Tag Archives: euro

‘Euro was a mistake,’ says Nobel Prize-winning economist

RT, Dec 13, 2016


The European Union should start the decentralization process and give the right of decision-making to its member states, according to the Nobel Prize-winning economist Oliver Hart.

He told the European media platform Euractiv that Brussels has “gone too far in centralizing power” and “if it abandons this trend, the EU could survive and flourish. Otherwise, it could fail.”

The 28 EU member states are not “sufficiently homogeneous” to be considered one single entity and trying to tie them into one was an “error,” said the British-born economics professor from Harvard University.

Hart added that Brussels should return powers to the EU capitals but might retain control of “some important areas,” like free trade and free movement of workers.

He also expressed firmly that “the euro was a mistake.” An opinion Hart says he held since the monetary union was introduced.

It “wouldn’t be a bad thing at all” if in the future Europe abandons the single currency, said the economist, adding the British were “very clever” to stay out of it.

Hart’s prize-winning colleague Bengt Holmstrom said the EU needs to “redefine its priorities, limiting its activities and its regulatory arm, to focus on what can be done on the essential things.”

The Finnish economist and a professor at the Massachusetts Institute of Technology, Holmstrom, said the EU has to “do something” with its governance system and its ground rules to make it “clearer and simpler.”

Hart and Holmstrom shared the 2016 Nobel Prize in Economics for their contributions to contract theory which covers everything from how CEOs are paid to privatization.

Another Nobel Prize-winning economist Joseph Stiglitz has recently published a book describing the euro as a threat to the future of Europe.

Stiglitz, who won the Nobel Prize in Economics in 2001, wrote that the single currency as designed to hold together a region with enormous economic and political diversity is almost incapable of working.

The eurozone was flawed at birth and is destined to collapse unless massive changes are made to its common currency, he said.

According to the economics guru, a project that was meant to bring countries together has succeeded only in tearing them apart in a manner which now threatens wider European economic and social stability.


Brexit Means Draghi’s ECB Seen as Euro-Area Rescuer Again

Bloomberg, July 4, 2016


Frexit. Quitaly. The names are amusing, the reality would be anything but.

In the days since the U.K. voted to leave the European Union, the fact that commentators are scanning for the next country to worry about illustrates the existential crisis that the European project is having. For the euro area — the 19-nation section of the EU that has pursued the deepest integration — a dangerous loss of economic momentum is on the way, according to a Bloomberg survey.

Even with the economy entering its 14th quarter of expansion, unemployment is still above 10 percent and populist parties are on the rise from Germany to the Netherlands. Slower growth risks pushing political positions further toward extremes, yet questions still hang over issues including Italy’s failing banking system and reform of the bloc’s budget rules, and the European Central Bank looks like the only institution willing to act.

“Populism is a real threat to cohesion across Europe now, and a weaker growth environment makes solving the issues more difficult,” said Philippe Gudin, the Paris-based chief European economist at Barclays Plc. “To get out of this negative feedback loop we need a very strong message of confidence to the business sector on the future of Europe. The answer isn’t there yet.”

The ECB forecast economic growth for the euro area of 1.6 percent in 2016 and 1.7 percent in 2017 — but it did so before the June 23 Brexit vote. The next update is scheduled for September.

Economists in the survey said the fallout from Brexit will shave off 0.1 percentage point of growth in gross domestic product, 0.3 percentage point in 2017 and 0.15 percentage point in 2018. That’s about 59 billion euros ($66 billion) of lost output.

Useful hard economic data won’t be available until September, when July’s figures will be reported. The political impact could be felt sooner though. Pressure from euroskeptic parties in France and Italy, the euro area’s second- and third-largest economies, mean leaders there are struggling to implement the policies needed to extricate their countries from the current low-growth trap.

A constitutional referendum in Italy slated for October and the fate of France’s labor-market reform ahead of a 2017 presidential election are political flash-points that could further ratchet up investor uncertainty and curb the growth Outlook.

While ECB President Mario Draghi implored European leaders at the post-Brexit EU summit to “address bank vulnerabilities,” there’s little sign of a region-wide plan to do so. Quite the opposite: Italian Prime Minister Matteo Renzi’s efforts to design a 40 billion-euro bank bailout that can skirt EU rules are meeting stiff opposition from Germany and elsewhere.

“Each country doubts its neighbor’s ability to reform its economy and willingness to move forward together,” ECB Executive Board member Benoit Coeure said in an interview with Le Monde published July 1. “We cannot move forward under these conditions. Once confidence returns, it will be time to integrate further.”

Yet the euro-area now risks drifting even further apart. On Sunday, German finance minister Wolfgang Schaeuble said in a series of interviews that national governments should set the pace of change in the region — if necessary sidestepping the EU’s executive, the European Commission.

“If the Commission isn’t coming along, then we’ll take matters into our own hands and solve problems between governments,” Schaeuble told Welt am Sonntag. “The Brexit decision has to be seen as a wake-up call for Europe.”

While the EU decides on its response to Brexit, a boost to the economy from either fiscal support or the pace of reform may go wanting. That would leave the ECB carrying the burden of countering the slowdown. More than 80 percent of economists surveyed said the central bank will have to add more stimulus, up from 67 percent in a similar survey at the end of May.

Of those who expect action, 90 percent said it will come at one of the next two meetings, either July 21 or Sept. 8, considerably more than said the same in May.

A similar share said Draghi will extend the 80 billion euros-a-month asset-purchase program beyond the scheduled end-date of March 2017. Thirty percent said the amount will be increased.


World’s Longest Negative Rate Experiment Shows Perversions Ahead

Bloomberg, May 2, 2016

Denmark uses negative rates to defend the krone’s peg to the euro.
Denmark uses negative rates to defend the krone’s peg to the euro.

* After almost 4 years of negative rates, Danes invest less
* Pension funds say policy is distorting markets, asset prices

When interest rates are high, people borrow less and save more. When they’re low, savings go down and borrowing goes up. But what happens when rates stay negative?

In Denmark, where rates have been below zero longer than anywhere else on the planet, the private sector is saving more than it did when rates were positive (before 2012). Private investment is down and the economy is in a “low-growth crisis,” to quote Handelsbanken. The latest inflation data show prices have stagnated.

As the Danes head even further down their negative-rate tunnel, the experiences of the Scandinavian economy may provide a glimpse of what lies ahead for other countries choosing the lesser known side of zero.

Denmark has about $600 billion in pension and investment savings. The people who help oversee those funds say the logic of cheap money fueling investment doesn’t hold once rates drop below zero. That’s because consumers and businesses interpret such extreme policy as a sign of crisis with no predictable outcome.

“Negative rates are counter-productive,” said Kasper Ullegaard, head of fixed-income overseeing more than $15 billion at Sampension in Copenhagen. The policy “makes people save more to protect future purchasing power and even opt for less risky assets because there’s so little transparency on future returns and risks.”

Currency Peg

The macro data bear out the theory. The Danish government estimates that investment in the private sector will be equivalent to 16.1 percent of gross domestic product this year, compared with 18.1 percent between 1990 and 2012. Meanwhile, the savings rate in the private sector will reach 26 percent of GDP this year, versus 21.3 percent in the roughly two decades until Danish rates went negative, Finance Ministry estimates show.

The numbers suggest that companies aren’t taking advantage of record-low rates to expand. Dong Energy A/S, a Danish utility preparing for an initial public offering, recently provided a concrete example of this. It is redeeming up to 650 million euros ($745 million) in senior debt in an effort to cut the cost of holding cash, said Allan Boedskov Andersen, head of group treasury and risk management. The decision comes as the company scales back investments in its oil unit.

Denmark’s central bank argues that negative rates have worked because its sole mandate is to keep the krone pegged to the euro in a 2.25 percent band. The currency regime came under attack at the beginning of last year when Switzerland’s failure to defend its euro cap fanned conjecture other central banks would also cave in to speculation.

In the event, the Danes prevailed but only after cutting their benchmark deposit rate to minus 0.75 percent. Sales of Denmark’s AAA-rated government bonds were halted and currency reserves were quickly built up to almost 40 percent of GDP. The measures saved Denmark’s euro peg, allowing central bank Governor Lars Rohde to declare victory.

Macro Doubts

But while the currency regime was upheld, the macro-economic fallout provides little reason for celebration. There are few signs the extreme monetary stimulus is aiding growth and the government last week slashed its GDP forecast for this year to 1.1 percent, from the 1.9 percent previously seen. March inflation data showed annual prices completely stagnated after about two years of readings well below 1 percent.

And Handelsbanken is warning that the central bank’s battle to defend its euro peg is also not yet over amid signs that policy makers are having to resume currency interventions for the first time in more than a year to weaken the krone.

Carsten Stendevad, the chief executive officer of Danish pension fund ATP, with about $115 billion in assets, says the policy is also proving problematic for markets.

“I’m very concerned about what these low, negative rates mean,” Stendevad said. “I’m concerned about what they mean for asset pricing. Clearly, they are driving asset prices. That’s the intention, but it’s always a cause for concern when asset pricing is driven more by central bank policy than cash flow generation.”

The fund is positioned for a return of inflation, not necessarily imminently, but at some point. Back in February, Stendevad noted that it would be an “anomaly” if very low interest rates didn’t result in “high inflation at some point.”

Banking Shift

The only bright spot seems to be the success with which Denmark’s banks have withstood negative rates. Danske Bank A/S, the country’s largest lender, reported its biggest profit on record in 2015. Its first-quarter results exceeded analyst estimates in part as the bank wrote back impaired loans that Danes found easier to repay amid record-low rates.

The bank’s CEO, Thomas Borgen, says Danske is “preparing for these low rates for a prolonged period of time.” Most economists tracking Denmark don’t see a shift into positive rates until 2018 at the earliest.

Danske, like other banks trying to hold on to customers while operating in negative-rate environments, has so far promised retail clients they won’t be asked to absorb the cost of the policy via their deposits.

To make up for lost lending income, Danske and other Nordic banks are focusing more on investing the savings of wealthy Scandinavians in an effort to earn more fees. And with stricter capital requirements making traditional lending more costly, banking in the region may shift more toward wealth administration in the future.

Given the long-term outlook of extremely low rates, Ullegaard at Sampension says the upshot looks clear.

“Eventually, negative rates will have the opposite effect from the intended one,” he said. “They will curb lending rather than pushing borrowing.”


John Rubino: How Stupid Do You Have To Be To Let This Happen?

By John Rubino, Mar 27, 2016

How Stupid Do You Have To Be To Let This Happen?

Europe is the birthplace of Western civilization and the source of most of the trends and bodies of knowledge that define modernity. The average European speaks several languages versus sometimes less than one for Americans. They are, in short, a well-schooled people with vast accumulated wisdom.

So how do we explain this: After World War II most European countries set up generous entitlement systems including government pensions designed to offer dignified retirements to citizens who had worked hard and paid taxes and obeyed the rules for a lifetime. BUT they didn’t bother putting anything aside for the inevitable — and mathematically predictable — retirement of the immense baby boomer generation. Here’s an excerpt from a recent Wall Street Journal article outlining the problem:

Europe Faces Pension Predicament

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared.Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the U.S. has 24 nonworking people 65 or over per 100 workers.

“Western European governments are close to bankruptcy because of the pension time bomb,” said Roy Stockell, head of asset management at Ernst & Young. “We have so many baby boomers moving into retirement [with] the expectation that the government will provide.”

The demographic squeeze could be eased by the influx of more than a million migrants in the past year. If many of them eventually join the working population, the result could be increased tax revenue to keep the pension model afloat. Before migrants are even given the right to work, however, they require housing, food, education and medical treatment. Their arrival will have effects on public finances that officials have only started to assess.

A Growing Mismatch
The pension squeeze doesn’t follow the familiar battle lines of the eurozone crisis, which pits Europe’s more prosperous north against a higher-spending, deeply indebted south. Some of the governments facing the toughest demographic challenges, such as Austria and Slovenia, have been among those most critical of Greece.

Germans, meanwhile, “are promoting fiscal rules in Spain and other countries, but we are softening the pension rules” at home, said Christoph Müller, a German academic who advises the EU on pension statistics. He pointed to a recent change allowing some workers to collect benefits two years early, at 63. A German labor ministry spokesman called that “a very limited measure.”

Europe’s state pension plans are rife with special provisions. In Germany, employees of the government make no pension contributions. In the U.K., pensioners get an extra winter payment for heating. In France, manual laborers or those who work night shifts, such as bakers, can start their benefits early without penalty.

Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69.

In 2012, the Polish government launched a series of changes in its main national pension plan to make it more affordable. One was a gradual rise in the age to receive benefits. It will reach 67 by 2040, marking an increase of 12 years for women and seven for men. The changes mean the main pension plan now is financially sustainable, said Jacek Rostowski, a former finance minister and architect of the overhaul.

The party that enacted the changes lost an election in October, however, and a central promise of the winning party is to undo them. Recently, Poland’s president introduced a bill to reverse some of the measures. “You have to take care of people, of their dignity, not finances,” said Krzysztof Jurgiel, agriculture minister in the current Law & Justice Party government.

The implication is that Germany, Italy, Spain, France et al are functionally bankrupt, apparently (amazingly) by choice. They saw the avalanche coming decades ago and instead of getting out of the way or reinforcing their chalets, simply sat there watching the snow roll down the mountain. It will be arriving shortly, and they’re still debating what — if anything — to do about it.

In fact the only thing that can be reasonably described as preparation is the decision to ramp up immigration. This might have worked if Europe had chosen more compatible immigrants, but that’s a subject for a different column. For now let’s focus on insanely stupid choice number one, which is to offer entitlements with no funding mechanism other than future tax revenue. If an insurance company or corporate pension plan did something like that its executives would be led away in handcuffs — rightfully so, since the essence of such deferred-payout entities is an account that starts small and grows to sufficient size as its beneficiaries begin to need it.

So what the Europeans have aren’t actually pensions, but a form of election fraud designed to give an entire generation of politicians the ability to offer free money to voters without consequence.

Soon, a whole continent will be left with no choice but to devalue its currency to hide the magnitude of its mismanagement. The math will work like this: devalue the euro by 50% while raising pension payouts by 20%, thus cutting the real burden significantly — while taking credit for the nominal benefit increase at election time. It might work, based on the level of voter credulity displayed so far.

Now here’s where it gets really interesting. The US “trust funds” that have been created to guarantee Social Security and Medicare are full of Treasury bonds, the interest on which is paid from — you guessed it — taxes levied each year on US citizens. So the only real difference between the European pay-as-you-go and US trust fund models is that the former is more honest.

This is why gold bugs and other sound money people are so certain that precious metals will soon be a lot more valuable. The pension numbers are catastrophic everywhere and the reckoning that was once merely inevitable is now imminent. Europe is a little further along demographically and so might have to devalue its currency first, but $80 trillion in unfunded Medicare liabilities can’t be denied. We’ll be following along shortly.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


John Rubino: Well That Didn’t Work

By John Rubino, Mar 18, 2016

Well That Didn’t Work

The Bank of Japan and European Central Bank eased recently, which is to say they stepped up their bond buying and/or pushed interest rates further into negative territory. These kinds of things are proxies for currency devaluation in the sense that money printing and lower interest rates generally cause the offending country’s currency to be seen as less valuable by traders and savers, sending its exchange rate down versus those of its trading partners.

This was what the BoJ and ECB were hoping for — weaker currencies to boost their export industries and make their insanely-large debt burdens more manageable. Instead, they got this:

Yen March 16

Euro March 16

Both the yen and the euro have popped versus the dollar, which means European and Japanese exports have gotten more rather than less expensive on world markets and both systems’ debt loads are now harder rather than easier to manage. And it gets worse: Japan’s yield curve has inverted, meaning that long-term interest rates are now lower than short-term rates, which is typically a harbinger of recession. Here’s a chart from today’s Bloomberg:

Japan yield curve March 16

This sudden failure of easy money to produce the usual result is potentially huge, because the only thing standing in the way of a debt-driven implosion of the global economy (global because this time around emerging countries are as over-indebted as rich ones) is a belief that what worked in the past will keep working. If it doesn’t — that is, if negative interest rates start strengthening rather than weakening currencies — then this game is over. And a new one, with rules no one understands, has begun.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit: