Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

News & Supplemental  

Berlin has the same old new plan. But this time it’s “special”

There was some positive sounding signals coming from Merkel’s government recently: Berlin was open to more “pro-growth” policies for the eurozone, yielding to the growing calls for a duel policy of “structural reform” (i.e. austerity madness) and some form of stimulus. Unfortunately, that seems to come with the constraint of no additional spending. Hmmmmmmmm:

German opposition leader says Merkel embraces idea of EU growth pact alongside fiscal treaty

By Associated Press, Published: May 24

BERLIN – Germany’s opposition leader said Thursday that Chancellor Angela Merkel has accepted the need to add a separate set of measures promoting growth to the European Union’s treaty enshrining fiscal discipline.

Sigmar Gabriel told reporters after a two-hour closed-door meeting between Merkel and top lawmakers that the government has “significantly moved toward accepting a pact for growth and investment.”

Hollande’s election this month shifted the political tide in Europe away from talk about austerity measures toward ways of fostering growth as Europe is on the brink of a recession, with southern European nations such as Greece, Portugal or Spain particularly hard hit.

Merkel recently also started talking about spurring growth, although she strictly opposes the idea of fostering growth through more spending, saying it would only make Europe’s debt woes worse. Instead, she maintains that growth can be fostered through a more effective use of existing EU funds and implementation of structural reforms.

Previously, the conservative chancellor also refused to link the ratification of the fiscal pact to growth-promoting measures.

“The government has realized today that it can only win France’s approval and a two-thirds majority in Parliament through changing its position,” said parliamentary caucus leader Juergen Trittin of the opposition Greens.

However, it remained unclear Thursday what exactly a growth pact would entail, and whether Merkel has accepted that more spending might be necessary.

So did Merkel “accept that more spending might be necessary”? Ummmmmmmmmmmm…no. At least, not if Berlin is co-signing and it lacks a ‘relinquishment of national sovereingty’ clause:

NY Times
As Euro Bond Wins Supporters, Details Remain Vague
Published: May 27, 2012

FRANKFURT – To euro zone countries in need, euro bonds would be a noble expression of European solidarity and a crucial instrument for preserving the common currency.

To Germans and quite a few others, though, euro bonds would be a lot like co-signing a loan for a deadbeat brother-in-law.

Those caricatures have dominated a debate that has left Europeans deeply divided on a central question: Should euro zone countries create common bonds to reduce borrowing costs for members that cannot get affordable credit on their own?

But despite the intensity of the debate, even as political upheaval in Greece and bad bank loans in Spain mushroom into existential threats to the currency union, the euro bond remains only the vaguest of concepts.

About the only thing clear is that Germany and some other creditworthy northern countries oppose adopting such bonds anytime soon. Meanwhile, François Hollande, the new French president, seems keen on speeding things up – even if he has not quite articulated how his idea would work.

“You don’t know what François Hollande is talking about when he talks about euro bonds,” said Jacques Delpla, a member of the French Council of Economic Analysis, a panel that advises the government. “An open bar with German money for Greece and Spain? That doesn’t work.”

At their meeting in Brussels last week, European Union leaders agreed only that euro bonds deserved further study.

Mr. Delpla is the co-author, along with a German economist, Jakob von Weizsäcker, of one of the few detailed proposals so far. They outlined how euro bonds might be used to ease financial pressure on countries like Greece, Spain or Italy while addressing German concerns by encouraging more prudent government spending.

The basic idea of euro bonds does enjoy wide support among economists. Proponents also include Christine Lagarde, managing director of the International Monetary Fund. And last week the Organization for Economic Cooperation and Development in Paris called for some variation of euro bonds.

The various models share a basic idea: In addition to each country’s raising money by issuing its own bonds, as is now the practice, they would put at least some of the debt into a common pool. These pooled bonds would be issued by some kind of joint European debt agency, with all members assuming shared responsibility for repayment.

The problem is that talk of euro bonds inevitably raises fundamental questions about the nature of the European Union. Such bonds would require European countries to watch one another’s spending much more closely, and each country would have to cede some control over its own budget.

For euro bonds to work the way U.S. Treasury securities do, investors would need assurances that they are backed by a central treasury, or at least an agency with direct access to tax revenue from each member state.

“This needs a very strong institutional setup,” said Guntram B. Wolff, deputy director at Bruegel, a research organization in Brussels. “If you are going to sell them to a Singaporean investor, the Singaporean investor needs to know who is going to pay that bond.”

Once European governments began financing one another on a large scale, they would certainly also want more say over one another’s budgets and big-ticket items like military spending or pension systems. For those who advocate a more powerful “United States of Europe,” these changes would be good. But they would represent a huge transformation of the decentralized Europe that exists today.

“Immediately behind the euro bond proposal lurks political union,” said Uri Dadush, a director at the International Economics Program at the Carnegie Endowment for International Peace in Washington.

“The moment you start saying, ‘Give me half your tax receipts,’ we are talking serious stuff,” Mr. Dadush said. “We are talking about giving up major sovereignty.”

The European Central Bank probably has the credibility to play the role of a euro bond debt-issuing agency. But the bank would almost certainly refuse to do so, seeing it as a threat to its political independence – and a violation of the prohibition on using the bank to finance governments.

But even if the E.C.B. did not issue the debt itself, euro bonds would need at least the central bank’s tacit support, Mr. Dadush said.

A big reason U.S. Treasury securities have retained credibility with investors, for example, is that despite official denials of complicity, there is an assumption that the Federal Reserve would not let the U.S. government go bankrupt. The E.C.B. would probably be much less likely to accede to such an implicit guarantee.

The German chancellor, Angela Merkel, made an argument similar to Mr. Dadush’s at last week’s meeting in Brussels, saying Europe must become more economically and politically integrated before it could issue common debt. But the federal Europe she seems to have in mind could take years to build, by which time the euro could lay in ruins.

Germany also fears that lower interest rates would simply reinforce irresponsible spending habits by countries like Italy. To German eyes, Italy, Greece and others did not take advantage of the low interest rates available in past years to make their economies function better.

In a short statement to the news media after the Brussels meeting, Ms. Merkel said “several participants noted that the common interest rates with the introduction of the euro really didn’t lead to improvements in the economic competitiveness of all the euro countries.”

One European diplomat, speaking on condition of anonymity, said even a step toward euro bonds could reassure investors who have been watching Greece teeter and fear a bank run in Spain – and wondering what happens next. “The fundamental issue,” he said, “is who or what stands behind the euro.”

Ok, so Merkel seems to acknowledge that the growing call for eurobonds is fueled by a desire to quell the self-reinforcing crisis dynamic where concerns over a country’s credit leads to a spike in borrowing costs and an even greater crisis. That self-reinforcing death spiral is happening right now and Merkel appears to agree that eurobonds would be an effective solution for preventing this. And that’s why she opposes it. The debt crises are apparently an unpleasant necessity needed to “avoid reinforcing irresponsible behavior”. And this eurobond opposition in Berlin exists even when the “pro-growth” sides are apparently open to the idea of a “United States of Europe” model where budget-making authority is handed over in exchange for pooled eurobonds. That’s pretty much a sovereingty fire-sale and it’s still not acceptable.

Now why on earth would Berlin be unwilling to accept having their neighbors basically hand themselves over for cash? That’s pretty much the dream, right? Wrong. Get ready for mini euro-Chinas:

Six-Point Growth Plan Merkel Prepares to Strike Back Against Hollande

Translated from the German by Christopher Sultan

The more European leaders talked at a dinner last Wednesday, the grimmer Angela Merkel looked. One after another, they spoke out in favor of the joint assumption of debt and against the strict austerity course Berlin is calling for. The chancellor stared silently at the man who was responsible for this change of mood — France’s new president, François Hollande, who noted with satisfaction that there was “an outlook for euro bonds in Europe.”

Merkel disagreed, saying that euro bonds are not the right tool, but to no avail. Only a minority stood behind the German leader. Even European Council President Herman Van Rompuy said, at the end of the dinner, that there should be “no taboos,” and that he would examine the idea of euro bonds. “Herman,” Merkel blurted out, “you should at least say that some at this table are of a different opinion.”

Merkel’s world had been turned upside down. For the first time in years, the chancellor did not set the tone at an EU summit, nor did she and the French president agree on joint positions in a backroom before the meeting.

A Judo Attack

But Merkel is an experienced opponent. She knows that she is now on the defensive in Europe, and she is planning her counter-attack. She believes that euro bonds would enable the crisis-ridden countries to lower their borrowing costs, and that the necessary structural reforms would be postponed. This is why she now wants to counter Hollande’s proposals with a principle familiar to judo fighters: using your opponent’s momentum for your own attack.

When it comes to energy projects, the European Commission places special emphasis on projects such as connecting the wind farms in the North Sea and the cross-border power and gas lines among the Baltic countries, between Northern and Southern Europe and to North Africa. It also wants to promote international natural gas pipelines like Nabucco and expanding efficient internet connections. While Germany and France agree on the importance of these projects, their differences lie elsewhere. To stimulate growth throughout Europe, Merkel’s advisors don’t just want to implement measures that cost money. The Germans are convinced that growth can also be generated less expensively, using structural reforms that require nothing more than living with hardships.

Six-Point Plan

According to an internal document making the rounds at the Chancellery, German government experts have developed a six-point plan that is reminiscent of former Chancellor Gerhard Schröder’s Agenda 2010 economic reforms, and seeks to harmonize austerity and growth in Europe once again. The document defines the position with which Merkel intends to enter into negotiations with Hollande and the other EU partners.

In the plan, the Germans focus primarily on measures that have been successful in Germany in the past, and that placed the country in the role of Europe’s engine for growth. Accordingly, Merkel wants to launch Europe-wide programs to promote start-ups and small and mid-sized business, like the programs offered by the KfW development bank in Germany. Under the German programs, government agencies have to approve investments within a fixed time period, and the applications are considered automatically approved if they are not denied within that time period.

Merkel also wants EU countries with high unemployment to use Germany as a model in reforming their labor markets. This would mean relaxing protections against wrongful dismissal and introducing more limited employment circumstances, called “mini-jobs” in Germany, with lower tax and contribution burdens. And like Germany, these countries would also be expected to develop a dual education system, which combines a standardized practical education at a vocational school with an apprenticeship in the same field at a company in order to combat high youth unemployment.

Merkel’s advisors have also noticed that southern EU countries still own many companies that enjoy special protections. Under their plan, privatization agencies or special funds would be established in these countries to privatize the state-owned businesses. Foreign investors could be attracted with tax benefits and less stringent regulations.

The advisors also recommend the establishment of so-called special economic zones, like the ones that once ushered in China’s economic ascent. Finally, the Germans want Europe’s southern countries to invest more in renewable energy, reduce tax barriers and promote worker mobility. All of this, they reason, strengthens Europe’s competitiveness.

So the new six-point plan that’s supposed to counter the growing calls for more pro-growth economic policies is going to include creating mini-Chinas. Well, at least that might explain the apparent desire of Berlin’s policy-makers to permanently impoverish its neighbors…you can’t mimic China without a seemingly inexhaustible supply of poor migrant workers. And the best part of the whole plan? It’s cheap! Not only is there going to be a bunch of state-asset fire-sales but the main cost for these types of “structural reforms” is apparently just “living with hardships”. And since you can’t monetize hardship that means it’s free! Sweet! Isn’t it awesome how money = karma. It really simplifies things.

So how did Berlin’s policy-makers arrive at these wise and merciful policy (and cost effective!) solutions for their ailing neighbors? By learning a few lessons from their own experience with reunification. It was long, painful, and expensive:

NY Times
Germany Looks to Its Own Costly Reunification in Resisting Stimulus for Greece

Published: May 25, 2012

MUNICH – When Germany wants to understand Greece and the crisis afflicting Europe it not only looks south to the Continent’s periphery but also turns inward, to the former East Germany, still struggling more than two decades after German reunification.

To an extent not often appreciated by outsiders, the lessons provided by that experience – with the nation pouring $2 trillion or more into the east, by some estimates, to little immediate benefit – color the outlook and decisions of policy makers and the attitudes of voters, a majority of whom would like to see Greece leave the euro zone, polls show.

Most economists agree that Germany could do more to help revive growth throughout the euro zone, and there are reports that Chancellor Angela Merkel is preparing to propose a major European Union plan to accomplish that. But the German reluctance to underwrite the economies of Greece and other struggling countries is not just a matter of the parsimonious Germans hoarding their funds, as it is so often portrayed, but a sense that subsidies do not breed successful economies.

“Money alone doesn’t help,” said Simon Huber, 44, out for a stroll recently near Sendlinger Gate here. “You’re only saved when you save yourself.”

Though regularly lectured by their colleagues across the Atlantic about the need for stimulus measures to reverse the sagging fortunes of countries like Greece and Portugal, German experts believe they have a lot more experience trying to revive uncompetitive economies locked in currency regimes after nearly 23 years of dealing with the former East Germany.

“We performed a real-life experiment,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research here.

While unemployment in the former West Germany is 6 percent, it remains stubbornly higher, at 11.2 percent, in the east. In 2010 gross domestic product per capita was more than $40,000 in the former West and just under $30,000 in the former East, compared with 1991 figures of $27,500 in the West and about $12,000 in the East. But much of the narrowing in the gaps between east and west, experts say, is attributed to the migration of job seekers westward as much as to any significant improvement in the east.

There have been success stories in the revival of cities like Dresden and Leipzig, and some regions, especially on the southern edge of the former East Germany, are doing better. But the eastern part of the country today is known for perfectly rebuilt town squares that sit empty for much of the day and new stretches of autobahn with few drivers on them.

“Germany made huge investments in infrastructure in East Germany,” said Klaus Adam, a professor of economics at the University of Mannheim. “The hope that the rest would follow has not been fulfilled. You need to get the productivity figures up.”

The magazine Der Spiegel reported that a six-point plan is in the works that includes incentives for midsize companies, a loosening of protections against firing for workers, special economic zones and even a version of Germany’s system of dual training divided between vocational school and hands-on work at companies. State-owned enterprises would be sold in a process similar to that of the Treuhand, the agency that helped privatize East Germany.

“The Mediterranean area should become like the Federal Republic, only with better weather,” the magazine said.

Yet the one-dimensional portrayal of Germans as heartless austerity taskmasters is only part of the story. A basic sense of thriftiness is also coupled with a strong belief in social safety nets; this is not unchecked capitalism, but a model known here as the social market economy.

“The limit of German brotherhood extended to East Germany, and they saw what happened with two trillion euros over the past 20 years,” said Michael C. Burda, an economics professor at Humboldt University in Berlin. “And these are people they love. They don’t consider the Greeks their brothers.”

Great, so the lessons from Germany’s decades of dealing with the challenges of reunification appear to be:

1. Privatization, declining wages, deregulation, and mini-Chinas = good.
2. Investments in infrastructure and social well-being = bad.

So I guess the article below is what we get to look forward to, but without all that awful wasteful social welfare spending. International ‘tough love‘, interestingly, sometimes resembles an intranational transregional shakedown:

NY Times
East Germany Counts the Cost Of Privatization
By Brandon Mitchener
Published: July 12, 1993

DRESDEN – One of the lasting lessons of East Germany’s costly conversion from a command to a social market economy is that privatization seldom means automatic salvation.

First, an ill-conceived currency union with West Germany, combined with notoriously low productivity, rendered most of the region’s manufactured goods vastly overpriced. Then its traditional customers in Eastern Europe vanished as old trade ties were severed.

Now, with Western Germany and much of Europe languishing in recession, even privatized East German companies that have slashed costs and produce competitive products suddenly find their survival at stake again.

“We’re getting more and more companies that weren’t ready for the free economy when they were privatized by the Treuhand,” said Michael Sagurna, chief spokesman for the southeastern state of Saxony. He was speaking of the government agency charged with selling off East Germany’s state-owned assets.

More and more companies want to have a new crack at the process, said Alexander von Klaudy, head of acquisitions for Deutsche Industrie-Holding GmbH, part of Deutsche Bank. “We think we’ll get a lot of business from companies that aren’t entirely happy with their privatization,” he said.

The recession, and a series of serious mistakes, are also rendering sale of the Treuhand’s remaining 700 privatization candidates more difficult and expensive and increasing the likelihood that the agency will be around for years rather than close at the end of 1993 as originally planned.

One of the agency’s most complicated and controversial tasks in coming years will be policing the fulfillment of investors’ contractual promises. As a rule, the Treuhand refuses to take back companies that it has already privatized, although in a few cases it has made exceptions. Eighty percent of investors meet their obligations, in fact, but with evidence of abuses accumulating, the Treuhand recently announced an expansion of its audit staff to 550 from 350 by the end of the year.

In recent weeks, at least three cases have come to light involving unscrupulous investors who plundered their Eastern purchases for personal profit.

Many entrepreneurs in the East, including those no longer directly involved with the Treuhand, describe an almost conspiratorial alliance of regional bureaucracies, banks and competitors making it impossible for them to stay afloat. The IWH economics research institute in Halle, in a June report, said there was reason to fear a “deindustrialization of the East German landscape.”

The construction mafia in West Berlin barely lets us breathe,” said Dieter Hasler, director of Eletro-Anlagen-Bau Kleinmachnow GmbH, an electrical equipment maker based in Brandenburg.

Peter Dittrich, a consultant to Atlas, a mini-Treuhand set up by the state of Saxony to salvage 140 unsold Treuhand companies, defended government intervention as a growing political necessity. “There are some areas that would have 70 percent unemployment if these companies died,” he said.

Mr. Sagurna cited MuZ as an example of state support with a purpose. “If you compared a Trabi with a Golf,” he said, referring to East Germany’s failed attempt to copy the Volkswagen people’s car, “it was safe to say the Trabi wouldn’t survive competition. But if you compare an MuZ with a western motorcycle, you would probably conclude that it’s a good motorcycle that’s worth building.”

But Mr. Späth, of Jenoptik, ridiculed the government’s plans to salvage “industrial cores” in the East. He said it was a sop to East Germans “to call everything that’s left an industrial core.”

Rather than nurture unprivatized East German industries back to competitive health, which is no guarantee of market success, the Treuhand should stick to its original mission of selling off companies at any cost, critics say.

Yes, international ‘tough love’ does sometimes resembles an intranational transregional shakedown, but it doesn’t have to be so expensive. Lesson learned.

Ok, so the six-point plan for ailing economy’s appears to be:
1. De-industrialization at any cost
2. Re-industrialization at any cost (China-style!)
3. Rinse and repeat at any cost
4. Rinse and repeat at any cost
5. Rinse and repeat at any cost
6. Eutopia (China-style!)

Oh wait! But what is this new news I see? Is the Frankfurt Group having a change of heart? Perhaps it’s been recognized that the eurobonds-for-sovereingty swap was one of the most amazingly cheap forms victorious economic conquest ever achieved? Naaahh…think ‘eurobonds turned into an austerity straight-jacket’…or something like that:

Germany Seeks Financial ‘Redemption’ for Europe
By Peter Coy on May 28, 2012

Germans hate the idea of covering the debts of the big spenders of Southern Europe, but the hottest new idea for sharing Europe’s debt burden comes from … Germany.

Surprising but true: Germany’s opposition parties have gotten Chancellor Angela Merkel to reconsider an idea floated last winter that involves joint European liability for nations’ sovereign debt.

The idea comes from the German Council of Economic Experts, also known as the “wise men.” It’s called the European Redemption Pact (PDF), which sounds a bit religious to the American ear but isn’t intended to be.

Since fresh thinking on the European debt crisis is badly needed, it’s worth taking a look at what the wise men advise. Here’s the plan in a nutshell:

The debt of the 17 countries belonging to the single-currency euro zone is split into two parts. The portion up to 60 percent of each nation’s gross domestic product stays on the books, unchanged.

The portion of nations’ debt exceeding 60 percent of GDP is transferred into something called the European Redemption Fund.

The 17 countries are still liable for the portion of their debt that’s transferred in the fund. They have 20 or 25 years to pay it off.

Legally, however, all 17 nations are jointly liable for the debt placed in the fund. This is a way for low-debt nations such as Germany to backstop high-debt nations like Greece, giving peace of mind to their creditors and lowering interest rates.

To make sure countries pay off their debt in the European Redemption Fund, some of their national tax revenue would be earmarked for repayments. They would also have to commit to fixing national finances to free up money for debt service.

Having gotten the rest of their debt down to 60 percent of GDP, countries wouldn’t be allowed to run it back up. There would be automatic “debt brakes,” as Germany and Switzerland already have.

The responsibility of Germany and other creditor nations is strictly limited to the amount of money that’s put into the redemption fund. That makes this plan different from “euro bonds,” which some countries are pushing. Euro bonds would be new bonds for which all the euro zone countries would be jointly liable. There would be no cap on the size of borrowing via euro bonds.

Befitting a plan originating in Germany, the proposal is not exactly generous. It’s hard to imagine how a country like Greece could immediately begin repaying the European Redemption Fund while keeping the debt remaining on its books at a mere 60 percent of GDP.

But at least it’s something. Establishing the principle of joint liability for debt could open the door to a more forgiving (read: realistic) plan in the future.

Is anyone else feeling like they’ve seen this movie before?


8 comments for “Berlin has the same old new plan. But this time it’s “special””

  1. its the old Germany seeking alternative methods of binding nations together under her control in closer subservience under long term debt, fully aware that some will never repay and suffer the consequencies to relinquish full sovereignty to German dictatorship

    Posted by Harry Beckhough | May 29, 2012, 12:43 am
  2. It seems so much easier now, this once arduous task of bringing all of Europe to heel. And what else can we name the sub-units of this “mini-China syndrome” but Cantons?

    Posted by Rob Coogan | May 29, 2012, 3:41 am
  3. @Harry Beckhough–

    Welcome to the website, once again. I continue to be somewhat surprised that more people haven’t figured out the German/Underground Reich plan by now.

    At your convenience, note the excerpt published by Dorothy Thompson in 1940, highlighted in the “Memorial Day Post” on the front page of this website.

    The machinations now being realized are long in the making,and a foolish, myopic world is ignoring the mandates of history and squandering the sacrifice of World War II heroes, such as yourself.


    Dave Emory

    Posted by Dave Emory | May 29, 2012, 4:37 pm
  4. Europe’s strange mix of immediate financial union coupled with only a seemingly partial attrition of sovereignty for the members is leading to these bizarre conditions. Does the entity known as the ‘Greek government’ any longer have any meaning except as a legal device to indebt the people on that peninsula to a transnational cabal?
    Watch for paradoxical developments as desperate (motivated) labor seeks to move across borders to regain an income. German popular chauvanism is already causing a reaction against the process of erasing borders, at least when it comes to retaining German identity. The EU process is guaranteed chaos.

    Posted by Dwight | May 30, 2012, 5:00 am
  5. One more advantage of turning your neighbors’ economies into a frothy mess: skimming off the cream:

    Greeks Flock to Germany Even as They Criticize It
    Published: Wednesday, 30 May 2012 | 5:51 AM ET
    By: Andy Eckardt and Carlo Angerer, NBC News

    Thousands of well-educated workers are fleeing Greece as the euro zone crisis batters their homeland.

    Germany, Europe’s economic powerhouse and a country that has been criticized by many Greeks over its harsh demands for austerity cuts in return for bailout cash, has experienced an influx of young skilled immigrants.

    Der Spiegel magazine noted that while Greek newspapers “printed cartoons depicting the Germans as Nazis, concentration camp guards, and euro zone imperialists who allow their debtors to bleed to death,” the Greeks have kept arriving – bringing an “anything is better than Athens” attitude with them.

    With more than 50 percent of young Greeks out of work, it’s not surprising that official statistics show the number of Greeks who moved to Germany increased 90 percent during 2011.

    Unemployment rates have consistently been shrinking in Germany in recent years and the economy is thriving, despite Europe’s ongoing financial crisis. Relaxed cross-border employment regulations for member states of the European Union also make Germany an attractive choice for job seekers. While Germany is in need of specialized workers, however, the Greek labor market has little to offer.

    Warning of ‘Cold War’ Over Cuts

    “It is virtually impossible to find a job in Greece at the moment,” says Christos Christoglou, an inspection engineer who took a job at German chemical and pharmaceutical giant Bayer at the start of the financial crisis in June 2010. “It is not that there are only very few jobs for young graduates to seek, no, there are none, zero, there is nothing.”

    There was also a significant spike in the number of immigrants relocating to Germany from other economically depressed southern European countries last year, with official statistics showing an increase of 52 percent from Spain, 28 percent from Portugal and 23 percent from Italy.

    Posted by Pterrafractyl | May 31, 2012, 8:27 pm
  6. Oh boy, this will really calm things down:

    German Court Won’t Rule on Bailout Fund for 8 Weeks
    By Patrick Donahue – Jul 16, 2012 6:37 AM CT

    Germany’s top court will take more than eight weeks to decide whether to suspend the euro-area’s permanent bailout fund, leaving Europe’s anti-crisis coffer less than half full to respond to the debt crisis.

    The Federal Constitutional Court in Karlsruhe will issue a ruling on bids to halt Germany’s participation in the European Stability Mechanism and the fiscal pact on Sept. 12, it said today in an e-mailed statement. That’s more than two months after it held a hearing on the measures.

    “The court has held a comprehensive hearing on the issue and will now take the time it needs to reach a decision,” German government spokesman Steffen Seibert told reporters in Berlin today. Finance Minister Wolfgang Schaeuble warned the hearing last week that a delay in activating the ESM “could lead to a significant worsening” of the crisis.

    The delay could complicate efforts to resolve the 2 1/2- year-old crisis as European leaders squabble over the details of bailout conditions, bank rescues and burden sharing. In an interview yesterday, Chancellor Angela Merkel gave no ground on German demands for more centralized control over euro member states in return for joint liabilities.

    Chiding states which sought to slow moves toward more central control, Merkel told broadcaster ZDF that a so-called banking union involving a bloc-wide financial overseer will have to include joint oversight on a “new level.” She said efforts to advance on “solidarity” without supervision will fail.

    The complaints targeting the ESM and fiscal pact were brought by a group of lawmakers, academics and political groups filing separate suits seeking an injunction. They argued that the legislation designed to overcome the three-year-old debt crisis transfers constitutionally mandated authority from German lawmakers to Brussels and undermines democratic rule.

    Vosskuhle at one point in the hearing last week asked Rolf Strauch, a board member for the EFSF, what the effects would be if the court took longer to decide.

    German Bundesbank President Jens Weidmann said euro leaders had caused damage by failing to define more clearly their conclusions at the summit. He told Dutch newspaper Het Financieele Dagblad on July 14 that euro nations “should discuss giving up sovereignty with the same openness as the question of how to resolve the debt problem collectively.”

    As governments in Spain and Italy struggle under the burden of higher borrowing costs, Weidmann, Germany’s chief central banker and a European Central Bank Governing Council member, told Boersen-Zeitung that Italy’s higher yields don’t justify a request for bailout assistance. Euro bailout funding should be deployed only as a last resort, he said.

    “If Italy stays the course on reforms, it’s on a good path,” Weidmann told the newspaper in an interview. Asked whether the euro area’s third-largest economy needs to tap the fund, he said, “No, I don’t see Italy in that situation.”

    That’s right Italy, just stay the “austerity”-course. Things are going great.

    Posted by Pterrafractyl | July 16, 2012, 8:23 pm
  7. The ECB has a new super awesome plan for quelling the ongoing panic in the distressed eurozone bond markets. The plan contains the kind of super awesomeness that’s pretty much what we should expect by now:

    The European Central Bank’s Ongoing Power Grab

    By Matthew Yglesias

    Posted Wednesday, Sept. 5, 2012, at 10:14 AM ET

    Mario Draghi is out with a new European Central Bank plan that, on its face, doesn’t make sense.

    For the loose money crowd, he’s offering potentially “unlimited” ECB purchases of peripheral government bonds. But on the other hand, he’s promising that these purchases will be “sterilized” (which I don’t believe can actually be done in unlimited quantities) He’s also saying that the bond purchases will be limited to government bonds, which turns it into a kind of subsidy for peripheral governments rather than a general monetary easing. Last but by no means least, there’s no firm target for what the bond purchases are supposed to accomplish and the purchases are stipulated to be “conditional.”

    The last point is the most important one. As monetary policy, this doesn’t make sense. But as power politics it makes a ton of sense.

    What the ECB is doing, in essence, is setting itself up as the shadow government of Italy, Spain, Portugal, and perhaps Ireland. If the governments of those countries do what Draghi wants, Draghi will provide them with generous subsidy. If the governments of those countries don’t do what Draghi wants, he’ll use a monetary laser to destroy their budgets. Fear will keep the peripheral states in line.

    Unlimited “sterilized” bond purchases, eh? That sounds like the kind of measure intended to placate the German government and Bundesbank over the inflationary fears of “unlimited” ECB bond purchases. Not that it will help:

    Merkel Ally Fuchs Says Germany Backs Draghi With Conditions
    By Patrick Donahue and Francine Lacqua – Sep 5, 2012 8:24 AM CT

    Germany will back European Central Bank bond purchases to help overcome the euro-area debt crisis only if such an operation is limited and recipient countries agree to strict conditions, said a senior ally of Chancellor Angela Merkel.

    Michael Fuchs, a deputy parliamentary caucus leader in Merkel’s Christian Democratic Union, said that Germany would oppose any ECB plan that foresaw “too much” bond buying without ensuring countries in need of help commit to overhaul their economies.

    “Germany is a country which is very much afraid about inflation,” Fuchs told Bloomberg Television today, speaking in English. “We don’t want to have the ECB just buy on the market, either in the primary or secondary market,” he said. “The ECB can do it only if there are certain conditionalities, if the countries are really doing their homework.”

    The remarks are further evidence that Germany will support ECB President Mario Draghi’s plan to buy sovereign debt as a way to ease bond yields in countries such as Italy and Spain so long as governments sign up to strict conditions in return and the euro-area’s rescue funds enter bond markets first. Merkel, speaking in Ottawa last month, said the ECB was “counting on political action in the form of conditionality as the precondition for a positive development of the euro.”

    Unlimited Purchases

    Draghi’s proposal involves unlimited purchases that will be sterilized to assuage concerns about printing money, according to two central bank officials briefed on the operation. The ECB chief is due to give a press conference in Frankfurt tomorrow.

    Ah yes, the irrational inflation concerns in the midst of a near depression and “strict conditions” (it’s not “austerity”, it’s just “strict conditions”). Well, ok, the inflation concerns might not be entirely irrational…even Spain is experiencing higher inflation. At least all of that austerity strict conditionality on all of its aide has probably put a damper of Spain’s inflation rate. You know, useful stuff like VAT tax increases, which not only helps curb Spain’s deficit but also should help reduce inflation. That’s how it works, right?

    UPDATE 1-Inflation adds to Spanish woes with jump to 2.7 pct

    Thu Aug 30, 2012 1:31pm IST

    * Spain consumer prices rise 2.7 pct in Aug, up from 2.2 pct July

    * Fuel prices behind rise, says Statistics Institute

    * Nasty mix for Spain of rising prices and declining economic output

    * Prices likely to rise in after Sept. 1 VAT hike

    MADRID, Aug 30 (Reuters) – Spanish consumer prices surged in August driven by higher fuel costs and a value-added tax hike in September could drive another jump, complicating Spain’s efforts to get out of recession and generate the growth needed to reduce its debts.

    EU-harmonised consumer prices rose by 2.7 percent year-on-year in August, flash data from the National Statistics Institute (INE) showed on Thursday, up from 2.2 percent in July and much higher than a market consensus for an unchanged reading.

    Prices could well rise further from September 1 when value-added tax rises to 21 percent from 18 percent, raising prices for consumers already struggling under the weight of falling wages and unemployment of almost 25 percent.

    Spain also depends on imports for some 70 percent of its energy needs, meaning higher fuel prices raise costs for businesses.

    “We can see an energy cost effect here, but it might also be that some businesses have raised prices on products before the September VAT hike, so they can then say they haven’t raised prices when it happens,” said Nicolas Lopez, economist at M&G Valores.

    He said inflation could rise as high as 3.7 percent in September.

    Spain’s inflation figures come before those for the wider euro zone on Friday, which should show inflation at 2.5 percent in August, faster than the 2.4 percent rate seen in July.

    That would be some way above the European Central Bank’s inflation target of close to 2 percent.

    INE data also showed Spain’s national consumer price index rose by 2.7 percent in August on an annual basis, up from 2.2 percent in July.

    Huh, so Spain’s tax hike was actually fueling inflation? Well, that’s unfortunate considering the eurozone’s new inflation obsession. Oh well, at least that VAT tax hike should at least help with the Spanish deficit:

    Spain: rising jobless rate offsets VAT tax increase
    Gov’t to dip into reserves to cover pensions

    05 September, 19:06

    (ANSAmed) – MADRID – The rise in unemployment costs in Spain has offset income from the newly increased VAT tax, from 18% to 21% as of September 1, according to data published by El Mundo newspaper on Wednesday.

    The cost of unemployment benefits is rising by 2.6 billion euros a month, against the 2.3 billion euros projected in the state budget. Unemployment benefit payments through July cost 1 billion euros more than in the previous year. They equaled 18.456 billion euros in seven months, almost two thirds of the 28.503 slated in the budget for the entire year. The government went 2 billion euros over budget, equal to the income from the new VAT tax increase, El Mundo wrote. New unemployment benefit requests totaled 200,000 as of July, and the government paid out 174,000, according to national statistical institute data published on Tuesday. There were 137,000 jobs lost in August, and an additional 38,179 unemployed joined the line, bringing the total to 4,625,634 people out of work. There were 604,541 jobs lost in the past 12 months, against the 215,947 lost in the previous year, and the number of people paying into the social security fund dropped to 16,895,977. In July, the cash-strapped government dipped into a business workplace compensation fund to pay 15 billion euros in pensions.

    Mariano Rajoy’s administration has aired the possibility of using the 68 billion euro national pension reserve fund to cover future pensions, year-end wage bonuses, and inflation-indexed compensations. (ANSAmed).

    Hmmmm, well…at least there will no doubt be many valuable lessons learned during this exciting period.

    Posted by Pterrafractyl | September 5, 2012, 9:37 am
  8. Ah, it looks like Merkel is now calling for a “competitiveness pact” that will exist to enforce the new “fiscal treaty”:

    Merkel Says Europe Must Persist With Reforms

    Published: Thursday, 24 Jan 2013 | 9:40 AM ET
    By: Antonia van de Velde

    Deputy News Editor

    German Chancellor Angela Merkel urged European nations to continue the economic reforms they have begun and argued that the debt crisis offered an opportunity for the bloc to become more competitive.

    Throughout the euro zone debt crisis, Merkel has placed significant emphasis on austerity measures in response to soaring debt and widening budget deficits.

    Others, including French President Francois Hollande believe those measures need to be balanced with initiatives to spur growth. They fear austerity alone will not get the economy moving again.

    “Consolidation and growth basically are two sides of the same coin,” Merkel said.

    Merkel called for the creation of a “competitiveness pact” which would exist alongside the existing fiscal pact, which is aimed at ensuring EU member states stick to their budget commitments.

    “In 2013 we must see to it that over the next few years we also have a convergence in competitiveness within the common euro area.”

    Here we go again.

    Posted by Pterrafractyl | January 28, 2013, 9:42 am

Post a comment