This position also appears in large sectors of academia, although using a different narrative. They divide the labor market between the “insiders” (those who have a job due to the power of the unions, primarily male adults), and the “outsiders,” (those excluded from the labor market, i.e. the unemployed, youth and women,) due to the rigidities. And they present the first responsible for the unemployment of the second. This position has achieved the category of dogma, not only in the European Commission, but also in the other two components of the Troika, the International Monetary Fund (IMF) and the European Central Bank. In Spain, such position has become part of the conventional wisdom, reproduced by major economic policy research centers, such as FEDEA, funded by the major banks and large corporations of that country.

The intention of this insiders (adult men) verses outsiders (youth and women) position is to divide the working population, indicating that job security is a “threat” to both youth and women’s employment prospects. And a result of the pressure exercised by the Troika over the Spanish governments, both the one led by the social democrat José Luis Rodríguez Zapatero and the other one, the Conservative party led by Mariano Rajoy, have been eliminating job protection and permanent fixed contracts. And as a result, unemployment has exploded. It already reaches 27%.  And among the unemployed youth, 57%. Employers have been firing and firing, with very little hiring in return. The outcome of eliminating the so-called rigidities has been the largest unemployment ever.

The Problem is Not in the Labor Market

The evidence is overwhelming that the major cause of unemployment in Spain has very little to do with the supposed rigidities of the labor market. European countries with greater job protections than Spain have less unemployment. Many Northern European countries, where trade unions have consistently had a stronger role and influence over the state than in Spain, have lower unemployment figures and higher occupational rates. Unemployment rates in Sweden (8%), Norway (3.2%), Finland (7.7%) and Iceland (6%) are markedly lower than the EU average (with the EU-27 at 10.5% and EU-15 at 10.6%), and much, much lower than Spain’s (27%). Actually, one of the reasons for the low unemployment in Germany (usually presented as a model for other countries in the EU) is because of “work sharing” rather than firing workers; work sharing that has been established at the workplace as a result of the power of the trade unions in Germany.

Why Spain (and the EU) Has Higher Unemployment than in the US

The evolution of unemployment in the EU and Spain as compared with the US is another case used in support of the argument that Spanish unemployment is a result of labor market rigidities. It is constantly said that the US has lower unemployment than the EU average and Spain because of greater US labor market flexibility. In other words, it is assumed that unemployment is lower in the US because it is easier to fire workers in the US than in the EU (including Spain). If that is the case, then how can it be explained that the U.S. unemployment was higher than the average of the countries that later on became the EU-15 for the majority of years in the post-World War II period, even as the U.S. labor market was already more ‘flexible’ than those of the countries that would eventually form the EU-15? In fact, unemployment in the EU only started to overtake the US unemployment rate when preparations to establish the Euro were underway, as the governing institutions of the euro set controlling inflation as a top priority rather than job creation.

The True Cause of Unemployment: Macroeconomic Policies Pushed by the Troika, including Commissioner Olli Rehn

Higher unemployment in the EU is due, in large part, to the system of governance of the euro, a system of governance that starkly contrasts with that of the dollar. The mechanisms governing the euro reveal the clear domination of financial actors over the economic life of Europe, a practically absolute and suffocating domination with no comparable model elsewhere. For American progressives, accustomed to criticizing (for good reasons) the Federal Reserve Board, it may come as a surprise that the Feds, under Bernanke,  are far to the left of the European Central Bank (ECB), the most right wing and independent central bank in existence today. Actually, the ECB is not even a Central Bank: it is a lobby for banking (very close to German banking community, the center of European financial capital). The formation of the Euro system (See “The Causes and Consequences of the Euro”, published in Publico in Spanish, July 2012) was indeed a triumph of neoliberal ideology; it weakened states and forced them to weaken the European social model, a model that ensured social protections for workers.  One can simply peruse the published statements and documents of the European Central Bank (ECB), of the European Commission, of the International Monetary Fund or of the Bank of Spain to gain a quick and clear view of what these financial institutions are proposing as solutions to the high levels of unemployment in Spain. Ostensibly, their proposals disempower the working class even further, reducing the system to even greater levels of human and social suffering. These three Troika institutions, whose officers generally enjoy the highest pay and best job stability in the European labor market, continue to callously impose cuts, including curtailing unemployment insurance on unemployed populations with minimal resources. Aided and abetted by academics and economic think tanks in well financed institutions that enjoy the same lifestyle and privileges, the individuals behind these institutions proceed with an aggressiveness and class hostility that manifests itself in how these establishments have been treating the popular classes of the countries of the EU. What used to be called the class war is obvious and clear. The control of inflation requires, according to the ECB and to the European Commission to weaken labor as much as possible. And they are achieving what they have always wanted.

Meanwhile the evidence shows clearly that the US has a lower unemployment rate than the Eurozone because there is a federal government with a US Central Bank (the Federal Reserve Board or FRB) with the goal of stimulative economic growth through creation of employment, besides controlling inflation. The agenda of the FRB, led by Mr. Bernanke, is indeed very different than the one pursued by the ECB, led by Mr. Draghi and, before him, by Mr. Trichet.

The poverty Underlying the Physical and Social Infrastructure in Spain

Another significant factor contributing to Spain’s high unemployment is the slow production of jobs, due in part, to the enormous poverty of social and physical infrastructure. This poverty stems from the tremendous poverty of state resources (whether central, regional or local). The figures sadly speak for themselves. Spain is one of the Eurozone countries with the lowest state revenues, lowest public employment and least developed public services (as documented in my book the Underdevelopment of Social Spain, 2006, in Spanish). These conditions are the result of an enormous regression in fiscal policies, conditions similar to those suffered in Greece, Ireland and Portugal, countries that are in even greater crises  than in Spain (For more on the crises in the peripheral countries, see “Why Does the Crisis in Spain Remain Unresolved and What Can be Done About It”, published inSystem in Spanish, July 2012).

The argument put forward by the ECB, the European Commission and the IMF that the Spanish State has spent too much, far above its possibility, is also false and it is easy to show it. Spain has the lowest public expenditures per capita in the EU 15, and it was so when the crisis started in 2007. The rapid growth of its public deficit had nothing to do with overspending but rather with an enormous decline of revenues due to high unemployment and reduction of economic activity (facilitated by the enormous cuts of public expenditures and investments pushed by Olli Rehn, the Troika, and co.). What we are witnessing in Europe is the control of the institutions of governance of the Commission and of the ECB by economists of neoliberal persuasion (close to the Tea Party in its mentality) that are achieving what they want: i.e., to weaken labor.

Vicente Navarro is a Professor of Public Policy at Pompeu Fabra University, Spain and Johns Hopkins University.

This article was originally published by the Social Europe Journal.

Source: http://www.counterpunch.org/2013/08/23/the-case-of-spain/

Germany has profited from the euro crisis to the tune of 41 billion euros in reduced interest payments. Strong demand for its debt has cut yields and made it cheaper for Germany to borrow. Meanwhile, the crisis has only cost Germany a mere 599 million euros thus far.

SPIEGEL/cro

Costas Lapavitsas: Cyprus should let the private banks fail and create a public bank that focuses on strengthening the real economy.

Latest News on Cyprus:

Cyprus PM threats for resignation and Referendum [GR] http://thepaper.gr/%CE%B8%CF%81%CE%AF%CE%BB%CE%B5%CF%81-%CE%B3%CE%B9%CE%B1-%CE%B3%CE%B5%CF%81%CE%AC-%CE%BD%CE%B5%CF%8D%CF%81%CE%B1-%CF%84%CE%BF-%CE%BA%CF%85%CF%80%CF%81%CE%B9%CE%B1%CE%BA%CF%8C/

Eurogroup delayed as Cyprus fights EU, IMF demands  [EN] http://www.globalpost.com/dispatch/news/afp/130324/eurogroup-delayed-cyprus-fights-eu-imf-demands

Cyprus has just 24 hours to find a solution to its funding gap before its banks are due to reopen following the dramatic no vote on Tuesday night, which failed to support a hastily renegotiated change to the original deal.

With the crisis escalating, an RAF flight carrying €1m (£850,000) in low denomination notes set off for Cyprus to provide cash for 3,000 British service personnel based on the Mediterranean island.

The banks have been shut since Friday and electronic transactions halted, although cash machines are still working and the Ministry of Defence said the euros were being flown in as “contingency measure”.

About 2,000 of the military staff, who typically serve out 18- to 24-month postings to the island, have their salaries paid into local accounts. The MoD said it was “approaching personnel to ask if they want their March, and future months’ salaries paid into UK bank accounts, rather than Cypriot accounts”.

Even before the no vote was announced, the euro had already slumped to its lowest level in four months after speculation that the Cypriot finance minister, Michalis Sarris, had resigned.

Sarris, who was in Moscow ahead of his meeting with his Russian counterpart on Wednesday, was forced to text-message Reuters to deny the quick-spreading rumours that he had quit.

There were also reports that the banking arm of the Russian energy company Gazprom might pump cash into Laiki, Cyprus’s second largest bank, which is in urgent need of a capital injection. Gazprom officials insisted this was not being planned.

Russia has already lent €2.5bn to Cyprus and has close ties to the country after its nationals flooded the island’s banks with cash to take advantage of high interest rates and a lax approach to account vetting.

The 56-member Cypriot parliament rejected the bank tax by 36 votes with 19 abstentions (one MP was absent) even after the proposal had been tweaked during the day to remove any levy on savings below €20,000.

Accounts holding €20,000 to €100,000 still faced a 6.75% levy, and any account with more than €100,000 a tax of 9.9%, despite calls by Cyprus’s eurozone partners not to tax accounts below €100,000 – the level at which a European Union-wide guarantee kicks in if an EU bank goes bust.

In return for the levy, savers would be given shares in Cyprus’s banks and possibly a share in the nation’s gas reserves – once the country is back on its feet.

Cypriot MPs had called the levy blackmail and a disaster for Cyprus and the president, Nicos Anastasiades, had been promising to discuss a possible plan B even before the no vote, which had appeared inevitable ever since the bailout terms were revealed on Saturday.

“It would have been a very weird thing to legitimise confiscation of savings; it has never happened anywhere in the world and would set a dangerous precedent for Europe,” an MP from the Cyprus opposition communist party, Akel, told Sky News.

Before the vote, hundreds of demonstrators gathered outside the Nicosia parliament chanting “No” and holding banners such as “Cyprus today, who’s next tomorrow?” in reference to eurozone partners such as Spain and Italy.

Officials in Brussels insist the Cyprus savings tax will be a one-off and the guarantee stands across the rest of the EU.

The conservative ruling party aligned to Anastasiades had attempted to postpone the bill for another day but opposition MPs insisted a vote went ahead. The 19 members of the president’s party abstained even though the government had signed up to Saturday’s bailout to release €10bn of eurozone funds and raise €7bn through a combination of the bank levy and a fresh round of austerity measures.

Russia has expressed its anger about the levy, which would hit its nationals, some 30 of whom are reported to have been granted Cypriot citizenship after depositing at least €17m into local banks, making investments of €30m or registering businesses on the island.

Vladimir Chizov, Russia’s envoy to EU, likened the levy to a “forceful expropriation” that could wreck Cyprus’s financial system. “When the banks open, people will rush to withdraw their deposits – that’s another threat – and then the whole banking system can collapse,” Chizov said.

Russian officials also moved to avert concerns that its own banks could face difficulty if the taps remained turned off in Cyprus. The ratings agency Moody’s estimated that Russian banks had extended up to $40bn in loans to companies in Cyprus.

The markets will now be looking to the European Central Bank to provide crucial liquidity lifelines to the Cypriot banking sector, which has expanded to eight times the size of the nation’s €17bn economy as a result of the Russian cash deposits.

An ECB spokesperson said: “The ECB takes note of the decision of the Cypriot parliament and is in contact with its troika partners [the European Union and the International Monetary Fund].”

Analysts will also be looking for evidence that Germany – the country that holds the eurozone purse strings – is willing to release more funds to Cyprus, which is the fifth eurozone nation to require a bailout, but the only one to force its savers to pick up part of the bill.

Alex White, analyst at JP Morgan Chase, said: “If it is not ultimately reversed, we think the treatment of Cyprus will come to look like a watershed for the region.

“The objective in this case is to remove the implied support for the Cypriot banking system, so that it can no longer function as a large offshore financial centre whilst receiving a European backstop.”

Yields – a measure of the cost of borrowing – on Italian government bonds edged above 5% on Tuesday, a sign of potential tensions in the eurozone while yields on British government bonds, gilts, fell to their lowest levels in 2013 of 1.82% as the UK appeared a relative safehaven. Brent crude dropped by $2 to €107.45.

Source: http://www.guardian.co.uk/world/2013/mar/19/cyprus-rejects-eurozone-bailout-savings-tax

European finance ministers have agreed an £8.7bn bailout for Cypruswhich includes all Cypriot bank customers handing over up to 10% of their savings.

Cyprus becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the eurozone for financial help amid the region’s debt crisis, but also faces a possible run on its banks as depositors try to avoid losing up to 10% of their savings.

The savers, half of whom are thought to be Russian, will raise almost €6bn. It is the first time a bailout has included such a measure.

“I wish I was not the minister to do this,” the Cypriot finance minister, Michael Sarris, said after 10 hours of late-night talks in which eurozone finance ministers agreed the package. “Much more money could have been lost in a bankruptcy of the banking system or indeed of the country.”

Without a rescue, Cyprus would default and threaten to unravel investor confidence in the eurozone, a renewed confidence fostered by the European Central Bank’s promise last year to do whatever it takes to support the euro.

However, on Cyprus, initial incredulity at the decision gave way to anger. Co-op credit societies, normally open on Saturdays, were shut for business in the coastal city of Larnaca as depositors started queuing early in the morning to withdraw their cash.

“I’m extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans,” said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.

“They call Sicily the island of the mafia. It’s not Sicily, it’s Cyprus. This is theft, pure and simple,” said a pensioner.

The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks hit by sovereign debt restructuring in Greece.

Cypriots with savings of under €100,000 will pay a one-off levy of 6.75%, which rises to 9.9% for those with larger deposits.

The levy on bank deposits will come into force on Tuesday, after a bank holiday on Monday. Cyprus will take immediate steps to prevent electronic money transfers over the weekend.

“As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders,” the Dutch finance minister, Jeroen Dijsselbloem, who chaired the meeting in Brussels, told reporters.

Such levies break the taboo of hitting bank depositors with losses, but Dijsselbloem said it would not have otherwise been possible to salvage its financial sector, which is around eight times the size of the economy.

“We are not penalising Cyprus … we are dealing with the problems in Cyprus,” Dijsselbloem said, adding that that under the programme, the island’s debt would fall to 100% of economic output by 2020.

In return for emergency loans, Cyprus agreed to increase its corporate tax rate by 2.5 percentage points to 12.5%.

This should boost Cypriot revenues, limiting the size of the loan needed from the eurozone and keep down public debt.

The International Monetary Fund managing director, Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.

“We believe the proposal is sustainable for the Cyprus economy,” she said, “The IMF is considering proposing a contribution to the financing of the package … The exact amount is not yet specified.”

Cyprus, with a GDP of barely 0.2% of the EU bloc’s overall output, applied for financial aid last June, but negotiations were stalled by the complexity of the deal and the reluctance of the island’s previous president to sign.

Moscow, which has close ties with Nicosia, is likely to help by extending a €2.5bn loan to Cyprus by five years to 2021 and reducing the interest rate.

Source: http://www.guardian.co.uk/world/2013/mar/16/cyprus-eurozone-bailout-anger

Unpaid work by unemployed people is the suggestion of the ex finance deputy minister, Petros Doukas.

Mr Doukas outlined on his personal webpage a number of suggestions in order for Greece to exit the crisis. One of his brilliant suggestions is that unemployed people should offer unpaid work wherever the State needs them to. Also enterprises could be asked whether they are interested in having some workers or employees for three months without compensating them for their work. As a matter of fact the State would compensate these enterprises for the cost they will bare for having these employees for free (what an unbearable cost indeed).

Mr Doukas explained why this would be a win-win solution: Enterprises being full of debts cannot afford new employees. On the other hand unemployed people will be able to “un-rust” a little bit and start working instead of doing nothing and come in touch with their employers to be (but why would they hire them if they can have them for free?). In parallel there will be produced valuable projects for the country, now that we all need them (what a patriotic way of putting this!). The production of a project will create opportunities and real demand and need for more work and more real and regular paid jobs (isn’t he a genius?)

No further comments from our side…
ReINFORM

From Reuters:

Greece’s debt buyback attracted bids totalling 31.8 billion euros, but the price paid for the bonds will not be sufficient to reduce the debt burden to 124 percent of GDP by 2020, a euro zone official familiar with the auction said.

 

The source said the average price was 33.5 cents on the euro, slightly above what was expected, meaning that there was a shortfall of about 450 million euros. Senior euro zone finance and treasury officials discussed the results on a conference call earlier on Tuesday.

 

The official said the operation was sufficient to reduce Greece’s debt-to-GDP ratio by 9.5 percentage points, below the originally targeted 11 percent.

 

That means that debt as a proportion of GDP will only fall to about 126.6 percent by 2020, above the goal agreed with the IMF of 124 percent.

As a reminder, this is what the trajectory of Greek GDP has to be in the next decade for the “target” to be hit:

http://www.zerohedge.com/news/2012-12-11/greek-debt-buyback-falls-short-goal-will-reduce-greek-debt-less-required

By Yalman Onaran

An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system.

A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year.

The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis.

“Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core,” said Alberto Gallo, the London-based head of European credit research at Royal Bank of Scotland Group Plc. “Companies pay 1 to 2 percentage points more to borrow in the periphery. You can’t get growth to resume with such divergence.”

Lending Rates

The erosion of deposits is forcing banks in those countries to pay more to retain them — as much as 5 percent in Greece. The higher funding costs are reflected in lending rates to companies and consumers. The average rate for new loans to non- financial corporations in July was above 7 percent in Greece, 6.5 percent in Spain and 6.2 percent in Italy, according to ECB data. It was 4 percent in Germany, France and the Netherlands.

Some of the decline in deposits is because German and French banks are reducing their exposure. They cut lending to their counterparts in the four peripheral countries plus Italy by $100 billion in the 12 months ended March 31, according to the latest data available from the Bank for International Settlements. ECB data count interbank lending as deposits, as well as money being held for corporations and households.

Banks in the core countries also have been reducing their holdings of Spanish, Portuguese, Italian, Irish and Greek government bonds. At the same time, lenders in the periphery have been buying more of their own governments’ debt. That has further contributed to the fragmentation of credit along national lines, as banks collect deposits from people and companies in their own countries and lend internally.

IMF Warning

Organizations such as the International Monetary Fund have warned about the danger of such fragmentation. Financial disintegration along national lines “caps the benefits from economic and financial integration” that underlie the common currency, the IMF wrote in an April report.

The disintegration can fuel a cycle of deteriorating economic conditions and weakening banks, said David Powell, a Bloomberg LP economist based in London. The more banks pay for deposits the less profitable some of their businesses are, he said. A Spanish lender that borrows at 4 percent from depositors and is limited by Europe-wide interest rates to charging only 2.5 percent for a mortgage is losing money.

“The financial divergence is a symptom of the underlying economic divergence, but they feed on each other, making it harder to break out of,” Powell said. “Until companies and individuals are convinced that the euro will survive, they won’t invest in the periphery, and that will keep funds away.”

ECB Loans

The ECB has taken the place of depositors and other creditors who have pulled money out over the past two years, largely through its longer-term refinancing operation, known as LTRO. The Frankfurt-based central bank was providing 820 billion euros to lenders in the five countries at the end of July, data compiled by Bloomberg show. Irish and Greek central banks loaned an additional 148 billion euros to firms that couldn’t come up with enough collateral to meet ECB requirements.

Because central-bank financing is counted as a deposit from another financial institution, the official data mask some of the deterioration. Subtracting those amounts reveals a bigger flight from Spain, Ireland, Portugal and Greece. For Italian banks, what appears as a 10 percent increase is actually a decrease of less than 1 percent.

When financing by central banks isn’t counted, the data show that Greek deposits declined by 42 billion euros, or 19 percent, in the 12 months through July. Spanish savings dropped 224 billion euros, or 10 percent; Ireland’s 37 billion, or 9 percent; Portugal’s 22 billion, or 8 percent.

Accelerating Flight

The pace of withdrawals has increased this year. Spanish bank deposits fell 7 percent from the beginning of January through the end of July, compared with a 4 percent drop the previous six months. The decline in Portuguese savings accelerated to 6 percent from 1 percent, while Irish deposits fell 10 percent compared with almost no change in the last six months of 2011.

Banco Santander SA (SAN), Spain’s largest bank, lost 6.3 percent of its domestic deposits in July, according to data published by the nation’s banking association. Savings at Banco Popular Espanol SA, the sixth-biggest, fell 9.5 percent the same month.

Eurobank Ergasias SA, Greece’s second-largest lender, lost 22 percent of its customer deposits in the 12 months ended March 31, according to the latest data available from the firm. Alpha Bank SA (ALPHA), the country’s third-biggest, lost 26 percent of client savings during that period.

The ECB data include items such as deposits by securitization funds that Spanish banks say they don’t rely on for financing their businesses. Household and company deposits nationwide are stable if financing from instruments such as commercial paper sold to retail clients is included, Banco Bilbao Vizcaya Argentaria SA (BBVA) said in a Sept. 4 report.

Irish Banks

Irish government officials and bank executives say deposits at three government-backed banks have stabilized after almost three years of outflows. Bank of Ireland Plc, the largest lender, saw its customer deposits rise by 11 percent in the year ended June 30, according to regulatory filings. Ireland also hosts dozens of foreign institutions that use Dublin as an offshore base to benefit from lower tax rates and whose movements of funds would show up in the ECB’s Irish data.

Ireland nationalized almost all of its domestic banks in 2010, forcing them to recognize losses on real-estate lending, and injected 63 billion euros to keep them alive. Spain has resisted a similar cleanup that could cost several hundred billion euros, according to some estimates. After agreeing to 100 billion euros of potential assistance from the EU in June, the Spanish government still hasn’t decided how much of that to tap or what to do with its troubled lenders.

Plugging Holes

ECB cash may have plugged holes at lenders that otherwise would have had to sell assets at fire-sale prices as they lost private financing. The aid didn’t prevent funding costs from rising for the rest of the banks’ borrowing, including deposits.

While Italian lenders arrested the decline in deposits this year, they paid a high price to do so, with average deposit rates jumping 50 percent to 3.1 percent in July from a year earlier, ECB data show. That’s more than the 2.4 percent paid by Spanish banks, whose deposit wars were halted by a rate cap last year. Those limits were lifted last month, and Spanish firms have begun raising interest rates on deposits again.

The average deposit cost at German banks in July was 1.5 percent. Two years ago, Italian and German deposit rates were the same, at 1.3 percent.

Loan Pricing

The difference in funding costs is reflected in loan pricing. Italian rates on consumer loans of less than one year, at 8.2 percent on average, exceeded even those in Greece and Portugal, ECB data show. Spanish consumers had to pay 7.3 percent to borrow from their banks, compared with 4.5 percent for German borrowers.

Another blow to financial integration is the localization of borrowing and lending. Units of German, French and Dutch banks in Spain, Italy and other peripheral countries also borrowed from the ECB to reduce the need for funds from their parent companies. Deutsche Bank AG, Germany’s largest bank, said last week it had cut the reliance of units on financing by the Frankfurt-based firm 87 percent through ECB loans.

While the largest banks say they’re protecting themselves against currency redenomination in case a country leaves the union, such moves help exacerbate divisions between the periphery and the core. A locally financed Deutsche Bank unit can’t make loans that reflect the cheaper funding sources of its parent in Germany.

‘Backdoor Bailout’

By taking over the financing of weak banks, the ECB is in effect bailing out their creditors in the core, according to Edward Harrison, an analyst at Global Macro Advisors, an economic consulting firm in Bethesda, Maryland. If Irish or Spanish lenders burdened with losses from their nations’ housing busts were allowed to fail, German and French banks would lose money on loans to financial institutions in Europe’s periphery.

The ECB’s latest plan to buy the sovereign bonds of some countries will continue the trend of bailing out German and French banks, Harrison said.

“The leaders of the core countries won’t let the periphery countries write down their debt because then they’d have to capitalize their own banks losing money from those investments,” Harrison said. “This is a good backdoor bailout of their banks, but it still doesn’t solve the solvency issue of Spain or Italy.”

The rescue shifts default risk from private shareholders of core banks to the ECB and, in effect, to euro-area taxpayers. When Greece restructured its debt earlier this year, so much of it already had been transferred to the public that losses by European banks outside Greece were cut in half. Because the ECB and other government lenders wouldn’t take any losses, the debt load wasn’t reduced enough to make it sustainable.

Bond Yields

The ECB’s offer to purchase Spanish and Italian government bonds — if those countries ask for help and agree to conditions imposed in exchange for the assistance — would reduce yields, which have fallen in expectation of the move. Still, the purchases won’t bring down borrowing costs for companies and consumers in those countries because banks will continue to pay higher rates for their funding, according to RBS’s Gallo.

Unlike in the U.S., where the Federal Reserve’s buying of securities in 2009 and 2010 brought down mortgage rates immediately, there isn’t as strong a connection in Europe between bond yields and loan rates, Gallo said.

Increased funding costs for Italian banks are purely a reflection of the sovereign’s borrowing costs, not weakness in the banking system, according to Bank of Italy Deputy Director General Salvatore Rossi. When Italian government-bond yields decline, banks’ funding costs should too, he said.

‘Vicious Cycle’

“Our banking system was in good shape before the crisis,” Rossi said in an interview in New York. “If the spread goes down, credit-market conditions would ease, contributing to halt a vicious cycle, which is hampering economic activity.”

That spread, the difference between the yields of Italian sovereigns and the German bunds, fell to 342 basis points yesterday from a high of 536 in July. One basis point is 0.01 percentage point.

While Italian banks are affected by their government’s debt overhang, some increased funding costs result from a rising level of bad loans, Gallo said. The ratio of nonperforming loans to total lending in Italy has almost tripled since 2008 to 5.6 percent in May, Italian Banking Association data show.

European Union leaders have acknowledged the dangers of a two-tiered banking system, which is accentuated by deposit flows from south to north and diverging borrowing costs.

“We cannot pursue price stability now when we have a fragmented euro zone,” ECB President Mario Draghi told European lawmakers Sept. 3.

Banking Union

Draghi has said that the central bank’s plan to buy sovereign bonds addresses the divisions. Euro-area leaders also have responded by attempting to establish a banking union. Shared deposit guarantees, a central regulator and a resolution mechanism for bad banks backed by common funds from member states could reduce concerns that customers will lose money when lenders fail, halting the deposit shift from south to north.

The European Commission unveiled its proposal for such a banking union last week as directed by leaders in June. The commission is initially focused on a centralized supervisor, with other elements such as the deposit guarantee to come later.

Even the supervision proposal has generated controversy. While there’s agreement the ECB should play a key role overseeing banks, EU members are divided about how it will interact with national regulators and the scope of its powers.

‘Difficult Road’

Germany, which spent about 50 billion euros to rescue its failed lenders in 2008, has opposed placing all banks under ECB supervision. At an EU finance ministers’ meeting in Cyprus last weekend, Germany was joined by the Netherlands in warning against a hasty move toward central supervision, while non-euro members such as Sweden criticized the plan for not protecting those outside the common currency.

While a banking union is seen as a first step toward a more fiscally united euro zone, getting there will be politically challenging and take longer than initially envisioned, according to Alexander White, European political analyst at JPMorgan Chase & Co. in London. Euro-area leaders had called for the establishment of a central supervisor by January, a date which now looks unlikely, White said.

“We’re still left with very big political questions about who pays for all this, how the backstops work and so on,” White said during a conference call with clients last week. “The proposals are going to be quite difficult for quite a lot of member states. It’s going to be a difficult road ahead.”

http://www.bloomberg.com/news/2012-09-18/deposit-flight-from-europe-banks-eroding-common-currency.html

Dutch and German politicians like to blame Greece for refusing to stick to the agreements — but, in truth, the Greeks are doing more than they should.

Everyone who talks about Greece these days — even well-intentioned liberals — seems to assume a priori that Greece is somehow “opposing the reforms” and “refusing to stick to the agreements”. With Dutch Prime Minister Mark Rutte and German Chancellor Angela Merkel at the forefront, of course. Greece does not deserve respite, not a second of extra time and not a single penny more, simply because “the country keeps breaking its promises.”

First of all, the problem is that it’s impossible for a country as a whole to stick to any agreement whatsoever as if it’s some kind of ‘person’. In Greece there are countless people — the majority of the population — who have been struck by austerity measures that have been forced down their throats as if they were some kind of natural disaster; measures that are the result of those aforementioned “agreements”: a 40 to 50 percent reduction of salaries and pensions, an unbearable series of extra taxes, layoffs on a gigantic scale, a massive increase in unemployment and poverty, the destruction of labor rights, the implosion of healthcare. All these things are utterly unthinkable in a country like Germany or the Netherlands, yet nobody seems to give the Greeks who bravely carry this burden any credit whatsoever.

And then there is obviously the minority, a substantial part of Greece’s rich and corrupt political and industrial elite, which does dodge taxes on a grand scale by funneling money away to foreign countries, but which still gets away unscathed. The majority of Greeks who are bending over backwards to serve the Brussels diktat cannot help that. The middle class, the incredibly hard-working and impossible-tax-paying Greek, cannot be held responsible for that. Try to convince those people that, simply because a tiny minority keeps behaving scandalously, their country is somehow “refusing to stick to the agreements”.

Mind you, it’s exactly that “virtueless” minority of Greeks that Berlin and The Hague were happily doing business with and that could comfortably continue its corrupt ways under the watching gaze of Brussels. For decades, journalists wrote blisters onto their fingers about all the things that were going wrong in Greece, how the people suffered as a result of this, and how sooner or later things were bound to go wrong — but EU politicians didn’t even budge. I would like to see Dutch Prime Minister Rutte explain to my elderly Greek neighbor, who now has to find a way to survive on a miniscule pension of 300 euros, that she is somehow “refusing to stick to the agreements” and “opposing the reforms” when she recounts, crying, that she can’t (and hence won’t) pay her electricity bills.

Secondly, this is not about “agreements” at all. Somehow, that word presupposes that we are talking about two equal parties agreeing on a mutual course of action. Nothing could be further from the truth. Greece has been humbled, mangled and castigated, forced to accept the various IMF demands and Merkel’s austerity measures in a profoundly unequal “like it or lump it” type of situation. The word “agreements” itself is just as deceptive as the words “support” or “reform”. In the case of Greece, “agreements” refer to demands made at knifepoint. Support does not consist of gifts, subsidies or investments, but of big fat loans at disastrous, sky-high interest rates that squeezed Greece will never be able to repay. And the reforms are really just absurd budget cuts that would be utterly impracticable in Northern Europe, including the prospect of a total annihilation of minimum labor rights — something for which Europeans, including the Greeks,  have fought for centuries.

Thirdly, contrary to what Merkel and Rutte unjustifiably keep claiming, ad nauseam, the Greek government is making unbelievable, superhuman efforts to fulfill those impossible demands from Brussels. It does so in spite of the inevitable social unrest and understandable resistance of the Greek people, who are naturally rebelling against all this injustice. Whoever still claims that the Greek government is “once again” falling behind on its commitments and, as a result of slacking and bad governance, fails to pursue the right measures and reforms in the timeframe imposed by Brussels, is simply lying. Merkel is lying. Rutte is lying. Nobel Prize-winning economists and commentators like Joseph Stiglitz and Paul Krugman have already been predicting for two years, also ad nauseam, that Merkel’s current austerity policies are not only failing to work, but are actually driving the Greek economy ever deeper into the abyss.

And behold, they were right. The fact that Merkel and Rutte seem to believe that the targets of their much-revered but ultimately disastrous austerity policies are not being met has nothing to do with the fact that the Greeks are “failing once again”, but is simply the result of a stupid and unworkable set of policies. Back in the Netherlands, Prime Minister Rutte keeps complaining that Greece isn’t privatizing fast enough. This is completely unjustified. Something else is going on: the time Greece has been granted to privatize is simply surreal. Not a single government could comply with that. It’s simply demagoguery to go on and claim that the “Greeks are falling behind again”.

Moreover, the pressure of this “Mission Impossible” pushes the Greek government into an unworkable position. Partly because of Brussels, it finds itself with its back against the wall, in an in extremely weak position to privatize. It is being forced to sell off large state assets at firesale prices. Foreign buyers and vulture investors smell weakness — and blood. No surprise, then, that government revenues are disappointing; something which can subsequently be used by Rutte and Merkel to claim that “Greece is not honoring its promises”. The same goes for the disappointing revenue from all those extra new taxes: the austerity measures have pushed the Greek economy into a diabolical recession, as a result of which all those EU and IMF calculations about expected revenues turn out to be wrong. That’s not the fault of the Greeks.

One of the most extreme pronunciations came from Dutch Prime Minister Mark Rutte in a recent pre-election debate with Labour leader Diederik Samsom. Samsom openly asked Rutte whether, in order to save Greece and the euro, he would be willing to cough up the money for another bailout. (Obviously, it’s not about “giving” this money, it’s about expensive loans. But let’s leave that aside). No, Rutte yelled. Why not? Because it would be extremely unwise to say that now, for the Greeks would immediately slow down, sit back and stop privatizing and reforming. After all, they would count their blessings in advance, knowing full well that “someone would pay for them” again and therefore refuse to do anything whatsoever. And so Samsom had to be careful with his words, because the Greeks were listening along — and they would “now receive a completely perverse incentive” from the Labour leader.

Rutte: “we have to keep them on a tight leash.”

Excuse me?

As if Greece were a dog. As if the Greeks were shitty little kids grabbing every opportunity to skirt their responsibilities. What an idiotic way of doing international politics. What an arrogant attitude toward people who are bending over backwards to stay inside of “Europe”. Rutte apparently has such a deep distrust and such a profound contempt for our fellow EU member state that we — from the point of view of Ruttian pedagogy — have to actively deceive them and, above all, should not let them know that they can count on any further bailouts if needed. As Prime Minister, Rutte has already made it known that he has “nothing to do with the Greeks”. Such a person, who just like the right-wing extremist Geert Wilders likes to play with the gut feelings of ill-informed citizens to win their votes, should never be allowed to become PM in the first place.

Last but not least: in my own environment and extensive circle of acquaintances in Greece, I do not know a single Greek who does not want to see reform — in the pure sense of the word — from the government; not a single Greek who does not want to put an end to the old and corrupt Greek political establishment, and who does not believe that the debt, for which they themselves are not responsible, should ultimately be paid back (should it?). These people deserve our support and encouragement; not to be treated arrogantly, mercilessly and unjustly, like second-class citizens — or even worse, like a dog.

Ingeborg Beugel is a Dutch journalist and was formerly based in Athens as a foreign correspondent for various Dutch media. She regularly appears on Dutch television to comment on the Greek debt crisis.

http://roarmag.org/2012/09/ingeborg-beugel-austerity-greece-europe-rutte-merkel/

In Dutch: http://www.volkskrant.nl/vk/nl/3184/opinie/article/detail/3314000/2012/09/10/Ingeborg-Beugel-Griekenland-is-geen-hond.dhtml

The true believer’s faith is strengthened by disaster. So the true believers in a federal Europe have no intention of abandoning the monetary, budgetary and commercial integration policies that have exacerbated and prolonged the economic crisis. On the contrary, they want to increase the authority of those responsible for these policies. If European summits, stability pacts and disciplinary measures haven’t solved the problem, then that, our true believers assure us, is because they did not go far enough: we owe all our successes to Europe, all our failures to its absence. On the strength of this blind faith, they sleep soundly and dream happy dreams.

They also have nightmares, because federalists do not dislike storms: warnings of storms ahead give them the pretext of an emergency with which to subdue resistance to their grand design. Caught in mid-stream and under fire, you cannot go back. You must reach the other bank or die in the attempt, make the great “federal leap” or fail. As the former German foreign minister, Joschka Fischer, said last year: “Unless the current confederation evolves into a political federation with a central government, the eurozone — and the Union as a whole — will disintegrate” (1). In France, the three major radio networks and two of the main newspapers say the same thing every day.

Listening to the federalists, you would think the European institutions have no power or resources, while states have unlimited authority and means. But the European Central Bank (ECB), which has managed the crisis with the success we know, producing €1,000bn to refinance the banks, does not depend on EU governments or EU voters. Far from being under excessive constraints because of any lack of integration (a common budget, a single minister), the harmonisation of European policies under the German austerity regime has succeeded in increasing national debt and public poverty.

Today’s prophets of doom are former optimists. They were behind the European Community policies technocratically imposed 30 years ago; they celebrated the greatest market in the world, then the single currency, then the “policy of civilisation”; ignored public opinion as soon as it dissented; destroyed any plan for European integration based on social welfare, public services or trade protection. But when midnight strikes and their coach turns into a pumpkin, they forget how happy they were, and swear they always warned us the scheme would never work.

Will the current drama be the pretext for imposing a new federal leap forward without allowing universal suffrage a last bow? Europe is already in trouble; it cannot afford to deny democracy yet again.

Source: http://mondediplo.com/2012/07/01federal