Topolanek ousted – and the Lisbon Treaty in trouble
Forget Ireland. The real obstacle to the ratification of the Lisbon Treaty is now the Czech Republic, after yesterday vote of No-Confidence in PM Mirek Topolanek by the Czech Parliament. The vote of No Confidence strengthens the powers of Vaclav Klaus, who can now decide what to do. It is expected that Topolanek can stay in office in a caretaker capacity until the end of June to finish the work of the Czech EU presidency. Jean Quatremer recalls that in previous periods when government toppled during the presidency (France in 1995, Italy in 1996) the work of the presidency was seriously disrupted. At those time, however, the presidency could rely on a strong Commission, which is not the case now. But the really worrying aspect of the Topolanek resignation lies in the politics of Lisbon ratification. The Czech parliament’s lower house has accepted the Treaty, but the Senate has yet to vote. Quatremer quotes MEP Elmar Brok as saying that this could mean the end of the Lisbon Treaty.
Paul Volcker gets nervous about inflation
Paul Volcker is effectively saying that he fears the Fed will deliberately allow inflation to rise. This is from Dow Jones, hat tip Calculated Risk.
“I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery,” Volcker said. “I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery.”
IMF eases credit conditions
The IMF decided yesterday to introduce a so called Flexible Credit Line, credit to countries without strict conditionality, FT Deutschland reports. The new credit replaces the previously agreed Short Term Liquidity Facility. The new facility places no new ceilings on the loan, and the recipient has up to five years time to repay (nine months previously). The money is targeted for crisis prevention. In a separate article, the paper interview Thomas Mirow of the EBRD, who called on CEE countries to call on the IMF in time, and not wait until the crisis hits them.
Blanchard warns on European policy response
In an interview with Les Echos IMF chief economist Olivier Blanchard warned that the Europeans have so far ignored the extent of the demand shock that this crisis provoked. The French stimulus package is weaker than initially announced and the government will have to think about increasing its stimulus for 2010 and 2011 now. Europe is more worried about the public debt to GDP ratio though the immediate problem is to relaunch the economy, something that the US cannot do for the Europeans. Europe has to do more.
French consumption down
Bad news for the French government as the latest figures from the statistical office reveal a decline of consumption of manufacturing goods by 2% (24% of total consumption) in February. Les Echos writes that this news could not come at a worst time. While Nicolas Sarkozy continues to promote the government’s relaunch strategy via investment, trade unions get new ammunition for their call to boost consumption. Economists say the decline reflects the rapid rise in unemployment, the fall in consumption credits and the fact that households become more anxious about future prospects. But the government counts on a recovery in consumption in March, when the social measures of the relaunch package and the price falls kick in.
Germany vs France
FT Deutschland has an interesting article comparing the economic forecasts for Germany and France for 2009. According to Commerzbank, Germany will shrink some 7% this year, while France will shrink by only 3.5% - the difference is mainly due to Germany’s overbloated export sector, which constitutes almost 50% of GDP. Other comparative data: purchasing manager index: 32.4% (Germany), 36.3% (France). For the euro area as a whole the purchasing managers index for February has improved marginally, by 1.4pp to 37.6 (with 50 the neutral level).
Irish unions call off strike in return for pay talks
Unions will today dramatically call off a national strike for next Monday in return for a restart of failed pay talks with the Irish government and employers, reports the Irish Independent. Though the unions get now back at the negotiation table, the only have until Saturday, when the Government signs off the €6bn required in tax hikes, cutbacks and borrowing. It is a face saving exercise for the unions, which got under increased pressure from their own members, and get them a last chance to lobby on contentious issues.
Willem Buiter on the ECB and quantitative easing
Willem Buiter, in a four-column series on the fiscal aspects of central banking in Vox, argues in the first part that the ECB’s lack of fiscal backing is both unusual among major central banks and a severe handicap – it is a factor in why the ECB is “fiddling while the Eurozone burns” by hesitating to undertake quantitative easing started by the Fed, Bank of England, and others.
Reactions to the Geithner Plan
Adam Posen
Adam Posen has an interesting comment on the Geithner plan in which makes, among others, the following points. He says in terms of price discovery there is no new information for investors except the terms of the government guarantees and leverage terms, so that the price that will be discovered will reflect no more than that information. Also, he recalls the experience of Japanese financial services minister Hakuo Yanagisawa, who in 1998 got a bank recapitalisation scheme under way, but without sufficient conditions attached to the capital. The Japanese banking system failed again three year later. The Japanese banking crisis was only resolved when the banks were forced to write down their bad assets.
Wolfgang Munchau
Wolfgang Munchau says in his column in FT Deutschland that the Geithner plan is probably the single biggest policy error committed in this crisis, as it deliberately fails to address the problem of an undercapitalised banking sector. The programme is likely to succeed in its own limited terms – creating an artificial liquid market for bad assets – but this is not itself a solution to the problem. Moreover, it will take time to work, during which the economy will continue to deteriorate. Munchau advocates either outright nationalisation, or the setup of bad banks, good banks, but what Geithner proposes is another expensive scheme that will not do the job.
Martin Wolf
Martin Wolf says in his FT column that he is getting ever more worried. He is particularly worried about the politics of the Geithner plan. Even if it works, it is such a transfer of wealth from the taxpayer to the bank shareholders, that the public may get increasingly hostile to further bank rescues. He says this plan is not going to solve the problem of under-capitalised banks. The danger is that this scheme will, at best, achieve something not particularly important – making past loans more liquid – at the cost of making harder something that is essential – recapitalising banks.
Jeffrey Sachs
Jeffrey Sachs, writing in Vox, did some arithmetic and concludes that this plan is a massive transfer of wealth from the taxpayer to the bank shareholders. He has calcuated that investors have an incentive to bid $636bn for toxic assets worth $360bn, which means a transfers of $276bn from the taxpayer (via the Federal Deposit Insurance Corporation) to the bank shareholders. It is no surprise that stock prices were going up. Furthermore, Sachs advises Congress to block this scheme. Congress could use a 1990 Act, which would allow it to turn the off-balance sheet transfer into an appropriation. This means Geithner would have to ask Congress to get the $276bn, which is not going to happen.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.
