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No Bounce for Europe in Rebound by Germany

September 3, 2013 by

Despite Berlin’s hefty financial support of the euro zone’s more beleaguered members in the last few years, the economic crisis has corroded commercial ties between Germany and the rest of Europe. Countries like Italy and Spain no longer have the purchasing power they once did, and they trade less with Germany because of it.

Greece, the most distressed country in Europe, is now little more than a German rounding error. German exports to Greece plunged 40 percent from 2008, while Germany imported 9 percent less from Greece. Last year, Greece ranked 44th among German trading partners, just behind Vietnam.

No wonder German companies, cheered on by the government of Chancellor Angela Merkel, have turned their attention to faster-growing places like Asia or the United States.

“Right now it’s a decoupling story rather than a helping-hand story,” said Carsten Brzeski, a senior economist at the Dutch bank ING.

It is not simply an economic issue, but a geopolitical one.

Ms. Merkel is running for re-election this month in a campaign in which one of the few debating points is how many more financial handouts Germany will give to its weaker neighbors. She has made a conscious effort of building closer ties with bigger and faster-growing markets like China. If the Merkel government succeeds in making Germany a bigger global player through trade and investment policy, it not only insulates Germany from European structural woes but also ensures that it remains a global economic force in its own right.

For the rest of the euro zone and the larger European Union, however, unity depends on the sustained energy and commitment of Germany, the wealthiest and most powerful member. The more that Germany sees its long-term interests lying outside Europe, the less certain the future of the entire European project.

“Germany is less willing to play ball,” said Stefano Micossi, director general of Assonime, an Italian business group and research organization. Rather than pulling together, he said, European leaders have been “falling back to mutual mistrust and national solutions.”

On Tuesday, the Organization for Economic Cooperation and Development said that even as Germany resumed growth, the euro zone’s most vulnerable countries were unlikely to follow until sometime next year. European banks remain weak, the group said, while lending — usually considered a prerequisite for economic growth — continues to decline.

The euro zone’s economic future remains heavily dependent on Germany, the biggest market for products like shoes from Italy or Ford minivans made in Spain. German companies like Linde, a large supplier of gases for use in industry and health care, are major employers in Southern Europe.

But Linde’s big growth this year was in the United States, where sales rose 58 percent in the third quarter, to $2.6 billion, thanks to the purchase of Lincare, a company that supplies oxygen to patients in their homes.

The United States has also become a hot market for German companies like Voith, a maker of industrial equipment, which said last month that it expected to profit from a new law intended to encourage construction of hydroelectric power plants. Voith issued a statement calling the new law “terrific news” — no surprise considering that the company is one of the world’s largest suppliers of hydropower equipment.

In addition, China has become the most important market for Volkswagen, which sold 1.5 million cars there in the first six months of this year, more than in Western Europe. Volkswagen is also putting renewed emphasis on North America. In 2011, it opened a factory in Chattanooga, Tenn., that contributed to a 10 percent increase in American sales through June from a year earlier.

Article source: http://www.nytimes.com/2013/09/04/business/global/no-bounce-for-europe-in-rebound-by-germany.html?partner=rss&emc=rss

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Inside Europe: Economy Is a Casualty in Germany’s ‘Noncampaign’

August 19, 2013 by

BERLIN — Germans sleep better, Bismarck once said, when they don’t know how sausages and laws are made.

A century and a half later, Chancellor Angela Merkel seems to be modeling an election campaign on the musings of Bismarck, the “Iron Chancellor.” She is avoiding detailed discussion of what she would do with a third term, emphasizing instead her personal appeal over policy prescriptions.

In five weeks, Germans will vote in what has been billed as the most important election of the year in Europe, a continent struggling to emerge from years of financial and economic crisis. Yet there is virtually no debate about the major problems facing Germany — like handling its departure from nuclear energy, the aging of its population and articulating a vision for the euro zone.

Differences between the major parties are also hard to identify. Ms. Merkel has pushed her Christian Democrats so close to the opposition Social Democrats and Greens on energy, wages and family policy that the parties have become virtually indistinguishable for many voters.

This has given the parliamentary election campaign a surreal feel. There is no doubt that it is finally under way: Colorful party posters in the streets and Ms. Merkel’s first week of rallies, after her return from an Alpine hiking vacation, attest to that.

But there is no excitement in the air. The opinion polls showing the conservatives with a comfortable lead over the Social Democrats have barely budged for months.

As so often happens in Germany, a new word — Nichtwahlkampf, or noncampaign — has cropped up in the media to describe the state of affairs.

Compounding the angst have been two studies, from the Friedrich Ebert Foundation and the Bertelsmann Foundation, showing a sharp drop in German voter participation.

According to the Friedrich Ebert study, 18 percent fewer Germans vote in national elections than did three decades ago, the second-largest decline among West European democracies after Portugal.

At about 70 percent, Germans still vote at a higher rate than their counterparts in Britain and the United States, at 65 percent and 57 percent, respectively. But that hasn’t prevented soul-searching, with Germans asking whether the absence of political debate represents a threat to democracy itself.

“One reason people are voting less is that the parties have become so similar,” said Klaus-Peter Schöppner, the head of the polling institute Emnid. “The big ones no longer distinguish themselves from each other on the important issues.” In the early 1990s, Mr. Schöppner says, about 30 percent of Germans said it made no difference to them whether the Christian Democrats or Social Democrats were in government. Now that figure stands at a stunning 70 percent.

Last month, President Joachim Gauck, who traditionally steers clear of domestic politics, publicly chastised German lawmakers for failing to articulate their policy differences.

“Those who avoid clarity today are creating the nonvoters of tomorrow,” said Mr. Gauck, a former Lutheran pastor and East German dissident.

Asked last week about that, Ms. Merkel was dismissive. “If there are similarities between the parties, that is not such a bad thing,” she said. “I don’t think the people want to hear about differences all the time. They just want their problems solved.”

It would be unfair to put all the blame for rising voter apathy on Ms. Merkel, said Mr. Schöppner and Manfred Güllner, head of the Forsa research institute.

A major factor, they argue, is the increasingly fractured party landscape that has forced politicians to contemplate coalitions that would have been unthinkable in the past.

In this new world, voters can back the Social Democrats or the Greens only to see their party of choice end up in a partnership with the traditional archenemy, Ms. Merkel’s conservatives. That has convinced some Germans that there is no point in showing up on election day.

Another explanation is a growing sense that politicians are looking out for themselves instead of working for the public good, Mr. Güllner says.

That feeling has deepened with a series of scandals. Two of Ms. Merkel’s ministers were forced to resign for plagiarizing their doctoral theses. The campaign of her Social Democrat challenger Peer Steinbrück got off to a disastrous start when it emerged that he had made €1.2 million, or $1.6 million, in speaking fees while he was a member of Parliament. Now many dismiss him as greedy.

Another reason why voters are tuning out may be the complexity of the issues. Many simply do not understand the ins and outs of the euro zone crisis, the intricacies of shifting from nuclear power to renewable energy or the details of online surveillance by the U.S. National Security Agency.

“Who really understands what is going on there? And who really understands what politicians are calling for on these issues?” Mr. Schöppner asked.

Ms. Merkel’s response is to keep things simple, like Bismarck.

At her first major campaign rally last week, she skated over the surface of the issues. Speaking in Seligenstadt, a medieval town near Frankfurt, Ms. Merkel barely touched on Europe and made no mention of the biggest policy initiative of her second term — the Energiewende, or energy shift.

Her popularity ratings of about 60 percent are the envy of other leaders in Europe. Still, it is difficult to find a German who is genuinely enthusiastic about Ms. Merkel. Her monotone 25-minute speech in Seligenstadt left even the most ardent supporters cold.

But she does represent stability, security and continuity. According to a new book “The German: Angela Merkel and Us” by Ralph Bollmann, she is in “perfect sync” with the national mood.

She does not overburden Germans with detail. What she lacks in vision and inspiration, she makes up for in trust.

Strip the pageantry and policy out of an election campaign, and all you have left is the person. That may mean fewer voters show up Sept. 22, but the outcome is not in doubt.

Noah Barkin is the Berlin bureau chief for Reuters.

Article source: http://www.nytimes.com/2013/08/20/business/global/economy-is-a-casualty-in-germanys-noncampaign.html?partner=rss&emc=rss

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Berthold Beitz, German Steel Industrialist Who Saved Jews, Dies at 99

August 1, 2013 by

Yet when Mr. Beitz died on Tuesday at 99, he was remembered as much for his efforts to save hundreds of Jews and Poles from the Nazis while stationed in Poland during World War II.

Mr. Beitz (pronounced BITES) worked for an oil company when the war broke out. Instead of being called up for active duty, the Nazis sent him to supervise the Borislav oil fields, which had fallen into German hands with the invasion of Poland in 1939. Oil was crucial to Hitler’s war machine, and Mr. Beitz wielded considerable power. He used it to create unneeded jobs that spared hundreds of Poles and Jews from being deported to death camps.

His death, on the island of Sylt, off Germany’s northern coast, was announced by ThyssenKrupp.

Often called “the grand old man of German steel,” Mr. Beitz joined the company after the war and over the next six decades transformed it into a publicly traded international conglomerate. While continuing to make steel and armaments, it expanded into building and equipping factories and manufacturing elevators, among other things.

Mr. Beitz’s reputation for integrity, earned during the war, gained him the confidence of leaders beyond Germany’s industrial backbone in the Ruhr River Valley and placed him in a position after the war to renew business and restore diplomatic ties to countries in Eastern Europe, especially Poland. Chancellor Konrad Adenauer sent him on an exploratory mission to Poland in the 1960s, paving the way for Willy Brandt’s normalization of relations with East Germany and its allies a decade later.

“With the death of Berthold Beitz, Germany has lost one of its most eminent and successful corporate personalities, who helped to shape the country in important ways,” Chancellor Angela Merkel said.

Born on Sept. 26, 1913, in the eastern German city of Zemmin, Mr. Beitz trained to become a banker, but his career took a turn in 1938 when he joined the Shell Oil Company in the northern port city of Hamburg. His experience there led to his war duty in Poland.

After the war, Poland awarded him its highest civilian honor, and the Yad Vashem, the Holocaust memorial in Israel, honored him as a Righteous Among the Nations, its highest recognition for non-Jews who saved Jews from the Holocaust.

“I saw how people were shot, how they were lined up in the night,” he told The New York Times in 1983. “My motives were not political; they were purely humane, moral motives.”

After the war, as president of the German insurance company Iduna, Mr. Beitz adopted business methods, like bonuses and competitions, that were unusual at that time. His success caught the eye of Alfried Krupp, then 45 and the sole owner of the Krupp steel company. Mr. Krupp had recently left prison after serving part of a 12-year sentence for war crimes, including using slave labor.

Mr. Krupp needed someone with an unblemished reputation, and in 1953 he made Mr. Beitz the company’s chairman. One of his major tasks was to re-establish a sense of purpose and direction among the company’s demoralized employees.

Mr. Krupp died in 1967, leaving Mr. Beitz as executor of his will. Mr. Beitz persuaded Mr. Krupp’s sole heir to renounce his inheritance, with which he then established the Alfried Krupp von Bohlen und Halbach Foundation and converted the company into a publicly traded corporation. The foundation today holds a 25.3 percent stake in ThyssenKrupp.

In recent years, ThyssenKrupp has suffered from Germany’s slow economic growth as the country’s center of economic power has shifted away from the Ruhr Valley.

Mindful of that shift, Mr. Beitz invested heavily in the arts and established a cultural foundation that helped transform the Ruhr Valley from an industrial heartland to a hub of postmodern and postindustrial art. The foundation provided the Folkwang Museum with financing for a new building, designed by David Chipperfield. It opened in January 2010.

Mr. Beitz is survived by his wife of more than 70 years, Else; three daughters, Barbara Ziff, Susanne Henle and Bettina Poullain; and many grandchildren and great-grandchildren.

Robert Ziff, a grandson, said Mr. Beitz did not like to talk about his experiences during the war. Instead, he gathered letters he had received from survivors and bound them in a book, which he gave to his family.

He “let that do the talking,” Mr. Ziff said.

Article source: http://www.nytimes.com/2013/08/02/business/berthold-beitz-german-steel-industrialist-who-saved-jews-dies-at-99.html?partner=rss&emc=rss

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Joblessness to Keep Rising, O.E.C.D. Forecasts

July 16, 2013 by Leave a Comment

Joblessness is expected to continue edging up, to about 28 percent in Spain and Greece, 12.5 percent in Italy and 11 percent in France by the end of 2014, the Paris-based O.E.C.D. said in its forecast. Young people and the low-skilled will be affected the most, according to the organization, which represents 34 of the world’s largest economies. Two of the biggest exceptions to the trend are the United States and Germany, where the number of people out of work is expected to decline further next year, the study said.

“The social scars of the crisis are far from being healed,” the organization’s secretary general, Ángel Gurría, said.

Unemployment in many developed economies around the world has been on a steady rise since the financial crisis started in 2008. People on short-term contracts, especially the younger and lower skilled workers, were often the first to be fired at the beginning of the crisis and struggled to find a new job, the O.E.C.D. said.

Chancellor Angela Merkel of Germany declared youth unemployment Europe’s biggest challenge earlier this year. And some governments, including France, pledged new measures to try and reduce unemployment.

But some economists said that some labor policies pushed through by governments to improve the employment situation, including apprenticeship programs, can do only so much to alleviate the unemployment burden. Government reforms can help a bit, said Jennifer McKeown, an economist at Capital Economics, but “it’s more about boosting firms’ confidence and easing access to credit and maybe further easing of austerity.”

The O.E.C.D. warned against trying to address youth unemployment by turning to early retirement programs or relaxing unemployment benefits for older workers, saying it would be “a costly mistake.” New evidence cited by the O.E.C.D. showed that even though workers tend to retire later because of better health or financial needs, they did not stay in their jobs longer at the expense of younger workers.

Holger Schmieding, chief economist at Berenberg Bank, agreed with that assessment, saying that European demographics and the growing financial demands of pensions made it necessary to get people to work longer, not shorter. But Mr. Schmieding was less pessimistic than the O.E.C.D. He said that while more bad news on unemployment was already “baked into the cake,” the labor markets should stabilize as the economic environment improves, probably over the summer.

“Unemployment is a lagging economic indicator and even if the economies stabilize there may be pressure, but it doesn’t have to get quite as bad as the O.E.C.D. forecasts,” Mr. Schmieding said.

In Europe’s hardest-hit job markets, the outlook remains grim. In Greece, where thousands walked off their jobs Tuesday in a 24-hour general strike against austerity measures, one university graduate at the protest in Athens said she had few hopes of finding a job in the fall.

“I was top of my class and all my teachers said I should have a bright future, but I can’t see it, can you?” said Aliki Tsavou, 24, an economics graduate who has been working part time and uninsured in a cafe for the past year as she looks for a full-time job. “I’ve even applied to make coffee in an accountant’s office but there’s nothing, absolutely nothing.”

The O.E.C.D. also said that governments should spend more on helping the unemployed with their job search and training. Spending per job seeker fell on average by almost 20 percent among O.E.C.D. countries since the beginning of the crisis.

In Italy, addressing youth unemployment is a stated priority of the 11-week old government of Enrico Letta, which at the end of June approved a series of programs to increase jobs. The measures include tax breaks for employers, as well as new training and internship programs. But concerns remain that Italy’s overall economic situation — limping through a two-year recession — will continue to act as a brake to new hires.

“The real issue is one of demand,” said Stefano Sacchi, assistant professor of political science at the University of Milan, who noted that work incentives were unsustainable in the long term.

Calls for the government to relieve the tax load on companies and reduce labor costs to boost employment have also been widespread, but tax breaks in other areas have reduced the government’s wriggle room. “The margins for this are tight in the current situation,” Mr. Sacchi said.

Flavio Vallone, 28, a Web developer and university graduate in Siena, Italy, has been struggling after a first job that ended when the company was taken over. Now that he has spare time, he has been teaching himself new skills in Web marketing and social media in the hope that it will help land new employment.

“I’m taking advantage of being unemployed to learn what I didn’t while I was at university,” he said. But prospects look dim. “Companies want the compromise between a young person and a person who has experience, which is a paradox.”

Elisabetta Povoledo contributed reporting from Rome and Niki Kitsantonis from Athens.

Article source: http://www.nytimes.com/2013/07/17/business/economy/joblessness-to-keep-rising-oecd-forecasts.html?partner=rss&emc=rss

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For Ireland, a Setback on the Road to Recovery

June 27, 2013 by Leave a Comment

As Ireland prepares to become the first European country to exit its international bailout, politicians across the Continent have promoted it as a model for how austerity can help a country emerge stronger from the crisis.

“A shining example,” Chancellor Angela Merkel of Germany declared recently.

But Ireland’s economy is disappointing its fans — again.

The country slid into its second recession in three years during the first quarter, the government reported on Thursday. Consumers and businesses, still reeling from steep tax increases, government spending cuts and a long stretch of sluggish economic activity, have sharply curbed spending.

“Everything is not hunky-dory in the Irish economy,” said Constantin Gurdgiev, a professor at Trinity College in Dublin. “But there is a group of people who refuse to listen to that, because they see it as convenient to promote Ireland as a success story to support policies promoted by the troika,” he said, referring to the country’s bailout creditors, the International Monetary Fund, the European Central Bank and the European Commission.

Gross domestic product shrank 0.6 percent in the first quarter from a year earlier and was revised to show contraction of 0.2 percent in the fourth quarter of 2012, the government said. Its economy had already shrunk 1 percent in the preceding quarter.

Consumer spending slumped 3 percent in the first quarter from a year earlier, the steepest decline in four years. And exports of goods and services declined 3.2 percent, the deepest contraction since Ireland fell into its crisis in 2009, the government reported.

The backsliding reverses the momentum Ireland seemed to have gained since it joined Greece in 2010 as an emergency bailout recipient. In exchange for its 67.5 billion euro ($88 billion) bailout, Dublin agreed to an austerity program aimed at rapidly improving the country’s tattered balance sheets.

But gross investment in the economy has continued to shrink, with construction activity and the retailing sector.

“Everything domestic is still contracting,” Mr. Gurdgiev noted.

On the other hand, austerity measures in Britain may be having an effect. The Office of National Statistics reported on Thursday that the British economy grew by 0.3 percent in the first quarter, a 1.2 percent annualized rate.

That was a revision up from the previous estimate. Contrary to earlier readings, the British economy did not slip into a double-dip recession the last quarter of 2011 and the first quarter of 2012, the office said.

On the Continent, France’s official accounting agency warned on Thursday that France would need a severe dose of austerity in the form of spending cuts, saying the country could no longer rely on tax increases to fix its finances.

The state’s Court of Auditors noted that public finances had been held in check for several years through higher taxes and spending control. But it said the policy had reached its limits.

If the country’s budget deficit is to reach 3 percent of gross domestic product — the European Union target — by 2015, structural spending cuts “on the order of” 13 billion euros ($17 billion) will be needed in 2014, along with 15 billion euros of cuts in 2015, the report said.

The challenge is to rein in public spending in a country with generous welfare and pension benefits and a bloated public sector. France’s social spending last year was among the highest in the world, at more than 30 percent of gross domestic product, according to Philippe d’Arvisenet, global chief economist at BNP Paribas. “It’s getting more difficult to afford this type of generosity,” he said.

Public spending made up 56.6 percent of gross domestic product last year, the auditors found, up from 55.9 percent in 2011 and just below the record high of 56.8 percent set in 2009. Tax receipts, meanwhile, rose to a record 45 percent of G.D.P. in 2012.

“Everyone agrees this is where the next effort has to come from,” Gilles Moëc, an economist at Deutsche Bank in London, said. Cuts on the scale suggested by the auditors are “doable,” he said, at just over 1 percent of G.D.P.

The government has essentially conceded the point in recent months, he said, but it has not provided any details about how it intends to go about doing it.

France’s problems partly result from the economic downturn. The French economy contracted by 0.2 percent in both the first quarter of this year and the last quarter of 2012. Insee, the national statistics institute, predicted last week that it would shrink by 0.1 percent this year.

The government’s forecasts are still more optimistic than some private forecasts. Standard Poor’s estimated Thursday that the French economy would shrink by 0.3 percent this year, before returning to growth with a 0.6 percent expansion in 2014.

Article source: http://www.nytimes.com/2013/06/28/business/global/for-ireland-a-setback-on-the-road-to-recovery.html?partner=rss&emc=rss

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Political Economy: Cyprus Refuses to Learn From Its Mistakes

March 24, 2013 by Leave a Comment

Cyprus will pay dearly for its sins. The Mediterranean island has committed many follies over the years — and is still making mistakes.

The Cypriots always seem to overestimate their negotiating position. In recent years, their first big mistake was to reject in 2004 the U.N. plan for uniting their island. That irritated their E.U. partners, put Cyprus in a weak strategic position vis-à-vis Turkey and left a jagged scar across the island.

The last Communist government was also virtually criminal in its failure to act as the crisis in Greece threatened to swamp Cyprus. If it had been willing to restructure the banks, the Cypriot economy would now be a lot healthier. It also would have been easier to make a deal with Germany then than now, when Angela Merkel is only months away from an election.

The new center-right president, Nicos Anastasiades, has been in office for a month. But he has managed to turn a crisis into a disaster by initially backing a plan to impose a 6.75 percent tax on insured depositors.

Of course, the other euro zone governments, the European Central Bank and the International Monetary Fund should not have approved this terrible idea either. And Mr. Anastasiades certainly had a gun to his head: He had to rustle up money somehow, as the euro zone was rightly unwilling to lend Cyprus more than €10 billion, or about $13 billion, leaving the country with a €5.8 billion funding gap.

But the Cypriot president is ultimately responsible for his actions. There was an acceptable alternative: Tax the uninsured depositors at 15.5 percent and leave the insured ones untouched.

Mr. Anastasiades did not want to do this, as it would have angered Russia and undermined Cyprus as an offshore financial center. But both of these have happened anyway.

When Mr. Anastasiades found he could not sell the deposit grab to his people, he backtracked. There was jubilation in the streets.

The Cypriot government then asked Russia for help. But again Nicosia overestimated its negotiating position. Moscow was not interested in buying bankrupt banks or lending more money. Michael Sarris, Cyprus’s finance minister, was sent home empty-handed.

Meanwhile, the E.C.B. has threatened to pull the plug on insolvent Cypriot banks unless there is a deal with the euro zone by Monday night. As of Sunday morning, the government was frantically trying to put together a deal focused on restructuring its banking system and imposing capital controls.

The banking system certainly needs a severe revamp. The second-largest lender, Laiki Bank, is essentially bust. The largest one, Bank of Cyprus, is not in much better shape. Controlled bankruptcy of one or both institutions would cut the amount of capital Nicosia has to pump into them while cauterizing the problem.

But imposing capital controls would be a historic mistake for Cyprus and the euro zone — even worse than the crass idea of taxing uninsured deposits. Noncash transactions would be limited, while withdrawals from cash machines would be rationed.

This would be equivalent to Argentina’s “corralito,” which lasted a year in 2001-02. If capital controls are imposed, it will be almost impossible to lift them because people will stampede for the exits once they are removed. But such heavy-handed rationing of limited cash would clobber an economy that is already heading for a slump.

It would also be a terrible precedent, probably contravening European treaties. Savers in Italy, Spain, Greece and other vulnerable euro zone countries might worry that they would be next and rush to remove cash from their banking systems. Capital controls really might spell the beginning of the end of the single currency.

Some of the technocrats trying to save Cyprus were belatedly waking up to such dangers over the weekend. But they were struggling to find a viable alternative. After all, if Cypriot banks open Tuesday morning without capital controls, there will inevitably be a run on deposits.

The least-bad solution is for the European Central Bank to offer to supply unlimited liquidity and finance a run. For it to do this within its rules, the banks must be properly recapitalized and have sufficient collateral.

The key is to separate the rotten parts of the banking system from the good ones. The uninsured depositors can then go with the bad banks and effectively be tied up until they are wound down. This will cut substantially the liquidity that needs to be provided to the system. Nicosia has effectively accepted such a solution for its second-largest bank, but was resisting doing so for the biggest one.

Provided a good bank/bad bank split can be agreed upon, the good banks will be in a healthier position to get liquidity from the E.C.B. or Cyprus’s own central bank. If they still do not have enough suitable collateral, the E.C.B. should change the rules to allow other types of assets to be accepted. If there is still a shortfall, the good banks should be allowed to manufacture collateral by issuing government-guaranteed bonds.

The Cypriot members of Parliament will not like any of this. But what is the alternative? Endless capital controls? Printing a parallel currency so people get Cypriot pounds instead of euros from the cash machines? Or quitting the euro entirely?

There are no good options. But the longer it takes for Cyprus to get real, the greater the damage.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/03/25/business/global/25iht-dixon25.html?partner=rss&emc=rss

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Cyprus Set to Reject Tax on Bank Deposits

March 19, 2013 by Leave a Comment

NICOSIA — Cyprus’s Parliament was set to reject a divisive tax on bank deposits in a vote scheduled for Tuesday, a government spokesman said, a move that would push the island closer to a default and banking collapse.

A weekend announcement that Cyprus would break with previous practice and impose a levy on bank accounts as part of a €10 billion, or $13 billion, E.U. bailout prompted turmoil on European financial markets on Monday.

Cypriot and euro zone officials have sought to soften the initially proposed levy of 6.75 percent on depositors of up to €100,000 and 9.9 percent above €100,000 to ease the burden on small savers.

But passage of the bill in the 56-member chamber, where no party has a majority, was unlikely and it was not clear if the vote would even go ahead later on Tuesday if leaders were sure it would be rejected.

“It looks like it won’t pass,” a Cypriot government spokesman, Christos Stylianides, told state radio.

The House of Representatives was expected to meet at 6 p.m. local time. Rejection of the measure would effectively block a bailout that Cyprus needs to keep its banks afloat and government paying wages and welfare.

Tuesday’s vote, originally planned for Sunday, has been postponed twice already. Three parties have said outright they will not support the tax, while a fourth, in the co-governing coalition, said it cannot support it as it stands either.

President Nicos Anastasiades asked the European Union for more aid during a telephone conversation on Monday with Chancellor Angela Merkel of Germany, with a second call likely on Tuesday.

Mr. Stylianides said Mr. Anastasiades might also speak to Vladimir Putin, the Russian president.

The French finance minister, Pierre Moscovici, said the bailout was the maximum that could realistically be expected to be paid back. “Above €10 billion we are entering into a size of debt that is not sustainable,” he told reporters on Tuesday.

The tax will batter not only Cypriots, but thousands of Europeans and Russians with business interests on the island. Mr. Putin on Monday described it as “unfair, unprofessional and dangerous.”

The Cypriot finance minister, Michalis Sarris, was due to hold meetings in Moscow on Wednesday, partly to try and get an extension to an existing €2.5 billion loan.

Stunned islanders emptied cash machines over the weekend and banks are to remain shut on Tuesday and Wednesday to avoid a bank run. Hundreds of protesters rallied outside Parliament on Monday, honking horns and holding banners saying “We are not your guinea pigs!”

“If they vote for this tax they will face the fury of the people,” said Markos Economou, a 47-year-old physics teacher and father of two. “The banks and the politicians should pay for this mess, not the people.”

The island’s stock exchange also suspended trading for another two days, Tuesday and Wednesday.

International market reaction has been muted so far but if a vote was lost, or postponed, that could change. The uncertainty saw the euro drop 0.2 percent as it remained near a three-month low and European shares fall 0.4 percent in early trading Tuesday.

Article source: http://www.nytimes.com/2013/03/20/business/global/cyprus-set-to-reject-tax-on-bank-deposits.html?partner=rss&emc=rss

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Euro Watch: German Economy Shrank in Fourth Quarter

January 15, 2013 by Leave a Comment

The Federal Statistical Office in Wiesbaden estimated that the German economy shrank about 0.5 percent in the final three months of 2012, compared with the previous three months. The decline was largely the result of sagging investment by German managers worried about the future of the euro zone.

And despite reassurances from economists that growth would bounce back quickly in Germany, the data underlined how closely the country’s fate remained tied to its ailing euro zone allies.

“This idea that Germany is a powerhouse dragging the rest of Europe along with it is a bit of a myth, to be honest,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “You have a very weak periphery, and a core which is not as strong as everyone seems to believe.”

Throughout the European debt crisis Germany has managed to float above the bad news, enjoying record employment, rock-bottom borrowing costs and export-led growth that kept chugging in spite of the cloud hanging over the euro zone. But Germany’s European partners are also among its biggest customers, leaving it vulnerable to the Continent-wide slowdown made worse by the very austerity policies championed by Chancellor Angela Merkel.

Portugal’s central bank on Tuesday cut its economic forecast for this year, saying the economy would contract more steeply than expected. France has probably missed its target for reducing the budget deficit, according to data published Tuesday, raising the prospects of deeper spending cuts and additional taxes. Meanwhile, elections pending in Italy next month have ground that country’s drive toward economic overhauls to a halt.

“The longer the euro crisis lasts, the more difficult the situation becomes for Germany,” said Stefan Kooths, an economist at the Kiel Institute for the World Economy. “We have always said Germany is not a Teflon economy.”

The German government is scheduled to release its report on the economy Wednesday and will forecast growth of 0.5 percent this year, the Handelsblatt newspaper reported, saying it had obtained a copy of the document. In the context of the euro zone as a whole, which is in recession with record unemployment, any growth is considered positive.

But most forecasts are based on the assumption that financial markets will remain calm. If anything were to shake investor confidence in the euro zone, like political turmoil in Italy or Greece, the weak growth rate would mean that Germany would not have much of a cushion against recession.

France is en route to missing its deficit reduction target this year, according to preliminary data released Tuesday by the French government. Although the government aimed for a deficit of 4.5 percent of gross domestic product, data for November suggest the shortfall will be 4.8 percent, ING Bank estimated.

That means the French president, François Hollande, would have to find an additional €5 billion, or $6.7 billion, in revenue to meet the 2013 budget target, and could risk another downgrade of the country’s credit rating.

The data also indicate the challenge of keeping France’s overall level of debt from rising beyond its current level, which is already above 90 percent of G.D.P.

“Today’s figures underline how difficult the task will remain for François Hollande to keep the debt below 100 percent of G.D.P. during his mandate, and France’s rank in the core of the euro zone,” Julien Manceaux, an economist at ING, wrote in a note.

German public finances contrast with those of France. Together, German federal, state and local governments recorded a budget surplus for the year equal to 0.1 percent of G.D.P, the statistical agency in Wiesbaden said. That is the first government surplus since 2007, and it creates leeway for Ms. Merkel to stimulate the economy with public spending if the downturn is worse than expected.

The fiscal strength in Germany underscores the inequities within the euro currency union. Already, the government has been expanding a program that encourages companies to cut worker hours rather than eliminate jobs. The so-called short work program uses government money to compensate employees for some of the wages they lose by putting in fewer hours.

Within the region, Germany has served as a crucial counterweight to the struggling economies of Southern Europe, and helped to stabilize the euro zone as a whole.

Article source: http://www.nytimes.com/2013/01/16/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

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European Leaders Back Common Banking Rules

December 15, 2012 by Leave a Comment

BRUSSELS — European Union leaders pledged on Friday to take further steps to set up common banking rules for the bloc, but they delayed plans for a shared budget for the euro zone nations as pressure appeared to be easing on the single currency.

At the end of a two-day summit meeting, the leaders fully endorsed a deal, reached Thursday by European finance ministers, to place the region’s biggest banks under the supervision of the European Central Bank.

The leaders also agreed on the need to put in place by 2014 a central means for shutting down failing euro zone banks. That policy is aimed at stopping banks from accumulating so much debt that they put the finances of countries like Ireland and Spain at risk, in turn threatening the future of the euro.

But the leaders also appeared to take advantage of the relative calm in financial markets to avoid rushing toward any further central integration of banking in the region.

At a news conference Friday at the end of the meeting, Chancellor Angela Merkel of Germany brushed off suggestions that leaders were complacent. She acknowledged, however, the difficulties of pressing 27 different nations to adopt similar fiscal and economic systems in the middle of a period of low growth and high unemployment.

“On the one hand, we have accomplished a lot,” she said. “But we also have tough times ahead of us that can’t be solved with one big step.”

Analysts were mostly unimpressed by the results.

“The E.U. summit failed to deliver any big decisions,” Gizem Kara, an analyst with BNP Paribas, wrote in a research note Friday. “Certainly, some countries — Germany, in particular, with its election in September — may want to postpone major decisions as much as possible.”

Pursuing a more integrated banking framework could entail even more difficult negotiations than in the case of the banking supervisor because it implies that nations share some liability for failing lenders in other countries and that they give up some sovereign rights over how those decisions would be made.

As part of efforts to make it acceptable, the European leaders said the resolution system should receive significant financing by banks, in advance. A financial “backstop” to ensure failing banks do not endanger national finances should be “fiscally neutral over the medium term” and ensure that “public assistance is recouped by means of ex post levies on the financial industry,” the leaders said in their formal conclusions.

But other plans, like a bigger budget for the euro area, would have to wait amid continuing disagreement on what it should be used for.

France has continued to emphasize the need for a budget to counter economic shocks and better manage unemployment. But Germany wants the money mainly available for countries that carry out painful structural reforms.

Leaders agreed to establish a so-called solidarity fund for euro area countries, which would be limited to 10 billion to 20 billion euros ($13 billion to $26 billion). The fund would be linked to countries signing contracts in exchange for carrying out reforms.

“To me it seems rather intelligent to start with a specific fund dedicated to these contracts for employment, growth and competitiveness, more than waiting for an eventual budget for the euro zone that perhaps will never come,” the French president, François Hollande, said in a news conference Friday.

The current atmosphere of calm could still be broken by events in Italy, where the economy is contracting, debt levels are rising and Silvio Berlusconi, the scandal-tainted former prime minister, has threatened to try to reclaim his old office next year.

It remained unclear Friday whether Mr. Berlusconi would run and, if that were to happen, whether he would campaign on promises to reverse reforms put in place by Mario Monti, the current prime minister.

But leaders are aware that the re-emergence of Mr. Berlusconi — who attended a meeting of center-right parties in Brussels on Thursday — could destabilize markets.

Ms. Merkel praised Mr. Monti during a news conference on Friday, but she said it was not her role to endorse him as a potential candidate. “What Mario Monti and his government have done in recent months has greatly contributed to a growing confidence in Italy,” she said.

Ms. Merkel said she would “not interfere as the head of the German government in the question of who is a candidate in Italy and how the elections are structured there.”

Mr. Hollande also said he did not wish to interfere in Italian matters, though he did take a swipe at the former prime minister. “I don’t think Berlusconi is all that serious,” Mr. Hollande told journalists in Brussels. “With him, what’s true one day is not necessarily true the next.”

David Jolly contributed reporting from Paris.

Article source: http://www.nytimes.com/2012/12/15/business/global/european-leaders-back-banking-regulation-but-delay-further-measures.html?partner=rss&emc=rss

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DealBook Column: Why the Bailout in Spain Won’t Work

June 12, 2012 by Leave a Comment

Chancellor Angela Merkel of GermanyMarkus Schreiber/Associated PressChancellor Angela Merkel of Germany.

It was not enough. And it may never be enough.

The euro zone’s offer of $125 billion to bail out Spanish banks over the weekend was hailed by finance ministers and officials across Europe as a masterstroke. Germany’s finance minister, Wolfgang Schäuble, suggested no further bailouts would be needed, saying, “Spain is on the right track.” On Sunday, some analysts and investors even applauded, with David R. Kotok, co-founder and chief investment officer of Cumberland Advisors, proclaiming: “Euro zone leaders rose to the occasion.” How wrong they were.

By now, it should be apparent that the bailout has failed — or is at least on its way to failing.

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After a brief rally Monday morning, stock markets in Spain swooned. The 10-year Spanish bond — perhaps the greatest indicator of confidence, or in this case a lack of confidence — jumped higher, to about 6.5 percent, demonstrating that investors were now even more anxious about the country’s ability to pay back its debts than they were the day before the bailout was announced. Seven percent was the threshold that preceded the government bailouts for Greece, Ireland and Portugal in 2010 and 2011. The cost on Monday of buying credit-default swaps — or insurance — on Spanish debt spiked, too.

Indeed, it now appears that the bailout could make things in Spain worse, not better. And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.

This was bound to happen. That’s because bailing out the banks in each European country individually is a fool’s errand.

Experts often note — wrongly — that TARP, the Troubled Asset Relief Program that pumped $700 billion into the banking system in the United States, arrested the financial crisis in 2008. TARP, to some degree, has become the model for Europe.

But we forget history: TARP was only one component of the bailout. Perhaps more important — consider it the unsung hero of ending the crisis — was the government’s unilateral move to raise the amount of money the Federal Deposit Insurance Corporation could insure, increasing the account limit to $250,000 from $100,000 and fully backstopping the entire money-market industry.

Investors and bank customers who were considering taking their deposits and running in 2008 no longer had reason to do so once deposits and money-market funds had been guaranteed. Keeping your money at Citigroup or Bank of America was relatively indistinguishable from a safety standpoint.

That is not the case in Europe. Customers of Spanish banks still have reason to worry about the solvency of their banks — and their country — making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany. Indeed, the bailout makes it less likely Spain can pay back its debts because the new loan of up to $125 billion was just added to its huge debt pile. Worse, Spanish banks had been the biggest buyers of Spanish debt (a farce of a way to prop up the economy) and that most likely won’t continue.

As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to its shareholders, not to move its money out of Spanish banks. Of course, money leaving the banks can become a self-fulfilling vicious cycle that virtually no amount of bank bailouts can plug. (By the way, countries like Spain have their own version of F.D.I.C., but it is all but worthless if you believe the country could collapse under its own debt.)

Ultimately, the only real way to begin to ensure the safety of the banks in Spain — and all of Europe — is to create a euro zone deposit guarantee system so that there would be no reason for a depositor to withdraw money. European leaders are expected to address the idea, along with regional banking regulation and a way to recapitalize ailing euro zone institutions, at a summit meeting at the end of the month. Oddly enough, such a deposit guarantee would probably be pretty cheap. The psychological effect of such a guarantee would most likely ensure the solvency of more banks than the guarantee would ever have to pay out. That was the experience in the United States.

Of course, there’s a catch. A euro zone deposit guarantee would require agreement from all the countries that use the euro, which is something that the leaders there seem incapable of reaching because ultimately it would mean tighter integration and, yes, a loss of sovereignty.

And here’s another problem with a euro zone deposit guarantee: Unless you believe the euro is going to remain the standard — that countries like Greece or Spain won’t be forced out or secede from the currency — even the guarantee might not be enough, unless the guarantee holds for all currencies. For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he may well move his money.

In the meantime, this piecemeal approach is bound to fail. Kicking the can down the road, to use again an overused phrase, at some point will fail — and that’s what may have just happened.

Article source: http://dealbook.nytimes.com/2012/06/11/why-the-bailout-in-spain-wont-work/?partner=rss&emc=rss

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