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(email exchange)

>   On Mon, Jun 22, 2009 at 9:10 AM, wrote:
>   
>   And reach Wolfgang Munchnau in the FT today. Germany is really going nuts here.
>   German sado-fiscalism!
>   

As he says towards the end, it’s a moral issue.

This type of thing is the largest long term risk to economic well being.

I am starting to call it the federal ‘contribution’ rather than the federal ‘deficit’ hoping that might help.

Berlin weaves a deficit hair-shirt for us all

by Wolfgang Münchau

June 21 (FT) —

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe’s stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.

Anchoring the stability law at the level of the national constitution is an extreme measure – like locking the door, and throwing the keys away. It can only ever be undone with a two-thirds majority – and even a future Grand Coalition may not be able to deliver this as both of the large parties are in a process of secular decline. It means that future fiscal policy will be in the hands of the justices of Germany’s Constitutional Court. The new law replaces a much softer constitutional clause – a golden investment rule that said deficits can only be used to finance investments. It was not a satisfactory rule, but at least it allowed structural deficits in principle. The new law not only sets draconian deficit ceilings, it also provides a detailed numerical toolkit to implement the rules over the economic cycle.

I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.

To meet the interim deficit reduction goals, the new government will have to start cutting the structural deficits by 2011 at the latest. There is clear danger that the budget consolidation timetable might conflict with the need for further economic stimulus, should the economic crisis take another turn for the worse. There is still economic uncertainty. Bankruptcies are rising, and the German banks are just about to tighten their credit standards again. I simply cannot see how Germany can produce robust growth in such an environment, not even in 2011. If that scenario prevails – as I believe it will – the new constitutional law will produce a pro-cyclical fiscal policy with immediate effect.

One could also construct a virtuous cycle – the second outcome. If Germany were to return to a pre-crisis level of growth in 2011, and all is well after that, the consolidation phase would then start in a cyclical upturn.

Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany’s lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.

I am a little surprised not to hear howls of protests from France and other European countries. Germany has not consulted its European partners in a systematic way. While the Maastricht treaty says countries should treat economic policy as a matter of common concern, this was an example of policy unilateralism at its most extreme.

What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.

While the balanced budget law is economically illiterate, it is also universally popular. Average Germans do not primarily regard debt in terms of its economic meaning, but as a moral issue. Der Spiegel, the German news magazine, had an intriguing report last week on the country’s young generation. One of the protagonists in its story was a young woman who had borrowed a little money to set up her own company. The company turned out to be a success, and she had began to repay the loan. And yet she said she had not felt proud of having taken on debt.

This general level of debt-aversion is bizarre. Many ordinary Germans regard debt as morally objectionable, even if it is put to proper use. They see the financial crisis primarily as a moral crisis of Anglo-Saxon capitalism. The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now.

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(email exchange)

>   On Mon, Jun 22, 2009 at 4:32 AM, wrote:
>   
>   ECB President Trichet has warned that governments have no more room
>   for taking on more debt, and should now look to start bringing down
>   budget deficits. “There is a moment where you can’t spend anymore and
>   you can’t accumulate any more debt. I think we are at that moment”.
>   

Similar to the Obama statement that the US has ‘run out of money.’

The difference is that under current institutional constraints Trichet is, unfortunately, probably right.

They are stuck waiting around for their own automatic stabilizers to function, and for exports to improve.

And hope the markets don’t test their banking system deposit guarantees and national government funding abilities.

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Mike Norman Economics

Some thoughts

If we ever enact a balanced budget amendment, take yourself and your family and move to Canada or China.

Obama believes the U.S. has “run out of money.” Scary. Our president doesn’t understand our own monetary system. Even George Bush understood this.

Any country that spends in its own currency, where that currency is not backed by gold or bound by some fixed exchange can NEVER run out of money!

We are ceding our position as the world’s largest economy to China because of stupid policies that are based on myth and fallacy.

The demise of GM was not due to putting workers’ interests over the company and shareholders. It was precisely the opposite!

The easiest way to lower “debt” (if that’s what you want to do) is to sustain full output and employment.

If the private sector can’t sustain full output and employment for whatever reason, then gov’t should!

Here in America we mock the Europeans as being, “Socialist.” Did anyone notice that Europe’s economy is larger than ours and adding size?

By definition, those Socialist Europeans are richer than us! And they have free health care, education, 6-weeks paid vacations, new cars, homes, movies, culture and all the consumer items that we have, in abundance. Not bad for a bunch of commies!

Our leadership is destroying America’s real terms of trade because of irrational sensitivity to perceived “imbalances.”

We care more about the Chinese standard of living than our own, apparently!

For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver. This is all definitional. It’s double entry accounting! Did anyone in Obama’s administration take an accounting course? Has any Republican taken one? Has any Democrat taken one?

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Yes!

Europe Snubs US Calls for More Stimulus Before G-20

by Jennifer Ryan and Agnes Lovasz

Mar 10 (Bloomberg) — European finance ministers rejected calls from the U.S. to do more to battle the economic crisis, saying stimulus plans already in place need time to work.

“Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking,” Luxembourg Finance Minister Jean-Claude Juncker said yesterday after leading a meeting of euro-area finance chiefs in Brussels. “We want to see what the effect of the recovery package is going to be.”

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Each time the euro falls like it has done over the last several days suspicions arise that ‘this is it’ and it’s on the way towards 0, with a wholesale exit by individuals and institutional investors afraid of everything from inflation to a total breakup of the currency union.

The cross currents are enormous, and the range of predicted outcomes wide.

What’s sure as always is in the end someone will have had the right forecast, but it will be because of ’statistics’- the forecasts cover all possibilities- or maybe inside information, but not greater wisdom.

Partial list of cross currents:

Euro positive:

• The eurozone has relatively tight fiscal policy, with no proactive fiscal package of consequence. This keeps the euro strong, and promotes deflationary domestic conditions as the economy tries to export to gain needed financial assets.
• Fed swap lines tend to support the euro vs the dollar, as institutions that otherwise would need to sell euros and buy dollars to cover dollar losses can instead buy time and borrow them cheaply via the swap line arrangement. This kept the region from collapse in the fall.

Euro negative:

• The dollar losses don’t go away with the swap lines, unless dollar asset prices and credit quality improve, which has not been the case. So any euro strength tends to see sellers of euro vs dollars to cover some of the losses.
• In a breakup of the eurozone there is a risk euro securities get redenominated to the new national currencies which may be subject to high levels of deficit spending to support domestic demand and promote high inflation, high interest rates, and falling currencies as in the past.
• Euro governments could default and payments be suspended indefinitely.
• Bank deposits could be frozen indefinitely with major bank failures too large for any national govt. to politically or even operationally write the check.
• The low price of crude supports the dollar by keeping dollars ‘hard to get’ for the foreign sector.

The exit from the euro includes those who buy gold, which has been driving gold to extremes vs other commodities even though you can’t eat it and it doesn’t pay interest, and it’s been a very long time since it was what you needed to pay taxes.

This is a major bubble in progress that ends in a very sharp collapse when the buying has run its course, and as those owning gold need it for payment purposes and begin to sell.

Along with the real buyers who are exiting the euro (and other currencies) are the usual specs and trend followers who exacerbate every trend on the way up and the way down.

And the fact remains that all the ‘money’ in the world is nothing more than spread sheet entries of what is needed to pay taxes.

And there aren’t a lot of practical alternatives to storing ‘wealth’ apart from inherently worthless gold, and various forms of ‘property’ that can all be taxed and therefore demands currency for payment.

Ironically, it is a spreadsheet crisis- there is no shortage of real resources- and therefore readily ‘fixed’ by the right data entry by governments on their own spreadsheets.

For the US that means something like:

1. A full payroll tax holiday where the treasury makes all payments for employers and employees- why are we taking $1 trillion per year from workers and business struggling to make their payments?
2. $300 billion to the states on a per capita basis with no strings attached- the per capita distribution concept removes the need for specific federal oversight.

Those two spreadsheet entries would end the ‘crisis’ in very short order.

And a government funded $8/hour job for anyone willing and able to work begins to replace the current unemployed labor buffer stock with an employed labor buffer stock, which is both a superior price anchor and potentially a source of increased useful output and reduction of the high real social costs of our current system.

But deficit myths are likely to remain the obstacle to making the spread sheet entries readily available to restore output and employment.

The latest ridiculous bit of non sense is that government borrowing takes ‘money’ from one place and puts it in another.

Government deficit spending adds exactly that many NEW ‘bank balances’ to non government financial assets, and government borrowing subsequently offers those NEW, ADDITIONAL bank balances CREATED BY DEFICIT SPENDING alternative financial assets called Treasury securities.

At the end of the day there are NEW financial assets called Treasury securities added to the existing stock of financial assets in the non govt sectors by federal deficit spending.

Spread the word!

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Agreed!

They are risking the solvency of the national governments.

The national governments are beyond the point where they can write the check should any of their major banks be declared insolvent.

Trichet Says Rising Deficits are ‘Problem,’ Osnabruecker Reports

by Matthew Brockett

Feb 12 (Bloomberg) — European Central Bank President Jean-Claude Trichet said rising budget deficits in the euro region are an “important problem” and urged governments to respect the Stability and Growth Pact, the Neue Osnabruecker Zeitung reported, citing an interview.

Trichet also said the situation in the banking sector remains “difficult” and should be monitored closely by governments and central banks, the newspaper reported on its Web site today. Measures such as so-called bad banks should be competition neutral, Trichet said, according to Neue Osnabruecker.

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RBS SOVEREIGN $$ CDS Indicative levels

 
** Another leg of aggressive widening in SOV CDS with UK out 20bps, Ireland out 40bps, Portugal/Spain/Italy/Greece out 15/20bps! Seen small buying flows in Belgium/Austria & Italy.

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The news just keeps getting worse over there.

They are unlikely to make up for lost exports with domestic demand due to structural constraints on proactive fiscal policy.

This put deflationary forces in place that drive relative prices down until exports resume.

And with national government solvency in question, there is no ’safe haven’ for euro financial assets.

Overly tight fiscal currency keeps it strong, but a reduction in the desire to save in that currency works the other way.

Highlights

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(email exchange)

Yes, as well as this:

Pros Say: German Stimulus ‘Irrelevant’

Jan 13 (CNBC) — The euro remained under pressure Tuesday despite the German government approving a second stimulus package worth $64 billion to help Europe’s largest economy.

Experts tell CNBC the rescue package is “irrelevant” and that the euro will remain under pressure ahead of the European Central Bank rate decision on Thursday.

It’s irrelevant regarding economic recovery, but can accelerate the rate of credit deterioration of the German state.

And the falling euro once again distorts USD exposure as a percentage of capital that is expressed in euros.

>   
>   On Tue, Jan 13, 2009 at 8:01 AM, Dave wrote:
>   
>   France and Italy under performing Germany 5
>   bps today and Greece under performing 12 bps
>   in 10yrs
>   
>   DV
>   

Greeks Bearing Gifts

by John Authers

Jan 12 (FT) - The market fears the Greeks, even when bearing gifts. It is also scared about the Irish and the Spanish.

Greece has always been treated as a peripheral eurozone member, not only in geography. Even before last year’s civil unrest, its bonds traded at a significantly higher yield than those of Germany - showing a higher perceived default risk.

A eurozone country defaulting and leaving the euro is close to an
unthinkable event. But Friday’s news from Standard & Poor’s that Greece and Ireland were on review for a possible downgrade, followed on Monday by Spain, left many thinking the unthinkable.

The spread of Greek bonds over German bunds is 2.32 percentage points, almost 10 times its level of two years ago. Spanish spreads on Monday rose above 90 for the first time. An Intrade prediction market future puts the odds on a current eurozone member leaving the euro by the end of next year at about 30 per cent.

And German default swaps cost nearly 10 times as much as they did not long ago as well.

The euro dropped more than 1 per cent against the dollar within minutes of the Spanish news, and is down 9.8 per cent in the last few weeks.

A crisis over Greece might be the euro’s ultimate “stress test” (to
borrow a phrase from Daniel Katzive of Credit Suisse). If the eurozone
could find a way to deal with a default, that might confirm the euro’s
status as the world’s next reserve currency.

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• Euro Area Sector Analysis (Released n/a EST)
• US Sector Analysis (Released n/a EST)
• Japan Fiscal Balance as % of GDP (Released n/a EST)

Euro Area Sector Analysis (Dec 17)

 
Karim writes:
Euro-middle of historical range. But with government deficits nearing Maastricht limits (though those limits will be bent, it will be grudging), not much chance for large enough fiscal stimulus to make a difference to private demand.

Yes, deficits seem too small to support higher levels of output and employment.

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US Sector Analysis (Dec 17)

 
Karim writes:
U.S.-still far below peak of early 90s. Nearing levels of earlier this decade, but much private demand growth in recent years fueled by credit (unlikely to be repeated, certainly not to same extent).

Yes, we are still paying the price for allowing the budget to go into surplus. The deficit needs to be substantially higher to restore output and employment, to ‘make up’ for the surplus years that drained the financial equity needed to support the credit structure.

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Japan Fiscal Balance as % of GDP (Dec 17)

 
Karim writes:
Japan-well off recent peaks, in some part due to some fiscal tightening in recent years. Fiscal policy starting to be loosened, but private savings still have ways to go to get back to levels that were associated with the moderate period of domestic demand growth from 2003-2006.

Yes, and with their higher propensity to not spend income they require a higher deficit to sustain output and employment.

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Several months back, the eurozone national governments fell into ‘Ponzi’ as growth prospects went negative.

They now seem to be in that downward spiral of falling revenues, rising transfer payments, and rising credit default premiums.

Without a fiscal response to restore growth this will only get worse, and the National governements are, by treaty and by market dependence, in no position to enact a meaningful fiscal expansion.

Highlights

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(email exchange)

>   
>   On Tue, Dec 23, 2008 at 2:43 PM, Russell
>   wrote:
>   
>   Warren:
>   
>   You have known I have been negative on this
>   market collapse for a long time.
>   

Yes!

I was more hopeful for the right political response after it went bad in July. :(

>   
>   And what happens on a day to day basis only
>   stirs the pot. The reason for trucks not being
>   able to lift anything at the ports is that trade
>   finance has disappeared and the reason why
>   the Baltic Dry Index declined 98% in 90 days.
>   The banks are technically bankrupt. I said that
>   about Citi way back when.
>   

Yes, they weren’t bankrupt back then, and they were open for business. Now that the government has let it go bad after an OK Q2, previously sort of OK/money good assets have further deteriorated and are no longer money good if this is left to its own ways.

A $1 Trillion of the right fiscal response turns it all around.

Idle Cranes From Long Beach To Singapore

Idle shipping cranes at Frozen Ports From Long Beach to Singapore portend a bleak 2009-2010.

Chris Lytle, chief operating officer of the port of Long Beach, California, took in a panorama of the slumping world economy from his rooftop observation deck one day this month. Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier.

“You never see that,” Lytle said. “It’s quiet. Too quiet.”

Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

“Everybody expects 2009 to be a bleak year,” said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. “Now, it looks like 2010 is going to be just as bleak.”

Coal is piling up at the Mozambique port of Maputo. Brazil’s exports of cars, household appliances, machinery and furniture fell in November from a year earlier. The port in Singapore, the world’s busiest for containers, posted its first month-over-month decline in seven years in November, at 1.5 percent.

“You take it for granted until it blows up,” said Bernard Hoekman, trade economist at the World Bank, in an interview. “Now it’s blowing up.”

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Very interesting.

Seems the ECB can use this facility to ‘replace’ lost deposits of any bank, which would seem to remove the ‘bank run’ risk.

However, it is supposed to be only for very short term liquidity needs.

>   
>   On Wed, Dec 3, 2008 at 2:54 AM, Dave wrote:
>   
>   Not sure if any of the following is new info but was an interesting read
>   
>   DV
>   

Emergency Liquidity Assistance in the euro area

A Belgian newspaper (La Libre Belgique) is currently running a fascinating series of articles on the collapse of Fortis and Dexia.

In one article (lalibre.be/economie/actualite/article/464148/chapitre-7-la-trahison-des-hollandais.html) it mentions that Fortis benefited from an Emergency Liquidity Assistance from the NBB at the end of September for an amount of about €50bn. This confirms our own findings that showed such a loan on the balance sheet of the NBB (most of it was in $, see NBB loans to Fortis: About €50bn at the end of September 2008, 16 October 2008).

What is interesting is that it sheds a bit more light on a mechanism that is available on a euro area basis, and that up until now had been referenced only infrequently by the ECB. For example, the December 2006 edition of the Financial Stability Review (p.171) has the following description:

“One of the specific tools available to central banks in a crisis situation is the provision of emergency liquidity assistance (ELA) to individual banks. Generally, this tool consists of the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets. This support may be warranted to ease an institution’s liquidity strains, as well as to prevent any potential systemic effects, or specific implications such as disruption of the smooth functioning of payment and settlement systems. However, the importance of ELA should not be over-emphasised. Central bank support should not be seen as a primary means of ensuring financial stability, since it bears the risk of moral hazard. Furthermore, ELA rarely needs to be provided, and is thus less significant than other elements of the financial safety net, which have increased in importance in the management of crises.”

Apparently, these credit lines can be given by the various national banks, against collateral (including all the buildings of the retail banks network, in the case of Fortis!) and a ‘high’ rate of interest. But these credit lines need to be approved first by the ECB Governing Council and all 15 governors of the individual central banks. According to press reports, in a few days at the end of September, there were no less than 15 ECB teleconference calls to approve such ELAs to Belgian banks (Fortis and Dexia) but also German and Irish banks (probably Hypo Re since the bailout was at about the same time).

Looking at the balance sheets of the individual central banks it is quite difficult to have a complete picture of how much of these ELAs have been extended: while it was relatively clearly identified on the NBB balance sheet, it does not look like it was the case on the Bundesbank balance sheet, and to our knowledge the ECB as such has not given any figure on such credit lines. It is interesting, though, that such a mechanism existed. It is still available if needed in case of emergency, even if to a certain extent the existence of the guarantee schemes (introduced after this) may make its use slightly less necessary.

In addition it seems that Trichet was quite involved in the discussions, warning that Fortis did not have enough liquidity even after the capital injection that occurred over the weekend of 27-28 September (the ELA was probably extended from the Monday onwards, and it was after the next weekend that the Fortis share price really took a dive to below 1).

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Another tenth and the ECB will hit it’s inflation target for the first time since inception!

That’s why they called this the ‘beneficial recession.’

Just in time for year end performance bonuses…

Highlights

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This is not a good sign given their monetary arrangements with no federal fiscal authority to incur the corresponding budget deficits, public and private.

And the unlimited Fed swap lines to the ECB could now be further increasing eurozone foreign currency debt, and funding imports with fresh ‘cheap and easy’ dollar debt.

Euro-zone trade deficit swells in September

Euro-zone trade deficit swells in September (AP) - The euro-zone swung to a trade deficit of 5.6 billion euros ($7.1 billion) in September from a 2.9 billion euro surplus last year. Imports surged 16 %in September from a year ago. Exports grew just 9 percent. The euro-zone trade deficit for the year to date — from January to August — now stands at 29.6 billion euros ($37.52 billion). Euro exports to the United States dropped 5 %from January to August from a year ago, Eurostat said. And exports to the currency area’s biggest customer, Britain, did not grow at all for the first eight months of the year. Imports from Russia climbed by a quarter over the same timeframe. Eurostat revised down its August trade figures, saying total euro-zone exports dropped 3 %during the month from a year ago. It originally reported a first estimate of 2 percent. Imports in August also grew less than expected — at 6 %instead of 7 percent.

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(email exchange)

The dollar is a world reserve currency only because we are the only ones who ‘allow’ a trade deficit.

With a trade deficit, the rest of world is long your currency.

With a trade surplus, like japan, the world is short your currency.

The eurozone wants a trade surplus and to be a reserve currency.

They are either ignorant of how a monetary system works or have the arrogance of demanding the violation of an accounting identity by decree???

>   
>   On Fri, Nov 14, 2008 at 12:15 AM, Russell wrote:
>   
>   If True … hyper inflation in the pipe.
>   

Sarkozy Pushes for Abandonment of Dollar as World Reserve Currency

French President Nicolas Sarkozy said on Thursday ahead of the G20 meeting of world leaders:

“I am leaving tomorrow for Washington to explain that the dollar cannot claim to be the only currency in the world…, that what was true in 1945 can no longer be true today”.

There have been many previous indications that the dollar would not remain the world’s reserve currency for long. But this is a dramatic statement by a close American ally.

Reading between the lines, I am guessing that Sarkozy is pushing for a shift from the dollar to a basket of currencies as a world reserve standard, instead of a change to a single currency such as the Euro or the Yuan.

But we’ll have to wait and see what Sarkozy is really advocating.

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ECB to Cut Rates as Slump Calls for `Radical Action’

by Christian Vits

Nov. 6 (Bloomberg) — The European Central Bank will cut interest rates for the second time in less than a month today as the region’s economy suffers its worst slump in 15 years, economists said.

“It’s time for radical action,” said Ken Wattret, an economist at BNP Paribas SA in London. “This is a very severe economic downturn, interest rates should come down a long way.”

Obviously they still haven’t figured out lower rates will make matters worse, as lower rates cut government interest payments (it’s a spending cut) which removes income paid to the private sectors.

The only aspect that might help is the hope that the lower rates drive the currency lower. This is one of those ‘be careful what you wish for’ conditions.

First, with falling aggregate demand around the world, export growth will be problematic even with the lower real wages that come from a lower currency.

Second, a falling currency raises import prices and reduces real terms of trade, particularly for a large energy importer like the eurozone.

Third, anything that weakens the economy and lowers standards of living is socially dangerous.

Fourth, the problems of USD debt including USD losses growing as a % of euro based capital and income that have been driving the euro down remain and the risk of an acceleration of this process increases as the eurozone economies weaken.

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As the Belgian bank giant Fortis collapses, citizens of that country appreciate the bonheur of belonging to the eurozone. Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do. The banking and financial crisis is quickly changing perceptions. Across Europe, there is a bit of a scramble to join the euro. Politicians from Scandinavia to Eastern Europe, fearful of the abyss, are re-evaluating the wisdom of going it alone (Denmark, Sweden, Norway) or postponing structural reform (Hungary, Poland). Brazil and Mexico have secured a swap line from the Federal Reserve Bank. When it comes to liquidity conditions, size seems to matter after all.

‘Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do.’

Yes, but only because they don’t understand what other options are, like sustaining output and growth via fiscal measures, setting interest rates where they want them for further public purpose (including the option of a zero rate policy), and letting private corps with external currency debt problems default on them and convert them to equity in bankruptcy while sustaining the ongoing business as desired for further public purpose (keeping the banks open while they are legally getting reorganized) etc etc.

It’s the blind leading the blind.

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This will keep a lid on euro aggregate demand in the eurozone for a while as budget deficits grow due to falling revenues and increasing transfer payments.

Larger national deficits are needed to sustain output and employment, but also add systemic risk due to their peculiar institutional structure.

Eurozone to honour budget rules as econ faces stall

By Dave Graham and Anna Willard

BRUSSELS, Nov 3 (Reuters) - Euro zone finance ministers pledged on Monday to stick to European Union budget rules even though economic growth is seen halting next year, in a deal the European Commission hailed as needed policy cooperation.

“This is not the time to let the deficits rip,” said Jean-Claude Juncker, chairman of monthly talks among the finance ministers of the 15-country currency area.

“We don’t want to indulge in an orgy of spending and indebtedness — in essence, mortgaging future generations,” he told a news conference after their Monday talks.

The ministers backed European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change.

They also supported the Commission’s estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the widening of the deficit, mainly as a result of a natural fall in revenues and a rise in expenditure, already constituted a significant fiscal stimulus for the euro zone.

>   
>   On Mon, Nov 3, 2008 at 11:18 PM, James K. wrote:
>   
>   sad, sad.
>   
>   ”This is not the time to let the deficits rip,” said Jean-Claude Juncker,
>   chairman of monthly talks among the finance ministers of the
>   15-country currency area.
>   

Their loss, our gain, if we play our cards right and accommodate their desire for export driven growth- preferably with their exports going to us.

Might happen if we have the right fiscal package and trade policy to support imports.

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He’s not quite there. Yes, they need a ‘fiscal authority’ but he doesn’t see it’s function as providing the deficit spending necessary to sustain output and growth, though his mention of ‘currency printing’ could be stretched to suggest that. Instead, the focus is on collecting taxes to fund itself:

Agree. Eastern Europe is a huge problem and again much depends on what the Fed does because the ECB can only underwrite this stuff to the extent that the Fed will continue to offer the ECB unlimited swap facilities. Sarkozy gets this. He now recognizes the Achilles Heel at the heart of the EMU:

Speaking to the European Parliament on Tuesday, French President Nicolas Sarkozy said that an “economic government” partnering with the European Central Bank (ECB) was necessary for the continuation of the 15-nation eurozone — the collection of nations within the European Union that uses the euro as currency.

The financial and banking imbroglio consuming Europe has emphasized how the EU and specifically the eurozone — although impressive and supranational — are nonetheless unprepared for, and incapable of handling, wide-ranging economic crises. The European Union is not a superstate, despite the accusations of its detractors or the wishful thinking of its supporters. It does not have a unified decision-making authority on most policy issues except for those concerning the functioning of its common market, and those are primarily non-political.

The establishment of the eurozone is an impressive feat in its own right. It binds together 15 economies within the 27-member union with a common currency and a common central bank. However, the ECB and the eurozone in general lack a number of competencies that, if ever implemented, would have impinged on national sovereignty but would have also made monetary and economic sense. These include taxation, currency “printing”, decision-making on where to funnel funds in times of crises and European-wide bank regulation.

In times of plenty — which the eurozone has experienced for the most part since its inception — it may seem sufficient that the authority of the ECB is strictly limited to keeping inflation under 2 percent (a role inherited from its direct ancestor the German Deutsche Bundesbank). However, the current crisis illustrates the deficiency of this system. Without supranational taxation, the eurozone does not have the ability to make liquidity infusions into the system directly — it simply does not have any real cash of its own. In fact, Europeans have had to depend on the U.S. Federal Reserve for capital through unlimited dollar funds made available Oct. 13. A credit-starved Europe had to draw $250 billion — with hundreds of billions more potentially outstanding — on the first day the Fed announced that swaps would be unlimited.

Even with a taxation system that would supply the ECB with its own pool of funds, someone would still have to make a political decision regarding receivership of those funds.

Sarkozy may have tried to allay these fears by using the word “economic” — highlighting that the authority would not extend beyond the policy realm currently being rocked by the financial crisis. This is a valiant marketing effort for sure, but in reality one cannot separate the political and the economic “government”, especially if the eurozone receives authority over taxation or the ECB becomes responsible for deciding which banks get bailed out or which industries receive loans. Were the Europeans willing to go this far in giving up national sovereignty, they would have done it already.

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