Germany vetoes Sarkozy's proposals for euro area and global policy co-ordination
Things are clearly not well in Franco-German relations, and certainly not going well for euro area governance. Frankfurter Allgemeine reports that Angela Merkel wants to block Nicholas Sarkozy´s proposal to hold regular euro group summits. Jean-Claude Juncker said the eurogroup also opposes this (which is not surprising, given that the prime ministers are likely to be a far more effective group that this dinner party club).
Germany appears to react allergically to any proposals that come from France these days. According to Frankfurter Allgemeine, finance minister Peer Steinbruck now rejects any form of international macroeconomic co-ordination as nonsensical and unrealistic as European economic governance. The bit of the French proposals he supports is the demand that there should no part of the world with unregulated markets (as though this would be realistic!. This reminds us of the saying: Those whom the Gods wish to destroy, they first make crazy. Germany´s madness comes in the form of Mr Steinbruck)
Jean Quatremer writes that Germany´s position is very difficult to comprehend, and there is fury in Paris about the way the Germans are behaving. He also welcomes Jean Claude Junker´s self criticism, when he said as president of the eurogroup that they underestimated the different stages of the financial crisis, of which they never thought that it would reach Europe. Quatremer says it is no wonder that the American elections are so closely followed here in Europe, since Washington is the Rome of modern times.
Munchau on global co-ordination
In his FT Deutschland column, Wolfgang Munchau writes that national stimulus packages will not be effective, since they will have little effect in the countries most willing to stimulate, such as the US and the UK, while in Germany, where they could work, the government opposes them. The only way out of this dilemma is international coordination. At the moment, any US stimulus has more impact abroad than domestically. For that reason alone, the new US president will not be in a position to focus solely on the domestic economy.
French EU presidency ready to drop group supervision from solvency II
Europe´s ability to accompany the euro with stronger financial market integration will suffer another setback, as the French EU presidency appears resigned to drop the group supervision element of the Solvency II package for the insurance industry, according to a report in the FT Deutschland. Group supervision is being opposed by a sufficiently large minority of mostly small east European countries, but also including Spain and Poland, which are reluctant to delegate supervisory powers. Group supervision intends to create cross border supervisory structures. Solvency II also contains important new capital adequacy rules, and the French presidency is not prepared to sacrifice the entire package.
Rasmussen advocates euro referendum
The FT reports that Anders Fogh Rasmussen, the Danish PM, sought political support for a euro referendum, after it emerged that the Danish central bank used up a fifth of the country´s forex reserves to maintain the position inside the ERM after a speculative attack. Rasmussen said he would now start talks with opposition parties.
Italy announces €30bn recapitalisation programme
The Italian government will provide up to €30bn in new capital to the banking sector during the next few days, according to the Financial Times. There has been growing evidence of a credit crunch, and expectations that the economy is headed towards a severe recession. Details of the plans have not been finalised, and are expected to be unveiled before the informal EU summit on Friday.
Spain has done what it can
El Pais reports that Pedro Solbes said at the Ecofin that Spain had exhausted almost all its margin for manoeuvre to fight the crisis, with the economic support programmes announced so far, including the plan to help distressed mortgage borrowers to get through the next two years with the help of bridging loans.
Germany’s savings banks in trouble
We reported yesterday on a comment in the FT according to which the business model of Germany’s small savings and mutual banks was strong. Today, FT Deutschland leads with the news that the North Rhine Westphalian savings banks are being clobbered by their majority shareholding in WestLB, a Landesbank, which has created some toxic products by itself, as it emerged, and sold it on to the savings banks. FTD reports that there will be a series of big write-offs in those banks. (To us, this is a typical story about how this crisis has evolved. Banks are still hiding toxic investment which come all of a sudden and cause a contagious knock-on effect).
Crisis hits German industry
Frankfurter Allgemeine leads its business section with a story that the global economic slowdown has hit the country´s two most important industries, cars and chemicals. There are fears of a takeover of Daimler, as the German car industry, like the US industry, is suffering from extreme falls in sales. The chemical industry is also registering shrinking production.
French Socialists and the financial crisis
What should be a Socialist agenda in response to the financial crisis? Former finance minister Michel Sapin and two co-authors provide their wish list in Les Echos. At the global level they want an international conference for a new financial system and the end the predominance of the dollar. IN Europe, they promote a classical French version of “government economique”, harmonising fiscal and social policies, an institutionalised dialogue with the ECB, a member state solidarity fund endowed with a budget of 1.5% of GDP. They also want the EU to borrow €100bn for an EU wide relaunch package based on investments and to become pivotal for the reform of the international system. The authors call on the French Socialists to reunite their forces with the European counterparts (with this agenda all we can say is: good luck!).
Belgian relaunch package
All federal governments will meet today to discuss a Belgian relaunch package for employment and investment. Many proposals will be on the table including how to ensure credits to flow and more regional control. Le Monde warns that the institutional crisis between the Flemish and the Wallonians, which have been sidelined by the financial crisis, is likely to resurface again.
Product liability in banking
The Finnish finance minister Jyrki Katainen said Tuesday that banks should be brought to book for damage caused by their financial instruments, reports Newsroom Finland. Mr Katainen added banks should face product liability legislation like that applied to car makers. Attending an EU finance ministers' meeting in Brussels, Mr Katainen said a failure of regulation was one of the key factors behind the international financial crisis.
Credit and money market indicators
The 3-month Euribor continues to improve slowly. It is now at 4.7%, now fully shadowing the ECB rate cut, and further rate cut expectations. The 3-month dollar Libor also fell 15bp to 2.71%, and the TED spread is now at 2.23% - which is still very bad, but marginally better.
EU Commission proposes commodities policy
The European Commission yesterday proposed a new strategy to improve access by European companies to some markets for rare and strategic commodities, amid suggestions that China and some other emerging markets have signed contracts with an intent to corner the market. The number of commodities needed to produce a modern computer chip is now 60, and the scarcity of some of those commodities, such as cobalt, platinum, and palladium, could threaten hundreds of thousands industry jobs.
Martin Wolf on the new Bretton Woods
In his FT column, Martin Wolf favours a new Bretton Woods, as this moment of crisis is now the right time to repair the dysfunction global economic system of policy co-ordination. The first priority is to gain a handle on the policies of surplus countries. Second priority is to fix the problem of sudden stops of capital flows to emerging economies. Third priority is to stabilise the financial system. And finally, we need more democratic legitimacy. Not just dominance by the west, but shared powers.
Edmund Phelps on Keynes
This is a very reflective comment in the Financial Times by the 2006 Nobel Prize winner. He argues that Keynes´ recipes to deal with an asset price slump are not relevant today. He said Keynes failed to distinguish between slumps springing from monetary causes, for example an exogenous increase in the demand for money, or non-monetary causes, such as a change in expectations of future earnings. We have the latter problem, which requires a drop in nominal prices in those assets. Phelps said towards the end of his life Keynes said he want to move on and re-examine his theory. Phelps advocates that we should also move on, and not revert to the old Keynes.
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