EconomicsEuroZone: Financial Sector: On verge of collapse?

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Financial Times via iPolitics Canada (November 23, 2k11)
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Eurozone really has only days
to avoid collapse

Posted on Sun, Nov 27, 2011, 9:48 pm by Wolfgang Munchau, The Financial Times

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough that politicians finally act — eurobonds, debt monetization, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.

Technically, one can solve the problem even now but the options are becoming more limited. The eurozone needs to take three decisions very soon, with very little potential for the usual fudges.

This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.

First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread or a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a “stability bond,” surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on Dec. 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then there is still a risk of a long recession, possibly a depression. So even if the European Council was able to agree on such an improbably ambitious agenda, its leaders would have to continue to outdo themselves for months and years to come.

How likely is such a grand deal? With each week that passes the political and financial cost of crisis resolution becomes higher. Even last week Angela Merkel was still ruling out eurobonds. She was furious when the European Commission produced its own proposals last week. She had planned to separate the discussion about the crisis from that of the future architecture of the eurozone. The economic advice she has received throughout the crisis has been appalling.

Her own very public opposition to eurobonds has now become a real obstacle to a deal. I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints. If she had been more circumspect, she could have travelled to the summit with the proposal of the German Council of Economic Advisers, who produced a clever, albeit limited and not yet fully worked-out plan. They are proposing a “debt redemption” bond – another candidate for this year’s top euphemism award. The idea is to have a strictly temporary eurobond, which member states would pay off over an agreed time. At least this proposal would be in line with the more restrictive interpretation of German constitutional law.

Merkel’s hostility to eurobonds certainly resonates with the public. Newspapers expressed outrage at the Commission’s proposal. I thought both the proposal itself and its timing were rather clever. The Commission managed to change the nature of the debate. Merkel can get her fiscal union, but in return she will now have to accept a eurobond. If both can be agreed, the problem is solved. It is the first intelligent official proposal I have seen in the entire crisis.

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement, given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the half-life of these fake packages has been getting shorter. After the last summit the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Copyright The Financial Times Limited 2011

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Iran: Mediation: A deal brokered by Brazil and Turkey fails, 'Big Powers' sanction Ayatollahland

Brazil brokers a swap deal between Iran and Turkey regarding enriched uranium (nuclear grade) for use in a key Turkish medical project, but meantime the slow grind of Big-Power diplomacy reaches agreement on draft resolution to be presented for a vote at the UN Security Council. Reuters via Yahoo! News offers this May18,2k10 dispatch, "Big powers agree on Iran sanctions draft":

The United States handed the U.N. Security Council a draft resolution on Tuesday that would expand U.N. sanctions against Iran by hitting its banking and other industries for refusing to halt nuclear enrichment.

The 10-page draft, agreed by the United States, Britain, France, Germany, China and Russia after months of negotiations, also calls for international inspection of vessels suspected of carrying cargo related to Iran's nuclear or missile programs.

The Security Council draft restricts Iran's international expansion of banking for nuclear-war purposes, and it specifically names the Revolutionary Guard's activities, alerting the world to the latter's insidious if clandestine manoeverings.

Politics: France: Winnipeg Free Press gives an entirely alternative understanding of immigrant voters in France

Pembroke Daily Observer carries an Editorial in Winnipeg Free Press May12,2k7) that records how h+rise-housing immigrants voted in the recent Presidential election in France. I noted the absence in the press of mention regarding how these districts voted, but I did notice what the Free calls "a bit of stone-throwing and car burning."

Sarko also did well among blue-collar workers, to the chagrin not just of the Socialist Party's regular supporters, but also of that 10% who voted for ultraleft parties in the first round (where now the enfeebled Communists took only 1.6% of the vote, as against the 20% of the national vote they once commanded in 1st rounds, before they came to the aid of the Socialists in the 2nd round).

In the bitter run-up to the final round of the French presidential election on Sunday, Socialist party candidate Segolene Royal suggested that a win for her right-wing rival, Nicolas Sarkozy, would bring an explosion of ethnic violence to France.

In the wake of Mr. Sarkozy's substantial victory, there was a bit of stone-throwing and car burning at the Place de la Bastille in [downtown] Paris, but nothing like the riots of 2005 that Ms. Royal was trying to resurrect as a fear in French minds, reminding them that as interior minister at the time, Mr. Sarkozy had referred to the rioters as "scum.''

In fact, in those areas, the banlieues, or immigrant ghettos of France where the riots took place, Mr. Sarkozy did surprisingly well when the votes were counted, taking 44 per cent of them. He did surprisingly well among blue collar workers between 46 and 52 per cent across the country. He won the support of the greater part of voters who had supported centrist Francois Bayrou in the first round of voting. In short, French voters stood French politics on its ear and confounded the pundits by breaking away from tradition all of those [who] are Ms. Royal's more natural constituencies.

The election result may rejuvenate France, which is in danger of becoming the sick man of the European Union. Mr. Sarkozy promised that change, with 100 days of action to implement economic reforms, including a longer work week. France's mandated 35-hour work week, the shortest in Europe, is widely blamed for its deplorable productivity rate and competitiveness, a dismal 27th in word rankings; its high unemployment; and its extraordinarily high debt-to-GDP ratio. Mr. Sarkozy promises to address all those issues, and his victory indicates that the French agree with him, at least in principle.

France would seem set for change but Mr. Sarkozy's triumph is also a boost for Canada and the Western alliance. France is naturally a major player, an integral ally in that relationship, but under outgoing President Jacques Chirac, it was a difficult, even a disagreeable one. Mr. Sarkozy is an unabashed defender of the alliance and an admirer of the United States, although no one is likely to accuse him of being America's poodle. Rather, he will try to keep America in step with France and France in step with America, even if that takes some serious double-stepping, enabling the West to present a stronger front in an increasingly fractious world. As a former leader of the Western alliance might have said, on both fronts, domestic and international, the news from France is very good.

That Sarko did "surprisingly well" among blue-collar workers, gaining an estimated 46 to 52 per cent of their votes nationwide, is a factoid worth meditating. This factoid suggests that a good chunk of featherbedded workers now realize that the country must become competitive soon. It would be most interesting to see what the Transport workers did with their votes, as they are among the worst blackmailers among unionized employees when it comes to demanding exorbitantly h+ wages. But France does have a much more entrenched viewpoint pluralism in its system of workers-representation, with parallel unions functioning on the same shop floor, and often bargaining nationally. As I recall, however, France does not have collective agreements with the force of binding contracts, but only "agreements" that settle a strike, etc.

Politics: France: Sarkozy wins Presidency of France on Conserve platform, Socialists crumble into deep divide

Bloomberg's Celestine Bohlen reports "Sarkozy Signals Shift in France's Ties With US, Europe" (May7,2k7)

Nicolas Sarkozy, in his acceptance speech after being elected president last night, signaled a shift in tone in France's relations both with the United States and Europe.

``I want to call out to our American friends to tell them that they can count on our friendship,'' said Sarkozy, a half hour after he was declared the winner. He also threw down a challenge to the U.S. to take the lead in the fight against climate change.

Similarly, he said ``France is back in Europe,'' while adding that the European Union should listen more closely to the citizens it is supposed to protect.

Sarkozy's approach marks a change from the policies of the outgoing President Jacques Chirac [12 years in office], who set himself up as an opponent of the Bush administration on a number of issues, most notably on the US-led invasion of Iraq [altho France is a NATO participant in the Afghanistan War].

Chirac has also been held responsible for the defeat in May 2005 of the proposed European constitution in France, which is one reason why the European Union's attempts to modernize have come to a halt. ...

He called for a return to a foreign policy based on France's historic commitment to human rights.

``I want to tell all those in the world who believe in the values of tolerance, liberty, democracy and humanism, that France will be at their side, that they can count on her,'' he said.

Bloomberg again: reporter Francois de Beaupuy, "Sarkozy Claims French Mandate to Push Tax-Cut, Labor Measures" (May7,2k7).

Nicolas Sarkozy claimed a mandate for change after his election as French president, pledging to unify the country as he began promoting a program of tax cuts, tougher prison sentences and tighter immigration rules.

``The people of France have chosen to break with their ideas, habits and behavior of the past,'' Sarkozy, 52, said late yesterday in a victory speech in Paris after congratulating his Socialist opponent, Segolene Royal. ``I will restore the value of work, authority, morals, respect, and merit. I'll restore national pride and national identity.''

Sarkozy, candidate of the governing Union for a Popular Movement [UMP], took 53.2 percent against 46.8 percent for Royal, the Interior Ministry said, with 96 percent of the vote counted.

Provided his party wins June parliamentary elections, lawmakers will be asked to vote on a budget that scraps payroll charges and income taxes on overtime hours. It would also eliminate inheritance taxes for all but the richest 5 or 10 percent and introduce a tax deduction for mortgage-interest payments.

Criticized as divisive and dangerous by Royal, 53, during the campaign, Sarkozy may not have much of a honeymoon. He has said he would push through a law in September requiring a minimum level of service by transport workers unless unions negotiate a deal by the end of summer. An impasse may lead to strikes that could set the tone for the rest of his presidency. ...

`Casus Belli'

``Transport reforms could be a casus belli,'' said Nicolas Sobczak, a Paris-based economist at Goldman Sachs Group Inc. ``But it's hard for grass-roots unionists to mobilize with Sarkozy winning with a big margin.''

Strikes crippled the French economy for three weeks in 1995, when Chirac unsuccessfully tried to reduce pension privileges of public-sector workers in his first year.

Sarkozy also risks running into opposition from public- sector employees because he has pledged not to replace half of the civil servants retiring over the next five years and to roll back some transport workers' pension benefits. ...

Sarkozy inherits an economy whose share of European exports is shrinking and whose growth is likely to lag behind Germany's for a second year. The jobless rate of 8.7 percent is the highest among the 13 nations that share the euro.

He blames the 35-hour work week, above-average taxes, and generous unemployment benefits for discouraging initiative and holding down salaries.

To boost hiring, Sarkozy, who was Chirac's interior minister and finance minister for four years, has pledged that his government will confer with business federations and labor unions by the end of the year to make firing procedures quicker and more predictable in exchange for increased unemployment benefits and extra training for jobseekers.

Sarkozy says he'd make students' earnings tax free and [promised] to give universities more autonomy to manage their staff and real estate and to create partnerships with businesses.

Chirac's successor, who campaigned on law and order, said he'd introduce a law in July [after June elections for a new Parliament] that toughens sentences for repeat offenders, and a separate law that will aim from preventing immigrants who don't have a job and an apartment from being joined by family members.

He also faces hurdles abroad. Sarkozy, who made criticism of the European Central Bank one of his campaign staples, may also clash with fellow European Union leaders on Turkey. He opposes the nation's entry into the 27-nation EU. Negotiations on Turkey joining the EU, approved in 2005, are partially suspended amid a dispute over Cyprus.

In his post-election comments he urged ``our European partners not to remain deaf to the anger of people who see the EU as a Trojan horse'' for globalization.

Bloomberg in a third report features the loser in France's two-way election last nite, a story by Helene Fouquet and Sandrine Rastello, "Royal's Election Loss Tolls `End of Era' for French Socialists" (May7,2k7):

Segolene Royal's loss to Nicolas Sarkozy in yesterday's presidential election amplified divisions among French Socialists that may fracture the nation's second- biggest party.

A leadership purge won't be enough to heal the split between [Socialist party] skeptics of global capitalism and [that party's social democrats] who seek an alliance with centrist Francois Bayrou, who finished third in the April 22 first round, said Bernard Kouchner, a former Socialist health minister.

``This is the end of an era, the end of French socialism,'' Kouchner, 67, said in an interview.

Royal's six-point loss to Sarkozy marked the party's third straight defeat in presidential elections and followed a rout five years ago. In 2002, Lionel Jospin failed to make it into the runoff against Jacques Chirac when he was beaten by anti- immigration leader Jean-Marie Le Pen.

``They had five years to reinvent themselves, but instead of starting over from scratch, they took the same people and stayed where they were,'' said Etienne Schweisguth, a senior fellow at the Institute for Political Studies in Paris. ...

``You know what social democracy means? It means compromising with the right wing and at the Socialist Party we're against that,'' David Assouline, a Socialist senator from Paris and a Royal campaign aide, said in an interview on May 4.

Sensing the looming defeat, Socialists had already begun campaigning for what they call the ``third round'' -- the legislative elections on June 10 and June 17. ...

``Even Communist China has taken the road of capitalism, even them,'' Kouchner said. ``Is France the only country where we will keep thinking capitalism is perverse, vulgar and dangerous?''

Each of these stories is worth clicking-up to read in their entireties, along with the title-link from Reuters that appeared in Times of India. However, the Bloomberg trio of stories by Celestine Bohlen, by Francois de Beaupuy, and by Helene Fouquet and Sandrine Rastello taken together are exceptional as an au courant source. Even in my foreshortened excerpts, the reader has access to a veritable course on the current political situation in France. This sustained non-repetitive reporting speaks well also for Bloomberg.com (click for the frontpage) which basically focuses on on financial and business news.

In my opinion Sarkozy is going to have one hell of a term of office, because France is featherbedded as no other country on Earth. And all the featherbedded "workers" and their unions, who opposed giving non-white youth better job-market chances (easy to hire, easy to fire) in small businesses (therefore non-unionized) out of sheer racism-socialism will fite the new President tooth and nail from his first day in office to his last. We wish him good luck, because at present France can't compete with in Europe, let alone globally.