Towards Default

By: Wolfgang Münchau

The European response to the Greek crisis is at least in part to blame.

Why the European Debate on Competitiveness is going nowhere

Raising competitiveness has been the prime goal of economic policy in Europe. But is it a sensible goal? Those who favour a competitiveness-based approach often make false analogies between enterprises and countries. Countries do not compete in the way companies do. Trade among countries is not about profit but about the division of labour. It can benefit all by raising productivity. A more meaningful concept of competitiveness at the national level defines a competitive country as one that can maintain high rates of growth and employment in the medium term. This concept focuses on the country’s ability to provide its citizens with high and rising standards of living in the medium and long...

The ignominious role of Goldman Sachs

Merkel has sharply criticised “banks” that helped Greece circumvent EU budget rules; Jean Quatremer reports that Goldman Sachs was among the institutions that placed heavy bets in European bond markets during the height of the crisis; Simon Johnson is calling on the EU Commission to launch a full investigation of the role of Goldman Sachs during the crisis, and of Mario Draghi, who was then a vice-chairman of the bank; Satyajit Das offers an in-depth explanation of how the currency swap scam worked; Yves Smith takes a look at the legal issues involved; pressure is growing inside Merkel’s coalition against a Greek bailout; the Greek government may be preparing a bond issue, or syndicated loan, next week, which might force the issue of a bailout; Dominique Strauss-Kahn, meanwhile, makes the case against unilateral national financial regulation.

Juncker opposes Weber as president of the ECB

Luxembourg PM criticises the stitch-up that assure Vitor Constancio the job of ECB vice president; Juncker says there was no discussion on the qualification of the candidates; warns that Germans should not take it as given that Weber would succeed Trichet as the ECB’s president; Eurostat requests information from Greece about the controversial currency swaps; Lawrance Boone argues that the one month period given to Greece to amend its austerity package could give rise to more market turbulence; Wolfgang Munchau says after Greece, the next challenge are the EU’s internal imbalances, and this involves Germany as well; Giancarlo Corsetti calls for a reform of the stability pact to include credible crisis resolution procedures; Martin Feldstein, meanwhile, calls for Greece to exit the euro area and to re-enter it shortly later with a devalued exchange rate.

The euro group gets concrete – on what Greece has to do, but not on the bailout

Juncker and colleagues demand further expenditure cuts and VAT increases, but do not say, in public, how their bailout plans take shape; eurogroup gives Greece until March 16 to present a more credible plan; Rehn says the Greek budget was based on unrealistically positive assumptions; the euro continued to slide to below $1.36; a senior Greek official says the EU had known all along about the controversial currency swaps; the German reaction to the bailout is getting more extreme, as politicians are arguing to strip the Greeks of their EU voting rights; the FT claims that bond valuations led CDS valuations during the present crisis, not the other way round; Paul Krugman blames European policy elites for the creating the euro when the EU was not ready; Barry Eichengreen says the euro was not necessarily a mistake, but it is a disaster in the making; Otmar Issing, meanwhile, makes the case in the Financial Times that Greece must not be bailed out.

Greece under massive pressure to step up austerity package

European finance ministers will insist on implementation of existing measures, and new measures as the underlying assumptions of the Greek austerity plan are regarded as too optimistic; Greek governments wants to delay any austerity measures until mid-March when an EU review is complete; Papandreou is angry at German handling of the situation; Papandreou’s approval ratings are rising; Jean-Claude Juncker says euro area will not abandon Greece; a majority of Germans wants Greece to be kicked out of the euro; Wolfgang Munchau writes that the bailout-agreement is important, despite the lack of details, and it is the maximum we can expect given the many political and legal constraints; Gillian Tett writes about efforts to constrain naked CDS trading; Simon Johnson says Greece might still collapse; Barlcays banks has published the legal details of when and whether a breakup of the euro area would constitute a credit event; the French are not as keen on Axel Weber as successor to Jean-Claude Trichet as they first appeared; Kenneth O’Rourke says there is another euro crisis – a fall-back in economic growth; Paul Krugman, meanwhile, endorses Simon Johnson’s call for a higher inflation target.

A historic political agreement

European Council says Greece will be supported, on strict conditions, if and when the need arises; details to be worked out be finance ministers; ECB and IMF will formally take part in evaluating Greek deficit reduction efforts; there were signs of some divisions with the Council, as some member states pushed for a more concrete result; Germany is reportedly considering two concrete measures, direct purchases of Greek bonds, and a loan guarantee; financial markets reaction was mixed, though the euro fell on the news; European banks have strong exposures to Greek debt, including the nationalised German bank HRE; Holger Stelzner in Frankfurter Allgemeine welcomes the absence of a concrete bailout; Mark Schieritz of Die Zeit hails this as an historic agreement; FT Deutschland says there is now an acute danger of moral hazard; James Rickards has a comment in the FT, in which he explains how the speculators have been pushing up Greek CDS rates; Olivier Blanchard, meanwhile, calls for a higher inflation target.