Sunday, October 16, 2011

The Euro-Crisis

Oct 15, 2011
Euro crisis dominates G-20 summit

PARIS: The finance chiefs and central bank governors of the Group of 20 (G-20) began last night a two-day summit to put flesh on the bones of plans to end Europe's festering debt crisis conclusively.

'The absolute priority is to find ways to stabilise the euro zone, epicentre of the global crisis,' French President Nicolas Sarkozy, the G-20's outgoing chairman, said on the eve of the meeting.

Underlining the challenge ahead, Standard and Poor's cut Spain's long-term credit rating, while another ratings agency, Fitch, downgraded Switzerland's UBS and placed seven US and European banks on a credit watch for a possible downgrade.

United States Treasury chief Timothy Geithner also weighed in, warning that 'cascading default, bank runs and catastrophic risk' lie ahead for the world economy unless Europe puts its house in order.

A Franco-German crisis plan is likely to ask banks to accept bigger losses - possibly as much as 50 per cent - on their Greek debts than the 21 per cent spelled out in a July plan for a second bailout of Athens, which now looks insufficient.

'It will be more, that's more or less certain,' said French Finance Minister Francois Baroin, who is hosting the Paris talks.

The G-20's finance ministers are also pressuring Europe's banks to shore up their capital, as the likelihood of Greece declaring a default keeps flaring up.

Efforts to fortify the continent's lenders took a sense of urgency after Franco-Belgian bank Dexia collapsed because of its huge exposure to Greek debts.

Also on the table are plans to leverage the euro zone's €440 billion (S$769 billion) rescue fund - the European Financial Stability Facility (EFSF) - to give it more firepower.

Emerging economic powers China and Brazil, meanwhile, are offering to help out by increasing the International Monetary Fund's war chest to make it more effective at dealing with Europe's debt crisis.

A key concern has been that, while the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it will be overwhelmed by the need to rescue bigger economies such as Italy or Spain.

Such a firestorm will devastate bank balance sheets, rock markets, derail economic growth and threaten to splinter the 17-nation euro area.

Europe's woes are already responsible for wiping out about US$13 trillion (S$16.5 trillion) of wealth since July 1, analysts at Barclays Capital estimate.

The most effective method would be to turn the EFSF into a bank, so it could draw on European Central Bank resources. Both Germany and the central bank, however, are opposed to that.

The G-20 may refer to the euro crisis in its communique and in closing news conferences tonight, but little else of substance is likely to be inked in, with the EU summit in nine days' time the make-or-break moment.

The Paris meeting may give the green light to regulators for new rules on banks deemed 'too big to fail', including capital surcharges.

Any concrete progress on bigger goals, such as setting parameters to measure global imbalances and reining in speculative capital flows, is unlikely to come before a Nov 3 to Nov 4 summit in Cannes, where France will pass the G-20 baton to Mexico.

The G-20 countries make up 85 per cent of global output.


The end of an economic dream

Market upheavals in the euro zone are symptoms of a deeper problem. Here's a look at what the buckling of an untenable model will mean for jobs, welfare and pensions in Europe, as well as its impact on national politics.

By Jonathan Eyal

LONDON: It is highly unusual for the European Union to miss one of its regular summits: These are hugely important gatherings, where its 27 member states conduct their business.

But that's precisely what the EU has now done, by postponing a summit originally scheduled for this weekend.

Ostensibly, the delay is needed to allow governments to come up with an answer to Europe's roiling financial crisis. However, no such solution is in sight. A plan to help EU countries on the verge of bankruptcy was nearly derailed by Slovakia, one of its poorest members, before it finally relented on Thursday.

As the continent flounders in disarray, European Central Bank chief Jean-Claude Trichet warned this week that political dithering is 'only aggravating the situation'.

And yet, regardless of what its politicians do, decades of austerity and economic decline loom for a Europe that was built on fragile foundations, the cracks of which are emerging now in the form of the wildly teetering market movements.

Its beginnings go back to the end of the Cold War two decades ago, a period when, paradoxically, Western Europe seemed to be at the height of its powers.

It was then that the EU embarked on its most audacious project: the creation of the euro as its single currency. Some experts warned that no monetary union can succeed unless national economies approach a similar level of development, and spending priorities are decided centrally, rather than in each state. But the warnings were ignored.

The result is today's disaster. A currency designed for an industrial giant such as Germany, which exports more than the United States, was also adopted by Greece, whose exports are less than a tenth those of Singapore's. European governments were allowed to spend as much as they wished, borrowing at cheap interest rates that they would never have enjoyed had they retained their old national currencies.

What's more, Europe's problem is no longer one of just too much debt, but one of long-term economic competitiveness, destroyed by an overvalued currency. For example, after Italy adopted the euro, its effective exchange rate - based on its labour costs - rose by 26 per cent. The only way this disparity can be addressed is by either devaluing the currency, or by depressing the salaries of workers, a method that economists call 'internal devaluation'.

The first option is not available, since the euro is controlled by a bank beyond the influence of any government. And the second option is equally impossible, since workers will not tolerate a huge drop in their earning power. So, even if Germany - which now bankrolls Europe - agrees to guarantee the debts of all other European governments, this will still not stop Europe's crisis.

Getting out of Europe's monetary union is not an option either. According to the most optimistic calculations, an exit from the euro could cost Italy about 10per cent of its gross domestic product, as government debts remain unpaid and banks go bankrupt. The country would need about 25 years of uninterrupted growth to merely recover from this loss. In short, the Europeans are damned if they stay in the euro, and damned if they don't.

The only way out of this deadlock is to reinvent Europe's monetary union, this time according to economic, rather than political, principles. Countries will have to abandon all control over their financial policies; these will be decided on a Europe-wide basis. And they will have to continue repaying their huge debts. Some nations will make it, but others will not; this will be a battle in which only the fittest survive.

Either way, the continent is inevitably facing decades of misery. Since the end of World War II, Europe's economic model was broadly the same. Each government came to power promising to expand the provision of health care and welfare services. And each took it for granted that the economy would inevitably continue to grow. Capital was cheap, companies made fat profits and jobs were plentiful.

Europe's model has been fraying for years. An ageing population has already made the generous provision of pensions unsustainable. The cradle-to-grave welfare system excused the Europeans from hard work: When France faced a high unemployment problem, it simply shortened the working week, on the assumption that employers would be forced to hire more people.

The nanny state also protected people from the consequences of their own actions: Children from broken families were left to the state to look after, while few Europeans saved any money, because no financial cushion for a rainy day was needed. And, as Europe became less competitive, its share of global trade shrank. A century ago, Britain alone was responsible for more than half of global commerce; today, all of Europe accounts for a quarter.

Yet, although European governments knew they had to address these problems, they hoped that the process of adjustment would be gradual, and that economic recessions would remain short.

When the global financial crisis struck in 2008, then British Prime Minister Gordon Brown famously proclaimed that it would last a mere six months.

Europe's current crisis means that the hard choices can no longer be postponed. As debts are being repaid and governments struggle to balance their books, welfare and pension entitlements will be slashed. And Europeans will be forced to save rather than spend, leading to a prolonged period of zero growth.

But the continent is ill-prepared for what lies in store. Politicians, all of whom were born during an age of plenty, have yet to explain what needs to be done. And the EU, which until now was associated with ever-rising prosperity, will come in for even more criticism as an organisation that imposes permanent austerity with no democratic accountability.

Unsurprisingly, therefore, Europeans are now lashing out at others - immigrants, 'devious bankers' or 'unfair traders' such as China - rather than admitting that the failure is theirs alone.

Still, the coming European depression will be different from the global Great Depression of the 1930s. For while that century's crisis resulted in a great expansion of the role of the state, the current European crisis can be solved only by actually shrinking the powers of governments.

The only common thread between these two huge economic disasters is that, as always, it will be the ordinary citizen who will pay the immediate price.


Of swimming pools and the Greek crisis

LONDON : It invented the Olympics and the word 'democracy', and served as the cradle of European civilisation. Today, however, Greece may also be the country which drags down the entire continent with its monumental debts.

The Greeks are far from poor: the nation of 11 million is ranked 22nd in the latest Human Development Index. Nor are the Greeks lazy; in terms of official hours worked per year, they work harder than the Spaniards or Italians. But such statistics are rendered meaningless by a culture of bribery and tax-dodging.

If a Greek wants anything from the government, he assumes a bribe is expected; even the supreme court ruled that bribes are legal although, quaintly, only if they are offered after, rather than before services are rendered. But, once the bribe is paid, a citizen does not see why he should also pay taxes. Last year, for example, 324 homes in a part of Athens declared for tax purposes that they own a swimming pool. But satellite photography showed 17,000 pools there.

Among the developed countries, Greece ranks bottom in terms of public sector efficiency. Its officials can retire at the age of 58, on almost full salary. Better still, pensions often continue to be paid after a person is deceased, since families avoid recording the death. A country both spendthrift and incapable of collecting taxes can only survive by borrowing. Greece's debt stood at 94 per cent of its total economy a decade ago; today, it is 144 per cent, and rising.

Yet, as disaster loomed, Europe looked the other way. 'Matters such as probity, auditing, efficiency of tax collection and the nature of public spending were studiously ignored by the European Union,' claims Jason Manolopoulos, the author of a recent angry book about the country.

And nothing currently contemplated tackles the problem. Greece was offered a bailout of €110 billion (S$193 billion). In return, it has pledged to balance its books: It has introduced six budgets in the past year, each with braver financial targets. All of these were missed.

It has also vowed to raise €50 billion from the sale of government assets; not even 5 per cent was collected. Everyone continues to claim Greece will not default on its debts, but every European government is planning for it. The economy shrank by 6 per cent this year, throwing one million people out of work.

'We have told the Greek population that, maybe, it is time to pay some tax,' a Greek official meekly told protesters outside Parliament recently.

The response was immediate: He was pelted with rocks, and someone shouted back: 'Let the German taxpayers pay; It's our right not to pay tax.'

Jonathan Eyal


Euro crisis fuels rise of French far-right

AMNEVILLE (France): Amneville, a town in north-eastern France, does not look like a fault line in the euro zone. The smell of grilled chicken wafts over the marketplace on a Saturday morning, the CD vendor plays German oom-pah music and the sky behind the ochre clock tower is a steely blue.

Yet, the single currency is a target for an unusual politician canvassing voters in this town near the German border.

Mr Fabien Engelmann, a 32-year-old plumber with tight-cropped hair, was an activist with France's leading trade union and a Trotskyist for many years. Later he joined the far-left New Anticapitalist Party. This year, he switched party again - but not on a leftist ticket.

He joined France's famed far-right National Front, and he was not the only one among disenchanted unionists. Since January, Ms Marine Le Pen has taken charge of the minority party and revived it.

'It really is the arrival of Marine Le Pen that convinced me to join the National Front,' Mr Engelmann said. 'She has an economic programme that is much more geared to defending the little people, the workers.'

Ms Le Pen is reshaping France's political landscape and putting pressure on mainstream parties with her populist war cry on pocketbook issues.

Whereas her father, Jean-Marie, played up worries about immigration as party leader, the anxiety she addresses is economic and deep. Her party's new target is the oppressive power of global finance, and the mood she is tapping spreads across Europe.

Traditionally in France, President Nicolas Sarkozy's right-of-centre UMP party wins the votes of the self-employed, farmers and retirees. Government workers, young people and urbanites favour the Socialists. The swing voters - blue-collar workers and low-level employees - are the Front's constituency. And they are tired of making sacrifices to shore up the single currency and fed up with losing jobs to global rivals.

To make things better, Ms Le Pen wants to pull France out of the euro, reinstate protectionist barriers and reassert the state's supremacy over market forces.

And she is being taken seriously by French opinion makers. She has been on the front page of every magazine and newspaper, and is a regular on prime-time TV. She already ranks third in polls for the next presidential election in May.

Her score in an Ipsos voting intention poll this month was 16 per cent, behind Socialist Francois Hollande (32 per cent) and Mr Sarkozy (21 per cent). In 2002, her father beat Socialist candidate Lionel Jospin with just 16.86 per cent of the first-round votes. Mr Sarkozy's biggest fear is that Ms Le Pen could knock him out in the first of the two-round vote.

'Our ideas are gaining ground,' says finance professor Jean-Richard Sulzer, who is in charge of the party's economic programme. His glee is evident as he points out a protectionist Socialist Party goal that echoes one of the Front's. 'They are spreading like an oil slick.'

The National Front rejects all the ideas that have previously driven European economic growth: globalisation, free trade and the dominance of services and the financial industry. To restore French competitiveness, it will quit the euro; to boost employment, it will close French borders to cheap Chinese imports, re-industrialise and empower the state's regulatory role. And it will bring the banks to heel.

For some in towns like Amneville, scarred by the loss of jobs as its factories close, this sounds like an idea worth trying.

In the eyes of the working classes, power is no longer held by politicians but by the financial markets, says sociologist Alain Mergier.

The European Union, far from protecting workers, overexposes them to the effects of globalisation. The working classes are the most eager for France to abandon the euro, Ifop polls show. Nearly one in two blue-collar workers wants a return to the French franc.



Economic nationalism making a comeback

LONDON: They do not like immigrants and they do not like Europe. Some of them do not even like being called 'far right'.

However you describe them, fringe parties from Finland to the Netherlands are taking a cue from the euro crisis to revive ideas of economic nationalism.

Few go as far as Ms Marine Le Pen's National Front in France, which advocates a pullout from Europe's single-currency regime.

But some have turned up the rhetoric in favour of a strong state to reclaim powers lost to Brussels. Often they want to shed the burden of bailing out weaker euro zone partners like Greece.

In the Netherlands, Mr Geert Wilders' Freedom Party is now the second most popular, recent polls show.

'The peoples of Europe were robbed of their sovereignty, which was transferred to far-away Brussels. Decisions are now being taken behind closed doors by unelected bureaucrats,' Mr Wilders said in a Berlin speech last month.

He has toyed with the idea of leaving the euro but it does not seem that strong a view - he would rather be in the euro club with Germany and kick out the countries on the periphery.

The Finns Party, known until recently as the True Finns, won 19 per cent of the vote in an April election. Their opposition to bailouts gained sympathy among voters who resent helping southern countries while they face austerity. The party wants countries like Greece out of the euro.

Austria has two far-right parties, both in opposition and widely accepted on the political landscape. Both oppose further bailouts of euro zone countries.

One, the Freedom Party, has proposed dividing the euro zone into two parts: the strong north and Mediterranean weaklings. It often comes second in opinion polls behind the Social Democrats.

Among Europe's big countries, Germany's National Democratic Party and the British National Party are more marginalised.

Britain's Conservatives provide a mainstream outlet for euro sceptics, and German Chancellor Angela Merkel has been the reluctant party in euro zone bailouts.

A September poll showed a euro-sceptic political party would find strong support in Germany. Around 50 per cent said they would welcome such a group on the scene.


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