Pressure is growing for a European stimulus

 

Spiegel online has the story that Jean Claude Juncker and Frank-Walter Steinmeier called for an EU wide relaunch package. On a common press conference Juncker said that the crisis can only be addressed at the European level. Juncker and Steinmeier advocate a EU wide rescue package for the car industry. Steinmeier said that Europe cannot leave its car industry alone while the US bails out GM, Ford and Chrysler. Juncker even suggested that the EU Commission could launch EU bonds to finance investment in infrastructure and energy projects. 

 

In Germany meanwhile the government is ready to provide a multi-billion dollar package of loan guarantees to Opel, albeit under strict conditions, as election-wary politicians fear the consequence of a large auto bankruptcy. Opel is a special case, given its strong links to GM, which owns 80% of the German car maker. All German papers are full of reports. See for example Frankfurter Allgemeine.

 

 

But there is also pressure for a macro-wide co-ordinated stimulus package. The Bruegel think tank yesterday called for a European stimulus packages in the form of a co-ordinated 1 pp cut in value-added tax, plus an additional national measures. Jean Pisani Ferry, Andre Sapir, and Jakob von Weizsäcker say that VAT cuts are not the most effective growth stimulus instruments, but the one that all EU countries have jointly at their disposal. (A very good proposal, but probably too modest. We think the EU needs a significantly larger stimulus than 1% of GDP, as the economic downturn is likely to be much more severe than forecasts currently suggest). See also the authors’ Oped in the FT for a shorter version. For countries in danger of missing the 3% deficit-to-GDP target as a result of a stimulus, they recommend a binding agreement on structural reforms.

 

 

McCreevy wants central counterparty for CDS

Frankfurter Allgemeine reports that EU Commisssioner Charly McCreevy believes that the main problem in the market for credit default swaps is lack of transparency, and thus he proposes an obligatory central counterparty. The idea of this is to reduce counterparty default risk, one of the problems that is currently affecting the market.

 

 

Jean Quatremer on Ireland

Almost forgotten, the Lisbon Treaty still lurks in the background, and it appears that the financial crisis has brought Ireland a step closer to accepting the Lisbon treaty. The latest opinions polls, published in the Irish press, show that there is now again a narrow Yes majority, which is quite a turnaround. Jean Quatremer reports that the issue will come up at the December EU summit in Brussels.

 

 

Strikes in France

This week is the week of strikes. Pilots, teachers and employees from transportation and the postal office protest, each one for another reason. Higher pension age, degradation of working conditions, privatization are the matter of discontent (see Liberation). Large mobilization is expected.

 

Belgian wage round

Employers organizations and trade unions started their negotiations to settle the wages for the next two years to come. Le Soir writes that the wage increase is expected to be between 5.1% and 6.4% for those two years. The financial crisis is not expected to feature in this settlement.  Other issues are the reduction of social charges, unemployment benefits, higher minimum wages and indexation.

 

Deflation in Ireland

Ulster Bank’s chief economist Pat McArdle projected 0.5% fall in the Irish CPI reflecting a significant drop in mortgage inflation as the ECB rate cuts feed through in addition to further falls in energy and food prices, reports the Irish Independent. Anticipating that consumers are more likely to save the additional income instead of spending it, he projects a two-year recession, with GNP to fall by 4% in 2009. (The article is a bit misleading as it talks about deflation but refers to Ireland only not to the entire euro area)

 

Central bank warns about Greek Bank engagements in Balkans

Kathemerini has the story that Bank of Greece Governor Giorgos Provopoulos expressed his worry about Greek banks’ investments in the Balkans, in a letter sent to the European Commission last week.He argued that despite the strong capital position of the local credit institutions, the considerable problems faced by the countries in Southeastern Europe could affect Greek banks and then the local economy. The drop in economic activity in the Balkan states could cause Greek banks to channel more capital to their subsidiaries in those countries, resulting in an inability to respond to the requirements of their activities in the Greek economy.

 

Going off balance

Writing in Les Echos Jean Marc Vittori argues that after we had Enron in the past and the banking crisis today where we learned all too late about their off-balance  liabilities, the state to be next by taking over risks that are not properly accounted for.  Be it Sarkozy’s guarantee for bank deposits, be it nationalization of struggling banks in the UK or AIG in the US. We will only know the true extent of the bill when it is already too late. Vittori says that regulatory changes are certainly part of the solution as they could limit the incentives to do so in the future, but it will – if not backed up by ethical standards – always remain insufficient. 

 

In defence of capitalist pension schemes

Also in Les Echos Jean Marie Percesse remarks that the financial crisis should not automatically lead the French to dismiss the capital based pension system. Right now the French receive an additional pension from a capital based scheme on top of their pay-as-you-go pension. But this pay as you go system accumulated some €40bn deficit over the last six years. With poor growth perspectives even for the future it means that the bill for this generation’s pensions is paid by the next generation. Percesse argues that the capital scheme has at least the advantage of being socially more just as peope have to cut back on their own expenses, even if it risks to worsen the economic situation.

 

 

Jean Pisani Ferry on the G20 summit

Jean Pisani Ferry is quoted by FT Deutschland as saying considering that the G20 summit was not prepared and that the US has a lame duck administration, the actual results of the summit were reasonably good. From a European perspective it is good that the IMF will widen its influence, both in terms of current account assistance and supervision of industrial countries’ financial policies. But the IMF did not get full authority over global financial stability, which it will have to share with the Financial Stability Forum.

 

 

Dani Rodrik on the emerging market crisis

In a Project Syndicate column, printed in FT Deutschland and possibly some other newspaper, Dani Rodrik warns about the escalating emerging market crisis which is now hitting solid countries, such as South Korea and Brazil, as investors are retrenching. He advocates emergency lending programmes by the IMF and the G7, a role for China, which has foreign currency reserves of $2 trillion, in addition to the currency swap agreements already put in place by the Fed for Brazil, South Korea, Mexico and Singapore.

 

 

The Reinharts on the exorbitant privilege

Carmen and Vincent Reinhart ask in Vox who global investors are rushing to purchase US government securities when the US is the epicentre of the financial crisis? They attribute the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis.

 

 

Denis Snower on China

Denis Snower, writing in FT Deutschland, does some math on Chinese growth. Investments account for a massive 45% of growth. In the view of the global downturn, China would suffer from an investment overhang that might lead to a 50% drop in investments, some 22% of GPD. Even the 16% of GDP stimulus is not going to be sufficient to bridget that gap. The result is a much deeper than expected economic crisis – which might be the next shock the world economy has to confront.

 

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