298 lines
11 KiB
Plaintext
Executable File
298 lines
11 KiB
Plaintext
Executable File
finance
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comment
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ambroseevans_pritchard
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8166198
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-----
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# Germany faces its awful choice as Spain wobbles
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## Desperate moments call for desperate measures. In June 1940, the British
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War Cabinet led by Winston Churchill offered a total national merger to a
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shattered France.
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![The British War Cabinet led by Winston Churchill offered a total national
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merger to France, which was rejected by the French cabinet][1]
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The British War Cabinet led by Winston Churchill offered a total national
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merger to France, which was rejected by the French cabinet Photo: PA
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[![Ambrose Evans-Pritchard][2]][3]
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By [Ambrose Evans-Pritchard][4] 5:45AM GMT 29 Nov 2010
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[Comments][5]
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"France and Great Britain shall no longer be two nations, but one Franco-
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British union," read the declaration.
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"The constitution of the Union will provide for joint organs of defence,
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foreign, financial and economic policies. Every citizen of France will enjoy
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immediately citizenship of Great Britain, every British subject will become a
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citizen of France."
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The text was drafted by Jean Monnet, the father of the European Project. If
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alive today, he would be pounding on the door of the Kanzleramt, exhorting
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Angela Merkel to offer a total fiscal union to all members of the eurozone
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before everything falls apart, and to be enshrined in EU treaty law forever.
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"All debts of Greece, Cyprus, Italy, Spain, Portugal, and Ireland will be
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fused immediately with German debt; a single treasury will control spending,
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and issue euro-bonds for all Euroland," or some such formula.
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This is the sort of game-changer that may now be required to save EMU and the
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Monnet dream. Germany must contemplate doing for Euroland what it has done for
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its own Volk in the East over the last 20 years - pay big transfers - or watch
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its strategic investment in the post-War order of Europe collapse with a bang,
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and in hideous acrimony. Tough call.
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## Related Articles
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* [Contagion strikes Italy as Ireland bail-out fails to calm markets][6]
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29 Nov 2010
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It is clear to those working in the bond markets that the debt crisis in the
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EMU periphery is nearing danger point, and risks spiralling out of control as
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quickly as the Lehman-AIG-Fannie-Freddie crisis in 2008.
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Prof Willem Buiter, chief economist at Citigroup, said last week that Portugal
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is likely to need a rescue before the end of the year and that Spain will
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follow "soon after".
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Klaus Baader from Societe Generale issued a report the same day entitled
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"Eurozone sovereign debt crisis: next stop Spain". He suggests that the EU
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bail-out fund raises money to buy Spanish bonds pre-emptively. Nice idea, but
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what would the German constitutional court have to say about that?
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At Deutsche Bank, Thomas Mayer said Spain might soon need a flexible credit
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from the IMF. Informed opinion has turned.
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Markets are already pricing a 23pc chance of default in Spain (34pc for
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Portugal, and 39pc for Ireland). If the country needs a rescue, it instantly
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exhausts the credible financial and political firepower of the EMU system.
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The EU's €440bn (£372bn) rescue fund "looks small, very small, too small",
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says Dr Buiter. Alleged plans for a double-up are circulating "en coulisses"
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in the Berlaymont, but Berlin squashed the idea as "completely over the top".
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In any case, we are beyond the point where escalating bluffs can achieve
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anything. Markets doubt that it makes sense to heap further debt on states
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that cannot service existing debt.
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The EU strategy of hair-shirt austerity and 1930s debt-deflation for crippled
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economies has been tested in Ireland, and has led to the same doleful outcome
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as the 1930s. Tax revenues have collapsed. The deficit has hardly shrunk at
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all. The policy is based on mechanical theories of the "fiscal multiplier",
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and is patently self-defeating. Sinn Fein's landslide victory in Donegal is a
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condign response to this academic hocus pocus.
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Should the EU really impose a 6.7pc interest charge on Ireland's bail-out
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loans, it should not be surprised if the new Irish government in January walks
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away from the whole stinking arrangement, and pulls the plug on Europe's
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banking system. Many might cheer.
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However, it is Spain that determines EMU's fate. Spanish premier Jose Luis
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Zapatero said there is "absolutely" no chance that his country would need a
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rescue. "Those investors shorting Spain are making a big mistake."
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As Keynes once said, blaming economic crises on speculators is "not far
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removed, intellectually, from ascription of cattle disease to the "evil eye".
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Has Mr Zapatero read the IMF's devastating Article IV report on his own
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country? It states that the government's "gross financing needs" for 2011 will
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be €226bn, or 21pc of GDP. "Spain's financing requirements are large and,
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retaining market confidence will be critical. Spain has exhausted its fiscal
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space. Targets should be made more credible."
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Madrid must attract €226bn of good money from Spanish savers, German pension
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funds, French banks, Japanese life insurers, and China's central bank, so that
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an incompetent government (this one happens to be socialist, but the Greek
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conservatives were worse) can continue to run budget deficits of 7pc to 8pc of
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GDP in 2011. Why should they lend a single pfennig, having already been told
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by EU leaders that they will face scalping if Spain ever needs a rescue?
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"The economy is highly indebted and has one of the most negative international
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investment positions (IIP) among advanced countries," said the IMF. Its
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external accounts are under water by 80pc of GDP.
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Furthermore, Spanish banks will need to roll over €220bn in 2011 and 2012,
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according to Enrique Goñi, head of Banca Civica. "We're in the antechamber of
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a new liquidity crisis. We're living through a financial pre-collapse," he
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said.
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Now, before yet more Iberian brickbats fly my way, let me say that Spain's
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public debt will be a modest 63pc of GDP this year (though total debt is over
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270pc, which is what matters). The savings rate is high.
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The Banco de Espana has been heroic, but then it needed to be given that Spain
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no longer has control over its policy levers. The country had to contend with
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real interest rates of minus 2pc during the long boom, and cannot offset the
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horrendous bust with monetary stimulus or a properly valued peseta.
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Spanish readers like to point out that British failings are comparable or
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worse. Whether or not that is true, it is irrelevant. Britain is not a
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prisoner of EMU. You might as well compare chalk and cheese.
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We can argue whether the overhang of unsold properties in Spain will reach
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1.5m, or six years' supply, as claimed by Madrid consultants RR de Acuna, but
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there is little doubt that the "Cajas" and smaller banks have played a game of
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"extend and pretend" to disguise the true scale of losses on their property
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loans.
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This then is the headache facing Angela Merkel. By the time she inherited the
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EMU debacle, imbalances were already chronic, and she certainly does not have
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popular mandate for Churchillian gestures right now.
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Even so, it is remarkable that Berlin is not even allowing the European
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Central Bank to pursue the first and obvious line of defence, which is to calm
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eurozone bond markets by using its financial stability powers to buy Irish,
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Portuguese, and Spanish debt on a nuclear scale.
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As the storm rages, the ECB is tightening monetary policy by draining
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liquidity (the Eonia rate is up from 0.4pc to 0.8pc since mid-year) and by
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signalling that they may soon shut the lending window that keeps Greek, Irish
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and Iberian banks alive.
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Frankfurt is doing this even though the eurozone's M3 money supply contracted
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on a month-to-month basis in both September and October, as did private
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credit. Is this just incompetence, or is somebody pushing PIGS into the
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slaughterhouse?
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As for Britain's offer in 1940, it is hard to see how such a union could ever
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have worked over time. It was rejected by the French cabinet, though premier
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Paul Reynaud pleaded in favour. One Gallic patriot said that utter destruction
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was better than becoming a "dominion of the British Empire".
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By the same token, today's eurozone patriots might ask whether it is really
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worth giving up ancient sovereignty to keep a currency.
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[What are these?][8]
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* Share: [Share][7] [ ][9] [ ][10]
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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8166198
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/Germany-faces-its-awful-choice-as-Spain-wobbles.html
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Telegraph
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## [Ambrose Evans-Pritchard][3]
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* ### [Finance »][12]
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* ### [Comment »][13]
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In finance
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[![A protester stands opened armed in front of the military in Pearl Square in
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Bahraini capital Manama][14] ][15]
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### [Energy crunch as nuclear and oil both go wrong][15]
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[![Will 'Chindia' rule the world in 2050, or America after all?][16] ][17]
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### [Will 'Chindia' rule the world in 2050, or America after all?][17]
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[![From the overheating East to a troubled West, Ambrose Evans-Pritchard
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offers his predictions on the global economy next year.][18] ][19]
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### [Predictions for 2011: Overheating East to falter][19]
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[X][7] Share & bookmark
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Digg Fark LinkedIn Google Buzz StumbleUpon Y! Buzz
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[What are these?][8]
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Share:
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* [ ][7]
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* [ ][9]
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* [ ][10]
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* [Tweet][11]
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* Advertisement
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![][20]
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telegraphuk
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Please enable JavaScript to view the [comments powered by Disqus.][21] [blog
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