Tag Archives: eu

Two EU Finance Ministers Throw their Bosses and Nations Under the Bus

By William K. Black

The finance ministers of Italy and Serbia have just publicly thrown their heads of state and their nations under the bus.  In a testament to the crippling effect of the belief that “there is no alternative” (TINA) to austerity, these finance ministers have insisted on bleeding economies that are in desperate need of fiscal stimulus.  Their pursuit of economic malpractice is so determined that they eagerly sought out opportunities to embarrass the democratically elected head of state in Serbia when he dared to support competent economic policies.

Continue reading

Merkel’s Pyrrhic Victory over Cameron

By William K. Black

The old line that one should be very careful about what one wishes for – for you may receive it applies to Germany’s installation of Jean-Claude Juncker as head of the EU Commission. Germany’s Prime Minister Angela Merkel has just crushed her UK counterpart (David Cameron) by orchestrating a nearly unanimous vote among EU nations to appoint (not, really, “elect”) Juncker as head of the EU Commission (not, really, “Parliament”).

The old days of needing to hide Germany’s control of the EU through the façade of a German-French partnership are long gone.  EU nations know that there will be a high price to pay for attempting to buck Germany – and that the effort will fail.  Cameron’s effort to block Juncker is generally viewed outside of the UK as quixotic and humiliating while Merkel is viewed as reigning supreme and serene.

Continue reading

The EU Center-Right and Ultra-Right’s Continuing War on the People of the EU

By William K. Black

The New York Times has provided us with an invaluable column about the interactions of the EU’s rightist and ultra-rightest parties. It is invaluable because it is (unintentionally) so revealing about the EU’s right and ultra-right parties and the NYT’s inability to understand either the EU economic or political crises. The NYT article illustrates its points by presenting a tale entitled “A German Voice, Hans-Olaf Henkel, Calls for Euro’s Abolition.”

Continue reading

The Troika Attack Italy for Refusing to Bleed the Economy

By William K. Black

The title to the latest Wall Street Journal article on Italy is “EU Tells Italy to Adopt More Austerity Measures.”  It’s an old, stupid remedy.  If you hit your carburetor with a hammer and it doesn’t fix it – hit it harder and more often.  Italy is the troika’s carburetor and austerity is its hammer.

The Troika’s Response to Renzi’s Electoral Success: Crush Him

The general context of the troika’s latest act of depravity is particularly interesting.  The troika consists of the European Commission, the IMF, and the ECB.  The troika’s insistence that the periphery inflict austerity caused not simply a gratuitous second recession through much of the EU but a Second Great Depression in Italy, Spain, and Greece.  One-third of the eurozone’s population – 100 million people – was kicked into a Great Depression due to the troika’s long-falsified economic dogmas.

Continue reading

Heard (but not understood) On the Street: The WSJ and Deflation

By William K. Black

A brief update is in order after my three part series on how the troika (the ECB, EU, and the IMF) was acting contrary to its stated policies on deflation, Mario Draghi’s (the head of the ECB) confession that he favored deflation in the eurozone periphery because he wanted these nations to have lower prices and wages so that they could increase exports, and the disgraceful reporting of the subject in the New York Times and the Wall Street Journal.  The WSJ’s Heard on the Street” feature is out with an April 3, 20014 story on deflation that epitomizes each of these defects.  The title of the article foreshadows the analytical black hole that follows: “Inflation, Euro Test Draghi’s Resolve at ECB.”

Continue reading

The EU Needs a Bill Seidman to Save It from Itself: Cyprus and the “Reverse Toaster Theory”

By William K. Black
(Cross posted at Benzinga.com)

Everyone involved in financial regulation in modern times with any broad knowledge of the field will know of Bill Seidman, Chairman of the FDIC and the RTC.  In 1989, the newly elected President Bush (the First) had a very good idea that became the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA).  FIRREA was one of the very unusual cases of enhancing financial regulation.  It was prompted by the lessons we had learned in containing the Savings and Loan (S&L) Debacle.  The original administration bill, however, had a very bad idea associated with the President’s chief of staff, John H. Sununu.  Sununu is a brilliant guy – who wants you to know how much smarter he is than everybody else.  His wiki biography page informs the reader that: Continue reading

EU austerians rely on US stimulus to bail them out of recession

By William K. Black

The New York Times’ web version ran a story this morning (January 8, 2013) entitled “Unemployment Continues to Climb in Euro Zone.”

Eurostat reports that Eurozone unemployment has reached the record rate of 11.7%, with 18.8 million unemployed (an increase of two million in a year).  “[Y]outh unemployment continues to grow, with 5.8 million people under 25 classified as jobless in November, up 420,000 from a year earlier.”  As youth unemployment surges it becomes common for college graduates in the periphery to emigrate.  The article shows that Berlin’s insistence on inflicting austerity on Spain and Greece has forced them into Great Depression levels of unemployment.  Italy’s level of youth unemployment is also at Great Depression levels.   
Continue reading

The Elephant in the Room is Spain, Not Italy

By Marshall Auerback


Another day andthe markets remain fixated on whether Greece comes to a “voluntary” arrangementwith its creditors.  The key word is“voluntary” because the myth of “voluntary compliance has to be sustained sothat those deadly credit default swaps avoid being triggered. 
But let’s faceit:  Greece is a pimple.  If the rest of the euro zone could cut itlose with a minimum of systemic risk, Athens would have long gone the way ofTroy.  The real issue is whether thecredit default swaps trigger such a huge mess with the counterparties that itcreates renewed systemic stress which more than offsets the benefits to theholders of the CDSs. 
The moreinteresting question is:  suppose Greece finally does get a deal?  Irealize everybody says it is a “one-off”, but do you really think theIrish, Portuguese, or even the Spanish and Italians will go along with that,particularly if (as is likely) they continue to experience double digitunemployment and minimal growth?
Now you could argue thatPortugal and Ireland, like Greece, are but small components of the EuropeanUnion and could well be covered in one form or another via the existingbackstops established over the last several months, notably the EuropeanFinancial Stability Fund (EFSF) and the European Stability Mechanism(ESM). 
But you can’t say this aboutSpain, which remains the real elephant in the room – not Italy – even thoughSpain’s borrowing costs remain lower than Italy’s. This is perverse. 
Though Italy has a highsovereign debt, it has a low private debt (the product of years of high budgetdeficits, but that’s the story for another blog). Italy has a fiscal deficitthat is low relative to most economies today. It already has a primary surplus.The greater than expected past expansion of the ESCB and the current ongoingLTROs are likely to absorb panic and forced selling of Italian debt. TheItalian 10-year yield could fall back below 5% (having already fallen from the 7%plus levels, pertaining a mere 6 weeks ago).

In theory, this rally in bond yields should lead to a reassessment of thegravity of the Italian problem and therefore the European sovereign debt andbanking problem. That could be positive for equity markets and, indeed, hasbeen so since the start of the year. 

But does Spain truly deserve theborrowing advantage it now has in relation to Italy?  Its 10-year bonds are yielding some 60 basispoints lower. True, its sovereign debt to GDP ratio is low at about 75%, but partof its enormous private debt will almost certainly have to be “socialized.”  Moreover, Spain has virtually the highestnon-financial private debt-to-GDP ratio of all the major economies.  Its ratio is almost twice that of Italy’s. Itsfiscal deficit last year was probably higher than the official estimates, closeto 9% of GDP (the previous Socialist government routinely lied about itsfigures – in fact, no country, not even the US, has lied more extensively aboutthe condition of its banks.  Spain, relative to GDP, has the largestshadow real estate inventory in the world, with the possible exception ofChina, which probably doesn’t even have a reliable second or third set ofbooks).

Let’s be clear about onething:  this is not a tale of Mediterranean“profligacy”, as least as far as public spending was concerned.  Anybody looking at Spain through a sensiblefinancial balances framework in the mid-2000s would have observed that theprivate sector was being squeezed badly by the fiscal drag. The externalposition was in deficit (current account) which means the public and externalbalances were draining growth from the economy. Yet it still boomed up into theonset of the crisis. How did that happen?

The profligates were all in theprivate sector, although you could readily argue that the government’s“responsible” fiscal policy created the conditions for a private sector debtbinge.
  Prior to 2008, the Spanisheconomy was held out as the darling of Europe however the reality was quitedifferent. The country was running budget surpluses by 2005 and foreigninvestment was booming. Most of this investment went into construction whichwas stimulated by a massive real estate boom.

A few years ago, using data fromData from the Banco de España (central bank) Bill Mitchell graphed the nationalbudget deficit as a percentage of GDP for Spain and the EMU overall from 1989to 2008 (data for the EMU clearly didn’t start until 1995). As Mitchell
notes,one can observe the tightening of fiscal positions as the Growth and StabilityPact provisions were forced on the EMU nations:


EMU and Spain: Budget deficit % of GDP,1989 to 2008

Consistent with a tighteningfiscal position leading to surpluses in 2005, the only way that this boom couldcontinue was for the private sector to go increasingly into debt.That is exactly what happened and because the property boom was so large thedebt levels were also very high – average household debt tripled. And that, incontrast to Italy, is the core problem with which Spain is dealing today to asubstantially greater degree than Italy. So it’s wrong to lump the two together interchangeably as the marketshave been doing.  Paella and pasta don’tmix well together.

Okay, but that was the previousZapatero
Administration.  Now we supposedly have a new “responsible” conservativegovernment that promises to carry out the same policies even moreresolutely.  And look how successfulthey’ve been:  Spain’s joblessclaims shot up a further 4% in January from December to 4.59 million, a signthat the euro zone’s fourth-largest economy is still shedding jobs at a recordrate. All sectors posted more claims but the rise was sharpest for services at5.1%. In construction, weighed down by a four-year property slump, the numberof residents registered as job seekers rose 2.1%. Compared with the same perioda year ago, overall claims rose 8%.  GDPcontracted 0.3%.  

Okay,“give them time”, argue the defenders of the new government.  And, if the Rajoy Administration was trulyembarking on a new policy course, that would be a fair comment.  Unfortunately, this government has signed onto even tighter fiscal policy rules.
Somehowthey are expected to suck demand out of their economies through tax increasesand spending cuts, but when the slower growth that results in means the targetfor deficit reduction is not met, the Spanish, like their Greek, Irish,Portuguese and Italian counterparts, will be punished for it.

Eventhe Rajoy Administration implicitly appears to recognize this danger, as it isalready moving the goalposts in regard to its spending cuts targets as apercentage of GDP.  Unfortunately, theyblame this on external circumstances beyond their control. To the extent thatthey agree to submit themselves to rules which were routinely disobeyed by theGermans and French during the EMU’s inception, that is true, although theSpanish government refuses to acknowledge that their resolute tightening fiscalpolicy ex ante might well have something to do with the fact that Spain’seconomy continues to deflate into the ground ex post.  Remember,
thehistory of the Stability and Growth Pact has long demonstrated that thesenonsensical rules are already impossible to keep within during a significantdownturn. And now the new Spanish government wants to tighten them even furtherand invoke pro-cyclical fiscal reactions earlier.
This, at a time when the nationalunemployment rate is approaching 23%, and the youth unemployment rate (25 yearsor younger) is at 49%, according to the latest Eurostat data.

Sonearly 50 per cent of willing workers under the age of 25 in Spain are withoutwork and will remain like that for years to come. That will damage productivitygrowth for the next decade or more. It is an indication that the monetarysystem has failed and attempting to reinforce those failures with moreausterity will only make matters worse.  The new government’s proposed fiscal policy “reforms” areparticularly toxic policy mixture for Spain.

Of course, the ongoing threat ofa disorderly default in Greece also remains a potentially dangerous areaif it is not contained by the ECB’s actions.
 But it’s more interesting to see what happens as the magnitude ofSpain’s problems become more apparent.  Will the troika tell Spain that a Greek style70% haircut is not in the cards?  Willthey try to suggest that the government is rife with corruption, that thecountry is chock-a-block full of scoff-laws and tax evaders, and that theefficient Germans would do a much better job of collecting taxes?

Spain is still a relatively youngdemocracy.
  The transition began a mere37 years ago when Francisco Franco died in 1975, but there was an attemptedcoup by Antonio Tejero as recently as 1981. This is worth pondering whilst observing the implosion of Spain’seconomy. The decision for Europe’s bosses is this: they must ultimately confront theconsequences of their policy choices. They can destroy the eurozone by continuing with the same failed mix ofpolicies or by salvaging it by adding what has been missing from the outset: amechanism for shifting surpluses to the deficit regions in the form ofproductive investments(as opposed to handouts or loans). Turning stateslike Spain into sundrenched economic wastelands within the eurozone, andforcing the rest of the currency area into a debt-deflationary spiral, is amost efficient way of blowing up the whole system and possibly threatening thevery existence of Spanish liberal democracy itself.

Germany puts the EU through the Wood Chipper – and Theocrats Cheer

By William K. Black

Those of you who have seen the film Fargo have the wood chipper scene indelibly seared into your memory.  (If you have not seen Fargo please remedy this deficiency promptly.)  I return to the scene at the end of this piece.

Walter Russell Mead, a recovering liberal, has crafted a crude ode to purported German national character and insult to purported French national character.  The defective purported national character of the French is leavened with equally crude stereotypes of the purported superior religious character of Huguenots and Jews.  It is all set within a broader, cruder attack on purported ethnic “Latin” character.  Mead’s piece ran in opinion pages of the Wall Street Journal, which embraces these prejudices and considers them the height of intellect.

Continue reading