Still looks like the strategy for Europe could be functionally very close to my proposal, and fiscally sustainable if they continue on the current path.
This is just inference on my part- I have no information other than what I’ve read online.
The ‘distributions’ the ECB will make will be via buying enough national govt debt in the secondary markets to keep the national govs solvent and able to fund their deficits, at least in the short term markets.
If they determine any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent.
ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable.
The austerity measures will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed.
With currency strength and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro to 1.60 vs the dollar remain in place, while the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is in place.
While restructuring risk remains, it need not be forced by solvency risk. So restructuring need not happen.
Power has shifted to the ECB, presumably under substantial influence of the national govt finance ministers, as the ECB directly or indirectly moves to fund the entire banking system and national govt. deficits.
This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national govt. deficits they allow.
The conflict will remain the money interests in Europe who put currency strength as a priority, vs the exporters who favor currency weakness.
The consensus will be that unions and wages in general must be controlled.
Again, I do not know for sure that the ECB is actually moving in this direction.
They may not be.
Watch closely to see if the buying of national govt. securities remains sufficient to keep the national govts solvent.
(Feel free to distribute)
HEADLINES:
Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
Merkel faces test in vote for president
Berlin hints at move on pay deal ruling
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
Germany Faces Shortage of Skilled Workers in 2025, Study Says
French Economy Slowed to a Crawl in First Quarter of 2010
French Jobless Claims Increase as Companies Trim Workforces
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
Spanish May Producer Prices Advance Most in 19 Months on Oil
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
Greek optimistic on budget deficit reduction
ARTICLES:
Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
(Bloomberg) The euro-area economic recovery stalled in June for a third month amid financial-market “strains.” The Eurocoin index measuring economic expansion in the 16 nations that share the single currency fell to 0.46 percent from 0.55 percent in May, the Center for Economic Policy Research and the Bank of Italy, which co-produce the index, said in a statement. “Recent strains in the financial markets have affected the performance of the indicator,” according to the statement. The index “has however been supported by the new improvement in foreign trade.” The index, which includes business and consumer confidence readings, industrial production, price figures and stock-market performance, aims to provide a real-time estimate of economic growth, according to the report.
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
June 25 (Bloomberg) — European Commission President Jose Barroso said the region’s leaders are determined to keep the euro a “very strong” currency.
“I have no doubts of the absolute determination of European Union leaders and European Union institutions to keep the euro as a very strong and stable currency,” Barroso said in an interview with Bloomberg Television in Toronto, where he is attending a meeting of leaders from Group of 20 countries.
Against the U.S. dollar, the euro has fallen 19 percent since its Nov. 25 high, trading yesterday at $1.2279 after reaching a four-year low of $1.1877 on June 7.
The 16-nation currency’s “real effective exchange rate has lost close to 10 percent” since its peak in October, the European Commission, the EU executive, said yesterday in its quarterly assessment of the euro-region economy.
The continent’s economic “fundamentals” are good, and Europe’s debt and deficits are smaller than some of its “main partners,” Barroso said, adding investors have been reassured by an almost $1 trillion plan by the euro nations and the International Monetary Fund to backstop the sovereign debt of the region’s weakest members.
It’s “a very important message of confidence that is being conveyed to markets as well,” Barroso said.
Barroso also said that China’s plan to provide more currency flexibility was a “move in the right direction” that increases confidence in the global economy.
Earlier yesterday, Barroso said that exit strategies from fiscal stimulus programs should be gradual, differentiated and “growth-friendly.”
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
June 25 (Bloomberg) — German Finance Minister Wolfgang Schaeuble said he has “no doubt” that European governments will hold to their commitments to cut public deficits, Corriere della Sera reported, citing an interview.
“Too-high deficits have to be responsibly reduced,”
Corriere quoted Schaeuble as saying. “We have a shared agreement, and I have no doubt that all will abide by their commitments.”
Merkel faces test in vote for president
(FT) The presidential election – in a specially constituted federal assembly – represents the biggest challenge for Angela Merkel since she formed a government in October combining her own Christian Democratic Union with the liberal Free Democratic party. The combined popularity of the coalition parties has since dropped from 48.4 per cent to 35 per cent, according to a poll published by Stern magazine and the RTL television network. The proportion of voters saying they would vote again for Ms Merkel as chancellor has also dropped to just 39 per cent, her lowest rating for more than three years, according to a Forsa institute poll. Political scientists believe that if Christian Wulff, Ms Merkel’s candidate for the presidency, were to lose the vote on Wednesday to Joachim Gauck, the non-party candidate supported by the SPD and Greens, it could force the resignation of both the chancellor and her government.
Berlin hints at move on pay deal ruling
(FT) The German government on Thursday signalled it was considering legislation to quell protests from both company chiefs and worker representatives over a court ruling that threatens the way they agree wage deals. Judges in Erfurt, eastern Germany, on Wednesday ended a 50-year-old practice of extending in-house wage deals made between an employer and its biggest union to cover all workers in the company doing similar jobs. The judges agreed with a doctor at a hospital in Mannheim who had demanded he be paid according to the national pay deal of the doctors’ union, not the in-house deal agreed by services union Verdi. They said in their verdict that established wage-bargaining practices contravened the right of citizens freely to form alliances. There was no “basic principle” forcing a company “to adopt a uniform wage deal”, they declared.
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
(Bloomberg) Germany will sell 77 billion euros ($94.5 billion) of bonds and bills in the third quarter, 2 billion euros less than forecast in December. A larger adjustment will come in the fourth quarter, assuming the economy stays steady, a finance ministry official said. Finance Minister Wolfgang Schaeuble has pledged to cut net new borrowing by the end of the year. A federal issuance calendar released in December said gross debt sales this year would be a record 343 billion euros ($421.5 billion). The third-quarter debt issuance includes 44 billion euros of bonds and 33 billion euros of bills. Schauble’s ministry said on June 22 that the so-called structural budget deficit will be 53.2 billion euros this year, 13.4 billion euros less than the 66.6 billion euros originally expected. It also said then that net new borrowing this year will be 15 billion euros below the 80.2 billion euros in the 2010 budget plan.
Germany Faces Shortage of Skilled Workers in 2025, Study Says
June 25 (Bloomberg) — Germany faces a shortage of skilled workers in 2025 as the population is shrinking, the Federal Labor Agency’s research institute said.
Due to demographic reasons the size of the German workforce will constantly decrease until 2025 while the number of employed in the services industry may rise by more than 1.5 million, the institute said in a study published yesterday.
By contrast, the number of employees in the manufacturing industry may fall by almost 1 million over the next 15 years, the study said.
German unemployment fell more than twice as much as economists forecast in May as exports from Europe’s biggest economy surged, bolstering the recovery. The number of people out of work declined a seasonally adjusted 45,000 to 3.25 million, the lowest since December 2008, the Labor Agency said June 1.
French Economy Slowed to a Crawl in First Quarter of 2010
Paris (dpa) — The French economy slowed alarmingly in the first quarter of 2010, with gross domestic product (GDP) expanding by only 0.1 per cent, the government’s statistics office Insee said Friday.
The primary reason for the poor result was a drop of 0.2 per cent in domestic demand, compared to an increase of 0.5 per cent in the last quarter of 2009, when GDP rose by 0.6 per cent.
This was the second bit of bad economic news for the government in less than 24 hours. Late Thursday, the Labour Ministry said that the rolls of unemployed had grown by some 22,600 in May, the largest rise in unemployment since the beginning of the year.
Some 2.7 million people were out of work at the end of May, an unemployment rate of 9.5 per cent.
French Jobless Claims Increase as Companies Trim Workforces
(Bloomberg) The number of jobseekers in France climbed in May as manufacturers trimmed payrolls in the wake of the country’s worst recession in more than half a century. The number of unemployed actively looking for work rose by 22,600 last month, an increase of 0.8 percent, the Labor and Finance Ministries said. The total number of jobseekers was 2.7 million. While claims have risen every month this year except in March, national statistics office Insee predicts the economy is about to begin creating jobs again for the first time in two years. “Total employment fell heavily in 2009, dragged down by the drop in activity,” Insee said late yesterday. “It should progress slightly over 2010 as a whole.”
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
June 25 (Bloomberg) — France’s plan to lift its retirement age is a signal to investors about the seriousness of President Nicolas Sarkozy’s intention to cut the budget deficit, Finance Minister Christine Lagarde said.
“The priority is to protect the retirement system,”
Lagarde said today on France Inter radio. “We are also trying to send a message of security to the markets.”
Sarkozy’s government set out proposals last week to raise the minimum age at which workers can tap the state pension to 62 in 2018 from 60 currently. The age at which full benefits are reaped is to rise to 67 from 65 under the plan, which labor unions protested yesterday.
France is the only country among Europe’s five biggest economies not to have presented a detailed savings plan for next year. Britain set out deficit-cutting measures totaling 113 billion pounds ($167 billion) earlier this week and Germany announced cuts of 81.6 billion euros ($101 billion) on June 7.
Sarkozy has committed to reducing the deficit from 8 percent of gross domestic product this year to 6 percent in 2011 and 3 percent in 2013.
Lagarde said “there’s no reason to think” that France’s AAA credit rating is threatened, though she said the country doesn’t have the luxury of time to debate the pension overhaul.
“We have time pressure, it’s not possible to delay,”
Lagarde said. “The public finance situation doesn’t allow for it. We need to take measures quickly.”
Sarkozy and Lagarde join leaders and finance ministers of the Group of Eight later today in Huntsville, Ontario, before meeting their Group of 20 counterparts tomorrow in Toronto.
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
(Bloomberg) Italian gross domestic product will expand 1.2 percent this year and 1.6 percent in 2010, up from previous forecasts of 1.1 percent and 1.3 percent respectively, Confindustria said. The single currency’s 14 percent slide against the dollar this year will “more than offset” the impact of budget cuts worth 24.9 billion euros, which will shave 0.4 percentage points of GDP in 2011 and 2012, Confindustria said. Prime Minister Silvio Berlusconi’s deficit-curbing measures aim to reduce the budget deficit by an additional 1.6 percent of GDP, bringing the shortfall within the EU limit of 3 percent of GDP in 2012 from 5.3 percent last year.
Spanish May Producer Prices Advance Most in 19 Months on Oil
June 25 (Bloomberg) — Spanish producer-price inflation accelerated to the fastest in 19 months in May as higher oil prices boosted energy costs.
Prices of goods leaving Spain’s factories, mines and refineries rose 3.8 percent from a year earlier after a 3.7 percent increase in April, the National Statistics Institute in Madrid said today. That’s the biggest increase since October 2008. From the previous month, prices gained 0.2 percent.
Crude-oil prices rose 8 percent in the 12 months to the end of May, pushing up manufacturers’ costs. Still, with the economy continuing to shrink and the unemployment rate at 20 percent, consumer-price inflation remains restrained. Spain’s underlying inflation rate, which excludes volatile food and energy prices, turned negative in April for the first time on record.
The government forecasts the economy will contract 0.3 percent this year.
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
June 25 (Bloomberg) — Spain’s Labor Minister Celestino Corbacho may cut a 426 euro-a-month ($525) subsidy paid to the unemployed whose two-year, contributions-based jobless benefit has run out, Cinco Dias reported.
The subsidy, which cost the state 1.2 billion euros since it was introduced last year, will be difficult to maintain after August as Spain tries to cut its deficit, the newspaper reported, citing an interview with Corbacho.
Greek optimistic on budget deficit reduction
(AP) Greece’s finance minister on Thursday voiced confidence that the country will meet or even surpass its ambitious targets to slash spending and boost revenues by the end of the year. “Have we won the bet? No,” George Papaconstantinou said. “But we have well-founded hopes and are optimistic that, for the first time in many years, at the end of the year the state budget will achieve or even exceed the targets we have set.” Papaconstantinou said his optimism was based on figures showing a 40 percent deficit reduction during the first five months of the year, as well an expected revenue boost from increased consumer taxes. On Friday the cabinet is set to approve a key draft law on pension and labor reforms. The government says the current pension system is not viable, and if left unchanged would come to absorb 24 percent of GDP in 2050, from the current 12 percent.