Euro Summit: Chinese Help and Italian Trouble

The Economist just published this post on the element of this week's eurozone summit that would involve Chinese cash as a part of the currency zone's recapitalization plan. Ever instructive, the article lays out the China factor in some of the magazine's trademark economics-in-layman's-terms. I didn't know, for example, that the EU is China's biggest trading partner. Given all the hub-bub stateside, wouldn't most Americans assume that position was enjoyed (or maligned) by the United States? 

Yet the piece's author makes an effort to signal that the appeal for Chinese cash is neither revolutionary nor a particularly important change in the status quo. He takes a longer-term view on the EU-Chinese relationship, which of course bears direct influence on the American role between the two. 

"Grand political bargains between China and Europe—money in return for more representation at the IMF, or market-economy status—seem wildly improbable. These prizes will eventually come anyway; and weak though parts of Europe are, the EU cannot be seen to trade them too nakedly. Bargaining of this sort would also require both parties to change their positions markedly. China is keen not to be seen as a source of “dumb money”, but requiring big political concessions in return for cash is a pretty clear signal that this is not a commercially attractive investment. As for the euro zone, it can hardly claim that senior Spanish and Italian debt is now safe for institutional investors if it has to horse-trade too hard to get China on board."

And further along the pessimism spectrum is the Wall Street Journal, which, true to form, has expressed typical euro-skepticism on the summit's results and bemoaned the plan's lack of detail and the risks that remain for U.S. companies and stakeholders. Though the European Financial Stability Facility will "backstop" troubled eurozone countries against default, the paper says, this week's decisions fall short of the muscular moves called for by experts and do relatively little to stem fears of a backslide toward recession in Europe and worldwide. 

Both articles signal the lingering dangers of the tenuous Italian situation, where fractious politics in Silvio Berlusconi's government has dimmed hopes for any kind of meaningful action against the euro's woes. Italy is heavily in debt and, as the third-largest economy on the euro, its future determines that of a host of other dependent nations both in and outside the monetary bloc.

Courtesy of the Wall Street Journal and ICAP

Though the chart refers to Italy only, its title -- "Brief Relief" -- sounds just as appropriate for the whole of the eurozone for the many observers that continue to be concerned about the currency's immediate and middle-term prospects.

Federal Disunity: Civil-War-era US and the Eurozone

Global Policy, a fairly new world affairs journal, has some interesting things to say on the current eurozone troubles. Its quality of links is slightly derivative, with liberal borrowing from the Economist and even Wikipedia. But it's still a worthy read, if for nothing else that its unorthodox comparison of leadership styles of US President James Buchanan (predecessor to Abraham Lincoln) and Angela Merkel.

"... If Buchanan is remembered as one of the worst American presidents of all time, his successor Abraham Lincoln is remembered as perhaps its greatest. Although lacking in executive experience his underlying principle was unwavering: preserve the union at all costs. To this goal he was willing to subsume all other concerns, including his moral repugnance of slavery. To its end he was willing to commit to and sustain a bloody civil war and rebuff suggestions of compromise. Everything else was negotiable, but union was not. The result was a nation ripped apart by an enormously destructive and prolonged civil war, but also one reborn on a stronger footing. The slavery and secession issues that had, since America’s founding, threatened to rip the nation apart were (at an enormous cost) settled once and for all.

"It is from this parable-like take on the American Civil War era that perhaps lessons can be drawn for Europe’s undisputed present-day leader, Angela Merkel. The seriousness of the conundrum she faces is immense. Preservation of the European project requires a willingness to risk political martyrdom on her own part. The case for Germany continuing as the backstop of the Eurozone grows more unpopular domestically every day. Meanwhile the irresolute action and half-measures that characterised earlier attempts to save the single currency have merely postponed the day of reckoning. They have also, at almost every turn, increased the cost and the stakes of the next move. The case of the Greek Bailout is perhaps the most blatant example. Yet time and again her approach has seemed reductionist and pedantic. Bowing to national pressures she has proven more adept at tinkering with the terms of bailouts and turning the screws on profligate states, than on securing a long-term fix for the single currency. The result has been a continuing narrative of core vs. periphery and an ominous slide towards a series of defaults, which even the German coffers will not be able to rebuff."

See the piece in full here. 

ECB Code Words for Dummies

The Wall Street Journal's finance blog "The Source" analyzes European Central Bank chief Jean-Claude Trichet's use yesterday of the phrase "strong vigilance" in reference to the prospect of forthcoming interest rate raises, and what this means in numerical terms for market watchers. The Financial Times alternatively terms the code a "traffic light system" that indicates rate rises with a certain reliability.

Particularly interesting is the article's chart of ECB verbal expressions and their corresponding interest rate change metrics, which should demystify for all of us non-economists (myself included) some of the opaque language used by economists and finance folks on each side of the Pond. 

By the FT's count, the ECB has invoked the words "strong vigilance" and then raised rates seven out of nine times since 2005. 

The WSJ article surmised that Trichet's most recent use of the expression "strong vigilance" can be translated in layman's terms to, "we are worried about inflation and are leaning toward raising interest rates." 

Trichet's hawkish if nuanced rhetoric is widely perceived as a way of projecting a confident public front for the ECB in the face of grave concerns over the EU's economic recovery strategy on the eurozone's sovereign debt and the global financial crises.

If the past six years are anything to go by, turns of phrase such as "vigilance," "monitor closely" and in particular "strong vigilance" all preceded actual interest rate shifts orchestrated by the ECB. As the piece puts it,

“During the last tightening cycle, ‘strong vigilance’ was used one month prior to all policy moves (except for the one in March 2006, when only ‘vigilance’ was used). In addition, some form of ‘monitor closely’ or ‘monitor very closely’ was used in other months to signal that the rate normalization was not yet complete. Such code words could be used again this time."

Sources have varied widely on whether Trichet's words should be considered worrisome. Reuters says that the Frankfurt-based bank "stunned markets by indicating it could raise interest rates as soon as next month." In contrast, Seeking Alpha puts the odds of a rate hike at "above zero, [but] not much higher." 

Euro Crisis: Calling the Little Dutch Boy

Ireland's financial house is on the brink of collapse, the transatlantic media is incessantly telling us. If the floodgates are to be held back indefinitely, Europe will need to coordinate both a stability plan and a mechanism by which the Eurozone never again finds itself prone to being swept away. 

Ireland's troubles began at roughly the same time as every other beleaguered state in the eurozone, following the financial crisis in 2008 that spawned the generalized, global economic downturn that persists today. The country formerly known as the "Celtic Tiger" for its stellar growth and market conditions -- including a business-attracting 12.5% corporate tax rate, far below the 35% rate in the U.S. Ireland has since fallen from high up the totem pole of Europe's most robust economic performers. 

A major element of the current worry over Irish finances is that the instability it has caused within investment markets will spread to other at-risk countries in the eurozone, namely Spain and Portugal. The 16 European countries that comprise the bloc all face serious exposure to a currency sapped of investor confidence; if market professionals decide en masse that the euro is a fool's bargain, the EU faces a nightmarish self-fulfilling prophecy by which dimmed hopes on the euro will fuel a sell-off of eurozone assets, which will depreciate their value, which will further dim investors' hopes, which will lead to more selling and more depreciation... The trick will be to stanch this vicious-circle psychology before Ireland and other precarious countries bring the entire eurozone to rock-bottom.

To combat this, European leaders have adopted a common and steely demeanor by which they hope to hold off full-fledged exodus from eurozone markets.  The Prime Minister of Spain, Jose Luis Rodriguez Zapatero, declared through what seemed like gritted teeth that “I should warn those investors who are short-selling Spain that they are going to be wrong and will go against their own interests," as quoted in the FT on Nov. 28.  

Zapatero “absolutely” ruled out any need for a rescue. But his words came just one week after Irish Prime Minister Brian Cowen caved to pressure from fellow eurozone senior officials and requested a bailout from the IMF. Cowen had initially denied the need for an Irish bailout, and the dustcloud kicked up by Cowen's reversal of words has triggered demonstrations, feelings of betrayal among Ireland's citizens and further tumult on the waves of international finance. 

It seems Cowen, Zapatero and others are scrambling to play the proverbial Little Dutch Boy, who in sticking his finger in the dyke was able to prevent a large-scale flood of his entire community. European leaders have in the last days all put their fingers in, but the levee doors are straining and leaking both confidence and political capital--neither of which the eurozone can afford to lose. 

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For more on the intra-Irish politico-economic situation, see this article from The Economist. Gulf Stream Blues provides a good big-picture summary. And the FT's Wolfgang Munchau ponders the formerly "unthinkable" moves still available to the eurozone, namely, in his own turn of phrase, "fiscal union or break-up."

Roubini on European Recession : "Hangover"

The economist fabled to have predicted the global financial crisis shoots from the hip on European recovery -- and describes a still-dire bill of economic health for the Old Continent. Nouriel Roubini, professor at New York University, dubs the European condition a "hangover" and one sure to continue galling livers for a good while to come.

The professor employs a host of disparaging idioms in his take on the EU's present status, decrying 1) the policies that "stole demand from the future," 2) the laughable "stress tests" (quote marks his) that only "kicked the can down the road,"  and 3) the lingering "fundamental problems of the eurozone." He singles out sitting EU president and Belgian head of state Yves Leterme as "unable to keep his own country together, let alone unite Europe."

He also dismisses the notion that the EU bail-out created anything beyond transient relief. Though Brussels policy heads managed in May to slap together a rescue fund, risk spreads have returned to their pre-bail-out levels for several European countries. Roubini sniffs that operatives "fudged" this summer's round of financial "stress tests" for European markets, serving to pep up world markets' frail confidence only temporarily -- a move that is already beginning to wear thin.

Even the sunniest eurozone example, Germany, suffers Roubini's ire, and he shrugs off that country's supposed promise as the EU's post-crisis front-runner:

"Even Germany’s temporary success is riddled with caveats. During the 2008-2009 financial crisis, GDP fell much more in Germany – because of its dependence on collapsing global trade – than in the United States. A transitory rebound from such a hard fall is not surprising, and German output remains below pre-crisis levels."

In what may bear nightmarish implications,  the "double dip" recession so feared throughout the world may actually be taking root as we read his words.

"Indeed, the latest data from Germany – declining exports, falling factory orders, anemic industrial-production growth, and a slide in investors’ confidence – suggest that the [double dip] has started."

His forecast on current and future European politics provides little sustenance for optimists. He cites a litany of bummer political events ranging from Angela Merkel's recent shallacking in German regional elections, to unlikely odds that Sarkozy will initiate real (Roubini says "cosmetic") structural reforms in France -- and that is concurrent with sobering competition prospects from the Socialist Party's presidential likely, one Dominique Strauss-Kahn. Similarly unpopular leaders also face grim predictions across the EU's southern belt, from the vulnerable Presidents Silvio Berlusconi (Italy) and Jose Luis Rodriguez Zapatero (Spain), to the bete noire of EU fiscal cohesion, George Papandreou (Greece).

If all that wasn't enough, Roubini finishes by going for broke on two scenarios for the eurozone's future. The first, the "best" case scenario (though hardly a good one) says the monetary bloc limps on some years longer. The second -- this is the 800-pound gorilla whose presence EU public officials from across the 27 states refuse to entertain -- predicts that "the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies."