Category Archives: Germany

Japan- G-7 Statement on Currencies, ‘Concerted Intervention’

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In the context of this ‘everyone’s out of paradigm’ world, it makes sense for Japan’s MOF (Ministry of Finance) to buy dollars vs yen.

But it makes no sense to do this as a coordinated effort with other nations also buying dollars vs yen.

It does make sense for the MOF to ask the G7 for permission to buy dollars, as the ‘out of paradigm’ world considers that kind of thing ‘currency manipulation,’ and brands those nations that do buy fx as currency manipulators and outlaws. And they consider this kind of ‘competitive devaluation’ as a ‘beggar thy neighbor’ policy that robs others of aggregate demand. The last thing they all want to happen is a trade war, where each nation buys the other’s currency trying to weaken his own.

So it’s interesting that the rest of world has agreed to allow Japan to conduct this kind of ’emergency measure.’ It probably means it will be short term and limited.

However the strong yen itself may have only been an initial, temporary phenomena as Japan’s domestic households and businesses move to hoard yen liquidity in anticipation of looming yen expenses. That includes reduced borrowing for the likes of cars and homes as well as widely discussed converting of dollar and other fx deposits to yen deposits. This all works to make the yen ‘harder to get’ and keep it firmly bid.

What follows the initial flight to yen liquidity, however, is the spending of the yen, which makes yen ‘easier to get’. And with that comes more spending on imports, which means those yen spent on net imports are likely to get sold for dollars and other fx by the exporters selling to Japan, to meet their own ongoing liquidity needs.

Additionally, Japan”s budget deficit will rise, which makes yen easier to get by adding yen income and net financial assets to the economy, all of which contributes to a weaker yen. The deficit can rise either proactively, as may be happening with the (relatively modest, but a good start)10 trillion yen govt. rebuilding initiative just now announced, or reactively via increased transfer payments and falling tax revenues due to the fall off in economic activity.

And if they try to contain their deficit spending by implementing the consumption tax hike recently discussed, that will only make things worse, and further increase the reactive deficit spending.

Also, weaker exports and a smaller trade surplus due to supply issues likewise weaken the yen.

As for the BOJ, nothing they do with regards to ‘liquidity injections’ will matter, apart from keeping rates about where they are.

And not to forget that what’s happening in the Middle East, where that pot is still boiling as well.

In my humble opinion this remains a good time to be on the sidelines.

G-7 Statement on Currencies, ‘Concerted Intervention’

March 18 (Bloomberg) — The following is a joint statement
released today by officials from the Group of Seven industrial
nations. The G-7 includes the U.S., Japan, Germany, France, the
U.K., Italy and Canada.

“We, the G-7 Finance Ministers and Central Bank Governors,
discussed the recent dramatic events in Japan and were briefed
by our Japanese colleagues on the current situation and the
economic and financial response put in place by the authorities.


“We express our solidarity with the Japanese people in
these difficult times, our readiness to provide any needed
cooperation and our confidence in the resilience of the Japanese
economy and financial sector.

“In response to recent movements in the exchange rate of
the yen associated with the tragic events in Japan, and at the
request of the Japanese authorities, the authorities of the
United States, the United Kingdom, Canada, and the European
Central Bank will join with Japan, on March 18, 2011, in
concerted intervention in exchange markets. As we have long
stated, excess volatility and disorderly movements in exchange
rates have adverse implications for economic and financial
stability. We will monitor exchange markets closely and will
cooperate as appropriate.”

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Welcome to the 7th US depression, Mr. bond market

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Looks to me like the lack of noises out of Japan means there won’t be a sufficient fiscal response to restore demand.

If anything, the talk is about how to pay for the rebuilding, with a consumption tax at the top of the list.

That means they aren’t going to inflate.
More likely they are going to further deflate.
Yes, the yen will go down by what looks like a lot, maybe even helped by the MOF, but I doubt it will be enough to inflate.

In fact, all the evidence indicates that Japan doesn’t don’t know how to inflate, nor does anyone else.

Worse, what they all think inflates, more likely actually deflates.

0 rate policies mean deficits can be that much higher without causing ‘inflation’ due to income channels and supply side effects.
There is no such thing as a debt trap springing to life.
Debt monetization is a meaningless expression with non convertible currency and floating fx.
QE mainly serves to further remove precious income from an already income starved economy.

Only excess deficit spending can directly support prices, output, and employment from the demand side, as it directly adds to incomes, spending, and net savings of financial assets.

The international fear mongering surrounding deficits and debt issues is entirely a chicken little story that’s keeping us in this depression (unemployment over 10% the way it was measured when the term was defined) that’s now taking a turn for the worse.

The euro zone is methodically weakening it’s ‘engines of growth’- its own (weaker) members being subjected to austerity measures that are reducing their deficit spending that paid for their imports from Germany. And now China, Japan, the US and others will be cutting imports as well.

UK fiscal austerity measures are accelerating on schedule.

The US is also working to tighten fiscal policy, particularly now that both sides agree that deficit reduction is in order, beaming as they make progress towards agreeing on the cuts.

The US had 6 depressions while on the gold standard, which followed the only 6 periods of budget surpluses.
And now, even with a floating fx policy and non convertible currency that allows for immediate and unlimited fiscal adjustments,
we have allowed the deflationary forces unleashed by the Clinton budget surpluses to result in this 7th depression.

We were muddling through with modest real growth and a far too high output gap and may have continued to do so all else equal.

But all else isn’t equal.

Collective, self inflicted proactive austerity has been working against growth, including China’s ‘fight against inflation.’

And now Japan’s massive disaster will be deflationary shock that, in the absence of a proactive fiscal adjustment, is highly likely to further reduce world demand.

Hopefully, the Saudis capitulate and follow the price of crude lower, easing the burden somewhat on the world’s struggling populations.
If so, watch for a strong dollar as well.

And watch for a lot more global civil unrest as no answers emerge to the mass unemployment that will likely get even worse. Not to mention food prices that may come down some, but will remain very high at the consumer level as we continue to burn up our food supply for motor fuel.

And it’s all only likely to get worse until the world figures out how its monetary system actually works.

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A few Boehnalities and other notables on the US going broke

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Cross currents of right and wrong but always for the wrong reasons.

Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech

By David J. Lynch

March 7 (Bloomberg) — House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville.

Boehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.

“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”

Wrong reason! Broke implies not able to spend.

The US spends by crediting member bank accounts at the Fed, and taxes by debiting member bank accounts at the Fed.

It never has nor doesn’t have any dollars.

The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007.

That’s simply a function of where the Fed, a agent of Congress, has decided to set rates, and market perceptions of where it may set rates in the future. Solvency doesn’t enter into it.

Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.

All taxing does is debit member bank accounts. The govt doesn’t actually ‘get’ anything.

To be sure, the U.S. confronts long-term fiscal dangers.

For example???

Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.

So?

“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.

So?
What does that have to do with govts ability to credit accounts at its own central bank?

$1.6 Trillion Deficit

A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.

Still, a rhetorical drumbeat has spread that the U.S. is tapped out. Republicans, including Representative Ron Paul of Texas, chairman of the House domestic monetary policy subcommittee, and Fox News commentator Bill O’Reilly, have labeled the U.S. “broke” in recent days.

Chris Christie, the Republican governor of New Jersey, said in a speech last month that the Medicare program is “going to bankrupt us.” Julian Robertson, chairman of Tiger Management LLC in New York, told The Australian newspaper March 2: “we’re broke, broker than all get out.”

A similar claim was even made Feb. 28 by comedian Jon Stewart, the host of “The Daily Show” on Comedy Central.

So much for their legacies.

Cost of Insuring Debt

Financial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the
G20.

There are two factors in default insurance. Ability to pay and willingness to pay. While the US always has the ability to pay, Congress does not always show a united willingness to pay. Hence the actual default risk.

Creditors regard Venezuela, Greece and Argentina as the three riskiest countries. Buying credit default insurance on a notional $10 million of those nations’ debt costs $1.2 million, $950,000 and $665,000 respectively.

“I think it’s very misleading to call a country ‘broke,'” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”

In any case, the euro zone member nations put themselves in the fiscal position of US states when they joined the euro.

That means a state like Illinois could be the next Greece, but not the US govt.

Less Likely to Default

CMA prices for credit insurance show that global investors consider it more likely that France, Japan, China, the United Kingdom, Australia or Germany will default than the U.S.

Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”

Presumably a statement with regard to willingness of Congress to pay.

George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.

That has nothing to do with it.

“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”

Any nation can do that with its own currency

The current concerns over debt contrast with the views of founding father Alexander Hamilton, the nation’s first Treasury secretary. At Hamilton’s urging, the federal government in 1790 absorbed the Revolutionary War debts of the states and issued new government securities in about the same total amount.

Alexander Hamilton

Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”

Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.

Far be it from me to argue with a Pulitzer Prize winner…

From Oct. 1, 2008, the beginning of the 2009 fiscal year, through the current year, which ends Sept. 30, 2011, the U.S. will have added more than $4.3 trillion of debt. Despite White House forecasts of an additional $2.4 trillion of debt over the next three fiscal years, investors’ appetite for Treasury securities shows little sign of abating.

It’s just a reserve drain- get over it!

Govt spending credits member bank reserve accounts at the Fed

Tsy securities exist as securities accounts at the Fed.

‘Going into debt’ entails nothing more than the Fed debiting Fed reserve accounts and crediting Fed securities accounts and ‘paying off the debt’ is nothing more than debiting securities accounts and crediting reserve accounts

No grandchildren involved.

Longer-Term Debt

In addition to accepting low yields on two-year notes, creditors are willing to lend the U.S. money for longer periods at interest rates that are below long-term averages. Ten-year U.S. bonds carry a rate of 3.5 percent, compared with an average 5.4 percent since 1990. And U.S. debt is more attractive than comparable securities from the U.K., which has moved aggressively to rein in government spending. U.K. 10-year bonds offer a 3.6 percent yield.

“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.

Who also completely misses the point.

Any doubts traders had about the solvency of the U.S. would immediately be reflected in the markets, a fact noted by James Carville, a former adviser to President Bill Clinton, after he saw how bond investors could determine the success or failure of economic policy.

No they can’t.

“I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter,” Carville said. “But now I want to come back as the bond market. You can intimidate everyone.”

Only those who don’t know any better.

Republican Dissenters

Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.

“To say your debts exceed your income is not ‘broke,'” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.

The U.S. government nonetheless faces a daunting gap between its expected financial resources

It’s not about ‘financial resources’ when it comes to a govt that never has nor doesn’t have any dollars, and just changes numbers in our accounts when it spends and taxes

and promised future outlays. Fratto said the Obama administration’s continued accumulation of debt risked a future crisis, as most major economies also face growing debt burdens.

The burden is that of making data entries.

In the nightmare scenario, a crush of countries competing to simultaneously sell IOUs to global investors could bid up the yield on government debt and compel overleveraged countries such as the U.S. to abruptly slash public spending.

It could only compel leaders who didn’t know how it all worked to do that.

Not selling the debt simply means the dollars stay in reserve accounts at the Fed and instead of being shifted by the Fed to securities accounts. Why would anyone who knew how it worked care which account the dollars were in? Especially when spending has nothing, operationally, to do with those accounts.

Fratto dismissed the markets’ current calm, noting that until the European debt crisis erupted early last year, investors had priced German and Greek debt as near equivalents.

“Markets can make mistakes,” Fratto said.

So can he. That all applies to the US states, not the federal govt.

$9.4 Trillion Outstanding

If recent budgetary trends continue unchanged, the U.S. risks a fiscal day of reckoning, slower growth or both.

No it doesn’t.

Altman notes that the U.S. debt outstanding is “enormous.” As of the end of 2010, debt held by the public was $9.4 trillion or 63 percent of gross domestic product — roughly half of the corresponding figures for Greece (126.7 percent) and Japan (121 percent) and well below countries such as Italy (116 percent), Belgium (96.2 percent) and France (78.1 percent).

Once a country’s debt-to-GDP ratio exceeds 90 percent, median annual economic growth rates fall by 1 percent, according to economists Kenneth Rogoff and Carmen Reinhart.

Wrong, that’s for convertible currency/fixed exchange rate regimes, not nations like the US, Uk, and Japan which have non convertible currencies and floating exchange rates.

The Congressional Budget Office warns that debt held by the public will reach 97 percent of GDP in 10 years if certain tax breaks are extended rather than allowed to expire next year and if Medicare payments to physicians are held at existing levels rather than reduced as the administration has proposed.

So???

AAA Rating

For now, Standard & Poor’s maintains a stable outlook on its top AAA rating on U.S. debt, assuming the government will “soon reveal a credible plan to tighten fiscal policy.” Debate over closing the budget gap thus far has centered on potential spending reductions. S&P says a deficit-closing plan “will require both expenditure and revenue measures.”

Measured against the size of the economy, U.S. federal tax revenue is at its lowest level since 1950. Tax receipts in the 2011 fiscal year are expected to equal 14.4 percent of GDP, according to the White House. That compares with the 40-year average of 18 percent, according to the Congressional Budget Office. So if tax receipts return to their long-term average amid an economic recovery, about one-third of the annual budget deficit would disappear.

Likewise, individual federal income tax rates have declined sharply since the top marginal rate peaked at 94 percent in 1945. The marginal rate — which applies to income above a numerical threshold that has changed over time — was 91 percent as late as 1963 and 50 percent in 1986. For 2011, the top marginal rate is 35 percent on income over $373,650 for individuals and couples filing jointly.

Not Overtaxed

Americans also aren’t overtaxed compared with residents of other advanced nations. In a 28-nation survey, only Chile and Mexico reported a lower total tax burden than the U.S., according to the Organization for Economic Development and Cooperation.

In 2009, taxes of all kinds claimed 24 percent of U.S. GDP, compared with 34.3 percent in the U.K., 37 percent in Germany and 48.2 percent in Denmark, the most heavily taxed OECD member.

“By the standard of U.S. history, by the standard of other countries — by the standard of where else are we going to get the money — increased tax revenues have to be a part of the solution,” said Jeffrey Frankel, an economist at Harvard University who advises the Federal Reserve Banks of Boston and New York.

So much for his legacy.

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Weber/LBS/Rehn

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Karim writes:

Weber being more explicit than what LBS said earlier today. Basically, if 1% is considered too low, 1.25% or 1.5% would be as well.

Domestic orders in Germany today and BdF Confidence survey both firm. Expect 25bp/qtr from ECB until they get to at least 2%.

Weber:
“I wouldn’t do anything here to try to correct market expectations at this point,” Weber told Bloomberg News in Frankfurt today when asked about investors pricing in an increase in the benchmark rate to 1.75 percent by the end of the
year. It was the intention of the ECB to bring forward market expectations and “I see no reason at this stage to signal any
dissent with how markets priced future policies,” he said.\

Weber also said the ECB’s latest inflation forecasts may underestimate price pressures.

LBS:
ECB Board Member Bini Smaghi said this morning that the increase in energy and agricultural raw materials prices is a “permanent” phenomenon. He also said that the wider the gap between real interest rates and GDP growth, the higher the risk of instability, and that keeping interest rates at 1% would further increase the rate of monetary expansion.


Also, EU Commissioner for Economic Affairs Rehn keeping positive sentiment alive about reducing borrowing rates for Ireland and Greece:

“The issue now, today and tomorrow is debt sustainability and I can see that there’s a case to be made to reduce the interest rates paid by Greece and Ireland”.

Agreed, and should it happen this is not good for the euro, though markets will think it is.

Higher rates both increase national govt deficits and exacerbate credit issues.

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WSJ Euro Symposium- Eichengreen, Sinn, Feldstein, Solbes, Hanke

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The utter lack of understanding of monetary operations is telling.

None recognize the significance of the fiscal hierarchy move that shifted the euro member nations from currency issuer to currency users, making them much like US states in that regard.

None recognize the difference between deficits at the ‘currency issuer’ level and deficits at the ‘currency user’ level.

None recognize that the problem is a shortage of aggregate demand, that is not caused by a lack of available bank credit, and that ‘fixing the banks’ changes nothing in that regard.

None recognize that the liability side of banking is not the place for market discipline and that the ECB is the only source of credible deposit insurance.

None recognize that the ECB is in the role of currency issuer and is the only entity that is not revenue constrained.

None recognized the role of fiscal balance in offsetting the ‘savings desires’ that cause unemployment and the output gap in general.

None have proposed a means of allowing govt deficits that can be sustained at full employment levels.

None have recognized that the forces at work have resulted in the ECB has assuming the role of dictating permissible ‘terms and conditions’ for its funding that has become mandatory for the survival of the currency union. This includes the ECB dictating fiscal policy for the member nations.

This list could go on forever.

The text is below.

I couldn’t read it all and don’t suggest you read it either.

WSJ: The Future of the Euro: A Symposium

Fix the Banks, Fix the Currency
By Barry Eichengreen

For the euro to grow into a happy and healthy adult, many things must happen. Most importantly, Europe needs to fix its banking system. Many European banks, starting with Germany’s, are dangerously over-leveraged, undercapitalized, and exposed to Greek, Irish and Portuguese debt. Rigorous stress tests followed by capital injections are the most important step that governments can take to secure the euro’s place.

Since European leaders seem fixated on what to do after Greece’s rescue package runs out in 2013—often, it appears, to the neglect of more immediate problems—they should also contemplate transferring responsibility for supervising their banks from the national level to the newly created European Banking Authority. The mistaken belief that a single currency is compatible with separate national bank regulators is, at the most basic level, why Europe is in the fix it’s in.

Indeed, Europe’s budget deficits are largely a result of the continent’s festering banking crisis. Greece may be an exception, but it’s clearly of a kind. The whole euro area would benefit from stronger discipline on borrowers and lenders. However, it is fantastical to think that this can be achieved by imposing Germanic debt ceilings Continent-wide. Germany’s fiscal rules work because of Germany’s history. The idea that they can be mechanically transplanted to other countries is a historical thinking at its worst.

The only discipline guaranteed to prevent fiscal excesses is market discipline. Reckless borrowers and lenders must be made to pay for their actions. Governments with unsustainable debts should be forced to restructure them, damage to their sovereign creditworthiness or not. The banks that lent to them should similarly suffer consequences, as should the bondholders who provided those banks with funds.

But whether Europe can afford to let market discipline work comes back to the condition of its banks. Only if banks are adequately capitalized can they take losses without collapsing the financial system. Only if they are adequately capitalized can the European Central Bank refuse to buy more Greek, Irish and Portuguese bonds, and only then will the EU be able to say “no more bailouts.”

And once this experience with market discipline is burned into Europe’s collective consciousness, it will be correspondingly less likely that borrowers and lenders will again succumb to similar excesses.

In other words, European governments need to “put the risk back where it belongs, namely in the hands of the bondholders.” Those are not my words. They are from the mouth of Bundesbank President Axel Weber speaking in Dusseldorf on Feb. 21. But while President Weber is right about the principle, he is wrong to think this can wait until 2013.

Mr. Eichengreen is a professor at the University of California, Berkeley. His book, “Exorbitant Privilege: The Rise and Fall of the Dollar,” (Oxford University Press) was published in the U.K. last month.

Survival Isn’t Guaranteed
By Hans-Werner Sinn

In my opinion the euro should survive. Though its members are too many and too disparate, the monetary union must be maintained, largely with its current number of states, for the benefit of political stability. The euro also offers measurable economic benefits, among them substantial reductions in transaction costs and exchange risks, which are prerequisites for exploiting the benefits of free trade.

Whether the euro will survive is another matter. This very much depends on whether European countries implement political and private debt constraints that effectively limit capital flows. The trade imbalances from which the euro zone is currently suffering have resulted from excessive capital flows brought about by interest-rate convergence and the apparent elimination of investment risks after the currency conversion was announced some 15 years ago. While huge capital exports brought a slump to Germany, the countries at the euro zone’s southern and western peripheries overheated, with the bust and boom resulting in current-account surpluses and deficits respectively.

Automatic sanctions for excessive public borrowing, and a reform of the Basel system that forces banks to hold equity capital if they invest in government bonds, are among the political constraints necessary for the euro to survive. But much more important are private constraints.

After years of negligence, private markets have recently started to impose more rigid debt constraints on overheated euro economies. So the brakes kicked in eventually, but much too abruptly, triggering Europe’s sovereign debt crisis. What Europe needs is a crisis mechanism that is able to activate markets earlier and allow for a fine-tuning of the brakes they impose on capital flows; in sum, a crisis mechanism that helps to prevent a crisis in the first place and mitigates it when it occurs.

Such a system has recently been proposed by the European Economic Advisory Group at the Center for Economic Studies and the Ifo Institute for Economic Research (CESifo). The plan’s essential feature is a three-stage rescue mechanism that distinguishes between a liquidity crisis, impending insolvency, and full insolvency, and offers specific measures in each of these stages. The system places the most emphasis on a piecemeal debt-conversion procedure that contemplates haircuts in the second of these stages, which could help to avoid full insolvency by acting as an early warning signal for investors and debtors alike.

The system would allow Germany to gradually appreciate in real terms by living through a boom that generates higher wages and prices and thus reduces the country’s competitiveness, while cooling down the overheated economies of the south such that the resulting wage and price moderation would improve their competitiveness. European trade imbalances would gradually reduce.

If Europe, on the other hand, moves to a system of community bonds, where national debts are jointly guaranteed by all countries, then excessive capital flows would persist, and so would trade imbalances. The countries at Europe’s southern and western peripheries would abstain from necessary real depreciation, and Germany would not appreciate, with the result that trade imbalances would continue with ever-increasing foreign debt and asset positions respectively. In the end, Germans would own half of Europe. I do not dare to imagine the political tensions that would bring about. The death of the euro would be the least of our worries.

Mr. Sinn is president of Germany’s Ifo Institute for Economic Research and the CESifo Group.

David Gothard

Still an Economic Mistake
By Martin Feldstein

I continue to believe that the creation of the euro was an economic mistake. It was clear from the start that imposing a single monetary policy and a fixed exchange rate on a heterogeneous group of countries would cause higher unemployment and persistent trade imbalances. In addition, the combination of a single currency and independent national budgets inevitably produced the massive fiscal deficits that occurred in Greece and other countries. And the sharp drop in interest rates in several countries when the euro was launched caused the excessive private and public borrowing that eventually created the current banking and sovereign-debt crises in Spain, Ireland and elsewhere.

But history cannot be reversed. Despite these problems, the euro will continue to exist for the foreseeable future. It will continue even though that will require large fiscal transfers from Germany and other core nations to those euro-zone countries with large debts and chronic trade deficits.

One reason for the euro’s likely survival is purely political. The political elites who support the euro believe it gives the euro zone a prominent role in international affairs that the individual member countries would otherwise not have. Many of those supporters also hope that the euro zone will evolve into a federal state with greater political power.

There is also an economic reason that the euro will survive. While hard-working German voters may resent the transfer of their tax money to other countries that enjoy earlier retirement and shorter workweeks, the German business community supports paying taxes to preserve the euro because it recognizes that German businesses benefit from the fixed exchange rate that prevents other euro-zone countries from competing with Germany by devaluing their currencies.

The euro will not only survive but will likely continue to increase in value relative to the dollar as sovereign-wealth funds and other major investors shift an increasing share of their portfolios to euros from dollars.

Those investors had been quietly diversifying their investment funds to euros before the crisis began in Greece. They stopped temporarily because of uncertainty about the future of the currency. But they eventually came to recognize that the problems of the peripheral countries were not a problem for the euro and should be reflected in country-specific interest rates rather than in the euro’s value. The result was a rising euro and a renewed shift of portfolio balances to euros from dollars. As that process continues, the relative value of the euro will continue to rise.

Mr. Feldstein, chairman of the U.S. Council of Economic Advisers under President Reagan, is a professor of economics at Harvard University.

A Decade of Success
By Pedro Solbes

After 10 years with the euro, the economic crisis and its consequences in some countries of the euro zone have reopened the debate about the suitability of a single currency in the absence of a high level of political integration.

But the euro has been a great joint success, which has allowed for a long period of growth and price stability in Europe. It has had a different impact in each country, but its benefits have been seen across the board. The euro has permitted more coordinated action in Europe and has prevented competitive devaluations. This has been key not only for the euro zone, but also for the rest of Europe and even for the global economy. Without the euro, we would have witnessed an increase in protectionism, which would in turn have aggravated the impact of the crisis in Europe and elsewhere.

Would it have been easier to reach consensus in the G-20 without the euro zone? Would it have been easier to respond to the challenges and difficulties faced by the international financial system? Would there have been greater cash-flow access? The answer to all these questions is no. It could be argued that a fluctuating exchange rate could have limited the impact of the crisis in some countries. However, would the crisis have been avoided without correcting the fundamental problems in each country and subsequent generalized competitive devaluations? The absence of an exchange rate may have aggravated the problems that existed before the crisis. But have these been better tackled outside the euro? Some observers have affirmed that behavior outside the euro zone has not been any better.

Quite a few countries of the euro zone already faced significant risks before the crisis, both real (real-estate bubble, public and/or private debt) and financial (inadequate risk management or excessive dependence on external funding). In addition, in some cases, uncoordinated fiscal and monetary policies in the euro zone could have helped generate the problem. Experience shows that the Maastricht architecture designed to manage the euro zone has been lacking. Focusing economic-policy coordination in the fiscal arena, coupled with a somewhat lax implementation of norms, has not been enough. Leaving the task of correcting imbalances in the hands of euro member states has not worked. The crisis has brought to the fore the lack of a mechanism to help troubled countries before their problems end up affecting the entire euro zone.

As is often the case with the European construction process, the problem resides not only in diagnosing the problem. There is an urgent need for clear and quick solutions, backed by the political will to comply with what has been agreed, something not always easy to achieve when dealing with 27 different countries.

Even though it has not been adopted by all EU member states, the euro is today, as German chancellor Angela Merkel has recently expressed, an inherent element of the European integration process. The euro is here to stay and the real challenge is how to make it more efficient.

Mr. Solbes is chairman of the Executive Committee of FRIDE and former Spanish minister of economy.

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Brussels May Punish German Competitiveness, Die Zeit Reports

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And stupider.

Maybe the world should outlaw lawnmowers and require lawns be cut with toenail clippers to create jobs. I’d suggest they were trying to weaken the euro but surely that would be giving them too much credit…

Brussels May Punish German Competitiveness, Die Zeit Reports

By Jeff Black

February 2 (Bloomberg) — European Union officials are considering measures that would punish countries that run excessive trade surpluses or whose competitiveness is too high, Germany’s Die Zeit newspaper reported, citing a document.

The proposed measures, outlined in a position paper obtained by the newspaper, would require states to keep their current account balance within a “corridor” of plus or minus four percent of gross domestic product, Die Zeit said.

A similar boundary would apply for the yearly change in unit labor costs, a measure of price competitiveness, the newspaper said. In 2008, Germany’s current account surplus was 7 percent of GDP and its price competitiveness improved by 5.5 percent, Die Zeit reported.

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(APW) EU Considers Loans to Greece to Buy Back Bonds

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They EU may as well buy the Greek bonds themselves and save the legal fees.

And probably get a higher rate, and, of course, the option to forgive if it ever suits them.

Amazing anything like this ‘option’ even gets this far as a trial balloon.

But it does.

EU Considers Loans to Greece to Buy Back Bonds
2011-01-28 14:20:53.271 GMT
By GABRIELE STEINHAUSER
Brussels (AP) — Lending Greece money to buy back its bonds
on the open market is “one option” under discussion as eurozone
governments overhaul their euro440 billion ($603 billion)
bailout fund, a spokesman for the European Union’s executive
Commission said Friday
Greece’s bonds are currently trading below face value,
meaning the country could buy them back at a discount and cut
its mounting debt pile.
The European Commission raised that idea in an internal
“working document” on improving the response to the debt
crisis, said Amadeu Altafaj-Tardio, spokesman for EU Monetary
Affairs Commissioner Olli Rehn.
However, he emphasized that the document wasn’t a proposal
from the Commission, adding “It will be up to the member states
to see to it that our response (to the crisis) is more
effective in the future.”
Speaking to journalists at the World Economic Forum in
Davos, Greek Finance Minister George Papaconstantinou confirmed
that the idea of bond buybacks was being discussed, but
stressed that Greece wasn’t “engaged in any official way in
those discussions.”
Greece was saved from bankruptcy with a euro110 billion
rescue loan from its partners in the euro and the International
Monetary Fund in May, after investors worried about the
country’s high government debt sent its funding costs soaring.
In the wake of that bailout, the European Commission, eurozone
governments and the IMF set up a euro750 billion fund to help
other governments in financial troubles. That fund in November
extended a euro67.5 billion emergency loan to Ireland.
Eurozone governments are currently discussing new crisis
measures, after the bailout of Ireland failed to stop concerns
over debt levels from spreading to Portugal and much larger
Spain. At the center of these discussions is the eurozone’s
euro440 billion portion of the bailout fund — the European
Financial Stability Facility — and whether it should be
expanded and given more powers.
In a paper published Monday, London-based consultancy
Capital Economics calculated that an EFSF-funded bond buyback
program based on the market price of Greek bonds last week,
could cut Greece’s debt pile from about euro260 billion to
around euro194 billion. That would mean that at the end of this
year, the country’s debt would stand at 126 percent of economic
output as opposed to 154 percent, Capital Economics estimated.
However, even that reduction might not eliminate fears over
Greece’s ability to repay its debts, Ben May, European
economist at Capital Economics, said in an interview.
On top of that, telling investors that there is a buyer for
their bonds would likely push up bond prices and there is no
guarantee that all investors would be willing to sell their
bonds at a discount. “So the savings would be much less than
the current market price would suggest,” May said.
To make the buyback effective, any loans from the EFSF
would have to come at very low interest rates, said May. For
its current bailout, Greece has to pay interest of more than 5
percent. Germany and other key funders of the EFSF have so far
opposed lowering interest rates.
—
Masha Macpherson in Davos contributed to this report.

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Euro-Area Inflation Accelerates to Fastest Since 2008

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Saudi crude oil price hikes are nudging up the various inflation indices some, but most core measures remain tame and the headline CPI increases will only be a one time event if/when crude prices stabilize, as aggregate demand remains relatively weak and inventories plentiful in general.

However, the anti inflation rhetoric from the CB’s, which still fail to recognize the currency is a (simple) public monopoly, will intensify as they all believe it’s inflation expectations that cause actual inflation, and so they are continuously in action to manage those pesky expectation things. Call it another example of ‘Aztec Economics’ (the Aztecs performed human sacrifices to make sure the sun came up every morning).

EU Headlines:
Euro-Area Inflation Accelerates to Fastest Since 2008

Europe Keeps Interest Rates Steady on Concern About Economic Growth

Trichet Puts Inflation Fighting Back on ECB Agenda

ECB’s Weber Says Inflation Risks ‘Could Well Move to Upside’

EU Bailout Rates May Need to Drop for Aid to Work: Euro Credit

Euro Will Be Even Stronger Currency, EU’s Almunia Tells Negocios

Euro-Area November Exports Increase 0.2%, Imports Rise 4.4%

Weber Says German Economic Growth Will Moderate Going Forward

German Inflation Expectations at Nine-Month High as CPI Surges

Spain Underlying Inflation Rate Rises to Highest Since Feb. 2009

Euro-Area Inflation Accelerates to Fastest Since 2008

By Simone Meier

January 14 (Bloomberg) — European inflation accelerated to the fastest pace in more than two years in December, led by surging energy costs, complicating the European Central Bank’s efforts to deal with the sovereign debt crisis.

Inflation quickened to 2.2 percent in December from 1.9 percent in the previous month, the European Union’s statistics office in Luxembourg said today. That’s the fastest since October 2008 and in line with a Jan. 4 estimate. European exports rose 0.2 percent in November from the previous month when adjusted for seasonal swings, a separate report showed.

Crude-oil prices have jumped 10 percent over the past three months, fueling inflation just as austerity measures threaten to hurt economic growth. ECB President Jean-Claude Trichet said yesterday that inflation in the euro region may remain above the bank’s 2 percent ceiling over the coming months, signaling he is prepared to raise interest rates if needed.

“Overall, the latest from the ECB reveals some increase in concern about euro-zone inflation dynamics,” said Simon Barry, chief economist at Ulster Bank in Dublin. “It doesn’t appear that that trigger is going to get pulled in the next few months, but the chances of a hike by the end of this year have risen.”

The euro declined against the dollar after the data, trading at $1.3354 at 10:02 a.m. in London, down 0.1 percent on the day after being up as much as 0.7 percent earlier.

Energy Prices

The increase in energy prices leaves households with less money to spend just as governments from Spain to Ireland toughen budget cuts. The ECB last month forecast euro-area inflation to average around 1.8 percent this year and about 1.5 percent in 2012.

Trichet, whose central bank has been forced to provide banks with emergency liquidity and purchase governments bonds to fight the crisis, said yesterday that he sees signs of “upward pressure” on inflation over the coming months. Inflation is “likely to stay slightly above 2 percent, largely owing to commodity-price developments, before moderating again towards the end of” 2011, he said at the press conference in Frankfurt.

Euro-area core inflation, which excludes volatile costs such as energy prices, held at 1.1 percent in December, today’s report showed. Energy costs rose 11 percent from a year earlier after increasing 7.9 percent in November.

The euro’s depreciation has helped drive up import costs while also making goods more competitive abroad just as the global recovery gathered strength. In Germany, Europe’s largest economy, plant and machinery orders surged 43 percent in November from a year earlier and business confidence jumped to a record last month.

German ‘Engine’

Siemens AG, Europe’s largest engineering company, said on Jan. 11 that it’s confident of reaching its full-year targets. The Munich-based company is “off to a good start,” Chief Financial Officer Joe Kaeser said on the previous day.

Euro-area imports increased 4.4 percent in November from the previous month and the region had a trade deficit of 1.9 billion euros ($2.6 billion) after a surplus of 3.5 billion euros, today’s report showed.

“Germany will remain the region’s growth engine,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “Companies in countries with buoyant demand will find it easier to pass on higher costs while some nations remain very weak.”

Euro-area exports to the U.S. rose 18 percent in the 10 months through October from a year earlier, while shipments to the U.K., the euro area’s largest market, increased 11 percent. Exports to China surged 38 percent. Detailed data are published with a one-month lag.

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German Economy Grew at Fastest Pace in Two Decades

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It’s been a long two decades, and 3.6% growth coming out of a 4.7% slump, slowing to 2% this year, isn’t anything to brag about.

And with the German dependency on exporting to the rest of Europe they’ll likely support continued ECB funding assistance.

The austerity measures, which make euro ‘harder to get’, combined with ECB funding assistance, which addresses default risk, also continue to fundamentally support a stronger euro.

And higher crude prices, which make dollars ‘easier to get’ off shore, work to both weaken the dollar and weaken US domestic demand.

German Economy Grew at Fastest Pace in Two Decades

By Christian Vits

Jan. 12 (Bloomberg) — Germany enjoyed its fastest economic expansion in two decades last year as booming exports spurred hiring and consumer spending.

Gross domestic product jumped 3.6 percent, the most since data for a reunified Germany began in 1992, after slumping 4.7 percent in 2009, the Federal Statistics Office in Wiesbaden said today. The figure was in line with the median forecast in a Bloomberg News survey of 28 economists. GDP probably rose 0.5 percent in the fourth quarter from the third, the statistics office said. The official fourth-quarter report is due on Feb. 15.

The Bundesbank expects Europe’s largest economy to expand 2 percent this year and 1.5 percent in 2012 as the sovereign debt crisis damps demand in the euro area, its main export market.

Germany’s Continental AG, the second-biggest tire maker in Europe, yesterday reported sales and earnings that beat its 2010 goals.

“The growth momentum continued into the first quarter and current forecasts might turn out to be too pessimistic,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “The German economy will likely have returned to its pre-crisis level in the third quarter.”

The euro traded at $1.3032 at 10:13 a.m. in Frankfurt, up from $1.3005 before the GDP report.

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Italian deficit narrows in third quarter

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Now that Japan has an open door to buy euro to ‘help out’ the region’s finances, and the ECB’s funding terms and conditions forcing deflationary austerity measures that continue to bring euro zone deficits down, I’m itching to buy the euro vs the yen.

At some point, however, and maybe as soon as q3 this year, or even sometime in q2, the austerity in the euro zone will fail to reduce deficits and instead the tightening measures will cause growth to go into reverse and deficits to increase, causing fundamental euro weakness.

But until then, the euro remains fundamentally strong, with technicals/one time portfolio shifts causing the sell offs.

Headlines:
Portugal Finance Minister says no need for bailout
Euro May Decline to 2010 Low Against Yen: Technical Analysis
ECB intervenes as debt crisis deepens
Portugal faces growing tensions
Tensions Rise Before Portugal Auction
Germany May Soften Objections to Euro Fund Increase
German 2011 Construction Sales May Drop, HDB Building Lobby Says
German Trade With China Rose to a Record in 2010
French Business Confidence Rose in December for Fourth Month
Italian deficit narrows in third quarter

Italian deficit narrows in third quarter

(FT) Italy’s public budget deficit narrowed in the third quarter of last year, putting the economy on track to hit government austerity targets of about 5 per cent of gross domestic product in 2010. As a result of austerity measures passed in December, Italy is targeting a public budget deficit of 3.9 per cent in 2011 and 2.7 per cent in 2012. Debt is expected to peak at about 120 per cent of gross domestic product this year, giving the economy ministry little room to manoeuvre. In the third quarter, the public deficit narrowed to 3.2 per cent of GDP compared with 3.9 per cent in the period a year earlier, according to data from the national statistics office. It narrowed to 5.1 per cent of GDP in the first nine months, down from 5.5 per cent a year earlier.

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