Tag Archives: Eurozone

JN Daily | Jobless Rate Moves Higher, CPI drops, HHold Spending Misses Expectations

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Looks like China is starting to stabilize Japan, which means it is probably helping the eurozone some as well.

  • Shipments Up Across Industries In June As Production Recovers
  • Cost Cuts Help Electronics Firms Reduce Losses In April-June
  • Jobless Rate Hits 6-Year High Of 5.4% In June
  • Household Spending Rises 0.2% In June
  • June CPI Falls At Record Pace
  • Housing Starts Fall 32.4% In June
  • June Const Orders Fall 8th Straight Month
  • LDP Aims For Steady Growth, Hints At Sales Tax Hike In Platform
  • Forex: Dollar Trades In Y95 Range Ahead Of U.S. GDP Data
  • Stocks: End Up, Set New ’09 High As Earnings Shine
  • Bonds: End Lower On Nikkei Rise, Pre-Tender Hedge


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Eurozone- quantitative easing VS fiscal adjustment

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Thanks, they all have it wrong regarding quantitative easing.

Net financial assets of the non government sectors remain unchanged.

There is no ‘monetary’ consequence apart from the resulting somewhat lower long term interest rates.

And the idea that it helps delays fiscal responses that do help.

Europe needs its politicians to drive a new fiscal stimulus

by Julian Callow

Mar 31 (FT) — As international pressure intensifies on the European Central Bank to print money by adopting a programme of aggressive asset purchases, it is worth questioning whether Europe has got its priorities in the right order. So far, the ECB has been doing most of the heavy lifting in terms of injecting stimulus into the euro area.

Looking ahead, it is preferable that opportun- ities to undertake radically further fiscal easing are fully exploited before requiring the ECB to go down the route taken by the Federal Reserve, Bank of England and Swiss National Bank (ie. undertaking “pure” quantitative easing via extensive asset purchases financed by the creation of new central bank money).

This implies quantitative easing is more powerful than fiscal and should be saved for last. Not true.

In short, if the euro area is to err on the side of being a little reckless in terms of policy,

Quantitative easing is totally tame, not reckless. It’s just part of the CBs role in setting the term structure of risk free rates.

it is preferable this be in a fiscal, rather than monetary, direction.

For the eurozone, with the national governments credit sensitive agents, fiscal is unfortunately the reckless pass under current institutional arrangements.

This is for three reasons.

First, well devised and appropriately targeted fiscal incentives can prove very efficient, both in terms of stimulating demand and even in timeliness. For example, a modest €1.5bn scheme to encourage new car purchases via subsidies to scrap older cars (just 0.06 per cent of German GDP) has already led to about 350,000 new orders being placed in Germany. That represents 11 per cent of German registrations last year.

Yes, fiscal works!

Second, the fiscal framework is much better established, including a possible exit strategy.

Just the thought of an exit strategy shows a lack of understanding of how aggregate demand works and is managed by fiscal policy. It also shows deficit myths are behind the statement.

For decades, economists have built up a good understanding of fiscal multipliers and lags. The cost of such measures is transparent,

There is no ‘cost’, only nominal ‘outlays’ by government.

unlike a strategy of central bank asset purchases, where the impact and exit strategy are uncertain and future costs are obscured.

Yes, few understand this simply thing. It’s about price (interest rates) and not quantities.

Third, for the euro area there is a particular reason why aggressive quantitative easing could prove hazardous.

It can’t be hazardous.

This results from the unique status of the ECB and euro as icons of European integration. Even though it may have happened more than 80 years ago, the collective memory of the hyperinflation experienced by Germany and Austria during the 1920s – and of its consequences, which ultimately gave birth to the euro – still casts a long shadow over European perceptions of paper money.

The mainstream believe that it is inflation expectations that cause inflation, and we pay the price via their errant analysis.

Here, we should not forget that, in contrast to the dollar, the pound and the Swiss franc, the euro has been in physical cash circulation for only seven years. As well, it is worth noting that the proportion of EU citizens saying they tend not to trust the ECB has tended to shift upwards – to 31 per cent in the most recent survey (autumn 2008), the highest in EMU’s history. This compares with 48 per cent saying that they tend to trust the ECB (source: Eurobarometer 70).

In short, were the ECB to adopt a strategy of aggressively printing money through an extensive asset purchase programme, this would risk significantly undermining the euro’s credibility, particularly if this strategy was not well communicated.

Credibility is way overrated!

That said, the ECB is in a neighbourhood where most of its peers have embarked on a strategy of aggressively printing money.

The term ‘printing money’ is a throwback to the gold standard and fixed FX in general where the CB prints convertible currency in excess of reserves. This has no applications with today’s non convertible currency.

This risks pushing up the euro on a trade-weighted basis further, at least in nominal terms, which would represent another negative shock to euro area exporters. In this context, if fiscal policy was used more aggressively as a means of providing new stimulus to the economy, it should seek in part to compensate businesses whose outlook could be further weakened by currency appreciation.

Increasing deficits does not strengthen a currency. If it did Zimbabwe would have the word’s strongest currency.

Without doubt, reaching agreement on sufficiently robust fiscal stimulus in Europe is harder to accomplish than a policy of leaving the bulk of policy stimulus up to the ECB.

True. And too bad the ECB doesn’t have any policy variables at hand to add to aggregate demand.

The measures, rather than having a small committee to determine the appropriate level of stimulus, must be decided by politicians, who face political constraints and competing interests. But the transparency that gives a strategy of fiscal stimulus its rel>ative appeal also hampers the ability of politicians to execute it. Also, we are presented with an adverse starting position, with the euro area budget deficit likely this year to be close to 6 per cent of GDP.

That’s the good news. The automatic stabilizers are causing the deficits to grow to the point where they will trigger a recovery. Hopefully before the point where the national governments become insolvent trying to fund themselves.

Nonetheless, this should not mean that the aggressive use of additional fiscal stimulus is insuperable. We have lived through desperate times, which call for desperate measures. Central banks, including the ECB, have already responded with far-reaching measures. In order to stimulate economic recovery in Europe, its political leaders need to take up the baton.

Europe could also assist its cause by several other measures. For one thing, it seems odd that the European Commission has launched “soft” excessive deficit procedures against several euro area countries. As well, European governments, including the European Commission, could do a much better job of outlining to the rest of the world, in a clear and concise way, the details of their stimulus actions so far. For, encompassing the full range of monetary and financial system support measures, these are far from being negligible – with the discretionary fiscal stimulus measures alone amounting to about 1 per cent of euro area GDP in 2009.

Julian Callow is chief European economist at Barclays Capital


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Re: The pressure increases on the eurozone

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These types of articles have gotten respectable and are getting more strident by the hour.

I do think a banking crisis where the national government can’t or won’t write the check freezes the entire payments system, as no one will want to keep any funds in a eurozone bank, nor will they have anywhere to go other than actual cash.

Gold had been benefiting by all this, but looks to me like a major bubble that breaks when the eurozone resolves itself one way or another.

>   
>   On Mon, Feb 16, 2009 at 5:27 PM, wrote:
>   
>   Even the euro enthusiasts are now starting to contemplate the break-up
>   of the European Monetary Union, which basically would finish the euro.
>   This problem is becoming evident to more people in the euro zone, but
>   not reflected yet in policy:
>   

Narrow-minded leadership hurts Europe

by Wolfgang Münchau

Feb 15 (Financial Times) — “It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory … is built in the Czech Republic and its cars are sold in France” – Nicolas Sarkozy, president of France.

This is a troubling statement indeed. But instead of launching a tirade against Mr Sarkozy, I would like to make an observation that is perhaps not immediately evident: his statement is entirely consistent with the way the European Union has reacted to the financial crisis.

To see the link between crisis management and the rise in protectionism, look at the initial policy response to last September’s financial shockwaves. European leaders have woefully underestimated the crisis and possibly still do. The European economy is now heading towards a depression, with German gross domestic product falling at an annualised rate of almost 9 per cent. The early misjudgment of the crisis resulted in stimulus packages with two defects. They were initially too small but, more importantly, they were not co-ordinated. One important aspect of the economic meltdown is the presence of strong cross-country spillovers, both globally and inside the EU. The policy response failed to take account of these spillovers.

For the bank bail-out programmes, the EU managed to set a minimum level of competition rules, but these programmes, too, were national and not co-ordinated. So how does the combined effect of these two unco-ordinated responses lead to protectionism?

If stimulus money is dispersed at national level, governments naturally try to make sure that the money stays inside their countries. The prospect that consumers might spend the money on imported goods was one of the reasons why eurozone governments were reluctant to cut taxes. Because of EU competition rules, the same logic also applies to government purchases. Under those rules, governments had to open public projects to EU-wide tenders. If you play by the rules, keeping the cash in your country is not easy.

Governments have since relaxed those rules. In other words, if you want to make sure that these programmes function in their warped way, you have to dismantle the single market. The same logic applies to the bank rescue packages. If the European Commission tried to block each uncompetitive bank rescue, it would be blamed for causing a financial collapse. Governments have found a way to circumvent the EU, by breaking so many rules at once, that the Commission cannot even begin to react effectively.

Expect to see three effects with progressively destructive force. The first is that the stimulus is much less effective than it could otherwise have been. When everybody tries to gain a competitive advantage over each other, the effects usually cancel out.

Second, the stimulus and bank rescue packages harm the single European market directly. The French subsidies are more blatant, as is the protectionist rhetoric of its president. But everybody in Europe plays the same game. It is not as though the single market is the default position for European commerce. Much of the service sector is exempted. Europe lacks an effective pan-European retail infrastructure and retail banking system. Reversing this programme long before it is completed would be a mistake.

Third, and most destructive, the combined decision on stimulus and financial rescue packages poses an existential threat to monetary union. A blanket loan guarantee to every bank, as most governments have granted, in combination with indiscriminate capital injections and a reluctance to restructure, will mean the transformation of private into sovereign default risk – aggravated further by the economic downturn. Some insolvent banks are now owned by the state, while the bulk of damaged, not-yet-insolvent banks are lingering on, hoarding cash. This programme is a drain of resources with no resolution in sight.

I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.

When European leaders meet for their anti-protectionism summit on March 1, they will produce warm words to reaffirm their commitment to the single market. I suspect they will continue to misdiagnose the crisis. Protectionism is not the root of the problem. The protectionism we are experiencing now is caused by co-ordination failure. It is neither sudden, nor surprising.

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.


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Re: Proposals for the eurozone

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(email exchange)

>   
>   On Mon, Feb 16, 2009 at 8:12 AM, Morris wrote:
>   
>   What would you do for Europe?
>   

For Europe:

  1. The European Parliament or ECB has to be given fiscal authority and give the national governments a check for maybe 1,000 euro per capita to be used for general purposes.

  2. This new fiscal authority would also provide deposit insurance for all the euro banks and lend to member banks on an unsecured basis.

  3. It would also regulate and supervise the banks.

  4. I would have the new fiscal authority fund jobs for anyone willing and able to work at a fixed wage, which, via market forces, would become the minimum wage.


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Eurozone going the wrong way

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This has been making the rounds and is not impossible:

But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.

As my kids would say, “Really, Dad, you think so?” Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.

Waterfield reports, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors — particularly those who lend money to European governments — have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

I’m not too worried about the UK. but the eurozone banks and national governments are at risk.

In fact, they may have failed last fall when the Fed stepped in with unlimited USD swap lines (could turn out to be fiscal transfers?) to the ECB to buy them some time.

Unfortunately it all gets a lot worse as the eurozone GDPs melt down.

“The Commission figure is significant because of the role EU officials will play in devising rules to evaluate ‘toxic’ bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.”

Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.

Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany’s problems, they may have a long wait.


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Eurozone trade deficit rising

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This is not a good sign given their monetary arrangements with no federal fiscal authority to incur the corresponding budget deficits, public and private.

And the unlimited Fed swap lines to the ECB could now be further increasing eurozone foreign currency debt, and funding imports with fresh ‘cheap and easy’ dollar debt.

Euro-zone trade deficit swells in September

Euro-zone trade deficit swells in September (AP) – The euro-zone swung to a trade deficit of 5.6 billion euros ($7.1 billion) in September from a 2.9 billion euro surplus last year. Imports surged 16 %in September from a year ago. Exports grew just 9 percent. The euro-zone trade deficit for the year to date — from January to August — now stands at 29.6 billion euros ($37.52 billion). Euro exports to the United States dropped 5 %from January to August from a year ago, Eurostat said. And exports to the currency area’s biggest customer, Britain, did not grow at all for the first eight months of the year. Imports from Russia climbed by a quarter over the same timeframe. Eurostat revised down its August trade figures, saying total euro-zone exports dropped 3 %during the month from a year ago. It originally reported a first estimate of 2 percent. Imports in August also grew less than expected — at 6 %instead of 7 percent.


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In over their heads

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The Fed and Treasury decided ‘the problem’ was the LIBOR/Fed funds spread and threw everything they had at it.

What finally did the trick was the Fed’s unlimited swap lines with the MOF, BOJ, ECB, and SNB.

Unfortunately that turned a technical problem into a fundamental problem, as I’ve previously described.

Back tracking to why they wanted LIBOR rates lower- they wanted to assist the mortgage market and consumer debt in general.

There were other ways to do this, such as my plan for uncollateralized lending to their own member banks where government already regulates and supervises all bank assets and insures bank deposits.

That would have eliminated the interbank market for Fed member banks.

Euro banks would have still been paying up for USD borrowings and been distorting LIBOR.

The next step would be to get the BBA to adjust the USD LIBOR basket to not include banks who had to pay substantially higher for funds than the US member banks.

(This is supposed to happen automatically but the BBA is dragging its feet as it did with Japan years ago.)

And this would have immediately gotten LIBOR and Fed funds back in sync.

Also, they could have expanded treasury funding for the agencies to make mortgages to member banks in general for the same purpose and lowered mortgage rates that way.

Point- lots of other/better/more sensible ways that don’t increase systemic risk than the policy of unlimited (and functionally unsecured) USD lending lines for foreign commercial banks.

The ‘cure’ seems a lot worse than the new problems it creates.

Note the euro falling fast…


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European leaders vow Bank guarantees, bid to stop financial rot

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Hopefully this will buy some time to hope for a general recovery of output and employment that contains the national deficits.

This plan is also coordinated but still relies on the national government’s balance sheets.

European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

By James G. Neuger

Oct. 12 (Bloomberg) — European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a
commitment to recapitalize any “systemically” critical banks in distress.


All good, but depends on national governments for funding.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

A communiqué gave no indication of how much governments are willing to spend or the size of bank assets deemed at risk,

Or how much the national governments are able to spend before markets stop funding them.

leaving unclear the ultimate cost to the taxpayer.

Also, these are not fiscal measures that directly add to demand.

Nor do they address the need to fund in USD which the eurozone nations don’t have.


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EU leaders to agree to relax stability rules

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This will only move them closer to brink of investors refusing to buy their debt.

EU leaders agree to relax Stability Pact rules (Roundup)

by Siegfried Mortkowitz

Paris – To help prop up their banking systems, European leaders meeting Saturday in Paris agreed to loosen the requirements of the European Union’s Stability and Growth Pact, which imposes rules on member states regarding their public spending.

French President Nicolas Sarkozy, German Chancellor Angela Merkel, British Prime Minister Gordon Brown and Italian Prime Minister Silvio Berlusconi also called for an international conference of the 14 largest industrial nations to ‘rebuild the international finance system,’ as Sarkozy phrased it.

Also attending the mini-summit of the EU’s four members of the G8 group of industrial nations were European Commission head Jose Manuel Barroso, European Central Bank (ECB) president Jean-Claude Trichet and the head of the Eurogroup, Luxembourg Prime Minister Jean-Claude Juncker.

The meeting was called by Sarkozy, currently president of the EU, to formulate a common European position to surmount the finance crisis.

A statement released after the talks said, ‘The application of the Stability and Growth Pact should also reflect the current exceptional circumstances.’

This was a victory for Sarkozy, whose closest advisor, Henry Guaino, earlier this week had declared: ‘Temporarily, (the Stability Pact) is not the priority of priorities. The priority is to save the world banking system and therefore save citizens’ savings.’

The criteria, set out in the Treaty of Maastricht, include a national budget deficit totalling less than 3 per cent of gross domestic product (GDP) and public debt not exceeding 60 per cent of GDP.

The leaders at the meeting also called for an international conference on the financial crisis that would include the G8 countries and large developing economies such as China, India, Brazil and South Africa.

‘We will work with all major economies to rebuild the international banking system,’ Berlusconi told journalists when asked about the purpose of the meeting of the so-called G14.

Sarkozy said the aim of the international conference would be to construct ‘the foundation of an entrepreneurial capitalism instead of a speculative capitalism. We want to build the beginning of a new financial world as they did in Bretton Woods.’

The 1944 international meeting in Bretton Woods established the rules for commercial and financial relations among the world’s major industrial states.

The EU leaders also agreed to work to change European accounting rules, increase regulation of credit rating agencies and hedge funds and alter the way executives are rewarded, in order to prevent the payment of ‘golden handshakes’ – that is, exorbitant severance payments – to executives who have created risk for their companies.

‘Executives who failed must be penalized,’ Sarkozy said.

The summit was preceded by a controversy over a proposal to create a 300-billion-euro (413-billion-dollar) fund to bail out struggling financial insitutions, similar to the plan passed by the US House of Representatives and signed into law by President George W Bush late Friday.

Reportedly supported by the Dutch and the French, the idea was summarily rejected by Germany and Britain, and was not on the summit’s agenda.

Sarkozy told journalists that the idea was not his.

‘I never assumed it, I never proposed it, I never imagined it,’ Sarkozy said.

Instead, in line with German and British wishes, each EU member state is to aid its troubled banks with its own funds, but after discussions with other countries, a reference to the unilateral decision by the Irish government to establish a 100-per-cent guarantee for depositors in the six largest Irish-owned banks.

The move, made without consultation with the European Commission, has already attracted investors away from British banks, and has put pressure on the Brown government government to match it.

Merkel said that the European Commission and the ECB would talk to the Irish about their move, which contravenes the EU’s state aid and competition requirements.

‘But my satisfaction about (this solution) is limited,’ the German chancellor said.

Decisions taken at Saturday’s mini-summit are to be further elaborated at Tuesday’s meeting of EU finance ministers and at the October 15-16 EU summit in Brussels.


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Game over in the eurozone?

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In addition to the financial drag on the governments needed to keep their banks and their payments system functioning, they now face an indirect but more potent force:

Falling tax revenues as incomes and assets fall.

Unlike nations with fiscal authorities (most everyone- US, UK, Japan, Russia, etc.) at the federal level who can write ANY size check (in local currency) that won’t bounce, the eurozone national governments are subject to constraint by market forces much like that faced by the US states.

When the risk of growing national deficits scares away investors from buying their debt it’s ‘game over’.

The payments system gets shut down and stays shut until it’s reorganized with expanded (fiscal) powers probably for the European Parliament and the ECB.

They need to grant these institutions with the operational capability to run unlimited budget deficits the authority to guarantee bank deposits and to deficit spend in general.

For the US my remedy remains:

  1. The Fed needs to lend unsecured in unlimited quantities to its member banks.
  1. Congress needs to declare a ‘payroll tax holiday’.

 
Yes, it’s still that simple for America to ‘save itself and the world’.

Write your Congressman and other political leaders ASAP!


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