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Unless Germany and the ECB move quickly, the single currency’s collapse is loomingEVEN as the euro zone hurtles towards a crash, most people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen. A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls. The euro zone could shatter into different pieces, or a large block in the north and a fragmented south. Amid the recriminations and broken treaties after the failure of the European Union’s biggest economic project, wild currency swings between those in the core and those in the periphery would almost certainly bring the single market to a shuddering halt. The survival of the EU itself would be in doubt. Yet the threat of a disaster does not always stop it from happening. The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast. Markets, manias and panics Investors’ growing fears of a euro break-up have fed a run from the assets of weaker economies, a stampede that even strong actions by their governments cannot seem to stop. The latest example is Spain. Despite a sweeping election victory on November 20th for the People’s Party, committed to reform and austerity, the country’s borrowing costs have surged again. The government has just had to pay a 5.1% yield on three-month paper, more than twice as much as a month ago. Yields on ten-year bonds are above 6.5%. Italy’s new technocratic government under Mario Monti has not seen any relief either: ten-year yields remain well above 6%. Belgian and French borrowing costs are rising. And this week, an auction of German government Bonds flopped. The panic engulfing Europe’s banks is no less alarming. Their access to wholesale funding markets has dried up, and the interbank market is increasingly stressed, as banks refuse to lend to each other. Firms are pulling deposits from peripheral countries’ banks. This backdoor run is forcing banks to sell assets and squeeze lending; the credit crunch could be deeper than the one Europe suffered after Lehman Brothers collapsed. Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits. Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration. Germany’s cautious chancellor, Angela Merkel, can be ruthlessly efficient in politics: witness the way she helped to pull the rug from under Silvio Berlusconi. A credit crunch is harder to manipulate. Along with leaders of other creditor countries, she refuses to acknowledge the extent of the markets’ panic. The European Central Bank (ECB) rejects the idea of acting as a lender of last resort to embattled, but solvent, governments. The fear of creating moral hazard, under which the offer of help eases the pressure on debtor countries to embrace reform, is seemingly enough to stop all rescue plans in their tracks. Yet that only reinforces investors’ nervousness about all euro-zone bonds, even Germany’s, and makes an eventual collapse of the currency more likely. This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default. The perils of brinkmanship Can anything be done to avert disaster? The answer is still yes, but the scale of action needed is growing even as the time to act is running out. The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral. Even if the ECB rejects this logic for governments—wrongly, in our view—large-scale bond-buying is surely now justified by the ECB’s own narrow interpretation of prudent central banking. That is because much looser monetary policy is necessary to stave off recession and deflation in the euro zone. If the ECB is to fulfil its mandate of price stability, it must prevent prices falling. That means cutting short-term rates and embarking on “quantitative easing” (buying government bonds) on a large scale. And since conditions are tightest in the peripheral economies, the ECB will have to buy their bonds disproportionately. Vast monetary loosening should cushion the recession and buy time. Yet reviving confidence and luring investors back into sovereign bonds now needs more than ECB support, restructuring Greece’s debt and reforming Italy and Spain—ambitious though all this is. It also means creating a debt instrument that investors can believe in. And that requires a political bargain: financial support that peripheral countries need in exchange for rule changes that Germany and others demand. This instrument must involve some joint liability for government debts. Unlimited Eurobonds have been ruled out by Mrs Merkel; they would probably fall foul of Germany’s constitutional court. But compromises exist, as suggested this week by the European Commission. One promising idea, from Germany’s Council of Economic Experts, is to mutualise all euro-zone debt above 60% of each country’s GDP, and to set aside a tranche of tax revenue to pay it off over the next 25 years. Yet Germany, still fretful about turning a currency union into a transfer union in which it forever supports the weaker members, has dismissed the idea. This attitude has to change, or the euro will break up. Fears of moral hazard mean less now that all peripheral-country governments are committed to austerity and reform. Debt mutualisation can be devised to stop short of a permanent transfer union. Mrs Merkel and the ECB cannot continue to threaten feckless economies with exclusion from the euro in one breath and reassure markets by promising the euro’s salvation with the next. Unless she chooses soon, Germany’s chancellor will find that the choice has been made for her. One problem, two visions (part I)Dec 2nd 2011, 19:06 by Charlemagne | BRUSSELS IT SEEMS odd, at first sight, to see the markets taking so much hope from two speeches in two days - one by France's President Nicolas Sarkozy and the other by Germany's Chancellor Angela Merkel - that revealed more differences than agreement on how to resolve the euro zone's debt crisis. Perhaps it is the fact that both say the European Union's treaties should be changed, and any agreement on any subject is good news. Or perhaps it is the hope that, whatever they say in their opening bids, they will come up with enough of a deal at the next European summit on December 8th-9th to allow the European Central Bank to deploy its “big bazooka”. Then again, markets have often rallied ahead of summits in the expectation of an agreement, only to be disappointed within days, or even hours, of the latest half-step being announced. Neither Mr Sarkozy nor Mrs Merkel offered any real detail of what should be included in a revision of the treaties. But even their vague outlines reveal contrasting philosophies. I give a fuller analysis of the speeches in the next post. In summary: - Mr Sarkozy places the emphasis on “solidarity” among European states (ie, joint Eurobonds, and no defaults or debt-restructuring after Greece), while Mrs Merkel gives priority to budgetary discipline and rules. - Mr Sarkozy urges the European Central Bank to act; Mrs Merkel is jealous of guarding its independence - Mr Sarkozy wants to create a hard core of euro-zone countries within the European Union; Mr Merkel wants to include as many non-euro states as possible - Mr Sarkozy wants to Europe to integrate through the action of leaders (reproducing France's presidential system, with lots of discretion for the executive); Mrs Merkel favours more independent institutions like the European Commission and the European Court of Justice (more akin to Germany's federal structure, which restricts politicians' leeway). These differences should come as little surprise. It has been ever thus in the EU. The Franco-German motor is not made for harmonious co-operation, but rather to manage and contain the many disagreements between Paris and Berlin. Still, something has changed recently. In the past year, Mrs Merkel and Mr Sarkozy (“Merkozy”, as they are known) have tried to resolve their differences behind closed doors, and then issued a joint declaration setting out their position ahead of European gatherings. This happened at the Franco-German summit in Deauville in October last year, when they agreed that private creditors should share the pain of rescuing collapsed economies. A year later, the two leaders claimed to have found “total accord” when it was patently untrue: they soon had to postpone the EU summit in October, and then held a second one days later, in order to overcome their differences over a second Greek package and how to boost the euro zone's rescue fund. So now, just a week before a key summit of European leaders, Merkozy chose to set out their stalls separately, before meeting at a Franco-German summit on December 5th, that may find some kind of compromise. Mr Sarkozy's appearance was, in effect, a campaign speech, with many barbs aimed at the opposition Socialist party as well as exhortations to fellow Europeans. He spoke at a party rally in Toulon, where in 2008 he had vowed to reform capitalism. Now he says it is time to reform the European Union. Mrs Merkel, by contrast, gave a matter-of-fact speech in the Bundestag to outline her negotiating position at the forthcoming summit. In a sense, neither of these speeches really matters. Any new treaty, even a limited one, will take month to negotiate and, probably, years to ratify. What is important, in the short term, is whether European leaders come up a sufficiently credible promise to reform, and rein in those who break budgetary rules, to allow the European Central Bank to use its “big bazooka” more freely without fear of moral hazard. Earlier this week, the ECB president, Mario Draghi, hinted that he might be willing to do so, if euro-zone countries reached a new "fiscal compact". He did not define it, and did not say treaty change was needed. Another hopeful sign is that Germany, while rejecting permanent Eurobonds, is now floating a proposal to mutualise, probably temporarily, all excessive debt above 60% of GDP. This is not quite joint Eurobonds, but may set a precedent for them. In any case, for the first time Germany may be saying ja to something after months of nein. That would be something to cheer. One problem, two visions (part II)Dec 2nd 2011, 22:10 THE two speeches in two days by Nicolas Sarkozy and Angela Merkel reveal the many differences between them ahead of next week's European summit. I give a brief analysis in my earlier post. What follows is a more detailed exegesis: Sarkonomics and the origin of the crisis The French president offers a strange bit of Sarkonomics to explain that the crisis was caused by external forces – the unregulated globalisation of trade and finance – of which France is essentially a victim. Financial globalisation established itself to compensate artificially the ravages that [trade] liberalisation without rules caused in the economies of developed countries. It was necessary so that the surplus of some could finance the deficits of others. It was necessary so that debt could compensate for the unacceptable fall in living standards of households in developed countries. It was necessary to finance a social model that was crumbling beneath deficits. It was ineluctable so that financial capital could seek elsewhere the profits that it could no longer hope to gain in developed countries. Thus was established a gigantic machine to create debt. Mr Sarkozy says France cannot be blamed for the troubles it faces because other rich countries are in trouble too; yet he does not explain why some developed countries (Germany and several Nordic states, for example) have survived the crisis better than France despite the infernal debt machine. Later on, Mr Sarkozy says France has to cut back on state expenditure to preserve its destiny (this was tricky for him, as he had vowed three years earlier in Toulon not to conduct a policy of austerity) Mrs Merkel, for her part, does not speak much of great uncontrollable forces unleashed by laissez-faire capitalism. Instead she emphasizes the responsibility of individual states. The problem, in her view, is that countries have broken fiscal rules, and there has been nobody to enforce the limits on deficits and debt. Early victims There is an interesting contrast in how Mr Sarkozy and Mrs Merkel speak of the countries that have already succumbed to the markets: Greece, Ireland, Portugal, Italy and Spain. For Mr Sarkozy, their fate is a warning of what might happen if France does not act in time. Let's take a moment to look around ourselves at the situation of other European countries that have not taken the measure of the crisis in a timely manner, that did not make the necessary efforts. They have been forced to lower salaries and pensions, and massively increase taxes. Mr Merkel, aware of criticism that Germany is wantonly pushing vulnerable countries into recession, even depression, praises those that are undergoing the pain of adjustment: I think we often have no idea of the contribution that people in the countries are making to ensure that the euro will be a permanent and stable currency. So I want today to express my absolute respect for these efforts. Because this is a contribution to a sustainable Europe. She also makes a point of praising eastern European EU members outside the euro zone – the Baltic States, Romania and Bulgaria – that have also tightened their belts, sometimes brutally. Germany, moreover, does not seek to impose its will, only to promote a "stability culture". Rushing and waiting Both agree the euro zone and the wider European Union face their gravest crisis. Mr Sarkozy is in a hurry, not least because France's AAA-rating is in danger. Europe, he says, could be “swept away” unless it acts. There is urgency. The world will not wait for Europe. If Europe does not change fast enough, History will be written without Her. Mrs Merkel, though, is in no rush. There is no possibility for a quick fix. There is not one last shot, as some say before every summit. This is not my language nor my thinking. There are no easy and fast decisions.The debt crisis is a process. It will take years. Even senior Americans officials come away from Berlin perplexed by the way Germany seems oddly unperturbed by a crisis that is alarming the rest of the world. Perhaps Germany feels less exposed to the crisis. Or perhaps it thinks that only by dangling countries over the abyss will they understand the need to reform. In any case, Germany is reluctant to risk more of its taxpayers' money. Discipline or solidarity? Both Mr Sarkozy and Mrs Merkel speak of a crisis of confidence” in the markets. But they mean very different things by this phrase. For Mrs Merkel, markets have lost confidence that the rules of the Stability and Growth Pact (which limits deficits to 3% of GDP and total debt to 60% of GDP) will be kept. Now there must be legally-enforceable rules – including legal debt brakes in each country and intrusive monitoring at the European level - with real sanctions for breaches. This crisis is a chance to make a turn for the better, to repent. The lesson are quite simple: rules must be adhered to; compliance must be monitored and non-compliance should have consequences. National responsibility and European solidarity are mutually dependent. Mrs Merkel does not speak much of “solidarity”, except to say that it must go hand in hand with discipline. She specifically rules out joint Eurobonds, of the kind being examined by the European Commission. These would breach the German constitution. However her officials are now signalling that they may be willing to consider a partial, and probably temporary, mutualisation of debt. The best-know scheme, promoted by the Bruegel think-tank, would see joint Eurobonds issued for good debt (blue bonds) under 60% of GDP. Anything above that (red bonds) would be issued nationally and would incur higher yields. But Germany is floating the idea, inspired by a panel of wise men, of mutualising the bad debt above 60% of GDP to try to restore some order. For Mr Sarkozy, the crisis of confidence is driven by the worries in the markets about the prospect of a succession of defaults or debt-restructurings, and the doubts about the survival of the euro. The answer is, first and foremost, cast-iron solidarity. He does not say Eurobonds, but he hints at them strongly. And he wants to stop all talk of imposing losses on private bond-holders – a prospect that many in Germany want to maintain so that markets can impose discipline on governments. The French president says: If we want the euro to survive, we don't have any choice: we must establish solidarity without weakness against all those who doubt the viability of the euro and speculate on its break-up. It must be absolutely clear that all the countries of the euro zone will be in solidarity with each other. It must be clear that what was done for Greece, in a very particular context, will not happen again, that no state in the euro zone will be pushed into default. It must be absolutely clear that in future no saver will lose a cent in the reimbursement of a loan granted to a country of the euro zone [ie, a bond-holder] Like Mrs Merkel, Mr Sarkozy says solidarity must go hand in hand with discipline. On this, at least, there is some agreement. Let us examine our budgets together. Let us more rapid, automatic and severe sanctions on those that do not respect their commitments. The EU and its treaties All this, say both leaders, requires the treaties to be changed. For Mrs Merkel, this is a matter of completing the economic and monetary union, and establishing a “fiscal union” (though she does not define the term). For Mr Sarkozy, “Europe must be re-thought”. So far so good. But Mrs Merkel and Mr Sarkozy disagree deeply on the nature of a reformed union. Who, for instance, should be responsible for monitoring budgets and economic policies, and imposing sanctions? Mrs Merkel is clear: independent institutions, free from political interference, are essential for credibility. Preserving the independence of, for example, the courts and the ECB, is “for the highest good of our democracy”. On the question of budgetary rules and sanctions, she says: There must be no political leeway when it comes to determining whether the limits are violated or not. There must be real automaticity. Mr Sarkozy sees it completely differently: the decisions must be taken by leaders. Political involvement is the essence of democratic legitimacy, in his view. This passage is telling, even though Mr Sarkozy begins by casting the argument in terms of his opposition to economic liberalism. Europe without politics, Europe on automatic pilot that blindly applies rules of competition and free trade, is a Europe that cannot confront crises...A more democratic Europe is one where responsible politicians decide. The foundation of Europe is not the march towards more supranational...The crisis has pushed heads of state and government to assume growing responsibilities because, in the end, only they have the democratic legitimacy to be able to decide. Thus European integration will pass through intergovernmentalism because Europe must make strategic choices, political choices. Intergovernmentalism may well ensure that decisions have greater legitimacy, but it also has drawbacks. National vetoes make it much harder to reach decisions and implement them, as seen throughout the debt crisis. Mr Sarkozy tries to address this by suggesting that decisions be taken by “qualified” majority (ie, a weighted majority). There are other problems. Leaders that need each other to make political deals have too often turned a blind eye to each others' flaws, as happened with Greece. Without institutions to guard the common interest, smaller countries tend to feel bullied by bigger states: just see the growing rancour over the involvement of Merkozy in unseating George Papandreou and Silvio Berlusconi, the leaders of Greece and Italy respectively. Europe at 17 or 27? Mr Sarkozy has recently spoken bluntly about the need to create a core eurozone more or less separate from the ten non-euro states, including Britain. In his Toulon speech Mr Sarkozy toned down his latent separatism, though he still speaks of a “euro-zone government” and is filled with rancour about “social and fiscal dumping” and “disloyal competition" within the EU (ie, by low-tax Ireland and low-cost eastern European members). Mr Merkel, by contrast, has been careful to sound inclusive. Under presure from Mr Sarkozy, she has agreed to hold more summits of the 17 member-states. But when it comes to reforming the treaties, her stated preference is to do it with all 27 members of the EU “to avoid splits within euro members and non-euro states”. She knows that treaty change at 27 is the best way – perhaps the only way - to ensure that the European Commission and the ECJ are involved. Whether it is feasible will depend, in large part, on the price that Britain seeks to extract for its agreement to changing the EU's treaty. Though he did not express a preference, a separate new treaty at 17 is probably Mr Sarkozy's preference. This would help create a harder, more exclusive core; ensure that it it becomes as intergovernmental as possible; and exclude the more liberal British, Scandinavians and easterners. Mrs Merkel says this would be “second-best” and, even she is forced down this route, she will seek to ensure that the euro “outs” are able to join its budget strictures and remain free to join the euro in future.1 СПИСОК литературы http://www.economywatch.com http://www.canadianbusiness.com http://www.freshplaza.com http://www.ft.com/home/europe http://www.kpmg.de - a global network of independent professional firms http://www.livemint.com – the wall street journal http://www.sanna-group.ru http://www.themoscownews.com - online independent newspaper www.translate.google.ru http://www.wto.org - официальный сайт ВТО http://rt.com/business/ http://english-bird.ru/about-economics/ Богацкий И.С., Дюканова Н.М. Бизнес-курс английского языка. Словарь-справочник. Под общей ред. Богацкого И.С. – 3-е изд., испр. – Киев: «Логос», 2007 Васильев К. Англо-русский и Русско-английский словарь // изд. «Азбука», М. – 2008 Новый учебный словарь английского языка = Collins New School Treasures.- М.: ООО «Издательство Астрель», 2006 Мюллер В.К. Англо-русский словарь (онлайн версия) - http://www.classes.ru/dictionary-english-russian-Mueller.htm |