Europe Must Burn the Bridges and Create the Eurobond. US, UK Must Stop Myopic Opposition to Financial Transaction Tax

There is popular support for further European integration, as the Irish vote shows. Furthermore, that may be the only opportunity for the survival of the common currency in the form we know it today. Nonetheless the ECB must be given the authority, if it does not have it already, to devalue the euro and make the economies of the common currency more competitive.

Above all, they all must act fast. There must be a calculated decisiveness in their actions. Actually I tend to think that the two steps – eurobond and devaluation – must be taken together.

Irish Vote Yes in Fiscal Pact Referendum – SPIEGEL ONLINE.

The main stumbling block toward the eurobond is of course Germany although several other countries bordering the Baltic and North Seas are also opposed to the idea for obvious reasons: The eurobond would make borrowing to them more costly than with the national notes is today. But that is what unity is all about. Germany and the others can more than recoup their loses by keeping the huge common, duty free market to their products. The latter will most likely change very rapidly if the euro disappears in which case we may see intra-Europe commerce plummet.

This is actually the great opportunity for Germany to redress the wrongs of two world wars. Yes, Germany has paid huge reparations in the past but this would be a voluntary act, saving the continent’s economy, perhaps the world economy. It would be a reversal of roles: Germany saving the world economy that we screwed up; the opposite from 1939-45.

The exit of Greece from the eurozone is almost inevitable now, due to the country’s political atmosphere. The question now is whether damage control by the ECB, IMF, will be effective enough in dealing with the separation.

ECB chief calls euro ‘unsustainable,’ slams Spanish bank response – The Washington Post.

ECB President Mario Draghi said on Thursday that he believed the euro zone’s current structure  is unsustainable, and added that the region’s governments must surrender far more budget and regulatory power to a central authority if the currency union is to be saved.

As he spoke, the Irish did their part.

The eurozone crisis is affecting the U.S. tremendously but the greatest contribution we could offer to help, instead of sermonizing, is to cease the opposition to the financial transaction tax (FTT) – intended to diminish wild speculation in the financial markets. We triggered this global crisis and it is it the least we could do. But we do not support the (continental) European proposal because of Wall Street’s influence in Washington. I do believe the republican candidate Romney is also clueless in this regard and will cave in to the same forces. We, with the UK, stand alone on the rock of idiocy.

Regarding the FTT, the UK (that is the conservative government) is just being the little selfish twerp that it has been since taking office. UK’s GDP is much more dependent on The City than their continental neighbors are on their respective financial markets. And PM Cameron’s policies reflect that fact.

Our economic sluggishness today is in part caused by Europe’s crisis and Europe’s crisis is caused, in part, by our political surrender to the influence of money. Everybody will lose unless we have the courage to change.

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Egyptian Presidential Election Today, French, Greek Legislative Elections in June – All Critical

The Egyptian candidates, 13 in all, range from islamists to former ministers of the Mubarak regime. The outcome of this election, the first free election in Egyptian history, may have profound consequences in the Middle East. Unfortunately, women have been marginalized in this historic event. Not a single presidential candidate is female. Egyptian women were very active during the revolution which led to the election.

The French will go to the polls to elect a new National Assembly and its composition will be paramount in determining whether President Hollande will be able to carry out his program or instead adopt a more centrist approach.

With the arrival of Hollande, huge differences have surfaced between Germany and France in how to deal with the crisis. Hollande’s call for the creation of the euro-bond has been rejected by Germany, The Netherlands, and Finland.

With the euro bond, the borrowing cost for these 3 nations would increase while others, debt strapped nations, would find borrowing cheaper. The euro bond would homogenize their credit ratings.

All continental members of the EU want to impose a tax on financial transactions which would benefit fiscally in two ways: By generating revenue and by reducing speculation. Only the U.S and Britain oppose the move. But by opposing this tax, and the reduction of speculation, both the U.S. and Britain may be shooting themselves in the foot. If the EU breaks apart, they will feel the pain too. Britain is part of the EU but not of the eurozone.

The Greeks are forming a new government in June and the composition of this government may be the key on whether Greece stays in the euro zone. Further international fiscal support for Greece hinges on whether the new Greek government swallows the bitter pill of austerity reforms. French President Hollande however favors reducing the size of the pill and instituting growth measures simultaneously.

If Greece leaves the euro zone, all bets are off. There is really no precedent in this area so the consequences are difficult to predict. Greece leaving the common currency zone may trigger a contagion effect in both Italy and Spain.

I do not understand why the ECB does not devaluate the euro more to make European-made products more competitive. I believe decisive action in that area should be taken rapidly but it is not happening and the exchange rate is being left to the currency markets where the euro has lost some ground but not enough to really make a difference.

What we all can count on is that all these events will affect us profoundly here in the U.S. The only thing certain is uncertainty.

Greek Debt Deal Passes: Europe Must Focus on Growth – U.S. Adds 227,000 Jobs – Governor Christie Throws Environment Under the Bus

BBC News – Greek debt swap ‘success’ welcomed by European leaders.

Probably not many Americans realise how much was at stake here and although the respite gained by Greece is temporary and comes at a cost, it provides time for Europe to energize the euro zone economies.

The first step toward that goal, in my opinion, is to devaluate the common currency, probably to reach parity with the US dollar. This would make imports more expensive and euro-zone exports cheaper abroad. Tourism, one of the industries where Greece can show rapid growth, would greatly benefit from a cheaper €. The Greek economy contracted 7.5% in the last 3 months of 2011 under the weight of austerity measures.

One other factor is to control the price of oil and Europe must make an effort in muffling the war drums in the Middle East. The E.U must take the high ground of reason and diplomacy. High oil prices will make growth more difficult for everyone but the weaker economies will suffer the most.

The prudence in foreign policy that I advocate above applies to the United States as well. We should not be playing firemen elsewhere when our house is smoldering.

The Greek swap deal was welcomed by numerous private sector lenders to Greece, who said it paved the way for agreement on the EU bailout.

“The very strong and positive result provides a major opportunity now for Greece to move ahead with its economic reform program, while strengthening the  €  area’s ability to create an economic environment of stability and growth,” said Josef Ackermann, chairman of the International Institute of Finance, which represents private lenders.

U.S. Extends Its Run of Strong Job Growth Another Month – NYTimes.com.

It is the third consecutive month above 200,000 nationally. Unemployment however remains at 8.3. Nonetheless, the absence of bad news is good news. If this continues, it will help President Obama in November.

Christie administration adopts rule allowing businesses to bypass N.J. environmental regulations | NJ.com.

This was expected because the governor had proposed it in 2011. New Jersey is the most polluted state in the nation, with the possible exception of Louisiana. It is an act of desperation of an administration bent on creating some economic growth on faulty foundations. Growth that comes at the expense of the environment is not sustainable but what does he care? The governor is constantly flirting with higher offices which would involve moving to Maryland or Virginia. It really does not matter (to him) if he leaves a mess behind.

If elected governor in 2013, my policies will aim at sustainable growth with most consideration for maintaining the environmental integrity of New Jersey. Will I be an environmental zealot? Certainly not. But I will not exchange public health and quality of life for the mighty dollar either.

Lessons for New Jersey Found in Greece

Greece’s debt swap looks like it might work – Mar. 7, 2012.

The deadline for private investors accepting a haircut of their Greek holdings is tonight. If a sufficient number of investors approve the deal, which involves losing up to 75% of their investment, Greece will then enforce what is called Collective Action Clauses (CAC) – essentially forcing the investors reneging of the deal to accept the same terms.

The CAC are terms Greece and many other bond issuers insert in their prospectus at the time of offering. It is a contract point.

If not enough private investors agree on the Private Sector Involvement agreement (PSI), – the haircut – then Greece would not be able to apply the CAC and a disorganized default would take place, at worse terms for investors.

A disorganized default could cost over €1 trillion and send shock waves throughout the world economy.

Private institutional investors own about 41% of the €206 billion Greece owns to private investors. That includes banks, insurance companies, pension systems, hedge and mutual funds, etc.

Some Investors who own Credit Default Swaps (CDS) – a sort of insurance policy against default – may be reluctant to accept the haircut offered by Greece.

The Lessons for New Jersey: Unlike Greece, New Jersey can not officially default but can default de facto – as a matter of fact – by missing payments on its outstanding debt. All the current proposals for tax reduction or tax credits made by both the Governor and the Legislature lack solid fiscal footing, are based on wishful thinking, and are too small to have the intended economic effect – if there was any intention other than a political stunt preparing for the 2013 election.

I like tax cuts like everyone else but not when I will have to pay back the money with interest in a few years or my sons will have to if New Jersey’s liquidity outlives me. The current proposals are nothing but irresponsible.

The New Jersey Government, both sides of the aisle, are placing New Jersey on the same path Greece followed, exactly for the same reasons Greek politicians did: To perpetuate themselves in power.

Christie N.J. Budget Proposal: I’ll Have One of What He’s Having

Gov. Chris Christie budget speech full text | NJ.com.

This a proposed budget; not the final budget. An over-optimistic proposal is not a capital sin but the main problem is that if this become the budget and the revenue does not meet the glossy expectations, of course the governor will rather sacrifice something else  than his pet-tax-cut experiment – not for any economical reason but for purely political and propagandistic purposes. And here are two further points:

First: The question if the governor is throwing this in to influence the VP selection in the event that Romney becomes the republican candidate in 2012. That would be the most unconscionable act but nothing surprises me. And anyway, I still believe it would be a futile sacrifice of New Jersey’s interests: I think that Romney – if he wins the nomination at all – most likely will choose a more conservative VP from the South or Midwest. A Northeastern ticket may not do very well in November considering that the bulk of the republican base is not in the Northeast.

Second: Every imponderable is against the prospect of a fast recovery: High consumer leverage, possible conflict with Iran, possible U.S. intervention in Syria (Obama may turn more hawkish if he sees re-election in doubt), China’s economy slowing down, political gridlock in Washington, more problems with the EU crisis  (Greece is not out of the woods and Portugal is beginning to show signs of distress again), New Jersey’s highest unemployment in the Northeast, wage stagnation, and the list goes on – all on the negative side.

The Straits of America – Nouriel Roubini – Project Syndicate.

I frankly can’t imagine how the administration arrived at this rosy forecast. As in “When Harry Met Sally”
I’ll have one of what he’s having.

Then, for the sake of argument, we must arrive at the best scenario – that everything goes well – and thus face the question: What does this tax cut accomplish – from the economic point of view? My answer is: Nothing, and the same goes for the democratic alternative. Both proposals are political; not economical measures. They are too small, would be applied in lieu of drastic structural reforms, and as they have been proposed are spread out – because the fat State of New Jersey is unable to do any better – so the input of cash in the economy is diluted to insignificance.

But we will see what comes out as final product at the end of June. By then, the French presidential election will be over and we may have a socialist government in France which may close the chapter of euro rescue. Or all hell may have broken lose in the Persian Gulf. And even if neither happens, we should be addressing our outstanding obligations before they compound beyond reach.

Central Banks Take Joint Action to Ease Debt Crisis

Central Banks Take Joint Action to Ease Debt Crisis – NYTimes.com.

Very timely move as credit is tightening and numerous nations , including the U.S. depend on borrowing. Without readily available credit, any chances of growth are null.

At the core of the issue is that Chinese banks are also hoarding cash under orders of the government to reduce leverage and the money supply. The Chinese are worried about inflation.

In Europe, numerous banks are over-exposed with large holdings of sovereign debt. Just yesterday numerous banks were downgraded, including all the major American banking institutions.

Then investors do not trust sovereign bonds any longer, not after they lost 50% of their loans to Greece. The German 10 years notes offered last week received cool reception even though Germany is viewed as the most stable economy in the E.U.

The possible way out I see at this point is to further the union of Europe, democratizing the E.U – so that member of the European parliament are elected by the people – and establishing a supranational control system for national budgeting and eurobonds. The question is whether European political leaders can move fast enough or achieve those goals at all.

A Two-Gear Europe? French President Proposes Division

Troubled Currency: Italian Problems Stoke Worry over EU’s Future – SPIEGEL ONLINE – News – International.

And the French president has received support from the German foreign minister Joschka Fischer. What the two-gear Europe may look like – if adopted at all, is still a mystery. I am assuming here that the high gear Europe will encompass mostly the northern portion of the continent and the lower gear zone with some of the countries on the Mediterranean basin, most of the Balkans, Portugal, and Ireland.

German chancellor Merkel envisions rapid changes in the structure of the common currency zone to reinforce the union. The Euro zone would them become a political union and the greatest challenge there is to convince individual members to surrender some of their sovereignty. Some may say that Germany is trying to conquer Europe, this time without firing a shot.

If a closer union is the end-result, the current crisis would be a blessing in disguise.

Cause for particular worry is that the size of Italy’s economy, the euro zone’s third largest, makes it too large to bail out. A euro-zone official told Reuters on Thursday that “financial assistance is not in the cards” and said that granting an emergency credit line to Italy, enabling it to avoid the punitive interest rates currently being demanded on the open market, was not under consideration.

I am very sincerely hoping that the Euro, and its dream of continental unity, survive.