In further proof that the world is in the throes of lunacy, there is a piece in today’s London Telegraph by one of my favorite financial journalists that will certainly send you rushing for the lithium. Titled, “Germany Risks EU FINES WITH RECORD CURRENT ACCOUNT SURPLUS,” the article highlights concerns in Brussels about the Germans’ record external surplus of over 7.5 percent of GDP, even though the European technocrats in Brussels wanted the surplus at no more than 6 percent.
As Ambrose Evans-Pritchard writes: “The Commission warned Germany late last year that it faced possible sanctions if failed to do its ‘homework,’ either by boosting consumption at home or by weaning its economy off excess reliance on foreign markets. The threat caused consternation in Germany’s press and a vitriolic exchange with Brussels.” Further on Pritchard notes “Brussels said the German government is ‘over-achieving’ and needs to do more to boost infrastructure spending.”
The bottom line is that the EU Commission could levy a fine of up to 0.1 percent of GDP if it fails to correct its positive imbalances. The Germans agreed to the Maastricht Treaty because it had penalties built into it for those nations that violated the 3 percent budget deficit rules and other forms of excess debt. Now the EU Commission is desiring that the Germans be fined for being too successful at promoting economic growth. The EU’S GRAND CREDITOR is being asked to spend more for the success of the overly indebted. What guarantees are there that German domestic spending will aid the European peripheries? Maybe the good burghers will import cheaper goods from Asia driving up the current account deficit of the entire EU. There is no doubt that Germany will be the main target of the U.S.and other countries at this week’s G20 meeting.
Germany, a nation with a cultural proclivity for high savings and low debt is being asked to transform itself to bail out it Europe brethren. Germany’s public sector debt is about 80% of GDP, which is actually above what the Maastricht rules stipulate, but its private sector/GDP ratio is one of the lowest in the developed world. While global investors are in a mad dash to buy European sovereign debt the question again needs to be asked about who is co-signing for the massive amount of credit being advanced.
As Sarah Gordon writes in today’s FT, “Europe’s Companies Labour Under a Stifling Debt Burden,” corporations have a huge amount of debt coming due on the next four years. “Europe’s companies have to repay or refinance more than $4 trillion of debt between now and 2018–nearly half of the $8.9 trillion of corporate debt maturing globally.” This is a large number and remember that much of it is owed to banks. Is there any wonder why Mario Draghi is in a hurry to create a viable ABS market to help bundle and off load this bank debt? Who will buy it? Why, the ECB, using the German credit card! Hello, Vladimir!
Tags: Ambrose Evans-Pritchard, ECB, EU, EU Commission, GDP, Germany, Mario Draghi
April 10, 2014 at 9:21 pm |
So essentially speaking, Germany will own the entirety of Europe?
April 11, 2014 at 12:09 am |
Was the Fed able to prevent the housing bubble burst? No but they were able to bail out the irresposible banks 5 years ago.
Will the mispricing of assets today continue as PM chase yield to stay in the game without that bubble bursting? No but this time will the Fed or ECB have enough arrows in their quiver to bail out institutions or future ABS holders that own all the toxic sovereign debt in Europe ?
Can top heavy balance sheets be saved by the printing press? Can we wish away our problems? But that is probably not a problem we have to face tomorrow so let’s keep dancing as Charles Prince famously said.
April 11, 2014 at 6:49 am |
Asherz—as woody allen I mean Alan Greenspan said—we cannot identify bubbles in real time and if we are wrong the hammer of monetary policy can damage the entire economy and may not be politically desirable—fast forward to Europe but now the sovereigns and their banks are wound tighter together in a dance of death or a negative feedback loop of major proportions
April 11, 2014 at 7:45 am |
Are these 10-year EU sovereign debt yields sustainable?
As the charts in this article show (http://go.shr.lc/1kPWBNb) the improvement over the past two years in the 10-year sovereign debt yields for some of the EU’s weakest economies has been nothing short of spectacular .
The question then becomes whether they can hold these gains?
April 13, 2014 at 1:21 pm |
Another fine example of managing to the lowest common denominator. This phenomena knows no geographic, nor social border.