Everything is open: Spain's rescue, Italy's ills, ECB's policy response, Germany vs. everybody and the ESM is taken for granted. It has not been ratified yet and even its seniority seems to be a bad thing now. Only one week to go before the big summit. Meanwhile, Greece is already trying to get concessions on austerity. Everything is at play, simultaneously, and no-one is in charge.
Meanwhile, EU's highest court decided that if one gets sick during a holiday, new holiday should be granted. Pro-growth? Meanwhile, one of the top items on summit agendas is the creation of EU-wide patent union, and where the patent court will be placed is surely the most important thing to argue about. Meanwhile, France's president Hollande sounds and acts even worse than a Finnish mature social democrat. If we all act like Greeks and retire at 60, there will be more work. Someone please wake me up.
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GENERAL
Europe 1-2-3 – Mark Grant / ZH
The Simplification of Europe: Germany says what it means, PIIGS say whatever, ECB prints both money and information – which should be listened to. European parliament is meaningless and Commission takes its directions from Germany. To be solved shortly: Greece (kick out?) and Spain (350-400 bn?)
The Simplification of Europe: Germany says what it means, PIIGS say whatever, ECB prints both money and information – which should be listened to. European parliament is meaningless and Commission takes its directions from Germany. To be solved shortly: Greece (kick out?) and Spain (350-400 bn?)
Europe’s highest court ruled that workers who happened to get sick on vacation
were legally entitled to take another vacation.
Powerful as well as dangerous – The Economist
Investors beware: François Hollande is set to
take France in the wrong direction even faster than you feared
Philosophy and European Union – LSE
(mp3)
A look at the role of philosophy in launching
the idea of a European Union with reference to Kant and Nietzsche. Simon
Glendinning is reader in European philosophy in the European Institute, LSE and
director of the Forum for European Philosophy. 1h 21min
PLANS
If German politicians want the euro to survive,
they must recognise that defaults, credit writedowns and bank recapitalisations
will be inevitable. The sooner this occurs, the better. But, if Europe is to survive, we will also need to
change the European institutional architecture to integrate Europe in a way that smoothes business
cycles with supranational automatic stabilizers instead of exacerbating them
with procyclical austerity. The ECB will be a big part of the transition to
this approach.
Blogs review: a political union as a precondition – bruegel
We’re closing our series on the future of
European integration ahead of the 28-29 June European Council meeting (see our
previous issues on a banking union and on a fiscal union) with a focus on the
process of political integration. A political union is often seen by Germany as a precondition for other forms of European integration, while France sees the sequencing
the other way around.
THE EURO
The End of the Euro Is Not About Austerity
– Economix
/ NYT
Simon
Johnson: The underlying problem in the
euro area is the exchange rate system itself – the fact that these European
countries locked themselves into an initial exchange rate, i.e., the relative
price of their currencies, and promised never to change that exchange rate… European
governments should never have put their heads so far into the lion’s mouth with
regard to public-sector borrowing. But the politicians, and many others,
convinced themselves that they were all going to become more like Germany. Peripheral Europe will never be like Germany.
In the Balance: does Business need the Euro? – BBC
(mp3)
Decisions, decisions. The Greeks choose to stay
in the euro, but is it a case of Greece can fail another day?
In the Balance discusses how the world of business lives under that cloud of
eurozone uncertainty. Wouldn't it just be better off without the single
currency altogether? Who decides? Not the politicians - they're too busy
kicking the can down the road.
SUMMITS
The latest version obtained by the Brussels
Blog – the second iteration ahead of next week’s increasingly high-stakes
gathering in Brussels (which we’ve posted here) – has quite a few items listed
as “p.m.”, an abbreviation for pour mémoire, which loosely translated means “to
be added later”. It’s those items where the real debate still rages, and where
all eyes will be focused.
Tumbling towards the summit – The Economist
Europe is trying to deal with the euro crisis one problem at a time. That
approach is doomed to fail
a stimulus worth 1 percent of Europe’s GDP — roughly the size of the package
being contemplated above — could, if done right, boost growth in periphery
countries such as Spain and Italy by 1 to 2 percent. That’s not nothing. And it
beats the ongoing recession in Europe. But it all depends on the details — which remain murky. This new
stimulus package may not actually be as big as advertised.
Germany will work with a core group of EU
countries on introducing a financial transactions tax, its finance minister
said on Friday, after efforts to get an agreement among all 27 EU countries
fell short.
Euro's big four agree on growth boost, split on
bonds – Reuters
German Chancellor Angela Merkel resisted
pressure on Friday for common euro zone bonds or a more flexible use of Europe's rescue funds but agreed with
leaders of France, Italy and Spain on a 130 billion euros ($156 billion) package to revive growth.
Some unpleasant eurozone arithmetic – Gavyn
Davies / FT
The next summit on June 28 and 29 will unveil a
long term road map towards fiscal and banking union, which in better economic
circumstances could appear highly impressive. But the market is currently
focused on the shorter term. Unless there is some form of debt mutualisation at
the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could
rapidly worsen.
Forget about economics – alphaville
/ FT
Nomura: It’s all political at this point. The goal
going forward is to bring Europe into a state of sustainability. Only politicians can do that.
Euro gang of four – or three versus one? – MacroScope
/ Reuters
The euro zone’s big four meet in Rome with
Germany’s Angela Merkel likely to come under pressure from Italy’s Mario Monti,
Spain’s Mariano Rajoy and France’s Francois Hollande to loosen her purse
strings and principles…The big questions are what the ECB has in its locker,
how prepared it is to use it and whether it would be effective for anything
more than a few weeks.
EFSF, ESM, REDEMPTION FUND
German Supreme Court Delays ESM; Another
Setback for Merkel; Creeping Bailouts; Reflections on German Expectations – Mish’s
With creeping bailouts caused by cave-in after
cave-in by Merkel, and with Target2 balances skyrocketing out of sight, perhaps
the German supreme court has finally had enough.
The 9 July start for the eurozone's €500bn
bail-out fund is set to be delayed as Germany waits for a ruling by its highest court - a move adding to the woes of Italy and Spain.
Domestic political considerations are often an
under-appreciated factor in the formation of a country's position in
international forums. This is a material point in Germany. Merkel depends on the opposition (SPD and Greens) to secure approval
for ESM and the fiscal pact… Merkel has not been a strong advocate of the
financial transaction tax, but the SPD and Greens pushed her further to support
the measure, even if it not EU wide. This measure has support from other
creditor countries. In fact, Austria refuses to ratify the ESM without a the FTT commitment.
EFSF Newsletter June 2012 – EFSF
(pdf)
IMF
Consultation with the Euro Area- Concluding
Statement – IMF
A determined and forceful move toward a more
complete EMU, particularly a banking union and more fiscal integration, is
needed to arrest the decline in confidence engulfing the region. These steps
should be supported by wide-ranging structural reforms throughout the euro area
to raise growth, while demand support should be maintained in the short term to
cushion the impact of the region’s adjustment efforts.
IMF on Thursday outlined a series of measures
it says should be taken if the eurozone crisis is to be overcome, including
more cental bank intervention and allowing banks to be funded directly by
bail-out funds - two ideas Germany opposes.
ECB
The tragedy-of-the-commons at the ECB – voxeu.org
Despite the recently-announced €100 billion EFSF
loan to Spain and the recent Greek elections, this column argues that Eurozone
periphery may soon need another large-scale rescue operation. But it fears that
without reform at the ECB, the rescue package will be just yet another
temporary plaster over the cracks.
Eurozone as a tragedy of the commons – alphaville
/ FT
Not so much the periphery states being
reckless, but some states taking advantage of what should have always been seen
as a collective pool of wealth…Until individual NCBs are dispanded, and a
proper central authority (more akin to a Federal Reserve) takes their place,
there is little to curtail the abuse of existing mechanics which allow for
individual countries to take advantage of the collective monetary “commons”.
The ECB’s Bagehot Rule Policy – Credit
Writedowns
ECB is mandated in its role promoting the
smooth operation of payment systems to intervene in these bond markets in order
to fulfil its role as banking system lender of last resort. It has done so.
However, the ECB’s interventions have been politically-charged with some
arguing that the manner in which the ECB has conducted its liquidity operations
violates the ECB’s mandate as set out in the Lisbon Treaty. This is
troubling. And I therefore suggest the ECB should move away from an ad-hoc
approach to providing banking system liquidity and move to a rules-based
approach.
Well, if the ECB won’t do it… – alphaville
/ FT
Moody’s: Though prohibited by current guidelines, Fed
purchases of Italian and Spanish government bonds probably would do more to
boost the US economy than additional purchases of US Treasury bonds.
When the chips are down – The Economist
The ECB has unlimited firepower and limited
inclination to use it. This article explains the ECB’s thinking
Why the Euro Crisis Will Never End in 1 Chart – The
Atlantic
A firebreak/firewall/bazooka needs unlimited
funds to work. In other words, it needs to be the ECB. They have infinite
money. That's the magic of the printing press. And that's the final part of
every euro rumor. It involves the EFSF getting a banking license so the ECB can
give it money. Of course, the ECB doesn't want to do that. That's when the
rumor dies.
Sovereign risk, European crisis resolution
policies and bond yields – BoF
(pdf)
Financial stability - measurement and policy – BIS (pdf)
Vítor
Constâncio / ECB 14 June 2012.
The importance of money markets – BIS (pdf)
Benoît
Cœuré / ECB 16 June 2012.
ECB: COLLATERAL RULES
ECB discussing a medium-term plan (as in
indefinite) to scrap rating rules on euro zone sovereign bonds and instead set
their value when used as collateral in lending operations on its own internal
assessment.
The (sovereign) mystery box – alphaville
/ FT
You could say this is just the continuation of
a trend. The ECB is already inclined to waive ratings criteria for sovereign
collateral if this is in any danger of a major pro-cyclical downgrade. It did
this for Greece, Ireland, and Portugal. In fact you could even say this might be one of the central bank’s key
tools for targeting repo markets.
GERMANY
Angela’s vision – The Economist
The promised land that lies ahead keeps
receding into the distance…Austerity and structural reforms will be of little
help unless confidence returns. That requires an unequivocal, if limited,
sharing of liabilities. The proposal by Germany’s council of economic advisers to pool part of the euro zone’s stock of
debt is a good start.
The moral core – Free
exchange / The Economist
In a recent post, Simon Wren-Lewis assigned
blame in the euro crisis in a provocative way: it's the core's fault! He
clearly wants to provide a counterweight to the opposite story ("It's the
periphery's fault!"). However, he goes a little too far.
ITALY
One thing Greek politicians have taught other
European leaders: fear mongering for the purpose of extortion is the way to go.
It might not work, and it might be counterproductive… but it’s nevertheless the
way to go.
Mario Monti: we have a week to save the
eurozone – The
Guardian
Italian prime minister warns that there is no
room for failure in talks between single currency's big four countries
Are we next? – The Economist
Italians fret that they may end up going the
same way as Spain
Italy "Gasping Like Beached Whale"; Berlusconi Reiterates Euro Exit
"Not Blasphemy"; Beppe Grillo Discusses "Taboo of the Euro" – Mish’s
Outside Italy, very little
attention has been given to Beppe Grillo and his Five Star Movement. Yet the
Five Star Party is now the second largest party in Italy. PDL, is now the third largest party and
Berlusconi is now anti-euro, as is the Northern League. These are very
significant events.
SPAIN
Why an ESM programme could be a kiss of death:
Recovery values and subordination – voxeu.org
Daniel
Gros: Spain, needing a bailout
for its banks, was granted a vague promise by EZ leaders for up to €100
billion. The details remain obscure, yet they matter enormously. This column
argues that the so-called subordination effect of fresh official lending could
put Spain on the slippery road to ruin. It argues that if sovereign bonds must be
bought, this should be done in the secondary market which, would be pari passu
with private investors and thus avoid the subordination trap.
Debt seniority and the Spanish bailout – voxeu.org
In a recent Vox column, Piero Ghezzi of
Barclays bank challenged the view that new bailouts for Eurozone countries
might reduce the value of existing debt held by private investors. This column
continues the debate by looking at the case of Spain’s latest bank bailout
announcement.
The €52bn (or maybe €62bn) Spanish bank
clean-up – alphaville
/ FT
That’s €51.8bn (how precise) from Roland
Berger… and €62bn from Oliver Wyman…here are the reports in full
Local Spanish press: auditors find banks need
€65bn – alphaville
/ FT
Fitch: base
case losses 230bn, stress scenario 295bn. Additional capital between 50-100bn
needed.
The bigger issue is not the insufficiency of
the loan but the fact that such a relatively small loan was impossible for the
sovereign to raise itself as no private investors believe their solvency -
implying Spain has reached its debt saturation point. Neither government nor taxpayers
can afford to take on more debt (which is what the bailout is).
Spanish Bond Yields, 1821-2012 – The
Big Picture
GREECE
If Greece leaves the euro, it
can devalue its currency and start an export-led recovery – or so the popular
argument goes. This column provides some hands-on insights from another small
open economy, Barbados. It argues that for these economies that rely heavily on imports,
devaluation will never be a viable option.
Citi's Buiter Goes All Maya On The GRexit – ZH
…highly unlikely that Greece will comply
sufficiently with even ‘lite’ fiscal austerity conditionality… Grexit may well
be triggered by a troika review declaring Greece wilfully non-compliant with
the conditionality of its programme, stopping the disbursements to the Greek
sovereign…There is now a material risk, if procrastination and policy paralysis
prevail, that the end game for the euro could be an onion-like unpeeling and
unravelling.
Reform, or else – The Economist