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Britain Takes a Step Back From Europe

When Countries Fail

A moving essay of watching a proud country's ecconomic demise.

Bitterest of nights when Arctic ice entered our country's soul

 In the bleak midwinter Frosty wind made moan, Earth stood hard as iron, Water like a stone; Snow had fallen, snow on snow, Snow on snow.
(In the Bleak Midwinter by Christina Rossetti)Via-Irish Independent


By Lise Hand


Monday November 29 2010

The Arctic air was frozen as a blanket of snow settled over the towns and cities, the meadows and mountains from the Atlantic Ocean to the Irish Sea.

But this was nothing, nothing compared to the ice that entered the soul of the country's men and women last night. The glacial, biting chill that descended at the sight of our Taoiseach, our Head of Government, announcing that the economic sovereignty of Ireland had been exchanged for the modern equivalent of 30 pieces of silver, or €85bn.

And the bitterest, coldest fact of all was that €17.5bn of that bailout is to come from the National Pensions Reserve Fund. This was our money under the mattress, the comforting National Nest-Egg that was salted away for a rainy day.

Well, now the hardest of rain has fallen, but is this nest-egg being deployed to help get the country back off its knees, to aid the long march back out of the valley and on to the hilltops?

Is this last legacy of the Celtic Tiger being used to put the unemployed back to work, to build new schools as an investment in the indebted generation to come, to ease the crippling burdens on small businesses struggling to keep afloat?

No. It will rejoin the other lost billions being poured into our banjaxed banks, those shattered receptacles of greed and hubris and treachery which have put this frost on our land.

It was the bitterest of nights for our Taoiseach as he took his seat at the podium in the press centre in Government Buildings. On one side of him was Green Minister Eamon Ryan, on the other sat Kevin Cardiff, the secretary general in the Department of Finance -- that chair had been reserved for Culture Minister Mary Hanafin but she (possibly accidentally, possibly deliberately) sat down one place further away from Brian Cowen.

This was one historic photo-opportunity that nobody wanted to be in.

By the time he delivered the avalanche of bad news, most of the figures were already out, and the scale of the bailout was beginning to sink in.

The Taoiseach looked strained and pale but composed as he tried to put the best possible face on this billion-dollar digout. He stressed that this "final agreed programme represents the best available deal for Ireland".

"It allows us to move forward with secure funding for our essential public services, for our welfare state, for the most vulnerable members of society that depend on them," he said.

"And it provides Ireland with vital time and space to successfully and conclusively address the unprecedented problems we have been dealing with since this global economic crisis began."

The Taoiseach insisted that the Government had "carefully considered all available policy options" before signing on the dotted line.

It's hard to imagine how desperate the horse-trading must have been, how the Taoiseach and the Finance Minister and the governor of the Irish Central Bank and the head of the National Treasury Management Agency at various times faced the flinty row of negotiators and pleaded for leniency, while option after option was dismissed. Senior bondholders must be saved above all -- the Irish people would have to suck it up. What a depressing image to contemplate.

The Taoiseach insisted that this deal gave us "further room to manoeuvre", but it's hard to see how any manoeuvres are possible when your back is right against the wall.

As Cowen left the press centre it was announced that this would shortly be followed by a joint press conference by the IMF, the ECB and the EC. "In other words, the real Taoiseach, Tanaiste and Minister for Finance," one insider grimly muttered. It would've been funny if there hadn't been a horrible grain of truth in it.

And right on time, a quartet of men walked on the podium; two from the IMF, including the team's head Ajai Chopra, a chap from the EC and another from the ECB.

They didn't look like the Four Horsemen of the Apocalypse, but it felt a bit like Armageddon all the same. And like our Taoiseach, they strove mightily to put a good slant on this bailout. Chopra was full of praise for the Irish negotiating team, lauding them as "proactive".

But every now and then the steel fist glinted behind the velvet glove.

The National Nest-Egg had been sacrificed because it was felt that "everyone should put in whatever they have".

In fact, according to Chopra, the use of the National Pensions Reserve Fund is "a win-win situation", basically because the country doesn't have to go further into hock.

But it's left the cupboard bare. It was our bit of shelter against the howling wintry storms of the global markets.

Now we're at the mercy of the elements.

- Lise Hand

Irish Independent

George Soros Talks Obama’s Book in Threat to Euro

Via-Bloomberg

Amity Shlaes

George Soros has been making what he calls a “grave accusation” against Germany. The financier- philanthropist said last week that Germany is endangering the European Union by keeping wages down and pursuing a balanced national budget too aggressively. Germany’s parsimonious attitude, Soros suggests, may bring down the euro.

You get the feeling that Soros is speaking directly to Angela Merkel, trying to give the German chancellor a kindly tutorial. In a speech at Humboldt University, Soros said that Germany had understandable reasons for pursuing thrift. But, he added, the country should spend more and advocate aggressive spending and looser money by the European Investment Bank and the European Central Bank, respectively.

Soros implied that Germany should look to the U.S., where President Barack Obama has spent vigorously and Federal Reserve Chairman Ben Bernanke has created money for the greater good. Soros, the tutor again, underscored that Germany clearly “does not know what it is doing.”

It is time to turn the question around, and make a grave accusation against Soros. It is Soros who is endangering the euro by advocating these spending and loosening policies. They are policies that may give Europe budget problems that render its currency vulnerable to attack by Soros-like traders. Perhaps, like Merkel, Soros is doing his endangering for understandable reasons. Nonetheless, the danger is there, and worth laying out.

Currency Strains

Start with the euro’s creation, as Soros has. Europe unified its monetary policy through the euro before it unified politically, therefore sustaining member countries’ abilities to pursue the kind of independent fiscal policies that can strain a joint currency.

Soros labels this construct “patently flawed.” Clever is another way to describe it. The enormous carrot of access to the euro-land market incentivizes nations to apply the stick of fiscal discipline to themselves. Under that plan, countries that fail to apply the stick with alacrity face the unpleasant choice of initiating extraordinary tax increases and budget cuts to curtail debt or being forced out of the monetary union.

That happened to the U.K. back in the early 1990s, when Soros cost the country $3 billion while he made $1 billion by forcing Britain out of the European Exchange Rate Mechanism, the euro precursor.

What Merkel Knows

As a former East German, Merkel has visceral knowledge of the enormous waste of human capital that takes place in countries lacking good currencies. Because the East German mark of her young adulthood was a political fantasy rather than a genuine currency, scientists such as Merkel couldn’t purchase the equipment they needed to compete with Western scientists.

Germans like Merkel recall better than Americans what happened when Soros’s raiders hit the U.K., so they know how brutally any non-dollar currency, even the currency of a regional leader, can be brought down.

Beyond Merkel’s personal memory there is the German national memory of the 1920s hyperinflation. That resulted from the decision of a desperate Weimar Republic to inflate its way out of war debts. That hyperinflation so punished middle-class savings and so weakened the 1920s economy that the average German became more susceptible to maniacs like Adolf Hitler and the communists.

Pressure on Germany from Soros, and for that matter, from the Obama administration, makes it harder for Merkel or other European leaders to heed their own sound instincts. Soros’s pressure also obscures a desirable policy path for Germany, one in which it practices fiscal discipline and growth creation so well that other euro nations emulate it.

False Choice

The Keynesian argument that the choice is binary, between spending and pain, is untrue. For one thing, deflation isn’t always painful -- in the 1920s, even as Germany agonized, the U.S. thrived during an American deflation. Budget tightening, especially in combination with competitive tax codes, may put all Europe on a growth path that renders its currency a true competitor for the role of global leader over the long run.

The best defense of Soros is that Soros-recommended stimuli by Germany and in euro-land will indeed yield strong growth, and prevent one recession, just as he says. But what happens after that recovery? Europe, like the U.S., isn’t growing fast enough to continue spending its way out of every recession. It is likely that German-tolerated euro-spending on a big scale in 2010 or 2011 would render Europe’s nations the very sort that vulnerable currency traders specialize in annihilating.

The Obama administration for its part is being disingenuous when it makes spending recommendations. As my colleague Sebastian Mallaby at the Council on Foreign Relations notes, the dollar’s status as the currency of reserve amounts to a sort of Kevlar vest against the bullets of currency raiders. The euro possesses no vest.

Soros wants to help the Obama administration and the Keynesian spending that Democrats favor. If Europe spends, that makes the U.S. look less isolated. A big spending Europe also makes the euro less of a threat to the dollar. In any case, it is hard to imagine that what Soros alleges about Germany is true for Soros: that he just doesn’t understand what he is doing.

Beating swords into welfare cheques

Via-Macleans.CA

MARK STEYN: Hedonistic benefits, low birth rates—Europe needs protection from itself

The trick in this line of work is not to be right too soon. A couple of years back, I wrote a bestselling hate crime. Don’t worry, I’m not in plug mode; indeed, I shall eschew even mentioning the book’s title. But its general thesis is that the jig is up for much if not most of the Western world. “Alarmist,” pronounced Maclean’s, reflecting the general consensus of polite society here and in Europe.

Polite society has spent the years since playing catch-up. So if you don’t want your fin du civilisation analysis from a frothing right-wing loon you can now get it from the house-trained chaps at the New York Times:

“Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism . . . ‘The Europe that protects’ is a slogan of the European Union.”


Protects from what? Right now, Europe mostly needs protection from itself, and its worst inclinations:

A Big-Bang, Trillion-Dollar Euro Burial?

"Friends, Romans, countrymen, I come to bury Caesar, not to praise him."

Via-TCS Daily

By Larry Kudlow

Oops. What the European leaders really meant to do with their big-bang, trillion-dollar sovereign-debt rescue was to save the euro currency, not to bury it. But with the cave in by European Central Bank head Jean-Claude Trichet (formerly a hard-money man and closet gold watcher) to use the "nuclear option" to buy up dubious sovereign debt, the euro is likely to keep depreciating.

When central banks buy bonds they pay for it with new cash. That's almost always negative for currency values. Ben Bernanke bought a ton of new mortgage and Treasury bonds last year, and until the Greek crisis came along, the dollar sunk like a stone. Get ready for more euro declines.

And then you wonder if the European leaders came to save welfare socialism rather than bury it. The mere fact that this rescue package will provide loan guarantees to the very countries that boast the largest welfare states and can't afford to pay for them probably suggests that the loan guarantees will guarantee more welfarism.

There's a lot of talk about belt-tightening and spending cuts. But where's the enforcement mechanism? No one knows. This is the Achilles' heel of the whole European Union experiment. The monetary discipline has now been broken while the sought-after fiscal discipline is still broken.

If the trillion-dollar European package succeeds in calming lending markets and stopping an outright credit freeze-up, that's good, at least in the short run. Perhaps it will allow a cyclical-growth recovery, with JPMorgan indexes of Euroland purchasing managers or manufacturing and services showing the possibility of a 3 percent continental growth rate. Yet while a cheap euro will stimulate exports in the short run, in the longer term it will stimulate inflation.

And in addition to Western Europe's failure to enforce real welfare-state reductions, there really is no flat-tax reform — such as adopted in Eastern Europe — to promote growth. Ironically, the countries of Western Europe, including the southern tier of Greece, Spain, Portugal, and Italy, have a lower corporate tax rate than the United States. That is good. But they could build on that with real flat-tax reform, rather than jacking up value-added taxes.

So there are no enforced spending cuts, there is no flat tax, and there is plenty of political upheaval. (Angela Merkel just lost an important regional election.) So right now, on the day after a big relief rally in stock and bond markets, a sober assessment of the so-called rescue package doesn't look so great. Actually, the real winner looks to be gold, which is up $20 this morning and is almost at its all-time high of $1,226. That's a sign of no confidence in the European story.

The euro currency has been compromised and the European welfare state continues. Not good.



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Czech president compares EU to Soviet Union

BRUSSELS – The European Union has turned into an undemocratic and elitist project comparable to the Communist dictatorships of eastern Europe that forbade alternative thinking, Czech President Vaclav Klaus told the European Parliament on Thursday.

Klaus, whose country now holds the rotating EU presidency, set out a scathing attack on the EU project and its institutions, provoking boos from many lawmakers, some of whom walked out, but applause from nationalists and other anti-EU legislators.

Klaus is known for deep skepticism of the EU and has refused to fly the EU flag over his official seat in Prague during the Czech presidency, saying the country is not an EU province.

He said current EU practices smacked of communist times when the Soviet Union controlled much of eastern Europe, including the Czech Republic and when dissent or even discussions were not tolerated.

"Not so long ago, in our part of Europe we lived in a political system that permitted no alternatives and therefore also no parliamentary opposition," said Klaus. "We learned the bitter lesson that with no opposition, there is no freedom."

He said the 27-nation bloc should concentrate on offering prosperity to Europeans, rather than closer political union, and scrap a stalled EU reform treaty that Irish voters have already rejected.

Klaus said that questioning deeper integration has become an "uncriticizable assumption that there is only one possible and correct future of the European integration."

"The enforcement of these notions ... is unacceptable," Klaus said. "Those who dare thinking about a different option are labeled as enemies." Observers had been expecting Klaus to deliver a critical speech during his first and only visit to the EU chamber at a time when his country holds the EU limelight as chair of the 27-nation bloc.

"I have never experienced a situation where the presidency of the European Union ... compares the EU with the Soviet Union," said Belgian lawmaker Ivo Belet.

More...

Complete Original Article

MEASURING THE UNFUNDED OBLIGATIONS OF EUROPEAN COUNTRIES

Europe is undergoing two major transitions. On the demographic front, many European countries are undergoing rapid population aging as their Baby Boom generations enter retirement, senior citizens live longer and fertility rates remain well below the population replacement level. On the economic front, 15 European countries have adopted the euro as a common currency, eliminating the ability to use monetary policy to achieve country-specific economic goals. Both transitions will place tremendous, conflicting pressures on the domestic national budgets of European countries, says economist Jagadeesh Gokhale.More...
As a result, all European countries have large unfunded liabilities -- the difference between the projected cost of continuing current government programs and net expected tax revenues. In general:

* The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government's borrowing rate, in order to fund current policies indefinitely.
* At the low end, Spain would need to have almost two and one-half times (244.3 percent) its annual GDP invested.
* At the high end, Poland would need to have 15 times its GDP invested in real assets, forever!

No EU government has made the necessary investment, says Gokhale. As an alternative, the next-best option is for these countries immediately to gradually but significantly increase saving and investment. In particular, the average EU country could fund its projected budget shortfall through the middle of this century if it put aside 8.3 percent of its GDP each and every year. Despite this adjustment, a budget shortfall is likely to emerge after 2050, requiring additional fiscal reforms.

What will happen if EU countries do not set aside these funds? Unless they reform their health and social welfare programs, they will have to meet these unfunded obligations by increasing tax burdens as the larger benefit obligations come due, says Gokhale.

Spending already averages 40 percent of GDP today:

* By 2020, the average EU country will need to raise the tax rate to 55 percent of national income to pay promised benefits.
* By 2035, a tax rate of 57 percent will be required.
* By 2050, the average EU country will need more than 60 percent of its GDP to fulfill its obligations.

Source: Jagadeesh Gokhale, "Measuring the Unfunded Obligations of European Countries," National Center for Policy Analysis, Study No. 319, January 22, 2009.

For text:

http://www.ncpa.org/pub/st/st319/st319.pdf

Complete Original Article