Eurozone Blog

This must be one of the best modern examples of Karl Marx’ famous observation in his Brumaire essay that historic events occur twice – as a tragedy and as a farce. After the bad local election results, Beppe Grillo is now conducting an old-fashioned purge of his Movimento 5 Stelle, triggered by criticism of his leadership style by an M5S senator – as we had reported. Grillo has now taken his battle against Adele Gambero to the next level, by forcing an online plebiscite with the motion to expel her from the party. The move is supported by a narrow majority of the M5S MPs – which as the FT suggests could indicate that the party might split over this. La Repubblica talked about mobbing in a front page editorial, recalling the prediction of a commentator who had observed a few months ago that the real test of any new party is how it will deal with dissent. That question has now been comprehensive answered.

On Kathimerini Alexis Papachelas writes politicians took some tough decisions to slash pensions and salaries but they are foot-dragging with the public sector overhaul. The coalition has failed in the simple task of agreeing on the closure of even one single state entity, the ERT broadcaster. Even if the shutdown was carried out badly, the problem remains that the government needs to break taboos. A close look also suggests that even if they flag out progress it often turns out to be a masquerade – like the announcement of a merger between two hospitals when in fact all they did is to abolish one of the two boards. He concludes: ”The country needs to learn to live with such changes, and on a practical level this means that its politicians need to finally take the decisions that so many thousands of Greeks have already had to take at great cost over the past few years.”

Car sales are often a reliable bellwether of the economy, so the news of a 20 year low in EU-wide car registrations is not reassuring. Reuters reports on figures from the  Association of European Carmakers, which show that car registrations during May were 5.9% lower than in May 2012. The seemingly good figures for April are now considered to have been distorted by calendar effects. Over the first months of the year, total EU sales were down 6.8%, relative to the same period in 2012. Germany underperformed the EU, with sales down 8.8%, while in France and Italy they were down over 11%. The UK, by contrast, posted an 11% annual increase for May.

The eurozone plays virtually no role in the German elections – which is somewhat strange since the next parliament will probably spend a large portion of its time dealing with its various aspects. Yesterday, Peer Steinbruck outlined some of his thinking on the eurozone, which is different from Merkel's. He criticised her fiscal consolidations policies for the eurozone as leading to political and social crises – something she has not on her agenda, he said. His big idea was a European Marshall plan funded by the EU budget. He also does not exclude explicitly further contribution from Germany, Frankfurter Allgemeine reports.

Reuters, meanwhile, has an interesting comment from hedge fund manager Galia Velimukhametova. A fund manager at GLG, which is part of Man Group, she said that Germany would end up spending more than 10% of its GDP to support a transfer union. Germany may get some concessions, like haircuts on debt, but it will cost a fortune to sort out the haemorrhaging of the banking sector.

Martin Wolf argues that the Greek crisis triggered a number of tragic misunderstandings. Here is his summary:

“In brief, the Greek crisis proved a triple calamity: a calamity for the Greeks themselves; a calamity for the popular view of the crisis inside the eurozone; and a calamity for fiscal policy everywhere. The result has been stagnation, or worse, particularly in Europe. Today, we have to recognise that the huge falls in output relative to pre-crisis trends may well never be recouped. Yet the reaction of policy makers has not been to admit the mistakes, but to redefine acceptable performance at a new, lower level. It is a sad story.”

Corriere della Sera and La Republica have detailed articles on Silvio Berlusconi’s criticisms of the Letta government, which yesterday reiterated its absolute commitment to the 3% deficit target – for which it is prepared to raise VAT by one percentage point. Berlusconi yesterday said Italy was a net contributor to the EU, and such should challenge the consensus, and simply insists on its position. Repubblica quotes him as saying that the Italian government should make the point “without slamming heels but with courage and authority to tell these gentlemen that under these conditions we are go after you with your damn austerity.” He also criticised the Letta government for setting the wrong priorities. He said cutting expenses by 1%, instead of raising taxes, is not that hard. Every company know how to cut budgets by this amount. The article gives the response by PD general secretary Guglielmo Epifani who said that Berlusconi unnecessary provocations were weakening the country. 

The Supreme Administrative court in Greece ordered the state broadcaster ERT back on air while it is restructured, Reuters reports. All parties claimed victory from the ruling, which failed to specify whether ERT must restart with programming as before or only partially resume operations until its re-launch. During talks with his coalition partners, Antonis Samaras offered to reopen a pared-down version of ERT under temporary management, reshuffle the cabinet and update the coalition's agreement to improve cooperation among parties according to sources. PASOK's Venizelos said Samaras had appeared to accept the option of a cabinet reshuffle and better coordination, and that the three political leaders would meet again on Wednesday to agree on how to implement the court ruling. The threat of early elections appeared to recede as talk shifted to the reshuffle.

El Confidencial has a report on personal bankruptcy in Spain. Spanish law allows natural persons access to the same bankruptcy procedure as legal persons only since 2003, but the number of people who took advantage of the possibility was exceedingly small prior to 2008-9. Now, 15% to 20% of all cases taken on by bankruptcy lawyers involve legal persons. However, because any remaining debt after liquidation of assets remains according to Spanish law, bankruptcy is not as beneficial to individuals as it is for firms. In the first quarter of 2013, just under 200 people declared personal bankruptcy, which is less than 7% of all bankruptcies. Bankruptcy can be favourable to families with substantial unsecured debt (typically consumer debt), which can usually be written down, and would be able to pay their mortgage if the rest of the debt went away. Another favourable case is when the bankruptcy has been precipitated by the failure of a firm that the person had provided a loan guarantee to. It is also relatively common to fold personal debt into a refinanced mortgage with a longer maturity and notional than the original mortgage, as this typically lowers the interest payments.

Antonis Samaras sought to defuse tensions with coalition partners over his surprise shutdown of the state broadcaster last week by offering to quickly relaunch programming—with a reduced staff, the WSJ reports. But his offer was rejected by the coalition partners demanding that the broadcaster remains fully operational while restructuring take place. However, both have said they would continue to support the government, and most analysts expect some kind of compromise to be reached at a meeting of the three party leaders today evening, after the ruling of the Supreme Administrative Court whether or not to hear an appeal from ERT staff, which could prompt the judges to order the broadcaster to resume service until a final verdict, Kathimerini reports.

A poll by Metron Analysis for the Ependytis newspaper found that 68% disagreed with the decision to shut down ERT. 49% said the coalition government should remain in place against 47% preferring snap elections. According to the Kapa poll there is a clear preference for political stability, with 57% saying that there should not be another early election. Both polls show New Democracy and SYRIZA would be neck and neck, with a slight 0.3pp advantage for ND, Reuters reports.

The turbulence created by the ERT decision has also sparked speculation about Samaras’s future. It has been reported that his position within New Democracy might be insecure. On Saturday, Foreign Minister Dimitris Avramopoulos issued a statement on ERT, interpreted by some as a symbol of distancing himself from Samaras.

Hundreds of ERT workers, meanwhile, extended their days long sit-in at the company's headquarters north of Athens over the weekend, sending out live programming over the Internet. Private-sector journalists also went on strike, causing a nationwide news blackout, although some returned to work on Saturday after a court ruled the strike illegal.

It is not looking good for the SPD ahead of the September elections. In a Spiegel interview, Peer Steinbruck criticised SPD party leader Sigmar Gabriel for failing to support him, a conflict Suddeutsche Zeitung said had overshadowed the party convention over the weekend. Gabriel tried to paper over the cracks, with some embarrassing remarks about his political marriage to Steinbruck. What triggered the latest spat was a dispute within the party’s parliamentary faction about whether the SPD should support banking union, or not. Steinbruck was in favour. Gabriel was sceptical. Gabriel also attacked Steinbruck for not showing enough engagement in the election campaign. Suddeutsche writes the party’s grandees are absolutely aghast at this internal fight between the SPD’s two most important leaders.  

The Wall Street Journal seems impressed by an OECD study claiming large-scale emigration from southern to northern Europe. 34,000 Greeks and 28,000 Spaniards moved to Germany between September 2011 and September 2012, according to preliminary data, apparently the highest immigration numbers in 17 years. The total number of immigration into Germany is 116,000 in the 12 months to September 2012 – which is a bit more than 0.1% of the German population. The OECD noted this was somewhat less than an exodus. The article quoted László Andor, EU commissioner for labor, as saying that Greeks and Spaniards should not just be looking at migration as a solution. 

Frankfurter Allgemeine has an article about an Ifo study, showing that the US and the UK would benefit most from the setup of a free trade zone. Germany would be a minor beneficiary. For the US, GDP per capital would increase by 13.4% over 10 to 15 years. For the UK, the benefit would be 9.7%, for Spain 6.6%, and for Germany 4.7%. A free-trade union would also have a negative impact of intra-eurozone trade. German trade with the southern eurozone countries would decline by 30%, with France by 23%. 

Simon Wren-Lewis has a blog post on multipliers based on a paper by Farhi and Werning. He discusses the difference in the multiplier between a closed economy and a monetary union. The closed economy result is clear. The multiplier at the ZLB is larger than one. But he says you cannot extend this logic to a monetary union. In a closed economy, nominal interest rates are fixed at the ZLB. An increase in government spending would thus generate inflation, reducing real rates, which in turn will increase current consumption relative to its steady state. That measn the multiplier is larger than one.

The logic in a monetary union is different because nominal exchange rates are fixed, and you have to take into account the price level relative to the monetary union. And in that case the multiplier might actually be below one. However, as the Farhi and Werning paper shows, once consumers are credit-constrained, the multiplier may also exceed one.

His post also discussed the effect on the multiplier by various monetary policy regimes, such as price-level target. He concludes that the of the policy regime for the multiplier is crucial.

We like his concluding remark: “But of course they all know that, don’t they!” 

Frankfurter Allgemeine has an interview with Klaus Regling, in which he accuses the IMF of failing to understand the rules of the eurozone. He says it would be best to get rid of the troika in the long run. The paper notes that Jose Manuel Barroso also supports the idea of getting rid of the IMF – though Regling adds the important detail that the IMF was (unfortunately) the only institution with any experience in crisis resolution.

Regling was particular furious about the IMF’s paper. “The IMF pokes fun at the stability pact, and declares itself responsible for economic growth,” he said. That shows that it does not understand and respect the rules underpinning the monetary union. 

Jan Fleischhauer has a good column in Spiegel Online, in which he tries to explain why Steinbruck’s campaign is not taking off. The fundamental problem with Steinbruck, he writes, is a deep arrogance, an almost total lack of interest in what others are sayings. Despite some recent attempts to appear a little softer, this arrogance does not work for a candidate who is trying to gain power from opposition – as opposed to defending power. He said it is no surprise that Helmut Schmidt backs him. He sees in Steinbruck a politician of similar ilk to himself. But Schmidt, too, never gained power from opposition, since he inherited the throne.