After the banks, let's bail out the car industry
The big news this weekend was not the G20 summit – a non-event really. It was that governments are considering significant state aid to prop up the imploding car industry. FT Deutschland reports that the German government held talks with Opel, owed several billion dollars by its parent GM, which is likely to go bust or end up in some form of receivership. The German government is somewhat unprepared for this, not knowing whether this is in compliance with EU state aid rules (probably not), and struggling to find a way to ensure that subsidies or credit guarantees do not end up abroad – which is what often happens. But there is no realisation in Germany that the country’s car industry is in danger, and for that eventually the country’s economic strategists have no plan B. Even Roland Koch, the ultra-market liberal premier of Hesse has pledged a package of support for Opel, as did another conservative state premier, as they all realise that the demise of Opel would almost certain cost them their job.
Paul Krugman points us to an interest article in the The New Republic, in advocacy of a full bailout of the Big Three US car companies, GM, Ford and Chrysler. The essential argument is that a normal chapter 11 bankruptcy is unlikely to lead to a restructuring of the industry, but to a chapter 7 total liquidation, which would costs millions of jobs in those companies, and at numerous just-in-time suppliers of those companies. Coming at this particular time, this would be a catastrophy for the US economy. The article therefore pleads in favour of a big bailout.
And now for the rest of the news
Not much happened in Washington this weekend, except for a bit of foul weather over the US capital. And then there was also a largely ignored G20 meeting that set itself the goal to save the world economy, and resounded failed. Global leaders presented a very convincing demonstration that they failed to understand the causes of this crisis, and thus presented an action plan, which is a collection of disparate measures to fight yesterday’s war. The root cause of this crisis is apparently human failure, as people sought underestimate risk, and lack of structural reform. For a good laugh, see the G20’s very long press release. It is a collection of motherhood and apple pie principles, such as more transparency, more stability, no abandonment of free market economics, all of which are difficult to disagree with, and which mean nothing whatsoever. The only real news is that there will be another summit by early next spring, and expert groups that will prepare even longer reports than the press release. In the meantime, the recession continues.
Judging from the reaction, or lack of, this summit was a mistake. Our favourite bloggers did not even mention it.
Clive Crook, in the FT, had a bit of fun with the summit, as he looked what stories US newspaper through were more important (“four firemen injured” got a better showing on the New York Times front page). The problem, from a US perspective, was that Obama was not there. This summit should have been called for end-January.
Delanoe drops out of Socialist race
The Socialist party conference ended last weekend as it started (or nearly) – with three candidates running for party secretary and a power battle between two women about where the party is to go to. During the conference a ‘tous sauf-Royal’ alliance was nearly successful, but ended when Bertrand Delanoë, the one-time favorite, dropped out of the race when Aubry suggested to rally behind the left wing candidate Benoît Hamon In the coming weeks party members are now to chose between Martin Aubry or Benoît Hamon towards the traditional left or Segolene Royal . There are two rounds one on Thursday and the second most probably on Friday. For more see the analysis of Liberation or Le Monde.
Jouyet to leave French government
Jean-Pierre Jouyet, the French European affairs ministers, and one of the Socialists Sarkozy invited into his government, will quit his post after the next EU summit in December to take up the job of head of the Autorité des marchés financiers, the French version of the SEC. It is a sign of the times that top people consider it more rewarding to be in charge of financial stability than European integration. Jean Quatremer, who regrets the decision, has more.
EU Commission imposes conditions on German bank bailouts
The European Commission imposed tough conditions on German bank bailouts, according to FT Deutschland. The German bailout scheme is regarded in Brussels as too generous, and potentially distortive, and Brussels is now imposing that banks must have a capital ratio of at least 8%, before they can accept government guarantees. Brussels also imposes tough repayment, or restructuring conditions on capital injections, which many of the banks asking for government aid are unlikely to fulfil.
The crisis and the euro
Wolfgang Munchau argued in the Financial Times that the UK is more likely than previous to join the euro area as a direct consequence of this crisis. He lists four reasons. The first is that staying outside will carry a large economic costs in terms of higher real interest rates, and higher bond yields, which is a sign of risk aversion as global investors are pulling out of the UK. Second, the City of London is unlikely to maintain its position as the euro area’s financial centre in the post transaction-based world of finance; there will be more euro area level governance, leading to increasing political isolation of those outside; and, like Iceland, the UK may simply not survive this crisis without a run on sterling.
Willem Buiter says the UK may already be in the midst of a sterling crisis. He lists a long series of mistakes the British government has made to make this crisis worse, for example to have failed to announce a special resolutions regime. His proposal to avert a full blown run on the currency is to announce an intention to join the euro area, and to be the currency to the euro via the ERM2. (And for some hilarious divertimento, you might want to read his entry on why he writes his blog).
Writing in Frankfurter Allgemeine, Joachim Fels makes the point that the crisis has the potential both to weaken and to strengthen a monetary union, and his take is that the euro area is strengthened as a result. There are countries, such as Denmark and Hungary, which are contemplating membership as a direct result of the crisis. And a split-up of the euro area is unlikely large because it would create an even worse financial crisis, for which nobody has any appetite.
The crisis and Europe
This is from Guy Verhofstadt, hat tip A Fistful of Euros, with more hat tips there. We quote in full.
The financial crisis is acting as a sort of ‘particle accelerator’, speeding us on our way to a new multipolar society. This is abundantly clear in the economic sphere, but politically and militarily too great powers in the making are beginning to sit up and make their presence felt. Russia and China particularly, but India as well, let no opportunity pass to show the world that they are a force to be reckoned with. The question is, though, whether Europe will be able, or willing, to play a part in this multipolar concert. ‘Able’ it most certainly should be, but ‘willing’ is another matter. Europe continues to suffer from cold feet. (…) Yet the way ahead for Europe is only too clear. If it wishes to play a role in tomorrow’s multipolar world and survive the ‘new age of empires’, its only option is to take a bold and decisive new step in the integration process. Seen in this light, the current financial crisis is not a disaster but rather a golden opportunity for the future. What is needed now is for our political leaders to overcome their cold feet and take the plunge.
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