The Mess That Is Europe

The Telegraph – Nightmare week for Angela Merkel as austerity bloc crumbles
Elected governments have already been swept away – or replaced by EU technocrats without a vote, indeed to prevent a vote – in every eurozone state where unemployment has reached double-digits: Spain (23.6pc), Greece (21pc), Portugal (15pc), Ireland (14.7pc) and Slovakia (14pc). The political carnage has been striking. Ireland’s Fianna Fail, creator of the Irish free state, has lost every seat in Dublin. Greece’s Panhellenic Socialist Movement (PASOK) – torch-bearers of Greek democracy since the Colonels – has fallen to 14pc in the polls and faces ruin next month. This week the tornado has smashed into the core, bringing down Holland’s govenment and probably the French leader Nicolas Sarkozy as well in a cacophany of anti-EU diatribes. Keynesians blame budget cuts, convinced that the pace of fiscal tightening – a net 2.5pc of GDP in Spain and 3.5pc in Italy -is beyond any sensible therapeutic dose, and already shown to be self-defeating in Greece, where economic collapse has left the deficit stuck near 10pc. Monetarists blame the European Central Bank, accusing Frankfurt of tipping half of Europe back into slump by responding to last year’s oil shock with rate rises. The effect was to compound drastic falls in real M1 deposits across Club Med, and trigger a credit crunch just as banks were slashing balances sheets to meet new rules. While the ECB has since launched its €1 trillion liquidity blast, this is not quantitative easing and has toxic side-effects. – Merkel Pushes Back Against Hollande Call to End Austerity Drive
German Chancellor Angela Merkel said balanced budgets are the best answer to the debt crisis, rebuffing French Socialist presidential candidate Francois Hollande’s campaign pledge to reverse Europe’s austerity drive. As Europe’s two largest economies head toward potential conflict over quashing the crisis, Merkel and her ruling party stood firm on German-led remedies, including the debt-cutting fiscal pact signed last month by all 17 euro-area leaders. “If Mr. Hollande were to say that he wants to increase government spending and save less, he’ll lose the confidence of the financial markets,” Peter Altmaier, the parliamentary whip of Merkel’s Christian Democrats, said in an interview in Berlin yesterday. “We will stick to our fundamental principles because there’s really no alternative.” Germany, the largest country contributor to euro-area bailouts, is facing growing resistance from traditional allies to its anti-crisis prescriptions as a $1 trillion firewall and unlimited European Central Bank loans to the region’s lenders fail to stop the turmoil from threatening Spain and Italy. Hollande, who leads President Nicolas Sarkozy in polls for France’s runoff election on May 6, said two days ago that budget austerity across Europe is “bringing desperation to people” and that he’ll refocus the economy on growth if he wins.

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The Wall Street Journal – Europe Struggles With Painful Deficit Cures
A pledge by European Union governments to bring their swollen budget deficits back in line with EU rules by the end of 2013 is causing economic pain and political discontent across Europe, prompting officials to begin a politically sensitive discussion on how the goal could be changed to avoid driving the Continent further into turmoil. The target, set in 2009, is still seen as an important signal that the budget rules won’t be flouted as they were in the past. But meeting the 2013 goal, which for most countries was a deficit of 3% of gross domestic product, will entail more spending cuts or tax increases by governments across the EU. These further measures will come with the European economy already reeling from earlier rounds of austerity and the fallout from the sovereign-debt crisis. The euro zone is teetering on the brink of recession, and unemployment in the currency area is at a record high. The political consequences of austerity are becoming apparent. The Dutch government, one of the EU’s main enforcers of fiscal orthodoxy, collapsed this week over disagreements about spending cuts and taxes that will be needed to bring the deficit under 3% of GDP next year. François Hollande, the French Socialist candidate who is favored to defeat incumbent President Nicolas Sarkozy in next month’s election, has made a pledge to soften Europe’s austerity policies a central plank of his campaign.

The Financial Times – The high cost of disorderly deleveraging
Markets in Europe have understandably been preoccupied with politics, but Monday’s weak eurozone purchasing managers’ indices suggest that more attention ought now to be paid to the dysfunctional relationship between eurozone banks and the real economy. That point is reinforced by the latest Global Financial Stability Report from the International Monetary Fund, which ominously forecasts that the process of deleveraging in the European banking system is set to continue and broaden. In the last quarter of 2011 alone, the 58 banks in the IMF’s sample reduced assets by almost $580bn. On current policies, the fund’s economists expect a $2.6tn decline in bank assets between end-September 2011 and the end of 2013, equivalent to a seven per cent decline in total balance sheet size. About a quarter of that fall in assets reflects a potential reduction in lending as opposed to asset sales. On a weaker policy scenario in which cyclical pressures are doing more to hold back the economy, which is where the PMI managers come in, the forecast is for assets to be cut by $3.8tn. This would amount to a 1.4 per cent knock to eurozone real gross domestic product. The report’s authors, though, are not entirely downbeat, pointing out that these simulated shocks to eurozone credit are well within the range of past episodes of deleveraging such as Japan in the 1990s or the US at the start of the financial crisis. It should also be said in passing that if the deleveraging process can be managed in an orderly way, any reduction in big bank balance sheets is good both from a systemic stability and competition policy point of view.

The New York Times – Spain’s Weak Spot
By any measure, the Spanish real estate boom was one of the headiest ever. Spurred by record-low interest rates, Spaniards piled into holiday villas along the Costa Blanca, gaudy apartments in Madrid and millions of starter homes throughout the country. But since the frenzy drove Spanish home prices to a peak in 2007, they have fallen by at least one-fourth, and the bottom seems nowhere in sight. As Spain endures its second recession in three years and unemployment nears 25 percent, an increasing number of debt-heavy Spaniards can no longer meet monthly payments on the mortgages that their banks were all too eager to give. With a rising portion of Spain’s 663 billion euros, or $876 billion, in home mortgages at risk of default, many economists say it is only a matter of time before some of Spain’s biggest banks will need a bailout. And the Spanish government, staggering under its own debt and budget deficit burdens, may not have the money to come to the rescue. The implications of all this for the rest of Europe were a prime topic at last weekend’s meetings of the International Monetary Fund and the World Bank in Washington. The big fear is that the European Union will need to step in with a Spanish bailout — one much bigger than any of those already extended to Ireland, Greece and Portugal.

Source: Bianco Research

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