Greece is now putting pressure on the eurozone – if you don’t help, we will turn to the IMF

 

This is now the most interesting, and potentially dangerous moment of the Greek crisis. After George Panpandreou effectively did everything the ECB and the European Commission have told him, the ball has left Athens, and is now in the court of the euro area. And it has to be played very quickly, for otherwise Papandreou will turn to the IMF, as he already indicated. His travel schedule leaves no doubt about the time. Tomorrow in Berlin and Paris, on Wednesday in Washington.

Bloomberg has a story that Germany remains unwilling to promise aid. It cites Angela Merkel’s cool reaction to Papandreou’s plans, including the announcement that tomorrow’s meeting will not even address the issue of aid and financial commitments. It quoted German sources as saying that Germany can, and will not, commit. (We disagree: German can and will. This is just the attempt to emit two conflicting message, one to the outside world, one for domestic consumption)

Kathimerini, in its news coverage of the crisis, produced a detailed account of the measures taken. They include: Increate in VAT rates from 19 to 21%, plus 1pt increases in the two smaller bands; increase in excise duties on fuels, increase in duties on cigarettes and alcohol; excise taxes on luxury goods, including cars costing more than €17,000, boats, helicopters, precious stones, precious metals and leather; repeal of the excise duty exemption for certain energy categories; 30% cut of Christmas, and easter bonuses; 12% cut in allowances for public sector workers; reduction in performance incentives and other work-related allowances, freeze in public sector pensions, and all pensions over which the government has direct and indirect control; 5% cut of a public investment programme, plus cut in the education programmes. We could go on. The list comprises many more items.

The European Commission said Papandreou had now done what is necessary. Juncker also supports the plan. Olli Rehn spoke of a turning point in the crisis.

The markets reacted positively to the news. The euro was back up at close $1.37

 

Fierce public reaction

The FT reports: “...several hundred Greek pensioners broke through a police cordon to demonstrate outside the prime minister’s office while the cabinet meeting was under way. ‚What are we supposed to live on? We can’t even seek help from our children because they’re facing unemployment,’ said Stathis Anemoyiannis, a retired civil servant. Adedy, the federation of public sector unions, announced another 24-hour walk-out for March 15. Separately, customs and tax workers, teachers, and staff at state hospitals said they would hold strikes this month.“These are the toughest measures to be imposed since the second world war… they are one-sided and they will plunge the country further into recession,” said Spyros Papasypros, Adedy’s president.

 

Greek and euro trades officially investigated

The FT reports that the European Commission has invited banks and investors to discussion this week about regulatory actions regarding naked CDS and other instruments that have been used in the speculation against Greece. Furthermore, the US Department of Justice is taking a close at trading against the euro, following reports that a group of hedge funds had met in New York to devise a common trading strategy.

 

Italy’s president favours a European Monetary Fund

President Giorgio Napolitano of Italy came out in support of the idea for a European Monetary Fund. He said the eurozone was lacking a mechanism in its common arsenal, a mechanism to deal with acute crises. The Greek crisis demonstrated the need for other tools in crisis management, Kathimerini reports

 

German nominal wages fall in 2009

So much for nominal wage rigidities. We have been used to real wage cuts, but in Germany during last year nominal wages have fallen for the first time since 1949, according to the Federal Statistics Office. They were down 0.4%. Nominal wages in industry fell by 3.6%, due to short-time work. This means that Germany’s competitive position within the euro area has increased further last year – and with the most recent 0 per cent pay round, there are no signs that Germany-versus-rest-of-eurozone gap is stabilising, let alone closing.

 

Waiting for Trichet

Ed Hugh has an interesting curtain raiser for today’s ECB meeting, in which he argues that this is going to be one of the more interesting meetings in the ECB’s history, not because anyone expects any interest rates decisions (nobody does, in fact), but because everyone wants to know what the ECB thinks about the economic recovery, and how Greece effects its own policy manoeuvre. He makes the interesting observation that ECB board members have been collectively and unusually silent, and have made fewer speeches in the last three months than in any three-month period during the crisis. “So why the comparative silence? The ECB is not normally reticent in coming forward to guide market expectations. Could the communication pause reflect growing uncertainty among board members about what to do next?”

 

 

Merkel and economic governance

Peter Ehrlich has an interesting comment on the confusion Angela Merkel has created by her endorsement of a common economic governance for the euro area. This does not indicate a shift in the position. She has rejected the proposal in Barroso’s 2020 agenda for a closer policy co-ordination mechanism, and shows no signs of acceptance any dilution or re-interpretation of the stability and growth pact. She remains, what the French call “Madame Non”. What she meant by economic governance is a more prominent role of the European Council in question of policy co-ordiation – i.e. at the level of heads of governments and state as long as Germany has a veto.

 

Against a new Glass-Steagall

Writing in VoxEU, Hans Werner Sinn says a return of the Glass-Steagall Act has been suggested by US policymakers and commentators as a way to reduce risk in financial markets. He  argues that the legacy of separate commercial and investment banks actually made the crisis worse. Europe should not follow these proposals but should instead concentrate on strengthening the capital reserves of its banks.

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