wealthy countries

A Small Country — Finland — Casts Doubt on Aid for Greece

FRANKFURT — France and Germany may effectively run the European Union, but Finland has been demonstrating how even a small country can disrupt their grand designs.

By insisting that it receive collateral from Greece in return for aid, Finland is threatening to upend an agreement that euro zone countries, led by France and Germany, made in July to expand the E.U. bailout fund.

Finland would contribute less than 2 percent of the guarantees provided to the fund, known as the European Financial Stability Facility. But the country’s demands, the subject of intense negotiations in recent days, threaten to derail the fragile consensus that is preventing Greece from defaulting on its debt.

Finland is the most vivid example of the way parochial domestic politics can become Continental problems, threatening the unity of the 17 euro zone members as they face their deepest crisis ever. But Germany, the Netherlands and Austria — all wealthy countries with strong economies — also harbor deep opposition to bailing out Greece, Portugal, Ireland or any other country that may become overwhelmed by debt.

“In countries like Finland the opposition to what are described as bailouts is huge,” said Philip Whyte, senior research fellow at the Center for European Reform in London. “Governments are politically constrained.”

In Finland, Prime Minister Jyrki Katainen faces discontent within his governing coalition as well as pressure from a nationalist opposition group, the True Finns, which rode euro-skepticism to big gains in April parliamentary elections.

Finland is just one of 17 euro zone countries whose parliamentary approval is needed for the expanded bailout fund and whose domestic politics could upset the process. The case of Finland points to a bigger governance problem in Europe, said James Savage, a professor at the University of Virginia who has published a book on European monetary union.

“You have all these multiple veto points, so they can’t come to a reasonable conclusion, at least not easily,” Mr. Savage said. “You have increasingly less efficient decisions that are being made.”

European squabbling has contributed to market turmoil around the world and alarmed policy makers.

The possibility that euro zone members will not agree on an expansion of the bailout fund is a concern of the Federal Reserve Bank of New York, according to a person briefed on issues there. Matthew Ward, a spokesman for the New York Fed, declined to comment.

Christine Lagarde, the president of the International Monetary Fund, warned European leaders Saturday that their fractiousness was threatening the common currency.

“The current economic turmoil has exposed some serious flaws in the architecture of the euro zone, flaws that threaten the sustainability of the entire project,” Ms. Lagarde, the former finance minister of France, said in Jackson Hole, Wyoming, where makers of economic policy were meeting.

The dispute provides one more measure of market uncertainty this week as the summer lull ends and trading regains a more normal volume.

Officials from European Finance Ministries spent much of Friday in long- distance negotiations about the collateral issue but did not reach an agreement. Conflicting reports about the negotiations have fed market confusion. The news media in Germany and other countries reported Friday that Finland had dropped its demands, but the reports were swiftly denied by Finnish officials.

The climate created by the collateral dispute could make it more difficult for the European Central Bank to continue to defend Italy and Spain in bond markets and contain their borrowing costs. This month the E.C.B. has spent €36 billion, or $52 billion, intervening in debt markets in an effort, so far successful, to cap bond yields for the two countries.

The E.C.B.’s task could prove more difficult when trading volume picks up, especially since both Spain and Italy are scheduled to try to sell debt this week. “A litmus test for the effectiveness of the E.C.B.’s bond-buying program is in the cards,” Rainer Guntermann, an analyst at Commerzbank, wrote in a note.

Article source: http://www.nytimes.com/2011/08/29/business/global/finland-casts-doubt-on-aid-for-greece.html?partner=rss&emc=rss

Brazilian Criticizes Wealthy Nations’ Policies

The minister, Guido Mantega, said wealthy countries were attempting “to export their way out of difficult economic situations” by printing money and keeping interest rates low. Those policies are driving up the prices of food and oil, causing particular pain for the world’s poorest people, Mr. Mantega told the policy-making committee of the International Monetary Fund.

His strong remarks highlight the challenges the United States and Europe face as they try to change their economic relationship with the developing world. In place of unsustainable borrowing to fuel consumption of imported goods, they would like to sell more goods and services to those countries. The problem is that developing nations, losing business from their best customers, hope to replace sales by increasing domestic consumption — selling to the same customers developed nations are trying to reach.

It is a dispute that plays out largely in terms of exchange, with both sides charging that their rivals are boosting exports by artificially suppressing the value of their currencies.

The two sides spoke past each other over the last week, during the annual meetings of the major forums for international economic coordination — the monetary fund, the World Bank and the Group of 20.

The United States says that higher prices are not a necessary consequence of American policies, but instead have resulted from the efforts of developing countries to hold down the value of their own currencies in the face of the capital inflows from developed countries.

The treasury secretary, Timothy F. Geithner, said Saturday that developing nations should allow the value of their currencies to be determined by open-market trading. The United States believes that the exchange rates set by the market will contribute to a more sustainable allocation of economic activity among nations, and increased international growth.

“Major economies — advanced and emerging — need to allow their exchange rates to adjust in response to market forces,” Mr. Geithner said.

Rising concerns about inflation shadowed the debate. Commodity prices and asset values are already rising sharply in the developing world, and there is concern that those pressures could contribute to inflation in developed countries.

Economic development in China and other emerging markets has long been felt in the United States largely in the form of lower prices. As those countries absorb a larger share of the world’s raw and finished goods, the impact instead may be felt in the form of rising prices.

“Interest rates rising in the emerging world could drive up interest rates in the developing world,” said Tharman Shanmugaratnam, the finance minister of Singapore and the new chairman of the International Monetary and Financial Committee. “We’ve learned from very painful experience during the last few years that nothing is isolated.”

Economic policy makers in the United States have played down the impact of commodity prices on domestic inflation. European policy makers, by contrast, are increasingly concerned.

Didier Reynders, the Belgian finance minister, warned in a statement that “one should not underestimate” the possibility that food and oil price inflation could travel from the developing world to Europe and the United States. He noted that those pressures would pass through the same financial and trade channels that helped to lower global inflation in the past by holding down prices. “Central banks everywhere should be highly vigilant,” Mr. Reynders said.

Article source: http://www.nytimes.com/2011/04/17/world/americas/17imf.html?partner=rss&emc=rss

A Small Country — Finland — Casts Doubt on Aid for Greece

Brazilian Criticizes Wealthy Nations’ Policies

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