Germany boycotts EU stimulus proposals

 

Frankfurter Allgemeine reports that EU finance have “defused” the European Commission’s (relatively modest in any case) stimululs packages, by ruling out tax cuts and changes in the EU budget. Especially the German finance minister rejected any idea that he should do more given his country good budgetary position. But they accepted the idea of an EU-wide package of €200bn to which the member states should constribute €170bn. Germany declared immediately that it had already done its share – of €31bn! – a number that is significantly larger than the actual stimulus of €12bn – but which shows that to get to the EU’s number, member states will include measures that have already been taken, and that are already budgeted for. (which shows that this is €200bn package is a lot of hogwash!). Steinbruck categorically rejected any further German contributions.

 

Spanish unemployment up at 11.3%

Unemployment in Spain went up from 2m to 3m in a space of a year, according to El Pais, and reached a level of 11.3%, the highest level in the EU, and the highest level since 1996, and this even at this early stage in the recession, which is likely to get a lot wrose in Spain. Most of those job losses concern immigrants, who have found employment in the booming construction sector. The FT writes that Mr Zapatero’s latest fiscal stimuls will create only about 300,000 jobs which is the number of job lost in a two-month period on current performance.

 

Solvency II compromise

Finance ministers also reached a compromise in principle on Solvency II, the set of regulations and capital adequacy requirements for the EU insurance industry, Frankfurter Allgemeine reports. This compromise will include group supervision, in which an insurance companies home regulator becomes the EU-wide regulator for that groups’ activities. But the compromise weakens the EU Commission’s original proposal in that it also gives an explicit role for national regulators.

 

EU Commission more flexible on state aid

The FT reports from Brussels that the Commission wants to more flexible in the way it applies state aid rules to banks hit by the credit crisis following criticisms by several government, including from France and Germany. Neelie Kroes, the competition commissioner, promised to release new guidelines shortly on the application of the rules to produce greater flexibility over what incentives can be used to make sure government assistance is repaid.

 

Rapidly deteriorating Irish budget

The Irish government prepares further spending cuts amid a further loss of €2bn in taxes in just two months, reports the Irish Independent. The rapid deterioration in the public finances is worse than the picture set out by Finance Minister Brian Lenihan in his Budget six weeks ago. The Government can now expect a final shortfall in its tax predictions of at least €8bn for the year as a whole come the end of December. But economists warned against savage cutbacks or tax rises, saying these would do further damage to the economy.

 

The German car industry

The annual comparisons are getting longer-dated. The German car industry currently has its worst performance since German unification. The car industry accuses the German government of confusing the customers in relation to their intentions of levying a CO2 tax, which has persuaded many people to put of car sales.

 

 

Germany in the liquidity trap

Wolfgang Munchau says in his column in FT Deutschland that Germany and the euro area are probably not yet caught in a Keynesian liquidity trap, but that this was only a matter of time. In such a situation monetary policy has limited traction, while fiscal policy becomes all the more important – and all the more potent. It is therefore extremely unwise to rule out fiscal options in advance as Merkel and Steinbruck have done, and it is even more unwise to adopt a policy stance of wait and see. Once you are caught in the trap, the policy options become more limited, as the case of Japan has shown.

 

Global imbalances threaten free trade

Martin Wolf has written an important column in the FT on the links between global imbalance and global trade. He argues that there is a real danger of global collapse of free trade unless the surplus countries expand domestic demand. They include the oil exporters, but also China and Germany, which have current account surplus of 9.5% and 7.3% respectively. Wolf rejects the argument that Germany’s surplus is irrelevant given the euro area’s small overall current account deficit. All it means is that the euro area, the world’s second largest economy, makes no contribution to offset some of the surpluses elsewhere.  He says the surplus countries are now sitting tight on their surpluses, while the deficit countries can no longer generate the private sector demand, which they offset by public sector demand. But that is an unsustainable position, and a trade crisis will ensue from this.

 

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

 

Roubini on the world economy

Writing in the Financial Times, Nouriel Roubini outlines how the world economy will get from bad to worse over the next year. On the one hand, the global economy faces “Stag-Deflation”, a 1930s liquidity trap, in which falling growing and falling price feed each other, and where central banks resort to unorthodox methods to reflate the economy. On the other hand, huge government fiscal stimulus programmes will have long-term implications for real interest rates on public debt. The Fed and the Treasury are taking a massive amount of credit risk, he writes, endangering the long-term solvency of the US government. 2009 will be an awful year, and so will 2010 in the absence of aggressive and co-ordinated global policy action.

 

 

Rogoff advocates a policy to generation inflation

Kenneth Rogoff says in a Project Syndicate column that creating inflation is the lesser evil, and the global central banks should join and buy up government securities en masse to generate a good dose of inflation. Of course there is a risk of an overshoot, a risk that paralysed the BoJ for a decade, with inflation landing at 20-30%, rather than a more desirable 5-6%.
 

It will take every tool in the box to fix today's once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.

 

Helicopter Ben, and the bond market

FT Deutschland column das Kapital says that an exchange rate of $1.27 you would be mad to buy bonds with a yield of only 2.7%. The investors seem to believe that the masses of new dollars created by the Fed will not affect the US currency in the long-run. The column concluded that considering the net savings of the US economy has fallen to minus $249bn even before the fiscal stimulus kicks in, something is seriously wrong here.

 

 

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