The eurozone economic crisis is set to continue for quite some while until public finances are manifestly on a sound path. Then there must be a fundamental re-think about how the financial system was corrupted by excessive public debt. So to give you a better overview, GrahamBishop.com has separated the monitoring and analysis of the economic crisis from that of financial services regulation. This new weekly Economic Crisis Update will include articles on economic governance, Council and Parliament statements on the powers of the eurozone and financial regulators, issues about financing the eurozone, comments on States “at risk”, the international context, and the thoughts of some leading commentators. I trust you will find it informative, and would welcome any comments you might have.

 

 

 

 

Cameron used his speech at the Lord Mayor's banquet to set out his vision of the EU, and raised the possibility of repatriating powers. However, he added that he believed that it was in Britain's interests to remain in the EU.  

 

Some macro funds are faring better than other strategies because they are used to taking political risks into consideration when making investment decisions.  

 

Big European insurers have been able to watch the unfolding eurozone sovereign debt crisis almost from the sidelines so far. Italy is an entirely different story though. As crisis over the country's bonds hits its most acute phase, risks are rising for insurance company shareholders.   

 

 

European Council/Parliament Statements (crisis)  

ALDE/Verhofstadt: Nothing less than full economic and fiscal union will do

Intervening in a debate today on the future scope and structure of economic governance in Europe, Verhofstadt drew attention to widening spreads on European bond markets - even amongst AAA countries - and called for a bold and global step forward towards economic and fiscal union.  

 

The leader of the European Parliament's main progressive group today warned of "an incredible risk to democracy" in the eurozone crisis.  

 

After President Barroso's presentation of the Commission programme for 2012 which focused on jobs, growth and the single market, most political group speakers said Parliament and the Commission need to get back to the political centre stage and work closely together to lead the EU out of the crisis.  

 

 

Reuters: Barroso says eurozone must integrate to survive

The eurozone faces a systemic crisis and will not survive unless it becomes more integrated and disciplined, possibly through a change of the European Union's treaty, European Commission President José Manuel Barroso said.  

 

France and Germany clashed over whether the European Central Bank should intervene more forcefully to halt the eurozone's accelerating debt crisis, after modest bond purchases failed to stop the rout.  

 

Sir Mervyn King said he had "every sympathy" with the European Central Bank's reluctance to bail out indebted eurozone countries.  

 

The ECB intervened in government bond markets, which curbed rises in Italian debt yields. The euro's monetary guardian, however, has refused to become explicitly the “lender of last resort” to governments.  

 

German Chancellor, Angela Merkel, called for an overhaul of the European Union, advocating closer political ties and tighter budget rules in her most explicit prescription for ending the debt crisis.  

 

Germany's constitution obstructs the transfer of power from Berlin to Brussels -- a fact that has hindered the rescue of Europe's common currency. At the CDU's party conference this week, Angela Merkel may push for an overhaul of the Basic Law in order to hasten euro bailout efforts.  

 

Bundesbank president, Jens Weidmann, said that only politicians could resolve the crisis, and he rejected the idea of using the ECB as “lender of last resort” to governments.   

 

The President of the European Commission issued a strongly-worded plea to the UK to embrace European integration.  

 

Nobel laureate, Paul Krugman, argues that the European Central Bank (ECB) must become a lender of last resort and adopt a more tolerant attitude to inflation if it hopes to improve the economic situation within the eurozone.  

 

Portuguese President, Anibal Cavaco Silva, said that the European Central Bank can stop the spread of the continent's financial crisis with “foreseeable, unlimited” purchases of Italian and other government bonds.  

 

The report says that the uncertainty related to the sovereign debt crisis is expected to fade gradually over the forecast horizon, provided the necessary policy measures are implemented.  

 

The German Council of Economic Experts – GCEE (Sachverständigenrat) has decided to compute alternative scenarios for Germany's cyclical development in the coming period. If the sovereign debt crisis is not contained, this will have a considerable impact on the German economy's external sector.  

 

 

EFSF/ESM/Eurobonds  

 

Barroso to table eurobond blueprint

Commission President, José Manuel Barroso, announced in the European Parliament that his office would table a proposal next Wednesday on 'stability bonds'.  

 

ELEC in its proposal rejects the short-term approach to policy-making and suggests that the states that are economically stable and sound should pool their short-term borrowing via a Fund that itself would borrow in the markets for a two-year term.  

 

This week's market upheaval in Europe has made it difficult to increase the firepower of the eurozone's €440 billion rescue fund to the €1,000 billion that the bloc's leaders had hoped for.  

 

 

At-Risk States  

WSJ: Italian premier appoints emergency government

Italian Prime Minister, Mario Monti, on Wednesday appointed an emergency government of technocrats who now face the delicate task of restoring investor confidence in the eurozone's third-largest economy and pulling it out of the spiralling debt crisis.  

 

Greece's new government comfortably survived a vote of confidence on Wednesday, but interim Prime Minister, Lucas Papademos, has to move quickly to shore up the country's deteriorating finances to qualify for European aid.  

 

Budapest has endured three difficult bond auctions in a week, yields have shot up, and the forint has tumbled. That, in turn, is fuelling inflation and increasing the pain for hundreds of thousands of Hungarians who took out mortgages in foreign currencies when the forint was much stronger.  

 

The mission has reached agreement on economic and financial policies to meet the programme's objectives. Strict implementation of these policies will be needed to restore external competitiveness, bolster confidence in the sustainability of public finances, and maintain financial stability.  

 

BlackRock is calling for bond holders to write off 80 per cent of the value of Greek, Portuguese and Irish debt, suggesting that recent agreements between European regulators and investors in government debt do not go nearly far enough.  

 

"Our membership of the euro is a guarantee of monetary stability and creates the right conditions for sustainable growth”, Papademos told lawmakers late yesterday at the start of a three-day debate on a confidence motion in his new government. "Our membership of the euro is the only choice."  

 

In his FT column, Rachman writes that Europe, and the world at large, has every reason to hope that Messrs Monti and Papademos can work miracles. For if the technocrats fail to do so, the extremists are waiting in the wings.  

 

European Council President Van Rompuy and European Commission President Barroso commented on the decision to ask Mario Monti to form the next Italian government.  

 

The budget package includes measures to loosen local authorities' control over public-service contracts and liberalise professions. It also includes a plan to privatise public real estate in a way that could relieve pressure on the country's banks, which are large holders of Italian bonds.  

 

President Van Rompuy stressed that fiscal consolidation should go hand in hand with the structural reforms that are needed to enhance Italy's growth potential and competitiveness.  

 

Greeks lauded the nomination of new prime minister, Lucas Papademos, and expressed hope his government could put the economy back on track and calm political turmoil that has threatened to force Athens out of the eurozone.  

 

Van Rompuy and Barroso stated that although this will be a transitional government, its workload will be extremely intense. They announced that the voluntary bond exchange with private sector investors should take place as planned at the beginning of 2012.  

 

 

International Comments on the EU Crisis  

 

S&Ds call for more transatlantic cooperation

The S&D Group in the European Parliament urges the EU and the USA to cooperate more closely to find solutions to the serious economic, social and political issues we face today.  

 

The Asian Development Bank has called for India and China to be ready to help rescue the eurozone from its sovereign debt crisis to avoid a long-term downturn that will stunt the growth of Asian economies.  

 

Writing for Brookings in the US, Elliott asks should Greece or other nations be allowed to leave the eurozone, or even be forced out? He adds that those questions were considered heresy among European leaders until mere days ago.  

 

 

Commentataries on the Economic Crisis  


Nicolas Véron: Europe needs institutional creativity

Nicolas Véron comments on the latest institutional developments that the European economic crisis has brought about. In times of uncertainty, Europe needs institutional creativity to restore confidence in the markets and the citizens.  

 

In his FT column, Wolf observes that what is at stake today is not only the stability of the European – perhaps the world's – economy, but the survival of the most successful – and certainly most civilised – effort to unite Europe since the fall of the western Roman empire 1,535 years ago.   

 

David Marsh says anyone who expects technocrats to work miracles must ponder an essential fact: Economic and monetary union has been above all a “top down” project dreamed up by political and business leaders and pushed through without undue consultation or communication with the people.   

 

With much of Europe in the grip of a liquidity crunch, many now believe that only a clear commitment by the ECB to act as a lender of last resort can prevent the debt crisis spiralling out of control, threatening the future of the single currency.  

 

Berglof writes in Project Syndicate that no region of the world has benefited more from cross-border banking, yet these achievements are now at risk – and with them the European bank groups themselves.  

 

In his FT column, Münchau writes that as of last week, the eurozone no longer had a functioning sovereign bond market, S&P is clearly preparing a downgrade of France and the EFSF is therefore also likely to lose its triple A rating. The depressing reality is that the eurozone may be only weeks away from a financial collapse.  

 

 

Think Tank Contributions  

 

Bruegel: (Com-)Mission to Rome or what a euro area finance ministry means

Guntram B Wolff writes that while IMF involvement is welcome, the euro area should itself use available instruments to frame and guide the process. Using existing instruments would also allow us to pave the way towards deeper integration and a eurozone finance ministry.  

 

CEPS Senior Fellow, Paul de Grauwe, expresses astonishment in this new Commentary at the continued insistence in both Brussels and Frankfurt on budgetary austerity as the necessary and sufficient response to stop the government debt crisis in the eurozone.   

 

CEPS: A crisis of the institutions as well? 

Director Daniel Gros writes in the November newsletter that the euro debt crisis is exposing weaknesses in the EU framework on a number of fronts, but the most immediate casualty is the 'community method', which underpins the whole of the European Union.  

 

Marco Incerti says a lot has been made of the recent appointment of Papademos and Monti as Prime Ministers in pectore of their respective countries. In particular, the public debate has focused on their status as unelected officials who allegedly constitute a break of the democratic continuum.  

 

According to Benjamin Angel, Head of Unit of Financial Institutions and Financial Stability at the European Commission (DG ECFIN), the crisis unfolds in three acts: the 2008 financial crisis, the 2009 banking crisis, and the 2010-2011 sovereign crisis – all being caused by both micro- and macro-economic factors.   

 

In this article, Jean Pisani-Ferry writes that in spite of an ever-darker economic outlook, every month countries under pressure in the bond markets are announcing new budget restrictions in the hope of limiting their deficits and halting the slippage in their borrowing terms.   

 

Guntram B Wolff comments that massive financial speculation can turn into self-fulfilling crises, which are difficult to counteract with measures taken at a national level alone.