Accessibility links
Monday 10 May 2010 | Financial Crisis feed
Advertisement Website of the Telegraph Media Group with breaking news, sport, business, latest UK and world news. Content from the Daily Telegraph and Sunday Telegraph newspapers and video from Telegraph TV. Enhanced by Google Home News Sport Finance Lifestyle Comment Travel Culture Technology Fashion Jobs Dating Subscriber Offers News by Sector Comment Personal Finance Markets Economics Your Business Business Club Blogs Finance Video Fund Game Home Finance Finance Topics Financial Crisis Europe prepares nuclear response to save monetary union Are Europe's leaders grasping the nettle at last? Faced with the imminent disintegration of monetary union, they appear poised to create the beginnings of an EU debt union and authorize the European Central Bank to step in immediately to stabilize the eurozone bond markets.By Ambrose Evans-Pritchard Published: 7:54PM BST 09 May 2010
Comments 87 | Comment on this article
Masked protestersstand outside the Greek Parliament in Athens on Sunday"It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government," said French president Nicolas Sarkozy, once again basking as Europe's action man. "Today we have an attack on the whole of the eurozone. This is a systemic crisis: the response must be systemic. When the markets open on Monday morning we will be ready to defend the euro."
Great caution is in order. German Chancellor Angela Merkel has so far said little. The descriptions of the deal agreed by EU leaders in the early hours of Saturday are coming from the French bloc and EU bureaucrats. How many times during the Greek saga of the last four months have we heard claims from Brussels that turned out to be a distortion of what Germany had actually agreed, causing each relief rally to falter within days? They had better get it right this time.
Related Articles Darling agrees to give £10bn to Europe bail-out Euro jumps as markets welcome €750bn rescue package Europe digs its economic grave while the ECB answers to no one Trichet is bounced into defence of the euro Bank of England poised for rate cut Will the FTSE100 fall back to Iraq War levels?But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe's AAA rating to help eurozone states in trouble -- apparently €60bn, with a separate facility that may be able to lever up to €600bn -- is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.
No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and -- the two clinchers -- Spain and Italy. "We have a serious situation, not just in one country but in several," she said.
The euro's founding fathers have for now won their strategic bet that monetary union would one day force EU states to create the machinery needed to make it work, or put another way that Germany would go along rather than squander its half-century investment in Europe's power-war order.
Whether the German nation will acquiesce for long is another matter. Popular fury over the Greek rescue has already cost Mrs Merkel control over North Rhine-Westphalia and with it the Bundesrat, dooming her reform agenda. The result was a rout.Events are getting out of hand, and not just on the streets of Athens.
For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt
Bond risk on European banks as measured by the iTraxx financial index reached even higher levels late last week than in the worst moments of the Lehman crisis. The safe-haven flight into two-year German Schatz was flashing the most extreme stress warnings since the instruments where created forty years ago."We're seeing herd behavior in the markets that are really wolfpack behavior," said Anders Borg, Sweden's Finance Minister.
Credit specialists in Frankfurt, London, and New York feared a
By Ambrose Evans-Pritchard Published: 7:54PM BST 09 May 2010
Comments 87 | Comment on this article
"It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government," said French president Nicolas Sarkozy, once again basking as Europe's action man. "Today we have an attack on the whole of the eurozone. This is a systemic crisis: the response must be systemic. When the markets open on Monday morning we will be ready to defend the euro."
Great caution is in order. German Chancellor Angela Merkel has so far said little. The descriptions of the deal agreed by EU leaders in the early hours of Saturday are coming from the French bloc and EU bureaucrats. How many times during the Greek saga of the last four months have we heard claims from Brussels that turned out to be a distortion of what Germany had actually agreed, causing each relief rally to falter within days? They had better get it right this time.
But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe's AAA rating to help eurozone states in trouble -- apparently €60bn, with a separate facility that may be able to lever up to €600bn -- is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.
No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and -- the two clinchers -- Spain and Italy. "We have a serious situation, not just in one country but in several," she said.
The euro's founding fathers have for now won their strategic bet that monetary union would one day force EU states to create the machinery needed to make it work, or put another way that Germany would go along rather than squander its half-century investment in Europe's power-war order.
Whether the German nation will acquiesce for long is another matter. Popular fury over the Greek rescue has already cost Mrs Merkel control over North Rhine-Westphalia and with it the Bundesrat, dooming her reform agenda. The result was a rout.Events are getting out of hand, and not just on the streets of Athens.
For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt
Bond risk on European banks as measured by the iTraxx financial index reached even higher levels late last week than in the worst moments of the Lehman crisis. The safe-haven flight into two-year German Schatz was flashing the most extreme stress warnings since the instruments where created forty years ago."We're seeing herd behavior in the markets that are really wolfpack behavior," said Anders Borg, Sweden's Finance Minister.
Credit specialists in Frankfurt, London, and New York feared a blow-up by Thursday afternoon, when ECB president Jean-Claude Trichet said the bank's council had not even discussed the `nuclear option' of buying Club Med bonds. The ECB seemed to be on another planet.
It was the fall-out from that press conference -- at a moment when markets were losing all confidence in EU leadership -- that had much to do with the DOW's 1000 point drop in New York hours later. This is not to blame Mr Trichet. He did not have a mandate to go further at that stage. The Bundesbank had blocked him, knowing full-well that ECB purchases of bonds is the end of monetary discipline and the start of a Primrose Path to Hell. As they say in Frankfurt, a central bank should be like pudding: "the more you beat it, the harder it gets".
It is pointless to fault either camp is this clash of Latin and Teutonic mores. The euro was never an "optimal currency area", which is to say it was never an "optimal legal and cultural area". It was a late 20th Century version of the same Hegelian reflex of imposing ideas from above -- making facts fit the theory -- that has so cursed Europe. Schopenhauer said Hegel had "completely disorganized and ruined the minds of a whole generation". Little did he know how long the spell would last.
But I digress. There is a difference between quantitative easing by the US Federal Reserve and the Bank of England for liquidity purposes, and use of this policy to soak up the debt of governments dependent on external finance to cover structural deficits. The lines are of course blurred. One purpose can leak into the other.
But whatever the objections of the Bundesbank, it seems that Europe's elected leaders pulled rank this weekend -- and high time too says the French Left. The reaction in Germany already been fierce. "The ECB is going crank up the printing presses," said Anton Börner, head of Germany's export federation. "In five to ten yeas we will have a weak currency, with rising inflation and higher rates of inflation that will act as a break on growth."
I don't agree with Mr Börner. The M3 money supply is contracting in the eurozone, pointing to the risk of a Japan-style slide into deflationary perma-slump, although the panic response to that down the road may well be to call in the printers. But there is no doubt that Mr Börner represents German opinion.
The EU is invoking the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty, arguing that the euro is subject to an "organized worldwide attack". This is a legal minefield. A group of professors has already filed a case at Germany's Constitutional Court, claiming that the Greek bail-out is illegal and that the EMU is degenerating into a zone of monetary disorder.
The judges have denied an immediate injunction on aid to Greece, saying that it would to be too "dangerous" to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal. One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads.
Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.
The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.
Search the market for saving & ISA accounts
Comments: 87
It is like a game of chess, when the Germans couldn't take control of Europe with two world wars, they play the silent money strangling silent approach? Who is behind it, who wins?
"The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz." The hangover will be huge, so let's enjoy the part while it lasts.
Charles Lee on May 10, 2010 at 08:11 AM "I think this is a signal to the Greeks and others that they can relax now and not actually bother to implement those austerity measures that were being demanded. The rest of Europe will fund their overspending, overborrowing, underworking, featherbedded, early retiring, tax-avoiding habits. " You can forget that one now Charles.... It will Be all synchronized paddeling like the Oxford-Cambridge boatrace
Chelyabinsk on May 10, 2010 at 08:11 AM ......my my...what a dreamer and fantasist you are!
Chelyabinsk on May 10, 2010 at 08:11 AM ......my my...what a dreamer and fantasist you are! The party's over!
The Drachmark is born.
There is NO way markets are actually going to fall for this indefinitely: http://www.jrdeputyaccountant.com/2010/05/europe-slaps-nearly-1-trillion-on-table.html Monday markets... up up UP! Shock and awe! Bloodbath by Friday. There's no way to sustain it, the EU is bluffing.
All good news for gold and silver prices as we argue today on arabianmoney,net. Inflation will be the result. Britain will need a bailout next.
From mid 2009 onwards I warned of an impending US Dollar rally and it's here ! More people should use technical analysis as it's a leading indicator and tells us where the economy is headed. My proprietary indicators can identify trend changes before they occur. In *early 2007* I warned of an impending stockmarket crash. I confirmed an equity bottom by early April 2009. The uptrend since March 2009 was a bear market rally contained within a much larger bear cycle that started in 2000.
"Great caution is in order. German Chancellor Angela Merkel has so far said little." AEP. Germany need say nothing at all. Remember the treaty of Elysee 1963. The French voice all of the contentious policy matters while Frau Merkel watches the response in Germany. Never forget that the EU is the Pan-German empire with France dragged along by the Elysee treaty. The rest of us are mere satrap states. Look at the impossibility of the situation we have arrived in: A collective Union has begun to set up events to create the state of Europe. They have done this using the engineered crisis. Said state has been born in circumstances where the people of Europe have been disenfranchised: The only votes allowed have rejected this collective completely. Now we have Chancellor darling setup by Germany into paying for greece even as we are told that our own economy is going down the toilet. The 16 Eurozone states automatically made a majority vote forcing Britain to accept foreign debt. this is outrageous. I would go so far as saying that my own opinion sees this setup as crooked. Criminal. Giving countries that are no chance to say NON! The EU Collective is about as nice and democratic as a bullet.
Insanity: doing the same thing over and over again and expecting different results. Albert Einstein
http://stockmarket618.wordpress.com From mid 2009 onwards I warned of an impending US Dollar rally and it's here ! More people should use technical analysis as it's a leading indicator and tells us where the economy is headed. My proprietary indicators can identify trend changes before they occur. In *early 2007* I warned of an impending stockmarket crash. I confirmed an equity bottom by early April 2009. The uptrend since March 2009 was a bear market rally contained within a much larger bear cycle that started in 2000.
John M - you said it all. I am old enough to have lived through 3 Labour governments that destroyed the British economy and left the Conservatives to clean up the mess. And for all those who criticise Margaret Thatcher's time in office - you weren't there! She was a breath of Spring. By the way, New Zealand are soon to vote to giving up proportional representation (MMP).
So EU is gradually transforming into Union of Bankrupts. Greek, Italian, Spanish, Portuguese (and British...) troubles will surely pull German and French economy into abyss. All Europeans will end up united in bankruptcy and then entire structure of EU will collapse like Soviet Union did in the past. Such a sad end of European project.
Where is all this money coming from when every country is bust ? Sorry to ask stupid questions......!
Sign me up to the CHELYABINSK fan club. Britain may yet eat humble pie as it begs for help to bridge its funding gap with the POUND under maximum pressure for higher interest rates...like today? For Britain reliance on KUWAIT and GULF STATES treasure chests seems the mostly likely escape route from the coming storm. Even they may have doubts since the British political system even fails to produce a government. Obviously the Conservative Party is not compatible with LIBDEMS and a fairer voting system.
The answer for the England is simple. Let Scotland have independence. This will mean the UK no longer exists. Tell the EU that since the UK no longer exists then all treaties signed are now back open for renegotiation and then strike a deal that is much more palatable for England.
In case you hadn't noticed the EU deniers were wiped out at the election. Isn't it time you started reporting more objectively?
And, I might ask, who is going to put up the collateral and who is going to pay the debt? I think we hare headed for total collapse, if fraud is allowed to continue. There are a lot of rich folks that should be broke from this
"Great caution is in order. German Chancellor Angela Merkel has so far said little." But so far, what she has said speaks volumes. She said that she is fully behind this rescue package. Don't forget that the 'European IMF' idea, and the 'European Rating Agencies' idea, came from Germany too. Also, in Germany, a slight majority is in favor of the European bailout, while still 66% of Germans are favorably disposed towards the Euro. So your reporting is tendencious at best. "Popular fury over the Greek rescue has already cost Mrs Merkel control over North Rhine-Westphalia and with it the Bundesrat" No, Mrs. Merkel did not loose her big state election, because of voter anger over the Greek bailout. Mr Ruettgers, the prime minister of Nort Rhine Westphalia, was trailing in the polls long before the Greek crisis broke, primarily because of a party financing scandal. Also, Merkel's coalition partner, the FDP, has dramatically lost in popularity for insisting on unpopular tax-cuts (yes that does indeed happen!). "This is a legal minefield. A group of professors has already filed a case at Germany's Constitutional Court, claiming that the Greek bail-out is illegal and that the EMU is degenerating into a zone of monetary disorder." That case was fully rejected by Germany's Highest Court. And I disagree with this being a legal minefield, the Treaty of Lisbon has all the bells and whistles that it needs. And even if it doesn't, these are exceptional circumstances, and if needed, EU leaders can come up with emergency legislation. Considering the fact that the EU leaders are in favor of the rescue package, emergency legislation is easy to implement. "Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining." I have to disagree again. This is a cure, because the weaker nations are being put on a mandatory exercise regime. Just take a look at Greece, that nation is being transformed entirely. Higher pension ages, wage cuts, and such, will vastly boost competitiveness. The other mediterranean nations are going to do the same. Spain already announced an extra 15 billion in savings, and Spain is already out of its recession. Furthermore, the latest economic reports show that the Greek economy is to return to growth in 2012.
I think this is a signal to the Greeks and others that they can relax now and not actually bother to implement those austerity measures that were being demanded. The rest of Europe will fund their overspending, overborrowing, underworking, featherbedded, early retiring, tax-avoiding habits.
A very bad day for europhobes. The EU's shock and awe package will terminate the endless negative comments about Greece and about the Euro. The EU is also about to terminate anti-eurozone derivative market activities. As a member of the EU, Britain is obliged to take part in the European stabilisation fund, despite trying to weasel out of its obligations. The terms under which Britain might be forced to fork out up to £13 billion are exquisite. Only if countries like Portugal and Spain were to face Greek style problems in the markets would Britain have to pay up. If the City and Mayfair continue to undermine the countries of the eurozone with speculative attacks Britain will be massively fined. That's the way to curb speculation! Fine it! The nuclear option faces UK financial markets. Today sterling is dangerously exposed. The Euro has a stabilisation fund, sterling does not. With political uncertainty rife and a febrile atmosphere, rumours will abound. Sterling could have a rocky time. On PR, if diehard old Tories won't concede to the voters wish for a fairer voting system, and insist on putting party interest before national interest, then Clegg must resort to the nuclear option of an electoral pact with Labour. As distasteful as that would be. Britain's electorate is chained to a Victorian voting system that has produced a couple of extremist governments that between them have led Britain to the brink of economic disaster and a seriously unbalanced economy. The root cause of Britain's economic ills lies in its politics.
The danger is the Euro could collapse within hours if no bailout is arranged. The bailout will only create a slower collapse, unless a business friendly environment is created.
Bazza McKenzie To your point "As ever, Sarkozy stands ready to spend every last German euro in defence of France's control over Germany. " Or as was once attributed to Margret Thatcher "The problem with socialism is eventually you run out of other people's money" Which country's banks has the largest exposure to Greek Debt? The French. No wonder Sarkozy is feeling good and strong with his rethoric about pounding the "Wolfpack"! He's spending everyone else's money! Ha goodness me you Europeans are just suckers for all of this! JM
The Heglian reflex "making the facts fit the theory" adds to this critique of the EURO. However abandoning the EURO at this stage would be a disaster for the world. Every "fact" needs to reconfigured in the EURO matrix. ESSENTIALLY Europe needs a single European currency that is not attacked by speculators like hedge funds for their pleasure. Its open season on the bond markets. America witnessed a 1000 drop in the DOW JONES INDEX last thursday. So there are forces at work undermining our financial markets. The markets seem driven by a desire for destruction. Suddenly nations and currencies can be hunted down by the vultures. This is not how capitalism is supposed to function. Traders in debt seek their next victim. Ban OFFSHORE HEDGE FUNDS!!!
Read Full Article »