Domino Effect at Work with Euro - Last Days of the Eurozone ? - UPDATE: S & P put EU on Negative Watch

[C. Flower]

http://www.irishtimes.com/newspaper/...265034009.html

The Irish Times reported today that Greece has missed a deadline

to provide EU investigators with full information about currency hedges it made with Goldman Sachs, deals under scrutiny because they may have improperly flattered the country’s public finances.
As Goldman Sachs said the transactions were consistent with the “principles” set out by the EU’s statistical division Eurostat, the European Commission said Greece failed to provide all relevant data before the expiry of a deadline last Friday.
The development comes amid pressure on Athens to prove that it can within 28 days prove its austerity plan is working.
With Prime Minister George Papandreou under the threat of having fresh austerity measures imposed on it by other EU states, IMF and EU officials arrived in Athens yesterday to examine the country’s finances.
“Athens told us that the reason for the delay was partly to do with the four-day strike which affected the ministry of finance,” said a spokesman for EU economics commissioner Olli Rehn.

It appears that the EU is looking for an excuse for a punitive approach to Greece.
The currency hedging may have been a necessary arrangement for a country like Greece that had foreign borrowings when it entered the Euro.

[C. Flower]

http://www.ft.com/cms/s/0/fa9877f0-2...nclick_check=1

The Financial Times today is reporting that Germany and France have a preliminary agreement to start an iMF style Eurofund.

Germany is much, much, less keen on any kind of bail out system than France.

Such a fund would only happen in a new regime with enforcement of rules on all EU countries on a shared economic approach.

The idea of economic independence for smaller, peripheral, weaker states is clearly a nonsense with a single currency.

Beggars can't be choosers would be the brutal way of putting it.

[C. Flower]

Angela Merkel (correctly) says that there could not be a new European Monetary Fund without a new Treaty. France is pushing hard for a fund, which Sarkhozy would see as extending French influence, but Merkel is under pressure from a German population that has taken 10 years of pay freeze to get their economy right and doesn't want to pay for anyone else's problems.


http://www.breakingnews.ie/business/...ty-449299.html

[evercloserunion]

Well, it wouldn't quite be another Lisbon Treaty--none of the abortion or anything like that. I also don't know if a new EMF Treaty would require a referendum, as not all changes to the Treaties require a referendum under Crotty. Needless to say though we would have to have a referendum before accepting EMF funds, if they came with a set of stringent conditions which were to bind us.

Support is luke warm in a lot of places. Germany's representative on the board of the ECB thinks that it's a bad idea and Christine Lagarde, France's finance ministers, has said it's not a major priority. France see it as more of a long-term vision and they definitely don't want to see a new Treaty battle any time soon.

[C. Flower]

It looks to me to be a great political difficulty for Germany. Their own population put up with 10 years of falling living standards in order for their economy to recover. A German funded bail out of Greece would be deeply unpopular.

Merkel is also clearly right that a support fund would breach existing Treaties.

But to some extent, they are between the devil and the deep blue sea. There is the possibility of contagion, if Greece goes, with Spain, Portugal, Ireland and others in a similar situation.

There doesn't appear to be a right answer.

[People Korps]

good oh Ganley back for round three?

[C. Flower]

I posted this on the Tok! blog on 19th February 2010 and have updated it with some more comments at the end.

This interesting comment in the FT (Ralph Atkins 14.12.2009 ) points to the relative insignificance of the Greek economy to the EU (3%), compared with California to the US (14%). Economists (and the markets) view both as bankrupt states, but Greece’s weakness is interpreted as an indication that the Eurozone can’t hold together. The FT puts it down to a hostile commentariat and to the lack of political cohesion of the eurozone. Most tellingly, the US can transfer tax income from stronger states to weaker when it needs to and this is not the case in the EU.
"The US economy allows fiscal transfers between states, to help the weakest. But other eurozone countries might well just let Greece fall into an abyss, whatever the consequences"
http://blogs.ft.com/money-supply/2009/12/14/greece-versus-california/

For stronger, more central EU states, the scenario of EU expansion originally held the prospect of fresh territories that could be incorporated into their markets, without any responsibility for fiscal transfers, no matter how debilitated the weaker peripheral countries became. Had they never heard of centrifugal force? With this imbalance of steady, strong central economies and whirling, weakening peripheral economies, the likelihood of something flying off is ever-increasing.

Atkins asks if there are any other reasons why the worry about the Euro, when the dollar appears relatively immune from contagion from California's disease. One reason, I believe, is that Greece has a well organised and class concious, unionised working class, which will undoubtedly resist the slash and burn approach to renewing economies.

C Flower 19.1.2010

The EU is faced with a choice of throwing in the towel and allowing the US dominated IMF to dictate economic policy to weaker EU nation states, or consolidating to a far more economically homogenous and centralised political and economic entity, with economic supports to the weaker economies but also with shared economic policies on public spending and taxation.

Isn't the idea of a shared currency, without centralised economic control, a nonsense ?

Having faced that conundrum, the second one is, why should we assume that the solution across the EU is the nostrum of saving the banks, at all costs, without taking the banking system into public ownership.

Today there is a massive General Strike going on in Greece against the IMF/ECB prescription.

[C. Flower]

There's a very good article by Tim of CIT in today's Irish Examiner.

http://www.examiner.ie/business/kfkfeygbsnid/
The idea that a group of states who are broke can bail out a State that is broke somehow reminds me of the attempts to shore up Anglo Irish's price by buying bonds.

If the fundamental economies are not productive and sound, it can't do more than postpone the evil day.

We need completely different economic and planning systems run in the interests of the wider populations, not a tiny elite.

O'Connor points out that any kind of bail out will come at a very heavy price.

The Greek monetary crisis, however, underlines a profound and deeply rooted problem for the eurozone.

The facts are that 13 of the 16 eurozone countries are in breach of the stability and growth pact. Their budget deficits exceed 3% of GDP and their debt to GDP ratios exceed 60%.

Helping Greece leaves this problem unsolved.

Countries borrowing heavily causes their currency to haemorrhage abroad to pay the government’s borrowings, resulting in a deterioration in its balance of payments. This capital flight puts downward pressure on the exchange rate.

This is compounded by the flight of currency investors from the country, based on a perception that it is becoming insolvent and unlikely to provide a return on investment.

This has been happening to the eurozone in recent times. The evidence for the financial markets’ disdain for the unhealthy finances of eurozone countries is borne out by the exchange rate movements of the euro against several currencies.

The euro fell sharply against the dollar since last December dropping from $1.52 to $1.37. On February 25, the euro fell to an all time low of 120.6 Japanese Yen and since then has barely climbed to 124.

The deal on Greece will offer some respite for other countries by setting up buyers for Greek bonds in a co-ordinated way.

This prevents a steep drop in bond prices where other heavily indebted nations try to sell government stock together. Ireland is one of these countries.

However, if the German finance minister Wolfgang Schauble gets his way, there will be a heavy price to pay for countries forced to seek support from other eurozone members. A European Monetary Fund, modelled on the IMF, would be used to finance such situations.

Schauble is demanding draconian interest rates be levied on countries that an EMF is forced to bail out. They may also lose their EU voting rights and pay exorbitant fines. In order to avoid this from happening, he is demanding a strict implementation of the stability and growth pact rules.

Greek workers are being forced to pay higher taxes to pay debt and narrow the country’s deficit. This has resulted in huge unrest in the country.

In order to defend to euro, Schauble and others are demanding a punitive financial discipline in the years ahead. They realise that if the euro collapses, then the EU project is badly dented, if not fatally damaged.

However, the cost of keeping the euro afloat may be too high. Given the collapse of the stability and growth pact across 13 countries, it is hard to imagine how any rapid improvement can be achieved. It is also difficult to imagine how Greek-style EMF solutions could be feasibly applied to many other member states who are debt laden.

It is very difficult to expect strict fiscal and monetary co-ordination among 16 disparate nation states.

Short term bailouts for Greece and other countries will not convince the markets that the euro is sound.

Read more: http://www.examiner.ie/business/kfkfeygbsnid/#ixzz0iRtY479B

[Cassandra Syndrome]

I have nothing but contempt for that Neo Liberal Milton Friedman but he was spot on when he said that the Euro would not survive its first crisis.

[evercloserunion]

I have nothing but contempt for that Neo Liberal Milton Friedman but he was spot on when he said that the Euro would not survive its first crisis.

We'll see about that.

[C. Flower]

We'll see about that.

Are you thinking that the bilateral loans will do the trick ?

[evercloserunion]

Are you thinking that the bilateral loans will do the trick ?

I don't know, TBH the way the Greek crisis has been handled by the EU is atrocious. Now Germany are talking about Greece going to the IMF after all. Nobody knows whether they're coming or going, it's a bit of a farce.

That said, I do not think this will be the end of the Euro. As I've said before, it's no surprise that people are a bit caught for what to do next, as the Euro has never faced something like this before. But of the political will is there the Euro will survive. The Euro is being punished by the Greek crisis but in spite of that, getting out of the Eurozone isn't really on anyone's minds and that says a lot. The Euro is not an experiment anymore; it is accepted as fact. The price of disassembling the Eurozone would be too high.

[C. Flower]

I don't know, TBH the way the Greek crisis has been handled by the EU is atrocious. Now Germany are talking about Greece going to the IMF after all. Nobody knows whether they're coming or going, it's a bit of a farce.

That said, I do not think this will be the end of the Euro. As I've said before, it's no surprise that people are a bit caught for what to do next, as the Euro has never faced something like this before. But of the political will is there the Euro will survive. The Euro is being punished by the Greek crisis but in spite of that, getting out of the Eurozone isn't really on anyone's minds and that says a lot. The Euro is not an experiment anymore; it is accepted as fact. The price of disassembling the Eurozone would be too high.

I don't honestly think that anyone is in control of the economic situation globally, or knows what is going to happen. There are massive accumulations of bad debt and unbacked paper money sloshing around. If the whole thing doesn't blow it will be good luck, not good management. the euro'sparticular vulnerability is due to the disparities and weaknesses of individual economies, but the pound, dollar and other currencies are also facing uncertainty.

The latest "basket of currencies" notion includes gold, along with a number of different currencies. Oil prices are very high. If an inflation tsunami is about to follow after the deflationary earthquake, all bets are off.

[ang]

Ran a thread on this a couple of days ago on P.ie, thought I would add it here so we can watch what is said and what becomes reality.

Angela seems to have had enough of countries like Greece and wants them to play by the rules or get out.

The 16-nation eurozone must have the option of removing one of its members from the club if a country persistently breaks its fiscal rules, German Chancellor Angela Merkel said Wednesday.

The option, which would be used only "as a last resort", should apply to countries which "again and again do not fulfil the conditions" to which euro area members are bound, she said in a speech to parliament.

The chancellor added that the current rules in the European Union's Stability and Growth Pact were no longer sufficient to deal with the current crisis, which she described as the euro's "greatest-ever challenge."

Nevertheless, she insisted that "no country should be left on its own" amid the crisis that has seen speculators attack debt-laden Greece and confidence in the euro shaken on the international financial markets.

She also said that "rapid support" for Greece was not the right answer and that the problem must be "attacked at the roots."

"A show of rapid support can not be the correct solution," she said. Instead, Greece must tackle its fiscal crisis on its own, which would get more to the heart of the problem.

"We should not offer premature aid, but get everything back in order. Anything else would be disastrous," said Merkel.

http://www.france24.com/en/20100317-...ro-zone-greece

[ang]

Just spotted Barrosso response to Angela. They certainly don't seem to be in agreement.

But in his interview with FRANCE 24, Barroso dismissed the idea of kicking out eurozone members. "I do not comment on other’s comments,” he stressed. “What I can tell you is the position of the Commission…currently, excluding a member state from the eurozone is not possible. It's absurd.”

He also said the euro area was "ready to take all the necessary measures" to guarantee Greece's financial stability.

http://www.france24.com/en/20100319-...ce-merkel-debt