From friend of Alhambra, Brian Cronin:
The concept of summits is well known: Teheran, Yalta and Potsdam during the Second World War to the G-7 summits of recent years between heads of state. Summits inside the European Union are somewhat different. Since the EU is not a cohesive whole with an overall political authority, it is akin to America’s governors arguing amongst themselves as to what works for their states without regard to the federal government. It’s not a perfect analogy but it will serve.
It seems as if the spinmeisters in Germany have reassessed Chancellor Merkel’s performance at the recent summit. Far from caving in to France, Italy and Spain, she wrung concessions from them. She was playing chess when everyone else was playing checkers (draughts in the UK). That’s what some pundits said of Chief Justice Roberts’ tortured rationale in handing down the Supreme Court’s decision on the Affordable Care Act. Time will tell as to that.
It looked initially as if Chancellor Merkel had softened her stance and given in by allowing rescue funds to go directly to struggling banks rather than going through the central banks and giving them oversight and responsibility. While that might be less than satisfactory, she did manage to get them to agree to stricter banking supervision by the ECB and heaven knows they need it. Yet there are voices, like those of Hans-Werner Sinn, the head of the prestigious research group IFO (Institut für Wirtschaftsforschung), who aren’t sold on what she did.
But the question remains whether Germany and its citizens are willing to be the funding mechanism for southern Europeans. Finland and Holland have already questioned the summit resolution and want to see some collateral for the money they are supposed to kick in for Spain‘s banks. In France, President Hollande has been confronted with the audit report on the French economy and it’s not pretty. It needs about €11 billion so, as a start, he is going to raise taxes on the very wealthy to the tune of €7.2 billion. He even proposes to tax Brits who own second homes in France. They won’t like that! Something else to strain the Entente Cordiale but it may not get past the constitutional court. So we will see how much he can be relied on for.
Germans did fork over a lot of money to bring the former East Germany into the West Germany economy because it made political sense to do so. Will they feel it is in their interest politically and economically to do the same for their wayward southern neighbors? As long as they play by the rules and there is a good chance of getting their money back. And it is a lot of money – €1.5 trillion according to some estimates when you add it all up.
Just how conscientious the debtors are going to be in trying to balance their books is the billion euro question. Evading taxes is a way of life in the sun-drenched brain-frying south, something that is anathema to Germans who, by and large, play by the rules. It would never occur to them to trangress the tax authorities.
Travelers to Spain are already being confronted with a new airport departure tax which will vary depending on which airport they use. Will we see, I wonder, advertising signs in Greece atop the ancient monuments? “The Acropolis – brought to you by….” It sounds pretty crass, but desperate times require desperate measures though it would spoil many a Kodak moment. Just as those who are unemployed must put their pride in their pocket and take what comes, so then maybe those nations under the gun must be creative in their approach to raising money.
But Spain will eventually get the money to bail out its banks which are in hock to banks in Germany and France mainly, but, just like Greece, there are strings attached. Austerity measures are required, and, just like Greece, the Spanish people are not happy about it. Riot police were out in force firing rubber bullets at protesters, mainly miners, over the measures: VAT is going up to 21% from 18%, unemployment benefits are to end after six months out of work, and there will be cuts to public salaries and bonuses and so on. This is the fourth attempt at austerity measures, this latest worth €65 billion, since he was elected at the end of last year.
Prime Minister Mariano Rajoy was elected on the promise to cut taxes and he is now obliged to do the exact opposite. “Things change” was effectively his response to opposition cries of protest. But with 25% unemployment generally, over 50% among the young, and the economy in recession, he doesn’t have much choice or freedom to maneuver if he wants the money. He said just that to the Spanish parliament. It’s a fragile house of cards. One gust of wind and it will all collapse.
In order to ease the pain around the world, the European Central Bank and the central banks of China (twice in the last month), Korea and Brasil all cut rates. The Bank of England also injected money into the banking system but for all that, there doesn’t seem to be much joy or movement where there should be joy and movement. The notable exception to all this stimulation is the Federal Reserve. The minutes of the latest FOMC did not indicate any immediate stimulative measures. Equity markets were therefore depressed and investors found little to cheer them.
And if that wasn’t enough gloom and despondancy, there are an increasing number of cities and municipalities around the US that either have declared chapter 9 bankruptcy or are on the verge of doing so. Burdened by decreasing tax revenues, higher healthcare costs and generous pensions for retirees, these cities are realising the inevitable cost of promising the moon and the stars.
“Does not compute” was the line that computers and robots used to come up with in sci-fi movies and TV shows of the 1960s. They would refuse to operate properly until it had received a more logical command and/or would self destruct because they couldn’t handle the paradox. Somehow seems appropriate.
In 1965, there was a movie, a comedy, called “Situation Hopeless But Not Serious” with Sir Alec Guinness as a German who hides two downed American flyers (Robert Redford and Mike Connors) in his basement for years after the war had ended. He enjoys their company so much that he tells them that Germany was fighting on though after seven years, they eventually learn the truth. The title is a play on the old saying about the difference between Germans and Austrians. A German says the situation is serious but not hopeless whereas the Austrian would say that things are hopeless but not serious.
How you look at all this turmoil and the way your money might be eroding with everything going on around the world will dictate whether you think things are serious or hopeless – or both!
July 13, 2012