Tuesday, November 08, 2011

This, from today's Guardian, is about all you need to know about where the EU imbroglio is right now . .

Germany has come under heavy pressure from its EU partners to abandon its veto on a huge rescue operation by the European Central Bank to prevent the eurozone from falling apart and the world from sliding into renewed recession.

With the eurozone's main €440bn bailout fund in tatters, it has emerged that the ECB has been forced to intervene at an increased rate by buying up more and more distressed government bonds. Figures released on Monday showed it bought €9.5bn last week – or more than twice as much as a week earlier (€4bn).

The eurozone's 17 finance ministers began crisis talks in Brussels on Monday night "to stop the rot" with Italian bond yields – the country's cost of borrowing – hitting a new peak of 6.69%, threatening to crash the euro system, and political leaders from virtually all countries outside Germany lining up to demand full-scale ECB intervention. Bond yields of 7% would be seen by the markets as a trigger for the IMF to intervene as it did when Irish borrowing costs reached a similar level last year.

The mood among non-Germans was summed up by one EU diplomat: "The Germans will have to be dragged kicking and screaming and it will probably come to a knife-edge before they agree to let the ECB play a bigger role." Markets have already lost faith that the euro rescue mechanism, the European Financial Stability Facility, due to see its firepower lifted to €1tn, can even remotely do the job. On Monday it was barely able to attract investors to a €3bn bond for Ireland, signalling that it will fail to raise funds in future.

The Irish finance minister publicly voiced doubts about the EFSF's future, saying the ECB must continue to play a parallel role "until the EFSF firewall has been put in place, whenever that may be" and even then "the ECB must carry out a parallel function until it is quite clear that the new firewall is doing its job".

So far the German chancellor and her finance minister, have heeded warnings from the Bundesbank president that a prolonged bond-buying spree by the ECB would jeopardise its independence and stoke up inflation. Prompted by him, they killed off attempts led by the US at last week's G20 summit in Cannes to raid the Bundesbank and other central bank gold reserves to boost the IMF's firepower so it could effectively boost the EFSF.

The Bundesbank alone has reserves of €180bn, of which €130bn are in gold – prompting headlines such as "A grab for our gold". One abortive plan at Cannes was to convert some of these into extra "special drawing rights" at the IMF to boost German guarantees for the EFSF over the heads of the Bundestag.

But there is still hope in London and other European capitals that the Bundesbank and Berlin will relent under sheer market and political pressure, with the IMF clearly unable to persuade the oil- and gas-rich Russians to contribute more to the EFSF as Christine Lagarde, its managing director, discovered in Moscow on Monday. She now heads for China and Japan.

David Cameron yesterday told British MPs:- "The G20 withheld specific IMF commitments at this stage precisely because we wanted to see more concrete action from eurozone countries to make their firewall credible and to stand behind their currency. In short, the world sent a clear message to the eurozone at this summit: Sort yourselves out and then we will help. Not the other way round. The rest of the world can play a supporting role but, in the end, this work has to be done by the eurozone countries themselves. No one else can do it for them."

On Monday the 17 finance ministers failed to give any clear guidance on their plans for the EFSF, including its eventual firepower, as the fund's CEO, said he and his team would have to go back to "market participants" to help decide. After issuing a paper about how to enhance the EFSF's firepower, he blamed the Greek political crisis for yesterday's difficulties in placing the €3bn bond and insisted that the problems had been exaggerated because German bonds are trading at their lowest yield for almost 50 years.

He also blamed lack of clarity about the fund's eventual firepower, disclosing merely that the new investment fund designed to attract overseas investors would now be known as a the "co-investment fund" rather than a special purpose investment vehicle (SPIV).

Showing every sign of stress, the eurogroup chairman and the EU economic and monetary affairs commissioner, made plain that the only decision taken was to demand a letter from the new national salvation government in Greece – and to scrap plans for another emergency session on 17 November. This letter would have to spell out that all members of the new government, particularly the two main parties, pledged to implement in full the stiffer austerity programme associated with the next €130bn bailout for the near-bankrupt country. Once that was received Greece would probably get the €8bn bailout instalment it needs to avoid bankruptcy next month.

All clear now?

If so, and if you've read this far, you'll probably enjoy (if that's the right word) this article - also from the Guardian - on whether the ECB can actually fulfil the role demanded of it.
Extract:- "Germany's economic elite are very detached from what other economists throughout the world are thinking. They are closely aligned to the monetarist, neo-classical form of economics. They see a close link between money supply and inflation. They believe that if you print a little more money in order to buy Italian bonds, that leads to inflation."

Postscript: Here's David Owen - also in the Guardian - arguing the case for Germany both to come to the ECB party and to pay for most of it, despite not wanting to be there and notwithstanding her obvious lack of party spirit. Or 'solidarity', as EU states call it whenever they're demanding (often undeserved) hand-outs from someone else. The payoff would be a smaller, more Teutonically-flavoured eurozone. Dominated by a Germany which can rely on the members to follow the same rules as her. And not just accept them and then blithely ignore them. Which is generally the Latin way.

I guess it would be possible for those EU states denied membership of this club to join in about 30 years' time, when they're not just willing but also able to play by German rules. After all, they do manage this in the area most important to the lives of voters - on the soccer pitch. With just the occasional head-butt, when things get too onerous.

1 comment:

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