Euro Area
Talks Break Down, Or Maybe Not
A brief update on the EU's bizarre mercantilistic plan to increase tarrifs on solar panels from China. As previously noted, it is not only shooting itself in the foot in order to protect a tiny minority of producers to the detriment of the far larger contingent of consumers, but is risking a trade war with China to boot.
China's trade association has let it be known that the talks with the EU's 'trade experts' have broken down, something the EU denies:
“The European Commission rejected Chinese trade association statements that talks to resolve a dispute over allegations of dumping of solar panels had broken down, while Chinese comments highlighted risks the dispute could escalate.
EU regulators agreed to impose solar panel duties earlier this month following a investigation launched by a complaint from German manufacturer SolarWorld.
The dispute has the potential to impact 21 billion euros ($27.1 billion) worth of imported Chinese solar panels, cells and wafers from manufacturers such as Trina Solar, Yingli Green Energy and Suntech Power Holdings.
A Chinese industry association authorized to represent Chinese solar companies told reporters in Beijing on Wednesday that it had made an offer during a visit to Brussels but was rebuffed by the European Commission.
"These claims are simply wrong and misleading for one simple reason – no formal negotiations are yet ongoing between the EU and China in the solar panel anti-dumping case," EU trade spokesman John Clancy said in a statement on Thursday.
We Can Inflate Too …
Perhaps it is a coincidence that we get these news so shortly after James Bullard forwarded his ideas as to how the ECB could most effectively join the global inflatathon. In any case, ECB board member Peter Praet – hitherto regarded as a 'hawk' – let it be known that the ECB too has a 'toolkit' at its disposal that can be 'expanded' to inflate the euro area back to economic Nirvana. What a surprise!
“The European Central Bank could expand its monetary policy toolkit if needed to respond to threats to price stability, and must ensure the euro zone economy does not enter a downward spiral, ECB Executive Board member Peter Praet said on Wednesday.
"We have an objective: price stability," Praet, who is in charge of the economics portfolio on the ECB's six-member executive board, told a conference in Washington.
"If that objective is at risk, we have the possibility … to expand the range of (monetary policy) instruments if we think it's necessary for that objective," he said.”
The Misguided Urge to Close Loopholes
As 'Der Spiegel' reports, there are efforts underway in the EU to close the tax loopholes used by multinational corporations to quite legally avoid taxes. Allegedly it is a 'tough battle' as a few member states are not very happy about these plans. Recently Apple's CEO was forced to defend his company's use of such loopholes in front of a very hostile Congress. Everybody seems agreed that tax loopholes are somehow bad. But are they really?
Ludwig von Mises reportedly once remarked that 'tax loopholes allow capitalism to breathe'. In a speech he delivered in 1951 at a conference in White Sulphur Springs, West Virginia, he remarked that so-called 'loopholes' are actually simply the law. One should not even call them 'loopholes'.
“What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. . . . The income-tax exemptions in our income tax are not loopholes. The gentleman who complained about loopholes in our income tax . . . implicitly starts from the assumption that all income over fifteen or twenty thousand dollars ought to be confiscated and calls therefore a loophole the fact that his ideal is not yet attained. Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country.”
The Eater of Children
The EU's monetary and economic affairs commissar Olli Rehn is concerned that his reputation as the enforcer of austerity gives the wrong impression about the true nature of Olli, deep down. As the NYT reports, he wants to 'peel off' the label that has been stuck on him. One very big concern of his is to avoid the impression that he is somehow not a Keynesian.
“The European Union's top economic policy maker and scourge of debt-fueled budget deficits, is fed up with austerity. Or at least with being tarred by a term that "is clearly used to label somebody as an unworthy person who is almost eating children."
With more than 26 million Europeans out of work and the economies of the 27-nation bloc shrinking over all for six quarters in a row, Mr. Rehn, the commissioner for economic and monetary affairs, has become a lightning rod in recent months for swelling anger across Europe against the harsh belt-tightening policies generally known as austerity.
But in an interview, Mr. Rehn, 51, described himself as a "doctrinaire agnostic in terms of economic policy" who has read and found much of value in the writings of the British economist John Maynard Keynes, whose name is synonymous with the idea of economic stimulus in times of crisis.”
The Out of Touch Eurocracy
Not a day passes without the citizens of the EU witnessing new absurdities being imposed by the apparatus of compulsion and coercion in Brussels. The decrees emanating from the EU's center of power of course have to be read by the cold light familiar from morgues these days, as the bureaucrats in their wisdom have felt it necessary to ban the incandescent light bulb in the wake of heavy lobbying by industry. The pretext was that they needed to 'save the planet' and who can be against saving the planet?
Following on the heels of the solar panel duties madness that risks a trade war with China, the EU's commissars have now decided that the producers of olive oil require their protection – this time under the pretext of safeguarding the interests of consumers. Consumers will of course end up paying through the nose for this nonsense.
According to a recent Reuters report, the “EU finds time to tell restaurants how to serve olive oil”:
The 'Fair Share'
Whenever a politician appeals to either his fellow citizens' patriotism or employs the term 'fair' (as in 'fare share' or 'fair trade', to name two examples), he is about to embark on a policy that is deeply injurious to same citizens. The term 'fair' specifically means that the rapacious paws of the State are about to be thrust deep into their wallets on some pretext. Usually it is either to 'protect' favored interest groups that can afford to send their lobbyists to the centers of political power, or it is a simple tax grab due to the perennial problem that treasuries are weighed down by the deficits of the past and need new sources of income to buy the next round of votes.
What is not going to happen after citizens have coughed up the share deemed to be 'fair' is that they will enjoy an improvement in the services they never asked for in the first place. The funds just disappear in the maws of Leviathan never to be seen again. This policy of 'fairness' can be implemented up to a point; there is a threshold beyond which the economic damage it inflicts becomes so large that the government's revenue actually shrinks instead of increasing. These negative repercussions are then held to require even more interventions and so a vicious circle ensues. The eventual long term outcome is either that the system gives up the ghost in some shape or form (often by means of a destruction of the underlying currency system) or that the governments concerned decide to embark on war.
EU Imposes Tariffs on Chinese Solar Panels
The EU has finally decided to give in to the lobbying of an industry group that wants to get government protection against the alleged 'dumping' of goods by solar panel manufacturers in China.
Apparently no-one in Brussels deigned to ask consumers, i.e., the buyers of solar panels, if they agreed with the idea (we know what their answer would be though). Solar energy has for a long time been a money loser with a net negative energy equation that could only hope to survive by means of government subsidies. Now that prices are finally declining to a level that may make solar energy worth considering, the cries of 'dumping' go up. What the term indicates is that the bureaucracy has decided that domestic producers must be protected against allegedly 'unfair competition' from foreigners who produce and sell the same goods more cheaply. In this way, a tiny group of manufacturers is assured of higher profits on the back of the great mass of consumers. Obviously this is a self-defeating strategy. It means that society at large will be worse off. But lets move on with it anyway, and damn the torpedoes.
“The European Commission agreed to impose punitive import duties on solar panels from China in a move to guard against what it sees as dumping of cheap goods in Europe, prompting a cautious response from Beijing which called for further dialogue.
EU commissioners backed EU Trade Chief Karel De Gucht's proposal to levy the provisional duties by June 6 and make Chinese solar exports less attractive, two officials said.
Shares in German manufacturers SolarWorld, Phoenix Solar and Centrotherm rose sharply, while China's Suntech fell heavily. The investigation into accusations of dumping is the biggest the commission has launched, but Brussels is trying to tread a careful path, knowing it needs China, the EU's second largest trading partner, to help the bloc pull out from recession.
China's ambassador to the World Trade Organisation, Yi Xiaozhun, called the decision a mistake although he declined to comment on any possible retaliation. "It will send the wrong message to the world that protectionism is coming," Yi told Reuters in Geneva on Wednesday.
China's Commerce Ministry on Thursday called for dialogue. "We don't want to see a trade war between the two sides and we hope the EU can cautiously make the ruling decision on China's solar panel products," spokesman Yao Jian told reporters.
Given that Germany and France are seeking to increase exports to China, De Gucht will try for a negotiated solution with new Chinese Commerce Minister Gao Hucheng before an EU deadline in December to cement the levies for up to five years. That could mean agreeing a minimum price at which all solar panels makers selling in Europe adhere to, diplomats said. The EU duties, which will come into effect once the commission publishes the decision in its Official Journal, will be set at an average of 47 percent, officials said.
Trade specialists from all 27 EU countries will be consulted on May 15 at a meeting in Brussels and are expected to back the decision, although their position is non-binding. The European Commission declined to comment.
Chinese solar panel production quadrupled between 2009 and 2011 to more than the entire global demand. EU producers say Chinese companies have captured more than 80 percent of the European market from almost zero a few years ago, exporting 21 billion euros ($27 billion) to the European Union in 2011. As a result, Chinese-made panels are as much as 45 percent cheaper than those made in Europe, industry executives say.”
Hollande: Europe Needs More Bureaucracy, More Spending and Higher Taxes
You can't keep a good énarque down. Faced with an economy that is no longer merely circling the drain but gurgling down it at great speed, Francois Hollande has discovered what Europe needs to fix its ailments.
Perhaps not surprisingly, his epiphany, revealed to the press after his first 150 days in office, consisted of the recognition that what the EU urgently needs is yet another layer of centralized bureaucracy, complete with its own taxing power and 'harmonized' taxes (this is the codeword for 'everybody's taxes should be as high as those in France, i.e., the highest possible') across the continent.
That will fix things. For sure.
According to a Reuters report:
“French President Francois Hollande called on Thursday for an economic government for the euro zone with its own budget, the right to borrow, a harmonized tax system and a full-time president.
At a 150-minute news conference marking his first year in office, a day after economic data showed France had slipped into recession, the Socialist leader defended his record on economic reform and budget discipline and told the French people they would have to work "a bit longer" for a full pension in future. Rebutting criticism that France has lost its leadership role in Europe because of its dwindling economic competitiveness, Hollande said he wanted to create a fully-fledged political European Union within two years.
"It is my responsibility as the leader of a founder member of the European Union… to pull Europe out of this torpor that has gripped it, and to reduce people's disenchantment with it," Hollande said. "If Europe stays in the state it is now, it could be the end of the project."
He acknowledged he could face resistance from Germany, Europe's dominant power, which opposes mutualising debt among member states. Berlin is also reluctant to give the euro zone its own secretariat for fear of deepening division in the EU, between the 17 members of the single currency and the 10 others. Non-euro Britain's government already faces growing domestic pressure to hold a referendum on leaving the bloc.
Hollande said he wanted Britain to stay in the EU but added: "I can understand that others don't want to join (the single currency). But they cannot stop the euro zone from advancing."
Speaking in Berlin before the French leader announced his initiative, German Chancellor Angela Merkel said her relations with Hollande were good, and she was "very optimistic" France would strike a balance between growth and budgetary rigor.
Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.
He proposed bringing forward planned EU spending to combat record youth unemployment, pushing for an EU-wide transition to renewable energy sources, and envisaged "a budget capacity that would be granted to the euro zone along with the gradual possibility of raising debt".
He also called for a 10-year public investment plan in the digital sector, the promised energy transition, public health and in big transport infrastructure projects.
Barroso Admonishes France
EU Commission president Manuel Barroso let it be known that France needs to present a 'credible reform plan' given the extension it has received with regard to reaching its 'fiscal target'. Good luck with that.
“European Commission President Jose Manuel Barroso said on Wednesday France needed to present a credible program of structural reforms as new data showed Europe's second largest economy slipping into a shallow recession.
Barroso, who was due later to meet President Francois Hollande in Brussels, said France must pursue reforms if the EU was to grant it two more years to bring its budget deficit down to 3 percent of economic output as promised. The extension would be approved "if France presents a credible reform program so that France can regain its competitiveness," Barroso told Europe 1 radio.
On Tuesday, the French parliament passed a landmark reform of the country's labor code, part of Hollande's efforts to convince European partners that he is committed to revamping the economy. But as preliminary data on Wednesday showed the French economy contracting by 0.2 percent in the first quarter, Barroso said that France needed to prove its commitment to pursue further structural reforms.
"The truth is that France has lost competitiveness over the past 20 years," he added.
Speculation of a cabinet reshuffle intensified on Tuesday after Foreign Minister Laurent Fabius, a former premier and finance minister, said France's giant Finance Ministry needed a "boss" to better coordinate economic policy. The remarks targeted Finance Minister Pierre Moscovici, whose left-wing firebrand junior minister Arnaud Montebourg has criticized budget cuts and had a series of run-ins with potential foreign investors in France.”
Not Even Germany Can Pull It Up – Sixth Negative Quarter in a Row
The economic news from Europe aren't getting any better, in spite of the abatement of crisis conditions in the financial markets. Once again the news were 'worse then expected', which has become standard operating procedure.
“Falling output across the bloc, from France to Finland, meant the 17-nation economy shrunk 0.2 percent in the January to March period, the EU's statistics office Eurostat said.
That was slightly worse than the 0.1 percent contraction forecast by economists polled by Reuters and highlighted the devastating impact of the euro zone's debt and banking crisis that has driven unemployment to a record 19 million people.
While Germany managed to grow 0.1 percent in the first quarter, the bloc's recession is now longer than the five quarters of contraction that followed the global financial crisis in 2008/2009 and dampens optimism of a quick recovery.
The European Central Bank's promise to buy the bonds of struggling governments has removed the threat of a euro zone break-up, but the crisis that began in Greece in 2009 has seeped across the bloc to suck in the wealthy nations such as France.”
A Brilliant Idea: Introduce More Taxes
Obviously, Shinzo Abe is not the only economic genius populating the global political scene. There is one man in Europe who has become known for both his perpetually slightly confused mien and his astonishing (for a politician) propensity to keep electoral promises, especially when they concern tax hikes that invariably worsen his country's economic contraction.
We are of course referring to Francois Hollande, as the title of this post already indicates, whom Gaspard Koenig once characterized so trenchantly as “the ultimate – and probably also terminal – embodiment of the European-style Welfare State”.
One can always hope on that 'terminal' point.
Hollande is – similar to many of his predecessors – apparently very concerned about keeping France's unique cultural heritage alive and kicking, even if that means he has to invent and/or raise a few more taxes here or there. Some people might of course be inclined to allege that he has found yet another justification for extending the State's rapacious claws further into its citizens' pockets. Naturally only people who don't understand the urgency of defending France's embattled culture from the onslaught of evil free markets with any and all means at the government's disposal would say such a thing.
ECB eager to Inflate
As we noted in our update on the last ECB rate decision, Mario Draghi said in his press conference that the ECB wishes for the creation of a larger ABS market (asset backed securities) in Europe in order to be able to monetize more debt. The difficulty for the ECB, as Draghi explained, is that it is forbidden by statute from financing governments, while monetizing bank loans directly has the disadvantage that they lack a market price and an independent credit rating. While one of the emergency measures the ECB has taken in the course of the crisis was to allow national central banks to accept such bank loans as collateral, these are only taken aboard at very large discounts in order to reflect the associated risks. This is obviously not a useful means for goosing credit expansion.
Hence the pining for more ABS issuance. The ECB also has plans to steer more credit in the direction of small and medium sized enterprises in the periphery, as the high interest rates on private sector credit in the periphery have failed to decline along with the yields on sovereign bonds.
After the G-7 meeting, Draghi talked about the 'many options' the ECB is considering, once again mentioning ABS as a potential target of ECB purchases. Apparently, the ECB doesn't want to get left behind in the global race to debase. It can even point to a very large decline in euro area inflation expectations for justification of more easing measures. After all, the 'price stability' policy also encompasses averting 'deflation' (this is to say, falling prices).
“European Central Bank President Mario Draghi said the ECB is considering buying asset-backed securities among possible options to support lending to small and medium-sized companies.
“We looked at a variety of things, one of which was this ABS,” Draghi told reporters after a Group of Seven meeting of finance chiefs in Aylesbury, near London. “We’re still looking at that, it’s one of the many options. We don’t have a position, certainly, on that.”
The ECB is keen to rally lending at banks, which account for about 80 percent of corporate financing in the euro area, compared with less than 20 percent in the U.S. Lending to households and companies in the region contracted for an 11th month in March, and small- and medium-sized companies, which account for the bulk of employment in Italy and Spain, have been particular victims.
“On the lending side, we see that the situation is still tight, especially in the periphery, but not exclusively,” Draghi said. Still, “the situation is in a sense getting less bad,” he said. “In other words it’s still tight, but it’s less tight than it used to be.” ECB Executive Board member Joerg Asmussen said on May 8 that the central bank has discussed ABS purchases, while his fellow board member Yves Mersch said the same day that it was “looking at ways to restart the ABS market.”
Acquisitions in the ABS market are “not easy for the ECB to do because we’re in a completely different set-up from the U.S., where you have a capital market,” Draghi said today. “So the ABS in this case would have to contain assets from the banking system of the euro system and you can understand what sort of moral hazard there is there.” Last month, the ECB Governing Council tasked technical committees at the central bank to investigate ways to stimulate lending to small- and medium-sized businesses.”
So this is the situation at present – the ECB continues to look for things it can buy with money from thin air. Never mind that in the crisis countries, there may be literally nothing left to lend due to the massive capital consumption during the boom. It is not enough to simply print money. Borrowing by entrepreneurs is ultimately about obtaining capital, not just money. There is a clear difference between the two; money is the medium of exchange, but it cannot actually fund production.
Non-Template Becomes Template, Continued
We have previously written about the fact that the 'depositor haircut' in Cyprus has indeed become the 'template' for dealing with bank insolvencies in the EU. As we have pointed out at the time, this is in a fundamental sense a salutary event: it should finally open the eyes of depositors as to what risks they are exposed to when keeping money at fractionally reserved banks. Moreover, there is no reason why tax payers should foot the bill for bailing out insolvent banks.
So far, so good, if only it were that easy! This week a report made the rounds regarding German ECB board member Jörg Asmussen informing a reportedly 'astonished' EU parliament in Strasbourg about the 'new template'. The original article can be found at 'Deutsche Wirtschaftsnachrichten' in German language (a Google translation should serve to get the drift). 'Savers must bleed', as the article states. Moreover, it points out that citizens will now be asked to so to speak pay up twice: once as tax payers funding the ESM, and in individual cases as savers keeping money at banks that happen to go under.
A major bone of contention remains however the fact that in order to avert bank runs, the EU wants to make sure that the deposit insurance for deposits of less than €100,000 remains in place. It is a bone of contention mainly for the reason that a number of countries could not possibly swing even that. Hence the urge to create the so-called 'banking union', because once it is in place, German tax payers and savers will be liable for insuring bank depositors in Greece and elsewhere just as they are now doing in Germany. France is very eager to get this banking union off the ground, as are understandably Spain and Italy. It is a good bet that none of these nations have the wherewithal to bail out their own banking systems if push really comes to shove. For instance, the three largest French banks hold assets worth 240% of GDP (with the assets of the banking system as a whole clocking in at over 400% of GDP).
Delayed Information Leak
A few weeks ago, we published a post entitled 'Nether-Crumble', which discussed the growing economic problems faced by the Netherlands – a member of the euro area's 'core', which is widely perceived as stodgy and financially solid. Nothing could be further from the truth though, as the country is home to one of the largest household debtbergs and real estate bubbles in the world.
The fiscal discipline of its government to date is entirely meaningless in this context, as it will likely be swept away by the bursting bubble. Already a great many mortgage holders are 'underwater', as the fall in home prices has brought the value of their homes below the size of their outstanding mortgage debt. Consequently, the Dutch banking system is now an accident waiting to happen – or rather, an accident that is already happening, albeit seemingly in slow motion.
Now the mainstream press has begun to take notice as well. The Financial Times reported on the Netherlands on May 7 as follows:
“Rising personal debt and high unemployment could mean the Netherlands becomes the next casualty of the eurozone crisis, according to Premier Asset Management’s Jake Robbins.
The manager of the £9.4m Premier Global Alpha Growth fund said positive sentiment from European economists and politicians risked overlooking increasingly negative data emanating from countries such as the Netherlands and France.
Mr Robbins said: “Increasingly in the past few months we’ve seen this ‘leap of faith’ that the liquidity supplied by central banks is improving the environment. But if you look at countries like the Netherlands, economic data is deteriorating further. “Most worryingly the Netherlands reminds me of the US in 2006-07 with the amount of debt secured against property when prices are falling.”
The Netherlands is currently mired in the second of two recessions it has experienced in the past four years and its unemployment rate jumped from 7.7 per cent in February to 8.1 per cent in March, the biggest monthly increase since the turn of the century.
Earlier this year the Dutch government was forced to pump €3.7bn (£3.1bn) into the country’s fourth-largest lender, SNS Reaal, after the bank sustained heavy losses from property assets. The country’s coalition government is also trying to force through stringent austerity measures to cut public spending.
In spite of this the Dutch stockmarket, the AEX index, has risen 4.7 per cent in six months. The Eurostoxx 50 index gained 7 per cent in that period.
“It is very difficult to understand why even the head of the European Central Bank [Mario Draghi] is being so positive when there is no data to support it – there is just hope, and that is not a great investment tool,” Mr Robbins said.”
Deficit Spending is Just Fine
It was clear that once enough time passes without further market pressure, politicians would seize the opportunity to return to their bad habits in full force. In the forefront of the EU's 'anti austerity' movement we find – to no-one's particular surprise – the socialist government of France. France is already more akin to a command economy than a free market, with government's spending amounting to 57% of GDP and the government attempting to micro-manage industry. The Hollande government has created an environment that is extremely inimical to free enterprise. Clearly this is a case where the parasite has eclipsed the host. France is has entered a very nasty recession that could easily turn out to be worse than the last one. The government's preferred 'solution' to this is to increase its spending even more. Contrary to popularly held beliefs, this will impose additional burdens on the economy.
Germany has made the 'mistake' (in reality it had no choice) to provide more 'wiggle room' for countries to reach their agreed upon fiscal targets. The end result will be that none of the targets will be reached, ever.
According to a Bloomberg report:
“French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies.
“We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said yesterday on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”
The gap between the French Socialist finance chief’s view and the election-year positioning of Germany’s Wolfgang Schaeuble underscores the divergence between their economies and the wrangling that has marked the crisis fight since Francois Hollande replaced Nicolas Sarkozy as French leader a year ago.
Bizarre Theories
It is really astonishing what passes for 'economic logic' these days. A favorite mainstream meme regarding the euro area is the perverse plan to make things better for everyone by making them worse for Germany. You would think that our bien pensants should be happy that Germany's economy is fairly strong, considering that it is supposed to bail out all and sundry. Not so. Instead it is held that Germany's success, especially in terms of foreign trade, comes at the expense of everybody else and therefore represents everybody else's loss.
The tenacity with which such mercantilist fallacies are clinging to the minds of people is simply incredible. First of all, 'nations' don't trade with each other – people do. National borders are entirely incidental to this fact and possess no particular economic significance. Secondly, there are no 'losers' in voluntary trade; every trade is mutually beneficial. If it were not, the parties concerned would not engage in trade with each other. What's so hard to grasp about this?
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