In an attack that pits Germany against other eurozone countries ahead of a vital European summit this week, Jens Weidmann, the head of Germany's central bank, said proposals to shore up Greece with bonds guaranteed by the eurozone amounted to forcing taxpayers to "vouch for Greece's entire national debt". "Nothing would destroy more quickly and in a more lasting fashion incentives for a solid budget policy than joint guarantees for sovereign debt," he said. "But this is exactly what some politicians and economists are proposing in the form of eurobonds as a solution to Greece's problems." Eamon Gilmore, Ireland's deputy prime minister, said issuing eurobonds was "one of a series of options that have to be looked at" and "an option I favour". Mr Gilmore said the stronger European countries had to see the crisis as a "eurozone problem rather than an issue for individual countries". On Friday, Deutsche Bank analysts warned that markets around the world could crash by more than a third if Europe fails to resolve its debt crisis. If the Germanic bloc agrees to tear up the mandate of the European Central Bank, letting it switch from inflation-targeting to job-targeting ("Unemployment must not exceed 10pc in two or more EMU states, or some such formula), effectively instructing the ECB to embark on Fed-style stimulus for three to five years. This might allow Spain to work off a total debt load now topping 300pc of GDP without having to deflate wages and tip further into a Fisherite debt-deflation spiral. It might allow Italy at 250pc of GDP to claw back lost competitiveness without self-defeating perma-slump. Yet such ECB stimulus would have a nasty side-effect: inflation threatening 5pc or 6pc in Germany. Berlin would find itself in much the same trouble as Madrid and Dublin six years ago: expected to twist itself in knots by undertaking massive fiscal tightening and financial repression to offset a massively inappropriate monetary policy. I strongly doubt that the Bundestag, Tweede Kamer, or Finland's Eduskunta will accept such conditions. Why should they? The citizens of the German bloc never voted for an EU treasury, tax union, or debt pool, or for the emasculation of parliamentary prerogatives that this implies, if they were allowed to vote at all. Indeed, they were told this would never happen. Germany's Social Christian leader Edmund Stoiber japed after Maastricht that a future German rescue of any EMU state was as likely as "famine in Bavaria". Given that these sovereign diets will not efface themselves lightly, the wise course is to prepare for an orderly break-up of monetary union. (source: the telegraph)
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Monday, July 18, 2011
In an attack that pits Germany against other eurozone countries ahead of a vital European summit this week, Jens Weidmann, the head of Germany's central bank, said proposals to shore up Greece with bonds guaranteed by the eurozone amounted to forcing taxpayers to "vouch for Greece's entire national debt". "Nothing would destroy more quickly and in a more lasting fashion incentives for a solid budget policy than joint guarantees for sovereign debt," he said. "But this is exactly what some politicians and economists are proposing in the form of eurobonds as a solution to Greece's problems." Eamon Gilmore, Ireland's deputy prime minister, said issuing eurobonds was "one of a series of options that have to be looked at" and "an option I favour". Mr Gilmore said the stronger European countries had to see the crisis as a "eurozone problem rather than an issue for individual countries". On Friday, Deutsche Bank analysts warned that markets around the world could crash by more than a third if Europe fails to resolve its debt crisis. If the Germanic bloc agrees to tear up the mandate of the European Central Bank, letting it switch from inflation-targeting to job-targeting ("Unemployment must not exceed 10pc in two or more EMU states, or some such formula), effectively instructing the ECB to embark on Fed-style stimulus for three to five years. This might allow Spain to work off a total debt load now topping 300pc of GDP without having to deflate wages and tip further into a Fisherite debt-deflation spiral. It might allow Italy at 250pc of GDP to claw back lost competitiveness without self-defeating perma-slump. Yet such ECB stimulus would have a nasty side-effect: inflation threatening 5pc or 6pc in Germany. Berlin would find itself in much the same trouble as Madrid and Dublin six years ago: expected to twist itself in knots by undertaking massive fiscal tightening and financial repression to offset a massively inappropriate monetary policy. I strongly doubt that the Bundestag, Tweede Kamer, or Finland's Eduskunta will accept such conditions. Why should they? The citizens of the German bloc never voted for an EU treasury, tax union, or debt pool, or for the emasculation of parliamentary prerogatives that this implies, if they were allowed to vote at all. Indeed, they were told this would never happen. Germany's Social Christian leader Edmund Stoiber japed after Maastricht that a future German rescue of any EMU state was as likely as "famine in Bavaria". Given that these sovereign diets will not efface themselves lightly, the wise course is to prepare for an orderly break-up of monetary union. (source: the telegraph)
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Eurozone governments need to improve their crisis-management skills and learn to speak with one voice, the head of the European Central Bank said on Sunday at the start of what promises to be a crunch week for the single currency.
As financial markets deliver their verdict on the results of controversial stress tests on European banks and political leaders prepare for a crunch summit to discuss the single currency crisis on Thursday, the ECB president, Jean-Claude Trichet, said governments needed to improve "verbal discipline".
"There is an absolute need to improve 'verbal discipline'. The governments need to speak with one voice on such complex and sensitive issues as the crisis," Trichet said. In an interview with Financial Times Deutschland conducted last week, he reiterated that the ECB would not accept bonds from a nation that defaults as collateral for fear of triggering a "Lehmans-style" event in the financial system
Eurozone leaders are braced for another battering from financial markets this week, amid growing fears that the spiralling sovereign debt crisis is threatening the future of the single currency.
"It's likely to be a very confused and volatile week, with mixed messages from markets and policymakers," said Sony Kapoor, director of the Brussels-based thinktank Re-Define.
After Italy was forced to bring forward austerity plans last week to placate anxious bond investors, European council president Herman Van Rompuy called leaders to an emergency summit this Thursday.
The results of "stress tests" by the new European Banking Authority revealed on Friday that eight banks were vulnerable, and must raise €2.5bn (£2.2bn) to cushion themselves against potential losses.
The EBA did not calculate the impact of a default by Greece or other vulnerable eurozone countries, but it released detailed data about banks' holdings that will allow analysts to make their own assessment. "Everybody's sitting up crunching numbers," said one market insider.
Matt Spick, banking analyst at Deutsche Bank, said: "We expect the sector to still be at the mercy of macro issues."
Unless Thursday's summit results in concrete announcements about how to contain the crisis, analysts are warning that anxious investors will continue to target Italy and Spain.
Neil Mellor, of BNY Mellon, said: "Everyone expects some sort of default to come about but in the meantime contagion is rife."
Eurozone leaders are braced for another battering from financial markets this week, amid growing fears that the spiralling sovereign debt crisis is threatening the future of the single currency.
"It's likely to be a very confused and volatile week, with mixed messages from markets and policymakers," said Sony Kapoor, director of the Brussels-based thinktank Re-Define.
After Italy was forced to bring forward austerity plans last week to placate anxious bond investors, European council president Herman Van Rompuy called leaders to an emergency summit this Thursday.
The results of "stress tests" by the new European Banking Authority revealed on Friday that eight banks were vulnerable, and must raise €2.5bn (£2.2bn) to cushion themselves against potential losses.
The EBA did not calculate the impact of a default by Greece or other vulnerable eurozone countries, but it released detailed data about banks' holdings that will allow analysts to make their own assessment. "Everybody's sitting up crunching numbers," said one market insider.
Matt Spick, banking analyst at Deutsche Bank, said: "We expect the sector to still be at the mercy of macro issues."
Unless Thursday's summit results in concrete announcements about how to contain the crisis, analysts are warning that anxious investors will continue to target Italy and Spain.
Neil Mellor, of BNY Mellon, said: "Everyone expects some sort of default to come about but in the meantime contagion is rife."
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