Sovereign debt bubble thread

[Zanza]

I cannot, for the life of me, understand why, even in a Federal Europe it's any of Germany's business that France meets its fiscal rules through 75% surtaxes and with whatever pension system they choose - so long as they meet their agreed targets, which they are.  If France wants to tax her citizens to death (and she does) and to fund an extraordinarily generous welfare state (as she has) then that's her right so long as it doesn't break the EU's roles - which it doesn't.

France has funded its extraordinarily generous welfare state through debt in the last forty years. If there was no talk about debt burden sharing, you would be right and it would be no ones business. However, if the policies proposed make it dubious whether France will in the future be able to meet their agreed targets, then yes, it becomes an issue for the EU.

At the moment a genuinely liberal Italian PM, a conservative Spanish PM, a Socialist French President and Anglo-Saxon bond vigilantes and speculators are in agreement about the steps the Eurozone should take.  I've read analysts in the City saying they were celebrating when Hollande won because he'd increase the pressure on Merkel to change course.  When that happens it's worth thinking about whether they've maybe got a point.

The only thing they all agree on is one thing: someone else (remaining AAA countries in the Eurozone) should pay.

And if Germany disagrees, they should gracefully leave.

If reality could be reloaded like a computer game, I would love to see what would happen if Angie would go to the Bundestag and announce that Germany would be leaving the Euro next week. I expect a financial markets clusterfuck of truly epic proportions then. And not just in Germany.
I would expect the Euro to end very shortly after Germany left by the way.

[Tamas]

France has funded its extraordinarily generous welfare state through debt in the last forty years. If there was no talk about debt burden sharing, you would be right and it would be no ones business. However, if the policies proposed make it dubious whether France will in the future be able to meet their agreed targets, then yes, it becomes an issue for the EU.

That's the key here.

And why we sadly have more chance of seeing a breakup of the euro (and the EU) than true reform: eurobonds could only work if the member states were told that they cannot buy votes with loaned money anymore.
That is not going to happen.

[Zanza]

No-one wants just Eurobonds.  They want Eurobonds, banking union and the ECB to stand behind states and banks - as the Fed or BofE does and the ECB have hinted at if there's movement by politicians. 

But they don't want the shared governance that is required for all of that to work. And that's the crux and that's why Merkel is right not to agree to that.

[Tamas]

No-one wants just Eurobonds.  They want Eurobonds, banking union and the ECB to stand behind states and banks - as the Fed or BofE does and the ECB have hinted at if there's movement by politicians. 

But they don't want the shared governance that is required for all of that to work. And that's the crux and that's why Merkel is right not to agree to that.

I am all for Eurobonds if the necessary restrictions on spending by member states is in place and is actually enforcable by a federal authority. Otherwise this scharade would continue until all reserves of Germany are spent and we just collapse into anarchy and WW3.

[Sheilbh]

France has funded its extraordinarily generous welfare state through debt in the last forty years. If there was no talk about debt burden sharing, you would be right and it would be no ones business. However, if the policies proposed make it dubious whether France will in the future be able to meet their agreed targets, then yes, it becomes an issue for the EU.

And they've still got a debt-to-GDP level that's roughly the same as Germany's - I think there's 4-5% difference.  Despite that the reports leaking out of the French spending review is that to protect that welfare state (and their defence budget) they're planning cuts of around 40% in other departments.  So they are taking steps to meet their fiscal pact targets, which is all that should be required of them.

I mean is the fiscal pact what matters or some EZ body examining whether countries can, in the future, be likely to meet their targets because that seems rather different.

If reality could be reloaded like a computer game, I would love to see what would happen if Angie would go to the Bundestag and announce that Germany would be leaving the Euro next week. I expect a financial markets clusterfuck of truly epic proportions then. And not just in Germany.
I would expect the Euro to end very shortly after Germany left by the way.

I agree on the first point and you're probably right on the second one too.  But I think Germany could manage a Euro-divorce well and we'd be back to some growth relatively quickly.  If it's forced on us by the disorderly exit of member states then I think the consequences will be far more severe.

But they don't want the shared governance that is required for all of that to work. And that's the crux and that's why Merkel is right not to agree to that.

Again we can hardly be surprised to discover that France and Ireland etc are proud of their independence and their sovereignty.  I mean this was a big issue with the fiscal pact.  But I think it's a case of finding the right system.  The sort of shared governance Germany wants is, I think, the sort that only Germany, and possibly the Netherlands, could support.  Similarly I think the Van Rompuy proposals are woolly and, perhaps inevitably, seem to focus power in the less democratic bits of the EU's institutions.

But it's certainly a leap into integration (to restore confidence in the currency) and then build the institutions and the required treaty changes afterwards.  It's a bit like the Euro in that sense...

I think the odd thing is that Germany's not the perfect EU member when it comes to integration, but I think, and I could be wrong, that German sovereignty and rights are sort of embodied and protected in the Federal Constitutional Court which has always had an odd relationship with the EU and EU law.  In other countries that's more embodied in their political system.

Personally I think the Schmidt-Delors proposals are more promising:
http://www.notre-europe.eu/uploads/tx_publication/CompletingTheEuro_ReportPadoa-SchioppaGroup_NE_June2012.pdf
So for example Eurobonds would be issued for 10% of GDP by a European Debt Agency (headed by a Euro-FinMin accountable to a Euro finance committee from the 17 national parliaments and the European parliament).  If a country then needs access to issuing more then they can apply to the EDA for that, each increas (say to 20% of GDP) requires more oversight by the EDA FinMin.  If they need more than 60% then the country can either default and restructure their national debt (excluded from EDA) or accept EDA issued debt over 60% but the EDA FinMin more or less takes over their fiscal situation.

They also want a European fund to pay for temporary counter-cyclical policies, which is important given how eye-wateringly pro-cyclical the fiscal pact is.

[Sheilbh]

I am all for Eurobonds if the necessary restrictions on spending by member states is in place and is actually enforcable by a federal authority. Otherwise this scharade would continue until all reserves of Germany are spent and we just collapse into anarchy and WW3.

What's the fiscal pact for?  Constitutional debt and spending limits that can be enforced by the ECJ (via the Council) and charge countries up to 1.5% of GDP. 

I think the debate with fiscal union is going beyond that, because the EU has that and countries are driving themselves into recession to meet its terms (the Netherlands, for example).

[Zanza]

http://www.guardian.co.uk/business/economics-blog/2012/jun/27/eurozone-summit-germany-merkel

Eurozone summit: Germany v Italy, Spain and FranceThe summit will fail because Germany will not give the rest of the Big Four what they want: financial aid without any political terms

Let's be clear. The two-day meeting of European heads of state that begins in Brussels on Thursday will not come up with a solution to the sovereign debt crisis. It won't even get close, so any investor going long on the euro in anticipation of a successful outcome had better ought to have an exit strategy.

The reason for pessimism about the summit's outcome is not just based on historical experience, although this is certainly part of it. Nor is that the big players have done their usual trick of generating unrealistic expectations in the run-up to the talks. In the past that has been the case, but not this time.

Instead, the issue this time is that there appears to be differences between Germany and the other three members of the Big Four – France, Italy and Spain – that cannot be reconciled, at least for the moment.

Paris, Madrid and Rome have forged what might be called, for shorthand purposes, a Latin bloc. They have a long list of suggestions for how the single currency could work more effectively: a banking union, commonly issued eurozone bonds, a willingness by the European Central Bank to intervene directly in financial markets to buy the bonds of troubled countries. Put simply, what they want is a Europe in which Germany continues to write the cheques but has no greater say than now in how sovereign countries raise their taxes or run their banks.

The immediate demand is for help to Spain's banks to be provided directly rather than through Madrid. Why? Because this would mean assistance without the political guarantees demanded by Angela Merkel. The German chancellor knows that this would set a precedent and will therefore dig in her heels. This will mean the crisis gets worse but that will strengthen Germany's bargaining position.

[Sheilbh]

Anatole Kaletsky wrote an article last week in Reuters on this division:

Can the rest of Europe stand up to Germany?
By Anatole Kaletsky JUNE 20, 2012

As financial markets slide toward disaster, scarcely pausing to celebrate the "success" of the Greek election or the deal to recapitalize Spanish banks, the euro project is finally revealing its fatal flaw. One country poses an existential threat to Europe – and it is not Greece, Italy or Spain. Every serious proposal to resolve the euro crisis since 2009 – haircuts for bank bondholders, more realistic fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank – has been vetoed by Germany, and this pattern looks likely to be repeated next week.

Nobody should be surprised that Germany has become the greatest threat to Europe. After all, this has happened twice before since 1914. To state this unmentionable fact is not to impugn Germans with original sin, but merely to note Germany's unusual geopolitical situation. Germany is too big and powerful to coexist comfortably with its European neighbors in any political structure ruled purely by national interests. Yet it isn't big and powerful enough to dominate its neighbors decisively, as the U.S. dominates North America or China will dominate the Far East.

Wise German politicians recognized this inherent instability after 1945 and abandoned the realpolitik of national interest in favor of the idealism of European unification. Instead of trying to create a "German Europe" the new national goal was to build a "European Germany." Unfortunately, this lesson seems to have been forgotten by Angela Merkel. Whatever the intellectual arguments for or against German-imposed austerity or the German-designed fiscal compact, there can be no dispute about their political import. Merkel's stated goal is now to create a "German Europe," with every nation living, working and running its government according to German rules.

Merkel doubtless believes that she is helping Europe when she maternally instructs the Greeks, Italians and Spaniards to "do their homework" and so become good little Germans. But like its less benign predecessors, this effort to impose German hegemony is guaranteed to fail. Europe's leaders must therefore start considering a previously unmentionable question, perhaps as soon as next week's summit, if the euro crisis intensifies. This question is not whether Europe will agree to live under German leadership, but whether Germany will agree to live under EU leadership – or whether the other nations must form a united front against Germany to prevent the destruction of Europe, as they have repeatedly in the past.

To be specific, the euro's only chance of survival now depends on a decisive move toward political and fiscal union. Angela Merkel plays lip service to such political union, even claiming that democratic accountability is her main condition for financial rescues; but what she means is accountability to German voters, German newspapers and German constitutional judges. She promises to "do whatever it takes to save the euro" but vetoes anything that might actually work, claiming deference to German public opinion or national interests.

Europe must now call this bluff. At next week's summit, France, Italy and Spain can turn the tables on Merkel by presenting her with an ultimatum: Led by President Hollande, who has abandoned President Sarkozy's Gaullist pretensions of parity with Germany, the big three Mediterranean countries could agree on a program that really might save the euro: a banking union, followed by jointly issued eurobonds and backed by ECB quantitative easing. If Merkel tried to block these policies, the others could politely invite her to leave the euro, since Germany's political pressures evidently made membership impossible on terms its partners could accept – essentially the proposition Merkel put last month to Greece. Without Germany, the euro zone would have much smaller internal imbalances and much more political coherence, with a much weaker currency and higher inflation, both of which would make debts easier to resolve.

Merkel would probably insist on Germany's legal right to remain within the euro, ironically echoing the Greek position. At this point the other nations could play their trump card: To reduce interest rates and make their economies more competitive by weakening the euro, the debtor nations could vote for unlimited bond purchases by the ECB. The Germans on the ECB council would doubtless oppose this, but even with support from Finland, Slovakia, and perhaps Austria and Holland, Germany could command no more than 7 votes out of 23. Germany would then face the very same existential choice about its relations with Europe that Merkel has inflicted on Greece and other debtor nations.

Germans will almost certainly support the political concessions that might give the euro a chance of survival, including fiscal transfers and some mutualization of debts, once they realize that their only alternative is isolation from the rest of Europe. But before they agree to a European Germany, voters may need to be reminded that trying to create a German Europe always leads to disaster.

[Crazy_Ivan80]

Anatole Kaletsky wrote an article last week in Reuters on this division:

heh, germany might very well leave. The euro is not popular there, never has been. and if germany leaves the other rich countries will leave too I think. Will it be hard? sure. But it'll be a phyrric victory for sauce hollandaise and other southrons.

[MadImmortalMan]

Anatole Kaletsky

Wow, lots of inflammatory and insulting language in there. I'm not sure the points he makes are not overpowered and nullified in value by it.

I mean is the fiscal pact what matters or some EZ body examining whether countries can, in the future, be likely to meet their targets because that seems rather different.

Depends on whether the goal is to fix the problem or just put it off for a few years.

[Admiral Yi]

Like a lot of commentators, this dude seems more focused on adding to the narrative that the inevitable collapse was all Germany's fault rather than analyzing the solutions.

[Sheilbh]

Apparently Greece's new FinMin is projecting that their economy will shrink by 6.7+% this year.  That's rather worse than the EU/IMF projected in the second bailout.  No doubt when the Greeks inevitably fail to meet their fiscal targets this will be down to Southern European laziness/moral failings and insufficient austerity.

Wow, lots of inflammatory and insulting language in there. I'm not sure the points he makes are not overpowered and nullified in value by it.

Nonsense.  I don't think it's that strong and the language doesn't matter if the point's valid. 

It also seems in a similar vein to the Economist worrying that Merkel may go down as Bruning II or Fischer noting the painful irony of a peacefully restored, well-meaning Germany destroying herself and the 'European order' for the third time in a century.  I think George Soros goes to far when he's talking of a new German Empire of a German core with a denuded periphery.

Depends on whether the goal is to fix the problem or just put it off for a few years.

I've said all along I think Merkel's approach is the only time I've seen politicians failing to address a crisis because they're too busy trying to deal with the long-term issues.  Fiscal pacts and precise details of sovereignty sharing won't matter if the currency union doesn't exist in a year.

[Admiral Yi]

Apparently Greece's new FinMin is projecting that their economy will shrink by 6.7+% this year.  That's rather worse than the EU/IMF projected in the second bailout.  No doubt when the Greeks inevitably fail to meet their fiscal targets this will be down to Southern European laziness/moral failings and insufficient austerity.

And no doubt that will be right in part.

[MadImmortalMan]

I don't understand why all the "austerity" countries are doing their austerity in the most self-destructive way. It's like they didn't want to do it in the first place, so they're making sure it's as harmful as possible to make the public hate it. The way it is, it's both insufficient and too severe. 

[MadImmortalMan]

I've said all along I think Merkel's approach is the only time I've seen politicians failing to address a crisis because they're too busy trying to deal with the long-term issues.  Fiscal pacts and precise details of sovereignty sharing won't matter if the currency union doesn't exist in a year.

Do you honestly think it will ever happen once the pressure is off?