Eideard

Haven’t we been here before?

Under the pressure of financial crisis and with the euro currency at stake, the two key leaders of the euro zone said Monday that they would together push to remake the European Union into a more integrated political and economic federation, with tight legal restraints on how much debt national parliaments can issue.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, meeting here at the start of a crucial week that will end with a European Union summit meeting on Thursday and Friday, called for amendments to European treaties that would include centralized oversight over budgets and automatic sanctions against countries that violate firmer rules on deficits…

The automatic sanctions – or threat of – are the most Neverland part of the proposals, of course. Who expects a country unable to pay sufficient bills to pay a fine for not paying those bills?

“We want to make sure that the imbalances that led to the situation in the euro zone today cannot happen again,” Mr. Sarkozy told a joint news conference. “Therefore we want a new treaty, to make clear to the peoples of Europe that things cannot continue as they are.”

Mrs. Merkel, warmly embracing the French president despite their often testy relationship, insisted that the euro zone must be effectively reestablished under a different set of rules. “We want structural changes that go beyond agreements. We need binding debt brakes,” she said…

The two leaders are aiming to develop a clear consensus among the other members of the euro zone that they will push ahead with a new treaty. They appear to be calculating that such a signal of solidarity will be enough to persuade the European Central Bank, the only institution in Europe with enough financial firepower to defend the ability of member states to raise money on bond markets, that it has enough political cover to move more aggressively to protect vulnerable countries like Italy and Spain.

RTFA for the details, anecdotal hogwash, hopeful analysis – all of which ignores the fact that standards meant nothing for the several nations brought into the EU in the first place though they didn’t really meet standards. Creative analysis, voodoo economics were used to justify including countries like Greece into the club although they were miles and years away from realistic qualification.

France and Germany may effectively run the European Union, but Finland has been demonstrating how even a small country can disrupt their grand designs.

By insisting that it receive collateral from Greece in return for aid, Finland is threatening to upend an agreement that euro zone countries, led by France and Germany, made in July to expand the E.U. bailout fund.

Finland would contribute less than 2 percent of the guarantees provided to the fund, known as the European Financial Stability Facility. But the country’s demands, the subject of intense negotiations in recent days, threaten to derail the fragile consensus that is preventing Greece from defaulting on its debt.

Finland is the most vivid example of the way domestic politics can become Continental problems, threatening the unity of the 17 euro zone members as they face their deepest crisis ever. But Germany, the Netherlands and Austria — all wealthy countries with strong economies — also harbor deep opposition to bailing out Greece, Portugal, Ireland or any other country that may become overwhelmed by debt…

In Finland, Prime Minister Jyrki Katainen faces discontent within his governing coalition as well as pressure from a nationalist opposition group, the True Finns, which rode euro-skepticism to big gains in April parliamentary elections…

Finnish officials say they want to resolve the collateral issue and contribute to the bailout fund. But they are also adamant that the country must receive guarantees.

“We have to listen to the people of Finland,” said a government official, who requested anonymity because of the sensitivity of the issue. “Collateral is an absolute condition for Finland to be involved.”

It is unclear what the collateral might consist of — jokes making the rounds suggest that Greece could pawn the Acropolis or the island of Corfu. And any concessions made to Finland would probably then be demanded by other countries like Austria, where citizens are also grumpy about having to provide tax dollars to support Greece…

They may be jokes to NYTimes writers; but, that was exactly the same response from my favorite banker when we got into a discussion of exactly these fiscal issues — the European Union not being a fiscal union.

Confederacies still haven’t anymore viable economic solutions than they have political solutions. A simple agreement for commerce and currency doesn’t guarantee sound monetary policy for seventeen different economies.

Daylife/Reuters Pictures used by permission

After months of quietly watching from the sidelines, the United States finally intervened in the European debt crisis on Sunday night.

The Federal Reserve announced that it would open currency swap lines with the European Central Bank — in essence, printing dollars and exchanging them for euros to provide some liquidity for European money markets and banks.

The step came after a hectic week in which Washington began to fear that the sovereign debt crisis threatened to infect the American economy and hamper its recovery, according to several United States officials…

The intervention, which also involves the central banks of England, Switzerland, Canada and Japan, is part of a colossal package intended to quell the restive credit markets with a show of force and resolve that American policymakers had quietly believed was lacking. The package has two other elements: about $950 billion in loan guarantees from the European Union, and a decision by the European Central Bank to intervene in the bond markets through a series of refinancing operations…

“It became increasingly clear that, if they were willing to take very strong measures, that it would be in the interests of the United States to encourage and support that,” one American official said…

In a statement, the Fed said the currency swaps were intended to make it easier for European companies, institutions and governments to borrow dollars when they need them, “and to prevent the spread of strains to other markets and financial centers…”

The Fed actually made money from the previous dollar swap program. The foreign central banks paid the Fed interest equivalent to what they made from lending the dollars. The Fed, however, did not pay any interest on the foreign currencies it took in exchange, having agreed to hold them instead of lending them out or investing them in the private markets. The new program is designed the same way.

None of which will punch through the minimal comprehension level of teabaggers and Republican ideologues.

Banks and the Federal Reserve will quietly continue doing what it is they are supposed to do. Lend and borrow money. The dollar ends up stronger.

Jean-Claude Trichet
Daylife/Reuters Pictures used by permission

The global economy is expanding again and financial conditions have improved significantly, the International Monetary Fund (IMF) has said.

But in its latest World Economic Outlook, the IMF said the “pace of recovery is expected to be slow”. It added that the recovery is likely to be “insufficient to decrease unemployment for quite some time“.

On Wednesday, the IMF cut its forecast for the amount that banks are likely to lose in bad loans and investments…

Separately, the head of the European Central Bank (ECB) said that the 16 countries in the eurozone should withdraw stimulus packages in the next two years.

“From an ECB point of view, it is important to do what is necessary to exit as soon as possible,” Jean-Claude Trichet said at a meeting of EU finance ministers and central bank governors in Gothenburg.

The global recovery is being led by Asia, where economies have “withstood the financial turmoil much better than expected,” the IMF said.

Much better then who expected.

They always got that part right.