France shot itself in the foot with its 35 hour work week and manda­tory early retirement.

There’s some con­flict­ing mes­sag­ing com­ing out of the Ger­man export-oriented busi­ness lead­ers regard­ing the fate of the euro­zone and pos­si­ble reme­dies. One fac­tion appears to be voic­ing an increased will­ing­ness for Ger­many to dump the euro because return­ing to “Old Europe” is not an option:

‘The Old Europe’ Is ‘Not An Option For Ger­many’
Tues­day, Jan­u­ary 17, 2012 at 5:28PM

“The fact that we profit mas­sively from the euro doesn’t mean that we have to accept every polit­i­cal horse-trade to save the com­mon cur­rency,” Anton F. Börner, pres­i­dent of the Ger­man Asso­ci­a­tion of Exporters (BGA), told the Handelsblatt—a swipe at Ital­ian Prime Min­is­ter Mario Monti who’d demanded that Ger­many dig deeper into its pock­ets to reduce the debt bur­den of other coun­tries, such as, well, Italy.

“The Ital­ian gov­ern­ment is on the wrong track if it thinks it can get out of this with­out dif­fi­cult reforms to strengthen its com­pet­i­tive­ness,” Börner said. Clear polit­i­cal mes­sages would be nec­es­sary; and Italy would have to deliver. But if coun­tries like Italy that are mired in crisis—the Krisenländer—refuse to imple­ment those reforms, then the breakup of the Euro­zone would be a solution.

His voice doesn’t go unno­ticed: the BGA rep­re­sents 120,000 exporters—the lifeblood of the econ­omy. Ger­many fights for the euro because fail­ure would have a “mas­sive eco­nomic cost and incal­cu­la­ble polit­i­cal con­se­quences,” Börner said. It would mean “rena­tion­al­iza­tion and pro­tec­tion­ism” and finally “balka­niza­tion and mar­gin­al­iza­tion of Europe.”

He’d already stepped into the spot­light in Novem­ber when he uttered the then still unspeak­able: “We need a com­mon mar­ket, not one cur­rency.” And he’d sug­gested an alter­na­tive: a mini-eurozone, one with­out Italy. For that whole deba­cle, read.... The Next Step Towards The End Of The Euro.

Each coun­try must fight to retain the con­fi­dence of the finan­cial mar­kets or regain it through reforms, Börner said. But if “a coun­try can­not keep its deficits and debt within the com­monly agreed-upon lim­its, it must irrev­o­ca­bly accept a sub­stan­tial reduc­tion in sov­er­eignty.” Ger­many is pre­pared to sink a lot of money into the Krisen­län­der to help them on their way to com­pet­i­tive­ness, he said, but “the old Europe doesn’t have a future—and is there­fore not an option for Germany.”

He isn’t the only one. Over the week­end, it was Wolf­gang Reit­zle, CEO of Linde AG, who’d elicited gasps when he told the Spiegel, “I don’t believe that the euro must be saved at any price.”

He feared that reform efforts would fade if the ECB takes pres­sure off the Krisen­län­der by buy­ing their bonds. And he explained: “If it is not pos­si­ble to dis­ci­pline the Krisen­län­der, then Ger­many must exit.”

Yes, it would lead to an appre­ci­a­tion of the “Deutschmark, the euro-north, or what­ever cur­rency we’d have then.” It would be a shock to the econ­omy. Exports would cave and unem­ploy­ment would rise. But not for long. “Five years down the road, Ger­many would be even stronger in com­par­i­son to its Asian competitors.”

The Ger­man indus­trial elite now openly dis­cuss exit­ing the Euro­zone. The ques­tion no longer is whether or not to keep Greece in it—the cap­i­tal mar­kets had already “checked off” that topic long ago, Reit­zle said—but what price Ger­many should pay to stay in it itself. Already, there is utter frus­tra­tion with the ECB. Hans-Werner Sinn, pres­i­dent of Ifo, a large eco­nomic research insti­tute, lamented that Ger­many was being mar­gin­al­ized at the ECB as nei­ther its pres­i­dent nor its chief econ­o­mist were Ger­mans. “All the pretty words how the ECB would func­tion after its model, the Bun­des­bank, and how Ger­many, as the largest coun­try, would retain its spe­cial role turned out to be echo and smoke.”

But there is no agree­ment. Yet.

“A return to the D-Mark would be cat­a­strophic,” BMW CFO Friedrich Eich­ner told Reuters (Spiegel). “We should to do every­thing pos­si­ble to avoid that it will get that far.”

Siemens CEO Peter Löscher was more san­guine. “The euro is extremely impor­tant for the Euro­pean indus­try,” he said. Frank Appel, CEO of Deutsche Post DHL, said, “what­ever it would cost to save the euro will be less than that what the euro has given and will con­tinue to give Ger­many and Europe.” The spokesper­son for Merck KGaA was more ambiva­lent: “It’s part of our job ... to be pre­pared for changes.”

Mean­while, aus­ter­ity is tak­ing its toll on Greece. Sui­cides jumped by 22.5%. Unem­ploy­ment rose to 18.2%. Phar­ma­cies are hav­ing dif­fi­cul­ties obtain­ing med­ica­tions. More cuts are com­ing. If there is no agree­ment with bond­hold­ers, the bailout Troika will walk and Greece will default in March. But now, even the Troika is in disarray.

So is this what the busi­ness lead­ers are plan­ning on mak­ing “New Europe” look like:

...

Fed­eral and state agen­cies sup­port the inter­na­tional endeav­ors not only of cod­dled multi­na­tion­als like Siemens and VW but also of family-owned mid­size enter­prises that form the core of Ger­man indus­try. For exam­ple, the Cham­ber of Com­merce, a fed­eral agency, has branches all over the world to sup­port Ger­man com­pa­nies in doing busi­ness over­seas. It’s all part of “Deutsch­land AG.”

The cap­i­tal struc­ture of most com­pa­nies is con­ser­v­a­tive. With sig­nif­i­cant amounts of equity, returns on equity might not be stel­lar. But the fact that bal­ance sheets weren’t lever­aged to the hilt paid off dur­ing the finan­cial cri­sis when the his­toric order col­lapse didn’t cas­cade from an oper­a­tional fiasco to a finan­cial fiasco.

Quarter-to-quarter think­ing (short-term-itis) is less preva­lent among Ger­man man­agers, par­tic­u­larly of mid­size com­pa­nies that are often closely held and can afford strate­gies that don’t imme­di­ately trans­late into upticks of their stock price.

While com­pa­nies might not be able to lay off employ­ees eas­ily, they can cut their pay in half and reduce their hours. The gov­ern­ment makes up half of the cut. Thus, employ­ees get a 25% cut in pay, instead of being laid off. The gov­ern­ment doesn’t have to pay unem­ploy­ment com­pen­sa­tion. Dis­rup­tions, morale prob­lems, and dis­lo­ca­tions that result from lay­offs are mostly avoided. The com­pany remains fully staffed with expe­ri­enced peo­ple whose tech­ni­cal skills are up to date. As orders come in, hours and pay can be ratch­eted up as needed with­out the expense and delays of hav­ing to hire and train new people.

...

Because that’s not what “New Europe” is look­ing like:

Greece: Dis­agree­ment Every­where, Rift in the Troika
Thurs­day, Jan­u­ary 12, 2012 at 8:11PM

Aus­ter­ity mea­sures are tak­ing their daily toll on Greece. Sui­cides and attempted sui­cides have jumped by 22.5% since 2009. The unem­ploy­ment rate rose to 18.2%. RTL, the largest radio net­work in Europe, lost 50% of its adver­tis­ing rev­enues in Greece since the start of the crisis—and decided to leave. And now phar­ma­cies are hav­ing dif­fi­cul­ties obtain­ing medications.

The phar­macy prob­lem is an unin­tended con­se­quence of the aus­ter­ity mea­sures that the bailout Troika (EU, IMF, and ECB) is impos­ing on Greece. To cut its health­care bud­get, the gov­ern­ment has reduced the prices that the indus­try can charge state-owned insur­ers. So whole­salers are sell­ing their lim­ited sup­ply out­side Greece. And state-owned insur­ers, whose bud­gets are squeezed as well, delay pay­ments to phar­ma­cies, which then can’t pay their whole­salers for the med­ica­tions they do get. Thus, whole­salers are even less likely to sell to pharmacies—and the sys­tem breaks down. A micro­cosm of the cur­rent state of the Greek economy.

Yet more cuts are com­ing. To impose them, Prime Min­is­ter Lucas Papademos even threat­ened pri­vate sec­tor unions (and every­one else) with the nuclear option—disorderly default.

...

In light of the forced col­lapsed of the PIIGS’s economies, it’s worth ask­ing why the Ger­man busi­ness elites seem to intent on mak­ing the weaker euro­zone nations more “com­pet­i­tive” when that very process will gut the abil­ity of those nations to keep buy­ing Ger­many exports. After all, much of the tab would be paid by the Ger­man tax­payer for either bailouts or some sort of sub­si­diza­tion of Germany’s weaker neigh­bors in order to make the euro­zone sus­tain­ably viable (instead of a giant trade imbal­ance debt bub­ble machine), with the bulk of the ben­e­fits accru­ing to the export busi­ness own­ers with increased exports and a cheaper cur­rency. It’s a ques­tion the Ger­man mid­dle class should be ask­ing itself because the unfold­ing sit­u­a­tion is look­ing a lot like one where the mid­dle class loses and the export busi­ness elites win. Every­where, includ­ing in Ger­many. Because there is an alter­nate sus­tain­able mode of eco­nomic growth that Germany’s export busi­nesses can use to keep grow­ing in the face of sus­tained reduced demand from their euro­zone neigh­bors: Turn the PIIGS into Germany’s Mexico/China. Germany’s mid­dle class may not like pay­ing for the “profli­gacy” those “lazy” Greeks (that actu­ally work more hours on aver­age than their Ger­man coun­ter­parts), but they’re prob­a­bly not going to like wage nego­ti­a­tions with an employer that can open up new man­u­fac­tur­ing oper­a­tions in “New Greece”, where labor laws and social safety net are deemed to be “uncom­pet­i­tive”. After all, with the loss of all those exports to the lazy PIIGS, the whole euro­zone needs to become more “com­pet­i­tive” and the PIIGS aren’t the only ones that can be sent to the slaughterhouse.

One of the crit­i­cal ques­tions that don’t seemed to be asked very much about the pro­posed visions for a future euro­zone is the ques­tion of what, exactly, a “com­pet­i­tive” econ­omy might look like. There’s an arti­cle in NY Times about Apple’s man­u­fac­tur­ing sup­ply chain in China and the rea­sons why those jobs are unlikely to ever return to devel­oped nations. It might give us a hint as to what a “com­pet­i­tive” manufacturing-based econ­omy might look like for any puta­tive PIIGS in need of a mas­sive fun­da­men­tal social con­tract over­haul. Hint: it involves lots of “flexibility”:

The iEcon­omy
How the U.S. Lost Out on iPhone Work
By CHARLES DUHIGG and KEITH BRADSHER
Pub­lished: Jan­u­ary 21, 2012

When Barack Obama joined Sil­i­con Valley’s top lumi­nar­ies for din­ner in Cal­i­for­nia last Feb­ru­ary, each guest was asked to come with a ques­tion for the president.

But as Steven P. Jobs of Apple spoke, Pres­i­dent Obama inter­rupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its prod­ucts were made in Amer­ica. Today, few are. Almost all of the 70 mil­lion iPhones, 30 mil­lion iPads and 59 mil­lion other prod­ucts Apple sold last year were man­u­fac­tured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unam­bigu­ous. “Those jobs aren’t com­ing back,” he said, accord­ing to another din­ner guest.

The president’s ques­tion touched upon a cen­tral con­vic­tion at Apple. It isn’t just that work­ers are cheaper abroad. Rather, Apple’s exec­u­tives believe the vast scale of over­seas fac­to­ries as well as the flex­i­bil­ity, dili­gence and indus­trial skills of for­eign work­ers have so out­paced their Amer­i­can coun­ter­parts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

...

Apple exec­u­tives say that going over­seas, at this point, is their only option. One for­mer exec­u­tive described how the com­pany relied upon a Chi­nese fac­tory to revamp iPhone man­u­fac­tur­ing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forc­ing an assem­bly line over­haul. New screens began arriv­ing at the plant near midnight.

A fore­man imme­di­ately roused 8,000 work­ers inside the company’s dor­mi­to­ries, accord­ing to the exec­u­tive. Each employee was given a bis­cuit and a cup of tea, guided to a work­sta­tion and within half an hour started a 12-hour shift fit­ting glass screens into beveled frames. Within 96 hours, the plant was pro­duc­ing over 10,000 iPhones a day.

“The speed and flex­i­bil­ity is breath­tak­ing,” the exec­u­tive said. “There’s no Amer­i­can plant that can match that.”

...

Of course, no one can rea­son­ably expect Euro­pean coun­tries to tran­si­tion to the Chinese-model of fac­tory cities where employ­ees are forced to live next to the fac­tory and work under slave-labor stan­dards in a job that destroys their bod­ies and pro­vides no futures for advance­ment...it’s unthink­able:

Sep­tem­ber 08, 2011, 10:00 AM EDT
In Hun­gary, the Job­less Go to Labor Camp
A new wel­fare reform pro­gram forces the unem­ployed to sweat for their benefits

By Carol Mat­lack and András Gergely

Wield­ing scythes and pitch­forks, about 30 men and women hack through bram­bles on a hill­side above the Hun­gar­ian vil­lage of Gyöngyös­pata. With the near­est road more than a half mile away, work­ers have to hike in with food and water for the day. For bath­room and lunch breaks, they duck into a thicket that offers the only shade in the 98F heat. “It’s degrad­ing to work in these con­di­tions,” says Károly Lakatos, a 38-year-old father of three who was laid off ear­lier this year from his forklift-operator job in an auto parts fac­tory. When his unem­ploy­ment ben­e­fits ran out, the gov­ern­ment assigned him to a brigade clear­ing land owned by the village.

If Prime Min­is­ter Vik­tor Orbán has his way, hun­dreds of thou­sands of Hun­gar­i­ans will soon join sim­i­lar squads. Under a plan approved by Par­lia­ment in July, by 2012 some 300,000 peo­ple will be work­ing in com­mu­nity ser­vice jobs—doing every­thing from pick­ing up trash to build­ing stadiums—instead of draw­ing wel­fare or unem­ploy­ment ben­e­fits. Hun­gary will no longer “give ben­e­fits to those capa­ble of work, when there is much work to be done,” Orbán said in June. The effort is part of the rul­ing Fidesz Party’s 2010 elec­tion pledge to cre­ate 1 mil­lion jobs over the next decade.

No ques­tion, Hun­gary needs jobs. Only 54.6 per­cent of the working-age pop­u­la­tion is employed, the low­est rate in the Euro­pean Union, accord­ing to EU data. An ane­mic econ­omy, fore­cast to grow 2 per­cent in 2011, is part of the prob­lem. But the real cul­prit is the sprawl­ing wel­fare state cre­ated after the fall of com­mu­nism. To help work­ers who lost jobs in state-run indus­tries, the gov­ern­ment estab­lished gen­er­ous early retire­ment, dis­abil­ity, and parental leave pro­grams. Those ben­e­fits are still in place. Accord­ing to the EU’s Euro­stat agency, in 2008 Hun­gary spent $5,200 per capita on social pro­tec­tion, vs. $4,088 in Slo­va­kia and $3,706 in Poland. “There are peo­ple in this work pro­gram who’ve never had a proper job in their lives,” says Oszkár Juhász, the mayor of Gyöngyös­pata, which is an hour’s drive north­east of Budapest.

Under the new law, job­less ben­e­fits will be cut off after 90 days, down from nine months, and eli­gi­bil­ity for other wel­fare pay­outs will be cur­tailed. Peo­ple taken off the dole are being offered jobs pay­ing $303 a month, twice the basic wel­fare pay­ment but less than the stan­dard $415 min­i­mum wage. Those who refuse will receive no gov­ern­ment aid.

The oppo­si­tion Social­ist Party says the pro­gram “is based on fear and force, just like in a pre­vi­ous era of terror”—an allu­sion to the hun­dreds of thou­sands of Hun­gar­i­ans who were con­scripted for Nazi and Soviet work camps. By launch­ing the pro­gram in Gyöngyös­pata, where mem­bers of the town’s Roma eth­nic minor­ity clashed with nation­al­ist vig­i­lantes ear­lier this year, the gov­ern­ment gave the impres­sion that it is try­ing “to keep the Roma under con­trol,” says Péter Juhász of the Hun­gar­ian Civil Lib­er­ties Union. “We live in fear that the black uni­forms [worn by the vig­i­lantes] will return,” says Irén Rácz, a 57-year-old Roma assigned to the Gyöngyös­pata brigade.

Roma make up about 6 per­cent of Hungary’s pop­u­la­tion and as much as 12 per­cent of those receiv­ing wel­fare and unem­ploy­ment ben­e­fits, accord­ing to the Budapest Insti­tute. In Gyöngyös­pata, 36 of the 40 peo­ple work­ing in the pro­gram are Roma. Hungary’s Inte­rior Min­istry, which admin­is­ters the pro­gram, says it is pay­ing spe­cial atten­tion to Roma because they are dis­crim­i­nated against and “under­skilled” com­pared with other work­ers. “There is lit­tle chance that they can find work in the pri­vate sec­tor with­out devel­op­ment pro­grams,” the min­istry said in a writ­ten response to ques­tions from Bloomberg Businessweek.

The policy’s price tag is another con­cern. The gov­ern­ment, which is repay­ing a $29 bil­lion bailout led by the Inter­na­tional Mon­e­tary Fund, hasn’t spec­i­fied where it will find the money to put hun­dreds of thou­sands of work­ers on the state pay­roll and finance projects to employ them. Orbán has said the pro­gram will rely on old-fashioned man­ual labor. “Build­ing dams, clean­ing ditches, build­ing reservoirs—this won’t hap­pen using 21st cen­tury tech­nol­ogy,” he said in a May tele­vi­sion inter­view. Balázs Váradi, a Budapest Insti­tute econ­o­mist who advised the pre­vi­ous Social­ist gov­ern­ment, says “there has been an explicit choice to use labor-intensive meth­ods, even if that is not eco­nom­i­cal.” The Gyöngyös­pata work­ers are to spend three months clear­ing 16 hectares of land, a job that could be com­pleted far more quickly and cheaply with machinery.

Hun­gar­ian employ­ers say they are eager for skilled work­ers. Daim­ler (DDAIF) is recruit­ing 2,500 peo­ple, includ­ing engi­neers and IT spe­cial­ists, for a new Mer­cedes fac­tory in the town of Kecskemét. Public-works jobs gen­er­ally don’t pro­vide the kind of train­ing and expe­ri­ence busi­nesses need, says Adri­enn Bálint, direc­tor for social dia­logue at the Con­fed­er­a­tion of Hun­gar­ian Employ­ers and Indus­tri­al­ists. “This is not pro­duc­tive work,” she says.

Nearly a decade ago, Slo­va­kia tried a sim­i­lar public-works pro­gram to wean peo­ple off the dole, but the gov­ern­ment aban­doned the effort after a few years “because they real­ized peo­ple were not tran­sit­ing into reg­u­lar employ­ment,” says Mar­tin Kahanec, an assis­tant pro­fes­sor of pub­lic pol­icy at Cen­tral Euro­pean Uni­ver­sity in Budapest.

...

Truly com­pet­i­tive soci­eties employ teem­ing masses of dis­em­pow­ered cit­i­zens will­ing to destroy their bod­ies and minds for sub­sis­tence wages. Remem­ber that folks. It’s the new normal.

It begins...again...

Por­tu­gal to need “debt hair­cut” as econ­omy tips into Gre­cian down­ward spi­ral
Portugal’s bor­row­ing costs have jumped to record highs and are track­ing the moves seen in the cul­mi­nat­ing phase of Greece’s debt cri­sis, dash­ing hopes that the coun­try will be able to stave off con­ta­gion by embrac­ing dras­tic austerity.

By Ambrose Evans-Pritchard, Inter­na­tional Busi­ness Editor

6:38PM GMT 19 Jan 2012

Yields on Portugal’s 10-year bonds climbed to 14.39pc on Thurs­day. Credit default swaps mea­sur­ing bond risk have reached 1270 points, pric­ing a two-thirds chance of default over the next five years.

While some of the lat­est dam­age reflects forced sell­ing of Por­tuguese debt after Stan­dard & Poor’s cut the country’s credit rat­ing to junk sta­tus last Fri­day, there are deeper wor­ries that sharp fis­cal cuts by the free-market gov­ern­ment of Pedro Pas­sos Coelho may prove self-defeating.

Mr Pas­sos Coelho has been praised by EU lead­ers and the Inter­na­tional Mon­e­tary Fund for deliv­er­ing on aus­ter­ity, but the risk is that severe tight­en­ing — with­out off­set­ting mon­e­tary and exchange stim­u­lus — will push Por­tu­gal into the same down­ward spi­ral that has already engulfed Greece.

Jur­gen Michels, Europe econ­o­mist at Cit­i­group, said Portugal’s econ­omy will con­tract by a fur­ther 5.8pc this year and by 3.7pc in 2013, a far sharper decline than offi­cial fore­casts. The peak-to-trough col­lapse would be 13pc, a full-fledged depression.

“As this gets worse it is going to be extremely dif­fi­cult to go ahead with more aus­ter­ity mea­sures: polit­i­cal con­ta­gion will start to come through,” he said.

Por­tu­gal has so far reacted calmly. It has avoided the sorts of riots seen in Greece, but patience is wear­ing thin. The CGTP labour fed­er­a­tion held a protest march in Lis­bon this week, vow­ing to resist “forced labour”.

A new study by the Barom­e­ter for Democ­racy shows that con­fi­dence in Portugal’s democ­racy has fallen to the low­est since the end of the Salazar dic­ta­tor­ship. Barely more than half retain faith in the sys­tem and 15pc pine for “author­i­tar­ian” rule.

While Portugal’s pub­lic debt of 113pc of GDP is lower than Greece’s, the pri­vate sec­tor has much larger debts and the country’s total debt-load is higher at 360pc of GDP — much of it exter­nal debt.

“There is huge pri­vate sec­tor delever­ag­ing going on and the bank­ing sys­tem has big prob­lems. It is unclear how much of this pri­vate debt is going to end up on the state’s door-step,” said Mr Michels.

“With­out a size­able hair­cut to its debt stock, Por­tu­gal will not be able to move into a viable fis­cal path. We expect a hair­cut of 35pc at the end of 2012 or in 2013.”

Portugal’s Trea­sury faces mod­est debt repay­ment of €17bn this year. There is no immi­nent cri­sis since Lis­bon is already under an EU-ECB-IMF Troika regime as part of its €78bn res­cue and does not need to access mar­kets until 2013.

The prob­lem is the slow-burn threat of debt-deflation. Inter­est costs for Por­tuguese com­pa­nies are painfully high — if they can roll over loans at all — and the debt bur­den is ris­ing on a shrink­ing eco­nomic base. Real M1 money deposits con­tracted at an annual rate near 20pc in the sec­ond half of 2011.

Since the coun­try can­not devalue within EMU, it hopes to achieve an “inter­nal deval­u­a­tion” to restore 30pc in lost com­pet­i­tive­ness against Ger­many. This is a gru­elling process, entail­ing cuts that eat away at tax rev­enue.
...

I won­der if there are any “moral haz­ards” in this new fan­gled EU-debt-troika-government sys­tem that seems to have a default anti-labor/social safety net man­date via a default tem­po­rary de facto mini-dictatorship every time the finan­cial sec­tor bursts ones of its bub­bles? If so, like all moral prob­lems fac­ing soci­ety, some aus­ter­ity is in order. Maybe even aus­ter­ity for the finan­cial sec­tor. Just as long as folks don’t go over­board.

Oh look, another country’s bank­ing sys­tem is look­ing a lit­tle queasy. More “labor mar­ket” reforms are the only pos­si­ble solu­tion:

Span­ish cen­tral bank pre­dicts big drop in econ­omy
Spain cen­tral bank pre­dicts 1.5 per­cent fall in Span­ish econ­omy and jobs mis­ery to con­tinue
Asso­ci­ated PressBy Daniel Woolls, Asso­ci­ated Press | Asso­ci­ated Press – 01/23/2012

MADRID (AP) — Spain faces more unem­ploy­ment mis­ery and needs seri­ous labor mar­ket reforms, the country’s cen­tral bank warned Mon­day as it slashed its eco­nomic fore­casts for this year.

The Bank of Spain pre­dicted the country’s econ­omy will con­tract 1.5 per­cent this year, rather than expand by that same amount as per its fore­cast until now.

In a report, the bank said that since last sum­mer the euro­zone debt cri­sis has sapped busi­ness con­fi­dence and choked off bank credit. This has caused a major drop in domes­tic demand, only par­tially off­set by strong exports.

In 2012, house­hold spend­ing will con­tract because of euro15 bil­lion ($19 bil­lion) in tax hikes and spend­ing cuts already enacted by the new con­ser­v­a­tive gov­ern­ment to chip away at the bud­get deficit, it said.

The econ­omy will expand in 2013, but only by 0.2 per­cent, the cen­tral bank forecast.

It warned that the gloomy out­look will hit jobs with­out thor­ough labor mar­ket reforms. Spain already has a 21.5 per­cent unem­ploy­ment rate and fig­ures due out Fri­day are expected to show a fur­ther rise.

The new con­ser­v­a­tive gov­ern­ment that swept to power after Nov. 20 elec­tions has warned Spain will fall into reces­sion this quar­ter because of declines in GDP in the last three months of 2011 and the first quar­ter of 2012.

...

It looks isntalling a troika in place of Greece’s gov­ern­ment didn’t go far enough:

Exclu­sive: Ger­many wants Greece to give up bud­get control

By Noah Barkin

BERLIN | Fri Jan 27, 2012 6:59pm EST

(Reuters) — Ger­many is push­ing for Greece to relin­quish con­trol over its bud­get pol­icy to Euro­pean insti­tu­tions as part of dis­cus­sions over a sec­ond res­cue pack­age, a Euro­pean source told Reuters on Friday.

“There are inter­nal dis­cus­sions within the Euro group and pro­pos­als, one of which comes from Ger­many, on how to con­struc­tively treat coun­try aid pro­grams that are con­tin­u­ously off track, whether this can sim­ply be ignored or whether we say that’s enough,” the source said.

The source added that under the pro­pos­als Euro­pean insti­tu­tions already oper­at­ing in Greece should be given “cer­tain decision-making pow­ers” over fis­cal policy.

“This could be car­ried out even more strin­gently through exter­nal exper­tise,” the source said.

The Finan­cial Times said it had obtained a copy of the pro­posal show­ing Ger­many wants a new euro zone “bud­get com­mis­sioner” to have the power to veto bud­get deci­sions taken by the Greek gov­ern­ment if they are not in line with tar­gets set by inter­na­tional lenders.

“Given the dis­ap­point­ing com­pli­ance so far, Greece has to accept shift­ing bud­getary sov­er­eignty to the Euro­pean level for a cer­tain period of time,” the doc­u­ment said.

Under the Ger­man plan, Athens would only be allowed to carry out nor­mal state spend­ing after ser­vic­ing its debt, the FT said.

“If a future (bail-out) tranche is not dis­bursed, Greece can­not threaten its lenders with a default, but will instead have to accept fur­ther cuts in pri­mary expen­di­tures as the only pos­si­ble con­se­quence of any non-disbursement,” the FT quoted the doc­u­ment as saying.

The Ger­man demands for greater con­trol over Greek bud­get pol­icy come amid intense talks to final­ize a sec­ond 130 billion-euro res­cue pack­age for Greece, which has repeat­edly failed to meet the fis­cal tar­gets set out for it by its inter­na­tional lenders.

...

“One of the ideas being dis­cussed is to set up a clearly defined pri­or­i­ties on reduc­ing deficits through legally bind­ing guide­lines,” the Euro­pean source said.

He added that in Greece the prob­lem is that a lot of the budget-making process is done in a decen­tral­ized manner.

“Clearly defined, legally bind­ing guide­lines on that could lead to more coher­ence and make it eas­ier to take deci­sions — and that would con­tribute to give a whole new dynamic to efforts to imple­ment the pro­gram,” the source said.

...

It’s a good thing Euro­peans kept all those cas­tles around. They’ll make great scenic back­drops for Europe’s neo-feudalist future.

At least it sounds like Greek politi­cians are dis­miss­ing the new pro­posal com­ing out of Berlin. And as details con­tinue to drib­ble out, we also learn­ing that Greece shouldn’t take this new pro­posal too personally...the rest of the euro­zone would also be liv­ing under the new euro­zone sword of Damo­cles:

Greece should give up bud­get con­trol: Ger­many
By Erik Kirschbaum | Reuters – 01/29/2012

BERLIN (Reuters) — Greece must sur­ren­der con­trol of its bud­get pol­icy to out­side insti­tu­tions if it can­not imple­ment reforms attached to euro zone res­cue mea­sures, the Ger­man econ­omy min­is­ter was quoted as say­ing on Sunday.

Philipp Roesler became the first Ger­man cab­i­net mem­ber to openly endorse a pro­posal for Greece to sur­ren­der bud­get con­trol after Reuters quoted a Euro­pean source on Fri­day as say­ing Berlin wants Athens to give up bud­get control.

“We need more lead­er­ship and mon­i­tor­ing when it comes to imple­ment­ing the reform course,” Roesler, also vice chan­cel­lor, told Bild news­pa­per, accord­ing to an advance of an inter­view to be pub­lished on Monday.

“If the Greeks aren’t able to suc­ceed them­selves with this, then there must be stronger lead­er­ship and mon­i­tor­ing from abroad, for exam­ple through the EU,” added Roesler, chair­man of the Free Democ­rats (FDP) who share power with Chan­cel­lor Angela Merkel.

Reuters reported on Fri­day that Ger­many wants Greece to give up con­trol of bud­get pol­icy to Euro­pean insti­tu­tions as part of dis­cus­sions over a sec­ond res­cue package.

...

With many Greeks blam­ing Ger­mans for the aus­ter­ity med­i­cine their coun­try has been forced to swal­low, offi­cials in Athens dis­missed the idea of relin­quish­ing bud­get con­trol as out of the question.

Finance Min­is­ter Evan­ge­los Venize­los said on Sun­day Greece was per­fectly capa­ble of mak­ing good on its promises.

“Any­one who puts a nation before the dilemma of ‘eco­nomic assis­tance or national dig­nity’ ignores some key his­tor­i­cal lessons,” he said in a state­ment before head­ing to Brus­sels for a Euro­pean Union sum­mit on Monday.

...

Under the plan, Athens would only be allowed to carry out nor­mal state spend­ing after ser­vic­ing its debt, the paper said.

...

A gov­ern­ment source in Berlin said Germany’s pro­posal was aimed not just at Greece but also at other strug­gling euro zone mem­bers that receive aid and are unable to make good on their obligations.

The Euro­pean Com­mis­sion, the exec­u­tive arm of the 27-country bloc, said it wanted the Greek gov­ern­ment to main­tain autonomy.

So if Greece ends up in this new bud­get trap, where all state expen­di­tures must be spent on pay­ing bond hold­ers before any­thing else after Greece exceeds the deficit limit, are things like schools and hos­pi­tals sub­ject to get­ting shut down? How about national defense-related costs? These seems like a ques­tion worth ask­ing before the lat­est rad­i­cal over­haul in the social-contract gets agreed upon. Ampu­ta­tion isn’t the best diet plan.

Putting the ‘vicious’ in ‘vicious cir­cle’:

Greeks unset­tled by demands of a frus­trated Europe
By Michael Birn­baum, Pub­lished: Feb­ru­ary 1

...

As Europe starts to acknowl­edge that its austerity-driven poli­cies else­where have not done enough to lift the con­ti­nent out of its eco­nomic trou­bles, lead­ers have shown a new will­ing­ness to con­sider eco­nomic stim­u­lus poli­cies. But Greece, so far, remains an exception.

If Greece doesn’t lower its min­i­mum wage, cut pen­sions and fur­ther slash spend­ing on pub­lic health within days, Euro­pean lead­ers have hinted that they are ill-inclined to keep loan­ing money to help the coun­try pay its debts. They com­plain that Greece has fallen far short of meet­ing the finan­cial promises that it has made over the past two years and has nearly run out of time to make up for it.

In Ger­many, frus­tra­tion with Greece has grown so deep that lead­ers there briefly floated the idea last week­end of hav­ing a Euro­pean com­mis­sioner take over the country’s bud­get and spend­ing sov­er­eignty for the dura­tion of the bailout, spark­ing mem­o­ries of Germany’s World War II occu­pa­tion of Greece. They later backed off.

“Greece must live up to its com­mit­ments. We can only help when it is not a bot­tom­less pit,” Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble told Deutsch­land­funk radio Wednesday.

Some Greek lead­ers are incred­u­lous that Europe is demand­ing cut­backs that could hurt the nation’s poor­est first even as it talks about stim­u­lat­ing eco­nomic growth else­where in the euro zone. “If you cut salaries, incomes, pen­sions,” said Devel­op­ment Min­is­ter Michalis Chriso­choidis, “you cut every­thing, the demand decreases, and then con­sump­tion decreases rapidly. All the poli­cies are part of a vicious circle.”

Euro­pean lead­ers say that reduc­ing Greece’s min­i­mum wage would boost the nation’s com­pet­i­tive­ness against coun­tries such as Por­tu­gal, where labor costs are lower. But Greek offi­cials and econ­o­mists say that stronger com­pet­i­tive­ness is vir­tu­ally mean­ing­less as long as their future with the euro is in doubt. Only the gut­si­est investor, they say, is will­ing to gam­ble on the coun­try in the interim, because if Greece goes back to its old cur­rency, the drachma, infla­tion could wipe out a large por­tion of those investments.

But many oth­ers see the demands as way too bur­den­some. The cuts “are not nec­es­sar­ily very wisely thought out,” said a Greek offi­cial, speak­ing on the con­di­tion of anonymity to talk can­didly about Greece’s per­cep­tion of the demands from the Euro­pean team of nego­tia­tors from the IMF, the Euro­pean Com­mis­sion and the Euro­pean Cen­tral Bank. “The troika,” as the team is called, “is becom­ing harsher,” the offi­cial said.

The troika has pro­posed addi­tional lim­its on health spend­ing, and many doc­tors who work in the tan art deco Sis­man­oglio Hos­pi­tal, perched atop a hill in a sub­urb north of Athens, said they’re wor­ried about the future.

Their pay has been slashed, their ranks have thinned by a third, and their work­loads have increased as many of their peers go abroad for work or they retire and are not replaced, the doc­tors said. For­eign sup­pli­ers demand upfront pay­ment for ban­dages and other med­ical neces­si­ties before they send over their goods, fear­ful that if they extend any credit to Greece they will never be paid back.

Now, the doc­tors said, the troika is reach­ing deeper into their pro­fes­sional lives, ask­ing that that they write at least half of their pre­scrip­tions for generic drugs, dri­ven in part by sus­pi­cion that kick­backs from drug com­pa­nies are keep­ing costs arti­fi­cially high. Doc­tors acknowl­edge that cor­rup­tion is a prob­lem, but they say that the new rules are arbi­trary and rigid.
...

So does Protugal’s min­i­mum wage get a pass once Greece slashes its min­i­mum wage below Portugal’s or do they keep play­ing this game forever?

Anschluss eco­nom­ics!?

@GrumpusRex: Per­haps, more like Leben­sraum. LOL. =D