Tag Archive | "Austerity"

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Euro, US Recoveries Stalling Emerging Economies


The momentum behind the western European economic recovery and the US economy are taking a heavy toll on emerging economies and currencies. The trend is most visible in the rise of the blue-chip Euro STOXX Index, which has gained 9 points this year and in the remarkable strength of US equities. Similarly, the MSCI Index of equities from emerging powerhouses Russia, India, China and Brazil has slid 13 points in 2013.

The euro continued its recent stable trend after good data from Germany boosted the currency. With a more stable euro and renewed whispers about the tapering of the US Federal Reserve’s sustained buying spree, investors have shifted their attention to the more stable currencies. With improved yields in US Treasuries, emerging economies are seeing larger than expected outflows.

Perhaps the most encouraging news from Europe is the resurgence of private sector enterprises. Data from this sector showed growth in July for the first time in the last 18 months. At the same time, private industry growth around the world dipped by 13 percent.

However, the effect of the Federal Reserve’s tapering initiative is driving the world currency markets. Projections show that currencies in Turkey, Brazil, Russia, India and South Africa will decline between 7 and 14 percent in 2013. Meanwhile, the yen has lost more ground to the euro and continues to fluctuate wildly against the dollar.

The European Central Bank has indicated the region must remain focused on unemployment and private sector job development. However, economists feel that the front-loaded austerity measures enacted two and three years ago are easing. The hope is that credit markets will ease and that private businesses will pursue growth more aggressively.

Tapering Is Coming

Markets appear to have adjusted to the reality that tapering is on the horizon. The dollar continues to gain relative strength and the benchmark ten-year Treasury is gaining favor with international investors. Speculation that tapering could begin as early as October was fueled by remarks from two separate governor’s of the Federal reserve on Tuesday. The strength of US corporations supports tapering and Chairman Bernanke would like to see the reduction plan underway when he leaves office.

At the same time, the Bank of England’s (BoE) new head, Mark Carney, has announced steps to boost British sterling and to encourage job growth, clearly a top priority. Encouraging economic data indicates that the UK has climbed out of recession and is recovering. Carney has said the BOE will leave interest rates at 0.5 percent until the unemployment rate dips to 7 percent. Experts feel that will require about 3 years.

UK manufacturing has finally ended three years of dismal reports with some encouraging data. Consumer confidence is rebounding and the strained financial system appears stable. In overnight trading, sterling reached its highest point since June 21st at $1.5493 before settling at $1.5446, a 7 percent gain.

In Japan, the Nikkei Index shed 4 percent as the yen gained strength against the dollar. The USD struck a 45-day low at 96.76 yen. The yen’s strength reflects pullbacks from riskier economies in Asia and in returns on the country’s massive investments in the US.

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Euro Zone GDP Contracts Further


The 17-nation euro zone output shrank by 0.2 percent in the first quarter 2013 creating the longest recession in the bloc’s history. Projections for the future are not promising. Analysts project slight growth in late 2013 but no significant upturn until 2015. The first quarter contraction marks the sixth consecutive quarter that euro zone GDP has contracted.

France which has been teetering on the edge of a recession finally crossed the line and suffered a 0.2 percent downturn, equaling its output in the fourth quarter 2012. Unemployment in France is at record levels.

France joined the list of euro zone economies in recessions. Finland, Cyprus, Italy, The Netherlands, Portugal, Greece and Spain are solidly entrenched in recessions. Italy and Spain, the euro zone’s third and fourth largest euro zone economies, have endured seven consecutive quarters of negative growth.

The new data pushed the euro below the 1.29USD mark. The currency fell to six-week lows and shows little hope for recovery. The trend of the euro and the anemic growth in the bloc may prompt the ECB to engage in more aggressive monetary easing initiatives.

Last week, the ECB cut interest rates to historic lows. However, Mario Draghi, ECB president, has said that he is not opposed to another rate cut.

Austerity vs. Growth

To a degree, German led calls for austerity have stabilized the euro zone treaty. But, most of the nations want to shift the focus to growth. Euro zone unemployment is estimated to include more than 19 million workers.

The consensus is that the natives of the euro zone have been pushed about as far as they can go. France has been an advocate for growth and has marked the formation of a Europe-wide banking supervisor as an important step in the region’s recovery. German finance minister Wolfgang Schaeuble and Chancellor Angela Merkel have opposed this new initiative fearing that Germany would have to bear the heavy load.

On Tuesday, Schaeuble appeared to soften his position, suggesting that the new, broader banking union could be structured by June. A second aspect of this initiative would call for identification of banks that need to be closed. Schaeuble told French finance minister Pierre Moscovici that the new banking union was a “priority object.”

Germany, always the pillar of the euro zone, is facing its own manufacturing, export and GDP problems. GDP was revised from negative 0.6 percent in the fourth quarter 2012 to 0.7 percent. Germany narrowly avoided falling into recession by posting a 0.1 percent gain in the first quarter 2013. Despite its tempered growth, Germany enjoys the lowest unemployment rate in years.

Liquidity Driving Equity Markets

The euro is off 2.3 percent in May, hitting 1.2883USD in overnight trading. The dollar rests comfortably in the 102 range against the yen. The ECB is likely to consider another rate cut before the end of the year. The dollar reached 102.63 yen overnight.

Meanwhile, the Federal Reserve and the Bank of Japan continue to pour money into easing programs. The weak yen is very liable to cause more export stress in Europe.

The UK has been damaged by the weaker euro and the stronger pound. UK exports have lowered to Europe but have increased to other markets like Southeast Asia and Africa. Outgoing Bank of England head, Mervyn King hinted that the BoE may be softening its easing program shortly. King put forth the first positive outlook for the UK since the outset of the financial crisis. Britain has been successful encouraging small business growth but still fights high unemployment and a slumping housing market.

All eyes will be on Italy’s upcoming 30-year bond auction after Spain had a successful 10 billion euro sale of its 10-year bonds on Tuesday. After Fitch Ratings upgraded the nation’s sovereign debt, a positive accomplishment, Greece’s 10-year bonds surged in Wednesday’s auction. Greece is no longer viewed as a country about to leave the euro zone, a credit to the tough love imposed by Germany.

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Cyprus, ECB and BoJ Weigh On Markets


As details of the Memorandum of Understanding (MoU) between government and the “Supreme Savings‘ international lenders” were revealed on Tuesday, markets stepped back to gauge the 10 billion euro bailout. Markets also slowed in anticipation of this week’s updates from the Bank of Japan (BoJ) and the European Central Bank (ECB). Investors are concerned about whether the BoJ will scale down its proposed easing initiative. At the same time, the ECB will need to calm investor fears in the wake of the Cyprus fiasco that cost international investors billions of euros.

One of the big concerns facing the euro zone and the European Union is whether the Cyprus model is the model that could befall Spain and Italy. A general lack of confidence in the EU has led to the paring of the euro. Investors are unclear as to the direction of the BoJ and the USD rose to its highest level in two weeks against the yen.

Cyprus Turnaround Outlined

The MoU leaves little doubt about what the bailout investors, who contributed 10 billion euros to the troubled banking sector, will require of Cyprus. Meanwhile, the former finance minister resigned in anticipation of legal action for his roll as President of the country’s second largest bank, which failed last week.

As if there was not enough disgruntlement on the island nation, Cypriots are now staring at some lofty goals that are likely to impose the similar austerity sanctions other southern tier euro zone neighbors face.

The MoU says Cyprus must attain a four percent of GDP primary surplus by fiscal year 2017. This would a significant turnaround.

Reuters reports there are a number of other goals established by the MoU:

  • In 2013, Cyprus will suffer a 395 million euro budget shortfall (2.4 percent of GDP) in 2013.
  • This shortfall exceeded the 1.9 percent deficit in 2012.
  • In 2014, the deficit will expand further to 678 million euros.
  • The MoU expects the deficit to pare down to 344 million (2.1 percent GDP) by 2015.
  • In 2016, Cyprus is charged to achieve a primary surplus of 204 million euros (1.2 percent GDP) by 2016.
  • By 2017, Cyprus must achieve a 4 percent surplus by 2017.
  • Growth in Cyprus will contract by 8 percent this year.
  • Growth in Cyprus will contract 3 percent in 2014.
  • Growth will finally increase by 1 percent in 2015 and 2016.

In light of these assumptions, Cyprus has much work to do to live up to expectations. The 8 percent paring of GDP suggests a good amount of austerity will be necessary and Cypriots have thus far rejected most EU initiatives.

The MoU states that Cyprus will earn about 1.4 billion euros by selling certain state-owned assets, such as state-owned telecoms. Additionally, Cyprus expects to realize revenue from selling off rights to undersea natural gas deposits, which have been found of the island coastline.

The future of the public sector will be under pressure with new actions taken by government. The banking sector employment is already in turmoil. Now, government has announced that public sector pensions are frozen. The retirement age will be raised by 2 years. New taxes will be imposed upon alcohol, tobacco products and petrol. The VAT will be increased and corporate taxes on earnings and on interests earnings will also rise. Fees for all government services will increase by 17 percent effective immediately.

These measures are designed to ensure that debt in Cyprus is at 100 percent by 2020.

The ECB, BoJ and BoE

Investors are anxiously awaiting results from the three central banks. There are concerns that the BoJ will scale back on its proposed quantitative easing policy.

The ECB is now expected to hold steady on current interest rates. Prior to the Cyprus crisis, it was projected that the EC would raise interest rates.

In England, the BoE is expected to continue its current purchase of asset program without increasing the stimulus. British sterling gave back recent gains in anticipation of the upcoming central bank meeting. It is nervous times on the currency front.

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Osborne Calls For Bolder BoE


Finance minister George Osborne stated his case for more aggressive and innovative Bank of England initiatives to help the country climb out of the economic rut that has led to a credit downgrade and has the economy on the verge of another recession. His address to Parliament was marred by jeers from Labor and their leader, Ed Millibrand.

While the politics is sticky, the current economic trends point to disaster unless a commitment to growth is in place. Osborne looks to the BoE to carry the ball by giving the economy some breathing room with an already stifling inflation rate.

Osborne made it clear that this was not the time to cut back on austerity. Prime Minister David Cameron and Osborne remain committed to the austerity strategy that is designed to narrow the deficit through curtailing public debt. Many Brits believe their success will determine the outcome of the elections in two years. The deficit reduction package is a five year plan.

Another EU Nation Long On Austerity, Short on Growth

However, as other EU nations have found, austerity without growth is a dangerous formula. Recession looms and the UK manufacturing output is discouraging.

Latest growth projections are dismal. Osborne announced the economy will grow about 0.6 percent this year. The finance minister projects 1.8 percent GDP expansion in 2014. He was quick to point out that the 1.8 percent would exceed the output of Germany and France.

Cameron and Osborne had paid a price politically for the struggling recovery. British sterling took another hit on Wednesday but the prospect of a more aggressive BoE seemed to stabilize equity markets.

Osborne called for the central bank to maintain its 2 percent inflation rate, if possible, but not at the expense of growth. He asked for the bank to devise a strategy to reduce the inflation rate over time if it became necessary to increase the rate by more than 2 percent to supply enough easing to stimulate growth.

Housing and Construction Must Lead Way

Of particular interest is the stagnant construction and housing industry. Osborne’s charge to the BoE would transform the mission to resemble the mandate of the US Federal Reserve, whose controversial three rounds of QE have sparked a slow, tenuous but steady recovery.  US equity markets have flourished in the meantime.

Most troubling in Osborne’s presentation is his paring of the 2013 GDP growth. The 0.6 percent is half the original 2013 projection of 1.2 percent.

Osborne said, “As we’ve seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPB with setting out clearly the tradeoffs it has made in deciding how long it will be before inflation return to target.”

It looks like uneasy times are ahead for the Sterling and the UK economy.

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Troubling Data Across The Board


Politics continued to plague the euro zone and US economies and China’s rising housing crisis added fuel to the fire as currency markets trembled under the weight. European and Asian equity markets slipped on Monday as the US markets trended down by midday.

The euro slumped to 1.30USD. Britain’s pound slumped to a 2-year low against the yen and to 1.50USD on Monday.

In the euro zone, the lack of resolution to last week’s elections had markets on edge. The yield on Italian bonds rose, but the lack of a permanent government has many economists worried about how ECB Chairman Mario Draghi can help the struggling economy. Without a government, no commitment of austerity can be made to the ECB thus sealing off the infusion of more euros.

In the US, markets received the news of the sequester without blinking but by Monday a sobering tone was noted in Washington. President Obama reached out to Congressional Republicans and to Democrats in the hopes of composing middle ground legislation.

Obama apparently asked for consideration of a new direction for the massive spending cuts, specifically throwing entitlement reform and tax reform on the table.  Several Republican s have said they would consider closing some tax loopholes as long as entitlement reform is art of the package.

Public consensus is that the US must deal every aspect of the entitlement scenario. A lack of progress will certainly affect every sector of the US economy.

A revealing report from China on 60-Minutes confirmed what many analysts already realize. The Chinese construction market is overdue for a slowdown. 60-Minutes showed cities of unoccupied, new housing. All apartments in the massive buildings are sold but they remain vacant, unaffordable for the majority of the population.

On Sunday, China announced that its residential construction sector had slowed to its lowest activity in five years. China added more damaging data indicating that factory output slowed to multi-month lows in February.

China is already curtailing its ever expanding residential development but the effects have yet to be felt. This could be a housing bubble that has the potential to dwarf the US housing collapse.

In the UK, the pound fell because of reaction to a decline in the construction industry. This decline could push the country into its third recession in five years.

The data has supported the Bank of England’s cries for further quantitative easing, but there is unrest throughout the economy. Ian Stannard, the Head of European FX Strategy at Morgan Stanley explained, “The construction PMI today was quite weak, but the really big one is the services PMI which comes tomorrow and if that comes in weak as well it would increase the possibility of further action at this week’s BoE meeting.”

Forecasts for a global slowing in 2013 seem more likely now that politics has entered the economic fray.

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Greece Protests Send Message To Brussels


As European Union (EU) leaders met in Brussels with the bailout of Greece a backburner topic, most of Greece’s workforce staged a second national work stoppage in the last three weeks. Tensions in the streets of Athens rose as one man died and three strikers received injuries while 50 protestors were arrested. Protestors hurled anything they could throw at police who were forced to fire rounds of tear gas into the swelling crowd.

The country’s two largest labor unions, ADEDY and GSEE called for the 24-hour strike. Yannis Panagopoulos, the leader of the GSEE’s 2-million private sector members explained the protest. “Agreeing to catastrophic measures means driving society to despair and the consequences as well as the protests will then be indefinite.”

In order for Greece to comply with terms set by the European Commission, the European Central Bank (ECB) and the IMF, commonly called the Troika, Greece must trim another 11.5 billion euros from its budget before another Tranche can be released. These cuts will put the workforce at risk of working for substandard pay that prevents the household from sustaining itself and will further deplete the pensions of today’s workers.

The intent of the EU meeting in Brussels is ostensibly to mend fences so that a banking union can be created. Many participants of the euro zone feel this is a necessary evil but some countries have no interest in participating. As a result, the meetings will be more conceptual than substantive. Usually, these meetings give cause for an optimistic spin but in reality just buy time.

There appear no plans to announce any new programs to deal with the region’s debt crisis.  Meanwhile, Greece muddles along mired in the worst economic downturn in the euro zone and worst since World War II. What becomes clear with every national strike is that the working people of Greece cannot survive under the current austerity plan. There is no future, no incentive to excel and little hope for resolution.

This means that the majority of the country’s workforce does not feel the abuse of credit by past governments is their problem. The workforce appears willing to return to their own currency and bid farewell to the Troika and the nation’s investors.

To avoid default next month, the government must push through more austerity cuts or cease to operate. If Greece were standing alone, EU and euro zone members would most likely let the country fail. The problem is that such a failure may take more robust economies down. The largest investors in Greece are France, Germany and the ECB. Yet, it is Spain and Italy that stand most threatened by a failure in Greece.

In support of saving Greece, Italy’s Finance Minister, Vittorio Grilli, told reporters that, “It certainly can be saved and it will be saved.” Grilli indicated that he understood the plight of the nation’s working persons and hinted that more time was needed to allow for a recovery.

In Brussels, France and Germany went toe to toe over differing views of how European Union members should control their budgets and shift to a single banking supervisor.  As expected, German Chancellor Angela Merkel seeks stronger authority by the European Commission with the power to veto national budgets that are non-compliant with stated EU guidelines. President Francois Hollande of France said that this was not on the EU agenda for this meeting and should be tabled until a discussion of the creation of a European Banking Union was addressed.

Germany’s position is that the only banks that required supervision are large “cross-border banks.” Merkel rejects the idea that banks in rich countries must prop up deposits to prepare to assist weaker economies.

“We have made good progress on strengthening fiscal discipline with the fiscal pact but we are of the opinion, and I speak for the whole German government on this, that we could go a step further by giving Europe real rights of intervention in national budgets,” Merkel told the Bundestag.

Germany’s proposal to empower a European super-charged European currency commissioner along with a stronger European Parliament is resisted by Hollande because it would call for restructuring of existing treaties.

Another German proposal has been agreed upon by 11 of 17 euro zone members and calls for creation of a European fund to invest in specific projects in member states. The fund would be created by implementation of a “transaction tax.”

If there was good news to be had in the euro zone, it came from an unlikely source, Spain. Moody’s determined that Spain’s debt could maintain its rating as “investment grade.”  The 10-year bonds immediately went to their lowest yield since February at 4.61 percent.

The focus of this week’s meeting in Brussels was ostensibly to further the development of a viable central bank for the EU. However, as the pages turn on this concept, there is political theater that will prevent to bank until at least 2014.

 

 

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Good Employment Data Bumps Markets


On Friday, the US Labor Department posted its Non-Farm Payroll report and global markets were swift to act on the positive trend. Private employers added 114,000 jobs and the unemployment rate dipped 0.03 percent to a four-year low of 7.8 percent.

Republicans were quick to criticize the release as a public relations coup for President Obama. However, the unemployment rate returned to the rate when Obama first took office in 2009. To arrive at the improved rate, July and August non-farm payrolls were increased by 86,000 jobs.  It was believed that the unemployment rate had contracted in July and August but the revisions indicate otherwise.

With the Federal Reserve’s QE3 added to this encouraging data, the impact could well be reflected over the next few months.  The Fed’s initiative is already showing positive results as the credit markets appears to be functioning more easily than in the past. There is one more non-farm payroll report due prior to the November 6 elections.

The employment report showed a loss of jobs in the manufacturing sector for the second consecutive month but the dormant construction industry got a boost of 5,000 new jobs. This is a reflection of a slowly improving housing market.

Government employment increased by 10,000 jobs.  This followed an increase in government employment of 45,000 in August.

What is of great importance to the economy and for millions of unemployed workers is the stability of the small business environment. A poll conducted by Vistage International, a consulting firm, indicates that the small business owner does not see a strong 2013. Thus, small businesses are hesitant to add workers.

The undercurrent about the US Fiscal Cliff is weighing heavily on small businesses. Rather than tax reform or austerity cuts, the small business person wants to know how the federal government will stabilize the economy and government spending before the end of the year. 57 percent of business owners stated that the expiration of the Bush Tax Cuts, set to expire December 31st, would definitely have a negative effect upon their business.

However, 12 percent of employers said they intended to add jobs in the next 12 months. Nine percent said they expected to lay-off workers.

Regarding marketplace uncertainty, 30 percent of business owners said the fiscal cliff was a serious issue. 17 percent pointed to political uncertainty as the biggest drain on their business. On the positive side, only 6 percent of the participants indicated tax accessing credit was a problem. This can be attributed to the Federal Reserve’s commitment to hold interest rates at historic lows through 2015.

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Euro Zone Supranational After Greece and Spain?


One day after Greece’s Prime Minister, Antonis Samaras, announced that Greece was in a Great Depression similar to the US depression of the 1930’s, fears that Spain would need a full scale government bailout, sent the euro spiraling down.  At one point Monday, the euro touched the 1.2073USD mark before settling at 1.2118USD, the lowest mark in more than two-years.  Samaras projected that Greece’s GDP will shrink another 20 percent before year’s end.

The Prime Minister spoke two days before a team of international lenders are expected to meet in Athens to discuss a last gasp attempt to avoid an unstructured default. Under the terms of the country’s bailout agreement, Greece must reduce its budget deficit to 3 percent of GDP by the conclusion of 2014. By today’s standards, that translates to additional cuts and/or tax increases amounting to 12 billion euros. Currently, Greece’s debt is 9.3 percent of GDP.

Adding to the instability of the country, the IMF appears to be pulling back from negotiations. The IMF’s resistance is based on Greece’s inability to meet already agreed upon terms. Germany economy minister, Phillip Roseler, reiterated Germany’s hard line that Greece could receive no further bailout funds until promised obligations were met.

Former President Bill Clinton met with Samaras on Sunday and told reporters that Greece’s financial planners were making a mistake on focusing strictly on austerity. He recommended that Greece continue to pursue privatization of state-owned assets and new pro-growth initiatives to get the workforce back to work.

Greece’s woes have been predictable, but the rain of bad news from Spain fueled the fire for euro zone doubters. With a bank bailout in hand, Greece appears to need what many analysts have said all along, a massive sovereign bailout. Spain was late to arrive at the bailout table and the delays have proved very costly. Spain’s ten-year bonds topped 7 percent today and the country finds itself embroiled in controversy.

Spain’s provincial governments are strapped for operating funds. Valencia has already applied to the government for assistance and Murcia appears ready to apply for aid. Estimates for the magnitude of the government bailout are in the range of 100 billion euros. If the euro zone bailout in Greece continues and if Spain is granted the already agreed-upon bank bailout and the new funds for government operations, the European Stability Mechanism will be virtually depleted.

On Saturday the ECB head, Mario Draghi told France’s newspaper that the euro was safe. He suggested that the public was unaware of the political capital expended on preserving the euro. Draghi added that the ECB had no weapons left. As he has said for months, it is time for the euro zone members to rise to the fore.

Draghi referred to the creation of “supranational bodies.” The euro zone and the euro may survive but there are no guarantees for Greece and Spain.

 

 

 

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Does The Euro Zone Need Germany


For its leadership role in the region, Germany has received much criticism from other euro zone members and the international investment community.  At the same time, Chancellor Angela Merkel is walking a political tightrope while facing a strong challenge to hold a majority coalition in Parliament. Meanwhile, German taxpayers are not feeling the pain of the other euro zone nations and do not support financial assistance to irresponsible EZ members. Accordingly, Merkel has been confrontational about austerity demands and addressing growth through increasing or at least not reducing sovereign debt.

For many months, finance ministers and political leaders have nervously observed what will happen with Greece, Ireland, Portugal, Spain and Italy.  The urgency about Greece is the belief that a default would ignite a series of triggers that would have investors withdrawing from Spain, Portugal, Italy, Ireland and eventually France. This has led to questions about the dissolution of the euro zone.  It has never led to questions about a euro zone without Germany.  At this week’s summit, Merkel’s intransigency has led to speculation that this is a possibility.

This possibility seems to be gaining traction and serves Merkel well as she addresses stiff political pressure from a nation of taxpayers who do not think the euro zone crisis is their problem.  Germany’s economy is not what it was before the Lehman crash, but factories are busy and the economy is strong enough that taxpayers all received a bonus earlier in the year.

In its current structure, common practice dictates that all euro zone initiatives have to clear the paymaster, Germany. The current composition of the 17-member alliance pits Greece, Spain, Portugal, Spain, Italy and a number of other EZ members who are supported by the IMF, the US, the European Commission and the ECB against Germany. As these countries share similar economic symptoms, they have common, growth oriented strategies.  While Merkel has presented a positive spin to the media, when push comes to shove, she rejects economic revival plans that are not austerity- based.  With a wavering majority in the parliament, Merkel’s hands are tied.

All along, the premise has been that if Greece falters, contagion will spread, picking off one defaulting country after another. However, what would happen if Germany left or were ousted from the Euro Zone?  Surprisingly, there might well be real advantages for other members and very real problems for Germany.  Firstly, the struggling nations would work together to create a series of stability initiatives. Secondly, these at-risk economies would be capable of drafting longer-term austerity and growth strategies. Thirdly, the Euro Zone would present a brave, unified voice.

Most importantly, with Germany out of the way, the coalition of nations with common challenges could launch several initiatives, the countries have put on the table.

  • The ECB would be empowered to follow the strategies of quantitative easing that other Central Banks have implemented.

 

  • The euro zone could issue euro bonds.

 

  • Deposits up to 250,000 euros could be secured by the central bank and encourage domestic and foreign investors to keep money in the banking system.

Without Germany, the ability of the stressed euro zone members to right the ship increases significantly. Without the euro zone, Germany would revert to the mark.  The mark would be a strong currency that would hamper the nation’s export trade. German banks would need recapitalization and the Bundesbank’s recapitalization would dwarf the recapitalization of any American bank.

Unquestionably, a euro zone without Germany would hurt Germany and help the struggle economies in other member nations. Unless there is a dramatic shift in Germany’s policy, it will not be long before troubled euro zone nations unify and bump Germany.

 

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Greece Government Receives Threats


The leader of New Democracy, Greece’s conservative party, won Sunday’s election and was immediately charged to align a functional parliament that would support the party’s pro-bailout stance. The vote was interpreted as support from the populace for Greece remaining in the euro zone and operating under the single currency.

All the euro zone nations offered plenty of support prior to the election. The tone was conciliatory and suggested that the 17-member euro zone would work with Greece to ease the tight austerity and extend the terms of the bailout that has fueled Greece’s 5th recession and 22.5 percent unemployment.

Germany went as far as taking out a full page add in the nation’s most well read newspaper.  The ad was a plea to voters to support the New Democracy.  The voters were not pleased with the tone of the article but pushed New Democracy over the top.  The party expects to announce a controlling alliance with the Socialist Party, PASOK.  This is the same coalition that has controlled Greece for decades.

On Tuesday, New Democracy’s top gun, Antonis Samaras, is expected to announce the creation of a government that will be able to carry necessary parliamentary rule to support the bailout. World markets opened on the up and the euro had a short rally before the nations that had seemed amenable to modifying terms of the bailout began to renege on their pre-election overtures.  Germany’s Chancellor, Angela Merkel was quick to stress the need for Greece to strictly follow the terms of the original agreement. Jean-Claude Juncker, former head of the European Central Bank and current leader of Eurogroup, backed Merkel’s puzzling policy reversal.  Juncker said that some conditions might be eased but that there could be no major changes to the bailout package.

The euro zone and Germany in particular has been criticized for austerity cuts that make it impossible for Greece’s 219 billion GDP to grow. Unemployment for young workers exceeds 30 percent.  Pensions and wages have been trimmed significantly.  If the euro zone and Germany do no offer some easing, Greece is doomed.

Combining this bitter reality to the crisis in Spain turned global markets into a late day tailspin. The euro touched briefly at $1.2601, fell to $1.2580 before closing at $1.2591. US analysts were quick to note that Spanish 10-year bonds crossed the 7.00 percent yield mark. There is a lack of confidence in the economies of Spain, Greece and Italy and investors are finally sensing the dysfunctional theater of operations. At the G20 in Mexico City, President Obama is pressing Germany to develop a long-term solution for the region. Whatever appetite international investors may have had for euro zone investment is stalled. Several forex experts have predicted the euro will fall to par against the USD before the end of 2013. Most of these investors also believe the euro zone will continue to shed members very quickly if Spain does not stabilize. This is bad news for the USA whose biggest importer is Europe.

In addition to PASOK’s cooperation, a smaller, left wing party known as Democratic Left has thrown its support behind New Democracy. It appears that the euro zone is prepared to let Greece kick the can down the road until the economic powers in the region set a course that benefits them. This is not the long-term arrangement international investors hoped to see. Once again, the political instability in the region is playing against the welfare of the troubled economies. Without pressure from the international community, Disaster looms.

In a race that went down to the wire, the conservative New Democracy party finished just ahead of SYRIZA and has begun talks on a new government. It is expected to form a coalition with the Socialist PASOK party, meaning that Greece would continue to be governed by the two parties that have ruled for decades and led the country to economic disaster.

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