Does the Euro have a Future?

Monday 26 September 2011 at 10:49 am. Used tags: , , , , , , , , , , , , , ,

Does the Euro Have a Future?     George Soros

I am not a big fan of George Soros but I never said he was a dope.
 
this article contains lots of links for more detailed explanations. 
 
He is a clear thinker and writer and paints a grim picture for the Euro, and his article is worth reading;  it is never too late to begin to comprehend the underlying issues, particularly when you can get it first hand, in writing, from an expert like Soros, as opposed to the confused media.
 
Soros recommends that the Eurozone, led by Germany, create a Common European Treasury that could tax and therefore borrow and lend. [does anyone in their right mind think this will happen?] 
 
It is interesting to note that England has insulated itself somewhat from all this because it maintained its own currency, the pound stirling.
 
Soros points out the similarities between  the EU and USA.  The former divided by sovereign states and the later divided by the politically correct rich and poor.  In both crises, supposedly riskless assets lost some of their value; USA  mortgaged backed CDOs and eurobonds respectively. 
 
Soros believes that Germany has to get off its ass I argue the same is true in the USA. And, in both cases, it is not government, but the voters who have to get off their asses.
 
Soros hints that the eurozone has run out of money;  and the second article below from the IMF indicates that they are short funds.  And I believe our Fed is low on funds as well but not hubris.
 

If everyone is low on funds it beckons deflation and then inflation, and unfortunately big time (Jimmy Carter +) inflation.

 
The controversial Alan Klugman (sic) in a recent paper described two solutions, both of which I know would work:  (1) default on our debt and whack the Chinese and others; or (2) Inflation.
 
Inflation would hammer the elderly and those on fixed incomes; and also the poor and those with limited financial or intellectual resources.  NOT A PRETTY SIGHT. 
 
As Soros preaches:  It is a time bomb; it is a see-saw; nothing is going to happen until the fat lady sings and cuts entitlements, unfortunately, unless of course one opts for inflation which cuts entitlements in a mean insideous way and lets politicians off the hook.  
 
In the USA, the Simpson-Bowles Commission proposed a plan; but Obama refused to engage it.  So we will have to wait for the voters to decide in 2012.
 
the market today (9/26/2011) is positive on the news from the ECB and the EFSF they are willing to take more risk, as recommended by Soros.  Read the article; it is educational. 
 

I often wonder about class war politics. Who really are the greedy:  the rich? [the rich have given us the libraries and parks and hospitals and the universities and museums and foundations];  the pols? [the pols do not give, they take];   the entitled ones? [a state of mind];   the welfare staters? [the poor will always be with us, per Jesus, but Jesus didn't say they could sit on their asses];  the good people in the trenches? [my state, NH, is a conservative democrat state, the home of the proud working poor; and our unemployment is at 6%, the lowest in the nation; and we help one another]

read the rest of the article on the next page. 

Joe,

I have been watching various financial European experts debate the euro crisis on TV from France, Germany and the UK.  They all mentioned the issue that Soros discussed in his article.  There is a natural national hesitation on the part of the northern (economically responsible countries) to go into the common treasury solution that was apparently agreed to in May 2010.  They feel they have not been dissolute like their Mediterranean neighbors to the South and therefore should not be punished by becoming involved in the problems of these dissolute countries.  They have already given funds to bail out Ireland, Portugal and Greece.  Enough is enough – no more.  Angela Merkel and Nicolas Sarkozy have to convince their countries it is in their own interests to do so, but those countries do not want to hear it.  The UK stayed out of the mess by not joining in the euro.  This gave the Brits the option to weaken their currency should the need come to do so.  By the other countries joining the euro, they relinquished this most valuable tool.

Rather than continuing to keep Greece as a member of the euro, they should give them the go ahead to return to their drachma currency and let it float freely in the international currency markets.  This will give Greece the opportunity to take the steps necessary to put its economic house in order.  Once it has done so, it can opt to return to the euro.

In the meantime, all the countries, banks and other entities holding the Greece debt will have to take losses should Greece leave the euro.  This will work extreme hardship on France and French banks who hold the most of all the Greece Bondholders.  Ireland and Portugal seem to be more or less adhering to their austerity programs and in time should be able to regain their financial footing.  Italy has a rather unique problem, but instituting and adhering to its recently announced and enacted austerity measures should enable them to get control of their finances in due time.

Presently, the European common Market is not having anything to do with allowing Greece to withdraw and default.  They are intent on saving Greece as well as the other members.  In attempting to do so, they put into jeopardy the entire economy of the EU.  The contagion in Greece will surely drag down the other members in time, if it is not surgically removed.  The situation in Greece after it seriously wounds the EU economy, will spread to the US and China because the EU is a large market for both US and China goods.  If the EU gets caught in a deflationary situation it will greatly reduce the amount of goods purchased from the US and China which will result in deflation in the US and greatly curtailed exports in China.

Had the euro been instituted with a common treasury and euro bonds backed by the economies of all its members, there would most likely be no euro crisis today.  Unfortunately, the economic collapse in the Eurozone is too far along now to do anything about that other than to permit these troubled economies to be cut adrift as the contagion continues to grow.  Tom


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soros_1-101311

German Chancellor Angela Merkel and Portuguese Prime Minister Pedro Passos Coelho, Berlin, September 1, 2011

The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, [why or why did we let Lehman fail? Political payback - says Brophy] the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.

Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. [Editorial Note:  a common treasury is needed to tax so they can borrow and lend] The crisis itself erupted more than a year later, in 2010.

There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless assetcollateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now—lost some or all of their value.

Unfortunately the euro crisis is more intractable. In 2008 the US financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.

In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.

It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis.

Where are we now in this process? The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)—agreed on by twenty-seven member states of the EU in May 2010—and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.

The situation has been further aggravated by the recent decision of the German Constitutional Court. While the court found that the EFSF is constitutional, it prohibited any future guarantees benefiting additional states without the prior approval of the budget committee of the Bundestag. This will greatly constrain the discretionary powers of the German government in confronting future crises.

The seeds of the next crisis have already been sown by the way the authorities responded to the last crisis. They accepted the principle that countries receiving assistance should not have to pay punitive interest rates and they set up the EFSF as a fund-raising mechanism for this purpose. Had this principle been accepted in the first place, the Greek crisis would not have grown so severe. As it is, the contagion—in the form of increasing inability to pay sovereign and other debt—has spread to Spain and Italy, but those countries are not allowed to borrow at the lower, concessional rates extended to Greece. This has set them on a course that will eventually land them in the same predicament as Greece. In the case of Greece, the debt burden has clearly become unsustainable. Bondholders have been offered a “voluntary” restructuring by which they would accept lower interest rates and delayed or decreased repayments; but no other arrangements have been made for a possible default or for defection from the eurozone.

These two deficiencies—no concessional rates for Italy or Spain and no preparation for a possible default and defection from the eurozone by Greece—have cast a heavy shadow of doubt both on the government bonds of other deficit countries and on the banking system of the eurozone, which is loaded with those bonds. As a stopgap measure the European Central Bank (ECB) stepped into the breach by buying Spanish and Italian bonds in the market. But that is not a viable solution. The ECB had done the same thing for Greece, but that did not stop the Greek debt from becoming unsustainable. If Italy, with its debt at 108 percent of GDP and growth of less than 1 percent, had to pay risk premiums of 3 percent or more to borrow money, its debt would also become unsustainable.

The ECB’s earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB’s German board member, resigned from the board in protest. The intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority. Subsequently, the controversy led the ECB to adamantly oppose a restructuring of Greek debt—by which, among other measures, the time for repayment would be extended—turning the ECB from a savior of the system into an obstructionist force. The ECB has prevailed: the EFSF took over the risk of possible insolvency of the Greek bonds from the ECB.

The resolution of this dispute has in turn made it easier for the ECB to embark on its current program to purchase Italian and Spanish bonds, which, unlike those of Greece, are not about to default. Still, the decision has encountered the same internal opposition from Germany as the earlier intervention in Greek bonds. Jürgen Stark, the chief economist of the ECB, resigned on September 9. In any case the current intervention has to be limited in scope because the capacity of the EFSF to extend help is virtually exhausted by the rescue operations already in progress in Greece, Portugal, and Ireland.

In the meantime the Greek government is having increasing difficulties in meeting the conditions imposed by the assistance program. The troika supervising the program—the EU, the IMF, and the ECB—is not satisfied; Greek banks did not fully subscribe to the latest treasury bill auction; and the Greek government is running out of funds.

In these circumstances an orderly default and temporary withdrawal from the eurozone may be preferable to a drawn-out agony. But no preparations have been made. A disorderly default could precipitate a meltdown similar to the one that followed the bankruptcy of Lehman Brothers, but this time one of the authorities that would be needed to contain it is missing.

No wonder that the financial markets have taken fright. Risk premiums that must be paid to buy government bonds have increased, stocks have plummeted, led by bank stocks, and recently even the euro has broken out of its trading range on the downside. The volatility of markets is reminiscent of the crash of 2008.

The authorities are doing what they can to forestall an immediate breakdown. The Greeks are meeting the troika’s demands so as to receive the next installment of the rescue package. The ECB is allowing banks to borrow dollars for up to three months instead of just one week, as has been the case. The Bundestag is expected to pass legislation establishing the EFSF. These steps will delay the climax from September to December.

Unfortunately, the capacity of the financial authorities to take additional measures has been severely restricted by the recent ruling of the German Constitutional Court. It appears that the authorities have reached the end of the road with their policy of “kicking the can down the road.” Even if a catastrophe can be avoided, one thing is certain: the pressure to reduce deficits will push the eurozone into prolonged recession. This will have incalculable political consequences. The euro crisis could endanger the political cohesion of the European Union.

There is no escape from this gloomy scenario as long as the authorities persist in their current course. They could, however, change course. They could recognize that they have reached the end of the road and take a radically different approach. Instead of acquiescing in the absence of a solution and trying to buy time, they could look for a solution first and then find a path leading to it. The path that leads to a solution has to be found in Germany, which, as the EU’s largest and highest-rated creditor country, has been thrust into the position of deciding the future of Europe. That is the approach I propose to explore.

To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable. To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland. To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults.

All this would cost money. Under existing arrangements no more money is to be found and no new arrangements are allowed by the German Constitutional Court decision without the authorization of the Bundestag. There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow. This would require a new treaty, transforming the EFSF into a full-fledged treasury.

That would presuppose a radical change of heart, particularly in Germany. The German public still thinks that it has a choice about whether to support the euro or to abandon it. That is a mistake. The euro exists and the assets and liabilities of the financial system are so intermingled on the basis of a common currency that a breakdown of the euro would cause a meltdown beyond the capacity of the authorities to contain. The longer it takes for the German public to realize this, the heavier the price they and the rest of the world will have to pay.

The question is whether the German public can be convinced of this argument. Angela Merkel may not be able to persuade her own coalition, but she could rely on the opposition. Having resolved the euro crisis, she would have less to fear from the next elections.

The fact that arrangements are made for the possible default or defection of three small countries does not mean that those countries would be abandoned. On the contrary, the possibility of an orderly default—paid for by the other eurozone countries and the IMF—would offer Greece and Portugal policy choices. Moreover, it would end the vicious cycle now threatening all of the eurozone’s deficit countries whereby austerity weakens their growth prospects, leading investors to demand prohibitively high interest rates and thus forcing their governments to cut spending further.

Leaving the euro would make it easier for them to regain competitiveness; but if they are willing to make the necessary sacrifices they could also stay in. In both cases, the EFSF would protect bank deposits and the IMF would help to recapitalize the banking system. That would help these countries to escape from the trap in which they currently find themselves. It would be against the best interests of the European Union to allow these countries to collapse and drag down the global banking system with them.

It is not for me to spell out the details of the new treaty; that has to be decided by the member countries. But the discussions ought to start right away because even under extreme pressure they will take a long time to conclude. Once the principle of setting up a European Treasury is agreed upon, the European Council could authorize the ECB to step into the breach, indemnifying the ECB in advance against risks to its solvency. That is the only way to forestall a possible financial meltdown and another Great Depression.


 

Christine Lagarde: IMF may need billions in extra funding

Christine Lagarde has signalled that the International Monetary Fund (IMF) may have to tap its members – including Britain – for billions of pounds of extra funding to stem the European debt crisis.

French Finance Minister Christine Lagarde addresses a press conference, in New Delhi, India,
Christine Lagarde has warned the IMF may need more funding from its members. Photo: AP

The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.

In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: "The fund's credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders."

The suggestion came after European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion.

The plan to increase the EFSF firepower is the crucial part of a three-pronged strategy being designed by German and French authorities to stop the eurozone's debt crisis spiralling out of control. It also includes a large-scale recapitalisation of European banks and a plan for an "orderly" Greek default.

Although Britain is not involved in the large-scale eurozone bail-out projects, it is liable for 4.5pc of IMF funding.

The plan, which would aim to build a "firebreak" around the indebted eurozone countries, emerged at the IMF annual meeting in Washington where global leaders united to demand urgent action from European politicians.

Despite the developments, traders warned that the failure of politicians to agree a solid rescue plan would result in more turbulence on global stock markets.

One trader said: "The expansion to the EFSF would be good, although it's still not the eurobonds that the market has really been wanting to see. And, most significantly, it's still only an idea, not a deal."

In a G20 communique issued on Friday, leaders set a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4.

However, already the plans to recapitalise European banks have been criticised in France – which has the biggest exposure to Greek debt.

The governor of the Bank of France, Christian Noyer, told reporters yesterday he didn't "see any sign" that French banks were in trouble and that he believed there was "no need" for a recapitalisation.

But international pressure on European politicians has intensified.

Timothy Geithner, the US Treasury Secretary who proposed an increase to the EFSF at the Ecofin meeting on September 16, said that the sovereign debt pressures and banking strains in Europe were "the most serious risk now confronting the world economy". Larry Summers, Barack Obama's former chief economic adviser who was attending his 20th IMF meeting, said: "I have not been at a prior meeting at which matters have had more gravity."

Demands for action were also made by emerging market leaders. Brazil's finance minister, Guido Mantega, said European policymakers had a responsibility "to ensure that their actions stop contagion beyond the euro periphery".

The governor of the Chinese central bank, Zhou Xiaochuan, said that "the sovereign debt crisis in the euro area needs to be resolved promptly to stabilise market confidence".

With Greece facing a debt deadline at the beginning of October, the first priority is to release an €8bn tranche of bail-out money. Ms Lagarde said that the priority of international authorities this week must be "implementation, implementation, implementation" of the bail-out agreement of July 21.

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