Eurozone: This time is different, or is it?

Thursday, Germany lost twice against the Italians: once for the euro 2012 soccer cup semi-final and then, later during the night, when the Italian PM Monti’s (and Spanish PM Rajoy) blitzkrieg won over frau Merkel. He played tough by simply refusing to sign any agreement until Germany agreed that the eurozone must jointly back Spanish banks without Spain having to guarantee the deb.

1. The agreement

• setting up a single European supervisory mechanism for banks under the ECB control

• ESM allowed to directly recapitalize banks

• Possibility for countries which are complying with common rules, recommendations and timetables, to make use of the existing EFSF/ESM instruments to stabilise markets. Financial assistance to Spain will be provided without seniority status for the financing provided by the EFSF/ESM.

• mobilizing around 120 billion euro for growth measures:

• A 10 billion euro increase of the capital of the European Investment Bank implying a lending capacity by 60 billion euro.
• The other 60 billion euro comes (i) from the reallocation of unused structural funds (55 billion), and (ii) from the pilot phase of Project Bonds to be launched this summer and targeted at key initiatives in energy, transport and broad-band infrastructure (4.5 billion).

• Adopting a Financial Transaction Tax by December

2. What’s next?

Ireland must rejoice since they now can lineup to require the same favorable treatment, which cost is put at EUR 64 billion.

European (read mostly EZ) taxpayers are on the hook thanks to the pan-EZ mutualization of the European banking sector rescue. Do not misread me, I strongly believe that for a monetary union to survive (if not thrive) the banking sector MUST have a single supervisory board and the costs must then be shared. However, we are mutualizing liabilities before having had any chance to mutualize benefits (and will probably share none, if any in the future) at nil cost for banks; in a capitalistic environment, the ones who rescue an ailing company take control: nothing near this simple and sensible criteria here… I also notice that no FDIC equivalent is set up to guarantee deposits with no limit on the number of accounts guaranteed one can hold.

The question remains: is this the first step towards the mutualization of sovereign debt? I cannot believe that Germany would carve in; if they do, the credibility of Europe would be jeopardized.

The direction towards fiscal integration is going ahead but many obstacles remain which let me think that the success is far from being certain (I am in fact very doubtful).

Fiscal union without social union will fail as the EZ failed (whatever politicians do to disguise it, it is a failure). The EU loves, and writes in many of its statements, the words “best practice”: ask the French if best practice is 67 years old retirement age, no minimal wage, 40h a week working time, etc.

What last week agreement achieved is reassuring markets for some time by reducing the amount of money Club Med countries will devote to save their ailing banking sector: Spain has gone from 100% down to 12%. Conversely, France is adding EUR 20 billion of liabilities. Remember my words for a rather long time, France is really sick economically and worse than Italy. Today, the French Audit Court is publishing a report that I will carefully read; the first comments are rather straight to the point: EUR 40 billion need to be found until end 2013 to abide by France’s commitments on deficit reduction…

Markets will however go back to the reality of the EZ: a monetary union with a widening competitiveness gap. NOTHING, I repeat nothing, of what was decided last week is addressing this gap; the EUR 120 billion to spur growth via infrastructure investments, particularly in distressed European countries, will take years to bear fruits and 1% of EZ GDP split over 5 or 10 years, with nearly nothing in 2012-2014, is not going to help them drive their way out of recession.

The core of the problem is still pending: lack of competitiveness of Southern Europe versus Northern Europe. As a matter of fact, French will never accept a 25-30% decrease in wages to become competitive again: understandably they will always prefer a currency devaluation than a salary devaluation (and no, the effects are not the same for the population concerned).

Conclusion

Yes, this time is different because Germany bent before blackmailing, but no, it is not different because the roots of the problems remain: lack of competitiveness and structural trade deficits that act as a drag on growth which is the only way out of the crisis. The necessary structural adjustments (lengthening of working hours, postponing the retirement age, reducing the share of the public sector in the economy, etc.) will only be accepted by the population if there is some form of growth. Austerity to bring public finances under control without devaluation is a death spiral – see Greece.

As reported by Bloomberg: “the EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting the ability to lower the nations’ borrowing costs.”, not mentioning France.

Source:

European Council 28/29 June 2012 – Conclusions

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf

Remarks by President Herman von Rompuy following the European Council

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/131390.pdf

Bloomberg: EU Leaders Ease Debt-Crisis Rules on Spain

http://www.bloomberg.com/news/2012-06-29/eu-leaders-ease-debt-crisis-rules-for-spain-as-merkel-retreats.html

To my Greek readers: The sale of gold and silver coins by the Central Bank is a rip-off

On April 30 the Greek Ministry of Finance issued a press release announcing the sale of gold and silver collector coins. It is a rip-off, so keep clear!

The calculation is as follows:

1. Gold coins

17 g / coin @ 1,615 $/oz (1 troy oz= 31.1g) = 702.58 EUR / coin (1.2565 USD / 1 EUR)

Selling price: EUR 2,100 i.e. 3 X the value of gold!!!

2. Silver coins

24 g / coin @ 29 $/oz (1 troy oz= 31.1g) = 17.81 EUR / coin (1.2565 USD / 1 EUR)

Selling price: EUR 90 i.e. 5 X the value of silver!!!!!

Please also note that the title of precious metal is on the low end at 916/1000 of gold and 925/1000 of silver.

You are better buying alternative coins quoted on the market or gold bars. For example, for EUR 2,100 you could buy a 1 oz Canadian Mapple Leaf with 999.9 / 1000 purity and get 14.1 g more gold, a better purity and still have EUR 700 to go shopping! (and I included a fat 5% broker commission).

This deal is much worse than the issue of gold and silver coins by the French Mint in April 2011…et do not tell me that that the “collector” value makes the difference!

Source:

Ministry of Finance: Press release

http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/f5/a3/e8/f5a3e8c5477c1dfd193356144901e5120f657bec/application/pdf/ANNOUNCEMENT+75+YEARS+BoG.pdf

Markets & Beyond: The French mint issues a limited series of gold and silver coins: a rip-off!

http://marketsandbeyond.blogspot.com/2011/04/french-mint-issues-limited-series-of.html

Eurozone falling chikens’ choice: internal or external devaluation?

1. An awful political background

Since the financial crisis started in 2007, 8 elections in Europe have driven incumbent parties out of business. Whether justified or not, it shows how the European population is disgruntled by a generation of politicians whose lack of courage led to the current over-indebtedness mess (N.B. voters share the responsibility by voting for the same politicians they despite now).

For a couple of years I have written that Greece could not be saved and I strongly believe that European politicians did not give a damn about Greece to solve the crisis, and were solely interested in insulating their banks from a Greek default: to succeed, (1) time needed to be garnered (hence the succession of costly bailouts) and (2) the ECB involved by buying sovereign debt from banks and extending unlimited liquidities; banks used these liquidities to buy more European sovereign debt (the 3 years EUR 1 trillion LTRO is meant (1) to provide some breezing space for deficit prone Southern European countries –France included- and (2) give a free return to banks to strengthen their balance sheet in the turn of 2-4% i.e. EUR 20-40 bn a year, a disgrace– as a side comment, none of the executives of European banks benefiting from the ECB largess should get any bonus since the profitability of banks has nothing to do with managerial acumen, and should in fact, for many of them, be bankrupt; as I have advocating for so many years banks’ executives and theirs boards should have been fired: what shareholders are waiting for?).

Greece will again go the poll in June and I do not see why results would favor a corrupt and incompetent political arena which has ruled Greece for 30 years, and all poll are giving the extreme left SIRYZA party a large lead. Despite disguised threats to the Greek electorate (80% want to remain within the EZ but with no austerity but an open check book from the Germans – they are living in Cuckoo land) from policy makers about a possible exit from the EZ (if your vote is wrong i.e. you do not abide by our integrationist rules, then it will be a disaster for you and no more money from us), the PASOK and the so-called liberals will be out of business for good, hopefully. The trick is to propose at the same time a referendum about the exit of Greece from the EZ which would end up in a rather strange situation where the majority would vote for an anti-austerity parliament and at the same time vote again the exit from the euro whilst bailouts are linked to austerity; the discussions about adding growth to austerity are fine but will not address the roots of the problem: lack of competitiveness.

After the failure of economic convergence within the EZ, we are witnessing Greece’s standard of living fast converging not with Northern Europe but with its European neighbors, Romania and Bulgaria!

For the time being, Greece got its EUR 4.2 bn rescue payment from Europe last week (add EUR 1.6 bn if the IMF disburses its part of the deal) that will cover its liquidity needs for June and probably until late July since Greece has hardly any repayment due in July.

Parliamentary elections in France, also taking place in June, will see the current Sarkozyst party (UMP) lose a considerable number of seats pending unofficial local agreements with the FN, Mrs. Le Pen populist party. The socialist party will win the elections, the question being by which margin: if their victory is large enough, after gaining control of the Senate in September 2011 for the first time under the V^th Republic, they could hold 2/3 of the congress (Senate + Parliament gathering) to modify the constitution as they wish.

Germany’s Chancellor Angela Merkel registered a strong defeat in North Rhine-Westphalia state election in May, the most populated region. However the increased lead for the SPD (the center left) does not mean that this will end the austerity imposed onto Southern Europe since it is the SPD that enshrined budget balance in the Constitution: Germans will not agree to finance ad vitam aeternam Southern Europe for the sake of “peace and the European construction”, which is the dogmatic and untrue eurocratic motto.

2. An awful economic background

Economic forecasts for 2012 and 2013 are between bad and disastrous for Club Med countries (the IMF is less confident than the EC, and private forecasters are even more pessimistic), and downward revisions will crawl along the year and next.

As the table below exemplifies, GDP will turn negative this year and more deeply so in 2013, with hardly any EU country escaping, the EZ being more affected, and within the EZ, Southern Europe the most

In the case of France, the new President, François Hollande, based his economic program on official, and as usual over-optimistic, growth forecasts of 0.7% in 2012, 1.75% in 2013 and 2% until 2016, whilst the country will be in negative territory in 2012 and 2013 at least. Add a Greek default and you get an asset that becomes a straight loss in the turn of EUR 15 bn from the first bailout already paid plus any recapitalization of the ECB.

France’s deficit will not be reduced back to the 3% Maastricht criteria in 2016 and its debt will continue on its upwards trajectory. Expect 2 notch rating downgrade within 12 months.

 Like other Europeans, the standard of living of French citizens will keep up contracting.

The key issue of low competitiveness is structural, and economic, social and tax reforms are not addressed. Policy makers have focused for too long on what they thought, incompetently or dogmatically, were liquidity issues.

3. The choice

This foolish blindness is leading to one of two tough choices: internal or external devaluation to quickly regain competitiveness.

Let’s come back to my preferred equation:

PIB = Public spending + private spending + commercial balance

The World has huge imbalances which result from demand led economies (USA for example) whose consumption is satisfied by export driven economies (China for example), and these imbalances must be corrected to go back to some economic and financial normality.

Looking at the equation, and taking into account the state of debt and budget deficits in demand driven economies in the West, they MUST shift their focus to improving their trade balance, and export driven countries MUST stimulate domestic demand.

There are two ways to improve the trade and services balance: either increase exports or reduce imports or a combination of the two.

To increase export one needs to propose goods that others want to buy by focusing on added value products (there is no way to be competitive for goods very elastic to prices) or unique goods and improve competitiveness. Wage and social costs are the items a country controls which impact productivity and no Club Med country will escape harsh austerity. Energy is also quite important and must be addressed (the USA is thriving in becoming self sufficient again in the years ahead thank to technology which allows shale oil and gas recovery – this will all also have a substantial positive impact on the US trade balance).

To reduce imports, goods must become too expensive for consumers or find the same ones locally at attractive prices. This can be achieved via custom tariff and/or other tricks or via unfavorable exchange rates.

Therefore, taking the extreme case of Greece (but it is valid for Spain, Italy, France, etc.), to rebalance the economy and improve the terms of trade, the choice is between external or internal devaluation.

External devaluation corresponds to the exit from the fixed exchange rate mechanism (the euro) where the Drachma will loose 50-70% of its new parity with the euro (or DM) leading to much higher imported goods thus lowering consumption and more importantly lowering imports; this assumes that the goods and services needed will be substituted with locally produced ones, otherwise the country will continue impoverishing itself. The terms of trade for exports will also dramatically improve, assuming Greece will produce goods other countries want to buy. For the country not to crumble under debt servicing, this will be accompanied with a debt default (restructuring, straight default, inflating the debt away, you name it). Competitive exchange rate devaluation has always been and still is an economic policy tool (see the US and China manipulating their currencies at will).

Internal devaluation is where countries have chosen austerity without currency devaluation: the only adjustable variable is real wages and social benefits which must be reduced and this must be equivalent to a currency devaluation. The terms of trade will not improve and trade imbalances will remain. Debt servicing becomes unsustainable by eating a rising portion of taxes collected. This can only work with fiscal transfers from other countries if a social collapse is to be avoided, i.e. Germany continuing paying.

Whatever the course of action followed, the standard of living of Europeans will continue to fall for years if not for a decade. However, the internal devaluation route, if followed, would end up very nastily.

I will never sufficiently outline the need for Europe to focus on innovation (strength of the US which also explains why I am more positive on the US economic prospects than the European one) and demographics, an other factor of economic growth: spending money in these areas instead of Greece et al. would have been more beneficial to European growth long term.

Source:

Capital Economics: European Economic Outlook Q2 2012

http://www.capitaleconomics.com/

French Presidential Elections: First round and why it does matter

1. Results

For the first time under the V^th Republic, the incumbent President is behind his main challenger.

The official results are as follows (I do not provide the meaningless result from Jacques Cheminade):

2. Consequences

One of the central conclusions of the campaign is the rejection of the EU as it currently works and calls for increasing protectionism: even Sarkozy demands modifications to the Shengen accord and Hollande a renegotiation of the Lisbon Treaty. A quick analysis of the results show that, in one way or the other, the vast majority campaigned on a platform that will lead to a frontal shock with Germany: budget balance and austerity vs. social welfare and deficits, southern Europe vs. Northern Europe, domestic demand oriented growth vs. export oriented growth.

In addition, both Sarkozy and Hollande built their programs on an over-optimistic GDP growth forecast to cut borrowing at 0.7% in 2012, 1.75% in 2013 and 2% until 2016, well above consensus (most politicians do overstate future growth to buy votes). and neither is addressing the key issues holding back growth. For example, last week the IMF revised down 2013 French growth to 1.0%.

Whoever is elected President on May 6, he will not be able to hold by his promises. This will have a number of consequences:

• Spread between OAT and Bund will widen
• The eurozone will again come under strain and attack from markets (i.e. investors)
• France will loose it AA+ and be downgraded (over a 18 months period, one notch if Sarkozy is elected, two notches if it is Hollande)
• Expect social unrest within 12-18 months, particulalry if Sarkozy is elected

Then, the Parliamentary elections will come in June and there is no chance whatsoever that the current ruling party wins, even if Sarkozy is re-elected. The antagonism with the Front National is too entrenched and the possibility for the Front National candidates to have enough votes to remain in 1/3 of constituencies for the second round.

If Sarkozy is not elected (the likely outcome as of today since over 1/3 of Bayrou and 40% of Le Pen voters will abstain for the second round, the rest will go +/- 50/50 for each remaining candidate), I also expect the current ruling party to fall in shambles with infighting between Coppée (current Head of the ruling party - UMP) and Fillion (current Prime Minister – a senior member of UMP) each preparing for the next Presidential race in 2017 (Fillion will present himself at the mayoral election for Paris).

I then forecast the Front National to try its utmost to organize the opposition to the the socialists around its platform, with some with the right wing of the UMP joining forces with the National Front, and possibly Dupont-Aignan.

Source:

Ministère de l’Intérieur: Presidential elections 2012

http://elections.interieur.gouv.fr/PR2012/FE.html

Ministère des Finances: Stratégie Pluriannuelle de Finances Publiques

http://www.budget.gouv.fr/files/mise-a-jour-rapport-economique-social-financier.pdf

Capital Economics: French election won’t tackle key issues

www.capitaleconomics.com

Stop Press: Markit Eurozone Manufacturing PMI – It’s really bad

Stop Press: Markit Eurozone Manufacturing PMI – It’s really bad

Stop Press: Markit Eurozone Manufacturing PMI – It’s really bad

I usually do not post this kind of economic data, since there are so many published every week. I am doing so since the numbers are striking, France in particular is a real disaster. As I indicated many time, forget about Portugal, Spain (well not really, do not forget Spain!) and Italy, France is the sick man.

Greece: 3 month high but still in contraction territory @ 41.3

France: 33 month low (yes, you read it right!) @ 46.7 (I heard on the French radio that the 2 French auto-manufacturers – Renault and Peugeot – had sales 30% down in March; the French auto industry, Peugeot in particular, is entering the danger zone for its survival).

The roots of the problem have not been addressed, and politicians are still in denial territory: the construction of Europe for the past 20 years is a failure due to a dogmatic approach.

Source:

Markit:  Markit Eurozone Manufacturing PMI® – final data

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330

French capitalism = socialist cronyism

French capitalism = socialist cronyism

Greece, Europe and the rule of Law

On 23^rd February 2012, the Greek parliament passed a Law which at the time went mostly unnoticed in one of its provisios: the retroactivity of the CAC (Collective Action Clause) for Greek Law bonds. Greek bonds holders who do not accept the debt swap will be forced to do so.

EUR 205 bn were eligible for the debt swap:

Investors (well, banks) holding EUR 152 bn Greek law bonds accepted the offer (85.9%)

and EUR 20 bn of non-Greek law (69.9%), i.e. 83.7% for the aggregate.

The invitation period (to the public offer) for each series of PSI-eligible foreign-law bonds and of bonds issued by state enterprises and guaranteed by the Hellenic Republic has been extended until 9:00 p.m. (C.E.T.) on March 23, 2012. Note that not only content to renege on past contractual agreements on Greek-Law bonds, Greece is threatening to default on bonds held under foreign (Brtiish) Law if bondholders do not accept the terms of the bond swap agreed (read forced) on March 8.

I thought retroactivity of laws was the benchmark of totalitarian regimes, but no, it is happening in 2012 within Europe, in the birthplace of democracy. All European leaders are applauding to something they should utterly reject, but for futile self-political interest. There is one basic principle of democracies: the non-retroactivity of laws.

I feel that any investor would successfully challenge this before the European Court of Human Rights.

Source:

Hellenic Republic – Ministry of Finance: Press release PSI

http://www.minfin.gr/portal/en/resource/contentObject/id/baba4f3e-da88-491c-9c61-ce1fd030edf6

Eurobank EFG: Greece Macro-Monitor

http://www.eurobank.gr/Uploads/Reports/FOCUS%20GREECEPSI%20March%209%202012.pdf

ISDA: Unofficial translation of the Act of the Governor – Bank of Greece

http://www.isda.org/uploadfiles/_docs/Act_of_the_Bank_of_Greece_9_March_2012.pdf

French capitalism = socialist cronyism

On February 20 the French financial newspaper, Les Echos, announced that Mr Proglio, former CEO of Veolia, the world leading environment company, now CEO of EDF (one of the world largest electricity companies), designed a plot to oust the current CEO, Mr Frerot who has been trying to sort out the mess left by Mr Proglio, still a Director of Veolia. His replacement was meant to be Mr Borloo, former Minister in the Sarkozy Government until last summer (when he was not nominated Prime Minister), and candidate for the Presidency who unexpectedly dropped out of the race a few weeks ago to support President Sarkozy… Please note that Mr Poglio was strongly promoted by Sarkozy to arrive at the helm of EDF.

This is typical of political cronyism which looks more like what is witnessed in banana republics than in a so called developed democratic country.

France has never ever been economically liberal despite what is said on media, in political circles or with outdated unions (few remember that during the early 70’s the French Stalinist communist party was gathering around 23% of votes!). France has always been a centralized country since the affirmation of the absolute monarchy with Louis the XIV during the 17^th Century; such centralization might work when the ruler at the helm is able, otherwise you run to disaster: unfortunately for France, since General de Gaule (i.e. for the past 40 years), France has never been ruled by a statesman but by politicians of varying quality (generally average to low), always with a socialistic agenda. Since the Mid-90s, cronyism has developed at a fast pace which has been detrimental to French citizens well-being.
Mr Proglio is unfortunately not due to renewal as a Director of Veolia until 2014. I invite all shareholders of this company to draw a line in their agenda for 2014 and vote against his re-appointment (if he is a candidate indeed).

Please note that EDF share price lost 50% since Mr Proglio took over EDF as CEO.

Source:

Bloomberg: Veolia Falls After Les Echos Says CEO Frerot May Be Replaced: Paris Mover

http://www.bloomberg.com/news/2012-02-20/veolia-falls-after-les-echos-says-ceo-frerot-may-be-replaced-paris-mover.html

Greece 2011 Budget execution and the (bleak) future

A year ago, European politicians were hailing the progress made by Greece stating that the nadir of the crisis was behind and difficulties ahead would be dealt with forcefully. As my readers may recollect, I did warn that the plan will fail and the Greek situation would worsen, the country being bankrupt.

Let’s see what happened in 2011 in the Greek Budget:

Note that the last column was the planned 2011 budget as of December 2010, whilst the column (5) contains the budget post-revisions.

A few remarks:

• Compared to the original plan, the budget implementation failed miserably with a EUR 5.5 bn wider borrowing requirement, i.e. a staggering +23%.
• A much larger gap would have been registered (EUR -3.3 bn) without deep cuts in military spending (EUR -1.3 bn.) and the Public Investment Program (EUR -2 bn) during the course of the year compared to the initial budget.
• Revenues were lower than in 2010 and EUR 5.5 bn less than in the initial budget, EUR 6.7 bn if it was not for a new line of revenues that “miraculously” appeared in November and December, registering EUR 1bn (“special revenues from licensing public rights”). Primary expenditures were contained but did not decrease enough to compensate.
• Interest payments were marginally higher than in the initial budget, but EUR 3 bn more compared to 2010.

As I forecasted early 2011 (and also in 2010) the situation has worsened, not improved. Greece is insolvent with a 155% debt/GDP, a 10% budget deficit/GDP (there are rumors that it would finally be closer to the 9.1-9.4% mark thanks to an emergency property tax representing a good EUR 1 bn –looks like a desperate trick to “improve” the picture of a desperate situation) and EUR 350 bn debt (not talking about high unemployment, dismay current accounts and trade balances, insolvent banking system, deposits going abroad, weak productivity, antiquated social welfare state, continued weak tax collection – whilst improving -, etc.). 

As of this Saturday morning, discussions with the financial sector are ongoing regarding the level of write-downs, or more exactly the strength of guarantees on the new bonds to be swapped with the existing ones.

The schedule of T-bills maturing during the next 5 months is:

26wk	09-Aug-11	10-Feb-12	1,000
13wk	15-Nov-11	17-Feb-12	1,600
26wk	06-Sep-11	09-Mar-12	1,455
13wk	20-Dec-11	23-Mar-12	1,600
26wk	11-Oct-11	17-Apr-12	1,600
13wk	20-Jan-12	20-Apr-12	2,000
26wk	08-Nov-11	11-May-12	1,600
26wk	13-Dec-11	11-Jun-12	2,000
26wk	13-Jan-12	13-Jul-12	2,000

In March, add two 5 years bonds due for redemption:

5 yr	07-Feb-09	20-Mar-12	7,000
	05-May-09	20-Mar-12	7,433

Therefore, Greece will need to auction T-Bills next week and the following one to refinance maturing ones (which should go fine if nothing dramatic occurs with the discussions between banks and Greece on existing debt) and find EUR 16.5 bn in March, i.e. EU and IMF money.

To regain solvency, the discussions are centered around how much the financial sector would forgo, and the latest discussions are 70% of their current debt holdings, beyond EU/IMF rescue packages and drastic austerity measures. Would this be sufficient? No: Europe is at best growing flat, debts continue to go north and trade imbalances between countries are not reduced, and these imbalances are one of the reasons of the current crisis, themselves a result of the widening competitiveness gap between countries, with no currency adjustment possible within the euro.

This crisis cannot be solved by only reducing the stock of debt but also by improving cash flows, i.e. growth. Whether the financial sector forgoes 70% of its Greek debt pile (estimated at EUR 200 bn with themajority of it held by Greek banks and, in my view, a substantial chunk of thebalance with the ECB), this is just kicking the can down the road as it has been done for the past 2 years (well, really for the past 10 years). Let’s see the simple equation below:

GDP = private sector consumption + public sector consumption + (exports – imports). This is a very important equation largely overlooked by commentators.

For Greece all of theses items are negative yoy, according to the latest official statistics, and in many countries at least two items are negative: in the current economic environment there is no way that Greece (and others) can get out the over-indebtedness black hole. Greece and Club Med countries (France included) need to improve competitiveness to gain/regain a positive trade balance.

Growth based on retail demand in southern Europe was unsustainable with negative trade balances, and the potion to remedy to this situation will be very bitter indeed: a sharp fall in the standard of living. This is compound by the fact that within a state welfare, redistribution represents a substantial chunk of revenues for individuals, which these countries will drastically reduce to get their finance in order. To regain competitiveness, salaries/social transfers are to decrease by 15-35% - depending on countries - multiplied by the productivity differential with the main exporting countries. The euro is indeed a kind of gold standard where individual countries can no longer devalue their currency to adjust their lack of competitiveness and boost exports.

None of the European political sphere is addressing what is at the core of a flawed eurozone construction.

The table below provides the effort required to get Greece’s finances back under control: this is unsustainable since I do not believe official figures of a EUR 50 bn privatization plan, and will lead to social unrest to a scale not seen so far, the more so that the OCDE announced that the situation is worse in the tune of EUR 15 bn and the EFSF/ESM is not large enough:

“The current EFSF/ESM resources of € 500bn are not enough. Furthermore, the EFSF/ESM has not found it easy to raise funds at low yields even with guarantees.”…

Source:

Hellenic Republic - Ministry of Finance: various publications

http://www.minfin.gr/portal/en

The Telegraph: Eurozone bail-out funds not enough, warns OECD

http://www.telegraph.co.uk/finance/financialcrisis/9057597/Eurozone-bail-out-funds-not-enough-warns-OECD.html

OECD: Solving the Financial and Sovereign Debt Crisis in Europe

http://www.oecd.org/dataoecd/14/25/49481502.pdf
Markets & Beyond: European rescue package: truth and fallacy
http://marketsandbeyond.blogspot.com/2011/11/v-behaviorurldefaultvmlo.html