so-called exit. Market conditions are important. The main risks of an exit are associated with an unexpected or more-rapid-than-expected rise in interest rates, especially longer-term interest rates. Exit will mean that central banks start increasing interest rates, and they may also decide to sell some of the bonds they bought during the crisis. If private investors—fearing bond price declines from these central bank exit policies— respond by selling bonds en masse, this could lead to a spike in interest rates. Such a spike could have adverse consequences: • Banks and other financial institutions—including even central banks—would incur capital losses on fixed-rate assets such as bonds. While a rise in interest rates can be good for banks in that it tends to increase net interest margins (their main source of profits), it also leads to immediate losses on bonds. Because these losses are immediate and higher profits take a while to materialize, in the short run, weakly capitalized banks could suffer. This risk makes it very important that any necessary bank restructuring and recapitalization is completed as soon as possible. • Credit risk for banks may increase. Higher interest rates make it harder for bank customers to pay back their loans, especially if the rise is in response to an inflation threat rather than improved economic circumstances.
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• Spillover effects to emerging markets. Shifting expectations of the path of future interest rates can lead to sudden and potentially disruptive financial flows between markets and countries, especially if the timing of tightening differs across the central banks. The downside of selling off your assets There are also risks associated with efforts by central banks to shrink their balance sheets. While an outright sale of assets purchased by central banks in large quantities over the past several years may not be necessary to tighten monetary policy, whether sales materialize will depend on a number of factors. Central banks may use other instruments to drain liquidity; but there may be pressures—for example, political—to sell these assets anyway. These sales could also have adverse consequences: • Uncertainty about the necessity or willingness of central banks to sell their large portfolios of government bonds and other assets could lead financial markets to overreact when central banks begin to sell these assets. Fears that central bank sales could lead to falling bond prices may prompt private investors to dump bonds, which could lead to the previously mentioned sharp increases in interest rates. • Policy missteps could disrupt markets. If central banks sell assets before policymakers address underlying market vulnerabilities, the market dysfunction we saw during the crisis could resurface. This risk is heightened in markets where central banks hold a large share of outstanding issues or played an important market-making role, especially if underlying market dysfunction is now masked by central bank intervention. • Banks could face funding challenges. As central banks drain excess reserves to make monetary policy implementation more effective, some of the banks that will need to turn to the interbank market for funding will find the transition challenging. How to make a graceful exit What can policymakers do to prevent these risks from posing a serious threat to financial stability? Most importantly, the eventual changes in policy should as much as possible be gradual and predictable. A more normal policy environment implies—at a minimum— substantial increases in interest rates, and given the prolonged period of very low rates such a substantial increase will require more adjustment in markets, companies and financial institutions. A gradual and predictable exit would facilitate that adjustment. So central banks should carefully plan and communicate their exit strategies well in advance to markets, financial institutions, and other central banks to minimize the potential for disruption. Bank supervisors should ensure that banks repair their balance sheets and generally get their proverbial house in order while these unprecedented policies are still in place, so they can thrive once central banks decide to exit from their extraordinary policies http://blog-imfdirect.imf.org/2013/04/11/how-to-make-a-graceful-exit-the-potential- perils-of-ending-extraordinary-central-bank-policies/
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“Nobody in Europe” sees a “contradiction” between austerity and growth Posted on April 10, 2013 by Devin Smith | 4 Comments By William K. Black The two most revealing sentences about the gratuitous Eurozone disaster – the creation of the deepening über-Depression – was reported today. The context (rich in irony as I will explain) is that U.S. Treasury Secretary Lew spent his Spring Break in Europe meeting with his counterparts. The Wall Street Journal’s article’s title explains Lew’s mission and its failure: “U.S. Anti-Austerity Push Gets Cool Reception in Europe.” Here are the sentences that capture so well why Germany’s destructive economic policies caused the über-Depression: ““Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,” said Mr. Schäuble. “We have a growth-friendly process of consolidation.” Wolfgang Schäuble is Germany’s finance minister. “Fiscal consolidation” is his euphemism for austerity. “Austerity” is an infamous word to tens of millions of Europeans. “Growth-friendly” is his euphemism for causing the über-Depression. I have explained in a recent column that current unemployment rates in the European periphery are often multiples of the average unemployment rates in large European nations from 1930-1938. Current unemployment rates in the U.K. and France are broadly comparable to their average unemployment rates in 1930-1938. Schäuble’s economic policies (austerity) have proven catastrophic. They are contrary to everything we have learned in economics. In my April 9, 2013 column criticizing the New York Times’ coverage of the self-destructive austerity the EU and the IMF inflicted on Cyprus I quoted Paul Krugman’s devastating criticism of the EU austerians’ dishonest response to their failures and the massive misery they have inflicted. “Thus in January 2011 Olli Rehn, a vice president of the European Commission, praised the austerity programs of Greece, Spain and Portugal and predicted that the Greek program in particular would yield ‘lasting returns.’ Since then unemployment has soared in all three countries — but sure enough, in December 2012 Mr. Rehn published an op-ed article with the headline ‘Europe must stay the austerity course.’ Oh, and Mr. Rehn’s response to studies showing that the adverse effects of austerity are much bigger than expected was to send a letter to finance minsters and the I.M.F. declaring that such studies were harmful, because they were threatening to erode confidence.” Schäuble’s claims about austerity repeat two of the great lies that are driving the über- Depression: (1) austerity in response to the Great Recession stimulates economic growth and (2) everyone agrees this is true. The third great lie is that “there is no alternative” to austerity. Economists have known for at least 75 years that austerity is likely to make economic contractions more severe. The eurozone’s infliction of austerity has produced precisely the self-inflicted damage that economists predicted. The European leaders who caused 65 this wholly gratuitous economic disaster, unsurprisingly, will not admit or remedy their errors. But America has its own variant of this insanity and Lew is one of our most self- destructive austerians. Like Schäuble, Lew is a lawyer. As Obama’s OMB Director, Lew prepared a budget and a rationale for that budget that was an ode to austerity. I demonstrated this in detail in a prior column. Lew was also one the group of Obama aides noted for their protection of Wall Street’s interests who led the effort to inflict austerity and begin to unravel the safety net through what they called the “Grand Bargain” (actually, the Great Betrayal). Obama’s decision to send Lew, the great proponent of self-destructive austerity, to Europe to urge them to end their self-destructive austerity exemplifies the incoherence of the administration’s financial policies. The fact that Obama is simultaneously proposing the Great Betrayal – its sixth form of austerity that Obama has agreed to inflict on our Nation since 2011 – produces a level of incoherence, incompetence, and hypocrisy so epic that it is likely to cause economists to act like manic depressives bouncing between wild-eyed gales of laughter and crying jags. Putting two lawyers together to discuss macroeconomic policy also leads to discussions that cause economists’ jaws to drop in shock. If you understand economics you may wish to put on a neck brace before reading the next passage lest its incoherence cause whiplash. “Standing next to Mr. Schäuble, Mr. Lew said pointedly that deficit reduction needed to be balanced with growth and investment policies. While growth targets may be different for different countries, he said, ‘I think it is fair to say that zero isn’t a good target for anybody and negative is very bad.’” “Growth targets” are meaningless in this context. You cannot counteract austerity dragging your economy deeper into recession or depression by saying: “we are targeting a growth rate of four percent.” There is no magic incantation that can remove austerity’s destructive effect. A country cannot “balance” austerity with “growth and investment policies.” Austerity is an anti-growth policy. It frequently makes the debt- to-GDP ratio larger because it causes such a large fall in GDP. Krugman explained this in the same article I cited above. “Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing.” Investment programs can be very helpful in conjunction with overall stimulus budgets, but they cannot counteract austerity. This has been one of Obama’s recurrent blind spots. He seems to believe that if he can implement a new $2 billion infrastructure investment or jobs program that can overcome the damage to the economy caused by austerity in the form of a combined $300 billion in reduced spending and increased tax revenues. The net effect is $288 billion in lost demand due to austerity. This slows growth. If the austerity is large enough it causes growth to turn negative and throws the Nation back into recession or depression. We may know why Obama has this blind spot about the damage he is inflicting through austerity – he gets his advice from Lew. http://neweconomicperspectives.org/2013/04/nobody-in-europe-sees-a-contradiction- between-austerity-and-growth.html
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ft.com Comment Analysis April 10, 2013 7:41 pm Germany: Angela’s choice By Quentin Peel The country’s election is unlikely to deliver a less austerity-focused coalition
©Reuters All eyes: Angela Merkel and fellow parliamentarians prepare to vote on aid to Greece at the Bundestag last November With almost six months to go before the general election in Germany, the victor is already almost a foregone conclusion, if the opinion polls are to be believed. They all suggest that Angela Merkel, the chancellor, is a shoo-in to keep her job in September. Europe’s most powerful politician looks set to buck the trend in which incumbents have been swept away across the rest of the EU in a popular revolt against austerity and recession, and romp back for a third term. The very insistence on debt reduction that has seen Ms Merkel caricatured as Adolf Hitler and made the butt of angry protests in Greece, Spain and Cyprus has won her plaudits at home. Cautious and conservative, she models herself on the “Swabian housewife” who does not borrow what she cannot repay. The image works. Ms Merkel is the most popular politician in Germany, far in front of her main rival to be chancellor. More ON THIS STORY/ Merkel popularity at a record high/ Decade-old reforms still divide SPD/ SPD unveils agenda for German elections/ Global Insight Black- green talk colours German politics ON THIS TOPIC/ Poor Germans tire of bailing out eurozone/ Josef Joffe Berlin right to say no gain, no pain/ Berlin sidesteps ban on far-right party/ Ulrich Speck Berlin well placed to lead on Syria IN ANALYSIS/ Taiwan Time to change gear/ Companies Up in arms/ India Corporate kinsmen/ Healthcare Big pharma, big data 67
Sixty per cent of German voters want her to keep the job, compared with just 29 per cent who favour Peer Steinbrück, candidate of the opposition Social Democratic party, according to a Politbarometer poll for ZDF television in March. Asked whom they expected to win, 76 per cent of respondents said Ms Merkel, against just 14 per cent for Mr Steinbrück.
Yet appearances can be deceptive. Even if the chancellor tops the poll, the centre-right coalition she heads may have no majority. Her Christian Democratic Union, and the Christian Social Union, its Bavaria-based sister party, together have about 40 per cent support – more than 10 points ahead of the SPD. But only 25 per cent of voters want to see the CDU/CSU alliance with the liberal Free Democratic party returned to power. The preferred choice would be a “grand coalition” with the SPD. Thanks to the peculiarities of Germany’s electoral system, and the need to forge a coalition of at least two parties to win a majority, the precise result after polling day on September 22 is still too close to call. With six parties expected to win seats in the Bundestag, there are at least four possible coalition outcomes, ranging from centre-right to centre-left. The election is being watched with unusual attention across Europe, not just as a test for Ms Merkel but for its effect on German attitudes to the eurozone crisis, and for the longer-term changes it may bring to Berlin’s economic policies. In Paris, Madrid and Rome, there is hope that if Ms Merkel is forced to switch partners, the poll could produce a less austerity-focused administration in Berlin. Yet if François Hollande, France’s Socialist president, is looking for a tilt to the left in Germany, or measures to boost growth, he may be disappointed. Mr Steinbrück is aware that many of his supporters sympathise with the Swabian housewife: they do not want to see growth financed by more borrowing. But although all parties admit the eurozone is the most important item on the agenda, there has been no sharp divide on policy. That may change with the launch of the eurosceptic Alternative for Germany party. But the lack of debate so far is a tribute to Ms Merkel’s success in presenting herself as a “good European” while fighting to limit the cost to the German taxpayer. That is what voters want. “The CDU would now like to conduct a low-key campaign,” says Jürgen Falter, a professor at Mainz university. “They would put all potentially dangerous, divisive themes to one side, and come down to the one question: who is the most competent candidate – Merkel or Steinbrück? And the answer will be pretty clear: Merkel.”
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Not just on Europe, but on economic and social issues, such as a guaranteed minimum wage, scrapping conscription and abandoning nuclear energy, she has seized the middle ground. It has exposed her to some criticism from her own party, but forced the SPD to move left. “She has been Tony Blair’s best student,” says Andreas Busch, politics professor at Göttingen university, referring to the success of the former UK prime minister in winning the middle ground in British politics. Prof Falter says the dilemma for the SPD on Europe is that “if they call for more solidarity for the eurozone, they will hit deep distrust in the electorate.” German voters are convinced that they have tightened their belts and lived within their means, he says. They do not want the eurozone to become a “transfer union” financed by German taxpayers. The SPD and Greens were the first to insist that they would not vote for a rescue of Cyprus that “bailed out Russian oligarchs”, and demanded a bail-in of bank depositors. The eurozone debate has divided the SPD. “Europe is too important (for us) to commit the danger of populism,” says Michael Roth, European affairs spokesman for the SPD in the Bundestag. “The SPD has pursued a constructive policy, with a very difficult discussion inside the party.” Mr Steinbrück is not looking for a fight he cannot win. Ideas that he floated two years ago for the introduction of jointly guaranteed eurozone bonds, or a debt redemption fund, have been quietly shelved, if not wholly abandoned. “The chancellor has succeeded in positioning herself in such a way that people are reassured that Germany won’t throw good money after bad,” says Mr Roth. That means flatly ruling out joint guarantees of borrowing. “The chancellor has killed the whole subject of eurozone bonds. If you raise the theme, you will be destroyed politically very quickly.” Angelica Schwall-Düren, Europe minister for North Rhine-Westphalia and a former deputy leader of the SPD in the Bundestag, says “it might be possible to use eurozone bonds in the form of project bonds. But I must say very clearly that won’t be a central theme of the SPD campaign. The election is more about the social foundation of our society.” . . . The SPD, however, has a deeper problem on domestic policy: it is divided over Agenda 2010, the package of labour-market reforms introduced by Gerhard Schröder’s “red- green” government in 2003. Making it easier for employers to hire and fire workers but tougher to stay on unemployment benefit long-term alienated many traditional trade unionists. “It split the party then, and it has never recovered,” says Prof Busch. Although many believe the reforms helped revive German competitiveness and bring about a sharp drop in unemployment, the SPD has never taken the credit. Indeed, it has allowed Ms Merkel to do so. In this campaign the left-leaning party leadership has drafted most of the manifesto – but the right-leaning Mr Steinbrück has to sell it. The combination is not persuasive. The party conference this weekend to endorse the manifesto may be a gloomy affair.
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“They have produced a bundle of themes, such as higher taxes for the rich, bringing back property tax, and action on social justice. But they don’t sound as authentic coming from Peer Steinbrück as they might from someone on the left,” says Prof Falter. Mr Steinbrück, who made his name as a strict if sometimes abrasive finance minister in Ms Merkel’s first coalition government, was chosen by his party because he had a pro- business agenda and could challenge the chancellor as a competent economic manager. But he has had a nightmarish start, with a series of gaffes widening the chancellor’s lead. First, it emerged he had supplemented his parliamentary income with generous speaker fees from business and banking audiences. Then he told an interviewer the chancellor’s salary was too modest. His latest faux pas was to say the Italian election had been won by “two clowns” – comedian Beppe Grillo and former prime minister Silvio Berlusconi. It was a sentiment shared by most Germans but they did not think a candidate for chancellor should have said it. “Steinbrück is kaput,” says Manfred Güllner, head of the Forsa polling agency. “His image is too negative. He has made himself a clown.” Mr Güllner sees the SPD election platform as another fatal mistake. “It has never helped the SPD to win with themes based on social justice, redistributing income and raising taxes. Even the working classes hope their children and grandchildren will get richer.” Only a clear red-green majority of the SPD and the Greens would unseat Ms Merkel. That is what both leading opposition parties are campaigning for. But unless they were to forge an alliance with the far-left Linke – anathema to the SPD leadership seeking to preserve party unity – they look to fall short of the target. According to the latest Forsa poll in Stern magazine, Ms Merkel’s current “black- yellow” coalition would squeak back with a majority if the election were held on Sunday. The SPD is languishing with 23 per cent, the same figure as at the last election in 2009, while the Greens have 14 per cent, giving them a combined 37 per cent. Ms Merkel’s CDU/CSU has 41 per cent, and the FDP has 6 per cent, for a combined 47 per cent, just enough to have a majority in the Bundestag. . . . Only once before, in 1994, have such polling figures changed by more than 3 percentage points between the beginning of the election year and the autumn vote, says Prof Güllner. Even if the chancellor has manoeuvred herself into an unbeatable position, choosing a coalition partner will be tough. She says the FDP remains her preferred choice, in spite of the unpopularity of the current coalition. Most analysts expect the liberals to scrape back into the Bundestag. “Without Philipp Rösler [the vice-chancellor and FDP leader] they could get 8 per cent. With him, maybe 6 per cent,” Prof Güllner says. Many observers believe Ms Merkel would secretly prefer a grand coalition with the SPD, the same combination she presided over from 2005 to 2009. But Mr Steinbrück has said he will not serve as vice-chancellor in such an alliance, and the party leadership blames the experience for its defeat in 2009. The alternative would be “black-green”. Sigmar Gabriel, national chairman of the SPD, has warned the Greens against contemplating any deal with the CDU.
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Such a “black-green” alliance has never been tried at federal level or in a big German state before – it has worked in the Saarland, and the city of Hamburg, but nowhere else. It could be a step too far for leftwing Greens and rightwing Christian Democrats. Conservatives will find it very difficult to accept the Greens’ leftwing stance on many social issues, such as equal rights for gay marriages or reintroducing property taxes, says Prof Falter. But they no longer disagree on nuclear energy. Prof Güllner says the Greens are “sitting pretty” and would have no hesitation about approaching the CDU. “They want power.” Ms Merkel understands that. Two years ago she described a black-green coalition as “a delusion”. Recently, she has stopped ruling it out. In German coalition politics, she knows nothing can be entirely excluded. D-Mark ‘taboo’ challenged In the first two years of the eurozone crisis, Angela Merkel often told German voters that there was “no alternative” to bailing out debt-laden partners. Now the German chancellor’s words are haunting her. At September’s general election she will face a challenge from a new eurosceptic party called Alternative for Germany. It hopes to mobilise a significant portion of Germans who are doubtful about the wisdom of her crisis management. One poll says 25 per cent might contemplate backing a eurosceptic party, but so far its support is barely measurable – well below the 5 per cent needed to win any parliamentary seats. “We are not anti-Europe, but we are anti-euro,” says Bernd Lucke, economics professor at Hamburg university, who is the spokesman for the new party. Its website declares that it wants an “orderly winding up” of European monetary union. “Re-introduction of the DM [Deutschemark] must not be taboo,” it says. “We are demanding a change in the European treaties so that every state can leave the euro.” No eurosceptic party has made headway in Germany before. The last time an anti-euro party ran in Germany in the European parliament elections – in 1994, after the Maastricht treaty launched the common currency – it won just 1.1 per cent of the vote. Prof Lucke says this time will be different because of the crisis. Before 2010, he says, “people were not aware of the problems that could arise. Now we have the problem of over-indebtedness, of transfer payments not following any kind of objective criteria, of current account imbalances and lack of competitiveness.” The party is dominated by academic economists from Germany’s monetarist school of strict fiscal disciplinarians, who have always been sceptical about monetary union. A constituent party congress will be held on Sunday to elect a leadership. Then the party has to get 2,000 signatures in each of Germany’s 16 federal states to be allowed to run. Several leading figures of the party leadership were longstanding members of Ms Merkel’s Christian Democratic Union, including Prof Lucke and Alexander Gauland, a former state secretary in Hesse. Other leading eurosceptics are supportive but have refused to join. Prof Lucke insists the party is attracting support from left and right, with 5,000 members already signed up. But if the eurozone crisis deteriorates during the summer, it is the votes it might steal from the CDU and its Free Democratic party government partners that will matter most to Ms Merkel.
71 http://www.ft.com/intl/cms/s/0/c8a92b0a-9b83-11e2-a820- 00144feabdc0.html#axzz2PrIpeB3U ft.com Comment opinion April 10, 2013 7:04 pm Scapegoating Germany is easy but wrong By Marcel Fratzscher EU governments need to convince their citizens that reforms are necessary, says Marcel Fratzscher
©Reuters The most terrifying words in the English language, according to Ronald Reagan, are: “I’m from the government and I’m here to help.” Today, for some Europeans, they are: “I’m from the EU and I’m here to bail you out.” Germany and the single currency have been made scapegoats for the problems of member states and for Europe’s inability to overcome the continent’s financial and economic crises. Berlin is accused of lacking solidarity, imposing contractionary policies and gaining competitiveness at others’ expense. The euro is blamed for depriving countries of their own central banks’ ability to act as lender of last resort and provide unlimited liquidity to the government and banks; and for depriving national policy makers of scope to devalue, thereby trapping them in a vicious spiral. More ON THIS STORY/ Gideon Rachman The making of a German Europe/ Global Insight Germany senses unfairness over Cyprus plan/ Josef Joffe Berlin right to say no gain, no pain/ Global Insight German line hardens/ Poor Germans tire of bailing out eurozone ON THIS TOPIC/ Gavyn Davies Cash boost for troubled eurozone/ Cyprus ranks near top for household wealth/ Europe bailout fund raises record/ US urges euro states to boost demand IN OPINION/ Andrew Edgecliffe-Johnson TV set for a revolution/ Richard Florida Detroit shows way to beat blues/ Dominique Moïsi Hollande and lessons of Louis XVI/ Lebanon is the Middle East’s weather vane again Germany is flabbergasted at being made the scapegoat. It sees itself as a victim, not a perpetrator. It has contributed substantial funds and assumed a great deal of risk for the five bailouts to date. And it has sacrificed much in the past decade to generate employment at home, with real wages barely higher today than in 1999. But the fact is that every country in crisis needs a scapegoat. It is hard to accept that the fruits of decades of hard work can vanish in a few years. For Europe today, painful domestic reforms can be accomplished only with a high degree of national solidarity, and it is tempting to rally against a common nemesis to achieve such solidarity.
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The history of financial crises is a good guide to how scapegoating works. Take the International Monetary Fund. Although some of its prescriptions during the 1997-98 Asian crisis were misguided, governments succeeded in implementing essential reforms – many of which domestic opposition had thwarted for years – by rallying national solidarity against the fund. The cost is that the IMF’s standing on the continent is permanently damaged, as shown by the unwillingness of Asian governments to accept its help during the global crisis of 2008-09. This strategy has, to some extent, proved effective in Europe. Germany is the perfect scapegoat: it is the big European brother who is doing well, is often diplomatically clumsy and has a stained history that makes it tempting to revive old prejudices. There is another virtue: scapegoating has so far allowed moderate governments to keep political extremism largely at bay, a remarkable achievement given the deep social changes under way. Yet scapegoating is dangerous. At stake for Europe is nothing less than the survival of the euro. The confrontations are causing deep rifts among both states and citizens. Surveys reveal a high degree of animosity between nations. Think of mocked-up photos showing German politicians in Nazi uniforms, or the misguided perception in Germany of citizens in crisis countries living on European welfare handouts. The renationalisation of policy making – with politicians increasingly focused on domestic objectives – and the continued blaming of monetary union for national problems, in crisis and non-crisis countries alike, has eroded the credibility of European institutions and the euro. By making integration more difficult, if not politically impossible, this is starting to cause permanent damage. EU institutions may end up in the position of the IMF in Asia, with governments disengaging from Europe and turning inward. What is the way forward? For one, Berlin must take more leadership in Europe. As irritating as it may be to be blamed for all Europe’s ills, Germany’s position of strength gives it a special responsibility. This means it should stop hindering financial and fiscal union, and start pursuing it more forcefully. To revive the European economy, it should also address its own domestic structural imbalances. Second, EU countries must assume greater ownership of reforms. Rather than scapegoating, governments need to convince their citizens that the fundamental restructuring is necessary and will be fruitful. It is clear, not just in Cyprus and Italy but across the EU, that we have a long way to go to achieve this. Third, selected decision-making processes in Europe must be removed from the national political sphere. The crisis has shown that, for many issues of eurozone governance, delegating decisions to intergovernmental political bodies does not work. We need to build institutions to fill this void. Creating a European finance minister, making institutions more immune to national interests and strengthening the European parliament are all urgent. The renationalisation of policy making is splitting Europe and risks causing irreversible damage. The pursuit of these three measures is important if Europeans are to prove the Reaganite approach wrong and continue on the path of integration. The writer is head of DIW Berlin, a research institute and think-tank http://www.ft.com/intl/cms/s/0/793550b8-a13b-11e2-990c- 00144feabdc0.html#axzz2PrIpeB3U
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Barry Eichengreen Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. The Use and Abuse of Monetary History 10 April 2013 BERKELEY – Imagine two central banks. One is hyperactive, responding aggressively to events. While it certainly cannot be accused of ignoring current developments, its policies are widely criticized as storing up problems for the future. The other central bank is unflappable. It remains calm in the face of events, seeking at all cost to avoid doing anything that might be construed as encouraging excessive risk- taking or creating even a whiff of inflation. What I have just described is no mere hypothetical, of course. It is, in fact, a capsule depiction of the United States Federal Reserve and the European Central Bank. One popular explanation for the two banks’ different approaches is that they stem from their societies’ respective historical experiences. The banks’ institutional personalities reflect the role of collective memory in shaping how officials conceptualize the problems that they face. The Great Depression of the 1930’s, when the Fed stood idly by as the economy collapsed, is the molding event seared into the consciousness of every American central banker. As a result, the Fed responds aggressively when it perceives even a limited risk of another depression. By contrast, the defining event shaping European monetary policy is the hyperinflation of the 1920’s, filtered through the experience of the 1970’s and 1980’s, when central banks were enlisted once again to finance budget deficits – and again with inflationary consequences. Indeed, delegating national monetary policies to a Europe-wide central bank was intended to solve precisely this problem. It is not only in central banking, of course, that we see the role of historical experience in shaping policymaking. President Lyndon Johnson, when deciding to escalate US intervention in Vietnam, drew an analogy with Munich, when the failure to respond to Hitler’s aggression had catastrophic consequences. A quarter-century later, President George H.W. Bush, considering how best to roll back Iraq’s invasion of Kuwait, drew an analogy with Vietnam, where the absence of an exit strategy had caused US forces to get bogged down.
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But a key conclusion of research on foreign policy is that decision-makers all too often fail to test their analogies for “fitness.” They fail to ask whether there is, in fact, a close correspondence between historical circumstances and current facts. They invoke specific analogies not so much because they resemble current conditions, but because they are seared into the public’s consciousness. As a result, analogical reasoning both shapes and distorts policy. It misleads decision-makers, as it did both Johnson and Bush. The same dangers arise for monetary policy. For the Fed, it is important to ask whether the 1930’s, when its premature policy tightening precipitated a double-dip recession, really is the best historical analogy to consider when contemplating how to time the exit from its current accommodating stance. Certainly, the Great Depression is not the only alternative on offer. The Fed might also consider policy in 1924-1927, when low interest rates fueled stock-market and real-estate bubbles, or 2003-2005, when interest rates were held down in the face of serious financial imbalances. At a minimum, the Fed might develop a “portfolio” of analogies, test them for fitness, and distill their lessons, as President John F. Kennedy famously did when weighing his options during the Cuban missile crisis in 1962. Similarly, the ECB might consider not only how monetary accommodation allowed governments to run large budget deficits in the 1920’s, but also how central bankers’ failure to respond to the financial crisis of the 1930’s fed political extremism and undermined support for responsible government. Again, rigorous analysis requires testing these historical analogies for fitness with current circumstances. Anyone who does so will find it hard to defend the ECB and its stubborn inaction in the face of events. There is exactly zero evidence in Europe today that inflation is just around the corner. And, if current European governments are not committed to austerity and fiscal consolidation, then which governments are? When I consider the European economy, the ECB’s failure to provide more monetary support for economic growth appears to be directly analogous to Europe’s disastrous monetary policies in the 1930’s. The political consequences could be similarly devastating. Europeans should ponder why the inflationary 1920’s, rather than the politically catastrophic 1930’s, have become the historical lodestar for current monetary policy. On the other hand, when I contemplate the US economy, I conclude that recovery from the Great Depression, and not 1924-1927 or 2003-2005, is the episode that most closely resembles current circumstances. Only in the 1930’s were interest rates near zero. Only in the 1930’s was the economy digging itself out from a major financial crisis. Then again, perhaps it is to be expected that I find the analogy with the 1930’s compelling. That was the defining episode for American monetary policy. And I am, after all, an American. This article is available online at: http://www.project-syndicate.org/commentary/history-and-monetary-policy-in-europe- and-the-us-by-barry-eichengreen
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04/10/2013 02:03 PM Harvard Economist 'The Crisis Isn't Over in the US or Europe' In a SPIEGEL interview, Harvard economist Carmen Reinhart argues governments are incapable of reducing their debts and that central banks are now stepping up to resolve the crisis themselves. In the end, she argues, everyday savers will pay the price. SPIEGEL: Ms. Reinhart, central banks around the world are flooding the markets with cheap money in order to spur economies and support governments. Are these institutions losing their independence? Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis. SPIEGEL: Is that true of the European Central Bank as well? Reinhart: Less than for other central banks, but yes. And the crisis isn't over yet -- not in the United States and not in Europe. SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation. Reinhart: True. But it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change. SPIEGEL: As a historian who knows the potential long-term consequences very well, doesn't such short-sighted decision-making frighten you? Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt. SPIEGEL: You mean some kind of haircut? Reinhart: Yes. But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates. SPIEGEL: In other words: When the inflation rate is higher than the interest rates paid on the markets, the debts shrink as if by magic. The downside, though, is that this applies to the savings of normal people. Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit
76 default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means. SPIEGEL: Which means? Reinhart: Monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments. SPIEGEL: Do you think it is wrong for Europe to focus on austerity measures with inflation at such a low level? Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level. SPIEGEL: Is the new trend in monetary policies a good way of tackling debt problems? Reinhart: There are no silver bullets. If central banks try to accommodate and buy debt, there are risks associated with it. Somewhere down the road you are going to wind up with higher inflation. That is a safe bet -- even in Japan … SPIEGEL: … which is currently dealing with the opposite phenomenon: deflation with sinking prices. Reinhart: A further risk of such policies is that efforts to save will be delayed. SPIEGEL: So what should be done? Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn't happen -- you seldom just grow yourself out of debt. You need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation … SPIEGEL: … with the consequence that people are going to lose their savings? Reinhart: No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold. In France, for example, public pension funds have shifted money from shares (on the stock market) to government bonds. Not because their returns are great, but because it is more expedient for the government. Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game. SPIEGEL: We have seen 50 years of peace and democracy in Europe, but also 50 years of rising debt. Are democracies incapable of setting a budget and sticking to it? Reinhart: No, but after World War II austerity was easier to pursue, because you had a younger population and therefore less entitlements. Furthermore, military expenditure was easier to reduce. So, the build-up in debt we have seen since the crisis is very rare. Usually you get that kind of build-up when there is a war. SPIEGEL: But is it not a declaration of bankruptcy for democracy if central bankers, who haven't even been elected, have to step in to fix the problem in the end?
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Reinhart: I think the biggest mistake that European policy-makers are now making is not to put debt restructuring more explicitly on the table. SPIEGEL: Are you referring to Greece? Reinhart: Greece has had its restructuring, that's history. But look at Ireland and Spain. Private senior bank debt has not been written off, despite the fact that underlying asset prices in those countries have collapsed and are still collapsing. SPIEGEL: So closures of some banks would be helpful? Reinhart: What is sacrosanct about bank debt? SPIEGEL: Well, the bankruptcy of banks can have a considerable effect on the financial system. Reinhart: Let me be a little blunter: A haircut is a transfer from the creditor to the borrower. Who would get hit by a haircut? French banks, German banks, Dutch banks -- banks from the creditor countries. So you can see why this is politically torched. This is why it is not done, it's a redistribution. But ultimately it is going to happen, because the level of debt is too high. SPIEGEL: The United States is very highly indebted as well. Reinhart: Yes, but who are the large holders of government bonds? Foreign central banks. You think the Bank of China is going to be repaid? The US doesn't have to default explicitly. If you have negative real interest rates, the effect on the creditors is the same. That is also a transfer from China, South Korea, Brazil and other creditors to the US. SPIEGEL: And what happens if the creditors don't continue to play along and the interest rates on American government bonds climb? Do you see the danger of a debt crisis in the US? Reinhart: Why do we have such low interest rates? The Federal Reserve Bank is prepared to continue buying record levels of debt as long as the unemployment situation isn't satisfying. And China's central bank will also continue to buy treasuries, because they don't want the renminbi to appreciate. SPIEGEL: That sounds like a perpetual motion … Reinhart: ... of course it is! Interview conducted by Martin Hesse and Anne Seith URL: http://www.spiegel.de/international/business/interview-with-harvard-economist- carmen-reinhart-on-financial-repression-a-893213.html Related SPIEGEL ONLINE links: • World from Berlin: 'Last Euro-Crisis Taboo Broken' (03/18/2013) http://www.spiegel.de/international/europe/0,1518,889511,00.html • ECB Executive Board Member Asmussen: 'German Interest Rates Will Rise Again' (01/28/2013) http://www.spiegel.de/international/business/0,1518,880025,00.html • Betting with Trillions: Prison of Debt Paralyzes West (11/16/2012) http://www.spiegel.de/international/business/0,1518,867404,00.html • The Inflation Monster: How Monetary Policy Threatens Savings (10/08/2012) http://www.spiegel.de/international/europe/0,1518,860021,00.html
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04/10/2013 02:41 PM Next Domino? Slovenia Totters Toward Euro-Crisis Brink Could Slovenia become the next euro-crisis victim? A new OECD report highlights the deep problems facing the Slovenian banking industry and economy. While both Brussels and Ljubljana insist that a bailout won't be necessary, difficult times are in store for the country. The row of buildings, containing 833 apartments, stands mostly empty, and construction on some of the buildings has not quite been completed. Nearby is a deep hole, ready to be filed with a brand-new hotel that will now almost surely never be built. It is a scene that can be found in a number of euro-zone countries, ravaged by a sovereign debt crisis and a burst real estate bubble. But this particular complex, known as Siska, is on the outskirts of Ljubljana, the capital of tiny Slovenia. And it provides a dramatic backdrop to growing fears that the country could soon become the next euro- zone member state to require a bailout from Brussels. Concerns that Ljubljana might soon request emergency aid were intensified on Tuesday by a report issued by the Organization for Economic Cooperation and Development (OECD). Noting the country's economic struggles, rising sovereign debt and deeply troubled banking industry, the report noted that the country is at risk of a "prolonged downturn and constrained access to financial markets." In other words, Slovenia might soon be unable to borrow the money from the markets it needs to remain solvent. Slovenian Prime Minister Alenka Bratusek was quick to dismiss bailout concerns as "speculation." She insisted that her country's economic fundamentals remained sound and that it could take care of the current problems it is facing without external help. European Commission President Jose Manuel Barroso likewise brushed off the OECD report, saying he was "confident that Slovenia will rise to the challenge" facing it. Huge Banking Sector Problems Those challenges are many. The Slovenian economy is in recession, with the OECD expecting a further contraction of 2.1 percent this year. Sovereign debt, though currently lower than the euro-zone average, is on pace to double to 100 percent of gross domestic product by 2025, according to the report. While the OECD notes that Ljubljana has taken significant steps toward consolidating its budget and reforming its economy, it writes that it could be many years before Slovenia resumes catching up with "more developed OECD countries." First and foremost, however, Slovenia's problems are focused on its financial institutions. While the banking sector is worth the equivalent of about 140 percent of the country's GDP -- well below the euro-zone average and much lower than the more than 800 percent ratio seen in Cyprus -- the real estate collapse in the country has left banks there with significant quantities of bad loans on their books. As the OECD report highlighted, many of the problems faced by the banks can be traced to the fact that the industry was never fully privatized after the fall of
79 communism. The result has been an unhealthy amount of political influence on large banks such as Nova Ljubljanska Banka, the country's largest. Critics allege that some companies even received special treatment due to their political ties. 'Working Day and Night' The result has been up to €7 billion ($9.17 billion) in bad loans weighing on the balance sheets of Slovenian banks. Bratusek's government is currently pursuing a plan to create a "bad bank" to offload those loans, many of them to the moribund construction industry. According to news reports, it will also have to inject €1 billion into those banks so as to prepare them for sale, though no date has been set. Concerns that the government may not be able to generate that cash along with another €2 billion Ljubljana needs to remain solvent have been driving up the country's borrowing costs. "We are aware that the banking sector is the No. 1 problem in Slovenia," said Bratusek, who became prime minister in March. "We are working on it literally day and night." Were Slovenia forced to apply for emergency aid, it would become the sixth euro-zone country to do so. Its economy represents just 0.4 percent of the currency union's annual economic output. cgh -- with wire reports
URL: http://www.spiegel.de/international/europe/slovenia-could-become-next-country- to-request-euro-zone-aid-a-893585.html Related SPIEGEL ONLINE links: • Agreeing to Disagree: US and Europe Deeply Divided on Austerity (04/09/2013) http://www.spiegel.de/international/europe/0,1518,893368,00.html • Graft Report: Austerity Can Help to Fight Corruption (04/08/2013) http://www.spiegel.de/international/europe/0,1518,893069,00.html • 'Abject Error': How the Cyprus Deal Hurts EU Strategic Interests (04/03/2013) http://www.spiegel.de/international/europe/0,1518,892331,00.html • Underwater: The Netherlands Falls Prey to Economic Crisis (04/02/2013) http://www.spiegel.de/international/europe/0,1518,891919,00.html
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Nada es Gratis Blog Fedea Una bomba de relojería por San Fermín Por Marcel Jansen el 10/04/2013
de Samuel Bentolila y Marcel Jansen A muchos trabajadores les podrían pillar unos toros muy distintos de los que correrán en los encierros de los sanfermines a partir del próximo 7 de julio. Para esa fecha está programada la explosión de una bomba de relojería cuya onda expansiva podría poner patas arriba todo nuestro sistema de relaciones laborales. Se trata del primer aniversario de la versión definitiva de la reforma laboral de 2012 y a partir de entonces pueden decaer los primeros convenios colectivos que llevan un año en “ultraactividad” (vencidos sin ser renovados) desde su denuncia. Algo nunca visto en España. Esta nueva situación plantea algunas preguntas importantes: ¿Qué ocurrirá con los salarios y las demás condiciones de trabajo de los trabajadores cuando decaiga su convenio? ¿Cambiarán para todos los trabajadores en el ámbito del convenio vencido o solo para los nuevos contratados y cuál será la magnitud de los cambios? ¿Cuántos trabajadores corren actualmente el riesgo de perder la cobertura de un convenio colectivo? Todas estas preguntas son clave y sorprende la absoluta falta de explicaciones por parte del Gobierno. También nos sorprende el aparente silencio de los expertos en derecho laboral. Los derechos y obligaciones de las empresas y los trabajadores afectados por la expiración de un convenio no están totalmente claros y sería conveniente que se aclararan lo antes posible. El vacío legal Como es sabido, la reforma laboral de 2012 limita el período de ultraactividad a un año a partir del momento de la denuncia de un convenio. En ese momento se abren dos vías. Como estipula la ley, si transcurrido este período no se ha acordado un nuevo convenio o dictado un laudo arbitral, el convenio pierde su vigencia (salvo pacto en contrario) y se aplica, si lo hubiere, el convenio colectivo de ámbito superior relevante (Art. 86.3 ET). En caso contrario, y aunque la ley no lo dice explícitamente, solo están garantizadas las restricciones mínimas impuestas por el Estatuto de los Trabajadores. Es decir, en el plazo de varios meses los salarios de muchos trabajadores podrían sufrir importantes recortes, incluso hasta el nivel del salario mínimo interprofesional. Si lo veremos o no dependerá en última instancia de la voluntad de los empresarios. Pero el silencio del legislador sobre la situación derivada de la caducidad de los convenios en ausencia de otro supletorio es llamativo y crea un cierto vacío legal. 81
Según una interpretación estricta de la Constitución y del ET, los convenios colectivos son fuente de Derecho del Trabajo, es decir, tienen eficacia normativa: obligan a todos los empresarios y trabajadores incluidos dentro de su ámbito de aplicación. Así, como pasaría con cualquier ley, al expirar quedarían suprimidas sus previsiones, abriéndose la puerta a ajustes salariales y de las demás condiciones de trabajo para todos los trabajadores cuyas condiciones laborales estén vinculadas a los convenios. Sin embargo, el laboralista Jesús Lahera y otros juristas de prestigio (ver aquí) defienden desde hace mucho tiempo una interpretación menos estricta, según la cual los convenios deberían entenderse como contratos colectivos y al decaer sus condiciones “bajarían” a los contratos individuales de los trabajadores. Por tanto, cualquier ajuste salarial para los empleados en ese momento debería contar con su consentimiento. Al contrario, en las nuevas contrataciones solo serían de aplicación las restricciones del ET. Esta segunda interpretación coincide con la práctica habitual en otros países europeos, como Holanda. Pero en este país los convenios son verdaderos contratos colectivos y no gozan de eficacia normativa automática, como sucede en España. La autoridad laboral holandesa puede extender el convenio a todas las empresas en el ámbito relevante, pero solo si las empresas que se han adherido voluntariamente al convenio emplean a más del 55% de los trabajadores en el ámbito del convenio. Además, en Holanda tampoco existe la ultraactividad. A vencer un convenio, sus condiciones bajan a los contratos individuales –se “contractualizan”– y a partir de esa fecha las empresas son libres de renegociar los salarios con sus trabajadores y de contratar a nuevos trabajadores a un salario menor. A estas alturas sorprende que no se hayan aclarado estas cuestiones doctrinales. No somos expertos en derecho laboral, pero queremos dejar clara la incoherencia del argumento a favor de la contractualización de los convenios con el marco legal vigente. La contractualización puede ser ciertamente deseable, como defendimos, junto con otros economistas, en el conjunto de propuestas promovido por Fedea en 2011. Pero hoy por hoy los convenios tienen rango de ley y muchas empresas nunca han tenido la opción de quedar al margen del convenio (las condiciones para el descuelgue son bastante restrictivas). Esta situación perdura, sobre todo para las pymes, en sectores en que se ha renovado el convenio, pero ahí donde decaiga las empresas han de tener la libertad para decidir si quieren contractualizar las condiciones del convenio vencido o no. No es de recibo el posible uso oportunista de la interpretación de los convenios como contratos colectivos cuando no lo son, con el único objetivo de negar a las empresas el derecho de ajustar los salarios. En otras palabras, antes de imponer la contractualización de los convenios, se debería aprobar otra reforma que los transforme en verdaderos contratos colectivos, sustituyendo la extensión automática actual por un sistema de extensión administrativa con umbrales de representatividad exigentes y eliminando la ultraactividad. Nótese que las partes pueden pactar la inclusión en el propio convenio de la congelación de sus condiciones económicas más allá de su fecha de vencimiento. Por tanto, no hay motivos de peso para imponer tal congelación por ley. Consideraciones económicas Hasta ahora nos hemos centrado en cuestiones jurídicas. Pero también hay cuestiones económicas de mucha relevancia y este sí es nuestro terreno natural.
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La economía española necesita recuperar competitividad lo antes posible. Un ajuste salarial que afecte a todos los trabajadores en los sectores asolados por el paro es sin duda el mecanismo más efectivo y equitativo para conseguirlo. Limitar el alcance de los ajustes a los nuevos contratados mejoraría su empleabilidad, pero tendría un efecto muy limitado sobre la competitividad de las empresas. Además, la introducción de dobles escalas de remuneración –algo que ya se está produciendo– es otra forma más de dualidad, esta vez en función de la antigüedad de los trabajadores y también entre empresas nuevas y viejas. De hecho, una doble escala salarial crea nocivos incentivos a despedir a trabajadores y reemplazarlos por otros nuevos más baratos o incluso para cerrar una empresa y abrir otra con una plantilla nueva y con condiciones más favorables para la empresa. La mejor solución, en nuestra opinión, sería un ajuste negociado para todos los trabajadores, los hoy empleados y los de nueva contratación, en todos los sectores que han perdido competitividad en el periodo previo a la crisis. Así los trabajadores mantendrían la cobertura de un convenio colectivo y las empresas obtendrían un balón de oxígeno en forma de una menor masa salarial. Además, existe una solución fácil para evitar una caída de la cobertura de la negociación colectiva: la firma de convenios nacionales al nivel del sector, que actuarían como convenio supletorio en todos los casos en que la falta de acuerdo provoca la desaparición de un convenio de ámbito inferior (de empresa, provincia o comunidad autónoma). De hecho, este mecanismo corregiría otra deficiencia del sistema actual: la proliferación descoordinada de convenios provinciales. Por ahora no disponemos de datos fiables para verificar si está produciéndose este cambio en la estructura de la negociación ni para estimar el número de trabajadores en peligro de perder la cobertura de un convenio en los próximos meses (como dijimos ayer), aunque cálculos preliminares indican que podrían ser hasta seis millones. Esta es la cifra de trabajadores con un convenio que había finalizado vigencia antes del 7 de julio de 2012 y que no había sido renovado a finales de diciembre de 2012. Os mantendremos informados. http://www.fedeablogs.net/economia/?p=29823
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Daily Morning Newsbriefing April 10, 2013 Germans now officially the poorest These are interesting data – but not for the reason the right-wing press in Germany is using them, which is to say that poor Germany should not bail out rich Cyprus. The study released by the ECB on household consumption and wealth indeed shows that Germans have the lowest median net wealth in the eurozone, while the Cypriots have the second highest. Here is the table: Median net household wealth in €‘000 Luxembourg 397.8 Cyprus 266.9 Malta 215.9 Belgium 206.2 Spain 182.7 Italy 173.5 France 115.8 Netherlands 103.6 Greece 101.9 Slovenia 100.7 Finland 85.8 Austria 76.4 Portugal 75.2 Slovakia 61.2 Germany 51.4 Source: ECB To us the data are in part a reflection of economic imbalances. Germany has spent the first 14 years of the eurozone deflating against the average, while other countries have been inflating. Over such a long period, one would clearly expect to a significant effect in measured wealth. Another important reason is property ownership. Germany has the lowest property ownership rate in the eurozone, and property is clearly the biggest factor in household net wealth. Germans have high living standards, but this is not the same as net wealth. Third, there are without a doubt some statistical issues. How do you measure the value of a house in Spain or Cyprus? Do official estimate not always overestimate house price during a crash? And as the Wall Street Journal points out in its coverage, the survey does not include the value of pensions as net assets. Furthermore, while the median is politically most relevant, Germany scores better on the average figure, given the
84 enormous wealth held by rich families and foundations. The gap between average and media is thus a metric of the wealth differential inside countries. In another article the Wall Street Journal also points that the report dispels the myth that the German households have large financial savings, in the form of bank deposits. The media financial wealth in Cyprus is about twice as high as in France, and about five times as high as in Germany. There has been a lot of spiel by the German press about why ECB has not published the data before the Cyprus rescue, when the data were already there. This morning, Frankfurter Allgemeine had an exasperating comment by Holger Stelzner, a usual suspect, about poor Germans, poor Austrians, and poor Slovaks, bailing out rich southern Europeans. Mark Schieritz, in his blog Herdentrieb, has a scathing comment about this abuse of the data for political purposes. Montebourg calls for renewed austerity debate Unsurprisingly it is Arnaud Montebourg who used the Cahuzac affair to relaunch the debate about austerity. In an interview with Le Monde Montebourg said that “this austerity policy leads to a debacle”. He said citizens throughout Europe reject austerity imposed by Europe and that it is the systemic error of the EU that there is no democratic debate about the sources and consequences of austerity leading the EU collectively into a recessionary spiral. After Cahuzac the French government needs a more systemic response to re-establish confidence, so Montebourg. To get ministers to publish their assets won’t be enough. Meanwhile, we learn from Montebourg’s published asset account that he owns a designer fauteuil for €4000 and has ‘lots of debt’. French parliament adopts labour market reform cluThe French parliament pass a draft law on labour reform, adopting a series of measures to loosen firing and hiring rules by 250 votes in favour versus 26 against, Reuters reports. 178 abstained. The Greens Party, part of Hollande's government and supposed to be a parliament ally, abstained. Thirty-five Socialist deputies joined Greens dissidents and abstained, suggesting a growing rift in Hollande's camp as tens of thousands of protesters led by the hardline CGT union marched against it in 170 towns and cities. They want to mobilise public mood, which is so far favourable of the reforn, to get as much amendments as possible before the senate passes it. Moïsi compares Hollande with a modern Louis XVI In a spirited comment for the FT Dominique Moïsi compared Francois Hollande with a modern Louis XVI, the ‘unexceptional man in exceptional times’, a victim of a revolt against France’s modern elites. Moisi says the crisis goes beyond the scandal surrounding Jérôme Cahuzac though he considers it very unlikely that a Sixth Republic will emerge from the current crisis. “Hollande wants above all to appease and reassure the French. But by navigating with excessive prudence between the logic of the bond markets and that of his Socialist party.. has encouraged a climate of negative expectations and suspicion vis a vis the efficiency of the state. Louis XVI was an honest man who tried to do his best for his country but who failed to perceive the depth of popular discontent, was unable to control his entourage and ended up as a tragic figure… François Hollande should be wary of such a fate.”
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The cost of fixing Slovenia's banking sector could be significantly higher than estimated, the OECD said Tuesday, while the government insists that it wouldn't need external assistance. The bank recapitalisation is likely to exceed the €1bn cost estimate, because it has based on a "most likely already outdated" analysis, said the OECD. Troika and Greek government stuck over dismissals Progress is reported after troika talks in Athens on Tuesday, with only the contentious issue of a civil service overhaul said to be pending, according to Kathimerini. The troika reportedly insisted on a total of 7000 dismissals this year and 20000 by the end of 2014, a prospect Democratic Left vehemently objects to. Reports suggested that troika is prepared to give in to government demands for Greeks to be allowed more than 40 instalments to repay debts to the state. The troika has also reportedly accepted a proposal to reduce a contentious property tax by around 15%. Antonis Samaras is keen get an agreement by Thursday, so Stournaras can travel to Friday’s informal Ecofin in Dublin with concrete progress to report ahead of decision to release €2.8bn tranche later this month. OECD on Slovenia The OECD on Tuesday released its country survey of Slovenia. The report welcomes the creation of a bad bank, but also advocates "recapitalization and privatization of state-owned banks" as well as "foreign direct investment" to ease the deleveraging of the overindebted corporate sector. The report calls Slovenia's fiscal consolidation plans "ambitious" but insufficient for debt sustainability, which would be improved by "restructuring welfare spending". Finally, "structural reforms" are advised to restore "potential growth" lost since the start of the financial crisis. Spanish monarchy under scrutiny 20 minutes reports that the Spanish parliament will not allow the opposition to ask questions about the King's Swiss account and the Princess' indictment in Wednesday's 'government control session'. In has recently become known that King Juan Carlos inherited from his father millions of Euros in a Swiss account, causing no small amount of controversy. We have also reported on the indictment of Princess Cristina so she can be questioned by the judge investigating a case of embezzlement of public funds involving her husband Iñaki Urdangarín. Also controversially, on Monday it became known that Urdangarin, formerly a successful handball player, may accompany his former coach Valero Rivera when the latter signs up as coach to the Qatar national team. As El Pais writes, the public prosecutor has at no point requested that the investigative judge withhold Urdangarin's passport. The Royal household has had to deny claims that the King intervened with his Qatari counterpart to secure Urdangarin's appointment. In this context, the leader of the opposition Alfredo Perez Rubalcaba proposed Tuesday that the Constitution be reformed to give the King "a status similar to the rest of political authorities", reports El Pais. Currently, "the person of the Monarch is inviolable and not subject to legal liability". This would be in the context of a broader Constitutional reform that the PSOE is advocating. The paper also writes that the Royal House has agreed with the Government to be included in the upcoming "transparency law" in a position analogous not to a public administration but to the two houses of parliament.
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Alliance against tax fraud Europa Press reports that the five largest EU countries, Germany, France, UK, Italy and Spain have agreed to set up a pilot facility for the multilateral exchange of data to fight tax evasion, and are encouraging other member states to join the initiative. The agency notes the initiative is directed especially at Austria and Luxembourg, where bank secrecy is still the norm. El Pais also writes that France's new finance minister Bernard Cazeneuve has appealed to the international press consortium that recently published a report on an international network of tax evasion for the super-rich to turn over the documents in their possession to the courts. Berlusconi and Bersani meet to discuss presidency The Italian political stalemate has reached the stage of trench warfare, with no party coming out in the open for a full-frontal attack. The process now goes through very predictable motions – the next being the election of the presidency. The left and the centre could impose their own candidate, but this would be a risky strategy as their majority in the joint electoral chamber is thin. Pier Luigi Bersani yesterday met with Silvio Berlsuconi to discuss the presidency. There were no results, just comments from senior party officials who said the talks had been positive, according to Corriere della Sera. A second round of elections still looks the most likely outcome of this stalemate, but a new president needs to be in place to call them. EFSF raises €8bn The FT reports that the EFSF has raised €8bn in the biggest ever bond sale by a supranational organisation, benefitting from the recent influx of money due to events in Japan. The EFSF’s five-year bond is priced at a yield of 0.956% and attracted orders of more than €14bn. Asian investors accounts for 29% of the sale. Soros tells Germany should quit the Euro In a lecture in Frankfurt, George Soros said the eurozone crisis has now reached an intensity that there can be only two solutions: a eurobond, or a German exit – the first is a taboo in Germany, the second is a taboo everywhere. He said if countries that abided by the fiscal compact were allowed to convert their national debt into euro- denominated debt, the positive impact would be miraculous. He said eurobonds were necessary, but not sufficient, adding that additional monetary and fiscal stimulus and structural reforms were needed. He concluded about Germany: “It has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing Eurobonds". He also criticised the Cyprus depositor bail-in as the right reform implemented too early, i.e. before a banking union is in place. Eurozone Financial Data This Previous day Yesterday Morning France 0.515 0.535 0.554 Italy 3.107 3.077 3.057 Spain 3.512 3.465 3.429 Portugal 5.207 5.225 5.211 Greece 10.659 10.460 10.45
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Ireland 2.749 2.697 2.687 Belgium 0.724 0.763 0.782 Bund Yield 1.236 1.262 1.282
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.303 1.308
Yen 128.900 129.64
Pound 0.851 0.8531
Swiss Franc 1.219 1.2196
ZC Inflation Swaps previous last close
1 yr 1.57 1.56
2 yr 1.53 1.53
5 yr 1.75 1.75
10 yr 2.05 2.06
Euribor-OIS Spread
previous last close
1 Week -6.000 -6.1
1 Month -4.486 -3.386
3 Months 2.171 3.071
1 Year 31.843 29.543
Source: Reuters
http://www.eurointelligence.com/professional/briefings/2013-04- 10.html?cHash=ee0686f32789685347b140e0cbf13bb0
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ft.com/global economy EU Economy April 9, 2013 4:23 pm US urges euro states to boost demand By Robin Harding and Quentin Peel in Berlin
©Reuters Countries with sound finances should act to boost domestic demand, the new US Treasury secretary said on a visit to Germany that highlighted continuing sharp differences between the two countries on fiscal policy. Jack Lew spent his first official trip to Europe telling eurozone leaders that nations with room for fiscal manoeuvre – such as his hosts in Berlin – must create demand to offset budget cutting in troubled economies from Spain to Greece. More ON THIS TOPIC/ Cyprus ranks near top for household wealth/ Europe bailout fund raises record/ Spain’s PM wants more powers for ECB/ The World Spain eyes Portugal and Cyprus IN EU ECONOMY/ Deflation takes hold in Greece/ Dublin to delay water charges/ Portugal’s austerity plan fails to deliver/ Portugal court rules against austerity “The driver for economic growth will be consumer demand,” said Mr Lew said in Berlin. “Policies that would help to encourage consumer demand in countries that have the capacity would be helpful.” But there was little sign that Germany is ready to shift from its insistence on a tight domestic fiscal policy, even in a domestic election year. “Nobody in Europe sees this contradiction between fiscal consolidation and growth. Our common position is for growth-friendly consolidation or sustainable growth, however you want to call it,” said Wolfgang Schäuble, German finance minister. “We haven’t been talking about differences that don’t exist. We have a different situation, economically.” Germany plans to cut public spending by 1.7 per cent from 2013 to 2014 to get its structural deficit down to zero. From 2016, Germany plans to run a budget surplus. The eurozone crisis has been a top economic concern for the Obama administration, which has seen spurts of growth in the US derailed by turmoil across the Atlantic. “As we continue to address many of our long-term challenges, our economy’s strength remains sensitive to events beyond our shores,” said Mr Lew. “In particular, we have an immense stake in a strong and prosperous Europe.” Seen from the US, the eurozone economy looks as if it is suffering from lack of demand, and the only in place it can come from is northern economies such as
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Germany. Without that, there is no path for the eurozone to grow, according to the US view. “Targets for different countries in terms of . . . potential GDP are not all the same, but I think it’s fair to say that zero is not a good target for anybody and negative is very bad,” said Mr Lew. But from the European perspective it is not obvious that more consumer demand in Germany will feed through to countries such as Greece that lack a strong export sector. Germany also feels it is setting an example of disciplined fiscal policy. Mr Schäuble said he had tried to explain to his US counterpart “the complicated structures in Europe. “We are on a good track in Europe, but we have difficult . . . decision-making processes,” he said. He declined to express an opinion about the need for swifter deficit reduction in the US budget deficit. “We trust the American government,” he said. “We don’t engage in public criticism.” A senior US Treasury official said that the conversation focused on demand more broadly rather than just fiscal policy, and despite some differences in intellectual outlook, the countries were working together closely. Both the US and Germany agree on the need for deficit reduction but have different views on its pace and the balance with promoting growth. The German side pointed out its different institutional arrangements, including a constitutional debt brake, and the relatively rapid pace of wage growth, which should add to domestic demand. Mr Lew cited the relatively strong recovery in the US as evidence that it has the right policy mix. Mr Lew finished his trip by meeting Pierre Moscovici, French finance minister, in Paris, where he found a warmer reception for his message of greater demand. Mr Moscovici said that countries should “maintain a balanced approach between repairing public finances and doing whatever is necessary to ensure an economic pick- up in the eurozone”. http://www.ft.com/intl/cms/s/0/300b34cc-a116-11e2-bae1- 00144feabdc0.html#axzz2PrIpeB3U
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Euro or Drachma, or Both? A Temporary Parallel Currency Concept Authors: Wolfgang Richter, Carlos Abadi & Rafael de Arce Borda · April 9th, 2013 · “Dramatic scenes in the streets of Athens; strikes are paralyzing all of Greece.” “Greek prime minister considers leaving the euro.” “German parliament will decide tomorrow whether to reject the refinancing of the public Greek debt due next month.” “Greek bank deposits are disappearing rapidly.” Introduction Numerous voices describe such headlines as a plausible future scenario. In spite of the recent relative calm in the markets, the euro break-up has been at the forefront of discussions since the start of the peripheral Europecrisis in 2007. In recent weeks this relatively quiet period has been disrupted by the Cypriot crisis and has led to renewed speculation about the future of the euro. All kinds of scenarios have been – and are being – considered including scenarios which foresee individual peripheral countries leaving the euro, or that core Euro Zone (EZ) countries do so.[1] . Both the ECB and the political leaders of coreEurope fiercely defy all break-up discussion and are fighting to keep the monetary union alive in its current form. But is this an optimal scenario? Or even a realistic one? We believe the answer to the two above questions to be no and we offer an alternative approach: the temporary introduction of one or various parallel currencies to the euro in specific countries. Although there have been various proposals for parallel currencies in the wake of the current euro crisis, we believe that our approach offers some unique features which address problems that have not been yet been tackled. In our opinion, clear goals and parameters are key for the success in this process: 1. Establishing a well-defined path of reversion (“return to euro”) will establish credibility and will boost the chances of turning the current macroeconomic vicious circle into a virtuous one; 2. The avoidance of improvisations with sudden announcements of short-term extraordinary measures; only a well-defined road map and calendar will produce the desired effects. The latest events in Cyprus demonstrate how damaging improvisation and short-term measures can be. All parties involved have been under tremendous pressure, working within a very short time-frame, to come to an agreement on the refinancing of Cyprus’ public debt to avoid a disorderly insolvency and exit. Economic and Political Factors The crisis of the peripheral euro (Greece,Ireland,Spain,Portugal, andItaly) has led to a sharp widening of refinancing levels, sometimes dangerously closing in on or even surpassing the psychological 7% threshold. In several cases, the spectacular increase in spreads of peripheral debt as compared to German Bunds has led to public bailouts
91 and/or private haircuts. As a result, peripheral countries are currently under severe public expenditure control (Ireland, Portugal, Spain and Greece). Unlike the case of the US, the failure of labor mobility within the EZ has led to radically different employment situations in countries like Spain or Greece (with unemployment rates of over 25%), as compared to others like the Netherlands, France or Germany (with unemployment figures in the 7-10% range). Austerity policies as a fiscal deficit reduction tool have proven ineffective and even detrimental across euro member states as they often resulted in an activity slowdownacross almost all the European countries. Although internal devaluation strategies have worked out for approximately 10 years within the EZ, their negative effects on output have overshadowed the positive impact on public accounts, which leads us to question their validity. Fiscal austerity faces several problems when it is used as a tool to improve competitiveness. While public sector pay cuts may have a positive effect, a real challenge appears in the private arena: when drastic cuts in income are not simultaneously offset by lower prices of goods and services, austerity quickly faces social refusal. Additionally, private agents are often reluctant to reduce their prices in line with the public sector price cuts. In theory, this disconnect could be overcome by legislation mandating across-the-board cuts in salaries and prices; however, this policy, even if legally feasible, would certainly face stiff political resistance and, even if ultimately implemented, would lead to supply-demand imbalances. It is obvious that the peripheral euro states need massive growth in order to be in a position to service their current debt levels[2]. Three main factors have to be taken into account: (i) the country’s productivity relative to other member states, (ii) its unemployment rate, and (iii) its fiscal primary balance (which is heavily influenced by the first two factors, but also dependent on spending behaviour of the member state and its citizens). Therefore, boosting the real economy is the only efficient tool to adjust the differences in productivity and employment between peripheral and core euro countries, hence the call for devaluation, being it external or internal, to solve the current status quo. Yet, excessive public expenditure in a context of income reduction (resulting from GDP contraction) has hampered the growth opportunities for several economies inEuropewhich have already committed to austerity measures to meet the stability conditions of the Euro Club. Trapped in a vicious circle, public expenditure cuts reduce the scope for counter-cyclical policies, leading to further GDP contraction and, ultimately, reduced fiscal revenues. As a result, the public deficit worsens and the increased public debt must be financed at wider spreads over the reference rate: this further restrains public policies that could potentially be implemented and often results in even more difficult structural reforms in terms of productive investment (external finance flows decrease due to a higher default risk). So, the international competitive position deteriorates in both real and financial terms. In order to invert this vicious circle, exchange rate devaluation[3] could be the key to: • Reduce the current account deficit by improving competitiveness; • Increase domestic consumption and investment through new monetary flows (coming from the private banks and the Central Bank) and new employment opportunities;
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• Reduce the pressure on public accounts through debt denominated in the newly- introduced national currency (sterilized, as needed by the Central Bank) and, especially, from the additional fiscal revenue resulting from the positive economic growth and unemployment reduction; and • Facilitate structural reform policies, and boost the long-term competitive position. External devaluation can obviously be achieved by a definitive withdrawal of a euro state. Yet it would obviously endanger the benefits of a single currency between the states within the single European market. The suppression of exchange rate costs in a single market heavily concentrated between EU members would disappear, and the national monetary stability produced by the system within the EZ would be compromised. Most importantly, the balance-sheet costs of exit would be substantial. A temporary withdrawal cannot be managed successfully ex-ante, as an open negotiation prior to introducing the new currency would most probably foster tremendous capital flight. So external devaluation is coveted as it fulfils the requirement of completeness (all prices) and immediacy, as the process is instantaneous. However, immediacy poses a tremendous problem in practical terms: the switch to the new currency has to happen overnight to avoid massive capital outflows from the local state into other member states or even foreign states. A standard approach consists of announcing the introduction of the new currency on a Friday after close of business, imposing immediate capital controls and preparing the opening on Monday morning (or later) so as to guarantee non-disruptive trading in the new currency. Secrecy in the introduction of the new currency is required to avoid damaging speculation and ensure a totally managed process. While it may be possible to engineer a unilateral exit/devaluation with the required secrecy, the relationship to the other EZ states and a potential return path could not be pre-negotiated under this template. This process, aside from being suboptimal, would entail huge risks. The Solution: Parallel Currency for Value Creation Going Forward Our parallel currency approach aims to capture the advantages of a devaluation, while avoiding the cost of an unmanaged breakup. There have been long-standing experiences of parallel currency systems (see Dirk Meyer, 2011 or Borssone and Sarr, 2011[4]). The recent case of IOUs in Argentina (“patacones” et al) at the beginning of the century offers a great illustration. Provincial governments issued one year IOUs and used them to meet their current obligations. These IOUs were then used as a parallel currency and actually traded relatively close to par (see The Economist, November 10th 2011[5]). However, none of those attempts have been carried out on large enough of a scale to successfully address the competitiveness problem, and certainly not in the framework of a monetary union managing a parallel currency in an agreed process with the other member states. Our suggestion of a parallel currency has several unique features: (i) The external devaluation will only apply to value creation going forward, i.e. current values will be maintained in euros or euro equivalents[6]; (ii) Those market participants having on the one hand obligations to be paid in euros, and on the other claims to be collected in the parallel currency (mainly banks) will get compensated by the local Central Bank for those contracts effective at the cut-off date;
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(iii) There would be a devaluation target set by the local Central Bank and executed via capital market instruments; the inflationary effect of the parallel currency would be monitored and managed by the local Central Bank in coordination with the ECB; (iv.) At any point in time, the parallel currency can be converted into euros and any parallel currency holder can always decide to hedge in euros. As previously mentioned, the key problem of introducing a new currency is that it has to happen virtually overnight to avoid massive capital outflows from the local member state into other member states or other currencies. Since we maintain in our approach the values of the assets at the cut-off date in euro, there is no incentive for capital flight resulting from the introduction of this new currency[7]. We suggest redenomination at par, i.e. one unit of the parallel currency represents one euro. The principle is that all the claims before cut-off date stay in euro so as to not be expropriatory.[8] If the basis for the performance is initiated after the cutoff date, then the claim/liability is redenominated. However, the creditor should be entitled to compensation by the local Central Bank if the creditor is faced with long-term contracts which cannot be terminated early and the creditor receives consideration in parallel currency. The two main types of long-term contracts that this would affect are bank financing/refinancing and long-term renting/leasing. Bank deposits and other bank refinancing instruments would not be redenominated; however, banks’ lending often is long-term and clearly, such banks’ loans have to be redenominated to achieve the benefits of devaluation – parallel devaluation of income and the cost base for the citizenry (with the exception of imports), i.e. we cannot impose on a borrower to repay a loan in euro with a wage paid in local currency. Technically, such compensation to the banks could be in the form of bonds issued by the local Central Bank which allow banks to be compensated at a future date based on a devaluated local currency amount. Until such moment, those bonds would not introduce inflationary pressure as they would simply sit on the banks’ balance sheets, allowing them to maintain their pre-cutoff date capital levels. Yet situations where the banks refinancing obligations mature prior to the maturity of these “compensation bonds” need to be addressed. One solution would be to allow refinancing through the local Central Bank with a predefined haircut. Long-term renting and leasing in principle suffer the same problem for the lessor. In these cases, the difficulty lies in quantifying the compensation the lessor is entitled to. If the lessor’s refinancing is also redenominated into the new local currency, there should not be compensation claim. The situation becomes different if the performance of the lessor is financed by equity or by non-redenominated funds. Then compensation would be appropriate. Clearly, one has to look at how this affects inflation of the parallel currency. The inflationary consequences resulting from these newly issued bonds can be controlled, for instance by limiting the banks’ ability to use the proceeds to refinance themselves through the local Central Bank or actively trading them. However, the main purpose of our approach is to instigate a controlled inflationary process in order to achieve an external deflation effect. So it may even be appropriate to allow refinancing, as this could expand the monetary supply in a controlled manner. Obviously, which of the respective contractual obligations should be redenominated and/or should be subject to a compensation claim has to be carefully thought out. For instance, all contracts related to future events like forward swaps are priced according to sophisticated forward looking models. The party entitled to receive future payments could rightfully expect that those payments should be made in euros rather than in 94 parallel currency to avoid any loss. But this should only be the case when the receiving party has to meet obligations in euros. Managing the Money Supply of the Parallel Currency The local Central Bank can use all available money market instruments to control the supply of the new currency. This includes the setting of refinancing interest rates charged to banks, active open market operations, and capital control measures. The initial devaluation target should be a political decision pegging the parallel currency to the euro rather than the result of free market forces. We suggest that the member state should initially fix a specific devaluation target for a specific period of time, for instance two years. We further suggest that the Central Bank of the member state introducing a parallel currency should manage the devaluation target by offering forward contracts to the market that secure parallel currency exchange into euros with a specific premium and a minimum settlement date (for instance 2 years). That would allow the Central Bank to manage the inflationary expectations of the parallel currency by varying the swap premium and using money market policies to manage the exchange rate. For instance by affecting the supply of parallel currency (M1), publishing inflation targets, etc. The swaps would be brokered on an exchange platform run by a clearing institution which guarantees that the exchange contracts will be fulfilled. Each swap holder could then trade these contracts at any time. At settlement date, the exchange platform settles all the contracts. The necessary euro amounts are provided by the local Central Bank from its reserves. The entire process would be pre-agreed with the ECB. A procedure would need to be agreed upon between the local Central Bank and the ECB as to how the parallel currency is managed in terms of inflation, interest rates etc. This process would require the ECB, other member states, the local Central Bank and the local government(s) to agree on how long and under which criteria the parallel currency system is to be implemented and an exit strategy for the reconversion of the parallel currency into euros at a future date. We do not view these agreements as specific automatic processes of reintegration, but rather as flexible rules to be negotiated among the parties. Certainly, once it is publicized that a member-state is negotiating the introduction of a parallel currency with ECB and the other member states, financial markets and all asset holders potentially affected by the introduction of the parallel currency will evaluate the possibility of moving their local funds abroad, liquidating their assets and taking their money out of the country. Therefore, the credibility of the local government, the ECB and the other EZ states is key to reassure these asset holders that the value of their assets will be preserved according to the outlined criteria. Since such credibility will be difficult to achieve from the outset, temporary capital control measures might also be used until confidence is restored. As a result, all exporting industries will benefit, while all importing industries would suffer, which is exactly the desired effect: substituting imports for local goods and boosting exports. Yet the overall effect of the devaluation would be a reduction of unemployment, enhanced economic activity, an improved primary balance and, ultimately, growth. The Example of Greece: Introducing the New Temporary Drachma
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Greece has been rigorously following the path of austerity, at least in the view of its government and, even more so, its citizens. However, despite substantial cuts in salaries and spending, the country is still running a primary deficit (around 2% of GDP) and, still, in spite of a radical haircut on its debt to private holders, the prospect that Greece will ever be able to repay its debt in full is dim. In order to evaluate the consequences of introducing a parallel currency inGreece(the “New Drachma”), we have modeled the effects of this policy on the real economy by varying the exchange rate. We have run different simulations for the exchange rate devaluation using a neoclassical simultaneous econometric model in a two year time horizon for 2011 and 2012 withGreece’s current macroeconomic data as a baseline. An assumed devaluation of 15% of the exchange rate during 2011 and 2012 would have produced around a 1% increase in GDP growth, composed of a private consumption growth of around 0-0.2%, an increase in exports of around 7% and a decrease of imports of approximately 10%. In this scenario, employment figures are not significantly improved, but its 6.5% deterioration would stop. The unemployment rate would decrease from 22-25% to 20%-22% in our first simulation. The primary public deficit (-4,777 million euros in 2011), would be reduced in this scenario to 1,000 Million euros. In a second simulation, we estimate the effects of a 30% devaluation of the exchange rate. In this situation, the external trade balance records positive export growth of around 11% and an import decrease of around 13%. Domestic demand is boosted by 5%. Employment figures clearly improve, increasing by around 3% and unemployment decreases to under 19%. Primary public deficit would be brought back to zero, boosted by a reduction in unemployment and an increase in payroll tax revenues from new workers. However, devaluations of 15% or 30% are not enough to significantly affect gross capital formation, which starts showing positive improvements under a 50% devaluation scenario. Only in this case does Greece achieve a modest primary public surplus and, of course, this surplus is accompanied by better results in terms of external trade (increase of exports around 19% and decrease in imports of 18%), new employment (10% of employment increase and unemployment rate situated around 14%). Certainly, it is difficult to evaluate the consequences of such devaluation in terms of social conditions and acceptance by citizens; h, recent history demonstrates that these kinds of events have had positive and non-traumatic results in those countries where they have been applied. In the monetary system crisis of 1992-1993 several countries decided to implement substantial devaluations in a very short-time frame. Spain, for instance, reduced its exchange rate against the Deutsch Mark by 20% in 5 months and the United Kingdomdevalued the British Pound by 40% in 1930, after abandoning the gold standard. And one has to take into account that Greece’s minimum wage cut[9] trickled through the Greek economy also leads to an (internal) deflation process which we estimate is more than 20%.[10] This analysis shows that the introduction of a depreciating parallel currency can have a substantial positive effect on the debt dynamics of the introducing state and is therefore also in the best interest of the rest of the EZ. The stakeholders in the EZ should consider such a parallel currency approach which combines the advantage of an immediate thorough devaluation with political stability, keeping the troubled membership states within the EZ.
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Summary: Only our suggestion of a parallel currency combines the advantages inherent in the internal devaluation and exit policies: it provides instant devaluation while staying within the euro community with a defined schedule for full reintroduction of the euro as the sole legal tender. Key to the success though is that upon embarking in negotiations on such a policy with a member state, the ECB and the EU communicate together with the local government that all its equity values at the moment of the cutoff date will be preserved in euro and only the value creation going forward will be subject to the parallel currency and as such to the devaluation. Clearly, there are intricacies as to how to define the equity value; but, this can be done in a sufficiently transparent and acceptable manner: for those who are faced with long-term obligations in euros (receiving income in the parallel currency) the local Central Bank can compensate. This refers mainly to the banks and long-term renting and leasing. The new parallel currency has to be managed in terms of inflation; however, the local Central Bank can, in conjunction with the ECB, use a broad array of tools to this effect. The introduction of an exchange-centered swap market for hedging the parallel currency to the euro will be one critical element of such arsenal. Finally, our modeling has shown that such an immediate devaluation will have positive effects on employment, primary deficit and GDP as compared to the alternative of not devaluating immediately and accepting a long drawn out process of internal devaluation. BIBLIOGRAPHY Boesler, M., 2012: “INTRODUCING THE ‘GEURO’: A Radical New Currency Idea To Solve All Of Greece’s Problems”. Bussines Insider, May, 20th 2012. Available at: http://www.businessinsider.com/introducing-the-geuro-a-new-parallel-currency-to- solve-all-of-greeces-problems-2012-5 Bossone, B. and Abdourahmane Sarr , 2011. “GreeceCan Devalue AND Stay in the Euro”. Economonitor, July 7th, 2011. Available at: http://www.economonitor.com/blog/2011/07/greece-can-devalue-and-stay-in-the-euro/ Markusen, J. R. and Venables, A. (2000) “The Theory of Endowment, Intra-Industry and Multi-National Trade”, Journal of International Economics 52: 209-234. Read more: http://www.businessinsider.com/introducing-the-geuro-a-new-parallel- currency-to-solve-all-of-greeces-problems-2012-5#ixzz2LiceUx2V Mundell, R. A., 1961. “A Theory of Optimum Currency Areas”. American Economic Review 51 (4): 657–665. Mundell, R., 1973. “A Plan for a European Currency”, In Johnson, H. G. and Swoboda, A. K. (eds.), The Economics of Common Currencies: Allen and Unwin, p.^pp. 143-172.
[1] See a comprehensive discussion of those options, Roger Bootle, Leaving the Euro: A Practical Guide, 2012, in: Wolfson Economic Price MMXII [2] And the ongoing discussion will continue whether the current external debt is too high to allow the return to a sustainable growth path. [3] One famous example about how this effect can be mitigated by dual currency is the example of the city ofWörgl inAustria between 1932 and 1933. This model effectively worked with a negative interest rate, and fostered continuous spending, boosting local activity (see also Buiter, W., 2009[3]). 97
[4] Dirk Meyer, 2011: Das Konzept der Parallwährung für die Eurozone, IFO- Schnelldienst 23/2011, p. 12. Bossone, B. and A. Sarr (2011), “Greece Can Devalue AND Stay in the Euro”, http://www.economonitor.was; and Boesler (2012) [5] The Economist, 2011: “Breaking up the Euro. How it could happen; why it would be horrible”. November, 10th 2011. Available at: http://www.economist.com/blogs/freeexchange/2011/11/breaking-up-euro; [6] A similar approach to that outlined by Michael Vogelsang, Die temporäre Doppelwährung als Anpassungsinstrument, ifo Schnelldienst 23/2011 – 64. Jahrgang, who suggests preserving all asset positions in euro if notified to the tax authorities; however, he does not specify how that practically should be achieved. [7] Capital flight and speculation could obviously still happen should the countries’ fundamentals deteriorate further – failure to generate a surplus – or if creditors are unwilling to concede significant write-offs. [8]See detailed table showing the appropriate treatment of the different asset/contract types in, Wolfgang Richter, Carlos A. Abadi, Rafael de Arce Borda: EURO OR DRACHMA? OR BOTH? A temporary parallel currency concept (exended version) [9] Reduction of 22%, and 32% in the case of those under age 25 [10] Comprehensive figures for this are not available, but we estimate that compensation (including the black market) for employees and freelancers has been reduced by at least 20%. http://www.economonitor.com/blog/2013/04/euro-or-drachma-or-both-a-temporary- parallel-currency- concept/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ec onomonitor%2FOUen+%28EconoMonitor%29
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ft.com comment Columnists April 9, 2013 7:07 pm Japan’s unfinished policy revolution
By Martin Wolf Tokyo’s economic system is a machine for generating high private savings
Haruhiko Kuroda, the new governor of the Bank of Japan, has launched a monetary policy revolution. He has ended two decades of caution, during which the BoJ declared itself helpless to end deflation. Prime Minister Shinzo Abe’s goal of 2 per cent inflation within two years is ambitious – and Mr Kuroda now has a bold policy to meet it. The question is whether the policy will work. My answer is: on its own, no. The government must follow up with radical structural reforms. On April 4, the Bank of Japan announced the launch of “quantitative and qualitative easing”. It promises to double the monetary base and to more than double the average maturity of the Japanese government bonds that it purchases. The monetary base will rise at an annual rate of Y60tn-Y70tn ($600bn-$700bn or 13-15 per cent of gross domestic product) and the average maturity of holdings of JGBs will increase from three to seven years. Furthermore, says the BoJ, it “will continue with the quantitative and qualitative monetary easing as long as it is necessary”. More ON THIS STORY/ Comment Japan takes an introductory course in Abenomics/ Editorial Bank of Japan opens floodgates/ Bank chiefs reluctant to follow Japan/ Gavyn Davies BoJ follows the Fed, on steroids/ Lex Bank of Japan ON THIS TOPIC/ BoJ policy action continues to hit yen/ Lex Yen and how/ Global Market Overview Equities sell off after weak US jobs report/ Japan bonds swing wildly after BoJ move
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MARTIN WOLF/ Thatcher the great transformer/ Why China’s economy might topple/ Cyprus adds to Europe’s confusion/ Homes ruse will not rebuild the economy
This is not “helicopter money”, since the intention is to reverse the monetary expansion when the economy recovers. This is also not an outright purchase of foreign assets, as the Swiss National Bank has done. This is, instead, in the words of Gavyn Davies, chairman of Fulcrum Asset Management, “an outsize dose of internal balance sheet manipulation”, designed to encourage the financial sector to shift from holdings of JGBs and to raise the prices of real assets. Nevertheless, a weaker exchange rate is surely a desired consequence. Why might this work? The answer is that Japan suffers from a structural excess of savings in the private sector. Companies are accumulating too much cash. The announced policy could change this, at least temporarily, in a combination of two ways. First, by lowering the real exchange rate, it could increase Japan’s ability to export excess savings via a larger current account surplus. Second, by turning the real interest rate negative and also raising real wealth, the policy might raise investment and lower savings. Yet, at best, this would only work in the short run. At worst, it could destabilise inflation expectations so dangerously that it pushes Japan from deflation to ultra- high inflation, without stopping for long at any point in between. Thus, the Japanese might decide that the aim of the government is to impoverish them brutally, by reducing the real value of their (admittedly unsustainable) savings. If this frightened them into fleeing the yen, policy makers would be at a loss, since they could not respond by increasing interest rates without devastating the public finances. They might even have to impose exchange controls. What, then, has to be done to make the shift in monetary policy work? The answer is to recognise that the underlying obstacle is structural: it lies in what is now a dysfunctional corporate sector. Andrew Smithers of Smithers & Co and Charles Dumas of Lombard Street Research have recently made much the same point. Japan’s private savings – almost entirely generated by the corporate sector – are far too high in relation to plausible investment opportunities. Thus, the sum of depreciation and retained earnings of corporate Japan was a staggering 29.5 per cent of GDP in 2011, against just 16 per cent in the US, which is itself struggling with a corporate financial surplus. Japan’s economic system is a machine for generating high private savings. A mature economy with poor demographics cannot use these savings productively. As Mr Dumas notes, US gross fixed business investment has averaged 10.5 per cent of GDP over the past 10 years, against Japan’s 13.7 per cent. Yet US economic growth has much
100 exceeded Japan’s. Japanese corporations must have been investing too much, not too little. It is inconceivable that raising the investment rate, to absorb more of the corporate excess savings, would not add to the waste. In the short term, negative real interest rates might raise investment a little, since savings earn less. But, in the medium to long term, Japanese corporate investment should fall, relative to GDP, not rise. Since household savings are low and their willingness to borrow is small, this leaves only two other areas capable of absorbing the huge excess savings of the corporate sector: foreigners and the government. In practice, the government has largely done the job over the past two decades. That is why fiscal deficits are huge and public sector indebtedness is on an ever-rising trend. Meanwhile, the external surplus has diminished. This is due to worsening terms of trade and poor performance on export volume. Again, a depreciation in the yen should help, but only a little. The current account surplus needed to absorb the excess savings of the corporate sector and generate the fiscal surplus needed to lower public debt ratios would be at least 10 per cent of GDP. Still a fairly closed economy, Japan could not generate such a surplus. If it could, the rest of the world would surely not absorb it. It follows that Japan desperately needs structural reform – but not just any structural reform. It needs reform that both lowers excess corporate savings and increases the trend rate of economic growth. This combination should be possible, since Japan’s GDP per head (at purchasing power parity) is down to 76 per cent of US levels and its GDP per hour to just 71 per cent. The policy options include: a huge reduction in depreciation allowances; a punitive tax on retained earnings, possibly combined with incentives for higher investment; and reform of corporate governance, to give more power to shareholders. The aims would be to deprive companies of the cash flow cushion that has featherbedded inefficiency. The worst possible tax rise is the one on consumption now planned, since Japan consumes too little. Tax corporate savings, instead. Such reforms really would be radical. Is there the smallest chance that Mr Abe might move in this direction? No. But without this sort of reform, the BoJ’s new policy will prove, at best, a short-term palliative and at worst an inflationary disaster. Meanwhile, China needs to note that this is the end result of an economy built by favouring investment and suppressing consumption. That is a great strategy for catching up with the rich world, but it leaves huge headaches when fast growth is over. http://www.ft.com/intl/cms/s/0/2d7cc812-a079-11e2-88b6- 00144feabdc0.html#axzz2PrIpeB3U
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ft.com/markets MARKETS INSIGHT April 9, 2013 4:54 pm Markets Insight: Bank deregulation part of Thatcher legacy By John Plender Radical reform transformed City’s role in global finance The Thatcherite legacy is receiving renewed scrutiny since the former UK prime minister’s death on Monday. One of its most important features was radical financial reform, along with a marked change in the way the financial sector was perceived. When Margaret Thatcher came to power in 1979 the job of the financial system was thought to be about mobilising funds for investment and providing access to payment services – worthy but boring roles. More ON THIS STORY/ Thatcher funeral will be held on April 17/ Thatcher risk to Cameron fragility/ Opposition moves to damp down triumphalism/ Thatcher inspired generation of Tory MPs/ Comment Thatcher in the face of political defeat ON THIS TOPIC/ Crosby offers to give up knighthood/ Editorial Financial sins/ Inside Business The leverage story banks want to hide/ Philip Augar Barclays has vaccine against future ills MARKETS INSIGHT/ Days of inflation targeting are numbered/ Regulation is not the only answer/ Asia’s SWFs must shed political shackles/ New orthodoxy means EM currency gains After the liberalisation of the City and the Big Bang reform of the stock exchange in 1986, politicians were pleasantly surprised to discover that the financial sector could contribute to economic growth while providing post-industrial jobs as British manufacturing ran down. Few foresaw the dangers in looking at an inherently fragile financial system as a motor of the economy. As with so many policies at the time, this upheaval was not the product of ideology. (Never forget that the flagship privatisation of British Telecom took place because the Treasury’s rules on public sector investment were so restrictive that no one could work out how to finance the renewal of the disintegrating telephone network – hence the decision to outsource the headache to the private sector.) Indeed the real architect of the historic deal struck between Cecil (later Lord) Parkinson, the secretary of state for trade, and Sir Nicholas Goodison, chairman of the stock exchange, to liberalise securities trading in London was not a politician. It was David Walker, then a director of the Bank of England, now Sir David and chairman of Barclays. He and his colleagues at the BoE saw their role in relation to the City much like that of a sponsoring department in Whitehall. They worried about a lack of competitiveness in parts of the Square Mile. In particular they were concerned that a stock exchange club that excluded foreigners and operated a different dealing system from that of the US had become a backwater in a world of rapidly globalising capital flows.
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In the aftermath of the Latin American debt crisis big companies could raise finance more cheaply in markets than from banks, which meant the City needed reinvigorated securities markets to keep up. It was also behind New York in new risk management products such as interest rate and currency swaps, which had proliferated since the break-up of the Bretton Woods semi- fixed exhange rate system and banking deregulation. With hindsight, one of the big regulatory shortcomings in the 1980s and 1990s was a failure to recognise the need for a bigger capital buffer as financial institutions took on more market risk and cross-border counterparty risk. Indeed the opposite happened. The Basel capital adequacy regime of the late 1980s was a lowest common denominator exercise, driven by banks’ demands for a level playing field rather than concern about increased risk and growing concentration in the banking system that would cause the “too big to fail” problem to escalate. In pursuit of high returns on equity, banks ran down their capital to absurdly low levels. Another serious error was the downgrading of liquidity in the Basel regime when banks were becoming more dependent on volatile wholesale finance. Then there was the failure to grasp the extent to which the American dealing system, which allowed securities companies to make markets and deal on their own account as well as for clients, involved overwhelming conflicts of interest. The old ethical imperative of putting the client’s interest first was severely damaged. Combined with the introduction of ever-higher bonuses, this cultural change led ultimately to today’s Libor-related scandals and the rest. The interesting question now, in the light of the banking catastrophes in Iceland, Ireland and Cyprus, is whether there is a case for putting limits on the size of banking systems in relation to economies to address incipient “too big to save” problems. An explicit limit may not, in fact, be necessary. The Swiss authorities are imposing a de facto constraint on size by demanding more draconian rules on bank capital than required by Basel III. The UK’s proposal for ringfencing retail banks may well end up having the same effect. If markets believe the investment banking activities outside the ringfence will not be regarded by politicians as too big to fail, and if regulators respond to the non-ringfenced banks’ increased dependence on wholesale funds with tougher liquidity rules, funding costs in the non-ringfenced banks will be higher than in continental universal banks. Does anyone believe that the Germans and French will allow the Liikanen review’s European ringfencing proposals to take effect? Surely not. They like to protect their big banks – in which case ringfenced UK investment banking may be a dead duck. http://www.ft.com/intl/cms/s/0/7f8aaf08-a122-11e2-bae1- 00144feabdc0.html#axzz2PrIpeB3U
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Research-based policy analysis and commentary from leading economists Measuring potential output: Eye on the financial cycle Claudio Borio, Piti Disyatat, Mikael Juselius, 9 April 2013 Financial factors are known to influence output but they are generally neglected when assessing potential output – the maximum sustainable level of economic activity. This column argues for embedding financial-cycle variables into potential output estimates. Such estimates could help central banks walk the line between too much and too little stimulus. Related Macroeconomics and the financial cycle: Hamlet without the Prince? Claudio Borio// Did global imbalances cause the financial crisis? Claudio Borio, Piti Disyatat No-one questions any longer the powerful feedbacks between financial conditions and the real economy. In recent years and in many countries, credit and housing booms have gone hand-in-hand with strong spending and production. Similarly, during downturns, deteriorating financial conditions have weighed heavily on growth. Such linkages have challenged the long-standing intellectual chasm between macroeconomics and finance. Efforts are underway to bridge it. To a large extent, however, these efforts have neglected the concept and measurement of potential output. This is surprising. Potential output: From 'inflation-neutral' to 'finance-neutral' measures From such a unified macro-finance perspective, prevailing views of potential output have two shortcomings. The first has to do with the concept. A defining feature of potential output is sustainability. From at least Okun (1962) onwards, sustainability has generally been defined exclusively in terms of inflation.1 In Macroeconomics 101, it is the behaviour of inflation that provides a key signal of unsustainability. But identifying sustainable output with non-inflationary output is too restrictive. As the recent financial crisis has powerfully reminded us, output may be on an unsustainable path even if inflation remains low and stable: financial developments may be out of kilter.2 The second shortcoming has to do with measurement. There is little doubt that financial developments contain information about the cyclical component of output. Variations in financial conditions are associated with, and in many instances drive, fluctuations in economic activity. Ignoring them is bound to provide less accurate estimates of potential output whenever this is measured by the non-cyclical component of output fluctuations. In a recent paper (Borio et al (2013)), we take a first step towards addressing these shortcomings. Our approach fully recognises the critical role that financial factors may play in the evolution of output, and in determining which of its paths are sustainable and which are not.3 More specifically, we rely on two variables that we have found in other
104 work to be the best proxies for the financial cycle: credit and property prices (Drehmann et al (2012)). And we allow these variables to capture the cyclical component of output at traditional business-cycle frequencies. By operating at these frequencies, we arrive at a measure of potential output, and a corresponding output gap, that are comparable to standard ones in economic analysis and policy. But since it is the behaviour of financial variables, and not inflation, that signals deviations of output from its potential, one can think of the corresponding estimates as 'finance-neutral', as opposed to 'inflation-neutral', measures of potential output. Statistically, the novelty of the approach is that it incorporates economic information very flexibly. In particular, we do not force the output gap to explain economic variables, as is typically done in systems-based approaches and most prominently through the inclusion of a Phillips curve (eg, the fully fledged production-function approaches commonly used in policy institutions). Rather, we include the proxies for the financial cycle as potential explanatory variables for the transitory, or cyclical, fluctuations in output at the chosen frequencies. If the explanatory power of a given variable is small, it will make little difference to the estimate of potential output. In other words, the approach lets the data speak and, by so doing, avoids a common source of misspecification. Moreover, it is simple and very transparent. The estimates: Much more precise and robust in real time Of course, the proof of the pudding is in the eating. And this particular pudding happens to taste quite nice. We illustrate this in the case of the US, although in the paper we also apply the procedure to the UK and Spain, for which the findings are similar. The results are striking. For one, credit and property prices have significant explanatory power: their inclusion greatly improves the statistical precision of the estimates. Figure 1 compares the 95% confidence bands for the output gap derived from our approach (right-hand panel) with those associated with the output gap resulting from a very common statistical technique based only on output itself, the so-called Hodrick-Prescott (HP) filter (left-hand panel).4 Our procedure roughly halves the size of the error bands. Moreover, these bands are likely to be considerably smaller than those for fully fledged production function approaches, which rely on many assumptions about economic relationships and on several HP trends for key variables. Figure 1. US: Finance-neutral output gaps – statistical precision (as a percentage of potential output)
Source: Authors’ calculations.
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More importantly, our procedure yields output gaps that are much more robust in real time. In other words, history does not get heavily rewritten as time unfolds: the output gap estimated based on information available today (the 'real-time' estimate) is not very different from that estimated a few years later, when more information is available ('ex post'). This is shown in Figure 2, which compares real-time estimates with those based on the full sample of data. Figure 2. US output gaps: Full sample and real-time estimates (as a percentage of potential output)
Sources: IMF; OECD, Economic Outlook; authors’ calculations. The difference between our approach and traditional ones is immediately apparent. The HP filter gap and the full-fledged approaches of the OECD and IMF – a representative sample of current approaches – did not detect that output was above sustainable levels during the boom that preceded the financial crisis. In fact, the corresponding real-time estimates indicated that the economy was running below, or at most close to, potential. Only after the crisis did they recognise, albeit to varying degrees, that output had been above its potential, sustainable level. By contrast, the finance-neutral measure sees this all along (bottom right-hand panel). And it hardly gets revised as time unfolds. Why the difference? It reflects how the approaches deal with what is technically known as the 'end-point' problem. Statistical filters typically have a hard time measuring trends accurately because they are very sensitive to the latest observations. As long as the financial variables soak up the cyclical fluctuations, and do so reliably, they can obviate this problem. This is precisely what is happening here.
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A word of caution, though. The finance-neutral estimates shown in the graphs are illustrative. For simplicity, they refer to the linear version of our approach. This version does not allow for the possibility that, as other evidence suggests, the distorting impact of the financial booms increases with their size (eg, Borio and Drehmann 2009). Allowing for this possibility, which we think is more realistic, yields output gaps that are considerably larger during the boom and smaller during the bust.5 Policy application: the case of cyclically adjusted budget balances For policymakers tasked with keeping the economy on an even keel, large revisions as time unfolds are daunting. Based on traditional methods, policymakers would have completely missed that output was on an unsustainable path ahead of the financial crisis. Had they relied on finance-neutral potential output measures, they would have been in a better position to assess potential vulnerabilities and to take remedial action. We illustrate this for fiscal policy – although the point applies also to monetary policy. Consider cyclically adjusted government budget balances. Because tax revenues tend to be low and expenditures high during booms, and vice versa, taking into account the state of the economy gives a better indication of the underlying stance of fiscal policy and health of the public accounts. Given that financial booms can flatter the fiscal accounts, neglecting the financial cycle can make assessments unreliable. The recent experiences of Spain and Ireland are quite telling (eg, Benetrix and Lane 2011). The fiscal accounts looked strong during the financial boom: debt-to-GDP ratios were low and falling and fiscal surpluses prevailed. And yet, following the bust and the banking crises, sovereign crises broke out. The finance-neutral output gap measures help correct for the flattering effect of financial booms.6 Consider, again, the US. Figure 3 shows the actual fiscal balances (red line, right-hand scale) together with the real-time cyclical adjustments based on the HP filter, production function and the finance-neutral potential output measures (bars, left-hand scale). In this context, a difference of more than half a percentage point of GDP is generally regarded as economically significant. During the financial boom that preceded the financial crisis, cyclical adjustments based on the HP filter and production function approaches were small and sometimes even positive. By contrast, those based on the finance-neutral measure were persistently negative, generally above 0.5 percentage points and often in the order of one percentage point, if not larger. Clearly, underlying fiscal positions were substantially weaker than the headline figures suggested. Figure 3. US: Budget balances and cyclical adjustments (as a percentage of output)
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Notes: 1As a percentage of GDP. 2Cyclical correction of the unadjusted budget balance implied by the different output gap estimates. In percentage points. Sources: OECD, Economic Outlook; national data; authors’ calculations. Conclusion Financial developments are an integral part of cyclical output swings. Our findings reflect this simple fact. Assessments of sustainable output that ignore financial factors are fundamentally incomplete. Authors’ note: The views expressed are those of the authors and do not necessarily represent those of the Bank for International Settlements or the Bank of Thailand. References Benetrix, A and P Lane (2011): "Financial cycles and fiscal cycles," mimeo, Trinity College Dublin. Borio, C and P Disyatat (2011): “Global imbalances and the financial crisis: Link or no link?”, BIS Working Papers No. 346, May. Borio, C, P Disyatat and M Juselius (2013): “Rethinking potential output: Embedding information about the financial cycle,” BIS Working Papers No. 404, February. Borio, C and M Drehmann (2009): “Assessing the risk of banking crises – revisited”, BIS Quarterly Review, March, pp 29–46. Congdon, T (2008): “Two concepts of the output gap”, World Economics vol 9, no 1, pp 147–75. Drehmann, M, C Borio and K Tsatsaronis (2012): “Characterising the financial cycle: don’t lose sight of the medium term!”, BIS Working Papers, no 380, June. Mishkin, F (2007): “Estimating potential output,” Speech delivered at the Conference on Price Measurement for Monetary Policy, Federal Reserve Bank of Dallas, May 24, 2007. Okun, A (1962): “Potential GNP, its measurement and significance”, Cowles Foundation, Yale University.
1 See, for instance, Congdon (2008) and Mishkin (2007) for useful discussions of the literature. 2 On reflection, there are several reasons for this. Unusually strong financial booms are likely to coincide with positive supply side shocks. Economic expansions may themselves temporarily weaken supply constraints (eg, inducing increases in labour supply and the capital stock). Financial booms often go hand-in-hand with a tendency for the currency to appreciate, as domestic assets become more attractive and capital flows surge; this, in turn, puts downward pressure on prices. And unsustainability may have to do more with sectoral misallocation of resources than with overall capacity constraints (eg, unsustainable expansion of the construction sector). 3 These factors can give rise to what elsewhere we have termed the 'excess elasticity' of the financial system (Borio and Disyatat (2011)). Just like a piece of rubber that stretches too far and eventually snaps, the self-reinforcing interaction between credit creation, asset prices and the real economy can lead to a build-up of financial imbalances that eventually derails economic activity.
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4 Technically, the graph refers to a dynamic HP filter, which allows for autocorrelation in the output gap. 5 Moreover, as we argue in the paper, we suspect that our current procedure does not adequately capture these non-linearities. Doing so would likely reduce the estimate of the output gap in the bust further. 6 That said, they do so only partially. They capture the impact of output being above potential, but they ignore compositional effects (the fact that financial booms are revenue-rich) and the build-up of contingent liabilities to address the subsequent bust. http://www.voxeu.org/article/measuring-potential-output-eye-financial-cycle vox
Research-based policy analysis and commentary from leading economists Social multiplier versus social norms: What matters most for outcomes? Xiaodong Liu, Eleonora Patacchini, Yves Zenou, 9 April 2013 Economists know that your peers’ behaviour affects your economic and social outcomes. But what mechanisms are at work here? This column highlights the two major approaches that hope to explain ‘peer effects’: either people don’t want to deviate from social norms; or they are affected by a ‘social multiplier’, the influence of the sum of their peers’ behaviour. Using detailed data on friendship networks, evidence suggests that there are strong social-multiplier effects in criminal behaviour whereas, for education, social norms matter the most. A detailed understanding of peer effects will undoubtedly help policymakers better tackle social problems. Related / Are education policies reaching the marginalised in Africa? Maria Kuecken, Marie-Anne Valfort/ The long-run gains of not mixing genders in high- school classes Massimo Anelli, Giovanni Peri/ Schools hours and educational inequality: Evidence from Japan Daiji Kawaguchi/ It’s not what you know, but who: The role of connections in academia Manuel F. Bagues, Natalia Zinovyeva In many circumstances, individual utility does not seem to adequately explain peoples’ behaviour. An explanation may be found in how peers and others value this behaviour or activity. These are called ‘peer’ effects and there is plenty of evidence showing that they matter in areas that are critically important to policymakers. Peer effects have been shown to matter in education (Sacerdote 2011) and crime (Bayer et al. 2009, Patacchini and Zenou 2012), for instance. What are 'peer effects'? Although we know that your peers’ views affect your behaviour, defining what we really mean by a ‘peer effect’ is more challenging. Sacerdote (2011) adopts a broad definition of peer effects to encompass nearly any externality in which peers’ backgrounds, current behaviour, or outcomes affect your own outcome. By limiting peer effects to externalities, Sacerdote is excluding market-based or price-based effects. For example if the families in a particular county contribute to a demand shock for
109 private schooling which raises or lowers the dollar cost of private schooling to the individual, that is clearly a market-based effect and not a peer effect. The peer reference group: Local-aggregate vs local-average model In our recent research, we adopt a similar definition of peer effect and investigate the notion of ‘peer reference group’. For that, we consider two social-network models aimed at capturing the different ways peer effects operate: • In the so-called local-aggregate model, peer effects are captured by the sum of friends' efforts in some activity so that the more active friends an individual has, the higher is her marginal utility of exerting effort. Social-multiplier effects are clearly important in this model. • In the local-average model, peers' choices are viewed as a social norm and individuals pay a cost for deviating from this norm. It is social norms that are important in this model. Each individual wants to conform as much as possible to the social norm of her reference group, which is defined as the average effort of her friends. New research To test the two approaches, in our recent CEPR Discussion Paper (Liu, Patacchini and Zenou 2013) we use of a unique database on friendship networks from the National Longitudinal Survey of Adolescent Health (AddHealth). The AddHealth database has been designed to study the impact on adolescents' behaviour of the social environment – things like friends, family, neighbourhood and school. Data has been collected on US students in grades 7-12 from a nationally representative sample of roughly 130 private and public schools in years 1994-95. The most interesting aspect of the data is the friendship information, which is based upon actual friend nominations. It is collected when individuals were at school where students were asked to identify their best friends from a school roster (up to five males and five females). As a result, one can reconstruct the whole geometric structure of the friendship networks. We find that: • For juvenile delinquency, students are mostly influenced by the aggregate activity of their friends (local-aggregate model). This indicates important social-multiplier peer effects in delinquent activities. • For education, both the social-multiplier and social-norm effects matter, even though the magnitude is higher for the social norm effect. This indicates that students tend to conform to the social norm of their friends in terms of effort in education (local-average model). What it means for policy Our results shed light on several policy approaches including the so-called ‘key-player policy’. The idea is to remove the criminal that reduces total crime in a network the most (Ballester et al. 2006, 2010; Liu et al. 2012). Our results suggest that this would be effective since the effort of each criminal and thus the sum of one's friends' crime efforts will be reduced. In other words, the removal of the key player can have large effects on crime because of the feedback effects or ‘social multipliers’ at work. As the fraction of
110 individuals participating in a criminal behaviour increases, the impact on others is multiplied through social networks. For education policy, our results show that the local-average model is at work. This suggests that one should change the social norm in the school or the classroom. One should try to implement the idea that it is ‘cool’ to work hard at school. An example of a policy that has tried to change the social norm of students in terms of education is the charter-school policy. The charter schools are very good in screening teachers and at selecting the best ones. In particular, the ‘No Excuses policy’ (Angrist et al. 2010, 2012) is a highly standardised and widely replicated charter model that features a long school day, an extended school year, selective teacher hiring, strict behaviour norms, and emphasises traditional reading and math skills. The main objective of these policies is to change the social norms of disadvantage kids by being very strict on discipline. This is a typical policy that is in accordance with the local-average model since its aim is to change the social norm of students in terms of education. Angrist et al. (2012) focus on special needs students that may be underserved. Their results show average achievement gains of 0.36 standard deviations in maths and 0.12 standard deviations in reading for each year spent at a charter school called ‘Knowledge is Power Program (KIPP) Lynn’, with the largest gains coming from the Limited English Proficient (LEP), Special Education (SPED), and low-achievement groups. They show that the average reading gains were driven almost entirely by SPED and LEP students, whose reading scores rose by roughly 0.35 standard deviations for each year spent at KIPP Lynn. Conclusion Policymakers typically seek to influence peoples’ behaviour. Understanding human behaviour is thus, of course, an important input to better policy. Recent theory and data have allowed the profession to reach beyond oversimplistic views of human motivation. We hope this will lead to better policy. References Angrist J D, S M Dynarski, T J Kane, P A Pathak and C R Walters (2010), “Inputs and impacts in charter schools: KIPP Lynn,” American Economic Review Papers and Proceedings 100, 239-243. Angrist J D, S M Dynarski, T J Kane, P A Pathak and C R Walters (2012), “Who benefits from KIPP?” Journal of Policy Analysis and Management 31, 837-860. Ballester C, A Calvó-Armengol and Y Zenou (2006), “Who's who in networks. Wanted: the key player,” Econometrica 74, 1403-1417. Ballester C, A Calvó-Armengol and Y Zenou (2010), “Delinquent networks,” Journal of the European Economic Association 8, 34-61. Bayer P, R Hjalmarsson and D Pozen (2009), “Building criminal capital behind bars: Peer effects in juvenile corrections,” Quarterly Journal of Economics 124, 105-147. Liu, X, E Patacchini and Y Zenou (2013), “Peer Effects: Social Multiplier or Social Norms?”, CEPR Discussion Paper No. 9366. Liu, X, E Patacchini, Y Zenou and L-F Lee (2012), “Criminal networks: Who is the key player?” CEPR Discussion Paper No. 8772.
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Patacchini, E and Y Zenou (2012), “Juvenile delinquency and conformism,” Journal of Law, Economic, and Organization 28, 1-31. Sacerdote, B (2011), “Peer effects in education: How might they work, how big are they and how much do we know thus far?”, in E A Hanushek, S Machin and L Woessmann (eds.), Handbook of Economics of Education 3, Amsterdam: Elevier Science, 249-277. http://www.voxeu.org/article/social-multiplier-versus-social-norms-what-matters-most- outcomes
George Soros George Soros is Chairman of Soros Fund Management and Chairman of the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including The Alchemy of Finance and The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. Una solución europea para los problemas de la zona Euro 09 April 2013 El siguiente texto es una versión extendida del artículo de George Soros, titulado “La alternativa de Alemania”. Mi objetivo al acudir hoy aquí es el de examinar la crisis del euro. A la luz de los últimos acontecimientos, creo que convendrán ustedes conmigo en que la crisis dista de estar resuelta. Ya ha causado daños tremendos tanto financiera como políticamente y también se ha cobrado un enorme precio humano. Además, la crisis ha transformado a la Unión Europea en algo radicalmente distinto de lo que se había propuesto originalmente. La Unión Europea había de ser una asociación voluntaria de Estados iguales, pero la crisis la ha convertido en una prisión de deudores a cuyo mando están Alemania y otros acreedores y los países muy endeudados han quedado relegados a la condición de países de segunda clase. Aunque en teoría Alemania no puede dictar las políticas, en la práctica no se puede proponer política alguna sin obtener primero su permiso. Para colmo de males, la política de austeridad promovida por Alemania tiene el efecto de prolongar la crisis y perpetuar la subordinación de los países deudores. Así se han creado tensiones políticas, como lo demuestra la paralización política de Italia. Este país tiene ahora una mayoría opuesta al euro y es probable que esa tendencia se intensifique. Ahora existe un peligro real de que la crisis del euro acabe destruyendo a la Unión Europea. Una desintegración desordenada dejaría a Europa en una situación peor que cuando se inició el audaz experimento de la creación de una Unión Europea. Sería una tragedia de proporciones sin precedentes, pero sólo Alemania puede
112 prevenirla. Este país no se propuso ocupar una posición dominante y se ha mostrado renuente a aceptar las responsabilidades y obligaciones que entraña. Ésa es una de las razones por las que se ha producido la situación actual, pero, quiera o no, Alemania ocupa el asiento del conductor y ésa es la razón que me ha traído aquí. ¿Cómo acabó Europa metida en semejante embrollo? ¿Y cómo puede escapar de él? Ésas son las dos cuestiones que quiero abordar. La respuesta a la primera pregunta es extraordinariamente complicada, porque la crisis del euro es extremadamente compleja. Tiene una dimensión a un tiempo política y financiera y podemos dividir la dimensión financiera en al menos tres componentes: una crisis de la deuda soberana y una crisis bancaria, además de divergencias en competitividad. Los diversos aspectos están interconectados, por lo que los problemas resultan tan complicados, que parecen inconcebibles. En mi opinión, no se puede entender adecuadamente la crisis del euro sin comprender el papel fundamental que los errores y las ideas equivocadas han desempeñado en su creación. Se trata de una crisis casi enteramente autoinfligida. Tiene las características de una pesadilla. En cambio, la repuesta a la segunda pregunta es extraordinariamente sencilla. Una vez que hemos logrado una comprensión apropiada de los problemas, la solución se desprende por sí sola. Voy a sostener que corresponde a Alemania una gran parte de la responsabilidad por los errores normativos que han creado la crisis, pero quiero dejar claro de antemano que no acuso a Alemania. Quienquiera que hubiese estado al mando habría cometido errores similares. Puedo decir, por experiencia propia, que nadie podría haber entendido la situación en toda su complejidad en el momento en que se desarrolló. Comprendo que me arriesgo a granjearme la antipatía de ustedes al atribuir la responsabilidad a Alemania, pero sólo este país puede arreglar la situación. Soy un partidario convencido de la Unión Europea y no quiero verla destruida. También me preocupa el inmenso e innecesario sufrimiento humano que la crisis del euro está causando y quiero hacer todo lo que pueda para mitigarla. Mi interpretación de la crisis del euro es muy diferente de las opiniones que predominan en Alemania. Espero que, al ofrecer a ustedes una perspectiva diferente, consiga hacerlos revisar su posición antes de que se causen más daños. Ése es mi objetivo al acudir aquí. La Unión Europea fue un proyecto audaz que entusiasmó a muchos, incluido yo. Consideré la Unión Europea la encarnación de una sociedad abierta: una asociación voluntaria de Estados iguales que cedieron parte de su soberanía en pro del bien común. La Unión Europea tenía cinco Estados miembros grandes y varios pequeños y todos ellos subscribieron los principios de la democracia, la libertad individual, los derechos humanos y el Estado de derecho. Ninguna nación ni nacionalidad ocupaba una posición dominante. El proceso de integración fue encabezado por un pequeño grupo de estadistas con visión de futuro que reconocieron que la perfección es inalcanzable y practicaron lo que Karl Popper llamó ingeniería social fraccionada. Se fijaron objetivos limitados y plazos firmes y después movilizaron la voluntad política para dar un pequeño paso adelante, sabiendo perfectamente que, cuando lo lograran, su insuficiencia resultaría patente y requeriría otro paso. El proceso se alimentó de su propio éxito, de forma muy parecida a una sucesión de auge y caída en los mercados financieros. Así fue como la Comunidad del Carbón y del Acero se transformó gradualmente en la Unión Europea, paso a paso.
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Francia y Alemania estaban en la vanguardia de la operación. Cuando el imperio soviético empezó a desintegrarse, los dirigentes de Alemania comprendieron que la reunificación sólo era posible en el marco de una Europa más unida y estuvieron dispuestos a hacer considerables sacrificios para lograrla. A la hora de negociar, estuvieron dispuestos a hacer una contribución un poco mayor y recibir un poco menos que los demás, con lo que facilitaron el acuerdo. En aquel momento, los estadistas alemanes solían afirmar que Alemania no tenía una política exterior independiente, sino sólo europea, lo que propició una aceleración espectacular del proceso, que culminó con la reunificación de Alemania en 1990 y la firma del Tratado de Maastricht en 1992, a lo que siguió un período de consolidación que duró hasta la crisis financiera del período 2007-08. Lamentablemente, el Tratado de Maastricht tenía fallos fundamentales. Los arquitectos del euro reconocieron que era una construcción incompleta: una unión monetaria sin una unión política. Sin embargo, aquellos arquitectos tenían razones para creer que, cuando surgiera la necesidad, se podría movilizar la voluntad política para dar el siguiente paso hacia adelante. Al fin y al cabo, así había funcionado el proceso de integración hasta entonces. Pero el euro tenía muchos otros defectos, de los que ni los arquitectos ni los Estados miembros eran totalmente conscientes. Por ejemplo, en el Tratado de Maastricht se dio por sentado que sólo el sector público podía producir déficits crónicos, porque el sector privado siempre corregiría sus propios excesos. La crisis financiera del período 2007-08 demostró que se trataba de un error. Además, reveló un defecto casi fatal en la construcción del euro: al crear un banco central independiente, los países miembros se endeudaron en una divisa que no controlaban, lo que los expuso al riesgo de suspensión de pagos. Los países desarrollados no tienen motivo para suspender pagos; siempre pueden imprimir moneda. Su moneda puede depreciarse, pero el riesgo de suspensión de pagos es prácticamente inexistente. En cambio, los países menos desarrollados que deben endeudarse en una divisa extranjera corren el riesgo de suspensión de pagos. Para colmo de males, los mercados financieros pueden abocar, en realidad, a dichos países a la suspensión de pagos mediante operaciones bajistas que aumentan el costo del endeudamiento. El riesgo de suspensión de pagos relegó a algunos Estados miembros a la condición de los países del tercer mundo que llegaron a endeudarse excesivamente en una divisa extranjera. Antes de la crisis financiera del período 2007-08, tanto las autoridades como los mercados financieros pasaron por alto esa característica del euro. Cuando se introdujo éste, los bonos estatales estaban considerados carentes de riesgo. Los reguladores permitieron a los bancos comerciales comprar cantidades ilimitadas de bonos estatales sin dejar en reserva recursos propios y el Banco Central Europeo aceptó todos los bonos estatales en su ventanilla de descuentos en condiciones de igualdad, lo que creó un incentivo perverso para que los bancos comerciales acumularan los bonos de los países miembros más débiles, que pagaban tipos de interés mayores, para ganar algunos puntos básicos más. A consecuencia de ello, los diferenciales de los tipos de interés entre los diversos bonos estatales prácticamente desaparecieron. La convergencia de los tipos de interés causó una divergencia en los resultados económicos. Los llamados países periféricos –y muy en particular España e Irlanda– disfrutaron de unos auges de propiedad inmobiliaria, inversión y consumo que los volvió menos competitivos, mientras que Alemania, afectada por el costo de la
114 reunificación, emprendió reformas estructurales del mercado laboral y de otras índoles que la volvieron más competitiva. En la semana siguiente a la quiebra de Lehman Brothers, los mercados financieros mundiales cesaron, literalmente, de funcionar y hubo que someterlos a respiración asistida, lo que requirió la substitución del crédito de las entidades financieras, cuya posición estaba dañada, por el crédito soberano (en forma de garantías del Banco Central y déficits presupuestarios). La insistencia en el crédito soberano reveló la característica del euro hasta entonces pasada por alto, a saber, que, al crear un banco central independiente, los países miembros de la zona del euro cedieron parte de su condición soberana. Aquél debería haber sido el momento para dar el paso siguiente hacia la unión fiscal, además de la monetaria, pero faltó la voluntad política. Alemania, afectada por los costos de la reunificación, ya no estaba en la vanguardia de la integración. Cuando la Canciller Merkel declaró que cada país debía ocuparse de sus entidades financieras, en lugar de que lo hiciera la Unión Europea colectivamente, interpretó correctamente a la opinión pública. Fue un paso atrás. Retrospectivamente, fue el comienzo de un proceso de desintegración. Los mercados financieros tardaron más de un año en comprender las consecuencias de la declaración de la Canciller Merkel, con lo que demostraron que también ellos funcionan con un conocimiento no precisamente perfecto. Sólo al final de 2009, cuando se reveló la magnitud del déficit de Grecia, comprendieron dichos mercados que un país miembro podía suspender pagos en realidad, pero después los mercados aumentaron mucho más las primas de riesgo a los países más débiles, lo que volvió potencialmente insolventes los bancos comerciales cuyos balances estaban llenos de esos bonos y así se creó una deuda soberana y una crisis bancaria. Las dos cosas van unidas como gemelos siameses. Existe un claro paralelismo entre la crisis del euro y la crisis bancaria internacional de 1982. Entonces el FMI y las autoridades bancarias internacionales salvaron el sistema bancario internacional prestando exactamente el dinero suficiente a los países profundamente endeudados para que pudiesen evitar la suspensión de pagos, pero a costa de provocarles una depresión duradera. Latinoamérica sufrió la pérdida de un decenio. Actualmente Alemania está desempeñando el mismo papel que el FMI entonces. Las circunstancias difieren, pero el efecto es el mismo. Los acreedores están haciendo recaer, en realidad, todo el peso del ajuste sobre los países deudores y eludiendo su responsabilidad por los desequilibrios. Resulta interesante que se haya generalizado el uso de los términos “centro” y “periferia” casi inadvertidamente, pese a que en términos políticos resulta, evidentemente, inapropiado calificar a Italia y a España de países periféricos de la Unión Europea. Sin embargo, el euro había convertido, en realidad, sus bonos estatales en bonos de países del Tercer Mundo que corren el riesgo de suspensión de pagos. Retrospectivamente, ésa fue la verdadera causa de la crisis del euro. Exactamente como en el decenio de 1980, toda la culpa y la carga recayó sobre la “periferia” y nunca se ha reconocido adecuadamente la responsabilidad del “centro”. Se critica a los países periféricos por su falta de disciplina fiscal y de ética del trabajo, pero hay algo más que eso. Cierto es que los países periféricos deben hacer reformas estructurales, exactamente como hizo Alemania después de la reunificación, pero negar que el euro mismo tiene algunos problemas estructurales que se deben corregir es pasar por alto la verdadera causa de su crisis. Sin embargo, eso es lo que está ocurriendo. 115
En ese marco, la palabra alemana Schuld desempeña un papel revelador. Como ustedes saben, significa a un tiempo “deuda” y “responsabilidad” o “culpa”. Por eso, ha resultado natural o selbstverständlich” a la opinión pública alemana culpar a los países profundamente endeudados de su desgracia. El hecho de que Grecia violara las reglas manifiestamente ha contribuido a reforzar esa actitud, pero otros países, como España e Irlanda, habían cumplido las reglas; de hecho, a España se la consideraba un dechado de virtud. Está claro que los fallos son sistémicos y la causa de las desgracias de los países muy endeudados son en gran medida las reglas que rigen el euro. Eso es lo que quiero hacer ver claramente hoy. En mi opinión, la Schuld o responsabilidad del “centro” es incluso mayor hoy que en la crisis bancaria de 1982. Puede que en 1982 fuera políticamente aceptable infligir la austeridad a los países menos desarrollados para salvar el sistema financiero internacional, pero hacer lo mismo con la zona del euro actualmente resulta inconciliable con la Unión Europea como asociación voluntaria de Estados iguales. Existe un conflicto no resuelto entre lo que dicta la necesidad financiera y lo políticamente aceptable. Eso es lo que han revelado las recientes elecciones italianas y se debería haber comprendido. La carga de la responsabilidad recae principalmente sobre Alemania. El Bundesbank contribuyó a la formulación del proyecto del euro, cuyos defectos han colocado a Alemania en el asiento del conductor. A consecuencia de ello, se han creado dos problemas. Uno es político; el otro, financiero. Lo que ha vuelto la situación tan insostenible ha sido la combinación de los dos. El problema político estriba en que Alemania no se había propuesto conseguir esa posición dominante en la que se ha visto situada y no está dispuesta a aceptar las obligaciones y responsabilidades que entraña. Como es comprensible, Alemania no quiere ser el “bolsillo sin fondo” para el euro. Así, pues, concede tan sólo el apoyo suficiente para evitar la suspensión de pagos, pero nada más, y, en cuanto remite la presión de los mercados, procura endurecer las condiciones con las que se concede el apoyo. El problema financiero estriba en que Alemania está imponiendo políticas erróneas a la zona del euro. La austeridad no funciona. No se puede reducir la carga de la deuda reduciendo el déficit presupuestario. La carga de la deuda es un coeficiente entre la deuda acumulada y el PIB, ambos expresados en términos nominales, y en condiciones de demanda insuficiente los recortes presupuestarios causan una reducción desproporcionada del PIB: dicho técnicamente, el llamado multiplicador fiscal es mayor que uno. Al público alemán le resulta difícil entenderlo. Las reformas fiscal y estructural emprendidas por el gobierno de Schroeder funcionaron en 2006; ¿por qué no habrían de funcionar en la zona del euro unos años después? La respuesta es la de que la austeridad funciona aumentando las exportaciones y reduciendo las importaciones. Cuando todo el mundo hace la misma cosa, no funciona, sencillamente. La crisis del euro alcanzó su punto culminante el verano pasado. Los mercados financieros empezaron a anticiparse a una posible ruptura y las primas de riesgo alcanzaron niveles insostenibles. Como último recurso, la Canciller Merkel respaldó al Presidente del Banco Central Europeo, Mario Draghi, frente a su propio candidato, Jens Weidmann. Draghi estuvo a la altura de las circunstancias. Declaró que el BCE haría “lo que [fuera] necesario” para proteger el euro y lo respaldó con la introducción de las llamadas “transacciones de mercado abierto”. Los mercados financieros se 116 tranquilizaron y gracias a ese alivio empezaron a subir mucho, pero el júbilo era prematuro. En cuanto remitió la presión de los mercados financieros, Alemania empezó a escatimar en cuanto a las promesas que había hecho en el punto culminante de la crisis. En el rescate de Chipre, Alemania fue demasiado lejos. Para reducir al mínimo el costo del rescate, insistió en que los depositantes de los bancos participaran en el rescate. Se trataba de una medida prematura. Si hubiera ocurrido después de la creación de una unión bancaria y de que se hubiesen recapitalizado los bancos, podría haber sido una iniciativa oportuna, pero se produjo en un momento en el que el sistema bancario estaba retirándose a los silos nacionales y seguía muy vulnerable. Lo que ocurrió en Chipre socavó el modelo de negocio de los bancos europeos, que depende en gran medida de los depósitos. Hasta ahora, las autoridades se habían desvivido para proteger a los depositantes. Lo sucedido en Chipre ha entrañado un cambio a ese respecto. Se ha centrado la atención en las repercusiones del rescate en Chipre, pero las repercusiones en el sistema bancario son mucho más importantes. Los bancos van a tener que pagar primas de riesgo que recaerán más duramente sobre los bancos más débiles y los bancos de los países más débiles. Así se reforzará la insidiosa vinculación entre el costo de la deuda soberana y la deuda bancaria. El terreno de juego llegará a ser incluso menos igual para todos que antes. A la Canciller Merkel le habría gustado congelar la crisis del euro al menos hasta después de las elecciones, pero ya ha vuelto con fuerza. El público alemán puede no estar al corriente de ello, porque lo sucedido en Chipre fue una victoria política tremenda para la Canciller Merkel. Ningún país se atreverá a llevarle la contraria. Además, la propia Alemania sigue sin verse gravemente afectada por la depresión cada vez más profunda que está envolviendo a Europa. Sin embargo, preveo que en el momento de las elecciones Alemania estará también en recesión. Se debe a que la política monetaria aplicada por la zona del euro no está en sintonía con las otras divisas importantes. Los otros están dedicados a la relajación cuantitativa. El Banco del Japón fue el último que se resistió, pero recientemente ha cambiado de bando. Un yen más débil, combinado con la debilidad de Europa, ha de afectar por fuerza a las exportaciones de Alemania. Si mi análisis es correcto, hay una solución muy sencilla. Se puede resumir en una palabra: eurobonos. Los eurobonos son las obligaciones conjuntas de todos los Estados miembros. Si se permitiera a los países que cumplen el Pacto Fiscal convertir todo el volumen de su deuda estatal en eurobonos, las repercusiones positivas serían poco menos que milagrosas. El peligro de suspensión de pagos desaparecería y también las primas de riesgo. Los balances de los bancos recibirían un impulso de inmediato, como también los presupuestos de los países profundamente endeudados, porque les costaría menos que el servicio de la deuda estatal existente. Italia, por ejemplo, se ahorraría hasta el cuatro por ciento de su PIB. Su presupuesto pasaría a tener superávit y, en lugar de austeridad, el Gobierno podría aplicar un estimulo fiscal. La economía crecería y la proporción de deuda disminuiría. La mayoría de los problemas aparentemente arduos se esfumarían. Sólo las divergencias en competitividad seguirían irresueltas. Los países seguirían necesitando reformas estructurales, pero el principal defecto estructural del euro quedaría corregido. Sería en verdad como despertar de una pesadilla.
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Para evitar cualquier malentendido, lo que propongo es la conversión del volumen existente de bonos estatales en eurobonos, no el plan de rescate presentado por el Consejo de Asesores Económicos de la Canciller. Así funcionaría mi propuesta. La zona del euro crearía una Autoridad Fiscal que estaría encargada de la emisión de eurobonos. Su Junta Ejecutiva estaría compuesta por los ministros de Hacienda y tendría un Presidente independiente elegido por la Junta Ejecutiva. La votación sería ponderada con arreglo al PIB de cada uno de los países. A los países que violaran el Pacto Fiscal no se les permitiría ejercer el voto. A los que lo cumpliesen se les permitiría convertir su deuda nacional en eurobonos, pero no se los obligaría a hacerlo. De conformidad con el Pacto Fiscal, se les permitiría emitir nuevos bonos y letras del Tesoro para substituir los que llegaran a su vencimiento, pero nada más; al cabo de cinco años, la deuda pendiente se reduciría gradualmente al 60 por ciento del PIB. Si un país dejara de cumplir, la Autoridad Fiscal lo sancionaría limitando la cantidad de eurobonos que se le permitiría emitir; tendría que pedir prestado el monto de su saldo por cuenta propia y pagar primas de riesgo muy onerosas. Alemania se opone a los eurobonos con el argumento de que, una vez que se introduzcan, no puede haber seguridad de que los llamados países periféricos no violarían las reglas una vez más. Creo que esos temores están fuera de lugar. Perder el privilegio de emitir eurobonos y tener que pagar primas de riesgo onerosas sería un incentivo poderoso para cumplir. De hecho, la sanción sería tan dura, que las reglas deberían establecer que se aplicara en pequeñas dosis para no agravar demasiado abruptamente la situación financiera del país infractor. Al mismo tiempo, la Autoridad Fiscal ejercería controles más estrictos y la desobediencia sería sancionada con nuevas reducciones de la cantidad de eurobonos que se permitiría emitir. Ningún gobierno podría resistir semejante presión. También existen temores generalizados de que los eurobonos arruinarían la calificación crediticia de Alemania. Con frecuencia se comparan los eurobonos con el Plan Marshall. El argumento consiste en que el Plan Marshall sólo costó unos pocos puntos porcentuales del PIB de los Estados Unidos, mientras que los eurobonos costarían un múltiplo del PIB de Alemania. Ese argumento equivale a comparar manzanas con naranjas. El Plan Marshall fue un gasto real, mientras que los eurobonos entrañarían una garantía a la que nunca se recurriría. Se ha exagerado enormemente el costo para Alemania de la aceptación de los eurobonos. Las garantías tienen un carácter curioso: cuanto más convincentes son, menos probable es que se recurra a ellas. Los Estados Unidos nunca tuvieron que saldar la deuda que contrajeron cuando convirtieron la deuda de sus estados en obligaciones federales. Alemania ha estado dispuesta a hacer sólo el mínimo; ésa es la razón por la que ha tenido que seguir incrementando sus compromisos y está padeciendo pérdidas reales. El Pacto Fiscal, respaldado por una Autoridad Fiscal que funcionara bien, eliminaría prácticamente el riesgo de suspensión de pagos. Los eurobonos resultarían mejores que los bonos de los EE.UU., del Reino Unido y del Japón en los mercados financieros. Es cierto que Alemania debería pagar más por su propia deuda que ahora, pero el rendimiento excepcionalmente bajo de los Bunds alemanes es un síntoma de la enfermedad que padece la periferia. El beneficio indirecto que Alemania obtendría de la recuperación de la periferia superaría con mucho el costo suplementario para su deuda nacional. Desde luego, los eurobonos no son una panacea. En primer lugar, el propio Pacto Fiscal es un instrumento mal concebido. La introducción de los eurobonos daría a la zona del
118 euro un impulso, pero podría no ser suficiente. En ese caso, sería necesario algún estímulo fiscal o monetario suplementario, pero tener ese problema sería un lujo. En segundo lugar, la Unión Europea necesita también una unión bancaria y con el tiempo una unión política. El rescate de Chipre ha agudizado esas necesidades, pero la introducción de los eurobonos sería un paso en la dirección correcta. Al aceptarlos, Alemania cambiaría totalmente la atmósfera política y prepararía el terreno para las medidas suplementarias. La deficiencia más profunda de los eurobonos es la de que no eliminarían las divergencias en competitividad. Los países seguirían teniendo que emprender reformas estructurales. Los que no lo hicieran se convertirían en bolsas permanentes de pobreza y dependencia similares a las que persisten en muchos países ricos. Sobrevivirían con un apoyo limitado de los Fondos Estructurales europeos y las remesas, pero las reformas funcionan mejor cuando los socios comerciales son prósperos que en condiciones de declive generalizado. Los eurobonos ofrecen un ambiente prometedor para las reformas estructurales que también son necesarias. El caso es que la gran mayoría del público alemán se opone rotundamente a los eurobonos. Desde que la Canciller Merkel los vetó, ni siquiera se han examinado los argumentos que he expuesto aquí. Así es como ideas equivocadas pueden arraigar en la opinión pública. Corresponde a Alemania decidir si está dispuesta a autorizar los eurobonos o no, pero no tiene derecho a impedir que los países enormemente endeudados se libren de su desdicha uniéndose y emitiendo eurobonos. Dicho de otro modo, si Alemania se opone a los eurobonos, debería examinar la posibilidad de abandonar el euro y dejar que los demás los introduzcan. Esa operación daría un resultado sorprendente: los eurobonos emitidos por una zona del euro que excluyera a Alemania seguirían siendo mejores que los bonos de los EE.UU., del Reino Unido y del Japón. La deuda neta de esos tres países como proporción del PIB es en realidad superior a la de la zona del euro, excluida Alemania. Se puede explicar ese resultado sorprendente comparando las consecuencias del abandono del euro por Alemania con las que tendría el de un país profundamente endeudado, como Italia. Como toda la deuda acumulada está denominada en euros, la diferencia estribaría en cuál fuera el país que se quedara al mando del euro. Si saliera Alemania, el euro se despreciaría. Los países deudores recuperarían su competitividad. Su deuda disminuiría en términos reales y, si emitieran eurobonos, la amenaza de suspensión de pagos desaparecería. Su deuda se volvería de repente sostenible. La mayor parte de la carga del ajuste recaería en los países que abandonaran el euro. Sus exportaciones resultarían menos competitivas y se toparían con una dura competencia de la zona del euro en sus mercados internos. Además, sufrirían pérdidas en sus créditos e inversiones denominados en euros. La magnitud de sus pérdidas dependería del grado de la depreciación; así, pues, tendrían interés en mantener la depreciación dentro de unos límites. Después de las dislocaciones iniciales, el resultado final haría realidad el sueño de John Maynard Keynes de un sistema monetario internacional en el que tanto los acreedores como los deudores compartan el deber de mantener la estabilidad y Europa se libraría de la depresión que se cierne. En cambio, si saliera Italia, la carga de su deuda denominada en euros resultaría insostenible y habría que reestructurarla. Con ello el resto de Europa y el resto del
119 mundo se sumiría en un colapso financiero, que podría muy bien superar la capacidad de las autoridades monetarias para contenerlo. El desplome del euro provocaría probablemente la desintegración desordenada de la Unión Europea y Europa se encontraría en una situación económica peor que cuando se lanzó al noble experimento de crear la Unión Europea. Evidentemente, sería mejor que saliera Alemania, en lugar de Italia, y, de forma igualmente evidente, sería mejor que Alemania aceptara los eurobonos, en lugar de abandonar el euro. El problema es que Alemania no ha tenido que elegir y cuenta con otra opción: puede continuar con el rumbo actual, haciendo siempre lo mínimo para preservar el euro, pero nada más. Si mi análisis es correcto, ésa no es la mejor opción ni siquiera para Alemania, excepto a muy corto plazo. La situación está deteriorándose y tarde o temprano ha de llegar a ser por fuerza insostenible. Cuanto más tarde, mayor será el daño. No obstante, ésa es la opción que Alemania prefiere, al menos hasta después de las elecciones. Existen razones poderosas para que Alemania se incline definitivamente por una opción, ya sea la de aceptar los eurobonos o la de abandonar el euro. Eso es lo que he venido a sostener aquí. He reflexionado larga y profundamente sobre si debía exponer mi argumentación ahora o esperar hasta después de las elecciones. Al final, he decidido seguir adelante, basándome en dos consideraciones. Una es la de que los acontecimientos tienen su propia dinámica y es probable que la crisis se agudice incluso antes de las elecciones. El rescate de Chipre me ha dado la razón. La otra es la de que mi interpretación de los acontecimientos es tan radicalmente distinta de la que prevalece en Alemanía, que tardará en calar y cuanto antes comience yo, mejor. Permítaseme resumir mi argumento. Sostengo que Europa tendría una situación mejor, si Alemania decidiera entre los eurobonos o la salida, que si continuara con su rumbo actual de hacer lo mínimo para mantener el euro, cosa que es válida tanto si Alemania aceptara los eurobonos como si decidiese abandonar el euro y lo es no sólo para Europa, sino también para Alemania, excepto a muy corto plazo. Lo que está menos claro es cuál de las dos opciones es mejor para Alemania. Sólo el electorado alemán tiene la posibilidad de decidir. Si se convocara un referéndum en este momento, los euroescépticos vencerían rotundamente, pero un examen más detenido podría cambiar la opinión de los ciudadanos. Descubrirían que se ha exagerado mucho el costo de la autorización de los eurobonos por Alemania y se ha minimizado el del abandono del euro. Si he de exponer mi propia opinión, mi primera preferencia son los eurobonos; la segunda es que Alemania abandone el euro. Cualquiera de las dos opciones es infinitamente mejor que no elegir y perpetuar la crisis. Lo peor de todo sería que un país deudor, como Italia, abandonara el euro, porque provocaría una disolución desordenada de la Unión Europea. He hecho algunas afirmaciones sorprendentes: en particular, la del buen resultado que podrían dar los eurobonos incluso sin Alemania. Mis amigos proeuropeos no pueden creerlo, sencillamente. No pueden imaginar un euro sin Alemania. Creo que confunden el euro con la Unión Europea. No son dos cosas idénticas. La Unión Europea es el objetivo y el euro es un medio para conseguirlo. Así, pues, no se debe permitir que el euro destruya a la Unión Europea.
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Pero puede que yo me esté mostrando demasiado racional en mi análisis. Se confunde a la Unión Europea con el euro no sólo en los relatos populares, sino también en la legislación, En consecuencia, puede que la Unión Europea no sobreviva a la salida del euro por parte de Alemania. En ese caso, todos debemos hacer todo lo posible para persuadir al público alemán de que abandone algunos de sus prejuicios e ideas erróneas más arraigados y acepte los eurobonos. Quisiera terminar subrayando lo importante que es la Unión Europea y no sólo para Europa, sino también para el mundo. La UE había de ser la encarnación de los principios de la sociedad abierta. Eso significa que el conocimiento perfecto es inalcanzable. Nadie está libre de prejuicios e ideas erróneas; no se debe culpar a nadie por haber cometido errores. La culpa o Shuld comienza sólo cuando se descubre un error o una idea errónea, pero no se corrige, es decir, cuando se traicionan los principios conforme a los cuales se constituyó la Unión Europea. Por esa razón, Alemania debería aceptar los eurobonos y salvar a la Unión Europea. This article is available online at: http://www.project-syndicate.org/commentary/a-european-solution-to-the-eurozone-s- problem/spanish The Telegraph Margaret Thatcher: how the papers covered her death The Telegraph takes a look at how British and world newspapers covered the death of Margaret Thatcher.
How the papers covered Margaret Thatcher's death
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By Alice Philipson, Andrew Hough, and Our Foreign Staff 6:00AM BST 09 Apr 2013 Margaret Thatcher: coverage in full Margaret Thatcher obituary Margaret Thatcher dies: latest reaction The Daily Mail remembers Mrs Thatcher as the "the woman who saved Britain", using a quote from David Cameron, in a "special tribute edition" containing 25 pages of news and a 12-page "souvenir pullout". It begins its coverage with a story by James Chapman and Tim Shipman calling for her to be given a state funeral: Related Articles • Thatcher's Right To Buy: a history 09 Apr 2013 • Carol Thatcher to be accompanied by 'on-off' boyfriend at Baroness Thatcher's funeral 09 Apr 2013 • Taiwan TV sorry for Thatcher-Queen mix-up 09 Apr 2013 • Thatcher scored a political own goal with her attitude to football 09 Apr 2013 • Falklands: doubts and fears in far-off conflict that changed Britain 08 Apr 2013 • Thatcher tributes from Westminster and beyond 08 Apr 2013 Allies of Britain's greatest peacetime prime minister expressed disappointment last night that she will not be given a full state funeral. Baroness Thatcher, the first and only woman voted into Number Ten, died peacefully yesterday at the age of 87 after the latest in a series of strokes. Friends and foes alike described her as the most dominant political figure to emerge in Britain since Sir Winston Churchill - the last commoner to be honoured with a state funeral in 1965." Its leader argues that "nothing less than a state funeral will do". It can be said of very few people that their existence on this Earth made a difference. But that claim can be made with absolute certainty for the great British stateswoman who died yesterday. Indeed, Margaret Thatcher changed the landscape of politics, at home and around the world, in ways that reverberate to this day. She was a giant, beside whom other peacetime politicians of the 20th and 21st centuries look like mere pygmies." It concluded:
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True, the Coalition plans a splendid send-off for Lady Thatcher. But for the woman who saved the country she loved and fought for so tirelessly, and who redefined global politics, this paper believes nothing less than a full state funeral will suffice." Columnist Richard Littlejohn said her beliefs are still as relevant today as they were 20 years ago. She was of the firm conviction that society is the sum of its parts — individuals, families, churches, voluntary organisations, businesses. It was her belief that people expected too much from government, concentrated too much on their ‘rights’ and ‘entitlements’ and not enough on their obligations. We all have a duty to help ourselves and our neighbours. Hers was a vision of a liberated, bottom-up society, not the bureaucratic top-down version favoured by Socialists. It is especially relevant to today’s ferocious debate over welfare — safety net versus cradle-to-grave lifestyle option." The Times revisits its popular wrap-around picture of Mrs Thatcher on an official visit to Moscow in 1987. On the inside it has a graphic map detailing the "long road from Grantham". It highlights one of her most famous quotes on being elected Prime Minister: Where there is discord, may we bring harmony. Where there is error, may we bring truth. Where there is doubt, may we bring faith. And where there is despair, may we bring hope. Inside, its splash was headlined "The first lady" under a picture of the former Prime Minister at a Tory party conference. Ben Macintyre reports that "her legacy will live on" (£). The death of Baroness Thatcher yesterday prompted an outpouring of admiration, some criticism, and a fresh debate over her legacy. Britain began to assess the foremost peacetime politician of the 20th century, a woman who transformed life in this country, profoundly, permanently and through sheer force of personality. Lady Thatcher will have a ceremonial funeral at St Paul’s Cathedral with full military honours, the same status accorded to Queen Elizabeth the Queen Mother. It may be no coincidence that the thanksgiving service for victory in the Falklands war, her defining moment, was held at the cathedral. The funeral, to be held next week, will be followed by a private cremation." The paper argues in its full-page editorial that Baroness Thatcher was a "woman of simple truths", who "came to power at the end of a decade in which Britain had lost confidence in itself. On the big issues of her time, she made the right choices". It concluded: Mrs Thatcher was a dominant political figure, the greatest, by far, of her time. And as for her words that day, those long years ago, outside No 10, she did indeed make Britain less discordant, less doubting, more optimistic. Where there
123 was despair, she brought hope." Columnist and former Conservative politician Matthew Paris writes that Baroness Thatcher was "worshipped and admired by many, but loved by few" (£). He writes: There is History with a capital H, and there is curiosity. The grander kind of history asks what Margaret Thatcher did. The more gossipy kind asks what she was like. Both matter. I was better placed (though from no great elevation or intimacy) to observe her as an individual. Mrs Thatcher became my boss not long after she had become Leader of the Opposition. I worked as a correspondence clerk in her office until she became Prime Minister. After 1979, as a new backbench Tory MP and part of her governing party, I watched her lead the Government." He adds: My own view is that during her time in office she burnt herself out, physically and mentally. Men often forget that a woman may be wearing make-up. Mrs T was brilliantly efficient at making herself look good, and insistent on the importance of appearance at all times." The Guardian splashes an epitaph written by the late Thatcher biographer Hugo Young, who died in 2003 under the headline "She became harder than hard": He wrote just days before his own death: The first time I met Margaret Thatcher, I swear she was wearing gloves. But without any question, sitting behind her desk, she was wearing a hat. He went on: Thatcher became a supremely self-confident leader. No gloves, or hats, except for royalty or at funerals, but feet on the table, whisky glass at hand, into the small hours of solitude, for want of male cronies in the masculine world she dominated for all her 11 years in power." Its main news story across the first two pages reports that "Parliament has been recalled from recess to mark death of Lady Thatcher". Lady Thatcher, Britain's first female prime minister and among the most influential and divisive political leaders the country has ever seen, died on Monday at the age of 87 after suffering a severe stroke. The former Conservative leader had been in ill health for more than a decade, and was staying in a suite at the Ritz hotel in London while recuperating from a minor operation." In its editorial, the paper looks at "the lady and the land she leaves behind". It argued: Whether you were for her or against her, Margaret Thatcher set the agenda for the past three and a half decades of British politics. All the debates that matter today in the public arena, whether in economics, social policy, politics, the law, the national culture or this country's relations with the rest of the world, still bear something of the imprint she left on them in her years in office between 1979 and 1990.
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More than 20 years after her party disposed of her when she had become an electoral liability, British public life is still defined to an extraordinary degree by the argument between those who wish to continue or refine what she started and those who want to mitigate or turn it back. Just as in life she shaped the past 30 years, so in death she may well continue to shape the next 30. These are claims that can be made about no other modern British prime minister. She was in many ways the most formidable peacetime leader this country has had since Gladstone." The Independent splashes with a picture of Mrs Thatcher during her early years as Prime Minister under the headline "the woman who changed Britain". Across the first two inside pages Andreas Whittam Smith wrote that "for better or worse, Baroness Thatcher remade our nation". She was one of the two great prime ministers that the United Kingdom has had since the Second World War. The first was the Labour Party leader, Clement Attlee (1945 to 1951). The Conservative Party broadly accepted what Attlee had done until Mrs Thatcher (as she then was) challenged the post-war settlement. Attlee had founded the welfare state, created the National Health Service and nationalised major industries and public utilities. The NHS remained inviolate but one of Mrs Thatcher’s first actions as Prime Minister in 1979 was to give council tenants the right to buy their council houses at a discount. Over a million were sold before she left office. And denationalisation, or “privatisation” as Mrs Thatcher called it, was one of the most prominent aspects of her period in 10 Downing Street. Indeed we largely live in Thatcher’s Britain." He adds: Not many prime ministers remain in people’s minds long after they have stepped down. Lady Thatcher was one, even becoming a character in plays and films. Only Winston Churchill exceeds her in stage and broadcast impersonation. Fewer still have been the British prime ministers who have given their name to a political philosophy. The only other example since the war is “Blairism”, but what is that, other than a skill in political marketing? Its only followers are, bizarrely, the present Prime Minister and a handful of those close to him. To this day, “Thatcherism” is used all over the world to describe a brisk, unsentimental pull-yourself-up-by-your- bootstraps approach. It can indicate political obstinacy. It has also become synonymous with “cuts”. In the era of 24 hours news and social media, the newspaper publishes a piece by Tom Sutcliffe asking: "So where were you when you heard Lady Thatcher had died? Lady who?" It publishes a series of screen grabs from news channels and news programmes with them all carying the "breaking news" strap. Sutcliffe wrote: This wasn’t, like 9/11, one of those events that take news organisations completely unaware, and it showed. The instant reaction and off-the-cuff eulogies were held together with packages and profiles that had been sitting ready
125 for this moment. But there was a sense that a significant chapter of British, even world history, was being closed, and that the schedules should buckle to acknowledge it." "Maggie Dead in Bed at Ritz", says The Sun in its splash. It also publishes three bullet points: Stroke kills former Prime Minister at age of 87/ She died at 11.28am as she read/ Funeral next week to be like Diana's. It starts its "24 page "Iron Lady" tribute with a spread by political editor Tom Newton- Dunn in which friends suggested her death was a "a good way to go”. Its editorial pays tribute to a "unique PM of great courage". It says: So how will The Sun remember Margaret Thatcher, the greatest peacetime Prime Minister in our history? For her courage. The Iron Lady had principles and stuck to them. And what principles they were. Personal freedom. Self reliance. Strong defences. Low taxes. No union tyranny. No nanny state. No EU meddling. She helped end the Cold War. She defied IRA assassins and she won the Falklands back. Above all, in the teeth of bitter hostility, she saved Britain from ruin at the hands of union wreckers and transformed the economy. She won three general elections, backed by millions of Sun readers. Indeed, isn't her clarity of purpose what voters cry out for today? Not for Maggie the wishy-washy fudging of minnows like Dave, Nick and Ed." Fellow "red top" and rival newspaper The Daily Mirror splashes with a picture of Lady Thatcher looking serious under the headline "The woman who divided a nation". It asks whether Baroness Thatcher should be given a ceremonial funeral: The tribute is expected to cost up to £8million and is the biggest of its kind for a politician since Sir Winston Churchill’s state funeral in 1965. Many are furious controversial Thatcher is getting such a grand honour, especially as the taxpayer is likely to bear the brunt of the bill. Critics quickly took to Twitter, with #nostatefuneral one of the top UK trends and an e-petition quickly gaining thousands of signatures." The Financial Times splashes a piece by Martin Wolf under the headline Thatcher: the great transformer. He wrote: Margaret Thatcher was the most important peacetime prime minister of the UK since the late 19th century. She transformed the Conservative party and British politics, by overturning the ruling assumptions about the relationship between the state and the market. Britain's only female leader was also a towering figure on the global stage. Her passionate convictions and close ideological connection with Ronald Reagan helped give her a role in the world unlikely ever again to be occupied by a British politician." He added: True believers view her as a Saint Joan of free markets, dedicated to rolling back the state in all its dimensions. In reality, however, Thatcher was a pragmatic politician who showed little interest in embarking on politically suicidal attempts 126 to demolish pillars of the welfare state, such as the National Health Service. Under her governments, public spending never fell below 39 per cent of gross domestic product. Nevertheless, hers was a transformational premiership." The Wall Street Journal's Europe Edition splashes with the headline "Britain loses its Iron Lady". Alistair Macdonald wrote: Margaret Thatcher, the former British prime minister who became one of the most influential global leaders of the postwar period, died on Monday, three decades after her championing of free-market economics and individual choice transformed Britain’s economy and her vigorous foreign policy played a key role in the end of the Cold War. Mrs Thatcher, who grew up in an apartment without hot water above her father’s grocery store in Grantham, eastern England, went on to become Britain’s first female prime minister and arguably the country’s most dominant political figure since Winston Churchill. She was a key ally and close friend of former President Ronald Reagan, sharing with him a view on free-market, monetarist solutions to the economic problems of the day, as well as an uncompromising stance on how to handle the former Soviet Union, earning her the nickname the Iron Lady. The Scotsman draws up on Mrs Thatcher's own words to sum up her Scottish legacy: "economically positive but politically negative". It goes on to say: The positive aspect of Lady Thatcher’s balance sheet was undoubtedly true. At the beginning of her premiership, the Scottish economy lagged behind that of England, but 11 years later it was in harmony with its southern neighbour, and even a little ahead. But she was genuinely mystified by her political failure north of the Border. It probably didn’t bother her personally, but as a Conservative imbued with Disraelian notions of “One Nation”, it concerned her politically. Yet her legacy, however lopsided, persists, in the language, policy and most importantly the assumptions of a devolved nation, a legacy that will – most ironically – likely persist even in an independent Scotland. The Evening Times in Glasgow wrote that Lady Thatcher was "loved and hated in equal measure throughout Britain".
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It added: As her popularity in Conservative strongholds in the south of England increased with election victories in 1979, 1983 and 1987, in parallel her reputation in Scotland worsened and here she became one of the most despised politicians of the modern age. There will be no national show of grief, civic sentimentality or spontaneous public floral tributes here for a woman whose very name being mentioned can still get the blood of many a Glaswegian boiling … even more than 20 years after leaving office. Her premiership saw the decline of heavy industry and factory closures in Glasgow and elsewhere leading to mass unemployment in communities and a spiralling of associated problems such as debt, alcoholism and drug abuse. Battles with unions, with nurses, teachers and most notably the miners going on strike provided defining social images of the 80s. Around the globe, the world's media also devoted large amounts of space to the former Prime Minister's death.
Our Brussels correspondent Bruno Waterfield reports that in devoting six pages to the self-declared political enemy of Socialism, Libération is unforgiving about her political legacy and her approach, defined by the newspaper’s editorial as “the famous Tina: ‘There is no alternative’.” Splashing with the headline The Grim Reaper: Libé, the French Socialist newspaper, is strident in its disapproval of Lady Thatcher, who is described as an “ultra”, a word meaning “extreme reactionary” in the bestiary of the French Left. “At the head of Britain from 1979 to 1990, the Iron Lady profoundly transformed her country, violently applying a liberal doctrine, paid dearly by the population,” the newspaper concludes. The miners, Argentines, Irish hunger strikers were the victims of her unwavering convictions. She lifted the limits of nationalism and chauvinism and anti- European xenophobia,” the newspaper opines in a page 2 editorial. In economics, she imposed her vision of society to her party and her country before pollinating the world, including Reagan's America, but also the European left. Blair is as much a child of Thatcher as a cowboy from California… The crisis of the 2000s is also a crisis of Thatcherism that her henchmen carried to extremes.” Le Figaro splashed its newspaper with the headline: Margaret Thatcher, courage to power The newspaper of the French Right is as glowing in its appreciation of Lady Thatcher as its Left-wing rival Libération is damning, Bruno writes. The divide highlights the enduring power of Thatcherism to divide France, a country that has yet to carry out many of the economic reforms, privatisation, political confrontation with the trade unions that the Conservative leader was famous for. The newspaper declares in a comment article: France needs a Margaret Thatcher A large part of the elite
128 does not want it. However, it will come because of full international competition in social, fiscal and regulatory models. It is not an option. It is an obligation, if France wants to continue living.” Les Echos has a headline "Margaret Thatcher the indomitable".1 The newspaper of business in France expresses admiration for Lady Thatcher but like many in the French elite there are also reservations and the downside or limits to her politics is also noted. She privatised many of the state business and services, with the exception of railways, which was John Major, and the Post Office. The result has not been an increase in competition, public monopolies becoming private monopolies. However by adopting the methods of the private sector, they have become more flexible. Simultaneously, the British have become a nation of shareholders, encouraged by taxation and privatisation of supplementary pensions,” the paper notes in an assessment of her economic record. “On the other hand, public investments were sacrificed and the gap between rich and poor increased.” Every major Italian daily newspaper has the death of Baroness Thatcher on their front page, reports Nick Squires.
Il Giornale, a centre-Right daily owned by Silvio Berlusconi's family, described the former Prime Minister as "the daughter of a grocer" who went on to become "the enemy of the unions". The paper dedicates three pages to the life of the former Tory leader, complete with photos of her famous black handbag and pictures of her "adored husband", Denis. "The handbag became legendary", the paper said. "The term 'handbagging' entered British vocabulary, meaning attacking someone verbally." Il Giornale, a centre-Right daily owned by Silvio Berlusconi's family has the death of Margaret Thatcher on its front page (Picture: NICK SQUIRES) The centre-Left La Repubblica described Baroness Thatcher as "the Iron Lady who changed Britain". The paper devotes five pages to examining the life and legacy of Britain's first woman Prime Minister. "For her hyper-liberal ideas she was both loved and hated, both at home and in the world," the paper says in an editorial.
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She had "humiliated" and weakened the once-powerful unions with "an iron fist". "Politics was her life, deregulation her faith," La Repubblica says. A gallery of archive photos recalled the IRA hunger strikes, the retaking of the Falkland Islands, the Brighton bombing and the Poll Tax riots. Corriere della Sera has four pages of coverage on Baroness Thatcher, celebrating what it calls "the ambitions and the glory of Maggie", with pictures of her dancing with Ronald Reagan and commanding a British tank. As Mrs Thatcher, she "challenged the establishment and changed a country", the top- selling newspaper said, describing her as "a British icon". Her decision to send a taskforce to the South Atlantic to retake the Falkland Islands from Argentina was "absurd and heroic". The windswept islands were, for the British, "the remnants of a fallen empire, the memory of past greatness". But Romano Prodi, a former European Commission president and centre-left prime minister of Italy, wrote in business daily Il Sole 24 Ore that Thatcher's ideas helped pave the way for the global financial crisis. "Thatcher reduced the state to nothing," Prodi said. In Germany, the Mass-circulation Bild summed up the attitude of many towards Lady Thatcher, saying: "One didn't love her, one admired her." Berlin-based Tagesspiegel said she "shaped Britain like no-one else. Everyone agrees on that, those that loved her and those that hated her." There are no front pages on Thatcher in Russia, only a couple of small sky boxes and inside pages, reports Tom Parfitt from Moscow. The Rossiyskaya Gazeta newspaper carries a headline Iron and great. Russia’s government newspaper said Baroness Thatcher was “the most successful post-war leader of her country". It said: Maggie raised the standard of the free market to an unprecedented height, thus making clear that under her leadership the country would once and for all stop fostering social benefits and nurturing the lumpens to the detriment of the toiling middle class.” The Komsomolskaya Pravda has a story under the headline "She will remain in the memory as lady number one". The mass-circulation tabloid said Lady Thatcher was a “hard nut” and a “brilliant, unusual woman”. “She always aspired to lead,” said the paper. Her credo was, ‘Never give up without a fight’. But at the same time Maggie, as many English people called her, was a real woman. A strong handshake - and an enchanting smile; metal in her voice – and femininity.” The pro-Kremin newspaper, Izvestiya said: "The baroness who preferred liberty". For the Soviet Union and Russia, Lady Margaret [sic] was a symbolic figure,” it said.
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"She was the first of the western leaders who recognised a reformer in Mikhail Gorbachev.” The daily quoted Alexander Rutskoi, the former vice-president of Russia, who said: I have only positive impressions about Thatcher. She was very interesting to talk to; she was a kind and pleasant woman, albeit tough in defending the interests of her country.” Across the Atlantic, The New York Times, in an analysis by John Burns and Alan Cowell wrote: Along with President Ronald Reagan, with whom she helped define modern conservatism, Mrs. Thatcher propagated a faith in the redemptive power of capitalism that became dominant around the world, and hastened the fall of Communism. But she also helped to unleash market forces, and unravel social compacts, in ways that many societies have yet to resolve. Its leader argued: Mrs Thatcher was, without a doubt, a divisive political figure in her day. The passage of time has drained much of the old anger and left behind her record of accomplishments." Over in California, The Los Angeles Times reported: Indifference was not an option. In death as in life, at home and abroad, former British Prime Minister Margaret Thatcher was lionised and lambasted — sometimes both in the same breath — as news of her passing Monday spread across the world. David Ignatius in an opinion piece in The Washington Post, writes: The person who perfected the Thatcher revolution was Tony Blair... But it was Thatcher who opened the door for modern Britain. She wielded the wrecking ball that demolished old ideas and barriers, on the right and left. When people speak of Barack Obama or anyone else as a potentially transforming political leader, I ask myself: Does this person have the raw toughness and hunger for change of a Maggie Thatcher? Almost always, the answer is no. Catherine Mayer in Time magazine: Whatever you thought of Margaret Thatcher... you never doubted her force of will. The Iron Lady showed her mettle again and again, wrenching Britain, often brutally, out of a malaise and sense of all- encompassing failure that had blighted it for much of the era after the end of World War II. This meant not only facing down opponents but also critics in her own party, who ran scared as the strong economic medicine she
131 prescribed sickened swathes of voters. The news of Mrs Thatcher’s death arrived during the late evening in Australia, and not long before deadlines, leaving newspapers scrambling to provide coverage, The Telegraph's Sydney correspondent Jonathon Pearlman reports. The national broadsheet, The Australian, sidelined the latest polls and covered the death across it front page, hailing Mrs Thatcher as one of the greatest British politicians of the twentieth century. The Sydney Morning Herald published a picture on its front page while its sister newspaper in Melbourne, The Age could only manage a "puff" at the top of the paper, pointing readers to its world pages. In Israel, Haaretz has a tribute to Thatcher this morning by Anshel Pfeffer, under the headline "Margaret Thatcher, the British PM who praised Israel's 'pioneer spirit'" which notes that she was the first serving British prime minister to visit Israel During her landmark visit in 1986, Pfeffer notes,. "She was asked why Queen Elizabeth has never found the time to tour the Holy Land, to which she answered, "but I'm here," was the reply. The piece is accompanied by a photo of Thatcher, meeting a smiling Golda Mier, Israel's only woman prime minister (but then out of office) Pfeffer during her maiden trip to Israel in 1976 when she was opposition leader. Of course, when one reviews the "firsts" and other achievements by Thatcher over her long career, the fact that she was the first British prime minister to stare down the Arabists of the Foreign Office and visit Jerusalem is way down on the list," Pfeffer writes. He goes on to analyse her relationship with British Jews, whom she greatly admired. Thatcher was a deep admirer of what she saw as the Jewish work ethic and of a community that had not waited for social hand-outs to raise itself out of poverty and succeed. Thatcher was known for many years to be close to the Jewish community, largely as a result of representing Finchley in parliament, a constituency with a very large number of Jewish voters." Newspapers in South Africa gave the news prominence, reports Aislinn Laing. The Johannesburg Star splashed the paper with the headline: "Terror" ANC hails Thatcher. She once called it a terrorist organisation. But even the ANC joined in the flood of tributes and condolences from prominent South African politicians and parties for former British prime minister Margaret Thatcher.
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ANC spokesman Keith Khoza said: We believe she was one of the outstanding leaders of the developed world." South Africa's Citizen was simple in its splash: Its headline was "Hailed and despised". Leaders laud Iron Lady, some Britons rejoice at her death, it added. The Zimbabwe Herald carried a plain headline: "ZANU PF on Thatcher's Death". Zanu-PF national chairman Cde Simon Khaya Moyo described Baroness Thatcher as mature leader. She did better during her time in terms of concluding the Lancaster House Agreement and making efforts to its implementation in terms of the land issue by establishing a fund to see that white farmers were compensated for land acquired for resettlement. “When Tony Blair took over his government totally disowned the agreement (to fund land reforms in Zimbabwe. May her soul rest in peace at least she showed some maturity and direction while in power than Blair." China’s English-language Global Times wrote about "solving of Hong Kong question a major legacy", Tom Phillips in Shangai reports. “Thatcher visited China four times, first coming in 1977 when she was opposition leader. Li Weiwei, a researcher with the China Institute of International Studies, told the Global Times Monday that Thatcher made a great contribution to improving Sino- British ties by removing the biggest obstacle to relations, namely sovereignty over Hong Kong.”
In a leader, it painted Lady Thatcher’s death as a further sign of British decline.
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Some have concluded that Thatcher represented the remaining prestige of the British empire and her death marks the end of an era,” the tabloid argued. "Her restoration of the British economy represented one of the last glorious achievements of Great Britain, or even Europe.We have reasons to show respect to this woman,” the newspaper added, praising her role in the handover of Hong Kong. But at the same time, the world should move on."
Coverage of the death of Margaret Thatcher in Hong Kong newspapers (Picture: PHILIPPE LOPEZ/AFP/Getty Images) The China Daily took a more sympathetic line, writing that Lady Thatcher “helped push ties with China”. In a dispatch entitled “Fond Farewells for ‘Iron Lady’, its London-based correspondent wrote: “She was an outstanding woman and is admired by many Chinese girls and women." Margaret Thatcher, the Iron Lady of British politics who died on Monday at 87, played a key role in China’s relationship with the United Kingdom, especially in the peaceful handover of Hong Kong, experts said. Tian Dewen, an expert on European studies at the Chinese Academy of Social Sciences, said Thatcher realized the importance of a rising China.” In a back page story it had a "Fond farewells for 'Iron Lady’". “She was an outstanding woman and is admired by many Chinese girls and women.” The Shanghai Daily had a piece under the headline Britain’s 'Iron Lady’ dies at 87 “Thatcher, the controversial 'Iron Lady’ shaped a generation of British politics and was a pivotal figure in the Cold war. On a visit to China in 1984, she signed an agreement to hand back Hong Kong to China’s sovereignty in 1997.” The Economic Times (India), wrote about "Mrs T & the Political Economy of Courage" “Commentators who disliked Margaret Thatcher’s policies would often say she was a “polarising figure”. But changemakers often seem polarising: you can’t implement radical transformation by keeping most people happy..... As India struggles to get out of a 5% growth trap created largely by domestic policy timidity, and as we approach general elections whose outcome will have a deep impact on growth and incomes in the medium term, it is natural to ask if any of our presumed leaders across parties possess Thatcher’s conviction and courage.” Back home, the regional papers were also divided: The socialist tabloid The Morning Star greets Mrs Thatcher’s death with the headline: "The woman who tore Britain apart". It goes on to say she was the “PM who brought country to its knees and ruined lives of millions”. The Northern Echo, which covers Tees Valley and North Yorkshire, proclaims "Thatcher: loved, hated, never forgotten". The headline points to the wide range of opinion on Britain's first woman prime minister in an area that had a strong mining community in the 80s.
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The paper’s website prominently displays the comments of David Hopper, general secretary of the Durham Miners' Association, who said the death of Mrs Thatcher was a "great day" for coal miners. The Liverpool Echo Mrs Thatcher was a divisive figure in Merseyside, which experienced mass unemployment in the 80s when she made radical changes to British industry. The paper spoke to Liverpool Mayor Joe Anderson, who said he admired her “strength of character” but believes she left a legacy of “social injustice”. There is no doubt Baroness Thatcher was a unique figure in 20th century politics. Her strength of character and determination were to be admired but I firmly believe her policies were misguided and inflicted huge damage on cities like Liverpool. I was motivated to get involved in politics in the 1980s because I could see the effect her government’s economic policies were having, particularly in terms of unemployment and creating inequality and division. Sadly you will not find many people in Liverpool who believe her legacy is positive. Thatcherism is still alive and kicking. Part of her legacy, her Tory values were about making inequality more prevalent. The social injustice, the attacks on the poor – we are still seeing that today. Despite having coverage on pages 2-10, the newspaper chose not to splash its front page with the news, instead carying a story about the the "incredible tale of a Mersey family’s quest to bury their war hero ancestor...96 years after his death."
The Western Mail says several high profile Welsh figures believe Thatcherism was a major catalyst for devolution. Welsh foes of Mrs Thatcher portrayed her as an enemy who had not been elected by a majority of people in Wales, who sought the destruction of heavy industry and whose policies shattered community solidarity. The late Duncan Tanner, one of Wales’ most respected political historians, in 2007 named Mrs Thatcher among the founding fathers of devolution.
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He said she “undermined the belief that British government would cure Welsh ills and did more to swell support for devolution than anyone else”. Yet, it points out: Thousands of Welsh voters chose not to pin the blame for economic hardship on Mrs Thatcher. People with long memories would also, rightly, raise a sceptical eyebrow when confronted with claims that the Thatcher Government single-handedly destroyed the mining industry for which Wales was world famous.
http://www.telegraph.co.uk/news/politics/margare t-thatcher/9980529/Margaret-Thatcher-how-the- papers-covered-her-death.html#mm_hash
ft.com/global economy April 8, 2013 8:01 pm Thatcher: the great transformer
By Martin Wolf Pragmatic politician who defended free markets Margaret Thatcher was the most important peacetime prime minister of the UK since the late 19th century. She transformed the Conservative party and British politics, overturning the ruling assumptions about the relationship between the state and the market. More ON THIS STORY/ Video Thatcher redefined role of the state/ Philip Stephens Radical showed power of character/ Obituary Margaret Thatcher/ Matthew Engel Loved, hated and, by most, unknown/ Slideshow Margaret Thatcher in pictures ON THIS TOPIC/ Global tributes paid after Thatcher dies/ Comment Big Bang gave London top tier status/ A-List Thatcher knew that foreign policy begins at home MARTIN WOLF/ Japan’s unfinished policy revolution/ Why China’s economy might topple/ Cyprus adds to Europe’s confusion/ Homes ruse will not rebuild the economy Thatcher was also a towering figure on the global stage. Her close ideological connection with US President Ronald Reagan helped give her a global role unlikely ever again to be occupied by a British politician. True believers view her as a Saint Joan of free markets, dedicated to rolling back the state in all its dimensions. In reality, however, Thatcher was a pragmatic politician who showed little interest in embarking on politically suicidal attempts to demolish pillars of
136 the welfare state, such as the National Health Service. Under her governments, public spending never fell below 39 per cent of gross domestic product. Nevertheless, hers was a transformational premiership. The legacies of Thatcher’s governments include liberalisation of exchange controls, a huge cut in top income tax rates, liberalisation of labour markets, transformation of the legal position of trade unions and defeat of militant organised labour, notably in the miners’ strike of 1984-85, sale of a large part of the council housing stock, privatisation of most nationalised industries and the liberalisation of finance, including the “Big Bang” of 1986, which transformed the City of London into the world’s biggest international financial entrepôt. In macroeconomic policy, Thatcher’s governments started with monetarism and ended with a row over the role of exchange rates in monetary policy. But the rejection of Keynesian fiscal policy and the shift to relying on monetary policy, in its place, were cemented during her period in power. It was left to the incoming Labour government to take the logical step of making the Bank of England independent, in 1997. Thatcher also played a large role in Europe, contributing to launching the single market programme and the concomitant Single European Act, in 1986. She saw this as an attempt to export liberal economics to the rest of the European Community. But she became anxious about the dirigiste consequences and was staunchly opposed to the single currency. Her speech to the College of Europe in Bruges, in September 1988 – when she said: “We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level” – marked a turning point for Thatcher and her party. Big Bang saw London attain ‘top tier’ status During Big Bang, the head of a tiny bond brokerage announced a multimillion-pound buyout offer to colleagues with the words: “We have just been kissed by the Holy Ghost”, writes Jonathan Guthrie. London’s pre-eminence as a financial centre was a lasting legacy of the deregulation of the City of London in 1986 under Margaret Thatcher. “The City was on a slow burn until then,” says Brian Winterflood, chairman of securities dealer Winterflood Securities and a City professional since the 1950s. “A lot of people argue against Big Bang but it was what put us into the top tier.” The changes were emblematic of Thatcher’s determination to elbow aside vested interests. Diversified US investment banks, such as Merrill Lynch and Chase Manhattan, were allowed to buy traditional UK securities dealers, triggering an influx of capital that London deployed to pull clear of continental rivals. Within months, the bulk of share trading had moved online. Long, boozy lunches fell from fashion. In the Square Mile, a new era had dawned. Euphoria was shortlived, with a crash ensuing in October 1987. The asset bubble stoked up partly by government giveaways through privatisations and council-house sales was beginning to deflate, presaging the recession of the early 1990s. City reforms, meanwhile, bear some blame for the far worse reversals of 2008, according to the historian Philip Augar. “Good characteristics of the City were thrown out with the bad,” he says. “It put us on a helter-skelter course towards the financial crisis.”
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On the world stage, Thatcher’s influence rested on both her outspoken defence of free markets and her close relationship with the US. On privatisation, she persuaded many around the world that even countries with socialist legacies could roll back state ownership. How is one to assess Thatcher’s legacy, then, more than two decades after she was unceremoniously evicted from power? For the UK, the 1980s, 1990s and 2000s did mark the first sustained period since the 19th century when GDP per head rose more than in the other large European economies. Unfortunately, the post-crisis economic malaise, the high inequality, the persistent regional imbalances and the over-reliance on an unstable financial sector mar this success. Nevertheless, even though Thatcher was, and remains to this day, an intensely divisive figure, UK politics remain in her thrall. Even Ed Miliband’s Labour party has not dared to suggest a return to the policies of the 1970s. At home and abroad, the ideas with which she was most strongly associated – above all privatisation – remain influential. On Europe, Thatcher’s worries about the obstacles to running a single currency for such different countries have proved prescient. Yet the project is still in place, while the UK creeps towards the edges of the EU. Globally, the end of Thatcher’s period in office coincided with the collapse of the Soviet Union, a triumph for the roll-back of socialism that she proclaimed. After the Tiananmen protests, China’s reform seemed to have been aborted. Yet if one asks today which political leader did most to transform the world through a shift towards markets the answer would be Deng Xiaoping, not Reagan or Thatcher. The transformation of China is the great economic and political event of our era. Thatcher was a political giant, albeit within a declining nation. She stood for a revival of free markets and a declining role of the state. Today, however, it is not the west but emerging economies, which are the flag-bearers of relatively free markets. This was far from her doing. But she could well have regarded this outcome as a great success. Her appreciation would have surely been marred by disappointment over the state of her own country. History has not been kind to confidence in a durable British economic resurgence. Today, alas, the post-Thatcher renaissance looks as much illusion as reality. http://www.ft.com/intl/cms/s/0/e0c032dc-a066-11e2-88b6-00144feabdc0.html#slide0
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Daily Morning Newsbriefing April 09, 2013 Gaspar’s race against time Vitor Gaspar has four days to come up with a plan B, writes Jornal de Negocios, to keep the timetable for an agreement on loan extension on track. The finance minister is to submit Portugal’s plan to offset the four measures deemed unconstitutional by the court, worth €1.3bn, at the informal Ecofin in Dublin on Friday. The meeting is also to discuss the extension of loan maturities, and possibly to decide on the specific procedures for the extension of deadlines. Expectations are that if a decision is taken the deal could be sealed and send to national parliaments for approval already end of April or early May. The troika will make an interim visit to Portugal to reassess the measures after the the decision of the Constitutional Court. Ruling gives government pretext to cut Jornal de Negocios writes that the ruling did not come as a surprise to the government and that it gives back some room for manoeuvre the government had lost before. The government now has the backing of the president, and a pretext to cut spending, which the government should use. More time to Portugal in return for structural reform In its editorial the FT writes Portugal should see the constitutional ruling as a chance to tackle structural reforms and that the EU should give enough time to plan it carefully: “The government workforce in some departments, for example security, can be shrunk without affecting the quality of front-line services. Ministries should share services and resources more efficiently. These cuts, however, should be part of a carefully considered plan to reform the state and not the result of a hasty scramble for savings.” Breakingsviews says Portugal should rewrite constitution, not austerity plan Reuters Breakingviews argues that the court blocked the Coelho’s government from scrapping privileges - annual holiday bonus salary and some public sector pension perks- that should never have been given in the first place. The result will be an ugly compromise. “The protection of public sector privileges in the recession-afflicted, deficit and debt- ridden country is not what Portugal - or Europe - needs. Though the euro zone crisis drags on and there is much talk of harsh austerity, the reality is that in most countries reforms have not gone nearly far enough. … Portugal should be rewriting or reinterpreting its constitution, not its austerity.” Speculation over Slovenia’s bailout rises in post-Cyprus world Slovenia’s creditworthiness is deteriorating significantly in the after-Cyprus world as investors speculate a banking crisis will force it to become the sixth euro country to
139 need aid, Bloomberg reports. Although the Slovenian banking sector is smaller relative to GDP (1 1/3 times ) than Cyprus and its public debt also lower than elsewhere ( 53.7% of GDP in 2012), credit-default swaps shot up in the weeks after Cyprus. insuring Slovenian debt for five years soared as much as 66% to a six-month high of 414bp on March 28 from 250bp on March 15, the last trading day before Cyprus announced plans for its rescue. It’s now up 34% at 336 basis points, compared with a 45% increase for Cyprus and 18% for Portugal in the period. What actually happened in Cyprus? Frankfurter Allgemeine has seen the report by an external auditing company into what drove Cyprus into bankruptcy – and it appears that it is largely the result of complete collapse of risk management, bank supervision, combined with some criminal activity. A report into Bank of Cyprus shows that the bank only had €100m in Greek bond by the end of 2009 when the crisis had already begun. The bank said at the time that it was not exposed. In December 2010 the bank bought Greek bonds with a nominal value of €300m. In January 2011 it bought €400m. That continued until the holdings were €2bn by October 2011. The bank had not cared at all about the risks, while the goal had been to maximise profits on a quarterly basis. In March 2010, the central bank had started to question the positions of Bank of Cyprus, but had received no answer. Nor did it press to get an answer. The auditors’ report says important data had been deleted from the computers of various managers – which is against the law. The next investigation concerns the now insolvent Laiki bank. Dixon on a Cypriot euro exit This is very well argued and detailed Reuters column by Hugo Dixon, who has considered in detail of what would happen if Cyprus left the eurozone. Devaluation would trigger inflation, and even more austerity that what the troika is demanding now. The current account deficit of 5% would vanish overnight, as imports would slump, and so would domestic production, which is reliant on imports. Cyprus would default on foreign debt, including on the ELA. There is a risk that Cyprus might lose membership of the EU. Dixon concludes that quitting the euro would not be a good choice, but staying in is not a good choice either. Unless the troika can help lift the capital controls, Cyprus may well end up quitting the eurozone. Investors swamp eurozone as yen crashes One of the main developments in financial markets has been the ongoing devaluation of the Japanese yen, which is now down against the euro by some 30% since last year – it now trades at almost Y130 to the euro. One of the more interesting consequences of this shift, as reported by the FT, is a large Japanese influx into the European debt market, especially France, driving down yields. The article quoted a trader saying that most of the recent action was driven by hedge funds “trying to front-run the wall of cash from Japan that is expected to hit global markets in the coming weeks”. The French 10- year spread is now down to 0.511bp, almost vanished, as investors perceive no risk whatsoever about France future in the eurozone. We agree with that assessment on France. It is interesting how especially the Anglo- Saxon media have been portraying France as a basket-case, the next stage in the eurozone crisis, despite the fact that the bond spreads have continued to fall. The French economy is weakening under austerity, but we do not see any scenarios under which France could be next.
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German industrial output rises Figures for German industrial output and orders are hugely volatile, so care must be taken interpreting any monthly data. January was awful, February was a lot better. The latest data, according to Reuters, show a return of cautious optimism after the economics ministry said industrial orders had gone up 0.5% in February mom. At the same time, the economics ministry revised the bad January figures downwards to a fall of 0.6%. The expectation among German economists and businessmen is that the economy will pick up during the year. In terms of composition, output of capital goods and energy rose, outweighing a sharp drop in construction, but this is mostly due to the cold winter. The consensus is now that after the decline in Q4, production has once again stabilised. Industrial orders are also picking up, though not to the extent as to expect a large boom. Remember Target 2? The Target 2 imbalances continue to fall slowly as the interbanking market is gradually repaired, according to the latest Bundesbank data, as reported in Frankfurter Allgemeine. In August 2012 Germany’s Target 2 payments surplus reached a record of €750bn. In March, they are now down to €588.7bn, still high in total terms, but not accelerating as it was in 2012. The ECB’s OMT programme is widely credited for having achieved that turn-around. The article contains a warning by Jorg Kramer of Commerzbank that the balances are still sufficiently high to blow up the Bundesbank’s balance sheet. Austria considers weakening bank secrecy laws One of the effects of the never ending stream of revelations about secret Swiss bank accounts and various CDs with long lists of names of tax dodgers has been a political shift away from bank secrecy in all of Europe. After Luxembourg said it will re- consider its bank secrecy laws, the Austrian chancellor Werner Faymann yesterday also signalled that Austria is willing to enter into a dialogue with its EU partners on this issue, Frankfurter Allgemeine reports. The issue is controversial in Austria, where Faymann’s coalition, the conservative OVP, is dead set against any concessions. Faymann said Austria is wrongly accused of being part of a club of countries helping with money laundering, which is why it is in Austria’s best interest to negotiate. Spanish company bankruptcies soar A report by Spanish credit rating agency Axesor shows that over 2,500 firms filed for bankruptcy in Spain in the first quarter of 2013, 45% more than in the same period of 2012, reports Reuters. It is estimated that nearly 28,000 firms have gone bankrupt in Spain since the crisis started. The study attributes the recent increase in failures to tight credit, sagging demand and a failure to "prepare for a crisis this big or this long", as Spain is in its second 18-month recession since the crisis hit the country 5 years ago. Spanish Youth protest economic exile On Sunday, the organization "Youth Without a Future" organized protests in over 20 cities in Spain and abroad, reported Europa Press. The protesters denounced crisis policies for "condemning them to exile". Organization spokespeople criticized the increased labour insecurity brought about by "structural reform", as well as the government's policy to lure large fortunes back from tax havens while presenting emigrating youth as "adventure" seekers.
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Rajoy's most explicit call yet for new ECB mandate In his press remarks on the occasion of the visit of the UK's David Cameron, Spanish PM Mariano Rajoy made an unusually explicit call for the ECB's mandate to be changed, reports El Pais. After praising the Bank of Japan for "making a very important policy change" and recognizing the "important effort" made by the ECB so far, he said Europe "must consider whether the ECB should have the same competences as all other central banks in the world" or go on as currently. Rajoy argued "in an ever more competitive world, we Europeans should be strong and flexible and give ourselves the tools that other regions in the world can count on". El Pais writes that Rajoy worries that 16 months of orthodox austerity policies have not helped improved the economic situation, and looks to Portugal with worry. In reference to Portugal, Rajoy said that the efforts of national governments are "important but not sufficient" and that "Europe must make a greater effort to solve the South's liquidity problems". Krugman on the wrong kind of moral hazard Paul Krugman has a point we have not yet heard. It is about moral hazard, but of a different kind. He writes in his blog that the ECB, through the OMT programme, has left governments off the hook – but not in the way we and others have argued. Krugman says it left them free to pursue austerity, allowing the Austerians to claim that the fall in spreads was the result of their policies. The Meltdown Economics Award Gerald Silverberg has a wonderful spoof in his blog, announcing the Creditanstalt' Heinrich Brüning and Andrew Mellon Memorial Prizes for the best contribution to the global meltdown. On the short-list of seven candidates, there are four Germans, Merkel, Kohl, Weidmann and Schauble, plus Dijsselbloem, Sarkozy and Rehn. The prize winner will get 1m Cypriot euros, subject to the usual controls of course. Eurozone Financial Data This Previous day Yesterday Morning France 0.544 0.515 0.506 Italy 3.175 3.081 3.074 Spain 3.551 3.512 3.494 Portugal 5.207 5.207 5.223 Greece 11.018 10.659 10.57 Ireland 2.854 2.749 2.738 Belgium 0.757 0.724 0.718 Bund Yield 1.212 1.236 1.243
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.301 1.3022
Yen 128.670 128.76
Pound 0.849 0.8533
Swiss Franc 1.215 1.2183
ZC Inflation
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Swaps previous last close
1 yr 1.55 1.57
2 yr 1.53 1.53
5 yr 1.78 1.75
10 yr 2.07 2.05
Euribor-OIS Spread
previous last close
1 Week -5.600 -5.6
1 Month -4.257 -2.457
3 Months 2.029 4.529
1 Year 30.714 31.714
Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-04- 09.html?cHash=2ca064c197c1d8cbbc6c9a69f274f93b
Cyprus is edging towards euro exit April 8, 2013 @ 9:17 am By Hugo Dixon Cyprus is no longer centre stage. Nicosia has agreed a 10 billion euro bailout deal with its euro zone partners and the International Monetary Fund. A visible bank run has been averted by stringent capital controls. International markets, which only ever suffered a mild bout of jitters, have calmed down. But it would be foolish to forget about Cyprus. The small Mediterranean island is edging towards euro exit. Quitting the single currency would devastate wealth, fuel inflation, lead to default and leave Cyprus friendless in a troubled neighbourhood. Even so, the longer capital controls continue, the louder the voices calling for bringing back the Cyprus pound will grow. President Nicos Anastasiades is against Cyprus leaving the euro. But the main opposition communist party wants to pull out. A smaller opposition group wants to stay in the euro but kick out the troika – the European Commission, the European Central Bank and the IMF. The country’s influential archbishop is also critical of the troika. Anastasiades can hold the line for now. After all, he has just been elected and the constitution gives him huge power. What’s more, there are strong arguments for staying inside the single currency – not least the fact that, otherwise, it would lose the 10 billion euros (or nearly 60 percent of GDP) of bailout money. If Nicosia brought back the Cyprus pound, it would plummet in value. Nobody knows how much, but economists guess it might be up to 50 percent. Cypriots are complaining at the massive haircuts suffered by big depositors in their two largest banks: Bank of Cyprus and Laiki. Such a massive devaluation would savage the wealth of all other depositors.
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Meanwhile, devaluation would fuel inflation. Cyprus is a small open economy. All the oil is imported. Over 80 percent of the textiles, chemicals, electronics, machinery and automotive vehicles are imported too, according to Alexander Apostolides, a lecturer in economics at the European University Cyprus. Cyprus also relies on cheap immigrant labour in its agricultural and tourism industries. Following a devaluation, their cost in local currency would rise. All this would mean that any gain in competitiveness would be eroded. The island’s economy would suffer a further shock because it is running a current account deficit of somewhere around 5 percent of GDP. Given that Cyprus has limited access to hard currency reserves, this deficit would have to vanish overnight. Imports would slump. But so would domestic production, given its reliance on imports. In such a scenario, Nicosia would not be able to avoid defaulting on its debts. Following a 50 percent devaluation, these would be double their current value when expressed in local currency. The debts come in two forms: the government’s own 15 billion euros of borrowings; and the central bank’s 10 billion euro emergency liquidity assistance (ELA) to the banks. Default might seem an attractive option because Nicosia would suddenly shrug off a vast debt load. But it wouldn’t be that simple. It would face a slew of lawsuits. What’s more, if the central bank defaulted on its provision of ELA, the ECB would take the hit. The euro zone would not be happy and would, at minimum, insist on some sort of staged repayment plan. Cyprus could, of course, refuse to pay point blank. But it is not Argentina. Its small size makes it vulnerable to being pushed around. If it tried to act tough with its euro zone partners, they would probably play hardball in return. They might even find a way to kick Cyprus out of the European Union. Exit from the EU would be another blow for Cyprus. Its best trading opportunities are with the bloc. Most of the rest of the neighbourhood – such as Syria and Egypt – is not in great shape. And Turkey is off bounds until and unless some way can be found of resolving the dispute between Nicosia and Ankara over the latter’s occupation of the northern part of the island. Cyprus will also struggle to exploit its offshore natural gas reserves if it quits the EU. Turkey, which is already trying to stop it, would find it easier to get its way if Nicosia was friendless. Apart from all this, the country would have to decide how to run monetary policy. A responsible government would want to contain inflation by either linking the Cyprus pound to another currency, such as sterling, or running a tight but independent monetary policy. In either case, Nicosia would have to keep interest rates high and curb its budget deficit. It might also need to maintain capital controls. Such an austerity programme would be worse than that demanded by the troika. It would then be hard to avoid the temptation to print money. But that way lies hyperinflation. So quitting the euro would not be a good choice. But staying is not a great one either. GDP could plunge around 20 percent over the next two years, according to the latest guesstimates. And the longer capital controls are in place, the more the Cypriot people
144 will feel they are not in the single currency anyway – as a euro in Cyprus is not equal to one in the rest of the world. The troika should help lift the controls as soon as possible. Otherwise, Cyprus may well quit the euro and, small though it is, that could destabilise the zone. [The sixth paragraph of this story has been corrected to say that Alexander Apostolides is a lecturer in economics at the European University Cyprus. An earlier version of this article mistakenly stated that he is a lecturer at the University of Cyprus.] http://blogs.reuters.com/hugo-dixon/2013/04/08/cyprus-is-edging-towards-euro-exit/
April 8, 2013, 1:41 pm 46 Comments The ECB, OMT, and Moral Hazard Back in 2011 and again in the summer of 2012, a number of economists pleaded with the European Central Bank to intervene in sovereign bond markets, buying troubled nations’ debt to stop the “doom loop” of plunging bond prices and financial distress that was pushing the euro to the brink. The objection from austerians was always that this would create moral hazard: it would let countries off the hook, and lead them to slack off on their belt-tightening.
In the end, however, the prospect of imminent collapse concentrated the mind. First through the LTRO lending program, then with the promise to do “whatever it takes”, including Outright Monetary Transactions, the ECB did intervene or at least promise to intervene. And sure enough, there turns out to be a problem of moral hazard — but not the kind everyone warned about. Instead, the people who ended up being left (temporarily) off the hook were the austerians themselves, who took the narrowing of spreads — which was the result of the ECB’s new activism — and took it as proof that austerity was working.
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Via Mark Thoma, Francesco Saraceno marvels at the European Commission’s response to the Portuguese political crisis; the Commission praises the government’s determination to impose austerity no matter what the courts say, because austerity is producing “growing investor confidence in Portugal”. Say what? Well, pretty obviously they’re referring to the narrowing of interest rate spreads. The point is that this narrowing of spreads has nothing to do with austerity. As Paul De Grauwe points out, the amount by which a country’s interest rate spread against Germany has narrowed is fully explained by how big its spread was at the peak of the crisis — there is essentially no indication that policies mattered at all: (OK, if you squint really hard you can maybe find that Ireland has done a bit better than one might have expected, but the point stands). Yet the Commission has chosen to claim credit for this narrowing of spreads — it is, after all, the only good news they have to show for three years of austerity — and claim that it would go away if there was any relaxation of the pain. So as I said, there is some clear moral hazard here; the ECB’s intervention has let some people off the hook, and encouraged them to continue with bad policies. But the people in question aren’t spendthrift governments, they’re pain-inflicting troika members, who have been given license to keep on inflicting pain. http://krugman.blogs.nytimes.com/2013/04/08/the-ecb-omt-and-moral-hazard/
April 8, 2013, 8:33 am 76 Comments France Has Its Own Currency Again Joe Weisenthal draws our attention to a development that may surprise many people: French borrowing costs are plunging. (Don’t tell George Osborne — he thinks that low British rates are a unique personal achievement). Here’s the chart for French 10-years:
But wait– wasn’t France supposed to be the next Italy, if not the next Greece? Well, Joe has what I agree is the right explanation: markets have concluded that the ECB will not, cannot, let France run out of money; without France there is no euro left.
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So for France the ECB is unambiguously willing to play a proper lender of last resort function, providing liquidity. And this means that in financial terms France has joined the club of advanced countries that have their own currencies and therefore can’t run out of money — a club all of whose members have very low borrowing costs, more or less independent of their debts and deficits. Welcome to the club, France. Now, why are you doing all this austerity? http://krugman.blogs.nytimes.com/2013/04/08/france-has-its-own-currency-again/
April 8, 2013, 8:25 am 127 Comments The Intellectual Contradictions of Sado-Monetarism Still convalescing from This Week; but it helped focus my thoughts a bit more on the jihad against low interest rates. What I realized is that Stockman, and many others, represent the latest incarnation of sado-monetarism, the urge to raise rates even in a deeply depressed economy. It’s a long lineage, going back at least to Schumpeter’s warning that easy money would leave “part of the work of depressions undone” and Hayek’s inveighing against the “creation of artificial demand”. Nothing must be done to alleviate the pain! I have to admit that the resurgence of sado-monetarism has come as a surprise. In the early stages, some readers may recall, there were many people — e.g. my colleague David Brooks — arguing that we should use monetary rather than fiscal policy to respond to the crisis. The hard task of persuasion therefore seemed to be one of explaining the zero lower bound and why it matters, the great difficulty of getting monetary traction and hence the need for fiscal action. But now that the deficit scolds have killed fiscal policy, monetary policy is also under attack, and with even more vehemence. Yet there’s something very odd about that attack. The modern sado-monetarist view is, after all, very much centered on the presumption that markets, left to their own devices, will get it right, and that it’s only the distortions introduced by money-printing central banks that cause bubbles and crises — which is why the Fed must stop its easing right away. But here’s the problem: for loose monetary policy to have the dire effects the sadomonetarists claim, markets must massively get it wrong, and hugely overreact to low interest rates. Suppose, to take the obvious example, that your claim is that loose policy by the Fed caused the housing bubble, and hence all our current woe. Well, it’s true that borrowing costs were relatively low during the bubble years. Here are mortgage rates:
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So mortgage rates fell by about 20 percent from late-90s levels. If housing prices were the simple inverse of bond prices, this could explain something like a 25 percent rise. Realistically, you can adjust this either up or down; focusing on real rates would push the number up, realizing that there are other costs to buying a house would push it down. But one thing seems clear: on no rational calculation can the fairly modest interest rate decline shown above justify this (A) Now, you could try to explain the doubling or more of housing prices in key markets by arguing that low interest rates were what set in motion a process of irrational exuberance, in which lenders and borrowers both got carried away; I would agree with Ben Bernanke that most of the evidence suggests otherwise, but your mileage may vary. The point, however, is that even if you want to make the Fed the villain here, you can only do that by assuming that markets are highly irrational and unstable. If they can overreact so drastically to loose money, why should you believe that they get it right in response to other shocks? So sadomonetarism is intellectually inconsistent. It wants to blame central banks for all the instability in the economy, it preaches a doctrine of non-intervention, but it can only make the case by insisting that financial markets are irrational and unstable to begin with, in which case it’s hard to see why laissez-faire makes sense under any conditions. And no, I don’t think the sadomonetarists have thought this through. Their position isn’t intellectual, it’s visceral: easy money=sin, and must not be condoned. And while everyone is entitled to his own viscera, this is no way to make economic policy. http://krugman.blogs.nytimes.com/2013/04/08/the-intellectual-contradictions-of-sado- monetarism/
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ft.com/global economy EU Economy April 8, 2013 7:27 pm Spain’s PM wants more powers for ECB By Tobias Buck in Madrid and Michael Steen in Frankfurt
©AP Mariano Rajoy, the Spanish prime minister, has called for the European Central Bank to be handed more powers, highlighting renewed north-south political tensions about the bank’s role in battling the eurozone debt crisis. “I think in Europe we must all ask ourselves whether the ECB should have the same powers as other central banks around the world,” the Spanish leader said at a press conference on Monday. More ON THIS STORY/ The World Spain eyes Portugal and Cyprus/ Wolfgang Munchau ECB priority is to fix southern Europe ON THIS TOPIC/ Record eurozone unemployment hurts euro/ Eurozone joblessness stays at record high/ Slovenia dismisses Cyprus comparisons/ Eurozone SMEs struggle to access finance IN EU ECONOMY/ Dublin to delay water charges/ Portugal’s austerity plan fails to deliver/ Portugal court rules against austerity/ Cyprus to probe Greek bond purchases Mr Rajoy did not spell out what additional central bank powers he had in mind, but mentioned both the US Federal Reserve and the Bank of England as possible models. He also referred to the “very important” shift in stance undertaken by the Bank of Japan, which surprised markets with a huge monetary stimulus package last week. Both the Fed and the Bank of England have engaged in quantitative easing, or printing money, to stimulate the economy. Although the ECB has cut interest rates to what is for it a record low, its main interest rate of 0.75 per cent is higher than those in the US, Japan or the UK, which critics say, puts the region at a further disadvantage. The Spanish leader said Europe needed the same “instruments that other countries have” and voiced frustration over Europe’s failure to progress more quickly towards a banking union. His call reflects not just hope for a change in ECB policy but also the growing frustration in Spain and other European countries with the hardline position of countries such as Germany and the Netherlands. The independent ECB has very wide-ranging powers, but must justify any non-standard monetary policy measures it takes as being within its inflation-fighting mandate, a key
149 condition of which is that it should not engage in “monetary financing” – printing money to help a member state. It consistently faces strong criticism from Germany, the biggest eurozone economy, when considering unorthodox measures, such as the so-called Outright Monetary Transactions bond-buying plan announced last September. That successfully calmed financial markets, but has yet to be deployed. Speaking last week, Mario Draghi, ECB president, said there were clear limits to what the bank could do, although it was thinking about policies “consistent with our mandate” to ease the extreme differences in the cost of loans faced by companies in different eurozone countries. Spanish officials would like Germany and other surplus countries in the eurozone to run a more expansionary policy, in order to help struggling economies in the crisis-hit countries to escape recession. They complain that Spanish and Italian companies still have to pay much higher interest rates on their debt than their competitors in northern Europe, and warn that such “asymmetries” are undermining the foundations of economic and monetary union. Spanish officials would also like the eurozone to make faster and more decisive progress towards a banking union – which they hope would help to insulate their domestic economy from fresh market turmoil. Mr Rajoy on Monday voiced fresh concern over the continuing disagreements that bedevil the project, arguing that speedier agreement could have prevented the recent crisis in Cyprus: “If there had been a banking union in Europe . . . what happened in Cyprus would not have happened,” he said.
The aftermath of the Cypriot bailout has highlighted fresh political tensions inside the eurozone, with Spanish officials voicing sharp displeasure with the public stance taken by Jeroen Dijsselbloem, the Dutch finance minister who chairs the meetings of eurozone finance ministers. Mr Dijsselbloem said that the ‘bail-in’ of Cypriot account holders could be repeated in future European financial rescue packages. http://www.ft.com/intl/cms/s/0/61306ff4-a06c-11e2-88b6- 00144feabdc0.html#axzz2PrIpeB3U
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Economía Rajoy reclama al BCE que actúe como los bancos centrales de EE UU y Japón Presiona a Alemania ante los resultados de los recortes en los países del sur El jefe del Gobierno exige cambios para inyectar dinero en la economía El presidente dice que Portugal demuestra que solo con los ajustes "no es suficiente" Carlos E. Cué Madrid 8 ABR 2013 - 23:19 CET759
El presidente, Mariano Rajoy, conversa con su homólogo británico, David Cameron. / EFE El presidente del Gobierno, Mariano Rajoy, analizó este lunes el caso de Portugal y el de España para llegar a una conclusión: ambos están cumpliendo “los compromisos”, esto es las exigencias de Bruselas, están haciendo recortes y reformas, pero los resultados no llegan. ¿Por qué? Porque no basta con recortes, según Rajoy, y hacen falta reformas en el funcionamiento de la Unión Europea y del euro. Tanta frustración mostró, que se animó por primera vez a hablar claramente de un anatema para los países nórdicos y en especial para Alemania: la posibilidad de que el Banco Central Europeo actúe como los demás bancos del mundo e inyecte dinero a la economía para luchar contra la recesión, como acaba de hacer el banco japonés y lleva años haciendo la Reserva Federal de EE UU o el Banco de Inglaterra. Mariano Rajoy es conocido por su enorme paciencia, pero este lunes parecía al límite de la resistencia. Rajoy habló muy claro y mostró el giro que ha dado poco a poco a su posición, que ahora apoya políticas keynesianas de estímulo como la multimillonaria que acaba de aprobar Tokio. El presidente lanzó así un mensaje directo de presión al BCE olvidándose de los habituales llamamientos al respeto a su independencia: “El banco central de Japón acaba de tomar una decisión que es un cambio muy importante de sus políticas. Creo que el BCE ha hecho un esfuerzo muy importante en los últimos meses y hay que reconocerlo. Pero creo que en Europa, y entre todos, debemos plantearnos si el BCE debe tener las mismas competencias que todos los bancos centrales del mundo o las que tiene ahora. Habrá que hablar de este tema. Estamos en un momento decisivo. En un mundo cada vez más competitivo los europeos necesitamos ser fuertes, ser flexibles y dotarnos de los instrumentos con los que cuentan otras regiones del mundo”. La pregunta era sobre un posible cambio en los Estatutos del BCE, que determinan que el banco, al contrario que los demás —la Reserva Federal ha anunciado que seguirá inyectando dinero hasta que el paro baje del 6,5%— no tiene ninguna obligación de
151 velar por el crecimiento ni el empleo. Sus estatutos le obligan a estar pendiente solo de la inflación. Decenas de expertos critican este mandato y reclaman que luche contra la recesión. Pero Alemania y sus socios no tienen ninguna intención, y Rajoy, que hasta ahora mantenía la cautela, sabe que este mensaje clarísimo no va a gustar a los alemanes. Antes de que hablara él, el ministro de Finanzas alemán, Wolfgang Schäuble, ya había dicho que esta línea, que Rajoy plantea abiertamente y que gusta a otros países como Francia e Italia, no es la adecuada. Schäuble explicó que el hecho de que el BCE pueda darle a la máquina de imprimir billetes no es la solución a la crisis, que según él pasa por perseverar en la senda de las reformas.
MÁS INFORMACIÓN/ España mejora en el mercado pese a las dudas del rescate portugués / Japón lanza su revolución monetaria / Portugal recortará más en sanidad, educación y seguridad social Y este es precisamente el punto de fondo político. Rajoy lleva 16 meses en el poder, ha recortado de casi todas partes, ha sufrido dos huelgas generales, tiene un nivel de desconfianza del 83% y está en medio de una enorme crisis institucional que afecta incluso a la Monarquía. Y ve que Portugal, que empezó antes y con más dureza los recortes, está hundida. Y que en España, las previsiones vuelven a empeorar: en el mejor de los casos en 2013 seguirá en recesión, con un paro del 27% y un tímido crecimiento en 2014. Rajoy está inquieto por el agravamiento de la crisis. Y hace una nueva llamada de atención a sus socios alemanes. El presidente defiende los recortes, porque admitir que han sido un error sería un suicidio político, ya que a ellos apostó toda su estrategia, pero trata de quitarse presión llevándola al BCE: “No es suficiente lo que hacen los estados nacionales solos. Es muy importante pero no es suficiente. Portugal ha puesto en marcha reformas dolorosas, pero ahora Europa debe hacer un esfuerzo mayor. Hay que resolver los problemas de liquidez de los países del sur de la UE”. El presidente utilizó el caso de Portugal casi como si estuviera hablando de España y lo que le está pasando a Pedro Passos Coelho pudiera sucederle a él. “Quiero hacer un elogio del pueblo de Portugal, al que conozco muy bien, viví muchos años muy cerca. Está sufriendo una situación muy dura y lo está llevando con gran dignidad. También mi apoyo y admiración hacia su Gobierno. No es fácil tomar decisiones. Passos Coelho ha dicho que va a cumplir sus compromisos, es una decisión valiente que le honra, una decisión que tendrá sus frutos porque Portugal volverá a crecer”. Rajoy apoyó así sin matices los nuevos y durísimos recortes sociales que ha anunciado su socio portugués, que se niega a subir más impuestos. Y con esto lanzaba otro mensaje a Bruselas: si en España sucediera algo similar —hay también recortes clave recurridos al Tribunal Constitucional español— Rajoy cumpliría lo prometido, como Passos. Esto es, el mensaje a Alemania y los socios poderosos del norte no puede ser más claro: pueden contar con Portugal y España para seguir la política de recortes marcada, pero a cambio tienen que permitir al BCE que haga políticas de estímulo para salir de esta durísima recesión que ya está llegando al corazón del euro. En esa estrategia, Rajoy buscará alianzas de nuevo con Italia y Francia, ambos muy débiles, como él, por distintos motivos. Pero de nuevo, las elecciones alemanas de septiembre parecen bloquear cualquier posible movimiento por el momento. http://economia.elpais.com/economia/2013/04/08/agencias/1365429511_411114.html
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EDITORIAL Revolución monetaria La intervención del BCE, reclamada por Rajoy, frenaría la pérdida de competitividad del euro El País 9 ABR 2013 - 00:00 CET Los bancos centrales de Estados Unidos, Reino Unido y Japón han intensificado las políticas de relajación monetaria a la vista de que sus economías no acaban de despegar, el paro se resiste a bajar de forma significativa y las expectativas de recuperación no son claras. Las decisiones de la Fed y el Banco de Inglaterra, bien conocidas, y la más reciente del Banco de Japón que ha llevado la relajación monetaria y las facilidades crediticias hasta límites desconocidos hasta ahora, han inspirado al presidente del Gobierno, Mariano Rajoy, a reclamar abiertamente que el Banco Central Europeo (BCE) intervenga en la vacilante situación de la economía europea inyectando dosis masivas de liquidez. Es evidente que el discurso de Rajoy contradice la ortodoxia monetaria dominante que procede de Alemania y el Bundesbak. También es evidente que la reclamación de una intervención monetaria procede de un análisis oportunista; no todos los males de la economía española proceden de la cautela monetaria europea. Son muchos los errores cometidos en la política económica lo que permite afirmarlo. Ahora bien, es un hecho que después de la decisión de Japón, el BCE aparece como un islote donde reina la contención, rodeado por un océano de liquidez en las áreas del dólar, la libra y el yen. El BCE sigue atenazado por la falta de cohesión de la eurozona, el euro pierde competitividad a raudales y Draghi no se decide a utilizar la política monetaria con todas sus consecuencias para hacer política de recuperación. Quizá ahora Draghi esté más motivado para sumarse al relax monetario. El último e impactante ejemplo es Japón. Agotadas las recetas para consolidar el crecimiento, el banco central ha decidido aumentar la liquidez del sistema con una intensidad insólita. El objetivo es reducir los tipos de interés reales, aumentar la inflación (hasta el 2%), elevar la capacidad de compra de los japoneses, estimular las exportaciones bajando la cotización del yen y facilitar la financiación del déficit. Para ello, duplicará la base monetaria en dos años, hará lo propio con el plan de compra de títulos; en el bienio (el total sobrepasará el 15% del PIB) aumentará el crédito a familias y hogares (consumo igual a crecimiento) y ampliará el vencimiento de bonos hasta los 40 años. Japón tiene la ventaja de que una parte importante de su deuda pública está en manos de sus ciudadanos. El Gobierno español debería impulsar el ahorro interno para reducir la financiación exterior; pero su camino es justamente el opuesto. Hay efectos secundarios. La decisión tendrá impacto en las economías de la zona, puesto que la depreciación del yen deteriora la competitividad de sus vecinos y, menos acusadamente, en Europa y EE UU. La prolongación de los vencimientos de deuda confía el pago a los nietos de los actuales contribuyentes nipones. Circunstancia poco tranquilizadora si se observa la pirámide de edad del país, muy envejecida por la longevidad, la baja tasa de natalidad y la ausencia de inmigración. http://elpais.com/elpais/2013/04/08/opinion/1365450492_191041.html?rel=rosEP
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Telegraph.co.uk Portugal's top court has ruled out euro membership Whether Portugal's judges realise it or not, they have just ruled that the eurozone doctrine of "internal devaluation" is unconstitutional. By Ambrose Evans-Pritchard 2:25PM BST 08 Apr 2013 Since this is the central thrust of EMU crisis strategy – and the only way offered for Club Med states to regain lost competitiveness within monetary union – the court has essentially said that Portugal may no longer participate in the euro Project as currently constructed. Specifically, it shot down four of the nine key elements in the austerity budget. Public sector wage cuts must be reversed. So must pension cuts. Premier Pedro Passos Coelho is discovering that he cannot slash public pay unless he cuts private pay as well, which is entirely beyond his control in a free market system. Nor he can he shrink Portugal's Leviathan state. The situation is absurd. The court made it clear that he should raise taxes instead. But raising taxes is not an internal devaluation. It may reduce the budget deficit, but it does not reduce Portugal's unit labour costs (UCL) or bring about the much needed wage realignment against Germany, or for that matter against China, Turkey, Poland, and Morocco. This drives a stake through the heart of EMU policy. The European Commission said there can be no "departure" from the agreed bail-out terms. We will see how that goes down. Related Articles/ Eurozone debt crisis: as it happened - April 8, 2013 / 08 Apr 2013 / Greek bank shares plunge as merger called off / 08 Apr 2013 / Eurozone on alert as Portugal political crisis threatens bail-out / 08 Apr 2013 / Leaders paralysed amid record EMU jobless rate I have written many times before that the whole policy of internal devaluation is immoral, reactionary, and indefensible. It functions by driving unemployment to such excruciating levels (26pc in Spain and Greece, 17.5pc in Portugal and rising) that it "eventually" breaks the back of labour resistance to pay cuts. This is in stark contrast to genuine devaluations. Iceland's jobless rate is 5.4pc, and the UK's is 7.7pc. But "eventually" can be a very long time, or never at all. Britain tried this in the 1920s after returning to Gold at an overvalued rate in 1925. Five years of attrition very little. Pay had barely dropped at all by 1930. As Keynes said, wages are "sticky" on the way down. We now learn that the taboo against wages cuts in so strong in Portugal that such a policy is effectively unconstitutional. Juridico-politics have intruded rudely against those in Brussels and Berlin who think they can command whole societies like so many pawns on a chess board.
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This would not have happened if Portugal still had the escudo. The currency would have fallen. De facto wages would have been cut to internationally competitive levels without the same trauma. Mr Passos Coelho will now find other ways to cut, hacking into large areas of spending like a drunken surgeon. Again, this does nothing in itself to achieve a wage cost adjustment. It will almost certainly test his government to slow destruction. As the Left Bloc said over the weekend, his latest demarche is "totally irresponsible" and lacking in elementary statecraft. The prime minister gave a strong hint before the court ruling that he would resign if the decision went against him. Well Senhor, get on with it, resign, and be gone. Clear the air. As Publico said a recent editorial policy. The EU-IMF Troika policy so enthusiastically embraced by Mr Passos Coelho and his young ideologues has "failed". The economic contraction has been deeper than expected at every turn. It is not as a bad as Greece's self-feeding downward slide, but the same pattern of shrinking tax revenues and labour hysteresis is all too clear. Output contracted at a 3.2pc rate in the fourth quarter of 2012. The budget deficit rose last year to 6.4pc of GDP from 4.4pc in 2011. It is getting worse, not better. Barclays expects public debt to reach 125pc of GDP by next year. The Troika has had to extend the deficit targets by two years already. Mr Passos Coelho is no doubt right to argue that the eurozone's double-dip recession has blown everything off course, but that recession is entirely the result of a double- barrelled contractionary fiscal and monetary policy for the whole currency bloc that he himself supported (ignoring a chorus of Nobel Prize winners and world-class economists who knew better, and have been entirely vindicated). Portugal's 10-year yields have punched back to 6.57pc, as a I write. We will find out in due course from the ECB's Target 2 data whether capital is beginning to leak away, post-Cyprus. "I wonder if people/companies with savings of over €100,000 in Portuguese banks are feeling entirely comfortable with the situation," said Gary Jenkins from Swordfish. Mr Passos Coelho (and those in the Portuguese establishment who are invested up to their political necks in the Project) will no doubt bend every sinew to keep Portugal in the euro. I do not question his determination. I question his judgment. The policy is ruinous. He should accept that Portugal's top court has expressed the will of the nation. "Lex est anima totius corporis popularis", to cite the Visigoth Laws, of this ancient Visigoth state. He should remind the EMU creditor states that they are equally to blame for the eurozone crisis. A policy that essentially deploys the European Commission and ECB as debt collectors for the North is intolerable – and no, stretching the maturities a little on Portugal's rescue loans does not change the story. He should tell them that the North must play an equal part in closing the competitiveness gap from its end, that it must raise its unit labour costs pari passu with
155 cuts in the South, and that it must stimulate its internal demand pari passu to match the contraction of demand in the South. If that is not acceptable, Portugal should return to the escudo, and enjoy a cathartic release at long last from the Máquina Infernal. As Paul Krugman writes in his latest blog, "Just say Não". Will Mr Passos Coelho do this? Little chance. He will persist in trying to break his country on the wheel, until it breaks him. http://www.telegraph.co.uk/finance/financialcrisis/9978991/Portugals-top-court-has- ruled-out-euro-membership.html#mm_hash
THE OUTLOOK Updated April 7, 2013, 7:31 p.m. ET Housing Prices Are on a Tear, Thanks to the Fed
The U.S. housing market has broken out of a deep slump, and prices are shooting up faster than anyone thought possible a year ago. For many homeowners, that is a cause for celebration.
Nick Timiraos explains how the Federal Reserve keeping interest rates low is causing home prices to grow faster than they normally would during a recovery, and that has some experts worried. Photo: Getty Images.
But the speed at which prices are rising is prompting murmurs of concern that the Federal Reserve's campaign to reduce interest rates could be giving the housing market a sugar high.
Prices of existing homes rose 10% in February nationally from a year ago. They have been rising during the seasonally slow winter months—and they show signs of jumping further as the spring buying season gets under way. What's going on?
Prices of existing homes rose 10% in February nationally from a year ago. Above, a home in Mariemont, Ohio.
First, inventories of homes available to buy have fallen to 20-year lows. Home builders have added little in the way of new construction since 2008. Banks are selling fewer foreclosures. Investors have scooped up more homes, converting them to rentals.
Many borrowers, meanwhile, aren't willing or able to sell at prices that are down sharply from their 2006 highs, despite a greater inclination among banks to approve short sales. Tight lending standards mean some owners will hold back from selling because they aren't sure they would qualify for a mortgage on their next home.
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Demand has also revved up, first from investors buying homes below their replacement costs, and later as rising rents and falling interest rates encouraged more first-time buyers to purchase homes that have monthly payments that are less than what it costs to rent.
Improving home-price expectations have also unleashed pent up demand. The U.S. added around 1.3 million households a year for the 10-year period ending in 2007, after which household formation fell to more than half that level. Household formation was lower in the five years following the housing bust than any period since the 1960s, according to Altos Research, an analytics firm in Mountain View, Calif.
But the population never stopped growing. Households simply doubled up. Between 2008 and 2010, the country had around two million households that "couldn't wait to launch on their own," says Mike Simonsen, chief executive of Altos Research. Many of those new households have been renters, but more are opting to buy.
The upshot is that, in a reversal from just two years ago, demand is outstripping the available supply. Even though sales volumes could be constrained this year by low inventories, some economists say prices are set to soar. "A lot of folks are realizing, 'Wow, there is no second wave of foreclosures. Interest rates if anything could head up. Prices are rising. If I'm going to get in I better get in now,'" says Christopher Thornberg, a housing economist with Beacon Economics in Los Angeles.
The impact of low mortgage rates is profound. Before the Fed began buying mortgage- backed securities in late 2008, rates for 30-year fixed mortgages stood at around 6.1%, and a borrower who could qualify for a $1,000 monthly payment could get a $165,000 mortgage. Today, that same borrower, at a 3.5% rate, can borrow as much as $222,000. In other words, the Fed's low-rate campaign has increased purchasing power by a third.
So is this the beginning of another bubble? Not really. For now, home prices on a national basis are still below their long-run average relative to incomes. "The recovery is solid. There are pure fundamentals you can point to," says John Burns, chief executive of a real-estate consulting firm in Irvine, Calif.
But he says the housing market is turning up sharply, "hockey-sticking faster than it otherwise would," because of investors, low inventories and low mortgage rates. The 157 worry is that if prices keep rising at their current pace, "we're going to have a real affordability problem" once rates move above 6%, says Mr. Burns.
Buyers face a dilemma: paying more for a home today, compared with a year ago, or paying even more tomorrow at a time when interest rates might also be higher.
"It's been a lot slower process than we had hoped it would be, and things were getting a lot more expensive," says David Fritsche, a retired architect who lost bids on six properties in the past six months before closing last week on a home in Rancho Santa Margarita, Calif. He and his wife, Darlene, want to be closer to their daughter's family but plan to hang onto their old home in Phoenix for a few years.
While prices may be rising on the back of the Fed's easy money, tighter credit standards are acting as a brake on the recovery. High unemployment, low savings, and high debt loads among those who would like to buy their first homes will also remain a drag.
The housing sector is finally healing. But the sector may be in for more volatility until there is more demand from—and credit for—people who want to buy homes that they plan to live in.
Write to Nick Timiraos at [email protected]
A version of this article appeared April 8, 2013, on page A2 in the U.S. edition of The Wall Street Journal, with the headline: Housing Prices Are on a Tear, Thanks to the Fed. http://online.wsj.com/article/SB10001424127887323916304578402831129812740.html #printMode
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04/08/2013 01:48 PM Pirates of the Caribbean Global Resistance to Tax Havens Grows Tax havens cause hundreds of millions of euros in annual damage to national economies around the world and they create an uncontrollable parallel economy. The recent Offshore Leaks investigative reports are helping to fuel efforts in Europe and the US to have them eliminated. What do a now-deceased German playboy and the daughter of the former Philippine dictator have in common? What connects a Russian oligarch and the former campaign manager of the French president? Gunter Sachs and Maria Imelda Marcos Manotoc, Mikhail Fridman and Jean-Jacques Augier have all parked assets in countries that expect little in taxes and guarantee absolute confidentiality. And they are not alone. More than 130,000 people do exactly the same thing, and those are only the ones whose names appear in a data set called "Offshore Leaks," which was analyzed by a group of international media organizations. But the real scandal is much bigger than that, namely that no one knows how much money is on deposit in anonymous bank accounts in countries that are euphemistically referred to as tax havens. Estimates by the non-governmental organization Tax Justice Network put the figure at about €16 to 25 trillion ($21 to 33 trillion). In this manner, the native countries of these individuals and companies are deprived of hundreds of millions in taxes, sometimes legally but often illegally. The billions deposited in offshore accounts come from the United States and the rest of North America, and recently from emerging economies and the Third World, as well. Many Russian oligarchs manage their companies through offshore firms, while wealthy Southern Europeans use offshore accounts to protect their assets from a collapse of the euro -- and from the taxman. But it isn't only tax fugitives who use the discreet services offered by these countries. A Global Shadow Realm Drugs and other criminal funds are hidden and laundered there, shady deals are arranged, and hedge funds whose speculative activities could shake the financial system once again use them as a base. As a result, a global shadow realm has developed in the last few decades, with bases on all continents, a parallel economy that escapes all democratic scrutiny, and from which many profit: banks that provide assistance to tax refugees, as well as attorneys and companies that devise sophisticated systems to obfuscate the path the money takes. The number of tax havens has gone from a handful only a few decades ago to 60, 70 or even more today. Years ago the British Virgin Islands (BVI), Belize, the Cayman Islands, Cyprus and the Marshall Islands were, in some cases, dirt-poor -- until they decided to charge no or almost no taxes on money brought into the country, as well as guarantee the owners of the asset anonymity through company and foundation structures. In return, they collected fees from the offshore companies. The British Virgin Islands, for example, transformed itself into one of the most affluent parts of the world in less than a generation, after the group of islands adopted laws to guarantee secrecy in financial transactions in 1994. Today the BVI, which is formally 159 part of the United Kingdom and has a population of about 31,000, is home to almost half a million foundations and letterbox companies. Trust companies and law firms worldwide help create such trusts and offshore companies. They include firms like Portcullis Trustnet in the Cook Islands and Commonwealth Trust Ltd. in the BVI, the companies whose 2.5 million documents are now making headlines. The purpose of their business is to establish anonymous trusts and letterbox companies for their generally affluent clients. But instead of the actual owners, the tax evaders use straw men as the offshore companies' supposed shareholders and managing directors. A deed of trust between the customer and the trustee ensures that the funds are managed in the customer's interest. For the last two decades, the European Union and the Organization for Economic Cooperation and Development (OECD), the club of industrialized nations, have insisted again and again that they intend to dry out these fiscal swamps. But so far the differing national interests of the member states have largely stood in the way of effective international agreements. In the fight for international capital and jobs, there are diverging opinions on where legitimate tax competition ends and unfair competition begins. 'The Kind of Tax Scam We Need to End' That could now change, and Offshore Leaks seems to have come at the right time. The determination to address abuses has grown considerably, at least in the United States and Europe. In his first election campaign, US President Barack Obama called for clamping down on tax havens. In one speech, he gave a detailed description of the Ugland House in the Cayman Islands, where more than 12,000 companies are registered, saying, "either this is the largest building in the world or the largest tax scam in the world." He added: "And I think the American people know which it is. It's the kind of tax scam that we need to end." The debt-ridden countries of the Western world can no longer afford to be deprived of such massive revenues. In addition, the public is sharply critical of the fact that some wealthy people can escape their responsibility for their countries through tax flight, even as the gap between rich and poor widens. Taxpayers also have trouble understanding why the euro countries are using their money to rescue banks, while the banks are simultaneously helping the wealthy shelter their money from the tax authorities. Almost all major German banks have branches and subsidiaries in a number of tax shelters. According to its annual report, Deutsche Bank has 13 subsidiaries in Singapore alone. And according to the Offshore Leaks data, Germany's largest bank has used its Singapore office to establish 300 trust companies and foundations in tax shelters. Germany's Commerzbank, which received a government bailout, insurance companies like Allianz and state-owned banks like LBBW and HSH Nordbank, also operate subsidiaries in Singapore. HSH, whose survival is still a heated subject of debate among German politicians, also has a presence in exotic places like the Majuro Atoll in the Marshall Islands. There can be many motives for the German financial sector's fondness of tax havens. But institutions where portfolio management and financial consulting for the wealthy play an important role are especially active in the offshore arena.
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Deutsche Bank uses the websites of its offshore subsidiaries to actively recruit wealthy customers. The bank also officially confirms that it offers its affluent customers services like the establishment of trust companies, albeit under the condition, as it notes, that their tax affairs are handled legally. 'Tax Optimization, not Evasion' In fact, businesses in all industries use tax havens to optimize their tax burdens within the letter of the law. "Of course banks advise their customers on setting up foundations and trust companies. As a rule, this is for purposes of tax optimization, not evasion," says Christoph Kaserer, a professor of finance specializing in banking at the Technical University of Munich. Publicly traded companies that pay more taxes than necessary, he says, must justify their actions to their shareholders and, in extreme cases, make themselves liable to pay damages. Nevertheless, says Kaserer, publicly traded companies in Germany have an average tax burden of 30 percent. Deutsche Bank also reports an average tax rate of this magnitude. Nevertheless, the company's tax experts were recently called before the financial committee of the German parliament, the Bundestag, to justify their tax policy. The inquiry was triggered by a remark the bank had made in its annual report, stating that it partially attributes its tax rate to an "advantageous geographic distribution of consolidated profits." The lawmakers suspected that the bank was deliberately shifting profits to tax havens. "When a bank has more than 2,000 subsidiaries, with 500 of them in tax havens, it makes sense that there are tax reasons for that," says Lothar Binding, a member of the center-left Social Democratic Party (SPD) on the Bundestag's Finance Committee. Critics find the industry's claims that it doesn't support tax evasion hard to believe. Although banks require their customers to certify in writing that they do not engage in tax evasion, there is reason to suspect that they do this primarily to cover their legal bases. "This formally legal pseudo-correctness should no longer be allowed," says Binding. He wants banks to have to take more responsibility for the questionable business dealings of their customers. "If banks were required to report such transactions in Germany, it would be easier to assess whether customers are truly acting within the law when it comes to taxes," he says. Binding also believes that tougher sanctions are the right approach. "If banks don't have to worry about losing their licenses, it will not be possible to effectively put a stop to questionable transactions." It is quite possible that Offshore Leaks will now give a boost to such efforts. The data will also have "political consequences," says Kaserer. "If there are reactions directed against countries that have made tax optimization and evasion their business model, it's to be welcomed." A Deterrent Effect Some 86 journalists from 46 countries spent 15 months analyzing the data, with the help of special computer software and supported by programmers in Germany, Great Britain and Costa Rica. So far the trails have led to 10 tax havens. Most names on the lists are from China, Hong Kong and Taiwan, while another important group of customers are from Russia and the former Soviet republics. Several hundred Germans are also reportedly affected, although German tax evaders have traditionally tended to favor Switzerland or Liechtenstein. The principality was essentially around the corner, German was spoken there, and there was close
161 cooperation with the Swiss banks that managed the money of the rich and powerful. In the 1990s, even Commerzbank offered its affluent customers the Liechtenstein model for tax optimization. There, the money was deposited into foundations managed by a trustee, while the names of the real owners did not appear in any public registry. And because Liechtenstein's politicians had an interest in the influx of wealth from around the world, they initially blocked any efforts by foreign tax authorities for legal assistance. But then there was a leak in Liechtenstein, just as there is a leak today with the Offshore Leaks data. An employee of trustee Herbert Batliner siphoned off his customer data, which eventually ended up with the German tax authorities. Investigations were launched against hundreds of tax evaders, including well-known corporate families and the center-right Christian Democratic Union party, which squirreled away its illegal money there in what eventually became a massive slush fund scandal. Suddenly Liechtenstein, long a monetary fortress, was no longer secure, and it continued to crumble when Germany and its other EU neighbors increased pressure on the principality. Today Liechtenstein even cooperates in cases involving only the suspicion of tax evasion. The release of information like the Offshore Leaks data still has a deterrent effect. Tax evaders who already have a bad conscience or are plagued by the fear of being found out have a tendency to turn themselves in. Legally Controversial 'Bycatch' This also became evident when CDs containing tax information from Switzerland were acquired in recent years. Several German states purchased various CDs with the names of presumed tax evaders. The western state of North Rhine-Westphalia, in particular, benefitted from the information. When the state bought a CD with Swiss data for the first time, in the spring of 2010, the number of people turning themselves in quickly increased from a few hundred to about 5,000 in only a few months. But the deterrent effect quickly wore off. By the end of 2012, the number of tax evaders turning themselves had only increased by 2,200 over 2010. The material on the CDs was also significantly less explosive than hoped. By the end of summer last year, judicial authorities in North Rhine-Westphalia had concluded about 900 cases. Only in 11 cases, or about 1 percent, were punishments imposed. Ninety percent of the cases were discontinued with no consequences at all. The purchase of tax CDs was often the only way to track down tax evaders, but it was always legally controversial. The German foreign intelligence agency, the BND, was even accused of dealing in stolen goods when it acquired one of these CDs from a former employee of the Liechtenstein bank LTG. After that, then BND President Ernst Uhrlau prohibited the purchase of further CDs. The BND's position changed when Gerhard Schindler became its president. Now sources within the agency say that it is also responsible for cases of money laundering, international crime and terrorism. If there happens to be tax information on an acquired CD, the BND argues, it is seen as "bycatch" and can be made available to the tax authorities. The BND's position is that if informants break the law by selling such data, they are responsible for their own actions. But there have been no such offers to the agency since Uhrlau's replacement.
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To avoid being dependent on the acquisition of data CDs, the German government negotiated a bilateral tax treaty with Switzerland. But the deal fell through because of opposition in the Bundesrat, the legislative body that represents the German states, and because tax evaders, as the SPD believes, would have gotten off too lightly with a relatively low payment of tax arrears. "The German-Swiss treaty would have allowed for bigger holes than in a piece of Swiss cheese," SPD chancellor candidate Peer Steinbrück said in a SPIEGEL interview. Many at the Finance Ministry in Berlin and in parliament hope for a new attempt to forge a tax treaty after the federal election this autumn. But Switzerland has already indicated unofficially that it is no longer interested in a comprehensive solution. Difficult negotiations are in the offing. The United States had an easier time of it. It wrested a much better agreement from the Swiss by threatening to banish the country's banks from New York in the future. That was all it took. But the German government is barred from employing such repressive tactics. As a financial center, Frankfurt isn't nearly as important and appealing as New York. Besides, the German government, in its efforts to attack tax havens, is always constrained by the need to take its partner countries into account. Combatting the Tax Haven Epidemic No number of pithy declarations of war against the world's tax havens can disguise the fact that there are EU member states that pride themselves on their special discretion when it comes to financial and fiscal matters. In addition to Britain's Channel Islands, Austria, Ireland, the Netherlands and Luxembourg also exhibit some clear characteristics of tax havens. The latter already appears to be feeling at least some pressure from Offshore Leaks. In an interview published Sunday in the Frankfurter Allegemeine Sonntagszeitung, Luxembourg Finance Minister Luc Frieden said his country was considering easing its banking secrecy rules. "We want an intensified cooperation with foreign tax authorities," he said, noting that there is a clear trend towards the automatic exchange of information. "In contrast to the past, we no longer strictly reject this," he added. Until now, the country has blocked any strict EU directive on taxation of foreign-held savings that would require such automatic exchange of data, ensuring favorable advantages for investors in the country. On Friday, German Finance Minister Wolfgang Schäuble said there are two EU countries that "make use of special rules for themselves," a clear reference to Austria and Luxembourg. "I assume that will now change, also through such developments." During the Cyprus crisis, representatives of several euro-zone member states had indirectly called for Luxembourg to rethink its business model and to reduce its oversized financial sector. Initiatives are also underway in Brussels to tackle tax havens. European Commissioner for Taxation Algirdas Semeta presented a plan of action last December. It contains more than 30 eminently reasonable proposals to combat the tax haven epidemic. But it isn't being taken very seriously in European capitals. The EU treaties stipulate that taxes are a national matter, and the finance ministers are jealously ensuring that it remains that way. Joint tax rules would require the approval of all 27 EU member states, including those that profit from tax flight today. In the case of Cyprus, the other Europeans have only now, when the island nation is on the verge of bankruptcy, been able to insist on compliance with certain standards. With
163 a low corporate tax rate of 10 percent, the Cypriots attracted many offshore companies that have deposited billions there. Now the corporate tax is at least being raised to Ireland's level of 12.5 percent. The agreement that the troika negotiated with Cyprus contains a number of requirements to combat money laundering and tax flight. For instance, under a memorandum of understanding the Cypriots are now required to supply "adequate, accurate and timely information on the beneficial ownership" of Cypriot letterbox companies if requested by foreign tax authorities. The country is also being required to create a new registry with regulators for the many Cypriot trusts, which are generally foreign-owned. This is precisely what experts like Raymond Baker are calling for to stop worldwide tax flight and money laundering. The director of US think tank Global Finance Integrity believes it is imperative that the names of the true owners of offshore companies, trusts and foundations be disclosed in a public registry, or at least to the authorities. Bilateral Agreements But governments aren't quite that far along yet. Still, the German government has agreed to exchange information with a large number of countries. Luxembourg, Liechtenstein, the British Channel Islands of Jersey and Guernsey, as well as Antigua and the Cayman Islands in the Caribbean are included in this group. The agreements give German tax authorities the right to obtain information about German depositors when there is any suspicion of wrongdoing. The information can enable the treasury to collect outstanding taxes. This could also be helpful today, if the authorities, as demanded by Finance Minister Wolfgang Schäuble, actually obtain and are able to evaluate the Offshore Leaks data. But what will be far more useful for Schäuble is something that the recent revelations have made clear to even the last tax evader: In the future, anyone who evades paying taxes won't feel safe anywhere in the world. REPORTED BY SVEN BÖLL, MARKUS DETTMER, HUBERT GUDE, MARTIN HESSE, ARMIN MAHLER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, JÖRG SCHMITT AND GREGOR PETER SCHMITZ Translated from the German by Christopher Sultan URL: http://www.spiegel.de/international/world/offshore-leaks-gives-boost-to-global- resistance-against-tax-havens-a-892977.html Related SPIEGEL ONLINE links: • Tax Haven Revelations: German Offenders Face Tough Road Ahead (04/05/2013) http://www.spiegel.de/international/germany/0,1518,892728,00.html • Offshore Leaks: Vast Web of Tax Evasion Exposed (04/04/2013) http://www.spiegel.de/international/business/0,1518,892505,00.html • Germany's Schreiber Affair: The Scandal that Helped Merkel Become Chancellor (08/07/2009) http://www.spiegel.de/international/germany/0,1518,640938,00.html Related internet links • Speech by US President Obama on Ugland House http://www.whitehouse.gov/the_press_office/Remarks-By-The-President-On- International-Tax-Policy-Reform SPIEGEL ONLINE is not liable for the content of external web pages.
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04/08/2013 06:11 PM Peer Steinbrück 'Merkel's One-Sided Crisis Management Is a Mistake' In an interview with SPIEGEL, Peer Steinbrück, the 66-year-old Social Democrat German chancellor candidate, says Chancellor Angela Merkel's strict focus on austerity in the debt crisis has been wrong. He also vows to crack down on tax evaders and raise taxes on high earners. SPIEGEL: Mr. Steinbrück, following the revelations about trillions of euros in assets deposited in offshore tax havens, you have called for a tougher approach against tax evaders. Why have you waited so long? You would have had an opportunity to do this when you were finance minister. Steinbrück: First, I have advocated a tougher approach for years. Second, if there was anyone who placed the topic on the agenda during his term in office, with the support of the OECD and my French partners at the time, it was I. Some have even quoted my use of the word "cavalry" to criticize my hard-hitting approach. SPIEGEL: Why do Germany and the European Union have such a hard time taking action against tax havens? Steinbrück: The current government has indeed neglected the issue. Worse yet, Mrs. Merkel's government wanted to stop German tax authorities and public prosecutor's offices from accepting tax CDs for their investigations of tax evaders. This makes the latest reactions about wanting to establish a sort of tax FBI all the more hypocritical. That's what the German government should have done long ago, instead of sidelining the tax evasion probes. SPIEGEL: What's your objection to a nationwide tax investigation authority? Steinbrück: It's the usual strategy of the government. First it does nothing, and now it's far too late in presenting an idea that the SPD already proposed in a five-point paper on combating tax fraud. In that document, we also proposed a criminal code for corporations, which could be used to force the banks to assist tax investigators. So far the government has rejected all of these ideas. SPIEGEL: At least one tax oasis could have been dried out by now: Switzerland. The SPD prevented that from happening. Steinbrück: No, the SPD prevented a tax amnesty that wouldn't even have made tax fraud impossible. The German-Swiss treaty would have left bigger holes than you get in a piece of Swiss cheese. My successor Wolfgang Schäuble was prepared to exempt German tax evaders from punishment, allow them to remain anonymous and accept tax secrecy, while the Americans get all the data on their tax evaders with money in Swiss bank accounts. With the help of the OECD, which I have just visited, and the European Commission, the pressure on European tax havens should have been intensified by now. SPIEGEL: Do you expect that the desire to avoid tax will become even stronger if the SPD and the Greens form the next government? Steinbrück: Why?
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SPIEGEL: Because you want to revoke some of the tax cuts enacted during the former SPD/Greens government. Steinbrück: Times have changed since the crisis. We will not increase all taxes for everyone, but some taxes for some people. I stand by that because the gaps in income and wealth distribution are widening. To contribute to greater equality of opportunities, we have to invest more money in infrastructure and education, as well as help local authorities. At the same time, we have to adhere to the debt brake. SPIEGEL: You could also cut spending. Steinbrück: An SPD/Greens government under my leadership will make savings. We will cut subsidies where there are environmental disincentives. For instance, we will repeal the Mövenpick tax break for hotels. Other changes will follow. For more than 10 years, we have been in a situation in which top incomes and assets have been growing considerably, while ordinary citizens have had to accept real wage losses. That's why stronger shoulders will also have to contribute more to the funding of public services. SPIEGEL: The income gap between rich and poor hasn't grown any larger in recent years. Steinbrück: The basic situation hasn't changed. In recent years, we have also been dealing with stagnating real wages and a significant increase in income and wealth at the upper levels of society. The gap has grown wider, as Hans-Ulrich Wehler recently explained convincingly in a SPIEGEL interview. SPIEGEL: But it was already there when your party was still in power. Steinbrück: We didn't manage to reduce the incomes gap. But the current government hasn't even tried. Besides, the situation and the challenges have changed since 2008, when the major crisis erupted. Society is drifting apart. SPIEGEL: Former Chancellor Gerhard Schröder likes to point out that the relatively low tax rates have helped Germany become competitive again. Steinbrück: Yes, but as I said, we face different problems today. Demographic change and the integration of children from weaker social classes mean that more money is needed for education, if we want to keep our society together and innovative. We'll have to do more for childcare to help improve opportunities for women in the workplace. SPIEGEL: Where exactly do you stand within your party on a program like that? Still to the right or more to the left now? Steinbrück: The left-right scheme is too simplistic for me. If something that is socially just also makes sense economically, I support it. The introduction of a comprehensive, statutory minimum wage, for example, is socially just and makes economic sense, because purchasing power is increased. SPIEGEL: Those are the words of someone who is trying to please everyone. So far, you have always been viewed as a representative of the party's right wing. Steinbrück: That doesn't make sense to me. It isn't a matter of right or left, but of right or wrong. For example, it's a question of ensuring that no child is left behind. And providing for affordable housing is probably less of an issue of right or left, but of social necessity. SPIEGEL: You just visited President François Hollande in France. What can a German Social Democrat learn from the winner of last year's French election?
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Steinbrück: He too made an issue out of the question of greater balance, specifically in French society. Apparently both we and the French Socialists are concerned with the same question: How do we keep a society together? That's how he won the election… SPIEGEL: … a victory he is now putting on the line with many scandals and a clearly leftist economic program. Steinbrück: He has been in office for 10 months, and he can hardly be held responsible for the omissions of two conservative presidents. He can't be blamed for the scandal surrounding his budget minister, who lied to him and the French people. We have many similarities, especially when it comes to European policy. But that doesn't meant that in Germany everything has to be done the same way it's done in France. SPIEGEL: How worrisome is the situation in France, where unemployment is rising sharply and the economy is in a crisis? Steinbrück: The French president is familiar with the situation in his country and gave me a no-frills description. We Germans, in particular, have a great interest in ensuring that his efforts to make France more competitive are successful. Together, we have to make sure that the crisis in Europe does not destabilize our social order and social cohesion. SPIEGEL: Hollande blames Europe's austerity policy, which Germany, in particular, has been pushing. Steinbrück: The very one-sided crisis management pursued by Mrs. Merkel's government, which is geared solely toward cutting costs, is a mistake. As a result, entire countries have entered a vicious circle of sharply declining growth, higher unemployment, especially among young people, declining tax revenues and rising deficits, which they can hardly refinance anymore. Then their ratings are downgraded and the screw tightens even further. We have to be careful that this crisis management doesn't end up costing us Germans more money than it appears to be costing at the moment. SPIEGEL: In contrast to Germany, wages have risen sharply in these countries in recent years, while productivity has stagnated. This is why European Central Bank President Mario Draghi argues that there is no getting around a strict austerity policy. SPIEGEL: I disagree. Reforms are necessary and mistakes have to be corrected. But the mix of consolidation and growth enhancement, of demanding and encouraging, isn't correct. As a result, social tensions are building in these societies. SPIEGEL: In the end, your argument amounts to a call for Germany to spend more money for Europe. Steinbrück: Well, saying that in Germany, at any rate, has long been a taboo for the current government. SPIEGEL: Then you now have the opportunity to break the taboo. Steinbrück: I'm not saying this for the first time: We must tell people the plain truth. Overcoming the European crisis will cost money. And Germany will always only do well if its neighbors are doing well. SPIEGEL: Do you want to give the affected countries more time to save money? Steinbrück: Yes, as long as they make verifiable efforts to improve their situation in return for the solidarity they receive from others.
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SPIEGEL: And the consequence is that the rest of Europe, including the Germans, will have to take on more costs? Steinbrück: If consolidation efforts are tied to stimulating economic growth, it will also be possible to curb costs. Any other solution will not only come with an economic price, but will also impair democracy in Europe. Then we won't be seeing a peaceful demonstration by 200,000 young people in Madrid, but of 300,000, and protests of similar magnitude elsewhere. SPIEGEL: Do you think Germany has assumed sufficient responsibility in Europe? Steinbrück: Germany has assumed responsibility. Our country had a good reputation for a long time, but it's no longer quite as certain at the moment. (Former Chancellor) Willy Brandt's motto about Germans wanting to be good neighbors is in question. SPIEGEL: Does it worry you that posters in Southern Europe depict the chancellor with a Hitler moustache? Steinbrück: That's completely unacceptable. We Germans haven't prevented these countries from implementing reforms and making themselves more competitive. Their governments should take a look at themselves and shouldn't lay the blame on Mrs. Merkel or a different German leader. SPIEGEL: Should the Germans change their tone toward the other countries of Europe? Steinbrück: Yes, there have been tones coming from Germany that were not seen as helpful. For example, the remark by Volker Kauder (chairman of the CDU/CSU parliamentary group in the Bundestag), that German is now being spoken in Europe, or some of the chancellor's speeches ahead of the 2010 regional election in (the western state of North Rhine-Westphalia) were unsettling. SPIEGEL: You, on the other hand, with your keen diplomatic abilities, would be the right man to represent Germany in Europe? Steinbrück: I can certainly distinguish between plain language and the duties of the office. SPIEGEL: It's not that easy for voters. Steinbrück: Many voters understand my language. In the case of Mrs. Merkel, it's hard to tell what she wants. SPIEGEL: There would be no more talk of clowns and cavalry attacks? Steinbrück: The cavalry remark put the debate in a nutshell in political terms. And I won't take back what I said about clowns in relation to Mr. Berlusconi. But you can be sure that as chancellor I will speak the way a chancellor should. SPIEGEL: So you think that you've learned something? Steinbrück: One should never stop learning. SPIEGEL: You were finance minister when you made your cavalry remark. You held a position of governmental responsibility at the time. Steinbrück: Yes, and a broad segment of the public understood what I was saying perfectly well. SPIEGEL: But it caused considerable upset in Switzerland.
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Steinbrück: Perhaps, but much has changed in Switzerland since then. SPIEGEL: So far you have only been restrained when it comes to Russia, even though the regime of (President Vladimir) Putin has just taken action against the Konrad Adenauer Foundation and the Friedrich Ebert Foundation, the latter of which is aligned with the SPD. Why were you so loud in the case of Switzerland and are so quiet on Russia? Steinbrück: What the Russian authorities have done is completely unacceptable, and I strongly object to it. But I believe that since Willy Brandt's time, we have done very well with the motto "change through rapprochement." It's the way we should deal with countries where there are human rights violations. This also applies to China. SPIEGEL: So you don't agree with your mentor, (former Chancellor) Helmut Schmidt, who says that the West should stay out of these issues? Steinbrück: These issues must be clearly addressed in direct talks with the governments in question. All former chancellors have done so, it's what the current chancellor does and when I am chancellor, I'll do it, as well. SPIEGEL: Do you enjoy running for office? Steinbrück: Yes. Come to my events and you'll see. SPIEGEL: Have you sometimes regretted running for chancellor? Steinbrück: Never. SPIEGEL: We don't quite believe you. Steinbrück: When I was chosen as the candidate all of a sudden in late September, I assumed a responsibility that goes beyond me as a person. That is why I say "never." SPIEGEL: Does that mean that you did indeed think of ditching your candidacy? Steinbrück: No, because when the wind is blowing in your face, you automatically think that a candidacy isn't a private matter. It's sort of like the motto: The air contains iron, so I'd better pull the covers over my head and not get up anymore. I'm aware that I also assumed responsibility for my party, our supporters and a cause. And if things sometimes get tough, you can't ask yourself what impact it's having on you. It isn't an option. SPIEGEL: Things certainly haven't gone that well in recent months. Steinbrück: Of course, not everything has gone smoothly. I don't deny that at all. But there have also been times when I had the impression that others had an interest in stirring things up. But that's behind me, and now it's time to enter the campaign and talk about the issues. Translated from the German by Christopher Sultan Interview by Konstantin von Hammerstein and Gordon Repinski URL: http://www.spiegel.de/international/germany/spiegel-interview-with-spd- candidate-peer-steinbrueck-a-892973.html Related SPIEGEL ONLINE links: • Letter from Berlin: Franco-German Left Mired in Difficulties (04/05/2013) http://www.spiegel.de/international/europe/0,1518,892820,00.html
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• From Black to Orange: SPIEGEL ONLINE's Guide to German Political Parties (02/28/2013) http://www.spiegel.de/international/germany/0,1518,886188,00.html • Europe Frets over Italy: 'Two Clowns Won the Election' (02/27/2013) http://www.spiegel.de/international/europe/0,1518,885816,00.html • Muzzled: Merkel Opponent Put on Short Leash (01/28/2013) http://www.spiegel.de/international/germany/0,1518,880017,00.html 04/08/2013 02:58 PM Graft Report Austerity Can Help to Fight Corruption By Andrew Bowen Austerity measures are widely hated in many European countries. But a recent study has shown they can have a positive effect in combating corruption, limiting the amount of cash that public officials can give out for things like bloated government contracts. Mediterranean countries like Spain, Portugal and Italy have been given a boost in their fight against corruption through the austerity measures so many of their citizens despise, according to a recent study on corruption in the European Union. The wide-ranging study found that the euro-zone crisis "has acted as a strong anticorruption agent in these countries, drying up resources and opportunities for corruption." The report, titled "The Good, the Bad and the Ugly: Controlling Corruption in the European Union," was conducted by the Berlin-based Hertie School of Governance and is due to be presented to the European Parliament on Tuesday. The study divided the EU's 27 member states into four groups, with the three aforementioned Mediterranean countries grouped with Slovenia and Slovakia as states with few opportunities for public corruption, but also with few mechanisms to prevent officials from acting in a corrupt way. "The capacity to audit and control is considered insufficient in these countries," the study's authors write. "The independence of the judiciary is seen as problematic, at least in Italy and Slovakia, and the tools available to society to control the government are feeble, with low levels of Internet connection (Spain and Slovenia do somewhat better), weak civil society and little media capacity to confront corruption." While austerity may limit opportunities for corruption in some countries, it could have the opposite effect in countries where, for example, civil servants who are already earning a meager living have their pay cut even further. "I think it varies from country to country," said Dr. Alina Mungiu-Pippidi, the Hertie professor who led the study. "There are austerity measures that are beneficial... (but) if you reduce wages for policemen or judges, that's not good." EU Funding Increases Risk for Corruption Mungiu-Pippidi said she conducted the study to depart from the expert indicators of corruption and build a more complex model that takes into account what the underlying causes of that corruption are.
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Her findings also directly contradict the notion that membership in the EU necessarily makes countries less corrupt. "Older member countries Greece, Italy, Portugal and Spain have all regressed rather than progressed since they first joined -- the first two of them to worrying levels -- and that has raised doubts about the EU's transformative effect on its members," the study found. Funding from the EU can also have the counterintuitive effect of fostering corruption when government officials are given too much freedom in how to spend that money. An EU grant to expand touristic infrastructure in a country, for example, may end up going to build a soccer stadium that no tourists will likely visit. EU Needs More Effective Oversight Mungiu-Pippidi said the EU's controls for how money is dispersed are "very strict formally, so if you respect the forms, you can easily allocate this money to whomever you want." She recommended that the current "post-facto" practice of evaluating projects after they've been funded be replaced with an "early warning mechanism" that flags when favoritism could be a factor in how money is being spent. She added that there was a direct link between corruption, or favoritism, and overspending, leading to poorer and more corrupt countries spending up to four times more for infrastructure projects than more developed and less corrupt states. The study concludes by making recommendations to EU policymakers, like reducing bureaucracy and streamlining regulation so that officials have fewer opportunities for corruption. Opportunities for reform aside, the study also cites a clear link between the wealth of a country and its vulnerability to corruption. Romania and Bulgaria, the EU's two newest and poorest members, can only do so much against corruption as long as their economies lag behind the rest of Europe, Mungiu-Pippidi said. URL: http://www.spiegel.de/international/europe/study-finds-austerity-in-europe-can- help-fight-corruption-a-893069.html Related SPIEGEL ONLINE links: • 'Secrecy-Cloaked Companies': Deutsche Bank Criticized for Offshore Operations (04/05/2013) http://www.spiegel.de/international/business/0,1518,892739,00.html • Tax Scandal: Ex Budget Minister's Failings Threaten French Government (04/04/2013) http://www.spiegel.de/international/europe/0,1518,892547,00.html • Promising but Perilous: German Firms Put Off by Russian Corruption (04/03/2013) http://www.spiegel.de/international/europe/0,1518,892043,00.html • The 'Pride of Russia': A Corrupt Politician's Ignoble Demise (03/27/2013) http://www.spiegel.de/international/europe/0,1518,891055,00.html • Crisis Concerns: Investors Nervous about Italy and Spain (02/05/2013) http://www.spiegel.de/international/europe/0,1518,881664,00.html
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04/08/2013 11:18 AM Secret Athens Report Berlin Owes Greece Billions in WWII Reparations By Georgios Christidis in Thessaloniki A top-secret report compiled at the behest of the Finance Ministry in Athens has come to the conclusion that Germany owes Greece billions in World War II reparations. The total could be enough to solve the country's debt problems, but the Greek government is wary of picking a fight with its paymaster. The headline on Sunday's issue of the Greek newspaper To Vima made it clear what is at stake: "What Germany Owes Us," it read. The article below outlined possible reparations payments Athens might demand from Germany resulting from World War II. A panel of experts, commissioned by the Greek Finance Ministry, spent months working on the report -- an 80-page file classified as "top secret." Now, though, the first details of the report have been leaked to the public. According to To Vima, the commission arrived at a clear conclusion: "Greece never received any compensation, either for the loans it was forced to provide to Germany or for the damages it suffered during the war." The research is based on 761 volumes of archival material, including documents, agreements, court decisions and legal texts. Panagiotis Karakousis, who heads the group of experts, told To Vima that the researchers examined 190,000 pages of documents, which had been scattered across public archives, often stored in sacks thrown in the basements of public buildings. The newspaper offered no concrete figure regarding the possible extent of reparation demands outlined in the report. But earlier calculations from Greek organizations have set the total owed by Germany at €108 billion for reconstruction of the country's destroyed infrastructure and a further €54 billion resulting from forced loans paid by Greece to Nazi Germany between 1942 and 1944. The loans were issued by the Bank of Greece and were used to pay for supplies and wages for the German occupation force. Bad Time to 'Pick a Fight' The total sum of €162 billion is the equivalent of almost 80 percent of Greece's current annual gross domestic product. Were Germany to pay the full amount, it would go a long way toward solving the debt problems faced by Athens. Berlin, however, has shown no willingness to revisit the question of reparations to Greece. Athens too is wary of moving ahead with the demands. The government sees the report as being particularly sensitive due to the fear that it could damage their relations with Europe's most important supplier of euro-crisis aid. The Greek public, however, has a different view. To Vima reflected the feelings of many by arguing that "the historical responsibility now falls on the three-party coalition government. It should publish all the findings and determine its position on this sensitive issue, which has detonated like a bomb at a time we are under extreme pressure from our lenders."
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But political analysts believe that the Greek government is disinclined to raise the issue with Germany. The official government position, most recently expressed by deputy finance minister Christos Staikouras, is that Greece considers the issue open and "reserves the right … to bring it to a satisfactory conclusion." The report is no longer in the hands of Finance Ministry officials. It was delivered in early March to Foreign Minister Dimitris Avramopoulous and Prime Minister Antonis Samaras. "It will be a top level, political decision regarding how to use it, and Mr. Samaras will be the one to decide," a senior government official told SPIEGEL ONLINE. "This is no time to pick a fight with Berlin."
URL: • http://www.spiegel.de/international/europe/greek-commission-concludes- germany-owes-billions-in-war-reparations-a-893084.html Related SPIEGEL ONLINE links: • 'Our Mothers, Our Fathers': Next-Generation WWII Atonement (03/28/2013) http://www.spiegel.de/international/germany/0,1518,891332,00.html • Nazi Childhood Memories: 'It's All Still Very Present' (03/28/2013) http://www.spiegel.de/international/germany/0,1518,891349,00.html • A Son's Quest for Truth: The Last Battle of a German WWII Veteran (03/29/2013) http://www.spiegel.de/international/zeitgeist/0,1518,891462,00.html • Lessons from Cyprus: Euro Crisis Poses Grave Dangers to EU Unity (03/25/2013) http://www.spiegel.de/international/germany/0,1518,890745,00.html • Pensions for Jewish Ghetto Laborers: Israel Angered By German Government (03/22/2013) http://www.spiegel.de/international/germany/0,1518,890485,00.html
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Where Bank Regulators Go to Get Rich By William D. Cohan Apr 8, 2013 12:05 AM GMT+0200 Mary Schapiro, the former chairman of the Securities and Exchange Commission, must take us for fools. No need to worry about her and the so-called revolving door between government and Wall Street, she told the Wall Street Journal on April 2, after announcing she would be joining the Promontory Financial Group LLC as a managing director in its Washington office, in charge of its governance and markets practice. “In my case, there’s no revolving door,” she said. “I won’t ever be going back to government.”
About William D Cohan» William D. Cohan is the author of the recently released "Money and Power: How Goldman Sachs Came to Rule the ... MORE Oh well, then, I guess that makes it OK that four months after leaving the SEC, Schapiro is joining a firm stuffed to the gills with former government financial-services regulators peddling their knowledge of Washington’s regulatory thicket to the banks and financial-services companies they once oversaw. (Schapiro, remember, also had a swell incoming trip through the revolving door: She previously ran the Financial Industry Regulatory Authority, Wall Street’s self-appointed watchdog, which paid her a bonus of almost $9 million after she left to go to the SEC in 2009.) Promontory, founded in 2001 by Eugene Ludwig, a former comptroller of the currency, has become a sort of mini-version of Fannie Mae in its heyday. Back then, the mortgage giant was the ultimate revolving door between Washington and the private sector, paying retired politicians huge salaries to lobby their former colleagues. We all know how that turned out. About 100 of the 400 Promontory employees are former Washington regulators; some 5 percent, like Ludwig, come from the Office of the Comptroller of the Currency, which regulates all banks with federal bank charters, including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. Last year, the firm hired Julie Williams, the former chief counsel of the OCC. To keep things in the family, the agency hired as Williams’s replacement Amy Friend, a Promontory managing director. Among the members of Promontory’s advisory board are Arthur Levitt, like Schapiro a former SEC chairman (and now a senior adviser to Goldman Sachs Group Inc. and a board member at Bloomberg LP); Frank Zarb, a longtime Wall Street hand at firms such as Lazard, American International Group Inc. and Citigroup; Kenneth Duberstein, the former chief of staff to President Ronald Reagan and a member of the special committee of the board of directors of Dell Inc.; and Alan Blinder, a Princeton University economics professor and former Federal Reserve vice chairman.
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Blinder is a particularly interesting case study of how Promontory works its magic. According to the Promontory website, Blinder is a co-founder of something called Promontory Interfinancial Network, which when you cut through the gobbledygook says it helps smaller financial institutions get some of the same benefits of size enjoyed by our “too big to fail” banks. One of the products Promontory Interfinancial offers customers is Insured Cash Sweep, which according to a fancy video allows someone with more than $250,000 in cash on deposit in a bank -- the limit of what the Federal Deposit Insurance Corporation will insure -- to get federal insurance for any amount. What the company does is allow someone to hand over, say, $1 million, which is then broken up for him into four $250,000 pieces and farmed out to separate financial institutions so that, voila, each $250,000 is FDIC-insured. The depositor notices no difference on a daily basis -- he can still get his money whenever he wants, unless the money is in a savings account, where access is limited to six times a month -- but, like magic, $1 million is federally insured instead of just $250,000. Nassim Nicholas Taleb, the best-selling author of the “Black Swan,” describes in his latest book, “Antifragile,” how he ran into Blinder at the World Economic Forum in Davos, Switzerland, one year and thought he was going to engage the former Fed vice chairman on ideas about how to save the financial system. Instead, Blinder tried to sell him on Insured Cash Sweep. It quickly dawned on Taleb what Blinder was up to. “It would allow the super-rich to scam taxpayers by getting free government sponsored insurance,” Taleb wrote. “Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.” “Isn’t this unethical?” Taleb asked Blinder. According to Taleb, Blinder told him, “It is perfectly legal,” adding that, “we have plenty of former regulators on the staff.” Taleb felt this implied “that what was legal was ethical and asserting that former regulators have an edge over citizens.” Taleb calls it the Alan Blinder Syndrome: “A model of how people use public office to, at some point, legally profit from the public.” Taleb told me the other day that he views Schapiro’s move to Promontory -- and to a seat on the board of General Electric Co. -- no differently. “I find Mary Schapiro morally repulsive,” he said, because there is an “implicit deal” whereby regulators such as Schapiro and Blinder (and many others) “make regulations complex” and then “sell their services at a higher price when they go to the private sector.” Taleb proposes that high-ranking regulators who return to the private sector, where they benefit directly from their knowledge of complex regulations and agencies, be forced to return to taxpayers any compensation above their own former salary. In Schapiro’s case, Taleb would have her return to taxpayers anything exceeding the $165,000 or so she earned as SEC chairman. “Mary Shapiro has used the taxpayer to puff up her career,” he said. “To me, it is a legal scam, taking advantage of the taxpayer because no regulator will ever make a regulation that’s clean anymore.” While the chances of Taleb’s proposal becoming reality are exactly zero, it remains deeply disturbing that former top government regulators can skip off to the private sector so soon after leaving public service, and then insist it is something we shouldn’t worry about. Enjoy your big new payday at Promontory, Ms. Schapiro, but please spare us the sanctimonious claptrap.
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(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.) http://www.bloomberg.com/news/2013-04-07/where-bank-regulators-go-to-get- rich.html
Arvind Subramanian Arvind Subramanian is a senior fellow jointly at the Peterson Institute for International Economics and the Center for Global Development. Tres nuevas lecciones de la crisis del euro 08 April 2013 WASHINGTON – Mientras algunos observadores sostienen que la lección fundamental del bautismo de fuego de la eurozona es que se necesita una mayor integración fiscal y bancaria para sustentar la unión monetaria, muchos economistas ya lo señalaban incluso antes de la creación del euro en 1999. Las verdaderas lecciones de la crisis del euro residen en otra parte -y son genuinamente nuevas y sorprendentes. La creencia popular sobre las uniones monetarias era que se podía evaluar su efectividad en dos terrenos. Primero, ¿las regiones que se iban a unir eran similares o disímiles en términos de la vulnerabilidad de sus economías a las sacudidas externas? Cuanto más similares las regiones, más eficiente la zona monetaria resultante, porque las respuestas políticas se podían aplicar de manera uniforme en todo el territorio. Si las estructuras económicas eran disímiles, entonces el segundo criterio se volvía crítico: ¿había acuerdos vigentes que permitieran un ajuste frente a las sacudidas asimétricas? Los dos acuerdos clave que la mayoría de los economistas resaltaban eran las transferencias fiscales, que podían amortiguar las sacudidas en regiones muy afectadas, y la movilidad laboral, que les permitiría a los trabajadores de esas regiones desplazarse a otras menos afectadas. La ironía de todo esto es que el ímpetu hacia una unión monetaria fue en parte la consecuencia de haber reconocido las asimetrías. Como resultado, luego de las devaluaciones de la libra y la lira a principios de los años 1990, con las consiguientes sacudidas adversas para el comercio en el caso de Francia y Alemania, la lección que se extrajo fue que se necesitaba una moneda única para impedir que se repitieran esas sacudidas dispares. Sin embargo, esto pasó por alto una característica crucial de las uniones monetarias: la libre movilidad de capitales y la eliminación del riesgo monetario -atributos
176 indispensables de una zona monetaria- podían ser (y fueron) la causa de las sacudidas asimétricas. Las uniones monetarias, en otras palabras, deben preocuparse por las sacudidas endógenas tanto como exógenas. La libre movilidad de capitales permitió que los excedentes de grandes ahorristas como Alemania fluyeran a importadores de capital como España, mientras que la eliminación percibida del riesgo monetario sirvió para agravar esos flujos. Para los inversores, las burbujas inmobiliarias españolas parecían una gran inversión, porque las fuerzas de la convergencia económica desatadas por el euro seguramente harían aumentar sus precios -y porque no había una peseta que pudiera perder valor. Esos flujos de capital crearon un auge -y una pérdida de competitividad a largo plazo- en algunas regiones, que precedió un colapso demasiado previsible. En la medida que los acuerdos monetarios y fiscales no reduzcan o eliminen el riesgo moral, la probabilidad de que los flujos de capital creen esas sacudidas asimétricas endógenas seguirá siendo proporcionalmente alta. Una segunda lección que arrojó el caso de la eurozona, anunciada por el economista Paul de Grauwe, es que las uniones monetarias pueden ser propensas a crisis de liquidez que se retroalimentan, porque algunas partes vulnerables (Grecia, España, Portugal e Italia en varios puntos) carecen de monedas propias. Hasta que el Banco Central Europeo intervino en agosto del año pasado para convertirse en el banco central no sólo de Alemania y Francia, sino también de los países periféricos en apuros, estos últimos eran como economías de mercados emergentes que se habían endeudado en moneda extranjera y enfrentaban salidas de capital abruptas. Esos "frenos repentinos", como los llaman los economistas Guillermo Calvo y Carmen Reinhart, hicieron subir las primas de riesgo y debilitaron las posiciones fiscales de los países afectados, lo que a su vez aumentó el riesgo y demás, creando la espiral descendente viciosa que caracteriza a las crisis que se retroalimentan. La analogía más apropiada es con un país como Corea del Sur. Tras el colapso de Lehman Brothers en 2008, Corea del Sur necesitaba dólares, porque sus empresas se habían endeudado en dólares que los ahorristas domésticos no podían proporcionar en su totalidad. En consecuencia, entró en un acuerdo de permuta con la Reserva Federal para garantizar que se satisfaría la demanda de moneda extranjera de Corea del Sur. Por supuesto, la crisis del euro no fue sólo una crisis de liquidez. Varios países en la periferia (Grecia, España y Portugal) fueron responsables de las circunstancias que generaron y precipitaron la crisis, y tal vez haya cuestiones de solvencia fundamentales de las que haya que ocuparse incluso si se resuelve la escasez de liquidez. Finalmente, una lección menos reconocida de la crisis del euro tiene que ver con el rol y el impacto de los miembros dominantes de una unión monetaria. Se suele decir que Estados Unidos, por ser el principal emisor de moneda de reserva, goza de lo que el entonces ministro de Finanzas francés Valéry Giscard d'Estaing llamó en los años 1960 un "privilegio exorbitante", que se traduce en costos de endeudamiento más bajos (un beneficio que, según se estima, puede llegar a representar hasta 80 puntos básicos). Este supuesto privilegio siempre tuvo un inconveniente -ignorado previamente pero ahora sumamente destacado en nuestra era mercantilista-. Si los inversores se vuelcan masivamente a activos financieros "seguros" de Estados Unidos, esos flujos de capital deben mantener el dólar significativamente más fuerte de lo que sería de otra manera, lo cual es un costo evidente, especialmente en un momento de recursos ociosos y capacidad no utilizada.
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Pero, en el caso de Alemania, el privilegio exorbitante no tuvo ese costo, debido exclusivamente a la unión monetaria. La debilidad en la periferia hizo que el capital regresara a Alemania en busca de un refugio regional seguro, reduciendo los costos de endeudamiento alemanes. Pero, sumado a economías débiles como Grecia, España y Portugal, el euro también ha sido mucho más débil de lo que habría sido el marco alemán. En efecto, Alemania ha tenido el doble privilegio exorbitante de reducir los costos de endeudamiento y una moneda más débil -un proeza que una moneda como el dólar estadounidense, que no pertenece a una unión monetaria, no puede lograr. El futuro de la eurozona estará determinado, por sobre todas las cosas, por la política. Pero su desarrollo hasta la fecha ha cambiado y mejorado para siempre la manera en que entendemos las uniones monetarias. Y eso será así más allá de si la eurozona logra o no los acuerdos fiscales y bancarios más estrechos que siguen siendo necesarios para sustentarla. This article is available online at: http://www.project-syndicate.org/commentary/what-the-eurozone-crisis-has-taught- economists-by-arvind-subramanian/spanish
Print Joseph E. Stiglitz , Arjun Jayadev La patentemente sabia decisión de la India 08 April 2013 NUEVA YORK – La negativa del Tribunal Supremo de la India en cuanto a ratificar la patente de Gleevec, el exitoso medicamento contra el cáncer desarrollado por Novartis, la gigante empresa farmacéutica suiza, es una buena noticia para muchos de aquellos que viven en la India y sufren de cáncer. Si otros países en desarrollo siguen el ejemplo de la India, esta también será una buena noticia en otros lugares: se podrá destinar más dinero a otras necesidades, ya sea a la lucha contra el SIDA, a proporcionar educación, o a llevar a cabo inversiones que permitan el crecimiento y reduzcan la pobreza. Pero la decisión de la India también significa menos dinero para las grandes empresas farmacéuticas multinacionales. Como era de esperar, esto ha llevado a una respuesta sobreexcitada de dichas empresas y de sus grupos de presión: la sentencia, ellos alegan, destruye el incentivo para innovar, por lo que se constituirá en un golpe serio contra la salud pública a nivel mundial. Estas afirmaciones son ferozmente exageradas. En términos económicos y de políticas sociales, la decisión del Tribunal de la India tiene mucho sentido. Además, es sólo un esfuerzo localizado para reequilibrar un régimen mundial sobre la propiedad intelectual (PI) que se inclina fuertemente hacia el lado de los intereses farmacéuticos, a expensas del bienestar social. De hecho, existe un creciente consenso entre los economistas sobre que el régimen de propiedad intelectual vigente en realidad reprime la innovación. El impacto que tiene una fuerte protección de la propiedad intelectual en el bienestar social se ha considerado por largo tiempo como ambiguo. La promesa es que los
178 derechos de monopolio pueden estimular la innovación (aunque por lo general los descubrimientos más importantes, como el ADN, ocurren dentro de las universidades y de los laboratorios de investigación patrocinados por los gobiernos, y dependen de otros incentivos). Sin embargo, a menudo existen también otros costos importantes: precios más altos para los consumidores, el efecto moderador sobre la innovación posterior por la reducción del acceso al conocimiento, y, en el caso de los medicamentos que salvan vidas, la muerte de todos los que no pueden permitirse el lujo de pagar por la innovación que podría haberlos salvado. El peso otorgado a cada uno de estos factores depende de las circunstancias y prioridades, y debe variar según el país y el tiempo. Los países industrializados avanzados en las primeras etapas de su desarrollo se beneficiaron de un mayor crecimiento económico y un mayor bienestar social al adoptar de forma explícita una menor protección para la propiedad intelectual en comparación con la que hoy en día se exige a los países en desarrollo. Incluso en los Estados Unidos existe una creciente preocupación sobre que las llamadas “hold-up patents” (patentes retenidas) y las “me- too patents” (patentes yo también) – y el gran matorral de patentes, en el que es probable que cualquier innovación se enrede debido a las reclamaciones de propiedad intelectual de otros – estén desviando los escasos recursos de investigación, alejándolos de sus usos más productivos. India representa sólo entre el 1 al 2% del mercado farmacéutico mundial. Pero ha sido durante mucho tiempo un punto de inflamación en las batallas sobre la expansión de los derechos de propiedad intelectual de las compañías farmacéuticas mundiales, debido a su dinámica industria de productos genéricos y su voluntad de impugnar las disposiciones sobre patentes tanto a nivel nacional como en jurisdicciones extranjeras. La revocación de la protección de patentes para medicamentos en el año 1972 expandió enormemente el acceso a los medicamentos esenciales, y llevó al crecimiento de una industria nacional competitiva a nivel mundial que a menudo se denomina como la “farmacia del mundo en desarrollo”. Por ejemplo, la producción de medicamentos antirretrovirales por parte de fabricantes de productos genéricos en la India, como lo es la fabricación de Cipla, ha reducido el costo de salvar vidas mediante el tratamiento del SIDA en el África subsahariana a sólo el 1% del costo que se invertía una década atrás. Gran parte de esta valiosa capacidad a nivel mundial se construyó bajo un régimen débil – de hecho, no existente – de protección para las patentes farmacéuticas. Pero la India está comprometida por el acuerdo de la Organización Mundial del Comercio sobre los Aspectos de los Derechos de Propiedad Intelectual relacionados con el Comercio (ADPIC) (TRIPS agreement), y consecuentemente revisó sus leyes sobre patentes, causando ansiedad generalizada en el mundo en desarrollo acerca de las implicaciones que esto conllevaría para la provisión mundial de medicamentos a costos asequibles. En efecto, la decisión sobre Gleevec es aún tan sólo un pequeño revés para los productos farmacéuticos occidentales. En las últimas dos décadas, los grupos de presión han trabajado para armonizar y fortalecer un régimen sobre la propiedad intelectual que sea mucho más estricto y aplicable a nivel mundial. Como resultado, en la actualidad existen numerosas protecciones superpuestas para las empresas farmacéuticas que son muy difíciles de debatir por parte de la mayoría de los países en desarrollo, y que a menudo confrontan sus obligaciones internacionales frente a sus obligaciones domésticas de protección de la salud y las vidas de sus ciudadanos. Según el Tribunal Supremo de la India, la modificada ley de patentes del país aún pone mayor peso en los objetivos sociales en comparación con lo que ocurre en los EE.UU. y 179 en otros lugares: las normas sobre la no obviedad y la novedad requeridas para obtener una patente son más estrictas (especialmente en lo que se refiere a los medicamentos), y no se permite la “perpetuación” de las patentes existentes – o protección de patentes para innovaciones incrementales posteriores. Por lo tanto, el Tribunal reafirmó el compromiso primario de la India en cuanto a proteger la salud y las vidas de sus ciudadanos. La decisión también puso en relieve un hecho importante: a pesar de sus limitaciones severas, el acuerdo sobre los ADPIC sí tiene algunas salvaguardias (que se usan de forma muy poco frecuente) que dan a los países en desarrollo un cierto grado de flexibilidad para limitar la protección de las patentes. Esta es la razón por la que la industria farmacéutica, los Estados Unidos y otros han promocionado desde su inicio un conjunto de normas más amplio y más fuerte a través de acuerdos adicionales. Estos acuerdos, por ejemplo, limitan la oposición a las solicitudes de patentes; prohíben que las autoridades reguladoras nacionales aprueben medicamentos genéricos hasta que las patentes expiren; mantienen la exclusividad de los datos, lo que consecuentemente retrasa la aprobación de medicamentos biogenéricos, y requieren nuevas formas de protección, como por ejemplo medidas de lucha contra la falsificación. Existe una curiosa incoherencia en el argumento que indica que la decisión de la India socava los derechos de propiedad. Un requisito institucional esencial para los derechos de propiedad en buen funcionamiento es la existencia de un sistema judicial independiente que los haga cumplir. El Tribunal Supremo de la India ha demostrado que es independiente, interpreta fielmente la ley y no sucumbe fácilmente a los intereses corporativos mundiales. Corresponde ahora al Gobierno de la India utilizar las salvaguardias del Acuerdo sobre los ADPIC para garantizar que el régimen de propiedad intelectual del país progrese tanto en los ámbitos de la innovación como de la salud pública. Existe un creciente reconocimiento a nivel mundial sobre la necesidad de un régimen de propiedad intelectual más equilibrado. Pero la industria farmacéutica, al tratar de consolidar sus ganancias, ha estado presionando en la dirección opuesta, promoviendo la instauración de un régimen de propiedad intelectual cada vez más fuerte y más desequilibrado. Los países que consideren firmar acuerdos como la Asociación Trans- Pacífico o acuerdos de “asociación” bilateral con los Estados Unidos y Europa tienen que estar conscientes de que este es uno de los objetivos ocultos. Lo que se promociona como “acuerdos de libre comercio” incluye disposiciones sobre propiedad intelectual que podrían sofocar el acceso a medicamentos a precios asequibles, causando un impacto potencialmente significativo en el crecimiento económico y el desarrollo. Traducido del inglés por Rocío L. Barrientos. This article is available online at: http://www.project-syndicate.org/commentary/the-impact-of-the-indian-supreme-court- s-patent-decision-by-joseph-e--stiglitz-and-arjun-jayadev/spanish
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Lagarde welcomes Japan's big stimulus By Jamil Anderlin i and Ben McLannahan , FT.com April 8, 2013 -- Updated 0444 GMT (1244 HKT) CNN.com
International Monetary Fund (IMF) managing director, Christine Lagarde, said Japan's stimulus plan will help boost global growth. (Financial Times) -- Christine Lagarde has welcomed the huge monetary stimulus plan unveiled by Japan and says it will help to boost global growth at a time when the outlook is already starting to improve. The Bank of Japan last week announced it aimed to double its monetary base over two years through the aggressive purchase of long-term bonds, in a dramatic shift from previous policy. Ms Lagarde, the International Monetary Fund's managing director, said loose monetary policies and "unconventional measures" had helped boost global growth and "the reforms just announced by the BoJ are another welcome step in this direction". She was speaking at the Bo'ao business forum in southern China on Sunday. In contrast, some Chinese economists and business leaders have criticised the move by the BoJ, saying it will hurt export competitiveness in other countries and could trigger large capital inflows to China and push up inflation. "A substantial portion of the global economy looks better now than it did a year ago," Ms Lagarde said. "In particular, we are beginning to see momentum pick up in the US." During her spell as managing director of the IMF, Ms Lagarde has often spoken warmly
181 of Japan and its record in bolstering the IMF's resources. In November 2008, in the wake of the Lehman collapse, then prime minister Taro Aso - - now finance minister and deputy to prime minister Shinzo Abe -- offered the IMF up to $100bn in temporary funds, while calling on other member countries to inject additional permanent capital. And when the IMF asked member states for more capital last year to boost its firepower, Japan was first to commit. Its $60bn pledge was also the largest from any country, helping to lift the total loans available to the IMF above $1tn. "When the global economy faced its darkest hours, you stood by your fellow global citizens," Ms Lagarde told a Tokyo forum last July. Japan's actions, she said, had helped "stave off an even more dire global economic collapse". But serious risks remain for the global rebound, particularly worries about continued low growth in Europe and "fiscal risks in some major developed economies that are weighing on recovery," Ms Lagarde told the Bo'ao forum. She said European banking union was a key first step to putting Europe on the path to sustainable recovery. Ms Lagarde also said that central banks in Asia should begin to think about the timing and scale of reductions in monetary support for their economies and about returning fiscal balances to pre-2008 levels. Ms Lagarde said the IMF was pleased to see China taking steps to quantify and reduce local government borrowing that funded a huge infrastructure boom in recent years and helped the country pull itself out of a downturn in the wake of the financial crisis. "Efforts by the Chinese authorities to co-ordinate, control and limit local government indebtedness is a good thing in our view," she said. Local governments in China had run up debts of more than Rmb20tn ($3.2tn), or nearly double previous estimates released by the government, a former Chinese finance minister said at Bo'ao. Xiang Huaicheng told reporters that earlier government reports of around Rmb11tn in local government debt had seriously underestimated the total but that overall debt levels in China were manageable. He did not elaborate but his mention of the Rmb11tn figure appeared to refer to an estimate published by China's National Audit Office in 2011. Mr Xiang said the central government had debts of between Rmb7tn and Rmb8tn and the overall government debt-to-gross domestic product ratio was about 40 per cent at the end of last year, roughly unchanged from a year earlier. © 2013 Cable News Network. Turner Broadcasting System, Inc. All Rights Reserved. http://edition.cnn.com/2013/04/08/business/japan-stimulus-welcomed- eu/index.html
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Daily Morning Newsbriefing April 08, 2013 Over to Portugal Portugal’s constitutional court last Friday ruled several key articles of the 2013 state budget unconstitutional, forcing the government to find new ways to raise what international newspapers put between €860m and €1.3bn in extra savings in 2013. The Court found the planned cuts in wages and pensions for public employees to be discriminatory because they didn't apply to all income-earners and also overturned a planned tax on unemployment and sickness benefits. Prime minister Passos Coelho said in a televised statement on Sunday that the government has no alternative but to cut spending on health, education and social security to keep the country’s €78bn bailout programme on track, the FT reports. The budgets of state-owned companies would also be cut, ruling out more tax rises on top of record increases introduced in January. Coelho confirmed the government’s commitment to all targets under the programme, a precondition for a decision on the lengthening of maturities, Reuters cites a statement from the Commission. Portuguese opposition parties seized the ruling calling on the prime minister to resign. Socialist leader António José Seguro said an early general election would be the best solution. But President Aníbal Cavaco Silva, who had asked for the constitutional court’s ruling, came to the government's defense, saying that the “the government has conditions to fulfil its mandate". In Portugal only the president has the power to dissolve Parliament and call for early elections. Passos Coelho would still have to sell any new budget to a restive parliament, reminds the Wall Street Journal. Though the governing coalition has a majority, the prime minister struggled to get his budget approved because of resistance from his coalition partner, the Democratic and Social Center Party. One of its members, Lobo Xavier, already said in an interview with the Diario Economico that it is now time for the government to reshuffle and to review the objectives with the troika. Spain doing better than Portugal thanks to PP, says PP The Spanish reaction to the Portuguese institutional crisis came from Esteban Gonzalez Pons, PP secretary in charge of studies and programs, who said that "Portugal is as Spain would be if the PSOE had remained in power", reports Europa Press. Gonzalez Pons also promised that "sacrifices will bear fruit very soon" and that the PP government "has taken the necessary measures to avoid a rescue or intervention". Further allegations emerge in PP cash payments scandal One of the media sensations of the weekend in Spain was a column by journalist Raul del Pozo in El Mundo, in which he claimed to have met an informer close to former PP treasurer Luis Barcenas, who showed him documents dating back to 1989 corroborating the existence of cash payments to PP cadres. Del Pozo claims that, were the names to be 183 known, they would leave the government and prominent firms and media personalities shaken. The documents included evidence of a shell company set up by the PP to route irregular funds, payments and donations. Allegedly the payments continued to be made after the PP won the national government in 1996. According to the informant, Barcenas is "very angry" at the PP for "not being able to remove from the [Gurtel] case the judges and prosecutors of the previous [PSOE] government", and his wife would "let the chips fall where they may" in case "something happens" to Barcenas. Finally, he informant confirmed the authenticity of the "Barcenas papers", saying that the previous Treasurer Alvaro Lapuerta has the originals, and that the copies were given to El Pais by Jorge Trias, a former member of parliament for the PP who published a highly damaging article about the cash payments in El Pais. Finally, it was said that Francisco Correa, at the centre of the 'Gurtel' case, might release damaging information to El Mundo in the near future. Over the weekend, Raul del Pozo appeared on Tele5 talk show 'El Gran Debate' and explained that he didn't publish any names because he could not corroborate the information independently (El Plural has video and a summary). Canary Islands to keep schools open in the summer to feed children La Opinion, a regional paper from the Canary Islands, reports on plans by the regional government to keep schools open during the summer months for nearly 6,000 children for sports and English lessons. However, the real aim behind the move is to continue to make school meals available for the increasing number of children whose families are having trouble feeding. Currently there are nearly 3,000 children whose parents cannot afford to pay €10 a month for school meals, and a further €10 who are not eating at school but whose families are going through a "critical" situation. Unemployment on the Islands is at 33% and child poverty at 29%, both above Spain's national average. For scale, the population of the region is 2.1 million; there are over 70,000 children who eat at school, of whom nearly 37,000 have their meals subsidized. Spain's national research council near financial collapse Spanish science news portal EsMateria reports that Spain's national research council CSIC is asking the government for a "cash advance" in order to avoid "collapse" as it expects to have a deficit of €100m this year. According to EsMateria, the Finance Ministry has been delaying, canceling or attaching conditions on disbursements decided by the R&D&i secretariat of the Economy Ministry. Forecast for negative growth in Spain and Cyprus in 2014 ABC reports on economic projections by HSBC, according to which Spain and Cyprus will be the only Eurozone countries not to grow in 2014. HSBC forecasts a 1.9% GDP contraction for Spain in 2013, and a 0.2% drop in 2014, due to the "toll from harsh austerity measures". Official Spanish government forecasts are of a 0.5% contraction in 2013 and a 1.2% expansion in 2014, though the 2013 forecast might be revised down to a 1% drop. HSBC is forecasting public debt at 99.5% in 2014 and unemployment at 27.4%. The end of Spain's two-party system? In its monthly tracking poll by Metroscopia, El Pais finds that combined voter intent for the two major Spanish parties PP and PSOE continues to drop and is now below 50%. In the November 2011 general election, their combined vote share was nearly 75%. The same poll, whose field work was carried out before Princess Cristina was indicted, shows the King's net approval rating at -11% where three months earlier it was +21%. As a curiosity, El Pais points out that tax inspectors have a better approval rating than
184 the King. The King's support is particularly weak among PSOE voters, and among the under-34 who have no memory of the 1981 coup attempt. Italian centre-right ready to launch counteroffensive Silvio Berlusconi says the way to break the current political stalemate is through a grand coalition with the centre left, Il Corriere della Sera reports. For the stability of the country, Italy should not return to the polls, he said. The priority is to form a stable, strong government to pull the country out of the crisis in the shortest possible time. Unfortunately, as Berlusconi remarks, Bersani refuses such a solution. Berlusconi said he will now launch an 8-points plan: abolition and refund of the IMU real-estate tax, new power to tax agency Equitalia, tax discounts to firms that will hire young people, less bureaucracy, abolition of public financing to political parties, fiscal reform, direct election of President of the Italian Republic, justice reform. Italian tax burden at 52% in Q4 The Italian tax burden has reached another record, Il Sole 24 Ore reports. The tax burden was 52% in the fourth quarter of 2012, up 1.5% on the same period in 2011, according to an analysis by ISTAT. The average tax burden for 2012 was 44%. The tax level has spiked due to the Mario Monti’s tax hikes. It is expected to rise again during the current year, but there are not forecasts yet, the agency said. Italy’ political deadlock not over Eugenio Scalfari writes in La Repubblica that the current political deadlock is simply insurmountable. The PD won’t be the solution: too many internal fights. Popolo della Libertà is a nest of uncertainty. The Movimento 5 Stelle is blocked by its hard-line position against the establishment parties. And the wise men group? It is a trick to buy time, Scalfari writes. Unfortunately, there is no easy solution. Italy will be stuck in this useless stalemate for a while. Greek finance minister upbeat on agreement with troika Following talks with troika officials late on Sunday, Yannis Stournaras appeared upbeat on the prospect of an agreement so Greece could receive more bailout loans and insisted there would be no need for more fiscal measures, Kathimerini reports. The troika has reportedly accepted the hiring of 1000 new civil servants to replace the departure of as many public sector employees who have broken the code of conduct, during talks with the Greek prime minister at his office in Athens on Sunday, according to Skai radio. Greek bank merger halted The Wall Street Journal reports that the Greek government has blocked the merger of National Bank of Greece and Eurobank, as the two banks came up short in their plans to raise sufficient capital. The fear is that the combined entity would be too big to be bailed out. The article quotes a senior Greek finance ministry official as saying that the bank rescue fund would begin recapitalizing the two lenders separately, which would bring both of them under direct state control. The troika had earlier raised objections against the tie-up. Coeure redefines ECB inflation target This is the first time we can remember an ECB official has expressed concern of inflation undershooting the target. Benoit Coeure also seems to have quietly redefined the target, which is now 2%, and no longer “below but close to 2%”. This is what Coeure is quoted as saying, by Reuters: "We have a rate of inflation which looks set to
185 move away from the ECB's 2% target over the next 18 months." He went on to clarify this by saying: “It [inflation] is still fairly close to the 2% target but it is moving below that goal and this is something the board of governors is clearly following as we have a goal of 2%," Coeure said. The Reuters story fails to pick up on this important point. Coeure is shifting the target. We have never heard an ECB official publicly stating that the target is 2%. The reason why this is important is that a simple number suggests a symmetric target, forcing you to correct when you undershoot and overshoot. The previous target of “close to, but below 2%” is asymmetric. Inflation of 1% may be interpreted to be in line with the older target, but is clearly an undershoot if the target is 2%. Munchau on Draghi’s priorities In his FT column, Wolfgang Munchau argues that the ECB’s priority should be to deal with the broken monetary transmission mechanisms. The OMT programme has not succeeded in this respect, and a much more target programme is now needed. Munchau favours direct corporate bond purchases and a backstop of a large-scale EIB lending programme for small companies. He says a rate cut would also be desirable as a means to deal with the fall in aggregate demand, but says the overall impact of non-conventional measures be higher than the impact of further rate cuts. He also says Mario Draghi can organise a vote against the Bundesbank, but to do so over both conventional and non-conventional policies might not be wise. Von Hagen says effective debt capacity much lower Jurgen von Hagen makes an important point in a comment in Frankfurter Allgemeine this morning. He says members in a monetary union have a much lower overall debt capacity than they think because they can no longer inflate away their debt. He makes a comparison with the US states and Canadian provinces, whose indebtedness is about 20-30% of GDP. He says the long-term debt capacity of eurozone member states is below 60%. He says the first ten years of the eurozone had presented member states with a unique chance to drive down the debt ratio, but this chance was wasted. He also makes the point that the ESM offers no solution. It gives the impression of a stabilising function but only works for small countries with debt problem as long as the guarantors have no debt problems themselves. His conclusion is that the eurozone needs to return to the principle of no bailout and national responsibility. We totally agree with his analysis, both on the debt sustainability of members of a monetary union and the weakness of the ESM, but we arrive at the exact opposite conclusion. A return to the no-bailout principle is not realistic. The alternatives now are: a strong centre with much higher debt absorbence than the member states or a break-up. Eurozone Financial Data Previous day Yesterday This Morning
France 0.634 0.544 0.538 Italy 3.322 3.125 3.118 Spain 3.681 3.551 3.501 Portugal 5.180 5.207 5.370 Greece 10.866 11.018 11.28 Ireland 2.877 2.854 2.871 Belgium 0.843 0.757 0.755 Bund Yield 1.244 1.212 1.219
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Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.296 1.299
Yen 124.670 128.09
Pound 0.850 0.847
Swiss Franc 1.216 1.2147
ZC Inflation Swaps
previous last close
1 yr 1.51 1.55
2 yr 1.45 1.53
5 yr 1.67 1.78
10 yr 1.95 2.07
Euribor-OIS Spread
previous last close
1 Week -5.100 -5.1
1 Month -2.357 -4.357
3 Months 2.357 2.357
1 Year 30.171 30.971
Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-04- 08.html?cHash=33df81b21c76f419b49f620bf99c6eee
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ft.com comment Columnists April 7, 2013 6:53 pm The ECB’s priority should be to fix southern Europe
By Wolfgang Münchau Mario Draghi should prioritise the unconventional over the conventional The eurozone economy is stuck in a long and drawn-out recession. It will probably continue for the rest of the year. Unemployment has reached a eurozone-era record of 12 per cent, and will probably rise further. Inflation is at the lower end of the target range, and projected to fall. The risks to growth and inflation are both on the downside. So why on earth is the European Central Bank not cutting interest rates? This is a legitimate question, and an important one. But the most important question facing European monetary policy is how to fix the credit crunch in the southern half of the monetary union. More ON THIS STORY/ Editorial Europe needs more creative thinking/ ECB signals rate cut on the agenda/ BoE policy makers hold rates and QE/ ECB draws bail-in lessons from Cyprus/ Eurozone joblessness stays at record high ON THIS TOPIC/ Central banks move into riskier assets/ Nervous Europe drives demand for dollars/ Small companies warn of hit from weak pound/ Hungary unveils growth stimulus package WOLFGANG MUNCHAU/ Economics will catch up with the euro/ Eurozone break- up edges even closer/ EU ministers risk bank run/ Italy must seek generational change Nowhere is the situation more acute than in Italy, where small and medium-sized companies are being hit by austerity and the credit crunch at the same time. Mario Monti’s administration in Italy implemented austerity in such a way that it has prevented municipalities and other public entities paying bills to their suppliers. This has turned into an existential threat to the survival for many small companies, which face the simultaneous problem of not getting paid and not having access to credit to tide them over. Small Italian companies typically face interest rates of 10 per cent. Over the border in Austria, similar companies get credit for less than half that rate. Italian households, too, are credit constrained, as lending for mortgages and consumption goods has been steadily falling, and rates rising. Unlike in Italy, the fall in bank lending in Spain is mostly demand-driven. In Spain, lending to households was down 4.4 per cent year-on-year in February, while lending to firms was down by 10.6 per cent. Spain is the classic example, along with Japan in the 1990s, of a balance-sheet recession where the private sector deleverages irrespective of the level of interest rates. But even for Spain I would expect that a targeted programme to reduce the interest-rate premium would bring higher returns than an overall quarter-point rate cut. I am not against a rate cut. On the contrary, I think the ECB should cut policy rates to zero to counteract the fall in aggregate demand. But while this would have a small
188 positive effect on average monetary conditions, it will be less effective than a programme designed to reduce real-world lending rates. A recent IMF working paper by Edda Zoli found a link between the size of the sovereign spreads and the funding costs for Italian banks, and ultimately, the rise in corporate borrowing costs. The high sovereign spreads thus indirectly created credit supply constraints in the private sector. But the process did not seem to have worked the other way round. Mario Draghi, president of the ECB, tried to fix the problem last year with the launch of a sovereign bond purchasing programme, known as Outright Monetary Transactions (OMT). It triggered a fall in sovereign bond spreads, but, unfortunately, had no effect on transmission mechanisms. On the contrary, they have deteriorated. Last week, Mr Draghi said he was “thinking 360 degrees on the non-standard measures”. It looks as though he is up to something. What can he do? I could think of three options in rising order of firepower: First, the ECB could find a way to provide direct incentives to banks to lend money. It might relax collateral requirements for various classes of asset-backed securities, or extend an existing programme to allow bank loans themselves to be posted as collateral. But do not hold your breath – this programme has not been very successful so far. Second, he could backstop a massive lending programme to be spearheaded by the European Investment Bank to co-finance loans to small and medium-sized companies. For this to work, it would have to be big, uncharacteristically fast and unbureaucratic. The third, and most radical, action the ECB could undertake is to purchase corporate bonds on the primary and secondary market, thus funding companies directly, in addition to purchases of covered bonds. A corporate bond purchasing programme may not help the smallest companies, though there is no reason in theory why they should not issue bonds for the ECB to buy. Some combination of the three measures may well do the trick. Would this be legal? Of course it would. The ECB has a legal mandate to target price stability. It is not allowed to monetise government debt. But it is allowed to fix the transmission mechanism of its own policies. The obstacles are more political than legal. I have doubts whether the Bundesbank and other northern European central banks are willing to go along with this. They have argued in the past that it was the responsibility of member states to fix their own banking systems. So this is ultimately a conflict about banking union. A fully-fledged banking union would constitute a necessary and sufficient solution to the credit crunch problem. If you sever the link between Italian banks and the Italian state, then there should be no reason why Italian companies pay higher interest rates than their northern European equivalents. To get anything done, Mr Draghi will once again have to organise a majority against the Bundesbank. This is possible, but he may find his political capital is finite. In that case, he should prioritise the unconventional over the conventional. http://www.ft.com/intl/cms/s/0/df18590a-9d4b-11e2-a8db- 00144feabdc0.html#axzz2PrIpeB3U
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ft.com Comment Editorial April 7, 2013 5:57 pm Europe needs more creative thinking ECB should consider ways of targeting SMEs directly Not for the first time during the crisis, the eurozone is looking short of ideas to stimulate growth. Last week, the European Central Bank declined to relax monetary policy, in contrast to the forceful example set by the Bank of Japan. Yet the recovery will not come of its own accord. Without creative thinking, the currency bloc risks drifting into prolonged stagnation. There is also a growing sense that policy makers are being held hostage by the German elections, scheduled for next September. The optimists are prone to think that a newly minted government in Berlin is bound to show greater flexibility towards its eurozone partners. This almost certainly underestimates the forces of continuity in German economic policy. Anyway, Europe cannot afford to wait six more months for action. More ON THIS STORY/ Bank chiefs reluctant to follow Japan/ Editorial Bank of Japan opens floodgates/ Euro still needs stronger fundamentals/ Portugal’s austerity plan fails to deliver/ Portugal court rules against austerity ON THIS TOPIC/ ECB signals rate cut on the agenda/ Blow for ECB as wider loan rates hit south/ ECB sticks to its monetary guns/ ECB unveils €1.1bn profit on crisis bonds EDITORIAL/ IMF should look to long-term on Egypt/ Apple in China/ Japan embraces monetary change/ Keystone pipeline The recovery, which policy makers were predicting for the second half of this year, now looks fanciful. The latest data on industrial production, which will be out this Friday, are expected to make for yet more gloomy reading. Unemployment in the periphery is soaring. Even the German economy, which some thought would rebound strongly after shrinking late last year, has run out of steam. There is a widespread belief, particularly in the rich countries of the European core, that growth will come from structural reforms, such as liberalised labour laws and freed up closed-shop professions. But, while necessary, these measures will necessarily take time to produce the desired effects. In countries such as Italy, reform fatigue is kicking in as a result of the widening economic malaise. The European Commission is rightly shifting its stance on fiscal policy, giving governments in difficulty more time to meet their targets. But this is tinkering at the margin. What is needed is for Germany and other countries with fiscal space to expand demand to provide breathing space to their struggling eurozone partners. For now, this is regrettably off the table. Which leaves monetary policy. During his tenure, Mario Draghi, president of the European Central Bank, has shown himself capable of exercising decisive leadership, which has saved the eurozone from collapse. He has kept the banking system afloat by providing lenders with cheap loans. His commitment to buy sovereign debt of distressed countries in unlimited quantities has all but removed the convertibility risk and lowered interest rates on peripheral bonds. Yet, these measures have had only a limited impact on getting credit flowing to businesses, especially in the eurozone periphery. 190
The problem is acute for small and medium enterprises, which form the backbone of the eurozone economy. In peripheral countries such as Spain and Italy, SMEs are the engine of job creation. Yet, they find it increasingly hard to get access to loans. When they do, the price they pay is significantly above what is asked from their German competitors. The ECB should start by lowering its policy rate. With headline inflation at 1.7 per cent and economic activity stagnant, a cut should be incontestable. But since the monetary transmission mechanism is not working, Mr Draghi should do more, seeking ways to target SMEs more directly. One option is to adopt something similar to the UK’s Funding for Lending Scheme, offering cheap loans to banks which should be used to finance commercial and mortgage lending at reduced rates. There is a risk, however, that lenders use the cash to fund loans that would have happened anyway. In Britain, the initiative has so far failed to get credit to businesses, while proving useful for a still overvalued housing market. Another option for the ECB is to continue to relax its collateral eligibility rules on loans to SMEs. But if the ultimate credit risk remains with the banks, this is unlikely to spur lending significantly. A more effective step would be for the central bank to purchase securitised SME loans directly. The ECB would create liquidity in the market and favour the entry of more private players. True, this policy would transfer the credit risk of the loans on to the ECB balance sheet, a step the governing council appears to date reluctant to take. European governments could share some of the potential liabilities, for example via a more flexible use of the European Stability Mechanism. As policy makers across the world act ever more forcefully to help their economies, Europe cannot remain fixated on an orthodoxy which is not working. Nor can it wait for a new government in Berlin. In the name of jobs and growth, Europe should take a brave leap forward. http://www.ft.com/intl/cms/s/0/b54c1448-9ded-11e2-bea1- 00144feabdc0.html#axzz2PrIpeB3U
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Economía Japón lanza su revolución monetaria El gobernador Kuroda hace suya la estrategia de Bernanke con inyecciones masivas de liquidez Duplica el balance del banco central para situarlo en el equivalente al 55% del PIB en 2014 Desenfreno monetario Alicia González Madrid 7 ABR 2013 - 00:53 CET109
El nuevo gobernador del Banco de Japón (BOJ), Haruhiko Kuroda, / FRANCK ROBICHON (EFE) Pocas veces un estreno en un cargo de una institución económica había resultado tan apabullante y drástico. Apenas dos semanas después de tomar las riendas del Banco de Japón, Harukiro Kuroda anunció el pasado jueves una de las mayores inyecciones monetarias que se recuerdan en la historia de los bancos centrales y que supone insuflar a la economía el equivalente al 30% del PIB en solo dos años. Con esta estrategia, el banco central de la tercera economía del mundo espera poner fin a más de 15 años de deflación y depresión económica, aunque para ello haya tenido que abrir la caja de pandora, con los riesgos —algunos desconocidos— que conlleva. Arranca, así, la historia del nuevo Banco de Japón, como lo definen los analistas. El comité del banco central japonés ha apostado por una nueva fase de relajación monetaria, tanto en términos cuantitativos como cualitativos. El objetivo es situar la inflación en el 2% cuanto antes, a más tardar en un plazo de dos años. Sólo como referencia, los precios cayeron en enero, en tasa interanual un 0,2% y excluidos los precios más volátiles de la energía y los alimentos, el descenso fue del 0,7%. Las medidas del nuevo plan - La base monetaria se incrementará a un ritmo de entre 473.000 y 552.000 millones de euros anuales. De esta forma, el volumen de la base monetaria pasará de 1,08 billones de euros a finales de 2012 a 2,13 billones a finales de 2014, según los cálculos de la entidad.
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- Aumentará la compra de bonos a un ritmo de unos 394.000 millones de euros al año (frente a los 55.200 millones fijados en el programa actual) y se podrán adquirir títulos con vencimiento de hasta 40 años. Así, la vida media de los bonos adquiridos por la autoridad monetaria se alargará de tres a siete años. - Se efectuará un incremento anual de 79.000 millones de euros en las compras de fondos cotizados (ETF) y de 236 millones en las de fondos inmobiliarios japoneses (J- REIT). - Se mantendrá la compra de deuda corporativa privada y se relajarán las condiciones de acceso a las entidades financieras en próximas reuniones para impulsar el crédito. - Suspensión temporal de la regla de los billetes, lo que supone que el total de compras de deuda pueden superar el nivel de los billetes en circulación de la economía. - Se da por finalizado el actual programa de compra de activos que estaba dotado con unos 800.000 millones de euros. Para alcanzar ese objetivo, el banco abandona la referencia de los tipos de interés —que ya están próximos a cero— como principal instrumento de su política y apuesta por duplicar la base monetaria, es decir, la suma del dinero en circulación en la economía y las reservas que las instituciones mantienen en el banco central. De esta forma espera que su volumen pasará de los 138 billones de yenes (1,08 billones de euros) de 2012 a 270 billones (2,13 billones de euros) a finales de 2014, lo que supondrá en torno al 55% del PIB de Japón. De esta forma, Kuroda ha hecho suya la estrategia que puso en marcha Ben Bernanke al frente de la Reserva Federal estadounidense tras la caída de Lehman Brothers, en septiembre de 2008. Aunque quizás sería más apropiado decir que, en todo caso, se trata de un viaje de ida y vuelta puesto que Bernanke presume de haber estudiado en profundidad el papel de Koreikiyo Takahashi al frente del Ministerio de Finanzas de Japón entre 1931 y 1936, los años de la Gran Depresión, y cuyas medidas “salvaron brillantemente a Japón de la depresión mundial”, según el banquero estadounidense. La receta aplicada entonces sería, traducida a la actualidad, una combinación de estímulos fiscales, relajación cuantitativa y depreciación del tipo de cambio. Pero Bernanke, además, ha reconocido en varias intervenciones que su objetivo es evitar las consecuencias que una falta de decisión en la adopción de medidas o la retirada anticipada de los estímulos pueden tener sobre la economía, lo que le ha sucedido a Japón desde la década de los años 90 y que explican en buena medida la situación actual. Porque si algo ha puesto de manifiesto la actual crisis financiera es la limitación de los tipos de interés —que en la mayoría de los países desarrollados rondan el 0%— como instrumento de política monetaria y que ha forzado a los bancos centrales a optar por otras medidas de relajación para sacar a flote sus economías. Japón llevaba muchos años en esa situación y el nuevo plan va mucho más allá. Basta compararlo con lo que han hecho otros bancos centrales en este tiempo. Según los cálculos de Estefanía Ponte, de Cortal Consors, la Reserva Federal de EE UU ha aumentado su balance un 233% desde 2007, lo que situaba a finales de febrero la base monetaria de la Reserva en el equivalente a 2,11 billones de euros. Una cifra muy parecida a la meta que ahora se ha fijado Japón, sólo que EE UU tiene una economía tres veces mayor que la nipona y lo ha llevado a cabo en un plazo de cinco años frente a los dos que se ha marcado Tokio. Hablamos de una avalancha de liquidez de proporciones históricas.
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“Kuroda lo ha hecho”, titulaban su informe los analistas del banco de inversión japonés Nomura, como reflejo de su propia sorpresa. “Nadie creía que Kuroda tendría el coraje de hacer lo que ha hecho”, admitía el multimillonario George Soros en una entrevista con la CNBC “Hay que dar un voto de confianza al Banco de Japón por su full monty de expansión monetaria”, señalaba Steen Jacobsen, economista jefe de Saxo Bank, en una nota a clientes. El banco que dirigía hasta el pasado 19 de marzo Masaaki Shirakawa estaba más centrado en el correcto funcionamiento del mercado y en la disciplina fiscal, como explica Kiichi Murashima de Citi Research, temeroso de un rápido repunte de precios si la economía volvía a crecer de forma sostenida o de financiar los déficit del gobierno. Kuroda ha decidido dejar de lado los paños calientes y tomar de golpe, y en su primera reunión, todas las medidas necesarias para alcanzar su objetivo. Aunque para ello haya tenido que suspender la regla de los billetes, “inevitablemente”, según Yujiro Goto, de Nomura. Esa regla, implantada en 2001 por la entidad, obligaba a la autoridad monetaria a situar el total de las compras de bonos por debajo del volumen de billetes en circulación. Con la nueva oleada de compras agresivas de bonos esa regla deja de estar en vigor, temporalmente, según la entidad. “Con la introducción de estas medidas, el Banco de Japón está siendo muy contundente para impulsar el crecimiento y lograr que la inflación se sitúe en el 2% lo antes posible”, asegura José Ramón Díez Guijarro, profesor de Entorno Económico de IE Business School. “No obstante, el Banco y en particular Kuroda se han plegado de lleno a la presión del Gobierno de [Shinzo] Abe en la primera oportunidad que han tenido para ello, menoscabando la independencia del banco central”, advierte. Abe ganó las elecciones del pasado mes de diciembre con una decidida apuesta porla recuperación de la economía, con un plan basado tres pilares: estímulos fiscales, una política monetaria agresiva para lograr que la inflación se sitúe en el 2% y un plan de reformas estructurales. Es la Abeconomía, como lo denominan los analistas. Su plan le llevó incluso, a plantear acabar con la independencia del banco central, uno de los paradigmas económicos de las últimos décadas y por la que mantuvo un agrio enfrentamiento con el presidente del Bundesbank, Jens Weidmann, el pasado mes de enero. “Intencionadamente o no, con la intereferencia del gobierno en la política del banco central Japón puede desatar una guerra de divisas”, advertía entonces Weidmann. Desde su llegada al gobierno Abe no ha ocultado su intención de propiciar una devaluación del yen con el objetivo de impulsar sus exportaciones, en directa competencia con sus vecinos de Corea del Sur y China. Entre enero de 2008 y el pasado mes de enero, las exportaciones japonesas han caído un 16,4%, según datos de Capital Economics. Eso puede cambiar radicalmente en los próximos meses ya que en lo que va de año el yen ha perdido un 11% de su valor y solo desde que se conoció el plan del Banco de Japón, la divisa ha retrocedido un 2,5%, hasta las 97,57 unidades por dólar y los 126,79 yenes por euro del cierre del pasado viernes. Jeremy Hale, de Citi Research, calcula que el yen puede situarse en las 115 unidades por dólar a finales de 2014. Pero Hale advierte: “Claramente, esto dependerá en buena medida de lo que hagan otros bancos centrales, en concreto, la Reserva Federal, y de la evolución de los bonos a 10 años”. De lo que no cabe duda es que, dados los niveles actuales, para conseguir el objetivo del 2% de inflación, el yen debe depreciarse mucho más de lo que lo ha hecho hasta el momento. Y no está nada claro que el resto de las grandes potencias mundiales vayan a permitir a Japón semejante ventaja en un momento
194 en el que el desapalancamiento interno de las economías industrializadas hace de las exportaciones el motor soñado de la recuperación. “En esta semana en la que ha habido reuniones de varios bancos centrales, la principal conclusión es la inexistencia de cualquier tipo de coordinación en sus decisiones”, señala Díez Guijarro, del IE Business School. “Estas divergencias en la filosofía de los grandes bancos centrales van a tener, sin duda, efectos muy importantes en el comportamiento de los mercados financieros de los próximos años, tras décadas en las que existió una visión muy homogénea sobre el papel que deben jugar. Y ya veremos quién tiene razón”. No falta quienes dudan de que, pese a la magnitud de las decisiones adoptadas, el Banco de Japón vaya a lograr su propósito inflacionista e incluso quienes advierten que incluso en el caso de tener éxito en su empeño “la inflación importada por la debilidad del yen puede dar al traste con la incipiente recuperación de la economía”, como advierten los analistas de Capital Economics. En esa línea, Raymond Van Der Putten, de BNP Paribas, sostiene que la compra masiva de bonos “puede provocar burbujas especulativas en el mercado”, con las consecuencias de todos conocidas. Lo cierto es que hay pocos precedentes de una política monetaria tan agresiva y aplicada en tan poco tiempo y lo que temen los expertos es que “una vez que el genio salga de la lámpara veremos lo que pasa”, como sostiene Díez Guijarro. http://economia.elpais.com/economia/2013/04/06/actualidad/1365270071_194806.html
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Why Making Europe German Won’t Fix the Crisis By Ivan Krastev and Georgi Ganev - Apr 7, 2013 Most people see Europe’s economic crisis as a cautionary tale of good and bad policy making, in which fiscally prudent countries, such as Germany, remain stable, while reckless ones, such as Greece, unravel. So ingrained is this idea that it’s now common to hear analysts say Europe must become “German” to exit from the crisis, adopting Teutonic approaches to policy -- from fiscal tightening to labor- and product-market reforms. If only societies on Europe’s periphery can learn to do what the Germans do, the argument goes, the European Union and its single currency will have a stable future. This is wrong and we already have evidence to show it. The question isn’t whether Germany’s policies are correct. It is whether they will produce the same outcomes in different economic and political environments. To see that they don’t, you need to ignore Greece and look at its neighbor, Bulgaria. Like Germany, Bulgaria went through several years of prudent budgets and economic reforms aimed at improving competitiveness before the financial crisis began in 2008. Both countries initially responded to the shock with sudden increases to their budget deficits, but also quickly reined these back in. Bulgaria’s deficit was 0.7 percent of gross domestic product in February, according to the Finance Ministry. Government debt was 16 percent of GDP. So pretty German already. Identical Policies In both countries, per-capita economic growth has been positive through the crisis (except for a dismal year in 2009), with average annual German per-capita GDP growing at 2.1 percent in 2010-2012, only slightly faster than Bulgaria’s 1.7 percent. The two countries’ monetary policies have also has been virtually identical. Although Bulgaria isn’t a euro member, its currency (the lev) is pegged to the euro and its central bank is banned from lending to commercial banks. As a result, monetary policy is, in reality, set by the European Central Bank in Frankfurt. Lest anyone think this Bulgaria-Germany connection is fanciful, Chancellor Angela Merkel has made it on several occasions, praising Bulgaria as a model for other European economies to follow. Despite all this, Bulgaria’s Germanic calm was shattered in February, when street protests over rising electricity prices triggered the collapse of the government. Why? Because ordinary Bulgarians can’t afford German policies, any more than they can afford a German BMW or a Mercedes. Germany is one of the richest members of the EU and by far its most influential. Bulgaria is the poorest country in the EU, as well as being one of its newest and least influential members. Bulgarians are more than 2 1/2 times poorer than Germans and have a much lower rate of employment.
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This isn’t about liking or disliking the EU. Both populations score highly in terms of trust in the bloc, though for different reasons: Germans because they trust their own government and its ability to influence the EU, and Bulgarians because they don’t. According to the EU’s Eurobarometer survey, 70 percent of Germans believe their voice counts in what their national institutions do, compared with 37 percent of Bulgarians. Wealth and institutions can explain why the same fiscally prudent policies played out so differently in these two countries. To wealthy Germans, fiscal conservatism in their institutionally functional country promises that tomorrow won’t be too different from today -- their lifestyle will be protected. In poor, dysfunctional Bulgaria, the same policies make people angry that tomorrow will be too much like today. They are angry because their poor lifestyle won’t change. Lost Hope This may help to explain why the trigger for the government’s collapse in Bulgaria was rising electricity prices, which make up a far larger portion of people’s incomes than in Germany and were eroding already poor standards of living. Lost hope for a better future is probably the most important feature of Bulgaria’s political crisis. For decades, the formula that drove the EU’s integration has been one of divergent policies producing convergent economic performances. The EU is the most impressive economic catch-up machine the world has known. So why is it that the shift toward policy convergence today is threatening to destroy this machine? In the last 15 years, both Germany and Bulgaria underwent important economic reforms, but the political context for these could not have been more different. Former German Chancellor Gerhard Schroeder’s Agenda 2000 reforms were marked by consensus and institutional stability. The two largest political parties (Schroeder’s Social Democrats and the Christian Democratic Union) supported the reforms. Initiated by the nation’s political elite, the changes were broadly -- if not enthusiastically -- endorsed by the electorate. Bulgaria’s situation is the opposite. The country’s macro- economic policies altered little over the years, while its governments changed all the time. Since the collapse of the Soviet bloc in 1989, not a single government has been re-elected to power in Bulgaria. Voters constantly demanded change, but no matter which leaders they chose, they got the same macro- economic policies. If Germany’s economic transformation was a classic case of politically driven reform, Bulgaria’s experience was an equally clear example of the “there is no alternative” doctrine. That’s the same one now on offer to voters in Greece, Italy and other peripheral euro-area economies. Bulgarian politicians, one after the other, justified their loyalty to fiscal conservatism by arguing that this was the pre- condition for joining the EU -- something Bulgarians overwhelmingly wanted, and achieved in 2007. Governments compensated for their inability to change economic policy in response to voter unhappiness, by constantly churning personnel. Protests therefore swing instantly from complaints that won’t get addressed -- such as high electricity prices -- to demands for radical political and constitutional change.
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Bulgarian Instability Both countries face elections this year, Bulgaria on May 12 due to the collapse of the government, and Germany in a routine vote on Sep. 22. Opinion polls suggest the ruling center-right parties are likely to win in both cases, but the similarities end there. Few predict significant changes for Germany. In Bulgaria, by contrast, expect a prolonged period of Italian- style political instability. A convergence of policies has led to opposite outcomes in Germany and Bulgaria, showing that Europe won’t necessarily be cured by becoming German. This is because it is wide differences in wealth and institutional performance, rather than divergent policies, that threaten the EU and its currency. (Ivan Krastev is chairman of the Centre for Liberal Strategies in Sofia and is a permanent fellow at the Institute for Human Sciences in Vienna. Georgi Ganev is a program director at the Centre for Liberal Strategies and is assistant professor at Sofia University. The opinions expressed are their own.) http://www.bloomberg.com/news/2013-04-07/why-making-europe-german-won-t-fix- the-crisis.html
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Beware of Economists Peddling Elegant Models By Mark Buchanan - Apr 7, 2013 Mathematics can be beguilingly elegant. It can also be dangerous when people mistake its elegance for truth. Albert Einstein’s theory of general relativity might be the best example of elegant math, capturing a wide range of subtle and surprising phenomena with remarkable simplicity. Step toward the practical, though, and physics moves quickly away from elegance to makeshift usefulness. There’s no pretty expression for the operation of a nuclear reactor, or for how air flows past the swept wings of an aircraft. Understanding demands ugly approximations, or brute-force simulation on a large computer. In one very practical and consequential area, though, the allure of elegance has exercised a perverse and lasting influence. For several decades, economists have sought to express the way millions of people and companies interact in a handful of pretty equations. The resulting mathematical structures, known as dynamic stochastic general equilibrium models, seek to reflect our messy reality without making too much actual contact with it. They assume that economic trends emerge from the decisions of only a few “representative” agents -- one for households, one for firms, and so on. The agents are supposed to plan and act in a rational way, considering the probabilities of all possible futures and responding in an optimal way to unexpected shocks. Surreal Models Surreal as such models might seem, they have played a significant role in informing policy at the world’s largest central banks. Unfortunately, they don’t work very well, and they proved spectacularly incapable of accommodating the way markets and the economy acted before, during and after the recent crisis. Now, some economists are beginning to pursue a rather obvious, but uglier, alternative. Recognizing that an economy consists of the actions of millions of individuals and firms thinking, planning and perceiving things differently, they are trying to model all this messy behavior in considerable detail. Known as agent-based computational economics, the approach is showing promise. Take, for example, a 2012 (and still somewhat preliminary) study by a group of economists, social scientists, mathematicians and physicists examining the causes of the housing boom and subsequent collapse from 2000 to 2006. Starting with data for the Washington D.C. area, the study’s authors built up a computational model mimicking the behavior of more than two million potential homeowners over more than a decade. The model included detail on each individual at the level of race, income, wealth, age and marital status, and on how these characteristics correlate with home buying behavior. Led by further empirical data, the model makes some simple, yet plausible, assumptions about the way people behave. For example, homebuyers try to spend about a third of
199 their annual income on housing, and treat any expected house-price appreciation as income. Within those constraints, they borrow as much money as lenders’ credit standards allow, and bid on the highest-value houses they can. Sellers put their houses on the market at about 10 percent above fair market value, and reduce the price gradually until they find a buyer. The model captures things that dynamic stochastic general equilibrium models do not, such as how rising prices and the possibility of refinancing entice some people to speculate, buying more-expensive houses than they otherwise would. The model accurately fits data on the housing market over the period from 1997 to 2010 (not surprisingly, as it was designed to do so). More interesting, it can be used to probe the deeper causes of what happened. Consider, for example, the assertion of some prominent economists, such as Stanford University’s John Taylor, that the low-interest-rate policies of the Federal Reserve were to blame for the housing bubble. Some dynamic stochastic general equilibrium models can be used to support this view. The agent- based model, however, suggests that interest rates weren’t the primary driver: If you keep rates at higher levels, the boom and bust do become smaller, but only marginally. Leverage Boom A much more important driver might have been leverage -- that is, the amount of money a homebuyer could borrow for a given down payment. In the heady days of the housing boom, people were able to borrow as much as 100 percent of the value of a house -- a form of easy credit that had a big effect on housing demand. In the model, freezing leverage at historically normal levels completely eliminates both the housing boom and the subsequent bust. Does this mean leverage was the culprit behind the subprime debacle and the related global financial crisis? Not necessarily. The model is only a start and might turn out to be wrong in important ways. That said, it makes the most convincing case to date (see my blog for more detail), and it seems likely that any stronger case will have to be based on an even deeper plunge into the messy details of how people behaved. It will entail more data, more agents, more computation and less elegance. If economists jettisoned elegance and got to work developing more realistic models, we might gain a better understanding of how crises happen, and learn how to anticipate similarly unstable episodes in the future. The theories won’t be pretty, and probably won’t show off any clever mathematics. But we ought to prefer ugly realism to beautiful fantasy. (Mark Buchanan, a theoretical physicist and the author of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You,” is a Bloomberg View columnist. The opinions expressed are his own.) http://www.bloomberg.com/news/2013-04-07/beware-of-economists-peddling-elegant- models.html?wpisrc=nl_wonk
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ft.com/global economy April 7, 2013 10:15 pm Central banks move into riskier assets By Claire Jones in London
©Dreamstime Central bankers are putting cash into riskier assets and exotic currencies to compensate for ultra-low returns on US Treasuries, according to a poll of officials responsible for almost $7tn in reserves. The world’s central bankers together manage reserves worth $10.9tn, most of which is held by monetary authorities in Asia and the Middle East. The bulk of their reserves, usually accumulated from attempts to curb their currencies’ gains, are held in the form of US government debt as well as the bonds of safer eurozone sovereigns. More ON THIS STORY/ The Last Word Markets’ dance is misleading bankers/ Wallflowers at the Wall Street party/ In depth Central banks/ Safety matters as sovereign ratings slip/ Serious Money Equities look risky – but how safe is cash? ON THIS TOPIC/ Wolfgang Munchau ECB priority is to fix southern Europe/ Nervous Europe drives demand for dollars/ Small companies warn of hit from weak pound/ Hungary unveils growth stimulus package IN GLOBAL ECONOMY/ Lagarde welcomes Japan’s big stimulus/ Gavyn Davies Germany pivotal for global activity/ The A-List Bruce Bartlett - The David Stockman Phenomenon/ Data leak exposes BVI investors’ names But near-zero interest rates and large-scale money printing have cut returns on these assets to record lows. At the same time, the value of the dollar and other traditional reserve currencies has fallen, forcing central bankers to diversify or risk losses on investment portfolios. A poll of 60 central bankers responsible for reserves worth $6.7tn, conducted by trade journal Central Banking Publications and the Royal Bank of Scotland, sheds light on the secretive world of official sector investments. The response to the crisis by the major monetary authorities has had a profound impact, the poll found – more than four-fifths of respondents said the aggressive monetary easing of the Federal Reserve and the European Central Bank had altered their behaviour. Central bankers, increasingly frustrated with ultra-low returns and the depreciation of the dollar and the euro, have invested in currencies which until recently they would have avoided along with riskier, higher-yielding assets such as equities and lower-rated government bonds.
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Respondents to the poll said their forays into foreign currencies would help stabilise global financial markets. But the shift from traditional reserve currencies has spooked some foreign-exchange investors, even though this still only makes up just over 6 per cent of central banks’ total investments. Other investors fear that the size of monetary authorities’ cash piles and the lack of transparency among some of the major reserves managers in Asia and the Middle East risk destabilising markets. The most popular alternative currencies were the Australian and Canadian dollar, the Scandinavian currencies and the Chinese renminbi. About four-fifths of respondents said they had invested, or would consider investing, part of their reserves in Australian or Canadian dollars. More than 40 per cent said they already invested in, or would consider investing, in the renminbi. About half had, or were considering, branching out into the three Scandinavian currencies and the New Zealand dollar: 14 per cent either owned, or were considering buying, assets denominated in the Brazilian real. Thirty per cent of respondents, responsible for managing reserves worth $2.5tn, said they would probably buy equities – previously anathema to central banks because of the higher risk associated with shares – though almost half did not think this would happen for at least five years. Highlighting their frustrations with low returns on US Treasuries and German Bunds, reserve managers viewed lower grade single-A rated sovereigns and US government agency paper as more attractive than a year ago. The poll also found that central bankers remain reliant on credit rating agencies, despite attempts by the Group of 20 leading industrialised nations to wean investors off dependence on Moody’s, Standard & Poor’s and Fitch in judging the creditworthiness of bonds. More than four-fifths of respondents had not altered their investment practices as a result of the G20 guidance. However, almost half of those polled said they were spending more on resources to improve the assessment of the creditworthiness of certain assets. http://www.ft.com/intl/cms/s/0/66c91d4a-9f71-11e2-b4b6- 00144feabdc0.html#axzz2PrIpeB3U
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ft.com Comment Opinion April 7, 2013 6:57 pm This is a golden age of global growth (yes, you read that right) By Arvind Subramanian An unequal world is becoming less so, writes Arvind Subramanian
©AFP When the world’s policy makers meet in Washington this month, the travails of advanced countries will be the focus. Five years into the global financial crises, the economic landscape remains largely cheerless. A depressed eurozone is struggling with high and rising unemployment. The US recovery is fitful. The blistering pace of emerging market growth has cooled. But all this risks obscuring the good news: that the golden age of global economic growth, which began in the mid-to-late 1990s, has mostly survived. These continue to be the best of economic times. Lant Pritchett of Harvard famously described the phenomenon whereby the living standards of a few countries pulled away from the rest in the aftermath of the industrial revolution as “divergence, big time”. My 2011 book, Eclipse , documented the converse: never had the living standards of so many poorer nations begun to “converge” or catch up with those of advanced countries. What we are seeing today, despite the crises, is convergence with a vengeance. An unequal world is becoming less so.
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Convergence occurs when a country’s rate of economic growth per head exceeds that of the typical advanced country, say the US. Between 1960 and 2000, the US grew at about 2.5 per cent. About 20 poor countries (excluding oil exporters and small countries) grew faster than the US by 1.5 per cent on average, among them remarkable growth stories such as Japan, Korea, Singapore, China and India. About a decade before the global crisis struck, a shift occurred. Eighty countries – four times as many as in the previous period, located in sub-Saharan Africa and Latin America as well as Asia – started catching up with US living standards. Their growth exceeded that of the US on average by nearly 3.25 per cent, implying that this broader group was catching up twice as fast as did countries following the second world war. Put simply, prosperity was spreading across the globe, and at an accelerating pace. The implications are enormous. For example, if this pace continues, sub-Saharan Africa – and, indeed, 80 per cent of all countries – could in 50 years be in a situation comparable to that of Chile today. Did the subprime and eurozone crises set back this process? Between 2008 and 2012, developing countries’ growth did decelerate in absolute terms, from about 4.5 per cent to about 3 per cent. But the pace at which they were catching up with rich ones did not slow significantly. These numbers help to clarify confused discussions about the decoupling of rich and poor nations. Cyclically – that is, in the short run – everyone is coupled: if the US slows, so will China; and vice versa. That is a fact of interdependence. But the phenomenon of convergence suggests there is structural decoupling: in the medium to long term, the rise in living standards relative to that of the rich world depends mostly on what developing countries themselves do and less on the external environment. And what have they been doing? Many have shed the most egregious forms of dirigisme and embraced markets. New information and communication technologies have created investment opportunities to galvanise growth, and unleashed social and economic churn. The full consequences are yet to be felt. Developing countries have embraced macroeconomic stability as an end in itself and as a pre-requisite for sustained growth, a lesson industrial countries forgot in the run-up to the crisis. The failure to deliver stability lay behind the poor growth performance of Latin America and sub-Saharan Africa in the 1970s and 1980s. Macroeconomic prudence ensured that they emerged from the crises relatively unscathed. Not everything about the convergence phenomenon is rosy. Poor countries on average may be catching up, but the gains are not being shared widely among their citizens because of rising inequality. And corruption and weak governance are endemic across the world, which could yet hold back investment and growth. For the vast majority in the developing world, then, the real challenge lies at home: to make sure that strong economic growth and the resulting catch-up with rich countries become, in the words of John Maynard Keynes, “normal, certain, and permanent”. The writer is senior fellow, Peterson Institute for International Economics http://www.ft.com/intl/cms/s/0/d69ec792-9e08-11e2-9ccc- 00144feabdc0.html#axzz2PrIpeB3U
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Chained CPI’s Diminishing Returns for U.S. Budget By Peter Orszag - Apr 7, 2013 News that the White House will propose a new cost-of-living index in the budget it releases this week has brought joy to deficit scolds and consternation to defenders of Social Security. The measure, called the chained consumer price index, would lower the annual payment increases for Social Security beneficiaries, saving the government money as it lowers the future monthly income of retirees and disabled Americans. The change would also raise revenue over time because it would cause more taxpayers to wind up in higher marginal brackets. What neither side seems to have noticed, however, is that the difference between the chained CPI and the standard CPI has been diminishing. That means the impact of switching indexes may not be as great as many assume. The change may still be a good idea, but it probably won’t matter as much as expected. A decent guess is that, over the next decade, the effect on the deficit of adopting the chained index would be less than $150 billion. Social Security benefits even 20 years after retirement would be reduced by less than 2 percent. This does not amount to bold long-term deficit reduction. On the other hand, it wouldn’t be the end of Social Security as we know it either. It may lead some people to ask why policy makers should bother -- though I would still support making the shift. Standard Indexes To understand why the chained CPI would save less money than hoped, it helps to know some background about the federal retirement and disability program as well as the tax code. Once an American begins to claim Social Security benefits, his monthly checks increase each year in line with a consumer price index called the CPI-W (the “W” is there because the index was created to measure inflation for workers). The federal tax code, for its part, is indexed to a related measure, the CPI-U, which is the inflation measure that receives the most attention each month. The Bureau of Labor Statistics, which calculates both indexes, also publishes the chained CPI, which is a more accurate measure of inflation because it better reflects how people change what they buy in response to price increases. When the price of apples rises relative to oranges, for instance, people eat more oranges, and the chained CPI accounts for this substitution, reducing the measured inflation rate. The result is that the chained CPI rises more slowly than either the CPI-W or the CPI-U. Switching to the chained index would therefore cause Social Security checks to grow more slowly. And if the Internal Revenue Service switched to the chained CPI as well, the cutoff lines for tax brackets would rise more slowly, pushing more Americans into higher marginal tax brackets and thereby raising revenue.
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Official budget estimates suggest that switching to the chained CPI would save the federal government about $125 billion on Social Security benefits and about $40 billion in other indexed benefits (such as federal civilian and military pension payments) over the next decade, and raise about $125 billion more in tax revenue. It would also save about $30 billion in health programs and nearly $20 billion in refundable tax credits. That adds up to total deficit reduction of about $340 billion. The Social Security actuaries suggest that it would also reduce the 75-year actuarial gap in the program by about 20 percent. These official estimates all assume, however, that the chained index grows 25 to 30 basis points more slowly than the standard indexes do. That’s a reasonable assumption based on the average difference in how fast the indexes have risen over the past 13 years. From January 2000 to January 2013, the chained CPI rose 27 basis points more slowly each year, on average, than the CPI-U and 29 basis points more slowly than the CPI-W. Smaller Difference Over the course of those 13 years, however, the differences between the annual growth rates of the indexes have become substantially smaller. From January 2000 to January 2003, the annual increase in the chained index was 47 basis points lower than that in the CPI-U. From 2003 to 2006, the difference was 31 basis points. From 2006 to 2009, it dropped to 15 basis points. And over the past two years, the average difference has been just 11 basis points. Why is this happening? Examining the subcomponents of each index, it appears that housing and other goods and services have played a role. Sorting through the causes is complex, however. In any case, the more relevant question is, what is the best time period to use as a historical basis for projecting future differences in the indexes? Given that the gaps have narrowed so much in recent years, it probably doesn’t make sense to take the average all the way back to 2000. Consider what future projections look like if we instead assume that the chained index will grow just 10 basis points a year more slowly than the current indexes. In that case, the deficit reduction from switching to the chained index would be less than $150 billion over 10 years, rather than $340 billion. And the reduction in the long-term Social Security deficit would be about 7 percent, rather than 20 percent. This would make a pretty big difference in the effect on Social Security benefits. For an 85-year-old who began receiving checks at 65, checks would be about 2 percent less, rather than 6 percent if the chained index were to grow 25 to 30 basis points more slowly than the standard index. (By the way, since no one goes back to revisit budget scoring, progressives could get the best of this deal: If the chained index grows more slowly than the official estimates assume, the initial deficit score would be disproportionate to the actual impact on beneficiaries.) President Barack Obama deserves credit for political courage in being willing to adopt the chained CPI -- in the face of strong opposition from members of his party. But if switching to the chained index reduces the 10-year deficit by less than $150 billion and the 75-year Social Security actuarial gap by less than 10 percent, can a “grand bargain” built around it really be all that grand? And if it reduces benefits for an 85- year-old retiree by less than 2 percent, is it really so destructive?
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(Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.) To contact the writer of this article: Peter Orszag at [email protected] To contact the editor responsible for this article: Mary Duenwald at [email protected] http://www.bloomberg.com/news/2013-04-07/chained-cpi-s-diminishing-returns- for-u-s-budget.html?wpisrc=nl_wonk
April 6, 2013, 10:56 am 139 Comments We Get Results, Japan Edition Let it not be said that the scribblings of academic economists have no effect. Some of us have been urging the Bank of Japan to get truly aggressive and adventurous on monetary policy — and it’s happening! And it only took 15 years. Seriously, this is very good news. Japan is finally, finally making a real effort to escape from its deflation trap. We should all hope it succeeds. Housekeeping note: I’ll be being human for the rest of the day, so probably no blogging.
April 5, 2013, 9:30 am 110 Comments Depression, Not Ended Lousy jobs report. OK, you don’t want to put too much stress on one month’s numbers, yada yada, but it doesn’t look at all good. But is this really a surprise? I mean, it’s true that the incipient housing recovery has made many people somewhat optimistic — I’ve been one of them — but when all is said and done, we are following strongly contractionary fiscal policy in an economy in which monetary policy is still ineffective because of the zero lower bound. How contractionary? Look at CBO’s estimates of the cyclically adjusted budget deficit (third column):
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That deficit has declined from 5.6 percent of potential GDP in 2011 to 2.5 percent in 2013 — that’s 3 percent of GDP, which is a lot of austerity. Not all of that cut has even hit yet — the sequester isn’t in the macro numbers yet — but the rise in the payroll tax is very clearly driving the latest bad numbers, which show big declines in retail. This is really stupid; as long as we’re at the zero lower bound, austerity is a huge mistake. Yet for what, the third time since 2009, all discussion in Washington has turned away from job creation to deficits (even though the debt problem has largely faded away) and the need for an early Fed exit from stimulus (even though unemployment remains high and inflation low). Clearly, the answer is to cut Social Security! http://krugman.blogs.nytimes.com/2013/04/05/depression-not-ended/ August 31, 2010, 9:19 pm 69 Comments Japan 1998 I’m starting to see another curious myth popping up in comments — namely, that I claimed that Japan’s policy of quantitative easing, which consisted simply of stuffing more reserves into the banks, would work. So, just for the record, here’s the little wonkish paper (pdf) I wrote back in 1998 — the one that alerted me to the danger of falling into a liquidity trap, so that I was intellectually prepared for the mess we’re in. The whole point of that paper was that when you’re up against the zero lower bound, it doesn’t matter how much money you print — not unless you credibly promise higher inflation. And of course, now we’re all Japanese. http://krugman.blogs.nytimes.com/2010/08/31/japan-1998/
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Hans-Olaf Henkel Hans-Olaf Henkel, a former president of the Federation of German Industries (1995- 2000), is Honorary Professor of Economics at the University of Mannheim. Hans-Olaf Henkel Europa, asfixiada por el euro 05 April 2013 MANNHEIM – La Unión Europea mantiene una política de salvar al euro a toda costa, que es suficiente para garantizar la supervivencia de la moneda común. Pero, ¿es este objetivo motivo suficiente para sacrificar la competitividad de la eurozona y, en definitiva, la solidaridad europea? Después de todo, Europa obtuvo libre comercio, mayor competitividad y aumento de la riqueza como consecuencia de la creación del mercado común en 1992, no de la introducción del euro, siete años después. Lo cierto es que desde el punto de vista político y económico, la unión monetaria se ha convertido en una pesadilla, plagada de recesión, niveles de desempleo nunca antes vistos, agitación social y una creciente desconfianza entre los estados miembros. Pero aunque políticos y economistas ya se están quedando sin argumentos para defender al euro, pocos se atreven a poner en duda la estructura fundamental que lo sostiene, por no hablar de proponer alternativas. Para salir de la crisis, los líderes de la UE deben reconocer las deficiencias del marco unidimensional en el que se basa la eurozona y desarrollar un sistema más adecuado para el manejo de una unión monetaria multifacética. El exceso de centralización y armonización perjudica seriamente la subsidiariedad y la competencia que el buen funcionamiento de las economías de Europa requiere, ya que la socialización de las deudas atenta contra la responsabilidad de las economías más débiles. Además, para reducir la divergencia de competitividad (un paso fundamental para salvar al euro) no bastaría aumentar la productividad de las economías más débiles, sino que las economías fuertes como Alemania también deberían volverse menos eficientes, y esto disminuiría la competitividad general de Europa respecto del resto del mundo. Al mismo tiempo, la crisis del euro alienta sospechas, antagonismos y nuevas divisiones en la eurozona. Las relaciones franco-alemanas, que alguna vez fueron la piedra basal de la integración europea, atraviesan el peor momento en décadas. Y los jóvenes desempleados en Grecia, Portugal y España protestan constantemente contra los “dictados de Alemania”. En tanto, entre los 17 miembros de la eurozona y los otros diez países que integran la Unión Europea se está abriendo un abismo cada vez más grande. En particular, el Reino
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Unido pretende renegociar las condiciones de pertenencia a la UE, con un referendo cuyo resultado puede determinar su total abandono del grupo. La historia nos enseña que obligar a naciones y estados distintos a unirse en torno de una misma idea (sea el comunismo en la Unión Soviética, el socialismo en Yugoslavia o la moneda común en la eurozona) genera fuerzas centrífugas que pueden provocar el derrumbe de esa unión. Una integración unívoca que no haga diferencias entre las partes es, sencillamente, insostenible. Además, la eurozona no solo está repitiendo errores ajenos, sino también los suyos propios. Aunque 25 de los 27 estados de la UE suscribieron un “pacto presupuestario” que debería imponer disciplina fiscal entre los países miembros, nada garantiza que no vayan a incumplir sus reglas, así como no cumplieron las del Tratado de Maastricht. Del mismo modo, aunque seguir una política monetaria unificada contribuyó al endeudamiento excesivo de Grecia y a la formación de la burbuja inmobiliaria en España, los líderes de la eurozona no han dejado de procurar un reajuste de los tipos de interés, por ejemplo, mediante la imposición de “recortes” a los acreedores de Grecia, esto es, la cancelación de parte del capital adeudado. Pero estas medidas no pueden ser muy eficaces sin devaluación externa, algo que no es posible dentro de los confines de una unión monetaria. Aunque los socios de Grecia en la eurozona pueden seguir sosteniéndola así durante décadas, e incluso rescatar a España, es indudable que si tuvieran que soportar el peso de una economía de mayor tamaño, el sistema se derrumbaría. Y un serio riesgo ya se cierne sobre una de esas economías: Francia. En 2011, el cociente entre deuda nueva y PIB de Francia era tres veces superior al de Alemania, y el sector público equivalía a más del 56% del ingreso nacional. En la actualidad, el 9% de los ciudadanos franceses trabajan para el Estado (en Alemania son el 5%). Y el desempleo se mantiene por encima del 10%, con cifras de desempleo juvenil mucho mayores, de alrededor del 25%. Si bien algunas de las empresas más grandes de Francia (como Michelin, LVMH y Air Liquide) todavía son exitosas, no pueden compensar la falta de una base sólida de pequeñas y medianas empresas que aqueja a la economía, lo que provoca un deterioro de la competitividad de Francia. De hecho, en el Índice de Competitividad Global que elabora el Foro Económico Mundial, Francia cayó desde el 18.° lugar que ocupaba el año pasado hasta el 21.er lugar este año (Alemania fue sexta los dos años). Las últimas medidas del gobierno del presidente François Hollande (entre ellas, aumentar el salario mínimo y los impuestos corporativos y disminuir la edad jubilatoria de algunos trabajadores) amenazan con agravar la situación. En estas circunstancias, que el año pasado Moody haya rebajado la calificación crediticia de Francia no es extraño. Pero, lo mismo que los países en dificultades del sur de Europa, Francia no tiene muchas opciones. Los programas de austeridad fueron en gran medida contraproducentes, al generar círculos viciosos de crecimiento lento o nulo, cierres de empresas, desempleo rampante y deterioro de la base impositiva. Como consecuencia, a los países de la eurozona con situación fiscal sólida se les pide una y otra vez que pongan en riesgo sus políticas prudentes para financiar rescates que no se terminan nunca.
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La situación es insostenible. Los líderes europeos deben procurar una segmentación controlada de la eurozona, por la cual los países más competitivos (Austria, Finlandia, Alemania y los Países Bajos) adoptarían una nueva moneda, el “euro del norte”. La nueva unión monetaria funcionaría según el Tratado de Maastricht original, con un banco central verdaderamente independiente encargado de regular el tipo de cambio del euro del norte respecto del euro original (moneda que conservarían los países menos competitivos). El euro original tendría un tipo de cambio más bajo que estimularía la recuperación del crecimiento económico, la creación de empleo y la formación de una base impositiva más sólida en los países del sur de Europa. En un primer momento y para facilitar la reducción de la deuda, los bonistas deberían aceptar otro recorte. Los países que adopten el euro del norte también deberían hacer por única vez una contribución a estas medidas de desendeudamiento. Se implementaría un sistema flexible de pertenencia, por el cual aquellos países cuya situación económica y fiscal se vuelva suficientemente sólida podrán unirse al grupo del euro del norte. Es necesario que los líderes europeos dejen de imponer las mismas políticas a países que son sumamente diferentes, como si la eurozona fuera una entidad homogénea. El sistema del euro se debe adaptar a las realidades fiscales y económicas actuales, y no al revés. Traducción: Esteban Flamini This article is available online at: http://www.project-syndicate.org/commentary/splitting-the-eurozone-into-a-two-tier- monetary-union-by-hans-olaf-henkel/spanish
Joseph E. Stiglitz Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers our Future. La promesa de la Abe-economía 05 April 2013 TOKIO – El programa del primer ministro japonés Shinzo Abe para la recuperación económica de su país ha dado lugar a un aumento de la confianza interna. Pero ¿hasta qué punto puede la “Abe-economía” atribuirse el mérito? Curiosamente, un vistazo más cercano al desempeño de Japón durante la última década sugiere pocas razones para que tener un sentimiento bajista persistente. De hecho, en
211 términos de crecimiento del producto por trabajador empleado, a Japón le ha ido muy bien desde inicios del nuevo siglo. Con una fuerza laboral en contracción, la estimación estándar para Japón en el año 2012 – es decir, antes de la Abe-economía – fue que la producción por trabajador empleado creció en una tasa interanual del 3,08%. Ese crecimiento es mucho más robusto que el de los Estados Unidos, donde la producción por trabajador creció sólo un 0,37% el año pasado, y mucho más fuerte del de Alemania, donde se redujo en un 0,25%. No obstante, como muchos japoneses correctamente perciben, la Abe-economía sólo puede ayudar a la recuperación del país. Abe está haciendo lo que muchos economistas (incluyéndome entre ellos) han estado pidiendo en los EE.UU. y Europa: un programa integral que implique políticas monetarias, fiscales y estructurales. Abe compara este enfoque a sostener tres flechas – si se las sostienen de forma separada, se puede doblar cada una de ellas; si se las sostiene juntas, no se puede doblar ninguna. El nuevo gobernador del Banco de Japón, Haruhiko Kuroda, viene con una gran experiencia adquirida, primero en el ministerio de finanzas, y luego como presidente del Banco Asiático de Desarrollo. Durante la crisis del Asia oriental de finales de la década de 1990, él vio de primera mano el fracaso de la sabiduría convencional impulsada por el Tesoro de los EE.UU. y el Fondo Monetario Internacional. Ya que no esta casado con las obsoletas doctrinas de los banqueros de los bancos centrales, Kuroda se ha comprometido a revertir la deflación crónica de Japón, estableciendo una inflación objetivo del 2%. La deflación aumenta la carga de la deuda real (ajustada según la inflación), así como también la tasa de interés real. Aunque hay poca evidencia de la importancia que pudiesen tener los pequeños cambios en las tasas de interés reales, el efecto que tiene incluso una leve deflación en la deuda real, año tras año, puede ser significativo. La postura asumida por Kuroda ya condujo a la debilitación de la tasa de cambio del yen, lo que hace que los productos japoneses sean más competitivos. Esto simplemente refleja la realidad de la interdependencia de la política monetaria: si la política de la Reserva Federal los EE.UU. denominada como flexibilización cuantitativa debilita el dólar, otros tienen que responder para evitar la apreciación excesiva de sus monedas. Algún día puede ser que logremos una coordinación más cercana de las políticas monetarias a nivel mundial; sin embargo, por el momento, fue razonable que Japón responda, aunque fuera de forma tardía, a los eventos que ocurrieron en otros lugares. La política monetaria hubiese sido más eficaz en los EE.UU. si se hubiese dedicado más atención a los bloqueos de créditos – por ejemplo, a los problemas de refinanciación de los propietarios de viviendas, incluso a tasas de interés más bajas, o a la falta de acceso al financiamiento de las pequeñas y medianas empresas. Uno tiene la esperanza de que la política monetaria de Japón vaya a enfocarse en dichos temas críticos. Sin embargo, Abe tiene dos flechas más en su aljaba de políticas. Los críticos que argumentan que el estímulo fiscal en Japón fracasó en el pasado – argumentando que llevó únicamente a un desperdicio de inversiones en infraestructuras inútiles – cometen dos errores. En primer lugar, está el caso hipotético: ¿cómo se hubiera desempeñado la economía de Japón en ausencia de estímulo fiscal? Dada la magnitud de la contracción de la oferta de crédito a raíz de la crisis financiera de finales de 1990, no es de extrañar que el gasto público no hubiera podido restaurar el crecimiento. La situación hubiera sido mucho peor sin el gasto; en la forma que ocurrió, el desempleo nunca superó el 5,8%, y durante los estertores de la crisis financiera mundial, alcanzó el 5,5%. En segundo lugar, cualquier persona que visite Japón reconoce los beneficios de sus 212 inversiones en infraestructura (Estados Unidos podría aprender una valiosa lección en este tema). El verdadero desafío será diseñar la tercera flecha, a la que Abe se refiere como “crecimiento”. Esto incluye políticas destinadas a reestructurar la economía, a mejorar la productividad y a incrementar la participación laboral, especialmente de las mujeres. Algunos hablan de la “desregulación” – una palabra que con razón ha caído en el descrédito a raíz de la crisis financiera mundial. De hecho, Japón cometería un error si retrocede en sus regulaciones ambientales, o en sus regulaciones de salud y seguridad. Lo que se necesita es la regulación correcta. En algunas áreas, será necesario contar con una participación más activa del gobierno para garantizar una competencia más efectiva. Sin embargo, en muchas áreas en las que es necesaria una reforma, como por ejemplo en las prácticas de contratación, se requieren cambios en las convencionalidades del sector privado, no en las regulaciones gubernamentales. Abe sólo puede establecer el tono, no puede dictar los resultados. Por ejemplo, pidió a las empresas aumentar los salarios de sus trabajadores, y muchas empresas tienen previsto ofrecer una prima mayor a la de costumbre al final del año fiscal en el mes de marzo. Los esfuerzos del gobierno para aumentar la productividad en el sector de servicios probablemente serán de especial importancia. Por ejemplo, Japón se encuentra en una buena posición para aprovechar las sinergias entre un mejorado sector de salud y sus capacidades de fabricación de primera categoría en el ámbito del desarrollo de instrumentación médica. Las políticas dirigidas a la familia, junto con los cambios en las prácticas laborales de las empresas, pueden reforzar el cambio de costumbres, llevando a una mayor (y más efectiva) participación de la mano de obra femenina. Mientras que los estudiantes japoneses clasifican en niveles altos en comparaciones internacionales, la falta generalizada de dominio del inglés, la lengua franca del comercio internacional y la ciencia, pone en desventaja al Japón en el mercado mundial. Los aumentos en las inversiones en investigación y educación tienden a redituar altos dividendos. Hay muchas razones para creer que la estrategia de Japón para rejuvenecer su economía tendrá éxito: el país tiene instituciones fuertes que le brindan beneficios, tiene una fuerza laboral bien educada con excelentes habilidades técnicas y comportamientos sensatos de diseño, y se encuentra región más dinámica (¿en la única región dinámica?) del mundo. Sufre de una menor desigualdad en comparación con muchos países industriales avanzados (aunque tiene más desigualdad que Canadá y los países del norte de Europa), y ha tenido un compromiso con la preservación del medio ambiente que es de más larga data. Si la agenda integral que Abe ha trazado se ejecuta bien, se vindicará la confianza creciente de hoy en día. De hecho, Japón podría convertirse en uno de los pocos rayos de luz en el que al contrario es un sombrío paisaje de países más avanzados. Traducido del inglés por Rocío L. Barrientos. This article is available online at: http://www.project-syndicate.org/commentary/shinzo-abe-and-soaring-confidence-in- japan-by-joseph-e--stiglitz/spanish
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Research-based policy analysis and commentary from leading economists Budget balance, structural unemployment and fiscal adjustments: The Spanish case Javier Andrés, Rafael Doménech, 5 April 2013 Fiscal adjustment and structural reform are key parts of Eurozone bailout packages (or key features of government policy that aims to avoid such bailouts). This column argues that patience is the most prized virtue of policymakers implementing fiscal adjustment and structural reform. Reducing unemployment and fiscal consolidation are mutually reinforcing, but they move at different speeds. Related / Eurozone: Looking for growth Laurence Boone, Céline Renucci, Ruben Segura-Cayuela/ Fiscal policy in Europe: Searching for the right balance Marco Buti, Nicolas Carnot/ European imbalances Hans-Werner Sinn, Akos Valentinyi One of the most important questions in the current process of fiscal consolidation in many developed economies concerns the size and the pace of the adjustment. An excessive and/or too-fast fiscal retrenchment can have dramatic effects on unemployment and growth, while if it is too slow, it can prove to be ineffective and lack credibility in the eyes of the financial markets. Thus, when the debt-to-GDP ratio is high and there is limited fiscal space, the challenge is to find the proper balance between growth, efficiency and credibility of the fiscal adjustment. One of the main factors that determine this credibility is whether the implementation of the fiscal adjustment brings about an effective reduction in the structural budget balance, i.e., the public deficit that exists once the effect of the economic cycle has been adjusted for. The European Commission has just published its winter forecasts for 2013, where it has updated its estimates on structural budget balance. According to these estimates, for ten of European economies the structural public deficit exceeds 3% of their GDP. Spain is the country with the third highest structural deficit in 2012, after Ireland and the UK, with 5.9% of GDP.1 The budget balance and the unemployment rate Such a high estimated structural deficit for the Spanish economy is particularly striking considering that the unemployment rate was 25% in 2012, which is prima facie evidence of a strong negative cyclical position. As the public deficit converges towards its structural level (when the economy tends towards a neutral cyclical situation), unemployment simultaneously converges towards its structural rate. However, neither of these structural components can be observed and have to be estimated, introducing uncertainty in key variables for economic policy. Figure 1 represents the Spanish budget balance, as a percentage of GDP, against the unemployment rate, which appears on the horizontal axis; the negative correlation among these variables stems from the effects of the automatic stabilisers.2 Figure 1 also 214 displays two vertical dashed red lines corresponding to the structural unemployment rates in 2006 and 2012 estimated by the Commission.3 According to these estimates, structural unemployment appears to be highly volatile and strongly procyclical ranging from 11% (when the current unemployment rate was 8.5%) up to 21.7% (25% respectively), almost eleven points of difference in only six years for a structural component that should be otherwise fairly stable. Thus, these estimates imply that most of the fall in economic activity in Spain in recent years has meant a fall in potential GDP. To put it another way, that practically two thirds (0.65 of a percentage points) of each point of increase in the unemployment rate can be considered as structural. Figure 1. Spain, general government budget balance and unemployment rate, 1980-2012 (source: European Commission and own elaboration)
On top of these vertical dashed red lines for the structural unemployment rates for 2006 and 2012, the chart displays the structural budget balance estimated by the Commission for those two years; 1.7% and -5.9% respectively. Given that the nominal budget balance in 2006 was 2.4% of GDP, we can infer that the cyclical balance estimated at the highest point of the real-estate boom reached barely 0.7 percentage points of GDP. This is contradictory with the estimates by some authors (for example, Martínez- Mongay, Maza and Yaniz 2007), who found that between two and three points of GDP could be considered to be transitory revenues in those years. According to the decomposition estimated by the Commission, in 2012 for each point of cyclical unemployment the budget balance fell by 0.63 of a percentage point; this value is the result of dividing the cyclical fiscal balance (that is, -2.1% is equal to -7%, -1% and 5.9%), including one-offs (1%), by the cyclical unemployment rate (that is 3.3% is equal to 25% minus 21.7%). At least for 2012, the sensitivity of the cyclical component of the budget balance to the unemployment rate estimated by the Commission is very close to the value obtained by directly regressing the total budget balance on the unemployment rate (the regression coefficient is equal to -0.68).4 Therefore, Figure 1 makes clear that the structural budget balance estimated by the Commission depends on two crucial factors: 215
1) The estimated structural unemployment rate. 2) The sensitivity of the budget balance to cyclical unemployment. An alternative estimate of the structural budget balance How sensitive is the structural budget balance to these two factors? To answer this question we introduce two changes with important implications: • The structural unemployment rate is estimated following an alternative procedure base on the Okun's Law (see, for example, Ball, Leigh and Loungani, 2013), according to which this rate was 14% in 2006 and 18% in 2012, less volatile and procyclical than the one estimated by the Commission. Consequently cyclical unemployment is more persistent.5 • The sensitivity of the cyclical budget balance to cyclical unemployment has been re-estimated, giving a ratio of -0.7, very similar to the regression coefficient of the current budget balance over the unemployment rate (-0.68) and slightly above the elasticity estimated by the Commission (-0.63).6 With these new estimates the structural budget balance in 2012 can be calculated projecting the observed deficit onto the new vertical solid green line in the figure: 3%. Likewise, the structural budget balance in 2006 would have been in deficit (-1.5%), even though there was a positive balance due to the asset-boom effect, largely on revenues. The comparison between the results from these two methods highlights the paramount importance of uncertainties in both, the estimate of structural unemployment (e.g. Staiger, Stock, and Watson 1997), similar to that existing with trend GDP (Larch and Turrini 2009), and in the sensitivity of the deficit to the economic cycle. The question of which method to use, however, may be based on diverse qualitative judgements: • For 2006 the alternative approximation provides results that are more consistent with the existence of an asset boom. Between 2007 and 2008 non-financial public revenue fell 4.1 points as a percentage of GDP, while the structural unemployment rate estimated by the European Commission would have risen by only 1.4 points, from 11.8 to 13.2%: • The Spanish economy is implementing reforms (in the labour market and in the goods and services markets) that should reduce structural unemployment and, therefore, the structural deficit. • A reasonably high number of fiscal-adjustment measures in 2010, 2011 and, particularly, in 2012, can be considered genuinely structural. Economic policy implications According to our calculations, the Spanish economy would still need three points of GDP fiscal adjustments in the years to come to reach the budget equilibrium mandatory in the new Spanish Budget Stability and Financial Stability Act. With the calculations of the Commission the required adjustment would have to be almost twice as high. Given the uncertainty regarding the estimation of structural budget balances and unemployment, and about the negative effects of fiscal adjustments on economic activity, it is advisable to be cautious and not carry out fiscal adjustments that could end up being excessive, at least until further information allows a more precise estimate of the structural deficit. The implication of these discrepancies for this year’s fiscal objective is straightforward. As Buti and Carnot (2013) remind us, the IMF (2012) 216 considers a structural adjustment pace of 1% a year as a useful guideline, and the SGP requires an annual structural adjustment of 0.5% or more in the case of vulnerable countries. The problem is how to make this rule operational in a new fiscal target for 2013, given the uncertainty surrounding the structural unemployment rate. Assuming that the unemployment rate will increase from 25% to 26,9% (as in the recent winter forecasts by the Commission), the question is by how much is the structural unemployment affected by this increase in the observed rate. In fact, depending on the assumptions about the increase of the structural unemployment rate (and given an initial budget deficit of 6.7% in 2012), a fiscal target ranging from -6.1% to -6.7% in 2013 could be sufficient to ensure a 1% structural adjustment this year.7 Given these uncertainties, 2013 could be a year of transition in which it would suffice to apply the fiscal measures already under way, working rather on the quality of the fiscal adjustment. For example, substituting the one-off measures in 2012 by permanent ones and implementing much more selective measures, which might allow improvements in the efficiency of public administrations, based on items with lesser short term impact on growth and wellbeing. Meanwhile, it is necessary to continue to apply new structural reforms and also to give time to those that are already under way to do their job. As a result of these reforms, for each point of reduction in structural unemployment, we reduce the structural deficit by 0.7 percentage points of GDP. In short, the increase in potential growth, the reduction of structural unemployment and the fiscal consolidation are processes that mutually reinforce each other. References Ball, L, D Leigh and P Loungani (2013), “Okun’s Law: Fit at 50?”, NBER Working Paper 18668. Buti, M and N Carnot (2013), “Fiscal policy in Europe: Searching for the right balance”, VoxEU.org, 14 March. Corrales, F, Doménech, R and J Varela (2002), "El Saldo Presupuestario Cíclico y Estructural de la Economía Española", Hacienda Pública Española, 1(3), 1-26. Denis C, Grenouilleau D, McMorrow K and W Roeger (2006), “Calculating Potential Growth Rates and Output Gaps – A Revised Production Function Approach”, Economic Papers 247, European Commission. Fedelino, A, A Ivanova and M Horton (2009), “Computing Cyclically Adjusted Balances and Automatic Stabilizers”, Technical Notes and Manuals, IMF. IMF (2012), “Nurturing credibility while managing risks to growth”, Fiscal Monitor Update, July. Larch, M, and A Turrini (2009), “The cyclically-adjusted Budget balance in EU fiscal policy making: A love at first sight turned into a mature relationship”, Economic Papers 374, European Commission. Martínez-Mongay, C, L A Maza Lasierra and J Yaniz Igal (2007), “Asset Booms and Tax Receipts: The case of Spain, 1995-200”, European Economy Economic Papers 293. Mourre, G, G M Isbasoiu, D Paternoster and M Salto (2013), “The cyclically-adjusted budget balance used in the EU fiscal framework: an update”, Economic Papers 478, European Commission.
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Staiger, D, J H Stock and M W Watson (1997), “How Precise Are Estimates of the Natural Rate of Unemployment?”, in C D Romer and D H Romer (eds.), Reducing Inflation: Motivation and Strategy, University of Chicago Press, 195–246.
1 Given that the deficit for 2012 was 7% and that the one-offs measures estimated by the Commission represent 1% of GDP, this means that the cyclical component of the public deficit only accounts for 2.1 percentage points of GDP. In other words, according to the Commission most of the deficit in 2012 is largely due to its structural component. 2 The correlation between the budget balance and the unemployment rate was equal to - 0.84 between 1980 and 2012. 3 See Denis et al (2006) for a description of the method used to estimate the structural unemployment rate. 4 This was not the case in 2006, when the cyclical budget balance was 0.8% and the cyclical employment -2,46%. The slope for that year (-0.33) was half of the slope estimated in 2012, and for the period 1995-2012 has been equal to -0.456. The changes in these elasticities are explained by the fact that the in the method implemented by the European Commission, the sensitivity of the deficit to the economic cycle depends on the elasticity of revenues to their respective tax bases, and of the latter to the output gap and not to the unemployment rate (see, Fedelino, Ivanova and Horton, 2009, and Mourre et al, 2013). 5 It could be argued that many jobs that have been destroyed are of a permanent nature (for example, in the construction sector). Unless there is a complete hysteresis, the permanent destruction of jobs in certain specific sectors does not necessarily mean that the workers who held these jobs will become permanently unemployed, thus prompting an increase in the structural unemployment rate. 6 To obtain the elasticity of the cyclical budget balance to the cyclical unemployment rate we follow the procedure described by Corrales, Doménech and Varela (2002), but using the unemployment rate instead than the GDP. 7 One possibility is to assume that structural unemployment rate in 2013 will increase in the same proportion as the one estimated by the Commission from 2006 to 2012 (65% of the increase of the unemployment rate was due to its structural component). On the contrary, according to our alternative estimate, the structural unemployment rate increased only 4 pp out of the 16,5 points observed in the current unemployment rate, that is, only 24 per cent of the total increase would be explained by its structural component.. The implications of these different assumptions in terms of the expected increase of the cyclical unemployment rate in 2013 are huge (0.67 points vs 1.44). Given that the preliminary estimate of the budget balance in 2012 was -6.7%, first we could add between -0.4 and -1.0% of expected cyclical budget balance in 2013 (the elasticity, -0.63 vs -0.70, times the increase of the cyclical unemployment rate, 0.67 vs 1.44). Second, we subtract 1% of structural fiscal consolidation. Under these assumptions, the 2013 fiscal target would range from -6.1% to -6.7%. http://www.voxeu.org/article/budget-balance-structural-unemployment-and-fiscal- adjustments-spanish-case
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vox Research-based policy analysis and commentary from leading economists A banking union for the Eurozone Giovanni Dell'Ariccia, Rishi Goyal, Petya Koeva-Brooks, Thierry Tressel, 5 April 2013 The crisis has highlighted the need for, and difficulties with, a Eurozone banking union. This column argues that, to make a union, you need three crucial ingredients: common supervision, a single resolution mechanism, and common safety nets. The power to control and the resources to rescue must work in parallel. Eurozone leaders have taken the first critical steps, but further progress is needed to strengthen the financial architecture of the single currency. Related / Cyprus: What are the alternatives? Thorsten Beck/ Democratic legitimacy of the Eurozone Geoffrey R D Underhill, Jasper Blom/ Cyprus: The next blunder Charles Wyplosz/ Making the European Monetary Union Harold James Before the crisis, the common currency and single market promoted financial integration. Banks and financial institutions operated with ease across countries; credit went where it was in demand; and portfolios became increasingly more diversified. The interbank market functioned smoothly, and monetary conditions were relatively uniform across the Eurozone. There were side effects, such as large capital flows within the Eurozone and the associated buildup of sovereign and private-sector imbalances. But, by and large, a hybrid financial architecture based on a single currency and common market, and national-based financial safety nets, bank supervision and regulation seemed to serve the Eurozone well. Inherent tensions in institutional design The crisis laid bare the tensions inherent in this institutional design. Private borrowing costs rose with the sovereign's, imparting procyclicality and impairing monetary transmission. This amplified financial fragmentation (Figure 1) and volatility, and thus exacerbated the economic downturn. This adverse dynamic resulted from the inability to control local interest-rate conditions, and an architecture that strengthened the link between a country’s banking and real sectors and the health of its public finances. In hindsight, it is evident that, in good times, banks grew in many places to a scale that overwhelmed national supervisory capacities, while in bad times, they overwhelmed national fiscal resources. It is also clear that, in the existing architecture, if a sovereign’s finances are sound, then its backstop for its banks is credible. But if they are weak, then its banks are perceived as vulnerable and, therefore, face higher funding costs (Figure 2) (see Acharya et al. 2012, Gerlach, Schulz, and Wolff 2010). The crisis also brought to the forefront a second tension. Nation-bound regulators may unduly favour a country’s banking system and economy and may not internalise cross- border spillovers, which lie beyond their mandates. In good times, they may not take into account how their actions contribute to the buildup of excesses in other countries. In bad times, they may encourage reducing cross-border activities of their banks, exacerbating financial fragmentation.
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Figure 1. Foreign exposure (€ billions)
Source: BIS consolidated banking statistics, immediate risk basis. Note: Ireland and Finland not included due to breaks in data reporting. Figure 2. Bank CDS spreads cluster along country lines during crisis1
Source: Bloomberg and IMF staff calculations Notes: 1The sample includes all 31 banks in the 2010 EU-wide EBA stress test for which CDS data (end of month) were available in Bloomberg. Available data for Greece in 2012 are not plotted due to being far away from the rest of the sample (the CDS spreads of two Greek bank spreads were 1990 bps and 2027 bps, and the sovereign Greek CDS spread was 8711 bps as of May 2012). Can a banking union help and what should it look like? In a recent paper (Goyal et al. 2013), we argue that a well designed banking union can help address both tensions. To be effective, the new institutional framework would have to comprise three elements: • A single regulatory and supervisory framework. 220
• A single resolution mechanism. • A common safety net. All three elements are necessary. • A single supervisory mechanism without a common resolution and safety net framework will do little to break the vicious circle between banks and sovereigns and reestablish a properly functioning monetary transmission mechanism. In particular, lack of a credible resolution framework would hamper the effectiveness of the single supervisory mechanism and impede timely decision-making by leaving national authorities to deal with the fiscal consequences of others’ supervisory decisions. • Bank recapitalisation as well as resolution and deposit-insurance mechanisms would lack credibility without the assurance of fiscal backstops and burden- sharing arrangements. • Conversely, common safety nets and backstops without effective supervision and resolution would break sovereign-bank links, but risk distorting incentives, reinforcing tendencies for regulatory forbearance, and shifting losses to the Eurozone level. In short, power and resources must go hand in hand. Europe is moving in the right direction and (given the institutional constraints) at a commendable speed. Important progress has been made toward establishing a single rule book and a single supervisory mechanism, and the aim is to agree on a framework for a European stability mechanism direct recapitalisation by June 2013 and on a single resolution mechanism that could be in place in 2014. There are of course implementation challenges related to putting into practice effective common supervision. It is essential also to avoid stalling on reforms. In this regard, agreeing on a framework and timetable for common safety nets and backstops is critical. Is this the solution to the crisis? Obviously, a banking union will not solve all the Eurozone’s problems. But it can help speed the process of repair. Having common resources deployed through the ESM will help recapitalise and repair banks where the sovereign is weak. To align incentives, proper governance and control must be in place - through supervision at the ECB1. Common supervision will also mitigate regulatory ringfencing. These actions would reduce fragmentation of financial markets, help repair monetary transmission, and facilitate economic recovery. Looking back, one could also argue that an effective common supervisor would have limited the concentrated exposures of banks to certain risks. For example, Eurozone- wide supervisors would arguably not have allowed size, structure and concentration risks to grow as they did in countries such as Spain, Ireland, or Cyprus. Effective single supervision would take a broader perspective, and would need to counterbalance any tendency of common safety nets to allow imbalances to grow even larger. How do we get there? In an ideal world, in tranquil times, the transition to a banking union would be gradual. Most likely, it would start with harmonising supervision, resolution, and safety nets across countries. This would be followed by an agreement on burden sharing and fiscal
221 backstops and with the development of new common institutions. Finally, the process would culminate with the transfer of powers and responsibilities to a full banking union, with a single supervisory mechanism, a single resolution authority, a common resolution and deposit-insurance fund, and common backstops. But times are far from tranquil. Rapid action is needed, and solutions may temporarily involve risks and costs. Yet, a well defined timetable and agreement on what the banking union would finally look like will minimise the risk of an incomplete and possibly incoherent architecture. Breaking the sovereign-bank link Repairing the financial sector and re-establishing a properly functioning monetary- policy transmission mechanism are key elements of any crisis resolution strategy. From that standpoint, the decision by Eurozone leaders to allow the European stability mechanism to recapitalise banks directly is the right one. To be sure, failing non-systemic banks should be resolved at least cost to national deposit-insurance schemes and taxpayers. Yet, the issue of potential Eurozone assistance may still arise in relation to frail domestically systemic banks, for which individual sovereigns may not have adequate resources to deal with, lest public solvency be undermined. A first step is to fully recognise the losses on bank balance sheets. Given that the European stability mechanism cannot make expected losses, a pragmatic solution toward resuscitating frail domestically systemic banks is for the private sector and domestic sovereign to put in as much capital as would make the capital position non negative. The European stability mechanism would top up to meet regulatory requirements, and should stand ready to support the bank for any unexpected losses going forward. In this way, the European stability mechanism’s involvement would delink the sovereign from future unexpected losses on bank balance sheets. By ensuring that the banks have an owner of unquestioned financial strength, it would improve bank funding conditions. Moral-hazard concerns The European stability mechanism’s resources should be unlocked as soon as possible. However, the transfer of financial responsibilities to the centre needs to be balanced by the transfer of supervisory power. In that context, the decision to subordinate the European stability mechanism direct recapitalisation to the establishment of an effective single supervision mechanism within the ECB is a sensible one. Common resolution and safety nets The single stability mechanism will have to work with national resolution authorities to resolve or restructure weak institutions, until a single resolution authority with common backstops is established. To facilitate the process, there may be merit to establishing a temporary body or creating urgently an EU agency tasked with the coordination of bank crisis management and resolution among national authorities and the ECB. Agreeing on clear principles about the hierarchy of claimants and reducing expectation of bailouts would help contain the fiscal costs of future resolutions, including by allowing the possibility of bailing in uninsured creditors. Steps should be taken toward true common safety nets to insure risks more efficiently and weaken sovereign-bank links. A re-insurance scheme, for instance, could be created
222 for national deposit-guarantee schemes, funded at the Eurozone level through industry levies and contributions from member states. Ex-ante agreement on the shares of national and supranational funding in depositor payouts would limit moral hazard. Over time, the fund would build administrative capacity, and could be a step toward a permanent deposit-guarantee and resolution fund. Risks and problem issues A key risk is that of incomplete or stalled implementation. As discussed above, an effective banking union entails single supervision and regulation, a single resolution mechanism, and common fiscal backstops and safety nets. Therefore, agreement on and implementation of critical design aspects must not be deferred far into the future. Other transition risks relate to the ability to build adequate capacity at the ECB and establish incentive-compatible relationships between the ECB and national regulators. All this will inevitably take some time. In the meantime, conflicts of interest may lead to supervisory drift. Clarity is thus essential on the responsibilities and accountability of the various supervisory authorities. To limit conflicts and improve communication, the ECB would need quickly to put in place cross-country teams for the supervision of the most systemic or fragile banks. Moreover, it will be important to balance the representation of national interests and public officials from the ECB in the governance structure of the single stability mechanism. There are also concerns about conflicts between the ECB’s traditional objective and its newly acquired responsibility. To address these concerns, consideration could be given to strengthening the governance of the decision-making process and accountability of supervision at the same level as the central banking functions. Finally, because systemic risks may re-emerge in the future as interconnections and size evolve, renewed vigilance and new policy tools (such as those classified as macroprudential) will be required at the ECB. Conclusion In conclusion, European policymakers face the daunting task of putting in place a banking union while combating a crisis. They have taken critical steps and made admirable progress. Completing the architecture as summarised above can only augur well for the stability of the monetary union. Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated. References Acharya, V, Drechsler, I, and P Schnabl (2012), “A Tale of Two Overhangs: The Nexus of Financial Sector and Sovereign Credit Risk”, Banque de France Financial Stability Review, April. Gerlach, S, Schulz, A, and G Wolff (2010), “Banking and Sovereign Risk in the Euro Area”, CEPR Discussion Paper 7833. Goyal, Rishi, Koeva Brooks, Petya, Pradhan, Mahmood, Tressel, Thierry, Dell'Ariccia, Giovanni and Pazarbasioglu, Ceyla (2013), “A Banking Union for the Euro Area”, IMF, 12 February.
1 Agarwal et al (2012) show that, in the US, federal regulators are significantly less lenient than state regulators (although the US also has federal backstops in place). http://www.voxeu.org/article/banking-union-eurozone 223
Soros Joins Gross in Warning Kuroda Plan Risks Yen Rout By Wes Goodman and Bei Hu - Apr 5, 2013 Billionaire investor George Soros and Bill Gross, who runs the world’s biggest bond fund, said the Bank of Japan (8301)’s plan to end deflation risks weakening the yen. “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche,” Soros said today in an interview on CNBC. The currency will have to depreciate “much more” for BOJ Governor Haruhiko Kuroda to reach his inflation target of 2 percent, Gross said yesterday. Soros and Gross chimed in after Kuroda announced plans yesterday to double the BOJ’s monthly bond purchases to about 7.5 trillion yen ($77.8 billion) as it seeks to achieve 2 percent annual inflation in 2 years. Japan’s currency fell 18 percent in the past six months on speculation policy makers were planning to pump more money into the economy. Only the Malawian and Venezuelan currencies performed worse, according to data compiled by Bloomberg. The yen was little changed against the dollar today at 96.32 as of 8:51 a.m. in London. It earlier weakened to 97.19, a level not seen since August 2009. The BOJ is ready to do more if needed, Kuroda told reporters in Tokyo yesterday. Unstoppable Momentum? “If what they’re doing gets something started, they may not be able to stop it,” Soros said. Soros Fund Management LLC, the billionaire’s $24 billion family office, made almost $1 billion since November from bets that the yen would tumble, a person close to the New York-based company told Bloomberg in mid-February. In 1992, Soros and his then chief strategist Stan Druckenmiller made a $10 billion wager the Bank of England would be forced to devalue the pound, a trade that netted $1 billion. Kuroda may have difficulty achieving his inflation goal, Gross said. Group of Seven nations may press Japan to control the pace of the yen’s decline to temper gains in their own currencies, he said. A stronger currency makes a nation’s goods more expensive to overseas buyers. “It seems not unachievable, but it’s certainly a high target to reach,” Gross said yesterday on Bloomberg Television’s “Street Smart” with Adam Johnson and Sara Eisen. “They’ve got to depreciate the yen. To our way of thinking, much more depreciation of the yen has to take place in order to get even close to 2 percent” inflation, he said.
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“I’m not sure that other G-7 countries are willing to permit that,” said Gross, who is based in Newport Beach, California. “They’ve got to control it to some extent.” Gross manages the $289 billion Total Return Fund. (PTTRX) Pimco is a unit Munich- based insurer Allianz SE. (ALV)
Soros Joins Gross in Warning Kuroda Plan Risks Yen Rout By Wes Goodman and Bei Hu - Apr 5, 2013 Billionaire investor George Soros and Bill Gross, who runs the world’s biggest bond fund, said the Bank of Japan (8301)’s plan to end deflation risks weakening the yen. “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche,” Soros said today in an interview on CNBC. The currency will have to depreciate “much more” for BOJ Governor Haruhiko Kuroda to reach his inflation target of 2 percent, Gross said yesterday. Soros and Gross chimed in after Kuroda announced plans yesterday to double the BOJ’s monthly bond purchases to about 7.5 trillion yen ($77.8 billion) as it seeks to achieve 2 percent annual inflation in 2 years. Japan’s currency fell 18 percent in the past six months on speculation policy makers were planning to pump more money into the economy. Only the Malawian and Venezuelan currencies performed worse, according to data compiled by Bloomberg. The yen was little changed against the dollar today at 96.32 as of 8:51 a.m. in London. It earlier weakened to 97.19, a level not seen since August 2009. The BOJ is ready to do more if needed, Kuroda told reporters in Tokyo yesterday. Unstoppable Momentum? “If what they’re doing gets something started, they may not be able to stop it,” Soros said. Soros Fund Management LLC, the billionaire’s $24 billion family office, made almost $1 billion since November from bets that the yen would tumble, a person close to the New York-based company told Bloomberg in mid-February. In 1992, Soros and his then chief strategist Stan Druckenmiller made a $10 billion wager the Bank of England would be forced to devalue the pound, a trade that netted $1 billion. Kuroda may have difficulty achieving his inflation goal, Gross said. Group of Seven nations may press Japan to control the pace of the yen’s decline to temper gains in their own currencies, he said. A stronger currency makes a nation’s goods more expensive to overseas buyers. “It seems not unachievable, but it’s certainly a high target to reach,” Gross said yesterday on Bloomberg Television’s “Street Smart” with Adam Johnson and Sara
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Eisen. “They’ve got to depreciate the yen. To our way of thinking, much more depreciation of the yen has to take place in order to get even close to 2 percent” inflation, he said. “I’m not sure that other G-7 countries are willing to permit that,” said Gross, who is based in Newport Beach, California. “They’ve got to control it to some extent.” Gross manages the $289 billion Total Return Fund. (PTTRX) Pimco is a unit Munich- based insurer Allianz SE. (ALV) http://www.bloomberg.com/news/2013-04-05/soros-joins-gross-in-warning-kuroda- plan-risks-yen-rout.html
Analysis: Big inflows into bonds undercut the "Great Rotation" 05/04/2013 12:14am EDT By Jennifer Ablan (Reuters) - Fears of a rush for the exits from the U.S. bond market have been greatly exaggerated. Even as the fixed-income sector grapples with a rare negative start to the year, many of the biggest and widely followed bond firms are still attracting new cash to their flagship funds. And it is not expected to stop any time soon. "I think the demand is there because many investors, especially mom-and-pop investors, still want income and, equally important, have been burned twice on equities," said Jeffery Elswick, director of fixed income at Frost Investment Advisors, LLC, which manages over $9 billion. "They lost so much money, like in the double-digits, during the tech bust (2000-2002) and credit crisis in 2008 - and don't want to go through that again," he said. The Federal Reserve's massive bond-buying program, $85 billion a month of U.S. Treasury debt and residential mortgage bonds, has driven bond prices higher and pinned their yields, which move in the opposite direction, near record lows. That has led many market experts to warn there was a much greater risk of significant losses - as yields eventually return to more normal levels - than any further gains in the bond market. They therefore predicted 2013 would be the year of a large-scale investment shift market many dubbed "The Great Rotation" - a tilting of pension and insurance funds' long-term asset mix back towards equities from heavy weighting in bonds. Yet big names like Pacific Investment Management Co (PIMCO), DoubleLine, Loomis Sayles and TCW have seen their main bond funds take in an aggregate total of roughly $5 billion during January and February. Vanguard's indexed Total Bond Market portfolios have received over $5.6 billion for the same period, according to the latest data provided by Morningstar.
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More broadly, while U.S. funds that invest in stocks have gained $78.88 billion in new cash so far this year amid the U.S. stock market's run-up, taxable bond mutual funds have garnered roughly the same - $76.41 billion, according to data from Thomson Reuters' Lipper service. These inflows belie the notion that "The Great Rotation" has taken hold this year. "The idea of a 'Great Rotation' into stocks from bonds appears to be a somewhat naive justification of the bullish case for equities for those who have not grasped the magnitude of the Federal Reserve's impact on the market," said Bonnie Baha, head of Global Developed Credit at DoubleLine Capital LP, which manages more than $56 billion in Los Angeles. Too much emphasis has been placed on the widespread prediction that record-low bond yields will prompt investors to rotate out of bonds and into stocks during 2013, Baha said. Equities have gained strongly this year on increasing confidence in the U.S. economy and financial markets, while bond prices are being supported by U.S. central bank purchases. The reallocation to equities has apparently come at the expense of money market funds, noted Larry Jeddeloh, chief financial officer of the TIS Group, which produces the Market Intelligence Report. Those funds have suffered outflows of $82.5 billion so far this year. Indeed, the Fed's program to suppress interest rates has triggered a massive yield hunt among investors. That has translated into strong demand for investment-grade corporate debt and high-yield bonds, also called junk bonds because they carry below-investment- grade ratings from Standard & Poor's and Moody's Investors Service. "I think there's a tug of war going on," DoubleLine's Baha said. "This is likely to be a low volatility year for bonds with all the Fed bond buying. I don't think you will see a wholesale exit from diversified bond portfolios." The yield on the benchmark 10-year Treasury note, which popped above 2 percent in February, had declined to 1.76 percent by the close on Thursday. That is despite relatively strong economic data, a recovering housing market and gains in U.S. stocks that have taken indexes to record highs. Geopolitical risks have also led investors to their favorite safe haven of Treasuries. On Wednesday, Treasuries gained on news the Pentagon was sending a missile defense system to Guam in the coming weeks and remarks by Defense Secretary Chuck Hagel that North Korea posed a "real and clear" danger. WHAT BOND VOYAGE? Bonds did suffer a quarterly loss to start the year. The Barclays U.S. Aggregate Bond Index registered a total return of negative 0.12 percent in the first quarter, only its second down quarter since the financial crisis, though most big-name bond funds turned in a slightly positive total return. TCW funds easily surpassed the benchmark Barclays Aggregate, posting a first-quarter return of 1.12 percent, bringing its 12-month return to 10.37 percent. That performance stems from its bet on so-called non-agency mortgages, or residential mortgage bonds not guaranteed by the likes of Fannie Mae or Freddie Mac. Those have gained thanks to the Fed's massive bond-buying purchases, which have helped support risk assets including non-agency mortgage-backed securities(MBS). And
227 with the housing market recovering, managers like TCW correctly bet that there would be more profit and less risk in buying private-label MBS-backed debt. The fund's manager, Bryan Whalen, said he expects these bonds to offer loss-adjusted returns in the 7.5 percent to 9 percent range. Last year, TCW also began shifting into floating-rate assets that had been less in demand given the Fed's intention to keep its target interest rate low through mid-2015. For its part, the DoubleLine fund, which is also exceeding the index with a return of 1.27 percent during the first quarter, has used a combination of government-guaranteed securities, mainly agency MBS and some Treasuries, and credit securities, mainly private-label, residential mortgage-backed securities with some commercial MBS. DoubleLine's 12-month return is now 7.37 percent, as of the end of March. When corporate credit and equity prices have fallen, be it due to macro risks such as European debt crisis, heightened fears of economic weakness in the U.S., or worries over budget deficit issues, U.S. government-guaranteed issues such as agency MBS and Treasuries have rallied. Conversely, when credit prices rally because of growing confidence in the economy, non-agency MBS and commercial MBS participate in the gains. The fund's low duration and healthy yield also buffers the overall portfolio from swings or volatility in prevailing interest rates. The PIMCO Total Return Fund, run by PIMCO founder and co-chief investment officer Bill Gross, is also outperforming its benchmark. The fund has gained 0.60 percent so far this year, as of March 31, outperforming the Barclays Aggregate, and for the full year, the PIMCO portfolio's 12-month return of 7.92 percent is easily beating the one-year return of the Barclays index at 3.77 percent. Gross's Total Return Fund has been overweight in some credits such as non-U.S. developed markets and emerging markets. He has also shortened the fund's duration thereby reducing the portfolio's risk to rising interest rates. As of February 28, the fund's effective duration stood at 4.54 years, down from 4.77 years at the end of last year. Gross said on Twitter in March that five-year and shorter maturities will "do best based on continuing policy rate. (Reporting By Jennifer Ablan; Editing by Dan Burns and Leslie Gevirtz) http://www.reuters.com/article/2013/04/05/us-investing-bondflows-rotation- idUSBRE93403G20130405
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April 5, 2013 Obama Budget Reviving Offer of Compromise With Cuts By Jackie Calmes WASHINGTON — President Obama next week will take the political risk of formally proposing cuts to Social Security and Medicare in his annual budget in an effort to demonstrate his willingness to compromise with Republicans and revive prospects for a long-term deficit-reduction deal, administration officials say. In a significant shift in fiscal strategy, Mr. Obama on Wednesday will send a budget plan to Capitol Hill that departs from the usual presidential wish list that Republicans typically declare dead on arrival. Instead it will embody the final compromise offer that he made to Speaker John A. Boehner late last year, before Mr. Boehner abandoned negotiations in opposition to the president’s demand for higher taxes from wealthy individuals and some corporations. Congressional Republicans have dug in against any new tax revenues after higher taxes for the affluent were approved at the start of the year. The administration’s hope is to create cracks in Republicans’ antitax resistance, especially in the Senate, as constituents complain about the across-the-board cuts in military and domestic programs that took effect March 1. Mr. Obama’s proposed deficit reduction would replace those cuts. And if Republicans continue to resist the president, the White House believes that most Americans will blame them for the fiscal paralysis. Besides the tax increases that most Republicans continue to oppose, Mr. Obama’s budget will propose a new inflation formula that would have the effect of reducing cost- of-living payments for Social Security benefits, though with financial protections for low-income and very old beneficiaries, administration officials said. The idea, known as chained C.P.I., has infuriated some Democrats and advocacy groups to Mr. Obama’s left, and they have already mobilized in opposition. As Mr. Obama has before, his budget documents will emphasize that he would support the cost-of-living change, as well as other reductions that Republicans have called for in the popular programs for older Americans, only if Republicans agree to additional taxes on the wealthy and infrastructure investments that the president called for in last year’s offer to Mr. Bohener. Mr. Obama will propose other spending and tax credit initiatives, including aid for states to make free prekindergarten education available nationwide — a priority outlined in his State of the Union address in February. He will propose to pay for it by raising federal taxes on cigarettes and other tobacco products. “The president has made clear that he is willing to compromise and do tough things to reduce the deficits, but only in the context of a package like this one that has balance and includes revenues from the wealthiest Americans and that is designed to promote economic growth,” said a senior administration official, who, like others, declined to be identified confirming details about the coming budget. 229
“That means,” the official added, “that the things like C.P.I. that Republican leaders have pushed hard for will only be accepted if Congressional Republicans are willing to do more on revenues.” But just this week, Representative Eric Cantor, Republican of Virginia, the House majority leader, reiterated the party’s antitax stance and called for reducing spending by cutting waste and making changes in federal programs. The growth in the so-called entitlement programs, especially for health care, is a main driver behind projections of mounting federal debt as baby boomers age and medical costs rise. Mr. Obama’s budget was due in February but administration officials said it was delayed by the year-end fiscal negotiations and resulting tax changes. It will arrive on Capitol Hill hours before the president dines on Wednesday evening with a dozen Senate Republicans — his second such parlay in recent weeks. While the group is likely to also discuss gun-safety and immigration legislation, the timing of Mr. Obama’s budget release is all but certain to make it a prime topic. Some Senate Republicans have been urging the president to speak out more to Americans about his ideas for reducing the growth of entitlement programs. While the White House posted the offer to Mr. Boehner on its Web site this year, aides previously said that Mr. Obama would not include its provisions in his official budget documents. To do so, some said, would expose him to Democrats’ criticism that he is too quick to compromise and allow Republicans to embrace the proposals for spending cuts, in particular the C.P.I., but ignore those for tax increases. Neither the president nor senior aides privately hold much hope that Republican leaders — Mr. Boehner and Senator Mitch McConnell of Kentucky, the Senate Republican leader — will compromise. So Mr. Obama’s strategy of reaching out to other Senate Republicans reflects a calculation that enough of them might cut a budget deal with the Democratic Senate majority. If that happens, the reasoning goes, a Senate-passed compromise would put pressure on the House to go along. According to administration officials, the president’s budget plan would reduce projected annual deficits by $1.8 trillion over 10 years, even with the select spending increases. To offset the initiatives’ cost and avoid adding to deficits, Mr. Obama will propose the tobacco tax increase, a limit of $3 million on how much people can accumulate in tax-preferred savings accounts and repeal of a loophole that allows people to collect both disability and unemployment benefits. Together with the $2.5 trillion in deficit reductions that Mr. Obama and Congressional Republicans have agreed to since 2010, that would bring the total deficit reduction to more than $4.3 trillion over 10 years by the administration’s computations — just over the goal that both parties have set for stabilizing the growth of the national debt. The deficit, which for this fiscal year is expected to be equal to 5.5 percent of the size of the economy, as measured by the gross domestic product, would decline to 1.7 percent by 2023, according to officials. Of the more than $2.5 trillion to date in projected 10-year budget savings, nearly 80 percent would result from spending cuts. The rest would derive from tax increases on high incomes that became law on Jan. 1, in the tax agreement that the two parties reached at year-end when the efforts for a broader deficit-reduction deal collapsed. Mr. Obama’s proposals to reduce deficits $1.8 trillion more over a decade track his offer to Mr. Boehner, adjusted for the roughly $600 billion in higher taxes that became law in
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January. He will propose more than $600 billion in new revenues — his last offer had called for $1.2 trillion in taxes — mostly by limiting to 28 percent the deductions that individuals in higher tax brackets can claim. Congress has ignored that idea in past years. Deficits would be reduced another $930 billion through 2023 as a result of spending cuts and other cost-saving changes to domestic programs, and $200 billion more due to reduced interest payments on the federal debt. Mr. Obama’s proposed spending reductions include about $400 billion from health programs and $200 billion from other areas, including farm subsidies, federal employee retirement programs, the Postal Service and the unemployment compensation system. In Medicare, the savings would mostly come from payments to health care providers, including hospitals and pharmaceutical companies, but Mr. Obama also proposes that higher-income beneficiaries pay more for coverage. http://www.nytimes.com/2013/04/05/us/social-programs-face-cutback-in-obama- budget.html?src=recg
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Daily Morning Newsbriefing April 05, 2013 Draghi hints at policy action in May The Anglo-Saxon media are leading their ECB coverage with Mario Draghi’s statement that the ECB was ready to act, while the German papers observers that the ECB did not act (of which they approve, naturally). Draghi has been truly outstanding in terms of his management of market expectations, and yesterday gave the strongest hint yet that there is a discussion in the governing council about interest rate – with no sufficient consensus yet for another cut, but this position might change by the May meeting of the governing council. Draghi also said the ECB was considering new non-standard measures, adding “we are thinking 360 degrees on the non-standard measures". Draghi said the ECB’s mandate constraints its freedom of manoeuvre to help smaller companies regain access to credit. Draghi on Cyprus Draghi says Cyprus was no blueprint, but established the important principle of a hacking order; says bail-ins are chaotic in the absence of clear rules and buffers; Speaking on Cyprus, Draghi ultimately endorsed the model character of the rescue, by saying that the EU should now a hacking order through which to bail-in creditors. He said bail-ins turn chaotic in the absence of buffers and rules. He said that in the hacking ordered, insured creditor up until €100,000 should be the very last category to be included”. If you accept, in principle, that insured creditors can be included, then logically, you have to address the issue of insurance. The deposit insurance offered by some highly indebted countries is not credible. Add the two together, and people will easily conclude that they are not insured, and not protected. The hacking order principle is fine, but you have to have rock-solid deposit insurance – and this can only be delivered at EU level. Cyprus will cut bank profits A Barclays study says the Cyprus bail-in will cost European banks €15bn in lost profits, as they have to offer higher interest rates to attract customers; Patrick Jenkins of the FT quotes Barclays research according to which the Cyprus rescue will cost the largest banks €15bn annually in terms of reduced profits. The only way banks can stem the now likely withdrawal of large deposits is to offer higher interest rates on large deposits. The estimate is about 0.5%. This would add up to €8bn in costs, plus another €7bn for the pre-funding of national deposit guarantee schemes. The biggest hit would on Commerzbank, where a third of profits would be wiped out. PD seeks support of Monti Pier Luigi Bersani wants a broad agreement with Mario Monti to avoid the stalemate;
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Pier Luigi Bersani and Mario Monti want "prompt solutions" were needed to form a new government and make the election of Italy’s next president, as Il Corriere della Sera reports. Bersani and Monti are looking for a sort of alliance to break the current political deadlock. According to Bersani, there is the willingness to coordinate moves to avoid new elections. Monti agreed on this position, but said Italy needed a large coalition to rule the country. As a background: The Italian constitution gives the president important powers, but also imposes an important restriction: the president cannot dissolve parliament before leaving office. This is why the election of a successor to President Giorgio Napolitano is so important. There are suggestions that Bersani and Monti may bulldoze the election of Romano Prodi through the parliamentary assembly, which is possible with an absolute majority in the final round of voting. They may just be able to scramble enough votes together. Prodi, in turn, could then nominate Bersani to be PM, even without a vote of confidence in the Senate. This would make for a lame duck administration, is unlikely to last very long, and even more unlikely to find sufficient support for major policy change. But it would protect the old guard in the PD, for now. Napolitano says Renzi is unfair President Giorgio Napolitano says Mateo Renzi is unfair, there is no time wasting; President Giorgio Napolitano says Italy is not wasting time in seeking a way out of the post-election impasse, as La Repubblica reports. In response to Matteo Renzi, Napolitano reiterates that the 10 wise men group appointed on last week has a concrete job: to propose consensus policies, continue on the path of structural reforms and avoid a new electoral round. Napolitano said he wanted to find a solution until the end of the month to send a sign to financial markets. He also stressed international investors could be nervous by the inconclusive Italian elections. That is why, according to Napolitano, the wise men could be the solution. Italian crisis hits real-estate Italian house prices fell for the fifth time in a row; The Eurozone crisis has caught up with Italian real-estate transactions, as Il Sole 24 Ore reports. According to ISTAT the house prices fell for the fifth consecutive quarter in the last three months of 2012, when they dropped 1.5% versus to the July-September period, as ISTAT remarks. According to the national statistics agency the house prices were 4.6% lower between October and December of 2012 than they were in the same period of 2011. They are down 16% on 2007. ISTAT also said the average price of a house transaction is €200,000, 2.7% lower than in 2011. For new houses the average price was down 2.1% on annual basis, while for existing houses they were down 4.7%. Italy plans to issue bonds to settle unpaid bills; Reuters has the story that Italy will increase its target for government bond issuance in 2013 and 2014 to pay off a portion of outstanding state debts to the private sector, quoting a senior treasury official. Thousands of small Italian firms have gone bust since the beginning of the year, as they are waiting for the state to settle bills that have sometimes been outstanding for two years. There would not be a one-to-one correspondence between the new issues and the payment of the outstanding bills, as the government can handle this quite flexibly, the source is quoted as saying. Tough troika talks started in Athens
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Troika officials and the Greek government started talks yesterday; Sensible issues are civil servant reduction plans, the merger between National Bank and Eurobank and an expected shortfall of €3bn; In Greece talks with the troika started. After a first meeting with the finance minister the two sides are far apart on three key issues according to Kathimerini. The troika representatives remain unconvinced about the government’s civil servant reduction plan, raised concern over the size of a planned merger of National Bank and Eurobank and expect a fiscal shortfall of €3bn this year and next, though have so far not asked for new measures. The troika is still waiting to find out exactly how Greece intends to replace the emergency property tax introduced in 2011. Coalition partners seem to disagree about what has been agreed to replace the emergency property tax with. The Democratic Left insisted in a statement that the new tax would be progressive, have a tax-free threshold and would be applied across a wider property base. It added that taxpayers could choose to pay the levy at tax offices rather than via electricity bills. The finance ministry said Democratic Left leader Fotis Kouvelis interpretation was wrong and that the only difference between new and old property tax is that it would bring in 10% to 15% less in revenue than the emergency measure due to a slight reduction in charges. The prime minister was called to intervene. Greek parliament approves law to boost investment Greek parliament approved legislation to boost investment, through more fast-track licensing and a one-stop shop for investors; The Greek parliament approved legislation late on Thursday to boost private investment, by making a broader range of projects eligible for fast-track licensing and by creating a new one-stop-shop agency for investors. Amongst other things, the law sets out for the first time specific rules for licensing and operating seaplanes to encourage operators and improve access to holiday resorts. Germany and France and the spat over the austerity-growth debate Pierre Moscovici calls on Germany to allow France more time to reach deficit target or face recession and more unnemployment; Wolfgang Schäuble deflected call saying Berlin did not see budgetary rigour as incompatible with growth; Pierre Moscovici called on Germany to grant France more time to achieve its deficit target, saying that if Paris were forced to cut below the EU limit of 3% this year, "we would put the country into a recession", which would mean more unemployment, Deutsche Welle reports. Moscovici said he needs Germany to understand this appeal because Germany "needs a strong France" by its side. But Wolfgang Schäuble deflected the call by insisting that Berlin did not see budgetary rigour as incompatible with growth. "We need to stop this debate which says you have to choose between austerity and growth," he said, while adding that growth was nonetheless "indispensable". Moscovici also stepped up longstanding calls for Germany to do more to help crisis-hit euro zone members saying "Those countries with surpluses can act in a more cooperative way. That requires more coordination.” Pierre Moscovici says he expects French GDP forecast for 2013 to be close to 0.1%;
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France's economic growth this year may be close to a European Commission forecast of 0.1%, lower than a current official view of 0.8%, Finance Minister Pierre Moscovici said on Thursday. "The European Commission... says 0.1% (GDP growth) in 2013, I fear that we will not be far from that, I hope it will be more, we are fighting so that it will be more," Reuters quotes him. The government is due to present updated growth and deficit forecasts by mid-April as part of their Stability programme. Figures from a survey of purchasing managers published Thursday showed France to be the weakest of the major euro-zone economies, with private-sector activity falling to a 48-month low. Royal indictment dominates Spanish news Spanish politicians and press see the indictment of Princess Cristina as a sign that the rule of law works; In an editorial, El Pais argues that by indicting the King's daughter, the judge in the so- called 'Urdangarin case' "confirms that the rule of law works in Spain". According to the Editorial, indicting her is the only way to force her to appear before the investigative judge as, had she been named as a witness, she would have enjoyed the right not to answer questions, or to answer them in writing. The judge apparently wanted to avoid finalizing the investigative phase of the case without hearing the Princess. The El Pais editorial contrasts with a news report by the same paper on the "privately expressed" worries by both leading Spanish political parties, PP and PSOE, about the damage this case may cause to Spain's image, and about "the institutional stability" of the country. The public face focuses on upholding the rule of law and the respect for judicial independence. Spanish retail slump: kitchen appliance edition More evidence of slumping Spanish retail, as Spain accumulates 34 months and 6 years of declining kitchen appliance sales; "Free falling" retail demand causes nearly 100 self-employed persons a day to go out of business in the retail sector; El Pais writes that sales of large household appliances in the first two months of 2013 are nearly 9% lower than in the same period of 2012, as the sector accumulates 34 consecutive months of decreasing sales. In the whole of 2012, sales were nearly 14% lower than in 2011, making 2012 the sixth consecutive year of decreasing sales. The figures were included in a story about French retailer Darty pulling out of Spain due to continued losses and closing its 43 stores in the country. Meanwhile, El Economista writes on data released by Spain's National Statistics Institute INE showing that retail sales generally dropped by nearly 11% in February, with 32 consecutive months of declining sales, with employment dropping by 2% and accumulating 55 months of decline. The National Federation of Self-Employed Workers said in a press release that nearly 2800 self-employed retailers went out of business in February. According to ATA, retail sales dropped by 13% in the small firm segment, but only by 4% in large chains. Germany keen to exploit tax haven CD A CD has surfaced in Germany with lots of information about tax avoidance schemes in international tax havens; Wolfgang Schauble wants the information to start proceedings; 235
The German press coverage is dominated by revelation in Suddeutsche Zeitung about a CD that contains the names of 130,000 investors in letter-box companies in various tax havens. The CD contains 2.5m confidential documents, demonstrating how this network operated. The paper has loads of details of how they got the data, and what they contain. Some names are mentioned, but not many. Deutsche Bank is mentioned as having helped their wealthier clients to avoid taxes. Sensing an opportunity to exploit, Wolfgang Schauble expressed an immediate interest. French bond auction sends borrowing costs to record low France’s borrowing costs hit new record low with €6.97bn of 10y bonds sold with average yield falling to 1.94%; French 10-year borrowing costs fell to a new record low yesterday, Dow Jones reports. France sold €6.97bn in debt, slightly short of the upper end of its €6bn-to-€7bn range. The average yield on the 10-year bonds fell to 1.94% from 2.10% in the previous auction. Steinbrück’s poll ratings reach all-time low Spiegel Online has details of the latest polls, showing Peer Steinbruck receiving the lowest approval ratings since 2005. His rating now stands at 32%, while Angela Merkel’s approval rating is 68%. The party polls show the CDU/CSU at 41%, SPD at 27%, FDP 4%, Greens 14%, Left 8%, Pirates 3%. The polls also show that a majority of Germans believe the worst in the eurozone crisis is yet to come, but they are also very happy with Angela Merkel’s handling of the crisis. Eurozone Financial Data April 05, 2013 0 Eurozone Financial Data This Previous day Yesterday Morning France 0.701 0.634 0.612 Italy 3.311 3.273 3.272 Spain 3.637 3.681 3.633 Portugal 5.059 5.180 5.205 Greece 10.790 10.866 11.09 Ireland 2.845 2.877 2.887 Belgium 0.911 0.843 0.823 Bund Yield 1.288 1.244 1.245
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.279 1.2905
Yen 122.100 124.3
Pound 0.849 0.8481
Swiss Franc 1.216 1.2159
ZC Inflation Swaps
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previous last close
1 yr 1.56 1.51
2 yr 1.49 1.45
5 yr 1.68 1.67
10 yr 1.95 1.95
Euribor-OIS Spread
previous last close
1 Week -5.100 -5.1
1 Month -4.429 -4.329
3 Months 4.971 5.071
1 Year 33.929 34.429
Source: Reuters
Wren-Lewis on the ECB Simon Wren-Lewis says the ECB should have cut interest rates as all the indictors, including inflation, are pointing in the same direction; Simon Wren Lewis has a scathing comment on the ECB’s hesitation. All the indicators are pointing in the same direction, including inflation. Here is his main argument: “In macroeconomic terms, we have a large leftward shift in the IS curve. What monetary policy is meant to do in these circumstances is to cut real interest rates to restore demand. In macroeconomics speak, to move down the IS curve until demand is restored. Moving a bit along the IS curve, and saying ‘look, we are helping’, is not good enough. Policy needs to respond to the size of the shock. Now monetary policy is difficult when signals and forecasts conflict. But when everything is pointing in the same direction, it is really easy.” Avent on the future of the eurozone Brian Avent says that widening gap between the US and the eurozone will increase pressure on struggling eurozone countries to leave; Brian Avent (hat tip Brad DeLong) has this to say about how the growing performance gap between the eurozone and the US will influence the debate: “I had been surprised at how long euro-area residents seemed content to suffer through the continent's economic mess. But maybe I shouldn't have been; until recently, it wasn't obvious that other large, rich economies could manage much better. Now it is, and it will become more obvious every quarter. Perhaps the American example will motivate euro-area leaders to change course. If not, the temptation to abandon a sinking ship will only grow.” http://www.eurointelligence.com/professional/briefings/2013-04- 05.html?cHash=c5aa9d038870d0929c8b34d20cd57671
237 mainly macro Comment on macroeconomic issues Thursday, 4 April 2013 What does the ECB think it is doing? Or rather, why isn’t it doing something? Consumer price inflation is currently 1.7%. The OECD expects 1.6% as a whole for 2013, and 1.2% for 2014. The ECB sees downside risks due to the impact from lower activity, which it acknowledges is falling but which it hopes will recover soon. The OECD expects GDP to be flat this year, and increase by 1.3% next - is that what is meant by a recovery? On activity the ECB sees downside risks, but does not mention any upside risks. On the prices side they see upside risks from administered prices, VAT and oil, but for all three it is questionable whether it should react to these type of shocks at all. In fact, if you look at other measures of inflation, the inactivity is even more puzzling. Annual increases in the GDP deflator have been at or below 1.2% since 2009, and the OECD expect a rise of only 1% in 2014. Wage increases (compensation per employee) have been below 2% since 2009, and are expected by the OECD to be around 1.5% this year and next. (Wages should normally increase by more than price inflation because of underlying productivity growth.) With this in mind I read Draghi’s statement today, where he announced no change in the 0.75% interest rate, looking for some justification for why nothing was being done despite falling activity and below target inflation. After listing all the reasons that would normally suggest cutting interest rates, there was this: “Against this overall background our monetary policy stance will remain accommodative for as long as needed.” I’m sorry, but this does not compute. The Eurozone is suffering from a large negative demand shock due to many things: partly austerity, but also the kind of balance sheet adjustment that we have seen elsewhere. (See, for example, Reza Moghadam of the IMF here.) In macroeconomic terms, we have a large leftward shift in the IS curve. What monetary policy is meant to do in these circumstances is to cut real interest rates to restore demand. In macroeconomics speak, to move down the IS curve until demand is restored. Moving a bit along the IS curve, and saying ‘look, we are helping’, is not good enough. Policy needs to respond to the size of the shock. Now monetary policy is difficult when signals and forecasts conflict. But when everything is pointing in the same direction, it is really easy. The other interpretation of what the ECB is doing is that they do understand basic macroeconomics, but consumer price inflation of 1.7% prompts no action (because its close to 2%), and they expect (in contrast to the OECD) inflation to stay at this level. But is this plausible? One word that does not feature in Draghi’s statement is unemployment. The OECD expects unemployment to rise to 12% this year and next, which is 2% higher than in any year from 2000 to 2010. So how does this square with consumer price inflation stabilising at just below 2%? The answer is it does not. The ECB staff forecasts for consumer price inflation for 2014 are “between 0.6% and 2.0%” - exactly in line with the OECD. So something is very wrong here. Even if you assume that the ECB are focused on hitting consumer price inflation alone, and care nothing for activity, unemployment or other inflation measures, they are doing nothing about future inflation falling well
238 below 2%. So however you write the job description, they are not doing their job. What happens in this situation? Does anyone have ultimate control over the ECB? Or was the possibility that the ECB would not do their job properly never imagined? http://mainlymacro.blogspot.com.es/2013/04/what-does-ecb-think-it-is- doing.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+Mainl yMacro+(mainly+macro)
ft.com comment Columnists April 4, 2013 6:26 pm Spend and borrow will not save the left
By Philip Stephens The welfare state was built on growth. That is what social democrats should focus on
Whatever happened to European social democracy? Liberal financial capitalism perished in the great crash of 2008. The shredding of the Washington consensus promised to allow Europe’s centre-left to remake the bargain between state and markets. In the event, the champions of government now count themselves among victims of the crash. Europe’s political geography is one of mostly centre-right governments challenged here and there by populist insurgents. In the few places where the centre-left holds sway it is in trouble. Elsewhere, in the more familiar role of opposition, it looks unconvincing. All the while the post-crash nationalisation of private sector debts presents a lethal threat to Europe’s cherished social model. More ON THIS STORY/ Philipp Hildebrand Europe needs to focus on reform/ In depth Austerity Europe/ After the Third Way, edited by Olaf Cramme and Patrick Diamond/ Italy faces stalemate as talks crumble
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ON THIS TOPIC/ Dutch consensus for austerity starts to crack/ Global Market Overview Investors wrestle with eurozone angst/ Spain told to raise deficit estimate/ French unemployment hits 16-year high PHILIP STEPHENS/ Mideast needs more than words/ An end to self-righteous rule/ After hubris in Iraq, hesitation in Syria/ Pay up for Nato or shut it down I hear progressive politicians complain that this is unfair. Why should voters be more trusting of those most responsible for this terrible economic mess than of those who have always believed in fettered markets? There are two answers to this. The first is that the centre-left colluded in the credit boom: as long as the money was there to be redistributed, no one asked too many questions. The second, and more important, is that the progressive response in the aftermath of the crash has been wholly unconvincing. France’s Socialist government looks to be in office but not in power. François Hollande was in difficulties well before the tax evasion scandal now engulfing his administration. As it happens the president is not a madcap leftie. By French standards, his reforms are halfway radical. But his election victory was essentially a rejection of Nicolas Sarkozy. Without much of a grand plan of his own, Mr Hollande has failed to show that elusive but vital leadership quality known as “grip”. Instead, his government has come to be defined by a barmy plan for a 75 per cent tax rate on the rich. On the other side of the Channel, Ed Miliband’s Labour party looks at first glance to be prospering in opposition. Britain has a Tory prime minister with no discernible strategic ambition at the head of a coalition whose economic policies have run aground. The economy is flatlining and the UK’s fiscal deficit will soon be larger than that of Greece. For all that, Labour’s lead in the polls is misleading. As disenchanted as they are with austerity, voters show little real enthusiasm for a swerve leftward. In the event Mr Miliband wins the 2015 election – quite possible given the coalition’s failures – few even in Labour ranks know how he would govern. You can find such confusion across the continent. In Italy the leftist alliance of Pier Luigi Bersani was deprived of office by the anarchic populism of the Five Star Movement. No one I have spoken to in Berlin expects the Social Democrats to oust Angela Merkel in this autumn’s German election. Spanish voters may resent eurozone- imposed austerity, but Mariano Rajoy’s government is more troubled by corruption than by the Socialists. In Scandinavia, the spiritual home of modern social democracy, there has been a sharp rise in anti-immigrant populism. Many of these parties will gather in Copenhagen next week at a conference organised by the progressives’ smartest think-tank, Policy Network. Doubtless they will talk about austerity, inequality and the spreading scourge of rightwing populism. None of this will carry unless social democrats first understand what they need to do to win back trust. Blaming it all on the bankers and railing against public spending cuts resonates with hard-pressed voters. It is also displacement activity. Olaf Cramme, the director of Policy Network, puts it well: the centre-left is caught in a credibility trap. The mistake is to confuse popular empathy for anti-austerity policies with bankable electoral support. Much as they resent cuts, voters are deeply sceptical about a bigger state funded by more borrowing. As long as the conversation is about debt and deficits, the centre-right holds an advantage. The beginning of wisdom for the centre-left is a readiness to acknowledge
240 the post-crash limits on the size of government. Not all public spending is good and not all cuts are bad. Europe’s welfare state was built on growth. That is what social democrats should be talking about. What is needed, above all, is a prospectus that reaches beyond the old allegiance to Keynesian stimulus policies. Structural economic reform has a bad name on the centre-left. It should not. The big challenges to the welfare state, such as global competition and ageing populations, are structural rather than cyclical. So are the remedies. There is nothing rightwing about tough conditions on benefits when they are combined with serious investment in human capital such as training and education. Ask the Scandinavians. Raising the pension age is about intergenerational equity. Spending on childcare provision is better than on cash benefits. Flexible labour markets can unlock jobs for young people. Public services are sometimes more effectively provided by private contractors. Social democrats should be champions of such reforms. On one big thing Ms Merkel is right: Europe will be able to pay for a civilised social model only if it restores its global competitiveness. Financial markets will accept the logic of more measured deficit cuts only if they are convinced that governments are committed to raising the growth potential of their economies. Voters will trust the centre-left parties with their money only if their leaders are seen to be hard-headed as well as fair. Someone once summed it up in a neat phrase about marrying social justice to economic efficiency. OK, his name was Tony Blair. On the other hand, it did win him three elections. http://www.ft.com/intl/cms/s/0/2e2102de-9c8b-11e2-9a4b- 00144feabdc0.html#axzz2PU2C7w00
ft.com > World > Asia-Pacific > Japan April 4, 2013 6:43 pm Bank chiefs reluctant to follow Japan By Chris Giles, Economics Editor
©Reuters Haruhiko Kuroda is in the vanguard of policy thinking on central bank independence and the limits of monetary policy When a conservative central bank describes its policy shift as “massive”, there can be little doubt about the revolution in Japanese monetary policy.
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This enormous shift will fascinate the rest of the global central bank community, as Japan’s feeble economic performance is often seen as the canary in the coal mine – a warning of the consequences of repeated policy mistakes. More ON THIS STORY/ Bank of Japan unveils aggressive easing/ Gavyn Davies BoJ follows the Fed, on steroids/ Lex Bank of Japan/ Kuroda takes markets by storm/ Editorial Japan embraces monetary change ON THIS TOPIC/ Analysis Investors get ready to short yen again/ Peter Tasker Japan and UK must lead reflation/ Japan suffers decline in factory output/ Japan unlikely to pay its way out of fix IN JAPAN/ Wild swings for Japan bonds after BoJ move/ Yen plunges as easing exceeds forecasts/ Stephen King Kuroda follows Volcker and Greenspan/ Money Supply The BoJ revolution The immediate response on Thursday from two of the largest – the European Central Bank and the Bank of England – showed a complete lack of international co-ordination. The BoE kept policy unchanged and issued no statement, while Mario Draghi, ECB president, said his institution was “ready to act” but did not feel that any additional monetary stimulus was yet warranted. The reluctance to follow Japan’s lead partly reflects the special circumstances of Japan’s economy. Unlike any other large economy, Japanese nominal gross domestic product – the cash value of money spent on goods and services – was lower in 2012 than 20 years earlier, as gains in the volume of output were offset by falling prices. The victory of deflation over Japan’s moderately loose monetary policy has often been attributed to a conservatism in Tokyo not shared by other central banks since the 2008 financial crisis. Most European and American central bankers feel Japan is catching up with their steely efforts to maintain low, but positive, inflation rates during the recent years of sub-par economic performance. Although nominal GDP growth in the US, eurozone and the UK has been disappointing over the past three years, deflation has been conspicuous by its absence. So confident is the Federal Reserve that it has now succeeded in shifting US sentiment that John Williams, the dovish president of the San Francisco Fed, this week predicted it would start reducing its money-printing and asset-purchasing operations this summer. “If all goes as hoped, we could end the purchase programme some time late this year,” he added. Outside the immediate monetary policy parallels, however, the Bank of Japan’s move is much more significant, showing Haruhiko Kuroda, the new governor, and Shinzo Abe, prime minister, to be in the vanguard of policy thinking on central bank independence and the limits of monetary policy.
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The BoJ’s move also signals a victory for elected politicians in a long battle over the optimal degree of central bank independence. Japan has now settled on the view that government sets the parameters for a central bank – an end to deflation and a 2 per cent inflation target – and then expects the technocrats to meet these objectives. Jens Weidmann, the Bundesbank president, warned in January that such action was “threatening to end central bank autonomy” because “the new [Japanese] government is massively involving itself in the affairs of the central bank”. But his view is increasingly rejected across the world, as politicians demand that central banks act more aggressively to meet their given mandates. A similar move occurred in Britain in last month’s Budget when George Osborne, chancellor, ordered the Bank of England to consider how it could follow the Fed in using new, unconventional tools – such as making a commitment to keep interest rates low so long as unemployment remained high – in order to meet his goal of combining “monetary activism with fiscal responsibility”. If the BoJ’s independence is now clearly defined as operational rather than absolute, it has also signalled that it is willing to use its powers to test to destruction the view that it still has power to influence the economy and inflation. Japan’s monetary base – notes and coins in circulation alongside electronic money – is now set to rise to 55 per cent of national income, far above the levels in the US and eurozone, which sit comfortable below 20 per cent. The BoJ now “stands out among major central banks” in its willingness to throw much more ammunition at its deflation problem, according to Kyohei Morita, of Barclays, and this view is gaining some influential supporters. Much recent rhetoric from the Bank for International Settlements and other central bankers has stressed the limits to monetary policy in boosting economic growth when weakness is caused by the more fundamental hangover from the financial crisis. “Printing money is not . . . simply manna from heaven,” Sir Mervyn King, governor of the BoE, said last October.
However, he has more recently come round to the need for more monetary action in Britain, while Mr Draghi hinted on Thursday that the ECB was also close to changing its mind. http://www.ft.com/intl/cms/s/0/0dbf8b96-9d3a-11e2-a8db- 00144feabdc0.html#axzz2PU2C7w00
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Noahpinion FYI, the blog title is a pun conflating my name with the words "no opinion". Thursday, April 04, 2013 Abe surprised me!
I was wrong. For months I voiced heavy skepticism that Shinzo Abe's new administration would follow through on its plans for huge economic policy changes - in particular, a serious push for reflation. Yesterday, Abe's new central bank chief, Haruhiko Kuroda, proved me wrong by announcing a dramatic new program of quantitative easing: The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases... With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base...The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen... With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen... With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively... The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner... Note that "price stability target" means inflation target.
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Now, 60-70 trillion yen is about $600-700 billion, which is about the size of America's recent "QE1" and "QE2". Japan will basically do an new "QEx" every year. In addition to buying long-term government bonds (which the Fed did in QE2), Japan's central bank is going to buy stock and real estate. This is exactly the sort of reflationary policy that Miles Kimball recommended as a cure for depressions, back when I took his macro class. In any case, the move is very very big. George Soros says that the BOJ's plan is "three times as big" as the Fed's attempts at QE. People from big banks and research companies are saying much the same thing. Anyway, so Abe defied my expectations and really implemented a serious policy change. Now, we get to see how well monetary policy really works, in an economy with a deflationary trap and well-anchored deflationary expectations. A dramatic (though uncontrolled) natural macroeconomic experiment is being carried out in Japan - probably the biggest thing since Volcker whipped U.S. inflation in the early 80s. IF monetary policy works - i.e. if it can raise inflation in a controlled manner while boosting output - it's not only a huge win for Japan - which needs moderate inflation to erode its mountainous debt, and could probably use an employment boost too - but also for New Keynesian and monetarist type macroeconomics, which generally holds that a central bank has the tools to control the rate of inflation (or to beat any depression). A failure would mean either an uncontrolled "inflation snap-up", or a failure to budge Japanese expectations and prices. A majority or plurality of top macroeconomists probably believes in some sort of monetarism, so hopes are high. I'm a little bit more agnostic, and I'm excited to see what happens. So, Mr. Abe (or "Shinzo" as I somewhat cheekily called him in a recent interview on a Japanese website)...you convinced me. Excellent job. Now let's see if you can convince me again with structural reform and the TPP! http://noahpinionblog.blogspot.com.es/2013/04/abe-surprised-me.html
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ft.com/global economy EU Economy April 4, 2013 6:12 pm Glimmers of hope for Greek recovery By Kerin Hope in Athens
©Bloomberg The Greek economy is showing small signs of recovery after five years of recession, even though it is still “in a critical situation”, according to Antonis Samaras, the prime minister. Mr Samaras cited figures from the labour ministry indicating that new hirings in the private sector in March outpaced lay-offs for the first time since 2009 with a net gain of 8,000 jobs. More ON THIS TOPIC/ Greece and lenders fall out over firings/ Athens names new privatisation chief/ Greek privatisation agency head resigns/ Former Greek minister handed jail sentence IN EU ECONOMY/ ECB draws bail-in lessons from Cyprus/ Hungary unveils growth stimulus package/ ECB signals rate cut on the agenda/ Cyprus to receive €1bn from IMF However, the premier was careful not to sound too optimistic after several recent projections that the economy will shrink at a faster 4.5-5 per cent this year compared with forecasts in January of a 4 per cent contraction. “The results of work done by the government over the past months will become clear, in my view, in the second quarter . . . and will be measurable by markets within this year, ” the premier told delegates to a conference on Thursday on EU structural funding for Greece. Despite concerns over the slow pace of structural reforms, which has blocked a €2.8bn aid tranche due last month, analysts broadly agree that a turnround is on the way. Heads of mission from the “troika” – the EU, European Central Bank and International Monetary Fund – began talks in Athens on Thursday to overcome resistance to sacking 25,000 civil servants and streamlining property taxes to include undeveloped real estate and agricultural land, led by the two leftwing partners in the governing coalition. “The shocks that hit the Greek economy, including euro exit worries, are starting to dissipate,” Morgan Stanley said in a report published on Thursday.” We expect Greece to reach a primary budget surplus this year and maintain it thereafter.” In depth / Greece debt crisis / Greece struggles on with drastic austerity as eurozone leaders continue to argue over how to help the country cope with its debt mountain
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Greece’s business confidence index rose in March by 1.1 points to its highest level since October 2009, the Athens-based think-tank IOVE said on Thursday. “The gradual improvement in the business climate this year appears to be consolidating in spite of the significant pressures on households and companies,” IOVE said. Last month’s rise in net employment to a large extent reflects improved flexibility in Greece’s labour market, with individual contracts replacing collective agreements at company level, according to Michael Massourakis, chief economist at Alpha Bank in Athens. “The labour market reforms are working . . . Employers are hiring and firing more easily than previously,” Mr Massourakis said. “We can expect a further pick-up this month when seasonal hirings for the tourism industry take place.” Thousands more jobs would be created by the expected relaunch of infrastructure projects stalled for more than three years by disputes with contractors over the terms of public-private partnerships agreed before Greece plunged into recession. Kostis Hatzidakis, the development minister, has announced that a slimmed-down highway programme, in which the government’s contribution would be covered by EU structural funds, would resume this month. http://www.ft.com/intl/cms/s/0/799412f8-9d3d-11e2-88e9- 00144feabdc0.html#axzz2PU2C7w00
BoJ's actions could help everyone: U.S. Fed official
Thu, Apr 4 2013 DAYTON, Ohio (Reuters) - A top U.S. Federal Reserve policymaker on Thursday gave a cautious endorsement of the Bank of Japan's aggressive move to boost the Japanese economy, saying it could help economies globally. "Having Japan over the last many years going in and out of deflationary periods and being poised on the knife's edge of deflation and reflation, versus growth, is not a healthy element of the global scene," Atlanta Fed President Dennis Lockhart told reporters. "So their preparedness to take more aggressive action, if it works, will certainly help everyone." (Reporting by Jonathan Spicer; Editing by James Dalgleish) http://www.reuters.com/article/2013/04/04/us-usa-fed-lockhart-boj- idUSBRE9330NP20130404
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ECB Policy Debate Said to Skirt Loan Plan for Small Businesses By Jeff Black and Craig Stirling - Apr 4, 2013 European Central Bank policy makers skirted a debate on how to boost lending to small and medium- sized companies at their meeting yesterday because officials haven’t yet drawn up a proposal, said three people with knowledge of the deliberations. Five months after ECB President Mario Draghi said he wasn’t satisfied with funding conditions for small companies in some countries, officials are only now beginning to examine their options, the people said on condition of anonymity, because the talks are private. The Governing Council recently tasked committees to develop proposals, one of the people said. Draghi said yesterday that financing conditions for small and medium-sized enterprises remain tight in several of the 17 euro-area nations. With the economy in its second year of recession and a fumbled Cypriot bailout rattling confidence among investors and entrepreneurs, policy makers are looking for new ways to foster economic growth. The ECB is prepared to cut interest rates if the economy deteriorates further, Draghi said, without giving more guidance. The ECB kept the benchmark interest rate unchanged at a record low of 0.75 percent, as predicted by all but two of 56 economists in a Bloomberg News survey. “We will assess all the incoming data in the coming weeks and we stand ready to act,” Draghi said at a press conference in Frankfurt. Next Decision At the same time, the ECB’s next course of action is uncertain. The central bank is wary of introducing measures which, like the Bank of England’s Funding for Lending Scheme, might have only limited success in boosting credit supply for companies, one of the people said. “We will see which ones are either feasible or effective in our specific institutional context,” Draghi said. “One should always be mindful of what the ECB can do and cannot do.” In November, Draghi drew attention to a lack of credit access for small and medium-sized companies. “When we are asked whether we are satisfied with the financing conditions, the answer is: no, we are not satisfied at all,” he said then. “We are observing a fragmentation of the euro area, a re-nationalization of the banking systems, differences in the cost of funding that go beyond the fundamentals.” Small and medium-sized companies account for about half of all employment in Italy and Spain, compared with about a third in France and Germany, and those companies have seen their borrowing costs rise relative to rivals in Germany since the beginning of the sovereign debt crisis. In Italy, 75 percent of SMEs reported higher financing costs and 47 percent said banks were less willing to lend, the ECB’s latest survey of companies released in November showed. Spanish companies cited similar conditions, while in Germany and France the number of smaller companies that saw borrowing costs fall outweighed those facing steeper interest rates. http://www.bloomberg.com/news/2013-04-04/ecb-talks-today-said-to-skirt-lending-plan-for- small-businesses.html
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ft.com/global economy EU Economy April 4, 2013 8:13 pm ECB draws bail-in lessons from Cyprus By Michael Steen in Frankfurt If the European Central Bank faces any blame for last month’s botched bailout of Cyprus, Mario Draghi was determined not to acknowledge it on Thursday. But the president of the ECB did say there were urgent lessons to be learnt on the need to specify a “pecking order” of assets that could be raided to fund future rescues. Mr Draghi said an initial agreement between eurozone finance ministers, Cyprus and the ECB that would have levied a tax on insured deposits below €100,000 was a mistake. More ON THIS TOPIC/ Cyprus crisis to hit European banks hard/ Cyprus to receive €1bn from IMF/ Cyprus bailout sends warning to bank creditors/ Cyprus finance minister quits after troika talks IN EU ECONOMY/ Hungary unveils growth stimulus package/ Glimmers of hope for Greek recovery/ ECB signals rate cut on the agenda/ Spain threatened by resurgent credit crunch “That was not smart, to say the least, and was quickly corrected,” he said at a monthly news conference. He added explicitly: “Cyprus is no template, Cyprus is no turning point in euro policy.” However, he did raise the question of “bailing in” depositors when a bank becomes insolvent, a subject that came into sharp relief in Cyprus where the two major banks had few bondholders and large deposit bases. “We have to be able to resolve banks without using taxpayers’ money and without disrupting the payment system,” the ECB chief said. “We should ask the question, ‘What makes a bail-in a problem?’ Well, a bail-in by itself is not a problem. It’s the lack of rules, ex-ante rules known to all parties, [the lack of] which can make a bail-in a disorderly event. “And it’s the lack of buffers, capital buffers or other bail-inable asset buffers which may make a bail-in a disorderly event.” Since implementing its revised plan, which involves winding up Laiki, the biggest bank, and forcing large losses on uninsured depositors, Cyprus has had to enact capital controls to prevent an all-out bank run. Draft European legislation that would have the power to force losses on bank investors needs to come into force by 2015, rather than 2018 as currently planned, Mr Draghi said – a position also held by Germany, Finland, the Netherlands and Denmark. The European Commission’s draft bank recovery and resolution directive sets out a pecking order for shareholders, bondholders and uninsured depositors in the event of a bank collapse. “If you can, you wouldn’t touch insured deposit holders,” Mr Draghi said, but added that the current draft of the legislation failed to make an explicit distinction between uninsured depositors and senior debt, unlike US rules set by the Federal Deposit Insurance Corporation.
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“One wants to make sure that the same distinction is going to be present in the commission draft directive. That’s another lesson we draw from Cyprus,” he said. Under separate so-called “banking union” plans in the eurozone, the ECB is set to take over supervisory responsibility for major banks from next year. Mr Draghi said Cyprus highlighted how this was “absolutely essential”. “There is no better way to prevent such crises than to shed light on the situations of the national banking systems” through the international oversight provided by a single supervisory mechanism, he said. “It was the same situation in the previous cases, in Ireland, in Spain, in Greece and as it is today in Cyprus. So any delay on this front is extremely disappointing.” Since it was crucial that banks have assets to bail in in the event of a collapse, regulators should also take a view on the relative sizes of their funding bases to prevent a situation like Cyprus where too much was concentrated as deposits, he said. http://www.ft.com/intl/cms/s/0/a1db98e6-9d4a-11e2-88e9- 00144feabdc0.html#axzz2PU2C7w00
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ft.com/global economy EU Economy Last updated: April 4, 2013 3:57 pm ECB signals rate cut on the agenda By Michael Steen in Frankfurt
©Reuters Mario Draghi, president of the European Central Bank, has signalled that an interest- rate cut is rising up the bank’s agenda, saying it stood “ready to act” as economic weakness creeps further into eurozone countries unaffected by the sovereign debt crisis. Speaking after the bank’s governing council decided to keep the main interest rate on hold at 0.75 per cent for the ninth consecutive month, Mr Draghi responded cautiously to the Bank of Japan’s dramatic easing plan that will see it double its monetary base over two years. More ON THIS STORY/ BoE policy makers hold rates and QE/ ECB draws bail-in lessons from Cyprus/ Eurozone joblessness stays at record high/ Blow for ECB as wider loan rates hit south/ Eurozone SMEs struggle to access finance ON THIS TOPIC/ ECB sticks to its monetary guns/ ECB unveils €1.1bn profit on crisis bonds/ Inflation slows in France and Germany/ Euro drifts against the dollar IN EU ECONOMY/ Hungary unveils growth stimulus package/ Glimmers of hope for Greek recovery/ Cyprus to receive €1bn from IMF/ Spain threatened by resurgent credit crunch But he revealed that there had been an “extensive” discussion on the ECB’s governing council about interest rate policy. The bank's rates, despite being at a record low, are still higher than those in Japan, the US or the UK. “All in all, the consensus was for the time being not to look at rates,” he said. That contrasted with previous months when he described decisions to keep rates on hold either as unanimous or part of a “prevailing consensus”. “There were some pretty clear hints in the press conference that the ECB is contemplating a reduction,” said Ken Wattret, economist at BNP Paribas, in a note to clients, adding that Mr Draghi’s use of the phrase “monitor very closely” in reference to price developments was used by his predecessor, Jean-Claude Trichet, to signal a likely rate cut. Regarding the Bank of Japan decision, which is likely to exert upward pressure on the euro, Mr Draghi noted that the currency’s exchange rate was not a target for the ECB, although “we take into account exchange rate developments”.
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The ECB has been reluctant to cut its own interest rates further – which might involve moving into negative territory on its zero per cent deposit rate – and it would face difficulty adopting its own quantitative easing programme like that announced in Japan. Yet inflation in the eurozone has fallen below the bank’s 2 per cent target, unemployment is at a record high, and the 17-nation bloc remains in recession, with a stream of weak economic indicators further putting off hopes of a recovery. A key argument against any further interest rate cuts has been the fragmentation within the eurozone of real interest rates paid by businesses, especially smaller ones in Europe’s southern periphery. Efforts to fix the so-called transmission mechanism by which ECB rates translate into those paid by companies and households have not so far borne fruit. Mr Draghi said the bank was looking into unspecified “instruments” that could be deployed to deal with the financial fragmentation. “We are considering both standard and non-standard measures, and we are thinking 360 degrees on the non-standard measures,” he said. “We will see which of these tools are either feasible or effective in our specific institutional context.” He added that national central banks had a role to play. In an apparent allusion to the French economy, Mr Draghi said economic weakness “is extending to countries where fragmentation is not an issue”. A survey of purchasing managers in France released on Thursday confirmed that business activity in its service sector in March was falling at the fastest rate for more than four years. For the bloc as a whole, a final composite PMI index for the month showed no end to the downturn with a reading of 46.5 – below the 50 level that represents growth and lower than the figure for February, according to the data compiled by Markit. Nonetheless, the bank still expected a “gradual recovery” in the eurozone in the second half of the year, Mr Draghi said. On the botched bailout of Cyprus, Mr Draghi said the first plan agreed by eurozone finance ministers, Cyprus and the ECB, which would have taxed insured deposits below €100,000, had been “not smart”. He insisted that Cyprus should not be a template for future bailouts. The euro hit its lowest level in a week at $1.2745 against the dollar after Mr Draghi noted that weak economic activity had continued into the first part of the year, but it later recovered when he said the Cyprus bailout did not set a precedent and noted the relative market calm that followed the announcement in September of Outright Monetary Transactions (OMT) – an ECB bond-buying programme that has yet to be used. “The events in Cyprus have reinforced the governing council’s determination to support the euro,” Mr Draghi said. “Thanks to OMT and positive contagion in the financial markets we are now in a position to cope with serious crises without them becoming existential and systemic.” Additional reporting by Alice Ross in London http://www.ft.com/intl/cms/s/0/aec22064-9d15-11e2-88e9- 00144feabdc0.html#axzz2PU2C7w00
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David Cameron urged to act over British Virgin Islands Secret offshore havens 'stain face of Britain', says Lib Dem peer, as evidence grows over sham directors and hidden cash David Leigh The Guardian, Thursday 4 April 2013 20.45 BST
Politicians around the world use firms based in the British Virgin Islands, above, to hide funds. Photograph: Neil Rabinowitz/Corbis The prime minister has come under pressure to act against Britain's secretive offshore industry at June's G8 summit, as leaked evidence continued to mount that politicians and tycoons from all over the world have used the British Virgin Islands to hide funds. The premier of Georgia, Bidzina Ivanishvili, was the latest to be named, along with prominent Pakistani, Indian, Thai and Indonesian figures – while there was fresh evidence of Britons acting as front directors for companies based in offshore havens such as the BVI. A senior Liberal Democrat figure said the leaks showed the secret haven of the BVI "stains the face of Britain", as anti-corruption campaigners called for action. Lord Oakeshott, the Lib Dem peer and a former Treasury spokesman, said: "How can David Cameron keep a straight face calling for the G8 to make big business pay tax when we let the BVI use British law and British protection to suck in billions in dirty money?" He asked: "How much British aid paid to corrupt countries like Pakistan ends up behind a BVI brass plate?" Despite mounting evidence that British sham directors are selling their names as fronts for offshore secrecy, the UK's Department for Business, Innovation and Skills (BIS) signalled that politicians are reluctant to move against them. A report on the sham directors scandal has already been sent to ministers by the BIS deputy head of corporate governance, Jo Shanmugalingam. This followed a Guardian-BBC investigation last year into the leaked data which revealed that two dozen Britons, giving obscure offshore addresses, were purporting to control thousands of companies. 253
The latest example, which emerged on Thursday, is of a "general builder", Kevin Gaitely. He gives an address in south London and is registered as the director of Tamalaris Consolidated, a company blacklisted by the UK and US as a front for Iran. He is recorded as a director of a variety of other UK and BVI companies. Ministers insist they are not ready to act. The BIS issued a statement on Thursday night saying: "The vast majority of companies and directors do comply with the law and they should not be unfairly burdened, so we will focus our attention on those who deliberately seek to break the law." It is not illegal as such for Britons to rent out their names on behalf of offshore companies, so the BIS statement appears to be a recipe for inaction. Meanwhile MPs criticised tax avoidance in Pakistan in a report issued on Thursday by the UK Commons committee on overseas aid. It said: "We cannot expect people in the UK to pay taxes to improve education and health in Pakistan if the Pakistani elite does not pay meaningful amounts of income tax." Robert Palmer of the campaign group Global Witness repeated the call for Cameron to act, saying: "The massive cache of leaked documents demonstrates how hidden ownership of shell companies facilitates corruption, tax dodging and other crimes." He said: "The time to deal with this issue is now. Given that he has pledged to tackle these secretive shell companies at this year's G8 summit in Northern Ireland, he and his fellow leaders must commit to publishing information on the people who ultimately control and own companies." The names of thousands of owners of secret offshore companies are currently being published by the Washington-based International Consortium of Investigative Journalists (ICIJ), in collaboration with the Guardian and other international media. This follows the leak to ICIJ of a hard drive containing 200GB of internal files of offshore incorporation agencies in the BVI, Singapore and the Cook Islands. A spokesman for the Georgian prime minister, who had set up a BVI company called Bosherston Overseas Corp, said he had done everything in accordance with the law: "For the reporting period of 2011-12, prime minister Ivanishvili had no interest in the company … and therefore there was no obligation to report it in his [financial] declaration." In India, an MP from the ruling Congress party, Gaddam Vivekanand, said after an offshore company, Belrose Universal, was revealed to have been listed in his name: "I do not remember being involved with such a company and have no connection with it.'' A spokeswoman for Stephen Riady, who heads one of Indonesia's richest families, said there was "nothing illegal or improper in protecting the privacy of one's own information" after the leaked files revealed that his family's Lippo Group conglomerate controlled a number of offshore entities. The incorporation firm, TrustNet, refers to them as "Client A", noting "client does not want to be seen dealing offshore". Their agent, Gary Phair, instructed TrustNet staff to "delete any reference to 'C/- [Care of] Lippo". Thai MP Nalinee Taveesin, currently an official trade representative and previously blacklisted by the US for allegedly helping Robert Mugabe avoid sanctions, denied knowing about the offshore company Hall Kingston International, listed in her name. Her secretary said: "The information about her being [a company] shareholder is incorrect." In Pakistan, Moonis Elahi, a politician from a prominent Punjab dynasty who was acquitted in a Pakistan court in 2011 of receiving payments in a corruption scandal, said he did not own offshore company Olive Grove Assets, listed to his name at the family residence in Lahore. He did not state whether he had previously owned the firm. http://www.guardian.co.uk/uk/2013/apr/04/david-cameron-british-virgin- islands?CMP=EMCNEWEML6619I2
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April 4, 2013 The Urge to Purge By PAUL KRUGMAN When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. ... It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.” Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we? How naïve we were. It turns out that the urge to purge — the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever. Indeed, Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and the odds are that you won’t see someone arguing that the federal government and the Federal Reserve are doing too little to fight mass unemployment. Instead, you’re much more likely to encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil. Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. Remember how federal deficits were supposed to cause soaring interest rates? Never mind: After four years of such warnings, rates remain near historic lows — just as Keynesians predicted. Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent. But the Mellonites just keep coming. The latest example is David Stockman, Ronald Reagan’s first budget director, who has just published a mammoth screed titled “The Great Deformation.” His book doesn’t have much new to say. Although Mr. Stockman’s willingness to criticize some Republicans and praise some Democrats has garnered him a reputation as an iconoclast, his analysis is pretty much standard liquidationism, with a strong goldbug streak. We’ve been doomed to disaster, he asserts, ever since F.D.R. took us off the gold standard and introduced deposit insurance. Everything since has been a series of “sprees” (his favorite word): spending sprees, consumption sprees, debt sprees, and above all money-printing sprees. If disaster was somehow avoided for 70-plus years, it was thanks to a series of lucky accidents. So it’s more or less the usual stuff. In particular, like so many in his camp, Mr. Stockman misunderstands the meaning of rising debt. Yes, total debt in the U.S. economy, public and private combined, has risen dramatically relative to G.D.P. No, this doesn’t mean that we as a nation have been living far beyond our means, and must
255 drastically tighten our belts. While we have run up a significant foreign debt (although not as big as many imagine), the rise in debt overwhelmingly represents Americans borrowing from other Americans, which doesn’t make the nation as a whole any poorer, and doesn’t require that we collectively spend less. In fact, the biggest problem created by all this debt is that it’s keeping the economy depressed by causing us collectively to spend too little, with debtors forced to cut back while creditors see no reason to spend more. So what should we be doing? By all means, let’s restore the kind of effective financial regulation that, in the years before the Reagan revolution, helped deter excessive leverage. But that’s about preventing the next crisis. To deal with the crisis that’s already here, we need monetary and fiscal stimulus, to induce those who aren’t too deeply indebted to spend more while the debtors are cutting back. But that prescription is, of course, anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. And that, in turn, tells you why liquidationism is such a destructive doctrine: by turning our problems into a morality play of sin and retribution, it helps condemn us to a deeper and longer slump. The bad news is that sin sells. Although the Mellonites have, as I said, been wrong about everything, the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it. But they shouldn’t. Mellon was dead wrong in the 1930s, and his avatars are dead wrong today. Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less. http://www.nytimes.com/2013/04/05/opinion/Krugman-The-Urge-To- Purge.html?ref=global-home
April 4, 2013, 6:06 pm 73 Comments Thinking Straight About Debt A heads-up: I’m doing This Week this week. Also on the panel: David Stockman. This should be, um, interesting. So, a few more thoughts on debt and what it does and doesn’t signify. Start with the numbers that Stockman loves to cite, showing the ratio of total debt, public and private, to GDP: Stockman, and to be fair quite a few people, would have us see this as evidence that we have been on a vast spending spree (Stockman is big on sprees), living far beyond our means and leaving us with no choice except a drastic reduction in spending. After all, debt is about 200 percent of GDP higher than it was before 1980. Isn’t this a giant burden on the nation? OK, the sheer size of that number should tell you immediately that this can’t be right. Yes, we have run trade deficits and moved from being a net creditor to being a net debtor, but it’s not that big a deal (and
256 we still earn more on our foreign assets than we pay on our foreign liabilities). So the surge in debt reflects a surge in money Americans owe to other Americans.
I wrote about this analytically a while back, laying out a stylized framework in which it is literally impossible for the nation to live beyond its means — because there is neither foreign trade nor investment — so that debt growth is always about one group within the country lending to another. This can present problems, partly because it concentrates risk on the leveraged parties, partly because of the possibility of forced deleveraging. But the issue in the latter case isn’t that we as a nation have overspent and need to spend less; it’s that some people are being forced to spend less, and we have a depression because other people won’t (NOT can’t) spend more. This is how you want to think about debt: it’s not a burden on the nation’s resources, because it’s mainly money we owe to ourselves, and it’s a problem not because we have to tighten our belt but because debt is currently leading to spending that’s less than we need to maintain full employment. I would add that one thing the model doesn’t cover is debt of financial intermediaries, which is a big part of the real story and if anything bears even less resemblance to the notion of debt as a consequence of national overspending; to a large extent it’s just an accounting issue, because old-fashioned deposits aren’t counted as debt even though they are. Maybe a short way to put all this is to say that we have a real problem with excessive leverage; that’s not at all the same thing as the nation being deeply in hock to some external player or players. And failing to understand that difference is a way to get both the nature of our crisis and the shape of appropriate policies totally wrong.
April 3, 2013, 8:08 pm 144 Comments Debt and David Stockman Update: I forgot to explain that the chart shows the ratio of financial-sector debt to GDP. Well, it turns out that I’ve actually been polite to David Stockman; Neil Irwin describes his recent writings as “spittle-filled”, and gets at the essentially destructive nature of Stockman’s critique. More on that another day. What I want to point out is the way Stockman unintentionally makes a point I’ve been trying to get across: debt does not directly impoverish us, because it’s money we owe to ourselves. OK, some of it is money we owe to foreigners, but I’ve dealt with that part already. So here’s Stockman on how we lived “high on the hog”; he cites the current account deficit (which actually turns out to be a smaller thing than he imagines), then declares In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today. Actually, the LBO analogy isn’t too bad; but if he thought about that for even a minute, he would realize that LBOs have nothing to do with spending sprees, they’re just a change in the structure of risk, with equity (which shares the risk among a fairly broad set of investors) replaced with debt (that concentrates the risk).
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Anyway, think about the macroeconomics; did America really put itself $30 trillion in hock to someone else? No, some Americans lent to other Americans, which is a very different issue. And wait: even that isn’t really true. About half of the rise in Stockman’s rise in the debt-GDP ratio is debt of the financial sector:
How did that happen? Two things: a shift from ordinary deposit-based banking to shadow banking, and the increasingly complexity of the financial system. The first raises the official debt number because bank deposits aren’t counted as debt, even though they really are just a particular kind of debt. The second raises the debt number because the same money can be counted several times if an institution buys debt securities, then uses them as collateral to issue debt of its own, which is what repo is all about. Oh, and the rapid drop in the debt ratio reflects a partial return to plain vanilla banking, not a massive paydown of obligations. The point is that neither shifting from deposits to other forms of debt nor complexification of the financial system involve borrowing from the future, spending more than we earn. They’re just fancier ways of owing money to ourselves, ways that cause the official debt ratio to rise. So skip the moral lectures, please. Now, just to be clear, I’m not saying that complex shadow banking is harmless. Far from it: like LBOs, it shifts risk around, and as it turns out the concentration of risk made our economy much more fragile than it used to be. That’s a big deal. But it’s not at all the kind of big deal the debt scolds would make it out to be. And it’s just crazy to use the economy’s excessive reliance on fancy finance to argue that we can’t do what it takes to restore full employment.
April 3, 2013, 8:52 am 163 Comments America the Debtor I guess I’m going to have to write more about David Stockman’s unfortunate rant, since a lot of people who should know better seem to think he made serious points. Right now, however, I just want to lay down a marker on an issue I really really do know something about: America as a net international debtor. Stockman describes a horror show: Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar. That one act — arguably a sin graver than Watergate — meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. Leave the goldbuggery aside (does Stockman think that countries pegged to gold — or, for that matter, the euro — never run current account deficits?). Are things as bad as he says? Well, the $8 trillion number is right. But while it may be EIGHT TRILLION DOLLARS, that’s a cumulative deficit (which began in the 80s, by the way, not the 70s) of only half of this year’s GDP. And
258 if you know anything about the subject, you know that America’s debtor position isn’t actually that deep, because of capital gains (which aren’t counted in the current account):
But OK, market valuations are one thing, what about income flows? Aren’t we now paying a lot in interest to foreigners? Ahem. Here’s US net international investment income — income from US assets abroad minus income payments on foreign assets in the US — as a percentage of GDP:
Now, that surge at the end is crisis-related: America tends to issue debt while buying equity and real assets abroad, so the plunge in interest rates has pushed up our net investment earnings, and this will go down again if and when we recover. Prior to the crisis, the trend was clearly down. But we’re talking about fairly modest numbers, with America still earning more than it pays. This is the result of an epic spending spree, four decades of living high on the hog? But of course you don’t check out these numbers if your purpose is to scare readers by talking about EIGHT TRILLION DOLLARS.
April 2, 2013, 12:10 pm 185 Comments Jack-booted Insurance-bringing Thugs Jonathan Chait and Aaron Carroll both have fun with Elizabeth Cheney‘s bonkers op-ed about how Obamacare will destroy our freedom. As both note, the stirring quote from Ronald Reagan the younger Vader uses comes from the recording he made for Operation Coffee Cup, a 1961 project organized by the AMA to mobilize doctors’ wives and their friends against the looming horror of Medicare, which would clearly turn American into a totalitarian state. However, neither Chair nor Carroll mention what seems to me to be an obvious parallel, which is with the whole Hayekian notion that the welfare state sets us on the slippery slope to Stalinism. Yes, I’m aware that defenders of Hayek claim that this wasn’t what he said — but as far as I can tell their argument is very weak, and anyway more or less irrelevant to the role Hayek plays in American political discourse.
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Even if that isn’t what Hayek meant to say (in which case, what exactly was his point?), it’s the message American conservatives chose to take from his work. And with Hayek, as with Reagan, the truly amazing thing is that we have people citing as a source of wisdom someone who has been as thoroughly refuted by history as anyone can be. Three generations into the modern welfare state, and western democracies look less Stalinist than ever. Of course, you can still say that social insurance destroys freedom if you define freedom as the absence of social insurance — which isn’t quite what these guys are doing, but may capture the spirit of the thing.
April 2, 2013, 11:46 am 80 Comments One Size Fits None In today’s Business Insider, Joe Weisenthal reports on Europe’s truly dismal PMIs (survey-based indexes that act as early-warning indicators for official economic data). There’s no doubt at all that the continent is falling deeper into recession, even in the core countries. And reading this news reminds me of something I’ve been meaning to write – namely, that discussions of Europe’s troubles, and the debate over austerity, often suffer from a tendency to blur two somewhat different issues. One issue – which is the one that gets the most attention – involves the degree of austerity imposed on debtor countries. Clearly, debtor nations have very little choice about going along with the troika’s demands unless they’re willing to abandon the euro – and that’s a line nobody has yet been willing to cross, although Cyprus and the onset of capital controls bring the possibility closer. As for the troika itself, I would argue that enlightened self-interest on their part would call for milder austerity – loosening up by a few percent of GDP would make relatively little difference either to debt dynamics or to the pace of internal devaluation, but could be make or break for the political outlook. But even austerity skeptics would agree that some austerity in these countries is unavoidable; that’s the price of one-size-fits-all monetary policy. But there’s a separate issue – the status of Europe as a whole. What has happened in Europe is that the peripheral countries have been forced into extreme austerity, but this has not been offset in the core – in fact, core countries have also engaged in austerity measures, albeit not as severe. So the overall result has been a sharp fiscal contraction in Europe – the cyclically adjusted balance is now much tighter than it was before the crisis, even though private-sector demand remains very weak — with no offset from looser monetary policy. European policy makers seem surprised that this policy mix has led to a double-dip recession, but they have no right to be – it’s exactly what basic macroeconomics would have told you to expect. And this in turn tells you that the euro is an even more flawed construction than optimum currency area theory might have predicted. OCA emphasized the problem of one size fits all in the face of “asymmetric shocks” – the problem of how countries are supposed to cope if they’re slumping while the rest of the currency area is booming. But it turns out that in times of broad economic weakness this problem is compounded by the asymmetry of the pressures countries face, in which troubled economies are compelled to tighten but less troubled economies feel no need to loosen, so that the overall stance of policy has a strong deflationary bias. As Matt O’Brien says, this is the same issue countries confronted under the gold standard – a problem they dealt with, eventually, by going off gold. If European policy makers really want to save the euro, what they should be doing is pushing hard against their system’s deflationary bias. Unfortunately, as far as I can tell they aren’t even willing to acknowledge that the problem exists.
April 1, 2013, 12:54 pm 115 Comments Financing the Deficit (More Feldstein) OK, a bit more on the puzzle of people who think there’s an interest rate puzzle. Here’s the picture of what has happened to saving and investment in America in recent years: The blue line is government saving, roughly speaking (leaving some public investment aside) the public sector surplus or deficit; the red line is the private sector surplus, the difference between private saving and private investment. So yes, the budget deficit has soared — but it’s just offsetting a surge in the private sector surplus.
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Now, this is almost an accounting identity, so by itself the figure doesn’t tell you which side is driving the action. But we know the answer to that question from other evidence. For one thing, we know that most of that surge in the private sector surplus reflects the collapse of the housing bubble, and that most of the surge in the public deficit reflected automatic stabilizers. For another, we know that if government deficits were crowding out private spending, we should have seen rising interest rates; what we actually saw was falling rates.
So there isn’t any puzzle here, except the puzzle of people who are puzzled. I really don’t understand how Marty Feldstein can look at these facts and conclude that the only way to explain low interest rates is to imagine that the Fed is imposing massive market distortions.
April 1, 2013, 10:17 am 88 Comments Bond Bubble Brouhaha Brad DeLong is puzzled by Martin Feldstein’s mental contortions as he tries to come up with a reason to raise interest rates in a depressed economy. So am I. But I’m also puzzled by Feldstein’s underlying economic analysis, in which he treats it as totally obvious that we have a massive bond bubble. Now, maybe we do have a bond bubble. But the arguments Feldstein uses are one that I thought every sensible economist — a group I thought included Feldstein — had dismissed as bogus years ago. Feldstein writes: Historically, the real interest rate on ten-year Treasuries has been above 2%; thus, today’s rate is about two percentage points below its historical average. But those historical rates prevailed at times when fiscal deficits and federal government debt were much lower than they are today. With budget deficits that are projected to be 5% of GDP by the end of the coming decade, and a debt/GDP ratio that has roughly doubled in the past five years and is continuing to grow, the real interest rate on Treasuries should be significantly higher than it was in the past. In the words of Charlie Brown, aauuuggghhh! Why do we have large fiscal deficits? Because of the collapse of private demand, especially housing. The private sector’s financial surplus has surged; government deficits have risen in counterpart through the operation of automatic stabilizers, mainly revenue but also unemployment insurance and other safety-net programs. This is a situation of weak demand for funds, not strong demand; it’s a situation in which you would expect bond yields to be lower than normal, not higher — and you’d be right. One consequence of the economy’s weakness is that the Fed is keeping short-term interest rates down at the zero lower bound — and they’re likely to stay there for years to come. Take the CBO’s latest economic projection for unemployment and inflation, and apply a simple Taylor rule. Here’s the path for short-term rates that this implies: So years of zero rates, and still fairly low rates thereafter; the implied 10-year rate is about 2. And if you believe that the CBO is overly optimistic, as it has been consistently through this crisis, you can justify an even lower rate. So why does Feldstein think that the 10-year rate might go to 5 percent any day now? The thing is, Feldstein has invented a puzzle — how can rates be so low? — where there really isn’t any puzzle. He then grabs hold of an answer to his imagined puzzle — it must be the quantitative easing! — that assigns vastly more importance to Fed bond purchases than I think can be justified by any evidence I
261 see. And out of all that he manages to conjure up an argument for tightening monetary policy in the face of still-disastrous unemployment.
Bizarre; and not what I expected from Feldstein. Still, let me say something nice: at least it’s better than the Stockman screed. April 1, 2013, 9:43 am 106 Comments Very Ernstig People The FT reports on the lonely life of an austerity skeptic: Mr Teulings’ CPB let loose with a report in March accusing Dutch politicians of ignoring a consensus among macroeconomists that cutting deficits does much more economic damage than usual during so- called “balance-sheet recessions”, like the current one. Such contractions are driven by consumers and firms trying to pay down heavy debt loads, leaving government as the only actor in the economy still able to spend. The Dutch government’s inability to acknowledge the damage done by austerity despite mounting evidence is a case of “cognitive dissonance”, Mr Teulings told the Financial Times. He said persisting with the proposed new deficit cuts, on top of planned austerity measures amounting to 8 per cent of GDP over seven years, would hurt consumer confidence. “There’s different evidence that all fits [the argument] that the costs of austerity are currently higher, because there’s rising unemployment, there’s a financial crisis and we are close to the zero lower bound [on interest rates],” Mr Teulings said. He referred to recent papers by the IMF’s Olivier Blanchard and to work by Larry Summers, Paul de Grauwe and others that has rekindled the debate over the wisdom of austerity across the EU. Mr Teulings is not the only economist in the Netherlands sceptical of austerity, but he has been the only one with any policy influence. Prominent austerity sceptics at universities and big banks say they have been shut out, not just from government policy-making bodies but from the counsels of political parties on both right and left. “It’s not only the current government, basically all the sensible political parties have embraced austerity,” said Bas Jacobs, a professor at Erasmus University and austerity-sceptic. That includes the centre-right Liberals and the centre-left Labour party, who form the coalition government, as well as most mainstream opposition parties. Despite writing about all this stuff for years, I’m still amazed not just by the way policy makers threw basic macroeconomics out the window, but by the absolute unanimity of the turn to austerity. After all, the critics weren’t exactly invisible or inaudible; how could everyone serious be so sure that prominent macroeconomists were all wrong, and bureaucrats with no predictive track record were right? http://krugman.blogs.nytimes.com/2013/04/01/very-ernstig-people/
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April 4, 2013 Cyprus: A Blessing for Russia, in Disguise? By VLADISLAV L. INOZEMTSEV MOSCOW THE financial crisis in Cyprus raises two interesting questions. Of Russia and Europe, which needs the other more? And despite the outrage from Russian depositors who’ve lost money in their Cypriot bank accounts, could the crisis ultimately help Russia? At first glance, it seems that Russia depends heavily on the rest of Europe. Almost 60 percent of Russian exports — primarily oil and gas — go to the European Union and other European countries like Switzerland. Russians have deposited billions of euros in Cyprus’s banks, and the controversial decision by the lenders who bailed out Cyprus’s flailing economy to impose a so-called haircut on large depositors affected many Russians. But Moscow has less to worry about than it first appears. Russia suffers not so much from the Euro zone’s problems as its own outdated business practices. And it is not financially dependent on Europe. To the contrary, most foreign direct investment does not come to Russia from the heart of the European Union, but rather from offshore areas like Cyprus, the British Virgin Islands and Bermuda (a British territory). Germany, in contrast, accounted for just 4 percent of foreign direct investment in Russia. Almost all of these overseas deposits consist of Russian money that was accumulated outside of Russia. It’s true that some of it is “dirty” money from corrupt deals, and even more was channeled offshore to evade taxes. But the bulk of the cash flows occurred so that Russian investors could protect their money from possible litigation in Russia’s courts, which are not truly independent and as a result leave little confidence in the rule of law. Paradoxically, the economic problems in Europe might benefit Russia. Some of the money hidden offshore might be forced to come home. And politically, the crisis in Europe has allowed Russian leaders to spread nationalist propaganda, insisting that Russia is rising from its knees while the European project falls apart. Even so, Russian elites are understandably nervous. For the last few years, wealthy Russians have been buying up European real estate — turning some of London’s poshest neighborhoods into foreign-owned enclaves — and more than three million Russians now have European Union residency permits, which gives them an exit strategy should the volatile political situation at home turn sour. When the discussions of a Cyprus rescue plan among European Union leaders began to include talk of confiscating a share of deposits in Cypriot banks , Russian leaders expressed shock and outrage. President Vladimir V. Putin labeled the move “intolerable.” Prime Minister Dmitri A. Medvedev admitted that there were
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“government funds” in bank accounts and said the tax amounted to the “stealing of what has already been stolen.” The Russian government considered bailing out Cyprus. But the Kremlin quickly realized that a full-scale rescue could cost it close to six billion euros (about $7.5 billion) and a possible bank run in Cyprus might require 20 to 40 billion euros (about $26 billion to $51 billion) to cover depositors’ withdrawals and recapitalize the country’s banking system. They also understood that even taking complete control over Cyprus’s financial system would give Russia no significant voice in the euro zone — making such a move useless in political terms. This contributed to the failure of negotiations in Moscow about bailing Cyprus out in exchange for granting Gazprom, the state-controlled oil giant, rights for exploration of offshore gas fields around the island (complicating the matter, the oil fields are in waters claimed by Turkey). Cypriot politicians, facing near-revolt at home, returned to the European Union seeking an alternative solution. This benefited Moscow in three ways. First, Russia’s commercial bank in Cyprus, VTB, wasn’t forced to seize any of its clients’ deposits, meaning it might emerge from the crisis as the island’s most trusted financial institution. Second, while the Russian government decided not to help Russian private account holders, it declared that Russian businesses incorporated on Cyprus could get financial support from a Russian state-owned bank, VEB. Finally, several Russian oligarchs like Alexei Mordashov, Andrei Akimov and Yuri Kovalchuk (an old friend of Mr. Putin) seem to have been warned and withdrew their funds in early March. As a result, the pro-bailout constituency in Moscow lost a huge number of potential supporters and there was less pressure on Mr. Putin to undertake a costly rescue of Cyprus. A 20- to 40-billion-euro rescue operation would have been too much for Russia at a time when the state budget is facing a growing deficit and must also provide financing for the 2014 Winter Olympics and 2018 World Cup. Also, the government has begun a fierce rhetorical attack on corruption, so it wouldn’t have looked particularly good to bail out Cyprus, where a lot of “dirty” Russian money is believed to be parked. In the end, the overall damage of the Cyprus crisis probably won’t exceed 1 percent of Russia’s G.D.P., but there will be major consequences for Russia’s private sector. Russian businesspeople believed for many years that storing their money in law-abiding countries would compensate for the absence of the rule of law in their own country. Today, it has become clear that this tactic may not be sufficient anymore. After all, countries that possess a solid financial sector also tend to have high taxes and laws against corruption and money laundering. And several havens like Iceland, Latvia and Cyprus are no longer considered financially safe. Moreover, pressure on business owners at home is growing. Mr. Putin has started a new series of tax hikes, aimed at midsize businesses; more than 300,000 small businesses have closed since the start of this year, and the Kremlin has introduced new legislation effectively paralyzing independent nongovernmental organizations. Russian oligarchs and policy makers (generally the same social group) have also learned from the Cypriot crisis that their money and power cannot influence European decision makers when it comes to saving a small Mediterranean island from insolvency, because Russia has no political voice within the European Union. Given this dynamic, it would be much more productive for Russia to get closer to Europe rather than stay away from
264 it — and the pressure from Russian businesses on the government to do so will likely grow. The Kremlin must act faster to make Russia more investment-friendly so that money stops leaving the country; Russian companies should become more flexible so they can easily enter the European market during hard economic times; and, most important, honest businesspeople should become more politicized. In 2011, a small segment of the middle class took to the streets in protest after the parliamentary elections. If a huge segment of the Russian business community were to rise up asking for a better governance, more democracy and an effective judiciary, it might pose a true challenge for Mr. Putin’s regime. Vladislav L. Inozemtsev, an economist, is the director of the Center for Post-Industrial Studies in Moscow and a visiting fellow at the Institute for Human Sciences in Vienna. http://www.nytimes.com/2013/04/04/opinion/cyprus-a-blessing-for-russia-in- disguise.html?ref=global-home
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BOJ shocks with new base money target, boosts asset buying
Businessmen walk in Tokyo's business district April 1, 2013. // Credit: Reuters/Toru Hanai By Leika Kihara and Stanley White TOKYO | Thu Apr 4, 2013 5:34am EDT (Reuters) - The Bank of Japan shocked markets on Thursday with a radical overhaul of its policymaking, adopting a new balance sheet target and pledging to double its government bond holdings in two years as it seeks to end nearly two decades of deflation. At Governor Haruhiko Kuroda's first policy-setting meeting, the central bank shifted its policy target to the monetary base -- the total size of cash and bank deposits -- from the overnight call rate, which is at zero to 0.1 percent. The decision marks a return to the BOJ's five-year quantitative easing policy that ended in 2006, when it flooded markets with cash targeting excess reserves that financial institutions parked with the central bank. The scope of the changes Kuroda pushed through, and the fact he secured unanimous board support for them, drove the yen down sharply and knocked the 10-year bond yield to a record low. The Nikkei stock index unwound losses of more than 2 percent to end up 2.2 percent, just shy of a 4-1/2 year closing high hit last month. "I can say that the BOJ came up with a perfect answer in response to market expectations," said Junko Nishioka, chief Japan economist at RBS Securities. "Kuroda made good on his promise of boosting monetary easing in terms of both volume and types of assets that the bank purchases." To meet its new 2 percent inflation target, the central bank will boost asset purchases to double its holdings of government bonds and exchange-traded funds (ETF) in two years. In doing so, it will revert to open-ended asset purchases and buy over 7 trillion yen ($75 billion) of long-term government bonds per month, so that the balance of its bond holdings increase at an annual pace of 50 trillion yen.
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"The BOJ will conduct money-market operations so that the monetary base will increase at an annual pace of about 60 trillion yen to 70 trillion yen," the BOJ said in a statement announcing the decision. Despite the market excitement, some analysts were skeptical whether pumping money to markets already awash with excess funds was a solution to end deflation. The monetary base is expected to expand to 200 trillion yen this year and to 270 trillion yen by the end of 2014, almost doubling from 2012 when it was 138 trillion yen, the BOJ said. "It is as if we've gone back to the quantitative easing of the 2000s," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo. "Targeting the monetary base will lead to a huge increase in current account balances that commercial banks keep at the BOJ, but I'm still not sure if this money will move through the economy." Base money, or cash and reserves at the BOJ, already hit a record in March, but the huge pile of money has failed to end deflation or boost wages. REGIME CHANGE Kuroda's first policy meeting since taking office on March 20 was seen as a big test of his ability to steer the BOJ towards unorthodox measures to meet the inflation target it adopted in January, and he did not disappoint markets. Government bond futures soared and the benchmark 10-year bond yield hit 0.425 percent, its lowest ever. The yen, which had been creeping up in the run-up to the meeting, plunged, driving the dollar up by more than 2 percent to around 95.25 yen from around 92.90 before the decision. Kuroda has been keen to engineer a "regime change" from his predecessor's cautious approach, pledging to do "whatever it takes" to achieve the 2 percent inflation target in two years, a timeframe many see as overly ambitious. The BOJ combined two bond-buying schemes, its asset-buying and lending program and the "rinban" bond-buying market operation, to buy government bonds across the yield curve, including those with duration of 40 years. The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year. The BOJ strengthened its commitment to ultra-easy policy, saying it will continue aggressive stimulus until 2 percent inflation was sustainably achieved. Previously, it had said it would maintain ultra-loose policy for as long as necessary. As Kuroda had signaled earlier, the central bank also temporarily scrapped a self- imposed rule of capping its holdings of government bonds to the value of bank notes in circulation. ($1 = 92.8600 Japanese yen) (Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by John Mair) http://www.reuters.com/article/2013/04/04/us-japan-economy-boj- idUSBRE93216U20130404
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April 4, 2013 Japan Initiates a Bold Bid to End Falling Prices By HIROKO TABUCHI TOKYO — In its first policy steps under its new governor, Haruhiko Kuroda, the Bank of Japan announced Thursday it would seek to double Japan’s monetary base over two years, initiating a bold bid to end years of falling prices and dispelling market fears that Mr. Kuroda might fail to follow up his recent tough talk with concrete action. The central bank said it would aggressively buy longer-term bonds and double its holdings of government bonds in two years, doubling the amount of money in circulation in the process. The bank will aim for a robust 2 percent rate of inflation “at the earliest possible time,” it said. “This is monetary easing in an entirely new dimension,” Mr. Kuroda said following the bank’s decision. The dramatic turn in Japanese monetary policy could open up a new chapter in the country’s economic history, for years defined by what critics said was a halfhearted battle to end deflation — the damaging fall in prices, profits and wages that has weighed on its economic growth. The Japanese stock market reacted enthusiastically, with the Nikkei 225-share index finishing the day 2.2 percent higher. Prime Minister Shinzo Abe, who took office in late December, has made beating deflation a central facet of his economic policy, and has already arm-wrestled the bank into committing to a target of 2 percent inflation. So relentless was that pressure that the bank’s previous governor, the moderate Masaaki Shirakawa, resigned weeks before the end of his term, giving way to Mr. Kuroda, who shares Mr. Abe’s monetary fervor. Mr. Kuroda emphasized the break with history, repeatedly pointing to a graph showing the planned jump in the country’s money supply as he answered reporters’ questions on the bank’s new policies. “Incremental steps of the kind we’ve seen so far weren’t going to get us out of deflation,” Mr. Kuroda said. “I’m certain we have now adapted all policies we can think of to meet the 2 percent price target,” he said. And if prices did not rise as expected, he “would not hesitate” to step up the bank’s easing program, Mr. Kuroda said. That represent a sea change from his predecessors, who were faulted for being too ready to pull back at the first sign of higher prices for fear of runaway inflation. The Japanese financial markets appeared to give a collective sigh of relief, with their rise in recent months seemingly justified by Mr. Kuroda’s strong positioning. Japanese stocks have soared in anticipation of a reversal in monetary policy under Mr. Abe,
268 fanned higher by recent assurances from Mr. Kuroda that he would do “whatever it takes” to defeat deflation. But in recent days, the stock market had pulled back as jittery investors wondered whether Mr. Kuroda could make good on his promises. Shortly after the bank’s announcement, the benchmark Nikkei index jumped from negative territory. The yen weakened to ¥95.40 to the dollar early evening in Tokyo from about ¥93 before the announcement. “Kuroda did it,” Masaaki Kanno, an economist at JPMorgan Securities Japan, said in a note to clients. “This is a historical change in the B.O.J.’s policy..” In a statement detailing the new measures, the central bank said it would buy longer- term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to ¥270 trillion by March 2015. Under that plan, the bank will buy ¥7 trillion of bonds each month, equivalent to over 1 percent of its gross domestic product — almost twice the pace of the U.S. Federal Reserve. The policies are part of a new asset purchase framework that focuses on the monetary base instead of the overnight interest rate, which has remained close to zero for years doing little to increase prices or otherwise help the real economy. The bank will also consolidate all its purchases in a single operation in an attempt to improve transparency of the bank’s purchases. Mr. Kuroda said that the bank would suspend a longstanding rule that limits its bondholdings to the amount of money in circulation — and he pointed out that limit had already been surpassed. Some economists caution that the central bank’s huge purchases of government debt could eventually be seen by investors as enabling runaway public spending, quashing confidence that Japan will ever pare down its already sky-high public debt and driving up long-term interest rates. If Japan recklessly pursued aggressive monetary and fiscal policies, “the long-term interest rate could rise and fiscal collapse would ensue,” warned Ryutaro Kono, a Japan economist at BNP Paribas. Others argue that rising prices, once stoked, could be hard to control, a warning rooted in Japan’s “bubble economy” of the 1980s, and its subsequent painful collapse. Some experts also question whether monetary policy alone can end deflation in Japan, which suffers from other deflationary pressures, like a shrinking and aging population, and cumbersome regulations that make the economy inefficient. They charge that despite the easy money already available in Japan, lending has not increased dramatically because businesses and consumers see little potential for growth. Mr. Kuroda said that risks or doubts should not hold the central bank back from fighting deflation. “We have debated the side effects, but we are currently not concerned that long-term interest rates might spike, or conversely, that there would be an asset bubble,” Mr. Kuroda said. “That risks exist should not hold us back from pursuing much-needed monetary easing. We will keep in mind those risks, but push ahead.” He also said that once Japan had fought off deflation and reignited its economy, lending would surely follow, spurring more economic growth in a virtuous cycle. “We are already seeing an improvement in sentiment among consumers and companies,” he said. “As the economy expands and prices rise, lending will also grow.”
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Mr. Kuroda acknowledged that Japan’s new monetary push is weakening the yen, which bolsters Japan’s exporters at the expense of overseas rivals — a sticking point between Tokyo and its trading partners. But he declined to comment further, saying currencies were beyond his mandate as central bank governor. Government officials welcomed the bank’s decision. “The bold monetary easing steps go beyond expectations,” Economy Minister Akira Amari said. “The Bank of Japan is finally steering Japan toward rising prices.” http://www.nytimes.com/2013/04/05/business/global/japan-initiates-a-bold-bid-to-end- years-of-falling-prices.html?ref=global-home
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Daily Morning Newsbriefing April 04, 2013 Cahuzac admitted tax fraud turns into political crisis Jérôme Cahuzac finally admitted via his blog that he had a Swiss bank account and that he was sorry for lying. France is shocked. The press this morning covers this new turn in the Cahuzac drama, discussing what it all means for the French political class in general and the government in particular. The French opposition relentlessly attacks the government, targeting in particular François Hollande, Jean-Marc Ayrault and Pierre Moscovici, with the UMP saying they could not be not aware of Cahuzac’s account and calling for a cabinet reshuffle. Francois Hollande appeared but failed to calm down the waves with a promiss better controls. Cécile Cornudet in Les Echos writes that with Hollande’s unconvincing intervention it has become a political crisis in its own term, with unpredictable outcome. Italy relaxes fiscal policy It is interesting to see how newspapers from different countries are reporting the same story. Il Sole 24 Ore reports that Mario Monti called Olli Rehn to ensure Italy will honour its budget commitments under the EU’ Stability and Growth Pact, as. Monti told Rehn that Italy’ plan to pay €40bn of public-sector debt to private firms will not affect the public finances. In particular, Monti stuck to his commitment to keep the deficit under the threshold of 3% of GDP. As Commission spokesman Olivier Bailly says, Italy is now on the right road. La Repubblica reports Rehn asked Monti for further details of the debt pay-back plan. The measures will be approved by the cabinet on the next days. Contrast this to the coverage of Frankfurter Allgemeine. The headline reads: “Italy breaches deficit promise of balanced budget / consensus for additional spending”. The article starts with the statement that Monti’s technical government was paving the way for higher spending as the two chambers of the Italian parliament have now voted to expand the deficit to 2.9%. The article said the previous estimate on the structural deficit had been too optimistic. In addition, the government is planning to relax a number of budgetary rules. Municipalities will be free from the national stability pact (unlike German municipalities), and municipalities are now allow to pay their private- sector suppliers without limit. Exempted will also be the Italian contribution to European projects. The article says hardly anybody in the Italian parliament cares much about the fact that the country’s is getting dangerously close to the 3% limit in the Maastricht Treaty. On the contrary, a majority of parliamentarians want to negotiate a further extension of the deficit. The country also wants to postpone a tax on waste disposal and an increase in VAT, the paper notes with shock and horror. We obviously disagree with the moral outrage behind the story in Frankfurter Allgemeine, but the reporter certainly got his basic facts right. This is without a doubt a
271 fiscal expansion, of moderate scale, but highly welcome given the country’s depression. The Italian news coverage is indeed very poor by failing to acknowledge this basic fact. PD in search of a new leader Matteo Renzi, the mayor of Florence, said Italy was wasting time trying to form a government after the political stalemate. In a long interview with Il Corriere della Sera, Renzi remarks the whole world is asking Italy to run twice as fast to avoid becoming the next epicenter of the eurozone crisis. He also added that a political world that does not function produces solutions that cannot put into practice. Renzi also attacks the Partito Democratico: he was sceptical from the beginning about the talks between Pier Luigi Bersani and Beppe Grillo. Renzi said Italy needed political credibility. The two solutions are either an alliance with the PDL, or new elections. Le Pen praises Grillo As Il Fatto Quotidiano reports, the Movimento 5 Stelle received praise from Marine Le Pen. She said, like Beppe Grillo, she, too, considers herself to be a "full eurosceptic". For this reason she is ready to meet Grillo. Andrea Cecconi of the M5S, however, told La Stampa that there were many differences between the two parties. M5S is not Eurosceptic in contrast to Le Pen. According to Cecconi, the party thinks the role of Europe should be discussed, especially the euro membership. Galician PP leader embroiled in corruption controversy Galician regional president Alberto Núñez Feijóo (PP) is embroiled in his own corruption controversy over a set of photographs form the mid-1990s showing him in the company of a noted smuggler and drug lord. El Mundo writes that Feijoo will appear in the regional parliament next week to answer questions about the publication of these photographs in the press, though he denies wrongdoing. The smuggler, Marcial Dorado, has been in jail for the past 14 years. 10 days ago, as reported for instance by Expansion, Núñez Feijóo said that the PP should "apologize" to the public over the "Barcenas case" over alleged cash payment and illegal financing of the PP. Spanish Judge indicts King's daughter The judge investigating the "Urdangarin" case on embezzlement of public funds indicts Spain's Princess Cristina; The judge investigating an embezzling case involving the Spanish King's son-in-law Iñaki Urdangarín has summoned the King's daughter Princess Cristina to be indicted at the end of April, reports El Pais. This is a result of continued attempts by Urdangarin's business partner, Diego Torres, also indicted, to involve the Royal Household in the case. The judge in charge of the case had so far held that there was no evidence warranting citing Princess Cristina. The public prosecutor used to agree with the judge and has announced their intention to appeal the judge's decision. Spanish Judge indicts King's daughter The judge investigating an embezzling case involving the Spanish King's son-in-law Iñaki Urdangarín has summoned the King's daughter Princess Cristina to be indicted at the end of April, reports El Pais. This is a result of continued attempts by Urdangarin's business partner, Diego Torres, also indicted, to involve the Royal Household in the case. The judge in charge of the case had so far held that there was no evidence
272 warranting citing Princess Cristina. The public prosecutor used to agree with the judge and has announced their intention to appeal the judge's decision. Under Spanish court procedure, witnesses in a criminal case face penalties for making false statements, while those indicted are allowed to not tell the truth if it would incriminate them. Grüttner asks for less austerity for Spain El Plural picked up an editorial by Handelsblatt's Madrid correspondent Anne Grüttner commenting that if Germany were experiencing Spain's unemployment rate of 26% and the European Union forced it to cut salaries and raise taxes and university tuition, there would be strident euroscepticism and a rise of extremist parties, which are absent in Spain. Therefore, Grüttner praises Spain's "sacrifices" and "consolidation efforts" and says the EU risks smothering Spain's timid economic improvement with more "consolidation brute force". Münchau says SPD is lost for words In his Spiegel Online column, Wolfgang Münchau says the rise in European unemployent is a totally unsurprising consequence of the austerity policy. What is surprising, however, is the complete inability by Social Democrats, in Germany and elsewhere, to attack conservative governments over the rise in unemployment. He says the reason is an abandonment of macroeconomics in the politics of the left (the right has abandoned macro a long time ago). Now that we have entered into a massive macroeconomic crisis, the SPD is lost for words to attack those who are responsible for this calamity, notable Angela Merkel and her austerity policy. Münchau was particularly scathing about Gerhard Schröder’s interview in Spiegel this week, in which he lauded Merkel’s crisis policies. Shock! IMF introduces concept of demand to Europe This must qualify as one of the most insane comments we have yet read on the eurozone crisis. It is the front-page economic commentary of Frankfurter Allgemeine this morning, by Patrick Welter. This is our translation, no further comment necessary. Enjoy. „As part of the troika, the IMF exports its demand-oriented thinking to Europe. Debt financed stimulus programmes and a cyclically stabilising role for monetary policy have become respectable. At least the Germans had been promised other things when they pushed into the eurozone.” http://www.eurointelligence.com/professional/briefings/2013-04- 04.html?cHash=7cf0c7f9d07fba7fed916050df09bca8
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Yannos Papantoniou Yannos Papantoniou, a former economy and finance minister of Greece (1994-2001), is President of the Center for Progressive Policy Research (KEPP). La perpetuación de la crisis europea 04 April 2013 ATENAS – El acuerdo para el rescate de Chipre marca una divisoria en el desarrollo de la crisis de la eurozona: la responsabilidad de resolver los problemas de los bancos se transfirió de los contribuyentes a los inversores privados y a los depositantes. Pero las cuantiosas pérdidas que sufrirán los titulares de cuentas en bancos chipriotas atentan contra las garantías de depósito que forman parte de la propuesta de unión bancaria para Europa; al mismo tiempo, los controles al movimiento de capitales debilitarán aun más los cimientos de la unión monetaria. Parece que Europa está dando vueltas como un perro detrás de su cola. Con estas medidas, Alemania y los otros países del núcleo de la eurozona envían señales de que una mutualización de deudas dentro de la unión monetaria está descartada y de que el costo de los acuerdos de rescate de países o instituciones financieras será compartido con los acreedores. Pero el aumento de la incertidumbre sobre la seguridad de los depósitos provocará un alza de los tipos de interés y profundizará la recesión europea; también puede ocurrir que estimule la salida de capitales desde las economías periféricas más débiles hacia los países centrales. Estos cambios pueden tener consecuencias de largo alcance. El modelo alemán para la solución de la crisis de deuda y la recuperación del equilibrio interno y externo depende de la consolidación fiscal y de la implementación de reformas estructurales en los países deficitarios. Pero si todos los países recortan el gasto y aumentan los impuestos al mismo tiempo, en un intento de mejorar su situación fiscal o externa, ninguno lo conseguirá, porque las medidas de austeridad en un país cualquiera suponen menos demanda para la producción en los otros países, con lo que los desequilibrios internos y externos se perpetúan. Y la transferencia de costos a los acreedores agravará estas tendencias. Además, una profundización y prolongación de la recesión restará apoyo a las reformas, ya que los gobiernos no podrán convencer a sus ciudadanos de que los sacrificios actuales son para asegurar un futuro mejor. Las privatizaciones, la liberalización de mercados, la desregulación de profesiones restringidas y la reducción del tamaño del Estado crean conflictos con intereses creados poderosos (por ejemplo, empresas pertenecientes a sectores protegidos, sindicatos de trabajadores públicos o grupos de presión con influencia). La solución de estos conflictos demanda alianzas entre los diversos sectores sociales, pero el descontento, el desorden público y la inestabilidad política invariablemente dificultan su concreción.
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Como ejemplo del grado de toxicidad alcanzado por la asociación entre medidas de austeridad y políticas reformistas puede citarse la elección celebrada hace pocas semanas en Italia. La rabia contra la austeridad acabó con el programa reformista del saliente gobierno tecnocrático de Mario Monti y dejó a Italia sumida en la incertidumbre sobre su futuro y posponiendo la solución de sus problemas. Ahora parece que la misma situación se repite en Grecia, donde la gravedad de la recesión causada por la política de austeridad (con una caída del 25% en la producción a lo largo de cinco años y un nivel de desempleo que llegó al 27%) tiene paralizado al gobierno reformista de centroderecha. Los defectos de esta estrategia son evidentes. En primer lugar, las autoridades de la eurozona no comprendieron la causa real de la crisis de deuda: esta se originó, más que nada, por la creciente brecha de competitividad entre el núcleo y la periferia de la eurozona. Esta divergencia produjo desequilibrios en el sector privado de la economía, que luego se trasladaron a los bancos y, finalmente, se convirtieron en crisis de deuda pública. En este panorama, la prodigalidad fiscal de Grecia fue una excepción más que la regla. De hecho, a diferencia de Estados Unidos, las autoridades de la eurozona fueron lentas en consolidar el sistema bancario después del estallido de la crisis financiera mundial en 2008 y no lograron cortar el vínculo entre las cuentas públicas y las de los bancos. Tampoco se esforzaron en implementar reformas estructurales, sino que insistieron en imponer en todas partes una severa política de austeridad. En segundo lugar, los efectos de las medidas de austeridad se agravaron por buscar metas de déficit fiscal nominales en vez de estructurales. Lo correcto sería alentar a los países con mejor posición fiscal (es decir, menos déficit estructural) a adoptar políticas más expansivas que ayuden a incrementar la demanda general. También se podría aumentar significativamente la capacidad de préstamo del Banco Europeo de Inversiones y movilizar fondos estructurales de la Unión Europea para financiar proyectos de inversión en las economías de la periferia. En tercer lugar, cuando en agosto de este año el Banco Central Europeo anunció el programa de “transacciones monetarias directas” (que supone garantizar las deudas públicas de los estados miembros de la eurozona a cambio de la implementación de ciertas políticas), ese anuncio contribuyó en gran medida a calmar la turbulencia financiera en la eurozona. Pero el plan de TMD no se reforzó con una reducción de los tipos de interés clave, que aumentaría la inflación en los países centrales con superávit externo y de ese modo ayudaría a cerrar la brecha de competitividad con la periferia. La cuestión principal es que las medidas de política monetaria no enfrentan el problema subyacente: la falta de demanda. En último lugar (pero no es lo menos importante), las autoridades de la eurozona calcularon mal el factor confianza. En teoría, la implementación simultánea de medidas de consolidación fiscal y reformas del lado de la oferta debería facilitar la recuperación económica, al aumentar la confianza de los consumidores y los inversores y, por consiguiente, alentar el gasto y la producción. Pero en una unión monetaria imperfecta (como la eurozona), donde la aparición continua de fallas sistémicas erosiona la confianza, puede suceder que esas mismas políticas, en vez de aumentar el gasto, solo consigan incentivar el atesoramiento y la salida de capitales. Las fallas de la eurozona reflejan la distancia conceptual que la separa de Estados Unidos, único modelo de unión monetaria que funciona bien; un modelo que Europa, por razones históricas, no puede imitar. Pero para que la eurozona funcione, es preciso 275 que la unificación monetaria se extienda a los ámbitos fiscal y financiero, con lo que se crearía una unión económica integral. Cuanto más pospongan las autoridades europeas la introducción de eurobonos, la creación de una unión bancaria y fiscal efectiva y la conversión del BCE en prestamista de última instancia, más durará la crisis. En la práctica, lo que hizo la eurozona en Chipre equivale a incumplir con la garantía de depósitos y constituye un retroceso en el proyecto de unión bancaria. Mientras se siga una estrategia que al mismo tiempo que profundiza la recesión debilita la confianza, no habrá solución para la crisis de deuda. Los problemas de financiación en las economías en recesión se repetirán y habrá gobiernos que tal vez se opongan a la política de trasladar pérdidas a acreedores y depositantes. La agitación pública y la desestabilización política podrían agravarse y convertirse en crisis financieras y sociales que, en algún momento, pondrán en riesgo la supervivencia de la unión monetaria. En síntesis, la “solución” de la crisis chipriota no resuelve para nada los problemas de la eurozona. A menos que las autoridades adopten (y pronto) una estrategia para el crecimiento, el futuro de la eurozona será cada vez más sombrío. Traducción: Esteban Flamini This article is available online at: http://www.project-syndicate.org/commentary/cyprus-returns-europe-to-crisis-mode-by- yannos-papantoniou/spanish
Kenneth Rogoff Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly. El prolongado misterio de las bajas tasas de interés 04 April 2013 CAMBRIDGE.– Mientras los encargados de formular las políticas y los inversores se preocupan por los riesgos que implican los ultrabajos niveles actuales de las tasas de interés en el mundo, los economistas académicos continúan debatiendo sobre las causas subyacentes. A esta altura, todos aceptan alguna versión de la declaración en 2005 del presidente de la Reserva Federal de EE. UU., Ben Bernanke, quien afirmó que la raíz del problema está en la «superabundancia mundial de ahorro». Pero los economistas no 276 se ponen de acuerdo sobre el porqué de la superabundancia, sobre cuánto durará y, especialmente, sobre si es algo bueno. La declaración original de Bernanke enfatizó varios factores –algunos que reducían la demanda de ahorro en el mundo y otros que aumentaban la oferta. En cualquiera de esos casos, las tasas de interés tendrían que caer para equilibrar los mercados de bonos. Bernanke señaló que la crisis financiera asiática de fines de la década de 1990 causó el colapso de la voraz demanda de inversión en la región, induciendo simultáneamente el acopio de activos líquidos por los gobiernos asiáticos como cobertura contra otra crisis. También señaló el aumento en el ahorro jubilatorio por las poblaciones envejecidas en Alemania y Japón, así como los ahorros en países exportadores de petróleo, con sus poblaciones en rápido crecimientos y preocupaciones por los ingresos provenientes del petróleo en el largo plazo. La política monetaria, por cierto, no fue parte prominente del diagnóstico de Bernanke. Como la mayoría de los economistas, él cree que si quienes están a cargo de las políticas intentan mantener las tasas de interés en niveles artificialmente bajos durante demasiado tiempo, la demanda eventualmente se disparará y aumentará la inflación. Por lo tanto, si la inflación es baja y estable, no se puede culpar a los bancos centrales por las bajas tasas de largo plazo. De hecho, sospecho profundamente que en una encuesta a los inversores sobre las causas de las bajas tasas de interés de largo plazo en el mundo, la política monetaria se ubicaría en el primer lugar de la lista, en vez de estar ausente de ella. Que tantos inversores compartan esta perspectiva debiera hacernos pensar dos veces antes de absolver a la política monetaria de toda responsabilidad. Sin embargo, comparto el instinto de Bernanke en cuanto a que, si bien los bancos centrales fijan las tasas de interés de muy corto plazo, prácticamente no influyen sobre las tasas reales (ajustadas por inflación), más allá de un efecto modesto a través de sus políticas de gestión de carteras (por ejemplo, la «flexibilización cuantitativa»). Mucho ha cambiado desde 2005. Tuvimos la crisis financiera y algunos de los factores citados por Bernanke se han invertido considerablemente. Por ejemplo, la inversión asiática nuevamente experimenta un período de auge, liderada por China. Sin embargo, las tasas de interés globales son aún menores ahora que en ese entonces. ¿Por qué? Hay varias teorías alternativas, la mayoría de ellas muy elegantes, pero ninguna enteramente satisfactoria. Una visión sostiene que los riesgos de crecimiento de largo plazo han aumentado, elevando la prima sobre los activos que se perciben como relativamente seguros, e incrementando el ahorro preventivo en general. (Por supuesto, nadie debiera creer que los bonos gubernamentales son completamente seguros, especialmente con respecto a la inflación y la represión financiera). Ciertamente, la crisis financiera de 2008 debiera haber constituido un llamado de atención para los defensores de la «Gran Moderación», una visión que propone que la volatilidad de largo plazo ha disminuido. Muchos estudios sugieren que está tornándose más difícil que nunca anclar las expectativas sobre las tendencias de crecimiento en el largo plazo. Observen, por ejemplo el activo debate sobre la aceleración o desaceleración del progreso tecnológico. Los cambios en el poder geopolítico también generan incertidumbre. Otra clase de teorías académicas sigue a Bernanke (e incluso ideas a previas de Michael Dooley, David Folkerts-Landau y Peter Garber) al atribuir las bajas tasas de interés de largo plazo a la creciente importancia de las economías emergentes, pero con el énfasis principal en el ahorro privado más que en el público. Como las economías emergentes 277 tienen mercados de activos relativamente débiles, sus ciudadanos buscan refugio en los bonos gubernamentales de los países avanzados. Una teoría relacionada indica que los ciudadanos de las economías emergentes tienen dificultades para diversificar el enorme riesgo inherente a sus entornos con rápido crecimiento, pero elevada volatilidad, y se sienten especialmente vulnerables por la debilidad de las redes de seguridad social. Por ello, ahorran extraordinariamente. Estas explicaciones tienen un cierto mérito, pero debemos reconocer que los bancos centrales y los fondos de inversión soberanos, no los ciudadanos particulares, son los actores más directamente responsables de los grandes superávits de ahorro. Pensar que los gobiernos tienen idénticas motivaciones a los ciudadanos particulares es forzar la cuestión. Además, cuando se la observa más de cerca, la explicación de los mercados emergentes, si convincente, no resulta tan persuasiva como parece. Las economías emergentes están creciendo mucho más rápidamente que los países avanzados que, según sugieren los modelos de crecimiento neoclásicos, debieran presionar las tasas de interés mundiales al alza, no a la baja. De manera similar, la integración de países con mercados emergentes a la economía mundial ha inundado los mercados con mano de obra. Según la teoría estándar del comercio, una sobreabundancia mundial de mano de obra debiera implicar una mayor tasa de rendimiento del capital y esto, a su vez, presionaría las tasas de interés al alza, no a la baja. Claramente, todas las explicaciones deben incluir la restricción mundial del crédito, en especial para las pequeñas y medianas empresas. Una regulación más estricta de los estándares crediticios ha eliminado una importante fuente de demanda mundial de inversión, presionando las tasas de interés a la baja. Creo que cuando la incertidumbre global desaparezca y el crecimiento mundial se recupere, las tasas de interés mundiales también comenzarán a aumentar. Pero es difícil predecir cuándo se dará esa transición. El enigma de la superabundancia de ahorro en el mundo puede continuar intrigándonos durante muchos años. Traducción al español por Leopoldo Gurman. This article is available online at: http://www.project-syndicate.org/commentary/why-are-long-term-interest-rates-so-low- by-kenneth-rogoff/spanish
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Daniel Gros Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance. El significado de lo sucedido en Chipre 03 April 2013 BRUSELAS – La causa del problema de Chipre es bien conocida. Sus dos bancos principales habían atraído depósitos enormes del extranjero, en gran medida de Rusia, y la mayoría –es de suponer– de personas que deseaban escapar del control en su país o en otros lugares. Después los beneficios se invertían en bonos estatales griegos y préstamos a empresas griegas. Cuando se produjo la implosión de Grecia, las inversiones se deterioraron y los bancos chipriotas que habían adoptado esa estrategia acabaron en la insolvencia. En vista de esa situación, la opción lógica para el país debería haber estado clara: si el Gobierno quería sobrevivir, los depositantes extranjeros debían participar en las pérdidas. Así, pues, resulta difícil entender por qué el Gobierno de Chipre se mostró al principio tan renuente a infligir pérdidas a los depositantes. Pero la solución que al final se acordó es acertada: se ha encontrado una solución eficaz para los dos bancos mayores del país. Se separarán sus activos tóxicos, que irán reduciéndose con el tiempo. Ni el Gobierno de Chipre ni los contribuyentes europeos aportarán fondos suplementarios a esos bancos. Así, pues, las pérdidas que queden después de que se hayan eliminado los activos tóxicos habrán de recaer en los acreedores no asegurados de los bancos, que en este caso son los que tienen depósitos de más de 100.000 euros (130.000 dólares). Aunque Chipre es demasiado pequeña para afectar a los mercados financieros mundiales, la crisis habida en ella podría resultar un importante precedente que oriente a las autoridades europeas sobre cómo abordar futuros problemas bancarios. En particular, podría afectar a los planes actuales de “unión bancaria”, que requiere tres elementos: un único supervisor, una autoridad resolutoria común y un sistema creíble de seguro de depósitos. De la crisis de Chipre se desprenden importantes enseñazas respecto de los tres. En primer lugar, la crisis ha puesto de relieve la necesidad de un único supervisor que no esté mediatizado por intereses locales. El Banco Central Europeo nunca habría permitido a los bancos chipriotas atraer enormes depósitos pagando intereses superiores a los del mercado y después poner todos sus huevos en una misma cesta (Grecia). Era una estrategia de gran riesgo sin una red de seguridad.
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En segundo lugar, si bien existe un debate sobre cómo crear un único mecanismo resolutorio para los bancos de la zona del euro, los acontecimientos han mostrado que el BCE desempeña ya ese papel de facto. Ningún banco con dificultades puede sobrevivir, si el BCE no le concede ayuda en materia de liquidez de emergencia o la renueva. Naturalmente, esa acumulación de poder en manos de una institución completamente independiente no es ideal desde el punto de vista de la rendición de cuentas democrática, pero debe hacer de incentivo suplementario para que los Estados miembros de la zona del euro acuerden la creación de una autoridad resolutoria de verdad común con suficientes fondos para resolver los problemas incluso de los mayores bancos de forma ordenada. Por último, la rebelión de los pequeños ahorradores de Chipre puso de relieve la necesidad de un sistema creíble de seguro de depósitos. La directiva de la UE que establece la protección de los depósitos bancarios hasta 100.000 euros no constituye una garantía europea; sólo obliga a los Estados miembros a crear un sistema de seguro de depósitos en el nivel nacional. Sin embargo, ha habido en realidad la impresión errónea de que “Europa” protege de algún modo a los pequeños depositantes. Ahora bien, al menos hasta ahora ni siquiera se había debatido sobre un sistema común de seguro de depósitos, porque no se consideraba esa cuestión un problema urgente. Lo ocurrido en Chipre ha destrozado esa complacencia. La de dejar el seguro de los depósitos exclusivamente en el nivel nacional ya no es una opción válida. De lo sucedido en Chipre se desprende una enseñanza más general: en vista de la reacción de los mercados financieros ante el desplome de Lehman Brothers en 2008, había llegado a ser axiomático entre las autoridades europeas que no se debía dejar caer banco alguno en la insolvencia, pero los mercados financieros reaccionaron con calma ante la noticia de que por primera vez incluso los depositantes en un banco de la Unión Europea perderían parte de su dinero (y en Berlín y en otros países de la Europa septentrional se la recibió con regocijo). Así, pues, la enseñanza fundamental para las autoridades europeas es la de que se puede “rescatar” a los acreedores de un banco. No se ha reconocido oficialmente, pero el Presidente del Eurogrupo, Jeroen Dijsselbloem, ministro de Hacienda de los Países Bajos, lo dejó claro, al decir que, después de lo sucedido en Chipre, Europa debía volverse más valiente a la hora de rescatar a acreedores de bancos. Esa comprensión –la de que el contribuyente europeo no tiene que salvar todos los bancos con problemas– podría tener un efecto muy beneficioso, porque la resistencia de Alemania a una unión bancaria se debe al miedo de que los contribuyentes alemanes se vieran obligados a financiar indirectamente las pérdidas de bancos de países con problemas de la periferia de la zona del euro. Ahora ese temor puede disminuir. La crisis de Chipre representa un caso extremo y especial en muchos sentidos, pero es probable que la forma como surgió el problema y la solución que al final se adoptó tenga consecuencias muy importantes para la forma como Europa abordará sus problemas bancarios. Traducido del inglés por Carlos Manzano. This article is available online at: http://www.project-syndicate.org/commentary/the-lessons-of-the-cypriot-crisis-for- europe-s-banking-union-by-daniel-gros/spanish
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03 De abril de 2013, 14:16 Uhr S.P.O.N. - el rastro del dinero Tiempo para una nueva social democracia Una columna por Wolfgang Münchau ¿En Europa, una recesión furiosa, el número de desempleados se eleva a nuevas alturas - y lo hacen los socialdemócratas? Nada. Sin palabras, que persiguen los cortes devastadores de los conservadores. Ya es hora que se encuentran detrás de sus instintos políticos. La recesión en curso en la zona del euro y el alarmante aumento del desempleo no me sorprende. Después de todo, qué sabemos de la historia económica, exactamente lo que sucede si interior guarda en una recesión. Según los recientes hallazgos de investigación económica, sabemos que el efecto es especialmente fuerte si la política monetaria no tiene alcance para recortes de las tasas de interés. Ahora es el caso. No sorprende que los conservadores a favor de tal política en Alemania y otros países. El partido de centro, el precursor de los demócratas cristianos de hoy, apoyó la deflación y la austeridad de Heinrich Banez con entusiasmo. Los conservadores de hoy han prohibido los treinta de sus pensamientos. Han aprendido nada y no han olvidado nada. Lo que sorprende y sorprendido, es la incapacidad de los demócratas para hacer capital político de la depresión causada por la política conservadora. La tasa de desempleo en la eurozona está ahora en el 12 por ciento. Uno podría asumir los socialdemócratas fueron en pie de guerra y ellos mismos equipado para poder político. Pero en realidad, son incapaces de lidiar con la catástrofe económica y social en sus países de origen. Un ejemplo particularmente evidente de esta incapacidad fue la entrevista de Gerhard Schröder en el espejo. Schröder no es, por supuesto, ningún político activo del SPD. Ahora le gusta jugar al gran estadista. Pero siempre fue un instinto asesino político. Pero en vez de atacar al gobierno, alaba a Angela Merkel crisis del euro - y esto, aunque ella es responsable en gran parte de esta recesión. Porque era el pacto fiscal, forzado por Merkel, que ha disparado los ahorros procíclicos en toda la zona euro. La crítica sola, apenas perceptible, que sirvió como Schröder, fue titubeos iniciales de Merkel y los altos costos. Alemania sufre de nivel superior Aunque vocal vocal, en términos de contenido pero con matices algo también resuena Peer Steinbrück crítica de Merkel. Es una trampa que han convertido los socialdemócratas ellos mismos. En algún momento después de la salida de Helmut Schmidt que se detuvo, se interesó por cuestiones macroeconómicas. Durante la reunión, eran incapaces de aprovechar políticamente los flagrantes errores económicos del gobierno. Más tarde, Schröder se posiciona como un canciller, como promotor de la industria del automóvil. El partido de los macroeconomistas se convirtió en un partido de lobistas de la industria. El lenguaje de la industria era acerca de que no se debe guardar en una recesión muy buen agarre, no tan abstracta como la macroeconomía con sus teorías contrarias a la intuición. En la industria de correas en el cinturón en una recesión más de cerca. Para el populismo, que aseguró la ganancia de energía desde hace unos años en la última década el SPD, partido había pagado un alto precio. Porque la crisis 281 macroeconómica amplia por un gobierno conservador pasó casi sin dejar rastro de ella. El partido había perdido las palabras con las que ella podría criticar esa política. Ahora se puede afirmar: la situación en Alemania sigue siendo buena. Leí el otro día en un diario importante, la economía hum en Alemania - que por supuesto son tonterías, porque Alemania como la zona del euro también se encuentra en una recesión. La diferencia es: Alemania sufre en niveles superiores. Pero también en Alemania, desempleo está aumentando ligeramente. Y también en Alemania, el largo, fuerte repunte seguirá siendo ante todo. El pensamiento macroeconómico carece de los socialdemócratas ¿Lo hagáis así los socialdemócratas? Usted debe solicitar una corrección de las políticas presupuestarias en toda la eurozona. Esto significa: Grecia y España deben seguir consolidar sus presupuestos. Porque no hay pases. Incluso Italia debe seguir su curso de consolidación. Pero no puede consolidar la zona del euro. Austeridad en el sur debe ser tan compensada por una política expansionista en el norte, mejor incluso más que compensar tanto como la rabia de la recesión. Esto haría que la crisis del euro, aunque sin resolver, pero en gran parte desintoxicando. El sur consolidado, mientras que sus beneficios de la industria de exportación de la mayor demanda en el norte. Esto ayudaría a estabilizar en general. Si norte y sur al mismo tiempo ahorran, entonces es un desequilibrio que nos impulsa más profundo hacia la recesión. Los socialdemócratas debían transponer sólo la política de setenta de Schmidt en la zona del euro en esta década. Los demócratas sociales de los años setenta pero tenía un instinto natural mucho más análisis y discusiones bajo la influencia de su ex Ministro de economía Karl Schiller. Sus sucesores han perdido el instinto. La falta de voluntad para el pensamiento macroeconómico es también la razón por qué los demócratas sociales son políticamente por sí mismos tomar ventaja de la crisis financiera mundial. En lugar de atreverse el gran ataque, enredan se en política simbólica, como requisito para un impuesto a las transacciones financieras - como si a cualquier problema de la salida de una extenso sector financiero podría ser resuelto. Se trata de algo más que la gobernanza económica derecha cíclica. Es el debate de gran sistema de nuestra generación. Te lo agradeceria si los socialdemócratas se despertó de su sueño del largo invierno. http://www.microsofttranslator.com/bv.aspx?from=de&to=es&a=http%3A%2F%2Fww w.spiegel.de%2Fwirtschaft%2Frezession-im-euro-raum-wie-die-spd-aus-krise-kapital- schlagen-koennte-a-892286-druck.html
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El principal diario económico alemán pide que paren los recortes en España El 'Handelsblatt' destaca "la asombrosa capacidad de sufrimiento de los españoles" A.R. | 03/04/2013 El principal -y prestigioso- diario económico de Alemania, el ‘Handelsblatt’, ha asegurado en su editorial de ayer martes que deben parar los ajustes (recortes) en España por los esfuerzos realizados ya en nuestro país, por la autocrítica ejercida en vez de culpar de todos los males a Europa, y porque a pesar de la crítica situación económica España ha aportado dinero al rescate de otros países como Grecia, Portugal o Chipre. La editorial firmada por la periodista Anne Grüttner plantea una reflexión a los alemanes: ¿Qué pasaría si ellos sufrieran una situación como la que se vive en España? Ni auge de extremistas ni de eurocríticos En la editorial se formulan las siguientes preguntas: “¿Qué pasaría en Alemania si tuviésemos un paro masivo de más de un 26%? ¿Qué pasaría si en una situación así Alemania se viera obligada por los socios de la UE a recortar sus Presupuestos casi un 5% en un solo año? ¿Qué pasaría si se les recortaran los sueldos a los funcionarios y subieran el IVA y las tasas universitarias?· Para el rotativo la respuesta es evidente: “los partidos extremistas subirían como la espuma y los tonos eurocríticos pasarían a ser un coro estridente. En España se dan todas las condiciones citadas. Y, para gran asombro, este caldo de cultivo aún no ha dado movimientos extremistas o populistas. Ni en el Parlamento español ni en los parlamentos regionales hay un solo diputado de un partido xenófobo”. El Handelsblatt recuerda que Bruselas no solo ha obligado a recortar el Presupuesto, sino a elaborar una segunda reforma laboral que tiene sentido “a medio plazo”, pero que a corto solo provoca que para las empresas sea “más fácil y barato recurrir a despidos masivos”. Sin embargo “en España no hay movimientos antieuropeos como en Italia o en Alemania”. Asombrosa capacidad de sufrimiento El diario alemán calificó el año pasado a Mariano Rajoy como “el pinocho del día” por cambiar tres veces en dos meses las cifras de déficit de España. El objetivo de Rajoy y del PP era acusar a Zapatero de mentiroso y de dejar las cosas peor de lo que se decían. Esa estrategia podía valer en España, pero en Bruselas y en Alemania convirtió al Gobierno del PP en poco serio, e irritó profundamente la actitud de Rajoy de anunciar unilateralmente que no cumpliría el objetivo de déficit pactado con Bruselas. La consecuencia fue que nos cerraron el grifo, la prima de riesgo llego a superar los 600 puntos básicos el pasado verano y a Rajoy le quedó claro que, u obedecía a Alemania o íbamos de cabeza al rescate. El periódico alaba ahora los esfuerzos de consolidación fiscal realizados y pide que no se apliquen más recortes. “Sería nefasto que los halcones de la UE obligasen ahora a Madrid a sofocar el tímido auge mediante unas medidas de consolidación de fuerza aún más bruta. Esto volvería a poner a prueba una vez más la asombrosa capacidad de sufrimiento de los españoles”. http://www.elplural.com/2013/04/03/el-principal-diario-economico-aleman-pide-que- paren-los-recortes-en-espana/
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Expansión.com El primer diario económico de Alemania pide que se paren los ajustes en España 03.04.2013 C. Rivero 34 “Sería nefasto que los halcones en la UE obligasen ahora a Madrid a sofocar el tímido auge mediante unas medidas de consolidación de fuerza aún más bruta. Esto volvería a poner a prueba una vez más la asombrosa capacidad de sufrimiento de los españoles”. Esta no es una declaración del ministro de Hacienda, Cristóbal Montoro, o del PSOE, que están reclamando una flexibilización en los objetivos de déficit para España. Es un artículo del Handelsblatt, el principal periódico financiero de Alemania, con el que probablemente Merkel, defensora de la ortodoxia presupuestaria de la UE, desayunó ayer martes por la mañana. El editorial de la periodista Anne Grüttner advierte de que no se deben imponer más recortes a un país como España, que sigue colaborando con la UE en rescatar a otros países a pesar de que sufre altas tasas de desempleo: “¿Qué pasaría en Alemania si tuviésemos un paro masivo de más de un 26%? ¿Qué pasaría si en una situación así Alemania se viera obligada por los socios de la UE a recortar sus Presupuestos en casi un 5% en un solo año? ¿Qué pasaría si se les recortaran los sueldos a los funcionarios y subieran el IVA y las tasas universitarias?”, se pregunta. “La respuesta es evidente: Los partidos extremistas subirían como la espuma y los tonos eurocríticos pasarían a ser un coro estridente. En España se dan todas las condiciones citadas. Y, para gran asombro, este caldo de cultivo aún no ha dado movimientos extremistas o populistas. Ni en el Parlamento español ni en los parlamentos regionales hay un solo diputado de un partido xenófobo. Bajo la presión de Bruselas y en medio de una recesión, el gobierno español no solamente ha recortado masivamente los Presupuestos, sino que también ha liberalizado el mercado laboral. A medio plazo tiene sentido, pero para las empresas a corto plazo es más fácil y barato recurrir a despidos masivos. No obstante, en España no hay movimientos antieuropeos como en Italia o Alemania”, responde el artículo. El cambio de opinión de este diario sobre la figura de Rajoy es evidente. Hace justo un año llegaba a incluir al presidente español como el “pinocho del día” por sus negociaciones del déficit en Bruselas. Un año después el balance del diario financiero alemán es mucho más halagüeño: “Los frutos de la política española de consolidación –la reducción del déficit presupuestario, que recientemente ha sido muy notable, así como las bajadas del nivel salarial, el saneamiento de los bancos, la subida de las exportaciones y los superávits en los balances de los pagos corrientes– provocan que aumente la confianza de los inversores. Los gigantes internacionales del sector del automóvil amplían sus plantas de producción en España. Los bonos ibéricos vuelven a estar muy solicitados. Inversores financieros como Blackstone o Aurelius escudriñan el país en busca de inmuebles o participaciones empresariales atractivas”. El periódico reconoce que España sigue aportando al rescate de otros países a pesar de sus problemas internos: “Probablemente lo más sorprendente es que, a pesar de todo esto, en España, a diferencia de Alemania, nunca ha habido debates sobre las considerables contribuciones a los paquetes de rescate de la UE.
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España ha contribuido a los mecanismos de ayuda puestos en marcha hasta ahora, es decir al FEEF y al MEDE, una cantidad aproximadamente igual de alta que la suma que el MEDE ha destinado a Madrid para el saneamiento de los bancos: alrededor de 40.000 millones de euros. A pesar de la propia crisis permanente, todas las ayudas para Grecia, Irlanda o Portugal fueron aceptadas sin resistencias en el Parlamento en Madrid. Tampoco se pone en duda en el debate público el paquete para Chipre, al que España ha contribuido en un 15% que tendrá que restar de sus propios Presupuestos”. “En vista de todo ello, lo único que se puede decir es: ¡chapó! Es evidente que los españoles son personas solidarias y generosas. Es evidente que están dispuestos a buscar los errores primero en su propio país, en lugar de caer en campañas contra los inmigrantes, contra Europa o contra el euro”, señala el artículo de opinión. El artículo reconoce que las reformas aún no las está notando la sociedad: “La mayor parte de la población aún no nota nada de todo esto. Según apuntan todos los pronósticos, este año el desempleo seguirá creciendo. El gobierno español espera que en el cuarto trimestre la economía pueda volver a crecer mínimamente, por primera vez desde finales de 2011. En ese momento, la luz al fondo del túnel será ser más clara y la población por fin deberá ser recompensada por los sufrimientos de los últimos años”. http://www.expansion.com/2013/04/02/economia/1364931089.html
Economía financiación del déficit » El fondo de las pensiones ya tiene el 97% del dinero invertido en deuda española Adquirió 20.000 millones en bonos españoles Vendió 4.600 en títulos alemanes, holandeses y franceses El Gobierno cambió las reglas para poder comprar más deuda nacional El País Madrid 4 ABR 2013 - 11:24 CET63
En la imagen, monedas de dos euros recién acuñadas / EFE
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El Fondo de Reserva de las pensiones ha decidido poner todos los huevos en la misma cesta. Y esa cesta es la deuda española. El organismo que gestiona el dinero para pagar las pensiones futuras ha decidido vender sus bonos de máxima solvencia emitidos por Alemania, Francia y Holanda para ayudar a financiar al Tesoro español. Durante el año pasado, vendió títulos de deuda de esos tres países por importe de 4.600 millones de euros y en cambio compró títulos de deuda española por importe de 20.000 millones de euros, según datos de Bloomberg. Con ello, el 97% de su cartera, una proporción récord, está invertido en deuda española.
MÁS INFORMACIÓN/ La hucha de las pensiones invierte el 90% de sus recursos en deuda española / Bañez afirma que la hucha de pensiones se usará si es necesario para pagar / La Seguridad Social se ve abocada al déficit tras usar la hucha de las pensiones El fondo de reserva ha preferido ayudar a financiar el déficit del Gobierno de Mariano Rajoy a diversificar su cartera, como hacen la mayoría de los fondos de pensiones del mundo. La mayor parte de las compras del fondo se produjeron en la segunda mitad del año. El Gobierno pudo con la ayuda del dinero de las pensiones hacer frente con mayor facilidad al mayor aumento de deuda pública de la historia de España en un solo año, 148.000 millones de euros, a razón de más de 400 millones de euros al día, la mayor parte de los cuales se financiaron con títulos del Tesoro. El fondo de las pensiones acabó el ejercicio con 63.000 millones, después de que una ganancia de unos 3.000 millones compensase en parte la retirada de 7.000 millones realizada para pagar las pensiones. En 2012 fue la primera vez que se recurrió a este fondo, construido a lo largo de los años, para pagar las prestaciones, después de que no se cumpliesen las previsiones presupuestarias del Gobierno. Las cifras del informe anual del fondo muestran que España fue la que más compró deuda de España en un año en que se extendió la desconfianza sobre las finanzas estatales y la prima de riesgo marcó récords históricos. Para poder comprar más deuda nacional, el Gobierno cambió las reglas del fondo de reserva de las pensiones. Elevó del 16% al 35% de la cartera el importe máximo que puede ser invertido en un solo valor (una emisión de bonos a 10 años, por ejemplo). Al tiempo, aumentó del 11% al 12% su participación máxima en el total de deuda del Tesoro en circulación. http://economia.elpais.com/economia/2013/04/04/actualidad/1365067460_408625.html
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ft.com World Asia-Pacific Japan Last updated: April 4, 2013 9:36 am Bank of Japan unveils aggressive easing By Ben McLannahan and Jonathan Soble in Tokyo and Josh Noble in Hong Kong
©Reuters Bank of Japan governor Haruhiko Kuroda, center, and board members hold a monetary policy meeting in Tokyo on Thursday The Bank of Japan will aim to double the monetary base over two years through the aggressive purchase of long-term bonds, in a dramatic shift aimed at ridding Japan of the deflation that has dogged the country for almost two decades. Haruhiko Kuroda on Thursday announced his arrival as central bank governor with a “new phase of monetary easing”, a move that comes after Prime Minister Shinzo Abe told the bank to target a 2 per cent rate of inflation. More ON THIS STORY/ FT Alphaville The new BoJ/ Kuroda in spotlight with first BoJ meeting/ Abe warns over Japan inflation target/ Kuroda warns Japan debt ‘not sustainable’/ In depth Central banks ON THIS TOPIC/ Kuroda takes market by storm/ Peter Tasker Japan and UK must lead reflation/ Japan suffers decline in factory output/ Japan unlikely to pay its way out of fix “We can’t escape deflation with the incremental approach that’s been taken until now,” Mr Kuroda said after the announcement. “We need to use every means available.” While he did not rule out a further acceleration of the bank’s easing programme should prices fail to rise as desired, Mr Kuroda said the new measures would be sufficient to achieve his goal. “I am confident that all the policies we need to achieve 2 per cent inflation in around two years are now in place,” he said.
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The BoJ said it would boost Japan’s monetary base from Y135tn ($1.43tn) to Y270tn by March 2015, mainly by buying more long-term government bonds. That will raise the average remaining maturity of its holdings from about three years to seven years, keeping downward pressure on yields all along the curve. Under the new measures, the BoJ will expand its balance sheet by 1 per cent of gross domestic product each month this year and by 1.1 per cent per month in 2014, according to estimates from Barclays. By comparison, the US Federal Reserve’s current monetary easing programme involves increasing the balance sheet by 0.54 per cent of GDP per month. “This is really taking policy where it hasn’t been before”, said Jonathan Cavenagh, senior FX strategist at Westpac in Singapore. “It’s pretty bold. It has certainly taken us by surprise.” The BoJ will also set a new framework for its asset purchases. Previously, it had carried out market operations with the aim of keeping the overnight interest rate as close to zero as possible. Now it is focusing on the monetary base. BoJ steps ● An increase in the amount of Japanese government bond purchases so that total holdings rise by about Y50tn a year, about double the current pace of buying ● An increase in the remaining maturity of those purchases, so that yields stay very low all along the curve ● A new framework for those purchases. The main operating target switches from the overnight interest rate to Japan’s monetary base, which should roughly double by the end of 2014 ● More purchases of risk assets, and stocks in particular ● The scrapping of the asset-purchasing programme, which was the centrepiece of the easing efforts of former governor Masaaki Shirakawa ● A temporary suspension of the self-imposed rule that limited JGB holdings to the amount of banknotes in circulation. Discussions will continue on ways to ensure that the government keeps some discipline on spending Before the announcement, investors were hoping for “easing of a different dimension,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. “This was it.” The Nikkei 225 stock average closed up 2.2 per cent, snatching back losses earlier in the day. The benchmark 10-year bond yield fell almost a fifth to 0.446 per cent, matching the all-time low of June 2003. The yen tumbled from 92.91 to the US dollar to a two- week low of about 95.20. In a move that erases the centrepiece policy of Masaaki Shirakawa, the former central bank governor, the BoJ said it would scrap the asset-purchasing programme that was created in 2010 to buy shorter-term debt. Now, all bond purchases will be consolidated in one operation, making the scale of the BoJ’s easing more transparent. The bank says it will discuss with the government ways to ensure that investors keep faith in state finances, having temporarily suspended its self-imposed rule limiting bond holdings to the amount of banknotes in circulation.
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“The results were extremely bold and we highly evaluate the policies,” said Akira Amari, the Japanese economy minister. Despite speculation over dissent on the BoJ board, there was only one vote against the action, that of Takahide Kiuchi, formerly of Nomura. “Moving out of deflation is a good thing, but it won’t be easy,” said Kazumasa Iwata, president of the Japan Centre for Economic Research and former deputy BoJ governor, who was considered a rival to Mr Kuroda in the race for the top spot. “I hope he will succeed.” http://www.ft.com/intl/cms/s/0/81fbc13c-9cd6-11e2-9a4b- 00144feabdc0.html#axzz2PU2C7w00
ft.com World Asia-Pacific JapanLast updated: April 4, 2013 8:47 am Kuroda takes market by storm By Jonathan Soble
©AFP Markets were bracing themselves for disappointment in the days before the Bank of Japan’s policy decision on Thursday – inevitably, perhaps, given the Fuji-sized pile of expectations that had built up ahead of Haruhiko Kuroda’s first meeting as governor. This week, the yen crept back up against the dollar and shares sagged. Short of driving a lorry full of cash out of the central bank’s gates, it seemed there was little Mr Kuroda could do to satisfy the army of traders that had sold the Japanese currency and bought stocks in anticipation of aggressive new easing. More ON THIS STORY/ Kuroda in spotlight with first BoJ meeting/ Abe warns over Japan inflation target/ Kuroda warns Japan debt ‘not sustainable’/ Kuroda reiterates pledge on deflation/ In depth Central banks ON THIS TOPIC/ Bank of Japan unveils aggressive easing/ Peter Tasker Japan and UK must lead reflation/ Japan suffers decline in factory output/ Japan unlikely to pay its way out of fix IN JAPAN/ FT Alphaville The new BoJ/ Japan to overhaul power sector/ Japan Inc remains in contraction/ Japanese business sentiment ticks up In the event, however, he has delivered more than almost anyone had predicted. While he didn’t quite scatter money from the back of a Toyota, he came about as close as a central banker might dare. And just as importantly, he did it with the overwhelming support of his nine-member board.
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In what the bank called a “new phase of monetary easing”, it pledged to double Japan’s monetary base and formally adopted a two-year target for turning the country’s mild deflation into 2 per cent inflation – a timeframe that had previously been more of a personal goal of Mr Kuroda and Prime Minister Shinzo Abe. And instead of bringing forward the start date for an expanded programme of asset- buying, as many analysts had predicted it would, it scrapped its existing scheme altogether in favour of a simpler, bolder approach. Quantitative easing will no longer be relegated to a separate and temporary-looking part of its balance sheet. Now, Mr Kuroda appears to be saying, it is at the centre of what the BoJ does. A big question before the meeting was how much support the new governor could muster for radical steps. Most members of the board served under his more hawkish predecessor, Masaaki Shirakawa, and there were concerns that some, at least, would balk at wholesale regime change. So, winning would not have been enough. The delicate task facing Mr Kuroda, a former senior finance ministry official who most recently ran the Asian Development Bank, was to get his way without opening a rift: if his plans for more aggressive easing had been supported by only a narrow majority, for instance, it might have signalled that he had reached the limit of what he could do his first time out. That could have killed the inflationary expectations that he has been working so hard to build just as effectively as if he’d had his plans rejected outright. The vote tally announced by the BoJ showed unanimous support for the dramatic monetary-base expansion and for the plan to buy more and longer-dated Japanese government bonds: the amount outstanding is to increase by Y50tn a year, and the average remaining maturity is to be more than doubled, to seven years. Even 40-year bonds will be eligible for purchase. The lone voice of dissent came in an 8-1 vote to continue with quantitative easing “as long as necessary”. The dissenter, Takahide Kiuchi, appeared to be worried more about issues of deadlines and timing than the underlying policy of easier money – he proposed that the two-year target for achieving 2 per cent inflation be changed to a two-year “intensive period” for quantitative easing. http://www.ft.com/intl/cms/s/0/681711fe-9cef-11e2-88e9- 00144feabdc0.html#axzz2PU2C7w00
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BOJ shocks with new base money target, boosts asset buying
By Leika Kihara and Stanley White TOKYO (Reuters) - The Bank of Japan shocked markets on Thursday with a radical overhaul of its policymaking, adopting a new balance sheet target and pledging to double its government bond holdings in two years as it seeks to end nearly two decades of deflation. At Governor Haruhiko Kuroda's first policy-setting meeting, the central bank shifted its policy target to the monetary base -- the total size of cash and bank deposits -- from the overnight call rate, which is at zero to 0.1 percent. The decision marks a return to the BOJ's five-year quantitative easing policy that ended in 2006, when it flooded markets with cash targeting excess reserves that financial institutions parked with the central bank. The scope of the changes Kuroda pushed through, and the fact he secured unanimous board support for them, drove the yen down sharply and knocked the 10-year bond yield to a record low. The Nikkei stock index unwound losses of more than 2 percent to end up 2.2 percent, just shy of a 4-1/2 year closing high hit last month. "I can say that the BOJ came up with a perfect answer in response to market expectations," said Junko Nishioka, chief Japan economist at RBS Securities. "Kuroda made good on his promise of boosting monetary easing in terms of both volume and types of assets that the bank purchases." To meet its new 2 percent inflation target, the central bank will boost asset purchases to double its holdings of government bonds and exchange-traded funds (ETF) in two years. In doing so, it will revert to open-ended asset purchases and buy over 7 trillion yen (£49 billion) of long-term government bonds per month, so that the balance of its bond holdings increase at an annual pace of 50 trillion yen.
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"The BOJ will conduct money-market operations so that the monetary base will increase at an annual pace of about 60 trillion yen to 70 trillion yen," the BOJ said in a statement announcing the decision. Despite the market excitement, some analysts were sceptical whether pumping money to markets already awash with excess funds was a solution to end deflation. The monetary base is expected to expand to 200 trillion yen this year and to 270 trillion yen by the end of 2014, almost doubling from 2012 when it was 138 trillion yen, the BOJ said. "It is as if we've gone back to the quantitative easing of the 2000s," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo. "Targeting the monetary base will lead to a huge increase in current account balances that commercial banks keep at the BOJ, but I'm still not sure if this money will move through the economy." Base money, or cash and reserves at the BOJ, already hit a record in March, but the huge pile of money has failed to end deflation or boost wages. REGIME CHANGE Kuroda's first policy meeting since taking office on March 20 was seen as a big test of his ability to steer the BOJ towards unorthodox measures to meet the inflation target it adopted in January, and he did not disappoint markets. Government bond futures soared and the benchmark 10-year bond yield hit 0.425 percent, its lowest ever. The yen, which had been creeping up in the run-up to the meeting, plunged, driving the dollar up by more than 2 percent to around 95.25 yen from around 92.90 before the decision. Kuroda has been keen to engineer a "regime change" from his predecessor's cautious approach, pledging to do "whatever it takes" to achieve the 2 percent inflation target in two years, a timeframe many see as overly ambitious. The BOJ combined two bond-buying schemes, its asset-buying and lending programme and the "rinban" bond-buying market operation, to buy government bonds across the yield curve, including those with duration of 40 years. The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year. The BOJ strengthened its commitment to ultra-easy policy, saying it will continue aggressive stimulus until 2 percent inflation was sustainably achieved. Previously, it had said it would maintain ultra-loose policy for as long as necessary. As Kuroda had signalled earlier, the central bank also temporarily scrapped a self- imposed rule of capping its holdings of government bonds to the value of bank notes in circulation. ($1 = 92.8600 Japanese yen) (Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by John Mair) http://uk.reuters.com/article/2013/04/04/uk-japan-economy-boj- idUKBRE93216T20130404
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Kuroda faces test as BOJ set to embark on bold easing campaign Wed, Apr 3 2013 * BOJ to ease, decision expected 0330-0530GMT * BOJ to boost asset buying, target longer-dated JGBs * Kuroda wants to combine bond-buying programmes * Board may see split vote, test Kuroda's leadership * Kuroda's news conference scheduled 0630GMT By Leika Kihara TOKYO, April 4 (Reuters) - The Bank of Japan is expected to embark on a bold experiment of pulling out all the stops to get prices rising after nearly two decades of deflation, starting with boosting asset purchases and targeting longer-dated government bonds. But new Governor Haruhiko Kuroda may struggle to build a consensus for a radical overhaul of the bank's policy framework in a board divided on how much it should ramp up bond buying and how to convince markets it will not monetise public debt. The policy meeting, the first one chaired by Kuroda since he assumed the post on March 20, will be a big test of his leadership in steering the central bank toward untried and unorthodox measures to meet its new 2 percent inflation target set in January. "Markets are already pricing in the risk that the BOJ may not be able to agree on big monetary easing steps on Thursday," said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo. "The focus is on Kuroda's message at the post-meeting news conference. What's important is for him to sustain market expectations for more easing in future rate reviews." At the two-day meeting ending on Thursday, the BOJ is likely to start open-ended asset purchases immediately, rather than in 2014, and boost buying of government bonds and riskier assets such as exchange-traded funds, sources have told Reuters. The central bank is also expected to extend the duration of bonds it buys in easing policy from the current three years. But Kuroda wants to do more and combine two separate schemes for buying bonds, to clarify how much the BOJ is expanding its balance sheet and make it easier to buy longer-dated bonds. That will help Kuroda, mandated by Prime Minister Shinzo Abe to take bolder monetary easing steps, engineer a "regime change" from his predecessor's cautious, gradual approach.
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But Kuroda's idea may face resistance from some in the board who are wary of loading up the central bank's balance sheet with too much long-term debt, resulting in a split vote. Even if he succeeds in muscling through his plans, the BOJ may struggle to live up to expectations as markets are already positioned for aggressive stimulus steps, analysts say. Under pressure from Abe for bolder efforts to reflate the long-moribund economy, the BOJ eased policy in January and doubled its inflation goal to 2 percent, a level Kuroda has since pledged to achieve in two years -- a target many see as overly ambitious. Kuroda has said he will do whatever it takes to achieve the price target, but some analysts doubt whether printing more money is the solution. Base money, or cash and reserves at the BOJ, already hit a record in March but the huge pile of money has failed to end deflation or boost wages. Abe told parliament on Tuesday that he is not necessarily asking the BOJ to achieve the target "at all costs," as factors beyond the bank's control, such as global economic developments, may sway future price moves. http://uk.reuters.com/article/2013/04/03/japan-economy-boj- idUKL3N0CQ2U120130403
U.S. Stock Futures Climb as Japan Boosts Bond Buying By Sarah Jones - Apr 4, 2013 U.S. stock futures climbed, after yesterday’s biggest selloff for the Standard & Poor’s 500 Index in more than a month, as the Bank of Japan doubled its bond purchases to help drive the world’s third-largest economy. Facebook Inc. rose 0.7 percent in early New York trading after the company was said to be preparing a deeper push into smartphone software with a modified version of Google Inc.’s operating system. Microsoft (MSFT) Corp. fell after Bank of America Corp. downgraded the shares for the first time since 2008. S&P 500 futures expiring in June gained 0.4 percent to 1,555.2 at 7:25 a.m. in New York after the benchmark gauge slid 1.1 percent yesterday on worse-than-estimated economic data. Contracts on the Dow Jones Industrial Average rose 53 points, or 0.4 percent, to 14,540 today. “People should stick with equities; in fact, they should be buying more equities,” Daniel Morris, a market strategist at JPMorgan Chase & Co., told Guy Johnson on Bloomberg Television in London. Valuations “are still well below average and you still have otherwise very good fundamentals.” Stock futures climbed and Asian shares pared their losses today after the Bank of Japan strengthened a stimulus program that will see the central bank buy 7 trillion yen ($73 billion) of bonds a month. The European Central Bank meets today and is expected to leave its benchmark interest rate at a record low. The Bank of England left its interest rate unchanged at 0.5 percent. The BOE also kept its stimulus program on hold. The S&P 500 fell from a record high yesterday after separate employment and services industries reports fell short of economists’ forecasts. Data today may show fewer Americans filed for unemployment benefits last week. The Labor Department releases its monthly non-farm payrolls data tomorrow.
http://www.bloomberg.com/news/2013-04-04/u-s-stocks-futures-climb-as-japan-boosts-bond- buying.html
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ft.com World US&Canada US Politics & Policy
April 3, 2013 11:40 pm Fed member hints at summer slowing of QE3 By Robin Harding in Washington
©Bloomberg A leading dove at the Federal Reserve said it could start tapering off its QE3 programme of quantitative easing this summer, in a sign of how debate at the US central bank has shifted on the issue. John Williams, president of the San Francisco Fed, led the push for more asset purchases in the summer of 2012 and his willingness to consider slowing the rate of buying suggests the central bank is nearing its goal. More ON THIS TOPIC/ Dudley gives first hints of slowing QE3/ Fed keeps its foot on stimulus pedal/ More bond investors bet on US rate rise/ Analysis All eyes on Bernanke’s exit strategy IN US POLITICS & POLICY/ US to send missile defence unit to Guam/ Egypt in spat with US over embassy tweet/ Obama takes pay cut ‘to share in sacrifice’/ Hagel warns on rising Pentagon staff costs “Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labour market by this summer,” he said in a speech in Los Angeles on Wednesday. “If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase programme sometime late this year.” The Fed has been buying Treasury and mortgage-backed securities at a pace of $85bn a month as part of a third round of quantitative easing aimed at driving down long-term interest rates and speeding up the economic recovery. In recent comments, both chairman Ben Bernanke and New York Fed president William Dudley have endorsed a slowdown of purchases once the economy has enough momentum, but Mr Williams is the first to give a timescale.
The rate-setting Federal Open Market Committee will meet in mid-June and again at the end of July. Either could be a date to slow the rate of asset buying. Mr Williams was a long-time Fed staffer before taking the San Francisco job and his outlook is often close to Mr Bernanke and vice-chair Janet Yellen.
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“The situation we find ourselves in today is like driving a car up a long, steep hill. To keep the car moving at a reasonable speed, the Fed is pushing down hard on the accelerator,” he said. “As the road gets flatter – as the factors holding back the recovery wane – we’ll need to lighten up on the accelerator a bit.” Mr Williams forecast growth of 2.5 per cent for 2013 and 3.25 per cent in 2014 with an inflation rate of 1.5 per cent in both years. That is below the Fed’s long-run goal of 2 per cent. He predicted that the unemployment rate will not fall below 6.5 per cent until the middle of 2015. The Fed has said it will not raise interest rates until unemployment reaches that level. Officials at various Fed banks have sent differing signals about when they want to taper QE3. Speaking on Bloomberg Radio, James Bullard, president of the St Louis Fed, said that with inflation so low: “It’s full steam ahead right now”. He said that when the Fed does taper QE it could do so little by little. “I would be very comfortable with moving more often in small amounts – $10 or $15bn at a time – and I would like to get the committee to be willing to move in those kinds of increment,” he said. Mr Bernanke, by contrast, said that the Fed would not change the rate of purchases at every meeting. http://www.ft.com/intl/cms/s/0/2a1bf6fe-9c99-11e2-9a4b- 00144feabdc0.html#axzz2PU2C7w00
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ft.com comment The A-List
Philipp Hildebrand April 3, 2013 Europe needs to focus more on reform, not just austerity The eurozone finds itself back in the headlines. Once again, the world has been forced to watch a small country – this time Cyprus, with an economy smaller than that of Vermont – potentially threatening the integrity of the euro project. And not long before that, general elections in Italy produced extraordinary results – how often has a standing prime minister garnered only 10 per cent of the public vote? Both events remind us that, after a period of calm since Mario Draghi’s bold and forceful introduction of a conditional European Central Bank backstop, the eurozone has yet to resolve its fundamental problems. Ultimately, strategic, long-term solutions, rather than short-term fixes, will be necessary to do so. The eurozone’s problems are well understood. Some countries need to improve their competitiveness. Balance sheets need to be strengthened. And some debts will never be repaid – although who will bear those losses is yet to be resolved. To help address these problems, and put balance sheets back on to sustainable trajectories, Europe needs a resumption in growth. And to ensure that, vulnerable economies need to make progress on structural reforms, raising their potential growth rates. But even though those reforms are the solution to many of Europe’s challenges, they do not seem to be the focus of European debate. Rather, the debate revolves largely around austerity – how much is too much, is it too front-loaded and has it gone too far? Governments do indeed need to close structural deficits, to avoid their debts becoming an unbearable burden. And they need to be seen to be doing so, with the result that while their economies adjust, they can borrow from the market at reasonable rates. But a focus on austerity alone, without a parallel programme of structural reform, risks undermining growth, scaring away investors and ultimately being rejected by voters. The crushing defeat of Mario Monti in Italy demonstrates that all too clearly. His government met its immediate challenges to shrink fiscal deficits and reduce government bond yields. But it did so largely through raising revenues. There are good reasons why governments reach for revenue increases, rather than reforms and spending cuts, to close fiscal deficits. Taxes can be increased, and the proceeds banked, relatively quickly, enabling governments to demonstrate their resolve rapidly and clearly. In contrast, structural reforms and cuts to spending programmes tend to require consultation and consensus-building. And reforms take time to bear fruit. But an approach focused on revenue increases also brings with it three fundamental problems. First, and much debated, short-term austerity weakens growth, and so risks exacerbating the slowdown that led to fiscal deficits growing in the first place. Second, and discussed less often, the lack of consultation and coalition-building over tax increases
297 means that governments might not have secured the broad acceptance and buy-in that they will need when they come to face the electorate. And third, in focusing solely on near-term austerity, politicians risk misreading the concerns of investors. Markets are not solely – or even particularly – fixated on quarter-by- quarter fiscal out-turns. Rather, investors require reassurance that debt and deficits will be sustainable in the medium term. Near-term austerity measures alone are not necessarily the best way to satisfy them. A transparent and credible commitment to reform is likely to provide the market with more comfort. This is in no way a prescription for fiscal irresponsibility. Governments need to commit to fiscal discipline. But they should do so over the right timeframe. Medium-term fiscal plans need to be visibly and credibly sustainable. The only way to gain that credibility is for fiscal plans to be specific and granular. Plans need to set out which areas of spending will be cut, when and by how much. Governments can then be held accountable against those plans. And in parallel, they can then devote time and political capital to longer-term structural reforms, to boost their potential growth rates. If markets see that progress is being made on growth-supportive reforms, and that there are detailed and credible plans for reductions in spending over the medium term, they are likely to be much more forgiving of near-term fiscal deficits. And that means there will be less need for growth-stifling austerity. Of course, it is difficult for governments to commit credibly to medium-term reforms and fiscal plans. There is always a risk that they will not follow through on those plans, once market pressure to do so has diminished. And even if they wish to do so, their re-election cannot be guaranteed – so it is possible that the measures will fall to others to implement. That inevitably adds an uncomfortable degree of uncertainty. That means that it is all the more important that governments try to build meaningful and broad consensus for their programmes. And it suggests they should also focus on building politically independent institutions that will monitor fiscal out-turns. Over time, and as such institutions become established, it should become more difficult for future governments to deviate from those medium-term fiscal plans. This debate is particularly relevant for France, the eurozone’s second-largest economy and a crucial partner for Germany as the euro area builds and deepens its institutions. Clearly President François Hollande has to remain committed to longer-term fiscal consolidation. After all, France has not had a budget surplus in 30 years. Yet markets will not be overly concerned about the precise decimal point on the latest deficit figures. The French president should not spend diminishing political capital on further short-term pro- cyclical fiscal measures. Instead, he needs to reassure investors of two things. First, that he has a longer-term fiscal plan. And second, that he will throw his political weight behind his promise to shepherd a sensible and, at least by French standards, ambitious labour market reform programme through parliament. None of this is easy. But the fate of Mr Monti surely demonstrates the hazards, both for politicians and for the state, of strategies that rely excessively on near-term austerity. That is particularly the case when pro-cyclical measures focus largely on unpopular revenue increases. The Italian electorate has told us that and it is a lesson that should not be ignored, in Paris or elsewhere. The writer is vice-chairman of BlackRock and a member of the company’s global executive committee. Previously he served as chairman of the governing board of the Swiss National Bank and was a member of the Financial Stability Board http://blogs.ft.com/the-a-list/2013/04/03/europe-needs-to-focus-more-on-reform-not-just- austerity/#axzz2PUJ84Svw 298
ft.com comment opinion April 3, 2013 7:29 pm Don’t panic – financial reform is coming to America By Barney Frank It is no longer in the interests of Obama’s critics to delay, writes Barney Frank We are going to sort out the US financial system. This might seem a bold statement when, two and a half years after the Dodd-Frank Act was signed into law, much necessary regulation is still not on the books. But with the re-election of Barack Obama, I have no doubt that the necessary new rules will be in place in good time. While I share the frustration that many feel about our slow progress, I do not share the angst that often accompanies it. Some of the factors responsible for the pace were inherent in the task. Some critics have complained that we overloaded the agencies’ circuits with a law that was much too long. The 124-page Dodd-Frank Act is, sceptics note, rather longer than the 30 pages of Glass-Steagall, the financial reform bill passed in 1933 in the wake of the Wall Street crash. But our bill covered more subjects. More ON THIS STORY/ In depth US financial regulation/ Study highlights ‘cash for access’ risks/ Men or machines who runs the markets?/ Outgoing SEC head joins consulting group/ CFTC eyes derivatives reform compromise ON THIS TOPIC/ Flash crash explanation questioned/ Michael Pettis Why world needs reckless bankers/ Comment Commodity booms, busts and bubbles/ On Wall Street Storm clouds cast pall over hot US loans IN OPINION/ Peter Tasker Japan and UK must lead reflation/ David Gardner Ankara pulls at Kurdish thread/ Graeme Cooke Welfare state can be cheap, popular/ Apostolos Georgopoulos and Margaret Mahan More Bam A fairer comparison would be with the laws establishing federal deposit insurance, the Securities and Exchange Commission, the Investment Company Acts and many others. We decided to cover all interrelated issues in a financial system vastly more complex than that which existed in the 1930s, and to do it in one bill that treated the system as an integrated whole. A second complaint is that we left too much to regulators. Trying to be prescriptive would have required setting rules in concrete that we should allow to evolve with experience. Specificity without discretion would have been an invitation to evasion. A third criticism is both wholly valid and wholly unavoidable. Responsibility for regulating derivatives is divided between two separate agencies: the SEC and the Commodity Futures Trading Commission. This division is both irrational and impossible to fix without a major legislative fight. The good news is there is a growing bipartisan interest in taking on this task. Until that is done, much important regulation will require the two five-member commissions to agree on a single set of rules. If the new SEC chair is quickly confirmed, the requisite decisions will be made soon.
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This brings us to the set of obstacles to filling out the rule book caused by opponents of new regulation. The first of these is the resistance by financial businesses. This should be abating. The clear preference of many of these was not to have any new rules, and from the signing of the bill in 2010 until last November’s election, many hoped that a Republican president would rescue them. With that hope gone, it is no longer in their interest to delay getting rules adopted. This will mean a shift from efforts to filibuster the administrative process to working seriously for the adoption of appropriate rules (with an effort to lighten them). But this still means a heavy paper flow from regulatees to regulators, and this has given those opposed to the new law their leverage for a combination of partisan and ideological reasons. With Republican control of the House of Representatives – which we had not anticipated when passing the bill – combined with defective rightwing Republican control of the District of Columbia Circuit Court of Appeals, regulators have been hit with what readers of the old Li’l Abner comic strip will recognise as the “double whammy”. First, the SEC and the CFTC receive vast amounts of comments for each proposed rule, which they must process. Meanwhile, the Republican House appropriations committee starves them of money. Unlike the bank regulators, the SEC and CFTC have no independent funding. This is where the DC courts come in. Not only do these agencies have to go through comments, the court then grades their work with a strictness that belies conservatives’ professed opposition to “judicial activism”. On several occasions, DC courts have struck down SEC and CFTC rules, not because of any constitutional problem, but because the conservative judges think the agencies have given too little deference to the financial industry’s arguments. Documenting decisions to the degree that the court requires would be difficult in any circumstance. Doing so with the lack of staff and the resources resulting from Republican underfunding is impossible. This was, in part, what was at stake when the Republican Senate minority filibustered to death an Obama appointee to the DC circuit. It will be exacerbated if House Republicans continue to block funding for the agencies. The amounts concerned are too small to be caused by deficit concern. The CFTC funding is in the hundreds of millions of dollars, and fines and fees that it levies cover its costs. The rules will be completed in time to prevent the type of crises that they are intended to prevent, but later than they should be. But the fault for that will rest with Republican appropriators withholding adequate funding and Republican senators filibustering to maintain the DC circuit as a rightwing bastion. The writer is a former chair of the House financial services committee and a sponsor of the Dodd-Frank Act http://www.ft.com/intl/cms/s/0/cbe6c936-9182-11e2-b839- 00144feabdc0.html#axzz2PU2C7w00
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CNBC Bundesbank Launches Deutsche Probe Published: Wednesday, 3 Apr 2013 | 12:01 AM ET By: Tom Braithwaite, Kara Scannell, and Chris Bryant
Markus Bernet | Wikipedia Deutsche Bank, Frankfurt The Bundesbank has launched an investigation into claims that Deutsche Bank hid billions of dollars of losses on credit derivatives during the financial crisis, according to people familiar with the situation. Investigators from Germany's central bank are scheduled to fly to New York next week as part of an inquiry into allegations that misvaluing credit derivatives allowed Deutsche to hide up to $12 billion in losses, helping it avoid a government bailout. They intend to interview people, including former employees, who have knowledge of Deutsche's dealings in complex credit derivatives - known as leveraged super senior trades - between 2006 and 2009. (Read More: Rate Rigging Probe Homing In on Deutsche Bank) The Bundesbank inquiry opens a new front in the investigation. The Securities and Exchange Commission is among the regulators investigating the claims, reported in the Financial Times in December. Deutsche has denied the allegations. On Wednesday the bank reiterated that the allegations were "more than two and a half years old" and had been the "subject of a careful and thorough" investigation by a law firm, which found them "wholly unfounded". "Moreover, the investigation revealed that these allegations stem from people without responsibility for, or personal knowledge of, key facts and information," Deutsche said. "We have and will continue to co-operate fully with our regulators on this matter." (Read More: Litigation Forces Deutsche Bank to Restate Profits) Three employees approached the SEC independently with allegations that the bank misvalued a giant derivatives position, worth $130 billion on a notional basis. They alleged that the bank's traders - with the knowledge of senior executives - avoided recording "mark-to-market" losses during the unprecedented turmoil in credit markets in 2007-2009.
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More From The Financial Times: Experts Back Deutsche Whistleblowers Deutsche Bank: Show of Strength or a Fiction? Position in Derivatives Haunts Deutsche The complainants, who include Eric Ben-Artzi, a risk manager, and Matthew Simpson, a senior trader, alleged that the bank misvalued the positions by failing to account for losses it faced when the market worsened. Had the proper valuations been made on the positions during the tumultuous period, they allege, the losses for the whole portfolio would have exceeded $4 billion and could have risen to as much as $12 billion. The leveraged super senior trades were designed to resemble the top, or "super senior", tranche of a collateralized debt obligation. Deutsche's counterparties would sell credit protection against a pool of high-quality companies. Deutsche would pay a few basis points for this protection. The trade was "leveraged" because on a deal of $1 billion the investors would provide only $100 million in collateral and had the right to walk away without posting more. (Read More: Deutsche Bank CEO: Major Progress on Capital Ratio) The former employees' submissions to regulators contained different complaints. The common theme was an allegation that Deutsche booked profits on positive moves in the trade but avoided booking losses owing to the increasing risk that its counterparties would opt to walk away rather than pay out on the insurance. This risk is known as the "gap option". The Bundesbank declined to comment. http://www.cnbc.com/id/100613904
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German regulators probe Deutsche Bank accounts: sources
2013/04/04/ 5:46am EDT FRANKFURT (Reuters) - Germany's Bundesbank and financial watchdog Bafin are conducting an in-depth probe of Deutsche Bank AG's accounts over allegations that it failed to correctly value a derivatives portfolio, sources familiar with the investigation said. Two of the sources said on Thursday that Germany's central bank was reacting to accusations that Deutsche Bank had incorrectly valued credit derivatives from 2007 through 2010, allowing it to hide as much as $12 billion in losses. "This is a routine investigation. There is no prejudgment," one of the people, who is close to the investigation, told Reuters, saying the regulators were starting with the assumption that Deutsche Bank's accounts were in order. The person said the probe would include trips to New York to meet the people who had made the allegations. "But the investigators have not been there yet." Deutsche Bank has said the allegations were unfounded and declined to comment on the investigation. The Bundesbank said it could not provide information on measures that affect individual institutions. "Generally, you can assume that we pursue any allegations that are made to assess their validity," a Bundesbank spokeswoman said. Bafin declined to comment. The Financial Times reported in December that three former Deutsche employees had filed complaints with U.S. securities regulators claiming the bank failed to recognize up to $12 billion of unrealized losses during the financial crisis. At the time, Deutsche Bank said the allegations were more than two and a half years old and that an investigation by a law firm had found them to be wholly unfounded. Reuters had previously reported on a Sarbanes-Oxley whistleblower action filed against Deutsche Bank in May 2010, alleging that some of the assets in a derivatives portfolio may have been improperly valued in order to hide trading losses. In an internal presentation given by Bill Broeksmit, head of risk and capital optimization at Deutsche Bank in June 2011, Deutsche Bank said it had been able to unwind a large portion of its credit derivative portfolio without taking heavy losses, a sign that some buyers had broadly accepted Deutsche's view on how to value certain assets. (Reporting By Alexander Huebner, Kathrin Jones and Edward Taylor; Editing by Maria Sheahan and Tom Pfeiffer) http://www.reuters.com/article/2013/04/04/us-deutschebank-derivatives-bundesbank- idUSBRE93309620130404
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04/03/2013 02:48 PM World from Berlin 'Germany Isn't Living Up to EU Responsibility' The huge difference in jobless rates between the stable north and struggling south of Europe can't just be blamed on austerity policies imposed by Berlin, say German media commentators. But Germany has remained unmoved by their plight for too long. Euro zone unemployment reached a record 12 percent in February, the highest rate since the 1999 launch of the euro, according to figures released on Tuesday. Even more striking are differences between the northern and southern halves of the bloc, a split which tells the real story of the euro crisis. Countries like Germany are heading towards full employment while Greece and Spain have staggeringly high jobless rates of more than 26 percent. Young people are hardest hit, with 58.4 percent of Greeks under 25 out of work. In Spain, the rate is 55.7 percent. The social impact will be lasting, write German commentators, pointing out that young people are paying the highest price for the crisis, which is doing serious damage to their long-term prospects. But most commentators add that it's unfair just to blame Germany- imposed austerity for the problems faced by the struggling south. Bad governance and a lack of labor market reforms in individual countries is partly to blame, they insist. Berlin-daily Der Tagesspiegel writes: "The fact that one in eight people in the euro zone is without work is appalling enough. But the fact that one in two young people in countries like Greece or Spain are unemployed can't leave us in the north unmoved. It's not the young people's fault that managers or politicians took ill advised gambles in the past. The reforms in the southern countries may lead to them to emerge stronger economically at some point. But before that happens, far too many young people will have experienced what it's like to be jobless. They can't gather professional experience, they lack social recognition and a minimum of security with which to start a family, for example. Lasting damage will be done to their resumes. "The reasons for the high youth unemployment are more varied than it might seem. Countries like Spain and Italy have labor laws that primarily protect people who have been employed for a long time. The logical consequence is that young people are frequently the ones that get made redundant when business is bad. So it's too easy just to blame austerity policies imposed by Berlin." Center-left Süddeutsche Zeitung writes: "Competitiveness is the magic word. Only when it's comparably strong among all European countries will the economic imbalances be redressed. That all sounds simple in theory. But in reality, the figures reflect a brutal and painful adjustment process by deeply different political and economic systems. Is that the price for Europe's unity?" Left-wing Die Tageszeitung writes: "It depends on the Germans. They will decide whether the euro survives. This is the clear message that can be read from the European unemployment figures. These figures 304 present a divided Europe in which the north is heading for full employment while the south is growing steadily poorer." "In the south, entire generations are realizing they have no future. That will have political repercussions. In all the southern countries, the established political parties are spent forces or have seen their support collapse. Italy won't be the last euro member country to drift off into being ungovernable." "The voters in the south are even behaving rationally by using elections as protest votes and causing chaos. Their governments no longer really matter because they're effectively already being ruled by Germany. It's here that officials are dictating the terms that have to be met to qualify for bailout programs." "But as the latest pan-European jobless data show, Germany isn't living up to its responsibility. Instead of being helped, the southern countries are being plunged into poverty. Even worse is that the Germans have been totally unmoved by this so far. It's enough for them that they're not suffering from the crisis themselves." "As bizarre as this may sound: Merkel's opportunism is the last hope remaining to the southern countries. If the euro crisis reaches Germany, one can be sure that the chancellor in true Merkel style will perform a tactical U-turn and launch stimulus programs for the whole of Europe. It may sound cynical, but it would be good news for the euro zone if German unemployment were to rise." Mass circulation Bild writes: "Europe's unemployment statistics are a record of shame. Europe was the continent where the economy flourished. It was the continent of science. A model for the world. But there's no formula for progress. It has to be reinvented day by day. It needs impetus from governments. Wherever this impetus is lacking, young people have no future. They are the victims of politicians who -- like in Italy -- wreck the country through in- fighting or -- like the Greeks -- asphyxiate the state with corruption and shoddy governance." -- David Crossland URL: http://www.spiegel.de/international/europe/german-press-review-on-rise-in- european-unemployment-a-892305.html Related SPIEGEL ONLINE links: • Record High: European Jobless Rates Show North-South Rift (04/02/2013) http://www.spiegel.de/international/europe/0,1518,892137,00.html • Promising but Perilous: German Firms Put Off by Russian Corruption (04/03/2013) http://www.spiegel.de/international/europe/0,1518,892043,00.html • Life after the Fall: The Aftermath of the Cypriot Banking Collapse (04/02/2013) http://www.spiegel.de/international/europe/0,1518,891852,00.html • Crisis in France: Hollande Failing to Handle Unemployment (03/27/2013) http://www.spiegel.de/international/europe/0,1518,891182,00.html
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Newsletter del 3 de Abril 2013
Política La vida de los 27 INSTITUCIONES: Una democracia demasiado compleja 3 abril 2013 TROUW AMSTERDAM
Kazanevsky Con frecuencia se afirma que las medidas para luchar contra la crisis en la UE se adoptan de forma opaca y no democrática. Pero estas decisiones siguen una serie de procesos aceptados por todos. En opinión de una profesora universitaria holandesa, el debate debería centrarse en dichos procesos. Femke van Esch Desde que estalló la crisis de la eurozona a comienzos de 2010, se ha aplicado una serie de medidas para solucionar la situación. Entre muchos de nosotros, esto alimentó el temor de que nos dirigíamos inexorablemente hacia un súper-Estado europeo en el que los ciudadanos no tenían voz ni voto. Sin embargo, podríamos plantearnos si las medidas adoptadas para intentar solucionar la crisis en Europa son realmente antidemocráticas y si los ciudadanos apoyan únicamente las decisiones que toman sus propios diputados. La historia reciente demuestra que no es tan evidente una respuesta afirmativa a estas preguntas.
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“Diktat de Europa” Pensemos en el llamado six-pack: el objetivo de ese conjunto de medidas criticadas a veces con vehemencia es impedir que los Estados infrinjan impunemente los criterios europeos en materia de deudas y de déficits públicos. La decisión se tomó mediante el procedimiento legislativo habitual: la Comisión Europea (no elegida por los ciudadanos) planteó la propuesta, pero el Parlamento Europeo, elegido por sufragio directo, y el Consejo de ministros tomaron la decisión. Es cierto que el índice de participación en las elecciones al Parlamento Europeo es bajo y que el Consejo se reúne a menudo a puerta cerrada, pero no se puede hablar de un mecanismo totalmente antidemocrático ni de "diktat de Europa". Otro ejemplo: el Mecanismo Europeo de Estabilidad (MEDE). Este fondo de ayuda lo establecieron de común acuerdo los Estados miembros. El tratado que instituía el MEDE fue firmado [en nombre de Países Bajos] por Jan Kees de Jager, exministro de Finanzas. A continuación, fue objeto de un debate profundo en la segunda cámara del Parlamento neerlandés y obtuvo la mayoría de votos de nuestros diputados nacionales. Por lo tanto, aprobaron la creación del fondo, así como la cantidad de los préstamos y las condiciones asociados al mismo. Por consiguiente, desde el punto de vista de la participación del Parlamento, estas decisiones siguen las pautas habituales. Sin embargo, precisamente los fondos de ayuda se ponen en tela de juicio. Este ejemplo demuestra claramente que una decisión no goza necesariamente de un gran apoyo de la opinión pública porque sea resultado de la plena participación de los diputados nacionales. Un proceso sin injerencias El tercer ejemplo es el de la adquisición de las obligaciones de los Estados con dificultades por parte del BCE, dentro del programa de operaciones monetarias sobre los títulos (transacciones monetarias directas u Outright Monetary Transactions, OMT). Estas intervenciones financieras fueron elaboradas por el Consejo de los gobernadores del Banco Central Europeo, un órgano compuesto por los gobernadores no elegidos de los bancos centrales de los diferentes Estados miembros que no está sometido a ninguna injerencia política ni democrática. Sin embargo, estas intervenciones suscitan relativamente pocas objeciones en Países Bajos. Estamos acostumbrados a contar con un banco central independiente, del que apreciamos sus ventajas: los asuntos monetarios complejos los tratan los especialistas y no se someten a consideraciones electorales de los políticos elegidos. Estos tres ejemplos demuestran que no se puede hablar de dictado de Europa y que las medidas adoptadas según un proceso perfectamente democrático son las que generan más oposición, mientras que la que se adopta sin la más mínima participación parlamentaria puede gozar de un gran apoyo de la población. Una Europa demasiado lenta y dividida En Europa, queremos soluciones decisiones y soluciones firmes para los problemas que no podemos resolver solos. Pero también queremos que se nos escuche y mantener nuestra particularidad nacional. En nuestra opinión, Europa es demasiado lenta y está demasiado dividida. Si queremos dinamismo, eficacia y soluciones unívocas, es necesario optar por la centralización, por la despolitización y unas normas exigentes, es decir, un súpercomisario europeo. Y que no haga excepciones con nadie.
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Nos encontramos así ante la cuestión fundamental en la base de toda política, ya sea local, nacional o europea. La dosis correcta de los valores fundamentales que no son necesariamente conciliables, como la democracia y la eficacia, la igualdad y la autonomía. El problema clásico de la administración pública: ¿qué grado de centralización de los poderes se necesita para actuar con eficacia y qué dosis de freno y de contrapeso se debe aplicar para garantizar el apoyo de las poblaciones? En este caso, no sirve de nada un debate entre partidarios y detractores de los Estados Unidos de Europa. En cambio, podría resultar útil exponer claramente los mecanismos europeos empleados para tomar decisiones. El debate público debería centrarse en este equilibrio para que Europa pueda progresar, contando el apoyo de la población. Si en este Año Europeo de los Ciudadanos, los políticos están dispuestos a iniciar este debate, pueden contar con mi voz. En la web Sobre el mismo tema • Parlamento Europeo: Ya no somos figurantes Financial Times Londres • Debate: Europa ha perdido a sus ciudadanos El País Madrid • Euromitos (1/10) : El déficit democrático no es para tanto De Groene Amsterdammer Amsterdam • BCE: Los dirigentes de la eurozona pisotean la democracia La Tribune París • Instituciones: Parlamento Europeo, un déficit democrático The Economist Londres http://www.presseurop.eu/es/content/article/3625621-una-democracia-demasiado- compleja
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Daily Morning Newsbriefing April 03, 2013 The multiplier debate is settled as recession defies forecasts The forecasts for the eurozone economy have been so consistently wrong that one wonders why international organisations are still publishing this garbage. The latest economic data out yesterday confirm that the eurozone economy remains stuck in a very deep and very long recession, with unemployment now at 12% - and now turn-around in sight. They confirm that the size of the fiscal multipliers is indeed very high when monetary policy has hit the zero-bound. The headcount number of unemployment now stands at 19m, the highest levels since the start of the euro, according to the latest Eurostat data. The Markit purchasing managers index fell to 46.8 in March – which means that the eurozone is not only contracting, but contracting at an increasingly fast pace. The Wall Street Journal calls it a slump this morning, and said the data added pressure on the ECB to act at its policy meeting this week. The paper says the recession is different from the one 2008/09, which was sharp and short, while this one is slow and grinding. The data also show a gap between Germany, which is growing slowly, and most of the rest of the eurozone. Every European newspaper covered the story of the resignation of Michael Sarris as finance minister of Cyprus after only five weeks in office. But it is very hard to find an explanation, or even a hint of why he might have resigned. The only source we found that offered a conditional explanation was Frankfurter Allgemeine. It said his official line that he resigned to be able to support to commission to investigate the causes of the crisis was a euphemism for the fact that Sarris himself is likely to be one of the main target of the investigation. He was finance minister between 2005 and 2008, a period during which Cyprus built up its recent business model of attracting Russian money through high interest rates. Sarris later became CEO of Laiki, the bank that is now in resolution. He is succeeded by labour minister, Haris Georgiades. The Cyprus memorandum Reuters has seen the memorandum of understanding according to which Cyprus should have a primary surplus of 4% of GDP from 2017 onward. This year, primary deficit will be 2.4%, rising to 4.25% in 2014, before coming down to 2.1% in 2015, turning into a surplus of 1.2% in 2016, and 4% from 2017 onwards. Reuters says the targets imply an economic shrinkage of 8% this year, and a further 3% in 2014, with growth of 1% in 2015 and 2016. Under the agreement, the Cypriot government would prepare a plan in Q2 of the infrastructure investments needed to exploit gas reserves. Among the austerity measures currently implemented, the country will freeze public sector pensions and
309 raise the retirement age, as well as raise excise duties on alcohol, tobacco and petrol, value added tax, corporate tax and the tax on interest earnings and dividends. The troika has given Cyprus two more years to reach the deficit targets and to undertake the privatisation programme. The 10-year loan will a 22 year majority at an interest rate of 2.5%. The Cypriot government increased the increase in the amount of transfers from €5000 to €25,000, while subjecting transactions from €25,000 to €200,000 to a 24-hour notice period. We have yet to see a realistic troika programme. The idea of a short sharp recession for Cyprus is insane. After the destruction of most of the country’s banking sector and the imposition of exchange controls, a 20% fall in GDP is far more likely, which would blow all these numbers out of the water. We assume that the troika is knows that these projections are deceitful, and that their whole purpose is to get government/parliament to approve the programme, which will then be revised as reality sinks in. Quoting unnamed Spanish government sources, Reuters reports that Spain intends to renegotiate its deficit targets for this year and the next with the European Commission. Spain's deficit targets of 4.5% in 2013 and 3% in 2014 were based on a forecast 0.5% GDP contraction in 2013, which will now be revised to 1%, still short of the 1.5% consensus of international analysts. As a result, Spain will argue for a raise in its deficit forecast for 2013 to 6%, and will request an additional year (to 2015) to meet the 3% deficit target. Eurostat recently assessed Spain's 2012 deficit at just under 7% (up from Spain's estimate, as reported by Open Europe last week), missing the 6.3% target set a year ago after another upwards renegotiation. Spanish private debt contracts Yesterday we reported on the near 6% year-on-year contraction of resident deposits in Spanish banks according to newly released Bank of Spain's data. Today, we have the Bank of Spain's release on outstanding lending to households and nonfinancial firms. Publico writes that lending to both households and firms is at its lowest absolute amount since before the crisis, in 2007. In the case of households, the year-on-year reduction to February is 4.4% to €824bn, while nonfinancial firms have reduced their outstanding debt by 10.6% to €1.12 trillion. About one third of the lending to firm is by foreign lenders, accounting for €335bn, down nearly 7% from a year earlier.
We cannot recall how many times someone in Italy has ruled out a grand coalition. Pier Luigi Bersani did it again, according to Il Corriere della Sera. He still claims to be the candidate for PM, backed by the wise men group as a sort of caretaker executive with the purpose of deciding reforms. Italy is facing the worst crisis since the WWII and needs concrete action to revitalize growth, Bersani said. The PD leader also said that he could step down if necessary, but he’s not now considering this option. Alfano says he is ready to talk Angelino Alfano said he is available for talks with Bersani to form a working government, as Il Giornale reports. The general secretary of Popolo della Libertà said he accepted Bersani’s refusal to enter into a joint coalition, but says he still wants to find a way out of the gridlock. If Bersani wants to occupy all the institutions, there is no space
310 for dialog, but the PDL is ready to discuss, Alfano said. If the talks fail, Alfano said Italy would need new elections, as soon as June. Giorgio Napolitano said that the wise men group will take 8-10 days to make proposals to break the Italian political stalemate, according to La Repubblica. The group has the tasks to work out political and economic reforms, the Italian President said. Napolitano said the wise men will only address the issues, but not suggest any kind of government. The groups’ work, as Napolitano said, would be absolutely informal, intelligence-based, and will have obvious time limits. Greek coalition parties divided over property tax Another round of talks is scheduled for today as the coalition partners continue to disagree on the controversial property tax. The finance ministry and New Democracy insist that the levy needs to be extended for another year. But the Democratic Left is adamant the government should not renege on its original promise to replace the levy with a unified property tax while PASOK wants it to be substituted with a ‘fairer’ tax. Kathimerini writes that in the meeting today PASOK leader Evangelos Venizelos will also call for a revision of the coalition’s policy programme and for a cabinet reshuffle, amid a lack of progress in several key ministries – notably the development and interior portfolios. Venizelos is also expected to call for support for indebted households. Troika wants Ireland to report monthly on health reform to ensure savings targets The troika wants the Irish government to report monthly on its efforts to rein in over spending in the health sector, according to a front page story in the Irish Times. An internal report prepared by the EU Commission says 2012 targets for the health sector were not met and that monitoring is necessary to ensure Ireland realises its savings in 2013. It also states that the troika is concerned about the sharp increase in the number of distressed mortgages as well as about the high level of unemployment. The report will be discussed in parliament and is the basis for the troika mission to Ireland later this month. The ghost of Boycott In a piece in The Atlantic magazine Matt Phillips writes that delinquent mortgage rates in Ireland are several times larger as elsewhere in Europe due to extraordinarily lenient foreclosure legislation, which the Troika is pressuring the Irish government to change in order "to remove unintended constraints on banks to realize the value of loan collateral". However, Phillips suggest that this may touch a nerve with the Irish population, for whom traditionally the family home is 'sacred'. Phillips recalls that the word 'boycott' stems from a grass-roots protest in the early 1800 against an eponymous Englishman charged with collecting rent from Irish tenant farmers. Developing countries diversify away from euro reserves Central banks in developing countries drastically reduced their euro positions, $45bn in 2012 (8% of their holdings) or nearly $90bn since its last peak in second quarter of 2011, according to IMF data on currency reserves, as reported by the FT earlier this week. Euros now make up only 24% of their reserves, the lowest since 2002, and down from a peak of 28% in 2009 while the dollar hovers around 60%. At the backdrop of a continued Eurozone crisis the euro has become less liquid Developing countries have shifted instead into other currencies such as Australian dollars and those of fellow emerging markets. China and Brazil last week signed a $30bn swap deal so each can borrow the other’s currency in the event of turmoil in the international financial system,
311 bypassing the use of dollar reserves. China is gradually expanding the international role of its renminbi. Colm McCarthy asks a number of sensible questions about the meaning of capital controls in Cyprus. The capital controls affect even the insured savings. He says that if the banks are resolved, then surely any capital flight can be dealt with by the central bank. And if these banks are really solvent, why is there any need on restrictions on withdrawals? “Of course the haircuts may, in the eyes of the ECB, be inadequate to ensure solvency. In which case why is the deal not modified further? Capital controls effectively create an inconvertible currency trapped in Cypriot banks, a precedent likely to be remembered when trouble strikes elsewhere. Do re-opening US banks decline to release deposits after the Feds have done their work, for the want of a lender of last resort?” Previous day Yesterday This Morning
France 0.737 0.711 0.711 Italy 3.470 3.333 3.337 Spain 3.777 3.647 3.654 Portugal 5.144 5.133 5.171 Greece 11.200 10.952 10.92 Ireland 2.935 2.909 2.908 Belgium 0.948 0.924 0.926 Bund Yield 1.287 1.308 1.304
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.285 1.2799
Yen 119.570 119.64
Pound 0.844 0.8476
Swiss Franc 1.215 1.2162
ZC Inflation Swaps
previous last close
1 yr 1.53 1.53
2 yr 1.47 1.47
5 yr 1.77 1.66
10 yr 2.07 1.94
Euribor-OIS Spread
previous last close
1 Week -5.100 -5.1
1 Month -1.957 -4.457
3 Months 3.943 3.943
1 Year 30.743 31.043
Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-04- 03.html?cHash=54cfd6b2720e1f9f6d1b0529a26ce68d
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EUROPE NEWS Updated April 2, 2013, 6:02 p.m. ET New Signs Point to Deeper Europe Malaise Euro-Zone Unemployment Rose to 19 Million in February, Manufacturing Fell in March; Germany Among Few to Resist Trend By BRIAN BLACKSTONE and ALEX BRITTAIN People on Tuesday wait outside an unemployment office in Madrid, where the ranks of jobless are over 25%. The economies in Greece, Spain, Italy and Portugal are all shrinking. Rising unemployment and falling manufacturing activity in the euro zone indicate a slide into a deepening recession, intensifying the challenge for euro members and the European Central Bank to find a remedy against the slump.
Cypriot finance minister Michalis Sarris has resigned over the handling of the banking crisis. With the euro-zone struggling with record unemployment and economic weakness, can the euro zone save Cyprus? Charles Forelle reports. Photo: Getty Images. Unemployment in the 17-country euro zone rose 33,000 in February to more than 19 million, said the European Union's statistics office Eurostat, keeping the jobless rate at 12%, the highest level since the euro's creation. The purchasing managers' index for the euro-zone manufacturing sector fell to 46.8 in March, its lowest level since December, according to data-services provider Markit. A sub-50 reading in PMI surveys signals that business activity is falling. Tuesday's data releases add to evidence that the euro-zone economy contracted again in the first quarter, for the sixth quarter in a row. Only Germany and a few small euro members are thought to have grown in the first quarter. The recession is particularly acute in Southern Europe. Unemployment in Spain and Greece is over 25%. Shrinking economies in Greece, Spain, Italy and Portugal are making it harder to stabilize high public debts. The euro zone's economy overall isn't yet shrinking at a rapid pace, like in the recession of 2008-09, when the bloc lost more than 5% of its gross domestic product. Rather, the euro zone appears caught in a slow, grinding contraction, with few signs of stabilization apart from in Germany. Recent data also show the rising gap in economic health between euro members. Whereas Germany and a few others are benefiting from their strong overseas exports,
313 especially to emerging economies such as China, Southern European countries are struggling to repair their international competitiveness by pushing down labor and other business costs at the same time as paying down high debts. Government austerity measures aimed at stabilizing public debt are further depressing economic activity. Rising joblessness and weak business surveys suggest any euro-zone recovery remains elusive. ECB officials have said the bloc's economy should return to growth later this year, supported by low ECB interest rates and faster global growth that should help Europe's exports. Instead, "the euro-zone manufacturing sector looks likely to have acted as a drag on the economy in the first quarter, with an acceleration in the rate of decline in March raising the risk that the downturn may also intensify in the second quarter," said Chris Williamson, Markit's chief economist. Worsening jobless rates in Southern Europe "raise a big question mark over the social sustainability of current [EU] policies to contain the crisis," said Lena Komileva, chief economist at G+ Economics. Governments in Southern Europe have been clamoring for a more forceful response from the ECB. So far, central-bank officials have resisted, offering no significant stimulus measures since the creation of a government bond-purchasing facility last fall, which has yet to be used. The bond-buying facility's mere existence has reassured investors the ECB won't let bond markets collapse, stabilizing the borrowing costs of the Italian and Spanish governments. But the measure has done little to reduce the high borrowing costs of small businesses that make up the backbone of Southern Europe's economies.
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More Coverage/ Austerity Piles Pressure on Slovenia / Catalonia Warns Trouble May Spread / U.K. Remains in Danger of Contracting / Finger-Pointing Begins in Cyprus / Lenders Ease Terms of Cyprus Bailout Many Spanish, Italian and other Southern European companies face a higher cost of credit than comparable companies in Germany and Europe's north, in a sign of the euro zone's continuing financial fragmentation. Economists largely expect the ECB to keep its main interest rate at 0.75% at Thursday's policy meeting. Some analysts say a rate cut can't be excluded, given the worsening economic outlook and fading inflation pressures. Some ECB Governing Council members favored an interest-rate cut at the last monthly meeting on March 7, but were outvoted. ECB staff economists have been studying ways to narrow the gap between businesses' borrowing costs in different parts of the euro zone. One option being studied is to broaden the range of small-business loans that the ECB accepts as collateral when it lends to banks. More radical measures to encourage lending to businesses, say analysts, would be for the ECB to purchase large amounts of asset-backed securities from banks, to help them clear their balance sheets of risky loans that are holding back new lending. Europe's fragmented lending markets are "certainly an issue that is very close to the Governing Council's heart.…It really has been a key issue for quite some time, and we consider it important for the transmission of our monetary policy," ECB President Mario Draghi said after the ECB's March meeting. But it is unclear whether the 23-member Governing Council has formed a consensus to take new measures, which could expose the ECB's balance sheets to losses if the debt crisis worsens. ECB officials may instead continue to say it is up to euro-zone governments to restore growth by overhauling their economies and making labor markets more flexible to encourage job creation. —Laurence Norman and Todd Buell contributed to this article. Write to Alex Brittain at [email protected] A version of this article appeared April 3, 2013, on page A10 in the U.S. edition of The Wall Street Journal, with the headline: New Signs Point to Deeper Europe Malaise. http://online.wsj.com/article/SB10001424127887323296504578398090254171184.html
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ft.com World Asia-Pacific Japan April 2, 2013 8:20 am Abe warns over Japan inflation target By Ben McLannahan in Tokyo
©AFP Japanese Prime Minister Shinzo Abe has said that the 2 per cent inflation target he imposed on the Bank of Japan may not be reached within two years. “The economy is a living thing and we don’t know what will happen around the world. What is important is to aim steadily for the target,” Mr Abe told parliament on the eve of Haruhiko Kuroda’s first board meeting as Bank of Japan governor. More ON THIS STORY/ Editorial Kuroda’s warning/ Kuroda warns Japan debt ‘not sustainable’/ Kuroda reiterates pledge on deflation/ Markets Insight Japan sets course for hyperinflation/ Martin Wolf The risky task of relaunching Japan ON THIS TOPIC/ The Short View BoJ swings show weight of expectations/ Yen climbs ahead of BoJ policy meeting/ Japan bond prices near all-time high/ Trading Post BoJ strategy set to move US bond yields IN JAPAN/ Japan to overhaul power sector/ Japan Inc remains in contraction/ Japanese business sentiment ticks up/ Abe needs to fix broken electoral system In an exchange with Seiji Maehara, an opposition politician and former economy minister, Mr Abe said the BoJ should not pursue the inflation target “at all costs”. His comments mark the first time that the new prime minister has suggested the inflation target he set out four months ago may not be met within the two-year timeframe outlined by Mr Kuroda, his choice for BoJ governor. Since Mr Abe and the Liberal Democratic party swept to victory in December on a platform of aggressive monetary and fiscal stimulus to overturn more than a decade of deflation, the yen has fallen steeply against major currencies, sending the stock market higher. But amid mostly weak economic data, expectations of inflation have yet to pick up, suggesting that Mr Kuroda’s task may be more difficult than Mr Abe’s team of advisers had imagined. The yen continued to gain against the US dollar on Tuesday, breaching 93 to hit 92.90 in afternoon trading in Tokyo, which analysts partially attributed to weak manufacturing data overnight from the US. The Japanese currency has risen 3.5 per cent against the greenback over the past two weeks. The Nikkei 225 closed down 1.1 per cent, taking its fall over the past five days
316 to 3.8 per cent. However, despite the recent gains, the yen has fallen 20 per cent against the US dollar in the six months since Mr Abe was elected as leader of the then opposition LDP. Masaaki Shirakawa, Mr Kuroda’s predecessor as BoJ governor, often pointed out that Japan had rarely seen a 2 per cent rate of inflation, even in periods of strong growth decades ago. In January he adopted Mr Abe’s target but on the condition that it came with a statement from the government that it needed to play its part in generating inflation by implementing growth-friendly reforms. A quarterly BoJ survey released on Monday showed that the general public’s expectations of inflation over the next five years had not changed much since the last time the survey was carried out, between November and December. A separate survey of bond investors, also published on Monday, showed that, while average expectations of core inflation over the next ten years had increased to 1.13 per cent, the highest since November 2008, the median and mode were unchanged at 1 per cent. In a separate question on “Abenomics,” 79 per cent of respondents said they expected less than 2 per cent inflation in two years. The latest core CPI data, which excludes the price of fresh food, showed year-on-year price falls of 0.3 per cent in February. Excluding energy costs – similar to the US core measure of inflation – the index stood at minus 0.9 per cent. On Wednesday, Mr Kuroda takes charge of his first two-day meeting of the BoJ’s policy board, with investors expecting a shift in tone and direction from the Shirakawa era. Mr Kuroda last week said the central bank would consider combining its monthly bond purchases and asset-purchase fund, as well as buying more debt with longer maturities. The new governor’s “journey” to raise broad expectations of inflation “appears a challenging and long one,” said Masamichi Adachi, economist at JPMorgan in Tokyo and a former BoJ official. http://www.ft.com/intl/cms/s/0/5cc5b5d6-9b63-11e2-a820- 00144feabdc0.html#axzz2PCkxR1yK
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April 2, 2013 Investments in Education May Be Misdirected By EDUARDO PORTER James Heckman is one of the nation’s top economists studying human development. Thirteen years ago, he shared the Nobel for economics. In February, he stood before the annual meeting of the Nebraska Chamber of Commerce and Industry, showed the assembled business executives a chart, and demolished the United States’ entire approach to education.
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The chart showed the results of cognitive tests that were first performed in the 1980s on several hundred low-birthweight 3-year-olds, who were then retested at ages 5, 8 and 18. Children of mothers who had graduated from college scored much higher at age 3 than those whose mothers had dropped out of high school, proof of the advantage for young children of living in rich, stimulating environments. More surprising is that the difference in cognitive performance was just as big at age 18 as it had been at age 3. “The gap is there before kids walk into kindergarten,” Mr. Heckman told me. “School neither increases nor reduces it.” If education is supposed to help redress inequities at birth and improve the lot of disadvantaged children as they grow up, it is not doing its job. It is not an isolated finding. Another study by Mr. Heckman and Flavio Cunha of the University of Pennsylvania found that the gap in math abilities between rich and poor children was not much different at age 12 than it was at age 6. The gap is enormous, one of the widest among the 65 countries taking part in the Program for International Student Achievement run by the Organization for Economic Cooperation and Development. American students from prosperous backgrounds scored on average 110 points higher on reading tests than disadvantaged students, about the same disparity that exists between the average scores in the United States and Tunisia. It is perhaps the main reason income inequality in the United States is passed down the generations at a much higher rate than in most advanced nations. That’s a scandal, considering how much the government spends on education: about 5.5 percent of the nation’s economic output in total, from preschool through college. And it suggests that the angry, worried debate over how to improve the nation’s mediocre education — pitting the teachers’ unions and the advocates of more money for public schools against the champions of school vouchers and standardized tests — is missing the most important part: infants and toddlers. Research by Mr. Heckman and others confirms that investment in the early education of disadvantaged children pays extremely high returns down the road. It improves not only their cognitive abilities but also crucial behavioral traits like sociability, motivation and self-esteem. Studies that have followed children through their adult lives confirm enormous payoffs for these investments, whether measured in improved success in college, higher income or even lower incarceration rates. The costs of not making these investments are also clear. Julia Isaacs, an expert in child policy at the Urban Institute in Washington, finds that more than half of poor 5-year- olds don’t have the math, reading or behavioral skills needed to profitably start kindergarten. If children keep arriving in school with these deficits, no amount of money or teacher evaluations may be enough to improve their lot later in life. Much attention has focused lately on access to higher education. A typical worker with a bachelor’s degree earns 80 percent more than a high school graduate. That’s a premium of more than $500 a week, a not insubstantial incentive to stay in school. It is bigger than ever before. Yet the growth of college graduation rates has slowed for women and completely stalled for men. 319
The Economic Report of the President released last month bemoaned how the nation’s college completion rate had tumbled down the international rankings, where it now sits in 14th place among O.E.C.D. countries. The report restated the president’s vow to increase the number of college graduates by 50 percent by 2020, and laid out how the federal government has spent billions in grants and tax breaks to help ease the effects of rising tuition and fees. Last year the government spent almost $40 billion on Pell grants, more than twice as much as when President Obama came to office. Mr. Heckman’s chart suggests that by the time most 5-year-olds from disadvantaged backgrounds reach college age, Pell grants are going to do them little good. “Augmenting family income or reducing college tuition at the stage of the life cycle when a child goes to college does not go far in compensating for low levels of previous investment,” Mr. Heckman and Mr. Cunha wrote. Mr. Heckman and Mr. Cunha estimated that raising high school graduation rates of the most disadvantaged children to 64 percent from 41 percent would cost 35 to 50 percent more if the assistance arrived in their teens rather than before they turned 6. Erick Hanushek, an expert on the economics of education at Stanford, put it more directly: “We are subsidizing the wrong people and the wrong way.” To its credit, the Obama administration understands the importance of early investments in children. The president has glowingly cited Mr. Heckman’s research. In his State of the Union address, the president called for universal preschool education. “Study after study shows that the earlier a child begins learning, the better he or she does down the road,” Mr. Obama said at a speech in Decatur, Ga., in February. But the fresh attention has not translated into money or a shift in priorities. Public spending on higher education is more than three times as large as spending on preschool, according to O.E.C.D. data from 2009. A study by Ms. Isaacs found that in 2008 federal and state governments spent somewhat more than $10,000 per child in kindergarten through 12th grade. By contrast, 3- to 5-year-olds got less than $5,000 for their education and care. Children under 3 got $300. Mr. Heckman’s proposals are not without critics. They argue that his conclusions about the stupendous returns to early education are mostly based on a limited number of expensive experiments in the 1960s and 1970s that provided rich early education and care to limited numbers of disadvantaged children. They were much more intensive endeavors than universal preschool. It may be overoptimistic to assume these programs could be ratcheted up effectively to a national scale at a reasonable cost. Yet the critique appears overly harsh in light of the meager improvements bought by the nation’s investments in education today. A study by Mr. Hanushek found that scores in math tests improved only marginally from 1970 to 2000, even after spending per pupil doubled. Scores in reading and science declined. “Early education is an essential piece if we are going to have a better education system,” Barbara Bowman, an expert on early childhood education in Chicago who has advised the Education Department. “We’re inching in that direction.” Education is always portrayed in the American narrative as the great leveler. But it can’t do its job if it leaves so many behind so early. E-mail: [email protected];
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http://www.nytimes.com/2013/04/03/business/studies-highlight-benefits-of-early-education.html?src=recg
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Daily Morning Newsbriefing April 02, 2013 Bersani is out, as Napolitano appoints ten wise men It was a quiet Easter break – with most action in Italy and Cyprus. Apologies for the delay, we are experiencing some technical problems. As Il Corriere della Sera reports, Giorgio Napolitano has ultimately decided not to resign – an option he had reportedly considered – and instead chosen a technical government, consisting and ten wise men, while Mario Monti gets renewed for another two to three months. The mandate for the group of wise men is to avoid a renewed plunge into the financial crisis. The ten will be splits into two groups – one dealing with economic reforms, and the other with political and institutional reforms. In the first group there will be Enzo Moavero Milanesi (EU Affairs Minister), Salvatore Rossi (Bank of Italy), Enrico Giovannini (ISTAT chief), Valerio Onida (Constitutional Court President) and Giovanni Pitruzzella (Antitrust head). In the second group are Luciano Violante (PD), Gaetano Quagliariello (PDL), Mario Mauro (Mario Monti List), Giancarlo Giorgetti (Northern League) and Filippo Bubbico (PD). There is no representation from Beppe Grillo’ Movimento 5 Stelle. According to Il Corriere, the wise men should reach an agreement in the next weeks to form a government after Pier Luigi Bersani failure in political talks with other parties. In addition, they should have enough power to introduce a new electoral law. When the Italians run out of ideas, they go for a technical government. The purpose of this construction can clearly not be to govern – because it has no democratic mandate. It can only be to pave the way for new elections in two or three months’ time, by which time the Italian economy will have contracted even more. With everybody except Grillo inside this technical government, and with Monti, the loser of the elections at the head, Grillo will have a field day. Grillo criticizes Napolitano’ choice Beppe Grillo has immediately criticised the president’s choice, saying in Italy needed a functioning parliament, not proposals to interrupt democracy; says the priorioty has to be to restart growth; Grillo has immediately attacked the wise men government backed by President Napolitano. As Il Sole 24 Ore reports, he said Italy needed a functioning Parliament, not proposals to interrupt democracy. The country does not need unreal negotiators or facilitators, he wrote in his blog. The urgent thing Italy now needed is a return to growth – the work on which should start immediately. This is the end for Bersani, Il Foglio writes Il Foglio says this is the end of Pier Luigi Bersani, as the PD now has to renew itself; events favour Matteo Renzi, the mayor of Florence, who is now the most likely candidate to emerge for the PD in another election; elections most likely in the autumn, with Renzi against Grillo, a contest Renzi could easily win; 322
The failure of Pier Luigi Bersani is bigger than expected, Claudio Cerasa writes on Il Foglio. The Partito Democratico leader is facing the most difficult period of his political life, as does the old guard of the party, which is now in search of renewal. After the appointment of Napolitano’s wise men, the road is open for Matteo Renzi, the young Mayor of Florence, who could be the next PD candidate in case of early elections after the caretaker government. What will the PD do? According to Il Foglio, the biggest centre-left party will wait until the summer to propose a new electoral round in the autumn, just before the budget law. With Renzi as PM candidate, the PD could win easily according to latest polls. An opinion poll shows Renzi’s popularity up from 41% to 66% in a month; also shows that 55% of Italians want elections now – not an administration lead by 10 wise men; Some 50% of Italians are ready to go back to the polls, according a SWG survey. As La Stampa reports, the approval for Pier Luigi Bersani is under the 25%, while that of President Napolitano stabds at 55%. Silvio Berlusconi is steady at 40%, and Beppe Grillo at 45%. There are two surprise in the latest SWG survey. Renzi’s rating shot up from 41% to 66% in a month. Secondly, the number of Italians who prefer early elections over the wise men group are 55%. Jim O’Neill argues that the EU should not play down the Grillo Factor, and focus on growth immediately; Grillo could be a problem for the Eurozone, Jim O’Neill told Bloomberg in an interview. He said the biggest problem currently facing the EU is not Cyprus, but the so-called “Grillo Factor.” According to O’Neill, Italy is the third largest country in the eurozone and if Italy does not start to have some growth sometime soon, Grillo will ask serious questions about the benefits of staying in the eurozone. That’s why the EU should introduce growth-oriented measures (meaning an immediate end to austerity.) Manasse says Monti should step down and support Renzi Paolo Manasse says the eurozone crisis could return with a full force fairly soon; says it would be best for Monti to step down and support Renzi; The Eurozone needs a shock to revitalize, Paolo Manasse told Linkiesta in an interview. After the Cyprus bailout and the introduction of capital controls, the Euro-area is facing enormous challenges. He said the calm produced by the ECB’s OMT programme will end the second somebody applies for it. According to Manasse, these schemes (like the OMTs) are based on expectations, not on real actions. Talking about the Italian political deadlock, Manasse argues that Monti should step down and support Matteo Renzi, the Partito Democratico’s next candidate for PM. of the uninsured deposits in Bank of Cyprus 37.5% will turn into equity – i.e. wiped out – with 22.5% frozen for further haircuts; governor of the central bank of Cyprus says capital controls should be lifted in a week or two; It was already clear that depositors in Bank of Cyprus would ultimate suffer large losses, but this is approaching a 60% wipeout. For the insurance portion of deposits, investors received 37.5% in shares, with 22.5% frozen with no interest and to be used as a buffer, Cyprus announced Saturday. We treat any official pronouncements banking in Cyprus as a straight forward lie. This goes in particular for the interview given by the governor of the Bank of Cyprus,
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Panikos Demetriades in the Financial Times, who said the 22.5% would be soon repaid, and that the country would life the capital controls in one or two weeks. “I can’t really tell you if it will be seven or 14 days before capital controls end.” He said once people realised how well capitalised the banks are after the haircut, there would be no reason for a bank run. He said the 22.5% buffer had been agreed with the troika to insure that the worst case scenario is covered and that no further finance gaps would have to be covered. He said he expect most of that money to be repaid. One third of Spain’s unemployed receive no benefits; Spanish government statistics show that 2m unemployed people in Spain, a third of the total, received no state benefits in 2012, reports TV station La Sexta. This is as the government continues to tighten the eligibility requirements for unemployment benefits. The number of unemployed people went up 27% between 2010 and 2012, and the fraction not receiving benefits went up from 22% to 34%. Spanish bank deposits contracted by 6% in a year; Bank of Spain data for February show that bank deposits by residents in Spain dropped in each of the first two months of the year, which experts quoted describe as a seasonal effect according to El Economista. However, on a year-on-year basis deposits fell 5.8% to €1.48 trillion. Household deposits, accounting for 48% of the deposits this past February, grew by 2.5% form a year earlier; while firm deposits grew 1.1% to €192bn. Non-resident deposits held by Eurozone residents dropped 51% in a year, to €38bn. Spanish banks to benefit from relaxed Deferred Tax Asset rules In mid-March, Bloomberg had a report on European commission plans to relax the Basel III deadline for deferred tax assets (DTA) from 5 years to 10 years to stop computing DTA as bank capital. El Confidencial wrote this weekend that this may allow Spain's banks to avoid having to carry out rights issues. According to the paper, the Spanish banking system is carrying €47bn in DTA, and the banks with the highest amounts of DTA are those that are deemed not to need state aid. Most of these assets are the result of last years' "Guindos decrees' requiring Spanish lenders to make large provisions on their real estate and developer loan portfolios. The paper also writes that the Spanish government is considering the possibility of converting these assets into "fiscal credits", a form of government IOU that would allow these assets to be carried on the balance indefinitely. It is claimed that this would "level the playing field" as a similar tax asset conversion has been made in Italy. Constitutional ruling expected in Portugal this week; Jornal de Negocios expects the constitutional court to rule this week about Portugal’s 2013 budget, after the Socialists’ motion of censure in parliament tomorrow, April 3. The decision could impact €500m-€1bn of budget cuts and will define the legal space for budget policies in the future. Overall, the judges will have to rule on 16 questions raised by the President and the opposition parties. There is apparently disagreement with regard to whether or not the current situation is serious enough to qualify for a ‘state of emergency; Judges will also have to rule whether the cuts are equally distributed. Hollande on new record low in polls after televised speech, even revamped 75% tax fails to convince Francois Hollande fails to convince in televised address, especially with his economic policy; Hollande’s approval rates reach 31%, Sarkozy’s all time low; In his speech
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Hollande presents a revamped 75% tax – levied at company level rather than household income; French finance ministry expects more revenues, about €500m per year, from fewer contributors; The much heralded television appearance of Francois Hollande failed to impress. An Ifop survey showed that most voters found Hollande unconvincing on 10 out of 12 key issues, according to the the FT. The Ifop poll for Paris Match showed that on economic issues Hollande lost seven percentage points, with only 27% satisfied. 58% are still content with his foreign policy, notably the intervention in Mali. On total, with only 31% satisfied, Hollande is now as unpopular as Nicolas Sarkozy after four years. Even on his once-popular flagship election campaign promise to impose a 75% marginal tax rate on incomes above €1m, the president was found to be unconvincing. To preserve his promise, Francois Hollande announced that the levy will be paid by companies rather than households. The new version of the tax is to be taken at the company level on salaries above €1m. The finance ministry expects almost two times more revenues from than the original version, that is €500m per year, but concentrated on smaller population, about 1000 taxpayers rather than 1500, writes Les Echos. Free professions are exempted, footballers included. The tax is in force for two years and is to be voted in spring. Employer organisations showed their outrage against the brand against businesses, saying the tax confirms the anti-business attitude of the government. The two smaller Greek coalition partners are opposed to extending property levy for another year; Reform minister Antonis Manitakis conceded delays in the set-up of the mobility scheme, pleading for more time; Just three days before the anticipated return of the troika, Greece’s fragile coalition government struggles to find a common front on pending issues such as the extension of the property tax and the much delayed civil service reduction scheme, Kathimerini reports. While Samaras party prefers to impose the property levy on electricity bills for one more year to secure €3bn in revenues, the Democratic Left warned they would vote against it in parliament while Socialists consider to do the same. Another controversial issue is the downsizing of the public sector. In comments on Monday, Administrative Reform Minister Antonis Manitakis conceded that the 25,000 staff who are supposed to enter the mobility scheme by the end of the year have not yet been identified, pleading for more time to complete the staff evaluation and implement a so-called mobility scheme when he called it a “titanic task” that needs a long time because along with the reform, a lot of deeply rooted practices and attitudes need to change. Coalition partners met yesterday night in an attempt to resolve pending issues. Greece to extend bank recapitalisation deadline for a ‘few more weeks’ Greece to extend deadline for the recapitalisation of its banks by a few weeks, possibly until end of May; Greece will extend a deadline for the recapitalisation of its banks by a few weeks, possibly until the end of May, Greek central bank president George Provopoulos was quoted by Reuters. Provopoulos confirmed that Greece's foreign lenders were concerned about National Bank's takeover of Eurobank, as a combined group would have assets worth €170bn and 36% of total bank deposits. Though there seem to be no question to undue the merger. Gerhard Schroder says Angela Merkel has done a good job on the euro;
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We are referencing this story not because it has any significance in itself – Gerhard Schroder saying Angela Merkel is doing a good job on the euro crisis. What we find interesting is this has become such a pre-dominant narrative that it will likely hold until the elections. Schroder said Merkel had hesitate too much in the beginning, but she was now showing the needed leadership in the eurozone crisis. Der Spiegel carries an interview with the former German chancellor in which he said: “She is leading with restraint. And to my mind that's a good thing." Comment: What strikes us about this comment is that the euro crisis policies are not going to be the biggest issue in the elections. The SPD has not found its own narrative. The most damning thing they say about Merkel’s euro strategy is that her initial hesitation would be costing Germany some money. It is fair to conclude that a change in government will not change Germany’s euro policies – in that sense the German elections will have few consequences for the eurozone rescue policies. When should a country leave the eurozone? Wolfgang Munchau lists the economic criteria of when a country has a rational interest in leave the eurozone and finds that these criteria clearly signal an exit for Cyprus and others; In his FT column Wolfgang Munchau asks the question at which point does a country have an economic interest at leaving the eurozone. He poses two tests, the first is whether the banking system is sustainable in the absence of a meaningful banking union, and the second is whether total indebtedness is sustainable on the basis of realistic expectations of future economic growth. He says Cyrprus passes neither test. But even for Spain, the answer is possibly negative. He says that in terms of the economic arguments, the hurdle for leaving the eurozone is shockingly low. He says politics will no doubt trump economics – but cannot do so in the long run. Simon Wren-Lewis tries hard to understand the Austerity – but fails; In his latest blog entry Simon Wren-Lewis tries very hard to understand the Austerians. So he looks at the recent paper by Buti and Carnot, which he says deserves respect as it is an economically argued exposition of the case in favour of austerity. He summarises their argument as follows: “We recall that large adjustments are needed in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions.” But he then says there is a fundamental error in this argument: “It essentially involves the prioritisation of issues. Fiscal adjustment is seen as the overriding priority. Issues involving the state of the economy are secondary: they are one factor in judging the appropriate speed of adjustment. This is the wrong way around. The major priority at the moment should be doing something about the demand led recession in the Eurozone (and other countries like the UK). The budgetary position of some countries is a secondary factor that may influence the country by country balance of any fiscal actions required to deal with this priority.” April 02, 2013 This Previous day Yesterday Morning France 0.746 0.737 0.755 Italy 3.527 3.473 3.483 Spain 3.831 3.777 3.786
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Portugal 5.159 5.144 5.140 Greece 11.639 11.200 11.15 Ireland 2.996 2.935 2.950 Belgium 0.957 0.948 0.967 Bund Yield 1.271 1.287 1.277
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.281 1.2859
Yen 119.760 119.43
Pound 0.842 0.8447
Swiss Franc 1.216 1.2158
ZC Inflation Swaps previous last close
1 yr 1.3 1.3
2 yr 1.32 1.32
5 yr 1.6 1.6
10 yr 1.9 1.9
Euribor-OIS Spread
previous last close
1 Week -5.600 -4.3
1 Month -2.857 -2.757
3 Months 4.071 3.871
1 Year 32.786 32.586
Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-04- 02.html?cHash=b176609d68de50c8a1dbd6fad5ad4134
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Research-based policy analysis and commentary from leading economists Deposit insurance after Iceland and Cyprus Anne Sibert, 2 April 2013 Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points that that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this. Related / The capital controls in Cyprus and the Icelandic experienceJon Danielsson/ Europe’s Cyprus blunder and its consequencesNicolas Véron/ Cyprus is differentMarco Annunziata/ Cyprus: The next blunderCharles Wyplosz The facts are now well known. The largest banks in Cyprus are insolvent, but too big for the government of Cyprus to save – at least if it wanted to avoid the ‘double drowning’ fate of Iceland and Ireland. In those nations, governments trying to rescue banks found themselves needing a rescue. No surprise, then, that the message to Nicosia was: find €5.8 billion without increasing the country’s indebtedness. This was delivered to President Nicos Anastasiades on Friday 15 March 2013 by an ECB executive board member. The €5.8 billion figure was what Cyprus would have to add to the €10 billion offered by the European Stability Mechanism (ESM). The ECB threat that drove the deal The threat was clear and credible. Laiki, the second largest bank in Cyprus, had been living off ‘emergency’ ECB loans (i.e. Emergency Liquidity Assistance loans). Without a rescue package that recapitalised the banks, the ECB would cut these off. The likely result of this would have been the fall of Laiki and of the largest Cypriot bank – the Bank of Cyprus. With these in ruins, financial disarray would have reigned. Depositors’ savings would have been wiped out, and borrowing from the Eurosystem would have disappeared. As a euro-based banking system doesn’t work without euros, Cyprus would probably have no choice but to exit and to issue its own currency. The ramifications of this have been often discussed (see Eichengreen 2007, Buiter 2012, Buiter and Rahbari, 2011a, 2011b, 2012). • This new currency would immediately plummet in value, taking with it the value of Cypriot assets. • Euro-denominated foreign liabilities under foreign law could not be redenominated without triggering a default. Without such a redenomination, default would also be inevitable.
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• The Cypriot standard of living would be devastated. See Danielsson (2013) for a description of how things have worked out in Iceland. Desperate to avert such a catastrophic scenario, Anastasiades looked to the only source of readily available cash – Cypriot bank deposits. Possibly fearing capital flight and bank runs if he taxed solely the large (and thus uninsured) deposits and also possibly believing that many of the large deposits had been broken into small deposits, he proposed a levy on all bank deposits in Cyprus. Small-deposit holders would be taxed at a rate of 6.75%. Fortunately a proposal that spares small depositors and instead wipes out both the junior and senior bondholders of Laiki, and imposes huge losses on its large-deposit holders, has since replaced this scheme. Deposit protection Even though it wasn’t adopted, the extraordinary proposal that small depositors should lose a part of their savings – a proposal that had the approval of the Eurogroup, ECB and IMF policymakers – raises the question: • Is there any credible protection for small-bank depositors in Europe? And if the answer is no, should there be? Members of the European Economic Area – this covers the EU plus Switzerland, Norway and Iceland – are required to set up deposit-insurance schemes that cover most depositors up to 100,000 euros. The directive allows member states to choose among different types of schemes, and the idea is that they will be funded by taxing resident banks. • The intent of the legislation appears to be to ensure schemes funded by credit institutions are in place to protect small depositors in the event of the failure of a small or medium-sized bank. • The question of how depositors are to be compensated if such a scheme is set up and the scale of a banking crisis is such that the scheme lacks the necessary funds is left unanswered. Either the directive is not meant to cover such a scenario or it is a classic example of mandating without funding. The Iceland precedent Cyprus is not the first time deposits security came into doubt. When the Icelandic bank Icesave went down, the relevant court ruled that the Icelandic government was not legally obligated to repay UK and Dutch depositors in a timely fashion (EFTA Court 2013).1 Here is the key: • The court accepted Iceland’s argument that the EU directive was never meant to deal with the collapse of an entire banking system. It noted that the provision of a scheme that was both financed solely by credit institutions and that was able to guarantee coverage in the case of a systemic collapse would itself undermine the stability of the financial system (para 158) and that the provision of a scheme backed by a legal obligation of the state would have a negative effect on competition (para 164).2 Lessons: Deposit insurance as a political vs legal commitment The Cyprus and Iceland lesson is clear:
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• Deposit insurance is only insurance for small crises. • Sufficiently large bank failures or system collapses are a different matter. In such cases, small depositors are only safe if the sovereign has both the ability and willingness to compensate them. Consider the ex-ante ability of Cyprus and Iceland to assure their bank deposit: • In 2011, assets of commercial banks in Cyprus with Cypriot parents were about five times Cyprus’s GDP. • Including subsidiaries of foreign banks domiciled in Cyprus (and covered by Cyprus’s deposit insurance) the ratio is about seven (IMF 2011). • In Iceland, the assets of the three large Icelandic banks were about 11 times as large as Icelandic GDP prior to their collapse. Looking at this, and noting the precedents set in Iceland, it seems clear that these deposits were not insured for the case of systemic failure. Cyprus and bankruptcy realities When a business fails, its creditors must take their losses, otherwise no market economy would function effectively. If the creditors of banks do not take losses when banks fail then banks will take on too much risk. There are two reasons why it may be desirable to protect small depositors, however. • The ‘widows and orphans’ argument that small and financially unsophisticated investors should be protected; and • The efficiency argument that It is inefficient for large numbers of small-deposit holders to devote resources toward assessing the health of complex financial institutions. (Although by now, even the most gullible should be wary of tempting interest rates offered by large banks inhabiting tiny island nations.) Although these arguments are appealing, some might assert that the 100,000 euros of coverage is excessively large. Avoiding bank runs A third argument that is sometimes made is that deposit insurance prevents contagion. That is, if depositors at failed banks are forced to take losses then there may be runs on solvent banks as well. The idea is that if each depositor believes that all other depositors will run and as a consequence an otherwise solvent bank will fail, then it is optimal for each depositor to run as well. As a result the bank fails. Observing depositors lose their money at a failed bank is the sort of event that might coordinate the beliefs of depositors of solvent banks in such a fashion. But the argument misses an important point. There are other ways to prevent self- fulfilling bank runs. Runs on solvent banks can be prevented or their effects mitigated by having a central bank such as the Eurosystem that is a credible lender of last resort. This argument alone provides no need for transfers from either taxpayers or other credit institutions to any of the creditors of a failed bank. Conclusion If the EEA is wants to provide credible deposit-insurance schemes that cover the collapse of large banks or (not too large) banking systems, then it needs schemes that are jointly and severally funded. However, it is unreasonable to expect the area as a
330 whole to bail out a particular country’s banks unless it can also supervise that country’s banks. This is problematic for the EEA or even the EU, but it may be possible – at least in the Eurozone – when and if the single supervisory mechanism comes into being. References Buiter, Willem (2012),“Greece and the Eurozone: Political leaders should get off their high horses”, Vox Talks, VoxEU.org, 20 February. Buiter, Willem and Anne Sibert (2008), "The Icelandic Banking Crisis and What to Do about It", April, reprinted as CEPR Policy Insight No. 26, 29 October. Buiter, Willem and Ebrahim Rahbari (2011a), "A Greek Exit from the Eurozone: A Disaster for Greece, a Crisis for the World", Citi Economics, Global Economics View, 13 September. Buiter, Willem and Ebrahim Rahbari (2011b), "The future of the Eurozone: fiscal union, break-up or blundering towards a 'you break it you own it Europe'", Citi Economics, Global Economics View, 9 September. Buiter, Willem and Ebrahim Rahbari (2012), "Rising Risks of Greek Eurozone Exit", Citi Economics, Global Economics View, 6 February. Buiter, Willem, Ebrahim Rahbari, Juergen Michels and Guillaume Menuet (2012), "EMU Crisis Outlook: Lender of Last Resort on the Way", Citi Economics, Global Economics View, 28. Danielsson, Jon (2013). “The capital controls in Cyprus and the Icelandic experience”, VoxEU.org, 28 March. Eichengreen, Barry (2010), “The euro: Love it or leave it?” VoxEU.org, 17 November 2007; reposted 4 May 2010. EFTA Court (2013), "Judgement of the Court (on deposit-guarantee schemes – Obligation of result – Emanation of the State – Discrimination)", Luxembourg, 28 January. European Union (2009), "Directive 2009/14/EC of the European Parliament and of the Council", Official Journal of the European Union, 11 March. IMF (2011), "Cyprus: 2011 Article IV Consultation", Washington, DC, November. Pirker, Benedict (2013), "Case E-16/11 ESA/Iceland: It might be called a life jacket but it doesn’t mean it's built for emergencies", European Law Blog, 30 January.
1 EFTA Court (2013). Iceland was bound by an earlier version of the directive – Directive 94/19/EC, which had less stringent wording. The revision suggests that policymakers realise the shortcomings of the directive. 2 It is possible that the Court of Justice of the EU would have a different interpretation. The same question can be put to both courts with different interpretations. See Pirker (2013). http://www.voxeu.org/article/deposit-insurance-after-iceland-and-cyprus
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ft.com comment opinion April 2, 2013 7:33 pm Britain’s welfare state can be cheaper and popular By Graeme Cooke To satisfy deficit hawks and social justice doves a radical reshaping is needed, writes Graeme Cooke
©Bloomberg Depending on which political party you believe, this week has either seen the end of the welfare state as we know it or – as Chancellor George Osborne argued in a speech on Tuesday – sanity restored to an out of control benefit system. This is not the first government to prune social security expenditure, but the scale and timing of its moves are striking. Benefit spending will be reduced by about £21bn by the end of the parliament, in the teeth of virtually no growth and falling real wages. This will leave the benefits bill about 10 per cent smaller than it would otherwise have been. MoreON THIS STORY/ Osborne to attack welfare-reform critics/ Janan Ganesh Tories ignore signs in rush for the exit/ Editorial The retreat of the welfare state/ Tristram Hunt Talk of ‘shirkers’ echoes Victorian past/ Duncan Smith promises to deliver ON THIS TOPIC/ New IT warning over universal credit/ Osborne defends welfare reforms/ Duncan Smith defends benefit changes/ Welfare state sees big contraction IN OPINION/ Barney Frank Financial reform coming to America/ Peter Tasker Japan and UK must lead reflation/David Gardner Ankara pulls at Kurdish thread / Apostolos Georgopoulos and Margaret Mahan More Bam The coalition wants to marry its argument about deficit reduction to public anger about welfare. However, the symbolic moves – such as the cap on the total amount of benefit
332 payments to a household – save little. The big savings come from changes in how benefits rise with inflation, which will go largely unnoticed by those unaffected. This disconnect between politics and economics is a sign of the strategic weakness of the coalition’s approach. The government is neither addressing the drivers of higher social spending nor the reasons why some voters are unhappy with the legitimacy of the welfare state. Even after all the cuts, social security spending is still set to be £40bn higher in 2017/18 than it was at the start of this parliament. However, almost three-quarters of this increase is due to the rising cost of the state pension, not a rising tide of “scroungers”. Across this period, the share of benefit expenditure on pensions will rise from 46 per cent to 54 per cent (excluding tax credits). When it comes to the welfare part of social security costs, the Labour party is right that unemployment is keeping benefit spending high. But the government is also correct to say that recent rises are not all driven by the lack of economic growth. The trouble is that ministers are not acting on the deeper factors. To take one example, it is the lack of affordable housing and high private rents that are behind the growth in housing benefit spending, not a sudden surge in the spare rooms that come under the so-called bedroom tax. The risk for the government is that, without reforms to reduce the demands on welfare, it will press down on spending in one area, just to see it popping up elsewhere. Of course, popular resentment towards the welfare system is not only about cost but also culture. Successive governments have weakened the link between what people pay in and what they get out, to the point where the “contributory principle” – the cornerstone of the postwar settlement – has almost faded from working-age benefits. There are strong arguments for targeting support to those in the greatest immediate need but it comes at the cost of undermining the powerful idea of decent protection in respect of past contributions. Despite the rhetoric about rewarding work, universal credit – the planned single system for benefits – is means-testing on steroids. But those opposing the welfare measures should be careful not just to defend the status quo. A way to satisfy both deficit hawks and social justice doves requires the radical reshaping of social security, in the service of controlling costs and rebuilding popular consent. This could start with a shift in spending from things such as HB and benefits for children into house building and better childcare. This would lower prices, boost jobs and improve value for money. It could involve a job guarantee that limited the time anyone could be unemployed – and support for a living wage that would reduce dependence on tax credits. It could make symbolic moves that rebuild the contributory principle so that for those that pay in to the system, more generous protection is available at key life moments, such losing a job or having a baby. This system could be funded through reverting to an earnings-linked state pension or a faster withdrawal of UC as earnings rise. There are no easy choices on welfare. But such an approach could combine fiscal responsibility with a more resilient, popular welfare state. The writer is research director at IPPR and was expert adviser at the Department for Work and Pensions during the last government http://www.ft.com/intl/cms/s/0/140ea9bc-9b93-11e2-8485- 00144feabdc0.html#axzz2PU2C7w00
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George Osborne: we will make work pay Chancellor defends welfare reforms as necessary to fix a broken system as protests against change grow louder Patrick Wintour, political editor The Guardian, Tuesday 2 April 2013
George Osborne will insist welfare changes are a positive reform of a bloated system. Photograph: Luke Macgregor/Reuters The chancellor will launch a counter-offensive in the increasingly bitter war over welfare, accusing his critics of a cowardly defence of vested interests, and claiming the increase in the personal tax allowance introduced this month will make work pay. With a week-long chorus of protest from Labour, charities and church groups constantly intensifying, George Osborne, in a relatively rare set-piece speech, will insist the changes are not simply a necessary evil to tackle the deficit, but a positive reform of a bloated welfare system. But his claim that most families will benefit this week from the increase in the tax allowance will be immediately challenged by a leading thinktank warning that the move will be undermined by the introduction of the new universal credit. The majority of the benefit from raising the personal tax allowance will be eaten up by welfare reductions under the universal credit, the Resolution Foundation claims, arguing the government is "giving with one hand, while taking away with another". Osborne, convinced that Labour is on the wrong side of the welfare argument politically and intellectually, will claim the current system is broken, and that the reforms he is introducing this month will leave the average voter better off. His claim is focused solely on measures being introduced from this week and is designed to show that the furore over welfare cuts should be counter-balanced by the impact of the latest increase in the personal allowance. Osborne will say the reforms are "about making sure that we use every penny we can to back hard-working people who want to get on in life. This month we will make work pay." Putting himself on the side of the "striving" classes, he will say: "For too long, we've had a system where people who did the right thing – who get up in the morning and work hard – felt penalised for it, while people who did wrong thing got rewarded for it. That's wrong."
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Speaking to employees at a supermarket distribution centre, he will round on the loud complaints from those who defend the current benefit system. He will say: "These vested interests always complain, with depressingly predictable outrage, about every change to a system which is failing. I want to take the argument to them. Defending every line item of welfare spending isn't credible in the current economic environment." He will add: "Defending benefits that trap people in poverty and penalise work is defending the indefensible. The benefit system is broken; it penalises those who try to do the right thing; and the British people badly want it fixed. We agree – and those who don't are on the wrong side of the British public." Although some of his remarks are aimed at church groups which have been critical of the welfare reforms, he will reserve his most savage criticism for the shadow chancellor, Ed Balls, saying: "Some politicians seem to think we can just wish away Britain's debt problem. They want to take the cowardly way out, let the debt rise and rise and just dump the costs on to our children to pay off." He will claim welfare payments became so generous that people felt better off on the dole, adding: "Once it becomes the norm in an area not to work, welfare dependency can become deeply entrenched, handed on from one generation to the next." He will accept the Thatcher government contributed to this welfare culture in the 1980s by introducing incapacity benefit as a way of taking the long term unemployed out of the statistics, describing it as quick fix politics of the worst kind. In an attempt to reverse the impression the country is being pushed towards unreasonable austerity, he will claim the measures announced this month will mean nine out of 10 working households (around 14m households) will be better off by, on average, almost £300 a year. Osborne includes in this calculation the £1,335 increase in the personal allowance, freezing of council tax and fuel duty, and limiting many benefit rises to 1% this year. His figures do not include the unemployed. Labour said IFS figures show that the average family will be £891 worse off this year because of the cumulative effect of tax and benefit changes since 2010. The Resolution Foundation, in a new report, warns that Osborne's plans to introduce universal credit, merging different benefits, will undermine the impact of personal allowances. More than two-thirds of the benefit of a tax cut will be taken away from a universal credit claimant and returned immediately to government. Universal credit, merging six different benefits, is due to be phased in this year. Its warning also applies to Labour's plan for a 10p starting rate of income tax, and suggests the whole political class has not yet found a way to integrate its flagship reforms into a coherent tax and welfare package. In a new report it says: "Tax cuts will not, in large part, reach low to middle income working households. This is because universal credit is calculated on the basis of net income, meaning that any tax cut that boosts a household's income also reduces their UC support. Put another way, any tax cut will give with one hand and take away immediately most of the gains with the other. No party has questioned this basic aspect of UC's design." The report argues: "A tax allowance hike of £1,000 would be expected to lead to a gain of £200 in post-tax income. However, this increase in post-tax income leads to a reduction of £130 in universal credit, and therefore a net gain of just £70. This means that rather than every taxpayer gaining a flat rate £200, those in the greatest need gain barely a third of this amount – while those higher up, and not in receipt of universal credit, gain the full amount." http://www.guardian.co.uk/politics/2013/apr/02/george-osborne-work-welfare- tax?CMP=EMCNEWEML6619I2
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Free exchange // Economics Decoupling. One expensive euro Apr 2nd 2013, 21:13 by Ryan Avent | WASHINGTON MOST of the time, American economic trends closely track those in Europe and vice- versa. When growth in one slows so does growth in the other. When one's economy tanks so does the other's, as in late 2008. And when recovery begins in one, so too does a rebound begin in the other, as in mid-2009. Sort of. In fact, America managed slightly better growth in the early years of the Great Recession than did the euro area. The overall divergence in recovery paths widened slowly through 2010, but as of 2011 the gap has grown much larger. For a simple reason: America's economy has trundled on growing at a fairly steady pace over the past two years while the euro-zone economy has been stuck in recession. The contrast only seems to be growing starker. Forecasters now reckon that the American economy may have grown at close to a 4% annual pace in the first quarter of 2013. Meanwhile, the euro area's recession once again appears to be deepening; the latest PMI data are particularly bleak. In March, manufacturing activity declined across the euro area, from Germany to Greece. Through February, unemployment continued to worsen, albeit at a slowing pace. The March figures now coming in suggest the early- 2013 slowdown in job loss has probably come to an end.
At the moment there is little reason to expect America to fall below recent trend growth in 2013 and little hope that the euro-area will escape recession. If we take America's performance as a good estimate of potential rich-country growth (rather than, more likely, a very conservative lower bound), then we can take this growing Atlantic divergence as a measure of policy-induced macroeconomic failure: in other words, the gap in output and welfare that Europeans are needlessly costing themselves by behaving foolishly. Were they only behaving as foolishly as Americans, they could be doing substantially better.
As of the fourth quarter of 2012, real output in America was about 2.5% above the level of the fourth quarter of 2007 and it is rising. In the euro area, by contrast, real output was about 2.5% below the end-2007 level, and falling. Had the euro-area economy followed the American path, its members would have produced about €110 billion in additional output in the fourth quarter of 2012. We can expect that sum to grow for at least the next few quarters. And remember, that's a flow, not a stock. Cumulative losses relative to the American trend, since the end of 2007, topped €500 billion as of the end of last year. Though we don't yet have first quarter figures, we can reasonably assume that the true shortfall is now close to €700 billion. The figure looks even worse when
336 one considers that America still has an estimated output gap of about 6% of GDP. And don't forget that the euro zone is an economy that drove itself to the brink of crisis, most recently, over a funding shortfall of €17 billion. That €700 billion works out to over €2,000 for every man, woman, and child in the euro area. That kind of money could come in handy given the euro area's interest in balancing budgets.
So the question is: what explains the difference between the American trend and the European one? "The crisis, duh", while an accurate answer is a little too vague to be helpful. Back in late 2011, The Economist published a briefing on the dark waters into which the euro zone appeared to be heading, based on lessons learned from the Depression. The Depression, the piece argued, emerged from a nasty feedback loop. Some heavily indebted economies, like Germany, faced pressure to begin running large current account surpluses in order to pay back loans. The gold standard prevented devaluation, however, and instead forced countries into import-crushing downturns to generate the needed surplus. Other economies, unwilling to allow their current accounts to swing to large deficits lest they suffer gold outflows, tightened monetary policy in response, running themselves into the ground and making Germany's situation intolerable. At the same time, economic downturns squeezed banks, leading to waves of bank failures. The gold standard helped transmit banking panic. Capital outflows placed pressure on central banks to raise interest rates (to hang on to gold reserves), which increased the odds of bank failure, which accelerated the pace of outflows. The result was economic collapse and catastrophe, broken only by the end of the gold standard and which even then left political chaos in its wake. There are obvious parallels to the euro-area crisis. The single currency entails many of the same constraints as the gold standard. Had no lessons at all been learned from the 1930s, the euro area's economic trajectory would surely have more closely resembled that of the Depression, perhaps made somewhat less serious by modern safety nets and mature (perhaps that's the wrong word) democratic governments. It still might; Matt O'Brien updates the Depression story here. But today's policymakers do know more about how not to fight crises than their 1930s counterparts. That difference in knowledge is the reason the euro area is falling hundreds of billions short of an 337 achievable output path rather then several trillion. And so I think there might be a different and more effective way to describe what's happening in Europe. Let's say that America's output path represents "intellectual potential". The gap between a Depression-like path for America's economy and its actual path represents a gain attributable to the macroeconomic knowledge attained since the 1930s. I, like many others, think that the American economy could be doing even better—could in fact be operating at estimated potential. But policymakers lack an intellectual consensus on how to get there. Thus, intellectual potential. Europe is falling short of intellectual potential. This shortfall isn't "structural" in the usual sense; it has only emerged over the past two years or so. It could be due to a "Great Forgetting" in the euro area—a systematic loss of macroeconomic knowledge isolated to one corner of the global economy—but that seems unlikely, and the European Central Bank's refusal to give in to liquidationism suggests the lessons of the Depression have not leaked out of Mario Draghi's brain. No, the gap instead corresponds to the euro area's failure to implement an institutional framework capable of delivering intellectual potential. There are a number of different ways that it could tweak its framework to do so. But none of them appear to be politically manageable. That such large costs might materialise as a result of the euro's adoption has always been a possibility, but only now are they being realised. Thanks to the American counterexample, they are being realised very, very visibly. (This story is a little crude—one might ask whether Europe could duplicate America's shale bonanza, for instance—but to a first approximation it works.) The gold standard was a powerful idea which delivered unquantifiable benefits and unquantifiable costs. The powerful fear of the unknown kept the gold standard intact even as the costs of Depression mounted. But once the dominoes began falling, they fell quickly. Even America, with enormous gold reserves and therefore, seemingly, a strong interest in maintaining the standard, only remained on gold for two more years after the system began to unravel in 1931. The threat that disaster might befall any euro member to drop out may continue to keep economies in line. But America represents a wild card that wasn't present in 1931: a very large and very rich economy not on the prevailing standard and not suffering for it. The gap between the euro zone and America is the counterfactual, the but-for path, that helps illustrate just how damaging the single currency has been. Leave the euro area and you may not immediately spring back to that alternate path, leaders around the periphery may think, but at least you'll stop sinking, and you can sell your wares to the world's healthy economies at a steep discount relative to your neighbours. I had been surprised at how long euro-area residents seemed content to suffer through the continent's economic mess. But maybe I shouldn't have been; until recently, it wasn't obvious that other large, rich economies could manage much better. Now it is, and it will become more obvious every quarter. Perhaps the American example will motivate euro-area leaders to change course. If not, the temptation to abandon a sinking ship will only grow. http://www.economist.com/blogs/freeexchange/2013/04/decoupling
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Nouriel Roubini Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. La economía mundial al vuelo 01 April 2013 ESTAMBUL – En las últimas cuatro semanas, viajé a Sofía, Kuala Lumpur, Dubái, Londres, Milán, Fráncfort, Berlín, París, Pekín, Tokio, Estambul y por todo Estados Unidos. Así, nunca me sentí demasiado lejos de la infinidad de desafíos que enfrenta la economía mundial. En Europa, el riesgo de una excepcional ruptura de la zona del euro y la pérdida de acceso a los mercados para España e Italia disminuyó gracias a la decisión del Banco Central Europeo de crear una red de protección para la deuda soberana el verano pasado. Pero los problemas fundamentales de la unión monetaria –bajo crecimiento potencial, recesión sostenida, pérdida de competitividad y grandes volúmenes de deuda pública y privada– no han sido resueltos. Por otra parte, el gran acuerdo entre el núcleo de la zona del euro, el BCE y la periferia –dolorosa austeridad y reformas a cambio de asistencia financiera a gran escala– está resquebrajándose a medida que la fatiga por austeridad en la periferia choca con la fatiga por rescate en los países centrales de la zona del euro, como Alemania y los Países Bajos. La fatiga por austeridad en la periferia se percibe claramente en el éxito de fuerzas antiestablishment en la reciente elección italiana; en las grandes demostraciones callejeras en España, Portugal y otros sitios; y también en el malogrado rescate de los bancos chipriotas, que ha alimentado un intenso enojo popular. En toda la periferia, los partidos populistas de izquierda y derecha ganan terreno. Mientras tanto, la insistencia de Alemania en imponer pérdidas a los acreedores de los bancos en Chipre es el último síntoma de fatiga por rescate en el centro. Otros miembros centrales de la zona del euro, ansiosos por limitar los riesgos para sus contribuyentes, han señalado de manera similar que los rescates mediante reestructuración de la deuda con pérdidas para los acreedores (bail-in) son lo que se viene. Fuera de la zona del euro, incluso el Reino Unido lucha por recuperar el crecimiento debido al daño causado por los esfuerzos de consolidación fiscal concentrados al principio del período, mientras que el sentimiento antiausteridad gana fuerza en Bulgaria, Rumania y Hungría.
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En China, la transición en el liderazgo ha sido suave. Pero el modelo económico del país continúa, según las famosas palabras del ex primer ministro Wen Jiabao, «inestable, desequilibrado, falto de coordinación e insostenible». Los problemas de China son muchos: desequilibrios regionales entre sus regiones costeras y el interior, y entre las zonas urbanas y rurales; ahorro e inversión fija excesivos e insuficiente consumo privado; aumento de la desigualdad en el ingreso y la riqueza; y una enorme degradación ambiental que pone a la salud pública y alimentaria en peligro por la contaminación del aire, el agua y el suelo. Los nuevos líderes del país hablan seriamente de profundizar las reformas y reequilibrar la economía pero, por su inclinación, mantienen la cautela, el gradualismo y el conservadurismo. Además, el poder de los intereses creados que se oponen a la reforma –las empresas estatales, los gobiernos provinciales y los militares, por ejemplo– aún debe ser derrotado. Como consecuencia, es posible que las reformas necesarias para reequilibrar la economía no ocurran lo suficientemente rápido para evitar una caída brusca cuando, el año que viene, la inversión se derrumbe. En China –así como en Rusia (y parcialmente en Brasil e India)– el capitalismo de estado se ha afianzado más y esto no augura nada bueno para el crecimiento. En general, se exageró el desempeño de estos cuatro países (los BRIC). Otras economías emergentes pueden mostrar mejores resultados durante la próxima década: Malasia, las Filipinas e Indonesia en Asia; Chile, Colombia y Perú en Latinoamérica; y Kazajistán, Azerbaiyán y Polonia en Europa del Este y Asia Central. Más hacia el Este, Japón intenta un nuevo experimento económico para detener la deflación, impulsar el crecimiento económico de recuperar la confianza de las empresas y los consumidores. La «Abenomía» tiene varios componentes: estímulos monetarios agresivos del Banco de Japón; un estímulo fiscal este año para cebar la demanda, seguido por austeridad fiscal en 2014 para poner límite a los déficits y la deuda; un empuje para aumentar los salarios nominales e impulsar la demanda interna; reformas estructurales para desregular la economía; y nuevos acuerdos de libre comercio – comenzando con el Acuerdo Transpacífico– para impulsar el comercio y la productividad. Pero los desafíos son sobrecogedores. No queda claro si se puede vencer a la deflación con política monetaria; el estímulo fiscal excesivo y la austeridad diferida pueden hacer que la deuda se torna insostenible; y los componentes de la reforma estructural de la Abenomía son vagos. Por otra parte, las tensiones con China por reclamos territoriales en el Mar de China Oriental pueden afectar adversamente al comercio y a la inversión directa extranjera. Luego está el Oriente Medio, que se mantiene como un arco de inestabilidad desde Magreb hasta Pakistán. Turquía –con una población joven, gran potencial de crecimiento y un dinámico sector privado– busca convertirse en una importante potencia regional. Pero enfrenta muchos desafíos propios. La propuesta turca para unirse a la Unión Europea está actualmente estancada, al tiempo que la recesión en la zona del euro desalienta su crecimiento. Su déficit de cuenta corriente aún es grande y su política monetaria ha sido confusa, ya que el objetivo de impulsar la competitividad y el crecimiento entra en conflicto con la necesidad de controlar la inflación y evitar una excesiva expansión del crédito.
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Además, si bien han aumentado las probabilidades de un acercamiento con Israel, Turquía enfrenta graves tensiones con Siria e Irán, y el partido Islámico en el poder aún debe demostrar que puede coexistir con la tradición política secular del país. En este frágil entorno mundial, ¿se ha convertido EE. UU. en un faro de esperanza? Los estadounidenses han experimentado varias tendencias económicas positivas: la vivienda se recupera, el gas y el petróleo de pizarra reducirán los costos energéticos e impulsarán la competitividad; la creación de empleos mejora; los crecientes costos laborales en Asia y la llegada de la robótica y la automatización apuntalan un resurgimiento manufacturero; y la agresiva flexibilización cuantitativa ayuda tanto a la economía real como a los mercados financieros. Pero aún existen riesgos. El desempleo y la deuda de los hogares continúan obstinadamente altos. La carga del aumento impositivo y los recortes del gasto impactarán sobre el crecimiento; y el sistema político es disfuncional: la polarización partidaria impide lograr compromisos sobre el déficit fiscal, la inmigración, la política energética y otros temas clave que influyen sobre el crecimiento potencial. En suma, entre las economías avanzadas, EE. UU. es la que está en mejor situación relativa, seguida por Japón, donde la Abenomía impulsa la confianza. La zona del euro y el RU continúan sumidos en recesiones, empeoradas por restrictivas políticas monetarias y fiscales. Entre las economías emergentes, China podría enfrentar una caída brusca a fines de 2014 si se posponen las reformas estructurales críticas; y los demás BRIC deben alejarse del capitalismo de estado. Si bien otros mercados emergentes en Asia y Latinoamérica muestran un mayor dinamismo que los BRIC, su empuje no será suficiente para revertir la marea mundial. Traducción al español por Leopoldo Gurman. This article is available online at: http://www.project-syndicate.org/commentary/surveying-the-world-economy-s-myriad- problems-by-nouriel-roubini/spanish
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The day Britain changes: welfare reforms and coalition cuts take effect A new world heaves into view this week with sweeping changes in the fields of welfare, justice, health and tax Patrick Wintour, political editor guardian.co.uk, Monday 1 April 2013 10.00 BST
David Cameron leaves No 10, Downing Street: many of his government's radical cuts and reforms are due to be introduced this week. Photograph: Andrew Winning/Reuters
Monday 1 April Bedroom tax introduced The aim is to tackle overcrowding and encourage a more efficient use of social housing. Working age housing benefit and unemployment claimants deemed to have one spare bedroom in social housing will lose 14% of their housing benefit and those with two or more spare bedrooms will lose 25%. An estimated 1m households with extra bedrooms are paid housing benefit. Critics say it is an inefficient policy as in the north of England, families with a spare rooms outnumber overcrowded families by three to one, so thousands will be hit with the tax when there is no local need for them to move. Two- thirds of the people hit by the bedroom tax are disabled. Savings: £465m a year. As many as 660,000 people in social housing will lose an average of £728 a year.
Monday 1 April Thousands lose access to legal aid Branded by Labour a "day of shame" for the legal aid system, the cutoff to claim legal aid will be a household income of £32,000, and those earning between £14,000 and £32,000 will have to take a means test. Family law cases including divorce, child custody, immigration and employment cases will be badly affected. Savings: a minimum £350m from £2.2bn legal aid bill.
Monday 1 April
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Council tax benefit passes into local control Council tax benefit, currently a single system administered by the Department for Work and Pensions, is being transferred to local councils with a reduction in funding of 10%. Council tax benefit is claimed by 5.9 million low-income families in the UK. The new onus on councils has come at a time when local government funding, according to the Institute for Fiscal Studies, has fallen by 26.8% in two years in real terms. A Guardian survey of 81 councils last week found many claiming they face difficult cuts, with almost half saying they were reducing spending on care services for adults. This also comes at a time when 2.4m households will see a council tax rise. Savings: up to £480m a year, but depends on decisions of local councils.
Monday 1 April NHS commissioning changes for ever An NHS commissioning board and a total of 240 local commissioning groups made up of doctors, nurses and other professionals will take control of budgets to buy services for patients. They will buy from any service providers, including private ones so long as they meet NHS standards and costs. Strategic health authorities and primary care trusts disappear. Costs: £1.4bn, mainly in redundancies, followed by savings as high as £5bn in 2015 owing to fall in staff numbers.
Monday 1 April Regulation of financial industry changes The Financial Conduct Authority and Prudential Regulation Authority, housed in the Bank of England, replace the Financial Services Authority. The Bank promises these changes do not represent the death and Easter resurrection of the same body. A new, proactive supervisory approach towards the City is promised, focused on outcomes rather than a tick-box culture. It has powers to prosecute, throw people out of the industry and withdraw a bank's licence. Above all it monitors risk to the financial system as a whole.
Saturday 6 April 50p tax rate scrapped for high earners Announced in the 2012 budget. George Osborne said the 50p rate, introduced in April 2010, caused massive distortions in 2010-11 and raised only £1bn, rather than the £2.5bn forecast by Labour back in 2009. HMRC found £16bn was deliberately shifted into the previous tax year, largely by owner/directors of companies taking dividends in the previous year when the highest rate was still 40p. Labour claims 13,000 millionaires will get a £100,000 tax cut.
Monday 8 April Disability living allowance scrapped The personal independence payment (PIP) replaces the disability living allowance and, according to the DWP, is not based on your condition, but on how your condition affects you, so narrowing the gateway to the PIP.
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It will contain two elements: a daily living component and a mobility component. If you score sufficient points, a claim can be made. Assessments will be face-to-face rather than based on written submissions, starting in Bootle benefits centre, handling claims across the north-west and north-east.
Monday 8 April Benefit uprating begins For the first time in history welfare benefits and tax credits will not rise in line with inflation and will instead for the next three years rise by 1%. Had there been no change benefits would have risen by 2.2%. Disability benefits will continue to rise in line with inflation. Savings: £505m in the first year, rising to £2.3bn in 2015-16. Nearly 9.5 million families will be affected, including 7 million in work, by £165 a year.
Monday 15 April Welfare benefit cap The most popular of the welfare reforms will begin on 15 April in the London boroughs of Bromley, Croydon, Enfield and Haringey. The intention is that no welfare claimants will receive in total more than the average annual household income after tax and national insurance – estimated at £26,000. Other councils will start to introduce it from 15 July and it will be fully up and running by the end of September. Some estimate 80,000 households will be made homeless. The DWP says around 7,000 people who would have been affected by the cap have moved into work and a further 22,000 have accepted employment support to move into work. Households where someone is entitled to working tax credits will not be affected. Savings: £51m over three years.
28 April Universal credit introduced The new in- and out-of-work credit, which integrates six of the main out-of-work benefits, will start to be implemented this April in one jobcentre in Ashton-under-Lyne, Greater Manchester. The aim is to increase incentives to work for the unemployed and to encourage longer hours for those working part-time. It had been intended that four jobcentres would start the trial in April, but this has been delayed until July, and a national programme will start in September for new claimants. They will test the new sanctions regime and a new fortnightly job search trial, which aims to ensure all jobseeker's allowance and unemployment claimants are automatically signed onto Job Match, an internet-based job-search mechanism. Suspicion remains that the software is not ready. http://www.guardian.co.uk/politics/2013/mar/31/liberal-conservative-coalition- conservatives
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Coalition policies: cuts and credibility This week, Britain may have reached one of those rare moments when the music stops and politics is redefined. Editorial The Guardian, Monday 1 April 2013 22.43 BST
This week, Britain may have reached one of those rare moments when the music stops and politics is redefined. April 2013 is certainly a moment of severe change in many important fields of public policy – further cuts and reforms in welfare spending, localisation of council tax benefit, wholesale reorganisation of commissioning within the NHS, new systems of regulation in financial services, cuts in legal aid and, at the end of this week, new lower top tax rates for higher earners and new raised tax thresholds for all. The question for politics is whether this will mark the breaking point for the resigned stoicism that has characterised public opinion since cutting the deficit became such a dominant issue. No one can be certain about that. The welfare state and the NHS will still exist in 2015. And to say this ought to be the breaking point does not make it so. The view that there is no, or not much, practical alternative is tenacious and not simply to be scorned. Yet it is about to be tested under fire. This week's changes are big, and there are a lot more still to come. Next week, benefit rates will be cut in real terms, while in the months to come a new benefit cap, and the universal credit, will be piloted and then go into general circulation. Bear in mind, too, that more than half of the total planned benefit cuts have yet to come into force. The practical outcome of these changes is extremely grim for hundreds of thousands of already financially hard-pressed people. And the Conservatives, however well-meaning some of them may be, will never be widely trusted with the welfare system. End of argument? Not necessarily. For one thing, the net effect of George Osborne's March budget is a modest giveaway to many taxpayers. That may help mitigate the effect of this week's changes for a lot of people, if only in the short term. Moreover, given the scale of the public debt, the continuing increase in public borrowing, and the rises in expenditure on welfare, pensions and health, there is a legitimate mainstream argument to be had about whether a mass of changes of this kind represents an attempt at a regrettable but necessary restructuring of some sort – whether well or badly executed is a separate but equally important argument – or simply an ideological onslaught on public spending in itself. There is certainly room for more greys as well as the usual blacks and whites in that argument, as Labour's marked reluctance to commit to reversing these changes underlines. But the coalition has few grounds for complacency. It has hugely damaged its own case by the sustained failure to stimulate growth in the economy. The early claim that four years of pain were necessary to get the public finances into balance has given way to a destructive downward spiral of stagnation followed by cuts, followed by more of both. Now there is little end in sight to either of them. The credibility of the measures coming into force this week is fatally undermined by that changed context. And this is reinforced by the fact that government policies can work in opposite directions. The so-called bedroom tax, for instance, is supposed to
345 encourage mobility in social housing, yet social housing continues to give priority to those with a local connection, which is a disincentive to mobility. Meanwhile, as the Resolution Foundation argues, universal credit and raised income tax allowances – both flagship coalition policies – may be conspiring to cut, not increase, the incomes of the working poor. Ministers believe that the public mood has hardened against the benefits system. There is some evidence to support their view. But that would feel a lot stronger if the government's general economic strategy looked effective. In the continued absence of that, putting money into the hands of people who will spend it is one of the more effective ways of stimulating demand, yet the government is now actively taking it away from them. It all tends towards a politically devastating conclusion, well known from the chants of the football terraces. They don't know what they're doing. http://www.guardian.co.uk/commentisfree/2013/apr/01/coalition-policies-cuts- credibility-editorial
David Cameron snubbed as Germany and France ignore UK survey on Europe Boycott of impact assessment 'questionnaire' on EU laws and regulations seen as indication of Tories' isolation abroad Nicholas Watt, chief political correspondent The Guardian, Monday 1 April 2013 22.00 BST
David Cameron's EU survey has been ignored by German chancellor Angela Merkel in a deliberate snub to the prime minister. Photograph: Carsten Koall/AFP/Getty Images David Cameron has been dealt a major blow after Angela Merkel and François Hollande snubbed a special UK exercise to assess the impact of EU laws and regulations on Britain and the rest of Europe.
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In a sign of the prime minister's growing isolation in Europe after his decision to promise a referendum on Britain's membership of the European Union, Paris and Berlin have decided jointly to boycott the British "balance of competences" review. The decision by France and Germany is a particular setback to Cameron, who said in his long-awaited speech on the EU in January that nothing should be off the table in the review, which will examine every area of EU lawmaking. In an attempt to show it has an open-minded approach, Britain sent letters to the other 26 EU members asking for their thoughts on the impact of EU laws in areas ranging from the single market to the environment. The letters, dubbed questionnaires in Paris and Berlin, were sent after William Hague, the foreign secretary, launched the review last July. It will report in stages from this summer. But France and Germany, who form the EU's "big three" with the UK, have decided to steer clear of the review because they see it as driven by British politics. A French diplomat said: "This is a British domestic political exercise. We have therefore decided we would not participate." It is understood that only a few EU countries have replied to the letters. These include Italy, run until recently by Mario Monti's technocratic government, and Sweden, whose centre-right prime minister, Fredrik Reinfeldt, is Cameron's closest ally in the EU. The boycott by France and Germany, which went to the trouble of co-ordinating their positions at senior levels, will disappoint Cameron, who set great store by the decision of Merkel to give a guarded welcome to his EU speech. Berlin's decision to ignore the British "balance of competences" review follows a clear private warning from Merkel that, if re-elected in September, she would grant little of substance to Cameron in his demands for a renegotiation of the terms of Britain's EU membership before the UK's referendum, which the prime minister has said would be held by 2017 at the latest. Hollande has been publicly dismissive of Cameron's speech. The Tories plan to use the review to help them decide on which areas to renegotiate. Cameron showed the importance of the exercise in his speech announcing the referendum in January when he said: "Our balance of competences review [will] give us an informed and objective analysis of where the EU helps and where it hampers." Whitehall sources are putting a brave face on the Franco-German snub. One senior figure said: "It is shrug your shoulders time. We are not put-out." A government spokesperson said: "This is intended to be an open and transparent process so of course we have invited other EU countries to contribute, and indeed several have along with a number of international organisations, but we recognise others consider this an essentially domestic review and have decided not to so far. "Ultimately, the analysis will be focused on what the EU means for the UK and our national interest so our priority is the British audience and we've had a good response from stakeholders here so far. "Of course, we're regularly working with our European partners to reform the EU to make it more competitive, for example at the last summit the PM worked with Hollande and Merkel to secure agreement that the EU will identify areas where it an withdraw legislation that is no longer necessary." The Franco-German decision shows how Britain has become increasingly isolated in Europe after the prime minister's speech in January. The foreign secretary had high
347 hopes of co-operation from across the EU for his review when he launched the exercise last July in a statement to MPs. Hague said: "The review will be an outward-facing exercise, both domestically and internationally." The boycott will come as something of a disappointment to ministers because British diplomats across the EU have gone out of their way to stress that the exercise will be conducted in an even-handed way. Civil servants will submit reports to a three-strong ministerial team chaired by David Lidington, the Europe minister, which also includes Mark Hoban, the work and pensions minister, and Lord Wallace of Saltaire, the Liberal Democrat whip and European affairs academic who is the party's representative in the Foreign Office. The senior Whitehall source said: "The team is carefully balanced. William Wallace taught half the foreign ministers in Europe. His wife [European affairs academic Dame Helen Rushworth] taught the other half." The ministers are due to receive the drafts of the first six reports within weeks. These cover the internal market, foreign policy, development co-operation and humanitarian aid, taxation, health, animal health and welfare and food safety. Lidington and his team will assess the reports and could ask for them to be rewritten if they are written in EU jargon. "We don't want the language of the Berlaymont," one source said, referring to the name of the Brussels headquarters of the European commission. Once the ministerial team have approved the reports, they will then be sent to the European affairs committee of the cabinet. The senior Whitehall source said: "The letters explained our approach and said we would welcome contributions. It was important to show that this is not about putting together a list of demands that form a path to the exit route." The review was set up in the coalition agreement after the Lib Dems blocked the Tories from repatriating social and employment laws from the EU. The reports will not make policy proposals but will instead summarise evidence submitted. Each coalition party will be free to use the reports to draw its own conclusions. http://www.guardian.co.uk/politics/2013/apr/01/david-cameron-eu-survey-merkel
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Latest Central Bank Reserve Data Author: Marc Chandler · April 1st, 2013 · At the end of last week, the IMF reported the latest reserve figures for Q4 2012. Overall currency reserves stood at $10.9 trillion at the end of last year, up $734.5 bln over the course of the year. Most central banks provide the currency allocation of their reserves. There are two notable exceptions: China, which regards the information as a state secret and Taiwan, which is not a member of the IMF. Unallocated reserves total $4.85 trillion, the lion’s share accounted for by these two nations. In terms of percentages of allocated reserves, the dollar’s share slipped to 61.9% from 62.1%. The euro’s share was unchanged at 23.9%. The yen’s share eased to 3.9% from 4.1%. A more nuanced look at what took place is possible by looking at the change in amounts rather than percentages. For example, the decline in the share of allocated reserves account for by the dollar does not mean that a single dollar was sold. To the contrary, central banks added $31.4 bln to their reserves in Q4 and $247 bln all of last year. Of the 2012 increase, $78.5 bln was accounted for by the high income countries (what the IMF calls “advanced”). The means that developing countries were net buyers of dollars and hardly diversifying away from the greenback. Allocated reserves held in euros rose $20.6 bln in Q4, this is after pullback a $11.5 bln decline in Q3 and are now the highest since Q2 2011. Last year, the high income countries bought $106 bln worth of euros for reserves. However, developing countries sold almost $45 bln of euros over the could of 2012; reducing euro holdings in each quarter, except for the Q1 12. In Q4 2012, sterling and yen holdings were pared by $2.7 bln and $8.5 bln respectively. Nearly the entire $26.7 bln that sterling reserves rose in 2012 could be accounted for by the high income countries ($21.2 bln). Of the $33 bln increase in yen holdings, the high income countries accounted for a little more than 2/3. High income countries are also account for the lion’s share of the diversification into the “other” category, which is dominated by the Australian and Canadian dollars. The share of allocated reserves accounted for by this category stands at a record 6.1% at the end of last year. Roughly $54.8 bln was added to this category last year, of which $40.5 bln was purchased by the high income countries. In either Q1 or Q2 this year, the IMF will break out the Australian and Canadian dollars from the “other category”, to better reflect what is actually taking place. It is an accounting function, not normative in the sense for prescribing what countries ought to do. Lastly, despite the relatively low volatility in the foreign exchange market, the IMF’s data needs to be adjusted for valuation swings. The figures used for the IMF’s calculations show that the dollar rose 2.5% against sterling and the yen by 11.5% in Q4 12, while it appreciated by 2.1% against the euro. Over the course of 2012, the dollar slipped 2% against sterling and euro, while appreciated about 11.4% against the yen. This piece is cross-posted from Marc to Market with permission. http://www.economonitor.com/blog/2013/04/latest-central-bank-reserve- data/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+econo monitor%2FOUen+%28EconoMonitor%29
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April 1, 2013 Cyprus Was Not an Exception By THE EDITORIAL BOARD The recent crisis in Cyprus has highlighted the curious and dangerous phenomenon of banking systems that are much bigger than the economies in which they are based. One reason the government of Cyprus struggled to deal with its failing banks was that their assets were seven times as big as the country’s economy. Cyprus is not the only such country in the euro zone. Luxembourg and Malta, which have established themselves as tax havens serving big global corporations and the superrich, have banking systems that are even larger. Luxembourg’s bank assets are a staggering 22 times its gross domestic product, and Maltese bank assets clock in at eight times the size of its economy. Leaders of both countries have insisted that they should not be compared with Cyprus and that they expected European leaders to stand behind their governments and banks come what may. Speaking of his banking system, the finance minister of Luxembourg, Luc Frieden, said: “We want to expand it further, not to downsize it.” Banks in Luxembourg and Malta, many owned by big European and American financial firms, are healthier than those in Cyprus, according to the International Monetary Fund. But the I.M.F. raised concerns about the ability of the countries to properly monitor their banks or support them in a crisis. In other words, the euro zone and the I.M.F. would have to step in to bail them out if they ran into trouble. In any case, the euro zone needs urgently to finish work on a banking union that would allow the European Central Bank to supervise large banks instead of leaving that task to national policy makers who may be too protective of their banks. Europe should also have a common process to restructure troubled banks, which should reduce the risk of Cyprus-like debacles. A banking union would also give savers more confidence that their insured deposits are truly guaranteed, an assurance that was deeply shaken by what happened in Cyprus. Thankfully, the crowds were not as big and chaotic as people had feared when banks in Cyprus reopened last week after for two weeks — but only after the country imposed tough capital controls to prevent depositors from fleeing. Europeans may not be as lucky next time. Meet The New York Times’s Editorial Board » http://www.nytimes.com/2013/04/02/opinion/cyprus-is-not-an- exception.html?ref=global&_r=0
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Calculated Risk Update: Recovery Measures by Bill McBride on 4/01/2013 05:44:00 PM By request, here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments. Note: The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. These graphs show that some major indicators are still below the pre-recession peaks.
This graph is for real GDP through Q4 2012. Real GDP returned to the pre-recession peak in Q4 2011, and hit new post-recession highs for five consecutive quarters. At the worst point - in Q2 2009 - real GDP was off 4.7% from the 2007 peak. This 2nd graph shows real personal income less transfer payments as a percent of the previous peak through the February report. This measure was off 11.2% at the trough in October 2009. Real personal income less transfer payments returned to the pre-recession peak in December, but that was due to a one time surge in income as some high income earners accelerated earnings to avoid higher taxes in 2013. Real personal income less transfer
351 payments declined sharply in January, and were 3.7% below the previous peak in February.
The third graph is for industrial production through February 2013. Industrial production was off over 17% at the trough in June 2009, and has been one of the stronger performing sectors during the recovery.
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However industrial production is still 1.2% below the pre-recession peak. This indicator will probably return to the pre-recession peak in 2013.
The final graph is for employment and is through February 2013. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions. Payroll employment is still 2.2% below the pre-recession peak. All of these indicators collapsed in 2008 and early 2009, and only real GDP is back to the pre-recession peak (personal income returned to the previous peak in December due to a one time increase in income). At the current pace of improvement, industrial production will be back to the pre-recession peak later this year, personal income less transfer payments late in 2013, and employment in late 2014. Read more at http://www.calculatedriskblog.com/#AMIjEJZgJOAvE2Xm.99 http://www.calculatedriskblog.com/2013/04/update-recovery-measures.html
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04/01/2013 02:48 PM Bomb from Brussels Cyprus Model May Guide Future Bank Bailouts Should the Cypriot bailout become a model for the future? The mere suggestion sent markets tumbling last week. But increasing numbers of European politicians would like to see bank shareholders and investors bear a greater share of crisis risk. The EU may be changing its strategy. By SPIEGEL Staff Jeroen Dijsselbloem's original game plan was to just keep a low profile. When the 47- year-old Dutch finance minister became head of the Euro Group three months ago, the first thing he did was deactivate his Twitter account. In meetings of the finance ministers of the 17 euro-zone states, he let his counterparts do most of the talking. And whenever he appeared before reporters in Brussels afterwards, he would start with sentences like: "Maybe it's good, if I say something." Dijsselbloem seemed determined to become the most boring of all the boring bureaucrats in Brussels -- until last Monday, that is, when he did something no one would have anticipated: He detonated a bomb. The way that large depositors and creditors were being drawn into the bailout of Cypriot banks, he said, could become a model for the entire euro zone. In future aid packages, he said, one must look into whether bank shareholders, bond holders and large depositors could participate so as to spare taxpayers from having to foot the bill. He was announcing nothing less than a 180 degree about face. Cyprus as a model? Dijsselbloem had hardly finished his comments before international news agencies began registering its impacts. Markets around the world nosedived, the euro sank to a four-month low and EU leaders had to rush into damage-control mode, as did the man who triggered the storm himself. Dijsselbloem backtracked by saying that Cypriot banks were obviously "a special case." Germany's top-selling daily tabloid, Bild, scoffed that Dijsselbloem would get a new nickname in Brussels: "Dusselbloem," the rough equivalent of "Dimwit-bloem." But the ridicule might prove premature. In reality, Dijsselbloem merely expressed something that many Europeans already think. Whether at the European Parliament or in several Continental capitals, many are saying that the time is ripe for the financial sector to assume a greater share of the costs for rescuing ailing banks. 'Banks Must Save Themselves' More is at stake than determining just how to deal with insolvent financial institutions. It is about core tenets of the bailout strategy being followed by the EU. Since the collapse of Lehman Brothers in 2008, it has primarily been EU taxpayers who have assumed liability for the fallout. Failing banks, such as Germany's Hypo Real Estate (HRE) or Spain's Bankia, were kept on artificial life support while shareholders and creditors were spared. The advantages were enjoyed not only by actors on the global financial markets, but also by major banking centers, such as those in Luxembourg and London, which could count on seeing governments prop up teetering financial institutions.
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A growing number of politicians and experts are demanding an end to this arrangement. In the future, German Chancellor Angela Merkel said, "banks must save themselves." And German central bank board member Andreas Dombret is convinced that the financial sector can only regain health once there are no longer "implicit state guarantees for banks." These guarantees were one of the fundamental reasons why Germany's state-owned Landesbanken invested in worthless securities, why Irish and Spanish banks financed excessively dubious real estate projects, and why Cypriot banks became a hub for investors with a penchant for tax evasion. The guarantees were also responsible for causing banks' balance sheets to swell to many times the value of their countries' annual economic performance. "It's not that there are just individual lending institutions that are too big to be allowed to fail," Dombret says. "There are clearly entire banking systems for which the same holds true." A country's financial sector, he adds, must be designed so that a national economy can cope with a downturn on its own. But where is that the case? The balance sheets of Cypriot banks are seven times as large as the island's annual gross domestic product. The ratio is similar in Ireland, even though the banks in these countries have been being downsizing for four years. The imbalance is even more glaring in Europe's smallest countries, such as Malta and Luxembourg, where the bank balance-to-GDP ratio is 8-to-one and 22-to-one, respectively. Since the outbreak of the crisis, the euro zone has succeeded in pruning back the banks, and their balance sheets are now only 3.5 times the size of the currency union's combined economic performance. But, in recent years, while hundreds of mainly smaller banks have been shut down in the United States, Europeans have closed their eyes to the dangers. Stepping Into the Breach Christine Lagarde, the former French finance minister and current head of the International Monetary Fund (IMF), spoke in Frankfurt on March 19 about the progress that has been made in banking regulations, saying that 20 banks had been "resolved" since 2007 and that 60 have undergone "deep restructuring." Though impressive at first glance, these figures are misleading. Most of the banks were nationalized (such as HRE and Northern Rock), subsumed by other institutions (Sachsen LB) or broken down into smaller units (WestLB). Few have actually disappeared. More than anything, however, Lagarde's figures fail to indicate who bore the costs of rehabilitating the banks. "Since the outbreak of the financial crisis," Dombret says, "taxpayers have unfortunately been forced to step into the breach with all difficulties." Indeed, since 2008, the European Commission has authorized €5 trillion ($6.4 trillion) in aid for the financial sector, equivalent to 40 percent of the EU's combined economic performance. Germany alone has allocated €646 billion to its banks. In the process, private creditors have only been asked to make a modest contribution. For example, the Irish government put four times as much capital into rescuing domestic banks as private creditors did, and the ratio is similar in Spain. Likewise, shareholders of failing institutions have by no means lost their money in all cases. Owners of shares in Commerzbank, for example, were allowed to retain their stakes even though the bank, Germany's second-largest, received €18.2 billion in state aid.
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In many cases, simply too little could be taken from the shareholders to stabilize the institutions. "The Cypriot case vividly shows how little capital resources Europe's banks possess to absorb possible losses," says Harald Hau, 46, a finance expert at the University of Geneva. In his view, the unequal distribution of burdens between bank shareholders and taxpayers is by design -- he speaks of "existing banking socialism." The banks' lack of sufficient capital has made taxpayers de facto shareholders because they are unfailingly asked to pony up whenever a bank runs into trouble. But unlike the real shareholders, Hau notes, taxpayers are "in no way compensated for this risk." Including the Creditors In the case of Cyprus, European leaders have demonstrated for the first time that the burdens can be distributed differently. Laiki Bank, the country's second-largest financial institution, will be dismantled, and the remaining private shareholders of the already largely nationalized bank and its creditors will shoulder its losses. But the plan also calls for bank customers with large deposits to share in the pain for the first time: Deposits above €100,000 will be drawn on to help cover the bank's losses. "The plan is good because creditors and major depositors will be included," says Daniel Gros, director of the Brussels-based Centre for European Policy Studies. He also believes that the Cyprus solution could become a blueprint for dealing with banks in other EU countries in crisis. In recent years, Gros continues, banks and their creditors have been bailed out because people have kept in mind the dramatic market turbulences that followed in the collapse of Lehman Brothers. But he thinks people will now say: "Look at Cyprus. The market reacted positively to the plan to close down a major bank and have its creditors bear the costs." Forcing private creditors to participate in bailing out faltering banks has, to be sure, triggered worries about the possible flight of capital from ailing countries. Bank customers and creditors could "relocate (their money) from the weak to the strongest institutions," says Uwe Burkert, head of credit analysis at the Landesbank Baden- Württemberg, a publicly owned regional bank based in the southwestern German state. However, the financial markets have so far reacted to the conditions set for bailing out Cypriot banks with surprising calm. Indeed, ever since July 2012, when European Central Bank President Mario Draghi pledged that the EU's central bank would "do whatever it takes to preserve the euro," the situation in economically troubled euro-zone countries has stabilized considerably. If this calm persists, there is nothing to block the implementation of Dijsselbloem's plans. Indeed, even the European Commission backs them in principle. As early as last June, Internal Market Commissioner Michel Barnier presented the initial draft of an EU directive on bank liquidation. The draft envisions forcing private investors to bear more of the costs when banks run into trouble. However, Hau, the finance expert at the University of Geneva, criticizes the plan for not clearly specifying exactly which investors will be compelled to participate and in which order. Dissent from Luxembourg Precisely this issue is currently being discussed at the European Parliament. "We want to clearly strengthen the position of deposit customers," says Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Likewise, any deposits over
356 that amount would only get hit if the losses couldn't be fully covered by a bank's shareholders and other creditors. But governments and parliamentarians are fighting fiercely over the fine print. Officials representing Finland, the Netherlands and Germany want to pull in the financial sector as quickly and comprehensively as possible. But highly indebted Southern European countries, as well as governments fearing for their domestic financial sectors, are stepping on the brakes. Luxembourg Finance Minister Luc Frieden, for example, has warned about the dangers of following the Cyprus model of making people with deposits greater than €100,000 help pay for bailouts. "This will lead to a situation in which investors invest their money outside the euro zone," he said. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers." Despite major opposition, backers of Dijsselbloem's strategy believe their chances are improving. This has prompted Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats in Berlin, to call for implementing the rules for winding down banks by 2014 rather than the currently planned 2018. "Societal and political acceptance is ending for the model of bank rescues in which the state protects bondholders and major investors," he says. Dombret, the Bundesbank board member, likewise believes it would be sensible to push up the introduction of the new rules to 2015. Norbert Berthle, the parliamentary budget expert for Chancellor Merkel's conservatives, acknowledges that, "we first have to pull shareholders and creditors into a bank's rescue." Dijsselbloem Holds Firm In the end, however, one must conclude that, while Dijsselbloem's proposal may have been correct, it won't make it easier for EU leaders to resolve the euro debt crisis. On the one hand, the debate is urgently needed to put an end to the banking sector's business principle holding that profits should be privately enjoyed while losses are borne publicly. On the other, the issue threatens to spark new conflicts within the euro zone. Indeed, the dispute over Europe's banking system could soon become just as bitter as that between Northern and Southern Europe. Either way, Dijsselbloem is determined to wage the battle. Though he has said that he no longer thinks the Cyprus bailout is a good model, he still intends to hold firm to the crux of his approach. "Now that the situation is more calm and the financial markets seem to have become more steady and easier, we should start pushing back the risks," Dijsselbloem said in an interview with the Financial Times and Reuters last week. "Taking the risk from the financial sector and taking it on to public shoulders is not the right approach." BY MARTIN HESSE, MICHAEL SAUGA, CORNELIA SCHMERGAL and CHRISTOPH SCHULT Translated from the German by Josh Ward URL: • http://www.spiegel.de/international/europe/cyprus-bank-bailout-model-has- increasing-numbers-of-adherents-in-eu-a-891849.html
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Related SPIEGEL ONLINE links: • Capital Flight Accusations: Probe Puts Cypriot President Under Pressure (04/01/2013) http://www.spiegel.de/international/europe/0,1518,891925,00.html • Photo Gallery: The EU's Changing Approach to the Crisis http://www.spiegel.de/fotostrecke/fotostrecke-95021.html • Bail-In Blues: Luxembourg Warns of Investor Flight from Europe (03/29/2013) http://www.spiegel.de/international/europe/0,1518,891672,00.html • Suspicious Transactions: Cypriot Parliament Investigating Capital Flight (03/27/2013) http://www.spiegel.de/international/europe/0,1518,891168,00.html • False Start: Is the New Euro Group Head Up to the Task? (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891102,00.html • Bailout Insights: What Cyprus Tells Us about Germany's Character (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891063,00.html • Lessons from Cyprus: Euro Crisis Poses Grave Dangers to EU Unity (03/25/2013) http://www.spiegel.de/international/germany/0,1518,890745,00.html 04/01/2013 04:15 PM Capital Flight Accusations Probe Puts Cypriot President Under Pressure By Georgios Christidis in Thessaloniki Several Cypriot companies were allegedly able to move millions out of the country ahead of tight capital restrictions imposed as part of the recent bailout. President Anastasiades has been accused of passing on insider information to relatives to help them avoid losses. A new list containing the names of dozens of companies and individuals who allegedly emptied accounts worth hundreds of million of euros held at Laiki Bank -- just days before Nicosia enforced capital controls and a steep losses on holders of savings accounts -- are causing a political earthquake in Cyprus. The latest revelations come just days after the publication of another list containing names of businesses and prominent Cypriot politicians who allegedly saw their loans generously written off by Cypriot banks. The "war of the lists," as it is been labeled by local media, is raging. The new list published by Cypriot and Greek news media includes 132 names of companies and individuals who withdrew a total of €700 million in the days before the bank lock- down. The list contains names of shipping and energy companies, legal practices and even state-run companies. The transfers were all made in the first half of March, just in the crucial period before the March 15 Euro Group crisis meeting on Cyprus. The online edition of Greece's top-
358 selling Sunday newspaper Proto Thema argues that "there are legitimate suspicions that some people had insider information about the decisions eventually reached by the euro zone." One of the companies on the list belongs to relatives of Cypriot President Nicos Anastasiades. The company is said to have transferred millions of euros out of Cyprus to a bank account in London. Writing Off Debts The publication of the list comes just days after another media report was published revealing the cozy relationship between Cypriot politicians and the country's banks in recent years. Late last week, the Cypriot news website 24h.com.cy published a catalogue of initials of those who had allegedly seen loans generously written off by Cypriot banks. On Friday, the Greek investigative reporter Kostas Vaxevanis -- who was briefly imprisoned in 2012 for publishing the names of prominent Greek tax dodgers -- republished the catalogue complete with full names. The report reveals that both Laiki and the Bank of Cyprus had generously forgiven millions of euros worth of loans taken out by parliamentarians, municipal authorities and companies in recent years. Among the beneficiaries are prominent members of all political parties in the country, with many seeing well over €100,000 in debt wiped off the books. Some debts worth over €1 million were written off. But it is the more recent list of those who allegedly managed to move their money out of the country that has increased pressure on President Anastasiades. A report originally published by Cypriot newspaper Haravgi, affiliated with the country's communist AKEL party, indicates that a company owned by the father of the president's son-in-law, removed deposits worth €21 million from Laiki Bank on March 12 and 13. Half of the sum was then transferred to London and half to the Bank of Cyprus, which was considered safer at the time, according to the newspaper. Just two days later, the Euro Group agreed on a plan to impose one-time levies on holders of savings accounts with Cypriot banks. The country's financial institutions then remained closed for almost two weeks before reopening last Thursday with strict capital controls in place to prevent a bank-run. Uninsured depositors of Laiki Bank, the country's largest lender, as well as those holding accounts with the Bank of Cyprus, are in danger of losing up to 60 percent of deposits in excess of €100,000. 'Much Work to Do' President Anastasiades vehemently denies accusations of having passed along information from the euro-zone negotiations. In a written statement, he claimed that the story is an attempt "to distract people from the responsibilities borne by the culprits that bankrupted Cyprus." Talking to reporters on Sunday, he again rejected the accusations: "I neither knew (about the details of the bank levy) in advance (of the meeting) nor would it have been possible to be engaging in battle with the Euro Group until the early hours of Saturday and passing out inside information at the same time." The company also denies any wrongdoing, arguing that the money transfers were made for business reasons and that the company still maintained millions of euros in accounts in Cyprus. But even supporters of the president are concerned about the accusations and are demanding more information. In a Monday commentary, conservative Cypriot newspaper Fileleftheros writes that "as ordinary Cypriots line up outside soup kitchens
359 and swallow their pride, having no other choice but to become beggars, everyone, particularly the political leadership of the country, must prove they are beyond reproach." It said that the explanations thus far provided by Anastasiades and the company in question are "not satisfactory." The issue is to be examined by a special committee appointed by the government to shed light on the events that bankrupted Cyprus. The committee, consisting of high- ranking judges, will be sworn in on Tuesday. President Anastasiades has pledged he will not exempt himself from the investigation. Cypriot state prosecutors have also said they will examine the accusations. "There is much work to do," a spokesperson said on Sunday. URL: http://www.spiegel.de/international/europe/cyprus-investigating-allegations- of-covert-capital-flight-a-891925.html Related SPIEGEL ONLINE links: • Bomb from Brussels: Cyprus Model May Guide Future Bank Bailouts (04/01/2013) http://www.spiegel.de/international/europe/0,1518,891849,00.html • Bail-In Blues: Luxembourg Warns of Investor Flight from Europe (03/29/2013) http://www.spiegel.de/international/europe/0,1518,891672,00.html • Gloomy Economic Horizon: Cypriot Banks Reopen amid Calm and Fear (03/28/2013) http://www.spiegel.de/international/europe/0,1518,891608,00.html • Suspicious Transactions: Cypriot Parliament Investigating Capital Flight (03/27/2013) http://www.spiegel.de/international/europe/0,1518,891168,00.html • False Start: Is the New Euro Group Head Up to the Task? (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891102,00.html 04/01/2013 12:17 PM Developing World Euro Loses Attraction as Reserve Currency Countries in the developing world are drastically reducing their euro holdings as economic instability in Europe leads them elsewhere to stock their currency reserves. Euro holdings are at their lowest level in a decade, according to the International Monetary Fund. When the euro was first launched on Jan. 1, 1999, there were hopes in Europe that it might soon rival the US dollar as the world's premier reserve currency. And initially, it seemed that dream was not unrealistic, as countries around the world began filling their coffers with the European common currency. Now it looks as though that trend is beginning to reverse, though. Following years of crisis, developing countries are beginning to look elsewhere for their reserve currency needs -- and have spent the last year and a half shedding euros. That is the message to be gleaned from the latest installment of the regular International Monetary Fund report on currency reserves held by countries around the world.
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According to the report, developing economies shed some $45 billion worth of euros in 2012 and have sold close to $90 billion worth of euros since the second quarter of 2011. The numbers seem to indicate that the ongoing euro crisis, fueled by high sovereign debt loads in several countries belonging to the common currency union, has eroded global confidence in the euro. During the same period, US dollar holdings among developing economies have continued to rise. "It'll be the number two international currency but I wouldn't say there are any prospects of it challenging the dollar," Jeffrey Frankel, a professor of economics at the Kennedy School of Government at Harvard, told the Financial Times when asked about the report. Lowest Level in a Decade The IMF report indicates that the recent downturn in euro holdings marks a break following more than a decade of growth among developing nations. They now hold just a quarter of their foreign currency reserves in euros, a drop from 31 percent in 2009 and the lowest level in a decade, according to the Financial Times. The euro's diminishing attraction as a reserve currency is almost certainly a function of the bloc's recent instability. Holdings in US dollars among developing nations likewise dropped in the third quarter of 2011 following the crisis over the debt ceiling and the subsequent Standard & Poor's downgrade of US debt, though the dollar quickly recovered. Of particular concern for the euro zone is its stagnant economy, a situation that isn't likely to improve soon, with several countries struggling due to tight austerity programs. Furthermore, there is little appetite among northern European countries -- particularly in Germany -- for the introduction of expensive economic stimulus programs. That stance was underlined on Monday in an interview given by German Economy Minister Philipp Rösler to the German news agency DPA. "Debt-financed stimulus programs don't make sense," he said. "What we need are structural reforms and responsible budgets." He added that: "I think we Germans have shown that it can work. You can have both with a successful belt-tightening program: solid budgets while making growth possible." cgh -- with wire reports URL: http://www.spiegel.de/international/europe/developing-nations-retreating- from-euro-as-reserve-currency-a-891887.html Related SPIEGEL ONLINE links: • Bail-In Blues: Luxembourg Warns of Investor Flight from Europe (03/29/2013) http://www.spiegel.de/international/europe/0,1518,891672,00.html • Shredded Social Safety Net: European Austerity Costing Lives (03/27/2013) http://www.spiegel.de/international/europe/0,1518,891308,00.html • Crisis in France: Hollande Failing to Handle Unemployment (03/27/2013) http://www.spiegel.de/international/europe/0,1518,891182,00.html • False Start: Is the New Euro Group Head Up to the Task? (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891102,00.html Related internet links • IMF Report on Currency Reserves http://www.imf.org/external/np/sta/cofer/eng/index.htm SPIEGEL ONLINE is not liable for the content of external web pages.
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Topics: American vs European Roulette, rising US equity markets and continued European underpeformance Compared to Europe, the US is running easier monetary and fiscal policy, and playing a game of American Roulette: gambling that eventual withdrawals will take place at a time of higher growth, and will thus be less disruptive. On fiscal policy, after the cyclical increase in tax receipts and decline in unemployment insurance, the US fiscal deficit is projected to be ~5.5% by the end of 2013. Assuming the sequester remains in place and interest rates remain low, CBO projects a deficit of 3.7% for 2014 and 2.5% for 2015, with debt stabilizing at ~75% of GDP. However, in 2015, mandatory entitlement spending and interest start to grow more rapidly. The US is tabling this issue to another day; US equity markets seem to like the idea. There is evidence that with the help of easy money, the US private sector is recovering. As shown below, household debt service has declined to 1990 levels, and the number of consumers using credit is rising again (from a low base). Modest payroll gains and fewer jobless claims have contributed to rising auto sales and consumer spending; this is a mild surprise given recent increases in payroll and income tax rates. Housing is on the mend (particularly in states worst-hit by the crisis), and inventories continue to decline. Home sales and home prices are rising in most locations, which are driving furniture and building supply sales. By the end of 2013, the % of Americans with underwater mortgages should decline below 20% from 35%+ at the peak. However, housing is improving off such a low base that the contribution to GDP from residential construction is only ~0.5%. And while labor markets are getting better, they are not showing the substantial improvement the Fed cites as the criteria for ending its asset purchases. As a result, the Fed is adding to its 50 Trades of Grey ($2.5 trillion of US Treasury and Agency purchases and counting, measured in 10-year equivalents). We expect GDP growth of ~2.5% by the end of the year.
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US business conditions are also improving, after pausing last fall during the elections and fiscal cliff debates. Spending on equipment and software is rising, and durable goods orders are headed in the right direction. Capacity utilization is almost back to normal, and the number of private establishments is growing, a sign that the US private sector has a pulse. Commercial real estate transactions are picking up, along with a revival in securitized lending through commercial real estate and C&I loans.
These are the improvements that rallying equity markets anticipated: as shown in the first below, P/E multiples on the S&P 500 rose over the last year despite falling earnings growth. Earnings expectations for 2013 have been falling across most sectors, and may weaken further before year-end; and the ratio of negative to positive earnings guidance is at its highest level in three years. Consequently, the latest positive economic news may be mostly a validation of the market’s prior advance. While growth is still weak compared to prior recoveries, the recession that the Economic Cycle Research Institute was so sure about for 2012 never happened. We felt that 2012 and 2013 would be one of those anomalous years when equity markets would do better than
363 what growth conditions alone would imply; this view still seems to be on track as the S&P 500 hits new highs. Better economic conditions may eventually drive households and corporations to reduce their cash holdings, which are still close to the highest levels on record. The Fed won’t be making it easy for holders of cash: short-term policy rates may not rise until 2015-2016. Overall, no change to the benign view we outlined for US economics and markets in our 2013 Outlook.
Roulette: the European Version. The $13 billion bailout in Cyprus is small (in 2011, France and Germany made $80 billion of loans and grants to developing countries) and the situation is in many ways unique. However, the latest melodrama reinforces the inconsistent and chaotic nature of EU policy-making. Bondholders, equity investors, bank depositors and citizens of Europe are at risk of unpredictable outcomes as they play Eurozone Roulette. Here’s where they might land on any given spin:
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Depositor confiscation and subordination: The EU eventually backed off, but the initial proposal for Cyprus involved a confiscatory tax on small and large Cyprus depositors, both foreign and domestic, with no loss to senior bond-holders (effectively subordinating the depositors). It was a shocking policy proposal in a region where confidence is everything: uninsured bank deposits range from 45% (Spain, Germany) to 80% (UK, Italy) of total bank deposits. Note: Laiki bank branches in the UK were not subject to deposit withdrawal restrictions, even though their branches in Cyprus were. Zero risk weight applied to sovereign bonds: Even after Greek bonds suffered principal losses, EU banks have the flexibility to use 0% risk weights on EU sovereign debt as per “IRB permanent partial use rules”, regardless of the country’s credit rating. Maastricht Ja/Nein!!!: From the inception of the Maastricht treaty in 1992 to 2008, there was not a single year when both France and Germany were in compliance with Maastricht debt and deficit targets. Today, Southern Europe is pushed to get in line ASAP. Loss of tax rate sovereignty: Throughout all the difficult negotiations and bailouts, Ireland was able to keep its 12.5% corporate tax rate despite pressure from the EU to raise it. No such luck for Cyprus, which is being forced to raise its corporate tax rate from 10%. As far as I know, homogenization of EU personal or corporate tax rates was never a condition for Eurozone membership. Changing protections for senior bank bondholders: There is nothing wrong with bondholders, uninsured depositors or other creditors suffering losses when they are owed by insolvent banks whose asset values are insufficient to cover them. In Ireland however, a bailout was structured to avoid losses on some unguaranteed senior bank bonds which were subsequently repaid (a wealth transfer from Irish citizens to bondholders). In Cyprus, some senior bank bondholders are no longer protected. ax Haven Designation: Germany’s Federal Intelligence Service concluded last fall that an aid program for Cyprus would benefit certain Russian depositors with billions of dollars in deposits in Cyprus, and that “Cyprus is a gateway for money laundering activities in the EU”. Fair enough; Cyprus is seen as a personal tax haven. But according to a US Congressional Research Service report in January 2013, tax havens cater to both individuals and corporations. One measure of a corporate tax haven is when foreign sourced profits are very large relative to GDP, such that in the words of the CRS, “profits in these countries do not appear to derive from economic motives related to productive inputs or markets, but rather reflect income easily transferred to low-tax jurisdictions”. On this measure, Luxembourg leads the pack at 18% of GDP, 2x higher than Cyprus and 6x higher than Switzerland, Singapore and Panama. The degree, time and place of EU concern about tax havens can vary substantially. ECB asserts preferred creditor status: The ECB owned ~50 billion Euros of Greek sovereign debt that was not restructured along with the private sector. Typically, preferred creditor status is reserved only for entities like the IMF and World Bank. Proposed bonus caps on stand-alone asset management firms and UCITS funds (including regulated hedge funds): Because their investment activities played such a large role in the EU sovereign debt crisis? Because they were beneficiaries of official sector deposit insurance and lots of ECB lending? I can’t find evidence of either one happening, but maybe I am not looking hard enough.
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OK, enough about Cyprus. The bigger issue is that long-term growth conditions in Spain, Italy and France are as weak as they have been (other than during wartime) in over a century, as we first showed in October of last year and again last February. The chart below tells the story. While European sovereign debt spreads have rallied across the board, European bank lending to households and businesses is still declining, and the cost of small business loans in Italy and Spain is higher than both real and nominal growth. That may explain why European equity markets [a] are still trailing US counterparts (see table). As for Japan, we had a piece on March 18th that walked through why we believe its equity markets may keep rising this year despite economic data that is still pretty weak: some data is so bad (deflation actually worsened in February) that it may lead to a seismic shift in monetary and fiscal policy. On Emerging Market equities, this year’s returns are a disappointment, although over most longer-term time horizons, they have generated better returns.
Michael Cembalest / J.P. Morgan Asset Management [a] There are two indices most often referred to as “European equities”: the Eurostoxx 50 and the MSCI Europe index. They are quite different. From a constituency standpoint, there is only a 26% overlap in companies included due to the higher concentration and larger capitalization sizes in the Eurostoxx index. The other big difference is that the MSCI Europe index (which has outperformed in recent years) has very large exposures to the UK (34%) and Switzerland (14%), while the Eurostoxx has none. As such, the Eurostoxx is a better measure of the performance of Eurozone (EMU) equities, along with the MSCI EMU (European Monetary Union) index.
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See attached PDF for circled references to prior periods of long-term growth rates below zero.
BLS Bureau of Labor Statistics CBO Congressional Budget Office C&I Commercial & Industrial ECB European Central Bank FRB Federal Reserve Board UCITS Undertakings for the Collective Investment of Transferable Securities
“Tax Havens: International Tax Avoidance and Evasion”, US Congressional Research Service, Jane Gravelle, January 2013
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Is Germany too powerful for Europe? Twenty years ago, Germany's economy was stagnating. Today, as the eurozone crisis deepens, this giant is keeping Europe afloat. But what does it want in return? Stuart Jeffries talks to German sociologist Ulrich Beck, who believes that his country has become a political monster
Stuart Jeffries The Guardian, Sunday 31 March 2013 19.00 BST
Anti-German feeling . . . an employee of Cyprus Popular Bank at a protest last month. Photograph: Yannis Behrakis/Reuters In his novel Fatherland, Robert Harris envisaged a hellish scenario – Hitler won the second world war. Decades later, the Greater German Reich extends from the Rhine to the Caspian Sea. The rest of Europe, though notionally consisting of independent states, is really under the Nazi jackboot. Sound familiar? Of course not. That nightmare never came to pass. Happily, Germany does not rule Europe. Or does it? Munich-based sociologist Ulrich Beck argues in his new book that the eurozone catastrophe has given birth to a political monster: a German Europe. When, on 1 July this year, Croatia becomes a member, the European Union will contain 500 million people and be the largest market and trading bloc in the world. "The new German power in Europe is not based as in former times on force," writes Beck in German Europe. Which is a consolation. "It has no need of weapons to impose its will on other states," he says. "It has no need to invade, and yet is ubiquitous." His homeland's latest iron chancellor Angela Merkel rules Europe, imposing German values on feebler client nations, bailing out southern Europeans with their oversized public sectors, rampant tax evasion and long lunches. "In the countries most harshly affected by the crisis, many people think they are losers because the austerity policy
368 pursued jointly by Berlin and Brussels deprives them of their means of livelihood – and also of their human dignity," argues Beck. Other Germans, naturally, don't see it quite that way. The official line from the German embassy in London is that Germany is helping other European economies to become globally competitive and more able to take on emerging markets. "Germany was among the first to have started this endeavour and therefore might temporarily be a little ahead of others," says spokesman Norman Walter. "Our main political drive over the last few years has been to increase competitiveness in all eurozone and EU member states." To get a different perspective on German domination of Europe, I consult a standup comic: Henning Wehn, a German comedian who is tired of being called an oxymoron by Britons, and is in the middle of a UK tour. The blurb for his show goes: "According to Henning, there's no shortcut to success, hard work will eventually pay off and there is no shame in paying tax." How this transmutes into comedy is anybody's guess, but it seems to suggest that Wehn believes slacker Europe needs a German economics lesson. "Well, economically Germany is mainly dominant because it is the country with most people," says Wehn. "It also has several things that explain its economic success and from which others can learn – our system of apprenticeships, our building societies that help entrepreneurs. When David Cameron spoke about strivers and skivers, that reminded me of a Swabian saying: 'Schaffe, schaffe, Häusle baue!' It means: "Work, work, build your little house!' That sort of striving is deep in German identity."
Economic powerhouse … Frankfurt’s financial district, where the ECB’s HQ is located. Photograph: Odd Andersen The worry is that Germany thinks of itself as a nation of strivers bankrolling a continent of skivers. "German money [is being] thrown away on the bankrupt Greeks," ran a headline in the tabloid Bild, while Focus magazine had a cover image of the Venus de Milo giving the finger to the world. "If Ireland and Greece sank into the sea tomorrow, Germany would be quietly relieved," says Simon Winder, publishing director at Penguin and author of Germania: A Personal History of Germans Ancient and Modern. "Germany today reminds me of the British Empire, burdened with non-lucrative colonies that it has to defend when all it's really bothered about is India. The problem for Germany is that it has no India just, as it were, lots of Sierra Leones." The latest euro crisis over Cyprus bears out Beck's analysis. According to Newsnight's Paul Mason, the Germans want to "avoid creating a moral hazard, rewarding a country that has sold itself as a rule-free playground for Russians who want to
369 keep their money". For German politicians, and not just those of Merkel's ruling Christian Democratic Union, that irresponsible nonsense can't go on for ever: it's time for Cyprus to wake up and smell the austerity. Beck argues that Germany is teaching Cyprus a moral lesson, namely that, as he puts it: "Suffering purifies. The road through hell, the road through austerity, leads to the heaven of economic recovery." It's a very German lesson, borne of the philosophies of Martin Luther and Max Weber and based on the protestant work ethic. That doesn't play too well in Nicosia: hence all those "Merkel – Kaput" banners waved by soon-to-be redundant employees of Cyprus's Popular Bank. But what are the Germans getting out of teaching allegedly slacker Europeans how to run their economies? For Beck, Germany's European dominance has given the nation a new sense of identity after decades of Nazi guilt, and provides liberation from what he calls the "never again syndrome" – never again a Holocaust, never again fascism, never again militarism. After the second world war and the Holocaust, he argues, Germany was in ruins morally and economically. Now, in both senses, it is back. The origins of German economic dominance predate our current crisis. More than 20 years ago, Germany made a sacrifice for Europe at Maastricht when it agreed to put the deutschmark to the sword so that another currency could be born. "The tragedy for the Germans is that they viewed the euro as their great, healing gift to the rest of Europe, an act of self-denial in which they cashed in their totemic deutschmark for the continent's greater good," says Winder. Since the fall of Hitler, it has been Germany's self-imposed obligation to help build a Europe where the petty nationalisms that had ruined the continent in two world wars could be definitively overcome.
The prudent housewife … Angela Merkel sits before an EU flag on a visit to a Berlin school, 2011. Photograph: Sean Gallup It's all about Vergangenheitsbewältigung, which means (roughly) the struggle to come to terms with the past – and, in particular, a Nazi past. (Maybe Britain will some time undergo its own Vergangenheitsbewältigung for its imperial shame, but that's another story.) "The Germans no longer wish to be thought of as racists and warmongers," Beck says. "They would prefer to become the schoolmasters and moral enlighteners of Europe." It's a moot question whether the rest of Europe wants to be on the receiving end of German enlightenment. "Germany's chorus of I-want-to-
370 teach-the-world-to-sing doesn't play too well in Tring or Extramadura," says Winder. But that's the Teutonic song: two decades ago, Germany after reunification was once as Greece is today, with a stagnating economy and five million unemployed. But, thanks to neoliberal austerity and taking on the Protestant notion that "suffering purifies", the Germans were able to realise a jobs miracle. Now, Beck argues, German reunification is being used as the template for German crisis management in Europe. As head of the continent's strongest economic power, Merkel is in a position to dictate the terms under which struggling eurozone nations can apply for further credit, eroding the democratic autonomy of the Greek, Italian and Spanish parliaments. Beck calls her Merkiavelli – after Machiavelli – to highlight the political nous with which she has run rings around other leaders. He suggests that she is the uncrowned queen of Europe. Queen Merkiavelli the First of Europe, perhaps, demands that Germany's new colonies save in the interests of stability – a formula based on the good housekeeping practices of a woman who sometimes casts herself as a sensible Swabian housewife. Beck's chancellor sounds like Margaret Thatcher, who also prudently approached the balancing of government accounts as though they were a household budget. "There is one important difference," Beck says. "Thatcher was doing to Britain something the British electorate had voted for. What Merkel is doing to Europe has no democratic mandate." Viewed thus, Germans are power-crazed anti-democrats using economic crisis to stage a furtive putsch on a supine continent. Aren't we witnessing a German power grab? "Heavens, no. They have no imperial bone left in their body," argues Winder. "They are colonists, but incredibly reluctant ones. There is no smoke-filled room filled with sausage-eating Germans who want to dominate Europe. There is no conspiracy." "I think that's an incredibly silly point to make," says Wehn. "German dominance in Europe is not anti-democratic. There are parts of Europe that are economically ahead of other parts. It's just the same in Britain: London is economically ahead of the north-east of England. So should London leave sterling? That's obviously a silly answer. The same is true in Europe. There are fishing villages in Greece that are going to be economically negligible, while Germany is dominant. Does that mean we should leave the euro? No! A strong Europe needs a strong Germany."
Cultural export … German comedian Henning Wehn.
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There is, though, a paradox in Germany's European domination. It is economically supreme, but culturally negligible. Some of us are enjoying the Wagner bicentenary, but it can hardly be argued that his music indicates the virility of German cultural exports in the new millennium. Nobody is wearing lederhosen in Glasgow or Warsaw. Next to nobody is learning German as a foreign language. Your next box set might well be in Danish but nobody's will be in German. Fatih Akin, Christian Petzold, Hans-Christian Schmid and Ulrich Köhler have one thing in common: few have heard of these alleged icons of German new wave cinema outside Germany. Yes, the Tate's website did crash briefly when it was announced that tickets were available for the Kraftwerk gig at the Turbine Hall, but that's the exception that proves the rule. "They're living on empty, culturally," says Winder. "There's no German novel I'm looking forward to, and no German film. But it's the same throughout Europe. Europe is culturally null. Britain is the cultural dynamo of Europe by a million miles." Why is Germany failing to export its cultural goods with the success of, say, its car, machine tool or optics industries? "There's one simple reason," replies Wehn. "Bismarck didn't believe in colonies." What Wehn means by that is that the 19th- century German chancellor, who presided over a vast and recently unified people, decided not to emulate Britain, Spain and France in their imperial land grabs. As a result, German never became a global language; English became the world's most widely spoken tongue. "The English language is dominant because of Hollywood and that helps British culture," says Wehn. In a recent survey by Monocle magazine, Britain was found to be the world's leader in what's called "soft power" – a country's ability to make friends and influence people not through military might but through culture, education, language and values. "In short, the things that make people love us rather than fear us," says John Worne, the British council's director of strategy. Germany, by contrast, is feared for its economic dominance. At the same time it seems culturally insular. What a shame we don't get more German culture here. After all, the British and Germans are, one world cup and two world wars notwithstanding, simpatico. Germanophile 19th-century historian Thomas Carlyle wrote of Germany "speaking the same old Saxon tongue and thinking in the same old Saxon spirit with ourselves", while George Orwell wrote that during the first world war "the English working class were in contact with foreigners to an extent that is rarely possible. The sole result was that they brought back a hatred of all Europeans, except the Germans, whose courage they admired." Norman Walter at the German embassy argues that the case for his homeland's cultural nullity is weak. "Well, we're not exactly world champions – but we aren't that bad either." Ingeniously, he quotes back at me a string of Guardian arts stories that seem to suggest German culture thrives here. Last year's gig by heavy-metal band Rammstein in 2012 sold out within minutes and Dave Simpson's five-star review described it as "the rock show of the year". Judith Mackrell argued that Tanztheater Wuppertal's London retrospective World Cities was "revelatory". Similarly, the Economist noted that "British enthusiasm for modern German culture is quietly growing" and that "a new breed of artists is changing British tastes in German culture". And today there's Kurt Schwitters at Tate Britain, Rosemarie Trockel at the Serpentine Gallery. Nobody even mentions the great German art on show at the Northern Renaissance exhibition at the Queen's Gallery, but they really should. Yes, but visual art and music are the most readily exportable cultural products. Hardly any German literature makes it into the bestseller lists here. In Germany now, the
372 bestseller lists are dominated by Timur Vermes's novel Er is wieder da (He's back), which is about Hitler. The führer awakes in Berlin in the summer of 2011, having fallen asleep in 1945. Hitler becomes a media celebrity before entering politics where he campaigns against dog muck and speeding. The book has sold more than 400,000 copies in Germany, but is as yet untranslated here. A shame: it's a popular account of German Vergangenheitsbewältigung that deserves to be read in Britain. Maybe more Britons should learn German. And what about German TV? Why, I ask Wehn, are there no German TV series filling BBC4's 9pm Saturday night Euro-drama subtitle-a-rama slot? He contends that we aren't missing much, apart from a cop show called Derrick, which finished broadcasting 15 years ago. But why is there no German rival to Denmark's The Killing, Sweden's Wallander, Italy's Inspector Montalbano or France's Spiral? "In Germany there's no incentive to sell TV content abroad. The BBC makes a lot of money from selling foreign rights, which explains why so much of its content is shown overseas. In Germany, the contracts aren't like that – and the domestic market is huge so there's no incentive." What does a German Europe mean for the economically bumbling yet allegedly cultural dynamic Britain? "It is drifting into irrelevance," replies Beck. "There is already a two- speed Europe, with a pioneer Europe in the eurozone that the rest of Europe, especially Britain, doesn't really take part in decisions about. Cameron doesn't realise there's a shifting power base in Europe but instead focuses on withdrawal from Europe." Folly, he argues. "Europe isn't across the Channel. For the first time every European citizen existentially depends on Europe." But that too is a German perspective: Britons have rarely gone for continental things such as existentialism, still less a cosmopolitan transcontinental menage. Unsurprisingly, as a good German committed to the end of petty nationalisms, Beck counsels more powers to the European Union to bring the undemocratic reign of Queen Merkiavelli to an end. In the past, budgetary credits were tied to austerity and neo-liberal reform: in the future, Beck argues, they should be linked to a readiness to support a new, continent-wide social contract set up to defend job security, extend freedom and promote democracy. Good luck with all that, Professor, I say. "It may well sound hopelessly utopian and naive," he replies, "but why not be utopian and naive? Look at the alternative." Maybe only Germans, thanks to the darkness of their 20th-century past, have such sunny hopes for this benighted continent. It's a different kind of German Europe from the one Beck indicts and one that nobody need fear: not one premised on Teutonic austerity, but filled with a European idealism you get hardly anywhere else on this cynical continent, least of all in Britain. http://www.guardian.co.uk/world/2013/mar/31/is-germany-too-powerful-for-europe
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ft.com comment Columnists March 31, 2013 4:46 pm Economics will catch up with the euro
By Wolfgang Münchau In southern Europe the hurdle for a case in favour of eurozone exit is shockingly low
©Getty It is a question that I have been asking myself for a while: at what point does it become economically rational for a country to leave the eurozone? There are two things to consider. The first is whether the country’s banking system is viable in the presence of an imperfect banking union – one that will not share any risks in the foreseeable future. The second is whether public and private sector debts are sustainable, given the country’s present and expected future growth rates. More ON THIS STORY/ Podcast Cypriot contagion/ Euro still needs stronger fundamentals/ Euro remains stuck near four-month low/ Emerging markets dump euro reserves ON THIS TOPIC/ Editorial Cyprus and a dog that did not bark/ Bulls make seismic call on stocks record/ Nicolas Véron EU goes too far on moral hazard/ OECD gloomy on eurozone recovery WOLFGANG MUNCHAU/ Eurozone break-up edges even closer/ EU ministers risk bank run/ Italy must seek generational change/ Bonus issue marks start of a long battle For Cyprus, the answers to both questions are no. The decision to bail in shareholders, bondholders and uninsured depositors would have been logical if the eurozone had a full banking union. There would be no bank run as all banks would be reinsured centrally. In this parallel universe, one could have wound down Cyprus’s second-largest bank without collateral damage to the wider banking system, or to the Cypriot economy. The US shows how this works: if the Federal Deposit Insurance Corporation raids a bank in 374
San Francisco, and bails in uninsured depositors, there is no bank run on neighbouring banks as California is not liable for the banking system. Instead the US has a federal resolution authority and deposit insurance system. But as each eurozone country remains responsible for their banking systems, Cyprus had no choice but to impose capital controls after the bail-in. Despite official protestations, these controls will persist for a very long time. The authorities have in effect launched a new parallel currency convertible to the standard euro at an exchange rate of one to one, but only up to €5,000, the monthly transfer limit. It is not hard to imagine that exit from the eurozone would have been more traumatic to the population, but it would have brought the benefit of a devalued exchange rate. And that answers the second question. Cyprus is more likely to return to debt sustainability outside the eurozone, because a lower exchange rate would reduce net debt, and because of a faster resumption of economic growth. The same is ultimately true of Spain as well. Jeroen Dijsselbloem, Dutch finance minister and president of the eurogroup of eurozone finance ministers, unwittingly answered that question when – in an interview with the Financial Times – he shocked the world by telling the truth. It is now the stated policy of the creditor countries to solve the problem of a debt overhang in the banking sector in the peripheral countries through the bail-in of bondholders and depositors. Just think this one through. Minus its two largest banks – BBVA and Santander – Spain’s banking system is broke, even after recently agreed small recapitalisations. The housing bubble is no longer the main problem, but the ongoing depression is likely to last for most of the decade, given current policies. The logical consequence of Mr Dijsselbloem’s dictum and the reality of austerity and a deficient banking union is a future bail-in of Spanish bank bondholders and depositors. The problem is that even insured deposits will then not be protected. Look at what happens in Cyprus, where capital controls affect small and large deposits alike. I would expect that to happen in Spain as well. Given the stated policy, it is logically irrational for any Spanish saver to keep even small amounts of savings in the Spanish banking system. There is no way that the Spanish state can guarantee the system without defaulting itself. The consequence is that for Spain, too, it will eventually become economically rational to leave the eurozone. The best moment would be the time when the country achieves a fiscal balance before the payment of interest on debt. The same is also true of Greece, where economic growth keeps undershooting the underlying assumptions in the official debt sustainability analysis. In the absence of a willingness by the creditor countries to agree another debt rollover programme, the same routine beckons – more bail-ins, including of Greek bank depositors. And Italy? Its public sector debt, approaching 130 per cent of gross domestic product, is sustainable if the country manages to return to economic growth rates of 2 per cent. With growth just a little over zero for the past 15 years, it is unclear what a government can do to bring this change about. It would require big downward wage adjustments in the private sector, and efficiency gains in the public sector. Italy’s next government would have to confront vested interests on lines similar to what happened in the UK in the early 1980s. If the political gridlock could not be resolved to
375 achieve this effect, Italian society would be heading for a straight choice between a default inside the eurozone, or exit. The first of these choices would be really toxic, especially for depositors. If you believe Mr Dijsselbloem, as I do, then it would be rational for every southern European to take their money out of the country and deposit it outside the eurozone. In an environment in which the creditor countries refuse a genuine banking union, the hurdle for an economic case in favour of leaving the eurozone is shockingly low. Of course, economics may not be the main criterion in a country’s decision. In the short term, politics may trump economics. But in the long run, you cannot operate a monetary union in the face of economic logic. http://www.ft.com/intl/cms/s/0/1e4547c8-9554-11e2-a4fa- 00144feabdc0.html?ftcamp=published_links%2Frss%2Fcomment%2Ffeed%2F%2Fpro duct#axzz2PCkxR1yK
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ft.com Companies Financials Banks March 31, 2013 6:56 pm Blow for ECB as wider loan rates hit south By Ralph Atkins in London
©AFP Divergences across the eurozone in interest rates paid by businesses on bank loans have reached record highs, despite European Central Bank action to prevent Europe’s monetary union fragmenting. Widening differences in borrowing costs, shown in an analysis by Goldman Sachs, highlight how ECB measures have prevented a catastrophic eurozone break-up – but failed to ease crippling credit conditions in much of the region’s southern periphery, where economic growth prospects remain bleak.
More ON THIS STORY/ ECB damps hope of cheap loans/ Global Insight ECB battles demons/ US money market funds warm to eurozone / Loans payback points to divided eurozone ON THIS TOPIC/ ECB sticks to its monetary guns/ ECB unveils €1.1bn profit on crisis bonds/ Inflation slows in France and Germany/ Euro drifts against the dollar
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IN BANKS/ Japanese bank lobby to rethink Tibor/ Bailey calls for bank capital transparency/ Explainer Basel III bank reforms/ Online gaming sector snaps up ex- bankers Since mid-2012, the spread between yields on Spanish and Italian sovereign 10-year debt and the German equivalent has narrowed significantly. Goldman Sachs’ interest rate divergence indicator – measuring cross-border variations in interest rates charged by eurozone banks on a variety of business loans – also dipped initially. But the indicator has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals. “Market segmentation remains, divergence in bank lending rates persists and, as a result, immediate growth prospects in the periphery are bleak,” said Huw Pill, European economist at Goldman Sachs, who was previously a senior monetary policy official at the ECB in Frankfurt. The results will disappoint Mario Draghi, the ECB’s president, ahead of the meeting of its governing council on Thursday. They highlight the challenge the ECB faces in ensuring low official interest rates feed through into lower borrowing costs, especially for job-creating small businesses in countries such as Italy and Spain. In much of the eurozone periphery, small companies depend heavily on bank finance. Contagion effects from the crisis in Cyprus – not yet reflected in the Goldman Sachs indicator – may have intensified further the financing pressures they face. Since taking office in November 2011, Mr Draghi has battled against the eurozone’s financial fragmentation – first by injecting more than €1tn in cheap three-year loans into the financial system and then by pledging last July to do “whatever it takes” to ensure the eurozone’s integrity. Reasons for the latest widening in interest rates paid by business are not obvious – but could include heightened tensions ahead of Italy’s elections in February, a further weakening in banks’ finances, or a reversal of the initial improvement in financial market sentiment that followed ECB policy actions. Worries about the depth of the recession hitting the eurozone’s south have fuelled expectations that the ECB will cut official interest rates further. The ECB’s main policy rate has been held at 0.75 per cent since last July. http://www.ft.com/intl/cms/s/0/cbf94b90-993b-11e2-8dc6- 00144feabdc0.html#axzz2PCkxR1yK
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ft.com comment opinion March 31, 2013 4:46 pm Confessions of a Keynesian heretic By Roger Farmer Central banks and treasuries should intervene to reflate the asset bubble, says Roger Farmer
©Getty Imay be the only self-professed Keynesian who is not actively campaigning for large public infrastructure projects. Don’t get me wrong; I believe repairing a few bridges or building an oil pipeline or two would be good things to do. But it is unhelpful to confuse arguments for public investment with plans to restore full employment. Would a big-state investment programme increase employment? Yes. Would it be cheap, since interest rates are low? Absolutely. But it is much easier to increase the size of government than to shrink it. More ON THIS STORY/ Robert Skidelsky and Marcus Miller Demand also matters/ Osborne to announce £2.5bn for infrastructure/ No 10 ready to benefit from charm offensive/ Qatar lined up for £10bn UK projects fund IN OPINION/ Robert Zoellick Five questions for the world’s next trade chief/ Oil demand is set to fall in the age of gas/ Zaki Laïdi Trade deals and power politics/ Robin Lustig BBC needs audience help The Keynesians are right: we need to increase demand. But what is the best way to do that? I prefer to see the creation of more private sector jobs, not more government jobs. One way to do that is through managing the value of financial wealth, an approach that offers a creative alternative to more government spending in a time of austerity. John Maynard Keynes thought that public investment would restore full employment even in the extreme case when spending had no social value; for example, a scheme to dig holes and fill them in. He thought that the newly employed workers would spend more on consumer goods and trigger a virtuous cycle of increasing income and employment. Some argue that for every newly created public sector job, the associated increase in demand might trigger as many as two new private sector jobs. I disagree. The social benefit of more government spending of this kind rests on the answer to a simple question. Does every extra pound of government expenditure raise gross domestic product by more than £1? If so, the so-called multiplier is bigger than one. If, on the other hand, every pound of government expenditure raises GDP by less than £1, the multiplier is less than one. My reading of the facts is that this latter situation is closer to the truth.
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If the multiplier is bigger than one, social investment projects, whatever their intrinsic worth, will increase private consumption and make everybody better off. If the multiplier is less than one, digging holes will create jobs but we will be worse off. We will have gained full employment at the cost of less consumption. We cannot eat holes in the road. Until economies hit hard by the financial crisis grow to a point where we need all of those houses in Ireland or Nevada, they should, primarily, produce more consumer goods. Since households spend more when they feel wealthy, one way to get people back to work is to reflate the asset markets. Central banks and treasuries should actively intervene to reflate the asset market bubble. This heretical view will be widely denounced by those who think that free trade in financial instruments leads to an efficient allocation of capital. That notion is hard to defend in the wake of yet another financial collapse. It has long been known that financial markets are excessively volatile. Recent research has shown why: for markets to work well, everybody who has an interest in the outcome of volatility must be able to trade in those markets. Financial crises have effects that last for decades and the earnings of those who enter the workforce in a boom, as opposed to a slump, can vary substantially. Many people who will be affected were not alive on the date the crisis hit and those people are unable to buy insurance against severe recessions. Government can and should trade on their behalf. A further increase in equity prices, engineered by government, will benefit us all. As the economy recovers, employment will rise, tax revenues will rise and the need for austerity will fade. For example, the Bank of England, backed by the Treasury, does not need to print money to restore full employment – a move that would potentially be inflationary. They need simply to absorb the risky assets that private markets are unable to absorb by swapping debt for equity held by the public. If the market was overvalued in 2007, how could we possibly gain by going back to a situation of apparently unrealistic equity prices? An analogy may help. If we are sitting in a hot-air balloon that is out of control, the solution is not to burst the balloon and crash back to earth. It is to install an escape valve and let the gas out slowly. So it is with the financial markets. Governments can, and should, restore demand and engineer a smooth return to sustainable growth. The writer is distinguished professor of economics at the University of California, Los Angeles http://www.ft.com/intl/cms/s/0/9c8021ac-97a8-11e2-97e0- 00144feabdc0.html#axzz2PCkxR1yK
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ft.com comment Columnists March 31, 2013 5:42 pm US inequality will define the Obama era
By Edward Luce Since the financial crisis, each year has brought lower median incomes than the last
Barack Obama has said his biggest goal is to revive the US middle class. “Our country cannot succeed when a shrinking few do very well and a growing many barely make it,” the president said in his inaugural address. It remains to be seen whether higher inequality lowers the US growth rate, as Mr Obama hinted (and some economists fear). The chances are that it does. Either way, Mr Obama has been unable to check America’s most unequal distribution of income since the 1920s. Is it within his means to do so? The tide against him is powerful. For the past three years, Washington has been consumed in fiscal battles. But in his budget launch next week, Mr Obama will have his best chance before the 2014 midterm elections to shift the focus from deficit reduction to broad-based growth – though the two are entirely compatible. The US budget deficit is already on course to fall to about 4 per cent of gross domestic product within five years. And America’s real fiscal challenge will only start to be felt 10 years from now when retirement costs, such as those from the Medicare healthcare programme, begin to rise sharply. It might be a good moment to pivot to today’s problems. More ON THIS STORY/ US inequality is a lifetime plight/ Merryn Somerset Webb A wealth of inequalities bodes ill/ Christopher Caldwell Apathy over the Dow’s rise is unsurprising/ Republicans reject minimum wage increase ON THIS TOPIC/ Obama seeks middle ground in budget plan/ Senate budget shows shift in US politics/ Congress weighs corporate debt tax reform/ US Congress averts government shutdown
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EDWARD LUCE/ The Dispensable Nation; The Obamians; The Secretary/ As Congress sleeps the 2016 race begins/ View from Washington Chance to upgrade relationship stymied by events on the border/ Dangers lurk in US permanent campaign In June the US will enter its fifth year of post-financial crisis recovery. However, each year has brought slightly lower middle-class incomes than the last. According to data from Sentier Research, US median household income dropped by 1.1 per cent from January to February, to $51,404. It is now 5.6 per cent below where it was in June 2009, when the recovery began ($54,437). And it is 8.9 per cent below where it was at the start of the century. At this rate – and for all Mr Obama’s efforts – the middle class could suffer a double-digit fall during his presidency. It is a different story at the top. According to David Cay Johnston of Syracuse University, the wealthiest 10 per cent of Americans have taken 149 per cent of the growth since 2009 (the bottom 90 per cent have seen their incomes shrink). The top 1 per cent – those earning $366,623 or more – have taken 81 per cent of the fruits of the recovery. And the top one in 1,000 – those starting at $7.97m a year – hogged an astonishing 39 per cent of the growth. That means America’s top 15,837 households have gained almost as much as the remaining 158.4m. This is not the kind of record Mr Obama wants. John Rawls, the great US political philosopher, said inequality was justified if it was of greatest benefit to the worst off. Clearly, Rawls’ condition no longer holds. There is nothing inherently wrong with wide inequality. The prospect of large rewards spurs talented people to excel, which benefits everyone. But if growing inequality is accompanied by absolute declines in incomes, society is far less likely to tolerate it. And there is a lot of evidence to suggest economic growth does suffer if inequality becomes too acute. In 2011 the International Monetary Fund published a paper that suggested economies grow faster when there is less inequality – a key reason why east Asia outpaced Latin America in the last generation. Sceptics point out that the IMF’s findings only show a correlation between inequality and lower growth, rather than a causal link. That is true. But US growth is driven by consumer demand. It is hard to believe that higher spending by the very wealthy will indefinitely make up for the rest’s belt-tightening. Everyone, including US chief executives, who are sitting on $1.45tn of uninvested cash, has a stake in an economy that fires on all cylinders. Few disagree that inequality is also blunting the effectiveness of US monetary policy. The Wall Street bull market has clearly returned. Last week both the Dow Jones Industrial Average and the S&P 500 broke through to new highs. But very little of the US Federal Reserve’s easy money has found its way on to Main Street. Such deep-rooted trends are not easily fixed. There are many contributors to US inequality, including the rise of robots, faster globalisation and a domestic tax code customised largely for special interests. Some of the more obvious palliatives, such as a higher minimum wage and a more progressive Social Security tax, would have an almost instant effect on incomes. Others, such as boosting the quality of US education, will take 20 years to bear fruit. Upgrading the quality of US infrastructure would fall somewhere in between. In one form or another Mr Obama has proposed all these steps since 2009. But few stand any chance of enactment unless Republicans feel they have a stake in the outcome. The White House’s only realistic chance lies in a fiscal grand bargain that
382 would combine its “cut to invest” proposals with the promise of once-in-a-generation tax reform. Unlikely though its chances may be, it would still get better odds than the status quo. And it would offer Republicans a chance to escape their plutocratic branding. Everyone likes to pay lip service to equality of opportunity. Most Americans do not begrudge people such as Google co-founders Sergey Brin and Larry Page their fortunes. Nor should they. The question is whether high self-sustaining growth is possible amid flat or falling incomes. There are reasons to be sceptical. Mr Obama has so far failed to convince Washington that a stagnant middle class is bad for US growth. He should keep trying. If the US president means what he says, this is the challenge of his time. http://www.ft.com/intl/cms/s/0/2fb17b9e-9554-11e2-a4fa- 00144feabdc0.html#axzz2PCkxR1yK
383 mainly macro Comment on macroeconomic issues Saturday, 30 March 2013 The View from Brussels When incomplete ideas get embodied in institutions and the people in them As I have said before, its too easy to be rude about austerity. It is harder to put yourself in the mindset of reasonable individuals who take a different view, and pinpoint exactly - in ways that they will understand - why their view is wrong. So this paper from Marco Buti and Nicolas Carnot (HT Philip Lane) is useful because it shows us that mindset. [1] The argument in the paper is essentially this. “We recall that large adjustments are needed in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions.” So the debate is about the precise speed of adjustment, and the Commission is trying to strike the “right balance”. In particular, it recognises the need for different speeds in different countries. I think this view characterises the position of many international organisations, including the OECD, and many in the IMF. There is a big mistake being made here. It essentially involves the prioritisation of issues. Fiscal adjustment is seen as the overriding priority. Issues involving the state of the economy are secondary: they are one factor in judging the appropriate speed of adjustment. This is the wrong way around. The major priority at the moment should be doing something about the demand led recession in the Eurozone (and other countries like the UK). The budgetary position of some countries is a secondary factor that may influence the country by country balance of any fiscal actions required to deal with this priority. This point about priorities is not an expression of political preferences. It is about what basic macroeconomics tells us. The recession is a problem right now. If it is not dealt with now, the loss of resources is permanent and irretrievable, and in addition there is likely to be a more permanent scarring effect through hysteresis. Given the imbalances within the Eurozone, and the political tensions generated by creditor/debtor relationships, the costs of a recession could be greater still. Budget consolidation is a permanent, long term issue, and there is clearly a right and a wrong time to deal with it. Recessions are the wrong time, not just because it conflicts with other priorities, but because it may not even work, because of hysteresis effects, or political effects, or banking effects. So why is this obvious to me, but not to those running policy? To repeat, my own view is in no sense about the relative importance, in some abstract sense, of deficit bias versus avoiding recessions. As regular readers will know, on deficit bias and long run goals for debt I am something of a hawk. I just do not see why we cannot avoid recessions and bring down government debt. In some cases those running policy take a different view because of ulterior political motives, but not in all cases. I’m prepared to give those in the Commission, and other international organisations like the OECD and IMF, the benefit of the doubt on this. I believe an important influence on their mindset is that they are working in a framework in which overall demand stabilisation is not their problem. That is monetary policy, not
384 fiscal policy. It is very revealing that in the Commission paper two phrases do not appear at all: they are ‘zero lower bound’ (ZLB) and ‘liquidity trap’. Too few in government have recognised that when we hit the ZLB, the rules of the macroeconomic game fundamentally change, and the institutions of government - and those in them - have to adapt too. This is hardly a novel point, but as Paul Krugman keeps stressing, it is absolutely central. It is why I get annoyed by those who insist that, if only we did monetary policy differently, all would be well - what I call ZLB denial. Few (unfortunately not all) deny the central role and importance of monetary policy in getting us out of recessions. When monetary policy fails - which it patently has, mainly [2] because of the ZLB - fiscal policy has to take its place. Countercyclical fiscal policy becomes as important as monetary policy normally is. Institutions, and habits of thinking, that are set up for normal times must adapt. The IMF recognised this in 2009, but I’m not sure the OECD or European Commission ever did. We can see how this failure to change priorities influences the subsequent discourse by looking at two issues that are covered by the paper: OMT and Germany. The paper recognises the importance of OMT in altering market expectations. But they then say “As is clear as well however, the OMT announcement per se does not address the underlying sustainability concerns.” Of course OMT does not directly change the outlook for future primary balances. However it is a game changer in allowing periphery countries to change priorities. When you cannot sell your debt, this has to take priority over recession concerns (although fiscal consolidation can still be designed to try and avoid recession). What OMT allows countries to do is change priorities. If it had been implemented earlier, priorities could have been changed earlier. The paper does not see this, because for them fiscal consolidation remains the key priority. The paper says “In Germany, the fiscal stance is now broadly neutral [3], hence consistent with the call for a differentiated fiscal stance according to the budgetary space”. Which makes perfect sense (albeit using the rather tortured language of international organisation space), except at the ZLB. At the ZLB we need overall fiscal expansion in the Eurozone. The differentiation point still stands, so from an overall Eurozone perspective the Commission (and the OECD, and the IMF) should be arguing for substantial fiscal expansion in Germany. However, if your priority is fiscal consolidation, advocating doing nothing can seem quite radical and brave. Right at the end there is a hint of recognition, but in a way that reinforces my point. To quote in full: “A dedicated stabilisation fund could improve the conduct of fiscal policies throughout the cycle by enforcing tighter policies in good times and providing additional leeway for cushioning downturns. Such a tool could strengthen the existing automatic stabilisers while maintaining a credible rule-based framework. It would be particularly useful in the current predicament characterised by large cyclical differentials across the zone as well as a not insignificant average output gap. However, according to the Commission blueprint such a tool should only be considered in the longer term in the context of full fiscal and economic union.”
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In other words countercyclical policy at the overall Eurozone level would be useful right now, but it needs to wait until we have the institutional change that can accommodate it. [4] Which tells me that those in the Commission think institutions are very important, but it does not tell me why existing institutions (and those within them) have to be behave in such a blinkered way. [1] This can be seen as a companion piece to two others that looked at the power austerity has over politicians, and why some economists are suspicious of Keynesian fiscal stimulus. This post is about economists working in policy institutions. [2] Unfortunately the ECB often gives the impression that as long as consumer price inflation is around about 2%, then nothing else (like other measures of inflation, or a recession) has anything to do with them. However I doubt very much that if the ECB had done what the Fed is now doing, a Eurozone recession would have been avoided. [3] Whether this is true is another matter: see here for example. The latest OECD Economic Outlook has the German debt to GDP ratio falling steadily since 2011, despite a widening output gap. [4] That institutional change will come too late for the current recession. I take a critical view of whether fiscal union for the Euro is either feasible or desirable here. http://mainlymacro.blogspot.com.es/2013/03/the-view-from- brussels.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+Mai nlyMacro+(mainly+macro)
1. Ralph Musgrave 30 March 2013 09:36
The Buti / Carnot paper is very vague on the crucial distinctions between countries that issue their own currencies and EZ countries which don’t. The problems affecting each are very different. That makes me wonder whether the authors (and indeed the authors of similar papers) understand the distinctions. Concentrating on monetarily sovereign countries, and taking your question as why the mistake they make is “obvious to me, but not to those running policy?”, the answer is they just don’t understand macro. They’d don’t understand what Keynes meant when he said “Look after unemployment and the budget will look after itself”. To put that plain English: “stop worrying about consolidation”.
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March 31, 2013 As Banks in Cyprus Falter, Other Tax Havens Step In By ANDREW HIGGINS LIMASSOL, Cyprus — Bloodied by a harsh bailout deal that drives a stake through the heart of this Mediterranean country’s oversize financial industry, Cyprus now faces a further blow to its role as an offshore tax haven: the vultures from competing territories are circling. With a flood of e-mails and phone calls in recent days to lawyers and accountants here who make a living from helping wealthy Russians and others avoid taxes, competitors in alternative financial centers across Europe and beyond are promoting their own skills at keeping money hidden and safe. “We are aware of the economic problems facing Cyprus at the moment,” read one such message from a law firm in Malta, also a euro zone member. “We would like to propose an avenue of action for your consideration: offering corporate relocation to Malta,” continued the business pitch, trumpeting Malta’s low taxes and “flexible yet robust regime” for financial services. Similar unsolicited offers have originated in well-known havens like Switzerland, Luxembourg and the Cayman Islands, as well as in a host of other locations, including Dubai and Singapore. Even the northern part of Cyprus, controlled by Turkish Cypriots, has joined the feeding frenzy, promoting its own banks as a stable alternative to those run by Greek Cypriots in the crisis-racked southern part of the divided island. Particularly successful at luring Russians, Cyprus has built up a large infrastructure of lawyers, accountants and other professionals schooled in the arts of tax avoidance. Its corporate registry now has 320,000 registered companies, a staggering number for a country with only 860,000 people. Most are shells set up for foreign companies and wealthy individuals seeking to avoid taxes. “We have been thrown to the wolves, and now the wolves have responded,” said Nicholas Papadopoulos, head of the financial and budgetary affairs committee in Parliament. Bitterly critical of last week’s bailout deal — which is forcing Cyprus to shrink its banking and financial industry drastically and stick the largest bank depositors with much of the bill — Mr. Papadopoulos said the European Union was “punishing a whole country just to hit Russians.” Even if new controls in Cyprus make it impossible to move much capital elsewhere for the moment, rival havens are nonetheless intent on luring foreign-owned businesses that have been incorporated in Cyprus and might be happy to relocate. Mounting a counteroffensive is the Cyprus Fiduciary Association, an industry lobbying group.
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“The banking sector is finished, but the service industry can survive,” said the group’s secretary, Andreas Marangos, a Limassol lawyer. Russians who now use Cyprus will open bank accounts elsewhere but might stick around for other offshore services, he said. The rush by rival havens could pose economic troubles as Cyprus struggles to keep afloat a financial industry that employs tens of thousands of people. Cypriot unemployment, already at 15 percent, is expected to soar as the finance sector and the overall economy contract, aggravating a crisis that the bailout was intended to solve. Along with shipping, the financial industry is especially crucial here in Limassol, a port city popular with wealthy Russians looking for sun and a safe place to put their money. Cyprus, although only a relatively small player in a global network of low-tax financial centers, has made serving tax-averse foreigners a central pillar of its economy. A small sunny island whose main economic engine used to be potato farming, Cyprus shifted to a finance-centered model after Turkish troops took control of the northern part of the island in 1974. While Cyprus and its rivals dislike being described as “tax havens” and prefer to be known as “offshore financial centers,” those now picking at Cyprus’ carcass trumpet their ability to keep money beyond the reach of tax authorities. A Swiss company, the Gonthier Group, last week sent e-mails to Cyprus firms working with foreigners, suggesting they offer their clients a Swiss alternative, namely an investment “vehicle which is extremely low-profile, not classified as a bank account or trust and thus very much under the radar of national fiscal authorities.” Tilly Schneeberger Gonthier, a principal of the Montreux-based company, said on Sunday by telephone that her pitch was “absolutely not” an invitation to evade taxes, but merely an offer of a secure alternative to Cyprus-based investment vehicles. She denied wanting to hurt the Cypriot financial services industry. “We are trying to help them,” Ms. Gonthier said. “They have a lot of unhappy clients.” She said that nobody in Cyprus had yet taken up her offer, but added: “This doesn’t happen very fast. It takes time.” Mr. Papadopoulos, the parliamentary finance committee head, said he did not begrudge competitors in other locations trying to lure away clients rattled by his own country’s troubles. “This is a zero-sum game,” he said. Echoing a widespread view here, he complained that Cyprus had been unfairly singled out as a haven for shady money by the European Union even as others, including fellow members of the 27-nation bloc, provide much the same services. “We have made mistakes, but the whole point of seeking help from the European Union was to get fair treatment,” he said, referring to Cyprus’s request for a 10 billion euro lifeline from its European partners and the International Monetary Fund. A central demand of a bailout package announced early last Monday in Brussels, the headquarters of the union’s bureaucratic apparatus, is that Cyprus dismantle its finance- dominated economic model. Cypriot banks gorged for years on deposits from overseas, especially Russia, and spewed out loans at such a rate that the banking sector ended up dwarfing the rest of the economy. Its total assets — now mostly loans of uncertain worth — grew to be eight times larger than the whole country’s economic output.
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But this imbalance is no worse than that in Malta, where the banking sector is also about eight times gross domestic product. And it is far less severe than in Luxembourg, where banking assets are more than 22 times G.D.P. Both Malta and Luxembourg, each a member of the European Union, last week loudly insisted they were very different from Cyprus — while their own financial service providers rushed to court Cyprus’s clients. How much success those countries have had at getting Russians and others to decamp is still unclear, although many lawyers here acknowledge that they have already helped a number of foreign clients open new bank accounts outside Cyprus. The country’s own banks, closed for nearly two weeks to prevent depositors from withdrawing all their cash, reopened last week but are now caught up in a web of capital controls that make most normal transactions all but impossible. Vasilis Zertalis, the chief executive of Prospectacy, a Nicosia corporate services company, said he understood that foreigners with companies and investment vehicles registered in Cyprus now needed to find banks elsewhere. But he is outraged by the efforts of rival centers to profit from Cyprus’s pain. “When somebody is down, you should not try to push them further and give them a final blow,” said Mr. Zertalis. “I believe in capitalism, but there should be certain ethics.” As authorities last week unveiled plans to shut down Cyprus’s second biggest bank, Laiki, and worked out a strategy to preserve the Bank of Cyprus, the country’s biggest, by effectively confiscating 60 percent or more of deposits over 100,000 euros, a financial services company in the Cayman Islands made a transparent grab for business. “Given the inherent pressure banks will be placed under in Cyprus, your firm may see a need to consider other jurisdictions when consulting clients,” Bateman Financial said in an e-mail to Mr. Zertalis and other Cypriots in the same line of work. “The Cayman Islands can offer the stability that is currently desired.” http://www.nytimes.com/2013/04/01/business/global/as-banks-in-cyprus-falter- other-tax-havens-step-in.html
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March 31, 2013 Lessons From a Comeback By PAUL KRUGMAN Modern movement conservatism, which transformed the G.O.P. from the moderate party of Dwight Eisenhower into the radical right-wing organization we see today, was largely born in California. The Golden State, even more than the South, created today’s religious conservatism; it elected Ronald Reagan governor; it’s where the tax revolt of the 1970s began. But that was then. In the decades since, the state has grown ever more liberal, thanks in large part to an ever-growing nonwhite share of the electorate. As a result, the reign of the Governator aside, California has been solidly Democratic since the late 1990s. And ever since the political balance shifted, conservatives have declared the state doomed. Their specifics keep changing, but the moral is always the same: liberal do-gooders are bringing California to its knees. A dozen years ago, the state was supposedly doomed by all its environmentalists. You see, the eco-freaks were blocking power plants, and the result was crippling blackouts and soaring power prices. “The country’s showcase state,” gloated The Wall Street Journal, “has come to look like a hapless banana republic.” But a funny thing happened on the road to collapse: it turned out that the main culprit in the electricity crisis was deregulation, which opened the door for ruthless market manipulation. When the market manipulation went away, so did the blackouts. Undeterred, a few years later conservatives found another line of attack. This time they said that liberal big spending and overpaid public employees were bringing on collapse. And the state has indeed spent the past few years facing a severe fiscal crunch. When the national housing bubble burst, California was hit especially hard, and the combined effects of the plunge in home prices and the economic downturn led to sharply reduced revenue. Once more there were gleeful pronouncements of imminent doom: California, declared one pundit after another, is America’s Greece. Again, however, reports of the state’s demise proved premature. Unemployment in California remains high, but it’s coming down — and there’s a projected budget surplus, in part because the implosion of the state’s Republican Party finally gave Democrats a big enough political advantage to push through some desperately needed tax increases. Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback. Needless to say, the usual suspects are still predicting doom — this time from the very tax hikes that are closing the budget gap, which they say will cause millionaires and businesses to flee the state. Well, maybe — but serious studies have found very little evidence either that tax hikes cause lots of wealthy people to move or that state taxes have any significant impact on growth. So what do we learn from this history of doom deferred? I’m not suggesting everything in California is just fine. Unemployment — especially long-term unemployment — remains very high. California’s longer-term economic
390 growth has slowed, too, mainly because the state’s limited supply of buildable land means high housing prices, bringing an era of rapid population growth to an end. (Did you know that metropolitan Los Angeles has a higher population density than metropolitan New York?) Last but not least, decades of political paralysis have degraded the state’s once-superb public education system. So there are plenty of problems. The point, however, is that these problems bear no resemblance to the death-by- liberalism story line the California-bashers keep peddling. California isn’t a state in which liberals have run wild; it’s a state where a liberal majority has been effectively hamstrung by a fanatical conservative minority that, thanks to supermajority rules, has been able to block effective policy-making. And that’s where things get really interesting — because the era of hamstrung government seems to be coming to an end. Over the years, California’s Republicans moved right as the state moved left, yet retained political relevance thanks to their blocking power. But at this point the state’s G.O.P. has fallen below critical mass, losing even its power to obstruct — and this has left Mr. Brown free to push an agenda of tax hikes and infrastructure spending that sounds remarkably like the kind of thing California used to do before the rise of the radical right. And if this agenda is successful, it will have national implications. After all, California’s political story — in which a radicalized G.O.P. fell increasingly out of touch with an increasingly diverse and socially liberal electorate, and eventually found itself marginalized — is arguably playing out with a lag on the national scene too. So is California still the place where the future happens first? Stay tuned. http://www.nytimes.com/2013/04/01/opinion/krugman-lessons-from-a- comeback.html?ref=paulkrugman
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Bedroom tax will be costly disaster, says housing chief Cost-cutting policy will push up benefit bill, cause social disruption and create widespread misery, say critics Toby Helm and Tracy McVeigh The Observer, Saturday 30 March 2013 20.30 GMT
Liverpudlians protesting against the 'spare room subsidy' last week. Photograph: Chris McCleary/Demotix/Corbis Ministers came under new fire over benefit cuts last night as the independent body representing 1,200 English housing associations described the controversial bedroom tax as bad policy and bad economics that risks pushing up the £23bn annual housing benefit bill. David Orr, chief executive of the National Housing Federation, said the tax would harm the lives of hundreds of thousands of people. It comes into force this week alongside a range of other tax and benefit changes. "The bedroom tax is one of these once-in-a-generation decisions that is wrong in every respect," he said. "It's bad policy, it's bad economics, it's bad for hundreds of thousands of ordinary people whose lives will be made difficult for no benefit – and I think it's about to become profoundly bad politics." His intervention came as opponents launched nationwide protests against the tax, which will hit 660,000 households with each losing an estimated average of £14 a week. Crowds gathered in London's Trafalgar Square yesterday to protest against the measure, and simultaneous protests were being held in towns and cities across the UK. One protester, Sue Carter, 58, from Waltham Forest, told the Observer: "I'm a working single parent with a tiny boxroom and now I'm faced with the choice between food, heat
392 or paying the bedroom tax. People have looked after their homes, improved them – why should they be turfed out?" Under the scheme, which is introduced tomorrow, people in social housing with one spare bedroom will have their housing benefit cut by 14%, while those with two or more unoccupied rooms will see it slashed by 25%. Ministers say the tax, which David Cameron calls the "spare room subsidy", will encourage people to move to smaller properties and save around £480m a year from the spiralling housing benefit bill. But critics such as the National Housing Federation (NHF) argue that as well as causing social disruption, the move risks increasing costs to taxpayers because a shortage of smaller social housing properties may force many people to downsize into the more expensive private rented sector. The federation's warnings came as charities said the combination of benefit cuts and tax rises coming in from this week will amount to a £2.3bn hit on family finances. Labour said analysis of official figures showed average families would be £891 worse off in the new tax year as the changes – including those to tax credits and housing benefits – begin to bite. Research by the NHF says that while there are currently 180,000 households that are "underoccupying two-bedroom homes", there are far fewer smaller properties in the social housing sector available to move into. Last year only 85,000 one-bedroom homes became available. The federation has calculated that if all those available places were taken up by people moving as a result of the "bedroom tax", the remaining 95,000 households would be faced with the choice of staying put and taking a cut in income, or renting a home in the private sector. If all 95,000 moved into the private sector, it says the cost of housing benefit would increase by £143m, and by millions more if others among the remaining 480,000 affected chose to rent privately. As well as the move on spare bedrooms, council tax benefit will be replaced from this week by a new system that will be run by English local authorities but on 10% less funding. Pensioners will be protected under the changes but, as a result, it is feared there will be a bigger burden on poor working-age adults. Restrictions on the uprating of a number of welfare payments will also hit millions of households, homelessness charity Crisis has warned. Chief executive Leslie Morphy said: "Our poorest households face a bleak April as they struggle to budget for all these cuts coming at once. People are already cutting back on the essentials of food and heating but there is only so much they can do. "The result will be misery – cold rooms, longer queues at food banks, broken families, missed rent payments and yet more people facing homelessness – devastating for those directly affected, but bad for us all." A Department for Work and Pensions spokesman said: "Our welfare reforms will improve the lives of some of the poorest families in our communities, with universal credit simplifying the complex myriad of benefits and making three million people better off. And by next year, we will have taken two million of the lowest earners out of paying tax altogether." Crisis argues that homelessness is set to rise dramatically. This winter has already seen a rise of 31% in the numbers of rough sleepers across the country and a 20% rise in
393 people seeking help with homelessness from their local authority in the past two years, according to Crisis. ChartiesCharities are also concerned that the government-funded network of homelessness advisers in England is to be scrapped. The team of regional advisers and rough sleeper and youth specialists which have provided councils with expert guidance on meeting statutory homelessness duties since 2007 will be disbanded just as the bedroom tax comes in. Also being scrapped are the crisis loans and community care grants which provided a lifeline for people in financial crisis who needed essentials when moving to a new home. Shadow chancellor Ed Balls said: "This is the week when the whole country will see whose side David Cameron and George Osborne are really on and who is paying the price for their economic failure." http://www.guardian.co.uk/society/2013/mar/30/bedroom-tax-disaster-housing-chief
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EDITORIAL Resurrecting California’s Public Universities By THE EDITORIAL BOARD Published: March 30, 2013 Even before the recession hit, the public colleges and universities that educate more than 70 percent of the nation’s students were suffering from dwindling state revenue. Their response, not surprisingly, was to raise tuition, slash course offerings and, in some cases, freeze or even reduce student enrollment. The damage was acute in California, whose once-glorious system of higher education effectively cannibalized itself, shutting out a growing number of well-qualified students. Today's Editorials Editorial: Social Security, Present and Future (March 31, 2013) Editorial | Sunday Observer: Who Can Bring the E.U. To Its Senses? (March 31, 2013) The same California State Legislature that cut the higher education budget to ribbons, while spending ever larger sums on prisons, now proposes to magically set things right by requiring public colleges and universities to offer more online courses. The problem is that online courses as generally configured are not broadly useful. They work well for highly skilled, highly motivated students but are potentially disastrous for large numbers of struggling students who lack basic competencies and require remedial education. These courses would be a questionable fit for first-time freshmen in the 23- campus California State University system, more than 60 percent of whom need remedial instruction in math, English or both. The story of how the state’s fabled higher education system got to this point is told in a troubling analysis by the Public Policy Institute of California, a nonpartisan think tank. In simplest terms, the state has been de-emphasizing higher education spending for decades while shifting more money to other areas, most notably corrections. The net result is that despite growing demand, spending on higher education over the last decade has declined by 9 percent while expenditures for corrections and rehabilitation have shot up by more than a quarter. For these reasons, the report says, the percentage of recent high school graduates who enroll in the state’s public universities — including the 10 noted research campuses of the University of California, like the Berkeley campus — declined by about a fifth over the last five years. Many of the state’s brightest students appear to be attending schools in other states, raising fears that they might never come back. Other students have settled for poorly staffed, overcrowded community colleges and are unlikely to move on to four-year colleges. Alarmingly, the institute estimates that about 10 percent of students who qualified for admission to the elite University of California system did not enroll anywhere, perhaps because they were turned away from their first-choice schools. The report suggests that the portents for California’s economy are not favorable. If the current trends continue — with some students leaving and others deciding not to go to school at all — California, which cannot rely on imported graduates for its labor force, could fall one million college degree holders short of what it needs to drive its economy by 2025. 395
California has recently shown signs of coming to its senses. Last fall, voters approved Proposition 30, which raises taxes and directs most of the proceeds to education. Gov. Jerry Brown has also called for a higher education increase in his current executive budget. At the same time, however, the Legislature is awash in bills that seem to assume that online education is the answer to to the problem. One particularly ludicrous bill would create a “New University of California” that offered no instruction but would issue credentials to people merely for passing exams. Another bill would require public colleges and universities to give credit for faculty-approved online courses taken by students who were unable to register for oversubscribed courses on campus. That is a more plausible alternative than the “New University of California.” Online classes are and will be part of the educational mix, in California and elsewhere. But they cannot be counted on to revive a beleaguered public system whose mission is to educate a great many freshmen who need close instruction and human contact to succeed. To broaden access and preserve what is left of the public university, California lawmakers will need to change budget priorities that have been moving in the wrong direction for a long time. http://www.nytimes.com/2013/03/31/opinion/sunday/resurrecting-californias-public- universities.html?src=recg
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March 31, 2013 On the Economy, Think Long-Term By JEFFREY D. SACHS THE 2009 economic stimulus package has come and gone. So, too, have the temporary payroll tax cuts of 2011-12. Most of the Bush-era tax cuts, in addition, have been made permanent. Yet the lasting effects of these policies have been meager. The economy is still sluggish. Unemployment remains high, especially for lower-skilled workers. Inequality of incomes is higher still. What’s more, the fundamental structural challenges to our economy remain. Deeply disruptive forces — rapidly evolving information technology, globalization and environmental stresses — are radically reshaping the jobs market. Decent jobs for low-skilled workers have virtually disappeared. Some have been relegated to China and emerging economies, while others have been lost to robotics and computerization. The results of these changes can be seen in two starkly different employment figures: since 2008, 3.1 million new jobs have been created for college graduates as 4.3 million jobs have disappeared for high-school graduates and those without a high school diploma. These trends will only continue, and even become more sharply defined. But in the face of such immense challenges, Republicans continue to hawk their age-old remedy, demanding cuts in government spending, tax rates and regulation so that market forces can respond in due course. Democrats, meanwhile, push just as stridently for their familiar fixes — short-term spending programs like the 2009 stimulus package enacted during President Obama’s first term. It’s time to move beyond such transitory and piecemeal policies. Our underlying economic problems are chronic, not temporary; structural, not cyclical. To solve them, we need a systematic long-term approach. Consider three priorities for this new, long-range perspective: infrastructure, energy and job skills. With a smart, ambitious strategy in these sectors we can encourage the creation of good jobs and begin to resolve huge problems of competitiveness and the environment. Start with the country’s crumbling infrastructure. Mr. Obama has spoken eloquently about fast intercity rail, renovated highways, safe water systems and refurbished waterways and coastlines. And on Friday, in a speech at the Port of Miami in Florida, the president called once more for a new public-private funding strategy for infrastructure — $21 billion, on top of some $40 billion previously announced. That’s good and important. Yet the private money will move off the sidelines only when there are solid, long-term plans to deploy it. After all, the 2009 stimulus program put some short-term money toward infrastructure repair, but there has been precious little sustained investment to show for it. Calls for “public-private” financing aren’t enough. We need strategies — linking federal, state, regional and local efforts — that have a 10- to 20-year perspective.
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The same goes for our energy system. We are in the midst of a short-term boom of shale oil and natural gas. Yet this expansion in energy production, driven in large part by two new techniques — horizontal drilling and hydraulic fracturing — won’t begin to address our long-term energy needs. Like any overhyped gold rush, today’s boom will soon be tomorrow’s bust; fractured gas fields have a remarkably rapid decline rate. They also threaten the local environment. More important, given the genuine and increasing impact of climate change, there is no longer any doubt that the world will have to fulfill its energy needs with low-carbon sources — whether solar, wind, nuclear or carbon-capture and sequestration. A clearly laid out federal program to support large-scale solar and wind energy, electric vehicles and other smart technologies — and backed partly by public money — would unlock hundreds of billions of dollars of private investments. It would secure America’s energy future and protect the environment, too. The third area is job skills. Let’s take a lesson from Germany, which boasts a low youth unemployment rate because of skills training. There, many young people gain a job foothold through an apprenticeship with a private company partly financed by the government. If Mr. Obama were to stop angling for more temporary stimulus and instead put forward sound programs for job training, low-carbon energy and modernized infrastructure, he would most likely carry the public and eventually win the political battle. For encouragement, he can look to history. Indeed, the United States government has a strong track record of success in such long-term public-private investment programs. Federal agencies helped support and guide the birth of the computer age, the Internet, the Human Genome Project, the federal highway system, the GPS revolution, the global fight against AIDS and, of course, the space program. Each was built on the painstaking political work of a president, backed by scientific experts and private businesses, and fashioned over many years. All of the challenges above were daunting. We set out for the moon, John F. Kennedy said, not because it was easy but because it was hard. Likewise, those who think returning the nation to prosperity, economic fairness and a safe environment will be easy are only fooling themselves. Jeffrey D. Sachs, a professor of sustainable development and director of the Earth Institute at Columbia University, is the author of the forthcoming book “To Move the World: JFK’s Quest for Peace.” http://www.nytimes.com/2013/04/01/opinion/on-the-economy-think-long- term.html?partner=rss&emc=rss&wpisrc=nl_wonk
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March 31, 2013 Calculating the Impact of Cyprus’s Bailout By LANDON THOMAS Jr. WHAT are the implications of the huge losses — 60 percent — that the Cypriot bailout is imposing on the biggest depositors of that country’s two largest banks? The magnitude of the losses, disclosed late Friday and confirmed Saturday by Cypriot officials, has provoked concern that depositors in second-tier euro zone banks in Slovenia and Italy might withdraw their savings from those institutions. It has also raised fears that countries like Malta and Luxembourg, which like Cyprus have banking sectors many times bigger than their economies, might soon find it harder to gain access to international bond markets. One relevant lesson might lie not elsewhere in the euro zone but in the carcass of a Los Angeles-based savings and loan institution, IndyMac Bancorp, that failed five years ago and required a bailout. IndyMac was about the size of the Bank of Cyprus, and its depositors ended up taking nearly as big a loss — 50 percent on deposits above the levels insured by the Federal Deposit Insurance Corporation. Rather than causing a panic and a bank run elsewhere, IndyMac’s debacle proved to be a largely contained disaster with little fallout. “Just as you did not see mass panic and deposit runs in the U.S. after IndyMac, what happened in Cyprus is not going to spill over into Europe,” said Jacob Funk Kirkegaard, a specialist in banking and government debt at the Peterson Institute for International Economics in Washington. IndyMac needed rescuing because, like the Cypriot bank, it placed a large bet just before one of the biggest recent credit disasters. For IndyMac, the calamity was the collapse of the subprime mortgage market in the United States. For the Bank of Cyprus, it was the collapse of Greek government bonds, in which it and other Cypriot banks had invested heavily, seeking an adequate return on the billions of euros of deposits that had inflated their balance sheets. “How unique is Cyprus? Pretty unique actually,” Mr. Kirkegaard wrote in a research note. He pointed out that compared with other countries with huge banking systems relative to their economies — notably Malta, at about eight times gross domestic product, and Luxembourg at more than 22 times G.D.P. — Cypriot banks had much lower levels of equity to cushion against failing assets. What is more, it is the subsidiaries of foreign banks, which have little or no exposure to the local economies, that make up the bulk of the Maltese and Luxembourg banking systems. By comparison, many of the Cypriot banking assets that grew to be seven times the size of the country’s economy consisted of corporate, construction and mortgage loans to the Cypriot and Greek economies, which tied the health of these banks directly to those sagging economies. 399
As proponents of the Cypriot losses argue, just as it was fair that the large depositors that bankrolled IndyMac’s subprime excesses in 2008 pay the cost for the bank’s failure, so it is right that Cypriot savers — the largest of whom were Russian billionaires chasing high-yielding deposits — suffer a similar fate. “There were stories of pain, too, at IndyMac, but in the U.S., we paid little attention to it,” Mr. Kirkegaard said. “This will impose a lot of pain on Cypriot society, but the outcome will not be that much different.” IndyMac, when it was rescued by American regulators in July 2008, had become the ninth-largest originator of mortgage loans in the United States, relying largely on large, uninsured deposits to finance a lending spree in some of the riskiest areas of the housing market. And while the American government backed savers with deposits of less than $100,000, those with more deposited at IndyMac were required to accept a loss of 50 percent when it declared bankruptcy. (The federal government helped prevent a broader panic by later raising the deposit insurance threshold to the current $250,000.) As the Cypriot government begins investigating the misadventures of the Bank of Cyprus and the second-largest, Laiki, bankers and lawyers in Nicosia have begun to argue that the disastrous venture by the Bank of Cyprus into Greek bonds could well have been avoided. Local bankers say the bank had more or less sold out of its Greek bond position by early 2010 as Greece’s problems became evident. But then, in late spring of 2010, as an international bailout of Greece looked increasingly likely, the Bank of Cyprus plunged back into the market, buying 2.1 billion euros, $2.7 billion, worth of the troubled bonds, lured by the increasingly high yields that went with the risk. At the time, the bonds were trading around 70 cents on the euro, and bankers say that, in essence, when the Bank of Cyprus bought the securities, it was betting that the loss, when it occurred, would be less than the market had expected. Such a risky strategy is frequently used by hedge funds dabbling in distressed debt. But it is generally not seen as the expertise of large, deposit-reliant institutions like the Bank of Cyprus. “This was pure speculation — European banks like Deutsche Bank were desperately trying to get rid of these things,” said a Cypriot banker familiar with the transactions who was not authorized to speak publicly. Two years later, in March 2012, Greek bonds would be written down by 75 percent, saddling the Bank of Cyprus with a loss of about 1.6 billion euros — around 4.4 percent of its assets — from which it has yet to recover. European officials and economists at the International Monetary Fund are therefore making the case that the risks the Cypriot banks took were not just egregious but unique, given the size of its banking sector. This is not to say that there are no looming problems in Europe that could not become more dangerous in the days ahead as uncertainty over Cyprus continues. A few weeks ago the I.M.F., in its annual economic survey of Slovenia, warned that the country’s banks, hobbled by increasing nonperforming loans, were under “severe distress” and would need 1 billion euros in fresh cash to keep them afloat.
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Slovenia has large levels of understated debt that could attract investor scrutiny as broader finances continue to deteriorate. Nonperforming loans in Italy are also persistently on the rise. And risk-averse investors are becoming more wary about buying the bonds of Italian banks in the fear that if these banks fail, investors will be required to share in the burden of bailing them out. Nevertheless, those problems were endemic to Slovenia and Italy long before the Cyprus crisis emerged. If, as a result of Cyprus, bond investors and depositors become more discerning about where they put their money, European officials will see that as more positive than negative for the future of the euro zone. http://www.nytimes.com/2013/04/01/business/global/calculating-impact-of-cypruss- bank-bailout.html?ref=global
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Martin Feldstein Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues. When Interest Rates Rise 30 March 2013 CAMBRIDGE – Long-term interest rates are now unsustainably low, implying bubbles in the prices of bonds and other securities. When interest rates rise, as they surely will, the bubbles will burst, the prices of those securities will fall, and anyone holding them will be hurt. To the extent that banks and other highly leveraged financial institutions hold them, the bursting bubbles could cause bankruptcies and financial-market breakdown. The very low interest rate on long-term United States Treasury bonds is a clear example of the current mispricing of financial assets. A ten-year Treasury has a nominal interest rate of less than 2%. Because the inflation rate is also about 2%, this implies a negative real interest rate, which is confirmed by the interest rate of -0.6% on ten-year Treasury Inflation Protected Securities (TIPS), which adjust interest and principal payments for inflation. Historically, the real interest rate on ten-year Treasuries has been above 2%; thus, today’s rate is about two percentage points below its historical average. But those historical rates prevailed at times when fiscal deficits and federal government debt were much lower than they are today. With budget deficits that are projected to be 5% of GDP by the end of the coming decade, and a debt/GDP ratio that has roughly doubled in the past five years and is continuing to grow, the real interest rate on Treasuries should be significantly higher than it was in the past. The reason for today’s unsustainably low long-term rates is not a mystery. The Federal Reserve’s policy of “long-term asset purchases,” also known as “quantitative easing,” has intentionally kept long-term rates low. The Fed is buying Treasury bonds and long-term mortgage-backed securities at a rate of $85 billion a month, equivalent to an annual rate of $1,020 billion. Since that exceeds the size of the government deficit, it implies that private markets do not need to buy any of the newly issued government debt.
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The Fed has indicated that it will eventually end its program of long-term asset purchases and allow rates to rise to more normal levels. Although it has not indicated just when rates will rise or how high they will go, the Congressional Budget Office (CBO) projects that the rate on ten-year Treasuries will rise above 5% by 2019 and remain above that level for the next five years. The interest rates projected by the CBO assume that future inflation will be only 2.2%. If inflation turns out to be higher (a very likely outcome of the Fed’s recent policy), the interest rate on long-term bonds could be correspondingly higher. Investors are buying long-term bonds at the current low interest rates because the interest rate on short-term investments is now close to zero. In other words, buyers are getting an additional 2% current yield in exchange for assuming the risk of holding long-term bonds. That is likely to be a money-losing strategy unless an investor is sagacious or lucky enough to sell the bond before interest rates rise. If not, the loss in the price of the bond would more than wipe out the extra interest that he earned, even if rates remain unchanged for five years. Here is how the arithmetic works for an investor who rolls over ten-year bonds for the next five years, thus earning 2% more each year than he would by investing in Treasury bills or bank deposits. Assume that the interest rate on ten-year bonds remains unchanged for the next five years and then rises from 2% to 5%. During those five years, the investor earns an additional 2% each year, for a cumulative gain of 10%. But when the interest rate on a ten-year bond rises to 5%, the bond’s price falls from $100 to $69. The investor loses $31 on the price of the bond, or three times more than he had gained in higher interest payments. The low interest rate on long-term Treasury bonds has also boosted demand for other long-term assets that promise higher yields, including equities, farm land, high-yield corporate bonds, gold, and real estate. When interest rates rise, the prices of those assets will fall as well. The Fed has pursued its strategy of low long-term interest rates in the hope of stimulating economic activity. At this point, the extent of the stimulus seems very small, and the risk of financial bubbles is increasingly worrying. The US is not the only country with very low or negative real long-term interest rates. Germany, Britain, and Japan all have similarly low long rates. And, in each of these countries, it is likely that interest rates will rise during the next few years, imposing losses on holders of long-term bonds and potentially impairing the stability of financial institutions. Even if the major advanced economies’ current monetary strategies do not lead to rising inflation, we may look back on these years as a time when official policy led to individual losses and overall financial instability. This article is available online at: http://www.project-syndicate.org/commentary/higher-interest-rates-and-financial- stability-by-martin-feldstein
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The Irish Economy Cyprus and Capital Controls This post was written by Colm McCarthy March 30th, 2013 at 9:58 pm Having failed to agree a bank resolution regime more than four years into the Eurozone banking crisis, the EZ authorities have, at the second attempt, come up with a resolution of the Cypriot banks. The haircuts of uninsured bank creditors appear to be 60% and more. After a bank resolution, the surviving banks are solvent. Naturally, depositors may feel sore, and there could be deposit flight as soon as they re-open, even where the haircuts have been severe enough to make them adequately capitalised again. But not to worry, the central bank is there to deal with irrational deposit flight. It is after all the lender of last resort. But lo and behold, the Cypriot government has imposed capital controls - even insured deposits not facing a haircut are restricted. But since the written-down assets of the surviving banks are now in excess of their liabilities (they have been resolved) these assets will be money-good at the central bank. Not so apparently. If the ECB believes that the surviving Cypriot banks are now solvent, why is there any need for restrictions on depositor withdrawals? Is the ECB prohibiting liquidity provision through ELA after a bank resolution to which it has been a party? Of course the haircuts may, in the eyes of the ECB, be inadequate to ensure solvency. In which case why is the deal not modified further? Capital controls effectively create an inconvertible currency trapped in Cypriot banks, a precedent likely to be remembered when trouble strikes elsewhere. Do re-opening US banks decline to release deposits after the Feds have done their work, for the want of a lender of last resort? This entry was posted on Saturday, http://www.irisheconomy.ie/index.php/2013/03/30/cyprus-and-capital-controls/
Simon Wren-Lewis on Buti and Carnot This post was written by John McHale Simon Wren-Lewis has a typically thoughtful post on the European Commission’s approach to fiscal adjustment as set out by Buti and Carnot in a post linked to by Philip a couple of weeks back. In the context of the zero lower bound constraint on monetary policy, it is hard to disagree with him on the inappropriate aggregate stance of eurozone fiscal policy. But I think his discussion neglects an important second dimension of the challenge faced by the Commission (and indeed the ECB). In addition to being in recession, the fiscal lender of resort (LOLR) function is still a work in progress. This function has come a considerable way since early 2011, when a hard line on official creditor seniority, and the threat of a low trigger for PSI in future bail out programmes, pushed Ireland and Portugal – followed not far behind by Italy and Spain – deep into “bad
404 equilibrium” territory. (Some thoughts from the time here.) In strengthening the lender of last function, the Commission is constrained by the concerns of stronger countries about the fiscal risks they are taking on, which they see as further aggravated by moral hazard. (Sometimes I do wonder if the reluctance on LOLR can be fully explained by conflicting interests. Although it relates more to banking side, the recent comments – even if partially retracted – by the new Eurogroup head does give cause for concern about the appreciation for the importance of the LOLR for avoiding a serious escalation of the eurozone crisis.) The Fiscal Treaty, for example, must be seen as part of the quid pro quo for developing the LOLR. The ESM – absent some of the more damaging elements of the original proposal – and the ECB’s OMT programme would be unlikely without the strengthening of the rules-based framework. This must be balanced by the Commission against unwelcome implications of the rules for the aggregate fiscal stance. Given their advocacy for a strengthened LOLR, I do think the Commission sometimes gets a bum rap. This entry was posted on Saturday, March 30th, 2013 http://www.irisheconomy.ie/index.php/2013/03/30/simon-wren-lewis-on-buti-and- carnot/
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Free exchange Economics An interview with Athanasios Orphanides What happened in Cyprus Mar 28th 2013, 13:32 by G.I. | WASHINGTON, D.C. Though Cyprus only hit the front pages in the last month, its crisis has been years in the making. Athanasios Orphanides was governor of the Central Bank of Cyprus from 2007 to 2012, giving him a seat on the European Central Bank's governing council and oversight of Cyprus' banks. In an interview with The Economist, Mr Orphanides gives his views on how the crisis came about: exposure to Greece and the global financial crisis; decisions by the former communist government (with whom Mr Orphanides had a strained relationship); and flawed decisions by Europe's governments. Mr Orphanides was raised in Cyprus, received his PhD in economics from the Massachusetts Institute of Technology and was an adviser at the Federal Reserve Board. He is now a lecturer at MIT and a fellow at the Center for Financial Studies at the Goethe University of Frankfurt. The following is an edited transcript of the interview, conducted over the telephone and in writing in the last week. Give us the political and historical background for how Cyprus ended up in the euro area. Cyprus joined the EU in 2004 and immediately wanted to get into the euro area for the express purpose of completing as quickly as possible the union with the core of Europe. It was done because the public thought that would be beneficial for political reasons, not economic reasons. The strategic location of the island has made it a target over the millennia of various powers, and the country is just too small and weak. How did it come to have such a large financial sector with such large Russian deposits? Cyprus had developed its financial center over three decades ago by having double taxation treaties with a number of countries, the Soviet Union for example. That means if profits are booked and earned and taxed in Cyprus, they are not taxed again in the other country. Russian deposits are there because Cyprus has a low corporate tax rate, much like Malta and Luxembourg, which annoys some people in Europe. In addition, Cyprus has a legal system based on English law and follows English accounting rules. It has a well-educated work force that can provide financial services, and a high concentration of lawyers and accountants. As a result of that a lot of foreign interests, including from Russia, have a number of corporations based in Cyprus and organize their international business globally from Cyprus. This model is similar to
406 what you see in other countries: for example, there are even more Russian interests in the Netherlands and in Luxembourg. What was the role of decisions by Cyprus, decisions by Europe, and other factors in producing the crisis we see now? A number of factors played a role. The global financial crisis and exposure to Greece made Cyprus vulnerable. But the outcome was determined by decisions taken by the previous government in Cyprus as well as the broader malfunction of the euro area over the past three years. Two months after Cyprus joined the euro area [in January, 2008], there were presidential elections and the Cypriot public elected as president a communist, Demetris Christofias. The public was convinced he could solve the political problem we had with Turkey and reunify the island. The issue was not economic. If one thing has become clear over the last five years in Cyprus, it is that the euro area, which is not just a market economy but a currency union with strict rules, is not compatible with a communist government. Why is this important? This government took a country with excellent fiscal finances, a surplus in fiscal accounts, and a banking system that was in excellent health. They started overspending, not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth. What precipitated Cyprus' need for a bailout? Because of the fiscal policies the government pursued, it damaged the confidence of international investors and lost access to international capital markets in May of 2011. If the government had behaved as other governments did, they would have asked for assistance from the EU at that time, in May of 2011. The size of the banking sector and exposure to Greece were known risks but at that time there was no banking problem in Cyprus and the structural adjustments necessary to restore fiscal stability in the country were rather minor. As with any country with a large financial sector, a solid fiscal position was crucial to avoid creating doubts about the ability of the sovereign to serve as a temporary backstop, in case that became necessary. I was there at the time and as the central bank governor I was warning them all the time that not dealing with this issue in the context of the euro area crisis was extremely dangerous. Others had also warned the government, including ECB President Trichet. They were not willing to do anything because as a communist party they did not want to incur the political cost of adopting consolidation measures. Then on July 11, 2011 there was an explosion that destroyed the power station producing more than half the power supply of the island. It was triggered by 100 or so containers of ammunition stored in the sun for two years next to the power station. The containers were part of a shipment going from Iran to Syria that was intercepted in Cypriot waters after a tip from the U.S. The president took the decision to keep the ammunition. [NOTE: An independent prosecutor found that Christofias has ignored repeated warnings and pleas to destroy or safeguard the ammunition, apparently in hopes of one day returning it to Syria or Iran.] Cyprus did not have a severe recession in 2009 from the global crisis. The slowdown was fairly mild. But after the explosion, the economy was thrown into a recession. I recall that on July 18 I sent a confidential letter to the president and leaders of all parties calling for urgent measures to avert a crisis. Instead of heeding the warning, my letter was leaked to the press and my calls for action severely criticized by the government.
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The same month the European Banking Authority put the two largest Cypriot banks, which are being targeted now, through a stress test along other banks in the EU. The results were published on July 15, 2011. Both banks passed the stress tests. If the government had applied at that time for a reasonably small package from the troika, they could have fixed the fiscal problem fairly easily. Again, they didn't, because they didn't want to do structural adjustments. Instead, they started lobbying the Russian government to give them a loan that would help them finance the country for a couple more years, and Russia came through, unfortunately, in retrospect, with 2.5 billion euro which is a big chunk of money for a country with a 17 billion euro GDP. I say unfortunately because as a result the government could keep operating and accumulating deficits without taking corrective action. What was the impact of the Greek debt writedown? The next important date was the October 26-27, 2011 meeting of the EU council in Brussels where European leaders decided to wipe out what ended up being about 80% of the value of Greek debt that the private sector held. Every bank operating in Greece, regardless of where it was headquartered, had a lot of Greek debt. There were subsidiaries of French banks operating in Greece, a Portuguese bank, that were wiped out. Our two largest banks had major operations in Greece and significant exposure, so the Greek part of the operation and the bond holdings suffered a lot of damage. For Cyprus, the writedown of Greek debt was between 4.5 and 5 billion euro, a substantial chunk of capital. The second element of the decision taken by heads of states was to instruct the EBA to do a so- called capital exercise that marked to market sovereign debt and effectively raised abruptly capital requirements. The exercise required banks to have a core tier-1 ratio of 9%, and on top of that a buffer to make up for differences in market and book value of government debt. That famous capital exercise created the capital crunch in the euro area which is the cause of the recession we've had in the euro area for the last 2 years. For Cyprus, the combination of haircut and stress test meant that after taking measures the two largest banks needed about 2 billion euro of additional capital to be recapitalized according to the guidelines of the EBA. That's the first time someone could say: 'Your banks require assistance.' After losing more than 4.5 billion on the haircut on the Greek debt, this suggests how much capital they held before. The heads of states decision also said that if banks were not able to raise capital on their own, then the country is responsible for finding the capital and injecting it. The president of Cyprus agreed and did not ask for any provision to protect the country. Since all the holdings of Greek debt were public information (they had been published with the July EBA stress test), everyone could calculate what the haircut meant for the banks and since the Cypriot government was out of the markets the implications could be foreseen. You could say, well if they hadn't entered a programme before, they should have considered it now. But again they did not want to ask for assistance, because the troika would have forced them to make structural adjustments which the government did not want to do. What did you, as central bank governor, do with respect to the prudential oversight of the banks? The Basle II framework that governments adopted internationally, and that the EU supervisory framework during this period also incorporated, specifies that holdings of
408 government debt in a states' own currency are a zero-risk-weight asset, that is they are assigned a weight of zero in calculating capital requirements. This is the reason why [ECB] President [Jean-Claude] Trichet and most central bankers and supervisors were so alarmed at the prospect of the governments introducing credit risk (as was done in Deauville in October 2010) and at the prospect of considering defaults (as was done starting in late July 2011) in euro area sovereigns. It turned the supervisory framework in place upside down. To mitigate risks, the supervisor can ask a bank to raise additional capital. In Cyprus this was done and the two large banks raised significant amounts in 2009, 2010 and even as late as early 2011. After the government lost access to markets in May 2011 this became much harder, virtually impossible. Still, by spring 2012, with an additional 2 billion the banks could have met the EBA 9% plus capital buffer core-tier 1 set for the capital exercise. That was roughly 11% of GDP and would not have been an issue if the government had not lost market access as in that case the government could have injected this amount in any bank that needed it by issuing public debt. Given the government's lack of market access, was it inevitable that the stress tests, by exposing the banks' capital shortfall, would put the country's solvency in doubt? The ECB and the governors in general had been arguing before that capital exercise was done that the governments should have agreed to make the EFSF/ESM available for direct recapitalization of banks instead of asking each government to be responsible for the capitalization. That element created the adverse feedback loop between banks and sovereigns. They forced the stress test and recapitalization before they could reach an agreement on how to find resources for the recapitalization. Mario Draghi characterized the PSI [private sector involvement] on Greek debt, in association with these elements, as similar to a European Lehman in an FT interview. When my term ended on May 2, 2012, the recapitalization had not been completed. Instead of focusing on a solution, however, the government engaged on an assault on the banking system and started rallying on the slogan that the banks were responsible for all ills in the economy in preparation for the February 2013 election. What led to questions of debt sustainability and haircuts? Starting in July 2012, the press started reporting that the banking system needed 10 billion euro of capital, citing sources at the central bank. Some reports suggested the numbers were deliberately exaggerated as the issue had become part of the February 2013 presidential election campaign. When the press started reporting such unrealistically high numbers I became extremely concerned and warned in an interview that if the central bank was generating such high numbers it risked putting into question the sustainability of the country's debt. Under standard IMF sustainability analysis, the country's debt could be deemed unsustainable and the troika might ask for some form of a haircut. Indeed, the debt sustainability analysis created the debate over whether there should be some form of bail-in associated with the programme in Cyprus. How did the troika get involved? Following a downgrading in late June 2012, all three major rating agencies rated the sovereign paper Cyprus below investment grade. According to ECB rules, that made the government debt not eligible as collateral for borrowing from the eurosystem, unless the
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ECB suspended the rules, as it had done for the cases of Greece, Portugal and Ireland. In the case of Cyprus, the ECB decided not to suspend the eligibility rule. This was important because if Cyprus debt had remained eligible as collateral, Cyprus banks could continue to buy treasury bills and continue financing the needs of the country for some time. The ECB was trying to convince the Cyprus government that it had to make structural adjustments and fiscal adjustments and by that point in June, get into a programme. By triggering the loss of eligibility of the government debt as collateral, the ECB telegraphed to the government it had to go to the troika. The Cyprus government did formally ask for troika assistance in June of 2012, on the same day the Spanish government asked for assistance for its banking system. Even then, had the government accepted that they needed to make structural adjustments and negotiated a programme, which could have been done over two weeks, the government would have obtained financial assistance. If capital needs of banks had not been exaggerated, there would be no sustainability issue. Again, the government did not do that. They did not want to negotiate. According to press reports, the ECB communicated to the Cyprus government around November that if it did not engage in serious negotiations, it would consider cutting off liquidity. When that occurred the government agreed to bring the troika back and negotiate a programme. That programme and MOU was complete in December. Its elements included major reductions in pension benefits, major reductions in wages and salaries for the broader public sector and privatizations of government owned or semi- government owned corporations. It also included the suspension of cost of living adjustments, which were incompatible with being in the euro area. All these were agreed to in principle by an MOU. The government took them to parliament and the parliament immediately adopted them. What was not clear was what was negotiated about the banking system. The communist candidate was defeated in the February election and a conservative is now president. How did that affect the bailout? The new president, Nicos Anastasiades, took over on March 1 and wanted to complete the adjustment program that had been delayed so long as soon as possible in an honest manner. Cyprus expected a programme with similar terms to those faced by the other countries. Instead, he was effectively ambushed by the other governments at the very first meeting of the European council that he attended and the associated eurogroup meeting. On March 15-16, the other governments confronted the new president and new finance minister with blackmail: either you haircut deposits or we shut down the economy; the ECB would cut off liquidity to the banks. Why, in your view, was the March 16 plan flawed? The Cyprus parliament had passed a number of laws that influenced the current and future spending and pensions. And they were also in the process of finalizing how they would do privatizations of the semi public companies. So all the standard elements you'd expect in other programmes had been done or were being done. Why did they attack retail deposits in this manner? This had never before been a requirement of any other programme. And why did the German government insist in the last three days that there should be a bail-in? The only logical explanation I could see is that Angela Merkel's government faces re-election in September of 2013 and the SPD [the Social Democratic party, the principal opposition to Ms Merkel's Christian
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Democratic Union] has made it an issue: it does not want to support a loan by the German government to Cyprus because, they claim, that would be like bailing out the Russian oligarchs. This is how Cyprus got caught up in the German election. In the previous three programmes [Greece, Ireland and Portugal] the SPD supported Merkel's government on making the loans, but they were not as close to the election as this one. The SPD, I believe was trying to differentiate its position. This presented a dilemma for Merkel's government. If she suggested that a loan be given to Cyprus to bail out money from Russia, this would not go well with the debate in Germany. So it was incredibly convenient to say that all the depositors, including Russian depositors, be asked to be bailed in. To support this reasoning, unsubstantiated statements were being made in German press that deposits in Cypriot banks reflect money laundering and that the banking model of Cyprus could not be allowed to continue. The objective of the March 16 plan to confiscate part of deposits was none other than to damage irreparably the Cypriot banking system. The politics, in my mind, is what makes this episode so ugly, that some governments, to serve their own national or narrow political interests, arrived at a decision that inflicts irreparable damage to Cyprus. What will the implications be for Europe and the stabilization of the euro zone? This is similar to the blunder in Deauville with PSI that injected credit risk into sovereign government debt. The governments have created risk in what before last week were considered perfectly safe deposits. This is going to have a chilling effect on deposits in any bank in a country perceived to be weak. This will mean the cost of funding will increase in the periphery of Europe and as a result, the cost of financing for businesses and households will increase. That will add to the divergences we already have and make the recession in the periphery of Europe deeper than it already is. This is really a disaster for European economic management as a whole. http://www.economist.com/blogs/freeexchange/2013/03/interview-athanasios- orphanides
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Charlemagne North is north The euro zone’s exasperated north must do more than complain about the south’s troubles Mar 30th 2013 |From the print edition
LAPLAND is just about as far from Cyprus as one can go in Europe. But on a spring day the sun reflected on an endless expanse of snow can be as bright as a Mediterranean beach. Russian pleasure-seekers and businessmen may flock to both countries. Yet in economic terms they are worlds apart. This week Cyprus became the fifth euro-zone country to negotiate a euro-zone bail-out; AAA-rated Finland, in its laconic way, is perhaps the most hardline of creditor states. It is striking how the economies of EU countries on the Baltic Sea—from Scandinavia round to Germany, Poland and the ex-Soviet Baltic states—boast the union’s fastest- growing economies while many of those on the Mediterranean, from Greece to Spain, are shrinking fastest. The reasons are complex. For now, north and south are living up to stereotypes: Cyprus as the birthplace of the beautiful but fickle Aphrodite, who emerged from the surf at Paphos; Finland as the home of Vainamoinen, the wifeless old bard who, according to the “Kalevala”, a Finnish epic, surfaced from the primeval sea to plant the barren land. Bitterness between north and south is intensifying. In Cyprus protesters took to the streets angrily to defend their bank deposits, decry their looming impoverishment and denounce Europe, especially Germany. At the same time in Finland the prime minister, Jyrki Katainen, summoned several European leaders for a retreat in a Lappish resort to discuss how to bring greater “fairness” to European affairs. Those who “follow the rules” (ie, northerners) must not always have to put up money for those who break them (ie, southerners), he declared. The terms of the Cypriot rescue package reflect the exasperation of the creditor states. The era of the all-encompassing rescue is ending. Bail-outs must henceforth be accompanied by the bailing in of private investors. Cyprus was told its banks would not be helped by euro-zone taxpayers. So depositors have to take the hit for an oversized financial sector that had lived off questionable Russian business and had heavily exposed itself to Greece. The northerners’ priority is to avoid the mistakes in Greece,
412 where countries of the euro zone lent more money than Athens could ever repay (including to recapitalise banks). Creditor states later had to force private bondholders to take losses on Greek debt, and are now surreptitiously writing off official debt. The Finns, the Dutch and the Germans want to shift the euro zone away from the idea of greater pooling of liabilities, advocated by Euro-federalists. Instead they want to strengthen the euro’s basic framework as set out in the Maastricht treaty: each country must be responsible for its economic policies, within centrally imposed rules. Finland’s hard stance stems, in part, from notions of national self-reliance: a small people in a vast land of forests and lakes fought alone against the Soviet Union in the Winter War of 1939-1940, then with Germany in the Continuation War of 1941-44, and against Germany in the Lapland War of 1944. In the cold war Finland was a semi-isolated buffer state between East and West. The collapse of the Soviet Union and the bursting of a housing bubble pushed Finland into a severe recession and banking crisis: between 1990 and 1993 GDP fell by 10%, house prices fell by 40% and the Finnish markka lost 30% of its value. Finland did not seek outside assistance, and economists argue that crisis-era reforms laid the ground for strong recovery, best symbolised by the rise of Nokia, a mobile-phone maker. Having joined the euro, Finland’s attitude to Club Med countries is blunt: stop moaning and get on with reforms. Just look across the sea at the Baltic states: they have gone through agonising recession, and internal devaluation within fixed currencies, but are now growing faster than anyone else in the EU. Many in the Club Med countries talk of leaving the euro. But Club Balt members are still lining up to join. Estonia adopted the euro in 2011. Despite voters’ qualms Latvia has applied to join next year. Poland and Lithuania are not far behind. To their leaders, tough fiscal rules are not an imposition but a guarantee against future instability. That Cyprus became a playground and piggy bank for Russian money hardly boosts its case among Finns. Internal politics is hardening the debate over Europe. The rise of the Eurosceptical True Finns, which became the third-largest party in the 2011 election, threatens Mr Katainen’s awkward six-party coalition. The twain must meet The way Finland has liberalised its markets, and invested in education and technology while providing a generous welfare state and keeping tight finances, is admirable. Yet it risks falling prey to hubris. Any country can unexpectedly get into trouble and Finland is no exception. The once-mighty Nokia is in decline. Adjustment within a monetary union, where countries cannot devalue or relax monetary policy, is much more difficult, particularly when neighbouring economies are slowing down and even those with healthy budgets are retrenching. Had Finland gone through its recession within the euro, its pain would have been more intense. How much more support would the True Finns enjoy then? And how soon before Europe started talking of Finxit? The greatest threat to the euro’s survival is the increasingly poisonous politics of bail- outs in both north and south. Northerners have every right to demand responsibility from those they help. But they also have responsibilities of their own: they must show realism in designing bail-outs that do not inflict unnecessary pain; patience to delay austerity at home while others recover; and, above all, haste to rebuild the rickety financial structure of the euro zone. The first step to preventing another southern crisis is not hectoring from snowy forests, but creating a genuine banking union. http://www.economist.com/news/europe/21574539-euro-zones-exasperated-north-must-do-more- complain-about-souths-troubles-north 413
Economía
Dinamitad los limbos fiscales El ministro de Finanzas, Michalis Sarris, había sido, en 2012, presidente del grupo Laiki. Xavier Vidal-Folch 27 MAR 2013 - 20:58 CET449 ¿Por qué a nosotros nos hunden y los otros paraísos fiscales, como los de las islillas británicas de Man o Guernsey, o Luxemburgo, se quedan tan panchos? Este victimismo chipriota es bastante tontorrón. Si apenas nadie hurga en esos lugares es porque no piden dinero a los socios para ser rescatados de una quiebra. Y como en la mili, solo recibe palos quien no logra pasar desapercibido. El modo más rotundo de sajar la evasión fiscal territorial es armonizar a mansalva los impuestos Pero es que además el caso chipriota es de alucine. Hasta 2007 apenas tuvo impuestos. En los noventa acogió los 800 millones de dólares que arrambó Slobodan Milosevic al Tesoro yugoslavo. Coloca, lava y catapulta capitales rusos sucios, entre otros los de la especulación con el precio del petróleo. Distribuye, según la CIA, mujeres filipinas y dominicanas para su explotación sexual. Su gran puerto, Limassol, es capital de las navieras infrarreguladas, opacas e irresponsables que se acogen a la bandera de conveniencia —cuasipirata— del país, como cuenta muy bien Juan Hernández-Viguera en La Europa opaca de las finanzas (Icaria). Más. Su banca grande es el desastre quebrado que hemos visto. Y su élite financiera mantiene, como ocurría con la irlandesa, relaciones incestuosas con la derecha política, hijastra suya: el bueno del ministro de Finanzas, Michalis Sarris, que iba a pedir a los amiguetes de Moscú árnica con que aliviar las heridas bancarias, había sido, en 2012, presidente del consejo de administración de la más desastrosa de las entidades, el grupo Laiki. O sea que menos falsos agravios. En realidad, Chipre no es un paraíso fiscal, según la definición demasiado laxa de la OCDE. Es verdad que sus impuestos son bajísimos, el principal requisito para figurar en la lista negra. Pero no encaja en los otros dos: la opacidad total y la imposibilidad práctica de que terceros países obtengan de él información fiscal. Otros adornos le afean y lo fragilizan. El tamaño descomunal de su sector financiero (sus activos suponen 7,1 veces el PIB), exactamente igual que el de Irlanda —el otro gran rescate bancario medido en relación al tamaño de la economía—, el doble que la media de la eurozona (3,5 veces) y que España (3,1). Pero menos que la obesidad de Luxemburgo: 21,7 veces. De modo que no será paraíso en sentido jurídico estricto. Pero limbo, lo que para entendernos llamaremos limbo, un lugar próximo al cielo pero menos exultante, lo es, y sobremanera. También lo es Luxemburgo, aunque ambos hayan salido de la lista gris de la OCDE. ¿Luxemburgo? Sí, el país-comarca más rico del mundo, con sus 200 bancos extranjeros, con bastante más que tres billones de euros de activos financieros extraterritoriales (off-
414 shore) —de los 20 billones largos existentes en el mundo—, que gozan de un sistema fiscal supergeneroso. No tanto como con su antiguo régimen paradisiaco de los “hóldings 1929”, exentos de todo impuesto y retención. Pero, desde 2007, con unas SPF (societés de gestion de patrimoine familiale) que no pagan por renta, ni por patrimonio, ni por IVA, ni por asomo, salvo retenciones y una tasa de abono del 0,25%. Limbo. Algún día quizá Luxemburgo, y Suiza, y las cloacas isleñas de la City londinense (y... Singapur) se contagien del mal chipriota. En parte ya lo incuban. Para que entonces no tenga que salir el contribuyente alemán ni el asturiano a rescatarlo, para que no paguen sus platos rotos los tenedores de depósitos bancarios no asegurados, hay una solución: dinamitar los cimientos de los limbos fiscales. ¿Cómo? Mediante una poderosa armonización fiscal, que complete por el lado de los ingresos el Tratado fiscal sobre el déficit excesivo, que implica el control de los gastos. O sea, armonizar los tipos impositivos y las bases imponibles en los impuestos sobre el capital; implantar horquillas mínimas para el IRPF; eliminar las excepciones al IVA; armonizar al alza el impuesto de sociedades; gravar los beneficios cosechados en cada limbo por las sociedades mercantiles no residentes; imponer una Tasa Tobin progresiva a los movimientos de capitales. Una movida así no será coser y cantar. Los acuerdos fiscales en la UE requieren unanimidad. Los limbos y sus amigos tienen poder de veto. Y lo usan. De momento. Dinamitémoslo también. Pásalo. http://economia.elpais.com/economia/2013/03/27/actualidad/1364414111_545375.ht ml
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March 28, 2013 All of Draghi's horses - thoughts on banking union and the Cyprus 'solution' By Miguel Carrión Álvarez "The central bank defends the payment system every day, every hour, every minute." Scott Fullwiler[1] calls this "the fundamental truth of central bank operations" and I will call it the essence of monetary union. The usual institutional arrangement in monetary economies is that payments are made in state-issued currency, or by means of credit instruments denominated in a state currency serving as the unit of account. In advanced economies Banks provide the essential infrastructure of the payments system: they operate the channels, namely branches and ATMs, through which people and firms obtain cash; their demand accounts provide a store of value; and they provide their customers with payment instruments such as debit cards, or also credit-based instruments such as cheques and credit cards. Just as banks guarantee their customers' credit, backed by the customers' bank deposits, when issuing to them widely acceptable payment instruments; so the state guarantees the credit of the banks in relation to their customers' demand deposits, through deposit insurance schemes. All of this must be relatively transparent to the public if the payments system is to function effectively. Deposit insurance was, in fact, invented to prevent bank runs and you cannot have just a bit of it: it must be total up to a certain amount. The UK tried to have only partial deposit insurance and we saw how that turned out with Northern Rock in September 2007. In addition to this, the central bank acts as a clearinghouse for payments among banks, which comes into play every time two people use means of payment issued by two different banks to mediate an economic exchange between them. Central bank liquidity provision and lending-of-last-resort actions exist to protect the bank clearing system and thus the overall payments system. This is the meaning of Scott Fullwiler's dictum above, and the 'zeroth mandate' of central banks even if their charter say their first (and maybe only) mandate is price stability, for there can be no price stability without a stable payment and clearing system. Similarly, for international payments the BIS in Basel acts as a central bank of central banks. In the Eurozone the Eurosystem acts as a clearinghouse between Eurozone central banks through the TARGET2 system, and the ECB defends the stability of the payments and clearing system by means of its ordinary, and currently quite extraordinary, liquidity provision. The ECB may talk about broken monetary policy transmission channels but what should keep them awake at night is the possibility of a broken payments and clearing system. It is thus not unreasonable to argue that, in a monetary union with free movement of capital and electronic means of payment, deposit insurance should be union-wide. If it isn't there is a risk of bank deposit runs or destructive zero-sum games, as seen when at the end of 2008 the IceSave fiasco and the Irish blanket bank
416 guarantee forced the EcoFin to harmonise deposit insurance[2]. Even then the choice to mutualise Eurozone bank deposit insurance was rejected, and lo and behold the issue resurfaced again in the banking union debate in the second half of 2012. Deposit insurance is a state guarantee of the banking business and a recognition that banks are service providers of the public good of a payments system. Such a state guarantee requires regulation and supervision if moral hazard is to be avoided. Again, if liquidity provision and deposit insurance are to be mutualised, then it is reasonable that bank regulation and supervision should also be mutualised. Whether or not the banking supervisor is the same central bank that provides liquidity, there is an obvious synergy between the two functions and so-called Chinese walls between the two would prevent either from being effective. In the throes of the Greek sovereign debt crisis in 2011, Guntram Wolff of Bruegel[3] argued: "The ECB - providing a large part of the infrastructure of the ESRB - knows which banks use Greek bonds as collateral for the open market operations and should therefore have a good picture of exposure to Greek bonds. The ECB should also have fairly detailed information on the interbank market, from which contagion across banks can be assessed." The Eurozone would therefore be handicapping itself it it prevented the ECB in its capacity as liquidity provider from sharing information with whichever institutions are responsible for bank regulation, supervision and resolution. In addition, deposit insurance requires the ability to intervene an insolvent institution and to summarily put it into receivership or restructure it. In the US the FDIC has been doing this for 80 years, for thousands of banks[4], though apparently unbeknownst to the US President[5] "Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks." The example of the FDIC makes it inexplicable that the fact that there are a few thousand banks in the EU is used as an argument against EU-wide deposit guarantee and bank resolution by people who should know better. An ordinary judicial insolvency or liquidation process seems to be inadequately slow for banks, which is why special resolution regimes are needed. Such were advocated, for instance, by Joseph Stiglitz [6] (who called them 'super-chapter-11' by reference to US bankruptcy law) in light of the experience of the late 1990s Asian and Russian currency crises. The case of Lehman Brothers showed that nondepository institutions might also require a speedy resolution scheme which the FDIC could not provide and which 4 years later is still not in place. In Europe, a special resolution regime for banks is in the cards, but so far it appears that only Spain has anticipated such legislation, and only under duress as a result of the July 2012 Memorandum of Understanding. In sum, the case seems compelling for a Eurozone-wide clearing system, liquidity provision, deposit insurance, banking regulation and supervision, and a special resolution scheme for banks. The case is underpinned by the necessity to provide a unified and efficient payments system for the currency area, and the need to ensure its safety and defend its integrity. Arguments against joint supervision hinder the Central bank in distinguishing between illiquid and insolvent institutions. Polemics against joint deposit insurance actually foster cross-border deposit runs. And rhetoric against Target2 undermines the integrity of the payments and clearing system itself.
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The Target2 'issue' dovetails with deposit insurance because the whole point of worrying about Target2 is that, in case of a Euro breakup, the Bundesbank might not be able to recover its claims on the Eurosystem. However, these claims are, at least partly, balanced by nonresident deposits in German banks. As Paul de Grauwe[7] has pointed out, that problem would be solved if, after a Euro breakup, the Bundestag removed deposit insurance for nonresident deposits. In addition, Karl Whelan [8] has argued that even a Euro exit would not necessarily entail a repudiation of central bank debts to the Eurosystem, precisely because of its role as a clearinghouse for cross-border payments. Nevertheless, to the extent that German Target2 balances reflect peripheral residents taking their deposits abroad rather than German residents repatriating their foreign holdings, much clarity would be achieved if those banks taking full-page ads[9] encouraging Chancellor Merkel to oppose Euro-wide deposit insurance, instead lobbied the Bundestag to remove the umbrella of deposit insurance from nonresident deposits. It is not possible for a Euro member state to entertain Euro breakup, decry Target2 balances, refuse deposit insurance, and yet benefit from a panic in the deposit- taking zero-sum game. Or rather, it can be done but it's not in the wider European public interest. And so we come to the unfortunate outcome of the Cyprus crisis between the Eurogroup meetings of March 15 and March 25, 2013. The initial decision to bail in the insured depositors of Cypriot banks cast doubt on the commitment of those present in the Justus Lipsius building (finance ministers, Commissioners and ECB board members) to the integrity of the Eurozone payments system, and on their ability to act in the public interest. Probably the best one-liner was provided by David Zervos, who said[10] "All of us should really take a moment to consider what the governments of Europe have done. To be clear, they initiated a surprise assault on the precautionary savings of their own people."
With the move to 'tax' deposits below the €100k deposit insurance limit, on the legalistic argument contrived by the European Commission that if a tax is levied a minute before a bank fails in order to pay for a recapitalization the bank never failed and thus deposit insurance never came into play, the Eurogroup reneged on the October 2008 commitment to harmonize deposit insurance across the European Union. To go by immediate press accounts of the March 15 negotiations[11] [12] EU Commissioner Rehn and Cyprus President Anastassiades both made specific proposals taxing depositors under the deposit guarantee ceiling, and the ECB threatened to force the insolvency of the Cypriot banks which would have put the Cypriot government on the hook for €30bn in deposit insurance it could ill afford. Many people, German Finance minister Schäuble among them, have since attempted to exonerate themselves on the argument that they made proposals that left insured deposits unaffected. Nobody, least of all the ECB, appears to have warned of the implications of undermining deposit insurance. But in fact, to stem a bank run, a Cypriot bank holiday which ended up lasting nearly two weeks and included capital controls in the form on a ban on wire transfers. I would like to expand on the implications of the Eurogroup's "assault on precautionary savings". Ashoka Mody[13] has estimated that, in the OECD, at least two-fifths of the increase in households’ saving rates between 2007 and 2009 was due to increased uncertainty about labour-income prospects
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What this means is that, at times of economic uncertainty, ordinary people increase their stock of saving (precautionary savings are not savings for deleveraging, but to build 'rainy day funds'). Mody observes that in 2010 savings rates dropped again, which we can speculate is due to the modest economic recovery that took place that year. But given that the economic conditions in the Eurozone since 2010, and especially in 2012, haven't been all that good, with several countries in recession and a couple in outright depression; and given the unanimously gloomy official economic forecasts for the next year; it would not be surprising to find that households have again attempted to build up a rainy day fund in the form of liquid deposits at their local bank after the dates explored by Mody and his coauthors. The increasingly explicit threats by the Eurogroup to tax these deposits also beyond Cyprus can only encourage households to shift their precautionary savings away from bank deposits. The final Eurogroup decision on Cyprus ended up restoring deposit insurance and imposing a resolution of only the two money-center banks in Cyprus, leaving the rest of the banking system initially untouched. However, the message that it was the political intention of the Eurogroup to liquidate Cyprus' "business model" make a run on the remains of the Cypriot banking system a near certainty, and indeed the Cypriot parliament legislated stringent capital controls. But the Cypriot capital controls not only ringfence the Country to avoid a capital flight: they also completely tear up the modern payment system that used to exist in Cyprus. For ordinary people there will be restrictions on cash withdrawals, on check cashing, on payment orders, and on the use of payment cards. But the capital control bill passes by the Cypriot parliament also allows the monetary authorities to limit interbank lending. In order to save the Euro, and in order to save Cyprus from a crippling capital outflow, the entire payment and clearing system is Cyprus has been destroyed. The fact that not only the Eurogroup but the European Commission and the central banks involved are going along with this with only a meek statement that the capital controls should be lifted "as soon as possible". When Roosevelt's Emergency Banking Act of 1933 instituted a multi-day bank holiday it was on the promise that when banks reopened they would be solvent, and the promise was upheld and most banks opened within 4 days. Nothing of the sort is being promised in Cyprus, although the banks have finally open. Without a diagnosis of the underlying problem other that "the Cypriot economic model is unsustainable", the problem with ringfencing Cyprus and dismantling its payments system "for reasons of public safety and security", ostensibly to prevent an "uncontrollable outflow of deposits" is that it is not clear how the Cypriot and European authorities expect to fix the underlying problem in the very short time they're buying themselves (supposedly 7 days). Finally, it should give everyone pause that Eurogroup president Jeroen Dijsselbloem would characterize deposits above the €100k insurance limit as a risky investment earning a return "… Because if I finance a bank and I know if the bank will get in trouble I will be hit and I will lose my money, I will put a price on that. I think that’s a sound economic principle. …" [14]
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This completely ignores the fact that an important economic role of large deposits is to serve as revolving capital for firms of all sizes. Just like households have increased their "precautionary savings" in response to the recession, so firms may have increased their operating cash holdings in reaction to the contraction of trade credit that has accompanied a financial crisis lasting already 5 years. Have the European economic authorities thought out the impact that appealing to the "moral hazard" of large depositors as "investors" in "sky assets" may have on day-to-day functioning of the real economy? In conclusion, even if an immediate bank run due to Cyprus is avoided in the rest of the Eurozone, will all of Draghi's horses and all of Draghi's men be able to put together the broken egg of public confidence in deposit insurance, and more generally in the Eurozone's commitment to the integrity of its payments system?
[1] Fullwiler, Scott T., Modern Central Bank Operations – The General Principles (June 1, 2008). Available at SSRN: ssrn.com/abstract=1658232 [2] Ecofin Council, Immediate responses to financial turmoil - Council Conclusions (7 October 2008) www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/103202.pdf [3] Wolff, Guntram B., ESRB should act on sovereign risk, (May 5 2011) www.bruegel.org/nc/blog/detail/article/206-esrb-should-act-on-sovereign-risk/ [4] FDIC, Failed Bank List www.fdic.gov/bank/individual/failed/banklist.html [5] ABC News, Obama: No 'Easy Out' for Wall Street (February 10, 2009) abcnews.go.com/Politics/Business/story [6] Stiglitz, Joseph E., Globalization and its Discontents (2002) W W Norton & Co. [7] De Grauwe, Paul and Ji, Yuemei, What Germany should fear most is its own fear (September 18, 2012) www.voxeu.org/article/how-germany-can-avoid-wealth-losses-if- eurozone-breaks-limit-conversion-german-residents [8] Whelan, Karl, TARGET2 and Central Bank Balance Sheets. University College Dublin. School of Economics, 2012-11. hdl.handle.net/10197/3919 [9] Handelsblatt, Sparkassen und Volksbanken treiben Merkel zum Kampf (September 13, 2012) www.handelsblatt.com/unternehmen/banken/einlagensicherung-sparkassen-und- volksbanken-treiben-merkel-zum-kampf/7129638.html [10] Business Insider, ZERVOS: 'This Is A Nuclear War On Savings And Wealth' (March 17, 2013) www.businessinsider.com/zervos-this-is-a-nuclear-war-on-savings-and-wealth-2013-3 [11] Spiegel, Peter, Cyprus depositors’ fate sealed in Berlin (March 17, 2013) www.ft.com/intl/cms/s/0/f890566a-8f24-11e2-a39b-00144feabdc0.html [12] Steinhausser, Gabriele; Stevis, Matina and Walker, Marcus, Cyprus Rescue Risks Backlash (March 18, 2013) online.wsj.com/article/SB10001424127887323639604578366700444429538.html [13] Mody, Ashoka; Sandri, Damiano and Ohnsorge, Franziska, Precautionary savings in the Great Recession (22 February, 2012) www.voxeu.org/article/precautionary-savings-great- recession [14] Financial Times, The FT/Reuters Dijsselbloem interview transcript (26 March, 2013) blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem-interview-transcript/
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Daily Morning Newsbriefing
March 28, 2013 Have they thought this through? Cyprus imposes capital controls as banks are schedule to open today at noon under heavy police protection; measures include daily withdrawal limits of €300, a maximum size of transfers of €5000, and restriction on credit card transactions; FT says measures will be officially in place for only seven days, but likely to be renewed perpetually; This is our last briefing before the Easter break as most of continental Europe shuts down from Friday until Monday inclusively. We will resume on Tuesday, April 2. Cyprus yesterday essentially defaulted on all savings, as the government introduced capital controls. The only thing that a Cyprus euro has in common with a euro from now on, are the similar looking banknotes, and a one-to-one exchange rate for small denominations. These are the measures: Daily withdrawal limit: €300; Maximum size of transfers: €5000; overseas credit card transaction limit: €5000 per month maximum allowed transfers for Cypriot students abroad: €10,000 per quarter. The FT writes that “while the capital controls are designed to expire after seven days, people with knowledge of the matter said the government would continue to renew the curbs on a weekly basis for as long as necessary.” The banks will open at noon today for six hours, and will be heavily guarded by plainclothes police. Once you introduce capital controls, you will keep them for many years because the lifting of those controls would trigger an immediate bank run on deposits. It is not clear at all whether capital controls are legal under European law. European law foresees exemptions but those exemptions are in themselves limited. Another factor to consider are the external effects of this decision. Would anybody now keep their deposits in a Spanish bank, even insured deposits, if government can impose capital controls? While the Cyprus agreement apparent respects deposit insurance, the capital controls are effectively a backdoor way to tax small depositors. Christopher Pissarides says the eurozone has become a defunct colonial venture colonialism; also says that decision-making procedures in the eurozone are a shambles; If you only read one article on Cyprus, make it this one. Christopher Pissarides, who now works as a senior economic advisor to President Nicos Anastasiades, gives the historic background to the Cyprus crisis, how the country move to financial services
421 after the Turkish invasion 1974, which destroyed much of the country’s industrial and agricultural base. He said Cyprus had none of the problems of Greece. The way Cyprus has been treated by its eurozone partners shows that far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole. Meanwhile, the haphazard decision-making in the eurogroup continues. “Following the Cyprus agreement, the chairman of the group declared that this would be a template for the future. Panic spread in the eurozone, the value of the euro dropped; and then the denial came, on the same day – the remarks were taken “out of context”. Cyprus is a “special case”, apparently. We wait to hear what is special about it. Decision-making in the eurozone has reached a new low. Regardless of whether the deal for Cyprus is good or bad, observing the way that decisions were made, contradicting one week what was said the week before, designing templates and withdrawing them overnight, pushing Russian investors away from Cyprus one day and wooing them elsewhere in Europe the next, casts serious doubts on the ability of this group to make the decisions to push Europe forward to financial stability and economic growth.” John Dizard explains how capital controls turn into trade controls; Hat tip to FT Alphaville, here is an interesting observation by John Dizard, who explained the mechanism of how capital controls can turn into trade controls. “Capital controls turn into trade controls, as the locals attempt to find ways to turn hard assets or non-banking services into foreign exchange. At some price, for example, you can buy a boat in Cyprus with post-haircut, capital-controlled local deposits, sail it to Lebanon, and then sell it for real, usable money. The same with antiques, jewellery, or anything else you can think of. Even capital goods such as fork lifts can be motored off in the middle of the night.” After Cyprus, investors get nervous about Slovenia Slovenia failed to calm markets lacking specifics of its fiscal consolidation and bank restructuring plan; Slovenian bond yields rise 56bp to a new record high of 6.335%, credit default swaps jumped 49bp; Investors are spooked by the developments in Cyprus, now expecting Slovenia to be next asking for a bailout. Amid a lack of more details of Slovenia’s fiscal consolidation and bank plan investors are likely to be less patient. The IMF said last week Slovenia needs about €3bn of funding this year, while banks need an additional €1bn of fresh capital. The previous government, before collapsing amid a corruption scandal, had proposed a €4bn plan to deal with bad assets at financial institutions that the new prime minister pledged to follow. But the lack of specifics rattles the markets, sending bond yields to record highs. Yields on Slovenia’s dollar-denominated bonds maturing in 2022 rose 56 basis points to a record 6.336%, data compiled by Bloomberg show. The cost of protecting Slovenian bonds with credit-default swaps jumped 49bp yesterday to a five- month high of 327bp. IMF getting tough on Europe Robin Harding has the story of how the IMF had been getter tougher on Europe; This is a very useful backgrounder by Robin Harding at the FT on the shifts that have taken place inside the IMF since Christine Lagarde took over from DSK. While he ran 422 the show more centrally, relying only on a smaller number of close advisers, she has been running it in a more traditional manner, as a result of which power has shifted back to the department heads. One of the consequences of this shift is that the IMF has been getting much tougher on the eurozone, which was clearly evident in the negotiations with Cyprus. French household PPP drops sharply Household purchasing power contracted 0.4% in 2012, first decline in 30 years; INSEE confirms French economy shrank 0.3% in Q4 2012; French government set to sell its stake in aerospace group to raise e448.5m; One gloomy statistics after another for France, as new data from the statistics agency INSEE on Wednesday confirmed household purchasing power contracting by 0.8% in the last quarter of 2012 or 0.4% over the year as a whole, the first decline since 1984. Higher taxes and social contributions at the end of the year are principal factors behind the decline Les Echos cites INSEE. The French economy shrank 0.3% in the fourth quarter of 2012, stagnated over the year as a whole and corporate profit margins, which are among the lowest in Europe, stood at 27.9% in 2012, the weakest since 1985, according to Reuters. The French government, which admitted earlier this year it will fall well short of its 2013 growth and deficit targets, said on Wednesday it would raise €448.5m from the sale of a 3.12% stake in aerospace group Safran. Germany blocks SSM compromise Germany blocks SSM compromise with the European Parliament; The Wall Street Journal has the story that the German ambassador has blocked the compromise on the single supervisory mechanism. He raise three specific objections. He wants a stronger commitment by member state to change the treaties, to incorporate a strict separation between monetary policy and bank supervision; he wants to give national parliaments, not just the European Parliament, the right to question the SSM; and he wants member states to be able to give an official recommendation to the ECB to remove the vice chairman of the supervisory board. Pier Luigi Bersani’s attempt to form a government is not going well; has asked President Giorgio Napolitano for an extension of the mandate until Friday; Angelino Alfano ruled any possibility of a coalition with Bersani and the anti-European Five Star Movement, and his seeking a mandate of his own; Beppo Grillo also wants a mandate; Pier Luigi Bersani may ask for a few extra hours to try form a working government, La Stampa sources said. The Partito Democratico leader won’t have a majority to form a coalition able to lead country on the path of reforms. Both Silvio Berlusconi and Beppe Grillo rule out any possibility of a deal or a temporary agreement. That’s why Bersani may ask President Giorgio Napolitano extra time until Friday (and not until today as expected) to solve the deadlock. Angelino Alfano, meanwhile, closes the door on Bersani, Reuters reports. The Popolo della Libertà secretary said he cannot be in the same coalition with the anti- establishment and anti-European Movimento 5 Stelle. The continuous flirt between
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Bersani and Grillo outrages Alfano, who says that he now wants a full mandate from Italian President. As expected, the PDL says he will abstain from the confidence vote on any hypothetical government run by Bersani. The Movimento 5 Stelle, too, will ask Giorgio Napolitano to receive the mandate to form a new government. As Il Corriere della Sera reports, Beppe Grillo’s party rules out any alliance with the Partito Democratico. Its Senate whip, Vito Crimi, has called on the president to act responsibly, which is to give him a mandate to run the country. Crimi also said there was no chance that a government proposed by Bersani winning a confidence vote in Parliament. Italian financial police search Nomura in connection with MPS scandal; The Italian finance police searched Milan offices of Nomura International due the Monte dei Paschi di Siena scandal. As La Repubblica reports, the probe is regarding a 2009 derivatives agreement between Nomura and MPS. The Prosecutors of Siena are seeking evidence concerning a July 2009 conference call between executives of the two banks for the restructuring of the "Alexandria" derivatives deal. The Alexandria mandate agreement was found in October, locked in a safe belonging to the former managing director Antonio Vigni. Due a series of derivatives transactions, MPS posted unexpected losses for €730m. Luxembourg wary of Germany Jean Asselborn says Germany is seeking eurozone hegemony; Reuters quotes Jean Asselborn, foreign minister of Luxembourg, criticizing Germany for "seeking Eurozone hegemony". Specifically, Asselborn objects to German criticism of Cyprus' "business model", arguing that it is not for Germany to "choke" other countries' economic models "under cover of financial technicalities". Defending the low-tax financial centre model followed by many small countries, Asselborn also said the large countries such as Germany, France and the UK can't argue that only their financial centres are needed and those in other countries must be stopped. Spain's tier 2 banks post losses Reuters reports that three of Spain's financial institutions included in tier 2 in last summer's Memorandum of Understanding (that is, those needing state support but short of nationalization) have posted large losses for 2012. According to Reuters the losses are due mostly to the forced writedown of risky real estate assets on the institutions' balance sheets. CEISS and BNM lost €2.5bn, and Caja 3 lost €1bn, after taking provisions for €3bn, €3.7bn and €1.6bn on their real estate portfolios. Reuters writes that Caja3 and BMN are expected to recapitalise in the market, while CEISS is expected to be nationalized after a €600m public capital injection. CNBC reports that the fourth "tier 2" institution, Liberbank, will carry out a right issue in May after converting its subordinated debt and preferred shares to common equity. Medical study discerns negative public health effects of austerity A study published in The Lancet on the health effects of the economic crisis and of austerity policies argues that "suicides and outbreaks of infectious diseases are becoming more common" in Greece, Portugal and Spain as a result of austerity policies, while in Iceland "the financial crisis seems to have had few or no discernible effects on health". The paper "suggests" that "the interaction of fiscal austerity with economic shocks and weak social protection is what ultimately seems to escalate health and social crises in Europe".
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Reuters quotes the lead researcher in the study that "There is a clear problem of denial of the health effects of the crisis, even though they are very apparent" and compared the refusal by national and European authorities to acknowledge the health effects to austerity to the "obfuscation" by the tobacco industry. Eurozone Financial Data 10-year spreads
Previous day Yesterday This Morning
France 0.710 0.746 0.762 Italy 3.235 3.556 3.567 Spain 3.608 3.831 3.862 Portugal 4.879 5.159 5.181 Greece 10.810 11.639 11.63 Ireland 2.798 2.996 3.002 Belgium 0.911 0.957 0.973 Bund Yield 1.34 1.271 1.26
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.280 1.2785
Yen 121.020 120.38
Pound 0.846 0.8439
Swiss Franc 1.218 1.218
ZC Inflation Swaps
previous last close
1 yr 1.3 1.3
2 yr 1.34 1.32
5 yr 1.73 1.6
10 yr 1.91 1.9
Euribor-OIS Spread
previous last close
1 Week -5.100 -5.1
1 Month -4.357 -2.857
3 Months 2.214 4.414
1 Year 31.129 33.229
Source: Reuters
http://www.eurointelligence.com/professional/briefings/2013-03- 28.html?cHash=e80ee742c49425e9003b01dbb07807bc
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03/27/2013 10:35 AM Suspicious Transactions Cypriot Parliament Investigating Capital Flight By Stefan Schultz in Nicosia Banks have been closed and accounts frozen in Cyprus recently. Nevertheless, large amounts were moved out of the country's crippled financial institutions on the eve of the bailout package. Lawmakers are suspicious and are investigating both the government and the Cypriot central bank. Panicos Demetriades looked dead tired as he opened the press conference on Tuesday afternoon on the fourth floor of the Cypriot central bank. The questions and answers flew back and forth for 90 minutes, with Finance Minister Michalis Sarris doing his best to back up the central bank head. Outside, the mountains slowly receded from view into a haze, while inside journalists became increasingly restive. When the session ended, many were left wondering why Demetriades had invited them in the first place. He had virtually nothing new to say. Many interpreted the press conference as a symbolic exercise. Central bank head Demetriades, they felt, sought to stage a show of strength to counter the pressure that has been heaped on his shoulders in recent days. For one, he announced earlier this week, without consulting the Cypriot government first, that small banks in the country would open their doors again on Tuesday, in contrast to the island-nation's two largest financial institutions Laiki and Bank of Cyprus. The result was a massive protest from the smaller banks and a reversal. The banks stayed closed. For the moment, the opening date is set for Thursday, and many fear that a flood of angry customers could overwhelm the sector. Then, on Monday, the central bank announced that it was installing financial manager Dinos Christofides as a special consultant to the Bank of Cyprus as it prepares to take on assets from Laiki, which is to be liquidated. The deployment of Christofides is legitimate, but it triggered widespread concerns that the Bank of Cyprus too may soon be broken up. Demetriades was accused of not doing enough to explain the steps he was taking, thus intensifying investor anxiety. Most of all, though, the central bank head has been harshly criticized due to suspicious capital flight from Laiki and the Bank of Cyprus, the two institutions that have been hit hardest by the Cypriot banking crisis. There are indications that large sums flowed out of the two banks just before the first bailout package was signed in the early morning hours of March 16. At the end of January, some 40 percent of all savings held in Cypriot accounts were on the books of those two banks. Since then, however, much of it has been transferred elsewhere, despite orders from the central bank that accounts at the two institutions be frozen. 'Special Payments' The central bank now stands accused of not doing enough to control the movement of capital. Transfers for humanitarian aid were permitted which, while certainly an acceptable exception, opened a loophole for abuse. Many are also furious that the bank allowed "special payments," the definition of which was never adequately established.
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The Cypriot central bank has defended itself by saying that it was impossible to completely prevent all transactions, despite the account freeze. Much of the money was withdrawn from overseas, where Cyprus had no authority. Branches of Cypriot banks in non-euro-zone countries such as Russia and Britain do not answer to the European Central Bank. Their liquidity is controlled by central banks in those countries. Such a defense is nothing less than a voluntary admission of impotence. Holders of smaller savings accounts have been unable to access much of their money for almost two weeks, companies have been unable to pay their suppliers and across the country people are concerned that their salaries will not arrive on schedule on the first of the month. Meanwhile, rich businesspeople and those with connections overseas have been able to transfer their money into foreign accounts. Parliament in Nicosia is suspicious. Lawmakers have demanded that the central bank assemble a list of those customers who withdrew large amounts of money prior to the closure of the country's financial institutions. In particular, parliamentarians want to know if central bank employees or members of the government received early warning and were able to quickly rescue their assets. Loss of Faith According to the Greek television station Mega Channel, the list has already found its way into the hands of Parliament President Yannakis Omirou. No one in parliament or in the central bank could be reached for comment on Tuesday evening. Still, the parliamentary investigation indicates just how great the mistrust is between lawmakers and the government -- and how acute the doubts are as to Panicos Demetriades' competence. Toward the end of the Tuesday evening press conference, the central bank head did finally find some news to convey. Holders of smaller accounts, he said, should be prepared for the fact that not all bank services will immediately be available. Those who had more than €100,000 parked at the Bank of Cyprus will likely lose "about 40 percent" of their assets, he said, adding that the exact amount is still being established. Despite the remaining uncertainties, though, he assured the press that the banks would open as planned on Thursday. He also said that, while Cyprus is now threatened with a recession, the economy will quickly regain its footing. Demetriades made an appeal to the entrepreneurial spirit of Cypriots. But none of what he said is cast in stone. Bank customers could suffer for much longer and experts say that those with more than €100,000 in their accounts stand to lose up to 90 percent of their deposits. According to the Greek television station skai, Cypriot banks will remain closed until April 1. And economists forecast a deep recession for Cyprus with high unemployment, comparable to that which has gripped Greece in recent years. What remains is a central bank head who has lost much of the trust confided in him. He has said that he does not intend to resign, and because his job enjoys constitutional protections, he cannot be fired. Nonetheless, Cypriot President Nicos Anastasiades seems to have had enough of him. According to Cypriot television, the president is currently looking into potential legal loopholes that would allow him to get rid of Demetriades anyway.
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URL: • http://www.spiegel.de/international/europe/cypriot-parliament-investigates- government-after-dubious-transactions-a-891168.html Related SPIEGEL ONLINE links: • False Start: Is the New Euro Group Head Up to the Task? (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891102,00.html • World from Berlin: Cyprus Chaos 'Doesn't Inspire Hope for EU Future' (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891018,00.html • Bailout Insights: What Cyprus Tells Us about Germany's Character (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891063,00.html • Stubborn and Egotistical: Europe Is Right to Doubt German Euro Leadership (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890848,00.html • Lessons from Cyprus: Euro Crisis Poses Grave Dangers to EU Unity (03/25/2013) http://www.spiegel.de/international/germany/0,1518,890745,00.html
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Newsletter del 26 de Marzo 2013
Cultura & Ideas Ideas DEBATE: Un “Imperio latino” contra la hiperpotencia alemana 26 marzo 2013 LIBÉRATION PARÍS Compartido 361 veces en 10 idiomas
Detalle del sarcófago de Portonaccio en el que se representa una escena de una batalla entre germanos y romanos, 180-190 d.C. El filósofo italiano Giorgio Agamben recupera la idea de una unión entre países del sur de Europa, ya esbozada por su colega Alexandre Kojève en 1945. Así estos Estados podrían ejercer de contrapeso a la preponderancia de Alemania en el seno de la UE. Giorgio Agamben En 1945, Alexandre Kojève, un filósofo que además ocupó cargos de alto funcionario dentro del Estado francés, publicó un ensayo titulado El Imperio latino [subtitulado Esbozo de una doctrina de la política francesa, un memorándum dirigido al general De Gaulle]. Dicho ensayo vuelve a estar de actualidad y por ello deberíamos volver a reflexionar sobre el mismo. Con una predicción singular, Kojève sostenía sin reservas que Alemania se convertiría en breve en la principal potencia económica europea y que reduciría a Francia al rango de potencia secundaria en Europa Occidental. Kojève veía con lucidez el fin de los Estados-naciones que hasta entonces habían determinado la historia europea: al igual que el Estado moderno había desembocado en el declive de las formaciones políticas
429 feudales y en el surgimiento de los Estados nacionales, los Estados-naciones debían ceder el paso inexorablemente a formaciones políticas que traspasasen las fronteras nacionales y que él mismo designaba con el término de "imperios". Necesidad de recuperar los vínculos culturales La base de estos imperios, según Kojève, ya no podía encontrarse en una unidad abstracta, indiferente a los vínculos reales culturales, de idioma, de modo de vida y de religión: los imperios, los que él observaba, ya fuera el Imperio anglosajón (Estados Unidos e Inglaterra) o el Imperio soviético, debían ser "unidades políticas transnacionales, pero fundadas por naciones semejantes". Por este motivo, Kojève proponía a Francia que se situara a la cabeza de un "Imperio latino" que habría unido económicamente y políticamente a las tres grandes naciones latinas (es decir, Francia, España e Italia), de acuerdo con la Iglesia católica, cuya tradición habría adoptado, al mismo tiempo que se abría al Mediterráneo. Según Kojève, la Alemania protestante que se iba a convertir en breve en la nación más rica y más poderosa de Europa (que es lo que finalmente sucedió), se dejaría llevar por su vocación extraeuropea y se volvería hacia las formas del Imperio anglosajón. Pero, en esta hipótesis, Francia y las naciones latinas constituirían un cuerpo más o menos extraño, relegado necesariamente a una función periférica de satélite. Actualmente, puesto que la Unión Europea se formó haciendo caso omiso a los parentescos culturales concretos que pueden existir entre ciertas naciones, puede que resulte útil y urgente reflexionar sobre la propuesta de Kojève. Lo que había previsto se ha hecho realidad. Una Europa que pretende existir sobre una base estrictamente económica, dejando a un lado cualquier parentesco real entre las formas de vida, la cultura y la religión, no ha dejado de demostrar toda su fragilidad, sobre todo en el ámbito económico. Un griego no es un alemán En este caso, la supuesta unidad ha acusado las diferencias y podemos constatar a qué se reduce: a imponer a la mayoría de los más pobres los intereses de la minoría de los más ricos, que en la mayoría de los casos coincide con los de una sola nación, en cuya historia reciente no hay nada que se considere ejemplar. No sólo no tiene ningún sentido pedir a un griego o a un italiano que viva como un alemán, sino que además, aunque fuera posible, produciría la desaparición de un patrimonio cultural que constituye ante todo una forma de vida. Y una unidad política que prefiere hacer caso omiso de las formas de vida no sólo está abocada al fracaso sino que, tal y como demuestra Europa con elocuencia, jamás logrará constituirse como tal. Si no queremos que Europa acabe disolviéndose de manera inexorable, como nos hacen presagiar infinidad de signos, convendría plantearse sin demora cómo podría volver a articularse la Constitución europea (que, recordemos, no es una constitución desde el punto de vista del derecho público, ya que no ha sido sometida al voto popular y cuando así se ha hecho, como sucedió en Francia, ha sido rechazada con creces [por el 54,67% de los votantes]). De esta forma, podríamos intentar conferir a una realidad política algo parecido a lo que Kojève había denominado el "Imperio latino". http://www.presseurop.eu/es/content/article/3593591-un-imperio-latino-contra-la- hiperpotencia-alemana
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03/26/2013 04:08 PM Bailout Insights What Cyprus Tells Us about Germany's Character A Commentary by Tyson Barker The Cypriot government was willing to do anything to save its banking industry. Yet Berlin, driven by a deep-seated fear of tax havens, sought the opposite. The resulting deal may have driven a stake through the heart of the euro- zone's much ballyhooed banking union. The architects of the euro had one primary strategic goal. It was, to play on Lord Ismay's famous quip about NATO, to keep the Americans out, the Germans in and the Mediterranean states down -- at least as far as monetary policy was concerned. The Cypriot bailout package, which Dutch Finance Minister and Euro Group chief Jeroen Dijsselbloem said should be a model for future rescue packages, certainly holds true to this dictum. Cyprus will now have to find a new trade. With its banking sector halved, the country faces a difficult if not impossible challenge to re-establish its status as a financial oasis. The high-risk political economy that fueled the tiny island-nation since 1974 has ended. Iceland, facing a similar calamity in 2008, re-discovered fishing. The deal with the European Union and the International Monetary Fund that emerged on Monday grants Cyprus a €10 billion ($13 billion) loan that will not be used for bank re-capitalizations. In return, Cyprus will wind down the state-owned Laiki Bank and shift its salvageable components (along with €9 billion of European Central Bank debt) to the Bank of Cyprus. Laiki's uninsured depositors and bondholders will be wiped out. Bank of Cyprus depositors will also be heavily hit, allowing the country's debt-to- GDP ratio to remain at a sustainable level that can be brought down to 100 percent by 2020, according to the IMF. The story behind the deal played out for months in Berlin. The Cypriot government originally lodged its request for an aid package in June 2012. While then-Cypriot President Demetris Christofias delayed negotiating formal terms for an assistance package, German parliament -- primed by four previous debates on bailout packages involving the European Stability Mechanism (ESM) -- had fierce discussions on the issue. 'Cesspool of Profligacy' Germans have long had a deep-seated antipathy to tax havens and have sought to correct the arbitrage in the financial system that gives rise to them. This intolerance has been a mainstay of the German approach to global governance for the last five years. Berlin's 2008 pursuit, via the purchase of stolen data, of uncollected taxes on accounts held at LGT Bank by some 600 prominent "Davos men", including former Deutsche Post CEO Klaus Zumwinkel, led to a diplomatic incident between Germany and Liechtenstein. In 2010 the German government pursued tax evaders in Switzerland with a similarly shadowy data acquisition. Germany joined France in 2009 to push for G-20 sanction mechanisms, and Berlin has used domestic laws to
431 compel tax havens to adhere to rules set out by the OECD in its codex of uncooperative offshore banking centers. For the Germans, the Cypriot saga played into political tropes about moral hazard and free-riding tax havens. One German public intellectual described Cyprus in the Financial Times as a "cesspool of profligacy and haven for tax-dodging Russian oligarchs." German media are providing detailed analyses of other tax havens to which their countrymen might be exposed. The daily Die Welt declared recently that the tax haven as an economic model has been "exhausted." Luxembourg, with a financial sector more than five times the size of its €44 billion GDP has come under particular scrutiny. With a financial sector twice the size of its GDP, the United Kingdon could also become a point of interest. How did the inclusion of wealthy foreign depositors in the Cypriot bailout become such an issue for Germany? Politics and polls. Despite its international critics, the euro-zone crisis management of Chancellor Angela Merkel's government has been virtually unassailable at home. The chancellor's personal approval rating is 68 percent and that of her government, just six months before national elections, hinges on her measured approach to the currency crisis. Given the general Teutonic hostility to tax havens and indignation about using taxpayer money to aid Russian oligarchs, it was clear that Berlin would insist on putting some proportion of uninsured deposits towards Cypriot debt repayment. A Back-Door Transfer Union? What is remarkable -- as the political forensics of the original March 16 bailout deal have become clear -- is that the Germans and others gave Nicosia great leeway to set additional terms of that initial bailout plan. The Cypriot government then broke precedent to include small deposits in the "bail-in" scheme, only to have parliament reject the move. The government's second major decision -- to protect Russian depositors at the expense of its own citizenry -- was also woefully impolitic, not just in Cyprus but also in Germany. Commentators have compared the idea of imposing losses on insured depositors to the October 2010 Deauville Declaration, which broached the possibility of haircuts on sovereign debt. The latter set up the eventual participation of sovereign-bond holders in Greece's debt restructuring. In the end, insured deposits in Cyprus remained off limits. But German conditionality on the hit to uninsured depositors was left intact and even made more onerous. Still, more precedents may be broken, such as the establishment of capital controls, which Cyprus is now mulling. Any such controls could be a direct violation of the treaties that form the basis of the EU's "free movement of capital," one of the theoretically sacrosanct "four freedoms of the single market." Perhaps even more worryingly, the Cypriot crisis has put the credibility of the EU's banking-union project in doubt as deposit insurance -- long seen as the project's most difficult aspect -- becomes more urgent. Even the notion of direct bank recapitalization through the European Stability Mechanism, enshrined amid great fanfare in last summer's EU summit, seems to be in question. Both of these policies continue to sit uncomfortably with the Germans, who see them as a back-door transfer union. Given the upcoming German elections, the Merkel government is unwilling to confront these truths, even if it acknowledged them at the EU summit in July 2012. German politics remains the central democratic process
432 in euro-zone crisis management. The final March 25 bailout deal, after all, will not be voted on by the Cypriot parliament. But it will be voted on by lawmakers in Berlin. Tyson Barker is director of trans-Atlantic relations at the Washington, D.C.-based Bertelsmann Foundation.
URL: http://www.spiegel.de/international/europe/the-cyprus-bailout-reveals-german- fears-of-tax-havens-a-891063.html Related SPIEGEL ONLINE links: • Photo Gallery: Helpless Rage in Nicosia http://www.spiegel.de/fotostrecke/fotostrecke-94865.html • World from Berlin: Cyprus Chaos 'Doesn't Inspire Hope for EU Future' (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891018,00.html • Stubborn and Egotistical: Europe Is Right to Doubt German Euro Leadership (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890848,00.html • Lessons from Cyprus: Euro Crisis Poses Grave Dangers to EU Unity (03/25/2013) http://www.spiegel.de/international/germany/0,1518,890745,00.html • Cyprus Fallout: Moscow Accuses Euro Zone of Theft -- and Worse (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890860,00.html • Last-Minute Deal: The End of the Cypriot Banking Sector (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890731,00.html • Euro Bailouts: Savers Be Warned - Your Money's Not Safe (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890789,00.html 03/26/2013 02:09 PM World from Berlin Cyprus Chaos 'Doesn't Inspire Hope for EU Future' With Cyprus racing to install capital controls before re-opening its banks on Thursday, German media commentators say the island has only itself to blame for its plight. They also warn though that the tough bailout terms are a fresh sign of waning solidarity among euro-zone member states. Banks in Cyprus will remain closed until Thursday to prevent a run on deposits in the wake of the bailout deal reached on Sunday night that imposes a major levy on big depositors, many of them Russian, and shuts down the second-largest bank, Cyprus Popular, also known as Laiki. Cypriot Finance Minister Michalis Sarris told the BBC that the government was still hammering out details of capital controls on the size and amount of money people will be allowed to withdraw. He said the controls would "probably be a bit stricter" on the
433 two largest banks, Bank of Cyprus and Laiki. He also said people with deposits of more than €100,000 ($129,000) could see about 40 percent of their deposits converted into bank shares. Meanwhile, even though the banks have been closed since March 16, large amounts of money have been withdrawn from them, according to Reuters. The news agency quoted an EU source saying the Central Bank of Cyprus had requested more banknotes from the European Central Bank than were warranted in terms of the withdrawals it was reporting to the ECB. The scale of the outflow isn't known. Money has been moved out in various ways. Transfers for trade in humanitarian products, medicines and jet fuel remain allowed, for example. In addition, Laiki and Bank of Cyprus have units in London which remained open throughout last week and they placed no limits on withdrawals, according to Reuters. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Within hours of the bailout being agreed on, the head of the Euro Group of euro zone finance ministers, Jeroen Dijsselbloem, fanned market uncertainty on Monday by saying it would serve as a model for dealing with future euro zone banking crises -- a departure from previous rescues in which taxpayers have had to foot the bill. The comment unsettled investors with assets in larger euro-zone nations and sent share prices and the euro tumbling. Later in the day, Dijsselbloem backtracked and said Cyprus was a special case. The terms of the bailout have predictably angered Russia, and Germany is once again being vilified for taking a hard line. German media commentators say that while Cyprus brought its problems on itself, the rescue reveals an erosion of solidarity among euro- zone members after three years of crisis. The messy wrangling that preceded the bailout has done lasting damage to the EU, they add. Conservative Frankfurter Allgemeine Zeitung writes: "The Cypriots may see themselves as victims, but their European partners aren't to blame for the mess. The case of Cyprus shows how rife alienation and anger are among Europeans: Many in the crisis-hit nations are blaming their plight not on their own corrupt elites or bad governance but on supposedly unsympathetic EU governments, meaning the supposedly neo-hegemonial Germans. The donor countries in turn feel they are the victims of blackmail who are rewarded for their help with insults. At the start of the fourth year of the debt and euro crisis, one can't help but register that trust and empathy have been eroded along the way. It doesn't inspire hope for the future of the EU." Center-left Süddeutsche Zeitung writes: "This drastic infringement of property rights was possible due to the unique constellation in Cyprus: Cyprus is the third-smallest country of the European Union, so its political weight isn't very relevant. Cyprus set up a dubious business model that attracted dubious people; they're now being punished, so the burden isn't necessarily hitting the wrong people. The expropriation satisfied the sense of justice of most Germans, and not just them." "Thirdly, a remarkably poor set of Cypriot politicians refused to see reason for much too long, and in the last week displayed an unpleasant gambling mentality. Anyone who manages in just four days to alienate the entire euro zone, discredit the Euro Group
434 chief, tries to involve Russia in a circumventing maneuver and welds together the German government and opposition in an election year has failed to understand a few basic rules on transparency and policymaking in Europe." "In this unique combination, Cyprus will remain a unique case. But Europe has changed a lot as a result of this rescue drama. The readiness to show solidarity is eroding by the minute. The euro zone has long since stopped being a brotherhood for increasing prosperity and mutual stability. It has transformed itself into a school of gladiators in which everyone fights for his own advantage and his survival." Conservative Die Welt writes: "The solution for Nicosia is no blueprint for dealing with other bank crises. Authorities wouldn't dare to repeat such a procedure in Italy or Spain. If a bank has obtained most of its money from other banks or financial institutions, a radical cut becomes far more complicated because the consequences would eat through the entire financial system. The collapse of Lehman Brothers made this dramatically clear." "While the international impact of the Cypriot bank restructuring is likely to remain limited, the island nation itself will struggle. Not just rich foreigners but many Cypriot companies will lose a large part of their deposits -- which will inflict major damage on the country's economy." "The Cypriot compromise is a big experiment. Its outcome will determine how Europe tackles future crises. And whether taxpayers will in future be able to avoid always having to foot the bill for troubled banks." Left-wing daily Die Tageszeitung writes: "The case of Cyprus will mean once again that billions of euros will be shifted around. Whenever there's a minor problem, investors in Portugal, Italy or Spain will hurriedly transfer their money to Germany or the Netherlands. They will all try to turn their Spanish or Italian euros into German or Dutch euros. The monetary union may still exist, but it is history nonetheless. Officially we may still have one euro, but in effect we've had 17 different euros for a long time now." Mass circulation Bild writes: "The washing machine for illegal Russian money has been switched off! And the Kremlin is fuming. When Cyprus needed savings, Russia didn't lift a finger. Now it's throwing dirt at the rescuers. For Russia's billionaires, Cyprus was a euro colony where they could increase their wealth. It's only fair that they and not the small savers have to pay a high price for rescuing Cyprus." "Anyone who describes that as theft -- as the Russian prime minister did -- can't be a man of the people. He's a servant of the billionaires. And people who compare the share that the Russians now have to pay with the evil robbery of Jewish assets lack character and know no shame." Left-wing daily Berliner Zeitung writes: "The European Union too has been damaged. People will remember the rudeness of the German finance minister, who was more focused on public sentiment in Germany than on the welfare of the community. And the politicians have made one thing clear to all investors and savers inside and outside the currency union: If you invest your money in the euro zone, you take on enormous political risks in addition to economic ones. This
435 loss of confidence will have lasting impact, in the crisis-hit nations and far beyond Europe's borders." -- David Crossland
URL: http://www.spiegel.de/international/europe/german-press-reaction-to-cyprus- bailout-a-891018.html Related SPIEGEL ONLINE links: • Photo Gallery: Helpless Rage in Nicosia http://www.spiegel.de/fotostrecke/fotostrecke-94865.html • Bailout Insights: What Cyprus Tells Us about Germany's Character (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891063,00.html • Cyprus Fallout: Moscow Accuses Euro Zone of Theft -- and Worse (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890860,00.html • Lessons from Cyprus: Euro Crisis Poses Grave Dangers to EU Unity (03/25/2013) http://www.spiegel.de/international/germany/0,1518,890745,00.html • Last-Minute Deal: The End of the Cypriot Banking Sector (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890731,00.html • Iron Chancellor Returns: Merkel Can't Contain Anger over Cyprus (03/22/2013) http://www.spiegel.de/international/germany/0,1518,890453,00.html • Anger in Cyprus: 'They Can't Just Penalize Us Because of the Banks!' (03/19/2013) http://www.spiegel.de/international/europe/0,1518,889724,00.html • Hitting the Savers: Euro Zone Reaches Deal on Cyprus Bailout (03/16/2013) http://www.spiegel.de/international/europe/0,1518,889252,00.html • Haven for Oligarchs: Europe's Mounting Reluctance to Bail Out Cyprus (01/14/2013) http://www.spiegel.de/international/europe/0,1518,877369,00.html 03/26/2013 06:00 PM False Start Is the New Euro Group Head Up to the Task? By Carsten Volkery New Euro Group chief Jeroen Dijsselbloem fanned market uncertainty with contradictory statements about the Cyprus rescue and angered colleagues with his glib negotiating style. This never would have happened under his predecessor, say his critics. Is he in over his head? The clarification could hardly have been more clear: What Jeroen Dijsselbloem said "was wrong," European Central Bank executive board member Benoit Coeure said on
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Europe 1 radio. He added that the situation in Cyprus was not comparable with any other euro-zone country. The European Commission likewise rushed to assure Europeans that the involvement of large depositors and creditors in the bailout of Cypriot banks was in no way a model for the future. "The Cyprus case is unique for several reasons," said a spokeswoman for Internal Market Commissioner Michel Barnier. The reason for the rushed reassurances was an interview given by Dijsselbloem on Monday in which he said that the involvement of shareholders, creditors and large customers in the Cyprus bailout deal could become a model for the future. In interviews with the Financial Times and Reuters, he said that in possible future bailouts, the private sector must be prepared to become involved. He also suggested that, Luxembourg, a model of stability, could pose a problem because of its large banking sector. So Cyprus was not a special case, as the Euro Group had always insisted? Among investors, joy over the latest euro rescue package quickly fizzled, stocks and the euro went into a tailspin. And Dijsselbloem began backpedalling. He had been misinterpreted, he said. Of course Cyprus is a special case. It is never a good sign when a politician has to take back his own statements. It is even worse when others have to do it for them. And it is catastrophic when it happens in the middle of a debate about the future of the euro zone. Clarity and unity would have been necessary. Instead, European leaders look divided once again. It is no wonder that, among his colleagues in the Euro Group, the gaff elicited a fair amount of head-shaking. Still, none of the euro-zone finance ministers wanted to openly rebuke him. Up For the Task? Dijsselbloem's clumsy behavior immediately raised the question of whether the 46-year- old newcomer is really up to the task. After all, the faux pas in the interview was not the first blunder he had made in recent weeks. His critics point out that under his leadership, the Euro Group has made one of the worst mistakes in its history. Ten days ago, the 17 finance ministers decided to make small- scale savers responsible for bailing out the Cypriot banking sector. Although this was done at the insistence of the Cypriot government, it called into question the EU guarantee on deposits under €100,000 ($129,000). The blame, of course, should be shouldered by all the finance ministers. Particularly experienced politicians such as Wolfgang Schäuble should have recognized the explosive symbolism of this step. Yet much of the blame was pinned to Dijsselbloem. His experienced predecessor Jean-Claude Juncker, people said, would surely have prevented such a decision. Dijsselbloem's negotiation style has also been criticized. In Brussels, he's accused of being too rude with the Cypriots. The talks became difficult and messy because Cypriot President Nikos Anastasiades felt he had been treated poorly. It was a clear vote of no confidence when European Council President Herman Van Rompuy, European Commission President José Manuel Barroso and International Monetary Fund chief Christine Lagarde took the negotiations upon themselves over the weekend. All day Sunday, negotiations proceeded at the highest of levels. The finance ministers had to wait until midnight before they could rubber-stamp the agreement.
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The Nebulous EU Line on Private Sector Participation But is the criticism of Dijsselbloem really warranted? Or should it not be divided out to the entire Euro Group? After all, the presidency is merely a ceremonial post. Dijsselbloem has no independent decision-making power -- he is just the first among equals. Some other finance ministers, Schäuble above all, were no less rude in dealing with the Cypriots. And the contradictory statements about the participation of the private sector only reflect the unclear strategy of the Euro Group. Only time will tell whether Cyprus is really a special case, or rather a model. The line of the European Commission is no less nebulous. Barnier's spokeswoman said that Cyprus is not an ideal model to be repeated in the future. But it is essentially desirable that taxpayers not be on the hook for mistakes made by banks. The showdown over Cyprus throws a spotlight on the biggest disadvantage Dijsselbloem must contend with: He lacks the gravitas of his predecessor Juncker. Not only is the Dutch Social Democrat two decades younger, he is not a head of state. Because Juncker was both a finance minister and a prime minister, he was always able to talk to all parties on an equal footing. In dealings with Cypriot President Nicos Anastasiades, that might have helped. Unfortunately for Dijsselbloem, he can't change that fact. He will have to live with it -- as well as with the inconsistency of the Euro Group. As president, he will ever more frequently become a lightening rod.
URL: http://www.spiegel.de/international/europe/euro-group-head-jeroen-dijsselbloem- under-fire-for-cyprus-comment-a-891102.html Related SPIEGEL ONLINE links: • World from Berlin: Cyprus Chaos 'Doesn't Inspire Hope for EU Future' (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891018,00.html • Bailout Insights: What Cyprus Tells Us about Germany's Character (03/26/2013) http://www.spiegel.de/international/europe/0,1518,891063,00.html • Trans-Atlantic Trade: 'We Need a New Structure for the Global System' (03/25/2013) http://www.spiegel.de/international/business/0,1518,890809,00.html • Stubborn and Egotistical: Europe Is Right to Doubt German Euro Leadership (03/25/2013) http://www.spiegel.de/international/europe/0,1518,890848,00.html • Lessons from Cyprus: Euro Crisis Poses Grave Dangers to EU Unity (03/25/2013) http://www.spiegel.de/international/germany/0,1518,890745,00.html
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ft.com comment Columnists March 26, 2013 7:19 pm Cyprus adds to Europe’s confusion
By Martin Wolf The bailout is another occasion for anger with the European project to bubble to the surface
©Ingram Pinn The crisis in Cyprus may be a storm in an economic teacup. But it has important lessons for much larger vessels, including the eurozone as a whole. Some of those lessons are encouraging. But others are disturbing. The eurozone remains stuck in a horrific mess. Last week, in a desperate attempt to preserve its offshore banking model, the Cypriot government decided to impose losses on deposits of less than €100,000, the ceiling for deposit insurance in the eurozone. Not surprisingly, this idea went down well neither in Cyprus, nor anywhere else within the eurozone. More ON THIS STORY/ Cyprus to impose capital controls/ Cyprus contagion fears hurt euro/ Damage ripples through Cypriot economy/ Editorial A road to freedom for euro taxpayers/ Officials rule out Cyprus crisis ‘template’ ON THIS TOPIC/ Cyprus unveils severe capital controls/ Small states reject Cyprus comparisons/ Move to protect savers in UK branches of Laiki/ Brussels blog Dijsselbloem interview transcript MARTIN WOLF/ Homes ruse will not rebuild the economy/ Shrewd politics, brutal economics/ Big trouble from little Cyprus/ ‘The Bankers’ New Clothes’, by Anat Admati and Martin Hellwig The current plan is closer to what one would wish to see in an orderly bank resolution. Laiki Bank is to be split into good and bad banks. Deposits of less than €100,000 in the bank and assets worth €9bn – the sum owed to the central bank as part of its liquidity support – will be transferred to Bank of Cyprus. The remainder will be wound down. Those with claims to deposits in excess of €100,000 will obtain whatever the value of the bad bank’s assets turns out to be. Meanwhile, savers at the Bank of Cyprus with deposits of more than €100,000 will have their accounts frozen and suffer a “haircut” of still unknown size. That reduction in 439 value is likely to be large: perhaps 40 per cent. Finally, temporary exchange controls are to be imposed.
What is one to make of this? I suggest at least four lessons. First, the eurozone does indeed have the capacity to do the right thing in the end, though not before first exhausting all the alternatives. In saying that this plan is the “right thing”, I do not mean that one could not imagine superior alternatives. But all such alternatives assume a degree of solidarity among member states and peoples that is for now (and the foreseeable future) absent. Given unwillingness to make outright grants to Cyprus, the present plan is almost certainly the least bad one. It protects the small deposits and imposes a rational resolution process. The International Monetary Fund will be happy. So will the redoubtable Jeroen Dijsselbloem, the Dutch finance minister and head of the eurogroup, who believes a tough approach to creditors is right for the eurozone. Second, a euro is indeed not a euro everywhere. While a euro note is a euro note, nearly all euros are, in fact, the liabilities of banks. The outcome in Cyprus underlines the fact that the value of a euro of bank liabilities depends on the solvency of the bank itself and the solvency of the government standing behind the bank. If both bank and state are insolvent, lenders are likely not only to lose a big proportion of their money outright, but to find that the rest is frozen behind controls, introduced to prevent a collapse of a country’s banking system. How long might such “temporary” controls last? The French say “c’est le provisoire qui dure” (it is the temporary that lasts). This has tended to be true of exchange controls, as Iceland shows. Yet, as Guntram Wolff of Bruegel notes, a currency union with internal exchange controls is a contradiction in terms. Only the willingness of the European Central Bank to finance Cypriot banks without limit could end these controls in the near future. Will it be willing to act soon? The third lesson from Cyprus is that the relationship between banks, sovereigns and the eurozone is more complicated than it once appeared. One could conclude that the action over Cyprus tells us little about the monetary area. After all, the island is unique because of the size of its banking liabilities, the unpopularity of its banks’ creditors and the borderline insolvency of its state. Or one could believe it is a template, but only for other countries with similarly weak states. Or you could see it as a template for all eurozone states, except when there is a financial crisis of 2008 dimensions. Finally, an observer could believe Cyprus is a template for all eurozone states in all circumstances. Which of these readings is right? Nobody knows. But it is probably the first or the second. A consensus on the principle that creditors, not taxpayers, should pay if a bank becomes insolvent does not yet exist across the eurozone. Does anybody imagine the German government would not rescue Deutsche Bank if it were in trouble? Of course it would.
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The ideal conclusion from the Cypriot imbroglio would be that all eurozone banks should have more capital. Indeed, because of the limited fiscal capacity of member states of a currency union, their banks arguably need to be better capitalised than those elsewhere. But the actual conclusion is likely to be different: the safest banks will be those in the fiscally strongest jurisdictions. The alternative to that outcome would be a true banking union. But that would require either fiscal union or willingness to apply the same tough resolution regime to all banks. Neither outcome is likely. A final lesson of this crisis is that what I have called the “bad marriage” that binds the eurozone members together has become worse. Cyprus is not significant for the eurozone as a whole; the borrowing costs for banks and states have changed little (see graphs). But the crisis is another occasion for anger to bubble to the surface. Old fears that the euro would undermine European unity rather than strengthen it seem more plausible. The crisis has also demonstrated that, even when the price of staying inside the union seems high, as it has been for many Cypriots, debtors are willing to pay it. Divorce seems even more frightening – at least at the moment of the decision. This is also true for creditors. They resent being abused for “bailing out” debtors. But they prefer doing so to leaving the union, for reasons both economic and political. Thus the eurozone limps on through crisis after crisis. Can – or will – this continue indefinitely? I do not know. I am close to certain that the strategy of competitive austerity cannot return the eurozone to economic health. It guarantees a feeble eurozone economy and debt, banking and joblessness crises in weaker economies for the indefinite future. At the same time, the will to sustain the eurozone intact is formidable. This then is a clash between an irresistible force and an immovable object. The crisis in Cyprus is a small and, in some ways, unrepresentative episode in a long and painful story. Its last chapter is not even close to being written. http://www.ft.com/intl/cms/s/0/243a4eda-954a-11e2-a4fa- 00144feabdc0.html#axzz2OXSTd7q2
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