Especially with the pending Greek ‘restructure’ and ECB check writing to support the banking system seemingly making the euro stronger and not causing inflation.

And the ‘sustainability maths’ is just about the same for all of them as well, particularly given the current slowdown.

Once the markets realize the politics are moving in that direction, all euro member nation bonds again become suspect and the crisis enters the next stage, resulting in the ECB pretty much funding everything, one way or another.

It’s just a question of how it all gets from here to there.

Portugal Union Leader Wants Debt Renegotiation

By Axel Bugge and Daniel Alvarenga

Feb 7 (Reuters) — Portugal must renegotiate its debts rather than impose harsh austerity measures to overcome its economic crisis, the head of the country’s largest trade union said on Wednesday, threatening to step up strikes if the government pushed on with cuts.

Armenio Carlos, head of the CGTP union, told Reuters Portuguese workers would take a stand against attacks on labor rights, which he said were part of the government’s sweeping economic reforms promised under a 78 billion euro ($103.29 billion) bailout.

“What we defend is the renegotiation of debts, in terms of deadlines, in terms of interest and in terms of the amount,” Carlos said in an interview, adding that the country’s bailout had made it impossible to meet its obligations.

Portugal’s debt currently equals about 105 percent of gross domestic product.

“We are being confronted with a neo-liberal attack on workers’ rights,” he added, saying the government’s recent labor reform, making it easier to hire and fire, could spark a growing wave of protests.

The union leader, a former electrician and an ex-Communist lawmaker who took over as head of the CGTP a week ago, warned that with the austerity policies demanded by the bailout, Portugal was heading down the same road to ruin as Greece.

EU Leaders to Agree on Rescue Fund, Balanced Budget

Jan 29 (Reuters) — European Union leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.

The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity. The summit is expected to announce that up to 20 billion euros of unused funds from the EU’s 2007-2013 budget will be redirected towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.

Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins.

Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.

Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500 billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.

The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.

Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).

The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.

But Germany is opposed to such a step.

Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.

The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.

Karim writes:
U.S. GDP growth in Q4 a bit weaker than expected at 2.8%

Perhaps the FOMC had word of this, explaining the unexpected dovishness?

1.9% of that growth accounted for by inventories. Other contributions: (consumer spending 2%, fixed investment 0.4%, government spending -0.9%, net exports -0.1%).

Rebuilding post earthquake supply lines probably now complete.
Govt spending continues weak, as revenues increase some and the federal deficit falls some.
Imports rise quickly with any increase in consumer spending.

In growth terms: (consumer spending 2%, fixed investment 3.3%, government spending -4.6%, exports 4.7% and imports 4.4%).

So stripping away inventories, growth was below trend. Plus savings rate fell back to 3.7% from 3.9%.

Domestic savings down with spending up indicates increasing consumer debt.
The question is whether this is ‘wanted’ as per increased desires to buy on credit,
or because the decline in govt deficit spending ‘forced’ more consumer debt for ‘essentials’

And, core PCE slowed from 2.1% to 1.1%.

Also explains FOMC dovishness as they see risk as asymmetrical, fearing deflation more than inflation.

In sum, will keep QE3 talk very much alive

And somewhat moot, even as Q1 GDP forecasts are being revised down some, as most don’t think QE matters much for the real economy.

What’s becoming understood is that while there is ‘more the Fed can do’
for all practical purposes there is nothing they can do to further support the real economy.

Euro money and lending data shockingly weak in December.

Might partially explain how some banks apparently got the balance sheet room to buy more national govt debt?

In particular, record single month decline in lending to the non-bank private sector (74bn). Of that, 37bn decline in lending to non-financial corporates and 8bn drop in lending to households.

This should be very supportive of additional ECB rate cuts over the next few months.

Not to mention that once haircuts are finalized the obvious political response from the opposition in Italy, for example, is “if Greece doesn’t have to pay why do we?’

Europe Shares Retreat From Highs as Greece Talks Stall

Jan 24 (Reuters) — European shares retreated from near six-month highs as concerns deepened that Greece might head towards a disorderly default and technical analysts said the recent rally could be coming to a close.

Unless they somehow cut back on oil consumption, and no one else buys from Iran,
Iran’s sales and prices received don’t change:

Europe Agrees to Ban Imports of Iran Oil; No Date Set
Published: Wednesday, 4 Jan 2012 | 1:01 PM ET
By: Reuters

 
European governments have agreed in principle to ban imports of Iranian oil, EU diplomats said Wednesday, dealing a potentially heavy blow to Tehran just months before an Iranian election.

In a speech given in Paris on January 3rd, the President of France Nicolas Sarkozy confirmed that the country will soon see an increase to the national rate of value added tax and a reduction to the mandatory social security contributions paid by employers.

http://www.taxationinfonews.com/2012/01/president-confirms-tax-hike-in-france/

This is on top of the increase in the reduced rate of VAT in France (from 5.5% to 7%) that was announced earlier.

An increase in standard VAT rate (19.6%) in France (even though still under consideration), could have quite a significant impact on EU HICP and FR CPIx

EU Officials Begin New Year With Calls to Save the Euro
Published: Sunday, 1 Jan 2012 | 5:49 PM ET
By: Reuters

 
Policymakers marked the 10th anniversary on Sunday of the introduction of euro notes and coins by urging governments in the currency bloc to save and consolidate to overcome their debt crisis.

 
While German Finance Minister Wolfgang Schaeuble called the euro “a clear success story” and pledged the currency would remain stable, he also urged vulnerable debtor states to follow a tough savings course in 2012, boost their competitiveness and work to win back market confidence.

 
“This is not a euro crisis, it is a debt crisis in some euro states,” Schaeuble told German newspaper Bild in an interview to be published in Monday’s edition of the paper.

So what does locking in their funds via LTRO do for most banks? Not much. Helps keep interest rate risk off the table, but they’ve always had other ways of doing that. It takes away some liquidity risk, but not much, as the banks haven’t been euro liquidity constrained. And banks still have the same constraints due to capital and associated risks.

To it’s credit, the ECB has been pretty good on the liquidity front all along. I’d give it an A grade for liquidity vs the Fed where I’d give a D grade for liquidity. Back in 2008 the ECB was quick to provide unlimited euro liquidity to its member banks, while the Fed dragged its feet for months before expanding its programs sufficiently to ensure its member banks dollar liquidity. And the FDIC did the unthinkable, closing WAMU for liquidity rather than for capital and asset reasons.

But while liquidity is a necessary condition for banking and the economy under current institutional arrangements, and while aggregate demand would further retreat if the CB failed to support bank liquidity, liquidity provision per se doesn’t add to aggregate demand.

What’s needed to restore output and employment is an increase in net spending, either public or private. And that choice is more political than economic.

Public sector spending can be increased by simply budgeting and spending. Private sector spending can be supported by cutting taxes to enhance income and/or somehow providing for the expansion of private sector debt.

Unfortunately current euro zone institutional structure is working against both of these channels to increased aggregate demand, as previously discussed.

And even in the US, where both channels are, operationally, wide open, it looks like FICA taxes are going to be allowed to rise at year end and work against aggregate demand, when the ‘right’ answer is to suspend it entirely.

At the macro level it sort of funds the entire euro zone deficit spending.
And deficits are currently reasonable high.

So, even while recognizing that timing is everything,
the solvency issue could be in the process of stabilizing as the various ‘new’
‘E’ funding proposals and IMF come closer to fruition.

Not that the euro economy will boom anytime soon
as austerity measures take their toll,
but that ‘leg 2′ of the relief rally could be in progress.

Their actual economic problem is a shortage of aggregate demand and their response continues to be measures to reduce
aggregate demand further.

All efforts are focused on funding being conditional on further austerity.

As previously suggested, it’s better thought of as the Sarcophagus plan:

The letter attached signed by Sarkozy and Merkel appears to contain the details of the new measures addressed to EU President Herman van Rompuy.

“Mr President,

To overcome the current crisis, all necessary measures to stabilize the euro area
as a whole will have to be taken. We are confident that we will succeed.

We are convinced that we need to reinforce the architecture of Economic and
Monetary Union going beyond the indispensable measures which are urgently
needed to cope with immediate crisis resolution. Those steps need to be taken
now without further delay. We consider this as a matter of necessity, credibility and
confidence in the future of Economic and Monetary Union.

The current crisis has uncovered the deficiencies in the construction of EMU
mercilessly. We need to remedy those deficiencies. To build a lasting Stability and
Growth Union which allows us to preserve our unique European model combining
economic success and social responsibility, we have to substantially reinforce
the foundations of EMU. Alongside the single currency, a strong economic pillar
is indispensable, building on enhanced governance to foster fiscal discipline as
well as stronger growth and enhanced competitiveness. In order to achieve these
objectives, we need a renewed contract between the Euro area Member States.
This conviction is the driving-force behind our proposal.

We need more binding and more ambitious rules and commitments for the Euro
area Member States. They should reflect that sharing a single currency means
sharing responsibility for the Euro area as a whole. They should pave the way for
a new quality of cooperation and integration within the Euro area.

We propose that those new rules and commitments should be enshrined in the
European Treaties as. Alternatively , the Member States whose currency is the
Euro will have to go ahead. In that case, we would ensure that those Member
States willing and able to do so would be able to join and the European institutions
would play an important role. We would also work towards bringing this new
agreement into the framework of the European Union as soon as possible.

The main building blocks of the new Stability and Growth Union are:

A strengthened institutional architecture

Euro area governance needs to be substantially reinforced. We should provide for
a more integrated and more efficient institutional set-up without duplicating existing
European structures or institutions. This set-up should be based on:

•Regular summits – at least twice a year – of the Euro area heads of State
and Government with a permanent president. These summits will provide
strategic orientations on the economic and fiscal policies in the euro area.
The impact of our domestic economic and fiscal policies on the euro area
should be considered as a matter of common interest, while safeguarding
national responsibility.
• During the crisis, the Eurosummit should meet on a monthly basis: each
meeting should focus on a precise agenda regarding governance and
policies to foster growth, competitiveness and fiscal stability. Member
States having signed the Euro Plus Pact will be invited to participate to the
discussions on issues related to it.

• A ministerial Eurogroup and a reinforced preparatory structure to prepare
and implement the decisions taken by the summit and ensuring the current
functioning.

This framework will be fully consistent with the EU institutional architecture. We
strongly reaffirm our willingness to fully associate the European Commission.
The European Parliament and national Parliaments should also be involved in an
adequate way.

A comprehensive framework of prevention

It is undoubtedly in the interest of all members of the Stability and Growth Union to
detect and correct departures from sound economic and fiscal policies long before
they become a threat to the stability of the Euro area as a whole. Therefore, we
need a comprehensive framework on prevention consisting of strengthened co-
ordination, surveillance and enforcement as well as positive incentives, building
on current arrangements (new macroeconomic imbalances procedure, EU 2020-
Strategy, Euro Plus Pact, a greater focus of structural- and cohesion funds on
competitiveness etc.) and developing them further.

This framework should comprise in particular:

the adoption by each euro area member state of rules on a balanced
budget translating the objectives and requirements of the Stability and
Growth Pact into national legislation at constitutional or equivalent level.
A new legal provison should set minimum requirements for the national
rules on balanced budgets. The European Court of Justice, on request of
the European Commission or a Euro area Member State, should have the
possibility to verify the transposition in the national legislation.

-

Commitment of national Parliaments to take into account recommendations
adopted at the European level on the conduct of economic and budgetary
policies.

-

We need to foster growth through greater competitiveness as well as greater
convergence of economic policies at least amongst Euro Area Member States.
To these aims, building on Article 136 and/or on enhanced cooperation, a new
common legal framework, fully consistent with the internal market, should be
established to allowing for faster progress in specific areas such as :
- Financial regulation;

24
…24

-3-

Labor markets;
Convergence and harmonisation of corporate tax base and creation of a
financial transaction tax;
Growth supporting policies and more efficient use of European funds in the
euro area.

-
-

-

A reinforced procedure to enforce sound fiscal policies

To complement the preventive arm of the Stability and Growth Pact and in
particular the goal to achieve a structurally balanced budget and ex-ante
examination of draft budgets, a new procedure should be established to correct
breaches of the 3 % deficit of GDP ceiling.

As soon as a Member State is recognized to be in breach with the 3 % ceiling
by the European Commission, there should be automatic consequences unless
the Eurogroup, acting by qualified majority, decides otherwise. Exceptional
circumstances should be taken into account:

-

The obligation for the Member State to conclude with the Commission and
approved by the Eurogroup by reversed qualified majority on behalf of the
other Member States, a „European Reform Partnership“ specifying the
concerned Euro area Member States’ fiscal and structural policy measures
to overcome its difficulties and assisting them in those efforts.

-

A sequence of interventions of increasing intensity into Euro area Member
States’ rights should be allowed as a focussed response to continued
infringement. Steps and sanctions proposed or recommended by the
Commission should be adopted by the Council unless a qualified majority of
the Euro area Member States decides otherwise.

Buiding on the provisions for a numerical benchmark for debt reduction in the “six-
pack” (1/20 rule), the procedure for debt reduction by Euro area Member States
with a public debt of more than 60 % of GDP needs to be enshrined in the new
treaty provisions.

A permanent crisis resolution mechanism

We will accelerate the setting of the permanent intergovernmental European
Stability Mechanism which should be effective in 2012 to better address any future
threats to the stability of the Eurozone as a whole, including through the risk of
contagion for other Euro area Member States, thus assisting them in situations of
emergency.

In order to maximize the efficiency of the ESM and its capacity to take decisions,
specific super majority rules (85 % of signed ECB-Capital) should be implemented.

As far as the private-sector involvement is concerned, the ESM treaty should be
revised to make clear that Greece required a unique and exceptional solution. We

34
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recall that all other Euro area Member States reaffirm their inflexible determination
to honour fully their own individual sovereign signature. A recital in the preamble
should clarify that the euro area will apply the IMF practice. As agreed, common
terms of reference on CACs shall be introduced in national legislations.

***

On the occasion of the 50th anniversary of the Treaties of Rome we reiterated
solemnly together with all Member States of the European Union our resolve
to protect the achievements of European unification for the good of future
generations. To this end, we committed ourselves to always renewing the political
shape of Europe in keeping with the times. It is in this spirit that we submit our
proposal to our European partners.

We are convinced that we need to act without delay. We need to take a decision
at our next European Council meeting in order to have the new treaty provisions
ready by march 2012.

Angela MERKEL

Nicolas SARKOZY”