Goldman Sachs Targets France

Goldman Sachs has confirmed what I've been saying all along. The big targets in this war of the financial institutions against the states of Europe are not the small countries onthe euro zone periphery. They're the big countries. That's where they'll make a killing, where they will really get what they want: to make a fortune betting on the collapse of entire countries. It's what they've done until now, except it was with  countries that could be more easily blamed for getting into the mess themselves.

Jim O'Niell of GS announced yesterday that he was going straight past the next possible front line of this war, Spain, and directly to the core of what he wants. Whilst everyone speculated that GS would raise the battle cry to attack Spain next, O'Niell made it clear that France is his target. He sees the country's finances as far worse than its southern neighbour's. At first glance he's right. But France also has a greater capacity to put its economy right than Spain does. And neither country has the problems of Greece and Portugal. Painting them with the same brush makes the justification easier, but the facts remain the same.

This doesn't mean that GS won't lead an attack on Madrid. It eventually will. But it wants to keep folks guessing about where the next invasion will land.  After Portugal, of course. Silently, everyone has written that country off.

European leaders should consider one consequence of how the financial crisis was managed, and how it is hurting them now. Goldman Sachs is alive today because the U.S. Government kept it alive with TARP money. It paid the government back fairly quickly. But now Europe is going to pay the real price.

The Noose Tightens on Southern Europe

We've been waiting a long time to see when interest rates would rise in Europe. The ECB has been giving signals for the last month that it will raise them at its next board meeting in early April.

The ECB is concerned about inflation, so rates will rise. That means the euro zone's countries with deficit problems are about to see them get worse.

Greece's search for the exit

Greece's Finance Minister, Giorgos Papakonstantinou, has started to look for the exit. Emerging from a cabinet meeting today, he declared that Greece's economy is on the road to recovery, that tax cuts will be introduced on fuel, and that privatisations should not be pursued rashly, lest the country lose control of the foundations of controlling its destiny.


This comes just days after the EU Heads of Government committed fresh new funds to the European Financial Stability Facility under the Euro Plus Pact. That pact provides funds, but increases the likelihood that countries who let the finances spin out of control will face financial penalties, and eventually be left on their own.


The ink on that agreement is hardly dry and the Greek government does not look impressed. It claims that economic growth rates between 30 and 40 per cent are removing the necessity to make hard choices.  How convenient.


Assuming Greece's financial statistics are as poor as they ever were, Europe now faces a choice. It can drive a sword through its freshly-minted Pact (and indeed, there might be good reasons for never having agreed to this pact). Or it can turn the sword on Athens. You can imagine which option Berlin would prefer.


This should be interesting. The Greek governmnent sees itself not as Persephone, but more like  Asterix and Obelix. Whose view will turn out to be right?


Popcorn, anyone?

Portugal's next

It's been clear for some time that Portugal would be the next target, but the timing was an open question. This week, however, interest rates for Portuguese bonds have held above 8 per cent, and a political crisis has followed, which is likely to collapse the Portuguese government. 

The Prime Minister's office will now reap what it sowed when it acquiesced to tighter fiscal constraints on national governments that Germany and a few other creditor countries have demanded in return for institutionalising financial aid to the euro zone's debtor countries. That deal has been cemented just recently. It remained silent, hoping that financial markets would believe they had reason to be confident they wouldn't be next in line. 

But this is folly. Bluffing doesn't work when the situation is entirely clear to everyone. Portugal has never had anything resembling control of its public finances. Yes, it has had devastating natural disasters that have hurt the economy and the government's tax revenue for which it can do nothing, but Portugal also has no discipline. This is key in assessing its capacity to reform its finances. There is no evidence that successive Portuguese governments every intended to restrain the country's finances. They got a free ride during the euro's early years, as Germany and France were breaking the rules, but the free ride is over.

There are three ways to interpret the behaviour of the Portuguese government with regard to the austerity measures demanded by Europe's creditors. The first is that they realised they were in grave financial danger, and were willing to reform, but simply hoped that signalling strength would reassure markets not to flee the country. The second, is again that Portuguese parties are willing to exercise discipline, but no one wants to be first and reap the political backlash that ensues. The third possibility, and the one I fear is most likely, is that Portugal is in the grip of a Greek-style delusion that they can go on living as they have, because someone will bail them out. 

They're in for a rude awakening.  

Greece's decent into Hell

The concrete facts of today's post and the reasons for this post title are related to today's deliberations on excessive deficits in the euro zone.

The EU's Council of Economics and Finance Ministers (ECOFIN) is still meeting in Brussels, but the outlines of its deliberations on the euro zone's members are becoming clearer. Discussions have been had over the excessive budget deficits of Malta, Lithuania and Romania. The Council has granted each of these countries an additional year to sort out their finances making 'recommendations' on how to proceed. Greece, however, has been slapped with a

'decision giving notice to Greece to correct its excessive deficit by 2012, according to a specific timetable, including deadlines for reporting on measures taken'.

This reflects its budget deficit at more than four times the legal limit of 3% of GDP, and a total debt burden of almost twice the legal limit of 60%.

Everything is on the table. Everything that an elected government holds dear:

The Council therefore calls on Greece to design and implement as soon as possible, starting in 2010, a bold and comprehensive structural reform package. It sets out specific measures, covering wages, pension reform, healthcare reforms, public administrations, the product market, the business environment, productivity and employment growth.

And the initial reaction of the Greek government is anything but understanding. Beyond these measures, the Greek government will probably have to sell public land to raise cash, an issue that raised political hackles this week. This isn't speculation, but something that the EU and the IMF have told Greece they will have to do to qualify for financial aid.

Greece is going to Hell, and it will not return until it changes. There will be much (legitimate) debate about whether the timing and force of the demands made on Greece are just and wise, but the die is cast. Greece will become the scapegoat for all that is wrong with the 'weak links' of the euro zone. The others in the room have already put this in print. The others, above all Portugal, are being put on notice that they are next if they do not learn their lessons the 'easy' way. For Greece, however, it is too late.

Ironically, it is from Greek mythology that the most appropriate archetypal narrative of Greece's fate comes. Persephone, the Queen of the Underworld, started her existence as the Kore, the young maiden goddess born to Zeus and Demeter. She attains her true place in Greek mythology after Hades, the Greek god of the underworld, and of money, abducts her and forces her to become his Queen. After a time below, she is allowed up to the surface, for a part of the year, only to return below for the rest of it for all eternity. There is nothing consensual or pretty about these events. The initial trauma is total and encompassing, but in most versions of the Greek myth, Persephone is transformed sufficiently that she returns acceptantly to Hell each year, to wear her crown on Hades' side.

But for now, there will be a lot of screaming and tears.  

Quo vadis, euro?

Where is the euro headed? The race for the top job at the European Central Bank is heating up. In fact, it just got nasty. As this is happening, the Finance Ministers' Council, ECOFIN is preparing to discuss proposals to reform the economic constitution of Europe this Monday and Tuesday.

Axel Weber, head of the German Bundesbank, withdrew from the running for the ECB's top post. Angela Merkel, the German Chancellor, had been pushing for his appointment. He complained on pulling out that there was too much opposition in Europe (meaning among the member states of the EU) for the kind of policies he favours. The most important of those is letting a weak country in the euro zone go bust rather than buying its bonds. That is the most important, as it is the only German policy that the ECB would control.

The agenda for this week's meeting of ECOFIN will discuss a number of measures for dealing with the current euro crisis. The second most important set of proposals intend to combat tax evasion, thereby improving government finances across Europe. It is not a proposal to harmonise taxes, however. That has been and remains a non-starter.

The most important proposal from the Commission is to extend the EU's power to dictate, supervise and punish disobedience of national governments on macroeconomic imbalances. At least it reads that way on paper. What does this mean, and should we care?

First, the supervision and punishment part should be taken with more than a pinch of salt. The language is borrowed directly from the mechanisms that do the same thing for government borrowing, but in practice, have proved illegitimate for the majority of member states in the EU.

Second,' macroeconomic imbalances' refer to most economic trends within national economies, so it would extend the EU's legal right to demand things of national governments into all sorts of areas not currently allowed. It would also allow Europe to claim that it has a legal right to decide on things going on in the private sector. For example, the European Commission has already announced it wants to control is the amount of money that private individuals and companies can borrow for any purpose.

These rules reflect a long-standing feud between the Commission, which is unabashedly supporting 'old Europe' against the newer member states of 'new Europe', that have higher inflation rates, borrowing rates and consumption of goods and services originating from outside the country. The Commission wants to clamp down on current account imbalances, which effectively mean that a country would not be allowed to consume more than it had already earned as a country.

It should be clear this is a non-starter. The Commission has been trying for ages to do something like this and failed. So why is it trying now, and why is it on the Council's agenda for Monday and Tuesday? Germany and the Netherlands have been pushing for their rules, their understanding of which way the euro should go. They have hated the behaviour of the countries now in trouble ever since they were admitted. Now they want to impose the control they never had. They are hoping for the same collapse of self-confidence in Southern and Eastern Europe that happened in the Soviet bloc at the end of the Cold War. The end of history. The end of politics, and the rise of technocratic control.

Axel Weber has looked into the heart of the EU and has seen that the future will be different. We should take note of that, as should all European governments.

Europe's new economic constitution

France and Germany, with the support of the Netherlands, have agreed on the price for supporting the euro zone's weaker economies. It will be a stronger economic constitution devoted to a supply-side competitiveness policy for the euro zone, and indeed for the entire EU. The agreement will form the centrepiece of the EU's Spring Council on 24-25 March.

What does this mean? It means that national governments must do everything in their power to make their economies attractive for private investment capital. This means limiting government spending and  borrowing, and restructuring the economy to promote economic renewal in new economic activity. Subsidies must be cut, job protections removed and unemployment insurance modified so that capital--financial, industrial and human--can be re-allocated to more productive endeavours. Government spending and market intervention is allowed to the extent that it encourages businesses and individuals to shift from sunset industries, where emerging markets are on an equal footing with the advanced economies of Western Europe, to sunrise industries where first-mover advantages are hopefully still to be had.

France and Germany's demands will likely be a reform of an existing instrument, the Integrated Guidelines. These Guidelines are decided collectively by the European Council under the advice of the European Commission and are used to set the standard that national governments are supposed to strive for in economic, and increasingly social policy. National governments are then required to prepare National Action Plans each year, which the Commission reports on and their colleagues in the Council then evaluate--with approval or disapproval--and if they feel it is required, recommend changes to the government in question.

Once upon a time, the Integrated Guidelines were limited to macroeconomic policy and known as the  Broad Economic Policy Guidelines (BEPG). They were designed to coordinate economic policy for the euro zone members, but also for non-member states, as the idea was that they would join the euro sooner rather than later. That process started after 1992, once the political agreement to launch the euro had been made. The Integrated Guidelines added similar benchmarking, reporting and peer review for labour market policy (which covers certain aspects of skills development, education,  unemployment insurance and measures to promote work by older. minority and female residents) from 1997 onward, and competitiveness policy more broadly from 2005 onward. That was the year that the EU reformed and strengthened its goal to become the world's most competitive economic zone by 2010.

The Integrated Guidelines were a great idea, but they had very little impact on national policies, and now Germany and France have agreed that they should be granted more importance than they have had before. The Guidelines are part of what is known in Europe as the Open Method of Coordination, which stresses that governments should view the benchmarks as voluntary and that strict demands contradict the spirit of the arrangement, which is to let 1000 flowers bloom.

The Franco-German deal will install a much more extensive economic constitution for Europe, if the Council adopts it. The question is: how many obligations will a successfully agreed-upon reform of Europe's economic constitution place on EU member states? All must agree. France and Germany will not gain everything they want. Now that they have decided what they will strive toward, the next three weeks will be surely be devoted to various combinations of coalition-building, sweet-talking, side-deals, arm-twisting and brow-beating to make an agreement possible.

France and Germany must consider more strongly than they have in their press statements to date what their narrative of success and appropriate policy actually entails.  Messages from Berlin argue that Germany must be the standard for the new economic constitution. Parts of that are right, but parts of that are also surely wrong and inappropriate for Europe. Germany is a highly conservative country in which privilege, class and gender biases are institutionally reinforced. That is hostile to some understandings of how the state should govern society, and of what a good society should strive towards. Economic policy only survives intact if it is embedded in social acceptance. German ideas of what is right are not European ideas, nor should they be. In the time to come, France may prove to be crucial in determining the final outcome. It is not as dogmatic as Berlin, and it has a stronger tradition of state intervention in the economy and social justice as part of the public good that resonates well in many other parts of Europe.

Germany will not only have to make demands; it will have to listen as well and consider alternative visions in good faith of what the state is there to do.

A constitution is a political compromise, and it must reflect everyone to be legitimate and not do harm.