The euro: Tempted, Angela?

A controlled break-up of the euro would be hugely risky and expensive. So is waiting for a solution to turn up

FOR all you know, Angela Merkel is even now contemplating how to break up the euro. Surely Germany’s long-suffering chancellor must be tempted, given the endless euro-bickering over rescues that later turn out to be inadequate. How she must tire of fighting her country’s corner, only to be branded weak by critics at home. How she must resent sacrificing German wealth, only to be portrayed as a Nazi in some of the very countries she is trying to rescue.
But for this very practical woman there is also a practical reason to start contingency planning for a break-up: it is looking ever more likely. Greece is buckling (see article). Much of southern Europe is also in pain, while the northern creditor countries are becoming ever less forgiving: in a recent poll a narrow majority of Germans favoured bringing back the Deutschmark. A chaotic disintegration would be a calamity. Even as Mrs Merkel struggles to find a solution, her aides are surely also sensibly drawing up a plan to prepare for the worst.

This week our briefing imagines what such a “Merkel memorandum” might say (see article). It takes a German point of view, but its logic would apply to the other creditor countries. Its conclusions are stark—not least in terms of which euro member it makes sense to keep or drop. But the main message is one of urgency. For the moment, breaking up the euro would be more expensive than trying to hold it together. But if Europe just keeps on arguing, that calculation will change.
Grexit, pursued by a bear
Begin with Greece. There is a common fallacy, not least in Germany, that dropping the Greeks would be a fairly costless way to teach a useful lesson. In fact the European Central Bank (ECB) owns Greek bonds with a face value of €40 billion ($50 billion), which would be converted into devalued drachma and which Greece might not service. A further €130 billion or so of loans that Greece has received in the bail-out would have to be written down, or written off. The €100 billion of the temporary debts Greece has stacked up in the ECB’s payments system would crystallise into a loss. Add in a one-off grant of say €50 billion to tide Greece over—call it conscience-salving “solidarity”—and the bill might come to €320 billion. Estimating the price of a “Grexit” is guesswork, but Germany’s share might reach €110 billion of this, about 4% of the country’s GDP.
At first sight that is a bargain, because it would save German taxpayers from an open-ended commitment to Greece. And yet proof of the euro’s reversibility will throw markets into a panic. Ireland, Portugal, Cyprus and Spain also all owe investors abroad a net sum of 80-100% of GDP (the gross debt is much larger). One reason why these foreigners have hung on is the belief that the euro cannot break up. Greece’s defenestration would turn that calculation on its head, triggering soaring bond yields in southern Europe. Stampeding domestic savers would cause runs on banks. With the single market in peril and depression looming, Mrs Merkel would come under huge pressure to pay whatever it takes to save the rest of the euro zone. She would have no time to negotiate the pan-European federal discipline that she has always demanded as the price for German aid. A rescue would be a blank cheque.
A bolder Plan B would amputate well above the site of infection, cutting off Spain, Ireland, Portugal and Cyprus too. Italy, which has net foreign debt of just 21% of GDP, would probably escape the chop: even with its heavy debts and chronic lack of competitiveness, Mrs Merkel would reckon that the euro zone could not function politically without it. The cost of a bolder Plan B would be high. When you add up the ECB’s holdings of their bonds, the temporary debts in its payments system, written-off rescue loans, and a care package to soften the blow of being chucked out, the total for Spain, Ireland, Portugal, Cyprus and Greece comes to perhaps €1.15 trillion. Germany would also have to put money into its own banks, hit by losses in the five departing countries. Altogether, this might cost Germany getting on for €500 billion, or 20% of GDP. But the blank cheque to defend the other four weaklings after a chaotic Grexit might exceed that; and the broader break-up would establish a more co-ordinated, defensible euro zone.
I’m a chancellor, get me out of here
If neither break-up looks attractive, is there a better way? This newspaper has argued that the euro zone’s members should use their combined strength to create a banking union and to mutualise a chunk of the outstanding debt (as well as introduce policies to temper austerity and promote growth).
This more federal Europe would also involve costs. Recapitalising banks and financing a euro-wide deposit-guarantee scheme might cost €300 billion-400 billion, perhaps a third of it paid for by Germany. But this would be a one-off and might be reclaimed from the banks. Mutualising a slug of debt would lift Germany’s interest costs by €15 billion or so a year. The numbers are rough, but, even allowing for some extra loans to the south, rescue would be cheaper than break-up. And that is before you factor in the enormous political costs of disintegration, with, say, Greece departing into a new Balkan hell.
Our solution, then, is broadly the same as Mrs Merkel’s appears to be. But a prescription is useless if it is never applied—and our doubts that this one ever will be are increasing.
The euro could have been saved a long time ago, had the politicians agreed on who should pay what or on how much sovereignty to surrender. Rather than push forward, Mrs Merkel has waited, hoping that fiscal adjustment and structural reform will lead to economic growth in southern Europe and that the politicians could sort out their differences. The ECB has once again bought her a bit more time (see article).
The evidence, though, is that time is not on her side. Southern Europe’s economic rot is deepening and spreading north. Politics is turning rancid as the south succumbs to austerity fatigue and the north to rescue fatigue (see article). Populism only makes a grand bargain more elusive. For the moment, breaking up the euro would be riskier than fixing it. But unless Mrs Merkel presses ahead, the choice will be between an expensive break-up sooner and a really ruinous one later.

from the print edition | Leaders 

 http://www.economist.com/node/21560269

 

Europe’s far right, Culture matters more

The far right in Europe is rising in many European countries in spite of its inability to provide a coherent economic message

Aug 11th 2012 | AMSTERDAM, ATHENS, BUDAPEST AND COPENHAGEN | from the print edition

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“WE ARE providing food produced in Greece for Greek citizens only.” Ilias Kassidiaris, spokesman of Golden Dawn, sounded adamant gesturing towards a queue of hundreds of shabbily dressed, mostly elderly people waiting on August 1st for a handout of food aid in Syntagma Square outside parliament. A line of young women and men wearing the right-wing party’s trademark black T-shirts checked identification before giving grateful recipients a plastic carrier bag filled with fruit, vegetables and pasta.
Golden Dawn is Europe’s most recently successful far-right party. It won 6.9% of the vote and 18 seats, mostly in Athens, at parliamentary elections in June. Nikos Michaloliakos, the party’s founder and leader, insists his is not a neo-Nazi group, despite a swastika-like official symbol and the Nazi-style salute from party members when he appears on a podium. Golden Dawn’s voters include many police officers, disaffected young Greeks and older people living in city districts with high rates of crime.

The party has gained some credibility thanks to its food handouts and other social efforts, yet its overt racism, anti-Semitism and taste for violence disturbs many Greeks. “This party has a strong hooligan element as well as connections with the criminal underworld,” says Yiannis Boutaris, the mayor of Thessaloniki, who was criticised by Golden Dawn for backing the city’s first gay-pride celebration.
A common view is that the economic downturn and austerity in the euro zone explain the rise of the anti-immigrant far right in Greece, the Netherlands, Hungary, Finland and other EU countries. But Matthew Goodwin, an expert on the far right at Nottingham University, finds the evidence unconvincing. “We are all voting for Nazis because Europe is in recession? That’s claptrap,” he says. Concerns over national culture, identity and a way of life matter more than material worries. The potential for a xenophobic party exists in every European state whether a country has a triple A credit rating, as the Netherlands does, or a country is on the brink of bankruptcy, as Greece is. “All it needs is for a semi-competent party to pick up on these sentiments,” says Mr Goodwin.
The National Front in France (see article) and the Freedom Party in the Netherlands have been especially adept in exploiting the latent feelings of resentment against immigrants. Mainstream parties struggle to convince ordinary voters that they understand the popular anxiety about globalisation and the distrust of elites. Fiercely anti-immigrant, the Freedom Party (PVV), claims to trace its ideological roots back to the ideas of the Enlightenment and to defend them against culturally different newcomers.
At elections in 2010, the PVV, which had been founded only five years earlier, used an anti-Islam platform to become the third-largest Dutch party. The PVV leader, Geert Wilders, has called Islam a “backwards” religion and requested a ban on the Koran. At the same time Mr Wilders has fashioned himself as defender of gay rights and gender equality. He is a staunch supporter of Israel, which happens to make his anti-Arab stance more plausible.
Mr Wilders’ party has had a profound effect on Dutch politics. Mainstream parties terrified of bleeding votes have taken many of his ideas on board. A recent minority government that was supported by the PVV adopted a ban on burkas, a ban on double citizenship and other anti-immigrant policies. Most of these have been dropped since he pulled the plug on the cabinet earlier this year, but the Dutch Muslim minority was bruised.
The economy is Mr Wilders’ Achilles heel. He took up fierce criticism of the EU and the single currency in the hope that his anti-EU-polemic will camouflage his lack of ideas for how to deal with the economic downturn. “The far right is struggling to weave an economic story into their message,” says Jamie Bartlett at Demos, a think tank in London. “They don’t have a coherent story to tell.” In the run-up to the Dutch elections that will take place on September 12th, Mr Wilders is campaigning hard on an anti-EU platform criticising the bail-out packages, promising a referendum on membership of the euro zone and even playing with the thought of ditching the Dutch EU membership altogether.
Hungary’s Jobbik, an anti-Semitic and anti-Roma party, is in a different league of extremism compared with the PVV. Jobbik’s economic policies however are relatively sophisticated. The party advocates a mixture of state-control and protectionism combined with support for small entrepreneurs and farmers. Jobbik calls this an eco-social national economy: “Economic policy must endeavour to defend Hungarian industry, Hungarian farmers, Hungarian businesses, Hungarian produce and Hungarian markets”. Most Jobbik voters show little interest in the finer points of the party’s economic policy. Instead they harbour a sour resentment against what they call the “multis”, or multinationals, even though foreign companies, unlike some Hungarian firms, pay their employees’ tax and social security. A whole subculture of national-identity politics is flourishing in Hungary, with its own music, summer camps, bars and even a national taxi service called nemzeti.
A national culture seemingly under threat is also the main attraction of the far right in the Nordic countries, which, with the exception of Finland, are still relatively untouched by the euro crisis. Norway’s Progress Party, the True Finns in Finland and the Danish People’s Party are all contenders for entering government in their country’s next general election. Only in Sweden has the far-right been shunned.
Nordic far-right parliamentarians fight shy of comparison among each other, but the similarities are striking. They share a loathing of Islam, decry the attrition of Nordic culture and have strong views on law and order. Outsiders can be surprised by their growing appeal in a region that is famous for tolerance. Yet their plain-speaking and promises to care for the elderly, reduce taxes and preserve indigenous traditions strike a chord with many.
After the second world war the far-right was taboo in much of Europe. As memories of the war fade, Europe’s far-right parties have adopted the welfare aspirations of the centre-left and flavoured them with protectionism and nationalism. Their increasing popularity suggests that this recipe will go down well—unless mainstream parties find ways to calm voters’ pressing anxieties over culture, identity and Europe’s way of life.

http://www.economist.com/node/21560294

A Slowdown in Growth, an Increase in Income Inequality

By DAVID LEONHARDT

The income stagnation of the last decade stems, in the simplest terms, from two factors: a slowdown in economic growth and a rise in inequality, which has concentrated the economy’s modest gains among a small share of the population. In this post, I want to look at both factors in a bit more detail.

The Agenda: Economy

Middle class stagnation and inequality.

The economy’s recent struggles arguably began in late 2001, when a relatively mild recession ended and a new expansion began. The problem with this new recovery was that it wasn’t especially strong. From the fourth quarter of 2001 through the fourth quarter of 2007 (when the financial crisis began), the economy grew at an average annual rate of only 2.7 percent. By comparison, the average annual growth rate of both the 1990s and 1980s expansions exceeded 3.5 percent.
This mediocre expansion was followed by the severe recession and weak recovery brought on by the financial crisis. The combined result is that, in recent years, the economy has posted its slowest 10-year average growth rates since the Commerce Department began keeping statistics in 1947:

In addition to slow growth, the bounty from the economy’s growth has largely flowed to a small slice of the population: the affluent. Since 2000, no income group has done particularly well. Income in households that rely on wages has failed to keep pace with inflation, while in households that have large investment holdings the value of many of those holdings — both real estate and stocks — has fallen.
Over a longer term, though, the affluent have done extremely well. Since 1980, a household at the cutoff for the top 1/1,000th of earners — making about $1.5 million in 2010 — has received a pay increase of more than 100 percent, after adjusting for inflation. A household in the middle of the income distribution has received an inflation-adjusted raise of only 11 percent.




















http://economix.blogs.nytimes.com/2012/08/06/a-slowdown-in-growth-an-increase-in-income-inequality/?ref=politics