Monday, September 17, 2012

The crisis atmosphere around the euro (temporarily) eases a bit as the US Presidential election approaches

Peter Ehrlich in Schuldenkrise: So sieht es in den Euro-Problemländern aus Financial Times Deutschland 17.09.2012 reports in a vaguely-sourced but easily believable statement: "... so heißt es in Euro-Kreisen, hätten viele Regierungszentralen Anrufe aus dem Weißen Haus bekommen, doch bitte vor der US-Präsidentenwahl nicht für Unruhe zu sorgen." ("... so it is said in euro-circles, many government central agencies have received calls from the White House, asking strongly not to create any unrest before the US Presidential election.")

It would be very surprising if the Obama Administration weren't doing that.

The article is mainly about how the euro crisis is in a period of temporary calm, thanks to the European Central Bank's (ECB) new program to purchase sovereign debt in secondary markets and to the German Federal Constitutional Court upholding Germany's participation in the European Stability Mechanism (ESM). Ehrlich lists Cyprus, Greece and Spain as the three countries presenting the most immediate problem to EU decision-makers.

Spain may or may not ask for new bailout funds. Greece needs more aid, but the Troika (EU, IMF, ECB) is expecting to wait until the end of October - a few days before the US Presidential election - to decide on the next steps there. Athens News editorializes about the draconian steps the Troika is demanding and wonders whether keeping Greece in the euro is really even their policy any more (Rein in the troika 09/14/2012):

A barrage of recent statements from top European officials - from German Chancellor Angela Merkel and French President Francois Hollande to European Commission President Jose Manuel Barroso and European Central Bank president Mario Draghi - has stressed that Greece must stay in the eurozone. The stated precondition is full implementation of Athens’ bailout obligation.

But the troika’s decision to reject about half of the 11.5 billion euros in budget cuts presented by the government - while at the same time piling up demands for the complete deregulation of labour relations, thousands of direct layoffs and a hike in the retirement age - raises questions about the intentions of Greece’s lenders.

The proposed abolition of the eight-hour workday and the five-day workweek, coupled with plans to facilitate massive private sector layoffs, has sent new shockwaves through a society already devastated by massive cuts in pensions, wages and social welfare spending.
And Cyprus has a problem that seems ready-made for German Chancellor Angela Merkel's preferred method of giving the patient medicine that addresses their immediate problem but makes them much sicker in the short run.

According to Ehrlich's summary, Cyrus may need €11-16 billion to keep up payments on its national debt, currently at 75% of GDP. That's small potatoes for the ESM to provide. But ESM aid is expected to be treated as an increase to debt, which would double the debt load Cyprus already is having trouble carrying. And presumably Angie will insist on new, brutal fiscal austerity measures accompanying the new aid, which will make Cyrus' economy shrink and thereby make the debt-to-GDP ratio even worse. Awesome, just awesome! Another country weeks away from being financially crushed into the ground by Angie-nomics!

Italy's interest rate on its bond is relatively good at the moment as they implement Angie Austerity that will make their economic situation and debt ration worse. And in Ireland and Portugal: austerity, austerity, austerity.

Daniela Schwarzer of the think-tank Stiftung Wissenschaft und Politik writes in Die EZB allein kann den Euro nicht retten Die Zeit 17.09.2012 about the major issues coming up for the European Council at their meeting in December: unified bank governance, establishing the next steps in the EU becoming a fiscal and transfer union, lack of democratic legitimation in the EU. All taking place in the middle of a depression, with a euro crisis keeping the eurozone constantly on the brink of a new financial meltdown, and a pitiful lack of sensible leadership from the EU partners. That means Germany in particular, but both Britain and France have nearly as much responsibility for the leadership failure as Germany. Britain not least because Prime Minister David Cameron's own austerity policies, chosen by London and not imposed from Berlin, are threatening to create a "lost decade" of stagnation for Britain. Given that the depression started in 2007, we're already half way into a "lost decade" on both sides of the Atlantic.

Schwarzer also notes that the German Constitutional Court's ESM decision last week effectively removes the Court as an excuse for politicians like Merkel not to proceed with necessary common measures for the health of the EU and the eurozone. Her performance so far does not give us great reason to hope that she will do so.

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