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MINISTERIO DE ECONOMÍA Y DIRECCION GENERAL DE POLÍTICA ECONOMICA COMPETITIVIDAD '$' UNIDAD DE APOYO

CUADERNO DE DOCUMENTACION

Número 95

Weekly Digest

26 Abril/11 Mayo 2012

Alvaro Espina Vocal Asesor 11 de Mayo de 2012

Weekly Digest: 26 abril-11 Mayo 2012 Abstract Paul McCulley (el exdirector de estudios de PIMCO que creó el concepto de “banca en la sombra” y predijo de manera presciente y tempestiva la llegada de la Gran Recesión) —junto a Zoltan Pozsar (que diseñó el mapa y el sistema de monitorización de la banca en la sombra para el FMI y la Fed) — afirmaban rotundamente en un paper presentado al seminario que se celebró en el Banco de Francia el 26 de abril de este año: “Actuar de manera responsable con respecto a la ortodoxia en la zona del euro — siguiendo los "dictados" alemanes de sado-fiscalismo y de devaluación interna — es una simple reminiscencia de varias peripecias económicas y de las fricciones provocadas por el patrón oro, características del período de entreguerras. La insostenible acumulación de deuda en las economías periféricas y la insistencia de Alemania para corregir pretendidamente este problema a través de la austeridad no resulta ser muy diferente de la insistencia de Francia en obligar a los "boches" a pagar las reparaciones de guerra en su totalidad y sin demora en aquella época. En uno y otro caso la austeridad constituye una imposición extranjera sobre el correspondiente país, que aboca a una elevación del malestar social y a la inestabilidad política —y, lo que es peor aún, al aumento del extremismo— y no al crecimiento económico. Mientras que ahora no es probable que el incumplimiento reiterado en el pago de las deudas conduzca a la ocupación militar, la insistencia de Alemania en que se nombre un jefe supremo del presupuesto para Atenas no viene a ser muy diferente de la invasión de la cuenca del Ruhr por Poincaré en 1923. Está por ver si en Grecia se adoptará alguna modalidad de resistencia pasiva, como sucedió entonces. En un nivel más sistémico, la negativa de Alemania a dinamizar económicamente el centro de la eurozona, al tiempo que insiste en la devaluación interna en la periferia, resulta inquietantemente parecido a las fricciones causadas por el desequilibrio entre los países con superávit de oro, que se negaron a admitir ninguna forma de inflación, y los países con déficit, que no consiguieron realizar una deflación interna suficiente durante el decenio de 1920 y principios de 1930. ………………. Si nos dejamos guiar por la historia, los ajustes extremadamente dolorosos obligarán a algunos países a abandonar el euro, o, alternativamente, a adoptar una política que haga caso omiso de la ortodoxia monetaria, y, especialmente: (1) de las restricciones legales en contra de la monetización de la deuda, que son la plasmación actual de la mentalidad de tipo de cambio fijo del patrón oro, y, (2) del mandato de total independencia del BCE. “Del mismo modo que se hizo cuando estuvo vigente el patrón oro, actuar de manera responsable con relación a aquella ortodoxia hará fracasar a Europa, y al igual que le pasó al canciller Churchill, la Canciller Merkel lamentará haber insistido en exigir el lecho de Procusto de la austeridad, y acabará considerándolo como el mayor error de su vida política.” En el caso de Japón tras la quiebra de la burbuja de finales de los ochenta, el gobierno y el banco actuaron “irresponsablemente respecto a las ortodoxias fiscal y monetaria, pero solo a rachas y sin comprometer una política firme de reflación, lo que palió la situación y evitó la depresión, pero no fue suficiente para desencadenar la recuperación, porque no fueron suficientemente heterodoxos (como les recomendó Bernanke en 2003). Por su 1

parte, durante la gran recesión el Reino Unido actuó de forma “irresponsable” en el terreno monetario, pero de forma ortodoxa en el fiscal, y esa combinación no está teniendo éxito, ni parece que vaya a tenerlo. En cambio la política seguida por los EEUU desde 2008 constituye un claro ejemplo de aplicación de las enseñanzas extraídas de la gran depresión: EEUU actuó de forma irresponsable respecto a las políticas fiscal y monetaria, y ha resultado ser el único caso de éxito desde entonces. Respecto al futuro, en el paper de la Brookings Institution sintetizado al final de este WD, Brad DeLong y Larry Summers demuestran la conveniencia de reforzar esa misma política, aunque de forma abiertamente temporal y condicional, poniéndole límites precisos y sendas de actuación para ser ejecutadas tan pronto se registren las condiciones preestablecidas (bien es verdad que el clima político norteamericano parece estar dominado por gentes que no se dejan “persuadir por el conocimiento convencional de los hechos, la evidencia y la ciencia”). Inevitablemente este debate se va a suscitar más pronto que tarde en Europa y en el Reino Unido, “infectada” como está la eurozona de una recesión que empieza a pesar gravemente sobre el crecimiento global y que amenaza con convertirse en patológica (sobre todo en la periferia, pero también en el núcleo, si bien Alemania vio crecer en marzo su IPI en un 2,8%, a consecuencia de las exportaciones al mercado asiático), como indicaba David Keohane, en el blog Alphaville, de FT, a la vista de la gráfica de los PMI de abril (en la que España se situaría algo por debajo de Italia: 43,5/43,8):

Para Lorenzo Bini Smaghi la disyuntiva a la que se enfrenta actualmente la Eurozona no es la de austeridad versus crecimiento, sino la de aplicar políticas acordes con el mejor conocimiento disponible. Y este conocimiento indica que el conjunto de la eurozona ha perdido competitividad, y especialmente los países periféricos (aunque Alemania la haya ganado en exceso, tras un decenio sin crecimiento, algo a lo que enseguida volveremos). Y sin embargo, la cotización del euro no cae (o no lo hace suficientemente), lo que iría en contra de todo lo que sabemos si no fuera porque China y otros países emergentes (principalmente asiáticos) vienen realizando una operación

sistemática de adulteración de los tipos de cambio comprando masivamente activos denominados en euros (principalmente, bonos de los países periféricos, a precios mínimos, dados los elevados rendimientos exigidos), con el fin de mantener depreciado el Renminbi para favorecer sus exportaciones hacia Europa (mientras controlan el superávit de su balanza corriente con EEUU, temerosos de las represalias norteamericanas). En su día, cuando esto se lo hacían a EEUU, a tales prácticas se les denominaba “el conundrum” de Alan Greenspan1. Lo que sucede es que en aquellos tiempos tal enigma se traducía en bajos tipos de interés para los bonos de EEUU, mientras que ahora, la política del BCE permite que la misma operación se haga a tipos de rendimiento extraordinariamente lucrativos. Así es como los chinos matan dos pájaros de un tiro, con el beneplácito de Angela Merkel (que visitó China para pedir que lo hicieran con mayor intensidad todavía pero, sobre todo, para fomentar las exportaciones alemanas, que crecen a excelente ritmo). Esto es en buena medida fruto de la renuncia del BCE a actuar en el mercado secundario de bonos y a estabilizar los diferenciales de tipos de interés a medio y largo plazo a unos niveles admisibles, lo que dificulta en extremo cumplir los programas de consolidación fiscal de los países periféricos (ya obstaculizados por el deterioro de su competitividad exterior, debido al euro fuerte). El trabajo de Wei Chi, Richard B. Freeman, y Hongbin Li para NBER, cuyo abstract se incluye también en este WD, señala hacia la otra pata de la estrategia china de competitividad: la de un mercado de trabajo absolutamente desregulado y sin la más mínima forma de derecho ni práctica de negociación colectiva, que impide la aparición de diferencias salariales, manteniendo al país en una de las formas más crudas del modelo de “crecimiento con oferta ilimitada de mano de obra”, descrito por Arthur Lewis en los años cincuenta. Ya entonces se interpretaba que una cosa así haría inviable el sistema internacional de intercambios, pero nada se ha hecho para corregirlo. En el otro extremo de este tipo de prácticas se sitúa la estrategia alemana de ganar competitividad masivamente dentro de la eurozona a base de aplicar una política masiva de contención salarial a lo largo de todo un decenio, lastrando el crecimiento del consumo. El gráfico adjunto, preparado por Spiegel, ilustra bien el tipo de desequilibrios en que se basa la estrategia de crecimiento liderado por las exportaciones, aplicado por Alemania al amparo de la creación del euro. Puede decirse que la perseverancia en esta estrategia, una vez recuperada

1 Véase Stefan Karlsson “Greenspan's Mysterious Conundrum”, (12/07/2005), en : http://mises.org/daily/1859

la competitividad perdida anteriormente por Alemania —y en un contexto de recesión del conjunto de la eurozona —, podría considerarse contraria a la buena fe imprescindible dentro de una zona monetaria, y puede acabar resultando suicida para el euro. Probablemente por ello, Wofgang Schäuble reconocía esta semana que los salarios deben subir más en Alemania, añadiendo inmediatamente un toque de moderación, que no debería ser tal, puesto que en la desmesura de la estrategia anterior se encuentra una de las claves de los desequilibrios que producen los problemas actuales de la eurozona. Esto no resta un ápice de responsabilidad a los países periféricos (que necesitan aplicar reformas firmes para mejorar su propia posición), pero sin una contribución simétrica por parte de Alemania, la tarea podría resultar también de imposible cumplimiento. Los datos recogidos por el equipo de investigación de Spiegel sobre el dualismo del mercado de trabajo alemán resultan clamorosos y sirven de balance acerca de lo que Alemania podría hacer para salvar el Euro, salvándose a sí misma (especialmente si se sigue la voluntad mayoritaria de su electorado, que parece inclinarse por un gobierno de gran coalición). Esta sería la ocasión para tomar en cuenta la posibilidad de una cierta armonización en el marco de regulación de los mercados de trabajo a escala europea, procediendo a la regulación común de los contratos de trabajo. En este punto, Krugman saludaba tal posibilidad y veía por primera vez un portillo de esperanza para el Euro, afirmando que si Alemania no reflacta, España y el resto de la periferia no podrán recuperar la competitividad a su debido tiempo, porque los procesos de deflación interna resultan demasiado lentos (obsérvese en el gráfico que sigue el movimiento de los costes laborales en la eurozona durante el pasado bienio). En cambio, si desde Alemania se acompañase este movimiento de aproximación de los costes laborales (todo ello apoyado por un cierto espaciamiento temporal de la fecha límite para alcanzar el déficit del 3%, que empieza a contemplarse desde Bruselas), el horizonte empezaría a ser creíble. Esto no es una vuelta atrás, ya que la fecha idónea para alcanzar un déficit del 3% debería haberse establecido desde el comienzo en 2015, como se planteó desde aquí en el Cuaderno de Documentación nº 91-Final (30/julio/2010).2 Pero entonces tal cosa resultaba incomprensible para Bruselas, mientras que ahora empieza a comprenderlo hasta el Bundesbank.

2 Sintetizado en: “La primera recesión global y la crisis del Euro”, publicado en el nº 18 de la publicación Mediterráneo Económico (30-XI-2010): http://www.fundacioncajamar.com/files/publicaciones/264.pdf

En cualquier caso, existe la impresión general de que la absorción del impacto de la burbuja inmobiliaria se ha realizado de forma muy lenta en España. El artículo de Bloomberg firmado por Sharon Smyth et al., incluido en este WD, es un buen ejemplo de la mezcla de medias verdades y de exageraciones con las que se puede ir formando una reputación en el contexto internacional. En este caso, el leit motiv es la pretendida estrategia de denegación (denial) llevada a cabo hasta ahora por España, que se reflejaría en el retraso en reconocer los activos dañados de la banca, derivados de la burbuja (en inglés: procastination). Sin embargo, los datos que aporta el propio artículo sobre la evolución del mercado inmobiliario no casan bien con tal aseveración: por un lado, se afirma “los precios de las casas se duplicaron en España durante el decenio 1997-2007, mientras que en Irlanda se multiplicaron por más de cuatro entre 1995 y 2005, formando la mayor burbuja de la OCDE”; por otro lado, se señala: desde el pico de 2007, los precios de la vivienda en Irlanda se han reducido en un 49% (para estabilizarse por primera vez en marzo de 2012), mientras que los de España solo lo han hecho en un 22%.” Inmediatamente se cita al creador de El Idealista quien aventura la hipótesis de que en España los precios tendrían que caer otro tanto (pero si esto fuera así, los de Irlanda, tendrían también que hacer lo propio, puesto que la burbuja tuvo allí intensidad doble, en términos de precios, fruto en parte de que el stock de viviendas por mil habitantes seguía siendo en 2007 el más bajo de los nueve mayores países de la UE, mientras que en España a partir de 1990 desapareció cualquier forma de racionamiento de la oferta, en términos relativos, como se observa en el gráfico adjunto.3 Evolución del parque de viviendas: Viv./1.000 habitantes: 1970, 1980, 1985, 1990, 1995, 2000, 2005, 2007

No obstante lo cual, en el informe para el año 2012 del rating de “accesibilidad al mercado de la vivienda” (affordability), preparado por Wendell Cox (Demographia) y Hugh Pavletich (Performance Urban Planning) para siete grandes mercados de países

3 Extraído de: http://habitat.aq.upm.es/boletin/n47/arrod_2.html

anglosajones (incluido Hong Kong) —cuyo umbral de accesibilidad se sitúa en un índice 3 para la ratio entre el precio medio de la vivienda y los ingresos medios familiares —, Irlanda se sitúa ya en segundo lugar, con un índice 3,3, inmediatamente después de EEUU, con índice 3, como se observa en el gráfico que sigue.4

Tales criterios no pueden aplicarse con carácter general, dadas las diferencias entre el mercado inmobiliario del mundo anglosajón y el del continente europeo. Para el caso de España, los estudios dirigidos por Ezequiel Uriel5 indican que entre 1990 y 2007 el valor total del stock de viviendas en España pasó de 6,4 a 10,2 veces la remuneración de los asalariados, lo que representa un crecimiento del 60% (similar al registrado en Francia en ese mismo período)6. Con independencia del peso de los compradores no nacionales, una caída del 22% desde aquella fecha situaría la ratio en torno a 8, muy por encima del caso de Australia, que es el país menos asequible en el estudio de Demographia Internacional. Otra forma de evaluar el punto de equilibrio de los precios de la vivienda consiste en estimar el PER, o ratio entre el precio y el alquiler, cuya media para los últimos 25 años se situó en 19,5 en España, según el Instituto Juan de Mariana. Tras alcanzar un máximo de 32,2 en 2007 (un 40% por encima del punto de equilibrio), en 2010 ese indicador se situaba ya en 25,6, lo que implica que el “regreso hacia la media” habría exigido en esas fechas una nueva contracción del 23,8%,7 que obviamente no se ha registrado durante el último bienio. Restaría, pues, por hacer un ajuste residual que, sin embargo, dista mucho del orden de magnitud que se baraja entre los medios creadores de opinión internacional.

4 Véase 8thAnnual Demographia International Housing Affordability Survey: 2012 , disponible en: http://www.demographia.com/dhi.pdf. De su lectura surge la pregunta sobre si el mundo se encuentra atascado todavía en una burbuja inmobiliaria global, como se preguntaba Barry Ritholtz el 07/mayo/2012: http://www.ritholtz.com/blog/2012/05/global-real-estate-bubble/ 5 Véase E. Uriel (dir.) et al., El stock de capital en viviendas en España y su distribución territorial (1990.2007), Fundación BBVA, 2009, página 14. 6 Véase « L’évolution des prix du logement en France sur 25 ans », La note d’analyse, nº 221, abril, 2011, gráfico nº 11 : http://www.politiquessociales.net/IMG/pdf/CAS.pdf 7 Véase: http://www.juandemariana.org/nota/4946/precio/vivienda/espana/sigue/sobrevalorado/ 6

En cambio, lo que sí marca la diferencia a los ojos de la mayoría de los observadores es la celeridad irlandesa en afrontar el problema que la burbuja supuso para los balances de sus bancos: “en 2009, Irlanda creó la Agencia Nacional de Gestión de activos (National Asset Management Agency, NAMA), o sea, un “banco malo”, que emitió deuda para adquirir por €32.000 millones préstamos comerciales al sector inmobiliario con un valor facial de €74.000 millones”. ¿Debería haberse hecho esto mismo en España con anterioridad? Existen muchas dudas al respecto. Quienes así opinan aducen que solo tras el saneamiento de los balances de los bancos y la recuperación de los precios de equilibrio de la vivienda puede volver a fluir el crédito, vaciarse el mercado de viviendas y recuperarse la actividad en el sector de la construcción, de modo que cuanto antes se haga, más pronto llegará la recuperación. Pero tal razonamiento no cuenta con las fricciones que aparecen necesariamente en todos los mercados afectados. Por ejemplo, es cierto que el mercado de la vivienda norteamericano ajustó sus precios con una celeridad incomparable a la de otros mercados, como se observa en el gráfico que sigue, según el cual el ajuste fundamental de la ratio precio/renta se llevó a cabo en EEU en el primer trimestre de 2009 (en que el índice volvió a los niveles de comienzos de siglo), aunque siguió estancado o descendiendo durante todo el trienio subsiguiente, alcanzando en el mes de febrero de 2012 niveles equiparables a los de finales de los años noventa.

Fuente: http://www.calculatedriskblog.com/2012/04/real-house-prices-and-price-to-rent.html Pero eso no significó ni mucho menos la dinamización del mercado de compraventa de viviendas (de segunda mano y nuevas), que lleva también tres años estancado y con un diferencial creciente en el perfil de ventas de unas y otras, como se observa en el gráfico que sigue, mientras todos los analistas concluyen que hasta que no se cierre tal desfase no se regularizará el mercado. Por el contrario, la compraventa de viviendas usadas ha vuelto también a niveles de finales de los noventa, y la de viviendas nuevas se encuentra

todavía en mínimos históricos (por debajo incluso del nivel alcanzado en 1982).8 Y todo ello en el contexto de una política —tanto del gobierno federal como de la Fed — decididamente volcada en la dinamización de ese mercado y el del crédito hipotecario (además de lanzar inmediatamente tras la aparición de la crisis el programa TARP, para limpiar los balances de los bancos, en una operación combinada del Tesoro y la Fed)9 lo que dista mucho de haber sucedido en Europa (dada la política monetaria practicada por el BCE a lo largo de la crisis).

Fuente: http://www.crgraphs.com/2011/10/new-home-sales.html

Pero lo que los partidarios de una política de ajuste fulminante no contemplan son los efectos colaterales de este tipo de procesos en términos de deflación de balances de los hogares y de las instituciones financieras. En el trabajo de Charles W. Calomiris et al. cuyo abstract se incluye en este WD, se analiza el efecto-riqueza de los cambios en el valor de la vivienda sobre el consumo de los hogares, situándolo para el conjunto de los EEUU entre el 5% y el 8%. De ser este efecto similar en el caso de España, una disminución del 22% del valor de la riqueza invertida en vivienda habría significado una caída del consumo desde 2007 de entre el 5,3% y el 8,45% del PIB, ya que ese año el valor total del stock de viviendas representaba aproximadamente cinco veces el valor del PIB (5,07 y 1,05 billones de euros, respectivamente).10 De quedar pendiente un ajuste de la misma dimensión, ese sería el nuevo efecto contractivo que debería esperarse, pero probablemente se trate de una exageración, como ya observamos. No obstante, el gráfico sobre el desapalancamiento de los hogares elaborado por Laborda

8 Véase : http://www.calculatedriskblog.com/2012/04/new-home-sales-in-march-at-328000.html 9 El programa desembolsó 411.000 millones de dólares de fondos federales, de los cuales el 82% (337.000) han sido recuperados hasta la fecha. Vid.: http://www.treasury.gov/initiatives/financial- stability/results/Pages/TarpTracker.aspx 10 La cifra de la riqueza en viviendas proviene del estudio de Uriel, ya citado, página 217.

(véase su trabajo en este WD) confirma el retraso del proceso, ya que desde un máximo de la ratio de endeudamiento privado español superior al 85% del PIB en 2009, en 2011 se habría situado todavía por encima del 80% (frente al promedio de la eurozona, situado en 65%), lo que es atribuido por el autor a la sequía del crédito, pero en realidad se trata del mismo efecto de contracción de los balances en los hogares y las entidades de crédito, derivada del efecto riqueza. Todo ello, naturalmente, trae su causa de los excesos cometidos durante la etapa de crédito fácil y de burbuja inmobiliaria, que explica unos niveles de endeudamiento solo comparables a los de Japón en 1990, como señalaba recientemente Richard C. Koo, de Nomura Research (que Landon Thomas Jr. recuerda en su artículo para NYT reproducido en este WD, en el que toma a ACS como prototipo del exceso de endeudamiento corporativo en que se ha venido viviendo). La deflación de deuda es la consecuencia casi inevitable de tales precedentes. Ratio entre el precio de la vivienda y el ingreso disponible El gráfico adjunto hace de los hogares (1996=100) una comparación del ritmo del ajuste de la ratio precio/renta de la vivienda en 5 países. Viniendo del gabinete de estudios del primer ministro francés, la estimación no parece exagerada: en 2011 el ajuste pendiente en España era ya inferior al 20%, menos de la mitad que el imputado a los casos francés y Fuente: « L’évolution des prix du logement en France.. », cit., G.12 británico. En el gráfico se observa también que en el caso de Irlanda probablemente se haya incurrido en un ajuste excesivo “en busca del precio de equilibrio que vacía los mercados,” que es algo que no existe cuando se atraviesa por una trampa de liquidez, ya que los mercados no se vacían porque la demanda se ha evaporado (como se observa en EEUU). La mejor prueba de ello a escala global es que el rendimiento real de los bonos americanos a diez años cotiza en negativo: 1,9% nominal frente a una inflación del 2,5%. A consecuencia de ello, Irlanda se encuentra en depresión, como indica el gráfico adjunto.11

11 Tomado de http://www.princeton.edu/~pkrugman/brussels.pdf 9

En cualquier caso, aquellas perspectivas y el efecto bola de nieve de los medios de opinión explican en parte que el fuego de los mercados se haya concentrado estas últimas semanas sobre España. El razonamiento manejado por los grandes medios es sencillo: como la burbuja todavía no está digerida, completar el proceso de reducción de precios inmobiliarios dañará los balances de los bancos. Por un lado, esto agravará la sequía de crédito (de hecho, ya viene haciéndolo, porque los bancos vienen manteniendo un exceso de reservas en previsión del futuro shock), lo que contrae el consumo (ya afectado por el efecto riqueza), la inversión y el crecimiento. Por otro lado, se afirma que los bancos más frágiles deberán ser rescatados con dinero público, lo que dañará el balance imaginario del soberano, reduciendo su rating de solvencia y endureciendo las condiciones de acceso al crédito en el mercado de bonos. Esto es lo que ha venido ocurriendo Pero hay mucho más, porque a todo ello viene a unirse la repatriación de capitales desde el centro a través del sistema Target 2, como explican Sebastian Dullien y Mark Schieritz en el artículo de Vox reproducido en este WD: antes de la crisis de confianza en la periferia, los bancos comerciales de los países centrales disponían de su exceso de depósitos y de la creación de reservas del BCE para financiar el excedente de balanza por cuenta corriente de esos países, prestando a los bancos periféricos (que hacían escaso uso de la ventanilla del BCE). Desde finales de 2010 la repatriación de fondos hacia los países centrales se ha llevado a cabo fundamentalmente cortando la refinanciación de los bancos comerciales de la periferia, que han acudido en masa a las subastas del BCE (a través de operaciones REPO en sus propios bancos centrales), lo que se ha reflejado en un drástico aumento del pasivo periférico (que constituye un activo a favor del eurosistema), al mismo tiempo que la apelación al BCE de los bancos comerciales de los países centrales disminuía drásticamente, aumentando las reservas depositadas en sus propios bancos centrales, que han elevado sus activos (bajo la forma de pasivos contra el eurosistema), como se observa en el gráfico que sigue.

En forma resumida, concluye el artículo de Vox, lo que antes se hacía a través del interbancario, se lleva a cabo ahora a través de los bancos centrales del eurosistema.

Esto “mejora” la posición e los ahorradores e inversores privados de los países centrales porque lo que antes eran créditos contra un colateral privado periférico (considerado menos seguro), ahora son reservas en su propio banco central. Lo que sucede es que la conjunción de este proceso con el de deflación de balances en la periferia (y la necesidad regulatoria de provisionar fallidos y elevar las ratios de capital) provoca una carrera a favor de la liquidez que solo el cambio de estrategia realizado por el BCE tras la llegada de Mario Draghi ha permitido saciar temporalmente (con un plazo fijado actualmente en tres años). El origen y el empleo de los recursos de liquidez en los bancos españoles (de acuerdo con la estimación UBS), figuran en el gráfico adjunto. Los 350.000 millones de Euros obtenidos del programa LTRo del BCE (270mM€), por un lado, y de la recuperación de préstamos y contracción del crédito (82mM€), por el otro, se emplean así: 52mM€ para cubrir el exceso de vencimientos respecto a las nuevas emisiones; 74mM€ para cubrir la reducción en el mercado privado de repos hasta febrero; 55mM€ para cubrir la salida de depósitos hasta abril, y 60mM€ para aumento en la tenencia de deuda del gobierno. Todo ello deja un remanente de 80mM€ que parcialmente servirán para cubrir las nuevas emisiones del gobierno y otras instancias, como el FROB (y, a su vez, parte de estos recursos volverán a la banca, vía operaciones de salvación).12 Esto no resulta sostenible por mucho tiempo. A la larga, tanto los bancos como los soberanos tendrán que volver a los mercados, pero esto no será posible si no se recupera la confianza. La operación de reestructuración y afloración de activos dañados en la banca española puede contribuir a ello, siempre que cuente con el necesario respaldo europeo. Pero en el origen de los problemas actuales se encuentra también el problema de los desequilibrios comerciales estructurales, que dieron origen al reciclado de los excedentes del centro, en forma de crédito barato e ilimitado hacia la periferia, que ahora se esfuma y se repatría. El Bundesbank y sus asesores han venido tratando de circunscribir el problema a la situación del sistema bancario, obligando a los gobiernos periféricos a comprometer sus recursos en la solvencia de los bancos, pensando que de esta manera, en caso de colapso del sistema, la garantía de los gobiernos será más segura que la de los particulares. Pero es esa misma falta de confianza en la continuidad del sistema la que profundiza la huída de depósitos y amenaza con convertir los problemas de iliquidez en problemas de insolvencia. Nouriel Roubini afirma que nadie puede pretender saber si los problemas españoles son de uno u otro tipo, puesto que, en ausencia de crecimiento, todo problema de iliquidez puede convertirse en insolvencia.

12 Véase: http://www.zerohedge.com/news/spain-appears-unsure-what-bank-bailout-means

Pero para que esto no ocurra haría falta: “expansión cuantitativa en el BCE; un euro más débil; estímulos fiscales en el centro; menos sobrecarga de austeridad en la periferia; más cortafuegos internacionales, y mutualización de la deuda…, y resulta poco probable que todo esto se produzca en el inmediato futuro.” Ciertamente, Roubini tiene fama de ser el “doctor catástrofe” (Dr. doom). De modo que, como señala Stephen King, los fantasmas de los años treinta vuelven a atenazarnos: entonces, el problema principal eran las reparaciones que Alemania tenía que pagar a los antiguos aliados (principalmente, a Francia). Ahora, de lo que se trata es de la devolución del exceso de crédito contraído durante la etapa de la burbuja (de la periferia hacia el centro). Pero, en ausencia de un crecimiento desequilibrado —aunque esta vez en sentido inverso, liderado por el crecimiento de la demanda alemana —, el problema de la devolución se hará irresoluble. Y ahora, como entonces, los problemas de deudores y acreedores resultan comunes a ambos, no antagónicos. Este no es un juego de suma cero, sino cooperativo. De ahí que algo que en principio tiende a considerarse como perteneciente al ámbito microeconómico —la competitividad de empresas y países —, aparezca de repente sobre la mesa de los decisores políticos de la UE. Y es que, como afirma Paul Krugman, el cuento de hadas según el cual austeridad más reformas significa crecimiento parece haberse terminado. Aparentó funcionar mientras Alemania disfrutaba del crecimiento derivado de las medidas de impulso norteamericano y del fuerte crecimiento asiático. Pero la eurozona es un jugador global demasiado fuerte para permitirse crecer a rebufo de los demás. De modo que la recesión de segunda vuelta está aquí (como todo el conocimiento disponible vaticinaba) y desde todas partes se mira hacia Europa como la principal responsable de la pérdida de dinamismo global.13 FT editorializa leyendo la cartilla de tareas al BCD (“A job description for Frankfurt”). Ciertamente, ante el cúmulo de la evidencia Alemania parece irse plegando a reconocer los hechos, pero solo cuando cae el último bastión de sus defensa numantina y sin aceptar la más mínima anticipación preventiva, porque rechaza el conocimiento macroeconómico. De una u otra manera los acontecimientos electorales en Francia y Grecia constituyen el aldabonazo que obliga a despertar de esa especie de modorra en la que ha venido instalándose la UE. Por mucho que la mayoría del electorado griego siga apoyando la permanencia en la eurozona, la realidad es que ha votado mayoritariamente a partidos que, sin rechazarla explícitamente (salvo en el caso de los comunistas), rechazan drásticamente las condiciones impuestas por todos los demás estados miembros para continuar apoyando con su crédito a Grecia, en ausencia de lo cual el país no tendría otro remedio que salir del euro y devaluar masivamente el dracma, de modo que las pasadas elecciones serían el preludió del dracma, como afirmaba Alexis Papachelas en el diario Kathimerini, de Atenas. El impacto que algo así tendría sobre la eurozona resulta absolutamente impredecible, pero eso no quiere decir que haya que permanecer a la espera, salvo que se ceda al fatalismo del colapso de la UEM. En caso contrario (y casi todo el mundo, incluidos los griegos, apuesta por una reacción en sentido

13 Aunque con su acostumbrado sesgo alarmista, véase Edward Hugh, “Global Economy Heading Downhill?, en línea : http://www.economonitor.com/edwardhugh/2012/05/08/global-economy-heading- downhill/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+economonitor%2F OUen+%28EconoMonitor%29

contrario), la única salida consiste en un salto adelante en la arquitectura institucional de la Unión y en un fortalecimiento de sus políticas. En los comentarios editoriales y de opinión aparecidos tras los dos sobresaltos electorales del primer domingo de mayo aparecen dos líneas bien definidas: para Gideon Rachman, el colapso de Grecia hace que la llegada de François Hollande al Elíseo resulte irrelevante. En cambio, para Martin Wolf, lo primero amplifica el efecto de lo segundo, a condición de que Hollande prescinda de la hojarasca de su campaña electoral (entre la que se encuentra la pretensión de que el BCE financie directamente a los Estados) y, con la fuerza que le da tener todo un mandato por delante, plantee a Merkel —y al resto de la Unión — la necesidad de elegir entre una de los cinco escenarios en que todo esto puede terminar: 1) El más favorable, que consiste en la realización de un ajuste simétrico, tanto en el centro como en la periferia, acompañado en esta última de un gran programa de reformas; 2) Una Unión con transferencias permanentes desde las economías más fuertes hacia las más débiles; 3) Una Unión con fuerte superávit en su balanza por cuenta corriente (o sea, el modelo alemán, a escala global, si es que el sistema internacional lo permitiera); 4) Soportar una depresión semipermanente en las economías más débiles (si lo aceptan sus electorados), y, 5) La ruptura de la eurozona. A todo ello habría que añadir la necesidad de superar el nacionalismo bancario, en ausencia de lo cual el euro no tiene futuro a largo plazo, porque la mezcolanza entre intereses bancarios, políticos y financieros a escala nacional y/o regional hacen que la supervisión (incluso la más independiente) resulte sesgada, permitiendo la acumulación de problemas que, cuando aparecen, tienen ya carácter sistémico, como señalan Martin Hesse, Christoph Pauly y Anne Seith en el documentado artículo de Spiegel que se reproduce aquí. ¿Quiere esto decir que no existe más salida que una “refundación” de la UEM desde la nada? Prácticamente nadie apuesta por esa posibilidad. Con motivo de la celebración el 9 de mayo del 62 aniversario de la presentación de la idea de Europa pro Robert Schuman, Hendrick Vos afirmaba en De Standaard14 que la preferencia de los intelectuales y los analistas políticos y económicos por las soluciones drásticas y adanistas, empezando desde cero, no se corresponde con la experiencia europea, en donde los políticos prefieren siempre la senda de las correcciones, completando y retocando lo ya existente, sin dejar nunca la página en blanco ni dar pasos atrás “porque nos hemos convertido en 27 hermanos siameses” cuyos metabolismos funcionan cada vez más interconectados y “el precio que hay que pagar por dar media vuelta, por lo general es demasiado alto o va acompañado de enormes incertidumbre.” De modo que cuando aparece un problema que a todas luces requeriría una gran bifurcación, lo que se hace es preparar la agenda de una nueva cumbre que añada algo y corrija algo, pero sin grandes aspavientos. El artículo clásico de Lindblom “la ciencia de andarse por las ramas”15, tiene casi tantos años como la Unión y parece escrito a propósito de este nuevo espécimen político. Pero no; se escribió para analizar el arte de la reforma incrementalista en un mundo político, como el norteamericano, tremendamente fragmentado, en el que las reformas “de raíz”

14 En: http://www.presseurop.eu/es/content/article/1954171-estamos-para-pocas-fiestas 15 Charles E. Lindblom (1959), “The Science of ‘Muddling Through’”, Public Administration Review, Vol. 19, No. 2 (Spring), pp. 79-88, Blackwell Publishing. Copia abierta disponible en línea: http://www.emerginghealthleaders.ca/resources/Lindblom-Muddling.pdf

difícilmente logran encontrar consenso suficiente, de modo que toda gran reforma se ve sometida a la disciplina de despiezarse, hacerse comprender y evaluar por separado en cada una de sus piezas (no solo institucionales, por bloques constitutivos, sino también en su descomposición territorial, cuando es posible hacerlo). En filosofía eso es lo que había hecho Hume, con su enemiga hacia las grandes ideas abstractas y su exigencia de concretarlas en todos y cada uno de sus componentes empíricos, para someterlos al correspondiente contraste con la evidencia. En el artículo reproducido en este WD, Luke Johnson titula: “andarse por las ramas es una estrategia que funciona”. Aunque se trate de una idea fuertemente enraizada en el management empresarial, esa es la estrategia de salida de la crisis que Johnson recomienda para los bancos y las naciones europeas. Pero andarse por las ramas no quiere decir divagar, ni mucho menos carecer de ideas hacia adonde ir o actuar partiendo de ideas contrapuestas. Uno puede hacer un jardín replantándolo íntegramente o partiendo de otro existente, reubicando piezas, podando aquí o allá y dando forma progresivamente a un diseño prefijado (algo que también habría que hacer si se replantase). Lo que no cabe es edificar algo adoptando en cada ocasión o para cada problema decisiones mutuamente incompatibles, excluyentes o contraproducentes. Y los decisores políticos europeos han venido actuando precisamente así: adoptando políticas que todos los observadores contemplaban como la marcha inexorable hacia un choque de trenes (visto, eso sí, a cámara muy lenta), como señalaba Nouriel Roubini en FT.16 Ese es probablemente el factor que ha contribuido más poderosamente a crear incertidumbre y hasta pánico. Si se encuentra una dirección en la que todos puedan trabajar (aunque paso a paso y de forma incrementalista) y sin que nadie tenga que arrodillarse ante los demás, el euro sobrevivirá. En caso contrario, perecerá. A mediados del mes de mayo de 2012 esta última posibilidad dista mucho de haber quedado excluida, aunque siga siendo remota. Puede decirse, en cambio, que algo ha empezado a moverse: Alemania admite una cierta reflación salarial, cediendo al principio de ajuste simétrico de los desequilibrios existentes. El Bundesbank parece dispuesto a elevar sus objetivos de inflación. Merkel admite la conveniencia de adoptar un presupuesto de inversiones. Bruselas abre la puerta a la revisión de calendario de austeridad (no al concepto, y de forma condicional). Es todavía muy poco, pero puede ser un comienzo constructivo (¿podría sugerirse fijar objetivos de crecimiento del PIB nominal, como sugiere Samuel Brittan, siguiendo a James Meade?). La pregunta que surge, sin embargo es esta: llegados a este punto ¿resulta suficiente en este momento aplicar la estrategia incrementalista en Europa? Existe amplio consenso en afirmar que la Eurozona no puede subsistir sin un salto adelante en el proceso de integración europea. Pero tampoco se puede olvidar que la idea de una integración europea más firme, cuando se plantea abiertamente, resulta rechazada por buena parte de los ciudadanos europeos, como señalan Peter Spiegel y Niall Ferguson, pese a que, en su ausencia, Europa no sobreviviría, y a que la Unión siga contando con apoyo demoscópico y político muy amplio. Pues bien, el liderazgo político consiste precisamente en el arte de encauzar los sentimientos populares hacia fines que satisfagan las aspiraciones más permanente y menos coyunturales del público. Las elecciones francesas y griegas pueden ser la señal de que hace falta algo más que lo que se ha venido haciendo. Todo el mundo sabe ya que el mantenimiento de la Eurozona es algo que requerirá esfuerzos y medidas que van mucho más allá de lo hoy

16 En: http://www.ft.com/intl/cms/s/0/1cfa36ee-99fb-11e1-aa6d-00144feabdc0.html#axzz1uMkMjgzy

conocido, porque la heterogeneidad de las doce mayores economías de la UEM es superior a la que obtendríamos de una amalgama aleatoria de doce países, como indica el experimento de Michael Cembalest (o sea, la UEM es el área menos parecida a una zona monetaria óptima que pueda encontrarse). Y ahí es donde aparece la necesidad de adoptar algunas decisiones que no son estrictamente incrementalistas (como sucede en dirección estratégica, cuando en ciertas coyunturas aparece la necesidad de practicar el denominado turnaround management). ¿Existe hoy en Europa esta posibilidad? Lo que parece cierto es que todos los gobernantes europeos que se presentan a las elecciones, las pierden. Y los momentos en que aparecen grandes retos y amenazas son también los que ofrecen grandes oportunidades. Quizás haya llegado el momento de que Angela Merkel haga por primera vez una apuesta arriesgada, contra las encuestas y los periódicos amarillos de su país. De hecho fue ella quien habló por primera vez, en el último congreso de su partido, de Europa como una “comunidad de destino”. Dos académicos de Harvard — Niall Ferguson y Pierpaolo Barbieri —, piensan que esta sería la coyuntura idónea para plantear en Europa seriamente la idea de unión fiscal, como hizo Alexander Hamilton al adoptar la constitución de 1787 en EEUU. Bien es verdad que tal cosa podría no ayudar a Angela Merkel a salir victoriosa en las próximas elecciones de su país (aunque nunca se sabe), pero al menos habría hecho algo grande para Europa. Die Zeit lanzaba estos días la pregunta ¿Sabrá Angela Merkel irse a tiempo?17, sugiriendo precisamente que su mejor destino político podría ser la Presidencia europea. Y resulta evidente que quien fuera capaz de dar semejante paso adelante en la construcción europea sería un candidato inmejorable para presidirla

17 http://www.presseurop.eu/es/content/news-brief/1960921-sabra-angela-merkel-irse-tiempo

Contenido

1. Berlin reaches out to the periphery. FT Editorial, 10 Mayo, 2012. Página 18 2. A real alternative to austerity economics. By Samuel Brittan. 10 Mayo, 2012. Página 19 3. Spain takes 45% in Bankia. By Eurointelligence. 10 Mayo, 2012. Página 21 4. Ghosts from the 1930s have returned to haunt us. By Stephen King. 10 Mayo, 2012. Página 23 5. In Spain, a Debt Crisis Built on Corporate Borrowing. By Landon Thomas Jr. 9 Mayo 2012. Página 25 6. Muddling through is a strategy that works. By Luke Johnson. 9 Mayo 2012. Página 28 7. Greek insurrection takes shape; European response makes it worse. By Eurointlligence. 10 Mayo 2012. Página 30 8. What Hollande must tell Germany. By Martin Wolf. 9 Mayo 2012. Página 32 9. Ceder el testigo. Le Monde. 8 mayo 2012. Página 34 10. Greece alone must decide its fate. FT Editorial. 8 Mayo, 2012. Página 35 11. ¿Quién restaurará el orden? By Alexis Papachelas. 8 Mayo, 2012. Página 37 12. Los expertos advierten que los ‘bancos malos’ necesitarán ayudas públicas. Por Íñigo de Barrón. 7 Mayo 2012. Página 39 13. German savers should applaud the growing TARGET balances. By Sebastian Dullien & Mark Schieritz. 7 Mayo 2012. Página 40 14. Saving the Euro Will Require Banking Sector Reform. By Martin Hesse, Christoph Pauly and Anne Seith. 7 Mayo 2012. Página 43 15. Those Revolting Europeans. By Paul Krugman. 6 Mayo 2012. Página 48 16. Ex-President Bling-Bling. By Paul Krugman. 6 Mayo 2012. Página 50 17. Schäuble backs wage rises for Germans. By Chris Bryant. 6 Mayo 2012. Página 51 18. Baja la fiebre de deuda del sector privado. Por Ángel Laborda 6 Mayo 2012. Página 53 19. La Comisión Europea abre la puerta a suavizar el cumplimiento del déficit. Por Claudi Pérez Bruselas 5 Mayo 2012. Página 55 20. The High Cost of Germany's Economic Success. By Sven Böll, Markus Dettmer, Catalina Schröder, Janko Tietz & Florian Zerfass. 4 Mayo 2012. Página 58 21. Growth vs austerity ignores the euro facts. By Lorenzo Bini Smaghi. 3 Mayo 2012. Página 67 22. New Estimates of the Housing Wealth Effect. By Charles W. Calomiris, Stanley D. Longhofer, and William Miles. Mayo 2012. Página 69

23. The Labor Market in China, 1989-2009. By Wei Chi, Richard B. Freeman, and Hongbin Li. Mayo 2012. Página 70 24. Will France's Election Hinder German Leadership of the Euro Group? By Philipp Wittrock. 3 Mayo 2012. Página 71 25. Core infection and eurozone PMIs. By David Keohane. 2 Mayo 2012. Página 74 26. Madness in Spain Lingers as Ireland Chases Recovery. By Sharon Smyth, Neil Callanan & Dara Doyle. 2 Mayo 2012. Página 76 27. Eurozone voters query closer integration. By Peter Spiegel. 2 Mayo 2012. Página 82 28. Merkel can achieve fiscal union in Europe. By Niall Ferguson and Pierpaolo Barbieri. 2 Mayo 2012. Página 84 29. Topic: how lonely a road is Europe traveling. By Michael Cembalest. 2 Mayo 2012. Página 86 30. Time for householders to buy bonds and save Spain. By Martin Feldstein. 30 April 2012. Página 89 31. A job description for Frankfurt. FT Editorial. 29 April 2012. Página 91 32. Hollande is start of progressive insurrection. By Wolfgang Münchau. 29 April 2012. Página 93 33. Finance and economic growth delinked. By Dirk Bezemer 27.04.2012. Página 95 34. Death of a Fairy Tale. By Paul Krugman 27/04/2012. Página 97 35. The New Voodoo.// Leveraging, Deleveraging, and Fiscal Policy.// The Unbearable Slowness of Internal Devaluation. By Paul Krugman 25- 26/04/2012. Página 99 36. Debt fears return as ECB funds are used up. By Richard Milne. 26.04.2012. Página 102 37. Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap? By Paul McCulley & Zoltan Pozsar. 26 Abril 2012. Página 105 38. Fiscal Policy in a Depressed Economy. By J. Bradford DeLong & Lawrence H. Summers. 20 Marzo, 2012. Página 111

ft.com Comment Editorial May 10, 2012 8:09 pm Berlin reaches out to the periphery Germany has often been blamed for holding Europe hostage to its economic conservatism. But at a critical moment in the eurozone crisis, there are signs that the mood in Berlin is loosening up. The traditionally inflexible Bundesbank signalled this week that it might be prepared to tolerate Germany having a higher rate of inflation than its eurozone partners. This follows eye-catching comments by Wolfgang Schäuble, finance minister, who argued in favour of wage increases for his country’s workers. More ON THIS STORY/ Schäuble ready to tolerate German inflation// Bundesbank signals softening on inflation// Bundesbank shows signs of yielding// Money Supply// Jens Weidmann Monetary policy is no panacea for Europe’s ills ON THIS TOPIC/ Hollande meets Van Rompuy over growth plan// German and UK bond yields hit record low// Buyers flock to top-tier bonds// Editorial Greece alone must decide its fate EDITORIAL/ Inelegant U-turn on UK defence// A hole in the heart of Spanish banking// Cameron must get a grip on his team// The paradox of Putin’s third term These remarks raised hopes that Germany might, at last, be willing to pull more of its weight in addressing Europe’s longstanding current account imbalances. Higher German wages could reduce the gap in competitiveness between Europe’s industrial motor and the periphery. More money in workers’ pockets could also give a boost to domestic consumption, which in turn might offer greater export opportunities to countries struggling with austerity. Such a recognition of economic reality on the part of German policymakers is, indeed, welcome. But it is over-optimistic to see it as a game-changer in the sovereign debt crisis. Exports to Germany only account for 2.5 per cent of the combined gross domestic product of Italy, Ireland, Portugal, Spain and Greece. Even with a moderate increase in German wages, it will take time before the periphery can substantially increase its competitiveness in relation to Berlin. Nor will these straws in the wind solve the immediate funding constraints faced by countries such as Spain and Italy. But by providing a sense of the direction in which the currency bloc is heading, they may help to calm the markets. The Bundesbank’s stance could also make the European Central Bank more relaxed about loosening monetary policy. To accelerate the resolution of the crisis, policymakers in Berlin may want to supplement this month’s encouraging statements with some further steps. The German government could loosen its fiscal policy or, at the very least, take steps that encourage workers and companies to spend rather than hold cash. While the Bundesbank should keep a prudent eye on the banking system, it should be willing to allow credit provision to expand. As political uncertainty in Greece weighs on investors’ confidence, Berlin’s cautious steps are a heartening sign. Having picked the right direction for its economic policies, Germany should become more ambitious in their reach. http://www.ft.com/intl/cms/s/0/a21255b2-9aa7-11e1-83bf-00144feabdc0.html#axzz1uMkMjgzy

ft.com comment Columnists May 10, 2012 8:25 pm A real alternative to austerity economics By Samuel Brittan

The term austerity was introduced into political discourse by Sir Stafford Cripps, a postwar Labour chancellor known as “Austerity Cripps”. He was a moralist rather than an economist; and Winston Churchill is supposed to have said of him: “There but for the grace of God goes God.” Sir Roy Harrod, a Conservative Keynesian, gave a more erudite refutation, titled “Are these hardships really necessary?” Austerity economics is now being increasingly rejected by European public opinion and for once the popular reaction is right. At the other end of the spectrum some financial market types have taken fright at the trillions of dollars created by central banks for firewalls and in “quantitative easing”. I would not dismiss these fears out of hand. It is easy to imagine a long period of stagnation or recession followed by a breakout into rapid inflation. More ON THIS STORY/ Mittal urges ‘buy European’ programme// Merkel’s austerity put to test in poll// Global Insight Hollande at odds with key partners on structural reform// Cameron vows ‘no going back’ on deficit// Greece braced for repeat elections ON THIS TOPIC/ Miliband and Hollande agree on united front// The Short View Eurozone bond vigilantes face risks// Barroso pushes EU growth measures// US stocks steady after European elections SAMUEL BRITTAN/ Free Market Fairness by John Tomasi// The BoE needs neither a bureaucrat nor a dictator// The bogus distinction between left and right// Robbing selective Peter to pay for collective Paul Yet there is a way of sustaining an expansionary policy while minimising this threat. This is not through any financial market gimmick but by a different way of thinking. Long-time readers will not be surprised to learn that I have in mind something usually called a nominal GDP objective. One of the greatest obstacles is that its name is so off- putting. I seem to remember a former chancellor, Nigel Lawson, saying that it lacked sex appeal. Yet the basic idea could hardly be simpler. The growth figures that dominate the headlines are of “real” gross domestic product, which means they are corrected for inflation. With nominal GDP they are uncorrected. The idea of targeting nominal GDP is to leave room for real growth, but damp any inflationary take-off. Suppose that the nominal GDP objective is 5 per cent annual growth per annum and that inflation is 2 per cent. Then room is left for 3 per cent real growth. This is not far from what was achieved in the western industrial economies in the benign decade up to 2008. Nominal GDP then shrank. After, it recovered to nearly 6 per cent in the UK before easing to 2 per cent last year. The eurozone had a similar experience. The best recovery has been in the US, where nominal growth has been close to 4 per cent for two years. A nominal GDP objective is far from a new idea. It was promulgated by the Nobel Prize-winning economist James Meade and by Sylvia Ostry, one-time economic 19

director of the OECD. Nominal GDP is at least discussed in the reports of the US Council of Economic Advisers. A target could in principle be adopted by the eurozone if it ever moved away from its obsession with fiscal austerity. It could also be the basis of a British “Plan B”. It cannot be emphasised enough that it is not an alternative to monetary and fiscal policy, simply a guide to how they should be used. There is a frequent objection by economic technicians, which runs as follows: “Growth is a good thing; inflation a bad one. What is gained from putting the two together?” This ignores the causal processes. There is a flow of spending in any economy, which can to some extent be influenced by government. How this is apportioned between real growth and price increases depends on economic agents such as businesses and unions and is much less easy to control by public policy. Of course problems would arise in implementing a nominal GDP objective. It could be adopted by any public authority with its own currency – but that would make it a difficult measure for the new French government to adopt inside the eurozone. To my mind the most difficult question, though, would be what to do when a bulge in nominal GDP arises from external forces – such as an oil price explosion. There are also questions of definition and measurement. There may be related measures, such as total domestic expenditure, which make better allowance for necessary changes in the trade balance. Another conundrum is what do about “base drift”. In plain English: should eurozone and UK authorities try to make up for lost ground with a temporary period of unsustainably high expenditure growth; or should they start from where we are now? I believe, however, that opposition to the nominal GDP idea arises from none of these things, nor even from unfamiliarity. The fact is that it will never appeal to those who like to diagnose economies on the basis of minute-to-minute changes on a financial market screen. If nominal GDP were taken seriously, the accuracy and speed of publication of the quarterly data would improve. Even so, it would be necessary to take an informal moving average over several quarters. But the short- term financial merchants have had their chance. It is now time for other voices to be heard. http://www.ft.com/intl/cms/s/0/73699910-99ca-11e1-aa6d- 00144feabdc0.html#axzz1uMkMjgzy

Eurointelligence Daily Briefing 10.05.2012

Spain takes 45% in Bankia

Yesterday began a new phase in the crisis with the Spanish nationalisation of Bankia, the large caja that emerged from the merger of Caja Madrid and the Valencia-based Bancaja. The Spanish State nationalised the holding company BFA, and thus becomes a 45% shareholder in Bankia. El Pais said the dismissal of Rodrigo Rato as head of Bankia was an attempt to recover the credibility of the system, as Spain has acted far too late in cleaning up the real estate mess. The new chief is Jose Ignacio Goirigolzarri, a former CEO of BBVA. Spain will hold the share through the Frob, the bank recapitalisation fund. Technically, this has been accomplished by converting state aid into equity capital. The holding company BFA is a bad bank, which means that the taxpayer is left to cover its losses. The group has €31.8bn in troubled real estate assets, while Bankia contains the clean parts of the business. As we reported yesterday, Deloitte has refused to sign off on the account. The El Pais article contains more details. Deloitte believes that BFA overvalued its assets by €3.5bn. If that loss had been realised, the banks equity capital would have been wiped out. The article said another state capital injection may occur once the government proceeds with its plan to force banks to write off a small part of the country’s real estate losses. El Pais also makes the point that the restructuring of BFA effectively eliminates the seven cajas that make up BFA. Their capital has now been wiped out. And Bankia’s depositors are getting nervous. In another article, El Pais has talked to some, with views splits between those who say Bankia is too big to fail, and those who will move their savings to other institutions. Even though the nationalisation of Bankia was well flagged, the Spanish stock markets yesterday react with steep losses for the entire Spanish banking sector. Spanish bond spreads rose sharply. European Commission believes Spain will not meet the deficit targets Of course, Spain is not going to meet the deficit targets. To achieve a correction of 5.5% net, you have to aim for a correction of some 8-10% in order to meet this moving target, because of the negative growth dynamic. Spain could abolish its armed forces, or the welfare state. As this is not going to happen, a slow process of public realisation is setting in that the speed of deficit reduction has to be slower than planned. El Pais reports that the latest official estimates of the European Commission suggest that current policies will set Spain on a trajectory of a 6% this year, and 4% next year, as opposed to official targets of 5.3% and 3% respectively. (We think even this is too optimistic). Nouriel Roubini on Spain

Writing in the FT, Nouriel Roubini says the recapitalisation of Bankia was the beginning of a process to raise the capital stocks of Spanish banks by what he estimates €100bn-€250bn. The Spanish gover;nment cannot conceivable meet that challenge alone, and will require a bailout “A bailout package would buy some time for Spain, but time will only help if it is used to generate economic growth. By making private claims on the sovereign junior to the claims of the troika … even a bailout risks reducing the chances of it regaining market access. Moreover, with economic indicators showing Spain sinking further into recession, a turnround in the country’s economic performance would require a significant shift in policy: monetary easing by the ECB, a weaker euro, fiscal stimulus in the core, less front-loaded austerity in the periphery, more international firewalls and debt mutualisation. The only way for there to be a happy ending in Spain is if action is taken swiftly in Brussels, Frankfurt and other European capitals. But that is not likely to happen. The eurozone periphery and Spanish crisis look like a slow-motion train wreck.” Bundesbank signals acceptance of higher inflation in Germany For the first time the Bundesbank signalled that it was ready to accept higher inflation in Germany than in the eurozone as a result of the good domestic economy and the rebalancing efforts in the eurozone, Financial Times Deutschland reports. “In this scenario Germany could in the future have an inflation rate somewhat above the average within EMU”, the German central bank wrote in comment to a hearing in Bundestag. The Bundesbank stressed however that monetary policy would have to ensure that inflation overall in the EMU remained consistent with the gaol of price stability and the inflation expectations must remain firmly anchored. With this position the Bundesbank accepts that a rebalancing of the eurozone economies will not be possible without temporarily accepting higher inflation in Germany while peripheral countries undergo severe reforms that entail deflationary tendencies. In a recommendation to Germany, the IMF wrote that the country should accept “a pick up of salaries and some asset prices”. The new position of the Bundesbank on inflation is a further indication of a change in mentality among the German leadership after Angela Merkel’s recent willingness to do more to enhance growth in the eurozone and Wolfgang Schäuble’s appeal to social partners to bring about significant wage increases. Mark Schieritz applauds the Bundesbank’s flexibility Writing in Herdentrieb, Mark Schieritz applauds the flexibility of the Bundesbank and the German government. “As a fundamental principle I observe that many Anglo-Saxon analysts underestimate the flexibility of German politics”, Schieritz explains. “German finance politicians have to be seen as tough guys in domestic political debates. That is what the population expects. And most certainly the political mainstream is more dogmatic in Germany than in France or the USA – from my point of view often too dogmatic. But the Germans are not stupid. Another fitting example of this are Wolfgang Schäuble’s comments according to whom salaries in this country must rise more significantly once again after years of wage moderation in order to decrease the imbalances.” http://www.eurointelligence.com/eurointelligence-news/home/singleview- restricted/article/spain-takes-45-in-bankia.html

ft.com comment The A-List

Stephen King May 10, 2012 Ghosts from the 1930s have returned to haunt us We may not yet have succumbed to a Great Depression but depression, in one form or another, is all around us. And we are witnessing the rise of political extremism, a nationalist backlash against a country’s obligations towards its – typically foreign – creditors. Ghosts from the 1930s have come back to haunt us. Recovery has either been remarkably muted or, in many parts of Europe, totally non- existent. For some eurozone nations, economic freefall threatens. Politicians and economists squabble over what needs to be done next, as noted by Jeffrey Sachs on the FT A-List (“We must move beyond growth versus austerity”, May 7, 2012). The emergence of Nikos Michaloliakos and his Golden Dawn party – its emblem a thinly disguised swastika – in Sunday’s Greek elections together with the bumper vote for Marine Le Pen in the first round of the French presidential elections two weeks earlier only serve to highlight the growing disillusionment of voters with mainstream political parties seemingly able to offer neither jam today nor jam tomorrow. For those on the outer fringes of the political spectrum, this is fertile ground – as it proved to be in the 1930s. The problem can be simply stated. With levels of national income now a lot lower than expected just five years ago, the willingness and ability of debtors to repay their foreign creditors has been seriously reduced. The new slogan for debtors is in danger of becoming “can’t pay, won’t pay”. To date, the response of creditors has been to demand continued austerity from the debtors: higher taxes, cutbacks in public spending and regular doses of the economic equivalent of cod liver oil, all to be washed down with cheap loans from the International Monetary Fund, the European Central Bank and other generous benefactors. In return, there is a vague promise of a return to growth at some unspecified point in the future. The creditors insist the debtors have only themselves to blame for the lack of growth. In the years preceding the financial crisis, southern European countries allowed their wages to rise far too quickly, thereby undermining competitiveness. For creditors, it’s an attractive explanation because it lets them off the hook. Yet it’s an explanation full of holes. If competitiveness in southern Europe was so bad, why did northern European creditors lend to southern European nations with such reckless abandon in the first place? If the problem is only one of competitiveness, why have “well-behaved” northern European nations also ended up back in recession? The Dutch economy is shrinking again as is the UK despite – in the latter’s case – the supposed benefits of regular bouts of quantitative easing and, in the initial stages of the financial crisis, a huge decline in sterling. And if the story is only about competitiveness, why has the allegedly competitive US economy struggled to regain its pre-crisis poise?

Creditors typically absolve themselves from blame until it’s too late. And they demand adjustment from debtors even when the debtors no longer have the political capacity to do so. Yet, as the interwar period demonstrates, problems for debtors inevitably become problems for creditors too. In 1931, Austria was attempting to deliver the kind of austerity now being witnessed in parts of southern Europe. Under the Gold Standard, the only option to regain competitiveness was to force domestic prices and wages lower. In the process, businesses failed, non-performing loans rose and the banking system began to look incredibly vulnerable. The crisis culminated in the failure of Creditanstalt, a major Viennese bank – the 1931 equivalent of Lehman Brothers. What had up until then been only a Great Recession turned into the Great Depression. A handful of years later, Hitler was welcomed by cheering crowds in Vienna. For debtor nations, keen to escape from the clutches of their creditors, resurgent nationalism led to waves of default and, in time, to the politics of hate. For creditor nations – the US and France were the key players at the time – it was a rude awakening. Their own economies suffered more than most, a reflection of their adherence to economic orthodoxy – notably their continuing devotion to the Gold Standard – in the wake of an extraordinary economic and financial upheaval. François Hollande has been elected president of France on a pro-growth platform. This may be no more than wishful thinking unless there is voluntary adjustment from both creditor and debtor nations. To achieve this – and to allow the euro to survive – there needs to be more, not less, Europe. The single currency will need to be buttressed by some kind of federal fiscal policy, including the issuance of common bonds. Lower wages in the periphery will need to be offset by higher wages in the core, prompting German capital to head south and Spanish and Greek workers to head north. And creditors must stop thinking about a world of only saints and sinners. Creditors and debtors are two sides of the same coin. Berlin should take note. None of this will be easy. Perhaps the success of the far Right will spur mainstream politicians into action. The irony, though, is obvious. A successful resolution of the eurozone crisis needs “more Europe” but growing numbers of voters are beginning to demand less of it. The ghosts have returned. http://blogs.ft.com/the-a-list/2012/05/10/ghosts-from-the-1930s-have-returned-to-haunt- us/#axzz1uM9ZgQ00

Global Business May 9, 2012 In Spain, a Debt Crisis Built on Corporate Borrowing Denis Doyle/Bloomberg News

Florentino Pérez, the chief of Grupo A.C.S. The company, saddled with a 9 billion euro ($11.7 billion) debt pile is in the midst of a frantic campaign to distance itself from the Spanish economy. By LANDON THOMAS Jr. LONDON — In a country with one of the highest levels of company debt in the world, few businesses in Spain shoulder as big a burden as Grupo A.C.S., the global construction giant whose debt woes have become a mirror image of Spain’s own increasingly severe financial struggle. Saddled with a 9 billion euro ($11.7 billion) debt pile that is twice the size of the company’s shrinking market value, A.C.S. is in the midst of a frantic campaign to sell off assets, pay down debt and further distance itself from a Spanish economy caught in a spiral of austerity and deflation. The Spanish government’s harsh budget cuts and their depressive effect on the economy have prompted foreign investors to sell Spanish stocks and bonds in droves. On Tuesday, Spanish stocks plunged 2.8 percent and the government’s 10-year bond yields spiked to 6 percent as Spain moved to bail out its ailing banks, and uncertainty over Greece loomed. But economists now say that one of the greatest threats to Spain could well be the snarl of debt choking off the growth prospects of A.C.S. and other highly indebted Spanish corporations. And they warn that as these companies cut back on investments and shed assets as well as jobs, the result could be a Japan-style lost decade of stagnation. An important metric in the euro zone debt crisis has been government debt as a percentage of the total economic output, and Spain has a relatively low ratio of 70 percent, compared with 165 percent for Greece and 120 percent for Italy. But according to a recent report by McKinsey on global debt, Spain’s nonfinancial private sector debt is 134 percent of gross domestic product, higher than any major economy in the world with the exception of Ireland, where the figures are skewed by the outsize presence of foreign multinationals. Factoring in bank, household and government obligations, the total figure rises to 363 percent of G.D.P., trailing only Japan at 512 percent and Britain at 507 percent.

“The problem in Spain is not government debt, it’s private sector debt,” said Jonathan Tepper of Variant Perception, a London-based research boutique with a specialty in Spain. “A.C.S. perfectly captures this problem.” Under the stewardship of its ambitious chairman, Florentino Pérez, A.C.S., like many other corporations in Spain during the recent boom, gorged on cheap debt, seeking to diversify by buying large equity stakes in companies in Spain and elsewhere. In a bull market, this web of cross-holdings held in special-purpose vehicles and financed by bank loans can sustain a vast corporate appetite. But when the assets backing these debts plunge and the banks call in their loans, the opposite can occur. “It is a really bad time for these companies,” said Mauro Guillen, an expert on Spanish multinational companies at the Wharton School of the University of Pennsylvania. “The government is no longer investing in infrastructure, the municipalities are no longer paying their bills and the companies are in constant need of refinancing from their banks. So they have to unload their positions to raise cash.” With 28 billion euros in revenue, A.C.S., or Actividades de Construcción y Servicios, is one of the largest building services companies in the world. Its projects range from building subway stations in Manhattan and managing toll roads in Florida, to collecting waste in France and building wind farms in Brazil. But for the growing legion of investors who have been betting against the company by selling its shares short, A.C.S.’s still significant exposure to Spain’s ailing construction industry and austerity-hobbled municipalities feeds their bearish outlook. Credit Suisse, in a recent report, warned that 48 percent of the company’s cash flow comes from various Spain-related infrastructure projects. Tellingly, the bank said, 70 percent of that income depends on austerity-bound government entities. More than anything, though, it is the 6 billion euros in debt that A.C.S. has used to buy a controlling stake of the German construction company Hochtief, and a similar but now thwarted move to take over Iberdrola, the Spanish utilities giant, that is at the heart of investor concerns. “The debt of this company has gone out of control,” said Javier Suarez, a utilities analysts at Nomura in Madrid. The decline of its shares has accelerated in recent weeks — the price is down 40 percent for the year and fell 27 percent in April alone — as it became clear that the more Iberdrola fell, because of concerns about regulatory pressures and its own high debt, the worse A.C.S.’s financial position became. Bowing to pressure from banks and investors, A.C.S. reversed course on its Iberdrola strategy last month and sold a 3.6 percent chunk of its stake at a loss, bringing down its position in the company to just under 15 percent. “Spanish corporates and households are paying down debt massively,” said Richard C. Koo, an economist at the Nomura Research Institute in Tokyo who has been warning for some time now that Europe is entering the same type of balance sheet recession that plagued Japan in the 1990s. Indeed, he and others argue that it is this relentless private sector downsizing in Spain — by individuals weighed down by mortgages and corporations tethered to their boom-

time loans — that threatens to make the Spanish economic collapse semipermanent as opposed to cyclical. Jobs are lost, companies have stopped investing and assets have plunged, from house prices to the stock market, which is already down 18 percent this year, the worst among major merging and developed markets — all compounded by the government’s own austerity drive. In many ways, A.C.S. is a product of its chairman, Mr. Pérez, who, after Emilio Botin of Santander Bank, is perhaps the most commanding business figure in Spain, in large part because of his position as president of the soccer club Real Madrid. Trained as an engineer, he gave up a career in politics in 1983 to buy into a bankrupt construction firm and then presided over a succession of mergers that culminated in the formation of A.C.S. in 1997. Just as he has used debt to accelerate his company’s remarkable growth, he has borrowed heavily to sign prominent Real Madrid players — from the British star David Beckham to the current Portuguese sensation, Cristiano Ronaldo. Mr. Pérez, who owns 13 percent of A.C.S. (worth about 550 million euros and down 56 percent over the last year), is known for his austere personal tastes. He does not drink nor does he often vary the color of his blue suit and shirt. While soccer-mad Spain may excuse Mr. Pérez for piling an estimated 500 million euros of debt on the team, investors in a public company tend to be less forgiving, especially as A.C.S., unlike Real, must publicly account for its rising debt levels. A.C.S. remains profitable. It earned 962 million euros last year and many of its diverse overseas operations are thriving, especially those in fast-growing markets like Latin America. An A.C.S. spokesman said Mr. Pérez and other executives were not available for interviews. But in comments to analysts in March while reporting 2011 results, Mr. Pérez emphasized the importance of speeding up asset sales to further reduce the company’s debt burden, and he pointed to the company’s 66 billion euros in backlogged business as a sign of its strength. Its most vigorous supporter is Southeastern Asset Management, a value-based investment company based in Memphis that owns 7.5 percent of A.C.S., making it the company’s fifth-largest shareholder. Southeastern’s main international fund was down 20 percent last year, largely because A.C.S., the fund’s second-largest holding, put it among the worst-performing mutual funds in its category as ranked by Morningstar, the mutual fund tracker. In its most recent letter to investors, Southeastern took pains to justify its significant exposure, writing that A.C.S. “sells for approximately half of our valuation because the market oversimplifies this as a Spanish business with optically high leverage.” But in a global marketplace that has become obsessed with debt, be it sovereign, household or corporate, optics can count for a lot, especially when they are backed by numbers that are all too real. http://www.nytimes.com/2012/05/10/business/global/in-spain-grupo-acss-high-debt- reflects-countrys-finances.html?_r=1&nl=todaysheadlines&emc=edit_th_20120510

ft.com/management May 8, 2012 6:09 pm Muddling through is a strategy that works By Luke Johnson

At a conference in Vienna last week, a perceptive speaker said that “muddling through” was actually a sound strategy in many circumstances. He was right. Our instinct is to look for the black and white solution to a problem. But that approach applies rather better in theory than in practice. The real world is a complicated and volatile place. Neat answers might sound impressive in a presentation, but they are rarely the best policy on the ground. More ON THIS STORY/ Hold on to staff, your most-prized asset// Feature of the Week Innovation and creativity move to the heart of the curriculum//Relief for investors in bigger range of start-ups LUKE JOHNSON/ Luke Johnson Tips for the PM// Break-ups don’t need to be a breakdown// Companies aren’t to blame for every ill// Timing is everything except in our control Instead one needs to be adaptable and opportunistic to make progress. Unfortunately business schools, economists, management consultants and how-to books can’t offer guides to “muddling through” – so it is rarely promoted as a wise philosophy for enterprises, or even countries. By contrast, entrepreneurs tend to be experts at muddling through. They can cope with significant uncertainties in their work, while retaining a sense of confidence and a feel for priorities. I have partnered with several highly able founders who have launched start-ups or even made offers for companies without having the necessary funding. They knew that if the deal was right they would find the money. In Silicon Valley, they have learnt the art of the “pivot” – completely changing the business model because the initial concept didn’t succeed. Pulling off such a reinvention is hard but almost every founder has done it – because few ideas really take off in their original form. Expedience is paramount; slavish devotion to last year’s structure is irrelevant. The essence of a bootstrapped business is a willingness to do what it takes (within the law, of course) to get things moving. That means forgoing the joys of clarity for the messy truth that comprises any new venture – imperfect products, clients who don’t pay, the wrong staff, insufficient capital and so on. Such projects prosper thanks to many incremental wins and plenty of errors, rather than a few clean victories. When pitching to banks for loans, the usual expectation from credit officers is a precise business plan. But markets, customers and competitors simply do not behave as they are told. Commerce is subject to so many unpredictable variables that it makes little sense to pay much heed to a set of projections more than a year ahead. Rely too much on a precise set of spreadsheets, and there is likely to be disappointment – or worse.

I’m not advocating that management should depend entirely on their instincts and ignore the facts. Quite the opposite – I’m suggesting that one should remain flexible and avoid a rigid attitude based on predetermined desires. Focus and determination are important; but stubbornness in the digital age can be a liability. Institutions, regulators and bureaucrats abhor the very idea of muddling through. They worship rules, predictability and systems. That is probably why they are so bad at innovation, and weak at coping with change. They prefer static conditions; but human affairs are dynamic. Rather than an obsession with procedure and cumbersome governance, they should embrace trade-offs and compromise. I have noticed that many wily entrepreneurs hate to give a definitive “yes” or “no” to difficult questions. They prefer to say “perhaps”, and delay to see if more information emerges or their bargaining position improves. Most of us are impatient to know the detailed price and exact terms of a transaction; but actually tolerating vagueness for a while can be the more profitable path in the long term. This approach does not reflect a lack of decisiveness. Rather, it demonstrates realism about the future: our ability to predict is weaker than most of us would like to admit. Last year Dan Gardner published a book on the subject called Future Babble: How to stop worrying and love the unpredictable. It is a valuable antidote to the many experts who claim to make accurate forecasts. For many of the eurozone banks and nations, the only way to survive this crisis is to gradually resolve their difficulties by rebuilding balance sheets incrementally. There will be no big fixes. Instead governments need to seek pragmatic deals by any means necessary. They have little choice but to adopt the philosophy of muddling through. The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts http://www.ft.com/intl/cms/s/0/7a2fc122-9860-11e1-8617- 00144feabdc0.html#axzz1uMkMjgzy

Eurointelligence Daily Briefing

Greek insurrection takes shape; European response makes it worse 09.05.2012

Panic everywhere. European shares fell, spreads rose across the board, and the euro was down below $1.30 again. The panic set in as the outside world started to comprehend the enormity of the Greek election results. The trigger was the speech by Alexis Tsipras, the young leader of the anti-austerity Syriza party that ended up in second place in Sunday’s elections. Kathimerini writes that Tsipras yesterday proposed a five point plan: immediate cancellation of the austerity programme, cancellation of the law to end collective contracts, proportional representation, nationalisation of the banks, and the formation of a committee to investigate whether Greece can pay its debts. Tsipras has three days to form a government. He spent Tuesday in talks with leftist parties but had mixed success. He is due to meet the heads of PASOK and New Democracy on Wednesday. It is expected Tsipras will be unable to reach any agreement by Thursday, leading to PASOK taking over the mandate to form a government. After that, Papoulias will call in the party leaders to try to broker a deal. If that fails, a caretaker government will be appointed and new elections called. Kathimerini writes that Tsipras is to send a letter to Jose Manuel Barroso, Herman Van Rompuy and Mario Draghi to argue that the fact that PASOK and New Democracy received just 32% of the vote means that the terms of the bailout can no longer apply. Tsipras wants PASOK and New Democracy to do the same in a letter to the IMF and the EU. This prompted Antonio Samaras to accuse Tsipras of risking Greece’s membership of the eurozone. The conservative leader said his party would be prepared to back a minority government “as long as it secures the country’s position in the eurozone and its national interest.” But, he said, the leftist leader’s statement left no doubt “that he has no intention of safeguarding Greece’s European identity and future” and revealed “unbelievable arrogance.” Jörg Asmussen became the first eurozone official to link Greek membership of the eurozone to the reform programme. He told Handelsblatt that there was no readiness from the troika’s side to re-engage in negotiations Asked if Greece should get out of the eurozone if it does not implement the program he replied that it was up to them to decide whether they want to remain a member. According to Süddeutsche Zeitung, the troika has cancelled all meetings it had planned to hold in Athens in May in order to wait for a clarification of the political situation.

Informal summit on growth agenda Herman Van Rompuy has called EU leaders to discuss the fallout from the Greek and French elections and the increasing clamour for new measures to boost growth in Europe’s recession-struck economies at an informal meeting on May 23, according to the Irish Times. Enda Kenny said that he had urged Van Rompuy to hold a summit meeting on a growth agenda, “but there are issues that are clearly not in Ireland’s interests, including changes to corporation tax rates.” Preparations for the summit are overshadowed by the uncertain political outlook in Greece. Bankia is threatening to become the next Northern Rock The Bankia recapitalisation is turning out to be one of the more important developing stories of the eurozone crisis. This is an affair that looks increasingly like an Iberian Northern Rock story. Following on from our briefing yesterday, in which we quoted an El Pais linking the resignation of Rato to the capital injection, it turns out that the Spanish government totally cocked up the transition. Mariano Rajoy started the avalanche with a rare radio interview he gave on Monday, in which he talked in vague terms about the need to recapitalise the banking system. Then Rato’s resignation letter came out. While Rajoy and Rato had earlier agreed on Rato’s eventual departure, this sudden shift came as a surprise. This was not supposed to happen this way. Rato must have realised he was being set up as fall guy, and wanted to pre-empt the news flow. The government attempt to micromanage the process clearly came unstuck. The result: denials everywhere, and worried retail investors, who are beginning to get out. The parallels to Northern Rock are obvious. Further delevopments: El Conf idencial reports that BFA, the parent group of Bankia, and Bankia are to push forward their board meetings to today. And here is their article about the retail investors starting to panic. And finally, here is El Confidencial article about the now inevitable nationalisation of Bankia, to be announced on Friday. That articles includes the detail that Deloittes, the auditors of BFA, refused to sign off on the accounts. The original plan had been to do announce the entire package on Friday – Rato successions, the recapitalisation etc. Asmussen tells Hollande to respect fiscal pact and to get deficit down in time In Handelsblatt interview Asmussen also said Francois Hollande would need to respect France’s obligations within the eurozone, including the ratification of the fiscal pact. “Also I expect that the new government will stand by its promise to bring the deficit below the 3% limit.” Asmussen stressed that “it must be clear to everyone that the fiscal pact that is complemented by a growth element must not be weakened in its substance”. http://www.eurointelligence.com/eurointelligence-news/home/singleview- restricted/article/greek-insurrection-takes-shape-european-response-makes-it- worse.html

ft.com comment Columnists May 8, 2012 7:12 pm What Hollande must tell Germany By Martin Wolf

The elections in France and Greece tell us that austerity fatigue has set in. This is not surprising. For many countries no plausible exit exists from depression, deflation and despair. If the currency union were a normal fixed exchange rate arrangement, it would collapse, as did the gold standard in the 1930s and the Bretton Woods system in the 1970s. The question is whether the fact that it is a monetary union will do more than delay that outcome. The last chance of bringing needed change rests on the shoulders of François Hollande, the newly elected president of France. Mr Hollande says his mission is to give Europe “a dimension of growth and prosperity”. So can he achieve this laudable aim? Fiscal tightening does not improve outcomes in shrinking economies. Thus, austerity is merely begetting more austerity. According to the International Monetary Fund, the ratio of gross public debt to gross domestic product will rise, not fall, in every year from 2008 to 2013 in Ireland, Italy, Spain and Portugal. It will briefly fall in Greece, but only because of its debt restructuring. The most frightening data are for unemployment (see chart). The proportion of young people between the ages of 15 and 25 who are now without a job is 51 per cent in Greece and Spain, 36 per cent in Portugal and Italy and 30 per cent in Ireland. France is in better shape, but even there the picture is dire, with one in five young people out of work. Is it plausible that people will put up with this indefinitely? No. Far more likely is a repetition of the protest votes we have seen in these elections. Nicolas Sarkozy was the eighth leader of a eurozone member country to have been swept from office in little over a year. Economic prospects are poor. The IMF forecasts that the economy will shrink this year, in real terms, in Greece, Italy, Portugal and Spain and grow by just 0.5 per cent in Ireland. Growth is forecast, optimistically, at close to zero in the first four countries in 2013. This is politically perilous. The emergence of still more extremist parties and a rising sense of betrayal seems inevitable. It is also economically dangerous: how many of the brightest young people are now seeking to emigrate?

Something must change. Yet all routes seem blocked. Jens Weidmann, Bundesbank president, has argued in the Financial Times that monetary policy has reached, if not exceeded, its limits. The fiscal compact is designed to preclude discretionary fiscal policy. Anyway, in the absence of fiscal solidarity, member countries that face unsustainably high interest rates have no room for manoeuvre, while the currency union lacks a federal fiscal actor. This leaves “structural policies”, which is what eurozone leaders mean by a growth policy. But the view that such reforms offer a swift return to growth is nonsense. In the medium run, they will raise unemployment, accelerate deflation and increase the real burden of debt. Even in the more favourable environment of the 1980s, it took more than a decade for much benefit to be derived from Margaret Thatcher’s reforms in the UK. More On this story/ Hollande takes French presidency// France’s new first lady// Global Insight Hollande at odds with key partners on structural reform// European elections Live coverage// Global Market Overview Greece fears put shares under pressure Martin Wolf/ Flexibility is no sin when policy is failing// After the bonfire of the verities// Banks are on a eurozone knife-edge// Some Tolstoyan advice for the UK on debt

As Josef Joffe’s article in the FT indicates, many Germans believe that their country’s recent relative success is due to reforms introduced under Gerhard Schröder. This, too, is largely nonsense. Germany’s has been an export-led growth story. What made this possible was partly the fact that Germany has a superb industrial base. But it also benefited from incontinent credit-fuelled booms elsewhere. Is there any chance that Germany will now return this favour? Close to none, is the answer. Perhaps the most important sentence in Mr Weidmann’s article was the following: “Monetary policy in the eurozone is geared towards monetary union as a whole; a very expansionary stance for Germany therefore has to be dealt with by other, national instruments.” In brief: if you dream that Germany will allow a credit-fuelled boom to raise domestic inflation, stop. This is consistent with the IMF’s forecasts. Up to the crash, inflation was consistently higher in the eurozone as a whole than in Germany, largely because of relatively high inflation in Spain and Italy. Logically, this must now be reversed. But that is far from what the IMF forecasts (see chart). According to the IMF, the European Central Bank will even fail to hit its inflation target of close to 2 per cent. As Paul de Grauwe, now at the London School of Economics, stresses in a recent note, the current adjustment process is asymmetric: countries in difficulties disinflate; but countries in a good position do not inflate. This is not a monetary union. It is far more like an empire.

What, then, might Mr Hollande do? First, he is going to have to forget almost all of his domestic promises, not only because they are not going to help France, but also because German leaders will not take him seriously otherwise. Then the new president must embark on a serious discussion with the latter on how they expect the eurozone to end its crisis. He should give enthusiastic support to the wise recent remarks by Wolfgang Schäuble calling for higher German wages. He should then point out that there seem to be only five ways this can end. The first and best would be symmetrical adjustment of the imbalances that built up before the crisis, along with reform in weaker countries. The second would be a permanent transfer of resources from surplus countries to deficit ones. The third would be a painful shift of the eurozone into external surplus – a Germany writ large, so to speak. The fourth would be semipermanent depressions in weak countries. The last would be partial or total break-up of the eurozone. The only sensible choice is the first. But that is not the path the eurozone is now on. Austerity has to be matched to the realistic pace of adjustment and structural reform. The chances that Mr Hollande can deliver such a changed perspective are small. But the currency union was a French plan. It was François Mitterrand, his Socialist predecessor, who signed the Maastricht treaty. His task and his goal must be to turn hostility into hope. He may fail. But he alone of European leaders has the desire and the ability to try. http://www.ft.com/intl/cms/s/0/51bf429c-98f8-11e1-948a- 00144feabdc0.html#ixzz1uLIZt33E

Viñetas

FRANCIA Ceder el testigo 8 mayo 2012 LE MONDE PARIS Nicolas Sarkozy: "Buena suerte, colega."

VIÑETISTA Jean Plantureux es un dibujante y caricaturista francés nacido en 1951. Conocido bajo el pseudónimo Plantu, se unió a Le Monde en 1972 y se convirtió en su principal dibujante en 1985. Sus ilustraciones son publicadas también en L'Express.

ft.com Comment Editorial May 8, 2012 7:02 pm Greece alone must decide its fate The Greek people have finally delivered their verdict on the European rescue plan agreed by their leaders in February. At Sunday’s general election, almost 70 per cent of the votes cast were for parties opposed to the diet of austerity prescribed by that deal. Support for the mainstream parties – New Democracy on the centre-right and Pasok on the left – collapsed and for the first time a neo-fascist party entered parliament. The vote signalled the depth of anger over the political establishment’s contribution to the crisis. The main parties are seen as pillars of a parasitic system, fuelled by political patronage and cronyism. More ON THIS STORY/ Greeks face fresh political turmoil// Greek politicians suffer backlash to austerity// In depth Greek debt crisis// Concern as far-right party gains ground// Reforms in jeopardy ON THIS TOPIC/ Buyers flock to top-tier bonds//Overview Bloc faces stiffest test in its history// Jens Weidmann Monetary policy is no panacea for Europe’s ills// Market focus shifts to policy uncertainty EDITORIAL/ The paradox of Putin’s third term// Editorial Hollande’s win is a chance for change// Editorial Stopping a slide to Afghanistan redux// A touch of the mid-term blues Given the difficulty of assembling any administration from the seething mass of interests represented in the new parliament – from extreme left to the ultranationalist right – a second poll is now likely. But with Greek public opinion highly inflamed, it is far from clear that a different answer will be forthcoming. The result raises serious questions about Greece’s ability to live with the terms of the €174bn rescue deal it agreed with the EU and the International Monetary Fund. The deadline for parliament to pass the reforms required to trigger the package is the end of next month. What is important is that the Greek people should now understand the choice that lies before them. While it is their democratic right to tear up any deal that has been done in their name, they should know that to do so would have consequences. Without the forbearance of their creditors, such an act would put the country into default and risk its exit from the eurozone. Greece has made big inroads into its deficit. Between 2010 and 2011, about 6 percentage points were cut off the budget over-run through sharp tax rises and painful spending cuts. The cost has been breathtaking. By the end of this year Greece will have lost 20 per cent of its pre-crisis gross domestic product. Unemployment stands at 21 per cent. There was no guarantee that February’s rescue package – the second in two years – would solve Greece’s problems. Even as the ink was drying on the deal, analysts estimated that Greece could need a further €50bn of aid in the second half of the decade. But it is the only deal on the table and should remain so. 35

Greece’s problems stem from its profligacy and the refusal of successive governments to tackle a hidebound system that privileges insiders at the expense of the majority. Vital structural reform has foundered on the opposition of establishment parties. George Papandreou, the former Pasok prime minister who resigned last year, described his own country as “corrupt to the bone” in his first EU summit in 2009. While the comments shocked his European peers, the legitimacy of Greece’s membership of the single currency has always been in question. Soon after joining the euro, Greece’s claims to have met the economic targets for membership were thrown in doubt by accounting revisions. In 2006, Greece’s GDP jumped 25 per cent overnight when it sought to include prostitution and money-laundering in its calculations. Greece’s record is one of mishandling EU subsidies and fiddling figures. The EU has gone as far as it can in seeking to help Greece. If there is not the political will in Athens to do what is necessary to preserve membership of the euro, it is pointless to continue. Europe must prepare for an exit from the eurozone that has become probable rather than possible. Inevitably there will be repercussions. But there are reasons to hope that the fallout will be more limited than would have been the case two years ago. The private sector has pulled back from exposure to Greece. International banks have taken haircuts of more than 50 per cent on their Greek bonds. The eurozone, for all its problems, is in better shape to weather an exit now. The IMF and European Central Bank will suffer big losses. While this will hurt, the pain should be manageable. If there is another election it may defy expectations and return a government determined to do what it takes. If not, however, Europe must prepare for the inevitable. That means ensuring its firewall is robust enough to protect the most vulnerable of its members from the markets, which may put the weakest to the test. Efforts must be made to protect those who are still abiding by programmes from the worst of the storm. But Greece must decide its own fate. http://www.ft.com/intl/cms/s/0/a348f462-9918-11e1-948a- 00144feabdc0.html#axzz1uMkMjgzy

• Política Países miembros

Newsletter del 8 mayo 2012

Política Países miembros GRECIA ¿Quién restaurará el orden? 8 mayo 2012 KATHIMERINI ATENAS

Ilias Makris Las elecciones del 6 de mayo han sacudido el panorama político griego de tal manera que no puede articularse ninguna mayoría capaz de gobernar. Aún así, apunta Kathimerini, deben ser los políticos, desacreditados tanto por los votantes como por sus socios europeos, los que encuentren la forma para salir adelante. Alexis Papachelas ¿Tendrá algún efecto el mensaje atronador de las elecciones del domingo? El país no tiene ni mucho tiempo ni margen de maniobra. Algunos optan por pensar que el resultado asustará a Alemania y a Francia, que relajarán sus demandas fiscales en Grecia y que quizás envíen al país un generoso paquete de ayuda. En otras palabras, esperan que nuestros prestamistas extranjeros se den cuenta de que la transformación de Grecia en una especie de República de Weimar es sencillamente un anticipo de lo que ocurrirá en breve en Italia, España o incluso en Francia. Pero las cosas no son tan sencillas. Por supuesto que nuestros socios están más preparados para una “quiebra” griega o incluso para una salida de la eurozona. Una flexibilización de las demandas fiscales significaría más dinero para Grecia, algo que no aceptarían bien ninguno de los Parlamentos de Europa. Pero hay otro problema más. El concepto que tienen nuestros socios de los políticos griegos no es muy distinto al nuestro, es decir, no confían en ellos. Creen que son poco

fiables. Observan poca voluntad de cambio entre los partidos dominantes de Grecia y tampoco hay a la vista ningún nuevo partido reformista. El preludio del dracma Además, los griegos han desacreditado cualquier cosa que tenga que ver con el memorándum de la UE y el FMI. Y mientras no vean otro movimiento importante de renovación, apoyarán a partidos de protesta como el dirigido por Tsipras [líder de Syriza, izquierda radical]. Es obvio que si los alemanes no cambian sus posiciones y no se plantea ninguna solución convincente en nuestro país, las elecciones de ayer serán el preludio del dracma. Algunos afirman que si se recorta el dinero de los sueldos y las pensiones, la gente se dará cuenta de lo que sucede. Puede que sea así como funcionan las cosas, pero también puede ser un boomerang que enoje aún más a la gente. No se puede imponer ninguna solución desde arriba. Deben plantearse los argumentos a favor de luchar por el euro. Ayer quedó claro que la élite política y económica ateniense habla un idioma distinto al resto del país. Nos esperan unos días y unos meses complicados. Es lo que suele suceder cuando un sistema podrido se hunde sin que haya otro que lo sustituya. Es lo que suele pasar cuando un pueblo madura de repente tras décadas de vida fácil. Ayer, este pueblo puso todo patas arriba. Y ahora está esperando a ver si alguien puede restablecer algún orden. http://www.presseurop.eu/es/content/article/1947101-quien-restaurara-el-orden

Economía Los expertos advierten que los ‘bancos malos’ necesitarán ayudas públicas Gestores y accionistas deben asumir pérdidas antes que los contribuyentes El Gobierno abre la posibilidad de inyectar dinero para traspasar activos problemáticos Íñigo de Barrón Madrid 7 MAY 2012 - 01:51 CET12 El Gobierno ha negado, más de tres veces, que haya “la más mínima ayuda pública para un banco malo”, como dijo Luis de Guindos, ministro de Economía, el 21 de abril. Desde entonces, la tormenta ha sacudido con fuerza. El FMI y el BCE reclaman actuaciones rápidas sobre el sector financiero; los bancos arrastran una caída media en Bolsa del 24% en el año; la prima de riesgo sigue disparada y los ratings de las entidades caen en picado. En los últimos días, Guindos ha admitido alguna posibilidad de ayuda pública para que las entidades trasladen sus activos problemáticos a “sociedades inmobiliarias” a precios de mercado. Comúnmente se entiende que así se crea un banco malo, aunque no sea una entidad bancaria. En el mundo financiero hay una máxima: “Para resolver los problemas, o tienes tiempo, o tienes dinero”. Está claro que no hay tiempo, así que solo queda ver cómo se explica a la opinión pública que, otra vez, y pese a la que está cayendo, el Estado ayudará a los bancos para que la economía española no se gripe definitivamente. En el mundo financiero hay una máxima o tienes dinero o tienes tiempo. Y no hay más tiempo Todos los expertos consultados creen que el real decreto de saneamiento, que ha exigido 50.000 millones a la banca, no es suficiente para poner a precio de mercado los activos inmobiliarios. Hará falta más dinero y la banca no lo tiene, así que llegará del Estado, dicen todos los expertos consultados. Goldman Sachs y Merrill Lynch reclaman otros 50.000 millones para limpiar el ladrillo. El Santander, el BBVA, el Popular y el Sabadell intentarán no pedir dinero público para evitar el estigma de la nacionalización. Para la mayoría del sector, será necesario el salvavidas del Estado, pero con condiciones. “Este saneamiento debería exigir contrapartidas rigurosas en la propiedad y la gestión de las entidades saneadas”, apunta Aristóbulo de Juan, consultor y ex director general del Banco de España. Es decir, los gestores y los accionistas deberían asumir las pérdidas si las hubiera, antes que los contribuyentes. Otros expertos piden que “las ayudas sean vía préstamos remunerados con la posibilidad de que si los activos se revalúan, el Estado se beneficie”, como apunta Alfonso García Mora, socio de AFI. Pero no hay escapatoria. “No hay constancia de bancos malos en Europa en los últimos años que no hayan recibido asistencia publica”, afirma Íñigo Vega, experto de Cheuvreux. Joaquín Maudos, catedrático de Economía, cree que el verdadero problema “es Bankia”. Pero añade: “Veo complicado crear un banco malo sin fondos públicos. El Gobierno se niega. Tendrá que cuadrar el círculo”. http://economia.elpais.com/economia/2012/05/06/actualidad/1336341099_430328.html

vox Research-based policy analysis and commentary from leading economists German savers should applaud the growing TARGET balances Sebastian Dullien Mark Schieritz 7 May 2012

The Eurozone debt crisis has led to increasing imbalances among Europe’s central banks, the causes and consequences of which are the subject of fierce debate. But this column argues that the discussions are missing a fundamental point – the extent to which the German financial sector and German savers benefit from this arrangement. The European debt crisis has led to increasing imbalances between Eurozone central banks, which then show up in the TARGET system (also known as the TARGET2 system). The causes and consequences of this phenomenon are the subject of a vivid and controversial debate (Sinn and Wollmerhäuser 2011, Buiter et al 2011, Merler and Pisani-Ferry 2012). However, one point so far has been neglected in the debate – the extent to which the German financial sector and German savers benefit from the TARGET imbalances. As we will argue, a significant share of the changes in the TARGET balances is effectively a transfer of risk from the balance sheets of the private sector in Germany to the Bundesbank and, hence, the public sector’s balance sheet. Within the Eurozone, financial flows between national central banks of the Eurosystem are operated via TARGET, an online real-time cross-border settlement system. While the transactions are complex in detail, the economic logic behind them is very simple. If a country has a net TARGET liability, its banks in total have experienced net outflows of funds to the rest of the Eurozone. Conversely, if a country has net TARGET claims, its banks have received a net inflow of funds (Bundesbank 2012). The TARGET liabilities of most peripheral European countries have increased dramatically since 2009, while Germany's TARGET claims jumped to a staggering €547 billion in February 2012. The main reason for this is that as private investors and savers withdrew their money, peripheral banks had to access their respective central banks in order to meet their refinancing needs. Banks in the core, however, attracted more than enough liquidity on the interbank funding markets. As private capital flows to the south were drying up, they have been replaced by official capital flows in order to prevent a sudden stop. This mechanism is demonstrated in Table 1, where the changes to the different positions in the balance sheet are shown if funds are repatriated to the centre. In this case, the imaginary commercial bank “Centre Commercial” has not rolled over a loan to the also

imaginary “Periphery Commercial” with the volume C. As a consequence, Periphery Commercial has increased its borrowing from the periphery central bank by C and has used the money to repay the loan to Centre Commercial. Centre Commercial, in contrast, has parked the money in its account at its central bank. As the payment has been booked through the TARGET system, the periphery central bank’s TARGET liabilities have increased by C while the centre central bank’s TARGET claims have increased by C. Note that if we were to consolidate the balance sheets of the two central banks’, net claims would not change. Table 1. Centre Commercial and Periphery Commercial accounts

In the national account of the centre, these transactions would show up as a capital inflow (the repatriation of the loan) and a similar outflow (the increase in the TARGET claims). In fact, Germany's TARGET claims amount for an ever-increasing share of the country's capital-account deficit (Bornhorst et al 2012). This corresponds with an increasing share of TARGET claims in Germany's foreign claims. In the fourth quarter of 2011, the net foreign investment position stood at €933 billion, of which €483 billion was TARGET claims. This is the economic equivalent of a swap of claims against private banks in the periphery against a claim again the central bank in the periphery. A number of commentators, led by Hans-Werner Sinn in Germany, have argued that this is a form of expropriation of German savers, who are witnessing a transformation of the country's external wealth. “The marketable assets of savings banks, banks and life insurance companies, which back the savings (…) were exchanged without consent of

the savers into claims against the ECB” (Ifo-Institut 2012). These claims are seen as inferior to private claims as they disappear if the system collapses. Yet on closer inspection, this argument seems to get the logic completely wrong. It implicitly assumes that private sector entities in the periphery would honour their euro debt in full if the Eurozone disintegrates, while claims against the central bank in the Eurozone periphery would need to be written down. From all the experience we have from emerging market crisis, this is clearly nonsense. An exit of a periphery country from the Eurozone and a following depreciation of the country in question would increase strongly the value of all euro liabilities in households’ and firms’ balance sheets. Given that these entities would earn their revenue in (newly issued) domestic currency, this currency mismatch would render many of them bankrupt overnight. There are only two solutions to this problem – mass defaults of households, firms, and banks in the exiting country or a redenomination of the liabilities in the new domestic currency. In both cases, creditors from the north would lose (parts of) their wealth. In addition, while it is true that marketable direct claims on the aggregate level have been replaced by non-marketable indirect claims through the Eurosystem, these claims can sensibly be assumed to be safer than the original assets. • First, Germany now has a matching claim against a periphery central bank, which in turn has a claim against a commercial bank in its territory. There is no reason why such a claim should be less secure than a direct claim on the commercial bank in the periphery. • Second, if the euro does not disintegrate altogether but only single countries leave, the potential losses for Germany have become smaller, not larger. According to the ECB's statutes, losses in the Eurosystem are distributed among the central banks according to their share in the ECB. The Bundesbank's capital share is 27%, which means that Germany would only have to take less than one-third of the total losses, compared to the full amount that private creditors would have to take. The rest would be borne by those partner countries that remain in the euro with Germany. • Third, the shifting of the risk of a collapse of the Eurozone from the private to the public sector also benefits the savers. As the centre central bank can be expected to always honour its obligations to the commercial banks in its territory, the commercial banks have been able to replace risky foreign assets by safe domestic assets. Thus, at least to the extent that the increase in TARGET claims stems from German banks’ repatriation of money from the periphery into Germany, this increase actually protects the savings of the German public. Of course, the increase in TARGET claims is not entirely due to the repatriation of German funds. Residents from the euro periphery have also started to move their funds into German banks, most likely to hedge from a possible euro break-up. This results in an increase in Germany's TARGET claims as well. Therefore the question is: To what extent do the additional claims result from the repatriation of German funds? The consolidated claims of Germany's banks vis-à-vis the rest of the Eurozone give us an idea of what is going on. From August 2008 to January 2012 (more recent data is not yet available), German banks have cut their claims against the rest of the Eurozone by €320bn. During the same period, the net TARGET claims of the Bundesbank

have increased by €390bn. Hence, the larger part of the TARGET balances seems to stem from a repatriation of funds. Thus, the liquidity provided by the ECB which is reflected in the TARGET system has made it possible for German banks to bring their money back home. Without the ECB's intervention, the attempt to shed assets in the periphery would most likely have led to defaults in the banking sector and the wider economy, which would have eroded the value of these assets. German savers – whose money the banks ultimately manage –should therefore applaud the increase in the Bundesbank's TARGET balance. References Bornhurst, F and A Mody (2012), “TARGET Imbalances: Financing the Capital- Account Reversal in Europe”, VoxEU.org, 7 March. Buiter, W, E Rahbari, and J Michels (2011), “The implications of intra euro area imbalances in credit flows”, VoxEU.org, 6 September. Bundesbank (2012), “Zur Problematik der TARGET2-Salden im Eurosystem”, Geschäftsbericht 2011, Frankfurt. Ifo-Institut (2012), “Explodierende TARGET-Kredite”, press statement, 18 April. Merler, S and J Pisani-Ferry (2012), “Sudden Stops in the Eurozone”, VoxEU.org, 2 April. Sinn, H-W and T Wollmershäuser (2011), “TARGET Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility”, NBER Working Papers No. 17626. http://www.voxeu.org/index.php?q=node/7953 05/07/2012 05:37 PM The EU's Black Holes Saving the Euro Will Require Banking Sector Reform By Martin Hesse, Christoph Pauly and Anne Seith As concerns about Spanish banks grow, leading economists are warning that Europe's banking system urgently needs to be overhauled, otherwise the entire monetary union could be in jeopardy. The continent's leaders missed their chance to reform the system in the wake of the 2008 financial crisis, and are now paying the price. It was one of those puzzling sentences that central bankers like to leave hanging in the air. The temporary European Financial Stability Facility (EFSF), the rescue fund for cash-strapped euro-zone countries, has not been very successful, admitted European Central Bank (ECB) President Mario Draghi at a press conference in Barcelona last Thursday. "Its functioning fell short of both expectations and needs," he said. Draghi left it up to the journalists in the audience to interpret what is wrong with the fund and what needs to be changed. Furthermore, the Italian banker failed to mention that his organization has long been exploring ways of expanding the scope of the EFSF, or its permanent successor, the European Stability Mechanism (ESM), to give the bailout mechanism more firepower. 43

Euro Group chief Jean-Claude Juncker had asked Draghi for his advice in the matter two weeks earlier. Originally, the ESM, which will be launched in July 2012, was only intended to help out debt-ridden governments, which would have to meet strict requirements in return. But recently, there have been serious closed-door discussions about direct aid for banks. In Brussels, a working group is also looking at this delicate subject. Time is running out. With the financial crisis now in its fifth year, the banks' problems remain unresolved, and in some countries they are even jeopardizing the stability of the state -- and the future of the European common currency. Throwing Money into a Black Hole Spanish banks are particularly unsteady. They are sitting on roughly €1 trillion ($1.3 trillion) in shaky loans related to the ailing real estate sector -- and urgently need fresh capital as a risk buffer. The estimates for the cash shortfall range from €50 billion to €200 billion. Since such sums of money would overburden both the banks and the government budget, experts believe that the Spanish government should urgently seek help from the EFSF. But Spanish Prime Minister Mariano Rajoy is resisting this move, not just because the euro partners would basically have a say in governing the country, but also because his entire nation would then be branded as high risk -- and would probably find itself cut off from the international financial markets for a long time. Direct aid for banks from the euro countries is a sensitive issue, though. The German government rejects the idea flat out for fear that its money will disappear into a black hole. Sources at Germany's central bank, the Bundesbank, say they have no idea what's going on in the Spanish banks. This lack of knowledge is a consequence of a dangerously nation-centric approach that Europe has allowed to flourish in its financial industry. The sector is more internationally interconnected than any other, yet each country controls and, if necessary, rescues its banks on its own. Clemens Fuest, a German economist who teaches at Oxford University and advises the German government, is convinced that, "without a fundamental reform of the European banking sector, the euro is in jeopardy." It is the financial industry, he argues, that repeatedly endangers the monetary union. Real estate bubbles such as the ones in Spain and Ireland could not have formed without the active help of local banks, he says. "The national watchdogs have failed to prevent this." Business as Usual Following the collapse of Lehman Brothers, the Europeans continued as before -- which is a decisive mistake, says Daniel Gros, director of the Center for European Policy Studies (CEPS), a Brussels-based think tank. "Back in October 2008, the Netherlands proposed the establishment of a European bank rescue fund, but this failed due to resistance from Germany," says Gros. Instead, every country focused exclusively on its own problems, and the European banking system "was, on the whole, not sufficiently stabilized," he contends. Take, for example, bank bailouts: Too many ailing institutions were kept alive by national funds, but at the same time EU conditions for receiving aid restricted their operations to a national level and further weakened the banks. What's more, the safety mechanisms to protect customer deposits are still organized on a national basis.

Bank regulation is another example: Global banking groups like BNP Paribas and Deutsche Bank still have to deal with 27 different European national regulatory agencies, which often go to great lengths to hide information from each other. The new European Banking Authority (EBA), which has a staff of only 62 and limited power, is desperately struggling to bring some semblance of coordination to the sector. British Victory The most recent example of the wavering course of European banking policy was supplied by euro-zone finance ministers at a meeting in Brussels last Wednesday. A heated debate erupted over the issue of the size of the capital buffer that banks should be required to have in the future. After over 12 hours of negotiations, German Finance Minister Wolfgang Schäuble had had enough. "We'll see each other at the Champions League final in Munich," he said with annoyance in the direction of his British colleague George Osborne and headed for the exit at 11 p.m. But the British chancellor of the exchequer continued unruffled and, around midnight, proposed additional amendments to the controversial draft legislation. Having reached the end of their tether, the remaining finance ministers and a German undersecretary finally acquiesced. Everyone knew that the British -- with their key financial center, London -- had to be on board for any agreement that was made. Early Thursday morning, Osborne was able to proclaim victory. The British will now be able to force their banks to hold up to 12 percent core Tier 1 capital -- more than some other countries wanted. With the move, they are putting pressure on the entire financial sector to act. If the plans are actually implemented, European financial institutions will require many hundreds of billions of euros in additional capital, bankers warn. While the German government fundamentally supports requiring banks to hold larger capital buffers, it is unclear how such large amounts of money can be raised so quickly. Spanish banks already have too little capital to counterbalance looming losses from high-risk real estate loans. The government in Madrid is working feverishly on a so- called bad bank that would relieve institutions of their toxic assets. The favored model would call for the banks to finance the measure themselves, possibly backed up by guarantees from state development banks. The plan B, as the Spanish see it, would involve direct EU aid to the banks. Calling the Tune Experts like Fuest, Deutsche Bank chief economist Thomas Mayer and CEPS economist Gros favor such a solution. But direct aid from the ESM can also only be granted under strict conditions. "He who pays the piper calls the tune," Mayer remarks. Fuest adds: "Spain has to relinquish the supervision of its banks to Brussels." According to the economists, the case of Spain shows once again that the euro zone's approach to its banks is outmoded. The experts see ESM aid to Spanish financial institutions as the first step toward a far more integrated European banking market. In the coming days, Gros will present a paper that proposes a joint European fund for insuring deposits and liquidating ailing banks. "It would make sense to create a European bank rescue fund, which would be financed through fees paid by the banks. This would take roughly 10 years," says Gros.

Already one year ago, Fuest went on a tour to promote the idea of joint institutions in Europe. This week, the German parliament, the Bundestag, has invited him to attend a hearing. What the Oxford professor will recommend to the legislators is largely consistent with the proposals made by Gros and is nothing short of a minor revolution. "The national supervisory agencies have to be replaced by a strong European supervisory body," says Fuest. "National deposit insurance funds also have to be consolidated. Furthermore, there has to be a permanent European fund that rescues ailing banks or is able to liquidate them in an orderly manner." Fuest says that it still has to be discussed whether this should be achieved with money from the ESM, or a regular fee paid by European banks, or whether state guarantees alone should finance it. 'More Desirable than Ever' Economists are of course free to promote relatively unrealistic ideas -- but politicians are also under pressure on another front: Deutsche Bank CEO Josef Ackermann, who already proposed a European bank rescue fund back in 2009, says that such a fund is "more desirable than ever -- to stabilize banking systems, to restructure large international banks, to secure the domestic financial market and to avoid unfair competition due to national regulations." The re-nationalization of European banking markets is alarming, he says, and it stands in the way of the urgently needed growth in crisis-stricken countries. Many officials at the ECB also agree that the firefighting operations against the conflagrations in the industry finally have to be centrally organized. For weeks now, Draghi's new right-hand man, Jörg Asmussen, has been emphatically promoting the idea of a joint fund modeled after Germany's bank rescue fund, the Special Fund for Financial Market Stabilization (Soffin). And the ECB president himself said at a recent conference in Frankfurt that a strengthening of bank supervision and a safety net for banks have become more "urgently" needed on the European level. But as pressure is growing to make banks a pan-European issue, there is also massive resistance to such plans. "The countries of the monetary union should first press ahead with greater integration of economic and financial policies," says Michael Kemmer, general manager of the Association of German Banks. "Only then would it make sense to also more strongly centralize regulation and supervision of the financial sector, and to consider a European bank rescue fund." Opening Pandora's Box The German government suspects that behind these proposals is an attempt to make strong countries like Germany foot a bigger part of the bill for bailing out banks. Berlin rejects a joint rescue fund. Instead, German government officials say that it would be better to agree to common European standards for liquidation procedures and safety systems. Indeed, the German government wants to prevent the bailing out of Spanish banks from setting a precedent. Bailing out German banks at the taxpayers' expense has already not been particularly popular. Now, it would be virtually impossible to gain majority support in the Bundestag to prop up Spanish banks that gambled and lost on the country's construction boom. What's more, it would hardly end with bailouts for Spanish banks. Ireland, which only had to be bailed out by the rescue fund because of its banks, and thus has a much

higher level of government debt than Spain, could insist on equal treatment. The Irish are already demanding discounts at EU summits because they have to pay extremely high interest rates for the loans to rescue their banks. It's a similar story with the European Commission, where many officials are opposed to special programs to rescue Europe's banks. "This would open Pandora's box," says one of the highest-ranking officials on the Commission. It is only when countries officially seek aid from the rescue fund that the experts in Brussels have been able to push through precise requirements on the necessary structural reforms and austerity measures. Spain apparently wants to avoid this burden. Living Beyond Their Means To make matters worse, the banking sector is only one of the many problems facing Spain. Youth unemployment is running at over 50 percent. Large sectors of the industry are said to be no longer competitive, the labor market is inflexible and the Spanish have lived far beyond their means for many years. Fresh money from Europe, with repayments guaranteed by others, could cause Spain's reform efforts to run out of steam. Many structural reforms that the government has promised are, at least for the time being, only on paper. But no matter how cautiously Europe aids its cash-strapped banks, there's no denying one fact: The euro partners have to overcome their financial nationalism. Otherwise Europe's banks will remain a constant trouble spot and place the continent at a permanent competitive disadvantage. Translated from the German by Paul Cohen

URL: http://www.spiegel.de/international/europe/europe-needs-to-reform-its-banking- sector-a-831712.html

May 6, 2012 Those Revolting EuropeansBy PAUL KRUGMAN The French are revolting. The Greeks, too. And it’s about time. Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that’s a good thing. Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. It was actually kind of funny to see the apostles of orthodoxy trying to portray the cautious, mild-mannered François Hollande as a figure of menace. He is “rather dangerous,” declared The Economist, which observed that he “genuinely believes in the need to create a fairer society.” Quelle horreur! What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco- German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest. What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper. Moreover, there seems to be little if any gain in return for the pain. Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe’s policy elite keep proclaiming that Irish austerity has indeed worked, that the Irish economy has begun to recover. But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives? One answer — an answer that makes more sense than almost anyone in Europe is willing to admit — would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation. As a counterpoint to Ireland’s sad story, consider the case of Iceland, which was ground zero for the financial crisis but was able to respond by devaluing its currency, the krona

(and also had the courage to let its banks fail and default on their debts). Sure enough, Iceland is experiencing the recovery Ireland was supposed to have, but hasn’t. Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the “European project,” the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is — and the Germans have shown how that way can work. Unfortunately, they don’t understand the lessons of their own experience. Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom. So Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth. The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago. http://www.nytimes.com/2012/05/07/opinion/krugman-those-revolting- europeans.html?_r=1&nl=todaysheadlines&emc=edit_th_20120507

May 6, 2012, 2:22 pm Ex-President Bling-Bling According to projections. Now what? The basic fact about Europe right now is that the strategy of adjustment through austerity and internal devaluation isn’t working, won’t work, and is rapidly turning into a social and political disaster. The question now is whether there’s a way out that doesn’t involve breaking up the euro. And let’s not call euro breakup unthinkable. It would cause large short-run disruptions, it would be a body blow to the European project, but it would at least offer a path to eventual recovery; Spain would have a chance to restore competitiveness through a devalued peseta that seems infinitely out of reach under current conditions. If you don’t like that outcome, you have to come up with a better one. In a way, the German refrain — we did it, so can they — actually offers a solution, although not in the way the Germans want. For as I emphasized in that post earlier today, that German success story was based on a (modestly) inflationary boom in much of the rest of Europe. Give the peripheral countries a comparably favorable external environment — or actually a more favorable one, since they’re much deeper in the hole — and maybe there is a way to make this work. Let Spain regain competitiveness by inflating more slowly than Germany, rather than by deflating, and this whole thing might, might, become feasible. But this means, yes, overall inflation in the euro area significantly higher than the less than 2 % target. It certainly means a lot higher than the 1.5% the market currently expects. Don’t like that? OK, so no euro. It’s that stark. http://krugman.blogs.nytimes.com/2012/05/06/ex-president-bling-bling/

ft.com World Europe May 6, 2012 5:18 pm Schäuble backs wage rises for Germans By Chris Bryant in Frankfurt

Wolfgang Schauble at a press conference after the G20 meeting of fnance ministers and central bank governors Germany’s finance minister has backed wage increases for the country’s workers in what may be seen as an olive branch to critics who argue that weak German consumption has exacerbated the eurozone debt crisis. “Europe and the G20 are relying on us remaining an engine of growth,” Wolfgang Schäuble said in an interview with Focus, a German magazine. More ON THIS STORY/ Sarkozy reluctant to play crisis card// Brussels signals easing of fiscal rules//Editorial A pact for growth is vital for Europe// ON THIS TOPIC/ Italian polls test appetite for austerity// Serbian presidential election heads for run-off// May Day sees wave of austerity protests// Editorial The right kinds of austerity policy IN EUROPE/ Greeks face fresh political turmoil// Socialists celebrate own Bastille day//Hollande takes French presidency// Protesters’ stand against Putin turns violent “We have to remain alert, we also have to work on our competitiveness, but not as much as the crisis states,” he said, referring to Germany’s record in implementing structural reforms. “It is fine if wages in Germany currently rise faster than in other EU countries. These wage increases also serve to reduce the imbalances within Europe.” Many of Germany’s international partners hope a generous German wage round will finally kick-start anaemic private consumption in Europe’s largest economy. This in turn might help weaker eurozone nations to export and thereby shore up public finances. German engineering workers are battling to secure a substantial pay reward, staging warning strikes last week in support of their bid for a 6.5 per cent pay increase. Employers argue that Germany’s 3.6m engineering workers should receive a 3 per cent pay increase, spread over 14 months.

Berlin has been unimpressed by calls from abroad for action on the country’s burgeoning trade surpluses, seeing it as countries trying to distract attention from their own domestic problems. But pressure is increasing on Germany to show it will do more to help support European growth rather than simply calling for spending cuts. Guido Westerwelle, German foreign minister, told the Frankfurter Allgemeine Sonntagszeitung newspaper that “after the [French] election we will swiftly get to work on supplementing the fiscal debt-cutting pact with a growth pact for more competitiveness”. Mr Schäuble insisted it was not a matter of choosing between growth and savings, arguing that from the beginning the EU had pursued a twofold strategy to cut debts and boost growth via reforms to improve competitiveness. However, the finance minister warned against growth-stimulating measures paid for with new debts. “That would be like vowing to improve oneself by first committing a new sin,” he said. Pressure on labour costs and labour market reforms have made Germany far more competitive than countries in Europe’s periphery, where wages rose comparatively quickly before the crisis. Parts of German industry, especially its automakers, are enjoying record profits thanks to their ability to export to fast-growing emerging markets, Meanwhile, unemployment in Germany is at the lowest rate since the country was reunified in 1990, and German industrial companies have complained of staff shortages, even as unemployment soars in the eurozone’s recession-hit periphery. Berthold Huber, head of IG Metall, the industrial trade union, said on Sunday that German workers should share in the benefits of productivity improvements. He also warned in a newspaper interview of the potential for full-blown strike action if an agreement with employers was not reached soon. The trade union pay demands, coupled with low interest rates and rising house prices, have prompted worries about inflation in Germany where fears of a sudden price spiral are deeply ingrained in the national psyche. But Mr Schäuble, a conservative politician who might ordinarily be expected to lend support to employers, defended the right of German workers to seek more pay whilst cautioning that any pay increase should not be excessive. Voters in the state of Schleswig Hostein went to the polls on Sunday and a key federal state election in North Rhine-Westphalia takes place next week. http://www.ft.com/intl/cms/s/0/54aa8246-9772-11e1-83f3- 00144feabdc0.html#axzz1uAfZe3yd

Economía OPINIÓN Baja la fiebre de deuda del sector privado El proceso de desapalancamiento de la economía española, aunque tardío, avanza a ritmos notables Ángel Laborda 6 MAY 2012 - 01:00 CET1

Entre el cúmulo de malas noticias que llenan los medios de comunicación los últimos meses, algunos datos pasan desapercibidos, pero son de suma importancia para seguir los progresos de la economía española en la corrección de sus desequilibrios, que son el muro que hay que derribar para poder franquear el camino del crecimiento y de la generación de empleo. Entre esos datos se encuentran los de las cuentas financieras del cuarto trimestre del pasado año. En ellos aparecen cifras clave para entender la desconfianza de los inversores y las dificultades de financiación: la deuda de los sectores institucionales y del conjunto de la economía. Pero antes de analizar estos datos, es obligado hoy referirse a los del paro y afiliaciones a la Seguridad Social del mes de abril conocidos el pasado viernes. Abril es un mes favorable, desde el punto de vista estacional, para la evolución del empleo y el paro. Así, en abril de 2011 la afiliación aumentó en 81.400 personas y el paro disminuyó en 64.300. Por eso los modelos de predicción auguraban aumentos de la afiliación y descensos del paro, aunque en cifras originales, pues en términos desestacionalizados mantenían la tendencia inversa propia de la actual coyuntura, es decir, descensos de la afiliación y aumentos del paro. Así ha sido, efectivamente. Pero

dichos modelos se quedaron cortos en la cuantía de las variaciones, que desgraciadamente han sido peores que las previstas. El paro registrado descendió en 6.600 personas en cifras originales, pero aumentó en unas 65.000 en cifras desestacionalizadas, que son las relevantes para analizar la tendencia. La desviación respecto a mis previsiones ha sido de unas 30.000. Lo que indica esta marcada desviación es que la tendencia de esta variable ha empeorado de forma más acusada de la que podían recoger los modelos. En cuanto a las afiliaciones, el aumento original de 16.500 personas se convierte en un descenso desestacionalizado de unas 70.000. También en este caso los modelos predecían un descenso menor, pero la desviación ha sido inferior a la del paro registrado, unas 10.000 personas. El ritmo anualizado de descenso de los afiliados en los tres últimos meses respecto a los tres precedentes supera el 4%, un punto porcentual más negativo que la tasa de los tres últimos meses de 2011. Estos datos son coherentes con otros conocidos en la semana, como los indicadores PMI de la industria y los servicios de abril, que también experimentan un notable deterioro. El aumento del paro en abril es coherente con los datos de actividad en la industria y los servicios En cuanto a la deuda, en los gráficos adjuntos se presenta su evolución para los cuatro sectores institucionales comparada con la media de la zona euro. Aquí las noticias son positivas, pues indican que el necesario desapalancamiento (simplificando, reducción del endeudamiento), aunque con algo de retraso, ya está tomando ritmos notables. Claro que, si tus acreedores no te financian en la cuantía que necesitas, no tienes más remedio que reducir tu deuda. Ello implica gastar menos en consumo e inversión, generar superávit por cuenta corriente, vender las joyas de la abuela (vender activos) y con todo ello amortizar la deuda. Es lo que está sucediendo. La contrapartida es que reducir el gasto (la demanda interna) supone sumir a la economía en recesión. La deuda bruta de los hogares aumentó vertiginosamente durante la pasada década, sobrepasando en 2009 a la media de la eurozona en casi 20 puntos porcentuales (pp). En los dos últimos años esta deuda se ha reducido en casi 5 pp y la diferencia con la eurozona ha bajado a menos de 16 pp. Este proceso ha empezado más tarde entre las empresas no financieras, pero también fue muy acusado en 2011. Aun así, la deuda de las empresas españolas supera en 29 pp a la de la eurozona. La deuda de las instituciones financieras españolas, en cambio, sigue siendo inferior a la de la eurozona. Su problema no es tanto la deuda, sino dónde la tienen invertida, es decir, los activos y créditos inmobiliarios. Por último, también la deuda pública española sigue siendo notablemente inferior, aunque con una tendencia de acercamiento. Conclusión: la elevada deuda del sector privado se está reduciendo, pero el problema es que ello se está haciendo en un clima de desconfianza de los acreedores, lo que obliga a acelerar el paso en el proceso de desapalancamiento, deprimiendo así la economía. Si tus acreedores no te financian en la cuantía que necesitas, no tienes más remedio que reducir tu deuda Ángel Laborda es director de coyuntura de la Fundación de las Cajas de Ahorros (Funcas http://economia.elpais.com/economia/2012/05/04/actualidad/1336157817_276621.html

Internacional La Comisión Europea abre la puerta a suavizar el cumplimiento del déficit Rehn: “El pacto de Estabilidad no es estúpido” Los países con recesiones prolongadas y profundas, como España, se beneficiarán Bruselas ultima el paquete de estímulo Claudi Pérez Bruselas 5 MAY 2012 - 18:27 CET600

El comisario Olli Rehn (d), junto al presidente del BCE, Mario Draghi. / Alberto Estevez (EFE) Austeridad, sí. Y al fin también crecimiento. La Comisión Europea ha abierto definitivamente no una, sino varias puertas imprescindibles para sobrevivir a la interminable crisis financiera y fiscal, con medio continente en recesión y cifras de paro propias de la Gran Depresión en algún país. El vicepresidente Olli Rehn, en un discurso muy medido en la Universidad Libre de Bruselas en vísperas de las trascendentales elecciones en Francia y Grecia, ha asegurado que el Pacto de Estabilidad y Crecimiento “no es una estupidez”, sino que “contiene un margen considerable” que permite dulcificar las reglas en los países con mayores problemas, muy poco utilizado hasta ahora por dogmatismos ideológicos, presiones alemanas y, en fin, por la incomparecencia de Francia. Pero Francia ha vuelto. Y la respuesta europea no se hace esperar: fuentes europeas han explicado que Bruselas tiene prácticamente listo el Pacto de Crecimiento, que viene a complementar el tratado que consagra la austeridad en Europa con dos grandes paquetes de medidas. Por un lado, un plan de inversiones para estimular el crecimiento y el empleo en línea con las ideas del candidato socialista francés, François Hollande. Y por otro, más suavidad en la aplicación drástica de las medidas de austeridad que han contribuido a sumir a media Europa, especialmente a la periferia, en una recesión profunda. Países con caídas

profundas y duraderas del PIB, como España, tendrán algo más de tiempo para alcanzar así el sacrosanto déficit del 3% del PIB. La Comisión ampliará el plazo a los países con recesiones profundas y prolongadas para ajustar sus cuentas públicas “En los dos últimos años Europa ha hecho grandes progresos para estrechar los lazos de la Unión y contener la crisis financiera. Pero el continente necesita también esfuerzos colectivos para impulsar el crecimiento”, ha dicho Rehn. El vicepresidente de la Comisión ha hablado por primera vez de un “pacto europeo de inversiones”, esbozado docenas de veces aquí y allá, pero en el que ahora encajan varias piezas. Ese plan pasa por usar el Banco Europeo de Inversiones (BEI) y el presupuesto europeo como palanca para impulsar proyectos de infraestructuras, energía verde e I+D con la participación del sector privado. Bruselas acudirá a la ingeniería financiera si es necesario, ante los problemas presupuestarios y los recelos de Alemania ante las políticas que huelan a poskeynesianismo. Pero esa es solo una parte de la historia: los planes de la Comisión pasan por suavizar la política de austeridad ante la constatación de que las condiciones económicas son peores, mucho peores de lo esperado. Europa se adentra en una recesión peligrosa. Dura y prolongada –quizá un lustro más— en algunos países. Y Bruselas mueve ficha para que los recortes no ensombrezcan aun más ese horizonte, y para no quedarse atrás en el nuevo escenario político europeo. "En la periferia, varios estados miembros están sufriendo una recesión severa y un alza del desempleo" Olli Rehn, comisario europeo Eso puede ser clave para los países periféricos. Fuentes europeas han asegurado a este diario que hará falta cumplir varias condiciones para que un país sea acreedor de un plazo más holgado para reducir su déficit hasta el 3% del PIB consagrado en el pacto de estabilidad. Una: haber hecho un esfuerzo fiscal para reducir el déficit estructural al menos durante un año. Dos: haber puesto en marcha medidas drásticas corto plazo para embridar las cuentas públicas. Tres: haber aprobado reformas estructurales de calado. Y cuarto: haber iniciado o estar en puertas de una recesión profunda y duradera. En principio, España –junto con otros países— cumple las condiciones, aunque la Comisión y el Banco Central Europeo (BCE) reclaman más control sobre las comunidades y cerrar de una vez la reforma financiera. Bruselas añade todavía una condición más: que haya voluntad política para que esos plazos de recorte del déficit se suavicen. Y ese punto no está claro: fuentes del Ministerio de Economía aseguran, en un movimiento que se antoja mitad táctico mitad motivado por la tensiones en los mercados, que España “va a cumplir con el déficit del 5,3% del PIB este año y con el 3% el próximo, haya o no haya flexibilización del pacto de estabilidad”. “El Gobierno va a cumplir a rajatabla con el plan de estabilidad y reformas que acaba de enviar a Bruselas”, abundan las mismas fuentes. Las metas de reducción del déficit se fijaron allá por 2009, cuando Europa empezaba a salir del hoyo y las perspectivas eran más favorables. A finales de ese año empezó a formarse ese círculo vicioso entre crisis fiscal y financiera que ha desembocado en una crisis existencial del euro, y al que Europa respondió con “austeridad a muerte”, en palabras del expresidente Felipe González. España ya planteó hace un par de meses suavizar los objetivos, con esa apelación del presidente Mariano Rajoy a la “soberanía

nacional” que le costó una severa reprimenda del Eurogrupo y que coincidió con un incremento de la presión sobre España en los mercados. Finalmente, Madrid consiguió algo de margen para este año, pero se mantuvo el objetivo del 3% del déficit en 2013, lo que equivale a una especie de asfixia económica: el Gobierno debe recortar a toda velocidad y eso hace mella en la actividad y en el paro. Otros países están en una situación peligrosa o pueden estarlo: la reciente ruptura de la coalición de Gobierno en Holanda se produjo por la negativa de un partido ultraderechista a aprobar nuevos recortes para cumplir el déficit. Con Grecia, Portugal e Irlanda rescatados, el nivel de tensión sobre España e Italia, y en menor medida de países del núcleo duro europeo como Bélgica y Francia, empieza a ser preocupante. De ahí el movimiento táctico de Bruselas. La otra pata de la nueva política europea será el crecimiento. Ni Bruselas ni Berlín quieren dar la sensación de estar aislados ante la constatación de que la austeridad por sí sola no funciona, de que incluso el BCE ha hecho más de un guiño para que la Unión vuelva a prestar atención al crecimiento. “El problema es que apenas hay margen, y donde lo hay, como en Alemania, los países tienen miedo de usarlo”, afirmaba el vicepresidente de la Comisión Joaquín Almunia. El comisario de Asuntos Económicos, Rehn, ha explicado hoy que si no hay margen habrá que buscarlo, e incluso llegó a calificar la sobredosis de austeridad como una “camisa de fuerza” para la Unión. Bruselas rehúye dar cifras, pero fuentes europeas consideran que es posible recapitalizar el BEI con 10.000 millones o usar 11.700 millones del presupuesto comunitario a través de vehículos de inversión para impulsar proyectos por una cifra que rondaría los 200.000 millones, el 2% del PIB europeo. A eso hay que añadir los fondos estructurales, unos 30.000 millones más para combatir el paro que se podrían movilizar suavizando los requisitos de utilización. Quizá sea algo atrevido hablar de un Plan Marshall para Europa: EE UU invirtió el equivalente al 5% de su PIB en estimular la economía europea tras la II Guerra Mundial. Pero ya no puede hablarse solamente de un cambio de léxico. http://internacional.elpais.com/internacional/2012/05/05/actualidad/1336235273_56464 1.html

05/04/2012 05:22 PM Millions Left Behind in Boom The High Cost of Germany's Economic Success Countries around the world envy Germany's economic success and look up to it as a role model. But a closer look reveals a much bleaker picture. Only a few are benefiting from the boom, while stagnant wages and precarious employment conditions are making it difficult for millions to make ends meet. By SPIEGEL Staff What a year it's been for carmaker Audi and its employees, a year marked by the biggest profits in company history, a bonus in the millions for its chairman and handsome bonuses for many employees -- though little to nothing for those at the very bottom of the pay scale.

Technically speaking, Nadja Klöden isn't even at the very bottom of the hierarchy at Audi, which is based in Ingolstadt, near Munich. She's on the sidelines, yet also in the thick of things. The 28-year-old, who studied business management, works as a project assistant in administration. But her employer is BFFT, a service provider that organizes parts distribution among the Volkwagen Group's subsidiaries, which include Audi. That's why Klöden earns €800 ($1050) less than comparable Audi employees for the same 40-hour work week. In other words, although she contributes to the success of the company, she doesn't directly benefit from it. She receives neither an Audi-level salary nor any bonus whatsoever. Helen Kozilek is in a similar situation. The 26-year-old works full-time on the assembly line at Audi, but the carmaker doesn't pay her wages. Instead, she is paid by Tuja, a temporary-employment agency and subsidiary of the Swiss temp giant Adecco. Compared with Klöden, however, Kozilek can consider herself a higher earner. The hourly rate for temporary workers in her salary group is normally about €10. But IG Metall, Germany's leading metal workers' union, has signed a wage agreement with Adecco so that Kozilek benefits from the €16 rate negotiated by the union. Still, Kozilek doesn't receive a bonus. Franz Wolff, on the other hand, is sitting pretty. He has been working in maintenance at Audi's car painting division in Ingolstadt for the last 32 years. Wolff has a 35-hour work week and earns a gross salary of €3,300 a month, which is based on an industry-wide multi- employer agreement. Through an in-house wage agreement between the works council (the

body that represents the interests of workers) and management, the 57-year-old trained auto mechanic also receives profit-sharing payments. This year, Audi will pay Wolff a bonus of €10,000. The average bonus at Audi is €8,251 -- a record. Audi values Wolff's contribution to its success -- and it provides him with a share of it. Audi CEO Rupert Stadler's salary was also probably record-breaking, climbing 73 percent last year to reach €7.6 million. One company. Four employees. Four worlds. Broken Promises "Prosperity for all" was once the credo of Ludwig Erhard, the first economics minister of postwar Germany. This promise shaped the country for decades and set it apart from many other economies. But how much is this promise still worth today? The working world is disintegrating. On the one side are managers, specialists and members of the core workforce, who benefit from the fact that well-trained workers are scarce. On the other side is the reserve pool of workers who can be used as needed and then let go -- as contract workers or through special-order contracts, part-time work or temporary jobs. Many of these people work outside the provisions of collective bargaining agreements. Labor-market experts view this increasing flexibility as the price of success, a necessary evil that made the rise of the German economy -- from "the sick man of Europe" to the Continent's economic paragon -- possible in the first place. In fact, the German economy is in better shape than ever. Companies are reporting record profits, the size of the working population reached a new peak in 2011 and, according to Germany's Federal Employment Agency, the ranks of the unemployed have shrunk to only 3 million. In March, the country had an unemployment rate of just 7.2 percent. Some companies are allowing their employees to benefit from the economic upswing through profit-sharing models. One of them is Sedus Stoll, a mid-sized maker of office furniture in the southwestern German town of Dogern, which has allowed its employees to share in company profits for the last 60 years. The aim is to ensure that the 950 employees "identify with the company" and learn to think for themselves even though they are part of a larger organization, says Carl-Heinz Osten, the company's chief financial officer. A portion is paid out directly, but most of the money goes into the company's pension plan. Herbert Ebner, the chairman of the works council, says that, "in good times," employees have even taken home the equivalent of 15 or 16 monthly salaries each year. Still, such ideal conditions are rare. Contrary to what the headlines about record bonuses in the automotive and chemical industries would suggest, only few employees benefit from them, as only 9 percent of German companies have profit-sharing arrangements with employees. The majority of workers feel very little of what the Economist has dubbed "Germany's economic miracle." For decades, they have had to settle for falling or stagnating real wages, and wages and salaries have been declining for many years as a share of aggregate national income. "In no other European country has social inequality grown as strongly as in Germany," says Gerhard Bosche, the specialist in industrial sociology who heads the Institute for Work, Skills and Training (IAQ) at the University of Duisburg-Essen. Unions in a Pinch The ongoing collective bargaining round won't fundamentally alter any of this. Ver.di, the services sector trade union, achieved its best outcome in a long time in labor negotiations

for municipal and federal public-sector workers. Nevertheless, Ver.di Chairman Frank Bsirske was unable to push through the desired "social component," a minimum monthly increase of €200 in the lower salary groups. The powerful IG Metall is currently fighting to secure its members a 6.5 percent wage increase. In recent weeks, the third round of negotiations failed, and now warning strikes and possibly a tough labor dispute could follow. While skilled workers in unions can expect to see increases, the prospects are grim for those at the lower end of the pay scale. Employer representatives have made it clear that they will resist IG Metall's demand to be given more of a say in the use of contract workers and employees hired through special-order contracts. The unions face a dilemma. They are poorly represented among the employees in precarious circumstances, who would actually need their help the most. With their higher- earning core clientele, however, they face competition from new types of niche unions, which are promising special conditions to privileged professional groups, such as train drivers or air traffic controllers. It is one of the "dark sides of the boom," says labor sociologist Bosch, that most low-wage earners are not getting "a fair share" of Germany's economic success. A Fracturing Society It's a paradox: At a time when the economic elites in the United States and Great Britain are turning to Germany's recipes for industrial success as role models, the social structure in Germany is increasingly moving in the direction of a three-class society. This is a fundamental shift for a social market economy whose policies have long been aimed at ensuring that the country's prosperity is fairly distributed to all echelons of society. That system now appears to be eroding fast. These days, it is executives, with their compensation skyrocketing into the millions, who are at the top. The second tier consists of the well-trained and reasonably well-paid legions of white-collar and skilled workers in modern information and industrial societies. Bringing up the rear are professional groups that were once considered part of the core of the traditional working world: salespeople, cooks, waiters and teachers, for example, who often earn less now than they did a decade ago. In his inaugural speech, Germany's new president, Joachim Gauck, praised his country for "bringing together social justice, participation and opportunities for advancement." But Germans, the president warned, should not accept "people having the impression that advancement is out of their reach despite their every endeavor." But this is precisely the case now, and, as a result, the old questions of wealth distribution are being asked once again. How can we overcome the gap between rich and poor? How can all employees share in the growing prosperity? And, most of all, what roles should politicians and the parties to collective bargaining agreements play in the process? It isn't just the long-term unemployed who feel marginalized, but increasingly people who work in industries with narrow profit margins, or in which wages are a determining factor in competition. There are also those who work in the public sector, where there are often few opportunities for career advancement. On the Darker Side of the Labor Divide A small party was held last December to celebrate Sabine Rieckermann's anniversary in her job, but it hardly reduced her frustrations. "I've been working for the city for 25 years now,

and I've been stuck in the same job for the last 16 years," Rieckermann says. "For me, there are practically no opportunities for advancement. I'm not getting ahead anymore." Rieckermann, a member of the Ver.di union, has held many jobs for the northern city-state of Hamburg over the years, in both city agencies and schools. "I've learned a lot, I've continued to develop personally and professionally, and I've gained management experience," she says. "But, at some point, you just hit the ceiling. It's pretty bitter." She has been in the sixth compensation group of the public-sector wage agreement for the German states since 1996. But the most recent Ver.di wage agreement only applies to employees of the federal government and municipalities. As the director of a school office, she is unable to enter a higher pay group. "It makes no difference at all whether I'm doing a great job or getting poor evaluations," Rieckermann says. "My actual performance simply doesn't matter." She feels she has hit a dead end despite being relatively privileged, with a more or less secure job and a somewhat acceptable income. Millions of other employees would completely envy her situation. But now there are about 1 million temporary workers in Germany, and they often do the same work as their full-time counterparts for significantly less pay. In many cases, they don't know where they'll be working in a week or whether they'll be able to keep their jobs if their employer doesn't have enough work for them. The boom began with the statutory deregulation of temporary work in 2003. Previously, highly prohibitive legal restrictions made a mass scale temp industry next to impossible. Since then, the number of temporary workers has almost tripled, from a little over 300,000 to more than 900,000. Earnings are low, even though there is now a minimum wage in the industry. In 2010, normal full-time employees who are required to make social insurance contributions earned an average gross monthly salary of €2,700, as compared with only about €1,400 for temporary workers. "Temporary work is the most visible sign of the brutalization of conventions in the labor market," says Detlef Wetzel, the second chairman of union IG Metall. But temp workers are only part of the low-wage sector. According to think tank IAQ in Duisburg, about 8 million people in Germany now work for an hourly wage of less than €9.15, while 1.4 million receive less than €5 per hour. Working More for Less Since no one can live on incomes like these, many workers have to rely on public assistance to supplement their earnings. Many are also part-time employees, but some 329,000 people with full-time jobs are still unable to make ends meet. Jens Vandrei is one of them. After almost six years of work and several promotions, he is back where he came from. "At the club," says the 43-year-old, referring to his local job center, where unemployed Germans must go to collect their benefits and also search for new work. Vandrei was receiving welfare benefits under the Hartz IV program for the long-term unemployed when, in June 2006, he was placed at a high school in Hamburg in a so-called one-euro job, which paid him that hourly amount while allowing him to keep receiving regular welfare payments. He worked as a handyman, and he was good at it. The school kept increasing his hours until he was offered a part-time position and then a full-time one. Nevertheless, he kept receiving Hartz IV benefits. Vandrei's is actually a success story, given that he was out of the work force for years before being placed at the school. But Vandrei and his family -- which includes his wife,

their three children and her son from a previous relationship -- can't live on his gross monthly income of about €2,000. In late February, Vandrei returned to the "club" to file an application for supplementary Hartz IV benefits. "The €217 end-of-year adjustment in the electricity bill knocked us off our feet," he says, adding that he goes to work every day a "nervous wreck" with money troubles on his mind. He and his wife wear second-hand clothing they get from relatives and acquaintances, but finding clothes for their growing children is naturally a bigger problem. When Vandrei, a union member, switched to a full-time job two years ago, his situation didn't get any better. On the contrary, he says, "I had twice as much work but less money." Since he was working full-time, he was no longer eligible for the supplementary Hartz IV assistance through the job center, and since he was earning more money, the day care fees for his children increased. On balance, his monthly income dropped by €25. "There is something wrong with our system," Vandrei says. Pitting Workers against Workers Since the situation is so precarious in the lower wage groups, Ver.di Chairman Bsirske has been set on establishing a "social component." Berthold Huber, the chairman of IG Metall, also wants to fight for more than higher pay in the current wage dispute. In a SPIEGEL interview in early March, when the talks were just starting, he said that IG Metall "isn't just a moneymaking machine." In the past, this would have been an outrageous statement for a chairman of IG Metall given the decades his union has spent serving its core clientele. But now the union is also addressing the needs of the less established workers and trying to help them gain a foothold. The union has already convinced more than 1,200 companies to pay temporary workers the same wage negotiated for IG Metall members. In the current collective bargaining round, it also wants employers to include members of the works council in decisions on the extent to which temp workers are used. And, lastly, the workers' organization is currently trying to convince the temporary-employment industry to require companies to pay extra wages to workers when they are used in the metal and electronics industries.

Niche Unions' Threats to Solidarity

The union's aim in this is to make temporary work so unattractive to companies that they might consider employing temp workers on regular terms. It also wants to prevent any further shrinkage of the core workforce. But the big unions are caught in a dilemma. When making their wage demands -- and especially when signing collective bargaining agreements -- they have always had to make allowances for industries and companies that are not as profitable as others. This sort of compromise requires solidarity from all parties involved. But, these days, not all professional groups are willing to compromise. In fact, they want more, and new labor unions are stepping in to fill the vacuum.

The official establishment is terrified by people like Dirk Vogelsang. The 55-year-old lawyer in the northern city-state of Bremen is the strategic mind behind several niche trade unions, which only represent the members of specific professions within a company, such as pilots and train drivers. The separatists have had many successes in recent years with their focus on the few, sometimes securing significant pay increases for their clientele. Members of these mini- unions seem to enjoy a constant upswing no matter how the economy is doing. Vogelsang benefits from the weakness of the big unions and dissects their crisis with relish. He simply turns around the charge that his niche unions lack solidarity. "Most trade unions adhere to the notion, influenced by a rush to obedience, that only a fixed wage bill is negotiable in collective bargaining rounds." "It isn't that some employees are fighting against other employees," he continues. "We're all fighting against the employers, and we want to take away as much possible from this opponent." Still, Vogelsand won't go so far as to say it's best to pursue the principle of every professional group for itself and no one for all. Instead, he says that niche unions will remain the exception because very few employees pose as much of a potential threat as pilots and train drivers. 63

In other words, the powerful will prevail and receive even more compensation in good times, while the replaceable will have to settle for less even during economic booms. "So far, niche unions have arisen mainly in places where competition is weak," says Justus Haucap, an economist at Düsseldorf's Heinrich Heine University and head of Germany's Monopolies Commission, which advises the government in Berlin on competition policy. Like Vogelsang, he sees a trend toward mini-unions representing professional groups that cannot be replaced by other employees within a company. He also believes that, when push comes to shove, the negotiating power of the few specialists is greater than that of the larger group. But, unlike Vogelsang, Haucap is convinced that the wage pie wouldn't get any bigger if more unions fight for their share of it but, rather, that the pieces will only get smaller. "The distribution battle is no longer being fought just between capital and labor," he says, "but also among the employees themselves." What Politicians Have to Do If nothing happens, the chasm between those who can participate in the growing prosperity and those who are left out of it will only continue to grow. The reforms of recent years have clearly failed to reach one of their two goals. More temporary labor and short-term employment relationships were intended to make the labor market more flexible and thereby lead to more employment, and this has been achieved. But they were also expected to form a bridge from unemployment into well-paid staff positions, which hasn't happened. "The hopes of non-core and temporary workers of entering the core workforce and thereby participating in prosperity have hardly been fulfilled so far," says Lutz Bellmann, a labor market specialist at the Institute for Employment Research (IAB) in Nuremberg, a division of the Federal Employment Agency. Only about 8 percent of temporary workers are permanently hired within a year by the companies they are used in, he explains, and very few successfully negotiate the transition from mini-jobs and short-term work contracts into the safe world of wage-agreement tables and bonuses. As in society at large, Bellman says, "permeability decreases as you move up." Ulrich Walwei, the IAB's deputy director, has just examined all the available labor market data. The results are clear: As qualifications decline, the risk of unemployment multiplies. In other words, education exponentially increases job prospects. As Walwei notes, the gap "between the wages of people with good and bad qualifications has grown in recent years." Those with poorer qualifications are highly likely to end up in precarious employment situations. In fact, this growing chasm between the top and the bottom is not only growing in Germany, but also in many countries across the world, according to organizations such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). Experts see the growing divide as a threat to long-term economic growth. "We will only achieve this goal if prosperity is distributed more widely throughout incomes," says Peter Bofinger, a prominent economist and government adviser. Different Times, Different Challenges But how can employees be given a share in the continually growing prosperity? And what role should politicians play if the parties to wage agreements are too overwhelmed to solve their problems? Ten years ago, when Germany was stuck in a reform bottleneck and thousands of jobs were being lost to low-wage countries, there was a need for policies that promoted more jobs and economic competitiveness. But, today, the challenges are different. To narrow the gap 64

between rich and poor, the labor market and the tax and social systems must be fundamentally altered: • One reason that the low-wage sector has grown so strongly in recent years is that a statutory minimum wage only exists in certain sectors. If a minimum wage of €8.50 were introduced nationwide in Germany, 25 percent of all female employees would immediately earn more money, and some 15 percent of male workers would see their pay go up.

• The tax burden for higher earners has significantly gone down in recent years. First Helmut Kohl, the member of the center-right Christian Democratic Union who served as Germany's chancellor between 1982 and 1998, eliminated the wealth tax. And then Gerhard Schröder, the Social Democratic chancellor between 1998 and 2005, reduced the income tax. But both the IMF and the OECD say these steps went too far and recommend that the government tax the affluent more heavily again, possibly through higher levies on property or inheritances. 65

• Low-wage and normal earners bear a particularly large burden in the German social security system because, for example, health insurance premiums are only paid on up to €45,900 in gross annual income. All income above this threshold is not subject to a premium payment. As a result, a senior engineer with an annual income of €150,000 is only required to pay 6.6 percent of his total income in social security contributions, whereas a laborer who makes only a tenth as much is required to pay 20.7 percent of his income. However, the claims to unemployment compensation or a pension that he acquires with these payments are often only at the level of the welfare he would be entitled to anyway. To offset this disadvantage, years ago, the German Confederation of Trade Unions (DBG) called for a system of tax exemptions that would ease the burden on lower earners. The Needed Agenda 2020 Those hoping to narrow the gap between rich and poor cannot put all their trust in the power of the unions and the forces of demographic change. They also have to emphasize political reforms. More spending on education and changes to the tax and transfer systems that would benefit low earners are needed. The series of labor market and welfare reforms known collectively as Agenda 2010, which Chancellor Schröder put in motion in 2003, completely reorganized the welfare state and were necessary for making Germany's economy globally competitive again. But, to achieve more social equality, we now need an Agenda 2020. Indeed, what's needed is nothing less than a change in the system so radical that it would make the painful Hartz reforms (named after former Volkswagen exectuve Peter Hartz, who advised the Schröder government closely on its ambitious structural reforms) seem like cosmetic surgery by comparison. Hilmar Schneider, director of labor market policy at the Bonn-based Institute for the Study of Labor (IZA) and one of Germany's best-known employment experts, agrees. He notes that there is no alternative to making the working world more flexible, adding: "The days of small changes are over." REPORTED BY SVEN BÖLL, MARKUS DETTMER, CATALINA SCHRÖDER, JANKO TIETZ AND FLORIAN ZERFASS, Translated from the German by Christopher Sultan URL: http://www.spiegel.de/international/business/0,1518,830972,00.html Related SPIEGEL ONLINE links: • Growth at Risk: Slow Pace of Reform Threatens German Prosperity (03/26/2012) http://www.spiegel.de/international/germany/0,1518,823710,00.html • 'We Need To Learn from Germany': How the German Economy Became a Model (03/21/2012) http://www.spiegel.de/international/business/0,1518,822167,00.html • Wage Wars: The Disruptive Rise of Niche Unions in Germany (03/07/2012) http://www.spiegel.de/international/germany/0,1518,819710,00.html • Union Boss on German Labor Market: 'We Need a Bond Between Companies and Workers' (03/07/2012) http://www.spiegel.de/international/business/0,1518,819646,00.html • Germany's Labor Shortfall: Wooing Professionals from Debt-Stricken Parts of the EU (07/18/2011) http://www.spiegel.de/international/germany/0,1518,775018,00.html

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Lorenzo Bini Smaghi May 3, 2012 Europe • Finance • Global Economy Growth vs austerity ignores the euro facts Amid the eurozone cacophony, the growth rhetoric sounds nicer than the austerity refrain. But the challenge is to translate rhetoric into facts, especially in countries where market conditions provide no room for deficit spending. Structural reforms are a well-known recipe. While necessary, they take time to produce their effects on growth and employment. So they might not be sufficient to pull the eurozone economy out of stagnation over the next couple of years and to restore market confidence. The debate needs to take place at a broader level. The foreign exchange market has not worked properly over the past few years and it is increasingly creating obstacles for the European recovery. The eurozone economy is projected to be in recession this year and to barely stabilise in 2013. The US and Japan have now been growing again for some time, although modestly, and emerging markets are experiencing a soft landing from the crash. This should provide grounds for a depreciation of the euro against other major currencies. The private capital outflows from the eurozone periphery also seem to be pointing in the same direction. A gradual depreciation of the euro would be justified by the loss of competitiveness accumulated by several member countries and the need to reduce the pain associated with the current account adjustment. Yet such a depreciation is not happening. The reason is that several foreign official institutions, notably the central banks of emerging markets such as China, are continuing to intervene in the foreign exchange market to buy euro-denominated assets at a pace which more than compensates the sales of private market participants. These interventions are producing two types of distortions. First, they do not allow the external value of the Euro to adjust to underlying fundamentals and thus contribute to a further worsening of economic conditions in the euro area. Second, by investing mainly in low yielding euro assets, the interventions contribute to widen the spreads among eurozone Government bonds and thus fuel financial instability. These issues can only be addressed directly with the major counterparties, notably China and other Emerging markets, and also other advanced European economies which are pegging to the euro. At times of crises like the one we are currently experiencing, there is a need for stronger cooperation among major economies to avoid beggar-thy-neighbour policies and competitive devaluations.

The eurozone needs to equip itself for such enhanced international cooperation. Unlike the US and Japan, for example, the competence for the external value of the euro is shared between the European Central Bank and the eurogroup, which comprises eurozone finance ministers. The former is responsible for deciding and implementing foreign exchange interventions, the latter for defining the guidelines of the exchange rate policy of the euro. Given that the main objective is to convince some of Europe’s partners to change their foreign exchange policies and promote a better functioning of the international financial system, a stronger political stance by European authorities is required. The eurogroup needs to take leadership in in the various international forums where such issues are discussed, bilaterally, trilaterally or in the G7, G20 or the International Monetary Fund. This requires a more efficient functioning of the Eurogroup, in line with the provisions of the Lisbon Treaty. The problem is that the Eurogroup is currently without leadership, following the resignation of Luxemburg’s Prime and Finance Minister Jean Claude Juncker. Such a vacuum cannot last long. A new President needs be appointed rapidly, with a clear mandate. The selection process should take into account the candidates’ ability to stand up to the other major global powerhouses and defend the interests of the euro area, including by promoting a better functioning of the international financial system. For the euro to seriously get back on a growth path, it needs to get its interest better represented in the global scene. This requires stronger political institutions, whether comprising finance ministers or Heads of Government, and beginning with the eurogroup. The good news is that it doesn’t require any institutional change. The bad news is that it requires political leadership. The writer is a visiting scholar at Harvard’s Weatherhead Center for International Studies and a former member of the European Central Bank’s executive board http://blogs.ft.com/the-a-list/2012/05/03/growth-vs-austerity-ignores-the-euro- facts/#axzz1tu7MhaHc

New Estimates of the Housing Wealth Effect Charles W. Calomiris, Stanley D. Longhofer, and William Miles

"On average, a single dollar increase in housing wealth raises consumption by between five and eight cents."

f the value of a homeowner's house rises by one dollar, how much will that homeowner increase spending on consumption? In The Housing Wealth Effect: The Crucial Roles of Demographics, Wealth Distribution, and Wealth Shares (NBER Working Paper No. 17740), authors Charles Calomiris, Stanley Longhofer, and William Miles determine that the impact of housing wealth on consumer spending depends crucially on the age and wealth distribution within states, as well as on the share of housing wealth relative to total wealth. In particular, they find that young people, who are more likely to be credit-constrained, and older homeowners, who are likely to be "trading down" on their housing stock, experience the largest housing wealth effects. Housing wealth effects also are higher in years when housing wealth shares represent a larger portion of overall wealth an d in years with higher poverty rates. Thus, there tends to be huge variation over time and across states in the size of housing wealth effects. For this study, the researchers constructed a new annual dataset for each of the U.S. states for the period 1981-2009, taking into account the relative amount of state-level housing and securities wealth in any given year. They also considered differences in age distribution and poverty rates, both across states and over time, because housing wealth effects tend to be larger in state-years with high proportions of young and old people, and in state-years with higher poverty rates. In addition, they estimated holdings of corporate stock in each state by calculating aggregate U.S. stock wealth and multiplying by each state's share of aggregate mutual fund holdings. Calomiris, Longhofer, and Miles find that consumption responds positively to innovations in both housing wealth and securities wealth, but that housing wealth effects are significantly larger than stock wealth effects. They estimate that on average, a single dollar increase in housing wealth raises consumption by between five and eight cents. In contrast, the same dollar increase in the value of securities wealth raises consumption by less than two cents. Nonetheless, there is substantial variation across states and over time in both of these consumption responses to wealth changes, which are related to the age, poverty, and wealth characteristics of various states at particular points in time. -- Matt Nesvisky http://papers.nber.org/papers/W17740

The Labor Market in China, 1989-2009 Wei Chi, Richard B. Freeman, and Hongbin Li

"[In the U.S.] cohort effects persist for over a decade, [but] in China cohort effects associated with the supply/demand balance diminished within three years."

uffeted by dramatic structural and economic changes in its demand for labor over the past two decades, China's workforce has adjusted in ways often seen in advanced economies. However, according to Wei Chi, Richard Freeman, and Hongbin Li writing in Adjusting to Really Big Changes: The Labor Market in China, 1989-2009 (NBER Working Paper No. 17721), China's labor market has shown a marked difference: cohorts who enter the workforce at favorable or unfavorable times see their wages and occupational position revert to the average much more rapidly than in most Western economies. This study suggests that three factors are behind this enhanced flexibility: 1) rapid economic growth; 2) high employee turnover; and 3) the weakness of China's internal labor markets. "The Chinese labor market has responded about as well as one could expect to the changes in the demand and supply factors and institutional shocks in this critical period in Chinese economic history," write the authors. China has accomplished a dramatic transformation in less than three decades. Until the 1980s, it had no real labor market. State-owned enterprises were the only employers; government agencies assigned workers to jobs. But starting with agriculture and product markets, the government began to loosen the reins of control. Firms began to decide how many workers they needed. Workers got to choose for whom they worked. Labor began to adjust to changes in demand and supply as China's urban economy grew rapidly. By focusing on the period 1989-2009, the authors find that this liberalization had three major effects: 1) Wage differentials widened --the pay gap between better- and less-educated workers increased and then stabilized. Through 1990, the premium for more experienced workers shrank. Then it grew massively, especially for older workers whose pay had been limited in the pre-reform era. The more experience workers had, the more likely they were to have white collar jobs. 2) Young workers saw wages and job opportunities vary depending on the state of the economy when they started looking for work. 3) The size of the cohort entering the workforce had a direct impact on wages: larger cohorts reduced wages. Rising gross domestic product increased wages and wage inequality. Between 1989 and 2008, the inequality in earnings more than tripled, then fell back somewhat in 2009. All of this may sound familiar. "Overall, the adjustments in China to changes in supply and demand are similar to those in the US (which faced more modest market pressures)," the authors write. Only in the persistence of cohort differentials did the two vary in a substantial way. "Whereas in those countries [like the US and other advanced economies] cohort effects persist for over a decade, in China cohort effects associated with the supply/demand balance diminished within three years." For example, the authors found that if a particularly large class of Chinese graduating from college depressed starting salaries by 10 percent from the predicted trend, the students' wages would grow faster than expected - about 12 to 14 percent - over the next three to five years, allowing them to catch up. The same was true for those forced to take less desirable positions. Within three to four years, they typically were able to get jobs on a par with those of earlier cohorts at the same stage in their career. -- Laurent Belsie http://papers.nber.org/papers/W17721

05/03/2012 06:34 PM In Hollande's Hands Will France's Election Hinder German Leadership of the Euro Group? By Philipp Wittrock German Finance Minister Wolfgang Schäuble is the leading candidate to become the president of the Euro Group, the common currency's powerful decision-making body. But if François Hollande wins the upcoming French election, he could scupper the appointment, dealing a major blow to Chancellor Merkel. When France goes to the polls on Sunday to elect a new president, politicians in Berlin will be biting their nails in anticipation of the results. This is not only because Chancellor Angela Merkel must fear that François Hollande, who stands a very solid chance of becoming the next French president, could question the Germans' rigid austerity course in Europe. There are also concerns that Hollande might put the kibosh on an important appointment Merkel would like to make. She wants to install German Finance Minister Wolfgang Schäuble in a second position as president of the Euro Group, the body that manages decisions regarding Europe's common currency. But the appointment has been delayed until after May 6, and the outcome is uncertain. The acting president of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker, wants to leave the post in June. Unofficially, Schäuble has been a candidate to succeed him for weeks now. But the French election has prevented any decision thus far. Incumbent Nicolas Sarkozy reportedly signaled his approval for the appointment a few weeks ago, but his advisors then pushed him to withdraw his support -- or at least keep it quiet until after the election. They feared it would be unpopular with voters if Sarkozy appeared to further promote the savings dictate that Germany has applied to the rest of the euro zone countries. And after the election? It's an open question whether Sarkozy will still have a say in the matter. Pollsters are predicting a victory for Hollande. In recent weeks, the Socialist Party candidate has clearly stated that he will seek to loosen the Germans' firm consolidation policies. Why, then, would he want to elevate the fiercest champion of these policies to head the Euro Group, as one of his first actions in office? Such a move would be tough for him to explain to his supporters. There is a considerable threat that as the new French president Hollande would thwart Berlin's efforts -- if for no other reason than simply to send a message. A First Test for French-German Relations? The decision on whether to appoint Schäuble could indeed become the first true test of the new alignment of French-German relations under a President Hollande. If Hollande were to hinder Schäuble's appointment, it would be a disastrous start. The chancellor would be duped. Following the letdown in the arduous negotiations over the appointment of the leader of the European Central Bank, which saw Merkel's hand- picked candidate Axel Weber drop out of the running, the chancellor is under increased

pressure to ensure that another top European post is occupied by a German. So far, she has avoided publicly suggesting Schäuble as Juncker's successor. Schäuble has also made no public statements confirming his ambition to become the next Euro Group president. But neither politician has taken any steps to deny the reports. Behind the scenes sources say that Merkel wants Schäuble and that he is prepared to take the job. Juncker Praises Schäuble as 'Ideal Choice' On Monday, the Euro Group's current president fuelled further speculation about Schäuble. At a public SPIEGEL event in Hamburg, Juncker gave his public support to the German finance minister, calling him the "ideal choice" to succeed him. Juncker has never been so clear in his endorsement of Schäuble. Sources inside the German Finance Ministry attributed the Luxembourg prime minister's words to "friendliness." Though sources inside expressed satisfaction, they said there had been no new developments. "There is nothing new to state," they said. The post comes with considerable prestige. All important decisions about the currency union are made by the Euro Group and the influence of its president has grown considerably during the crisis in recent years -- a trend which is expected to continue. Even if plans to have a full-time Mr. Euro as president have been shelved, the group is still expected to become more professional and meet more frequently in the future. It would seem almost logical for a German to do the job. Germany is the euro zone's model country -- its economy is booming and unemployment is falling. Policies for dealing with the economic crisis have been decisively shaped by Germany -- and Schäuble, to an extent, is also a personification of that success. In addition, a representative of a country with the best credit rating should assume the presidency, a factor that greatly restricts the number of potential candidates. Along with Germany, Luxembourg, Finland and the Netherlands are the only other countries with the cherished triple-A rating. Juncker's not interested, Finland has declined to appoint a president and officials in the Netherlands are currently busy preparing for new elections. Among Merkel's conservatives -- the Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU) -- the majority would like to see Schäuble succeed Juncker. And even the CDU/CSU's coalition partner, which has often had difficulties with the finance minister, is playing along this time. "I think the idea that the post should be filled by a German is a reasonable one," said the Free Democratic Party's financial policy spokesman Volker Wissing. "Germany's role in stabilizing the euro is especially important." The politician welcomed Juncker's proposal to select Schäuble for the job. Euphoria Isn't Widespread In other parts of the euro zone, however, such euphoria is far from universal. Schäuble may enjoy tremendous respect from his colleagues, and his competence and the success of his efforts on behalf of the European issue are indisputable, but there are still some rumblings -- particularly in southern European countries moaning under the weight of their debt burdens. A strict German austerity minister at the helm of the currency union? Few are likely to be pleased with the idea. At the same time, some skeptics are hopeful that by putting a German in the role, it might force Germany to behave more moderately because it is also the president's task to mediate.

But is Schäuble capable of acting as a balanced mediator rather than a hard negotiator? Some believe representatives of smaller European countries or better suited as diplomats. And even if they aren't fundamentally opposed to his appointment to the position, opposition politicians in Germany also harbor doubts. "A Euro Group president who spends more money in Germany than he has, is going to have a difficult time promoting austerity in Europe," said Thomas Oppermann, the senior politician in the center-left Social Democratic Party's (SPD) parliamentary group. Will Juncker Stay? The German government has noted that Juncker's successor is just one of the appointments that must be decided by the EU. New top jobs also need to be filled at the European Stability Mechanism, the permanent euro bailout fund that is supposed to start its work in July, along with the European Bank for Reconstruction and Development (EBRD), and new appointments on the European Central Bank's executive board. As always in appointments to major European bodies, the issue of regional balance will play a large role. If Schäuble does actually succeed in becoming the Euro Group's next president, then it would be difficult to push Klaus Regling, the current head of the European Financial Stability Facility (the temporary euro bailout fund, EFSF), through as the head of the new ESM. The current head of the EBRD is also a German. SPD politician Thomas Mirow will probably have to leave the post -- a move made more likely by the fact that that Werner Hoyer of the business-friendly FDP recently became the head of the European Investment Bank (EIB). It would be impossible to convince the other member states that Germans should hold so many top jobs at the EU level. A French person could head the EBRD in the future. And Yves Mersch, the president of Luxembourg's central bank, is considered the favorite contender for the seat on the ECB board. But Mersch won't be able to take that job as long as Juncker remains head of the Euro Group. Some observers in Brussels haven't ruled out the idea that Juncker might stay in office in the end despite his repeated statements that he would step down. The 57-year-old, observers say, is just waiting for people to beg for him to stay -- and it's very possible that is exactly what will happen after Sunday's election in France. URL: http://www.spiegel.de/international/europe/french-election-could-determine- whether-german-leads-europ-group-a-831223.html Related SPIEGEL ONLINE links: Austerity Backlash: What Merkel's Isolation Means For the Euro Crisis (05/01/2012) http://www.spiegel.de/international/europe/0,1518,830594,00.html Ratings Agency Downgrade: Merkel Blasts Hollande as Spain Worries Increase (04/27/2012) http://www.spiegel.de/international/europe/0,1518,830090,00.html The World from Berlin: 'Berlin Is Running Out of Allies in Euro Crisis' (04/24/2012) http://www.spiegel.de/international/europe/0,1518,829440,00.html French-German Relations: What a Hollande Victory Would Mean for Merkel (04/19/2012) http://www.spiegel.de/international/europe/0,1518,828537,00.html First Contacts with Hollande Camp: Merkel Braces for Possible Sarkozy Election Defeat (03/30/2012) http://www.spiegel.de/international/europe/0,1518,824873,00.html 'We Need To Learn from Germany': How the German Economy Became a Model (03/21/2012) http://www.spiegel.de/international/business/0,1518,822167,00.html 73

ft.com/alphaville Core infection and eurozone PMIs Posted by David Keohane on May 02 10:10. Eurozone manufacturing purchasing managers indices are out and it does not look pretty. The final Markit Eurozone manufacturing PMI hit a 34-month low of 45.9 in April, below the flash estimate of 46, as job losses accelerated to their fastest rate in over two years. Significantly, manufacturing weakness was no longer confined to the periphery. German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate. (When are those elections again?) And as intra-Eurozone trade volumes slumped, even German manufacturers saw production fall for the first time in 2012 as an accelerated rate of decline in new export volumes hit hard. Unemployment rose for the first time since March 2010. In France, April’s reduction in new work was the tenth in as many months and the sharpest for three years. Job losses quickened to the sharpest since July 2010.

(Well done Ireland and Austria – the new core?) The overall data signals a more than 2 per cent contraction of industrial production across the eurosone in the quarter to come:

And a slide further into recession (h/t Michael McDonough):

“The ECB’s latest forecast of merely a slight contraction of GDP this year is therefore already looking optimistic. However, with the survey also showing inflationary pressures to have waned, the door may be opening for further stimulus,” said Chris Williamson, markit chief economist. And the euro was distinctly unimpressed, falling sharply against the dollar as the data hit screens:

http://ftalphaville.ft.com/blog/2012/05/02/983801/core-infection-and-eurozone-pmis/

Madness in Spain Lingers as Ireland Chases Recovery By Sharon Smyth, Neil Callanan and Dara Doyle - May 2, 2012 From atop the stone walls of Avila, Spain, a medieval city an hour’s drive northwest of Madrid, beyond the parking lots and empty playgrounds and thousands of vacant new apartments, a construction crane can be seen moving on the horizon as building continues. “Avila isn’t an exception,” said Jesus Encinar, co- founder of Madrid-based Idealista, Spain’s largest property website, and an Avila native. “It’s a small-scale example of the madness that gripped the whole real estate industry.” In the stages of death of a real estate boom, Spain is still in denial. In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow at the Shelbourne Hotel in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning. “Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.” Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that. Legacy of Bust Ireland, where home prices have fallen a record 49 percent since peaking in 2007, is making more progress as it deals with the legacy of a bust that crippled its economy, once the most dynamic in Western Europe, and required a 67.5 billion-euro international bailout in 2010. The state purged lenders of 74 billion euros ($98 billion) of mostly toxic commercial mortgages by creating a bad bank, and poured enough cash into the financial system to make it among the best capitalized in Europe. Building virtually halted overnight in 2008 after debt markets seized up globally. Spain has so far rejected the bad bank model, even after Standard & Poor’s last week cut the country’s credit rating to BBB+ from A, on concern the government will need to provide further support to banks. Truth About Spain On the plain below the central walled city of Avila, a world heritage site and a popular tourist destination, the province with a population of 171,680 has about 19,000 76

apartments and villas empty or unfinished, according to Borja Mateo, the author of “The Truth About the Spanish Real Estate Market.” Ministry of Infrastructure figures show 23,419 homes were constructed in the decade through 2007, with another 11,000 homes built there since 2008. The sprawling developments are dotted with thousands of empty parking spaces, while streets have makeshift barriers where the money has run out, others simply end in fields. Miguel Angel Garcia Nieto, mayor of Avila for the past decade, disagrees that his city has been overbuilt. “When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.” European Bailouts That may take decades, said Encinar, after Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest in almost two decades and the economy is mired in a recession that the International Monetary Fund predicts will cause it to shrink by 1.8 percent in 2012. The Spanish real estate bust is the biggest test to date for European authorities with Spain’s economy almost twice that of Greece, Portugal and Ireland combined. Yields on Spain’s 10- year bonds climbed nine basis points to 5.86 percent from April, approaching the level of those countries when they had to be bailed out. Spain and Ireland are “very similar,” said Angel Mas, president of European mortgage insurance at Genworth Financial Inc., in an interview in Madrid. “They had never experienced this cheap credit, same as here. And they experienced a construction boom that at the beginning was out of necessity, but they couldn’t stop it.” Speed of Response The key difference is the speed in which the two nations are responding to the collapse. In 2009, Ireland created the National Asset Management Agency, or NAMA, a so- called bad bank. It used bonds to buy commercial real estate loans from the banks with a face value of 74 billion euros for 32 billion euros. That left banks needing capital, leading the state to pour in cash and nationalize five of the six biggest lenders. NAMA is now seeking investors for those assets it can sell, and forcing debtors to rent out some of the remaining properties to produce revenue. Irish home prices were unchanged in March, the first month values have not fallen since August 2010, according to the country’s statistics office. In Dublin, residential prices rose 0.7 percent in March. “The big knock to the domestic economy was the fact that building and construction totally collapsed and that was over 20 percent of the economy and it was bang, gone completely,’” Finance Minister Michael Noonan said in a speech to a Parliamentary committee on April 25. “It is beginning to move, it is very tender shoots of growth at the moment.”

Second Recession While the negative drag from construction in Ireland is largely over, Spain still has a ways to go, Alcidi said. The economy will barely grow next year after contracting in the fourth-quarter, entering its second recession since 2009. The Irish economy will expand 0.5 percent this year and 2 percent next year, the IMF said on April 17. Still, the empty buildings that pockmark the landscape of both countries are testament to their similarities. South of Dublin’s city center lies Sandyford, earmarked as a new residential quarter at the height of Ireland’s boom. Instead, two towers lie unfinished, with one covered by a fraying tarpaulin depicting imaginary residents drinking cocktails on non-existent balconies. A Bank of Ireland branch at ground level is one of just a few businesses open in the area. A glass window in the South Central apartment block’s marketing suite there has been shattered and the chairs inside draped with dust covers. Europe’s Poorest Countries Sandyford and Avila are reminders of the booms that fueled both economies and the busts that crippled them. In the 1970s and 1980s, Spain and Ireland were among the poorest countries in Europe. Following the creation of the euro, both tapped into international money to fuel the growth in their real estate markets. Prices doubled in Spain in the decade through 2007. Irish house prices more than quadrupled from 1995 to 2005 to an average of 303,247 euros, the fastest growth among 18 countries surveyed by the Paris-based Organization for Economic Cooperation and Development. “It was avarice,” said James Nugent, managing director of Dublin-based real-estate broker Lisney. “You just had to get as much of it as you could possibly get your hands on. Credit wasn’t a problem, the banks were throwing money at people.” Former Irish Minister Tom Parlon recalls putting a 2.1 acre site of the state’s veterinary college in Dublin’s embassy belt of Ballsbridge up for sale in 2005. ‘Wildest Dreams’ “We thought in our wildest dreams that maybe it might make 100 million euros, which was a crazy price,” he said. “When the bids were opened there was a bid of 171 million euros and the developer was backed up by one of our main banks. That was just a flavor of the madness.” The site is currently being used by a local luxury car dealer, MSL Ballsbridge Motors, to store vehicles, mainly Daimler AG’s Mercedes-Benz models. On the northern outskirts of Madrid, near Barajas airport and the Real Madrid soccer team’s training ground, is Valdebebas, a development project under construction covering more than 10.6 million square meters of space. About 5,400 of the planned 12,500 homes have been built and another 2,100 are under construction, according to a spokesman for the project who declined to be identified by name, citing company policy. The development, which belongs to private land owners who pooled their property, is backed by banks including Banco Bilbao Vizcaya Argentaria SA and Aareal

Bank AG. (ARL) There are bus tours on Saturday for potential buyers, and an open house of the model homes every Sunday. Longer Adjustment “In Spain, there seemed to be an effort to smooth out the pace of activity rather than face the shock, as Ireland did,” said Alcidi. “That means the adjustment is going to take much longer in Spain.” At the height of their respective real estate booms, construction accounted for more than 20 percent of the economies of both Spain and Ireland. In Spain, the figure is now about 14 percent, according to Alcidi. In Ireland, the figure is just 5 percent. Both booms also were fueled by incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified. The towns would get revenue from the developments and they could use the land they acquired as collateral for loans, said Encinar. ‘Drunk on the Revenue’ About 230,000, or about two-thirds, of Irish construction jobs have gone since 2007. Home building will hit an all time low this year, with just 1 house per 1,000 people being built, compared with 15 in the 2000s, according to the Society of Chartered Surveyors Ireland. “It was a mania,” said Parlon, the former Irish government minister who now heads the Construction Industry Federation. “You could say the government was drunk on the revenue that was coming from all the construction taxes.” In other respects, too, the Irish are moving to deal with the overhang of vacant properties. On Dublin’s north quays lies a half-completed, eight-story skeleton of an office block. Anglo Irish Bank Corp. had planned to use the tower as its headquarters before the company’s collapse helped push Ireland toward the international bailout the country agreed in 2010. Visible Wound It was constructed by Liam Carroll, one of the country’s biggest developers, who has seen many of his assets seized by banks. The skeleton office block is “becoming a landscape photo for Ireland internationally,” Brendan McDonagh, NAMA’s chief executive officer, told lawmakers on Oct. 26. “Everybody who comes to Dublin to see us wants to see the Anglo Irish Bank building; they ask the taxis to bring them around,” he said. “It is a landscape eyesore and it needs to be dealt with.” Ireland’s central bank has agreed to pay about 8 million euros ($10 million) for the office block, and will make the tower its headquarters, removing the most visible wound of the crash. In all, about 15 percent of Irish homes were vacant in 2011, the country’s statistics office. About 20 percent of office space in Dublin is vacant. In places like Sandyford, NAMA is behind the rental of about 1,000 properties, as it seeks to make it more attractive to sell towers of apartments to investors. The agency is also enticing buyers for homes by effectively insuring against price declines.

‘Stabilize and Recover’ NAMA is finishing a plan to ask individual buyers for 80 percent of the purchase price at the time of the transaction and only collect the remaining 20 percent if the market value remained the same or increased by a certain amount. If the value fell, the purchaser would have to pay only part of the outstanding amount or, in some cases, nothing at all. “The banking system is in a lot better shape than it was two years ago but there is a road still to be travelled,” McDonagh said in an interview. “What you’re trying to do is balance out and give yourself a chance for the Irish market to stabilize and recover.” McDonagh has said the agency may end up bulldozing some of the ghost estates that litter the country. Two estates controlled by NAMA may be demolished, and the agency used laws for the first time last month to take control of a development to stop it from falling into a dangerous state. ‘Eyes on This Sale’ Others may end up at distressed property auctions run by Allsop, whose previous auctions have drawn crowds of hundreds. At one point, the company had to employ security guards to marshal bidders, and broadcast the sale to the overflow crowd watching at Doheny & Nesbitts, one of the city’s best known bars. Now they are readying for their first sale of an unfinished estate at the Shelbourne Hotel, where the Irish constitution was drafted in 1922. The lot, in Cavan, consists of three unfinished houses and a field with planning permission for another 31 homes. “There will be a lot of eyes on this sale,” said Robert Hoban, director at auctions at Allsop. “‘It is representative of a large number of unfinished developments across the country that people are trying to find a solution to.” Shunned Bad Bank Spain shunned proposals to create a bad bank like NAMA to acquire toxic real estate assets, with Economy Minister Luis de Guindos saying this week the nation won’t seek a European bailout for its lenders. Instead, authorities pushed banks to pay for the clean up by absorbing weaker lenders. Spanish banks hold about 329,000 foreclosed homes, helping to prevent steep price declines, and provide 100 percent financing on easy terms such as interest-only payments for up to three years, for buyers who agree to buy the banks’ properties. “Banks are employing financing like a weapon of mass destruction to sell their stock and keep prices artificially high by using high loan-to-value mortgages,” said Mikel Echavarren, chairman of Irea, a corporate finance company that specializes in the real estate industry. “Today in Spain it’s easier to buy a 200,000 euro flat from a bank with 100 percent financing than buy a 150,000 flat from an individual homeowner where you have to have a 20 percent deposit.” ‘Coffee All Around’ The psychological shock in Spain stems in part from the length of the boom, which stretched more than a decade, said Encinar. After the country made the transition from the dictatorship of Generalissimo Francisco Franco, who ruled from the end of the Spanish civil war in 1939 until his death in 1975, to a modern European democracy, economic expansion and home price growth were driven by a succession of 80

developments over the next four decades: women joining the workforce, slowing inflation, the adoption of the euro and the growth of tourism and increasing property purchases by foreign buyers, mainly in coastal areas. Governmental authority also moved to regions and municipalities. The decentralization was nicknamed “cafe para todos” or “coffee all around,” and Spain’s autonomous communities demanded self-government and greater control over issues such as health and education, and taxes and financing. And many local governments were eager to build. “It took 20 centuries for the center of Avila to be developed, and in the last 10 years they’ve developed twice that amount,” said Natalio Encinar, a brother of Jesus Encinar who still lives in Avila. Until demand collapsed, “the main industry here was building houses. And plumbers made more than engineers.” To contact the reporters on this story: Sharon Smyth in Madrid at [email protected]; Neil Callanan in London at [email protected]; Dara Doyle at [email protected]. To contact the editors responsible for this story: Rob Urban at [email protected]. http://www.bloomberg.com/news/2012-05-01/madness-in-spain-lingers-as-ireland- chases-recovery-mortgages.html

ft.com World Europe Global Insight May 2, 2012 6:15 pm Eurozone voters query closer integration By Peter Spiegel in Brussels

Almost two years ago, just as the eurozone debt crisis was intensifying, a group of senior European officials sat down behind closed doors with some of the region’s leading thinkers to discuss ways resolve the crisis through closer integration. The solution was to move towards a fiscal union to accompany their monetary union. George Soros, the Hungarian-American financier and philanthropist, listened and wrapped up the discussion with a warning: the plans made sense, but leaders had to move fast. The politics of economic integration would only get harder, not easier. “The political conditions further down the road will be less favourable than today,” Mr Soros said. More ON THIS STORY Money Supply ECB, Barcelona and barricades //US data raise fears over jobs//Unemployment tests eurozone austerity drive//Jobless rise adds to eurozone concerns//Euro hit by slowing manufacturing growth ON THIS TOPIC//Ferguson/Barbieri Merkel can achieve fiscal union in Europe// Spanish youth urged to seek work abroad// Markets Insight Haircuts on repos will jeopardise recovery// Global Insight Spain shows faith in the gospel of reform GLOBAL INSIGHT// Chen’s fate central to US-Sino relations// US election noise obscures approaching fiscal precipice// Obama courts ‘angry white men’//Assad allies back president to complete term The backlash Mr Soros warned about may now be upon us. In France, Greece, Ireland and the Netherlands, forthcoming elections are likely to produce results that profoundly shake conventional European wisdom on the way forward. Much of the recent ballot box revolt has been characterised as an anti-austerity backlash. That certainly is the case in Greece. The two mainstream parties that once dominated the Greek political landscape before signing up to a new €174bn bailout will struggle to get even 40 per cent in Sunday’s vote. Similarly in Ireland, Sinn Féin, led by Gerry Adams and the only significant political party to campaign against the new fiscal discipline treaty which will be put to a

referendum on May 31, has seen support surge to nearly 20 per cent on an anti-austerity message. Anti-EU sentiment elsewhere has been less about austerity than something potentially more insidious – a revolt against the very idea of further integration which most economists and senior EU officials believe is indispensable to getting out of the crisis. Indeed, if 2011 was the year of financial crisis that shook the word economy, 2012 is shaping up to be the year of acute political crisis. Although half of the governments in the eurozone fell or were replaced during the past 12 months, the political upheaval has had almost no effect on the EU’s policy response to the crisis. In Greece, Ireland, and Portugal – all under bailout programmes – and in Spain, new leaders have at most modified Brussels’ demands and in some cases exceeded them. In creditor countries, such as Finland and Slovakia, where leaders were turned out of office because of tensions over bigger contributions to the eurozone’s €440bn rescue fund, new administrations quickly fell back into line. Now, however, angry voters are rallying to more radical candidates, forcing mainstream leaders to slam the brakes on just the kinds of integration needed to create a fiscal union. Mario Draghi, president of the European Central Bank, recently lamented the sudden loss of momentum behind closer integration. “A number of actors are trying to adjust to the change in tone in the debate,” said one senior Brussels-based diplomat. In France, where eurosceptic parties of both left and right polled nearly 30 per cent, incumbent president Nicolas Sarkozy has gone after the most high-profile symbol of European integration (after the euro) by threatening to pull out of the EU’s passport-free travel zone. In the Netherlands, the party that has gained most from last month’s government collapse has not been the anti-austerity Freedom party of rightwing populist Geert Wilders. It is the far-left Socialists, who believe handing more powers to Brussels would destroy the Dutch social model, and who are close to becoming the country’s second largest political party. Even in Finland, where austerity has been relatively gentle, anti-Brussels sentiment is moving from the fringes to the mainstream. Paavo Vayrynen, a former minister who ran for president this year advocating euro withdrawal, is poised to become the next leader of the once pro-EU Centre party, political home to the EU’s top economic official, Olli Rehn. It is this rebellion against further integration, not the revolt against austerity, that will do most to undermine Europe’s ability to manage the crisis in the months to come. “Good intentions and sound policies are not enough,” said an EU diplomat. “Ultimately, it must be supported by those for who it was made.” http://www.ft.com/intl/cms/s/0/460b5dc6-946d-11e1-8e90- 00144feab49a.html#axzz1tnJ5Nlbd

ft.com Comment Opinion May 2, 2012 7:54 pm Merkel can achieve fiscal union in Europe By Niall Ferguson and Pierpaolo Barbieri Europe, it seems, is the problem. Eminent economists argue that the monetary union is doomed. Last year’s fiscal compact, they warn, is crushing Spain’s economy with unwarranted austerity. If François Hollande is elected French president this month, he may even seek to renegotiate the pact. We prefer to see the compact as a first step on the long road to joint and several liability for eurozone sovereign debt, and the deeper fiscal union that the monetary union always implied. The next step should be a Europe-wide banking recapitalisation scheme. More ON THIS STORY// Global Insight Voters query closer integration// Money Supply ECB, Barcelona and barricades// US data raise fears over jobs//Unemployment tests eurozone austerity drive// Jobless rise adds to eurozone concerns ON THIS TOPIC// Spanish youth urged to seek work abroad// Markets Insight Haircuts on repos will jeopardise recovery// Global Insight Spain shows faith in the gospel of reform// US and China data ease concerns IN OPINION// Our central bankers are intellectually bankrupt// Li Keqiang China has great expectations for ties with Europe//Ahmed Rashid The Pentagon echoes with the hubris of Vietnam// Martin Feldstein Time for householders to buy bonds and save Spain Consider Spain’s plight. Mariano Rajoy, prime minister, is trying to trim the federal deficit while tackling structural reform, unemployment, a too-decentralised government and a banking sector that has yet to be adequately recapitalised after the end of the biggest real-estate bubble since Japan’s. It is a Sisyphean task. Spain need not be given a Greek-style bailout. But its banks need more help than European Central Bank liquidity can provide. So funds should be given directly to the troubled banks, much as the US did in late 2008. A further step would be to create a proper eurozone-wide deposit insurance scheme. This would end the bleeding of national banking systems in the periphery. What next? There must be rewards for virtue. Greece, Portugal, Ireland, Spain and Italy are struggling to improve competitiveness. But even where things are going quite well – as in Italy – structural reforms are painful, while their benefits may take years to materialise. Eurozone governments don’t have years. Last week the Dutch government became the 10th to fall since this crisis began. Nicolas Sarkozy may soon be its next victim. So the eurozone needs to help – and needs more firepower than EU structural funds can provide. This is where eurobonds come in. Joint and several liability for eurozone sovereign debt can take many forms but what matters is the principle. As Tom Sargent recently argued in his Nobel Prize acceptance lecture, Europe is now where the US was under the 1781 Articles of Confederation. The

next step is fiscal federalism, which means giving a federal Treasury some responsibility for the past borrowing of the member states, as happened with the adoption of the 1787 Constitution. The conventional wisdom is that Germans will not swallow this, not least because they would be on the hook for large-scale transfers to the periphery for years to come. True, Angela Merkel is no Alexander Hamilton. But the German chancellor remains the only eurozone leader who has been electorally boosted by her crisis management. In her likely third term, perhaps in a grand coalition with the pro-Europe Social Democrats, she should have the political capital to realise this federalist vision. Those who doubt her resolve must have missed her last CDU Party Congress keynote address, in which she called Europe a “community of destiny”. German governments cannot avoid a referendum on fiscal integration indefinitely, given the requirements of their own constitution. But with the strong support of German business – riding high on a favourable exchange rate and dynamic economy – a federalist “Ja” campaign can win. More than most, Germans are invested in the European ideal. It has given their country a route back not just to prosperity but also to political respectability, to successful reunification, and now to a dominant economic position. Small wonder no credible German politicians are against “more Europe”. Europe’s monetary union is neither the joint checking account of a dysfunctional family nor a latter-day gold standard. It was always meant to be a staging post on the road to a federal Europe. Today the biggest threat to its survival is no longer the economic consequences of austerity; it is the political consequences, in the form of populist, anti- European, usually xenophobic fringe parties. Almost everywhere but Germany, such parties are gaining support. The only way to counter peripheral depression and protect reforming governments is to move towards fiscal union. The time has come to remind disillusioned voters that – to borrow from the Spanish philosopher José Ortega y Gasset – “Europe is the solution”, not the problem. The writers are Laurence A. Tisch professor of history and an Ernest May fellow at Harvard University. http://www.ft.com/intl/cms/s/0/50a1f9fe-9466-11e1-8e90- 00144feab49a.html#axzz1tnJ5Nlbd

Eye on the Market, May 2, 2012 Attached is our "Eye on the Market" update written by Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset Management. Eye on the Topic: how lonely a road is Europe traveling Europe and the road less traveled. As we wait for the next round of fiscal transfers from North to South, European Central Bank rescue operations, IMF firewall expansions, foreign capital flight, deferral of tighter bank capital standards, elections, Bundesbank resignations, protests, rising unemployment and generally miserable economic data in the European Periphery, it’s worth remembering something broader about what Europe is up to. There is no small amount of economic hubris associated with the European monetary project, and the chart below shows why. Multinational monetary unions are rare (see Appendix). Some regions debate adopting them, like the Persian Gulf, but decide not to, preferring to retain independent monetary policy. Europe went ahead anyway, despite large differences between member countries. Just how different? Countries in the European Monetary Union are more different than just about any other monetary union you could imagine:

What does this chart show? ** The best way I know of to compare countries is via the World Economic Forum Global Competitiveness Report. This compilation rates 142 countries on over 100 factors related to labor and goods market efficiency; government institutions (property rights, corruption); macroeconomic soundness (debt, deficits); health and education; business sophistication (local supplier quality/quantity); and capacity for innovation (quality of scientific research institutions, R&D spend, patent grants).

** Using this raw data, I imagined what other monetary unions might exist, and how different their constituents would be. The chart shows the country dispersion for hypothetical unions comprised of the UK and its English-speaking offshoots (US, Can, Australia, Ire, NZ); and of countries in Central America, Latin America, the Gulf, Northern Europe, Africa and Southeast Asia (see Appendix for details). All of these hypothetical monetary unions have lower country dispersion measures than the European Monetary Union. And yet, these regions have resisted the temptation to form one. ** I even reconstituted the old Soviet Union by combining the Russian Federation with 11 former republics, and the Ottoman Empire, by combining 25 countries which now inhabit its 18th century borders. I also added a random monetary union comprised of the 12 countries on Earth located at the latitude of the 5th parallel (north), and another union comprised of the 13 countries on Earth whose names start with the letter “M”. Even these groupings exhibited less dispersion than the EMU. And still, Europe soldiers on, even as the rest of the world avoids monetary union in circumstances more favorable to it. What remains are political questions regarding how much inflation and/or fiscal transfers Germany can sustain; if a true fiscal union can be created, seen by some as indispensable to the Euro’s future (e.g., Bordo); and how much austerity countries like Spain can take. As this is a road less traveled, it’s hard to know how it will turn out. It’s a tough road, and I think the chart helps explain why. Europe’s problem is not just one of public sector deficit spending differences, but also of deeper, more fundamental differences across its various private sector economies. Whether it’s equities, credit or real estate, EMU valuations need to be considerably more attractive than US counterparts to justify investment given the challenges of the European project. Michael Cembalest J.P. Morgan Asset Management Some notes on the Monetary Union chart and associated topics ** “Major countries of the EMU” include Germany, France, Italy, Spain, Netherlands, Greece, Belgium, Portugal, Austria, Slovakia, Finland and Ireland. This group accounts for 98.5% of Eurozone population and GDP. Excluded to avoid small-country distortions: Slovenia, Estonia, Cyprus, Luxembourg and Malta. When they’re included, the results are similar. Results are also similar when Greece is excluded; the dispersion in Europe is not just about Greece. ** Some of Europe’s higher dispersion scores relate to the link between pay and productivity (#7.06); the efficiency of the legal system in settling disputes (#1.10); anti- monopoly policy (#6.03); wastefulness of government spending (#1.08); judicial independence (#1.06) and quality of scientific research (#12.02). ** “Market Economy of Latin America” is a category that excludes Venezuela and Argentina for reasons we can discuss some other time. If you owned shares in companies that were nationalized in either country, you know what I am talking about. ** In the 1860’s, Belgium, Italy, Switzerland and France created the Latin Monetary Union. Greece (!!) formally joined in 1876, but was expelled in 1908 for currency debasement. Among the reasons the LMU failed: a glut of silver reduced the value of LMU coins relative to gold, and the LMU did not control the printing of paper money,

forcing some countries to finance higher spending of other members (Italy). The LMU ended in practice with the onset of WWI and the need to finance military expenditures with paper money. ** Sweden, Denmark and Norway created the Scandinavian Monetary Union in 1873, which functioned well in both political and economic terms until member countries suspended convertibility at the beginning of WWI. The most successful monetary union in European history appears to be one between Belgium and Luxembourg, which lasted from 1922 until Euro integration in 1999. In both cases, member countries were in an economic sense much more homogenous than in the Latin Monetary Union or today’s EMU. ** 120 million people in 8 French-speaking West African countries have been using the CFA Franc for more than half a century. The CFA Franc is pegged to the Euro, and France guarantees its convertibility in exchange for holding ~50% of the region’s foreign exchange reserves. Some analysts believe the CFA Franc is overvalued, creating incentives for perpetual capital flight, and advantageous terms for French exporters selling goods into West Africa. Studies I have seen suggest that CFA membership has hindered growth performance in CFA members relative to other sub- Saharan countries. ** The microstate islands of the Caribbean have successfully been using a currency union since the establishment of the Eastern Caribbean Currency Union in 1965. Combined population: 616,000.

ft.com Comment Opinion April 30, 2012 7:48 pm Time for householders to buy bonds and save Spain By Martin Feldstein Spain is rapidly approaching a liquidity impasse. Markets are nervous because it is not clear how the government will finance its budget deficit and the rollover of its maturing bonds. The budget deficit now stands at 5 per cent of gross domestic product and the bonds maturing in 2012 equal a further 15 per cent of GDP. The International Monetary Fund expects these large deficits and refinancing needs to continue for several years. The Spanish government therefore needs the confidence of both foreign and domestic investors. Private investors must believe that Spain has both a credible programme to eliminate the annual fiscal deficits and a back-up plan to deal with the maturing debt if there is a shortfall of buyers. If investors know there is such a plan that could be triggered in an emergency, it might never be needed. The government should quickly reduce its near-term fiscal deficits and develop a plan to deal with its needs in following years. More ON THIS STORY// S&P downgrades Spain to triple B plus// Debt fears return as ECB funds are used up// FT Alphaville BBBasta — Spain cut to BBB+// Dutch strike budget deal to avert crisis// IMF says Spanish banks must go further ON THIS TOPIC// Scepticism greets Spain’s plans for banks// Spain in talks over ‘bad bank’ scheme// Editorial Madrid cries for help – is anyone listening?// Vulnerable banks under the spotlight IN OPINION// Ferguson/Barbieri Merkel can achieve fiscal union in Europe// Our central bankers are intellectually bankrupt// Li Keqiang China has great expectations for ties with Europe// Ahmed Rashid The Pentagon echoes with the hubris of Vietnam Spain’s commercial banks have little remaining lending capacity – the result of their previous purchases of government bonds and of their losses on property loans. The Bank of Spain lacks the money-creating ability of the US Federal Reserve and the Bank of England to buy government bonds. And the European Central Bank is explicitly precluded from financing fiscal deficits of member governments. This means that the Spanish government must depend on foreign and domestic investors who are now reluctant to lend to a government that may be insolvent. The challenge is to rebuild their confidence. Although eliminating annual budget deficits is politically difficult, Italy has recently shown that it can be done by a combination of reforms to spending (particularly pensions) and strengthening tax collections. The IMF now forecasts that Italy will have a cyclically adjusted budget deficit this year of less than 0.5 per cent of GDP, with cyclically adjusted budget surpluses starting in 2013. Spain should also be able to find the spending cuts and revenue gains, since Spanish government spending now exceeds 45 per cent of GDP. It should allow the relative budget autonomy of the Spanish regions to continue only if (as with the states in the

US) they are required to limit operating outlays to the funds they receive from central government and from their own taxes. Even with tough political action, it will take years to achieve a balanced budget. This means there will continue to be budget deficits that need financing, so delays in persuading investors to roll over existing debt as it matures are possible. Building investor confidence during this process requires a plan to avoid a Greek-style default. One part of such a plan is to negotiate access to the European Stability Mechanism, the €700bn fund created to protect member states from default. But if the refinancing shortfall from private sources is very large, Spain will need to supplement ESM funds. Raising those additional funds from taxes would push Spain’s economy into a deeper recession and weaken the supply-side incentives needed to stimulate long-term growth. Although some of the increased supply of lending might be achieved by changing the required asset holdings of the Spanish banks, those banks’ condition leaves very little scope for additional lending. An alternative emergency approach would be to mandate, on a temporary basis, bond purchases by Spanish households and businesses. Here is how such a plan might work. The Spanish government could use the income tax system to levy a temporary “lending surcharge” on individual incomes. In exchange for those surcharge payments, the households would receive an interest-bearing government bond with a maturity of five to 10 years. A similar surcharge could be levied on businesses based on corporate profits or the businesses’ value added. Having this back-up plan in place to fill any shortfall in Spain’s finances could give private sector investors the reassurance they need to provide the necessary funds. With private sector confidence that a default would be avoided, it should not even be necessary to draw on the ESM or to levy the surcharge on households and businesses. The Spanish government should therefore move quickly to enact such a plan before it is overcome by its current liquidity problems. The writer is professor of economics at Harvard University and was president Ronald Reagan’s chief economics adviser http://www.ft.com/intl/cms/s/0/de893dd0-92aa-11e1-b6e2- 00144feab49a.html#axzz1tnJ5Nlbd

ft.com Comment Editorial April 29, 2012 7:53 pm A job description for Frankfurt In the run-up to the French presidential election, the two front runners have debated whether the European Central Bank’s mandate needed to be changed. It is a question that should be taken seriously throughout the eurozone. This newspaper is a firm supporter of central bank independence. Since independent central banks became the norm in most countries in the 1990s, most have impeccably pursued the goal they were set – usually keeping inflation close to an explicit or implicit target. The problem was that this ignored the greater threat to the economy: we now know that low, stable inflation can hide mounting imbalances in the financial system. While central banks have autonomy in how they fulfil their mandate, the mandate itself must be continuously evaluated by elected leaders so that monetary policy be both effective and anchored in democratic legitimacy. More ON THIS STORY// Europe A shift in the political wind// Dublin cuts growth forecast for year// Eurozone SMEs struggle to secure credit// Eurozone optimism falls to four-month low// Eurozone economic activity contracts// ON THIS TOPIC// Comment Our central bankers are intellectually bankrupt// Fed policy drives down yields// Philipp Hildebrand Now is not the time for boring central bankers// Cyprus replaces bank head amid crisis EDITORIAL// Strong mayors can revive democracy// National seizure// Euro 2012 cannot be political football// Parliament takes Murdoch to task As much of the eurozone heads into a renewed recession, it is appropriate for the currency area’s elected leaders to ask if their central bank is pursuing the right task. The ECB cannot be faulted for not doing the job it has been given. At the end of his ECB presidency, Jean-Claude Trichet liked to point out that inflation averaged 1.98 per cent in the euro’s first decade. It is impossible to come closer than this to the target of “below, but close to two per cent”. But when the monetary union sees output shrink and unemployment rise for reasons that have largely to do with credit markets, monetary policy is clearly not doing all that the eurozone’s citizens are entitled to expect from it. In particular, they would be right to ask if there is not more the ECB can do to reignite growth. In principle, Frankfurt is responsible for contributing to growth and the eurozone’s other economic objectives, but this is strictly subordinated to price stability. An explicit dual mandate – with inflation and growth ranked equally – is not ideal, however. It would bring confusion and make it harder to assess how well the central bankers are doing their job. The Federal Reserve, which has such a dual mandate, in any case treats it as a flexible inflation target. But there are three things the euro’s elected leaders can do to have Frankfurt pursue price stability in a more growth-friendly way. First, they should tell the ECB to focus on domestically generated inflation. The current broad measure includes price changes that really reflect terms of trade shifts. A better measure would remove a perverse incentive for the ECB to rein in an already-depressed

economy in an attempt to undo spikes in global commodity prices. This has encouraged the governing council to stay its hand. Second, they should make absolutely clear that undershooting the target is as bad as overshooting it. At a time when deflation is a real threat to the eurozone’s economic wellbeing, it is a scandal that the ECB should be more comfortable below the target than above it. Third, they should stress that the ECB may use any monetary instrument it sees fit. By rights this is already so, but political pressure has shrunk Frankfurt’s freedom of action with respect to buying government bonds. Direct monetary financing must remain prohibited, but Frankfurt should be allowed any financial intervention needed to keep its control over the price level. The ECB has no business, however, to oppose turning the eurozone’s rescue fund into a bank – a good idea supported by both contenders in the French presidential elections.supported by both contenders revived by François Hollande, the French presidential contender. The value of independence is that an autonomous central bank is better able to achieve goals set by elected leaders than those leaders themselves. In a democratic society, this ability cannot be sustained if the population feels that the central bank’s goal is at odds with their economic wellbeing. http://www.ft.com/intl/cms/s/0/7489847e-9090-11e1-9e2e- 00144feab49a.html#axzz1tnJ5Nlbd

ft.com comment Columnists April 29, 2012 8:41 pm Hollande is start of progressive insurrection By Wolfgang Münchau

Six days to go in France. Crude antipathy seems to be the main reason French voters are likely to throw out their president. Nicolas Sarkozy does not look like a president, talk like a president, or act like a president. But there is a better reason why he deserves to be ejected. He won the 2007 campaign with a promise of ambitious economic reforms. He was one of the few European politicians with a mandate for big changes. He flunked it for a reason that already became apparent during the 2007 campaign: he was hyperactive. Reforms are for boring politicians. We are still in the campaign, and stuff can happen in six days. But Mr Hollande is so far ahead in the polls – and has been for a long time – that it is hard to see how Mr Sarkozy can still pull off a surprise. It will take a lot more than a convincing performance on Wednesday in the scheduled television debate. More ON THIS STORY// Hollande rebukes Berlin over crisis role//In depth French elections 2012// Interactive Hollande vs Sarkozy//Le Pen backers scorn Sarkozy and Hollande//Sarkozy seeks to win over far-right ON THIS TOPIC Sarkozy fails to land killer blow//Sarkozy and Hollande lock horns on TV// Candidates eye state sell-offs//Sarkozy’s party fractures over Le Pen talks WOLFGANG MUNCHAU The eurozone’s unpalatable solution// Mission impossible//The prize for European political illiteracy// Hollande presidency would be its impact on the French economy and its impact on the eurozone. On the first, I consider the effect broadly neutral. On the second, I think it would be significantly positive. Mr Sarkozy’s two greatest failures as a reformer are his failure to implement a single contract for all French labour, and to scale back public expenditure. Mr Hollande is not promising structural reform either. Europe’s experience is that such changes are more likely to be delivered by the left than the right, and usually under stress. France will ultimately adopt those reforms, no matter who is president. Mr Hollande should, however, resist the pressure from the left to raise the minimum wage and to reverse the increases in the pension age. What about Mr Hollande’s threat of a marginal 75 per cent tax rate on incomes over €1m? It is as politically astute as it is economically inconsequential. A few more rock stars may move from Paris to Geneva or Brussels. Some bankers on high bonuses may move to London. Some chief executives will pay the tax. But frankly, who cares? It would be hard to make the claim these days that France would lose any talent here. Most entrepreneurs will not be affected, as they do not amass their wealth in the form of earned income, let alone bonuses. The main reason why I look forward to a Hollande presidency is for its impact on Europe. At present, all the large, and many of the small, eurozone countries are governed by centre-right governments. Angela Merkel is their undisputed queen. Mr

Hollande is not going to be a comfortable partner. On some issues, such as the fiscal pact, he will challenge her outright. I would welcome a Hollande presidency on the grounds that it would introduce a much needed shift in the toxic narrative about the eurozone crisis and its resolution. According to this narrative, the crisis was caused by fiscal irresponsibility. Its prescription is austerity and economic reforms. The tool to achieve the former is the fiscal pact, which Mr Hollande has said he will not sign unless it is complemented by policies to boost economic growth. I wish that Mr Hollande would go further because austerity will snare countries in a low-growth trap. No set of structural policies will change this. I understand the political reason why he does not want to go further. He does not want his presidency to start with an existential fight with Germany – and the dreaded prospect of another panic attack by global investors. France isn’t the only country to watch, though. In the Netherlands the centre-right minority government collapsed after Geert Wilders, the leader of the populist Freedom Party, decided not to support its austerity programme. The Dutch government last week managed to strike a deal with a number of opposition parties. The Netherlands will now embark on a fairly brutal fiscal adjustment in the middle of a recession. Value added tax will increase to 21 per cent, depressing consumption. Health and education spending will be cut. The big question is how the Dutch electorate will react to this set of policies when they go the polls in September. My guess is that we will see a surge of support for both the left and the right – which are united in their rejection of these policies. Mr Wilders, who has previously focused on immigration, has now adopted the eurozone as his favourite subject through which to bash foreigners. The rise of political extremism in Europe is in part the consequence of stubbornness and stupidity among centrist elites. It is a bit risky to judge someone before he is even elected. But I suspect Mr Hollande is the beginning of a progressive insurrection. http://www.ft.com/intl/cms/s/0/c400be82-9063-11e1-8adc- 00144feab49a.html#axzz1tnJ5Nlbd

Finance and economic growth delinked By: Dirk Bezemer 27.04.2012

Woody Allen quipped that ‘economics is about money and why it is good’. Funny – but he probably did not realize that much of economics is not about money, to its peril. The cutting-edge ‘general equilibrium’ (or ‘GE’) type of models that have come to dominate macroeconomics over the last decades do not have money, nor financial flows, nor credit and debt. They are widely used in policy institutes, academia and central banks, but these models have no banks. Stephen Cecchetti of the Bank for International Settlements recently described how ‘for a macroeconomist, debt is trivial because it is net zero – the liabilities of all borrowers always exactly match the assets of all lenders.’ Cechetti’s description is accurate, and stupefying. It is as if an auditor blindly signs off on a firm’s financial record, happily asserting that whatever is in the balance sheet is trivial since assets always match liabilities. Sure. But does not the level of debt tell something about financial fragility? Can not asset values fall so that liabilities become binding and crisis ensues? Posing the question is answering it. There are reasons why macroeconomists nevertheless prefer to neglect money and debt. Including financial flows in GE models would contradict key assumptions enshrined in their mathematical structure, removing the foundation under decades of academic research. Understandably, macroeconomists have shrunk from sawing off the branch they sit on. Meanwhile, the neglect of finance in macroeconomics has left us badly unprepared for a credit crisis. Central bankers and top academics united in saying that ‘no one saw this coming’. That is patently false: there are alternatives ways of doing economics and clear forewarnings of crisis had been issued by many in fact. Significantly, none of them adhered to the cutting-edge models, and all include the economy’s financial structure in their analysis. That is now history. But the neglect of credit and debt in economic theory continues to produce muddled policy thinking. Take the tendency to protect banks lock, stock and barrel, at huge costs. The mantra is that if we let banks go bankrupt, that will ruin the economy. This is a nifty inversion of the truth: it is precisely the support for

banks’ balance sheets that will prolong our economic woes. But to see this, you need to think about balance sheets – which macroeconomics almost forbids one to do. Nothing more intricate is involved than the accounting equality that the financial sector’s assets are the real sector’s liabilities. But here comes the important bit: most of that debt growth has NOT been due to lending to the real sector – to nonfinancial firms, supporting growth in wages and profit. Almost all of it was due to mortgage lending and to credit to the nonbank financial sector credit, to inflate stocks and property prices and to create and trade options, futures, and other derivative instruments. These credit flows, and the activities they fuelled - share buybacks, leveraged buyouts, securitization - create no wage or profits for the many, but capital gains for the few, and a huge net debt burden on the economy. Property and asset prices may be falling, but the debts that jacked them up are not. The threat to growth today is not a shrinking of the financial sector, but it enormous size. The accumulated claims by the nonbank financial sector cause a daily drain of purchasing power out of the economy in debt service. This is money that could be effective demand for goods and services, and stimulate economic growth. Nowadays, finance is stifling, not stimulating growth. So what of the ‘save the banks’ policy? Why don’t we shed some (or all) of the triple increase in the size of the financial sector over the last decades? Of course we must jealously safeguard the payment system and retail banking: their collapse would spell disaster to the economy. But we must also save the economy by shrinking the debt, and inevitably that will mean shrinking the creditor. This is balance sheet logic. If we continue supporting finance in toto, we keep an artificially large waterhead on the economy alive. We continue the drain on the economy that could otherwise be growing. The economy will be pushed in many W-shaped recessions, and it would be a largely man-made disaster. Instead, if financial firms living off capital gains go bust, this will not be the end of the world. It will improve market functioning and price discovery, and bring back asset prices to more normal levels. Balance sheet logic also indicates that there will be fallout among firms, households and pension funds. To the extent that this has real-sector repercussion via falling demand and incomes, there should be provisions to compensate. A good chunk of that can be financed by cuts in today’s blanket support for the financial sector. There is a lot of thinking to do. So let’s start – but not on the faulty foundations of models without money. We have done that for too long. Dirk Bezemer is Associate Professor at University of Groningen in the Netherlands. http://www.eurointelligence.com/eurointelligence- news/home/singleview/article/finance-and-economic-growth-delinked.html

Op-Ed Columnist Death of a Fairy Tale By PAUL KRUGMAN This was the month the confidence fairy died. Fred R. Conrad/The New York Times

Paul Krugman 27/04/2012 For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets. Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue. The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level. So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression- level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic. None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011.

Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent. However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working. The question now is what they’re going to do about it. And the answer, I fear, is: not much. For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs. Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent. And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better. But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar. So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end. A version of this op-ed appeared in print on April 27, 2012, on page A27 of the New York edition with the headline: Death Of a Fairy Tale. http://www.nytimes.com/2012/04/27/opinion/krugman-death-of-a-fairy-tale.html

April 26, 2012, 7:21 am The New Voodoo Every time I think we might be making progress against the prejudices and myths that pass for judicious thinking these days, something like this editorial in the FT comes along to renew my despair. The editorial is a response to the latest bad UK economic news, which it says offers no reason at all to reconsider austerity policies. Here’s the substantive argument, in full: Ed Miliband, the leader of the opposition, predictably used the figures to attack the coalition for “cutting too far, too fast”. But this is unconvincing. There is no guarantee that under a more expansionary fiscal policy the British economy would be doing significantly better. And set against this is the risk that the UK’s low borrowing cost might rise. This is really extraordinary, if you think about it for a minute. It’s true that there is “no guarantee” that Britain would be going better with less austerity; nothing is life is guaranteed. Hey, my cup of coffee might suddenly turn into a block of ice — thermodynamics is just statistical, you know. But there is now overwhelming evidence (pdf) that contractionary fiscal policy is contractionary; not least from the results of austerity in Europe:

Somehow, though, the FT feels able to reject this evidence based on .. what? Then there’s the assertion that bond yields might rise. Well, sure, and there might be a flu outbreak or whatever. But nothing in recent experience suggests that countries with their own currencies are at risk from an attack by bond vigilantes — Japan’s 10-year rate, after more than a decade of warnings that the bond crisis was coming any day now, is 0.91 percent.

Furthermore, eminently respectable economists now argue persuasively that austerity in a deeply depressed economy may well be self-defeating, so that backing off such austerity should encourage, not worry, bond investors. So the FT’s argument boils down to the assertion that Britain must stay the course lest it be forsaken by the confidence fairy and attacked by misguided invisible bond vigilantes. And whoever wrote that imagines himself to be sensible and judicious. http://krugman.blogs.nytimes.com/2012/04/26/the-new-voodoo/ April 25, 2012, 8:26 am Leveraging, Deleveraging, and Fiscal Policy. Just a brief note. It’s an awkward fact — for the fiscal responsibility types, anyway — that Spain and Ireland were running budget surpluses, not deficits, before the crisis. It was private borrowing, not public borrowing, that created the mess. But, say some commenters, this was nonetheless malfeasance on the part of the authorities; they should have been running even bigger surpluses to offset the private credit bubble. One answer is that at the time there was no consensus that it was, in fact, a bubble — conventional sources like the IMF and the OECD did not assert that there were big problems. But here’s my thought: do all the people who believe that it’s appropriate for governments to run big surpluses to offset rising private-sector leverage also believe that it’s appropriate to run big deficits to offset large-scale private deleveraging — which is what’s happening now? If not, why not? Why the asymmetry? Inquiring minds want to know. April 25, 2012, 5:00 pm The Unbearable Slowness of Internal Devaluation The euro area’s economic strategy, such as it is, rests on two pillars: confidence through austerity, and “internal devaluation”. You know how the first is going; what about the second? For the uninitiated, internal devaluation means getting your wages and other costs to a competitive position, not by devaluing your currency, because you don’t have one, but by reducing wages relative to those of your trading partners. This is essential in the crisis countries, which all saw much more rapid inflation than the rest of Europe during the good years, and now need to reverse the process. When the euro was being created, the claim was that reforms would produce “flexible” labor markets, a k a markets in which wages could easily fall as well as rise. Now Eurostat has the latest on hourly labor costs (pdf); let’s look at changes from 2009 to 2011:

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What we see is that even in Ireland, which has made the most progress, wages have fallen only slightly. Since wages have risen in the rest of the euro area (that’s the bar labeled EA17), the actual internal devaluation is bigger — about 5 1/2 percent in Ireland’s case — but still only a fraction of what’s needed. Oh, and Germany — which should be experiencing substantial internal revaluation, a rise in its relative costs — hasn’t. You can argue that adjustment is happening here, but it’s painfully slow — and not remotely fast enough to avert catastrophe on the current course. April 25, 2012, 7:59 am The Big Wrong It’s Official: Keynes Was Right, says Henry Blodget. Recent election results in Europe seem to have raised consciousness in a way literally years of economic data couldn’t: the austerity doctrine that has ruled European policy is a big fat failure. I could have told you that would happen, and sure enough, I did. Did I mention that after three years of dire warnings that the bond vigilantes are attacking, the interest rate on US 10-years remains below 2 percent? It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case — that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks — was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite. And now the results are in: Keynesians have been completely right, Austerians utterly wrong — at vast human cost. I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose. Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence. Do you not know, my son, with how little wisdom the world is governed? http://krugman.blogs.nytimes.com/2012/04/25/the-big-wrong/

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ft.com Markets Capital Markets Last updated: April 26, 2012 9:22 pm Debt fears return as ECB funds are used up By Richard Milne Investors have begun to pay especially close attention to Spanish and Italian banks. Thanks to the billions of euros in cheap loans dispensed by the European Central Bank, the banks’ dealings have become linked to moves in their countries’ bonds. And that relationship could well determine the course of the eurozone crisis. More On this story //Markets Insight Eurozone is starting to look Japanese// The Last Word Of debt, dukes and monetary excess/ Reawakening eurozone crisis fuels concerns IN Capital Markets// Hunt for high yields bolsters Maiden Lane III//US delays introduction of floating rate notes// Infrastructure projects face funding gap//Fitch warns US growth poses credit threat

At the heart of bond traders’ concerns is whether the banks are running out of money with which to buy their own governments’ debt. Both countries’ lenders took advantage of ECB’s emergency programme of three-year loans, known as the longer term refinancing operations (LTRO). They used much of the money to buy sovereign debt, helping drive down borrowing costs for Spain and Italy.

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But a lurch upwards in sovereign yields, which move inversely to prices and are a gauge of the countries’ cost of borrowing, has raised fears the banks have allocated all their LTRO money or are unwilling to buy more debt. Italian benchmark yields fell from more than 7 per cent in January to 4.5 per cent in March but are now back at 5.63 per cent. Spain’s fell less dramatically but are now higher than they were in January and have been trading near 6 per cent, close to territory regarded as unsustainable. How much the banks have left to spend on buying bonds, therefore, is important and, on this, strategists are divided. “The war chest is still there,” says Mohit Kumar, fixed- income strategist at Deutsche Bank. He estimates Italian and Spanish banks each have about €60bn left that they could use to buy sovereign debt. “There is a cautious normalisation ... We won’t see a rally as we did in January or February. But the war chest should continue to support the market, which is positive,” he says. Other analysts believe that Spain could be in a better position than Italy. Nikalaos Panigirtzoglou, of JPMorgan’s flows and liquidity team, thinks Spanish banks have about €90bn in available LTRO funds compared with just €60bn for Italian banks. This is largely because Spanish lenders borrowed heavily in the second of the LTROs in February. Nonetheless, he notes an increased lack of willingness among the banks to continue buying sovereign debt. “In the first quarter Spanish and Italian banks aggressively bought government bonds from international investors. They are now not such aggressive buyers. At some time banks might say: enough is enough, we can’t keep buying,” he says. Hanging over the banks in both countries is the spectre of what happened to Greek lenders, many of which were nationalised due to their losses on domestic bonds. Mr Panigirtzoglou points out that Spanish banks are second only to Greece’s in having such a high proportion of their assets in government bonds. “What destroyed Greek banks was their sovereign bond holdings. They feel betrayed because they were asked in 2007, 2008 and 2009 to support their country. It is not the loan book that destroyed the Greek banks and that is something Spanish and Italian banks have in mind,” he says. Another reason some analysts feel more positive about Spain is because it is further through its issuance schedule for the year, having raised close to half its total needs. It also benefits from having less debt maturing held by foreign investors, many of whom are not rolling over their debt any more as they shun the peripheral eurozone. JPMorgan estimates that Spain has net issuance of €30bn still to do and €15bn in maturing debt held by non-domestic investors, set against the €90bn in LTRO funds. Italy, on the other hand, has net issuance of €20bn but €50bn of maturing non- domestically held debt, more than the €60bn in LTRO money left with Italian banks. But a senior Spanish banker cautions against assuming that the banks’ dwindling LTRO firepower will necessarily lead to another sharp rise in yields. He points out that domestic institutional investors such as pension funds and insurers could also be counted on to support forthcoming debt auctions. Mr Kumar fears the “massive domestication” of the bond markets could have further to go. He says more than

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40 per cent of Spanish sovereign debt was in the hands of foreign investors two years ago. The proportion is now 32 per cent. Before the euro was established, it was just above 20 per cent. He also worries about the health of Spanish banks. “The key risk that remains is the Spanish banking system. What I would like is a credible recapitalisation of the banks,” he says. Some fund managers remain worried more about Spain than Italy, believing that it suffers not just from liquidity problems but also from solvency concerns. Keith Wade, chief economist at Schroders, says: “I think Spain will have to restructure its debt. The trajectory of the debt is lower than Italy but it is increasing at such a rate I think they will have to.” For now, the remaining LTRO funds provide some support. Mr Panigirtzoglou says: “It can last for a few more months but it doesn’t solve the problem ... Somebody else has to step in.”

Additional reporting by Robin Wigglesworth http://www.ft.com/intl/cms/s/0/3b4a5946-8fa9-11e1-98b1- 00144feab49a.html#axzz1tnJ5Nlbd

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Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap? By Paul McCulley, Chair, GIC Global Society of Fellows and Zoltan Pozsar, Visiting Scholar, GIC Global Society of Fellows Paper to be presented at the Inaugural Meeting of the Global Interdependence Center’s Society of Fellows on March 26, 2012 at the Banque de France, Paris? March 26, 2012 Conclusions: Monetary policy is ineffective in a liquidity trap and fiscal policy is effective. However, at a time of elevated public debt levels, attempts to increase public borrowing often meet fierce opposition based on the orthodoxies that increased public borrowing will be counterproductive on Ricardian grounds and will hurt confidence; that it will raise interest rates and crowd out investment; and that it will lead to a buyers’ strike. Cooperation between fiscal and monetary authorities for a period of time can fix these problems. By the monetary authority breaking with orthodoxies and openly encouraging and monetizing fiscal expansion, the government’s concerns over elevated debt levels, Ricardian equivalence and rising rates would be allayed, and the transmission mechanism of monetary policy would be restored by the presence of a willing borrower – the government. Unless fiscal stimulus is deployed with force to offset the loss of demand from private deleveraging in a liquidity trap, enduring economic slack, deflationary pressures and the risk of depression may arise. In the topsy-turvy world of liquidity traps, adherence to fiscal and monetary orthodoxies can be costly, and acting irresponsibly relative to orthodoxy can work. Three historical cases are exemplary in this regard: First, during the inter-war period, fiscal and monetary authorities adhered to the orthodoxies of the gold standard religiously. Government budgets were balanced and gold outflows were controlled by interest rate hikes and internal devaluation. The inter-war gold standard lacked the flexibility of the classical gold standard, however. Labor markets were not as flexible as they once were, making deflation increasingly difficult to engineer, and the governance of the global interwar gold standard had no rules for surplus countries to inflate.

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The net result was a deflationary bias to the system that snowballed into a bout of worldwide deflation when the Federal Reserve raised interest in 1927 to slow stock market speculation in the U.S. Rate hikes followed in every country on the gold standard, budgets remained balanced in the face of growing adversity and a deflationary spiral befell the global economy beginning in 1929 that dragged the world into depression. During this period, acting responsibly relative to orthodoxy failed. Second, as long as adherence to the gold standard’s orthodoxies remained the main policy objectives, stimulative fiscal and monetary policies were off the table, deepening the depression. Once orthodoxies were abandoned, however, fiscal and monetary policies were free to be applied more aggressively. The sooner a country abandoned gold’s orthodoxies, the faster it recovered. Different countries broke with orthodoxies for different reasons. Some were forced by markets, some chose to, and some had no option but to adapt to a world unfettered from gold. However, we find that in no case were orthodoxies abandoned voluntarily. When orthodoxies were in conflict with democracy, orthodoxies were overruled by political considerations! Perhaps the most aggressive effort to break the depression was the fiscal-monetary cooperation applied via President Roosevelt’s reflationary policies, which aimed at reflating the price level as well as incomes via increased deficit spending financed by central bank purchases of government obligations. During this period, acting irresponsibly relative to orthodoxy worked, apart from the mistake of fiscal and monetary tightening in the U.S. in 1937, which set the recovery back by years. Third, following the burst of Japan’s twin stock market and commercial real estate bubbles in 1989, stimulative fiscal and monetary policies helped avoid a collapse in GDP and prices. Interest rates fell to zero by 1995, the economy fell into a liquidity trap and monetary policy become ineffective amidst a corporate deleveraging that lasted fifteen years, until 2005. However, several episodes of premature fiscal tightening over this period - similar to that of the U.S. in 1937 – caused the economy to relapse into recession, delaying the recovery. Although fiscal orthodoxies were suspended periodically despite rising debt levels, the lesson of history is that politics make it hard to maintain fiscal stimulus in democracies during peacetime. Monetary orthodoxies were also abandoned when the Bank of Japan embarked on quantitative easing between 2001 and 2006, however, QE was not deployed aggressively enough to have had profound, demonstrable, reflationary effects. In Japan, acting irresponsibly relative to orthodoxy simply was not tried hard enough. Fiscal monetary cooperation akin to that implemented by Finance Minister Takahashi during the 1930s and advocated by Governor Bernanke in 2003 were not applied. These historical cases of acting responsibly, irresponsibly and half-heartedly irresponsibly relative to orthodoxy carry telling lessons for the outlooks of the Eurozone, U.K. and U.S. today. First, acting responsibly relative to orthodoxy in the Eurozone and following the German “dictat” of sado-fiscalism54 and internal devaluation are reminiscent of several defining economic episodes and frictions of the interwar gold standard.

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The unsustainable debt load of peripheral economies and Germany’s insistence to putatively attack them via austerity is no different from France’s insistence that the “boche” should pay war reparations in full and without delay. Both involve the foreign-directed imposition of austerity domestically that would be more likely to end in social unrest and political instability – and even worse, the rise of extremism - than stronger growth. While repeated failure to pay will likely not lead to military occupation, Germany’s insistence on appointing a budget overlord in Athens is not unlike Poincare invading the Ruhr in 1923. Whether Greece will adopt passive resistance is yet to be seen. On a more systemic level, Germany’s refusal to inflate at the core while insisting on internal devaluation in the periphery is eerily similar to the frictions caused by the imbalance between gold surplus countries refusing to inflate and deficit countries unable to sufficiently deflate during the 1920s and early 1930s. Just as laboring classes could not bear the pain of adjustments required by the gold standard’s orthodoxies, laboring classes in peripheral Eurozone economies may not be able to bear the pain of adjustments required by the single currency’s orthodoxies. If history is our guide, painful adjustments will ultimately lead to some countries abandoning the euro, or politics overruling monetary orthodoxies: (1) legal restrictions against monetizing debt today versus the fixed exchange rate mentality of the gold standard, and (2) the independence of the ECB. Just as it did during the gold standard, acting responsibly relatively to orthodoxy will fail in Europe, and like Chancellor Churchill, Chancellor Merkel will likely come to regret insisting on Procrustean austerity and will ultimately come around to see it as the greatest mistake of her political life.55 Second, acting responsibly relative to orthodoxy on the fiscal front, but acting irresponsibly relative to orthodoxy on the monetary front, policies in the U.K. are also unlikely to work. 54 The word “sado-fiscalism” was coined by James Aitken. 55 Germany does not realize what it is doing at the Eurozone level. All it wants to do is remain competitive and not pay up, and is advocating its own policies of wage cuts and austerity from the past for others to regain competitiveness. What makes sense for one does not make sense for everyone, however, as in the aggregate, austerity begets the paradox of thrift. George Soros compares Germany’s economic policies to the “policies” of Procrustes. A rogue smith in Greek mythology, Procrustes physically attacked people by stretching them or cutting off their legs so as to force them to fit his bed. As Mr. Soros notes, the Procrustes bed being inflicted on the Eurozone is called deflation. We would add that Theseus killed Procrustes in a similar manner. The lesson for Germany should be that by insisting on continent-wide austerity, it is effectively undermining its own economic growth via exports. Policies insisted on out of fear of inflation will ultimately lead to deflation and depression not only in the periphery but also the German core. With the private sector in deleveraging mode, quantitative easing (QE) can only ease the pain of deleveraging, but absent willing borrowers, it cannot offset the shortfall of demand; as Governor King said “the ability of monetary policy to bring forward spending from the future to the present is limited.” Fiscal austerity measures are unlikely to improve growth and increase demand and while a weaker pound, via QE, will help with the economic outlook of Europe – the U.K.’s main export market – moribund exports will not bring salvation. Just like in the 1930s, Keynesian

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solutions are not being applied in the birthplace of Keynes. This will hurt relative growth and employment in the U.K., just as it did back during the 1930s. Third, to date, the U.S. has acted irresponsibly relative to orthodoxy on both the fiscal and monetary front. This is good. However, risks are rising that while the monetary authority will remain committed to acting irresponsibly, the government will choose to act responsibly relative to fiscal orthodoxy and adopt austerity. For evidence, look no further than the recent renewal of the legally binding limit on federal borrowing – reminiscent of the Koizumi Administration capping bond issuance in Japan a decade ago with an aim of restraining the deficit, but then having to abandon the cap as it had the opposite effect via a collapse in economic activity and falling revenues – and the start of a Congressionally mandated sequester, a mechanism that will automatically cut domestic spending from 2013 onwards. Full blown fiscal-monetary cooperation and reflationary policies similar to that pursued by President Roosevelt and Finance Minister Takahashi during the 1930s, as recommended to Japan by Governor Bernanke in 2003, are not yet on the horizon. The missing partner is a fiscal authority with a willingness to spend and respond to the Federal Reserve’s unprecedented stance to willingly encourage and accommodate fiscal expansion to facilitate the private sector’s deleveraging without depression. Private sector deleveraging in the U.S. may be protracted or rapid, depending on the solutions policymakers choose to apply. And here, too, fiscal authorities are unwilling partners. The fiscal authority has been rejecting the idea of principal forgiveness on moral grounds: it would be not fair to all those who made their payments faithfully and let those off the hook who purchased larger homes than they could afford. But policy paralysis due to concerns of moral hazard will only prolong the liquidity trap and delay recovery. And that is not fair, either. Moral debates like these are not new – we saw them between the rentier and laboring classes during the gold standard in many countries – and their swift resolution is key to a recovery. While the U.S. monetary authority has learned its lessons from the Depression, Congress seemingly has not. In the political arena, it is not pragmatism that applies, but Keynes’ maxim that “worldly wisdom teaches it is better for reputation to fail conventionally rather than to succeed unconventionally”. The costs of austerity can be enormous, however, not only economically but also socially (see Figure 2), and we believe there must be a path of enlightenment other than the bitter experience of folly.

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Appendix 1: Reparations to be paid by Germany were set at $12.5 billion in May 1921 or roughly 100 percent of Germany’s pre-war GDP, to which Germany formally agreed but was never fully committed to. Reparations only worsened Germany’s budget deficit which has been rising since the end of the war due to residual war expenses and progressively more generous social

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programs offered by a series of failed governments for a demoralized laboring class unable to find jobs immediately after coming back from war. To finance the deficit, the government turned to the Reichsbank which financed it by printing money. Inflationary policies worked initially and stimulated demand until late 1922.56 However, they started to turn increasingly disruptive starting in January 1923,57 when repeated failures by Germany to meet reparation payments led French Premier Poincare to occupy the Ruhr – Germany’s center of coal, iron and steel production. In response, German Chancellor Cuno launched a campaign of passive resistance, which effectively meant the government asking the population of the occupied areas to stage a general strike which in the end lasted a full nine months until September 1923. As Germany’s industrial heartland was idled, workers were supported with federal cash grants-in-aid printed by the Reichsbank. Over the first nine months of 1923, inflation got out of hand, and Germany – then the world’s third largest economy – “launched itself on that infamous voyage of fantasy into the outer realms of the monetary universe”.58 The reichsmark collapsed and hyperinflation became a diplomatic weapon of choice in Germany’s fight over reparations payments with France. The position of Rudolf Havenstein, the Reichsbank’s President at the time was difficult. Had he leaned against the government and refused to inflate the deficit, budget cuts or inflation would have brought about recession and more social and political unrest in an already flammable environment. Moreover, austerity forced by the central bank onto the government would have made the public perceive Havenstein as a “collection agent”59 of the allies. This would also have gone against the government’s interests given the foreign policy imperative of demonstrating with ongoing deficits and inflation that Germany was unable to pay reparations and needed concessions from the Allies. As Max Warburg – banking scion and Reichsbank board member - noted in 1923, the essence of the Reichsbank’s policy debate was “whether [it] wished to stop the inflation and trigger the revolution”.60 56 See Eichengreen and Temin (2000) 57 See Eichengreen and Temin (2000) 58 Ahamed (2009) 59 Ahamed (2009) 60 Ferguson (1995) http://www.interdependence.org/wp-content/uploads/2012/03/Paul-McCulley-Fellows- Paper.pdf

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Fiscal Policy in a Depressed Economy J. Bradford DeLong And Lawrence H. Summers March 20, 2012 ONCLUSION The analysis in Section II demonstrates that, as a matter of arithmetic, if the short run multiplier is even moderate and if there are even modest hysteresis effects, then temporary expansionary fiscal policy will not impose future fiscal burdens.35 Our subsequent analysis in Sections III and IV has made the strong case that short-run fiscal multipliers are likely to be substantial enough and that hysteresis effects are likely to be present in an environment like the present one in the United States, where the economy is operating well short of potential and where interest rates are constrained by zero lower bound. It is crucial to stress as that this result does not speak to the question of the long run sustainability of fiscal policy, or to the importance of addressing unsustainable fiscal policies. If committed spending and committed revenue plans are incon-sistent, then as a matter of arithmetic adjustments will be necessary. Nothing in our analysis calls into question the widely held proposition that it is desirable for those adjustments to be committed sooner rather than later. Our analysis simply demonstrates that additional fiscal stimulus, maintained during a period when economic circumstances are such that multiplier and hysteresis effects are significant and then removed, will ease rather than exacerbate the government’s long run budget constraint. In drawing policy implications from this result, three crucial questions arise:  First, Doesn’t the argument prove too much? Surely it cannot be the case that most governments at most time can take on increased debt relying on the benefits of induced growth to pay it back?  Second, is the kind of temporary fiscal stimulus envisioned in our model feasible in the world or does temporary stimulus inevitably in reality or perception become at least quasi permanent?  Third, whatever the merits of fiscal stimulus, should not monetary policy be relied on as an alternative and superior instrument? We very briefly consider these questions in turn. ______35 We are not alone in this conclusion. See also Denes et al. (2012) and Cottarelli (2012) for oth-er, somewhat different arguments that many economies now are at least near the edge of the re-gion where stimulative deficit spending is self-financing, and fiscal austerity is self-defeating.

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Does not our argument prove too much? It surely cannot be the case that at most places and times expansionary policy is desirable, nor that at all times when economies are severely depressed fiscal policy should be pursued without limit. This is why we stressed that, outside of extraordinary downturns where the zero lower bound constrains interest rates, we believe that the right assumption is that the fiscal multiplier is effectively zero. Increases in demand will run up against supply constraints.36 And to the extent they do not, increases in demand will be offset by monetary policy. With a zero policy-relevant multiplier, judgments about fiscal policies should be on allocative rather than stabilization-policy grounds. Moreover, the nature of the hysteresis effects described in Section IV are such that, even if fiscal policy is stimulative in normal times, hysteresis effects are unlikely to be significant in normal times. Policies that alter the variability but not the average level of output over long intervals will not give rise to hysteresis effects. Further, it is much more likely that deep downturns in which, for example, labor withdrawal increases substantially have disproportionate impacts on potential. While we believe that our analysis has relevance to the question of fiscal policy in the United States and probably a number of other countries at present, we do not think it is likely to have much bearing on policy after the economy has recovered and has exited the zero lower bound.

36 Note that Gordon and Krenn find a multiplier of 1.88 for the pre-Pearl Harbor mobilization for World War II at the zero nominal bound when they end their sample in the still demand-constrained first half of 1941, but of only 0.88 when they end their sample at the end of 1941 hen supply constraints begin to bite. This feature does not make it into modern models. As Robert Hall (2012a) comments: “The simple idea that output and employment are constrained at full employment is not reflected in any modern model that I know of. The cutting edge of general-equilibrium modeling—seen primarily in the DSGE models popular at central banks around the world—incorporates price and wage stickiness that makes supply quite elastic both above and below full employment.” 112

With regard to the second question, the premise of our analysis is that expansionary fiscal policy can be both timely and temporary. Thus it can be delivered when output is severely depressed and the zero nominal lower bound binds, and stopped as the economy recovers. Thus it makes a case only for as much fiscal stimulus as can be delivered in a timely and temporary way. If, as Taylor (2011) argues, fiscal stimulus enlarges government deficits but does not increase spending, then its benefits will not be realized. If, in a political sense, stimulus will not in fact be temporary, or if there are substantial lags in implementation, than the calculus of costs and benefits considered here is altered. There are limits to the scale of the fiscal stimulus that can be both timely and tem-porary. Our reading of the recent US experience is encouraging as to the feasibility of significant timely and temporary stimulus. Contrary to Taylor’s assertions, the work of Seidman (2011), Chodorow-Reich et al. (2011), and Serrato and Wingender (2010), and others suggests that a very substantial fraction of the fiscal stimulus enacted in the 2009 Recovery Act translated rapidly into increased spending. The recent US experience also suggests that fiscal stimulus can be reversed. The large-scale support for states and localities provided in the Recovery Act has already been withdrawn. Federal infrastructure spending has largely run its course. Un-employment-insurance expansions are already being run down. The vast majority of observers of Congress do not expect tax cuts for households legislated in 2009 and at the end of 2010 to become permanent. More generally, the cyclically ad-justed Federal deficit suggests that there exists considerable scope for temporary action. There remains the question, on which our analysis is mute, of whether temporary fiscal stimulus is inconsistent with a perception of long run fiscal consolidation. There is no necessary inconsistency. There is experience with temporary expansions, and also with phased-in long-run deficit reductions (e.g. The 1983 Social Security bipartisan agreement of the Greenspan Commission). But it is possible that short run fiscal expansion undercuts the credibility of long-run fiscal consolidation. It is also possible that, in a world with limited political energy and substantial procedural blockages, that effort towards one objective compromises the other. On the other hand, as Cottarelli (2012) warns, if countries that have committed themselves to short-term deficit reduction as a down payment on a move to long-term sustainability find that “if growth slows more than expected… [they are] inclined to preserve their short-term plans through additional tightening, even if hurts growth more” then: “my bottom line:… unless you have to, you shouldn’t.” His fear is that fiscal austerity will be counterproductive because “interest rates could actually rise [even] as the deficit falls” if “growth falls enough as a result of a fiscal tightening.” We do not see a good way to address this issue analytically or empirically. Clearly, the risks of short run fiscal stimulus having adverse effects on long-run credibility will be greater in settings where government debt already carries a significant risk premium. Clearly, it will be larger when there is evidence that deficit fears are impacting on stock market valuations and on investment decisions. But even in the absence of such evidence, there is always the risk that market psychology can change suddenly. Even if it is granted that the stimulus can be both timely and temporary, the question of how large it can be while preserving these attributes remains for future research. Our analysis has simply taken it as given that, when the zero lower bound constrains monetary policy does not change when fiscal policy is altered. As is clear from the 113

actions around the world, central banks do have room for maneuver even when there is not room for changes in interest rates. The room for maneuver principally takes the form of (i) the ability to operate directly on a wider than normal range of financial instruments, and (ii) the ability to precommit future policy. As a matter of logic, it is possible that increased fiscal actions would call forth a contractionary monetary policy response by causing central banks to use these measures less expansively. We doubt the realism of this concern. At least in the United States, the Federal Reserve has sought to encourage short run fiscal expansion. There are limits to the efficacy of nonstandard measures, so even if they were contracted, the impact is likely to be to only partially offset fiscal expansions. Moreover, expansionary fiscal policies may operate to call forth a more expansionary monetary policy response by, for example, raising the credibility of commitments to monetary expansion after the economy has recovered, or increasing the extent of debt monetization in the short run. Perhaps, though, as Mankiw and Weinzerl (2011) suggest, arguments for temporary fiscal expansion are even better arguments for expansionary monetary policy. Here too we are skeptical. While a much richer model would be necessary to fully address the issue, it seems to us that if fiscal policy is self financing it will be desirable to use as an instrument once it is recognized that (i) with uncertainty about multipliers diversification among policy instruments is appropriate as suggested by Brainard (1967), (ii) expansionary monetary policies carry with them costs not represented in standard models (including distortions in the composition of investment, impacts on the health of the financial sector, and impacts on the distribution of income), and (iii) the historically-clear tendency of low interest rate environments to give rise to asset market bubbles. http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2012_spring_bpea_papers /2012_spring_BPEA_delongsummers.pdf.

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