Dec 14, 2011
By Noah Barkin and Erik Kirschbaum
Source:Reuters
(Reuters) - It was approaching midnight at a yacht club on the French Riviera, down the road from a G20 summit. German Chancellor Angela Merkel was telling reporters about her decision to block a loan to Greece, when suddenly her finance minister interrupted to set the record straight.
Wolfgang Schaeuble told the journalists that it had been his idea to stop the flow of aid to Athens. That move had helped convince Athens to drop its controversial plans for a referendum on new austerity steps, calming financial markets. Schaeuble had personally delivered the news in a phone call to his Greek counterpart Evangelos Venizelos, in hospital at the time with stomach pains.
"Yes, indeed it was the finance minister who stopped the payment," a somewhat startled Merkel acknowledged. "He was the one who reacted first."
Reporters glanced at each other in surprise. Here was Europe's most powerful leader being called out in public by one of her ministers. Instead of rebuking Schaeuble, Merkel had deferred to him, admitting he was right.
The unusual exchange in early November gives a glimpse into the complex relationship between Merkel and Schaeuble. Once his deputy, Merkel is now Schaeuble's boss. Their bond has survived two decades of slights and reversals -- and it is now central to the euro-zone debt crisis.
Germany is Europe's pre-eminent power, and France is No. 2. For months, markets and the media have focused on the link between Merkel and French President Nicolas Sarkozy as the key to saving the common currency from a breakup. The media have dubbed the pair "Merkozy."
But an examination of the relationship between the German leader and her outspoken minister -- whose contrasting views on Europe mirror tensions in the broader electorate -- suggests their give-and-take may be just as crucial to the continent's future.
"The chancellor can count on my loyalty," Schaeuble said in an interview with Reuters. "But that doesn't mean I'm going to keep quiet, that I'm going to be easy. I have the freedom to do what I think is right."
Schaeuble, a 69-year old political veteran, has been confined to a wheelchair since being shot by a deranged man a week after German reunification. Long committed to the cause of European unity, he has heavily influenced Berlin's response to the crisis. Some European insiders say he is perhaps the only politician capable of pushing Merkel, a risk-averse politician from ex-communist East Germany, to adopt the policies which may be needed to save the currency bloc.
"I think Schaeuble will be one of the key architects of a solution for the euro zone crisis in the coming weeks," said Klaus Tschuetscher, the prime minister and finance minister of Liechtenstein. "He is renowned and respected for tossing out ideas without worrying what the political reaction might be. I don't think the value of that should be underestimated."
IDEA FACTORY
Since the euro zone's troubles erupted just over two years ago, Schaeuble's finance ministry has been a veritable factory of ideas. His fingerprints are on many of the big decisions taken by the broader bloc.
At the heart of the crisis are huge debts racked up by euro-zone governments and a spreading belief that investors in those countries' bonds won't get paid back in full. In the early stages of the crisis, Schaeuble proposed creating a "European Monetary Fund" to shore up weakened members. At the time, the idea sounded radical. Merkel quickly overruled it, insisting the Washington-based International Monetary Fund should be involved in any euro-zone rescues.
But a year and a half later, the bloc has created a permanent rescue facility -- the European Stability Mechanism -- that in the end looks likely to closely resemble Schaeuble's monetary fund. Funded by euro-zone governments, the European Stability Mechanism will provide loans to members in financial trouble.
In June, Schaeuble made waves by writing to his euro-zone colleagues to demand that private holders of Greek bonds make a substantial contribution to a debt relief package. He suggested this could be achieved by a bond swap that would reduce the amount of debt the Greek government had to pay back. Many dismissed the idea as unrealistic, but the debt-swap idea has now been adopted by the euro zone.
Although Merkel was warned ahead of time that Schaeuble was sending the letter, she did not see it beforehand, her aides say -- a sign of just how much freedom the finance minister has, especially compared with other ministers.
"Merkel knew from the beginning that if she made him finance minister, her control over him would be limited, that he would have his own ideas and speak out on them," one of Merkel's top advisers said. "He is an anomaly in the cabinet."
To politicians and investors outside Germany, Schaeuble's proposals have sometimes been a source of confusion: It's not always clear whether they have the backing of the Chancellery.
In March, for example, the finance minister struck a deal with his euro-zone counterparts on funding for the European Stability Mechanism, only for Merkel to veto it and re-open negotiations days later.
But Schaeuble's freedom also works to Merkel's advantage. He can float ideas while she gauges how euro-zone partners and markets react before committing to them. It's also part of the "bottom-up" structure of the German government, where ministries are encouraged to come up with proposals for the cabinet to consider.
"Everyone in the government has a role," said Schaeuble in his spartan office in the finance ministry, a Nazi-era structure that housed Hermann Goering's aviation ministry during World War Two. "I've been in politics for a long time, I'm relatively old, and that gives me a certain amount of independence."
KOHL'S HEIR APPARENT
In some ways Schaeuble's freedom is made starker by his obvious physical limitations. The assassination attempt nearly succeeded. A little over a year ago, complications from two decades in a wheelchair were forcing him into hospital on a regular basis, and his doctors told him to slow down. In September 2010, after missing crucial summit meetings, he told Merkel he may need to quit because of his health. The chancellor told him to take a month off but urged him to stay.
Now he says he feels better. He has gained weight and resumed two-to-three hour handbike workouts in Grunewald Forest in western Berlin to stay fit.
"I was sicker in parts of 2010 than I wanted to believe," Schaeuble said. "She said she wanted me to keep on doing the job if that was possible. She told me to get better and stay in my post."
Merkel and Schaeuble first met in the months after the Berlin Wall fell in 1989. A lawyer by profession, he was heir apparent to West German Chancellor Helmut Kohl, and considered by many to be the greatest political talent of his generation. She was a shy 35-year-old from the other side of the Wall, working as a press spokeswoman for Lothar de Maiziere, East Germany's caretaker leader in the run-up to reunification.
Within half a year of their first encounter, Schaeuble's world was turned upside down.
It was October 1990 and the newly united Germany was in a buoyant mood. West Germany had just won the soccer World Cup. The country was months away from the first pan-German election in more than half a century. As the 20th century entered its final decade, a nation that had been weighed down by two world wars, hyper-inflation, a murderous Nazi dictatorship and decades of Cold War division could finally look forward with optimism.
Schaeuble, then interior minister, was leaving a campaign stop at a tavern in the town of Oppenau, near the French border, when a 37-year-old man pulled a gun and fired three shots, hitting Schaeuble in the face and spine.
"I can't feel my legs anymore," he is reported to have said before losing consciousness.
He was flown to a university medical centre in his birthplace of Freiburg, where doctors worked through the night to save his life. Kohl visited his right-hand man in the intensive care unit. At an impromptu news conference a few hours later, the burly chancellor choked back tears.
Schaeuble not only survived but he returned to his job in Bonn a few months later, despite appeals from his family that he quit politics. He looked frail, but Kohl kept faith in his loyal ally. To Germans who questioned whether a paraplegic could run the country, Kohl would often reply that Franklin Roosevelt had led the United States from a wheelchair through the Great Depression and World War Two.
His trust paid off. After Kohl scraped into office again in 1994, it was Schaeuble who worked behind the scenes to keep his narrow centre-right majority intact.
"He kept the coalition majority together," recalls Peter Hausmann, Kohl's spokesman in the 1990s and now editor of a newspaper in Bavaria. "It was a slim majority but he kept the discipline up and everyone in line."
FROM SCANDAL TO POWER
If Kohl had stepped down before the 1998 election and allowed Schaeuble to run against Social Democrat Gerhard Schroeder, the feisty lawyer from Freiburg might have become chancellor. But Kohl was intent on leading the country into the single currency, an ambitious project that he had pushed over the objections of many compatriots, and ran for an unprecedented fifth term.
Kohl lost to Schroeder, and Schaeuble took his place as head of the conservative Christian Democratic Union. Schaeuble named the up-and-coming Angela Merkel as his deputy.
It was a pairing that would last less than a year and a half. By December 1999, Kohl was caught up in a campaign finance scandal. Merkel penned an article for the Frankfurter Allgemeine Zeitung newspaper which hit German politics like a tsunami. In it, she urged the party to move on "without its old war horse" Kohl.
The godfather of the Christian Democrats could not believe the cautious young protégée he had plucked from obscurity could have written the article without the approval of her boss, Schaeuble.
Kohl launched a withering behind-the-scenes campaign to undermine the man he had once anointed his successor. Less than two months later, after discrepancies emerged in Schaeuble's story about a party donation, he was forced to resign.
Merkel was left standing. Hailed as the "clean face" of the Christian Democrats, she was catapulted into the party leadership.
"It was an extremely difficult situation for Schaeuble," said a former minister in Kohl's government who witnessed the drama at first hand and knows both Schaeuble and Merkel well. "At the time there was a strong yearning in the CDU for something new, for someone who wasn't in the Kohl orbit like Schaeuble. She profited from the Kohl scandal."
In "My Way," a 2004 book of interviews with Merkel, she confirms that Schaeuble did not know about the article before it was published. One reason for writing it, she says, was to give him the freedom to run a party over which Kohl still cast a long shadow.
Schaeuble said he does not believe Merkel set out to topple him when she wrote the piece. He describes their working relationship as good, while making clear the two are not friends. He played down the significance of other slights over the years, such as Merkel's refusal to back him for the German presidency in 2004.
In his 2010 biography of Merkel, Gerd Langguth describes how Schaeuble waited in vain for weeks to speak with her about the presidential post he coveted, only to get the cold shoulder. During a joint trip to Turkey at the time, the book says, Merkel made sure she was never alone in a room with Schaeuble to discuss the matter.
A year later, Merkel unseated Schroeder to become the first woman chancellor in German history. She named Schaeuble interior minister, preferring to lock him into her government rather than
give him a role outside the cabinet, such as parliamentary floor leader, where he might have proven dangerous.
When she was re-elected chancellor in the autumn of 2009, just as the first wave of the global financial crisis receded, Schaeuble was Merkel's surprise choice to run the finance ministry. His mastery of financial details during coalition talks convinced her he was the right person for a post that had been expected to go to her coalition partner, the Free Democrats, or her close Christian Democratic ally, Thomas de Maiziere.
"IMPOSSIBLE BECOMES POSSIBLE"
Since then, Schaeuble has emerged as Merkel's most important minister and a respected shaper of policy in Europe at a time of unprecedented financial turmoil.
He is a French speaker who maintains excellent ties with France and knows President Nicolas Sarkozy from their days as interior ministers. At the Cannes summit, when Merkel could not make a crucial meeting of euro zone leaders because of a previously arranged meeting with U.S. President Barack Obama, Sarkozy pressed her to send Schaeuble in her place. She agreed.
It was Schaeuble who pushed hard for the Christian Democratic Union to demonstrate its commitment to Europe at a party congress held in Leipzig last month under the banner "For Europe, For Germany." In a crucial vote in parliament in late September, he also helped convince party allies to back enhancements to the euro zone's rescue fund, averting a government crisis for Merkel.
But the differences between Schaeuble and Merkel on Europe are sometimes hard to hide.
While Merkel seems focused on limiting the damage to Germany from the debt crisis, Schaeuble sees the crisis as an opportunity to complete the political integration of Europe that was missing when the euro was launched.
In public, he sticks to the party line on controversial crisis-fighting proposals. When asked last month whether he could envision common euro-zone bonds -- an idea Merkel staunchly opposes -- Schaeuble's initial reaction was: "Now I need to be careful to say the same thing as the chancellor." He then went on to say it was too early to consider such a step.
But people who know him say Schaeuble would probably be ready to back such ideas, if the alternative was a breakup of the currency bloc.
"He's for euro bonds," said the former Kohl cabinet minister who worked with both for years. "He can't come out and say that, but if you look carefully at what he's been saying he won't exclude euro bonds like some of the others. He's dropped some clear hints with his language."
EU leaders agreed at a summit meeting in Brussels last week to press ahead with forming the "fiscal union" Schaeuble has long favored, under which euro-zone members relinquish control over budget policy. They also freed up more funds for the IMF to help troubled euro states like Italy and Spain, and decided to bring forward the launch of their permanent rescue fund by a year.
But these steps may be insufficient to stop the rot. And pressure on Germany to take bolder action could rise in the coming weeks.
If a euro-zone breakup looms, Schaeuble will again have to decide whether to speak up and challenge Merkel, as he did light-heartedly in Cannes. Like Dick Cheney under U.S. President George W. Bush, he has nothing to lose, no higher post to shoot for, only his vision of what needs to be done.
"When things get really difficult ... suddenly solutions which seemed impossible become possible," Schaeuble said.
"Because of this, the crisis represents an opportunity. I'm not saying that I enjoy being in a crisis, but I'm not worried. Europe always moved forward in times of crisis. Sometimes you need a little pressure for certain decisions to be taken."
(Editing by Sara Ledwith and Simon Robinson)
Showing posts with label euro. Show all posts
Showing posts with label euro. Show all posts
Thursday, December 15, 2011
Thursday, September 29, 2011
German parliament passes expanded euro fund
43 mins ago
By MELISSA EDDY - Associated Press
BERLIN (AP) — German lawmakers on Thursday overwhelmingly approved expanding the powers of the eurozone bailout fund, a major step toward tackling the sprawling debt crisis, in a vote that also helped strengthen Chancellor Angela Merkel's coalition government.
The measure had been largely expected to pass the lower house of parliament, but a lively debate ahead of the vote reflected how divided Germans remain over their role as Europe's economic power.
Of 611 lawmakers present, 523 voted in favor, while 85 voted against it. Only three lawmakers abstained, meaning that Germany in the future will be guaranteeing loans to the bailout fund, the so-called European Financial Stability Facility, or EFSF, of up to euro211 billion, rather than euro123 billion so far.
The vote had highlighted tensions in Merkel's center-right coalition that was strained by threats of dissent from many members who balked at the cost of propping up the eurozone's strugglers.
Opposition leaders had said going in that if Merkel's coalition has to rely on their votes, it would be a sign that her strife-prone and increasingly unpopular government is finished.
Yet after a night of intense lobbying, a majority of coalition members — 315 — voted in favor of the measure, enough to have ensured its passage even without opposition support.
"This shows the clear determination of the coalition on this issue," Rainer Bruederle, parliamentary leader of Merkel's junior partner, the Free Democrats, told n-tv broadcaster after the vote. "We have made an important decision for Europe."
Yet Frank Schaeffler, also of the Free Democrats, argued that bailout measures have worsened Greece's economic situation.
"Despite all arguments, the first bailout did not make the situation for Greece better, but worse," Schaeffler said. "Expanding the fund will make the situation even worse."
The lawmakers — under close scrutiny from jittery markets — were voting on European leaders' decision in July to increase the effective lending capacity of the fund to euro440 billion ($595 billion) and give it new powers, such as buying the bonds of shaky countries or lending money to governments before they get into a full-blown crisis.
Though Merkel described the euro ahead of the vote as "our common future" and said approving the beefed-up bailout fund was "of the very, very greatest significance," discussions went deep into the night Wednesday, in an attempt to win over dissenting members of her governing coalition.
On Wednesday, Finland voted in favor of expanding the fund's powers despite earlier threats to pull out of a rescue plan for Greece.
The fund expansion has to be ratified by all 17 eurozone nations to take force.
Germany's upper house of parliament is expected to pass the measure on Friday.
______
Geir Moulson contributed to this story.
By MELISSA EDDY - Associated Press
BERLIN (AP) — German lawmakers on Thursday overwhelmingly approved expanding the powers of the eurozone bailout fund, a major step toward tackling the sprawling debt crisis, in a vote that also helped strengthen Chancellor Angela Merkel's coalition government.
The measure had been largely expected to pass the lower house of parliament, but a lively debate ahead of the vote reflected how divided Germans remain over their role as Europe's economic power.
Of 611 lawmakers present, 523 voted in favor, while 85 voted against it. Only three lawmakers abstained, meaning that Germany in the future will be guaranteeing loans to the bailout fund, the so-called European Financial Stability Facility, or EFSF, of up to euro211 billion, rather than euro123 billion so far.
The vote had highlighted tensions in Merkel's center-right coalition that was strained by threats of dissent from many members who balked at the cost of propping up the eurozone's strugglers.
Opposition leaders had said going in that if Merkel's coalition has to rely on their votes, it would be a sign that her strife-prone and increasingly unpopular government is finished.
Yet after a night of intense lobbying, a majority of coalition members — 315 — voted in favor of the measure, enough to have ensured its passage even without opposition support.
"This shows the clear determination of the coalition on this issue," Rainer Bruederle, parliamentary leader of Merkel's junior partner, the Free Democrats, told n-tv broadcaster after the vote. "We have made an important decision for Europe."
Yet Frank Schaeffler, also of the Free Democrats, argued that bailout measures have worsened Greece's economic situation.
"Despite all arguments, the first bailout did not make the situation for Greece better, but worse," Schaeffler said. "Expanding the fund will make the situation even worse."
The lawmakers — under close scrutiny from jittery markets — were voting on European leaders' decision in July to increase the effective lending capacity of the fund to euro440 billion ($595 billion) and give it new powers, such as buying the bonds of shaky countries or lending money to governments before they get into a full-blown crisis.
Though Merkel described the euro ahead of the vote as "our common future" and said approving the beefed-up bailout fund was "of the very, very greatest significance," discussions went deep into the night Wednesday, in an attempt to win over dissenting members of her governing coalition.
On Wednesday, Finland voted in favor of expanding the fund's powers despite earlier threats to pull out of a rescue plan for Greece.
The fund expansion has to be ratified by all 17 eurozone nations to take force.
Germany's upper house of parliament is expected to pass the measure on Friday.
______
Geir Moulson contributed to this story.
Saturday, July 16, 2011
The Euro Crisis: How Much Worse Can It Get?
July 14,2011
Source: Yahoo News
With the euro staggering from one crisis to the next, the 17 euro-zone nations are facing some tough questions, but the most pressing one this week seemed to be about scheduling: is it serious enough to warrant an emergency summit meeting? Plans for a Friday gathering in Brussels were hastily rolled out on Tuesday, but when German Chancellor Angela Merkel nixed them the next day, they were just as sharply postponed. If the euro zone's leaders can't even agree when to meet, what hope is there for the euro itself?
With every passing day bringing ever-worse news, the leaders will doubtless be wondering how bad it can get. You could say that crisis management is the euro zone's current default mode - if the word "default" was not such a loaded term when it comes to the debts of certain embattled members of Europe's single currency. (Read how the Greek economic crisis is threatening the euro.)
Just two weeks ago, Greece narrowly passed an austerity law aimed at securing key funding and buying precious time for the embattled euro zone, which is still struggling to put together a second Greek bailout package. Yet the respite lasted only a brief moment before the euro once again tumbled into a downward spiral that shows no sign of recovering.
On Wednesday, credit-ratings agency Moody's downgraded Irish government debt to junk status, following similar downgrades for Portugal last week and Greece last year. Thanks to the growth-choking austerity demands of their bailouts, none of the three countries are expected to see a quick turnaround in their fortunes. According to analysis by Citigroup banking group, Greece's ratio of gross debt to output will have risen to 180% by 2014, while Ireland's will grow to 145% and Portugal's 135%. (See photos of the protests in Athens.)
And as much as it dominates the debate, leaving the euro zone is not an easy option. Daniel Gros, director of the Centre for European Policy Studies, a Brussels-based think tank, says that Athens might ultimately require more than €400 billion ($565 billion) in official support - almost 200% of its GDP today. But if Greece were forced to abandon the euro after a messy default, its nominal GDP would likely be halved. "In that case, the Greek government's debt to its euro-zone partners would be equivalent to 400% of its GDP, very little of which would be repaid," he says. On July 11, euro zone finance ministers all but conceded that Greece is likely to default as they tried to agree a scheme to encourage private and public sector bond-holders to swap existing Greek bonds for new, longer-maturing bonds, thereby giving the country more time to pay them back.
But the Greek default they are hoping to head off is just part of the crisis that is threatening to contaminate other euro-zone members. Borrowing costs have soared for Italy and Spain - respectively the third and fourth largest economies in the euro zone - despite hasty pledges from their finance ministers to take further debt-cutting measures. (See the Top 10 Things You Didn't Know About Money.)
Italy and Spain insist that they are secure, but their economies are increasingly seen by markets as the next in a line of dominos: yields on both of their 10-year bonds are now hovering around 6%, meaning the interest rates on their debts are twice as high as those on Germany's. They are nearing the unaffordable levels that could trigger talk of default. Despite this, Spain's Finance Minister Elena Salgado insisted on Monday that Italy and Spain have "strong economies" and that there is no logic to them being affected by market instability.
The case of Italy is particularly worrisome for the euro zone: the country is a founding member of the European Union, a member of the G-8 and, by most accounts, the world's eighth biggest economy. Italian officials point to their large, diversified economy and their high savings rate as reasons to dismiss the market jitters. But not only does the country have a debt-to-GDP ratio of 120%, economic growth is anemic: In the first quarter of this year it was just 0.1%, well below the euro zone average of 0.8%. That helps explain why the odds are shortening on Italy being the next European economy to receive a bailout - literally: Irish bookmaker Paddy Power says Italy is now odds-on to be bailed out by the end of this year, along with Spain. (See five destructive myths about the economic recovery.)
The concerns are echoed by heavyweight financial institutions like the Royal Bank of Scotland (RBS), which is also critical of vacillation by Europe's politicians. "We expect the crisis to continue deteriorating and threaten the entire euro area as European policy makers still misunderstand market dynamics," RBS said in a July 13 briefing note. The bank is urging leaders to almost triple the €750 billion ($1.06 trillion) euro-zone bailout fund to some €2 trillion ($2.8 trillion). "A euro-wide policy response is required to address powerful contagion channels which are threatening the stability of the whole region," it says.
Such a response could mean the euro zone shifting towards fiscal unity. The bailout fund, set up in May 2010, is run under unanimity rules but is paralyzed by political interference, according to Paul De Grauwe, professor of international economics at Leuven University in Belgium. "Each euro-zone member has a veto on the fund," De Grauwe says. "Can you imagine individual IMF members having veto power on its decisions? To act decisively, the euro zone needs to accept some transfer of sovereignty, like the IMF."
But De Grauwe has doubts about whether the euro zone is ready for that step. "Our leaders have not been able to cope with this crisis," he says. Until now, Europe's leaders have navigated a tricky passage through a succession escalating crises. If they fail to take decisive action, they risk bringing the euro to its breaking point, De Grauwe warn: "This is a dangerous moment. One should be afraid for survival of the euro zone."
Source: Yahoo News
With the euro staggering from one crisis to the next, the 17 euro-zone nations are facing some tough questions, but the most pressing one this week seemed to be about scheduling: is it serious enough to warrant an emergency summit meeting? Plans for a Friday gathering in Brussels were hastily rolled out on Tuesday, but when German Chancellor Angela Merkel nixed them the next day, they were just as sharply postponed. If the euro zone's leaders can't even agree when to meet, what hope is there for the euro itself?
With every passing day bringing ever-worse news, the leaders will doubtless be wondering how bad it can get. You could say that crisis management is the euro zone's current default mode - if the word "default" was not such a loaded term when it comes to the debts of certain embattled members of Europe's single currency. (Read how the Greek economic crisis is threatening the euro.)
Just two weeks ago, Greece narrowly passed an austerity law aimed at securing key funding and buying precious time for the embattled euro zone, which is still struggling to put together a second Greek bailout package. Yet the respite lasted only a brief moment before the euro once again tumbled into a downward spiral that shows no sign of recovering.
On Wednesday, credit-ratings agency Moody's downgraded Irish government debt to junk status, following similar downgrades for Portugal last week and Greece last year. Thanks to the growth-choking austerity demands of their bailouts, none of the three countries are expected to see a quick turnaround in their fortunes. According to analysis by Citigroup banking group, Greece's ratio of gross debt to output will have risen to 180% by 2014, while Ireland's will grow to 145% and Portugal's 135%. (See photos of the protests in Athens.)
And as much as it dominates the debate, leaving the euro zone is not an easy option. Daniel Gros, director of the Centre for European Policy Studies, a Brussels-based think tank, says that Athens might ultimately require more than €400 billion ($565 billion) in official support - almost 200% of its GDP today. But if Greece were forced to abandon the euro after a messy default, its nominal GDP would likely be halved. "In that case, the Greek government's debt to its euro-zone partners would be equivalent to 400% of its GDP, very little of which would be repaid," he says. On July 11, euro zone finance ministers all but conceded that Greece is likely to default as they tried to agree a scheme to encourage private and public sector bond-holders to swap existing Greek bonds for new, longer-maturing bonds, thereby giving the country more time to pay them back.
But the Greek default they are hoping to head off is just part of the crisis that is threatening to contaminate other euro-zone members. Borrowing costs have soared for Italy and Spain - respectively the third and fourth largest economies in the euro zone - despite hasty pledges from their finance ministers to take further debt-cutting measures. (See the Top 10 Things You Didn't Know About Money.)
Italy and Spain insist that they are secure, but their economies are increasingly seen by markets as the next in a line of dominos: yields on both of their 10-year bonds are now hovering around 6%, meaning the interest rates on their debts are twice as high as those on Germany's. They are nearing the unaffordable levels that could trigger talk of default. Despite this, Spain's Finance Minister Elena Salgado insisted on Monday that Italy and Spain have "strong economies" and that there is no logic to them being affected by market instability.
The case of Italy is particularly worrisome for the euro zone: the country is a founding member of the European Union, a member of the G-8 and, by most accounts, the world's eighth biggest economy. Italian officials point to their large, diversified economy and their high savings rate as reasons to dismiss the market jitters. But not only does the country have a debt-to-GDP ratio of 120%, economic growth is anemic: In the first quarter of this year it was just 0.1%, well below the euro zone average of 0.8%. That helps explain why the odds are shortening on Italy being the next European economy to receive a bailout - literally: Irish bookmaker Paddy Power says Italy is now odds-on to be bailed out by the end of this year, along with Spain. (See five destructive myths about the economic recovery.)
The concerns are echoed by heavyweight financial institutions like the Royal Bank of Scotland (RBS), which is also critical of vacillation by Europe's politicians. "We expect the crisis to continue deteriorating and threaten the entire euro area as European policy makers still misunderstand market dynamics," RBS said in a July 13 briefing note. The bank is urging leaders to almost triple the €750 billion ($1.06 trillion) euro-zone bailout fund to some €2 trillion ($2.8 trillion). "A euro-wide policy response is required to address powerful contagion channels which are threatening the stability of the whole region," it says.
Such a response could mean the euro zone shifting towards fiscal unity. The bailout fund, set up in May 2010, is run under unanimity rules but is paralyzed by political interference, according to Paul De Grauwe, professor of international economics at Leuven University in Belgium. "Each euro-zone member has a veto on the fund," De Grauwe says. "Can you imagine individual IMF members having veto power on its decisions? To act decisively, the euro zone needs to accept some transfer of sovereignty, like the IMF."
But De Grauwe has doubts about whether the euro zone is ready for that step. "Our leaders have not been able to cope with this crisis," he says. Until now, Europe's leaders have navigated a tricky passage through a succession escalating crises. If they fail to take decisive action, they risk bringing the euro to its breaking point, De Grauwe warn: "This is a dangerous moment. One should be afraid for survival of the euro zone."
Friday, July 15, 2011
It's ever more obvious, Greece must leave the euro
16 July 2011
By Jeremy Warner, Assistant Editor
Source: The Telegraph
I've hardly been alone, but that's no excuse. For more than a year now, I've been regularly predicting the euro crisis's final denouement, yet still it hasn't arrived.
So I've been forced to reach a different conclusion; perhaps it never will. Instead, the eurozone has entered a seeming state of permanent crisis. In desperation, European policymakers have adopted a very British characteristic – the hope that they can somehow just muddle through.
But though no one can know the exact timing of the endgame – that's ultimately for the politicians to decide, so no time soon might be a reasonable bet – it's now fairly clear what that endgame must be.
What's presently being played out among the GIPS (Greece, Ireland, Portugal and Spain) is final proof that you cannot have a monetary union of such size among sovereign nations without compensating fiscal union. That simple underlying truth leaves the euro facing a choice between two equally unappetising outcomes.
Either the richer countries carry on bailing out the poorer ones more or less indefinitely, rather in the manner that Germany subsidises its formerly communist East, or membership of the euro has to be reconstituted on a smaller and more sustainable basis. There's really nothing in between. The longer European policymakers remain in denial about this choice, the worse the situation will become.
So it's with a sense of weary familiarity we approach the latest impasse. The European Central Bank is implacably opposed to debt restructuring, but the eurozone's solvent Northern states have reached the limit of their appetite for further bail-outs. This leaves Greece in an impossible position; it can neither reduce its debt burden through restructuring, nor will anyone lend it more money.
By Jeremy Warner, Assistant Editor
Source: The Telegraph
I've hardly been alone, but that's no excuse. For more than a year now, I've been regularly predicting the euro crisis's final denouement, yet still it hasn't arrived.
So I've been forced to reach a different conclusion; perhaps it never will. Instead, the eurozone has entered a seeming state of permanent crisis. In desperation, European policymakers have adopted a very British characteristic – the hope that they can somehow just muddle through.
But though no one can know the exact timing of the endgame – that's ultimately for the politicians to decide, so no time soon might be a reasonable bet – it's now fairly clear what that endgame must be.
What's presently being played out among the GIPS (Greece, Ireland, Portugal and Spain) is final proof that you cannot have a monetary union of such size among sovereign nations without compensating fiscal union. That simple underlying truth leaves the euro facing a choice between two equally unappetising outcomes.
Either the richer countries carry on bailing out the poorer ones more or less indefinitely, rather in the manner that Germany subsidises its formerly communist East, or membership of the euro has to be reconstituted on a smaller and more sustainable basis. There's really nothing in between. The longer European policymakers remain in denial about this choice, the worse the situation will become.
So it's with a sense of weary familiarity we approach the latest impasse. The European Central Bank is implacably opposed to debt restructuring, but the eurozone's solvent Northern states have reached the limit of their appetite for further bail-outs. This leaves Greece in an impossible position; it can neither reduce its debt burden through restructuring, nor will anyone lend it more money.
Greece Mulls Plans to Exit Eurozone, Start New Currency
May 7, 2011
Christian Reiermann
Spiegel Online
Source: Activist Post
The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.
Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.
Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.
Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.
'Considerable Devaluation'
Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.
"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.
It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.
What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.
"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.
In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.
Banks at Risk
Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.
The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.
In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.
"Should the country become insolvent," the paper reads, "euro-zone countries would have to renounce a portion of their claims."
Christian Reiermann
Spiegel Online
Source: Activist Post
The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.
Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.
Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.
Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.
'Considerable Devaluation'
Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.
"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.
It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.
What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.
"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.
In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.
Banks at Risk
Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.
The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.
In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.
"Should the country become insolvent," the paper reads, "euro-zone countries would have to renounce a portion of their claims."
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