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Vocapedia > Economy > Currencies > Euro, Eurozone crisis




RJ Matson

Roll Call


 21 June 2011















single currency        UK






currency > euro


































take Britain into the euro





euro > Maastricht treaty        UK






Europe        USA








European Central Bank    ECB        UK









 euro zone’s jobless rate        USA






euro woes        USA






'euromess'        USA






euro collapse        UK






on edge of financial collapse        UK






economic crash        USA






Eurozone GDP > double-dip recession        UK








economy > European debt crisis / eurozone crisis        2011-2015
















































































eurozone crisis > Spain        2012








Spain borrowing costs        2012












Tracking Europe's Debt Crisis        December 2011






fallout of the debt crisis






Europe’s financial crisis






“suicide by economic crisis”






U.S. Banks Tally Their Exposure to Europe’s Debt Maelstrom        January 29, 2012















eurozone banks






be forced out of eurozone






leave the euro







exit from euro / exit from the single currency > Greece












euro zone breakup







eurozone crisis / euro zone crisis / euro crisis       2011























euro area / euro zone






all over the euro zone





European credit markets        2012
















European Union        EU

































credit rating






rating firms






rating firms > Moody’s Investors Service






rating firms > Standard & Poor’s        S&P's



















downgrade of debt ratings / rating downgrade




















Rob Rogers


May 20, 2012















credit crunch






shun the dollar






dollar plunges to all-time low against euro





slip below euro












stock market > against the euro

















A protesting officer from Greece's police stands in a mock gallows

outside the Finance Ministry during an anti-austerity protest in Athens on September 6, 2012.


More than 4,000 officers, chanting "thieves, thieves’’ and carrying black flags

took part in the march against expected new pay cuts in the crisis-hit country.


Thanassis Stavrakis/Associated Press

Boston Globe > Big Picture > Austerity protests        November 12, 2012




























Boston Globe > Big Picture > Austerity protests        November 12, 2012


Matters of the economy are forefront in many minds,

with economic issues dominating the recent American election

and the leadership change in China.


But in several countries in Europe,

economic debate is played out on the streets

with protests, petrol bombs, and strikes.


As the Eurozone struggles with the global financial crisis,

many member countries have turned

to a series of spending cuts to health, education,

and other services and social programs.


Widespread protests against

these so-called austerity measures

have erupted in several countries


Gathered here are photographs

from the most heavily impacted nations in recent months,

including Spain, Greece, Portugal, and Italy






austerity        IRE
















Crash of the Bumblebee


July 29, 2012

The New York Times



Last week Mario Draghi, the president of the European Central Bank, declared that his institution “is ready to do whatever it takes to preserve the euro” — and markets celebrated. In particular, interest rates on Spanish bonds fell sharply, and stock markets soared everywhere.

But will the euro really be saved? That remains very much in doubt.

First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.” But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.”

Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country.

Consider, for example, the comparison between Spain and Florida. Both had huge housing bubbles followed by dramatic crashes. But Spain is in crisis in a way Florida isn’t. Why? Because when the slump hit, Florida could count on Washington to keep paying for Social Security and Medicare, to guarantee the solvency of its banks, to provide emergency aid to its unemployed, and more. Spain had no such safety net, and in the long run, that has to be fixed.

But the creation of a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what can be done to save the currency?

Well, why was the bumblebee able to fly for a while? Why did the euro seem to work for its first eight or so years? Because the structure’s flaws were papered over by a boom in southern Europe. The creation of the euro convinced investors that it was safe to lend to countries like Greece and Spain that had previously been considered risky, so money poured into these countries — mainly, by the way, to finance private rather than public borrowing, with Greece the exception.

And for a while everyone was happy. In southern Europe, huge housing bubbles led to a surge in construction employment, even as manufacturing became increasingly uncompetitive. Meanwhile, the German economy, which had been languishing, perked up thanks to rapidly rising exports to those bubble economies in the south. The euro, it seemed, was working.

Then the bubbles burst. The construction jobs vanished, and unemployment in the south soared; it’s now well above 20 percent in both Spain and Greece. At the same time, revenues plunged; for the most part, big budget deficits are a result, not a cause, of the crisis. Nonetheless, investors took flight, driving up borrowing costs. In an attempt to soothe the financial markets, the afflicted countries imposed harsh austerity measures that deepened their slumps. And the euro as a whole is looking dangerously shaky.

What could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b).

In his remarks, Mr. Draghi — who I suspect understands all of this — basically floated the idea of having the central bank buy lots of southern European bonds to bring those borrowing costs down. But over the next two days German officials appeared to throw cold water on that idea. In principle, Mr. Draghi could just overrule German objections, but would he really be willing to do that?

And bond purchases are the easy part. The euro can’t be saved unless Germany is also willing to accept substantially higher inflation over the next few years — and so far I have seen no sign that German officials are even willing to discuss this issue, let alone accept what’s necessary. Instead, they’re still insisting, despite failure after failure — remember when Ireland was supposedly on the road to rapid recovery? — that everything will be fine if debtors just stick to their austerity programs.

So could the euro be saved? Yes, probably. Should it be saved? Yes, even though its creation now looks like a huge mistake. For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.

But will it actually be saved? Despite Mr. Draghi’s show of determination, that is, as I said, very much in doubt.

    Crash of the Bumblebee, NYT, 29.7.2012,






On Old Walls, New Despair


April 21, 2012
The New York Times



ANA LUISA NOGUEIRA started out looking for love. More and more, she found hate.

Not hate, exactly, although that’s a word she sometimes uses for it. Sorrow. Anger. A broken faith in a future with much to offer.

About four years ago, as a weekend hobby, she began wandering Lisbon to photograph the clusters of hearts and proclamations of ardor — the endearing graffiti of romance — that she saw on the city’s buildings. But about two years ago, on those same buildings, she noticed new images and messages sprouting. Some raged at the Portuguese government, which had saddled the country with debt. Some railed at Germany, which held the cards and the purse strings. Some were just scrawled wails of grief.

As Europe’s financial crisis deepened and Portugal reeled, Lisbon’s walls talked. “Abandon all hope, you who still believe in me,” they said, in Portuguese. “Portugal died. R.I.P.”

That epitaph was long gone by earlier this month, when I joined Nogueira, 37, for one of her walks. But we found other writings, including several with the same blunt refrain of hopelessness.

“You will never own a house in your life,” it said. Except it said this with an unprintable adjective before “your life.” It said this with vitriol and heartache.

In the late 1990s and early 2000s, Portugal was a very different place, riding high on the promise of the European Union, optimistic. So, to varying degrees, were Greece, Spain, Ireland, Italy. Today they’re enduring a magnitude of sacrifice, uncertainty and anxiety that trumps what America is going through, not to belittle our hurt, and that serves as a warning and lesson.

What happens when the gap between what people thought lay ahead of them and what they now confront is allowed to widen as quickly and as much as it has in these countries? How do they adjust?

“They commit suicide in the public square,” said my friend Paulo Côrte-Real, an economics professor in Lisbon, over dinner here. He was referring to international headlines about a 77-year-old man who had recently shot himself in front of the Greek Parliament and to “suicide by economic crisis,” a phrase that several European newspapers now use. A story about the rise of such deaths happened to appear in The Times the day after our dinner.

Maybe they flirt with far-right parties that scapegoat minorities and that bemoan modernism and globalism. There have been reports and evidence of this in Greece, Hungary, even France.

Maybe they take to the streets, loudly and repeatedly, as in Spain. Or maybe they flee. Seemingly any young college graduate you talk to in Portugal — where the unemployment rate is 15 percent overall but significantly higher for young people, and where wages and benefits have plummeted — tells you about similarly well-educated peers who have moved, with their skills and their ambitions, elsewhere, leaving Portugal poorer in an additional way.

“The Netherlands, Germany, England, Canada, the U.S., Brazil, Angola, Denmark,” said Joana Pacheco, 26, when I asked her to name places her friends had gone. When I asked her how many of her friends she was talking about, she answered, “All of them.”

She has an M.B.A. but works as a computer technician, making 800 euros (about $1,000) a month, after taxes, in a job whose salary is trending downward. “Ten years from now, we’ll be working for 300 euros,” she joked — sort of. She recently applied for a position, any position, in a German municipality that advertised jobs in a Portuguese newspaper. It was flooded with 8,000 applications, she said.

I met her through Nogueira, the photographer, whom I had met through a Portuguese wine exporter I know. I had asked him, “What’s the mood like in Portugal right now?”

He e-mailed me back a picture that Nogueira had just sent him: one of the darker images she now sees and collects. On a blue doorway, in white, someone had written, “Destiny is erased.”

Nogueira is a divorced mother of two girls, ages 8 and 10. She runs a private kindergarten in Lisbon whose enrollment dropped to 85 students from 125 over the last two years. Those departed children’s parents couldn’t afford it anymore.

Her income fell sharply as a result, and in order to pay for her own daughters’ private school, she had to move into a simpler apartment where she could live rent-free, since her father owned it. But the bank could technically seize it at any moment and probably will within two years, tops. The computer company over which her father presided went bust, and he with it.

If forced to, she’ll put her daughters in public school, but she’s desperate to keep them where they are, because the instruction in languages is so strong. “I want them to learn English — better than me — and German,” she said. “I want them to be able to leave.”

She doesn’t believe that Portugal will rebound anytime soon, in part because she thinks its prosperity a decade ago was an illusion assisted by European Union aid and extravagant, unnecessary infrastructure projects.

“Roads, roads, roads everywhere,” she said. “Portugal seemed perfect.” I remembered having similar thoughts about Greece, which I covered from 2002 to 2004 for The Times. It had used European Union financial assistance and the impetus of the looming Olympics to build, build, build.

And Greeks spent, spent, spent. Athens seemed to have three furniture stores and two kitchen appliance retailers for each one in Italy, where I lived at the time.

Nogueira took me to see wall writings. They’re not everywhere, but she knows where to find them.

We spotted a stencil of the Portuguese flag beside the Greek flag and, snug above them, this message: “Figure out the differences.” Another stencil, stamped on many buildings, said: “All systems have a dead end.”

Many of the epigrams we saw over two days — and many others that she showed me pictures of — are cryptic that way, more emotional than specific. Some are reproduced in a slide show that accompanies this column online.

“Destroy what destroys you.” “The debt isn’t yours.” “I want to be happy.”

And in English, for whatever reason: “Until debt tear us apart.” “They say jump, you say how high.” “Don’t give up.”

Perhaps the saddest one I saw was only one word. “Liberdade,” meaning freedom. But with an arrow pointing heavenward. As if to say there was freedom only in death?

About two months ago she persuaded a Lisbon souvenir store, Lisbon Lovers, to turn her love photos — she still takes them, because romance hasn’t perished — into a packet of 10 postcards.

She’d like to do something with the hate photos, too. But she senses that those would be a much harder sell.

    On Old Walls, New Despair, NYT, 21.4.2012,






Europe’s Economic Suicide


April 15, 2012
The New York Times


On Saturday The Times reported on an apparently growing phenomenon in Europe: “suicide by economic crisis,” people taking their own lives in despair over unemployment and business failure. It was a heartbreaking story. But I’m sure I wasn’t the only reader, especially among economists, wondering if the larger story isn’t so much about individuals as about the apparent determination of European leaders to commit economic suicide for the Continent as a whole.

Just a few months ago I was feeling some hope about Europe. You may recall that late last fall Europe appeared to be on the verge of financial meltdown; but the European Central Bank, Europe’s counterpart to the Fed, came to the Continent’s rescue. It offered Europe’s banks open-ended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and put an end to the panic.

The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course.

Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

In a way, it doesn’t really matter how Spain got to this point — but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.

So if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is actually fairly clear. The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.

What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that in effect locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasizing the bank’s willingness to raise rates at the slightest hint of higher inflation.

So it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff. And the whole world will pay the price.

    Europe’s Economic Suicide, NYT, 15.4.2012,






Europe’s Failed Course


February 17, 2012
The New York Times


Struggling euro-zone economies like Greece, Portugal, Spain and Italy cannot cut their way back to growth. Demanding rigid austerity from them as the price of European support has lengthened and deepened their recessions. It has made their debts harder, not easier, to pay off.

This is not an issue of philosophical debate. The numbers are in.

As The Times’s Landon Thomas Jr. reported this week, Portugal has met every demand from the European Union and the International Monetary Fund. It has cut wages and pensions, slashed public spending and raised taxes. Those steps have deepened its recession, making it even less able to repay its debts. When it received a bailout last May, Portugal’s ratio of debt to gross domestic product was 107 percent. By next year, it is expected to rise to 118 percent. That ratio will continue to rise so long as the economy shrinks. That is, indeed, the very definition of a vicious circle.

Meanwhile, shrinking demand and fears of a contagious collapse keep pushing more European countries toward the danger zone of unsustainable debt.

Why are Europe’s leaders so determined to deny reality? Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, in particular, seem unable to admit that they got this wrong. They are still captivated by the illogical but seductive notion that every country can emulate Germany’s export-driven model without the decades of public investment and artificially low exchange rates that are crucial to Germany’s success.

Mrs. Merkel also seems determined to pander to the prejudices of German voters who believe that suffering is the only way to purge Greece and other southern European countries of their profligate ways.

There’s no question that Greece has behaved inexcusably, spending more than it could afford, failing to collect taxes from some of its richest citizens and fudging its books. And while we sympathize with Greek protests against excessive austerity, we have no patience with politicians who continue to drag their feet over pro-growth reforms and privatizations. But the cure is neither collective punishment nor induced recession. Europe must be willing to help Greece grow out of its problems — on the condition that Greek politicians finally commit themselves to market reforms.

Under strong pressure from international investors, euro-zone leaders have recently adjusted some of their policies. Europe’s central bank has injected much needed liquidity into the Continent’s banking system. Plans are finally under way to add money to a chronically underfinanced European Union bailout fund. But until they abandon the mistaken belief that austerity is the way to debt relief, even those steps won’t be enough.

With Greece rapidly approaching the day (probably next month) when it can no longer pay government salaries and foreign creditors, Europe still has not released needed bailout money. It is not clear whether Mrs. Merkel and Mr. Sarkozy and others are playing chicken with Athens or think they could withstand Greece defaulting and leaving the euro zone. The risks are enormous.

At a minimum, a Greek default would send damaging aftershocks rippling through government finances and banks across Europe. The ideal and the practice of a united Europe would suffer a major blow. Those are high prices for all of Europe to pay for clinging to a failed idea.

    Europe’s Failed Course, NYT, 17.2.2012,






Europe v. World


February 14, 2012
The New York Times



FOR the third time in a century, a bitter conflict fueled by historic grievances has erupted in Europe, with the United States looking from afar and hoping not to get involved. Of course, this is not being fought on the battlefields but in the arcane arenas of international finance. But as in World War I, which President Woodrow Wilson once dismissed as “a drunken brawl,” and in World War II, which America formally stayed out of until Pearl Harbor, the crisis over the euro will require further American involvement — whether we like it or not.

Currently, the United States is discouraging the International Monetary Fund and its non-European members from promising additional financial assistance to Europe.

The American posture is understandable and, at one level, sensible. With our own debt and deficit problems, we and other countries can be forgiven for feeling that it not up to us to extricate Europe from its mistakes and excesses. President Obama, facing a tough re-election fight, is hardly in a position to offer financial aid to Europe. Just as Washington wants Europe to do more to enhance its political and military security, so is it appropriate to demand that Europe do more on its own with respect to its economic and financial security.

But policy passivity risks exacerbating the European crisis and its macroeconomic effects. The United States must show more leadership. First, it must be bolder and more public in setting conditions on Europe’s loan programs. Then, if Europe finally responds convincingly, the United States should rally the rest of the world in a supporting role.

For two years, Europe has dithered over creating a financial firewall to prevent the financial meltdown’s spreading from Greece. Little has come of the discussions. Europe now needs a financial safety net to rescue itself from a self-made conflagration that threatens itself and the rest of the world.

As a measure of the consternation outside of Europe, the economic forecasts released recently by the I.M.F. projected global growth this year at 1.2 percentage points lower than last spring, a deterioration that is largely attributable to mismanagement of the euro crisis. No region of the world has been spared. The loss in global output amounts to $1 trillion.

Two months ago, European leaders asked the I.M.F. and the rest of the world for help, while pledging to make their own financial contribution, channeled through the I.M.F. The United States does not need to put up money, but it has been slow to respond positively. It is time for Washington to insist that I.M.F. assistance be accompanied by conditions on economic and financial policies in the euro area. There should be conditions attached not just to programs to support Greece, Ireland, Portugal and potentially Italy and Spain but also to euro-area policies more broadly because this is a euro-area crisis.

Four conditions are appropriate.

First, countries that can — that is, those where the ratio of government debt to gross domestic product is 90 percent or less — should reverse their projected budget tightening in 2012 and 2013. Those countries are Austria, Finland, France, Slovenia — and, above all, Germany.

Second, the European Central Bank should lower its refinancing rate to 0.25 percent from 1 percent — an action that it has resisted because of an unjustified fear of inflation.

Third, euro-area authorities should set aside at least $1 trillion for a European financial safety net — a far larger amount than what has been publicly discussed so far — to persuade markets to stop betting against debt markets of solvent countries.

Fourth, new loans from the euro area, channeled through the I.M.F back to the euro area, should not be repaid until all existing I.M.F. loans to euro-area countries have been entirely repaid. A change in this treatment is necessary before China, the Persian Gulf countries and other potential contributors are comfortable with throwing a lifeline to a region more prosperous than their own countries.

If these four conditions are met, then the United States should drop its tacit opposition to a proposal by Christine Lagarde, the managing director of the I.M.F. and a former French finance minister, to raise $500 billion to support Europe and actively encourage those countries with the political and financial capacity to participate in the I.M.F. component of a European financial safety net.

Ironically, the I.M.F. will be turning to these emerging markets and developing countries for help just as the euro debt crisis has delayed the timetable for long-promised increases in voting power for those nations at the I.M.F. Given the economic and financial damage inflicted by Europe on the rest of the world, the United States must insist that these promises be strengthened, and speedily fulfilled.


Edwin M. Truman,

a senior fellow at the Peterson Institute

for International Economics,

was director of international finance

at the Federal Reserve Board from 1977 to 1998

and assistant secretary of the Treasury

for international affairs from 1998 to 2001.

He served as a counselor to the Treasury secretary in 2009.

    Europe v. World, NYT, 14.2.2012,






Why Is Europe a Dirty Word?


January 14, 2012
The New York Times



QUELLE horreur! One of the uglier revelations about President Obama emerging from the Republican primaries is that he is trying to turn the United States into Europe.

“He wants us to turn into a European-style welfare state,” warned Mitt Romney. Countless versions of that horrific vision creep into Romney’s speeches, suggesting that it would “poison the very spirit of America.”

Rick Santorum agrees, fretting that Obama is “trying to impose some sort of European socialism on the United States.”

Who knew? Our president is plotting to turn us into Europeans. Imagine:

It’s a languid morning in Peoria, as a husband and wife are having breakfast. “You’re sure you don’t want eggs and bacon?” the wife asks. “Oh, no, I prefer these croissants,” the husband replies. “They have a lovely je ne sais quoi.”

He dips the croissant into his café au-lait and chews it with zest. “What do you want to do this evening?” he asks. “Now that we’re only working 35 hours a week, we have so much more time. You want to go to the new Bond film?”

“I’d rather go to a subtitled art film,” she suggests. “Or watch a pretentious intellectual television show.”

“I hear Kim Kardashian is launching a reality TV show where she discusses philosophy and global politics with Bernard-Henri Lévy,” he muses. “Oh, chérie, that reminds me, let’s take advantage of the new pétanque channel and host a super-boules party.”

“Parfait! And we must work out our vacation, now that we can take all of August off. Instead of a weekend watching ultimate fighting in Vegas, let’s go on a monthlong wine country tour.”

“How romantic!” he exclaims. “I used to worry about getting sick on the road. But now that we have universal health care, no problem!”

Look out: another term of Obama, and we’ll all greet each other with double pecks on the cheek.

Yet there is something serious going on. The Republican candidates unleash these attacks on Obama because so many Americans have in mind a caricature of Europe as an effete, failed socialist system. As Romney puts it: “Europe isn’t working in Europe. It’s not going to work here.”

(Monsieur Romney is getting his comeuppance. Newt Gingrich has released an attack ad, called “The French Connection,” showing clips of Romney speaking the language of Paris. The scandalized narrator warns: “Just like John Kerry, he speaks French!”)

But the basic notion of Europe as a failure is a dangerous misconception. The reality is far more complicated.

What is true is that Europe is in an economic mess. Quite aside from the current economic crisis, labor laws are often too rigid, and the effect has been to make companies reluctant to hire in the first place. Unemployment rates therefore are stubbornly high, especially for the young. And Europe’s welfare state has been too generous, creating long-term budget problems as baby boomers retire.

“The dirty little secret of European governments was that we lived in a way we couldn’t afford,” Sylvie Kauffmann, the editorial director of the newspaper Le Monde, told me. “We lived beyond our means. We can’t live this lie anymore.”

Yet Kauffmann also notes that Europeans aren’t questioning the basic European model of safety nets, and are aghast that Americans tolerate the way bad luck sometimes leaves families homeless.

It’s absurd to dismiss Europe. After all, Norway is richer per capita than the United States. Moreover, according to figures from the United States Bureau of Labor Statistics, per-capita G.N.P. in France was 64 percent of the American figure in 1960. That rose to 73 percent by 2010. Zut alors! The socialists gained on us!

Meanwhile, they did it without breaking a sweat. The Bureau of Labor Statistics says that employed Americans averaged 1,741 hours at work in 2010. In France, the figure was 1,439 hours.

If Europe was as anticapitalist as Americans assume, its companies would be collapsing. But there are 172 European corporations among the Fortune Global 500, compared with just 133 from the United States.

Europe gets some important things right. It has addressed energy issues and climate change far more seriously than America has. It now has more economic mobility than the United States, partly because of strong public education systems. America used to have the highest proportion of college graduates in the world; now France and Britain are both ahead of us.

Back in 1960, French life expectancy was just a few months longer than in the United States, according to the Organization for Economic Cooperation and Development. By 2009, the French were living almost three years longer than we were.

So it is worth acknowledging Europe’s labor rigidities and its lethargy in resolving the current economic crisis. Its problems are real. But embracing a caricature of Europe as a failure reveals our own ignorance — and chauvinism.

    Why Is Europe a Dirty Word?, NYT, 1.14.2012,






Downgrade of Debt Ratings

Underscores Europe’s Woes


January 13, 2012
The New York Times


PARIS — Standard & Poor’s downgraded the credit ratings of France, Italy and seven other European countries on Friday, a move that may have more symbolic than fundamental financial impact but served as a reminder that Europe’s economic woes were far from over.

Another memory jog came Friday from Greece, the original source of Europe’s debt troubles. Talks hit a snag between the new Greek government and the banks and other private investors that Athens hopes will agree to take losses on their debt so that Greece can avoid a default.

Together, those developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight — despite recent signs that a new lending program by the European Central Bank might be easing financial market pressures.

S.& P. warned in December that it might downgrade many of the 17 nations that share the euro, largely because it said European politicians were moving too slowly to strengthen the monetary union and because the euro zone’s problems were propelling Europe toward its second recession in three years.

European politicians, in turn, criticized S.& P.’s downgrade plans as providing no meaningful new information to investors but simply stoking a sense of crisis.

To some extent, the prospect of rating downgrades has already been priced into recent bond auctions by Italy, Spain and other countries. Italy, in fact, completed another fairly successful bond auction on Friday, even as rumors of the downgrades had begun to swirl.

But the downgrades may now add to the borrowing costs of the nations affected. Some commercial banks that are required to hold only the highest-rated government securities will have to replace French bonds with other assets, like bonds of Germany.

And the downgrades cannot help but add to the gloom pervading Europe’s economic climate.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S.&. P said.

Finance Minister François Baroin of France said Friday that the loss of his country’s pristine AAA rating, cut a notch to AA+, was “not good news” but was “not a catastrophe.” He insisted that the country was headed in the right direction and that no ratings agency would dictate the policies of France, which has Europe’s second-biggest economy, behind Germany’s.

But the downgrades pose fresh challenges for Europe’s political leaders, particularly President Nicolas Sarkozy of France, who is expected to run for re-election this spring and had long cited his country’s AAA credit rating as a badge of honor.

In August, when S.& P. cut the United States a notch from its top-rank AAA rating, markets briefly plunged. But bond investors have continued to flock to the debt of the United States, which as the world’s largest economy has retained the perception of a financial safe haven. That has kept the United States government’s interest rates at very low levels. But none of the countries downgraded on Friday can necessarily count on such a reaction.

After Friday, the only euro zone nations retaining their top AAA ratings are Germany, the Netherlands, Finland and Luxembourg.

Italy and Spain, which are considered the two big euro-zone economies most vulnerable to an escalation of debt problems, both were downgraded two notches, Italy to BBB+ and Spain to A.

“It will make it harder to erect firewalls around struggling euro zone economies and convince investors that things are more sustainable,” said Simon Tilford, the chief economist for the Center for European Reform in London.

Stocks were down broadly if not deeply in Europe and the United States on Friday, as rumors of the downgrades preceded S.& P.’s announcement, which came after the close of trading on Wall Street. And the euro fell to a 16-month low against the dollar.

Just as significant as the ratings downgrades may be the suspension on Friday of the creditor talks in Greece — whose debt S.& P. long ago gave junk status.

In October, the European Union pledged to write off 100 billion euros ($127.8 billion) of Greece’s debt if bondholders would agree to voluntarily accept 50 percent losses on their Greek holdings. Such an arrangement, known as private-sector involvement, or P.S.I., has been pushed by Chancellor Angela Merkel of Germany as a way of forcing banks, not only European taxpayers, to foot the bill for bailing out Greece.

But talks broke down on Friday between Greece and the commercial banks.

“Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach,” the Institute of International Finance, which negotiates on behalf of the banks, said in a statement on Friday, after its leader, Charles Dallara, left Athens.

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward,” the statement added, “has not produced a constructive consolidated response by all parties.”

The reference to a “voluntary approach” might be a not-so-subtle message that if Europe pushed too hard on this point, then the creditors could no longer accept the agreement as a voluntary one. That is crucial, because an involuntary debt revamping would be seen by creditors as a default — a step Greece and Europe are trying hard to avoid.

If Greece defaults, it could set off the activation of credit default swaps — a type of financial insurance. If the issuers of that insurance have to start paying up, many analysts fear the same sort of falling dominoes of i.o.u.’s that cascaded through the financial industry after the subprime mortgage market collapsed in the United States in 2007 and 2008.

Talks are expected to resume next week. If Greece fails to persuade enough bondholders to take voluntary losses, it may pass a law activating clauses in the bonds that would force creditors to take losses.

“We should be ready, if we don’t have 100 percent participation and if Europe doesn’t want to give us more money,” Christos Staikouras, a member of the Greek Parliament from the center-right New Democracy opposition party and its economic spokesman, said in an interview.

The tense negotiations over Greece’s debt come as the Greek government struggles to find a consensus to pass the budget reforms demanded by its so-called troika of lenders — the European Central Bank, European Union and International Monetary Fund — in exchange for releasing the next installment of bailout money, a 30 billion euro ($38.3 billion) payout scheduled to be released in March.

The Greek uncertainties only add to the regional doubt that helped set off the S.& P. downgrades. Europe’s economy, having barely clawed its way out of a recession three years ago, is again tipping into a new one. France, Spain, Greece and Portugal are already in recessions, and Italy is expected to head into one as a result of belt-tightening measures being pushed by its new prime minister, Mario Monti.

Austria, the other country whose AAA rating was cut a notch on Friday, could be in for trouble if the political turmoil in neighboring Hungary affects Austrian banks, S.& P. said.

Even mighty Germany, with most of its neighbors in a downturn, is also expected to slip into a shallow recession this year. On Friday, S.& P. kept Germany’s ratings untouched, citing its continued competitiveness and financial rigor. But it said it could lower Germany’s rating if its debt, now 80 percent of gross domestic product, reached 100 percent.


David Jolly and Steven Erlanger

contributed reporting from Paris,

Landon Thomas Jr. from London

and Gaia Pianigiani from Rome.

    Downgrade of Debt Ratings Underscores Europe’s Woes, NYT, 13.1.2012,






Austerity Reigns Over Euro Zone

as Crisis Deepens


January 1, 2012
The New York Times


Europe’s leaders braced their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach.

Saying that Europe was facing its “harshest test in decades,” Chancellor Angela Merkel of Germany warned on New Year’s Eve that “next year will no doubt be more difficult than 2011” — a marked change in tone from a year ago, when she praised Germans for “mastering the crisis as no other nation.”

Her blunt message was echoed in Italy, France and Greece, the epicenter of the debt crisis, where Prime Minister Lucas Papademos asked for resolve in seeing reforms through, “so that the sacrifices we have made up to now won’t be in vain.”

While the economic picture in the United States has brightened recently with more upbeat employment figures, Europe remains mired in a slump. Most economists are forecasting a recession for 2012, which will heighten the pressure governments and financial institutions across the Continent are seeing.

Adding to the gloomy outlook is the prospect of a downgrade in France’s sterling credit rating, a move that analysts say could happen early in the new year and have wide-ranging consequences on efforts to stabilize Europe’s finances.

Despite criticism from many economists, though, most European governments are sticking to austerity plans, rejecting the Keynesian approach of economic stimulus favored by Washington after the financial crisis in 2008, in a bid to show investors they are serious about fiscal discipline.

This cycle was evident on Friday, when Spain surprised observers by announcing a larger-than-expected budget gap for 2011 even as the new conservative government there laid out plans to increase property and income taxes in 2012.

Indeed, even in the country where the crisis began, Greece, the cycle of spending cuts, tax increases and contraction has not resulted in a course correction, and the same path now lies in store for much larger economies like those of Italy and Spain.

“Every government in Europe with the exception of Germany is bending over backwards to prove to the market that they won’t hesitate to do what it takes,” said Charles Wyplosz, a professor of economics at the Graduate Institute of Geneva. “We’re going straight into a wall with this kind of policy. It’s sheer madness.”

Rather than the austerity measures now being imposed, Mr. Wyplosz said he would like to see governments halt the recent tax increases and spending reductions, and instead cut consumption taxes in a bid to encourage consumer spending. More belt-tightening, he said, increases the likelihood that Europe will see a “lost decade” of economic torpor like Japan faced in the 1990s.

In fact, economists and strategists on both sides of the Atlantic have been steadily ratcheting down their growth expectations for 2012.

“Europe is likely to have a meaningful recession in 2012,” said Tobias Levkovich, Citigroup’s chief equity strategist. While Mr. Levkovich does not see that as a significant threat to the bottom line of most American businesses — he estimates that Europe accounts for about 8.5 percent of sales for the typical company in the Standard & Poor’s 500-stock index — the psychological effects on global markets will be magnified if political opposition to austerity increases.

“Powerful street protests could bring it back to the front pages,” he said. “We’ve seen episodic crises in Europe over the past two years. It’s a recurring event.” He expects Europe to remain a key worry for investors worldwide in 2012.

Neville Hill, head of European economics at Credit Suisse, expects gross domestic product in the euro zone to shrink by 0.5 percent in 2012, with the worst of the pain being felt in the first quarter. At the same time, borrowing needs will remain elevated, with Italy and Spain planning to raise more than 100 billion euros in the first quarter alone.

“We shouldn’t underestimate the scale of the challenge the euro zone faces in early 2012,” Mr. Hill said. “Italian and Spanish sovereign borrowers are at the foot of the mountain, rather than the top. The first quarter is a crunch point.”

The Continent’s economic outlook will take center stage on Jan. 9, when Mrs. Merkel and President Nicolas Sarkozy of France will discuss a new fiscal treaty intended to impose stringent budget requirements on European Union nations. Then on Jan. 30, European Union leaders will gather in Brussels to discuss ways to spur growth.

There are some bright spots as Europe enters 2012. The recent drop of the euro currency against foreign rivals like the yen and the dollar makes European exports more competitive — a critical advantage for Germany, Europe’s largest exporter and its largest economy. German unemployment now stands at 5.5 percent, the lowest since German reunification.

About 15 percent of the euro zone’s gross domestic product comes from German consumer spending, more than the contribution of Greece, Spain, Portugal and Ireland combined, according to Mr. Hill.

The first test for the Continent will come this Thursday, when France is expected to raise as much as 8 billion euros. On Jan. 12, Spain plans to auction 3 billion euros worth of euro debt, followed by Italy the next day with 9 billion euros. Along with governments tapping the market, European banks are also expected to keep borrowing heavily as loans come due.

In the first quarter of 2012, about 215 billion euros worth of euro zone bank debt must be rolled over, according to Julian Callow, chief European economist at Barclays.

Over all, Mr. Callow said, “the big picture is one of very restricted visibility. The choice is whether you get a mild or more severe recession.”

Despite a move by the European Central Bank on Dec. 21 to provide 489 billion euros in cheap, long-term credit to European banks, the central bank remains reluctant to take more aggressive steps to become the lender of the last resort as the Federal Reserve did in the wake of the financial crisis in the United States in 2008.

In particular, the European bank has remained steadfast in its opposition to buying up sovereign debt outright, for fear of encouraging a return to the kind of deficit spending that got countries like Greece — which continues to rely on bailout money — into trouble in the first place. But the bank’s move to inject liquidity on Dec. 21 was seen as a kind of backdoor way of supporting government bonds, since it is likely that a substantial portion of the money the banks borrowed was quickly parked in sovereign bonds.

Rates have fallen since then, especially on short-term notes. At an auction Wednesday of Italian six-month bills, the yield fell to 3.25 percent from a record 6.5 percent yield a month earlier. But plenty of caution remains — a sale by Italy Thursday of longer-term debt, including 10-year bonds, managed to raise only 7 billion euros instead of the 8.5 billion euros that had been forecast.

“Europe is going about this the hard way,” Mr. Callow added. “It’s not really using the central bank to alleviate these pressures in a dominant way.”

In addition, with governments in Spain, Portugal, Italy and Ireland planning more austerity measures, Mr. Callow said, “this is likely to fuel growing political and social tension. The markets will be closely watching the level of domestic support.”


Melissa Eddy contributed reporting.

    Austerity Reigns Over Euro Zone as Crisis Deepens, NYT, 1.1.2012,






As Tension Rises in France,

Harsh Talk With Britain


December 16, 2011
The New York Times


PARIS — To the long list of victims emerging from Europe’s financial crisis, make room for a new one: the “Entente Cordiale” between Britain and France.

A week after the British prime minister, David Cameron, refused to sign a Europe-wide pact that leaders had hoped would stabilize the euro zone, a cross-Channel spat has escalated into a full-blown war of words. Fears in Paris have reached a fever pitch over the prospect that France is about to lose its triple-A credit rating, the highest available.

President Nicolas Sarkozy started preparing the country this week for the imminent loss of its gilt-edged status, though Fitch Ratings on Friday affirmed France’s top credit rating while changing its outlook to negative.

A downgrade by Standard & Poor’s Ratings Services, which has put France on review with a negative outlook, became more likely last week after a summit meeting of European Union leaders was widely declared a flop.

But in the last two days, French officials have unleashed a diatribe suggesting that Britain, not France, is far more deserving of a downgrade.

“At this point, one would prefer to be French than British on the economic level,” the French finance minister, François Baroin, declared Friday.

The ruckus comes as Mr. Sarkozy prepares for a tense re-election campaign heading into what promises to be a gloomy year economically for the country and much of the rest of Europe.

Troubled by the crisis in the euro zone, France is probably already in a recession, the government and the central bank warned this week, with a decline in economic activity expected to continue at least through March. Business and consumer sentiment have deteriorated, and unemployment is stuck at just below 10 percent.

Paris has embraced two austerity plans since the summer in a bid to reduce the country’s chronic budget deficit and meet the demands from Berlin to set an example for the rest of Europe to follow. Officials say those steps are also necessary to prevent France’s international borrowing costs from rising to unhealthy levels because of investors’ concern that France is losing the capacity to foot a growing bill from the euro zone crisis.

The verbal onslaught seemed aimed at deflecting attention from those problems. Within hours, headlines blared from British news Web sites taking exception to the perceived French snub.

“The gall of Gaul!” read The Mail Online. An article in The Guardian accused French politicians of descending “to the level of the school playground.”

Both countries are in poor economic shape. While the French are not suffering anything like the distress being felt in Greece, Portugal and Ireland — which cannot pay their bills without help from the European Union and the International Monetary Fund — the French government is not immune to speculators who see its rising debt levels as making it vulnerable to attacks in the bond market.

France’s debt as a percentage of gross domestic product was 82.3 percent in 2010, a figure that is expected to rise in the coming years even after it tightens its belt. Britain’s debt was 75 percent of its G.D.P. and also rising fast despite a stringent austerity program that is, at least for now, only adding to the country’s economic woes.

In France, the budget deficit was 7.1 percent of G.D.P. last year. Mr. Sarkozy has pledged to reduce it to 3 percent by 2013, partly through higher taxes, but he has been reluctant to spell out which social programs may have to be cut as well, out of fear of further alienating already disenchanted voters.

A looming recession is making that fiscal dilemma even worse by adding to social costs and reducing tax revenue.

“It is very bad news for people, because it means the unemployment rate will increase as more firms will have to fire people or go bankrupt in the private sector,” said Jean-Paul Fitoussi, a professor of economics at L’Institut d’Études Politiques in Paris. “It’s also bad news for politicians. They are in a kind of a trap because they have to say to the people that there is nothing they can do for them.”

As he walked to his job in an affluent suburb of Paris, Steve Kamguea, 22, an entry-level banker at AlterValor Finances, said he saw little hope for a revival of economic growth in France.

“With the problems in the euro zone hitting us, people are anxious about what will happen in the future,” Mr. Kamguea said. “Purchasing power is already low, and it’s hard to get by,” he added, shielding his face from a driving cold rain. “Many people don’t know if they can find a job, and if they do, how much it will pay.”

The prospect of losing France’s sterling credit rating may throw more fuel on the fire. Both Standard & Poor’s and Moody’s said they would review all European Union countries for a possible downgrade soon after last week’s summit meeting.

On Friday, Fitch left France off a list of six euro zone countries that it warned could be downgraded soon. The agency named Belgium, Cyprus, Ireland, Italy, Spain and Slovenia.

But Fitch, in a separate statement reaffirming France’s AAA rating, revised its outlook on long-term debt to negative from stable. It suggested that France could lose the top rating over the next two years, saying it was the most exposed of other euro countries to a further intensification of the crisis.

As for last week’s euro crisis summit and actions by the European Central Bank to ease a banking credit crunch, Fitch said the commitments “were not sufficient to put in place a fully credible financial firewall to prevent a self-fulfilling liquidity and even solvency crisis for some non-AAA euro area sovereigns. In the absence of a comprehensive solution, the euro zone crisis will persist and likely be punctuated by episodes of severe financial market volatility.”

In the six-country announcement, Fitch was even more severe, concluding that after the summit meeting, “a ‘comprehensive solution’ to the euro zone crisis was technically and politically beyond reach.”

Also Friday, Moody’s Investors Service downgraded Belgium by two notches to Aa1 with a negative outlook.

Because a potential credit downgrade has been widely telegraphed, most French officials do not expect significant damage. Many cite the one-notch downgrade S.& P. made to the United States’ AAA credit rating this summer, saying the move did not stop investors from flocking to United States Treasury securities.

In Europe, “if everyone is downgraded at the same time, it may be a nonevent,” said one high-ranking French finance official, who spoke on condition of anonymity. In any case, the official added, French debt, and that of most other euro zone governments, is already trading in financial markets as if the downgrade had already happened.

A senior French banking official insisted that a downgrade would not affect the French banking industry nearly as much as new regulatory requirements that banks raise tens of billions of euros in new capital to help guard against a further worsening of the debt crisis in the euro zone.

Some banks in France, Italy, Spain and even Germany have already started to pull back on lending to consumers and businesses, analysts say. A number of European banks are planning to sell assets to raise fresh capital.

Those issues are probably far more worrisome than the prospect of a credit downgrade, but that has not stopped the rating question from infiltrating the national psyche and dominating discussions of public affairs. It has even hit the streets. “France will lose its Triple-A,” lamented a recent scrawl of graffiti on the side of a commercial building in the chic Marais quarter.

Despite the growing nervousness, the high-ranking French official insisted Friday that France was not calling on the ratings agencies to actually pull down Britain’s own triple-A rating. “That would be stupid,” he said.

The message, the official added, was more to tell the ratings agencies that there was “no ground to downgrade France, but if a downgrade does happen, there are other countries that should be in the same spot.”

That did little to placate Britain’s political establishment. Nick Clegg, Britain’s deputy prime minister, telephoned Prime Minister François Fillon of France on Friday to object to France’s criticism.

Mr. Fillon “made clear it had not been his intention to call into question the U.K.’s rating but to highlight that ratings agencies appeared more focused on economic governance than deficit levels,” Mr. Clegg’s office said.

Mr. Clegg accepted the explanation but had a blunt reply of his own. “Recent remarks from members of the French government about the U.K. economy were simply unacceptable,” Mr. Clegg told Mr. Fillon, according to the statement. “Steps should be taken to calm the rhetoric.”

    As Tension Rises in France, Harsh Talk With Britain, NYT, 16.12.2011,






A Treaty to Save Euro May Split Europe


December 9, 2011
The New York Times


BRUSSELS — European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets. But efforts to get unanimity among the 27 members of the European Union, as desired by Germany, failed as Britain refused to go along.

In a day of historic, seemingly tectonic shifts in the architecture of Europe, all 17 members of the European Union that use the euro agreed to the new treaty, along with six other countries that wish to join the currency union eventually. Twenty years after the Maastricht Treaty, which was designed not just to integrate Europe but to contain the might of a united Germany, Berlin effectively united Europe under its control, with Britain all but shut out.

Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.

“It is a very good outcome for euro area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,” Mr. Draghi said early Friday morning.

The support of Mr. Draghi and the bank to continue to buy the bonds of troubled large countries like Italy and Spain is crucial to buy time for their economic adjustment and restructuring, to reduce their debt and avoid a collapse of the euro.

The outcome was a significant defeat for David Cameron, the British prime minister, who had sought assurances to protect Britain’s financial services sector in exchange for doing a deal. Mr. Sarkozy said that “David Cameron requested something we all considered unacceptable, a protocol in the treaty allowing the U.K. to be exempted for a certain number of financial regulations.”

Mr. Cameron said, “What was on offer wasn’t in British interests, so I didn’t agree to it.” He conceded that there were risks with others going ahead to form a separate treaty, but added, “We will insist that the E.U. institutions, the court and the Commission work for all 27 nations of the E.U.”

The prime minister seemed to be betting that his unhappy coalition partners, the Liberal Democrats, would not bolt over the issue, and that calculation seemed to be right. On Friday, the party’s leader, Nick Clegg, said that as much as he regretted the turn of events, Mr. Cameron’s demands had been “modest and reasonable.”

The European Council president, Herman Van Rompuy, said that in addition, the leaders agreed to provide an additional 200 billion euros to the International Monetary Fund to help increase a “firewall” of money in European bailout funds to help cover Italy and Spain. He also said a permanent 500 billion euro European Stability Mechanism would be put into effect a year early, by July 2012, and for a year, would run alongside the existing and temporary 440 billion euro European Financial Stability Facility, thus also increasing funds for the firewall.

The leaders also agreed that private sector lenders to euro zone nations would not automatically face losses, as had been the plan in the event of another future bailout. When Greece’s debt was finally restructured, the private sector suffered, making investors more anxious about other vulnerable economies.

Mr. Sarkozy said that the institutions of the European Union would be able to police the new pact, though Britain may dispute that.

Chancellor Angela Merkel of Germany, who pressed hard for a treaty that would codify and enforce debt limits and central oversight of national budgets, said the decisions made here will result in increased credibility for the euro zone. “I have always said the 17 states of the euro zone need to win back credibility,” she said. “And I think that this can happen, will happen, with today’s decisions.”

European financial markets strengthened mildly on word of the agreement. The Euro Stoxx 50 index, a barometer of euro zone blue chips, gained 1.5 percent, while broader barometers rose slightly, and stocks rose in early United States trading as well. The euro’s value strengthened to $1.3369, up from $1.3338 on Thursday. In the bond market, the borrowing costs of the euro region’s two most closely watched debt-ridden economies, Italy and Spain, were little changed.

President Obama said on Thursday that the European leaders’ efforts to reach a long-term “fiscal compact where everybody’s playing by the same rules” were “all for the good.” Yet he added, “But there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”

The best hope for providing that shot of confidence has been seen as the European Central Bank. But the bank’s president, Mr. Draghi, at a news conference in Frankfurt on Thursday, seemed to back away from signals he sent last week that a grand bailout bargain might be in the works — a big infusion from the central bank in exchange for a commitment to greater fiscal discipline from the European heads of state.

On Thursday, Mr. Draghi said that he was “surprised” that a speech he made last week had been widely interpreted as meaning the central bank stood ready to shore up weak European Union members like Italy and Spain by buying many more of their bonds — or to possibly work in concert with the International Monetary Fund. He played down the I.M.F. idea Thursday as too “legally complicated” and said it might violate the spirit of the euro treaty.

Many analysts were stunned by what appeared to be Mr. Draghi’s turnaround.

“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” Carsten Brzeski, an economist at the Dutch bank ING, wrote in a note to clients. “According to Draghi, it was up to politicians to solve the debt crisis.”

For now, Mr. Draghi appeared to have left the subject of government bailouts to the heads of state, while focusing the European Central Bank’s efforts on the less controversial business of keeping money flowing through commercial banks.

The main step the central bank took Thursday, which buoyed stock markets before Mr. Draghi held his news conference, was to cut its main interest rate to 1 percent, from 1.25 percent. That returned the rate to the record low level that had prevailed from 2009 until April. Mr. Draghi did not rule out the possibility that the rate could go even lower.

The central bank also announced additional measures to aid euro zone banks suffering from a dearth of the short-term lending and to avert a credit squeeze. The European Central Bank said it would start giving commercial banks loans for three years, compared with a maximum of about one year previously. Banks will be able to borrow as much as they want at the benchmark interest rate.

They must provide collateral, but the central bank on Thursday also broadened the range of securities it accepts, which will help banks that have large amounts of assets that are hard to sell. The central bank also eased its requirements for reserves that banks must maintain, which frees more cash.

In a sign of how badly banks need the money, 34 institutions took advantage of a new lower interest rate offered by the European Central Bank in conjunction with other central banks for three-month loans denominated in dollars.

Earlier Thursday, the Bank of England held its benchmark rate steady at a record low 0.5 percent, after the bank’s governor warned of growing risks for Britain’s economy from the euro area. Mr. Draghi, who took over at the European Central Bank from Jean-Claude Trichet on Nov. 1, has wasted little time reversing rate increases that Mr. Trichet oversaw in April and July. Those increases were widely criticized as an overreaction to tentative signs of inflation and may have helped hasten a widespread economic slowdown in Europe.

The economy of the 17 countries in the euro currency union is almost stagnant, growing just 0.2 percent in the third quarter, with unemployment at 10.3 percent. Economists expect the euro zone economy to slip into recession early next year if it has not happened already. Declining output makes the debt crisis even worse by cutting tax receipts.

The E.C.B. lowered its growth projections Thursday, saying that output could fall as much as 0.4 percent next year.

Lower interest rates will be particularly welcome in countries like Portugal and Italy, where the debt crisis has pushed up interest rates and made it harder for businesses to get loans. And the cuts will provide immediate relief to the many homeowners in Ireland and other euro countries who have variable-rate mortgages tied to the central bank’s rate.

But many economists continue to argue that ultimately the European Central Bank will have to intervene more aggressively in the region’s government bond markets, to prevent borrowing costs for Italy and other countries from becoming so high that they are unable to refinance their debt.


Jack Ewing contributed reporting from Frankfurt,

and Mark Landler from Washington.

    A Treaty to Save Euro May Split Europe, NYT, 9.12.2011,






UK isolation grows

as three more countries

reconsider eurozone treaty

The 23 EU countries ignoring the UK veto
may be joined by Hungary, Sweden
and the Czech Republic, leaving Britain alone


Friday 9 December 2011
12.51 GMT
Ian Traynor, Nicholas Watt and David Gow in Brussels
This article was published on guardian.co.uk
at 12.51 GMT on Friday 9 December 2011.
It was last modified at 15.26 GMT
on Friday 9 December 2011.


The sense of unprecedented isolation afflicting Britain in Europe has been reinforced in Brussels after Hungary joined Sweden and the Czech Republic in reconsidering whether to take part in a new pact aimed at rescuing the euro.

Britain parted ways with the rest of Europe earlier on Friday morning when David Cameron dramatically wielded his veto to block Germany's drive to reopen the Lisbon treaty in an attempt to rescue the single currency.

Initially 23 of the 27 EU countries said they would ignore the British veto and negotiate a new pact outside the treaty. Later the other three waverers said they would take the agreement to their own parliaments, leaving the UK on its own.

The prime minister's unexpected move was seen as a watershed in Britain's fractious membership of the EU. He insisted on securing concessions on and exemptions from EU financial markets regulation as the price of his assent to the German-led euro salvation blueprint. The others balked, accusing Cameron of putting Britain's perceived interests ahead of resolving the EU's worst crisis.

The prime minister blocked the accord, meaning that Britain is on its own while Cameron has failed to secure the concessions for Britain's strong financial services sector. In one of the most significant developments in Britain's 38-year membership of the EU, the British prime minister said early on Friday morning he could not allow a "treaty within a treaty" that would undermine the UK's position in the single market.

Cameron's blocking tactics frustrated the German chancellor Angela Merkel's plans to secure a new punitive rulebook for the single currency by anchoring it in the Lisbon treaty. Plan B is to create a "fiscal compact" among a coalition of the willing – probably everyone but Britain – with quasi-automatic penalties for countries breaking the single currency rules and stronger powers of intervention for European institutions policing the pact.

Britain, however, is also likely to contest the new architecture, arguing that bodies like the European commission responsible to all 27 member states should not be given a role to police the euro.

The outcome on Friday morning, following nine hours of negotiation through the night, was a setback for Merkel, perhaps a disaster for Britain, and a partial victory for Nicolas Sarkozy of France, who had been pressing for an inter-governmental agreement among the 17 members of the eurozone to underpin tough new fiscal rules for the single currency.

"We could not accept this," he said of Cameron's demands.

But many other countries opposed the Merkel plan to reopen the Lisbon treaty and will not be disappointed that the German scheme has failed. Merkel nonetheless stressed that the accord would stabilise the euro. "I have always said, the 17 states of the eurogroup have to regain credibility," she said. "And I believe with today's decisions this can and will be achieved."

Cameron wielded the British veto in the early hours of the morning after France succeeded in blocking a series of safeguards demanded by Britain to protect the City of London. Cameron had demanded that:

• Any transfer of power from a national regulator to an EU regulator on financial services would be subject to a veto.

• Banks should face a higher capital requirement.

• The European Banking Authority should remain in London. There were suggestions that it might be consolidated in the European Security and Markets Authority in Paris.

• The European Central Bank be rebuffed in its attempts to rule that euro-denominated transactions take place within the eurozone.

Sarkozy rejected the demands out of hand.

Cameron defended his decision to wield the British veto on the grounds that eurozone members could have used the institutions of the EU to undermine Britain's interests in the single market without his safeguards. Speaking at 6.19am local time, he said: "I said before I came to Brussels that if I couldn't get adequate safeguards for Britain in a new European treaty then I wouldn't agree to it. What is on offer isn't in Britain's interests so I didn't agree to it.

"Of course we want the eurozone countries to come together and to solve their problems. But we should only allow that to happen inside the European Union treaties if there are proper protections for the single market and for other key British interests. Without those safeguards it is better not to have a treaty within a treaty but to have those countries make their arrangements separately."

Cameron acknowledged there were risks in striking out alone. But he said Britain would protect its position by insisting that the institutions of the EU could not be used to enforce the new fiscal rules.

"While there were always dangers of agreeing a treaty within a treaty, there are also risks with others going off and forming a separate treaty. So we will insist that the EU institutions – the court, the commission – that they work for all 27 nations of the EU. Indeed those institutions are established by the treaty and that treaty is still protected."

Cameron indicated that Britain may go further and block the use of EU institutions if eurozone countries club together to shape financial regulations and labour laws.

The decision by Cameron will transform Britain's relations within the EU. Other projects, such as the euro and the creation of the passport-free Schengen travel area, have gone ahead without British involvement. But it is the first time since Britain joined in 1973 that a treaty that strikes at the heart of the workings of the EU will be agreed without a British signature. Britain signed the 1991 Maastricht treaty after winning an opt-out on the single currency and the social chapter.

Cameron will be able to tell Eurosceptic backbenchers he refused to sign a treaty that would have undermined British interests. But some Eurosceptics may say the new treaty marks a major change in the EU and that the British people should be consulted in a referendum.

Sources in Brussels say Cameron is playing a "dangerous game" because financial service regulations are decided by the system of qualified majority voting in which Britain does not have a veto. Britain can form a "blocking minority" at the moment to stop harmful legislation. But this will shrink as more countries join the euro.

The summit also agreed that:

• Eurozone countries will provide up to €200bn in extra resources to the International Monetary Fund to help countries in difficulty.

• The eurozone's two bailout funds, the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF), will be managed by the European Central Bank.

    UK isolation grows as three more countries reconsider eurozone treaty,
    G, 9.12.2011,






Britain Suffers

as a Bystander to Europe’s Crisis


December 7, 2011
The New York Times


LONDON — No matter what happens at the European summit meeting on the euro in Brussels that begins Thursday, Britain is sure to lose.

There is looming recognition at 10 Downing Street that if the euro falls, Britain will sink along with everyone else. But if Europe manages to pull itself together by forging closer unity among the 17 countries that use the euro, then Britain faces being ever more marginalized in decisions on the Continent.

Many Europeans have been irritated by British Conservatives’ quiet satisfaction throughout the crisis with the decision not to join the euro (the United Kingdom ostentatiously kept its currency, the pound), particularly when juxtaposed with the panic over Britain’s inability to have any significant impact on Europe’s biggest crisis since the end of the cold war.

“Germany is the unquestioned leader of Europe,” said Charles Grant, director of the Center for European Reform. “France is definitely subordinate to Germany, and Britain has less influence than at any time I can recall.”

Of particular concern here is the health of Britain’s financial industry, a vital economic engine at a time of slowing growth and deep cuts in government spending, which is seen to be vulnerable to new European regulations that could hurt British competitiveness in global markets.

Despite all that is at stake, Prime Minister David Cameron’s coalition government looks doomed to be cast in the role of impotent bystander, torn between anti-Europe forces and European leaders’ moves toward greater fiscal integration on the Continent — with or without Britain.

On Wednesday, Mr. Cameron told a fractious Parliament that his main goal in Brussels was to “seek safeguards for Britain” and “protect our own national interest” by resisting measures like a proposed financial transaction tax. But such Britain-centric rhetoric has annoyed the brokers of Europe’s future, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, who are trying to find a way to save the euro while imposing legally binding fiscal discipline on the Continent’s floundering southern economies.

They have not been shy about expressing their frustration. Just six weeks ago, after Mr. Cameron tried to inject himself into talks about the euro, Mr. Sarkozy said bluntly, “You have lost a good opportunity to shut up.” He later added: “We are sick of you criticizing us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.”

Steven Fielding, director of the Center for British Politics at the University of Nottingham, said: “Cameron might sound off to look good to his backbenchers, but in Europe, he hasn’t got much to negotiate with. It’s been made clear that France and Germany can do whatever the hell they like and Britain can say yes or no, but it doesn’t matter, since they’ll do it anyway.”

The paradox of this is that plans for tighter integration among the 17 euro zone countries are at the same time destined to create greater divisions within Europe — divisions between countries that use the euro and those that do not, and divisions within the euro zone itself, depending on the health and importance of the various economies. A two-, three-, four- and even five-tier Europe could possibly emerge.

“The markets have defined who are the good guys and who are the bad guys, and their interest rates are in many ways the manifestation of this,” said Alexander Stubb, Finland’s minister for European affairs. “When we look at future E.U. rules, it is the triple-A countries that are running the show.”

The political price of Britain’s self-proclaimed exceptionalism was made clear with a vengeance to Mr. Cameron on Wednesday, when he was pounded from all sides in a raucous session in the House of Commons. Fractious Europe-hating Conservative backbenchers called for him to stand firm on Europe, to “show bulldog spirit,” in a “resolute and uncompromising defense of British national interests,” as one legislator, Andrew Rosindell, put it.

Trying to placate them, the prime minister pledged not to sign anything that did not contain “British safeguards.”

Meanwhile, should the Europeans in the euro zone “go ahead with a separate treaty” that leaves out the noneuro countries, Mr. Cameron explained, “then clearly that is not a treaty that Britain would be signing or would be amending.” However, he said, he would still retain “some leverage” over the process.

“The more the euro zone countries ask for, the more we will ask for in return,” he said. But France and Germany have already made it abundantly clear that they will go ahead with their plans for the euro zone without regard to the needs or interests of Britain.

The explosive debate in Britain, while never welcome, comes at an unusually inopportune time for Mr. Cameron. The so-called special relationship with the United States is not looking all that special right now, and enormous cuts in defense spending are making it hard for the British military to maintain its status as America’s right hand.

The austerity budget is fraying at the edges, amid strikes and protests over layoffs and rising fees. Growth has been slowing, despite Mr. Cameron’s insistence that businesses would pick up the pace when it became clear that the government’s finances were sound. And now Britain looks to be in an unusually poor position to defend its interests in Europe.

Members of the Labour opposition lost no time exploiting what they saw as Mr. Cameron’s weakness on the issue.

“Six weeks ago, he was promising his backbenchers a handbagging for Europe, and now he’s just reduced to hand-wringing,” the Labour leader, Ed Miliband, told Parliament, as his party members whooped their approval. “The problem for Britain is that at that most important European summit for a generation, that matters hugely for businesses up and down the country, the prime minister is simply left on the sidelines.”

Even more worryingly for the government, several prominent Conservatives, including the cabinet minister in charge of Northern Ireland, Owen Paterson, broke ranks with the party line and said flatly that Mr. Cameron should make good on what they called his promise to hold a national referendum on any proposed European treaty changes. With much of Britain in the anti-Europe camp, the no side would surely prevail in such a vote.

Mrs. Merkel has said that she would like any treaty changes to be approved by the entire European Union, so in theory Britain could exercise a veto. But Germany and France have also said they will make changes in the way the euro zone alone operates, if that is the only way to defend the common currency.

Most dangerous to Mr. Cameron was the unwelcome intervention of the mayor of London, Boris Johnson, a potential wild-card rival for the Conservative leadership. Mr. Johnson, who is perhaps Britain’s most popular politician, enjoys injecting himself into questions of foreign policy when the spirit moves him.

If Britain was asked to sign a treaty creating “a very dominant economic government” across Europe, he told BBC radio, then Mr. Cameron should veto it. “And if we felt unable to veto it, I certainly think that it should be put to a referendum,” he said. He added that in rescuing the euro, there was a danger of “saving the cancer, not the patient.”

Mr. Cameron says he has pledged to call a referendum on any treaty that would transfer more power from Britain to Europe. None of the current possibilities features such a treaty, he said, so there is no cause for a referendum.

The other political pressure on Mr. Cameron, of course, comes from the unique challenge of a coalition government with partners who disagree on many issues, including Europe. This puts him and his deputy prime minister, Nick Clegg, a Liberal Democrat, in tough spots for equal but opposing reasons.

“Nick Clegg has party activists who don’t like the idea of the coalition and don’t like many of the things it has done, and they’re the most Europhile of the three main parties,” Mr. Fielding of the Center for British Politics said. “And David Cameron has on his back benches people who don’t like the idea of the coalition and don’t like many of the things it has done, and they’re the most Euroskeptic. It’s a tricky position for them all to be in.”


Sarah Lyall reported from London, and Stephen Castle from Brussels.

    Britain Suffers as a Bystander to Europe’s Crisis, NYT, 7.11.2011,






Killing the Euro


December 1, 2011
The New York Times


Can the euro be saved? Not long ago we were told that the worst possible outcome was a Greek default. Now a much wider disaster seems all too likely.

True, market pressure lifted a bit on Wednesday after central banks made a splashy announcement about expanded credit lines (which will, in fact, make hardly any real difference). But even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis.

How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!

But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.

The story so far: In the years leading up to the 2008 crisis, Europe, like America, had a runaway banking system and a rapid buildup of debt. In Europe’s case, however, much of the lending was across borders, as funds from Germany flowed into southern Europe. This lending was perceived as low risk. Hey, the recipients were all on the euro, so what could go wrong?

For the most part, by the way, this lending went to the private sector, not to governments. Only Greece ran large budget deficits during the good years; Spain actually had a surplus on the eve of the crisis.

Then the bubble burst. Private spending in the debtor nations fell sharply. And the question European leaders should have been asking was how to keep those spending cuts from causing a Europe-wide downturn.

Instead, however, they responded to the inevitable, recession-driven rise in deficits by demanding that all governments — not just those of the debtor nations — slash spending and raise taxes. Warnings that this would deepen the slump were waved away. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”

But the confidence fairy was a no-show.

Wait, there’s more. During the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe. This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north. And it matters which: If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems. The chances of success would be much greater if the gap were closed via rising prices in the north.

But to close the gap through rising prices in the north, policy makers would have to accept temporarily higher inflation for the euro area as a whole. And they’ve made it clear that they won’t. Last April, in fact, the European Central Bank began raising interest rates, even though it was obvious to most observers that underlying inflation was, if anything, too low.

And it’s probably no coincidence that April was also when the euro crisis entered its new, dire phase. Never mind Greece, whose economy is to Europe roughly as greater Miami is to the United States. At this point, markets have lost faith in the euro as a whole, driving up interest rates even for countries like Austria and Finland, hardly known for profligacy. And it’s not hard to see why. The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.

I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

So the next time you hear someone claiming that if we don’t slash spending we’ll turn into Greece, your answer should be that if we do slash spending while the economy is still in a depression, we’ll turn into Europe. In fact, we’re well on our way.

    Killing the Euro, NYT, 1.12.2011,






The Fed and the Euro


December 1, 2011
The New York Times


The Federal Reserve’s move on Wednesday to make it easier for European banks to acquire dollars shows that American policy makers understand the gravity of Europe’s turmoil and will do what they can to prevent a financial collapse across the Atlantic. European leaders, however, seem paralyzed and, even at this point, fail to share the Fed’s sense of urgency.

The Fed’s extraordinary intervention should impress upon the European Central Bank, as well as its paymasters in Germany, that it is high time it stopped sitting on its hands. Only aggressive action by the bank can arrest the government debt crisis that is spreading across the Continent and threatening the very survival of the euro.

The Fed offered to swap dollars for euros at a low interest rate with the E.C.B., which would allow it to offer cheap dollars to European banks. That became necessary when American money market funds and other financial institutions started cutting off financing to banks in Europe, which own piles of risky government bonds.

Absent an alternative source of dollars, Europe’s banks could have been forced into a fire sale of dollar-denominated bonds and other assets, which would have spread the crisis to American financial institutions. But, while it was necessary, the Fed’s move does not address the root of Europe’s immediate dilemma: investors are demanding high interest rates to buy the bonds of weak euro-area economies, which are burdened by big piles of debt and are unable to devalue their currencies to become more competitive.

The European leaders’ failure over the past two years to assemble a credible bailout plan to restore financial stability to the weak economies like Greece has pushed the crisis to Italy, the euro zone’s third-biggest economy, which owes $2.5 trillion and must refinance $530 billion of that debt next year. This week, Italy issued new debt at interest of nearly 8 percent, a rate that, if sustained, could force the country to default. The euro could not survive such an event.

This is why it is urgent for the E.C.B. — which can print euros at will — to act immediately by promising to purchase as many bonds of stricken countries as is necessary to reduce their interest rates to affordable levels.

Until now, the central bank has refused to intervene on a substantial scale. Leaders in Germany, the strongest European economy, argue that allowing the central bank to turn on the printing press would foster profligacy by taking weak nations off the hook. And it says it fears inflation, an implausible concern for economies that are slipping into recession.

On Thursday, Mario Draghi, the president of the E.C.B., made a veiled suggestion that the bank might buy more bonds if nations in the euro zone could agree to establish a “fiscal compact” that set credible rules and enforcement mechanisms to ensure that budget deficits are pared. This would be good news if the central bank started buying bonds right after the European summit meeting next week. But if it waits until euro-zone countries agree to give the central bank or the European Commission control over their budgets, the euro is probably doomed.

    The Fed and the Euro, NYT, 1.12.2011,






Euro, Meant to Unite Europe,

Seems to Rend It


October 19, 2011
The New York Times


PARIS — The euro was a political project meant to unite Europe after the Soviet collapse in a sphere of collective prosperity that would lead to greater federalism. Instead, the euro seems to be pulling Europe apart.

As European leaders scramble to present a united front for this weekend’s critical meeting in Brussels, anxiety in Europe is growing, and not just about the euro. The assumptions of 60 years suddenly seem hollow, and the road ahead is unclear, as if the GPS system has gone out of whack.

On the surface, the European Union is an enormous success. It has nearly 500 million citizens and a gross domestic product of more than $17 trillion, larger than that of the United States and more than three times China’s or Japan’s. It is America’s largest trading partner by far, and together the two economies account for roughly half the world’s gross domestic product and nearly a third of its trade.

But Europe is in economic and demographic decline as Asia is rising. The European Union’s share of global trade is steadily dropping, especially in exports. Its aging population is placing huge strains on generous social welfare and pension programs and pumping up sovereign debt in an extended period of flat growth.

Technologically, it is behind the United States, but its pay scales are too high to be an easily competitive exporter.

The current crisis over the euro has deep roots in the imbalances between north and south, rich and poor, export-led and service-driven economies, tied together by a currency but few rules, and those are rarely enforced.

A fix will require fundamental changes in the functioning of the bloc, with more interference in the workings of sovereign states. There would need to be a fiscal union, with a treasury and a finance minister capable of intervening in national budgets, and more unified tax and pension policies. But it is far from clear that the European Union can gather itself to take these fateful steps away from nationalist identities to a truly European model.

“We are today confronted by the greatest challenge our union has known in its entire history,” said José Manuel Barroso, the head of the European Commission. “It is a financial, economic and social crisis. But also a crisis of confidence — in our leadership, in Europe itself, in our capacity to find solutions.”

There are many who believe that the European Union and its leaders have already been found wanting, and that the European project that brought democracy and peace to the Continent may begin to unravel.

“This crisis is threatening the benefits of 60 years of European integration,” said Nicolas Baverez, a French economist and historian. “All the principles on which the euro zone was built — no state default, no monetary transfers, no bailouts and strict limits on debt — all these principles are dead, and we have no rules to make this work.”

Worse, he said, political leaders underestimate the dangers. “This is not just another recession, but a real and fundamental crisis,” he said. “There is a tension in the political system and doubt about democratic institutions that we have not experienced since the fall of the Soviet Union.”

Built from the ruins of war and expanded generously in the euphoria after the Soviet collapse, the European Union heralded itself as a model, radiating “soft power.” But now the model looks tarnished and flawed.

Leaders seem diminished; local politics trump solidarity. There is a new nationalism degrading the collective responsibility and shared sovereignty that defines the European Union. Euro-skepticism runs from far-right parties that simultaneously detest immigrants, globalism and Brussels to the governing parties of Europe’s most successful countries.

A European Union of 15 nations seemed coherent and manageable; the Europe of 27, soon to be 28, is almost ungovernable, even by a professional bureaucracy with little connection to voters and whose decisions cause increasing resentment, summarized in the “democratic deficit” that the European Union suffers.

The historical ironies are considerable.

Germany, for example, divided and in ruins after the war it fought to dominate Europe, is reunited and dominating Europe now, but without arms and with deep reluctance.

Nothing gets done in the European Union without German agreement, commitment and money. But in Chancellor Angela Merkel, Germany has a leader who is reactive and uninspiring, while her coalition partners, the Free Democrats, are slumping into irrelevance. Her eye is on Germany’s internal politics, its loose federalism and coalition government, a major contrast to France’s centralized, nearly monarchical state.

France once dominated the European Union, but Paris has now fallen behind booming Germany, one reason that François Mitterrand feared German reunification. Anxious about its own debt, banks and credit rating in the midst of a nasty presidential campaign, France is having a hard time dragging Berlin along.

At the same time, the countries of Eastern Europe are more vibrant economically than many of their western partners. They share much of the German, Dutch and Finnish view about strict fiscal discipline, and are reluctant to join a shaky euro and become responsible for the failures of others.

Britain, always an outlier in the European Union, looks wise to reject the euro, and the mood now is probably more anti-European than even in the days of Margaret Thatcher.

The fundamental changes needed to cope with the euro crisis — particularly the historic step of creating a common treasury — would require a redrawing of the basic treaties, which would require the approval of the voters.

But Europe is unpopular, a local metaphor for globalization, faceless and interfering. It is by no means certain that the voters are ready to leap into a new world of economic integration. Even if they prove to be, the new treaty will be complex and take years to draft even before being put to the electorate for ratification, if there is ratification.

It is easy to say that the answer is “more Europe,” not less. That can seem self-evident to Eurocrats and the political elite. But “more Europe” may not be what voters want.

“The only thing that can save the euro in its current form can’t and shouldn’t be done without democratic debate and support,” said Simon Tilford, chief economist for the Center for European Reform, a research institution.

“You need to bring the electorate with you,” he said. Of course, he acknowledged, a real democratic debate “could exacerbate the crisis.” That may be the largest historical irony of all.

    Euro, Meant to Unite Europe, Seems to Rend It, NYT, 19.10.2011,






Sterling hits record low against the euro


December 15, 2008
From Times Online
Grainne Gilmore


Sterling tumbled to a new low against the euro today, with some travellers receiving less than €1 for every pound they exchange at airport terminals and train stations.

The euro has risen to a record high of 89.98p, coming close to breaking through the key 90p barrier.

The pound is now at its lowest level since the single currency was introduced in 1999 and has been weakening since the beginning of the year, though the decline has become more marked in recent days as the UK economy worsens.

Britain is regarded, so far at least, to have been hit harder by the global slowdown and financial crisis than the 15-nation eurozone.

This week, new figures are expected to show that UK unemployment is worsening, increasing from 5.8 per cent to 6 per cent, while the number of people claiming jobless benefits is forecast to have risen by 45,000 in November.

Just a few months ago, travellers could be confident of receiving at least €1.15 or €1.20 for each pound, but that amount has fallen to €1 in many foreign exchange outlets.

Sharply falling demand for sterling-denominated assets, such as shares in UK-listed companies, has also helped reduce demand for sterling, which has dragged the pound lower.

But spread-betting companies are reporting a surge in business as thousands of private investors in Britain are joining institutional investors in reckoning that sterling has further to fall.

    Sterling hits record low against the euro, Ts, 15.12.2008,






Sterling hits new record low against euro


Wednesday, 10 December 2008
The Independent
By Tamawa Desai, Reuters


Sterling hit a record low against the euro and a basket of currencies today as pessimism about the UK economy was reinforced by a think tank report showing a sharp contraction in growth.

The report, which said the nation's economy shrank more than many believe in the three months to November, kept expectations high that the Bank of England will continue to cut interest rates aggressively.

The pound extended losses as British finance minister Alistair Darling told parliament on Wednesday that sterling depreciation would help the country's exporters.

By 1507 GMT, the pound had fallen to 87.83 pence versus the euro, its weakest since the single currency was introduced in 1999.

Meanwhile, trade-weighted sterling fell to 79.7, the lowest on a daily basis according to Bank of England records going back to 1990.

"There's really not much good to say about the pound, although it has already fallen a long way," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

Given the prospect of lower interest rates and a rising fiscal deficit, "the risks are still clearly to the downside," he added.

Despite sterling's losses against the euro, it rose 0.6 percent to $1.4829 (GBP=) against a broadly weaker dollar on a slight pullback in risk aversion as global shares gained on news of a tentative agreement to bail out US carmakers.

The National Institute of Economic and Social Research said on Wednesday Britain's economy shrank by a full percentage point in the three months to November and the pace of contraction looked set to accelerate into the end of the year.

"There is every reason to believe that the output decline in the fourth calendar quarter of the year will be larger than one percent in magnitude," it said.

The report came on the heels of dismal data in manufacturing, housing and retail sales on Tuesday, which bolstered expectations that a sharp economic downturn will put more pressure on the central bank to ease rates further.

"Altogether, these readings made a strong case for the United Kingdom ultimately suffering the worst recession in the developed world," Commerzbank analysts said in a research note.

The BoE has cut key interest rates by 300 basis points since October to 2 percent, their lowest since 1951.

BoE policymaker Paul Tucker is appointed deputy governor for financial stability for a five-year term starting next March, and arch policy dove David Blanchflower will step down when his term expires in May, Darling told parliament.

    Sterling hits new record low against euro, I, 10.12.2008,






The currency crunch:

British tourists pay price

for euro's strength

Today a euro is worth 80p, an all-time high against the pound.
Bad news for British holidaymakers –
but are there more serious consequences
of living next door to the world's strongest currency?


Thursday, 10 April 2008
The Independent
By Martin Hickman, Consumer Affairs Correspondent

Tens of millions of British people will experience their own credit crunch on holiday this year as the soaring value of the euro forces them to pay more for everything from the price of a coffee in a Parisian cafe to a hotel room in Barcelona. As currency traders pushed the European single currency to a record high against the pound yesterday, holidaymakers were coming to terms with the fact they now have almost a fifth less spending power on the Continent than a year ago.

The 17 per cent fall since last February has come about as the euro has powered ahead on the strength of its member economies, while the pound has slumped, most recently because of the knock-on effects of the sub-prime collapse in the US.

The euro's new high of 80p, reached in early trading yesterday, came after the International Monetary Fund warned that UK growth would only hit 1.6 per cent this year, compared with the Government's claim of up to 2.25 per cent.

The euro's surge may spur new theories from economists that the currency of the eurozone will become the main international unit of currency as early as 2015, upsetting almost the best part of a century of dominance of the dollar.

For holidaymakers, however, the collapse of the pound has an earthier reality that will curtail their spending power in shops and restaurants in Ireland and on the Continent. In practice, it means spending money of £500 earmarked for eating out, trips and presents is now worth only £415 in the 15 eurozone states.

The 42 million foreign holidays a year that British people take are influenced by affordability and, during the past two years, the cheap dollar has lured thousands of Britons to stock up on designer jeans and iPods in New York.

However, the majority of foreign holidays, some 31 million, are taken in the eurozone and going there – and staying there – has become markedly more expensive.

As a result of the currency fluctuation, a family weekend break to Disneyland in Paris that would have cost £456 last year costs £533 this month. A day's car rental in Vienna that would have set back a Briton £56 now costs £67.

And those expecting to savour a meal for two Ferran Adria's acclaimed El Bulli restaurant in Spain will find the experience has risen in price from £195 to £236.

Many people who had been hoping to go on holiday to France or Spain may be forced to change plans and stay at home instead.

Others may look for cheaper destinations outside the eurozone, such as Bulgaria or Croatia.

The Association of British Travel Agents said yesterday that the rise of the euro might prompt the growth in journeys to Turkey and Egypt as well as long-haul trips.

At home, the surging euro will apply upwards pressure on much that we import from the Continent, from cheese to cars, though retailers may take some of the pain.

But there will be a sign of relief from British companies battling to export their goods as their products become cheaper in the 15 euro countries.

After a shaky start in 1999, when the economies of the 11 participating states were lurching downward, the euro has become a totemic success for the European project and has been rising against the pound for more than a year.

Further pressure is likely to be piled on to the pound – and in favour of the euro – today if, as expected, the Bank of England's Monetary Policy Committee cuts interest rates. Some economists believe the rate may cut by as much as half a per cent.

Geoff Kendrick, a currency strategist, said: "The UK has clearly softened a lot more than Europe and I guess that's why we'll see the Bank of England cut rates tomorrow while the ECB will be hawkish... At least for now it looks like the trend (in euro/sterling) is well and truly intact."

The pound has weakened after days of bad economic news which has increased the chances of the interest rate being cut, reducing the attractiveness of holding the currency.

This week, the Halifax house price index posted its steepest monthly fall in over 15 years, a 2.5 per cent fall in a single month. Banks have withdrawn their 100 per cent mortgage deals and Nationwide's consumer confidence fell to its lowest level in four years.

    The currency crunch: British tourists pay price for euro's strength, I, 10.4.2008,






Dollar Falls Against Euro, Yen


March 17, 2008
Filed at 12:09 p.m. ET
The New York Times


BERLIN (AP) -- The dollar fell to record low against the euro on Monday, and sank to its lowest level in more than 12 years against the Japanese yen as investors reacted to the latest emergency rate cut by the U.S. Federal Reserve and to news that JPMorgan Chase is buying rival investment bank Bear Stearns for a fraction of what it was worth last week.

In European trading, the euro rose as high as $1.5904 but soon fell back to $1.5746. That was still above the $1.5687 it bought late Friday in New York trading.

The U.S. Commerce Department said that the deficit in the current account dropped by 9 percent last year to $738.6 billion. Later, the Fed said U.S. industrial output fell half a percent in February, the biggest amount in four months.

The dollar fell as low as 95.72 Japanese yen, its lowest since August 1995, before recovering to 97.03 yen but still below the 99.21 yen it bought in New York on Friday. The dollar broke below 100 yen just last Thursday.

The lows came a day after the Fed approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.5 percent.

Also on Sunday, JPMorgan Chase & Co. said it would acquire Bear Stearns for $236.2 million in a deal backed by the Fed. JP Morgan will pay $2 per share, down from Bear Stearns closing price of $30 per share on Friday.

''It has certainly been something of an historic weekend, with an emergency Fed rate cut and news that J.P. Morgan intends to acquire Bear Stearns marking the next chapter in the credit crisis,'' said James Hughes of CMC Markets in London.

''Unsurprisingly this has been broadly bad news for the dollar with (the) euro-dollar managing a short-lived breach above 1.5900 -- yet another all-time record high -- although this has been short lived with profit takers stepping in,'' Hughes said.

The Fed is scheduled to meet Tuesday, and analysts are predicting that the central bank could reduce its 3 percent benchmark rate on overnight loans between commercial banks by as much as another percent.

The European Central Bank, by comparison, has left its own rate at 4 percent as inflation in the 15-nation euro zone hit yet another record high last month.

Lower interest rates can jump-start a nation's economy, but can also weigh on its currency as traders transfer funds to countries where they can earn higher returns.

So far the ECB has remained steadfast in keeping its rates unchanged because inflation has been so high, but politicians and some companies have bemoaned the strong euro because it makes goods produced in the euro zone far more expensive elsewhere and undermines exports.

However, at the same time, the higher euro can increase domestic purchasing power.

The Bank of England said Monday it will offer an extra 5 billion pounds -- around $10.1 billion -- of reserves into the short-term money market because of conditions in the market.

The dollar rose against the British pound, which fell to $2.0059 from $2.0218 on Friday.

    Dollar Falls Against Euro, Yen, NYT, 17.3.2008,






Dollar Weakens to $1.50 to the Euro


February 27, 2008

The New York Times



The dollar breached the level of $1.50 to the euro on Wednesday for the first time as fears of weakness in the United States economy mixed with evidence of resilience in Europe.

In Asian trading, the euro hit $1.5047 after flirting with the $1.50 level in New York Tuesday. That was the dollar’s weakest position since the euro, now the currency of 15 countries, was introduced in 1999. In New York, the dollar continued to weaken and was trading at $1.5126 at 12:30 p.m.

“Psychologically and symbolically, this is a significant move,” said Tony Morriss, senior currency strategist with Australia & New Zealand Banking Group in Sydney. “The economic numbers out of the U.S. have been uniformly terrible, and we are entering a new phase of dollar weakness.”

The dollar has weakened steadily in recent weeks after recovering from similar levels in November on the emerging realization that the Federal Reserve, despite worries about inflation in the United States, will keep cutting interest rates to protect economic growth at the same time that the European Central Bank is holding rates steady.

Interest rate differentials drive currency movements by decreasing the appeal of dollar-denominated assets. Donald L. Kohn, vice chairman of the Fed, played down the risks of inflation in the United States on Tuesday, focusing instead on the risks to economic growth — a clear sign the Fed has not finished the rate-cutting cycle it began after the start of financial market turmoil late last summer.

“The Fed’s stance is really aggressive,” said Stephen Jen, chief currency economist at Morgan Stanley in London. “Every time we think the Fed is eyeing inflation, they turn around and cut rates.”

Another round of weakness has the potential to increase political tensions in Europe, though so far France is the only country that has consistently complained about the strong euro. Though it has acknowledged the potential costs of a stronger euro, Germany has remained upbeat, saying it is not worried.

Volker Trier, the chief economist of the German Chambers of Industry and Commerce, largely echoed this view on Wednesday.

“The euro’s strength is hurting here and there,” Mr. Trier said, according to Reuters. “Over all, though, the economy can still cope with it well.”

Asian currencies have also risen against the dollar, but exporters there can take comfort in the fact that any pain is being broadly shared.

“Asian currencies are uniformly appreciating against the U.S. currency due to dollar weakness, rather than any single Asian currency rapidly firming against the others,” said Cem Karacadag, director in the emerging markets economics group at Credit Suisse in Singapore. “So, no single country is going to lose export share to its competitors in the region.”

Dollar Weakens to $1.50 to the Euro,










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