In Monday’s Financial Times there is a column by Lawrence Summers, the GODFATHER of U.S. economic policy. Mr. Summers offers the Europeans a great deal of advice on “HOW TO SAVE THE EUROZONE IN THE COMING CRITICAL WEEKS.” The article is actually a good policy prospective if there was not the issue of politics that play a large and important role in the EU‘s inability to resolve its fiscal difficulties. Summers wants to believe that the EUROCRATS have the political mandate to negotiate Brussel’s desire for a peaceful, state-supported EDEN of entitlements.
“European authorities must restate their commitment to solidarity as embodied in a common currency and recognise that the failure of any European economy is unacceptable. If they can find the political will the technicalities of a policy response are not that difficult.But it should include these further commitments.”
The former Treasury Secretary goes on to list his proposals, much of it dependent on the ECB creating and sustaining the concept of TOO BIG TO FAIL: “… and ensure the ECB could continue backstopping the stability of European banks.” It is not a comfort that one of main economic policy influencers in the U.S. is sustaining the TBTF concept. The real problem with Summers, though, is that his analysis implies that Europe is controlled by an oligarchy of PHILOSOPHER KINGS. Fortunately, there is still a concept of democracy as some of the individual nation-states have voted not to be the deep pockets for large bank bailouts. If Europe’s Philosopher Kings step too far over the autocratic line they may well run into a wall established by the GERMAN CONSTITUTIONAL COURT.
Summers’ advice is sound but it will require the return to the Europe of Napoleon or some other autocrat. The economic union is a flawed political union, making the solutions crafted within ivory covered walls difficult to bring to enactment in a timely manner. Facts on the ground have the ability to throw sand into the gears of the best theory. Europe’s debt crisis is as much political as economic which makes any genuine resolution so difficult, for the big question is and will be: HOW FAR WILL THE GOOD BURGHERS OF BAVARIA GO TO GUARANTEE THE FINANCIAL SYSTEM WITH THEIR HARD EARNED EUROS?
The markets were in the RISK-ON mode today and after Europe closed with no major further negative news. President Obama has a brief statement about the newfound support for the “GANG OF SIX” proposal put forth a few weeks ago. Under the leadership of Mark Warner (D-Virginia) and Saxby Chambliss (R-GEORGIA), it is a bipartisan group of centrists trying to reach a compromise on the U.S. budget. The bipartisan group put forward a plan to cut $3.7 trillion from the deficit over the next 10 years and the solution would entail considering all budgetary items.
This group probably proposed changes that are closest to the original propositions of the Bowles-Simpson committee. The actual details of the “GANG’S” are murky as of now but the markets rallied at it seems that 50 Senators have added their support to the Gang of Six’s work. As it was already a RISK-ON day, the U.S. equities rallied on the seemingly good news. The NOTES and TREASURIES also rallied, especially the 30 year, as a responsible budget would give confidence to U.S. bond holders. Also, the positive budget news led to a sharp selloff of the precious metals and the Swiss franc, completing the RISK-ON grand slam. The market’s positive reaction will probably be short-lived as the European policy makers head to Brussels for that frequent on/off emergency meeting.
The correction in the ITALIAN BTP/BUND spread will need to continue if there is to be some European support to a U.S.-based rally. The Bank of Canada held it lending rate steady but the Bank’s statement was deemed to be of a firmer tone, thus leading traders to speculate about Canadian rates heading higher. The BOC was cautious as it wants to see if the U.S. economy can regain traction and if the Europeans resolve their debt issues. Overall, the statement was tinged with cautious optimism. The Canadian DOLLAR staged a rally against all the currencies, aided greatly by the RISK-ON crowd. Commodities were a mixed bag: The GRAINS were up strongly on weather concerns but seemed to sell off on the budget news from the Gang of Six.
Agricultural commodities and ETHANOL have historically been large recipients of government largesse so any attempt to curtail budgetary support to farm products is deemed to be negative for prices. It seems strange that it would affect present prices but that is how the market reacts. Budget concerns will not prevail over the weather for long as supply/demand is tight globally. If weather conditions stay dry in the heartland, several politicians that have pushed for ethanol are going to have to answer for the steep rise in prices. Remember that grain prices have been strong with several years of record crops … you do the math.
Tags: 30-year bond, BOC, Bunds, Canadian Dollar, Commodities, ECB, ethanol, Eurocrats, Gang of Six, German Constitutional Court, Italian bonds, Larry Summers, Mark Warner, notes, philosopher kings, risk-on, Saxby Chambliss, too big to fail, Treasuries, wheat
July 19, 2011 at 5:16 pm |
The solution in Europe is not much different than the “solution” for a united Europe some 70 years ago:
Dispatch tens of thousands of tax collectors from the German Finanzamt (with appropriate security forces); quarter them in Greece, Italy, Spain, Portugal and Ireland; and extract tribute until all debts are paid with interest. Debtors will ignore lesser measures.
Or, write-off the debts and collapse the big banks into insolvency and liquidation and start the credit process all over again.
July 19, 2011 at 10:06 pm |
[…] Summers tried to fix Europe, since he did so well in the […]
July 19, 2011 at 10:32 pm |
They tried a united Europe Bavarian style, then the Fascist way, and now the Economic way. Maybe we are in the times of Charlemagne?
July 20, 2011 at 5:02 am |
Peter–good points and some have written about how the world has changed since the British have been able to send in Warships to collect the debts owed to the British treasury or private British concerns.The world is certainly a different place or is it as the Greek creditors are pushing for the privitization of state assets.