No it is not over yet, not by a long chalk

On another forum someone pointed out that it must be at lest 2,500 years since Iran (a.k.a. Persia) and Greece dominated the headlines to the extent they have been doing for the last week or so. That is true with some exceptions: there was the time six months ago, and a year ago, and two years ago and so on. Nor have the two stories gone away. President Obama may be lauding the nuclear agreement and pretending that it has nothing to do with Congress (memo to the Prez: read that Constitution at last) but Congress does not think so and there are a good many unhappy people in the region, starting with Israel and continuing with most Arab states. So that one will run and run.

What of Greece? Did the runner from Brussels bring the good news as the one from Marathon had done? Not exactly. On the one hand there will be a third bail-out (anyone who is surprised by that has not been paying attention) but on the other hand the terms imposed on Greece are about the same if not worse than the ones they voted against in that referendum. And this time the Prime Minister has accepted them because he had no alternative.

To his and the Greek population's surprise it emerged that they were not holding the whip hand. Far from it: they voted against the austerity plan on the assumption that they will still be getting a bail-out and emergency funds to keep going in the style they seem to have accustomed themselves to. (Well, maybe not quite in that style as anyone who has a transferable skill is leaving or planning to leave the country.) The trouble with that reasoning as I have pointed out before, is that you cannot vote democratically or otherwise about something you cannot control. In other words, for the Greeks to vote in favour of getting more money from other EU member states was pointless - it is the other states that were going to decide on that and they, too, have people and electorates.

The sad truth is (well, sad from the Greek point of view) that it is they who are desperate to stay in the eurozone while the other members do not seem to care all that much. My suspicion is that most of the big banks and government departments in German, France and the other countries have been making various plans for a Grexit and will be more or less prepared. Not fully, of course, as one can never be fully prepared for something like that, but more or less. Whether the Greek government has made any plans remains a moot point. For the time being they are hanging on in there and I do mean the eurozone.

Will the Greek government survive in Greece? That remains to be seen but I predict that they will. No other real alternative is being presented. Tsipras is facing a rebellion in Syriza but is being supported by the opposition parties. A good deal of hysterical nonsense is being spouted:

Greek Energy Minister and Left Platform leader Panagiotis Lafazanis said yesterday, “Our so-called partners led by the German establishment, behaved towards our country as being their colony and they are nothing more than brutal blackmailers and financial assassins.”

Clearly, even elementary knowledge of economic facts is not a requirement in the Greek government. As for political understanding, don't even think of it. Greece has been a colony of the EEC/EC/EU ever since it joined and its own political establishment, backed by its electorate has done nothing to change that situation.

Meanwhile, the agreement might (though probably won't) be scuppered by the German Bundestag who seem to think that democracy and voting is not just for the Greeks.

“The package is neither credible nor viable,” centre-right MP Klaus-Peter Willsch told Tagesspiegel.

MPs from the larger of the two centre-right parties, the Christian Democratic Union (CDU), Wolfgang Bosbach and Willsch announced their intentions to vote “no” on Friday, just as they have in previous votes regarding Greek aid.

Still, most of the Bundestag’s centre-right, Social Democrats and Greens are expected to vote “yes” on a mandate the German government needs for negotiations on a third bailout for Greece. The Left Party is expected to reject the plan. In a second vote, the Bundestag would later have to agree to the new assistance programme.

The agreement established on Monday (13 July) morning in Brussels is a further attempt to “patch-up cracks in the system with a lot of money”, Willsch said. Among other things, he criticised the scope of the planned €50 billion trust fund. This was already recorded as a privatisation target in the first bailout package, but not even 10% of it was actually achieved.

Hans-Peter Friedrich, the deputy chair of the centre-right group in the Bundestag, expressed his doubts over reform pledges from Greece’s left-wing government.

“I do not believe one word the Greek communists say anymore,” Friedrich told Bild.

Looking at it from another point of view, I cannot help wondering whether the sort of weeping and wailing and gnashing of teeth that is to be seen on the left of our own political spectrum, especially among the europhiliacs, has anything to do with the fact that the Greek government that is allegedly being "humiliated" is of the fairly extreme left-wing variety. Would we see the same if it had been of the right?

Brendan O'Neill has written an excellent piece on the born again left-wing eurosceptics who are in agony because the poor Greeks and their left-wing government is being so badly treated.

But I’m not feeling very welcoming to these latter-day doubters, currently live-tweeting their Euro-existential angst and clogging their newspaper columns with tortured questions about whether the EU really is a ‘great achievement of enlightened internationalism’. (Answer: no, you donuts.) For two reasons.

Firstly because it’s just too late. Where the hell were you guys in 2001, when the Irish people rejected the Nice Treaty and were subjected to a tirade of abuse from EU officials before being made to vote again? Where were you in 2005, when the Dutch and French peoples were libelled by EU officials as racists and xenophobes and ‘the generally pissed off’ for having the temerity to reject the EU Constitution? Where were you in 2006 and 2007 when some of eastern Europe’s elected leaders were told by Brussels to tone down their political rhetoric or face being found in contravention of EU obligations? Greece is far from the first European nation to have its democratic impulse nulled by Brussels bureaucrats.

I’ll tell you where you were back then: you were on the side of the Eurocrats sneering at the pesky masses. You treated criticism of Europe as a kind of mental malaise: Europhobia. And you let it be known that all good people, like you, back the EU, whereas only bad people — racists, nationalists, fat blokes with the St George’s Cross tattooed on their arses — oppose it. You formed a chattering-class ring of steel around the EU, deflecting all critical jabs and barbs as the unhinged mutterings of the generally pissed-off. So, yeah, your Damascene conversion to the cause of Euro-questioning is a tad irritating, to be frank.

The second reason I’m not rolling out the red carpet for these people coming around to a way of thinking they once branded a phobia is because they’re doing it wrong. They aren’t genuinely opposed to the EU; they’re just really angry with Germany. In fact, much of this oh-so-late Euroscepticism, especially from the left, is really anti-German sentiment in disguise. It’s the return of the British disease: a hives-like allergy to all things German and a rash fear that this nation is once again plotting to subject all of Europe to its black, unforgiving boot.

As a matter of fact I, too, am fed up with the stupid cry of "Nazi Germany marches again" and "Merkel is just like Hitler". No, this Germany is not Nazi, Merkel is nothing like Hitler, the country is a democracy and has to pay attention to its own people and, in any case, the other putative donors (there is no point in pretending that these are loans) are not too happy with Greece either.

This is what I said on the anniversary of the bringing down of the Berlin Wall:

And now, my fellow eurosceptics, let us do a little bit of maths. The Federal Republic of Germany, popularly known as West Germany, became a constitutional democracy in May 1949, that is sixty-five years ago. That democracy was strong enough to take in twenty-five years ago a section of Germany that had been a Communist country for forty years. Since then united Germany has had many problems (haven't we all?), both economic and political but it has remained a democracy and there seems not possibility of it being anything else. As against that, the Nazi regime lasted for twelve years. That's twelve years against sixty-five and twenty-five. Could we now stop talking about Germany as being always and for ever potentially Nazi?

Obviously no, we cannot get out of that stupid rut for if we did we might have to think a little more seriously about the present and the future.

Many of the people who have been raising the wicked Germans oppressing the Greeks cry found themselves spluttering with fury when it became apparent that Britain would have to contribute £1 billion to the short-term funding (there really is no money there). The UK is, therefore, opposing any immediate solution that would involve British taxpayer's money. As I am one of them I have no objections to that stance (though it ignores certain other funds) but I am a little perplexed by people's attitude of being generous at Germany's and other eurozone countries' expense.

A diplomatic source said Monday that Poland too would oppose the use of EFSM to provide emergency cash for Greece.

The source added that even some eurozone countries are wary of the bridge-funding idea, saying Greece has enough money to meet its short-term needs.

Other solutions to provide the bridge-funding have been aired, for instance, the use of SMP profits - the profits made on Greek bonds by the ECB and eurozone national banks - or bilateral loans to Greece from countries including France and Italy.

"I foresee those negotiations being very difficult because I don't see many countries having a mandate to give money without any conditions", Finnish finance minister Alex Stubb said Monday.

Arriving at the Ecofin meeting on Tuesday, Luxembourg finance minister Pierre Gramegna said there is "no ready product on the table yet" and that ministers would listen to experts from the euro working group who have been tasked to work on the issue.

According to Germany's Handelsblatt newspaper, German finance minister Wolfgang Schaeuble proposed at Monday's Eurogroup that Greece issues IOUs to repay its debt to the IMF and ECB.

Well, that should solve it. Would IOUs be acceptable to Greek pride about which we have been hearing so much recently?

Just to make things worse, the IMF tells us that they are actually worse than we think. Much worse.

A secret International Monetary Fund study showed Greece needs far more debt relief than European governments have been willing to contemplate so far, as Germany heaped pressure on Athens on Tuesday to reform and win back its partners' trust.

The IMF's stark warning on Athens' debt was leaked as Greek Prime Minister Alexis Tsipras struggled to persuade deeply unhappy leftist lawmakers to vote for a package of austerity measures and liberal economic reforms to secure a new bailout.

The study, seen by Reuters, said European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a dramatic maturity extension. Or else they must make annual transfers to the Greek budget or accept "deep upfront haircuts" on existing loans.

That is a complex, technical way of saying that Greece is going to be kept going by the rest of us, that debts will not be repaid, that no reforms will be sufficient to solve the problems and .... that we shall all have to keep them going. Even colonies are stronger economically than that.

Is there a solution to any of this? I am not sure anybody knows what it might be. Certainly leaving the eurozone might be a starting point for Greece but it will still have the debts and an dysfunctional economy. Leaving without some idea of what to do next will solve nothing.

As I said, it is not over, not by a long chalk.

Changes in Finland

It takes a great deal more knowledge about various aspects of the problem than most commentators have shown to write sensibly about the high tragedy that is going on in the Mediterranean. For the record I do not think it was particularly sensible of Nigel Farage to blame David Cameron not because this is "playing politics with people's lives" but because it was silly and unserious. As to playing politics, he is a politician so he plays politics.

In other words, this blog is for the time being, refraining from comments or analysis except to say that undoubtedly the EU will try to use this ghastly tragedy as a beneficent crisis and attempt to create another single or common policy out of it, though, so far as we know there already are various EU policies that are meant to deal with migration, legal or otherwise; undoubtedly the attempt will bog down in discussions about the policy and how it should benefit the EU until more migrants either appear on our shores or drown off them.

Instead, we turn to the far less dramatic events in Finland that, in the long term, may well have a greater effect on politics across Europe. Sadly, we have had tragedies with migrants before and apart from calls for all sorts of things in the EU and outside it, nothing much has changed.

The Finnish election brought in a new government, or will do just as soon as the coalition can be put together. The winners are the Centre Party, led by businessman and millionaire Juha Sipila.

Sipila's main concern will be to repair the Nordic country's spluttering economy, although the centrist politician told journalists on Sunday evening that “it will be about 10-year project to get Finland in shape again”.

“A combination of cuts, reforms and growth” is needed, he added.

As Tim Worstall points out on the Adam Smith Institute blog,

We think it’s fairly obvious that over the past decade the most successful economy in the eurozone has been that of Germany. And we also think it’s fairly obvious why this has been so, the so-called Hartz IV reforms. Which appears to be very much what the new Finnish likely Prime Minister believes in.

He quotes from an article in the Telegraph

Opposition Centre Party leader Juha Sipila, who advocates a wage freeze and spending cuts to regain Finland’s competitiveness, beat pro-EU and pro-NATO Prime Minister Alexander Stubb after four years of policy stagnation and a bickering coalition.

Not sure how NATO comes into it unless we are talking about the usual attempt by the europhiliacs to assure all and sundry that if you are not enamoured of their project you are clearly against every kind of international co-operation.

As Mr Sipila starts negotiations it will be very difficult for him to ignore the party that came second, the eurosceptic Finns Party (formerly known as True Finns).

[W]hile the populist anti-establishment party, led by Timo Soini, lost one of its seats, other parties lost more. Soini now leads the second-largest party in parliament, with 38 seats.

The party is anti-immigration but what is of greater importance for the immediate future is that it is against any more bail-outs for Greece and in favour, if needs be, of Grexit. As Mr Worstall says, Finnish politics has just become more interesting.

Cyprus will probably be bailed out

Despite the marked reluctance shown earlier to bail out Cyprus and its banking sector to the tune of €17.5 billion, it would appear that, as predicted, German opposition to that course of action is lessening.

[P]ressure to reach a deal on Cyprus had grown from euro-zone member states, the European Commission and the European Central Bank. There is concern in Brussels and across Europe that were Cyprus to be allowed to slip into bankruptcy, it could reverse the recent progress that has been made in coming to terms with the euro crisis.

Apparently, it is not a solution anyone is looking for but merely a coming to terms with, which shows some rationality in the approach and an acceptance of the fact that there can be no solution.

Still, the bailout is not without risks. Cyprus is in urgent need of up to €17.5 billion ($23.6 billion) in emergency financing, primarily to prop up its ailing and outsized banking sector. But a bailout of that size would be roughly equivalent to the country's annual gross domestic product and would increase the island nation's sovereign debt load to a potentially unsustainable level. The International Monetary Fund had even demanded in December that the aid package be paired with a significant debt haircut.

There have been recent indications that the final bailout price tag might ultimately be lower. For one, Nicosia has said that its banks do not need as much help as had originally been estimated. For another, the Associated Press reported on Tuesday that Russia will very likely take part in the bailout package, lessening the burden on Europe.

That means the Russians are softening as well or someone has explained to the Russian government that Cyprus is essential for the welfare of the oligarchs who are, in turn, supportive of Putin. (Others are either abroad or in Siberia.) German Finance Minister Schäuble remains opposed to the bailout package but he may be outvoted at the next meeting of Finance Ministers.

Still, Schäuble isn't the only one in Berlin with his doubts. The Cyprus bailout, once it is agreed to by European finance ministers in Brussels in the coming weeks, must also be rubber-stamped by German parliament. And that, particularly with a general election coming in September, is no longer a foregone conclusion. Chancellor Angela Merkel's coalition partners, the business-friendly Free Democrats, have voiced significant skepticism of a Cyprus bailout and could see a no vote as a way to sharpen the party's extremely dull profile.

There are also several rebels within Merkel's own Christian Democratic Union (CDU) who are likely to vote no. Christian von Stetten, chairman of the CDU parliamentary caucus that advocates for small- and medium-sized businesses, said he would oppose an aid package for Cyprus if it came to a vote. "Cyprus applied for aid seven months ago, and since then it has been staying afloat with payments from the Central Bank of Cyprus," Stetten told SPIEGEL ONLINE. He added that the country's actions since then have been carefully scrutinized, and that "if a majority decides to transfer money to Cyprus from the bailout fund, I wouldn't be able to understand that." He said he would vote against any motion to grant Cyprus aid in parliament.

My guess is that the deal with go through and, naturally, will solve nothing. The time for the German rebellion is not yet. Besides, they may not be able to afford it. Whether the countries that are being bailed out can afford the process is another question.

More on Cyprus

Couple of articles in Der Spiegel that might be of interest or amuse readers of this blog. Spiegel Staff write collectively on the problem that Cyprus is causing, the opposition to the bail-out in Germany itself and other eurozone countries and Chancellor Merkel's visit on Friday.

The financial woes of Cyprus are a thorny issue for the German government, the mood in global financial marks and, most of all, for Europe's bailout policy. Ever since last fall, when SPIEGEL published a report by Germany's Federal Intelligence Service (BND) on money laundering in Cyprus, it has been clear that an aid program for the country would also benefit Russian oligarchs who have deposited billions in assets from dubious sources on the Mediterranean island. According to the BND analysis, if Brussels released the requested aid money, German taxpayer funds could very well be used to protect the illegal assets of Russian business magnates.

This realization triggered hectic activities in various places. In Brussels, the Euro Group of euro zone finance ministers postponed its decision on the bailout program last week, while donor countries like Germany, Finland and the Netherlands voiced concerns. In Cyprus, the government is trying to show it's tough on tax dodgers and money laundering. "Cyprus is no tax haven," Finance Minister Vassos Shiarly insists in an interview with SPIEGEL. 

The euro rescuers face a dilemma. On the one hand, they want to prevent the country from going bankrupt. On the other hand, they lack the support of a majority of member states for an aid program that would mostly benefit rich Russian tax fugitives.

The tricky situation is prompting European leaders to do what they always do when a crisis comes to a head: play for time. They want Nicosia to satisfy additional conditions in the fight against tax dodgers and economic criminals. At the same time, Brussels is hoping that current President Dmitris Christofias will be ousted in the February election.

There is also an interview with the Cypriot Finance Minister, Vassos Shierly,  in which he "denies accusations that Cyprus encourages worldwide money laundering and is attracting investment by means of tax dumping". Not sure what he means by tax dumping but the money laundering has been reasonably well proven.

We have a problem with Cyprus

Come February 10 there will be another country whose bail-out will  be discussed: Cyprus. There will be certain problems with the whole discussion. Not just the usual problems - corruption and political stagnation - but an extra one. Just who will be receiving the €17.5 billion (as Wolf Richter points out, this is about the equivalent of the country's GDP) that the country is requesting from the EU or, maybe, just the eurozone but there is usually a way of drawing other member states in?

A “secret” report by the German version of the CIA, the Bundesnachrichtendienst (BND) was leaked last November, revealing that any bailout of Cyprus would benefit rich Russians and their €26 billion in “black money” that they deposited in the now collapsing banks. The report accuses Cyprus of creating ideal conditions for large-scale money laundering, including handing out Cypriot passports to Russian oligarchs, giving them the option to settle in the EU. Much of this laundered money then reverses direction, turning minuscule Cyprus into Russia’s largest foreign investor.

The assumption is that €12 billion of the requested €17.5 will "go directly to the murky and putrid banks".

Neither German politicians nor the euro-weenies like this idea. Handing over money to the Russian oligarchs is a bail-out too far.

Politicians in Berlin have said they are not prepared to help as long as Cyprus' banking industry lacks transparency. Chancellor Angela Merkel was in Nicosia Friday as Moody's downgraded the Cyprus' credit rating by three notches to Caa3. The mood is tense in Nicosia. Finance Minister Vassos Shiarly said there is only enough money to sustain the economy until the end of March.

What is to be done? Russia, having come to the country's rescue once in the past, will not do so again. Wolf Richter is sceptical:

If Greece is any guide, Merkel will vociferously demand more reforms and transparence in the banking sector. The February 10 deadline might pass. Cyprus will come up with a list of promises. Gradually the rhetoric will change. Words like “progress” will show up. “Black money” will disappear from the media. This might even culminate with a heartwarming meeting in Berlin between Merkel and Christofias. And suddenly, voting against the Cyprus bailout, once a safe bet, will become politically risky. It worked before. It might work again. If not, Cyprus with all its “black money” might become the first Eurozone country to go bust.

How many people can be fooled and for how long?

ADDENDUM: A knowledgeable reader of this blog has commented:

2 factors: (a) Cyprus has a presidential election coming up on 17/24 February. Christofias is not a candidate. It's likely Anastasides (EPP) will win (a potential ally for Merkel). So the change of government - Cyprus is the only EU Member State with a US-style Presidential government - may work in favour of a softening of the language. (b) which country has invested more political capital in building up and assisting the Russian oligarchs? Surely that's Germany. Can hardly expect them to complain now.

For all of that I fully expect the Germans to complain though, perhaps, not Chancellor Merkel.

And in other (less surprising) news

The Karlsruhe Court has refused to block the ESM treaty and, as the Washington Post reports, inevitably the markets "breathed a sigh of relief" and "rallied". The article does not add the words "for the time being" but that is understood.

The Financial Times also reports the result, adding:

The conditions imposed by the court appeared less onerous than some of the fund’s supporters had feared.

It ruled that the ceiling of €190bn in German financial guarantees imposed when parliament approved the rescue fund could only be increased with the assent of lawmakers. There must be no unlimited liability for Germany, the ESM’s biggest backer, the justices decided.

The judgment was greeted with immediate relief by members of the German parliament. Frank-Walter Steinmeier, leader of the opposition Social Democrats, expressed satisfaction that the Bundestag decisions had been confirmed.

“The ESM can finally start work,” he said.

What happens when that money runs out and the German economy suffers some more?

Reuters adds that "the euro rose to a four-month high against the dollar" because of the Court decision. The train wreck continues.

Meanwhile, in the Netherlands

The crisis goes on and the government has either resigned or about to resign. The Guardian's constant update is quite useful but, by definition, cannot give clear answers as it has to provide minutiae. For example stating as a certainty what one opinion poll has predicted at a time of see-sawing opinion, is asking for trouble.

The Financial Times is certain that Mark Ruttke will be resigning as the austerity talks have come to nothing and Geert Wilders continues in his refusal to support the government. Much laughter and schadenfreue in Brussels, according to the Wall Street Journal with Neelie Kroes also attacking Wilders.

Meanwhile in the Netherlands ...

... the government is in trouble.

The liberal and conservative Dutch government cabinet holds an emergency meeting on Monday after talks on a £7 billion cuts package, demanded by the EU under eurozone budget deficit rules, broke down at the weekend. Mark Rutte, the Dutch Prime Minister, a Liberal, will try to find support for austerity measures with the opposition Labour Party this week but will have to offer early elections in September in return.

Apparently, the crisis was caused by Geert Wilders withdrawing his support from the government, arguing "against Europe, against the euro". If he has seen the light, I am going to take some credit for that, as I was instructed by Lord Pearson during Mr Wilders's visit to enlighten the man about the EU. I did my best but did not think I had succeeded. Who knows? I may have been more successful than I had realized.

Here are the figures

As readers of this blog know I have very little time for Open Europe's endless call for that elusive reform of the EU. However, when they deal with facts, they are worth listening to as they have the resources and they use them to produce good research of primary material.

Here is their analysis of the second Greek bail-out. The figures are not good. Well, you would not have expected them to be so. Reading the key points will take a couple of minutes. Then go and have a stiff drink.

An unexpected development

Jan Fleischhauer notes in Der Spiegel and interesting, unexpected and not entirely happy as far as the Germans are concerned political development.

The German parliament is set to approve a new multibillion euro bailout package for Greece on Monday, but instead of thanks, southern Europeans are expressing their dislike of us. Germans will have to get used to their new role: We have become the Americans of Europe.

Since then the German parliament has approved the most recent bail-out package but the abuse from southern Europe will, undoubtedly, continue. I suppose, there is a funny aspect to it all.

Stupid, tedious and counterproductive

That is all I can say about the recent upsurge of Germanophobia as part of the Greek crisis. The Greeks are spending all the time they can spare from rioting and burning fine buildings producing pictures of German leaders in Nazi uniform because, forsooth, they have dared to say that it is time the country started cutting back on its insane spending  that use other people's money.

Furthermore, it would seem that Angela Merkel shows herself to be an heir to Hitler when she begins to suggest through policy if not words that, perhaps, Greece would be better off outside the eurozone. Well, wouldn't Greece be better off with her own currency? Of course, she would and almost everyone has now acknowledged it. Yet the same people who proclaim that this, indeed, is the only solution, painful though it might be in the short term also scream abuse at Germans because that is what they are, in all probability trying to achieve.

The Boss on EURef is fed up and so am I. Let me count the ways in which this dumb.

The Greeks are going to get nowhere by screaming that it is not their fault, guv, not even their venal and incompetent politicians' fault but that of the nasty Jerries.

The newspapers that are producing improbably and misleading stories implying that democratic Germany not wishing to pour more money into Greece is exactly the same as Nazi Germany invading it are merely turning everybody's attention away from the real problems that have to do with the eurozone and the European project in general. But then, that is exactly what the Daily Wail wants to do.

Last but not least, this is playing into the colleagues' hands. As this blog has argued, the best way for the EU to cease to exist is for Germany to accept that it is an ordinary democratic state (as it has been despite all problems ever since the late forties in part and the early nineties in whole). Screaming that they are all Nazis, whipping up hatred and fear of Germany is exactly what the europhiliacs want for it is the best, indeed the only argument they have to promote the EU as the answer to a non-existent problem. Just how stupid are those eurosceptics (not least UKIP) who are playing this game?

Are we prepared?

Who can tell? When Lord Barnett asked HMG on Tuesday

whether HM Treasury is developing contingency plans for use in the event of a Eurozone collapse.

the answer was not altogether reassuring.

My Lords, as my right honourable friend the Chancellor of the Exchequer made clear in the Autumn Statement, the Government, including of course the Treasury, are undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis.

I can't help feeling that Lord Barnett was a mite ironic when he thanked Lord Sassoon for his "very informative reply". In fact, the exchange between the two peers about that answer makes me think that not only it was ironic but that the Minister realized it. Of the various questions and reassuring, not to say palliative answers, Lord Lawson's was the hardest hitting:

My Lords, there is only one thing as worrying as the collapse of the eurozone, and that is the continuation of the eurozone. It has been demonstrated to be fundamentally flawed and is the cause of all these problems. Is the noble Lord, Lord Campbell-Savours, not right that at the heart of the thing that we need to address is the risk of a banking meltdown? Will the Minister give an undertaking that should it prove necessary for the United Kingdom Government to rescue any British banks, they will do so on much tougher terms than the ludicrously soft terms on which the previous Administration went in to save banks?

Lord Sassoon's reply was not reassuring:

My Lords, we have a lot to learn about the softness with which the previous Administration went about a lot of things. One of the key lessons for this crisis is that we must stick to a deficit reduction programme that is firm and fair, and keep this country isolated from the worst of the problems that are all around us.

I ask again: are we prepared for an even bigger catastrophe than any we have faced so far?

Nine countries?

Here is a conundrum: if everybody's credit ratings are cut then what do credit ratings signify? Well, we shall soon find out. France, as we know, has had her AAA credit rating cut, as has Austria. This is very bad news for President Sarkozy who has vowed to preserve that cherished AAA and is starting the presidential election campaign by losing it.

The downgrade of France in particularly is evidence of the divergence taking hold between those European countries that still enjoy rock-solid faith on international markets and those whose economic and financial path is more questionable.

As Reuters details:

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status. It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

This may not be the disaster gleefully predicted by many(a disaster, incidentally, that will affect this country) but it is bad news. However, credit rating is really just that: information that needs to be taken into account when a country tries to borrow money. So one has to ask again: when this many countries are losing their rating, will markets go on paying attention or will they simply metaphorically shrug their shoulders?

Let us not forget that the USA lost its AAA rating last August and the world did not collapse.

Meanwhile ..

... things are dragging on in Greece towards the inevitable but much-postponed catastrophe. According to the BBC

Talks between Greece and its private sector lenders over a possible 50% write-off of its debts have stalled. Reaching a deal is a pre-condition for Athens receiving the next chunk of bailout cash from the International Monetary Fund and European Union. Without that money, the Greek government could run out of cash and be forced to leave the euro.

Which is what they should do, of course.

Is this important?

According to Sky News

Standard & Poor's is about to downgrade France's credit rating, sources including the French news agency AFP are reporting.

They quote Reuters correspondent Peter Thal Larsen:

Reuters columnist Peter Thal Larsen told Sky News: "If we're talking about expectations then clearly France is what we would consider to be most vulnerable to a potential downgrade."

Mr Larsen went on to explain that a French downgrade would be significant due to the country's role as one of the AAA guarantors of the eurozone's rescue fund, the EFSF, which would in turn also need to be downgraded.

This would make it more difficult to raise funds to bail out weaker countries, like Italy and Spain, if the need arose.

Nobody quite knows what to do with the credit rating agencies. Their track record prior to the financial crisis is lamentable and their intervention, always very long-drawn out, tends to have negative effects on the market. At one point there was a proposal to silence them, which would not have the desired effect. The question is, will anybody go on listening to them as they downgrade one country after another?

Spanish economy in free-fall

This does not come as a surprise to anyone but here are some interesting graphs about the Spanish economy, published by The Atlantic.

To sum up: The overall unemployment rate is in the mid-20s, industrial production and services activity have both cratered, construction indicators like cement consumption have been devastated after doubling between 1998 and 2007, retail is in a free fall, and exports (most of which go to Europe) are falling. [Word of warning: None of these graphs have the same Y-axis range, so beware direct comparisons.]

In the next year, Spain is meant to cut spending to show the bond market that Madrid can stabilize its all-important ratio of debt to GDP. But what Spain really needs today is what it had 10 years ago: Lots of money flowing into the country! Spanish leaders know the intricacies of Spanish economics far better than I ... but I do know something about ratios, and if your GDP isn't growing, it's rather impossible to increase your GDP faster than your debt.

Spain has avoided an even worse recession, if you can believe it, by growing exports in every year since the housing crash. But even here, trouble lurks. As you can see (bottom-right graph in the collection above), export growth is slowing down as the nation's largest trade partners -- in order: France, Germany, Portugal, Italy, and the UK, which account for more than half of Spanish exports -- all face austerity regimes of their own, which is likely to make businesses and consumers cut back on Spanish goods. In a word: Yikes.

I have noticed that there are more Spanish youngsters working in various low-skill jobs in London than there had been for years. They are competing with the Poles and, personally, I think the Poles are more efficient, friendlier and better at learning English. However, that is, undoubtedly, a sign of the times.

I'll leave you with this thought

Thanks to a reader from Scandinavia and to The English Blog but, of course, in the first place, thanks to Patrick Blower of the Daily Telegraph. It will take a little while and the mess left behind will be great though not as great as the mess North Korea is facing. Happy New Year and all good wishes for 2012.

Sounds familiar

Here is an interesting quote from a long article that analyzes the problems of the eurozone and insists that it was founded on a lie and that politicians do not understand or will not admit what is happening:

Nevertheless, not one of the currency union's founding fathers will admit that it was poorly designed. The currency union brought together countries that weren't compatible economically simply because it was opportune politically. It replaced the currency exchange rate, the standard mechanism for balancing out differences between national economies, with the principle of hope. Now, the common currency was supposed to make the economies align themselves with each other, practically automatically.

In reality, however, the differences between the economies of the euro-zone countries became larger rather than smaller. The so-called "Club Med" countries benefited from the low common interest rate. They lived beyond their means and they consumed more than they could afford -- to the detriment of their already weak ability to compete.

A country with a flagging economy normally devalues its currency. Doing so makes its goods cheaper on the global market, allowing it to increase exports and cut back on its deficit. But, in a currency union, there isn't an exchange rate that can serve as a compensatory mechanism. If a country doesn't have a sound economy, the tensions only increase.

Yes, and your point is? I hear readers ask. Well the point is that the article appeared in Der Spiegel. Worth reading.

Will this be a new treaty?

City AM reports with some shock in its tone that

MOST countries will not get a vote on tighter fiscal integration, allowing Germany to force through new financial controls across the Eurozone, European Council president Herman Van Rompuy said yesterday in a report sent to EU leaders ahead of tomorrow’s two-day summit.

I have already seen comments that this is a denial of democracy. Actually it is not, given that the EU structures are not exactly democratic. This may well be a denial by the EU of its own rules, which would not be the first time. (Here, here and here)

The question is will this be a new treaty or merely the old one tinkered with. Rumpy-Pumpy says it will not be a new treaty but tightening up of rules, which were supposed to be tight enough already (no, he didn't say that last bit).

By changing only protocol 12 of the EU treaty, which relates to “excessive deficits,” Van Rompuy believes the proposed changes “do not require ratification at national level”.

This means “rapid and significant changes” can be introduced to stop any repeat of the current debt crisis.

“It is crucial to enhance the credibility of our budgetary rules and to ensure compliance,” said Van Rompuy, which will help “restore market confidence in the Eurozone.”

The report also outlined plans to keep national debts below 60 per cent of GDP, and followed German plans for a “golden rule” on balanced budgets.

Well, now, will our valiant Prime Minister go along with that?

Respectable? Moi?

I missed the fact that no less a person than Gavyn Davies said in the Financial Times

It has suddenly become respectable to ask the question: what would happen if the euro broke up?

Dear me. Does this mean we are all becoming respectable? Not sure how I feel about that.