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Bailout Terms Eased for Ireland and Portugal

April 12, 2013 by Leave a Comment

But ministers struggled to make progress on a bundle of initiatives to create a so-called banking union intended to break the vicious circle between indebted sovereign governments and shaky banks that helped unleash a string of crises, repeatedly threatening to sink the euro over the past three years.

The most important step taken by the ministers Friday was an agreement in principle to extend the maturities of emergency loans made to Ireland and Portugal by seven years. Prolonging the payment schedules could ease pressure on the countries’ public finances and allow them to obtain better terms from private lenders.

Because some of the bailout loans were granted by a fund backed by all 27 European Union countries, the 10 finance ministers from non-euro member states had to give their approval, too, after they joined the meeting Friday afternoon. The extensions still must be approved by the parliaments of some E.U. countries, including Germany.

“This is another very important step forward towards a sustained return to full market financing for both countries” Olli Rehn, the E.U. commissioner for economic and monetary affairs, said at a news conference after the meeting of finance ministers.

But Mr. Rehn also underlined that officials in Dublin and Lisbon had to stick to promises to overhaul their economies, including the kind of painful belt-tightening that has been criticized for restraining growth, leading to wider deficits and making it harder for governments to pay down debt.

“Ultimately it is the combination of growth-enhancing structural reforms and consistent fiscal consolidation that will firmly re-establish investor confidence and ensure that the Irish and Portuguese people can put this very hard crisis behind them and move on,” Mr. Rehn said.

Jeroen Dijsselbloem, the president of the so-called Eurogroup of finance ministers, said at the same news conference that the authorities in Portugal, where the Constitutional Court recently overturned some austerity measures, would be able to pass “compensatory measures” to control spending.

The ministers are struggling to fend off a return to full-blown crisis mode in the euro zone as the ramifications of the Cypriot bailout become clearer and as other concerns, including the parlous state of the economy of Slovenia, another euro member, rise up the agenda.

The Cypriot bailout raised questions about whether efforts to save the euro are on course. Investors were rattled by terms that included raiding the savings of uninsured depositors, and by a forecast this past week by the troika of international bodies overseeing bailouts that the downturn in the Cypriot economy in the next two years would be far more severe than expected just weeks ago. Unemployment is already near 15 percent.

The worry now is that Cyprus may eventually need another bailout to keep it as a member of the euro area. On Friday the ministers gave their political approval to the terms of the bailout, which involves euro zone member states contributing €9 billion in loans and the International Monetary Fund providing €1 billion. The deal still needs approval by some national parliaments.

Officials said the first payments of aid to Cyprus from the bloc’s bailout fund, the European Stability Mechanism, could take place in mid-May.

Mr. Rehn said that there would be further aid for Cyprus but that it would involve directing more E.U. structural funds to the country, rather than changing the total amount of the bailout.

Cyprus must raise billions of euros to stay within the terms of the bailout, and one option is for its central bank to sell gold reserves. Mario Draghi, the president of the European Central Bank, said at the news conference that that decision would be left to the central bank of Cyprus. But he added that “profits made out of the sales of gold should cover first and foremost any potential loss that the central bank might have” from the emergency liquidity assistance that has been provided by the E.C.B.

Article source: http://www.nytimes.com/2013/04/13/business/global/euro-zone-finance-ministers-gather-in-ireland.html?partner=rss&emc=rss

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Italy and France Are Risks to Euro Zone, Report Says

April 10, 2013 by Leave a Comment

In Spain and Slovenia, structural economic imbalances are “excessive,” according to a report covering 13 European Union countries prepared by the commission’s directorate for economic and monetary affairs.

“Decisive policy action by member states and at E.U. level is helping to rebalance the European economy,” Olli Rehn, the commissioner for economic and monetary affairs, said in a statement before a press conference Wednesday.

But “it will take some time yet to complete the unwinding of the imbalances that were able to grow unchecked in the decade up to the crisis, and which continue to take a toll on our economies,” Mr. Rehn said.

In Spain, very high levels of debt, both domestically and externally, continue to pose serious risks for growth and financial stability, the report said.

In Slovenia there are substantial risks for financial sector stability stemming from high corporate indebtedness that is linked to and has an effect on public finances, according to the report.

The report on so-called macroeconomic imbalances said Italy and France, among others, others were suffering a decreased ability to withstand economic shocks.

In Italy, real gross domestic product has declined by 7 percent since the onset of financial and debt crises in mid-2008.

Italy’s unit labor costs are increasing compared to its peers, which translates into a loss of productivity, while its specialized companies are increasingly unable to compete with those in countries like China, and the banking sector remains burdened by non-performing loans, the report said.

“The potential economic and financial spillovers to the rest of the euro area remain sizeable, should financial market turmoil related to the Italian sovereign debt intensify again,” the report said.

France successfully avoided a recession in 2010-2011, but its trade balance had been decreasing since 1997 and its external debt rose sharply in 2011.

“Should these trends continue, they would increasingly push down France’s medium-term growth prospects,” the report said.

In France, as in Italy, unit labor costs have increased, putting pressure on the profitability of companies and hurting innovation, according to the report.

“The reduced number of exporting firms, their relatively small size, as well as factors relating to the business environment are also impediments for export performance,” the report said.

The commission heaped blame for France’s weak prospects on the structure of the labor market, where costs continue to rise and it is too difficult to reallocate workers to more productive areas of the economy.

“The profit margin of French companies is the lowest in the euro area,” the report noted.

The cost of servicing France’s “high and increasing public debt” is depriving the economy of public spending and will require higher taxes, according to the report.

Overall, the French debt “represents a vulnerability not only for the country itself but for the euro area as a whole,” the report warned.

Article source: http://www.nytimes.com/2013/04/11/business/global/italy-and-france-are-risks-to-euro-zone-report-says.html?partner=rss&emc=rss

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Economix Blog: Comparing the World’s Glass Ceilings

April 2, 2013 by Leave a Comment

One of the more surprising things I learned in my research for an article in The New York Times Magazine is that despite all the complaints about the glass ceiling, the United States is actually doing a relatively good job of getting women into high-achieving jobs.

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Other developed countries have much more family-friendly labor policies than the United States does. The United States is one of only a handful of countries in the world (rich or poor) that do not offer paid maternity leave, for example. And while prominent American companies like Yahoo and Best Buy are banning work-from-home arrangements, European Union countries have legislated that parents can request part-time, flexible or telecommuting arrangements without penalty. In some countries, employers are not allowed to say no to these requests, and in places where they can, there’s often a pretty involved process required to justify the refusal. Some places, like Germany and Spain, also require companies to keep a job open for an employee on parental leave for as long as three years.

A new paper by Francine Blau and Lawrence Kahn of Cornell argues that those policy differences may explain why the United States has fallen behind in women’s labor-force participation rates. But the paper also suggests that the same policy gap could explain why, paradoxically, women in the United States seem to have more varied and ambitious career paths open to them if and when they do choose to work.

After all, not all full-time positions can be easily divided into two or more part-time ones, or can be done remotely. It can be costly or even impossible for employers to reconfigure their existing jobs. Nurses and receptionists can work shifts without difficulty; that’s probably less true for a lawyer on a big merger, where there’s a lot of case-specific knowledge that’s hard to hand off. If women are disproportionately the ones taking advantage of these work-life-balance options — which they are — that makes women more expensive to hire.

The chart below includes data from the study (to be published in The American Economic Review), and shows the share of women and the share of men who were managers or were in traditionally “male” professions (defined as all professionals excluding nurses and pre-university teachers) in the United States versus the average of 10 other developed countries. The numbers are for 2009.

Source: Francine Blau and Lawrence Kahn, using 2009 International Social Survey Programme microdata. Source: Francine Blau and Lawrence Kahn, using 2009 International Social Survey Programme microdata. “Male” professionals are professionals excluding nurses and pre-university teachers. Non-U.S. countries are Australia, Austria, Denmark, France, New Zealand, Norway, Portugal, Spain, Sweden and Switzerland.

The lighter-colored bars refer to the incidence of being a manager or traditionally male professional in the United States; the darker-colored bars refer to the same rates for 10 other developed countries. As you can see, American women are about as likely as American men to become managers or land in traditionally male jobs.

To clarify, this does not mean that the United States has as many women as men who are senior managers or professionals, since there are fewer women than men in the overall labor force. It just means that if you’re a working woman, your chances of being a manager or a professional are about as good as they are for a working man.

Indeed, according to separate data from the Organization for Economic Cooperation and Development, the United States has the smallest gap between the share of employed women who are in senior management positions and the share of employed men in such positions.

Source: Organization for Economic Cooperation and Development. Source: Organization for Economic Cooperation and Development. “Senior managers” refers to legislators, senior officials and managers.

In the United States, the ratio of the share of women who are in senior management positions to the share of men who are in senior management positions is about 0.85 (13.9/16.3), whereas for all O.E.C.D. countries it is about 0.59 (6.1/10.3). The country with the next highest ratio, behind the United States, is New Zealand, with a ratio of 0.76 (11.7/15.4).

Article source: http://economix.blogs.nytimes.com/2013/04/02/comparing-the-worlds-glass-ceilings/?partner=rss&emc=rss

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Euro Crisis Still Poses Threat, Germany’s Central Bank Asserts

November 15, 2012 by Leave a Comment

“The risks to the German financial system are no lower in 2012 than they were in 2011,” the Bundesbank said in its annual report on financial stability in the largest European Union country.

The report came a day before highly anticipated official data on growth in the 17 European Union countries that use the euro, which could confirm that the region is in recession. The report also provided another example of how the Bundesbank and Europe’s central bank diverged in their views of the state of the crisis and how best to fight it.

Even as countries like Spain suffer a severe credit squeeze, money has poured into Germany because it is perceived as a haven from European turmoil. That has pushed down borrowing costs for German businesses and consumers, producing some worrying consequences, including a sharp rise in real estate prices in urban areas, the Bundesbank warned.

Andreas Dombret, a member of the Bundesbank’s executive board, said it was too early to speculate about a real estate bubble. But at a news conference, he added: “The experiences of other countries show that precisely such an environment of low interest rates and high liquidity can encourage exaggerations on the real estate markets.”

Real estate bubbles were a primary cause of the financial crises in Spain and Ireland.

The downbeat Bundesbank report came a week after Mario Draghi, the European central bank’s president, argued that there were signs, albeit tentative ones, that tensions in the zone had eased.

Countries have begun to bring their debts under control while their labor costs have fallen, making them more able to compete on world markets, Mr. Draghi said.

These and other improvements will lead to what he described at a news conference last week as a “slow, gradual but also solid” recovery.

The Bundesbank acknowledged those improvements but warned that there could be a hangover from the measures the central bank has taken to combat the crisis, which include a record-low benchmark interest rate of 0.75 percent.

“The side effects of short-term stabilization measures could leave a difficult legacy for financial stability in the medium to long term,” the bank said.

On Thursday, the European statistics agency is scheduled to release official figures on third-quarter gross domestic product for the zone. The data is likely to show that the region suffered a fourth consecutive quarter of little or no growth.

Figures released Wednesday reinforced expectations that output might have declined again. Industrial production in the 17 countries using the euro fell 2.5 percent in September from August, according to Eurostat, the European statistics office. That was worse than expected and the weakest monthly performance since January 2009.

German factories, which until recently had managed to avoid the worst of the crisis, were largely responsible for the decline.

In addition, Greece sank deeper into depression in the third quarter, as output fell 7.2 percent compared with figures in the period a year earlier. In Portugal, gross domestic product fell 3.4 percent from a year earlier, the seventh consecutive quarterly decline. Unemployment in Portugal rose to 15.8 percent from 15 percent in the second quarter.

The Bundesbank no longer sets monetary policy but remains a strong influence in the region. It is the largest member of the so-called Eurosystem, the network of 17 national central banks overseen by the central bank. The Bundesbank handles some important tasks for the euro zone as a whole, like administering a system used to transfer large sums of money.

The Bundesbank, with its emphasis on preserving price stability, also served as the template for Europe’s central bank. The Bundesbank has complained that the central bank has exceeded its mandate by effectively becoming lender of last resort for governments.

Some of the Bundesbank’s dismay was on view Wednesday. “The progressive blurring of boundaries between monetary and fiscal policy has increased the longer-term risks and side effects of crisis management measures,” the Bundesbank said.

Low interest rates have encouraged investors to take more risk as they try to earn better returns, the Bundesbank said. Despite a gloomy economic outlook, corporations, not including banks, issued a record 201 billion euros ($255 billion) in bonds from January to October, the Bundesbank said. Investors were willing to accept an average interest rate of just 1.3 percent on the highest-rated corporate debt.

While that is good for companies, it could backfire if interest rates rise again or more companies than expected have trouble repaying their debts.

Low interest rates have also driven up real estate prices in cities, as Germans take advantage of cheap loans to buy property.

On a more positive note, the Bundesbank said that German banks stand on more solid foundations than a year ago. They have been able to raise money from more reliable sources, like deposits. In addition, German banks have increased the amount of capital they hold in reserve, and reduced the amount of money they have at risk in troubled zone countries like Greece, the Bundesbank said.

However, German banks still held almost 59 billion euros in Spanish and Italian government debt, the Bundesbank said. Their total exposure to the two countries, including other kinds of loans, was about 203 billion euros at midyear, the Bundesbank said.

“A substantial escalation of the sovereign debt crisis would, of course, have an adverse impact on the German financial system, too,” said Sabine Lautenschläger, a member of the Bundesbank’s executive board who is responsible for bank regulation.

Article source: http://www.nytimes.com/2012/11/15/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss

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Croatia Wavers Over European Union as Allure Fades

January 18, 2012 by Leave a Comment

But if Croatians vote to join the European Union next Sunday, Mr. Sluga’s simple business will become a lot more complicated. The cages he keeps his hens in will not meet the group’s rules, requiring expensive upgrades. Italian egg producers, given access to Croatian markets, are likely to undercut his prices. Mr. Sluga believes that his very way of life is a stake. And for what? he asks.

“See what happened to Greece,” he said. “They got billions from the E.U. and it did not work out.”

Much has changed in the decade since Croatia first applied to join the European Union. What was once seen as a rich man’s club — which Croatia was eager to join — no longer looks like such a clear ticket to prosperity. Today’s European Union is mired in a crippling debt crisis, which has pushed some of its members to the brink of bankruptcy and threatened its very essence.

Recent polls show that Croats are still likely to vote yes. Then, the 27 European Union countries are expected to ratify their membership and Croatia will become part of the group on July 1 — in all likelihood, the last new member for many years.

Srdjan Dumicic, the director of Ipsos Puls, a company that has conducted several polls on the subject in recent years, said that support had been dwindling in the past few weeks and could narrow, according to the latest poll that has not yet been published. Some Croatians joke, he said, that joining now is like arriving at the party at 2 a.m. Half the revelers are drunk. Half have gone home.

“It’s not the party it was at midnight,” Mr. Dumicic said.

Even the recently elected prime minister, Zoran Milanovic, talks about the prospect of European Union membership without much fervor.

Mr. Milanovic, a social democrat, says the pluses outweigh the minuses. He emphasizes the benefits of full access to a market of 500 million consumers and of gaining about $2 billion a year in development aid in the next couple of years, though future assistance is less certain.

And he sees progress in the overhaul of Croatia’s legal system, which the European Union insisted on.

But he also says that the events of recent years have proved that membership does not guarantee success and that Croatians need to be ready to work hard in a highly competitive environment.

“The working title could be ‘Curb That Enthusiasm,’ ” Mr. Milanovic said in an interview, slightly mangling the title of Larry David’s HBO series.

Critics go much further. They say that recent events have proved that Germany and France make the big decisions and that a country the size of Croatia, with a population of just 4.5 million, will have little say.

They worry also about joining just in time to pay the bill for Greece and other debt-laden countries. And they worry that Croatia, with a long Adriatic coastline, will find itself confronting a flood of immigrants, as Spain, Italy and Greece have.

“In the European Parliament, we would be 12 members out of more than 740; in the Council of Ministers, 7 votes out of more than 350,” said Marjan Bosnjak, secretary of the Council for Croatia, an association opposing European Union membership. “We will be a statistical error. Who will give a damn about what Croatians think?”

To get this far, Croatia, which could not escape the vicious fighting that broke out in the 1990s after the dissolution of Yugoslavia, had to subject itself to a European Union-style makeover. Once deeply corrupt, the government was forced to pass 350 new laws. No one knows how many documents were exchanged because the Croatians stopped counting after 150,000 pages. About 3,000 Croatians worked on the project, from diplomats to translators.

The reach of the European Union is often underestimated, as it tries to create an even playing field among its members. Take the egg business. No detail seems overlooked. The union’s rules say that the chicken cages must allow at least 750 square centimeters per hen and contain a nest, litter, perch and “clawing board.” These requirements are amusing to Mr. Sluga, the farmer. “The chickens have more rights than humans in the E.U.,” he joked.

Article source: http://www.nytimes.com/2012/01/18/world/europe/croatia-wavers-over-joining-the-european-union.html?partner=rss&emc=rss

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France Loses AAA Credit Rating, S.&P. Says

January 14, 2012 by Leave a Comment

The actions, which lowered the ratings of nine countries, were the strongest signal yet that Europe’s sovereign debt woes were far from over and would pose fresh political challenges for politicians, including President Nicolas Sarkozy of France, as they try to stabilize the problem on the Continent, now in its third year.

Another reminder of the continuing challenge came Friday from Greece, the original source of Europe’s debt troubles. A snag arose in talks between the new Greek government and its creditors —  banks and other private investors — in which Athens hopes the bond holders will agree to take losses as a way for Greece to avoid a default.

Together, the developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight — despite recent signs that financial market pressures might be easing as a result of a new lending program by the European Central Bank.

In announcing the downgrades, Standard Poor’s said: “Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone.”

A downgrade by a single ratings agency like Standard Poor’s could have an immediate, though not devastating, impact on the countries’ ability to borrow money. S. P. warned in December that the agency was reviewing the credit ratings of more than a dozen European Union countries because of the crisis. Germany and the Netherlands, which were on the original list, did not receive a downgrade.

European politicians had criticized S.P.’s downgrade plans as providing no meaningful new information to investors but simply stoking a sense of crisis. In fact, the prospect of rating downgrades has already been priced into the bond auctions that Italy, Spain and other countries have held recently.Even before the announcement by S.P., Finance Minister François Baroin of France confirmed the loss of France’s AAA grade to AA+, but he insisted the country was headed in the right direction and that no ratings agency would dictate the policies of France.

“It’s not good news,” Mr. Baroin said on France television earlier in the day, but it is “not a catastrophe.”

In addition to Italy (now BBB+) and Portugal (BB), two nations had their ratings cut by two notches — Spain (A) and Cyprus (BB+). Those lowered by one grade, along with France, were Austria (AA+), Malta (A–), Slovenia (A+) and Slovakia (A).

The ratings of the other countries in the review — Belgium (AA), Estonia (AA–), Finland (AAA), Ireland (BBB+) and Luxembourg (AAA) — were unchanged.

Of the 17 euro zone countries, only Greece, with the lowest rating of the group (CC), was not cited in the review.

Rumors of imminent downgrades trickled out all day Friday, the end of a week in which Prime Minister Mario Monti of Italy and Mr. Sarkozy warned that the crisis could deepen if steps were not taken to stoke growth. Both delivered their messages to Chancellor Angela Merkel in her offices in Berlin, prompting the German leader to admit for the first time that the harsh program of austerity she has been pushing on the euro zone was not a cure-all for the crisis.

S. P. issued its warning last month after all three leaders held an emergency European summit meeting aimed at establishing a consensus for better fiscal discipline in the euro monetary union.

But the bid to reassure the financial markets about the European Union’s resolve quickly fizzled, as investors fretted that the years-long efforts to strengthen the foundations of the euro currency club could be overwhelmed in the meantime by a looming recession in most of Europe.

Last summer, Standard Poor’s lowered the AAA rating of United States long-term debt by one notch, citing a threat to America’s finances from political gridlock in Washington.

Interest rates for Treasury debt in the United States have remained at remarkably low levels as investors continue to avoid other risk. But in general, a downgrade is likely to make it costlier for a country to pay down its debt, as investors demand that the government pay higher borrowing costs to compensate for the loss of its risk-free status.

In addition, the new European rescue fund, the European Financial Stability Facility, which is designed to prevent the contagion from spreading to large countries like Italy and Spain, would likely see its borrowing costs rise. France is one of its major financial backers, and if the country is downgraded, that could make the fund less effective in stemming the euro crisis.

Steven Erlanger contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=6d711d3dc7c297651054aee2266a936d

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Bank Deposits at European Central Bank Reach High for Year

December 23, 2011 by Leave a Comment

FRANKFURT — Banks from the 17 European Union countries that use the euro stashed 347 billion euros overnight with the European Central Bank on Thursday, in another sign that the Continent’s debt crisis is still putting pressure on the banking system despite central bank support.

The figure announced Friday, equivalent to $453 billion, is the highest for 2011, topping 346.4 billion euros earlier this month.

It is a sign of mistrust in the interbank lending market where banks raise operating funds, suggesting they are depositing money with the central bank at low interest rates because they are afraid to lend it to other banks — for fear they won’t get paid back.

Europe is suffering from a debt crisis marked by concerns that heavily indebted governments, like Italy, may be unable to pay off their bonds. That means trouble for banks because they typically hold government bonds.

The large deposits come despite Wednesday’s big central bank credit operation, in which the European Central Bank let banks borrow as much as they wanted for up to three years. As a result 523 banks took 489 billion euros, the largest package of loans from the central bank in the 13-year history of the euro.

The European Central Bank has stepped up lending to banks to help them get through the crisis. Some of the banks are finding it extremely difficult to raise money elsewhere, so the bank steps in as lender of last resort, a typical role for central banks in times of turmoil.

The bank has refused to play the same role for governments by buying large amounts of their bonds, saying they must get their debts under control through their own efforts and not wait for a central bank rescue.

Italian 10-year bond yields remained elevated Friday at 6.90 percent, another sign that the markets remain fearful of a default by the euro zone’s third-largest economy. Before the crisis spread to Italy, it was able to borrow at under 4 percent as recently as October 2010.

European governments are trying to win back the confidence of bond market investors by reducing deficits, a difficult job in a slowing economy. The Italian prime minister, Mario Monti, won approval Thursday from the Italian Senate for 30 billion euros in additional cutbacks and revenue increases.

Greece is working on a deal to cut its debt by making bondholders accept a bond exchange that would mean a 50 percent reduction in the value of their investments. The bondholders could accept that instead of the larger losses that would come from a disorderly default not agreed in advance.

A top policy maker with the European Central Bank said in an interview published Friday that the bank could use its power to create new money to buy financial assets if a deteriorating economy threatens the euro zone with deflation.

The official, Lorenzo Bini Smaghi, who is leaving office next week, was quoted by The Financial Times as saying he saw “no reason” why the bank could not use the technique, called quantitative easing by economists. Both the United States Federal Reserve and the Bank of England have used it after lowering interest rates to record low levels and finding that their economies still needed more stimulus.

The central bank’s mandate is to provide price stability, so fighting deflation could be consistent with that. At the moment, however, inflation is running at 3 percent, well above the bank’s goal of just under 2 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=238b2c663408d15aff6eab4591cdcf74

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News Analysis: European Debt Deal May Not Be a Cure

December 12, 2011 by Leave a Comment

At least four major issues still need to be resolved: how much money is needed to protect Italy now from speculative attack; whether banks will stumble because of the crisis; the isolation of Britain, which does not belong to the euro zone; and not least, whether the Brussels cure, prescribed by Germany, fits the disease.

With mounds of European debt due to be refinanced early next year, the crisis is far from over. “More tests will obviously come, and soon,” perhaps as early as the opening of financial markets on Monday, said Joschka Fischer, the former German foreign minister.

And there are risks remaining even in getting the Brussels deal ratified, which is likely to take until late summer 2012 at the soonest.

The European stock markets had slipped by midmorning on Monday and, in a potentially ominous sign, Moody’s Investors Service said it could downgrade the sovereign ratings of some European Union countries in coming months, adding that the crisis remained at a “critical and volatile stage.”

The agreement, under which the 17 countries that use the euro accept more oversight and control of national budgets by the European Union, “was a big step, which was pushed on the Europeans by the markets,” Mr. Fischer said. He has been sharply critical of what he considers Chancellor Angela Merkel’s hesitant, slow and incremental management of the crisis, but he said that “in the end, the markets have limited the options of the political leaders, especially of Merkel, and pushed her into giving more support for the euro.”

Germany got nearly unanimous agreement on a treaty to pursue its favored remedy for the sovereign-debt crisis that has shaken the union for months: fiscal discipline, central oversight and sanctions on countries that break the rules about debt limits, which will be written into national laws. The rules themselves are not new: they recap the ceilings set in Maastricht 20 years ago when the euro was created, with deficits limited to 3 percent of gross domestic product and cumulative debt eventually held to 60 percent of G.D.P. Now, though, those formulas will have teeth.

The idea is that, with the new fiscal discipline in place, the Germans and the European Central Bank will be willing to do more to solve the euro zone’s troubles.

But many argue that the core problem is less discipline than the lack of economic growth and the deep current-account imbalances — exporters versus importers — within the euro zone. Austerity tends to bring recession, not growth, and Europe needs growth to cope with its debt. But structural changes and investments to accelerate growth and competitiveness generally take years to bear fruit.

“The relationship between 3 percent and fiscal vulnerability is a weak one,” said Jean Pisani-Ferry, director of Bruegel, an economic research institution in Brussels. Both Spain and Ireland have run balanced budgets, or even budget surpluses, in recent years, and both were well within the Maastricht criteria, but became speculative targets in the credit crisis anyway; Italy has one of the lowest budget deficits in the euro zone, and runs a primary surplus, meaning that its budget is in the black when debt service is discounted.

“The countries were not in crisis because of bad management of their budget,” said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. He called the Brussels deal “rather disappointing over all, since it means that there will be more rigor, more austerity, which means less growth ahead.”

The issue is how to promote economic growth and competitiveness in the poorer countries at the euro zone’s periphery that ran up large debts and trade deficits. “You need discipline as part of your stabilization strategy, but we also need a much stronger growth strategy for the southern countries,” including Italy, Mr. Fischer said.

Bernard Avishai, a contributing editor of the Harvard Business Review, said that the questions now should be: “Under what scenarios are the southern economies most likely to grow? Who will be starting, owning and profiting from what businesses? In that context, would not Spain, Portugal, Greece, et cetera, be better off with their own currencies? Would they not become more competitive if they could simply devalue them?”

His answer to that last question is no: A globalized, networked economy requires a stable currency, he said. Inside the euro or out, he said, the real competitors for countries like Greece and Portugal are Poland, Hungary and Romania, and to thrive they need to remain part of the European economic space and invest in education and high technology to attract more capital from abroad.

“The path to development is not devalued money in the hinterland, but intellectual capital from the metropole,” Mr. Avishai said. “The key is not cheap labor but rich brainpower, the climate that will cause globals to inject the DNA of various businesses into the commercial life of southern European states.”

Steven Erlanger reported from Vienna, and Liz Alderman from Paris. Maïa de la Baume and Scott Sayare contributed reporting from Paris, and Alan Cowell from London.

Article source: http://feeds.nytimes.com/click.phdo?i=3a381d956d1f3a6c2428916f9f5166dc

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Economix Blog: Gauging the Strength of a European Firewall

December 10, 2011 by Leave a Comment

WASHINGTON — The Obama administration has applauded the euro zone for moving to save its common currency and enforce fiscal discipline among its members. Yet the deal has done little to calm American concerns about an inadequate “firewall” — financing put up by European governments to ensure that all euro zone countries maintain access to the debt markets at sustainable interest rates.

Chancellor Angela Merkel of Germany “has made some progress with other European leaders in trying to move towards a fiscal compact where everybody is playing by the same rules and nobody is acting irresponsibly,” President Obama said at a news conference on Thursday. “That’s all for the good, but there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”

A senior administration official echoed those comments on Friday, saying that Europe is making encouraging and significant steps toward a comprehensive plan — but still needs more money and stronger mechanisms to calm markets in the short term.

At the Brussels summit meeting, the 17 European Union countries that use the euro agreed to run only small deficits in the future, allowing central oversight of their national budgets. But they did considerably less to stop investors from pushing bond yields up to punishing levels in countries like Italy and Spain.

To deal with that immediate crisis, the European Union governments agreed to two things. First, they agreed to consider offering up to 200 billion euros in bilateral loans to the International Monetary Fund, with a final decision to be made within 10 days.

Second, they agreed to put a permanent 500-billion-euro bailout fund, called the European Stability Mechanism, or E.S.M., into place a year early. Rather than supplanting the current, temporary bailout fund, the European Financial Stability Facility, in 2013, the E.S.M. will run alongside it for one year starting in July 2012.

Those measures in and of themselves will not be enough to stop investors from shutting big euro zone countries out of the international debt markets. Nor will they wrench borrowing costs down. Thus, they are unlikely to cheer the Obama administration, which has repeatedly argued that European leaders need to address the sovereign-debt crisis plaguing countries across the Continent immediately, with overwhelming force, and using their own money.

“The deal will quiet markets for a while, but the situation will remain fluid and subject to numerous shocks,” says Uri Dadush, the director of the international economics program at the Carnegie Endowment for International Peace. “The deal is too heavily reliant on adjustment in the periphery, and not enough on help from the core and the rest of the world. The main thing missing from the deal is a real ‘bazooka.’”

The agreement does move forward the creation of the permanent bailout fund, and would seem to enhance the amount of money available to keep countries’ borrowing costs stable. But the Brussels compact actually caps the two funds’ total lending capacity at 500 billion euros. That is only 60 billion euros more than the current lending capacity of the temporary bailout fund, the European Financial Stability Facility. The plan does say European leaders will reassess the cap in March, though, and watchers say they may do so sooner.

American leaders have continually called for any bailout mechanisms to have significantly more financing, enough to deal with problems in big, heavily indebted countries like Italy. Speaking in Berlin on Tuesday, for instance, Treasury Secretary Timothy F. Geithner called for a strengthened firewall to “provide the oxygen necessary for economic growth” and to keep interest rates manageable.

Nor is the I.M.F. measure seen in Washington as any sort of magic bullet for the short-term sovereign-debt crisis.

It is not clear whether the 200 billion euros will go to a special fund earmarked for Europe, or into the general I.M.F. funding pool. If it goes into the general pool, it would help with the fund’s liquidity. But it would not mean the fund would have enough money to help a big European sovereign — or two — if borrowing costs spiked. Italy alone has to roll over 360 billion euros in debt in 2012.

That said, the 200 billion euros are seen as an invitation for other countries — presumably cash-rich emerging-market nations — to add financing to the I.M.F. as well. In a statement, the European Council added the hopeful note, “We are looking forward to parallel contributions from the international community.” The I.M.F.’s managing director, Christine Lagarde, said in a statement, “I appreciate this demonstration of leadership from Europe, and I am hopeful that others will also do their part.”

A senior administration official indicated that the United States supported enhancing the I.M.F.’s liquidity, though the United States has ruled out contributing any more financing to the I.M.F. But the Obama administration argues that Europe must provide the great bulk of the financing for stabilizing its own countries’ borrowing costs.

It is a point they have made repeatedly. “Europe is wealthy enough that there’s no reason why they can’t solve this problem,” Mr. Obama said on Thursday. “It’s not as if we’re talking about some impoverished country that doesn’t have any resources. If they muster the political will, they have the capacity to settle markets down.”

The senior administration official did emphasize that the fiscal compact may make other changes to improve the situation in Europe easier, including opening the door for more action from the European Central Bank. The official also lauded a change to E.S.M. bylaws, striking a clause requiring insolvent countries to negotiate haircuts with their bondholders.

Article source: http://feeds.nytimes.com/click.phdo?i=624760d008b3f89bc58081ec67545497

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