Eurozone Stability Stricken

Economist Ambrose Evans Pritchard is predicting a major Eurozone upheaval as Germany comes to terms with the fact that it can no longer support weaker union partners, particularly Greece. He describes possible scenarios, including the breaking of the EU into separate blocs with Germany introducing new currency in one bloc with France maintaining the euro in the other to avoid EU collapse. Regardless of strategy, he argues it is clear the status quo will not survive and that some type of system overhaul will be necessary to move forward in a positive direction. For more on this continue reading the following article from Tim Iacono.

Now completely back into the swing of things after what seemed like an unusually long absence over the summer, time that was presumably taken for a good long break from focusing on the world’s financial market woes, Ambrose Evans Pritchard at the U.K. Telegraph files this comprehensive report on why Europe is about to go up in flames.

First we learn from planted leaks that Germany is activating “Plan B”, telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece’s return to the drachma.

German finance minister Wolfgang Schauble chose to do this at a moment when the global economy is already flirting with double-dip recession, bank shares are crashing, and credit strains are testing Lehman levels. The recklessness is breath-taking.

If it is a pressure tactic to force Greece to submit to EU-IMF demands of yet further austerity, it may instead bring mutual assured destruction.
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Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been “Unconditional Capitulation”, and “Terrorization of Greeks”, and even “Fourth Reich”.

As one prone to hyperbole, you might think that Ambrose is just doing what he does best (something that, apparently, boosts the Telegraph’s readership), but, maybe not this time.

The problems in Greece seem even more intractable today than they did a month ago or a year ago, so, maybe the Germans are really just doing the world a favor by precipitating a default (and breaking up the euro) sooner rather than later, and the recent resignations by top German banking officials have gone a long way in helping to make that happen.

We have never been so close to EMU rupture. Friday’s resignation of Jurgen Stark at the European Central Bank is literally a kataklysmos, a German vote of no confidence in EMU management. Dr Stark is not just an ECB board member. He is the keeper of the Bundesbank’s monetary flame.

The vehemence of his protest against ECB bond purchases confirm what markets suspect: that the ECB cannot shore up Italian and Spanish debt markets for long without losing Germany.
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There is a close parallel between 1930s Gold and EMU, both in destructive effect and totemic sanctity. The Gold Standard was more than a currency system. It was the anchor of an international order and way of life.

My solution – like that of Hans-Olaf Henkel, the ex-head of Germany’s industry federation (BDI) – is to split EMU into two blocs, with France leading a Latin Union that keeps the euro. This bloc would devalue but not by 60pc, yet uphold its euro debts intact. The risk of default and banking crises would decrease, not increase.

The German bloc could launch their Thaler, recapitalizing banks to cover losses from rump euro debt. Disruptions could be contained by capital controls at first. None of this is beyond the wit of man. My bet is that aggregate losses would be lower than the status quo, and the long term outcome much healthier. The EU might even carry on, unruffled.

The status quo, however, is not acceptable. EMU’s debt-deflation strategy has trapped half of Europe in depression, with youth unemployment reaching 46pc in Spain and no way out for years.

Perhaps a global coalition of the G20, IMF, China, and the oil powers will combine to rescue Euroland, as some now hope. But how would that bridge the gap between EMU’s North and South? It solves nothing.

Germany and Greece in the same monetary union just doesn’t seem to make any sense anymore (actually, it hasn’t made any sense since the incoming Greek government announced in late-2009 that their predecessors had cooked the books for the last decade). At this point, the sooner they ditch the status quo, the better.

This article was republished with permission from Tim Iacono.

Is France's Stimulus Package More Effective Than The US Stimulus?

France's approach to stimulus spending contrasts pretty sharply with the US approach. Instead of spending on long-term infrastructure projects designed to stimulate the economy in both the short and long-term, France is focusing on getting funds out quickly to citizens with public works projects like restoring famous landmarks. The French minister in charge of the stimulus says their strategy is better, but is it? Economist Mark Thoma examines this question in the following post.

The "cheese-eating surrender monkeys" say that when it comes to stimulus programs, “The country that is behind is the U.S., not France.”:

France, Unlike U.S., Is Deep Into Stimulus Projects, by Nelson D. Schwartz, NY Times: French workers normally take off much of the summer, but this month,... throngs of tourists will be jostling alongside stonemasons, restoration experts and other artisans paid by the French government’s $37 billion economic stimulus program.

Their job? Maintain in pristine condition the 800-year-old palace of more than 1,500 rooms where Napoleon bid adieu before being exiled to Elba and where Marie Antoinette enjoyed a gilded boudoir.

Besides Fontainebleau, about 50 French chateaus are to receive a facelift, including the palace of Versailles. Also receiving funds are some 75 cathedrals like Notre Dame in Paris. A museum devoted to Lalique glass is being created in Strasbourg, while Marseilles is to be the home of a new 10 million euro center for Mediterranean culture.

All told, Paris has set aside 100 million euros in stimulus funds earmarked for what the French like to call their cultural patrimony. It is a French twist on how to overcome the global downturn, spending borrowed money avidly to beautify the nation even as it also races ahead of the United States in more classic Keynesian ways: fixing potholes, upgrading railroads and pursuing other “shovel ready” projects.

“America is six months behind; it has wasted a lot of time,” said Patrick Devedjian, the minister in charge of the French relance, or stimulus. By the time Washington gets around to doling out most of its money, Mr. Devedjian sniffed, “the crisis could be over.” ...

As it turns out, France’s more centralized, state-directed economy ... is proving remarkably effective at deploying funds quickly and efficiently in bad times. ...

It is easier to find money for castles and cathedrals, of course, in a country that believes “art is equal to other investments, not secondary,” as Mr. Devedjian puts it. But the largess is driven as well by President Sarkozy’s support for more spending to combat the recession, even if it means borrowing more and running up big deficits.

That contrasts sharply with the commitment by the German chancellor, Angela Merkel, to hold down stimulus spending and move as quickly as possible to curb her government’s budget deficit.

So what about the criticism that Europe is not being as aggressive as the United States in combating the global slowdown, with only tepid stimulus packages? That’s not the way the French see it.

“You lost time with changing a president and no decisions were made in the last three months of 2008,” Mr. Devedjian jibed. “Nothing happened in January 2009, and in February, there was just a speech.”

“The country that is behind is the U.S.,” he said, “not France.”

While the scale, $37 billion versus close to $800 billion, is a bit different and probably ought to be accounted for in the comparison, there does seem to be a difference not just in the speed of deployment, but also in the focus of the policy. It will be interesting to see how that difference, which seems to place somewhat more emphasis on boosting employment and aggregate demand immediately than on long-run growth in France as compared to the U.S., translates into a differential response to the fiscal policy boosts in the two countries.

This post was republished from Mark Thoma's blog, Economist's View.