The Intercept: Eurozone

Showing posts with label Eurozone. Show all posts

Tuesday, November 20, 2012

Sacraficing The Will Of The People On The Altar of The Euro

The Eurozone debt crisis is exacting its toll. Convoluted undemocratic taxpayer-funded bailouts of bondholders and banks designed to keep the Eurozone together can’t kick the can down the road far enough. But the price has been huge, and people have expressed their anger in massive protests. Now, these efforts are also tearing up the fabric of the 27-member European Union: the first one out may be the UK.

If offered a referendum, 56% of the British would vote for a UK exit from the EU (with 34% definitely and 22% probably). Only 30% would vote to keep the UK in the EU. It wouldn’t even be close! It would be a landslide. Thus, if it came to a referendum today, the UK, a cornerstone of the EU, would bail out.

The EU has little patience with the will of the people. In most member states, decisions such as ratification of EU treaties, scrapping one’s own currency, or bailing out holders of sovereign bonds are made by parliamentary vote. But in instances, when people were finally given a vote, they had a nasty tendency to surprise the elite—the politicians, bankers, and unelected bureaucrats that run the show.

The Lisbon Treaty, the chef d’œuvre of the EU’s political elite, was supposed to repeal existing treaties and replace them with a European Constitution that would transfer significant national sovereignty to unelected EU bureaucrats and their institutions. Negotiations started in 2001, and by 2005, a majority of member states had ratified it by parliamentary vote.

But in France, the people got an opportunity to ratify it by referendum—after parliament had passed it with 93% of the votes. What should have been a cakewalk turned into an epic battle that split the Socialist Party in two. And the people, who loved their sovereignty and wanted to hang on to it, “unexpectedly” killed the thing by a margin of 55% to 45%. In the Netherlands, a similar scenario played out. 2005 was the year that referendum became a dreadful word in the European political lexicon.

The lesson was unforgettable: don’t let the riffraff decide. Such matters should be handled by politicians, bankers, and unelected bureaucrats. And so they did damage control. Many of the measures in the failed constitution were revived as reforms in a watered-down treaty. That was in 2008. As a precaution, the uppity people in France and the Netherlands weren’t allowed to vote on it. Irish voters were, however. And they killed it. They too wanted to hang on to their sovereignty.

But then the financial crisis hit. The Irish got scared. Their banks were in trouble. The economy was going south. So the referendum was re-run after the Irish government had negotiated some concessions, and the people changed their mind (the treaty became effective December 1, 2009).

Eurozone slumps back into recession after austerity cuts

Output drops across single currency bloc as economists warn of no early end to crisis

The Independent
Ben Chu

The eurozone has double-dipped back into its second recession in three years, official figures confirmed yesterday – and analysts warned economic pain across the single currency will continue well into 2013.

Output across the 17-member bloc fell by 0.1 per cent over the third quarter of 2012, following a 0.2 per cent decline in the second quarter, according to Eurostat.

The picture across the Continent was uneven with France and Germany both eking out 0.2 per cent growth between July and September, while The Netherlands and Austria showed declines. Meanwhile, the crisis-hit states of Spain, Italy and Portugal, which have been in recession all year, shrank once again. Protesters in all three countries took part in anti-austerity demonstrations on Wednesday.

Economists predict weakness among the currency bloc's southern states to drag Germany and France into recession too in the coming months, with most expecting Europe's dominant economy to register negative growth in the fourth quarter of the year.

The European Commission has forecast that the bloc will shrink by 0.4 per cent over the course of 2012 and expand just 0.1 per cent in 2013.

The slowdown is making it more difficult for eurozone member states to hit their targets under the Fiscal Compact, which compels them to bring deficits down to 3 per cent of GDP.

The European Commission, which polices the Compact, showed some signs of flexibility on deficit reduction this week when the EU economic commissioner, Olli Rehn, said that Spain would not be required to make more cuts this year to compensate for being thrown off course by recession. But he added that Brussels would "look at every country case by case".

Paul De Grauwe of the London School of Economics said that the latest downturn had been brought on by the drastic spending cuts already enacted in southern Europe.

"We are getting into a double-dip recession which is entirely self-made," he said. "It is a result of excessive austerity in southern countries and unwillingness in the north to do anything else."

Steen Jakobsen, the chief economist at Saxo Bank, agreed, saying: "This was totally expected because of austerity policies combined with world growth slowing down and a fall in activity in Germany and the Netherlands."

Separate figures this week showed the Greek economy shrank at an annual rate of 7.2 per cent in the third quarter, up from 6.3 per cent in the previous three months. The International Monetary Fund yesterday reiterated its call for the European Central Bank and the European Union to write off more of the country's debt.

"The IMF has done what it needs to do in the context of its framework," the fund's spokesman William Murraysaid. "Clearly there has to be other actions taken to reach debt sustainability."

Athens' public debt is expected to hit 190 per cent of GDP next year. Greece is facing a sixth-successive year of contraction in 2013.

There was, however, a flicker of good news for Ireland yesterday as the Fitch credit rating agency upgraded its outlook for the country's BBB sovereign bonds, citing its success in cutting the deficit and return to capital markets.

UK Parliament Votes Down Increased Funding to EU

Funding for the European Union has sparked a rebellion in the British Parliament.

Prime Minister David Cameron's own Conservative backbenchers dealt him the worst defeat since he took power in 2010.

Eurosceptic Tories joined forces with the opposition and voted for cutting the UK's cash flow to Brussels.

Mark Pritchard believes the EU is inefficient and that Britons should get the chance to vote on whether to stay part of it...

RT LIVE http://rt.com/on-air

Threat of a Complete Financial Meltdown: IMF Report Points to Growing Instability

World Socialist Website
Nick Beams

Four years after the collapse of Lehman Brothers, the latest Global Financial Stability Report published by the International Monetary Fund (IMF) makes clear that the threat of a complete meltdown of the international financial system remains. And the dangers of such an event are increasing.

The report, issued earlier this week, began by noting that risks to financial instability had increased since the previous report last April and that “confidence in the global financial system has become very fragile.”

The main risk to financial stability was a further deterioration in the euro area crisis, but “rising imbalances elsewhere are also a cause for concern.”

The report pointed to the increasing fragmentation of the euro zone, which could set off a massive withdrawal of capital from the weaker economies, as well as from central and eastern Europe. Such a withdrawal would push record unemployment levels even higher. There was now a “wedge” between the euro zone periphery and the core.

The crisis arises from the imbalances that were built into the euro zone from the outset. For the so-called periphery economies, adopting the euro as the common currency meant that they could no longer rely on a fall in the value of their national currencies to maintain their export markets. Hence, they increasingly suffered from a balance of payments deficit.

However, this was covered by an influx of capital from the stronger economies, in particular Germany. The inflow of capital boosted demand and provided valuable markets for German exports, setting up a virtuous circle. Now a vicious circle has replaced it, as capital flows in the other direction. “Liquidity in the core economy banks,” the report noted, “is not being recycled to the periphery but is instead being deposited at core central banks or in relatively safe government bonds.”

Bank bailouts have been accompanied by the imposition of austerity programs and recession, leading to a further withdrawal of funds.

The IMF report also warned that the corporate sector could become “an additional force in this pernicious feedback loop” as sovereign downgrades pulled investment grade corporate debt toward junk status.

The report’s forecasts were made on the basis of what the authors called a baseline scenario. This assumed that European policymakers would move to closer economic and political integration, establish a single supervisory mechanism for the financial system and take action to close the gap between the high interest rates in the periphery and the very low rates in core countries, such as Germany.

Unless these measures were carried out—and that is far from likely, given the growing conflicts among the European powers—then the eurozone would slide into a “weak policies scenario”.

That scenario would bring a rapid worsening of the financial crisis. The forces of fragmentation would become “entrenched” and the capital problems of banks would increase, posing a “far-reaching threat to the global financial system and the global economic outlook.”

So far as policy prescriptions were concerned, the IMF demanded an intensification of the attacks on the working class. One of the key elements of any recovery program had to be the implementation of “growth-friendly fiscal consolidation”.

Such a thing does not exist. “Fiscal consolidation” is a euphemism for budget cuts, the impact of which is to reduce demand—either through cuts in social services or by the cutting of public sector jobs—leading to a further economic contraction, followed by demands for more cuts.

At the same time, finance capital demands that real wages be reduced and the exploitation of workers intensified. Accordingly, the IMF called for “wide-ranging … structural and institutional reforms” in order to “strengthen competitiveness and narrow external imbalance.”

What this means is that, given that the countries running a balance of payments deficit cannot devalue their currency, they must carry out what is termed an “internal devaluation” in order to lower their costs, above all wages, and thereby become competitive on international markets.

The history of such “internal devaluation” was the subject of a comment by Financial Timescolumnist Martin Wolf, published on Wednesday. He pointed out that when the UK carried out such a regime between the wars, economic output in 1938 was barely above what it had been in 1918. “High unemployment,” he noted, “was the mechanism for driving nominal and real wages down.”

This is the program to be now applied across Europe.

While focusing attention on Europe, the IMF report also commented on the worsening situation in both Japan and the United States, two of the major pillars of the world economy.

Sovereign credit risk was an important “challenge” to stability in the US, with an already weak economy facing slow growth and inadequate demand. In addition, a “fiscal cliff” posed “near-term risks.” That is, the series of tax increases and spending cuts due to come into effect at the end of the year could, if implemented, cut US economic growth by as much as 2 percentage points.

The report warned that the present problems in the euro region were a “cautionary tale” for Japan, given its high public debt and the heavy investment by banks in government bonds.

The crisis has had contradictory effects. On the one hand, Japan has become a beneficiary of “safe-haven” inflows as a result of the crisis in Europe. These inflows have pushed the yields on government bonds to near-record lows, facilitating easy financing of the national public debt.

On the other hand, the foreign capital inflow has pushed up the value of the yen, thereby weakening Japanese exports and impacting on domestic production.

The increasing investment by domestic Japanese banks in government bonds could be sowing the seeds for future problems. If, for any reason, the yields on Japanese bonds started to rise (that is, there was a fall in bond prices) then the banks would incur a capital loss on their assets. And as the experience of Europe has shown, this can rapidly lead to the onset of a full-blown financial crisis.

Spain prepares yet more austerity measures , protesters battle police

The Daily Herald

Protesters clashed with police in Spain's capital on Tuesday as the government prepared a new round of unpopular austerity measures for the 2013 budget to be announced on Thursday.

Thousands gathered in Neptune plaza, a few metres from El Prado museum in central Madrid, where they formed a human chain around parliament, surrounded by barricades, police trucks and more than 1,500 police in riot gear.

Police fired rubber bullets and beat protesters with truncheons, first as protesters were trying to tear down barriers and later to clear the square. The police said at least 22 people had been arrested and at least 32 injured, including four policemen.

As lawmakers started to leave the parliament shortly after nine p.m. in official cars or by foot, a few hundred people were still demonstrating in front of the building. Most dispersed shortly afterwards
The protest, promoted over the Internet by different activist groups, was younger and more rowdy than recent marches called by labour unions. Protesters said they were fed up with cuts to public salaries and health and education.

"My annual salary has dropped by 8,000 euros and if it falls much further I won't be able to make ends meet," said Luis Rodriguez, 36, a firefighter who joined the protest. He said he was considering leaving Spain to find a better quality of life.

With this year's budget deficit target looking untenable, the conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions, "green taxes" on emissions or eliminating tax breaks.

The 2013 budget is the second conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. Spain must persuade its European partners that it can cut the budget shortfall by more than 60 billion euros by 2014. Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.

He said earlier this month the 2013 budget would cut spending further in all areas of government apart from pensions and borrowing costs. Spain is at the centre of the euro zone debt crisis on concerns the government cannot control its finances and those of highly indebted regions, bitten by a second recession since 2009 which has put one in four workers out of a job.

The Eurozone’s Rescue Fund: German High Court Capitulates to Bankers

Global Research
Stephen Lendman

As expected, the Court caved. On September 12, headlines reported it. The Financial Times said “German politicians declared the road clear for the creation of the eurozone’s (500 billion euro) rescue fund after the country’s constitutional court rejected a petition to block it.”At issue is does it matter? More on that below.Two Eurozone rescue schemes exist. The European Financial Stability Facility (EFSF) is running out of funds. Germany’s High Court approved the European Stability Mechanism (ESM).

Originally it was scheduled to take effect July 1. Germany’s parliament was still debating it. Constitutional Court approval is required.

It could have linked passage to constitutional law change. Doing so would have required Germany’s first post-war national referendum. It stopped short and approved what lacks legitimacy, and in the end won’t work.

On the one hand, countries are running out of resources. On the other, the ECB has few bullets left. Everything it tried so far failed. Constitutional approval changes nothing.

With it came conditions. The Financial Times said those imposed appear less onerous than feared. The Court ruled Germany’s maximum 190 billion euro liability can’t be increased without its ESM representative approving it. According to Court President Andreas Vosskuhle:

“(No) provision of this treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative.”

It also insures Bundestag involvement. Under German law accompanying ESM approval, the parliament must approve its representative’s positions. It’s unclear if full parliamentary or budget committee voting is required.

Another condition mandates that Bundestag and upper chamber Bundesrat (representing federal states) are kept fully informed about bailout fund activities.

Vosskuhle called the Court ruling provisional. Full proceedings will follow. A final decision is expected in December. The Court plans a full review of ESM’s legality. At the same time, it said it won’t accept ESM interpretations to permit direct ECB borrowing.

Germany is the only Eurozone country that hasn’t ratified the treaty establishing ESM. Doing so is required to make it operative. It’s likely rubber stamp. Again does it matter?

Serious internal opposition exists. The group Mehr Demokratie (More Democracy) sued the High Court to halt ratification. It claims approval entails “unlimited and irreversible liability risks.” It wants a referendum held to let Germans decide how their money will be spent.

Christian Social Union member Peter Gauweiler called accepting new liabilities irresponsible. Members of Chancellor Angela Merkel’s Christian Democrats are skeptical. Wolfgang Bosbach has mixed feelings, he said.

Despite some advantages, he’s greatly concerned about increasing potential liability beyond what’s safe and sensible.

In June, Germany’s Bundestag approved ESM. President Joachim Gauck is free to sign it. His signature is required.

ESM and EFSF will operate in parallel until mid-2013. At that time, ESM will be on its own. Germany must provide 27% of its funds. Critics warn amounts will end up much more than anticipated.

ESM will have 700 billion euros in capital. Only 500 billion maximum can be loaned. Troubled Spain and Italy need multiples that amount. Enough resources aren’t available to provide it.

A push come to shove moment awaits. It’s just a matter of time. It may arrive sooner than expected. Economic conditions are dire and worsening.

Brussels-based Bruegel think tank deputy director Guntram Wolff believes ESM will only provide short-term relief. He doesn’t think it’s enough. How can it be with member state resources inadequate to fund it.

ING economist Carsten Brzeski said today’s ruling fell short. It doesn’t resolve crisis conditions. It’s more feel good than real good. What’s next remains a big unknown. Clarity may arrive with a bang or thud.

Dollar no longer primary oil currency as China begins to sell oil using Yuan

The Examiner

Kenneth Schortgen Jr.

On Sept. 11, Pastor Lindsey Williams, former minister to the global oil companies during the building of the Alaskan pipeline, announced the most significant event to affect the U.S.dollar since its inception as a currency. For the first time since the 1970's, when Henry Kissenger forged a trade agreement with the Royal house of Saud to sell oil using only U.S. dollars, China announced its intention to bypass the dollar for global oil customers and began selling the commodity using their own currency.

Lindsey Williams: "The most significant day in the history of the American dollar, since its inception, happened on Thursday, Sept. 6. On that day, something took place that is going to affect your life, your family, your dinner table more than you can possibly imagine."
"On Thursday, Sept. 6... just a few days ago, China made the official announcement. China said on that day, our banking system is ready, all of our communication systems are ready, all of the transfer systems are ready, and as of that day, Thursday, Sept. 6, any nation in the world that wishes from this point on, to buy, sell, or trade crude oil, can do using the Chinese currency, not the American dollar. - Interview with Natty Bumpo on the Just Measures Radio network, Sept. 11

This announcement by China is one of the most significant sea changes in the global economic and monetary systems, but was barely reported on due to its announcement taking place during the Democratic convention last week. The ramifications of this new action are vast, and could very well be the catalyst that brings down the dollar as the global reserve currency, and change the entire landscape of how the world purchases energy.

Ironically, since Sept. 6, the U.S. dollar has fallen from 81.467 on the index to today's price of 79.73. While analysts will focus on actions taking place in the Eurozone, and expected easing signals from the Federal Reserve on Thursday regarding the fall of the dollar, it is not coincidence that the dollar began to lose strength on the very day of China's announcement.

Since China is not a natural oil producing nation, the question most people will ask is how will the Asian economic power get enough oil to affect dollar hegemony? That question was also answered by Lindsey Williams when he pointed out a new trade agreement that was signed on Sept. 7 between China and Russia, in which the Russian Federation agreed to sell oil to China in any and all amounts they desired.

Lindsey Williams: "This has never happened in the history of crude oil. Since crude oil became the motivating force behind our (U.S.) entire economy, and everything in our lives revolves around crude oil. And since crude oil became the motivating factor behind our economy... never, ever has crude oil been sold, bought, traded, in any country in the world, without using the American dollar."

"Crude oil is the standard currency of the world. Not the Yen, not the Pound, not the Dollar. More money is transferred around the world in crude oil than in any other product."
"On Friday, Sept. 7, Russia announced, that as of today, we will supply China with all of the crude oil that they need, no matter how much they want... there is no limit. And Russia will not sell or trade this crude oil to China using the American dollar." -Interview with Natty Bumpo on the Just Measures Radio network, Sept. 11

These duo actions by the two most powerful adversaries of the U.S. economy and empire, have now joined in to make a move to attack the primary economic stronghold that keeps America as the most powerful economic superpower. Once the majority of the world begins to bypass the dollar, and purchase oil in other currencies, then the full weight of our debt and diminished manufacturing structure will come crashing down on the American people.

This new agreement between Russia and China also has serious ramifications in regards to Iran, and the rest of the Middle East. No longer will U.S. sanctions against Iran have a measurable affect, as the rogue nation can simply choose to sell its oil to China, and receive Yuan in return, and use that currency to trade for the necessary resources it needs to sustain its economy and nuclear programs.

The world changed last week, and there was nary a word spoken by Wall Street or by politicians who reveled in their own magnificence as this event took place during the party conventions. A major blow was done on Sept. 6 to the American empire, and to the power of the U.S. dollar as the world's reserve currency. And China, along with Russia, are now aiming to become the controllers of energy, and thus, controllers of a new petro-currency.

For more on finance and economics, you can follow Ken Schortgen Jr on Twitter, and listen to the weekly economic roundup segment of the Angel Clark radio show from 6-7p.m. est on Friday evenings.

Everything You Need To Know About The September 12 German Court Decision That Could Rock The Entire World

Business Insider
Matthew Bosler

The eurozone is running out of bailout cash, and the German Constitutional Court now holds the fate of Europe in its hands.

The European Financial Stability Facility, the original euro area bailout fund established in the summer of 2010, is down to about €248 billion of lending capacity left after existing bailouts for Greece, Portugal, and Ireland are accounted for.

Spain and Italy – the next two countries expected to be in line for a bailout – could have combined financing needs as large as €703bn over the next two years, according to Citi estimates, dwarfing the existing capacity of the EFSF.

Those huge numbers underscore the need for the additional firepower of the European Stability Mechanism, the new bailout fund expected to replace the EFSF and make available hundreds of billions of euros in additional lending capacity to struggling member states.

However, the ESM has still yet to be ratified, which has many counting chickens before the eggs have hatched, so to speak.

The 16 judges that sit on the Federal Constitutional Court of Germany need to sign off on the fund's constitutionality in order to make the fund operational – and the Court is widely expected to do just that when they deliver a ruling on ESM ratification on September 12.

Here are some views from Wall Street:

"The Court will not rule against the ESM allowing it to become operational, but any conditions could have implications on further integration and debate in Germany." – SocGen economist Anatoli Annenkov, August 24
"However, the court may also require additional information, particularly on the ECB’s bond purchase plans under existing ESM programmes, before making a final ruling." Citi economist Jürgen Michels, August 23
"Needless to say, a surprising rejection (not our assumption) would hurt risk sentiment massively." – SocGen fixed income strategist Vincent Chaigneau, August 23
"There is a chance that things could go wrong and if they do they might go terribly wrong. Hence, caution is warranted." – Morgan Stanley FX strategist Hans Redeker, August 16
"Our central scenario is a positive ruling from the German court, but there is a slight chance that the ruling makes the ESM implementation delayed or more complex." – BofA Merrill Lynch economist Laurence Boone, August 10

So, even though the Court is widely expected to approve ESM ratification – and the German Bundestag parliamentary body already approved it by a 3/4 majority – what is behind murmurs of caution among analysts and investors?

The constitutionality of the ESM treaty – which is what the Court is set to rule on – is a matter of question in Germany. Several complaints regarding constitutionality have already been lodged against the ESM to the Court.

Philine Schuseil at the European think tank Bruegel has penned a good breakdown of the debate over the ESM in Germany. The upshot is that the ESM, governed by eurozone finance ministers, would have full control over disbursement of ESM funds to struggling countries, even though such decisions would affect the German government budget.

Internet Reformation Is EU Reality?

Daily Bell

Europe finally awakes from its utopian dream ... Let's say this again, just in case a single sentient being on the planet has missed it: Germany cannot simply decide to bail Greece (or Spain, or Italy, etc) out of its debts. OK? However much Angela Merkel is nagged, berated, bullied and patronised by Barack Obama, David Cameron, or the BBC/Guardian axis that regard the preservation of the euro project as critical to their own interests, she cannot just revoke, in a unilateral act, the rules of German government or of the Bundesbank. Her persistent refusal to "take decisive action" of the kind that would suit the purposes of all those clamorous voices at the G8, is not "dithering", as it is so often described. In fact, it is not (or not entirely) to be explained in any of the mildly contemptuous ways that her tormentors suggest. It does not arise from an unthinking, superstitious terror instilled in her by the Weimar nightmare of hyper-inflation. Nor is it a narrow-minded expression of the German hausfrau's values of thrift and self-discipline. What Mrs Merkel is doing, quite appropriately, is defending the integrity of her national constitution, the economic principles on which her country's economic success has been built, and the interests of her own electorate. – Janet Daley/UK Telegraph

Dominant Social Theme: It is time to go.

Free-Market Analysis: Someone in the mainstream press has finally written the evident and obvious truth about the Eurozone: Angela Merkel does not have it in her power simply to declare a new pan-European empire.

For this clear – clarion-like – truth, we thank Janet Daley. As part of a truly remarkable show of force on this Monday, the UK Telegraph is in full cry with no fewer than half a dozen articles calling for the demise or reduction of the EU.

But this article by Daley is by far the best, in our view – and, of course, that is a biased statement, for she comes closest to enunciating the position regarding the EU that we have been taking.

The German people themselves are the stumbling block, to Brussels' psychopathic ambition and assertion of power over Charlemagne's long-ago demesne. Here's some more from the article:

A defiant Angela Merkel is doing no more than defending the interests of her own electorate ... As the leader of a democratic state, what else should she be expected to do? Would Mr Cameron, who is busily assuring us that he will always put the needs of this country first, be chivvied into throwing over the interests of his own citizens for the sake of another national population that has come to grief largely as a consequence of its own misjudgments? Last week, he called for the "pooling [of] fiscal sovereignty" among the eurozone countries. Would he be willing to give up his Government's right to determine its own tax and spending policy?

Dithering European policymakers fail to calm volatile stock markets

The Guardian
Helen Pidd
Jill Treanor

• Germany divided over bolstering bailout fund
• Analysts expect US-style Tarp €150bn relief scheme

Eurozone in turmoil as markets remain unconvinced that
European debt crisis can be stabilised.

Stock markets endured a day of sharp volatility amid uncertainty about how eurozone leaders intend to solve the ongoing – and increasingly pressing – crisis that is gripping the single currency and threatening global growth.

While the US and UK hope that eurozone leaders will come up with a scheme strong enough to build a firewall around the most indebted countries in the eurozone, Germany has emerged as a stumbling block to any plan to increase the bailout funds for the eurozone to €2tn (£1.7tn) or more.

German politicians told the Guardian of their dismay at reports following the last weekend's meeting of the International Monetary Fund about beefing up the existing bailout fund – known as the European Financial Stability Facility.

Frank Schäffler, a Free Democratic Party (FDP) politician from North Rhine-Westphalia, said any scheme to bolster the fund from its existing €440m capacity would be a "catastrophic development" that he feared would lead to inflation.

"It must be stopped," he said in a phone interview. Schäffler is from the pro-business Free Democratic Party (FDP), which rules in coalition with the Christian Democratic Union (CDU) of the chancellor, Angela Merkel.

Germany's finance minister, Wolfgang Schäuble, appeared to downplay any attempt to bolster the EFSF. "We do not intend to increase it," he said in a television interview.
His remarks came after European markets closed and after France's CAC40 closed 1.8% higher and the Dax in Germany rose 2.9%.

Gains in London were more muted with the FTSE index ending 0.4% higher at 5,089.37, while Wall Street was gyrating.

President Barack Obama called on European leaders to move more quickly to address the crisis. He said in a town hall meeting that Europe's financial crisis "is scaring the world" and that the actions the region's leaders have taken so far "haven't been as quick as they need to be".
Louise Cooper, of BGC Partners, said: "These massive moves tell us how deeply uncertain is the future. Trying to trade or invest in such markets is more than difficult, I would suggest it is almost impossible."

Gold prices are falling – down by $40 and off $300 from its $1,920 an ounce high on 6 September – as traders liquidate positions to release cash to cover losses elsewhere.

But earlier Lorenzo Bini Smaghi, an executive board member of the ECB, had insisted that discussions were under way about how to bolster the EFSF. "I know that people are thinking about these things. They may not be willing to admit it in the public, but they are thinking about these things," he said, referring to the Troubled Asset Relief Programme (Tarp) used in the US after the 2008 banking crisis.
Analysts at JP Morgan expect European banks to get a capital injection of up to €150bn through a Tarp-like deal. "Euro-Tarp is, in our view, the best risk-reward medicine for opening the Eurobank funding market," JP Morgan analyst Kian Abouhossein said.

There is also speculation about recapitalisation of eurozone banks, particularly because the losses, or "haircut", on Greek bonds are expected to rise to 50%. The second bailout for Greece in July put the loss at 21% and fears of large writedowns drove shares in Greek banks – big holders of their country's debt – to a 19-year low.

French banks are also of concern to the market and remarks by Banque de France's Christian Noyer at the weekend were seen as suggesting the central bank was ready to step in if necessary.

While a wide-ranging solution is needed, the focus is still on Greece. It needs the sixth tranche of payouts – €8bn – from its original bailout to be released next month or it will run out cash, potentially defaulting on its debt and being unable to pay its public-sector workers.

The EFSF must also be endorsed across the eurozone, even before any plans can be adopted to bolster its firepower. A key vote in Germany is due on Thursday and Schäffler suggested Angela Merkel, the chancellor, and Schäuble were not being honest with parliament about what lay ahead. "The ink has not dried on this second bailout and already there is talk about more money," he said.
On Tuesday afternoon the FDP, part of the government coalition, will meet to decide whether to support Merkel but Schäffler says he will vote "no" regardless.

Doubts remain about whether enough will be done. Philip Booth, from Cass Business School, said: "The IMF and the EU still has not woken up to the realities of the sovereign debt situation."

Greece and the Euro: Towards Financial Implosion

Global Research
By Prof. Rodrigue Tremblay

“If you can't explain it simply, you don't understand it well enough.”

Albert Einstein (1879-1955), German-born theoretical physicist and professor, Nobel Prize 1921

“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.”

Thomas Jefferson (1743-1826), 3rd President of the United States (1801-09)

"Having seen the people of all other nations bowed down to the earth under the wars and prodigalities of their rulers, I have cherished their opposites, peace, economy, and riddance of public debt, believing that these were the high road to public as well as private prosperity and happiness."

Thomas Jefferson (1743-1826), 3rd President of the United States (1801-09)

On the 4th of July, the credit agency Standard & Poor called Greece what it is, i.e. a country in de facto financial bankruptcy. No slight of hand, no obfuscation, no debt reorganization and no “innovative” bailouts can hide the fact that the defective rules of the 17-member Eurozone have allowed some of its members to succumb to the siren calls of excessive and unproductive indebtedness, to be followed by a default on debt payments accompanied by crushingly higher borrowing costs.

Greece (11 million inhabitants), in fact, has abused the credibility that came with its membership in the Eurozone. In 2004, for instance, the Greek Government embarked upon a massive spending spree to host the 2004 Summer Olympic Games, which cost 7 billion euros ($12.08 billion). Then, from 2005 to 2008, the same government decided to go on a spending spree, this time purchasing all types of armaments that it hardly needed from foreign suppliers. —Piling up a gross foreign debt to the tune of $533 billion (2010) seemed the easy way out. But sooner or later, the piper has to be paid and the debt burden cannot be hidden anymore.

Greece's current financial predicaments (and those of other European countries such as Spain, Portugal, Ireland and even Italy) are not dissimilar to the ones Argentina had to go through some ten years ago. In each case, an unhealthy membership in a monetary union of some sort led to excessive foreign indebtedness, followed by a capital flight and a crushing and ruinous debt deflation.

In the case of Argentina, the country had decided to adopt the U.S. dollar as its currency, even though productivity levels in Argentina were one third those in the United States. An artificially pegged exchange rate of one peso=one U.S. dollar held for close to ten years, before the inevitable collapse.

Indeed, membership in a monetary union and the adoption of a common currency for a group of countries can be a powerful instrument to stimulate economic and productivity growth, with low inflation, when such monetary unions are well designed structurally, but they can also turn into an economic nightmare when they are not.

Unfortunately for many poorer European members of the euro monetary union, the rules for a viable monetary union were not followed, and its unraveling in the coming years, although deplorable, should be of no great surprise to anyone knowledgeable in international finance.

What are these rules for a viable and stable monetary union with a common currency?

1- First and foremost, member countries should have economic structures and labor productivity levels that are comparable, in order for the common currency not to appear persistently overvalued or persistently undervalued depending on any particular member economy. An alternative is to have a high degree of labor mobility between regional economies so that unemployment levels do not remain unduly high in the least competitive regions.

2- Secondly, if either one of the two above conditions is not met (as is usually the case, since real life monetary unions are rarely “Optimum Currency Areas”), the monetary union must be headed by a strong political entity, possibly a federal system of government, that is capable of smoothly transferring fiscal funds from surplus economies to deficit economies through some form of centrally managed fiscal equalization payments.

This is to avoid the political strains and uncertainty when the standards of living rise in surplus regional economies and drop in regional deficit economies. Indeed, since the regional exchange rates cannot be adjusted upward or downward to redress each member country's balance of payments, and since the law of one price applies all over the monetary zone, this leaves fluctuations in income levels and employment levels as the main mechanism of adjustment to external imbalances. —This can turn out to be a harsh remedy.

Indeed, such a system of income or quantity adjustment rather than price adjustment is somewhat reminiscent of the way the 19th century gold standard used to work, albeit with a deflationary bias, except that it was expected to have price and income inflation in surplus countries and price and income deflation in deficit countries, caused by money supply expansions in surplus economies and money supply contractions in deficit economies. In a more or less formal monetary union, we are left with income inflation and deflation while the central bank holds the rein on the overall price level.

3- A third condition for a smoothly functioning monetary union is to have free movements of financial and banking capital within the zone. This is to insure that interest rates are coherent within the monetary zone, adjusted for a risk factor, and that productive projects have access to finance wherever they take place.

In the U.S., for instance, the highly liquid federal funds market allows banks in temporary deficit in check clearing to borrow short-term funds from banks in a temporary surplus position. In Canada, large national banks have branches in all provinces and can easily transfer funds from surplus branches to deficit branches without affecting their credit or lending operations.

4- A fourth condition is to have a common central bank that can take account not only of inflation levels but also of real economic growth and employment levels in its monetary policy decisions. Such a central bank should be able to act as lender of last resort, not only to banks, but also to the governments of the zone.

Unfortunately for the Eurozone, it currently fails to meet some of the most fundamental conditions for a smoothly functioning monetary union.

Let's look at them one by one.