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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Enviro: G-8 Summit: Bush stuns world leaders with gung-ho freelance carbon-emissions reductions by USA, China and India

Bloomberg.com carries a long and valuable overview of the Brendan Murray and Tina Seeley story, "Bush Proposes Initiative for Cutting Greenhouse Gases (Update5)" (May31,2k7).

President George W. Bush, in a counter-offer to European leaders on climate change, proposed convening a new round of talks with the world's biggest economies to set targets for cutting greenhouse gas emissions. past opposition to setting global goals to cut the pollution causing the Earth's atmosphere to warm. He said each nation should be free to pursue its own strategy for meeting targets.

``My proposal is this: By the end of next year America and other nations will set a long-term global goal for reducing greenhouse gases,'' Bush said in an address that set out the US agenda during next week's meeting of the Group of Eight [G8] industrial nations in Heiligendamm, Germany. The talks would ``establish a new framework'' for when the Kyoto Protocol on emissions expires in 2012.

Bush is heading into the G-8 summit having rejected a proposal by host German Chancellor Angela Merkel to set a target of limiting global warming to 2 degrees Celsius (3.6 degrees Fahrenheit), effectively cutting emissions to half of 1990 levels by 2050. The administration also opposes a cap-and-trade system, favored by Europeans, that would allow the buying and selling of credits to meet carbon dioxide targets. By proposing to convene talks on climate change, Bush is positioning the US to begin negotiations on the next steps to take.

`Huge Step Forward'

Bush's closest European ally, U.K. Prime Minister Tony Blair, hailed the president's proposal as a ``huge step forward'' for the US.

``For the first time, America is saying it wants to be part of a global deal,'' Blair said in an interview on Sky News during a visit to South Africa. ``For the first time it is saying it wants a global target for the reduction of emissions'' which opens the way ``for a proper global deal.''

Merkel, while calling it an ``important step'' and ``positive,'' was more cautious in her reaction.

``When it comes to the concrete formulation for Heiligendamm, though, we certainly have to continue to work on it,'' she said during a news conference in Berlin. ``But I do see movement on the issue.''

The president's critics said the administration was still trailing behind allies, state officials and US companies in addressing global warming and the proposal didn't offer much in the way of concrete progress.

G8 Summit, Heiligendamm, Germany > Enviro

`Isolated'

``The White House is just trying to hide the fact that the president is completely isolated among the G-8 leaders by calling vaguely for some agreement next year, right before he leaves office,'' Philip Clapp, president of the National Environmental Trust, said in a statement.

National Wildlife Federation President Larry Schweiger called the plan ``is an attempt to muddy the waters for the next president.''

``If President Bush were serious about this plan, he should have offered it six years ago when he rejected the Kyoto treaty,'' Schweiger said in a statement.

The proposal addresses one of Bush's objections to the 1997 Kyoto agreement -- which required industrialized nations to cut greenhouse gas emissions by 2012 -- by including India and China. Bush pulled the US out of the accord.

India and China

``To develop this goal, the United State will convene a series of meetings of nations that produce the most greenhouse gas emissions [GHGs], including nations with rapidly growing economies like India and China,'' Bush said. ``In addition to his long- term global goal, each country would establish mid-term national targets and programs that reflect their own mix of energy sources and future energy needs.''

The U.S. is the biggest producer of greenhouse gases, among them carbon dioxide, methane and nitrous oxide. Bush's chief environmental adviser, James Connaughton, said the U.S. had a net reduction of such emissions of 1.3 percent in 2006 even as the economy grew. While part of that is attributable to cooler summers and warmer winters, he said, ``we're getting more output with the same or slightly increasing amount of energy.''

Bush said the US-led climate change talks would include industry leaders so that technological advances are part of the solution.

``We need to harness the power of technology to help nations meet their growing energy needs while protecting the environment and addressing the challenge of global climate change,'' Bush said.

James Hansen, a climatologist and director of the Goddard Institute for Space Studies at the National Aeronautics Space Administration, said he won't be persuaded that the administration is serious about addressing climate change unless the targets are mandatory. ...

The G-8 countries are the U.S., Japan, Germany, the U.K., France, Italy, Canada and Russia. The U.S. economy accounts for about 45 percent of the group's $29.3 trillion in annual economic output.

More coverage:

* A carbon-neutral house? -- Plan would offset emissions by end of current Congress

* US carbon emissions fell 1.3% in 2k6

* Bush wants greehghouse gas summit

* Bush seeks global warming goal with China, India (2nd roundup)

* International Herald Tribune carries a G8 Summit story, by Brian Knowlton"Bush calls for action to reduce greenhouse gases'" (May31,2k7):

WASHINGTON: President George W. Bush reversed previous policy on Thursday and called for the first time on the world's top greenhouse-gas emitters to meet and agree, by next year, on goals to cut emissions aimed at averting potentially catastrophic global warming.

"In recent years, science has deepened our understanding of climate change; it opened new possibilities for confronting it," Bush said. "The United States takes this issue seriously."

It was the most significant call for action on climate change from a president who angered much of the world in 2000 when he rejected the Kyoto Protocol on global warming.

For the first time, Bush has now accepted the principle of goals for emissions reduction. His effort also would pointedly include India and China, whose fast-growing economies now rank them among the worst greenhouse-gas emitters.

Bush's call came a week before the Group of 8 industrialized countries are to meet in Germany, where Chancellor Angela Merkel had planned personally to press the president for bolder action on climate change. Bush's comments appeared, at least in part, to be an effort to seize the initiative from the Europeans - while endorsing a less-ambitious approach and giving countries 18 months before taking any action.

Also another story with another slant, this time in the Daily Telegraph [London, UK] by David Blair and Richard Spencer, Bush 'undermines G8 with new climate plan' (May31,2k7):

President George W Bush was accused of "spoiling" next week's G8 summit today after he announced that America would not agree to reduce its carbon emissions before a new conference next year.

Germany, which holds the presidency of the G8 group of rich countries, had hoped to reach a landmark deal on climate change when leaders gather in the Baltic town of Heiligendamm.

Angela Merkel, the German Chancellor, has proposed a global agreement limiting any increase in world temperatures to no more than two degrees Celsius.

In practice, scientists believe this would require a reduction of 50 per cent in global carbon emissions below the 1990 level by 2050.

But Mr Bush's latest speech might have destroyed any chance of a deal being agreed next week. He said that America and the group of 15 countries forming the world's largest economies should meet to discuss the issue next year.

This conference would convene shortly before America's next presidential election and a few months before Mr Bush steps down.

When this meeting happens, Mr Bush said: "America and other nations will set a long-term global goal for reducing greenhouse gases. To develop this goal, the United States will convene a series of meetings of nations that produce the most greenhouse gases, including nations with rapidly growing economies like India and China.

"Each country would establish mid-term management targets and programmes that reflect their own mix of energy sources and future energy needs."

For me, this Bush move makes the G8 Summit vitallty interesting, and the move Bush recently made regarding fiting AIDs increases the likelihood of approval also of Blair's own proposal to renew the G8's Africa Promises from the last summit.