Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
A nice piece over on Bloomberg re: Europe this morning with quite a few interesting snippets. Keep in mind for those hoping for Eurobonds – this would have to pass 17 legislatures – and we see how difficult it is for anything to pass even 1 legislature here in the U.S. [May 22, 2012: Are Eurobonds Coming?] And in many ways what the EU has enjoyed the past 15 years has been a form of Eurobonds – a massive reduction in borrowing costs for non competitive countries due to the inclusion of a few select fiscally conservative northern European countries in a union. In the end that did not turn out well, so Merkel has a point. All that would change is Germany would explicitly be on the hook for shared debt as opposed to implicitly as the current structure showcases.
As for a banking union – which seems far more likely in the near term – it again exposes the current flaws of the Europen system. To wit, when Citigroup needed a bailout it was not the responsibility of the "state of New York" to go bankrupt to provide said funds, it was paid out at the federal level in a regime that has unlimited ability to create currency from thin air. (Unlike the state of New York which can not print money from thin air) Ireland did not have that choice and hence once it bailed out its banks was crushed by the obligations – and hence the bailout was required. Spain is now in the same boat. While these are countries, in the current EU setup they are treated more like U.S. states without the ability to self fund via methods that we may or may not like. But this is the advantage the U.S, U.K., and Japan retain – and hence when crisis hits in these countries they don't have the same situation happen that is hitting Europe. Yes there was a massive BANKING crisis in the U.S. but what happened to the sovereign debt? People actually fled INTO it, not AWAY from it as is happening in these European states.
If these European countries (states) were independent entities they could in theory print tons of currency to pay for said bailouts – of course depending on the size of their banking sector versus the size of GDP this is not necessarily a great option, but still an option. Or of course they could go the Iceland option and walk away from the debt! [Dec 9, 2010: Should Sovereign Nations Pursue the Iceland Solution or the Irish Solution?] Which is what Greece is threatening with these new political groups. Keep in mind most of the bailout money sent to Greece just gets sent back to German and French banks – so who is really getting "bailed out"?
The key point being these European states have no such option now, and there is no 'federal' level of the EU that can take the same steps the U.S. government did or the U.K. government did during their bank crises. But maybe this is where the next steps are headed for Europe.
Here are some of the key outtakes:
- With Europe’s debt crisis cited last week for canceled IPOs, weaker-than-expected Chinese manufacturing figures and a rise in the U.S. jobless rate, Merkel rejected joint debt issuance in the 17-nation euro area as a solution, saying“under no circumstances” would she agree to Germany-backed euro bonds. Some “come along and ask for euro bonds, saying all we need are equal interest rates and everything will turn out all right,” Merkel said in a speech to members of her Christian Democratic Union in Berlin yesterday. Instead, what’s needed is an economic overhaul to tackle the lack of competitiveness inEurope, she said.
- The president’s point person for the European crisis, Lael Brainard, Treasury undersecretary for international affairs, ended a three-day tour of Europe’s crisis capitals the same day as work continued on erecting a financial firewall to stem contagion. The European Union is targeting July 9 as the start date for its permanent rescue fund, the 500 billion-euro ($620 billion) European Stability Mechanism, an EU official said.
- Brainard held closed-door meetings with government officials in Athens, Madrid, Paris, Frankfurt and Berlin in a week when investors flocked to the perceived safety of German and U.S. bonds. The euro tumbled against the dollar and dropped to an 11-year low against the yen as uncertainty over the outcome of Greek elections on June 17 shifted to take in Spain, where Prime Minister Mariano Rajoy’s government is struggling to shore up banks amid a recession. Merkel and Finance Minister Wolfgang Schaeuble are urging Rajoy to take an international bailout since Spain cannot solve its banking woes alone, German news magazine Der Spiegel reported yesterday, without citing a source for the information.
- A Spanish government spokeswoman declined to comment, refering instead to a speech Rajoy made yesterday in which he said the euro region should have a centralized mechanism that can directly recapitalize lenders as part of a “banking union,” echoing a proposal by European Commission President Jose Barroso. Such a structure, which might include conditions for banks receiving aid, would help meet Spain’s need for external capital without the stigma of a formal rescue.
- Proposals on a banking union are among elements of a“master plan” to resolve the crisis being worked on by ECB and EU officials for the next European summit at the end of June, German newspaper Welt-am-Sonntag reported today, citing officials it didn’t name.
- The German chancellor, who was besieged over her crisis-fighting policy last week by Italian Prime Minister Mario Monti and ECB President Mario Draghi, took aim at Italy as she cited a“missed opportunity” offered by the euro’s introduction for Europe to overhaul uncompetitive economies. The cheaper borrowing that came with the euro meant “countries like Italy became virtually on a par with Germany in terms of interest rates,” she said. “The freedom created by this situation wasn’t exploited to improve long-term competitiveness,” Merkel said. “Instead, the time was used to spend too much money in consumption and too little time in tackling reforms.” (bingo)
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