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BailOut Hope Renewed as Germany Proposes New "European Stability Mechanism"
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The European Stability Mechanism (ESM) -
BERLIN - The European Stability Mechanism (ESM), the new bailout fund for the eurozone, will now be buying bonds of countries in economic difficulties, like Spain and Italy, in order to prop up demand and thus keep the interest rates down.
And it will do so without special conditions attached, like austerity measures or fiscal discipline, something other countries like Greece or Portugal, who already received bailout packages in return for harsh and highly unpopular cuts in public spending, will certainly notice. The ESM will also be authorized to give money directly to European banks struggling with debts – a big problem in Spain right now. Until now the rescue fund could only transfer money to governments which in turn would distribute it among banks, and again this aid was linked to certain conditions. Not any more.
“We remain within our approach so far,” the chancellor insisted after the summit, facing a vote to ratify the ESM in the German parliament only hours later. “The approach is: help and trade-off, conditionality and control. We have remained true to our philosophy of no help without trade-off."
That is not how it is seen at home. “Merkel crossed several red lines at the summit,” says Mark Schieritz, economic editor of Die Zeit, Germany’s influential liberal weekly. “Consequently, she is seen as the loser of the summit, and the southern Europeans as the winners. This is a first.”
Merkel did not give in all the way. The capitalization of struggling banks through the ESM is going to be supervised by an independent control authority yet to be created – another step toward a banking union within the EU. “Together with the growth measures decided at the summit, this should buy us several months,” says Guy Verhofstadt, former Belgian prime minister and now leader of the Liberals in the European parliament. “Months we need to use to really tackle the crisis by establishing a fiscal union and by mutualizing debt.”
It is this mutualizing of debt that Merkel – and a few allies like the Netherlands, Austria, and Finland – particularly oppose. As soon as the whole eurozone is liable for the debts of individual nations, they argue, there is no incentive for governments to follow a prudent fiscal and budgetary course – it’s the return of checkbook politics.
So the fight is likely to go on.
“Certainly some form of debt mutualization will come,” says Jan Techau, director of Carnegie Europe, a Brussels-based think tank. “But it needs to be linked to structural reforms in the economies of southern Europe – that is not just Mrs. Merkel’s position.”
The conflict between the two camps, the austerity champions and the Keynesian spenders, will continue, according to Mr. Techau, until in the end a great political bargain will be struck, leading to a more integrated Europe.
The EuroCrisis: Far From Over
BERLIN - European Financial Stability Facility and the soon-to-be founded European Stability Mechanism have some $600B available to buy debt. But the sovereign debt of Spain and Italy totals some €2,400bn and past experience of publicly funded purchases of sovereign debt (indirectly with ECB loans) have been that putting public money in merely allows private savings to get out. The available funds could be used up very fast.
Lots of Political Maneuvers in Europe, but no answers yet.
Economist Shayne Heffernan takes a look at the latest from Europe.
Markets mistakenly rallied after the EU leaders made many promises with few details, while it sounded good to market players, the reality is even if they kept all their promises the EuroCrisis has a good 3 years left:
The Base of the Rally were Politicians promising to:
* Centralise regulation of European banks and, if necessary, bail them out directly, instead of funnelling loans through governments that already have too much debt.
Easy to say, the fight to form the Euro went on for a decade, the fight for a Centralized Bank will last just as long.
* Ease borrowing costs on Italy and Spain, the euro region’s third- and fourth- largest economies.
Nice statement, but provided without any detail, what can really be done for an economy where Government Debt surpasses GDP?
* Stop mandating painful budget cuts to every country in need of emergency financial aid.
If Europe is to meet the debt commitments and stimulate the Euro would need to trade at 73cUS, given they do not have the cash to support the reduced spending levels, how is it possible to leave that spending in place and stimulate? Easy, it is not possible.
* Tie their budgets, currency and governments more tightly.
The 28 senior leaders have trouble agreeing on a lunch menu, trying to bring them closer will be heavily resisted.
“If we do not take that to heart, then everything we are planning, agreeing, implementing would ultimately be worthless, because it would be clear that it demanded too much of Germany and that would, in turn, have unforeseeable consequences for Germany and Europe. We will not allow that to happen.”
The question a week or so ago was whether Germany would indeed deploy its economic strength, in the months to come, the focus will now shift more and more to the limits of German strength.
The two main pots, the European Financial Stability Facility and the soon-to-be founded European Stability Mechanism have some €500bn (£400bn) available to buy debt. But the sovereign debt of Spain and Italy totals some €2,400bn and past experience of publicly funded purchases of sovereign debt (indirectly with ECB loans) have been that putting public money in merely allows private savings to get out. The available funds could be used up very fast.
When that happens once again, the German taxpayer will be asked to take on more potential liabilities. Once again, we have to assume, the German government will reluctantly cave in. Indeed it will go on to implode.
Germany itself is at risk of a slowdown, which would make it even harder to end Europe’s crisis. Many analysts say a downturn would hit home to Germans how much they depend on the health of other European economies. If so, they could become more willing to put money at risk to support their weaker neighbors.
Those issues are helping drive discussions that began Thursday at a European Union summit in Brussels. The summit is intended to reach agreements on how to shore up Europe’s economies and save the euro alliance. Olli Rehn, the European commissioner for economic affairs, said Thursday he expects an agreement on steps to spur growth and reduce Spain’s and Italy’s unsustainably high borrowing costs.
Concerns about Germany’s economy grew last week with a report that German business optimism fell in June. Earlier in the week, a survey showed manufacturing was slowing. Germany’s economy is powered by exports, and manufacturing is at the heart.
Both surveys are intended to forecast where Germany’s economy could be in several months. For now, its economy remains far stronger than its European neighbors’.
German retail sales unexpectedly fell for a second month in May as the sovereign debt crisis worsened, damping the economic outlook.
Sales, adjusted for inflation and seasonal swings, dropped 0.3 percent from April, when they declined 0.2 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 0.2 percent, the median of 13 estimates in a Bloomberg News survey shows. Sales dropped 1.1 percent from a year ago.
Unemployment at a two-decade low, falling energy costs and rising wages have bolstered consumer spending this year, helping to shield the German economy from Europe’s turmoil. With at least seven euro nations in recession and budget cuts across the region eroding demand for German exports, investors and executives are growing more pessimistic.
Unemployment is just 5.4 percent. German autos and other products have been selling well in China and North America. Low interest rates have made it easy to borrow and invest. And the euro’s value, held down by weaker nations in the currency alliance, has made German goods affordable for foreign buyers.
But Europe’s raging debt crisis threatens the entire continent. Nearly 60 percent of Germany’s exports go to the 27 countries in the European Union. Recessions in Greece, Spain, Italy and Portugal are weakening demand for those goods.
Slowing growth by its trading partners in Asia is also affecting Germany’s economy. Asia accounted for 16 percent of German exports. Germany’s exports to China surged 15 percent last year and contributed significantly to Germany’s 3 percent growth in 2011.
Fear of a catastrophe, possibly resulting from a Greek exit from the eurozone or the need to bail out a big economy like Italy’s, could make German businesses scale back plans to expand.
Economists still foresee modest growth in Germany this year, whose gross domestic product totaled €2.57 trillion ($3.42 trillion) in 2011 and accounted for 27 percent of the eurozone’s economy. The interest rate on Germany’s 10-year bond is just 1.56 percent — even lower than the rate on the U.S. 10-year Treasury note