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 99

ANEXO II

Alvaro Espina 25 de Octubre de 2013

ENTRE 11 Y EL 24 DE OCTUBRE DE 2013

Legal/Regulatory October 24, 2013, 5:10 pm 24 Comments Fed Proposes a Rule to Help Big Banks Stay Liquid in Times of Crisis By PETER EAVIS

Jim Lo Scalzo/European Pressphoto Agency The Fed’s Board of Governors discussed a plan to make banks hold a set amount of liquid assets. During the financial crisis of 2008, the big banks fell dangerously short of cash, forcing them to take out enormous government loans to survive the tumult. To help prevent another giant cash squeeze, federal regulators proposed a rule on Thursday that requires big banks to hold a set amount of assets that they can quickly turn into cash. The hope is that, in times of turbulence, banks will have adequate funds to replace the cash that might be leaving them at a rapid clip. The new rule, known as the liquidity coverage ratio, is the first to systematically require banks to be in a position to cover a set amount of cash outflows. The rule is intended to complement new rules on capital that focus more on making banks resilient to losses on loans and securities. “The proposed rule would, for the first time in the United States, put in place a quantitative liquidity requirement,” Ben S. Bernanke, chairman of the Federal Reserve, said in a statement. He added that it “would foster a more resilient and safer financial system in conjunction with other reforms.” The liquidity rule works by asking large banks to estimate how much cash might flee in a 30-day period. They then have to have enough assets that they could quickly sell to cover that outflow. The requirement, scheduled to come into full effect at the start of 2017, could dent the profits of banks, particularly Wall Street firms that rely on huge amounts of short-term market borrowing. Still, regulators are concerned that the big institutions remain vulnerable to bank runs. And based on comments from prominent banking regulators on Thursday, banks should expect additional measures. “In some sense, this is just a big but only first step down the road to achieving that durability of funding,” Daniel K. Tarullo, the Fed governor who oversees regulation, said at a board meeting on the rule. The new liquidity ratio, which was conceived by an international grouping of bank regulators soon after the crisis, addresses a thorny dilemma at the heart of modern banking. For decades, central banks have been willing to provide emergency loans to their banking systems in times of stress, recognizing that bank runs can do terrible damage to the wider economy. But if banks come to expect that their central bank will always act as a lender of last resort, they might be encouraged to take excessive risks. The support “creates potential moral hazard problems,” Jerome H. Powell, a Fed governor, said. The new rule “puts private liquidity in front of the taxpayer,” he said. Darrell Duffie, a finance professor at Stanford, said: “The new rule is a measured response. It says, ‘We’re still here as a lender of last resort, but we want you to be more self-reliant.’ ” Analysts expect that most large banks would already comply. The industry and other parties have 90 days to comment on the rule. But the operations of large foreign banks are also subject to it, and some of them may have to do more. Some foreign banks have already criticized the Fed for making their United States operations follow more stringent capital rules than they might face at home. If foreign regulators are planning liquidity rules that are more lenient than the American one, foreign banks could step up their lobbying of the Fed. In calculating how much liquidity is needed, safe and liquid assets like Treasuries would count at full value. But assets like stocks and corporate bonds would not because their prices might fall in a panicked market. The top quality assets have to account for at least 45 percent of the liquid asset pool. Though some Wall Street firms may already comply with the liquidity rule, they may still find the adjustment difficult. Broker-dealers are still dependent on short-term funding, which is effectively targeted by the rule. Goldman Sachs, for instance, finances two-thirds of its assets with shorter-term market borrowings, based on an analysis of its latest securities filing. In particular, the new rule might reduce the profitability of a practice that is common on Wall Street, according to Robert Maxant, a partner at Deloitte & Touche. Brokers provide loans to clients to buy securities. To obtain the money that it lends to a client, a broker takes out its own loan, pledging securities as collateral. To ensure it 2 profits on the arrangement, the broker needs to get more in interest on the client loan than it is paying on its own loan. To achieve this, the broker typically takes out a loan that is of a shorter term than the client’s loan. But the new rule could penalize a bank that uses this approach because it assumes the broker’s short-term loan would evaporate in a crisis, and a shortfall would occur that would need to be covered. Amassing the liquid assets to cover the shortfall adds a cost to the brokerage business. “The regulators have been very concerned about short-term funding,” Mr. Maxant said. http://dealbook.nytimes.com/2013/10/24/new-liquidity-rule-proposed-to-guard-against- cash-squeeze/?emc=edit_tnt_20131028&tntemail0=y&_r=0

An Encouraging Start to the ECB’s Big Bank Review by Nicolas Véron | October 24th, 2013 | 01:29 pm The European Central Bank (ECB) just announced its planned review of the largest banks in the euro area, before assuming direct supervisory authority over these banks in early November 2014. (March 1, 2014, had been initially envisaged as the date for this transfer of authority from the national to the European level, but various institutional squabbles have delayed it by eight months.) This communication marks the concrete start of a year-long review process that will be the make-or-break test for Europe’s banking union, which itself is arguably the most important structural change the crisis has prompted in Europe so far. The ECB’s announcements do not have any major surprises, but they help clarify the review process. To echo Article 33.4 of the EU Single Supervisory Mechanism Regulation [pdf], the legal basis for the new supervisory role of the ECB, which is expected to be published in final form within two weeks or so, the exercise is called Comprehensive Assessment, a bland label that will probably not end the minor semantic confusion that has affected it. Many market participants like three-letter acronyms and refer to it as the AQR (Asset Quality Review), while others use the term “stress tests” to echo the spring 2009 Supervisory Capital Assessment Program [pdf] in the United States and the successive (and ill-starred) rounds of capital simulations conducted in 2009 [pdf], 2010 and 2011 in the European Union. In fact, the AQR and stress tests will be two separate components of the Comprehensive Assessment, plus a third one called “supervisory risk assessment,” which remains loosely defined for now but appears to focus on liquidity and funding patterns.

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The Comprehensive Assessment will be conducted over the next 12 months. This is a very long period of time for such a market-sensitive process but is justified both by the large scale of the endeavor (the ECB describes it grandly but aptly as “the largest such exercise ever undertaken in terms of the number of banks, their overall size, and geographical reach”) and by the lack of prior supervisory experience at the ECB. The AQR will be based on balance sheets as of end-2013, an early cutoff date that is welcome as it reduces the risk of aggressive credit contraction by banks over a long period of time, which would have weighed negatively on European growth. The ECB will use an 8 percent threshold for the minimum capital requirement, corresponding to the 7 percent reference of the Basel III Accord (4.5 percent so-called core equity tier one capital + 2.5 percent so-called conservation buffer), plus a 1 percent surcharge as all banks are considered of systemic importance. This is a reasonable yardstick for capital adequacy and marks an acceleration of the long Basel III transition period as enshrined in the European Capital Requirements Regulation. In addition, the ECB will introduce a leverage ratio, also in reference to Basel III but in anticipation of EU legislation. The ECB has published a tentative list of 124 banks to be reviewed, which it reckons represent an aggregate 85 percent of the euro area’s total banking assets; 18 of these are local subsidiaries of non-euro-area banks (from Canada, Denmark, Russia, Sweden, Switzerland, the United Kingdom, and the United States). The list also includes a few government policy banks such as France’s new Banque Publique d’Investissement and Germany’s KfW IPEX import-export promotion bank; financial arms of carmakers (PSA Peugeot Citroën, Renault, and Volkswagen); two subsidiaries of financial infrastructure firms (LCH.Clearnet in France and Clearstream in Luxembourg); and 15 banks that were nationalized during the crisis (including Allied Irish Banks, ABN Amro, Bank of Cyprus, Bankia, Dexia, and Hypo Real Estate). The other names on the list illustrate the diversity of bank governance models in Europe: More than half of them are cooperatives and national or local government-controlled banks, including savings banks; of the remaining ones, which can be considered commercial banks, many have a controlling shareholder, leaving relatively few in the sample (but several of the largest) as publicly listed companies with dispersed ownership, the dominant model in the United States and United Kingdom. This is one more reason why the political economy of Europe’s banking sector [pdf] is so different from that in the United States. Most importantly, the ECB’s announcement confirms that this will be a markedly different process from the 2010 and 2011 stress tests and potentially a much more credible one. The European Banking Authority (EBA), which directed the 2011 round, did all it could to ensure a rigorous and consistent assessment, but it had no mandate to impose its demands on reticent national authorities. By contrast, next year’s review will be conducted by the ECB itself, of course with help from national supervisors but with its own supervisory staff, direct access to information from banks, and additional help from private-sector consultants, some of which (such as Oliver Wyman) will report directly to Frankfurt and not national capitals. National authorities will not be able to veto consideration of some issues, in contrast to the 2011 exercise, when they could raise so-called red flags. Recent communication by Eurosystem officials indicates that the final recommendations (to the ECB’s still-to-be-formed Supervisory Board, which itself will be placed under the authority of the existing Governing Council) will be made solely by ECB staff, rather than on the basis of consensus-dependent committee decisions. If national authorities disagree, their position will be reported to the Supervisory Board, but only as a dissenting opinion.

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Even so, the 2014 review raises monumental challenges. The key reason is that the ECB’s assessment is by definition only part of the action. The other part is that, if some banks are found undercapitalized to an extent that could not be corrected only by raising money from market investors, these “problem banks” will need to be restructured (recapitalized, taken over, sold, or resolved) by public authorities. The previous steps taken during the European financial crisis since mid-2007, not to mention earlier European episodes or the parallel experiences in the United States and elsewhere, have amply illustrated how difficult and contentious such government-led bank restructuring could be. It is widely suspected that the number of such problem banks is probably in the double digits and that the corresponding financial shortfall could be very large, possibly higher than 100 billion euros. To finance these future operations to which the ECB refers euphemistically as “corrective measures,” in cases where market investors would be unwilling to step in, forced losses (for which the clumsy but now-fashionable euphemism is “bail-in”) may be imposed on junior and perhaps also in some cases senior creditors. But in certain scenarios of systemic contagion risk, one cannot rule out the need for some funding from the public purse. Following a decision in June [pdf], the European Stability Mechanism (ESM) essentially will not play a significant role in such cases, at least outside of countries under an assistance program, such as Greece or Cyprus (Ireland and Spain are expected to exit their current assistance program shortly; the case of Portugal is more uncertain). As a consequence, resources may have to be found in national budgets, for which the current ECB jargon is “backstops.” A minor controversy in July between the ECB and the European Commission on the specific cases of solvent but slightly undercapitalized banks, which was revealed a few days ago, illustrates the ECB’s skepticism about an excessive recourse to bail-ins, which may correspond to the prevailing political mood—particularly in Germany—but would swing the pendulum too far compared with the European’s near-systematic recourse to public bailouts in the first five years of this crisis. All this sets the stage for a politically complex series of choices to be made in 2014 to prepare for the consequences of the banks’ assessment by the ECB. Some member states, including the largest, might push for “forbearance” (i.e., hiding the bad news) for fear of the political and financial consequences of publicly led bank restructurings. The ECB has strong incentives to resist them. Its credibility is at stake, not only as a supervisor but more broadly as a European institution, with possible spillovers to its reputation as a monetary policy authority. The sad precedent of the EBA, whose reputation never fully recovered after it gave a clean bill of health in July 2011 to banks such as Dexia and Cyprus Laiki, which collapsed shortly afterwards, can only reinforce the ECB’s determination not to follow the same path. Germany, here as elsewhere, will be in a pivotal position. On the one hand, it is a natural defender of the ECB’s integrity and has enough heft to take responsibility for the euro area as a whole. But on the other hand, its banking system is notoriously politicized, and some banks might be in a sorry state (all Landesbanken are included in the ECB’s assessment list). Furthermore, the consequence of large bank restructurings in, say, Italy or France may create domestic difficulties for the German government as well. To top it all, the European Parliament election of May 2014 may trigger unpredictable political interferences in the midst of the assessment process, especially if, as opinion polls currently suggest, it marks an unprecedented setback for most of the euro area’s governing parties, at least outside of Germany.

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The 2014 bank review thus presents a choice between two diverging scenarios. In the first, “forbearing” scenario, the ECB would yield to the political pressure from member states and do little better than the EBA did in 2011 in terms of rigor and consistency of the assessment. The ECB would avoid flashpoints, but the “zombification” of the euro area’s banking sector would continue, with a heavily negative impact on Europe’s future growth. In the second, “rigorous” scenario, the ECB would resist the pressure for forbearance and expose a number of problem banks, whose restructuring will involve some public cost and political turmoil. But the corresponding cleanup would gradually lift the drag that dysfunctional credit allocation has put on European growth since mid- 2007. Furthermore, only in the “rigorous” scenario can the Single Supervisory Mechanism be established on a sound basis, which is a necessary condition for further successful steps towards banking union, itself an indispensable (though not sufficient) component of an eventual resolution of Europe’s current predicament. Alas, it is difficult to imagine that the assessment would be rigorous and expose a number of significantly undercapitalized or insolvent problem banks, some of which quite large. If all were already well in the European banking system, these disclosures would already have happened and investors would have been reassured long ago. It is also difficult to imagine a happy middle ground between the two above described scenarios. The ECB can probably not sugarcoat the assessment’s results sufficiently to avoid painful restructuring, while preserving its credibility. Thus, the conflict between the ECB and member states will escalate. It is likely to trigger significantly more financial-market volatility in 2014 than Europe has witnessed (so far) in 2013, in spite of sizeable internal shocks this year such as the February election in Italy and the March developments in Cyprus, and external ones such as the turmoil in emerging markets and the recent US fiscal drama. If the assessment is lax, the risks are a major loss of ECB’s reputation and thus further weakening of an already fragile euro area and the European Union, which would be compounded by a final loss of hope in Europe’s ability to address its now many-years-old banking problem [pdf]. By contrast, if Europe’s leaders choose the more rigorous option, they have the opportunity to allow trust to return to Europe’s banks and pave the way towards a much more resilient financial system. They will need to be clear-sighted about the consequences of their choices in the weeks and months ahead. Posted in Global Financial Crisis Tags: banks, central banks, euro area, Europe, European Central Bank http://www3.nd.edu/~nom/Papers/agent2005_revised.pdf

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THE WALL STREET JOURNAL Europe News Plans for Political Union Unravel in Europe Quest to Ensure Euro's Long-Term Survival by Forging Deeper Union Is Fizzling By Marcus Walker in Berlin and Gabriele Steinhauser in Brussels Updated Oct. 23, 2013 10:33 p.m. ET Europe's quest to ensure the euro's long-term survival by forging a deeper political union out of crisis is fizzling out.

Front row left to right, European Council President Herman Van Rompuy, Lithuanian President Dalia Grybauskaite, French President Francois Hollande, European Commission President Jose Manuel Barroso and Greek Prime Minister Antonis Samaras. Back row left to right, Slovenian Prime Minister Janez Jansa, Portugal's Prime Minister Pedro Passos Coelho, German Chancellor Angela Merkel, Finland's Prime Minister Jyrki Tapani Katainen, Austria's Chancellor Werner Faymann and Bulgaria's Prime Minister Boyko Borissov pose during a group photo at an EU summit in Brussels on Nov. 23, 2012. APASSOCIATED PRESS

A European Union summit, starting Thursday, was originally intended to pave the way for tighter coordination of economic policies, but now is expected to make little progress. Many European officials say they are losing hope of reaching a deal in the next year to build elements of a common government for the 17 countries that use the euro, including shared spending, borrowing and support for banks and depositors. Germany is leading the resistance. In Vilnius, Lithuania, last month, German Finance Minister Wolfgang Schäuble orchestrated a revolt against a proposal to let EU officials decide when euro-zone banks should be wound down or restructured. The proposal was part of a so-called banking union in which Europe as a whole would stand behind its lenders. Many countries favor the concept because it would take pressure off weaker countries to support their banks alone. But German officials see parts of it as a green light for EU bureaucrats in Brussels to spend Germany's money to rescue banks in Ireland or Spain. Mr. Schäuble mustered a coalition in Vilnius to block the proposal, recruiting EU members such as the U.K. that don't use the euro and don't want more powers for Brussels.

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The quest for a deeper union was born last year at the height of financial-market panic in Europe, when fear was widespread that the euro might collapse. The crisis showed that sharing one currency among 17 countries with separate policies is an unstable formula. Although financial markets have calmed since then, the euro zone still is struggling with debt, unemployment and impaired banks, especially in Southern Europe.

European countries already have taken many steps to bolster their currency union, establishing a permanent bailout fund, new rules to prevent fiscal profligacy and a stronger European Central Bank that can stabilize bond markets and will soon supervise big banks across the bloc. Further Reading// Wessel: Europe's

Flawed Growth Herman Van Rompuy presides German Finance Minister Strategy/Live: Europe over EU summits. Zuma Press Wolfgang Schäuble ASs. Press Updates But advocates of tighter integration believe that the euro zone needs to go further by borrowing elements from the American system of federalism. Many proposals reflect a belief that the euro zone needs to partially mimic the U.S., where the dollar works well across all states partly because of budgets, bonds, financial oversight and depositor protection at the national level. Jörg Asmussen, a German executive-board member at the European Central Bank, says the debt crisis showed the monetary union wasn't finished. "If we don't complete it, we will remain vulnerable to shocks," he says. Over the past year, however, the political winds have shifted. Interviews with more than a dozen officials across Europe reveal how plans for deeper integration have run aground as financial markets have calmed and mistrust has simmered between power centers including Berlin, Brussels and Paris. The push to build a more stable currency union arose from a May 2012 dinner, when Europe's leaders charged top EU officials with figuring out a plan. Herman Van Rompuy, a conservative Belgian politician who presides over EU summits and who writes haiku in his spare time, led the effort. At the time, massive capital flight from Italy and Spain was threatening to unravel the euro. Observers on both sides of the Atlantic were saying the euro zone needed an "Alexander Hamilton moment," akin to the 1790 move by the U.S. treasury secretary to take over states' debts, which made the U.S. a deeper economic and political union. During the summer of 2012, Mr. Van Rompuy and his colleagues worked on proposals that echoed the view of many economists in the U.S. and Europe: The euro zone needed

8 to become a little more like America by replicating some of the functions of U.S. federal authorities. To work properly, the EU officials believed, the euro zone needed a central budget, or "fiscal capacity," which would help cushion crisis-hit countries, for example, by funding some of the rising cost of unemployment benefits in a slump. The budget would eventually be financed through bonds guaranteed by the euro zone collectively.

Advocates of tighter integration believe that the euro zone needs to go further by borrowing elements from the American system of federalism. In a written report, the group led by Mr. Van Rompuy also proposed a banking union, with a common safety net for stricken banks, and federal deposit insurance. It called for

9 closely aligning euro members' economic policies and said Europe's strengthened central authorities should be either elected or accountable to elected officials. In late June, the European federalists won their first big victory: German Chancellor Angela Merkel agreed to deploy the bloc's collective financial strength to save ailing banks, relieving pressure on cash-strapped nations facing a banking crisis. In return, the bloc agreed to unify supervision of the region's lenders. By fall, the European Central Bank's promise to intervene massively in bond markets had calmed the financial-market panic. The move bought time for governments to address the euro's flaws. But it also reduced the pressure to take politically unpopular steps. Mr. Schäuble, the German finance minister, fought to water down the banking union that Ms. Merkel had assented to in June under pressure from France, Italy and Spain. Those three countries saw their "victory in battle" undone by German-led "guerrilla attacks," says a senior Italian official. One such incident occurred that September, when Mr. Schäuble met with his Finnish and Dutch counterparts at a country mansion outside Helsinki. Without consulting other euro members, the three finance ministers issued a statement that said: "Legacy assets should be under the responsibility of national authorities." It was a refusal to pay for cleaning up Southern European banks. A summit meeting last December in Brussels proved a turning-point for the proposed fiscal union. Before flying to the gathering, Ms. Merkel described Mr. Van Rompuy's report—supposedly the blueprint for the euro's future—as merely a "background document." When she arrived, Ms. Merkel rejected Mr. Van Rompuy's euro-zone budget. She said she was prepared to offer small-scale funding for economic reforms—but not for Europe-wide unemployment insurance or stimulus spending to fight recessions, according to people who were there. Germany had already shown enough "solidarity" by supporting the bloc's bailout fund, she told her counterparts over dinner. Mr. Van Rompuy thought he could count on French support. Signals from Paris had led him to believe that President François Hollande would help push Ms. Merkel to soften her stance, say people familiar with the matter. But when Mr. Van Rompuy sought the Frenchman's backing, Mr. Hollande kept quiet, officials familiar with the discussion say. Other EU officials were left scratching their heads. French officials say their leader had concluded that fiscal union was only realistic as a long-term aspiration. This year, Ms. Merkel changed her tone on the "political union" she had called for in 2012. The lingering economic crisis had turned public opinion against EU institutions such as the European Commission, the bloc's executive arm. Germany, the most powerful euro member, saw the Commission as too eager to spend Germany's money and too soft on indebted Southern European countries. Ms. Merkel backed away from a major rewrite of EU treaties, instead pushing for a limited change only to allow more economic-policy controls. This summer, she said she opposes more rights for the Commission or the European Parliament. German officials have begun talking about taking some powers back from the EU.

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The split between Berlin and the euro-zone majority was readily apparent in Brussels on the morning of Oct. 3, when top aides to European leaders, known as "Sherpas," gathered to prepare this week's EU summit. Ms. Merkel's adviser on Europe, Nikolaus Meyer-Landrut, argued that further integration should focus on a limited goal: enforcing stiffer discipline in the economic policies of member countries to improve their competitiveness. He proposed that EU leaders attending the meeting agree on a set of indicators, such as rising labor costs, that would signal when a country's economy is veering off course. He also said national governments should sign binding promises on economic overhauls that EU leaders would monitor. The German proposal found no takers. French presidential aide Philippe Leglise-Costa argued that the focus shouldn't only be on competitiveness, and that monitoring of countries' performances should also include "social cohesion." Other countries, meanwhile, insisted that any further handover of economic control would have to come with financial incentives. Southern European countries were only interested in Germany's money, one Northern European delegate said after the Oct. 3 meeting. "They had dollar signs in their eyes," he said. A delegate from Southern Europe, meanwhile, said Berlin wants European unity based only on discipline and controls, which the official called "politically and economically unsustainable." Guntram Wolff, director of Brussels think tank Bruegel, says that across a range of issues, "Germany thinks more and more that we should move back to a model where countries are responsible on their own." Without a fiscal, political and banking union, he argues, "we will have a euro that just survives, but not one that functions well." —Gabriele Parussini and William Horobin in Paris contributed to this article. http://online.wsj.com/news/articles/SB100014240527023039024045791496132006236 96#printMode

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The Economist The euro zone Europe’s other debt crisis It’s not just sovereign borrowing; there are too many zombie firms and overindebted households Oct 26th 2013 |From the print edition

FIFTEEN months ago, in July 2012, Mario Draghi, the president of the European Central Bank (ECB), promised to do “whatever it takes” to preserve the single currency. Although the bond-buying scheme set up to fulfil that pledge has never been tested, yields on sovereign bonds have fallen. The euro mess has morphed from an acute crisis into a chronic one. This week Mr Draghi launched what could become the second big turning-point in the euro saga: an inspection of the balance-sheets of the region’s 128 biggest banks which the ECB will supervise from late 2014. As part of its “asset-quality review”, ECB officials, along with outside experts, will start peering into the banks’ balance-sheets and impose common standards for loan quality (see article). This process is supposed to find out which banks are viable now, which will need more capital and which should just be closed down. Mr Draghi should be tough. The euro zone’s politicians, even in supposedly prudent Germany, have been reluctant to look too deeply into banks’ balance-sheets, let alone to force them to clean themselves up. There are certainly questions to be asked about all the government bonds that the banks have bought in recent years. But the main dodgy assets that have been swept under the European carpet are private: bad loans made to households and companies. There are some nasty bugs under your carpet, Angela Europe is always thought of as having a sovereign-debt crisis, and it has. But the origins of the euro disaster lay less with government profligacy than with excessive private

12 borrowing. True, Greece got into trouble because its government spent too much and collected too little in taxes. But elsewhere the bust followed a private-sector binge: mortgage debt in Ireland and Spain; corporate borrowing in Portugal and again in Spain (see article). In all three countries household and corporate debt combined were way over 200% of GDP before the crisis, much higher than in America (175%) or even Britain (205%). Unfortunately, the euro zone has made less headway than other places in reducing this private-debt burden. Thanks to mortgage write-downs and faster growth, America’s households have unwound about two-thirds of the excess debt built up during the boom years. Most euro-zone countries have achieved far less private-sector “deleveraging”, for three reasons. First, the fiscal austerity imposed on Europe’s peripheral economies deepened their recessions, which made it harder to reduce private debts. Second, weak banks have been reluctant to recognise, and hence make provisions for, non-performing loans. And third, European bankruptcy law is less debtor-friendly than America’s, and so tends to be less conducive to restructuring debt. In America many mortgages are “non-recourse”, meaning a borrower can hand back the keys and walk away; Europeans typically remain liable for unpaid mortgage debt. Corporate-bankruptcy procedures are often slow and costly: in Italy the process takes an average of seven years. The corporate-debt problem is worst in Portugal, Spain and Italy, where the IMF says that 50%, 40% and 30% of debt, respectively, is owed by firms which cannot cover their interest payments out of pre-tax earnings. These firms are unable to invest or grow. They are zombie companies, much like those wafting through Japan in the 1990s. The household-debt burden is especially heavy in Ireland and, surprisingly, the Netherlands—exceeding 100% of GDP in both places. Paying the mortgage strains household finances and crimps consumer spending. Whereas in America the share of income that the average household spends on servicing debt is now the lowest in decades, in Spain it is higher than during the boom years. and, this time, they’re not Barack Obama’s If the euro zone’s recovery is to strengthen, this burden of private debt must be lightened. According to the IMF, private debt is a bigger drag on Europe’s growth than government debt. One prerequisite, which even Germany’s chancellor, Angela Merkel, is beginning to accept, is less draconian austerity. It is virtually impossible for the private sector to reduce debt when governments try to slash their borrowing too. Another necessity is for banks to recognise, and write down, non-performing loans. That is where the ECB’s asset-quality review will be crucial. The central bank must make sure its assessment is both thorough and credible: Mr Draghi should stand firm against any political pressure to downplay the size of the bad-loan problem in order to minimise potential capital shortfalls. Equally, Europe’s politicians must be willing to provide the resources to recapitalise banks if necessary. Lastly, a more honest assessment of banks’ balance-sheets must translate into a willingness by the banks to sell or restructure mortgages and corporate loans. Mrs Merkel has been far tougher on Greece than on the German banks that lent the Greeks so much. Governments can create “bad banks” or specialist asset-management companies to manage and dispose of non-performing loans; they can help develop secondary markets in distressed debt with tax and regulatory breaks. And they can reform bankruptcy and tax laws to make it easier to restructure corporate and personal debts.

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Explore our interactive guide to Europe's troubled economies Most countries have already put a few of these reforms in place. Spain and Ireland have “bad banks”. Several countries have streamlined bankruptcy rules. Portugal has pioneered the use of out-of-court settlements. But much remains to be done. In Italy a mere €2 billion ($2.8 billion) of non-performing debts is sold each year, out of a stock of €122 billion. The Bundesbank is prone to lecturing the financial world about everything except the mess in Germany’s regional banks. Sorting all this out will take time. The euro zone will not look like America, with a debtor-friendly legal system and a big market for distressed assets, overnight. But dealing with the private-debt trap should be a priority for Europe’s leaders. Better capitalised banks would be more able to lend; they would also make it easier to create a banking union. A continent littered with zombie firms and broke households will never prosper. It falls to Mr Draghi to start clearing up. http://www.economist.com/news/leaders/21588366-its-not-just-sovereign-borrowing- there-are-too-many-zombie-firms-and-overindebted

The Economist Working hours

Free exchange

Economics Get a life Sep 24th 2013, 12:19 by C.W. and A.J.K.D. | LONDON BERTRAND RUSSELL, the English philosopher, was not a fan of work. In his 1932 essay, “In Praise of Idleness”, he reckoned that if society were better managed the average person would only need to work four hours a day. Such a small working day would “entitle a man to the necessities and elementary comforts of life.” The rest of the day could be devoted to the pursuit of science, painting and writing. Russell thought that technological advancement could free people from toil. John Maynard Keynes mooted a similar idea in a 1930 essay, "Economic possibilities for our grandchildren", in which he reckoned people might need work no more than 15 hours per week by 2030. But over 80 years after these speculations people seem to be working harder than ever. The Financial Times reports today that Workaholics Anonymous groups are taking off. Over the summer Bank of America faced intense criticism after a Stakhanovite intern died.

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But data from the OECD, a club of rich countries, tell a more positive story. For the countries for which data are available the vast majority of people work fewer hours than they did in 1990:

And it seems that more productive—and, consequently, better-paid—workers put in less time at the office. The graph below shows the relationship between productivity (GDP per hour worked) and annual working hours:

The Greeks are some of the most hardworking in the OECD, putting in over 2,000 hours a year on average. Germans, on the other hand, are comparative slackers, working about 1,400 hours each year. But German productivity is about 70% higher. One important question concerns whether appetite for work actually diminishes as people earn more. There are countervailing effects. On the one hand, a higher wage raises the opportunity cost of leisure time and should lead people to work more. On the

15 other hand, a higher income should lead a worker to consume more of the stuff he or she enjoys, which presumably includes leisure. Some research shows that higher pay does not, on net, lead workers to do more. Rather, they may work less. A famous study by Colin Camerer and colleagues, which looked at taxi drivers, reached a controversial conclusion. The authors suggested that taxi drivers had a daily income "target", and that: When wages are high, drivers will reach their target more quickly and quit early; on low-wage days they will drive longer hours to reach the target. Alternatively, the graph above might suggest that people who work fewer hours are more productive. This idea is not new. Adam Smith reckoned that [T]he man who works so moderately as to be able to work constantly, not only preserves his health the longest, but in the course of the year, executes the greatest quantity of works. There are aberrations, of course. Americans are relatively productive and work relatively long hours. And within the American labour force hours worked among the rich have risen while those of the poor have fallen. But a paper released yesterday by the New Zealand Productivity Commission showed that even if you work more hours, you do not necessarily work better. The paper made envious comparisons between Kiwis and Australians—the latter group has more efficient workers. So maybe we should be more self-critical about how much we work. Working less may make us more productive. And, as Russell argued, working less will guarantee “happiness and joy of life, instead of frayed nerves, weariness, and dyspepsia". http://www.economist.com/blogs/freeexchange/2013/09/working-hours

The Economist Financial markets What we talk about when we talk about bubbles Sep 25th 2013, 10:26 by R.A. | LONDON SINCE March of last year the Case-Shiller 20-city home-price index has risen by 21%. Some of the markets within that index have risen even more; the Los Angeles index has doubled CORRECTION: has risen 30% from its post-crisis bottom. Rising prices have many financial-market observers worried that the bubble is reinflating, helped along by low interest rates and a pipeline of mortgage credit owing to the Federal Reserve's purchases of mortgage-backed securities. But that raises the question: just what is a bubble? Use of the term has grown so fast and loose that nearly any sustained rise in prices in any market gets the bubble label at some point. I'd say there are a few ways to think about what a bubble is or might be. A bubble could be a pure, financial-market ponzi game, in which prices bear no relation to any defensible story about future fundamentals. It may depend entirely on buyers betting prices will go up because others will buy betting prices will go up, and so the bubble inflates until the supply of suckers is exhausted. But a "bubble" might have a more rational basis. It could be a sustained rise in prices that is reasonable given particular, defensible expectations about the future, but which

16 deflates once it becomes clear that particular version of the future has not come to pass. The future is uncertain, after all, and it is not irrational to bet that something might happen just because it doesn't eventually happen. Or, a "bubble" could be a sustained rise in prices that is reasonable given particular, defensible expectations about the future—which eventually are borne out—but which nonetheless deflates, temporarily, due to an unexpected turn in credit conditions. Now, which of these was America's housing bubble? Before you answer, it's worth going back to look at a Free exchange column written earlier this year, on an interesting working paper by Ed Glaeser, which describes America's history of real-estate booms and busts. The column examines his take on the great Chicago land boom of the early 19th century: At the time, water access was critical to trade. In 1816 it cost as much to move goods 30 miles over land as to ship them across the Atlantic Ocean. Land near key ports and shipping routes was therefore extremely valuable. The Erie Canal led to economic booms around the Great Lakes, and Chicago’s proximity to the Mississippi river system made it an attractive bet. In 1830 Chicago land went for a song at $800 per acre (in 2012 dollars). In just six years the value soared to $327,000 per acre, with some plots fetching $1m. Tighter international credit conditions led to panic in 1837. By 1841 prices had fallen back to $38,000 per acre. Yet this was more a product of unpredictability than irrationality. Given the risk that Chicago might fail to become a great metropolis, values immediately after the crash look low but justifiable. Prices at the peak were also consistent with reasonable views. At the time Chicago’s prospects looked uniquely bright. Land values in 1836 made sense given the defensible assumption that Chicago prices would rise to a fourth of those in New York city. And, Mr Glaeser notes, people who bought and held land through the crash prospered over the next two decades: average annual returns through to 1856 were about 9%. From the perspective of 1841 Chicago was obviously a bubble; nothing could have been clearer. And yet an investor who had purchased the most expensive tract in Chicago at the very height of the boom would still have earned a real return of 3.6% per year over the next 20 years. As Mr Glaeser notes, there is a selection bias at work. Chicago became Chicago and so bets at the peak of the Chicago market were, ex post, sensible. Yet there were other cities that might have become Chicago but didn't, where bets at the top of the market didn't pay off. Calculated Risk gathers the latest Case-Shiller data into this helpful chart (see): There's quite a variety of experience there. Prices in Las Vegas peaked at 135% above their 2000 level, then bottomed out below the 2000 level. They now stand 20% above the 2000 level. That's an average annual return of 1.4% since 2000. At that pace of appreciation Las Vegas will be back to its bubble peak in 2062. Washington has managed average appreciation of 5.3% since 2000, by contrast, and might therefore expect to be back to the bubble peak by 2018. Or it might not. The lesson of history is that it's nearly impossible to know whether a price boom was or was not a bubble without the benefit of a comfortable period of hindsight. And even with hindsight it will often be clear that a "bubble" wasn't so much a bubble as a reasonable bet on a particular view of the future which turned out to be

17 mistaken. That sort of bet, it should be clear, is not the kind of thing governments ought to be stamping out.

Rising American home prices surely reflect some speculation. But Mr Glaeser's work suggests that for the most part investors are making reasonable bets on the future, given reasonable expectations of future supply, demand, and credit conditions. They aren't making more of coastal California, you may have noticed, and on defensible beliefs about demand for coastal California, supply growth in coastal metros, and credit conditions prices for Los Angeles homes make perfect sense. That doesn't mean the bets on rising LA prices will pay off. Teleportation may make housing location irrelevant or, more prosaically, LA may become much better at adding new housing supply near the beach. (It is very much worth remembering that to the extent such developments occur and undermine bullish property bets, they will owe something substantial to the price signal sent by bullish bettors!) While it would be very smart to prevent a deterioration in lending standards or to get rid of subsidies for housing debt, it is not at all clear that tamping down LA home prices is a sensible goal for monetary policy-makers or financial regulators. Actually that's wrong; it is a plum bad idea. Unfortunately, in the wake of the recent crisis it may prove an irresistible one. http://www.economist.com/blogs/freeexchange/2013/09/financial-markets-0

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Austerity and Growth: Dispelling Confusion With Some Facts Author: Roberto Tamborini · October 24th, 2013 A lot of confusion surrounds the quarrel about austerity and growth in and among the Euro-countries. [1] Confusion helps neither the assessment of the current policies nor the choice of the correct ones. Critics of austerity argue that it is mainly responsibile for the extent and persistence of low or negative growth rates after the Great Recession of 2008-09. The orthodox pro-austerity pedagogy revolves around the following arguments: 1) poor growth of Euro-countries is a long-lived structural problem and it is not due to recent austerity measures; 2) stronger fiscal stimuli are either useless of harmful; 3) austerity is not enemy of growth, rather it is a means to foster sustainable growth; 4) austerity may depress growth (in the short run) if it is badly implemented, i.e. too little, too late, too much taxation rather than expenditure cuts, and no structural reforms[2]. The first confusion is between long-run and short-run analysis. Let us accept that the growth performance of major Euro-countries (Germany included) has been rather poor relative to the rest of the world for more than a decade, which cannot be due to recent austerity but to other structural factors. Agreement on this point still begs the following questions: given the Great Recession shock, has austerity been the best possibile response? Has austerity amplified or absorbed the shock? How far are the Euro- countries from growth recovery? In order to address these questions, a second confusion should be dispelled concerning the nature of the Great Recession. To be consistent with the orthodox pro-austerity narrative, one should show that the Great Recession is just a large episode along the long-run trend of decline of potential growth of the Euro-countries, that actual GDP has closely followed available estimates of potential GDP, and that austerity is a means to restore potential capacity (at least). To the best of my knowledge, austerity advocates have never produced robust evidence in support of this view. One main reason being that such evidence does not exist. Available data tell a different story of a big Transatlantic shock emanating from the private financial sector and investing the engines of the real economy both on the supply and the demand side. Questionable as they may be, official estimates (e.g. Eurostat and OECD) indicate that since 2007 1) potential growth has been revised downwards, and 2) almost all countries have been operating with demand below capacity. The crisis has indeed prompted a new wave of “structural” studies, both theoretical and empirical, revolving around the “macroeconomics and finance” nexus (e.g. Borio 2102, Hall, 2010). One important thread running through this buoyant literature is that there are different types of crises, and that the crises which originate in the (private) financial sector have special, thorny, characteristics that we still fail to understand fully. The main focus of these models is on the fact that financial shocks may disrupt growth potential as well as determine wide swings of GDP from its potential track. When this happens, the private sector’s expenditure falls to an inefficiently low level, but not because the public sector’s expenditure is too high. This phenomenon has also been 19 popularized by Koo (2011) with his now famous notion of deleveraging or “balance- sheet crises”. Contrary to the traditional neoclassical “loanable-funds” motivation for austerity, in a deleveraging process the non-financial private sector is not constrained in its ability to borrow but it is (it wants to be) a net saver in the first place. Things are even worse when the financial sector is deleveraging as well, because the consolidation of private balance-sheets is not translated into new supply of loans either. Under these conditions, forcing the government into deleveraging to foster “crowding in” is pointless; the result is just additional excess saving. Flow-of-funds data provide abundant evidence (Koo, 2011; ECB, 2011). That is why, in a crisis of this type, fiscal multipliers turn out to be “surprisingly” larger with respect to those observed under ordinary fluctuations. Hence, none of these studies supports simple austerity recipes aimed to restrcit the public sector’s share of GDP in the hope that the private sector’s one will be enlarged. As preliminary evidence, the post-shock GDP growth rates for Euro-countries, UK and US (see figure 1), have largely followed a common “double dip” pattern with high cross-correlation (only Ireland and Greece seem on a track of their own). There are also some quantitative differences across countries highlighted on the graph. Hence, data suggest the presence of common Transatlantic driving factors together with country- specific factors. Figure 1. Year growth rates, 2008-13

Source: Eurostat, onlinde database AMECO Figure 2. Compound growth rates 2008/09-2013

Source: Personal elaborations on Eurostat, onlinde database AMECO The data indicate that after the second dip, growth rates are improving. Is this the true start of catching up with the pre-crisis ordinary state of affairs? “For Europe, recovery is within sight” President Barroso said in his State of the Union Address (September 11, 2013). As a matter of fact, in 2013 four Euro-countries are still dwelling in negative territory or almost zero growth (Greece, Italy, Portugal, Spain). The others are on the

20 track of very weak growth (Germany included) with respect to, say, the US. A better gauge of the overall recovery process is provided by the compound growth rate (CGR) from the first year of recession (2008 or 2009) to 2013: if negative, it indicates a net output loss, if positive a net output gain. The Euro12 group as a whole is still lagging behind the pre-crisis GDP level by 1.4%. In fact, only three countries have gained a (small) additional output in five years (Austria, Belgium, Germany), and only three have barely caught up with their initial level (France and Luxembourg). The others, at foreseeable growth paces, will take years just to regain the pre-crisis level of GDP. All in all, there is not much ground for optimism or for declaring the end of the Recession war in Europe. How are fiscal policies related to these facts? In the first place we need some measure of austerity. The ratio of the cyclically adjusted primary budget over GDP has become common use. This (net of thorny technical problems) may be a good measure of the government intended fiscal stance. However, a better measure of the actual impact of fiscal variables on the economy is the year change of the primary deficit over the current GDP[3]. Hence I measure fiscal austerity in year t as FAt = (Ft - Ft-1)/Yt < 0, where F is the primary deficit and Y is GDP, both in current euros[4]. In a medium-term perspective after the 2009 shock, Figure 3 provides the correlation graph of the cumulated FAs (CFAs) with the CGRs of the Euro- countries. United States and United Kingdom have been added for comparison. There are a few interesting facts to consider. Figure 3. Cumulated austerity and compound growth rates 2010-13

Source: Personal elaborations on Eurostat, onlinde database AMECO First, as of 2013 all countries (except Luxembourg) have built up a negative CFA as a result of a sequence of austerity doses. The five most financially distressed countries (Euro5: Greece, Ireland, Italy, Portugal, Spain) stand out for the strongest treatment, ranging from 4.4% of Italy to about 10% of Ireland, Portugal and Greece (the three under Troika treatment). Second, statistically there exists a significant positive relationship between the two variables. Hence the countries with the largest net output losses (the Euro5 countries) are also those with more cumulated austerity. Contrary to the orthodox narrative, these differences in fiscal policies matter: they account for about 40% of the cross-country variance in growth performances. The interpolation line indicates that the critical dosage of CFA that has triggered net output losses has been 4%, with 1% of additional CFA associated with 2.5% net output loss. This figure may provide a first quantitative hint for the notion of excess austerity (e.g. De Grauwe and Ji, 2013). It may be argued that severe austerity was a necessity for countries under

21 sovereign debt attack; however, this does not justify the imposition of austerity as a global uncoordinated policy. As recalled above, the pillar of growth-friendly austerity policies is “crowding in”, that is, the substitution of more private expenditure (especially durable and capital goods) for less public expenditure. A simple and direct test, though seldom pursued, is provided by data on the GDP components. Following the same medium-term approach as above, figure 4 shows the compound growth rate of total private domestic expenditure vis-à-vis CFAs. Figure 4. Correlation between CFA indicators and the compound growth rates of private expenditure, 2010-13

Source: Personal elaborations on Eurostat, online database AMECO The “crowding in” area (the north-west quadrant) contains 7 of the 15 cases, 4 of which display a “crowding in” effect (the ratio with CFA) smaller than 1. These are also countries with relatively low net fiscal restrictions (except perhaps the UK). The other 8 cases fall in the Keynesian area of “general crowding out” (south-west). Overall, a positive correlation prevails across all countries. Along the interpolation line, the CFA beyond which “crowding in” has vanished is about 4%. Notably, this is the same value that in figure 2 marks the point where CFAs have triggered net output losses. Then, on average, 1% of additional public sector’s restriction has been associated with 2.5% of net loss of private expenditure. Again, differences in CFAs account for 55% of the observed differences in the compound growth of private expenditure[5]. Figure 5. Correlation between the tax share of CFAs and compound growth rates

Source: Personal elaborations on Eurostat, online database AMECO As recalled above, in the pro-austerity literature “composition matters”. Accordingly, the recessionary effects of austerity are attributed to a composition unbalanced towards higher taxation instead of lower expenditure. However, inspection of the relevant data on the composition of CFAs does not lend support to this view. See figure 5. A virtuous austerity policy wants a tax share of CFA smaller than 1 (or negative); a tax share larger 22 than 1 indicates that the CFA has been obtained by increasing taxation more than expenditure. Contrary to widespread beliefs, the countries with more virtuous composition of CFAs are those in the Euro5 group (for Ireland, Portugal and Greece this may actually be the effect of the Troika therapy). Nonetheless they are suffering the worst net output losses. All the other better performing countries have let expenditure grow and have incresed taxation more than proportionally. Finally, the other standard disclaimer in the pro-austerity narrative is that undesirable effects on unemployment may arise owing to labour market rigidity; if large losses of employment are observed, these are more the result of rigidities than of austerity per se. Cursory inspection of standard labour market statistics does not lend much support to these argument in two respects. The first is that there is not much evidence that labour markets have remained rigid in the face of falling output and rising unemployment. Wage deflation has been substantial in the most austere countries. The second is that differences in rigidity across countries amount to a thin explanation of differences in unemployment performances. Rigidity is a difficult concept to render operational. It combines institutional factors with other factors that condition the functioning of the labour market in specific economic circumstances. From the former point of view, OECD offers a well-known set of indicators, the Employment Protection Indicators (EPI)[6], which are widely used by labour researchers for comparative analyses. A high value of the indicator provides a measure of rigidity in terms of legislations and regulations that may hamper wage changes and/or workers mobility across jobs and sectors. To gauge how this dimension of labour market rigidity may relate to differences in unemployment performance across countries during the crisis, I have elaborated a synthetic index for each country based on two EPI: “Strictness of employment protection; Individual and collective dismissal (regular contracts)” (version 3), and “Temporary employment” (version 3).[7] My index is the average of the average value of the two EPI from 2008 to 2013 (actually, EPI have remained constant or have changed very little in this period of time). The relationship between this rigidity index and the change of unemployment is shown in figure 6. Figure 6. Labour market rigidity index and change of unemployment rate 2007-13

Source: elaborations on OECD Employment Protection Indicators If some countries with higher index display a greater increase in unemployment than do some countries with lower index, this pattern is far from providing an exhaustive explanation of the differences in unemployment performance. True, the more flexible economies of US and UK have obtained relatively smaller increases in unemployment, but the majority of the Euro-economies, with much higher indices, have done no worse, or even better. The amazing performance of Germany is not associated with a lower than average EPI. The much worse unemployment performance of the

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Euro5 countries seems unrelated to significant differences in rigidity with respect to the other Euro-partners. To conclude, there is persistent confusion around the crucial issue of austerity and growth standing in the way of policymaking in the Monetary Union. Critics and defenders of austerity have in mind different problems and different perspectives. Critics may have too a short-term perspective, but the orthodox pro-austerity arguments fail to address, and are inconsistent with, the available evidence about austerity and growth in the Euro-countries five years after the Great Recession. How long is the long run? References Borio C. (2012), “The Financial Cycle and Macroeconomics: What Have We Learnt?”, BIS Working Paper, n. 395. Buti M., Carnot N. (2013), “The Debate on Fiscal Policy in Europe: Beyond the Austerity Myth”, ECFIN Economic Brief, n. 20. Buti M., Padoan P. C. (2012), “From Vicious to Virtuous: A Five-Point Plan for Eurozone Restoration”, CEPR Policy Insight, n. 61. Buti M., Pench L. (2012), “Fiscal Austerity and Policy Credibility”, Vox EU, April 20. De Grauwe P., Ji Y. (2013), “More evidence that financial markets imposed excessive austerity in the eurozone”, CEPS Commentary, February. ECB (2011), “The Financial Crisis in the Light of the Euro Area Accounts: A Flow-of- Funds Perspectives”, Monthly Bullettin, October. Hall R. E. (2010), “Why Does the Economy Fall to Pieces after a Financial Crisis?”, Journal of Economic Perspectives, 24, pp. 3-20. Koo R. (2011), “The World in Balance Sheet Recession: Causes, Cure, and Politics”, Real-World Economics Review, n.2013-10-21.

[1] The complete working paper “Transatlantic austerity, 2010-…” can be downloaded from my homepage. [2] For a detailed and well articulated rendition of the arguments by institutional officers see e.g. Buti and Carnot (2013), Buti and Pench (2012), Buti and Padoan (2012). [3] In fact, the cyclical components of the budget do affect the budgets of their recipients in the private economy. [4] Note that FA is likely to underestimate the intended fiscal stance of government because low growth or recession tend to create larger primary deficits. [5] The sole support to GDP growth for all countries has come from exports. Yet this, rather than being evidence of “crowding in”, indicates a typical Alexander’s “absorption” mechanism whereby the enlargement of the export component is obtained by way of compression of the domestic components [6] http://www.oecd.org/employment/emp/oecdindicatorsofemploymentprotection.htm [7] Considering both segments of the labour market is important since temporary jobs are becoming increasingly common and typically less regulated than open-ended contracts. Both versions 3 encompass a larger number of indicators, and are available from 2008 to 2013. http://www.economonitor.com/blog/author/rtamborini/

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Japan’s Abenomics: Time to Take Stock Author: iMFdirect · October 23rd, 2013 · By Anoop Singh Almost one year ago, the term Abenomics first surfaced in Japan. The idea of a coordinated policy effort to revive Japan’s economy and end deflation seemed a bold idea, but also a long-shot. Back in February, several young investment bankers told me that ending deflation within the next few years stood at most, a 20 percent chance. They noted that they had never experienced rising prices in their lifetimes. By June they had upped the chances of success to 40 percent. With Abenomics approaching the one-year mark, is the new strategy working? Lot of policy action The year started with a flurry of new policy initiatives: in January, the Bank of Japan (BoJ) adopted a 2 percent inflation target, followed by new fiscal stimulus, and a decision to join negotiations over the Trans-Pacific Partnership (TPP), a proposal for a free trade agreement spanning countries from Australia, Brunei, to Chile, Canada, and the U.S. Shortly after, Haruhiko Kuroda took the helm at the Bank of Japan and introduced Quantitative and Qualitative Monetary Easing—an aggressive plan to reach 2 percent inflation in about 2 years mainly through large-scale bond purchases. Just, a few days ago, the government agreed to go ahead with the consumption tax increase in 2014 and announced further fiscal stimulus to soften the growth impact. Discussions on growth reforms are next on the agenda, with a special Diet session starting this month. Plenty of action, but has this whirlwind of activity paid off? Signs of a turnaround The strength of the recovery in the first half of this year has surprised many. The rebound in equity markets, yen depreciation, and new public spending all contributed to a remarkable turnaround, with growth reaching almost 4 percent in the first six month of the year. That said, the transition to a private demand-led recovery is still at an early stage. Private investment has not taken off and labor markets, while tighter, have not generated much wage growth. A good start, yes, but not a homerun. What about prices? Inflation turned positive in June helped by higher energy import costs, and long-term inflation expectations have risen. But most core prices are still falling and monetary easing is slow to transmit to the economy: most of the liquidity pumped into the economy is flowing right back to the BoJ in the form of growing bank reserves. Some banks have begun to rethink their investment strategies and bank lending has begun to rise, but in aggregate the new easing has not lead to substantial portfolio rebalancing or capital outflows, contributing to a relatively stable exchange rate since July. Probably the most noticeable achievement has been continued low and stable long-term interest rates, despite the rise in inflation expectations and a steepening of yield curves, overseas, especially in the US. This has helped bring real interest rates down. But Abenomics has still a way to go

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The truth is that there is no clear benchmark against which Abenomics can be assessed. Japan’s history of mild deflation and subdued growth makes it very hard to predict a path to recovery. But if Abenomics is to succeed, progress along several dimensions should be expected. Key milestones are: self-sustaining growth propelled by investment, employment, and earnings growth; a re-anchoring of inflation expectations at 2 percent and a steady rise in headline inflation driven by price increases of non-food and non-energy items; finally, successful Abenomics should lead to falling real interest rates as monetary easing keeps nominal interest rates low. Against these metrics, Abenomics has done well, but it also has some ways to go. Growth reforms are needed For Abenomics to work, Japan’s long-term economic problems need to be tackled in a convincing manner. In other words, strategies for raising trend growth and reducing public debt need be put in place. The consumption tax increase has sent a clear signal that the government is serious about fiscal reform. A similar resolve is needed on growth reforms—the third arrow of Abenomics. Discussions have been underway for some time on a new growth strategy, including labor market reform, deregulation, and efforts to revamp the agricultural sector. While these are all important areas, there is now a premium on concrete action. Japan needs a signature initiative similar to the consumption tax increase on the fiscal side. The upcoming special session in Japan’s legislative arm, the Diet, this October provides an opportunity to take action and keep the reform momentum going. Just one year ago, Japan was entering its third recession in 5 years, and the outlook seemed bleak. To avoid getting stuck again, the rapid pace of reforms needs to continue and, especially, extend to structural reforms. While there is no guarantee that it all will work, Abenomics has generated—for the first time in a long time—a real chance to bring Japan back on the road of sustained growth. And Japan’s economic prospects will be among the issues discussed at an IMF sponsored seminar “Abenomics approaching its one-year mark” taking place in Tokyo on October 29. This piece is cross-posted from iMFdirect with permission. http://www.economonitor.com/blog/2013/10/japans-abenomics-time-to-take- stock/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+econ omonitor%2FOUen+%28EconoMonitor%29

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Daily Morning Newsbriefing October 24, 2013 ECB gives details on AQR – sets minimum tier 1 at 8% The ECB’s published its guidelines to the AQR/Stress tests yesterday, triggering an immediate fall in bank share prices. As so often it is best to read the ECB’s statement, which is concise and well structured, rather than the convoluted and less precise press coverage. Here is our summary of the main points: • The common equity tier 1 capital threshold will be 8% of risk-weighted assets, based on forward-looking estimates of asset values, to be determined in the AQR; phase-in period is 2014-2018; the headline number includes the Basel III 4.5% baseline, a 2.5% conservation buffer, and a 1% surcharge to reflect the size and systemic relevance of the 130 banks under investigation. the ECB said the median core tier 1 capital ratio currently stands at 12%. Please note that recent media reports suggest that the required capital threshold could be 9%; • assessment will comprise credit and market exposure, including a qualitative and quantitative estimates on hard-to-value assets, on and off balance sheet positions, non-performing loans, and sovereign exposures; Igazio Angeloni later made clear that the ECB was not going to re-invent accounting principles for bonds (in other words: you can relax); • the AQR is the second part of a three pillar process, which beginning with a supervisory risk assessment – an analysis of bank balance sheets that includes liquidity, leverage and funding – culiminating in a stress test in co-operation with the EBA; • The ECB will oversee the entire exercise, while national authorities will implement the tests at the national level but under ECB oversight; the evaluation models are not in themselves harmonised, as banks are allowed to use their internal models. But the models themselves should be subject to common criteria. Angeloni said later in a press conference that the ECB’s stress test exercise will be more credible than the EBA’s because it the exercise is conducted by someone who will immediately become the supervisor, and because the EBA was not in a position to conduct a prior AQR. He said he expected the exercise to result in some big shifts in capital ratios. Mario Draghi told Bloomberg TV as saying that banks need to fail the tests to prove the credibility of the exercise. The FT surmised that Draghi made the comments to put pressure on EU leaders to agree a common resolution mechanism and put adequate funding in place. The article also made the point that there is ongoing concern inside the ECB that a lack of agreed public backstops could unsettle financial markets. The immediate market reaction was negative. Spain's stock market index IBEX35 lost 1.8% weighed down by banks losing between 2.4% and 5.6%, which Cinco Días 27 attributes to the ECB appearing ready to apply stricter criteria to its stress tests than in earlier rounds. Bank shares prices were also down sharply in Italy. The coverage by Spiegel Online included an interesting assessment by Martin Hellwig, one of Germany’s most renowned economists, who said that two German banks were in danger. One is HSH Nordbank, which has according to Hellwig has made to few write- offs of its shipping credits. And the other one is Commerzbank, which also has some dubious shipping loans on its books. The comments were mostly balanced: Philip Plickert writes in Frankfurter Allgemeine that, as yet, there is not much clarity, about risk portfolios the ECB will investigate, how it will determine the discounts on bad loans, how to link the AQR to the stress tests, and how to value sovereign loans. He said one should expect market nervousness to persist. Sam Fleming and Patrick Jenkins write in the FT that the capital standard was not as harsh as expected. A big problem for the ECB is that it lacks the experience and the staff for an exercise of such sweeping ambition. It is ultimately relying on national supervisors. And there is a risk that well resourced lenders will be able to push back against unfavourable assessments of their portfolios as the exercise unfolds. In addition to the points raised in the commentaries, for us the critical question is what will happen if there is no adequate resolution mechanism in place next year. We cannot see the ECB failing banks without an agreed backstop procedure, for this would raise market uncertainty – which the ECB wants to avoid for obvious reasons. We are therefore not sure whether the ECB thus really is in a position to put pressure on reluctant political leaders. Spain's economy out of technical recession, says Bank of Spain The Bank of Spain's quarterly economic report estimates that the Spanish economy grew by 0.1% in the third quarter of the year, thus ending the "technical recession" in Spain. Nevertheless, GDP still dropped by 1.2% on a year-to-year basis. Internal demand dropped by 0.3% for the quarter, but this was made up by a 0.4% increase in external demand. Employment was still slightly down for the quarter and down 3.1% from a year earlier. The effect of VAT rises on inflation has waned and core inflation is 0.6% lower than the Eurozone average which is at 1.1%. The Bank of Spain sees signs of a sustained improvement in domestic capital investment, to support export growth. Rehn confirms further debt relief for Greece after May elections Olli Rehn confirmed that Greece will have to wait until after the European elections to find out whether it will be granted further debt relief, Kathimerini reports. Rehn also underlined that Greece’s fiscal monitoring would not end when its bailout expires, regardless of whether that is next summer or if a third package is needed. The new fiscal rules foresee monitoring to remain in place until a country has paid 75% of the loans it has received. For Greece, this means surveillance will be in place for at least another 25 years. Athens has so far received €133.04bn from the EFSF with an average maturity of 30.48 years. The EFSF is due to pay out another €10.66bn. Greece has also received €52.9bn in bilateral loans from its eurozone partners. This will also have to be paid back as part of the process of exiting fiscal surveillance. Greek coalition policy agreement and its ambivalent message PASOK and New Democracy in their just published 12-page long policy agreement, strike the balance with an ambivalent message: we will stick to the bailout targets but cannot accept any more measures. Among the 43 measures in this document,

28 released after a meeting between Antonis Samaras and Evangelos Venizelos, there are many ‘red lines’ leading to the document’s conclusion that “Greece can convincingly argue that it can't and shouldn't take new fiscal measures curtailing wages and pensions." The declared objective of the coalition is to get rid of the memorandum and to proceed with structural reforms “that allow Greece to become a modern, normal European state that is at the service of its citizens,” according to Kathimerini. Its Deputy Editor Nick Malkoutzis twittered that if this is all what the coalition has after 3 years of crisis and 16 months in government, “we're screwed.” Malkoutzis remarks the agreement is more or less the same as the one in 2012, which was not signed at the time. Greece cuts off state funding to Golden Dawn Greek lawmakers voted early on Wednesday to cut off state funding to the Golden Dawn party after a judicial decision to prosecute its leader as the head of a “criminal gang,” the FT reports. The legislation to suspend the party’s funding was approved by 235 lawmakers in the 300-member house. Thirty-four others abstained. There were no votes against the motion as Golden Dawn deputies had already walked out of the chamber in protest. Athens has earmarked €11m for elected parties in 2013, including €873,000 for Golden Dawn. Hollande should not run for second time, poll suggests Valls instead A third of the French (33%) wish interior minister Manuel Valls to become the next Socialist candidate for presidency in 2017, far ahead of Francois Hollande (9%), according to a poll published by Le Figaro magazine (hat tip Les Echos). Among Socialists, Hollande is still leading (37%), Valls follows second with 24%. Among all the ones polled 80% consider Hollande not able to win against a conservative candidate where Valls could win. The magazine wonders if this is the first time since 1974 that a president might not be in the situation to candidate for a second term. Portugal plans debt swap Portugal aims to replicate Ireland's path out of a bailout with a debt swap later this year, but the likely high cost make investors doubt that it can stand on its own feet, Reuters reports. An exchange of short-term for longer-term bonds would ease Portugal's immediate refinancing burden and is seen as a crucial step in its plans to replace the €78bn EU/IMF bailout with a precautionary credit line (PCL) next year. But based on current market prices, foreign investors would have little incentive to take part in any debt exchange. The government has said it plans a swap though not which bonds would be included. Analysts and traders say a swap out of 2014 and 2015 bonds into 2018 paper is the most likely. But swapping 2014 and 2015 bonds for paper maturing in 2018, when Lisbon faces lower repayments, would give investors 120-220 basis points of extra yield in exchange for putting their money at risk for longer. While local banks and pension funds might accept that, foreign investors - who own about 53% of tradeable Portuguese debt - may not be so keen. To lure them, Portugal will have to top up the price, which in turn could trigger concerns over its longer-term debt sustainability. At €215bn, its public debt is already 1.3 times economic output, just above what the IMF deems as sustainable. Mussler on what to expect, and not to expect, from today’s European Council Werner Mussler, writing in Frankfurter Allgemeine, is pouring some cold water on other recent German press reports detailing several initiatives by Angela Merkel that she might put to the European Council today. In reality, she is not coming up with any new proposals on treaty reform or a permanent chief of the eurogroup. The government also

29 denies that Merkel will present any concrete proposals on banking union, as this issue would at this stage be dealt with by the eurogroup, not the European Council. The only banking union talking point at today’s meeting, will be Mario Draghi’s report about the banking review. Mussler says the EU was still not close to an agreement about the resolution mechanism and a source of common funding. The only decision the summit is likely to take today – as already indicated by the draft conclusions – is the timetable, according to which a solution should be found before the end of the year. EBA proposes more relaxed bonus rules The EBA has issued a consultative document according to which banks can exceed the recently agreed 100% bonus cap on senior staff, or 200% with shareholder approval. The document gives details on a “discount rate” that would allow banks to pay up to another 50%, bringing the total to 250%. Reuters reports the discount rate idea was a concession to the UK, which opposes the plans amid fears that this might disadvantage the City of London. The consultation paper says the size of the discount would depend on inflation, sovereign bond yields, and the deferment period of the bonus payment. The story quotes an analyst as saying that the discount rate idea would not alter the fact that banks will now raise fixed salaries. Bini-Smaghi says ECB may have to impose negative rates Lorenzo Bini-Smaghi has a comment in the FT, in which he warns that the US debt crisis might have catastrophic consequences for the eurozone. He said the recent agreement between Obama and the Republicans had resolved nothing – and is very similar to how European leaders behave at the height of the debt crisis. He said the ECB may have calmed the markets, but the catastrophic risk had not disappeared. In the US, we are soon in a situation where market participants start pricing in a non-zero probability of a disaster – thus triggering substantial capital inflows into the eurozone, exerting further pressure on the euro/dollar exchange rate. He says one problem is that the ECB does not have many policy options available now. The ECB could increase overall euro liquidity through market operations, or discourage demand for euro assets by imposing negative interest rates. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.494 0.495 0.486 Italy 2.315 2.343 2.334 Spain 2.413 2.380 2.343 Portugal 4.422 4.464 4.469 Greece 6.748 6.817 6.81 Ireland 1.779 1.772 1.771 Belgium 0.756 0.761 0.753 Bund Yield 1.797 1.763 1.772

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.376 1.3814

Yen 133.760 134.61

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Pound 0.852 0.8521

Swiss Franc 1.231 1.2308

ZC Inflation Swaps

previous last close

1 yr 1.03 1.03

2 yr 1.29 1.16

5 yr 1.52 1.51

10 yr 1.78 1.92

Euribor-OIS Spread

previous last close

1 Week -4.943 -4.343

1 Month -2.029 -2.229

3 Months 4.586 4.286

1 Year 31.286 29.986

Source: Reuters

http://www.eurointelligence.com/professional/briefings/2013-10- 24.html?cHash=5804584e2b9c70c4c53a21eb8870ac19

ft.com World Europe

Last updated: October 23, 2013 7:14 pm Draghi’s blunt warning on bank stress test By Michael Steen in Frankfurt

©Reuters Mario Draghi warned on Wednesday night that some European banks needed to fail a series of European Central Bank health checks to prove the credibility of its year- long review of the region’s biggest banks. The blunt comments by the ECB president raised pressure on EU leaders to earmark public money that could in extreme cases be used to recapitalise struggling lenders.

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More ON THIS STORY// Bank tests’ unanswered questions/ The Short View ECB’s eurozone fight/ Editorial ECB review must have sharp teeth/ Lex Bank assets – inside the black box/ Video The ECB’s bank health check ON THIS TOPIC// Editorial The price of the ECB doing nothing/ Draghi faces eurozone inflation dilemma/ Money fears point to more ECB bank loans/ Editorial It is time to shore up Europe’s banks IN EUROPE/ Berlin claims US targeted Merkel phone/ Berlusconi faces new trial/ Pope suspends German ‘bishop of bling’/ Roma case exposes Greek registry flaws The ECB’s assessment, which includes stress tests and balance sheet reviews, is designed to dispel doubts about banks’ financial health before the central bank takes over from national authorities as supervisor in a year’s time. “Banks do need to fail to show its [the assessment’s] credibility,” Mr Draghi told Bloomberg Television. “There is no question about that.” He went on to note that EU political leaders had made an “explicit commitment to have in place proper, adequate national backstops by the time the exercise is being carried out. We have a commitment at the highest level”. While the ECB has said banks that are found wanting capital should first turn to shareholders for fresh funds, there is concern that the lack of agreed public backstops could unsettle financial markets if left unresolved for too long. Germany, however, this month hardened its stance against granting direct access to eurozone rescue funds for troubled banks. It insisted that losses be imposed on bondholders before any taxpayer money comes into play, making it harder to set in place a common safety net for lenders. The grand coalition government that will probably be formed in Berlin is not likely to give ground on the issue. The centre-left Social Democrats share Angela Merkel’s Christian Democratic Union’s opposition to “direct recaps” by the European Stability Mechanism. Bank share prices fell after the ECB unveiled its plans. Italian bank stocks fell by as much as 3 per cent in early trading, reflecting investor concern that the tests would show up unexpected holes in balance sheets. Most other leading banks in Spain, France and Germany saw share prices fall about 2 per cent. As part of the ECB’s assessment, the central bank will conduct an asset quality review of bank balance sheets, leading to a recommendation in a year’s time that may involve demanding some banks bolster their capital reserves. “We expect that this assessment will strengthen private sector confidence in the soundness of the euro area and in the quality of bank balance sheets,” Mr Draghi, ECB said in a statement. Additional reporting by Patrick Jenkins and Sam Fleming in London http://www.eurointelligence.com/professional/briefings/2013-10- 24.html?cHash=5804584e2b9c70c4c53a21eb8870ac19

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ft.com World Europe October 23, 2013 1:44 pm Britain and France tangle in pre-summit spat over EU regulations By Peter Spiegel in Brussels and George Parker in London Britain and France clashed on Wednesday over Brussels’ efforts to cut back on excessive regulations, with Paris warning on the eve of an EU summit that the push risked going too far in dismantling European social protections. David Cameron, the UK prime minister, is urging more aggressive action and is travelling to Brussels with members of his “business task force” to lobby European leaders on the need to curb EU social and employment legislation. More ON THIS STORY// EU summit Leaked draft conclusions/ Europe Watch out for a Tea Party/ Report boosts fight against EU red tape/ Philip Stephens EU needs mower rules ON THIS TOPIC// European dark pool equity trading jumps/ Lex Insurance regulation – don’t panic/ EU to act on claims of forex manipulation/ Joanna Shields EU must not regulate the web IN EUROPE// Berlin claims US targeted Merkel phone/ Berlusconi faces new trial/ Bank tests’ unanswered questions/ Draghi’s blunt warning on bank stress tests Downing Street said Mr Cameron’s business team would brief Angela Merkel, Germany’s chancellor, and five other economically liberal leaders on Friday morning; François Hollande, France’s Socialist president, was among those not invited. Plans by José Manuel Barroso, the European Commission president, to streamline EU regulations were expected to be only a small part of the two-day EU summit that starts on Thursday. But diplomats said it could become a significant point of conflict after Britain and France circulated position papers that appeared to many as in direct confrontation. The three-page French contribution, dated October 14 but circulated to national delegation only on Tuesday night, warned the “quantitative approach” to reducing regulations was misguided and could weaken EU protections that Paris regards as critical. “Simplification should be implemented by guaranteeing that the level of requirements in key areas such as consumer and worker protection and environment protection will not be diminished,” said the French paper, obtained by the Financial Times. In what appeared to be a direct response, British diplomats on Wednesday morning circulated a formulation that would call on Mr Barroso to go even further. “The European Council stresses that the reduction of regulatory burdens should be a primary objective of all European Union institutions and their leaderships in the coming years,” the suggested British amendment reads.

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Mr Cameron will be joined in Brussels by Marc Bolland, chief executive of Marks and Spencer, and Dale Murray, an angel investor, to explain their thinking in a report that called for 30 reforms that they claim could save EU businesses tens of billions of euros a year. They will meet the leaders of Germany, Italy, the Netherlands, Estonia, Denmark and Finland on Friday along with Mr Barroso, who argues that the commission is already radically cutting red tape. “We need to hold Brussels’ feet to the fire,” said one UK official. In depth Euro in crisis

As the debt storm spreads Europe’s leaders battle to save the eurozone One European diplomat called the French paper a “counterblast” to Mr Barroso’s “smart regulation” programme and suggested it could become a significant point of dispute in a summit that otherwise was expected to focus on routine reviews of telecommunications legislation and eurozone reforms. Mr Barroso has thus far struck a delicate balance in his so-called “Refit” plan, unveiled this month. While he has called for scrapping some regulations – such as occupational health standards for hairdressers that would have prevented them from wearing high heels to work – Mr Barroso has insisted it would not compromise on already agreed goals in environmental or social policy. “This commission is removing unnecessary burdens on business across all policy areas,” Mr Barroso said in his pre-summit address to the European Parliament Wednesday. “This is neither about calling into question established policy goals. Nor should it be a battle of competencies between Brussels and national capitals. This is about the right dose in using existing competencies.” Mr Barroso has faced challenges to the effort even from within the commission itself, where some of the 28 EU commissioners resisted giving up pet projects they had been championing. The French contribution, while agreeing that regulatory simplification should “reduce the administrative and regulatory burden for companies”, would achieve this through additional burdens on the commission, including expanded Brussels impact assessments and mandatory reviews of all EU standards. Additional reporting by Alex Barker in Brussels http://www.ft.com/intl/cms/s/0/80713b68-3bd6-11e3-b85f- 00144feab7de.html?ftcamp=crm/email/20131024/nbe/BrusselsBrief/product#axzz2icjM wFl8

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Economía TEST DE ESTRÉS » El BCE endurece el examen a la banca pero se da un gran margen de maniobra Draghi evita concretar los criterios de las pruebas ante la ausencia de un cortafuegos creíble Exige un capital de máxima calidad del 8% Claudi Pérez Bruselas 23 OCT 2013 - 21:36 CET35 "No sabemos cómo están los bancos”. Las palabras del jefe del Eurogrupo, Jeroen Dijsselbloem, resumen el estado de excepción permanente en el que vive la banca europea, que un lustro después de detonar la peor crisis en varias generaciones es incapaz de despejar las dudas acerca de su salud pese a haber devorado miles y miles de millones de euros en ayudas públicas. El BCE tomará las riendas de la supervisión bancaria en 2014, pero antes quiere saber qué demonios hay en las tripas de las entidades: Fráncfort ha presentado este miércoles la metodología de los exámenes a la banca, que serán algo más duros de lo esperado para arrojar luz de una vez por todas sobre los balances financieros. Pero ha evitado las concreciones: quiere dejarse margen de maniobra en la aplicación de las normas, ante la ausencia de un cortafuegos europeo creíble. “La transparencia es el primer objetivo”, ha dicho este miércoles el presidente del BCE, Mario Draghi. Y las pruebas abarcarán “todas las fuentes de riesgo”, ha señalado Ignazio Angeloni, el funcionario del BCE encargado de definir la metodología.

MÁS INFORMACIÓN//El BCE exigirá un colchón de capital del 8% a la gran banca /La norma de morosidad perjudica a la banca alemana y británica / DESCARGABLE Nota explicativa del BCE sobre las pruebas (en inglés)/Comunicado en español del BCE Eso sí: los resultados definitivos no se conocerán hasta dentro de un año; los tiempos del ejercicio están bastante abiertos y son una fuente de incertidumbre para un sector obligado a moverse deprisa para no salir mal en la foto. Además, pese a la dureza, el diablo sigue estando en los detalles. Y los detalles solo se verán en la aplicación de las normas, según las fuentes consultadas. El BCE tiene incentivos para ser severo, pero tiene que conseguir un difícil equilibrio: no pasarse de duro si no quiere nuevas turbulencias. El examen a la banca es también un examen al BCE, más aún tras las dudas provocadas por las maniobras de Draghi para que la Comisión suavice la aplicación de las reglas de ayudas de Estado si surgen, como parece, agujeros de capital y los bancos necesitan otra vez al contribuyente. El BCE afirma que estas pruebas son más creíbles porque el examinador asumirá después la supervisión de las entidades: puede obligarles a hacer lo que crea oportuno. Estas son las claves: Examinados y ausencias. Pasarán las pruebas unas 130 entidades, que concentran el 85% de los activos; 16 de ellas son españolas (el 95% del sector). Hay ausencias notables: las cajas alemanas, en muy mal estado, no se examinan. El BCE estudiará los balances a 31 de diciembre de este año, por lo que quedan algo más de dos meses para

35 que las entidades hagan sus deberes. El ejercicio debe estar listo antes de octubre de 2014. 8% de capital. El colchón de capital es elevado: el Eurobanco exige un 8% de capital de máxima calidad (Common Equity Tier 1, para los amantes de la tan ininteligible como precisa jerga financiera anglosajona). Si encuentra agujeros, ordenará su recapitalización inmediata. Pero el BCE ya ha recomendado a los supervisores nacionales acciones preventivas, y varios bancos han acudido a los mercados en las últimas semanas. Lo normal sería que ese proceso se intensificara si las condiciones siguen siendo favorables. El propio BCE se encargará de eso: lleva semanas insinuando que habrá una barra libre de liquidez el año próximo, una de esas subastas multimillonarias como las de finales de 2011 y principios de 2012. Examen al examinador. Las pruebas son también un examen para el prestigio del propio BCE. Sin un cortafuegos europeo más allá del Mede, la dureza de los exámenes es una incógnita por su potencial desestabilizador. Si no tienen suficiente capital, las entidades deberán acudir primero al mercado para conseguirlo; si no es posible llegará el ya tradicional rescate con fondos públicos, en primer lugar nacionales y en última instancia europeos (si los hay) o el recurso final al Mede. Se da por hecho que harán falta ayudas públicas. Y en ese caso se aplican las reglas de ayudas de Estado: pérdidas para accionistas y poseedores de deuda de peor calidad, salvo que Bruselas considere que peligra la estabilidad financiera. La lupa. El BCE mirará el capital, la liquidez y las fuentes de financiación. Y toda clase de activos, incluidos los afectados por morosidad. Evaluará la exposición a los bonos soberanos (a los que no somete a ningún recorte, a diferencia de lo ocurrido en las pruebas de estrés de 2011, que provocaron una sacudida en el mercado). Se comprobará tanto el estado de los activos ponderados por riesgo como la ratio de endeudamiento, para evitar trampas (un cierre del grifo del crédito durante meses). A pesar de la presión alemana, se examinarán los productos estructurados o derivados, de los que la banca germana se empachó en los años precrisis. Tres en uno. El BCE hará dos exámenes: sobre la calidad de los activos y sobre el total de los balances, con la ayuda de Oliver Wyman. Posteriormente la Autoridad Bancaria Europea hará una prueba de resistencia. ¿50.000 millones, 75.000 millones o medio billón? Las primeras estimaciones sobre el capital que necesita la banca europea empezaron incluso antes de saberse los detalles de los exámenes del BCE. Morgan Stanley calculaba en septiembre que harán falta 50.000 millones de euros, apenas un pellizco para el que no habría mayores problemas. Goldman Sachs lanzó hace unos días una cifra algo superior: 75.000 millones de euros, aunque esos números estaban basados en supuestos algo más laxos de los que ha publicado el Eurobanco. Curiosamente, esas dos cifras están en torno a los 60.000 millones de euros destinados por los socios del euro para la muy restringida recapitalización directa de entidades que puede acometer el mecanismo europeo de rescate (Mede). El resultado del examen a la banca es una incógnita: algún think tank europeo ha llegado a estimar entre medio billón y un billón de euros la cifra necesaria para limpiar de vardad las tripas de los bancos, números que supondrían un auténtico dolor de cabeza. Se espera que en los próximos días la gran banca publique nuevas estimaciones del potencial agujero que puede haber en el sector, pero lo preocupante, de momento, es que solo hay cortafuegos nacionales para el día después de la publicación de resultados: los socios del euro no han conseguido ponerse de acuerdo para crear un fondo europeo para recapitalizar entidades, más allá del Mede, sometido a grandes restricciones y con la inevitable condicionalidad, como sucedió con el rescate español. http://economia.elpais.com/economia/2013/10/23/actualidad/1382517653_568743.html

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Economía OPINIÓN ¿Brotes verdes de verdad? Superar la recesión es una buena noticia. No cabe racanear. Ni tampoco embriagarse Xavier Vidal-Folch 24 OCT 2013 - 00:00 CET57 Ciudadanos: no ridiculicemos los brotes verdes,no racaneemos contra nosotros mismos. El fin de la recesión, aunque sea por una solitaria décima, es una buena noticia. Más que por sí misma, porque tocar fondo (en PIB; iremos viendo en las demás variables) y subir algo aunque sea desde mucho menos de cero es requisito indispensable: para que luego la economía crezca de verdad, se relance y al cabo se recupere de los precipicios en que todavía chapoteará durante tiempo. Sin pasar por el cero no se sube nunca al uno. Ministros: no os emborrachéis ni nos mareéis, que salir de la recesión (romper la caída del PIB consecutiva de al menos dos trimestres, y llevábamos nueve) no es superar la crisis, como propaga el siempre estupendo Cristóbal Montoro. Porque el 0,1% es estancamiento, el consumo interno está parado, el paro nos consume. Economistas: analizad la debilidad de la trasrecesión, la vulnerabilidad de los actuales brotes verdes, mirando al pasado inmediato: para ser prudentes. Pese a que aún resuenan ciertas carcajadas inmisericordes, hubo una anterior ronda de auténticos brotes verdes. Era bajo Zapatero, aunque moleste. Entre el segundo trimestre de 2010 y el segundo de 2011, la economía creció no una, sino más de seis décimas, y el PIB se encaramó a un 0,6% positivo. ¿Qué ocurrió? El 11 de marzo de 2011 explosionó Fukushima y se multiplicó la incertidumbre. El 19 de marzo Occidente bombardeó Libia y el petróleo se disparó. El 7 de abril, Portugal pidió el rescate. Y la Unión Europea se precipitó, con la segunda crisis griega, hacia el abismo del miedo a la ruptura del euro. Los brotes verdes españoles se secaron de súbito. Y nos sumimos en una segunda ronda de la Gran Recesión. Hasta hoy. Si el enfermo deja la fiebre, pero sigue débil, cualquier corriente lo devuelve a la UVI. ¿Hay riesgo de marcha atrás? Lo hay. Pero menos que entonces. Veamos por qué vamos algo menos peor. Internamente, se ha realizado una gran devaluación interna desde mayo de 2010, con dos Gobiernos de signo opuesto al frente. El sacrificio social (paro) y económico (mortalidad empresarial) ha sido brutal. Junto a las alzas impositivas, el adelgazamiento, y los recortes de las Administraciones (autonómica y municipal, mucho menos la central) han deprimido la actividad, pero también han generado mayor competitividad. Los costes laborales unitarios se han reducido a la brava (vía desempleo) recuperando niveles europeos comparables de antes del aznarato. Faltará ahora evitar la servidumbre de la gleba y añadir tecnología y organización para mejorar esa competitividad recobrada. Pero hay mucho hecho, incluida alguna reforma (muchas van siendo a peor) como la financiera, eficaz también gracias al aval y tutela de Bruselas; y la activación de un único motor, el exportador (ya un tercio del PIB). Aunque los sacrificios han sido demasiado desiguales. En dolor. Quizá más decisivo que el esfuerzo interno haya sido el factor europeo: la debacle de la eurozona y de España empezó a sortearse cuando el presidente del BCE, Jean Claude- Trichet, le espetó a Angela Merkel en la cancillería, el 21 de julio de 2011: “Le digo que

37 ha gestionado fatal la crisis”, y la indujo a dar el segundo rescate a Grecia, como narra Arnaud Leparmentier (“Ces fraçais, fossoyeurs de l'euro”, Plon, 2013). Y Fráncfort compró deuda española en el mercado secundario. Las inyecciones masivas de liquidez a la banca lanzadas por su sucesor Mario Draghi en diciembre de 2011 y febrero de 2012, hasta un billón de euros, que tanto molestaron al Bundesbank; su anuncio del programa OMT para comprar cuanta deuda pública conviniese, impugnado ante el Tribunal Constitucional por el mismo Buba; las garantías de Draghi, Merkel y demás, de que el euro no caería; y el rescate de los europeos a la banca española por 40.000 millones largos de euros (los usados, de 100.000 prestados) hicieron el resto. No hizo falta un rescate-país, en buena medida porque la UE ya se había rescatado con todo ello a sí misma y a sus socios. ¿Qué esfuerzos adicionales tocan ahora para convertir este respiro decimal en relanzamiento verdadero? Internamente, habría que volver a la economía real, a la financiación de las empresas, a la política industrial, a los consensos básicos: todo eso de lo que apenas se discute. En cuanto al vecindario, atención a Alemania. Nuestro Gobierno debiera apoyar que el pacto de gran coalición cristianodemócrata/socialdemócrata (CDU-CSU/SPD) en ciernes incorpore el mayor número posible de los 10 mandamientos propuestos por los socialdemócratas. Así, el aumento del gasto en infraestructuras domésticas que repare la cutrería de autovías y canales fluviales; la implantación de un salario mínimo de 8,5 euros hora que corrija al menos en parte la devaluación salarial de la Agenda 2010 de Gerhard Schröder y sobre todo, la semiesclavitud de algunos minijobs; y una nueva agenda para el crecimiento europeo: todo ello revierte en más consumo. Es estímulo de la demanda. Es más crecimiento. Es engrasar la máquina de la economía, también la europea, y de los países socios exportadores, como este de aquí abajo. Pequeños cambios como esos —ninguno de los actores parece postular un vuelco absoluto— pueden abrir bastante margen a la política económica e inducir efectos notables. Al menos, el de matizar, suavizar o acotar la monolítica obsesión de la austeridad. Pero claro, siempre que no se trate de cuantías meramente simbólicas. Lo último que se pierde es la esperanza. http://economia.elpais.com/economia/2013/10/23/actualidad/1382556240_093293.html

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ft.com comment The A-List

Lorenzo Bini Smaghi October 23, 2013 America’s debt crisis may drag the eurozone down The temporary agreement to avoid a debt default in the US will produce severe consequences, not only in America but also in the rest of the world, notably in the eurozone. As long as Barack Obama’s administration and US Congress remain in the hands of different parties, they will muddle through, trying to gain time by postponing the fundamental decisions. The deadline for raising the debt ceiling will be pushed forward, but there is no certainty that the worst scenario can be definitely avoided. In fact, the two main actors have an incentive each time to move ever closer to the precipice and try to obtain some advantage by threatening a default. This is similar to the game of chicken European policy makers played during the eurozone debt crisis, bringing the single currency very close to collapse. Only at the last minute, when the risk of implosion became apparent, did European politicians ultimately decide to create a European Stability Mechanism and to move towards a banking union. The intervention by the European Central Bank, pledging to do whatever it takes to avoid a collapse of the monetary union, calmed the markets but catastrophic risk has not disappeared. It is reflected in the risk premium of some eurozone sovereign bonds. If the US political authorities continue to follow the same pattern, market participants will have to start pricing in a non-zero probability of a disaster scenario. The memory of Lehman Brothers has not faded away, after all. Tail risk is likely to increase in the near future. A repricing of risk for Treasuries can be expected to affect a whole range of asset prices, including in other countries. At the global level, international investors will be induced to further diversify their portfolios, reducing the overweight of dollar- denominated assets in favour of real assets or financial assets denominated in liquid currencies such as the euro. The incentive to rebalance investors’ portfolios may also be influenced by the US Federal Reserve’s reaction to the recent deal. Interest rates may remain low for longer and capital may be induced to flow outside the US, chasing higher returns. Overall, the increased tail risk on US government bonds and the likely reaction of US monetary policy should increase demand for non-US assets. The best rated European sovereigns should benefit from such a portfolio shift. It is less clear, however, that the eurozone as a whole will benefit. Indeed, the supply of euro-denominated assets is not increasing at the same pace as the global demand. As a result, the euro exchange rate can be expected to further

39 appreciate, continuing the trend of the past few weeks. In fact, the European currency is rapidly heading towards the levels prevailing before the start of the euro crisis. The rising current account surplus of the eurozone, resulting from asymmetric internal adjustment, is further contributing to this trend. This restricts monetary conditions in the eurozone. On balance, the recent US budgetary events will produce direct and indirect restrictive spillover effects in the eurozone, symmetrical with those the eurozone crisis produced in the US at the peak of the crisis between mid-2011 and 2012. However, eurozone authorities seem less well equipped to deal with these spillovers than the US authorities. While at the peak of the euro crisis the US authorities flew frequently over the Atlantic to convince European policy makers to get their act together and take the steps needed to complete the institutional framework underpinning the single currency, it is more difficult to imagine Herman Van Rompuy, European Council president, meeting back and forth with John Boehner, speaker of the US House of Representatives, and Mr Obama to convince them they need to reach an agreement on the next debt limit in the interests of the world economy. Furthermore, while the Fed embarked on various waves of quantitative easing to inundate financial markets with liquidity, avoiding an over-appreciation of the dollar, the ECB’s options are more limited. Cutting further the policy interest rate may help divert some of the demand for euro-denominated assets. The acknowledged weakness of the eurozone recovery and the low inflation rate – increasingly distant from the 2 per cent ceiling – provide the necessary justification for such a cut. It would hardly be sufficient, however, to discourage international investors’ demand for euro-denominated assets. If the strengthening of the euro is a result of increased demand for euro assets by international investors, the only way to counter it – in the absence of capital controls – is to increase the supply of euro assets or to discourage demand. The only institution in a position to do so is the ECB. It could increase overall euro liquidity by operating directly in the markets, which would not be inflationary as long as the liquidity is held by foreign investors for diversification reasons. Alternatively, it could discourage demand for euro liquidity by imposing a negative interest rate on euro deposits held by the central bank. Either measure would be a significant innovation for the eurozone. However, they may in the end be unavoidable to counteract the unintended consequences of the way the US is managing its debt problems. The writer is a former member of the executive board of the European Central Bank and currently visiting scholar at Harvard’s Weatherhead Center for International Affairs and at the Istituto Affari Internazionali in Rome http://blogs.ft.com/the-a-list/2013/10/23/americas-debt-crisis-may-drag-the-eurozone- down/#axzz2idniahwH

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ft.com Comment Analysis October 23, 2013 7:15 pm Eurozone recovery: A job half-done By James Fontanella-Khan and Peter Wise Data suggest the bloc is emerging from recession but unemployment remains a worry

©AP Tiago Costa and his teenage friends milling about outside a Lisbon youth training centre are surprisingly upbeat about the future of Portugal where youth unemployment has reached 37 per cent this year. “We’ve hit the bottom, things can only getter better from here,” says Mr Costa, 17, who is confident of landing a job at a hotel by the time he finishes his three-year professional training course in tourism in 2015. Unemployment in the eurozone

By country and age group, and vs GDP growth More ON THIS STORY// Spain emerges from two-year recession/ Draghi faces eurozone inflation dilemma/ Bundesbank warns of property bubble/ ESB case highlights Irish pension crisis/ Draghi’s blunt warning on bank stress tests IN ANALYSIS/ China – Foreign values/ Emerging markets – While the sun shone/ China – A place to call home/US politics – They blinked

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Eurozone data appear to support Mr Costa’s optimism. The bloc’s economy emerged from its longest recession this summer, factory output has expanded, exports outstrip imports and business and consumer sentiment has risen steadily since April. But economists caution that the nature of the recovery is fragile and that record levels of unemployment – currently at 12 per cent across the bloc, with peaks in the periphery at about 25 per cent – are jeopardising any turnround hopes. “Structural unemployment is the biggest challenge ahead for the eurozone,” says Pier Carlo Padoan, chief economist at the OECD. “If unemployment does not fall back significantly you have a number of negative effects: fewer people in work means less income consumption, less demand growth and much lower confidence. All these things together put a further burden on the recovery.” Jobless recoveries – an increase in economic growth without a fall in unemployment – are common in European economies where rigid labour laws discourage companies from hiring new people at the beginning of a upturn, says Markus Beyrer, director- general of Businesseurope, the EU’s largest employers’ lobby group. But the eurozone is confronted with another structural problem: an ageing population. “If people live until 80, they can’t retire at 55 any longer as we wouldn’t be able to afford it,” says Bert Colijn of The Conference Board, an industry group. “So people work longer and this makes it harder for the younger ones to find a job.” Since 2005 the share of workers over 65 years has increased steadily, while that of people below 24 has fallen. The aftershocks of the crisis, compounded by dramatic change in demographics, risks extending the period of jobless recovery beyond the usual four years to anything between five years and a decade, says Marcel Fratzscher, head of the German Institute for Economic Research. “I’m pessimistic,” he says. “Unless a number of eurozone countries carry out radical labour reforms, liberalise professions, make it easier to fire and hire, the crisis-hit countries will continue to have record high inflation and no real growth.” Germany’s 2003-05 labour market reforms helped the long-term jobless back to work; the number fell from 5.2m in 2003 to 2.2m this year. The reforms that helped cut unemployment in Germany have been criticised by trade unions, which say the measures reduced the number of regular jobs in favour of less reliable work bringing in lower pay. “There is no proof that having more precarious jobs will create employment,” says Bernadette Ségol, general secretary of the European Trade Union Confederation. “Plus, wages are already under enormous pressure and in many countries people are living below the poverty line . . . if we cut salaries further it will hurt consumption.”

Daniel Gros, director of the Centre of European Policy Studies, disagrees with the unions’ contention that labour market deregulation will fail to create jobs. However, he concedes that such reforms would be hard to implement unless supported by robust social welfare and efficient bureaucracy. “In Italy, for example, I doubt they would be able to create a corruption- free system that actively helps and monitors that the unemployed are seeking work . . . the risk of collusion is high,” says Mr Gros.

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Marco Valli, chief economist at UniCredit, the Italian bank, says it would be easier for eurozone countries to liberalise further goods and service markets to attract new business. “Such a policy is less controversial than changing labour laws and would help reduce unemployment.” The EU’s youth guarantee scheme, which will allocate €6bn to help students move into the labour market, has also come in for criticism. Christopher Pissarides, the Nobel Prize-winning economist, says such measures give new skills to the unemployed but are inadequately funded. However, even if they are implemented, these politically unpopular structural changes will take time to have an effect, which offers scant hope for Mr Costa in Portugal and many of his peers across southern Europe. “It’s tough,” says Mr Pissarides. “We have to face that we run the risk of having a so- called lost generation of poor, undervalued and unskilled youth . . . Unfortunately, there are no quick fixes.”

. . . Spain When Mariano Rajoy is asked to describe his country’s economic predicament, the Spanish prime minister has a handy answer ready: the recession is over, he says, but the crisis continues, writes Tobias Buck. Most economists offer a similarly mixed diagnosis. There are pockets of good news: after nine consecutive quarters of declining output, Spain will post a small rise in gross domestic product in the three months to September. Forecasters have revised upwards their growth predictions for next year and many believe the economy could grow by about 1 per cent in 2014. Unit labour costs have fallen sharply and companies are making the most of the new flexibility they have gained as a result of last year’s labour market overhaul. The current account is in surplus, and investment in equipment and machinery has been on the rise since the start of the year – a sign that the recovery is spreading from exports into other sectors. But recovery will be painfully slow – too slow to put a rapid dent into Spain’s still- disastrous unemployment numbers. More than one in four Spanish workers are currently out of a job. And if forecasters from the International Monetary Fund are right, the jobless rate will remain stuck above 20 per cent for at least another five years. Debt is the other big problem: the bursting of Spain’s debt-fuelled housing bubble and the resulting recession have left both private and public balance sheets in a terrible state. Public debt is on track to reach 100 per cent of GDP within the next two years, up from just 36 per cent before the crisis hit. Amid the lingering gloom, it is easy to forget how close Spain came last year to joining Greece, Ireland and Portugal in requesting a sovereign bailout. That threat was averted, not least thanks to the European Central Bank’s now-famous commitment to do “whatever it takes” to save the euro. In the months since, Spain has taken further steps away from the precipice. But the debris of the Spanish property and debt crisis will take many more years to clear away. . . .

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Finland Oulu was meant to be the bright hope for northern Finland. The biggest city in the frozen north became a leading high-technology cluster, attracting companies such as Nokia and Microsoft and several science parks, writes Richard Milne. But now the business climate is as cold as the weather. Unemployment reached 16.7 per cent this summer, the highest for any Finnish city. The last time so many were jobless was during the Nordic crisis in the 1990s. Nokia’s frailty is not solely to blame; Renesas, the Japanese electronics group, announced hundreds of job losses. The blow is a double one – increasing benefit costs and reducing corporate tax intake. “The taxes have reduced quite heavily – both the labour and profit taxes,” says Matti Pennanen, Oulu’s mayor. It is a pattern repeated across Finland, still one of the eurozone’s few holders of a triple A credit rating. The economy is just emerging from its second recession since the financial crisis and unemployment is stubbornly high. Mr Pennanen is keen to identify the silver lining in Nokia’s decline. He points to Microsoft’s research capabilities and Nokia’s telecoms equipment business, both in Oulu. “What happened this summer, from an Oulu perspective, it’s in principle a good solution,” he says. Still, 1,700 engineers are out of work in the city – out of a total population of 190,000. But there is little desire among executives or politicians for stimulus. Instead, there is a realisation that Finland’s problems are structural rather than temporary. Following the fall of the paper and pulp industry and now Nokia, Finland is in search of a new leading sector. Hope springs from start-ups created by laid-off Nokia workers and others. But Finland’s remoteness presents a problem of high transport costs for much of its industry. “We are in some trouble,” says a leading member of Helsinki’s business community. “It isn’t just going to take a few billion euros spending to get out of this. It’s going to take a lot of hard work – and probably some luck.” . . . Portugal Fátima Franca, 50, was made redundant in January after five years selling local handicrafts at a shop in Lisbon airport, writes Peter Wise. The jobcentre has nothing to offer. “My country has no jobs for people of my age,” she says. The need to care for elderly parents and a disabled brother prevents her from emigrating, an option taken by hundreds of thousands of Portuguese over the past five years. After four years studying business and management, João Martins, 24, earns €430 a month as a part-time hotel receptionist. He is applying for a one-year internship that would be 80 per cent funded by the state. “The people running the country have made it impossible for young people to dream,” he says. Portugal surprised economists by reporting the strongest quarterly growth in the EU from April to June after 10 consecutive quarters of contraction. Further, if less robust, growth is forecast for the third quarter. Industrial production also rose 8.2 per cent in July. But even Pedro Passos Coelho, the prime minister, is refraining from declaring the recession over. The government is forecasting a turnround next year, projecting growth of 0.8 per cent. 44

But economists and businesses fear that a tough austerity budget for 2014 will kill off any green shoots. Economic forecasters at Lisbon’s Católica University are projecting zero growth next year and others expect another year of contraction. Even if a turnround does materialise, unemployment is set to climb from 17.4 per cent this year to 17.7 per cent in 2014, according to government forecasts. Business leaders and unions are united in their anger over the budget proposals, designed to prepare Lisbon for its exit from its €78bn bailout next June. The bill aims to slice almost 2 percentage points off the budget deficit with €3.9bn of spending cuts but critics say it will not promote growth or employment. “I think we’re reaching the limit of [people’s] resistance,” Adriano Moreira, a conservative statesman, told a Lisbon conference. “To go hungry is not a constitutional duty.” . . . France As early as July, President François Hollande proclaimed: “The recovery is here!” writes Hugh Carnegy. The International Monetary Fund predicts 1 per cent growth next year but many are unconvinced that is enough. “In France, you need about 2 per cent growth to bring down unemployment [and] to talk of a real recovery,” says Nicolas Lecaussin, of the Institute for Economic and Fiscal Research. Yves Weisselberger is an entrepreneur who has launched several businesses, including co-founding SnapCar, an app-driven cab service. “The economic situation still doesn’t look very good, although there are some distant signs it might get better,” he says. “People are very reluctant to invest.” Mr Hollande has promised to “invert the curve” of unemployment by the end of this year. The national statistics institute suggests he will just about keep his promise, with the jobless rate set to peak at 11 per cent in the fourth quarter. But that will be driven largely by a series of government schemes. This year it will subsidise 100,000 “jobs for the future”, providing work for 16 to 25-year-olds with few qualifications. Still, companies such as telecoms equipment maker Alcatel-Lucent, the airline Air France, PSA Peugeot Citroën, the carmaker, and Natixis the bank are all laying off workers Mr Lecaussin does not spare the government. “They have not really touched the public sector in the way other countries have. And not only have they not reformed, they have made the tax situation worse. It is a tax casino, with 84 changes of taxes in the last three years . . . There is no belief yet in a real recovery.” Impetus may come from technology start-ups, such as Mr Weisselberger’s SnapCar. But he and rival private cab services were exasperated this month when the government bowed to traditional taxi companies and ruled that there must be a 15-minute delay between the time a person books a private cab online and when they are picked up. “We are in a business where there is lots of unsatisfied demand. We are not dependent on the wider economic situation. But we might be dependent on government decisions that slow us down,” he says. http://www.ft.com/intl/cms/s/0/fd8a20ca-3b3a-11e3-a7ec- 00144feab7de.html?ftcamp=crm/email/20131024/nbe/Analysis/product&siteedition=int l#axzz2icjMwFl8 45

ft.com World Europe October 23, 2013 7:23 pm Unanswered questions hang over euro bank tests By Sam Fleming and Patrick Jenkins in London The US set the gold standard for bank health checks in 2009 when it undertook stress tests underpinned by its troubled asset relief programme. The question hanging over Wednesday’s announcement by the European Central Bank was whether its own “comprehensive assessment” of eurozone banks would measure up to the US precedent. More ON THIS STORY// The Short View ECB’s eurozone fight/ Editorial ECB review must have sharp teeth/ Draghi’s blunt warning on bank stress tests/ Lex Bank assets – inside the black box/ Video The ECB’s bank health check ON THIS TOPIC// Editorial The price of the ECB doing nothing/ Draghi faces eurozone inflation dilemma/ Money fears point to more ECB bank loans/ Editorial It is time to shore up Europe’s banks The answer will only become clear in several months as the ECB begins its probe of 130 institutions and follows up with stress tests in conjunction with the EU-wide European Banking Authority. While European bank shares fell after the launch, the scale of the declines suggested investors are not expecting the exercise to unearth crippling holes in the big institutions’ balance sheets. The capital standard being set was not as harsh as some analysts had expected and key details about the process, including the parameters of stress tests, remain unknown at this point. For its part, the ECB pitched the initiative as the “largest such exercise ever undertaken in terms of the number of banks, their overall size, and geographical reach”, with 85 per cent of eurozone bank assets being covered. It promised a “broad and inclusive” exercise that will include credit and market exposures, hard-to-value assets and off-balance sheet exposures. The exercise is critical for the credibility of the ECB as it prepares to take over as supervisor of the euro area’s banking system. It needs to expose any festering problems right from the start. A big problem for the ECB is, however, that it lacks the experience and staff needed for an exercise of such sweeping ambition. While it will draw on the advice of Oliver Wyman, the management consultancy, it is relying heavily on secondees from national authorities. The risk is that well resourced lenders will be able to push back against unfavourable assessments of their portfolios as the exercise unfolds. The process outlined by the ECB comprises three “pillars” – the inevitable buzzword in bank regulation-speak. The first is a supervisory risk assessment, which will interrogate banks’ liquidity, leverage and funding. The second is a so-called asset quality review, which will examine banks’ loans and other assets held as of December 31 of this year. 46

The third element is a stress test, which will assess banks’ ability to withstand shocks and will be conducted in collaboration with the EBA. Key details about this phase remain unannounced, including the particular stresses banks will be subjected to, but the European authorities will be desperate to ensure it does not become a repetition of previous exercises that were derided as lacking credibility. One detail that did send a tremor through markets on Wednesday was the ECB’s statement that its assessment would encompass holdings of sovereign bonds. This helped trigger share price declines by Italian and Spanish banks that have drawn heavily on official funding and used it to invest in government debt. Still, Daniel Davies, a banks analyst at Exane BNP Paribas, said he did not see much likelihood of big failures in the quoted sector on the back of the review. In particular, the capital standard being set by the ECB for its asset quality review looks “undemanding”, he said. The benchmark the ECB will hold banks to is the 8 per cent core tier one capital ratio under the Basel III definition of capital as at January 2014, as implemented by the European “CRD4” definition of those global rules. Basel III’s definition of capital becomes gradually tougher between now and 2019. Ignazio Angeloni, head of financial stability at the ECB, insisted that the benchmark was robust. “Once you complete the AQR, you will probably have some significant adjustments in some banks’ capital ratios,” he said. The ratios, which compare capital with risk-weighted assets, would be calibrated to incorporate “any necessary adjustment to the risk weights”, the ECB said in an allusion to regulators’ suspicions that some banks apply artificially low weightings to their assets to keep capital requirements down. Some analysts suspect the protracted uncertainty surrounding the process could lead to market volatility, especially given the continued tussle among the European authorities over the availability of public backstops if banks cannot plug capital shortfalls on their own. Within the ECB there is a clear awareness that a great deal is at stake. The previous two stress tests efforts in the region failed on that score. The authorities cannot afford to botch the process a third time. http://www.ft.com/intl/cms/s/0/85ddc416-3c00-11e3-9851- 00144feab7de.html?siteedition=intl#axzz2icjMwFl8

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ft.com Comment Editorial October 23, 2013 7:11 pm ECB review must have sharp teeth Study is a test of central bank as well as the bloc’s lenders A great deal hangs on the drily named “asset quality review” that the European Central Bank is undertaking of the banks it will soon supervise. Concerns about Europe’s lenders are central to the bloc’s economic woes. Since the crisis began, balance sheets have come under increasing strain as loans to households and businesses have soured and property portfolios have tumbled in value. Matters have not been helped by banks’ willingness to load up on holdings of domestic sovereign bonds – often at unrealistic prices. More ON THIS STORY// Bank tests’ unanswered questions/ The Short View ECB’s eurozone fight/ Draghi’s blunt warning on bank stress tests/ Lex Bank assets – inside the black box/ Video The ECB’s bank health check ON THIS TOPIC// Editorial The price of the ECB doing nothing/ Draghi faces eurozone inflation dilemma/ Money fears point to more ECB bank loans/ Editorial It is time to shore up Europe’s banks EDITORIAL// Grangemouth and Scotland’s future/ Merkel’s big tent/ L’affaire Dibrani/ Sharif in America The transfer of supervisory powers to the ECB offers a chance to clear the air. The asset quality review is a combination of a balance sheet assessment and a stress test. The former must be transparent and rigorous; the latter sufficiently fulsome in terms of the capital infusions it recommends to ensure that the banks are put on a sound footing. The tests also have a broader significance for the planned banking union. They represent a big stride towards a single supervisory mechanism. The ECB has now revealed some of the methodology it will be using to grade banks over the next year – the period the assessment will run. These look encouraging. Crucially, regulators will review all assets and have for the first time set out eurozone- wide definitions of terms such as non-performing loans. They also cover a much larger number of lenders than earlier exercises. The ECB needs to be conservative. Mario Draghi, a central banker renowned for his political nous, will be all too aware that this exercise is a test not just of bank balance sheets, but also of his own institution’s credentials. The ECB has one advantage over other regulators which to date have been responsible for a string of botched stress tests. This is its relative independence from political pressure. Unlike national central bank governors, Mr Draghi does not have an anxious finance minister breathing down his neck – keen to minimise the capital hole that taxpayers might have to plug. Nonetheless, the whole exercise would carry greater conviction had European governments been able to agree on how the shortfall might be filled. The fatal embrace between teetering banks and weak sovereigns remains unaddressed. Recalling the turmoil of the past few years, most will wish the ECB well. But if the tests are to work, the ECB and Brussels must not waste their opportunity. A good first step would be to establish who will foot the ultimate bill. http://www.ft.com/intl/cms/s/0/346b37e2-3bee-11e3-b85f-00144feab7de.html#axzz2icjMwFl8

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ft.com GlobalEconomy EU Economy THE SHORT VIEW October 23, 2013 7:46 pm ECB must fight on two fronts to aid eurozone By Ralph Atkins The great European bank clean-up has started. The European Central Bank has put its credibility on the line with its broad review of the region’s weakened financial sector. The ECB is failing, however, to tackle another more immediate danger to eurozone economies: the increasingly strong euro, which could set back the region’s gradual return to economic growth. More ON THIS STORY// Bank tests’ unanswered questions/ Editorial ECB review must have sharp teeth/ Draghi’s blunt warning on bank stress tests/ Lex Bank assets – inside the black box/ Video The ECB’s bank health check ON THIS TOPIC// Editorial The price of the ECB doing nothing/ Draghi faces eurozone inflation dilemma/ Money fears point to more ECB bank loans/ Editorial It is time to shore up Europe’s banks THE SHORT VIEW// Investors turn bad news into good news/ US dollar faces a testing period/ Timing Fed taper comes back into focus/ More gains to come for EM shares? The two issues are related. If the ECB is serious about getting tough on European banks, its asset quality review and stress tests will have to result in remedial action at quite a few banks. If so, the ECB’s monetary policy will have to remain loose for longer – which should be negative for the currency, or so the argument goes. But the euro is not paying attention. Against the dollar, Europe’s single currency has risen to the highest level for two years. On a trade-weighted basis, it is up 4 per cent since the start of the year and 10 per cent since mid 2012 – a significant blow for exporters. What is driving the currency’s appreciation is not euro strength but dollar weakness, and the diminishing prospects of the US Federal Reserve winding down its asset purchases – quantitative easing – in coming months. The ECB could retaliate. It could cut its main policy interest rate, currently 0.5 per cent. Or it could announce another offer of long-term cheap loans – perhaps on even more favourable terms than in late 2011 when it launched its three-year longer-term refinancing operations. The snag is that the previous cut in interest rates – in May – failed to stop the euro appreciating; such is the influence of the Fed. It is also unclear whether another LTRO would work. Banks have paid back much of the previous offer. When finances are under official scrutiny, only the desperate would borrow more. The ECB will be loath to put its credibility further at risk by taking action that could backfire. Eurozone economies and banks may simply have to live with a strong euro. http://www.ft.com/intl/cms/s/0/1d38ef7a-3bf7-11e3-b85f- 00144feab7de.html#axzz2icjMwFl8

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Mario Draghi says banks will fail. Question is, does he know which ones? Photographer: Andrew Harrer/Bloomberg Can Europe's Banks Handle Draghi's Exams? By Jonathan Weil Oct 23, 2013 7:04 PM GMT+0200 The European Central Bank has published plans for its assessment of the euro-area’s largest banks. And the signals it has sent are mixed. To see that, look no further than the ECB’s own news release describing its objectives. “The exercise has three main goals: transparency -– to enhance the quality of information available on the condition of banks; repair -– to identify and implement necessary corrective actions, if and where needed; and confidence building –- to assure all stakeholders that banks are fundamentally sound and trustworthy,” the ECB said. The last of those, confidence building, may be at odds with the first, transparency. If it turns out that Europe’s banks by and large are in rotten shape, then transparency wouldn’t assure stakeholders that they are sound and trustworthy. It would inform the public that they aren’t. Plus, how can the ECB be so confident that stakeholders will be re-assured when it hasn’t even done the tests yet? The ECB is running a three-stage probe into the health of the largest banks before taking over supervision of the industry next year. The first part is a risk assessment. The second is a review of the banks’ asset quality. The final step will be a series of stress tests conducted with the European Banking Authority. The ECB’s release today included this quote from Draghi: “A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85% of the euro area banking system, is an important step forward for Europe and for the future of the euro area economy. Transparency will be its primary objective. We expect that this assessment will strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets.” It’s hard to know what he hoped to communicate with that last sentence. Does he expect the assessment will boost confidence because he already knows the answers will be flattering? Or does he expect the reviews will be so rigorous and beyond reproach that the markets will accept the results as the final word and move on? Draghi knows he is walking a tightrope. When pressed during an interview today in Frankfurt with Bloomberg Television, he said the right things. “Banks do need to fail,” to prove the credibility of the exercise, he said. “If they do have to fail, they have to fail. There’s no question about that.” Of course some do, if only to prove that the ECB’s oversight isn’t a joke. And of course Draghi had to say that. The problem with past stress tests by the European Banking Authority is they gave passing grades to large banks that failed shortly afterward, such as Dexia SA. The critical question for the ECB is whether its objective will be to dig out the truth about banks’ health and let the chips fall where they may, or whether it hopes to divulge merely the minimum amount of bad news needed to give the results a veneer of credibility. By telling us ahead of time that the exercise will show banks to be sound and trustworthy, the ECB risks leading the public to suspect the opposite. (Jonathan Weil is a Bloomberg View columnist.) http://www.bloomberg.com/news/2013-10-23/can-europe-s-bank-handle-draghi-s-exams-.html

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ft.com Comment Editorial October 23, 2013 6:05 pm Merkel’s big tent Chancellor’s prestige should carry grand coalition before it A week is supposed to be a long time in politics. But not in Germany. On Wednesday, more than a month after Angela Merkel swept to victory in the general election, the country’s two main “people’s parties”, the Christian Democrats and Social Democrats, finally began the arduous task of assembling a grand coalition to run Europe’s largest economy. Compared with the five-day gallop to assemble Britain’s coalition three years ago, the German version is likely to be a measured plod. No one expects a new government to be formed before December. Ms Merkel may need all the time a patient public allots her. The chancellor scored a triumph on September 22. She came closer than any leader since Konrad Adenauer to winning an absolute majority, falling just five seats short. But victory was as much a burden as a blessing. Fated by German constitutional convention to spurn minority rule in favour of coalition, she has little choice but to talk to the Social Democrats. The other parties in the Bundestag are either beyond the pale or non-compliant. More ON THIS STORY// Global Insight Merkel can be generous in coalition talks/ Constanze Stelzenmüller German responsibilities/ Germany’s SPD unveils coalition demands/ CDU’s first Muslim MP marks change/ CDU and SPD to talk on ‘grand coalition’ ON THIS TOPIC// Lucy Kellaway Distraction from back pain/ The Macro Sweep Economic expectations rise in Germany/ Cost burden an issue in transformation to renewables/ Germany nears victory on EU car emissions While a grand coalition between Ms Merkel’s party and the SPD would have overwhelming parliamentary authority, holding 504 of the 631 seats, assembling one will not be easy. The CDU’s preponderance, holding 311 of those seats, makes a compromise harder to strike. An administration reflecting this outcome in both agenda and composition would leave the SPD in a humiliatingly junior role. Ms Merkel has given herself some space to trade. Her own campaign was short on specifics, while her undoubted authority gives her scope to accommodate some of the SPD’s red-line issues. There is a case for giving some ground on social policy, where the SPD wants to increase the minimum wage. Ms Merkel could usefully drop her unwise plan to extend the “solidarity surcharge” levy to fund German reunification beyond 2019, while still resisting SPD demands to raise taxes on higher earners. On many other issues, the partners share common ground. Fixing Germany’s energy problems and renewing its creaking infrastructure will be easier with the SPD than with the Greens. On the eurozone, the differences are more cosmetic than real. Such is the political momentum behind Ms Merkel at present that a deal should be possible that secures SPD support and leaves her room for manoeuvre. After all, the alternative would be an early election that a chastened centre left has every reason to fear. http://www.ft.com/intl/cms/s/0/560a9f64-3bee-11e3-b85f-00144feab7de.html#axzz2icjMwFl8

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10/23/2013 04:08 PM 'Over-Banked' ECB Tests Set to Reveal German System Flaws By Christopher Alessi The European Central Bank's upcoming review of the euro zone's largest banks could expose weaknesses in the German banking sector. It may also reveal Germany's political role in limiting the scope and efficacy of the Continent's nascent banking union. The European Central Bank is preparing to conduct a "comprehensive assessment" of the euro zone's biggest banks ahead of taking on the role of banking supervisor for the region late next year. German banks, considered some of the strongest in the fragile euro area, are expected to fare relatively well. However, a thorough -- and apolitical -- review could reveal cracks in the German financial system, while underscoring Germany's fundamental resistance to a full-fledged banking union. Earlier this month, European Union finance ministers officially signed off on plans to create a Single Supervisory Mechanism within the ECB, which will monitor around 130 of the euro zone's largest banks. The step is the first in a larger EU plan to shift financial regulatory authority from national governments to the European level by developing a so-called banking union. However, the ECB, starting in November, will first assess the health and stability of the big banks through an evaluation that includes a risk assessment, an asset quality review, and a stress test targeting bank balance sheets. The review, which will be based on a capital benchmark of 8 percent, should "strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets," ECB President Mario Draghi said when the bank outlined its assessment criteria on Oct. 23. Bank analysts and economists expect some banks in Italy, France, and Spain to require additional capital following the evaluation, in large part due to non-performing loans. But what about German banks? 'Too Many Banks' "In the European context, German banks are much stronger than others, so the adjustment will probably be a lot smaller," says Marcel Fratzscher, president of the German Institute for Economic Research. However, he warns, "Commerzbank is a big question mark." Fratzscher says it is not clear whether Commerzbank has a sustainable business model, like that of its well-capitalized competitor, Deutsche Bank. "It's not an international player, and it's not reaching a lot of private companies and households in Germany," Fratzscher explains. He suggests that the German government, which has held a 17 percent stake in Commerzbank since the global financial crisis, might ultimately need to inject more liquidity into the bank or "scale it down." Similarly, a European bank insider, who spoke on the condition of anonymity, says he could envision the government re-privatizing Commerzbank by selling to a buyer like UBS, which could lead to a "winding down" of the bank. Part of Commerzbank's trouble stems from its large exposure to poor shipping loans. "It's taken huge losses and can't find anyone to sell its shipping portfolio to," says

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Megan Greene, chief economist at Maverick Intelligence. Commerzbank's exposure to non-performing shipping loans increased from 21 percent to over 25 percent between November 2012 and June 2013, according to a recent report on the planned asset quality review by Nomura Equity Research. But Commerzbank is not the only German bank facing challenges ahead of the assessment. "I think shipping loans is a higher risk area for a number of German banks, and as in previous stress tests one of the key challenges will be the comparatively low level of Basel III core Tier 1 [capital ratios above 7 percent] as a starting point," notes Jon Peace, a Nomura analyst. Other German banks with high shipping exposures are two of the publicly-owned Landesbanken, or regional banks, including NHS Nordbank and Norddeutsche Landesbank. Those regional banks are part of what Carsten Brzeski, chief economist at ING DiBa bank, calls Germany's "over-banked" system -- including private commercial banks, savings and cooperative banks, and the Landesbanken. "There are too many banks in Germany," Brzeski says, suggesting that the upcoming ECB tests could provide an opportunity for a consolidation of the sector. More broadly, a functioning and effective banking union would "imply some adjustments" for German banks, says Jan Pieter Krahnen, director of the Center for Financial Studies at Frankfurt's Goethe University. "There will be adjustments -- consolidation -- for the big banks, as well as for the savings banks and the smaller regional banks," Krahnen explains. A Forceful Backstop There remain a number of unsettled elements that make such a comprehensive banking union far from complete. These include the development of a Single Resolution Mechanism for addressing weak banks, the harmonization of standards for certain loan classifications and bank assets, and a deposit guarantee fund. The resolution scheme has proven particularly controversial because it entails the creation of a central joint fund that would act as a backstop for struggling banks. In the long term, the banking industry would finance the fund, but in the short term, national governments -- potentially through the European Stability Mechanism -- might have to guarantee loans to failing banks. Germany has forcefully opposed such a move, which could theoretically force German tax payers to bailout banks in, say, Spain or Italy. German Finance Minister Wolfgang Schäuble recently insisted that senior and junior bank creditors would have to take full losses -- so-called bail-ins -- and German law would have to be amended before Germany could agree to assist with the recapitalization of euro zone banks. But Chancellor Angela Merkel later tweaked the government's position, at least rhetorically, indicating that she could potentially support a joint resolution mechanism under certain conditions: namely, that private creditors and bondholders be liable first, and that any government assistance be approved by national parliaments. Meanwhile, Draghi said in a recently leaked letter to the European Commission that forcing losses on bondholders before a banking union is up and running could destabilize markets. The irony of the firm German position, as former ECB executive board member Lorenzo Bini Smaghi sees it, is that the recapitalization of German banks in the wake of the financial crisis was among the largest in Europe. The Germans "have never 'bailed- in' anybody," Bini Smaghi says, "their banks have always been bailed out." He faults Germany for its insistence on a "system they have never tried at home and writing rules

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that put you in a straight jacket," which he suggests could create conditions that ultimately trigger a run on banks. Without agreement on a forceful backstop, or resolution mechanism, many analysts and economists question whether the upcoming ECB assessments can actually be meaningful. "The backstop is the key thing for this test," says Krahnen. The ECB is in a tight corner. If the bank does not conduct a "serious" review of banks, it will not be able to operate effectively as a banking supervisor down the line, Krahnen says. But if it does operate a genuine comprehensive test with no resolution mechanism in place, many banks "will be in trouble soon," he explains. Greene, of Maverick Intelligence, bets that the asset review and stress tests will ultimately be a "big fudge." "Europeans are not really sure what they'll do with the results. There's no fund for big recaps," she adds. Ultimately, she argues, Germany will get its way regarding the joint backstop. National supervisors will continue to have a large role in the bank resolution process, which, Greene says, will make the new system more of a "banking confederation" than a banking union. URL: • http://www.spiegel.de/international/europe/ecb-tests-set-to-reveal-german-banking- faults-and-political-agenda-a-929553.html Related SPIEGEL ONLINE links: • Preparing to Govern Formal Coalition Talks Kick Off in Berlin (10/23/2013) http://www.spiegel.de/international/germany/0,1518,929509,00.html • Wasted EU Funds Brussels Ignores Tip-Offs from Greek Official (10/18/2013) http://www.spiegel.de/international/europe/0,1518,928639,00.html • High Stakes Making Sense of a Banking Intern's Death (10/11/2013) http://www.spiegel.de/international/europe/0,1518,927174,00.html • 'Last Opportunity' ECB and Politicians at Odds Over Stress Tests (09/30/2013) http://www.spiegel.de/international/business/0,1518,925256,00.html • Architect of Austerity Schäuble's Search for a Way Forward (09/26/2013) http://www.spiegel.de/international/germany/0,1518,924526,00.html • The Europe Question Will Coalition Mean End of Austerity Angie? (09/23/2013) http://www.spiegel.de/international/europe/0,1518,924040,00.html Related internet links • European Central Bank: Comprehensive Assessment http://www.ecb.europa.eu/pub/pdf/other/notecomprehensiveassessment201310en.pdf?2f 97d5bf7c51640e4bd84c0002570051 SPIEGEL ONLINE is not liable for the content of external web pages.

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Daily Morning Newsbriefing

October 23, 2013 What Merkel wants Suddeutsche Zeitung is leading with a report on what type of banking resolution regime Angela Merkel will propose to the European Council on Thursday. The article says Germany will accept a common resolution fund under three conditions. We list them in reverse order: 1. National parliaments have to vote each time any money disbursed. 2. The fund is limited to the 130 banks under ECB supervision only; 3. a bail-in cascade has to be in place. A short note from us: Points 2 and 3 are generally accepted – Germany would not fund bank bondholders elsewhere, and the scope should logically coincide with that of the SSM. But a prior vote by national parliaments for any disbursement would render the whole thing inoperable. This is a poison pill. The article argues that this “solution” would suit everybody. The Bundestag gets involved, the hurdles for state intervention are high, the Sparkassen are exempt. In addition to those three conditions, Merkel also wants more economic reforms in member states, and more central control of national budgets. Merkel also seeks common guidelines on labour market policies and r&d. The Thursday summit is not primarily about bank resolution – but sets the beginning of a round of negotiations. In a separate article on the same subject, the author, Stefan Cornelius, gives some further background. He writes the solution to let parliaments decide was attractive because member states have a strong disincentive to trigger it. If a bank needs urgent recapitalisation, it might be easier for a foreign government simply to pay for it, than to wait for the Bundestag. Cornelius also discusses the legal basis. Germany continues to dispute the Commission’s choice of Art 114 TFEU (the internal market empowering law), but prefers instead to use Art 352, which gives the Council the right to legislation outside the areas specifically set out in the Treaty, with unanimity, and on a proposal from the Commission and with acceptance of the EP. This article is good example of the Stockholm syndrome applied to journalists. Journalists tend to agree with the institutions they cover. The whole idea of this discussion is to have a final backstop – once all the others pots are exhausted. If you provide disincentives to use it, or set hurdles that may in reality never be met, you simply don’t have this backstop, and outside observers, and investors in particular, will then conclude that such a backstop does not exist. Given the state of eurozone banks, it is very likely that such a backstop will be necessary at some point in the next ten years, the time until the resolution fund is sufficiently replete. And even then it might still be necessary, since no fund can cover systemic risk. If there is any doubt about the ultimate liability – which is clearly intentional in this construction – one should not expect the resolution fund to erase the catastrophic tail risk.

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Europe is relegated in German coalition talks German coalition talks are due to start today after yesterday’s convocation of the new parliament, and the formal end of the CDU/FDP coalition. Suddeutsche reports one small, but revealing decision – to relegate the issue of Europe/banking – to subcommittee status with the overall field of finance. The article says this procedural change means that one should not expect big changes in European policies, merely a continuation of the status quo. The subcommittee will be chaired by EP President Martin Schulz for the SPD, and CDU MEP Herbert Reul. The article says one of the reasons for this relegation is that both CDU and SPD are opposed to treaty change, which both parties consider as too risky. The consensus seems to be that it would be better to use the flexibility clauses within the Lisbon Treaty. The article says over EU/EZ related policies, the Grand Coalition has been, de facto, in place for the last four years, since Angela Merkel needed SPD support. Frankfurter Allgemeine writes that the CDU will be confronted with a long list of financial demands, following up on yesterday’s story that there will be no debt redemption in the current term because of high spending demands. The SPD’s chief negotiator for finance will be Hamburg’s mayor Olaf Scholz, who will represent the interests of the federal states. The SPD has a majority in the Bundesrat, which is why is negotiating position is relatively strong. One of the SPD’s demand is the launch of Germany bond – joint bond between by federal government and the Lander -, while Schulz advocates a form of eurobonds, but with national liability. In a separate article, the paper collected a number of fuming reactions to the suspension of debt redemption. Clemens Fuest, head of the ZEW institute, is pointing out the permanent procyclicality of German fiscal policy – they always save in recessions, and once they end, they start spending again. Joachim Scheide, of the Kiel Institute of International Economics, called the policy risky, and made the point that it undermindes Germany’s credibility in the eurozone. The president of the German industry federation Markus Kerber said fiscal surplus should not be used for debt redemption but to invest in infrastructure, education and R&D. Viñals insists on unserviceable corporate debt Speaking at an event hosted by La Caixa in Barcelona, the IMF's director for monetary affairs, Spaniard José Viñals, said that a large fraction of corporate debt in Southern Europe is unpayable, writes El Periódico. Specifically, he was referring to firms whose interest expense exceeds gross earnings (EBIT), an issue he had already highlighted when he presented the IMF's Global Financial Stability Report two weeks ago as covered by us. Viñals gave figures for Italy where 30% of outstanding corporate loans are in this stuation, Spain (41%) and Portugal (47%), and said that if these loans were written off they would negate bank provisions and profits for the next two years in Italy and Portugal though Spanish banks have these losses fully provisioned. Viñals called the upcoming Asset Quality Review by the ECB a "golden opportunity" to address this issue. In this context, La Información reported last week that Spain's finance ministry introduced amended Spain's corporate tax regulations so that debt writeoffs in the context of a refinancing are not taxable as profits. This is explicitly intended to aid the viability of sectors requiring debt refinancing.

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French MPs adopted revenues of the 2014 budget The French parliament adopted yesterday the revenue side of the 2014 budget yesterday, with a draft deficit of €82.121bn, Reuters reports. It contains a transitional 75% tax on incomes above €1bn and a reform of the capital gains tax on property sales. The lower VAT rate remains at 5.5%, and is thus not brought down to 5%. The wider application of the Tobin tax beyond ‘intra-day’ transactions, as proposed by the parliamentary budget committee, was finally not adopted. The idea was to tax all transactions which was expected to increase tax revenues from €600m to €1.6bm. The idea gained support among MPs of the majority, but the finance ministry warned that this tax would put Euronext at a disadvantage and would be a non-starter in negotiations with the EU partners and got its way (More behind the controversy about the Tobin tax on Euroactiv). As from October 29, the MPs will discuss the expenditure side and will cast its final vote over the totality of the budget November 19. Then the Senate will have its go before the budget will be definitively adopted around December 20. Troika to insist on new measures from Greece The troika mission is due to return to Athens at the beginning of November. Greece is expecting a tough negotiation round. A European official told Kathimerini that the troika does not consider the draft 2014 budget reliable, as the plan overestimates tax revenues and underestimates social spending. As a result, the troika wants to see more measures to ensure that the deficit target for 2014 will be met. Though troika institutions agree with Athens’s positions that any extra savings should not come from “horizontal” cuts to wages and pensions. But the official said they would not back down over their demands for further fiscal measures and the closure of Hellenic Defense Systems (EAS) and the Hellenic Vehicle Industry (ELVO). Macropolis finds troika arguments disingenuous Macropolis says it is not only unclear where these extra savings should come from, but also finds the troika arguments disingenuous. First, lower than expected tax revenues and higher social spending are a direct result from the austerity policies pursued by the Greek government in agreement with the troika. Second, the decision to delay talks about debt relief for after European elections rather than on Greece achieving a primary surplus also suggests double standards. And third, the request for more fiscal measures comes after the troika rejected Greece’s intention to include in its primary surplus for this year profits from the Hellenic Financial Stability Fund even though it is part of the general government budget. This is its rather sad/ironic conclusion: “Maybe this will turn out to be a storm in a teacup. Maybe Greece will swallow the bitter medicine, as it has done on similar occasions over the past three years. Maybe, though, the Europeans are underestimating just how much pressure this government and Greek society are under. Maybe they truly cannot see that the coalition and the country are running out of runway. If this is the case, then it’s time to pull our seat belts tight.” Towards $1.40 This morning, our financial table has the euro at $1.3771, a cent up on yesterday, and as Reuters reminds us that the highest level for two years. The Reuters article says this comes amid market expectations that Fed will delay tapering until next year.

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Belgium’s central bank president Luc Coene is quoted by Reuters as saying that a further drop in core inflation would, irrespective of the exchange rate, be a sufficient reason “to think about strengthening the accommodative stance of policy." He says the current core rate – of 1% - is too low if it were to stay there for too long. The return of the good old times This is clearly outside our reservation, but we are watching the credit market for any sign of a pick-up in activity, and possibly bubbles, given its importance for the financial economy. The FT has the story this morning, that some of the three-letter acronym pre- 2007 credit instruments have returned with a vengeance, with covenance-light loans now exceeding pre-crisis levels, and collateralised loan obligations approaching 2007 levels. A new instrument, described with much enthusiasm in the article, is the Pik- toggle note, which essentially allow a borrower to pay off his debt through the issue of more notes, as opposed to cash (in other words, where you have a maturity extension built in). The article ends with the following comment from a credit expert: “We are at the beginning of a releveraging cycle…Ultimately, we all know how this story ends.” Revisiting the multiplier The paper was published by mistake, then withdrawn, now it is back. It is one of those rare cases where the disclaimer that the authors’ view does not represent that of his institution has a meaning. As Matina Stevis of the Wall Street Journal reports, a report by Jan in ‘t Veld has calculated that fiscal multipliers were between 0.5 and 1 – higher than the Commission had previously estimated. For Spain the multiplier on spending cuts was 1.1, and 0.5 for tax increases. The paper itself points specifically to the problem that all the countries adjusted at the same time, and the resulting spillovers: “The symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries... These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in programme and vulnerable countries.” We think these estimates are lower than what we expected. Given the ZLB and the credit crunch, we would have expected the multiplier to have been at least one – and this without even hysteresis effects. Heisbourg’s call to save Europe from the euro EMU break-up calls are reaching the French foreign policy establishment and the pro- European core, concludes the Eurosceptic Ambrose Evans-Pritchard for the Telegraph. And for this he cites François Heisbourg, a European federalist, long-time supporter of EMU and influential expert on European foreign policy, defence in particular. Heisbourgs latest book “La Fin du Rêve Européen” argues that Europe must get rid of the single currency to save the rest of the EU Project and this sooner rather than later. "The dream has given way to nightmare. We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the Union yet further," as denial has been for a long time, by default, the operating mode of those in charge of EU institutions. Expansionary fiscal policy or growth returning will not solve anything, Heisbourg argues, it will just reshape the underlying North-South conflict on a different plane. These arguments, Evans-Pritchard claims, are essentially the same as those used by Eurosceptics, just as many Eurosceptics were once "pro-Europeans".

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Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.510 0.494 0.491 Italy 2.348 2.313 2.325 Spain 2.433 2.413 2.417 Portugal 4.388 4.422 4.445 Greece 6.570 6.748 6.75 Ireland 1.756 1.779 1.789 Belgium 0.772 0.756 0.754 Bund Yield 1.848 1.797 1.785

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.367 1.3771

Yen 134.450 134.13

Pound 0.848 0.8513

Swiss Franc 1.235 1.2326

ZC Inflation Swaps

previous last close

1 yr 1.03 0

2 yr 1.29 1.16

5 yr 1.52 0

10 yr 1.78 0

Euribor-OIS Spread

previous last close

1 Week -4.343 -4.343

1 Month -1.329 -2.229

3 Months 3.243 4.643

1 Year 30.243 30.043

Source: Reuters

http://www.eurointelligence.com/professional/briefings/2013-10- 23.html?cHash=e03364a028aaadecb8a2df290df4b8c2

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ft.com World Europe Last updated: October 23, 2013 10:55 am Eurozone bank shares fall after ECB outlines health check plan By Michael Steen in Frankfurt and Patrick Jenkins and Sam Fleming in London

©Reuters Bank share prices across the eurozone fell early on Wednesday, after the European Central Bank outlined its planned health checks of eurozone banks ahead of taking over responsibility for supervising the top 130 lenders in a year. Italian bank stocks fell by as much as 3 per cent in early trading, reflecting investor concern that the tests would show up unexpected holes in balance sheets. Most other leading banks in Spain, France and Germany saw share prices fall about 2 per cent. More ON THIS STORY// ECB Note Comprehensive Assessment, October 2013 (PDF)/ ECB unveils checks on way to banking union/ Editorial It is time to shore up Europe’s banks/ Ailing banks are elephant in the room/ Markets Insight Stress tests must prompt debt revamp/ ON THIS TOPIC// Editorial The price of the ECB doing nothing/ Draghi faces eurozone inflation dilemma/ Money fears point to more ECB bank loans/ Draghi pledges to keep interest rates low IN EUROPE// Greece halts state funding to Golden Dawn/ Merkel can be generous in coalition talks/ Juncker sidelined as coalition talks begin/ Paris protests over claims of US spying As part of the ECB’s assessment, the central bank will conduct an asset quality review of bank balance sheets, leading to a recommendation in a year’s time that may involve demanding some banks bolster their capital reserves. “We expect that this assessment will strengthen private sector confidence in the soundness of the euro area and in the quality of bank balance sheets,” Mario Draghi, ECB president, said in a statement. Heralding the “largest such exercise ever undertaken in terms of the number of banks, their overall size and geographical reach”, the bank also reiterated that eurozone politicians needed to make sure public backstops were in place to cover any capital shortfalls that cannot be covered with private means. “For the success of the exercise, the ex ante availability of backstops is critical,” the ECB said. The central bank and the other organs of the EU have been tussling for months about whether national governments, and the European Stability Mechanism,

60 should be the backstop facility for direct bank recapitalisations if banks cannot plug capital deficits under their own steam. The ECB on Wednesday laid great emphasis on the success of the US stress tests in 2009, which were underpinned by the US government’s “Tarp” (troubled asset relief programme) funding. The balance sheet tests will affect “all asset classes, including non-performing loans, restructured loans and sovereign exposures”, it said. The asset quality review, a risk assessment of each bank will feed into an EU-wide stress test to be conducted by the European Banking Authority. The exercise will be concluded by November next year, when the ECB will also publicly announce which banks need more capital. Banks will be required to meet an 8 per cent core tier one capital ratio under the asset quality review, according to the Basel III definition of capital as at January 2014, under the European “CRD4” definition of those global rules. Basel III’s definition of capital becomes gradually tougher between now and 2019. The ECB said that ratios, which compare capital with risk-weighted assets, would be calibrated to incorporate “any necessary adjustment to the risk weights” – an allusion to regulators’ suspicions that some banks apply artificially low weightings to their assets to keep capital requirements down. The exercise will cover 85 per cent of eurozone banking assets, Ignazio Angeloni, the ECB’s director-general of financial stability, told reporters on Wednesday. “We want the exercise to encompass all the sources of risk,” he said. “Of course in a selective way to make the exercise manageable.” The ECB has yet to agree with the London-based European Banking Authority on how it will conduct the bank stress tests. Mr Angeloni said the new stress tests would be better than ones carried out by the EBA in 2009 thanks to data that would emerge from the asset quality review. But it is not clear how exactly the bank will combine the results of its balance sheet review, which is based on a given point in time under normal circumstances, and the stress tests, which simulate economic shocks over time. “In the end it’s a judgment,” Mr Angeloni said, adding there was no “mechanical” relationship between how the results of the two tests would be combined. http://www.ft.com/intl/cms/s/0/a27d75d0-3bb5-11e3-b85f-00144feab7de.html

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ECB, on new mission, sets out bank health tests plan

23/10/2013 3:32am EDT By Eva Taylor and Jonathan Gould FRANKFURT (Reuters) - The European Central Bank vowed on Wednesday to submit the euro zone's top banks to a comprehensive batch of tests next year, staking its credibility on a review that aims to build confidence in the sector. The ECB wants to unearth potential risks hidden in banks' balance sheets before supervision is centralized under its roof from November 2014 as part of a European banking union. That broader plan was drawn up in response to the euro zone debt crisis that undermined economies around the world and was made worse by banking black holes in several countries including Ireland and Spain. Setting out its plans to scrutinize the 128 top euro zone lenders, the ECB said it would use tougher new measures set out by Europe's top regulator - the European Banking Authority (EBA) - in the asset quality review it will conduct next year. "A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85 percent of the euro area banking system, is an important step forward for Europe and for the future of the euro area economy," ECB President Mario Draghi "Transparency will be its primary objective," he said. "We expect that this assessment will strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets." The ECB said it would conclude its assessment in October 2014, before assuming its new supervisory tasks in November although some policymakers have suggested that timing could slip. If capital shortfalls are identified, banks will be required to make up for them, the ECB said. Draghi has said a "public backstop" must also be available. Detailing the measures it will use in its review, the ECB said it would use the EBA's definition of non-performing loans. The EBA said this week it will define bank loans more than 90 days overdue as non-performing.

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The ECB also said it will ask banks in its balance sheet review for an 8 percent capital buffer. The buffer could have been higher but may still prove a challenge to some banks as they reshuffle their balance sheets to make them crisis-proof. The ECB wants a tough review so that it does not face surprises once it has taken charge, and to avoid repeating the mistakes of two earlier European-wide stress tests that failed to spot risks that led to the Irish and Spanish banking crises. "A poorly-managed exercise would undermine the ECB's credibility as supervisor from day one, with potentially adverse consequences also for its credibility in the field of monetary policy," said Unicredit's chief euro zone economist Marco Valli. BACKSTOPS The ECB's new supervision role is the first leg of a three-pronged plan for a banking union in the euro zone, to further integrate the bloc's 17 economies. Wary of a lopsided banking union that could see it supervise euro zone banks without a common backstop in place, the ECB has urged governments to agree on a strong single resolution mechanism (SRM) to salvage or wind down banks in trouble. However, this second stage of the planned union is incomplete as politicians discuss how much of the costs should be shouldered by taxpayers. Plans for a third stage, a common insurance scheme, have stalled. "For the success of the exercise, the ex ante availability of backstops is critical," the ECB said, adding that capital shortfalls should be first and foremost made up with private sources of capital. Some ECB policymakers feel uncomfortable taking on the extra responsibility and have suggested spinning off bank supervision into a separate institution over the long term. But such a step would require a change of the EU treaty, which might take years. A Morgan Stanley survey of investors this month showed between five and 10 of the banks to be tested by the ECB are expected to fail the tests and could be forced to raise up to 50 billion euros ($68.87 billion) to bolster their capital. However, some banks may be unable to raise capital on their own and the euro zone crisis has shown that sometimes even national governments cannot afford to stage rescues. In addition to Ireland, Spain - the bloc's fourth biggest economy - had to take international help to tackle its banking problems. ($1 = 0.7260 euros) (Additional reporting by Jonathan Gould. Editing by Mike Peacock) http://www.reuters.com/article/2013/10/23/us-ecb-banks-idUSBRE99M00020131023 Factbox: Details of health check of euro zone banks 23/10/2013 3:28am EDT LONDON (Reuters) - The European Central Bank vowed to submit euro zone banks to a comprehensive batch of tests next year, aimed at restoring confidence in the industry, providing transparency on assets and setting out a consistent supervisory approach. Here are key details of its plan: CAPITAL BENCHMARK Banks will need to hold 8 percent of common equity Tier 1 capital as a minimum, using the Basel III definition but including transitional arrangements.

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The benchmark will consist of a common equity Tier 1 ratio of 4.5 percent, a 2.5 percent capital conservation buffer, and a 1 percent add-on to take into account the systemic significance of the banks. The ECB said the median core Tier 1 capital ratio for the largest euro area banks is about 12 percent. BANKS The ECB said about 130 banks in the 18 member states will take part in the test, accounting for 85 percent of the euro area banking system. A provisional list of banks includes 24 German banks, 16 in Spain, 15 in Italy, 13 in France, seven in the Netherlands, five in Ireland and four each in Greece, Cyprus and Portugal. TIMING The assessment will start in November 2013 and finish in October 2014, just prior to the ECB assuming its supervisory role. The ECB will release results in a single disclosure. The ECB will design the assessment and monitor it, and national regulators will execute it in each country. Consultancy Oliver Wyman will be the main advisor, and each country will use other private sector advisors. AIMS The ECB said there are three main goals: Transparency - to enhance the quality of information available on the condition of banks; Repair - to identify and implement necessary corrective actions. That can include increasing provisions banks have for assets and forcing them to recapitalize, retain profits, issue equity, change their funding mix or sell or separate assets. Capital shortfalls should come from private sources, but if that is insufficient public backstops might be needed, and should be established before the completion of the exercise; Confidence building - to assure all stakeholders that banks are fundamentally sound and trustworthy. PROCESS It will be a three step process: A supervisory risk assessment to review risks, including liquidity, leverage and funding; An asset quality review (AQR) to assess the quality of banks' assets, including asset and collateral valuation and any provision, based on balance sheets at the end of 2013. It will cover sovereign and institutional holdings and corporate and retail exposures, and both the banking and trading books will be reviewed; A stress test to examine the resilience of banks' balance sheet to stress scenarios, carried out in conjunction with the European Banking Authority.//The ECB said more details will be released in due course.//(Compiled by Steve Slater, Editing by Patrick Lannin) http://www.reuters.com/article/2013/10/23/us-ecb-banks-factbox-idUSBRE99M06720131023 64

Economía Almunia rechazó por carta la petición de Draghi de suavizar las reglas para la banca La Eurocámara carga contra el presidente del Banco Central Europeo Las maniobras de Draghi irritan a Bruselas Claudi Pérez Bruselas 22 OCT 2013 - 23:17 CET18

El comisario europeo de la Competencia, Joaquín Almunia. / FRANCOIS LENOIR (REUTERS) Bruselas marca territorio. El vicepresidente y comisario de Competencia, Joaquín Almunia, rechazó por escrito el pasado 3 de septiembre, en una carta a la que ha tenido acceso este periódico, las presiones de Mario Draghi, el presidente del Banco Central Europeo. Draghi pretendía relajar las reglas de ayudas de Estado a la banca tras los exámenes del Eurobanco, para evitar un nuevo episodio de inestabilidad financiera si algún banco solicita dinero público y Bruselas obliga antes a pasar por caja a los accionistas y a quienes tengan deuda de mala calidad. A la petición de clemencia para los poseedores de títulos como las preferentes en España, realizada también en una carta cargada de intención, Almunia responde a Draghi con un lacónico “eso se verá en su momento, y caso por caso”. Los resultados de esas pruebas se darán a conocer en la segunda mitad del año próximo, pero tienen en vilo a algunas de las grandes capitales —y a Roma en particular—, que temen que sus bancos salgan mal en la foto y han puesto todas sus baterías diplomáticas en funcionamiento para rebajar en lo posible los daños. Y preocupan también al examinador: Draghi, expresidente del Banco de Italia, teme que si los exámenes son duros aparezcan agujeros, y que eso desencadene nuevos problemas si Bruselas muestra la misma dureza que en el pasado. En la misiva, Almunia considera que “las preocupaciones” de Draghi “se pueden encauzar” a través de las normas actuales, publicadas en agosto, sin necesidad de poner en peligro la estabilidad financiera. Draghi, en fin, pretendía que Bruselas bajara la guardia como norma general, pero Almunia quiere garantizarse margen de maniobra para decidir en función de cada banco.

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Almunia viene a decir que hay tiempo de sobra para que la banca se recapitalice: “Sus preocupaciones por la posible falta de capital que resulte de los exámenes solo se verán a partir de la segunda mitad de 2014”, cuando se den a conocer los resultados, informa al banquero central europeo. Y a partir de ahí, habrá todavía unos meses —tal y como pasó con las cajas españolas— para que las entidades financieras consigan fondos, con lo que ese proceso podría alargarse hasta bien entrado 2015. En caso de que pasado todo ese tiempo haya que acudir al dinero del contribuyente, la regla general será aplicar quitas a los accionistas y a las preferentes, como sucedió con las cajas españolas. En Italia vence deuda subordinada por importe de 2.700 millones en 2014 y 4.600 millones en 2015, según datos recogidos por el think tank Eurointelligence. De ahí la preocupación de Draghi. La misiva contiene alguna dosis de veneno, pese a que las relaciones entre Competencia y el BCE han sido y son excelentes, según las fuentes consultadas. Bruselas publicó su normativa en agosto y Almunia considera que los mercados ya le han puesto un precio a la deuda de baja calidad, basándose en la aplicación de las reglas de ayudas de Estado en España y en otros países desde que empezó la crisis. “Las contribuciones de los acreedores júnior [la deuda de peor calidad] han sido solicitadas sistemáticamente en años anteriores en varios países”, indica Almunia, “incluidas las recapitalizaciones por motivos de precaución”, las que preocupan a Draghi. “Esto no es nuevo”, remacha el comisario para quitar hierro al temor del BCE a que tras las pruebas de esfuerzo las posibles quitas levanten una polvareda en los mercados. El Europarlamento hizo ayer un llamamiento a Almunia para que resista la presión de Draghi (o la de los alemanes, que quieren lo contrario: más dureza). “Sería un error mostrar debilidad”, defendió Sharon Bowles, presidenta de la comisión de asuntos económicos. “Esto no es lo que esperábamos del BCE”, atacó. Junto a las críticas por la italianidad de Draghi, que según los analistas ha puesto en peligro su credibilidad, el eurodiputado alemán Sven Giegold dijo que la carta del BCE “es la demostración de que los banqueros centrales no deberían tener ninguna responsabilidad sobre la resolución de entidades”. http://economia.elpais.com/economia/2013/10/22/actualidad/1382476659_899989.html

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ft.com Markets Capital Markets October 22, 2013 8:44 am Boom-era credit deals raise fears of overheating By Tracy Alloway and Vivianne Rodrigues in New York Neiman Marcus, the upscale US department store chain, is no stranger to fashion trends. But in the autumn of 2005 the luxury retailer started a very different kind of fad – this time for an unusual new bond structure known as a “payment-in-kind toggle”. Pik-toggle notes, as they became known, gave Neiman Marcus the option to pay its lenders with more bonds instead of cash if the retailer ever ran into financial difficulty. For a company that was at the time being bought by private equity giants TPG and Warburg Pincus, in a leveraged buyout involving about $4.3bn worth of debt, that additional financial flexibility was considered a savvy move. Back to the bubble?

Junk-rated companies issuing PIK-toggle notes, 2013 More ON THIS STORY// Pre-crisis debt products make comeback/ Buyout debt returns to pre-crisis levels/ On Wall Street Surge in boom-era debt signals overheating/ Companies tap fierce floating debt demand/ On Wall Street Cov-lite loans lose their stigma in hunt for yield IN CAPITAL MARKETS// ‘Rich country’ creditors seek EM lender accord/ Blackstone rental bond rated triple A/ China bond market emerges from shadows/ Default fears hit JC Penney bonds Pik notes proliferated over the course of the next three years, until the financial crisis led many borrowers – including Neiman Marcus – to “toggle” the bonds. The luxury 67 retailer ultimately saved almost $10m every quarter by paying its lenders with debt instead of cash but left disappointed investors in its wake. Now, eight years since the Pik-toggle entered the market, companies are again using the esoteric structures, along with a host of riskier borrowing practices associated with the buyout boom that helped inflate the 2006-07 credit bubble. That has fuelled concerns that the return of practices last seen before the financial crisis could be indicative of overheating in credit markets. Last week, Neiman Marcus sold $600m of Pik-toggle notes to help finance its sale by TPG and Warburg to new owners – bringing the evolution of the Pik-toggle full-circle. Other companies to have recently sold Pik-toggle notes include Checkers and Rally’s, the drive-through restaurants, and Ancestry.com. “We’re in the third year of the greatest leveraged finance markets of all time because of the efforts by the Fed, and all the central banks around the world, to keep rates at zero,” said Craig Packer, who helped build the first Neiman Pik-toggle and is now head of leveraged finance at Goldman Sachs. The return of Pik-toggles and other lending practices is symptomatic of a wider trend in the capital markets. With interest rates hovering at record lows, highly indebted companies have been able to sell their debt at ultra-low prices, and on terms that they dictate, to investors who are increasingly starved for yield. Already the amount of indebtedness in leveraged buyout deals is creeping up. The average amount of debt used to finance LBOs has jumped from a low of 3.69 times earnings in 2009 to an average 5.37 so far this year, according to data from S&P Capital IQ. At the height of the LBO boom, average leverage was 6.05. The $6bn sale of Neiman Marcus to Ares and a Canadian pension fund is expected to leave the retailer with a debt of about seven times earnings. At the same time, more than $200bn of “cov-lite” loans have been sold so far this year, eclipsing the $100bn issued in 2007. That means 56 per cent of new leveraged loans now come with fewer protections for lenders than normal loans. Bankers say much of that issuance has been a result of the return of another pre-crisis market vehicle – the collateralised loan obligation. CLOs buy up leveraged loans and slice them into pieces that can be tailored to the risk appetite of a variety of investors – from big pension funds to small banks. Like the rest of the leveraged loan market, CLOs have enjoyed buoyant demand. At least $55.41bn of the vehicles have been sold this year – the highest amount since the $88.94bn issued in 2007. Meanwhile, at $9.2bn, the amount of Pik structures sold as part of new bond deals this year has surpassed the $6.7bn issued in the course of 2012. The number of deals involving Pik-toggle notes will continue to increase, says Matt Toms of ING Investment Management. But with default rates below historic averages and abundant credit, there is little indication that companies will face difficulty meeting debt payments or refinancing obligations, he adds. We all know how this story ends. The question is trying to figure out exactly when - Matt Toms, ING Investment Management

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But the effervescent mood in credit markets could change quickly. Regulators are closely scrutinising credit institutions’ lending, with the Office of the Comptroller of the Currency having criticised 42 per cent of the leveraged lending portfolio in its last review. Proposed rules that would force CLO managers to keep a portion of a securitised deal – known as risk retention – could eventually damp demand for leveraged loans. CLOs account for about 55 per cent of demand. Perhaps the thing that could pour water on the leveraged loan boom the fastest is the prospect of the Fed’s historic low interest rates coming to a sudden end. “We are at the beginning of a releveraging cycle,” Mr Toms says. “Ultimately, we all know how this story ends. The question is trying to figure out exactly when.” http://www.ft.com/intl/cms/s/0/f151df3a-3a6f-11e3-9243- 00144feab7de.html?siteedition=intl#ixzz2iW2Enuu4

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October 22, 2013, 12:23 PM ET ByMatina Stevis Paper by EU Economist Backs Austerity’s Critics ByMatina Stevis Coordinated austerity in euro-area countries has stifled economic recovery and deepened the crisis across the currency bloc, according to a new technical paper prepared by an economist at the European Commission. Spending cuts in Germany in particular have made things worse for the weaker members of the euro area through “spillovers” – the economic impact on economies connected to Germany’s– the paper says, adding that limited stimulus programs in richer countries could help the whole of the currency bloc. The paper, which doesn’t necessarily represent the views of the powers-that-be at the Commission, presents some inconvenient conclusions for European authorities from one of their own economists. The European Union and national governments have come under fire from outside economists for pursuing austerity across the euro zone. These critics have argued that Germany in particular should be running bigger deficits to help drag the bloc’s weaker members out of their slumps. The commission paper backs the critics. It claims that the effects of brutal cuts in the weaker euro-zone countries could have been mitigated if Germany and other core euro- zone nations had refrained from also cutting spending and raising taxes at the same time. “The symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries,” the paper says. “These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in programme and vulnerable countries,” it concludes. Analyzing austerity between 2011 and 2013 in Greece, Italy, Spain, Portugal, Ireland, France and Germany and the rest of the euro area as one bloc, the paper finds that the impact of cuts in euro-area countries didn’t just hit the domestic economies but stalled an economic turnaround across the currency zone. A link to the paper, entitled Fiscal Consolidation and Spillover Effects in Euro Area Countries, was tweeted out of the account of the commission’s economics and finance department, known as DG ECFIN, Monday. The tweet was later deleted and the paper was removed from DG ECFIN’s website. A spokesman for the European Commission said the upload of the document was an accident and the research document is not yet ready for publication. Another commission official said the paper would be published, with no significant changes, shortly. [UPDATE: The paper has now been published.]

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The document was downloaded by several people Monday following the errant tweet, and was first reported by Greek daily, Kathimerini [in Greek]. As in all economic-analysis papers from commission staff, this too carries the disclaimer that its finding represent the views of its author, not those of the European Commission. The author of the document, Jan in ‘t Veld, said in an email that he couldn’t comment on his findings because the research hadn’t been published yet. The paper briefly published Monday shows that overall fiscal multipliers in the euro area–how much in economic output is lost for every euro withdrawn from the economy either through raising taxes or cutting public spending–are between 0.5 and 1, depending on how open the economy in question is. Officials of the EU and International Monetary Fund have previously assumed a multiplier of around 0.3. The question of fiscal multipliers led to a heated debate over the last year. IMF chief economist Olivier Blanchard, in a paper published September 2012, argued that too-low fiscal multipliers had been used in the design of Europe’s bailout programs, leading to sometimes gross underestimation of the effects of austerity. The commission paper goes into further detail, assessing the impact of austerity through spending cuts versus austerity through higher government revenue. In the case of Spain, for example, the new draft research shows that for every euro in spending cuts, 1.1 euros were lost in the economy. The impact of reducing the government’s deficit through raising more revenue would have taken 0.5 euros out of the economy for every euro in revenue. The finding can be interpreted as a rejection of the brand of austerity widely implemented in the European periphery, which has focused on spending cuts rather than boosting revenues. The commission has repeatedly recommended that troubled countries like Greece focus more on cutting spending rather than raising revenue through higher tax rates. The European Commission has more recently also recommended slowing down on fiscal consolidation for several countries in the euro area. As experts at DG ECFIN prepare to assess national budgets for 2014, the commission has encouraged stimulus programs for countries that have the budget leeway for it, especially in the form of job-creating public investments. The draft research paper notes that, despite the severe shock of austerity since 2011, the efforts to rationalize public finances will bear fruit from 2014 onwards “by when expectations of lower debt and lower future taxes generate positive confidence effects that lead to a recovery.” By Matina Stevis, “Paper by EU Economist Backs Austerity’s Critics” October 22, 2013 http://blogs.wsj.com/brussels/2013/10/22/paper-by-eu-economist-backs-critics-of- austerity/

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ft.com/markets MARKETS INSIGHT October 23, 2013 6:01 am Look to ‘Helicopter’ Ben for clues to Yellen’s Fed By Scott Minerd Janet Yellen is haunted by history of dovish monetary sentiment What can we expect from a Federal Reserve helmed by newly nominated chair Janet Yellen? Unlikely as it may sound, we can draw insight from a decade-old misinterpreted remark. In November 2002, as the US economy was emerging from recession, Federal Reserve Governor Ben Bernanke delivered his now infamous “Helicopter” speech – during which he recalled Milton Friedman’s jocular depiction of dropping money from helicopters as a last-ditch means to fight deflation. More ON THIS TOPIC// Robin Harding Memo to Yellen/ Diane Coyle Gender matters in central banking/ Global Market Overview S&P 500 reined in by US budget worries/ Letter campaign was boost for Yellen MARKETS INSIGHT// Treasuries turn anything but risk-free/ Rough ride in store for EM currencies/ No alternative to dollar except chaos/ Chasing trends is a dangerous game “A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money,” Mr Bernanke said, using the analogy to combat fears of imminent deflation which had driven the yield on the 10-year US Treasury note below 4 per cent, the lowest yield since the early 1960s. The witty but obscure reference to Friedman’s 1969 paper “The Optimum Quantity of Money” was largely misinterpreted, both on Main Street and Wall Street. Derided as “Helicopter Ben”, Mr Bernanke saw his commitment to price stability drawn into question as he was viewed as championing easy money. Nevertheless, it appeared that his comments serendipitously contributed to ending the deflation scare. Interest rates stabilised and the market’s concerns over price deflation were successfully allayed. Inflation fighter The helicopter speech continued to haunt Mr Bernanke, even upon his confirmation as chairman of the Federal Reserve. With his commitment to price stability in doubt, the chairman found it hard to take pre-emptive and decisive action in the subprime crisis he encountered soon after taking office. It was imperative to him that he reaffirm his mantle as an inflation fighter, even though maintaining a restrictive monetary policy before the housing collapse would prove only to further exacerbate the crisis. Ultimately, the chairman relented. He dramatically reversed course and flooded the financial system with unprecedented levels of monetary liquidity.

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Future historians will ultimately judge whether the chairman’s actions in the early days of the crisis – marked by a reluctance to reduce rates – are responsible for the depth of the collapse. More pressing, however, is the similar series of questions that looms large for Ms Yellen. Like Mr Bernanke, she is haunted by a history of dovish monetary sentiment; her reputation for favouring easy money is virtually ubiquitous. But this characterisation may be unfair. Her long and established career at the Fed renders her one of the most seasoned and highly informed central bankers in the world. Ms Yellen has an impeccable resume, and is arguably one of the best qualified candidates in recent history for the Fed chairman position. She has previously served as chair of the president’s Council of Economic Advisors, was an FOMC governor for two years, and president of the San Francisco Fed for five- and-a-half years. Over the past three years, she has served as vice-chairman of the Fed, and is known for her cautious and methodical leadership style. She is well regarded for having excellent communications skills and is a leading advocate of Fed transparency. Nevertheless, the spectre of easy money advocacy with which she is associated could potentially complicate her life as the chair of the Fed. Will she face the same challenges as Mr Bernanke? Will her dovish legacy cause her to act in ways inconsistent with promoting economic recovery? Will she exit QE too soon or too quickly – causing rates to rise and potentially damaging the housing market – in an effort to establish inflation-fighting credibility? Hard course to steer Or will Ms Yellen embrace earlier comments which suggest the Fed might tolerate higher levels of inflation than the central bank’s stated 2 per cent ceiling – assuming such price pressures were deemed to be transient? Either way, it will be hard for the chairman to steer a middle course in trying to fulfil its dual mandate. I take Ms Yellen at her word. I believe in the long run she will use monetary policy, including inflation, as a tool to reduce unemployment. She may, in the short run, feel a need to establish her anti-inflation credentials – resulting in an earlier exit of QE than expected. If that path were to result in dramatic increases in interest rates, similar to the aftermath of Mr Bernanke’s June press conference when he raised the notion of tapering, I believe she would quickly reverse course. The ultimate normalisation of post-crisis monetary policy will be tricky. Policy makers will find it difficult to pace the reduction in monetary accommodation to assure both price stability and full employment. Given the significant possibility for a policy error, the odds favour betting on lower unemployment and higher inflation in a Yellen Fed. Scott Minerd is global chief investment officer at Guggenheim Partners http://www.ft.com/intl/cms/s/0/69d9f958-3a69-11e3-b234- 00144feab7de.html#axzz2iRy35TFA

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ft.com comment Columnists October 22, 2013 6:28 pm The reality of America’s fiscal future

By Martin Wolf The real debate is not about the debt – it is about whether citizens will fund the government

From the frenzied political battle and clashes of opinion of recent weeks, an observer might conclude the US faces fiscal catastrophe. It does not. The fiscal position has improved dramatically and poses no medium-term risks. The only fiscal crisis the US faces is one inflicted by a purported desire to avert one. The real issue is what government Americans want and how they choose to pay for it. Between 2007 and 2009 the fiscal deficit of US general government, including state and local, jumped from 2.7 per cent of gross domestic product to 12.9 per cent as a result of the financial crisis. But the latest International Monetary Fund forecast is for a deficit of 5.8 per cent of GDP this year and 3.9 per cent for 2015. Much of this tightening is thought to be structural, with a deficit of just 3.9 per cent this year, down from 8 per cent in 2010. Fiscal tightening of 2.6 per cent this year helps explain poor growth. As fiscal drag slows, growth should pick up (see charts). More ON THIS STORY// US jobs report shows sluggish growth/ Markets Insight Treasuries turn anything but risk-free/ Treasuries risk losing superpower status/ Impasse fallout splits US conservatives/ Fed could taper as early as December ON THIS TOPIC// Laurence Fink US must show it still works/ Dollar biggest victim in US debt drama/ Republicans gear up to take on Tea Party/ US business considers anti-Tea Party move

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MARTIN WOLF// US The debt-ceiling doomsday device/ UK housing Beware absurd property trap/ Sound and fury, but signifying nothing yet/ Martin Wolf The pain of rebalancing

US public finances The latest long-term forecasts of the non-partisan Congressional Budget Office also justify medium-term optimism. They show a fall in the ratio of federal debt to GDP held by the public over the next decade, from 73 per cent to 71 per cent. These forecasts are, as always, based on current laws. Last year this approach created difficulties for the CBO. It responded by providing two forecasts: a baseline and an alternative. The baseline assumed that the George W Bush-era tax cuts would expire, as required by law. As a result of this and other factors, revenues would reach 24 per cent of GDP by 2037. This was believed by the CBO to be implausible – rightly, as it turned out: the Bush tax cuts would not expire in toto. The CBO provided an alternative. The tax cuts (and relief from the alternative minimum tax) were assumed to be extended through 2022. Thereafter, revenues were assumed to stay at their 2022 level of 18.5 per cent of GDP. The new forecasts, which show debt reaching 100 per cent of GDP 25 years hence, are worse than last year’s baseline, in which the Bush tax cuts expired, but far better than the CBO’s earlier alternative. Is this long-run forecast a disaster? No. The US could probably sustain debt held by the public at 100 per cent of GDP. It is high, but borderline manageable. The costs of doing so would depend on the real rate of interest. If that were to be no higher than the real rate of growth (consistent with long-run experience), the country would not even need to run a primary fiscal surplus to stabilise the debt ratio. Moreover, revenue enhancements and spending cuts needed to keep debt at 73 per cent would be 0.8 per cent of GDP now and 1.3 per cent in 2020. That is small relative to what has been achieved in recent years. The CBO states that “bringing debt back down to 39 per cent of GDP in 2038 – where it was in 2008 – would require a combination of increases in revenues and cuts in non- interest spending totalling 2 per cent of GDP for the next 25 years”. The 2012 forecasts suggest letting the Bush tax cuts expire would have delivered much of this decline. Since the US economy did well in the 1990s, before these unaffordable cuts, it is extraordinary that Barack Obama did not let them expire when he had the chance in the fight over the “fiscal cliff” in late 2012. It would have given the president the leverage he now lacks to obtain a balanced fiscal adjustment. Instead, he has left the country on the rack of sequestration. Yet it is quite possible that no further fiscal adjustment will be needed to reduce the debt. In the second quarter of 2013, GDP was 14 per cent below its 1980-2007 trend. It may well recoup much of this. Indeed, as Lawrence Summers, former US Treasury

75 secretary, noted, forecasts for the difference between the far larger numbers for revenue and spending over a quarter of a century are wildly uncertain. Growth is not only uncertain, but amenable to intelligent policy making over both the short and longer term. The US does not confront any medium-term crisis of fiscal sustainability. It could wait until the 2020s before deciding to do any more. Yet this does not mean no important fiscal challenges exist. It is easy to see at least five. First, the sequestration process is arbitrary. It needs to be changed. Second, as Ezra Klein of The Washington Post notes, the federal government is “an insurance conglomerate protected by a large, standing army”. The CBO forecasts that spending on social security will rise from 4.9 per cent of GDP to 6.2 per cent and spending on healthcare from 4.6 per cent to 8 per cent over the next quarter of a century. Other spending, including on science and education, will be badly squeezed. If spending on defence were to be 4 per cent of GDP, other spending, apart from on social security and health and interest, would be 3 per cent of GDP in 2038 – too low to sustain essential services. Third, a part of the solution is to curb spending on pensions and medical costs. On the latter, there is an opportunity. The US government spends as much on health as a share of GDP as many European welfare states, while covering a far smaller share of the population. It must be possible to deliver much the same at lower costs or more at much the same cost. Fourth, the US needs fiscal reform. Here the room for greater efficiency and equity is huge. Finally, the share of GDP taken in revenue will need to rise. The 19.7 per cent of GDP now forecast by the CBO for 2038 is too low, unless the Tea Party slashes spending on social security and Medicare. Given that group’s age composition, this looks very unlikely. The CBO data suggest that a rise in federal revenue to 22 per cent of GDP may be needed. That is surely achievable. Yet this also defines the nature of the debate. It is not about the debt. It is about whether Americans will pay the taxes needed to fund the government they have legislated. The US has created major social programmes. But it seems unable to agree on the taxes needed to pay for them, while sustaining essential state functions at a reasonable level. This struggle is disguised behind the rhetoric on unsustainable debt and disincentive effects of modest rises in taxation. If the US does create a huge fiscal problem for itself, it will be because agreement on the balance between what government does and how it is financed is impossible. But, first, the factitious crises of recent weeks simply have to stop. [email protected] http://www.ft.com/intl/cms/s/0/99a1bd48-3a45-11e3-b234- 00144feab7de.html#axzz2iRy35TFA

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Viñals: "Entre el 30% y el 47% de la deuda la tienen empresas del sur de Europa sin capacidad para pagarla" El director de Asuntos Monetarios del FMI afirma que la banca española cuenta con provisiones para afrontar el reto y alerta del riesgo de la "complacencia" en la zona del euro Lunes, 21 de octubre del 2013 - 21:55h. AGUSTÍ SALA / Barcelona El director de Asuntos Monetarios del Fondo Monetario Internacional (FMI), José Viñals, ha alertado de que entre el 30% y el 47% de la deuda empresarial está en manos de compañías que no pueden hacer frente al pago de estos pasivos con los recursos que generan. Esa situación implica que para estas empresas la deuda y los intereses superan cada año el resultado de explotación y solo lo pueden superar con refinanciaciones, ajustes "terribles", la venta de activos o reducciones de la inversión. Durante una conferencia en el Cercle Financer, Viñals ha afirmado que la banca española cuenta con provisiones suficientes para hacer frente a todos los impagos previsibles por este nivel de endeudamiento empresarial. En cambio, las entidades financieras de Portugal e Italia "se comerían buena parte de los beneficios de los próximos dos años". Los porcentajes de deuda empresarial en manos de compañías que no pueden pagarla es del 30% en Italia, del 41% en España y del 47% en Portugal. Es en este contexto en el que el directivo del FMI ha avisado de que las próximas pruebas de esfuerzo a la banca europea son "una oportunidad de oro" para analizar la calidad de activos y ver la situación real de la entidades. SEGUIR CON LAS REFORMAS ESTRUCTURALES Viñals, que ha sido presentado por el presidente de CaixaBank y de La Caixa, Isidre Fainé, ha destacado que la recuperación de la economía global "continúa". No obstante, las previsiones de crecimiento han empeorado con respecto a seis meses atrás por la "pérdida de gas" en las economías emergentes. A su vez ha reiterado que el mayor riesgo actual de la zona euro, una vez superada la recesión, es "caer en la complacencia" y el "exceso de confianza". En este sentido, ha advertido de que la recuperación "es pírrica" y que hay que seguir en la senda de las reformas estructurales. El directivo del FMI ha pronunciado la conferencia 'La economía y el sistema financiero: Mal en transición', seguido por un auditorio de empresarios y directivos. Entre los asistentes se encontraba el 'conseller' de Economia, Andreu Mas-Colell. http://www.elperiodico.com/es/noticias/economia/vinals-entre-deuda-tienen-empresas- del-sur-europa-sin-capacidad-para-pagarla-2770391

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ft.com Comment Analysis October 21, 2013 7:32 pm Emerging markets: While the sun shone By Jonathan Wheatley and FT reporters Only a few developing nations used their boom years to enact crucial structural reforms. This failure to pursue change has worried investors

Soldiers guarding the Rio hotel where Brazil's Libra oilfield is to be auctioned. Elsewhere in the oil sector the state has clawed back control, at a heavy cost In December 1994 Fernando Henrique Cardoso, president-elect of Brazil, made a speech before the country’s Senate. He held up a paper on which he had listed his priorities. It was a blueprint for profound reform of Brazil’s fiscal system and of its “economic order”, cutting across public spending, labour law, the judiciary and politics. Two decades later, despite a commodities boom and the rise of a new consumer class in the developing world, it is striking how little of Mr Cardoso’s work has been done. Brazil is not alone. Investors are increasingly questioning whether many leading emerging markets have undertaken vital structural reforms during their years of high growth. Such doubts about the resilience of developing markets raise hackles from Brasília to Bangkok. Governments across the emerging world argue that they are much less exposed to external shocks than they were in the 1990s, when tremors that began in Mexico, Thailand and Russia sent waves of financial destruction around the globe. To an extent, their claims are justified. Many emerging economies have reduced their dependence on foreign currency debt, cleaned up their public finances and built big foreign reserves. More ON THIS STORY// Markets Insight Rough ride in store for EM currencies/ The Short View Emerging markets can beat IMF’s gloom/ Emerging economies

78 under fire at IMF/ China is the biggest danger to EM rally/ IMF warns Fed of QE exit ‘spillovers’ IN ANALYSIS// China – A place to call home/ US politics – They blinked/ Petrobras – unfulfilled potential/ Iran A changing of the Guards Emerging markets

Currencies and perception of institutions Mehmet Simsek, Turkey’s finance minister, says sweeping changes have been made. “Many emerging markets have significantly improved their balance sheets, whether you are talking about public finances or other macro- fundamentals,” he says. Floating foreign exchange rates and better regulated banking, for example, are now almost universal, he says. But such changes, as Mr Simsek recognises, were “first-generation” reforms – the kind of measures that can be implemented by technocrats at finance ministries and central banks. Just as that work was being done, Chinese demand, the commodities supercycle and the age of irrational exuberance sent a flood of new wealth into the emerging world. The financial crisis of 2008-09 kept the money flowing via quantitative easing. The imperative for reform ebbed. Now the world has changed again. Chinese growth has slowed. The commodities supercycle is over. The end of quantitative easing was deferred by the US Federal Reserve in September but it is coming, nevertheless. The failure to reform is again a worry. “Maybe the second and third-generation reforms were shelved,” says Mr Simsek. “Let’s say emerging markets were not aggressive enough against this relatively easy backdrop.” One problem is that, today, there is little room for finance ministries and central banks to come to the rescue. “There is nothing they can do now that is easy,” says Gaurav Mallik of State Street Global Advisors, an asset manager. “It is all difficult stuff now.” He cites India, where the government is battling with politically charged land and labour reforms. “Look at the maelstrom that happens every time a new policy is tried,” he says, pointing to U-turns in New Delhi’s efforts to allow foreign investment into the retail industry.

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In Brazil, the failure to reform is notable because the road ahead had been so clearly mapped out. Mr Cardoso was no slouch. As finance minister, he beat runaway inflation. As president, he did much to lay the foundations of later prosperity. In a country addicted to irresponsible state largesse, he enshrined fiscal responsibility in law. He also advanced privatisations in core areas such as energy, utilities and telecommunications. But his reforms lost momentum. The government still spends too much and badly. A bewildering tax system and bureaucracy remain heavy burdens on business, as is a labour code inspired by Benito Mussolini’s Italy. Luiz Inácio Lula da Silva, who succeeded Mr Cardoso, kept his pillars of stability in place and helped extend their benefits to the poor through a generous social security safety net and by encouraging access to cheaper credit. But the Cardoso agenda was partly reversed, as the government clawed back state control over the oil sector at a heavy cost and extended state influence elsewhere. Not all emerging governments have gone backwards. Some, such as Chile and Poland (and others in central Europe) have neared developed-world income levels and now face the challenge of escaping the middle-income trap. Others have yet to come close. As he spoke in 1994, Mr Cardoso was perhaps at the height of his popularity, having been swept to power on the inflation-busting Plano Real. As he told the senators, the plan had been “only the first step of the changes and a bridge towards the structural reforms that we lost the opportunity to launch this year”. He had no idea the opportunity would be lost for so long. . . .

©AFP A protest to demand better access to education in Chile, where inequality is a serious challenge Chile: a beacon of stability and progress Chile is often held up as an example of Latin American success, writes Benedict Mander . Its gleaming macroeconomic fundamentals and solid institutions give it a fighting chance of entering the select club of developed countries. It was a pioneer in pensions reform and almost all of the economy has been privatised apart from Codelco, the copper miner; its profits are stashed in a sovereign wealth fund that can be dipped into during lean times. Chile’s labour laws are considered more liberal than those of many European countries. Although poverty has fallen from 40 per cent during the Pinochet dictatorship to 15 per cent today, inequality remains among the highest in the region and is Chile’s most serious challenge.

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With Chinese demand for copper slowing, some fear that lower export revenues will restrict economic growth and the ability of Michelle Bachelet, who is expected to return to power in next month’s elections, to implement reforms needed to promote equality and keep a lid on social unrest. Nevertheless, Chile’s stability is in marked contrast with crisis-ridden Argentina across the border. Argentina suffered a crushing debt default in 2001-02, which was a culmination of poorly implemented market reforms during the 1990s. Even today, Argentina has to pay double-digit interest rates, while Chile’s borrowing costs are similar to those of France. Companies in Argentina are struggling against strict economic controls, while Chilean businesses are expanding around the world. . . .

©Bloomberg Volvo’s bus-building plant in Wroclaw. The flexible labour market has brought jobs to Poland Poland: state policies have led to a booming private sector Poland has been a star performer among central European post-communist countries, partly because its starting position was so dismal, writes Jan Cienski . When the communists slunk off the stage in 1989, the country was a hyperinflationary mess. Reforms launched under Leszek Balcerowicz, the then finance minister, ended support for state-owned businesses, opened the country to foreign investors and made the zloty convertible. Communist-era debts were paid, inflation conquered, spending brought under control and the conditions created for a flourishing private sector. Poland’s labour market, for example, is among the most flexible in Europe. This was not achieved without cost and the economy fell into deep recession. But by 1992 it was growing again and Poland has been the only European country not to fall into recession over the past two decades. Its gross domestic product per capita this year will reach 62 per cent of the level of the eurozone, up from below 30 per cent in 1992. Some reforms have stalled, though. Privatisation is incomplete; bureaucracy is rife and the tax system is complex. Poland’s initial enthusiasm for reform has waned. Donald Tusk’s government pushed through one significant change: raising the retirement age to 67. But it is rolling back earlier pension reforms, saying they are hurting public finances.

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Much effort has been concentrated on guiding the country through the financial crisis – something that Mr Tusk and Jacek Rostowski, his finance minister, have done relatively successfully. . . .

©Reuters Comparatively few Turkish women have joined the labour market and illiteracy remains a problem Turkey: Political tension puts investment at risk For many observers, Turkey is a case apart, writes Daniel Dombey . Recep Tayyip Erdogan, the prime minister, has dominated the country for a decade. His sheer force of will has established the supremacy of democracy in a country previously in the shadow of the military. The economy has also been transformed. In the late 1990s inflation exceeded 90 per cent; it is now in single figures. In 2002, 86 per cent of tax revenues went to interest payments compared with 16 per cent today. But the extent of Mr Erdogan’s power is controversial and this year mass protests erupted against his rule. His government clashed with Turkey’s biggest company, Koc Holding; business leaders warn privately that the atmosphere of tension risks scaring away foreign direct investment. Growth has slowed. The savings rate has fallen by more than in any other G20 country; reliance on foreign capital has left Turkey dependent on portfolio funds to finance more than 80 per cent of its current account deficit, which at about 6 per cent of gross domestic product is the largest of the big emerging markets. Not enough Turks are working and those that do often lack skills. Just 28 per cent of women participate in the labour force. Despite improvements in education, a quarter of all 15-year-olds are functionally illiterate. Given such challenges, many wonder if a country in which one man wields so much power is likely to make the changes that would lead to continued success. . . .

©Getty

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There are formidable bureaucratic obstacles to building and running factories in India India: Bureacracy still bedevils investors In May, when the US Federal Reserve warned of an approaching end to its quantitative easing programme, the Indian rupee was the hardest hit of the big emerging market currencies, writes Victor Mallet . One fundamental problem is that, while the country has largely liberalised its trade regime and its financial markets, it has not tackled the vital factors of production. Foreign and domestic investors complain bitterly of needing several years to acquire expensive land for factories and projects. And they are so appalled by burdensome labour laws and low productivity that they typically try to employ as few people as possible and mechanise where they can. The result is a weak manufacturing sector, substantial industrial imports that contribute to the current account deficit and high unemployment. The other big problem is one of implementation. Since returning to the job in 2012, Palaniappan Chidambaram, the finance minister, has wooed India’s investors by announcing a series of liberalising reforms. They include the opening of more sectors to greater foreign investment, the clearing of bureaucratic obstacles to infrastructure projects, the part-privatisation of state companies and cuts in diesel subsidies. However, progress on the ground has been painfully slow, largely because the left- leaning Congress party that heads the coalition is ambivalent about such reforms. It wants to win over voters in next year’s election by increasing subsidies rather than cutting them, and by distancing itself from big business. . . .

©Bloomberg Average Indonesian incomes rose sharply in the good times, but so did inequality Indonesia: Little progress made on structural reforms Until recently, Indonesia was a darling of emerging-market investors, writes Ben Bland . Once it recovered from the turmoil that followed the fall of its dictatorship in 1998, it enjoyed a decade-long boom that made it one of the world’s hottest markets. But that hype has been blown away during the past year, with falling prices for Indonesia’s commodities exposing a widening current account deficit. Growth, consumption and investment are all slowing. Like other emerging markets, Indonesia has reduced its foreign debt, cleaned up its banking sector and sharpened its financial regulation. It has also made progress in tackling poverty, set up an independent body to tackle corruption and resolved most of its ethnic conflicts.

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Average incomes rose sharply in the good times but so did inequality. The receding tide of optimism has revealed that scant progress was made on structural reform. Indonesia badly needs judicial, tax and labour reform; a big reduction in red tape; infrastructure development; an overhaul of ailing health and education systems; and more systemic efforts to reduce the most egregious forms of corruption. And the prospects? President Susilo Bambang Yudhoyono will step down next year after reaching the legal two-term limit, meaning southeast Asia’s biggest economy will get its first new government in 10 years. But with power still captured by a tight-knit political and economic elite, hopes for radical change are slender. Copyright The Financial Times Limited 2013. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/intl/cms/s/0/1bcefd0e-3a2c-11e3-9243- 00144feab7de.html?ftcamp=crm/email/20131022/nbe/Analysis/product&siteedition=int l#axzz2iLpt3NRN ft.com comment Columnists October 21, 2013 5:15 pm Watch out for the rise of a European Tea Party

By Gideon Rachman The big danger to the euro is that the political consensus that underpins it could come unstuck

©Ingram Pinn America’s debt-ceiling crisis achieved something quite remarkable. It made the EU look well governed by comparison. Both the EU and the US systems are weighed down with checks and balances that make it hard to get things done. But Europe currently has one thing going for it that America lacks. All the most important decision makers in Brussels are committed to making the system work. There are no Tea Party types who regard compromise as a betrayal. This broad centrist consensus was an unacknowledged strength of the EU throughout the euro crisis. Although it became routine to complain that European leaders always do “too little, too late”, the markets also realised that – even if Europe’s leaders did not get

84 it right first time – they would just reconvene, at yet another emergency meeting, and keep bashing away at the problem. The fact that all 28 national leaders at EU summits are committed to working together is crucial in keeping the euro alive. More ON THIS STORY// Republicans gear up to take on Tea Party/ Europe United by hostility/ Philip Stephens Do not blame democracy for the rise of the populists/ Philip Stephens Italy must throw out its racist politics ON THIS TOPIC/ Periphery bank debt makes a comeback/ Volume of foreign-issued eurobonds jumps/ Finland PM softens stance on bailouts/ John McDermott Niall Ferguson and the magic ratio GIDEON RACHMAN/ Japan’s unsettling glimpse of the future/ US cannot live so carelessly/ Gideon Rachman Middle East optimism/ Merkel the visionary is misunderstood In the coming year, however, the big danger to the European single currency is that the political consensus that underpins the euro could come unstuck. A weak economy, weariness with austerity, anger about immigration and resentment of a remote-seeming EU are fuelling the ascent of anti-establishment and nationalist political parties across the continent. These rising political forces are gaining ground in big EU countries such as France, the Netherlands, Britain and Italy – and also in smaller nations such as Greece, Hungary, Finland and Austria. Given that the EU requires unanimity for many big decisions, even a small state that goes rogue could cause real trouble. As the Tea Party has demonstrated in the US, anti-establishment radicals do not need to capture the position of president or prime minister to gum up the system. Even if traditional pro-EU centrists continue to lead most national governments in Europe, their room for manoeuvre at EU summits is greatly reduced if populist parties are making big gains back home. A Dutch prime minister who fears the anti-EU Freedom party – which is topping the opinion polls at present in the Netherlands – will find it much harder to agree to a new bailout for southern Europe. Similarly, a British leader who is losing ground to the UK Independence party will be driven to take more extreme positions in EU negotiations. Next year’s elections to the European parliament also look like a possible breakthrough moment for a European Tea Party. The parliament has traditionally been the most federalist institution in Europe, acting as a lobby group for the transfer of more powers to Brussels. But next May’s elections are likely to show a surge in votes for eurosceptic parties across the continent. It is quite feasible that the National Front will top the polls in France, that the Freedom party will win in the Netherlands and that Ukip will be the biggest single bloc from Britain. What is more, the European parliament has recently gained new powers. While it lacks the blocking capacity of the US Congress, a rebellious European legislature could reject the EU budget, prevent crucial appointments and refuse to sign off on legislation that is needed to prop up the euro. Europe’s rebel parties are very far from forming a coherent bloc. They range from proto-fascists such as Hungary’s Jobbik to the far-left Syriza in Greece – and from conservative nationalists such as Poland’s Law and Justice party to semi-anarchists such as the Five Star Movement in Italy. Some of the anti-establishment parties, such as France’s National Front, are trying to make the journey from the far right towards

85 political respectability. A few, such as Ukip and parts of the Italian right, share the tax- cutting, small-government agenda of the Tea Party. Other rebel parties in Europe, including the Dutch Freedom party, have cast themselves as defenders of the traditional welfare state. What almost all Europe’s anti-establishment parties share with the Tea Party, however, is an anti-elitist rhetoric that casts mainstream politicians as the servants of a remote, globalised elite. Another central theme that unites most of Europe’s anti-establishment parties with the Tea Party is resentment of immigration. When mainstream politicians say – correctly – that their ability to curb immigration is constrained by EU rules on free movement of people, they merely fuel populist rage at “out of touch” elites. Opinion polls in the richer countries of western Europe show an increasing voter concern about migration – legal and illegal – that is rich fodder for Europe’s Tea Party types. Anger about the economy and about immigration are fusing – and can then be easily directed at the EU itself, which has large powers in both areas. As one British official puts it: “Ukip’s dream is to get Europe, immigration and welfare into the same sentence.” Beyond particular issues, what Europe’s rebel parties really share with the Tea Party in America is a political style – a rhetoric that holds that the system is rotten, that society is heading for disaster and that therefore compromise is a betrayal. Even in the US – which has built up global confidence in the dollar over centuries – the Tea Party’s political machinations came close to causing a financial panic. For the EU, which is still struggling to rebuild confidence in the euro, the rise of a European Tea Party would risk disaster. http://www.ft.com/intl/cms/s/0/eb265a64-3a42-11e3-b234- 00144feab7de.html?ftcamp=crm/email/20131022/nbe/BrusselsBrief/product&siteeditio n=intl#axzz2iLpt3NRN

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Opinión LA CUARTA PÁGINA Dos imperios en apuros financieros El conflicto entre Felipe II y las Cortes en 1575 y las dificultades de Obama sobre el “techo de la deuda” en 2013 muestran similitudes sorprendentes. En ambos casos, la cuestión de fondo sólo quedó aplazada Carlos Álvarez Nogal / Christophe Chamley 21 OCT 2013 - 18:31 CET

EVA VÁZQUEZ En las últimas semanas el mundo ha estado pendiente del enfrentamiento entre el gobierno federal de los EEUU y su poder legislativo por el llamado "techo de deuda". El gobierno había alcanzado el límite de gasto que le permitía su presupuesto. No podía endeudarse más, salvo que lograse una autorización del Congreso. Muchas voces, dentro y fuera del país, han advertido de las enormes consecuencias que tendría la falta de un acuerdo entre ambos, no sólo para su economía, sino también para la del resto del mundo. Si la primera potencia del planeta dejase de pagar su deuda, se desencadenaría una espiral que probablemente paralizaría el crédito y el comercio internacional. En EEUU el "techo de deuda" no se puede aumentar sin que los legisladores y el gobierno federal se pongan de acuerdo. Sin embargo, desde 2010 los republicanos dominan la Cámara de Representantes, mientras que la presidencia la ocupa el demócrata Barack Obama, decidido a reformar el sistema de salud norteamericano (Affordable Care Act). Los republicanos se niegan a incrementar el "techo de deuda", si el presidente no renuncia a su propuesta. Una pugna muy similar a la que ocurrió hace casi cinco siglos en España, cuando Felipe II gobernaba un extenso imperio y ejercía una influencia internacional que también le exigía endeudarse. La Corona española conseguía crédito a corto plazo firmando anualmente contratos con los grandes banqueros alemanes y genoveses; y también a largo plazo, emitiendo títulos de deuda pública (juros). Mientras en los asientos, Felipe II abonaba intereses en torno al 12%, la mayoría de los juros rendían un 7%. Los niveles de inflación —la famosa revolución de los precios— se situaban entonces en torno al 1% anual. Estas cifras permiten entender por qué la mayor parte de la deuda del rey era doméstica. Un 9% del stock total de la deuda en 1575 estaba en juros. El nombre de este instrumento financiero significaba que el rey empeñaba su palabra en el pago de intereses, algo que

87 durante su reinado se cumplió escrupulosamente, contribuyendo a ampliar su demanda, incluso a nivel internacional. La Corona española fue la primera en el mundo en alcanzar, ya en el siglo XVI, niveles de deuda doméstica similares a los que presentan hoy en día muchas economías modernas (en torno al 60% de su PIB). La principal característica de la deuda pública castellana en el siglo XVI —como en la de Inglaterra del siglo XVIII— era su vinculación directa con los impuestos más estables (impuestos al consumo, monopolios y aduanas). El más destacado fue el equivalente a nuestro IVA actual (la alcabala), cuyo cobro y gestión estaba en manos de las ciudades. El mismo tesorero que cobraba el impuesto, pagaba los juros. Así se creó un vínculo entre quienes pagaban impuestos e invertían en deuda pública, algunos de los cuales eran los propios gobernantes de las ciudades y los primeros interesados en que todos los años se abonaran sus intereses. Muchas ciudades castellanas empezaron su decadencia a raíz de la suspensión de pagos La Corona logró en 1536 que las ciudades cobrasen la alcabala en su nombre, a cambio de entregarle a la Corona una cantidad fija todos los años (encabezamiento). Convertir en cupo el ingreso indirecto más importante del rey, en una economía en plena expansión, obviamente suponía limitar sus ingresos, pero tenía como ventaja que la ciudad se comprometía a pagar los intereses de la deuda, reforzando aún más la confianza de los inversores en los juros. La ventaja para las ciudades era obvia: se establecía una contribución fija y en dinero en un momento de expansión económica. La inflación supondría, a la larga, pagar menos impuestos. Las Cortes de Castilla fueron las encargadas de negociar con el rey la suma total de este cupo o encabezamiento, que básicamente permaneció invariable durante casi 40 años, salvo un pequeño incremento en 1562. En 1575 Felipe II alcanzó su "techo de deuda" y quedó imposibilitado para emitir más deuda pública. A diferencia de lo que ha ocurrido en EEUU esta semana, el rey y las Cortes no llegaron a un acuerdo. Adelantándose al problema, a principios de la década de 1570 Felipe II solicitó un aumento de impuestos. Las Cortes recibieron su solicitud con enorme frialdad y concentraron sus críticas en los banqueros del rey. Si la Corona tenía problemas financieros, la solución no era subir impuestos, sino actuar contra ellos. A finales de 1574, Felipe II tomó la iniciativa y multiplicó por tres el encabezamiento. Las ciudades se sintieron traicionadas y trataron de impedirlo, desentendiéndose de la recaudación del impuesto. ¡El rey no estaba de parte suya, sino de los banqueros extranjeros! Felipe II accedió entonces a sus demandas y el 1 de Septiembre de 1575 suspendió el pago de sus obligaciones en los contratos con sus principales financieros. Por supuesto, los juros no se vieron afectados. Aquel otoño, muchos pensaron que le habían ganado el pulso a la Corona, pero la realidad demostró ser muy diferente. Los banqueros del rey no eran más que intermediarios financieros. Captaban crédito en los mercados y en las ferias antes de prestárselo al monarca. A través de sus redes y correspondientes aceptaban depósitos (herencias, dotes, ahorros), o vendían letras de cambio entre los mercaderes, canalizando así dinero hacia la Corona. Cuando el rey dejó de pagarles, ellos tampoco lo hicieron a sus acreedores. Su dinero quedó atrapado. Por primera vez, las ferias de Medina del Campo, las más importantes del reino, dejaron de celebrarse. En 1576 quebraron los dos grandes bancos de Sevilla, la ciudad que monopolizaba el comercio con América. En Madrid y otras ciudades, muchos comerciantes fueron encarcelados por no pagar sus deudas. Otros se vieron enzarzados en costosos pleitos. Su ruina fue también la de las

88 ciudades donde residían y hacían negocios. El daño causado se extendió a otros mercados internacionales a través de Génova y Flandes, afectando incluso a la propia Roma. El acuerdo de la semana pasada apenas ha mitigado los temores de la economía mundial Paradójicamente, los únicos que no acabaron en la cárcel fueron los grandes banqueros del rey, a quienes Felipe II, poco después de publicar el decreto de suspensión, les concedió inmunidad ante cualquier tribunal de justicia, evitando así que les embargasen sus bienes. El rey no quería arruinarlos porque en breve los necesitaría de nuevo. En marzo de 1577 llegó a un acuerdo con ellos para abonarles todo lo que les debía, pero en lugar de firmarlo y restablecer los pagos, lo dejó aparcado. El rey siguió esperando. La situación no se desbloqueó hasta noviembre de 1577, cuando las principales ciudades de Castilla aceptaron el nuevo encabezamiento, logrando que el incremento de las alcabalas se multiplicase sólo por dos. El acuerdo permitió que Felipe II incrementase su "techo de deuda". Un acuerdo duradero porque logró 20 años adicionales para poder seguir emitiendo deuda a largo plazo. Nada más firmar el acuerdo con las ciudades, Felipe II lo hizo con sus banqueros: abolió el decreto de suspensión y les abonó sus deudas. Los ahorradores accedieron de nuevo a sus depósitos, el crédito volvió a fluir entre los mercaderes y las ferias de Medina del Campo se reabrieron en 1578. La vuelta a la normalidad no impidió que Castilla sufriera serias consecuencias por esta pugna entre los poderes ejecutivos y legislativos. Muchas ciudades comenzaron su decadencia, en la que arrastraron al resto de la economía castellana y, con el tiempo, a la propia Corona. La suspensión de pagos de Felipe II en 1575 no fue una quiebra, sólo formó parte de un plan para permitirle elevar su "techo de deuda". El rey no tenía problemas para pagar sus deudas, sino para seguir endeudándose. No podemos adivinar el futuro, pero analizar el pasado con rigor nos debería ayudar a no cometer los mismos errores. La semana pasada los EEUU consiguieron aplazar el problema una vez más después de varias semanas de incertidumbre, pero el enfrentamiento sigue sin resolverse, prolongando así los temores que tendría una falta de acuerdo sobre la economía mundial. Carlos Álvarez-Nogal Universidad Carlos III de Madrid Christophe Chamley Paris School of Economics and Boston University http://elpais.com/elpais/2013/10/21/opinion/1382373068_151671.html

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October 21, 2013 1:23 pm EBA sets standards for sizing up banks’ distressed loans By Sam Fleming in London European banking regulators have laid down tough standards for sizing up troubled loans on bank balance sheets as they pave the way for health checks on the region’s lenders. The European Banking Authority on Monday set forth standard definitions for non- performing loans and for loans subject to “forbearance”, which is when a struggling borrower is being given extra leeway by a bank. More ON THIS TOPIC// EBA seeks to reassure on bank risk models/ EBA pushes for banks to preserve capital/ Setback hits Europe’s structured loans market/ European banks face tougher scrutiny IN BANKS// SFO narrows Libor charges/ Ex-UBS banker faces US extradition/ Banker sues over being blamed for ‘Whale’/ Co-op hands the reins to bondholders It said the two definitions should help generate a more coherent picture of the health of banking sectors in different EU countries. Analysts said the standards could lead to higher figures for non-performing loans in some parts of Europe. The London-based EBA said it wanted the new standards to be used in the forthcoming asset quality review to be run by the European Central Bank – seen as a critical test of the strength of the region’s banking system. It said all asset reviews should be completed by October 2014. The Frankfurt-based ECB will on Wednesday announce details of how the euro area assessment is to be conducted. Previous EU stress tests were criticised for being excessively lenient and for giving national authorities too much discretion in setting standards for when loans have gone sour. The new standards are also meant to be used by non-euro countries in their own asset quality reviews. The Bank of England this month published a discussion paper on plans for asset quality reviews and bank stress tests in the UK. “More harmonised asset quality reviews, based on more comparable data, will help address uncertainties around EU banks’ asset quality in the current context and will support ongoing and future monitoring of levels and changes in asset quality,” the EBA said. Daniel Davies, an analyst at Exane BNP Paribas, said: “This will in time be the regulatory standard for assessing NPLs and it is quite tough. In our opinion these could deliver substantially higher NPLs in some parts of Europe. However in the shorter term they have left a lot of national discretion in terms of how they are applied in the forthcoming asset quality reviews.”

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Forbearance has been widely used by some lenders as a way of avoiding the recognition of losses, adding to the question marks that have persistently dogged the health of EU banks. More harmonised asset quality reviews . . . will help address uncertainties around EU banks’ asset quality

- European Banking Authority As things stand, standards for assessing when a loan has gone sour or is subject to forbearance vary widely across the region, making it difficult to make a solid comparison of the health of different countries’ banking sectors. The EBA’s draft standards said that loans should be considered non-performing when they are more than 90 days past due. Forborne loans could, depending on the detailed circumstances, be considered either performing or non-performing. James Chappell, a banks analyst at Berenberg Bank said: “It would be a positive if we have comparable measures of non-performing loans across Europe but the fact is that these definitions will still leave room for interpretation. They don’t remove the grey areas.” The definitions will apply to all loans and debt securities on bank balance sheets and some off-balance-sheet, but will exclude those held for trading. The EBA stressed that they were not meant to supersede existing accounting and regulatory definitions of soured loans. http://www.ft.com/intl/cms/s/0/19fab30a-3a2d-11e3-9243- 00144feab7de.html?ftcamp=crm/email/20131022/nbe/BrusselsBrief/product#axzz2iLpt 3NRN

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INTERNATIONAL INTERNATIONAL ACTUALITES La BCE va dévoiler les règles des nouveaux tests bancaires 21/10 | 12:49 Les règles uniques, nouveau pas vers l'union bancaireLes tests révèleront les faiblesses des banquesPas encore d'unanimité sur les solutions La Banque centrale européenne (BCE) dévoilera mercredi les critères sur la base desquels elle s'apprête à évaluer la santé des principales banques de la zone euro, un exercice crucial dans la reconquête de la confiance perdue après l'échec des tests de ces dernières années. L'opération est toutefois à double tranchant, car appliquer à ces tests des critères plus rigoureux qu'auparavant risque de mettre au jour des faiblesses coûteuses à compenser alors que la zone euro ne dispose toujours pas d'un mécanisme commun de recapitalisation des établissements les plus fragiles. Pourtant, tout le monde s'accorde à penser que la région ne connaîtra pas de reprise économique solide et durable tant que la confiance dans le système bancaire ne sera pas restaurée. "Les tests vont jouer un rôle crucial en montrant les faiblesses du système mais en même temps, il faut qu'ils préservent l'intégrité du système dans son ensemble", a dit Alberto Gallo, responsable de la recherche macroéconomique de Royal Bank of Scotland. "Si cela fonctionne bien, cela va vraiment changer la donne." La BCE doit reprendre dans un an aux autorités nationales la responsabilité de la supervision d'environ 130 banques dans le cadre de la première étape de l'union bancaire. Et c'est dans cette optique qu'elle se prépare à procéder à un "examen de la qualité des actifs" (asset quality review, AQR) de chacune des banques dont la valorisation excède 30 milliards d'euros ou 20% du produit intérieur brut (PIB) de leur pays, ainsi que celles qui auront reçu des aides publiques. Les deux séries de "tests de résistance" réalisées ces dernières années sont cependant loin d'avoir donné satisfaction. La première avait ainsi donné un feu vert aux banques irlandaises quelques mois seulement avant que celles-ci conduisent leur pays au bord du gouffre financier. Les nouveaux tests visent à vérifier si les banques sont assez fortes pour encaisser une crise grave le cas échéant ou si, au contraire, elles doivent lever de nouveaux capitaux pour renforcer leur bilan. Les tests pourraient être douloureux pour certains pays: le Fonds monétaire international (FMI) estime par exemple à 230 milliards d'euros les créances douteuses des banques italiennes et espagnoles pour les deux prochaines années.

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CRÉANCES DOUTEUSES ET "TOLÉRANCE" Prélude à l'annonce de la BCE mercredi, l'Autorité bancaire européenne (ABE) a publié lundi ses recommandations en matière d'évaluation des créances douteuses et de prise en compte de la "tolérance" (forbearance) des banques, c'est-à-dire de leur décision éventuelle d'autoriser un emprunteur à retarder un remboursement. Ces règles seront reprises par la BCE pour les examens à venir des 130 banques relevant de sa nouvelle responsabilité, dont font partie les grands noms du secteur comme BNP Paribas , Deutsche Bank ou UniCredit. Mais aussi par les 11 pays de l'Union extérieurs à la zone euro, qui devront réaliser leur propre AQR. L'examen de la BCE devrait se concentrer sur les catégories de prêts "à problème", comme ceux accordés aux secteurs du transport maritime, de l'immobilier commercial ou du marché immobilier dans certains pays. Les fonds propres des banques devraient être mesurés en fonction des nouvelles règles dites de "Bâle III", ce qui signifient qu'ils devront représenter au moins 7% des actifs pondérés des risques, un ratio auquel s'ajoutera une surcharge pour les établissements jugés d'importance systémique. Si cette phase de l'union bancaire semble désormais bien engagée, la suivante reste à préciser. Car malgré des mois de débat, les ministres des Finances de l'Union ne sont toujours pas parvenus à un accord sur le financement du sauvetage éventuel d'une banque en difficulté. Or, de nombreuses banques risquent d'être incapables de lever seules les capitaux nécessaires pour se conformer aux règles édictées par la BCE et l'ABE. Et la crise des dernières années a montré - dans le cas de l'Irlande et celui de l'Espagne, par exemple - que les Etats nationaux n'étaient souvent guère plus capables de se substituer à elles. La France, avec l'Espagne et l'Italie, fait partie des Etats qui plaident pour un engagement sans ambiguïté à soutenir les banques en difficulté. Mais l'Allemagne freine des quatre fers de peur d'être contrainte à financer la recapitalisation d'un établissement non-allemand. http://www.lesechos.fr/economie-politique/monde/actu/reuters-00558121-la-bce-va- devoiler-les-regles-des-nouveaux-tests-bancaires-620399.php

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ft.com GlobalEconomy EU Economy Last updated: October 21, 2013 7:05 pm German city apartments overvalued, warns Bundesbank By Michael Steen in Frankfurt and Alice Ross in Baden-Baden

©Bloomberg The Bundesbank has warned that apartment prices in Germany’s biggest cities could be overvalued by as much as 20 per cent, stepping up its concern about a real estate boom in the powerhouse of the European economy. The warning will feed into German concern that the European Central Bank’s monetary policy is far too loose for the country. The bank’s main refinancing rate is 0.5 per cent, a record low. It also adds to signs that international investors are fuelling rising property prices around the world. The trend reflects the lack of opportunities investors regard as a safe haven and low returns for traditional asset classes such as bonds and stocks. More ON THIS STORY// Irish property boom back with €12m home/ New BoE deputy rejects home bubble fears/ beyondbrics Asia’s housing bubbles put UK in shade/ Boost for European commercial property ON THIS TOPIC// Bundesbank doubles risk provisions/ Bundesbank weighs bullion against public pressure/ Germany creates pile of golden opportunities/ Bundesbank put on spot over gold stocks IN EU ECONOMY// EU and Canada agree trade pact/ US senators say questions remain on Irish tax/ Italy unions threaten to strike over budget/ Draghi faces eurozone inflation dilemma Rapid price rises have particularly affected the seven largest cities in Germany, the central bank said on Monday, although the value of houses had risen at a more moderate pace. Flats in Berlin, Munich, Hamburg, Cologne, Frankfurt, Stuttgart and Düsseldorf had, on average, seen prices rise more than 25 per cent since 2010. “After the real estate bubbles in the US and several European house markets burst, the German property market, which had been quiet for many years, became more attractive to international investors,” the Bundesbank said in its monthly report for October. Low interest rates – imposed as a result of the eurozone’s economic slump – were making mortgages more affordable and prompting savers to seek alternatives to putting their money in banks, the central bank noted. A slowdown in construction during the crisis has also limited supply. Asian cities such as Hong Kong and Singapore have imposed new taxes on foreign buyers in an attempt to limit the effect on their housing markets. Prices of the most expensive homes are now above their pre-crash highs in Hong Kong, according to data from estate agent Knight Frank. 94

The other place where prices of high-end properties have risen above their pre-2008 peak is London. Nearly three-quarters of all newly built homes in central London are being bought by foreign buyers, it was revealed this summer. In the US, industry watchers are concerned about accelerating prices in New York, Washington, Los Angeles and other big US cities that have seen growing demand for high-end residential properties from deep-pocketed Americans and foreign investors seeking stable investments. The property market trend is unusual in Germany, a nation of home renters with historically slumbering property markets, and is in sharp contrast to the rest of the eurozone, where house prices are near seven-year lows following property slumps in Spain, Ireland and the Netherlands. If the Bundesbank wanted to cool the market it would either have to persuade the ECB to raise interest rates or introduce so-called macroprudential measures in Germany, such as making banks set aside more capital for mortgage lending. “In the short term, the [upward] price pressure will not ease,” the Bundesbank said. But it was “not very likely that the price structure on real estate markets currently represents a serious macroeconomic risk. The observed price movements are an expression of delayed increases in supply.” However, “the empirical evidence shows there is no substantial overvaluation of the German residential property market as a whole”, the central bank said. The Bundesbank has repeatedly expressed concern about the housing market after a boom started in Berlin, Frankfurt and Munich around 2010. This has spread to smaller cities as higher prices in larger conurbations have driven property investors in both residential and commercial real estate to seek opportunities in so-called “B” towns such as Dortmund or Hannover, where prices are lower but liquidity risks are higher. The big 10 cities remain in the focus but the desire of investors to achieve higher returns will flood the secondary cities with capital - Philipp Ellebracht, Schroders Deutsche Pfandbriefbank, the government-owned real estate specialist, is among the lenders that say they have seen increased demand for financing in Germany’s smaller cities. “We expect such exposure to account for a growing proportion of our business,” said board member Bernhard Scholz. “The big 10 cities remain in the focus but the desire of investors to achieve higher returns will flood the secondary cities with capital,” says Philipp Ellebracht, a property specialist at Schroders in Frankfurt. Rises in residential property prices have also concerned German politicians, who have sought to cap rent rises in larger cities, a measure the Bundesbank opposes. Yet despite fears of overheating, international investors are unlikely to be deterred. Matthias Danne, head of German real estate investor Deka Immobilien, said: “The German market is saturated, yes, but saturated also means stable.”// With additional reporting by Kate Allen in London and Anjli Raval in New York // http://www.ft.com/intl/cms/s/0/e5cb6ab6-3a54-11e3-9243- 00144feab7de.html?ftcamp=crm/email/20131021/nbe/InTodaysFT/product#axzz2iLpt3NRN

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Daily Morning Newsbriefing October 22, 2013 Italy gives incentives to banks to hold BTP derivatives We have been on the watch-out for stories that government and central banks encourage banks to continue to act as buyers of last resort of government debt. Here is one from Reuters, according to which Italy is planning to circumvent the Basel III requirement that banks must hold more capital against derivative contracts through which they hedge their exposures on government bonds. The plan comes at a time when Italian banks were due to slow down their purchases of domestic bonds. The government has now published a draft decree in the 2014 budget law according to which the Treasury and the banks can exchange cash sums on a short-term basis to guarantee their respective derivatives positions, based on their mark-to-market value. Reuters cites from the draft document that the measure was necessary due to "new financial regulations, (in order) to favour easier and cheaper sales of government bonds, through the reduction of the credit exposure of bank counterparties." It said that as a two-way system it will also protect the Italian state from counterparty risks. Reuters quotes a treasury official as saying that the new system would help Italy issue debt denominated in currencies other than euros. Currently the proportion of non-euro denominated Italian bonds is negligible. The draft said the new system was in accordance with IMF recommendations, and it had recently also been introduced in the UK. It also quotes an analysis from Prometeia, which forecasts an increase in the Italian sovereign debt- to-GDP to 134% next year. The think-tank says banks had absorbed €100bn of Italian debt in 2013, and may lower their stocks from 2014 onwards. In further bank-related news: In an interview with El País, Eurogroup chairman Jeroen Dijsselbloem made a number of interesting statements, such as "we don't know the state of European banks". He refused to "speculate on the state of the banks" but he added "there are suspicions of hidden nonperforming loans of capitalization issues all over Europe: it's time to deal with that". He did say that Spanish banks are in a better shape than in other countries because of the clean-up already carried out. Reuters is quoting Klaas Knot that a narrowing of ECB’s interest rate corridor would hurt the inter-banking market. He said he does not want to jeopardise the recovery by allowing renewed liquidity tensions, and with the revival of the interbanking-market, there would be no need for another LTRO. He said it was not on the table. On an aside, we noted Karl Whelan’s a hilarious comment about Mario Draghi’s letter to Joaquin Almunia (see the briefing yesterday), in which Draghi cautions against investor bail-ins in certain situation on the grounds that this would damage the market for subordinated debt: “Draghi reveals his inner Trichet.” There is nothing technically or legally appalling about the two-way guarantee of derivative positions, but it nevertheless cements, and is thus designed, the absurd inter- dependence of the Italian state and the Italian banking system. The eurozone crisis

96 resolution policies critically depend on banks behaving as national players. Everything we see is geared towards the maintenance of this extremely unhealthy situation – the derivatives guarantees, and Draghi’s letter to Almunia. Policymakers realise that in the short run they have less to lose to maintain the status-quo than to fix the problems. This is why we are not holding our breath over banking union. In a properly functioning banking union, there should be no reason why Italian banks would want to hold Italian sovereign bonds, or that we should expect them to. Eurostat shifts parts of 2013 Spanish deficit back to 2012 In a column in El País, economist Juan Laborda writes that Eurostat has forced a revision of Spain's deficit figures for the last year and this, regarding the timing of the recognition of overpaid tax reimbursements. Because the Spanish government's practice was to recognize these payments when the tax authorities decided the taxpayer was entitled to reimbursement, there was some discretion to move the outlays around, in particular to delay them until the beginning of the next calendar year. This leeway was used by the Spanish government to lower the 2012 deficit by shifting some reimbursements to 2013. The new Eurostat rule is that reimbursements must be recognised when the taxpayers file their reimbursement claims. The result of applying the new rule to last year's tax reimbursements has been to lower the year-to-date deficit estimate for 2013, which makes it more likely that the 6.5% deficit target for thie year will be met. The 2012 deficit estimate, writes Europa Press, is 10.6% incuding the banking rescue, by far the largest deficit in the EU for that year. For the purposes of the excessive deficit procedure the deficit was 6.9% in 2012, as the European Commission does not count the banking rescue. In a separate story, El País writes that the finance ministry expects local authorities to run a budget surplus this year. Already in 2012 they ran a small aggregate surplus of 0.22% of GDP, compared with an authorised deficit of 0.3%, but this year the finance ministry hopes that the local authorities may run a surplus of at least 0.6%. The Spanish government intends to pass a reform of the local administration in the last months of the years which they hope will contribute to this goal. The majority of the Spanish government deficit corresponds to the central government, whose deficit for the first half of 2013 is already 4.6% of estimated GDP. Spanish households increase wealth and paying down long-term debt Bank of Spain data show Spanish households have increased their net wealth to pre- crisis levels of €900bn, reports Expansión. In the second quarter of the year, total household debt dropped over 3% to under €880bn. Financial assets are up 21% year-on- year to €555bn. Spanish households are also paying down long-term debt and taking on short-term loans. From a year earlier, outstanding long-term loans are down nearly €42bn to €780bn, and short-term consumer loans are up slightly, to under €37bn. Portugal to seek precautionary credit line in early 2014 Portugal is seeking to negotiate a precautionary credit line from its international lenders early next year, according to it’s economy minister. "We still have some work to be done, some progress to be achieved. But our aim is to start negotiating a precautionary programme in the first months of 2014," Antonio Pires de Lima said in an interview with Reuters after hosting a breakfast roundtable with journalists. Pires de Lima admitted Portugal has an "issue with perception" by the international community, but dismissed that pessimism as unjustified. He also dismissed speculation that Portugal could instead consider a debt exchange later this year in order to capitalise on improved

97 investor demand for its bonds and start tackling its €8.2bn of financing needs for 2014. He was in London on the first stop of a European roadshow to drum up investment in Portugal. Dijsselbloem says Slovenia should avoid financial aid When asked which type of aid programme would be best for Slovenia, Jeroen Dijsselbloem answered "None", Reuters reports. Slovenia should try to avoid any kind of international financial aid programme for its ailing banks, he said on Monday. Burdened by some €7.9bn of bad loans in its mostly state-owned banking sector, Slovenia is struggling to avoid becoming the currency bloc's sixth member to seek a bailout. Slovenia plans to recapitalise its banks later this year or in early 2014 after it gets results of the stress tests, which are expected by the end of the year. There are delays to an ongoing stress test, but Dijsselbloem says there were no indication of the final result. Greece prepares ‘red lines’ for tough negotiations with troika New Democracy and PASOK worked over the last two weeks on their common policy outline and defined a set of Greece’s “red lines” ahead of what are expected to be very tough talks with troika officials, Kathimerini reports. According to sources, the blueprint stresses that further “horizontal” cuts to salaries and pensions cannot be imposed. The government is also expected to insist that the creditors offer debt relief, in accordance with a Eurogroup agreement. More details are expected after the two party leaders meet on Wednesday. Meanwhile troika sources told Kathimerini that creditors were not pushing for “additional horizontal interventions” and only wanted Greece to honour “targets that have been already agreed.” Greece’s forecast for a €2.8bn primary surplus next year are questionable, the source said, as the 2014 growth forecast was not adequate to sustain the projected increase in revenues, and called for a revision of the draft budget. Three parties are starting coalition talks without Juncker In Luxembourg, Liberals, Socialists and Greens are exploring a common coalition that could bring an end Jean Claude Juncker’s era of 19 years as prime minister. The three party leaders got the mandate to start coalition negotiations today, according to France 24. Juncker still reclaims the right to form a government, as his CSV party still came out strongest with 33.7% of the votes, but with its 23 out of 60 seats in parliament they would need a coalition partner. The Socialists (20%) are unlikely, as they left the governing coalition with Juncker and caused the early elections, while the sharply improved Liberals (18.2%) are ambitious to leave their mark and change politics. The Grand Duke Henri is to award the first-crack mandate on Wednesday, following a Tuesday round of talks between Henri and all the main party leaders. Chinese companies issue debt in Euros Les Echos reports that two Chinese oil companies, CNOOC and Sinopec, issued parts of their debt in Euros, €500m and €550m, and that this phenomenon is part of a larger observable trend. Chinese companies already operate in dollars. At the end of 2013, Chinese companies issued about $100bn in dollar obligations abroad over a period of 12 months. Although it is difficult to evaluate where this trend will lead to, diversification is now part of the companies’ strategy, especially as some find it difficult to raise the funds on the national market. Experts estimate that worldwide there are assets worth $20000bn in dollar under management, and €14000bn in euros. Europe with its large

98 savings is thus already target for raising money, a trend which might have been even more pronounced if it were not the Eurozone crisis. Crisis-Yet-to-Come Watch: Bundesbank edition The Bundesbank expressed concerned about a property bubble in Germany, as prices reached levels that are not justified given the country’s long-term demographic trends, and its economic development. In the last three years alone, prices for houses and apartments had risen by 8.25%. The situation was particularly severe in large cities, such as Munich, Hamburg and Frankfurt, where prices were overvalued by about 20%, while there was no overvaluation for family homes in the suburbs, while the bubble is spreading slowly from the cities to the suburbs and rural areas. The Bundesbank sees the causes in this development in ultra-low interest rates, cyclical developments, and the safe-haven status of German property. The bubble does not bring risks for overall financial stability, though the Bundesbank warns of severe potential losses for individual investors. The risks for the banking system is low, given that the banks have increased the standards for credits. The trend towards higher prices, however, is likely to continue. In its report, Frankfurter Allgemeine cites the German real estate brokers association that the price bubble mainly concerns the centres large cities, where only one twentieth of the population lives. Relative to 1993, the cost of rents, after inflation, has declined by 23%. The report also mentions a property price index, calculated by Bulwien Gesa, according to which the index has remained unchanged during the third quarter. But is this not what adjustment means? That German wages or asset prices rise a little faster than those of other eurozone countries? And how does the Bundesbank know what price level is the correct one – given the demographic and economic developments? It is also very important to look at the development over the last 20 years. German property have declined in real terms, and what we are seeing now is simply a correction – or rather the beginning of a correction. This is not a bubble by any stretch of the imagination. In particular, it is not driven by credit. Since the bubble is mainly an inner-city phenomenon, mostly the result of some safe-haven foreign investment inflows, it is almost irrelevant. There is an increase in rental costs for new property contracts, and a shortage of affordable accommodation for students, for example. And yes, this is a problem. But the cause of this problem is not a property bubble, but rent controls that protect existing tenants at the expense of new tenants. Crisis-Over Watch: Die Welt edition Die Welt has an article cobbles together a number of opinions to support that thesis that the eurozone crisis will be over in 2014 and that both Germany and the eurozone will experience much better economic growth rates than previously expected - with one private-sector forecaster predicting a eurozone-wide 1.5% growth rate for 2014, driven by a strong economic performance by Germany. CDU/CSU postpones debt repayment An unsuspected outbreak of economic sanity has come over Germany – at least according to this report in Frankfurter Allgemeine – according to which the CDU is not prioritising debt repayment right now. Angela Merkel’s party will not insist on debt repayment in the coalition talks, starting tomorrow. But the party will insist that there shall be no more deficits from 2015 onwards. The party said that it remained committed

99 to debt repayment, but realises that this will be impossible given the SPD’s long list of spending demands. The article also notes that the finance ministry had changed its previous position that it would use windfall tax receipts to reduce the overall levels of debt. That, too, seems no longer to be the policy. German polls see CDU surging further, SPD stable The latest German opinion polls suggest a broadly stable situation, with the CDU registering small gains, the FDP registering further losses. The polls are important in one respect: it gives none of the coalition negotiators an incentive to let the negotiations collapse, hoping this would trigger new elections. This is according to Bild/INSA: CDU/CSU: 43; SPD: 26; Greens: 10; Left Party: 8.5; AfD: 4; FDP: 3.5. It is perhaps surprising that the AfD, the anti-euro party, has lost a little, but beware, the polling error margins are bigger than the reported movements. The real threat of extremist parties Gideon Rachman makes an important point in his latest column on the influence of extremist political parties in Europe. The danger is not that they come to power, but that they influence governments whilst in opposition, just as the Tea Party does in the US> “As the Tea Party has demonstrated in the US, anti-establishment radicals do not need to capture the position of president or prime minister to gum up the system. Even if traditional pro-EU centrists continue to lead most national governments in Europe, their room for manoeuvre at EU summits is greatly reduced if populist parties are making big gains back home. A Dutch prime minister who fears the anti-EU Freedom party – which is topping the opinion polls at present in the Netherlands – will find it much harder to agree to a new bailout for southern Europe. Similarly, a British leader who is losing ground to the UK Independence party will be driven to take more extreme positions in EU negotiations.” Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.516 0.510 0.511 Italy 2.344 2.339 2.339 Spain 2.435 2.433 2.423 Portugal 4.487 4.388 4.398 Greece 6.560 6.570 6.52 Ireland 1.780 1.756 1.759 Belgium 0.764 0.772 0.773 Bund Yield 1.832 1.848 1.848

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.367 1.3674

Yen 134.100 134.38

Pound 0.845 0.8476

Swiss Franc 1.235 1.2346

100

ZC Inflation Swaps

previous last close

1 yr 1.17 1.16

2 yr 1.3 1.17

5 yr 1.53 1.38

10 yr 1.93 1.78

Euribor-OIS Spread

previous last close

1 Week -4.086 -4.486

1 Month -3.000 -3.4

3 Months 5.443 4.743

1 Year 29.243 30.043

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-10- 22.html?cHash=e9e1472f76eec33200c04b2739c22446

Expansión.com: Portada » Economía y Política

Se ahorra más y se piden menos créditos La riqueza de los hogares crece un 19% y vuelve a niveles previos a la crisis Datos macroeconómicos, economía y política - Expansión.com 21.10.2013 Expansión.com / Efe 10 La riqueza financiera neta de las familias españolas -diferencia entre los ahorros y los préstamos que tienen concedidos- alcanzó en el segundo trimestre del año 922.640 millones de euros, el 19,1% más que hace un año y su nivel más alto desde 2007, en el inicio de la crisis. Según los datos publicados hoy por el Banco de España, el aumento ha sido de apenas un 1,2% entre el primer y el segundo trimestre, pero los 10.979 millones de euros sitúan el ahorro familiar de nuevo por encima de los 900.000 millones de euros, lo que no ocurría desde hace seis años. Los activos financieros de los hogares españoles -dinero en efectivo, acciones, depósitos y valores en renta- alcanzaron en junio 1,802 billones de euros, el 5,7% más que los 1,704 billones del segundo trimestre de 2012 y también su tasa más alta desde 2007. El ahorro familiar suma así ya cuatro trimestres consecutivos al alza, tras romper la racha negativa que había seguido durante los dos primeros trimestres de 2012. En depósitos y efectivo, los hogares españoles tenían en marzo 877.952 millones de euros, 27.933 millones de euros más que en junio de 2012 -el 3,2% más- y 13.897 millones más que en marzo de este año. En cuanto a la inversión en acciones y otras participaciones, se incrementó un 21% en tasa interanual hasta 555.111 millones de euros, pero permaneció sin apenas cambios respecto al primer trimestre, cuando alcanzó 551.010 millones. Por

101 lo que respecta a los pasivos financieros de las familias -los préstamos a corto y a largo plazo y otras cuentas pendientes de pago, como créditos comerciales y anticipos- se redujeron ligeramente a 879.803 millones entre marzo y junio frente a los 911.661 millones que había en marzo. Lo más llamativo de la partida de los pasivos es el aumento de los préstamos a corto plazo, que han crecido un 1,38% en tasa interanual y un 18,4% desde el primer trimestre, hasta 36.531 millones de euros, lo que refleja un mayor consumo con pago aplazado, ya que estos créditos se suelen emplear para adquirir bienes como televisiones o automóviles. Los créditos a largo plazo, por el contrario, han caído, aunque en este caso acumulan ya varios trimestres de caídas, ya que la crisis económica se traduce en un retraimiento de la clientela a la hora de pedir financiación y hace que las entidades financieras endurezcan sus condiciones. En concreto, al finalizar el mes de junio las familias residentes en España acumulaban 780.563 millones en préstamos a largo plazo, casi 10.991 menos que en el trimestre anterior y 41.705 millones menos que un año antes.

La riqueza de los hogares crece un 19% y vuelve a niveles previos a la crisis,Datos macroeconómicos, economía y política - Expansión.com http://www.expansion.com/2013/10/21/economia/1382345219.html

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10/21/2013 04:29 PM Angela's Agenda A Grand, Controversial Plan for Europe By SPIEGEL Staff Angela Merkel's domestic policy in her third term will likely be confined to higher spending. But she has grand plans for Europe. SPIEGEL has learned she wants Brussels to have far more power over national budgets. It's a risky move that EU partners and the Social Democrats are likely to oppose.

In the end, the atmosphere became downright festive in the Berlin Hall of the Parliamentary Society, a building next to the Reichstag. Chancellor Angela Merkel's conservatives and the center-left Social Democratic Party (SPD) had met there three times in the last three weeks to sound out whether they could form a coalition government. The decision was still up in the air. Merkel gave SDP Chairman Sigmar Gabriel a questioning look, and said: "Would you like to say something?" But Gabriel beckoned to her to speak. "I have my delegation's support for what we discussed," she said. "So do I," Gabriel replied. The grand coalition took shape shortly before 3 p.m. last Thursday. For the third time in postwar German history, Merkel's Christian Democratic Union, together with its Bavarian sister party, the Christian Social Union (CSU), and the SPD are preparing to form a coalition government. The talks are expected to begin this Wednesday. The chancellor is in a hurry because she wants to have a new government by Christmas at the latest. "Christmas will be here sooner than you think," she told fellow members of the CDU executive board on Friday afternoon. At the beginning of her third term, Merkel has more power in Germany and Europe than any chancellor before her. There hasn't been such a strong majority behind a government in Germany's parliament, the Bundestag, since the first grand coalition half a century ago. In the midst of the European crisis, Germany has become the undisputed dominant power in Europe. The grand coalition will hand Merkel a majority she could use to shape Germany and Europe and address major issues, including constitutional reforms in Germany and the reform of European Union institutions. Merkel, unlike SPD Chairman Gabriel, has been unchallenged in her own party since her election victory. Little is left of the accusations that critics had leveled at Merkel,

103 except one: That she is a chancellor without an agenda, plan or vision; that her style of government is reactive rather than proactive; and that she doesn't know where she wants to take her government and Germany. Big Plans for Europe In the past, Merkel has treated governing primarily as repair work. The major issues of her first two terms in office, the financial crisis and the fight to save the euro, were suitable for that approach. Will that change, now that she has the necessary power and means? Hardly at all, when it comes to Germany. There are no major reforms in the works at government ministries, and the grand coalition will focus on increasing spending to fulfil some of the parties' campaign promises. In contrast, officials at the Chancellery are forging plans for Europe that are practically visionary for someone like Merkel. If she prevails, they will fundamentally change the European Union. The goal is to achieve extensive, communal control of national budgets, of public borrowing in the 28 EU capitals and of national plans to boost competitiveness and implement social reforms. The hope is that these measures will ensure the long-term stability of the euro and steer member states onto a common economic and fiscal path. This would be the oft-invoked and ambitious political completion of Europe's monetary union -- a huge achievement. It isn't a new goal, but what is new is the thumbscrews Brussels will be allowed to apply if Merkel has her way, including sooner and sharper controls and veto rights, as well as contractually binding agreements and requirements. In short, this would amount to a true reconstruction of the euro zone and a major step in the direction of an "economic government" of the sort the SPD too would like to see put in place. Germany's current economic strength helps to explain these visions for Europe, since stricter budget controls wouldn't pose a threat to Berlin at the moment. Jobless levels are so low that the country has almost reached full employment, and the budget is in good shape, at least at the national government level. In fact, public coffers are so full that the government can afford to boost domestic spending. More Money to Spend And that's precisely what the members of that coalition intend to do. The first item on their agenda is to hand out benefits and spend money. Thanks to the strong economy, this won't even require raising taxes. In his financial planning for the medium term, Finance Minister Wolfgang Schäuble anticipates growing national budget surpluses from the year after next: €200 million ($274 million) in 2015, €5.2 billion in 2016 and €9.6 billion in 2017. In other words, the government will have an additional €15 billion at its disposal in the coming years. This gives Merkel and Schäuble the necessary leeway to fulfill the desires of the CDU/CSU and the SPD for more investment in infrastructure and education without having to raise taxes. There is talk of an €11 billion fund for infrastructure alone. Prior to the election, Merkel and Schäuble had announced their intention to use the surpluses to pay off old debts. That won't happen now, and yet the conservatives are not plagued by a guilty conscience, noting that despite the additional spending plans, the country will still remain within its debt limit requirements. The reorganization of the financial relationships between the national and regional state governments, which is on the agenda in this term, will likely be costly for the national

104 government. Many states would have to cut billions from their budgets so that they can make do without new borrowing starting in 2020. Many state governors complain that it's a burden their states can't handle without national government assistance. They are hell-bent on demanding financial support from Berlin in return for agreeing to a reform of the system of transfer payments from richer to poorer German states. The states' ability to block legislation in the Bundesrat, the legislative body that represents the states, will likely become costly for the new administration long before that. Merkel is worried at the way in which preliminary coaltion talks in recent weeks turned into haggling over money between the national and state governments. "We just had a national parliamentary election, not 16 state parliamentary elections," an irritated Merkel recently told the CDU/CSU parliamentary group. There may also be a major restructuring in the way transport projects are funded, due to the states' lack of money. The CSU's pet project, the automobile toll, stands a good chance of being approved, since it would generate new revenues. More Powers For European Commission During the negotiations, CSU Chairman Horst Seehofer presented a plan for how the toll could become a reality. It calls for drivers to pay an "infrastructure fee" in the future. Germans would be able claim the fee as a credit against the motor vehicle tax, so that the cost could ultimately be imposed on foreign drivers. According to the document, prepared by Transportation Minister Peter Ramsauer, this would be possible under European law. The new coalition won't face serious resistance to its spending policies, not even from the opposition. With the elimination of the pro-business Free Democratic Party (FDP) from the Bundestag, the voice of moderation in budget policy has disappeared. Only the economic wing of the CDU/CSU is likely to put up weak resistance. So Seehofer will get his toll, the states will be kept happy with financial gifts and the social security offices will hand out benefits. This doesn't exactly sound like an ambitious program for Merkel's second coalition government with the Social Democrats. Instead, it feels like more of the same, or a program of minor improvements, at least on the home front. But regarding Europe, Merkel is heading for strategic decisions -- and is likely to show more courage to take political risks than usual. Schäuble, the last dyed-in-the-wool European among Germany's top policymakers, can be pleased. Merkel wants tangible amendments to the European Union treaties: more power for Brussels, and even more power for the much-criticized European Commission. "Unfortunately, there is no other option," say government officials. Carrot-And-Stick Approach Last Thursday, after the final round of exploratory talks with the SPD, Merkel brought European Council President Herman Van Rompuy into the loop in a private conversation at the Chancellery. It was a back-door initiative of the kind so typical in EU policymaking. Documents are already being put together at the German Finance Ministry over how "Protocol 14" of the EU Treaty could be beefed up. It currently contains a few general statements on cooperation in and control of the euro zone. But now, if Berlin is able to implement its carrot-and-stick approach, tangible powers for the European Commission will be added to the protocol.

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For instance, the Commission could be given the right to conclude, with each euro country, an agreement of sorts to improve competitiveness, investments and budgetary discipline. Such "contractual arrangements" would be riddled with figures and deadlines, so that they could be monitored and possibly even contested at any time. In return, a new, long-discussed Brussels budget will become available to individual countries, an additional euro-zone budget with sums in the double-digit billions for obedient member states. Protocol 14 could also be used to install the full-time head of the Euro Group. The influential job is now held by one the member states' finance ministers, currently Dutch Finance Minister Jeroen Dijsselbloem. Devoted Europeans like Schäuble have long dreamed of installing a "euro finance minister." Resistance Against Merkel's European Plans If Chancellor Merkel is focusing on an amendment of this central part of the EU treaties, it is a remarkable about-face. Still, the new course is risky, and it has many detractors and an uncertain outcome. None of this is to the chancellor's taste, at least not the chancellor we know. But Merkel has already deployed her key European strategist. The relevant department head in the Chancellery, Nikolaus Meyer-Landrut, outlined the German plan at a Brussels meeting in early October. It didn't go down very well. Opponents of the common currency are rapidly gaining popularity in almost all euro countries. Every change in the balance of power in Europe and every upgrading of the European Commission make governments more vulnerable to domestic political attacks. More power for "Brussels?" No way. There are even growing doubts in the European Parliament, albeit for completely different reasons. Both leftists and conservatives fear that anyone who opens the door to amending the treaties "won't be able to close it again that quickly," says a top Christian Democrat. Especially the British government, driven by the radical, anti-European UK Independence Party (UKIP), could use the opportunity to retrieve powers from Brussels, essentially renationalizing the European Union. The SPD could raise objections. "The SPD won't support any arrangements if Merkel conducts parallel negotiations with Britain's David Cameron to transfer EU powers back to member states," Axel Schäfer, deputy leader of the SPD's parliamentary group, told SPIEGEL ONLINE. He added that the SPD won't accept any treaty changes that relate to referendums in individual EU states. The president of the European Parliament, German Social Democrat Martin Schulz, has already warned Merkel privately that he won't back any change in EU treaties. He wants national governments to make the euro zone resilient to future crises by using the instruments created step-by-step over the last three years -- without treaty changes. Schulz fears that a treaty change would take too long and that referendums necessary in some countries couldn't be won given current poor public sentiment regarding the EU. "We will check all the chancellor's proposals to see whether they can be implemented in all EU states," says Schulz, who will be part of the SPD's negotiating team in the coalition talks, responsible for all issues pertaining to Europe. But Merkel seems undaunted by these obstacles. And she already has a timetable. First she wants to wait and see what happens in the May 2014 European parliamentary election. Then the new president of the European Commission will have to be chosen once the second term of the current incumbent, José Manuel Barroso, ends in 2014.

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Merkel got him the job and ensured he got a second term. But these days, she doesn't even bother disguising her contempt for Barroso. Once the new European Commission is in office, the political window for Merkel's European vision is expected to open. It doesn't seem to bother her that she will be in a clear minority when she embarks on her reform plans. She is familiar with this position from the first days of the euro debt crisis, when she wanted to include the International Monetary Fund as a key authority in distributing aid packages, and almost all other euro countries were against the idea. At the time, she said privately: "I'm pretty much alone here. But I don't care. I'm right." NIKOLAUS BLOME, CHRSTIANE HOFFMANN, PETER MÜLLER, CHRISTIAN REIERMANN, GORDON REPINSKI, CHRISTOPH SCHULT Translated from the German by Christopher Sultan URL: • http://www.spiegel.de/international/germany/merkel-wants-to-reform-eu-with-more- powers-for-brussels-a-928988.html Related SPIEGEL ONLINE links: • 'Non-Negotiable' Demands Social Democrats OK Coalition Talks (10/21/2013) http://www.spiegel.de/international/germany/0,1518,928992,00.html • Vying for Top EU Jobs Bidding Begins for European Commission (10/09/2013) http://www.spiegel.de/international/europe/0,1518,926770,00.html • Auf Wiedersehen Austerity? Europe Hopes for Gentler Merkel (09/25/2013) http://www.spiegel.de/international/europe/0,1518,924176,00.html • 'Merkel Must Take Action' SPD Demands a New Europe Approach (09/24/2013) http://www.spiegel.de/international/europe/0,1518,924213,00.html

10/21/2013 12:43 PM 'Non-Negotiable' Demands Social Democrats OK Coalition Talks Formal talks on a grand coalition between Merkel's conservatives and the Social Democratic Party are due to start Wednesday after an SPD conference on Sunday gave its blessing. But the talks could prove difficult, and the outcome will be put to an SPD membership ballot. A party congress of the center-left Social Democratic Party on Sunday gave the go- ahead for coalition talks with Chancellor Angela Merkel's conservatives, allowing negotiations to start Wednesday. But the SPD listed 10 points it called "non-negotiable," including a minimum wage of €8.50 ($11.60) per hour, equal pay for men and women, greater investment in infrastructure and education, and a common strategy to boost growth in the euro zone. Of the 229 SPD members who voted on Sunday, 196 backed the talks, 31 voted "no" and 2 abstained -- surprisingly strong support given how reluctant many in the party had sounded in the days following the Sept. 22 election about the prospect of another right- left grand coalition between the two main parties.

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The last such alliance, during Merkel's first term between 2005 and 2009, ended badly for the SPD, which plunged to its worst national election result since World War II in 2009 because Merkel got all the credit for the work of that government. "We aim to form a government by Christmas. That should be enough time," SPD Chairman Sigmar Gabriel told reporters. He said there would be disagreements but implied that they were likely to produce a deal. "If you start negotiations, you do so with the aim of bringing them to a successful conclusion," he added. Finance Ministry Post in Question In addition to government policy, the parties need to thrash out the allocation of cabinet posts. Media reports said the SPD wants the finance ministry, currently occupied by Wolfgang Schäuble of Merkel's conservative Christian Democratic Union (CDU). It would be a major prize that would give the SPD a de facto veto over Merkel in key areas including Europe. The SPD appears to have dropped its demand for a tax increase for the rich, though. A grand coalition would enjoy an overwhelming majority in the Bundestag, the lower house of parliament, and find it easier to push legislation through the Bundesrat, the upper house where the governments of Germany's 16 federal states are represented. The new government is unlikely to take any steps to boost the rights of gay couples. In preliminary talks last week, Merkel and her Bavarian ally Horst Seehofer, leader of the Christian Social Union (CSU) party, ruled out measures such as introducing adoption rights for same-sex couples, and Gabriel accepted that demand. But supporters of gay adoption expect the Federal Constitutional Court to make a ruling in their favor at some point, anyhow. The court has already recently forced Merkel's government to back down in its opposition to equal tax treatment for same-sex partnerships. Even when a coalition agreement has been finalized -- which some say could take until December -- grassroots members of the SPD will have a final say on it. The SPD will seek approval of the pact in a ballot of its 472,000 members. cro -- with wire reports URL: • http://www.spiegel.de/international/germany/spd-conference-approves-start-of- coalition-talks-with-merkel-a-928992.html Related SPIEGEL ONLINE links: • Coalition Face-Off Tough Negotiations Lie Ahead (10/18/2013) http://www.spiegel.de/international/germany/0,1518,928583,00.html • Coalition Talks Greens Reject Alliance with Conservatives (10/16/2013) http://www.spiegel.de/international/germany/0,1518,928153,00.html • Election Triumph Merkel Victorious But Faces Tough Talks (09/22/2013) http://www.spiegel.de/international/germany/0,1518,923755,00.html

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Economía OPINIÓN La interminable historia autonómica Las comunidades se verán forzadas a reducir gasto en sanidad y educación en 2014 José Ignacio Conde-Ruiz / Carmén Marín / Juan Rubio-Ramírez 21 OCT 2013 - 00:09 CET2 Desde el inicio del ajuste fiscal en 2009, las comunidades autónomas han reducido sus gastos no financieros en un 13% (22.300 millones), descontando el efecto del pago de intereses, o lo que es lo mismo, casi un 2,2% del PIB. El ajuste volverá a repetirse en el año 2014. Los presupuestos detallan que las comunidades recibirán unos 2.000 millones menos en concepto de entregas a cuenta y liquidaciones de lo que recibieron en el 2013. Estos recursos representan en torno al 80% del total de ingresos autonómicos. Esta caída de recursos se suma al ajuste exigido para poder cumplir con el objetivo de déficit autonómico y la incapacidad crónica de los gobiernos regionales de generar ingresos propios. Por estas razones, los ejecutivos autonómicos se verán forzados, de nuevo, a recortar el gasto. La historia interminable. Las comunidades deben terminar 2014 con un déficit del 1% para cumplir con el objetivo marcado por Bruselas. El ajuste que tendrán que hacer va a depender de cual sea el déficit de cierre de 2013. Vamos considerar dos escenarios. El escenario optimista que supone que estas administraciones cumplen con su objetivo de déficit para el 2013 (1,3%). Y el escenario pesimista donde se desvían de este objetivo. A este respecto, según nuestras propias estimaciones, las autonomías podrían terminar el año con un déficit del 1,8%. En el escenario optimista, si asumimos que los ingresos de 2014 son los mismos que este año, las comunidades deberían reducir sus gastos en 3.000 millones. Pero, tal como hemos dicho antes, dado que los ingresos caerán en 2.000 millones, el ajuste de los gastos ascenderá a 5.000 millones (-0,5 % PIB). En el escenario menos optimista — cierre de 2013 con un déficit del -1,8%—, el ajuste a realizar puede subir hasta los 10.000 millones. En ambos escenarios, el ajuste deberá hacerse en un contexto más adverso que en el pasado ya que también en este nivel de la Administración hay que hacer frente a un aumento del gasto en intereses como consecuencia del aumento del nivel de deuda. Además, parece imposible reducir significativamente el gasto en inversiones, tras una caída del 60% desde el comienzo del ajuste. Esto significa que la mayor parte del recorte caerá sobre Sanidad, Educación y Servicios Sociales. En este sentido, queremos recordar que 10.000 millones es equivalente al recorte que se realizó en 2012 en gasto de Sanidad y Educación. Pero el lector se puede hacer la siguiente pregunta. Si los ingresos tributarios del presupuesto del próximo año aumentan en un 2,6% (4.500 millones de euros) con respecto al presupuesto de 2013, antes de descontar las participaciones de las administraciones territoriales en IRPF, IVA e impuestos especiales, ¿cómo es posible que los recursos transferidos caigan en unos 2.000 millones? La explicación reside en que las subidas de impuestos diseñadas por el Gobierno no han supuesto en la practica más ingresos autonómicos. Parte de los 4.500 millones se basan

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en subidas del impuesto de Sociedades, IVA e impuestos especiales. La subida del impuesto de Sociedades no reporta más ingresos para las comunidades porque este impuesto no es compartido. Además, la subida del IVA (en 2012) y las de los Impuestos Especiales (en 2012 y 2013), a pesar de que estos impuestos si que se comparten, no se refleja en más recursos para las regiones puesto que se ha visto compensado con una reducción de las transferencias del Fondo de Suficiencia por la misma cuantía. Este recorte en la cuantía del fondo esta reflejada en la ley de financiación autonómica aprobada en 2009. Así, podemos concluir que la incapacidad de los ejecutivos autonómicos para generar recursos propios, o la falta absoluta de corresponsabilidad fiscal, les obliga a reducir gastos. Dado que el problema del déficit español es principalmente de ingresos, sería mejor opción proveer a las comunidades de mecanismos para aumentar los ingresos y que éstas fueran las que tomasen la decisión de aumentar el ingreso o reducir el gasto. Ahora la decisión la toman otros por ellas. José Ignacio Conde-Ruiz, Carmen Marín y Juan Rubio-Ramírez son investigadores de Fedea. http://economia.elpais.com/economia/2013/10/20/actualidad/1382300077_898062.html

Economía España se sitúa en 2012 al frente de la eurozona con un 10,6% de déficit Eurostat revela que 11 de los 17 socios del euro superan el límite del 3% El País Madrid 21 OCT 2013 - 12:00 CET El déficit público de España alcanzó el año pasado el 10,6% del PIB —incluyendo las ayudas a la banca, que suman 3,7 puntos—, el porcentaje más alto de toda la UE, por delante de Grecia (9%), Irlanda (8,2%), Portugal y Chipre (6,4%), según los datos finales validados este lunes por Eurostat. La oficina estadística de la UE, además, confirma que 11 de los 17 países del euro siguen por encima del límite del 3% que Bruselas

MÁS INFORMACIÓN . Montoro fía el cumplimiento del déficit de 2013 a los Ayuntamientos . La deuda pública de España superará el billón de euros en 2014 Sin contar las ayudas a la banca —que se excluyen en el procedimiento sancionador por déficit excesivo—, el déficit español ascendió al 6,9% del PIB, en lugar del 7% que se había estimado inicialmente en abril, de acuerdo con los datos que ha confirmado este lunes Eurostat. España se ha comprometido a rebajarlo este año al 6,5% del PIB. El presidente del Gobierno, Mariano Rajoy, había anunciado en una entrevista el pasado 25 de septiembre que el déficit estaría finalmente en el 6,8%. Pese a la revisión, la cifra global de déficit del 10,6% no cambia respecto a lo calculado en abril porque el coste de las ayudas a la banca sube de 3,6 a 3,7 puntos. Ello se debió a las recapitalizaciones de BFA-Bankia, Catalunya Caixa, NCG Banco y Banco de Valencia, según Eurostat.

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Resto de rescatadas Aparte de España, el país donde más ha pesado la ayuda a la banca es Grecia (2,8 puntos), debido a la liquidación de ATE Bank y de las cooperativas bancarias y a la recapitalización de Proton Bank. La banca también ha provocado aumentos del déficit destacables (superiores a 0,5 puntos) en Bélgica, Letonia, Austria y Portugal. Irlanda, que en 2011 fue el país con más déficit, en 2012 rebajó su desfase al 8,2%. En contraste, en Irlanda los beneficios conseguidos con las ayudas a la banca (en forma por ejemplo de intereses o dividendos) redujeron su déficit en un punto. Según los datos de Eurostat, el nivel de deuda pública de España aumentó desde el 70,5% en 2011 hasta el 86% del PIB el año pasado. En el conjunto de la eurozona, el nivel de déficit público bajó del 4,2% del PIB en 2011 al 3,7% en 2012 (y del 4,4% al 3,9% en la UE). Alemania registró un superávit del 0,1%, mientras que los Estados miembros con menor déficit fueron Estonia y Suecia (0,2%), Luxemburgo (0,6%) y Bulgaria (0,8%). El nivel de deuda aumentó en la eurozona del 87,3% en 2011 al 90,6% en 2012 (del 82,3% al 85,1% en el conjunto de la UE). Los Estados miembros con más deuda pública son Grecia (156,9%), Italia (127%), Portugal (124,1%) e Irlanda (117,4%). En el extremo contrario se sitúan Estonia (9,8%), Bulgaria (18,5%), Luxemburgo (21,7%) y Rumanía (37,9%). http://economia.elpais.com/economia/2013/10/21/actualidad/1382349621_858796.html

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lunes 21/10/2013 6:52 1. Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects by Marcus Hagedorn, Fatih Karahan, Iourii Manovskii, Kurt Mitman - #19499 (EFG) Abstract: We exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -- the micro effect -- we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively. http://papers.nber.org/papers/W19499?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 4. High Frequency Traders: Taking Advantage of Speed by Yacine Ait-Sahalia, Mehmet Saglam - #19531 (AP) Abstract: We propose a model of dynamic trading where a strategic high frequency trader receives an imperfect signal about future order flows, and exploits his speed advantage to optimize his quoting policy. We determine the provision of liquidity, order cancellations, and impact on low frequency traders as a function of both the high frequency trader's latency, and the market volatility. The model predicts that volatility leads high frequency traders to reduce their provision of liquidity. Finally, we analyze the impact of various policies designed to potentially regulate high frequency trading. http://papers.nber.org/papers/W19531?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 7. Risk-Taking Behavior in the Wake of Natural Disasters by Lisa Cameron, Manisha Shah - #19534 (DEV EEE) Abstract: We investigate whether experiencing a natural disaster affects risk-taking behavior. We conduct standard risk games (using real money) with randomly selected individuals in rural Indonesia. We find that individuals who recently suffered a flood or earthquake exhibit more risk aversion. Experiencing a natural disaster causes people to perceive that they now face a greater risk of a future disaster. We conclude that this change in perception of background risk causes people

112 to take fewer risks. We provide evidence that experimental risk behavior is correlated with real life risk behavior, highlighting the importance of our results. http://papers.nber.org/papers/W19534?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 10. Money as a Unit of Account by Matthias Doepke, Martin Schneider - #19537 (EFG IFM ME) Abstract: We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non-contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions. http://papers.nber.org/papers/W19537?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 12. Measuring the Accuracy of Survey Responses using Administrative Register Data: Evidence from Denmark by Claus Thustrup Kreiner, David Dreyer Lassen, Soren Leth- Petersen - #19539 (LS) Abstract: This paper shows how Danish administrative register data can be combined with survey data at the person level and be used to validate information collected in the survey. Register data are collected by automatic third party reporting and the potential errors associated with the two data sources are therefore plausibly orthogonal. Two examples are given to illustrate the potential of combining survey and register data. In the first example expenditure survey records with information about total expenditure are merged with income tax records holding information about income and wealth. Income and wealth data are used to impute total expenditure which is then compared to the survey measure. Results suggest that the two measures match each other well on average. In the second example we compare responses to a one-shot recall question about total gross personal income (collected in another survey) with tax records. Tax records hold detailed information about different types of income and this makes it possible to test if errors in the survey response are related to the reporting of particular types of income. Results show bias in the mean and that the survey error has substantial variance. Results also show that the errors are correlated with conventional covariates suggesting that the errors are not of the classical type.

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The latter example illustrates how Denmark can be used as a "laboratory" for future validation studies. Tax records with detailed information about different types of income are available for the entire Danish population and can be readily merged to survey data. This makes it possible to test the ability of respondents to accurately report different types of income using different interviewing techniques and questions. The examples presented in this paper are based on cross section data. However, the possibility to issue surveys repeatedly to the same persons and linking up to longitudinal tax records provides an opportunity to learn more about the time series properties of measurement errors, a subject about which little evidence exist, in the future. http://papers.nber.org/papers/W19539?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 13. The Development of Opacity in U.S. Banking by Gary Gorton - #19540 (CF DAE ME) Abstract: An examination of U.S. banking history shows that economically efficient private bank money requires that information-revealing securities markets for bank liabilities be closed. That is, banks are optimally opaque, which is why they are regulated and examined. I show this by examining the transition from private bank notes, the predominant form of money before the U.S. Civil War, to demand deposits and show that markets endogenous closed. The opacity of bank money in the recent financial crisis is also briefly discussed. http://papers.nber.org/papers/W19540?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 16. Asking Households About Expenditures: What Have We Learned? by Thomas F. Crossley, Joachim K. Winter - #19543 (PE) Abstract: When designing household surveys, including surveys that measure consumption expenditure, numerous choices need to be made. Which survey mode should be used? Do recall questions or diaries provide more reliable expenditure data? How should the concept of a household be defined? How should the length of the recall period, the level of aggregation of expenditure items, and the response format be chosen? How are responses affected by incentives? Can computer-assisted surveys be used to reduce or correct response error in real time? In this paper, we provide a selective review of the literature on these questions. We also suggest some promising directions for future research. http://papers.nber.org/papers/W19543?utm_campaign=ntw&utm_medium=email&utm_ source=ntw

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20. The Impact of Medicaid on Labor Force and Program Participation: Evidence from the Oregon Health Insurance Experiment by Katherine Baicker, Amy Finkelstein, Jae Song, Sarah Taubman - #19547 (HC LS) Abstract: In 2008, a group of uninsured low-income adults in Oregon was selected by lottery for the chance to apply for Medicaid. We use this randomized design and 2009 administrative data to evaluate the effect of Medicaid on labor market outcomes and participation in other social safety net programs. We find no significant effect of Medicaid on labor force participation or earnings: our 95 percent confidence intervals allow us to reject that Medicaid causes a decline in labor force participation of more than 4.4 percentage points, or an increase of more than 1.2 percentage points. We find that Medicaid increases receipt of food stamps, but has little, if any, impact on receipt of other government benefits, including SSDI. http://papers.nber.org/papers/W19547?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 21. Linkages across Sovereign Debt Markets by Cristina Arellano, Yan Bai - #19548 (EFG IFM) Abstract: We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders with concave payoffs. A foreign default increases incentives to default at home because it makes new borrowing more expensive and defaulting less costly. Foreign defaults tighten home bond prices because they lower lenders' payoffs. Foreign defaults make home default less costly by lowering future recoveries, because countries can extract more surplus if they renegotiate simultaneously. In our model, the home country may default only because the foreign country is defaulting. This dependency arises during fundamental foreign defaults, where the foreign country defaults because of high debt and low income, and also during self-fulfilling defaults, where both countries default only because the other is defaulting. The simultaneity in defaults induces a correlation in interest rate spreads across countries. The model can rationalize some of the recent economic events in Europe. http://papers.nber.org/papers/W19548?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 23. Predatory Lending and the Subprime Crisis by Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas D. Evanoff - #19550 (LE) Abstract: We measure the effect of an anti-predatory pilot program (Chicago,

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2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third. http://papers.nber.org/papers/W19550?utm_campaign=ntw&utm_medium=email&utm_ source=ntw 32. Macro Fiscal Policy in Economic Unions: States as Agents by Gerald Carlino, Robert P. Inman - #19559 (PE POL) Abstract: The American Recovery and Reinvestment Act (ARRA) was the US government's fiscal response to the Great Recession. An important component of ARRA's $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments. We examine the historical experience of federal government transfers to state and local governments and their impact on aggregate GDP growth, recognizing that lower-tier governments are their own fiscal agents. The SVAR analysis explicitly incorporates federal intergovernmental transfers, disaggregated into project (e.g., infrastructure) aid and welfare aid, as separate fiscal policies in addition to federal government purchases and federal net taxes on household and firms. A narrative analysis provides an alternative identification strategy. To better understand the estimated aggregate effects of aid on the economy, we also estimate a behavioral model of state responses to such assistance. The analysis reaches three conclusions. First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately. Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years. Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support. http://papers.nber.org/papers/W19559?utm_campaign=ntw&utm_medium=email&utm_ source=ntw

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Daily Morning Newsbriefing October 21, 2013 Mario Draghi’s not so secret letter Federico Fubini has a cracker of a story in Saturday’s edition of La Repubblica, detailing a letter by Mario Draghi to the European Commission, warning them not to impose losses on bank bondholders, at least not initially, for fear that this might de- stabilise the financial markets. Draghi was not opposed to a bail-in regime once the banking union was operating at full speed. In Italy there were €2.7bn of subordinated bank bonds maturing in 2014 and €4.6bn in 2015. If a bail-in regime was started prematurely, investors would sell those bonds, thus raising the funding costs for the banks. In addition, bondholders could drag the banks and the ECB into endless court cases. The article quoted an anonymous source in Brussels as saying that Draghi had abandoned his neutrality in defence of Italian interests. Draghi disagrees with that statement, the article says, but he knew the risk that his intervention might be interpreted this way, which is why he preferred to keep this letter secret, known only to a handful of people. In a follow-up to this story, Reuters managed to dig up the letter, written on July 30 and addressed to Joaquin Almunia. It quoted the passage: "By structurally impairing the subordinated debt market, it could lead to a flight of investors out of the European banking market, which would further hamper banks' funding going forward." A Commission spokesman responded thus: "The revised guidelines also foresee exceptions, which would be applicable for reasons and on a case-by-case basis.” Draghi said mandatory burden-sharing was warranted when a bank was on the brink of collapse or its capital had fallen below the minimum regulatory threshold. His criticism related to cases where the bank had a viable business model and where the capital was above the minimum threshold, and where the supervisor required it to raise additional funds. In that case, he said, state aid should be possible without hitting junior bondholders first. The letter also said incentives should be in place to ensure that banks raise private capitals before tapping state aid. In a separate development, Der Spiegel reports today that Thomas Wieser proposed at a recent meeting of the euro working group to bring forward the starting date of the new bail-in regime from 2018 to 2016. The article quotes participants as saying that there has been little resistance to the proposal. The idea is to make it easier for Germany to accept the resolution proposals. Luxembourg liberal party woes to oust Juncker Juncker’s centre-right Christian Social People's Party (CSV) suffered losses in Luxembourgs’s national elections yesterday, Reuters reports. His party, which has held the post of prime minister for all but five years since World War Two, will have 23 seats in the 60-seat parliament, down three from the last elections in 2009. The largest winner was the liberal Democratic Party (DP), which won four seats more than in 2009, at the same level as the Socialists, with 13 seats each, while the Greens secured six seats.

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Juncker said he will hold talks with all three parties to form a government. Luxembourg media say it is likely he invites the liberals first given their strong performance in the polls. The socialist party is unlikely to form a new alliance with the conservatives as the party withdrew its support from Juncker last July over a spying scandal which triggered early elections. The FT notes that three main opposition parties won sufficient seats to form a coalition government. The liberal and socialist parties together with the greens, which combined would give them 32 out of 60 seats – enough to oust Mr Juncker. Xavier Bettel, the 40- year-old leader of the liberal party and mayor of Luxembourg city, has hinted at his intention to try to form an alternative government without the CSV after his group emerged as the big winner of the electoral night, gaining four seats. The three main opposition leaders have repeatedly accused Mr Juncker of spending too much time in Brussels and putting Europe first instead of the Grand Duchy, which has seen rising unemployment levels and a growing debt exposure. The coalition has to be formed before the first week of December because there's an obligatory budget vote that month. Anti-European alliance for Europe The Dutch right-wing populist Geert Wilders has large plans to reunite Anti-Europeans in the EU to form a common alliance, writes the FAZ. Wilders already established contacts with other anti-Europe parties throughout Europe, Marine Le Pen in France, Vlaams Belang in Belgium, Lega Nord in Italy, Austria’s Freedom Party of Austria, the Sweden Democrats and the Danish People's Party. The far-right alliance idea is not new, but earlier attempts often ended in ideological disputes. This time, it might be different, warns the article. Only the British, with their long tradition in eurosceptisism, refuse to join the club. Greek finance minister says no bailout if austerity measures required The Greek newspapers’s coverage over the weekend prepared the mood ahead of the upcoming negotiation round with the troika. To Vima expects a “debt thriller” with Greece at the mercy of the troika, Ethnos accused the troika of blackmailing, while Kathimerini talks about days of anxiety (hat tip Der Standard). Finance Minister Yannis Stournaras told Kathimerini that Greece will not agree to a new bailout if the troika demands more austerity measures as part of the deal, “We will only agree on a new bailout package if it is not accompanied by new measures,” said Stournaras. “We will accept structural measures.” Greece has already backed down over the size of its primary surplus this year, when the troika rejected Athens’s requests to include gains made by the Hellenic Financial Stability Fund. It has also been rebuffed by the troika over projections of increased tax revenues next year. And the ECB has refused to budge on the issue of bond rollovers. The Greek government however believes that the ECB has been more flexible on similar issues in the cases of Ireland and Italy. Portuguese 2014 budget without deposit reserve Jornal de Negocios notes that the 2014 budget does include an explicit deposit reserve as did the other crisis budgets before, but relies entirely on the banking reserves to give the government a safety cushion in the budget. Portugal’s finance ministry puts these bank recapitalisation reserves at €6.4bn in the draft report, but the end figure will depend on the banks’ capital needs as assessed by the stress test.

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Cyprus central bank governor and the escalating battle with his president The governor of Cyprus’s central bank speaks to the FT about his escalating battle with Cyprus’ president over the alleged mismanagement of the country’s banking crisis and bailout. Panicos Demetriades told the FT that his dysfunctional relationship with president Nicos Anastasiades was “not a sustainable state of affairs”, but insisted he would not resign. The president and central bank governor have been at loggerheads for months, with the president accusing Demetriades of foot-dragging in his handling of the crisis and questioning the governor’s “adequacy in the execution of his responsibilities”. Last week Mr Anastasiades said he had provided the state prosecutor with documents in order to prepare a case at the supreme court against the central bank governor with a view to having him removed from office. The threat of using the supreme court to have the central bank governor removed prompted the ECB president Mario Draghi to come to Mr Demetriades’s defence. “We would have a dim view of any attempt to constrain or threaten or to undermine the independence of the central bank,” Mr Draghi said earlier this month. Demetriades also said in the interview that it could be a year before Cyprus’s capital controls were lifted, and that the earlier government timetable of lifting the controls by January was “too ambitious.”Capital controls imposed in March under the terms of the bailout have been eased, with businesses now allowed to make transfers up to €1m. But restrictions for individual depositors are still tight, with cash withdrawals capped at €300 daily and a ban on cashing cheques. Savers can withdraw up to 20% of their fixed- term deposits on maturity but the rest has to be rolled over. Merkel wants another fiscal pact For us, it was another of those “Oh No” moments of the eurozone crisis. Der Spiegel had a report this morning that Angela Merkel plans another fiscal pact to give the EU greater control over member states’ budgets. The article is short on detail, but said that Merkel was seeking treaty change to extend protocol 14 of the treaty with a clearer mandate for the European Commission. The Commission should be empowered to make binding contractual agreements with member states to enforce fiscal discipline and to increase competitiveness. The article said there was substantive resistance to those plans, both from other member states, and more crucially perhaps from the SPD, Merkel’s likely future coalition partner. To get a majority of members on board, Merkel is considering the acceptance of a special eurozone budget. The article said that Martin Schulz opposed a treaty change, and asked Merkel to press ahead with fiscal integration on the basisi of the current treaties. Schulz is afraid that a treaty change could take too long, and would be potentially risky as it would require referendums in several countries. The article said the Merkel planned to focus on Europe in her third term of office, leaving national politics largely to her ministers. The authors probably misunderstand what Merkel wants. Protocol 14 TFEU sets out the workings of the eurogroup. This is not about the Commission. Like so many media articles, this one remains extremely vague on details, especially on institutions. Whenever we hear journalists referring to “Brussels”, that means they either have no clue, that there editors have no clue, or that they deliberately obfuscate for whatever reasons. Given what we know about Merkel’s views of the European Commission, and given the reference in this article is to protocol 14, we would surmise that Merkel

119 wants to give the eurogroup a greater co-ordinating role, not the European Commission. Coalition talks start on Wednesday: SPD wants much more tan a minmum wage Frankfurter Allgemeine has the story that the SPD plans further restrictions on the labour market in addition to the imposition of a minimum wage of €8.50. As a condition for its participation in a Grand Coalition, the SPD wants to impose a time-limit on temporary work, restrictions on off-shoring, and the ability by companies to contract out labour to third parties – through which companies can circumvent minimum wage rules in their sector. The SPD also wants to raise social contributions, especially contributions for the country’s underfunded old-age care system. The paper writes that these regulations are part of the SPD’s ten core coalition demands for a formal coalition negotiation. A mini party congress gave the green light for the coalition talks, which are due to start on Wednesday. SPD chief Sigmar Gabriel wants to conclude them before the end of December. Other changes the SPD is insisting on includes a strengthening of employee co-decision rights. Merkel seems personally relaxed about these changes, but the CDU business lobby is up in arms over the SPD’s proposed changes. Deutsche Bank sees Germany, France and Spain swapping growth models A report by Deutsche Bank Research called ‘Swapping growth models in Europe’ claims that “Germany is becoming French” while “Spain is becoming German” and “France is becoming Spanish”, writes Cinco Días. According to Deutsche Bank Reseach, Germany is becoming French because unit labour costs have stopped dropping and internal consumer demand is becoming more important for German GDP growth. France is becoming Spanish in the sense that corporates are becoming more indebted in response to sagging profitability. And Spain is adopting a “German poor-growth model” by shifting income from wages to profits and reorienting economic growth towards exports. Euphoria in Spanish capital markets as domestic economy restructures El País led its Sunday edition with a story on the Euphoria in Spain’s capital markets, emphasizing also that Spain is leaving its longest recession behind. In the last 18 months the risk premium on Spanish sovereign debt has dropped by 60%, and the IBEX35 stock market index is up from 6,000 to 10,000. Funding costs for the Treasury are suitably low, and major corporations are able to raise equity or issue debt, while foreign investors are buying real estate portfolios, writes the paper. El País quotes several analysts with the message that the Euro crisis is essentially over as a result of Mario Draghi dispelling the fear of a Euro breakup. While unemployment remains above 25%, tourism and other exports are growing, Spain has achieved a current account surplus and foreign investment is returning. However, recovery for the broader economy has barely started as the growth rate needs to be significantly above 0% to create net employment. Meanwhile, despite the euphoria in the capital markets in the ‘real economy’ a number of household names are going through bankruptcies or restructurings. In addition, the growing poverty rate will only be arrested by growing salaries and employment rates, which are not expected for some time.

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And now for the budget amendments in Italy Corriere della Sera has the story that the Italian parliament will propose new spending and tax cuts of between €8-10bn, which would tip the budget over any agreed fiscal targets with the European Commission (in addition to not being specific on how to raise various categories of funds). The article said the response from Brussels on the budget could be severe. The article said the existing provisions to reduce the tax wedge are insignificant. There is now pressure on practically every front in the Italian budget. Wolfgang Munchau writes in his FT column that Mario Monti was right in substance in his criticism of the Italian budget (even though his career as an elected politician ended in less than a year). The budget is another big missed opportunity, and reflects the political gridlock. Munchau concludes that Matteo Renzi is probably best placed to offer a new start – the main problem being that he faces a gargantuan task reforming Europe’s last unreconstructed Socialist Parties – which could take many years to accomplish. Bordo and James on why the eurozone is more toxic than the gold standard The economic historians Michael Bordo and Harold James have a good comment in Vox, in which they compare the experiences of the gold standard with that of the eurozone. They recall that there was a similar debate in the inter-war years on whether private US creditors or official creditors should have payment priority. There was also a crisis of democracy and social stability. But there is one important difference: the asymmetric adjustment, which was a feature of the gold standard as well, but which is much more intractable in the modern era. “A design that intentionally excluded a contingent clause made the system at first apparently more robust, but aggravated the eventual adjustment issue. That is why the initial crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted. The instability is increased by the heightened complexity and length of credit chains, and by the fact of the mediation of credits through small country banking centres.”

Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.515 0.516 0.519 Italy 2.326 2.336 2.320 Spain 2.428 2.435 2.416 Portugal 4.412 4.487 4.508 Greece 6.580 6.560 6.51 Ireland 1.761 1.780 1.764 Belgium 0.753 0.764 0.766 Bund Yield 1.872 1.832 1.848

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.367 1.3682

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Yen 133.650 134.2

Pound 0.845 0.8459

Swiss Franc 1.235 1.2351

ZC Inflation Swaps

previous last close

1 yr 1.18 1.18

2 yr 1.31 1.18

5 yr 1.53 1.37

10 yr 1.78 1.77

Euribor-OIS Spread

previous last close

1 Week -3.886 -4.486

1 Month -1.000 -1

3 Months 3.500 5.3

1 Year 28.671 29.471

Source: Reuters

http://www.eurointelligence.com/professional/briefings/2013-10- 21.html?cHash=c7a8d7f52599f1481282f9fad8977851

Economy Bail-In Rules for Eurozone Banks Should Start In 2016 By MICHAEL KLIMES : Subscribe to Michael's RSS feed | October 21, 2013 1:22 PM BST

The speed and shape of European integration will largely depend on Angela Merkel (Reuters) Eurogroup Working Group's leader Thomas Wieser has revealed that the the eurozone should introduce bank bail-in rules from 2016.

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According to a report in German publication Der Spiegel, Wieser called on authorities in the European Union to bring forward the 2018 deadline for the bail-in policy, in order to strengthen the continent's banking system. The EU has been trying to work out how it can shore up Europe's fragile financial sector that has been a major casualty of the sovereign debt crisis that erupted in 2010. A bail-in is designed to protect taxpayers from rescuing a bank in the event of financial crisis. Before bankruptcy can be declared, under current proposals, a bail-in is designed to impose losses on bondholders while leaving untouched other creditors of similar stature, such as derivatives counterparties. Wieser called for the bail-in to be brought forward in order to allay German fears that a European wide banking union, which is required to make the monetary union work better, would be paid for by taxpayers. North European governments, especially the Germans, have spent billions bailing out weaker eurozone countries. It seems Germany will only move towards a banking union if a resolution is in place that ensures the German taxpayer will not foot the entire bill for bailouts in the future. The introduction of the bank bail-in process is therefore vital to secure German support and consent for a banking union. The urgency displayed by Wieser in his demand for bail-in laws to be implemented in 2016 to bring a banking union forward was reinforced by European Central Bank heavyweight Jörg Asmussen who called on Germany's political leaders to form a government so that they can focus on reforming the EU. Asmussen, who is a member of the European Central Bank's executive board, said that the eurozone crisis was not over and need Germany's politicians to be decisive. "Swift formation of a government would certainly be helpful from a European point of view as there are important decisions to be taken for Europe, for example a banking union," he said. Much To Discuss Different officials at key EU institutions have made various comments about the speed at which Europe should integrate and how it should deal with failing banks that pose a risk to the survival of the euro. Just recently, finance ministers from the eurozone met in Luxembourg to tackle the issue of plugging the holes which are likely to be revealed by the European Central Bank's health checks in 2014. The European Banking Authority revealed that the continent's banks have a €70bn ($95.7bn, £59.2bn) capital black hole in their balance sheets in September. According to the report by the EBA, which is charged with the task of assessing European financial institution capital health, banks were not fully compliant with new capital requirement regulations coming into force in 2019. To report problems or to leave feedback about this article, e-mail: [email protected] To contact the editor, e-mail: http://www.ibtimes.co.uk/articles/515557/20131021/european-central-bank- thomas-wieser-bail-ins.htm

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October 20, 2013 The Man Who’ll Do Triage on Europe’s Banks By DANNY HAKIM FRANKFURT — All Ignazio Angeloni has to do is figure out Europe’s banking system. Mr. Angeloni, 59, heads the European Central Bank’s financial stability division, giving him a lead role in a task about to begin: examining the books of the 130 or so largest banks in the 17 members of the European Union who use the euro. It will be financial triage aimed at determining which banks are sound and which are not. Good luck with that. Over the last few years, the world’s financial institutions have become black boxes, so opaquely complex that they are little understood by regulators or their own executives. Lehman Brothers vanished in a puff of financial wizardry gone wrong. JPMorgan Chase was humbled when it lost control of its own traders in London. And European regulators gave the French-Belgian banking giant Dexia a clean bill of health in 2011 after a supposed “stress test,” only to see it collapse subsequently. This week, Mr. Angeloni and other central bankers are expected to announce new details of the review process. The undertaking, at the behest of the European Union, is meant to place the big banks of Europe more directly under the supervision of the European Central Bank, instead of the current patchwork of national regulators. At stake is the world’s confidence in Europe’s banking system. If the effort fails, it could undermine Europe’s fragile economic recovery and the credibility of the European unity project. “You have to supervise what banks do,” Mr. Angeloni said, during a recent interview at the central bank’s headquarters here. “You cannot leave them alone, because if you do, they can become dangerous.” The banks of Europe, of course, are particularly treacherous. The ones in Greece were crippled by their government’s toxic debt. Those in Cyprus were “bailed in” by their own depositors. Spain’s have sucked in billions of euros in aid to make up for bad loans. And several banks across Europe have become wards of the state. So can anyone really make sense of it all? “Nothing will be perfect, right?” Mr. Angeloni said. “There will be mistakes, there will be things that are not uncovered fully. The goal is to make as much progress as possible.” James Chappell, a banking analyst at Berenberg, called the banking review exercise “incredibly important.” “Ultimately, for a banking union you need to have a credible supervisor, and investors want to have trust in banks’ balance sheets, and that’s what’s been lacking and continues to lack now,” Mr. Chappell said. “What the market has to believe is that the process has been credible.”

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From the window of Mr. Angeloni’s downtown office, the future headquarters of the European Central Bank can be seen rising on Frankfurt’s horizon. The grand skyscraper, bracketed by cranes, is a testament to the central bank’s growing role as a world power. The unwieldiness of some banks is a symptom of technological advances that have led to nano-speed trading and the use of complex computer algorithms that guide investment decisions, Mr. Angeloni said. While he expressed doubts about the usefulness of splitting the investment and retail arms of banks, as many on both sides of the Atlantic have advocated, he still suggested that some banks had grown too complex for their own good, or for society’s. Perhaps ominously for the banks, the silver-colored cuff links on his monogrammed shirt were shaped like bears. “The C.E.O.’s, they look superhuman, but, in fact, very often they don’t know what’s going on, and they don’t understand because it is very, very complicated,” Mr. Angeloni said. “The algorithms that govern the movements of asset prices are very difficult to understand for any C.E.O.,” he added. “In the end, the C.E.O., the people at the top, have to concentrate on the politics, right? If you are in that mind frame, it’s very difficult to concentrate on the nitty-gritty technical details. So there is a growing gap between the people who work at the bottom and understand the little things, and the people on the top.” Mr. Angeloni is a global citizen. Born in postwar Milan, Italy, he studied economics at Bocconi University in Milan with Mario Monti, the respected technocrat who led Italy’s previous government. At the University of Pennsylvania, where Mr. Angeloni received his doctorate, he studied macroeconomics under Robert J. Shiller. “He gave me an ‘A,’ ” Mr. Angeloni joked last Tuesday, the morning after his former professor was named a winner of the Nobel Memorial Prize in Economic Science. But Mr. Angeloni’s career has ranged beyond traditional economic research, to include diplomatic work for the Italian Treasury, where he also led the state-run export credit agency. He quotes Kant and Pirandello in his published works. Now Mr. Angeloni is one of the more multifaceted lieutenants of Mario Draghi, the president of the European Central Bank. The immediate task is to prepare for the inception of a quasi-independent supervisory branch of the central bank, which will have its own chairman. The first step is reviewing the financial health of the biggest banks of Europe. The central bank must do so in the next 12 months, while creating a supervisory wing staffed by a thousand new employees. “People come to us and ask, ‘How can you do it? You have to recruit many supervisors, you don’t have many resources,’ ” he said. “That’s not true.” The central bank has the advantage of drawing on the aid and experience of national regulators that have long been at work in member states, he said. “What makes it difficult is that it is very fragmented,” he said. “It is diversified in different countries, and they are not used to working together, so it’s a huge organizational effort, and it’s also a huge political effort in the sense of convincing everybody to converge to common styles of supervision.” The review process will have three parts, he said. The first will be to make a broad assessment of a bank’s risk profile. The second is the so-called asset quality review,

125 reviewing the logbooks of each bank and assessing whether loans and other assets are performing as advertised. The third is a stress test, in which several models are created to simulate what would happen if the bank were exposed to a variety of economic shocks. It is a job that was fumbled by other European regulators, most notably in the case of Dexia. For the supervisory process to be truly useful, specialists say it must be accompanied by a so-called single resolution mechanism — a system for winding down failing banks in an orderly way, to avoid market upheavals. Regulators hope an independent body to oversee such work will be in place by 2015, but almost every detail of the banking overhaul effort has been mired in political wrangling among the member states. “The stakes are the recovery and well functioning of Europe and the euro,” Mr. Angeloni said. “Europe has this project for several decades, to not only live in peace — that’s already an important thing in itself — but also to make its economic model function and potentially — why not? — be also exported elsewhere. And it’s a good economic model, because the quality of life in Europe is very high in many ways.” The question, he said, was, “Can you make this economic and social model, which to some extent is a luxury, can you make it compatible with the increasing pressure of competition from emerging markets and from elsewhere?” “You have to make the system work, you have to reform it a little bit, and what we are doing is part of this reform,” he said, adding, “Building a federation is a long process.” http://www.nytimes.com/2013/10/21/business/international/the-man-wholl- perform-triage-on-europes-banks.html?_r=0

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Economía ANÁLISIS Donde dije digo… La revisión estadística arroja que el déficit hasta junio es 7.600 millones menor a lo estimado Ángel Laborda 20 OCT 2013 - 00:00 CET A comienzos de mes, el INE publicó la contabilidad nacional trimestral de los sectores institucionales, con datos hasta el segundo trimestre del año. En esta ocasión tocaba revisar los datos de los tres últimos años para completar la revisión llevada a cabo en el mes de agosto para el conjunto de la economía, como es habitual todos los años. Recordemos que esa revisión supuso una rebaja importante del PIB, de tal forma que el de 2012 es ahora inferior a la estimación anterior en unos 20.000 millones de euros. Al repartir esta cifra por el lado de las rentas, el agregado más afectado fue el excedente de explotación de las empresas; por el lado de la demanda, el consumo de los hogares, y por el lado de la producción, la rebaja se la repartieron la construcción y los servicios privados. Todo ello se refleja en cambios significativos en las cuentas de los sectores institucionales, concretamente de los hogares.

Fuentes: IGAE, INE y Funcas. Gráficos elaborados por A. Laborda. / C. AYUSO Antes de comentar los rasgos más importantes de los nuevos datos, se hace necesario tener en cuenta otra revisión publicada esta semana por la Intervención General del Estado (IGAE) respecto a las cuentas de las Administraciones Públicas (AA PP). La revisión obedece a un cambio impuesto por la oficina estadística europea (Eurostat) sobre las devoluciones de impuestos. Hasta ahora, estas devoluciones se registraban como devengadas en las cuentas nacionales en el momento en que las agencias tributarias acordaban su procedencia a favor del contribuyente. Pero esto dejaba abierta la posibilidad de que los Gobiernos utilizasen este criterio para retrasar o adelantar discrecionalmente las devoluciones entre los últimos meses de un año y los primeros del siguiente, con el fin de contabilizar más o menos ingresos por impuestos en un año determinado y, así, poder trasvasar déficit público de un año a otro. Para eliminar esta discrecionalidad, las devoluciones pasan a registrarse ahora en el momento en que el contribuyente presenta la correspondiente solicitud formal de devolución. Este criterio se ha implantado con efectos retroactivos, lo que ha llevado aparejada la revisión de los datos de los últimos años. Lo más llamativo e importante es que el déficit público 127 acumulado en el primer semestre, excluidas las ayudas a instituciones financieras, es 7.600 millones de euros inferior al estimado y publicado por el INE a comienzos de este mes y, más aún, es inferior en 1.900 millones al registrado en el mismo periodo del año anterior, mientras que con las estimaciones anteriores era superior en 5.700 millones. Esto cambia notablemente los análisis hechos hasta ahora sobre la evolución del déficit púbico y las posibilidades (que creíamos escasas) de alcanzar el objetivo del 6,5% del PIB a finales de año. Si los datos de la IGAE son los definitivos, este objetivo parece ahora mucho más alcanzable, aunque aún hay elementos de riesgo. Eso cambia notablemente las posibilidades de alcanzar el objetivo de déficit del 6,5% este año El caso es que esta revisión de las cuentas de las AA PP afecta al resto de sectores y a la valoración del propio PIB nacional, que tendrán que ser revisadas próximamente. Por ello, los datos disponibles ahora deben analizarse con esta cautela. Por lo que respecta a los hogares, las nuevas cifras apenas cambian la magnitud de su renta disponible respecto a las estimaciones anteriores, pero sí rebajan sustancialmente su consumo, por lo que se obtiene un mayor ahorro. Para 2012, este supone ahora el 10,4% de la renta, 2,3 puntos porcentuales más que lo estimado anteriormente. Lo que no cambian las revisiones es la continua caída de la renta familiar disponible, aunque se va frenando. En el primer semestre, esta renta disminuyó un 1,2% (-3,4% en términos reales) respecto al mismo periodo de 2012. La partida principal de la misma, las remuneraciones salariales, fue un 5,4% inferior, sobre todo por la caída del empleo. El consumo descendió más que la renta, un 2,5%, lo que se tradujo en un aumento notable del ahorro. Haciendo sumas móviles de cuatro trimestres para evitar la fuerte estacionalidad, la tasa de ahorro al finalizar el segundo trimestre aumentó hasta el 10,9% de la renta disponible, medio punto porcentual más que en el cuarto trimestre del pasado año. Pero esta alza del ahorro puede quedarse en nada cuando se revisen las cifras, ya que tendrá que rebajarse la renta y aumentar el consumo. La realidad es que hay poco margen para el ahorro en la actual coyuntura. Ángel Laborda es director de coyuntura de la Fundación de las Cajas de Ahorros (Funcas). Cifras de negocio Entre los escasos indicadores de coyuntura publicados esta semana destacan los indicadores de actividad del sector servicios (IASS) y los índices de cifras de negocios y de pedidos de la industria, con datos de agosto. Tanto en los servicios como en la industria, las tasas interanuales de las cifras de negocios son bastante más negativas de lo que fueron los meses precedentes, pero esto se debe al “sesgo IVA”, que hinchó las ventas de agosto de 2012 en detrimento de las de septiembre. Las tasas más significativas para ver la tendencia reciente son las mensuales o trimestrales, obtenidas sobre las series ajustadas de calendario laboral y estacionalidad. En estos términos, las medias de julio y agosto dan crecimientos anualizados del 2,6% y 12,4% para la industria y servicios, respectivamente, respecto a la media del segundo trimestre del año. Los IASS también dan datos sobre el empleo en los servicios. Calculando las mismas tasas, el empleo aumenta un 0,4% tras ocho trimestres de caídas continuadas, el mismo aumento que registraron los afiliados a la Seguridad Social en los servicios en el tercer trimestre. http://economia.elpais.com/economia/2013/10/18/actualidad/1382111778_866608.html

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Economía JOSÉ MANUEL GONZÁLEZ-PÁRAMO Consejero ejecutivo del BBVA “El BCE sabe que estas pruebas a la banca son la última oportunidad” Alicia González Madrid 20 OCT 2013 - 00:00 CET5

González-Páramo defiende que el cortafuegos europeo lo financie la banca privada. / Bernardo Pérez José Manuel González Páramo (Madrid, 1958) no ha dejado las alturas. Ha cambiado las vistas de la sede del Banco Central Europeo (BCE) en Francfort por las de su despacho en la planta 27ª del edificio del BBVA en Madrid. Su análisis es ahora, cómo no, algo más benévolo con los bancos, pero su foco de atención es el mismo: la regulación financiera y la economía global. Su antigua casa, afirma, se la juega en las pruebas de resistencia a la banca. Pregunta. ¿Hay riesgos serios de que se suavicen esas pruebas? Respuesta. No entendería que se cediera a esas presiones porque esto es un antes y un después. Estos tienen que ser los test definitivos, así lo ha dicho [Mario] Draghi. Si tienes que trazar una línea y definir el legado que recibes al asumir la supervisión única, es ahora. P. ¿Y si las necesidades que afloran superan las expectativas?

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R. No pasa nada si está previsto el backstop, el cortafuegos. Cualquier necesidad es asumible, lo importante es que se reconozca y que haya una red. Cuando hablamos de legado, de la situación de los activos que tendrá que supervisar en adelante el BCE, la herencia será nacional y la cuestión es si hay músculo financiero a nivel nacional para hacer frente a ese agujero y, si no, cuál es el cortafuegos europeo. P. Eso hoy no está resuelto. Sin resolución única, la independencia del BCE está coartada” R. No, está pendiente de decisión. Tenemos un Mecanismo Europeo de Estabilidad (ESM, por sus siglas en inglés) que es el que tiene posibilidades de actuar a nivel nacional de distintas maneras. Pero se tendrá que decidir cuál es la secuencia estricta, que sea homogénea en todos los países y trate de la misma manera los casos que se puedan dar. El Eurogrupo ya ha iniciado discusiones al respecto y deberían anunciar pronto, en los próximos días o semanas, cómo se va a acometer. Porque ese fue precisamente el talón de Aquiles del anterior test de estrés, donde se hizo un gran esfuerzo que, a la postre, no sirvió para mucho pese a que generó una transparencia sin precedentes. Creo que el BCE entiende perfectamente que es la última oportunidad de hacerlo en condiciones y que no empezaría bien su andadura como supervisor único si fuera débil con la revisión de los criterios sobre la calidad de los activos. P. ¿Estará todo en marcha antes de que el BCE pase a ser el supervisor único? R. Depende de lo que la política dé de sí. El ESM tiene una serie de líneas de financiación para cuando se estime que los recursos nacionales no son suficientes o no es factible movilizarlos en plazo razonable. Pero antes de eso está la capacidad de los Estados, la posibilidad de recapitalización interna de algunas categorías de pasivos, medidas de tipo presupuestario nacional… La cuestión es más de tipo político, cómo entra a jugar el cortafuegos europeo allí donde las autoridades nacionales tengan dificultades de actuar. P. ¿Podemos encontrarnos sorpresas en los test de estrés? R. En términos de cuantía, yo creo que nadie cuenta con grandes sorpresas. Todo el mundo parece contar con que en algún país de la periferia, que no es España, pueden aparecer necesidades. En el caso español, se ha hecho todo ese ejercicio con un año de antelación y el programa de recapitalización de entidades ha avanzado mucho. Pueden surgir necesidades como consecuencia de alguno de los criterios que se usen, pero serían de muy pequeña magnitud y asumibles. En otros casos quizá no, porque la recesión está siendo muy prolongada y eso afecta a las tasas de mora. Ahí puede haber dificultades porque hay una situación de debilidad política bastante generalizada en Europa, con la excepción de Alemania, y conseguir que los Parlamentos liberen los fondos necesarios para hacer frente a carencias de la banca es cada vez más difícil. Una inflación del 1% está muy cerca del umbral en que puede hacer daño” P. ¿Puede la supervisión amenazar la independencia del BCE? R. Que haya injerencias políticas se puede entender, pero que el banco ceda o se sienta tentado a hacerlo es otra cuestión, y ahí el BCE tiene que hablar muy claro. Aparte de la gobernanza de la que se dote, que es la primera línea de defensa, el mayor reto es cómo se organice la resolución bancaria. No es realmente independiente un supervisor que se enfrenta a la tesitura de tener que intervenir una entidad sin saber cómo se va a resolver ni si eso va a provocar contagio. Si tenemos al supervisor funcionando en

130 noviembre de 2014, pero no tenemos criterios claros de resolución única, estamos coartando la independencia del supervisor para actuar. P. Pues no parece que Alemania esté dispuesta a ceder. R. Veremos qué opina el nuevo Gobierno alemán, pero Alemania tiene razón al advertir que si tenemos una unión bancaria legalmente poco firme, corremos el riesgo de que a la primera actuación inspectora relevante del banco que pueda acabar, por ejemplo, con el cierre de una entidad, un juez lo declare ilegal. Hay que reformar el Tratado, y estos procesos son largos, pero hasta entonces hay que construir un puente creíble, que haga que la resolución europea funcione como si existiera una autoridad única y un fondo único. Es de nuevo voluntad política entender cuánto hay en juego y que cuando hablamos de fondos de resolución, hablamos de fondos privados. Hay una debilidad política generalizada en Europa, con la excepción de Alemania P. ¿Deberían los bancos construir ese cortafuegos europeo? R. Los fondos de resolución los tienen que constituir las entidades, bien a nivel nacional o europeo, eso debe coordinarse. Lo que no puede haber es doble aportación por la misma contingencia. Mientras ese fondo se llena, debería haber un cortafuegos público, que preste a las entidades, con intereses, claro. Pero, tal y como están redactados los acuerdos de resolución, es extremadamente improbable que vuelva a haber un uso de fondos públicos. Solo debería usarse como salvaguarda de la estabilidad financiera en el conjunto de la zona euro. P. ¿Una inflación tan baja cuestiona la credibilidad del BCE? R. La guía de política del BCE, asegurando tipos bajos por mucho tiempo, tiene como primer objetivo asegurar que unos precios en torno al 1% no suponen estabilidad de precios. No tengo duda de que el BCE está tan insatisfecho con un 1% de inflación como lo estaría con un 3% porque está muy cerca del umbral a partir del cual la tasa de inflación puede producir daño, ya que constriñe excesivamente la oscilación de tasas nacionales y puede reflejar que algunos países rozan situaciones de deflación. Hay margen para tomar medidas: se pueden bajar los tipos oficiales o se pueden desindexar as subastas de liquidez, que ahora se fijan en función de los tipos de interés. Si tomas la liquidez al 0,5%, pero suben los tipos al 1,5%, vas a tener que pagar por esos fondos el 1,5%. El banco puede renunciar a esa indexación para dar una señal de su compromiso con los tipos bajos. Hay muchos instrumentos. P. Hay muchas voces en el mercado que piden otra subasta de liquidez, como las de 2011 y 2012. R. En este momento no hay necesidades de liquidez porque los mercados se han reabierto y la liquidez es relativamente generosa. Pero esa opción debería estar abierta, y así la mantiene el banco. Es un instrumento al que no puedes renunciar. Las dos anteriores subastas tuvieron su justificación en que el mercado estaba seco para los bancos. Esa no es ahora la situación, pero la subasta podría cumplir otra finalidad. JOSÉ MANUEL GONZÁLEZ-PÁRAMO “El BCE sabe que estas pruebas a la banca son la última oportunidad” http://economia.elpais.com/economia/2013/10/18/actualidad/1382113269_321638.html

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Saturday, 20 October 2012 Different approaches to austerity This is a really interesting chart from the IMF’s October 2012 Fiscal Monitor (HT Antonio Fatás). The red dots are the cyclically adjusted primary balance, the blue bars changes in government expenditure and the yellow bars changes in tax revenue.

It shows the extent of austerity (the red dots). Look how ludicrous is the idea that Greece is not trying hard enough – their current and planned fiscal contraction is literally off the scale! (Here are similar numbers from the OECD.) But what I want to focus on, which this chart clearly shows, is the tax and spend composition of austerity. In many countries (Ireland, Spain and the UK) austerity is concentrated on the expenditure side. In some (e.g. US) it is more evenly balanced, while in a few (France in particular) it mainly takes the form of rising taxes rather than lower spending. Now how you regard this depends crucially on whether these measures are permanent or temporary (where by temporary, I mean lasting around ten years or less). If they are permanent, then this is largely a political issue about the size of the state. Raising taxes protects the existing size of the state (taking on board any distortionary costs that permanently higher taxes may bring), while cutting spending aims to reduce the size of the state. In terms of short run demand impact - which is obviously important given the current state of demand deficiency in most countries - permanent tax and spending changes will have similar effects.[1]

1 Spending cuts may still have a larger impact on domestic demand because government spending tends to have a lower import content than private spending.

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On the other hand, if these measures are temporary, then in macroeconomic terms their impact will be rather different, because multipliers are different. A very broad generalisation is that theory suggests multipliers for spending cuts will be significantly higher than those for tax increases. The simple idea is that consumers will smooth the impact of income changes due to tax increases, whereas cuts in spending go straight into reducing demand. In addition, incentive effects on labour supply will be much less important if they are temporary and output is demand constrained. We need to be careful, however, because this is a generalisation that applies to government spending on goods and services with a high domestically produced content. If the decline in government spending involves a temporary reduction in civil servants’ salaries, rather than building fewer hospitals or roads, then it is much more like a tax cut. As analysis later in the IMF’s report shows, cuts in wages make up a significant proportion of spending cuts in Portugal, but not much in the UK, where cuts in government investment are more important. So are these austerity measures temporary or permanent? Normally governments do not say. An exception is a much remarked upon feature of the French austerity plans, which is the introduction for two years of a new top tax rate of 75% on incomes over €1m. We can be pretty sure that this is one group where the income effects of tax increases on consumption will be largely smoothed away (which is good), but where the incentive effects are the subject of debate which seems more ideological than evidence based. Of course whether such temporary tax measures will in fact be temporary is a moot point, as the Bush tax cuts in the US illustrate. In the absence of reliable information from governments, people have to make their own assessments. In the initial stages of a crisis, if either there is an unforeseen shock to government finances, or to the long run level of output, then it may make sense to regard any austerity as permanent. However as austerity proceeds, the goal is to get debt down from a high but sustainable level to a lower sustainable level. In these circumstances a rise in taxes (say) will be temporary, and will eventually be reversed as lower debt reduces debt interest payments and therefore taxes. So it seems likely that a good part of current austerity plans involve temporary fiscal changes designed to reduce debt levels, and so the differences between the multipliers of tax and spending changes will apply. For countries like the UK, that have focused on spending cuts, the knock on effects on output will be relatively large, whereas for countries like France the impact of austerity may be more moderate (although still unwelcome).

http://mainlymacro.blogspot.co.uk/2012/10/different-approaches-to-austerity.html

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Economía OPINIÓN Situación y perspectivas de la unión bancaria Guillermo de la Dehesa 20 OCT 2013 - 00:00 CET Archivado en: El área euro no posee una política fiscal única, como Estados Unidos o Canadá, para hacer frente a los llamados choques asimétricos que afectan solo a unos Estados miembros y no a otros, como les ocurre ahora a los del sur de Europa. Existe una política monetaria única, y aunque sus efectos suelen ser simétricos, esta no se transmite al sur. Por esa razón, el BCE está utilizando políticas monetarias no estándar y asimétricas para ayudar a los bancos del sur a obtener liquidez. Además, el sistema bancario del área euro está fragmentado, ya que los bancos del norte no prestan a los del sur, aplicando un ring-fencing apoyado por sus supervisores. En el sur, los créditos a pymes y a familias son dos puntos porcentuales más caros, y sus garantías, más duras que en el norte. Siendo el crédito un factor fundamental para la recuperación y el crecimiento, ahora que se ha tocado fondo, y siendo los bancos el 80% del sistema financiero, la única solución alternativa viable es intentar una unión bancaria. La unión bancaria consistiría en cuatro pilares: un Sistema Único de Regulación (SUR o SRB, Single Rule Book), del que se encarga la Autoridad Bancaria Europea (ABE o EBA, en inglés) y tres mecanismos: un Mecanismo Único de Supervisión (MUS o SSM), un Mecanismo Único de Resolución (MUR o SRM) y un potencial Esquema Común (no único) de Protección de Depósitos (ECPD o CDPS). Un Reglamento del Consejo, aprobado por el Parlamento Europeo el 12 de septiembre y que entrará en vigor en octubre de 2014, ha creado el MUS dentro del BCE, que asumirá toda la supervisión de las instituciones de crédito que tomen depósitos y den préstamos de todos los Estados miembros. Sin embargo, el BCE solo tendrá poderes supervisores directos sobre las entidades de crédito más grandes. Es decir, aquellas que superen los 30.000 millones de activos en balance, o que representen más del 20% del PIB del Estado miembro (a menos que sus activos sean menores de 5.000 millones), o que estén entre las tres mayores entidades del Estado miembro. Pero el BCE podrá también controlar la supervisión del resto de los supervisores nacionales. Todavía nos queda el BCE, que tiene sus incentivos correctamente alineados y que, a pesar de fuertes críticas, ha logrado salvar el euro. Confiemos en él. Su segundo pilar, el Mecanismo Único de Resolución (MUR), será aprobado en 2015, y el tercero, el Esquema Común de Protección de Depósitos (ECPD), no tiene todavía fecha. El MUS solo supervisará las 130 entidades más grandes y más transfronterizas del área euro, con más de 30.000 millones de balance, que pueden llegar a representar hasta el 80%-85% del balance total de las existentes, pero que solo representan el 2,2% del total de las 5.925 entidades existentes en los 18 Estados miembros del área euro, según la estadística anual publicada por el BCE en agosto de 2013.

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De las 5.925 entidades, España tiene 298 (5% del total); Francia, 630 (10,6%); Italia, 697 (11,8%), y Alemania, 1.847 (31,2%). Otros Estados miembros tienen también un elevado número de entidades, como Austria, 739 (12,5%); Irlanda, 465 (7,8%); Finlandia, 310 (5,2%); Holanda, 251 (4,2%); Portugal, 152 (2,6%), y Bélgica, 100 (1,7%). Por esta razón, el MUS solo supervisará el 50% del sistema bancario de Alemania, frente al 90% de los de España y Francia. España tendrá más bancos que Alemania supervisados por el MUS, dada la profunda consolidación de nuestro sistema. Hasta la entrada en vigor del MUS, el BCE tendrá un año para concretar su organización y determinar cómo interactúa con los supervisores nacionales (SN o NS, en inglés). Asimismo, en el primer trimestre de 2014 evaluará los balances de aquellos bancos que supervisará directamente, mediante una Revisión de la Calidad de sus Activos (RCA o AQR, en inglés), para determinar si necesitan más capital. A continuación, la EBA coordinará una nueva ronda de stress tests de los bancos de la UE, cuyos resultados dará a conocer en el segundo semestre de 2014. El MUR está regulado por la Directiva de Recuperación y Resolución Bancaria (DRRB o BRRD), que entrará en vigor en 2015, pero, antes, los bancos tendrán que definir sus planes de recuperación y de resolución (living wills) y los Estados miembros tendrán que establecer autoridades nacionales de resolución (de no existir) para poder vender parte de su negocio; establecer una institución puente, o banco bueno; hacer una separación de sus activos, y establecer un orden de prelación del bail-in de los accionistas y acreedores, que serán los primeros en enjugar sus pérdidas. Dicha directiva establece ya el orden de prelación de los acreedores, antes de que el MUR intervenga en última instancia: accionistas, acreedores subordinados, tenedores de bonos sénior no asegurados, grupos de depositantes no cubiertos por los Sistemas Nacionales de Garantía de Depósitos (SNGD o DGS) y otros depositantes no cubiertos, así como cualquier exceso sobre lo asegurado. Además, los accionistas y acreedores subordinados tendrán que perder todo antes de recibir ayuda alguna de los Fondos de Resolución Nacionales (FRN o NRF). Los depositantes cubiertos por los SNGD estarán exentos, así como las cédulas hipotecarias, los pasivos ante el BEI, los salarios y los beneficios de pensiones, los suministradores esenciales para el funcionamiento y la seguridad de los bancos. También los fondos en sistemas de pagos con menos de 7 días de plazo. Además, los bancos serán obligados a mantener pasivos mínimos exigibles (PME o MREL) disponibles, para evitar lo ocurrido en Chipre. Asimismo, los Estados miembros tendrán que establecer Fondos de Resolución Nacionales (FRN), de no existir, además de sus Fondos de Garantía de Depósitos (FGD o DGF), aceptando que ambos puedan fusionarse. Estos tendrán que alcanzar, como mínimo, el 0,8% de los depósitos cubiertos, pero tendrán un máximo de 10 años para hacerlo. Serán financiados mediante impuestos a los bancos, basados en sus pasivos ajustados por riesgo. Además, solo podrá accederse a dichos FNR si al menos el 8% de sus pasivos han participado ya en el bail-in, y su acceso se limitará a un máximo del 5% de los pasivos de los bancos. Por último, la directiva deja abierta la posibilidad de que las autoridades nacionales puedan evitar el bail-in de ciertos subgrupos de acreedores, bien por no poder hacerlo en tiempo razonable, bien para asegurar la continuidad de sus funciones críticas y evitar el contagio o la destrucción de valor.

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Por último, la directiva acepta la posibilidad de que el MEDE (ESM) pudiera utilizarse como un freno fiscal (backstop) para la resolución bancaria, pero solo por un máximo de 60.000 millones. Si interviene, podrá cambiar tanto la dirección del banco como su modelo de negocio, pero nunca intervendrá antes de que la directiva sobre un Esquema de Garantía de Depósitos (EGD, o DGS) esté aprobada, lo que llevará mucho tiempo. Están excluidos los bancos que estén ya bajo un programa MEDE, como los españoles. En resumen, la nueva Unión Bancaria está basada en principios similares a los del MEDE. Primero: minimizar costes, compartir el mínimo riesgo y, mientras tanto, que cada Estado miembro se las arregle como pueda. Segundo: utilizar nombres mínimos (esquema, mecanismo) cuando están creándose importantes instituciones europeas. Finalmente, evitar que el MEDE pudiera ser el futuro embrión de una Agencia Europea de Deuda y de un Tesoro Europeo, que pudiese emitir euroletras y, en última instancia, eurobonos, evitando así crisis sistémicas. Pero todavía nos queda el BCE, que tiene sus incentivos correctamente alineados y que, a pesar de fuertes críticas, ha logrado salvar el euro. Confiemos en él. Guillermo de la Dehesa es presidente del Centre for Economic Policy Research (CEPR). http://economia.elpais.com/economia/2013/10/18/actualidad/1382092945_576557.html

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Research-based policy analysis and commentary from leading economists The European crisis in the context of historical trilemmas Michael Bordo, Harold James, 19 October 2013 The Eurozone’s tangle of conflicting goals – a series of ‘trilemmas’ – is not without precedent. This column argues that it is reminiscent of the interwar situation. The interwar slump was so intractable not just due to financial issues, but also a crisis of democracy, of social stability, and of the international political system. The big difference in the EZ is that nations cannot go off the euro as they went off the gold standard. That is why the initial EZ crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted. Related • Dilemma with the financial Trilemma Michael W Klein, Jay C. Shambaugh • Dilemma not Trilemma: The global financial cycle and monetary policy independence Hélène Rey • Empirical evidence on the monetary policy trilemma since 1970 Joshua Aizenman, Menzie D. Chinn , Hiro Ito The European financial crisis has often produced comparisons with the historical problems of the classical gold standard. Many of the key political figures who drove forward European monetary integration admired the discipline and certainty of the gold standard. Both Valéry Giscard d’Estaing and Helmut Schmidt shared this view. But recently, the comparison is more usually a negative or hostile one. The intent is to demonstrate the unrealise-ability or absurdity of the constraints that rigid monetary systems impose (Krugman 2013), or the problems of an asymmetric adjustment process (Eichengreen and Temin 2010). Adherence to the gold standard, and to the euro, involved an acceptance of: • Monetary orthodoxy. In the gold standard, the constraint is the convertibility of claims into a metallic equivalent. In the modern monetary union, it is imposed by a central bank with a price stability target. • Fiscal orthodoxy. Both regimes depend on the avoidance of fiscal deficits that would place the monetary objective in danger. In the gold standard era, most states had little room (little technical capacity or political consent) to raise large amounts in taxation. Before the First World War, despite a costly arms race, economic growth meant that for most countries the share of government debt of GDP was falling. The modern European monetary union – the Eurozone – occurred in the context of much higher spending levels and higher levels of government debt in all industrial countries, as well as of continual social and political pressure to expand government spending.

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The benefits of the gold standard were seen in the nineteenth century as lying in: • Ease of a common monetary standard. • Access to capital markets (overcoming “original sin” that made financially immature economies unable to borrow abroad except in foreign-denominated currency). • Reduction of borrowing costs; and • The gold standard as a contingent rule. In the event of an emergency – such as a war – the gold peg could be temporarily suspended, but with an expectation of an eventual return to convertibility at the original peg. The contingent rule gave a safety valve for fiscal policy in dealing with exceptional circumstances (Bordo and Kydland 1995). But there were also substantial risks. Large-scale emerging market borrowers ran a substantial risk of entering into an unstable dynamic with a destabilizing fiscal policy that might threaten the maintenance of the rules of the game. The gold standard experience is filled with sudden stops of capital inflows in which advanced country creditors either hit by domestic shocks or fearful of events in the borrowing countries turn off the lending spigot (Bordo 2006). The flows of capital almost always produced an expansion of the banking system in the importing country. That expansion could turn into a source of instability if banks became unable to repay credits, either because of a liquidity or a solvency problem. When countries credibly adopted the gold standard, they often experienced surges of capital inflows. These were almost always mediated through the financial system. Sudden stops, were sometimes caused by banking sector weakness, and sometimes lead to bank collapses. They did not inevitably end the exchange rate commitment. There was thus a close association between capital flows and banking crises. A strong and effective state could underpin a banking system, and thus allow greater volumes of borrowing to continue for longer and with greater sustainability. In Russia, for instance, the State Bank was widely regarded as a reinsurance mechanism that would bail out problematical private debtors: it was often referred to as “the Red Cross of the bourse”. Thus Russia had large inflows, and a sudden stop in the early twentieth century, but no suspension of convertibility. International diplomatic commitment enhanced the market perception of state effectiveness. The story of how diplomatic commitments enhance credibility is especially evident in the well-known case of Russia. The beginning of the diplomatic rapprochement of Russia with France in 1891 was accompanied by a French bond issue, which the supporters of the new diplomacy celebrated as a “financial plebiscite” on the Franco-Russian alliance. Popular political discontent eventually limited the possibility of adjustment policy. The Tsarist Empire was an effective and capacious borrower, it never seemed to violate the gold standard rule in peacetime, but it was brought down by massive social discontent that was in large part driven by the widespread perception that its policy had been sold out to foreigners. A major part of Lenin’s analysis, for instance, was devoted to the demonstration that Russia had become a quasi-colony as a result of the large scale capital imports, and that the foreign creditors in effect controlled Russia’s foreign policy.

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The linkages of these issues can be summarized as a series of impossible trinities or trilemmas. 1. The macroeconomic classic – fixed exchange rates, capital flows, autonomous monetary policy; 2. The financial sector – fixed exchange rates, capital flows, financial stability; 3. The international relations setting – fixed exchange rates, capital flows, national policy independence; and 4. The political economy – fixed exchange rates, capital flows, democratization. The interwar experience All four of these trilemmas became impossible after World War I. First, the asymmetry of the adjustment problem in the gold exchange standard of the 1920s and sterilization of gold inflows by the surplus countries (US and France) put deflationary pressure on the deficit countries (UK, Central Europe and Latin America) when capital flows dried up ( Eichengreen 1992). Second, in the financial sector, high inflation destroyed the capital base of many financial institutions in the defeated countries of Central Europe making them vulnerable to sudden stops. Correspondent banking networks between these countries and neutral countries exposed them to contagion. Third, taking on international commitments by debtor countries enhanced their credibility for the lenders (US) which ultimately increased the borrowers exposure to sudden stops. Fourth, taking on international commitments became a focus for domestic political disorder when the great Contraction after 1929 required adjustment by deflation. The Eurozone story The move in Europe to monetary union for weaker countries was a credibility enhancing mechanism that would lower borrowing costs. For countries that had strong creditor positions, the attractions of monetary union lay in the depoliticizing of the adjustment process (James 2012). The Eurozone worked quite well as a disciplining mechanism before it entered into effect, but much less well afterwards. The trilemmas became an increasing constraint in the years after the euro: Banking expanded after the establishment of the euro (Shin 2012). No adequate provision on a European basis existed for banking supervision and regulation, which like fiscal policy, was left to rather diverse national authorities. An explosion of banking activity occurred simultaneously with the transition to monetary union and may well have been stimulated by the new single money. A “banking glut” led to a new challenge to monetary policymaking. The bank expansion could go on longer because of implicit government backstop. It was reversed when government debt management no longer looked credible – in the Greek case after the elections of October 2009. The implicit national government backstop was really only credible because of the international commitment to the European integration project. It was that commitment that led markets to believe that – in spite of the no bailout provisions of the Maastricht Treaty – there were almost no limits to the amount to which debt levels could accumulate both in the private and the public sector. When governments turned round, in particular after the Deauville meeting of Chancellor 139

Merkel and President Sarkozy in October 2010 and demanded a haircut for Greek creditors (or Private Sector Involvement, PSI), the yields immediately diverged. Deauville undid the framework of solidarity that the EU treaties seemed to have created. When the democratic/popular backlash occurs, it takes the form of rejection of international/cross-border political commitment mechanism. Voters are surprisingly discerning. Opinion poll data shows a major increase in hostility to the EU in peripheral countries, but with no corresponding unpopularity of the common currency. Hostility to the EU is also evident in parliamentary elections results in Greece and Italy. The trilemmas are worse in the recent context because of the absence of an escape clause. In the absence of an exchange-rate option, there is a need for greater debt reduction, but that raises a politically awkward question of the distribution of losses between the private and the public sector. The result is reminiscent of the interwar political debate about whether (mostly American) private creditors or (mostly European) official reparations creditors should have priority in the payment of German debts. What made the interwar slump so intractable was that it was not just a financial issue, but also a crisis of democracy, of social stability, and of the international political system. In the interwar period, increased social tension as a consequence of increased unemployment and of widespread bankruptcy made normal democratic politics impossible. Domestic political pressure also became a source of heightened international tension. That is true in today’s Europe. Democracy has become a central target of complaints by the European elite. Luxembourg Prime Minister Jean-Claude Juncker and former euro group chair stated that it wasn’t that European leaders didn’t know what the right policies were; but that they didn’t know how to be re-elected after they had implemented them. The 2013 Cyprus crisis and its resolution exposed two new dimensions to the clashes over Europe’s debt and bank crisis. The discussion of a levy on bank deposits, and whether small customers should be exempted, puts class conflict at centre stage. The question of foreign, and especially Russian, depositors – along with the proximity to Syria - makes the incident into an international relations problem. Supranational commitments however do not change the problems posed by the adjustment requirement, and the asymmetric character of crisis adjustment is more apparent in the modern era (and in the interwar experience) than it was under the classic gold standard. A design that intentionally excluded a contingent clause made the system at first apparently more robust, but aggravated the eventual adjustment issue. That is why the initial crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted. The instability is increased by the heightened complexity and length of credit chains, and by the fact of the mediation of credits through small country banking centres. References Bordo, Michael D and Finn Kydland (1995), “ The Gold Standard as a Rule: An Essay in Exploration”, Explorations in Economic History. Bordo, Michael D (2006), “Sudden Stops, Financial Crises, and Original Sin in Emerging Countries: Déjà vu?” NBER working paper 12393.

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Eichengreen, Barry (1992), Golden Fetters, New York : Oxford University Press. Eichengreen, Barry and Peter Temin (2010), "Fetters of gold and paper," Oxford Review of Economic Policy, vol. 26(3), pp. 370-384. James, Harold (2012), Making the European Monetary Union, Cambridge Mass.: Harvard University Press Krugman, Paul (2013), “Lust for Gold,” The New York Times, April 11, 2013. Shin, Hyun Song (2012), “Global Banking Glut and Loan Risk Premium,” Mundell- Fleming Lecture, presented at the IMF Annual Research Conference, November 10-11, 2011, IMF Economic Review, 60, pp. 155-192. http://www.voxeu.org/article/ez-crisis-and-historical-trilemmas Bordo, Michael & Harold James (2013), “The European crisis in the context of historical trilemmas”, 19 Octubre, http://www.voxeu.org/article/ez-crisis-and-historical- trilemmas

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ft.com World Europe Brussels October 20, 2013 5:21 pm Brussels stands ground against Mario Draghi over bailout curbs By Alex Barker in Brussels

©AFP ECB president Mario Draghi Brussels is standing its ground against Mario Draghi over the EU curbs on bank bailouts, despite the European Central Bank president warning that overzealous haircuts of bank bondholders could destroy confidence. The strongly worded intervention from Mr Draghi, in a private letter leaked this weekend, came as he prepares to launch a deep review and stress test of banks on Wednesday, which is expected to expose capital shortfalls that eurozone states will need to cover. More ON THIS TOPIC// Germany hardens stance/ Healthier French banks look to expand/ European bank bond issuance leaps/ John Authers Funds begin to back European banks IN BRUSSELS// Report boosts fight against EU red tape/ Backlash feared amid hostility to migrants/ EU revives foreign airlines climate plan/ EU urges including rights in Turkey talks Given the likely need for public backstops, Mr Draghi wrote in July to Joaquín Almunia, EU competition commissioner, raising concerns over revised state aid rules, which force losses on junior debt before any taxpayer support is approved. He said “improperly strict” interpretation “may well destroy the very confidence in the euro area banks that we all intend to restore”. Nevertheless, the so-called bail-in rules came into force on August 1 and last week the commission reiterated its main principles, rejecting Mr Draghi’s request that “viable” banks are given easier access to state funds. Mr Almunia, however, repeated that all decisions would be taken on a case-by-case basis, without harm to financial stability. Mr Draghi’s warning over the dangers of forcing junior bondholders, rather than taxpayers, to foot the bill for strengthening solvent European banks underscores the fraught discussions within the eurozone over the cost of repairing the financial system. The stress test is intended to dispel doubt over Europe’s banks before the ECB takes charge of supervision from late 2014. But the euro area is torn over the public backstops that should be in place, with Germany insisting all junior and even senior bondholders pay before taxpayers.

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Mr Draghi is worried that even penalising more lightly protected junior creditors could backfire. Mr Draghi is supportive of bail-ins when a bank is failing. His specific concern is the forced conversion of junior debt into equity when banks meet their minimum capital requirements but are asked to strengthen their buffers following the stress test, according to his letter, first reported by Italy’s La Repubblica and seen by the Financial Times. Mr Draghi said the move would “negatively impact” bank debt markets and could be considered “disproportionate” and in breach of contract. “By structurally impairing the subordinated debt market, it could lead to a flight of investors out of the European banking market, which would further hamper banks’ funding going forward,” he wrote. State support should be allowed without such a conversion, he added, citing the risk of a “crowding-out effect” as banks race to raise capital after next year’s stress test and the potential for damaging deleveraging, as lenders shrink to meet the higher capital demands. Mr Almunia has so far stood his ground. Even at banks reaching their regulatory minimum, “subordinated debt must be converted into equity before state aid is granted”, the commission said in informal guidance issued last week. “A stress test revealing a capital shortfall is as such not relevant for state aid control,” it added. “State aid control would only become relevant when the private means to raise capital had been exhausted and a bank would need to resort to public resources to fill the gap. In these cases, the bank’s soundness becomes doubtful.” In a nod to Mr Draghi’s concerns, the commission highlighted that under its rules exceptions can be made “when the implementation of writing down or conversion of subordinated creditors would lead to disproportionate results or would endanger financial stability”. This, in particular, applies when the bank has already raised money and state support is minimal compared to its overall assets. EU officials and the ECB are also in discussions over how mandatory conversion would apply to debt contracts issued under foreign law or cross-provisions that trigger default for other senior debt instruments. Loss-expectations of junior bondholders have increased, particularly following the writedown of sub-debt in Spain’s bank bailout. However hitting junior debt still remains politically painful for national authorities, given the instruments were sometimes sold to retail investors unaware of the full risks. Junior debt represents about 1.5 per cent of an average EU bank’s assets, compared to around 7 per cent for unsecured senior debt, according to Commission estimates. Antoine Colombani, a spokesman for Mr Almunia, said: “The revised guidelines apply in all cases where the banks, their shareholders and their junior bond holders are not able to collect the necessary capital to cover either regulatory or precautionary requirements, and when they need to have recourse to public money. The revised guidelines also foresee exceptions, which would be applicable for financial stability reasons and on a case-by-case basis.” http://www.ft.com/intl/cms/s/0/13cc9614-397f-11e3-a3a4- 00144feab7de.html?ftcamp=crm/email/20131021/nbe/BrusselsBrief/product&siteedition=intl#axzz2iLpt3 NRN 143

Welcome to Wonkbook, Ezra Klein and Evan Soltas's morning policy news primer. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go to Wonkblog. In the last two weeks, Oregon has cut the ranks of its uninsured by 10 percent through Obamacare.

They're not the only state seeing huge gains. California has signed up 600,000 low- income Golden Staters for the law's expanded Medicaid, and over 100,000 are in some stage of applying for insurance on the marketplaces. In Washington state, over 40,000 people have signed up for Obamacare. In New York, the numbers are even larger. Kentucky's online marketplace has been a model of glitch-free performance, with more than 10,000 signing up on the first day alone. It's increasingly possible that Obamacare, at least in its early years, will be a success in blue states (and red states run by Democrats, like Kentucky) even as it flails in red states. Alice Rivlin likes to say that if the law "really were a federal power grab it wouldn't be so complicated." Instead, it relies heavily on states. And some states are doing a much better job than others -- and the federal government's failures are further pulling the laggards down. "Unlike Medicare before it," write Sheila Burke and Elaine Kamarck in a new report for the Brookings Institute, "the ACA has built into it a number of key decisions that were left up to states. Among the most important was the decision whether or not to create an insurance exchange. Another decision, whether to expand Medicaid coverage (or not) was not built into the law but came as a result of the Supreme Court's decision on it."

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The law's drafters never really saw those as actual decisions. They expected most every state to want to build its own exchange. And, prior to the Supreme Court decision, they believe it impossible for any state to reject the Medicaid expansion. That's not how it played out, of course. Today, most states with Democratic governors both expanded Medicaid and built their own exchanges while most states with Republican governors rejected the Medicaid expansion and left exchange construction to the federal government. It's been clear for months that the Medicaid rejections would be a serious problem for the law. In those states, people who make less than the poverty line get nothing under Obamacare, but people who make between 100 percent and 400 percent of the poverty line gets subsidies for private insurance. The Kaiser Family Foundation estimates that about six million of the people expected to get health insurance through Obamacare fall through this massive crack.

But more surprising is the fact that the federal exchanges are a mess while the state exchanges are, by and large, working well. Since the states that expanded Medicaid are, for the most part, the same ones that built their own exchanges, that's further widening the divide. The state-by-state nature of the exchanges creates a potential problem even after the technical problems are fixed: Since each state exchange is its own risk pool, the states where sign-up is difficult and delayed may end up with with fewer healthy people and more sick people then the states where sign-up worked from the beginning. That would mean, in year two, higher premiums for insurance in the exchanges, and more difficulties for the law. The problems will be particularly bad in states that aren't attempting to advertise or otherwise sign young and healthy people up for their exchanges. The result could be that many blue states see cover both a successful Medicaid expansion and successful exchanges while many red states both reject the Medicaid expansion and see their exchange fail. To that point: "The Houston Chronicle reported that the elected Republican insurance commissioner for the state of Georgia, Ralph Hudgens, told an audience of the 145

Republican faithful that he and the Republican governor were doing 'everything in our power to be an obstructionist.'" It's much too early to say anything conclusive, or even very predictive, about Obamacare. As Burke and Kamarck note, a lot of what we're seeing right now are "short-term problems" that will likely be fixed within the first year. But short-term problems can become long-term problems in states where the leadership wants to see Obamacare fail rather than be fixed. The result may be that Obamacare doesn't do anything as simple as succeed or fail. Instead, it vastly improves the health-care systems of the states that wanted to use it to improve their health-care system while collapsing in the states where the leadership did what they could to undermine the law. Over time, that could lead to a country with two health-care systems: One, a near- universal system based around Obamacare and centered in blue states; the other, a policy mess based around the rejection of Obamacare in the red states. http://view.ed4.net/v/JDFA9Q/HYQ4CQ/HYSGNRU/YBPGKZ/

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vox Research-based policy analysis and commentary from leading economists Unemployment, labour-market flexibility and IMF advice: Moving beyond mantras Olivier Blanchard, Florence Jaumotte, Prakash Loungani, 18 October 2013 The state of labour markets in advanced economies remains dismal despite recent signs of growth. This column explains the IMF’s logic behind the advice it provided on labour markets during the Great Recession. It argues that flexibility is crucial both at the micro level, i.e. on worker reallocation, and at the macro level, e.g. on collective agreements. It suggests that the IMF approach is close to the consensus among labour-market researchers. Related // IMF failings in the EZ crisisSusan Schadler Growth in advanced economies is gaining some speed. The IMF projects these economies will grow 2% next year, up from an expected 1.2% this year. The average unemployment rate in advanced economies is expected to inch down from its peak of 8.3% in 2010 to 8% next year. This is progress, but it is clearly not enough. The state of labour markets remains dismal for a number of reasons. First, even before the crisis, average unemployment rates were high in many countries, and potential output growth too low. For instance, between 1995 and 2004, the average unemployment rate in the Eurozone was 9.5%. Unemployment today is over 11%, but a return to the pre-crisis average would be far from nirvana. Second, the labour market is plagued by a duality of outcomes, which the Great Recession has exacerbated. Workers on temporary contracts have limited employment protection, and have borne the brunt of labour-market adjustment. Low-skilled workers and young people have fared worse than high-skilled and older workers (see Figure 1). The long-term unemployed risk being cast away beyond reach of the tides of recovery. Figure 1. Recovery differs across groups

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Note: Ratio of each group's employment relative to overall employment. aOECD average b2008 Q1-2011 Q4, index = 100 at the start of the crisis Third, some countries in the Eurozone need to boost competitiveness. With devaluation ruled out as an option, the channel to bring this about is through wrenching labour- market adjustments. Micro and macro flexibility The mantra of “labour-market flexibility” is invoked as a remedy for many of these problems. A Google search of the term yields a million hits, of which nearly a thousand emanate from IMF documents. In a presentation at a recent IZA conference, we tried to go beyond ritual invocation to describing why flexibility is needed and what labour- market institutions are critical to providing it. Against this backdrop, we then assessed IMF advice on labour markets during the Great Recession. We do not pretend to have uncovered new insights; rather, we tried to summarise the consensus among labour- market researchers and to show how the IMF has applied it in practice. What is labour-market flexibility and why it is needed? We suggest that it’s useful to distinguish between micro and macro flexibility. Micro flexibility is the economy’s ability to carry out the reallocation of workers to jobs needed for productivity growth. High-productivity firms must be able to enter and grow, and low-productivity firms to contract and eventually exit. Such reallocation promotes productivity growth (Martin and Scarpetta 2012). Economies need macro flexibility too. This is the ability to bring about adjustment in labour markets in response to economic shocks, such as the oil- price shocks of the 1970s and the more recent loss of competitiveness in some Eurozone countries. Ensuring micro flexibility “Protect workers, not jobs” is the right mantra when thinking about micro flexibility. But how, concretely, can it be put into practice? All labour-market institutions likely play some role, but two are critical – employment protection legislation and unemployment insurance. Reallocation is important for productivity growth, but much productivity growth also comes from stable employment relationships. Employment protection is thus desirable, and some of it will be offered by firms that want their workers to invest in firm-specific skills. Some additional employment protection – in the form of a layoff tax for example – is justified by the fact that firms should take into account the costs they impose on society, namely the unemployment benefits paid to the workers who are laid off. But excessive protection or complex restrictions on the separation process hamper needed reallocation and productivity growth (Driffill 2013). Such overkill also leads to lower hiring and thus higher unemployment duration, so it does not end up protecting the cause of workers overall. Some countries have tried a dual system with high employment protection for permanent contracts and lighter protection for temporary contracts. But this has had undesirable consequences. Temporary workers have suffered a high level of employment insecurity, alternating between dead-end jobs and unemployment, and received little training from firms. Unemployment benefits are also essential to protect workers. For many workers, job changes involve an intervening spell of unemployment, and benefits play a critical

148 insurance role. Their provision has an efficiency cost. It raises the reservation wage and thus unemployment duration, but longer search is not necessarily bad when it leads to better matching. Experience has shown that, more than the level of benefits, what matters is to have them decrease with duration and to have active labour-market policies to help workers return to work. These two institutions – employment protection legislation and the unemployment insurance system – have been combined in quite different ways to protect workers. The ‘Anglo-Saxon model’ has low unemployment benefits and low employment protection, but it affords workers protection through high labour flows and a low duration of unemployment. The Nordic countries have moderate employment protection, and high unemployment benefits but with strong activation policies. The ability of many Nordic countries to keep unemployment duration low (see Figure 2), while also having low inequality of incomes, has made their ‘flexicurity’ model a beacon for many others. Figure 2. Inflow into unemployment versus duration of unemployment (%, 1995-2007 average)

Source: International Labor Organization (ILO) based on Perez and Yao (2012). Micro flexibility: IMF advice during the crisis Has recent IMF advice on labour markets conformed to these principles? The first thing to note is that at the onset of the crisis, the focus of IMF advice on unemployment was more on monetary and fiscal policies than on labour-market policies. Getting macro policies right was regarded as critical to countering the sharp decrease in aggregate demand. Thus, the IMF supported the rapid reduction in policy interest rates by several central banks. Moreover, it played a key role in making the case for – and helping coordinate through the auspices of the G20 – a coordinated global fiscal stimulus (Spilimbergo et al. 2008). In tandem, we supported other policies to lower the incidence of unemployment, such as the use of short-time work programmes in Germany. Other IMF advice can be tied more directly to our discussion of micro flexibility. The extension of unemployment benefits was generally supported, e.g. in the US and Iceland, to ease the pain of unemployment. The efficiency argument that longer unemployment benefits would decrease search intensity was thought to be weak in a severe recession. When vacancies are scarce relative to the pool of unemployed workers, any job not taken up by one worker (due to the provision of unemployment benefits) is quickly filled by another. Nevertheless, there were cases – such as Portugal,

149 where existing benefits were the most generous in the EU – where the adverse impact on incentives for re-employment led the IMF to advocate a reduction in benefits. The unequal distribution of unemployment and its concentration among young people was partly a fault of the dual employment protection systems. For instance, in Spain the vast majority of job losses were of those on temporary contracts (see Figure 3). In a number of countries – particularly Italy, Portugal, and Spain – the IMF’s recommendation has therefore been to reduce duality. This will not change things overnight; the large-scale destruction of jobs has already happened in some of these countries. A smooth transition, as well as grandfathering existing contracts, may well make sense. Lowering employment protection on existing contracts at this point would likely add to unemployment, though it may also facilitate the necessary process of economic restructuring. Reducing employment protection on new permanent contracts, where it is excessive, can help stimulate the hiring of the unemployed on more stable contracts as the recovery takes hold. Figure 3. Cumulative job destruction in Spain since 2007 Q3

Macro flexibility Macro flexibility is the ability of the economy to maintain a low unemployment rate in the face of macroeconomic shocks. Flexibility in this context has two dimensions – maintaining a low unemployment rate, and a stable unemployment rate. Here the critical institution is the structure of collective bargaining, and in particular the degree of coordination of social partners. What is the right amount of bargaining power for firms versus workers? Does centralised bargaining give too much to workers, decentralised bargaining too little? In theory, the effect of coordination on the level of unemployment is not clear. On the one hand, more coordination should lead worker representatives to put more weight on the welfare of the unemployed. On the other hand, it increases their bargaining power and could lead to higher wage demands and thus unemployment. One often-advanced hypothesis is that the worst outcome is achieved with intermediate levels of bargaining, such as sectoral bargaining. Relative to centralised bargaining, it is likely to put less weight on the welfare of the unemployed; relative to firm-level bargaining, it increases the bargaining power of unions, with potentially adverse effects on employment.

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There are two problems with this view. First, cross-country evidence on the impact of the structure of bargaining on unemployment is mixed. Second, extension agreements – which characterise sectoral bargaining – can be useful when there are large numbers of small firms (provided social partners are representative of a large share of the sector, and the agreements provide enough flexibility when there is a wide dispersion of productivity between firms). The structure of collective bargaining also influences how much unemployment increases in the aftermath of an adverse shock. When an economy-wide adjustment of wages is needed, theory suggests that centralised bargaining is likely to dominate firm- level bargaining for two reasons – it gives more weight to the welfare of the unemployed, and it can solve a coordination problem. When wages are negotiated at the firm level, a decrease in the wage at a given firm is a decrease in the relative wage – something that workers will be reluctant to accept. When wages are negotiated at the centralised level, wages can be adjusted at once and across the board without changes in relative wages. In short, what is needed for efficiency is a system that allows some decentralisation of wage setting – to aid adaptation across space, i.e. sectors, regions, firms – while keeping coordination to help with macroeconomic adjustment. This can be organised in various ways. To us, a combination of national and firm-level bargaining seems attractive. But we recognise that efficient forms of coordination of sectoral bargaining can also be found – e.g. the wage leadership of the tradable sector in Germany – and that trust may be more important than any particular bargaining structure. Macro flexibility: IMF advice during the crisis The toughest decisions were in those Eurozone countries where macro flexibility was needed to correct a large competitiveness problem at a fixed nominal exchange rate. To ease the adjustment, the IMF recommended accepting higher inflation in the ‘north’ of the currency union (Barkbu et al. 2012); and achieving wage reductions in the ‘south’ through national agreements among social partners. However, such agreements were difficult to achieve or did not take place, in some instances reflecting a lack of trust between social partners. • In Ireland, despite a tradition of tripartite agreements from the 1980s on, discussions turned contentious when conditions turned sour. The government undertook unilateral actions on pay and pension cuts before an agreement with unions was reached in 2010. • In Greece, with poor labour relations, no deal could be struck. In fact, real wages in 2009 – which incorporated inflation expectations that turned out to be too high – increased. This increased household incomes, but with wage growth outstripping the euro average, competitiveness further suffered. In the absence of national agreements, the choices left to ensure macro flexibility were far less attractive. In periphery countries where intermediate levels of bargaining were not delivering sufficient adjustment (Greece, Portugal, and Spain), the IMF’s advice was to facilitate opt-out clauses from collective agreements. Decreasing public-sector wages has been another channel of adjustment. This helps with the fiscal situation, but the impact on private-sector wages has been mixed. For instance, in Latvia the sharp decrease in public wages had limited effects on private wages; instead, much of the improvement in unit labour costs came from productivity gains (Blanchard et al. 2013). Conclusions

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It is a difficult task to design labour-market institutions so they enhance micro and macro flexibility while protecting workers. Our view is that to have micro flexibility, workers should be protected more through unemployment insurance rather than high employment protection. Dual employment protection should be avoided. Macro flexibility depends critically on the collective bargaining structure. A combination of national and firm-level bargaining seems like an attractive solution to the needs for both flexibility and coordination. But the implications of alternative structures of collective bargaining are not well understood, suggesting that the IMF should tread carefully in its policy advice in this area. Moreover, trust among social partners appears to be just as important in bringing about macro flexibility as the structure of collective bargaining (see Figure 4). This suggests that trusting partners can make widely differing combinations of institutions work well. Figure 4. Unemployment rate versus trust (%, 1995-2007 average)

Source: OECD and World Competitiveness Report. IMF advice during the Great Recession has been to maintain aggregate demand to the extent possible, and to share the pain of lower demand through extension of unemployment insurance benefits. In countries that need to improve competitiveness, but also want to belong to a currency union or maintain a currency peg, the choices have been more difficult. Some of the IMF recommendations have in these circumstances been controversial, but we have done our best to explain their logic. References • Barkbu, Bergljot, Jesmin Rahman, Rodrigo Valdés, and a staff team (2012), “Fostering Growth in Europe Now”, IMF Staff Discussion Note 12/07. • Blanchard, Olivier, Mark Griffiths and Bernard Gruss (2013), “Boom, Bust, Recovery: Forensics of the Latvia Crisis”, Draft, Fall 2013 Brookings Panel on Economic Activity. • Driffill, John (2013), “European labour-market reform”, VoxEU.org, 8 March. • Martin, J P and S Scarpetta (2012), “Setting It Right: Employment Protection, Labour Reallocation and Productivity”, De Economist 160(2): 89–116. • Spilimbergo, Antonio, Steve Symansky, Olivier Blanchard, and Carlo Cottarelli (2008), “Fiscal Policy for the Crisis”, IMF Staff Position Note 08/01. http://www.voxeu.org/article/unemployment-labour-market-flexibility-and-imf-advice

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Daily Morning Newsbriefing October 18, 2013 The end of Monti – and what it means for the Letta government We thought the front page of Corriere della Sera this morning gave a – probably involuntary – juxtaposition of pretence and reality. There was a picture of Enrico Letta with President Barrack Obama in Washington, and next to it an article that back home his government is imploding. Mario Monti has decided to leave the party he founded, and deputy finance minister Stefano Fassina of the PD is threatening to resign because he is serious miffed about not being sufficiently consulted during those late night hours of budget bartering. And PdL is also unhappy about the budget and is seeking more tax cuts. Monti’s departure does not change any majorities, but it is symbolises the failure of the attempt to establish a centrist, reforming party. His opponent was Mario Mauro, defence minister, and 11 Senators of his party, who signed a letter of support for the budget – which Monti had explicitly criticised, Corriere della Sera reports. The party did not follow their leader, as a result of which he decided to leave, and join the group of independent Senators. The rest of the SC – which consisted of survivors from the old Democrazia Cristiana, the Neo-Fascists and from Berlusconi – will now re-regroup under a new name. La Repubblica has a nice account of the hours leading up to Monti’s resignation, a public confrontation between Monti and one of his Senators, how and when his opponents met, and issued their dissenting views on economic policy, and Monti’s response. Filippo Ceccarelli has a comment in La Repubblica, in which he recalls how Monti had been transformed from a modest and enlightened reform into a power hungry politician. He said it was a mistake for Monti to have entered front-line politics against the recommendation of President Napolitano himself. He called it a senseless waste of credibility. Power is a beast that consumes those who seek it, he concludes. Over at the PD, Epifani feels let down by Letta, and is supported by Guglielmo Epifani, who said that the Fassina resignation was not really due to the budget, but to a lack of collegiality. Fabrizzio Saccomanni said that Fassina always has been in confrontation with him. La Repubblica writes that the budget really suits nobody, and may ultimately only serve the purposes of the hardliners around Silvio Berlusconi, who are seeking to break up of the government. Corriere della Sera, meanwhile, has an interview with Matteo Renzi, who outlined a radical reform agenda – with cuts in the tax wedge of €22bn, and a clean-up of the banking sector – and with no respect for the 3% deficit limit, which he called anachronistic. He said Europe has to change, not for the sake of Italy, but for its own sake. But before asking Europe to make those change, he says Italy has to change first.

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Spain improves its economic forecast for 2015 and 2016 The Spanish government accompanied the submission of its draft 2014 to the European Commission with updated economic forecasts for 2015 and 2016 which El Pais writes are more optimistic than previous ones. Specifically, the Spanish government is now forecasting growth of 1.2% in 2015 (up from 0.9% forecast 6 months ago) and 1.7% (up from 1.3%) in 2016. The paper says the reason for the change is not given, though the 2014 forecast was improved because of the expected impact of the relaxation of the austerity calendar agreed last Spring. In a separate story El País writes that the government expects to lower taxes in 2015, as the general election is expected by the end of the year. The paper suggests that while this may help Rajoy electorally, local and regional governments will face tough budget cuts in the run-up to their own elections which are scheduled for May 2015. Troika challenges Greece over €2bn fiscal gap in budget Greece faces tough negotiations with the troika over a looming fiscal gap in the 2014 budget. The FT reports that the troika wants the government to adopt further austerity measures to cover a potential shortfall of €2bn, as identified in the latest budget draft submitted by Athens. Greek finance ministry officials say the gap amounts to only €500m and can be covered through a crackdown on social security fraud by thousands of cash-strapped small businesses who fail to pay contributions. Even though the government is set to take a tough line on horizontal cuts, its commitment to accelerating structural reforms would allow new cost-cutting measures to be adopted, for example, a merger of smaller pension funds that would include reductions of up to 20% on payments. But it is uncertain whether such measures would raise enough savings to reassure the troika. The troika is due back later in Athens later this month to check that Greece has completed benchmarks, including the civil servants’ transfers, and then to hammer out the final budget draft to be presented to parliament for approval in November. Greek coalition survival tested, as more austerity is looming and debt relief delayed Macropolis points out that not only is the Greek government in danger of falling if it has to raise another €2bn in additional austerity measures next year (a revival of what happened under Papandreou), it will also suffer a heavy blow from the eurozone’s decision to delay talks on Greek debt relief for after the European elections in May: “New Democracy and PASOK know that the European polls could be a launching pad for SYRIZA to win the next general elections and form a government. With economic recovery still some way off, the euro area accepting some form of debt relief for Greece would have given the two governing parties something to help convince voters that their sacrifices are paying off. Instead, the government’s whole crisis strategy is in danger of being put in doubt… Samaras, Venizelos and Stournaras have invested in the policy of sticking as closely as possible to the troika’s demands arguing that a primary surplus would trigger the Eurogroup’s commitment to find a way to lighten Greece’s debt load, which would be beneficial for the country in the long run. If Greece goes to the polls in May without any decision from the eurozone on its debt, there is little doubt that the ruling parties will pay a heavy price.“ Kotthaus denies Germany is preparing a third bailout for Greece Martin Kotthaus denied a report in Die Zeit that the German finance ministry is preparing for a third bailout for Greece, according to Kathimerini. The issue, Kotthaus

154 said, will be discussed during mid-2014, adding that troika officials will continue their evaluation process before a final report is published in November or December. Kotthaus admitted that there are problems in plans to roll over Greek bonds held by European banks and other lenders, saying that several options are on the table. Broad support for bill to suspend funding to Golden Dawn In Greece MPs from the governing coalition and the main left-wing opposition SYRIZA backed a proposal to suspend state funding to parties whose leader or deputies are accused of serious crimes, as yet another step in the clamp down on Golden Dawn. SYRIZA backs the bill insisting of approval by an enhanced majority of 180 in the 300- seat Parliament. Kathimerini writes that the bill has attracted broader support than any other piece of legislation drawn up by the current government. Democratic Left said it will back the bill, Communists and Independent Greeks say they will not oppose it. It remained unclear whether the bill would mention Golden Dawn by name, something that leftists have demanded to ensure that deputies from their own ranks are not subsequently targeted. Government officials insisted that there were no secret plans to target leftists. The bill will be voted on Tuesday. Golden Dawn support still high in Athens Golden Dawn maintains a strong following in Athens, a new poll has shown, according to Marcopolis. Details reveal strong support in Athen’s largest constituency, attracting 8.2% of the votes, double what PASOK achieved. Though given the rapid developments in the Golden Dawn probe, the level of support is expected to drop further over the next weeks. But it is worth noting that the Golden Dawn supporters are not the young, unemployed or conservative eldery, but the ones aged 25 to 40, which accounts for 43.8% of their support. Portugal’s not so ‘final sacrifice’ budget The Portuguese finance minister warns in an interview with SIC television (hat tip Diario Economico) that there is some adjustment still to be done in 2015. "We will readjust wages as early as possible and readjust pensions as early as possible" but we cannot commit ourselves to do it next year ", because" there is a remaining adjustment that still needs to be done in 2015 "said Maria Luis Albuquerque. The finance minister reiterated that "there are no alternative measures designed" to face any leads of the Constitutional Court. She also said that Portugal will return to the primary debt market for long term issuance as soon as possible and do not pursue any further negotiations on a precautionary programme. Maria Luis Albuquerque also said on television that "the Portuguese have no reason to feel wronged" because "the budget is balanced and fair," though admitting that there is a heavy tax burden on citizens. Political row over Irish budget figures In Ireland political row has developed as to whether the budget adjustment adds up to €2.5bn, or to €3.1bn as originally envisaged under the EU-IMF bailout terms, the Irish Times reports. Fianna Fáil spokesman Michael McGrath said that there was a reference within the budgetary small print to additional savings, bringing the total adjustment to €3.1bn rather than the €2.5bn widely reported as the target. It says “€0.6bn of the budgetary adjustment comes from additional resources and savings elsewhere. Adding all of these to the €1.85bn in new policy measures outlined above gives a total adjustment package of €3.1bn in 2014.”

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Minister of State for Finance Brian Hayes rejected the claim there was any confusion or conflict between the figures saying that the finance minister had made it clear in the very first page of his budget speech that the tax and spending changes for next year would generate €2.5bn with another €600bn coming from savings carried over from last year, bringing the total to €3.1bn. Latvia’s PM reinforces austerity stance in the eurozone The euro zone's next entrant, Latvia, will push for tight budgets, labour reforms and free trade deals when it joins the bloc next year, Prime Minister Valdis Dombrovskis told Reuters. Latvia is joining the eurozone with strong economic growth and relatively low debt levels it has achieved after undergoing a deep recession when it slashed spending to keep its currency pegged to the euro. Its Baltic neighbour and euro member Estonia has been a vocal critic of bailouts of euro economies such as Greece and has often sided with a northern bloc including Germany and Finland that has insisted on tough bailout terms. Latvia is likely to join in. He said Latvia would push the EU to cut red tape and make free trade deals with the United States and Japan, but would not say whether Latvia would support further moves towards a banking union, which has hit a stumbling block over how to pay for closing or salvaging failed banks. Latvia will use euro notes and coins from January 1, 2014, Lithuania is expected to follow in 2015. German coalition negotiations to start No surprises here. CDU/CSU and SPD are pretending that there are some real negotiations going on, but they are performing to the script. Yesterday the party leaders met and agreed to start formal coalition negotiations, Frankfurter Allgemeine reports. The SPD’s two main issues, its red lines, are the minimum wage of €8,50 and the reform of the immigration laws. A senior CSU parliamentarian said Germany should have a government before Christmas. What has been agreed is that the CDU will have five ministers, in addition to Angela Merkel, the SPD will have six, the CSU three. The CDU will have another cabinet member in the form of the head of the chancellery. The CDU wants to keep the finance ministry. The SPD seems ready to accept this if it could get an enlarged economics ministry instead, with competence for infrastructure investment and energy. In that constellation, the paper writes, one could see Sigmar Gabriel, the SPD leader, as economics minister, and Andrea Nahles, general secretary, as labour minister. In an article in the business pages, Frankfurter Allgemeine says the CDU/CSU is ready to accept the SPD’s demand of a minimum wage for €8,50, in exchange for the SPD’s acceptance not to raise taxes. This trade-off seems to be supported by several CDU heavyweights. Merkel had earlier spoken out against the statutory minimum wage. The article quotes Germany’s leading economics institutes as warning against a minimum wage, arguing it would increase unemployment, especially in east Germany where 17% of jobs are estimated to be below the proposed minimum wage. The institutes do not, however, reject the principle of a statutory minimum wage, only the number. The OECD is quoted as saying that a minimum wage of €8.50 was acceptable. Wren-Lewis on structural deficits We reported on the attempt by the European Commission to change the way it calculates structural deficits – to bring it slightly more in line with reality – and of the

156 opposition by Germany and others, who fear that this would lead to a generally loosening of fiscal policy. Simon Wren-Lewis says the Commission was right to propose the changes, but wrong to cave in on the issue. “Luckily there is an obviously better way to proceed, even within the confines of the deeply flawed Fiscal Compact. Many Eurozone countries already have their own ‘fiscal councils’: independent bodies set up to provide scrutiny of national fiscal policy. It should be central to the mission of these bodies to estimate the output gap and structural deficit, as it is impossible to look at fiscal sustainability without doing so. So why not get estimates of the output gap from these institutions who will be able to take into account country specific factors, and use the academic expertise that exists in those countries to maximum effect.” Legrain on the excessive imbalances procedure Philippe Legrain has a good comment on the excessive balance procedure, which may be triggered this year for the first time – against Germany. The rules are extremely asymmetric. Last year, Germany got away with an average current account surplus of 5.9% over the previous three years - just below the 6% threshold at which the procedure is triggered (while for deficits the threshold is 4%). But Germany’s average three-year surplus is now certain to exceed 6% of GDP. The latest updated figures show Germany’s surplus to have been well above the 6% limit: according to Eurostat figures, Germany’s current account surplus was 6.3% in 2010, 6.2% in 2011 and 7.0% in 2012. This means, Germany is not the “growth locomotive”, as Wolfgang Schäuble claims, but a drag on growth. DG Ecfin is due to deliver its latest assessment of imbalances Nov 15. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.504 0.515 0.531 Italy 2.321 2.352 2.357 Spain 2.379 2.428 2.433 Portugal 4.323 4.412 4.605 Greece 6.477 6.580 7.65 Ireland 1.717 1.761 1.776 Belgium 0.740 0.753 0.781 Bund Yield 1.931 1.872 1.867

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.362 1.3676

Yen 133.530 134.05

Pound 0.847 0.846

Swiss Franc 1.233 1.2346

ZC Inflation Swaps

previous last close

157

1 yr 1.19 1.18

2 yr 1.32 1.31

5 yr 1.54 1.53

10 yr 1.94 1.78

Euribor-OIS Spread

previous last close

1 Week -3.786 -4.386

1 Month -1.200 -1.9

3 Months 5.671 5.071

1 Year 30.529 29.729

Source: Reuters

http://www.eurointelligence.com/professional/briefings/2013-10- 18.html?cHash=f56f9b556075cc46b11cf65f083bf8fd mainly macro Comment on macroeconomic issues

Thursday, 17 October 2013 How not to run fiscal policy: more lessons from the Eurozone In my last but one post I noted the case of European Commission estimates of the output gap as an example of what can happen if you do not allow for the asymmetry implied by firms’ reluctance to cut nominal wages. Their methodology implied that the natural rate in Spain had more than doubled in a decade, which seems nonsensical. However the economists at the Commission at least came to recognise the problem, and had proposed making some changes to get more reasonable numbers. As I will explain, the methodology they use is reasonable given the state of macroeconomic arts, which is why in that earlier post I used this as an example of a failure of macroeconomics generally, rather than economists at the Commission. In this post I want to note what happened next, which in contrast does seem to reflect badly on how the Commission works. But before getting to that, a few background points. First why this matters. As part of the “two pack” (don’t ask), Eurozone economies will now have to submit their budgets for approval by the Commission. Approval will depend, among other things, on the Commissions calculations of the structural budget deficit, which is the deficit corrected for the cycle. Measuring this is difficult, because we do not observe the output gap, which itself depends on both the natural rate of unemployment and the underlying trend in productivity (technical progress), which we also do not observe.

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You can say at this point why bother - just stick to looking at the actual deficit. That’s an overreaction. For most Eurozone countries we are pretty clear about the sign of the output gap, so making some adjustment should be better than doing nothing. To see the kind of stupidity that arises from just focusing on actual deficits, see the Netherlands. In principle we can use information on what we do observe, like wage inflation, to make inferences about what the natural rate of unemployment is. So if wage inflation depends on the gap between actual unemployment and the natural rate (called the NAWRU by the Commission), we can switch things around to make this an equation telling us what the natural rate is, given observations on actual wage inflation. There are three kinds of problem that arise in doing this. The first is that our estimates will be only be as good as the specification of the wage equation. If we leave important factors out of the specification of the wage equation (like a reluctance to cut the nominal wages of existing workers because of morale effects - see this paper by Eliaz and Spiegler for example), we will get our estimates of the natural rate wrong. The second is that some of the things that we are sure do determine wage inflation, like inflation expectations, may be difficult to measure. Paul Krugman discusses the possibility that inflation expectations in Spain might have become anchored here. Finally no equation is perfect, and if we do not allow for these inevitable errors we will get a ridiculously bumpy series for the natural rate. So we need to apply some kind of smoothing. The way the Commission tackled these problems is described in detail here. The fact that they use a Kalman filter to deal with smoothing issues seems sensible to me: I’m quite fond of the Kalman filter, ever since I wrote a paper with Andrew Harvey, Brian Henry and Simon Peters that used it to estimate labour productivity back in 1986. [1] I suspect they are getting the implausible results for one of the other two reasons. But the key thing to take away is that there are no easy answers here, and this kind of problem requires quite specific macroeconomic expertise. Furthermore, the importance of particular issues may vary between countries, so country specific expertise should be helpful. Following on from this last point, it is clear that this is not just an issue for Spain. As the Irish Fiscal Advisory Council notes here (p68), the Commission estimates for the natural rate in Ireland also look implausibly high. So it is not surprising that the Commission would want to adjust their methodology to give more plausible numbers. (Matthew Dalton looks at the implications of their methodology for the US here.) This all matters. If the Commission underestimates the output gap because it overestimates the natural rate of unemployment, then it will overestimate the structural budget deficit, and the country concerned will come under considerable pressure to undertake further austerity. Readers will know why I think that will be a very costly outcome. (More on this from Cohen-Setton and Valla here.) At least economists at the Commission have now recognised the problem, and changed their estimates. But as Matthew Dalton reports “The change was approved by technical experts at a meeting last week and was expected to be supported at a Tuesday meeting of more senior officials in Brussels. But an article published in The Wall Street Journal about last week's decision generated concern in some national capitals about its effects on budget policies, an EU official said. The new methodology will be sent back to the expert committee for further

159 discussions, in an effort to understand what its impact will be on all 28 EU countries, the official said.” Reassuringly, Dalton adds that "The commission is fully on board with the new methodology," the official said. "We believe it is superior." But he also notes that the new methodology “was supposed to have been used by the commission in its next round of estimates of the structural deficit, to be published in November. Now that will have to wait, if it is approved at all.” As one of my commentators pointed out, this article in a leading German newspaper may have contributed to this official hesitation. So the Commission will go on making estimates that it knows are overestimating structural budget deficits, because of ‘concern in some capitals’ about the implications of using better estimates! None of this does the Commission any good in terms of its competence to help determine national fiscal policy. (Of course nothing can top the incompetence recently shown by the US congress, but that is no excuse.) Luckily there is an obviously better way to proceed, even within the confines of the deeply flawed Fiscal Compact. Many Eurozone countries already have their own ‘fiscal councils’: independent bodies set up to provide scrutiny of national fiscal policy. It should be central to the mission of these bodies to estimate the output gap and structural deficit, as it is impossible to look at fiscal sustainability without doing so. So why not get estimates of the output gap from these institutions who will be able to take into account country specific factors, and use the academic expertise that exists in those countries to maximum effect. (Spain and Ireland are hardly short of good macroeconomists.) Unlike the governments of those countries, fiscal councils should not be prone to bias in producing these estimates. The Commission can play a coordinating role, getting experts from the national fiscal councils together to share ideas and expertise. This seems to me a clearly better way to proceed, unless of course your goal is to maximise the influence of the Commission. [1] Harvey, A., Henry, S.G.B., Peters, S. and Wren-Lewis, S. (1986), Stochastic trends in dynamic regression models: an application to the employment output relationship, Economic Journal, vol 96 pp 975-985. Simon Wren-Lewis, “How not to run fiscal policy: more lessons from the Eurozone”, 17 octubre, 2013, en: http://mainlymacro.blogspot.com.es/2013/10/how-not-to-run- fiscal-policy-more.html

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Philippe Legrain blog Aftershock: Reshaping the World Economy After the Crisis — out now The financial crisis brought the world to the brink of economic breakdown. But now bankers’ bonuses are back, house prices are rising again and politicians promise recovery – all this while unemployment remains high, debts mount, frictions with China grow and the planet overheats. Is this really sustainable – or do we need to change course? EU must tackle Germany’s dangerously destabilising current-account surplus By Philippe Legrain 17 Oct 2013 In additional to its fiscal enforcement powers, the European Commission is now mandated to tackle excessive imbalances in the eurozone that could endanger its stability. Due to German lobbying, EU rules on imbalances are dangerously unbalanced: while they deem a current-account deficit of 4% of GDP problematic, a surplus has to exceed 6% of GDP before it is considered excessive. Nor do EU rules take account of absolute size, so a surplus in tiny Luxembourg is treated like one in mighty Germany. That tilt allowed the Commission to overlook Germany’s vast current-account surplus in its first assessment of dangerous imbalances last year: Germany’s surplus averaged 5.9% over the three preceding years. Yet in dollar terms, Germany’s surplus is now the world’s largest. The Commission’s directorate-general for economic and financial affairs is due to deliver its latest assessment of imbalances on 15 November. This time, Germany’s surplus is well above the prescribed 6% limit: according to official Eurostat figures, Germany’s current account surplus was 6.3% of GDP in 2010, 6.2% in 2011 and 7.0% in 2012. Thus, far from being a “growth locomotive”, as Wolfgang Schäuble claims, Germany is a drag on growth: not only does it buy less than it sells, the gap between its exports and imports is growing. As an impartial enforcer of EU law, the Commission is obliged to act. It must demand corrective action in Germany. Higher wages and increased investment would be a good place to start. http://www.philippelegrain.com/eu-must-tackle-germanys-dangerously-destabilising- current-account-surplus/ 17 Oct 2013

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ft.com World UK October 17, 2013 6:00 pm BoE’s Tucker warns on shadow banking risk By Sam Fleming and Patrick Jenkins

©Bloomberg Regulators need to “up their game” in overseeing hedge funds and shadow banks as risky pools of capital build up beyond the heavily scrutinised world of traditional banking, one of the world’s top central bankers has warned. Paul Tucker, the Bank of England’s outgoing deputy governor, said in an interview with the Financial Times that it would be “absolutely disastrous” if the economic fragility of banks was recreated outside the mainstream banking sector. More ON THIS STORY// Interview BoE is marshal of all it surveys/ European dark pool equity trading jumps/ BoE to stress-test big banks every year/ Four who could be Bank of England deputy/ Tucker joins Hester in heading for exit ON THIS TOPIC// Access to markets signals Beijing’s resolve/ Forward guidance: Latest fad confuses rather than clarifies/ Global Insight Weidmann sticks to the red light rule/ Europe asset-backed securities at risk IN UK// Food bank demand triples in a year/ Catton youngest winner of Booker prize/ SSE boss blames green plans for price rise/ Aircraft noise linked to heart disease He drew an explicit parallel between the current situation and 2004, when super-low rates sowed the seeds for a search for yield that culminated in the crash of 2007-09. “The west is in the course of repairing itself from the past crisis; the western world needs to be very careful that it doesn’t brew another one,” he said. “This is exactly what happened in the first part of the last decade.” Securities regulators around the world were not yet collecting enough information about what is going on in non-banks, Mr Tucker said. “I think securities regulators around the world just need to up their game on their oversight of non-banks; this is not just a point about this country but it is relevant to this country,” said Mr Tucker. Mr Tucker was speaking ahead of his final day in the job on Friday as he prepares to leave the institution, where he has spent his career, for Harvard University in the US. He said that while his institution was often portrayed as the sole guardian of UK financial stability, this underplayed the responsibility of bodies such as the Financial Conduct Authority in London, the Securities and Exchange Commission in the US, and umbrella groups such as Iosco.

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“Not everything is in central banks. Actually an awful lot of future monitoring of stability is I think going to have to be done at ground level in securities regulators.” The deputy governor, who was widely touted as a likely successor to former Bank Governor Lord King before Canadian Mark Carney clinched the post, said considerable progress had been made in regulation. If the current tools had been available before the financial crisis there would have been problems but “we could have avoided cataclysm”. Asked about UK plans for Chinese banks to open London branches rather than more tightly monitored subsidiaries, Mr Tucker said it should not trigger regulatory issues if they were wholesale rather than retail lenders, and were conducting “vanilla” business. The move, announced by Chancellor George Osborne earlier this week, has provoked questions from MPs over whether political pressure was applied to smooth the way for Chinese banks to enter the City of London. The UK Treasury has insisted that the Bank’s Prudential Regulation Authority, which must assess the Chinese lenders, made its decision independently. Andrew Bailey, the head of the PRA, on Thursday told a conference that no special arrangements were being made for the Chinese banks and that he did not regard himself as “a promoter of the City of London”. Speaking about different countries setting different rules for banks, he said: “I hope it’s not done to create outright competitive advantage.” Mr Bailey also said it was key for the development of the world economy for regulators to establish credible resolution regimes. That would give confidence for a move away from the insistence on subsidiarisation that many banks have been subjected to in recent years. “We shouldn’t accept it’s inevitably a permanent feature of the world,” Mr Bailey said. But he hinted at the prospect of lower capital requirements: “If we don’t establish trust we will continue to have Balkanisation and higher levels of equity capital. [But] the capital issue would be easier [with a proper resolution regime].” Mr Bailey’s optimistic outlook contrasted with earlier comments from Michel Barnier, the EU commissioner, who suggested Europe should impose higher capital requirements on US banks in a tit-for-tat reprisal for US proposals that foreign banks in America should incorporate as local separately capitalised holding companies. http://www.ft.com/intl/cms/s/0/38763856-3747-11e3-9603- 00144feab7de.html?ftcamp=crm/email/20131017/nbe/InTodaysFT/product&siteedi tion=intl#axzz2hyXHTYEh

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10/17/2013 06:25 PM Moving Ahead Party Leaders Agree to Start Coalition Talks Coalition talks can now officially begin as soon as next Wednesday after Chancellor Merkel's conservatives and their rival Social Democrats agreed on Thursday to move forward on building a governing coalition together. Coalition talks can now officially begin as soon as next Wednesday now that Chancellor Merkel's conservatives and their rival Social Democrats have agreed to move forward on building a governing coalition together. Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and the center-left Social Democratic Party (SPD) have agreed to recommend taking up official talks to form a coalition government, party leaders said on Thursday afternoon. "Beginning coalition negotiations makes sense," SPD leader Sigmar Gabriel told the press after the two parties concluded their third round of exploratory discussions. "We believe that we can find a common basis with the CDU." Though no concrete compromises on the parties' differences have yet been made, the SPD delegation decided unanimously to move forward with coalition talks, he added. The next meeting could be as soon as next Wednesday if both party committees agree on taking the next step in creating a so-called grand coalition. Horst Seehofer, head of the CDU's Bavarian sister party, the Christian Social Union (CSU), said he was also quite happy with the result of Thursday's meeting. 'Mutual Trust' The two parties must still reach an agreement on contentious issues such as the introduction of a minimum wage and tax levels, but CDU General Secretary Hermann Gröhe said that "paths to agreement" are at hand. "Today's discussions were marked by mutual trust," said Gröhe's SPD counterpart Alexander Dobrindt. "We have the impression that we can find solutions to these big issues during coalition talks." Before Thursday's talks began, there had already been some clear signals that both sides may be willing to compromise. Conservative leaders said they might agree to institute a minimum wage in exchange for no new taxes, while SPD leaders indicated this might indeed be an option. Merkel's only option is forming a grand coalition after talks with the environmentalist Greens broke down on Wednesday. The chancellor said last week she wants to know by Oct. 22 which party she will be entering formal coalition talks with -- that's when the newly elected Bundestag, Germany's lower house of parliament, assembles for its first session. She led her conservatives to their best general election result since reunification in 1990, coming in just five seats short of an absolute majority. URL: • http://www.spiegel.de/international/germany/cdu-and-spd-party-leaders-agree-to-start- coalition-talks-in-germany-a-928505.html

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Related SPIEGEL ONLINE links: • Coalition Talks Greens Reject Alliance with Conservatives (10/16/2013) http://www.spiegel.de/international/germany/0,1518,928153,00.html • Merkel's Patrons Donation from BMW Owners Raises Eyebrows (10/15/2013) http://www.spiegel.de/international/europe/0,1518,927954,00.html • Hard Bargaining German Coalition Talks Yield No Progress (10/15/2013) http://www.spiegel.de/international/germany/0,1518,927866,00.html • Round Two of Talks Grand Coalition Looks Increasingly Likely (10/14/2013) http://www.spiegel.de/international/germany/0,1518,927760,00.html • In a Hurry Merkel Wants Coalition Partner in Two Weeks (10/09/2013) http://www.spiegel.de/international/germany/0,1518,926931,00.html

Pressemitteilung/Press Release Press Release of 17 October 2013 Autumn 2013 Joint Economic Forecast: Economy Picking Up - Put Budget Surpluses To Good Use

Project Group Joint Economic Forecast

Completed in Essen on 15 October 2013

Economy Picking Up – Put Budget Surpluses To Good Use

The German economy is on the verge of an upturn driven by domestic demand. The improving global economic climate and decreasing uncertainty are fuelling investment. Private consumption is benefitting from favourable employment and income prospects. Real gross domestic product looks set to grow by 1.8 percent in 2014, after an increase of just 0.4 percent

165 this year. Consumer prices are expected to rise by a moderate 1.6 percent this year and by 1.9 percent next year. The German public budget will continue to show a surplus.

The world economy picked up in the first half year of 2013. Production primarily expanded more rapidly in the advanced economies, while the pace of growth in emerging economies, in contrast, barely picked up. Growing confidence on the part of companies in most countries suggests that the economic uptick will continue in the second half of the year.

Although economic activity in the advanced economies remains constrained by structural problems, there have been signs of a recovery since the beginning of the year. The US economy has coped very well with cuts to the public budget. Japan’s new government has succeeded in clearly stimulating the country’s economy with its highly expansive economic policy, while the British economy has managed to put stagnation behind it. Finally, production in the euro area recently increased for the first time in 18 months. In emerging economies the growth dynamic remains strong overall, but has slowed down considerably in recent years. The lack of good institutions is proving a growing constraint. This is particularly true of the large emerging economies Brazil, Russia, India and China. Weaker growth in China, an economy that has heavily influenced the pace of world economic growth over the last decade, is of the greatest important in this respect.

The central banks in all of the advanced economies have announced their intention to remain on an expansive course this year and next. This announcement was credible since price dynamic and inflation expectations are already low or, in the case of Japan, a higher price dynamic would even be welcome. It is more difficult to predict when central banks will deem that the time has come to cautiously downscale the expansiveness of monetary policy. In the forecasting period, however, this problem only applies to monetary policy in the USA. The situation in the US labour market, however, will continue to improve in the winter half-year and the US Federal Reserve Bank is then expected to begin to scale back monetary expansion.

In the US the stalemate in Congress is currently blocking all financial policy decisions once again. Should no agreement on the debt ceiling for the federal budget be reached, then the USA’s ability to pay its capital market creditors is even at stake. It is assumed, however, that an agreement will ultimately be reached on raising the debt ceiling. However, this will probably not offer a stable solution to the financial policy blockade. In the euro area, the measures and timeframe for reaching overall consolidation goals remain unclear. This forecast assumes that financial policy will become less constrictive.

The slightly faster pace of world economic growth in the first half of 2013 will be sustained in the second half of the year, as well as in 2014. The improvement seen in sentiment also has fundamental roots: some of the factors constraining economic activity since the financial crisis are slowly becoming less significant. World production will expand by 2.1% in 2013, and thus at around the same pace as in 2012. In 2014 growth is expected to amount to 2.8%. The economic environment does pose significant risks to this forecast. Should the federal debt ceiling in the USA not be raised by mid-October, spending would have to be cut by the size of the current government deficit which is around 4% of gross domestic product. This would trigger a severe recession in the USA with serious implications for the world economy. The forecast of a gradual recovery of the euro area from the crisis is also by no means guaranteed.

The German economy is on the verge of an upturn in autumn 2013. Livelier growth in the world economy and decreasing uncertainty about the crisis in the euro area are creating an environment in which favourable domestic economic conditions have a greater bearing. The sharp increase in output in the second quarter of this year could not be sustained since it was due to catch-up effects after the long, hard winter. Current indicators, however, point to an underlying upward tendency in the economy.

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Rising employment and considerable increases in wages have been responsible for a robust development in private consumption for some time. This development looks set to continue over the remainder of the forecasting period, since employment will increase considerably. Exports will be stimulated by a further upturn in the world economy. Exports in non-European countries have been rising rather dynamically for some time, and deliveries to the euro area will gain impetus as its economy stabilises. Overall, however, the increase in German exports will be moderate. Imports, on the other hand, will be stimulated by strong domestic demand. The contribution of international trade to growth is expected to remain negative on balance.

Against a background of decreasing uncertainty over a renewed intensification of the crisis in the euro area and a brighter sales outlook in world markets, investment activity over the forecast period looks set to pick up slowly. Favourable financing conditions will therefore continue to impact the economy. Construction activity will be supported by the favourable investment environment, and especially low interest rates.

Overall, gross domestic product is expected to increase by 0.4 percent this year (68 percent projection interval: 0.2 to 0.6 percent). The low average annual increase is mainly due to significant declines in production in the winter half year of 2012/2013. Gross domestic product is expected to increase by 1.8 percent in the year ahead (68 percent projection interval: 0.6 to 3.0 percent). The German economy will expand faster than production potential in 2014 and the capacity utilisation rate is expected to increase significantly.

The upward development in prices is expected remain moderate during the forecasting period, with inflation rates of 1.6 percent in this year and 1.9 percent in the year ahead. The number of employed persons is expected to increase by 235,000 persons on average this year, and by 260,000 persons in 2014. Since, however, the size of the potential workforce is increasing, this will not be reflected in any significant decrease in unemployment. The unemployment looks set to decline only slightly from 6.9 percent in 2013 to 6.8 percent in 2014.

The total public budget will close the year with a surplus of around 3 billion euros, or 0.1 percent of gross domestic product. Next year this surplus will rise to almost 8 billion euros, or 0.3 percent of gross domestic product as the economic situation improves. This forecast is based on the budget and finance plans as they currently stand.

Risks for the German economy primarily lie in the fact that the situation in the euro area remains fragile and the possibility that the crisis may flare up again cannot be excluded. The instruments created in recent years to stabilize the financial markets, and the European Central bank’s announcement of its willingness to intervene, under specific conditions, in the government bonds market in order to stabilise it, have only calmed down the situation temporarily, but do not represent a long-term solution. Any relaxation of political efforts to build a sustainable framework for European Monetary Union, or any abate in the consolidation and reform efforts in the crisis-afflicted countries could result in renewed tensions in the financial markets.

Important decisions are waiting to be taken in German economic policy in autumn 2013. Since the German Bundestag elections did not yield any clear majority, the course to be pursued by the future government will only emerge over the weeks ahead. This forecast was made based on economic policy under status quo conditions. During the election campaign, however, many proposals were put forward which – should they be implemented – would bring changes to economic, financial and social policy. These changes would involve both distribution issues, as well as the promotion of economic growth.

Financial policy in recent years has attempted to consolidate the public budget and has therefore created a favourable economic situation. In 2012 Germany presented a structurally almost

167 balanced budget for the first time since 2000 and this will also apply to 2013. Based on the assumption that the increase in public spending will be very limited in the mid-term and that there will be no changes to tax rules, the government surplus will increase considerably to reach 1½ percent of nominal gross domestic product by 2018. Part of this surplus, however, is subject to cyclical considerations and should be used to pay off debts, as stipulated in principle by the German debt brake. The cyclically-adjusted public sector balance will be 1 percent of nominal gross domestic product in 2018. This corresponds to 33 billion euros. This amount represents the budgetary scope enjoyed by financial policy, without the need to raise taxes.

Financial policy should put the budget surplus to good use. It could be used to reduce “cold” progression in income tax (i.e., increasing burden on the taxpayers who are shifted by inflation into higher tax brackets) and to make investments in the fields of infrastructure, education and research. Additional scope could be created by eliminating subsidies.

With its announcement that it would defend the euro with all of the resources at its disposal, the ECB calmed down the situation in the financial markets and created a breathing space for economic policy. Its intervention, however, may possibly have had negative effects on the intensity of reform processes, by lessening pressure from the financial markets.

With its monetary policy the ECB reacted to the subdued developments in money and credit growth and dropped the interest rate for Eurosystem main financing operations by 25 points to 0.5 percent on 2 May 2013. However, the limits of expansive monetary policy in the euro area are now emerging. There will be no further noticeable stabilising impulses for the economy from further interest rate decreases in the crisis-afflicted countries, because the problems in their banking sectors have not yet been resolved. The institutes see a clean-up of these banking sectors as the key to an economic recovery. The owners and creditors of the banks should be called upon in the first instance, and in exceptional cases deposit holders beyond the limit of deposit protection. The national states would subsequently have to accept responsibility for the remaining old liabilities. A limited form of European burden-sharing should only be a last resort.

Project Group Joint Economic Forecast: Links

Autumn 2013 Joint Economic Forecast (German version) | PDF, 2.16 MB

http://www.diw.de/en/diw_01.c.429711.en/themen_nachrichten/autumn_2013_joint_ec onomic_forecast_economy_picking_up_put_budget_surpluses_to_good_use_nbsp.html Previsiones encargadas por el Ministerio Federal de Economía y Tecnología conjuntamente a los institutos: Alemán de Investigación Económica (DIW); Austriaco de Investigación Económica (WIFO); Leibniz para la Investigación Económica de la Universidad de Múnich (IFO); KOF Economic Research, de la ETH de Zurich; de Investigaciones Económicas de Halle (IWH); de Investigaciones Económicas de Renania del Norte-Westfalia en Kiel (RWI), y el Instituto de Estudios Avanzados de Viena (IHS).

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Failing the Test? The Flexible U.S. Job Market in the Great Recession Richard B. Freeman

NBER Working Paper No. 19587 Issued in October 2013 NBER Program(s): LS

The Great Recession tested the ability of the “great U.S. jobs machine” to limit the severity of unemployment in a major economic downturn and to restore full employment quickly afterward. In the crisis the American labor market failed to live up to expectations. The level and duration of unemployment increased substantially in the downturn and the growth of jobs was slow and anemic in the recovery. This article documents these failures and their consequences for workers. The U.S. performance in the Great Recession contravenes conventional views of the virtues of market-driven flexibility compared to institution-driven labor adjustments and the notion that weak labor institutions and greater market flexibility offer the best road to economic success in a modern capitalist economy.

doi: 10.1177/0002716213497463 The ANNALS of the American Academy of Political and Social Science November 2013 vol. 650 no. 1 78-97 The Optimal Currency Area in a Liquidity Trap David Cook, Michael B. Devereux

NBER Working Paper No. 19588 Issued in October 2013 NBER Program(s): IFM

Open economy macro theory says that when a country is subject to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries policy rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in open economies with flexible exchange rates. In this paper, we show that if the zero bound constraint is binding and policy lacks an effective `forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area, even when there are country-specific macro shocks. When monetary policy is constrained by the zero bound, under independent currencies with flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset

169 of countries are constrained by the zero bound, and other countries freely adjust their interest rates. In order for a regime of multiple currencies to dominate a single currency area in a liquidity trap environment, it is necessary to have effective forward guidance in monetary policy. http://www.nber.org/papers/w19588.pdf?new_window=1 Is The Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation Olivier Coibion, Yuriy Gorodnichenko

NBER Working Paper No. 19598 Issued in October 2013 NBER Program(s): EFG ME

We evaluate possible explanations for the absence of a persistent decline in inflation during the Great Recession and find commonly suggested explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms’ inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period. http://www.nber.org/papers/w19598.pdf?new_window=1 Is There A Case for a "Second Demographic Transition"? Three Distinctive Features of the Post-1960 U.S. Fertility Decline Martha J. Bailey, Melanie E. Guldi, Brad J. Hershbein

NBER Working Paper No. 19599 Issued in October 2013 NBER Program(s): CH DAE DEV LS

Dramatic fertility swings over the last 100 years have been the subject of large literatures in demography and economics. Recent research has claimed that the post- 1960 fertility decline is exceptional enough to constitute a “Second Demographic Transition.” The empirical case for a Second Demographic Transition, however, rests largely on comparisons of the post-1960 period with the baby boom era, which was itself exceptional in many ways. Our analysis of the U.S. instead compares the fertility

170 decline in the 1960s and 1970s to the earlier twentieth century fertility decline, especially the 1920s and 1930s.

Our findings affirm that both periods experienced similar declines in fertility rates and that the affected cohorts averaged the same number of children born over their lifetimes. In contrast to conventional wisdom, the mean age of household formation (by marriage or non-marital cohabitation) and first birth are almost identical for women reaching childbearing age in the 1920s and 1930s and today.

Three features, however, distinguish the post-1960 period: (1) the convergence in the distribution of completed childbearing around a two-child mode and a decrease in childlessness; (2) the decoupling of marriage and motherhood; and (3) a transformation in the relationship between the educational attainment of mothers and childbearing outcomes. These three features of the twentieth century fertility decline have implications for children’s opportunities, children’s educational achievement, and widening inequality in U.S. labor markets. http://www.nber.org/papers/w19599.pdf?new_window=1 Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence Olivier Coibion, Yuriy Gorodnichenko, Dmitri Koustas

NBER Working Paper No. 19600 Issued in October 2013 NBER Program(s): EFG LS ME

The persistence of U.S. unemployment has risen with each of the last three recessions, raising the specter that future U.S. recessions might look more like the Eurosclerosis experience of the 1980s than traditional V-shaped recoveries of the past. In this paper, we revisit possible explanations for this rising persistence. First, we argue that financial shocks do not systematically lead to more persistent unemployment than monetary policy shocks, so these cannot explain the rising persistence of unemployment. Second, monetary and fiscal policies can account for only part of the evolving unemployment persistence. Therefore, we turn to a third class of explanations: propagation mechanisms. We focus on factors consistent with four other cyclical patterns which have evolved since the early 1980s: a rising cyclicality in long-term unemployment, lower regional convergence after downturns, rising cyclicality in disability claims, and missing disinflation. These factors include declining labor mobility, changing age structures, and the decline in trust among Americans. To determine how these factors affect unemployment persistence, this paper exploits regional variation in labor market outcomes across Western Europe and North America during 1970-1990, in contrast to most previous work focusing either on cross-country variation or regional variation within countries. The results suggest that only cultural factors can account for the rising

171 persistence of unemployment in the U.S., but the evolution in mobility and demographics over time should have more than offset the effects of culture. http://www.nber.org/papers/w19600.pdf?new_window=1 Experimentation in Federal Systems Steven Callander, Bård Harstad

NBER Working Paper No. 19601 Issued in October 2013 NBER Program(s): POL

We present a model where heterogeneous districts choose both whether to experiment and the policies to experiment with. Since districts learn from each other, the first-best requires that policy experiments converge so that innovations are useful also for neighbors. However, the equilibrium implies the reverse – policy divergence – since each district uses its policy choice to discourage free-riding. We then study a clumsy central government that harmonizes final policy choices. This progressive concentration of power induces a policy tournament that can increase the incentive to experiment and encourage policy convergence. We derive the best political regime as well as the optimal levels of heterogeneity, transparency, prizes, and intellectual property rights.

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Daily Morning Newsbriefing October 17, 2013 Saccomanni’s dishonest budget Federico Fubini finds in La Repubblica that there is a gaping hole in Italy’s 2014 budget. Hours before it was presented, the budget still contained some €4bn in health care cuts, to counterfinance the tax reductions. But this was resisted by health minister Beatrice Lorenzin of the PdL. This triggered a last-minute scramble to find the resources before the midnight deadline, by which time the budget had to be presented to the European Commission. Fubini writes that the €8.6bn in new resources, more than half remain vague. They are non-recurring revenues to fund permanent expenditures, or they are so uncertain as to calculate their exact magnitude. He says it will not take the EU a long time to find out the gaping holes in this budget, and there will be a risk that Brussels will go back to Fabrizio Saccomanni and ask him to fill the gaps. Fubini finds a host of other problems. €2.5bn in expenditure cuts are undefined. There is no clarity of how the regions will contribute to the cuts, especially given that health care, their main expenditure item, remains frozen. Another problem are €3.2bn in disposals, revaluation of fixed assets and investments. Fubini says they keep on using assets sales to fund current expenditure, having already used this device to fix a hole in the 2013 finance in a recent mini-budget. He says Eurostat would normally not allow the proceeds of asset sales to support current expenditure. One should expect, therefore, that Italy’s structural deficit would be affected by this. Fubini also makes the point that the asset sales, which came from a special off-budget state fund, was done at non- market prices. In addition, Fubini also casts doubt on €2.2bn in calculated revenues the state might receive due to a review of how bank losses are treated, which might result in reduce tax breaks. He also addresses the controversial issue of the revaluation of the banks’ shares in the central bank, and concludes that the Italian treasury is really scraping the bottom of a barrel. German Greens pull out The Greens have pulled out of pre-coalition talks, leaving the Grand Coalition now as the only option to form a government in Germany. The Christian Democrats will hold another round of pre-coalition talks today, likely to extend until tomorrow. While the Greens have no real interest in a coalition negotiation with the CDU/CSU, they did say that they would stand ready to talk again if the coalition negotiations with the SPD were to fail. Suddeutsche Zeitung has the details of how the Greens came to the decisions. While the talks with the CDU/CSU were friendly, the Greens calculated there would not be sufficient funding for the projects they favoured, especially in the field of renewable energies. Wolfgang Munchau writes in Spiegel Online that the minimum wage should not be a big bone of contention between the CDU/CSU and SPD – as it seems to have been during the previous round of talks. The SPD favour a statutory minimum wage of €8.50. Munchau writes that the idea of a statutory minimum wage was a good one, though he was less certain about the level, which is higher the relative minimum wages in the US

173 and the UK, though lower than in France. He said that it would be best to separate the instrument of a statutory minimum wage from the level in the discussions, since the latter can be adjusted frequently. It would be better to start a little lower, say €7,50, to be supplemented with industry-wide agreements, then to assess the impact on the labour market, and then raise it if expedient. German institutes forecast weak economic recovery Each year, Germany’s economic institutes leak their joint economic forecasts to selected newspapers, which today report the main headline result of a 0.4% increase in GDP in 2013 to be followed by 1.8% in 2014. As Suddeutsche Zeitung points out, the numbers are down from previous forecasts, but still indicative of a moderate economic recovery. Frankfurter Allgemeine leads off with the political effects. Germany will have budgetary surpluses of 0.1% of GDP this year, 0.3% in 2014, rising to 1.5% by 2018, which gives the politicians some moderate room for manoeuvre, which the institutes put at an accumulated €33bn for the duration of the next parliamentary term. The institutes recommend measures to offset the fiscal drag, debt repayments, and investment in education and training. Eichengreen on Germany Barry Eichengreen has a comment in the Swiss Finanz und Wirtschaft about the incredible complacency of the German political establishment. He said it was unrealistic to expect Angela Merkel to change course after the elections. She also seems reassured by forecasts for a moderate uptick in economic growth next year. But what the Germans do not realise is the risk of a return of the eurozone crisis. All it takes is some bank failure, a vote no confidence in Greece or Italy, or setback for Ireland or Portugal in the attempt to regain market access. He said Germany should be open to joint funding schemes simply because Germany may need it in the future. The country suffers from a chronically low rate of investment, which suggests that productivity growth in the future will be low. German universities occupy lowly place in international rankings of universities. Germany’s energy policies will harm the country’s competitiveness. On top of that comes Germany’s dreadful demographics. Eichengreen says one should not dismiss the possibility that Germany may end up once again as the sick man of Europe – and could benefit from the joint funding mechanisms. Greek parliament lifts immunity of Golden Dawn MPs The Greek Parliament voted on Wednesday to lift the immunity of six Golden Dawn MP, opening the way for a broadening of a criminal investigation into the ultra-right party, Kathimerini reports. A total of 246 MPs in the 300-seat Parliament voted in favour of stripping six lawmakers of their parliamentary protection from prosecution. The vote, held by secret ballot, clears the way for Greek prosecutors to press various charges against the deputies. Opinion polls show support for the party declining, with only 6% to 7% of voters saying they would now vote for Golden Dawn, compared with 8% to 12% before the killing of the left-wing rap artist Pavlos Fyssas. However, it still remains the third-most popular party in the country, reminds the Wall Street Journal. Athens mayor says criminal prosecution not be enough to extinct support In a comment for the FT, the mayor of Athens Yorgos?Kaminis says expectations that criminal proceedings can deal a fatal blow to Golden Dawn may well be exaggerated, as it will take much longer to tackling the roots for right-wing extremism in Greece. The

174 rise of Golden Dawn was the result of popular anger at the political establishment and deepening insecurity exasperated by the economic crisis. The party has systematically worked to fill the vacuum created by the withdrawal of the state at local level, offering protection for the most vulnerable, as long as they are “Greeks”, while demonising and aggressively repelling those of any other ethnicity. While polls show a decline in popular support for the party since the assassination of Fyssas and the arrest of the leadership, it has been not as fast as one might have expected. New cuts are not possible, Samaras tells Wieser Antonis Samaras had the opportunity to convey his concerns about further austerity measures to the head of the Euro Working Group Thomas Wieser yesterday. According to Kathimerini Samaras told Wieser that the coalition government is not in a position to adopt any further spending cuts or tax increases apart from some €4bn already included in the 2014 draft budget. Others echo these concerns. Health Minister Adonis Georgiadis suggested on Skai TV that Greece would be forced to hold snap elections if the government is asked to implement “horizontal” cuts. In an interview with the Athens-Macedonian News Agency, New Democracy lawmaker Dora Bakoyannis said there was “no way” such measures would receive Parliament’s approval. Also on Wednesday, 60 ND MPs declared their opposition to the level of taxation on farmland and vacant plots of land. They were joined by 34 deputies from both ruling parties who requested in writing that Greeks who work in the tourism industry also receive unemployment benefits. Flagship Spanish cooperative appliance maker Fagor goes bankrupt Spain's largest kitchen appliance firm, Fagor, flagship of the Mondragón cooperative group, has filed for bankruptcy, reports Expansión. The firm's latest viability plan contemplated closing a number of factories and moving all of its production to Poland, as well as a nearly 50% staff reduction. Fagor has debt of over €1bn and immediate liquidity needs of €120m. The news of its insolvency has been covered in the Spanish press as a shocking symbol of the depth of the economic crisis, although Fagor's troubles were known as it had been losing money since 2009 and earlier this year its auditor had reservations on the 2012 accounts as reported by El Confidencial. Inflation down to 1.1% in September The eurozone annual HICP inflation fell from 1.3% in August to 1.1% in September, the lowest since February 2010, according to Eurostat. A year earlier, inflation stood at 2.6%. Core inflation, which excludes the volatile items of energy and food, alcohol and tabacco, fell from 1.1% to 1%. Reuters quotes Peter Praet from the ECB as saying that inflationary pressures would remain subdued in medium term. The Financial Times noted in an editorial that inflation was the dog never barked, and that the real threat is disinflation. It says there is more the central bank can do. It could do another 3-year LTRO or cut interest rates further. But there is no majority for this on the governing council right now. With unemployment in double digits, such inaction comes at a cost. The editorial makes the point that the ECB is asymmetric. If inflation had overshot the target to a similar degree, it would act sooner. Bruegel on the ECB In a Bruegel briefing paper, Zsolt Darvas and Silvia Merler write about the synergies between the ECB’s role as a monetary authority and as a financial supervisor, for

175 example when it comes to liquidity operations, or in the relationship between monetary policy, micro-prudential and macro-prudential policies. But there are also potential conflict of interest – when price stability considerations conflict with financial stability. The authors recommend that the ECB should give up one role – of a co-decision right on financial assistance programmes. While the structure is relatively solid, there is one situation for which there is no solution: if OMT is needed, but conditionally is not met. Ngaire Woods on the failure of global co-ordination The failure of global policy co-ordination has become one of the main themes among economic commentators. Here is a comment by Ngaire Woods, who notes that the Financial Stability Board (remember Mario Draghi’s old hangout) still has no legal mandate, enforcement powers, or even process to include other countries. The IMF still waits for the increase in its capital, while its existing resources are tied up in Europe. The world is now falling back to reliance on a patchwork of public and private “standard-setting” organizations, which has proved inadequate. The G20’s pledge in 2009 to protect the poorest and most fragile countries from the crisis remains unfulfilled. The World Bank has more than doubled its lending by front-loading existing loans, but crisis-hit countries that were not already borrowers were largely left out. She concludes that the global instruments to avert the next crisis have not been secured. This is a true as it is unsurprising. It has been the fundamental lesson of European integration that loose ad-hoc co-ordination even among willing governments does not work beyond the very short-term during a crisis. If you want to get lasting results, you need to build institutions with firm decision-making arrangements. The G20 lacks both legitimacy and instruments. Our conclusion is that this crisis has not been big enough to force the North-Atlantic governments into action. It will take another crisis for that to happen. Eurozone Financial Data 10-year spreads

Previous Yesterday This Morning day France 0.511 0.504 0.513 Italy 2.340 2.312 2.355 Spain 2.409 2.379 2.414 Portugal 4.358 4.323 4.395 Greece 6.537 6.477 6.52 Ireland 1.791 1.717 1.760 Belgium 0.744 0.740 0.751 Bund 1.909 1.931 1.888 Yield

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.353 1.3557

Yen 133.130 133.37

Pound 0.844 0.8476

Swiss The time series server does not have 0.000 Franc enough resources to complete the 176

request.

ZC Inflation Swaps previous last close

1 yr 1.07 1.19

2 yr 1.2 1.32

5 yr 1.39 1.54

10 yr 1.94 1.94

Euribor-OIS Spread previous last close

1 Week -3.643 -4.143

1 Month -0.771 -1.971

3 5.529 4.329 Months 1 Year 30.514 29.414

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-10- 17.html?cHash=395759a8003e82b8083f40c6b6489d3e

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ft.com Comment Editorial October 16, 2013 5:51 pm The price of the ECB doing nothing Draghi should use disinflation threat to try to boost growth

When the European Central Bank last year pledged to buy government bonds in unlimited quantities, the German media growled. Bild, its most popular paper, wrote: “Will inflation occur? Not immediately, but later.” A year on, inflation remains the dog that has not barked. Instead, the eurozone’s monetary guardian has the opposite problem – disinflation. Inflation in the bloc has drifted downwards since the first quarter and fell to 1.1 per cent in September, almost half the ECB’s target of below but close to 2 per cent. Even in Germany, inflation is just 1.5 per cent. Inflation could dip further in the months ahead as labour market reforms depress wages. Yet the central bank appears relaxed. More ON THIS STORY// Draghi faces eurozone inflation dilemma/ Eurozone industrial production rises 1%/ Wolfgang Munchau Blame bad policy for Europe’s lost growth/ Draghi pledges to keep interest rates low/ ECB considers liquidity boost for banks ON THIS TOPIC// Money fears point to more ECB bank loans/ Editorial It is time to shore up Europe’s banks/ Fast FT Euro rises on Draghi comments/ Live blog Draghi on ECB monetary policy EDITORIAL// Global hopefuls/ Stability risked to court China/ Time to end the US oil embargo/ Time to stand up to Marine Le Pen At the most recent of his monthly press conferences, Mario Draghi, ECB president, has parried concerns about the dip, saying risks to inflation in the medium term remain broadly balanced. There is more the central bank could do. It could pour liquidity into the banking system with another long-term refinancing operation of cheap three-year loans or it could cut rates. Neither approach appears likely to win the support of a majority of the governing council any time soon. While unemployment remains in double digits, such inaction comes at a cost. After the kerfuffle about the ECB straying beyond its remit with its plans for intervening in the sovereign bond market, disinflation offers the ECB a chance to do more within its mandate. The opportunity should be grasped, not passed over. It is easy to find arguments to explain the governing council’s stasis, not least that subdued price pressures help to cushion the blow of stagnant wages. The case for doing more wins out. The upside risks to inflation cited by Mr Draghi – higher commodity prices and indirect taxes – do not appear a serious threat to price stability. Many of the eurozone states most lacking in inflation are those most desperately in need of a boost to demand. They are also more exposed to the main problem associated with deflation: a rise in debt financing costs. In Italy, inflation is 0.9 per cent; in Spain, 0.5 per cent. Neither a rate cut nor more liquidity would serve as a panacea. So long as the stability of Europe’s banks remains in doubt, deflation could remain a threat. But that is no argument for doing nothing. Mr Draghi would not appear as calm, nor the governing council as unmoved, were inflation as high above target as it is below it. The ECB has room to ease. http://www.ft.com/intl/cms/s/0/079b54e8-366e-11e3-8ae3- 00144feab7de.html?siteedition=intl#ixzz2hwsKUIe4

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ft.com Comment Opinion October 16, 2013 5:30 pm The BBC is a cornerstone of Britain’s creative industries ByTony Hall The licence fee creates marketplaces for collaborators and competitors, writes Tony Hall

©Getty From the start, John Reith wanted the BBC to innovate. The founding director-general of Britain’s public broadcaster said: “Give the public slightly better than it thinks it likes.” As audience expectations have grown, the corporation has expanded into new areas. For some, this is worrying. Surely, goes the charge against us, a behemoth of our size can only stifle creative endeavour, crowd out rivals and prevent commercial innovation? I disagree: Britain is at the forefront of the worldwide surge in creative industries. And this is not despite the strength of our public service broadcaster. It is partly because of it. More// ON THIS STORY/ Hall reveals £100m BBC digital plan/ Editorial Channel- hopping BBC risks its mandate/ MPs to launch inquiry into BBC governance/ Harman takes issue with policing BBC/ BBC regulation faces overhaul IN OPINION// Julian Hunt and Johnny Chan Face up to storm threats/ Pascal Lamy Face up to crises yet to come/ David Li China should cut its lending/ Evgeny Morozov The ‘sharing economy’ Britain’s creative sector workforce has recently grown four times faster than the workforce as a whole. The UK is one of only three countries that are net exporters of music. It is also the biggest net exporter of TV formats: Dancing with the Stars is as much a phenomenon in the US as its parent, Strictly Come Dancing, is here. ITV’s recent success in drama with Downton Abbey and Broadchurch has done wonders for its balance sheet. Two of the top three newspaper websites in the world, as measured by unique user numbers – the Daily Mail and The Guardian – are British. This success, I believe, is built on two great comparative advantages. The first is the English language. But the second is access to a unique venture capital fund: the BBC. The manner of our funding, the licence fee, allows us to offer our public high-quality content; while, at the same time, investing in areas that have been starved of investment and taking risks on new technology.

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We put £1bn a year into the UK creative sector, commissioning more than 700 independent companies. We have taken on underdeveloped areas in Salford, Glasgow and Cardiff, and created centres of creativity and employment. Because we were the anchor tenant in the new Salford Media City, other employers have moved in – most recently ITV, which will produce Coronation Street from there. It is now the biggest digital hub in Europe outside London, with a workforce of 10,000. Our Scottish home, Pacific Quay in Glasgow, was once a derelict bank of the Clyde. It is now also home to STV. Cardiff Bay is today the BBC’s biggest drama centre in the UK, producing Casualty and Doctor Who. I know from my time as chief executive of the Royal Opera House how easy it is to invoke the power of culture to regenerate areas. I also know how often it fails, because good intentions are simply not enough. Our attempts to spread the economic benefits of the licence fee succeed because we do not build citadels, we create marketplaces where we are joined by both collaborators and competitors. Our investment has helped open up new technological avenues for our competitors, too. In 1997, I launched the BBC news website. At that time, there was limited content on the internet. But the audience moved with us. Ten years later, 9 per cent of UK internet users said one of the main reasons they went online was because of the BBC’s presence. As with the internet in general, so with broadband. We launched the iPlayer in 2007. Now it meets nearly 3bn programme requests a year, stimulating demand for broadband; 13 per cent of users say it was a reason for getting home broadband. And with Freeview – Britain’s free-to-air digital service, now the most popular TV platform in the UK – it is easy to forget that 10 years ago digital terrestrial TV was on its knees. A BBC-led coalition rebuilt it, and today it hosts dozens of successful commercial channels. Our revenues may be dwarfed by companies such as Fox, Apple or Amazon. But we can still be a catalyst, an innovator and a benchmark that benefits British companies and the public whose licence fee fund us. Across the country, and across the creative sector, we blaze trails others can profit by. Of course, I want the BBC itself to be a place that produces world-class content. But we use our expertise and certainty of funding to make new markets and new platforms for others to use. And we develop technicians, designers, journalists and actors that the whole world employs and benefits from. So we do not crowd out others or sate the appetite for media. We use the inventiveness of our people and the certainty of the licence fee to whet the appetite for more. The writer is director-general of the BBC http://www.ft.com/intl/cms/s/0/0e1432d0-3665-11e3-aaf1- 00144feab7de.html#axzz2hyMnLCkC

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ft.com World US US Politics & Policy Last updated: October 17, 2013 8:28 am US eleventh hour deal averts default By Richard McGregor and Stephanie Kirchgaessner in Washington

An image from Senate Televisionhows the final vote after the Senate approved The US Congress has passed a bill to reopen the federal government and approve new sovereign borrowings, ending three weeks of high drama on Capitol Hill that pushed the US to the edge of a debt default. With pressure mounting from US business and overseas creditors such as China, the Senate and then the House of Representatives both voted to end the partial government shutdown and extend the debt ceiling into early next year while Democrats and Republicans start negotiations on a new budget. The Senate approved the agreement on Wednesday night with a vote of 81 to 18, and the House followed, approving the measure 285 to 144, although a majority of Republicans in the chamber voted against it. President Barack Obama signed the legislation shortly after midnight and furloughed workers are expected to return to work at federal agencies on Thursday morning. More ON THIS STORY// Details of the US debt deal/ Lex Debt ceiling – not much ado/ Shutdown a drama in many episodes/ Edward Luce Republican self-harm/ Shutdown to continue to hurt US companies ON THIS TOPIC// Global Market Overview US fiscal deal rally fades/ Analysts see US crisis deferred not solved/ Further Fed support will buoy US equities/ Deal brings relief for Lew’s debt warriors IN US POLITICS & POLICY// Defeat has bitter taste for Tea Party/ Fed survey shows rise in uncertainty/ Negative watch for US rating on default fears/ Supreme Court to hear emissions case

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“Hopefully next time it won’t be in the eleventh hour. We’ve got to get out of the habit of governing by crisis,” Mr Obama said on television shortly after the Senate vote. Sylvia Burwell, the White House budget director, said: “Employees should expect to return to work in the morning.” The bill won the reluctant blessing of John Boehner, the Republican speaker in the House, who earlier said that blocking the deal “will not be a tactic for us”. “We fought the good fight. We just didn’t win,” he told an Ohio radio station. In a closed-door session, Mr Boehner and other leaders urged fellow Republicans to support the Senate-negotiated bill. The compromise reopens the government until January 15, suspends the debt ceiling until February 7, and requires negotiations to reduce the budget deficit to be completed by December 13. It includes a mechanism for Republicans to voice their disapproval for an extension of the borrowing authority, though this would not have a practical effect. Christine Lagarde, International Monetary Fund managing director, welcomed the deal but called on US politicians to act differently in future. “It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner,” she said in a statement. “We also continue to encourage the US to approve a budget for 2014 and replace the sequester with gradually phased-in measures that would not harm the recovery, and to adopt a balanced and comprehensive medium- term fiscal plan.” Equity markets mostly rallied on the news. On Thursday the FTSE All-World equity index rose 0.3 per cent to 257.4, on course for its best close since May 2008. The Nikkei 225 was up 1.2 per cent in Tokyo, the Hang Seng 0.4 per cent higher in Hong Kong and Australia’s S&P/ASX 200 rose 0.4 per cent. European markets opened marginally down, however. On Wednesday US equity markets had rallied on the prospect of the deal, with the S&P 500 index climbing 1.38 per cent, leaving it within striking distance of last month’s record closing high that followed the Federal Reserve’s decision not to begin scaling back its quantitative easing programme. The CBOE Vix equity volatility index – closely watched as a measure of Wall Street anxiety – was down 21 per cent. However, business leaders said the long, high-decibel stand-off had already damaged the economy and consumer confidence. Standard & Poor’s said the shutdown shaved at least 0.6 per cent off annualised fourth- quarter GDP growth, or about $24bn out of the economy. The rating agency even warned that another round of government brinkmanship could lead to another “Humbug” holiday season. “The most immediate impact we’re seeing from the government default risk is an inflow of deposits,” said Andy Cecere, chief financial officer of US Bancorp, the sixth-biggest US bank by assets. He said customers were moving money out of Treasuries – with a “few billion dollars in the last week” moving to cash deposits at the bank. Mr Boehner vowed to continue to fight against “Obamacare”, the subject at the centre of the fiscal stand-off, but said Republicans would rely on “aggressive oversight” and “smart, targeted strikes” to split supporters of the law and push through reforms.

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Harry Reid, the Democratic majority leader, and Mitch McConnell, the Republican minority leader, announced the agreement on the Senate floor on Wednesday, two weeks after the partial closure that has seen hundreds of thousands of workers temporarily laid off and just a day ahead of the debt ceiling deadline. Ted Cruz, the Republican senator from Texas who had pushed a hard line in negotiations, did not delay the vote. But he tweeted afterwards: “This is a lousy deal that sells the American people down the river. It’s time to #MakeDCListen.” Mr Reid said: “We will do everything we can to change the atmosphere in the Senate and accomplish things for the good of our country.” Government agencies could also get more flexibility to arrange their budgets to comply with long-term cuts in spending introduced in the last big budget agreement. Under the current law, the agencies have little wiggle room to determine how the across-the-board cuts should be made. However, the overall, lower levels of government spending would be preserved. http://www.ft.com/intl/cms/s/0/d9c98224-364f-11e3-aaf1- 00144feab7de.html?siteedition=intl

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ft.com/lex October 16, 2013 10:55 pm Debt ceiling: not much ado The shutdown and default dance have economic consequences A few months from now it will hardly be possible to tell, from looking at a chart of the S&P500, when, exactly, the government shutdown happened, or that the threat of a debt default was briefly waggled about. Yes, very short-term Treasuries spiked from virtually nothing all the way to just a hair more than nothing. And there was a moment of anxiety early last week when a per cent or two leaked from the stock market; but that little spasm had cleared quickly. More// ON THIS STORY/ US eleventh hour deal averts default/ Details of the US debt deal/ Shutdown a drama in many episodes/ Edward Luce Republican self-harm/ Shutdown to continue to hurt US companies ON THIS TOPIC// Regulators set to round on data providers/ Authorities prepare ConvergEx charges/ US export ban has oil producers over barrel/ Americans try DIY government services LEX// Stanley Black & Decker/ ASML – keeping the faith/ LVMH – All that glitters/ HK dollar peg – Lessons for Washington This cool response makes a certain amount of sense. A period of destructive political huffing and puffing pushed Federal Reserve asset purchase “tapering” decisively into mid-2014, making the market more attractive for equity investors who do not think a default was a possible outcome. And we have seen assorted versions of this low-budget horror movie before, and none of them ended in a bloodbath. But the shutdown and default dance have economic consequences. Macroeconomic Advisors reckons that lower discretionary spending caused by fiscal policy uncertainty has reduced US output growth at about 0.7 points a year since 2010 – a painful amount when total growth is in the range of 2.5 per cent. Economic counterfactuals are hard to measure, of course. But the burden of proof is on those who would argue that these games of fiscal chicken do not, for example, make companies less likely to invest in people and capital equipment. One argument for market complacency is that, given that the Republican party received no new policy concessions as a result of this most recent tantrum, the debt ceiling threat has now been declawed. But why shouldn’t the extremists take away a different lesson: that next time they just have to push a bit harder? The market’s indifference may, frighteningly, have given them the rope to give it another try. http://www.ft.com/intl/cms/s/3/c40a798c-36a6-11e3-aaf1- 00144feab7de.html#axzz2hyNHqq4P

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Finanz und Wirtschaft Germany’s Complacency Problem “The good citizens of Germany might think it inconceivable that Germany might someday have to restructure its debt. But history suggests otherwise” Chancellor Merkel is content with the status quo, just as the German public is content. But that status quo is not tenable. But just because the euro has survived so far is no guarantee that it will survive definitely, absent fundamental policy reforms.

Barry Eichengreen 09:24 - 15.10.13 If one has only one word with which to sum up the results of the recent German election, that word would be complacency. I was there earlier in the month, and the sense of complacency was palpable. The commentariat, like the voters, was more than happy with Mrs. Merkel’s stewardship of the economy. They were also tolerably satisfied with her handling of the euro crisis. The chancellor had delivered on her promise of doing «whatever it takes» to hold the euro together. Her reasonably tough line vis-à- vis Greece had prevented Germany from being taken as a pansy with an open pocket book. Thus, German voters were more than ready to give Mrs. Merkel’s Christian Democrats enough seats in the Bundestag to guarantee more of the same. There may be much intrigue around the identity of her prospective coalition partners, the defeated Social Democrats or the increasingly centrist-dominated Greens. But the answer will make little difference for economic policy. The Greens may pull the chancellor a little bit further in the direction of environmentalism and clean energy, but she has moved quite far in that direction already. The Social Democrats would like her to be even more supportive of the European project, but she is quite supportive of the EU already, and the Social Democrats have not been able to offer much in the way of an alternative. In any case, Mrs. Merkel has sufficient public support, in the wake of the election, to resist being pulled very far off her preferred course, whatever the direction. In terms of the euro, this means that there will be no post-election «surprise» of the sort predicted by some champions of the single currency. 2013 has not exactly been a year of great progress in resolving the euro crisis, to put an understated gloss on the point. The return to growth in Southern Europe has been halting. Progress toward banking union has been hesitant. There has been no restructuring of Greece’s debt to its official creditors – the ECB and the IMF. Whether Portugal and Ireland will be able to return to the markets or, instead, require a second rescue package remains unclear. And the biggest problem is yet to come, namely an Italy that is unable to grow, incapable of reforming, and burdened with what increasingly looks like an unsustainable debt.

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Angela Merkel will not pull a rabbit out of her hat I can’t count the number of times over the summer I was told that the eerie silence of those putatively responsible for addressing these issues was due to the impending German elections. The radical reforms needed to decisively address these problems were toxic to German voters. The election had to take place before new policy initiatives could be rolled out. This was always naïve. Mrs. Merkel is not about to pull a rabbit out of her hat. Rather, she was always going to stay the course. Her temperament is perfectly attuned to that of her public. She is content with the status quo, just as the German public is content. It is not her way to accept, much less offer, radical changes in policy strategy. The IMF has just told her that the growth of German GDP should accelerate further to 1.4% in 2014. Southern Europe may be suffering, but who is to say that a little suffering is bad for the soul? A little suffering may not be bad for the soul, but it is bad for stability. There is still the possibility that high unemployment and continuing recession may result in a sudden vote of no confidence in the Greek or Italian government. Portugal and Ireland may fail in their efforts to regain bond market access. A big bank failure in Italy or Spain might alarm investors. Complacent Germans evidently believe that the status quo is tenable. In fact, any number of untoward events could upset the applecart. At that point, the crisis will be back with a vengeance. Mrs. Merkel and other German leaders could in principle take steps to shatter the prevailing sense of complacency. They could drive home that the risks are very real. They could emphasize that just because the euro has survived a difficult five years is no guarantee that it will survive five more, absent fundamental policy reforms. Specifically, they could argue that the risks can be adequately addressed only by creating an full-fledged banking union – not just a single supervisor empowered to require European banks to raise adequate capital, but also a common deposit insurance scheme and a jointly-funded resolution mechanism – along with a jointly-funded pan-European unemployment insurance fund. The banking union would break the «diabolic loop» between banking problems and sovereign debt problems. The jointly-funded unemployment insurance fund would provide for limited transfers from low to high unemployment regions, like those which operate in the United States. The question is how to make the case. German leaders could start by observing that the common presumption that Germany will be a net contributor to these mechanisms is far from assured. Just because the German economy has been performing handsomely in the past is no guarantee that it will do so in the future. The country’s low investment rate and ageing infrastructure do not bode well for the future of productivity growth. The highest rated German university, according to the Shanghai Rankings, is the Technical University of Munich at number 50, which is not particularly impressive. The country’s sustainable energy policy is a logistical nightmare that, going forward, will weigh down German firms’ export competitiveness. Above all, there are Germany’s dreadful demographics. Germany’s population is already shrinking. The fertility rate has dropped to fewer than 1.5 children per woman. The country is now taking steps to raise fertility rates, giving tax breaks for families with children and stay-at-home mothers. But whether encouraging mothers to stay at home rather than work is the best way of growing the labor force is dubious. And even

186 the best-laid plans for raising fertility will impact the growth of the labor force only after 20 or more years. One day, Germany might be at the receiving end Germany’s demographic decline, in other words, is baked in. So too, therefore, is the decline of its economy. Together, these factors imply that the possibility that Germany will eventually number among Europe’s sick economies cannot be dismissed. Policies that transfer resources from booming to depressed regions might, in fact, benefit Germany. The country’s leaders need to make the case. They also need to make the case that debt restructuring is not just for other countries. As George Soros has recently observed, Germany restructured its own debt three times in the 20th century: in 1924 as part of the Dawes Plan, in 1929 as part of the Young Plan, and after World War II as part of the Marshall Plan. The good citizens of Germany might think it inconceivable that Germany might someday have to restructure its debt. But history suggests otherwise. This would not be a message of complacency. Sending it would be out of character for Mrs. Merkel. But when better to step out of character than immediately after a successful election run? Not doing so would only allow problems and risks to mount further, not just for the euro but for Germany itself. http://www.fuw.ch/article/germanys-complacency-problem/#wrapper

The Return of Europe’s Debt Crisis Author: Satyajit Das · October 16th, 2013 · Since mid-2012, the European financial crisis has been in remission, with the symptoms of the underlying disease temporarily suppressed. As treatment is discontinued and drugs lose efficacy, there is a high probability of a relapse. Taking the Waters… A combination of austerity programs, debt write-downs, the European Central Bank’s (“ECB”) commitment to “do whatever it takes” to preserve the Euro, the proposed banking union and the finalisation of the primary bailout fund (European Stability Mechanism (“ESM”)) helped restore relative financial stability. There were falls in the interest rates of peripheral countries and a rally in stock markets, although no meaningful recovery in the real economy. The cost of Spanish 10-year debt fell from more than 7.5% to 4.04%; Italy from 6.7% to 3.76%: Greece from 30% to about 10%; Portugal from 12% to 6.4%. The Spanish and Italian stock markets recorded a 1 year gain of 31% and 24% respectively. The French and German stock markets rose by over 24%. In contrast, Euro-Zone gross domestic product (“GDP”) fell 0.1% during Q3 2012, 0.6% during Q4 and 0.3% during Q1 2013, with sharper falls in the weaker economies. Falling off the Austerity Wagon…

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Austerity has failed to bring public finances and debt under control. Increases in taxes and cuts in government spending have led to sharp contractions in economic activity, reducing government revenues and increasing welfare and support payments as unemployment rates increase. Budget deficits, while smaller, persist and debt levels continue to rise. Euro-Zone GDP is now 3% below the level in 2007/2008. It is also some 135 below trend levels. Individual economies have fared even worse: the Greek economy has decreased by 23%; Ireland by 8%, Portugal by 8%, Spain by 8% and Italy by 9%. Euro- zone unemployment is 12%. Despite emigration of skilled worker, some weaker nations have higher unemployment: Greece 28%, Ireland 14%, Portugal 17%, Spain 26% and Italy 14%. Youth unemployment is significantly higher with 25-50% in some countries. In the antiseptic language of economists, the fiscal multipliers (the proportionate impact of austerity) have proved higher than expected, resulting in deeper recessions than forecast. Governments have found it difficult to continue austerity programs in the face of weak economic activity and high levels of unemployment. Pleading exceptional circumstances and extraordinary conditions, many nations have sought and received exemptions. Deficit and debt reduction targets have been deferred, although even these new reduced or deferred thresholds are unlikely to be met. Write Me Down, Write Me Up…. Further write downs in debt, as in Greece and Cyprus, to reduce debt to sustainable levels is difficult. Official lenders now directly or indirectly now own large amounts of the relevant debt. The ESM, the ECB and the International Monetary Fund (“IMF”) have direct loans to or have purchased bonds issued by Greece, Ireland, Portugal, Cyprus, Spain and Italy. The ECB and national central banks have substantial loans to Euro-Zone central banks and banks secured over the bonds of beleaguered countries. For example, the ESM, ECB, IMF and European central banks now hold more than 90% of Greece’s outstanding debt. Further debt write downs, providing relief for the borrowing nations, would result in immediate losses to these official bodies, ultimately flowing through to the taxpayers in stronger countries such as Germany. On a visit to Greece which necessitated a large and expensive security operation, German Finance Minister Wolfgang Schäuble advised Greeks “not to continue at this time this discussion on a new haircut” (European code for no further write downs of existing loans). Wolfgang Schäuble argued that it was not in Greece’s interests to ask for debt relief. In reality, it is in Germany’s interest that Greece does not seek further write downs. Further debt restructuring may result in actual cash losses to Germany, contradicting assurances to German voters that they were not at risk in the bailouts. The Invisible Measure… The ECB Outright Monetary Transactions (“OMT”), which allows purchase of unlimited amounts of the debt of Euro-Zone nations, has been hailed a success. President Mario Draghi has, self-effacingly, referred to it as the “most successful monetary policy measure undertaken in recent times”.

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Details of the yet to be used program remain opaque, especially on key issues such as whether the ECB’s status as a preferred creditor on such purchases in the event of default or restructuring. The OMT program is conditional, requiring the relevant government to formally request assistance and agree to comply with strict. It will be politically difficult for countries like Italy and Spain to ask for assistance if required, knowing that if a future debt restructuring is necessary then domestic taxpayers face a loss on their bank deposits as in Cyprus. If they are forced to seek assistance, then it will be under such extreme conditions and market pressures, meaning that ECB intervention may be too late. Germany and other Euro-Zone members remain opposed to unlimited purchase of sovereign bonds under the OMT. Its legal basis remains uncertain. The result of a challenges being heard by the German constitutional court is unknown. Diluting the Break… The banking union was intended to “to break the vicious circle between banks and sovereigns”. However, in the period since the announcement of the banking union, bank exposure to sovereign debt has increased, as national banks have purchased the sovereign’s debt which is used as collateral to obtain financing from the national central bank or ECB. As at August 2013, more than 10% of Italian banks’ total assets were sovereign bonds, an increase from 6.8% at the start of 2012. Spanish banks’ holding of sovereign bonds is 9.5%, an increase from 6.3% in the same period. Portuguese banks’ holding of sovereign bonds is 7.6%, an increase from 4.6%. The majority of the sovereign bonds held is that of the banks’ own governments. Euro-Zone bank claims on the public sector range between 10-40% of national GDP. European banks own around Euro 700 billion of Spanish government bonds and Euro 800 billion of Italian government bonds. They also have significant exposure to Greece, Ireland and Portugal. These holdings are complicated by the fact that banks hold no or minimal capital against these investments. The securities are frequently not marked to market, being held at historical purchase value. The key elements of any banking union are deposit insurance and a centralised recapitalisation fund. German opposition forced the ECB President to personally assure the Bundestag that a Euro-Zone wide deposit insurance scheme would not be part of the arrangements. There are no specific additional financial resources for recapitalisation, which remains reliant on the inadequate ESM. Germany insists that the banking union cannot be responsible for “legacy” risk, that is, problems originating from events before the finalisation of the banking union. Claudia Buch, a member of the German Council of Economic Advisers, speaking in an interview with the Frankfurter Allgemeine noted that bank recapitalisation would be carried out under “international control and national liability”. It highlighted the fact peripheral nations do not have the capacity to support their banks.

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The lack of resources to recapitalise banks has interesting side effects. Spain plans to convert Euro 51 billion in deferred tax assets (resulting from loan losses) into ‘core’ capital to meet minimum requirements. The banking union has become an inadequate single supervisory mechanism for a small number of Euro-Zone banks, maintaining pretence of action and progress allowing all governments to save face. The European Union has clarified that the goal is now to only “dilute” the link. Empty Wallets… The scope of the Euro 500 billion ESM is also limited. Following assistance to Greece, Ireland, Portugal, Cyprus and Spain (for the recapitalisation of banks), there is only maximum capacity of around Euro 200 billion, well below potential requirements, especially if Spain or Italy should require assistance. The ESM’s position is weak as it needs to issue debt, backed primarily by four countries: Germany (27.1%), France (20.4%), Italy (17.9%) and Spain (11.9%). If Spain or Italy needs assistance, then the contingent commitment of the remaining countries, especially France and Germany, would increase. The limitations of the ESM were highlighted by recent rating agency actions. If the ESM injects capital into Euro-Zone banks (up to a maximum of Euro 60 billion), then it will have to post collateral of Euro 120 billion (i.e. on a 2:1 basis) to maintain its credit rating, required to raise debt. Significantly the Latin American representative did not approve release of the most recent tranche of IMF funding for Greece, on the basis that forecasts for Greece’s debt and economic growth are delusional and there is significant risk of loss. The token abstention (the voting levels would have been insufficient to block the disbursement), which was puzzlingly repudiated by Brazil subsequently, highlights increasing divisions within the IMF about further assistance to Europe. In August 2013, Brazil asked for an overhaul of IMF assistance to European countries to make them more realistic. Testing Times… The identified weaknesses of key policies will increasingly be exposed. History suggests that European governments and the ECB will be tested. Firstly, the weakness of the real economy will increase financial pressure on European countries. During the second quarter 2013, European economies recorded slow growth, technically ending the recession. However, the levels of economic activity excluding Germany and France remained low. The turnaround may prove fragile, given deteriorating conditions in emerging markets which have been major buyers of European exports. Ever optimistic European governments and policy makers now proclaim a stabilisation or lower rate of decline as an indication of the success of their policies. European forecasts of recovery may prove over-optimistic. Secondly, banking sector problems will continue. European banks may have as much as Euro 1 trillion in non-performing loans. Italian banks may have as much as Euro 250 billion of these. Increasingly, European governments are resorting to tricks to resolve problems of the banking system including inadequate stress tests, overly optimistic growth and asset price forecasts and accounting stratagems. For example, Spain is seeking to convert

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Euro 51 billion in deferred tax assets resulting from loan losses into core capital to meet minimum requirements. If successful then these would represent around 30% of Spanish bank core capital. Without urgent and resolute action, bad debts and weak capital positions will create zombie banks, unable or unwilling to supply credit to the economy restricting any recovery. Thirdly, crucial structural reform of labour markets and entitlements will be slow, reflecting weak economic activity and also the unpopularity of many measures. In addition, the relative stability of the last twelve months has lulled governments into a false sense of security, reducing the urgency of pursuing economic restructuring. Fourthly, political tensions, both national and within the Euro-Zone, are likely to increase. As evident in Greece, Portugal, Spain and Italy, weak economic conditions have increased pressure on the government, highlighting political differences and destabilising fragile ruling coalitions. All these countries also have domestic issues that contribute to political instability; for example, the bribery scandal involving the ruling PP in Spain and the continued legal difficulties of former Italian Prime Minister Silvio Berlusconi. Across the Euro-Zone, Germany’s repeated rejection of any steps amounting to a mutualisation of debt or hidden transfer payments as well a reluctance to increase German commitments, increasingly supported by Northern European nations, will complicate crisis management. Little is expected to change after the German elections. Enough, Already? Economic and political pressures will manifest themselves in a number of ways. Weaker countries may require extensions of existing loans, additional assistance or debt write downs. Credit ratings are likely to be under pressure. Italy’s current credit rating (BBB with a negative outlook)) is perilously close to non-investment grade. Stronger countries also face rating pressure from larger financial burdens off supporting peripheral countries and European and global economic weakness. Borrowing costs of weak European countries have begun to increase, reflecting different factors including: economic weakness of the borrowers, political stresses and also the potential reduction of the US quantitative easing program. Doubts about the OMT program and decreasing flexibility to use national banks and state pension funds to purchase government debt will accelerate the pressure on rates. For Europe, it is now a case of NWO (no way out), as without strong growth (which is unlikely) its debt problems may prove intractable. The ECB has repeatedly stated that its ability to respond to pressures is “adequate”. Unlike in July 2012, it is not clear whether it response will be “enough” this time around. © 2013 Satyajit Das Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money http://www.economonitor.com/blog/2013/10/the-return-of-europes-debt- crisis/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+econ omonitor%2FOUen+%28EconoMonitor%29 191

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GLOBAL INSIGHT October 16, 2013 7:16 pm Berlin eyes haircuts to protect taxpayers in bank rescues By Alex Barker in Brussels Banks may be found wanting when ECB inspectors come knocking Eurozone watchers are all too preoccupied with saddling German taxpayers with the bill for the bloc’s financial woes. Yet if the more recent euro area convulsions are any guide, it is private investors that usually end up feeling the pinch first. All the political chest-beating over common backstops, shared safety nets, banking union and the like has belied a slow march in Europe towards making private creditors swallow more risk, often under duress. That is Berlin’s preferred definition of mutualisation. More ON THIS TOPIC// Clash ahead over backstopping weak banks/ UK demands hold up EU banking union/ Markets Insight Stress tests must prompt debt revamp/ Lawyers warn on banking union plans GLOBAL INSIGHT// South America’s golden era of growth dims/ US may yet benefit from debt ceiling fight/ Dutch budget deal offers model to the US/ Letta tries to end 20-year ‘Groundhog Day’ When the cash-calls came, it was owners of Greek sovereign debt, junior bondholders in Spanish lenders and big depositors in Cypriot banks that paid the price to unlock German bailout loans. This was a sea-change. Until then EU taxpayers – not least German ones – had pumped €473bn of capital into the system, typically to spare poor creditors any pain from lending money to insolvent banks. Now improvised creditor haircuts are the new norm (admittedly perhaps a few years too late). As another crunch point looms, the thing to watch is the Berlin-inspired habit of making these haircuts more severe than anyone expects, or than the law prescribes. Once again the stars are aligning for more so-called “burden sharing” from private creditors, this time in banks found wanting when the European Central Bank’s inspectors come knocking over coming months. This comprehensive balance sheet review and stress test is the ECB’s chance to restore faith in the banking system before it takes charge of supervision next year. Senior officials say the spotlight is falling on Italian, French and some German lenders. Yet as Mario Draghi, the ECB president, has made abundantly clear, the credibility of the clean-up exercise will “depend on the availability of necessary arrangements for recapitalising banks”. The test will be as strong as the means available to fill the gaps it exposes. So far the efforts to arrange a sizeable and credible taxpayer backstop are floundering, at least when it comes to eurozone level measures. Germany is pushing in the opposite

192 direction. It wants to make tapping eurozone bailout funds even harder. Whether they know it or not, creditors are being shuffled into the firing line. Just to complicate matters, this debate is conflated with a parallel argument over Europe’s longer term plans for banking union, including a common rule book and single authority to shut ailing lenders in the next crisis. But in all cases, Germany will do all it can to keep legacy issues – namely the stress test costs – separate. So how would any capital shortfall be addressed? Should raising capital or selling assets be impossible or insufficient, the great hope is that Brussels will ride to the rescue with new EU state aid rules that will force junior debt and shareholders take a hit before any state-backed recapitalisation. It is the first EU-wide formalisation of so-called “bail-in” procedures. But it is supposed to have limits. EU officials deliberately excluded unsecured senior debt for fear that going too far would backfire and rekindle the financial crisis. Now Germany is putting that in doubt. The open question is what happens when a government cannot afford to borrow to recapitalise its own banks. In theory, it can turn to the European Stability Mechanism, the eurozone’s €500bn bailout fund. Germany has ruled out the ESM taking direct stakes in banks for several years to come, so any support would be through condition- laden loans to the bank’s sovereign. But even this model, tried and tested in Spain, is facing a new German hitch. Wolfgang Schäuble, Germany’s finance minister, is insisting that senior bank creditors also contribute before the ESM steps in. The threat is deliverable: Germany wields a veto at the ESM. Ever alive to false hopes, during Tuesday’s meeting Mr Schäuble doubted whether a new German coalition government would be more accommodating. He noted the most likely coalition partner, the centre-left Social Democratic party, took an even dimmer view of taxpayer bailouts. “I wish you all well, best of luck,” he said as he left early for coalition talks. http://www.ft.com/intl/cms/s/0/49ed2cd2-367c-11e3-aaf1- 00144feab7de.html?ftcamp=crm/email/20131017/nbe/BrusselsBrief/product#axzz2hsSx yx3M

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Daily Morning Newsbriefing October 16, 2013 Germany gets even tougher on banking union: no Spanish-style EMS banking programmes You may remember that we reported from the previous days’ eurogroup meeting quoting Jeroen Djisselbloem as outlining the bail-in procedure with an ESM country programme for bank recapitalisation as the funding resource of last resort – a Spanish- style ESM programme. The FT has the story that Wolfgang Schauble rejects even this idea now. He told fellow finance ministers that everybody should follow Germany’s example and pass a law right away to bail in senior and junior creditors in all banks, implying that backstop would otherwise be unavailable, the FT writes, quoting three separate source who were present when Schauble spoke. This is an interesting twist to the debate so far, as the proposed resolution mechanism would take time to adopt, with Germany now insisting that the bail-in procedures should be frontloaded. The implication is that Germany would not again approve another Spanish-style ESM programme –earmarked for a bank recapitalisation. The Spanish programme is a normal programme in the sense that the state remains the counterparty to the transaction, and that the loan comes with conditionality attached, in the case of Spain with an emphasis reforms in the banking sector. Schäuble also said that the ESM will not be used for direct recapitalisation – as this could never be done without a full bail-in, in addition to a change in German law. It is not clear at all whether there are majorities for such a law change (we think not). Sueddeutsche Zeitung, meanwhile, has an interesting story this morning, quoting from an IMF report according to which Germany is among the countries where taxpayers pay the most for domestic bank rescues (which might help explain some of the political difficulties in Luxembourg yesterday). The total is about €290bn, which is about 11% of GDP, a number topped only by Greece and Ireland. The IMF report suggested that the US approach to force a large bank recapitalisation early on in the crisis was more successful than the European drip-feed. While the US government has now recouped the money, and even made a small profits, Germany has only been able to recoup 15%. The article then goes on to discuss the difficulty in drawing comparisons because it will take several years until the assets of the bad banks can be judged. Schauble’s statement is important, but it does not surprise us. There has been a lot of debate about what kind of help the ESM could provide – from Spanish-style country programmes, to the funding of national resolution schemes, the funding of national asset management companies, or even direct recapitalisations. What is often ignored is that ESM decisions are subject to unanimity. Schauble grudgingly accepted the theoretical €50bn limit for the ESM to recapitalise banks directly, but said at the same that

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Germany will never accept it in practice. Much of the debate is thus theoretical. As for the change in German law, we think this is highly unlikely to happen, given the current majorities. The reality is that there no funding mechanism in place, except bail-ins. Investors expect only moderate bank recaps from AQR Reuters reports on a poll among analysts according to which eurozone banks “will have to find tens of billions of euros of new equity next year”. The survey, conducted by Morgan Stanley, came up with a median estimate range of between €20-50bn, while a minority put the range at €50-100bn. 42% of those surveyed believe that between 5 and 10 banks would fail the subsequent stress test. €20-50bn would be a recognition that this whole exercise is a waste of time, – given the eurozone total banking assets of some €27 trillion. In that case, we would think that the ECB will get a similar problem than the EBA did with its fake stress tests. Bank of Spain relaxes capital requirements for bank lending to medium-sized firms A story in El País explains that, up to now, the Spain's definition of SME had a smaller upper limit (50 employees, €6m turnover, €3m balance) than even the European Commission's definition of a 'small' enterprise. Now the Bank of Spain will align its definition with the European one (250 employees, €50m turnover, €43m balance). This will allow bank loans to reduce the capital requirements for lending to medium-sized firms now falling under the Bank of Spain's SME category as the "risk weighted assets" will be 75% of loan notional rather than 100%. The motivation for the change is to try encourage bank lending to SMEs. However, experts quoted by El País expect the impact of the measure to be limited, in particular because credit to small firms which were already subject to the smaller capital requirements was already deemed insufficient and will not be affected by the rule change. Finland prime minister ready to support further eurozone bailouts Jyrki Katainen told the Financial Times in Rome that Helsinki was ready to support further eurozone bailouts of Greece and Portugal if necessary. “Nobody likes bailout packages but so far we have been looking at what is good for the stability of the eurozone,” Katainen said after talks with Enrico Letta, his Italian counterpart. Finland’s policy towards eurozone assistance had not changed and it would consider requests if forthcoming, he said. Finnish officials noted that the EU package for Cyprus, supported by Finland, had been a “bail-in” with banks and investors picking up the bill. Katainen is one of several possible candidates of the centre-right European People’s party federation to succeed José Manuel Barroso as European Commission president late next year and his recent focus on southern Europe is seen by some diplomats as aimed at garnering their support. The prime minister said the EPP would start discussing the issue at a Brussels congress next month and probably nominate its candidate next March. Eurozone Budget Wrap Portugal Portugal delivered the toughest austerity budget yet to reach the 4% deficit target next year, with austerity measures worth €3.9bn or 2.3% of GDP, €600m more than what was identified by the troika in its last review, writes Jornal de Negocios. The increase is mainly due to the fact that this year’s deficit was higher than expected, 5.9% instead of the 5.5% target. Of the €3.9bn savings measures, 80% or €3.12m are expenditure cuts while revenues are expected to increase by about €994m. On the expenditure side are

195 salary cuts of 2.5% to 12% for civil servants earning more than €600 a month, a one- year increase in the retirement age from 65 to 66, layoffs at state-owned companies, as well as pension cuts would hit anyone with retirement income of more than €600 per month, sums up the Wall Street Journal. The revenue improvement relies mainly on improved growth assumption of 0.8% GDP for next year, while some measures are targeted at ‘correcting distortions in the economy’ and improve the use of EU funds, according to the JdN article. Corporate taxes would be cut to 23% from 25% in a bid to attract new investment. The government would impose new taxes on energy producers and maintain other tax increases announced over the past two years. Government ministers and EU officials have voiced concerns that Portugal’s constitutional court could overturn some of the proposals, writes the FT, most likely the planned cut in survivor pensions for those who receive at least €2000 pension payments per month. António Costa in Diario Economico calls it an aggressive budget which adds another harsh year for state employees and will be decisive for the political survival of Passos Coelho and his government. The wage cuts will affect 90% of state employees and the government did not exclude further reductions, according to another article Jornal de Negocios. Particularly hit are salaries between €600 and €1500, representing 40% of the public sector employees, who are no longer be exempt from the cuts and will face a 9% cut. Some commentators said that the government should have done such a budget at the onset of the crisis, instead it wasted two years in short term saving measures without any long term effect. Portugal's largest union confederation, CGTP, has already scheduled a protest for Saturday. The main opposition Socialist Party, meanwhile, has said it will vote against the budget, considered the harshest since the bailout began in early 2011. Italy The headlines talk about tax cuts, but make no mistake: this is an austerity budget – but lots of reshuffling between taxes and spending. Income taxes will fall by 1 point , from 44.3 to 43.3 % by 2016 . Perhaps most disappointing is the cut in the tax wedge – the gap between labour costs and net income – by only $2.5bn – in 2014, with higher cuts earmarked for the following years. If your hope rested on a competitiveness-based economic recovery, this is not going to happen. The share of public spending in GDP ia set to fall from 46% to 45.5%. As Corriere della Sera reported, Fabrizio Saccomanni said the goal had been to reassure investors and Brussels. Judging by the reaction of Olli Rehn in Luxembourg, this seems to have paid off. He said that Italy was using the limited room for manoeuvre, and was moving in the right direction, as Reuters reports. Over a three year period, the total tax wedge reduction is €11.5bn, which is about a quarter of the gap between Italy and Germany, with roughly equal reductions for employees and employers. The budget also gave substance to the new service tax, which replaces the unpopular IMU property tax, and which is too complicated to summarise and assess here. The rumoured tax increase on financial income, on which we reported, did not make it to the final version, while there is now a stamp duty on securities instead. The other rumoured measure, the write-down of bad debts by banks, did make it. An important one-off measure is the revaluation of the banks’ shares in the Bank of Italy (in Italy, the central bank is owned by the banks). Tito Boeri, writing in Lavoce,

196 gave his outraged reaction. He said this was not the time for such a measure, as it would create an unholy alliance between banks and the government. Most of the savings come from the usual mindless budget brutalism - across the board cuts instead of a strategic public sector repositioning: there will be a 10% cut on overtime, cuts for the military, police and firefighters, a zero public sector wage round for 2014, and few allowances. In other Italian news: The Senate, meanwhile, is likely to postpone the vote on Silvio Berlusconi’s political defenestration until November, or possibly later, Reuters reports. Ireland Presenting Ireland’s 2014 budget, Michael Noonan announced the Irish government would impose fewer savings than originally planned. Noonan is using savings from a deal on its bank debt to make the smaller cuts, going against advice from his own central bank and initial misgivings from the EU and IMF. But as Ireland has hit all its bailout targets, this is unlikely to complicate completion of the €85bn bailout, according to Reuters. Noonan expects a budget deficit of 4.8% for 2014 and 2% GDP growth. Here are highlights as outlined by the Irish Times: Among the controversial measures announced were a lowering of dole payments to under-25s; a hike in prescription charges; a tightening on the eligibility criteria for medical card holders and the phasing out of the mortgage interest supplement. Beer, spirits and cigarettes are all to go up by 10 cents from midnight, while wine is to go up by 50 cents, following on from last year’s €1 hike on the price of a bottle. In surprise move, the Government decided to keep the reduced 9% rate of VAT on food and tourism services. There will be some income tax credits to homeowners who carry out renovation and improvement works on their principal private residences. The controversial airport travel tax is to be scrapped, which should boost the tourism sector further. there would be no increases in income tax or the Universal Social Charge in 2014. There will be no increases in excise duty on petrol, diesel or on home heating oil and gas either. A new bank levy worth €150 million a year to the exchequer was also announced, which will be roughly based on each institution’s market share. German coalition postscript: beware of posturing The German papers are full of reports of the terse night of coalition talks, during which the two sides clashed badly over the minimum wage and other policies. But Spiegel Online and other commentators pointed yesterday that much of this is for show only because the SPD in particular has to get their own rank and file to approve any eventual deal so that they have to be seen fighting hard. Gunter Bannas writes in Frankfurter Allgemeine that this game is potentially dangerous, and surprises are possible. The other big news in Germany is the €690,000 donation by the Quandt family – the owners of BMW – to the CDU. Quentin Peel makes the point in the FT that this come at the time when the German government is campaigning to block tougher exhaust emission standards for big cars. Eurozone-Crisis-Over Watch The ZEW institute said the eurozone crisis has come to an end for now, as Reuters reports, with its investor sentiment index reaching the highest level in three and a half years. The index shows a strong cyclical position of the German economy. 197

Greek bond yields hit post-crisis lows Greek bond yields have relaxed to their lowest point since the eurozone crisis, with 10- year bond yields falling to just over 8% yesterday, down from a high of 30.5% in March 2012, as a row of positive data has been published recently. Hedge funds have been among the biggest beneficiaries from the U-turn in sentiment towards Greece, because they snapped up government bonds for a fraction of their face value when many other investors feared the country would leave the currency bloc, writes the FT. Investors keen to profit from a potential Greek recovery have helped several domestic companies regain access to debt markets, and hedge funds are helping recapitalise the banking sector. Greek economy contracted by 6.4% in 2012 Greek gross domestic output shrank by 6.4% last year, according to ELSTAT’s first official estimates released on Tuesday. This means that from the start of the crisis in 2008 up to end-2012 the Greek economy contracted by 12.3%, writes Kathimerini. The biggest factor in the decline was investment, dropping 19.2% compared to the year before. Private consumption declined for a fourth consecutive year, by 9.1% yoy, which is the highest contraction rate since 2009. Public consumption contracted by 4.2%. Exports declined by 2.4% after a two years growth period with 0.3% in 2011 and 5.2% in 2010. Imports dropped by 13.8%. All you need to know about structural deficits – and beyond Zsolt Darvas of Bruegel offers a critique of the notion of a structural deficit, which now lies at the heart of a policy dispute. You might recall a report in the WSJ (as relayed here), that a European Commission proposal to change the methodology of calculating a structural defict had been rejected on the grounds that it would ease austerity in the affected countries. Darvas says while the concept itself is intuitive, the calculation is not as it requires the quantification of potential output, the impact of the output gap on the budget, and one-off budgetary measures and their impact. The hardest bit is the potential output, which is based on a production function, which uses capital, labour and total factor productivity. He explains how the assessment is made, with special emphasis non-accelerating wage rate of unemployment, which stands at the heart of this approach. He offers an alternative approach – that he believes to be more suited to small open economies, where excess demand is absorbed by the trade balance The Periphery Six We thought that, too, for a while, but the political economy of the eurozone makes this proposals by Thomas Wright of the Brookings Institute extremely unrealistic. In a Project Syndicate column he wonders why the six countries of the periphery, which he calls the Periphery Six, do not gang up and push through the desired policy changes. “This grouping, called the “Periphery Six” or P-6, could develop a political strategy to push the eurozone toward growth, voting as a bloc on relevant issues at European summits and within the eurozone. While France would not be a member, it could be an important ally, given the current government’s opposition to austerity.” It ain’t going to happen because there is no natural solidarity between the six. We recall Mario Monti constantly telling non-European investors that Italy is not like Spain, and the Spanish insisting that Spain is not Greece. If they had joined force, the periphery

198 could clearly have pushed its joint interest much more effectively, but as it happens, the eurozone’s collective action problem even exists at this level. Mohamed El-Erian is getting really pessimistic Writing in the FT, Mohamed El-Erian is getting really desperate about the state of global co-ordination. “Polite communiques aside, there were few signs from last week’s annual meetings suggesting more effective multilateral policy responses. Instead, officials from several emerging economies expressed quite publicly their frustrations with longstanding shortfalls in multilateral governance. Moreover, last week’s consternation over Congress served as a reminder of how far the world has fallen behind implementing the limited governance reforms agreed back in 2010. In the short-run, this adds up to a multispeed global economy that remains stuck in a low-level growth equilibrium overall, and with pockets of excessive and damaging unemployment and increasing inequalities of income, wealth and opportunities. This is also a situation in which politics gets no easier, and one in which social fabrics face even greater strains.” Eurozone Financial Data 10-year spreads Previous This Yesterday day Morning France 0.517 0.511 0.527 Italy 2.402 2.369 2.371 Spain 2.417 2.409 2.422 Portugal 4.412 4.358 4.363 Greece 6.832 6.537 7.60 Ireland 1.820 1.791 1.797 Belgium 0.750 0.744 0.770 Bund Yield 1.859 1.909 1.907

Euro Bilateral

Exchange Rate This Previous morning Dollar 1.354 1.3516 Yen 133.450 133 Pound 0.848 0.8453 Swiss Franc 1.235 1.2354

ZC Inflation

Swaps previous last close 199

1 yr 1.06 1.07 2 yr 1.19 1.2 5 yr 1.4 1.39 10 yr 1.78 1.94

Euribor-OIS

Spread previous last close 1 Week -3.886 -4.286 1 Month -1.500 -1.9 3 Months 3.329 4.429 1 Year 28.057 29.357

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-10- 16.html?cHash=72fb80a96aa7f8426d947afb3e374a09

Robert Shiller: ‘When I look around I see a lot of foolishness, and I can’t believe it’s not important economically’ By Neil Irwin, Updated: October 15, 2013 On Monday, the Nobel Prize committee awarded three American economists, Eugene Fama, Lars Peter Hansen, and Robert Shiller, the world's leading economic prize. Shiller won for his work explaining some of the limits of the hypothesis -- advanced in no small part by Fama -- that financial markets are efficient. Shiller, a professor at Yale, spoke with me by phone on Monday afternoon. Below is a lightly edited transcript. Neil Irwin: Congratulations. So, tell me about your morning. Robert Shiller: I was in the shower. I just got out and heard the phone ring. I had to rush downstairs and get the phone. It was a bit of a surprise. NI: You were confident it wasn’t a prank call? RS: I was wondering. I’ve been warned that other people worried that. It sounded very real to me because, first of all, they had very distinguished Swedish accents. It sounded completely real. I certainly believed it. NI: I guess for a lot of people the surprise is not that you have won the prize but that you’ve won alongside Eugene Fama, where many view the two of you as coming to opposite schools of thought on efficient markets. How do you think of his work and the ways it informs or relates to yours?

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RS: Eugene Fama was the person who really set the example for efficient markets. He wrote a survey article in 1969. "Efficient Capital Markets: A Review [of Theory and Empirical Work]." He put a slant on it. I think even in that article he found some contradictions in the efficient markets hypothesis. He put a slant on it that nothing important contradicts it. It’s a question of what you think is important. I had a sense that the contradictions were very important and could lead to financial crises. But we did disagree. But I trust him to report what that data says honestly. That’s how research goes. I read a lot of his papers. It’s not like I disagree with him on everything. It’s more that I'm after a different thing. There’s a kind of idea that has been especially prevalent at [the University of Chicago]. The other two people in this prize are from Chicago, where the prevalent view is to find the rational side of human nature very compelling. I guess it’s a different worldview than I have that I don’t find it quite so compelling. When I look around, I see a great deal of foolishness, and I can’t believe it’s not important economically. NI: So, is the old view that Fama and some of the other founders invented modern finance with the [capital asset pricing model] and efficient markets, and you and the behavioralists smashed it to smithereens wrong? RS: The capital asset pricing model is a view of how to form an optimal portfolio. That is an interesting model. People who do portfolios ought to study mean variance model as a first approximation to what they should be doing in terms of portfolio management. But they took a next step, which is saying that everybody already does that. That's where I start to part company. They assume people are already doing that. That can’t be right, because nobody understood it when the model was first developed. There’s an element of absurdity that they refuse to acknowledge. They fell in love with the model too much. NI: What do you see as the biggest implications of your conclusions on these market inefficiencies for policy and how policymakers should think? RS: I have a very idiosyncratic recommendation. I talk about it in my book "Subprime Solution." People should be encouraged to get professional help with their investing. We should be subsidizing financial advisers. In this country we seem to have come around to the idea that there might be a role for the government in subsidizing medical advice, though that is controversial, too. There might also be a role for subsidizing financial advice. It’s already tax deductible, but that only helps people with significant incomes. The system is not arranged so that low-income people have any subsidy for financial advice. That should change. I'd like to see more low-income people getting good financial advice. NI: Ironically, the shift away from pension plans and toward defined contribution retirement plans like 401ks is a shift in the other direction. With a traditional pension, a low-income worker did in effect have professional management. RS: Here’s where we made big mistakes. Here’s where the efficient markets hypothesis gets you into trouble. The idea that everyone will manage their 401k plan optimally is really not right. What was discovered by some of the behavioral finance research is people are inertial. They don’t do anything. If they have to sign up for the plan, they won’t do it. If they do sign up, they'll put their money in whatever asset seems to be recommended and leave it there the rest of their lives. You would think it’s kind of obvious, that some people aren't that interested in managing their portfolios. If you press Gene Fama or Lars Hansen on this, I suspect they would give in. They’d have to admit that's what the evidence shows. But it’s not their habit to emphasize it. That’s where we differ, perhaps. It's what do you want to emphasize that divides them from me.

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Gene Fama once told me that he is actually sympathetic to behavioral finance and that in fact he is proud to have accepted many of the journal articles or written referee reports accepting publication for articles that are important in the field. And I believe that's true. I think he's an open-minded person. Somehow people get into certain research directions that emphasize a certain interpretation of results, but nonetheless trustworthy interpretations of data. Fama has done a lot of important things. I’m pleased to be united with both [Fama and Hansen]. I am an admirer of both of them, and it is an honor to be associated with them in this way. NI: So, what led you to make a career studying behavioral finance and market inefficiencies? What did you see as a grad student or young scholar that made you think it would be a fertile field for study? RS: I married a psychologist. That’s part of it -- Ginny, my wife. Also I think I have a basically cynical, maybe not cynical but skeptical, personality. When everyone else agrees that something is true, I don’t just jump in and assume the same. I’ve always felt that people like to exaggerate their certainty about theories that their ego is involved with. I think something is suspect there when someone has such overwhelming certainty. It’s also a philosophy of science. As a child I wanted to be a scientist. Maybe I'm trying to do that as as social scientist. I had a view that emerged as a child really that science is about respect for the facts, about really studying nature and trying to take into account all the facts. No legends or myths or self-serving stories. I wanted to know the real facts. I thought that’s what a scientist does. You devise an experiment if there's any confusion. When I was getting started I thought a lot of economics wasn’t in that mode. It was more storytelling. We have this model. We test it, but we’re really not testing it. We just love these models. We’ll lionize and publicize the facts that are consistent with the model, and anything that’s inconsistent with it, we’ll put in some ad hoc fix. That has often bothered me about the economics profession. NI: Your model of how the financial markets work, with large effects from psychological swings in confidence, held up better than a lot through this last decade. What has the crisis made you reconsider about how the world works, though? RS: I suppose things I was not as schooled in, namely systemic interconnectedness. That was something I didn’t think much about. It turned out to be really important in this crisis. The lack of regulators having information about, or really anyone having information about, how interconnected everything was. How the failure of one Lehman Brothers could bring down the whole market. That is something people knew about but didn’t put it on their research agenda. The federal government didn’t have statistics about interconnectedness it needed. That's something that the Dodd-Frank Act tries to deal with by creating the Office of Financial Research at the Treasury Department. NI: So, you've won the big prize. What’s next for your research? I’m writing another book with George Akerlof. [Akerlof is also a Nobel laureate, is co-author with Shiller of "Animal Spirits," and, as it happens, is the husband of Federal Reserve chair nominee Janet Yellen.] It’s about manipulation and deception in economics. This doesn’t fit in with an efficient market theory, either. Of course, efficient markets people will admit that people are manipulative and deceptive. But it’s not part of their canonical story. Update: An earlier version of the post misspelled the first name of Shiller's wife, Virginia "Ginny" Shiller. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/15/robert-shiller-when-i-look- around-i-see-a-lot-of-foolishness-and-i-cant-believe-its-not-important-economically/

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Thomas Wright Thomas Wright is a fellow at the Brookings Institution. The Periphery Six 14 October 2013 WASHINGTON, DC – Cyprus, Greece, Ireland, Italy, Portugal, and Spain share a problem. With massive debt, no control over monetary policy, and no leeway for fiscal stimulus, they appear headed for a lost decade of high unemployment and low GDP growth. Such a path would drain the political establishment of legitimacy and prevent a real recovery in Europe. With structural reforms having proved inadequate to deliver sustained growth, a change in the external environment is needed. The most obvious scenario would be for the global economy to grow rapidly enough to rescue Europe from stagnation. But the growth slowdown in emerging economies and mixed economic news from the United States make this unlikely. Alternatively, the eurozone could change course, stimulating demand, mutualizing debt, and loosening monetary policy. But this would be impossible without Germany, and it is unlikely that the new German government – almost certainly to be led by Angela Merkel again, with Wofgang Schäuble returning as Finance Minister again, will be willing to pursue such a strategy. The problem is that this scenario may well be the only way that the eurozone’s troubled economies can avoid a lost decade. In this sense, any chance at recovery will require skillful foreign policy as much as effective economic policy. Over the last five years, the troubled economies have worked hard to distinguish themselves from one another. As Greece’s situation went from bad to worse, the others attempted to reassure the markets, “We are not Greece.” And there has been almost no formal cooperation among them, with each bargaining separately with Germany and the European Central Bank. That will have to change. All six troubled countries are facing the prospect of being consigned to second-class status in the eurozone. And they need eurozone policies that stimulate demand and provide some debt relief. But that means uniting as a caucus to demand the policies on which their future prosperity depends. This grouping, called the “Periphery Six” or P-6, could develop a political strategy to push the eurozone toward growth, voting as a bloc on relevant issues at European summits and within the eurozone. While France would not be a member, it could be an important ally, given the current government’s opposition to austerity. The P-6’s goals would include measures to reduce their debt burden and increase domestic demand, probably through targeted stimulus in Germany, the formation of a

203 banking union with a robust resolution mechanism, and the introduction of Eurobonds. The P-6 would also embark on a major diplomatic push to change perceptions within the rest of Europe. This means ensuring that the eurozone’s stronger economies do not view the group as a “debtor’s cartel” threatening to default collectively and destabilize Europe further. The collective bargaining power afforded by a coordinated diplomatic strategy would be sufficient to challenge the status quo. It would also demonstrate to the P-6 countries’ citizens that their leaders are taking every reasonable measure to bring about economic recovery. There is no time to lose. The decisions that the eurozone takes over the next year will determine its future structure. Now that Germany’s elections are over, the new government can be bolder if it so chooses. The international climate outside of Germany has turned against austerity, with an increasing number of governments recognizing that it has failed. Critics will likely argue that the creation of a P-6 would alienate Germany and divide Europe. But this has already happened. Unemployment in Austria and Germany stands at roughly 5%, while, in Spain and Greece, the jobless rate exceeds 25%. If this two-tier structure is allowed to endure, it will tear Europe apart. European integration cannot continue without a grand bargain between the two groups. Political leaders in the P-6 have run out of domestic-policy options, but they have a window of opportunity to change the external environment. They should waste no time in taking advantage of it. This article is available online at: http://www.project-syndicate.org/commentary/on-the-need-for-cooperation-among-the- eurozone-s-six-troubled-economies-by-thomas-wright Copyright Project Syndicate - www.project-syndicate.org http://www.project-syndicate.org/online-commentary/on-the-need-for-cooperation- among-the-eurozone-s-six-troubled-economies-by-thomas-wright

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ft.com World Europe

October 15, 2013 12:13 pm Finland prime minister ready to support further eurozone bailouts By Guy Dinmore in Rome

Jyrki Katainen A fervent defender of eurozone austerity even in the midst of its third recession since the start of the financial crisis, Finland appears to be softening its image as being more German than the Germans in the face of growing support for “populist” eurosceptic parties ahead of next year’s European parliamentary elections. Jyrki Katainen, Finland’s prime minister, told the Financial Times in Rome that Helsinki was ready to support further eurozone bailouts of Greece and Portugal if necessary. More ON THIS STORY// Dublin unveils tax rises and further cuts/ Lisbon unveils austerity budget/ Coalition complicates Italy’s budget talks/ Germany hardens stance/ In depth Eurozone in crisis ON THIS TOPIC// Europe United by hostility/ Volume of foreign-issued eurobonds jumps/ John McDermott Niall Ferguson and the magic ratio/ Eurozone industrial production rises 1% IN EUROPE// Europe warns Seoul over trade pact/ BMW family gave €690,000 to Merkel party/ Renewable energy costs stoke German debate/ Belgium detains suspected Somali pirates “Nobody likes bailout packages but so far we have been looking at what is good for the stability of the eurozone,” Mr Katainen said after talks with Enrico Letta, his Italian counterpart. Noting that his six-party coalition government, which is struggling in opinion polls, was also sharing the eurozone’s pain in cutting its budget to keep rising public debt under control, Mr Katainen added: “No one can outsource that national responsibility to others . . . but if the situation is hopeless we must look at the stability of the eurozone and be ready to help countries. We are very pragmatic on this issue.”

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Mr Katainen stressed that no further bailout request from Portugal or Greece was on the table, and that his coalition government had not discussed the possibility. Finland’s policy towards eurozone assistance had not changed and it would consider requests if forthcoming, he said. Finnish officials noted that the EU package for Cyprus, supported by Finland, had been a “bail-in” with banks and investors picking up the bill. Asked if Europe’s austerity had gone too far in exacerbating recession, Mr Katainen acknowledged it had been “difficult”. But he said it was impossible to know how interest rates on sovereign debt would have reacted otherwise, noting that rates for Ireland, Spain and Italy had dropped significantly and that southern Europe’s exports were recovering. Commenting on opinion polls showing that eurosceptic parties could emerge as the single largest bloc in the European parliament in next May’s elections, Mr Katainen admitted that “there are lots of people who tend to think that Europe is lacking fairness”. A decisive victory by France’s far-right National Front in a local by-election on Sunday was “worrying” but “part of democracy”, he commented. Remarking on his recent trips to Portugal and Spain, he said university students had asked him why northern Europe was so “arrogant” while in the north they are demanding to know “why are we sending or lending more money to countries that have not done their homework”. “These feelings are justified and pro-European parties must understand this,” Mr Katainen said, calling for “concrete actions” that address Europe’s problems rather than “philosophical” discussions”. He said “more Europe” required action on defence and security, the single market, the energy sector and rule of law. Nobody likes bailout packages but so far we have been looking at what is good for the stability of the eurozone - Jyrki Katainen, Finland PM Mr Katainen used his visit to Italy to express support for joint action to patrol the Mediterranean following this month’s tragedy when more than 350 migrants from Somalia and Eritrea drowned after the overcrowded fishing boat bringing them from Libya sank just off the Italian island of Lampedusa. “It is a common challenge,” Mr Katainen said, promising that his government would look into sending patrol boats and personnel. Mr Katainen, 42, is one of several possible candidates of the centre-right European People’s party federation to succeed José Manuel Barroso as European Commission president late next year and his recent focus on southern Europe is seen by some diplomats as aimed at garnering their support. The prime minister said the EPP would start discussing the issue at a Brussels congress next month and probably nominate its candidate next March. “There are lots of rumours around. It is natural . . . I have no clue who he or she might be,” he added. Asked if he was in the running, he smiled and replied: “I will concentrate on my job as a prime minister.” http://www.ft.com/intl/cms/s/0/75c243fa-3583-11e3-b539- 00144feab7de.html?ftcamp=crm/email/20131016/nbe/BrusselsBrief/product&siteeditio n=intl#axzz2hsSxyx3M

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The Irish Times EU budget oversight shows shift in fiscal power to Brussels Euro zone insists details of tax rises and cuts still the preserve of national governments

Budgetary control has always been seen as the preserve of sovereign countries, but the fact that budgets must now be signed off by the European Commission represents a ceding in power to Brussels on matters of fiscal policy. Suzanne Lynch First published: Tue, Oct 15, 2013, 15:22 The decision to shift the budget date to October from its usual December slot reflects changes at a European level. For the first time this year, the 17 countries which share the euro currency must submit their budgets to the European Commission by October 15th for scrutiny. The rules, known as the “two pack” regulations which entered into force this year, reflect an attempt by euro zone authorities to integrate euro zone countries’ economic and fiscal policy. It follows on from the introduction of the so-called “six pack” rules on economic governance, which Ireland voted to introduce in the fiscal compact treaty in May 2012, and which apply to all 28 European member states. Both sets of regulations can be seen as an attempt by Brussels to strengthen the Stability and Growth Pact, the EU’s agreement on fiscal policy which dates back to the late 1980s, and which was exposed as woefully inadequate by the financial crisis. While the pact set out specific targets for each country, the euro zone crisis revealed that most countries had failed to stick to the targets, with Europe turning a blind eye to blatant flouting of fiscal requirements.

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Nonetheless, while the new two-pack rules are a natural outcome of the pact, they represent a significant shift in budgetary power from national states to Brussels, even though euro zone authorities insist that details of tax rises and spending cuts will remain the preserve of national governments. Budgetary control has always been seen as the preserve of sovereign countries, but the fact that budgets must now be signed off by the European Commission represents a ceding in power to Brussels on matters of fiscal policy. For many commentators, greater fiscal integration in the euro zone is an inevitable outcome of having a currency union. Under the two-pack rules, all euro zone countries must submit their draft budgets to Brussels by today. They will then be reviewed by economic experts in the European Commission, with the commission presenting its opinion on these around November 15th. A special euro group or meeting of euro zone finance ministers has been convened for November 22nd in Brussels to review those opinions. As happens each year, some changes are expected as budgets pass through the various national parliamentary processes. While in theory Brussels could demand changes to each member state’s budget, informal discussions at a technical and senior official level have been ongoing between the European Commission and each national finance ministry over the past few months, so Brussels is not expected to find any huge surprises in any draft budget. Ireland is one of the last euro zone countries to announce its budget, though fellow bailout-country Portugal also announces its budget today. Over the last few weeks countries across the euro zone have been unveiling their draft budgets for 2014 to national parliaments, in close consultation with Brussels. The challenges of implementing tough fiscal measures have been revealed from Paris to Athens. Euro group chairman Jeroen Dijsselbloem, who is also finance minister of the Netherlands, was forced to cancel his trip to the IMF meeting in Washington last week as his government struggled to get its budget through the Dutch senate. France is also under particular pressure from Brussels and Berlin, with the commission already granting the country two extra years to bring its deficit in line with European targets. Many analysts argue that France’s budgetary plans don’t go far enough, but the strong performance by the far-right National Front party in Sunday’s local election encapsulates the political challenges facing governments across the euro zone as they introduce more cuts and tax hikes on an increasingly austerity-weary public. http://www.irishtimes.com/news/world/europe/eu-budget-oversight-shows-shift-in- fiscal-power-to-brussels-1.1561476

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Economía Guindos admite que el Tesoro será la “red de seguridad” de la banca Los esfuerzos del Gobierno se basan en cerrar definitivamente el rescate a la banca Claudi Pérez Luxemburgo 15 OCT 2013 - 20:53 CET Hay dos escenarios a la vista para España: a corto plazo, los esfuerzos del Gobierno se basan en cerrar definitivamente el rescate a la banca; a medio y largo plazo, ya se verá. La estrategia europea es similar: apagar cualquier amago de incendio a la espera de Gobierno en Berlín, y dejar para más tarde pasos decisivos en la unión bancaria, el proyecto que definirá qué salida de la crisis quiere Europa. Tras el espaldarazo del Eurogrupo a los planes de cierre de los rescates en España e Irlanda, el Ecofin ha sido este martes incapaz de avanzar para satisfacer la obsesión principal del BCE: crear un mecanismo de seguridad, un chaleco a prueba de balas por si los próximos exámenes a la gran banca detectan nuevos agujeros. España, pese al renovado optimismo europeo, está muy pendiente de esa red de seguridad. “El escenario central y cada vez más probable es el cierre del programa bancario de España”, ha reiterado este martes el ministro Luis de Guindos. Inmediatamente después, admitió que los mercados tienen “dudas” sobre la banca europea —que a su juicio no afectan a España— porque cinco años después de Lehman Brothers, y a pesar de los centenares de miles de millones en ayudas públicas, nadie sabe cómo diablos está el sector financiero continental, a diferencia de EE UU. Guindos insistió en que los exámenes del BCE y la Autoridad Bancaria Europea (EBA), que se harán entre fin de año y mediados de 2014, “tienen que ser rigurosos y serios”, y que para ello es imprescindible la famosa red de seguridad, ante la posibilidad de que hayan bancos que necesiten dinero: Goldman Sachs calcula que pueden hacer falta 75.000 millones. Pero de momento no hay tal red: apenas hay fondos nacionales, donde los hay, y la banca no puede aportarlos de inmediato. Por eso los mercados empiezan a sospechar de esos futuros análisis del BCE y la EBA, ante las presiones de los capitales para no salir mal en la foto, y por la falta de un mecanismo europeo de acción rápida. Los ministros siguen sin cerrar un acuerdo.. En caso de problemas, los bancos deben recurrir al mercado; si no consiguen capital, se aplican pérdidas sobre los accionistas y sobre la deuda de mala calidad (como las preferentes en España). Solo después de esas quitas puede intervenir el Estado, y en casos de asfixia fiscal el mecanismo europeo de rescate (Mede) con un programa a la española o, en casos excepcionales, con recapitalizaciones directas. La piedra filosofal es el papel del Mede: Francia quiere que ese mecanismo tenga un papel muy activo en caso de hipotéticas recapitalizaciones; Alemania no quiere ni oír hablar de que se mutualicen los problemas, en un ejemplo paradigmático de lo que ha pasado durante toda la crisis. España confía en que sus bancos no salgan mal. Y en caso de necesidad Guindos recordó que el FROB tiene un colchón de 10.000 millones para tapiar agujeros. Si con eso no es suficiente, el Tesoro —que se financia en cada vez mejores condiciones— será la “red de seguridad” de la banca española, según el ministro. http://economia.elpais.com/economia/2013/10/15/actualidad/1381863184_395021.html

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ft.com World Europe

October 15, 2013 7:27 pm Germany hardens stance on common eurozone safety net for banks By Alex Barker in Luxembourg

©EPA Wolfgang Schäuble, Germany’s finance minister Germany has insisted that eurozone countries impose losses on all bondholders in ailing banks before taxpayers’ money can be used to clean up the financial system, a move that would make it harder to activate Europe’s common safety net for lenders. At a meeting of EU finance ministers in Luxembourg, Wolfgang Schäuble, Germany’s finance minister, hardened his position on deploying common eurozone funds to cover any big capital shortfalls exposed in next year’s European bank stress test. Berlin is able to veto use of the funds. More ON THIS TOPIC// Healthier French banks look to expand/ European bank bond issuance leaps/ John Authers Funds begin to back European banks/ Inside Business The shaking up of Europe’s old order IN EUROPE// Coalition complicates Italy’s budget talks/ BMW family gave €690,000 to Merkel party/ Renewable energy costs stoke German debate/ Finland PM softens stance on bailouts Instead he told fellow finance ministers to follow Germany’s example and quickly pass national laws allowing full “bail-in” of senior and junior creditors in ailing banks, implying that joint eurozone backstops would otherwise be unavailable, according to three people present at the informal discussion. Diplomats took it as a warning that Germany would not sanction another Spanish-style bank recapitalisation programme – where eurozone loans are to the state, rather than in direct support of a bank – unless senior creditors also contributed fully. While the EU is in the advanced stages of negotiating reforms to make creditors pay for bank failure, it is expected that until 2018 only shareholders and junior bondholders would be routinely written down when banks were in difficulty. Mr Schäuble’s comments are a new twist on Germany’s long-running campaign to bring forward so-called bail-in requirements, a position staunchly opposed by France and a majority of member states.

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The dispute over who should pay the bill for repairing Europe’s finance system came as EU finance ministers signed off the first stage of Europe’s banking union, making the European Central Bank top bank supervisor in the eurozone as soon as October next year. The formal approval – hailed as “regulatory history” by Michel Barnier, the EU commissioner responsible for the reforms – came after the UK won assurances that assuaged its concerns over voting rights, which held up the process for three weeks. Mr Schäuble’s tough stance on creditors underlined Berlin’s resistance to using the European Stability Mechanism, the eurozone’s €500bn bailout fund, as the ultimate public backstop for the ECB-led stress test next year. At present, Europe has three main lines of defence should a bank require extra capital: raising funds through private means, if necessary through writedowns of junior creditors; public support from a bank’s home state; and ESM loans to a sovereign that struggles to pay for that recapitalisation. In addition, Jeroen Dijsselbloem, the Dutch chair of the eurogroup of finance ministers, said on Friday that the ESM could next year be used to take direct stakes in “exceptional circumstances” – an instrument that would relieve the burden of debt from a bank’s home state. Paris also pressed for the availability of the direct recapitalisation tool to be confirmed. However, Mr Schäuble flatly disputed the presumption that direct recapitalisation could be used, saying full bail-in would be required beforehand, as well as a change in German law. At a press briefing he suggested that changing German law would be fraught with difficulty and likened it to “winning a referendum in Ireland” on Europe. Before the end of the year, EU leaders are aiming to finalise “a comprehensive European approach” to dealing with fallout from the stress test, “notably comprising national backstops”, according draft conclusions drafted for a summit next week. Olli Rehn, head of finance at the European Commission, denied that senior bondholders will be vulnerable if no additional public backstops are in place before the stress test. “We have a broad and deep armory of backstops”, he said, adding: “We will use [them]”. http://www.ft.com/intl/cms/s/0/9533f236-35b7-11e3-b539- 00144feab7de.html?siteedition=intl#ixzz2hpYmj8hy

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ft.com comment The A-List

Mohamed El-Erian// October 15, 2013 Finance • Global Economy The artificial fuel for growth cannot last forever With the US government shutdown and the possibility of a debt default occupying a lot of the bandwidth, last week’s International Monetary Fund/World Bank annual meetings struggled to deliver on already-low expectations regarding major policy breakthroughs. Yet, if they internalise well what was discussed in formal meetings, in panels and in the corridors, policy makers from more than 180 countries would return to their national capitals with four important realisations. First, they cannot ignore an external political context that will continue to impinge on their domestic economies and markets. The ongoing congressional drama in Washington is the latest reminder that western political systems are challenged by the (“new normal”) persistence of unusually low economic growth and high unemployment. If anything, the rest of the world should expect an increase in the disruptive influence of western politics on the global economy – and, with that, the occasional bouts of financial volatility. Second, western central banks will have no choice but to continue to carry an enormous policy burden, and do so with inevitably-imperfect measures. In addition to compensating for the inactions of other policymaking entities – particularly in the fiscal and structural reform areas – look for central bankers to continue to counter the negative impact of political dysfunction on growth. This would be great news for the rest of the world were it not for an inconvenient truth: the policy tools at the disposal of the central bank are just too blunt and indirect for the task at hand. As such, the benefits of highly- experimental monetary policy come with externalities that the rest of the world needs to respond to, including financial and economic spillovers. Third, this combination – namely, unhelpful politics and policy responses that fall short of a first best – is likely to make worse the disconnect between artificially-bolstered asset markets and the sluggish fundamentals of the real economy. In the process, central banks and markets will continue in what is becoming quite an unhealthy co-dependency relationship. In normal (healthier) times, markets look to central banks to provide the appropriate regulatory and monetary policy environment; and central banks look to markets to deliver efficient pricing and resource allocation. Today, this co-dependence has become a lot less healthy. Markets are now conditioned to expect a solid and continuous “central bank put”; and the revealed-preference of central banks for repeated interventions to support asset prices undermines efficient market functioning and discipline. For their part, and as illustrated as recently as last month’s non-decision on tapering by the Federal Reserve,

212 central banks find it hard to reduce their direct market interventions lest they cause severe disruptions to market pricing, liquidity and financial conditions – as indeed occurred after the May 22 mention of “taper” by Fed officials. Fourth, global policy co-ordination and, more generally, the global financial architecture are far from able to overcome the dampening effect of domestic political problems, unbalanced national economic policy mixes and artificial market pricing. Polite communiques aside, there were few signs from last week’s annual meetings suggesting more effective multilateral policy responses. Instead, officials from several emerging economies expressed quite publicly their frustrations with longstanding shortfalls in multilateral governance. Moreover, last week’s consternation over Congress served as a reminder of how far the world has fallen behind implementing the limited governance reforms agreed back in 2010. In the short-run, this adds up to a multispeed global economy that remains stuck in a low-level growth equilibrium overall, and with pockets of excessive and damaging unemployment and increasing inequalities of income, wealth and opportunities. This is also a situation in which politics gets no easier, and one in which social fabrics face even greater strains. Beyond the short-term, however, systemically-important countries confront quite a stark “T junction”. In the medium-term turn the conditions we hope for – involving escape growth velocity, robust job creation, lower inequalities and financial stability – require that the ongoing process of endogenous healing be supported by political tailwinds and better global policy co-ordination. The alternative medium-term turn, one that we need to fear but is yet to command sufficient attention at a gathering such as last week’s, involves a global economy that runs out of artificial fuel for growth. And this is a world in which good economic policy making would have even less political and social support. The writer is the chief executive and co-chief investment officer of Pimco http://blogs.ft.com/the-a-list/2013/10/15/the-artificial-fuel-for-growth-cannot-last- forever/#axzz2hmCLJxet

213 naked capitalism Tuesday, October 15, 2013 Yanis Varoufakis: Economics Pseudo- Nobel 2013 – An Instinctive Reaction By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog The moment I heard that Fama and Shiller (together with Hansen) were awarded the latest pseudo-Nobel in Economics, my initial thought was: What next? A Darwin Prize to some Arch Creationist? The Award for Top Seamanship to the Titanic’s captain? But then I quickly changed my mind. Awarding this ‘Nobel’ to both Fama and Shiller was a brilliant hedge. One that can only be bested by awarding the Physics Nobel to Galileo and to the Inquisitor who condemned him. * * * Readers have requested a summary of the Efficient Market Hypothesis, which is in the news again as a result of the ‘Nobel’ Prize award to Professor Eugene Fama . In what follows the reader can peruse very brief presentations of the triad of toxic theories that undermined macroeconomic logic and helped legitimise the practices that contributed no end to the Crash of 2008. They are: the Rational Expectations Hypothesis, Eugene Fama’s Efficient Market Hypothesis and the so-called Real Business Cycle Theory… [The desciription below is an extract from Chapter 1 of my Global Minoatur] The type of economics which dominated the thinking of influential people (in the banking sector, the hedge funds, the Fed, the ECB, everywhere) was no more than a thinly veiled form of intellectual fraud which provided the ‘scientific’ fig leaf behind which Wall Street tried to hide the truth about its ‘financial innovations’. They came with impressive names such as the Efficient Market Hypothesis (EMH), the Rational Expectations Hypothesis (REH), Real Business Cycle Theory (RBCT). In truth, they were no more than impressively marketed theories whose mathematical complexity succeeded for too long in hiding their feebleness. Three Toxic Theories Underpinning pre-2008 Establishment Thinking EMH: No one can systematically make money by second-guessing the market. Why? Because financial markets contrive to ensure that current prices reveal all the privately known information that there is. Some market players overreact to new information, others under-react. Thus, even when everyone errs, the market gets it ‘right’. A pure Panglossian theory! REH: No one should expect a theory of human action to predict well in the long run if it presupposes that humans systematically misunderstand that very theory. No doubt, this sounds radically anti-patronising. It assumes that not much light can be shed on society by theorists who believe they understand its ways better than Joe Blog. But note the sting in the tail: For REH to hold, it must be true that people’s errors (when they predict some economic variable, e.g. inflation, wheat prices, the price of some derivative or share) must always be random; i.e. un-patterned, uncorrelated, untheorisable. It only takes a moment’s reflection to see that the espousal of REH, especially when taken together with EMH, is tantamount to never expecting recessions, let alone crises. Why? Because recessions are, by definition, systematic, patterned

214 events. However surprising when they hit, they unfold in a patterned manner, each of its phases being highly correlated with what preceded it. So, how does a believer in EMH- REH respond when her eyes and ears scream to her brain: Recession, Crash, Meltdown? The answer is: By turning to RBCT for a comforting explanation. RBCT: Taking EMH and REH as its starting point, the theory portrays capitalism like a well-functioning Gaia. Left alone, it will remain harmonious and never go into a spasm (like that of 2008). However, it may well be ‘attacked’ by some ‘exogenous’ shock (coming from a meddling government, a wayward Fed, heinous trades unions, Arab oil producers, aliens, etc.) to which it must respond and adapt. Like a benevolent Gaia reacting to a large meteor crashing into it, capitalism reacts efficiently to exogenous shocks. It may take a while for the shockwaves to be absorbed, and there may be many victims in the process but, nonetheless, the best way of handling the crisis is by letting capitalism get on with it, without being subjected to new shocks administered by self-interested government officials and their fellow travellers (who pretend to be standing up for the common good in order to further their own agendas). To sum up, toxic derivatives were underpinned by toxic economics which, in turn, were no more than motivated delusions in search of theoretical justification; fundamentalist tracts that acknowledged facts only when they could be accommodated to the demands of the lucrative faith. Despite their highly impressive labels and technical appearance, economic models were merely mathematised versions of the touching superstition that markets know best, both at times of tranquillity and in periods of tumult.

Read more at http://www.nakedcapitalism.com/2013/10/yanis-varoufakis-economics- pseudo-nobel-2013-an-instinctive-reaction.html#e4xAdD0A3MWqdMww.99

Construido con la herramienta http://www.imf.org/external/datamapper/index.php

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10/15/2013 01:14 PM Hard Bargaining German Coalition Talks Yield No Progress Coalition talks between Chancellor Angela Merkel's conservatives and the center- left Social Democrats got bogged down Monday night after an eight-hour meeting failed to produce results. Merkel meets the Greens for talks on Tuesday. Chancellor Angela Merkel's Christian Democratic Union (CDU) and the center-left Social Democrats (SPD) failed to make progress in preliminary coalition talks that lasted late into Monday night, dampening tentative hopes in recent days that the formation of a new government may be easier than expected following the Sept. 22 election. Politicians from both sides had been sounding positive before the second round of exploratory talks, which ended at midnight. "We're more clear about where we stand," SPD General Secretary Andrea Nahles told reporters, referring to differences on issues such as tax policy and the introduction of a minimum wage. She added that as things stood, the SPD's leadership would not be able to recommend the start of formal coalition negotiations with Merkel's CDU and its Bavarian sister party, the Christian Social Union (CSU). "That wasn't what we'd expected," said one SPD official, who blamed the conservatives for refusing to make compromises. Differences Include Tax Policy, Minimum Wage The 21 negotiators from both parties discussed issues ranging from European policy to how to deal with asylum seekers. Finance Minister Wolfgang Schäuble and other conservative politicians rejected SPD plans for tax hikes to boost investment in education and infrastructure. The SPD, on the other hand, refused to budge on its demand for a nationwide minimum wage of €8.50 ($11.53) per hour. The conservatives will hold a second round of preliminary talks with the Green Party, which won the fewest number of seats in parliament, later on Tuesday. However a grand coalition between the conservatives and the SPD remains Merkel's preferred option because it would give her comfortable majorities in both houses of parliament. A third round of talks between the conservatives and SPD could take place on Thursday -- the party leaders have kept their diaries free for that day. Grand Coalition Not Off the Cards The lack of progress on Monday night doesn't mean a grand coalition still can't be achieved. The SPD needs to talk tough to persuade its members that it is doing its utmost to get the maximum concessions out of the talks. An SPD party congress scheduled for next Sunday will decide whether the party should launch formal talks to form a government with Merkel, so the party leadership needs to present some successes. Any coalition agreement, once it has been finalized, will be put to a full membership ballot by the SPD. Schäuble said on Saturday that a government

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could be formed by mid-November. Following Monday's difficult negotiations, that was sounding a little too optimistic. Merkel said last week she wants to know which party she will be entering formal coalition talks with by Oct. 22,when the newly elected Bundestag, Germany's lower house of parliament, assembles for its first session. Merkel led her conservatives to their best general election result since reunification in 1990 and is just five seats short of an absolute majority. Meanwhile a survey commissioned by the mass-circulation Bild newspaper found Tuesday that nearly two-thirds of voters (62 percent) expected a grand coalition of the CDU and SPD to emerge from the talks. However only a third of the respondents (32 percent) said they actually wanted such a government. Reporting by Veit Medick and Philipp Wittrock URL: • http://www.spiegel.de/international/germany/german-coalition-talks-failed-to-yield- progress-monday-night-a-927866.html Related SPIEGEL ONLINE links: • Round Two of Talks Grand Coalition Looks Increasingly Likely (10/14/2013) http://www.spiegel.de/international/germany/0,1518,927760,00.html • In a Hurry Merkel Wants Coalition Partner in Two Weeks (10/09/2013) http://www.spiegel.de/international/germany/0,1518,926931,00.html • World From Berlin Coalition Talks Could Last Into January (09/30/2013) http://www.spiegel.de/international/germany/0,1518,925327,00.html • Auf Wiedersehen Austerity? Europe Hopes for Gentler Merkel (09/25/2013) http://www.spiegel.de/international/europe/0,1518,924176,00.html • 'Fatal Mistake' Green Party Takes Stock after Election Flop (09/24/2013) http://www.spiegel.de/international/germany/0,1518,924203,00.html • Merkel's Test Reluctant SPD to Extract High Price for Coalition (09/24/2013) http://www.spiegel.de/international/germany/0,1518,924281,00.html • Election Triumph Merkel Victorious But Faces Tough Talks (09/22/2013) http://www.spiegel.de/international/germany/0,1518,923755,00.html

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Daily Morning Newsbriefing October 15, 2013 ECB rejects Greek bond roll-over Jorg Asmussen ruled out the Greek proposal of rolling over bonds due to mature next May as a way to finance the funding gap, Kathimerini reports. Greece estimated that the financing gap is around €4.4bn and could be covered by a new bond issuance while Asmussen put it closer to €6bn insisting that other methods must be found to finance it for the second half in 2014. “We must find a way to close the financing gap and there is absolutely no way it can be done in a way of roll-over bond or whatsoever which results in monetary financing; this is not possible for the ECB and not for the whole euro system,” he said. Assmussen said the ECB will also not agree to an extension of the maturity of its Greek bond holdings due to expire in 2014, according to the FAZ. Asmussen said officials meeting in Luxembourg were to have “a first exchange of views” on how to close the financing gap of the existing programme. Jeroen Dijsselbloem could not confirm Asmussen’s estimate of Greece’s financing gap saying that he was “a bit surprised” by these figures. Dijsselbloem said there was no support for a Greek haircut noting that no decision could be made on Greece until December when troika officials expect to have more comprehensive fiscal data. On banking union, there was also no agreement among finance ministers about the resolution fund beyond the already agreed liability cascade, where the backstop of last resort would come in the form of an ESM country programme earmarked for financial reform on the lines of the Spanish programme, Frankfurter Allgemeine writes. The eurogroup did not produce any further clarification on the role of the states in the funding of the banks, the paper writes. Olli Rehn is quoted as saying that an ESM country programme would be the rule if a country is unable to fund the recapitalisation of its banks. The ESM would only invest directly in a bank under exceptional circumstances. As Reuters reports, France wants to strengthen the ESM’s role as a formal backstop beyond the existing arrangements, but this is rejected by Germany, the Netherlands, and other creditor countries. It is also a telling sign of the priority that Germany attaches to this issue with Wolfgang Schauble not attending this meeting, as he was in Berlin for coalition negotiations. Simone Boehringer has a comment in Suddeutsche Zeitung shows how difficult the issue of the banking backstop plays out in German politics. She writes that if the EU were to agree on the ESM as a common banking backstop, they would create an incentive for member states to offload their banking troubles onto the level of the EU. And that means it would be funded by the taxpayers (the innuendo being the German taxpayer). The ministers will today formalise the single supervisory mechanism after the UK dropped its objections, Frankfurter Allgemeine adds.

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The FT reported the story of a UK hold up of the SSM prominently last week, but we did not see a follow up that this conflict has now apparently been resolved except in this throw-away line in the FAZ story. Spain's government will pay regions' arrears to providers at a discount in 2013 The Spanish government is finalizing the payment of arrears owed to private providers by regional public administrations. Cinco Días writes that the latest stage of the program includes €14bn in unpaid bills incurred since January 2012, and which will mostly be paid during 2014 as the Spanish Treaury has only €1.7bn available until the end of 2013 as the government does not want to issue more debt than already scheduled to avoid sending the wrong message to the markets and possibly cause a spike in the risk premium. Payments will be prioritised considering the liquidity needs of private providers, but those who want to be paid during the rest of this year will have to accept a discount on their bill, which will be paid through private bank intermediaries. Spanish banks continue to reduce their debt to the ECB Expansión reports that Spanish banks' net debt with the Eurosystem went down for the 13th consecutive month, to €241bn, according to Bank of Spain data. The peak was reached in August 2012, at nearly €389bn. Spanish banks will require €5bn in new loan loss provisions for refinancings Cinco Días reports that the Spanish government has informed the Eurogroup that Spain's banking sector will require an additional €5bn in loss provisions as a result of the reclassification of refinancings as dubious loans which was required by the Bank of Spain earlier this year. The paper writes that initial estimates when the measure was announced in May were that €10bn in provisions would be needed, but only 50% was required in the end due to banks choosing to classify loans as nonperforming instead, which draws from existing provisions rather than requiring new provisions. Bank of Spain governor Luis María Linde said that he expects bank profits for the year to be sufficient to comfortably cover the required new provisions. Call for new centre-left alliance in Greek politics A group of 58 public personalities signed a declaration calling for an initiative to create a new center-left grouping in Greek politics, Kathimerini reports. PASOK leader Evangelos Venizelos hailed the initiative on Monday, calling for a “responsible center- left, not one beholden to party interests or personal opportunism.” Venizelos, who is also deputy PM, said he was open to dialogue and even to discuss changes in his own role. The development came amid increasingly strained ties between ND and PASOK. Portugal’s budget is out today, with up to 12% cut in wages Portugal will present its 2014 state budget today. There are lots of rumours out there but one story has been confirmed, namely that the budget includes a pay cut on public sector employees of between 2.5% and 12% next year, as reported by Diario Economico, though the details are not yet revealed. Salaries above €2000 will face a 12% cut in 2014, a significant increase from the current cut of 3.5% as applied since 2011, writes the article. Also lower wages could be hit given the proposed progression, according to Jornal de Negocios, though the design of the measure could change in the very last moment. More will be known tomorrow.

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Ireland’s budget has fiscal correction of €2.5bn Ireland will also present its budget today. According to the Irish Times a raft of ‘harsh measures’ such as ending the monthly telephone allowance for pensioners, a hefty rise in prescription charges, a 8-point rise to 41% rise in tax on earned interest and scrapping the mortgage interest supplement payments will be included in the €2.5 billion budget. The overall adjustment will be made up of some €900m in new taxes as well as a total of €1.6bn in cuts across all 15 Government departments. Not a good night for the coalition talks Spiegel Online leads with the story this morning of a terse eight-hour meeting between CDU/CSU and SPD leaders, during which the two sides clashed on several issues with no agreement in sight. The article quotes SPD general secretary Andrea Nahles as saying that it was good to know where we stand, but that the SPD was not even close to a position where it could recommend the start of formal coalition talks to its party congress scheduled for this weekend. Another SPD delegate said that this was not what they had expected. There are specific areas of disagreement. Wolfgang Schauble is blocking all attempts by the SPD to increase taxes, while the SPD members said they doubted that the investment plans could be funded in any other way. The SPD also insists on a statutory minimum wage of €8.50 per hour. And the third subject are different views on how to treat families – which apparently triggered a loud and ideological discussion with no results. No progress on electoral reform in Italy We would not really recommend that readers consult the source of this note – an article in La Repubblica of the typical he-said-she-said variety. But this article, hidden deep in this morning’s paper gives a clue how difficult and how gridlocked talks about electoral reform have become. While the House seems ready to proceed on a bill to establish majority triggers for House and Senate, the Senate was not yet even close to formulating its own position, and would currently block all proposals. There is an urgency for an agreement because the Constitutional Court will soon declare the current electoral law unconstitutional, notably the provision of a super-majority trigger for the House – which gives the party with the largest share of the votes an automatic majority. Without reform, Italy will thus take a step back to full proportional chaos. The Senate is working on a separate draft, led by two rapporteurs from the PD and the PdL, but this draft is making slow progress – partly because of the need for further clarification inside the PD. Meanwhile, there have been more leaks of the budget draft with a mixture of tax increases and tax cuts. Reuters reports that the draft foresees an increase in taxes on earnings from financial investments from 20% to 22%. Companies will be able to offset 50% of the IMU property against income tax to be paid in 2014. Coeure warns on waning enthusiasm for co-ordination Reuters reports that Benoit Coeure said on Monday that the momentum for global financial coordination was in the process of being lost so that there is now a substantial risk that financial systems would become more fragmented. What did he expect? Voluntary economic co-ordination helps during acute moments of crisis, but not over long periods as governments quickly revert to business as usual. The Financial

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Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.518 0.517 0.512 Italy 2.420 2.399 2.359 Spain 2.440 2.417 2.377 Portugal 4.440 4.412 4.366 Greece 7.095 6.832 6.76 Ireland 1.856 1.820 1.788 Belgium 0.755 0.750 0.743 Bund Yield 1.864 1.859 1.899

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.355 1.3566

Yen 133.210 133.51

Pound 0.848 0.849

Swiss Franc 1.236 1.2343

ZC Inflation Swaps

previous last close

1 yr 1.07 1.06

2 yr 1.19 1.19

5 yr 1.4 1.4

10 yr 1.79 1.78

Euribor-OIS Spread

previous last close

1 Week -3.886 -4.286

1 Month -0.900 -2

3 Months 3.500 4.8

1 Year 30.743 30.343

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-10- 15.html?cHash=9172b2d712c88bff1bf1d0acb6d793b0

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Monday October 14, 2013 Eurogroup dashes Greek hopes for funding gap fix

Top-ranking European officials meeting in Luxembourg suggested on Monday that no decision regarding Greece’s bailout program would be made before the end of the year, while also dashing Greek hopes of rolling over bonds due to mature next spring in order to cover a funding gap next year. On arriving at a summit of eurozone finance ministers in Luxembourg, ECB executive board member Joerg Asmussen ruled out the possibility

of rolling over bonds due to mature next spring to cover a funding gap which Greece estimates at around 4.4 billion euros. Asmussen put the funding gap closer to 6 billion euros and said that other methods must be found to plug it. “We must find a way to close the financing gap and there is absolutely no way it can be done in a way of roll-over bond or whatsoever which results in monetary financing; this is not possible for the ECB and not for the whole euro system,” he said. Asmussen said officials meeting in Luxembourg were to have “a first exchange of views” on how to close the financing gap of the existing program. European Monetary and Economic Affairs Commissioner Olli Rehn struck a similar tone. “We will reflect in the coming weeks to see and decide how to proceed with Greece concerning its financing needs and potential fiscal gap,” he said. Talks on whether Greece has achieved a primary surplus and about the sustainability of the country’s debt will be held “at some point later next year,” Rehn said. Eurogroup Chairman and Dutch Finance Minister Jeroen Dijsselbloem was also guarded, noting that no decision could be made on Greece until December when troika officials expect to have more comprehensive fiscal data. The comments by the European officials came just a few hours after Stournaras said, in an interview to the Greek business daily Naftemporiki, that Greece would roll over 4.5 billion euros in debt next year to cover a shortfall in its financing needs. The minister said the problem could be more comprehensively tackled if European central banks roll over Greek debt worth 19 billion euros through 2016. He said European central banks had pledged to roll over Greek bonds in a November 2012 agreement. “If they do not want to implement this because they consider it monetary financing, they must find equivalent measures,” Stournaras said, noting that this was an obligation of the central banks. “We have stuck to our promises up to now,” he said. “They must keep to theirs.” In a related development Klaus Regling, the head of European Stability Mechanism, said Monday that there would be no problem disbursing to Greece the next tranche of rescue fund – a sum of 1 billion euros – this month, provided that the government make good on the so-called “prior actions” pledged to the troika including forced transfers and layoffs in the civil service and the overhaul of state defense and mining firms. Troika mission chiefs are expected to return to Athens to resume negotiations later this month. http://ekathimerini.com/4dcgi/_w_articles_wsite1_1_14/10/2013_523101

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ft.com/global economy Last updated: October 14, 2013 5:42 pm Fama, Hansen and Shiller win Nobel Prize for economics By Ferdinando Giugliano and John Aglionby in London

©Bloomberg Robert Shiller The Nobel Prize for economics has been awarded to a trio of American academics for their work on what drives asset prices, a controversial question which goes to the heart of the current macroeconomic debate over the crisis. Eugene Fama, Lars Peter Hansen and Robert Shiller have all spent their careers analysing how the value of assets, such as stocks and bonds, vary over time. However, mirroring the broad disagreements which typically characterise the economics profession, the three scholars have come to radically different conclusions. More ON THIS STORY// The Short View Nobel efforts bring no guaranteed success/ John Authers Fama-Shiller - a Nobel contradiction/ FT Alphaville The prize-winning property Shiller/ Video Robert Shiller on the outlook for house prices/ Tim Harford Efficient markets hypothesis merits Nobel ON THIS TOPIC// Tax breaks for bus commuters urged/ IN GLOBAL ECONOMY/ Swiss to sign tax evasion convention/ Food prices push up inflation in China and India/ Fears voiced over trade pact standards/ Central bankers call for US to agree budget deal Mr Fama, from the University of Chicago, is one of the fathers of the so-called “efficient market hypothesis”. This theory – which underlies his seminal 1965 paper “Random Walks in Stock Market Prices” – formulates that markets are “informationally efficient”, as investors immediately incorporate any new available information in the price of an asset. In contrast to Mr Fama, Mr Shiller, from Yale University, believes that any explanation of investors’ behaviour cannot be fully based on rationality and must acknowledge the role played by psychology. In the 1980s, he showed that stock prices tend to fluctuate more than corporate dividends. This should not happen if investors were fully rational, since stock prices forecast future dividends. In the 2000s, Mr Shiller applied his insights on investors’ “irrational exuberance” to the US housing market, which he believed was overvalued. He claimed that the behaviour of house prices was driven by excessive optimism over future valuations – a finding which proved remarkably prescient when the market crashed in 2007.

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Mr Hansen, a co-founder of the Becker Friedman Institute also at the University of Chicago, designed methods to explore the drivers of stock market volatility. His statistical brainchild – called the “Generalized Method of Moments” – confirmed Mr Shiller’s finding that swings in asset prices could not be explained via standard models based on rationality. Subsequent work has shown that at least some of this volatility can be explained by investors’ different attitude towards risk. At different stages over the last decade, the three academics have all individually been considered as possible favourites for the $1.23m prize. However, on Monday the economics community buzzed with astonishment at the joint award. “Nobel Prize for Fama who led millions to believe financial markets are efficient and for Shiller who showed opposite. What a contradiction,” tweeted Paul De Grauwe, professor at the London School of Economics. The work of the three laureates has been highly relevant for market practitioners as much as academics. Mr Shiller contributed to build the monthly Case-Shiller housing indices that measure home prices in cities across the US. This helps investors to measure movements in house prices and to insure themselves against fluctuations. Mr Fama’s insight that markets immediately incorporate all available information in stock prices led to a careful re-examination of the merits of stock-picking and of the performance of mutual funds. The lack of predictability of stock movements has been an important driver behind the emergence of index funds, which aim to replicate the movements of an index or of a specific market rather than second-guessing where they will move. The wide recognition the scholars enjoy from investors has made them prominent voices in the debate over the future of the financial world after the crisis. Mr Fama last year warned on the issue of moral hazard among financial institutions considered too large to collapse in the wake of the financial crisis. “The worst thing to come out of that experience in my view is ‘too big to fail’,” he told the CFA Institute Annual Conference in Chicago last year. “The institutions that are too big to fail have their debt priced as if it was riskless, which gives them a low cost of capital, and creates an environment where it is easy for them to expand. Then we have an even bigger problem.” http://www.ft.com/intl/cms/s/0/6f949e8c-34c1-11e3-8148- 00144feab7de.html?siteedition=uk#axzz2hgPzDFTz

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THE WALL STREET JOURNAL U.S. News Americans Win Economics Nobel for Market Insights Scholars Fama, Hansen and Shiller Share Award By Brenda Cronin Updated Oct. 14, 2013 7:49 p.m. ET

University of Chicago Professor Eugene Fama is widely recognized as the "father of modern finance." On Monday he was one of three Americans to win the Nobel Prize for Economics. Fama joins the News Hub. Three American scholars won the Nobel Prize in economics for pioneering work in financial markets that has transformed portfolio management and asset pricing and launched the study of how emotions affect investment decisions. The Royal Swedish Academy of Sciences on Monday honored Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University, citing their complementary but independent breakthroughs on "empirical analysis of asset prices."

The laureates focused on how prices are set for stocks and bonds, but their findings have implications far beyond financial markets. Every corner of the macroeconomy is

225 affected by the risk tolerance—as well as rational and irrational acts—that spur individuals and corporations to invest or save. "Nobody's scratching their heads over this one. They've all been on the short list for many years," said Mark Gertler, a New York University economist currently on sabbatical at Columbia University. "The interesting thing is how the three are connected." The 74-year-old Mr. Fama is seen by many as the father of modern finance, for his 1960s-era work on the theory of efficient markets. After meeting with little success in stock picking, Mr. Fama found that markets were efficient in a day-to-day or month-to- month time frame. They absorbed the latest information swiftly and seamlessly and yielded accurate asset prices. The conclusion upended notions of trying to profit from timing the market or stock picking—and gave rise to the index-funds industry. Twenty years later, Mr. Shiller found that markets' short-term efficiency was less enduring over longer periods. He examined why asset prices were too volatile to be justified by fundamental information, such as dividends. In spans of three to five years, prices moved for a host of reasons, such as investors' risk aversion—or their optimism or pessimism. The field of behavioral economics was born as scholars attempted to tease out what was behind investors' shifting risk tolerances and decisions. • MoneyBeat: A Prize for Cool-Headed Thinking on Volatile Markets At the same time, Mr. Hansen was working on questions about market predictability, and came up with a tool for studying changes in asset pricing. That led to his Generalized Method of Moments—an econometric tool that today is a standard economics theorem, applicable throughout the field and not just to financial markets. Mr. Hansen's theorem is "absolutely spectacular," said John Cochrane, a professor at the University of Chicago Booth School of Business. "It looks really complicated but he's kind of taken it to another dimension…and seen how gloriously simple it is." At 60, Mr. Hansen is the youngest of Monday's winners. "I've been feeling old recently," he said. "But this gives me the feeling of being young." He said his work on the theorem dates back to when he was a graduate student and starting out as a professor—and being mentored by 2011 Nobelists Thomas Sargent and Christopher Sims. Mr. Cochrane, who is Mr. Fama's son-in-law as well as his colleague, said Monday that after hearing from the Nobel prize panel, his father-in-law resumed his regular routine, teaching a class Monday at Chicago, his professional home of 54 years. Although Mr. Fama has exchanged tennis and windsurfing for golf, he doesn't show any signs of slowing his pace, Mr. Cochrane said.

Robert Shiller found some predictability in stock and bond prices over the longer term, in part due to risk tolerance and behavioral biases. Reuters // Lars Peter Hansen, left, developed a statistical method to test rational theories of how assets are priced that became a standard of econometrics. Eugene Fama put forth the 'efficient market' hypothesis that says markets, taking the latest and best data, come up with the best prices for assets. Reuters http://online.wsj.com/news/articles/SB10001424052702304561004579135023249089820

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MINSKY DOES RIO: Notes from a Conference Author: L. Randall Wray · October 14th, 2013 · I recently returned from conference in Brazil jointly sponsored by the Levy Economics Institute, the Ford Foundation, and the Brazilian research group MINDS. It is part of a bigger project to take Hyman P. Minsky global. In my view, Minsky was hands-down the greatest economist of the second half of the twentieth century and he deserves the attention he’s getting. Watch for an upcoming film by Monty Python’s Terry Jones that will feature Minsky and his work. Minsky will even make an appearance—or, more accurately, a bigger-than-life Minsky puppet will be in the film. (Steve Keen and I were also interviewed.) Minsky the puppet had to travel from England to NY for filming. Question: how do you transport a huge puppet across the Big Pond? Well, you buy him a seat, of course! It would have been worth the price of airfare to be on that flight, buying Minsky a drink. In any event, I’m going to focus my comments around the conference’s kick-off presentation by the always entertaining Paul McCulley, formerly the brains behind PIMCO. I was sitting with Paul right before his talk, during which he apparently put the whole thing together. He asked for three fundamental principles to structure his presentation. In a matter of minutes he came up with three, fleshed them out, and then gave the kind of performance that only Paul can give. Herewith follows my recollection of his points along with my comments on each. Principle 1: Microeconomics and Macroeconomics are inherently different disciplines. Macro is demand-side; micro is supply-side. For any practical time horizon, demand always drives supply. For those who have been trained in economics, and then had to suffer through the mainstream preoccupation with the supposed “micro foundations of macro”, or even with the heterodox arguments for “macro foundations of micro”, Paul brilliantly cut to the chase: the twain do not meet in any way that matters. They are different disciplines and trying to uncover which of the two is really foundational would be like trying to determine whether poetry rests on the foundations of structural engineering, or versa vice. Further, and this is more important, demand drives supply—at least for any real world relevant situation. Your typical Keynesian argues that demand draws forth supply in the short run, but wants to concede to Neoclassicals the truth of Say’s Law that in the long run supply governs demand. (Exhibit A is the Solow growth model.) But as Keynes insisted, in the long run we’re all dead. Forget-about-it. Paul rightly says that what matters in the short, medium and practical long run is demand. That leads to point two: Principle 2: Monetary and fiscal policy are not inherently independent instruments. Both are macro policies in the policy-maker’s toolkit, and both work on the demand side. The Sovereign Fiscal Power is the ability to impose a tax; the Sovereign Monetary

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Power is the ability to name what can be accepted in tax payment. The goal is to use these two tools to achieve the maximum possible full employment position. That, in a nutshell, is MMT. MMT, of course, also emphasizes that the Sovereign issuer of the currency imposes a tax liability in the Sovereign’s money of account, issues currency in the same unit, and requires payment in that currency (broadly defined to include central bank reserves). MMT also embraces the view that Sovereign Government should pursue true full employment, defined as a job offer to anyone ready and willing to work at a basic compensation. Further, like Paul, MMT rejects the notion that fiscal and monetary policy are (or should be) independent. (A caveat will be discussed below—Paul insists that there can be instances where it is pragmatic to keep monetary and fiscal policy separate.) Indeed, MMT has emphasized the necessary coordination between monetary and fiscal policy: if the central bank wants to target overnight interest rates, its actions cannot be independent since it must coordinate operations with the fiscal authority (the Treasury). Paul was agreeing with MMT against various critics who attack us for “consolidation” of the central bank and treasury when we explain in simple terms “how a government really spends”: it chooses a money of account, spends its currency into the economy, and then receives its own currency in tax payment. The consolidation is not supposed to be a detailed description of today’s operations, but rather a statement of the logic of the way a sovereign currency “works”. I’ll return to this at the bottom. Principle 3: Banking is inherently a joint venture between the public and private sector. Why? Because of Principle 1: the effective demand problem. Banks promise what they cannot deliver, which is a positive sum game for society so long as banking is a going concern. The problem is that the ex ante demand for liquidity is (almost) always greater than the ex post demand. So banking must be a joint enterprise because only government can ensure that the ex ante demand = the ex post demand. We need a marriage of banks and government. The problem is that today’s global finance needs marriage therapy. Let me translate. You will recall from Econ 101 that the propensity to spend is generally less than one, meaning that income recipients generally want to save some fraction of their incomes. This is Keynes’s “demand gap” that needs to be filled. Banks can help fill that gap by financing spending by those willing to spend more than current income, most beneficially when it is based on the expectation that this will increase future income. As Paul put it, government needs bankers because bankers do not need to use democracy to determine who gets that credit. Bankers (are supposed to) lend in a very undemocratic way—to those most likely to repay. (Well, that was the ideal, anyway, before Wall Street decided it could earn far more by making loans to those who have zero chance of repaying!) Government cannot operate that way—its provision of credit is either democratic or allocated on the basis of cronyism—neither of which is desirable. So bankers are supposed to do their duty, using underwriting to selectively lend to the credit worthy, helping to raise aggregate demand. They do this by issuing their own highly liquid IOUs to borrowers. The problem is that the liquidity of these IOUs ex ante is greater than it is ex post. In the crunch, only the real thing—currency (or what I called TWINTOPT—that which is necessary to pay taxes—in my 1998 book)—will do. Suddenly no one wants those bank IOUs; as Paul put it, the ex post demand for this kind of liquidity is less than the ex ante demand was that got the banks to provide it. The

228 government needs to partner with the banks to supply the currency that bank depositors prefer ex post. In today’s world the problem is not really with the banks—since they’ve got the Big Bank (Fed) and Big Government (Treasury) standing behind them. Now it is the shadow banks (Paul coined the term) that suffer the run when their short term liabilities suddenly fall out of favor. I think that what Paul means by the need for marriage therapy is that policy needs to address the massive build-up of shadow bank liabilities in good times (ex ante liquidity) and the crisis of confidence in bad times (ex post liquidity). Unfortunately, that’s not happening. Leonardo Burlamaqui of the Ford Foundation began the conference with a reference to governance by lobbyists and regulation by the shadow banking system. The idea is that we cannot reign-in global finance because it has bought and paid for our “elected” representatives. Paul came back to that at the end of his talk, when he referred to lobbying as a legal twilight—legislation made in the dark. The solution, he declared is transparency: “Sunshine is a great disinfectant.” Returning to the aforementioned caveat on fiscal and monetary policy independence, Paul warned me that MMT goes too far. He echoed a position taken by the other Paul (Krugman, that is) that when we are in a slump, we need an alignment of fiscal and monetary policy. Because we’ve reached the zero bound on interest rates, monetary policy has become impotent. Hence, we also need fiscal stimulus. However, a time will come when we might need to delink the two. If after recovery we are still running a budget deficit, we might need monetary constraint to hold down inflation; or, if the budget is too tight the Fed can relax. I was puzzled. I told Paul that so far as I know, no MMT proponent has ever argued that monetary policy and fiscal policy must march lock-step in the same direction. He insisted we’ve never explained that as our position. So there you go, Paul and Paul, I’ve said it: YES, THERE CAN BE TIMES WHEN MONETARY AND FISCAL POLICY MIGHT PUSH OR PULL IN OPPOSITE DIRECTIONS. Now, for my own two caveats on that. (Note that not all MMTers necessarily agree with these—I’m more skeptical than most on the potency of interest rate changes.) 1. Monetary policy is not just impotent in a slump, it is also impotent in the boom. When a speculative fever takes hold—say, in stocks or gold or housing—raising interest rates a few hundred basis points is not going to cool the spirits. And the investment channel—which is how interest rates are supposed to work according to all the textbooks—is far too weak. So, while monetary policy can and most likely will tighten when fiscal policy is thought to be too loose, that will not do much. My own view is that monetary policy tightening mostly works by causing massive insolvency and widespread defaults. Witness the Volcker experiment of the early 1980s (the target was raised above 20%) and the Bernanke rate hikes after 2004 (while rates weren’t raised much, ARMs were structured such that rates exploded, ensuring instant insolvency). There isn’t any nice smooth relationship between rising rates and slowing growth of aggregate demand. If you want to use monetary policy to slow a boom, you’ve got to cause a significant financial crisis. I think that is bad policy, but it is a choice. 2. Within the normal ranges of interest rate hikes, monetary policy can even work in the opposite direction. If you’ve got a lot of federal government debt and not too much private sector debt, then raising rates can actually stimulate the

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economy. The reason is that it increases government spending servicing debt, which increases private sector income. In my view this is not just a theoretical point. Japan’s situation just before the GFC was like that. After two decades of huge government budget deficits and no private sector borrowing, raising rates actually was stimulating the economy and bringing Japan out of a slump. But when the GFC hit, Japan reversed course, lowering rates and adding to the global headwinds. (The USA was in the opposite situation, with massive private sector debt and a relatively small government debt so that rate hikes killed the private sector.) But more importantly, I think the two Pauls misunderstood the point MMT was making. Our argument is that the monetary and fiscal branches of government can NEVER be operationally independent. The central bank is the treasury’s bank. Virtually all payments made by and received by national government run through the central bank. Fiscal operations (spending and taxing) necessarily impact bank reserves. Since the Fed targets the overnight interbank lending rate (fed funds rate), the Fed must offset these fiscal operations. That is the sense in which we say that monetary and fiscal policy cannot be independent. Put it this way. If Washington ever gets its act together to let government start paying its bills again, the Fed will not bounce Treasury checks. But, yes, MMT agrees with the two Pauls that the central bank can squeeze when fiscal policy inflates, and vice versa. http://www.economonitor.com/lrwray/2013/10/14/minsky-does-rio-notes-from-a- conference/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ economonitor%2FOUen+%28EconoMonitor%29

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Research-based policy analysis and commentary from leading economists Exit strategies: Time to think ahead Charles Wyplosz, 14 October 2013 Exiting from unconventional monetary policies is a key challenge facing policymakers in advanced nations and a key worry for everyone else. This column introduces the new 'Geneva Report' on the subject, Exit Strategies, by Alan Blinder, Thomas Jordan, Donald Kohn and Frederic Mishkin. The report considers what the post-exit world will look like, how we can get there and the long-run impact on central banking. Related • Helicopter money as a policy option Lucrezia Reichlin, Adair Turner, Michael Woodford • Augmented inflation targeting: Le roi est mort, vive le roi Richard Baldwin, Daniel Gros Update Exit Strategies, the latest Geneva Report on the World Economy, has just been published by ICMB and CEPR. It was first presented at a conference in May 2013 – back when there were doubts about the topic’s relevance. Central banks were saying that they had it all under control. How things have changed. When Ben Bernanke talked about tapering, the markets were shocked, taken by surprise. Exit strategies are now the subject of voluminous discussions among policymakers, market participants and scholars. The 'Geneva Report' anticipates much of this debate. It shows that exiting from the extraordinary policies pursued since 2007 is going to be an extraordinary experiment, fraught with many technical challenges. It also makes the point of how crucial and delicate central bank communication will be. Original column as posted on 8 June 2013 Right now, most central banks in developed countries are deeply focused on finding ways to support a lackluster economic recovery from the 2009’s Great Recession. In some cases, these banks are struggling to exit from a double dip. With interest rates at the zero lower bound, these efforts are taking the form of a massive expansion of liquidity. Behind this unprecedented effort lies a seldom-discussed question: how do we revert to normality when it’s all over? It is certainly not yet time to act but it is never too early to think carefully about such a complex and untested process. ‘Exit strategies’, as this process is often called, were the topic of the 15th Geneva Conference on the World Economy, which took place in Geneva on 3 May 2013. The debates were structured around two main questions: Where to exit to? How to exit? Alan Blinder introduced the first issue, his key message being that the new, ‘normal’ monetary policies would differ from the pre-crisis consensus that a central bank should pursue inflation targeting and ignore financial stability. The future relevance of inflation targeting was heavily debated, focusing partly on how it should be defined. However, there was widespread agreement on three main points:

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• Financial stability is now recognised as an implicit responsibility of central banks; • Many new instruments have been experimented with since 2008 – including central-bank purchases on long-term assets – and they will not be abandoned; • Central banks are now involved in macroprudential financial supervision, which is not completely separate from microprudential supervision. The expanded role of central banks – often in areas that are unavoidably political – led to many conference participants expressing their concern about central-bank independence: Don Kohn introduced the second issue: the first question is ‘when to do it’? • Some conference participants were of the view that it is better to act early rather than too late, avoiding the risk of rekindling inflation; Others were of the opposite view, fearing another recession; • Do we raise interest rates or, first, re-absorb liquidity? It may seem natural to first raise the interest rate, but who will bear the ensuing capital losses on long-term bonds: central banks that now hold substantial amounts, or the private sector? • The third question is which assets central banks should dispose of, and in which order; Here the discussions revealed how intriguing is the newly discovered ability of central banks to shape the yield curve. Should this ability be used as part of the exit strategy? Should it be exercised in the ‘new normal’? A common theme running through these questions was, again, that the exit strategy was bound to be highly political. Withdrawing policy support is always delicate, but the scope for capital losses and the impact on fiscal policy of large-scale bond sales stand to make exit highly controversial. Overall, it’s clear that central banks need to prepare the public and the politicians. Editor’s note: This was the 15th conference organised by the International Center for Monetary and Banking Studies (ICMB). These conferences bring together academics, policymakers and financiers to discuss key policy issues. ICMB and CEPR will jointly publish in July a full Geneva Report on exit strategies. References Exit Strategy, the 15th Geneva Report on the World Economy, by Alan Blinder, Thomas Jordan, Donald Koohn and Frederic Miskhin, ICMB Alan Blinder’s Geneva presentation// Donald Kohn’s Geneva presentation Previous GENEVA reports on the World Economy (http://www.cepr.org/pubs/books/geneva/geneva.asp)

Topics: Monetary policy Tags: Eurozone crisis, liquidity trap, quantitative easing, Vox Views, zero lower bound Related // Helicopter money as a policy option Lucrezia Reichlin, Adair Turner, Michael Woodford// Augmented inflation targeting: Le roi est mort, vive le roi Richard Baldwin, Daniel Gros http://www.voxeu.org/article/exit-strategies-time-think-ahead

232 naked capitalism Monday, October 14, 2013 Why CEO Pay Will Keep Rising to Even More Insanely Unjustified Levels While Ordinary Workers Get Squeezed Yves Smith Even casual scrutiny will tell you that the current ridiculous levels of CEO pay bear no relationship to anything other than their highly developed rent extraction skills. Bloomberg reported earlier this year that the ratio of CEO pay to worker pay has increased 1000% since 1950. Fortune 500 companies pay their chieftans 204 times the level of average worker pay, versus a mere 20 times in 1950 and 42 times in 1980. Is it really five times harder to run a big company now than in 1980? It’s one thing if CEOs were the ones that had built important businesses and taken entrepreneurial risk. But the Bill Gates and Sergey Brins of this world got really rich on their shareholdings. CEOs, by contrast, inherit businesses with established franchises. And the idea that paying more buys you more talent is spurious. If you were to say that paying more for a house makes it a better house, you’d see how this rationalization is a form of magical thinking. Studies have found no correlation between CEO pay and results. Quite a few studies have found the correlation to be negative (here, here and here, for instance). And forget about the myth of the superstar CEO. Lucian Bebchuk, Martijn Cremers, and Urs Peyer analyzed what they called the CEO pay slice, which is the proportion the CEO took of the total pay of the top five execs that went to the CEO. The more the CEO took relative to the rest of the top team, the worse the company did. But CEO pay is strongly correlated with one metric: how many people they fire. Things have gotten so bad that even the lapdog SEC has tried to tamp things down a bit by launching a new rule requiring companies to disclose their ratio of top pay to average worker compensation. But as James Surowiecki describes in a new article in the New Yorker, this measure is not only likely to be ineffective, it may well be counterproductive. It does nothing to change the perverse norm for setting CEO pay, that of benchmarking. Benchmarking sounds perfectly sensible and objective until you understand how it really works in this arena. As we wrote in 2008: One practice that I have seen get perilous little mention is where the pay targets are set. Based on their belief of what constitutes good modern practice (influenced in no small degree by the pay consultants) most boards set general target ranges for how they would like the CEO to be paid relative to peers. The comp consultant then helps define and survey the peer group’s pay ranges, setting a benchmark for how the CEO in question is to be paid. That all sounds fine, right? Well, except just as all the children at Lake Woebegone are above average, no board likes setting a target below peer group norms. I have heard of numerous examples of targets being set somewhere in the top half (66th percentile, top quarter, top 20%), hardly any at the mean, and none I know of below average…. If readers know of any examples of companies (other than those with substantially owned by insiders) where the target for CEO pay is below the median of comparable companies, please let me know.

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So with this mechanism in place, any CEO who has fallen below median pay who is targeted to be in a higher group will have his pay ratcheted up, independent of performance, merely to keep up with his peers, This increase raises the average and creates new laggards. The comp consultants have institutionalized a leapfrogging process that keeps them busy surveying competitor reward levels and keeps top-level pay rising relentlessly. Surowiecki cited a paper by Charles Elson and Craig Ferrere that not only confirms what we had inferred in 2008, that no board sets out to pay less than 50th percentile, and most set pay levels above that, assuring a constant ratcheting up of CEO pay levels. Even worse, a study by Ron Laschever found that some boards often used a peer group that was really a stretch in terms of size and complexity of the company, again serving to justify higher levels of compensation (note this was not just to help the CEO; it would also presumably justify higher directors’ fees as well). Now the SEC’s assumption appears to have been that the disinfectant of sunlight, as in better disclosure, would curb these excesses. But shareholders are disenfranchised. Even large holders don’t have a big enough stake to have any real clout. Passive investors like index funds and ETFs accounted for 22% of the market in 2010. All they care about is index replication and minimizing expense ratios; they could care less who is running a company. It makes much more sense for an unhappy shareholder to sell rather than put up a fight. But investor sell stock for lots of reasons: technical signals or their more modern cousin, algos, portfolio rebalancing, missing earnings targets, a change in industry fundamentals, that any sales out of unhappiness with CEO pay or performance are lost in the noise of other trades. Surowiecki tells us why the SEC might have made matters worse. The visibility of pay makes the benchmarking easier (as in it helps the comp consultants goose pay higher) and likely has the effect of anchoring. A $10 million pay package is seen as justified because we read out them often. But Surowiecki reports that price transparency has had perverse effects elsewhere, often where the value of the service is hard to determine and price is thus seen as a proxy for quality. Surowiecki adds other possible causes: Some boards, in the face of much evidence to the contrary, remain convinced of what Elson calls “superstar theory”: they think that C.E.O.s can work their magic anywhere, and must be overpaid to stay. In addition, Elson said, “if you pay below average, it makes it look as if you’d hired a below-average C.E.O., and what board wants that?”… In a host of recent cases, public disclosure of the prices that hospitals charge for various procedures has ended up driving prices up rather than down. And the psychological causes in both situations seem similar. We tend to be uneasy about bargaining in situations where the stakes are very high: do you want the guy doing your neurosurgery, or running your company, to be offering discounts? Better, in the event that something goes wrong, to be able to tell yourself that you spent all you could. And overspending is always easier when you’re spending someone else’s money. Corporate board members are disbursing shareholder funds; most patients have insurance to foot the bill…. [T]here’s something naïve about the new S.E.C. rule, which presumes that full disclosure will embarrass companies enough to restrain executive pay. As Elson told me, “People who can ask to be paid a hundred million dollars are beyond embarrassment.” And that leapfrogging effect? It’s being used with great effectiveness against ordinary workers. Again as we wrote in 2008:

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One meme I have noticed surfacing in the debate over the automaker bailout is that UAW employees are paid more than average workers. Now in and of itself, that statement is meaningless. You need to have an idea of worker productivity to see whether that it out of whack (and for some odd reason, the bloated and highly paid management cohort almost never gets mentioned in these discussions, nor do the massive state level subsidies to the foreign transplants). Perhaps I missed it, but I do not recall seeing any longitudinal work on labor costs (that sort of analysis would help bring some badly needed facts to the table). But why is framing the discussion around averages alone dangerous? Let’s say we collectively want to bring car worker pay down to some sort of average. That has the effect of lowering the average. You will have groups that were formerly at the average that are now above it. And if you accept the implicit logic “above average pay is bad” (fill in the blank as to why), you have a race to the bottom due to pressure on the relatively better paid to take less which puts pressure on aggregate pay. And look at how the anti-worker effort has targeted various well-paid cohorts. The first target was members of unions at major manufacturers. Those blue-collar wages helped provide a reference point for the wages of college-educated white collar workers (as in the presumption was they should get at least comparable compensation, if not better). And you can’t attribute the wage squeezes to solely to cheap Chinese labor; for instance, middle level and senior corporate manager are often doing what would have been one and one half to two jobs fifteen years ago, and often at lower inflation-adjusted levels of pay. Similarly, retailers are squeezing down even more on workers by turning full-time jobs into part-time positions to stop providing benefits and to push pay even lower (workers who are desperate to get more hours will also accept reduced wages, working off the clock, and abusive work conditions). Remember, retailers are insulated from international wage competition. Yet this sort of wage-cutting is taking place even in high end stores that would presumably benefit from increasing income disparity. So now you can see how the assault on public sector workers fits in. When I was young, teachers and government employees were modestly paid, but they did have job security and decent pensions. Now that the wages of well and even merely adequately paid private sector workers have been beaten down, suddenly these not all that terrific compensation levels arouse jealousy among the newly disenfranchised, who now demand that public sector workers join them in the race to the bottom. Once this sort of beggar thy neighbor attitude is institutionalized, and it has been in many circles, it’s hard to reverse. But if we are going to restore the standing of the middle class, it’s time to reject the notion of competitive pay levels which can be used to justify class warfare, and return to the older, successful model of sharing the benefits of productivity gains between workers and management, rather than having it all go to the rentiers. Read more at http://www.nakedcapitalism.com/2013/10/why-ceo-pay-will-keep-rising- to-even-more-insanely-unjustified-levels-while-ordinary-workers-fare- worse.html#vhJB9j4HzT3Tm1aT.99 October 14, 2013

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ft.com comment Columnists October 14, 2013 5:01 pm Britain’s journey from austerity has hardly begun

By Janan Ganesh Winner of the 2015 election will have to carry on with cuts whatever the health of the economy

©Mitch Dobrowner At least Ronald Reagan was joking when he said the deficit was “big enough to take care of itself”. British politicians show similar insouciance about their fiscal crisis, and they seem to mean it. During the first three years of this parliament, politics revolved around the central fact of scarcity: the state spends vastly more than it reaps in taxes, and this cannot last. But this summer brought surprisingly strong economic growth. And each new morsel of happy data – and it really is radiant, in services, construction and consumer spending – has lured politicians away from bleak talk of fiscal rectitude. More ON THIS STORY// Cameron plans married couples tax break/ Labour takes aim at rising cost of living/ OBR absolves austerity for slowdown/ UK economy headlines ON THIS TOPIC// Ministers urged to tap university research/ Cameron eyes penalties for late payers/ ‘Zombie’ alert over survival companies/ London leads UK business activity growth JANAN GANESH// UK eurosceptics are not ready for a fight/ In It Together, by Matthew d’Ancona/ The Tories will get serious with populism/ Miliband needs Balls the pragmatist

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The debate about the deficit has turned into a critique of the recovery. Do people feel better off? Is growth coming from the dangerous old standbys of property and financial speculation? How shall we dole out the proceeds? This last question has even provoked a bidding war between the main parties in recent weeks as they tempt voters with expensive bribes. Have a tax cut for the mere fact of being married, say the avowedly austere Conservatives. Feed your children for free at school regardless of your income, counterbid their Liberal Democrat coalition partners. As for the Labour opposition, they plan to undo welfare cuts imposed on households with a spare room. All of these sops are supposedly paid for by cuts elsewhere but it is impossible to imagine them being announced last year, when the UK economy was grimly inert. Growth has roused the spirit of generosity in all parties. For too many politicians, How to Spend It is not just a Financial Times supplement but an attitude to the recovery. For anyone interested in Britain’s future, this complacency should freeze the blood. The country still carries a huge deficit and growing debt. The government has toiled to cut borrowing by a third but the International Monetary Fund still expects it to clock in at more than 6 per cent of gross domestic product this year. And, for now, the problem is not being eased by the recovery. Last week the independent Office for Budget Responsibility said it did not expect borrowing to fall in 2013-14; receipts from certain taxes, such as value added tax, are lagging behind economic growth. According to Treasury officials, the vaulting rise in the income tax threshold means little revenue is being generated by some of the new jobs being created. There is confidence that money will cascade into the coffers if the recovery holds. But right now, there is no cause for the cavalier tone – the mood of post-austerity – that is creeping into politics. George Osborne, the chancellor of the exchequer, tours China this week as a man of restored vitality. The IMF, having wavered during Britain’s economic malaise of recent years, is newly keen on his fiscal strategy. The OBR’s mightiest brains still cannot stand up the Keynesian case that cuts were the main cause of that malaise. By a swelling margin, voters favour his Conservatives over Labour to run the economy. A year ago he seemed jejune and accident-prone; some on his own side whispered he was a liability. His stock has risen so much since then that, to some wry amusement at the Treasury, people now see his influence even when it is not there. Last week’s ministerial reshuffle was giddily written up as a territorial gain for the “Osbornites”. There is no such tribe, just Tory loyalists with little in common who happen to have passed through his employ. Journalists love a comeback story but Mr Osborne’s political convalescence only shrouds the reality that his hardest work is about to begin. He must somehow talk up the recovery without allowing his countrymen to forget the gravity of their fiscal plight. Cajoling Britain’s animal spirits while shoring up its discipline will test his dexterity as a national figure. His recently announced aim to hit budget surplus in the next parliament was, in part, an effort to put austerity back at the core of politics. If it fails to do that, voters, opponents and even colleagues will continue to treat the recovery as an excuse to stop fretting about the deficit and debt. Requests for costly giveaways, always hard to resist before an election, will multiply. Of course, there is a neat meeting of national and party political interests here. When the central subject of politics is the deficit, the Tories thrive, such is their lead over Labour

237 on questions of frugality and decisiveness. When the conversation moves to other economic themes – such as living standards, to pick the issue of the moment – they struggle to find their voice. So, happily for Mr Osborne, doing the responsible thing also means doing the politically propitious thing. But in truth, all parties have an interest in being candid about the fiscal crisis. Whoever governs after 2015 will find it sheer drudgery; even if the economy is rampant, budget cuts will be unavoidable. Pretending otherwise now will only raise public expectations that cannot be met. Britain’s journey to fiscal sanity was always going to be prolonged, fitful and tortuous. The economic recovery does not spell the end of it, or even the beginning of the end. At best, it marks the end of the beginning. If this makes our fiscal crisis sound like a daunting historical challenge, it should. http://www.ft.com/intl/cms/s/0/b6ec892a-34c1-11e3-a13a- 00144feab7de.html#axzz2hgPzDFTz

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Economía Italia, Francia y Alemania presionan para suavizar los exámenes a la banca13 OCT 2013 Los tres grandes países del euro se movilizan para que sus entidades financieras no salgan mal paradas de las pruebas del BCE y la Autoridad Bancaria Europea El Eurogrupo debate el cierre del rescate Claudi Pérez Bruselas 13 OCT 2013 - 21:10 CET33

El presidente del Banco Central Europeo, Mario Draghi, en la última reunión mensual del consejo de la entidad. / CHRIS KLEPONIS (EFE) Es una batalla entre bastidores, pero silban las balas en Bruselas y Fráncfort: las grandes capitales europeas tratan de influir a toda costa en los exámenes a las 130 mayores entidades del continente y sus consecuencias. Cinco años después de la quiebra de Lehman Brothers y tras gastar centenares de miles de millones de dinero público en apuntalar los bancos continentales, nadie sabe de veras cómo diablos está el sector, pero hay serias sospechas acerca del estado de algunas de las grandes entidades alemanas, francesas e italianas, el país que despierta más recelos porque está en una situación económica, financiera, fiscal e incluso política más delicada. Llega la hora de la verdad para el sistema financiero y Berlín, París y Roma presionan, según fuentes comunitarias y del Eurogrupo, con el objetivo de limitar los daños derivados de las pruebas del Banco Central Europeo (BCE) —cuya metodología se fijará en apenas unos días— y la Autoridad Bancaria Europea (EBA), decisivas para eliminar de una vez por todas las sempiternas dudas sobre Europa. El Eurogrupo asume que España ha hecho buena parte de los deberes, aunque en los mercados persisten incertidumbres sobre el verdadero estado de salud del sistema financiero español. Pese a que la pasada primavera Berlín insistía en que España usara los 100.000 millones del rescate, ahora el foco de preocupación ha cambiado. Está en Italia. Y es Italia y su miríada de altos funcionarios puestos de relieve, incluido el presidente del BCE, Mario Draghi, quien más se ha movilizado para neutralizar una situación potencialmente explosiva. Dos altas fuentes comunitarias aseguran que Draghi en persona ha contactado con Bruselas para aclarar la utilización de las normas de 239 ayudas de Estado a la banca, que aplica la Comisión cuando se recapitaliza una entidad con dinero público. En el caso español, los rescates de Bankia y otras cajas provocaron quitas a los accionistas y a los poseedores de deuda de mala calidad: preferentes y demás, productos extensamente comercializados en Italia. Roma, con el apoyo de una parte del BCE, persigue evitar en lo posible ese mal trago si finalmente necesita dinero público para sus bancos (y todo apunta a que esa posibilidad está ahí), según confirma uno de los ministros del Eurogrupo. El Eurogrupo asume que España ha saneado buena parte de sus bancos Los argumentos italianos se basan en que eso podría activar de nuevo el efecto contagio y en que todo el examen a la banca puede retrasarse y enquistar la situación, según se desprende de una carta y de varios contactos entre Draghi y la Comisión, informan dos fuentes conocedoras de esa negociación. Pese a que el FMI ha avanzado ya que la banca italiana necesita reforzarse, no está claro si hará falta capital regulatorio (el de máxima calidad, imprescindible para operar) o si el agujero se verá solo en las pruebas de estrés de la EBA: más colchones por si las cosas se tuercen en el peor de los escenarios. Las presiones de Italia se centran en esa segunda posibilidad. “El BCE pide aclarar qué ocurre cuando los bancos no están al borde del precipicio, sino que solo necesitan capital precautorio. Draghi quiere saber qué flexibilidad puede aplicar la Comisión llegado el caso”, indica una alta fuente europea que prefiere no identificarse. Otras fuentes indican que quien presiona no es el BCE como institución, sino Draghi en persona, junto con Ignazio Angeloni (asesor de Draghi en el BCE y responsable de la metodología de los exámenes a la banca), y otros altos funcionarios italianos en tareas de responsabilidad como Andrea Enria (presidente de la EBA), además del Ejecutivo italiano. El FMI ha señalado a Roma al asegurar que sus bancos necesitan reforzarse “El dilema del BCE y la EBA es hacer unos exámenes blandos, a la vista de que no hay un colchón europeo por si hacen falta fondos para recapitalizar los bancos, o hacer pruebas serias para no jugarse la credibilidad. En ese caso, en ausencia de un dique de contención genuinamente europeo, el BCE pretende que puedan suavizarse las reglas de ayudas de Estado y que no haya quitas a la deuda de mala calidad (como ocurrió con España) para evitar disgustos. Pero eso está por decidir”, avisan fuentes comunitarias. Alemania y Francia protagonizan una historia paralela, destinada a presionar al BCE y al resto de instituciones para que la metodología de los exámenes a la banca sea lo menos lesiva posible para los intereses de sus entidades. “Berlín y París ponen el acento en el tratamiento de productos estructurados y derivados para salir lo mejor posible en la foto, y en menor medida en la ratio de endeudamiento”, según explicó una alta fuente del Eurogrupo. Algún gran banco alemán (el Deutsche Bank, puede que también el Commerzbank), dos grandes bancos franceses y dos italianos son los más señalados. Los alemanes y los franceses no van a tener problemas para levantar ese dinero en el mercado, y en todo caso tienen músculo fiscal para evitar sorpresas. Pero hay más dudas sobre la capacidad de Italia. “Los rumores acerca de una petición de rescate a la banca italiana están ahí”, avisan fuentes del Eurogrupo. Los exámenes a la banca son una pieza fundamental para el futuro de la eurozona. En junio de 2012, el Consejo Europeo declaró “imperativo” romper “el círculo vicioso entre bancos y deuda soberana”: para ello, como primer paso, el BCE debe asumir la tarea de supervisor único hacia mediados del año próximo. Pero antes, el Eurobanco lo quiere todo atado y bien atado: el BCE hará un chequeo sobre las provisiones, el grado

240 de endeudamiento de cada banco y la liquidez, aunque es posible que todo ese proceso no se cierre hasta bien entrado 2015, para dar tiempo a que las entidades se recapitalicen. En función de cómo se calibre cada una de esas variables los bancos de unos países saldrán más perjudicados que otros; de ahí las presiones. El examen del Eurobanco pondrá la lupa en los activos inmobiliarios, préstamos a pymes y los activos heredados (productos derivados y estructurados acumulados en la etapa previa a la crisis). Como aviso a navegantes, el FMI ha cifrado en 250.000 millones las pérdidas potenciales en Italia, España y Portugal en una sola de esas partidas: los créditos a empresas. El Eurogrupo debate el cierre del rescate Grecia, Portugal, Irlanda, España y debate sobre mecanismos de seguro por si hace falta recapitalizar bancos tras los exámenes del BCE y la EBA. El Eurogrupo, la reunión de ministros de Economía del euro, discutirá hoy los temas más candentes de la agenda europea. Pero con la boca pequeña: en casi todos los casos no queda más remedio que echar mano de la patada a seguir, a la espera de que Angela Merkel forme Gobierno de coalición en Alemania. Por ese motivo no se esperan decisiones de calado, aunque para España se trata de una reunión decisiva de cara al examen final del próximo 15 de noviembre, la fecha fijada para decidir si el rescate se cierra sin medidas de acompañamiento o con algún tipo de muleta para evitar futuras sorpresas. No hay una decisión tomada al respecto, pero todo o casi todo en Europa en estos momentos es una cuestión de apaños. Los exámenes a la banca europea pueden comportar necesidades de capital en varios sistemas bancarios: el esloveno y el austriaco son los dos más claros, pero todas las quinielas señalan también a Alemania, Francia e Italia. Sin un fondo europeo para inyectar capital en los bancos y con el acceso al mecanismo de rescate muy restringido, puede haber más de un país que tenga que recurrir a algún rescate al estilo español. “Por eso los países acreedores quieren una salida limpia de España del rescate, para demostrar que puede ser un éxito y que la petición de ayuda no estigmatiza a nadie”, indica Mujatba Rahman, del think tank Eurasia. “Hay signos muy positivos respecto a España, y si el Gobierno no pide más ayuda —un programa precautorio— nadie va a presionarle. Aunque hay vínculos con el objetivo de déficit: España tiene que cumplir y seguir con las reformas”, avisa una fuente del Eurogrupo. http://economia.elpais.com/economia/2013/10/13/actualidad/1381691431_456047.html

Economía La venta de viviendas se desploma un 15% en agosto y sufre el peor mes de 2013 La restricción del crédito sigue pesando en contra de las transacciones El dato acumulado en lo que de año es positivo El País Madrid 14 OCT 2013 - 09:56 CET17 La compraventa de casas en España sufrió en agosto un retroceso del 15,3% con respecto al mismo periodo de 2012, según los datos que ha publicado este lunes el INE.

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Durante este mes, 23.552 casas cambiaron de manos, lo que supone un dato relativamente bajo de la serie histórica, pero sin llegar a tocar los mínimos de marzo. El problema surge cuando la cifra se compara con la de agosto de 2012, ya que la caída interanual del 15,3% es la mayor que ha sufrido el mercado inmobiliario en lo que va de 2013. El desplome de agosto, que es el cuarto mensual consecutivo, se explica porque en verano de 2012 fue cuando se anunció que las desgravaciones fiscales a la compra iban a desaparecer en 2013. También, porque se confirmó que el IVA subiría desde el superreducido 4% al 10% desde el 1 de enero. Ambas medidas animaron a las familias a decidirse por cambiar de casa anticipándose al efecto al alza que tuvieron en el precio de la vivienda, lo que incrementó las operaciones. Al estar elaborada con cifras de los registradores de la propiedad, esta estadística en realidad refleja las ventas cerradas unos dos meses antes (en junio). Si el análisis se realiza sumando los resultados de julio y agosto para corregir el efecto de las vacaciones, el resultado es que las ventas retroceden un 8,4%. Esta caída solo tiene parangón con la que se sufrió en 2010, cuando fue del 10%, por el mencionado efecto del anuncio de la desaparición de las ayudas. Por el lado contrario, la estadística del INE también arroja algún dato positivo. Pese al dramático efecto que ha tenido en el sector el final de las ayudas fiscales, el balance acumulado desde enero arroja un alza del 1,2% en tasa interanual. En este avance ha tenido un papel destacado el colectivo de compradores extranjeros. También ha estado marcado por el incremento de las operaciones en efectivo ya que la restricción del crédito sigue lastrando las transacciones. Los datos de los notarios muestran que el 70% de las compras se han pagado al contado. Más ventas de segunda mano Del total de casas vendidas, el 44,6% eran nuevas y el 55,4% restante de segunda mano. En lo que va de año, la venta de inmuebles a estrenar baja el 3,3% y la de usadas sube el 5,5%. La venta de vivienda libre cayó el 15,3 %, hasta las 21.317 operaciones, en tanto que la de protegida se desplomó el 16,5% y sumó 2.235 transacciones. Por comunidades, el mayor número de compraventas de viviendas por cada 100.000 habitantes registradas en agoso se dio en La Rioja (112) y Comunidad Valenciana (89). Andalucía continuó a la cabeza de compraventas de viviendas en agosto, con 5.057 operaciones, seguida de Cataluña (4.009), Comunidad Valenciana (3.644) y Comunidad de Madrid (2.545). Las regiones con menbos transacciones fueron Cantabria (271) y La Rioja (287). En valores relativos, las regiones donde más se incrementaron en tasa interanual las compraventas de viviendas fueron Navarra (+20,4%) y La Rioja (+5,1%). Junto a estas, solo se registraron aumentos en Cataluña (2,2%). Mientras, bajó en el resto. Los mayores descensos correspondieron a Cantabria (-39,2%) y Asturias (-38,2%). NOTICIAS RELACIONADAS Selección de temas realizada automáticamente con EN EL PAÍS Ver todas » • La compraventa de viviendas cae en agosto un 20,1% en Galicia • Movilización masiva para evitar el desalojo del bloque de la PAH en Salt • ¿Janet ‘Paloma’ Yellen? • Cinco años en el limbo

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EN OTROS MEDIOS Ver todas » • abc.es La compraventa de pisos ahonda su caída al 15% en agosto y suma cuatro meses a la baja • cincodias.com Las ventas de casas siguen a la baja: 23.600 en agosto • cincodias.com Patronal y sindicatos piden 10.000 millones más de inversión • 20minutos.es El precio de los alquileres sigue bajando: un 0,3% en septiembre

Economía Más dinero vuelve al inmobiliario El grupo KKH adquiere cuatro hoteles y se propone gestionar 300 millones en España Lluís Pellicer Barcelona 13 OCT 2013 - 01:00 CET Josep Maria Farré, de KKH Capital and Property Europe. / Massimiliano Minocri El apetito del inversor foráneo por el mercado inmobiliario ha despertado este año tras llevar apagado cerca de un lustro. La rebaja de precios de los activos ha favorecido que fondos que jamás se habían fijado en España hoy ocupen oficinas de las zonas de negocios de Madrid y Barcelona, y que grupos que dejaron el país se hayan decidido a volver. Durante siete años, hasta 2007, Josep Maria Farré fue consejero delegado de Renta Corporación. Tras un paréntesis de seis años, ha vuelto a España al frente del grupo inversor KKH Capital and Property Europe. Tras haber operado en países centroeuropeos, la sociedad gestiona hoy una cartera de 100 millones de euros en España y se propone crecer el año que viene en Madrid, Barcelona y Lisboa para llegar a los 300 millones. Farré dejó su cargo de consejero delegado de Renta Corporación —hoy, en concurso de acreedores— tras la salida a Bolsa de la compañía. Firmó entonces un acuerdo de no competencia por el que no podía actuar en los mercados en los que estaba presente la inmobiliaria, entonces internacionalizada en Francia, Reino Unido, Alemania y Estados Unidos. Farré fue a Suiza, y desde allí empezó a realizar operaciones en Austria y Hungría. El grupo inversor, con sede en Luxemburgo, desembarcó de nuevo en España el año pasado. “Vimos que empezaba a haber oportunidades y que el panorama estaba más despejado, aunque eso ha ocurrido finalmente este año”, explica Farré. El grupo compra el edificio, lo transforma y lo vende, tras hallar un operador El grupo inversor gestiona ahora una cartera de 100 millones de euros en inmuebles. De momento, KKH se ha hecho con cuatro edificios para uso hotelero en el centro de Barcelona. Dos de ellos, en las calles de Balmes y Provença, están destinados al segmento de bajo coste, mientras que otro establecimiento, en la calle de Ausiàs March, tendrá cuatro estrellas. Su primera joya es la antigua sede de Agrupació Mútua, en la Gran Via, para el cual se trabaja en el proyecto arquitectónico. “Este está llamado a ser uno de los cuatro o cinco grandes hoteles de Barcelona, junto al Mandarin Oriental, el Arts o el W”, asegura Farré. Estas adquisiciones se producen en pleno boom turístico barcelonés. Según el Gremio de Hoteles, el año pasado se abrieron 14 nuevos establecimientos y 1.643 plazas, lo cual eleva el parque de la ciudad a 352 hoteles y 65.100 camas. Sin embargo, la llegada de turistas y las pernoctaciones siguen creciendo.

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La misión de KKH no es crear una cartera inmobiliaria, sino ir adquiriendo edificios para transformarlos, crear valor y luego venderlos. “Se trata de crear un producto para el inversor final”, aclara Farré. En el caso de los hoteles, el grupo inversor ha adquirido los inmuebles para pedir permisos, elaborar el proyecto arquitectónico, realizar las obras y buscar un operador que los gestione. Este paquete es el que vende al comprador final, que está prácticamente atado desde el principio. “Vemos edificios, los valoramos y los compramos. Procuramos que estén vacíos, pero si hay inquilinos o, por ejemplo, locales comerciales, nos encargamos de reubicarlos o indemnizarlos”, explica Farré. En estos proyectos llave en mano, los inversores se adaptan a las exigencias del comprador, que incluso puede marcar qué tipo de operador quiere para el establecimiento. El grupo inversor ha dado de momento un buen pellizco al mercado barcelonés, pero ahora tiene el punto de mira en Madrid. “No nos centramos solo en el segmento hotelero. También buscamos producto residencial con servicios, como residencias, o bien viviendas de alta categoría con un estándar internacional, es decir, edificios con unos servicios y una arquitectura de calidad. Eso es algo que no es fácil encontrar”, sostiene Farré. Este tipo de contratos, añade, suelen ser del agrado de los compradores a los que se dirigen. “Los hoteles, por ejemplo, tienen un operador único y se basan en contratos a largo plazo, muy profesionales y con pocas incidencias”, apunta. La sociedad busca hoteles y residencias con servicios en Madrid y Barcelona Los clientes que compran el producto ya transformado, explica Farré, son, sobre todo, family offices e inversores institucionales, a los que ofrecen una rentabilidad fija de entre el 7% y el 7,5%. “Vendemos el inmueble a una sociedad patrimonialista con una visión a largo plazo. Por ejemplo, firmas que quieren entrar en España aprovechando los precios actuales”, explica. El modelo de Farré recuerda al de Renta Corporación, que estaba especializada en la compra de inmuebles para darles valor, transformándolos o cambiando su uso y luego vendiéndolos a un tercero. Farré, sin embargo, aprecia varias diferencias. “Eran otros tiempos”, dice para empezar. Y eso ya supone que el sistema que seguía Renta Corporación, hoy sea difícil de replicar. Durante el boom, la inmobiliaria compraba, realizaba la transformación y vendía con importantes plusvalías en un tiempo relativamente corto. “Aquí agotamos todo el ciclo, añadimos valor, pero llave en mano. Se trata de operaciones a tres bandas: estamos nosotros, un operador que quiere explotar el inmueble y un inversor patrimonialista final”, asegura. Farré define a KHH como un “club de inversores” que, de momento, está hallando el capital necesario para sus operaciones en entidades españolas. La clave, asegura, está en “hacer algo nuevo” y “poner fondos propios”. “Si acudes a la banca con un proyecto nuevo, capital, y pides un acompañamiento, hallas respuesta. Eso sí, los precios de los préstamos son más caros”, afirma. La firma, no obstante, requerirá más músculo financiero para gestionar el año que viene una cartera que podría triplicarse, hasta los 300 millones de euros. “Hay bastante capital internacional con ganas de comprar en España, y grandes fondos que están trayendo equipos para hacerse con carteras voluminosas y gestionarlas. Junto a eso, hay gente que quiere carteras sueltas. Somos capaces de hacerlo, pero para atender un mayor volumen necesitamos abrirnos. Podemos hacerlo”, remacha Farré. http://economia.elpais.com/economia/2013/10/11/actualidad/1381496231_830631.html

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Economía OPINIÓN Cinco años en el limbo Joseph E. Stiglitz 13 OCT 2013 - 00:00 CET13 Aparentemente, cuando el banco de inversión estadounidense Lehman Brothers colapsó en 2008 y detonó la peor crisis financiera desde la Gran Depresión, se formó un amplio consenso sobre la causa de la crisis. Un sistema financiero inflado y disfuncional había asignado incorrectamente el capital y en vez de gestionar el riesgo, lo creó. La desregulación financiera —junto con el dinero barato— contribuyó a una excesiva toma de riesgos. Y la política monetaria sería relativamente ineficaz para revivir la economía, incluso si se lograba evitar el colapso total del sistema financiero con dinero aún más barato. Por tanto, sería necesaria una mayor dependencia de la política fiscal (un mayor gasto público). Cinco años más tarde, mientras algunos se felicitan a sí mismos por evitar otra depresión, nadie en Europa o Estados Unidos puede afirmar que la prosperidad ha regresado. La Unión Europea está empezando a emerger de la recaída en la recesión (y en algunos casos, de una doble recaída), mientras que algunos Estados miembros están en depresión. En muchos países de la UE, el PIB se mantiene por debajo, o insignificantemente por encima, de los niveles previos a la recesión. Casi 27 millones de europeos están en el paro. Algo similar ocurre en Estados Unidos: 22 millones de personas que desean un empleo a tiempo completo no logran encontrarlo. La tasa de actividad en la fuerza de trabajo estadounidense ha caído a niveles que no se veían desde que las mujeres comenzaron a ingresar en el mercado laboral de forma masiva. El ingreso y la riqueza de la mayoría de los estadounidenses se encuentran por debajo de niveles muy anteriores a la crisis. De hecho, la renta típica de un trabajador masculino a tiempo completo es menor que hace más de cuatro décadas. Sí, hemos hecho algunas cosas para mejorar los mercados financieros. Ha habido algún aumento en los requisitos de capital, pero mucho menos de lo necesario. Algunos de los derivados más arriesgados —las armas financieras de destrucción masiva— han sido incluidos en las Bolsas de valores. Eso ha aumentado su transparencia y ha reducido el riesgo sistémico, pero aún se negocia un elevado volumen en opacos mercados no organizados, lo que significa que sabemos poco sobre la exposición al riesgo de algunas de nuestras mayores instituciones financieras. Solo un cuarto del vaso está, como mucho, lleno; para la mayor parte de la gente, las tres cuartas partes están vacías De igual manera, se ha puesto freno a algunas prácticas crediticias predatorias y discriminatorias y a comportamientos abusivos de las tarjetas de crédito, pero todavía sobreviven conductas con el mismo nivel de explotación. Los trabajadores pobres continúan siendo explotados demasiado a menudo a través de anticipos salariales con intereses de usura. Los bancos que dominan el mercado aún obtienen elevadas tarifas por las transacciones con tarjetas de débito y crédito a los comerciantes, quienes se ven obligados a pagar varias veces el precio que toleraría un mercado verdaderamente competitivo. Esto es, sencillamente, un impuesto que enriquece las arcas privadas en vez de destinarse a propósitos públicos.

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Otros problemas continúan sin ser tratados y algunos han empeorado. El mercado hipotecario estadounidense aún sigue conectado a un respirador: el Gobierno ahora asegura más del 90% de las hipotecas y la Administración del presidente Barack Obama ni siquiera ha propuesto un nuevo sistema que garantice préstamos responsables con términos competitivos. El sistema financiero se ha concentrado aún más, algo que exacerbó el problema de los bancos, que no solo son demasiado grandes y están demasiado interconectados y correlacionados para caer, sino que también son demasiado grandes para ser gestionados y para pedirles responsabilidades. A pesar de un escándalo tras otro, desde lavado de dinero y manipulación del mercado hasta discriminación racial en los créditos y las ejecuciones hipotecarias ilegales, ningún funcionario de alto nivel ha sido señalado como responsable; cuando se impusieron sanciones financieras, fueron mucho menores de lo necesario, no fuera a ser que las entidades sistémicamente importantes pudieran verse en peligro. Las agencias de calificación de riesgo han sido declaradas responsables en dos juicios privados. Pero también en este caso lo que pagaron fue una fracción de las pérdidas que causó su actuación. Algo más importante aún, el problema subyacente —un sistema de incentivos perversos en el que reciben dinero de las empresas a las que califican—, aún debe cambiar. Los banqueros presumen de haber pagado totalmente los fondos de rescate que recibieron del Gobierno cuando comenzó la crisis. Pero nunca parecen mencionar que cualquiera que hubiera recibido enormes créditos gubernamentales a tasas de interés cercanas a cero podría haber ganado miles de millones con el mero hecho de prestar nuevamente ese dinero al Gobierno. Tampoco mencionan los costosos impuestos al resto de la economía: una pérdida acumulada del producto en Europa y EE UU que supera largamente los 5 billones de dólares. Mientras tanto, resultó que quienes sostuvieron que la política monetaria no sería suficiente estaban en lo cierto. Sí, todos fuimos keynesianos, pero durante demasiado poco tiempo. El estímulo fiscal fue reemplazado por la austeridad, con efectos adversos predecibles —y predichos— sobre el desempeño de la economía. Hay en Europa quienes están contentos porque la economía puede haber tocado fondo. Con el regreso del crecimiento del producto, la recesión —definida como dos trimestres consecutivos de contracción económica— oficialmente ha terminado. Pero sin importar cómo se la mire en busca de resultados significativos, una economía en la cual los ingresos de la mayoría de la gente se encuentran por debajo de sus niveles previos a 2008 aún está en recesión. Y una economía en la cual el 25% de los trabajadores (y el 50% de los jóvenes) están desempleados —como ocurre en Grecia y en España— continúa deprimida. La austeridad ha fracasado y no hay perspectivas de un pronto regreso al pleno empleo (no sorprende que las perspectivas para EE UU, con su versión más limitada de la austeridad, sean mejores). El sistema financiero puede ser más estable que hace cinco años, pero eso implica un bajo listón: en aquel momento se tambaleaba al borde del precipicio. Quienes se felicitan a sí mismos en el Gobierno y el sector financiero por el regreso de los bancos a la rentabilidad y por las tibias —aunque difíciles de conseguir— mejoras regulatorias deben centrarse en lo que todavía resta por hacer. Solo un cuarto del vaso está, como mucho, lleno; para la mayor parte de la gente, las tres cuartas partes están vacías. Joseph E. Stiglitz, premio Nobel de Economía, es catedrático de la Universidad de Columbia. Traducción de Leopoldo Gurman. http://economia.elpais.com/economia/2013/10/11/actualidad/1381489745_253493.html 246

10/14/2013 04:28 PM Round Two of Talks Grand Coalition Looks Increasingly Likely Angela Merkel's conservatives are holding their second round of preliminary coalition talks with the Social Democrats Monday and there's speculation that the parties could reach a deal sooner than expected. A government could be formed by mid-November.

Grand coalition soon? Merkel sharing a joke with Sigmar Gabriel, the leader of the SPD.

Chancellor Angela Merkel's conservatives are meeting the center-left Social Democrats (SPD) for a second round of preliminary talks on Monday afternoon and plan to decide by the end of the week whether to start formal coalition talks with them or the Greens. A grand coalition between the conservatives and the SPD -- Merkel's preferred option because it would give her comfortable majorities in both houses of parliament -- is looking increasingly likely. So far at least, progress has been easier than anticipated. The two parties are finding scope for compromises on a range of domestic policy issues including the introduction of a minimum wage, tax policy and the energy revolution. The allocation of cabinet posts could, however, prove contentious. The SPD wants the post of finance minister, a key position in tackling the euro crisis which is currently occupied by veteran Wolfgang Schäuble of Merkel's Christian Democratic Union (CDU), but Merkel doesn't want to hand it over. Wrangling Over Cabinet Posts

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The SPD also wants the labor portfolio, which would require Labor Minister Ursula von der Leyen to find another post. Rumor has it that she would like to be foreign minister, but sources have told SPIEGEL that Merkel may offer her the Health Ministry instead, a less attractive position. There is speculation that Schäuble could become Foreign Minister and that SPD member Jörg Asmussen, currently on the European Central Bank's executive board, could replace him as finance minister. Another difficult issue is likely to be dual citizenship. Merkel's CDU and its Bavarian sister party, the Christian Social Union (CSU), oppose it and the current law requires people born in Germany to foreign parents to choose by the age of 23 whether they want to be German or foreign citizens. The SPD wants to amend the law and allow permanent dual citizenship. Merkel said last week she wants to know which party she will be entering formal coalition talks with by Oct. 22, when the newly elected Bundestag, Germany's lower house of parliament, assembles for its first session. That doesn't mean a new government will be in place by that date, though. It means she wants to be sure who her likely coalition partner is going to be. 'New Government by Mid-November' Schäuble told reporters that a new government could be formed quite quickly. "I think we'll have a new government by around the middle of November," he said Saturday on the sidelines of international financial talks in Washington. Merkel, who led her conservatives to their best general election result since the heady days of reunification in 1990, is just five seats short of an absolute majority. Some observers said in the immediate aftermath of the election that the coalition talks could drag on to the end of the year or even into January. Germany may have a government a lot sooner than that. cro -- with wire reports URL: http://www.spiegel.de/international/germany/grand-coalition-increasingly- likely-in-round-two-of-merkel-talks-a-927760.html Related SPIEGEL ONLINE links: • In a Hurry Merkel Wants Coalition Partner in Two Weeks (10/09/2013) http://www.spiegel.de/international/germany/0,1518,926931,00.html • World From Berlin Coalition Talks Could Last Into January (09/30/2013) http://www.spiegel.de/international/germany/0,1518,925327,00.html • Auf Wiedersehen Austerity? Europe Hopes for Gentler Merkel (09/25/2013) http://www.spiegel.de/international/europe/0,1518,924176,00.html • 'Fatal Mistake' Green Party Takes Stock after Election Flop (09/24/2013) http://www.spiegel.de/international/germany/0,1518,924203,00.html • Merkel's Test Reluctant SPD to Extract High Price for Coalition (09/24/2013) http://www.spiegel.de/international/germany/0,1518,924281,00.html • Election Triumph Merkel Victorious But Faces Tough Talks (09/22/2013) http://www.spiegel.de/international/germany/0,1518,923755,00.html

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Daily Morning Newsbriefing

October 14, 2013 ECB to raise capital ratio for large banks Frankfurter Allgemeine has an interview with Yves Mersch, who says that he wants large banks to have a core tier 1 capital of 7%, plus an additional buffer. Mario Draghi will present the details of these changes October 23 after the governing council approves the proposals – which it has not done yet. What is not yet decided is the size of the additional buffer. The principle is that this will depend on the size of the banks. The article says the 7% would be below the 9% established by the EBA two years [ago?], but ultimately the effective quota would be in the same neighbourghood. Government bonds would continue to have zero risk weighting. The article said that the banking associations have been complaining bitterly that the ECB might set a capital quota above the legal minimum, but the ECB said it would not budge to the pressure of lobby groups. Jacob Kirkegaard writes that the ECB is playing a [chicken] [cat and and mouse] game with eurozone governments through the asset quality review. The ECB may identify holes that are simply too big for member states. His estimate is that the stress tests will reveal that a number of eurozone banks are insolvent – and that would trigger a Cyprus-style bail-in. He says even this is relatively low risk – since the ECB has the means at its disposal to fight any market turmoil that might arise from such a decision. Far worse, for the ECB, would be the opposite scenario of a botched AQR. He says the ECB has generally prevailed in its clashes with governments, but some volatility is likely. The FT has the story that David Cameron is delaying his approval for the SSM as he seeks further guarantees on voting rights. He wants to insure himself against changes to the double majority voting rule, which effectively ensures that the eurozone could not outvote the non-eurozone members of the banking union. The article said that a delay of more than two weeks could have serious knock-on effects on the whole process, which could lead to a delay of the SSM. The article quotes officials as saying that Cameron’s demand were disproportionate and illogical. The article says the UK has two specific concerns. The first is that the European Commission may revisit the voting arrangements in a review next year. The second is that legislative proposals might be amended with the goal for them to fall outside the scope of double majority voting. Greece proposes new bond issuance to cover financing gap The Greek finance ministry proposed to the troika to replace some €4.4bn in bonds that were issued in 2009 as a capital boost for Greek banks and are to mature next May by new bonds to close the funding gap next year, Kathimerini reports. With local authority elections and European Parliament elections looming next May, PM Antonis Samaras is keen to avoid imposing any more pain on austerity-weary Greeks. The government is expected to impress upon troika auditors the risks of increasing taxes or cutting the incomes of Greeks as social and political tensions continue to rise. Whether the troika

249 will offer any concessions is unclear as the government continues to lag behind with its structural reforms and in tax collection. The troika rejected last week’s appeal by Finance Ministry officials for a 15% reduction in the special consumption tax on heating oil and for an increase in the number of heating allowances. The measure was controversial also within the Greek finance ministry and have fuelled speculation of Yannis Stournaras’s possible departure ahead of next year’s local authority elections. Ireland confirmed exit bailout mid-December this year Enda Kenny told his Fine Gael party that Ireland will exit the bailout in mid-December and may do so without a precautionary credit line from the EU, Reuters reports. Kenny said earlier that he expected to comfortably beat EU deficit targets next year. Refusing to take a precautionary credit line would block Ireland from accessing the OMT programme but also avoid further conditions and monitoring. "Two years ago, I addressed the Irish people and said that I wanted to be the taoiseach who would retrieve our economic sovereignty and independence," said Kenny, "This goal is now within our grasp." Left-leaning opposition party Sinn Fein criticized Kenny as celebrating prematurely and said he was out of touch by suggesting that the austerity of the past three years was working for Ireland. Portugal seeks to calm down outcry over survivor pension cuts Amid intensifying critics of the government’s decision to cut survivors pensions, Paulo Portas reassured that the measure only applies to those who have accumulated pensions of above 2000€ and that 96.5% of pensioners receiving widow pensions "are not affected by this measure," Jornal de Negocios reports. The deputy prime minister accuses some of the critics wanting to "frighten and alarm the elderly." Portas stressed that the survivors pension runs a deficit which needs to be addressed, and said that the government will also look into including other investment income in its eligibility assessment. CDU and SPD to start coalition talks This is only a surprise if you believe the story that the CDU would regard a coalition with the Greens as a real (as opposite to tactical) alternative. Frankfurter Allgemeine has been leading both the Sunday and Monday additions with the news that CDU/CSU will enter into coalition talks with the SPD, instead of the Greens. CDU and SPD have scheduled another round of exploratory talks today, but the signals from both sides are that they are both head for talks over a Grand Coalition. The SPD announced what at first appears to be another red line, namely the agreement on a minimum wage, while the CDU emphasised that it rejects tax increases. (But these are both largely rhetorical statements, since the CDU, too, favours a minimum wage, while the SPD is not all that keen on tax increases in any case). The articles quotes Olaf Scholz, the mayor of Hamburg, considered a potential next-generation leader, as saying that the party did not lose in 2009 because of Angela Merkel, but because it was internally divided. FN wins local by-elections, leads polls for European elections France's far-right National Front has won a local by-election in Brignoles, with 53,9 % of the votes against 46,1 % of the UMP candidate according to Le Monde. Editorialists in the French press this morning attribute this to a “ras-le-bol” of voters, of disappointed Socialists and unnerved UMP supporters. Last week a poll in Le Nouvel Observateur found the anti-EU FN as France’s main political force, forecasting a 24% vote share for the FN in the EP elections May 2014

250 ahead of both the Socialists and the UMP union. "For the first time in a poll on voting intentions in an election of a national character, the FN is clearly ahead of both the [ruling] Socialist Party and the UMP," IFOP writes French banks want tax burden reduced Les Echos dedicated its front page story to John Bonnafé, CEO of BNP Paribas and Chairman of the French banking Federation who complained that with surtax on corporate profits, French banks will be taxed at almost 65%, which is 18 points higher than the average of companies in France and unrivalled in Europe. At such levels, the industry faces difficulties to invest and renew itself, he says. For the banking sector, the tax burden is a major disadvantage and one of the reasons why many analysts exile to the City. They call on the government to find a way to reduce the tax burden on banks. Charity Caritas alerts of fraying family safety net in Spain In Spain, a report by Catholic charity Caritas released last week alerts of the risk that the family as a safety net is at risk of being overwhelmed by the length and depth of the crisis, as the conditions of access to the publicly provided social safety net have hardened. In addition, the report finds that

• people in "severe poverty" (having an income below €307/mo) have doubled to 3 million since the start of the crisis; • the number of people assisted by Caritas has tripled to 1.3 million since the start of the crisis • alongside long-term unemployment, chronic poverty is on the rise as one in three people being helped by Caritas has been seeking help for 3 years; • average incomes have dropped by 4% as prices rose by 10% since the start of the crisis Italian banks get tax brake on bad loans Reuters has a story from Rome, digging up an important bit of the new budget draft, under which banks and insurance companies get better tax breaks on losses and write- downs of bad loans. The rule change will be contained in the 2014 budget (not to be confused with last week’s mini-budget for the rest of 2013). Under the rules, those losses can be partially frontloaded, with 20% written off in year one, as opposed to an even spread over 18 years. They would apply both to losses and write-downs of new loans, and to losses on past loans that were booked in 2013. The idea is to give banks an incentive to clean up their balance sheets before the end of this year. Bad debts in Italy now constitute 22.3% of banking assets, according to Banca d’Italia. The new tax rules would bring Italy in line with other European countries. Boeri and Pisauro on Italy’s budget Writing in Lavoce.info, Tito Boeri and Giuseppe Pisauro write that the mini-budget has raised funds through assets sales in order to reduce the deficit. This is against standard accounting practice whereby asset sales should be used to reduce debt. They call this a serious precedent, and argue that this should not be certified. Turning to the 2014 budget, they write that the entire fiscal space created by tax increases and spending cuts in the last two years has been more than eaten up by the recession. The cause of Italy’s deteriorating fiscal position is two decades of low growth

251 and two consecutive recessions. The most urgent need right now is to support demand with simultaneous structural reform to support the economy in the future. The most important reforms would be a reduction in the costs of labour. Their analysis is downbeat on the success chances of genuine reforms to reduce the tax wedge. The authors point to a previous period when Romono Prodi’s administration tried the same, and failed. Eurozone is not rebalancing The Wall Street Journal’s Brussels blog has delved into the Commission’s quarterly report on the eurozone, which has looked at the pass-through of lower labour costs in the periphery to prices –or rather the lack of. Despite falling wages, consumer price inflation in the periphery is running at broadly the same levels as in the core. The Commission says that lower wages helped exporters absorb the shock of lower sales caused by the crisis. Profitability is still depressed, both compared to pre-crisis levels and to core member states. The paper contrasts the situation with Germany, where the tradables’ share in both employment and value added has increased. The divide between Germany and the periphery, in the labour market, has actually increased during the crisis. What we learned at the annual IMF meeting One of us attended the IMF annual meetings – the first one in a long series in which the eurozone was not the main subject. Our impression from investors was that many felt the time had come to return to the eurozone. – despite the fact that pretty much everybody, including officials, expects economic growth in the eurozone to remain very low for a very long time, and despite the fact that nobody expects any positive surprises on banking union. Objectively, not much has changed since last year, except the mood. There was also quite a buzz about a potential ECB facility to help small and medium sized businesses, possibly in the form of a securitisation deal – which might be announced soon. We also noted quite a strong and vociferous criticism of forward guidance among macroeconomists and Fed watchers. Frankfurter Allgemeine reported that Jens Weidmann rejected IMF proposals of closer co-ordination between central banks to manage the exit from extra-ordinary monetary policies. He said the optimal result would be achieved if every central bank optimised price stability in its own jurisdiction. Munchau on trendlines In his FT column, Wolfgang Munchau argues that he accepts the view that not every eurozone member state should return to its pre-2007 GDP trendline, because in some cases bubbles resulted in positive output gaps. He cites Latvia as an example, which has experienced some extreme GDP volatility. But this argument cannot extend to the eurozone as a whole, which did not experience a bubble, but had a relatively stable GDP trend in the two decades before the crisis. Eurozone GDP is now some 12% below the pre-2007 trendline, and the eurozone is unlikely to catch up ever – and in the short-to- medium run not even with the pre-crisis growth rates. This gap is the metric of the policy failure. Gros on the myth of German Euroscepticism Daniel Gros debunks the notion that the Germans have lost their faith in the EU and its institutions. Writing in a Project Syndicate column, he argues that the opposite is the case – with the support for a reintroduction of the D-Mark falling continuously. A

252 majority of the Germans accept that their government should provide financial assistance. He said this trend also helps explain why Angela Merkel’s campaign to save the euro has been quite popular in Germany, and why she won the elections. Gros also says the outcome of the coalition negotiations ultimately matter relatively little in terms of the country’s broad strategy. Germany will not turn against the euro, or against European integration. We agree with him on the core of his analysis. There is, in general, no evidence of an anti-European swing in the German public opinion. We think, however, that Merkel owed her victory not to her stance on the euro, but more to the fact that the Germans were in no mood for a change in government, especially given the extraordinarily weak challenger. The euro was not part of the campaign. We also disagree with him over the importance of the AfD. This was a tremendously strong result for them, even though they narrowly failed to clear the 5% threshold, and we expect them to do very well in the European elections. Eurozone Financial Data 10-year spreads Previous This Yesterday day Morning France 0.538 0.519 0.518 Italy 2.564 2.411 2.420 Spain 2.528 2.476 2.440 Portugal 4.620 4.567 4.440 Greece 7.466 7.258 7.10 Ireland 1.955 1.867 1.856 Belgium 0.770 0.753 0.755 Bund 1.812 1.873 1.864 Yield

Euro Bilateral

Exchange Rate This Previous morning Dollar 1.353 1.3561 Yen 132.960 133.09 Pound 0.847 0.8486 Swiss 1.232 1.2333 Franc

ZC Inflation Swaps previous last close 1 yr 1.07 1.07

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2 yr 1.2 1.19 5 yr 1.41 1.4 10 yr 1.8 1.79

Euribor- OIS Spread previous last close 1 Week -4.286 -4.286 1 Month -2.971 -1.971 3 Months 2.943 4.286 1 Year 28.271 30.3

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-10- 14.html?cHash=97c52f536da8dc9d731be4b57696a251

Economía ¿Por qué Europa no despega? El FMI reclama a la zona euro que acabe con la fragmentación financiera para sacar a la economía del laberinto La falta de crédito sigue siendo una losa Draghi rechaza que el BCE se fije objetivos de empleo Amanda Mars Washington 12 OCT 2013 - 19:59 CET329

La directora gerente del FMI, Christine Lagarde, la semana pasada en la reunión con el Banco Mundial. / JONATHAN ERNST (REUTERS) El euro tiene en las manos un cubo de Rubik, un rompecabezas desquiciante en el que hay que coordinar el movimiento de 36 piezas a la vez y cada una de ellas está conectada al resto. Pero, mientras que en la red se pueden encontrar decenas de tutoriales y algoritmos para resolver ese popular cubo, y se han grabado hazañas de

254 jóvenes completando el juego en cuestión de segundos, de la primera gran crisis de la zona euro nadie sabe cómo salir. El Fondo Monetario Internacional (FMI) ha constatado esta semana en su asamblea anual que la eurozona ha logrado estabilizarse en los mercados financieros y salir del retroceso: tras una recesión del 0,4%, se espera un avance del 1% para 2014. Pero la mejora de la economía resulta tan débil y llena de dificultades que nadie en Washington ha lanzado las campanas al vuelo. Europa no acaba de despegar. El paro deprime la demanda interna y los países no pueden hacer gran cosa para animarla porque la mayor parte afrontan duros ajustes de sus cuentas públicas. El acceso a la financiación, que podría romper este círculo vicioso, no solo renquea, sino que tiene a Europa partida en dos: la de la periferia, que crece poco y está muy endeudada, y a la que el dinero prestado llega a cuenta gotas y con altos intereses; y la del corazón de la eurozona, más fuerte, y a la que sin embargo el crédito llega con más facilidad. El escenario de estos desequilibrios no es un cubo con seis colores, sino uno de 17 países con niveles de paro, de inflación y necesidades dispares, pero sometidos a una misma política monetaria. España y Grecia, excluyendo el efecto de los impuestos, se encuentran en números negativos de inflación, por ejemplo, mientras Estonia casi duplica la media “La zona euro se enfrenta al famoso cubo de Rubik porque sus retos están interrelacionados y tienes que resolverlos todos para reforzar cada pieza y lograr crecimiento y empleo”, admitió Reza Moghadam, el responsable para Europa del FMI, en un encuentro con periodistas. La revisión al alza del PIB ha sido respecto a julio de solo una décima para 2013 y para 2018 no se prevé un avance de más del 1,5%. “La zona euro se enfrenta al cubo de Rubik: sus retos están relacionados” El poderío europeo encoge el planeta: el FMI calcula que su cuota de PIB per cápita en conjunto del mundo, en paridad de poder de compra, cae: del 18% en 2000 al 16% en 2006, y del 13% de este año al 11% en 2018. “Los pronósticos sugieren que la economía de la zona euro ha tocado un suelo, es bueno, pero el verdadero reto es moverse de ahí. La esperanza habitual es que las exportaciones harán el trabajo, ¿pero exportaciones adónde? La economía de EE UU aún no es bastante dinámica y la de los emergentes está frenando. ¿Se volverán optimistas los consumidores europeos? Lo espero de veras, pero no veo por qué…”, resume Charles Wyplosz, de la Graduate School, en Ginebra. La economía global crecerá en 2014 dos décimas menos de lo previsto en julio, sobre todo porque el PIB de los emergentes ha dado un frenazo no esperado, y EE UU, enredado en su pelea fiscal, tampoco está acelerando. El Fondo aconseja avanzar de forma urgente en la unión bancaria y fiscal Para el Fondo, la fragmentación financiera es una las grandes trabas europeas. Antonio García Pascual, de Barclays, que ha acudido al FMI, coincide: “¿Puede el sur pagar 250 puntos básicos de interés por encima del norte? Pues no por mucho tiempo, porque desde luego no son 2,5 puntos más productivos”. La mejora de los mercados ha acortado las diferencias entre el coste de los bonos públicos alemanes y los de países como España o Italia. Si hace un año la diferencia de rentabilidad exigida era 4,34 puntos porcentuales, ahora está en el 2,43 puntos. “Pero más que la evolución, que ha sido buena, hay que mirar el nivel en el que están, y todavía es alto”, añade Pascual.

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El panorama empeora cuando se trata de las pequeñas y medianas empresas, que forman el grueso del tejido productivo sobre todo en el sur. El crédito ha caído un 66% en España en los últimos cinco años, un 82% en Irlanda y un 45% en Portugal, aunque en Italia, con más problemas de deuda pública que privada, el retroceso ha sido del 21%, según un estudio del Instituto de Finanzas Internacionales. Y el coste por un mismo préstamo —de hasta un millón de euros, el más habitual de estas compañías— ha llegado a duplicar al de las empresas alemanas en lo peor del declive. Pero, al mismo tiempo, preocupa el nivel de apalancamiento de las compañías en el sur de Europa, un foco de riesgo para la banca de estos países que el FMI ha puesto de relieve esta semana. “Además, no sabemos lo sanos —o insanos— que están los bancos. Después de varios años de recesión, muchos cargan con créditos dudosos y, si esto es cierto, los consumidores optimistas tendrán dificultades de lograr préstamos... Y, si las economías siguen paradas en el fondo, es solo cuestión de tiempo lograr una nueva crisis bancaria”, advierte Wyplosz. El Fondo reclama que Europa acabe con el saneamiento de sus entidades financieras y avance en su unión bancaria para poder romper esta dinámica, pero el proceso es lento. Para el FMI, es urgente también una mayor unión fiscal. El Fondo reclamó que Europa suavizase el ritmo de ajuste para que la austeridad no perjudicase demasiado el crecimiento, y estos días sus responsables han sacado pecho por las prórrogas obtenidas y piden que sigan las reformas estructurales, aunque estas no den frutos inmediatos. “La política fiscal es contractiva, y los tipos de interés están demasiado altos. Las reformas sirven para preparar la economía para aprovechar mejor el tirón de demanda, pero por sí solas no generan crecimiento”, apunta Ángel Ubide, investigador del Peterson Institute. La deuda pública genera interrogantes. Desde que comenzó la crisis, el pasivo de los gobiernos ha crecido del 70% al 95% del PIB. En concreto, el FMI cree que para España estará en 105% en 2018 y en el 123% para Italia. ¿Cuánto costará digerir ese lastre con crecimientos tan bajos? Luis Servén, responsable del departamento de análisis macroeconómico del Banco Mundial, advierte de que “el volumen de deuda ya supera el 100% del PIB en varios países y absorberla sin ningún tipo de reestructuración requerirá muchos años… Y no está claro cuánto más va a poder soportar el tejido social, que ya lleva años de austeridad”. El rompecabezas europeo necesita comodines. http://economia.elpais.com/economia/2013/10/12/actualidad/1381600780_797557.html

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Why a Partisan Commission President Would Be Bad for the EU

Stefan Lehne, Heather Grabbe October 14, 2013 Centre for European Reform Stefan Lehne, Heather Grabbe Other Publications October 14, 2013 Centre for European Reform Summary The idea of turning the European Parliament elections into a way to select the next president of the European Commission will not solve the EU democratic deficit. The EU urgently needs measures to improve its democratic legitimacy and the decisions taken in its institutions. But the most prominent proposal touted in Brussels as the solution to the democratic deficit could make the problems worse rather than better. The idea is to turn the European Parliament (EP) elections into a way to select the next president of the European Commission, with the four party families putting forward their choices as the face and voice of their 2014 campaigns. This essay examines the implications of this new procedure for the workings of the EU and the European political space. It concludes that a party-nominated Commission president would weaken the Commission and lead to increasing conflict between the European Parliament and national governments. A pretend democratic choice could also alienate the public further. The authors argue that instead of focusing on the choice of Commission president, politicians who want reform of the EU should use the election campaign to promote a wider public debate about the benefits of European integration across the 28 member-states.

Stefan Lehne Visiting Scholar Carnegie Europe More from this author... // Between Hesitations and Aspirations/Serbia-Kosovo Deal Should Boost the EU’s Western Balkans Policy/ Promoting a Comprehensive Approach to EU Foreign Policy Faced with rising populism and falling public trust in political institutions across Europe, politicians are casting about for new ideas to reconnect the EU with its citizens. There is a crisis of representative democracy in many countries, with voters feeling they have little say over decisions on austerity and other unpopular policies. The EU institutions are far removed from voters, and they are where most of the decisions that led to austerity were made. Public support for the EU has fallen sharply, even in countries where it used to be strong, and trust in political elites at all levels is at rock bottom. The way out of these enormous challenges is not to make the Commission president partisan. Instead, politicians who want reform of the EU should use the election campaign to promote a wider public debate about the benefits of European integration across the 28 memberstates. National leaders must themselves get out in the campaign because they have the clout and credibility to make the case for the momentous decisions they took to save the euro. EU-level policies have become much more salient and citizens in every country have strong views on them now. The spheres of national and European politics are no longer separate, so the election campaign for the European Parliament must integrate them. This is the vital challenge which European political parties should take up. The new proposal for selecting the next Commission president Until now, Commission presidents have been chosen by the heads of state and government in the European Council, and the European Parliament had then approved the choice with a majority vote. Article 17 of the Lisbon treaty now gives the Parliament the right to elect the Commission president. It 257 states: “Taking into account the elections of the European Parliament and after having held the appropriate consultations, the European Council acting by a qualified majority shall propose to the European Parliament a candidate for the president of the Commission. This candidate shall be elected by the European Parliament by a majority of its members.”1 The new treaty provision leaves the power of nomination with the European Council. However, the main party groups in the European Parliament would like to establish a more direct link between the outcome of the elections and the choice of the Commission president by putting forward their own candidates for the job. The largest party family, the European People’s Party (EPP), is committed to selecting a candidate but has not set a procedure. The Party of European Socialists (PES) will hold primaries to choose a candidate in January 2014, and the front-runner is the current president of the European parliament, Martin Schulz. The Liberals will elect their candidate at a party congress. The Greens will hold an online ballot to choose their candidate, who does not even have to be a party member – an impressively open procedure.2 The present Commission has endorsed the new procedure, with Vice-President Viviane Reding arguing it would “strengthen the people’s voice in European democracy and make next year’s European elections a real debate about the future of Europe.”3 Members of the European Parliament (MEPs) who support the idea argue that selecting the Commission president would help turn the existing federations of national parties into genuinely European parties.4 It would provide faces to complement the policy manifestos, attract media attention and increase voter turn-out, they claim. In sum, the elections would be about a decision on the head of Europe’s executive branch and amount to a big step for European democracy. However, the impact of this procedure on democratic legitimacy raises many questions, and any benefits could be outweighed by its negative effect on the EU’s functioning and the balance of power between its institutions. Will it really give greater legitimacy and authority to the Commission? Will it lead to the selection of a strong president who can make the Commission function better and restore its political role? Will it help rebuild popular support for the EU? Will it enhance public interest in the 2014 elections and increase participation? And how would a partisan Commission president affect the functioning of the EU’s political system? Would the Commission do its job better with a partisan president? Supporters of the idea argue that the Commission needs more political accountability and that this could be enhanced by linking its head to a political family in the European Parliament. But in fact the opposite might happen: a president who is blatantly beholden to one party will lack the credibility to impose sanctions or take other measures against national governments who are of another political stripe. Commission presidents are usually politicians with a background in one party or another, but they have never before had a mandate to achieve one party’s programme. They can only perform their function properly if they respect the Commission’s role as the impartial ‘guardian of the treaties’ that pursues the broad European interest. This role of the Commission is vital to the EU’s system of rule of law. When taking office, every commissioner takes an oath to be “completely independent in carrying out her responsibilities, in the general interest of the Union.” This pledge loses its meaning if the president of the College is explicitly partisan. Moreover, the Commission has gained new powers as a result of the euro crisis – but to exercise them effectively, it needs to act as referee in the political game, not as captain of one of the teams. Member- states have agreed that the Commission should monitor and enforce fiscal discipline across the eurozone under new rules aimed at reducing budget deficits and public debt (with such unlovely names as the European semester, Six-Pack, Two-Pack and Fiscal Compact). These powers intrude deeply into national sovereignty because the Commission analyses countries’ draft national budgets before national parliaments debate them, and can ask for revisions. The Commission then makes recommendations and its proposed sanctions can only be stopped if a qualified majority in the Council of Ministers votes against them. The Commission needs to act as referee in the political game, not as captain of one of the teams. As a member of the troika (together with the European Central Bank and the International Monetary Fund), the Commission also plays a crucial role in enforcing the conditions on debtor countries that receive international assistance in the event of crisis. And the new measures to strengthen fiscal governance and address macro-economic imbalances require a bureaucracy to monitor them. An institution with such powers has to maintain a high degree of trust in its impartiality and technical competence. Accusations of favouritism of one government over another would kill the disciplinary system. These new responsibilities are akin to those of the Federal Reserve or the US Federal Communications Commission rather than those of a national government. Would politicisation of the top

258 job make the Commission a more credible referee? More likely, it would undermine its ability to enforce the rules effectively. Prime ministers facing Commission criticism could claim that it was being unfair, reflecting the political bias of a president seeking to advance the interests of her own political family. This trap could also catch candidates for the Commission president job. Imagine a Socialist or Green candidate campaigning on a strong pro-solidarity and anti-austerity line; from the start, she would be opposed by the creditor countries, even if she was from Northern Europe. By contrast, a candidate identified with rigid austerity would get no support from the debtor countries. Even worse, neither of them would be able to deliver on campaign promises because the crucial decisions about fiscal rules are made by the European Council. If the Commission were given great discretionary powers for running the Economic and Monetary Union – and hence setting macroeconomic policy – a political process for electing the president would make sense. But this is a political non-starter at present, so why make it harder for the Commission to do its job as referee? Further partypoliticisation of the president would argue for reducing the Commission’s functions and powers, not increasing them. Governments and companies would question the Commission’s impartiality in taking decisions on state aids and anti-trust cases if its president were appointed by one party family. The Commission is also gaining new powers in sensitive areas, most recently oversight of standards of border protection around the Schengen zone. If the Commission president were overtly partisan, member- states would be much more likely to challenge Commission decisions in the European Court of Justice. That would undermine the Commission’s authority and reduce the deterrent effect of infringement proceedings. Recent problems with corruption and anti-democratic practices in several member-states have increased the need for EU-level monitoring of member-states’ adherence to fundamental values. The Commission has an important role to play as guardian of the EU’s treaties, including their provisions on fundamental rights and values. But a partisan president would make it much more difficult for the Commission to take on new functions such as safeguarding democracy.5 There are plans for the Commission to issue regular monitoring reports on corruption and rule of law in the member-states. How could its reports be taken seriously if any government facing censure – for mistreating immigrants, sacking judges, restricting media freedom or deporting Roma – could shrug them off as partisan and biased? The same risk would apply to the Commission’s threats of infringement proceedings. Would the new method lead to the selection of a strong and capable new Commission president? Rather than attracting new faces for Europe, the new procedure could deter capable politicians who would run the Commission well. For the past 20 years, the heads of state and government have picked the Commission president from among their own group because they trust prime ministers who have experience in running large and complex administrations. The Commission’s effectiveness depends critically on the president’s ability to work with national leaders, and she would be taken more seriously by them if she is one of their peers. The problem is that a sitting president or prime minister is most unlikely to take the risk of declaring herself to be a candidate for the Commission, unless she can be sure of getting elected and/or is a lame duck at home. It would look like a breach of loyalty to the voters who had elected her to national office. No leading politician would abandon national office to venture into a potentially damaging campaign with an uncertain outcome. Why risk your position at the top of the national tree when you might be beaten by a political rival for the Commission job? Rather than attracting new faces for Europe, the new procedure could deter capable politicians who would run the Commission well. The new procedure might broaden the field to more potential candidates, especially if they are selected through primaries, but many of these will lack the experience and political stature that the job requires. Would the new method increase turnout and promote a more substantive public debate? Voters tend to see European elections as second-order votes, when it is safe to kick the national government by casting a ballot for an entertaining or populist candidate, without any risk of him running the country. Every election since 1979 has resulted in a lower turnout. Only 43 per cent of voters bothered to go to the polls in 2009 – in some countries fewer than a fifth did so – and parties spend less money and time than on their national campaigns. European campaigns are often dominated by issues that have little to do with what the EU actually does, and even less with the real powers of the European Parliament. Many MEPs have argued for years that increased powers would bring more attention and respect to the Parliament. The Lisbon treaty has now bestowed on the Parliament equal powers with the Council to

259 decide legislation. It plays an increasing role in shaping the EU’s internal and external policies, especially through its control of EU budgets and oversight responsibilities. The Parliament has recently thwarted the Council more often than in the past. It gained wide media coverage when MEPs rejected the SWIFT treaty on sharing of personal data with the US, and made the popular move of imposing a cap on bankers’ bonuses. MEPs have stronger competences than parliamentarians in some member-states. These enhanced powers would help to redress the democratic deficit if the Parliament were grounded in political life in the member-states, and if voters felt directly connected to EU business through it. However, after nearly 35 years of increasing powers, the Parliament is still not accepted as an essential part of the European body politic. The Parliament’s creation and the step-by-step increase in its powers did not result from popular demand or broad public debate; rather it resulted from deal-making between governments. For example, direct elections were introduced in 1979 because of a trade-off with the creation of the European Council.6 The Parliament was constructed from the top down, and it has not grown deep roots in political life in most member-states. As long as voters do not turn out to vote for their MEPs and follow EP debates, the Parliament cannot provide the democratic link between the citizen and EU decisions. The European Council has made unpopular decisions about the euro, but voters still recognise the legitimacy of their prime minister or president. Many of them still do not know who is their MEP, by contrast. If citizens remain distant from the EU’s workings and the Parliament does not connect them to it, the legitimacy of the EU could be reduced rather than improved by increasing Parliament’s powers. A German politician’s face on Socialist Party posters in Spain and Greece could bring out anti-German sentiment. Advocates of change argue that a link with the election of the Commission president would excite voters, because they would see personalities heading the campaigns across Europe. But are there candidates whom electorates would recognise, let alone support, across Europe? After nearly ten years in office, José Manuel Barroso is not known in the majority of EU households, and most of the likely candidates for his succession lack name recognition. Their nationality is more likely to be noticed than their campaign promises. For example, Martin Schulz has made his political career in the European Parliament and is well known in Brussels and Strasbourg, but his face on Socialist Party posters in Spain and Greece could bring out anti-German sentiment. The EU’s legitimacy would improve if EP election campaigns were fought on EU issues rather than national ones. But the nomination of pan-European candidates is unlikely by itself to transform the political debate. Instead, it could add to the confusion of voters. Would an indirectly elected Commission president restore the EU’s legitimacy? The euro crisis has compelled European leaders to take important areas of economic policy out of the political sphere, subjecting them instead to technocratic supervision from Brussels. The Commission’s new responsibilities for ensuring fiscal discipline have given it a role in areas such as pensions that were once purely national matters. This transfer of powers has effectively reduced the discretion of national governments and parliaments, especially in debtor countries, without introducing more political accountability at EU level. Would the selection of the Commission president through EP elections introduce more accountability at EU level? Only if it offered voters a real choice between meaningful policy options. To do so, the candidates for Commission president would have to campaign on the basis of substantive economic policy platforms. But in fact the Commission does not have the power to decide economic policy. While crisis management in the eurozone has reduced the member-states’ autonomy over their fiscal policies and financial regulations, governments have reasserted their primacy in determining the EU’s overall policies. Very few members still want a federal EU. The really important issues are now decided by the most important leaders in the European Council, who could still overrule the party-nominated Commission president. This renaissance of inter-governmentalism in crisis management for the euro has side-lined the lead role of the Commission in initiating policies and proposing legislation. The Commission’s influence had been declining over the 15 years before the crisis. Its sole right to initiate new legislation still gives the Commission considerable influence, but it no longer sets the agenda and provides political leadership as it did under Jacques Delors. Like it or not, the Commission president is not the main shaper of EU politics, so her election cannot be the primary means of restoring democratic legitimacy. Ambitious political programmes of candidates will have little credibility if the real decisions are taken elsewhere. To link the choice of the Commission president to the performance of a party at the European Parliament elections will not change the fundamental structure of EU decision-making. 260

Would this new selection procedure “strengthen the people’s voice in European democracy” as Reding has claimed? The idea is to make the appointment of the next Commission analogous to the formation of a national government. But this is impossible under the current structures. All the vital elements of government formation – including putting together a coalition, negotiation of a government programme and selection of ministers – are incompatible with the current institutional rules. The Commission president alone does not determine the Commission’s policies, and the other 27 people in the College of commissioners (who are akin to ministers) are put forward by national governments, one from each member-state. The president can quietly tell a prime minister that his or her candidate is unsuitable and ask for another potential commissioner, but he cannot choose them freely as a head of government does. If the next Commission president is beholden to the Parliament, confrontations will more often result in political deadlock. The fact that commissioners are nominated by their governments means that the composition of the overall College reflects the political balance between member-states rather than the outcome of the European Parliament elections. If most governments are centreright rather than left, the College of commissioners will also have a conservative majority. This matters because voters often choose different parties in the European Parliament elections than the ones they vote for in national elections, so the majority in the Parliament will not necessarily match that in the College or the Council of Ministers. So far, this tension has resulted in a delicate political balance because the Commission is answerable to both member-states and the Parliament. But if the Commission president is effectively beholden to the Parliament, it will lead to confrontations that more often result in political deadlock. The impact on political dynamics between Commission, Parliament and Council A Commission president nominated by a political party in the European Parliament could also have a profound impact on the EU’s political balance. The power constellations at EU level could change in three ways: Scenario 1: The Parliament wins Some member-states have doubts about the new selection procedure, but the European Council might feel morally obliged to nominate the biggest party’s candidate for the job, even though no party usually wins an absolute majority in the Parliament. Conceivably, the European Parliament could also put forth a common candidate who enjoys all-party support. This would be at odds with the wording of article 17 of the Lisbon treaty, but the Parliament could get its way if the nominee wins the votes of a majority of its members. The outcome of more power to the Parliament is what MEPs and promoters of the new procedure hope for. If the Commission president has won her position through the EP elections, she will have a stronger sense of loyalty to the Parliament than to the member-states, as well as being the creature of one of its parties. This will upset the balance between the institutions. The Commission risks deriving its agenda from the prevailing wishes of MEPs, with less weight of its own, despite its formal right of initiative. If the Parliament’s weight grows, this implies that the member-states’ relative influence over the Commission declines. If the next Commission president is more beholden to the Parliament and pays less attention to subsidiarity, disgruntled member-states will start to block the EU system more often. Member-state leaders would be less willing to take responsibility for EU-level policies and defend them publicly. They might more often seek agreements among governments outside the treaty framework. Scenario 2: Protracted constitutional crisis If the candidate of the party that wins most seats in the European Parliament is not approved by the member-states, the European Council might decide to nominate another person; the EP could then refuse to elect that candidate by majority, resulting in stalemate. The European Council would then have to come up with other candidates until the EP agreed. The impact on the balance of power will depend on who blinks first. In theory, the crisis could escalate; for example, the Parliament could try to block the EU budget, or the member-states could press their MEPs to agree to the deal. If the European Council publicly imposed a candidate against the Parliament’s will, MEPs would demand other concessions before electing her. The final outcome could favour either Parliament or Council. But in both cases, the Commission would be weakened. This would create a drama in Brussels, which is perhaps useful to raise public awareness of political choices at EU level.7 But such a messy procedure could sap the authority of the Commission president who eventually emerges. Yet another crisis of indecision would damage the EU’s reputation. Moreover,

261 inter-institutional battles will not bring more legitimacy if they stop the EU from performing its key functions. However, this scenario is unlikely to emerge unless the elections produce a result that upsets the expectations of the mainstream parties. Both heads of state and government in the European Council and the EP party leaders have a shared interest in avoiding an open confrontation. Scenario 3: The Empire strikes back (pre-emptively) A political fix is also possible. It is no coincidence that, the EPP, the party group most likely to win the most seats in the next European Parliament, is not yet committed to holding primary elections for its candidate. Instead, informal contacts between the top EPP politicians in the European Council and Parliament are likely to be the means of pre-selecting a nominee who will be endorsed as the official EPP candidate for Commission president. If the EPP once again wins the most votes, this candidate will easily win the approval of both institutions. This political fix could include other jobs; for example an EPP Commission president would be accompanied by a Socialist Vice-President/High Representative for Foreign Policy, as happened in 2009. The biggest parties might even quietly agree such a deal prior to the EP elections.8 Inter-institutional battles will not bring more legitimacy if they stop the EU from performing its key functions. Such a solution would essentially continue the traditional method of selecting the Commission president. Proponents of the new procedure argue that voters would see the same faces and names on election posters across Europe. Some argue that this has value in raising awareness and public acceptance in itself. However, as argued earlier, this might not happen because of the dominance of national politics and the unwillingness of national leaders to put themselves forward as candidates. Moreover, if a backroom deal ultimately decides the nomination, voters will see through the pretence. The added value in terms of legitimacy would be negligible. What is really at stake in the 2014 elections For all the reasons explained above, party nominations for Commission president could cause huge problems for the EU’s functioning, without delivering benefits for democratic legitimacy that would outweigh them. Article 17 of the Lisbon treaty only says that the member-states have to take into account the outcome of the elections when selecting the Commission president. They should not interpret it in a way that limits the search for an eminently qualified candidate. The priority is to appoint a Commission president who can restore trust in the institution and not play party politics. A strong, independent, non- partisan Commission is badly needed in this crisis. The 2014 European Parliament elections will be more important than earlier ones because the EU is in a deep crisis. Even though the financial markets have calmed down somewhat, the eurozone’s underlying economic and political challenges have not yet been resolved. The EU’s long-term survival as a political system remains at risk. 2014 will see the first Europe-wide elections since the economic crisis began and momentous decisions for the immediate rescue of the euro were taken. Previous EP elections could be dismissed as second-order polls where every country discussed different issues, but this time the importance of EU-level decisions to the lives of ordinary citizens is felt across the continent. In debtor and creditor countries alike, citizens know that the EU matters, whether they like it or not. In the past, the democratic deficit could be ignored because the EU was dealing with issues that citizens did not care much about, whereas policies of direct salience on which they had strong views were dealt with at national level.9 But now the management of the euro crisis has brought the EU into matters such as the retirement age, social services, public investment, unemployment benefits and bank deposit insurance. Many long-maintained walls between EU competences and national sovereignty have been knocked down by the emergency measures to save the euro. Following this fusion, the EP elections matter much more because the substance of vital economic policies is governed at EU level as well as national. MEPs still do not decide on these policies by themselves, and the European Council has gained the most powers as a result of the crisis. But the prime ministers and presidents who form the European Council can no longer rely on national elections alone to legitimate the decisions they take at EU level; instead, they need to engage fully in European level democratic processes. The only transnational arena for this debate is the EP elections. For this reason, national leaders have a duty to involve themselves fully in the European campaigns, to justify the decisions they agreed to in the Council, and also to make the case for any further measures that they believe the EU needs – from banking union to a new treaty. The EP elections offer an opportunity to

262 move beyond incrementalism to a broad public debate about the choices to be made on Europe’s long- term future. To save the euro, talk to the Europeans Since the crisis began, the emergency method of finding agreement between the 28 member-states has been to remove the deliberations from the public eye; restrict the number of participants in the negotiations to the highest political level; take small steps, one at a time, without spelling out the longer- term consequences; and limit public communication to press conferences that announce the results after the fact. This method might have been justified in the early stages of the crisis, but it is now inadequate given the massive significance of the decisions and their consequences, especially for austerity. This “silent revolution”10 is partly responsible for the rise in EU-scepticism and growing public mistrust of political institutions. The fate of two recent attempts at long-term thinking on the future of the EU is telling. At the end of 2012, the European Council suppressed debate over papers on the EU’s long-term future produced by Commission President José Manuel Barroso and European Council President Herman Van Rompuy . German politicians, especially, wanted to avoid a divisive public debate about big issues such as possible issuance of Eurobonds and banking union. This approach of incremental change and ad hoc, crisis-driven decision-making by a small elite is not sustainable. Voters in every country, even those where the EU used to be uncontroversial, such as Italy and Greece, now have strong views on the EU-imposed fiscal policies that have led to austerity. Banking regulation and government debt are discussed much more widely by the population, in households, cafés and taxis. Many walls between EU competences and national sovereignty were knocked down by the emergency measures to save the euro. The EP elections offer a great opportunity to have a much wider debate about strategic choices in the public domain. EU-sceptics and populists will certainly take up this opportunity. Will mainstream parties use it to make the case for EU-level solutions? Those who believe that ‘more Europe’ is necessary – to confront the challenges of the financial crisis, to safeguard the values and interests of Europe, and ensure that it helps to shape the future global order – now need to build public support through a broad and inclusive political process. Conclusion: Make the utilitarian case for the EU A major feature of the 2014 campaigns will be the prominence of eurosceptic and xenophobic parties, which could dominate the themes of the campaign. According to some estimates, there could be 150-180 such MEPs – ut of a total of 751 – in the new Parliament. The new political reality in the EU is that most mainstream politicians are mistrusted and seen as remote and selfserving, even in their own countries. The only ones who have cross-border name recognition are the rhetoricians and demagogues who attack the EU and call for the destruction of the euro: Beppe Grillo, Nigel Farage, Marine Le Pen and Geert Wilders are among the best-known across Europe. The largest delegations of MEPs from the UK and France in 2014 could be UKIP and the Front National. The election of many MEPs from such parties might force the mainstream parties into a deal on the Commission president, but their presence would impede the work of the new Parliament, and amount to a massive vote of no-confidence for European integration. How should mainstream parties respond to this threat? Many might want to adopt part of the populist agenda, for example on migration. This would be a dangerous course. It is very hard for mainstream parties to outflank populists on the right. Why vote for the Conservative Eurosceptics when you can vote for UKIP? More fundamentally, if mainstream parties became more xenophobic, they would undermine European values. Instead, the centre-right and centre-left should define their own policy offerings and stances more clearly. This is the best way to help voters to see that the populists do not offer convincing alternatives to continuing to manage the crisis through the EU. Moderates should confront xenophobia and anti- immigrant sentiment directly, and show the benefits of maintaining an open economy. They should call the bluff of the anti-EU forces who offer nostalgia for a minimalist Europe that could not survive in a global economy. The utilitarian case for the EU is often reduced to mundane gains such as cheap bank transfers and mobile phone roaming; but it goes far beyond these daily benefits. The reality is that there is no going back to autonomous national policies for the economy or migration. Europe’s open markets are the best response to a globalising world. Populists in many countries pretend that a real option exists for European countries to opt out of globalisation by abandoning the EU and withdrawing behind national borders. This is a false choice. If mainstream politicians explained the implications convincingly – that prices would rise and

263 travel would become more difficult, for example – they would confront populism, and the vast majority of citizens would opt for the EU. There is a powerful utilitarian case for the EU to be made, but most mainstream politicians are not making it. This, rather than candidates for Commission president, should be the focus of the 2014 campaign. The centre of the political debate should be the practical benefits and economic necessities that require European integration. This offers the best hope for changing the prevailing mood of pessimism, cynicism and mistrust, and rebuilding a common European project. This article was originally published by the Centre for European Reform. Notes 1: The Lisbon treaty left the other arrangements for the appointment of the Commission unchanged. Each commissioner is nominated by a member-state in consultation with the president of the Commission. The entire list is then submitted first to the Council, then to the European Parliament. If approved by the Parliament, the Commission is officially appointed by the Council. 2: Individually, European parties have taken such initiatives before. In 2004 the Greens unsuccessfully nominated Daniel Cohn-Bendit as their candidate and in 2009 the European People’s Party, which won the most seats, nominated incumbent President José Manuel Barroso for a second term. 3: Press release, European Commission, ‘2014 European Parliament elections: Commission recommends that political parties nominate candidate for Commission president, March 12th 2013. 4: Richard Corbett, ‘Democracy beyond the state? The European experiment’, in ‘Democracy: Taking the next turn’, Queries, Foundation for European Progressive Studies, 03 (9), 2012-2013. 5: For example, see Jan-Werner Müller ‘Safeguarding democracy inside the EU: Brussels and the future of liberal order’, Transatlantic Academy Paper Series, 2013. 6: This problem is well analysed in Luuk van Middelaar, ‘The passage to Europe’, New Haven: Yale University Press, 2013. 7: The case for more political drama was made by Larry Siedentop, ‘Democracy in Europe’, New York: Columbia University Press, 2001. 8: Hugo Brady, ‘The EU’s Rubik’s cube: Who will lead after 2014?’, CER Insight, April 2013. 9: Andrew Moravcsik, ‘The choice for Europe: Social purpose and state power from Messina to Maastricht’, Ithaca: Cornell University Press, 1998. 10: Piotr Buras, ‘The EU’s silent revolution’, ECFR policy brief, September 2013.

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Analítica ¿Janet `Paloma´ Yellen? Por: Ernesto Ekaizer | 14 oct 2013 Cada vez se hace más evidente que si la Reserva Federal ha decidido aparcar de momento la desaceleración de su programa de estímulos monetarios (compras de bonos del Tesoro por valor de 85.000 millones de dólares que sostienen la subida de cotizaciones en la Bolsa de Nueva York y en las de casi todo el mundo desarrollado) es por los riesgos que se perfilaban en el Congreso norteamericano sobre el techo de gasto y el riesgo de default (impago de la deuda). Si la Reserva Federal iniciaba, como estaba previsto, la reducción de compras, en el contexto de caos político, EE.UU volvía cinco años después a septiembre de 2008, con la caída de Lehman Brothers, solo que esta vez con una amenaza muchísimo más grave. Lo primero, pues, era que la Fed no innovase. El presidente de EE.UU, Barack Obama, ha aceptado nombrar a Janet Yellen para sustituir a Ben Bernanke en la presidencia del banco central norteamericano, la Reserva Federal. El presidente quería a su ex secretario del Tesoro, Larry Summers, para el puesto, pero su grupo parlamentario boicoteó dicha iniciativa. Al anunciar la designación, Obama se presentó el martes 9 en la Casa Blanca flanqueado por el presidente saliente, Ben Bernanke, y por Janet Yellen, que durante los últimos tres años ha ocupado el puesto de vicepresidenta. En defensa de la trayectoria de la que va a ser la primera mujer a la cabeza de la Fed, recordó Obama que fue ella, situada de pie a su derecha, quien alertó sobre el estallido de la burbuja inmobiliaria en Estados Unidos. Yellen ha estado en la Reserva Federal alrededor de doce años, alternando su actividad en el banco central con la presidencia del Consejo de Asesores Económicos de la Casa Blanca, primero con Bill Clinton y más tarde con Barack Obama. Ha tenido voto durante ese periodo en el organismo que toma las decisiones: el llamado FOMC o Comité Federal de Mercado Abierto, que decide sobre la compra de bonos del Tesoro de Estados Unidos. A la izquierda del presidente de EE.UU, Bernanke, el hombre que junto con Greenspan ignoró la burbuja inmobiliaria, permanecía impertérrito el pasado martes. Ella, es verdad, vio la gestación de una burbuja que Alan Greenspan, El maestro, y Ben Bernanke, negaron. No se puede pinchar preventivamente una burbuja. Eso explicaban. La explosión llegó y desencadenó la Gran Recesión. Janet Yellen vio venir la burbuja en 2005 y, más tarde, ya en 2007 advirtió sobre la recesión, cuando todos sus colegas, o la mayoría de ellos, no veían más que un aterrizaje suave de la economía norteamericana. Las actas de la Fed lo certifican. El economista David Rosenberg, a quien sus colegas llaman un permabear (oso permanente en fraseología de Wall Street), por ser negativo sobre la evolución de la economía y de los mercados, advirtió como pocos sobre la burbuja y sus consecuencias, ha hecho un resumen de las principales intervenciones de la que va a ser First Lady, de la Fed en las reuniones del Comité de Mercado Abierto.

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El 20-21 de marzo de 2007, en la reunión, presidida por Ben Bernanke, Yellen recuerda la discusión sobre la burbuja. "Como hemos debatido en detalle hace dos años [bajo la presidencia de Alan Greenspan y cuando Bernanke era miembro del consejo de gobernadores] una burbuja de precio de los activos conduce inevitablemente a desequilibrios insostenibles en la economía y a la asignación incorrecta de recursos. La extraordinaria subida en los precios de la vivienda durante los últimos años provocó un boom en el sector de la construcción y en las ventas que no podía durar", dice, según consta en el acta de dicha reunión. "Hasta ahora los ajustes hacia niveles más sostenibles en el inicio de construcción de viviendas y ventas han sido relativamente ordenados. No obstante, hay una amenaza de financiación precaria desarrollada durante la relajacion en las exigencias para conceder credito hipotecario que debe ser eliminada. Por ejemplo, en 2005 y 2006 algo así como el 40% de los compradores de primera vivienda no pusieron dinero alguno al adquirirlas. El mercado está comenzando a reconocer el tamaño de esta amenaza y, con el reciente deterioro en el comportamiento de las hipotecas subprime, está revisando el riesgo hipotecario. En adelante, tendremos que vigilar estrechamente los aumentos en la compensación del riesgo hipotecario y la restricción de las exigencias para dar crédito. Estos cambios, especialmente si se desarrollan demasiado rápido o van muy lejos, pueden amplificar la caída del sector de la vivienda tal como se ha reconocido, hundiendo los precios y la actividad, y con efectos de segunda ronda sobre el gasto de consumo, pueden revelarse un obstáculo sustancial sobre la economía". Dejemos las actas y a Rosenberg. Vayamos a lo que decía Bernanke en el Congreso norteamericano. En esas mismas fechas, precisamente, el 28 de marzo de 2007, el presidente de la Reserva Federal describe los problemas en el mercado inmobiliario. Pero está confiado. "Sin embargo, en este momento, el impacto de los problemas de los mercados subprime en la economía y los mercados financieros parece que será probablemente contenido". Todo esto, ¿no recuerda a España? ¿No era que nadie lo había visto venir? ¿No será más cierto que muchos se negaron a reconocer la realidad? Lo que va a decir Janet Yellen tres meses después es más contundente. Frente al mensaje de Bernanke de que el problema está "contenido", en la reunión del 27 y 28 de junio de 2007 ella insiste. "En términos de riesgo para la perspectiva de crecimiento, todavía siento la presencia de un gorila de 600 libras en la habitación [272,16 kilos], y éste es el sector de la vivienda. El riesgo de un deterioro significativo todavía mayor en el mercado de la vivienda con precios cayendo e impago de hipotecas creciendo mucho más, me crea una fuerte angustia..." Bernanke sostiene el 18 y 19 de julio de 2007, ante el Comité de Banca del Senado, que "han salido a la luz las pérdidas en los créditos asociados con el mercado subprime y son bastante significativas". Añade: "Ciertas estimaciones son del orden de entre 50.000 millones y 100.000 millones". En la reunión del 7 de agosto de 2007, Janet Yellen sigue erre que erre.

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"El sector de la vivienda obviamente sigue siendo muy preocupante. Parecemos sorprendernos repetidamente por la profundidad y duración del deterioro de estos mercados; y las consecuencias financieras de los acontecimientos en los mercados subprime, que yo percibo extendiéndose ahora más allá de dicho sector, es una fuente de angustia apreciable". Prosigue: "Por supuesto, las condiciones financieras se han deteriorado en los mercados bastante más allá de aquellos conectados con los instrumentos subprime e incluso la propiedad residencial en general. Parece que los participantes están cuestionando los productos estructurados de crédito en general, las calificaciones de riesgo de las agencias de rating, y hasta qué punto existe diligencia debida por parte de los originadores que hacen paquetes y venden créditos pero que no mantienen ya una parte importante de dichos préstamos en sus propios balances". Añade: "El Libro Verde [el informe económico financiero que la Reserva Federal distribuye antes de cada reunión del Comité de Mercado Abierto] ha alertado hace mucho, y hemos estado preocupados desde hace bastante sobre ello, las posibilidades y potenciales consecuencias de un cambio más amplio en la percepción del riesgo. Con primas de riesgo tan bajas en términos históricos, no sería sorprendente que aumenten [las percepciones de riesgo], haciendo más restrictivas las condiciones financieras para cualquier política monetaria. Mientras es posible que los mercados financieros se estabilicen o incluso reviertan su curso en los días y semanas por delante, en mi pantalla de radar veo mucho más la posibilidad de que los mercados financieros se desplacen ahora hacia una senda más típica de reapreciación del riesgo. Si esta senda continúa y posiblemente se intensifica, tendrá muy importantes implicancias para [nuestra] política [monetaria]. En octubre de 2007, Bernanke asegura en que los bancos norteamericanos son sanos y expresa sus dudas de que el mercado de la vivienda pueda desestabilizar el sistema bancario. Yellen señala en la reunión del 11 de diciembre de 2007: "Mi previsión en abstracto vaticina que la economía intenta difícilmente evitar la recesión, con el crecimiento de cero durante este trimestre y alrededor del 1% el próximo. Espero que el crecimiento se sitúe por debajo del potencial durante el año, lo que provocaria que la tasa de desempleo se eleve al 5%, en línea con el Libro Verde. Esta previsión asume una reducción de 50 puntos básicos [0,5%] en el tipo de interés de los fondos federales [la tasa con vencimiento a un día a la que se prestan los bancos entre sí las reservas que mantienen en el banco central], situándose el tipo real de los fondos cerca del centro de la franja de estimaciones de la tasa neutral en el Libro Azul [Informe de los servicios de la Fed sobre alternativas de política monetaria antes de cada cónclave]." Y arriesga: "Debería hacer hincapié en que no tengo mucha confianza en esta previsión y, en particular, temo que estamos en peligro de deslizarnos hacia una credit crunch [reducción generalizada de la disponibilidad de préstamos o un repentino endurecimiento de las condiciones para conseguirlos en las entidades financieras]. Dicho desenlace es ilustrado por la alternativa de simulación en el Libro Verde. Aunque no preveo condiciones en el sector bancario tan sombrias como durante el credit crunch en los primeros años de 1990, el paralelismo de estos acontecimientos son llamativos. Entonces tuvimos un gran número de quiebras de bancos durante la contracción del sector de las cajas de ahorros [cayeron unas 747 entidades sobre un total de 3.200]. En la situación actual, la mayoría de los bancos están en bastante buena situación. En 267 cambio, es el sistema bancario en la sombra, esto es, el segmento de mercados en los que activos titulizados son financiados por la emisión de papel comercial [pagarés negociables emitidos por las empresas], es decir, allí donde las quiebras han tenido lugar. Este sector está prácticamente cerrado...". El momento, diciembre de 2007, en el que Yellen habla de la recesión es muy importante y realza su capacidad de análisis macroeconómico "en abstracto", como ella misma apunta en su intervención. Anotemos que el National Bureau of Economic Research (NBER), el organismo privado encargado de certificar el momento en que la economía norteamericana entra y sale de una recesión, afirma el 28 de noviembre de 2008, casi un año más tarde, que la fecha de entrada de EE.UU en recesión es... ¡diciembre de 2007! "La expansión ha durado 73 meses a partir de noviembre de 2001", dice el comunicado. En su libro In Fed we Trust (En la Fed confiamos, sin traducción al español), el columnista del periódico The Wall Street Journal, David Wessel, levanta acta notarial de la continua infravaloración que hacen Bernanke y la Reserva Federal, tanto de la amplitud de la crisis como de sus consecuencias. Del negacionismo pasamos a la desesperación y el pánico. En septiembre de 2008, el Gobierno de George W. Bush decide, a sugerencia del secretario del Tesoro, Hank Paulson, con el apoyo de Ben Bernanke en la Reserva Federal, dar el escarmiento. Deja caer al banco Lehman Brothers, y da lugar a las sus terribles consecuencias: la gran crisis financiera y la recesión posterior. La profecía de Yellen sobre el credit crunch se hace realidad. Las arterias del mercado interbancario internacional se congelan. De los 100.000 millones de dólares como "tope" que daba Bernanke en julio de 2007 las pérdidas provocadas se extienden, como vaticinaba Yellen, a otros préstamos, elevando las pérdidas a alrededor de 4 billones de dólares. Estas "vidas paralelas" entre Bernanke y Yellen, ¿sugieren que la próxima presidenta de lae Rserva Federal será todavía más paloma, como identifican los mercados, o más keynesiana, como advierte The Wall Street Journal, en la compra de bonos públicos o estímulo monetario? No necesariamente. Si bien Yellen subraya el mandato de la Fed para velar por el pleno empleo, además de la inflación, derivar su carácter de "paloma" no parece convicente. David Rosenberg sugiere que la economista norteamericana no es tan "blanda" o "paloma" como se asegura, o keynesiana como se teme en sus páginas editoriales el diario The Wall Street Journal. "Mire su foja de antecedentes en las votaciones en el FOMC. Votó no menos de siete veces a favor de subir los tipos de interés y solo apoyó recortes de tipos dos veces en doce año, mientras que Bernanke respaldo reducción de tipos doce veces y nueve veces se manifestó por subidas", explica en un informe a sus clientes. "Ya en 1995, en julio, cuando se hablaba de un aterrizaje suave, ella votó contra la rebaja de los tipos que proponía Alan Greenspan". Por tanto, hay que ver. Y esperar a que pase el espectáculo en el Congreso norteamericano.

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La política monetaria (compras de bonos del Tesoro por 85.000 milones de dólares mensuales) no puede hacer el trabajo en este tipo de crisis (recesiones de balance o recesiones que suceden al estallido de una burbuja de endeudamiento privado) que, por su eficacia, debería cumplir la política fiscal. Por otra parte, el déficit fiscal de EE.UU ya se ha reducido notablemente. Tocará probablemente a Janet Yellen al frente de la Fed hacer la transición entre la disminución de los estímulos monetarios y un mayor protagonismo de la política fiscal. Es la única forma de evitar que la recuperación de la economía norteamericana se agote y vuelva a la recesión. http://blogs.elpais.com/analitica/2013/10/una-paloma-en-la-fed.html

Economía La mujer más poderosa Janet Yellen tiene en sus manos la recuperación de la economía mundial Confianza en Yellen Yellen o la continuidad Sandro Pozzi Nueva York 13 OCT 2013 - 01:00 CET22

Janet Yellen, el pasado miércoles en la Casa Blanca. / Michael Reynolds (Efe) Abran paso, Angela Merkel y Dilma Rousseff: llega Janet Yellen. No será difícil ver a la elegida para presidir la Reserva Federal en lo más alto de la lista que la revista Forbesdedica a las 100 mujeres más poderosas del planeta, donde ni siquiera aparece ahora. Eso sucederá cuando el Senado de EE UU confirme su nominación por parte del

269 presidente Barak Obama, anunciada esta semana. Entonces, políticos, economistas e inversores serán todo oídos para ella. Y por la influencia que tienen las decisiones de la Fed en la marcha de la economía global, dicen que será más poderosa incluso que las reinas Isabel y Victoria de Inglaterra. Más allá de esta hipérbole, es un hecho que Yellen está llamada a ser la primera mujer en dirigir uno de los bancos centrales del G-7, un club de hombres donde la igualdad de género brilla por su ausencia. Su mandato debería empezar el 1 de febrero próximo. Nunca antes una mujer dirigió la Reserva Federal en sus 100 años de historia. Tampoco ha habido una mujer al frente del Tesoro de EE UU en más de dos siglos. Ampliando más la vista, entre los 23 miembros del Consejo de Gobierno del Banco Central Europeo (BCE) no hay ninguna. La imagen se repite en el Banco de Inglaterra, integrado por nueve hombres exclusivamente. En el de Japón hay una mujer entre sus gobernadores, Sayuri Shirai. La Fed tiene tres en su máximo organismo de gobierno de manera permanente, más otras dos alternas. Solo Austria, Finlandia y Polonia tienen también mujeres en el directorio de los bancos centrales, tomando a los 34 países de la OCDE. No pasa lo mismo en los países emergentes, con Mercedes Marcó (Argentina), Elvira Nabiullina (Rusia), Gill Marcus (Sudáfrica), Linah Mohohlo (Botsuana) y Zeti Akhtar Aziz (Malasia) al frente de sus bancos centrales. La nominación de Yellen, por tanto, da vida al debate sobre la falta de representación de las mujeres en el mundo de la economía. Es una realidad que no se puede pasar por alto, aunque no fue un reto mayor para que la menuda y cálida Yellen llegue a presidir la institución más influyente del planeta. Ella es la persona en la que confía Obama para dirigir la Fed. Es la decisión económica más importante de su segundo mandato, que le servirá para marcar el abandono de la crisis y dar continuidad a su legado cuando deje la Casa Blanca. Su nombramiento aviva el debate sobre la mujer en el ámbito económico Quizás la vulnerabilidad inmediata de Yellen como líder sea que no era la primera opción, pese a que apareció desde el primer momento en la lista que se manejó para suceder a Ben Bernanke. Obama prefería a Larry Summers por su experiencia en la gestión de crisis pasadas. Pero para Wall Street esta cuestión y la del género no importan. Ahora lo que trata de descifrar son dos cosas: si Yellen es un clon de Bernanke y cómo llevará a cabo la reducción de los estímulos al crecimiento económico. Yellen, de 67 años, tiene gran experiencia en el ámbito público y académico. Es seria y meticulosa, conoce los entresijos de la Reserva Federal (es su actual vicepresidenta) y entiende lo que se ha hecho durante los últimos cincos años para apoyar la economía. Por tanto debería saber qué hay que hacer para volver a la normalidad monetaria sin sobresaltos y romper con la dependencia de la economía hacia el dinero en efectivo que la Fed lleva años inyectándole. El proceso de confirmación de Yellen en el Senado debería ser bastante fácil viendo el expediente de la expresidenta de la Reserva Federal de San Francisco. Otra cosa son las cuestiones políticas. El demócrata Jeff Merkley señalaba tras conocerse la elección que lo que se necesita ahora al frente de la Fed es una persona que “mire las decisiones de política monetaria a través de la lente de lo que es mejor para la clase media”. Obama busca acelerar la salida de la crisis

270 y mejorar su legado De hecho, Yellen está considerada una de las voces que con más fuerza defendió dar prioridad a la creación de empleo sobre la inflación. También, como señala Merklye, es consistente en sus predicciones económicas. Pero es evidente que hay miembros del Senado que la ven con malos ojos como presunta continuadora de las políticas de Bernanke, pese a que ayudaron a EE UU a capear el peor temporal económico desde la Gran Depresión. El senador republicano Robert Coker se encuentra entre los que considera que la de Janet Yellen es una mala elección. Cuestiona su laxitud. Ya se opuso a su nominación a vicepresidenta hace tres años y ahora opina que no hay evidencias de que la estrategia actual esté ayudando realmente a la creación de empleo. “Hay mucho de lo que hablar”, dice el político de Tennessee. El momento del cambio en la Fed no puede ser más interesante. A corto plazo, la primera lectura que se hace de la elección es el apoyo de Obama a la política de estímulos sin límite de la Reserva Federal. El presidente necesita que continúe, por eso la elección de Yellen se ve como la evidente. La economista neoyorquina es partidaria de afrontar con calma el proceso de abandono de los estímulos. El banco central de EE UU lleva casi un año comprando deuda hipotecaria y pública a un ritmo de 85.000 millones al mes. Hasta el propio Bernanke admite que si se deja funcionando más tiempo del necesario el problema crecerá. Y ahí está el primer gran cometido para Yellen: cómo desmontar toda la estructura sin crear tensiones. Es un proceso que, según señala José Viñals desde el Fondo Monetario Internacional, “no tiene precedentes”. La gran cuestión es cómo reducirá los estímulos al crecimiento Se refiere Viñals tanto a su cuantía como a su complejidad. Para cuando Bernanke le ceda el puesto, Yellen heredará un balance con activos valorados en cuatro billones de dólares, cuatro veces más de lo que tenía antes de la crisis. En esencia, la Fed está comprando medio billón de dólares en deuda al año, con lo que se acerca a los 600.000 millones que coloca en el mercado. Por eso se considera que esto debe acabar pronto. Bernanke quiere irse con el camino marcado. Su idea es que el programa conocido como QE3 siga funcionando hasta el próximo verano. Pero para ello debe dar antes el primer paso hacia su ralentización, algo que podría suceder a final de mes, aunque por la tensión política en Washington y la falta de datos económicos por el parón gubernamental es más probable que se retrase a diciembre o incluso enero. Los economistas del banco Wells Fargo creen que la Reserva Federal no puede esperar mucho más y dejar un cambio de política de tal calibre en manos de una persona nueva. Además, señalan que la presidencia de la Fed no es el único asiento que queda vacante. Hay tres puestos de gobernadores que deben ser cubiertos, a lo que se suma la rotación en los presidentes regionales con voto. En marzo la Fed será muy diferente. La economista neoyorquina quiere afrontar el proceso con calma De momento, Wall Street se quita de encima un punto de incertidumbre. Al mercado le gusta la elección de Yellen porque ve continuidad en la labor de Bernanke, porque su propósito es apuntalar el crecimiento y por su capacidad para crear consensos. Lo que

271 espera ahora es que en su comparecencia ante el Comité de Banca del Senado explique con claridad su plan. En su cabeza no hay doctrina. Sencillamente trata de dar una explicación económica a cada escenario que se presenta. Es cierto que Yellen es algo más paloma que Bernanke, es decir, más laxa desde el punto de vista monetario. Pero eso puede cambiar cuando asuma la presidencia de la Fed, porque tendrá que mirar más hacia el centro para contar con el mayor apoyo posible a sus iniciativas. Eso no quitará que para ello tenga que retar a los miembros ubicados en los extremos. Es lo que hizo cuando desde la Fed de San Francisco cuestionó la solidez del mercado inmobiliario, cuando saltaron las alarmas de la inflación y, más recientemente, en su insistencia por centrar todo el esfuerzo en la reducción del paro. De momento, los hechos validan su visión. “No tiene una bola de cristal, pero es muy afinada en la comprensión de cómo funcionan los mercados y la economía”, dijo Obama. Un expediente impecable facilitará su confirmación en el Senado Por lo general, Yellen es partidaria de que la Fed movilice todo su arsenal si es necesario. “La Fed de Yellen será muy similar por eso a la Fed de Bernanke”, señalan desde la consultora IHS Global Isight. Es decir, si hay recortes en la compra de deuda en diciembre será porque Bernanke cuenta con el consentimiento explícito de Yellen. Aunque, como indican los analistas, ella “presionará para que no se vaya muy rápido mientras la incertidumbre amenace el empleo”. La futura presidenta de la Fed fue muy clara en este sentido cuando aceptó la nominación del presidente de EE UU. En un tono más bien populista, dijo que el mandato de la institución es “servir a todos los ciudadanos” y recordó que muchos de ellos “siguen sin encontrar un empleo y les preocupa cómo pagar las facturas y llevar comida a sus familias”. Era un intento de conectar con un público que ve que la Reserva Federal está más al servicio de Wall Street. El acta de la reunión de septiembre sigue mostrando un cierto equilibrio de fuerzas entre las palomas y los halcones que pueblan el Comité de Mercado Abierto, máximo órgano decisorio de la Fed en política monetaria. Como indican desde Cumberland Advisors, eso permitirá a Yellen modular el mecanismo de compra de deuda con tranquilidad. Pero también es cierto que el acta muestra una ansiedad creciente por dar el primer paso atrás, y la mayoría está a favor de que así sea antes de final de año, si la crisis fiscal lo permite y los datos acompañan. Heredará un balance con activos de cuatro billones de dólares Hay opiniones para todos los gustos. Están los que no ven el primer recorte en la compra de deuda hasta marzo, cuando todos los asientos en la Fed se hayan movido, o incluso que aumente si la economía sufre por el circo político en Washington. Pero en la firma financiera Guggenheim Partners creen que Yellen podría sorprender al mercado en febrero con un recorte mayor de lo esperado, en respuesta a los que cuestionan su compromiso con la estabilidad de precios. Desmontar por completo el QE3 es, por tanto, el reto más inmediato. El segundo llegará un año después y será mucho mayor. De ser confirmada su nominación, Yellen tendrá la responsabilidad de decidir el momento en el que procederá a subir los tipos de interés, estancados en el 0% desde hace cinco años. Ese será el punto de inflexión de la política monetaria.

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Yellen es firme al trazar una línea de separación clara entre el recorte en la compra de deuda y el alza de tipos. Bernanke ya dejó claro también que una cosa no lleva a la otra. Así lo entienden los estrategas de la gestora de fondos BlackRock, donde esperan que la nueva Fed seguirá poniendo más peso en la parte del mandato que se refiere al logro del pleno empleo, “incluso a costa de un alza temporal en la inflación”. No ven, por ello, alza de tipos antes de 2015. El banco central de EE UU ha dicho que mantendrá los tipos mientras el paro no baje de una forma sostenida del 6,5% —en agosto se encontraba en el 7,3%— y la inflación no amenace con superar el 2,5%. Lo que está por ver es si el alza de precios puede forzar a la Fed a actuar antes de que el paro llegue al nivel deseado. Antes de eso, puede decidir elevar los intereses que paga a los bancos por las reservas que estos tienen en el banco central. Los analistas de IHS no ven a Yellen sacrificando la credibilidad de la Fed en la lucha contra la inflación a cambio de impulsar la demanda y reducir el paro. “No esperamos que la lleve más allá del 2% durante su mandato”, auguran. Es más, creen que están probadas sus credenciales en este campo, lo que le permitirá hacerse con los votos republicanos que necesita para asegurar su confirmación. En su intervención ante Obama, Yellen dejó claro que como presidenta se encargará de mantener a raya la inflación y garantizar que “no mina los beneficios del crecimiento”. Con este compromiso con la estabilidad de precios, Goldman Sachs cree incluso que la salida no se completará hasta mucho más tarde, con la primera subida de tipos a comienzos de 2016. Los retos de suavizar los estímulos y de subir los tipos de interés irán acompañados de un tercero si cabe más complejo. En sus primeros dos años de mandato, Yellen deberá reducir el masivo balance de la Fed para devolverlo a su nivel normal, por debajo del billón de dólares. El temor ahí no es solo la inflación, sino que se creen burbujas difíciles de detectar o que el mercado se muestre incapaz de absorber estos activos. No hay un calendario ni un plan conocido para llevar a cabo todo esto. Así que Yellen tendrá que saber guiar las expectativas del mercado, un liderazgo que hasta ahora recaía en Bernanke. No es fácil, como se vio el pasado verano en Wall Street, porque la economía se muestra aún vulnerable a sacudidas tanto internas como externas. Y mantener la estrategia actual es ahora lo más fácil, porque se ajusta a los pilares del mandato. También, como Bernanke, es una firme creyente en la efectividad de la comunicación y la transparencia. Es, de hecho, la arquitecta de la estrategia de apertura de la Fed. Ahí llega su otro gran reto: cómo modular el lenguaje de la Reserva Federal, sus gestos en las comparecencias ante el Congreso y sus respuestas en las ruedas de prensa para evitar tropiezos. Cualquier desvío en la partitura puede crear confusión y restar credibilidad al mensaje de la Fed, como sucedió tras la reunión de septiembre. El mercado esperaba para entonces el primer paso para reducir los estímulos. Estuvo cerca, como muestra el encendido debate que hubo en el seno del banco central, de acuerdo con el acta del encuentro. Pero como después dijo Bernanke en rueda de prensa, lo importante es la marcha de la economía. En su discurso de aceptación de la nominación, Yellen introdujo además lo que podría considerarse un tercer pilar en el mandato de la Fed: “La promoción de un sistema financiero fuerte y estable”. Es una función que se da por asumida para mantener la

273 estabilidad de precios y promover el máximo empleo. La reforma financiera bautizada como Dodd-Frank dio además nuevos poderes al banco central para supervisar a las grandes instituciones. Pero entre los temas que pueden salir a colación durante el proceso de ratificación en el Senado está el apoyo que dio en los tiempos de la Administración de Clinton a que se desmantelara la ley Glass-Steagall, que levantó el cortafuegos entre el negocio de banca comercial y de inversión en las grandes instituciones. Una separación que quiere volver a instaurarse para así reducir el tamaño de los bancos y el riesgo de que estalle otra crisis. El último gran reto de Yellen será luchar contra la politización de la Reserva Federal. La nueva presidenta deberá salvaguardar la independencia de la institución, como tuvo que hacer su predecesor durante la crisis. No son pocos los políticos en Washington que aprovechan cualquier ocasión para criticar el trabajo del banco central y echarle el lazo. http://economia.elpais.com/economia/2013/10/11/actualidad/1381521719_326508.html

Economía “Yellen va a garantizar una transición muy suave en la Reserva Federal” David López-Salido, colaborador de la nueva presidenta de la Fed, afirma que “tiene cosas en común” con Bernanke Amanda Mars Washington 13 OCT 2013 - 19:05 CET8

El directivo de asuntos monetarios de la Reserva Federal, David López-Salido. / SAMUEL SÁNCHEZ “Qué bien… Yellen… Qué bien…” David López-Salido (Córdoba, 1967) sale exultante del Starbucks más cercano al cuartel general de la Reserva Federal en Washington, una ciudad estos días plagada de tipos con credenciales colgando del cuello que llevan cafés en vasos de papel. El director adjunto de Asuntos Monetarios de la Fed es colaborador estrecho de Janet Yellen, la recién propuesta por la Casa Blanca como sucesora de Ben Bernanke al frente del banco central más importante del mundo, y solo tiene buenas palabras hacia ella. Ha ocurrido durante la asamblea anual del Fondo Monetario Internacional y en plena crisis por el cierre parcial de la Administración estadounidense.

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Dice López-Salido que la vio más emocionada que nunca durante el acto oficial con Obama. Pregunta. ¿Se veía Yellen candidata? Respuesta. No hasta hace poco, el mensaje al comienzo del verano era que la apuesta de la Casa Blanca era Larry Summers, así ella entendía que ya había un candidato… Decía “Chicos, no os preocupéis por mí, que vuelvo a Berkeley...”. “El helicóptero se aparcará cuando sea preciso y habrá que explicarlo bien” P. ¿Por qué le parece tan buena noticia su nombramiento? R. Porque significa continuidad con las políticas que se han puesto en práctica hasta ahora. Eso bueno. Yellen ha conocido cómo hemos llegado hasta aquí y entiende lo que hay que hacer para lograr una estrategia de salida suficientemente suave para que tenga éxito. P. ¿Y Larry Summers no hubiese entendido esto tan bien? R. Sí, es una persona extremadamente cualificada para el trabajo, pero objetivamente está más lejos de lo que ha sido la dinámica interna del comité, ha estado al margen de las decisiones, aunque las haya seguido y las entienda. Una de las cosas extraordinarias de este país es el excepcional nivel de cualificación de los candidatos a dirigir la Reserva Federal. P. ¿Hasta qué punto va a haber continuidad? R. Bernanke y Yellen tienen un par de cosas muy importantes en común: una capacidad analítica enorme para entender la situación y también para generar consensos a la hora tomar decisiones. Eso va a garantizar una transición muy suave y que se vaya a pilotar la política monetaria con mucha similitud con como se ha hecho hasta el momento. Aunque cada uno tenga su impronta. P. ¿Y cuál es la impronta de Yellen, a nivel personal, cómo la ve? R. Es tremendamente cercana, respeta muchísimo y valora las opiniones del equipo y se apoya en él. Eso es tremendamente importante en un banco central, es una persona que está abierta a que se le explique la complejidad de la situación, a escuchar al equipo y tenerlo en cuanto para tomar decisiones al máximo nivel. Muy afable, muy educada y abierta a intercambiar opiniones en el grupo que colaboramos con ella. Es un placer estar ligado a alguien así, siempre está dispuesta entender las opiniones. P. Ayer fijó el empleo como prioridad. ¿Está dispuesta a aplazar la retirada de los estímulos? R. Bueno, se refirió a la importancia del empleo en el mandato de la Fed, de la necesidad de garantizar las expectativas de inflación y, muy importante, mantener y preservar la estabilidad financiera. Hay mucha sensibilidad en el comité en este último aspecto. P. Se esperaba que la retirada comenzara diciembre, ¿puede el cierre de la Administración estadounidense retrasar esta decisión? R. Los bancos centrales no tomamos las decisiones en función de una fecha, sino en función de lo que pasa en la economía y, si esta no evoluciona en función de lo previsto, habrá que decir si se mantienen o no los estímulos. Hay dos grandes variables: vamos a mantener los tipos a corto plazo mientras el paro supere el 6,5% y la inflación no supere

275 el 2,5%, y debe mantenerse la estabilidad financiera. No creo que esto vaya a cambiar con el relevo de Bernanke. P. En esta asamblea del FMI no dejan de oírse llamamientos a que la Fed haga una buena comunicación de sus políticas y destilan cierta crítica. ¿Cambiará eso con Yellen? R. La comunicación es uno de los retos que tienen todos los bancos centrales en los momentos de crisis, porque en las épocas tradicionales las decisiones de tipos de interés son muy sencillas. Para Yellen es muy importante mejorar cada día la estrategia de comunicación, es un aspecto clave de la política monetaria ahora y en el futuro. P. Bernanke ha vivido una época de expansión monetaria sin precedentes. ¿No es una patata caliente que ahora a ella le toque la operación retorno? R. Se enfrenta a un desafío enorme: pilotar la estrategia de salida de la Reserva Federal y garantizar la vuelta al crecimiento sostenido, con creación de empleo y estabilidad de precios. Ella es muy consciente de ello, pero también ha formado parte del comité que ha diseñado todas esas políticas que han garantizado la estabilidad y que ahora ha diseñado la de salida. P. Ha venido para aparcar el helicóptero (en referencia al apodo de Bernanke por su política de estímulos monetarios). R. Sí, suponiendo que haya que aparcarlo. P. ¿No va haber que hacerlo? R. El helicóptero lo aparcará cuando la economía crezca de forma robusta, con estabilidad de precios, en el momento preciso, y habrá que hacerlo con una clara estrategia de comunicación que no genere inestabilidades. No vamos a estar siempre en el helicóptero, habrá que aparcarlo, sí, pero lo haremos explicándolo muy bien. No va a ser fácil, ella es consciente, pero va a poner esa política de comunicación en el centro de su mandato. P. A Bernanke le han apodado Helicóptero Ben, no parece que este vaya a ser el mismo apodo de Yellen. R. No, no creo. http://economia.elpais.com/economia/2013/10/13/actualidad/1381683944_467289.html

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Economía ANÁLISIS Fuerte bajada de la inflación Los datos del IPC de septiembre nos dieron una excelente noticia Ángel Laborda 13 OCT 2013 - 00:00 CET3 Los temas de más interés esta semana han sido la bajada de la inflación en septiembre y los informes del Fondo Monetario Internacional (FMI) sobre perspectivas de crecimiento, estabilidad financiera y supervisión fiscal. A nivel global, el FMI es ahora algo más pesimista que en julio y reduce el crecimiento económico mundial tres décimas este año (hasta el 2,9%) y dos el próximo (hasta el 3,6%). Pero al contrario de lo que ha sido habitual hasta ahora, tal reducción proviene totalmente de las economías emergentes, cuyo fuerte crecimiento se frena. También es una novedad que, entre las economías avanzadas, se revisa a la baja el crecimiento esperado para EE UU y al alza el de la zona euro. Las revisiones son muy pequeñas, de una o dos décimas, pero es un signo de que en Europa las cosas empiezan a ir un poquito mejor.

Fuentes: INE y Funcas (previsiones IPC). Gráficos elaborados por A. Laborda. / C. AYUSO

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El FMI incluye a España entre los participantes de esta mejora europea, si bien, sus previsiones siguen siendo muy modestas y significativamente peores que las del consenso de analistas privados. Para 2014 estima un crecimiento del PIB del 0,2%, frente al 0,7% del consenso. Peor aún, en el escenario a medio plazo, no contempla crecimientos superiores al 1% hasta 2018. Es decir, la recesión ha terminado, pero la recuperación va a ser muy plana. Y ello a pesar de que el Fondo prevé un buen rendimiento de las exportaciones. El problema es la demanda interna, que va a estar lastrada por el escaso margen que van a tener las familias, las empresas y el sector público para aumentar su gasto en un contexto de inevitable reducción de sus elevadas deudas, a lo que hay que añadir unas condiciones financieras cuya normalización aún está lejos de producirse, sobre todo si no se avanza decididamente en la unión bancaria europea. Además, el Fondo estima que no se están llevando a cabo las reformas estructurales necesarias para potenciar el crecimiento a medio y largo plazo o que las realizadas se quedan cortas. Compartimos esta visión del FMI, pero pensamos que, aunque lentamente, la recuperación puede ir ganando algo más de intensidad, siendo previsibles crecimientos del PIB algo superiores al 1% a partir de 2015. Ello y el descenso de la población activa harían descender la tasa de paro a un ritmo algo superior al que prevé el Fondo. La inflación podría terminar el año en el 0,7%, lo que daría una media anual del 1,5% Frente a este sabor agridulce que nos dejaron las previsiones del FMI, el IPC nos dio una excelente noticia. La inflación de los precios de consumo se redujo en 1,2 puntos porcentuales, hasta el 0,3%. Que se iba a reducir notablemente esta tasa estaba cantado, pero la cuantía ha sido superior a la prevista (la previsión de Funcas era del 0,7%). Las causas de la mayor reducción han sido, en primer lugar, que los alimentos frescos (sin elaboración), especialmente las frutas, patatas y hortalizas, han “normalizado” sus precios tras el fuerte repunte que experimentaron durante la primavera, muy probablemente a causa de las malas condiciones meteorológicas [gráfico superior derecho]. En segundo lugar, el precio del barril de petróleo ha sido unos tres dólares inferior al que se había tomado como referencia al hacer las previsiones. En definitiva, han sido los elementos más volátiles e impredecibles del IPC los causantes de esta menor inflación. Los elementos menos volátiles, que conforman la llamada inflación subyacente (alimentos elaborados, bienes industriales no energéticos y servicios), se han comportado en conjunto en línea con lo previsto. Su tasa anual se ha reducido ocho décimas porcentuales, hasta el 0,8%. La razón principal es que en septiembre de 2012 subió el IVA y el coste de los medicamentos para los consumidores, lo que produjo un escalón, o aumento de la inflación, de unas ocho décimas porcentuales. Este año, al no repetir esas subidas, ha desaparecido el escalón y la inflación ha descontado esas ocho décimas. Las sorpresas positivas del IPC de septiembre, al incorporarlas en los modelos de previsión, se traducen en una revisión a la baja notable para los próximos meses. Bajo la hipótesis de que el precio del petróleo se mantenga en torno a los niveles actuales (110 dólares por barril de Brent), la inflación de diciembre de este año podría terminar en el 0,7%, siete décimas menos que en las previsiones anteriores, dando una media anual del 1,5%. Para 2014 la tasa de diciembre se situaría en el 1,2% y la media anual en el 0,9%. Ángel Laborda es director de coyuntura de la Fundación de las Cajas de Ahorros (Funcas).

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Producción industrial Esta semana última conocimos uno de los indicadores coyunturales más significativos, el Índice de Producción Industrial (IPI), con datos de agosto. Una vez corregido de calendario laboral, la tasa interanual reflejó una caída del 2%, superior a la que se produjo en los meses precedentes. Pero, como viene sucediendo con la mayoría de indicadores de demanda y producción, ello no significa que se haya invertido la tendencia de mejora que se observa en los últimos meses. La causa de esta mayor caída interanual es que agosto de 2012 se vio favorecido por el adelanto de compras ante la subida del IVA en septiembre. La tendencia de mejora se mantiene si la comparación la hacemos no con el mismo mes del año anterior sino con los meses precedentes después de corregir la estacionalidad. Así, la media de julio y agosto da un crecimiento anualizado del 0,5% respecto a la media del tercer trimestre, similar al 0,4% que creció ese trimestre respecto al anterior [gráfico inferior derecho]. El grupo de productos que registra una recuperación más intensa es el de bienes de equipo productivo. http://economia.elpais.com/economia/2013/10/11/actualidad/1381508566_052370.html

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ft.com comment Columnists October 13, 2013 8:04 pm Blame Europe’s policy makers for lost growth

By Wolfgang Münchau Had the eurozone fixed its banks, growth would be on its way back to its pre-crisis trend

©Reuters The most frequent sentiment among readers these days is this: surely the years before 2008 were a bubble? In those giddy days, gross domestic product and other economic indicators were overshooting. So why even try to return to pre-crisis growth trends? The times of debt-driven growth are over. The more modest projected growth rates are the new normal. Get used to it and move on. When I read such comments I am always reminded of Andrew Mellon. During the early phase of the Depression, the US Treasury secretary recommended liquidating the entire economy. Fortunately, wiser heads prevailed and he was prevented from doing so. Unfortunately, these days the Europeans allow their policy makers to do just that. More ON THIS STORY// Wolfgang Schäuble Europe is being fixed/ Editorial It is time to shore up Europe’s banks/ Simon Kuper What went wrong with Latvia?/ Crashes, Bangs & Wallops/ Miliband moves debate on from austerity ON THIS TOPIC// Bank exposure to EU states’ bonds on rise/ Eurozone fails to cheer recovery/ Eurozone debt boost for US banks/ Tony Barber Eurozone needs Herculean labours WOLFGANG MUNCHAU// Italy’s chance to realign/ Eurozone is not recovering/ Economic consequences of Merkel’s win/ Merkel’s almost total political triumph Let me acknowledge straight away that there is some truth to the bubble argument for a few individual eurozone countries – but not if you look at the eurozone as a whole. Take Latvia – a country that is simultaneously very small, very afraid of a large neighbour and very keen to be part of core Europe. After the end of communism in 1991, its economy shrank by more than half. The average post-shock growth rate from 1994-99 was about 4 per cent.

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After this period, growth began to pick up in 2000 in anticipation of EU membership. The average growth rate in the period from 2000 to 2007 was 8.5 per cent. Then crisis struck. In the aftermath the economy shrank 25 per cent from peak to trough – but it has since rebounded. Olivier Blanchard, chief economist of the International Monetary Fund, and two co- authors have recently tried to disentangle the Latvian boom-and-bust experience, and found that the boom was healthy until about 2006, and then became toxic because of massive foreign capital inflows. One of their main conclusions is that the fall in economic output was a result mostly of the credit crunch after the bubble burst, not austerity. But they rightly urge extreme caution in drawing any inferences beyond Latvia itself. What about Spain? The boom and bust period there is not nearly as extreme as in Latvia. On my calculations, based on Eurostat data, the average real growth rate in the pre-euro 1990s was 2.6 per cent. It rose to 3.7 per cent in the period from 1999 until 2007. This is clearly linked to the huge capital inflows that came with the euro and fuelled a crazy property boom. At one point, property-related economic sectors made up almost 20 per cent of GDP. So it is reasonable to assume that, as in Latvia, a part of Spain’s pre-crisis growth displayed unhealthy, bubbly symptoms. If you look at a trendline of pre-crisis GDP, it is probably fair to conclude that Spain will not fully return to those levels and GDP growth rates – and should not try to. But there is no way you could make that argument for the eurozone as a whole – and this really is the level that you should be looking at because countries are no longer relevant macroeconomic units if they lack their own monetary and fiscal policies. The eurozone did not have a pre-crisis bubble because of Germany, which had the opposite of a bubble, with real house prices contracting since the early 1990s until the end of the last decade. Average eurozone GDP during the period 1999-2007 was 2.3 per cent – similar to what it was the decade before. Once you look at the eurozone instead of individual countries, the fog lifts. Pre-crisis trends were fairly stable. On my calculations there is now a 12 per cent gap in real GDP between where we are today and where we would have been on the pre-crisis trend. This is staggering. There is no way that you can attribute this gap to a bubble – since at the eurozone level there was none. In the long run, economies tend to return to the trendline, barring some horrible economic policy mistakes. Japan has not. Even if you take its boom years as unsustainable, and flatten the trendlines a little, you still do not even come close. The experience of Japan since 1990 has been that policy mistakes can get you permanently off track. This is what has been happening in Europe. If the eurozone had fixed the banking system in 2008, as the US did, and if it had not front-loaded fiscal adjustment, there would still have been a deep recession. But by now it would be on its way to a return to its pre-crisis trend. Instead, the eurozone pursued austerity, reducing its fiscal deficit by 1.5 per cent in 2012 and by a further 0.75 per cent this year. The combination of sustained austerity and a credit crunch did enormous structural damage from which the eurozone will never fully recover – at least not in the sense of

281 catching up with the pre-crisis trend. And the credit crunch, which is still with us, will not end until the eurozone fixes its banking sector. Even if you are an optimist, you will probably acknowledge that this will not happen until 2015. I was always reluctant to play the blame game when the global financial crisis broke out five years ago. But policy makers alone are to blame for this permanent and unnecessary loss of economic output and employment. [email protected] http://www.ft.com/intl/cms/s/0/d8f25c56-31a2-11e3-a16d- 00144feab7de.html?siteedition=uk#axzz2hfvXPq1V

ft.com Comment Analysis October 13, 2013 4:51 pm Ireland: Back on the market By Jamie Smyth Although the country is about to leave the EU and IMF bailout, concerns about its recovery persist Ready to reopen: Ireland’s benchmark bonds have decoupled from Portugal’s and are more competitive than Spain’s and Italy’s At the height of Ireland’s building boom Dublin was known as the city of cranes. Their brightly coloured steel masts towered over building sites, testament to the dominance of a construction sector that by 2007 accounted for almost a quarter of the value of the domestic economy. Today the forest of cranes has disappeared from the skyline, victim of a financial crisis that forced the country into an international bailout. Employment in construction has slumped by almost two-thirds and the industry now accounts for only 6 per cent of gross national product. A better state of repair

Budget balance and government bond yields

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More ON THIS STORY// Ireland on course to exit bailout/ Ireland emerges from recession/ Dublin’s property prices pick up/ Irish house prices rise/ Rural Ireland feels the pinch as Dublin bounces back to life ON THIS TOPIC// Austerity hits Spain’s cultural ambitions/ Undercover Economist Bitter medicine is no cure/ Peripheral Europe SMEs ‘starved’ of cash/ Eurozone unemployment remains high IN ANALYSIS// Science Beyond the God particle/ Brazil Given the brush-off/ Analysis The new gas guzzler/ Analysis Eyes in the sky

©Corbis But recently there have been signs of life. Construction output in the second quarter rose 1.7 per cent over the quarter and 11.7 per cent in the year, the highest rate of expansion since 2006. Employment in the sector grew by almost 6,500, which is feeding into a wider economic upturn in Ireland. Unemployment has fallen from 15.1 per cent last year to 13.3 per cent. Property prices are rising and consumer confidence is at a six-year high. Sisk, Ireland’s biggest construction company, is one of the survivors in a battered sector. But Liam Nagle, its chief executive, strikes a cautious tone on the country’s prospects. “For us the decline has stopped and there is a little bit of an uptick. But I am not talking about green shoots yet. A lot will depend on the budget.” Dublin launches its seventh austerity budget in six years on Tuesday and the stakes for the country and for the eurozone could not be higher. In December, Ireland is poised to become the first eurozone country to leave a bailout and investors are watching closely. Since Ireland’s property bubble burst in 2007, catapulting its banks towards insolvency, the Irish have endured €28bn in tax rises and spending cuts under a bailout programme overseen by the EU and International Monetary Fund. Tomorrow, the coalition will impose a further €2.5bn in austerity measures. Dublin’s ability to maintain social cohesion and return its economy to modest growth has been lauded by its international lenders as an example of how implementing austerity and structural reforms can return a crisis-stricken economy to health. A botched return to international bond markets by Ireland would inflame the bitter row between proponents of austerity and backers of stimulus policies. It would have damaging repercussions for a still fragile eurozone, which faces challenges as Portugal, Greece, Spain and Italy seek to steady their economies.

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However, a successful bailout exit could help stabilise the eurozone sovereign debt crisis. “Berlin and Brussels desperately need to show that the tough economic medicine they have been prescribing during the eurozone sovereign debt crisis works and Ireland is their best chance of a success story,” says Hugo Brady, an analyst at the Centre for European Reform think-tank. “The key question is whether Ireland can make a sustained return to international bond markets when the EU-IMF money runs out later this year.” At the shiny, glass-fronted offices of the National Treasury Management Agency, Ireland’s state debt agency, preparations for re-entering the bond markets began shortly after the country was shut out of them. Six months after Ireland was forced to accept the €67.5bn bailout from the EU-IMF in November 2010, John Corrigan, NTMA chief executive, restarted investor roadshows in Asia, the US and Europe. “We didn’t do any deals on these early visits but it was important to maintain personal contacts with investors and explain how Ireland was dealing with its problems,” says Mr Corrigan. By mid-2012 the NTMA began issuing three-month Treasury bills, short-term debt that enabled Dublin to re-engage with investors. In January this year the agency raised €2.5bn through a syndicated tap of an existing five-year security and a few months later it raised a further €5bn through the sale of a benchmark 10-year bond. US investors led the charge back into Irish bonds, betting that the country would deliver on its pledge to honour its debts and restore its economy to health. At one point Franklin Templeton, a California-based asset manager, controlled almost a 10th of Ireland’s government bond market. More risk-averse continental European and Nordic funds have since invested and by March this year some 57 per cent of Irish medium and long- term securities were owned by non-resident investors. Berlin and Brussels must show their tough medicine works and Ireland is the best hope of a success story Over recent months Ireland’s benchmark 10-year bonds have decoupled from fellow bailout struggler Portugal and are trading at more competitive levels than either Italy or Spain. Ahead of its bailout exit the NTMA has raised a €20bn funding cushion, which is enough to cover all debt redemption payments and government spending requirements in 2014. “Ireland has been a success story,” says Chris Wightman, senior portfolio manager at Wells Fargo Asset Management. “But the concern is that the yields moved very low, very fast. The fundamentals are still not great and the bond market is limited. Despite this, Ireland is trading at extremely tight spreads compared to some of their peers,” he says. Standard & Poor’s and Fitch, the credit rating agencies, have both upgraded Ireland to investment grade. But Moody’s still maintains a “junk” status rating on Irish sovereign bonds. “This excludes a lot of Asian and Middle Eastern investors from buying Irish debt,” says Mr Corrigan. “We are disappointed with Moody’s. They missed Ireland on the way down and now they are being a laggard on the way up,” he says. Moody’s cites Ireland’s high debt, fragile banking system and its susceptibility to shocks elsewhere in the eurozone for its rating.

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“Positive growth is indispensable for the debt dynamics to turn in a favourable direction,” it said last month when it upgraded its Irish outlook to stable from negative but retained its “junk” rating. Ireland’s huge government debt, which is forecast to peak at about 123 per cent of gross domestic product this year, leaves the country vulnerable to external and internal shocks. The small, open nature of Ireland’s economy, where exports are worth more than GDP, means the country relies on the performance of its main trading partners – the UK, continental Europe and the US – to expand its economy. Ireland slumped back into recession in the second half of last year, largely due to the poor performance of the eurozone economy and the UK. Dublin forecasts economic growth this year will be 0.2 per cent, significantly below the level needed to enable it to begin reducing its debt burden. But there are encouraging signs that Ireland’s recovery is accelerating. Dublin is forecasting that GDP will expand by 1.8 per cent next year and foreign investors are flooding back into the property market for the first time since the crash in search of bargains. The Marker, Ireland’s newest five- star hotel, opened this summer in the heart of Dublin’s “Silicon Docks” neighbourhood, a base for US technology companies such as Google, TripAdvisor and LinkedIn. Facebook and Yahoo are both looking for office space in the area, underlining the importance of foreign direct investment to the Irish recovery. “There is a sense that Ireland is a really good place to put capital and there is still a bit of recovery left to come,” says Kevin McGillicuddy, a partner in Brehon Capital, a Dublin private equity firm specialising in real estate. Brehon Capital teamed up with Midwest Holdings, a US real estate investor, to buy the half-built Marker hotel out of examinership and complete construction. Earlier this year the same investors bought the Ritz Carlton hotel in Wicklow, which they have rebranded. Several other big US private equity investors, such as Kennedy Wilson, Lone Star and BlackRock, have bought into Ireland over the past year. Individuals including John Malone, the US media mogul, and Yelena Baturina, Russia’s richest woman, have also bought hotels. Ireland’s ability to meet its bailout targets, maintain political stability, return to bond markets and negotiate extensions of maturities on its debt with the EU authorities – which will ease funding requirements in the near term – have impressed investors. “The current market view is that Ireland can make it,” says Philip Lane, professor of economics at Trinity College Dublin. “But the vulnerability to contagion is the big issue for Ireland with Greece and Portugal still facing difficulties. Irish bond yields have also indirectly benefited from quantitative easing by major central banks and so are vulnerable to any tapering of these programmes.” In the summer, expectations that central banks in the US, Japan and elsewhere would tighten monetary policy caused yields on Ireland’s benchmark 10-year bonds to move above 4 per cent from a low of 3.5 per cent. Yields have fallen back since then but are likely to move higher again when the US Federal Reserve raises rates.

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Ireland’s banks, which have already gobbled up €64bn in taxpayer funds since the crisis began, also remain a source of concern. One in five home loans is in arrears of more than 90 days and half of banks’ loans to small and medium-sized businesses are non- performing. “The banks are a weakness because they may need extra capital following stress tests next year and it remains unclear where that money would come from,” says Megan Greene, an economist at Maverick Intelligence. “So far the EU is suggesting member states remain on the hook in the first instance, rather than its bailout fund, which would be tough for Ireland.” The IMF wants Dublin to seek a precautionary line of credit – a form of backstop – from its international lenders when it leaves the programme as a contingency plan against unforeseen events. This may make Dublin eligible for the European Central Bank’s bond-buying programme, which has been instrumental in calming the eurozone crisis, even though it has never been deployed. The fund is also pressing European authorities to allow the European Stability Mechanism, Europe’s new bailout fund, to provide a backstop in case Ireland’s banks fail next year’s stress tests. It has also urged the EU to intervene to lower bank funding costs in Ireland, which are causing a squeeze on credit that is slowing recovery. But two months before Ireland’s bailout exit, it remains unclear whether Dublin will apply for a backstop or whether EU authorities are willing to grant one. “A backstop would provide investors with additional confidence,” says Ms Greene. “But the big question is whether Ireland can maintain 2-3 per cent growth for several years once it exits the bailout to enable it to tackle its sky high debt. Investors tend to think in short-term time horizons and are willing to bet Dublin can. But I think debt restructuring is likely a few years down the line.” Budget: A package that will defy the EU and IMF When Michael Noonan, Ireland’s finance minister, delivers the country’s seventh austerity budget in six years tomorrow, he will be defying the wishes of the EU and International Monetary Fund for the first time since Dublin was forced into a bailout. Senior EU and IMF officials have urged Dublin to implement the full €3.1bn tax rises and spending cuts promised in its programme. Ireland’s Central Bank and its new Fiscal Advisory Council, a watchdog set up in the wake of the financial crash, have also told Dublin to stick with its programme to show it still has the “political capacity to make the necessary adjustments”. But under pressure from coalition partners the Labour party, Mr Noonan will announce Dublin will ease back on austerity next year by implementing only €2.5bn in tax rises and spending cuts. He says it will be enough for Dublin to meet its 2014 budget deficit target of 5.1 per cent of gross domestic product. But the decision highlights the difficult path ahead for the Fine Gael/Labour coalition in implementing reforms after its bailout. “It is a little unsettling to see austerity fatigue setting in when there is at least one or two difficult budgets ahead for the coalition and several difficult political and economic decisions to be made,” says Conall MacCoille, chief economist at Davy Stockbrokers. But when the quarterly EU-IMF review missions end next month, difficult issues remain for a coalition that has used up a lot of political capital. The mortgage crisis

286 probably cannot be solved without home repossessions, a politically toxic issue, and public sector pensions need reform. “There haven’t been many structural reforms during the bailout and even the changes that have been made – a new fiscal council and a strengthened central bank – have been ignored in the budget debate,” says Karl Whelan, economics professor at University College Dublin. “I don’t see any radical change in policy marking.” One of the criticisms of the coalition is that its record on political reform – an area where it has had freedom to propose radical changes – is poor. “This country has pretty much ruined itself three times since independence. In the 1950s with a trade war with Britain, again in the 1980s, and most recently with the property bubble,” says Mr Whelan. “That says something about our politicians and civil servants and their ability to exercise economic policy.” For those in government this criticism is unfair given the scale of the difficulties the coalition has faced. “Ireland’s fortunes have changed dramatically since this government was formed,” says Eamon Gilmore, Ireland’s deputy prime minister. “When we first went to Brussels we were one of the Piigs [Portugal, Italy, Ireland, Greece and Spain] and you couldn’t but experience the cold shoulders that went with that. We have restored our international credibility.” Additional reporting by Robin Wigglesworth http://www.ft.com/intl/cms/s/0/dc565516-3259-11e3-91d2- 00144feab7de.html#axzz2hgPzDFTz

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ft.com Companies Financials Banks

October 13, 2013 10:01 pm Lloyds warns of Help to Buy bubble By Patrick Jenkins and Sharlene Goff

©Bloomberg One of Britain’s big four banks has warned that the government’s Help to Buy mortgage scheme risks creating a dangerous bubble in property prices unless steps are taken to free up planning restrictions and boost the supply of new housing. António Horta-Osório, chief executive of Lloyds Banking Group and one of the most enthusiastic supporters of the government’s initiative to make home ownership more affordable, said the policy could only succeed if accompanied by broader reform. More ON THIS STORY// Interview Job half done for Lloyds’ chief/ UK banks set to face pension pressure/ Renting is cheaper than Help to Buy/ In depth UK house prices/ PM tries to soothe housing bubble fears ON THIS TOPIC// Baby boomers’ wealth gap grows/ The great housing divide/ IMF says Help to Buy risks inflating prices/ First-time buyer hopes to benefit from scheme IN BANKS// Employers face changed pension landscape/ JPMorgan’s legal burden weighs on US banks/ Wells Fargo record profit belies mortgage slump/ JPMorgan falls to first loss under Dimon “It is important that planning permits, building authorisations and social housing projects are [liberalised] so that the increase in [mortgage] transactions does not lead to a substantial increase in house prices.” The parameters of the government-backed initiative should also be subject to “tweaking”, in particular to avoid overheating prices in the southeast of the country, Mr Horta-Osório told the Financial Times in an interview. “I think the scheme should be focused outside London and the southeast,” he said. “[In the rest of the country] you have nothing close to a housing bubble.” Help to Buy has been widely criticised, especially the second phase of the scheme launched this month, which introduces a government guarantee on higher-risk mortgages that allow borrowers to buy a house with a deposit of only 5 per cent. The International Monetary Fund expressed reservations last week about its potentially malign effect on the property market. Ministers have suggested that planning laws be relaxed to accelerate the construction of new housing but there has been no firm commitment to a wholesale change of the rules.

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A number of senior bankers are also voicing concern about the reputational risk to banks should they ever claim on the government guarantee. “It would be like another banking bailout,” said one. Nonetheless, all the major banks have now signed up to the scheme and the first products were launched last week by Royal Bank of Scotland and Lloyds’ Halifax brand. Mr Horta-Osório said the initiative was an important way to correct the “anomaly” of banks lacking the appetite or capital to support high loan-to-value mortgages without a government guarantee. But over the longer term, he said policy makers might need to make modifications, such as raising the cost of the government guarantee or shrinking the £600,000 upper price limit of property purchases that are eligible for the scheme. Lloyds bosses have privately discussed the merit of a £300,000 limit, according to people familiar with the situation. Mr Horta-Osório said he expected the UK economy to “steadily improve”, but cautioned that it would be a “long and difficult recovery”. Lloyds, part-nationalised in the wake of the 2008 financial crisis, last month saw the UK government sell down its 39 per cent stake in the bank to 33 per cent. Investors expect this to be steadily reduced to zero, possibly by the end of next year. http://www.ft.com/intl/cms/s/0/c4fcd202-327a-11e3-91d2- 00144feab7de.html?ftcamp=crm/email/20131013/nbe/InTodaysFT/product&siteedition =intl#axzz2hgPzDFTz

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ft.com comment Columnists October 13, 2013 8:20 pm The battle over the US budget is the wrong fight

By Lawrence Summers A small rise in economic growth would entirely eliminate the projected long-term budget gap This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see today’s crisis as the turning point when American democracy was to shown to be dysfunctional – an example to be avoided rather than emulated. The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the main challenges and opportunities facing the country. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, and to the proposals to change congressional staff healthcare packages and cut a medical device tax that represents only about 0.015 per cent of gross domestic product. More ON THIS STORY// Senate takes over US budget negotiations/ US budget talks follow familiar pattern/ US budget talks break down/ Central bankers call for US to agree budget deal/ Obama sets stage for frantic budget talks ON THIS TOPIC// Global Market Overview US budget impasse weighs on stocks/ Edward Luce America’s sclerosis/ Global Market Overview Hopes of US debt deal support stocks/ Editorial Avoiding default is non-negotiable aim LAWRENCE SUMMERS// Help business by taxing profits abroad/ The buck does not stop with Reinhart and Rogoff/ America’s problem is not political gridlock/ Austerity, by Mark Blyth More fundamental is this: budget deficits are now a second-order problem relative to more pressing issues facing the US economy. Projections that there is a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder economically and more plausible politically than the long-term budget deals with which much of the policy community is obsessed. The latest Congressional Budget Office projection is that the federal deficit will fall to 2 per cent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 per cent. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the US economy. It would be offset by an increase in revenues or a decrease in spending of 0.8 per cent of GDP for the next 25 years and 1.7 per cent of GDP for the next 75 years. These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors 290 due to policy changes, the expected error in projections out only five years is 3.5 per cent of GDP. Put another way, given the magnitude of forecast uncertainties there is a chance of close to 40 per cent that with no new policy actions the ratio of debt-to-GDP will decline over 25 or 75 years. Of course, debt problems could also be much worse than is now forecast. But in most areas policy makers avoid taking strong actions unless there is statistically compelling evidence to support them. Few would favour action to curb greenhouse gas emissions without evidence establishing that substantial climate change is overwhelmingly likely. Yet it is conventional wisdom that urgent action must be taken to cut the deficit, even as prevailing short-run deficit forecasts suggest no problems and long-run forecasts are within margins of error. To be sure, there are steps that matter profoundly for the long run that should be priorities today. Data from the CBO imply that an increase of just 0.2 per cent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase US economic strength relative to other nations, help state and local governments meet their obligations and prompt investment in research and development. Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, there is the further aspect that growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment but we also need to reduce regulatory barriers that hold back private infrastructure. We need more investment in education but also increases in accountability for those who provide it. We need more investment in the basic science behind renewable energy technologies, but in the medium term we need to take advantage of the remarkable natural gas resources that have recently become available to the US. We need to assure that government has the tools to work effectively in the information age but also to assure that public policy promotes entrepreneurship. If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder government finances and a restoration of the power of the American example. At a time when the majority of the US thinks that it is moving in the wrong direction, and family incomes have been stagnant, a reduction in political fighting is not enough – we have to start focusing on the issues that are actually most important. The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary http://www.ft.com/intl/cms/s/2/71d7439c-31a2-11e3-817c-00144feab7de.html

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ABOUT FTfm FTfm is the voice of the global fund management industry, providing must-have news and sharp analysis to the world’s top asset managers and professional investors. ft.com Markets FTfm Regulation & Governance October 13, 2013 5:36 am Hedge funds shun new European framework By Madison Marriage

©AFP Hedge funds are shunning a new European framework aimed at improving protection for investors in alternative funds, due to the associated cost and compliance hurdles. Just 11 fund managers have signed up to the regime in the UK, which accounts for 74 per cent of European hedge fund assets under management, since it went live in July. A UK-based investment consultant, who did not want to be named, said she would have expected “thousands” of alternative fund managers to have registered by now. More// ON THIS STORY/ Var calculation a ‘time bomb’/ Report questions auditors’ ethics/ Lithuania moves to kill off bonus cap/ Comment Searching for fund managers’ dark past/ John Plender Where have all the bond vigilantes gone? ON THIS TOPIC// Hedge funds shun marketing route/ Hedge funds profit from Greek opportunity/ Whitney to launch hedge fund/ Smart Money Record hedge fund inflows come at a price IN REGULATION & GOVERNANCE// Asset managers fear more oversight from US Treasury/ Crackdown on UK fund market raises alarm/ ‘A flagrant violation of good governance’/ US fund market outstrips Europe in the pursuit of profits Luxembourg and Ireland, the two largest European hubs for alternative fund managers beyond the UK, each only have three fund companies registered under the framework, which was brought in as part of the Alternative Investment Fund Managers Directive. If interest in the framework remains muted, it could prove embarrassing for European regulators. They hoped it could one day rival the successful mutual fund regime, known as Ucits, which accounts for €6.4tn of assets under management.

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Lucy Frew, a UK-based lawyer at Gide Loyrette Nouel, a law firm, said anecdotal evidence suggested “not as many [fund managers have applied] as were perhaps anticipated by the regulator”. US fund managers are particularly reticent about signing up to the directive because of the “substantial” compliance costs it creates, according to Howard Groedel, chairman of the securities regulatory compliance group at Ulmer & Berne, a US law firm. He said: “It is a very competitive, challenging market right now, and fund managers are getting squeezed. If they can avoid added expense, they will.” By contrast, the UK private placement regime, which hedge funds will be able to use until at least 2018, is less arduous in terms of infrastructure and cost. Ian Meade, a partner at Akin Gump, the law firm, said that managers will continue to distribute via private placement as they are “sceptical about appetite for the [AIFM] structure in continental Europe”. “The headache and cost implications mean you have to be very confident in your ability to access funds in Europe,” he said. Michael Shaoul, chief executive of Marketfield, the US-based liquid alternative fund company, one of the first US groups to have received AIFM permission after a six- month application process, warned the experience was difficult. He said: “[Getting AIFM registration] is like major dental reconstruction – it’s not going to be pleasant. I would advise anyone going to take this step to budget considerable resources.” Unexpected hurdles included having to dig up old university certificates and substantiating his CV, according to Mr Shaoul, although he believes he may have been subject to higher levels of scrutiny as an early AIFM applicant. Deutsche Bank research published last week showed that 39 per cent of US and European hedge fund managers are uncertain whether the directive will bring additional investment from institutional investors. Ms Frew said many fund managers viewed the directive as a “mathematical exercise” in terms of working out the amount of assets they think they can get from European investors versus the cost of compliance. She said: “I think the most likely outcome for a Cayman Islands fund is broadly going to be the pre-AIFM status quo – private placement.” http://www.ft.com/intl/cms/s/0/dbd265d6-3271-11e3-91d2- 00144feab7de.html#axzz2hgPzDFTz Clash ahead over backstopping weak banks New options include backing national resolution funds with guarantees, a credit line or direct loans from the European Stability Mechanism

Brussels warns on bank bailout loophole Brussels has told members they will not be able to circumvent competition rules and shield all bank creditors from losses

Bank exposure to EU states’ bonds on rise Despite official pledges by eurozone authorities to break ‘sovereign-bank nexus’, government bonds accounting for more of lenders’ capital

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ft.com Markets FTfm Investment Strategy October 13, 2013 5:36 am Var calculation a ‘time bomb’ By Steve Johnson The widespread use of the “value at risk” (Var) methodology to measure mutual funds’ exposure to risk is a “time bomb” that could cause a severe market crash, according to the investment director of a European asset management house. Var, which attempts to measure the probability of a portfolio suffering a significant loss, is one of the two measures Ucits funds must use to gauge their risk, alongside the “commitment approach”, which measures leverage. More ON THIS STORY// Hedge funds shun new European framework/ Report questions auditors’ ethics/ Lithuania moves to kill off bonus cap/ Comment Searching for fund managers’ dark past/ John Plender Where have all the bond vigilantes gone? IN INVESTMENT STRATEGY// Capital gobbles labour’s share, but victory is empty/ ‘Pincer attack’ crushes European fund profits/ Flexibility is the Optimal solution for M&G fund/ JPMorgan plans to axe 100 of 650 funds Jeremy Monk, Investment Director at Prague-based Akro Investicni Spolecnost, feared the widespread use of Var could lead to a repeat of the 1987 stock market crash, when the S&P 500 fell by 33 per cent. The severity of that crash was partly blamed on the now widely discredited concept of portfolio insurance. In the wake of an initial 10 per cent stock market slide, this led fund managers to attempt to switch en masse out of “risky” equities and into “safe” assets, prompting a vicious cycle of selling. Mr Monk argued that Var worked in a similar way, in that if volatility rises as markets fall, fund managers would be forced to sell equities, exacerbating the initial sell-off. “Both portfolio insurance and Var limits are reassuringly dressed up as somehow controlling risk [but] significantly, both ignore the practical difficulties in dealing during times of market stress,” said Mr Monk, a former portfolio manager at the Abu Dhabi Investment Authority and M&G. “Both theories force selling when markets drop. To all practical purposes, the Var limit is portfolio insurance by a different name.” Under the current Ucits rules, Mr Monk said all three of Akro’s equity funds would have been forced sellers of equities at the bottom of the 2008-09 bear market, a position he believed would have been commonplace across the industry. As a result, he believed that sell-off would have been far more severe, arguably tipping the world into a “1930s- style depression”. JPMorgan, the architect of Var in the 1990s, recognised the dangers earlier this year, stating in an analyst report that: “Investors who target a stable value at risk ... tend to take larger positions as volatility collapses.” http://www.ft.com/intl/cms/s/0/d33f47a6- 31c0-11e3-a16d-00144feab7de.html#axzz2hgPzDFTz

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ft.com Markets FTfm Opinion THE LAST WORD October 13, 2013 5:36 am Where have all the bond vigilantes gone? By John Plender Where are the bond vigilantes when we need them? The shutdown of the US government and the cavalier attitude of politicians towards the debt ceiling is a classic example of the kind of behaviour that supposedly prompts bond markets into disciplinary action. Yet if investors are worried, they have done precious little to put the fear of God into the kindergarten on Capitol Hill. It could, of course, be argued that there is no need for vigilantism when the probable result of an unresolved stand-off between the White House and Congress would be a tougher fiscal policy. Yet a stand-off that resulted in sovereign default on what hitherto have been seen as the world’s safest assets could be horrendously damaging to the value of the bondholders’ investment. It is not in their interest to allow politicians to destroy the credit of the US government. Why, then, have they not been more vigorous in protecting their interests? More ON THIS STORY// Hedge funds shun new European framework/ Var calculation a ‘time bomb’/ Report questions auditors’ ethics/ Lithuania moves to kill off bonus cap/ Comment Searching for fund managers’ dark past THE LAST WORD// Will Kate Moss put Topshop back in fashion?/ Europe circles the currency danger zone/ The NBA tries to slam dunk the world/ Harsh statistics on manic regulation The easiest way to answer that is to look at history. The heyday of bond vigilantes was the late 1970s and early 1980s when inflation was running at exceptionally high levels and governments’ funding requirements were huge. It was a buyers’ market. And while governments and central banks could have sought to offset a buyers’ strike through central bank bond purchases, they were reluctant to do so. The experience of inflation in the 1970s was too searing, both distributionally and in terms of the dismal impact on the real economy. In the UK, the rate of growth in retail prices peaked at a phenomenal 27 per cent. This was in the period when Denis Healey was chancellor of the exchequer, which operated in a state of permanent fiscal crisis that called for no fewer than 15 budgets and mini- budgets in the space of six years. In a heavily unionised labour market, wage claims soared as workers desperately tried to prevent a decline in purchasing power. The Labour government of the day was ultimately forced to outsource fiscal policy to the International Monetary Fund. In its dog days under the leadership of James Callaghan in 1978, the winter of discontent saw rubbish pile up in the streets and the dead go unburied. Few wanted the chaos of this inflationary period to be repeated. The biggest victims were bondholders. From July 1945 to May 1979, when Margaret Thatcher ousted Mr Callaghan, there was a sevenfold rise in inflation. This produced a capital loss in real terms on undated fixed interest War Loan of 95 per cent, according to John Littlewood, the stock market historian. The yield on War Loan topped 17 per cent at its peak.

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Vigilantism, then, was the bondholders’ revenge. Their chief ally was Paul Volcker, chairman of the US Federal Reserve from 1979-87, who unleashed global disinflation and initiated a bond bull market that lasted for more than three decades. Today the fear of inflation persists in the investment community because fund managers are de facto spokesmen for the creditor interest. They always perceive threats to sound money and they have history on their side. Yet deflation is currently the more pressing problem, with global savings close to the peak reached before the financial crisis and economic growth hostage to a huge overhang of debt. Central banks are doing their best to crank up the money supply, without much impact on the broader monetary aggregates. Their asset purchases have led to big increases in commercial banks’ deposits at the central banks without doing much to return economies to their underlying growth potential. Against that background, any outbreak of vigilantism would probably be met by offsetting central bank purchases of bonds. In the case of US Treasuries, the natural vigilantes would be foreign central banks. Yet a wave of selling by the managers of official reserves would simply cause a decline in the dollar if the Fed mopped up the bonds they dumped. Their countries would then become victims of a competitive devaluation that they themselves had induced. The debt ceiling apart, the real problem for bond holders now is simply that central bank unconventional measures have pushed prices to levels that guarantee low future returns. And because this has precipitated a chase for yield across other asset classes, it has become difficult for contrarian investors to make money. James Montier, a member of the asset allocation team at GMO, the fund manager, calls this a “foie gras” bubble: central bankers have force-fed investors with higher-risk assets at low prices, just as French farmers force feed geese to enlarge their livers. The message for investors in that parallel is not nice. So what is a fund manager to do? Going for the least overvalued assets is the natural, if gloomy, option for fundamental investors. Absolute return strategies sidestep the problem, as does using currency as an asset category. If one goes up, another has to go down. But a world in which value investing is wrongfooted is not a comfortable place to be. It is the 1970s in reverse. [email protected] http://www.ft.com/intl/cms/s/0/fda5a744-30ec-11e3-b991- 00144feab7de.html#axzz2hgPzDFTz

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Improving economic policy Mind the gap! And the way structural budget balances are calculated* - an alternative calculation of the output gap by Zsolt Darvas on 12th October 2013 The so-called structural balance of the general government aims to measure the ‘underlying’ position of the budget by excluding the impact of the economic cycle and one-off measures, like bank recapitalisation costs. It has a crucial role in designing fiscal consolidation strategies in the EU (see the Annex at the end). Late September, a report in WSJ suggested that the methodology for calculating the structural balance may be revised to make it more reasonable, which would have also eased austerity in hard-hit European countries. The proposal has been rejected a few days later, but the debate on the methodology and its impact on actual fiscal policy will certainly come back soon. Let me try to explain and illustrate the main issues in a simple way and formulate a more general critique of the calculation of the output gap (the difference between actual and potential output), which is the main input to structural balance calculations. Also, I propose an alternative. The structural balance is an intuitive concept. It is the budget balance cleaned from temporary effects: the impact of the economic cycle and one-off budgetary measures. For example, in a deep recession tax revenues are smaller and unemployment benefit expenditures are larger, but once the economy returns to the potential level of output, both tax revenues and unemployment benefit expenditures return to normal. Also, in a given year, one-off budgetary measures, such as bail-out of banks, can make the actual deficit large, or a temporary tax can make the budget look better. However simple is the intuition, the structural balance is not observable and its estimation implicates difficulties, uncertainties and controversies, as it requires the quantification of: (a) potential output, i.e. the output that could be produced if all resources were employed at their long-term sustainable levels. The gap between actual and potential is the output gap; (b) the impact of the output gap on the budget balance; and (c) one-off budgetary measures and their impact on the budget balance. Of these, measuring potential output is the most controversial, though the other two tasks are not easy either. The potential output methodology used in the EU is based on a production function, which uses three main inputs: capital, labour and total factor productivity. For calculating potential output, the following main assumptions are made: 1. Capital: the actual capital stock (typically measured as accumulated investments less amortisation) is used;

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2. Labour: after identifying labour supply, a measure of ‘equilibrium’ unemployment rate, the so-called NAWRU (non-accelerating wage rate of unemployment), is used to estimate the sustainable level of employment. NAWRU is estimated with a statistical technique; 3. Total factor productivity: actual data on productivity is not directly observable; instead, it is measured as a residual after taking into account the contributions of capital and labour to actual output, which typically leads to a volatile time-series for productivity. For calculating potential output, it is assumed that productivity changes along a smooth path and a statistical method (initially the Hodrick- Prescott filter, while since 2010 an unobserved components model) is used to adjust actual data to this smoothness concept. All three assumptions are problematic. Capital Before the crisis, significant physical capacities were built in sectors that proved to be unsustainable, like the construction sector. Moving physical capital from one sector to another is not always easy, e.g. a crane cannot be used to make smartphones. Therefore, some of the capacities built before the crisis should not be taken into account when estimating production factors at their long-term sustainable levels. The good news is that Output Gap Working Group of the EU is working on the revision of the methodology to better consider the sustainable component of capital (see page 7 and section 4 of the methodological paper referred above). Labour The issue that receives the most attention nowadays is the methodology for estimating NAWRU. In the case of Spain, the forecast NAWRU for 2013 is as high as 23.7%, suggesting that actual employment is close to potential (because the unemployment rate forecast is 27% - see Figure 1). The forecasts for 2014 suggest that the two indicators will be even closer to each other: the NAWRU forecast is 25.9%, while the unemployment rate forecast is 26.4%. For Ireland the actual unemployment rate is expected to fall below the NAWRU estimate in 2014, suggesting that there will be ‘excess employment’. In other words, almost all presently unemployed people are regarded useless from the perspective of the production potential of the economy. This is strange indeed, even though it may be difficult to employ all former construction workers in other sectors in the coming years. If the actual unemployment rate is close to the NAWRU, actual employment is close to potential and thereby actual output is also close to potential, i.e. the output gap is small. If the output gap is small, the structural budget balance is close to the actual budget balance, and therefore a large actual budget deficit implies a similarly large structural deficit. In turn, the estimated large structural deficit requires large fiscal consolidation needs, according to the EU fiscal rules. But a NAWRU well below the actual unemployment rate would suggest that there is ample unused labour in the economy and therefore the potential output is much higher than actual output, i.e. the negative output gap is large. In that case, the structural balance is much better than the actual budget balance, implying lower fiscal consolidation needs.

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Therefore, the results of NAWRU estimations have implications for fiscal adjustment strategies. A major problem with the NAWRU methodology is that the view on the share of ‘useless’ unemployed people can be revised along with the revision of the unemployment rate forecast. The case of Latvia is illuminating in this regard (Figure 1): let me highlight two cases. First, in April 2007, the NAWRU in 2007 was seen at 6.3% and was forecast to fall to 4.9% in 2008 and even further later. But now (based on the May 2013 forecast of the Commission) the 2007 NAWRU is estimated to be 11.4%, while the 2008 NAWRU estimate is 11.8%. Second, in April 2010, the huge increase in the actual unemployment rate led the methodology to conclude that the NAWRU has increased to a high level and was forecast to increase even further, to 19.4% by 2011. But later, when the unemployment rate declined (which, by the way, was partly the result of emigration of unemployed people), the NAWRU estimates for the past and the forecasts for the future were revised downward significantly. Currently, the estimate for the 2011 NAWRU is 13.8%. Figure 1: The NAWRU estimates and forecast at different dates and the actual unemployment rate, 1995-2014

Source: Various vintages of the Spring Economic forecasts of the European Commission. Note: the 2013-14 values of the unemployment rate are from the Commission forecast published in May 2013. For NAWRU, we report the estimates made in the springs of 2007, 2010 and 2013. The last two data points of each vintage of NAWRU estimates are forecast made at the time. Productivity As said above, it is assumed in the EU methodology that TFP develops along a smooth path. When calculating the smoothed time series of TFP, forecasts are also taken in to account: among others, forecasts for GDP, labour (including NAWRU) and capital (investment) matter for the TFP forecast. A major problem is the instability of the estimates at toward the end of the sample period, which is also recognised in the official documentation of the potential output methodology. When e.g. a forecast turns to be too optimistic and thereby actual TFP turns to be smaller than forecasted, the smoothness assumption will imply that TFP for earlier years will be revised downward as well. This in turn will revise downward potential output estimates. This problem was a major reason for replacing the Hodrick-Prescott filter with an unobserved components model in 2010, yet major revisions were made in the past and it needs to be seen if the new methodology will prove to be more robust to the arrival of new data. Now let’s see how potential output estimates and forecasts have changed (Figure 2).

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Figure 2: Potential output estimates and forecasts at different dates and the actual GDP, 2000-2014

Source: Various vintages of the Spring Economic forecasts of the European Commission. Note: the 2013-14 values of actual GDP are from the Commission forecast published in May 2013. For potential GDP, we used the output gap estimates made in the springs of 2007, 2010 and 2013 and calculated potential output using the most recent data for actual GDP and the output gap estimates. Thereby, the revisions of actual GDP data do not impact the potential output estimates we show, but only the revisions of the output gap estimates. The last two data points of each vintage of potential output estimates are forecast made at the time. Figure 2 suggests that there were major revisions in potential output estimates. For example, the 2007 spring estimates reported that the Irish and Spanish GDP were below potential in 2005-2007 (and were forecast to stay below potential in 2008 too). On the contrary, the 2013 spring estimate indicates that in 2007 Irish output was 4% above potential, while in Spain the output gap was 2%. Even larger revisions were made for Latvia: in spring 2007, the 2007 output gap was estimated to be around 1%, while during 2009-2012 the 2007 output gap estimate was around 14-15%. The 2013 spring forecast lowered the 2007 output gap estimate to 11%: still, more than 11-times the real- time estimate made in 2007. To sum up, the EU methodology for estimating potential output has serious drawbacks – and since this methodology is used to estimate structural budget balances, the uncertainty in estimating potential output can have implications for the fiscal adjustment requirements along the SGP and Fiscal Compact. This does not sound good. I would like to offer an alternative. One reason for the inability of the EU’s methodology to correctly identify the economic cycle in real time is that it focuses only on the relationship between the output gap and labour market tensions via the NAWRU. While in a large and closed economy such a relationship may describe the impact of the output gap reasonably well, it is certainly insufficient for small open economies. In latter economies, much of the excess demand (i.e. positive output gap) is absorbed by the trade balance and this has indeed happened in Greece, Ireland, Latvia and Spain: before the crisis, the trade balance in these countries deteriorated rapidly. With András Simon, my former colleague at the Hungarian central bank, we are currently working on a model of potential output that incorporates this effect. Watch out for our paper in the coming months. * The title of this post is a tribute to late Gábor Vadas, my great former colleague and co-author at the central bank of Hungary, who wrote several papers on related topics, including a 2005 paper co-authored with Gábor P. Kiss titled “Mind the Gap – International Comparison of Cyclical Adjustment of the Budget” 300

Annex: The main roles of the structural budget balance in the EU fiscal governance framework: • The Stability and Growth Pact (SGP) defines the fiscal consolidation effort in terms of the structural balance that a country under the Excessive Deficit Procedure (EDP) has to take: at least 0.5% of GDP fiscal adjustment per year is required, and even more for countries with debt to GDP ratios over 60%. • The Fiscal Compact (formally, Treaty on Stability, Coordination and Governance in the Economic and Monetary Union – TSCG) stipulates that the structural budget deficit cannot be larger than 0.5% of GDP (unless the debt to GDP ratio is significantly lower than 60%, in which case the structural deficit can reach one percent of GDP). • Brano 16th October 2013 Zsolt, I have some trouble understanding this: \" In latter economies, much of the excess demand (i.e. positive output gap) is absorbed by the trade balance and this has indeed happened in Greece, Ireland, Latvia and Spain: before the crisis, the trade balance in these countries deteriorated rapidly. \" If there is an unexpected expansionary policy and households buy only foreign goods (they import more), then trade balance is deteriorating. But how is that going to affect GDP or output gap? In other words, shouldnt be the trade deficit counted on the top of the output gap to some kind of a total overheating indicator?

Reply to Brano

• Zsolt Darvas 19th October 2013 Thanks Brano for the comment. The main idea behind our model is the following. Excess domestic demand can push output above potential (ie above the level which corresponds to the sustainable use of inputs). Excess demand can be the result of various developments, such as an ‘inappropriate’ expansionary fiscal policy (as in your example), credit and housing booms, and the like. The effects of excess demand are not symmetric across tradable and non-tradable sectors, because foreign supply can make up the gap between demand and supply in the tradable sector, but not in the non-tradable sector. Therefore, excess demand creates excess employment and inflation via the Phillips-curve in the non- tradable sector, while in the tradable sector much of the excess demand is absorbed by the trade balance. But one cannot separate easily the two sectors, as the production of non-tradable goods and services use tradable inputs, and tradable goods are sold via a non-tradable distribution sector. We therefore set up a model that incorporates both channels (ie ‘excess inflation’ and ‘excess trade deficit’) and let the data to determine the relative importance of these channels. We are working hard on our paper, which will detail our model and calculations, and we plan to publish it in the near future.

http://www.bruegel.org/nc/blog/detail/article/1170-mind-the-gap-and-the-way- structural-budget-balances-are-calculated/#.UlptglNq5RY.twitter

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RealTime Economic Issues Watch The ECB’s New Pressure Tactics on Member States’ Taxpayers by Jacob Funk Kirkegaard | October 11th, 2013 | 11:02 am As President Obama and Congress speed toward each other on a world-rattling collision course, the European Central Bank (ECB) is also replaying its own version of “political chicken” with member states in the European Union these days. At issue is the shape of the common currency’s necessary institutional reforms. The core concern is about who pays the bill for rescuing the euro area’s undercapitalized banking system—investors, national taxpayers, or the euro area as a whole (e.g., Germany)—as the parties struggle to create a new banking union. Under measures that have already been agreed, the ECB is to take over as the new supranational banking regulator for the largest banks in the euro area with the creation of a new Single Supervisory Mechanism (SSM). [pdf] Before assuming its new responsibilities, the ECB must conduct an asset quality review (AQR) in collaboration with the European Banking Authority (EBA). The AQR is to be complemented by a stress test of the euro area banking system like those undertaken in the United States in 2009. This is in fact the third stress test of EU banks since 2010. Officials hope that the unlike the others, this one will finally restore the banks’ market credibility, reopen their access to interbank lending markets, and lower their cost of funding. The ultimate goal is to wean them off ECB liquidity and deliver much needed monetary easing in the euro area periphery. Their premise is that healthier banks will be more willing and able to lend at lower interest rates. But there is a catch, because of widespread concern about possible gaping holes in bank balance sheets that may be too big for some debt-burdened national governments to fill. A further concern is that the ECB might avoid exposing such weakness and instead show the same forbearance that national banking regulators have shown in the past. To alleviate this concern, Europeans are discussing a possible new “fiscal backstop” among member states ahead of the AQR/stress test results. No doubt the ECB would prefer such a step, but any assumption that it would water down its stress test to spare member states the cost is misplaced. The ECB, after all, remains the most politically powerful central bank in the world. It has shown its willingness to force the hands of governments in a crisis and indeed overrule national banking authorities. That is why it has been given the new bank regulatory responsibilities. The ECB knows that bungling its role as banking regulator would also ruin its reputation as a monetary policymaker. Its interest is to ensure that the AQR/stress test process is credible. As before in the euro area crisis, the ECB will not hesitate to use adverse financial news and market volatility to strengthen its leverage to force member states to create the backstop and recapitalize their banks, steps they are now resisting. Earlier in the euro

302 crisis the ECB exerted such pressure by withholding its approval of large-scale government bond purchases. Only in December 2011 did the bank provide long-term cheap liquidity to euro area banks (the so-called long-term refinancing operations, or LTROs), when market pressures forced member states to sign the Fiscal Treaty. The ECB therefore has a history of fomenting market volatility to get things its way. It is likely to do so again. Even a rigorous and transparent AQR/stress test might reveal that any hole in the euro area banking system will be manageable—€50 billion to €60 billion, for example. Such an amount could be supplied by private markets without much fuss. If that happens, the ECB would still look good. More likely, however, the stress test will reveal that a number of euro area banks are insolvent. Following the example of Cyprus, shareholders and creditors of insolvent banks will have to bear part of the cost for rescues—”bailed in,” as the term is known. Like Bear Stearns, Merrill Lynch, Wachovia, and other institutions in 2008, insolvent banks may have to be taken over or consolidated, posing little risk to member state governments. Banks that are solvent but undercapitalized may fail to attract sufficient new private capital. To some extent, this is a hypothetical problem. Banks in this category, being solvent, should be able to raise enough new equity capital from private sources to pass the stress tests, even if shareholders are wiped out. Shareholders would protest, but, faced with a robust regulatory approach from the ECB, they would probably proceed with new rights issues even at extremely diluting price levels. Many experts say they fear1 more volatility because of these factors, and perhaps even another downward spiral for the European banking system, pulling the economy into another recession. But even if euro area member states do not agree on a credible fiscal backstop, the ECB’s crisis strategy is there to exploit. Moreover, if a new crisis threatens to get out of hand, the ECB can restore its lavish support for euro area banks and sovereigns. Risks to its strategy are hence manageable. Despite the separation of the ECB’s monetary policy and its new banking regulatory responsibilities, the coming 12 to 18 months will bring together a relationship between its non-standard monetary policy initiatives and the stress test process. Why, for instance, would the ECB provide another LTRO or other new non-standard liquidity support to euro area banks before the AQR/stress test results are ready? Providing such a back would merely let bank shareholders and member states’ governments’ shirk their responsibilities to buttress bank capital levels. Political moral hazard lurks large here. It can even be argued that for the ECB, the biggest reputational risk lies in a potentially botched banking sector review. The last three-month average (April to June 2013) for the euro area’s harmonized inflation of consumer prices (HICP) is 1.4 percent, well below the target of “close to but below 2 percent.” But fears over the AQR/stress test would make it rational for the ECB governing board to maintain this deflationary bias by allowing its inflation target to be undershot. This would deny member states with monetary policy “gifts” in the months ahead, before they take action to fix their banks Since 2010, the ECB has generally prevailed in its clashes with euro area governments. Expect the game of chicken to continue, but expect volatility as a result. Notes: 1. I am deeply indebted to my colleagues Nicolas Véron, Douglas Rediker, and Angel Ubide for constant and always fruitful debates of these issues.

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http://www.piie.com/blogs/realtime/?p=4048 ft.com/global economy EU Economy October 11, 2013 5:05 pm UK demands hold up European banking union By Alex Barker in Brussels

©Reuters UK premier David Cameron discussed the issue with European Council president Herman Van Rompuy in London this month Britain is holding up approval for the eurozone’s single bank supervisor until it wins guarantees over voting rights, which could disrupt the push for Europe’s banking union. UK officials have declined for almost three weeks to sign off on the European Central Bank taking on supervision responsibilities, citing the need to consult the British parliament over what critics see as relatively minor changes to the legal text. More ON THIS STORY// Germany’s SPD calls for bank bailout tax/ Global Insight Weidmann sticks to the red light rule/ In depth European banking union ON THIS TOPIC// Clash ahead over backstopping weak banks/ Markets Insight Stress tests must prompt debt revamp/ Lawyers warn on banking union plans// EU banking union backstop fight looms IN EU ECONOMY// Ireland wins plaudits for budget plan/ Norway bank eyes millionaire’s deposits/ Draghi pledges to keep interest rates low/ ECB deputy says Europe’s banks undervalued The primary objective, however, has been to obtain extra assurances that UK safeguards against a eurozone caucus – the so-called double majority voting system – will survive future rounds of lawmaking. Talks on the issue have included David Cameron, the UK prime minister, who raised his concerns with Herman Van Rompuy, the EU Council president, at a meeting in Downing Street this month. London’s diplomatic tactics have caused frustration among other member states, who are perplexed by the demand that ministers give a political commitment to something that is already included in the proposed law. Final agreement on the supervision reforms had been seen as a formality. Senior EU officials fear that more than a two-week delay to rubber stamp the legislation, which requires unanimity, will have serious knock-on effects, delaying the

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ECB’s planned review of bank balance sheets and the start of reforms to wind up troubled banks. British officials have given no assurances on timing. One senior diplomat involved in the talks described the UK demands as “disproportionate”. Another said it was “illogical” and “meaningless” to ask for non- binding political assurances. A spokesperson for Michel Barnier, the EU commissioner responsible for the reforms, said the European Commission was “aware of UK concerns” about the voting balance between eurozone members and those outside the currency bloc. “We are confident we can sort any remaining issues in the next few days. Final agreement on the single supervisory mechanism is imperative – we cannot afford delay,” the spokesperson added. The UK in December secured voting changes at the European Banking Authority, an umbrella group for regulators to set technical standards, so any decisions have to be approved by most countries outside the banking union. The EBA protection ensures that the more than 17 members of the banking union, which would be acting as a formal caucus, would not have the voting power to dictate terms to all 27 EU countries. London has two main concerns. The first is that the commission may revisit the voting arrangements in a long-planned review of the pan-European financial watchdogs next year – months after the supervision reforms are passed. Under the text of the single supervisor law, a voting review should only take place when the number of countries outside the banking union is reduced to four. The second is that legislative proposals, such as reforms to harmonise rules for winding up ailing banks, will be amended to undermine the principle of double majority voting. After a misunderstanding this month, MEPs made clear that a double majority system would remain in bank resolution laws. The UK said: “We have consistently said that we support the creation of a eurozone banking union but we have also been clear that there needs to be safeguards to ensure the integrity of the single market is guaranteed and that the rights of countries not taking part are protected”. “As the building blocks of European banking reform are put in place, we need to ensure we have a consistent approach which respects the integrity of the single market.” http://www.ft.com/intl/cms/s/0/0f2d8c8a-3281-11e3-b3a7- 00144feab7de.html?siteedition=intl#ixzz2hcYqDZMt

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Daily Morning Newsbriefing October 11, 2013 Rehn proposes exemption of bank recapitalisation from deficit calculations Frankfurter Allgemeine carries the story that Olli Rehn proposes to exempt a future recapitalisation of the banks through the state from the Maastricht deficit rules. So there will be no excessive deficit procedure against countries on the grounds that the deficit exceeds 3% if the overshoot is due to the bank recapitalisation. The idea is obviously to give governments an incentive to restructure their banking systems. The information was contained in a letter sent by Rehn to EU finance ministers. He writes that this rule would stay in place as an interim measure, until the resolution fund is well capitalised. Rehn specifically referred to the asset quality review, which could trigger a bail-in cascade where member state governments are the pen-ultimate capital provider of last resort. Technically, since this is a one-off measure, it will fall under the heading of an extraordinary event – the type which is exempt from the Maastricht debt calculations. Bank recapitalisations, in general, fall under the Maastricht deficit rules. The exemption has no effect on the debt ratio. This is the kind of mess one gets into with strict deficit rules. While we have sympathies with Rehn’s position, it is also clear that as time passes, one has to make increasingly complicated exemptions – as a result of which deficit numbers cease to be consistent with debt numbers. This means that debt is gradually becoming a more reliable metric. The Maastricht debt definition is thus becoming a politicised number. It would be better to get rid of this entire classification, and focus on the structural deficit, which would clearly not include one-off measures, and has an economic meaning, while the Maastricht definition is purely administrative. Lagarde says Spain should now focus on unemployment IMF Managing Director Christine Lagarde said in a press conference that Spain's banking reform has been a success and should enable the banking sector to contribute to the recovery of the Spanish economy, writes Europa Press. According to Lagarde, Spain should focus its efforts on reducing unemployment, particularly among the young. Lagarde also said she was pleased that the EU last Spring gave Spain an additional two years to reach the 3% deficit threshold.

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Greece rules out any new austerity measures Greece’s government moved quickly on Thursday to rule out any possibility of further austerity measures after an IMF fiscal monitor suggested that Greece might need €6.7bn of austerity measures from 2014 to 2016, which is €2.6bn more than foreseen in the agreement between Greece and its creditors. “When the Greek government says it will not take any new measures, it absolutely means it,” Kathimerini quotes Evangelos Venizelos after an emergency meeting with PM Antonis Samaras. “Blood had to be spilt so there could be a realization that Greece has not just become a fiscal laboratory but a laboratory where democratic institutions are being tested,” said PASOK leader Venizelos. He added that troika officials had become “representatives of European governments, particularly those that have a defining role in developments,” (aka Germany). Greece’s lenders also appeared keen to douse any speculation about further measures. A Commission spokesperson in Brussels said that one of its reports, which seem to favour rises in indirect taxes in Greece, had been “misinterpreted.” IMF chief Christine Lagarde also tried to quell fears of imminent cuts to pensions and wages ruling out across-the-board cuts in wages and pensions.” Portugal plans wage cuts for public sector The Portuguese government is preparing a salaries cut for all public employees next year, including political appointees, Portugal’s newspapers report. It is not yet clear how large the cut will be, Diario Economico talks about a targeted 10% while Jornal de Negocios says it is going to be 7%. While there is not yet a decision of how to implement the cut, Jornal de Negocios says the scenario under discussion is that the monthly salary would be kept the same as this year, only that the extra premium employees will receive this November as a result of the constitutional court ruling will fall away, which is equivalent to a wage cut of slightly below 7%. A decision will be taken this Sunday. Irish government targets welfare benefit cuts As the Irish government enters its final preparation phase ahead of the publication of the 2014 budget next Tuesday it looks at possible cuts in welfare costs, not on primary but on secondary benefits, the Irish Times reports. The government is looking into the possibility of cuts from the gas, electricity and telephone allowances under the household benefit package for pensioners and people with disabilities. Initially welfare cuts were to make up €440m in savings, but the target has been reduced as part of a €2.5bn budget adjustment which is €600m less than the troika’s original target. There is still some uncertainty over a health spending overrun this year of up to €150m or more. The Health minister was told that he will have to make up for the difference next year. The Cabinet has been called to a special meeting this morning in Government Buildings and to another one on Sunday.

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Slovakia unfreezes wages while targeting deficit below 3% The Slovak government approved a 2014 budget draft yesterday, aimed at bringing the budget deficit to below the 3% limit already this year, Reuters reports. The budget draft projects the deficit to reach 2.98% of GDP this year and 2.83% in 2014. This is after the Finance Ministry raised its growth forecast in September to 0.8% this year and 2.2% in 2014, which is expected to boost tax income. The draft state budget foresees to unfreeze the salary of its public servants, whose salary could rise by 2% or 5% in the educational sector, according to the Slovak Spectator. The bill also includes administrative reforms and improved tax collection. It plans to cut the corporate tax rate to 22% from currently 23% as from 2014, after Prime Minister Robert Fico had scrapped the 19% flat tax last year. The adoption of the budget through parliament seems assured given the dominance of Fico’s Smer party in parliament. ECB in search for new money market benchmark Reuters reports that the ECB has called for the creation of a new set of money market benchmark rates to take over from the scandal-ridden Euribor and Libor. The monthly report contains an article in which the ECB expresses a preference for alternative reference rates that are more transactions based, and that could act as potential substitutes to the current benchmark rates. The ECB is due to conclude its own review of the interbank lending rates in the coming months. The ECB said that there were currently too few 'unsecured' money market transactions to create a reliable rate based purely on transactions. The current system is based on estimates, which themselves are vulnerable to manipulation. ECB Agrees Swap Line With PBOC Bloomberg reports that the ECB and the People’s Bank of China agreed a bilateral currency swap line with the dual goal to boost access to trade finance in the eurozone, and to strengthen the international use of the renminbi. The swap line is for three years with a maximum size of Y350 billion yuan and €45 billion euros. The ECB said the swap line was needed to ensure financial stability at a time when bilateral trade was growing rapidly. The PBOC hopes that the swap line will encourage multinationals to include the renminbi in their asset portfolios. This is part of the strategy to improve convertibility without giving up control of capital flows. The economic illiteracy of the PD’s housing tax proposal Gilberto Muraro, writing in lavoce, has a go at the PD’s now abandoned proposal to reintroduce the already absolished housing tax IMU, but only for properties where the officially registered land value exceeds a certain threshold, was both politically unrealistically, but also economically unjust – like any binary cut off

308 taxes. The argument is simple. If you are touch below the threshold, you pay nother, but if you are at the threshold you pay a tax. There is a case for marginal taxation, where nobody has an interest to stay below an artificially imposed figures, which is massively distortive. We did it, say the magnificent five Jeroen Dijsselbloem, Olli Rehn, Jorg Asmussen, Klaus Regling and Werner Hoyer, who represent the main European institutions dealing with the eurozone crisis, have written a joint op-ed in the Wall Street Journal, where they announced that recovery was within reach, and the crisis countries were about exit their support programmes. They said the crisis was not yet over, but the eurozone had a reached a turning point (which is logically inconsistent, since a crisis is, by its Greek definition, a turning point. So once you are beyond this point, you are beyond the crisis). They pointed to modest GDP growth, improvements in industrial orders and falling bond yields. And they pledged to stay the course, whatever it takes. “Our response to the crisis…is beginning to deliver results”, they concluded. The consequences of going soft on Greece The Wall Street Journal Real Time economics blog has a good discussion of a report by the Canadian think tank Center for International Governance Innovation, which was highly critical of the IMF’s involvement in Greece. It said in a report that the IMF had weakened its effectiveness in future debt crises. The previously agreed framework, which arose out of the crises in the 1990s, was completely changed to suit the Greek case for political reasons. The restructuring of private debt was insufficient and came too late. In 2002, the fund agreed to encourage PSI, with the fund only agreeing to provide extraordinary credit lines in excess of the country’s quota when four conditions are met: extraordinary pressure on capital markets; sustainability of current levels of debt; good chances of return to capital markets; likelihood of a return to financial stability. The IMF’s own staff had doubted the feasibility of the programme, but still that did not stop the fund from its continued engagement in Greece. This is due to the “systemic risk waiver,” which grants an exemption to the rules if there is a contagion threat. The report makes four suggestions: The “systemic waiver“ should be revoked; the IMF should focus on providing six-month bridging loans to help PSI; more transparency in the analysis of spillover effects; more independence from political influences. It is always political if an outside organisation imposes policy change on a country. So we should stop pretending that the IMF has ever non-political, or that it could ever as independent as a central bank – where the notion of independence is also more restrictive than the advocates of independence frequently acknowledge. The systemic risk waiver is, in principle, a good idea. The problem is that it has become a catch-all in the sense that every sovereign debt problem in the eurozone, for example, is now considered systemic. And the

309 pressure not to continue to support the eurozone, which comes outside Europe, is also political, and just as understandable. Greek families care at home to save pension The pension has become the main source of income for some thousands of Greek families struggling with unemployment, rising living costs and taxes, writes Kathimerini. This shift comes with a mass evacuation of retirement homes across the country as elderly family members move in with their children and grandchildren in order to make ends meet. Before the crisis, the 200 nursing homes in the country with a total capacity of 15000 people were operating at 100% capacity. Today this ratio has dropped to 80%, as one-fifth of their patients have left. Greek industrial production continues to fall Greece’s industrial production dropped 7.2% year-on-year in August, according to latest reports from ELSAT, with all of the major sub-sectors recording contraction in output. A 3.8 percent fall in manufacturing production contributed significantly to the overall slump in activity. Mining and quarrying output plunged 16.4% from last year, and electricity production dropped 13.3%. During the January-August period, industrial production on average slid 3.8 percent from the corresponding period of 2012, RTT News reports. Unlike leading economic and business indicators, hard data from industrial production as well as building activity and retail sales suggest that Greece's recession is still far from over, comments Macropolis. Eurozone Financial Data 10-year spreads

Previous This Yesterday day Morning France 0.538 0.519 0.530 Italy 2.564 2.472 2.483 Spain 2.528 2.476 2.486 Portugal 4.620 4.567 4.809 Greece 7.466 7.258 7.26 Ireland 1.955 1.867 1.871 Belgium 0.770 0.753 0.772 Bund 1.812 1.873 1.862 Yield

Euro Bilateral Exchange Rate This Previous morning Dollar 1.349 1.3536 Yen 131.940 133.3 Pound 0.848 0.8468 310

Swiss 1.231 1.2326 Franc

ZC Inflation Swaps previous last close 1 yr 1.08 1.07 2 yr 1.2 1.2 5 yr 1.4 1.41 10 yr 1.79 1.8

Euribor-OIS Spread previous last close 1 Week -4.286 0 1 Month -2.971 -3.271 3 2.943 2.943 Months 1 Year 28.271 28.271 Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-10- 11.html?cHash=d24c659ff99fc918cc8b04d474f524c2

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Brussels Beat IMF and Europe Part Ways Over Bailouts Euro Zone and IMF Could Be Heading for a Divorce

By Matina Stevis Updated Oct. 11, 2013 2:55 a.m. ET The euro zone and the International Monetary Fund were thrown into each other's arms when Greece's debt crisis began early in 2010. Now, officials say, they could be heading for a divorce. As representatives from both sides meet at the end of this week in Washington to discuss Greece's need for extra cash and a lighter debt load, the clashes that have built up over the past three years are coming to a head.

Antonio Borges in a 2011 photo. Bloomberg News "The divorce between Europe and the IMF is real," Antonio Borges , a former European director at the IMF, said in an interview in June, just months before he died of cancer at the age of 63. "The fund is going back to its normal way of business. It is an institution used to being alone in calling the shots," Mr. Borges said. Mr. Borges arrived at the fund in November 2010, six months after the first Greek bailout was agreed. He left 12 months later citing ill health—but said in the interview that the real reason was his marginalization over the design of the €73 billion (roughly $99 billion) Greek program. Brussels Beat// A Hundred Ways to Take Europe's Economic Pulse (10/3/13)/ Trans-Atlantic Trade Deal Risks Getting Derailed by Election Cycles (9/26/13)/ 'Hair of the Dog' Cure for Europe's Banks? (9/19/13)/ Jilting EU, Armenia Ties Knot With Moscow (9/4/13)/ Greek Cash Shortfall Spells Problems for Euro Zone (8/29/13)/ Last Chance for a Fix to Europe's Financial System (8/23/13)/ The Other Big Brake on Euro-Zone Growth: Private-Sector Debt (8/15/13)

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The Washington-based IMF joined the European Commission and the European Central Bank as a "troika" of institutions in handling the Greek, and subsequently the Irish, Portuguese and Cypriot bailouts. It started well. When the IMF team arrived in Athens in April 2010, one European official there described it as "almost like the U.S. Marine Corps arriving in a war zone." The fund and its expertise, he said, were "indispensable." But it wasn't long before tensions emerged. The fund, Mr. Borges said, pulled a template program from the shelf, failing to consider that Greece's policy options were severely limited by its membership of the euro. "Greece is the saddest case of all," Mr. Borges said. "The program was wrong from the start." Three years on, troika staffers now recount how they were involved in shouting matches over Greek growth projections, bank restructurings and public debt-to-output ratios. "We had to negotiate the figures…That's not how it is supposed to work," a European official said, referring to hourslong debates about projecting Greece's 2013 growth rate. A big source of tension has been the IMF's Debt Sustainability Analysis, which is heavily based on projections of the ratio of government debt to economic output. IMF rules prevent the fund from giving aid to states unable to repay their debts, so this analysis has been critical in ensuring the fund continues lending. But the analysis wasn't well regarded by some officials. One IMF official called it "a joke," a commission official described it "a fairy tale to put children to sleep" and a

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Greek finance ministry official said it was "scientifically ridiculous." Mr. Borges politely said the exercise was "highly subjective." An IMF review in June of Greece's first bailout contained a scathing critique of the commission's role in the troika. It also admitted that the fund had bent its own rules to lend to Greece. The report was received badly in Brussels. Olli Rehn , the commission's economics chief, reacted angrily. "It isn't fair and just for the IMF to wash its hands and throw the dirty water on Europe's shoulders," he said. He later dismissed the controversy as "a storm in a teacup." Mr. Rehn supports the idea of an independent European crisis mechanism to tackle future crises, without IMF involvement, as do top officials such as the ECB's powerful German executive-board member, Jörg Asmussen, and Germany's Finance Minister Wolfgang Schäuble. For its part, the fund is reluctant to see its credibility continue to erode in Europe, officials say. To prevent that, it has been contributing less and less over time to new bailouts, while retaining a de facto veto over policies—much to the irritation of European officials. European policy-making institutions are also emerging more confident as the crisis has waned, making them feel less dependent on the IMF. Klaus Regling , the head of the European Stability Mechanism, the euro zone's permanent bailout fund, reflected this new boldness when he dismissed as "meaningless" the debt ratio used by the fund as a lending benchmark. The ratio, he said in an interview with The Wall Street Journal, failed to account for the very low interest rates and long maturities on Greece's debts to its Euro-zone neighbors. It was a none-too-subtle hint that Euro-zone governments are rethinking a late-2012 pledge to the fund that they will forgive some of that debt. Christine Lagarde, the fund's chief, pushed back Thursday, in comments at the IMF meeting in Washington. "I have no reason to doubt [the governments] will honor and, if needed, they will reiterate their commitments," she said. One thing that has kept the fund involved in Europe is its relationship with the German government. The German parliament has conditioned its support for bailouts on IMF involvement. The Berlin-Washington axis held while their interests remained aligned, as in 2012 when the IMF pushed for Greece's private creditors to take losses and Germany was seeking to minimize its contribution to the second Greek bailout. Now, officials say Ms. Merkel is loath to go to her voters—even after being re- elected last month—and announce that the country's loans to Greece won't be repaid in full, as the IMF has urged. "If the euro area doesn't need the services of the IMF anymore, that is the best possible news," Ms. Lagarde said in July. That time may not be too far off. http://online.wsj.com/news/articles/SB100014240527023045004045791275211044142 30

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Bruegel

Improving economic policy Which role should the ECB give up? by Zsolt Darvas, Silvia Merler on 11th October 2013 Policy Contribution - 'The European Central Bank in the age of banking union' The European Central Bank’s roles have been greatly extended during the crisis, including in fields were it had previously no competences. In a briefing paper written for the European Parliament’s Monetary Dialogue with ECB President Draghi, we look at old and new competences of the ECB, identifying major synergies and conflicts of interests between them. We do indeed find a number of major synergies. One is between liquidity provision to banks and banking supervision. During the crisis, the ECB provided liquidity to banks at a massive scale under relaxed collateral rules, which was essential to avoid financial and economic meltdown. But at the same time, such operations delayed the bank restructuring efforts, prolonged the existence of non-viable banks, and were at the borderline of back-door financing of public debt, whereby banks borrow cheap from the ECB to purchase government bonds. The new euro-area architecture has the potential to limit these adverse side-effects: the ECB can foster bank restructuring by performing a tough comprehensive balance sheet assessment before taking over the supervisory role and, after that, micro-prudential supervisory powers can be used to ensure that all banks receiving liquidity support have indeed only a liquidity problem, and not a solvency one. The architecture could be further extended by conditioning longer-term ECB financing on banks not increasing their net lending to the government and/or increasing their net lending to the real economy. Another major synergy exists between monetary, micro-prudential and macro- prudential policies. Risks can in fact build up in the financial sector even when the price stability mandate is achieved and monetary policy, on its own, is not able to counterbalance such risks. This is especially true in a heterogeneous monetary union like the euro area (see our earlier post on Taylor-rule simulations). Micro- and macro- prudential tools can help to limit the build-up of such risks, leading to synergies. Therefore, the strict organisational separation of monetary policy and bank supervision within the ECB, which seems to be a major goal of SSM regulation, is not so important. At the same time, there is also a potential for conflicts of interest. An example would be a situation when an interest rate increase is needed for monetary policy purposes but such an increase would have a critical impact on the balance sheet of banks. Another one would be the possibility that monetary policy credibility be undermined by eventual supervisory failures. In our view, these risks are not high and they also do not seem to be shared by markets, given that long-term inflationary expectations continue to be anchored. There is however one important role that the ECB should give up in our view, i.e. the co-decision on various aspects of financial assistance programmes. While the ECB’s expertise can bring valuable input into design and monitoring, the participation

315 in future assistance programmes – formalised by the Treaty on the European Stability Mechanism (ESM), the permanent Euro-area rescue fund – creates potential conflicts of interest with the other tasks of the ECB. This may bias programme conditionality, expose the ECB to pressure from the other Troika institutions and would make it very difficult for the ECB to conduct a fully independent assessment of conditionality fulfilment. An informal role in the design and monitoring of financial assistance would therefore be preferable. Finally, there is a dilemma for which no proper solution exists in the euro area’s current economic governance framework: what to do if outright monetary transaction (OMT - the ECB’s government bond purchasing programme) is warranted from a monetary perspective, but the conditionality is not met? The announcement of the OMT was essential to avoid financial meltdown in the euro area, but such a programme cannot be unconditional, as it would create moral hazard and other risks. In case of non-compliance, the ECB would then face the dilemma between (a) interrupting the OMT at the risk of possibly endangering the stability of the euro area, and (b) continuing the OMT at the risk of inflicting a fatal blow to its own credibility. This could also undermine the political support for the euro in creditor countries. The alternative to this quandary of ‘monetary policy under conditionality’ would be a complete revision of the framework for euro-area sovereign debt crisis management and an immense increase in fiscal integration, by moving toward a system similar to the US, in which state-level public debt is small, there is no federal financial bail-outs for states, the central bank does not purchase state debt and banks do not hold state debt. Unfortunately, such an immense overhaul of the euro-area architecture is unrealistic in the foreseeable future. So for the time being, we can only hope that the OMT will never be used, but if used, the country in question will comply with the conditionality, sparing the ECB from facing the hard choices. http://www.bruegel.org/nc/blog/detail/article/1169-which-role-should-the-ecb-give-up/

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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 mito del euroescepticismo alemán 09 October 2013 BRUSELAS – Según la idea establecida, la crisis de la zona del euro ha reducido la confianza de los ciudadanos en la Unión Europa –y en las instituciones europeas en general– en todos los Estados miembros. En varios informes recientes se ha afirmado que el público alemán, en particular, ha dado la espalda a Europa. Por ejemplo, en una nota informativa de Open Europe se afirma que los ciudadanos alemanes suelen confiar menos en el Parlamento Europeo que en su Parlamento nacional y se descubre una tendencia a la disminución de la confianza alemana en las instituciones de la UE desde el comienzo de la crisis. Asimismo, en un artículo del Consejo Europeo de Relaciones Exteriores se declara: “La confianza en la UE se ha desplomado en todo el continente. Tanto los deudores meridionales como los acreedores septentrionales se sienten víctimas”. Y un informe del Centro Pew de Investigaciones hecho público en mayo y titulado “El nuevo enfermo de Europa: la Unión Europea”, concluye: “El proyecto europeo está ahora desprestigiado en gran parte de Europa”. Ese relato es, sencillamente, erróneo. En realidad, la confianza de los alemanes en el euro ha ido aumentando a lo largo de toda la crisis y, aunque su confianza en las instituciones de la UE fue disminuyendo hasta hace dos años, ahora se ha recuperado. Una encuesta periódica que se lleva a cabo desde 2002 y en la que se hace una pregunta sencilla: “¿Desearía usted recuperar el marco alemán?”, brinda el mejor indicador de la actitud de los alemanes para con el euro. El gráfico infra muestra que en los últimos años la proporción de quienes desearían recuperar el marco alemán ha disminuido constantemente y ahora representa sólo el 35 por ciento, aproximadamente. En cambio, la proporción de quienes desearían conservar el euro ha aumentado constantemente a lo largo de toda la crisis y ahora representa el 50 por ciento, más o menos. En realidad, la tendencia a una aceptación cada vez mayor del euro comenzó en 2008, con el estallido de la crisis financiera mundial y continuó con su trayectoria ascendente con el estallido de la crisis de deuda soberana de la zona del euro en 2010.

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http://www.project-syndicate.org/commentary/the-wrong-conventional-wisdom-on- germans--trust-in-europe-by-daniel-gros Parece que la situación de crisis ha obligado a los ciudadanos alemanes a reflexionar más detenidamente sobre la importancia de la moneda común. En los últimos años, el público alemán ha sido informado abundantemente sobre el posible costo fiscal de las operaciones de rescate para Grecia y otros países, pero, pese a ese posible costo elevado, los alemanes han concluido cada vez más que prefieren conservar el euro. Incluso el informe Pew concluyó que la mayoría de los alemanes (el 52 por ciento) creen que “su Gobierno debe prestar asistencia financiera a otros países de la UE que tienen importantes problemas financieros”. Además, Alemania no es una excepción. Por término medio, sólo ha habido una moderada disminución a escala de la UE de la confianza en las instituciones europeas y se ha debido en gran medida a la pronunciada disminución de la confianza en cuatro países de la periferia de la zona del euro: España, Grecia, Portugal e Irlanda. Sin embargo, más importante que la confianza en las instituciones de la UE es que haya sido más resistente en realidad en esos países que la confianza en las instituciones nacionales. Así, pues, lo que se considera comúnmente una crisis generalizada de la confianza en la UE es en realidad una crisis generalizada en la periferia de la confianza en todas las instituciones oficiales. En Alemania, la confianza en el elemento fundamental de la UE, a saber, el euro, ha ido aumentando constantemente. Esa tendencia fundamental ayuda también a explicar el resultado de las recientes elecciones generales de Alemania, en las que la Canciller Angela Merkel hizo campaña basándose en su ejecutoria para “salvar el euro” y consiguió una victoria clamorosa. El único partido claramente antieuro no consiguió superar el umbral del cinco por ciento de votos para entrar en el Bundestag.

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Se elucubra mucho sobre la composición del próximo gobierno de Merkel y lo que significará para la posición de Alemania sobre Europa, pero los detalles de la política de coaliciones en Alemania tienen menos importancia para Europa que el amplio apoyo de los alemanes al euro. Alemania no dará la espalda a la moneda única... ni al proyecto europeo en general. Traducido del inglés por Carlos Manzano. This article is available online at: http://www.project-syndicate.org/commentary/the-wrong-conventional-wisdom-on- germans--trust-in-europe-by-daniel-gros/spanish

Expecting the Unexpected: An Interview With Edmund Phelps By Caroline Baum - Feb 11, 2013 In 2006, the Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Sciences to Edmund Phelps "for his analysis of intertemporal tradeoffs in macroeconomic policy." Phelps showed that, contrary to the original Phillips curve, there is no long-run trade-off between inflation and unemployment, only a short-term one. Translated into lay speech: You can fool some of the people some of the time and reduce unemployment by paying workers what looks like a higher wage. Eventually, they wise up to the fact that their higher nominal wage is a function of higher inflation, not a higher real wage. Unemployment reverts to its so-called natural rate. Phelps is the director of Columbia University's Center on Capitalism and Society. I talked with him over the phone on Jan. 25 and Feb. 4 about his views on rational expectations: the notion that people’s expectations of economic outcomes are generally right and policy makers can’t outsmart the public. (This interview has been condensed and lightly edited for clarity.) Question: In a new volume with Roman Frydman, "Rethinking Expectations: The Way Forward for Macroeconomics," you say the vast majority of macroeconomic models over the last four decades derailed your "microfoundations" approach. Can you explain what that is and how it differs from the approach that became widely accepted by the profession? Answer: In the expectations-based framework that I put forward around 1968, we didn't pretend we had a correct and complete understanding of how firms or employees formed expectations about prices or wages elsewhere. We turned to what we thought was a plausible and convenient hypothesis. For example, if the prices of a company’s competitors were last reported to be higher than in the past, it might be supposed that the company will expect their prices to be higher this time, too, but not that much. This is called "adaptive expectations:" You adapt your expectations to new observations but don't throw out the past. If inflation went up last month, it might be supposed that inflation will again be high but not that high. Q: So how did adaptive expectations morph into rational expectations? A: The "scientists" from Chicago and MIT came along to say, we have a well-established theory of how prices and wages work. Before, we used a rule of thumb to explain or predict expectations: Such a rule is picked out of the air. They said, let's be scientific. In their mind, 319 the scientific way is to suppose price and wage setters form their expectations with every bit as much understanding of markets as the expert economist seeking to model, or predict, their behavior. The rational expectations approach is to suppose that the people in the market form their expectations in the very same way that the economist studying their behavior forms her expectations: on the basis of her theoretical model. Q: And what's the consequence of this putsch? A: Craziness for one thing. You’re not supposed to ask what to do if one economist has one model of the market and another economist a different model. The people in the market cannot follow both economists at the same time. One, if not both, of the economists must be wrong. Another thing: It’s an important feature of capitalist economies that they permit speculation by people who have idiosyncratic views and an important feature of a modern capitalist economy that innovators conceive their new products and methods with little knowledge of whether the new things will be adopted -- thus innovations. Speculators and innovators have to roll their own expectations. They can’t ring up the local professor to learn how. The professors should be ringing up the speculators and aspiring innovators. In short, expectations are causal variables in the sense that they are the drivers. They are not effects to be explained in terms of some trumped-up causes. Q: So rather than live with variability, write a formula in stone! A: What led to rational expectations was a fear of the uncertainty and, worse, the lack of understanding of how modern economies work. The rational expectationists wanted to bottle all that up and replace it with deterministic models of prices, wages, even share prices, so that the math looked like the math in rocket science. The rocket’s course can be modeled while a living modern economy’s course cannot be modeled to such an extreme. It yields up a formula for expectations that looks scientific because it has all our incomplete and not altogether correct understanding of how economies work inside of it, but it cannot have the incorrect and incomplete understanding of economies that the speculators and would-be innovators have. Q: One of the issues I have with rational expectations is the assumption that we have perfect information, that there is no cost in acquiring that information. Yet the economics profession, including Federal Reserve policy makers, appears to have been hijacked by Robert Lucas. A: You’re right that people are grossly uninformed, which is a far cry from what the rational expectations models suppose. Why are they misinformed? I think they don’t pay much attention to the vast information out there because they wouldn’t know what to do what to do with it if they had it. The fundamental fallacy on which rational expectations models are based is that everyone knows how to process the information they receive according to the one and only right theory of the world. The problem is that we don't have a "right" model that could be certified as such by the National Academy of Sciences. And as long as we operate in a modern economy, there can never be such a model. Q: Do you get a lot of push-back from the economics profession on your views? A: I am far from being the only economist who has critiqued the premise of rational expectations. I’m just the main victim, since that approach drove people away from my approach -– from my emphasis that expectations are a driver of what happens in modern economies. Several economists saw that the emperor has no clothes. Oskar Morgenstern explained that rational expectations would be untenable in the modern world, and Friedrich Hayek got the point. Q: I like the fact that the Austrians don't like math.

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A: A Danish economist complained about it in the 1940s. Axel Leijonhufvud attacked it. Roman Frydman has made his career uncovering the impossibility of rational expectations in several contexts. He explained that if the data are always bouncing around because expectations are bouncing around, we can’t use the data to calculate the right expectations. I have an image in my mind of a dog chasing its tail. Q: In the world envisioned by rational expectations, there would be no hyperinflation, no panics, no asset bubbles? Is that right? A: When I was getting into economics in the 1950s, we understood there could be times when a craze would drive stock prices very high. Or the reverse: An economy in the grip of weak business confidence, weak investment, would lead to loss of jobs in the capital- goods sector. But now that way of thinking is regarded by the rational expectations advocates as unscientific. By the early 2000s, Chicago and MIT were saying we've licked inflation and put an end to unhealthy fluctuations –- only the healthy “vibrations” in rational expectations models remained. Prices are scientifically determined, they said. Expectations are right and therefore can't cause any mischief. At a celebration in Boston for Paul Samuelson in 2004 or so, I had to listen to Ben Bernanke and Oliver Blanchard, now chief economist at the IMF, crowing that they had conquered the business cycle of old by introducing predictability in monetary policy making, which made it possible for the public to stop generating baseless swings in their expectations and adopt rational expectations. My work on how wage expectations could depress employment and how asset price expectations could cause an asset boom and bust had been disqualified and had to be cleansed for use in the rational expectations models. Q: And how has that worked out? A: Not well! The rational expectations treatment of inflation did not perform well in predicting inflation. In the 1990s, we had a boom with none of the inflation that was predicted. In 2004-2006 there was another boom without much inflation. Q: Let's look at the rational expectations hypothesis in the context of Fed policy. The Fed has been confident it can prevent long rates from rising by, first, laying out a timeline and, more recently, setting thresholds for unemployment and inflation as a prerequisite for raising short rates. What if they're wrong? Will the bond market "behave" during a growth or inflation scare? A: The bond market would be right to have very little confidence that the Fed has the right model. It's only a small exaggeration to say the Fed doesn't have any important structural forces in its model. It's just guessing about the new normal (for the unemployment rate). It seems to me that they don’t even want to think about it. Q: Do you have a message for policy makers? A: I would tell them not to assume they have hit upon a model that captures expectations so they don't need to think about expectations anymore. Expectations are a living thing and flighty; beliefs are flimsy, as Keynes said. The Fed is banking that expectations will behave according to the model the Fed wants people to adopt. But no central bank or anyone else should bank heavily on the correctness of its model. Expectations will almost certainly surprise the Fed and surprise Wall Street, too. Furthermore, the Fed model doesn't allow for animal spirits in Silicon Valley or evil spirits on Wall Street. It can't know about those things. Washington is banking on a best- case scenario to bail it out of the entitlements mess in the 2020s. The world is still in a crisis. Not a hospitable place for models based on rational expectations.

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(Caroline Baum is a Bloomberg View columnist. http://www.bloomberg.com/news/print/2013-02-11/expecting-the-unexpected-an-interview- with-edmund-phelps.html Caroline Baum Expecting the Unexpected: An Interview With Edmund Phelps Feb 11, 2013 http://www.bloomberg.com/news/print/2013-02-11/expecting-the-unexpected-an- interview-with-edmund-phelps.html

Rethinking Expectations: The Way Forward for Macroeconomics Edited by Roman Frydman & Edmund S. Phelps

Cloth | 2013 | $49.50 / £34.95 | ISBN: 9780691155234 440 pp. | 6 x 9 | 48 line illus. 18 tables.

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Google full text of this book:

http://books.google.es/books/princeton?id=POYl0lTA- rwC&printsec=frontcover#v=onepage&q&f=false This book originated from a 2010 conference marking the fortieth anniversary of the publication of the landmark "Phelps volume," Microeconomic Foundations of Employment and Inflation Theory, a book that is often credited with pioneering the currently dominant approach to macroeconomic analysis. However, in their provocative introductory essay, Roman Frydman and Edmund Phelps argue that the vast majority of macroeconomic and finance models developed over the last four decades derailed, rather than built on, the Phelps volume's "microfoundations" approach. Whereas the contributors to the 1970 volume recognized the fundamental importance of according market participants' expectations an autonomous role, contemporary models rely on the rational expectations hypothesis (REH), which rules out such a role by design.

The financial crisis that began in 2007, preceded by a spectacular boom and bust in asset prices that REH models implied could never happen, has spurred a quest for fresh approaches to macroeconomic analysis. While the alternatives to REH presented in Rethinking Expectations differ from the approach taken in the original Phelps volume, they are notable for returning to its major theme: understanding aggregate outcomes requires according expectations an autonomous role. In the introductory essay, Frydman and Phelps interpret the various efforts to reconstruct the field--some of which promise to chart its direction for decades to come.

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The contributors include Philippe Aghion, Sheila Dow, George W. Evans, Roger E. A. Farmer, Roman Frydman, Michael D. Goldberg, Roger Guesnerie, Seppo Honkapohja, Katarina Juselius, Enisse Kharroubi, Blake LeBaron, Edmund S. Phelps, John B. Taylor, Michael Woodford, and Gylfi Zoega.

Roman Frydman is professor of economics at New York University and the coauthor (with Michael D. Goldberg) of Beyond Mechanical Markets and Imperfect Knowledge Economics. Edmund S. Phelps, the winner of the 2006 Nobel Prize in Economics, is director of Columbia University's Center on Capitalism and Society. His many books include Structural Slumps and Seven Schools of Macroeconomic Thought. Endorsement: "The 1970 Phelps volume has been extremely influential in macroeconomics. Three of its contributors went on to win Nobel prizes for work detailed in the book, and it inspired many others who contributed to the small equilibrium models that became the workhorses of macroeconomics. Yet virtually all of these models use the assumption of rational expectations. In this new volume, Phelps and Roman Frydman assemble a new group of scholars to critique the work based on rational expectations. Phelps and Frydman argue that rational expectations destroyed one of the key premises of the original book--that independent expectations are critical for understanding macroeconomic phenomena. The contributors to this follow-up volume make a convincing case for the failure of several models with rational expectations, and present thought-provoking alternatives. Their efforts to build macroeconomic models without the rational expectations hypothesis might have the impact in their areas of research that the original volume had."--Christopher Pissarides, Nobel Laureate in Economics "Microeconomic Foundations of Employment and Inflation Theory, edited by Edmund Phelps forty years ago, established the concept of 'micro foundations' as an essential macroeconomics idea. Later, 'rational expectations' was added as the second pillar of the current standard macro model. Recent events have challenged the validity of that model. This new Phelps volume, coedited with Roman Frydman, challenges and offers alternatives to the second pillar while retaining the first. It is a must-read for anyone interested in modern economic thought and its implications for policy."-- Dale Mortsensen, Nobel Laureate in Economics "A great volume."--Peter Howitt, Brown University Contents

Which Way Forward for Macroeconomics and Policy Analysis? 1

Back to the Foundations 47

Autonomous Expectations in Long Swings in Asset Prices 167

Rethinking UnemploymentInflation Tradeoffs and the Natural Rate Theory 249

Policymaking after Rational Expectations 371

Contributors 415

Index 421 Copyright

Chapter 1 http://press.princeton.edu/chapters/s10002.pdf Frydman, Roman & Edmund S. Phelps (Eds.) (2013), Rethinking Expectations: The Way Forward for Macroeconomics, Princeton University Press. Capítulo 1 disponible en: http://press.princeton.edu/chapters/s10002.pdf

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European Commission Economic and Financial Affairs European Commission Economic and Financial Affairs News Economic governance EU economic governance The EU and its Member States have taken a series of important decisions that will strengthen economic and budgetary coordination for the EU as a whole and for the euro area in particular. As a result, the EU’s interdependent economies will be better placed to chart a path to growth and job creation. Surveillance of economic and fiscal policies The economic and financial crisis has revealed a number of weaknesses in the economic governance of the EU's economic and monetary union. The cornerstone of the EU response is the new set of rules on enhanced EU economic governance which entered into force on 13 December 2011. It has four main components: • Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination: Member States are required to make significant progress towards medium-term budgetary objectives (MTO) for their budgetary balances. Expenditure benchmarks will now be used alongside the structural budget balance to assess adjustments towards the MTO. An interest-bearing deposit of 0.2% of GDP will be imposed on non-compliant euro-area countries. • Stronger corrective action through a reinforced SGP: The launch of an Excessive Deficit Procedure (EDP) can now result from government debt developments as well as from government deficit. Member States with debt in excess of 60% of GDP should reduce their debt in line with a numerical benchmark. Progressive financial sanctions kick in at an earlier stage of the EDP. A non-interest bearing deposit of 0.2% of GDP may be requested from a euro-area country which is placed in EDP on the basis of its deficit or its debt. Failure of a euro-area country to comply with recommendations for corrective action will result in a fine. • Minimum requirements for national budgetary frameworks: Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels. National fiscal planning should adopt a multi-annual perspective, so as to attain the MTO. Numerical fiscal rules should also promote compliance with the Treaty reference values for deficit and debt. • Preventing and correcting macroeconomic and competitiveness imbalances:The new Macroeconomic Imbalance Procedure (MIP) broadens the EU economic governance framework to include the surveillance of macroeconomic trends. The aim of the MIP is to identify potential risks early on, prevent the emergence of harmful

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imbalances and correct the imbalances that are already in place. In this respect the objective of the MIP is to ensure that appropriate policy responses are adopted in Member States in a timely manner to address the pressing issues raised by macroeconomic imbalances. In doing so, the MIP relies on a graduated approach that reflects the gravity of imbalances and can eventually lead to the imposition of sanctions on euro area Member States should they repeatedly fail to meet their obligations under the corrective arm of the MIP. Enforcement is strengthened by the expanded use of 'reverse qualified majority' voting. Under this voting system, a Commission recommendation or proposal to the Council is considered adopted unless a qualified majority of Member States votes against it. Regulations • Regulation (EU) No 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area • Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability • Council Regulation (EU) No 1177/2011 of 8 November 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure • Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances • Regulation (EU) No 1175/2011 of the European Parliament and of the Council of 16 November 2011 amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies • Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area • Regulation (EU) No 1173/2011 of the European Parliament and of the Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area Directives • Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States Commission Green Paper on Stability Bonds The Commission Green Paper on Stability Bonds, published on 23 November 2011, sets out three main options: the full substitution by Stability Bond issuance of national issuance, with joint and several guarantees; the partial substitution by Stability Bond issuance of national issuance, with joint and several guarantees; and the partial substitution by Stability Bond issuance of national issuance, with several but not joint guarantees. The objective of the Green Paper is to have a broad debate on the issues raised.

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>> 23/11/2011. Green paper on stability bonds

• Green Paper on the feasibility of introducing Stability Bonds - COM(2011)818 final Commission Communication on common principles for national fiscal correction mechanisms Member States that are Contracting Parties to the Treaty on Stability, Coordination and Governance in EMU (TSCG), in force since 1 January 2013, will introduce in their national rules a correction mechanism to be triggered automatically in the event of significant observed deviations from the medium-term objective or the adjustment path towards it. With this Communication the European Commission puts forward seven common principles for designing the national correction mechanisms, covering legal status, consistency with the EU framework, activation, nature of the correction in terms of size and timeline, operational instruments, escape clauses, and the role and independence of monitoring institutions. • COM/2012/0342 final Coordination of economic and fiscal policy planning - The European semester Developed in 2010, the European Semester represents a new approach towards economic surveillance, including a new policy-making timetable. First put into practice during the first half of 2011, it ensures that EU-level economic policies are analysed and assessed together and are suitably covered by economic surveillance. To read more about the coordination of economic and fiscal policy planning in the EU go to our Economic Semester page. Setting of economic priorities - The Euro+ Pact To give further impetus to the governance reforms, 23 Member States, including six outside the euro-area (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania), signed the Euro Plus Pact in March 2011. The Pact commits signatories to even stronger economic coordination for competitiveness and convergence, also in areas of national competence, with concrete goals agreed on and reviewed on a yearly basis by Heads of State or Government. The Euro Plus Pact is integrated into the European semester and the Commission monitors implementation of the commitments. >> Conclusions of the Heads of State or Government of the euro area of 11 March 2011. A Pact for the euro. Stronger economic policy coordination for competitiveness and convergence. Europe 2020 The Euro Plus Pact builds on the existing framework of economic priorities agreed at EU level under the Europe 2020 strategy for 'smart, sustainable and inclusive' growth. The strategy sets targets in the fields of employment, innovation, climate/energy, education and social inclusion. >> Europe 2020 - The EU strategy for smart, sustainable and inclusive growth Repair and safeguard measures - Financial sector repair

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Getting Europe back on track also requires a healthy financial sector. The EU, therefore, established a new financial supervision architecture in January 2011. It includes a European Systemic Risk Board (ESRB) for macro-prudential oversight of the financial system, and three European supervisory authorities: the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority. Rules have also been tightened on capital requirements for banks, investment firms and insurance companies, and new rules on remuneration and bonuses will reduce incentives for short-term risk-taking. Bank stress tests have been conducted and the Commission will propose a framework to allow banks to fail in an orderly manner, thus ensuring that taxpayers don’t have to pay for bailouts. >> European Systemic Risk Board (ESRB) >> European Financial Stability Facility EFSF >> European Banking Authority (EBA) >> European Securities and Markets Authority (ESMA) >> European Insurance and Occupational Pensions Authority (EIOPA) >> Directorate-General Internal Market. Information on financial services (banking, insurance, securities, etc. Last update: 26/09/2013 http://ec.europa.eu/economy_finance/economic_governance/index_en.htm

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European Commission Economic and Financial Affairs European Commission Economic and Financial Affairs News Economic governance EU economic governance The EU and its Member States have taken a series of important decisions that will strengthen economic and budgetary coordination for the EU as a whole and for the euro area in particular. As a result, the EU’s interdependent economies will be better placed to chart a path to growth and job creation. Surveillance of economic and fiscal policies The economic and financial crisis has revealed a number of weaknesses in the economic governance of the EU's economic and monetary union. The cornerstone of the EU response is the new set of rules on enhanced EU economic governance which entered into force on 13 December 2011. It has four main components: • Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination: Member States are required to make significant progress towards medium-term budgetary objectives (MTO) for their budgetary balances. Expenditure benchmarks will now be used alongside the structural budget balance to assess adjustments towards the MTO. An interest-bearing deposit of 0.2% of GDP will be imposed on non-compliant euro-area countries. See page SGP • Stronger corrective action through a reinforced SGP: The launch of an Excessive Deficit Procedure (EDP) can now result from government debt developments as well as from government deficit. Member States with debt in excess of 60% of GDP should reduce their debt in line with a numerical benchmark. Progressive financial sanctions kick in at an earlier stage of the EDP. A non-interest bearing deposit of 0.2% of GDP may be requested from a euro-area country which is placed in EDP on the basis of its deficit or its debt. Failure of a euro-area country to comply with recommendations for corrective action will result in a fine. See page SGP • Minimum requirements for national budgetary frameworks: Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels. National fiscal planning should adopt a multi-annual perspective, so as to attain the MTO. Numerical fiscal rules should also promote compliance with the Treaty reference values for deficit and debt. • Preventing and correcting macroeconomic and competitiveness imbalances:The new Macroeconomic Imbalance Procedure (MIP) broadens the EU economic governance framework to include the surveillance of macroeconomic trends. The aim of the MIP is to identify potential risks early on, prevent the emergence of harmful imbalances and correct the imbalances that are already in place. In this respect the objective of the MIP is to ensure that appropriate policy responses are adopted in

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Member States in a timely manner to address the pressing issues raised by macroeconomic imbalances. In doing so, the MIP relies on a graduated approach that reflects the gravity of imbalances and can eventually lead to the imposition of sanctions on euro area Member States should they repeatedly fail to meet their obligations under the corrective arm of the MIP. Enforcement is strengthened by the expanded use of 'reverse qualified majority' voting. Under this voting system, a Commission recommendation or proposal to the Council is considered adopted unless a qualified majority of Member States votes against it. Regulations • Regulation (EU) No 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area • Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability • Council Regulation (EU) No 1177/2011 of 8 November 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure • Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances • Regulation (EU) No 1175/2011 of the European Parliament and of the Council of 16 November 2011 amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies • Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area • Regulation (EU) No 1173/2011 of the European Parliament and of the Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area Directives • Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States Commission Green Paper on Stability Bonds The Commission Green Paper on Stability Bonds, published on 23 November 2011, sets out three main options: the full substitution by Stability Bond issuance of national issuance, with joint and several guarantees; the partial substitution by Stability Bond issuance of national issuance, with joint and several guarantees; and the partial substitution by Stability Bond issuance of national issuance, with several but not joint guarantees. The objective of the Green Paper is to have a broad debate on the issues raised. >> 23/11/2011. Green paper on stability bonds

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• Green Paper on the feasibility of introducing Stability Bonds - COM(2011)818 final Commission Communication on common principles for national fiscal correction mechanisms Member States that are Contracting Parties to the Treaty on Stability, Coordination and Governance in EMU (TSCG), in force since 1 January 2013, will introduce in their national rules a correction mechanism to be triggered automatically in the event of significant observed deviations from the medium-term objective or the adjustment path towards it. With this Communication the European Commission puts forward seven common principles for designing the national correction mechanisms, covering legal status, consistency with the EU framework, activation, nature of the correction in terms of size and timeline, operational instruments, escape clauses, and the role and independence of monitoring institutions. • COM/2012/0342 final Coordination of economic and fiscal policy planning - The European semester Developed in 2010, the European Semester represents a new approach towards economic surveillance, including a new policy-making timetable. First put into practice during the first half of 2011, it ensures that EU-level economic policies are analysed and assessed together and are suitably covered by economic surveillance. To read more about the coordination of economic and fiscal policy planning in the EU go to our Economic Semester page. Setting of economic priorities - The Euro+ Pact To give further impetus to the governance reforms, 23 Member States, including six outside the euro-area (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania), signed the Euro Plus Pact in March 2011. The Pact commits signatories to even stronger economic coordination for competitiveness and convergence, also in areas of national competence, with concrete goals agreed on and reviewed on a yearly basis by Heads of State or Government. The Euro Plus Pact is integrated into the European semester and the Commission monitors implementation of the commitments. >> Conclusions of the Heads of State or Government of the euro area of 11 March 2011. A Pact for the euro. Stronger economic policy coordination for competitiveness and convergence. Europe 2020 The Euro Plus Pact builds on the existing framework of economic priorities agreed at EU level under the Europe 2020 strategy for 'smart, sustainable and inclusive' growth. The strategy sets targets in the fields of employment, innovation, climate/energy, education and social inclusion. >> Europe 2020 - The EU strategy for smart, sustainable and inclusive growth Repair and safeguard measures - Financial sector repair Getting Europe back on track also requires a healthy financial sector. The EU, therefore, established a new financial supervision architecture in January 2011. It includes a European Systemic Risk Board (ESRB) for macro-prudential oversight of the financial system, and three European supervisory authorities: the European Banking Authority,

330 the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority. Rules have also been tightened on capital requirements for banks, investment firms and insurance companies, and new rules on remuneration and bonuses will reduce incentives for short-term risk-taking. Bank stress tests have been conducted and the Commission will propose a framework to allow banks to fail in an orderly manner, thus ensuring that taxpayers don’t have to pay for bailouts. >> European Systemic Risk Board (ESRB) >> European Financial Stability Facility EFSF >> European Banking Authority (EBA) >> European Securities and Markets Authority (ESMA) >> European Insurance and Occupational Pensions Authority (EIOPA) >> Directorate-General Internal Market. Information on financial services (banking, insurance, securities, etc. Last update: 26/09/2013 http://ec.europa.eu/economy_finance/economic_governance/

European Commission Economic and Financial Affairs European Commission Economic and Financial Affairs News Economic governance The European Semester

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The European Semester The European Semester represents a yearly cycle of EU economic policy guidance and country- specific surveillance. Each year the European Commission undertakes a detailed analysis of EU Member States' programmes of economic and structural reforms and provides them with recommendations for the next 12-18 months. Coordination of economic and fiscal policy planning In the past, the EU institutions discussed economic policies in the spring and examined fiscal policies and developments separately in the autumn. But in 2010, a new approach towards economic surveillance and a new policy-making timetable was agreed. The aim is to ensure that all policies are analysed and assessed together and that policy areas which previously were not systematically covered by economic surveillance – such as macroeconomic imbalance and financial sector issues – are included. The new approach was put into practice for the first time during the first half of 2011, the first 'European semester'. EU-level discussions on fiscal policy, macroeconomic imbalances, financial sector issues, and growth-enhancing structural reforms will now always take place jointly during the European semester and before governments draw up their draft budgets and submit them to national parliamentary debate in the second half of the year (the 'national semester'). This 'upstream' policy coordination should make the implementation of policy guidance more effective and help embed the EU dimension in national policy-making. The annual cycle begins with the Commission's Annual Growth Survey, which gives broad guidance on priority actions to be taken at EU and national level. Member States then submit Stability or Convergence Programmes on their fiscal plans and National Reform Programmes on structural reforms and measures to boost growth and jobs. The Commission assesses these reports based on an integrated analysis covering fiscal, macroeconomic, and structural policies and on that basis proposes concrete policy recommendations for each country. The June European Council discusses the recommendations and the Council adopts them. For the euro area, an additional European discussion takes place during the national semester, to discuss Commission's opinions on the Member States' draft budgetary plans and the fiscal stance in the Eurozone as a whole. Documents The 2013 Annual Growth Survey: Charting the course to recovery Commission 2013 country-specific recommendations Last update: 26/09/2013 http://ec.europa.eu/economy_finance/economic_governance/the_european_semester/index_en.h tm

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European Commission Economic and Financial Affairs European Commission Economic and Financial Affairs News Economic governance Stability and Growth pact Stability and Growth Pact The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the European Union. It was established to safeguard sound public finances, based on the principle that economic policies are a matter of shared concern for all Member States. The Macroeconomic Imbalances Procedure (MIP) operates alongside the SGP to identify and correct macroeconomic imbalances and monitor competitiveness developments. Overview The SGP contains two arms – the preventive arm and the corrective arm. The preventive arm seeks to ensure that fiscal policy is conducted in a sustainable manner over the cycle. The corrective arm sets out the framework for countries to take corrective action in the case of an excessive deficit. The cornerstone of the preventive arm is the country-specific medium-term budgetary objective (MTO), defined in structural terms (i.e. in cyclically adjusted terms and net of one-off and other temporary measures). Member States outline their medium-term budgetary plans in stability and convergence programmes (SCP), which are submitted and assessed annually in the context of multilateral fiscal surveillance under the European Semester. The corrective arm is made operational by the Excessive Deficit Procedure (EDP), a step-by- step procedure for correcting excessive deficits that occur when one or both of the rules that the deficit must not exceed 3% of GDP and public debt must not exceed 60% of GDP (or at least diminish sufficiently towards the 60%) defined in the Treaty on the Functioning of the EU (TFEU or Treaty) are breached. Non-compliance with either the preventive or corrective arms of the Pact can lead to the imposition of sanctions for euro area countries. In the case of the corrective arm, this can involve annual fines for euro area Member States and, for all countries, possible suspension of Cohesion Fund financing until the excessive deficit is corrected. Legal basis of the SGP Treaty on the Functioning of the European Union (TFEU) Articles 121 and 126 of the TFEU provide the legal basis of the Stability and Growth Pact. While Art. 121 outlines the preventive arm of the SGP, Art. 126 of the Treaty forms the basis for the corrective arm and the EDP and Protocol 12 defines the reference values of 3% of GDP for public deficit and 60% of GDP for public debt. The Six Pack Secondary legislation governing the Stability and Growth Pact was initially approved in 1997, with significant reforms enacted in 2005 and 2011. The 2011 reforms, referred to as the "six- pack", addressed gaps and weaknesses in the framework identified during the recent economic financial crisis. These reforms significantly strengthened both the fiscal surveillance and

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enforcement provisions of the SGP by adding an expenditure benchmark to review countries' fiscal positions, operationalising the Treaty's debt criterion, introducing an early and gradual system of financial sanctions for euro area Member States, and requiring new minimum standards for national budgetary frameworks. The 2011 reforms also brought the surveillance of both budgetary and economic policies together under the European Semester, to ensure the consistency of the policy advice given. Further details on the implementation of the SGP by Member States are given in a code of conduct, which was last revised in September 2012. The Two Pack Recognizing the extent and potential consequences of spillovers among euro area Member States' economic and budgetary situations, the Two Pack Regulations, which entered into force on May 30, 2013, build on the Six Pack reforms by introducing additional surveillance and monitoring procedures for euro area Member States. The Two Pack Regulations support adherence to the SGP's existing fiscal surveillance framework, while at the same time establishing a comprehensive surveillance regime for those Member States in the euro area threatened with or experiencing serious difficulties with respect to their financial stability. This legislation introduces a European assessment of draft budgetary plans on a coordinated timeframe in Autumn for euro area Member States and improves national budgetary frameworks by requiring them to set up independent bodies in charge of monitoring national fiscal rules and to base budgetary forecasts on independent macroeconomic forecasts. For euro area Member States in EDP, a system of graduated monitoring is established in order to secure a timely and durable correction of excessive deficits and to allow an early detection of risks that a Member State does not correct its excessive deficit by the deadline set by the Council. Requirements placed on financially fragile countries are streamlined for countries currently receiving financial assistance while enhancing monitoring that will also enable the Commission to better assess the risks threatening or faced by the Member State in question and thus, in some cases, address vulnerabilities even before a need for financial assistance arises. To support the effective implementation of the Two Pack legislation, Member States and the Commission have agreed on harmonised frameworks for the draft budgetary plans and for the debt issuance reports, as adopted by the Commission in Communication COM(2013) 490 and contained in a Code of Conduct which sets out all commonly agreed guidelines. In addition, the form and content of the new regular reporting by Member States in EDP have been set out in a delegated Regulation, adopted by the Commission on 27 June 2013. This delegated act will enter into force if the co-legislators do not object to it by 27 August 2013. The Fiscal Compact Finally, the Fiscal Compact contained within the inter-governmental Treaty on Stability, Coordination and Governance (TSCG) complements, and in some areas enhances further, key provisions of the SGP. Specifically, the Fiscal Compact requires Member States to enshrine in national law a balanced budget rule with a lower limit of a structural deficit of 0.5% GDP, centered on the concept of the country-specific medium-term objective (MTO) as defined in the SGP. The Fiscal Compact’s provisions also increase the role of independent bodies, which are given the task of monitoring compliance with the national fiscal rules, including the operation of the national correction mechanism in case of deviation from the MTO or the adjustment path towards it (also included in the Two Pack). The TSCG, signed by 25 EU Member States (all but UK and Czech Republic), entered into force on January 1, 2013 and is binding for all euro area Member States that have ratified it, while other contracting parties will be bound only once they adopt the euro or earlier if they signal it. Last update: 05/09/2013 http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm

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European Commission Economic and Financial Affairs European Commission Economic and Financial Affairs News Economic governance Macroeconomic Imbalance Procedure Macroeconomic Imbalance Procedure The Macroeconomic Imbalance Procedure (MIP) is a surveillance mechanism that aims to identify potential risks early on, prevent the emergence of harmful macroeconomic imbalances and correct the imbalances that are already in place. The annual starting point of the MIP is the Alert Mechanism Report: Based on a scoreboard of indicators, it is a filter to identify countries and issues for which a closer analysis (in-depth review) is deemed necessary. The outcome of these in-depth reviews forms the basis for further steps under the MIP whereby a graduated approach is followed reflecting the gravity of imbalances. The MIP has a preventive and a corrective arm. The latter is made operational by the Excessive Imbalance Procedure, which can eventually lead to sanctions for euro area Member States if they repeatedly fail to meet their obligations. Preventing and correcting macroeconomic imbalances Over the first decade of the century, the EU has registered serious gaps in competitiveness and major macroeconomic imbalances. Therefore a new surveillance and enforcement mechanism has been set up in December 2011 as part of the so-called "Six-Pack" legislation, which reinforced economic governance in the EU and the euro area. The Macroeconomic Imbalance Procedure (MIP) is based on Article 121.6 of the Treaty and relies on the following main elements: An early warning system: An alert system is established based on a scoreboard consisting of a set of – recently – eleven indicators covering the major sources of macroeconomic imbalances. The scoreboard is published in the Alert Mechanism Report that marks the starting point of the annual cycle of the MIP. For each indicator, alert thresholds have been defined to detect potential imbalances. The scoreboard and the thresholds are not applied mechanically, as the scoreboard is complemented by an economic reading. The composition of the scoreboard indicators may evolve over time. The aim of the scoreboard is to filter countries that warrant in- depth studies in order to determine whether the potential imbalances identified in the early- warning system are benign or problematic. The Commission can organise missions, with the ECB if appropriate. The in-depth reviews are made public. Preventive and corrective action: The MIP allows the Commission and the Council to adopt preventive recommendations under article 121.2 of the Treaty. These recommendations are embedded in the package of country-specific recommendations which the Commission puts forward in May/June in the context of the European Semester. The MIP has also a corrective arm which applies in more severe cases: an Excessive Imbalance Procedure (EIP) may be opened for a Member State if it is found to experience excessive imbalances in the sense of the MIP regulation. The Member State concerned will have to submit a corrective action plan with a clear roadmap and deadlines for implementing corrective action. Surveillance will be stepped up by the Commission on the basis of regular progress reports submitted by the Member State concerned.

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Rigorous enforcement: A new enforcement regime is established for euro area countries. The corrective arm consists of a two-step approach: • An interest-bearing deposit can be imposed after one failure to comply with the recommended corrective action • After a second compliance failure, this interest-bearing deposit can be converted into a fine (up to 0.1% of GDP) • Sanctions can also be imposed for failing twice to submit a sufficient corrective action plan. The decision-making process in the new regulations is streamlined by prescribing the use of reverse qualified majority voting to take all the relevant decisions leading up to sanctions. This semi-automatic decision-making procedure makes it very difficult for Member States to form a blocking majority. Key Documents • Alert mechanism report 2013. 28.11.2012. COM(2012) 751 final

• Statistical Annex of the Alert Mechanism Report (4 MB) : data on scoreboard and additional indicators.

• Completing the Scoreboard for the Macroeconomic Imbalance Procedure (70 KB) : Financial Sector Indicator. • Alert mechanism report 2012. 14.02.2012. COM(2012) 68 final Data • Scoreboard data platform: Interactive database for the indicators of the scoreboard and additional 'reading' indicators • Relevant legislation: the MIP is part of the 'six-pack' of legislative acts that strengthens the monitoring and surveillance of macroeconomic policies in the EU and the euro area. Background documents • Occasional Paper 92/2012: Scoreboard for the surveillance of macroeconomic imbalances: technical explanations on the scoreboard • Staff working paper: Scoreboard for the surveillance of macroeconomic imbalances: envisaged initial design (59 KB) (8 Nov. 2011) In-depth reviews The in-depth reviews are part of the Macroeconomic Imbalance Procedure (MIP) which was introduced to prevent and correct macroeconomic imbalances. They currently cover 13 Member States, which were identified in the Alert Mechanism Report (AMR) of 28 November 2012 as warranting further economic analysis in order to determine whether macroeconomic imbalances exist or risk emerging. These Member States are Belgium, Bulgaria, Denmark, Finland, France, Italy, Hungary, Malta, the Netherlands, Slovenia, Spain, Sweden and the United Kingdom. Each of the 13 in-depth reviews examines the origin, nature and severity of possible macroeconomic imbalances. They assess whether the country is affected by an imbalance, and if it is, what the nature of the imbalance is. 30/05/2012 10/04/2013

Belgium Belgium SWD(2013) 113 final

Bulgaria Bulgaria SWD(2013) 114 final

Denmark Denmark SWD(2013) 115 final

Spain Spain SWD(2013) 116 final

France France SWD(2013) 117 final

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Italy Italy SWD(2013) 118 final

Cyprus

Hungary Hungary SWD(2013) 119 final

Malta SWD(2013) 120 final

Netherlands SWD(2013) 121 final

Slovenia Slovenia SWD(2013) 122 final

Finland Finland SWD(2013) 123 final

Sweden Sweden SWD(2013) 124 final United United Kingdom Kingdom Last update: 18/09/2013 http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_proced ure/index_en.htm

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EUROPA Press releases database Press Release details

COMISIÓN EUROPEA

NOTA INFORMATIVA

Bruselas, 27 de mayo de 2013 Entra en vigor el paquete legislativo sobre supervisión presupuestaria (Two-Pack), completando el ciclo de supervisión presupuestaria y mejorando la gobernanza económica de la zona del euro Desde la entrada en circulación del euro, está en vigor un corpus de normas, conocido como Pacto de Estabilidad y Crecimiento (PEC), cuyo propósito es asegurar unas finanzas públicas saneadas y en el que se establecen los ya conocidos límites del 3 % y el 60 % del PIB para los déficits presupuestarios y la deuda pública, respectivamente. No obstante, la crisis económica y financiera mundial ha puesto de manifiesto las deficiencias de la gobernanza económica y de la supervisión presupuestaria en el ámbito de la UE. Estas deficiencias se abordaron eficazmente con la creación en 2010-2011 del Semestre Europeo de coordinación de la política económica y las seis propuestas legislativas conocidas como «paquete de seis medidas» (Six-Pack), que reforzó el PEC en varios aspectos. Sin embargo, dado el elevado riesgo de que las políticas presupuestarias produzcan efectos indirectos en la zona de la moneda única, es absolutamente necesario contar con unos mecanismos más sólidos y específicos para la zona del euro. Para responder a esta necesidad, la Comisión propuso en noviembre de 2011 dos nuevos Reglamentos que refuerzan la supervisión presupuestaria en dicha zona. Este paquete de medidas de reforma, denominado «el paquete legislativo sobre supervisión presupuestaria» (Two-Pack) entrará en vigor el 30 de mayo de 2013 en todos los Estados miembros de la zona del euro. Las nuevas medidas implican una mayor transparencia en las decisiones presupuestarias adoptadas por los Estados miembros, una coordinación reforzada en la zona del euro a partir del ciclo presupuestario de 2014, y el reconocimiento de las necesidades especiales de los Estados miembros de la zona del euro sometidos a fuertes presiones financieras. La

338 entrada en vigor del Two-Pack también allana el camino para las nuevas medidas que deberán adoptarse a fin de reforzar la Unión Económica y Monetaria, según lo establecido por la Comisión en la Comunicación titulada «Un plan director para una Unión Económica y Monetaria profunda y auténtica», publicado el pasado mes de noviembre (véase IP/12/1272; MEMO/12/909). ¿Por qué son necesarios los dos nuevos Reglamentos? A fin de reforzar el pilar económico de la Unión Económica y Monetaria, los Estados miembros de la zona del euro deben ir más allá del «paquete de seis medidas» legislativas acordado en 2011. Las políticas económicas y presupuestarias de los Estados miembros de la zona del euro surten efectos indirectos evidentes en toda la zona de la moneda común. En épocas de bonanza, esta interdependencia genera más prosperidad, pero en los momentos más desfavorables los riesgos se comparten en mayor medida. Este riesgo común debe ir acompañado de una responsabilidad también compartida que implique un mayor grado de coordinación e intercambio de información, así como un procedimiento uniforme y aplicable a todas las eventualidades, incluido el uso de mecanismos de protección financiera. ¿Cuál es el fundamento jurídico de la nueva normativa? Los nuevos procedimientos se basan en el artículo 136 del Tratado UE. Este artículo permite a los Estados miembros de la zona del euro reforzar la coordinación y la supervisión de las políticas presupuestarias a fin de garantizar la necesaria disciplina presupuestaria en la Unión Económica y Monetaria. La nueva legislación se aplica, por tanto, únicamente a la zona del euro. ¿Cuáles son los principales componentes del paquete legislativo sobre supervisión presupuestaria? El paquete legislativo sobre supervisión presupuestaria se compone de dos Reglamentos destinados a reforzar aún más la integración económica y la convergencia entre los Estados miembros de la zona del euro. Los Reglamentos se basan en –y completan- las reformas que introdujo el «paquete de seis medidas» en el PEC, a saber, el marco europeo de supervisión presupuestaria y el Semestre Europeo para la coordinación de las políticas económicas. El primer Reglamento se aplica a todos los Estados miembros de la zona del euro y contiene normas especiales para aquellos incluidos en el componente corrector del PEC, es decir, el procedimiento de déficit excesivo. El segundo Reglamento establece normas claras y simplificadas para una supervisión reforzada de los Estados miembros que se enfrenten a graves dificultades de estabilidad financiera, los destinatarios de ayuda financiera y aquellos que salgan de un programa de ayuda financiera. El paquete legislativo sobre supervisión presupuestaria crea un marco común en la zona del euro basado en un enfoque gradual. Introduce unos requisitos de vigilancia adecuados para una amplia gama de situaciones presupuestarias, a fin de garantizar la continuidad ininterrumpida de la supervisión de las políticas. El marco presupuestario de la UE ya fue modificado por el «paquete de seis medidas». ¿Por qué se introducen estos cambios adicionales? La crisis nos ha enseñado que es necesario elaborar unas políticas fiscales más prudentes a lo largo del ciclo económico. Las reformas que el «paquete de seis

339 medidas» introdujo en el PEC impusieron a los Estados miembros nuevos requisitos en materia de política presupuestaria, especialmente nuevas normas fiscales. Este no es el caso del paquete legislativo sobre supervisión presupuestaria, que se centra en la coordinación. La crisis también ha puesto de manifiesto la necesidad de seguir mejorando la coordinación y la supervisión presupuestarias de los Estados miembros de la zona del euro, dado su mayor nivel de interdependencia y exposición a los efectos indirectos de las decisiones fiscales adoptadas por cada uno de ellos. Esto ha llevado a una mayor voluntad de reforzar la supervisión mutua y de considerar las decisiones presupuestarias como una cuestión de interés común. Mediante el refuerzo de la cooperación y la integración en la zona del euro, a través de un control gradual y más estricto, el paquete legislativo sobre supervisión presupuestaria contribuirá a reforzar la parte económica de la Unión Económica y Monetaria. ¿Cómo mejorará el paquete legislativo sobre supervisión presupuestaria la coordinación presupuestaria en la zona del euro? El paquete legislativo de supervisión presupuestaria introduce un calendario presupuestario común y normas presupuestarias comunes para los Estados miembros de la zona del euro. Concretamente, a partir del próximo ciclo presupuestario: El 30 de abril a más tardar, los Estados miembros de la zona del euro deberán publicar sus planes presupuestarios a medio plazo (programas de estabilidad), junto con las prioridades de sus políticas de crecimiento y empleo en los 12 meses siguientes (programas nacionales de reforma), en el contexto del Semestre Europeo de coordinación de la política económica. El 15 de octubre a más tardar, los Estados miembros de la zona del euro deberán publicar sus proyectos de presupuesto para el año siguiente. El 31 de diciembre a más tardar, los Estados miembros de la zona del euro deberán adoptar sus presupuestos para el año siguiente. Una importante innovación de este paquete legislativo es que la Comisión examinará y emitirá un dictamen sobre cada proyecto de presupuesto el 30 de noviembre de 2009 a más tardar. Si la Comisión detecta un grave incumplimiento de las obligaciones establecidas en el Pacto de Estabilidad y Crecimiento, pedirá al Estado miembro en cuestión que presente un plan revisado. En cuanto al conjunto de la zona del euro, la Comisión publicará una evaluación global de las perspectivas presupuestarias para el año siguiente. Los dictámenes de la Comisión sobre los presupuestos nacionales y sobre la zona del euro facilitarán los debates en el seno del Eurogrupo. Este ejercicio de supervisión coordinada, al celebrarse en otoño, es decir, entre dos semestres europeos, completa positivamente el marco de gobernanza existente, ya que sienta las bases para la primavera siguiente y ofrece un seguimiento de las recomendaciones formuladas en el ejercicio anterior. Asimismo, con el espíritu de supervisión integrada que condujo a la creación del Semestre Europeo, el paquete legislativo sobre supervisión presupuestaria garantiza la coherencia entre la política presupuestaria y otras decisiones y procesos de política económica. Sobre todo, el paquete legislativo sobre supervisión presupuestaria reforzará la solvencia de los procesos presupuestarios nacionales al obligar a los Estados miembros a basar sus proyectos de presupuestos en previsiones macroeconómicas independientes

340 y a garantizar la presencia de organismos independientes que supervisen el cumplimiento de las normas fiscales nacionales. ¿Cómo reforzará el paquete legislativo sobre supervisión presupuestaria la supervisión económica y financiera en la zona del euro? Para los Estados miembros incursos en el Procedimiento de déficit excesivo, este paquete legislativo introduce un sistema de seguimiento que coexistirá con los requisitos establecidos en el marco del PEC y los completará. Gradualmente, según la fase del Procedimiento de déficit excesivo en que se encuentre, el Estado miembro afectado deberá suministrar periódicamente a la Comisión información adicional sobre las medidas que ha adoptado para corregir el déficit excesivo. La Comisión estará entonces en mejores condiciones de detectar cualquier riesgo relativo a la corrección. Si se detectan tales riesgos, la Comisión puede dirigir una recomendación directamente al Estado miembro afectado para que este asegure que adoptará todas las medidas necesarias a fin de evitar que se le declare incumplidor y se le apliquen las correspondientes sanciones financieras. El paquete legislativo sobre supervisión presupuestaria también refuerza el control y la supervisión de los Estados miembros que experimenten o corran el riesgo de experimentar graves dificultades en relación con su estabilidad financiera. La intensidad del control y la supervisión dependerá de la gravedad de la situación financiera del Estado miembro. Esto afecta, aunque no solo, a los Estados miembros que reciben ayuda financiera o que están en vías de supresión progresiva de esa ayuda. Los que experimenten una grave inestabilidad financiera o reciban ayuda financiera con carácter preventivo también estarán sometidos a una supervisión reforzada muy estricta por parte de la Comisión y el Banco Central Europeo. Esta supervisión reforzada se basará en los requisitos de los Estados miembros en el marco del Procedimiento de déficit excesivo, e irá más allá. A partir de esta supervisión, la Comisión puede llegar a la conclusión de que un Estado miembro debe adoptar medidas adicionales porque su situación financiera podría tener graves repercusiones negativas para la estabilidad financiera de la zona del euro. En tales casos, la Comisión puede proponer que el Consejo de Ministros recomiende al Estado miembro afectado que adopte medidas correctoras o elabore un borrador de programa de ajuste macroeconómico. ¿Qué relación hay entre el paquete legislativo sobre supervisión presupuestaria y el Tratado de Estabilidad? El Tratado intergubernamental de Estabilidad, Coordinación y Gobernanza en la Unión Económica y Monetaria, generalmente denominado el Tratado de Estabilidad, es un acuerdo entre los Estados miembros de la zona del euro y otros ocho Estados miembros de la UE. Aunque no forma parte del Derecho de la UE, incluye el compromiso de transferir su contenido al marco jurídico de la UE en un plazo de cinco años. El paquete legislativo de supervisión presupuestaria incorpora algunos elementos del Tratado de Estabilidad, incluido el requisito de que los Estados miembros incursos en un Procedimiento de déficit excesivo elaboren programas de asociación económica y el requisito de una coordinación ex ante de los planes de emisión de deuda pública de los Estados miembros.

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¿Qué relación hay entre la nueva normativa, el Pacto de Estabilidad y Crecimiento (PEC) y el Semestre Europeo? El paquete legislativo de supervisión presupuestaria ha sido concebido para adaptarse plenamente al PEC y completarlo. En el marco del Semestre Europeo, en la primavera de cada año, los Estados miembros presentan sus planes presupuestarios a medio plazo (los denominados programas de estabilidad de los Estados miembros de la zona del euro y programas de convergencia de los demás). En cuanto a los Estados miembros de la zona del euro, el paquete legislativo sobre supervisión presupuestaria añade un equivalente otoñal al ejercicio de primavera, pero centrado únicamente en los planes presupuestarios para el año siguiente. La Comisión emitirá su dictamen sobre la adecuación de los proyectos de presupuesto a los requisitos del Pacto de Estabilidad y Crecimiento y a las recomendaciones específicas para cada país en el marco del Semestre Europeo y de la política presupuestaria, con anterioridad a la aprobación del presupuesto. Es importante señalar, sin embargo, que el paquete legislativo sobre supervisión presupuestaria no reconoce a la Comisión el derecho a modificar los proyectos de presupuestos nacionales ni tampoco obliga a los Estados miembros a seguir estrictamente el dictamen de la Comisión. El valor añadido de este ejercicio es la orientación directa que introduce en el procedimiento presupuestario, con el fin de proporcionar a todos los participantes en el mismo la información necesaria para tomar una decisión antes de la aprobación del presupuesto. La presentación de informes adicionales sobre las medidas adoptadas por los Estados miembros sujetos al Procedimiento de déficit excesivo es el primer requisito que estos deben cumplir con arreglo a las normas del PEC, sin que ello implique el solapamiento ni la sustitución de estas últimas. Ahora bien, esta información complementaria aumenta la responsabilidad de la Comisión en cuanto a la entrega a su debido tiempo de directrices sobre los incumplimientos de las recomendaciones del PED. A este respecto, refuerza el papel preventivo de la UE y contribuye a fortalecer los mecanismos de ejecución en la zona del euro (en forma de sanciones financieras graduales) introducidos por el «paquete de seis medidas». Gracias a estos nuevos procedimientos de presentación de informes, el paquete legislativo sobre supervisión presupuestaria refuerza la PEC al incorporarlos al conjunto de instrumentos de que dispone la Comisión para formular recomendaciones. Por ejemplo, cuando la Comisión señale en su dictamen que un proyecto de presupuesto no es conforme a las obligaciones establecidas por la PEC y que el Estado miembro en cuestión no ha adoptado medidas para corregirlo, este primer señalamiento por la Comisión podrá utilizarse más tarde como elemento a considerar a la hora de decidir, por ejemplo, sobre la eventual inclusión del Estado miembro en el Procedimiento de déficit excesivo si su déficit o deuda no se ajusta a las normas del PEC. ¿Qué ocurre cuando un Estado miembro sale de un programa de ajuste o deja de percibir ayuda financiera de carácter preventivo? El paquete legislativo sobre supervisión presupuestaria introduce un nuevo sistema de supervisión posterior al programa para los Estados miembros que salen de un programa de ajuste o dejan de percibir ayudas financieras de carácter preventivo. Estos Estados seguirán sometidos a la nueva supervisión reforzada hasta que devuelvan el 75 % como mínimo de la ayuda recibida. De este modo se garantiza el retorno correcto y duradero a los mercados y la sostenibilidad fiscal, en beneficio del Estado miembro en cuestión y del conjunto de la zona del euro. 342

¿Por qué crear un proceso de supervisión reforzada que se superpone al proceso de supervisión habitual? ¿Hay que suponer que este último no funcionará? El «paquete de seis medidas» ha contribuido a mejorar considerablemente el proceso de supervisión. Sin embargo, la experiencia muestra que deberíamos prever lo imprevisible. Por ello, los procedimientos de supervisión reforzada introducidos por el paquete legislativo sobre supervisión presupuestaria permitirán un seguimiento más estrecho de los países que corren el riesgo de sufrir dificultades financieras o que ya las están sufriendo. Dichos procedimientos conferirán a la Comisión las facultades necesarias para garantizar o restablecer una senda sostenible. ¿Por qué adaptar la aplicación del Pacto de Estabilidad y Crecimiento, el procedimiento de desequilibrio macroeconómico y el Semestre Europeo para los países beneficiarios de un programa? ¿No debilitaría esto la supervisión? Los programas de ajuste macroeconómico son de muy amplio alcance y van mucho más allá de las cuestiones estrictamente presupuestarias y de supervisión multilateral. En la práctica, al Estado miembro afectado se le pide que haga todo lo que se considera necesario para mejorar su situación económica y financiera a corto, medio y largo plazo. La suspensión de la aplicación del procedimiento de desequilibrio macroeconómico/procedimiento de desequilibrio excesivo y del seguimiento y la presentación de informes en el marco del PEC y del Semestre Europeo contribuirán a evitar la duplicación innecesaria de las obligaciones de control e información. La supervisión reforzada del paquete legislativo sobre supervisión presupuestaria ¿es compatible con lo previsto en las directrices del MES/FESF para los países que reciben ayuda financiera a título preventivo? Sí. La Comisión preparó las directrices MES/FESF y las debatió con los Estados miembros teniendo presente el paquete legislativo sobre supervisión presupuestaria, lo cual garantiza la coherencia natural entre ambos textos. Lo que hace el paquete legislativo de supervisión presupuestaria es incorporar al marco jurídico de la UE las prácticas de trabajo establecidas por estos instrumentos intergubernamentales. http://europa.eu/rapid/press-release_MEMO-13-457_es.htm

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European Commission Economic and Financial Affairs European Commission Economic and Financial Affairs News Economic governance Legal notice Six-pack? Two-pack? Fiscal compact? A short guide to the new EU fiscal governance 14.03.2012 - Economic and fiscal governance in the EU and the euro area has been fundamentally strengthened in the recent months. And the work is ongoing. Please find below an explanation of the main building blocks. What are the main features of the "six-pack" and the Treaty on Stability, Coordination and Governance (TSCG)? Six-pack • Entered into force on 13 December 2011; • Five Regulations and one Directive (that is why it is called six-pack); • EU secondary law; • Applies to 27 MS with some specific rules for euro-area Member States, especially regarding financial sanctions; • The six-pack does not only cover fiscal surveillance, but also macroeconomic surveillance under the new Macroeconomic Imbalance Procedure. • In the fiscal field, the six-pack strengthens the Stability and Growth Pact (SGP). According to the SGP Member States' budgetary balance shall converge towards the country-specific medium-term objective (MTO) - so-called preventive arm - and the general government deficit must not exceed 3% of GDP and public debt must not exceed 60% of GDP (or at least diminish sufficiently towards the 60% threshold). The six-pack reinforces both the preventive and the corrective arm of the Pact, i.e. the Excessive Deficit Procedure (EDP), which applies to Member States that have breached either the deficit or the debt criterion.

o The six-pack ensures stricter application of the fiscal rules by defining quantitatively what a "significant deviation" from the MTO or the adjustment path towards it means in the context of the preventive arm.

o Moreover, the six-pack operationalizes the debt criterion, so that an EDP may also be launched on the basis of a debt ratio above 60% of GDP which would not diminish towards the Treaty reference value at a satisfactory pace (and not only on the basis of a deficit above 3% of GDP, which has been the case so far).

o Financial sanctions for euro-area Member States are imposed in a gradual way, from the preventive arm to the latest stages of the EDP, and may eventually reach 0.5% of GDP. The six-pack introduces reverse qualified majority voting (RQMV) for most sanctions, therefore increasing their likelihood for euro-area Member States. (RQMV implies that a recommendation or a proposal of the Commission is considered adopted in the Council unless a qualified majority of Member States votes against it.)

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Treaty on Stability, Coordination and Governance (TSCG) • Entry into force following ratification by at least twelve euro-area Member States; • Intergovernmental agreement (not EU law); • Signed by 25 EU Member States (all but UK and Czech Republic); TSCG will only be binding for all euro-area Member States, while other contracting parties will be bound once they adopt the euro or earlier if they wish (they are allowed to choose provisions they wish to comply with). • The fiscal part of the TSCG is referred to as "Fiscal Compact". • Requires contracting parties to respect/ensure convergence towards the country-specific medium-term objective (MTO), as defined in the SGP, with a lower limit of a structural deficit (cyclical effects and one-off measures are not taken into account) of 0.5% of GDP; (1.0% of GDP for Member States with a debt ratio significantly below 60% of GDP). Correction mechanisms should ensure automatic action to be undertaken in case of deviation from the MTO or the adjustment path towards it, with escape clauses for exceptional circumstances. Compliance with the rule should be monitored by independent institutions. • These budget rules shall be implemented in national law through provisions of "binding force and permanent character, preferably constitutional". • European Court of Justice (CoJ) may impose financial sanction (0.1% of GDP) if a country does not properly implement the new budget rules in national law and fails to comply with a CoJ ruling that requires it to do so. In the case of euro-area Member States, sanctions would be channelled to the ESM, in the case of "non-euro-area Member States", the money would be attributed to the EU budget. • Compliance with the rule implementing the MTO in national law will also be monitored at the national level by independent institutions. • Other provisions aim at reinforcing the implementation of the Stability and Growth Pact: re- statement of the debt rule set up by the six-pack, behavioural commitment reproducing RQMV among euro-area Member States when the Commission considers that an excessive deficit exists (formal modification of the voting rules would require a Treaty change). • Finally, the TSCG sets stones for a reinforced surveillance and coordination of economic policies, with ex ante coordination of debt issuance plans among Contracting Parties and economic partnership programmes for Member States in EDP, which detail the structural reforms needed for an effective and durable correction of their excessive deficit. • TSCG also includes a part on economic governance in the euro area, e. g.: Euro Summits at least twice a year; reinforced economic cooperation. Does the Fiscal Compact succeed the six-pack or does it run alongside it? The Fiscal Compact, which is the fiscal part of the Treaty on Stability, Coordination and Governance (TSCG) - once it enters into force - and the six-pack will run in parallel. On the one hand, a couple of provisions included in the TSCG are mirroring concepts existing in the Stability and Growth Pact as reformed by the six-pack: medium-term objectives (MTOs), significant deviation, exceptional circumstances. On the other hand, some provisions of the TSCG are more stringent than the six-pack. For example, it says that at each stage of the Excessive Deficit Procedure (EDP) euro-area Member States will support the Commission's proposals or recommendations in the Council if a "euro- area Member State" is in breach of the deficit criterion, unless a qualified majority of them is against it. In practice this means that if a "euro-area Member State" breaches the deficit criterion a kind of reverse qualified majority voting (RQMV) applies to all stages of the EDP, even if not foreseen in the six-pack.

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Moreover, as mentioned above, the TSCG requires Member States to enshrine the country- specific MTOs in national binding law, preferably of constitutional nature. In addition, the TSCG reinforces economic governance (see above). The Commission clearly supports the objective to incorporate key provisions of the TSCG in EU law as soon as possible (the TSCG mentions a 5-year horizon, but some provisions may be enshrined in secondary legislation without delay). How does the "two-pack" fit in? Two-pack • Work in progress: Discussions between Commission, Council and Parliament are ongoing; • Shall be agreed in summer (indicative); • Two Regulations; • Applicable to euro-area Member States only (based on Art 136 TFEU); • Aims at further strengthening the surveillance mechanisms in the euro area; • Regulation on monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficits in euro-area Member States (original Commission proposal):

o Common budgetary rules at the national level shall be monitored by independent institutions.

o As part of a common budgetary timeline, euro-area Member States shall submit their draft budgetary plan for the following year to the Commission and the Eurogroup before 15 October, along with the independent macro-economic forecast on which they are based.

o This builds on the Stability and Growth Pact (SGP), under which Member States present the main characteristics of their medium-term public finance plans to the Commission and the Council in spring (in Stability or Convergence Programmes). The exercise in autumn introduced by the two-pack allows monitoring and sharing information on MS budgetary policies closer to their adoption. The Commission analyses if the draft budget is in line with the SGP and the recommendations from the European Semester (which the country has received in May/June).

o If the Commission assesses that the draft budgetary plan shows serious non-compliance with the SGP, the Commission can require a revised draft budgetary plan. Otherwise it may address an opinion to the Member States concerned, which would also be discussed by the Eurogroup.

o This Regulation therefore complements the preventive arm of the SGP, in particular, by ensuring appropriate integration of EU policy recommendations in the national budgetary preparations and increasing peer pressure in the Eurogroup.

o The National Parliaments remain fully sovereign in voting the Budget Law. With the Regulation, they would be now equipped with an independent opinion on the budgetary plans, namely the Commission opinion.

o For euro-area Member States in EDP, the Regulation introduces a system of graduated monitoring in order to secure a timely and durable correction of excessive deficits. This would in particular allow an early detection of risks that a Member State does not correct its excessive deficit by the deadline set by the Council, and permit to take action accordingly.

o The co-legislators, together with the Commission, are aiming at incorporating elements of the TSCG in this Regulation: in particular, the requirement to set up independent institutions in charge of monitoring fiscal rules which should implement the MTO at the national level, ex ante coordination of debt issuance plans and economic partnership

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programmes detailing structural reforms necessary to ensure an effective and durable correction of the EDP. o Regulation on enhanced surveillance of euro-area Member States experiencing or threatened with financial difficulties:

o euro-area Member States experiencing or threatened with serious difficulties will be subject to enhanced surveillance. Commission may decide this.

o Automatic enhanced surveillance for countries receiving certain types of precautionary financial assistance (in keeping with EFSF and future ESM guidelines). The list of precautionary assistance instruments concerned will be established and maintained by the Commission.

o Surveillance involves . An obligation on Member States to adopt measures to address the sources of instability. . Regular review missions and the provision of more detailed or disaggregated financial sector data if requested. . Quarterly reporting by Commission to Eurogroup Working Group.

o Procedure for deciding and monitoring a macro-economic adjustment programme: . Member States facing insufficient administrative capacities must seek technical assistance from Commission (e.g. Task Force for Greece). . If necessary Council may decide that beneficiary Member State does not comply with policy requirements contained in the adjustment programme. As a result, the country concerned would face financial consequences with regard to the disbursements under the programme.

o Simplification of the monitoring of programme countries: In order to avoid duplication and overburdening, the monitoring under the SGP and the implementation of the Macroeconomic Imbalance Procedure and the European Semester shall be suspended, as programme countries are per se subject to wide ranging surveillance and strict targets.

o Post-programme surveillance: According to the draft regulation, a country shall be subject to post-programme surveillance as long as it has not repaid 75% of its debt. Last update: 26/07/2013 http://ec.europa.eu/economy_finance/articles/governance/2012-03-14_six_pack_en.htm

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