11/04/2011 03:01 PM

The World from Berlin

'The Common Currency Endgame Has Begun'

Greece has backed away from holding a referendum on the euro bailout package. This week's tumult, however, shows that Europe is still far away from solving the euro crisis. German editorialists on Friday warn that the worst-case scenario may arrive sooner rather than later.

It took less than a week for confidence in the euro zone to evaporate. Again. Last Wednesday, European Union leaders agreed to sweeping measures aimed at saving the common currency. But the shocking announcement on Monday by Greek Prime Minister Georgios Papandreou that his country intended to hold a referendum on the conditions of the bailout measures, with its rigid and unpopular austerity measures, was all it took to shake markets again and raise doubts about the strength of the bailout.

As if that weren't bad enough, interest rates are rising on Italian government bonds again -- this week increasing to 6.4 percent and ever closer to the psychologically important 7 percent figure at which analysts believe the country will begin to have significant difficulties refinancing its debt.

On Thursday, even as Papandreou abandoned his referendum plans, he reinforced the image of a bumbling euro zone unable to get a grip on its currency crisis. His about face came within 24 hours of an emergency meeting with euro-zone leaders in Cannes -- and under tremendous pressure from German Chancellor Angela Merkel and French President Nicolas Sarkozy.

For the first time, the pair broke a longstanding taboo by raising the prospect that Greece might be forced to exit the euro. "We are prepared," Merkel said. And high-ranking representatives of the euro states said they were already reviewing scenarios of a Greek insolvency. On Thursday, Merkel reiterated her message, saying "our main concern is the stability of the euro."

Papandreou backed down after Merkel and Sarkozy threatened to freeze an €8 billion aid tranche until the referendum had been concluded. The Greek prime minister faces a crucial vote of confidence on Friday evening.

As the uncertainty over Greece's future worsened this week, the debt crisis in Italy also intensified. On Thursday, Merkel made clear to the Italian prime minister that he needed to accelerate his planned austerity measures. Later that night, a draft of the G-20 closing statement emerged including language with Italy agreeing to come close to balancing its budget by 2013. G-20 leaders also pressured Berlusconi to agree to have Italy's progress in implementing savings measures and reforms monitored by both the International Monetary Fund (IMF) and the EU.

In addition, a number of Italian media reports are suggesting Berlusconi's government in Rome could be close to collapse.

German editorialists on Friday look to the latest developments and conclude that the European debt and euro crisis has escalated to a dangerous new level. Some argue that the only hose left that is big enough to fight the fire is the European Central Bank with its money printing machines.

Business daily Handelsblatt writes:

"No matter who takes over the rudder in Athens, Europe shouldn't expect much. Rather, it should prepare for even greater chaos."

"Instead of simply accepting the aid package ... offered, thus demonstrating political leadership, Papandreou suggested to his countrymen that they had a choice. The bitter truth, however, is that there is no choice -- a truth the Greek prime minister heard with perfect clarity from Merkel and Sarkozy on the French Riviera, where he had been summoned to appear. Either Greece accepts European help, was the message from the EU crisis summit in Cannes on Wednesday night, or Greece has to leave the euro zone."

"With this unprecedented ultimatum from EU leaders, the common currency endgame has begun. Even if the referendum does not take place, the damage has been done: For the first time since the founding of the currency union, the exit of a member state is no longer mere speculation, it is an official alternative."

"(Were that to happen), the effects would not just be felt in an impoverished Greece, rather in the EU as well. Were Greece to be the first 'sinner' to leave the euro area, despite years of assertions to the contrary, attention would immediately move on to the next weak link in this chain. Were Italy and Spain to become endangered, an uncontrollable domino effect could begin -- which may in the end reach France."

"Whether the Greeks leave the euro zone in the end or not -- neither alternative will calm the situation."

Conservative daily Die Welt writes:

"At the end of the eventful day, the redemptive message came: Papandreou would withdraw his referendum because conservative Greek opposition leader Antonis Samaras declared he was ready to vote for the aid package with the government and take part in an interim national unity government. At the very last minute, and after two years of refusals, the opposition party (ND) finally showed a sense of responsibility."

"But the reasons behind this welcome development did not lie in Athens, but in Cannes. There, Merkel and Sarkozy beg the house when they took the Greek prime minister to task. They didn't just say that payments to Greece would stop until the Greeks made it clear they would hold up their end of the bargain. They also insisted that the Greek referendum would essentially be a vote on Greece's membership in the euro zone -- the really big question. The politicians in Athens decided they'd rather not take the risk."

The conservative Frankfurter Allgemeine Zeitung writes:

"Until Thursday ... one thing had never been questioned -- namely whether an overly indebted euro zone member, regardless what happens, would still belong to the currency union. The subject of a withdrawal or expulsion was always a taboo. The fact that the European treaties neither envisioned the one scenario or the other was the very least of the reasons for that."

"But this taboo doesn't exist anymore. The German chancellor, the French president and the Luxembourgian chief of the euro group no longer rule out what only a short time ago wasn't even allowed to be considered: that Greece will have to leave the currency union if it can't adhere to its agreements on consolidating its budget. Merkel, Sarkozy and Juncker appear to have run out of patience. The predicament Athens is clear to them and they do not underestimate what the Greek people are having to cope with. But their own voters are breathing down their necks."

"Regardless of whether the (inevitable) breaking of a taboo serves as an effective intimidation strategy or not, European politics have arrived on virgin soil. From now on, the order of the day will no longer be increasing the number of member states and transferring ever more competencies to the EU. From now on, the dismantling of institutions and duties will no longer be ruled out -- either because the voters will it or because objective contradictions exist that can no longer be simply resolved with existing methods. The dangers therein are obvious. It could become a slippery slope and once things start moving it may be hard to stop them. Still, this massive Project Europe, a unique undertaking of organizing peace and prosperity under the shared exercise of sovereignty, is experiencing a major crisis of confidence. Perhaps it is now time to give a radical signal with the goal of protecting it in its entirety from greater damage."

'The Rescue of the Euro Zone Has Failed Epically'

The center-left Berliner Zeitung writes:

"The rescue of the euro zone has failed epically. The conditions (Merkel and Sarkozy) have imposed on the Greeks show just how dramatic the situation has become. No more money will flow (to the country) until it is certain that the savings program will be carried out. If it doesn't? Then the euro will collapse and Greece will have to exit the currency union. Would Europe then collapse, too?"

"Regardless how the Greek drama ends, it has been clear since Wednesday night that confidence in the euro has been further seriously damaged. This is because the message sent by Merkel and Sarkozy in their urgency was that the euro zone is not only not going to cover the debts of its members -- but that the euro has not been planned for the long run."

"The countries seeking to rescue the euro need to be considering now how they will solve the euro zone's main problem: how they will restore trust. More is needed to accomplish this than just the bailout tools approved on Oct. 26. They won't even suffice to nurse the consequences of an orderly insolvency of a euro country. To save the entire euro, much more is necessary: euro bonds, common taxes -- something that will send a strong message of political confidence to angst-riddled investors that the rest of the euro zone wants to remain together and wants to become even more tightly bound."

The center-left Süddeutsche Zeitung writes:

"Neither Europe nor the euro will go down because of Greece alone. The fact is that the fate of the community will be decided in its founding nations. As all the spectators look spellbound towards Athens, the real finale in the European debt crisis has already begun a few hundred kilometres away: Independent of the Greeks, the Italians will determine whether the euro and the union survives. As painful as it might be for Europe, it could still withstand a (provisional) departure of Greece. But beautiful, proud Italy, on the other hand, has much more decisive dimensions: 60 million inhabitants, the third-largest economy in the euro club and €1.2 trillion in debt. The club would not be able to shoulder an Italian insolvency --neither politically nor economically."

"The crisis in Italy is acute and dramatic. Blame can be squarely cast on the disastrous Berlusconi government. Amidst the chaos in Greece, the fact has almost been lost that Italian Prime Minister Silvio Berlusconi has only partly recognized his country's need to conduct austerity and reform measures. He may have admitted out of necessity recently that the Italians live a little bit beyond their means, but that apparently hasn't given the bustling politician any reason to act. He presented an austerity plan in the summer and he brought a few pages with a handfull of proposals to the euro summit last week, but financial industry executives were quick to say what they thought of them: nothing. When Rome floated a bond last week to finance its debt, its interest rates rose to record levels."

"That is fatal. Already highly indebted Italy is having to take out ever greater loans in order to payback the old ones. The vicious cycle has begun and it will get faster and faster so long as Berlusconi doesn't save and reform."

The leftist Die Tageszeitung writes:

"How do you create a 'firewall' in Europe? How do you protect Italy and Spain from being driven to a state of bankruptcy? This question is unbelievably explosive -- particularly if you look at recent news, as unlikely as it may seem at first glance. On Thursday, the major French bank BNP published its quarterly report and disclosed that it had sold a large share of its Spanish and Italian bond holdings -- despite the enormous losses of capital and write downs that entailed. The Paribas action made clear that, by now, Italian government securities are considered to be junk bonds that must be dispensed with quickly."

"The development suggests that Italy is close to bankruptcy given that the country has a national debt of €1.9 trillion that must be regularly refinanced. But what bank is going to buy Italian government bonds if its competitors are selling them?"

"This danger is far greater than some theoretically conceivable development, as climbing risk premiums being demanded for Italian government bonds show. The euro zone is facing a crash -- and it may come now rather than at some point many years down the road. It is entirely inconceivable that the euro would survive if Italy and Spain topple."

"So what can be done? One thing is certain: Despite its recent €1 trillion in leveraging, we can forget about the EFSF backstop fund. Investors don't have faith in it; otherwise they wouldn't demand constantly increasing interest rates on Italian and Spanish bonds. The last thing remaining for a rescue is the European Central Bank. Like the US Fed, it could purchase unlimited amounts of government bonds until the panic among investors quiets down. That's precisely what Obama proposed during his meeting with Chancellor Merkel in Cannes."

"The chancellor has declined because she knows most Germans wouldn't accept having the ECB 'print money'. But the chancellor and Germany need to know: That is the cheapest solution. A crash of the euro would be infinitely more expensive."

-- Daryl Lindsey


Editorial Commentary

Hard Come, Easy Go

That's a very popular subject, because without money and class, America might have much less Pride, Envy, Gluttony, Lust, Wrath, Greed and Sloth, and we in the media would have much less to write about.

The headline number—and often the only number reported—was that people earning the top 1% of incomes were paid a much higher share of total national income in 2007 than in 1979. After adjustment for inflation, taxes and government payments to individuals—the top 1% earned, received or stole (according to the writer's perception) 17% of national income in 2007. The members of the top 1% in 1979 received 7% of income.

Less frequently noticed—and dismissed as trivial when noticed—was the fact that virtually everyone in the U.S. was better off in 2007 than their counterparts were in 1979. Incomes were up across the board. Although the top 1% saw real after-tax incomes rise 277% from 1979, even the lowest 20% of income-earners were gaining 18% after inflation.

Decade of Losses

The results of a study often depend on the starting and ending points. Many of the rich in 1979 were a lot poorer than they had been at the beginning of the decade. Their investments—especially their income-producing investments such as bonds and utility stocks—had been devastated by inflation. Indeed, when the effects of inflation are taken into account, the 1970s were more destructive of stock-market wealth than the 1930s. Some of the people in the top 1% may have had capital gains to cash in 1979, but not many.

By 2007, the investing class was awash in capital gains. The Dow Jones Industrial Average was up 1,300%, residential real estate was up 300% in price, and 3,000% increases in equity were not uncommon, thanks to leverage typically 10-to-1 or more. Even long-term bond prices had done better than anyone had expected in 1979.

The CBO report says capital gains accounted for 80% of the increase in the share of national income received by the top 1% of income earners. Since capital gains are earned by investors, it's not surprising that the change outraged those who believe that capitalists are the enemy.

"It is class warfare," thundered syndicated columnist Robert Scheer, a longtime warrior on what he imagines to be the side of the poor. "This war was sparked by the financial overlords who control all of the major levers of power in what passes for our democracy."

He blamed "three decades of rampant upper-crust greed unleashed by the Reagan Revolution of the 1980s [that] will be well-marked by future historians recording the death of the American dream." He concluded despondently, "Those who have seized 40% of the nation's wealth still control the big guns in this war of classes."

National Wealth

Scheer apparently believes that the nation's wealth belongs to the nation and not to the individuals who created it.

The same assumption lurks beneath Elizabeth Warren's recently famous claim that rich and productive Americans don't succeed by themselves. While campaigning for the U.S. Senate in Massachusetts, Warren said:
"There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: You moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

There's something to this, but less than meets the ear. The country as a whole does build roads, staff public schools, pay the police and fire departments and defend the nation against all enemies, foreign and domestic. And those who have the biggest stake in the country receive the biggest returns on the investments. But the country makes its investments primarily with taxes, paid primarily by the very same business owners, investors and high-income workers.

In the halcyon year of 2007, the top 1% of taxpayers paid 40% of federal income taxes, to say nothing of their overweighted shares of income, sales and property taxes levied by states and localities. The next 9% of income-earners paid 30% of federal income taxes, and the next 15% of taxpayers paid 15% of federal income taxes.

The bottom half of Americans who earned an income paid less than 3% of federal income taxes on more than 12% of national income, and most of the members of the bottom 20% received more federal charity back than they paid in income taxes. Although the workers among them are docked for a payroll tax, those taxes don't go to roads, schools, public safety or national defense; they fund part of the benefits such people can receive in Social Security and Medicare.

Building on Success

Twelve reasons why there is more inequality in the U.S. are Bill Gates, Larry Ellison, Sergey Brin, Larry Page, Michael Dell, Paul Allen, Steve Balmer, Michael Bloomberg, Jeff Bezos, Steve Jobs, Steven Spielberg and Oprah Winfrey—just a few of the people on the 2007 Forbes 400 list who earned most or all of their money after 1979, and changed our country for the good by doing so well. They created millions of direct and indirect jobs, and paid billions in taxes to all levels of government. The rest of the 1% also did their part, creating smaller businesses or investing in stocks and bonds to make businesses grow.

The "rest of us," also known as the 99%, received a lot more wages, capital gains, benefits and public works from the fortune-builders in America between 1979 and 2007 than we paid for, and it's high time such folks as Scheer and Warren expressed gratitude, instead of fanning the flames of Pride, Envy, Gluttony, Lust, Wrath, Greed and Sloth.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

The presidential race one year out

America’s missing middle

The coming presidential election badly needs a shot of centrist pragmatism

IT IS a year until Americans go to the polls, on November 6th 2012, to decide whether Barack Obama deserves another term. In January the Republicans start voting in their primaries, with the favourite, Mitt Romney, a former governor of Massachusetts, facing fading competition from Herman Cain, a pizza tycoon, and Rick Perry, the governor of Texas. Already American politics has succumbed to election paralysis, with neither party interested in bipartisan solutions.

This would be a problem at the best of times; and these times are very far from that. Strikingly, by about three to one, Americans feel their country is on the wrong track. America’s sovereign debt has been downgraded. Unemployment remains stubbornly above 9%, with the long-term unemployed making up the largest proportion of the jobless since records began in 1948. As the superpower’s clout seems to ebb towards Asia, the world’s most consistently inventive and optimistic country has lost its mojo.

Some of this distress was inevitable. Whatever the country’s leaders did in Washington, the credit crunch was always going to cause a lot of suffering. Rising inequality, unfunded pensions and bad schools are not new problems. But politics, far from offering a remedy, is now adding to the national angst. Eight out of ten Americans mistrust their government. There is a sense that their political system, like their economy, has been skewed to favour the few, not the many.

The European Union may seem the epitome of political dysfunction, but America has been running it close. All this year the deadlock between the Republicans in Congress and Mr Obama has meant that precious little serious legislation has been passed. The president’s jobs bill is stuck; the House of Representatives’ budget plans have been scuppered by the Democrat-controlled Senate. At the end of this year temporary tax cuts and other measures, worth around 2% of GDP, are set to expire—which could push America back into recession.

Surrender to extremists

On the face of it, neither side has gained from this stand-off. Only 45% of Americans approve of Mr Obama’s performance. The approval rating for Congress dropped to 9% in one recent poll. A plurality of Americans call themselves independents, and on the most divisive economic argumenthow to solve the budget messtwo in three of them back a combination of spending cuts and tax rises.
But politics is being driven by extremists who reject any such compromise.
The right is mostly to blame. Ronald Reagan, a divorcee who did little for the pro-life lobby and raised taxes when he had to, would never be nominated today. Mr Romney, like all the Republican presidential candidates, recently pledged to reject tax rises, even as part of a deal where spending cuts would be ten times bigger. Mr Cain surged briefly to the front of the pack because of a plan that would cut personal taxes to 9%; Mr Perry lost support for wanting to educate the children of illegal immigrants. Meanwhile, in Congress, the few remaining pragmatic Republican centrists, like Senator Richard Lugar, are being hunted down by tea-party activists.
Mr Obama has tried harder to compromise. But he foolishly failed to embrace a long-term budget solution put forward by the bipartisan Simpson-Bowles commission, which he himself appointed. Ever since the furore over the debt ceiling this summer, he has “pivoted” to the left, dabbling in class war, promising his supporters that the budget can be solved by taxingmillionaires and billionaires”. He is also trying to issue more executive orders, to bypass Congress.

The divisiveness is hardly new, but it is increasingly structural. As the battle for billions of campaign dollars heats up, neither side dares grant the other any modicum of success, or risk the ire of its donors by appearing to compromise.

Gerrymandered districts mean that most congressmen fear their partisans in the primaries more than their opponents in the general election. Ever more divisive media feed the activists’ prejudices. So, at worst, a bitter contest could merely reinforce the gridlock, with a re-elected, more leftish Comrade Obama pitted against a still more intransigent Republican Congress.

Wishing on a star

In other countries such a huge gap in the middle would see the creation of a third party to represent the alienated majority. Imagine a presidential candidate next year who spelled out the need for deep future cuts in spending on entitlements and defence, as well as the need to raise some revenue (largely by getting rid of deductions); who explained that the pain would be applied only after the recovery was solidly in place; who avoided class or culture wars; who discussed school reform without fear of the Democrats’ paymasters in the teachers’ unions. Better still, imagine a new centrist block in Congress, which might give that candidate (or for that matter a President Obama or Romney) something to work with in 2013.

And so the fantasy continues, for that is sadly what it is. Even if the money were forthcoming, there are all sorts of institutional barriers, especially to starting new parties, and the record of even very well-heeled third-party presidential candidates is bleak. Instead, the middle will have to be recreated from what is already there.

The immediate, rather slim, chance is of a grand bargain on the budget emerging out of a congressionalsupercommitteeset up after the debt-ceiling fiasco. If it were to embrace a centrist option, politics over the next year would be considerably more civilised. But it too appears deadlocked, with the Republicans once again ruling out tax increases of any kind.

So, back to the campaign. It is not entirely without hope. You can win the White House only by winning that disenfranchised middle. For Mr Romney and his party the danger is clear: the Republicans’ intolerant obstructionism could drive independents away.

But Mr Obama also has a lot to prove. Why re-elect a man who has failed to unite Americans? Now should surely be the time for the president to seize the centre ground. Otherwise, in a year’s time he may well see his own name added to the rolls of those who have lost their job.