As the economic crisis deepens, the push from above for tightening control of European Union members accelerates, with member states told that only surrender of sovereignty to Brussels offers any hope of recovery.
For Greece and, increasingly, Spain and Italy, Brussels control is already fact, and the outcome hasn’t been inspiring for smaller member states.
But yesterday’s meeting of EU leaders ended with no conclusive results, with any action delayed until they meet again next month.
Under the present rules of the Brussels game, a stronger central European government would mean a lot less transparency about the way decisions are made, at least for states with significant open records laws, and the EU hasn’t been able to agree on new policies to make their records more accessible.
There was one action Wednesday, by the European Parliament, but it was only a non-binding vote on a proposal calling for a tax on financial transactions, a measure strongly opposed by Britain, the continent’s main trading hub.
There’s more bad news about banks [including major preparations in London and Washington for a second wave of crashes], the official proclamation of a British recession, troubling signs for the German economy, a little political gamesmanship in France, bad news for British expats in Spain, a massive public sector strike in Norway, and, to close, a little bit of insight from a Nobel Laureate economist.
Oh, and we’re saving the Greek news for a separate extended post.
The leaders meet, greet, accomplish little
Yesterday marked the first meeting of European Union leaders after the French elections, and as EUbusiness headlined their story, “Hollande stole Merkel’s show, German press says.”
While François Hollande may have momentarily eclipsed the Iron Chancellor in the media lens, the meeting accomplished nothing concrete beyond advancing the call for tighter control of member states by Brussels’ eurocrats.
European Council President Herman Van Rompuy will present a report exploring ways to deepen economic integration in the euro zone when EU leaders hold their next meeting on 28-29 June.
Speaking to the press after an EU summit in Brussels, which lasted until 01.00 am, Van Rompuy announced that “we need to take Economic Monetary Union to a new stage.”
“I will report in June, in close co-operation with the Commission President, the Presidents of the Eurogroup and the European Central Bank on the main building blocks and on a working method to achieve this objective,” he said.
More from the BBC:
A top EU official is launching a plan to rescue the eurozone by binding its 17 nations closer together.
There is a widely held view that the EU single currency needs a fiscal union in order to function smoothly.
The “building blocks” for strengthening economic union will be drafted by the European Council President, Herman Van Rompuy, with input from the European Commission and European Central Bank.
Mr Van Rompuy announced the initiative after an EU leaders’ dinner.
“There was general consensus that we need to strengthen the economic union to make it commensurate with the monetary union,” he told a news conference in Brussels on Wednesday night.
Eurobonds, more integrated banking supervision and a common deposit insurance scheme would be among elements to consider, he added.
Eurobonds as the sticking point
Hollande and Merkel are divided over one key point: Whether or not to bankroll “growth” by floating more debt in the form of so-called eurobonds.
From Deutsche Welle:
French President Francois Hollande told a press conference it had been possible to gain some agreement on pooling debt into eurobonds as a long term strategy for integration. However, he said there was no agreement on the idea as a tool for shorter term growth.
“Germany remains convinced that eurobonds can only be the end of a process, while we believe it’s the start of a process. That’s it, in a nutshell,” he said.
Hollande added that he hoped to make progress at a summit late next month. “This was a necessary first stage,” he said, admitting there was still work to do to convince their partners.
The Guardian’s Ian Traynor and Patrick Wintour have more on Hollande’s apparent rise:
Officials said that the inconclusive meeting saw a shift in the balance of power towards the French, with supporters of Hollande’s eurobonds demands increasing in number and becoming bolder.
The Franco-German clash was framed in terms of German-scripted austerity which has dominated two years of European response to debt crisis against a new French-led drive for growth policies at a time of record eurozone unemployment.
A series of marginal measures entailing use of EU budget funds and increased capital for the European Investment Bank to finance growth projects were criticised by economists and analysts as “a PR exercise”. Hollande’s advisers also said they were inadequate to the scale of the challenge confronting a eurozone which could unravel.
There was no final agreement on whether and how the extra capital for the EIB should be organised.
And more from Agence France-Presse:
“We have to act straight away for growth… otherwise there will still be doubt on the markets,” new French President Francois Hollande insisted amid deepening worries over Greece’s eurozone future and Spain’s troubled banks.
“We have no time to waste,” the freshly-elected Socialist leader stressed on arrival for his first EU summit after a cost-conscious train ride from Paris.
German Chancellor Angela Merkel faced mounting pressure to give ground on her hardline austerity doctrine as the European single currency fell to $1.2564 and London, Frankfurt and Paris stock exchanges each shed well over two percent.
But she rejected a call by Hollande for eurobonds — jointly pooled eurozone debt — which the French leader considers a potential solution to the crisis.
“I believe that they are not a contribution to stimulating growth in the eurozone,” Merkel said, adding that such instruments were expressly forbidden by the EU’s own treaties.
Berlin fears eurobonds would only result in German taxpayers permanently underwriting the public finances of weaker eurozone economies.
The fundamental flaw in the eurobond notion is that all the growth they might generate would all go towards feeding the debt monster, leaving little for the citizens of Europe’s most ravaged economies.
Debt’s the problem, not the solution.
Transaction tax proposal passes parliament
This one should be a no-brainer.
While America’s Republicans typically depict Europe [except for Britain] as a socialist-dominated continent determined to loot those praiseworthy capitalists of their hard-earned lucre, the reality is that Europe’s main told of wealth extraction is the most regressive of all forms of taxation, the sales tax [or, as it’s called on the continent, the value added tax, or VAT].
But there’s one form of sales to which is doesn’t apply: The buying and selling of stocks and other financial instruments.
Given that rampant speculation brought Europe to its knees, that strikes us as a bit odd. Then add in the devastating wrought by computer-driven high-speed trading, where shares are bought and sold in microseconds by computers acting on programmed instructions, and you have a nightmare scenario, where automated trades can destroy companies and economies in less time than an eye-blink.
A financial transaction tax [also known as the Tobin tax after the Nobel Laureate economist who first proposed it] should be a no brainer: It would slow the pace of trading and it would raises revenues from sales that no go untaxed.
Europe has now taken the first step towards implementing the tax, and if there’s any residuum of integrity left in the political process, they just pass the damn thing.
From Radio France Internationale:
The European parliament has voted overwhelmingly for a financial transactions tax as eurozone leaders gather for a summit and dinner in Brussels to discuss the region’s financial crisis. MEPs says the vote was a “strong message” to countries such as the UK that oppose the tax.
France’s newly elected President François Hollande will join German Chancellor Angela Merkel and other eurozone for what is promised to be a no-holds-barred debate on how to tackle the crisis on Wednesday evening.
Hollande, who pledged to fight for pro-growth policies during his election campaign, favours the issuing of eurobonds, to raise finance for the bloc, and the transactions tax.
Merkel also wants the tax but, so far, has opposed eurobonds, although Italy and Spain back them.
But there were signs that compromise could be reached when European Union president Herman Van Rompuy declared that there should be “no taboos” and German Finance Minister Wolfgang Schaeuble said Berlin would look at “all constructive ideas”.
The European parliament on Wednesday voted 487 to 152 for the financial transactions tax, although it has only a consultative voice on the question, claiming that it could raise 57 billion euros.
Europe’s transparency fail
With the push on for even more Brussels control over EU member states, there’s an urgent need to make the actions of eurocrats more transparent to the peoples of Europe.
But guess what?
The Brussels bunch doesn’t want their secret wheeling and dealing exposed to light of day.
From Andrew Rettman of EUobserver:
Negotiators remain far apart on new rules to govern which internal EU documents can be released for public scrutiny.
Jakob Alvi, the Danish EU presidency spokesman, told EUobserver on Tuesday (22 May) that member states and the European Parliament rapporteur on the dossier, British center-left MEP Michael Cashman, remain poles apart after initial talks, set to continue on Wednesday.
“He made it clear the negotiating mandate that we [member states] have is not something he can accept … and the same goes the other way around,” Alvi noted.
EU countries agreed their position earlier this month in a paper leaked and denounced by the London-based pro-transparency NGO Statewatch.
Its most controversial provisions include: restricting the definition of what is an official EU document; giving member states the right to veto disclosure on the basis of national legislation; excluding legal advice given by EU institutions to their own policy makers; and giving “block exemption” to papers in ongoing infringement procedures against EU countries or in competition cases.
Member states want to define a document as any text “formally transmitted to one or more recipients, submitted for filing or registration, approved by the competent official, or otherwise completed for the purposes for which it was intended.”
They add that disclosure of institutions’ legal advice “shall be presumed to undermine the protection of legal advice.”
A parliament source told EUobserver the proposed definition of a document is so subjective it would give officials too much leeway to say No.
Greek “contagion” fears grow
And the first to be hit by a Greek exit form the Eurozone would be two other Mediterranean economies already reeling towards deeper collapse.
From Athens News:
Italian and Spanish insurers are most exposed to a Greek exit from the eurozone – through the contagion effect it could have on Italian and Spanish sovereign and bank debt – while most German and UK insurers are well-insulated from rising risks in the eurozone periphery, says Fitch Ratings.
Future rating actions on Italian and Spanish insurers are more likely to be driven by the macro-economic environment and sovereign rating than the idiosyncratic credit fundamentals of a particular insurer.
A Greek exit is not Fitch’s base-case scenario; but if it were to happen, Italian and Spanish insurance companies would most likely be placed on Rating Watch Negative or experience limited downgrades following a similar action on the sovereign ratings – even if the exit were accompanied by an effective EU policy response, and relatively orderly. There would be a heavier hit to sovereign and insurance ratings in the event of a disorderly exit with material contagion to peripheral countries.
U.S., Brits preparing for more bank failures
Call this a real alarm signal, the sign that officials in charge of regulating banks are considering a major second wave of the financial crisis as all but inevitable.
According to the Financial Times, the Bank of England, the Financial Service Authority (FSA) and the American Federal Deposit Insurance Corporation (FDIC) are studying a ‘top-down bail-in’ mechanism, in which authorities take control of a bank in difficulties, forcing investors to take their losses but rescuing the institution itself, avoiding a Lehman Brothers-style domino effect. The main risk in this issue is posed by Greece, which may say goodbye to the euro. If this happens, Citigroup analyst Stefan Nedialkov estimates that the banks of Ireland, Italy, Portugal and Spain could rapidly lose between 90 and 340 billion euros in deposits. It is no coincidence that the G8 leaders want to avoid this scenario. Meanwhile, only last week Greek citizens withdrew 700 million euros from Greece’s banks in a slowly rising trend to take money abroad. And then there is the case of Spain: amid speculations, later denied, that account holders are withdrawing their deposits from Bankia, Madrid estimates that the bank needs another 7-7.5 billion euros despite its nationalisation.
According to the IMF, 30% of Spanish banks will need state aid if they want to pass the government-imposed stress test. The Institute of International Finance (IIF) has estimated that banks in Spain will require up to 260 billion dollars in 2012-2013 and public aid for 50-60 billion dollars. The CJAS, the country’s savings banks, will need most money, the IIF adds, but the Spanish banking system is in a better position than the Irish banks, which have been hit by a property crisis. Clients in the U.K. are withdrawing funds from Santander (200 million pounds last Friday), downgraded by Moody’s. Many Italian banks have been hit by a rate cut as well, causing Montepaschi and Banco Popolare to approach the ‘junk’ status. France faces its first test under its new president Francois Hollande with the possible nationalisation of mortgage institute Credit Immobilier de France. But Germany is facing similar problems: the country’s seventh-largest property fund has gone into liquidation. The fund in question is Euroreal (Credit Suisse), which has to pay back 7.6 billion dollars.
Hollande sees the bank crisis coming
Hardly surprising in itself, but the way to handle it is part of what drives the division between the new French president and his german coutnerpart.
French President Francois Hollande called Thursday for the European Union to use its bailout fund to replenish directly the coffers of banks suffering from the eurozone debt crisis.
Speaking to reporters after an EU summit to thrash out ideas on tackling the crisis, Hollande said: “I took the position that banks could be recapitalised using the European solidarity mechanisms in liaison with the European Central Bank.”
Ireland has requested the possibility for banks to apply for aid directly, and the head of the International Monetary Fund, Christine Lagarde, has also said she favours such an option.
However, the rules of the fund, the European Stability Mechanism, state that only nations may request aid, which then can be used to recapitalise banks.
Germany in particular is adamant that the current rules stand. First, the bank should try to solve its problems on its own, then apply to its government or another member state if that did not work, Berlin believes.
Anxious money floods German banks
Looking for another sign that a lot of banks are about to collapse?
Consider this from Spiegel:
For now at least Germany and Greece share the same currency. But don’t tell that to investors. On Wednesday the German Finance Ministry pulled off a remarkable feat for a country in a threatened currency union: It issued €4.6 billion of two year bonds with a rate of zero percent. In other words, once inflation is factored in, investors are essentially paying to park their money with the German government.
Because of the strength of its economy, Germany has emerged as a significant benefactor from the problems being experienced by Greece as well as Spain, Italy and Portugal. In Greece worries that a government uncooperative with the European Central Bank could come to power after next month’s election forcing an exit from the euro zone has investors as well as ordinary citizens pulling their money out in droves. In Spain concerns over the health of the banking sector have driven up borrowing costs.
According to German officials on Wednesday, demand for the zero percent bonds was robust and added that Germany does not intend to offer up bonds with a negative interest rate. “As such, a coupon of zero percent is the lower limit,” Reuters quoted a finance official as saying.
Still, it seems likely that, with investors looking for safe havens for their money, even negative interest rate bonds might sell. “Many investors are putting their money only in places where they are guaranteed to get it back,” Commerzbank analyst Alexander Aldinger told the Berliner Morgenpost. “For a large degree of security, investors are willing to give up returns.”
German zero-rate bonds sell out
Yet another sign of the growing sense that collapse of many of Europe’s economies is drawing nigh comes for the latest sale of German bonds, with investors so desperate to find a safe haven that the bonds were bought up even they won’t earn investors any return at all.
In other words, buyers were simply happy to park their money in the place that seems safest, giving up any profits in the process.
From Valentina Pop of EUobserver:
European Parliament chief Martin Schulz has launched a scathing attack on the German chancellor for promoting policies he says drive up the borrowing costs of other euro-countries, while Germany has just hit a record zero-percent interest rate on its bonds.
“Germany sold €4.6 billion worth of bonds at a record 0.0 percent interest rate today. Meanwhile, borrowing costs for other countries are soaring. This imbalance is destroying Europe,” Schulz said on his way into the EU summit on Wednesday (23 May).
The record rate reflects increased market fears that the eurozone crisis will spin out of control if Greece leaves the euro-area, with German bunds considered a safe haven.
The German politician put the blame on Chancellor Angela Merkel for allowing policies that fuel this imbalance and warned that this will eventually backfire against Germany as well.
“We cannot have negative interest rates on one side and on the other having countries sinking under the burden of too high rates,” he said.
Germany economic alarm bells ring
The notion that Germany can somehow remain above the economic fray is simply ludicrous.
While their economy is currently the reigning industrial giant of the continent, all those factories and service providers require customers to fuel the boom, and with Europe on the brink, the owners aren’t feeling optimistic.
Exports and consumer demand are cushioning Germany against recession, data showed Thursday, but crisis clouds are gathering over Europe’s biggest economy as business confidence fell sharply.
The German economy expanded by 0.5 percent in the first three months of 2012, the federal statistics office Destatis calculated, with a 1.7-percent rise in exports and a 0.4-percent rise in consumer spending helping to avert a recession.
But at the same time, the Ifo economic institute said its closely watched business climate index dropped to 106.9 points in May from 109.9 points in April.
The intensification of the Greek crisis and the resulting resurgence in uncertainty in the eurozone as a whole “is impacting the German economy,” warned Ifo chief Hans-Werner Sinn.
It was the first time in seven months that the index has fallen and shows that companies are becoming increasingly spooked by the long-running eurozone debt crisis.
More from Deutsche Welle:
[G]ross capital formation – a barometer of investment activity – contracted 3.3 percent in the first quarter, with investment in machinery and equipment down 0.8 percent and construction investment falling by 1.7 percent.
That has led the German Central Bank, the Bundesbank, to warn in its monthly report published Wednesday that the “surprisingly good GDP data” for the first quarter “overstate the current underlying cyclical trend and cannot be extrapolated onto the following quarters.”
British recession grows deeper
Hardest hit is the construction sector, which has hit levels not seen since the global crisis caused by the American dot.com collapse.
From Jamie Grierson of The Independent:
The double-dip recession is deeper than originally feared as revised figures today showed a sharper decline in the economy in the first three months of the year.
Gross domestic product (GDP) shrank by 0.3% between January and March, the Office for National Statistics (ONS) said, down from a first estimate of 0.2%.
The change was driven by a worse-than-previously estimated performance from the nation’s builders, as construction output fell 4.8%, down from a drop of 3%, the steepest decline in 11 years.
The second estimate, which could be revised later, means the UK is in a technical recession – defined as two quarters of decline in a row – following a 0.2% fall in the final three months of 2011.
The downward revision will heap more pressure on the Government and fuel criticism that Chancellor George Osborne’s austerity measures are choking off the recovery.
Crisis drives British expats from Spain
For decades, many British retirees have found a safe haven in Spain, where the cost of living was cheaper, enabling them to stretch fixed incomes further.
Now the economic crisis has turned their Spanish dreams into a nightmare.
Dan Hyde and Lauren Thompson report for the London Daily Mail:
Many of the 400,000 British people living in Spain have been left in financial ruin following the banking crisis. And as the future of the euro is plunged into deeper uncertainty, they are desperate to get back to the UK.
Expats who are behind on their repayments are seen by local banks as a higher risk than Spanish homeowners and therefore are key targets for repossession.
To avoid this threat, many homeowners who have fallen well behind with their monthly bills are simply handing back the keys before the banks can act.
Many of the 400,000 British people living in Spain have been left in financial ruin following the banking crisis and are desperate to get back to the UK. They have seen a crippling combination of:
- Plunging property prices, which have left many who bought at the top of the market facing negative equity.
- Pitiful UK savings rates that have slashed incomes for those in Spain by a third.
- An exchange rate which, despite recent climbs, is still 16 per cent lower than when many expats bought their homes.
Major strike underway in Norway
In the first major walkout in three decades, Norwegian public sector workers walked off their jobs today after pay negotiations stalled Wednesday.
The numbers are relatively small, accounting for only about five center of the public workforce, but the action could be a sign of things to come.
From Deutsche Welle:
Around 30,000 public employees went on strike on Thursday after overnight negotiations regarding a pay raise broke down. Norway has a total of about 600,000 public sector workers.
The indefinite strike is Norway’s first by state employees in 28 years and affects police, customs authorities, schools, day cares, municipal administrations and other public sector departments.
Unions representing the workers say the government was not willing to meet their demands for a pay raise of just over 4 percent, which the unions had hoped to be in line with pay raises in the private sector.
Instead, the government offered a pay raise of 3.75 percent.
Arne Johannesen, one of the negotiators for the union, said their demands are “not outrageous.”
Government Administration Minister Rigmor Aasrud said in a statement that she was disappointed that the agreement could not be reached through negotiation, adding that the government’s proposal would have “ensured a significant purchasing power increase to all state employees.”
Le Pen wields le sword
With a parliamentary election drawing nigh, Marine le Pen hopes to leverage her third place finish in the first round of presidential voting into a swing vote position in parliament.
From France 24:
The divisive French far-right leader Marine le Pen this week refused to rule out the possibility of calling on her supporters to vote for a socialist candidate in next month’s parliamentary elections.
Le Pen’s declaration is the first time the National Front has ever made eyes towards the French left. The far right has made pre-election alliances in the past with the French right, always with the sole aim of beating the socialists.
In what marks a change of strategy, Le Pen declared this week that in ‘exceptional’ circumstances she was prepared to lend her backing to not only a conservative UMP candidate but even a socialist nominee in the key second round ballot on June 17.
Le Pen’s statement is a marked shift from the position she took after April 22’s first round of the presidential election when she declined to publicly endorse either candidate for the run –off vote.
Bidding for the role of chief kingmaker, she said she will hand out her endorsements on a ‘case by case’ basis depending on the ‘morality’ of the candidates and only if her own candidate does not make it through to the second round.
Eurocrats sacrifice democracy at the market’s altar
Finally, some words of wisdom from economist Amartya Sen’s op-ed today in the New York Times:
Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound.
Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.
Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.
Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution.
This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.