October 28, 2021

Europe Split Over Austerity as a Path to Growth

The tension between those realities will be on full display in Washington this week, as top economic officials from around the world gather for the spring meetings of the monetary fund and its sister institution, the World Bank. Once again, sluggish growth in advanced economies, and in particular the unfurling economic and fiscal afflictions in the euro zone, will be the central topic of discussion.

Political and economic officials agree that most countries, particularly in Europe, desperately need more growth. But they remain sharply divided on how to get it. Officials strongly influenced by the Great Depression thinking of John Maynard Keynes, including some from Europe, want an easing of austerity measures, more expansionary monetary policies and even some stimulus. But powerful northern European officials, including those from Germany, have argued that balanced budgets and fiscal consolidation are prerequisites for restoring sustainable growth.

In a somewhat dissonant posture, the monetary fund has split the difference: reassessing its views on austerity, pushing strongly for aggressive measures to bolster growth but all without repudiating its existing programs.

“We believe that for most European countries, fiscal consolidation is a must, simply given the level of debt,” said Christine Lagarde, the monetary fund’s managing director, speaking in New York this month. But she qualified that statement by saying that not all cuts need to be “brutal or abrupt or massively front-loaded.” She added, “There is a balance to be had between how much is called for and how much is tolerable.”

Economic fortunes during the recovery from the Great Recession have diverged, with new estimates of growth by the monetary fund expected on Tuesday. But they will not change the basic picture, which Ms. Lagarde has taken to describing as a “three-speed” world. Developing and emerging economies are growing apace. Some advanced economies, including the United States, are gaining strength.

But a third category of countries remains mired in stagnation or recession. Japan has struggled with a stalled-out economy, but has recently engaged in an athletic campaign of fiscal and monetary stimulus. The true laggard is Europe, suffering from rising unemployment and another bout of economic contraction — seemingly without the political consensus or economic mechanisms to tackle those problems.

“The European Union’s precrisis growth performance was disappointing enough, but the performance has been even more dismal since the onset of the crisis,” the European research group Bruegel concluded in a recent report, saying weak growth is undermining efforts to reduce debt and fueling bank fragility, all while skills erode for the unemployed. “Low overall growth is making it much tougher for the hard-hit economies in southern Europe to recover competitiveness and regain control of their public finances.”

Bruegel concluded that a failure to turn things around might render Europe’s social contract “unsustainable.”

In light of that reality, the monetary fund and its European partners, the European Commission and the European Central Bank — the so-called troika — have come under continued criticism for the austerity measures imposed on countries including Spain, Portugal and Greece, where unemployment rates extend well into the double digits. The criticism has become louder since the fund said it had determined that austerity had a far worse impact on weak economies than it once thought.

That assessment came in the form of a highly technical analysis of what economists term “fiscal multipliers” — essentially, a measure of how changes in a government budget affect growth at a given time. At the urging of the monetary fund’s chief economist, Olivier Blanchard, its research division last year started to investigate why the fund had overestimated rates of growth for some countries and underestimated them for others.

The researchers found that the multiplier used to forecast growth rates had not magnified the impact of government spending policies enough: Both austerity and stimulus had proved stronger-than-expected medicine.

Article source: http://www.nytimes.com/2013/04/16/business/global/europe-split-over-austerity-as-a-path-to-growth.html?partner=rss&emc=rss

Afghan Court Convicts 21 in Kabul Bank Scandal

But the halting and often obstructed investigation he helped fuel that day culminated on Tuesday with the first convictions in the Kabul Bank fraud scandal, a spectacular implosion of corruption that has undermined the credibility of the Afghan government and its Western benefactors.

Mr. Farnood was one of 21 people found guilty on Tuesday. But it was specifically his conviction and that of his chief executive and former bodyguard, Khalilullah Frozi, that American and European officials had warned would be necessary if billions of dollars of international aid was to continue to flow to Afghanistan. The two masterminds were convicted of a crime akin to fraud, sentenced to five years in prison and fined hundreds of millions of dollars, considerably lesser results than prosecutors had sought.

The path to those verdicts had been laid out in dozens of interviews since Kabul Bank nearly collapsed in 2010, with the main players offering details of the fraud scheme and their decision-making, including Mr. Farnood, shareholders and Afghan, American and European officials.

In the summer of 2010, Mr. Farnood stood atop a huge pyramid of fraudulent loans and kickbacks. But things were beginning to crumble, threatened by a perilously overstretched balance sheet and a power struggle for control of the bank among Mr. Farnood, Mr. Frozi and two other major shareholders.

Mr. Farnood was losing.

The enmity had become so great that Mr. Farnood was telling friends that he would rather bring down the bank than let his rivals have it.

In July, he got his chance when two American law enforcement agents investigating the mysterious flight of billions of dollars in cash from Afghanistan walked through the doors of his office in Dubai. Kabul Bank appeared to play only a tangential role in the cash smuggling. But the investigators had heard about the power struggle at the bank. They had a hunch that Mr. Farnood might talk.

He did more. Mr. Farnood, who had once won an event at the World Series of Poker Europe, went all in.

Within days, he was telling the Americans how the bank was basically a Ponzi scheme. Depositors put in money, and its owners took it out through fraudulent loans, lining the pockets of a narrow clique tied to President Hamid Karzai and his first vice president, Muhammad Qasim Fahim.

He told them how Mahmood Karzai, the president’s brother, had bought a 7 percent stake in Kabul Bank with a loan from the bank. He told them how Haseen Fahim, the first vice president’s brother, had taken millions of dollars deposited by Afghans to finance his own businesses, at least one of which won business from the American-led coalition. He told them about how millions in deposits had been used to finance President Karzai’s re-election campaign the year before.

He even told the investigators about the luxury villas he had bought in Dubai in his own name. How did he and his partners cover up a nearly $900 million fraud for so many years? Very simply, he explained: among their more creative ploys was to create fake letterheads and rubber stamps needed to make legitimate-looking paper trails for fictitious companies that were used to siphon money from the bank.

“I knew that this could be potentially huge,” said one American official familiar with the investigation, “when we found out there had been almost no capital ever invested in the bank.” The capital infusions in the bank’s records were financed with its own loans.

By midsummer in 2010, the Americans had warned the Afghan central bank about fraud at Kabul Bank. Regulators seized it that August.

By then, 92 percent of Kabul Bank’s loan portfolio — roughly $861 million, or about 5 percent of Afghanistan’s annual economic output at the time — had gone to 19 people or companies, according to an audit by Kroll Associates, an investigative firm.

Azam Ahmed, Habib Zahori and Sangar Rahimi contributed reporting.

Article source: http://www.nytimes.com/2013/03/06/world/asia/afghanistan-convicts-21-in-kabul-bank-scandal.html?partner=rss&emc=rss

Bureaucracy’s Salaries Defended in Europe

BRUSSELS — Days ahead of a summit meeting where leaders of the European Union’s 27 member states are to wrestle again with a proposed seven-year budget, a spokesman for the bloc’s executive body was forced to defend the salaries of some officials.

At a time when many European governments have been compelled to impose stringent budget cuts, the issue of salaries and perquisites for European Union officials has resonated. In November, Prime Minister David Cameron of Britain called on officials in Brussels to share the pain that austerity measures have brought to millions of Europeans.

On Sunday, the German newspaper Die Welt am Sonntag stoked the controversy by comparing the salaries of some European officials to the compensation paid to Chancellor Angela Merkel.

Anthony Gravili, a spokesman for the European Commission, told a news conference on Monday that such figures were flawed.

“It’s a totally unfair comparison,” said Mr. Gravili, who offered a long rebuttal of the article without mentioning the newspaper by name. “No official earns more than Chancellor Merkel.”

Mr. Gravili criticized comparisons of Ms. Merkel’s monthly salary that exclude her pay as a member of the German Parliament and other allowances, with European Union salaries that include allowances and benefits. European Commission data show that the monthly base salary of the most senior bloc officials is 18,370 euros, or $24,830.

Ms. Merkel’s monthly base salary is 21,000 euros, Mr. Gravili said. Of that, 17,000 euros is her pay as chancellor, while 4,000 euros is her reduced salary as a member of the German Parliament, he added.

Once Ms. Merkel’s basic allowances as both chancellor and Parliament member are included, Mr. Gravili said, her monthly pay was about 25,000 euros.

European Union officials generally pay low taxes, but Mr. Gravili said he did not have the figures available to say whether this would raise the officials’ after-tax income above Ms. Merkel’s. Inge Grässle, a German member of the European Parliament and a member of the body’s budgetary control committee, said that the highest-paid European Union officials paid taxes equivalent to about 25 percent of their gross salary.

Germany contributes the most to the bloc’s budget, one that last year reached about 135 billion euros.

European Union officials receive steady criticism about waste and bloat, but only about 6 percent of all spending goes to the bloc’s administration, which employs 55,000 people, including 6,000 translators, most of them in Brussels.

European political leaders will gather in Brussels on Thursday to consider a budget proposal of roughly 1 trillion euros for 2014-2020. One proposal would trim 1 percent from the European Commission’s requested spending for administrative costs. Britain has argued for deeper cuts, saying that those costs, while small in comparison to the overall budget, are symbolically important.

Unlike European Union officials, the 27 members of the European Commission are political appointees. Their salaries are much closer to those of national leaders like Ms. Merkel, and in some cases may exceed them.

José Manuel Barroso, president of the commission, is paid a monthly salary of 25,351 euros, a residence allowance equal to 15 percent of that salary, and allowances for expenses like running a household and schooling for children. The seven vice presidents of the commission earn basic monthly salaries of 22,963 euros.

Article source: http://www.nytimes.com/2013/02/05/business/global/eu-officials-salaries-draw-fire.html?partner=rss&emc=rss

E.U. Officials Impatient Over Lack of Progress on Trade Pact With U.S.

FRANKFURT — American and European officials are taking longer than expected to agree to begin free-trade talks, leading to some barely contained impatience among European political leaders who are hoping that President Barack Obama will signal support for a pact in his State of the Union address next month.

A joint statement by top U.S. and European trade officials was expected by the end of December or the beginning of this month, clearing the way for formal talks aimed at removing tariffs between the United States and the European Union, which are each other’s largest trading partners by far.

The continued absence of the statement, with no clear indication when it might come, has led to some frustration among European leaders, as well as among U.S. and European business groups who say that an accord could spur growth and job creation on both sides of the Atlantic.

“One is a bit impatient,” said Peter Beyer, a member of the German Parliament who has been involved in efforts to push trade talks forward. Mr. Beyer belongs to the center-right party led by Chancellor Angela Merkel, who like most euro zone leaders has expressed strong support for a trade accord.

Mr. Beyer and others involved in the issue said that they were not aware of any problem with the substance of a deal, and that they assumed the delay was a result of changes in the White House as Mr. Obama prepared to begin his second term.

“It has a lot to do with Obama building a new administration,” Mr. Beyer said.

There is considerable commerce at stake. Imports and exports between the United States and the European Union totaled $594 billion in the first 11 months of 2012. There is broad agreement in government and industry that both regions would benefit by eliminating tariffs and harmonizing regulations that apply to a broad range of products that include drugs, auto parts and even toys.

Among the groups filing statements last year in support of an agreement was the Spanish Toy Association, which complained that products approved for safety in Europe must be recertified in the United States and vice versa, adding unnecessary costs.

U.S. business groups have also been pushing energetically for talks to begin, arguing that the economic impact could be substantial because the overall volume of trade is so large.

“This is an important opportunity for both sides to get their economies going again, and we hope there will be positive recommendation by the end of the month,” said Peter H. Chase, vice president for Europe at the U.S. Chamber of Commerce in Brussels.

While some food producers and other industry groups have expressed concerns about what the provisions of a deal might be, there does not seem to be any broad-based opposition. But because the United States and European Union are both so large, reaching an agreement will be extremely complex.

Andrea Mead, a spokeswoman for the U.S. trade representative in Washington, was unable to provide much detail on progress on a free-trade agreement.

“We know there is a lot of interest in whether we will decide with our E.U. colleagues to launch F.T.A. negotiations,” she said Monday. “Our work in that regard is ongoing. We want to take the time to get the substance right so that any agreement we might pursue would maximize job-supporting economic opportunities.”

The most optimistic estimates are that an accord could be reached by the end of the year, but it could take longer.

A so-called High Level Working Group, made up of top trade officials from the United States and the European Union, was originally supposed to issue a statement in November that would establish a broad framework for detailed negotiations.

That deadline was then delayed until December or early January. There is still no firm indication when it might come.

Proponents of a deal would be delighted if Mr. Obama were to make even a glancing reference to an agreement when he makes his State of the Union address on Feb. 12.

The president’s endorsement would send a signal of encouragement to the hundreds of midlevel officials who would have to do the mind-numbing work involved in formulating an accord.

“That would be very positive,” said Mr. Beyer, the member of the German Parliament. “I don’t know how realistic that is.”

The United States and Europe have been discussing a trade pact informally since the 1990s. But despite widespread agreement that a comprehensive pact would be good for both economies, progress has been achingly slow.

Governments may have been put off by the complexity of the negotiations that would be needed, and they were also preoccupied with opening up new markets in Asia and other fast-growing regions.

In addition, because the United States and European Union are each accustomed to being the dominant power in trade talks, it will take some adjusting to negotiate with a trade partner on roughly equal terms.

Still, with Europe struggling to emerge from a recession, leaders including the British prime minister, David Cameron, have argued that a free-trade deal would be both a cheap and a relatively painless way to stimulate growth.

Mr. Cameron said this month that reaching an agreement would be his priority as Britain takes over the rotating leadership of the G-8 group of wealthy nations.

Another impetus will come from Ireland, which this month assumed the rotating presidency of the European Union. Ireland is the only member of the euro zone where English is an official language, making it a favored gateway for U.S. companies and giving Ireland an especially keen stake in smoother trade relations.

U.S. companies that maintain headquarters or very large operations in Ireland include Dell, Google, Microsoft and Pfizer.

Richard Bruton, the Irish minister for jobs, enterprise and innovation, said in a statement that a trade deal could lift the E.U. economy by €120 billion, or $160 billion, per year and the U.S. economy by $100 billion.

“Gains of that scale are invaluable at a time like this,” he said.

Brian Knowlton contributed reporting from Washington.

Article source: http://www.nytimes.com/2013/01/15/business/global/eu-officials-impatient-over-lack-of-progress-on-trade-pact-with-us.html?partner=rss&emc=rss

Euro Treaty to Require Only 9 Nations for Ratification

The treaty is intended to help improve confidence in the euro by tightening the coordination of the 17 euro zone economies, requiring nations to balance their budgets and cut debt.

The outline of the plan was agreed to by most European leaders a week ago, with the exception of Britain. European officials hope to reach agreement on the eight-page draft of the treaty within weeks, with Britain being offered observer status in discussions.

The treaty will enter into force “on the first day of the month following the deposit of the ninth instrument of ratification by a contracting party whose currency is the euro,” the draft states.

That means that if one country held a referendum on the treaty and did not approve it, the decision would not block others from putting it in place once nine other nations ratified it. The terms of the treaty will, however, apply to each country only when the country ratifies it.

If a euro nation fails to ratify the treaty, it would be in an “uncomfortable position” politically, said one European official who spoke on condition of anonymity.

The draft makes it clear that countries outside the euro will not be forced to abide by the treaty before joining the currency alliance, but they can opt to do so.

That makes the treaty easy for most of the nations not using the euro to accept, said one diplomat from a country not using the currency who spoke anonymously because he was not authorized to speak publicly.

Because the agreement is an intergovernmental one, rather than an amendment of a European Union treaty, any moves to make sanctions easier to impose on nations that break deficit and debt limits are complex.

Under the proposed treaty, nations would agree to abide by tougher rules than those currently laid down in the European Union treaty. If broken, that agreement could not be enforced by the European Court of Justice, though national courts could be able to do so, officials said Friday.

The treaty would require nations to write debt brakes into their national law. Summit meetings of euro zone leaders would take place at least twice a year.

Jean-Claude Juncker of Luxembourg, who leads the group of euro zone finance ministers, said he was confident that Europeans would meet a Dec. 19 deadline for arranging 200 billion euros ($260 billion) in loans to the International Monetary Fund to help bolster emergency financing for vulnerable nations that use the euro. Euro zone countries are expected to provide 150 billion euros ($198 billion), while it was hoped that nations not using the euro would contribute around 50 billion euros ($66 billion).

“Countries have to say within 10 days what’s happening, and we’re collecting this at the moment,” Mr. Juncker said Friday in Luxembourg, according to Bloomberg News. Asked if the European Union would meet this deadline, he said, “I think so.”

Article source: http://feeds.nytimes.com/click.phdo?i=fe7de911e15f8981c8f79ccdf0e9eaff

Euro Deal, if Vague, Draws Positive First Reaction

The markets rallied strongly on the news of the accord, which was achieved after nearly 10 hours of negotiations by European leaders, finance ministers and bankers at an emergency meeting in Brussels. Stocks rose 6 percent in France, 5.1 percent in Germany and 3.3 percent in Hong Kong. On Wall Street, shares surged 2 percent at the opening bell. The value of the euro, which cost $1.32 a few weeks ago when anxiety over its future stability was worsening, surged to $1.40 in European foreign exchange trading on Thursday.

Hopes were also boosted by the possibility that China, which has amassed enormous amounts of capital in its historic economic climb over the years, would play an active role in helping with Europe’s financial rescue. President Nicholas Sarkozy of France spoke to his Chinese counterpart, Hu Jintao, on Thursday, although there was no word on precisely what was discussed, and the top executive of the euro zone’s emergency bailout fund was scheduled to visit China on Friday.

Still, the optimism and relief that washed over the markets in the aftermath of the European announcement of the package obscured a host of technical questions about its implementation that have yet to be addressed. How those questions are dealt with, European officials and bankers said, could determine whether the Europeans have truly begun to restore confidence in the battered euro currency zone.

The accord was reached just before 4 a.m. after difficult bargaining. The severe reduction would bring Greek debt from its current level of 180 percent of gross domestic product down to 120 percent by 2020, a still enormous figure but more sustainable for an economy driven into recession by austerity measures.

The leaders agreed on Wednesday on a plan to force the Continent’s banks to raise new capital to insulate them from potential sovereign debt defaults, and to more than double the lending capacity of their emergency bailout fund to $1.4 trillion in order to better protect Italy and Spain.

“The results will be a source of huge relief to the world at large, which was waiting for a decision,” Mr. Sarkozy said.

After the buildup to this summit meeting, failure here would have been regarded as a disaster, and there was a clear sense among the leadership that they had averted potential catastrophe. “I believe we were able to live up to expectations, that we did the right thing for the euro zone,” Chancellor Angela Merkel of Germany said. “This brings us one step farther along the road to a good and sensible solution.”

While the plan to require banks to raise new capital was generally approved without difficulty — banks will be forced to raise about $150 billion to protect themselves against losses on loans to shaky countries like Greece and Portugal — the negotiations over the Greek debt were difficult.

In the face of considerable pressure from Europe’s leaders, the banks had been resisting requests that they voluntarily accept a loss of about 50 percent on their Greek loans, far more than the 21 percent agreed to previously. But after months of denying that Greece would have to restructure its large debt, which was trading at 40 percent of face value, European leaders forced the much larger reduction, known as a “haircut,” on the banks, while the International Monetary Fund promised more aid to Greece.

Germany had taken a tougher stance than France with the banks. Mrs. Merkel was willing to think about imposing an involuntary write-down on the private sector, but Mr. Sarkozy remained worried about the consequences on the markets and the banking system.

In a statement, Charles Dallara, managing director of the Institute of International Finance, which represents the major banks, said he welcomed the deal. He called it “a comprehensive package of measures to stabilize Europe, to strengthen the European banking system and to support Greece’s reform effort.”

In a meeting described as crucial for the fate of the euro zone, the leaders had been trying to restore market confidence in the euro and in the creditworthiness of the 17 countries that use it.

Reporting was contributed by Jack Ewing from Frankfurt, David Jolly from Paris and Rachel Donadio from Athens.

Article source: http://www.nytimes.com/2011/10/28/world/europe/europe-in-accord-on-basics-of-plan-to-save-the-euro.html?partner=rss&emc=rss

I.M.F. Slashes Growth Outlook for U.S. and Europe

The International Monetary Fund sharply downgraded its outlook for the United States economy through 2012 because of weak growth and concern that Europe won’t be able to solve its debt crisis, the organization said in its economic outlook Tuesday.

The fund said it expected the American economy to grow just 1.5 percent this year and 1.8 percent in 2012. That’s down from its June forecast of 2.5 percent in 2011 and 2.7 percent next year.

The International Monetary Fund also lowered its outlook for the 17 European Union countries that use the euro. It predicted 1.6 percent growth this year and 1.1 percent next year, down from its June projections of 2 percent and 1.7 percent, respectively.

The gloomier forecast for Europe was based on worries that Greece would default on its debt and destabilize the region.

“Fear of the unknown is high,” said Olivier Blanchard, the organization’s chief economist. “Strong policies are urgently needed to improve the outlook and reduce the risks.”

Over all, the International Monetary Fund predicted global growth of 4 percent for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe.

American and European policy makers need to act more decisively to cut budget deficits, the report said, and European officials need to ensure that the region’s banks have enough capital to withstand the debt crisis.

The United States economy grew at an annual rate of just 0.7 percent in the first six months of the year. And the unemployment rate has stayed above 9 percent for all but two months since the recession officially ended two years ago.

Financial turmoil and slow growth are feeding on each other in both the United States and Europe, fund officials say. Europe’s debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, like Treasury bonds. In Europe, slower growth will make it harder for stressed nations to get their debt under control.

President Obama’s proposal to cut taxes and spend more on infrastructure should provide much-needed short-term stimulus, the report said. But that initiative needs to be paired with a longer-term plan to reduce the deficit, the report said. The timing of the budget cuts is key, Mr. Blanchard said.

Budget cuts “cannot be too fast or it will kill growth,” Mr. Blanchard said in a statement. “It cannot be too slow or it will kill credibility.”

The 187- nation International Monetary Fund conducts economic analysis and lends money to countries in financial distress. It will hold its annual meetings with the World Bank later this week in Washington.

Article source: http://www.nytimes.com/2011/09/21/business/global/imf-slashes-growth-outlook-for-us-and-europe.html?partner=rss&emc=rss

World Banks Unite to Shore Up European System

The central banks, in a coordinated action intended to restore market confidence, agreed to pump United States dollars into the European banking system in the first such show of force in more than a year. Some banks have found it hard to borrow dollars as American lenders grew nervous about their financial condition.

Thursday’s action, coming almost exactly three years after the collapse of the investment bank Lehman Brothers, lifted global stock markets, sharply increasing the value of shares in banks heavily exposed to debt from Greece and the other struggling members of the euro zone. The euro, which had been falling in recent days, rebounded.

The central bank action came as European finance ministers and other policy makers were gathering in Wroclaw, Poland, for meetings on Friday and Saturday. The United States Treasury secretary, Timothy F. Geithner, who was scheduled to attend, was expected to urge European officials to act more aggressively to contain the sovereign debt crisis, which has already begun to undercut growth in Europe.

While the move will relieve some pressure on troubled banks, it does not address the underlying problems that made it difficult for the banks to borrow dollars on their own.

The central banks seemed determined to demonstrate that they would not hesitate to deploy their combined weight to keep the crisis from leading to a collapse of the euro zone.

“They are getting together and acting together,” Christine Lagarde, the president of the International Monetary Fund, said in Washington on Thursday. “To me, that is the most important message.”

But Ms. Lagarde also warned that policy makers had not done enough and suggested more action was needed. “We have entered into a dangerous phase of the crisis,” she said. There is still a path to recovery, she said, but it is “a narrow one.”

Jean-Claude Trichet, the president of the European Central Bank, called the move “a clear illustration of our very close cooperation at the global level.” Noting that the collapse of Lehman three years ago could have provoked a depression, Mr. Trichet said, “We still have a long way to go to move beyond this crisis.”

The European Central Bank said it would allow banks to borrow dollars for up to three months, instead of just for one week as before, giving them breathing room for the rest of the year. The E.C.B. said it was acting in cooperation with the Federal Reserve of the United States, the Bank of England, the Bank of Japan and the Swiss National Bank.

In recent days some European banks have faced difficulties in borrowing dollars, whether from other banks or from money market funds in the United States. There was fear that if they could not borrow dollars, they would be forced to cut off loans to American companies or sell dollar-denominated assets, perhaps forcing prices down in already unsteady markets.

The move was possible under deals between the central banks that were already in existence, and the Fed saw no need to make an announcement on Thursday.

While there now is more certainty that banks will have access to funds, deeper issues remain unresolved, including whether they have enough capital to withstand a possible default by Greece on its government debt.

An official forecast warned Thursday that growth in Europe would come “to a virtual standstill” toward the end of the year. It predicted, though, that Europe would just barely avoid a double-dip recession.

The euro system, established in 1999, created a common currency for 11 countries, a number that has grown to more than 20. But it did not unify national finances. Over time, inflation and a failure to reform labor markets left most countries in the group uncompetitive with Germany but unable to regain competitiveness through devaluation.

That is a problem that some say Europe has yet to deal with.

“The lesson of 2008 and earlier crises is that the later you act, the more you have to do, and the more painful it becomes,” said Robert Zoellick, the president of the World Bank, in a speech Wednesday. “It is not responsible for the euro zone to pledge fealty to a monetary union without facing up to either a fiscal union that would make monetary union workable or accepting the consequences for uncompetitive, debt-burdened members.”

Analysts said they expected Mr. Geithner to press European ministers in Wroclaw to increase the resources available to their bailout fund for the euro zone countries. But even the expansion of the fund to 440 billion euros ($611 billion), agreed to in July, has yet to be ratified. There is some worry that countries guaranteeing the bailout fund might themselves face doubts about their own credit.

“Part of the problem for policy makers is that they are still waiting for last big initiative to get off the ground,” said Peter Westaway, chief European economist in London for Nomura. “We’re all kind of on hold until then.”

Angela Merkel, the German chancellor, said Thursday during a visit to the Frankfurt Motor Show that her nation has “a duty and responsibility to make its contribution to securing the euro’s future.” But she added, stabilizing the euro area “won’t happen overnight or with any one-time thunderbolt.”

United States money market funds and other institutions have cut European banks’ access to about $700 million in short-term loans over the last year, according to research by JPMorgan Chase and CreditSights.

European banks have only rarely used an existing one-week dollar credit line offered by the E.C.B. On Thursday, two banks borrowed $575 million from the facility. The E.C.B. does not disclose the identity of the borrowers. The two banks were the first to tap the dollar credit line since August.

By making dollars available for a longer three-month period, the central banks are providing reassurance that ailing banks will not be dependent on the more fragile one-week funding. The E.C.B. will offer the dollars in three operations, starting on Oct. 14 and again in November and December. The other central banks will follow similar schedules. The Fed will not offer loans directly, but will provide dollars to the E.C.B. by way of a swap agreement. The borrowing banks must supply collateral in the form of bonds or other securities.

David Leonhardt contributed reporting.

Article source: http://www.nytimes.com/2011/09/16/business/global/borrowing-costs-stubbornly-high-at-spanish-auction.html?partner=rss&emc=rss

Europeans Talk of Sharp Change in Fiscal Affairs

The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.

Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.

Recently, for instance, when an official from a European central bank met with a financial official in Washington, his host brandished the Articles of Confederation, the 1781 precursor to the United States Constitution, to use as an example of why stronger unions become necessary.

The story of America’s failed early effort to operate as a loose confederation of 13 states is looking increasingly relevant for many European officials. The lack of strong central coordination of the euro zone’s debt and spending policies is a crucial reason Europe has been unable to resolve its financial crisis despite more than 18 months of effort.

The lack of progress has contributed to steep declines in European stocks recently, sending tremors through markets in the United States as well. On Monday alone, several major European markets fell more than 4 percent while markets were also down on Tuesday morning in Australia and Japan.

And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized approach, and some officials are going public on the issue.

“If today’s policy makers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration,” António Borges, director of the International Monetary Fund’s European unit, said in a recent speech. “To put the crisis behind us, we need more Europe, not less. And we need it now.”

Nothing happens quickly in Europe, however. For the most part, such efforts are still being made behind the scenes. But several longtime financial and central bank officials and staff members said there had been a substantial step-up in planning for a closer European fiscal relationship to match the unified monetary union under which the euro zone has operated for more than a decade.

For now, officials are mainly talking in generalities.

“The crisis has clearly revealed the need for strong economic governance in a zone with a single currency,” Jean-Claude Trichet, the departing president of the European Central Bank, said in a speech Monday, repeating earlier calls for greater fiscal discipline.

Officials, who spoke anonymously because their discussions were politically charged, said a major overhaul of the way Europe conducts fiscal policy was likely to take a long time and require changes in the treaties governing the euro. But they pointed to the smaller changes that were already taking place as evidence that euro area financial ministries see that they have little choice but to move together if they want to avoid a catastrophic breakdown.

With the new bailout for Greece that was agreed upon by European leaders in July still awaiting approval from each country in the euro zone, the fractionalized way that Europe runs fiscal decision-making risks setting off yet another crisis at each step along the way. Every plan requires agreement among finance ministers and the Parliament of any member country can veto the deal.

Many economists say that the Continent’s debt crisis, which began in early 2010 with the threat that Greece might have to default on its loans, could have been resolved far more quickly if there were some sort of central financial body, akin to the Treasury Department in the United States.

“If they had the equivalent of the U.S. Treasury, then this treasury could have formulated proposals with the collective objective in mind, rather than 17 national objectives competing with each other,” said Garry J. Schinasi, a former official with the International Monetary Fund who now privately advises European central banks and governments. “Instead, they fumbled around and took two baby steps forward and three backward.”

Louise Story reported from New York and Matthew Saltmarsh from London.

Article source: http://www.nytimes.com/2011/09/06/business/global/reluctantly-europe-inches-closer-to-a-fiscal-union.html?partner=rss&emc=rss

Reluctantly, Europe Inches Closer to a Fiscal Union

The message was clear: join together in a stronger union, or risk collapse.

The story of America’s failed early effort to operate as a loose confederation of 13 states is increasingly relevant for many European officials who are grappling with the drastic problems of their own flawed 17-nation currency union. The lack of strong central coordination of the euro zone’s debt and spending policies is a key reason Europe has been unable to resolve its financial crisis despite more than 18 months of trying.

And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized fiscal union that would eventually turn the euro zone into something resembling a United States of Europe.

“If today’s policy makers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration,” António Borges, director of the International Monetary Fund’s European unit, said during a recent speech. “To put the crisis behind us, we need more Europe, not less. And we need it now.”

Nothing happens quickly in Europe, however. For the most part, such efforts are still being conducted behind-the-scenes and many of the ideas have yet to hit official agendas or the public arena. But several longtime financial and central bank officials and staff members said there had been a substantial step-up in planning for a closer European fiscal relationship to match the unified monetary union under which the euro zone has operated for more than a decade.

For now, officials are mainly talking in public in generalities.

“The crisis has clearly revealed the need for strong economic governance in a zone with a single currency,” Jean-Claude Trichet, the departing president of the European Central Bank, said during a speech Monday, repeating earlier calls for greater fiscal discipline. “I think that European nations will create a confederation and we could then have a confederal finance minister, whose mission would be the surveillance of the entire zone, and who would be able to impose decisions,” on governments in breach of euro zone rules.

Officials, who spoke anonymously because their discussions are politically sensitive, said a major overhaul of the way Europe conducts fiscal policy — coordinating government spending, taxes and deficits — was likely to take a long time and require further changes in the treaties governing the euro. But they pointed to the smaller changes that were already taking place as evidence that euro area financial ministries see that they have little choice but to move together if they want to avoid a catastrophic breakdown of the euro zone.

With the new bailout for Greece that was agreed upon by European leaders in July still awaiting approval from each country in the euro zone, the fractionalized way that Europe runs fiscal decision-making risks setting off yet another crisis at each step along the way. Every plan requires agreement among finance ministers and the Parliament of any member country can veto the deal.

Many economists say that the Continent’s debt crisis, which began in early 2010 with the threat that Greece might have to default on its loans, could have been resolved far more quickly if there were some sort of central financial body, akin to the Treasury Department in the United States.

“If they had the equivalent of the U.S. Treasury then this treasury could have formulated proposals with the collective objective in mind rather than 17 national objectives competing with each other,” said Garry J. Schinasi, a former official with the International Monetary Fund who now privately advises European central banks and governments. “Instead, they fumbled around and took two baby steps forward and three backward.”

The idea of a European Treasury that would enforce fiscal discipline on wayward countries, while also having the power to spread E.U. wealth from healthier countries to ones struggling to pay their debts, is fiercely unpopular among voters in many countries. Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.

Article source: http://feeds.nytimes.com/click.phdo?i=69a50c297e8affcec1a415bc8ab501f2