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15 June 2012

Bundes-Europa oder Tod

Since early age I've been fascinated with politics and the eternal melee around the steering of the common future. In many ways it resembles chess, a game that I much appreciate, were each side lays a series of tactics supporting a final strategy. Last week we had a display of political chess at its best, justifying once more my passion. In chess sometimes a player that had been losing material and apparently getting cornered to his half board can pull out an unexpected play that by exploring some weakness in the opponent's back defence can give him back the initiative. It was more or less that that Angela Merkel achieved by directly calling for a European Federation last week, exploring the fact that François Holland, her main opponent today, had to associate himself with euro-sceptics in his road to the French presidency.

Irrespective of her faith in her words, as usual Angela Merkel got the timing wrong. She says the federation has to be built in the next 5 years, but Europe doesn't have even 5 months, it might not even have 5 days. This call for a European Federation should have been issued 4 years ago, in the wake of the credit freeze. The elections in Greece this Sunday may just mark another moment when events overcome Angela Merkel, sending her back to the defensive.

The strategy to replace the European sovereign debt market for a system whereby a restricted number of states issue debt on behalf of all the others is reaching its limits. Nothing short of a rebirth will do now, something that should bring upon a new Europe; rest to know if this will be a move towards more or less integration.

The last few days were prone in news bits explaining much of what is wrong in Europe these days. Today a party of newspapers published an interview with Jens Weidmann, president of the Bundesbank, the iconic institution, spiritual father of the strategy of internal devaluation brought upon half of Europe during these past four years. It provides a good insight on the thinking behind the crisis.

Ekathimerini
Renegotiation of Greek bailout would be dangerous, says Weidmann
By Tom Ellis
Friday June 15, 2012

One of the leaders of the two parties that could win says that the Greek government would request a total change of the program. What response would a unilateral move from Greece create?
Who will be elected in Greece is a democratic decision that we all have to accept. But also the newly elected Greek government is bound by existing agreements. If it unilaterally opted out of the programme, it would mean that in my view the basis for more financial help will no longer be given. Greece would have taken its decision but would also have to bear the consequences. We will all be affected, but my assessment is that Greece will be worse off than everybody else.

[...]

What about the growth compact? The Chancellor has spoken about it.
Our problem in Europe is raising the growth potential. If we debate a growth compact it should be focussed on long-term growth and therefore on structural reforms. This is also what Mrs. Merkel has in mind.

And what about project bonds?
To do what?

For infrastructure, for example.
For infrastructure? I am not convinced that Spain and other countries suffer from alack of infrastructure. What I am missing is an adequate analysis. If there is an impediment to investment, for instance in Greece, there is rather too much red tape and an inefficient tax system. I don`t believe in further stimulus programmes to cushion the adjustment process.

A better example of a politician (yes, a central bank presidency is a political post) in disconnect with reality would be hard to find. The over reliance of the so called PIIGS on petroleum is something totally alien to Jens Weidmann; perhaps he thinks to be president of a central bank in some middle east country, but that's not the case.

And my own word doesn't have to be taken for it. Coincidently, yesterday was published an important interview with Fatih Birol, head of the IEA. Though the agency refuses to reckon the unfolding decline in world petroleum production, it has been quite outspoken on the need for Europe to overhaul its energy system, starting by taking energy efficiency seriously.

EurActiv
IEA chief: Energy efficiency directive is 'a must'
14 June 2012

Energy imports cost the EU €84 billion in 1999 and rose rose nearly sixfold in the past decade, hitting €488 billion last year, figures from the EU's statistical office Eurostat show.

[...]

Green MEP Claude Turmes (Luxembourg), the chief negotiator on the energy efficiency bill for the European Parliament, could not agree more. He said the cost for the EU's energy imports in 2011 is equivalent to the cost of creating 17 million jobs, whilst the EU has 23 million unemployed people at the moment.

Maybe Willem thinks these figures are a mere coincidence. They are not, and they are the first and foremost reason for Europe to be were it is: the slow crunch on discretionary spending, the pressure on trade balances.

Back to Jens Weidmann for the other half of the problem:

How do you asses President Obama's emphasis on the need for growth and a more expansive policy?
We have to recognise that the recession we are seeing in many countries is the result of alack of confidence in public finances in combination with an erosion of their competitiveness. There is no easy way out, unless you address the root causes of these problems. And addressing this situation by adding further debt through fiscal stimulus is certainly not the solution.

Is the US totally wrong?
Sometimes one has the impression that all of a sudden some realised the importance of growth. But the adjustment programmes are all centred around growth. We have to be honest in this debate. What the protagonists of this discussion mean is publicly financed stimulus packages. And this is something different. Perhaps it will lead to a short-lived expansion. But it will aggravate our problems in the future, because it will create additional debt, and there are already doubts about debt sustainability. Credit-financed excessive demand was part of the problem, for example when we talk about the housing boom in Spain.

No only is the diagnose wrong, the problem is that this recipe is also wrong. And quite different from what was applied by Germany itself in the wake of its Maastritch infringement a decade ago. Also yesterday, Le Monde puts this reality black on white:

Le Monde
Grèce, Espagne et Portugal ont fait plus d'efforts que l'Allemagne
Par Frédéric Lemaître (Berlin, correspondant)
14.06.2012
[...] l'Allemagne a ramené son déficit structurel de 3,5 % du produit intérieur brut (PIB) en 2002 à 0,6 % en 2007. Soit une diminution de 2,9 points de pourcentage, soit environ 0,6 point de pourcentage par an. Germany reduced its structural deficit from 3.5 % of GDP in 2002 to 0.6 % in 2007. A reduction of 2.9 percentage points, about 0.6 percentage points per year.
Il n'y aurait donc pas de quoi faire la leçon aux Grecs, dont le déficit structurel est passé de 12,8 % du PIB en 2009 à 1,8 % en 2011. "En un an, la Grèce a fait environ deux fois plus d'efforts que l'Allemagne en plus de cinq ans" [...]. Hence there's no lesson to teach to the Greeks, that reduced their structural deficit from 12.8 % of GDP in 2009 to 1.8 % in 2011. "In one year, Greece has made the double the effort made by Germany in more than five years" [...].
Même chose pour l'Espagne, dont le déficit structurel est passé de 9,5 % du PIB en 2009 à 1,9 % en 2012 et pour le Portugal passé de 9,5 % du PIB en 2010 à 2,2 % en 2012. [...] The same for Spain, where the structural deficit went from 9.5 % of GDP in 2009 to 1.9 % in 2012, and Portugal, that went from 9.5 % of GDP in 2012 to 2.2 % in 2012. [...]
L'évolution a été comparable en ce qui concerne les baisses des salaires. Selon la Commission européenne, le salaire réel par salarié a diminué de 3,3 % en Allemagne entre 2002 et 2007, soit une baisse de 0,7 % par an. This development is also comparable in what concerns salary reduction. According to the European Commission, the real salary diminished 3.3 % in Germany between 2002 and 2007, a reduction of some 0.7 % per year.
En Grèce , la baisse a été de 13 % entre 2009 et 2011, au Portugal elle a été de 10 % en deux ans et en Espagne de 7 % en trois ans. In Greece, this reduction was of 13 % between 2009 and 2011, in Portugal it was of 10 % in two years an in Spain of 7 % in three years.

For Jens Weidmann this seems to be all part of the show, and according to him everything's going fine in Portugal:

Regarding Portugal, it seems to have the image of the good student in the bailouts program, but it's also a hostage to what happens in Greece and Spain. What message would you leave to the Portuguese government?
The key message from Portugal and Ireland is that adjustment programmes work. The reforms that have been implemented there have contributed to reducing unit labour costs and stopped the decline in competitiveness. We also see the first benefits of this in the current account deficit. And according to our forecasts, growth should pick up again in these countries. No serious forecast sees a downward spiral that doesn't end anywhere.

But the Portuguese press has been telling a different story. Expenditures are still rising, because the interests paied on the EFSF loans are actually higher than the average paid by Portugal to regular investors before it was shut off from the Europe sovereign debt market. GDP projections for this year are still being revised down, and down with it is going state revenue. Up are still going unemployment and, of course, sovereign debt itself, which is being weighted to an ever smaller GDP. In 2 months time, when official figures for the first semester of 2012 are released, the failure of the austerity recipe should be patent in its full extent.

This same failed strategy has brought today the Greek folk to a situation for which in Portugal we use the metaphor: left between the wall and the sword. And it might happen they opt for the sword. The doomsday scenario I envisioned some time back seems to be getting more plausible. SYRIZA, one of the parties battling for the first place in this Sunday election, is promising to simultaneously default on sovereign debt, stay in the eurozone and increase state aid and salaries. This incoherent discourse has gained the support of perhaps one third of voters; a desperate choice of a desperate folk, as Público vividly portraits:

Público
Líder da esquerda grega promete: "Bruxelas, vamos aí na segunda-feira"
14.06.2012 - 22:45 Por Maria João Guimarães, em Atenas
"Não tenho medo. A Europa é isto? Todos os dias há pessoas a matar-se porque não conseguem viver assim, os nossos jovens estão a abandonar o país, há cada vez mais gregos sem casa... Se isto é o que é preciso para estar no euro, não precisamos de estar. Quando as pessoas não têm nada a perder não têm medo", diz Stella, uma marinheira de 50 anos, de cigarro na mão, que veio ver o comício com amigos. "Vamos mudar esta política europeia. Vamos mudar todos: gregos, portugueses, espanhóis." "I'm not afraid. Is this Europe? Every day there are folk killing themselves because they can't live like this, our youth is leaving the country, there are ever more Greeks without home.. If this is what it takes to be part of the euro, then we don't need it. When folk have nothing to loose they have no fear", says Stella, a 50 year old sailor, cigarette in hand, that came to the [SYRIZA] rally with friends. "We'll change this European policy. We'll all change: Greeks, Portuguese, Spanish."

SYRIZA can't possibly fulfil all of its promises if it ever comes to lead a government, and most are assuming it is the euro that will eventually go over board. Earlier this week news surfaced of Europe wide preparations for reenacting capital controls, setting up cash withdrawal limits and even to reintroduce borders controls. It is sad to see this worst case scenario becoming a possibility so clearly, it has been the stubbornness of those fond of austerity and the reckless of the emerging fringes bringing Europe to this.

My expectation, minding the polls published two weeks ago, is for SYRIZA to come short of forming a government on its own. The practical result of this election should be very similar to the previous one, with no clear government emerging. This could buy Greece a few weeks time, before a final decision on whether to sail along the storm or go for the rocks.

In the end one must admit that Angela Merkel is right. There's no way the sort of mechanisms required to bring back the European sovereign debt market and to counter-balance the biased foreign trade balances without building proper federal institutions. And I would also add to overhaul the European energy and transport systems. But we are not in 2008 any more and indeed the sort of short term, wide reaching action called by the other side of the political fence is at this stage indispensable, if in fact a united Europe is our goal.

I still have hope. An happy ending to this story is still possible, though it seems harder and harder. Jens Weidmann says that Greece will be worse off if it chooses to leave the euro and/or default on its debt. I hope that the players around the European Council chessboard can understand the same message. It will take a great deal of courage, and it will require major concessions, but in the end, either it is a Federation or nothing.