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Leaders Piece Together an Effort to Keep the Euro Intact

December 5, 2011 by Leave a Comment

Important disagreements persist, and the two primary leaders of the euro zone, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, will meet on Monday in Paris to try to hammer out a joint proposal for the summit meeting. That gathering begins on Thursday evening, and is considered a last chance this year to set the euro right, even as some investors and analysts are beginning to predict its collapse.

“The survival of the euro zone is in play,” one senior European official said. “So far it’s been too little, too late.”

The emerging solution is being negotiated under great pressure from the markets, the banks, the voters and the Obama administration, which wants an end to the uncertainty about the euro that is dragging down the global economy.

In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.

After consecutive, expensive failures to stabilize the markets and protect the euro, the broad plan emerging this week may have a better chance at succeeding, analysts say, in part because it weaves together measures that deal with the various issues of the euro, particularly the provision of a central authority that can monitor and override national budget decisions if they break the rules.

Still, even if all the parts are agreed upon in the meetings, which are bound to be fraught, the fundamental imbalances in the euro zone between north and south and between surplus countries and debtor ones will not go away. The euro will still be a single currency for 17 disparate nations in the European Union.

One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts. Mrs. Merkel is also dead-set for now against collective debt instruments, like “eurobonds,” that would put taxpayers, particularly German ones, on the hook for the debt of others, which her government regards as illegal.

So Mr. Sarkozy and other European leaders are working on a less elegant and more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.

Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.

She would like the treaty changes to be accepted by all 27 members of the European Union, but failing that, she said she would accept treaty changes within the euro zone, with other countries who want to join in the future, like Poland, free to commit to the tougher rules now. Many countries, and not only Britain, are opposed to institutionalizing a two- or even three-tier European Union, fearing that their interests will be sacrificed and their voices diminished.

Article source: http://www.nytimes.com/2011/12/06/world/europe/leaders-piece-together-an-effort-to-keep-the-euro-intact.html?partner=rss&emc=rss

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News Analysis: New Warnings of Euro Zone Danger — News Analysis

December 1, 2011 by Leave a Comment

The assumption has been that if political leaders can convince voters in their countries that they are capable of enforcing greater discipline and centralized intervention in national budgets, as Germany demands, then the European Central Bank will have the political breathing space to move more aggressively to support the bond sales of Spain and especially Italy. The thought is that the bank can flood the market, driving down interest rates to tolerable levels, buying time for Europe to fix its debt problems and overhaul laggard economies.

But with Europe veering toward recession and with increased skepticism that discipline will solve the deep structural imbalances in the euro zone, the markets’ concerns have passed from doubts about the solvency of individual countries to fears for the euro zone as a whole. Those doubts now include Germany, which cannot by itself, even if it wishes to, guarantee the credibility of Italian and Spanish debt, which totals more than $3.3 trillion.

For Kenneth S. Rogoff, an economics professor at Harvard, the biggest problem for the euro is not money so much as structure, or the lack of it. “This is a deep constitutional and institutional problem in Europe,” Mr. Rogoff said. “It’s not a funding problem.”

Yet, with even German interest rates rising, the markets are now worried about the sustainability of the euro zone as a whole, said Simon Johnson, a former chief economist for the International Monetary Fund and a professor at the M.I.T. Sloan School of Management. “The market has signaled that the risk is relative currency risk, not sovereign risk,” Mr. Johnson said. “So a ‘big bazooka’ won’t work for Europe now, because of worries about the euro itself breaking up and German interest rates going up.”

The last plan that was supposed to stop the rot, agreed upon last July but not put fully into place until mid-October, was the European Financial Stability Facility, with a lending capacity of 440 billion euros, or about $587 billion. While large enough to cover, as intended, a second Greek bailout, Ireland and Portugal, it is far too small for Italy and Spain, which are now in play.

And efforts to “leverage” the fund upward, a crucial element of the “big bazooka” Mr. Johnson referred to, are falling considerably short of the $1.35 trillion target, European officials acknowledged Wednesday. That failure is in large part because, as Mr. Johnson noted, the bond spreads for even the AAA-rated euro zone countries are going up, leaving less leeway for leveraging.

Mr. Johnson is a euro hawk, predicting a breakup of the euro zone. Others say Europe has more time, especially if the European Central Bank can intervene to support Italy more forcefully, which by its charter it is not supposed to do, at least not directly.

If so, Mr. Rogoff said, “the Europeans can stretch it out a long time, they have the money.” Nevertheless, he said, they “need to take a big step toward economic and political union, whoever wants to be a part of it.” Germany “is right to hold out for systemic changes,” he said. “The Europeans hoped to have 30 to 40 years to integrate more fully. Right now they don’t have 30 to 40 weeks.”

Some say they have far less than that.

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” said the bloc’s economics commissioner, Olli Rehn, on Wednesday.

France and Germany are concentrating their efforts on a fundamental shift in powers among the 17 European Union states that use the euro, seeking to amend the bloc’s treaties to allow more centralized oversight of national fiscal and budget policies, and more centralized interference in them, too. Penalties would be assessed on those countries that violate the rules of economic discipline, which will be tightened and clarified.

Article source: http://www.nytimes.com/2011/12/01/world/europe/new-warnings-of-euro-zone-danger-news-analysis.html?partner=rss&emc=rss

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Time Runs Short for Europe to Resolve Debt Crisis

November 28, 2011 by Leave a Comment

LONDON — Eighteen months into a sovereign debt crisis — and after many futile efforts to resolve it — the endgame appears to be fast approaching for Europe.

While its leaders may well hold to the current path of offering piecemeal solutions, nervous investors are fleeing European countries and banks.

Two main options exist: either the euro zone splits apart or it binds closer together.

Each of these paths — Greece, and possibly others, dropping the euro or the emergence of a deeper political union in which a federal Europe takes control of national budgets — would lead to serious political, legal and financial consequences.

But with financial panic now threatening to move beyond Italy and Spain to Belgium, France and Germany, the euro zone’s paymaster, the pressure to arrive at a solution is at a new level of intensity.

In Britain, even the satirical weekly Private Eye has weighed in, proposing last week that the answer was for Europe itself to leave the European Union.

Underlying these possible outcomes has been Europe’s persistent inability to address the central weakness of its common currency project: how to get money from the few countries that have it, mainly Germany and the Netherlands, to the many that need it — Greece, Italy, Spain, Portugal, Ireland and perhaps even France.

The consequences of continued inaction are dire. Uncertainty and austerity have decimated the euro zone’s growth prospects, and analysts now expect the region’s economy to shrink 0.2 percent next year — a blow for the many American companies that export there.

American financial institutions are also at risk. According to the Institute of International Finance, they have $767 billion worth of exposure through bonds, credit derivatives and other guarantees to private and public sector borrowers in the euro zone’s weakest economies.

With the European Central Bank continuing to refuse to print money as its counterparts in the United States and Britain have done, investors now foresee a much greater likelihood of a broad market crash and a worldwide recession.

Such anxieties were on display last week when Vítor Constâncio, the vice president of the central bank, gave a speech to investors in London.

It was billed as an address on the international monetary system, but given the circumstances, there was little interest among investors in Mr. Constâncio’s views regarding fixed versus floating-exchange rates and quite a lot about what steps the central bank might take to address the crisis.

One somewhat frantic investment banker noted that beyond the Italians and the Spanish, even the Germans were having problems selling their bonds. What, he asked, was the European Central Bank going to do about it?

Mr. Constâncio mentioned the central bank’s bond buying program and making loans available to banks, but he was blunt in saying that unless countries like Greece and Italy followed treaty rules and reduced their budget deficits, there was not much the central bank could do.

“The countries must deliver,” said Mr. Constâncio, a former governor of the Portuguese central bank. “In the end, it is governments that are responsible for the euro area — it is not just the E.C.B.”

It is this eat-your-spinach policy approach, however, that many analysts now say is making the situation worse as countries throughout the euro area — including Germany, the region’s economic locomotive — cut spending and raise taxes to meet budget deficit targets.

In a recent paper, Simon Tilford, an economist at the Center for European Reform in London, argues that imposing additional rules rather than creating a federal framework to allow the euro zone to commonly transfer or borrow money — as can be done in the United States — will end in disaster.

“The solution to the problem has become the problem itself,” he said. “And investors see this: you cannot just keep cutting spending in the teeth of a recession.”

Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.

That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.

Analysts say it is the unbending attitude of Germany, Europe’s richest country, that it not become responsible for the debts of weaker economies that has so far stymied progress on the widely supported idea of a euro area able to issue its own bonds.

Lack of movement on a federal Europe has pushed investors to consider what would happen if a country like Greece exited the euro zone. Analysts predict dire consequences for the departing country, ranging from default to a collapse of its banking system.

A recent report by UBS estimated that in the first year, the citizens of the exiting nation would face costs of as much as 11,000 euros a person on top of the austerity-induced pain already incurred.

Such a move might be legally impossible: there is no provision in any European treaty for a country to leave or be expelled from the euro zone — a conscious choice by the framers of the project.

But if a country made such a decision, it would have to leave the 27-member European Union as well, thus entering a more profound state of exile.

A view is now taking hold among many European leaders that the ever-worsening crisis may result in Brussels being given direct control over the budgets of countries that continue to run excessive deficits — a proposal made recently by the euro’s most passionate advocate, Jean-Claude Trichet, former president of the European Central Bank.

“The will to make this thing work is stronger than you might think,” said Larry Hatheway, an economist at UBS and one of the authors of the report on the cost of one or more countries leaving the euro zone.

In this vein, several economists at Bruegel, a research institute in Brussels, are calling for a euro zone finance minister, elected by the European Parliament, who would have limited federal powers to raise revenue.

This is a radical measure, to be sure. Not only would it challenge the sovereignty of nations, but it would also require time and treaty changes.

With time short, pressure is building on the European Central Bank to defy German objections and buy more distressed government bonds, but there is little indication the bank has decided to do so.

Last week, Mr. Constâncio actually appeared to boast about the bank’s restraint thus far, explaining to harried investors that the central bank’s bond-buying effort represented about 2 percent of euro area G.D.P. That compares with an intervention of 11 percent of G.D.P. by the Federal Reserve in the United States and 13 percent by the Bank of England.

“We are not financing the deficits of countries,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=401088180da09e9bc5c7409ba49e9d03

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Memo From Europe: Euro, Meant to Unite Europe, Seems to Be Dividing It

October 20, 2011 by Leave a Comment

As European leaders scramble to present a united front for this weekend’s critical meeting in Brussels, anxiety in Europe is growing, and not just about the euro. The assumptions of 60 years suddenly seem hollow, and the road ahead is unclear, as if the GPS system has gone out of whack.

On the surface, the European Union is an enormous success. It has nearly 500 million citizens and a gross domestic product of more than $17 trillion, larger than that of the United States and more than three times China’s or Japan’s. It is America’s largest trading partner by far, and together the two economies account for roughly half the world’s gross domestic product and nearly a third of its trade.

But Europe is in economic and demographic decline as Asia is rising. The European Union’s share of global trade is steadily dropping, especially in exports. Its aging population is placing huge strains on generous social welfare and pension programs and pumping up sovereign debt in an extended period of flat growth.

Technologically, it is behind the United States, but its pay scales are too high to be an easily competitive exporter.

The current crisis over the euro has deep roots in the imbalances between north and south, rich and poor, export-led and service-driven economies, tied together by a currency but few rules, and those rarely enforced.

A fix will require fundamental changes in the functioning of the bloc, with more interference in the workings of sovereign states. There would need to be a fiscal union, with a treasury and a finance minister capable of intervening in national budgets, and more unified tax and pension policies. But it is far from clear that the European Union can gather itself to take these fateful steps away from nationalist identities to a truly European model.

“We are today confronted by the greatest challenge our union has known in its entire history,” said José Manuel Barroso, the head of the European Commission. “It is a financial, economic and social crisis. But also a crisis of confidence — in our leadership, in Europe itself, in our capacity to find solutions.”

There are many who believe that the European Union and its leaders have already been found wanting, and that the European project that brought democracy and peace to the Continent may begin to unravel.

“This crisis is threatening the benefits of 60 years of European integration,” said Nicolas Baverez, a French economist and historian. “All the principles on which the euro zone was built — no state default, no monetary transfers, no bailouts and strict limits on debt — all these principles are dead, and we have no rules to make this work.”

Worse, he said, political leaders underestimate the dangers. “This is not just another recession, but a real and fundamental crisis,” he said. “There is a tension in the political system and doubt about democratic institutions that we have not experienced since the fall of the Soviet Union.”

Built from the ruins of war and expanded generously in the euphoria after the Soviet collapse, the European Union heralded itself as a model, radiating “soft power.” But now the model looks tarnished and flawed.

Leaders seem diminished; local politics trump solidarity. There is a new nationalism degrading the collective responsibility and shared sovereignty that defines the European Union. Euro-skepticism runs from far-right parties that simultaneously detest immigrants, globalism and Brussels to the governing parties of Europe’s most successful countries.

A European Union of 15 nations seemed coherent and manageable; the Europe of 27, soon to be 28, is almost ungovernable, even by a professional bureaucracy with little connection to voters and whose decisions cause increasing resentment, summarized in the “democratic deficit” that the European Union suffers.

The historical ironies are considerable.

Germany, for example, divided and in ruins after the war it fought to dominate Europe, is reunited and dominating Europe now, but without arms and with deep reluctance.

Article source: http://www.nytimes.com/2011/10/20/world/europe/euro-meant-to-unite-europe-seems-to-be-dividing-it.html?partner=rss&emc=rss

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