Conorthoughts

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Me by Una Beag

Nuffin

'What's on your mind?', Facebook asks. Nuffin. Here is the view of an Alpine foot-hill from my Grenoble hotel window.

Wild-boar

'Follow the crowd' is the main rule when it comes to sniffing out a good place for lunch. But I was hungry and it was already 1.30 p.m. which is late for lunch in this part of France, so I settled for the nearly empty La Terrasse. My only lunch companion made me uneasy. The lunch, though, was good. La Terrasse, Meyrueis, the Cevennes, 11th December.

No. 38

Wow, I'm doing well: Twitter follower no. 38. Her name is Lulu Organek but something tells me that name might be made up.

 

 

Damn, forgot to send those presents

Have you sent those Xmas presents? Damn, I've forgotten to, and now I am in the middle of France and they are in my flat on Lupus and it is already the 8th December. Please note the sign for the post office in the background of the photo. I am whizzing in my rented car - well, ambling - through the village of Catus, 12 klms north-east of Cahors, in the Lot. "Get a move on, sleeping citizens of Catus (it is early morning) at least it is probably not too late for you to get them posted, if you get them wrapped and down to La Poste today. Damn about those presents!

Wolf eating Merkel and Sarkozy for breakfast again

Below is Merkozy failed to save eurozone by Martin Wolf in his regular Wednesday weekly column (FT, 7.12.2012):

Two heads, it is said, are better than one. In the case of the meeting between Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, the French president, that was not the case. If the conclusions give cover to a decision by the European Central Bank to intervene still more in public debt markets, it might offer some relief. But, like the Bourbons, the leaders seem to have learnt nothing and forgotten nothing.

What was agreed? The decisions seem to include: not compelling private bondholders to take losses on eurozone bail-outs, though voluntary restructuring remains possible; greater likelihood, though no automaticity, of sanctions on countries that fail to stay within the limits on budget deficits; inserting a balanced budget requirement into the domestic legislation of members; introduction of the European Stability Mechanism – the permanent rescue instrument – in June 2012, instead of June 2013; and monthly meetings of the European heads of state and governments, during the crisis, to oversee policy co-ordination.

Gone, then, is forced “private sector involvement” in rescheduling of debt, which will delight the ECB. Gone are automatic sanctions on fiscal “sinners” and review of breaches of fiscal rules by the European Court of Justice. This will delight France, which also obtained agreement that an intergovernmental accord among eurozone members might take the place of a new European Union treaty. Germany did not leave quite empty-handed: it managed to rule out “eurobonds” – joint issuance of sovereign debt – once again. But it does not seem to have got much.

Might this agreement encourage the ECB to intervene more heavily in markets for sovereign debt? Mario Draghi, its new president, told the European parliament last week that an agreement to bind governments on public finances would be “the most important element to start restoring credibility” with financial markets. “Other elements might follow, but the sequencing matters,” he added. The fiscal and reform measures announced by the technocratic government in Rome may help give the ECB the green light for those “other elements”. Markets have responded, in hope: Spain’s 10-year bonds were down to 5.2 per cent, and Italy’s to 6.3 per cent, on Monday. But Standard & Poor's decided to put the eurozone on negative watch. Fragility remains the watchword.

The summit on Friday is a huge moment. What we have heard from Mr Sarkosy and Ms Merkel does not create confidence. The problem is that Germany – the eurozone’s hegemon – has a plan, but that plan is also something of a blunder. The good news is that eurozone opposition will prevent its full application. The bad news is that nothing better seems to be on offer.

The German faith is that fiscal malfeasance is the origin of the crisis. It has good reason to believe this. If it accepted the truth, it would have to admit that it played a large part in the unhappy outcome.

Take a look at the average fiscal deficits of 12 significant (or at least revealing) eurozone members from 1999 to 2007, inclusive. Every country, except Greece, fell below the famous 3 per cent of gross domestic product limit. Focusing on this criterion would have missed all today’s crisis-hit members, except Greece. Moreover, the four worst exemplars, after Greece, were Italy and then France, Germany and Austria. Meanwhile, Ireland, Estonia, Spain and Belgium had good performances over these years. After the crisis, the picture changed, with huge (and unexpected) deteriorations in the fiscal positions of Ireland, Portugal and Spain (though not Italy). In all, however, fiscal deficits were useless as indicators of looming crises (see charts).

Now consider public debt. Relying on that criterion would have picked up Greece, Italy, Belgium and Portugal. But Estonia, Ireland and Spain had vastly better public debt positions than Germany. Indeed, on the basis of its deficit and debt performance, pre-crisis Germany even looked vulnerable. Again, after the crisis, the picture transformed swiftly. Ireland’s story is amazing: in just five years it will suffer a 93 percentage point jump in the ratio of its net public debt to GDP.

Now consider average current account deficits over 1999-2007. On this measure, the most vulnerable countries were Estonia, Portugal, Greece, Spain, Ireland and Italy. So we have a useful indicator, at last. This, then, is a balance of payments crisis. In 2008, private financing of external imbalances suffered “sudden stops”: private credit was cut off. Ever since, official sources have been engaged as financiers. The European System of Central Banks has played a huge role as lender of last resort to the banks, as Hans-Werner Sinn of Munich’s Ifo Institute argues.

If the most powerful country in the eurozone refuses to recognise the nature of the crisis, the eurozone has no chance of either remedying it or preventing a recurrence. Yes, the ECB might paper over the cracks. In the short run, such intervention is even indispensable, since time is needed for external adjustments. Ultimately, however, external adjustment is crucial. That is far more important than fiscal austerity.

In the absence of external adjustment, the fiscal cuts imposed on fragile members will just cause prolonged and deep recessions. Once the role of external adjustment is recognised, the core issue becomes not fiscal austerity but needed shifts in competitiveness. If one rules out exits, this requires a buoyant eurozone economy, higher inflation and vigorous credit expansion in surplus countries. All of this now seems inconceivable. That is why markets are right to be so cautious.

The failure to recognise that a a currency union is vulnerable to balance of payments crises, in the absence of fiscal and financial integration, makes a recurrence almost certain. Worse, focusing on fiscal austerity guarantees that the response to crises will be fiercely pro-cyclical, as we see so clearly.

Maybe, the porridge agreed in Paris will allow the ECB to act. Maybe, that will also bring a period of peace, though I doubt it. Yet the eurozone is still looking for effective longer-term remedies. I am not sorry that Germany failed to obtain yet more automatic and harsher fiscal disciplines, since that demand is built on a failure to recognise what actually went wrong. This is, at its bottom, a balance of payments crisis. Resolving payments crises inside a large, closed economy requires huge adjustments, on both sides. That is truth. All else is commentary.

                                                                                                    Martin Wolf

What's in a square

Place de l'Eglise? Place de la République? No, I am, right opposite the church, in the tiny hill village of Caumont, 15 klms south-west of Moissac in the Tarn et Garonne, photographing the sign for Square of the 19th March 1962 (the cease-fire in Algeria). A nice find, in effect a Place de la  République Algérienne, dans la France profonde. A coffee-break, 12.10 p.m., 6 December, 2011.

Pricks cunts I have known

In the name of God, Italy, Europe and the FT, Silvio, go!

In its leader this morning, the FT tries to plead exasperatingly with Berlusconi, and who am I to plead otherwise?

In case you have difficulty accessing the FT - paywalls etc. - here is the text and right at the bottom I give the link:

In God's name, go!

In a Group of 20 summit that fell well short of what was needed, the world’s most powerful leaders were powerless in the face of the manoeuvres by two European premiers: George Papandreou and Silvio Berlusconi.

The similarities between the two prime ministers are striking: both men rely on a thin and shrinking parliamentary majority and they are both squabbling with their own ministers of finance. Most importantly, they both have a dangerous tendency to renege on their promises at a time when markets worry about their countries’ public finances. There is, however, one important difference: having reached €1,900bn, Italy’s public debt is so high that its potential to destabilise the world economy is way above that of Athens.

The good news, of course, is that Italy is still a solvent country. However, the interest rate on its debt is becoming ever less sustainable. The spreads between Italian and German 10-year bonds have doubled over the summer. Yesterday, they reached a euro-era record of 463 basis points and would have probably been higher if the European Central Bank was not buying Italian bonds. Although Rome can sustain high interest rates for a limited time period, this process must be halted before it becomes unmanageable. Next year Italy has to refinance nearly €300bn worth of debt. As the eurozone crisis has shown too well, once spreads have risen, they are extremely difficult to bring down.

The most troubling aspect is that this is happening even as Italy has agreed, in principle, to the structural reforms recommended by Europe and the G20. That the International Monetary Fund will monitor Rome’s progress can only be a good thing. However, this risks being undermined while the country retains its current leader. Having failed to pass reforms in his two decades in politics, Mr Berlusconi lacks the credibility to bring about meaningful change.

It would be naive to assume that, when Mr Berlusconi goes, Italy will instantly reclaim the full confidence of the markets. Clouds remain over the political future of the country and structural reforms will take time before they can affect growth rates. A change of leadership, however, is imperative. A new prime minister committed to the reform agenda would reassure the markets, which are desperate for a credible plan to end the run on the world’s fourth largest debt. This would make it easier for the European Central Bank to continue its bond-purchasing scheme, as it would make it less likely that Italy will renege on its promises.

After two decades of ineffective showmanship, the only words to say to Mr Berlusconi echo those once used by Oliver Cromwell.

In the name of God, Italy and Europe, go!

 

http://www.ft.com/cms/s/0/9c118294-06fc-11e1-90de-00144feabdc0.html#axzz1cmY6o9Qj