Friday, December 9, 2011

Too Little

More Deck Chairs To Starboard

Chancellor Angela Merkel, President Nicolas Sarkozy (AAP)

Leaders of all 27 member governments of the European Union gathered in Brussels today for a summit conference, which was supposed to provide either a final, concrete plan to stabilize the Euro through unified member action, or the beginning of the end for a common currency and ultimately the EU.

There had been plenty of jockeying for position before the meeting. Angela Merkel and Nicolas Sarkozy have been pressing EU governments hard to vote on reopening the Treaty of Lisbon, the legal basis of the European Union, and allow it to be amended.

The suggested treaty changes would force the lowering of national debts through EU governments' ruthlessly cutting their own spending, reducing support for public programs and services. As reported by the UK Guardian, the treaty changes would "[confer] intrusive rights on European institutions [i.e., the European Central Bank and Financial Stability Facility] to enforce budgetary policy in countries breaking the [E]uro's debt and deficit rules, as well as quasi-automatic penalties for delinquents".

The New York Times reported that the treaty amendments "would allow the European Court of Justice to strike down [an EU] member’s laws if they violate fiscal discipline" -- in short, individual EU governments would have to agree to give up some national sovereignty over their economies to save the Euro, and the Union. The amendment would have to be ratified by the parliaments of EU member states, which would have to take the opinions of their respective voters into account -- but, if and when it was done, the Austerity Hawks would have the backing of European law.

Odd Man Out: Cameron In Brussels (Reuters - Francois Lenoir)

Their efforts to amend the Treaty of Lisbon failed. Britain's Tory Prime Minister, David Cameron, blocked the effort with a veto. He wouldn't accept his nation's financial center (known colloquially to the British as the 'City Of London', in the same way we use the term 'Wall Street') being dictated to by the ECB / EFSF. As quoted in the Guardian, Cameron said "... if I couldn't get adequate safeguards for Britain in a new European treaty then I wouldn't agree to it. What is on offer isn't in Britain's interests so I didn't agree to it." He could not allow a "treaty within a treaty" that reduced the UK's position in the EU's single market.

Apparently, Cameron had conferred with leaders of the Labor party (who dislike Cameron intensely, but "We're all Britons, after all")
EU leaders [reported the Guardian] promptly agreed to bypass Britain and establish a new accord on the [E]uro among themselves by March. The EU appeared poised to line up 26-1 against Cameron in support of the Franco-German blueprint, leaving Britain utterly isolated.

Cameron's bombshell came at what was billed as the most important EU summit in years, with the fate of the single currency hanging in the balance. The veto was unexpected and was being seen as a watershed in Britain's fractious relationship with the rest of Europe. Cameron insisted on securing concessions on, and exemptions from, EU financial markets regulation as the price of his assent to the German-led euro salvation blueprint.
Merkel and Sarkozy dismissed Cameron's performance with a wave ("Mr. Cameron was never with us at the table," Merkel quipped to the press) and immediately moved to Plan B -- a "fiscal compact" which would have to be ratified by each EU members' parliaments, and with the same Austerity elements as were in the treaty amendments, all to be in place by March of 2012.

As the New York Times noted, "Sarkozy also said he was tired of British criticism of the handling of the crisis. 'I am sick of hearing every day David criticizing us,' Mr. Sarkozy said, according to one official briefed on the discussions. On Friday, as the summit meeting was breaking up, Mr. Sarkozy snubbed Mr. Cameron, brushing past his outstretched hand."
[The result of the summit] is viewed as unlikely to calm fears that Europe is unwilling to muster the financial firepower to defend the sovereign debts of big member states, including Italy and Spain, that have little or no economic growth and have big debt bills coming due soon.

At the meeting, member governments agreed to raise up to $270 billion that could be used by the International Monetary Fund to aid indebted European governments, and they moved up the date that a European rescue fund [EFSF] would come into operation. But the sums involved fell well short of what many investors and some Obama administration officials have argued are needed to ensure the survival of the euro. Administration officials on Friday welcomed the long-term overhaul of the euro zone’s rules, but argued that stronger measures were needed in the short run.
Going into this summit, Merkel, Sarkozy and their allies had only one choice -- to take amazingly bold financial and (for them) politically dangerous positions. This would have involved a near blank check from the ECB to banks in at-risk EU nations (Portugal, Spain, Greece) for bailout funds; the announcement of a creation of a "Eurozone Bond"; and the formation of an EU "fiscal union".

Anything less would only kick the can further down the road, trying to buy more time for a long-term solution. And, that's what's happened. Pushing the beginnings of that solution out until March of next year, without taking drastic action to provide sufficient backstopping of EU banks, or speed up the creation of the EFSF, leaves Europe at risk to another debt crisis -- another Greece, another Italy; another key bank which implodes.

Felix Salmon, a commenter at Reuter's online, summed it up pretty succinctly today:
Here’s how the [London Financial Times] put it on Wednesday: "... The stakes are therefore very high at Friday’s summit. The world cannot afford another half-baked solution."

And yet, inevitably, another half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eurozone: the collapse of the entire edifice is now not a matter of if but rather of when.

For one thing, fracture is being built into today’s deal: [R]ather than find something acceptable to all 27 members of the European Union, the deal being done is getting negotiated only between the 17 members of the Euro zone. Where does that leave EU members like Britain which don’t use the euro? Out in the cold, with no leverage...

... It seems that German chancellor Angela Merkel is insisting on a fully-fledged treaty change... Europe, whatever its other faults, is still a democracy, and it’s clear that any deal is going to be hugely unpopular among most of Europe’s population. There’s simply no chance that a new treaty will get the unanimous ratification it needs, and in the meantime the EU’s crisis-management tools are just not up to dealing with the magnitude of the current crisis.

The fundamental problem is that there isn’t enough money to go around. The current bailout fund, the European Financial Stability Facility, is barely big enough to cope with Greece; it doesn’t have a chance of being able to bail out a big economy like Italy or Spain. So it needs to beef up: it needs to be able to borrow money from the one entity which is actually capable of printing money, the European Central Bank.

But the ECB’s president, Mario Draghi, has made it clear that’s not going to happen... a former vice chairman and managing director of Goldman Sachs, he’s perfectly comfortable delivering Italy the bad news that he’s not going to lend her the money she needs...

... All of Europe’s hopes right now are being placed in something called the European Stability Mechanism — a permanent successor to the temporary EFSF. Since it’s permanent, the ESM is going to have to be constructed with the ability to put out fires of any conceivable size. And as such, it’s going to have to be able to borrow enormous amounts of money, and lend them on to countries which have found themselves in trouble.

But that would make the ESM, essentially, a bank. And the European leaders seem determined, today, to prevent the ESM from operating as a bank at all. Which means it will never get the firepower it needs to be taken seriously... the ESM seems set to be capped at a mere €500 billion euros ... compare [that] to Italy’s total debt of roughly €2 trillion. And that isn’t even counting Spain, or Portugal, or Ireland, or whatever money Greece might yet still need.

...The European Banking Authority, with exquisite timing, informed the world on Thursday that the continent’s banks need to raise €115 billion in new capital, including more than €15 billion for Spain’s Banco Santander alone ...

Europe’s leaders have set a course which leads directly to a gruesome global recession, before we’ve even recovered from the last one. Europe can’t afford that; America can’t afford that; the world can’t afford that. But the hopes of arriving anywhere else have never been dimmer.
Any questions?

MEHR: Paul Krugman notes:
Let me return for a minute to Kevin O’Rourke’s recent piece on the European summit. Aside from pointing out just how bad an idea the new super-stability pact is, O’Rourke makes an important observation about what the European experience teaches us about macroeconomics:
One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and is predicting declines in eurozone GDP for late 2011 and early 2012.

A second, related lesson is that it is difficult to cut nominal wages, and that they are certainly not flexible enough to eliminate unemployment. That is true even in a country as flexible, small, and open as Ireland, where unemployment increased last month to 14.5%, emigration notwithstanding, and where tax revenues in November ran 1.6% below target as a result... how does the EU expect [cutting wages] to work across the entire eurozone periphery?

The world nowadays looks very much like the theoretical world that economists have traditionally used to examine the costs and benefits of monetary unions. The eurozone members’ loss of ability to devalue their exchange rates is a major cost. Governments’ efforts to promote wage cuts, or to engineer them by driving their countries into recession, cannot substitute for exchange-rate devaluation [between different currencies]. Placing the entire burden of adjustment on deficit countries is a recipe for disaster.
Basically, European experience is very consistent with a Keynesian view of the world, and radically inconsistent with various anti-Keynesian notions of expansionary austerity and flexible prices.

The point about nominal wages is especially telling. Ireland has clearly — clearly — faced a massive demand shock; maybe Casey Mulligan will find some way to insist that 14.5 percent of the Irish work force has voluntarily decided to refuse employment, but it’s just not true.

It is really, really hard to cut nominal wages, which is why reliance on “internal devaluation” is a recipe for stagnation and disaster.

The crisis really has settled some major issues in economics. Unfortunately, too many people — including many economists — won’t accept the answers.

Buckle up. This ride's just beginning; I'd pick out your cardboard box now. Don't wait. Make sure you have the capacity learn to love a Prestident Gingrich ("Historian" and Randyman), with all your heart. Or else.

Not kidding.