Russell Lee Sharecropper mother teaching children in home, Transylvania, LA. Jan 1939
It doesn’t matter what they do anymore.
China’s stocks extended the steepest five-day drop since 1996 in volatile trading as lower interest rates failed to halt a $5 trillion rout. The Shanghai Composite Index fell 1.3% to 2,927.29 at the close, after rising as much as 4.3% and declining 3.9%. The cuts in borrowing costs and lenders’ reserve ratios were announced hours after the benchmark measure closed with a 7.6% drop on Tuesday. Chinese equities have lost half their value since mid-June, as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. The government has halted intervention in the equity market this week as policy makers debate the merits of an unprecedented rescue, according to people familiar with the situation.
“The prevailing sentiment is still that investors want to cash out, whatever the government does,” said Ronald Wan, chief executive at Partners Capital International in Hong Kong. “Confidence is already damaged. Doubts over the effectiveness of policies are getting bigger. The market will remain under selling pressure for a while.” The People’s Bank of China said it will cut the one-year lending rate by 25 basis points to 4.6% and lower the required reserve ratio by 50 basis points for all banks. The move, which follows the biggest devaluation of the yuan in two decades earlier this month, comes amid signs of decelerating growth for the world’s second-biggest economy.
Weird moves both in the US and China the morning after.
In a dramatic reversal to a morning rally, U.S. stocks relinquished all of their opening gains, and then some, to finish with sharp losses. The main indexes began trimming gains in afternoon trade, falling into negative territory ahead of the closing bell as selling accelerated in the final hour. “We would have preferred stocks open flat and rally into the close. Today’s action is not a good news for those who were expecting a V-shaped recovery,” said Michael Antonelli, equity sales trader at R.W Baird & Co. “Unlike the pullback last October, this correction has a serious tone to it — there are serious global growth issues that are not going to be resolved any time soon. We expect the correction to last longer,” Antonelli added.
Trading on Wall Street remained volatile, with the CBOE Volatility index VIX, otherwise known as the Wall Street’s fear gauge, trading at 36, the highest level since 2011. The S&P 500 turned big gains into losses and closed down 25.59 points, or 1.4%, at 1,867.61. Utilities and telecoms saw the biggest losses. The benchmark index is firmly in correction territory, having fallen 12% from its peak reached on May 21. On a%age basis, Tuesday’s move marked the largest swing in the index, before closing negative, since October 2008 during the financial crisis. The Dow Jones Industrial Average which at session highs was up more than 400 points, ended with a loss of 204.91 points, or 1.3%, at 15,666.44. The Nasdaq Composite ended the day down 19.76 points, or 0.4% at 4,506.49.
“The kind of volatility we saw over the past week is normal historically. This is what risk premium means,” said Colleen Supran, a principal at San Francisco-based Bingham, Osborn & Scarborough. “We don’t know whether the correction is over or not, but usually when volatility picks up, it gains momentum,” Supran said.
And don’t you forget it.
We’re not the least bit unclear about why this unprecedented stimulus has only created mediocre 2% growth and little to no inflation. It’s turned into one big game of “Whack-a-Mole” with the economy. They take one bubble burst, whack it with massive money creation, and then create the next bubble, wait for it to burst, and whack that one too. What they can’t seem to get through their heads is – you can’t keep a bubble going forever! We had the stock bubble in 1987, the tech bubble of early 2000, the real estate bubble in early 2006, another stock bubble into 2007, oil in mid-2008, gold in mid-2011 – and now, a final stock bubble into 2015. They’ve all burst, or are still bursting!
Oil’s down more than 65% from its secondary peak in 2011 and was down 80% from its all-time high in 2008. Gold’s down 40% from its 2011 high. Bubbles typically crash 70% to 80% before they fully deleverage. But when they burst, they usually kick off with a 20% to 50% slide right out the gate – most often within a matter of months. Oil will keep falling – likely to $32 in the next month or so, crushing the fracking industry, and obliterating economies in the Middle East, Russia, and even Canada. At the rate it’s been falling –$38 now – $32 is probably a conservative estimate! We’ll see what John Kilduff, the oil guru for CNBC, says at our Irrational Economic Summit in two weeks. I’ve been predicting for many years that oil will eventually hit $10 to $20. How will the frackers survive that? Simple: They won’t!
China’s stock market will also keep crashing – it’s already down 42%. When it does, its real estate will follow – with devastating consequences to real estate in the U.S. and the globe. And over the next several years, we’ll see the greatest global crash in real estate in modern history. Even if stocks manage one more rally, there’s no avoiding the economic landmines all over. Over the last few trading days, we’ve seen how investors react to poor economic news. The truth is that the markets are finally getting what we’ve been saying about the vicious cycle of China slowing. It hurts commodity prices and crushes emerging countries. No kidding!
When this bubble economy fueled through zero interest rates and endless QE finally does burst, it will only be worse. This whole ordeal has taken longer than we would have initially expected from history. But it was unprecedented that central banks would come together on a global scale to fight a natural bubble-burst cycle with such massive money printing.
In this post I consider the economy in general: I’ll cover asset markets in particular in the next column, but you’ll need to understand today’s post to comprehend the stock and property market dynamics at play. Having said that, the Shanghai Index fell another 7.5% on Tuesday, after losing 8.5% on Monday, and is now down over 45% from its peak—so I’ll try to write the stock-market-specific post by tomorrow. In this post I’ll show, very simply, why a slowdown in the rate of growth of private debt will cause a crisis, if both the level and the rate of change of debt are high at the time of the slowdown. Engineers should find this argument easy to understand and informative, but tedious to read because the logic is so obvious. Economists are probably going to find it almost impossible to comprehend, clearly wrong, and they will probably be enraged by it.
So who should you trust if you’re neither? Firstly, think of how often you successfully trust engineers every time you operate a domestic appliance, hop in your car, drive over a bridge, or fly between continents. Then think how often you have unsuccessfully trusted economists (when I’m asked socially what I do for a living, I describe myself as an “anti-economist”—before I elaborate that I am a Professor of Economics but regard the dominant school of thought in economics as dangerously deluded). Finally, work out which profession you’d rather trust if the two groups disagree—even when we’re talking just economics. OK, preliminaries over. Now for the logic.
Demand is strictly monetary: there is some barter, but in the vast majority of cases, purchases of both goods and assets requires money. And there are two main private sources of money: you can either spend money you already have, or you can borrow from a bank. When you borrow from a bank, you increase your spending power without reducing anybody else’s: the bank records a new asset on one side of its ledger (the debt you now owe to the bank) and a new liability (the additional amount of money in your deposit account). When you spend that borrowed money, it becomes income for someone else. So total expenditure and income in our economy is the sum of the turnover of existing money, plus the change in private debt (I’m leaving the government and external sectors out of the argument for now).
Mainstream economists will already be screaming at this point, because they believe in a fallacious model of money called “Loanable Funds” in which banks are just intermediaries and lending is a transfer of money between savers and lenders. They continue to believe this model even though the Bank of England has said very loudly that it is wrong. Engineers should be waiting for stage two of the argument (the full mathematical argument will be published in the Review of Keynesian Economics in October).
“If they are worried enough to bet on such a forlorn hope, the rest of us should worry, too.”
I am neither intelligent enough to understand the behaviour of “Mr Market” — the manic-depressive dreamt up by investment guru, Benjamin Graham — nor foolish enough to believe I do. But he has surely been in a depressive phase. Behind this seem to be concerns about China. Is Mr Market right to be anxious? In brief, yes. One must distinguish between what is worth worrying about and what is not. The decline of the Chinese stock market is in the second category. What is worth worrying about is the scale of the task confronting the Chinese authorities against their apparent inability to deal well with the bursting of a mere stock market bubble. Stock markets have indeed been correcting, with the Chinese market in the lead. Between its peak in June and Tuesday, the Shanghai index fell by 43%.
Yet the Chinese stock market remains 50% higher than in early 2014. The implosion of the second Chinese stock market bubble within a decade still seems unfinished. The Chinese market is not a normal one. Even more than most markets, this is a casino in which each player hopes to find a “greater fool” on whom to offload overpriced chips before it is too late. Such a market is bound to be extremely volatile. But its vagaries should tell one little about the wider Chinese economy. Nevertheless, events in the Chinese market are of wider significance in two related ways. One is that the Chinese authorities decided to stake substantial resources and even their political authority on their (unsurprisingly unsuccessful) effort to stop the bubble’s collapse. The other is that they must have been driven to do so by concern over the economy.
If they are worried enough to bet on such a forlorn hope, the rest of us should worry, too. Nor is this the only way in which the behaviour of the Chinese authorities gives reason for concern. The other was the decision to devalue the renminbi on August 11. In itself this, too, is an unimportant event, with a cumulative devaluation against the US dollar of just 2.8% so far. But it has significant implications. The Chinese authorities want room to slash interest rates, as happened this Tuesday. Again, that underlines their concerns about the health of the economy. Another possible implication is that Beijing might seek a revival of export-led growth. I find this hard to believe, since the global consequences would be devastating.
But it is reasonable at least to worry about this destabilising possibility. A last possible implication is that the Chinese authorities are preparing to tolerate capital flight. If so, the US would be hoist by its own petard. Washington has sought capital account liberalisation by China. It might then have to tolerate a destabilising short-term consequence: a weakening renminbi.
After the foreign reserves, la deluge!
China has injected $100bn of liquidity into the country’s financial system and cut interest rates to records lows in a “shock-and-awe” bid to restore confidence, but worries persist that even this may not be enough to avert a crunch as capital flight surges. The move came as the authorities abandoned their futile efforts to shore up the stock market, allowing the Shanghai Composite index of equities to plummet by a further 7.6pc on Tuesday. It has tumbled by 22pc in the past four trading days. Mark Williams from Capital Economics said Beijing has made a strategic decision to let the stock market find its own level after the fiasco of recent weeks, switching stimulus instead to the broader economy. The central bank (PBOC) cut the reserve requirement ratio (RRR) for lenders by 50 basis points to 18pc, freeing up roughly $100bn of fresh funds.
It also cut the one-year lending rate by 25 points to 4.6pc. Mr Williams said the combined cuts are rare and amount to a dose of “shock and awe” in Chinese policy language. “It is a statement that policymakers mean business,” he said. Wei Yao from Societe Generale said the RRR cut was “absolutely necessary” to stop liquidity drying up and to reverse the passive tightening over recent weeks caused by capital outflows. It may not be enough to add any net stimulus to the economy. “Liquidity conditions are still under immense pressure,” she said. The PBOC has intervened heavily on the exchange markets to defend the yuan, drawing down reserves at a blistering pace. The unwanted side-effect is to tighten monetary policy. It is a textbook case of why it can be so difficult for a country to deploy foreign reserves – however large on paper – in a recessionary downturn.
The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash. Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting. Wei Yao said the strategy of the Chinese authorities is unworkable in the long run. If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous. She said China can use up another $900bn before hitting safe limits under the IMF’s standard metric for developing states.
“The PBOC’s war chest is sizeable, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long,” she said. Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion. “There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.
Epitomizing ‘pushing on a string’.
[..] how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning. The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:
In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.
Said otherwise, SocGen is suggesting that China has sold $106 billion in Treasurys in the past 2 weeks! And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.
In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!
The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.
And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.
I don’t see how Bloomberg can provide a viable assessment of China while continuing to quote a 7% GDP growth rate for Q1 2015.
“When the wind of change blows, some build walls while others build windmills.” In late January, Chinese Premier Li Keqiang shared that proverb with global leaders in a keynote speech at the World Economic Forum in Davos. China was in windmill mode, committed to structural reform “no matter how difficult.” The “new normal” called for more moderate, consumer-led growth. The financial system would be modernized and the country aimed to shift away from its excessive reliance on debt-fueled, infrastructure-powered growth that had led to industrial overcapacity and an epic credit bubble. Better still, the makeover would be pulled off smoothly: “What I want to emphasize is that regional or systemic financial crisis will not happen in China, and the Chinese economy will not head for a hard landing,” Li said.
Roughly seven months later, China finds itself at the epicenter of a global stock market rout that has vaporized $8 trillion in wealth. Nobody is quite sure whether the world’s No. 2 economy is really growing at 7%, as official figures suggest, or 6% — or actually careening toward a hard landing. Authorities are now quietly rolling out China’s biggest stimulus effort since the 2008 global financial crisis in an effort to put a floor under a weakening economy. Interest rates have been cut to record lows, banks are being encouraged to lend and new infrastructure spending is being rolled out. The confidence Li exuded in January has given way to policy zig-zags and mixed messages about the commitment of President Xi Jinping’s government to reform.
The tale of how Chinese leaders have dealt with decelerating growth, debt pressures, a stock market crash and its sudden currency shift is instructive for investors, executives and policy makers puzzled by the trajectory of this all-important, $10 trillion economy. It didn’t take long for economic trouble to surface. In April, Li met a group of local government officials in Changchun, the capital city of Jilin province that shares a border with North Korea. Li, 60, wanted to take the pulse of the region’s economy – and the news wasn’t encouraging. Known as China’s rust belt due to its state-dominated heavy industry and manufacturing sector, Jilin was among the worst performing economies in the country. It grew at 5.8% during the year’s first three months compared with 7% for the national economy. Neighboring Heilongjiang province grew by 4.8% and Liaoning by 1.9%.
The ‘real’ media recognize only the ‘real’ experts when it comes to these things. It makes no difference what I’ve said about China through the years. But that does say something about everyone involved.
[..] Mr. Rogoff is not the first person to identify China as a potential risk. Earlier this year, this column highlighted the views of Henry M. Paulson Jr., the former Treasury secretary and a Sinophile, who said, “Frankly, it’s not a question of if, but when, China’s financial system will face a reckoning and have to contend with a wave of credit losses and debt restructurings.” And the hedge fund manager James Chanos has been sounding the alarm on China for years, recently declaring, “Whatever you might think, it’s worse.” There are, of course, significant political reasons China needs to convince the world and its own citizens that it can manage its convulsing financial markets and slowing economy.
“Financial meltdown leads to a social meltdown, which leads to a political meltdown,” Mr. Rogoff said. “That’s the real fear.” Mr. Rogoff pointed to another factor that has contributed to China’s financial woes. “The crisis in Tianjin fed into the mix,” he said, referring to the deadly explosion on Aug. 12 in the port city, which killed more than 100 people. Mr. Rogoff said the explosion had undermined the credibility of the Chinese government because so many questions remained unanswered, and the response had been inadequate. So does Mr. Rogoff believe that China is headed for a terrible “hard landing” that will lead to a global recession?
Well, despite the market tumult and his persistent warnings, Mr. Rogoff says he believes that the last several weeks have raised the prospects of a meaningful crisis. But with China’s trillions of dollars in reserves, he thinks the country may have sufficient tools to prevent a calamity that spreads across the globe — at least for now. “If you had to bet,” Mr. Rogoff said, “you’d still bet they’d pull it out.”
All together to the bottom of the pond.
When a chemical warehouse in Tianjin, China, exploded this month, destroying some 10,000 parked vehicles, cynics suggested that the disaster might actually be for the best, given the massive glut of unsold cars sitting on Chinese lots. Yet with the turmoil in China’s stock markets continuing to pummel the troubled auto sector, it seems that any true industry correction will require a considerably larger explosion. The situation leaves the world’s biggest automakers torn between their desire for short-term dominance in China and the need for a painful correction to stabilize the world’s largest car market for them. There is no understating the importance of China to the big car producers: With only 106 cars per 1,000 Chinese right now, analysts say demand still has the potential to exceed 35 million units by 2020.
Yet rising inventories have been putting pressure on new-car dealers, resulting in severe price-cutting and open rebellion between the China Automobile Dealers Association and manufacturers late last year. By last month, when China’s stock market began melting down, import car dealers were facing as much as 143 days of supply. With new car sales falling nearly 7% in July and headed toward their first net-negative year in recent memory, it seems likely that oversupply will haunt China’s auto market for the foreseeable future. Global automakers have begun responding by cutting production at existing plants, and Toyota has extended production stoppages at its Tianjin joint venture.
An index of 23 major Chinese automotive joint ventures shows they are operating plants at less than full capacity for the first time ever. (The Chinese government mandates that all foreign investors have domestic joint partners.) The two biggest foreign players, GM and Volkswagen, have also slashed prices in hopes of turbocharging demand. But the effectiveness of these moves will depend on how large of a hole the automakers have dug for themselves. It seems pretty clear that Volkswagen has been overstating its Chinese sales numbers by booking 60,000 to 100,000 vehicles per year as “unsold deliveries.” In the race to dominate Chinese and global sales rankings, automakers seem to have been delivering cars without buyers, potentially creating an oversupply time-bomb.
And every other party too. Everyone but Xi and Li.
A researcher with China’s central bank on Tuesday blamed wide expectation of a Fed rate rise in September for the global market rout. Yao Yudong, head of the People’s Bank of China’s Research Institute of Finance, said the expected Fed rate hike next month had been the “trigger” for the wild market swings. Analysts worried that the Fed rate hike could accelerate the plunge of U.S. stocks and trigger a sell-off of assets worldwide and even a new global credit crisis. Yao said the Fed should remain patient before the U.S. inflation reaches 2%. Earlier, analysts said the devaluation of Chinese currency the Renminbi triggered the plunge and the weakening of bulk commodities and currencies in other countries.
China’s benchmark Shanghai Composite Index sank 7.63% to close at 2,964.97 points on Tuesday. It has lost 26% in the past six trading days. Overnight, the Dow tumbled 588 points, or 3.58%, to 15,871, after sliding more than 1,000 points, or 6% at the opening. Li Qilin, analyst with Minsheng Securities, said the small devaluation of Renminbi could have slightly weighed on stock markets, but it could not explain the huge sell-off in the United States and other countries. Li said the liquidity crunch is a bigger culprit. The global rout has little to do with economic fundamentals and the Asian financial crisis would not be repeated, Capital Economics said in a research note. But it said if the market plunge continues worldwide, the Fed might postpone its rate hike.
“In fact, they have to be responsible for the market crisis. It’s the authorities trying to act like a referee and a player at the same time.”
Faced with a renewed stock market slide that has wiped out $5 trillion in trading value, China is again on the prowl for scapegoats. Authorities announced a probe of allegations of market malpractice involving the stocks regulator on Tuesday, while the official Xinhua News Agency called for efforts to “purify” the capital markets. The news service also carried remarks by a central bank researcher attributing the global rout to an expected Federal Reserve rate increase. The Shanghai Composite Index has plunged more than 40% from its peak, after concerns over the Chinese economy helped snap a months-long rally encouraged by state-run media. Authorities have repeatedly blamed market manipulators and foreign forces since the sell off began in June and led officials to launch an unprecedented stocks-support program.
Now, after suspending that program, the administration has embarked on a new round of allegations and fault-finding. “The authorities have been too involved in the stock market and now they’re trying to pass the responsibilities to others,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology. “In fact, they have to be responsible for the market crisis. It’s the authorities trying to act like a referee and a player at the same time.” Police are investigating people connected to the China Securities Regulatory Commission, Citic Securities and Caijing magazine on suspicion of offenses including illegal securities trading and spreading false information, Xinhua reported. They’re probing suspects linked to the CSRC, including a former employee, over insider trading and forging official document stamps, Xinhua said.
Eight people at Citic Securities are suspected of illegal securities trading and the Caijing employees are under investigation for allegedly fabricating and spreading fake stock and futures trading information. Citic Securities said Wednesday in a statement posted to the Shanghai stock exchange that it hasn’t received notice related to the report and said the company’s operating as normal. Caijing in a statement Wednesday confirmed a reporter had been summoned by police. The magazine said it didn’t know the reason and would cooperate with authorities. Meanwhile, Xinhua published a commentary urging stricter enforcement to cleanse the markets. “We have reason to believe that more criminals and their hidden crimes will be exposed,” it said. “We also believe judicial departments will investigate thoroughly and impose punishments no matter who is involved in crimes.”
Who rules Italy?
Yesterday, those in command in Europe gave our President of the Council a resounding slap in the face to remind him of his duties: The German Chancellor Angela Merkel, and the French President Francoise Hollande, spoke out at the end of a bilateral meeting discussing immigration and they asked the Italian government to apply “the EU law in relation to asylum.” Thus they were pointing out that the current government is just not doing that. In fact the premier has shown himself to be completely incapable of managing the immigration phenomenon. Merkel and Hollande are asking Italy to “open up new registration centres for immigrants so that it will then be possible to take precise decisions” as regards requests for political asylum.
Whereas, right now, a great number of people arriving in Italy are not being registered and identified, and this is creating an unmanageable situation as well as a really serious danger for internal security. A reprimand that sounds like the Italian government is getting its knuckles rapped, a humiliating gesture that reminds us of those famous little smiles from Ms. Merkel and Mr. Sarkozy in 2011 in relation to the permier at that time, Silvio Berlusconi, and for an Italy that, because of him, was not considered to be a credible interlocutor.
Now, as then, Italy is not considered to be up to the challenge and the premier, just like Berlusconi before him, is being humiliated by France and Germany in press conferences.
On the other hand, the failure of the Italian government is visible to everyone: the management of immigrants has been shown to be a rich business opportunity for the Mafias, as heard in the telephone intercepts of conversations with Salvatore Buzzi and the investigation into “Cara di Mineo”, the biggest immigrant reception centre in the whole of Europe, and even though the M5S has made many requests on this issue, the government has still not given any responses. Thanks to the premier, we find we have another immigration emergency that is uncontrolled to such an extent that it brings shame on the country, and just as at the time of the Berlusconi government, it is berated by the good and the great in Europe.
How long does Italy have to go on being subjected to this sort of humiliation? And when will it finally get the Dublin Regulation re-discussed? Because it’s clear that anyone arriving in Italy needs to be identified, but it’s equally clear that there should then be a quota system to allocate people to different countries in Europe – and this has been forcefully requested by the M5S.
Division in the ranks.
Europe must end its “religious war” over debt, French Economy Minister Emmanuel Macron said. Macron outlined his approach to the euro area’s financial woes at a conference of German diplomats Tuesday, pitting what he termed debt-scolding Calvinists against over-indulgent Catholics. The two factions mirror the perceived rough divide between German-led budget disciplinarians in the north and Europe’s more indebted Mediterranean south. Speaking in Berlin, Macron at first needled the Calvinists with an articulation of a rigid view of debt. “Some people, some member states, failed,” Macron said in English. “They didn’t respect their commitments. They have to pay it till the end of their life.”
On the opposite end are the Catholics, “definitely France is on this side,” with an arguably more sanguine perspective on profligacy, Macron said. “We failed, but we go to church, we explain the situation and we can start another week the day after,” he said. The 21st-century version of the religious schism comes a month after German-backed austerity in the latest Greek crisis prevailed over calls by France and like-minded euro-area member states to ease off on the policy. “Probably, we have to find the balance between these two approaches,” Macron said in the speech, which was punctuated by calls for Franco-German unity, at times in German.
Five centuries after the Protestant Reformation plunged Europe into religious conflict and seven decades after the end of World War II, Macron said the entrenched positions on economic and fiscal policy pose the biggest barrier to genuine unity today. The result is discord at the conference table in Brussels, with Calvinists predestined to favor tighter budgets and Catholics offering forgiveness for rule-breaking — “with this kind of step-by-step approach, finding a solution, but at the last moment,” Macron said. Chancellor Angela Merkel, a Lutheran pastor’s daughter, has consistently advocated a “step-by-step” approach to solving the euro area’s debt crisis focused on austerity and economic overhauls.
Be nice. Every leader’s first requirement.
The point is not whether this or that particular charge raised against Germany is on target — or justified. What matters is that it is being leveled at all. U.S. Democrats, at the time of their pursuit of the American war in Vietnam, had some reason to feel unjustifiably targeted. After all, it took some chutzpah on the part of France’s de Gaulle to advance all those charges against Washington. It was an act of astounding arrogance on the part of the president in Paris! Vietnam had landed like a hot potato in the lap of the Americans, who — if anything — had stumbled into this French post-colonial minefield far too naïvely. Still, LBJ held the line. He resisted the temptation to give back in kind, an example that Wolfgang Schäuble should take to heart.
LBJ would not have patronized or sneered at Yanis Varoufakis, Schäuble’s former Greek counterpart. That Schäuble did just serves to show that the German finance minister, despite his long experience in politics, still has some lessons to learn. True leaders just don’t retort in kind. For all their obsessing about Greece, Germans need to properly consider larger issues as well. This may still be somewhat unfamiliar territory for them, given that their leadership role in Europe is still a new-ish thing. In that context, consider this latest development: The eurozone’s disastrous handling of the Greek crisis plays right into the hands of Brexit proponents in the U.K.. The heavily anti-EU Chancellor in the early 1990s, Norman Lamont, is now Varoufakis’ new best friend. He regales anybody and everybody in the U.K. with arguments for why the eurozone cannot work.
For more effect, Lamont also reminds everybody of his conviction that the German bullies are back in business (just as they were in 1992, when the U.K. was expelled from the European Exchange Rate Mechanism). Not one to be left behind, Britain’s Labour party may be poised to elect a leader who is very anti-eurozone in discipline. For the first time since 1950, being anti-German is fashionable in British political discourse again. This is not all poor Wolfgang Schäuble’s fault — far from it. All I can say, as a friend of Germany (and of the Greek people), as well as someone who does not want the U.K. to quit Europe, is that I am very worried. I find no language emanating from Berlin that is reassuring. And yet, reassuring others in moments of crisis, and showing at least a modicum of magnanimity toward those in serious trouble, is precisely what a leading nation must do.
“If it is true that elections cannot change anything, we should be honest to our citizens and tell them that. ”
When in my first Eurogroup meeting, back in February, I suggested to finance ministers a compromise between the existing Troika Austerity Program and our newly elected government’s reform agenda, Michel Sapin took the floor to agree with me – to argue eloquently in favour of common ground between the past and the future, between the Troika program and our new government’s election manifesto which the Greek people had just endorsed. Germany’s finance minister immediately intervened: “Elections cannot change anything!”, he said. “If every time there is an election the rules change, the Eurozone cannot function.”
Taking the floor again, I replied that, given the way our Union was designed (very, very badly!), maybe Dr Schauble had a point. But I added: “If it is true that elections cannot change anything, we should be honest to our citizens and tell them that. Maybe we should amend Europe’s Treaties and insert into them a clause that suspends the democratic process in countries forced to borrow from the Troika. That suspends elections till the Troika decides they can be held again. Why should we put our people through the rituals of costly elections if elections cannot change anything? But”, I asked my fellow ministers, “is this what Europe has come to colleagues? Is this what our people have signed up to?” Come to think of it, this admission would be the best gift ever to the Communist Party of China which also believes elections are a dangerous complication getting in the way of efficient government.
Of course they are wrong. As Churchill said, democracy is a terrible system. But it is the best of all alternatives, in terms of its long-term economic efficiency too. A frozen silence followed for a few seconds in the Eurogroup. No one, not even the usually abrasive Mr Djisselbloem, could find something to say until some Eastern European colleague broke the silence with another incantation from the Troika’s Austerity Book of Psalms. From the corner of my eye I could see Michel Sapin looking desolate. I was reminded of something he had said to me in Paris, when we first met at his office: “France is not what it used to be.”
Here’s some advice: Run for your lives, House of Saud.
Saudi Arabia is seeking advice on how to cut billions of dollars from next year’s budget because of the slump in crude prices, according to two people familiar with the matter. The government is working with advisers on a review of capital spending plans and may delay or shrink some infrastructure projects to save money, the people said, asking not to be identified as the information is private. The government is in the early stages of the review and could look at cutting investment spending, estimated to be about 382 billion riyals ($102 billion) this year, by about 10% or more, the people said. Current spending on areas such as public sector salaries wouldn’t be affected, the people said.
The Arab world’s largest economy is expected to post a budget deficit of almost 20% of gross domestic product this year, according to the International Monetary Fund. With income from oil accounting for about 90% of revenue, a more than 50% drop in prices in the past 12 months has put pressure on the nation’s finances. The country has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007. “This is a response to the lower oil prices but also to the fact that capital spending has been growing strongly over the past few years,” Fahad Alturki, chief economist and head of research at Jadwa Investment said.
“Although a cut in capital spending will impact economic growth, the non-oil sector is not as reliant on government spending as it was 20 or 30 years ago.” Capital investment accounts for less than half the government’s outgoings, with current spending estimated at 854 billion riyals, according to a report issued by Samba Financial. Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said this month. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”
Greece has been left out of an unfolding campaign by Balkan countries to forge a coordinated response to a torrent of migrants and asylum seekers fleeing war and poverty in the Middle East and Africa, Kathimerini understands. Meanwhile, although officials in Brussels admit that debt-wracked Greece, on the European Union’s external frontier, has had to shoulder an unprecedented burden, sources note overall frustration over the government’s failure to implement an action plan to deal with the problem. Greece may have to face an EU fine over the failure, the same source said. During a visit to the Former Yugoslav Republic of Macedonia (FYROM), Austrian Foreign Minister Sebastian Kurz called for “coordinated action across Europe” while urging Greece to control its borders more effectively.
“It’s also the fault of Greece if there is no support for the refugees there,” the Austrian said. Also speaking from Skopje, Bulgarian Foreign Minister Daniel Mitov pledged his country’s support for FYROM in dealing with mounting pressure while calling for cooperation between the states of the region – but he did not name Greece. Thinly disguised criticism of Athens came from FYROM Foreign Minister Mitko Cavkov, too, who noted it was “absurd that the problem is caused by an EU member-state.” Cavkov said that interior ministers from FYROM, Austria, Hungary and Serbia will soon meet in Skopje to decide further action. In an interview with German newspaper Handelsblatt, Serbian Prime Minister Aleksandar Vucic said Greek authorities “are unwilling to record asylum seekers because in that way Greece goes down as their EU entry point.”
It’s unworthy of Merkel more than anything else. No leadership in sight.
German Chancellor Angela Merkel said the region’s refugee crisis is unworthy of European values and will require a bigger effort to aid those seeking safe haven. At a town-hall meeting in the western city of Duisburg, Merkel said Tuesday that Germany must ease the process for setting up asylum centers and pledged more financial backing to tackle the crisis. Earlier, her spokesman said Merkel will visit a refugee shelter in Heidenau, the eastern German town near Dresden where anti-immigrant riots erupted last week. “Europe is facing a situation that’s unworthy of Europe,” Merkel said. “The federal government will need to strengthen its support for states and municipalities. We can’t just keep going in normal mode.”
Merkel and French President Francois Hollande, the leaders of Europe’s two biggest economies, pledged on Monday a united response to the influx, saying the refugees need to be distributed more equally among the 28 European Union countries. Hollande said Europe is facing “exceptional circumstances.” Merkel didn’t cite an amount for extra spending needed for Germany to deal with an expected 800,000 fleeing war and poverty who are expected to arrive this year. The cost may be €10 billion, compared to €2 billion in 2014, the Die Zeit newspaper has estimated.