There’s been quite a bit of chatter lately about the threat of “Currency Wars” amongst global policymakers. A situation might be declared a “currency war” when one or more countries engage in policies that end up significantly changing the value of their currencies, shifting the global trade dynamic. But nations might engage in policies that significantly change the value of their currencies for a lot of reasons, so the declaration of a currency war is never taken lightly. It’s also not taken lightly since it can signal a shift in fundamental market forces that can have broad and sustained impacts on the global financial markets and the broader global economy. Presently, the US and Japan have unleashed the financial bazookas: Both the Federal Reserve and the Bank of Japan (BOJ) have near zero interest rates and both are signaling that they will hold those rate at these historically low levels until the global economy appears to be well on the road to recovery. Additionally, the Fed and BOJ are employing additional “market operations” that involve buying and assets from financial institutions (e.g. the Fed’s “Quantitative easing”), typically used to free up credit for the financial system or lower borrowing costs). So it’s pretty clear that historically low interest rate are going to be the norm for the next couple of years or longer and, overall, this likely to be good news for the world given the ongoing economic  troubles  in these two critical economies.
In Europe, however, the European Central Bank (ECB) has a decidedly different overall path to recovery. The eurozone’s central banking strategy has been to maintain a surprising tight overall credit environment with the ECB holding its overnight rate at 0.75% vs the near 0% rates at the Fed and BOJ. In addition, while, the ECB has also agreed, in principle, to engage in open market bond purchases to ease up the eurozone’s sovereign debt crisis, no bonds have actually been purchased yet by the ECB . To be fair, the ECB has engaged rather extensive emergency lending to eurozone banks  in place of outright bond purchases (over 1 trillion euros), but as we’re going to see below, the ECB’s current policies also seem almost designed to ensure the bulk of those emergency loans get paid back early.
In other words, while the ECB appears to agree with the Fed and BOJ that central bank assets purchases can be a legitimate policy under emergency circumstances, the ECB appears to take a much stricter definition of what constitutes “an emergency”. While the Fed and BOJ seem to be treating high unemployment in the face of near zero rates as “an emergency”, the ECB has taken a decidedly different view. From the ECB’s apparent perspective, high unemployment is simply what is to be expected as a consequence of economic downturns and resulting austerity. These are intended to be temporary pains required for future prosperity. Ensuring “price stability” (low inflation) is, instead, the sole mandate of the ECB and that means the only emergencies that warrant significant central bank actions in the eurozone are those emergencies that risk the purchasing power of the euro itself.
The Fed, on the other hand, has a dual mandate  of price stability and full employment. Like the ECB, the BOJ has a single mandate of price stability. But unlike the ECB, the BOJ is effectively behaving as if it has the Fed’s dual mandate . This fundamental “mandate divide” may not seem very significant when the global economy is doing well. But when the world is trying to claw its way out of the world global recession since the Great Depression, interest rates are near zero, and two major central announce aggressive new monetary easing, it can become problematic when other major central banks decide that reducing credit and shrinking deficits is a higher priority :
G20 set to dilute big powers’ demands on currencies
By Jan Strupczewski and Tetsushi Kajimoto
MOSCOW | Fri Feb 15, 2013 3:22pm EST
(Reuters) — The Group of 20 nations will not single out Japan over the weak yen and will disregard a call from G7 powers to refrain from using economic policy to target exchange rates, according to a text drafted for finance leaders.
A G20 delegate who has seen the communique — prepared by finance officials for their bosses — also said it would make no direct mention of new debt-cutting targets, something Germany is pressing for but which the United States wanted struck out.
If adopted by G20 finance ministers and central bankers meeting in Moscow on Friday and Saturday, Japan will escape any censure for its expansionary policies which have driven the yen lower and drawn demands for action from some quarters.
“There will not be a heavy clash about currencies in the end, because nobody can risk such a negative signal,” said another G20 delegation source.
The currency market was thrown into turmoil this week after the Group of Seven — the United States, Japan, Germany, Britain, France, Canada and Italy — issued a joint statement stating that domestic economic policy must not be used to target currencies, which must remain determined by the market.
Tokyo said that reflected agreement that its bold monetary and fiscal policies were appropriate but the show of unity was shattered by off-the-record briefings critical of Japan.
A quick review of that recent G7 drama and subsequent whipsawing in the yen :
The currency market kerfuffle was, in part, a consequence of the nuanced/vague nature of the G7’s statement on Japan’s stimulus spending and currency devaluation. The G7 communicated this by basic saying that there would be no attempt to censure Japan over its new aggressive monetary easing. Following this statement, a Japanese official publicly declared it to be a G7 endorsement of Japan’s policies and those policies include talk of intentionally targeting a fall in the yen. So the markets took this as a sign that the yen would be allowed to fall further and the yen did just that: it fell further. Then a G7 official released a comment saying that , no, the Japanese official was incorrect and the G7 was indeed concerned about the rate of the fall in the value of the yen and also concerned over statements by Tokyo over targeting exchange rates. In other words, the G7 said stimulus spending designed to increase internal demand is ok, just don’t intentionally try to devalue a currency in order to make exports more attractive. Or something along those lines. Currency wars tend to involve a lot of rhetorical confusion .
The G20 draft merely sticks to previous language on the need to avoid excessive currency volatility, the delegate said.
The yen has fallen by around 20 percent since November. Having firmed earlier on Friday, it turned tail and dropped about 0.6 percent against the dollar and euro in response to the communique details.
“NO CURRENCY WAR”
Officials lined up to pour cold water on talk of a currency war where countries indulge in competitive devaluations.
European Central Bank President Mario Draghi said recent sparring over currencies was “inappropriate, fruitless and self-defeating” and U.S. Treasury official Lael Brainard warned against “loose talk”.
France has been a lone voice calling for euro exchange rate targets. Draghi said the currency was trading in line with long-term averages, a point endorsed by International Monetary Fund chief Christine Lagarde.
Also, make a note of France’s lone call for an exchange rate target, as it will be relevant to an important lessons highlighted below regarding a new dynamic in our contemporary currency conundrum: currency exchange rate policies can become exceedingly complicated when currency unions are involved. They tend to lend themselves to win-lose situations. Or win-“win more” or lose-“lose less”. Win-win situations are also possible, but we haven’t seen too many of those emerge out of the eurozone crisis yet. *fingers crossed!*
GROWTH VS AUSTERITY
The meeting in Moscow of ministers from the G20 nations, which account for 90 percent of the world’s gross domestic product and two-thirds of its population, also looked set to lay bare differences over the balance between growth and austerity policies.
The draft communique reflected a row brewing between Europe and the United States over extending a promise to reduce budget deficits beyond 2016 A pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a G20 summit of leaders in St Petersburg in September.
The G20 put together a huge financial backstop to halt a market meltdown in 2009 but has failed to reach those heights since. At successive meetings, Germany has pressed the United States and others to do more to tackle their debts. Washington in turn has urged Berlin to do more to increase demand.
“It’s very important to calibrate the pace of fiscal consolidation,” Brainard said. “It’s ... important to see demand in the euro area and some of that must take place through internal rebalancing.”
There will be no direct mention of fiscal targets, in response to U.S. pressure, reflecting its focus on running expansive policies until unemployment falls, the G20 delegate said.
Canadian Finance Minister Jim Flaherty, addressing the working dinner, said the growth versus austerity debate represented a “false dichotomy” that should not preclude action to boost jobs and growth now while targeting balanced budgets later.
The G7 and G20 powers are largely unified in their opposition to targeted currency devaluations. The conflict between the US and German over long term “fiscal targets”, however, underscores a more fundamental disagreement between the general role governments should be allowed to play during an economic crisis: should governments and central banks even be allowed to engage in the kinds of aggressive monetary policies we see coming from the Fed and BOJ? Or should the policy response focus almost exclusively on setting “fiscal targets”. The term “fiscal targets” is a fancy phrase for “government spending austerity intended to cut deficits” and its clearly the approach favored by the ECB and its chief member the Bundesbank. Germany’s Bundesbank is chief amongst the subordinated national central banks that operate in the eurozone and what the Bundesbank generally wants, the Bundesbank generally gets. And the Bundesbank really does not like low interest rates and LOVES “fiscal targets”. To a large extent, when we talk of a Fed/ECB divide, it’s really a Fed/Bundesbank divide.
In the above excerpt, there are references to the row over whether or not the “fiscal targets” set by the G20 in Toronto in 2010 — and set to expire this year — should be renewed for 2016 . The targets, championed by Germany, involve the major economies of the world cutting their deficits in half by 2016. Germany appears to be interesting in setting up more “concrete” deficit-cutting agreements. At this point it’s unclear what the enforcement mechanism Germany is envisioning to ensure compliance with such targets, but considering that this these call for global “fiscal targets” are coming from Germany in the midst of extreme global economic weakness — especially weaknesses in the eurozone — it’s pretty clear that German policymakers would really like to see austerity go global :
G‑20 at Odds Over Fiscal Goals as Fails to Meet 2010 Aim
By Ilya Arkhipov & Rainer Buergin — Feb 15, 2013 6:57 AM CT
Group of 20 governments disagreed over the strength of new fiscal goals as they risk missing the targets set three years ago.
After committing at a Toronto summit in 2010 to halve budget deficits by this year, most advanced nations are now facing failure on that score and on a related pledge to stabilize their debt by 2016.
As G‑20 finance chiefs meet in Moscow, the challenge now is to find a replacement for the Toronto goals after weak economic growth hamstrung fiscal consolidation worldwide. While German Finance Minister Wolfgang Schaeuble advocated “concrete” targets, Russian official Ksenia Yudaeva said formal commitments would be “counterproductive.”
“We might want to have long-term principles and particular strategies for countries with high deficit levels,” Yudaeva, Russia’s G‑20 sherpa, said in an interview. “But I don’t think we need any precise commitments like during Toronto. It should be much more flexible.”
The G‑20 will discuss adopting a new deadline for deficit goals and may set 2016 as the new target date, Russian Finance Minister Anton Siluanov said today. Given the debt burden of industrial nations, “a credible path of debt reduction is really essential and the positive environment should be used by the G‑20 countries,” Schaeuble said.
Assessing the appropriate stance of fiscal policy has caused rifts between the major economies since the global financial crisis began in 2007. It’s pitted the U.S., whose officials have preferred to focus on boosting economic growth in the short term, against a European push for immediate austerity measures.
The European fiscal stance remains “very restrictive,” leaving room for easing as the region’s debt crisis ebbs, Brazilian Finance Minister Guido Mantega said.
The finance chiefs already watered down their Toronto agreement after November talks in Mexico City, saying they would ensure “the pace of fiscal consolidation is appropriate to support recovery.”
To stimulate or not to stimulate, that is the question (to be asked by a centrally coordinating authority)
The major central banks don’t just have a divide in their overall philosophies regarding the risks and benefits of monetary stimulus. From a power-structure standpoint the ECB is operating in a vastly different environment from its US and Japanese counterparts. For starters, the Federal Reserve and BOJ are both central banks for a single economy whereas the ECB is kind of the chief central bank for a large number of nations that each have their own central banks. As such, the ECB is constantly forced to choose a single set of monetary policies for a wide variety of nations with very different needs. Additionally, because money is likely to flow within the eurozone as a consequence to changing economic realities it’s very possible for policies that damage some eurozone members to end up helping other eurozone members. For instance, one of the more persistent patterns we’ve seen emerging during the course of the eurozone crisis has been rising borrowing costs for the weakest nations coupled with ultra-low (and sometimes negative) borrowing costs for Germany. This type of phenomena is not something the Fed of BOJ have to face.
Another difference in the power structures of the ECB vs the Fed or BOJ is that when eurozone members fall into financial troubles the control of the entire nation is handed over to an ECB-EU-IMF “troika” that gets to manage the country, set policies, and impose austerity should the troika choose do so. And the ECB is always part of the troika. In other words, while central banks are normally politically “independent”, there has always been a risk that the politicians would just replace the central bankers should those bankers unilaterally decide run a “tight money” policy over strong public opposition. That risk of an indirect public revolt is just not a big issue for the ECB. As long as the ECB’s policies please the eurozone’s most powerful members (Germany, in particular), the ECB will be largely free to engage in the kinds of policies that would normally leave a populace livid. This “troika” reality  greatly facilitates the ECB’s ability to impose tight-money pro-austerity policies.
These fundamental difference in central bank operational consideration raise an additional question regarding the above article excerpts: When policymakers talk about the need for more “concrete” fiscal targets and new “promises” to cut deficits in half by 2016, how could such “promises” and “goals” carry any sort of weight without something like an international analog to the eurozone that includes a kind of super-central bank or super-troika to mandate potentially unpopular policies? These might seem like silly “out there” questions given the current G20 divide over whether or not to extend the 2010 Toronot “fiscal targets” or censure Japan for it’s aggressive stimulus. But keep in mind that there are policymakers with bigger international plans on their minds. This includes the European Union’s economic and monetary affairs minister Olli Rehn. If you think of Mario Draghi’s ECB as the “austerity-lite” bloc in the eurozone and the Jens Weidmann’s Bundesbank as the “austerity-heavy” crowd, Rehn is sort of in the middle . He’s been calling for greater central bank monetary policy “coordination” for years. It’s not exactly clear what exactly he has in mind, but back in 2010 he said that he saw “a certain need for reinforced international coordination of monetary policy” and then suggested that the IMF could be the “coordinator” in chief :
Global monetary policy coordination needed: EU’s Rehn
By Jan Strupczewsktae
WASHINGTON | Sat Oct 9, 2010 11:35am EDT
(Reuters) — The world needs more coordination of monetary policy to avoid exchange rate volatility and achieve balanced economic growth, the European Union’s economic and monetary affairs commissioner said on Friday.
Such coordination could take place in the framework of the International Monetary Fund or the Group of 20 biggest developing and developed economies, the commissioner, Olli Rehn, said as the IMF and World Bank convened meetings here.
“I can see that there is a certain need for reinforced international coordination of monetary policy,” Rehn told Reuters in an interview. “We are discussing with our partners the possible ways and means to advance such coordination in the G20 and IMF.”
Finance ministers and central bank governors from the Group of Seven richest industrialized countries were to discuss the issue on Friday evening, and the talks are likely to be continued in the wider G20 forum at the end of the month.
“I am looking forward to the G7 and later the G20 discussing the chances of enhancing international coordination of monetary policy, where the G20 and the IMF might play an enhanced role,” Rehn said.
Asked if it should be the IMF that would help coordinate policies globally, Rehn said: “In my view the IMF is a natural choice for facilitating enhanced international coordination of monetary policy.”
The need for more coordination is underlined by recent actions by several countries around the world to weaken their currencies in order to help exports and boost economic growth.
“In order to achieve a rebalancing of global growth, which is the main message of the IMF annual meetings, there is a need to address the currency issue as well; exchange rates should reflect economic fundamentals,” he said.
Asked if the euro, trading around $1.40, was too strong, Rehn said:
“Since several other currencies have been put on a path of depreciation recently, the euro has gained in value. It is not good for the European economy, nor for the world economy, for the euro area to carry a disproportionate burden of exchange rate volatility.”
The above article was written in October 2010, when the euro was trading near $1.40 as a consequence of the ECB running a relatively tight monetary policy compared to the other big central banks. The following article is from earlier this month but eerily similar: Mr. Rehn reiterated his calls for more international coordination of monetary policy while fretting over the dangers a ~$1.35 euro could do to the eurozone economies. Interestingly, at this point a number of Europe’s leading exporters don’t appear to mind an increasing euro :
EU’s Rehn wants closer currency coordination — report
VIENNA | Sat Feb 9, 2013 10:45am GMT
(Reuters) — The European Union’s top monetary official wants closer coordination on currencies to avoid potentially damaging disruptions to world trade, he told an Austrian magazine.
The remarks by Economic and Monetary Affairs Commissioner Olli Rehn come amid a standoff between France and Germany over whether a strengthening euro needs an official European response or whether markets should be left to set exchange rates.
Germany said this week the strong euro was not a concern and signalled opposition to a French proposal for a mid-term target rate, exposing policy divisions over mainland Europe’s currency between its top two economies.
The European Central Bank will monitor the economic impact of a strengthening euro, ECB President Mario Draghi said on Thursday, feeding expectations the climbing currency could open the door to an interest rate cut.
“I recognise the risk of competitive devaluation. We have recently warned the government of Japan about corresponding steps towards depreciation of the yen,” Rehn told Profil magazine in an interview published on Saturday.
“We need reforms in the international monetary system so as to avoid negative influences on international trade. The coordination within the G7, G20 or the IMF should therefore be improved,” he added, referring to policy-setting groups of leading nations and the International Monetary Fund.
Rehn said a stronger euro would be very harmful mainly for the southern euro zone countries, while Germany, Austria, the Netherlands and Finland could handle this. “But the southern countries would have problems with their exports to other parts of the world,” he said.
The eurozone’s Currency Civil War. Coordinating is hard
One of the fundamental challenges facing globalization is over the question of whether or not the priorities should be to create a unified set of global rules or a unified set of global goals. Some global goals — say, reducing suffering — might be best approached with a global rule like the universal enforcement of human rights. But other goals, like avoiding a global depression, might not do so well by the imposition of global rules on monetary policies. And as France has been discovering lately, if your nation live’s under a unifies monetary policy regime you probably don’t want the austerity fetishists running that regime :
Analysis: France runs into German wall on EU growth drive
By Mark John
PARIS | Sun Feb 10, 2013 6:57am EST
(Reuters) — French efforts to divert Europe from economic austerity have foundered twice in a week due to German resistance, underlining a growing policy divide that is hobbling the core partnership.
Berlin rejected President Francois Hollande’s call on Tuesday to set a mid-term target for the euro, a move he hoped would bring the single currency down to a level that would make it easier for French industry to sell its goods abroad.
Three days later, German Chancellor Angela Merkel joined forces with Britain’s David Cameron at a Brussels summit to push through the first ever cut in the 27-nation’s budget, taking an axe to spending on infrastructure projects backed by Paris.
Hollande could have expected a hero’s welcome in Brussels for his handling of his first war in the African state of Mali, where French forces have driven al Qaeda-linked rebels out of its main northern towns and into the hills.
Moreover, with Cameron having put Britain’s EU membership on the line by promising a referendum on it if re-elected, last week’s summit could have offered France and Germany the stage to rally together in a demonstration of European solidarity.
But in the budget wrangling that ensued, it was Hollande who looked isolated as his efforts to forge a coalition of southern and eastern European states demanding more generous spending were quashed by Germany, Britain and other northern countries.
EU officials were mystified when Hollande, citing other engagements, chose not to attend a pre-summit huddle with Cameron, Merkel and EU President Herman Van Rompuy on Thursday afternoon where key details of the deal were hammered out.
From then on, what Cameron called the band of “like-minded budget disciplinarians” including Germany, the Netherlands, Sweden and Finland had the upper hand and for France, it was a matter of salvaging what it could from the summit.
Ultimately, cuts to an EU budget which in total represents barely one percent of the region’s economic output are unlikely to influence how quickly it comes out of the current downturn.
However the clash between Paris and Berlin on the level of the euro currency points at deep-rooted differences in the national interests of the two countries that may prove more telling in the long run.
A study by Deutsche Bank last month calculated that France’s exporters start being priced out of world markets when the euro rises above 1.22–1.24 dollars — a level it has already long left behind to trade at $1.33 now.
Germany’s higher value-added export products, however, only start to be disadvantaged when the exchange rate is above $1.54. Until that point, there is little damage to the German economy and indeed some benefit in a strong euro because it keeps the prices of imported goods and hence inflation in check.
“We do not agree on economic policy and a number of other areas,” Jean-Dominique Giuliani, head of the Robert Schuman Foundation, a French think tank on Europe, told Europe 1 radio.
“The gulf between France and Germany is widening somewhat and that worries me.”
The Deutsche Bank study referenced in the above excerpt reveals another important complication facing the eurozone nations when attempting to crafting a one-size-fits-all-policy for the whole currency union: One of the patterns that’s emerged is that whenever bad news hits the markets, we find money flowing out of the weaker eurozone bonds markets and into German bunds . Now, when that bad news is in the form of a rising euro that reduces everyone’s potential exports, the eurozone’s wealthier members could engage in the kind of stimulus or monetary measures (e.g. interest rate cuts) seen elsewhere in the world to jump start everyone’s economies. This kind of stimulus could have the effect of a currency devaluation, so economies could be stimulated across the continent while the euro falls in value, but it would come at the cost of some additional debt — at least in the short run — for the countries financing the stimulus, but given that well placed stimulus that invests in the future that shouldn’t be a problem .
There’s another option that might also bring down the value of the euro too: When economies crash, the values of their currencies often follow suit. But the value of the euro is based on a strange mish mash of increasingly divergent economies that all get factored in together. So by allowing the euro to rise just enough to only trash some of the eurozone economies, the euro could actually end up falling back down to a more competitive level without any stimulus at all. It just takes some time...and the selective collapse of the eurozone economies. Plus, much of the money flowing out the crashing economies are likely to end up flowing back into Germany and the other wealthier members. And the “best” part of this selective collapse strategy is that it doesn’t require any nation’s postponing any of the “structural reforms”. In fact, those “structural reforms” can continue at an even faster pace! It’s win-“win”.
With the euro current sitting at ~$1.30 it wouldn’t take much more than a 15% rise of the euro before we find all of the eurozone economies running into serious trouble. But according to the following article, that same above Deutsche Bank study found that the euro’s “danger zone” range for the German economy was estimated to be 1.54-1.94 dollars/euro compared to the 1.22–1.24 dollars/euro putting France at risk(although, realistically, it’s probably much closet to 1.54 dollars/euro). So if that study’s estimates are reasonable (which is always a big if), the euro — currently ~1.30’s dollars/euro — might be able to rise another 50% (although probably much less than 50%) before it becomes “dangerously high” for Germany’s economy. It’s an example of one of the currency union conundrums we’re learning about: by using a single currency — and Bundesbank-style central banking — to integrate a set of diverse economies into one harmonious economic union, the strong euro policy championed by the Bundesbank is driving the eurozone economies into the categories of “the already screwed” and “not yet screwed” with respect to the rise of the euro. It’s a reminder of why a currency union isn’t necessarily the best union to start off an international integration project. Maybe a union of social contracts towards providing democracy, civil rights, a decent standard of living, high-quality labor laws, universal environmental protection, and an opportunity to pursue a meaningful life would be a better approach 
UPDATE 1‑France says surging euro “too high”
Wed Jan 30, 2013 11:35am EST
By Jean-Baptiste Vey
Jan 30 (Reuters) — The French government sounded the alarm on Wednesday about the surging value of the euro, vowing to raise the issue with euro zone and G20 partners as concerns about currency wars flare.
The euro has risen to a 14-month high against the dollar and hit its highest level in 33 months against the yen , making euro zone exports dearer on international markets.
Economists say that France suffers more than Germany when the euro rises because its exports are more price-sensitive than German exports, which include more higher value-added products.
A Deutsche Bank study found that the French economy begins to take a knock when the euro’s rise above 1.22–1.24 dollars while for Germany the pain threshold is not reached until the euro gets to an exchange rate in a range of 1.54–1.94 dollars.
In Professor Weidmann’s class don’t expect extra credit no matter how hard you try
It appears that the major powers have decided, for now, against declaring the monetary policies by Japan (and the US to a lesser extent) a form of “Currency Warfare”, but keep in mind that the decisions last week by the G7 and G20 powers against censuring Japan were done over the opposition of a German-led coalition of wealthier European nations. Also keep in kind the Bundesbank chief, Jens Weidmann, is continuing to demand that see the world “tough it out” through austerity in order to avoid try to bring the global economy back on track. Weidmann also argues that a rising euro is not a problem and in fact justified based on the eurozone’s strong economic fundamentals alone. The markets, it would appear, are deeply impressed with the ECB’s ability to impose austerity policies regardless of circumstance :
Weidmann Says ECB Won’t Cut Interest Rates to Weaken Euro
By Jana Randow & Jeff Black — Feb 15, 2013 4:03 AM CT
European Central Bank council member Jens Weidmann said an appreciating euro alone won’t trigger a cut in interest rates and the exchange rate’s gains are justified by the economic outlook.
The strength of the euro “is one factor among many in determining future inflation rates” and “we will certainly not justify any monetary policy decision with one single factor,” Weidmann, who heads Germany’s Bundesbank, said in a Feb. 13 interview. “I believe that the exchange rate of the euro is broadly in line with fundamentals. You cannot really say that the euro is seriously overvalued.”
His comments come as central bankers and finance ministers from the Group of 20 nations meet in Moscow today amid speculation of a currency war. Looser monetary policy in the U.S. and Japan combined with mounting optimism in Europe drove the euro to 14-month and three-year highs against the dollar and the yen earlier this month. The currency has dropped two cents since ECB President Mario Draghi said on Feb. 7 that its appreciation poses a downside risk for inflation, signalling he may consider cutting rates.
While the euro area’s recession deepened in the fourth quarter, there are signs the region is starting to recover. Economic confidence rose for a third month in January and investor sentiment has improved since September.
“If the appreciation of the exchange rate reflects a regained confidence in the euro area and an improved growth outlook, then this is fully in line with fundamentals,” said Weidmann, who opposes any further ECB action to fight the debt crisis and was the only council member to vote against the central bank’s bond-purchase program.
Weidmann suggested the ECB won’t significantly revise its economic forecasts next month. In December it predicted a 0.3 percent contraction this year followed by growth of 1.2 percent in 2014. Inflation was projected to average 1.6 percent this year and 1.4 percent next year.
“Our forecast, which I think is still in line with what we’ve seen so far, is one of a gradual recovery in the second half of this year, lagging the upswing of the world economy,” Weidmann said. “I have no reason to doubt this baseline” and confidence indicators serve “as a confirmation of our projections.”
Notice that the head of the Bundesbank is arguing that there is no need to be concerned about the rise in the euro because this rise merely reflects renewed market confidence in the region’s economy even though the eurozone  recession  deepened  in the last quarter. In addition, Weidmann’s own forecasts for the eurozone include a “gradual recovery in the second half of this year, lagging the upswing of the world economy”. The markets apparently like economies that are lagging their peers. Those “structural reforms ” will kick in doubleplusgood any day now.
All members of the ECB’s Governing Council agree “that central banks cannot solve the euro-area crisis,” Weidmann said. “There is unanimous agreement that only structural reforms and fiscal consolidation” are the answer.
A slower pace of adjustment in euro member countries remains “one of the major risk factors” for the economic outlook, he said.
Weidmann, 44, left his job as German Chancellor Angela Merkel’s advisor to take the helm of the Bundesbank in May 2011. He stuck to his criticism of the ECB’s as-yet-untapped bond- buying plan, which has been tacitly supported by Merkel, saying the calm it has brought to financial markets was to be expected.
When Bundesbank chief Jens Weidmann states that the ECB’s governing council is in “unanimous agreement that only structural reforms and fiscal consolidation” are viable options, he’s basically saying that monetary policy (e.g. the kinds of central banking policies we’re seeing from the Bank of Japan and the Fed) really can’t do anything to impact the overall eurozone situation. Ironically, however, by not engaging in monetary actions (like cutting the ECB’s interest rate), the ECB might be creating a situation that fuels a net monetary contraction (e.g. starving the eurozone banking system of credit) and it’s all related to the ECB’s earlier emergency monetary policy. Back in December 2011 and then again in February 2012, the ECB let Europe’s banks turn in all sorts of distressed securities (especially Spanish and Italian debt) as collateral for a three year loan. It was the kind of thing central banks are supposed to do when large systemic risks loom and no other entity has the clout needed to impose a shift in market sentiment. And the ECB’s maneuver did help quite a bit. At least they helped quite a bit in the financial markets. The austerity policies that were a condition (and Bundesbank demand) of the bond market intervention have wreaked havoc on the employment situation but that can’t really be blamed on the ECB’s emergency loans.
But there’s a provision to the ECB’s new emergency loan program that has just started kicking in that probably won’t help: Last month the banks became allowed to return those three year loans early. And if the healthiest banks do return those loans, that effectively sucks credit out of the eurozone banking system and raises borrowing costs for the weakest nations  and generally reduces the credit cushion out there for unexpected crises. So not only is the euro rising in value right now, but as long as the ECB holds its interest rate steady while the rest the US and Japan holds rates at near-zero levels the strongest eurozone banks are going to have an incentive to repay those ECB loans early and shrink the overall eurozone credit supply. On top of all that, ECB loan repayments that suck credit out of the eurozone banking system also have the effect of pushing up the value of the euro . Plus, the healthiest banks will get the first chances to unload the assets that all the banks turned in as collateral when the loans first took place (and that included a lot of crappy assets), leading to further bifurcation of the eurozone banking/finance sector (which is one of dynamics that led to the ECB’s emergency programs in the first place). It’s that self-reinforcing cycle of awfulness that should sound familiar at this point :
Banks’ LTRO Repayments to Underline Two-Tier Europe: Euro Credit
By John Glover — Jan 24, 2013 9:12 AM CT
Lenders repaying cash borrowed from the European Central Bank via its Longer-Term Refinancing Operations are poised to underline the north-south divide that characterizes the euro region.
Banks can start paying back this week more than 1 trillion euros ($1.33 trillion) of three-year money they borrowed in two portions during 2012. Only banks able to raise funds at less than the 75 basis points the ECB charges are likely to repay, and they will probably be from northern Europe, said Richard McGuire, a strategist at Rabobank International in London.
“If it turns out the repayments come from the core banks only, then that’s a negative,” McGuire said. “It shows there’s still a two-tier euro zone. The tension is still there.”
The ECB’s LTRO programs in December 2011 and February 2012 reduced the risk of a systemic crisis blowing the single currency apart. Along with ECB President Mario Draghi’s July pledge to do “whatever it takes” to preserve the euro, the cash infusions helped stem a rout in Spanish and Italian bonds.
Between 200 billion euros and 250 billion euros are likely to be repaid “and we aren’t expecting many peripheral banks to take part,” said Derek Hynes, who helps manage $9.5 billion at ECM Asset Management Ltd. in London. “They have some market access now, but they’ll need three to six months to gain the confidence to hand back the money.”
The prospect of money flowing back to the ECB has driven up interest rates in the futures market. The rate on three-month euro futures expiring in December 2013 rose as high as 0.54 percent on Jan. 18, the most since July and up from 0.25 percent at the start of the year. The two-year interest-rate swap cost has climbed to 55.2 basis points from 38 at the end of November.
The LTROs swelled the ECB balance sheet to 2.94 trillion euros, up from about 2.5 trillion euros on Dec. 16. While a reversal of that as banks repay is “a major milestone,” it may produce “stealth” interest rate increases, George Saravelos, a strategist at Deutsche Bank AG in London, said in a report.
The yield on two-year German notes increased to as high as 24 basis points on Jan. 17 from minus 1.5 basis points at the beginning of the year. The rate is now 17.4 basis points.
Banks can now repay their borrowings at weekly intervals. The ECB is expected to publish the number of companies repaying and the amount returned tomorrow, with national central bank accounts revealing later which countries reimbursed LTRO cash.
Spanish and Italian banks took about 334 billion euros of the 532 billion euros of LTRO borrowing disclosed by the banks and tracked by Bloomberg. Cash was parked in government securities, helping to support bond markets as suggested at the time by France’s then-President Nicolas Sarkozy.
The “Too little, too late is better late than never” school of central banking
ECB head Mario Draghi has often said that the relative value of major currencies should be determined “by the markets”. It’s another way for the ECB to say “we don’t want to do this or that policy at this point” without actually saying that explicitly. And that would seem to be sending a signal to the markets that the euro is poised to rise....unless the economy does so poorly that it ends up falling anyways. So when we factor in a rising euro (with falling exports) coupled to a shrinking eurozone credit market, should we expect a renewal of the kind of full-blown crises that prompted the ECB’s emergency lending in the first place?
Well, probably not. The near-full blown meltdowns of the recent past that prompted measures like the “LTRO” emegency loans in the first place have been put under control to varying degrees so the threat of any sort of immediate debt crisis emerging in the financial markets has subsided for now. It’s the labor market that’s threatening to trigger the round of crises . The austerity policies that have come as as condition for each of the bailouts for the Southern European economies countries — plus Ireland — are making the successful ECB interventions in the eurozone bond market and financial market an irrelevant accomplishment. Rising record unemployment  is going to insure the bailed out banks won’t have functioning economies needed work off their remaining mountains of debt (which was quite frequently nationalized private financial sector debts). But, for now, the banks should have sufficient funds to prevent the kind of banking solvency crises we’ve seen in recent years.
Another reason why the early repayment of the emergency loans probably won’t be a big deal is that the markets have been learning many lessons about how the eurozone’s leadership might respond. These have been powerful lessons in the past few years. Being the first major crisis since the creation of the eurozone, this has been a learning experience for everyone. And one of those lessons learned has been that the ECB will eventually step in to fix a dire situation. But only after it becomes dire. That’s just how they roll. Should the rise in short-term borrowing costs rise too much the ECB will intervene .
So we’ll likely see a continuation of the support by the ECB for the eurozone financial markets and more austerity for the public. The markets know there’s a pretty solid ECB guarantee on debt in the crisis-hit eurozone countries for at least in the short/medium-ish term even if the Bundesbank seems to want to unwind all the emergency lending programs. The bifurcation  of eurozone sovereign debt markets between the healthy and weak banks can probably continue  for a while longer. If the healthiest banks return more loans than expected, things will, ironically, suddenly start getting worse even though larger than expected loan repayments could be seen as sign that things are getter better. And if things start getting worse enought for the weaker economies, the ECB will probably do something to contain the damage. At least that’s what the markets seem to be expecting . And you can’t blame them. It’s the ‘just in time, one hopes’ brand of central banking that the ECB seems to have been striving for the entire time 
MONEY MARKETS-Draghi fuels bets for lower money market rates
Tue Feb 19, 2013 8:52am EST
* ECB’s “accommodative” stance creates one-way bet on rates
* LTRO repayments, high or low, seen flattening Eonia curve
* Trade already crowded, leaving slim gains for latecomers
By William James
LONDON, Feb 19 (Reuters) — European Central Bank president Mario Draghi has created a win-win situation for traders in the run-up to Friday’s announcement on early repayments of banking sector loans, with short-term rates expected to go anywhere but up.
Traders are banking on the euro zone money market curve flattening over the coming weeks, unwinding a rise in longer-term borrowing costs that has effectively tightened monetary conditions over the last month.
Larger-than-expected early repayments of emergency banking sector loans in January caused money market rates to rise, pushing up the wholesale cost of money that filters through the financial system and drawing the attention of the ECB.
But, that reaction has since moderated and even a larger-than-expected second repayment would be unlikely to prompt another rise because markets believe this would increase the chances of the ECB cutting interest rates to keep policy loose.
Lower-than-forecast repayments, or any signal from the ECB on cutting rates could even drive rates lower, market participants said.
“You could call it a Draghi ‘put’. He suggested at the last press conference that the ECB may act if it doesn’t like what it sees,” said Elwin de Groot, strategist at Rabobank in Utrecht.
“So, if there’s too strong a reaction from the market(to the repayment) they may take new measures, and the first best option is maybe a cut in the refinancing rate.”
The faster the surplus of liquidity in the banking sector shrinks, the more the money market curve steepens as traders bring forward expectations of when increased competition for scarce cash starts to push rates up.
So is betting that an ECB rate cut will follow a larger than expected loan repayments a sound bet? Well....maybe. But at the same time, over the last few years we’ve consistantly seen Jens Weidmann and the Bundesbank vehemently oppose virtually all of the existing emergency ECB measures. It’s the Bundesbank’s oppisition that seems to be the required ingredient for the “too little, too late” central banking methodology the ECB has been developing. So if banks do end up making surprisingly large emergency loan repayments and the markets are betting that this would likely lead to monetary easing by the ECB, the markets might want to hedge their bets :
Bundesbank looks ahead to ECB “exit” as LTROs repaid
By Eva Kuehnen and Andreas Framke
FRANKFURT | Fri Feb 22, 2013 12:07am GMT
(Reuters) — A bumper return of 3‑year loans to the ECB would boost the case for it exiting crisis mode, a top Bundesbank official said ahead of Friday’s news on how much banks will hand back at a repayment window next week.
Joachim Nagel, in charge of market operations at the German central bank, stressed, however, that it was still unclear when the exact time for an exit would be as the European Central Bank’s monetary policy has not yet worked evenly across the 17 euro zone countries.
The ECB lent banks a total of more than 1 trillion euros (864.8 billion pounds) in twin 3‑year, ultra-cheap lending operations in December 2011 and February 2012 — a ploy that ECB President Mario Draghi said “avoided a major, major credit crunch”.
The ECB is now giving banks the chance to repay the funds early. Last month, it began allowing them to pay back the first of the twin loans. Friday’s announcement will detail how much of the second they plan to return at the first chance on February 27.
“If the excess liquidity in the banking system abates significantly, then it would be time to consider an exit from the non-standard measures brought on by the crisis,” Nagel told Reuters, without giving a specific level.
“It is not yet completely clear when exactly it will be time for the exit. The markets and the financial system are still far too fragmented for that. I warn against declaring an end to the crisis despite the calmer phase on markets in recent months.”
The market-driven unwinding of the ECB crisis measures stands in contrast to the policies being pursued by central banks in the United States and Japan, which are looser.
This policy contrast has helped drive up the euro, which is also supported by investor confidence that the bloc will hold together after Draghi’s pledged last July that the ECB would do “whatever it takes” to preserve the single currency.
Banks to ECB: maybe we need those loans afterall
So will the markets be facing a situation where the ECB retreats from “crisis mode” as the Bundesbank desires? Or will we see a continuation of the ECB’s emergency measures? Well, that seems to depend on the whether or not the eurozone banks return more ECB emergency loans or less than expected when the repayment of the second round of emergeny loans becomes an option. And Friday (Feb. 22) was the day that the eurozone banks got to declare the amounts they intend to repay to ECB when the window for 2nd round loan repayment opens on Feb. 27. “Fortunately” for eurozone economies in need of a lower euro and continuing financial credit the news was “good”...in the sense that the news wasn’t actually very good so some ECB easing might be on the way :
Euro Touches One-Month Low as ECB Bank Repayments Miss Forecast
By Joseph Ciolli — Feb 22, 2013 2:48 PM CT
The euro touched the lowest level against the dollar in six weeks after the European Central Bank said institutions will repay less of Long-Term Refinancing Operation borrowing next week than economists forecast.
The 17-nation currency trimmed gains versus the yen as the European Commission forecast the region’s economy will shrink for a second year in 2013. The Australian dollar rose the most in seven weeks after central bank Governor Glenn Stevens said the bar for intervention was high. Japan’s currency weakened amid a White House meeting between Prime Minister Shinzo Abe and President Barack Obama, who made no mention of the yen during remarks after the discussion.
“The market is trading on confidence and sentiment, and the LTRO news shows that tail risk has shrunk less than we thought,” Greg Anderson, New York-based head of Group of 10 currency strategy at Citigroup Inc., said in a telephone interview. “What we’ve seen this week is the last of the euro longs getting squeezed out.” A long position is a bet that an asset will rise.
The euro fell was little changed at $1.3186 at 3:45 p.m. in New York after touching $1.3152, the lowest level since Jan. 10. The shared currency is down 1.3 percent this week. It rose 0.3 percent 123.21 yen today after strengthening as much as 0.8 percent. The yen weakened 0.4 percent to 93.43 per dollar.
The euro may depreciate to the 2013 low of $1.2998 it reached on Jan. 4 if it declines past a support level at $1.3151, Cilline Bain, a London-based technical analyst at Credit Suisse, wrote today in a client note. Support is an area on a chart where buy orders may be clustered.
The common currency declined as the ECB said 356 banks will hand back 61.1 billion euros ($80.5 billion) on Feb. 27, the first opportunity for early repayment of the second LTRO. The median forecast in a Bloomberg News survey was for 122.5 billion euros.
The region’s gross domestic product will contract 0.3 percent in 2013, compared with a November prediction of 0.1 percent growth, the Brussels-based commission said.
The euro rose earlier after the Germany’s Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, climbed to 107.4 from 104.3 in January. That’s the fourth straight gain. Economists predicted an increase to 104.9, according to a Bloomberg News survey.
Ordoliberal stagdeflation, possibly coming to a complex social arrangement near you
One of the more fascinating aspects about the eurozone’s structure is that it’s managed via the ECB(officially) and the Bundesbank(unofficially) and this has created a persistent “good cop/bad cop” dynamic although a “reluctant good cop/Calvinist fundamentalist bad cop” analogy might be a little more appropriate. This is going to be an important dynamic for the world to come to terms with an understand, because if folks like Olli Rehn — the EU economic and monetary minister that wishes to see greater international “reinforced coordination” of monetary and fiscal policies — ever see their envisioned system put into place, the “reluctant good cop/Calvinist fundamentalist bad cop” dynamic might be coming to a country near you.
That quirk of the Bundesbank — the quirk that makes it appear to be philosophically  unable  to  advocate  anything  other  than  austerity  policies - that’s a “quirk” we might expect to find in any sort of future international “eurozone-lite” complex international debt “arrangement”. It’s the Bundesbank’s Ordoliberalism  orthodoxy, where the state must create the regulations necessary to create market conditions that will most closely approximate perfectly competitive marketplace. The market outcomes still rule, but they’re outcomes from a market that is being actively designed and managed by the state. And temporary “one time” actions like state stimulus spending are considered serious breaches of Ordoliberal orthodoxy. If economic healing is to take place, it should take place at a systemic level. Budget cuts, deficit reduction, and general austerity are the preferred approaches to fixing economic imbalances. The Ordoliberalism of the Bundesank is certainly a more pragmatic form of economic utopianism when compared to, say, Ayn Rand’s Objectivism that dominates the US’s conservative movement in that Ordoliberalism doesn’t assume markets magically self-correct under any circumstances. It’s more pragmatic, but still crazily unpragmatic in that it still treats the market outcomes of the state-managed marketplaces as somehow sactrosanctr and magically super-efficient. Economic theories tend to fixate on monetary tranasactions alone in their models because that’s what’s measured. But it’s approach that tends to model market outcomes as being too meaningful leads to warped economics.
Ordoliberalism, like laissez-faire theories, takes market outcomes and economic imbalances very very seriously. Part of what makes the current application of Ordoliberal thought to the eurozone crisis so grimly fascinating to watch is that the Ordoliberal paradigm has been virtually untested for something like a currency union of 17 disparate nations. The philosophical disaste for something like trade imbalances and deficit spending can take on entirely new dynamics when translated from an individual nation to an entire collection of nations bound together by and currency union. And even though international Ordoliberalism has been a disaster so far it doesn’t sound like many Germans are interested in changing course :
The New Republic
NOVEMBER 28, 2012
Please, Herr Krugman, May I Have Another?
How America’s favorite liberal stokes German masochism
BY CAMERON ABADI
WHEN GERMANS VOTE in next year’s national election, they will have the choice between two candidates who hold the distinction of having been repeatedly insulted by Paul Krugman. The New York Times columnist has a habit of accusing Angela Merkel of dim-wittedness, questioning her “intellectual flexibility” and accusing the members of her government of “living in Wolkenkuckucksheim—cloud-cuckoo land.” Krugman has treated Peer Steinbrueck, her Social Democratic competitor for the country’s highest office, no better. The austerity policies embraced by Steinbrueck, who was Germany’s finance minister in 2008 and 2009, were pure “bone-headedness”; his speeches criticizing deficit spending were “know-nothing diatribes.” Krugman even went so far as to compare Steinbrueck’s ideology with that of the least popular political group, in contemporary German eyes, after the Nazis—the Tea Party.
The relationship between the popular Times columnist and the dominant European economy has thus settled into a stable, if neurotic, pattern: Krugman attacks Germans for their economic habits and trashes their most beloved public officials; in response, Germans wince, complain, and then ask for more. Irwin Collier, professor of economics at the Free University of Berlin (and a friend of Krugman’s from their graduate-school days at MIT), admitted that it was unlikely that any of those students who line up to hear Krugman speak at universities actually change their minds after engaging with him.
According to David Marsh, chairman of the advisory board of London & Oxford Capital Markets, it’s not a surprise that Germans would volunteer for such punishment. “Krugman is part of the ritual of self-criticism in Germany,” he tells me. “There is a tendency in the culture of self-flagellation.” But that doesn’t explain how a Nobel Prize–winning economist got involved. If Germany has a national penchant for masochism, why did Krugman become one of its primary public enablers?
KRUGMAN IS AWARE that people with his understanding of economics don’t normally receive much attention in Germany. “We have a tradition in the Anglo-Saxon world, you try and have a schematic view of the economy,” he tells me. “German have this whole—well, it’s kind of hard for me to know what they’re saying.”
Krugman is not alone in his confusion. The philosophical touchstone of contemporary German economics isn’t the work of Adam Smith, or Hayek, or Marx, but rather Walter Euken, a man whom few outside of Germany have ever heard of (though he’s so well-regarded in his own country that his face has appeared on a German stamp). In the 1930s, Euken founded a school of economics at the University of Freiburg that came to be known as ordoliberalism. It combined a commitment to free markets with a belief in strong government, but its primary economic concern was stability—understandable in a country scarred by the experience of hyperinflation in the 1920s, the depression of the 1930s, and the subsequent rise of Nazism.
When West Germany needed to create a state in the aftermath of World War II, the ordoliberal theoreticians set up the “social market economy” that became the country’s unquestioned economic framework. They created a robust welfare state, but it was embedded in a legal structure that was engineered to promote economic stability—rules for balanced budgets, rules for labor participation in the workplace—and ideally wouldn’t require continuous intervention by the state.
The flip side of this obsession with rules was a distaste for the sorts of pragmatic responses to crises preferred by American economists. That’s why many Germans still tend to embrace “automatic stabilizers” like unemployment insurance, but shy from discretionary spending, like massive stimulus packages. They would prefer to suffer short-term pain now for the promise of arriving at a more sustainable equilibrium later. And worst of all for Germans is the idea—not at all unusual in Anglo-Saxon economic literature—that inflation can help lift a country out of an incipient depression. Germans hear the word inflation and think only of their worst nightmare: instability.
That explains why “Germany has very few influential Keynesian economists,” as a recent report by the European Council on Foreign Relations put it. Olaf Storbeck, economics correspondent for the German business daily Handelsblatt, is somewhat more blunt: “Keynesianism is a dirty word in Germany,” he says.
Collier is blunter still. When I ask how he would summarize the native German tradition, he shifts from his flat American Midwestern accent to a shrill Colonel Klink–style Teutonic shriek. “If you do not follow the rules, you do not eat in Berlin, you do not eat in Frankfurt, you do not eat in Hamburg, you do not eat in Munich!”
Collier also volunteered to recite for me the effusive introductory remarks that he delivered when awarding Paul Krugman an honorary degree at the Free University. But before he could begin, Collier was interrupted by a muffled noise in the background. “That was my wife,” he said. “She wants me to tell you that she doesn’t agree with anything Paul has to say about inflation.”
The creation of a single currency for wide variety of nations was a bold experiment filled with a lot of potential but even more risks. One thing about complex social arrangements: There might be a number of ways to successful implement a complex social arrangement, like a currency union, but there are far more ways to screw them up. That’s entropy for you. This doesn’t mean we shouldn’t try to achieve complex social arrangement (e.g. democracy, or maybe even currency unions), but the inherent difficulties of trying to make complex social systems that make life easier and better for virtually all parties involved cannot be overstated. It’s just hard to do.
Money, itself, is a tricky enough complex social arrangement to implement in a closed single economy. It’s both a social arrangement and a social technology. But it’s tricky technology. Money subjectively represents some sort of “value” that gets traded around within a larger complex social arrangement. Money lets us “monetize” some of our interactions with each other so we can sort of keep accounts for who did what. Sort of. In that sense, money is a means to a desired end: We’d like to be able to live and trade with each other in ways that we can all agree are fair. Using money instead of barter seems to help achieve that end so we all use it in spite of its flaws. And we’ve actually gotten pretty good at it when weird far-right/Ordoliberal doctrines aren’t getting in the way.
Part of what makes money so tricky to implement is that it binds together things as vague as “a fair wage” or “value provided” across all the users of the currency with something as absolute as settling accounts. You have to pay what you owe or bad things happen to you. That’s part of how the system works. The settlement of accounts is part of what’s at the core of why money works as a system in the first place: the expectation of the settling of accounts keeps people participating. It seems fair and predictably. But that same expectation ends up causing many of the social problems we find today because the accounts that need to be settled aren’t actually fair. A major driver of the eurozone crisis has been the settlement of accounts (national debt following a crisis, usually after private debt had been nationalized). They’re only approximations of fairness and especially meaningful approximations. Again, money is a tricky technology.
And in the case of the eurozone, shared money became the foundation for building a new, integrated society. It might have seem like an obvious choice for a collection of nations to use money as that initial social contract lynchpin but it was actually a very risky choice . It was also a choice that inevitably led to a number of future choices as the many new situations that would inevitably arise in a new currency union came to fruition. One of those choices was the choice of how to settle accounts when an entire nation’s financial sector implodes. The fair answer to that question isn’t at all obvious. But the chosen answer by the Bundesbank and the large euorzone/EU/IMF policymaker community appears to be that the full settlment of accounts to foreign investors will be a core principle of the complex social arrangement of a continent of people all living together. Also, currency stability. And there won’t be that many other core priciples. Democracy won’t be one (e.g. troikas). Those sanctrosanct principles of foreign investor account settlement and currency stability appear to be what the eurozone’s designers  have in mind to unify the vast complex social arrangement that is the eurozone. Even if it means installing troikas that undemocratically impose massive unemployment and destroyed lives in an effort to somehow “settle accounts” with foreign investors. It’s symptomatic of a common problem facing societies all over the world: when account settlement ends up actually reducing the overall capacity of a society by disrupting people’s lives (via unemployment, a lack of education, degraded health, etc.), money, itself, becomes part of the problem . This is why we have a concept of usury. People have been learning and relearning these lessons about the potential pitfalls of account settlment for a long long time. The primary method the eurozone leaders have chosen to fosters a more harmonious way of living together is to implement national usury. Accounts will be settled even if the methodes for settling those accounts disrupts a nation’s ability to settle accounts.
The grim reality is that the eurozone social contract is now rooted in a fancy form of usury and a race to the bottom. This reality was hightlighted by an column written by EU economics and monetary affairs minister Olli Rehn last December. In the piece(excerpted below), Mr. Rehn argues that not only should the “structural reforms” continue unabated, but that there’s really no point in countries like Germany even trying to stimulate the economies of their eurozone neighbors because even if Germany did engage in stimulus spending, much of that spending would go to the rest of the world because the Southern European economies are too expensive and need more “structural reforms”. So even if it would help virtually the entire eurozone if the wealthier nations intentionally imported more goods from their ailing neighbors in order to settle accounts more quickly, that won’t happen until “structural reforms” make the Southern European economies as “competitive” as the poorest nations of the rest of the world (which ignores the artifical increase in their currencies that the Southern economies incurred to join the euro).
Part of the implicit social contract in what the eurozone’s designers envision for the eurozone is that “market forces” will play a major role in determining what happens in people’s lives. They will be regulated market forces, but the market forces will still reign supreme. In other words, the eurozone policymakers have decided that market equilibriums will determine the quality of life if its citizens. This is a particularly problematic perspective to have as the dominant philosophy guiding an entire continent. Marketplaces may naturally find equilibriums but they also naturally lend themselves to “race to the bottom dynamics”. The market equilibrium that the eurozone leaders are subjecting their citizens to may not be the kind of equilibrium you’d want to live in :
December 10, 2012 7:33 pm
Europe must stay the austerity course
Confidence is returning as structural reforms help rebalance the economy, says Olli Rehn
By Olli Rehn
The eurozone is living through lean times, but there is light at the end of the tunnel. On the one hand the short-term economic outlook remains weak. On the other hand, there are signs that confidence is returning.
The progress made reflects important decisions at both the national and European levels. These decisions have begun to rebuild confidence, calming markets and countering fears of a collapse of the euro. Far-reaching structural reforms are helping to rebalance the eurozone economy. Progress is tangible: current account imbalances among eurozone members have fallen markedly, as competitiveness lost by some members in the decade before the crisis is regained.
It is true that the correction of current account imbalances has so far come predominantly in deficit countries, but this is no surprise given the scale of the challenges they face. As John Maynard Keynes noted before the Bretton Woods talks, such adjustment is “compulsory for the debtor and voluntary for the creditor”.
Note that when Mr. Rehn says, “Far-reaching structural reforms are helping to rebalance the eurozone economy”, what he’s basically saying is that there was a group of nations that weren’t poor enough. Now they’re getting poorer. Things are improving.
Also note that when Mr. Rehn says, “It is true that the correction of current account imbalances has so far come predominantly in deficit countries”, he’s reminding us of the fact that the primary way the eurozone has cured itself from the problem of the Southern European nations importing from their neighbors more than they exported back wasn’t for the Southern nations to cut imports some and export more. They’ve simply been slashing imports  as a result of austerity. The exports don’t increase until the Southern wages get cut quite a bit more. That’s the plan.
This does not invalidate the case for a more symmetrical external rebalancing within the eurozone, involving creditor as well as debtor countries. The European Commission has said surplus countries should implement reforms to strengthen domestic demand. Germany could do this by opening up its services market and by encouraging wages to rise in line with productivity, two of the recommendations made to Berlin by the EU Council last July.
But at the same time, we should be aware that the eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world.
This means adjustment channels are influenced significantly by global economic interdependence. A reduction of surpluses in the north will not lead automatically to a corresponding increase of demand for exports by the south.
The principal beneficiaries of greater German demand would be the central European economies closely integrated into Germany’s supply chains. Our analysis suggests that a 1 per cent increase in German domestic demand would improve the trade balance of Spain, Portugal and Greece by less than 0.05 per cent of gross domestic product. This would not get us very far, which is why policies to enhance competitiveness – both structural and cost-related – remain crucial for the adjustment and rebalancing of the eurozone.
The case for a significant fiscal stimulus in Germany, as some call for, is also weak. The country will de facto have a much less restrictive fiscal stance in 2013 than the rest of the eurozone: the structural budget balance is expected to be little changed in Germany but to increase by 1 percentage point of GDP in the eurozone as a whole.
When Mr. Rehn writes “The case for a significant fiscal stimulus in Germany, as some call for, is also weak. The country will de facto have a much less restrictive fiscal stance in 2013 than the rest of the eurozone: the structural budget balance is expected to be little changed in Germany but to increase by 1 percentage point of GDP in the eurozone as a whole”, he’s basically saying that Germany should not be seen as having an overly restrictive fiscal policy, given the austerity measures elsewhere, because Germany itself isn’t engaging in austerity and therefore not “tightening” its spending as much as its neighbors. It’s an interesting argument.
In order to overcome the crisis and restore confidence, we must continue to remove structural obstacles to sustainable growth and employment; pursue prudent fiscal consolidation; and turn bold thoughts into convincing actions when redesigning and rebuilding our economic and monetary union. In short, we need to stay the course and pursue decisive reforms in our member states and deeper integration in the eurozone.
The writer is vice-president of the European Commission, responsible for economic and monetary affairs and the euro
Staying the course, no matter what: a lynchpin of the social contract
Olli Rehn ended his above column with a phrase often heard from leaders, “we need to stay the course”. It’s a rhetorical course he’s continuing to stay on . In addition to currency stability and usurious foreign investor accounts settlement, “staying the course” appears to be another apparent lynchpin of the new eurozone social contract. It’s a fascinating lynchpin for the eurozone to have since it’s actually “staying the course of continual change of an unknown nature towards a goal of greater integration to be implemented by people like Olli Rehn”.
“Staying the course” is also a fascinating lynchpin because it’s a microcosm of the global macrocosm. “Stay the course” has been the unspoken mantra of globalization for decades. The eurozone is just the most advanced manifestation of that global social contract to integrate our lives economies more and more no matter what. And for good reason. Technology and endless march of history ensured globalization. We really are all living in one giant global society in ways never seen before. It’s a really really complex social arrangement and it’s an arrangement we’re not getting rid of so we sort of have to figure out how to make it work. This is one reason why the eurozone’s trials and tribulations are so much bigger than the eurozone itself: the whole world is going to have to figure out how to all live together in better ways if we’re going to avoid global catastrophe over the next century. The twin threats of ecocollapse and social upheaval are poised to loom large over the next century. It’s a consequence of our built-to-fail global recklessness and mismanagement. We have to stay the “staying the course” course. We just need a better course.
Globalization really will happen because it’s already happened and continuing to happen. Globalization, like money, is both sort of an ends and a means. We want a global “community” with fair rules that make all of our lives better because that’s win-win. Globalization is just not a guaranteed win. We might mess it up immensly (like we’re currently doing). But we’re going to keep globalizing regardless of the risks because the alternative is for everyone to live alone in their own national enclaves. So we need a global social contract. It’s just a matter of what kind of social contract it turns out to be. The eurozone is currenly offering us an Ordoliberal social contract that’s sort of a more extreme version of the social contract that has dominated global trade for decades: an adherence to quasi-regulated neoliberal economics(austerity), foreign investor account settlement(more austerity), strictly enforced currency stability(and more austerity), and “staying the course”(presumably the austerity ends at some point). And, increasingly, a loss of national sovereignty in order to ensure the markets can work their magic :
The New York Times
Official Urges Greater Accountability by Euro Members
By JAMES KANTER
Published: January 11, 2013
BRUSSELS — Olli Rehn, the European commissioner in charge of the euro, defended the bloc’s austerity policies on Friday and urged legislators to pass a law that would let him push countries even harder to shore up their finances.
Signaling little letup in the need for wrenching adjustments in Europe, Mr. Rehn also issued warnings to a wide range of countries, including some with the region’s largest economies, to keep to the reform path and contribute to overall growth.
Mr. Rehn acknowledged the value of recent studies by economists at the International Monetary Fund suggesting that the damage created by austerity was up to three times more severe than previously thought. But Mr. Rehn also warned that those studies might not take sufficient account of the need to restore faith in countries blocked from borrowing money on international markets.
“We have not only the quantifiable effect, which is something that the economists like to emphasize, but we also have the confidence effect,” Mr. Rehn said.
Mr. Rehn, in Brussels, also urged members of the European Parliament to speed up an agreement on fiscal legislation.
Those rules would require member states to present their public finance plans to the European Commission in greater detail, and sooner, than is required now. The commission could then demand revisions, as deemed necessary. For member states that are already in financial trouble, those rules would let the commission conduct regularly scheduled reviews and require more information about a country’s financial sector than is currently the case.
The rules would give “stronger possibilities of pre-emptive oversight as to national budgets before they are finally presented to national Parliaments” in order “to ensure that the member states practice what they preach,” Mr. Rehn said.
Failing to pass the law, he said, could invite a rerun of events in the middle of the last decade, when Germany and France essentially ignored their deficit-cap provisions, contributing to the current debt crisis in Europe.
“It’s a very serious issue,” he said.
Unfortunately, it looks increasingly like we’re going to be seeing more and more proposals by the Bundesbank and folks like Olli Rehn for the world to embrace an Ordoliberal model. Fortunately, there’s no shortage of other approaches available. Social contracts are pretty much limited by what we can think of. A diversity of complex social arrangements is sort of humanity’s specialty on this planet. It’s identifying and picking the best options that’s the hard part. That’s why learning from history is so important. Recent history has been repeatedly demonstrating the inadequacy of Ordoliberalism as an international model. It’s similar to the problem with neoliberalism (the GOP’s crony-Ayn Randism): Any system that takes our current economy too seriously — to the point where lives are destroyed because someone doesn’t have enough money — is a society that’s priming itself for failure. Especially right now when we have a planet filled with messed up economies that are all integrating together...ledger balances — from individual to national debts — just aren’t that meaningful and with both neoliberalism and Ordoliberalism life outcomes are determined primarily by market outcomes. And as the financial sector taught us all in the lead up to the financial crisis: markets can be easily rigged. Neoliberalism and Ordoliberalism are just not what we need right now. Climate change, overpopulation, and overpollution are threatening to create mass migrations and the collapse of entire regions of the planet so we need a social contract that’s really good with dealing with lots of poor people that recently experienced mass catastrophes. Nature is going to ensure plenty of mass death and destruction on its own. Societies are going to need to be operating as intelligently and efficiently as possible. Artificially stagnating lives via austerity induced by economic circumstance is just not going to be an option for successful societies. If there were other technologically advanced species living on this planet that developed the ability to overpopulate, overpollute, and generally implode themselves we could learn for their experiences. But there aren’t any around* so we’re going to have to figure out something new to get humanity through the challenges of the next century because they are unprecedented and growing.
Part of what makes neoliberalism, Ordoliberalism, and currency unions in general so tantalizing a model for integrating the lives of large numbers of people in vastly different circumstances is that they all rest on a foundation of uniformity: there is a system, it has rules, and the rules are presumed to lead to better outcomes than if there were no rules. And it’s true that these systems are likely better an improvement over complete anarchy. But the uniformity of these systems that makes them so tempting for binding diverse lives together is also an enormous weakness. Different situations require different economic environments when you’re using something as imperfect as money as the medium for interactions. There’s just no reason to expect the social contracts we’re seeing offerred to the world — Ortholiberalism or the standard neoliberalism — to be successful for the vast majority of of the global population. One of the most prevalent and powerful lessons history teaches us is that markets sort of work but also sort of don’t work. Economic social contracts that allow market outcomes to destroy lives are not going to work, especially during this phase of history when more and more national economies are becoming ever more tightly integrated. Figuring out a fair system with the kind of flexibility that works for everyone is going to require different approaches and probably different ways of viewing money itself. We’re going to have to get creative if we’re going to figure out a how to live together successfully. It’s an ancient problem that requires unprecedented solutions for unprecedented* problems.
*There is one other species available that’s experienced global collapse, but the Wookies ain’t talking . And their situation doesn’t really apply. And in case you’re curious, there was a giant explosion that collapsed the ecosystem when their super duper fail safe DeathStar brand iridium fusion plant exploded. Someone  sold them what they thought were magical baby Ewok-Chihuahua hybrids. Nope . It was over fast. The Gremlin-sized vent leading to the reactor chamber didn’t help. It was seriously tragic . So there are some applicable lessons to humanity’s current situation regarding the dangers  of power plants  but, thankfully, the Wookies’ mogwai infestation doesn’t really apply to our current conundrum. And to keep it that way, Do Not Disturb the space eggs  people ! Leave those kinds of situations to the professionals .
And it looks like the G20 is officially backing away from Olli Rehn’s global developed-economies austerity drive, where the largest economies in the world all agree to cap government spending at some arbitrary debt-to-GDP ratio. For now, at least. Proposals for a cap on the unemployment-to-population ratio are similarly ignored, as such proposals would never be made in the first place. Classes at the Global Leadership Clown College are in session :
G20 backs off austerity drive, rejects hard debt cut targets
By Leika Kihara and Paul Eckert
Fri Apr 19, 2013 11:54pm BST
(Reuters) — Finance leaders of the G20 economies on Friday edged away from a long-running drive toward government austerity in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of worries over a sluggish global recovery.
The G20 club of advanced and emerging economies also said it would be watching for negative effects from massive monetary stimulus, such as Japan’s — a nod to concerns of developing nations that those policies risk flooding their economies with hot capital and driving up their currencies.
Russian Finance Minister Anton Siluanov said at a news conference that officials from the Group of 20 nations believed overall debt reduction was more important than specific figures.
“We agreed that these would be soft parameters, these would be some kind of strategic objectives and goals which might be amended or adjusted, depending on the specific situations in the national economies,” he said.
Russia — this year’s G20 chair — had hoped to secure an agreement on setting fixed targets for reducing debt by the time G20 leaders meet in St. Petersburg in September.
But the United States and Japan have firmly opposed the idea of committing to fixed debt-to-GDP targets, with Washington trying to keep the focus of the G20 on growth.
“Quite frankly, the language could have been stronger but it’s sufficient to move this forward,” said Canadian Finance Minister Jim Flaherty.
SOFT DEBT TARGETS
The drive toward government austerity has been undercut by weakness in economies that took severe measures to cut deficits, including Britain, which is headed into its third recession in the last five years. The U.S. economy also shows some signs of strain that economists pin on belt-tightening in Washington.
Earlier this week, the IMF reduced its forecast for global growth and reiterated its call for some European countries to throttle back their austerity drives.
Fitch cut its credit rating on Britain on Friday to double-A-plus, citing expectations that general government debt will rise to 101 percent of GDP by 2015–2016 due to weak growth.
In an interview with BBC television, IMF chief Christine Lagarde said now might be time for Britain to consider relaxing its focus on austerity given the recent weakness in its economy.
Russia’s Siluanov also said a greater amount of coordination was needed with the IMF on global liquidity, with recommendations expected by next July.
A language/doublespeak-related side-note: The phrase used in the article “The drive toward government austerity” is a phrase worth appreciating as a wonderful example of how ambiguity in language can parallel and even drive ambiguity in thought. One of the fun things about the term “government austerity” is that doubles as a phrase one could use to describle an idealized state of a government with “austere” finances from a debt and deficits perspective. Germany’s state of having low-deficits and a relatile low debt-to-GDP ratio could be considered a form of “government austerity” even though the German public sector is quite large by historical standards.
But the term “government austerity” could also describe that Ayn Randian/Grover Norquist Libertarian government-free paradise we hear so much about. Under this interpretation of the term, “goverment austerity” assumes that it’s a society with very little government. Period.
So the use of the phrase “The drive toward government austerity” is very appropriate in an article disussing this topic because what we’re seeing are seemingly endless attempts by leaders arguing that nations can acheive that Germany-like state of “government austerity” (low government debt/deficits) by simply cutting government spending. The Randian/Norquist ideal of an “austere government” that can’t provide basic services to its populace is being acheived by arguing that the low-deficit/low-debt ideal of “government austerity” can be accomplished if the public immediately cuts its goverment spending and the overall services provided by government to its citizens. But it’s just temporary. Once a transitory period passes and the magic of lower-government debt works throughout the economy, growth will return and society will be able to afford more government services if it so chooses. That’s the publically advanced theory for why Randian/Norquist policies are to be implemented.
That little trick of selling temporarily smaller government in order to afford larger government later is being successfully sold to one nation after another. THAT’s why it seems like nearly the entire G20, except for the US and Japan, wants to see global government spending curbs. The Reagan Revolution really has gone global, except it’s a variant of the Reagan Revolution that’s likelier to have more widespread appeal. Reagan’s phase, “Government isn’t the solution to the problem. Government is the problem” is an idea that’s only going to have limited global appeal. A lot of societies just aren’t crazy enough to embrace that. But the idea that “Government debt is the problem and therefore cutting government temporarily is the only solution,” is the kind idea that could appeal to a much broader audience around the globe. You get the same “Reagan Revolution” policies but without the “Reagan Revolution” idealistic fervor. There’s an idealistic fervor alright, but it’s based on a different kind of idealism...it’s an ideal world where various “crowding out” government debt theories  regarding what constitutes “too much” government debt are coupled to a theory that Germany’s Ordoliberal  approach of shock-doctrine economics to decrease the government deficits and debt loads really will work well for other nations in vastly different situations. The “crowding out” government debt theories  and austerity solutions turn out  to be demonstrably wrong , so it’s really more of a faith than an ideal at this point.
So you have to love statements like “The drive toward government austerity has been undercut by weakness in economies that took severe measures to cut deficits”. Yes, contractionary  policies  are  still  contractionary . Our leaders appear to still be struggling to figure that one out. When the Reagan Revolution  went global so did  stupidity .