“Over the past months, we experienced a worrisome trend towards re-nationalization and ‘summitization,’” said Martin Schulz, President of the European Parliament and member of the German opposition SPD, to a forum of the European Commission on Wednesday. His complaints went to the heart of democracy at the European level. Government leaders were becoming “more arrogant” and made decisions “behind closed doors, in violation of the community method.” They were attempting “to create a fiscal union outside the control of parliament, bypassing the EU Commission.” Calls for reintroduction of border controls within the Schengen area were “an extremely dangerous development” because “any attack on the freedom of movement is an attack on the foundation of the European Union.” And so, he said, the collapse of the EU was a “realistic scenario.”

Even at the highest levels, the can of worms has now been acknowledged as open—just as the rift that zigzags through the Eurozone has become deeper and wider: according to information the Süddeutsche Zeitung obtained, the ECB and a group of Eurozone countries are trying to make it possible for the permanent bailout fund, the ESM, to bail banks out directly. The countries remained unnamed but, given the nature of the topic, would have to include Spain.

Any such effort would violate the two fundamental principles of the ESM—that a country will get bailed out if, and really only if, it commits to the reforms necessary to make its economy competitive and to reduce its deficit; and that only countries will receive funds, regardless of what they do with them, and not banks. The goal was to alleviate the causes of the debt crisis—high deficits and uncompetitive economies. It was how German parliamentarians had been persuaded to vote for the bailout packages.

Nevertheless, a working group will determine over the next two weeks—lightning speed by EU standards where progress is measured in months and often years—how, not if, banks could receive bailout funds directly from the ESM. Cause for the rush: Spain.

Spanish banks have been ravaged by the implosion of a real-estate bubble that they themselves caused with their reckless lending practices. Now they needed an immediate injection of at least €50 billion, and much more later, as bad loans and collapsing real-estate values on their books would finally have to be dealt with.

Bailing out banks directly through the ESM would accomplish two things for the debt-sinner government: allow it to escape painful reforms and deficit reduction programs; and free it from having to bail out its own banks, highly unpopular when “austerity” is simultaneously being imposed on the citizens. This just happened in Greece where banks reported €28.2 billion in losses. 13% of GDP! But €25 billion in rescue funds had already been transferred to the government—to bail out the banks, not the Greeks themselves. Yet, it's almost over. Read.... “Drachma Clauses” For Greece’s Exit from the Eurozone.

Spain could have asked for bailout funds long ago, but it didn’t want to do that because, hampered by a mind-boggling unemployment problem, it didn’t want to subject itself to the painful reforms that had been imposed on Greece, Ireland, and Portugal. It would be much easier if the banks could get bailed out directly.

And it’s not just Spain. “Once Spain sits under the bailout umbrella, the markets will focus on Italy,” said an unnamed representative of one of the unnamed countries. And there aren’t enough means to bail out both. So keeping Spain from getting officially bailed out has now become one of the more bizarre strategies in solving the debt crisis.

Alas, Germany is categorically opposed to direct loans from the ESM to banks. Finance Minister Wolfgang Schäuble declared that he wouldn’t even discuss it. The treaties didn’t allow it, and that would remain so. Bundesbank President Jens Weidmann said that as long as Member States were responsible for oversight and regulation of their banks, they would also be responsible for bailing them out. “Liability and control must remain in balance,” he said. The Netherlands, Austria, and Finland also rejected it.

But Germany no longer controls the ECB. It is now run by Mario Draghi, an Italian, who appears to have a sympathetic ear for the plight of Spain and Italy. And so on Thursday, he pushed Germany to the sidelines once again and made similar noises by calling on politicians to create anew European fund charged with bailing out the banks. Vitor Constancio, Vice President of the BCE, and Portuguese, called for going as far as possible towards a pan-European solution to the crisis.

“The crisis is finished,” French President Sarkozy had said a few weeks ago. “There is no more risk that the euro will implode,” thanks to his leadership, he declared two days before the election last weekend. However, François Hollande, the socialist challenger and likely winner, has a prescription for fixing the very crisis Sarkozy declared finished. For how his ambitious plan might lead to an expedited break-up of the Eurozone, read.... Pushing the Euro to the Brink.

and...

http://www.testosteronepit.com/home/2012/4/20/pushing-the-euro-to-the-brink.html

Pushing The Euro To The Brink

FRIDAY, APRIL 20, 2012 AT 6:04PM

“There is no more risk that the euro will implode,” declared French President Nicolas Sarkozy on Friday, two days before the first round of the presidential election. Europe is “recovering,” he said desperately. Thanks to his leadership. To make sure that Europe doesn’t fall back into the hole, the French would need to reelect him. A few weeks ago, he’d proclaimed “The crisis is finished.” But Spain may require an emergency bailout of such proportions that the IMF is already collecting hundreds of billions of dollars from around the world. Then there is Italy....

However, François Hollande, the socialist challenger and likely winner, has a prescription for fixing the very crisis that Sarkozy declared finished, he confirmed on Friday. If elected on May 6, he would immediately set out to implement his ambitious plan—though it might lead to the break-up of the Eurozone.

He’d renegotiate the fiscal union pact, a hastily drawn-up document that is supposed to induce budgetary discipline into the 25 governments that signed it in even greater haste. The pact is German Chancellor Angela Merkel’s grand oeuvre. She forced it through at the height of the crisis. But Hollande wants to include provisions for additional government spending and borrowing, his “measures of growth,” and he’d block ratification of the pact if he had to.

Then he hammered home just how serious he was in pushing the ECB to print money and lend directly to the governments. “It’s incredible that the ECB floods the market with liquidity,” he said, and that the “banks borrow from it at 1% and re-lend to the States, specifically Spain, at 6%.” Oops, he saw the 5% spread. A breath of fresh air. A politician who looks at the numbers!

“There comes a moment when one can no longer accept phenomena of that kind of income,” he added with an eye on the €1 trillion that the ECB lent to the banks via its Long Term Refinancing Operations. “It would be more judicious, more efficient, and faster for the ECB to lend” directly to governments “as first and last resort.” In other words, he wants to cut out the middlemen, namely the banks. And he has his eyes open: “I know that the Germans are totally hostile to this; well then, this will be part of the negotiation.”

But he is dreaming; in Germany, frustration with the ECB’s bond purchases caused two well-regarded German central bankers, Axel Weber and Jürgen Stark, to resign from the ECB last year. The €1 trillion LTRO actions have heated up opposition to the ECB. And now, the battleground is the “Target 2” balance of €800 billion, of which €635 billion is owed the Bundesbank. Long swept under the rug, then declared harmless while mushrooming unchecked, it is now inciting a rebellion of sorts in Germany. Read.... Bundesbank Gets Sued for Perfidy.

Thus, the conflicts between the ECB and the Bundesbank, and now the German government, can no longer be bridged with soothing words. Former German central bankers are shaking their heads in dismay, wondering if ECB President Mario Draghi will ever draw a line as the ECB, tangled up in sovereign debt and bank bailouts, is abandoning its treaty-set monetary stability priority—and its independence.

Exactly what the Southern European countries, including Draghi’s Italy and Hollande’s France, demand. They’re in the majority. An eternity ago, the Bundesbank with its 27.1% share practically controlled the ECB. No longer. Yet Germany has its own issues. After nearly two decades of declining real wages, a stagnating economy, and high unemployment, optimism has set in and is driving internal demand, even as the powerful export machine has slowed down a notch. Inflation is raising its ugly head. And central bankers see a nascent housing bubble—and the blood-letting that will follow. Read.... Now a Housing Bubble in Germany.

Germany needs a tighter monetary policy—which would be the last straw for teetering economies like Spain and Italy. While the ECB is contemplating even more purchases of sovereign debt, the Bundesbank wants it to exit from its existing positions. And the time frame for the exit is one year.

Just enough time for Hollande to get his feet wet. He is already building alliances to be able to hit the ground running. “I have met with many European heads of State, and hardly anyone is satisfied with the economic situation,” he said in an interview. “I’m not isolated. A common initiative is possible.”

He might succeed in building enough momentum to push the ECB where he wants it and put the fiscal union pact back on the table. Despite his reassurances—“No matter what happened during the campaign, if I’m elected, my first visit will take me to Germany”—his policies are anathema to Merkel’s government and the Bundesbank. And the unity of the Eurozone could be at risk.

Already, there are numerous other conflicts, particularly over taxpayer-funded subsidies. The latest is the nuclear power industry that is going after taxpayers—in other countries. For that ingenious plan that once again pits France against Germany, read.... Suddenly a Nasty Fight over Subsidies for Nukes.

Catharsis Ours

Friday, April 27, 2012

Spain rapid and continuing implosion leading the EU to contemplate radical moves and the bastardization of the EFSF / ESM schemes....

Collapse of the EU a “Realistic Scenario”

Pushing The Euro To The Brink

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